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835 X-2011 I. 1- CREDIT CONTROL* What are the o b j e c t s sought to be a t t a i n e d by the p o l i c y of c r e d i t c o n t r o l i n the e x i s t i n g circumstances? I s the o b j e c t ( a ) To maintain or to s t r e n g t h e n r e s e r v e s ? (b) To s t a b i l i z e the e x i s t i n g s i t u a t i o n by p r e v e n t i o n of f u r t h e r expansion? ( c ) To b r i n g about a d i s c r i m i n a t i n g d e f l a t i o n by reducing the t o t a l volume of c r e d i t ? From s t a t i s t i c s compiled by P r o f e s s o r Ksmmerer of P r i n c e t o n , bank d e p o s i t s increased from $12,678,000,000 i n 191-j t o $27,928,000,000 i n 1919. At the same time the r a t i o of cash reserves t o t o t a l d e p o s i t s diminished from 11.7 in 1911 to 6 . 6 i n 1919* "Taking the index numbers of the United S t a t e s Bureau of Labor S t a t i s t i c s as the most comprehensive and most s c i e n t i f i c a l l y prepared of t h e index numbers covering the e n t i r e period 1913 to 1919 i n c l u s i v e , we may say t h a t the wholesale p r i c e l e v e l increased from 1913 t o A p r i l , 1920, 165%; in o t h e r words, if one c a l l s the d o l l a r of 1913 a 100$ d o l l a r i n i t s purchasing power over commodities a t vtiiolesale, the d o l l a r of today i s approximately a 38% d o l l a r . " This was the c o n d i t i o n of a f f a i r s when the Federal Reserve Board undertook to e x e r c i s e i t s power over c r e d i t f o r the purpose of p r o t e c t i n g p e r s o n a l and commercial i n t e r e s t s . All experienced "business men knew t h a t p r i c e s would seek a lower l e v e l , by gradual process if good judgment and conservatism p r e v a i l e d , or by a commercial debacle if the i l l o g i c a l , ill—considered and extravagant rrethods brought about by the war were permitted to c o n t i n u e . Under these c i r cumstances, and none too soon, the Federal Reserve Board e x e r c i s e d i t s power over c r e d i t i n order t o c o n s t r a i n bankers and business men to e x e r c i s e c o n s e r vatism and h e l p strengthen commercial and f i n a n c i a l c o n d i t i o n s . The Board i n so doing have accomplished a g r e a t work and have demonstrated one of . the powers f o r good which the Federal Reserve System p o s s e s s e s . N a t u r a l l y t h e i r f i r s t move was in the d i r e c t i o n of strengthening the b a n k ' s reserves*. That means s t r e n g t h e n i n g the bank and p u t t i n g i t i n a l i q u i d p o s i t i o n - i n the p o s i t i o n in which a well managed bank should always be, to respond t o the demands 01 i t s c l i e n t e l e . Strengthening the reserves meant c u r t a i l i n g c r e d i t and i p s e f a c t o would prevent " f u r t h e r expansion". ' No one wishes to " S t a b i l i z e " e x i s t i n g cond i t i o n s , b u t to get away from them to a s a f e r and more conservative l e v e l . This would n a t u r a l l y b r i n g about a "Discriminating d e f l a t i o n " by extending c r e d i t t o such i n d u s t r i e s as were e s s e n t i a l and needed support i n order t o preserve the general b u s in e s s w e l f a r e , and by r e s t r a i n i n g c r e d i t t o a c t i v i t i e s which though p e r f e c t l y l e g i t i m a t e were n e v e r t h e l e s s n o n - e s s e n t i a l t o the g e n e r a l w e l f a r e and should be promoted by the funds of t h e i r owners and managers, and n o t be allowed to absorb commercial resources needed f o r the f i n a n c i n g of busine ss c l o s e l y connected with the p u b l i c welfare# -2- 2, . 