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A.-)3)2
--
HJTIE'{ OF TIIGH::ST.
(~~ges
rP.fer to
~~ges
of
t~is
pamphlet)
Introduction.
Tligest, 'Pqge .l.
Sum"T·"ry of conclusions of Corrrr:ission.
Tli~st, -o,ges 1 to 9.
Feder<>l Feserve System, Digest, 'Page. 9.
Ch;rpt~r
II.
Oper·tions of Feder0'\1 B~serve System
by econorr,ic neriods.
'
1914 .. Anril, 1917.
1.
November,
2.
April, 1917
- Aum·,st,
3.
:'u~ru.st
·-.
- \lj"'rch, 1919
4.
March, 1919
-
5.
June, 1920
...
' 1918
,Jurt~,
J1igest, p. 10
1918.
1920.
.June, 1921.
"
"
p. 10
p. 11
"
p. 11
II
p . 18 to 22
Chapter I II .
Tr~J.sury policies wi tb r~1.,tion to Federal :Reserve
polici~s.
nig~st
p. 23.
Chapter IV.
Feder,,l Reserve 'T;)olicy, 1920.
'Digest, p. 26.
Ch3.pter V.
Feder~l Reserve nolicy as indic'1tt:>d by a comparison of
interest r~tes on U. S. certific~tes, b~
"l.cce·.)t 'mces, commerci ?1 paper ?nd Federal
:Reserve discount r?..tes.
!liges t, p. 35.
f1l;''>~
t' .-J - C·.'
" " ,• •·• !('
j ' ;-
X-3332
- 2 -
ehapter VI .
Earnings of Federal ~eserve banks as related to
Feder~l Reserve ~olicies.
Digest, p.36.
....
Cha-pter VII .
Movement of funds in and out of New York City,
Di@"est. p. 37 •
Chapter VIII.
Defects 8nd deficiencies ot the banking ~hiner,1.
~oposed new legislation. Digest, ~.~.
Chapter IX.
Statistical tables showing movement ot mane7 and
credit.
Digest, ~. 46.
Chapter X.
Minority opinion of Ogden L. Mills.
*• *
)
Digest, p.
46.
........
X-3332
RE'PORT OF
~
JOINT
CO~ISSION
OF
aGRICULTUR~L
Introd11.ction .
. ("Page references arc-iO~~ges
INQUIRY.
ot the report).
Page No.
.
I
•
I
The Senate eoncu~rent resolution 4 which created the
Joint Co;m1ission of Agricultural Inquiry, requires
the comrois~i~~ to investigate.and report to Congress
".pon su :ru.cjects.
This report deals wiU1 ·~e fifth subjee·t, namely, the banking
and financial Tesources and credits of the countr,y,
especially as affecting agricultural credits.
Th~
7
difficulties ot the farmer are due in a measure to the
credit testrietians and limitations of the past
eighteen months. and in part to the fact that the b8nlring machinery of the co1mtry is not ade~tely adapted
to the farmer's requir~ents.
7
The proposed bill to amend the Federal Farm Loan fl.ct and the
Federal Reserve Act.
9
Discount rates of Federal Reserve banks should normally be
slightlY' above the market rates on the same class of
paper.
11
Until our entrance into the World War, the rates of the
Federal Reserve banks were, for the most part, above
market rates on 'Orime comereial paper.
11
.
'
Since our entrance into the World War, the t•ate policy of
t'he Federal :Rese,-ve ba:'iks was suborc:'i.i:late6. to the
re"'uirements of 'i;he Treasury, a,lCi. the. 'J.'rAas'lll"y policy
of borrcwinp fm:tds for th~ war at ~;·a.t-~s :>:f lntl9rest
below the ma>.rket rate. and dlscourJ.G x::tte.a ther·aaft;er
were belcw the mat'ket ratec on ehe characte:r of
pa-per to which they app'l.ied.
11
2.
X-3332
t>age No.
The cost of the war coulC! not be met out of current
taxes, end it wes necessa.ry to -orovide for immectiate
payments by m('lt?ns of the exp:msion of manufacture of
credit,
11
This necessit~ted the use of the lending power of the
Federal Reserve bmks through loans to member banks
at a rate of interest below the rate carried by the
bond and certificate of indebtedness issues of the
Governrnen t.
11
This policy induced large borrowings on the part of member
banks from Federal Fe serve banl:s, and. 1 arger ex't)ansion
of loans and discounts of the member banks.
11
The greatest ex~ansion of loans and discounts of all banks
occurred in the period between November, 1914, and our
entrance into the war.
12
During this period, the loans anct discounts of all banks
in the country expanded 4o uer cent, while ~rices
increased 75 per cent.
12
nuring the war neriod loans and discounts ex~anded 14 per
cent and ~rices increased 17 per cent.
.12.
In the post-war period loans and discounts expanded 30 per
cent, and ~rices incre~sed 33 ~er cent.
.12
In the early part of 1919, the question arose of increasing
the discount rstes of the Pederal Peserve banks in the
direction of the sounder ~olicy ef m~intaining these
rates ?cbove the m?crket r:::ctes for corwercial paper and
above the rates on Government bonds and certificates
of indebtedness.
1~
At this th9 the Government was considering the flotation
of the Victory lo:m w~ich it was then thought would
involve $6,ooo,ooo,o~c.
12
/~ ''·.~.<4"-J
3.
X-3332
Page No.
'I
·I
The Treasury was unwilling to undertake the flotation
of this loan at a rate of interest comparable with
commercial rates on account of the possible effect
upon existing issues of nrivate securities, and
its possible effect in requiring the refunding of
the issues of Government bonds already floated.
12
The discount ~olicy of the Federal Reserve banks was
again subordin~ted to the Treasury policy in
aecuring its credit reouirements, although at this
time the tendency to,lllard e~ansion, speculation,
and extravagance was beginning to be apparent.
12
This was clearly the time for a policy of advanctng the
discoant rates of the Federal Reserve banks with a
view of curt.3.iling the enansion, speculation, and
extravagance which was then beginning.
12
A policy of restriction by advances in the discount
rates could. and should have been adopted in the
early part of 1919, notwithstanding the difficulties which the Treasury anticipated in floating the
Victory loan if such a policy were adopted.
12
Had this policy been adopted in the early part of 1919,
much of the expansion, speculation, and extravagance
could have been avoided.
12
Had such a policy been adopted in 1919, the difficulties,
hardshi'ps, and losses which occurred in 1920 - 1921
as a result of the nrocess of deflation and li~dat ion would have been diminished.
12
.
'
The Federal Reserve banks and the Federal Reserve Board
took no action in the direction of restriction by
increases in discount rates until necember, 1919,
when sli~t advances were rr.ade, fol10'Pied in January,
1920, by more radical advances and by further increases during the remainder of 1920.
12
In the meantime there began and continu~d a period of
e~ansion, extravagance, and speculation, the like
of which has never before been seen in this ccnmtry,
or -perhaps in the world.
4.
•
X-3332
Page No,
·I
When finally the Federal Reserve 13oard and the Federal
Reserve b~s adopted the policy of restriction,
loans and discounts~ currency and prices had
reached such a point that deflation was accompanied
by pe~endicular and very material declines of
prices accOfl'Panied with great losses and hardships.
13
The reserves of individual Federal Reserve banks, and of
the system as a whole, began to dwindle rapidly. In
some of the reserve banks, the r'3serves fell as low
as 9 per cent, 3.nd at one time it is said that the
reserves of one of the banks were entirely exhausted.
13
The tremendous drain upon the credit resources of the
co"Untry brought about the over extension of many of
the 'ban'k-s, and with some to the "!;)Oint where they
were utterly un3.ble to loan additional funds to
their customers without danger of insolvency.
13
From 1915 to 1920, the ratio of loans and discounts of
national ban.'ks to ca"~;>ital and surplus had increased from 3,g to 1 to 5.5 to 1.
13
In many cases, further eXl)ansion could not be made without endangering the interests of de~ositors and stockholders.
The -oolicy of the Federal Reserve banks,
therefore, during this period, underwent a change.
niscount rates were raised, ~articularly upon certificates of indebtedness and Government bands, resulting
in the lii'!Uidation of this class of paper by the
member banks, and the freeing of the funds invested.
in them for other purposes.
13
'I
With the exhgustion of the credits of European Gover.nments
in this country, the ~rchasin@: ,ower of Europe :ln
our roark~ts b <?.@..'an to fail.
This resulted in a sharp
decline in e~orts, -oarticrularly of farm ~roducts.
13
This exhaustion of credit, counled 1"ith the decline in
exports, gav~ im-oetus to the decline in prices.
13
5·
X-3332
Page No.
With the be!linning of this decline, the forces of
reaction and denression began to operate. Goods
were thrown on the market, orders were c~celled,
the buyer's strike developed, unemplo~ent ensued, and comr,>lete industri91 depression followed.
13
Goods began to congest the channels of commerce, and
more and more credit was re~ired to carry these .
goods until they could be marketed.
13
It was necessary, by a high level of discount rates,
to keep these credit re~irements in such a relation to "9rices that bank failures would no~ result ~nd a financial crash increase the inevitable industri9l depression resUlting from declining prices.
13
The commission believes that the policy of lower discount rates and greater liberal1 ty in extending
credits could have been adopted in the latter part
of 1920 and in the early months of 1921, and that
such a policy would have retarded the process of
lir-uid.ation and thus spread the losses incident to
the inevitable decline of prices to a lower level
over a longer -o~riod, and that the adoption of
such a policy at that time would have been advisabl9.
13
About on3-third of the banks at this period were greatly
oVBr-ext9nded.
14
.•
It was the ~osition of the Federal Reserve Board that a
policy of cheap money at this time, coupled with an
invitation to them to further extsnd theroselves,and
the ratio of loans and discounts to capital, might
have resulted in bank failures.
14
'!.'he Federo:tl Reserve Board and Federal Rsserve banks took
the position th~-t they were confronted with a. choice
betwe~n continuing the high discount rates and the
conserro.ent ~ssure upon comr~rcial and agricul tu:ral
industries on the one hand, and a policy of lower
discount rates involving a possible financial crisis
in the midst of an industrial crisis on the other..
14
~""}
6.
X-3332
c
i -
'Page No.
The Federal Reserve banJrs, with th~ approval of the
Federal Reserve Board, took th~ first choice, and
discount rates wer~ continuf'ld unon prattically the
same l~vel as before.
14
It seems probable that a chang"' in the policy of the
Federal R~serve system ·~ith reference to discount
rates IMOuld have accompliShed a reversal in part of
the ~sychological and economic f~ctors ~hich at this
time w~r? moving in tho direction of lo·.JV~r prices,
and at th~ same time woUld have tended to induce on
the part of the bc:nks a. more 11beral attitude toward
furnishing additional credit.
14
The pressure of &count rates and of li"'uidation in the
agricultural sectivns result~d in great hardship, losses
and sacrifice. Tr~se w~r~ not confined, horvever, to
agricu.l tural sections.
14
The pressure was greater upon the ap.-ricul tural sections:
(a) 'Because of the ~,eculiar conditions surrounding
the marketinrr of agricultural crops;
(b) 'Because the croos of 1920 had been ~reduced at
costs p.'r!"ater than those an'~")licabl!" to any other
cro-ps in th"! history of the country.
(c) Because prices of agricultural corrrrodities declined
to a ~eater degree and with greater rapidity than
the prices of other conmodi ties•
14
The liquidation of hank loans and discounts in agricaltural
sections was less than in the industrial sections.
In fact, but little actual lirmida.tion of loans and discounts
had taken -ol3.ce in the ap:ricultural sections of the
country as a whole up to May, 1921.
'I
Certain exceptions noted:~
Linuidation of loans and discounts in the Kansas City
district in the period between March 4, 1920 and April
28, 1921, ~ounted to_13 ~er cent, and was substantially
14
14
'
.
r"'~
-_
- ... - '-~-
j
r-.,"
j:· :.:_;.••,
X-3332
't
Page No.
as great in the ~gricultural sections as in the
industrial sections.
In the Dallas district the loans and di~counts in
agrlcUl tural counhes Nere r8duced b. 33 per cent,
and :in non-?.gricul turql counties 12.6 per cent .
•
In tr•:! ~ninnea:oolis district, the lo?lls and discounts
•vere reduced 4. 61 -oer cent in agricultural counties,
and 12.02 per cent in non--'lgricultural counties.
The above does not mean that there was no llressure for
li~id~tion in agricultural loans as well as
industrial and coinT>ercial loans.
It means rather
that trJ?. 1rices rf"c "iV8d by the f3nner were not
sufficient to lirlQidate the debts he had made in
-oroducin!! tr..e crop Pnd in extendine: his plant and
operations during the more nrosp~rous period which
preceded tr-3 crisis.
14
Lii"!U.idations in b'3llk lo9ns in the agrieul tural counties
in the Kansas City district were materially larger
than in th"! agricul tur~l counties of the other
FP~eral Reserve districts.
14
This enforced linuidation undoubtedly resulted in great
hardships and losses from forced sales of farm
commodities, particularly in the case of cattle.
14, 15
The deflation, hardships, and losses increased in the
Kansas City district particularly, and in other
districts in which the progressive rate was applied
and by the application of progressive rates upon
borrowing in eJtcess of the basic line of the borrowing banks.
15
The -oressure of liquidation may be indicated by a reduction in deposits as w~ll as by a reduction in loans
and discounts.
This -pressure in agricultural sections is exr. fbi ted by the fact that the reduction of
total deposits { Ume and demand) in agricultural
counties was 11.1 per cent as compared with 5.2 per
cent in semi-agricul tur~l counties 3lld 4. 4 per cent
in industrial counties.
15
.f'
~'-
8.
~-3332.
Page No.
In
.,.
dem~d
deposits, the reduction was 20.02 per cent
in agricultur9.l counties. 1}.14 per ce:nt in semiagricultural counties, and 10.07 per cent in
industri~l counties.
