Full text of Papers of Benjamin Strong, Jr. : Benjamin Strong's Addresses : Addresses, 1911-1915

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INTEREST RATES,
EARNINGS, DIVIDENDS

AND TAXATION
AN ADDRESS

DELIVERED BEFORE THE

AMERICAN
BANKERS ASSOCIATION
AT NEW ORLEANS

NOVEMBER 21,
BY

BENJ. STRONG,

JR.,

1911

VICE-PRESIDENT

BANKERS TRUST COMPANY

NEW YORK CITY

q The purposes to be accomplished by monetary
legislation are stated by Senator Aldrich in his
letter of January i6th to be the "unification of
our banking institutions into one comprehensive
system," the establishment of a "scientific basis
for bank note circulation," and the "creation of
a discount market similar to the discount markets

in Europe." The keystone of the proposed plan
is the assembling of a large part of the scattered
bank reserves into the custody of the Reserve Association, thus making them actively useful.

q As the reservoir of the country's reserves, the
Association must be able so to control its note
and deposit liabilities that its reserve will at all
times be adequate to permit extensions of credit,
both ordinary and extraordinary. At the same

time it must be able to exert a sufficient in-

fluence upon the exchange and money markets to
contract its credit extensions and increase its reserves when necessary and without harmful influence upon business.

q The provisions of the plan as to taxes, earnings and dividends, and the possible relation of
the Association to rates of interest throughout
the country all co-ordinate with the broad design
of the organization.

q Having no precedent in banking history for
the radical readjustment of the relations and
methods of a class of institutions controlling such

vast resources as do the banks of this country,
that is contemplated in the National Reserve Association, it was essential that its limitations and
powers be reasonably safe, clearly defined and
liberal enough to insure the accomplishment of
the objects for which it is created. As will be
seen, the safeguards provided in the plan operate
generally as restrictions upon expansion of the
Association's liabilities, and reduction of its reserves,management
while most of
thebepowers
the
may
directedvested
towardinstrengthening the Association's reserves. The proposed
methods of taxation govern every possible form of
expansion, and the limitation of the distribution
of profits to shareholders and to surplus should
cause the management to seek a record for conservatism rather than for money making. As it
is intended that the Reserve Association shall
maintain the surplus reserve of the whole country,
such provisions are most important.

The powers conferred upon the management
in the exercise of which it may strengthen its reserves are: The power to borrow gold; authority
to fix an uniform discount rate, and authority to
purchase and sell foreign bills of exchange and
foreign government obligations.
An analysis of the disposition of earnings, the
methods of taxation and the probable relation of
the Association to the domestic and foreign

money markets all lead to the belief that the
Reserve Association will be- a conservative and

trustworthy custodian of the country's lawful
money reserves.

As to the earnings of the Association and their
distribution, I suggest the following assumed
statement of the possible condition of the Reserve

Association at the end of say one year, as stated
by one of our noted financiers in an address delivered at Nashville last May:
ASSETS

Lawful money received for capital $100,000,000

Lawful money received for government deposits
Lawful money received for bank
deposits

Government bonds taken over

100,000,000

500,000,000
500,000,000

$1,200,000,000
LIABILITIES

$100,000,000
100,000,000
500,000,000
500,000,000

Capital
Government deposits
Bank deposits

Circulating notes

$1,200,000,000

q No amount has been allowed for capital subscribed by State institutions. The capital stock
of the State institutions which would be eligible
for membership could not exceed $803,000,000,
the present combined capital of such institutions,
but would be very much less owing to the fact
that of the 12,000 odd State banks and trust companies whose capital is included in these figures,

nearly 7,000 have not the requisite capital of
$25,000.

I Solely for the purpose of illustration we will
assume a condition for the Association, after some

years of operation, as follows:
ASSETS

Lawful money received for capital $125,000,000

Lawful money received for government deposits
Lawful money received for bank
deposits

Government bonds taken over
Investments and discounts

100,000,000

625,000,000
700,000,000
300,000,000
$1 ,850,000,000

LIABILITIES

$125,000,000
Capital
100,000,000
Government deposits
Bank deposits
625,000,000
Circulating notes
700,000,000
Deposit and note liabilities arising
from investments and discounts 300,000,000
$1,850,000,000

q In this estimate

is included an increase in
capital and deposit liabilities, as well as circulation to cover a possible admission of State insti-

tutions, and a larger discount and investment
account is indicated than may arise for many
years. Based upon this assumed condition the
earnings should work out in round figures about
as follows:
EARNINGS

3% on 700,000,000 U. S. 3's..
4Y2% " 100,000,000 discounts ..
3Y2% " 200,000,000 investments

$21,000,000
4,500,000

7,000p00

$32,5oo,000
DEDUCTIONS

I Y2% on 700,000,000 U. S. 3's
Expenses, Main Office and 15
branches
Expenses, note

$io,5oo,000
6,000,000

issues

double present cost)

(about
2,000,000

$18,500,000
3

9 This result, although allowing for changes in
the monetary plan since the estimate heretofore
referred to was made, is substantially the same.
The stockholders might receive a dividend of
$5,000,000, and there would be left for surplus
$4,500,000, and for the government $4,500,000,
total $14,000,000. It is quite apparent, therefore, that the disposition of the earnings of the
Association may become an important question
immediately upon its organization.

§Credit institutions are influenced in their
operations by two considerations-profit and
safety. In this plan the ability to make profits is
subordinated to the necessity for safety. Very

wisely a limit has been placed both upon the
amount of dividends to be paid to the subscribers
and the amount of profits to be added to surplus.
By limiting the amount of dividends and surplus,
incentive to large profits is removed, and no
pressure of opinion either from the public or

stockholders should induce the management of
the institution to allow undue inflation or extend
its operations for profit beyond the point of conservative action.

11 The attention of the country will be focused
upon the condition of the Reserve Association,
and its earnings will be a subordinate consideration, as is the case in Germany, France and
England.

11 Were the surplus to be increased beyond a
moderate maximum fixed amount, subscribers to
the stock, in later years, at a greater book value,

would realize an increasingly reduced interest
return as compared with older stockholders, unless adjustments in the dividends were made
which plan would seem impracticable.

11 The Bank of England has established by long
precedent, a fixed rest or reserve of approximately

3,000,000 Pounds, in excess of which amount
profits are distributed to the shareholders. The
dividends paid by the Bank since 1844 have been
from 7% to 113/1%, in recent years 9%. Eliminating its own notes held in. its Banking Department, the Bank of England shows roughly a net

earning power of 1.3% on all of its assets and
2.2% on the assets which are earning interest,
assuming that all of its earnings have been distributed. This compares with the assumed earn-

ings as above suggested of 3/4 of I% on all of the
assets of the Reserve Association, and 1.4% on
the assets which are earning interest.

q The Bank of England earns roughly $6,50o,00o to $7,000,000 on $500,000,000 assets, against

a forecast of earnings for the Reserve Association of $14,000,000 on $r,85o,o0o,000 of assets.

I No more difficult problem could have been
presented to the Monetary Commission than
that of devising a suitable check, by means of
taxation, upon expansion of the note and other
liabilities of the Association. The banking business of this country has about doubled in the last
decade, and an arbitrary tax, based upon a fixed
excess of circulation, would be almost certain in

time to cause distress and embarrassment, if, as
seems probable, our growing commerce results in
a continued growth in our banking requirements.

It has, in fact, been calculated that had a tax
upon the basis proposed in the first plan submitted by Senator Aldrich been applied to our
bank note circulation about seven years ago, a
portion of the normal note issues in circulation
to-day would be paying a tax of 6%. There
are three taxes proposed by the plan : The first
is based upon percentages of deficiency in the
amount of the Association's reserves. For each
2T/2% that the reserve falls below 5o% of net
demand liabilities, a tax at the rate of 1%% per
annum is to be paid to the government upon the
amount of such deficiency. Further consideration may develop necessity for increasing the
amount of such tax, or possibly starting the tax
at a smaller rate and increasing it as the amount
of deficiency increases. While there is no pre-

cedent in Europe for the imposition of a tax
based upon the percentage of reserves held, the
plan is so simple and appears to be so scientific in

its effect that it should meet with approval. It
must be borne in mind that emergency measures

are generally applied to bank crises after the
worst injury has been done. This was true in

the three instances when the Bank Act was suspended in England. The suggested form of
taxation should enable this country to meet a crisis

without the necessity of an emergency measure,
as Germany has done recently through the power

vested in the Imperial Bank to expand its circulation. To meet the demand upon it the Im-

perial Bank has issued 5oo,000poo Marks in
excess notes upon which it has had to pay a tax
of 5%, but by doing so in the ordinary course
of business a crisis never developed. When the
pressure was over the excess issue immediately
began to be reduced ; and the same phenomena
should occur under the Association plan, pro-

vided the amount of the tax is reflected in a
higher bank rate.

q The second tax provided in the plan is applied directly upon such amount of circulation in
excess of $90o,000,000, as is not covered by
it00% lawful money, until the circulation reaches
$1,2oo,000,000, after which the tax is 5%. This
is possibly a wise limitation, necessitated by inability at this time to forecast conditions which

may arise in future years. It may, however,
prove to be burdensome. There is certainly
difference of opinion among bankers in this coun-

try as to the wisdom of an absolute limitation
upon circulation either by fixing the maximum
amount permitted, or by applying a tax upon a
circulation in excess of a fixed amount. This
tax, however, does not interfere with the further
extension of note issues, if fully covered by
gold, and the Association would still be able to
receive gold and issue its notes against it to an
unlimited amount.

11 The provisions of law as to the taxation of
unusual note issues by the principal banks of
Europe are briefly as follows:
The Bank of England has a fiduciary circulation limited to the exact amount of 18,450,000
Pounds. Beyond that, notes must be covered
in full by gold or silver coin or bullion. Three
times since 1844 the Bank Act has been suspended, although it was only necessary in one
instance to issue additional fiduciary notes. The
tax imposed by the government has simply been

the amount of net profits realized upon such
issues. The Bank of France is limited to a maximum note issue of 5,8000000300 Francs. It

may not exceed this amount even with mo%
cover in gold, and there is no provision for an
emergency circulation subject to an emergency
tax. The Imperial Bank of Germany may issue
its notes to an unlimited amount, free of tax, if
fully covered by bullion, coin or lawful money.
It may also issue, free of tax, up to an amount

of M.750,000,000 in excess of the bullion, gold
coin and lawful money held by it, or an unlimited

further amount subject to a governmental tax
of 5%, provided such excess is covered by govern-

ment securities and short notes and bills, but at
no time may the total note issues of the Bank
exceed three times the amount of lawful money
held.

ti The first two plans of taxation should, as designed, provide an effective check upon expansion

by causing a higher rate and its resultant curtailment of loans. Actual contraction of liabilities
should soon follow, as the paper carried by the
Association would not be subject to renewal. As
soon, therefore, as the decrease in new loans exceeded the amount of maturing bills, a contraction in liabilities would commence.

The third tax provided by the Monetary Plan
consists of a "franchise" tax of 172 per cent. annually upon an amount equal to the par value of
the 2 per cent. government bonds transferred to
the Reserve Association by the subscribing banks.
The government is asked to increase the rate on
its 2 per cent. bonds to 3 per cent., thus giving
the Association an investment of a market value

about equal to the price at which it takes the
bonds over. At the present time the government
pays 2 per cent. interest on its bonds and receives
from the banks one-half of one per cent. upon the
amount of their circulation. Approximately the
same result is realized to the government by this

Were it not for such an adjustment the
bonds taken over by the Reserve Association
would have a market value upon an investment
plan.

basis estimated at 70 per cent. of their par value.

The shrinkage in the value of this asset would
be possibly $200,000,000, or nearly double the
assumed paid-in capital of the Association. This
tax, of course, has no relation to the reserves of
the Association, and its effect is simply to reduce
a large part of the government debt to an annual
net interest charge of 572 per cent.

Of more importance to the country as a whole
will be the relations of the Reserve Association
to the money markets, and the effect of its operations upon interest rates. The magnitude of the
plan will be realized when we consider the possible loan contraction resulting from the payment

of $100,000,000 lawful money to the Reserve
Association for its paid-in capital.

For instance,
if every subscribing bank were loaned up to its
limit, figured upon the 14 per cent. average of
lawful money reserves now held throughout the
whole country, this would theoretically call for a
contraction of about $7oo,000,000 in loans unless offset by other provisions of the plan, or by
the operations of the Reserve Association itself.
As partly offsetting the effect of such payment,
there will doubtless be released a considerable
amount of lawful money now held as reserve for
savings and time deposits, upon all of which reduced reserves are permitted by the revised plan.
Any further net contraction caused by payments
for the Reserve Association's capital stock would
probably be offset by the discounts of the Associa-

tion soon after its organization, and no disturbance of rates should result.
11 The plan provides that "The rates of discount

which the National Reserve Association shall
have authority to fix from time to time shall be
published, when fixed, and shall be uniform
throughout the United States." It further provides that the Association shall have power to
"contract for loans of gold, coin or bullion," also

that the Reserve Association shall have power
to purchase from its subscribers, and to sell with
or without its endorsement checks or bills of exchange, payable in foreign countries. These are
powers, in the exercise of which the Reserve Asso-

ciation may, in time, be expected to exert an important influence upon interest rates. A uniformly low rate of interest cannot be expected in
this country for a long time to come, but greater
stability in interest rates, particularly in our
money centers, might result as soon as the Reserve Association becomes active. This would
enable those engaged in commerce to anticipate,
with greater certainty, the cost of their credit re-

quirements and should make normal business
safer to carry on. French economists, commenting upon the unique record of the Bank of France,

contend that the welfare of the commerce of
France has been conserved and protected by the
maintenance of a low and uniform rate of
interest.

q To the forces already mentioned, which would
tend toward more stable interest rates, must be

added the wonderful power of expansion that the
Reserve Association would possess.

q In the second statement of condition given it is
assumed that the Reserve Association before making any discounts or investments might have total
deposit liabilities of $1,425,000,000, upon which
a 50 per cent. reserve, after deducting one-half of
the government bond holdings, would be $537,500,000. The lawful money held was $850,000,000, or $312,500,000 in excess of 50 per cent.
of its net liabilities. Were the Association to ex-

tend credits, thus expanding its deposit and note
liabilities to the maximum amount possible without incurring liability for tax upon either of the
two plans provided, it could at once add $200,000,000 to its circulating note issue, thereby reducing its surplus reserves $100,000,000. The
balance, $212,500,000, might still serve as loo
per cent. cover for a like amount.

II The extent to which this vast credit would be
employed would depend entirely upon the developing needs of the country as expressed in the
discount rate, for, as already stated, there would
be no temptation to the management to expand
its liabilities for profit, and it would consequently
be used only as a governor to interest charges.

J Under our present system (comprised of 26,000 individual units without cohesion) there is a
greater divergence of interest rates in various sections of the country than can be accounted for by
the difference in strictly local conditions. Credit

operations between the banks are now effected
through individual alliances and relationships, instead of through a broad market for commercial
paper and bank acceptances. This partly accounts
for the high rates that have ruled in certain sections of the country remote from financial centers,

for our system is so rigid and the provisions of
our present banking law so inadequate that it is
now repugnant to the country banker to show an
account of borrowed money in his statement.
The Association plan, carrying with it a system
of bank acceptances and encouraging the rediscounting of certain classes of paper will cure
such objections to the employment of the credit
of country banks for the purpose of making provision for the needs of their customers. The intro-

duction of a system by which bank acceptances

and short time commercial paper may be freely
moved from one part of the country to another
should, in time, exert an influence upon money
rates largely favorable to interior institutions.
q The influence of bank officers will probably be
exerted toward the creation and accumulation of
a larger volume of short time mercantile paper,
which will be susceptible of discount among banks

and rediscount with the Reserve Association.
Such paper will pass from the country bank to
the reserve bank, and will be considered by the
latter its choicest asset by reason of its convertibility through the Reserve Association. This
class of paper will then become the secondary
reserve of the banks of the country in place of
demand Stock Exchange loans which largely con-

stitute such reserve to-day. These loans are
made with the expectation that in the early Fall
they will be largely recalled, and the proceeds
used for crop movement in the West and South.
The same inducements which have made such
loans desirable, namely, realization of interest

and availability, will prevail to as great and probably a greater extent in the case of bank acceptances and short time commercial paper with the
Reserve Association in operation, and it is only

natural to suppose that the result will be the
gradual accumulation of bills of short maturity

in place of Stock Exchange loans and the building
up of a new form of secondary reserve. It may
be found that these changes take place slowly,
and that while the Discount Account of the Reserve Association will gradually increase, yet its
principal primary transactions will be the accumulation of foreign exchange. Its position, with
reference to the importation of gold, as its business develops, will necessarily require the accu-

mulation of such exchange, and its hold upon
the discount market will be influenced more or
less by the strength of its foreign relations. It
would seem natural to expect the bank rate of
the Association to follow, to a certain extent,
the same position relative to open market rates
in this country (open market rate would be the
discount rate for commercial paper and bank acceptances) that has prevailed in France and England between bank and open market rates. It

has been found in both of these countries that
the rate of discount in the open market has generally been lower than the official rate of the

bank.

However, when it has been necessary for

the Bank of England to check withdrawals of
gold or to attract gold to the bank, it has assumed control of the open market rate for such
time as conditions required, and it can safely be
assumed that the Reserve Association, with its
vast resources could, upon occasion, wield the
same power over our open market and make its
rate effective.

c The necessity for such control will be particularly felt in New York where the adjustment
of our foreign exchanges and the settlement of
balances in gold are principally effected.

(I It is plain to be seen, without further discussion, that the provisions of the Association as to
taxes, earnings, dividends and the probable effect
of the proposed organization upon interest rates
in this country are not only of the utmost importance, but that they have been given due consideration by those who prepared the plan and that they

are aimed to encourage and conserve the business interests of the people of the United States.
41 Gentlemen, this Reserve Association is a mar"- !
nificent conception. If Congress permits its organization in its present form, its destiny will be
in your hands, for you will own and manage it.
When that time comes the highest prize to be
gained by the American business man will be the
privilege of participating in the management of
the National Reserve Association of the United
States.

B. Strong., jr., Merchants Assn. Luncheon,

This is indeed a prosperity luncheon.

11/24/14.

I sympathize with your desire to permit

the Federal Reserve Bank to contribute to the object of the meeting.
warn you that the Reserve Banks cannot make prosperity.

I should also

As they gradually assume their

functions they will certainly aid in th._: recovery of business from the shock of war,

and I hope will reap their share of the rewards.
Until November 16th the Federal Reserve Act was simply the expression of what
Congress believed the country demanded in bankinE ..nd currency legislation.

Since

November 16th it has become a powerful force behind our business machinery.

The test

of its ability to accomplish the objects desired will be determined by the experience
of the future.

lie must bear in mind what banking legislation in the United States af-

fects over 25,000 institutions with resources of 425,000,000,000.

Since the panic of

1007, the states of New York, Pennsylvania, Ohio, Illinois and California have made
important or complete revisions of state banking laws, and Con Tees has enacted the
Federal Reserve Law.

Legislation of this sweeping character, which in the case of the

Federal Reserve Act reposes broad powers of interpretation and direction in a Federal
Board, must be dealt with conservatively.

The defects of the old system may have been

corrected by the new, but we must be sure that other defects have not crept undetected
into the act from which unsound tendencies may develop, thereby defeating the purpose
of Congress and creating other weaknesses which it would require further legislation
to correct.

Judgment must be suspended and a generous attitude must be observed both

toward the Federal Reserve Board and the measures adopted by it for the development
and control of the new system and toward the managements of the various Reserve banks
in their e;:ercise of the functions of these new institutions.

cooperation will insre the success of the system.

A liberal spirit of

Determined opposition can be made

to defeat its progress.

The first notable development in the inauguration of the system was the payment of the capital instalment, and during the past week, the completion of the initial
reserve transfer, largely in gold, without recourse to the deposited reserves in the

reserve and central

reserve cities.

Out of 2110,000,000 of such transfers made to the

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Federal Reserve Bank of this city, a negligible amount was made by New York banks for
account of their correspondents in this district, and over 885,000,000 of the amount
transfe ed was in gold.

The spirit of cooperation thus exhibited by the banks of this

district and particularly by the members of the New York Clearing House Association
in this as in all matters connected with the establishment of the Federal Reserve Bank
of New York, gives striking evidence of their intention to permit no opposition to
develop which may interfere with a thorough test of the plan.

This insures its success.

I take this opportunity to express my admiration of this body of men, our New York
bankers, who again give evidence of their loyalty to American institutions in true
American spirit.

The cooperation of the National banks, so necessary to the future of

this great plan, has been amply assured.

Of that the evidence is abundant.

Similar

cooperation by state institutions is of almost equal importance, and that of the business men of the country is essential.

Plans farthe admission of state institutions

to memberwhip in the system will, I believe, develop rapidly and afford means far enlarging the scope and usefulness of the system, without placing burdensome restrictions
upon the state institutions or subjecting the rational banks to unreasonable competition.
The soundest banking system possible for this country should embrace in its operation
all banks which receive demand deposits and discount commercial paper.
provided fur the establishment of an entirely new class of banks.

Congress has now

Their most important

functions will be to provide an elastic currency, to afford means of rediscounting commercial paper by the members of the system,

to act as the depositaries and distal agents

of the Government, to effect the gradual retirement of our bond secured national bank
notes and to furnish the machinery for the clearance of checks and a more economical
adjustment of domestic exchanges.

In addressing you, however, I shall refer to only one

section of the law in which you have a special interest from the standpoint of the mercantile borrower.

Some of you no doubt have at times been subjected to the uncertainty

and anxiety of having obligations to meet without the immediate means of meeting them,
except through credit with a bank.

Your business may have been in a sound condition,

but still your bank be unable to care for your legitimate needs.

as well as your

Certainly your business,

peace of mind will be promoted by a greater certainty in regard to your

- 3 -

credit at the bank and particularly at a time when money rates may be high and business uncertainty prevail.
System.

Therein lies an important function of the Reserve Bank

It will broaden and stabilize the market for commercial borrowings.

The

Federal Reserve Act provides for the discount by Federal Reserve Banks (I quote from
the law) "of notes, drafts and bills of exchange arising out of actual commercial
transactions. "

The limitations thus imposed upon the Reserve banks in the char-

acter of paper which they may discount raises three important questions:

First, shall

the test of the eligible character of the paper be evidencee in the form of the paper
itself?

Second, if the note does not bear such evidence on its face shall the Federal

Reserve banks accept the statement of the member banks that it does cooly with the
statute, or Third, shall the member banks provide themselves with such means of information as will enable them to determine whether paper offered for discount complies with
the statute.

The note of a merchant representing goods purchased, if drawn upon an acceptor who may be either the purchaser of the goods or a bank or banker, affords reasonably certain evidence on its face of the character of the transaction which it represents, and that it complies with the statute.

Such paper, is, in fact, the bill common

to the London market, and known by bankers the world over.

If gradually, without undue

disturbance of existing methods, the accepted bill can be substituted for the note of
hand, a class of paper will be created which will command a premium in the money markets
of this country.

Itsconvertibility at minimum rates of discount will serve as an induce-

ment to both the buyer and the seller of goods to substitute this form of credit for
direct bank borrowings against book accounts.

Many obstacles must be overcome before

any such practice can be generally introduced.

A merchant drawing a bill in Hongkong

for acceptance in New York must know that the bill can be sold in Hongkong.

The bank

in Hongkong with which he does business and which will be asked to buy the bill must
know that the credit is good and if it buys the bill that he or his agent (say in New
Ycrk) can get immediate discount.

He should be able to ascertain the rate, and shoulc

know that the rate will be fairly stable.

While the banker in Hongkong will know the

- 4 -

drawer of the bill, he must also be informed as to the standing of the acceptor in
New York.

There are today in this country no acceptance houses, very few of the

National and State banks are engaging in the acceptance business, and furthermore,
unfortunately, the Federal Reserve Act limits the new acceptance privilege of the
National banks to the acceptance of bills representing the exportation or importation
of goods.

In England the small number of acceptance and discount houses, lAihich,

however, do a vast volume of business, has enabled the business an

banking world to

become familiar with London credits to an extent that is not true of any other money
center.
over.

