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x-3231 REMARKS OF W„ p . G. HARDING AT THE OPENING SESSION OF THE JOINT CONFERENCE OF THE FEDERAL RESERVE BOARD WITH THE FEDERAL RESERVE AGENTS AND GOVERNORS OF FEDERAL RESERVE BANKS HELD AT WASHINGTON, D. C. OCTOBER 25-28, 1921. JLJu'. X-3231 EFFICIENCY AND ECONOMY IN ADMINISTRATION OF FEDERAL RESERVE BANKS, r In t h e program f o r t h i s Conference, which was sent out about a month ago, t h e f i r s t s u b j e c t l i s t e d f o r d i s c u s s i o n i s " E f f i c i e n c y and Economy i n A d m i n i s t r a t i o n of F e d e r a l Reserve Banks*'. This s u b j e c t , always an important one, h a s added s i g n i f i c a n c e a t t h i s time because of charges which have been g i v e n wide c i r c u l a t i o n and p u b l i c i t y t h a t t h e r e h a s been an amazing w a s t e of p u b l i c money i n t h e i n c r e a s e of s a l a r i e s and i n t h e e x p e n d i t u r e s of t h e Federal Reserve Banks. These c h a r g e s a r e , no doubt, r e s p o n s i b l e f o r t h e r e s o l u t i o n r e c e n t l y adopted by t h e United S t a t e s S e n a t e , d i r e c t i n g t h e Federal Reserve Board t o i n f o r m t h e Senate of t h e number of o f f i c e r s and employees, t o g e t h e r w i t h t h e i r r e s p e c t i v e s a l a r i e s , of t h e F e d e r a l Reserve Bank of New York, a s w e l l &s of t h e o t h e r F e d e r a l Reserve Banks, and t h e e x p e n d i t u r e s made by each ^Branch Bank11 i n t h e e r e c t i o n of p u b l i c b u i l d i n g s and t h e g e n e r a l e x p e n s e s i n the a d m i n i s t r a t i o n of each F e d e r a l Reserve Bank, and how much of the n e t e a r n i n g s have been p a i d t o t h e United S t a t e s a s a f r a n c h i s e tax* I n t h e o p i n i o n of t h e Board i t i s u n f o r t u n a t e t h a t m a t t e r s of this kind should assume a p o l i t i c a l a s p e c t or t h a t t h e y should become t h e s u b j e c t of a Congressional r e s o l u t i o n , The Board h a s kept Congress informed of t h e s e m a t t e r s ever s i n c e t h e Banks were organized l a t e i n t h e y e a r 1914* I n each Annual Report i n f o r m a t i o n r e g a r d i n g s a l a r i e s h a s been g i v e n i n d e t a i l , names only b e i n g omitted• An e x h i b i t h a s been made f o r each Federal Reserve Bank, showing t h e number of o f f i c e r s by g r a d e s , x-3231 - 2 - s a l a r i e s p a i d t o each, t h e t o t a l number of e n p l o y e e s , t h e a v e r a g e s a l a r y and t h e a g g r e g a t e of a l l s a l a r i e s p a i d . I n f o r m a t i o n e q u a l l y e x p l i c i t has been g i v e n from y e a r t o y e a r r e g a r d i n g t h e b u i l d i n g o p e r a t i o n s of t h e s e v e r a l F e d e r a l Reserve Banks. The Board h a s endeavored t o make c l e a r t h e c h a r a c t e r and f u n c t i o n s of t h e F e d e r a l Reserve Banks and t o d i s t i n g u i s h between m a t t e r s which come under t h e s u p e r v i s i o n and c o n t r o l of t h e r e s p e c t i v e b o a r d s of d i r e c t o r s and under t h e g e n e r a l s u p e r v i s i o n of t h e F e d e r a l Reserve Board. For some t i m e p a s t , a p e r s i s t e n t propaganda h a s been conducted, which i s c a l c u l a t e d t o mislead t h e p u b l i c and which a p p a r e n t l y i s d e s i g n e d t o b r i n g t h e System and i t s management i n t o d i s r e p u t e . The powers and d u t i e s of t h e d i r e c t o r s of F e d e r a l Reserve Banks a r e d e f i n e d i n S e c t i o n 4 of t h e F e d e r a l Reserve A c t . R e s p o n s i b i l i t y f o r t h e management of t h e s e Banks r e s t s p r i m a r i l y and d i r e c t l y upon them and upon t h e i r duly a p p o i n t e d o f f i c e r s and a g e n t s . The law r e q u i r e s t h a t any compensation t h a t may be p r o v i d e d by b o a r d s of d i r e c t o r s f o r d i r e c t o r s , o f f i c e r s or employees s h a l l be s u b j e c t t o t h e approval of t h e F e d e r a l Reserve Board. The Board h a s n o t i n a l l c a s e s approved s a l a r i e s which have been voted by d i r e c t o r s of F e d e r a l Reserve Banks, but a s a r u l e t h e recommendations of t h e d i r e c t o r s w i t h r e s p e c t t o s a l a r i e s have been approved by t h e Board, somet i m e s , p e r h a p s , w i t h some r e l u c t a n c e . The Board h a s t a k e n t h e p o s i t i o n , however, t h a t a s t h e d i r e c t o r s a r e p r i m a r i l y r e s p o n s i b l e f o r t h e a d m i n i s t r a t i o n of t h e Banks, much c o n s i d e r a t i o n should be g i v e n t o t h e i r views a s t o t h e r a t e of compensation n e c e s s a r y t o s e c u r e h o n e s t , e f f i c i e n t and c a r e f u l management. In i t s Annual Report f o r t h e year I 9 I 8 , t h e Board p o i n t e d out t h a t p a r t i c u l a r l y w i t h r e s p e c t t o j u n i o r o f f i c e r s and employees s a l a r i e s must be p a i d a p p r o x i m a t i n g -3- x-3231 t h e s a l a r i e s paid by l a r g e member banks i n t h e c i t i e s where t h e F e d e r a l Reserve banks a r e l o c a t e d . I f , i n o r d e r t o reduce expenses, t h e p o l i c y should be adopted of making t h e F e d e r a l Reserve banks mere t r a i n i n g schools f o r bank o f f i c e r s , i t i s h a r d l y p o s s i b l e , because of t h e f r e q u e n t changes i n v o l v e d , t h a t the banks would have the degree of e f f i c i e n c y i n a d m i n i s t r a t i o n and smoothness of o p e r a t i o n which t h e y would have i f the compensation p=id be s u f f i c i e n t l y l i b e r a l t o " r e t a i n t h e s e r v i c e s of t r a i n e d and c a p a b l e t e n . The Board does n o t f o r a moment b e l i e v e t h a t the d i r e c t o r s of any F e d e r a l Reserve bank i n f i x i n g s a l a r i e s o r i n a u t h o r i z i n g expendit u r e s i n developing the b u s i n e s s have been a c t u a t e d by any d e s i r e t o d e p r i v e the Government of the revenue which i t i s e n t i t l e d t o r e c e i v e u n d e r the terms of S e c t i o n 7 of t h e F e d e r a l Reserve Act, and most