15
It was contended th:::>t high rates for call money on
the New York stock exch?.ni!e brought a withdrawal
of funds to New York which were sorely needed by
industry and agriculture.
15
The rates for call money in New York during the period
from January,1920, to June, 1921, were continuously below 10 -oer cent, with the excention of the
period from Janua,ry to March , 1920.
15
Beginning with November, 1919, and continuously
throughout 1920 snd the first 'half of 1921, the
loans of New York City banks made on the stock
exchflnge for out-of-town correspondents as well
as the balmces of country banl<s with New York
City banks continuously declined.
15 .
The Gold Settlement Fund statistics show the continuous flow of money on ordinary trans~ctions from
the Federal Beserve Bank of New York to other
Federal Beserve banks during this period.
15
The very great derrands for money by industry and agriculture resulted in the withdrawal of funds from
New York, c~using higher interest rates, - instead
of the deromds of the stocY exch2nge resulting in
the withdrawal of funds from the banks serving industry md agriculture.
15
The position of the Feder~l Reserve ~oard and the
Federal Feserve banks during the war neriod and
the cycle of ex~ansion, extravagance, etc. which
followed it, was extremely difficult.
15
Enormous issues of war bonds were floated through them
and their auxiliary organi£ations~
15
! ·- ..- ___ ._,... . J
'""
I
9·
-x... JJ32
Page No.
-\
I
Their policy was not only int~rwoven with the policy
of the Treasury Dep"lrtrnPI'lt, but subordinated to it.
15
The decisions which had to bP. rn<:Jde were difficult and
important.
15
Doubtless in these circumst~c~s mistakes of judgment
were rn3.de which ths cleqrer judgment of retrospect
would chBnge.
15
The commission believ~s that a policy of sharp a.dv3.llCes
in discount retes srould h we be-:m inaug11r<1ted the
first six months of 1919, and cannot excuse the
action of the Feder3.l Reserv~ Board and the Federal
Reserve banks in this 1Jeriod in f>:tiling to take
measures to r8strict the ex~ansion, inflation, speculation, ~d extravagance 11<l1lich characterized the
period.
15
The Federal Reserve System.
16
19
Federal Reserve notes
Res'?rv~
ratios.
20
Disc cunt re.tes
21
Open-rr.arlr<:'t Tr<msac tions
22
Inter-Federal BeservA
~rum~
23
Basic tine
24
Progressive Rate
25
Dis,osi tion of E""rnings of
Transactions
Fed~ral
Reserve Banks
26
i
~
0
·~
_,_ \'
~t:
.-:--,.
/~
,~ '--'··- .._i£
10.
X-3332
\
Page. No.
CH II "Pl'ER II .
The
erations of the Federal Reserve System Related
~ "Econ<l!'ic Perro ds.
neve1opment of the Federal 'Reserve System
t»eriods:
•
!.
I.
II.
NOV8rr:b~r,
1914
- 1\pril, 1917 •
II.
Anri1, 1917
-
III.
August, 1918
- March, 1919.
IV.
lWarch, 1919
- June, 1920.
V.
June, 1920
- Jun.:>, 1921.
ilu~st,
1918.
Nov~rnber, 1914- ~~ril, 1917.
30
Pric~s incr8ased 8normously - 75~
Farm -r,roduc ts from 101 to 181
Food from 105 to 182, etc. ~tc.
~eat ros8 to $2.95 tn M~y, 1917
Exports incr-?aS8d 352~ mostly for "IT~.
~ank loans, state and national, increased 41%
General stoCk of money increased 27.4~
Incr~as~ in nrice caused by
(a) mar demand
{b) Gold bnoorts
Federal Peserve banlr r~tes hi,qher than m!U'ket rates.
31
1\pril, 1917 - A.ugust, 1918.
36
Great increase in -production
Gre3t increase in ~riees
Farm nroducts, - 181 to 230
Control of -r,>roduction and consumption
Food Administration
Fuel 4dministration
'R. R. Mministration
~ar Fingnce Corporation
Capital Issues Committee
~ank loans, state and national increased 11.9~
Federal Reserve bank discounts, etc. increased 171%
Federal 'Reserve aotes increased 238~.
General s toc1~ of money increased 33. 9~
Government eYcess of disbursements 12.3 billions financed
by Treasury.
37, 38
,~,-,
j
11.
Y.-3332
Page No.
III.
August, 1918- March, 1919.
Temporary deflation.
41
~rices declined
Production fell off
Ex~orts fell off slightly
Loans and de~osits of national banks practically
stationary
Federal Reserve notes declined slightly
General stoclr of money declined slightly
Federal Res~rve banks discouraged expansion by direct
action but did not advance discount rates.
I,
IV.
March, 1919 - June, 1920.
Post war inflation.
Great inflation
Great increase in ?rices.
33-1/3~
Great speculative activity.
Gover.nroent restraints removed.
Farm products. 228 to 244
Food products
203 to 287
Loans and discounts, state and national banks
increased 24.7~.
Federal Reserve bank discounts etc. increased 33.4%
Federal Reserve notes increased 24.7~
Exports sustained by loans of 2-1/2 billions to
foreign Governments.
'.
Prices and bank
e~ansion.
l?rice Advance.
'Prewar period
War period
Post war ..,eriod
i'
Banking Expansion
75%
17%
33%
Government's revenues in 1919 overtook expenditures.
This released credit which would have reduced borrowings
frorn Federal Reserve banks if rates had been increased so as to ~revent credit being employed in
speculative industries.
Up till 1919, total expenditures of
Gove~ent for all
purposes from beginning of war was 27.8 billions, of
which 6.9 billions .had been raised by taxation.
43
43
~
;
~
--~-- q_.)
t
1;;..
"\
X-3332
Page No.
No further bond issue could be made without added
inflation or manufacture of credit.
44
Increase of Federal Reserve discount rates just before
Victory loan would h"'ve diminished its succress or·
compelled its failure.
teffin~ell ouoted.
Increased discount rPtes would have necessitated higher
rates in Victory Loan is~e.
Treasury objected.
If rate of Victory ).oan had been th "'t of other taxable
investments or of short term Trea~y certificates, of
~cceptances (4-1/4~) or on commercial borrowings (5-l/2%)
pressure to refund outst~ding bonds on basis of higher
Victory Loan r'3.tes "vould h3Ve increased and possibly
have been irresistible.
Such hi¢h rates in Victory loan would increase interest
rates generally and de'r.lreci <>.te the v~lue of the outstandin~ Govemment bonds M.rrying lower rates.
44
44
Mtt1ht have caused large lir'!'Uidation of securities other than
Government bonds, and de-preci'3.tion of securities held
by sEvings benks, trust cownanies, insurmce corrroanies, etc.
The advantages of increased discount rates to ~revent S"f?eculation and inflation yielded to the apnrehensions of the
Treasury.
Treaswx difficulties should not h9.ve con trolled the
Discount 1?0licy of the Federal Feserve banks.
Had Federal Beserve b~~s in snring of 1919 increased rates
prorr>~tly and "f?rogressively, ~ch of the s~eculation,
exp~sion and inflation of the succeeding 12 months
mimt have been greatly retarded, if not \Vho1ly prevented.
44
44
44
·I
.13
Page No.
Loans and discounts of member and Federal Reserve banks
continued to e~and in s~ite of direct.action and
remonstrance.
44
The Federal Feserve banks, how~Wer, did not increase discount rates until necerriber, 1919, '"hen sli&_!ht increases were made, followed 'by more radical increases
in Janue.ry, 1920 :md others l?.ter in 1920.
45
Meantime the inflation <mC!. s!;)eculation continued and 11rices
went to unheard of l~vels.
Sharp increases 1t 'bednnin12: of this T'leriod 11110uld have:
(a) Served as
('b) Serv~'>d to
forces
era of
.'
warning.
check the economic and psychological
which combined to produce m un-paralleled
expansion, inflation, himn ~rices, etc.
It is altogether '11robable, if it is not wholly certain that
ltad a sound "POlicy been ado-pted st the beg:1nnin2" of this
period, li,uidation would h:::.ve been less preci-pitous,
the decline less abru-pt, 2nd the attendant hardships and
losses upon banks, individu'3.ls, etc. correspondin&rly
diminished.
V.
Jure, 1920 - June, 1921.
Snring of 1920.
Deflation snd
neflatian began
~nd
of 1919.
45
Li~idation.
Exports declined
Consumption fell off
Stream of ,.,roduction flowing frorr famer to consumer backed
up in ch.~els of distribution.
Himher discount rat~s ~d ti~ht reoney onerated as dikes to
keep goods flowin~ in chgnnels of trade.
l'rices fell belo'"' cost of nroduction.
Cost of '11roduction hi12:her in 1920 th8n in any "Precedin~ year.
t?ecei.,ts fran fam -,roducts could not lir-uidate the indebtedness a12:ainst them and -crovide for new 'T)roduction.
~ore credit-needed to finance new nroduction and carry 1920
production until it could 'be rooved.
-suyorst panio at
45
45
45
45
14
~
. _...,.
'_,
X-3332
Supply not
ade~uate
Page No.
to meet demand.
Marked increase of orders.
45
A runaway, sellers market.
46
Suddenly bubble burst
Cancellation of orders
Prices fell ~reci~itately
Causes:( a) Wave of cancelled order·s
(b) Fright ace om"9anyin2" it
(c) Exhaustion of credit nreceding it.
Price decline without ~arallel in 120 years.
46
These conditions forced upward the loans and discounts of
state and national banks and de"9osit and currency
liabilities of Federal Feserve banks.
Figures.
46
During this period, the ~olicy of Federal Reserve rates
lower than r~tes carried by Government securities
passed :=tway.
46
Discount rates during this neriod were more radical in increase than any previously adopted.
47
Especially so as to increase on coll-"'teral notes secured by
Government obligations, which ~~ere increased from 4-3/4 to
5~ in some cases, from 4-J/4 to 5-1/2 in others, and
later to 6~.
These increases were under Q"eneral ~olicy of uniform rates
on all paper of the same maturity rega_rdless of the
co]ateral su~orting it.
t
Claimed to be sound central
~11
banl~;inr-
nractice.
loans for sarre rraturities by Federal Reserve banks,
bein!! indorsed by rrember bari!rs are "!)resumed to be good,
whatever the collateral, comrr·ercial paper or Government
paper, md should take sarr.e discount rate.
_()
X-3332
Page No.
~'
That is to s~:.
l'ifference in rate sh6u.id be based upon maturity and
not on character of collateral.
Sixty-six per cent of borrowings of member banks at
this time were based on· Government t,)aper.
The increase in discount rates thus forced banks to
disl?ose of much of their holdin~s of this kind
of paper.
This released funds invested in war ~aper and made
possible a reduction of member banks borrowings
from Federal Res~rve banks.
This theory is sound and in line with central bankin.£" ,_,ractice.
Its application at this time resulted in hardship upon some
member banks, and was, -perh3ps, needlessly drastic.
..
·
48
Federal Reserve banks, as nreviously stated, to aid Treasury
fingnce, gave a preferential rate in favor of paper
secured by Government bonds.
i.
The effect of above increase:
(a) "Penalized the member b9llk borrO'dng on Government
securities owned by it, for the benefit of its
customers.
(b) "Penalized the banks loanin~ at low rates to custaners on their notes secured by Government bonds.
(c) J'lestroyed advantage of Government bonds as basis of
lo.:ms by member banks from Federal Reserve banks.
(d) Induced linu.idation of these bonds by member banks.
·'!
This tended to depress nrice of Govermnent bonds. Tables.
48 and
l'uring: a ""Oeriod of sharp and short duration, of unusual expansion and contraction, curves representin~? (a) movement of
logns and discounts, (b) mov~ent of deposits, (c) movement of T>rices, would t~d to run narallel.
The chart showing this, - B 'Page 51, - shows nrices falling
While (a) increase, and thus it is apT>arent that the
strain of credit becomes gr~ater and ~reater.
49
49
."""':<,....·,rl
I--
.16
X-3332
Page No.
The noint of greatest stress upon credit would occur at
point at which the curve of loans and discounts and
currency issues, and the curve showing nrices and stocks
of goods were the furthest apart.
49
If this condition continued, the credit structure would break,
with resul tin!! 1?anic a."1d bank failures,
50
That is, as nrices fall and loans and discounts increase, the
margin diminishes.
Debts must ul tim.'3tely be naid out of e-oods.
The higher nrice of ?Oods, relatively, the more easily the
debts can be 'Oaid.
'
'
'
The more debts to be naid, the more difficult to pay under
·
falling nrices.
Assuming a drop in nrices inevitable in 1920, some action of
Federal Reserve ~oard was necessary to bring the debts to
be paid into a closer relation to the nrice of goods.
·'
•
50
51
Position of Federal Feserve ~oard very difficult in •~riod
following armistice.
(a) Duty-of Board and banks to nrovide for essential credits.
(b) Duty to limit credits for non-essential and speculative aredi ts.
(c) Duty to nrevent banks to overextend.
51
Balance between these was extremely delieate.
It is -orobable that the Federal Feserv~ Foard and some of the
Federal Reserve banks, with a view to .,reserving the
int~ity of the banrinq systero, and to .,revent a financial
panic, itr?osed excessive ""lressure in the direction of
reduction, or at le'lst, ;revention of ex·')ansion of loans
and discounts of the member ban1rs.
52
'( • ;\_,.
(~ .'~\ ..('
,·'I';_...._
.17
X-3332
Pae-e No.
~olicy of Federal RPserve Board and Federal
in~ all of this ueriod, and increasin~ly
Reserve banks durduring latter half
of 1920, was one of restriction of credit.
52
, I'
An
l
I
altern~tive ~~lic.y
would have been extension of all credit
desired for any ~urpose.
Would h~ve involved dangers:( a) 1\1ight later h:r.;e resulted in large number of
failures.
(b) Undue r9duction of reserves
(c) Excessiv~ currency issues resultinrr in depreciated
currency.
(d) Loss of confidence in b"'nkin!2" system, runs on banks,
and d"l'lr'ands for r::>d8J'rr'Jtion 0f F~deral !Iesane
52
notes in g-old.