Similar information regarding our credits must be dissociated the world
Knowledge of the credit of American firms and institutions will follow the

trade of the country, but it will not precede it.

ithe process of education which

must accompany the general use of bills drawn and accepted in dollars will take time
and patience.

One important function of the Reserve banks at the outset should be

to standardize the development of this practice and put a premium upon that bill which
conforms to sound business ,:xinciples.

Accommodation acceptance, where the billdoes

not represent the sale of commodities, should be discouraged, so that eventually a
dollar acceptance will

in fact, represent the sale of a commodity, the proceeds of

the ultimate sale of which will provide the funds to meet the bill at maturity.

The Reserve Board

The second question has already been answered in part.

has, for the present, placed upon the management of each member bank the responsibility
of determining and giving satisfactory assurance to the Reserve banks that paper offere
by it for discount generally conforms to the intention of the Act.
denced by the written statement of an officer of the member bank.

This is to be eviCommencing with

January 15th, however, the member banks will be required to affix by stamped endorsement upon the note or by some other simple method, an indication that the note conforms

to the requirements of the Act and the definitions of the Reserve Board and that credit
information about the maker is available if called for.

This again places upon the

member bank, and not upon the Reserve bank, the obligation to determine the eligibility
of the paper.

By authorising this method the Rederal Board has recognized the unwisdom

- 5 -

of attempting revolutionary changes in business practice.

Assuming, however, that by

later regulation the Reserve banks are themselves required to determine the eligibility

of paper offered for rediscount, the thie question arises, How shall the Reserve banks
distinguish between that portion of the borrowings of a merchant which may have been
applied to the building of factories, the purchase of machinery or to soma other fixed
investment, and that portion which has been invested in the purchase of goods for
resale or which represents a sale of goods to a customer?

Borrowed dollars are not

earmarked in their journeys through the accounts of the borrower and it therefore would
necessitate an examination of the financial statements of borrowers to ascertain whether,
in fact, borrowings are confined to an amount representing the business turnover, or
ehether such borrowings, if representing fixed investments may not result in a condition in the merchant's affairs which would make it impossible to discount the paper
without violation of the provisions of the law.

By some means yet to be fully devised it must become possible to readily
determine the eligible character and quality of paper of the various classes which
may be offered to the Federal Reserve banks.

I do not wish to suggeet that the

present system of mercantile credits should be generally abandoned.

The discount

allowed for cash settlement is an important factor in our business system.

But much

of the trade of the couetry which is now condamted against book credits of 30, 60 or
even 90 days, may properly be represented by mercantile paper if the inducement is
attractive.

our vast domestic trade should not be disorganized or hampered by a

sudden and radical departure from methods which are now satisfactory to merchants
and which are approved by many bankers.

The elimination from our money market of

the single name note may not be necessary or desirable, bue on the other, it is
undoubtedly desirable that the paper in Which our banks invest should more largely
represent the purchase and sate of commodities and not permanent capital.

The induce-

ment to the making of double name paper, representing in fact commercial transactions,
will lie in a preferential rate, rather than in a regulation.
trade methods will aid in bringing this about.

Gradual changes in

The best guide to a safe course will

be experience.

In the meantime, it seems to be the intention of the Reserve Board

to facilitate adaptation to the new conditions, and to render the system effective
at a time when its service may be of more value to American business men than at
any time during the next generation.

This system does, in fact, mean a gradual

change in both banking and business methods.

The complete accomplishment of its

purpose will be brought about through the assistance, advice and patient cooperation
of both the lender and the borrower who by means of these banks will be brought
together on a sounder basis than has heretofore prevailed.

Permit me to ask the members of this Association to :lye careful study to
the provisions of thy: law and to the regulations of the Reserve Board.

Our new

system may at first appear to have been devised for the service and protection of the
banks.

Piley own the stock, the reserve deposits belong to them.

The benefits of the

system, however, will, in fact, be realized by the merchant who borrows money. It h.:7.s

already erased the word "panic" from our financial lexicon.

Its purpose is to safeguard

your credit and ultimately to enlarge the field of your business enterprise.

B. Strong, dr.. Merchants Assn. Luncheon,

This is indeed a prosperity luncheon.

11/24/14.

I sympathize with your desire to permit

the Federal Reserve Jank to contribute to the object of the meeting.
warn you that the Reserve Banks cannot make prosperity.

I should also

As they gradually assume their

functions they will certainly aid in th: recovery of business from the shock of war,
and I hope will reap their share of the rewards.

Until November 16th the Federal Reserve Act was simply the expressionce what
Congress believed the country demanded in banking and currency legislation.

Since

November 16th it has become a poeerful force behina our business machinery.

The test

of its ability to accomplish the objects desired will be determined by the experience
of tne future.

We must bear in mind what banking legislation in the United States af-

fects over 25,000 institutions with resources of $25,000,000,000.

Since the panic of

1907, the states of New York, Pennsylvahia, Ohio, Illinois and California have made
important or complete revisions of state banking laws, and Congress has enacted the
Federal Reserve Law.

Legislation of this sweeping character, which in the case of the

Federal Reserive Act reposes broad powers of interpretation and direction in a Federal

Board, must be dealt with conservatively.

The defects of the old system may have been

corrected by the new, but we must be sure that other defficts have not crept undetected

into the act from which unsound tendencies may develop, thereby defeating the purpose
of Congress and creating other weaknesses which it would r:quire farther legislation
to correct.

Judgment must be suspended and a generous attitude must be observed both

toward the Federal Reserve Board and the measures adopted by it for the development
and control of the now system and toward the managements of the various Reserve banks
in their e.ercise of the functions of these new institutions.
cooperation will ins-re the success of the system.

A liberal spirit of

Determined o position can be made

to d,feat its progress.

The first notable development in the inauguration of the system was the payment of the capital instalment, and during the past weak, the completion of the initial
reserve transfer, largely in gold, without recourse to the deposited reserves in the

reserve and central

reserve cities.

Out of $110,000,000 of such transfers made to the

- 2 -

Federal Reserve Bank of this city, a negligible amount was made by New York banks for
account of their correspondents in this district, and over $85,000,000 of the amount
transfe_ed was in gold.

The spirit of cooperation thus exhibited by the banks of this

district and particularly by the members of the New York Clearing House Association
in this as in all matters connected with the establishment of the Federal Reserve sank
of New York, gives striking evidence of their intention to permit no opposition to
develop which may interfere with a thorough test of the plan.

This insures its success.

I take this opportunity to express mv admiration of this body of men, our New York
hankers, who again give evidence of their loyalty to American institutions in true
American spirit.

The cooperation of the National banks, so necessary to the future at

this great plan, has been amply as tired.

Of that the evidence is alstandant.

Similar

cooperation by state institutions is of almost equal importance, and that of the business men of the country is essential.

Plans farthe admission of state institutions

The soundest banking system possible for this country should embrace in its operation
all :punks which receive demand deposits and discount commercial paper.

provided for the establishment of an entirely new class of banks.

Congress has now

Their most important

functions will be to provide an elastic currency, to afford means of rediscounting commercial paper by the membees or the system,

to act as the depositaries and distal agents

of the Gov.,:rnment, to effect the gradual retirement of our bond secured national bank

notes and to furnish the machinery for the clearance of checks and a more _seanomical
adjustment of domestic exchanges.

In addressing you, however, I shall refer to only one

section of the law in which you have a special interest from the standpoint of the mercantile borrower.

Some of you no doubt have at times bsen subjected to the uncertainty

and anxiety of having obligations to meet without the immediate means of meeting them,
except through credit with a bank.

Your business may have been in a sound condition,

but still your bank be unable to care for your legitimate needs.

as well as your

Certainly your business,

peace of mind will be promoted by a greater certainty in regard to your

- 3 credit at the bank and particularly at a time when money rates may be high and business uncertainty prevail.
System.

Therein lies an important function of the Reserve Bank

It will broaden and stabilize the market for commercial borrowings.

The

Federal Reserve Act provides for the discount by Federal Reserve Banks (I quote from
the law) "of notes, drafts and bills of exchange arising out of actual commercial
transactions. w

The )imitations thus imposed upon tee Reserve 'tanks in the char-

acter of paper which they may discount raises three important questions:

First, shall

the test of th, eligible character of the paper be evidenced in the form of the paper
itself?

Second, if the note does not bear such evidence on its face shall the Federal

Reserve banks accept the statement of tee member banks that it does cooly with the
statute, or Third, shall the member banks provide themselves with such means of information as will enable them to determine

: hether paper offered for diecouht complies with

the statute.

Such paper, is

to the London market, and known by bankers the world over.

in fact, the bill common

If gradually, without undue

disturbance of existing methods, the accepted bill can be substituted for the note of
hand, a class of paper will be created which will command a premium in the money markets
of this country.

Itsconvertibility at minimum rates of discount will serve as an induce-

ment to both the buyer and the seller of goods to substitute this form of credit far
direct bank borrowings against book accounts.
any such practice can be generally introduced.

Many obstacles must be overcome before
A merchant drawing a bill in Hongkong

for acceptance in New York must know that the bill can be sold in Hongkong.

The bank

in Hongkong with which he does business and which will be asked to buy the bill must
know that the credit is good and if it buys the bill that he or his agent (say in New
York) can get immediate discount.

He shoubd be able to ascertain the rate, and shoal'

know that the rate will be fairly stable.

While the en-ker in Hongkong will know the

- 4 drawer of the bill, he must also be informed as Lo Lhc standing of the acceptor in
New York.

There are today in this country no acceptance houses, very few of the

In 4ngland the smell number of acceptance and discount houses, which,

however, do a vast volume of business, has enabled the business an

banking world to

become familiar with London credits to an extent ehati is not true of any other money
center.
over.

Similar information regarding our credits must be disso;iated the world
Knowledee of the credit of American firms and institutions will follow the

trade of the country, but it will not precede it.

the process of education which

must accowparly the general use of bills drawn and accepted in dollars will take time
and patience.

Gne important fuection of the Reserve aanks at the outset should be

to standardize the development of this practice and put a premium upon that bill which
conforms to sound business

rinciples.

Accommodation acceptance, where the billdoes

.ot represent the sale of commodities, should be discouraged, so that eventually a
dellai4 acceptance will, in fact, represent tne sale of a commodity, the proceeds of

the ultimrte sale of which will provide the funds to meet the bill at maturity.
The second question has already been answered in part.

The Reserve Board

has, for the present, placed upon the management of each member bank the responsibility
of determining and giving satisfactory assurance to the Reserve banks that paper offerer'

by it for discount generally conforms to the intention of the Act.
denced by th

written statement of an officer of the member bank.

This is to be evieommencing with

January 15th, however, the member banks will be required to affix by s',amped endorsement upon the not- or by some other simple method, an indicatiennehat the note conforms

to the requirements of the Act and the definitions of the Reserve Board and that credit
information about the maker is available if called for.

This -gain places upon the

member bank, and not upon the Reserve bank, the obligation to determine the eligibility
of the paper.

3y authorising this method the Rederal Board has recognized the enwisdom

- 5 of attempting revolutionary changes in business practice.

Assuming, however, that by

later regulation the Reserve banks are themselves required to determine the eligibility
of paper offered for rediscount, the third question arises, How shall the Reserve banks
distinguish between that portion of the borrowings of a merchant Which may have been
applied to the building of factories, the purebise of machinery or to som

other fixed

investment, and that portion Which has been invested in the purchase of goods for
resale or which represents a sale of goods to a customer?

Borrowed dollars are not

earmarked in their journeys through the accounts of the borrower and it therefore would
necessitate an examination of the financial statements of borrowers to ascertain whether,
in fact, borrowings are confined to an amount representing the business turnover, or
whether such borrowings, if representing fixed investments may not result in a condition in the m3rchantls affairs which would make it impossible to discount the paper
without violation of the provisions of the law.

By some means yet to be fully devised it must become possible to readily
det:Irmine the eligible character and qualify of paper of the various classes Which

may be offered to the Federal Reserve banks.

I do not wish to saege:t that the

present system of mercantile credits should be generally abandoned.

The discount

allowed for cash settlement is an important factor in our business system.

But such

of the trade of the cou_try which is now conducted against book credits of 30, 60 or
even 90 days, may properly be represented by mercantile paper if the inducement is
attradtive.

Our vast domestic trade should not be disorganized or hampered by a

sudden and radical departure from methods which ara row satisfactory to merchants
and which are approved by many bankers.

The elimieation from our money market of

the single name note may not be necessary or desirable, but on the other, it is
undoubtedly desirable that the paper in Which our banks invest should more largely
represent the purchase and sale of commodities and not permanent capital.

The induce-

ment to the making; of double name paper, representing in fact commercial transactions,
will lie in a preferential rate, rather than in a regulation.
trade methods will aid in bringing this about.

Gradual changes in

The best guide to e safe course will

- 6 -

be experience.

In the meintime, it seems to be the intention of the Reserve Board

to facilitate adaptation to the new conditions, and to render the system effec,ive
at a time when its service may be of more value to American business men than at
any time during the next generation.

This system does, in fact, mean a gradual

change in both banking and business methods.

The complete accomplishment of its

Permit me to ask the members of this Association to _Ave careful study to
the provisions of th

law and to the regulations of the Reserve Board.

Our new

system may at first appear to have been devised for the service and protection of the
banks.

They own the stock, the reserve deposits belong to them.

The benefits of the

system, however, will, in fact, be realized by the merchant who borrows money. It has
already erased the word "panic" from our financial lexicon.

Its purpose is to safeguard

your credit and ultimately to enlarge the field of your business enterprise.

ik
.

.
K bin is indeed a prosperity luncheon.

aderal Reserve an

i eierwitnise with your desire to per ,;it the

to contribute to tne object of the metting.

you that the hesmagreSeahe canoe% make prepserity.

I hh:m1:0 also warn

AS they Willi swam thei

lunaton& they will eartibinlyaik. is the mowers or business free the shock of wow, and
Mope will reap their were of the rewards.
ovemLisr loth the ;sclera i Amer,* rat was simply the
wait:met: the ootintry detsaced in bunkla6

dezerueLeet

of what zAvaiiress

Stine ifeWeeker

ourrenoy

it bee bosom a powerful fame Whim. our Wesiness sushiawry.

to seassepitli the :ejects &Weed will

expression

The test of Its shinty

the emestenee

of the

future.

At oust bear in mind drat tanking legislittioa in the baited Utes offsets over 25,000
institutions with
of We' -

reeekleeeli

2bouw,uloo.Oo.

31mes the panic of 11 U'7, the suttee

York, INnualyilmeda, Ohil, Minds set deallornis have mode iMportAat or complete

revisions of etate banking Ian% and uengreee tee emoted the r Minna Aossows Law.
Ladisletion of this enesipin4,, aneaazter, which in the erne of the

Menai .4S mosso broad

gams of intemprolnlion nod direction in a radial Mel caret be dealt
Aye

with 00neWrithlittil-

OA defects of the old systesupy have been oorrostoo by the nes, nut we cu:,t be

eeft that ether defeats Immo net eriv nnertseted into the set tree tastok ismnuntlawenok-e

spy develop, thereby defeating the purpose of OM/4MM end creating otherweidametelehisk
it would require farther 1/etiolation to eorreot.

duutjant met be evepended Ana a

generous attitude at be observed he* tesard the i.sderal iteeerve hoard and t e sweloeuree
adopted by it for the nerelqpneet see Oestrol of the paw system sod toward the

reenefelleute

Of the various kesrre beaks la their eserciee of the funotioas or these new lastitutions.
liberal epialt at oureperation will insure the suocese at the eystem.

-eternised opposi-

ties can be me de te defeat its progress.
7ho first not

dirielaipent In the Urea .oration of lhe systemise the payment Of the

ock)ital inettalmmult, emi dmeimg the

pi6et wee k. the empletien el the initial reserve toms-

!eV. /away in obi. 'althea% riODUNO0 to the *Netted
reserve olties.

reeerreS

in the reserve and eestrsi

Jet of 4110,00Uouvo of such trunefre made to the redemel Reserve Salk Of

(a)

411 b. - Tr

ereate earbaintr in mewl tee Veer grid, eet the bed emit

pertisalimeivatatifte when

klAV

r4.46 nor be hi* en bengen teleartainflr

Iherela Ilea en Inverimat thatettog of the Ninwie iewlQt

ll troWn And WIblikee Mee peabet tor earxxvrelea barroviiht**

4001004

l'Omfmt

nert* an prortiao far the ilononnt br gtO&rAl anew,* *nuke (I iwto frog the

kaa)gmf nets% drafts an bill* et wee miming oat °tenni elemeroi41
U1 Stine thee impsemitelest the Inerve hash. in the

twoneettoneof

Viler et lever *high the

Atr Aleetuall Mimi area 11.000mOt telottenoe

Met, *all ;he %e at of the elimibbe ehmeeitir at the per b erliegen in the
forgot the gaper itself/

.0eiondo it the mate ins emt beswelmh evidemwe

en Itm 444. enA14 the peaorat Seeproo ImmWe imenopt the etostowest of tb* amnber

Mahe th%t it Awe comply 41ok V. tliatsbe ve

4h441 IA0 Pobbb, bubo
rvr&u enehae Owe to ileter-

pOort4he thmeelvee with mesh wow et tafterwookten

min" *other P6Por sigftroc, tOr eltneweet esepoLte. with the etootuto.

lbe mis urn aerehebt mapreemeitemi swede perOhoee04

aroma woo

otapsortoribe fgar be either the ramotower et the poode ur a basit or tota,mr,

stcforlereamegeblireertedgeabigneah its fags et the themieber at or, tr5no.
*Atm otileh it loymemmets* oat that tt oempttee with the 0,406eq,

Mr's It* Le Net, V.
the world, seers

biU

ININNEM to the Leedettmekloti god boom

Mods We.

Unbar*

IS goginally, without imam dietuptleamitotwetetteproorthetg,

the meeepied bill ems be sobetttehmt ter the este et

be ernes 'Web etla semen

;l4 gnaw ems' roper *ill

gosisa is thetehmWoo.b040kof the otentri.

2,0 wevertibilit sit minium rani of dinegn *ill *erre ee an Weelment to
firth the impor eed the seller ex Z 410v6.., be elhetilmte thi' forme wool, per
dim e% bomb. borrowings epainlot heOlt aacassns,.

aloe WO,* omy

at bill A*
sc14 to StO00101s

Prosteso do

Weer (*Male% me, be fief*

bee poror%Itr Cahrettueed.

A cswiliint dreeibt

OPOOK40010 in New Irft it bear( thAt t

bill er,ge be

the beet i Nowhens nith -44111h It4F0 10410 bag-teen ,And

Ohio% *ill be oohed be bier the bill net ham ant the trait Le pod end it

011insisting with "sow tith, botlairor, th itoolbor VOW 0111

Ow ocabor Vogt,

to !Iglu

bet rtylti Iv4Id"

otompoot ootterwrobS Vrain tto ne4111 or knYir. Meow 6101$1.

sot

soothe,. /Not tre33%tie thAt tto nolo atovrerws to 00 r4,1111,1rmsofftto of Ow

ti *wow*, bold awl Vo4 oro.At taislarkittilit oboal Os labor

the Wind ttuNil

Iti

to wJ4L4) ur 64100 for*

somber bomb, and Atiti *Pea

3,1,1tok vloome foroot

attotbillAtf

2eaotroo bletk, tow 0111.ittte to 4otoottibro

4r:61 Rovri1 boa recoolood Ito ilretiedett if Atop:4w

tatilhorlafig Wet Iwthod è

",*Ali.

Wow sl000totionory 0~034 tn

atoorsiditotu howerwro MOS Sr
turteftrAtrio isbe

War rotplAttoto cM b000rvo tolgao vie law ._161.4o

ottelbtlity

liwk

th,e, Tootles airldese alor

rt piper of !woo far va4diampard6

eon tio% lit344rito boaks distiootolt to

Mot portlite of t,,' SOP *1r

womb ot *We& rex". kl-Apt bewt appltiol to tho lettAtas of twtorioo, tM porobsoo

of ofthimory

4ta

014N',1 ottor Mood tw000koosit, Mid thAt per** Ottob boo boos

tow, 'be to thy ror3twoo

to i

pots for mots t(r *ASA ropmosade

arrold *Mare Ni owl av

tosotestese

to *lair $111M1111141 OM*.

U sastositook as osowlYwtion

tbo aommods tut SW Sierawar and SO WII

it 0109 1111"11441 146610/04161 if imirrolii* W 41001.1001 ftleAtors

wash bwr,votlimo. U oalwoorytttes Anal tatiottloott9 tor

pw'

Oats 6.110.10'

towiewoo loon over* or ohothor

likp sow owatiabl to on aramat repressolikag

tt. rL SA latt)

solo of mods

not molt to a omit.

4r4stindAta *Mips Atob **41.4 fook*'it tatwoolblo to 4.4't
iriolAtot oot Vito morevitNiertt

IMP

tbe

it- mow mom pot to kAn WI? aortae:* it t',),Aot bosom p000ttlo to
roa,324/ lotersitro tioo oltqlbto %Oar 61tor

i tpooltti t

rower fiz:11Pos vostesa

oto:wori ,sht" rAy to oVoove-': to tho Male* Swum troa,i,o

,;* Mt *eta, to

warfoot th9 tto prosest okvotwo of ,,toroosttlo ovehtto ohoislot to orar41,
dellate

swat

WNW wisp&

l000ttl for okqh **Mr. ',tint it NIS lapealmat Imiter to MI,

sot Ash of t

tstac.4 tie WO olowIty MIA to tot imeduatos

ogolsot boa eretAto of X, 10 or own 10 davo, omos propoloir to istowoontoll

worsoottle Irwor U

Istisionost to ottosottief,

*sot d000s?rtill

shaulai rurt

4400r17"tmool G' hwIrorael by

IZIO010d* Wrilt101, AREO OW*

lokor*,

ototiart-hatary

Tho elinktriatim tftr,

mtirelAntifO

,,garturt,

044311 agive 0(14,10014 111, WNW

tANkro It la tsolortbionif flom$rø tto4 tba

ioir bats korost lak:1114

mirel largtoloor riara:mratt

ritre4Peso

D inttofomtt

aomeolitiss 484 $ ot prim:intent om-lital.

tvking

2,4at MlivirAtralea tYkustftwttutv. 411 Ito in a

doubt* woo owpor, rogrosontina

proforootW ri4a. mthor t

menet ms.telt tie the aingia *Koss not* tow met

be noose low or 4LlootrAilo, lovt

Irmo? IA

iiqtv;tes esti rodloril

ervbx4, diortMet, I

in a. rocipItitlion,

win stid In bringing this 00,44.

koustio

gado to

* 011.111 .111461Pso

tio ,,stcha

An be exp,

this Hao:ail*, it oiseco to ba Vow intsotion ø bhp TIornorre Seera

porionot.

ronztav filsa aavatota tortnoat.-

to It4411.tato 04049b4ttoro t<4 tho nog olawiiiii41010# 41110.!

Vow

tanV

ttbre *en it% 443rvino Emo irm of ti*Of %/aka* to A -vziet:Yiti buoinoas was

otrl

Awing ktet qoact solostktion.

la t,stti

4114 a serto.47.: ilon*.

2to *twirls* oaaawkAistt.

borti000s votliOs.

malt Ot itte4 parrolmo 4I

PM,

lerettott about %%two*

1:,0414,, /aka sb

oetkletotese, oOtrioo oaf

/Wont ooeporotton of both the looter ongi, the between, olbe

mat faill to toveght boerttkpet m w somber Ude Wm

tie*

omits of

berstotoro yareettilibt*

Priffilt 4.$* to 04. tho aosaboso or this AwioattOtion to ktiso ilasamittit
MA04

W it Trervimioo, e Or tool oast W t

ragoisakiono k.07 tits 2000.111, Statii

04.Ar 14,01 Orton ewer ot 60,411 orroAr to bow boon Aeolvo litv th ocenellot oat
teketopetutti or tav, trisVik,

tboru

Ito banatiU

tzorrqP:,

be deleese abo

remirVe Oiispoolte betilee t

evalisod for the
footi
Imo,* the glow, speaso bee ever

thrh oteataN holsmsmir, mills

qftp ktirrem41 plenoy.

finanotol lead sons

*way own: Oa 00eks,

hi ronteso to to iotioattoed yolv *wilt out ttat4osboly
por.rir boeltsoso entorriri Vet

THE NEVy BA KING SYSTEM.