a s s u r e d l y t h e F e d e r a l Reserve Board would n o t b e a p a r t y t o any such undertaking. F e d e r a l Reserve banks a r e n o t , s t r i c t l y speaking, Government institutions. The government owns no s t o c k in them, they a r e n o t supported b y a p p r o p r i a t i o n s made by Congress, t h e y a r e s u b j e c t t o l o c a l t a x a t i o n on t h e i r r e a l e s t a t e j u s t as n a t i o n a l b a n k s a r e and t h e i r payments out of e a r n i n g s t o t h e Government as a f r a n c h i s e tax a t t i m e s g r e a t l y exceed a l l t a x e s p a i d by an e q u a l number of the l a r g e s t n a t i o n a l banks, s t a t e banks and t r u s t companies i n the United States. The d i r e c t o r s of F e d e r a l Reserve banks a r e given such i n - c i d e n t a l powers as s h a l l b e n e c e s s a r y t o c a r r y on the b u s i n e s s of banking w i t h i n t h e l i m i t a t i o n s p r e s c r i b e d by t h e F e d e r a l Reserve .Act 1126 X . 4 . "3231 and " s h a l l p e r f o r m the d u t i e s u s u a l l y a p p e r t a i n i n g to t h e o f f i c e of d i r e c t o r s of "banking a s s o c i a t i o n s and a l l such d u t i e s as a r e p r e s c r i b e d by law" . ? h e r e c a n be no q u e s t i o n , t h e r e f o r e , as t o the a u t h o r i t y of d i r e c t o r s of F e d e r a l Reserve banks t o p r o v i d e t h e i r i n s t i t u t i o n s w i t h s u i t a b l e banking q u a r t e r s . As h a s been r e p e a t e d l y p o i n t e d out t o Congress, i t has been i m p o s s i b l e t o l e a s e adequate q u a r t e r s , end b u i l d i n g o p e r a t i o n s hpve, t h e r e f o r e , become n e c e s s a r y . The Senate r e s o l u t i o n , t o which a l l u s i o n has been lmde, r e f e r s t o t h e F e d e r a l d e s e r v e banks as " b r a n c h e s " . The F e d e r a l Reserve Act, however, makes i t v e r y p l a i n t h a t t h e s e banks a r e n o t branches4 T h e i r i n dependent powers a r e d e f i n e d i n S e c t i o n 4 and a u t h o r i t y t o e s t a b l i s h branches of t h e i r own i s g i v e n them i n S e c t i o n 3* The b u i l d i n g s acquired or c o n s t r u c t e d by F e d e r a l r e s e r v e banks a r e i n no sense p u b l i c b u i l d i n g s . The f u n d s n e c e s s a r y f o r t h e i r a c q u i s i t i o n or c o n s t r u c t i o n were n o t a p p r o p r i a t e d by Congress, the t i t l e i s n o t v e s t e d i n t h e United S t a t e s b u t i n the F e d e r a l r e s e r v e bank, and they a r e not exempt from t a x a t i o n as a l l p u b l i c b u i l d i n g s a r e , b u t a r e e x p r e s s l y made l i a b l e t o s t a t e and l o c a l t a x a t i o n . The o f f i c e r s of F e d e r a l r e s e r v e banks a r e n o t o f f i c e r s of t h e United S t a t e s and a r e n o t p u b l i c o f f i c i a l s any more than o f f i c e r s of n a t i o n a l banks are p u b l i c o f f i c i a l s . Federal reserve banks, l i k e n a t i o n a l banks, are organized u n d e r t h e laws cf t h e United S t a t e s and e a c h a r e s u p e r v i s e d b y p u b l i c o f f i c i a l s ; t h e F e d e r a l r e s e r v e banks by t h e F e d e r a l Reserve Board and t h e n a t i o n a l banks b y t h e C o m p t r o l l e r of t h e Currency. - 5- x-3231.1128 Both c l a s s e s a r e impressed w i t h d u t i e s t o t h e p u b l i c , "but i t i s t r u e t h a t F e d e r a l r e s e r v e banks, by r e a s o n of t h e i r s u p e r v i s o r y powers over t h e member banks and t h e n a t u r e of t h e i r b u s i n e s s , and by r e a s o n of the e l i m i n a t i o n of t h e element of c o m p e t i t i o n , have more of t h e a t t r i b u t e s of governmental i n s t i t u t i o n s than n a t i o n a l b a n k s . I n o r d e r t o r e n d e r e f f i c i e n t s e r v i c e t o the member banks and through them t o . the p u b l i c and t o p e r f o r m t h e f u n c t i o n s imposed upon them by t h e .Act, F e d e r a l r e s e r v e banks are obliged t o make l a r g e e x p e n d i t u r e s which a r e n o t imposed upon n a t i o n a l b a n k s , s t a t e banks and t r u s t coprpanies. Board The /does n o t w i s h to i m p a i r i n any degree the e f f i c i e n c y of the F e d e r a l r e s e r v e b a n k s , b u t deems i t i m p o r t a n t , n e v e r t h e l e s s , t o c a l l y o u r a t t e n t i o n t o the r e a c t i o n which h&s t a k e n p l a c e d u r i n g t h e p a s t e i g h t e e n months, t o t h e g e n e r a l b u s i n e s s d e p r e s s i o n now p r e v a i l i n g throughout t h e c o u n t r y , t o t h e s m a l l e r volume of e a r n i n g a s s e t s now c a r r i e d by the F e d e r a l r e s e r v e banks and t h e consequent r e d u c t i o n i t i the e a r n i n g s , and t o the change i n p u b l i c s e n t i m e n t w i t h regard t o l a r g e e x p e n d i t u r e s . The Board u r g e s you, t h e r e f o r e , t o do a l l i n y o u r power t o e l i m i n a t e u n n e c e s s a r y expense and t o conduct the b u s i n e s s of y o u r r e s p e c t i v e i n s t i t u t i o n s i n such a manner as t o g i v e no r e a s o n a b l e grounds f o r any charge of e x t r a v a g a n c e and w a s t e . Recent Developments i n t h e Par Clearance System and Suggested Changes i n Methods. The Board d e s i r e s t o c ^ l l your a t t e n t i o n t o the p e r s i s t e n t o p p o s i t i o n on t h e p a r t of a l a r g e number of non-member banks of t h e c o u n t r y t o t h e F e d e r a l r e s e r v e p a r c l e a r a n c e system and t o t h e i m p e d i ments which have b e e n thrown i n the way of making t h i s system u n i v e r s a l in i t s scope. 