Increased discount rqtes could be effective only against banks
borrowing frorr Federal Bes'::3rve banks.
Tables#
52
Tables show 6941 b:mks (73c1-) were borrowing from Federal
Peserve b«nks md 2467 (27~) not borrowing-, in year 1920. 52, 53.
Federal Reserve Board e.nd Federal F.eserve b~s can not directly
control or su~ervise the .loan ":JOlicy of member banks; can not
require a banlr to make a loan, nor Ylrohibi t it.
53
Nor can they directly control loan ~olicy of 20,000 state
banks and trust corrnanies, not members, re;>resenting 35
or 4o% of bank resources of U. S.
53
Only restraint, restriction of credit against member banks,
throu.f!b:
(a) Fefusinr 1 oans in individual cases.
(b) ~ressure of discount rates an those which
were borrowinq
Restraint was exercised in both (a) and (b).
There were cases where it resulted in hardship on member banks
and on their custorrcers.
The
.
of Federal ~gs~rv~ ba~:-s reflected necessity for
control, restraint and r~striction •
53
~olicy
54
.
·::-'\,-~.0,
)~
18.
X-3332
Page No.
Could not be uniformly applied:
(a) Conditions in districts not uniform;
demands for customers loans in some
districts greater in ~roportion to
bankin.Q; resources than in others.
(b) Condition of ~ember banks not uniform.
(c) Loan ?olicies of member banks influenced
more by individual judgment of local
conditions than by considerations of
general 0olicy affectin? country as
a whole.
l t
Question of loans by Federal Peserve bank different from loan
by a rrell'ber bank.
~mount of a loan to a member bank only arises when member
bank 8.t tem·•)ts to borrow rrore than amount 'iO which it is
fsdrly <:m titled.
54
'While loo>ns and discounts of ba:nJ'"s and Feder?l Peserve banks
increased until October, 1920 9nd currency issues until
Je.n. 1921, the net result of the -,,,riod from June, 1920
to June 1921 was a decline.
54
Loans and discounts, all b:cTh:s, state and ne.tional declined
9. 5't.
Loans and discounts of n?tional banJTs declined 11.8~
Total bills, etc. of Federal Teserve banl!s declined 36.3~
Federal :Reserve notes in circuletion declinecl. 18.5%
..
,I
55
General stock of money incr~ased 3.4%
From June, 1920 to June, 1921
Prices decreased 44.9%
Loans and discounts decreased 18~
Fam ':"roducts decr'3a.sed 53.9'1b
55
Federal Reserve bank reserv~s increased from 43.6 to 60.8~
caused
(a) Li,...uidation of member bank" borrowings
(b) Net importations of gold
55
Pro~essive
rates ex~lained
(See also '!?· 25)
55
I/ . i'-- -.,4
X-3332
t
19.
Page No.
In districts where pro¥ressive rate applied, and in some
others, the resources of the Federal Reserve banks were
l~gely absorbed by a relatively small number of banks.
56
This absorption reduced ~bili ty to lend to other member banks.
56
r
»rogressive roates by ""1enali·zin~? banlrs which were borrowin~
excessively, tended to reduce their borrowin~s, making
a lar.:rer amount of funds available for banks borrowing
moder~tely or not at all.
Commission able only to obtain data as to nrogressive rates
in Kansas City District.
.I
.
t
56
Com:ylaints against ·,rogressive rates.
1. B.esul ted in e:":orbitant rates on member bank loans.
2. Excessive ....,ressure on member ba.nlrs to reduce borrowings from Federal 'Feserve banks •
3. Excessive rates on borrowin~s of some banks and conse~ent h~rdshi'p •
(
Kansas City District fairly tY?ical.
56
Chart C, .,, 57, shows:
Jan •. 1920. 14 Kmsas City banks h9.d absorbed 34~ of normal
lending ..,ower of the Federal Reserve bank, and 9 Omaha
banks 23. 5~.
Total 57<t..
·
56
A?ril 1920. The 14 Kansas City banks had absorbed 50~ and
the 9 Orr.a:h.a b-9.nks 23-'16.
Totd 73~.
56
This left only 27~ of norreal lending ..,ower for the 1063 other
member b 3lllrs.
In
~eriod
frorr April, 1920, to necet:.'ber 31, 1920:
Bari!.rs not ···reviously borrowinF' re.d absorbed 12~..
57
BorrO"nine: b::n'k's increased from 178 (16.8 of all banks)
to 416 (38.3~ of all banks).
'Borrowin!Z banks total borrowin~s from Federal Feserve bank
increased from 106.8 millions to 117.3 millions or 9%.
Borrowings of the 14 Kansas City banks fell off from 50%
to 361-, md the 9 Omaha ba.rik"s fell off from 23~ to 13%~
57
~-,~
,~ ~\{t . !.~
.20
X-3332
?age No.
Progressive ra.tes compelled reduction in proportion of
lending -:1ower absorbed by 14 Kansas City and 9 Omaha banks.
58
) f
•
k
Also ?errnitted use of lendin&r ~ower to meet requirements of
other banks ·7'reviously borrowing moderstely or not at all.
Ch2.rt II, ·~·. 59 ahows c'listribution of credit based on loaning
power of Federal Reserve banlr including rediscounts from
other Federal Reserve b~s which were not included in
Chart C, p. 57.
n
i '
'
t
i
58
Chart
shows similar decline in absorption by the 14 Kansas
City banks and 9 Omaha banks (pro&rressive rate banks).
58
Shows also that all other b3.nks "1')aying .,,ro~essive rates, exclusive of those in Kansas City and Omaha, - continued
to increase their borrowinftS until December, 1920, during
period of sh?,rpest decline of the borrowings of the Kansas
City and Omaha member banks.
58
Shows also:
That banks borrowin£" within their basic line increased
until August, 1920, when they absorbed 31'1& of total
lendin~ ~ower of Federal Reserve barik.
58
From Au~st, 1920, to December, 1920, they declined to 17~. 58
Chart also shows that effect of nronessive rate was to reduce
borrowings of city banks and to pe~it an increase in
borrowings of country b~s.
58
':':'h2.t actually happened, as the ch:.u-t s:b ows, was that the borrowings
of the Kansas City and Omaha banlrs were transferred to
country banks, thus increasin~ their nroportion of borrowings
subject to ~ro~ressive rates and decreasing that of the
Kmsas City and Omaha banlrs subject to proe:ressive rates.
58
Table, p. 60, shows gain in rates ·Jaid on "9rogressive plan over
what they would have been under a uniform ~ rate.
59
21
22f$
X-3a32
Average rG.te pcrld.
.
.
Average rate
6.61~
'
;.
pc.o.i~
o:r ba.n1m
.
borJ.~o.nr~ c.t 1iro.~ressive ra.tes, 6. 7~ ·
by .::.1.1 belollks d.t
no~
.
, 6Z
..m.d. pro:.:.resaive rate~ 1
62.
Total interest ~ca.ii by ..J.l o.::...ks i i l Z...Us.:.a Oit,t .1as $3.d59V!. 78 less
t.oc.n if 7;:0 rdote ~ oaa..1 i.t. atfact..
·
6ca
Cild.rt · al.so sJ10Ws:
If ell ~ in district ~ oorrO\Ied votc:J. omount of Od.Sie
lines, tAe lic.~tbili ties. ot tile Fed.er'-ll R-lserve Oa.nlt wouli .ao.ve
oeen extended by 30 ~llions ·of aoll..:;XS.
62
Govemor Miller testified tD.c:~.t totdl. c:.mount of 1ntar.3st in excess of
l~ refunded to country o&iuts Wd.S less t41an $300.
62 ·
Inte~st CJ.larps made by member blj\llks pa.yi~· pro~ressive rates were
.~ ci.S · t.co8e pay.i.ngr.nQl'lllcll r-c:~.tes or tLl.Ose w~cb. lW4 not
rediscounted c:~.t call :.vi tll J'ederal. Reserve Oonks.
62
Interest ctlcU'ged by member OCIJlks subse-tusn~ to a.ppliec..tion of
progressive rotes· 718re no tdgll8r .t4a,n r ...tes c~rged bet ore.
;
..
\Ybatever may be S~d .:::.8 to effect of progNSSiVe rca.tes on t.ae
avarage •. both aa to vOJil)elline liquic,ia.tion ond. c:~.verage ra.te. of
interest, the fd.Ct still rama,ins th&.t:
·
•
(a.) Its applica.tion in mc:.ny ~stances Te.~.t~d. ~ -uno~s~ionable
rates upon tne borrowings, or .soma portion the~ot • ot
.
banks. borrowing in excess of tileir Oc..sic Une.
62
(b) I·ts "PPlioation serve;i to exert pressure for liquidAtion
upon tbese CWlks cand coamuni t~s >'lUre tm ne~ were
grect.test, tlla.t is, to pelldl.ize t&4e oa.nks tD=aldng tJla gJ"eatest
atforts to serve ~eir cus tomars.
62 ..
The application of such ~ uniform and. ~bi tra.:ry rule to cill oa.nks *** :.
witJlout regc:11.~ to pecUliar cil:C'DStances *** c..n not be justifi.e4;
from stancipoint qf sound banking, nor from standpoint of the.
consideration 1;o w.uich the public is entitled. from banks '!'**
exercising public functions ****• :
62
X-3332
.·
226
22,
Pca.ge No.
Tne. infirmity of tne progressive ~ate is its substitution of fixed,
arbi trory rule fOr to.e exerciat lf S1fll>c...t.r.l1Jtic discretion in
JIWd.ng
.
1~.
Detl~tion WQ.S mor.> rc..pt.l. in Lnsc:~.S Cits
co~Qbl~ &6riculturol ~stricts.
03
District than ill otAJr fcdrly
Belc1.ti Vg \NgN.l ot ~flQtion o£ locms alll1
COJJ4PcU"ed "Ti tA oi ty Od.nka.
6?
disooWJ.~s
in country ,.
68
68
68
Progr.lssiv~
·l';;
ra.t3 WQS in '3ffJct in Atlontd.. st. Louis,
and Dallas
.
Not in -lffact in 'O'u.ica.go dlld Minn~apolis
lima~
City
Eltdminct.tion of ta.blae S4l0,.:l. AJDount and.
rat~
of d<Jflotion was not cemtrollgd. by
rates.
·
Rc..t.J of <Wfl~tion ·.Y<;WS\ ~ in l(WlsGS district
,(progr.Jssiv..l rei>~) and. 30.~ in J(inn.l~po~
(non progr~ss1ve ~t-l).
T.ns non-progr3saivJ rct.tlii bcmks ot Mca.go d~Jor~QEJ3d 30.-',
wnil.) DtUlu (Progr~ssi.vo rate) 'deor.lasod 1~ Ql'ld
Atlcan\Q (progressive) ?acr-losold 36:'
68
The reduction in lo~ c:md discounts ill country bQnks
was relca.tiv .,ly l~ss tLWl in ci ti. Oc:t.llks.
68
progr~ssiv~
a..
O~t
F, pa.g3 79 sAows:
Borrowings of m.maber ba.nks in., Atlanta .and. Biohmond. waro in
excess of total bd.sio lin.ls during eDiire p!riod from
JUna 1920 to July 1921 .. :.
'18
Borrowings of !Dr3mb:ar bc.nks in MinnJ~polis aistrlct ;r~N in
simild.r axcess except in J&;..rc.tl ani April,. 1921.
'78
33.
Pago
CHAPTER
l i I.
Cbd.pte:r II !•
Policy of Treasury in rJlation to F~dJral R;}scrv:J policy..
It is
aSS1.lm3d tbat war roqtiir·~mJnts could not b:J imnediataly
provided out of incrJas3d production or d:Jcrgas~d
consumption.
Som..J POI"tion of cost of .;a.r uru.st .ba.Ve
incr~as~ of o~ cr..Jdits.
Principc:W. q,ucstion mas ra.t-3 of
b:Jci.r.
~vo
policiJs possible:•
l. To sall bonds ~t
.tliglurata
2.
oo~n
int~ra~t
~rk3t
80
furnisn3d taough
GovJrnmant oonds s.o.ould
rate or at a r3lativJly
80
a: at a
r.;~lativ;:;ly
80
low rate.
f~voring
80
80
To sell bonds below lilcU'bt rd.t3
Consid3rations
227
No.
1. ·
(a) High rate ·,vould ancoura.gu sa,ving..
(b) Would r~sult in transfJr of ~xisting capital from
non-Jssentic&.l and low rat~ illV-.}stmonts to
Govt. bonds.
(c) Would absorb free ca.pi tal, discour.s.gu non;oessc3ntial
production.
(d) Would. limit 3xpa.nsion d.Ud inflation
(;,) ryould r~duc~ consumption
(f) All of a.bov J ,wouli rJtct.rd ris,; of pricGs,
(g) Lov·:;;;r pric,;s •vouli r;::ducc amount of mon;.;y n.Jodl3d by
Gov .;rnm.Jn t.
(h) T.aJ .aigu.3r rd.ta 'vould .!JaVJ t.:md.ad to maintain tha
price of ·Gov·.;rnm:mt oond.s ~t pct.r.
· ·
80
Consid.;;r...tions favoring 2..
(a.) Tr)a.sury s.aoulli
s~cuN
funds a.t lovrost possibl.; rc..to
Sound. only if sc:iiD.; Qlllount of moruy rJq_uirJd to
finca.L1C·J war· d.t .aig.:l a.s at low ra.tl.l of int.;r"'st..
81
81
228
Consid.;)rd.tions fd.voring 2 (Continu.ld)
(b) Al:.Y policy should avoid too suddon changas in rd.tes
which· would ca.us.;) rapid cbang~s in gonJral.
intJrust ra.t.Js. witil r.lsulting dislooa.tiqn and
.;)JDba.rra.sSJn.)nt to industry.
11
Commission is of o.pinion:
Advanta.a.1 of low ra.t~Js morJ ~ilan offs,Jt by tl:w
it Cci.US;.)d cand tA:J d.tt.mdcmt high pri~s.
