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FEDERAL RESERVE BOARD
WASHINGTON
X-3167
July 12; 1921.
SUBJECT:
Policy of Federal Re·serve Banks- with Respect to
Loans on Cotton.
Dear Sir:·
I transmit herewith for your information copy of a
letter r.eceived from Hbn. H. P. Fulmer 1 a Representative in
Congress from SoJ!.th Carolina., and copy of my reply thereto.
You are requested to transmit to the Board at your early convenience a statement regarding the attitude of your bank
toward cotton loans. This correspondence is being sent to
the Chairmen and Governors of the Federal Reserve Banks of
Richmond~ Atlanta~ St. Louis 1 Kansas City and Dallas and each
; recipient_ of this letter. j s requested to forward to the corresponding officer of each of the four other banks named 1 a ~opy_
of his reply to the Board. !f the atti_tude of .each of the
Federal Reserve Banks to ~ovhich this letter i's addressed is
substantially the same.t the Board would suggest that an appropriate public statement be made by the Governor of each bank
loc~ted in the ~otton sections.
Very truly yours,
(Enclosures)
Governor.
Governors and Chairmen oi F.R.Banks of
Richmond, Atlanta, St. Loui.s) Kansas City and
Dallas. (originals to each) ..
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Copy
July 12 J 1921.
Dear Congressman Fulmer:
I aCknowledge receipt of your letter of the 11th inst~t,
in which you suggest as a means of relieving the present distressing situation in the South, the authorization of a loan of
$100,000,000 through the Federal Reserve Bariks to the bariks of
the Cotton St ctes, upon customers' paper secured -by warehouse
receipts for cotton properly insur~d at, say, 80% of its market
value, or upon cotton manufacturers' acceptances of drafts against
shipments of cotton for consumption in their mills, the paper to
run from thirtv to ninety days, renewable during 1921, or until
the markets are o:9ened.. You suggest further that there should be
a distinct :understandin.g that these discounts will not have any
bearing upon the ordinary accommodations by the Federal Reserve
Batiks to their member bariks, stating that without such an understanding the loans would prove of no benefit, as the Southern
banks are so tied up with loans carried over from last year that
they are unable to function in their usual rr,armer and make loans
for current business out of their present resources.
In reply, I would advise you the t such 1 oans are already
authorized end all Federal Reserve Banks in the cotton sections
are carrying paper· of this cl:aracter for their member banks and
have been doing so for wany months past., There is no question
of the ability of the Federal Reserve banks to rediscount paper to the
amaunt named, or more, if necessary, under the terms prescribed
by the Federal Reserve Act.. Vihile the Federal Reserve Banks of
Richmond and Dallas would be considerably below t·r.eir required
reserves- today if put upqn their own footing, they are maintaining
them by rediscounting with other Federal Reserve E'a.nks and will
have no difficulty in rediscounting such additional amounts. as
may be needed. The Federal Reserve Bank of Atlanta has for sorr.e
time past main~ained its required reserve without rediscounting
with other Federal Reserve Banks. although it is $ite likely
that it will be rediscounting in a short while. ~e Federal Reserve Bank of St. Louis has a stronger reserve than any of the
other Banks in the cotton sections and does not anticipate 'any
difficulty in meeting ?11 legitimate demands out of its own resources. The Federal Reserve Bank of K2nsas City also has a strong
reserve, which stands but a few points below trat of the St. Louis
Bank.. The Federal Reserve Banks of Richmond, .Atlanta, St. Louis
and Dallas all have a flat rate of 6%. T.ne only b~a:nk ·in the system
wrich still maintains t11e progressive rate is the l.Federal Reserve
Bank of Kansas City, which has a normal rate· of 6%, an intermediate
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X-3167-~
rate of 7% al!ld a ma.xlmum rate of 8%.
There seems to be a good deal of misapprehension and
confusion as to the functions and powers of the Federal Reserve
.Board and t~he Federal Reserve Banks. s·ome people seem to be
under the impression that we have a central bailk in this country.
This is not tte case. The powers of the directors of the Federal·
Reserve Banks are defined in Section 4 of the Federal Reserve Act.
while those of t'he Federal Reserve Board are defined specifically
in _Section 11. Section 13 gives the Board the right to determine
or define the character of paper eligible for rediscount within
the· meaning of the Act and the limitation. of that Section. The
directors ·of tbe Federal Reserve :Banks are charged with the .administration of their respective institutions. They have the
sole power to pass upon eligible paper. offered treir respective
banks for rediscount and the Board cannot force tbem to. take
. paper w'hich may be in the:i.r opinion unsafe or uno.esi.rable. The
lending power is in the hands of the banks and not of the Board.