1129 X-323-. - 6 — The i n j u n c t i o n which was obtained some e i g h t e e n months ago by s t a t e banks i n Georgia a g a i n s t t h e F e d e r a l IVeserve B ank of A t l a n t a i s s t i l l in e f f e c t . The F e d e r a l r e s e r v e bank was s u c c e s s f u l i n removing the c a s e f r o m t h e s t a t e c o u r t t o t h e United S t a t e s D i s t r i c t Court and won a c l e a r c u t d e c i s i o n i n t h a t c o u r t . I t won a l s o i n thS United S t a t e s C i r c u i t Court of .Appeals, b u t the d e c i s i o n of t h e United S t a t e s Supreme Court was t o the e f f e c t t h a t i f the a l l e g a t i o n s made by t h e complainants could t»e s u s t a i n e d they would b e e n t i t l e d t o r e l i e f . By r e a s o n of t h e language used i n the o p i n i o n of t h e Supreme Court t h i s d e c i s i o n h a s been represented t o the p u b l i c as a sweeping v i c t o r y f o r t h e c o m p l a i n a n t s and as a condemnation by the h i g h e s t c o u r t of t h e l a n d of t h e p o l i c y of t h e F e d e r a l r e s e r v e banks w i t h r e s p e c t to c o l l e c t i o n s . As a m a t t e r of f a c t , however, t h e c a s e has m e r e l y b e e n remanded t o t h e United S t a t e s D i s t r i c t Court i n Georgia f o r t r i a l on i t s m e r i t s , and a f a v o r a b l e outcome i s a n t i c i p a t e d by t h e b a n k t s Counsel, w i t h whom i s a s s o c i a t e d Hon. John W, D a v i s , f o r m e r S o l i c i t o r General of the United S t a t e s and more r e c e n t l y United S t a t e s Ambassador t o G r e a t B r i t a i n . This c a s e w i l l d o u b t l e s s come a g a i n b e f o r e t h e Supreme Court of t h e United S t a t e s i n r e g u l a r c o u r s e a f t e r i t has b e e n d e c i d e d b y t h e United S t a t e s Circuit D i s t r i c t Court and the United S t a t e s / C o u r t of Appeals. I t i s n e c e s s a r y , however, t o c a l l y o u r a t t e n t i o n t o t h e f a c t t h a t the l e g i s l a t u r e s of t h e S t a t e s of L o u i s i a n a , M i s s i s s i p p i , Alabama, Tennessee, Georgia, F l o r i d a and North C a r o l i n a have e n a c t e d laws which w i l l make i t d i f f i c u l t , i f n o t i m p o s s i b l e , t o o b l i g e non-member banks t o r e m i t a t p a r , and w h i l e t h e r e i s doubt as t o t h e c o n s t i t u t i o n a l i t y of t h e s e laws, a s e p a r a t e t e s t w i l l have t o be made i n e a c h i n s t a n c e . x-3"! ii;;;o - 7 T h i s w i l l i n v o l v e g r e a t expense and p e r h a p s many y e a r s w i l l e l a p s e b e f o r e a l l t h e c a s e s can be decided f i n a l l y . I t i s not t h e purpose of t h e Board t o recommend any immediate change i n p o l i c y , f o r Counsel i s anxious t h a t n o t h i n g be done t o c o n f u s e t h e i s s u e s ae t h e v have a l r e a d y been d e f i n e d i n t h e case now pending i n t h e United S t a t e s D i s t r i c t Court i n Georgia, but a f t e r t h a t court h a s decided t h e case t h e Board may suggest a m o d i f i c a t i o n of t h e p r e s e n t p l a n . It seems opportune, t h e r e f o r e , t o d i s c u s s t h i s q u e s t i o n on t h e p r e s e n t o c c a s i o n and r e q u e s t t h e Federal H*eserve A g e n t s and G o v e r n o r s of t h e banks at t h e i r s e p a r a t e m e e t i n g s t o devote such time a s may be n e c e s s a r y f o r a full discussion ,of t h i s s u b j e c t . Section l6 of t h e Federal Reserve Act a u t h o r i z e s t h e F e d e r a l Reserve Board to exercise t h e f u n c t i o n s of a c l e a r i n g house f o r t h e F e d e r a l Reserve banks o r t o d e s i g n a t e a F e d e r a l r e s e r v e bank t o e x e r c i s e such f u n c t i o n s , and a l s o t o r e q u i r e each such bank t o e x e r c i s e t h e f u n c t i o n s of a c l e a r i n g house f o r i t s member banks. In t h e development of t h e p r e s e n t system t h e Board h a s attempted t o e s t a b l i s h such a c l e a r i n g house i n each Distriet. In many of t h e l a r g e c i t i e s t h e r e a r e banks which a r e not members of t h e l o c a l c l e a r i n g house, but which a r e p e r m i t t e d t o use some c l e a r i n g house member bank a s a c l e a r i n g a g e n t . Such banks a r e , however, obliged t o conform t o a l l t h e r u l e s and r e g u l a t i o n s which govern c l e a r i n g house member banks. Non-member banks which r e f u s e t o r e m i t a t p a r f o r checks drawn on them have been a v a i l i n g t h e m s e l v e s of t h e f a c i l i t i e s of t h e F e d e r a l r e s e r v e p a r c l e a r a n c e system through t h e i r member bank correspondents I t has been suggested t o t h e Board by t h e Governors of two F e d e r a l r e s e r v e banks t h a t i n view of t h e l e g i s l a t i o n i n t h e s t a t e s above named and of . g - X-3231 XJ p o s s i b l e s i m i l a r l e g i s l a t i o n i.i e t h e r s t a t e s , i t ,/ould be w e l l t o t&':3 advantage of a n o t h e r p r o v i s i o n - i n S e c t i o n l 6 , which a u t h o r i z e s t h e F e d e r a l Reserve Board t o f i x t h e charge which may be imposed f o r t h e s e r v i c e of c l e a r i n g or c o l l e c t i o n rendered by t h e F e d e r a l r e s e r v e bank, by a u t h o r i z i n g F e d e r a l r e s e r v e banks t o a d v i s e t h e i r member banks t h a t on and a f t e r a c e r t a i n d a t e a compensatory charge of so much p e r one hundred d o l l a r s w i l l be imposed a g a i n s t t h e member banks on a l l checks endorsed by or o r i g i n a t i n g with a non-member bank whose name i s n o t on the par l i s t . Under such a r e g u l a t i o n non-member banks which r e f u s e t o l e n d t h e i r c o o p e r a t i o n t o t h e F e d e r a l r e s e r v e c o l l e c t i o n system would have t o pay f o r t h e b e n e f i t s d e r i v e d by them from t h a t c o l l e c t i o n system, f o r member banks would h a r d l y be w i l l i n g t o c o l l e c t checks f o r such non-member banka u n l e s s p a i d f o r doing so a t r a t e s e q u a l t o t h o s e charged by t h e F e d e r a l r e s e r v e banks. The Board r e q u e s t s t h a t the g o v e r n o r s and F e d e r a l Reserve Agents i n t h e i r separate sessions discuss t h i s proposition i n a l l i t s bearings. P r i n c i p l e s Governing t h e Discount R a t e . Control over d i s c o u n t r a t e s , a s e x e r c i s e d by t h e F e d e r a l r e s e r v e banks and t h e F e d e r a l Reserve Board, i s one of t h e most i m p o r t a n t and f a r - r e a c h i n g powers ever d e l e g a t e d by Congress t o a n o t h e r i n s