81
Low
inflc~.tion
ra.t~
policy it;.cr.;d.S.Jd totql .;.xp.mditur..l for int.JNSt
and pli.noipW. oi d,.,Jbt.
Inv~stors, ~uying fr~p~triotic motiv~s suff~rad:
(d.) From low rd.t.>s cllld. cons~qn.>nt ®p:r.lcia.tion of
Jlb.rltat volu~ of t.l.) bonds.
(b) W~l.J country sufiJr;d from iuorJas;.)d cost .. of war
·· Aivantagll or disad.vcmtaga of t.1.: 2 policies is l'OOaBU.rod
by infle~otion nJcJssa.rUy following Ji t.a.;r.,
Tha
intle~otion
un.iJr tJU low rC~ot.; policy was
grJa.t.)r t.Gcm uni..sr ~gA rat.> policy.,
Mat.aod of infli:i.tion or
....
banks.
l'llC&nu.fC~>Ctur.l
~a.sur;.)a,bly
81
of or.Jdi t oy J't)d.Jrc..l R.>'S-.rV>J
(d.) B'u7Jrs w.;r.l ;ncou.ra.g.>d to borro·; l1lQnoy witJ:~. ·NG!.oh to
purohoa3 Liblrty bonds G.t sam.; ra.tJ a.s ~t paid on
th.J oond.s, .i~osi t~ng t.a.s bonds as oolla.t>~rW..
8l
(b) This incrlla.s.>d loana c,nj, discounts of t.n.> l~ng b~
and a.lso d~osi ts to cr.ldi t of Gov ;;1'll'4.>nt.
The Govo.rnmmt l.Jft t~) tunis 'Vi t4 1;4.; banks for SCIDG
wu.))ts c.t 2~ int.lNSt .a.nJ. ·no r..:ssrvJ wa.s r.lQ.Uir.Jd.
1'ho3
~ ~ d. profit on.i tD.J · incr .>a.s3 of th>Jir
doposits s•v,J 141'6.Jr sums for s~rt t~ loans
to tA.Jir oustouwrs, this t Jnding to ecms.J infl.:...tion.
'
(c) Wben t.o.; Gov.;~nt Celoll.sd for tJlJS.; funds txl.J oo.nks·
would obtc.in odvcmc~s from F.>doral R>Js.Jrv.. bonks
on t~.>ir not.>s w1 til tA.~ bonds a.s colla.t~rdl, or ::tlloy
would r.~discount tn>J not;;s· of t-.>ir customJrs, so
~~
(d) Tl13 proce.Jd.s of .lV.lry $5 would "PP.ld.r on F.ld:Jral B.>S;)l"V3
ban)t books ciS about $2 in de})osi ts and $3 in Fecleral
B3sarv~ not~s
·
81
'
82
82
~·
.as
•
· X-3332
paga No.
on
til.3 d.3posits tjms craa.t.Jd fu~ur.;) lOdn .JXj;onsion by
t~· m.;)JllOJr bo:Wka ·doul>1 ca.risa.
82
(a) According t.o p;,rsons, Q. duposi t in F.ld..;)rol. R.3S S1"V3
Bc:t.nk of $100,000 will ~upport 1 .. 1 or 1. (j millions of ·
lodllS by m.mfu.3r bcl.nks, .11 or 1~ to oa.;, ~ll will .P..trmi t
em Jqu.:.l i:.1Cr..so.S3 i:1 F.td.::rol R~s.trv .J not.)s .::.ni d.3poSi ts
of lJl.)mb.3r bonks comoin3d.
82
(f) Ti:w Qovlrma.;;nt, on m.t~'llrQ.;;u~·: tA:;sa fun..is; us1ldlly ~d
~ to J..m3riccan produc3rs of wo.r mc:..t.;ric:J., · ·.li t~r
llractly or t.:;.ro~ lo.:.ns to alliu.i Gov.:.mmants. .
. (g) TA.JS3 funis ~rOill)tly ~ OOOL to tAa b..a.nks ~ C01&1&13rcial
d..Jposits.
(A) TLis incr.:.as·Jd. t~ G.Ss ...ts ~~ li-bili 'G5•..ts of t.J.O Fodor~
R3s.Jrva bi.nlrs ~i lllJtlb.;r ·~.
T~is
proc3duro
witb~~
.
,
fore~
lOa& to
F:;ciJrQl
RJs~rV3
bQnks to
axt~i
cr3dit
~u~ ~3mbar ~.
82
Or 3Ve& to f':.mis.d ..;. proti t to t:w wmror oanks in tho
first instQJlc-3 by llscount ra.t3s lCI'W;)r ~A:.n ra.to
borM by vA3 bonds.
83
b.s th.l succusstul sdl.J of Libarty bor.ds cl.t low int3Nst
rQ.t3s wQ.S n.303Ss~ly prad.ictl)i on 10\v J.iscount rotss
by t.c..J F<3dural. R.3s :Jrvs ~.
83
Tms low rot~ policy \/eo.S contra.ri to tAO policy of tile
graot fi..lb.l'i.Cic:J. countri3s of L~ morld prior to the
W'Ql" QZ• .,. in SOill!.# Co83S during tb:i Wor.
83
cartifica.tes wer3 .J.so issued. in a.nticipa.tion of lOon c.nd
t~ Pcl.~3nts.
}.(ora iuportant in cr:J&tion of eonk cr.:sdi t can:i. expansion of loans
cmd discounts tc..an Libsrty oonis. or Victory notes.
83
R3Q.Son ·va.a:Primct.ry own..srs..dp lco.rgsly r:::mc:dn.Jd w1 tJl i..l~ bollkS.
Difficult or iupossibls to s-311 ~..wm on ~ invastm3nt boaia
T~s ~3 nJc~sswry disposcJ. of t.c.J oor~ i.O
wm.c~ ..vould malt.;)
JlQU.U3 tll.,)m.
basis
it profi tabl3 for
w
t~
oa.nks on a.
bc..nks to
8.3
229
230
X-3332
T.tw bonks roc.li vv<l d. l~g~ raturn from till3 purcha.sa of
cartificotas ~ th.l r~t~ borne by tho C3rtificatea.
Tll3
bonks 66.V3 croJ.i t to GoV3rnrJl.Jnt for tAeir subscriptions:
This incr~C~.Svd .lq~lly its d:Jposits ond lo.ns.
WAil~ tA..: Oc;.rka p.:..id 2fo on t4..1sJ deposits; tAcy D4.Jd ~ep no
r.3s3l"V3 cand t~y oft~ ii:Jr<J not dra..vn out oy th.1 Gov.>rnm~nt for. c::. consiJ..:Jr.o.bla tim.J.
\'lillln
o-ll~J.
for, t4<J bonks coulJ. oorrow from Fad.Jrc:sl
bonk o.t ca. ro.t.:> no .'lig~r or. .:JV::n low3r t.:an tha
cartificot3 rat~.
In t4s
R~san;a
83
~a.y a. proportion of t.ac cr..:dit 13x.pansion inpliad in
abking thasa loans
WQS
transfarrud to
tn~
Federal Raserve
bank.
83
t.a.J duposi ts tt..us cr-..e~ot.::d in t ~v F.Jd.:src..l R.Jservu bonks W:Jra
drd.\m upon by JD.:jmCNr bQ!lka for vo.ul t · caAl ani till mon.ly,
pa.rt of t4ls.J J..sposi ts wor.J conv .~rt.:Jd into F.:Jd.Jrol ~:>s3rva
notos.
W.c..JD. ti:oo ~s ·:~Jr.J po.ii by. t£U Gov.:~.mt to CW'lU.fd.Ctur.Js, .3tc.
t43y proq>tly returnod C~oS inllvi.iUc:tl. d3posi ts.
Against t.:ws..: :duposits tAl ba.nks hal to k..Jp rJs~rves,
incr~ing tA.l loQnS on~ .i.lpoaits l~cbiliti.:>s.
ori
84
t~r.Jb;r
sa.b of t!n long tim.:l GOV.Jmm.lnt oonis, tuJ c.Jrtifica.tJs
issu.Jd. in anticipotion ·v:lr:: r ... tirOO..
tb~ bon::LS :14r.J purcnos.Jd by inY.Jstors woo d.id not ·
to Oorro.v, t;u..; infl..:..tion :'lei.S r .Jduc ..d, baca.us.:: tAu
r ...d..:~tion oi ttl.. CJrtiiieo.t ..s r-duc.:d t~.J ~ invvstm...nts
~ t~ oQDks.couli r ... ducJ·t~Jir i.lot to ttl.J F.~d..:ral R.:svrv;
b~ ~thus pr.:pQr... ·for ~t~.~r p.:riod. o~ auort ti~
Gov .:r,nmJnt ....ccOIDllO.la.tion..
Ir-. so fa.r
CloS
Jl.:;.V ..
84
. cgartry;B IV.
F3dt)rd.l R.;s,:,rv.l policy in
19~0.
85
2·31
.27
l>age No.
In Se'Qt. 192n, decltne of :9rices well under way.
Q.cn~ral ind~ f~ll
Agric. -oroducts
frOJrl 272 to 242 ·
"
" 2411. to 210
Lower discount rlites demmded to check this decline
Claitr:~d
fall in -;rices duq to billh discount rate l)Olicy of
Fedent ~es~rve buD:s.
-
Lower discount rates were aSked in order to arrest process of lir'U.ida.tion.
No change in ";)Olicy wa.s made.
...
85
Factors in rate mal-"inq:( a.) Oondi tim: of lending banlrs
(b) Peser\rg ratio of FEideral Beserve banks
(c) l)ossil)il:i ty of .:old wi t~drawa.ls
(d) G9n9rel ccndition of business
Causes ·of decline in . ..,rices, es'?,eci~:>,lly of. agricultural products: .
(a) Falling off in 9X'DOrts.
85
(b)
"
" s-necul-:tiv<:l den"md.
86
(c) Reduction in domestic eonsunrotion in latter ~art
of 1920 and firS't half of 1921.
86
(d) l)sycboloncal. attitude of tbe ~eople.
!"86
In 1919 ~~~t compldnt a~a.inst him cost of livin«.
Senate Fesolution, l4ay 17, 1920.·
Aslred. Boud s t9'9s it -,roposed. to tue to meet
etistin~ inflation of currgncy and credit and
the eonset~Uent high ..,rices.
News~a'9er ~rop~anda,
86
86
cO\l'!)led with e1t'Dansion of
credit ••• tev~rs~d the ~sycholo@ieal attitude
which h3d contributed to infl11tion of prices and
ba:nlr credit.
· 86
The drop in -orices, h'3rald9d as beginning of den~
~ tion introduc'3d '9SYchology of f-.,ar into bank3rs
minds.
• 28
X-3332
Made th'ml
str~in,
i~or~ bankin~;t maxim that in times of credit
money should be lent freely though ;at a high
86
Merchants were forced to sell stoCks to li~uidate loans.
Buyers bought only froll' day to day.
Orders were cancelled.
C:onsumers bought only for itmJediate essential needs.
86
t>roduction slowed down.
Une~loyment incr~ased.
chan@e in Frederal Feserve ~olicy would probably have
reversed in nqrt the ~sychological and economic
factors t3ndinp· to lower ,..,rices.
mould
in
h~ve
86
t,qnded to 1'Jroduce a IPOre liberal attitude
to furnishin~ additional credit.
b~ks 3S
Such a ch?ng/!3 of -r>olicy '"rould necessarily mean an
extension of lo"l.ns.
Desirability of such a ch",nge in nolicy must depend
on su~ly of funds ~V"l.il~ble.
Banks can l~nd fre~ly only when their condition will
admit without end~~ering interests of depositors
and stockholders.
86
What was the condition of the banks in last "Cart of 1920:
87
Varied widely
One-third
}
'~'tere
greatly extended
One-third moderately
ext~ded
87
One-third loaning within very conservative limits.
This condition shown by numbers borrowing from
Federal t?eserve banks:
One-t'hird borrowing very heavily
One-third borro,ning moderately
One-third borrowing not at all.
87
Those not 'borrowin@" at all could meet their re®ireroents by
borrowing frorr Federal B~Mrve banl~s.
l
Page N'o.
rate.
Made them exert "'ressure for lio.u.idation.
~
"-t..
i
:"""\ ...., f""'
(·
"~,f-,J
r " - <~
,:·
29
X-3)32
Page
1~0.
Those borrowing moderately could borro>l more.
Those borrowing immoderately could not extend further credit
without danger of their solvency.
Where a bank is in latter si tuation1 where additional loans
dangerously decrease ratio of capital to loans and
discounts . . or to deposits, the remedy is to increase its
capital and not increase its borrowings from the Federal
Reserve banks.
87
Bar;king capital has not kept pace with deposits during, the
period of deflation.
From June 30~ 1913 to June 30, 1920:National banks
Deposits increased 109%
Capital and surplus increased 22%
Ratio of capital to deposits:
1913. 1 to 5.45
1920. 1 to 10. 89.
Margin of safety had thus decreased
87
5o%.
Ratio of capital to loans and discounts:-
1913.
1920.
1 to 5.84.
1 to 9·95·
87
If capital had maintained sam!;} ratio as deposits~ 16.8 biJlj.ons
of additional loans could have been made by member banks.
This possible expansion is wholly theoretical . . as i t would be
limited by reserve requirements which would greatly
reduce its aggregate.
It is clear that in many cases 1 inadequacy of capital and not
insufficienty of Federal .Reserve bank credit was a factor
which limited and restricted credit during this crisis.
87
87
..,_
.·~,~,1
,
0'""'·,1!f
~~~~.·~:_,_,t-::C
30.
X-3332
Page No.
F~d':lral
P?s8rV:? "Roerd qnd Fed<?r'll :8esgrve banks bound to
considar 3ff:?ct of a 'Tora liberal uolicy.
'fust r3sult in mor:?la<:Jns.