The following portions of an address delivered at Williams
College in the Bok lecture course will, I trust, furnish a satisfactory
answer to your editor's request for an article to be printed in the
Pyramid in relation to our banking systen-

It must be borne in mind that the use of an isolated banking
transaction as an illustration of a banking process is liable sometimes to be misleading.

Many influences are constantly affecting

the position cf our banking system with respect to reserves, and every
banking transaction reacts throu, pout the whole system exactly as a

stone dropped into a rond will set in notion every particle of water
in the pond and to some extent readjust the relations of the particles
to each other.

The illustrations used in this article were for the purpose
of making clear graphically, the importance of the reserves :aid the

duties and responsibilities of bankers as the custodians of the reserves,

upon the adequacy, security and proper use of which the commerce of
the country depends.

;N.

-1-

You will recall

r.Taft's

statement that the first

ideal for which a lawyer must strive, is thorough professional education.

If you choose banking as an occupation,

the important part of your education will commence the day
you enter the bank, and your success will depend upon your
mastery, by hard work

and close application, of both the

detail of banking machinery, and the principles governing
its operation. It is also important that you place a
correct value upon the results of the work that you are
doing, though at the time they may appear to be of small
consequence.

pile the measure of commercial success is commonly
expressed in dollars, any honest vocation in which the
material reward of ability and hard work is making money,
can also be made to contribute toward the making of good
or bad citizens.

If a life of hard work is concluded

with the reward of simply a huge estate, the worker may
find that he has missed or overlooked the accomplishment
of purposes which would have produced infinitely greater
satisfaction than will the possession of property. We are
no

witnessing the growth of convictions regarding standards

of citizenship in business affairs which are having a profound effect upon our laws and our business methods.

But

ignorant abuse of bankers and banking methods must not be

allowed to prejudice your decision, nor should it lead you
to beleive that bankers are wholly selfish, that their
business is sordid, or that their point of view is a narrow one.

-2-

The technique and clerical detail of any business to be
sure, is usually dry and uninteresting but, with the stimulus of
a correct knowledge of its economic value, work in a bank will
prove to be of absorbing interest.

Banking is, in fact, the

binder of commerce and brings the successful banker ito contact with every manner of business enterprise. should you under -

take that work it will be better done if you realize that it
has a purpose of large significance, and that you will assist
in the discharge of obligations to the public and services to
the Government which bring satisfying rewards, while not interferring in the least with the exercise of your talents to earn
dividends for stockholders.
la.. Paul

.4stem in

arburg, in his pamphlet on "Yhe Discount

tirope", has forcefully stated the great problem

ofbanking in the following language:
"If banks were to keep, in cash, all the

money deposited with them, business would come
to a standstill and a crisis would ensue.

banks were to lend to those who apply for loans
all the money on deposit with them, a general

panic and collapse would follow a short period
of everstimulation. Between these two extremes
lies the middle course, the finding of which is
the problem, and its practice the art of banking."

The puroose of this paper is to illustrate, by a few
simple examples, how the banking credit structure grows
upon, and is sup ported by the gold reserves; how these
reserves,

of necessity,

-4..

A bank,

(

call it the First National), receives * deposit

of .:80,000 of gold, Whioh the depositor orings to thia country
from Rurope.

3ear in mind that this gold does not come out of

another American 'oink in payment of a check draen by the depositor, but is new money imported from 'ourope.

The bank then shows

as an asset the =a80,000 of gold, and as a lialqiity the ::000

oweing to its depositor.
25 .i cash in

As it iJ only required to keep, say

vault as a roserre against its deposit liability,

(as until recently was the case with national banks in the cities
of 191w York', Chicago and it. i.ouis),it loans

00,000 to a borrower,

for whioh it issues a aheck. The borrower oeposite the oLeck in
the ".cooed rational Pank,w'zcich collecto the proceeds from the

First .ational Bank.
cash,

This leaves the First National

ank with

20,000 (being 2C / of the deposit) and .60,000 of loans.

The ..econd National Bank repeats t;.le operation, lending 75

its cash. or Ab,000, the chock for which us deposited in the
Third liational Bank. This operation is constantly being: repeated,

so that possibly An a for dAys, a consolidated statement made by all

the banks in the community which participate in the resulting
transactions would show: Cash :%30,000; Loans, '24,000; Derosits,
t320,000, There flax now been eructed a pyramid of bank deposits

resting neon the original '80,000 of gold, in the rate of 4 to 1.
The ratio is, in fact, nearer 8 to 1 in actual practice throughout the whole system of American Banks.
depositor draw a check on the

:ihould the original

810,00n deposit, it will likely

be deposited in another bank, And the same expansion will
occur through the use of the meney by similar successive
operations in various banks.

The same result arisen if the

check is used to pay an existing loan, the bank which has the

-5-

loan paid off thereby converts the amount of its loan into
gold, that iG to say, into reserve money, and may then make
a new loan and start anew the same successive operations.
Our checking system has, of course, facilitated this expansion, and the use of checks has become such a necessary con-

venience to the public that in cities containing a number of
banks, the bankers have formed associations for clearing,
(

that is for collecting and paying), the checks they receive

on deposit which are drawn upon each other. Every morning
they take all these checks to the clearing house, where each
bank receives or pays in cash only the difference between the
amount of the checks it has received from its depositors for
collection and the amount of checks drawn on it which the other
banks have received.

By this means, gross daily payments between the banks
of New York City, aggregating hundreds of millions, are settled
by net payments of a few millions only. The saving in time,
clerk hire and risk to effect this clearance of checks has
been of vast benefit to the banks and to the public.

You will observe that while the collection and payent of the claims of the banks due to and from each other
by this means necessitates only a minimum disturbance or
shifting of reserves within the limits of one couLnunity,

it is in fact, a community method by which the banks discharge
their obligations to each other. This will be referred to later
Returning to the original depositor, what harpens
if he draws a check for '';40,000 on his ziiE0,000 deposit and

sends it to some other part of the coantry?

-s-

are constantly shifting from one institution to another,from
one section to another, and from one country to another,and

haw important duties and responsilihities in the custody and
control of these bold reserves extend with our commerce
throughout -the world.

The operation I shall mention occur it endless variety
in the operation of the banking system with which you are

already familiar. They will, therefore, be best suited to
bring out the points that I have in mind, and incidentally,

they will illustrate some of the defects of the old system
and permit me to point out in conclusion the beneficial e fects
that our new system will have in this rennect.

SAPANDINa

CHANO1Z
41)1-1

Lk.000
Lst.hat. Cash
Loans
Deposits 60,000

60,000

2nd Nat. Cash
60.000
Loans
Deposits 60,000

45,000

3rd hat. Cash
45,000
Loans
Deposits 45,000

33,750

33,750
4th Nat. Cash
Loans
Denosits 33,750

25,312,50

TAia,L1

LOAN&

Li Ahb

UPC) SI Tb

20,000

460,000

60,000
80,0e0
15,000

+45,000

45,000

60,000
11,250

423,750

33,750

45,000

8,437.50
25,312.50

-f25,312.50

33,750
et*

lots

etc

ate
80,000

etc
240,000

etc
320,000

I
-6-

If he remits the check to the South to pay for cotton

purchased, the check will be deposited in a

;:jouthern bank

and by that bank will be remitted to hew York for collection.

The 6outhern bank, possibly reouiring cash to enable the
manufacturers and farmers in its community to pay laborers
and farm hands will instruct its New York correspondent to
ship the gold Jouth. The second chart will illustrate what
results:A.

..c:.!,

10,000

M!.

:)17061T3

10,000
30,000
4010L

40,000
7,500

7,500

22,500

2'4500

33,000

30,000

5,615

5,625

16,375

'i'j"

22,503
4,21X "

22,500
4,211'475

10656,25

12,656.25
16,875

16,875

e
40.000.00

120,00r.i.uo

oto

160,000

.7.

The withdrawal of the

110,Ss0 of bold from the first

1Zational dank then necessitates its calling for payment of
a loan of

30,000, the proceeds of which, together with

;10,000 of its reserves are shipped to the southern bank.
The borrower draws a check for fS30,000

on the 6econd Nat-

ional to pay the loan, which has been called, this causing
that bank to require payment of :;22.500 of its loans, the

proceeds of which, with 7,500 of its reserves, effects the
payment to the First

ational bank, and so, again, by suc-

cessive operations, the pyramid of bank desosits and loans,
erected as the result of theoriginal deposit of .S30,000

has been reduced one-half by the withdrawal of

0,000,

leaving, in fact, the consolidated statement of the various
banks participating in these transactions:

Loans, 320,000 and

Deposits,

sold,

40,000;

160,000.

Our National and State banks cannot extend their

business, by a system of branches, throughout every section
of the nation, as is done in other countries. 3o the check
sent to the south must be collected, and distance prevents

offsetting in the manner possible through a city Clearing
house.

:.erchants in the North sell their goods in the South,

farmers, in the :youth, sell their produce in the North. The

buyers and sellers send checks back and forth in payment,
and settlement of the balances resulting from the ebb and
flow of domestic commerce requires the shipment of vast
sums of money from one part of the country to another, at
great cost and some risk, and gives rise to sectional contraction and expansion as described in the case of the individual bank.

by one

Furthermore, an unusual volume of purchases

section from another section may result in positive

-8-

shortage of credit in the buying district which may necessitate the banks of that district borrowing from the banks of
other sections. In a country where so large an area is devoted to agriculture, the requirements of the farmer causes
a regular seasonal demand for currency and credit between
the sec ions. It may be illustrated by a simple example.
The farmer of the South begins in the Spring to prepare
his land for a crop of cotton. He buys fertilizers and seed,

food for his family, laborers and stock, farm implements
and other supplies,.8 his purchases and his payments to his
laborers increase, he becomes indebted to a local merchant,
frequently giving the merchant a mortgage on his cotton crop
before it is even picked or even grown.

The merchant is

likewise buying these supplies from implement and dry goods

houses, meat packers and other merchants in the North. He
finances his requirements by borrowing from the local bank,

which may have so many such borrowing clients, as to exhaust
its own lending facilities,whereupon it borrows from a larger
bank in a section where credit is available, say in New York.

For the production of the cotton crop, the farmer has
borrowed from the Southern merchant, the merchant from the
Southern bank, the Southern bank from the Northern bank, and
the Northern bank has shipped the borrowed gold or currency
to the South. The chain of credit has grown with the growing
crop, has extended to the Northern reserve reservoir and
moved some part of the reserves into the section where the
demand has arisen. Finally, in the Fall and Winter, the crop
is harvested and partly sold to Northern spinners. In payment,
the spinners remit to the South checks drawn on New York banks,

which

the banks of the South,receiving on deposit from the

-9-

sellers of cotton, send to their Northern bank correspondents for collection and receive credit for the proceeds.
Out of the proceeds of the cotton sales, the farmer
pays his indebtedness to the merchant, the merchant pays
his indebtedness to the ,southern bank and the jouthern bank
pays its loan to the 7:orthern bank; the last of these pay-

ments being effected by checks drawn by the Southern bank
on its credit with its Dew York correspondent.

At the sasse

time, farmers and laborers have paid their store bills owing
tosa merchant with the currency or gold which has been shipped Oouth earlier in the year and the .eerchants have de-

posited the currency in the bank or used it to pay bank

loans. The entire chain of loans and credits have been paid
off. The cash reserves of the Southern bank may then become

excessive, and in order to employ its funds profitably, it
ships its surplus reserves,( that is, (:old or currency),

back to the r2orth, where it is loaned possibly to the cotton

spinner to enable him to manufacture the very cotton for the
A

production of which the ;;old or currency was originally shipped to the South in the Fall.

Now take a case in which the cotton is sold to an

%::;lish

sninner. The Southern seller of cotton draws a draft or bill
of exchange on the Znglish buyer, say in London, payable at
60 cr 90 days aijit.

The draft on London is sold to a 1.ew

iork bank, thus producing the same New York credit and resulting in the seine liquidation of the chain of indebtedness

created for the purpose of producing cotton.

The New York bank,

however, sells this draft in London. The proceeds are placed
to the credit of the Dew York bank by its London correspondent,

and from this transaction an international credit is created

in favor of teio country. American importers of merchandise

from England purchase drafts drawn on the London bank by
the New York bank, in order, to pay for goods purchased, so

that, in this instance, the shipment and sale of the cotton
to :_ngland, by means of these checks and drafts, has also
effected payment for iroods which our merchants have pur-

chased from that country. But, should the value of our ex-

correspondent to ship gold to this country. If we consAder
that the shipment of gold thus arranged is the identical
gold first referred to as deposited with the First :!ational

Bank, it will be seen that the same gold starting from London, has paid London's debt to New 'nark for cotton, has than

been loaned to the South, or has paid New York's debt to the
south for cotton purchased, and in the South it has nerved
as a reserve for loans created to produce cotton, or furnished currency for labor.

Later in the season, when the coton

is sold, the Southern banks, as described, may loan their
surplus funds in the north and the oold will :cove back again
to New York.

Possibly, the trade balance by that time, will have turned in favor of

:ngland, when the gold might

again travel

across the ocean. The gold has moved between the same points

as has the merchandise, but in the opposite direction

Two other banking operations should be briefly referred

to. Our Covernelent receives and pays out every year hundreds

of millions of money to conduct the Government's business.
Payments to the Government, of duties, taxes and other revenues, are made in the same kind of money that serve az
the cash. reserves of banks. At times, the revenues of

tele

Covernment have run far ahead of its expenditures, and at
other times, unfortunately, the Government's revenues are
not sufficient to meet its expenditures.
i

Our foverreeent

distinguished from the governments of other nations in

that it has an independent treasury system; that is to say,
its revenues are paid directly in cash to government ag(nts
and sub-treasuries, and it has largely paid its bills by

warrant or check payable at the sub-treasuries, in recent
years, this system has been ahosna to involve decided dangers

to our banking system, in that it sometimes forces withdrawals of large sums of oasn from the reserves of the banks

which are looked up in the Treasury casinol contraction of
credit, as before illustrated. And when the :iovernmentes re-

venues are insufficient and its working balance as a result
it paid out, large 3UM$ are forced on the mar :et, that is,
are transferred from sub -Treasury to sank P,oservee causine

possibly an unhealthy expansion.

The

overnment has become

keenly alive to the fact that, in handling its revenues and
disbursements, it is either under the neoespity of alternately- withdrawing and returning huge sums of reserve money

from and to the banks, and possibly at most inconvenient
and dangerous times, or it must conduct its :coney transact-

ions in greater volume through banks. The Government has,
therefore, adopted the policy of depositing its funds in
National

banks throughout the country in increasing volume

served equally well by using the notes and the ban'k's

gold is unaffeated, provided, of course, no greater
ratio of reserves is required for notes than fcr deposits.

The notes, however, once delivered to the

depositor snd paid to the mill hands, are used by the

mill hands in payment for their purchaee* and remain
in circulation a considerable period of time, ,Ilerees
a check drawn on the account will be presented for pay..

ment the same day or shortly thereafter, and if paid
in gold or reserve money, will result in contraction

If, therefore, demande for cerrency

as described.

with whioh to mal.:e hand to hand payment° can be sup-

plied freely by an issue of the notes of the bank
without materially disturbing its reserves, a useful
purnone will certainly be performed

that s circula-

ting medium in provided which may be iesued at business
demands ite :arse and redeemed and cancelled when the

amount in circulation becomes redundant.
analysis of the transactions described discloses
the fellowing:
eiret:

The acoumulation of gold in the banks re-

welts in the creation of an inverted pyramid of credit

resting upon a comparatively narrow founation of sold:
Lecond:

The payment and collection of checks in

connection with the making of loans and the withdrawal

of deposits growing out of the conduct of businese in
a Given community necessitates the constant shifting
of :told reserves between the banks of that community

and

results in expansion and contraction of loane and

-12-

although by a cumbersome method. in tis, as in other
respects, experience shows the imperative necessity for
a close workinc relationship between the Government and
the banks, in the handling of the Governments finances.
The last banking transaction to be mentioned I must
sketch only too briefly.

The conduct of business requires the use of two
great instruments of exchange.

6ne is a deposit ac-

count or credit at a bank which may be used for paying
debts, or for making purchases, by drawing enecks upon
the account, and which account may be created by borrowing from the bank.

The other is currency with which to

pay mill hands and farm laborers, for detail cash trans..

actions, pocket and till money.
It is not my purpose to diecuss any of the many
theories as to the best form of this circulating medium.
Let us assume, in this illustration, that it is simply
the note of the bank welch is secured by some or all of
its assets and the prompt redemption of which is assured
by an adequate reserve of

old and by the pledge of loans

due the bank, the payment of which will result in its accumulating gold.

The use of this currency will be illustrated if we

assume that the original depositor with the Yirst national
...5ank is a large employer of labor and that, once a week or
once

month, he will withdraw a large payroll from the

bank in Gold or currency. if he with draws ;40,000 of gold
for that purpose, the contraction first described results.
But if the bank has the means of converting its deposit

liability

into a note liability, the customer's need is

-15-

their own, but their competitors' credit; for the conduct
of the business of the world depends upon the confidence

felt by the public in the ability of the bankers as a
whole to maintain this structure of credit represented by
the deposit and note liabilities of banks at all times
and under all conditions,

In the case of the local community, first mentioned,

where thr banks are associated in a Clearinc louse, their
responsibility to one another is commonly

recognised. In

times of difficulty, some of the banks in a

community

may be called on to meet needs of their depositors to
withdraw deposits or for loans in excess of their cash resources.

In such cases, as in 1907, and again in August

and September of last year, the Clearing House banks of
New York permitted those of their members who needed to do
so to settle the net balances of exchanges, not in cash,
but by borrowing from the other members.

y the use of

loan certificates they were enabled to borrow from all the
other caearinu }Louse banks for a time instead of immediately payinE7 checks drawn upon them in ca h.

urely, this is a

recognition of the principle of mutual obligations'. And in
resent

times the banks which are associated in Clearing

mouses, recognizing their obligations to each other, have
frequently agreed among themselves upon a plan for examination by examiners employed by the Clearing .mouse Associat-

ion for the purpose of further protecting the community and
one another.

In the case of different sections of the country, the

plan recently arranged for providing a large credit for
loans to :southern borrowers on the security' of cotton affords

-16-

a striking illustration.

Ay reason of the 'war, the value

of cotton aas been reduced this year to one-half of last
year's value.

Southern farmers, merchants and bankers

feared that it would be impooeible to market a large part
of the crop, and to the extent that it was elarketed, that

it might not produce sufficient value to enable them to
pay their debts. An appeal to the bankers of the country

reeulted in the pledge of :100,000,000 by the banke-of the
:forth and

est to be loaned upon the security of cotton

in order to releive the .southern lender of the necessity

of forcing the sale of his collateral at a sacrifice. The

obligations of bankers in one section to the bankers and
business men of another section could not be better illustrated.

The international brotherhood of mankind in matters
of credit, forces its recognition upon the banker as eoon
au his sold is required to meet a foreign debt.

ee be-

comes the medium through whom the great international
credit transactions growing out of commerce are adjusted,

and upon him the country depends for the settlement of
the balances in gold.

situation arose, au a result of the war, in res-

pect of our country's indebtedness to

urope wolch

brought home to the people of our country the extent of
its dependence upon the banks and their managers in these
mattere.

The city of New York had borrowed

60,000,000

abroad. ,erchants and bankers were also largely indebted
to merchants and bankers of iurope.

The outbrealz of the

war necessitated an unexpectedly prompt payment of a
large part of this debt. pearly 1,500 banks of the United

http://fraser.stlouisfed.org/
States
Federal Reserve Bank of St. Louis

entered into an agreement to furnish a total of

-17-

1E',0,000,000

of cold for shipment to Europe, if required,

in order that the city of New York and other American
debtors might promptly meet their enaagements. The possible drain upon the reserves of tbebanks as a result of
this engagement and of other demands growing out of the

war justified the Secretary of the Treasury in depositing
large sums of gold held in the Treasury with various banks
throughout the country, and the Fold resources of the gov-

ernment, as well as of the banks were brought to the relief
of a situation which might have caused serious embarrassment to both the creditor and the debtor.
The shock of the war likewise caused some panicy feel-

ing troughout the country in the minds of the people who
feared that they would not be able to iet money

(

tnat is

to say, gold or currency) from the banks with which to con-

duct taeir business. In 1907 similar fears became so exaggerated as to result in the hoardintl- of large sums of money

for which a premium of 3 to 4

was paid, and a similar

occurrence last year, coming at a time when our debts abroad
had to be paid might have resulted in such huge withdrawals
of reserve cash from the banks as to cause a most dangerous
contraction. This demand vas met, not by paying .Told out

of bank reserves to those who demanded currency, but by the
issue of nearly 1;400,000,000 of bank notes which were secur-

ed by the pledge of a portion of the assets of the barks.

has the withdrawal been gold, the contraction of loans
resulting therefrom might have brought disaster to our
country's business. In effect the banks substituted note
liabilities for deposit liabilities and conserved their
gold reserves.

Dealings in credit as vast and complicated as are

required for the conduct of industry and commerce result
in a constant increase and decrease in the deposit and
loan accounts of the banks, and constant changes in the
ratio of reserves to deposit and loano. but a safe ratio
must always les. maintained, and it is well to consider

what causes may put the reeerves in jeopardy and the situation beyond the bankers'"control.

A general or widespread loss of gold by the barks is
frequently caused by increased activity in business which,
for its conduct, requires the use of an increased supply
of currency for pay-rolls and hand to hand payments, or by
a demand for credit from one section of the country upon
another section,which me,y draw recerves from one section

to another;er by an adverse foreign trade balance resulting in ahiplllents of gold to foreign countries; or by high

rates of interest in foreigb countries which induce loans to
those countries, or by the locking up of gold in the Treasury
through accumulation of the Government revenues, or by
hoarding.

A sound banking system, coupled with a recognition by
bankers of their mutual dependence upon each other, generally provides the means of eleeting withdrawals of reserves

arising from all of the causes mentioned, except from
hoarding. No danger causes the ban :oar such a chili as that

caused by the stupid, uncontrollable effort of foolish
people to withdraw gold from the bank in times of distrust.
Unfortunately, our banking system formerly contributed to
the possibility of this danger a2ising. In such times,

net on

individuals, but the banks themselves, accumulate

and lock up gold.

A.th over

25,000 banks in tne country,

come of them will at times insist vpon building up their
reserves beyond what is regularly required.

Individuals

also put gold in safe deposit boxes and other places of
safety. ':() remedy for this ever-present danger is so effect-

ive RS that of meeting the demand. forturately,our new banking system has providod means for the issue, when such demands
arises, of a note based upon the aseeta of the new Federal
reserve banks, which greatly minimizes the dancer of this occurrence, usually brought about by the actions of selfish, unthinking people.

It is no's difficult Lo realize that the custody of

the gold upon which credit rests, hold as it is in this country

by these 25,000 banks, and supporting, as it does, credits
of nearly twenty thousand million dollars, places a responsibility upon the banIser, both to the Government and to the

people, of wide significance indeed. It cannot honestly be
claimed that his reoponsibility is lislited to compliance with

the lsw,earning dividends for stockholders and meeting the demands of his depositors.

Pis larger obligation must frequent-

ly be discharged for the benefit of or in co-operation with
his own competitors

it extents throut:;hout the country use

well as to the people of his own Lasediate comtsunity.

And now, within the past five months, a !reat miliSary
conflict his started, one of the consequences of which is to
impose upon our bankers increased burdens and responsibilities
of international importance.

e rnuot prepare ourselves, by

a better understanding of our duties and of how they should
be preformed to help ameliorate the distress and hardship

-21-

ConoTess has now created twelve institutions,(the
Federal reserve bank) into which have been paid over
260,000,000 of the reserves of the national banks and
subsequent payments, by both the C:overnment and the

banks, it is hoped, will increase this accumulation of
gold in the one common reservoir to more that :500,000,000
The reserve banks are authorized to perform five principal functions that relate directly to the occurrences

which I have described and for the control of which this
country has heretofore been inadequately equipped.
They furnish the means whereby the banks of the
country may convert their assets into credits, and thereby increase their credits to their customers, without the
use of emergency measures, such as the clearirr7 house loan
certificate first mentioned.

