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X-4662 95 THE RELATION OF THE COUNTRY BANKER TO TIG FEDERAL RESERVE BANK (An address before the Kentucky Bankers Association at Louisville, Ky., Sept. 16, 1926.) by Geo. R. James "' "' * MR. CHAIRMAN, LADIES AND GENTLEMEN: As a member of the Federal Reserve Eoaru, nothing has given me as much concern as does "The Relation of the Country Banker to the Federal Reserve Bank", and my one regret is that so few of the country bankers • have availed themselves of the priviiege and opportunity of becoming members. I s~y this because of my regard for and my unbounded faith in the Federal Reserve System. I feel that all of you agree with me in the belief that it is the greatest and strongest banking system in the world and that its usefulness, soundness and success have been demonstrated both in times of war and in times of peace. In co m idering its functions, I always try to look at the System not from the viewpoint of a banker altogether, but more from the standpoint of the public. For, while the System deals with the public almost entirely through its member banks, the question of how the public would be benefited was of paramount interest and vital importance in its creation and its continued existence depends entirely on whether or not the public is benefited. I, therefore, regard the public's interest in, and the public's opinion of, the System as the one great consideration. I do not share the opinion one frequently hears to the effect that the Federal Reserve System is an independent organization and that it -2is owned by the member banks. X-4662 I feel that the public has quite as much interest in the Federal reserve banks as have the member selves. B6 This public interest centers in our Government. baru~s them- "That Government of the people, by the people t for the people", ·and of which the Federal Reserve System is a vital part. As a citizen, the country banker, whether his bank is or is not a member of the Federal Reserve System, has an interest in the System growing out of his citizenship. True, the reserve denosits of the member banks may well be said to be the foundation of the Fe.deral Reserve System, and it is also true that the capital stock of the reserve banks was supplied by the member banks. But we must not overlook tho fact that the Act of Corgress, under which the System was established, provided at the outset that "Should the total subscriptions by banks and the public to the stock of said Federal reserve banks, or any one or more of thorn, be, in the judgment of the Organization Committee, insufficient to provide the amount of capital stoCk required therefor, then and in that event the said Organization Committee shall allot to the United States such an amount of said stock as said Committee shall determine." Then, too, let us for a moment consider "The Division of , Earnings of the reserve banks". The Act says - "After all necessary expenses of a Federal reserve bank have been paid or provided for, the stockholders shall be entitled to receive an annual divident of six per centum on the paid-in capital stock, which dividend shall be cwnulative. After tho aforesaid dividen4 claims have been fully met, the not earning::~ shall be paid to the United States as a franchise tax except that the whole of such net earnL1gs, includil-,g those for the year ending December thirty-first, nineteen hundred and eighteen, shall be paid into a ~urplus fund until it X-4662 -3- ~)7 shall amount to one hundred per centum of tho subscribed capital stock of such bank, and thereafter ten per centum of such net earnings shall be paid into the surplus. 11 Tbe net earnings derived by the United States from Federal reserve banks shall, in the discretion of the Secretary, be used to supplement the gold reserve held against outstanding United States notes, or shall be applied to the reduction of the outstanding bonded indebtedness of the United States ucner regulations to be prescribed bt the Secretary of the Treasury. Should a Federal reserve bank be dissolved or go into liquidation, any surplus remaining, after the :payme:1t of f;l.ll debts, dividend requirements as hereinbefore provided, and the ~ar value of the stock, shall be paid to and become the property of the United States and shall be similarly applied". The earni~gs a~plication, under these provisions of the law, of the of the System in the past, results in the capital account of the Reserve System being one-third under the ownershi~ of the member banks a1n two-thirds (representing the surplus) belonging to the Treasury of the United States. Neither must we forget the fact that the Government stands squarely behind the notes of the reserve banks, which notes play such an important part in providing a currency for the nation. Even though by any combination of circumstances all of the gold held by the System should be taken away and out of the country, still those notes backed by the integrity of our Government would be worth one hundred cents on the dollar. It is perfectly clear to my mind that the reserve banks were not created to make money either for thems~lves or for the member banks be- yond the six per cent interest on the money invested in the capital stock. It is equally clear that the System was designed to be an aid to agriculture, industry and commerce,- or, in other words, the public, although, as I said before, it functions through its member banks. The law does permit the Federal reserve banks to perform X-4662 -4- certain services for the me,nber banks without charge and at the expense of the reserve banks because it was believed that the reserve banks could reduce the costs of performing these services, and I can tell you that the services now rendered by the Federal reserve banks are performed at a saving in cost that is far greater than was originally anticipated. The cost of the collection of CheCks, transfer of funds, and handling of