t r u m e n t a l i t y . The g r a n t ranks w i t h t h e power g i v e n t h e I n t e r s t a t e Commerce Commission to regelate railroad rates. While i t i s n e c e s s a r y t h a t powers of t h i s kind should be v e s t e d i n a few hands t h e y should be used w i t h d i s c r e t i o n and t h e e f f e c t of a change i n r a t e should be c a r e f u l l y c o n s i d e r e d b e f o r e t h e change i s made. The p r i n c i p l e i s w e l l e s t a b l i s h e d t h a t i n t h e o r y t h e F e d e r a l r e s e r v e bank d i s c o u n t r a t e should be s l i g h t l y i n e x c e s s of c u r r e n t rates- There has been much d i s c u s s i o n of t h e r e d u c t i o n s which have been made i n d i s c o u n t r a t e s d u r i n g t h e l a s t s i x months and d i s r e g a r d i n g o p i n i o n s of t h e p r e j u d i c e d and t h e uninformed, l e t u s c o n s i d e r t h e c o n f l i c t i n g views of some whose o p i n i o n s a r e worthy of a t t e n t i o n and respect. The q u o t a t i o n s which follow a r e from a symposium r e c e n t l y published i n a f i n a n c i a l journal. A New York banker and an E a s t e r n economist e x p r e s s e d themselves t h e r e i n , as follows" "The b a s i c i d e a i n t h i s p o l i c y of keeping t h e r e d i s c o u n t r a t e above t h e market i s t h a t r e s e r v e bank money i s f o r e x c e p t i o n a l and unusual u s e - t h a t i t i s not t h e p r o v i n c e of a r e s e r v e bank t o s u p p l y a s u b s t a n t i a l p a r t of t h e o r d i n a r y f u n i s employed i n t h e market i n o r d i n a r y t i m e s . Of course, i t i s expected t h a t a r e s e r v e bank s h a l l make money f o r i t s s t o c k h o l d e r s and s h a l l employ such of i t s f u n d s a s may be n e c e s s a r y t o meet expenses and t o pay d i v i d e n d s . One p r o v i s i o n of t h e F e d e r a l Reserve Act, p e r m i t t i n g open market o p e r a t i o n s on t h e p a r t of t h e F e d e r a l r e s e r v e banks, was designed t o give them d i s c r e t i o n i n t h i s m a t t e r , whether t h e member banks should r e d i s c o u n t w i t h them or n o t . But t h e p o s i t i o n of a r e s e r v e bank i s a v e r y p e c u l i a r one. If an o r d i n a r y bank makes a l o a n , checks come i n a g a i n s t i t , a s a consequence of t h e l o a n , which i t must meet out of i t s r e s e r v e u n l e s s i t should happen t h a t s i m u l t a n e o u s l y new d e p o s i t s a r e made w i t h i t of checks drawn on o t h e r banks. Loans made by a r e s e r v e bank, however, need n o t l e a d t o d r a i n s on i t s r e s e r v e . When, i n making a l o a n , i t i s s u e s i t s n o t e s o r g i v e s a d e p o s i t c r e d i t t o a r e d i s c o u n t i n g bank, t h a t note o r a t r a n s f e r of t h a t d e p o s i t c r e d i t w i l l be a c c e p t e d a s u l t i m a t e payment by some o t h e r i n s t i t u t i o n . The d e p o s i t x-3231 113 - 10 - l i a b i l i t i e s of t h e r e s e r v e bank count a s u l t i m a t e r e s e r v e f o r t h e o t h e r banks of t h e country, and t h e volume of r e s e r v e money i s consequently i n c r e a s e d through a mere i n c r e a s e i n t h e d e p o s i t l i a b i l i t i e s of t h e r e s e r v e bank. With an i n c r e a s e i n t h e volume of r e s e r v e s of t h e member banks, t h e r e i s an immediate tendency t o a r e d u c t i o n i n t h e g e n e r a l l e v e l of discount r a t e s throughout t h e country, p l a c i n g them below t h e l e v e l which open market c o n d i t i o n s would otherwise c a l l f o r and c r e a t i n g a t e m p t a t i o n f o r t h e uneconomical use of bank f u n d s . There i s p a r t i - - c u l a r l y a t e m p t a t i o n t o use bank funds i n an e x c e s s i v e degree f o r c a p i t a l p u r p o s e s , and f o r t h e ordinary banks of the country, misled by ithe a r t i f i c i a l excess of l i q u i d cash, t o t i e up t o o g r e a t a p a r t of t h e i r assets in n o n - l i q u i d form. The r e s e r v e bank which makes r e d i s c o u n t r a t e s t o o low, t h e r e f o r e , i n s t e a d of performing i t s f u n c t i o n of i n c r e a s J i n g t h e l i q u i d i t y of t h e banking system, t e n d s r a t h e r t o d e s t r o y l i q u i d i t y , A Chicago banker r e i t e r a t e s t h e opinion expressed by him s e v e r a l times t h a t t h e Federal r e s e r v e banks and t h e F e d e r a l Reserve Board ought t o proceed very slowly i n lowering t h e p r e s e n t r a t e s . He a n t i c i p a t e s t h a t t h e r e i s c o n s i d e r a b l e danger, i n case t h e r a t e s a r e lowered p r e c i p i t a t e l y , of a renewed i n f l a t i o n , w i t h a consequent r e a c t i o n more v i o l e n t t h a n t h e one through which we a r e now p a s s i n g . He t a k e s t h e view t h a t i n g e n e r a l i t i s a complete mistake t o have t h e r e d i s c o u n t r a t e s lower t h a n t h e p r e v a i l i n g market r a t e s f o r commercial l o a n s , f o r i f banks a r e enabled t o r e d i s c o u n t t h e i r paper a t a lower r a t e t h a n they themselves r e c e i v e , obviously a continued i n f l a t i o n i s p r o f i t a b l e t o them His o p i n i o n c o i n c i d e s w i t h t h e views of t h e E a s t e r n banker and t h e economist above quoted and he s t r e s s e s t h e p o i n t t h a t o w l a r g e gold r e s e r v e i s , a f t e r a l l , due only t o t h e f a c t t h a t gold i s not b&ing X-3231 - 11 - c i r c u l a t e d a t t h e p r e s e n t moment and t h a t much of t h i s gold i s l i k e l y t o flow out of t h e country a s soon a s t h e r e i s a change i n t h e b a l a n c e s of trade« He concurs, a l s o , i n the view t h a t a c e r t a i n amount of t h e gold which t h e Federal r e s e r v e banks have a t p r e s e n t i s merely h e l d , i n a sense, i n t r u s t f o r Europe* He r e g a r d s a s e n t i r e l y f a l l a c i o u s t h e argument made by a d h e r e n t s of a p o l i c y of l o w e r i n g r e d i s c o u n t r a t e s t h a t such a c t i o n i s d e s i r a b l e because t h e r e s e r v e r a