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X-1427 The following recotrmendation was trade by t h e Federal Advisory Council t o the Federal Reserve Board: (Meeting of February 17 and 18, 1919.) Topic 9 . You have asked our advice as to the discount r a t e s current a t the Federal Reserve Banks, p a r t i c u l a r l y as they are a f f e c t e d by the amount of Government i s s u e s remaining undigested as evidenced by the f a c t t h a t the l a r g e r part of the invested a s s e t s of t h e Federal Reserve Banks c o n s i s t s of member banks' 15-day notes secured by Liberty bonds and Treasury c e r t i f i c a t e s and of customers 1 notes maturing within 90 days secured in l i k e manner. The Board would l i k e the opinion of the Council as t o the m e r i t s of d i f f e r e n t i a l r a t e s * Assuming the d i f f e r e n t i a l s have been necessary t o aid the Treasury in f l o a t i n g i t s s e c u r i t i e s , does the Council f e e l t h a t d i f f e r e n t i a l s with respect to the c h a r a c t e r of paper and not tri> time of maturity should be continued as a permanent policy? Recommendation: U n t i l the Liberty bonds already issued and t h e Victory bonds to be issued a r e d i s t r i b u t e d among permanent i n v e s t o r s and paid f o r by them and u n t i l the banks are r e l i e v e d of the o b l i g a t i o n they a r e under to carry such l a r g e l i n e s of them f o r t h e i r p a t r i o t i c customers who have gone in debt f o r them, and u n t i l our Government gets through with " i t s temporary f i n a n c i n g on short-time c e r t i f i c a t e s , the discount r a t e s a t t h e Federal Reserve Banks should continue t o show some preference on loans covered by Government s e c u r i t i e s . The r a t e s might well be continued as they now are u n t i l a f t e r the next bond issue has been placed, but t h e r e w i l l come a time when such preference should not be continued, otherwise loans on Government s e c u r i t i e s w i l l continue t o form too l a r g e a proportion of the Federal Reserve Bank loans t o the disadvantage of commercial paper and t h e r e f o r e to the d i s advantage of i n d u s t r i a l and commercial e n t e r p r i s e . The f i n a n c i a l n e c e s s i t i e s of the Government f o r the payment of i t s war d e b t s w i l l however have to be met and provided f o r before such d i s c r i m i n a t i o n in favor of loans covered by Government s e c u r i t i e s as w i l l induce people to borrow t o pay f o r them in a n t i c i p a t i o n of t h e i r f u t u r e earnings and incomes can be discontinued. 1 X-1427 The following recommendation was trade by the Federal Advisory t o the Federal Reserve Board: ( Meeting of February 17 and 18, 1919. ) Council Topic 10+ ^ You have asked f o r the views of the Council, as to whether i t w i l l be necessary f o r some time t o come in order t o develop an acceptance market in t h i s country to s t i m u l a t e i t by a lbw r a t e at the Federal Reserve Banks, and you. have drawn our a t t e n t i o n t o the lower r a t e s p r e v a i l i n g in London f o r bankers 1 acceptances than those current h e r e , Recommendation: In the opinion of the Council the acceptance market in t h i s country i s developing as well as could be expected. The market for bankers 1 acceptances i s now and has been m a t e r i a l l y i n t e r f e r e d with by our Government*s financing on c e r t i f i c a t e s of indebtedness* This i n t e r f e r e n c e w i l l continue as Ibng as the Government continues i t s short-time f i n a n c i n g . In the meantime the acceptance r a t e s a t the Federal Reserve Banks should be maintained just about as they have been. When conditions again s e t t l e down on a peace basis suppi> and derrand combined with competition in foreign markets w i l l govern such r a t e s In comparing discount r a t e s f o r bankers' acceptances current here with those current in London i t should be remembered t h a t during recent years much of Europe *s f o r e i g n business, p a r t i c u l a r l y t h a t of England, has been financed through loans made by our Government. In t h i s connection i t i s of i n t e r e s t t o note t h a t the acceptance business of the London banks and banks domiciled in London, on December 31,1913, amounted t o approximately 117,CL0,0u0 s t e r l i n g , while on December 31,1917, the same had f a l l e n t o approximately L 82,000,000. On August 31,1918, i t had advanced t o L 