currency by the Federal Reserve System is only a small percentage of what those fu:ootions cost when performed by individual banks. that are possible through mass production appl~ The economies with equal force in the Federal Reserve System as they do in the plants of the Ford Motor Company. The major earnings of the Federal reserve banks arise out of the interest charged meniber banks when the meniber banks borrow. They are increased or diminished only as the requirements of the member banks dictate. And, perhaps it may be important to state that tho facilities of the Federal Reserve System are available for the smallest and for the largest member banks on exactly the same terms and conditions. I am giving you this information because I thirik it is just and right that you should ktx:>w tha.t the so-called free service which the Federal Reserve System renders to its members is in the last analysis given at the expense of the public, and I feel that this great American public should he in a position to inquire (1) whether or not .it is getting the ·benefit of these services, and (2) if not, why not? A good part of my time has been taken up in the study of the question "why so many banks do not belong to the Federal Reserve System", but I am still unable to get anything like a satisfactory answer to this · problem. The fact is that when I sumup the replies I have seen or heard 99 X-4662 -5- I reach the conclusion that an alibi or an excuse has been offered in lieu of reasons. It appears to rre that a good many bankers, like a great many business men and individuals, have the habit of looking at every• thing through a pair of spectacles with the dollar sign on one lens and the personal pronoun 11 ! 11 on the other. Their vision is both narrow and distorted and this perhaps accounts for the attempt so many people make to go through life on the principle "How much can I get and how little can I give!" Oh, what a terrible mistake they make! If they would only take off the spectacles and get a clear. broad view of this wonderful universe they would see that those who have achieved the greatest s~ccess operated on the one and only principle of service which is just the opposite. No matter what one's avocation may be, to be successful he must have for his first and most important consideration the interest of the CllS tamers. Not 11 how much can I &tl_11 but 11 how much can I give" and "how much can I do 11 to extend my service to the greatest numbor of people. One of the popular answers to tho inquiry as to why • non-member banks do not join the Federal Reserve System has been that the System does not pay interest on reserve deposits, whereas, by keeping their reserves with some city correspondent bank they do receive interest on their bal&lces; in consequence, in the one case they get no return on their reserve balances, in the other, they make a X-4662 -6profit. This statement always brings to my mind tho story of tho two negroes who were passing a graveyard. and tho other couldn 1 t. One of them cOQld read Tho educated follow was entertaining his companion by reading the epitaphs on tho tombstones. came to one v.vhich said 11 He is not dead, but sleepeth11 • fellow said - .· 11 Umph, big boy, that white 1 Finally, they ma..'1 The ignorant ain 1 t fooling no body copt hissef. 11 ~ good friend Dr. Tait Butler once said that the greatest agricultural implement ever invented was a load pencil, so to a banker who springs that sort of an answer as his reason for not joining the Federal Reserve System, I offer the suggestion that he get himself a supply of lead pencils not to use as agricultural implements but to sharpen and usa in analyzing his own affairs. I could go into details in explaining to you just why this suggestion is offered but my time is too limited and I will only say in this connection that the city banks who act as correspondents for countty banks have quite a way of requiring 11 commen- surate balances 11 and there are mighty few of them but what mak:o a profit out of the country banks account. Every now and then we have the suggestion offered that the reserve banks Should give imnediate credit for items de~ iOO 1_01_ X-4662 -7- posited with thom by their members on the theory that 11 i t would not cost the System anything to do so", but any one who holds this view is very greatly mistaken. Experience has shown that member banks borrow from the reserve banks almost entirely for the purpose of replenishing their required reserve balances and the moment their balances at the reserve banks are in excess of tho legal requirements the excess is immediately used to retire the borrowings. If you will notice the "Report of Condition of the Federal Reserve Banks" published weekly in the leading newspapers of the as 11 you will find that the item listed in the assets c~ntry, Total Bills Discounted" very closely approxirrntes the amount of the item listed in the liabilities as "Deferred .A.vailabili ty Items 11• In other words, the direct borrowings of member banks• except for infrequent peak periods~ To give 11 offset the II float" • immediate credit" would cut the earning assets of the reserve banks very materially. last report available, it To replace these market w~ld 11 w~lu Oalcuin~od on the mean approximately fifty per cent. direct borrowings" by purchase:, in the open cause inflation that I ~hould regard as both unthink- able and unpardonable and it would also work a tremendous hardship on the com:rercial banks of the country by unnaturally forcing a reduction in rates. Possibly the effect upon the country banks would be less i02 - 8 - X-4662 noticQable at the start than would be the effect upon the larger city banks, but you may be certain it would reach even the smallest and most remote banks through competition in one form or another. It is extremely difficult, if not impossible, to get accurately the effect "giving immediate credit" at the reserve banks