3U2011 Can a s u b s t a n t i a l reduction in t h e volume of c r e d i t be e f f e c t e d without i n j u r y t o the l e g i t i m a t e b u s ine ss of the c o u n t r y and without c u r t a i l m e n t of e s s e n t i a l production? A s u b s t a n t i a l r e d u c t i o n of the volume of c r e d i t can be e f f e c t e d without i n j u r y t o the l e g i t i m a t e i n d u s t r y of the country and without c u r t a i l i n g of e s s e n t i a l p r o d u c t i o n . Not only t h i s b u t such r e d u c t i o n in volume of c r e d i t may be made t o m a t e r i a l l y strengthen the c r e d i t f a b r i c of the country as a whole. The f i r s t and most b e n e f i c e n t e f f e c t of the a c t of the Federal Reserve Board i n c o n t r o l l i n g c r e d i t was to a r r e s t the a t t e n t i o n of the whole country and to incur high commendation from conservative f o r c e s and incur c r i t i c i s m ranging from mild to v i o l e n t from c e r t a i n s e c t i o n s o r i n t e r e s t s . I t made everybody stop and t h i n k and the d i s c u s s i o n which ensued showed p l a i n l y t h a t the Board was r i g h t The psychological a t t i t u d e of the country toward busine ss immediately began to change and from wild extravagance and a d i s p o s i t i o n to e n t e r i n t o new and i l l considered b u s i n e s s , t h e r e came about a f e e l i n g of conservatism. People began t o ask themselves j u s t where they stood» how much they were r e a l l y worth, and how they would f a r e i f c a l l e d upon to l i q u i d a t e t h e i r outstanding o b l i g a t i o n s . D r a f t s drawn a g a i n s t goods shipped abroad were n o t always paid and sometimes r e t u r n e d . 'People began to repudiate t h e i r c o n t r a c t s to receive goods, e s p e c i a l l y in cases where the p r i c e had receded. Competition i n business has brought about a most u n f o r t u n a t e p r a c t i c e - people order goods and then i f i t does n o t s u i t t h e i r convenience, they r e f u s e to receive and pay f o r the same. This has continued so long and i s so much the custom t h a t manufacturers and w h o l e s a l e r s , h a r d l y expect t o hold t h e i r customers to r i g i d f u l f i l l m e n t of t h e i r c o n t r a c t s , if a change i n the market or a change i n business conditions makes i t d e s i r a b l e f o r them to r e p u d i a t e . Such r e p u d i a t i o n of purchases began to happen g e n e r a l l y and manufacturers and wholesalers found themselves possessed of l a r g e volumes of very h i g h - p r i c e d goods which they could n o t market without l o s s . That i s the c o n d i t i o n of the mercantile i n d u s t r y in our country today. They have f o r years d i c t a t e d the p r i c e of t h e i r goods and they are now endeavoring t o dispose of them to the public without m a t e r i a l abatement i n p r i c e s . I t i s g e n e r a l l y r e a l i z e d t h a t they cannot accomplish such r e s u l t s ; recessions i n p r i c e have already s e t i n and a r e bound to be more pronounced. Business people w i l l have t o l i q u i d a t e t h e i r goods i n order to l i q u i d a t e f i n a n c i a l o b l i g a t i o n s . This w i l l b r i n g about competition i n s e l l i n g throughout the country, something t h a t has n o t e x i s t e d f o r s e v e r a l years and t h i s competition in i t s normal and n a t u r a l course w i l l c l a r i f y the s i t u a t i o n end b r i n g about normal c o n d i t i o n s . 3« To what e x t e n t has one or more of these o b j e c t s been a t t a i n e d i n each D i s t r i c t and i n the country a t l a r g e ? The o b j e c t sought to be accomplished by the Federal Reserve Board h a s been and i s b e i n g accomplished i n a l l D i s t r i c t s . 4. To what e x t e n t i s i t necessary to d i s t i n g u i s h between t h e immediate o b j e c t i v e of the p o l i c y of c r e d i t c o n t r o l and the remoter o b j e c t i v e , such as reduction i n the c o s t of l i v i n g ? The immediate e f f e c t of c r e d i t c o n t r o l i s to safeguaid the s i t u a t i o n , to enable a l l b u s i n e s s to f u n c t i o n normally and the Board should a t a l l times make t h i s c l e a r . Although a l o g i c a l r e s u l t may be lower p r i c e s and lower c o s t of l i v i n g , i t should d i s t i n c t l y appear t h a t the Board does n o t s e e k t o c o n t r o l o r r e g u l a t e p r i c e s , b u t leaves the p r i c e l e v e l t o competition under the law of supply end demand. 