~.s b3.nl\:"S 1om in period of
falling nrices the strs.in upon crsdi t becomes more and
more nronounced.
,.
88
Danger of bank' failures increases.
F8deral :Reso.rv8 Bo<>.rd '-'nd F~deral P~serve b3.r.ks f3l t
this danger of b~k fqilures was a real menace. which
would h3.ve b'?"n gre9.tly increased by a. discount policy
suffici3ntly lil:leral to grr%t the -orocess of liquidation.
83
The Commission, how<>-ver, believes that notwithstanding this
danger, a mora liberal nolicy could h~ve been adopted in
the latter part of 1920 and the es.rly ?art of 1921, and
that it would have served to arrest in nart the tide of
deflation and reduce the hsrdships and iosses incident
thereto.
88
'i
111hat<?ver rr'iy be said of the nolicy adopted from the standpoint of wisdom and nec8ssity, in the light of the
psychologic<l.l ?.nd economic factors necessary to be
consideredL it is evident th~t the apnlication of the
policy in -.he rur:::l sections resulted- in great hardship and distress 3nd contributed to some results
economically und~sirable.
88
Tnis hardshi~ was due, in large measure:(a) To e'cessive cost of nroducing the 1920 crop
(b) To the slow~r turnov<?r incident to farrnin§! operations.
?r~ssur8 for li,.,uidation corr•pelled in TPany cases the sale of
imme.ture cs.ttle and ce.lves which se~ms likely to result
in a shortage of mee.t supuly during the coming season
of production.
The pressur8 for lil'luidation forced sales while a wiser and
more discriminatinR" -9olicy would hs.ve su;z?ested carryin>;; the borrower until less dis3strous sales could be
made.
Farm3rs difficulties were increas3d:Prices of what he sold dqclin3d faster than Drices of
wh:tt he had to buy.
88
88
59
,
0.f""'f· ._,.,
,-:.:···~·ar_J
31~
Page No.
Had the change in pol:i.cy .. i f carried out., arrested the decline
prices cf what he hac; to buy, without arresting the decline of
prices of what he had to eell., his condition ;,;ould have been
worse than whcot it -.vas.89
in
Federal Reserve banks ratio of reserves in May 1920 had
fallen to 42, 7%.
Omitting, inter-Federal Reserve baLk :rediscounts~ the ratio of
reserves in many of the southern and ¥1estern Fede:·al Reserve
districts was far belo~, 40%.
89
In Atlanta, ivlinneap ol is; Kansas Ch;- e:nd Dallas., the reserve ratio ..
unadjusted, fell below 2rtJ,, at ti1nes during last half of 19'.::.0.
89
7 of the Federal Reserve banks were
borrowing frow the other 5.
At one time during 1920,
39
The Federal Reserve Board could have s<Aspended the reserve
re_quirements, but would ~ave created an anomalous condition:The purpose of the suspension would be to enable member
banks to increase loans.
The banks, howe.ver .. would have to pay a tax on the reserve
deficiency.
39
The purpose of the tax, to be added to the discount rate,
is to cause a re1:.1.ct:ion in bo~rowi;._:s fr0-<1 FederaJ.
Reserve banks, so as to bring up the reserve ratio to
required amount of 4o%.
90
To have suspended reserve requirements in latter half of 15?0
would be to encourage larger borrowinbs from the Federal
Reserve banks, on the one hand, and to discourage them on
the other, by increase in the discount rate.
90
Studies made by
1.
Co~~ission:
Was expar.sion in bank loans during. the 4 or 5 years
ended with June 1920 more or less rapid in
rural districts than in financial and ~ndustrial
centers?
91
Examined into by Dr. David Friday.
Sl to 101
.r"'>·
,,
X-3332
32.
Page No.
The tables prepared by Dr. Friday show:The expansion in agricultura~ states during the period of
inflation was at least as great, if not greater,
than in the industrial states.
101
,.
Another study in cooperation ~~~i th the Federal Reserve Board and
Federal Reserve Bank of Nevi York:
Between May 4 1 1920 and April 28 1 1921.
{a) Loans and discovr~ts.
Banks in a~;ricul t...1.ral counties
If
fl
n
semi" non
n
"
"
"
declin~d.
1.2%
"
1.3%
5.6%
II
(b) Borrowin 6 s from Federal Reserve banks.
Banks in agricultural counties increased
Banks in semi " counties remained stationary
II
n
declilted,
" non II
56.6%
Pressure of liquidation is also shown by reduction of deposits
in above study.
A6ricultural counties decreased
Semi
"
n
u
11
Non
"
"
11.1%
5.2%
4.4%
115
This reduction is emphasized as to agricultural counties by
fact that time deposits increased except in il1ir.n. and
Kansas City districts.
115
Increase was over 594 millions or 1 Cftb
llb
Demand deposits
Agricultural counties decreased
Semi
"
"
n
II
ff
Non
"
20.02%
13.14%
10.07%
116
In agricultural counties, demand deposits decreased 468 millions
;,rhile loans and discounts d~creased only 3G. 5 millions~
117
Means that farmers being unable to sell their products for
enough to liquidate their loans, or to sell ·chem at all in
many cases 1 drew down their deposits to pay their debts to
merchants., factors, etc. who in turn paid the ivholesalers
or manufacturers., who in turn1 liquidated their bank loru1s. 117
~.
c
·~·~t_)
f(-,
,,
Jj.
X-3332
This process, added to the liquidation in industrial sections,
resulted in a total reduction of bank loans of 327 millions
and a reduction of total deposits of S65.7 millions.
117
Conclusion of co:n.a;ission from above studies:1.
2.
'
EA.pansion of bank loc:ms in rural districJ~s durine;
inflation !Jeriod endins June 1920, ·;,as relatively
greater than in industrial sections.
117
The action of the Board and Federal .Reserve banks during
the 15 mcnths rrecedint; April 23, 1921, did not
produce a greater curtailment of bank loans in
rural districts than in the financial and industrial
sectio:r.s.
117
3.
Credit ·;.ras not absorbed cy tbe f inancie.l centers at the
expense of rural communities for the purpose of
speculative activities.
4.
The pressure of liquidation and depression in the
agricultural sections ·:;as reflected in a reduction
of deposits, ·;:hich ·;;as relatively larger in
agricultural and serni-agrj.cultural counties than
in the industrizl centers.
117
These conclusions are supported by an ana1y sis of 'J orrovlinc,s of
ztember banks from Federal rieserve banks, JivLin;;_ the
Federal Reserve districts into:1.
Industrial section.
Federal Reserve banks of 3oston, New York,
Philadelphia and Cleveland.
2.
Cotton section
Feder.al Reserve banks of Richmond, Atlanta,
and Dallas.
3. A2ricultural and live stock
s~ction.
Federal Reserve banks of Chicago, St. Louis,
Minneapolis, Kansas City and San Francisco.
I'
Table 35.
Total amount of all paper held by Federal Reserve banks
during period fro:n January, J.920, to May 31, 1921,
divided into 3 sections, - industrial, a~ricultural
and live stock, and cotton.
118
118
-'""•«. ~M-/
·~
.
34.
X-3332
Page No.
Comparison with peak, - October 1 1920, and May 31, 1921.
1..
Total paper 1 all districts.
Industrial fell off from 109 to 60.3
'
.
:
42.7
.Agricultural and live stock fell fro,n 109.4 to 82
= 27.4
112.6 to 92.5= 20.1
Cotto:.1 section fell from
Agricultural paper 1 all districts.
From January 1920 to
l'~ay,
19'21. .Rose from 27.1 to 178.1
In a6ricultural section rose from 66.6 to 259.8
In agricultural and live stock section
rose from 34.1 to 184.6
In cotton section
«
"
8 to 158.2
3.
119
Live stock paper
Industrial section. Rose from 10.4 on Jan. 30, 1920
to 303.S in August 1 1920.
August 20, 1920 to May 31, 1921 1 fell to 43.8
Not sufficient in volume to be indicative.
120
Cotton section.
Rose from 32.5 in Jan. 1920 to 161.2 in April 1921.
Fell to 1b9.2 in May, 1921.
A6ricultural section.
Rose from 44.3 in Jan. 1920 to 136.5 in Oct. 1920, and
then fell to 84.4 in May 1921.
120
All districts combined.
Rose from 42.3 in Jan. 1920 to 136.9 in Oct. 1920 and
then fell to 96.2 in May 1921.
I'
120
This table indicates:
(a) Tne
i~crease in discounts of agricultural and live
stock paper was relatively greater than that of
all other paper.
(b) The liquidation of discounts of agricultural and
live stock paper 11as relatively less than the
liquidation of all o~her discounts.
120
?~'l
J',,• ..._ • .....__.
....
I
X-3332
Federal Reserve -oolj.cy as indicated by e. comparison of interest
rates on U. S. ce:-tificates 1 bank acceptances 1 commercial
paper, and discount rates.
121
New York is the money center of the U.S.
Transactions in U.S, certificates. acceptances (domestic and
foreign) 1 bankers acceptances: and com:uercial paper., center
in Nevi York.
The discount rates of Federal Reserve Bank of New York 1 the ref ore 1
il:d..:".cc..·~e t:L1~ g,enex·al r·ola·~ion bet,;etln ir.,;e:cest rates and
discount rates.
121
Chart K. p ~ 122
Sho·:vs relation between Federal Reserve Bank of Ne·•· York.
Discount rates and the market rate for U.S. certificates 1
bankers acceptances and commercial paper.
From Jan. to April 1520.
Federal Reserve bank rate lower than rr.arket rate for
all above eAcept U.S. certificates.
Since Jan. 1921.
Federal iieserve bank discount rate hi£.b!2.r than U.S.
certificates and bankers acceptances but ~JD:
than market rate for. ccm:::ercial paper.
r\elation betv-1een Federal Heserve bank rates and market rates is
irr.portant for reason that when Federal Reserve bank rate
is higher than market rates, banks would derive profits
frorr. paying off their indebtedness to the Federal Reserve bank.
,.
Chart L. p. 123
Relation between rates of issue of U.S. Treasury certificates
and rate o:f Federal !1.eserve 3ank of New York on advances on
such certificates.
Chart ~. and table 36 p. 124
Comparison between Federal Reserve oank of Nev; York.
Discount rates on J..;. to S mm:ths corc:oerc~s'. paJ:er) with t:1e
market rate.
121
~2l
'
~.
,-.,
~
r
I' ,. -'-\ __
X-3332
"Page No.
,.Jntil ~-Jr:.l, 1917, 3!1'~~:--::::~c i:ltO ,.~::.', t,.,~? Fe&era1 nes~rve
bmk discount rate on comnoercia1 paper was hi><:her than
the mar~et r~te.
Aft~r
trt?ril, 1917, was always lower.
125
Charts N and 0.
Belqtion bt?twe"'n rnn1rrum discount rate of "Bank of Engl.:Jnd 3Ild th0 rr:'Cr1_'"Jt rat?s on 90 day bills.
"
, '
125
Chart K.
Shows th":Jt F-?ders1 >:?es0rV8 "Bank of N~w York discount
rates on U. S. C"lrtific~t"s, since JanuB.ry, 1921,
has 'been <=lbovr.. :T"'.rket re.te.
'"'1so th~t Fed "!)ral :8es<:>rv•'>- b:ml· discount rate on
acce~t?nces since January, 1921. has been above the
market rate.
122
T?cblas 38 and 39.
Offici2l discount rat"'s.
127
For.:;im centr8l banks.
t:;,blcs show: ..
T!iscount rat'"'s of Gr-s<.l.t ~rit~in, 5!>ain, 'Denmark,
J"n•:m mt1 Norway 'Ner:: increas~d befor3 those
of t'l--., F~deral 't10s~rv~ 'Ban'!!." of New York.
122
Thes::;
Ja;?m.
)
Oct. 1919. !ncr'"'ased from 6.5 to 7.3~
Nov. 1919.
"
" 7.3 to 8.03%
Coincident ·'Vith. bro.;::-1.~ in th-? sil~ m=,rket and
resuJtinq fin~ncia1 crisis.
128
128
>
Earnin><:s of Federal :R'?s::rv"?
R.,serv-:'! -nolici"'s.
b2Jil.~s
as related to Federal
?ublic service and net ~rofit is the
Fed:?rsl Reserve system.
12.9
~urpose
of the
Profit from discount rates should not be and has not bJen
a factor in determining rates.
129
129
I
0
'.1'
f:
.:.:.,:.._._
X-3332
Page No,
)
.,
.
No incentive to profit because o! the franchise tax.
129
Prof its depend on vo1 ume of member bank borrowings and bi.J l s
purchased.
129
Borrovd.ngs are 1az·ger in times of financial stress 1 and 1
therefore 1 gross profits are larger.
129
Table 40, p. 130.
Profit and loss account of Federal Reserve banks, 1920.
130
Gross earninE,s.
1920. 131. 2 millions.
130
Net earnings.
1920.
149.2 millions.
132
Dividends.
5. 6 millions
82.9
il
Surplus
Franchise tax
6o. 7
II
Conclusion of commission
Profits of Federal Heserve banks bear no relation to policy
of Federal .H.eserve Board and Federal .Reserve banks
in determining discount rates.
132
CHAPTER VI I.
Movement of funds in and out of New York City.
133
2anking reso;.;.rce::.; of lie .. York City:2/5 of resources of all national banks in U.S.
1/5 of resources of all banks in U.S.
133
New York City is financial center of U.S.
New York City is today the mo.--1ey market of the world.
133
/"~
X-3332
f'
38
OuJstion to consid.Gr:was cr::d.i t or fu.'11s :lrawn from th:) i nt~rior to th:;
financi~l c :mt )rs.
Chart
133
'P.
BisG ani ;l8clin':l of d.o:posi ts in
r,;st of country.
}1:::-w
York City and.
134
During 1919.
D.;posi ~s outsiJ..; of N ;v.; York City :cos..; frow 7. S oillions
to 9.1 oillions.
During 1 s.~().