They will in time furnish facilities for a more
prompt and economical settlement of domestic exchanges,

and the balances resulting therefrom, without the risk and
expense of actual transfers of such large amounts of reserves, and with a minimum sectional expansion and contraction.

They provide for the prompt issue of currency as
business demands its use, and the liquid. character of the

assets of the banks, with their large gold reserves, insure prompt redemption of this currency when its use is
no longer required.

They will serve ae the depositaries of the revenues
of the Government, thereby avoiding the contraction and

expansion caused by the independent operations of the

http://fraser.stlouisfed.org/ Treasury.
Federal Reserve Bank of St. Louis

ee2-

of even greeter importance ir leech timer eu eusine
the poet fear- menthe, tbey may become tee iretrumerts, through
a juc'iciouc influece up Dr. interest -.fetes, ard a TiF.T ere

of credits, for exeecielne e certain meaeure cf cortrol over

the importation and exportation of old,

het meane, teey

may protect our benking eystem es P ehole Rgsinst to

danecrs

of too vollent expansion of contruction, too auf3eerIy tupeesd

as a reeult of en uncortrolled internstional movement of
gold reserves.

Tee conducL of businese by competitive methods iE an
econemio contest no lest! than is the war now regine in europe
a military coeteot.

(redit

(

that is, tl.c facilitiee of the

bankine syste) hae become the moot necessary inctrueent in
aucceesiful conduct of businese.

in e rational eenFe, the

maehirery of credit, in order to be tafely and succeosfIlly
emplo.)ed ire

inttrest of re.e couetryle industry and com-

merce, must be mobilized urder the leseerehip of a gencrel
staff end by a comprehensive ple.n upon much the Z=0 princi
pleo ae these uron whloh en army is mobilized.
We are nnw puttire into practical operation a 1:ftter

conceetien of the fenctiors of henke based upon a reec7rition
of the prinierles that R onordinetion of bertiee intereets

and a centralieed control of eareine reeeren afferee ereeter
protection to the bemker and results in a better service to
the eublie.

ecetelkeele.e4e,

Afeet.olow

You will recall Lie Taft's statomont that the first ideal for which
a lawyer must strive, is thorough professional education.

if you choose bank-

ine as an occupation, the important eart of your education will commence the

day you out r the bank, and your °weeps will depend upon your mastery, by hard
work, and close aeplicetion, of both the detail of banking machinery, and the
principles governing its oecration.

It is also imeortant that you place a cor-

rect value upon the results of the work that you aro doing, though at the time

they may appear to be of =all consequenme.
ehile the manure of cormerciel success is commonly expresoed in dollars, any honest vocation in which the material reward of ability and hard work
is making money, can also be made to contribute toward the making of Eood or
bad citizons.

If a lifo of hard work is concluded with the reward of simply a

huge estate, the worker may find that he has missed or overlooked the accome
pliahment of pueposee which would have eroduced infinitely greater satisfaction
than will the possession of property.

ee are now witnessing the growth of con-

victions recording standards of citizenship in business affairs which are having
a profound offoct upon our laws and our business methods.
of bankers and banking methods rent not be allowe

But ignorant abuse

to nrejudice your decision,

nor should it lead you to boliovo that beakers arc wholly selfish, that their
business is sordid, or that their eoint of view is a narrow one.
The technique and clerical detail of any business to be sure, is usually
dry and uninteresting;, but, with the stimulus of a correct enowledge of its
economic value, work in a bank. will prove to be of absorbing interest.

liabking

is, in fact, the binder of corr:.erco and brings the successful banker into con-

tact with every zan=ier of business ontereriso.

Should you undertake that work

it will be bettor done if you realize that it has a purpose of lard significance, and that you will assist in the discharge of obligations to the public
and services to the Government which bring satisfying rewards, while not interferring in the least with the exercise of your talents to earn dividends for
stoceholdors.

Mr. Pima Y. +.szburg, in his pamphlet on "The Discount eystee in europe",

has forcefully stated the great problem of bankinc in tho following langueee:
"If bseks wore to koep, in mdia, all tho money deposited with
them, buoiness would come to a standstill and a crisis would
ensue.

If banks more to lend to those who apply for loans

all the money on deposit with them, a general panic med 001 -

lapse would follow a short period of averstimulation.

344wpm

these two extreees lies the middle course, the finding of which
is the problem, and its :reetice the art of banking."
The purpose of this elver in to illustrate, by a few simple examples,
how the benking credit structure crows upon, une, is supported by the gold reserves;

how these reserv.3, of necessity, are constantly shifting from one institution to
another, from one section to another, and free one country to another, and hew

important duties and reseoneibilitioe in the custody and control of tho gold reserves extend with our commerce throughout the world.

The operations I shall mentlen occur in endless variety in the operation
of the bankine system with which you are alread,. familiar.

They will, therefore,

be best suited to bring out the points that I have in mind, and incidentally, they
will illustrate same of the defects of the old system and permit me to point out
in conclusion the beneficial effect that our now syntem will have in this respect.

.'-,PANDINC

CHANGES
Cash

Loans

20,000
Cash

Deposits

Loans

Denosits

15,000

-60,000
1st Natl.

T 0 T A L

80,000
Cash
--Loans
Deposits 80,000

-+-60,000

60,000

111

80,000

11,250

-45,000
60,000
Cash
2nd Natl. Loans
Deposits 60,000

45,000

+121;,000

60,000

MORN&

8,437.50

45,000
0:-Lsh
3rd Natl. Loans
Deposits 45,000

-33,750

33,750
Cash
4th Natl. Loans
Deposits 33,750

-25,312.50

33,750

+.33,75C

45,000

ow. .1.....41=

etc.

25,312.50

T-25,31240
80,000

33.750
320,000

etc.

240,000

etc.

A bank, (call it the First National), receives a derosit of :;80,000 of gold,
which the depositor brings to this country from -!urope.

Bear in mind that this gold

duos not come out of another American bank in peqmont of a check drawn by the depositor,
but is now money imported from Europo.

The bank then shows as as asset the :::80,000 of

gold, and as a liability the 480,000 owing to its dcresitor.

As it is only required to

keep, say 25 'p cash in its vault as a reserve against its deposit liability, (as until

rocently was the case with national banks in the cities of New York, Chicago and St.
Louis), it loins ,60,000 to a borrower, for which it issues a chock

The borrower de-

posits the check in the ,econd National Bank, which collects the proceeds from the First
National Bank.

This leaves the First National Bank with cash, 420,000 (being 25 ;1; of

the deposit) and ;,160,000 of loans.

The

econd National Bank repeats the operation,

lending 75 !> of its cash, or .$45,000, the chock for which is de osited In the Third

Nati-nal Bank.

This operation is constantly being- repeated, no that posnibly

in a few days, a consolidated statement maee by all the banks in the community
which participate in the resulting transactions would show:
Deposits, $320,000.

e240,000;

Cash, 480,000;

Loans,

There has now been erected a pyramid of bank de-

posits resting upon the original 00,0u0 of gold, in the rate of 4 to 1.

The ratio

is, in fact, nearer 8 to 1 in actual practice throughout the whole system of ,leseri'ehould the original deoositor draw a check on the 080,1,00 deposit, it

can Banks.

Bill likely be deiosited in another bank, and the same expansion will occur through
the use of the money by siellar successive o;fieratienn in various banks.

The same

result arises if the chock in used to say an exinting loan, the bank which has the
loan paid off thereby converts the amount of its loan into cold, that is to say,
into reserve roney, and may then make a nee loan and start anew the same euccessive
operations.

Our Cheekily systole has, of course, facilitated this expansion, and

the use of ehocks has become such a necessary convenience to the public that in
cities containing-; a number of banks, the bankers have forced associations for clear-

ing, (that is for collecting and
are drawn upon each other.

the checks they receive on deposit which

':'very =online they take all these checks to the clear-

ing. hone°, where each bank receives or lAyS in cash only the difference between
the amount of the chocks it has received froze its depositors for collection and the

amount of checks drawn on it which the other bankn have received.
By this boa s, gross daily paymentn between the banks of New York City,
aggregating hundreds of millions, are settled by net .eyments of & few millions
only.

The saving in tine, clerk hire and risk to effect thin clearance of checks

has been of vast benefit to the banks onsi to the public.

You will observe that while the collection and

:feymient of the claire of

the banks duo to and from each other by this moans necessitate° only a minimum disturbance or shiftine of reserves within the limits of one con. unity. it in in fact,

a community methed by which the banks discharge their obligations to each other.
This will be referred to later.

-5-

Returninc to the original depositor, what happens if he draws a check

for .440,000 on his 40,000 deposit and sends it to some other !.Aart of the country?
If he remits the check to the south to pay for cotton lurchased, the
chock will be deposited in a Southern bank and by that bank will be remitted to
:;ear York for collection.

The Southern bank, possibly requiring cash to enable

the manufacturers and farmers in its comunity to -..ay laborers and farm hands will
instruct its Now York correel:ondent to ship the gold south.

The ser-md chart will

illustrate ,that results:-

C ONTRACTING
REDUCTION

Cash
let Datl.Cash
Loans
Deposits

20,000
60,000
80,000

10,000

2nd 7atl.Cash
Loans
Deposits

15,000
45,000
60,000

7,500

3rd Est1.0ash
Loans
Deposits

11,250

5,625

3.5,750

4th Nat1.0ash
Loans

Deposits

Loans

Deosits

C -tsh

puesits

Loans

10,000

30,000

40,000

40,000
7,500

22,500

30,000

30,000
5,625
16,875

16,875

22,500

45,000
8,437.50
25,312.50
33,750

BA-14ANC3F,

4,218.75

4.218.71,

12,656.25

16.875
etc.

etc.

16,875
etc.

40,000

(ate .

120,000

etc.

160,000

The withdrawal of the 440,000 of gold from the First National Sank then
necessitates its calling for payment of a loan of 430,000, the proceeds of which,
together with ;:10,000 of its reserves are shipped to the southern bank.

The borrow-

er draws a Check for .;30,000 on the Seconkl National to plv the loan, which has ben

called, thus causing that bank to require payment of 22,500 of its loans, the proceods of which, with ,':;,7,500 of its reserves, effects the payment to the First National

-6-

Bank, and so, again, by successive operations, the pyramid of banl: deposits and
loans, erected as the result of the original deeosit of ,;:80,000 has been reduced

one-half by the withdrawal of e40,000, leneing, in fact, the cons :lidated state-

ment of the various banks earticieatine in these transactions:

Loans, 20,000 and

Cold, 440,000;

Deposits, 0.60,000.

Our National and State banks cannot extrid their busineseby a 'system
of branches, throhout every section of the nation, as is done in other countries.
3o the chock sent to the South must be collected, and distance prevents offsetting
in the manner possible through a city Clearing House.

Kerchnnts in the North

sell

their (epode in the youth, farmers, in the South, sell their produce in the North.

The buyers and sellers send checks back and forth in payment, and eettlement of
the balances resulting from the ebb and flow of domeetic cercerce requires the
shipment of vest suna of money from on© fart of the country to another, at great
cost and some risk, and gives rise to sectional contraction and expansion as doFurthermore, an unusual volume of

acribed in the case of the individual bank.

purohases by one section from another section may result in positive shortage of
credit in the buying district which may necessitate the banks of that district
borrewine from the banks of other sections.

In a country where so large an area

is devoted to agriculture, the requirements of the farmer causes a reenlae seasonal
demand for currency and credit between the sections.
simple example.

It may be illustrated by a

The farmer of the South begins in the tiering to prepare his lend

for a crop of cotton.

He buys fertilizers and seed, food for his family, laborers

and stock, farm implements and other supelies.

As his purchases and his ea

ants

to his laborers increase, he becomes indebted to a local merchant, frequently giving the nerchant a mortgage on his cotton crop before it is picked or oven grown.
The merchant is likewise buying_ these supplies from implement and dry coeds houses,

meat packers and other merchants in the North.

He finances his requirements by

borrowing froe the local bank, which may have so many such borrowing clients, as to

-7-

exhaust its own lending facilities, whereupon it borrows from a larger bank in a
section where credit is available, say in New York.
For the production of the cotton crop, the farmer hes borrowed from

the

Southern merchant, the merchant from the Southern bank, the Southern beam: from

the Northern bank, and the Northern bank has shipped the borrowed gold or currency
to the South.

The chain of credit has crown with the growing crop, has extended

to the Northern reserve reservoir and roved some part of the reserves into the
sectien where the demand has arisen.

Finally, in the fall and winter, the crop

le harvested and partly sold to Northern spinners.

In :Aye. nt, the spinners remit

to the South checks drawn on New York banks, which the banks of the South, receiving on deposit free the sellers of cotton, send to their Northern bank correspondents for collection and receive credit for the proceeds.
Out of the proceeds of the cotton sales, the farmer pays his indebtedness to the merchant, the merchant pays his indebtedness to the Southern bank and
the Se/ Ahern hank pays its loan te the Northern bank;

the last of these payments

being effected by checks drawn by the Southern bank on its credit with its New
York correspondent.,

At the oame time, farmers and laborers have paid their store

bills owing the merchant with the currency or gold which had been shipped ;oath
earlier in the year and the merchants have de!emited the currency in the batik or
used it to pay bane- loans.
off.

The entire chain of loans and credits has been paid

The cash reserve.: of the Southern bank may then become excessive, and in

order to employ its funds profitably, it ships its surplus reaerve,(that is, gold
or currency,) beck to the North, where it is loaned possibly to the cotton spinner
to enable him to manufacture the very cotton for the production of which the eold
or currency was originally chipped to the South in the fall.
Now take a case in which the cotton is sold to an English spinner. The
Southern seller of the cotton draws a draft or bill of exchange on the Enelish
buyer, cay in London, payable at 60 or 90 days sight.

The draft on London is

sold to a New York bank, thus producing the same Now York credit and resulting
in the same liquidation of the chain of indebtedness created for the purpose of
producitko cotton.

The T:;ow York bank, however, sells this draft in London.

The

proceeds are placed to the credit of the Now York bank by its London correspondent,
and from this transaction an international credit is created in favor of this country.
Aporican imeorters of merchnndise from England purchase drafts drawn on the London
bank by the New York bank, in orCor to pay for goods purchased, so that, in this
instance, the shipnont and sale of the cotton to England, by means of these chocks
and drafts, has also effected payment for goods which our morthants have purdhaood
from that countr..

But, should the value of our exports of cotton and other come

modities far oc000u the value of what we have purchased from lIngland, thn New Yolic

bank may be unable to sell chocks on London at satisfactory ratos of exchange and
in sufficient quantity to exhaust its balance there.

It may be more profitable to

loan those funds at home, whereupon it instructs its London bank corrospondont to
ship gold to this country.

If we consider that the shipment of gold thus arranged

is the identical void first referred to as de?osited with the ?irst National Bank,
it will be seen that the saeo gold starting; from London, has paid London's debt to

Now York for cotton, has thon b?on loaned to the Smith, or has paid New York's debt
to the South for cotton eurdhased, and in tho South it has served as a reserve for
loans created to oroduce cotton, or furnished currency for labor.

Later iu the

season, when the cotton is sold, the Southern banks, as described, may loan their
surplus funds in the north and the gold will move back again to New York.

iessibly,

the trade balance by that time. will

have turned in favor of England, when the gold

might again travel across the ocean.

Toe gold has moved between the one points as

has the merchandise, but in the opposite direction.
Two other bankine orerations should be briefly referred to.

Our Govern-

ment receivos and oays out every year hundreds of millions of money to conduct the
Government's business.

Payments to the Govrnmont, of duties, taros and other rev-

onuos, are made in the seine kind of money that serve as the cash reserves of banks.

-9-

At tines, the revenues of the Government have run tar ahead of its expenditures, and
at other times, unfortunately, the Government's revemeez are not sufficient to
meet its expenditures.

Our Government is dietinguished from the sovernmonts of other

nations in that it has an independent treasury syetam;

that is to any, its revenues

are said directly in cash to government agents and eeb-treesuries, and it has largely paid Ito bills by warrant or check neyable at the sub -- treasuries.

In recent

yeers, this systole has been shown to involve decided dangers to our banhing system,
in that it sometimes forces withdrawals of large Marc of cams: from the reeerves of

the banes which are locked up in the Treasury ceesine contraction Of credit, as before illustrated.

And when the Government's revnnuee arc insufficient and its

world/k7 balance as a result is paid out, large nume am forced on the nerket, that
is, are transferred from Sub-Treasury to Bane Reserves, causing posnibly an unhealthy exeaneion.

The Government has beco=me keenly alive to the feet that, in

handling its revenues and disbureeeents, it is either under the neceesity of al-

tornately withdemine and returnine huge sere of reserve noney feee and to the
banks, and possibly at met inconvenient and danrenene timee, or it must conduct
its none y transactions in greater velure throrgh beeka.

The Government hau, :hare -

fore, adopted the policy of depositing its funde in national banks threnehout the
country, in increasing voltwy although by a ceeberneme nethed.

In this, as in

other reopecta, experience showy the imperative neeeesity for a close working relationship heteeen the Government and the bents, in the handline of the Governments finances.

The last banking transaction to be mentirned I must eketch only too
briefly.

The conduct of business reqeiree the use of two great Instruments of exchange.

One is a deposit account or credit at a bank which nay be used for pay-

ing debte, or for makinE pnrchesee, by drawiug checks upon the account, and which
account may be created by borrowing from the bank.

The other is currency with which

to pay mill hands and far= lasorers, for retail mush transactions, pocket and till
moray.

I
-10-

It is not my purpose to discuss any of the many theories as to the best
form of this circulating medium.

Let us assume, in this illustration, that it is

simply the rate of the bank which is secured by some or all of its assets and the
p rox,t redemption of which is assured by an adoauato reserve of gold and by the

pledee of loans duo the bank, the payment of which will result in its accumulating
gold.

The use of this currene

will be illustrated if we assume that the

original depositor with the First National Bank is a large employer of labor and
that, once a week or once a month, he will withdraw a large payroll from the bank
in gold or currency.

If ho withdraws A0,000 of gold for that ,expose, the con-

traction first described results.

But if the bank has the means of converting its

deposit liability into a note liability, the customer's need iu served equally
well by using the notes and the bank's gold is nneffected, provided, of course,
no greater ratio of reserves is required for notes than for de,osits.

The notes,

however, once delivered to the depositor and paid to the mill hands, are used
by the mill hands in payment for their purchases and remain in circulation a considerable period of tire, whereas a check drawn on the account will be presented
for payment the same day or shortly thereafter, and if paid in gold or reserve
money, will result in contraction as described.

If, theref.re, demands for curren-

cy with which to make hand to hair} payments can be supplied freely by an issue

of the notes of the bank without materially disturbing its reserves, a useful purpose will certainly be performed in that a circulating medium is provided which
may be issued as business deeands its use an0 redeemed and cancelled when the amount
in circulation becomes redundant.

An analysis of the transactions described discloses the follewieg:
First:

she accumulation of cold in the banks results in the creation of

an inverted pyramid of credit resting teon a comparatively narrow foundation of
gold:

Second:

The payment and collection of checks in connection with the mak-

-11-

ins of loans and the withdrawal of deposits growing cut of the conduct of business
in a given coermmity necessitates the constant shifting of gold reserves between

the banks of that connmmity and results in expansion and contraction of loam
and deposits by the individual banks.
Third:

Commerce between the different sections of the country necessitates

the shifting of this gold reserve between the different sections of the country,
giving rise to expansion and contraction of credits in the different sections;
Fourth:

A similar shifting of the renervee of gold between the different

nations is necoesitated by the exchange of comeorce Between nations, also, giving
rise to expansion and contraction of credits in the
Fifth:

countrion affected:

The Governnent becomes a factor in this process of expansion and

contraction when the collection of its revenues or paynent of its expenses results
in doposite or withdrawals of gold, the same as in the case of an individual doposit, only on a ranch larger scale;
Sixths

The daily transactions performed by the use of cash or currency

between individuals for which checks cannot be employed tiny be &inducted by the use

of notes of the bank which can be substituted as a liability in place of its liability to its depositor, and thereby conserve the bank's gold reserve.
Few successful bankers will claim nowadays that their respcnsibility for
the conduct of the business of the bank is coy eletely fulfilled by the observance

of the law and by running their business to the satisfaction of their stockholders
and depositors.

They recognize their duty to do their share, in good and bad times,

to protect, not

nly their own, but their competitors' credit;

for the ccndnct of

the business of the world depends upon the confidence felt by the public in the
ability of the bankers as a whole to maintain thin structure of credit represented
by the deposit and note liabilities of banks at all tines and under all conditions.
In the case of tho local community, first rentioned, where the banks are
associated in a Clearing House, their responsibility to one another is commonly
recognized.

In tines of difficulty, se

of thn banks in a connunity may be called

-12-

on to meet needs of their depositors to withdraw deposits or for loans in excess
of their cash resources.

In such cases, as in 1907, and again in August and

September of last year, the Clearing HOueo banks of New York permitted those cf
their membere who needed to do so to settle the not balances of exchangos, not in
cash, but by borrowing from the other members.

By the use of loan certificates they

were enabled to borrow frog all the other Clearing house banks for a time instead
of ineediately paying chocks drawn upon than in cash.
tion of the principle of mutual obligationsi

Surely, this is a recogni-

And in recent times the banks Which

are associated in Clearing Houses, recognizing their obligations to each other,
have frequently agreed among themselves upon a plan for exmaination by examiners
employed by the Clearing House Association for the purpose of further protecting
the community and one another.

In the case of the different sections of the country, the plan recently
arranged for providing a large credit for loans to Southern borrowers on the security of cotton affords a striking illustration.

By roason of the war, the value

of cotton has boon reduced this year to one-half of last year's value.

.southern

farmers, merchants and bankers feared that it woeld be Impossible to narket a large
part of the crop, and to the extent that it was marketed, that it might not produce sufficient value to enable than to pay their debts.

An apnoea to the bankers

of the country resulted in the pledge of $100,000,000 by thy- banks of the North

and West to be loaned upon the security of cotton in order to relieve the Southern
lender of the neceesity of forcing the sale of his collateral at a sacrifice. The
obligations of bankers in one section to the bankers and businees non of another
section could not be bettor illustrated.
The international brotherhood of men kind in natters of credit, forces its

recognition upon th- banker as soon as his cold is required to meet a foreign debt.
He becomes the medium through whom the great international credit transactions
growing out of commerce are adjustod, and upon him the country depends for the

settlement of the balances in gold.

A situation arose, as a result of the war, in respect of our country's
indebtedness to ftrope which brought home to the peoelo of our country the extent
of its dependenoe upon the banks and their managers in these matters.
New York had borrowed :e80,000,000 abroad.

The city of

lore:heats and bankers were aloe large-

ly indebted to merchants and bankers of !urope.

The outbreak of the war necessi-

tatod an unexpectedly prompt payment of a large .art of this debt.

;early 1,600

banks of the United States entered into an eereement to furnish a total of
400,000,000 of gold for shipment to l'urope, if required, in order that the city
of New York and other ,alerican debtors might promptly meet their engagements. The

possible drain upon the reserves of the banks as a result of this engagement and
of other demands growing out of the war justified tho Secretary of the Treasury
in depositing large sums of gold held in the Treasury with various ha: ke through-

out the country, and the gold resources of the government, as well as of the banks
were brought to the relief of a situation which might have caused serious embers
rasement to both the creditor and the debtor.

The shock of the war likewise caused some panicky feeling throughout the
country in the minds of the people who feared that they would not be able to got
nonotry (that is to say, eel° or currency) from the banks with which to conduct their
business.

In 1907 similar fears became so exaggeratod as to result in the hoard-

ing of large sums of money for which a premium of 3 or 4

was paid, and a similar

occurrence last year, coming at a time when our debts abroad had to bo paid might
have resulted in such huge withdrswale of reserve cash from the banks as to cause
a moat

clangor:us

contraction.

This derand was met, not by paying gold out of bank

reserves to those who demanded currency, but by the 'saw) of nearly :400,000,000
of bank notes which were secured by the pledge of a portion of the assets of tho
banks.

Had the withdrawal been gold, the contraction of loans resulting therefrom might have brought disaster to our country's business.

In effect the banks

-14-

substituted note liabilities for deposit liabilities and conserved their gold
reserves.