t i a and gold a c c u m u l a t i o n s of. t h e Federal r e s e r v e banks j u s t i f y a r e l a x a t i o n of the o f f i c i a l r a t e s * A Milwaukee banker who contends t h a t t h e p o l i c y should be i n accord w i t h t h e money market tendency, s t a t e s t h a t tf i The main p o i n t made by those opposed t o t h e l o w e r i n g of Federal r e s e r v e d i s c o u n t r a t e s i s t h a t t h e r e d i s c o u n t r a t e should always be above t h e market r a t e . This i s l a i d down a s a g e n e r a l p r i n c i p l e t o which t h e r e a r e no e x c e p t i o n s . Federal reserve f u n d s a r e only emergency funds, i t i s s a i d , and i t should not be p o s s i b l e f o r banks t o make a p r o f i t by r e d i s c o u n t i n g a t a lower r a t e t h a n t h e marketV He c a l l s a t t e n t i o n t o t h e f a c t t h a t "When t h e demand f o r c r e d i t i s e x c e s s i v e and i n c r e a s i n g , t h e r e s e r v e banks should move i n t o a dominating p o s i t i o n by r a i s i n g t h e i r r a t e s above t h e market r a t e s f o r money. s i t y f o r discouraging r e s o r t t o Federal But t h e same n e c e s - r e s e r v e banks does n o t e x i s t when t h e demand f o r c r e d i t slows down, l o a n s a r e b e i n g p a i d off and r e s e r v e s a r e accumulating* What h a s rediscount rates? Has i t r e s u l t e d i n an expansion of l o a n s or r e i n f l a t i o n ? Not a t a l l . happened a s a r e s u l t of t h e r e c e n t l o w e r i n g of On t h e o t h e r hand, t h e p u b l i s h e d r e c o r d s show t h a t member banks have continued t o reduce t h e i r r e d i s c o u n t s and borrowings and t o do t h i s have brought p r e s s u r e upon t h e i r customers t o l i q u i d a t e . Customers who have v o l u n t a r i l y l i q u i d a t e d and got t h e m s e l v e s back i n t o good f i n a n c i a l c o n d i t i o n a r e o f f e r e d lower r a t e s on new loans* T h i s , of c o u r s e , i s an i n c e n t i v e t o t h o s e who have not done so t o l i q u i d a t e • This i s the X-3231 - 12 - p r a c t i c a l way i n which t h e l e a d e r s h i p of t h e F e d e r a l r e s e r v e banks i n r e d u c i n g t h e i r r a t e s h a s worked. newed i n f l a t i o n . There h a s not been t h e s l i g h t e s t tendency toward r e - R a t h e r t h e tendency h a s been t o f u r t h e r l i q u i d a t i o n * ** This banker a g r e e s t h a t "The g e n e r a l p r i n c i p l e of k e e p i n g Federal r e s e r v e r e d i s c o u n t r a t e s above t h e market r a t e f o r money i s sound,but i t does admit of e x c e p t i o n s a s i n t h e p r e s e n t c o n d i t i o n of things# The p r e s e n t Federal r e - s e r v e p o l i c y i s i n accord w i t h t h e tendency of t h e money market and i t i s any h a r d t o s e e how i t h a s had or w i l l have f but a wholesome and c o n s t r u c t i v e effect. I n a r e c e n t p u b l i c a t i o n a well-known banker and economist h a s a s - s e r t e d t h a t t h e b e s t index of t h e money market i n t h i s country i s the rate on l i n e - o f - c r e d i t l o a n s t o borrowers from two o r more banks, and not t h e r a t e on bank a c c e p t a n c e s , a s i n England» The volume of l i n e - o f - c r e d i t l o a n s i n t h i s country i s f a r l a r g e r t h a n t h e volume of bank a c c e p t a n c e c r e d i t s , but i t may be doubted whether t h e r a t e s on such l o a n s a r e a s c o m p e t i t i v e a s bank a c c e p t a n c e r a t e s . Bank a c c e p t a n c e r a t e s a r e f i x e d i n t h e open market and are p u b l i s h e d * L i n e - o f - c r e d i t l o a n s have no open market and t h e r e a r e no published rates* seeau L i n e - o f - c r e d i t l o a n s a r e not a s c o m p e t i t i v e a s they may A small f i r m commonly m a i n t a i n s a l i n e of c r e d i t only a t i t s own bank* Large c o r p o r a t i o n s u s u a l l y have l i n e s of c r e d i t n o t only w i t h t h e i r home banks but w i t h l a r g e banks i n f i n a n c i a l c e n t e r s , not n e c e s s a r i l y because t h e y can s e c u r e lower r a t e s , b u t because no one bank wants t o t a k e care of . t h e i r f u l l needs. For t h e s e r e a s o n s i t i s t o be doubted whether l i n e - o f - c r e d i t l o a n s a f f o r 4 1 a s good an i n d e x of money market t e n d e n c i e s a s t h e bank a c c e p t a n c e r a t e s * The l a t t e r r e p r e s e n t t h e minimum r a t e s f o r t h e b e s t c l a s s of paper and because t h i s i s so, t h e y i n d i c a t e f a r bey owl t h e i r a c t u a l money volume t h e d r i f t of t h e m a r k e t . The p r e s e n t r a t e on e l i g i b l e bank acceptance.6 of 5 - 1 / S t o 5 p e r cent i s a b e t t e r i n d i c a t i o n of what i s t a k i n g p l a c e and what may be expected i n t h e open money market t h a n r a t e s on l i n e - o f - c r e d i t l o a n s which r e f l e c t market c o n d i t i o n more s l o w l y , * - 13 - x-3231 Another Chicago "banker t a k e s an e x t r e m e l y c o n s e r v a t i v e v i e w . He would l i k e t o see many of t h e s o - c a l l e d "war amendments" t o t h e F e d e r a l Reserve Act r e p e a l e d and s t a t e s t h a t as the law s t a n d s , " n o t h i n g "but the courage and wisdom of the management p r e v e n t s i f from becoming a d i s a s t r o u s engine of i n f l a t i o n " . He o b j e c t s p a r t i c u l a r l y t o the amendment which f o r c e s member banks t o c a r r y t h e i r e n t i r e l a w f u l r e s e r v e s i n the form of c o l l e c t e d b a l a n c e s w i t h the F e d e r a l r e s e r v e banks and b e l i e v e s t h e t t h i s amendment, which he r e g a r d s as p r a c t i c a l l y demonetising g o l d , i s most dangerous i n normal t i m e s . R e f e r r i n g t o the complaints which have b e e n made t h a t t h e a g r i c u l t u r a l d i s t r i c t s have b e e n d i s c r i m i n a t e d a g a i n s t , he b e l i e v e s t h a t e x a c t l y the o p p o s i t e i s the c a s e and a p p e a r s t o b e l i e v e a l s o t h a t the F e d e r a l Reserve System has worked