Each Federal Reserve Bank is a body corporate and as such each
bank, among other things~ is authorized "·~o exerdse by its board
. of directors or duly authorized officers or agents, all powers
. specifically granted by the provisions of this.Act and such incidental powers as shall be necessary to carry on the husiness of
banking within the limitations prescribed by this Act 11 • "Every
Federal Reserve Bank shall be conducted under the. supervision
control of a Board of directors. The Board of directors
shall perform the duties usually appertaining to ·the office .of
directors of banking associations and all such duties as are
prescribed by law." No where in the Act is the Federal Reserve
Board given pqwer to pass on credits and the Board maintains no
· credit files. The Board itself is not organized as a banking
institution· but merely as a supervisory body; having general
supervision subject to the expr"ss reservations in Section 4
of the Fedetal Reserve Act.
and
In your letter you touch upon one of the difficulties in
the present situation. You SaY that "the Southern banks are
so tied up with loans carried over from last year that they
are unable to function in their usual mannex· and make loans
for current business ~t of their present resources". A considerable number of the mem'ter banks in the cotton districts
are not rediscounting at all :md of those that are redisco,mting, more than one-half are rediscounting very heavily. Many
member banks are carrying loans in larger volurr.e, no doubt,
than their onn directors would like to have them carry and I
know of some member banks wtich are very reluctant to add to their
contingent liability as endorser on any terms.
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X-3167-a
While the· suggestion made in your letter raises a ('uestion of
banking policy which should be determined by the Federal Reserve
Ba.m:s tl:emselves, rather than the Federal Reserve Board, 1 ma:r
say that I do not believe any advantage would be gained in having
an understanding that any rew loans will not be counted as part
of the bank 1 s regular line. No loans can be made by any Federal
Reserve Bank except wi tl: the endorsement of a member bank and the
endorsing "bank's liability is there whether i t is regarded as part
of its regular line or not.
With the concurrence of other members of the Board, I am sending cop:tes of your letter to the Governors of the Federal Reserve
Banks of Richmond, Atlanta, St. L6uis, Kansas City and Dallas, with
the reauest that it be brought to the attention of their respective
boards of directors and suggesting that each bank, as promptly as
possible, make a public announcement of its policy regarding cotton
loans.. It is the Board's view, and the Board has so advised the
banks, that it is the duty of the directors of each Federal Reserve
Bank to give consideration to all applications for rediscount of
eligible paper and that the directors of each Federal Reserve Bank
or its duly authorized officers must be tte sole judges of the soundness and desirabil:i. ty of paper offered for rediscount.
The Board feels assured that the Federal Reserve Banks are
fully informed of the conditions in treir resuective districts and
t"hat they will adopt a broad and liJ,eral polic;yr in assisting their
member banks to meet the requirements of the si~1ation.
Very truly yours,
(Signed) W. P. G. Tiarding
G o v e r n o r.
Eon. R. P. Fulmer,
House of Representatives.
c0
'P
y
HOUSE OF REPRZSENTATIVES U. S·
Washington 1 D.C.
X•3167b
JUly 11, 1921.
Hon. Wm. p. G. Harding~
Federal Reserve Board~
Washington1 D. C.
Governor~
My dear Mr. Harding:
I wish to call to your attention, for as earnest consideration and quick action as you may find possibleJ a plan just
proposed by Mr- J. Skottowe Wanramaker, President of the American
Cotton Association, for the relief of the present distressing
situation in the South. It is this:
THE RE-DISCOUNTING OF PAPER SECURED BY COTTONAuthorize the loan of $100,000,000 through the Federal Reserve Banks
to the banks of the Cotton States1 upon customers 1 paper secured by
warehouse receipts for cotton properly insured at 1 say} goro of its
market valueJ or upon cotton manufacturers' acceptances of drafts
a~inst shipments of cotton for consumption in their mills.
Paper
to run from 30 to 90 days~ renewable during 1921, or until the markets
are opened. The distinct under.standing being t.ha t these discounts
are not to have any bearing upon the ordinary acc9mmodations by the
Federal Reserve Banks to their member banks; Without this understanding the loans would prove of no benefit, as the Southern banks are so
tied up with loans carried over from last year that they are unable
to function in their usual manner and make loans for current business
out of their present resources.
Leading lankers 1 merchants, business men and farmers have
expressed the firm belief that this loan would accomplish the purpose
of relieving conditions and restoring some measure of normal business.
Business is now shrinking from day to day and distress is becoming more
acute. Confidence MUST be restored promptly.
I tperefore ask that you take immediate cognizance of this
proposition. As I see it~ if assistance is not forthcoming at once
conditions will become so acute that it will take years to overcome
the disastrous effect. This rratter ha.s received the marked attention
of leaders in business and agriculture~ and I have assured them tnat I
would immediately lay the matter before you and' request your prompt
and favorable action.
Very sincerely yours,
(Signed) H. P. Fulmer
M. C.
@FedFRASER