Dealings in credit as vast and complicated as are required for the conduct of industry and commerce result in a conntant increase ftriA decrease in the

denosit and loan accounts of the banks, and constant changes in the ratio of reserves to deposits and loans.

But a safe ratio must always be maintained, and it

is well to consider what causes may put the reserves in jeopardy and the situation
beyond the bankers' control.

A general or widespread loss of gold by the banks is frequently caused
by increased activity in business which, for its conduct, requires the use of an
increased supply of currency for :syerolls and hand to bend nayments, or by a demand for credit from one section of the country upon another section, which may
draw reserves from one section to another;

or by an adverse foreigh trade balance

resulting in shipments of gold to foreign countries;

or by high rates of interest

in foreign countries which induce loans to those countries, or by the locking up
of gold in the 2roasury through accumulation of the Government revenues, or by
hoarding.

A sound banking system, coupled with a recognition by bankers of their
mutual dependence upon each other, generally provides the means of mooting withdrawals of reserves arising from all of the causes mentioned, except from hoarding.

le danger causes the banker such a chill is that caused by the stupid, un-

controllable effort of foolish eeople to withdrew cold from the bank in tines of
distrust.

Unfortunately, our banking system formerly contributed to the possibil-

ity of this danger arising.

In such times, not only individuals, but the brinks

themselves, accumulate and lock Op gold.

eith over 2b,000 banes in the country,

some of them will at times insist upon building up their reserves beyond what is
regularly required.

Individuals also put gold in safe deposit boxes and other

places of sefety.
of meeting tho demand.

remedy for this aver-eresent danger is so effective as that
i'ortunately, our new banking system has provided moans for

-15-

the issue, when mak demand arises, of a note based upon the Resets of the now
Federal reserve banks, which greatly ednInizes the danger of this occurrence,
usually brought about by the actions of coltish, unthinking people.
It is not difficult to realize that the custody of the gold upon which
credit rests, held as it is in this country by these 25,000 banks, and supporting,
as it does, credits of nearly twenty thousand million dollars, places a responsibility upon the banker, both to the Cover:leant and to the people, of wide significance indeed.

It cannot honestly be claimed that his responsibility is United to

compliance with the law, earning dividends for atockholders and meeting the domande of his depositors.

ills larger obligations must frequently be discharged for

the benefit of or in co-operation with his own competitors.

It extends throughout

the country as well as to the people of his own ierediate comeunity.
And now, within the pest five months, a groat military conflict hns
started, one of the consequences of which is to Impose upon our bankers increased
burdens and responsibilities of international importnnco.

We met :Topa= ourselves,

by a bettor understanding of our duties and of how they should be performed to help
ameliorate the distress and hardship which is certain to result from tho war and to
disturb the world of correrco and credit.

Already the effect of the war has boon to direct comnerce through nee
Channels, and, as banking credit is the hsnd-maiden of commerce, we must now ;repast
to undertake those banking obligations which are imposed by the enlargement of our
commerce.

fee must not subject ourselves to the criticism which would justly arise

were we to seek to nee the profits without assuming- our share of the responsibilitioe growing out of our increased participation in the world's comeerce.

ee came

not be camp-followers profiting from the plunder of the battle field and capitalizing the misfortunes of our sister nations.

If we are to enlarge our usefulness by

furnishing a larger supply of food and clothing to the rest of the world, we must
likewise enlarge our usefulness by anablino our banks and merchants to extend credit
facilities to our nee customers.

-16--

The occurrences of 1907 (a year of serious eanic and distress) emphasised the urgent need for intedinte studs and revision of our banking- lees.

Our

note issues were inelastic, and their volume had no relation to the demands of
the people for currency to effect belie to heed exehanpos nor could they expand and
contract with fluctuating demands.

No check could be interposed to the expertee

tion of gold resulting from adverse trade balances or higher rates of interest in
foreign markets, and no machinery existed to enable the banks to readily convert
their resources so as to satisfy enlerged demands by their customers for both credit
and currency.

:;or could the Government'a revennee be deposited in banks with the

freedom required.

Congress has now created twelve institutione, (the federal r serve banks;

into which have been paid over tuo,000,000 of the reserves of the national banks
and subsequent eaynents, by both the Government and the b: z, it la hoped, will
increase this accumuletion of gold in the one con non reeervoir to mere than
5.00,000,000.

The reserve banks ere authorized to eerform five principal functions

that relate directly to the occurrences which I have described and for the control
of which this country has heretofore boon inadequately equipped.
They furnise the means whereby the banks of the country may convert their
assets into credits, and thereby increase their credits to their ceetemers, without the use of emergency reasur-s

such as the clearing house loan certificate

first mentioned.

They will in tire furnish facilities fora more prompt and economical
settlement of domestic exchanges, and the balances r.eultine therefrom, without

the risk and expense of actual transfers of snob large =rents of reserves, and
with a minimum sectional expansion and contraction.
They provide for the prompt iesue of currency ac business: derands its use,

and the liquid character of the assets of the banks, with their 'ere° gold reserves,
Insure prompt redemption of Lhia currency when Its use in no longer required.

They will serve as the depositaries of the revenues of the Government,

-1 ?-

thereby -

iding the contraction and expansion canned by the independent operations

of the Treasury.

Of oven greater in

in such tines as during the past few menthe,

they may become the instruments, throuja a Judicious influence upon interest rat-s,
and a wise use of credit, for exercising a certain reasure of control aver the importation and exportation of gold.

By that means, they may protect our banking

system as a whole against the dangers of too violent expansion or contraction, too
suddenly imposed, as a result of an uncontrolled international movement of gold reserves.

The conduct of business by conretitive methods is an economic contest
no less than is the war now raging in Turopo a military contest.

Credit (that is,

the facilities of the banking. systerd has become the most necessary instrument in
the successful conduct of business.

In a national sense, the machinery of credit,

in order to be safely and successfully employed in the interest of the country's
and commerce, mast be mobilized under the leadershil: of a general staff

and by a comprehensive plan upon much the sane principles as those upon which an
army is mobilized.

-A are now putting into practical operation a better

:nception of the

functions of banks based upon a recognition of the principle that a co-ordination
of banking interests and a centralized control of banking reserves afford a greater
protection to the banker and results in a better service to the public.

r e 8.

P
L-ist-ct

You will recall Ifir.Taft's

statement that the first

If you choose banking; as an occupation,

the important part of your education will commence the day
you enter the bank, and your success will depend upon your
mastery, by hard work

and close application, of both the

While the measure of commercial success is commonly
expressed in dollars, any honest vocation in which the
material reward of ability and hard work is making money,
can also be made to contribute toward the making of good
or bad citizens.

If a life of hard work is concluded

with the reward of simply a huge estate, the worker may
find that he has missed or overlooked the aocomplishment
of purposes which would have produced infinitely greater
satisfaction than will the possession of property.

a are

now witnessing the growth of convictions regarding standards
of citizenship in business affairs which are having a profound effect upon our laws and our business methods.

But

ignorant abuse of bankers and banking methods must not be

allowed to prejudice your decision, nor should it lead you
to beleive that bankers are wholly selfish, that their
business is sordid, or that their point of view is a narrow one.

414

74140

ideal for which a lawyer must strive, is thorough professional education.

4o, 2

IJX74,

-2-

Banking is, in fact, the

binder of commerce and brings the successful banker into contact with every manner of business enterprise. Should you undertake that work it will be better done if you realize that it
has a purpose of large significance, and that you will assist
in the discharge of obligations to the public and services to
the Government which bring satisfying rewards, while not interfeering in the least with the exercise of your talents to earn
dividends for stockholders.
ItZr. Paul Y. Warburg, in his pamphlet on "Me Discount

.system in Europe', has forcefully stated the great problem
ofbanking in the following language:
"If banks were to keep, in cash, all the

money deposited with them, business would come
to a standstill and a crisis would ensue.

banks were to lend to those who apply for loans
all the money on deposit with them, a general
panic and collapse would follow a short period
of everstimulation. Between these two extremes
lies the middle course, the finding of which is
the problem, and its practice the art of banking."

The purrose of this paper is to illustrate, by a few
simple examples, how the banking credit structure grows
upon, and is supported by the gold reserves; how these
reserves,

of necessity,

-3-

are constantly shifting from one institution to another,from
one section to another, and from one country to another,and

how important duties and responsilibities in the custody and
control of these gold reserves extend with our commerce
throughout the world.

The operation I shall mention occur in endless variety
in the operation of the banking system with which you are
already familiar, They will, therefore, be best suited to
bring out the points that I have in rind, and incidentally,

they will illustrate some of the defects of the old system
and permit me to point out in conclusion the beneficial effects
that our new system will have in this respect.

EXPANDING

TOTALS

CHANGES
CASH

60,000
Lst.Nat. Cash
Loans
Deposits 60,000

- 60,000

2nd Nat. Cash
60,000
Loans
Deposits 60,000

45,000

LOANS

DE.PuSIT°

CASH

DEPOSITS

LOANS

20,000
+60,000

60,000
80,000
15,000

+45,000

45,000
60,000
1

3rd hat. Cash
45,000
Loans
Deposits 45,000
33,750
4th Nat. Cash
Loans
Deposits 33,750

11,250

- 33,750
+33,750

33,750

45,000

25,312,50

8,437.50

+25012.50

25,312.50
33,750

etc

eta

etc

80,000

etc

240,000

etc

320,000

A bank,
of

(

call it the First National), receives a deposit

80,000 of gold, which the depositor brings to this country

from Europe.

Bear in mind that this gold does not come out of

another American bank in payment of a check drawn by the depositor, but is new money imported from Europe.

The bank then shows

as an asset the 'S80,000 of gold, and as a liability the r,80,000

oweing to its depositor.

As it is only required to keep, say

25 s cash in its vault as a reserve against its deposit liability,
(as until recently was tne case with national banks in the cities
of New York, Chicago and -A. Louis),it loans

'60,000 to a borrower,

for wsich it issues a check. The borrower deposits the check in
the Second hational Sank,which collects the proceeds from the
First National Bank.

This leaves the First National Sank with

cash, e20,000 (being 25

of the deposit) and

60,000 of loans.

The second National Bank repeats the operation, lending 75

its oash, or e45,000, the check for which us deposited in the
Third National Bank. This operation is constantly bein

repeated,

so that possibly in a few days, a consolidated statement made by all

the banks in the community which participate in the resulting
transactions would show: Cash '80,000, Loans,

240,000; Deposits,

S320,000. There has no'r been erected a pyramid of bank deposits

resting upon the original '80,000 of gold, in the rate of 4 to 1.
The ratio is, in fact, nearer 8 to 1 in actual practice through-

out the whole system of American Banks.
depositor draw a check on the

Should the original

'80,000 deposit, it will likely

be deposited in another bank, and the same expansion will
occur through the use of the money by similar successive
operations in various banks.

The same result arises if the

check is used to pay an existing loan, the bank which has the

-5-

loan paid off thereby converts the amount of its loan into
gold, that is to say, into romer-re money, and may then make

a new loan and start anew the same suuce23ive operations.
Our checking system has, of course, facilitated this expansion, and the use of checks has become such a necessary con-

venience to the public that in cities containing a number cf
banks, the bankers have formed associations for clearing,
(

that is for collecting and paying), the checks they receive

on deposit which are dravai upon each other. it icry morning

they take all these checks to the clearing house, where each
bank receives or payc in cash only the difference between the
amount of the checks it has received from its depositors for
eolleotion and the amount of checks drawn on it which the other
banks have received.

By this means, gross daily paynente between the bunks
of New York City, aggregating hundreds of millions, are settled
by net payments of u few millions only. Ylie eavine in time,
clerk hire are rltee to effect tniu olearanoe of ehecku hac
been of vat bevefit 1.(1 the benke and to the pn'elic.

You will observe thot while the collection and pay.:ent of the elvAmu of the, loeflAs dues to and /rum eLtult other

by this meane ecceecitytec only e minielpm disturbance or

eiifting of recervee rithin the limits of one: cmatunity,
it is in feet, a community method by which the Velars diuchar(;e

their otqleetions to each other. This win be referred to later
Returning to the oriainal depositor, what happen*
if he draws a check for e,!:1,000 on ::is :80,000 deposit and

rends it to some other part of the country?

If he remits the check to the South to pay for cotton
purchased, the check will be deposited in a

Southern bank

and by that bank will be remitted to New York for collection.
The Southern bank, possibly requiring cash to enable the

manufacturers and farmers in its community to pay laborers
and farm hands will instruct its New York correspondent to
ship the gold South. The second chart will illustrate what
results:-

C 014TfiACT1N0

lst.Nat.Cmah
Loans

20,000
60,000

Deposite0,000
15,000
2nd.Mat.Cash
45,000
Loans
Depoaits60,000
11,250
33,750
Loans
1;aposits45,0W

3rd.i;at.Cash

4thaat.Caab
Loans

8,437,50
25,312.50

r'eposits33, 750

40,000.00

120,000.00

160,000

-7-

The withdrawal of the !4.40,000 of gold from the First

Tational Bank then necessitates its calling for payment of
a loan of

30,000, tte proceeds of which, together with

I10,000 of its reserves are shipped to the southern bank.
The borrower draws a check for .,30,000

on the Second Nat-

ional to pay the loan, which has been called, this causing
that bank to require payment of ;22.500 of its loans, the
proceeds of which, with;;7,500 of its reserves, effects the

payment to the First National Bank, and so, again, by successive operations, the pyramid of bank deposits and loans,

erected as the result of theoriginal deposit of V30,000
has been reduced one-half by the withdrawal of

40,000,

leaving, in fact, the consolidated statement of the various
banks participating in these transactions:

Loans, a20,000 and

Deposits,

Gold, :.40,000;

1(30,000.

Our National and State banks cannot extend their

business, by a system of branches, throughout every section
of the nation, as is done in other countries. So the check
sent to the South must be collected, and distance prevents
offsetting in the mariner possible through a city Clearing
house.

Merchants in the North sell their goods in the South,

farmers, in the South, sell their produce in the North. The
buyers and sellers send checks back and forth in payment,
and settlement of the balances resulting from the ebb and
flow of domestic commerce requires the shipment of vast
sums of money from one part of the country to another, at
great cost and some risk, and gives rise to sectional contraction and expansion as described in the case of the individual bank.

by one

Furthermore, an unusual volume of purchases

section from another section may result in positive

shortage of credit in the buying district whioh may necessitate the banks of that district borrowing from the banks of
other sections. In a country where so large an area is devoted to agriculture, the requirements of the farmer causes
a regular seasonal demand for currency and credit between
the sec ions. It may be illustrated by a simple exazIple.
The farmer of the South begins in the .>pring to prepare

his land for a crop of cotton. He buys fertilizers and seed,

food for his family, laborers and stock, farm implements
and other supplies..As his purchases and his payments to his

laborers increase, be becomes indebted to a local merchant,
frequently giving the merchant a mortgage on his cotton crop
before it is even picked or even grown.

The merchant is

likewise buying these supplies from implement and dry goods

houses, meat packers and other merchants in the North. he
finances his requirements by borrowing from the local bank,

which may have so many such borrowing clients, as to exhaust
its own lending facilitiea,whereupon it borrows from a larger
bank in a section where credit is available, say in New York.

2or the production of the cotton crop, the farmer has
borrowed from the Jouthern merchant, the merchant from the
2)outhern bank, the Southern bank from the Northern bank, and

the Northern bank has shipped the borrowed gold or currency
to the .>outh. The chain of credit has grown with the growing

crop, has extended to the ;orthern reserve reservoir and
moved some part of the rcserves into the section where the
demand has arisen. Finally, in the Fall and 1inter, the crop
is harvested and partly Bold to Northern spinners. In payment,
the spinners remit to the 3outh checks drawn on New York banks,

which

the banks of the Uouth,receiving on deposit from the

-9-

his indebtedness to the Southern bank and the southern bank
pays its loan to the Northern bank; the last of these pay-

ments being effected by checks drawn by the Southern bank
on its credit with its new York correspondent.

At the same

time,farmers and laborers have paid their store bills owing
tie merchant with the currency or gold which has been shipped South earlier in the year and the kerchants have deposited the currency in the bank or used it to pay bank
loans. The entire chain of loans and credits have been paid
off. The cash reserves of the Southern bank may then become
excensk.re, and in order to emnloy its funds profitably, it

shins its surplus reserves,( that is,

;'old or currency),

back to the Tiorth, where it is loaned possibly to the cotton

spinner to enable him to manufacture the very cotton for the

production of which the <old or currency was originally shipped to the South in the Fall.

Now take a case in which the cotton is sold to an English
sninner. The Southern seller of cotton draws a draft or bill
of exchange on the English buyer, say in London, payable at
60 or 90 days sight.

The draft on London is sold to a New

*York bank, thus producing the same New York credit and result-

ing in the same liquidation of the chain of indebtedness
created for the purpose of producing cotton.

The !ew York bank,

however, sells this draft in 'bondon. The proceeds are placed

to the credit of the New York bank by its London correspondent,
and from this transaction an international credit is created

-10in favor of this country. Ps:lerican importers of merchandise

from England purchase drafts drawn on the London bank by
the New York bank, in order to pay for goods purchased, so
that, in this instance, the shipment and sale of the cotton
to England, by means of these checks and drafts, has also
effected payment for 0;oods which our merchants have pur-

chased from that country. But, should the value of our ex-

ports of cotton and other commodities far exceed the value
of what we have purchased from England, the New York bank
may be unable to sell checks on London at satisfactory
rates of exchange and in sufficient quantity to exhaust
its balance there. It may be more profitable to loan
tsese funds at home, whereupon it instructs its London bank
correspondent to ship gold to this country. If we consider
that the shipment of gold thus arranged is the identical
gold first referred to as deposited with the First rational
Bank, it will be seen that the same cold starting; from London, has paid London's debt to New Irork for cotton, has then

been loaned to the South, or has paid Lew York's debt to the
south for cotton purchased, and in the South it has served
as a reserve for loans created to produce cotton, or furnished currency for labor.

Later in the season, when the cotton

is cold, the Southern banks, as described, may loan their
surplus funds in the Forth and the sold will move back again
to Yew York,

Possibly, the trade balance by that time, will have turned in favor of England, when the gold might

again travel

across the ocean. The gold has moved between the same points
as has the merchandise, but in the opposite direction

Two other banking operations should be briefly referred

to. Our Government receives and pays out every year hundreds
of millions of money to conduct the Government's business.
Payments to the Government, of duties, taxes and other revenues, are made in the same kind of money that serve as
the cash reserves of banks. At times, the revenues of the
Government have run far ahead of its expenditures, and at
other times, unfortunately, the Government's revenues are
not sufficient to meet its expenditures.

Our Government

distinguished from the governments of other nations in
that it has an independent treasury system; that is to say,
its revenues are paid directly in cash to government agents
and sub-treasuries, and it has largely paid its bills by

warrant or check payable at the sub-treasuries, in recent
years, this system has been shown to involve decided dangers
to our banking system, in that it sometimes forces withdrawals of large sums of cash from the reserves of the banks
which are locked up in the Treasury ca;ising contraction of

credit, as before illustrated. And when the Government's re-

venues are insufficient and its working balance as a result
it paid out, large sums are forced on the market, that is,
are transferred from Sub-Treasury to 'Thank leserves causing

possibly an unhealthy expansion.

The Government h,ls become

keenly alive to the fact that, in handling its revenues and
disbursements, it is either under the necessity of alternately withdrawing and returning huge sums of reserve money
from and to the banks, and possibly at :lost inconvenient
and dangerous times, or it must conduct its money transactions in greater volume through banks. The Government has,
therefore, adopted the policy of depositing its funds in
National

banks throughout the country in increasing volume

-12--

although by a cumbersome iethod. In this, as in other
respects, experience shows the imperative necessity for
a close 'norking relationship between the Government and

the banks, in the handling of the Governments finances.
The last banking transaction to be mentioned I must
sketch only too briefly.

The conduct of business requires the use of two
great instruments of exchange.

One is a deposit ac-

count or credit at a bank which may be used for paying
debts, or for making purchases, by drawing checks upon
the account, and which account may be created by borrowing from the bank,

The other is currency with which to

pay mill hands and farm laborers, for detail cash transactions, pocket and till money.

It is not my purnose to discuss any of the many
theories as to the best form of this circulating medium.
Let us assume, in this illustration, that it is simply
the note of the bank which is secured by some or all of
its assets and the prompt redemption of which is assured
by an adequate reserve of ;-old and by the pledge of loans

due the bank, the payment of which will result in its accumulating gold.

The use of this currency will be illustrated if we

assume that the original depositor with the first Rational
Bank is a large employer of labor and that, once a week or
once

month, he will withdraw a large payroll from the

bank in gold or currency. If he with draws $40,000 of gold
for that purpose, the contraction first described results.
But if the bank has the means of converting its deposit

liability

into a note liability, the customer's need is

-1:5-

served equally well by using the notes and the bank's
gold is unaffected, provided, of course, no greater
ratio of reserves is required for notes than for deposits.

The notes, however, once delivered to the

depositor and paid to the mill hands, are used by the

mill hands in payment for their purchases and remain
in circulation a considerable period of time, whereas
a check drawn on the account will be presented for ray -

rent the same day or shortly thereafter, and if paid
in gold or reserve money, will result in contraction
as described.

If, therefore, demands for currency

with which to make hand to hand payments can be sup-

plied freely by an issue of the notes of the bank
without materially disturbing its reserves, a useful
purpose will certainly be performed in that a circulating medium is provided which may be issued as business

demands its use and redeemed and cancelled when the
amount in circulation becomes redundant.
An analysis of the transactions described discloses
the following:
First:

The accumulation of gold in the banks re-

sults in the creation of an inverted pyramid of credit
resting upon a comparatively narrow foundation of gold:
second:

The payment and collection of checks in

connection with the making of loans and the withdrawal
of deposits growing out of the conduct of business in
a given community necessitates the constant shifting

of gold reserves between the banks of that community

and

results in expansion and contraction of loans and

-14-

deposits by the individual banks.
Third:-

Commerce between the different sections of

the country necessitates the shifting of this ;7,-old reserve

between the different sections of the country, 81ving rise
to expansion and contraction of credits in the different
sections;

Fourth:-

similar shifting of the reserves of cold

between the different nations is necesstated
exchange

by the

of commerce bet' ern nations, also, giving rise

to exp&nsion and contraction of credits in the countries
affected:
?fifth:-

The Government becomoo a factor in this pro -

eese or expansion and contraction when the collection of its
revenues or payment of its expenses results in

eposits or

withdrawals of gold, the same as in the case of an individ..

ual deposit, only on a much larger scale;
s=ixth.:-

The daily transactions performed by the use

of cash or currency between individuals for which checks
cannot be employed may be conducted by the une of notes of
the bank which can be substituted as a liability in place
of its liability to its depositor, and thereby conserve
the bank's cold reserve.

Few successful bankers will claim nowadays that their
responsibility for the conduct of the business of the bank
is completely fulfilled by the observance of the law and by
running their business to the satisfaction of their stockholders and depositors.

They recognize their duty to do

their share, in good and bad times, to nrotect, not only

-15-

their own, but their competitors' credit; for the conduct
of the business of the world depends upon tne confidence

felt by the public in the ability of the bankers as a
whole to maintain this structure of credit represented by
the deposit and note liabilities of banks at all times
and under all conditions,

In the case of the local community, first mentioned,

where the banks are associated in a Clearin

House, their
recognized, In

responsibility to one another is commonly
times of difficulty, some of the banks in a

community

may be called on to meet needs of their depositors to
withdraw deposits or for loans in excess of their cash resources.

In such cases, as in 1907, and again in August

and september of last year, the Clearing House banks of

New York permitted those of their members who needed to do
so to settle the net balances of exchanges, not in cash,
but by borrowing from the other members.

By the use of

loan certificates they were enabled to borrow from all the
other Clearing house banks for a time instead of immediately paying checks drawn upon them in carli. Surely, this is a

recognition of the principle of mutual obligations', And in
recent

times the banks which are associated in Clearing

ouses, recognizing their obligations to each other, have
frequently agreed among themselves upon a plan for examin-

ation by examiners employed by the Clearing douse Association for the purpose of further protecting the community and
one another.

In the case of different sections of the country, the

plan recently arranged for providing a large credit for
loans to southern borrowers on the security of cotton affords

-16-

a striking illustration.