a g r e a t i n j u r y t o the c o u n t r y as w e l l as i n e s t i m a b l e b e n e f i t s . He s t a t e s " I n a time of i n f l a t i o n such as we had a y e a r ago, i t n u l l i f i e s the o p e r a t i o n of t h e u s u a l normal remedies' f o r such c o n d i t i o n s . If i t had not been f o r t h e F e d e r a l r e s e r v e banks, f a r m e r s g e n e r a l l y would have been compelled to s e l l t h e i r c r o p s a y e a r ago and pay t h e i r d e b t s . This would have saved them and the c o u n t r y f r a n t h e d i s - a s t e r t h a t h a s overtaken them. Also, had i t n o t been f o r the F e d e r a l r e s e r v e b a n k s , m a n u f a c t u r e r s and merchants would have b e e n unable t o a c cumulate o r c a r r y t h e heavy i n v e n t o r i e s e n t a i l i n g l o s s e s i n a s i n g l e y e a r which i t w i l l t a k e a g e n e r a t i o n t o r e p l a c e H e b e l i e v e s t h a t "The s o l u t i o n t o t h i s i s t o keep the F e d e r a l r e s e r v e d i s c o u n t r a t e s above l i o T - 14 - X-3231 c u r r e n t market r a t e s , s o t h a t t h e r e w i l l be no t e m p t a t i o n on t h e p a r t of t h e member "banks t o p r o f i t e e r through the F e d e r a l r e s e r v e banks* So long as t h e F e d e r a l r e s e r v e r a t e s are kept below c u r r e n t r a t e s > t h e r e i s , xn ray judgment, way i n which t h i s kind of i n f l a t i o n can b e p r e v e n t e d * On the o t h e r hand, i f b o r r o w e r s compel t h e i r banks t o r e d i s c o u n t i n o r d e r t o ena b l e them t o c a r r y crops o r goods f o r h i g h e r p r i c e s , they a r e p u t on n o t i c e t h a t t h e y a r e a c t i n g a g a i n s t the g e n e r a l judgment# I n normal times member banks should u n d e r s t a n d t h a t t h e y are n o t expected t o borrow except t o meet emergencies, and t h e y should be made t o f e e l t h a t borrowing a t sucn times i s an i n d i c a t i o n of weakness and needs e x p l a n a t i o n # * He e x p r e s s e s t h e hope t h ? t the F e d e r a l Reserve Board w i l l make a p u b l i c s t a t e m e n t of what i t s f u t u r e p o l i c y w i l l be r e g a r d i n g r a t e s and e x p r e s s e s t h e b e l i e f t h a t the conf i d e n c e of the c o u n t r y i $ the Board i s such t h a t any c l e a r s t a t e m e n t of f u n d a m e n t a l p r i n c i p l e s made b y i t would be acquiesced in# Another New York b a n k e r while convinced t h a t u n d e r normal c o n d i t i o n s i t i s l o g i c a l t h a t the F e d e r a l r e s e r v e r a t e should be h i g h e r t h a t the p r e v a i l i n g commercial r a t e , b e l i e v e s t h a t i n view of the world-wide c o n d i t i o n s t h ^ t e x i s t t o d a y , the a d o p t i o n , a t t h i s time, of a r t i f i c i a l means t o a c c e l e r a t e the p r o c e s s of r e a d j u s t m e n t would be a dangerous c o u r s e t o pursue * He states n C o n s i d e r i n g the e x t e n t t o which c r e d i t f o r s p e c u l a t i v e purposes nus been l i q u i d a t e d , and a l s o taking i n t o c o n s i d e r a t i o n the p r e s e n t r e s e r v e and s o l d p o s i t i o n of the Reserve b a n k s , . i t would seem t h a t the r e d u c t i o n i n r a t e i s f u l l y j u s t i f i e d . . Furthermore, I do n o t b e l i e v e t h e r e d u c t i o n a t t h i s time i n the r a t e w i l l a p p r e c i a b l y encourage a tendency toward renewed c r e d i t inflation. The q u e s t i o n of r a t e s h a s , on t h e whole, b e e n a b l y and c o u r - - 15 - X-3231 a g e o u s l y handled, "by the F e d e r a l r e s e r v e "banks and the F e d e r a l Reserve Board." He says t h a t i f he were t o o f f e r a c r i t i c a l o b s e r v a t i o n , i t would b e t o r e mark upon the " s a l u t a r y m o d i f i c a t i o n of t h e need f o r d e f l a t i o n t h a t would hav= r e s u i t e d had the high r a t e s b e e n p u t i n t o !ef f e e t i n t h e s p r i n g of 1919 i n s t e a d of the summer of 1920". A Boston "banker takes the view t h a t t h e F e d e r a l Reserve System was organized f o r the purpose of f u r n i s h i n g c r e d i t ."by means of red i s c ount i n g , t o the commercial banks of t h e c o u n t r y . He says " I n a g e n e r a l way the time when t & i s c r e d i t i s needed i s j u s t b e f o r e , d u r i n g and immediately a f t e r a c r e d i t c r i s i s , or c r e d i t p i n c h , and i t seems c l e a r t h a t a t such tune the r a t e charged f o r red i s c oun t i n g should be a t about the c u r r e n t market r a t e charged "by the commercial banks t o t h e i r c u s t o m e r s . To make the r a t e h i g h e r than the p r e v a i l i n g r a t e would tend t o r e s t r i c t the g r a n t i n g of n e c e s s a r y c r e d i t s t o merchants and s i m i l a r borrowers* To make the r e d i s c o u n t r a t e much lower t h a n t h e p r e v a i l i n g r a t e would tend t o encourage over l o a n i n g b y t h e commercial b a n k s . In f i x i n g the r e d i s c o u n t r a t e s , the managers of the Vedera i. r e s e r v e banks should t r y , so f a r as p o s s i b l e , t o keep t h e i r minds f r e e f r o m i n f l u e n c e s o t h e r than those which d i r e c t l y c o n c e r n ' t h e p r e v a i l i n g r a t e s of money, b u t t h e y c e r t a i n l y a r e j u s t i f i e d , when f i x i n g t h e r e d i s c o u n t r a t e , i n b e i n g i n f l u e n c e d by motives of t h e s a f e t y of t h e F e d e r a l r e s e r v e banks themselves» and when t h e r e d i s c o u n t s a p p e a r t o be approaching a dangerous t o t a l , they should use t h e i r r a t e - f i x i n g power t o c h e c k s p e c u l a t i o n and t o p r e v e n t any p o s s i b l e danger t o t h e F e d e r a l r e s e r v e b a n k s , which a r e the f o u n d a t i o n of our whole banking*sy6t®nu I t was n e v e r i n t e n d e d and n e v e r shfculd b e i n t e n d e d that t h e F e d e r a l r e s e r v e banks c o n s c i o u s l y use t h e i r x-3231 — 16 — power and a u t h o r i t y e i t h e r to encourage or t o d i s c o u r a g e b u s i n e s s . Their c h i e f