837 -J- X-2011 Question - What i s the proper conception of the "normal c r e d i t condition" which the Federal Reserve Banks should seek to b r i n g about? Note: Obviously i f " l i q u i d a t i o n " or " s t a b i l i z a t i o n " of the e x i s t i n g c r e d i t s i t u a t i o n are to be regarded a s the o b j e c t i v e s of the Federal Reserve p o l i c y of c r e d i t c o n t r o l , a condition which can be regarded as "normal" w i l l be a t t a i n e d very much more quickly than if the objective i s a reduction i n considerable amount of the t o t a l volume of c r e d i t . The proper concept of " a normal c r e d i t condition" i s something t h a t v a r i e s with the y e a r s , with the crops, with commerce, involving domestic and f o r e i g n exchange, and with a l l the varying influences t h a t make up the a c t i v i t y of a commercial nation- The making of crops has to be financed* While we are g r e a t l y indebted to nature f o r her annual c o n t r i b u t i o n to the p r o s p e r i t y and happiness of mankind, the volume of t h a t c o n t r i b u t i o n depends very l a r g e l y upon mankind's a c t i v i t i e s . The l a t e n t resources so abundant and so valuable n e v e r t h e l e s s must be exhumed and that costs time snd money and i s a r e g u l a r busine ss i n i t s e l f . A normal c r e d i t condition would seem to be one i n which funds were obtainable in s u f f i c i e n t volume to enable the i n d i v i d u a l , the c o r p o r a t i o n , the great t r a n s p o r t a t i o n systems of the country, the municipality and the s t a t e t o obtain funds a t reasonable r a t e s with which to prosecute t h e i r r e s p e c t i v e e n t e r p r i s e s . This i s not a s t a t i c world; there should a l s o be f u n i s a v a i l a b l e f o r new and enlarged e n t e r p r i s e , f o r i n s t a l l a t i o n of new and improved methods and processes, which the inventive genius of mankind i s c o n s t a n t l y producing. 5* Methods of c r e d i t c o n t r o l . Consideration of the e f f i c a c y of d i f f e r e n t methods of c r e d i t c o n t r o l . (a) Horizontal increase of r a t e s , e s p e c i a l l y of commercial r a t e s ; a canvass of the experience of banks which have p u t i n t o e f f e c t a 7% commercial r a t e , to w i t , New York, Boston, Chicago and Minneapolis. (b) Progressive r a t e schedules s t a r t i n g with 8 as a b a s i s r a t e ; a canvass of the experience of Federal Reserve Banks of Kansas City, D a l l a s , St.Louis, and A t l a n t a . (c) Other methods of d e a l i n g with the s i t u a t i o n , such a s the imp l i c a t i o n t h a t increased o f f e r i n g s by member banks w i l l f o r c e h i g h e r r a t e s or recourse t o the p r o g r e s s i v e r a t e ; a canvass of the experience of Federal Reserve Banks of . Cleveland, P h i l a d e l p h i a , Richmond, and SanFrancisco. (d) R e s t r i c t i n g issues of Federal Reserve n o t e s to F e d e r a l Reserve Banks as a p o t e n t i a l means of e n f o r c i n g c r e d i t c o n t r o l ; canvass of English experience and views* The d i f f e r e n t methods of c r e d i t c o n t r o l have not had a s u f f i c i e n t t e s t p e r i o d f o r the experience of the banks t o be c o n c l u s i v e . I t i s found t h a t each c l a s s of banks holds i t s own method t o be most s a t i s f a c t o r y and i n such a s i t u a t i o n there should be f u r t h e r experience b e f o r e we could give to the Board any conclusion as between the three methods i n use or advise any p r e s e n t a t tempt a t u n i f o r m i t y i n method. 