T.c..is L.;v.;l nlci.ir:.tu.in..;d outsiJ..J of
l:JJW
York City..
During 1920.
D.Jposits of NJw York City oanks f.;ll off 370 millions
During 1920.
D.;clinv of Q.;posits of
in N.;w York City.
~11
oar~s ~ccount.;d
for oy d.;c1in0
133
During 1921.
D;..']?osi ts of oo.nks outsiJ.J of IL.r York City 0..;gcW"l to
d:;clin.; out ~it rr.;uch 3lo.nr r~-L t ..... .m. in I'!J"J Yorlc City
July 13, 1921.
1. Bca.nks outsiiJ of N.;w York City
F.:ll from 9.1 oillions to 8. 7 billions.
2. N0.v York City Od.nks
FJll from 5 oillions on D->c. 31, 1920 to
4. 5 oillions on July 13, 1941.
C~rt
4%
10%
133
Q•
Shows
T~ol.;
133
Scl.U13.
41, pag.J 135.
P..:rc.mtd.g0 o.f d.0clin..;. Loa.~.1.s c.nJ d..;posi ts.
NJv; Yor1~ City o.,.,nks ....n .... a.ll o.a.llk> i;L u.s,
Lo...ns ..on..l ..10posi ts r..:c:.ic..::...:J :F .;d.k, ...:a.rli..:r in N..;w York
City t~ in co1.1ntrJ .-.s "" w. . . ol..:.
Tota.l doclin..; of oot...:.. loans anJ. d0poaits wo.s c,r...:c::~.t..;r
proportionatGly in N0w York City t.:Ja.n in
country ""s a. .v..... o1..;.
133
135
135
"'('"""\.
' ..:..,.• :''- ~i
'.0
.39
X-3332
"Page No.
Ch "1rt F.
Balances of out of to\'\1!1 ban1cs with New York City banks.
Loans nlaced by New York City banks for out of town
banks, on calL
136
During expansion of 1919 until Jan. 1920:These b ~1 ":J.nces inc:.teased ranicily
Balances of out of town banlrs were 840 millions
Loans i:>laced for them by New York City banks were 680
millions - tot<1l 1. 5 bill ions.
136
From J~., 1920- Jsn., 1921:These balances and lo~ns decroased 450 millions,
From Jan., 1921, to July 20, 1921:
Decr~ased an ~ddition3l 175 millions.
136
These reductions indicate:
(a) A mov9ment of money away from New York City to
the·country sections during the neriod of
gr~atest stress in the country districts.
(b} That ins t"-"td of money being drawn from the
int?rior to N<>.w Yorl< City, the opposite was
the case.
138
Above conclusion ie fortified by g·old settlement fund
tr?nsac tions.
Table 43 A.
Gold settlement fund tr3nsactions Jan. to June, 1920.
Table 43 B.
July to December, 1920.
Table
43 C.
Jan. , 1921, to July 20, 1921.
138
139
Above statements cover u.eriod from Jan., 1920, to July 20,
1921.
Results in entire period.
Orcinary transactions.
Net loss toN. Y.
1.7 billions.
Offsets.
Treasury deposits. 1.0 billions.
Bg_l<::>nce on S9.les and -ourchases of acceptnaces
629 millions.
139
14o
'"'
, .......~.;.." _;
n'
,·.
X-32>32
40
Stat-"m.;nt s..:..o'N'S distinct t..:nd.,:mc:r towards ·;::itnd.ra.-vc.l of funds
from :tT..;w York Ci iiY oanks t.urougb. c.c..Jck cl..:c:~.rdncuff, offs.Jt
only by .;xtra.or:l.L:.""ry trcJlsc.ctions.
140
Ta.ol :.;s 44 A .... nd 44 B.
LoC;~.Us to c;;W.-.i.J. :.t.-.;;posi ts from out of town corr.::sponJ.,.mts.
Uov.JmoJr l j , 19.GO.
Tabl.; 44 A·
Tot.ll lOd.l.1S outsi.i.J :JJ·•• York district
Totc.l looJ.1S arJ.d. inv .Jst..<>. mts
1.3 billion
5. 4
"
Ta.bL: 44 B.
d..;posits from outsi~~ Now York iistrict 1.2 oillions
Tota.l oorrowings fro'n F·.:;d:;ral R ... s...;rv.; baJlk. 8c30 millions
Tot~
S.;J.O"NS : -
(a) Lo.,.ns to oa.nks, rc:~.ilroc..J.s, c:..gricultura.l cJl.i iniustridl ..
J tc. outsiJ.;; of li:>>v York district JXC0-.;dod
iJ:posi ts from sor.r.~ sourc ... s oy 96.8 millions.
140
(b) In g;;n.;ra..l,
Accom::oiation rJC.)i Vvd. oy corporations, ..;tc.
outsi.i..:; of NJVI York J.is tric t from N::m
York City ~Jo:l.fJ.ks ·::o-s ci.pproxil'Ibt ;;ly ... qual
to t.u~ dJ:posits r0C.JiVei oy Now Yor~ City
bd.cits from institutions .;..nl p ..Jrsons outsiio
t.ac UJ•v York . .i.istrict.
Cn""rt S, Ta.bl~ 45, p.
Str..;..;t loans.
l~l.
S.uovvs:
1. Du.ring 1919, ca.ll fums from (o.) out of to.r.a o.;..nks
.::~.nd (b) N.;w York City oc:~.nks incr:;c:..s.;d witLL gr.;at
rQ.pidi ty.
2.
Fur1J.S from o·ll.t of to·:m oa.r~ks 1ncr Jci.S -.:i gr ..:a. t·.Jr t..:..;a.n
from ~Liiv York City oc:.nlr..s.
During 1920.
Suo:vs:S.a.:..rp i.;clin..: coL:-.cidmt wi t.u pr ..:ssurJ for loans for
C:~.gricultural dni cor~..;rci~l purpos..;s, oot.(j, in
lL:.- York City ""nd outsiio.
140
142
l4Z
142
~
•':...:~ --;:t;
41.
X-3332
Page No.
Shows also:"'Then funds b~2'-"ln to be withd·rawn from the
stock exch.::tn;ze in 1 ?'tter n~rt of 1919.
Interest rates on call ~oney rose sharply
from 6~ to 14~.
142
Chart also s'hows:
(a)
~~e incr~ase in the call loan rate was brought
about by the d?c1ine in amount of available
funds for call loms.
(b)
Trl;! increase in r?t~s did not result in drawing
funds frorr tn ~ intl'lrior 'OT the country.
142
(c)
Durin~Z
Chart T.
Str~"'t
1920 -?nd 1921, when funds both from New
York City snd outside were §.ec1ining, the
avera~?"! call rene'val r3.te r~ng:ed higher than
durin2: th~ ·orecedinc- t'NO years when funds available for call loms were incr<?asing.
143
loans:.
52
Nsw Yorlr City b<L'"lks.
Chart U.
Felation of tot'?l loans of all stock exchange banks
and the av'=r".!2'e call loan rate.
144
Both above charts show:( a) Th:=.tt tl:e incre::tse in the "Ver.age call loan rate,
in most cases followed a decline in the total
funds av:til·-ble for stock exchs..."l!2'.? loans.
(b)
The reduction of call loan funds either resulted
frorr or was coinci0ent 1vith the pressure for
commercial, industrial, :=.tnd agricultural loans
both in and out of Ne•111 York City and the higher
rates offered for these tynes of ~aper*
143
f'hile it is tne th<>ct the .qr"l"'t del!'and, durin~t 1920, for
loans for s.qricul tur:=.tl, industrial and comnercial purposes drew funds out of the stoc1.~ market and New York
City, to t,.';.e country districts, it is equally true
th8t in ;Priods of susts.in3d ~i~ interest rates in N3w
York or on tro stoc1r "'!xch9.n.Q'e !T'oney flows from the
country to N3w Yorlr City.
144
~1oney
is a. cormodi ty and, lik'3 ot~er coir'JTJOdi ties, flows
to nlace where it comrands th1'3 hirnest "':lrice.
144
.}
•
I
X-3332
Page
Chart U.
Street loans of New York City bar..ks and call loan rates.
No~
144
Chart V.
Loans of reporting banks in U.S. and street loans of Ne.v York
City banks.
145
.
Above charts show:Stock e.~Cchange loans in Ne.i York City decreased more
rapidly and to a much greater extent than 1 cans and
ir:vest:uentz of all n">pvrtin; ban:rs.
145
This sur;;Sests that the ieme>Jld f cr loans in the col.mtry benerally
resulted in the vd thdrawal of funds from the l\iew York Stock
exchange.
145
CH.'<PTER VIII •
'
Defects and deficiencies of the banking machinery.
14G
Jasis of credit machinery co1;.sists of 301 000 independent state
and natioLal banks.
Independent be,nkin;;_ 1 though well adapted to our independent
co:nmercial system and the spirit of our institutions,
results in certain limitations up on the full use of the
banking, p ovver of the country.
146
(a) Difficult to carry out a uniform policy, either
of liberality or of curtailment.
(b) The system is subject to the individual differences
of management and of 'flOlicy of 30~ 000 banks.
146
(c) Makes it impossible for full utilization of the
resources of some banks in the locality to
give relief where other banks in same locality
are extended to limit of safety.
Do not recommend le~islation nermittir.;:c any general or unj.versal
system of br~ch banking in U.S.-
146
Possibilities of credit control by large financial centers
might constitute a menace.
146
0
t
4_).
r-3332
.A
'Page No .
systerr of limi t~d br"'nch banking might furnish a
possibl~ solution.
Inaugu.ra.tion of such a s1stem involves reconsideration
of whole -policy of inde.,~ndiOlnt banking.
Commission does not feel warranted in making a definite
recomrrendation but suggests that ap-propriate committees of Co.ngrass consid~r it.
Further d3fects in our
(d)
b~king
machinery:-
20,000 O"'ri'c's, h9.vinl2" frcrr 35 to 4o~ of our
146
banking resources, E>re not roembers.
,.
146
(e)
These banks must rely on their correspondents
in times of str~ss.
(f)
They c'mtribute !.i ttle to .::eneral reserves of
the country.
146
If p~rmitted to borrow, directly or indirectly,
from Federal Peserve banks in times of stress
they do so at ex~ense of the reserves contrihuted by menber banks.
146
These country banks are usually small and can
not exnmd '3.de,.,uately in crises.
147
They are l"'r£T")ly st:::..te bal'JYs, and have no
access to Federal Peserve bank reservoir of
credit.
147
(g)
(h)
( i)
Other defects;
( j)
Merrber han..'lts can not furnish from 6 months ·to
3 years credits absolutely necessary to
farmers for -::>reduction nurposes.
147
Stock raisers re~uire
147
Grain crops
of~n
3
year credits.
reouire credit for
lon~er
than 1 Y'=- ?.r.
e. g. wint"lr whest, if
(1r)
lll-7
f~rtilizer
is used.
Credit should be available on a maturity basis
which will assure the farrr~r he will not be
~ressed for nayrr~nt until his ~roduct is
ready for mqrket.
147
• f"'·l
-. '
0,.'__r
,,.
,;.Q
44
X-3332
Pa.gs No.
Absolut.;ly n.oc.;ssd.ry to fill ta...J g,c:a.:p b.:.;t·.v. un s.u.ort
tim.J now furnis..:..;Q. ...n:i. loa6 tim.J cr.:d.i. t Olll y
:pa.rti~ly furnis.:.l..;d. oy t.u...; 11d.tiorldl, sta.t.; oni
COii.m"'rcica.l oca.nkin1;; syst"'m a.n.t lo.rgJlY furnis.o.·Jd.
oy f.-.n mortga.e;.J institutions ..nd t.a..; F.;d.ora.l
Fa.rm Lo""n syst"'m.
(l)
14?
In a.ili tion to o..;ir.g ];:rovil.:d ·.vi.t.J. Cd.S.:.. for :pro.iuction o.ni
ma.rk::tir..g of cror:s, cr~d.it·n.ust eo furnis ......;d. for f..;rtilizJr
· a.nd o~...:....;r .-xp ..ms~s L .. :i..:...:~~t to }:l~o.J.uc'.:;io~1.
1..:;? ·
148
Limi l:iations of Fa.rm Locwl SJSt..;m.
:rot intJnd.Jd to furni s.J. ·fw,1.ls for pro.iuction ,,,n.i Il'ld.rkJ ting.
Prd.ctico.lly limi t.:d. to _long tiro.; loa.11s of a. mor.J or luS's p.lriildl1.;nt
na.tur..;, sue..._ a.s t~os..; sp..;cifi..:J. in t.c....; Act.
,
I
F..;d.;ra.l
R~s..;rv..; sys~;m "'std.olis~~~
F.;d.Jrd.l R..;S.;rv..;
~~s
d.S
c..;;ntra.l r.;s~rvoirs of colo.u'1l.irci~l oa.r.kiug dll.:i COH<::.r..;ss liwi. t.:;d.
t ....; r..;.iiscount
J;:O
:;;rs to paf.Jr of r..;l.a.tiv.;ly s ..... ort m.... turity•.
T.C..-3 9J ld.y limi tca.tiOJ.1 is ,;;:m.;.rci.liy suJfici<mt to cov ~r t.u.~ n.;:;.is
u.:: .;;om:.:...:rc..;; ail.J. inJ.ustry.
T..::.~
::; n10nt.as limi tC~.tio;:l ta.k..:~s ca.ru of t.:.J s..:.ort
of fc..i~Jrs tor i~JJ:.:r_pol·a.ry purpos;;s.
t.:,r:;:
.)Or rowir;gs
Lo.-.:.s cov .ri11g t.a~ p.;riol of oot.a pro.iuction dll~ ordorly ::.""rk.jtir.g
i"lclu..J..:.n;; br.;JJ.icg c.nl fa.tteui~1g of liv<> stoci~, r;,-iuiri:..11
~tu.riti ... s of froxr. o mo:.:.·~--s to 3
y.;; ....rs, ""r..:l .• ot 0lie;iblJ
'
.
un~or F~dor~l
R3sarN
148
sy3~aw.
