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I?·. I·;·~·I!IMIY OJ' Till 'I'IIIAIUaY
.
CKAIIMAII
~OMM :Sl(ILTQII WILLIAMS
cbiiPTRULLIK 0, THI CUIRINCY
H. PARKER WILLIS, IICII!I'Aal'
.
SHEllMAN P. ALLEN. ASIT,IItCIIIrftY
FEDERAL RESERVE BOARD
,
WASHINGTON
A"~
FIICAI. AfiiNT
ADDRESS R'KPL.Y TO
FEDERAL RESERVE BOAJUt
X-855
!lhrch 30, 191$.·
.
Dear Sir:
You will doubtless roo.ember tmt a.t the .conference laet
Saturday there ~ some discussion as to the proper n.ethod of dis~tribution an.ong the Federal reserve banks of bills a.nd acceptances
, bought by the Federal Reserve Bank o:f New York, and attention was
called to the probability that the New York Bank would like to dispoee of a block of these acceptances during tba prasent week.
A stateaent of the reserve poaition of tha various banks
was rea4 and the suggestion that tho amount be
dis~ributed
an.ong the
.six or seven banko having the highest reserve was readily acceded to,
and it seeir..ed to
be
the general sentin:ent that 4{~ vrould be a fair
rate.
The CJUestion, however 1 was not discussed as fully as wQU.ld doubtless
bave 'been the cae:e had Governor Strong been present.
Members of the
har4, havi.D.g in n.ind recent transactions where two Federal .reserve
banks sold acceptances at a
41-%
rate,. and feeling that a.t'ter all the
rate was of no mterial consequence
~
view of the excess earnings now
being sra.cle by all the banks, did not press this mtter of rate for dis·cuaaion as fully a.s they might otherwise ha.ve don&, and the Governors of
the bauks interested in the arl1t.ugement left with the ieeling that the
paper would be offered t~m a.t ~
4t%
rata.
It has developed since, however, that this rate wa.s not en-
tirely eatj.sfactory to Governor Strong and the 4irectore oi tMI Feciera.l
Hew York, and tba
Be;;.r~
understa.nda t.ha.t eales by that
X-855
- 2bank have been n:e.cle on the basis of 4% up to 60 days ancl 4-l/8% from
60 to 90 days.
f~
The Boarcl wishes to call your attention to the fact that
a considerable period of tin&, -- probably during more than two years
follOW'ing the establishn:ent of the Federal reserve banks, when there was
only a negligible derr.e._nd for rediscounts and the earnings of the banks
were small, -- the Federal Reserve
~nk
of New York very generously gave
all other Federal reserve banks an opportunity of participating in the
New York bill narket by n:aking a.llotn:ents to the other banks of bills
purcbased by it.
It is true that the Federal Reserve Bank of New York
was allowed a conndssion of l/8 of 1% for ita services, but this did not
by any .o:eans cover the loss of incon:e that it sustained through its
policy of dividing its purchases with the other Federal reserve
As a result, during all this tir:e 1 it was able to take
advant~ge
local :u:a.rket to not more than 20% of the purchases n:n.de.
~ks.
of its
The bankts
policy was inspired entirely by a desire to be of service to the whole
system1 and the other Federal reserve banks were able to make much larger
earnings than would have been the case had they been compelled to rely
upon strictly local discounts.
. Since the entry of the Ubited States into the war 1 conditions
have radically changed.
The Government is constantly in the rxarket for
funds, and reserve banks general.ly have withdrawn from
'
ment and now uake only occasional pu.rchasesof bills in
the old arrangeNe~v
York; and
Governor Strong advises the Board that the directoi;s of the Federal Reserve Bank of New York feel that the disadvantage under which the bank
X-855
-3...
operates in this respect is BQfficiently i~portant
understanding than
~w
exists.
ta
justify a better
He pl)ints out that the JJew York .Bank
is net able to take advantage of its own ttarket when it is obviously
te its interest to
d~
so. but that it must carry the entire burden of
the New York market when it isto the apparent advantage of the other
Federal Reserve banks to withdraw. although their reserve positions
may be much stronger than that of the New York bamc.
It hardly seems fair
that by witbdrawing from the market atd a:waiting a distribUtion of the
bills purchased by the Federal Reserve Bank of New York under the provisions of the Act which en3ble the Federal Reserve Board to regulate
rediscounts between the rospccti ve Federal Reserve bariks, that tho Ee banks
which have withdrawn should be able to got bills at better rates than
would have been tho case had they pa.rtic ipated in
tm
purchase originally.
Furthermore, the New York bill and acceptance market is a
ve~
factor and i t is essential that it should. be sustained.
As the control
important
of this market by the Federal Reserve Bank of New York in the early days
of the system redounded to the advontage of all the other Federal reserve
banks by reason of the allotment policy adopted, it seems that all Federal
reserve banks should cooperate w1 th the Federal Reserve Bank of New York
in sustaining the market now, and wi th•u t imi.isting em endorsements where
they were willing heretofore to buy acceptances without endcrsement.
In view of these consjdera.tio:-,s the Boa:ra. feels
the FGderal Reserve banks
sh~uld
th,~t
each of
look at the matter from a national rather
than a local sta:rxlpoint, both as to.- the rate of interest 3.nd as to the
question ef endorsement by the Federal Reserve Bank of Jl!ew York. In the
i-855
exercise of
i~s
statutory power to require inter-bank rediscounts, the
Boa:N. would hesitate to direct •ne Federal Reserve bank to take paper
f~m
another without the
certainly seems
t~
endors~ment
of the selling bank, but there
be no occasion, when ptiper is sold by one bank to
another as the result ef negotiation and not by direction of the Board,
for the endorsement of the selling bank te be given, if the names on the
paper
be~ht
are well known to, and satisfact0ry to, the purchasing bank.
In the case of p:1per sold by the Hew
York banks the names as a rule are
well knO'·•n to all the Federal Reserve banks and have been bought freely
by them in the past
\~thout
the.endorsement of the
quite probable that, although the Federal Reserve
New York bank.· It is
Bank of New nrk
might be desirous of building up its reserves, it would prefer
te~~
con-
tinue t" carry the burden of the New Yoek market rather than sell bills
with its endorsement 4}t a higher rate than that at which they were
purchased.
It will be the
B.tard's policy
t~
watch. the reserve situatien
very closely, with the view of preventing any disproportionate decline
at any Federal Reserve bank, and hereafter, should the Board have
occasi•n to invite voluntary rediscount operations, it hopes that the
principles
Baaktl.
ab~ve
outlined will be observed by the
Reser~e
In case any of the Federal Reserve banks should be required by
the Beard to rediscount paper
:\
Federal
f~r
ether Federal Reserve banks, the en-
dorsement of the selling bank will be given. when demanded by the purchasing bank. but the transactitm \Jill be cJ.t a lower rate than would
obtain if sold without
endors~uent.
The Board would appreci<.l. te c::r1 e.JC_t)ression of gour views on this
,
subject.
Very truJwyours.
Governor.
@FedFRASER