Ey reason of the war, the value

of cotton has been reduced this year to one-half of last
year's value.

Southern farmers, merchants and bankers

feared that it would be impossible to market a large part
of the crop, and to the extent that it was marketed, that
it might not produce sufficient value to enable them to
pay their debts. An appeal to the bankers of the country
resulted in the pledge of ;:1001000,000 by the banks of the
North and

rest to be loaned upon the security of cotton

in order to releive the Southern lender of the necessity
of forcing,

the sale

of his collateral at a sacrifice. The

obligations of bankers in one section to the bankers and
business men of another section could not be better illustrated.

The international brotherhood of mankind in matters
of creoxt, forces its recognition upon the banker as soon
as his gold is required to meet a foreign debt.

He be-

comes the medium through whom the great international
credit transactions growing out of commerce are adjusted,

and upon him the country depends for the settlement of
the balances in gold.

A situation arose, as a result of the war, in respect of our country's indebtedness to :.urope which

brought home to the people of our country the extent of
its dependence upon tie banks and their managers in these
matters.

The city of New York had borrowed !.80,000,000

abroad. .:erchants and bankers were also largely indebted

to merchants and bankers of Europe.

The outbreak of the

war necessitated an unexpectedly prompt payment of a
large part of this debt. Nearly 1,500 banks of the United

http://fraser.stlouisfed.org/
states
Federal Reserve Bank of St. Louis

entered into an agreement to furnish. a total of

-17
160,000,000

of bold for shipment to Europe, if required,

in order that the city of New York and other American
debtors might promptly mest their engagements. The possible drain upon the reserves of thebanks as a result of
this engagement and of other demands growing out of the

war justified the 6ecretary of the Treasury in depositing
large sums of gold held in the Treasury with various banks
throughout the country, and the gold resources of the government, as well 'An of the banks were brought to the relief

of a situation which might have caused serious embarrassr:ient to both the creditor and the debtor.

The shock of the war likewise caused some panicy feeling throughout the country in the minds of the people who
feared that they would not be able to ,.-et money

(

that is

to say, gold or currency) from the banks with which to conduct their business. In 1907 similar fears became so exageftrated as to result in the hoarding of large sums of money

for which a premium of 3 to 4

was paid, and a similar

occurrence last year, coming at a time when our debts abroad
11,4 to be paid might have resulted in such huge withdrawals

of reserve cash from the banks as to cause a most dangerous
contraction. This demand was met, not by paying gold out
of bank reserves to those who demanded currency, but by the
issue of nearly $400,000,000 of bank notes which were secured by the pledge of a portion of the assets of the banks.

the withdrawal been gold, the contraction of loans

resulting therefrom might have brought disaster to our
country's business. In effect the banks substituted note
liabilities for deposit liabilities and conserved their
gold reserves.

Dealings in credit as vast and complicated as are

-18-

required for the conduct of industry and commerce result
in a constant increase and decrease in the deposit and
loan accounts of the banks, and constant changes in the
ratio of reserves to deposit and loans. Put a safe ratio
must always be maintained, and it is well to consider
what causes may put the reserves in jeopardy and the situation beyond the bankers' control.

A general or widespread loss of gold by the banks is
frequently caused by increased activity in buoineso which,
for its conduct, requires the use of an increased supply
of currency for pay-rolls and hand to hand payments, or by
a demand for credit from one section of the country upon
another section,which may draw reserves from one section
to another;er by an adverse foreign trade balance resulting in shipments of gol4 to foreign countries; or by high

rates of interest in foreigb countries which induce loans to
those countries, or by the locking up of gold in the Treasury
through accumulation of the Government revenues, or by
hoardin6.

A sound banking system, coupled with a recognition by
bankers of their mutual dependence upon each other, generally provides the means of meeting withdrawals of reserves

arising from all of the causes mentioned, except from
hoarding. No danger causes the banker such a chill as that
caused by the stupid, uncontrollable effort of foolish
people to withdraw gold from the bank in times of distrust.
Unfortunately, our banking system formerly contributed to
the possibility of this danger arising. in such times,

not only individuals, but the banks themselves, accumulate
and lock up gold.

With over

25,000 banks in the country,

some of them will at times insist upon building up their
reserves beyond what is regularly required.

Individuals

also put gold in safe deposit boxes and other places of
safety. No remedy for this ever-present danger is so effective as that of meeting the demand. fortunately, ur new bankin;_; system has provided means for the issue, when such demands

arises, of a note based upon the assets of the new Zederal
reserve banks, which greatly minimizes the danger of this occurrence, usually brought about by the actions of selfish, unthinking people.

It is not difficult to realize that the custody of
the gold upon which credit rests, held as it is in this country

by these 25,000 banks, and supporting, as it does, credits
of nearly twenty thousand million dollars, places a responsibility upon the banker, both to the rlovernment and to the

people, of wide significance indeed. It cannot honestly be

claimed that his responsibility is Itnited to compliance with
the law,earning dividends for stockholders and meeting the demands of his depositors.

Die larger obligation must frequent-

ly be discharged for the benefit of or in co-operation with
his own competitors. It extends throughout the country as
well as to the people of his own :Lmstediate community.

And now, within the past five months, a great military
conflict has started, one of the consequences of which is to
impose upon our bankers increased burdens and responsibilities
of international importance.

':!e must prepare ourselves, by

a better understanding of our duties and of how they should

be preformed

to help ameliorate the distress and hardship

which is certain to result from the war and to disturb the
world of commerce and credit.

Already the effect of the war has been to direct com-

merce through new channels, and, as banking credit is the
hand-maiden of commerce, we must now prepare to undertake
these banking obligations which are imposed by the enlarge
ment of our commerce.

We must not subject ourselves to

the criticism which would justly arise were re to seek to
reap the profits without assuming our share of the responsibilities growing out of our increased participation in the

wcrld's commerce, 7e cannot be camp-follovers profiting from
the plunder of the battlefield and capitalizing the misfortunes of our sister nations.

If we are to enlarge our use-

fulness by furnishing a larger supply of food and clothing
to the rest of the world we must likewise enlarge our useful-

ness by enabling our banks and merchants to extend credit
facilities to our now customers.
The occurrences of 1907

(

a year of serious panic and

distress) emphasized the urgent need for immediate study and
revision of our banking laws.

Our note issues were inelastic,

and their volume had no relation to the demands of the people

for currency to effect hand to hand exchanges nor could they
expand and contract with fluctuating demands. No check could
be interposed to the exportation of gold resulting from adverse trade balance or higher rates of interest in foreign
markets, and no machinery existed to enable the banks to
readily convert their resources so as to satisfy enlarged demands by their customers for both credit and currency. Nor
could the Government's

the

freedom required.

revenues be deposited ilk banks with

Conooress has now created twelve institutions,(the

Federal reserve bank) into which have been paid over
260,000,000 of the reserves of the national banks and
subsequent payments, by both the Government and the
banks, it is hoped, will increase this accumulation of
gold in the one common reservoir to more that ':,500,000,000

The reserve banks are authorized to perform five principal functions that relate directly to the occurrences

certificate first mentioned,

They will in time furnish facilities for a more
prompt and economical settlement of domestic exchanges,

and the balances resulting therefrom, without the risk and
expense of actual transfers of such large amounts of reserves, and with a minimum sectional expansion and contraction.

They provide for the prompt issue of currency as
business demands its use, and the liquid character of the
assets of the banks, with their large p'old reserves, in-

sure prompt redemption of this currency when its use is
no longer required.

They will serve as the depositaries of the revenues
of the Government, thereby avoidinff the contraction and

expansion caused by the independent operations of the

Treasury.

-22-

Of even greater importance in such times as during
the past few months, they may become the instruments, through
a judicious influence upon interest rates, and a wise use
of credits, for exercising a certain measure of control over
the importation and exportation of gold,

ay that means, they

may protect our banking system as a whole against the dangers
of too voilent expansion of contraction, too suddenly imposed
as a result of an uncontrolled international movement of
gold reserves.

The conduct of business by competitive methods is an
economic contest no less than is the war now raging in Europe
a military contest.

Credit

(

that is, the facilities of the

banking system) has become the most necessary instrument in
the successful conduct of business.

In a national sense, the

machinery of credit, in order to be safely and successfully
employed in the interest of the country's industry and com:erce, must be mobilized under the leadership of a general
staff and by a comprehensive plan upon much the same principles as those upon which an army is mobilized,

We are now putting into practipal operation a better
conception of the functions of banks wised upon a recognition
of the prinicples that a coordination of banking interests
and a centralized control of banking reserves affords i:Teater

protection to the banker and results in a better service to
the public,

THE FINANCIAL AGE.

national currency of uniform appearance
and of universal value everywhere
throughout the United States. That is,
it established an individual bank note of
uniform appearance and universal value.

The third great lesson taught by experience in American banking was the

the interest
be common counwake of this gigantic
blunder ofwillour
try. American
Will you people
do it?
a direct loss to the
every year of at least $100,000,000, or
$1 for every man, woman and child.
President
Haines:
Think of it, $100,000,000
every
year orWe will now proceed
with
the
program
10 per cent. of all the capital of all the as arranged, and
is an address
national banks inthe
thenext
country,
and yet on "The Federal

by Mr. Benjamin
System,"
this vast sum can Reserve
be saved to
the people
Jr., Governor
by the adoption Strong,
of the right
bankingof the Federal Reserve Bank of New York.
age,-the American Clearing House in system.
is not a single
there FEDERAL
assert
that
This
I
its most higlipr developed form.
THE
RESERVE SYSTEM.
unless like
the Jr., Governor of
unique institution has developed not only reason for its existence,
Mr. Benjamin
Strong,
other shockwithout the aid of law, but in a degree loss of the Titanic, or sotne
the Federal
Reserve Bank of
leads
ing, overwhelming cal ity, it now
in absolute defiance of law.
New
York.
nyielding
demand
to
a
persistent
and
Here, in the Anterican Clearing House,
Mr.
President
and
Gentlemen: I am
eform.
purely the product of experience, was for a true and real
sure
that
Congressman
Fowler will not
I assert that it ctinot
be
successfully
developed a model, a complete model
object
to
my
calling
your
by anybody, before attention to an
down to the last detail for an American defended anywhere,
error
the printing
of the program. It
any intelligent A ericaninaudience
where
Banking System.
seems
that
I
am
called
ce is illumined by the upon to address
Here then were all\ the essential ele- our own expert you
in regard to some features of an
of the eternal
nlight
all-pervading
ments of the most nattyal, most simple,
economic
monstrosity. (Laughter.)
economics.
most economical, mos efficient, most principles of banking
Now,two
unfortunately
ing
with
hearts in itsthe gentlemen who
A
human
perfect and most power I banking syswere
charged
withhearts
the duty of engaging ofheels, two arts in its knees, two
tem in all the world.
ficers in
forits
thehands,
Reserve
Bank failed to take
in
its
hips
two
hearts
two
First, the interconvertib ity of bank
into
consideration
that
certain
qualifications
two hearts in its
book credits, bank note cre s and gold. hearts in its elbows,
not
usually
required
for
bankers
apparshoulder
,
would
not
be
a
greater
physSecond, the individual ba k note of
ently
were
required
for
these
positions.
monstrosity than this act
uniform appearance and univ sal value iologic
Theypoint
should
selected men with some
ofhave
view.
is fro an economic
throughout the United States.
talent
for
speechmaking.
Ju now its managers are engaged in Our duties at the
Third, that most wonderful p duct of
office in New
York they
have been rather ardua
m
or surgical operation
by which
banking experience that has ev been
ous,a and
rather than
devote considerable
thirteenth
heart
evolved,-the American Clearing ouse pr ose to locate
time
to
careful
preparation
another limited amount of addresses in
with its Clearing House committe , its s. ewhere, with regard
Reserve
to thespecial
reserves
to
perform
some
or Bank, we have
its
united
reself-appointed examiner,
thought
best
to
ask
the
articular function, which with a proper bankers who are
serves and its issuance of bank credi
good enoughoccur.
to inviteInus to address them
system would automatically
All that was wanted was a knowled
to
let
us
make
very informal talks in rethe light of experience and the principles
of history; banking economics, a sing
gard toit the
work
thatasis being done, and
of banking economics
would
seem
ray of intelligence, the slightest degre
I
will
therefore
ask
your
though the task before the managers
of indulgence if the
of appreciation of the opportunity
matters
that
I want
this institution was
going
to be
as dif-to talk about this
hand, and even a partial comprehens.
afternoon
are very informally dealt with.
cult as it would be
for the physiological
of the needs of the country. Of co rse
Congressman
Fowler, I am sure, will not
onstrosity
to
walk
up
hill
backward
the
the work to be done was that o
object
to
my
referring
to one or two words
student, the statesman and the triot, o its head and hands.
Discussion of bankonly
of
his
remarks.
the
natural
opportunity
that
existed
mad
and not of the politician driven
ing
legislation
in
this
country,
as I recall,
fate to do something, whether ight or for e organization of a banking system
has
been
pretty
active
for
the
last
eight or
.een
utilized,
a
thousand
things
had
wrong.
ten
years.
If weout
areand
to have the real diswhich
would
have
to
be
worked
the
reBut the men charged wi
cussion
thatremains
Congressman
this Act
on Fowler suggests,
sponsibility of legislation, norant of forced hrough ifI am
afraid
weoccurred
will now have no time for
to
Books,
would
have
the
Sta
s
of
Amerthese great impressive less.
anything
banking
discussion, judging,
withoutbut
any
effort at
ican history, and still mo. ignorant of automatic.11y and
at
least,
by
the
activity
that has prevailed
all.
the great fundamental principles of
since
1907
in
efforts
to
I measu my words when I say that get better banking
banking economics, sup -imposed upon
He refers was
to a remark,
this
econo is law.
monstrosity
the possibly unfora naturally developed s uation that only
tunate,
that
this
new
law is 70 per cent.
waited the hand o organization, a natural mise ble miscarriage of a most
memory
of
one such remark
good. Mycohabitation
unnatural
and
disreputable
scheme that is wholl foreign to our init
was
80
per
cent.
good. And
was
that
stitutions and ban g practices, a de- of thoughts an forces that should never
Congressman
Fowler
considers
it 170 per
have
found
a
p
ce
in
this
great
work.
vice that is purel artificial and superI think
he is mistaken.
had. were
d forces
a single,
ficial, a gigantic extravagant machine These interests a cent.
lastorigin,
seven govyears of discussion, in
foreign
that must neces rily prove worse than economic thought .fThese
Congressman
Fowler himself parlegal
tender bank
useless because its tendency and effort ernment fiat issuewhich
very actively
and himself contribmbition,
personal
it to paralize nd destroy the true pur- notes, personal ticipated
uted ce,
toward
a better
benighted
par- understanding of
pose, the ul
ate and infinite advan- malice, insane preju
it did
these
problem,
if and
tionalism
un-nothing else, contages growl g out of the co-ordination tisanship, diabolical
the people of this country that our
influ nce.
and union of the American Clearing surpassed politicalvinced
a very different
one from any
e strangle
and
The question is,problem
shall was
House in a truly American Banking
that itexisted in Europe. We have in the
destroy
it and
or permit
strangle
System.

evolution of the most perfect mechanism
ever known in the banking world in any

destroy
signal
oppor nity and inThe f ct is that
when the
perfect
order

comparable
advantage
ve been brought
out of
a condi- of having the
most natural,
tion r e in opportunity,
chaos the
has most
been simp e, the most
economical,
the mostof
efficien the most
adde to chaos, while
the confusion
perfect
andcontroversy
the most powerf banking
con' itions increases
and the
in the
world,-that
is e quesgr s hotter be.:system
use of the
passing
of
t s tumble bug' tion.
t.
I appeal
C. -cf,
to to every banker here td study
could

this great question, as a trustee of our

Digitized
FRASER
Onefor
of
fil'inot
the commercial interests. I appeal to you
http://fraser.stlouisfed.org/
greate t in the all, as patriotic citizens, to study it in
Federal Reserve Bank of St. Louis

United States over 23,000 banking institutions. The are scattered over an

area equal to pretty much all of Europe.
Conditions are different in the different
parts of the country and at least twothirds or three-fourths of those institutions are governed by the laws of fortyeight different States. I think at least we
owe a great deal of thanks to those men
who devoted themselves, with tangible results. not reduced to percentages, however,

Vol. XXXI, No. 21

THE FI1ANCIAL AGE.

May 22, 1915

New Jersey Banks
affected by the recent boundary changes in the Federal
Reserve System, are invited to make use of the facilities of this
Company in the readjustment of their banking arrangements.
Interest credited monthly paid on active or surplus reserve accounts.
Detailed information upon request.

United States

Mortgage & Trust Company
New York
Capital and Surplus, $6,000,000

Member of the New York Clearing House Association.

Publishers of "Trust Companies of the United States"

have aroused such an opposition that we
may now have the much needed, the essential discussion to wise and ultimate

of banking economics, and would be the
rich fruitage of one hundred and twentyfive years experience of American bank-

carried the Government of France
through its wars and its revolutions,

action.

ing.

a kingdom to a republic, and from a

If, however, the Federal Reserve Bank
Act should serve any other purpose than

There have been three distinct evolutionary periods in American banking,
and each has taught us a great and essentially important lesson. Each has
established a great fundamental principle as applied to our pecular situation.
First: In thirteen different states,..
prior to the Civil War, we had de nstrated under the widest possi
range
of circumstances, the wis
and the
advantage of that all ,itbmprehending
banking principle lai . 'down by Alexander Hamilton, vvb he said:
"Every loanwhich a bank makes is, in
its first shiapf, a credit given to the bor-

republic to an empire, and from an empire to a republic, and has been the oftrepeated and final resort of the Bank of
England in times of great stress.

to arouse the American people, as

now promises to do, to a keen apprecia-

tion of their unfortunate situation and

threatened peril, and should by any
chance be allowed to cumber the statute

books, interfere with the organic life of
American banking and remain to curse

the commerce of the country, it will
prove the most stupendous economic
blunder ever committed in the economic life of this nation.
The Evolution of American Banking.
The whole history of Anglo-Saxon

civilization expressed in statutory law,
which is worth preserving, indeed which

is not a draw-back, a hindrance, an actual block to the advancement of t
race is the rich product of human e erience that finds expression in t practices and established
people.

habi

the

There is nothing tha as been more
clearly proved, perf y developed and
completely demo Crated in American
history than
anking system, which,
humanly s r king, would be absolutely
perfect
d so well adapted to our peculia conditions and particular needs

a o challenge
all criticism, for it would
http://fraser.stlouisfed.org/
be founded upon the eternal principles
Federal Reserve Bank of St. Louis

rower ()Ants books, the a

unt of which

it stands ready to pay eithe 'n its own
notes or in gold or silver at his tion."
Following

this

principle,

ton

drew the charter of the first bank of t
United States, and it became a law in
1791.

Undoubtedly, owing to the great success of this bank, and the very friendly
and intimate relations existing between
the United States and France in 1803,
France following the same principle, established the Bank of France, the most
successful and remarkable bank that has
ever existed in the world. It enabled

Napoleon to carry on his wars on a

metal basis. For more than a hundred
years this remarkable institution has

through its changes of government from

In the midst of a great business depression and when the credit of our
government was tottering in 1816 the
charter of the second United States bank
was granted.
A careful investigation, I think, would

disclose to any intelligent student that
owing to the success of both the first
and the second United States banks and
the close business relations existing between this country and Canada following
this same fundamental principle, the
Canadian Government granted three

bank charters in 1822, and to-day, exBank of France alone,
Canada has the best currency system in

cepting the

the world.

ut the United States, through political madness and insane party strife in
1832, and the supposed necessities of the
Civil War was torn from the safe moor-

ings of a scientific banking system and
has drifted so far out to the sea of
chance, and seem to have completely

forgotten the great

sson she taught

both France and Ca
But th>
us to le

rtant lesson for
esult of the Na-

tional

establi

THE FINANCIAL AGE.

S21

The

Seaboard National Bank
of the City of New York
earnestly solicits deposits from New Jersey Bankers. Personal
attention on the part of the officers is given to all accounts.
Capital

$1,000,000
2,825,000
35,000,000

Surplus and Profits (earned)
Deposits
S.

G. NELSON, Vice-President

L. N. De VAUSNEY, Assistant Cashier

to bringing about the law that has been
passed.
In fact, except some divine
inspiration had operated in the preparation of this law, I do not believe

the American people could expect one that
was 100 per cent. perfect.
Now, my own view of the law has somewhat changed since taking a position in this
system. Before the law was passed, with
many other bankers who I think were devoting themselves to serious thought on this
subject, I felt that one hank was what this
country wanted, as Congressman Fowler
has suggested. We have twelve banks.
With these we can well
Our problem just now

be
is

satisfied.
to as-

sist in the development of the system that
we

have,

that it will

serve

your

needs, and some of the work along that
line I would like to talk about.
I must not, however, pass the opportunity to express the satisfaction that some

of us feel at the apparent success of the
major surgical operation that was just
referred

to.

Those

131

banks

northern New Jersey that are shortly to
become members of the Second District
will receive a very warm welcome. (Applause.)

You will recall .that shortly after the
banks were organized, a circular, No. 13,
was issued by the Federal Reserve Board
in regard to commercial paper. That circular was later withdrawn and a new circular, No. 4, was issued in- i .. ace, the
Digitized
FRASER
effect offorwhich
was to leave
much
http://fraser.stlouisfed.org/
to the discretion of the me
s and
Federal Reserve Bank of St. Louis

G. BAYNE, President
C. C. THOMPSON, Vice-President
W. K. CLEVERLEY, Cashier
J. C. EMORY, Assistant Cashier

B. L. GILL, Vice-President

0. M. JEFFERDS, Assistant Cashier

the discretion of the officers of the Reserve Bank as to what paper was eligible
for rediscount by the member bank. Since
that time there has been issued a new circular and regulation which is to take effect on
July 15th. So many inquiries are being made
as to the exact procedure under that circular
and just what will be required after July 15
that we have had in course of preparation

a statement or letter which will express
as briefly as seems possible the views that
are entertained by the officers of our bank

bank shall be able to certify to its reserve
bank that it has a signed statement or
a copy of a signed statement of the borrower. As to the paper which they take
from their customers, no such certificate

is required in the case of a note of any
one customer or the obligation of any one
customer which does not exceed five thousand dollars in amount or does not exceed

10 per cent. of the capital stock of the
member bank. That is to say, a bank of
twenty-five thousand dollars capital can

on this matter so that the member banks

apply for a rediscount of notes of any

can readily observe its provisions. I would

one of its borrowers not exceeding twentyfive hundred dollars in amount without

like to read some portions of this circular,
which may, however, be changed at a later
date.

Circular No. 3, the one which takes effect July 15th, defines eligible paper and
provides that member banks will be expected to keep credit files showing the
condition of their larger borrowers in order to certify the eligibility of paper offered for rediscount after July 15, 1915.
Until July 15th, Circular No. 4 shows
how such eligibility shall be certified, but

making a certificate or stating that they
have in their files a statement of the borrower's financial condition. For larger
amounts credit bills will be required.
The Federal Reserve Banks must be prepared to make their resources available
when needed, to the commerce, industry and
agriculture of the country, to facilitate
production, manufacture or distribution.

That is the language that is employed in
the

ply.

regulation itself. Their resources
must, however, be kept liquid. Therefore,
except for a limited amount of agricultural

lar No. 3, and I would like to call your

paper, all notes rediscounted must mature within ninety days and must be

thereafter Circular No. 4 will no longer ap-

The judgment to be exercised, in
other words, will be controlled by Circuattention to the fact that that circular distinguishes between paper taken by members banks

from

their customers and

paper which they purchase from brokers
or through their bank correspondents.
As to all purchased paper, :he Board
has seen fit to require that each member

taken up by the banks which indorse them,

whether they are paid by the makers or
But the act and the regulation require that the original borrower's finannot.

cial condition shall also reasonably evidence
his ability to meet his current liabilities.
promptly. Stated negatively, this means

S22

THE FIN1NCIAL AGE.

Vol.

