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£-6121 FEDERAL BESERVE BOARD STATEMENT FOB THE P R E S S For r e l e a s e 3 o ' c l o c k p.m. August 29, 1928. There i s q u o t e d below a communication r e c e i v e d by t h e F e d e r a l Res e r v e Board f r o m a c l e a r i n g h o u s e a s s o c i a t i o n : " R e f e r r i n g t o l o a n s made member banks s e c u r e d b y U n i t e d S t a t e s s e c u r i t i e s we f e e l p r e f e r e n t i a l r a t e of i n t e r e s t s h o u l d b e c h a r g e d on t r a n s a c t i o n s of t h i s c h a r a c t e r , r a t e n o t t o exceed r a t e s b o r n e by s e c u r i t i e s in accordance with previous ruling,. In view of f o r t h c o m i n g f i n a n c i n g by T r e a s u r y Department we f e e l t h i s m a t t e r s h o u l d r e c e i v e t h e immediate and c a r e f u l c o n s i d e r a t i o n of F e d e r a l R e s e r v e Board. P r e s e n t r a t e s p e n a l i z e banks a s s i s t i n g i n f i n a n c i n g . " The f o l l o w i n g i s t h e B o a r d ' s r e p l y : "Gentlemen: This w i l l acknowledge r e c e i p t of your w i r e of August 2 7 t h to Governor Young recommending p r e f e r e n t i a l d i s c o u n t r a t e s by Fede r a l r e s e r v e b a n k s on c o l l a t e r a l n o t e s s e c u r e d by Government o b l i g a t i o n s , t h e d i s c o u n t r a t e i n each c a s e to b e t h e same a s t h a t borne by t h e s e c u r i t y . Your p r o p o s a l h a s been l a i d b e f o r e t h e F e d e r a l Res e r v e B o a r d , a n d , f i r s t , t h e Board fe«16 j u s t i f i e d i n r e m i n d i n g you t h a t t h e u s u a l p r o c e d u r e u n d e r t h e law i s f o r t h e D i r e c t o r s of t h e r e s e r v e b a n k s to i n i t i a t e r a t e s . When such r a t e s a r e i n i t i a t e d t h e y a r e l a i d b e f o r e t h e BDard f o r r e v i e w and d e t e r m i n a t i o n . While t h e Board u n d o u b t e d l y h a s t h e power to f i x r a t e s of d i s c o u n t f o r r e s e r v e banks we s e e n o t h i n g i n t h e p r e s e n t s i t u a t i o n to r e q u i r e such a r b i t r a r y a c t i o n . At t h e same t i m e t h e Board i s n o t a t t e m p t i n g to s i d e s t e p any r e s p o n s i b i l i t y i t may have f o r r e s e r v e b a n k d i s c o u n t r a t e g , and we a d v i s e your A s s o c i a t i o n t h a t i f any r e s e r v e b a n k s h o u l d i n I t t i a t e such p r e f e r e n t i a l r a t e s a s you s u g g e s t t h e Board would b e opposed to such p r o c e d u r e f o r t h e f o l l o w i n g r e a s o n s : (1) I t would n o t c a r e t o d i s c r i m i n a t e a g a i n s t commerce and i n d u s t r y by a p p r o v i n g a r e d i s c o u n t r a t e of a s low a s t h r e e and one q u a r t e r p e r c e n t on c o l l a t e r a l n o t e s s e c u r e d b y Government o b l i g a t i o n s w h i l e s i m u l t a n e o u s l y c e r t a i n r e s e r v e b a n k s would b e p e r m i t t e d to c h a r g e f i v e p e r c e n t on e l i g i b l e commercial, a g r i c u l t u r a l and i n dustrial paper. ( 2 ) T h e r e i s n o t h i n g i n t h e p r e s e n t s i t u a t i o n w h i c h woul(% j u s t i f y a lower r a t e on one c l a s s of Government s e c u r i t i e s o v e r an4 o t h e r . The p r e v i o u s a c t i o n of t h e r e s e r v e b a n k s t h a t you r e f e r to was a w a r t i m e measure o j i l y . (3) I f your p r o p o s a l was p u t i n t o e f f e c t a t t h e p r e s e n t t i m e i t would p e r m i t a member bank t o buy U n i t e d S t a t e s bonds i n t h e - 2 - X-6121 p r e s e n t m a r k e t on a y i e l d h i g h e r than t h e bonds "bear and t h e member b a n k would b e prompted to r e d i s c o u n t t o make such p u r c h a s e s o l e l y f o r profit. (4) Member b a n k s own o v e r f o u r b i l l i o n s of U n i t e d S t a t e s Government b o n d s , a n d , upon r e f l e c t i o n , we b e l i e v e y o u r C l e a r i n g House w i l l a g r e e w i t h u s t h a t t h e i n v i t a t i o n f o r p r o f i t would b e too g r e a t f o r many of t h e b a n k s to r e s i s t and o n l y r e s u l t i n i n f l a t i o n t h a t e v e n t u a l l y would work w i d e s p r e a d d i s a s t e r t o o u r e n t i r e f i n a n c i a l s t r u c t u r e a n d , i n d i r e c t l y , to t h e b u s i n e s s i n t e r e s t s of t h e country. (5) The p r o p o s e d p l a n would h a v e a s t r o n g t e n d e n c y to a p p r e c i a t e t h e market v a l u e of the o u t s t a n d i n g United S t a t e s o b l i g a t i o n s b e a r i n g low r a t e s and s i m u l t a n e o u s l y d e p r e c i a t e t h o s e h e a r i n g h i g h e r r a t e s , d e v e l o p i n g a r t i f i c i a l and u n w a r r a n t e d p r i c e s f o r t h e v a r i o u s Government i s s u e s . (6) Under n o r m a l p e a c e t i m e c o n d i t i o n s t h e T r e a s u r y D e p a r t ment s h o u l d and does p a y t h e o r d i n a r y m a r k e t r a t e s f o r money t h e same a s any o t h e r b o r r o w e r s . Moreover, t h e c r e d i t of t h e U n i t e d S t a t e s Government i s so good t h a t t h e r e i s no o c c a s i o n w h a t s o e v e r o f a t t e m p t i n g by a r t i f i c i a l means to p l a c e U n i t e d S t a t e s Government s e c u r i t i e s i n a f a v o r e d p o s i t i o n a s compared w i t h commerce, i n d u s t r y and a g r i c u l t u r e . Very t r u l y y o u r s , ( s i g n e d ) A. W. M e l l o n , S e c r e t a r y of t h e T r e a s u r y and Chairman of t h e F e d e r a l R e s e r v e B o a r d . "
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