would have on general interest rates but of more than one per cent. my guess is that it would cause a reduction So, from the standpoint of the commercial banks only and without regard to or for the Reserve System, see what price would be paid for getting this immediate credit. Say a bank with $200,000.00 of deposits and loans amounting say to $150,000.00, - such a bank might reasonably be expected to have something less than $5,000.00 of items in process of collection, which at four per cent - the present rediscount rate - would mean that "immediate cred:l.t 11 resulted in a aav:\,.ng of $200.00. But as an offset to this, consider the meaning to that bank of the forced reduction in interest rates to its customera. If the reduction was one per cent it would make a net loss of $1,300.00 to the bank. This is among those things that should be considered and figured on with a very sharp pencil. Another reason frequently offered by country bankers in the South for not joining the Federal Reserve System is that they are denied the right to charge exchange when remitting for their checks. banker asked in my One so-called presence on one occasion 11 What right has the Federal Re- serve System to deny my bank the right to charge exchange7 11 To this I very promptly answered by asking him the question - "What right have you to deduct anything when paying a customer's check that is presented either over the counter or through a Federal reserve bank?" It ts trae that in tba old a.qa· prto~ to - . eatablt. . . fl3 ot the Jed.al leatWn $7ftem it ... pq their cu.atomea-•' o~ wha . neceoaey fo¥" bake, the pape ot in order to the check lived at a. dia• taut. point, eith_. to ah1t;t the currccy or elae raaintain balances with . ~ coneQOndent baalD aplaat Which could dt'aw and, <>f course, in either case this coats money end the banb 'ftra e.ntltlecl to collect for the aervice. Bo.t with· the comtac of the Jederal leacve stat• thi• !'he coat of ahippinc cutrenc1 t• absorbed by the ai tua.tion changed.• reserve bank and it 11 not only leal e:x;penaive 'but it ia aa.fer and more . . convenient for a bank to· pq the checks ot ita cu.atomer when they are . pre1ented throup a reserve b&Dk than whc preacte4 bJ the cuatomer at the teller's window. oyholf, the Supreme Coun. If of tlle t1ni ted States baa aet tled ~ the question and baa eata'bliahed the "riebt", onde aDd tor all. at the requirement that manber bank::a ah$1.1 !r.Ut at collection through the reserve ·pall tor all checq ·act for 'bank~~. Jurthermoi"Ct, this ifl4r:bt ancl principle has 'been recOgnized by ninety per cent ot ali 'bankl in the tl':lx1te4 ltatM, .·and.· to4q e"'er;r ba11k tn· the Firat, Secollcl·and. Third Jtederal·:aeaer._ -.wiota 1• a ber bank or ia on tb.e par liata of tbe reaerve: mem- baaakl. I undlretand. there are onl¥ 16 out ·ot the 458 bankS in tlle State ot tentuck:v not on the ·~ temi ttln$ list" $\4 I congra\ulat• the people of your State accoN.ilJ&ly. It aeea quite possible that lome c0.\17' ·batllta have been kept out of the l'ecWtal Ileaerve S;rete 'becaU8'e thW dld not· 1f•t to diarupt their re-latfonaS.p with thetr city cos-r. . . . . .tl. 1M chance' j_Q,l X-4662 -10- are that the relationship has been and is most pleasant and in the main satisfying, but, as I see it, joining the Federal Reserve System does not rnee.n that this relationship should be broken, not by any means, although it would make a change in the nature of the relationship and a change which in my opinion can and should be of advantage to both parties. Undoubtedly, the city correspondent bank can and will find a way for rendering a service th/1·~ will fully justify the country bank in carrying a balance. I do not for a minute advocate cutting out the city corres:'?ondent, bu't I do urge the country banker to mru:e available for his community every facility the Government provides as an aid to the business of the country. Another thing, I wonder if "the bankers, particularly the country bankers, realize what a great change has taken place and is now taking place in the business methods and condi tiona of this entire country? Think of the evolutio:!:l i:r.. methods of transportation in the past twentyfive to thirt;y years. ~hink buggy and the steamboats. of the passing of the ox cart, the horse and Recall for the moment the coming of automobiles, and good roads, the increased use of the telephone and the inauguration of the rural postal service. ~:~,.res c:;:·u Then think of the development of chain and the growth of large department stores in cities and what these doing to the crosE:-roads storekeeper and the small town merchant. Dorlt overlook the shifting of the population from farms to cities, and keep your eye on the cooperative movement and its effect on the marketing of agricultural products. All of these tnings have a direct bearing and must be taken X-4662 - 11 - into account when you are figuring on whether or not it pays to belong:105 to the Federal Reserve System, and it would be well to take notice of them whether you consider joining the System or not for they are vital factors in your future, - you may be certain of that. After all, as I see it, the changes that are taking place in both the business and social life of the nation are only the working out of naturo 1 s law of tho survival of tho fittest. Tho American pub- lic not only demands but it is entitled to the best and the individual .. or the organization that provides the best service is the one who will survive. And this applies to banking just as well as it does to any other line of business. You who read the newspapers know what recently happened • to a chain of nonmember banks with more than a hundred members in the Atlanta District. That outfit, headed by the Bankers Trust affiliated with the Federal Reserve System. Co~any, was not On the contrary, they were against tho System; they were leaders in the fight against 11 par clearance of checks 11 , and