XX;

that a Federal Reserve Bank may not discount a member bank's paper which represents or is based on lands, buildings,
machinery or other fixed or permanent assets or on investment securities or on
goods carried merely for speculative purposes. Such paper does not contain the
element of self-liquidation, as it does not
represent goods in any of the stages of pro-

of
the concern to see if it has a reasonable from the reserve banks on the se
excess of quick assets over current liabil- bonds; conversely, it is no longer a., necities. But if Smith, a lawyer or physician, essary for member banks to carry bonds
merely borrows for household expenses or simply for the purpose of occasional borfor any purpose not commercial, industrial rowing, because the law permits the rediscount of their commercial paper when they
or agricultural, his note is not eligible.
Accommodation makers or endorsers do are in need of funds.
In examining the statements furnished us
not affect the eligibility of the note. The
eligibility depends primarily upon the pur- in New York by the member banks of
duction, manufacture and distribution. pose for which its proceeds are used.
our district I think there were something
The paper which in form evidences most
In the case of notes discounted by firms like seventy-five or eighty banks that resatisfactorily that it is self-liquidating is or corporations, if such firms or corpora- ported that they had little or no paper that
a note, bill or accepted draft, representing tions are engaged in commerce, industry was eligible to rediscount. We wrote each of
the obligation of the purchaser to the seller or agriculture, their notes are eligible, pro- those banks a letter asking them to either
for goods sold.
vided they show by statement or other- send an officer of the bank to see us or to
Let me say that there seems to be a wise that they have a reasonable excess write us and give a description of the chargood deal of misunderstanding as to of quick assets over current liabilities.
acter of the paper which they had in their
what might be called trade paper. Too
It is quite apparent that if a large bor- portfolios. We found on examination and
many of the member banks are under the rower in making a statement shows that in conversation with the officers that we
impression that they must in applying for his short borrowings, current liabilities, saw, that hardly any of those that replied
discounts submit only paper on which there current indebtedness, are in excess of his had less than 50 per cent. of eligible paper
are two obligations to pay, a maker and quickly available assets, some part of his in their portfolios; but their reports were
an endorser. That is not a fact. The test borrowings must have gone into plant or based upon a conception of what the reguof the eligibility of a note, which I will machinery or fixed assets. And that, in lation meant that was not accurate.
refer to later, is not of that character.
Many banks have been accustomed to
fact, is the principal test of the eligibility
This paper represents, in fact, an actual of paper, based, as I have stated, upon borrow on demand. The law does not
commercial transaction, and its payment is the character of the statement that the bor- permit the use of commercial paper as sedirectly related to the sale of the goods. rower makes.
curity to demand loans, but banks desiring
But the development in this country of the
In the case of purchased paper, eligibility short loans may select from their portopen credit granted by merchants and man- will be determined by the statement of folio paper having about the required time
ufacturers, and of the system of cash dis- the person, firm or corporation on the to run.
counts, offering advantages to purchasers strength of whose credit the paper is
The Federal Reserve Bank of New
with ample capital, has reduced the volume bought. If a reasonable excess of quick York has as members several of the largest
of self-liquidating paper and substituted assets over current liabilities is shown, as well as many of the smallest national
for it the promissory note on which work- the paper is eligible.
banks of the country. Its facilities are open
ing capital is obtained in order to carry
In the case of paper discounted by farm- on equal terms to all and it is prepared to
indebtedness due by customers on open ac- ers, unless the farmer makes a statement discount small as well as large notes. You
counts, as well as for the purchase of ma- (in which case the same test of quick as- may be interested in a few figures as to
terial. The provisions of the act and the sets over liabilities will apply), and if the exactly what discounting we have done.
regulation contemplate the rediscount of proceeds are to be used for seed, fertilizer,
Thirty-three banks have applied for rethe latter class of paper at Federal Re- feed, stock or current operating expenses, discount of paper, the total amount aggreserve Banks and it has so far constituted it is eligible, but it is not eligible if they gating $8,061,919.93. Only four of those
the vast majority in volume of the paper are to he used for lands, buildings or ma- banks were located in New York City; the
which our bank has thus far discounted.
other twenty-nine outside of the City of
chinery of a permanent nature.
In the case of the ordinary promissory
Eligibility and credit, of course, are not New York. The largest amount redisnote with or without endorsements, how to be confused. All notes discounted by counted on a single application has been
shall the member bank determine whether member banks are presumably good; some $2,182,500 and the smallest $1,700. The
it is eligible for rediscount with its Fed- are eligible and some are not, according largest single note rediscounted has been
eral Reserve Bank? This is most difficult to the purpose for which their proceeds are $300,000 and the smallest $25.40. (Laughin the case of notes discounted by indi- to be used.
ter.) Most of our applications come from
viduals. In such cases it would be advanA renewal is an indication that the debt member banks up the State and largely in
tageous to ascertain first the business of is not self-liquidating. But the regulation farming communities. I can say that the
the discounter. If he is engaged in com- makes the statement of the concern the paper that is offered for rediscount, which
merce, industry or agriculture, it may be test of eligibility. Whenever the statement is manifestly paper made by farmers, and
eligible. If he is not so engaged, it is not shows a reasonable excess of quick assets
very largely issued to buy fertilizer, stock,
eligible unless he uses the proceeds of the over current liabilities, a note, even if re- to some extent feed and other supplies in
note for commercial, industrial or agri- newed, may be considered eligible. What the spring season, has almost without excultural purposes. Smith may be a prac- is a reasonable excess varies with differ- ception been discounted, and much of it was

ticing lawyer or physician, but he may

also own a farm and his notes may be issued to purchase feed, fertilizer or stock,

or pay wages or other regular costs of
operating a farm, just as in the case of any
farmer.

Likewise Smith may also have

an interest in the local newspaper or other
industry.

A note issued by Smith for

industries. Packers maintain high
credit if they have say $1.50 of quick assets
for $1 of current liabilities. A manufac-

single name paper. It becomes double name

turer of jewelry possibly might make a
statement showing a large stock of gold

Applications for rediscount are almost
invariably acted upon when accepted, and

where the margin of quick assets would be
very small and yet the statement be a perfect test of the eligibility of his borrowings.

the proceeds credited on the day of receipt. There again is a delusion that in
some way or other there is a great deal
of red tape to uncut in connection with
the operation of discounting paper at
the Reserve banks. It is quite simple. A
number of banks have admitted to me

ent

money to advance to the newspaper would
be eligible for rediscount, provided it was

The more special the line the higher the

not to go into fixed assets, such as land,

strong endorser to permit the ratio to be

buildings or machinery.

reduced. But the excess should always be
reasonable considering all the circumstances

But if Smith should offer a note issued
by the person, firm or corporation running
the newspaper or other concern, it would
be evidence on its face that it had been
used for industrial or commercial pur
poses. In this case eligibility would he
http://fraser.stlouisfed.org/
determined by examining the statement of
Federal Reserve Bank of St. Louis

ratio expected, unless there is a sufficiently

in the case.
Many member banks in our district
carry bonds on which, as occasion required, they have been accustomed to borrow from 'heir reserve agents. The law
does not permit member banks to borrow

paper, of course, in our hands, with the endorsement of the member bank.

that they sent in some notes for discount just to see how it worked, and
they did not really want the money.
(Laughter.)

It is r"
collect;

ed it

practice to return paper for
he bank which rediscount-

ye or ten days before its

THE FINANCIAL AGE.

May 22, 1915

Fourth Street

National Bank
OF PHILADELPHIA

Capital

Surplus and Profits

$3,000,000
6,800,000

E. F. SHANBACKER, President
JAMES HAY, Vice-President
Ass't Cashier
W. A. BULKLI
FRANK G. ROGERS, Vice-President
W. K. HARDT, Ass't Cashier
R. J. CLARK, Cashier
C. F. SHAW, Jr., Ass't Cashier

Exceptional Facilities for Making Collections Throughout the World

ACCOUNTS INVITED
maturity. We charge it to the bank's
account on our books the day it matures.

It is not our practice to permit a mem-

ber bank to take up paper before the
date of maturity except in special cases

where the maker of the note has been
permitted by the member bank to anticipate his note. In such cases we have
generally allowed a rebate of interest at
one per cent. below the current rate for

such maturity at the date the note is

taken up. Member banks offering notes
for rediscount should examine them

carefully to see that they are in good
order. One of the most difficult matters

to deal with in the bank has been the
large around of paper that appears with
various technical

irregularities.

Too

recommended that that provision be eliminated from the statute if possible, but the

There is also some danger in the development of unenlightened and uninformed crit-

practice now followed, of sending notes
well in advance of maturity to the member bank for collection, will dispel any
doubt as to whether endorsers will be held
by presentation and demand at the proper

icism.

time.

Now I would like to say a few words
generally about the attitude of the member banks towards the Federal Reserve
system. There is some danger that the
work

of organizing and developing the

banks will be retarded by two classes of
bankers; on the one hand those that are

liable to make extravagant claims for
what the banks can do and express possibly
oversanguine expectations, and on the other

hand, those who are prone to express unfounded fears and criticisms. It takes time
to do the work that is now being undertaken

the

Federal

Reserve

Board

member banks has been almost entirely
due to the existence of this carelessness

and by the officers of these banks, and
according to my view the development
of the system will not be as successful

in the way paper is permitted to be drawn
by the customers of the member bank.

tions of immediate completion of Ole work

Due to what I personally regard as an
unfortunate provision of the act it is also
necessary to require a special endorsement on the paper discounted, which includes a waiver of demand, notice and
I may say that the Governors
protest.

of the twelve Reserve Banks

have already

as it should be

if unwarranted expecta-

are developed or an attempt is made to
progress too rapidly without due regard
to the real interests of the member
banks, both those who are present members and those state institutions which
are in fact potential members of the future.

I do not want to go into that particularly just now. You have all heard it.
I would like to feel that those who are affected by the development of these banks
are at least patient enough and loyal enough
to give those men who arc doing the work

an opportunity to demonstrate by experi-

ence with the system what it can do

rather than condemn it before any ex-

perience at all can be had with it. (Applause.)

Another feature of the attitude of the
member banks that personally I deplore
-it is a natural one, possibly-is a tendency
to regard the Federal Reserve banks as departments of the government. I am sure
you will not consider that I am dealing with
this matter in a trifling way when I say that
some of the bankers who have called at our
office have evidenced considerable uneasiness when they came in to talk to Mr. Jay
or myself, such, for instance, as they might
display in calling upon some high officer of
the government. Now that is all wrong.

Member bankers must bear in mind that
they own these banks. Every dollar of their
assets belongs to the member banks. Two-

thirds of the directors they have elected
themselves; and the officers of the banks

are appointed by those directors; and
speaking for our bank I have no hesita-

tion in saying that if that bank is not
properly managed it is largely the fault

THE FINANCIAL AGE.

Vol. XXXI, No. 21

of Lie member banks of that district for
not electing proper directors or seeing
that proper officers were elected. The
disposition to regard the banks as a department of the government is, however,

I would like also to refer to une rather
important matter that is peculiar to the
present time. It is undoubtedly a fact that
some bankers in this country feel that the
expiration of the Aldrich-Vreeland law,

tion only. They had no clerks, they had n
offices, they had no machinery, they had nr,

fairly natural owing to a feature of
the Federal Reserve Act that is quite
unique in legislation in this country.
Banking legislation in this country, as Congressman Fowler suggested, has been

its operation expiring by limitation on June
30th, possibly weakens our situation. They
look back with satisfaction at what was accomplished in August, September and October of last year in that great crisis by the

twelve Reserve banks have complete organi-

discussed and passed somewhat upon the
theory that the banks needed regulating.
just as the railroads needed regulating. In
the case of the railroads, statutes and regulations were passed and adopted and a special body was created by Congress to administer this law. Unfortunately the American people are altogether too prone to point

ability of the banks to promptly furnish

out evils existing in our economic life,
cry for the passage of some law, rejoice
over its enactment, and then subside into
a happy lethargy, thinking that the passage of the law has accomplished everything, that it will work some revolution.
As a matter of fact the accomplishment of
the purpose of such legislation depends upon its administration and in the case of the

Federal Reserve Act quite a new plan of
administration has been introduced. The
government has in fact loaned its credit in
a very important way to these banks. They

are the instruments through which notes

bearing the obligation of the government are to be issued. The security for
those notes remains in the office of the
bank by which they are issued. The government has therefore placed three directors in the hoard of the bank and appointed
two of those directors officers of the bank

to make them in fact not only partners in
the management of the reserve bank but
to recognize the responsibility resting upon
the government for its management.
Directing and supervising the management of the Reserve banks is a Government-appointed Board, with broad and necessary powers by which the system may be
co-ordinated and safeguarded.
Just the experience of the last six months

has indicated many of the advantages of
that arrangement. In the case of the regulation of the railroads it is common knowledge to everybody that for many years past

there has been a species of antagonism,
you may call it, at any rate a distinct
line of cleavage, between the body that
is administering the Interstate Commerce law and the railroads that are affected by it. Now that line of cleavage
has resulted in much of the construc-

the banks, and the contact there resulting
becomes rather a point of fusion. I can
see many cases where difficulties that might

develop at those points of contact are very
easilyfordealt
with, and I feel especially hopeDigitized
FRASER

ful of the success of that feature
http://fraser.stlouisfed.org/
Federal
Reserve
Federal
Reserve
Bank system.
of St. Louis

of the

currency through the operation of that law,
in fact, to convert their assets into a circulating medium. Some inquiry has been
made as to how well prepared the Reserve

Banks might be in case some emergency
arose that required a similar treatment of
the situation. I would like to read some
figures to indicate in a measure what has
been and what I think can be confidently
counted upon to take place if any such occurrence did develop.
In 1907 the reports made by the national

banks to the Comptroller of the Currency
as of August 22nd showed that the national

banks of the three central reserve cities
held $14,000,000 of excess cash reserve in
their vaults and that all the other national
banks in the United States held $77,000,000
excess cash reserve. No call was made

until after the worst effects of the panic
of the fall of 1907 had passed; that is,
until December 3rd. The call of December 3rd showed that the national banks in
the three central reserve cities were deficient $32,000,000 in cash reserve, and that

all the other national banks of the United
States held an excess cash reserve of
Now the effect upon our
$125,000,000.

banking system of this sudden withdrawal
or shifting of bank reserve, in addition to
the withdrawal of money which was undoubtedly hoarded at that time, can hardly
be estimated.

I would like to contrast those figures
with the reserve situation of last summer
and fall. The call of June 30, 1914, showed
that the national banks of the three central
reserve cities were deficient $6,000,000 in

their cash reserve and that all the other
banks of the country had excess cash reserves of $56,000,000. The call of September

12th, 1914, disclosed that the cash reserves

of national banks in the central reserve
cities were $45,000,000 deficient, and all the

other national banks of the country were
$60,000,000 excessive. Contrast these figures with 1907. It means that in 1907 the
country national banks and the national
banks in the reserve cities accumulated
about $50,000,000 of reserve money that
they did not need, and last fall, in the

face of a possible calamity far worse, from
our point of view, for the gold reserves of
Europe were closed to us, the country banks
actually accumulated only $4,000,000 of additional excess reserve. Undoubtedly that
was largely due to the influence of the existence of the Aldrich-Vreeland Act and to
its prompt operation. Now what can the

Reserve banks do after the expiration of
the Aldrich-Vreeland Act?

In the first place the Aldrich-Vreeland
associations were admittedly barely organized last fall. They had a paper organiza-

credit information except what could be
gathered from the banks that participated
in the management of the affair. These
zations, they have credit information; they
have stored in Washington already $300,000,000 of notes, and on July 1st they will
have

$500,000,000,

and

the supply

will

be kept at about $500,000,000 or over. And

I think sight has been lost of the fact that
these Reserve banks have over $250,000,000
of untouched cash assets. Sometimes it is

a little difficult to be patient with criticism that compares the facilities that existed last August, say, with those that exist today with these twelve banks in full
operation.

Now just one word in conclusion of a
more personal character. The men who are

managing these twelve banks-and I am
now well acquainted with nearly all of them

-believe that they are performing a public

It may be that they are mistaken
in that idea, but I do not think so. And
they feel that they are entitled to have
the support of the banks for whom they
are really working; and that support toduty.

day will be best evidenced by patience in
waiting for results. It may also be expressed by a statement of my personal views

as to what should be done in regard to facilities for the admission of State banks to
membership. No reform of our banking
methods in this country will be complete
and satisfactory to the country until it
includes all banks, at least all banks that
do commercial banking in one comprehensive system. I firmly believe that if a regulation can be issued which will appeal to
the State bankers of the country as fair, not
as evidencing an intention to buy their
allegiance, and, on the other hand, not evidencing an intention to bar their admission,
that we can then afford to let them work
out that particular feature of the problem
themselves. Our duty will be to make the
system attractive to them and wait for
them to come in if they want to.
Gentlemen,

I am sorry to have taken

so much of your time. You have listened
very patiently. Permit me to thank the

bankers of this State for extending to us
an invitation to address them on this very
important matter.

The Chair desires to anndunce the names

of the members of the Nominating Committee-Charles H. Laird, Jr., J. W. Lushear and Wessels Van Blarcom.
And the Resolutions Committee-W. H.
Taylor, F. A. Phillips and F. M. Riley.
We will proceed with the program with
an address on "Bank Publicity," by Fred
W. Ellsworth, of the Guaranty Trust Company- of New York.

-P-.wills 14

.14

4.1

820

The third great lesson taught by experience in American banking was the

wake of this gigantic blunder will be
a direct loss to the American people
every year of at least $100,000,000, or
$1 for every man, woman and child.
Think of it, $100,000,000 every year or
10 per cent. of all the capital cif all the
national banks in the country, and yet

evolution of the most perfect mechanism
ever known in the banking world in any

this vast sum can be saved to the people

by the adoption of the right banking

age,-the Atnerican Clearing House in
its most higNy developed form. This

system.
I assert

national currency of uniform appearance
and

universal

value

everywhere

throughout the United States. That is,
it established an individual bank note of
uniform appearance and universal value.

unique institution has developed not only

without the aid of law, but in a degree
in absolute defiirce of law.
Here, in the An3erican Clearing House,

purely the product of experience, was
developed a model, a complete model
down to the last detail for an American
Banking System.

Here then were all the essential elements of the most nat al, most simple,
most
most economical,
perfer! and most power f41 banking sys-

tem in all the world.

First, the interconvertilty of bank

book credits, bank note cre is and gold.

Second, the individual baik note of
uniform appearance and universal value
throughout the United States.
Third, that most wonderful product of
banking experience that has ev(k.r been

that there is not

single

reason for its existence,.,unless like the
loss of the Titanic, or s me other shocking, overwhelming cal toy, it now leads
to a persistent and nyielding demand

for a true and real eform.
I assert that it ciftinot be successfully
defended anywhere, by anybody, before
any intelligent yerican audience where
our own experi ce is illumined by the
all-pervading gimlight of the eternal
Principles of anking economics.
A human mg with two hearts in its
heels, two 1 arts in its knees, two hearts

in its hips two hearts in its hands, two
hearts in its elbows, two hearts in its
shoulder', would not he a greater physiologic4 monstrosity than this act
is frotti an economic point of view.

Juse now its managers are engaged in
a m or surgical operation by which they
evolved,-the American Clearing llouse pr ose to locate a thirteenth heart
with its Clearing House committA, its s tewhere, with another limited amount
of reserves to perform some special or
self-appointed examiner, its united reiiarticular function, which with a proper
serves and its issuance of bank credit.
All that was wanted was a knowledge system would automatically occur. In
of history, banking economics, a single .,' the light of experience and the principles
of banking economics it would seem as
ray of intelligence, the slightest degre
\ though the task before the managers of
of appreciation of the opportunity
hand, and even a partial comprehens' n \, this institution was going to be as difof the needs of the country. Of coirse ''Ocult as it would be for the physiological

the work to be done was that of the

nonstrosity to walk up hill backward

student, the statesman and the pdtriot,
mad
and not of the politician driven
fate to do something, whether ight or

0A, its head and hands.

wrong.
the reBut the men charged wi
norant of
sponsibility of legislation,
these great impressive less s of Amer-

ican history, and still

limo

ignorant of

fundamental principles of
banking economics, sup -imposed upon
the

great

a naturally developed s' uation that only
waited the hand o
organization, a
scheme that is holl foreign to our in-

stitutions and ban g practices, a device that is purely artificial and superficial, a gigantic extravagant machine
that must neces rily prove worse than
useless because its tendency and effort
it to paralize lid destroy the true purpose, the ul nate and infinite advantages growi g out of the co-ordination
and union of the American Clearing
House int a truly American Banking
System.

The f ct

that when perfect order

could
ve been brought out of a condition r e in opportunity, chaos has been
adde to chaos, while the confusion of

con' rations increases and the controversy

gr,

hotter because of the passing of

tl s tumble bug act.
Coat

Vol. XXXI, No. 21

THE FINANCIAL AGE.

to the Country.

Digitized
Onefor
of FRASER
the most obvious but not the
http://fraser.stlouisfed.org/
greatest evils that will follow in the
Federal Reserve Bank of St. Louis

if the natural opportunity that existed
for the organization of a banking system
had teen utilized, a thousand things
which\ would have to he worked out and
forced \through if this Act remains on
the Stat te Books, would have occurred
:ottoman
all.

lly and without any effort at

1 measur my words when I say that
econo is monstrosity was the
natural wise ble miscarriage of a most
unnatural and disreputable cohabitation
of thoughts am forces that should never
have found a p cc in this great work.
These interests a d forces were a single,
economic thought f foreign origin, government fiat issue, legal tender bank
notes,
personal
mbition, personal
malice, insane prejto cc, benighted partisanship, diabolical se tionalism and unsurpassed political influ nce.
The question is, shall ve strangle and
destroy it or permit it t strangle and

this

destroy the signal oppor nity and incomparable advantage of having the
most natural, the most situp e, the most
economical, the most efficien the most

interest of our
try. Will you do it

the

common

coun-

President Haines: We (till now proceed with the program as arranged, and
the next is an address on "The Federal
Reserve System," by Mr. Benjamin
Strong, Jr., Governor of the Federal Reserve Bank of New York.

THE FEDERAL RESERVE SYSTEM.
Mr. Benjamin Strong, Jr., Governor of
the Federal Reserve Bank of
New York.
Mr. President and Gentlemen:
sure that

Congressman Fowler wi:1 not

object to my calling your attention to an
error in the printing of the program. It
seems that I am called upon to address
you in regard to some features of an
economic monstrosity. (Laughter.)

Now. unfortunately the gentlemen who
were charged with the duty of engaging officers for the Reserve Bank failed to take
into consideration that certain qualifications
not usually required for bankers apparently were required for these positions.

They should have selected men with some
talent for speechmaking. Our duties at the
office in New York have been rather arduous, and rather than devote considerable
time to careful preparation of addresst;s in
regard to the Reserve Bank, we have

thought best to ask the bankers who are
good enough to invite us to address them

to let us make very informal talks in regard to the work that is being done, and
I

will therefore ask your indulgence if the

matters that

want to talk about this

afternoon are vtr informally dealt with.
Congressman Fowler. I am sure, will not
object to my referring to one or two words
only of his remarks. Discussion of banking legislation in this country, as I recall,
has been pretty active for the last eight or
ten years. If we are to have the real discussion that Congressman Fowler suggests,

I am afraid we will now have no time for
anything but banking discussion, judging,
at least, by the activity that has prevailed
since 1907 in efforts to get better banking
law. He refers to a remark, possibly unfortunate. that this new law is 70 per cent.
good.

My memory of one such remark

was that it was :s0 per cent, good. Ali!
Congressman FoWler considers it 170 per
cent. bad. I thin]: he is mistaken.
iThese last sev(n years of discussion, in
which Congressman Fowler himself participated very actively and himself contributed toward a better understanding of.
the problem, if it did nothing else, convinced the people of this country that our
problem was a very different one from any

that existed in Europe. We have in
United States over
stitutions.
The are

25.000

the

banking in-

scattered

over

area equal to pretty much all of Europe.

timc ques-

Conditions are different in the different
parts of the country and at least twothirds or three-fourths of those institu-

I appeal to every banker here to study

eight different States. I think at least we

this great question, as a trustee of our
commercial interests.
I appeal to you
all, as patriotic citizens, to study it in

sults. not reduced to percentages, however.

perfect and the most powerful banking

system in the world,-that is
tion.

tions are governed by the laws of fortyowe a great deal of thanks to those men
who devoted themselves, with tangible re-

THE FINANCIAL AGE.