purpose should he t o a s s i s t comrrercial banks and to f i x the r a t e s of r e d i s c o u n t so a s to b e s t accomplish t h i s , and a t t h e same time t o p r o t e c t t h e i r own p o s i t i o n from any p o s s i b l e o v e r s t r a i n . " He r e g a r d s as one of the g r e a t e s t dangers the F e d e r a l Beserve System can be s u b j e c t e d to would be the a t t a c k s and manoeuverings of p o l i t i c i a n s , i n o r d e r t o make the system serve p o l i t i c a l ends. Another l e a d i n g banker does n o t b e l i e v e t h a t t h e time h a s y e t a r r i v e d when d i s c o u n t r a t s s should be held uo t o a p o i n t above t h e r a t e s f o r comm e r c i a l paper because the c o n d i t i o n s of b u s i n e s s a r e n o t y e t on q u i t e a normal b a s i s . He says t h a t i t h a s been the h a b i t of commercial bankers to argue w i t h t h e i r commercial customers t h a t t h e i r rate,J t o t h e i r customers i s based on t h e F e d e r a l r e s e r v e bank d i s c o u n t r a t e and t h a t i t should ,be enough h i g h e r than the d i s c o u n t r a t e so t h a t t h e r e would be a p r o f i t t o the banker between the d i s c o u n t r a t e and h i s r a t e t o h i s customers. He says f u r t h e r "There i s y e t i n our banks a l a r g e amount of s o - c a l l e d f r o z e n l o a n s which may be d e s c r i b e d a s l o a n s which a r e probably good b u t which t h e borrowers a r e n o t i n a p o s i t i o n to pay o f f a t the p r e s e n t time. Therefore, they are not i n a p o s i t i o n t o t r a d e on market r a t e s on an even b a s i s with the b a n k e r . Under t h e s e c o n d i t i o n s , a high d i s c o u n t r a t e of t h e F e d e r a l r e s e r v e banks simply has h e l p e d the commercial banker to g e t h i g h e r r a t e s from h i s c u s tomers than a r e j u s t i f i e d by the c o n d i t i o n s of c r e d i t . T h e r e f o r e , i t was d e s i r a b l e and n e c e s s a r y f o r t h e F e d e r a l r e s e r v e banks t o reduce t h e i r d i s c o u n t r a t e s from 6 o r 7 p e r c e n t , t o p e r cent, i n order to inform ii-iO x-3231 - 17'— the commercial conmanity t h a t the c r e i i t s i t u a t i o n no longer demanded these high rates* " He t a k e s the view t h a t ^Federal r e s e r v e bank d i s - count r a t e s should n o t be made with the i d e a of c o n t r o l l i n g b u s i n e s s or market p r i c e s of commodities*,but t h a t "They should be i n d i c a t i o n s of the e f f e c t t h a t the p r e s e n t b u s i n e s s i s having on the suoply of c r e d i t and of a n t i c i p a t e d c o n d i t i o n s t h a t w i l l a f f e c t the supply of c r e d i t i n the n e a r f u t u r e , * He b e l i e v e s t h a t *#ien the b u s i n e s s community h a s become t r a i n e d t o the p o i n t of watching the r e s e r v e P o s i t i o n and d i s count r a t e s of the Federal r e s e r v e banks and has come to ani u n d e r s t a n d i n g of what t h e s e f i g u r e s mean ** they w i l l be helned very much by studying the published c o n d i t i o n s of the Federal r e s e r v e b a n k s and w i l l a p p r e c i a t e what a change i n i i s c c u n t r a t e s means, provided of course t h a t the o f i i c e r s and d i r e c t o r s of t h e Federal r e s e r v e banks a r e n o t hampered i n u s i n g t h e i r judgment in these m a t t e r s by o u t s i d e i n f l u e n c e s A Chicago r e r c h a n t n o t e s the d i f f e r e n c e of opinion among e x p e r t s as to the proper time f o r r a i s i n g or lowering the Federal r e s e r v e r e d i s c o u n t r a t e s * He points' out t h a t n e i t h e r the Federal nor Reserve Systems/ any p a r t of i t can be run on any formula, and t h a t i f i t could v e r y l i t t l e b r a i n s would be r e q u i r e d f o r t h a t p a r t a f t e r the formula had been found. He b e l i e v e s t h a t "If we a r e to be a world power in commerce, a s we may b e , we s h a l l have t o make the New York or some other d i s t r i c t r a t e a t t r a c t i v e f o r t h e d i s c o u n t of the world* s import and e x p o r t b i l l s . We might, of course, be above the E n g l i s h r a t e f o r a s h o r t time, f o r adjustment or o t h e r p u r p o s e s , b u t i f we make a r u l e ±1 - 18 - x-3231 to have the r a t e always above the commercial paper r a t e i n New York, our ambition to be the w o r l d ' s bankers, or t o compete with England i n commerce and f i n a n c e , w i l l vanish i n t o t h i n a i r . a He takes the view t h a t in c r i s e s and e x t r a o r d i n a r y emergencies a Reserve bank may well be j u s t i f i e d i n v i o l a t i n g temporarily the ordinary canons of sound f i n a n c e , b u t emphasizes t h a t under normal condit i o n s and under conditions when i t i s p o s s i b l e to take a long run view, the well e s t a b l i s h e d t r a d i t i o n s covering a Reserve b a n k ' s operations must be followed. The chief of these canons i s t h a t the rediscount r a t e of Reserve banks should be kept above the market. The Federal Advisory Council, a t i t s l a s t meeting, on Septemb e r 20th, expressed i t s b e l i e f t h a t r a t e s should b e a r a d i r e c t r e l a t i o n t # a Federal reserve b a n k ' s reserve and to the general money market, and t h a t in a d d i t i o n consideration should be given to the items enumerated i n the Council's recommendation of May 17, 1921, a s follows: 1. The r e s e r v e s of the Federal Reserve System as a whole. 2. The r e s e r v e p o s i t i o n of the Federal r e s e r v e bank whose r a t e i t i s contemplated to change. 3* The condition of a l l the banks of the country as a whole, and of the several Federal reserve d i s t r i c t s . 4. The economic and f i n a n c i a l c o n d i t i o n of t h i s country. 5» World c o n d i t i o n s , both economic and p o l i t i c a l . 