F;;;J.ora.l R,.;sorvoJ i.~v .;str:.-mts :cru.st oc co~1fL.3J. to t .... ose of ca.
GJll-11-,.ui ...... .,L ..."' ::L.tu..:~.;; -·~.J. of Si....Ort.;;r matul·iti.:;s.
::::.u.;3 :possioili cy oi ro[;.;3 ia.ls
sufr'ici<Jnt.
UJ.l~-:>r
148
Failera.l R3s jrv.:J syst..;m is not
149
,...... ' ' )
,·.
!-3332
Essentials of proposed
1.
Page No.
legisl~tion:-
Amend Farm Loan Act.
(a) To nermit Federal ler:d b$'J:rs to redls~mmt
agricultural paper havin~ a maturity from
6 months to 3 years, for national banks, state
banks and trust companies, savings insti tutions and incorporated live stoCk loan companies.
i
tv
(b) To nermi t Federal land banks to loan directly to
6ooperative associations of farmers or~ani~ed
under st"'te laws, when secured by warehouse
receints covering- sta"!?le a~ricul tural products.
(c) Permit Federal land banks to establish senarate
de~artments for nurpose of issuing short time
debentures l-:1 '?.Ving a maturity of not more than
3 years, secured by loans described above in
(a) and (b).
·
149
(d) Necessary ca~ital for the seParate departments
to be furnished from the Federal Treasury.
149
(e) The rates of interest under (a) and (b) and on
the short titre debentures need not necessarily
coincid~ with the rates of interest on farm
land mort~?a~es and farm loan b 011d.s covering
these mort~af'es issued by Farm Land banks.
149
(f) To n~rmi t Feder'3.1 'Reserve banks to ~;m.rchase
debentures issued under these ~roposed amendments under the same terms and conditions as
now govern their ~)urchase of farm los:n bonds. 149
(g) To 'T)errni t Federal ResArve banks to rediscount for
Federal land b~nks or joint stock land ba~s,
with their indorsement, any lo~s made under
(a) and (b) above when within a maturity of
6 months.
150
Farm land banks, not having large fixed ca-pital, rr:ust obtain
funds by sale of their bOnds in the investment market,
to provide canital for new loans.
150
Because of seasonal n~ture of agricultural requirements, it
would not be ..,ractic<:1ble to reouire farm land banks to
borrow by bond issues the amounts necessary to satisi'y
the Peak of the fa~~rs' demands.
150
i ' - · · - .,
~:--J'i
(" '
X-3332
46
Pag0 No.
Desirabl'-3 1 tharefore, if not n-:ccssary, to . mable t.n<Jm to
rediscount ·,vi t:O. Fedoral Reserve banks t:0.0ir loans upon
security of agricultural products, w~en wituin maturity
of six months.
Not necessary to a.dmit farm land banks into
system.
Fad0rc~.l
150
Reserve
Because of t:O.eir limit<:.3d working capital, they should not be
raq_uired to Irk.l.ka any deposit v-ri th the Fuderal Resarv0 banks
as a prereq_uisita to rediscounting loans as c~.oove r~f0rred to.
These racomrJ.endcl.tions will effect'U.d.lly bridg0 t.ue presant gap 1
wi tnout as td.olis.aing ncN c..nu. un trivd Irld.C.ai n0 ry or
sacrificing any of tua fund.a."ll,.mtal principl0s upon w.llicn both
the Fcirm Loa.n Syst-.;m d.ll-1 t.o.-:: F0d.Jrcil Rvs.::rve System must
rast.
150
Statistical tablas s.o.owing mov.::m,.mt of money and cr0di t.
Table •7, page 154.
Give:s a complete picture of movement.
151
Minority opinion of Ogden L. Mills.
153
Concur in report, with on.; exception:Ca.n not agree wi t.a tb...; s tate:r1en t tna t 11 a cnange in policy
as to discount ratas, lat0 in tue year 1920, would
have accooplisb.~d a. revJrsal in part of the
psychological and econonac factors w.o.ich at tnis
time were moving in tha direction of lower prices."
This suggestion is:(a) Out of b.ar::aony wi t.a tb.e balance of the report ..
_(b) Inconsistant Nith t.a0 facts brougnt out by our
inv<Jstiga.tion.
Hig.ller discount ra.t.;;s did. not produc0 t.ae orcak in prices.
InconceiVcibl0 taa.t t.u..:Jir reduction could .t:.cJ.Va counteracted
the economic forc...:s leci.ding to inc:vi table dafla.tion.
l58
_;f._
,r,.···
I·
47.
X-3332
'flage No.
l.
Federal 'Beserve bank rates were below market rates
throue·hout ye9.r 1920.
2.
''
Only 904-r' b"'-n~s out of a tot"'l of 28,210 az.e merroers of
Feder21l 'Feserve svst~>r.
(a) 1\~!?n.Y of those b:".nks e.re to a great extent free from
co~~etition and cr~rge rat3s fixed by local custom and local circums ts.nces.
(h) Decrl'lase of a Federal 'Reserve bank rate from 7 to
6~ can h?.V9 no effect on a western or south
western ban'~ ch"'rc;cing 8 1 10 or 12'1b.
(c) Fed'3r<>l Reserve discount rB.tes can only be effective in restriction of loans and discounts of
bsml~s wr-ich are harrowing from the Federal Reserve banl"s.
In Sept., 1920, in New York
district, trere were 454 non-borrowers against
323 borrowers.
3.
Borrowings from Feder=>l Reserve ban~'"S, May 4, 1920, to
~-pril 28, 1921.
~g:ricul
NonIf
4,
tur,1 counties.
"
~
Increased 56.6d/o
DecreB.sed 28.5~
st9.te~ent
I object to is true, a lower Federal Reserve
discount rate would hav<?- maintained industrial "9rices
to the furt'c <?r dise.dv"'n tage of the farmer.
158
~ile it can not be conclusively nroved that credit
strin!7ency W9.S not an initisl factor contributing to
price defl3tion 1 trere is no evidence to show i t ~· 158
•
admits tr~t once ~rices st~rted to drop, credit stringency
was tr~ cause ·of rruch h'trdship and, in m9.ny cases, of
incr~ased losses •
Do~ b~lieve
that increased Federal Deserve discount
and contractin!2" credit were the nrin~._x:y ca,~ses
of t'::e s"srr,> -::lrice defl?tion of the 2nd relf of 1920.
r:o~t<:ls
158
(a) Tr.e nrice "!)eak of all corrrcoditi~s was reach in ~1e.y,1920.159
"Loans of all r-'mortinl2" "bmks, and discounts of Federal
Feserv-: b?cnl-s continued to increase until Oct. 1920.
1
Federal Peservo note issues continued to increase until
J'.:lJ.""l, 1 1921,
-~
·-··--
~'''i"1)
,.•
,.__ ,
48.
X-3332
Page No.
Certain agricultural commodities reached their peak
in 19191 and fell rapidly before any material
increase in Federal Reserve bank rates, and
before any credit stringency was felt.
e.g. - Hogs 1 bacon, cattle, dressed mutton
and butter.
159
In all these instances, there was a direct relationship between
the ~peak and the eJU?ort true peak.
The hog export peak was in June, 1919, and the
July, 1919.
~
159
peak in
The same as to bacon.
The
g~ttle
export peak was in August 1 1919, and the
November.~
1919.
The cotton export peak was in
same month.
f~rm ind_u
~ril 1 l~Q
The total
April.~
pri~~
peak in
1920, and the price peak in the
peak was in March1 1920 and the price peak in
~9
Many other instanc~s showing relationship between production and
con§umption peak and the price peak.
No such relationshi~ can be established between increased Federal
rieserve bank discount rates and the drop in price of any
single commodity.
,,
I
...
159
(b) Agricultural prices broke more sharply than any other, and
yet, from M~y 1920 to May 1921, the liquidation of loans
in agricultural. counties was relatively much less than in
industrial counties .
(c)
(d)
Interest rates are only a small percentage to total outlay,
which is largely accounted for by cost of labor, cost
of material, transportation and distribution.
Price deflation was world wide.
Crisis began in Japan in 1919.
159
;~·-:..)
rj' ····
f~
I"' . ·- . t)
X-3332
Page No.
•I
Price level began to fall:Great Brit~in.
April, 1920.
n
France and Italy.May,
U. s., Germany, India and Canada. June, 1920.
Netherlands. Aurust, 1920.
Australia. Sept. , 1920.
159
Conclusion.
m:i:nc?>:i ty nr.nrn.on !liven. because many believe that the increase in Federal Reserve
bru;k rates we.s a T.Jrimary cause of dedine in
prices in 2nd half of 1920, which so disastrously affected agricultural products.
Th~,s
Such an opinion inev:i. tably leads to the conclusion that the ~ederal Reserve Board and
Federal Reserve bariks constitute an agency
by means of which ~rices may be raised or
lowered.
This opinion is so contrary to
economic facts and to the ~~oses of the
Federal Beserve system, that it should not
be nermi tted to pass unchallenged.
,.
I
159
1-3332
1~
A.
.,.
INQUIRY INTO THE
RE'POR1' OF THE JOINT AGRICUtTURft'L COMMISSION
.AS RELATES TO ITS CRITICISM OF
FEDER~t
RES11'RVE 'POLICIES.
Tbe eri tic isms ot Fed.et'al Reserve policies ate chiefly confined to
two periods:-
1. Post war inflation.
·tl
2.
March 1919 - Jtme 1920.
DeflPtion and liquidPtion. · June 1920 - June 1921.
1.
J'irst period.
Post war irtflaticn.
M~rch
1919 - June 1920
Criticisms made by the C~ission:
1.
The iow rate polic7 of the Federal Reserve :Board and the Federal
Reserve ·banks was unsound..
Digest P• 11. Report P• 43
2.
Diicotint rates shd'!lld have been radically increased during the
apring of 1919. to cheek speculation and inflation.
Digest P• 9· Report P•
It
3·
"
u..
" "
15
43
Such radical 'increase in discount rates would have forced the
melliber banks to apply the Government credit which was
released in 1919, towards pay-ing off their borrowings from
the Federal Reserve banks, instead of using it to feed
speculation..
· Digest p. 11. Report poi
43.
4. Tbe application of such a ''sound policr" would have made the
subsequent lililidr->tion less precipitous and would heve
mitigated tbe hardship on banks Pnd individuals.
Digest P• 3· Report
S.
ft
"
11
It
5
13
rt
'D•
fi
If
II
12
iJ
45
The Federal Reserve :Board should have insisted upon such a radical
increase of 'tlscount rates. in spite of the feet that such
aetion would have forced tm Tre~.sury "o issue tbe 'Victory
notes at higher rates, correspondin~
the market value of
money,
Digest p. 12. Repbrt :P• 44.
te
6.
The intlat1on ceused by the low rate policy ''~'as measurabi;y greater
than would have followed a hign rate polic7.
Digest P• 24.
I:'... ,. ~
i':' _,'·:.::
Report p. 81.
X-3332
A,.
2.
7. '!'be low rete policy increased Government expenditures for
principal and interest.
8.
Digest p. 24.
Refort :P• 81.
The low rate policy depreciated the market value of the
Liberty bonds causing loss to investors.
Digest :p. 24. Report P• 81.
S· The low rate policy increased the cost of the war.
Digest P• 24.
Report ~· 81.
10. Tbe low rate :policy was contrary to the policy of the great
finaneial centers of the wor1d:;,prior to the war, and. in
some CI!Ses, during the wctr.
Digest P• 25. Report P• 83.
II.
Answer to the above criticisms as shown by findings of the Oomnission.
1.
'!'he Commission finds that the whole Ciuestion of Federal Reserve
discot~Dt rates during this :r;:eriod hinged on whether the
'Victor.y notes should be issued at a relatively low rate or
at a higher rete eprroximeting the mBrket rete for mcney.
Dieest p. 23. Report p. 80.
2.
The C01m1ission admits that if the victory notes were to be issued
at a rele.tively low rete the discount rates of the Federal
Reserve banks: :must have been maintained at correspond.irgl;r
low rates.
Digest p. 25. Report P• SJ.
'.
,\
3· The CormdssiQl fims that higher rates fixed in the approaching
Vic tory notes=1.
Would increase interest N!tes generally thtoughout the
United States.
Digest p. 12. Report p. 44.
2.
Would depreciate the market value of all outstl!'nding
Liberty borda.
Digest P• 12. Report P• 44.
J. . Would force
4..
great
li~uide.tion
Would depreciate tbe market value of securities be:ld
by savings banks, trust companies, insurance coarpanies.
etc.
.5.
in all securities ..
Di@est P• 12. Report p. 44.
Di@est P• 12..
1llould give rise to e. demendfor refunding outstanding
Libert;r bonds which mi~bt have been irresistible.•
Digest p. 12. Report p. 45.
6. Would ·result in a dislocr.'tion PDd
growing out of
R&!>ort P• 44..
~be
embarrassment to industry
general increase in interest rates.
Digest P• 24. Report P• Sl.
X-3332
A.
3~-
.
'
Notwithstanding the eb ove,
The Commission f.inds that higher
I"E~tes
in the Victory notes:-
1.
Would encour~e s~>'Vings.
2.
Would cause a trmsfer from non-essential P..nd low rate
investments to Gov~rnment bonds.
3.
Would a.bs<:>rb free capitaL
4.
Would discourage non-essential production
5.. Would limit Eixpen$ion And inflation
6. Would reduce consumption
7• Would retard the rise in
8.
''
~rices
Would reduce the amount or money needed bt tbe Government
fOl" tlJe War, the higbf-Jf ir.. ~et"est rPt&S being Offset
b~ the smaller E:Cnoutit needed. •
Digest P• 23. Report pp~SO,Sl.
The Commission further firids the.t the decisions which bad to be made
were difficult Pnd. important and that doubtless; in these
cireumstEtnees, miste>kes of judgment were mede which the clearer
judgment of retrospect would clPnge~
Digest P• 9.. Report P• 15.