838 x-2o:i 6„ Inter-Reserve Bank rediscounts as r e l a t e d to the problem of c r e d i t c o n t r o l , Is the e x i s t i n g p o l i c y and p r a c t i c e with r e s p e c t to such rediscounts: s a t i s f a c t o r y and sound? (a) To e f f e c t an approximate e q u a l i z a t i o n of r e s e r v e s ? The e x i s t i n g p o l i c y with r e s p e c t to Inter-Reserve Bank r e d i s c o u n t s i s sound and the Board i s t o he h i g h l y commended f o r the manner i n which they have made i t e f f e c t i v e * (b) At the same r a t e f i x e d f o r i t s member banks by the bank g r a n t i n g the accommodation? Nojte: When recourse was f i r s t had to i n t e r - b a n k r e d i s c o u n t s i t was thought that the value of a Federal Reserve Bank l s endorsement was e n t i t l e d to recognition in the form of a reduced discount r a t e . More r e c e n t l y t h i s idea has been abandoned and rediscount t r a n s a c t i o n s between Federal Reserve Banks are made at the r a t e s e s t a b l i s h e d f o r member banks by the Federal Reserve Bank extending the accommodation* The question now a r i s e s , however, whether a Federal Reserve Bank which has been able to maintain high reserves by reducing the demands f o r accommodation from i t s own member banks, which are i t s d e p o s i t o r s , should be required to extend accommodations t o member banks i n o t h e r D i s t r i c t s through the medium of t h e i r Federal Reserve Bank at the same r a t e s as a r e e s t a b l i s h e d f o r t h e i r own members, The rate of sucii rediscounts should be v a r i a b l e .uid ii.cad by the Board from time t o time as the s i t u a t i o n may appear to r e q u i r e and without any s p e c i a l regard e i t h e r for the p r o f i t or l o s s t o the c o n t r a c t i n g banks. In the p r e s e n t s i t u a t i o n we approve the a c t i o n of the Board i n f i x i n g the r a t e of such r e d i s c o u n t s a t seven per c e n t . < 0 / II. LOANS SECURED BY LIBERTY BONDS AND VICTORY NOTES. 1. I s t h e r e any moral o b l i g a t i o n r e s t i n g upon any of the Federal Reserve banks to e s t a b l i s h r a t e s lower than commercial r a t e s f o r paper of t h i s c l a s s i f i c a t i o n ? I t i s d i f f i c u l t f o r t h i s Council to determine whether any moral o b l i g a t i o n e x i s t s i n any of t h e Federal Reserve D i s t r i c t s . On t h e general p r o p o s i t i o n of moral o b l i g a t i o n a r i s i n g out of the methods adopted i n the various Liberty Bond campaigns the Council i s equally divided, voting 6 t o 6. 2. Would l i q u i d a t i o n of loans of t h i s c l a s s be r e t a r d e d or promoted by the establishment of lower r a t e s ? The establishment of lower r a t e s doubtless would r e t a r d the l i q u i d a t i o n of loans secured by Liberty Bonds and Victory Notes, 3« If lower r a t e s a r e deemed d e s i r a b l e , would i t be e q u i t a b l e and p r a c t i c a b l e to have such r a t e s apply t o o r i g i n a l s u b s c r i b e r s only? I t might be e q u i t a b l e t o confine p r e f e r e n t i a l r a t e s to o r i g i n a l s u b s c r i b e r s only, but we a r e informed t h a t you have been advised t h a t i t would not be l e g ^ l , and i n our opinion i t would not be p r a c t i c a b l e . 4. Should member banks 1 c o l l a t e r a l notes be f u l l y secured, t a k i n g market value i n s t e a d of face value a s a basis? 5. If so, how and when could the new policy be put i n t o e f f e c t with a minimum of f r i c t i o n ? Yes. We understand t h i s i s the p r a c t i c e i n so&e d i s t r i c t s and should be made g e n e r a l , III. FEDERAL RESERVE NOTE ISSUES. 1. I s t h e n o t e - i s s u e policy of the Federal Reserve System subject t o l e g i t i m a t e c r i t i c i s m ? We regard the n o t e - i a s u e p o l i c y under t h e Federal Reserve System a s sound and t h e r e f o r e not s u b j e c t t o l e g i t i m a t e c r i t i c i s m . 