6. The eventual establishment of a c r e d i t r a t e p o l i c y f o r the Federal r e s e r v e banks by which the r e d i s c o u n t r a t e to member bank's i s higher than the p r e v a i l i n g com- - 19 - X-3231 m e r c i a l r a t e , t a k i n g due c o n s i d e r a t i o n of the p r e v a i l i n g open market r a t e s f o r v a r i o u s c l a s s e s of l o a n s b o t h i n t h i s country and abroad, 7. Uniformity of r a t e s , while a t times p r a c t i c a b l e and d e s i r a b l e , should n o t be adopted as a f i x e d p o l i c y , the System b e i n g p r e d i c a t e d upon the p r i n c i p l e t h a t v a r y i n g c o n d i t i o n s might e x i s t in d i f f e r e n t s e c t i o n s of t h e country. With r e f e r e n c e to the g e n e r a l money market the f o l l o w i n g f a c t o r s were suggested by t h e Board as ones which should be considered i n a r r i v i n g a t a c o n c l u s i o n as t o what i s the c u r r e n t r a t e f o r money, 1. 2. 3. 4. Hates charged by banks t o t h e i r r e g u l a r customers* Rates f o r one-name paper bought through n&te b r o k e r s . Onen market r a t e s on bankers a c c e p t a n c e s , and Rates on Treasury C e r t i f i c a t e s . The Board asked the Council f o r i t s views as to t h e r e l a t i v e importance of each of these f a c t o r s and the council expressed the view t h a t a l l f o u r items mentioned are important i n determining the money market b u t t h e r e may be o t h e r f a c t o r s which should l i k e w i s e be given c o n s i d e r a t i o n , such as general b u s i n e s s c o n d i t i o n s and the r e s e r v e p o s i t i o n of a Federal r e s e r v e bank. I t was the view of the Council t h a t t h e r u l i n g r a t e f o r money i n a d i s t r i c t w i l l a d j u s t i t s e l f a u t o m a t i c a l l y to t h e s e c o n d i t i o n s . The Council expressed the view a l s o t h a t a F e d e r a l r e s e r v e bank while i t i s borrowing should n o t lower i t s r a t e , b u t s t a t e s t h a t s p e c i a l c o n d i t i o n s -might e x i s t i n a d i s t r i c t which would m a k e / r e d u c t i o n s d e s i r a b l e and would j u s t i f y such a c o u r s e . . > lii.l - 20 - X-3231 I t seems c l e a r t o the Board t h a t i t i s n o t p r a c t i c a b l e i n t h i s country f o r F e d e r a l r e s e r v e banks to m a i n t a i n r a t e s of d i s c o u n t h i g h e r than c u r r e n t market r a t e s i f l i n e - o f - c r e d i t l o a n s a r e to be accepted a s the c r i t e r i o n . The r a t e s of i n t e r e s t p e r m i t t e d in many s t a t e s a r e so h i g h as t o n re elude t h i s as a p o s s i b i l i t y . In o r d i n a r y circum- s t a n c e s when the c r e d i t r i s k i s a t a minimum the r a t e s p a i l f o r h i g h grade commercial -papdr sold i n the open market may be regarded as a measure of the market r a t e f o r money, b u t i t i s e v i d e n t t h a t a t p r e s e n t t h e r e i s much c o n s i d e r a t i o n t o be given to the b a s i s on which s h o r t time o b l i g a t i o n s of the Treasury a r e sold and to"market rates f o r prime bankers 1 a c c e p t a n c e s . The problem, therefore,3,s more simple a t t h i s time i n d i s t r i c t s l i k e New York, Chicago and P h i l a d e l p h i a , where the Federal r e s e r v e c i t i e s a r e dominant i n t h e i r d i s t r i c t s , b u t i n o t h e r d i s t r i c t s which cover a l a r g e r t e r r i t o r y and where the b u s i n e s s i s more d i s t r i b u t e d and d i v e r s i f i e d , the problem i s more d i f f i c u l t . At the p r e s e n t time f o u r Federal r e s e r v e banks a r e r e d i s c o u n t i n g about $ 4 ^ 0 0 0 , 0 0 0 with t h r e e o t h e r Federal r e s e r v e banks. The d i r e c t o r s of one of these borrowing banks more than a iponth ago voted to reduce t h e i r - d i s c o u n t r a t e from 6 p e r c e n t , t o 5s p e r c e n t , on a l l c l a s s e s of p a p e r , b u t the F e d e r a l Reserve Board h a s n o t yet approved the r e d u c t i o n . No evidence has been p r e s e n t e d t o show t h a t c u r r e n t r a t e s f o r barik accomodations a r e l e s s t h a n t h e F e d e r a l r e s e r v e bank r a t e , or t h a t c u r r e n t r a t e s would be reduced by l o w e r i n g the r e s e r v e bank r a t e , b u t the d i r e c t o r s argue t h a t the c o n s o l i d a t e d r e s e r v e p o s i t i o n of the system j u s t i f i e s a lower r a t e . The Board d e s i r e s to have the views of members of t h i s c o n f e r e n c e as to the a d v i s a b i l i t y of p e r m i t t i n g any Federal r e s e r v e bank t o reduce i t s Of 1144 - 21 - X-3231 p r e s e n t d i s c o u n t r a t e •until i t s own r e s e r v e s have i n c r e a s e d to a p o i n t to make i t u n n e c e s s a r y f o r i t to r e d i s c o u n t w i t h other F e d e r a l r e s e r v e hanks. The Board h a s besn i n c l i n e d to the view t h a t the r e s e r v e p e r c e n t a g e of each F e d e r a l r e s e r v e bank, as well as t h a t of the System, should be taken i n t o c o n s i d e r a t i o n a s one of the determining f a c t o r s i n f i x i n g the d i s c o u n t rate. I f the F e d e r a l 8e serve Bank of Chicago, w i t h a r e s e r v e of around 70 p e r c e n t , and t h e F e d e r a l Reserve Bank of S t . Louis, w i t h a r e s e r v e of # # 63 p e r c e n t , do n o t f e e l j u s t i f i e d i n r e d u c i n g t h e i r d i s c o u n t r a t e s below the p r e s e n t l e v e l of 6 p e r c e n t , what argument i s t h e r e f o r a borrowi n g bank, l i k e A t l a n t a , having a r e s e r v e w i t h o u t r e d i s c o u n t s of only 32 p e r c e n t . , to have a 5^ p e r c e n t , r a t e ? On the o t h e r hand, what a r e the arguments a g a i n s t a r e d u c t i o n i n d i s t r i c t s which have so h i g h a p e r c e n t a g e of r e s e r v e ? The Board r e q u e s t s the members of t h i s Conference t o d i s c u s s a l l these q u e s t i o n s i n v o l v i n g p r i n c i p l e s of the d i s c o u n t r a t e f r a n k l y and f u l l y and to r e p o r t t h e i r conclusions b e f o r e t h e c l o s e of the Conference, I t seems d e s i r a b l e , i f p o s s i b l e , t o f o r m u l a t e a general p o l i c y r e g a r d i n g "rates of d i s c o u n t , from which t h e r e would be no divergence e x c e p t i n unusual or emergency c a s e s .
@FedFRASER