86,000,000. This decrease of from 25 per cent to 30 per cent in the volume of the London acceptance business, together with the f a c t t h a t our loans to the B r i t i s h Government had the e f f e c t of l a r g e l y r e l i e v i n g the London banks of responsib i l i t y f o r financing t h e i r Government on short-time obligations while i t threw exactly t h a t burden on the banks of t h i s country, l a r g e l y accounts f o r the low discount r a t e s f o r acceptances p r e v a i l i n g t h e r e and for the higher r a t e s prevailing here. When England again resurr.es the financing of her imports and exports through the ordinary banking channels and the present a r t i f i c i a l r e s t r i c t i o n s a r e withdrawn by both Governments in connection with t h e i r imports and exports, and our Government r e s t r i c t i o n s on a l l foreign exchange t r a n s a c t i o n s a r e removed a b e t t e r equilibrium of the two discount markets i s l i k e l y to be e s t a b l i s h e d . In other words, f o r e i g n exchange markets during the war have been in q u i t e an abnormal condition and a r e l i k e l y t o continue so u n t i l Government war debts between the n a t i o n s a r e f i n a l l y and permanently a d j u s t e d and i n t e r n a t i o n a l business t r a n s a c t i o n s r e t u r n to t h e i r norrral and n a t u r a l course f r e e from the governmental r e s t r i c t i o n s and impediments placed on them during the war. Until then e x i s t i n g conditions do not a f f o r d an equitable basis on which a comparison of current r a t e s e x i s t i n g in London and New York can be made. X-1427 The following recoim.endation was Trade by t h s Federal Advisory Council t o the Federal Reserve Board: (Meeting of February 17 and 18, 1919.) Topic 11. 1 The Council would draw the a t t e n t i o n of the Federal Reserve . Board to the following: Under the provisions of section 5202 of the n a t i o n a l bank a c t the l i a b i l i t i e s incurred by a n a t i o n a l bank d i r e c t l y and i n d i r e c t l y can hot Exceed the amount of i t s c a p i t a l stock except f o r c e r t a i n purposes namei. • I t would seem t h a t the amount of b i l l s of exchange which a n a t i o n a l bank rray discount in London and other f o r e i g n centers cotr.es under the p r o h i b i t i o n of t h i s s e c t i o n . The r a t e a t which 60 or 90 days b i l l s of exchange on London are sold in t h i s country i s based upon the s t e r l i n g cable r a t e l e s s c e r t a i n deductions, p r i n c i p a l l y an i n t e r e s t charge at the open market r a t e in London for discounting b i l l s . This r a t e , which to-day i s 3-7/16 per cent r u l e s much belbw market r a t e s f o r money in t h i s country. In purchasing export s t e r l i n g b i l l s a n a t i o n a l bank trust discount the b i l l in London immediately upon i t s a r r i v a l if i t i s to engage in a p r o f i t a b l e t r a n s a c t i o n . If i t does not discount the b i l l i t c a r r i e s a 3-7/16 per cent investment t o maturity when money in t h i s country i s worth more. This no bank w i l l do. But to engage i n t h i s class of business to the e x t e n t required by the demands of American exporters and t o discount the b i l l s purchased upon t h e i r a r r i v a l i n London the contingent l i a b i l i t y created by the bank by the indorsement of b i l l s w i l l quickly exceed the amount of i t s capital. As i t i s the d e s i r e of the Federal Government and the Federal Reserve Board t o encourage as f a r as possible the development of bankers' acceptances and the financing of foreign commerce by American banks to meet the competition of London banks, i t i s suggested t h a t s e c t i o n 5202 be amended so as t o exclude from i t s p r o h i b i t i o n s the l i a b i l i t y created by n a t i o n a l banks as an i n d o r s e r on accepted b i l l s of exchange a c t u a l l y owned by the bank and rediscounted a t home or abroad, or if t h i s object can be accomplished by a r u l i n g of the Federal Reserve Board i t would be more d e s i r a b l e than t o attempt an amendment t o the a c t . There i s no l i m i t t o the amount of b i l l s drawn a g a i n s t a c t u a l l y e x i s t i n g values which a bank may purchase and hold, hence i t would seem l o g i c a l t h a t t h e r e should be no l i m i t upon t h e amount which a bank might n e g o t i a t e by indorsement.
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