2. What connection i s t h e r e between changes i n t h e volume of c r e d i t and t h e volume of currency? -6- x-p.cn 3I s t h e r e any d i f f e r e n c e i n r e l a t i o n t o e f f e c t upon p r i c e s between the volume of c r e d i t and the volume of currency? I t i s not c l e a r t o t h e Council j u s t what i s meant by these questions. They a r e too involved t o admit of t h e i r being s a t i s f a c t o r i l y answered i n the time a t the C o u n c i l ' s d i s p o s a l . 4. Can t h e note/-poli%y of the Federal Reserve System be properly charged with any important r e s p o n s i b i l i t y f o r i n f l a t e d p r i c e s , if so, what has been t h e r e s p o n s i b i l i t y and in what way does the issue of Federal Reserve notes promote or a s s i s t i n f l a t i o n ? An i n c r e a s e of the Federal Reserve note i s s u e was made necessary by war conditions and doubtless had some i n f l u e n c e i n i n f l a t i n g p r i c e s , but i n the opinion of t h e Council t h e r e has been no undue i s s u e of these n o t e s . 5Can t h e accepted p r i n c i p l e s of bank-note-currency r e g u l a t i o n , a p p l i c a b l e i n normal circumstances when the commerce of the world i s conducted on a gold standard, be s a f e l y taken a s a guide i n the abnormal circumstances now e x i s t i n g , when the gold standard i s v i r t u a l l y suspended, except i n the United S t a t e s and Japan? 6. In connection with the policy of c r e d i t control should the p r e s e n t n o t e - i s s u e policy of the Federal Reserve System be changed and r e s t r i c t i o n s be thrown around the i s s u e of Federal , Reserve notes? 7» If the issue of Federal Reserve notes should be r e s t r i c t ed, what form should the r e s t r i c t i o n take and what e f f e c t would d i f f e r e n t methods of r e s t r i c t i o n have? 841 **>» X--2011 -7- (a) Imposition of charges a g a i n s t Federal Reserve n o t e s upon the uncovered, p a r t of c i r c u l a t i o n issued t o them a t a given r a t e , f o r example, a f i x e d r a t e of 5# or a r a t e varying with the corrarercial r a t e , (b) Would i t be p r a c t i c a b l e t o e s t a b l i s h f o r each member b a s k a s o - c a l l e d normal currency l i m i t and t o impose charges upon member banks c a l l i n g f o r notes in excess of t h e i r l i m i t ? (c) Would i t be advisable while continuing t o have the Federal Reserve Banks pay a l l t r a n s p o r t a t i o n charges on incoming currency, t o have shipments of outgoing currency made a t the expense of the consignees? (d) R e s t r i c t i o n s by d e f i n i t i o n cf the c h a r a c t e r of the paper acceptable as c o l l a t e r a l by the Federal Reserve Agent a g a i n s t the issue of Federal Reserve n o t e s . Should member banks ' c o l l a t e r a l notes or customers 1 notes secured by Government o b l i g a t i o n s be taken as c o l l a t e r a l f o r F e d e r a l Reserye n o t e s ? (e) L imita t i o n of the t o t a l volume of Federal Reserve notes by the Federal Reserve Board, the maximum amount being f i x e d pro r a t a f o r each Federal Reserve Bank. (The Federal Reserve Board has s t a t u t o r y power to accept i n p a r t or to r e j e c t e n t i r e l y a l l a p p l i c a t i o n s f o r Federal Reserve n o t e s ) . Would r e s t r i c t i o n of note i s s u e s i n any uf the above mentioned ways operate to promote a b e t t e r c o n t r o l of c r e d i t , and i f s o , what would be the e f f e c t upon the commerce and business of the country? We know of no reason why the p r i n c i p l e s under which bank note currency as issued under the Federal Reserve system should be changed as s u f f i c i e n t time has not elapsed to t e s t i t s f l e x i b i l i t y i n response to business c o n d i t i o n s . The Council i s of the opinion t h a t no a l t e r a t i o n should be made i n the r e g u l a t i o n s governing the currency issued which would impair i t s e l a s t i c i t y . FEDEML VBVlSOilY CCUrCIL rxgHi *GT.C:,' September 2 i , l j 2 0 .
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