III.
Deflation
C~Dd
liq,uidP.tion period..
Criticisms made
b~
June 1920 .. June 1921.
the Comrrission.
The Commission finds:-
1.
The policy of the J'edere.l Reserve !lonrd was one of reduction
or, it least, :Qrevention of furtJler expansion ot loans
and disco~.mts of member banks.
Digest p. 16. Report P• 52.
2.
That, although admittedly exercised with a. view to
preserve the integrity of the banking system and to prevent
financial panic, it is ,probable that the presstll'e was
excessive.
Digest P• 16. Report P• 52.
3·
That this pressure was exerted in the only way it could be
exerted, v17; .. , in refusing loans to trsmber banks in
individual cases mel by the pressure of discount rates
on borrowing member banks.
Digest p .. 17. Report P• 53•
1-3332
4..
A.
0--......"'l
r<)·.,_ ..
<
'
4.. That there were cases where such pressure resulted in
hardship on member banks and tl::mir customers.
Digest P•
17 .. Report 53.
5·
That· the· action of the Federal Reserve Board in wiping
out the differential rates on Goverment paper was
sound in theoa and in lim with central bsnking
practice, but that its §Pplic~tic:n penalized member
banks which were 'b orrowirg on their own Government
securities or were loaning at lON rates on customers
notes secured by Government bonds.
Digest P• 15. Report p. 48.
6..
That this action forced member banks to liQ.uidate theit"
holdings d Government borxls and depressed the ma.rlm t
value of Government bands ..
Digest :P• 15. Report P• 48
on the ass~tion tbat a
decline in prices was inevitable in 1926, shoulll have
taken some action to bring debts to be pfiid into c1dser
relation ·With the goo:ls with which onlr the debts eou1d
be paid.
Digest p. 16. Report p. 51
See • Digest P• St 24 A. "
rt
13
1. 'rhat tlB !eder8l Reserve :Board,
i.
s.
That He d:rop in prices inttoduced into the public the
psychology of fear md mede the banks ignore the banking
maxtm that, in ti~es of streas; credit should be gr?nted
freely though at a higher rate, and melte them exert
pressure fo.r li~uid.P tion.
Digest P• 28, Report P• 86•
9·
That a che!2se in Federal Reserve policy would probab!z
have reversed in pert this psychological factor •
.Digest P• 28. Report p. 86.
10.
That notwithstanding the epprehensions of the Federal
~serve 13oard. Pnd J'ede~el Rese"e 'banks that a. change in
policy, - resulting in a genal?l invitation to menber
banks to increase their loans, - might result in bank
failures, the Commission is t£ the opinion that:
A more liberal policy could. have been ~dopted.
That such a policy would have served to arrest in part
the tide of deflation end to reduce the hardships and
losses incident tba reto.
Digest P• 30. Report p .. SS.
11.
That it is evident that the applicf'ltion of the policy in
rural sections resulted in gre~t hardships .gnd. distress
and contributed to scm:e results economically undesir~ble,
wbatever may- be said otbe rwise in sUpport of the policy frem
tbe stF.!Ddpoint of its wisdom and necessity, and in the
light of tm psychological end economic fae tors which it was
necessary to consider.
Digest p. 30. Report P• 88.
'·
X-3332
•\
11 A.
Tbe pressure of li~uidation in agricultural sections
wes shown by a greater relative decline in
deposits than in semi-agri. ru l tural end indus trial
sections.
Digest p. 1· Report P•
0···p
~- .,_)
I
A•
15.
That the hardship em rural sections was due largely to:Excesslve cost of producing the 1920 crOp. ' · ; '·
Slower tunuwer for farmers ..
Pressure for liquidation forced sale of immature cattle
and ca:Lves, which will produ.ee a shortage of
meat sup-ply.
Sales were forced when borrower should ha,'ij'e been carried.
Digest :p.. 30• Report P• gg,.
Prices of what he had to sell declined taster ~
those be bad to biq.. Digest P• 30. Report P• 89.
lJ. Tba.t
\.
prOgressive rates resulted, in many in~ten~es 1 in
unc6nseione.ble rates: Upbn the borrowings• or some
portiQ'l thereof, of iiSir:tler banks in excess o£ th~ir
besic lines.
Digest p. 21~ Report p.
1
62.
14~
Penaqzed banks which were maki.ng the greatest effort to
serve their customers.
Digest p .. 21. Report P• 62.
15..
The application
at such a uniform ~'md ar'bit raty rule to ell
banks, wi1hout regard to peculiar circumstances, cen
not be justified from the standpoint of sOJm banking;
nor from the ccnsideration to which the public is .
entitled from banks * * • exercising ~b11e functions.
Digest P• 21. Report P• 62.
IV ..
.Answer to above as shown b;y; findi!l!s of the ComYr1issiono
1.
I
2..
'!'he increased discount r~tes ani subsequent tight moneT
ope~.ted as a dike to keep goods, - which .were backed up in
the channels of distribution from the farner to the cons\lller. flowing in the channels of trade, notwithstanding the
obstacles of declining :prices and slackening demand.
Digest p.-· 13. Report I>• 45.
See infra- Digest pp. 8, 24 ~.
"
" 13
The· causes of the headlong fall in prices were:-
cancelled orders.
frig.ht.
~lie
Digest p .. 14.
Digest ·p. 14.
If
ft
27-
Report p. 46.
Report p. 46.
" PP• 85, 86.
X-3332
I
6..
A..
''
Preceding exhaustiOn of credit~
Falling off in exports'It
n
n speculative demand.
n
1' domestic consumption.
•
3·
Digest p. 14..
n
n
II
n
n
"
27-
27.
27•
Report P• 46
• pp .. 85, 86
lt
85, 86.
85, 86.
"
" "
tm inflation period was relatively
greater in the rural districts than in the ird\ls trial sections.
Digest P• 33· Re~ort P• 117
"
It
34~
•
fl
120.
The expansion of loans during
4. The policy
of the :Fed'3ra.l Reserve lloa.rd and Federal Reserve banks
duting the deflation period did not produce a gre~t2r
c'lo¢ta.ilment of loans in the rur~l districts than in the fin8lleial
artd industrial sections.
Digest P• 33· Report P• 117.
•
5-
The rediscotints by Federal Reserve banks of agricultural and
live stoek paper was relatively
of ell other paper.
6. The
6
gt~ater
than the rediscounts
Digest P• 34. Report P• 120.
li~uidation, of Pgricultural and live stock p~per was relatively
less than the liquidation of Pll Other discounts.
Digest p. 34. Raper t p .. 120.
A.tn fact, but little t>ctua.lliquidation Cf loans and discounts had
taken place in the agricul tur a.l sec ti ons of the c ounti"y' as a
whole up to ~ 1921. Certain exceptions noted.
Digest P• 6. Report P• 14.
7. The Federal Reserve T:oa.rd was in a very delicate position.
Its duty
To
To
To
was:provide for essential credits
lirnit non-essential. and speculative credits.
prevent banks over~tending.
Digest p. 16. Report p. 51
The balance between these was extremely delic<'te.
Digest p. 16. Report p.5~.
8.
I
Tbe Commission, - while of the opinion that it is probable
that the Federal Reserve Boa~ and some of the Federal Reserve
banks imposed 'ieessive pressure towards reducticn or
prevention of expansion of loans, -states specifically that the
alternative Of its policy, - the extension of all credit
desired for any purpose, - would have ~tNol-eed the following
dangers:A large number of bank failures.
An undue redueti on of reserves
Excef'lsive currency issues resulting in deprecia..tion
Loss of confidence in the banking system
Runs on banks
Demand for redemption of Federal Reserve notes ~ goldDigest p .. 11.. Report P• 52
,~..
t
-
')
•.
X-3332
9..
10.
The
A.
C~ission specifically finds that
:Before the application of progressive rates the Federal
Reserve Bank of Kansas City's resources were
largely absorbed. by a relatively small number of
banks in Kansas City m.d Omaha. which, in April 1920,
were absorbing 73~ of the mormal leai.ing pow~r of the
Federal Reserve bank·
Digest P• 19• Report p. 56.
Tbe progressive rates reduced these borrowings 1argely thus
increasing the funds of the Federal Reserle bsrlk available
tor other banks borrowing moderately or not at all.
Digest p. 19. Repott P• 56.
11. Tbe chart sh01rs that the progressive rates permitted an increase
in the borrowing&
12.
or
countty banks.
.
Digest P• 20.
Report P•
58.
The borrowings of the Ks.nsf\s Cit1' Ehd Omabe. banks were
transferred to the eounttT banks.
Digest
·
·
p.
.
~o.
Report p; 58.
1;.
'!he
14..
The average ra.te paid by
rates was 6-7~·
15.
Tbe total interest paid by ... 11 banks in lriltlsas City was
$325,904.78 less tbsn would heve been paid had the tate
been a flat w-rate.
Digest p. 21. Report p ..
avet~ge
te.ter normal al'Xl_J)rogressive, }la-id by all banks
in the district was 6.61%.
Digest P• 21.. Report P•
ali
62.
benka borrowing at progressive
•Digest P• 21. Report P• 62.
62 ..
16.
The progressive rate did not cause eny increase in.. Guetomere.
rates; wbetber the loaning banks were borrowing at norma!
rates, progressive rates, or were not borrowing at alll,
the custaners rete was the sane.
Digest p. 21. Report P• 62.
17.
Progressive rates did not control ei tber the acunt of deflation
or the rate of deflation•
Digest p .. 22. Report p .. 68.
18.
The reduction of loans Alld discounts, under progressive rates,
was re1,_tively less in countr.y banks than in city banks.
Digest P• 22. Report p .. 68 ..
19..
The expansion of loam during inflation period was relatively
greater in the rural than in industrial districts.
Digest p. 33. Report p. 117
If
20.
"
34.
"
" 120 ..
The policy of tbe Federal Reserve Doard and Federal Reserve
banks during the deflation period did not produce a greater
curtailment of loans in the rural then in the industrial
sections.
Digest P• 33· Report P• 117.
• •
X-3332
21.
Tbe rediscounts by the Federal Reserve banks of agricultural
and live stock paper were relatively greater than the
rediscounts of ell other paper. Digest P• 34. Report P• 120
22..
The liCLuida.tiort of agi"icultut~l and live stoc)F pwper was
relatively
!
l!U thaxi
the
li~UidrUon
of all other discounts.
Digest P• 34. Report P• 120
It
n
6
n
"
14.
23.
If a more liberal. poticr ha4 been adopted by the Federal Reserve
:Board and as a re!!uit the prices of what tbe farmer had to
buz were stabilized mote than the prices of what he had to
.ell, his condition wOuld have be~n worae than before.
Digest P• 31. Report P• 89·
24.
In the spring of 1920
* * * the etl'Mm of ptoduction floWihg
from the farmer to the consumer began to back up in 1he
cha~ls af distribution, altho~ higher discount tates !94
£i@t m,gpg, like dikes erected along the banks of the .
stream, served as influences to keep goods flowil8 in the
channels ct trade, notwithstanding the obstacles of declining
prices and sleekening demand.
Digest p. 13. Report p. 45.
'.
I
A.
24 ·J. It we.a necessary, by e high level of discount rates, to keep
these credit re~uirements 1n such a relPtion to the
prices of goods th~'~t benk failures would not result ani a
financial crash increase the inevitable industrial.
depression resulting from declining prices.
Digest P• 5· Report P• 13
was not abeotbed b~ financi~l centers at the expense
of rural CODI1'Uni ties for purpose of specul~ ti ve ~c:ttJ.vitiea.
Digest p .. 33· Report p. 117 •
25. Credit
26..
Tbe J)ftlicy of the Federal Reserve banlts reflected the necessity
tor control, restraint, and restriction.
Digest :P• 17. Report P• 51.4..
27.,
Tbe Coa:missicn finds, however, tat the Federal Reserve Board
and tbe Federal Reserve banka cpyl4 not apply th~ir pftlicy
p.nUoJ!lz because conditions were not uniform.
·
28.. That it could not control tl:e loan policies of the 20,000 banks
which were not members • - representing from 25 to 40% of the
bmldng resou~es of the country.
Digest P• 17. Report P• 53·
29. That it could limit loans only to member bS!Uts which were
borrowing or threatening to borrow exeea§ivel;r.
Digest P• 17. Report P•
51+.
X-3332
..
:t~
A..
30· The Comnission finds that a chsnge in policy, to be effective,
must necessarily me~n a further extensicn of. loans.
Digest p. 28. Report P•
31. That
...
32.
86
s~h
further extension must derend on the ~veilable
supply of fundS•
Digest P• 28. Report P• 86 •
That when banks increase loans end discounts during a time of
falling prices, the credit strain increases, aS also the
danger ¢ bank f ai lures.
,.Digest P• 30. Report p. gg.
33· That l/3 of tlle banks w·ere greatly over extended.
Digest P• 26.
Report P• 87 •
That the Federel Reserve :Pol'!rd and. Feder.t:U Reserve banks felt
that due regp rd nust be had to the pes si ble results r:L
a change in poliCJ!i• ·
Digest P• 30. Report P• 88.
35·
.'
That they felt thAt a. gene:.·l".l invitation to me:aller banks to
increase loans, - through the effect of lONer discount
rates, - might result in bank failures.
Digest p. 30. Report P• 88.
36. That suspensicn of the reserve requirements would have
afforded no remedy, for the tax imposed. by the Federt:>l
Reserve l'lct must be ei&ed. to the discount rate, and
while such suspension would tend to increase loans. the
tex would operete in the same measure to restrict loans.
Digest p. 31. Report p. 90·
37 • That the renedy for overexteniei banks should. be en increase of
ca:pit~l.
Digest :P•
29. Report
P•
87.
38. That it is clear thflt in many CAses, inade9.ue.cy of capital, .<>ni
not insufficiency of bank c:eiit was a fP.ctor restrainins
and limiting credit iuring this p::ricd.
Digest P• 29. Report P• 88.
0·,~'""•")
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