declined to keop their reserves in a reserve bank. When the strain came and tho need of their reserves developed because of a decrease in the deposits of some of the banks in the chain, those reserves were not available and the crash followed~ 'The banks involved were srooll, it is true, and the damage measured in dollars was relatively 1ight, but think, my friends, of the tragedies that followed in those hundred and more communities whose hard-earned savings were wiped out. It seems to me most deplorable that such a large proportion of our people should be denied the financial protection and benefits created for them by the Government, simply because a large group of so-called - 12- X-:-4662 bankers a.ro asleep on the job. Already the Atlanta Constitution, one of the great newspapers of the Sout~, is discnssing the urgency of forcing by law all commercial banking institutions into a National System under Federal supervision. Certainly the discussions of branCh banking and the failure to pass in the last two sessions of Congress the so-called McFadden Bill, designed to Check the growth of branch banking in this country, should cause the officers of independent unit banks to wake up and endeavor to give the communities that are dependent upon them for banking facilities ,~ every advantage in banking service that is now available. Every State bank with requisite capitalization and proper management is not only entitled to membership in the Federal Reserve System but has been and is constantly being invited to join the System. I have told you what I thought of the reasons I have heard for not joining. I wonder what will happen when the depositing customers begin to study the situation and to ask questions? I do not for one moment mean to say that being a member of the Federal Reserve System guarantees deposits, nor does it insure the public and the depositors against dishonest or incompetent banking, but I do say that WHEN a bank is a member of the Federal Reserve System and its business is conducted within the limitations and restrictions laid .. down by the law and the rules and regulations of the Federal Reserve Board, THAT BANK CANNOT FAIL. There· have been a great many bank failures in the United States during the past few years. A small percentage of them - and a small percentage only - have been members of the Federal Reserve System, but NOT ONE SINGLE ONE ·Q! THm failed that had lived up to the letter and spirit of the law and the rules and regulations of the Federal X-4662 - 13- Res·erve Hoard. 1_0'( Another thing; a very careful analysis of the earnings of the something like .thirty thousand banks in the United States shows that the member banks who live up to the letter and the spirit of the law and the rules and regulations relating to the Federal Reserve System make more money on the capital invested than do those banks on the average that are not members of the System. As a result of my study of this great problem, I am willing to say that it is my judgment that if and when a commercial bank finds out that it cannot make money for its stockholders as a member in good standing of the Federal Reserve System, then the best thing that bank can do in the interest of its depositors, its stockholders and its community is to liquidate and get out of the wa;y for certainly there are too many banks in this day and time for the business now available, Lot me, in conclusion, urge you to look upon the law and the rules and regulations of the Federal Reserve Board not as restrictive measures, intended to harass and handicap, but as a standard of good banking, for, after all, that is exactly what they are. It may seem to the nonmember country banker that the require4 mente of the reserve banks, relative to the paper that is to be discounted, are difficult to meet, but let me assure you that is not the case. It is like it was when I began to realize that if I was to keep peace in my family I would havo to bey an automobile. I just hated to give up my horses, and then, too, I feared that I never would be able to operate a car. • One da:y I realized how many: people there were driving cars, then said to myself surely if other people can learn I can too, and with the determination to run an automobile or die in the attempt, my fears vanished, and I soon found that after all it was a very easy and - 14 simple matter, and ~ was in -this way enabled to again toke my place on the public highways. Don't be afraid to ask your borrowing customers for a statement or to insist that they carry a balance with you as a reserve against the loan. Surely you carry reserves against your obligations to your depositors, not because it is the law but because it is good banking. Good for you as well as the depositor. It is equally good for you and for your borrowing customer to require him to keep a reserve. Don't st·ick to the antiquated methods of getting your accommodations for seasonal needs just because it seems to be the easy way. I learned as a boy at Sunday School that the easy route was not the road to salvation. The future of the country banker will rest upon his ability to meet changed conditions by adopting the new methods. going to be an easy one by any means. His road is not Most likely it is and will be full of ruts, but right here let me remind you that the only difference between a rut and a grave is that one is longer and the other deeper. Study your position and do not be ashamed to acknowledge mistakes or to learn from the experiences of others. As Mr. Hubbard once said, 11 While we are green we are growing and when we think we are ripe we . are beginning to get rotten 11 • My last and possibly most important suggestion is that you keep in mind the slogan of your own great Commonwealth - • divided we fall 11 • Uni ted we stand; .And then, if you have not already done so, join the Federal Reserve System. I thank you. 11
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