The

Seaboard National Bank
of the City of New York
earnestly solicits deposits from New Jersey Bankers. Personal
attention on the part of the officers is given to all accounts.
$1,000,000
Surplus and2,825,000
Profits (earned )
Deposits 35,000,000
Capital

G. BAYNE, President
THOMPSON.05ic esident
A', Cashier

Assistant Cashier

B. L. GII.L, Vice-President

0. M. JEFFERDS, Assistant Cashier

the discretion of the officers of the Reserve Bank as to what paper was eligible
for rediscount by the member bank. Since
that time there has been issued a new circular and regulation which is to take effect on
July 13th. So many inquiries are being made
as to the exact procedure under that circular
and just what will be required after July 15

that we have had in course of preparation
a statement or letter which will express
as briefly as seems possible the views that
are entertained by the officers of our bank
on this matter so that the member banks

is required in the case of a note of any
one customer or the obligation of any one
customer which does not exceed five thousand dollars in amount or does not exceed

10 per cent. of the capital stock of the
member hank. That is to say, a bank of
twenty-five thousand dollars capital can
apply

for a rediscount of notes of any

can readily observe its provisions. I would

one of its borrowers not exceeding twenty-

like to read some portions of this circular,
which may, however, be changed at a later

five hundred dollars in amount without
making a certificate or stating that they
have in their files a statement of the bor-

date.

Circular No. 3, the one which takes effect July 15th, defines eligible paper and
provides that member banks will be expected to keep credit files showing the
condition of their larger borrowers in order to certify the eligibility of paper offered for rediscount after July 15, 1915.
Until July 13th. Circular No. 4 shows
how such eligibility shall be certified, but
thereafter Circular No. 4 will no longer apply.
The judgment to be exercised, in
other words, will he controlled by Circu-

lar No. 3. and I would like to call your
attention to the fact that that circular distinguishes between paper taken by members

banks

from

their

customers and

paper which they purchase from brokers
or
through
their bank correspondents.

As
to
all
purchased paper, he Board
http://fraser.stlouisfed.org/
fit to Bank
require
that
ea:h member
has
seenReserve
Federal
of St.
Louis

rower's financial condition. For larger
amounts credit bills will be required.
The Federal Reserve Banks must he prepared to make their resources available
when needed, to the commerce, industry and
agriculture of the country, to facilitate
production. manufacture or distribution.

That is the language that is employed in
regulation itself. Their resources
must, however, be kept liquid. Therefore.
except for a )imited amount of agricultural
the

paper, all notes rediscounted must mature within ninety days and must be

taken up by the banks which indorse them,

whether they are paid by the makers or
not. But the act and the regulation require that the original borrower's financial condition shall also reasonably evidence
his ability

to meet his current liabilities

promptly.

Stated negatively, this means

821

THE FINANCIAL AGE.
that 'a Federal Reserve Bank may not discount a member bank's paper which repor is based on lands, buildings,
Iresents
machinery or other fixed or permanent as-

or on investment securities or on
goods carried merely for speculative purposes. Such paper does not contain the
element of self-liquidation, as it does not
sets

represent goods in any of the stages of prodistribution.
duction, manufacture and

The paper which in form evidences most
satisfactorily that it is self-liquidating is
a note, bill or accepted draft, representing
the obligation of the purchaser to the seller
for goods sold.

Let me say that there seems to be a
good

deal

misunderstanding

what might be called trade paper. Too
many of the member banks are under the
impression that they must in applying for
discounts submit only paper on which there

are two obligations to pay, a maker and
an endorser. That is not a fact. The test
of the eligibility of a note, which I will
refer to later, is not of that character.
This paper represents, in fact, an actual
commercial transaction, and its payment is

directly related to the sale of the goods.
But the development in this country of the
open credit granted by merchants and manufacturers, and of the system of cash discounts, offering advantages to purchasers
with ample capital, has reduced the volume
of self-liquidating paper and substituted
for it the promissory note on which working capital is obtained in order to carry
indebtedness due by customers on open ac-

counts, as well as for the purchase of material. The provisions of the act and the
regulation contemplate the rediscount of

merely borrows for household expenses or
for any purpose not commercial, industrial
or agricultural, his note is not eligible.
Accommodation makers or endorsers do

not affect the eligibility of the note. The
eligibility depends primarily upon the purpose for which its proceeds are used.
In the case of notes discounted by firms

or corporations, if such firms or corporations arc engaged in commerce, industry
or agriculture, their notes are eligible, provided they show by statement or otherwise that they have a reasonable excess
of quick assets over current liabilities.
It is quite apparent that if a large borrower in making a statement shows that
his short borrowings, current liabilities,
current indebtedness, are in excessof his
quickly available assets, some part of his
borrowings must have gone into plant or
machinery or fixed assets. And that, in
fact, is the principal test of the eligibility
of paper, based, as I have stated, upon
the character of the statement that the borrower makes.
In the case of purchased paper, eligibility

will be determined by the statement of
the person, firm or corporation on the
strength of whose credit the paper is

reasonable excess of quick
assets over current liabilities is shown.
the paper is eligible.
In the case of paper discounted by farmers, unless the farmer makes a statement
(in which case the same test of quick asbought.

sets over liabilities will apply), and if the

the latter class of paper at Federal Re-

proceeds are to be used for seed, fertilizer,
feed, stock or current operating expenses.

serve Banks and it has so far constituted
the vast majority in volume of the paper

it is eligible, but it

which our bank has thus far discounted.

In the case of the ordinary promissory
note with or without endorsements, how

the concern to see if it has a reasonable
excess of quick assets over current liabilities. But if Smith, a lawyer or physician,

shall the member bank determine whether
it is eligible for rediscount with its Federal Reserve Bank? This is most difficult
in the case of notes discounted by individuals. In such cases it would be advan-

tageous to ascertain first the business of
the discounter. If he is engaged in com-

merce. industry or agriculture, it may be
eligible. If he is not so engaged, it is not
eligible unless lie uses the proceeds of the
note for commercial, industrial or agricultural purposes. Smith may be a prac-

ticing lawyer or physician, but

lie map.,

also own a farm and his notes may be issued to purchase feed. fertilizer or stock,

or pay wages or other regular costs of
operating a farm, just as in the case of any
farmer. Likewise Smith may also have
an interest in the local newspaper or other
industry. A note issued by Smith for
money to advance to the newspaper would
be eligible for rediscount, provided it was

not to go into fixed assets, such as land.
buildings or machinery.
But if Smith should offer a note issued
by the person. firm or corporation running
the newspaper or other concern. it would
be evidence on its face that it had been
used for industrial or commercial purposes. for
In FRASER
Digitized
this case eligibility would he
http://fraser.stlouisfed.org/
determined by examining the statement of
Federal Reserve Bank of St. Louis

is not eligible if they

arc to he used for lands, buildings or machinery of a permanent nature.
Eligibility and credit, of course, are not
to be confused. All notes discounted by

Vol.

xxl

from the reserve banks on the se
of
bonds; conversely, it is no longer a_ necessary for member banks to carry bonds
simply for the purpose of occasional borrowing, because the law permits the rediscount of their commercial paper when they
are in need of funds.
In examining the statements furnished us

in New York by the member banks of
our district I think there were something
like seventy-five or eighty banks that reported that they had little or no paper that
was eligible to rediscount. We wrote each of

those banks a letter asking them to either
send an officer of the bank to see us or to
write us and give a description of the character of the paper which they had in their
portfolios. We found on examination and

in conversation with the officers that we
saw, that hardly any of those that replied
had less than 50 per cent. of eligible paper
in their portfolios; but their reports were
based upon a conception of what the regulation meant that was not accurate.
Many banks have been accustomed to

borrow on demand. The law does not
permit the use of commercial paper as security to demand loans, but banks desiring

short loans may select from their portfolio paper having about the required time
to run.
The Federal Reserve Bank of New
York has as members several of the largest

as well as many of the smallest national
banks of the country. Its facilities are open
on equal terms to all and it is prepared to
discount small as well as large notes. You
may be interested in a few figures as to
exactly what discounting we have done.
Thirty-three banks have applied for rediscount of paper, the total amount aggregating $8,061,919.93.

Only four of those

banks were located in New York City; the

other twenty-nine outside of the City of
New York. The largest amount rediscounted on a single application has been

member banks are presumably good; some

$2,182,500 and the smallest $1,700.

are eligible and some are not, according

'largest single note rediscounted has been
$300,000 and the smallest $25.40. (Laughter.) Most of our applications come from
member banks tip the State and largely in
farming communities. I can say that the
paper that is offered for rediscount, which
is manifestly paper made by farmers, and
very largely issued to buy fertilizer, stock,
to some extent feed and other supplies in
the spring season, has almost without ex-

to the purpose for which their proceeds are
to be used.

A renewal is an indication that the debt
is not self-liquidating. But the regulation
makes the statement of the concern the
test of eligibility. Whenever the statement
shows a reasonable excess of quick assets

over current liabilities, a note, even if renewed, may he considered eligible.
is

What
a reasonable excess varies with differ-

industries. Packers maintain high
credit if they have say $1.50 of quick assets
ent

for $1 of current liabilities. A manufacturer of jewelry possibly might make a

The

ception been discounted, and much of it was
single name paper. It becomes double name
paper, of course, in our hands, with the endorsement of. the member bank.

Applications for rediscount are almost

statement showing a large stock of gold

invariably acted upon when accepted, and

where the margin of quick assets would be
very small and vet the statement be a perfect test of the eligibility of his borrowings.

The more special the line the higher the
ratio expected. unless there is a sufficiently

strong endorser to permit the ratio to be
But the excess should always be
reasonable considering all the circumstances
in the case.
Many member banks in our district
carry bonds on which, as occasion rereduced.

they did not really want the money.
(Laughter.)

quired. they have been accustomed to bor-

It is our practice to return paper for

row from 'heir reserve agents. The law
does not permit member banks to borrow

collect;on to the bank which rediscounted

it about five or ten days before its

THE FINANCIAL AGE.

May 22. 1915

S23

Fourth Street
National Bank
OF PHILADELPHIA

Capital

$3,000,000
6,800,000

Surplus and Profits

E. F. SHANBACKER, President
JAMES HAY, Vice-President
W. A. BULKLEY, Ass't Cashier
FRANK G. ROGERS, Vice-President
W. K. HARDT, Ass't Cashier
R. J. CLARK, Cashier
C. F. SHAW, Jr., Ass't Cashier

Exceptional Facilities for Making Collections Throughout the World

ACCOUNTS INVITED
maturity. We charge it to the bank's
account on our books the day it matures.

It is not our practice to permit a member bank to take up paper before the
date of maturity except in special cases
where the maker of the note has been
permitted by the member bank to anticipate his note. In such cases we have
generally allowed a rebate of interest at
one per cent. below the current rate for
such maturity at the date the .note is
taken up. Member banks offering notes
for rediscount should examine them

carefully to see that they are in good
order.

One of the most difficult matters

to deal with in the bank has been the
large around of paper that appears with
various

technical

irregularities.

Too

many of them altogether indicate that
carelessness prevails in observing prudent rules as to the way notes are drawn,
dated and filled in. And such little irritation as has developed from those discounting transactions that we have had with the
member banks has been almost entirely
due to the existence of this carelessness
in the way paper is permitted to he drawn
by the customers of the member bank.
Due to what I personally regard as an
unfortunate provision of the act it is also

necessary to require a special endorsement on the paper discounted, which includes a waiver of demand, notice and
protest.for FRASER
I may say that the Governors
Digitized
of the twelve Reserve Banks have

already

recommended that that provision be eliminated from the statute if possible, but the
practice now followed, of sending notes
well in advance of maturity to the member bank for collection, will dispel any
doubt as to whether endorsers will be held
by presentation and demand at the proper
time.

Now I would like to say a few words
generally about the attitude of the member banks towards the Federal Reserve
system. There is some danger that the
work

of ..rs2aniting and developing

the

banks will be retarded by two classes of
bankers; on the one hand those that arc
liable to make extravagant claims for
;Oat the banks can do and express possibly
oversanguine expectations, and on the other

hand. those who are prone to express unfounded fears and criticisms. It takes time
to do the wo:k that is now being undertaken

the

Federal

Reserve

Board

and by the officers of these hanks, and

according to my view the development
of the. system will not be as successful
it should he if unwarranted expectations of immediate completion of rtir work

are developed or an attempt is made to
progress too rapidly without due regard
to the real interests of the member
banks, both those who arc present Mein hers and those state institutions which
are in fact potential members of the future.

There is also some danger in the development of unenlightened and uninformed criticism.

I do not want to go into that par-

ticularly just now. You have all heard it.
I would like to feel that those who are affected by the development of these banks
are at least patient enough and loyal enough
to give those men who are doing the work

an opportunity to demonstrate by experi-

ence with the system what it can do
rather than condemn it before any experience at all can be had with it.

(Ap-

plause.)

Another feature of the attitude of the
member banks that personally I deplore
-it is a natural ca:e, possibly-is a tendency
to regard the Federal Reserve banks as departments of the government. I am sure
ybu will not consider that I am dealing with
this matter in a trifling way when I say that
some of the bankers who have called at our
office have evidenced considerable uneasi-

ness when they came in to talk to Mr. Jay
or myself, such, for instance, as they might
display in calling upon some high officer of
the government. Now that is all wrong.

Member hankers must bear in mind that
they own there hanks. Every dollar of their
assets belongs to the member banks. Two-

thirds of the directors they have elected
themselves; and the officers of the banks

arc appointed by those directors; and
speaking for our bank I have no hesitation in saying that if that bank is not
properly managed it is largely the fault

I
o.

THE FINANCIAL AGE.

of tot member banks of that district for
not electing proper directors or seeing
that proper officers were elected. The
disposition to regard the banks as a department of the government is, however,

I would like also to refer to one rather
important matter that is peculiar to the
present time. It is undoubtedly a fact that
some bankers in this country feel that the

fairly natural owing to a feature of
the Federal Reserve Act that is quite
unique in legislation in this country.
Banking legislation in this country, as Congressman Fowler suggested, has been

out evils existing in our economic life,
cry for the passage of some law. rejoice
over its enactment, and then subside into
a happy lethargy, thinking that the passage of the law has accomplished everything, that it will work some revolution.
As a matter of fact the accomplishment of
the purpose of such legislation depends upon its administration and in the case of the
Federal Reserve Act quite a new plan of
administration has been introduced. The
government has in fact loaned its credit in.
a very important way to these banks. They

are the instruments through which notes
bearing the obligation of the government are to be issued. The security for
those notes remains in the office of the
bank by which they are issued. The government has therefore placed three directors in the board of the hank and appointed
two of those directors officers of the hank

to make them in fact not only partners in
the management of the reserve bank but
to recognize the responsibility resting upon
the government for its management.

Directing and supervising the management of the Reserve banks is a Government-appointed Board, with broad and necessary powers by which the system may be
co-ordinated and safeguarded.
Just the experience of the last six months

has indicated many of the advantages of
that arrangement. In the case of the regulation of the railroads it is common knowledge to everybody that for many years past

much

the construc-

tive progress being wrung from one or
the other body as the result of bitter litigation carried to the court of last resort.
Apparently in the reserve banks
quite a different condition exists.
Instead of developing a distinct line of
cleavage between the regulating body and
the hanks these government directors and
elected directors meet weekly or monthly in
the banks, and the contact there resulting
becomes rather a point of fusion. I can
see many cases where difficulties that might
develop at those points of contact are vet-)
easily dealt with, and I feel especially hope-

ful of the success of that feature
http://fraser.stlouisfed.org/
Federal
Reserve
Federal
Reserve
Banksystem.
of St. Louis

of the

expiration of the Aldrich-Vreeland law,
its operation expiring by limitation on June
:loth, possibly weakens our situation. They
look back with satisfaction at what was ac-

complished in August, September and October of last year in that great crisis by the

ability of the banks to promptly furnish
currency through the operation of that law,
in fact, to convert their assets into a circulating medium. Some inquiry has been
made as to how well prepared the Reserve
Banks might be in case sonic emergency

Vol. XX Xl. No. 21
tion only. They had no clerks, they had nov
offices. they had no machinery, they had nu

credit information except what could be
gathered from the banks that participated
in the management of the affair. These
twelve Reserve banks have complete organizations, they have credit information : they

have stored in Washington already S300,000,00 of notes, and on July 1st they will
have $5onomoo, and the supply will
And

be kept at about $.1uttonom00 or over.

I think sight has been lost of the fact that
these Reserve banks have over $250.000.000
of untouched cash assets. Sometimes it is
a little difficult to he patient with criti-

arose that required a similar treatment of
the situation. I would like to read some
figures to indicate in a measure what has
been and what I think can be confidently
counted upon to take place if any such oc-

cism that compares the facilities that existed last August, say, with those that exist today with these twelve banks in full

currence did develop.
In 1907 the reports made by the national

more personal character. The men who are

banks to the Comptroller of the Currency
as of August 22nd showed that the national

now well acquainted with nearly all of them

banks of the three central reserve cities
held $14,000,000 of excess cash reserve in
their vaults and that all the other national
banks in the United States held $77,000.000
excess cash reserve. No call was made

until after the worst effects of the panic
of the fall of 1907 had passed: that is.
until December :trd. The call of December 3rd showed that the national banks in
the three central reserve cities were deficient $32,000,000 in cash reserve, and that

all the other national banks of the United
States held
$123,000,000.

an excess cash reserve of
Now the effect upon our

banking system of this sudden withdrawal
or shifting of bank reserve, in addition to

the withdrawal of money which was undoubtedly hoarded at that time, can hardly
be estimated.
I would like to contrast those figures
with the reserve situation of last summer

and fall. The call of June :to, 1914, showed
that the national banks of the three central
reserve cities were deficient $6.000,000 in

their cash reserve and that all the other
banks of the country had excess cash reserves of $56,000,000. The call of September

12th, 1914. disclosed that the cash reserves

of national banks in the central reserve
cities were $45,0n0,000 deficient, and all the

other national banks of the country were
$00,000.00 excessive. Contrast these figures with 1907. It means that in 1907 the
country national banks and the national
banks in the reserve cities accumulated
about $50.0m.(100 of reserve money that
they did not need. and last fall. in the

face of a possible calamity far worse, from
our point of view, for the gold reserves of
Europe were closed to us. the country banks
actually accumulated only 154.000,000 of additional excess reserve. Undoubtedly that

was largely due to the influence of the existence of the Aldrich-Vreeland Act and to
its prompt operation. Now what can the
Reserve banks do after the expiration of
the Aldrich-Vreeland Act?
In the first place the Aldrich-Vreeland
associations were admittedly barely organized last fall. They had a paper organiza-

operation.

Now just one word in conclusion of a
managing these twelve banks-and

-believe that they are performing a public

It may be that they arc mistaken
in that idea, but I do not think so. And
they feel that they are entitled to have
the support of the banks for whom they
arc really working; and that support today will be best evidenced by patience in
waiting for results. It may also be ex-

duty.

pressed by a statement of my personal views

as to what should be done in regard to facilities for the admission of State banks to
membership. No reform of our banking
methods in this country will be complete
and satisfactory to the country until it
includes all banks, at least all banks that
do commercial banking in one comprehensive system. I firmly believe that if a regulation can be issued which will appeal to
the State bankers of the country as fair, not
as evidencing an intention to buy their
allegiance. and, on the other hand, not evidencing an intention to bar their admission,
that we can then afford to let them work
out that particular feature of the problem
themselves. Our duty will be to make the
system attractive

to them and wait for

them to come in if they want to.
Gentlemen,

am sorry to have taken

so much of your time. You have listened
very patiently. Permit me to thank the

bankers of this State for extending to us
an invitation to address them on this very
important matter.

The Chair desires to announce the names

of the members of the Nominating Committee-Charles H. Laird, Jr.. J. \V. Lushear and \Vessels Van Blarcom.
And the Resolutions Committee -W. H.
Taylor. F. A. Phillips and F. .1L Riley.
\Ve will proceed with the program with
an address on "Bank Publicity." by Fred
W. Ellsworth. of the Guaranty Trust Company of New York.

-1-

You will recall the case of the man who stated in his
will, that he had led a very unhappy life, worrying about things,
90% of which, however, never happened.

This statement,

fortunately, would equally apply to tho attitude of many bankers
toward the Federal Reserve System.

It is, also, true that these

same bankers have in the past had many unhappy moments worrying
about things which frequently did happen, but which are not now
likely to happen again.

Frank discussion of these matters with

the member bankers would dispel

some of the misconceptions of the

effect of this legislation and make clearer some of the advantages which may not yet have become distinctly apparent.
It has frequently been stated to me that the Federal

Reserve banks will not earn their expenses, much less their dividends, and that the member bank's, either directly or indirectly,
must stand some loss.

This surmise is unfounded.

The Federal

Reserve Bank of New York in the past six months, has earned all
of its current expenses and a considerable sum to be applied towards liquidating the expenses of organization, and while it may
take some months to extinguish the latter item, it would, if that
were necessary, be quite proper to apportion it over a period of

-2-

years, as the greater part of the organization expense consisted
of the cost of »reparing an initial supply, and a very large one,
of Federal Reserve notes.

The Federal Reserve Bank of New York

has total resources of ::A40,000,000.

1ith but l0L; of these

resources invested and loaned at the present very low rates of
interest, the bank is to-day making earnings at the rate of about
v200,000, a year, after paying its running expenses.

If from

20jo to 25;.: of its resources were invested at present rates, it

would earn its expenses and dividends and have something in excess to add to surplus, and its reserves would still exceed 75::
of its liabilities.

It has not, however, been the policy of the bank to

force its funds into use at a time when huge excess reserves are
held by the banks throughout the country.

Had the Reserve banks

been in operation a few years, and accumulated a considerable
loan and investment account, their policy under present conditions
should be to withdraw

funds from the money market for the purpose

of correcting undue ease of money rates, which is only too frequently accompanied by unsound expension and speculation.
fact, the policy of the

reserve banks in using their funds, should

be influenced by the desire to stabilize rates, rathern than to elm,

ploy their funds at any rate obtainable, for the sole purpose of earn,
ing dividends, without regard to the effect of such a policy.

-3-

The statement has also been made by some bnnkers of our
district that very little, if any, of the paper held by their banks
is eligible for rediscount with the Federal Reserve Bank.

Those

bankers who make this statement are liable to create the impression that this opinion is held generally by member banks;

but an

examination of statements filed with us disclosed that only about
80 banks, out of 480 members, reported that they had very little,
if any, paper eligible for rediscount,

With these, we have com-

municated, in order to ascertain upon what theory their reports
were based.

By correspondence and personal interview with many

of them, we have satisfied them, as well as ourselves, that onehalf or more of the paper they hold is eligible for rediscount.

The reports, also, disclosed that the banks outside

of the City of New York, which carry about 40,000,000, of reserve
deposits in our bank, claim to hold no less than ;g9,000,000. of
eligible paper, and the banks of New York City which have on deposit with us

7.2,Q,000,000, report .248,000,000, of eligible paper.

Up to the

present time, and until July 15th, consider-

able latitude has been allowed as to the method by which the eligibility of notes offered for rediscount, shall be determined.

judgment of the officers of the member banks and of the Reserve
bank has been exercised broadly, and I may say, without undue

The

-4-

regard to technicalities, few notes have been rejected on account of failure of eligibility;

some having been returned ow-

ing to carelessness in drawing or indorsing;

and it has been

our practice - which we shall continue - to act upon the application on the day of receipt, and advise credit if so requested
by telegraph.

There is, in fact, no red tape to be untied, nor

is there any disposition to use it.

On July 15th next, however,

Regulation B becomes effective, and to the terms of that regulation your attention should be particularly directed.

After July

15th, member banks will be expected to furnish more specific
evidence of eligibility of notes when applying for rediscounts.

As to smaller borrowers whose notes are offered for rediscount, considerable latitude will still be permitted in determining the question
of eligibility;

as to larger borrowers, the member banks are asked

to adopt standards of credit information which will enable them to
promptly determine for themselves the eligibility of the paper which
they desire to rediscount.

The regulation is based upon three

important general rules:
First:

That the member bank should have in its

files an original ixt or certified copy of a signed statement disclosing the financial condition of the borrower in the case of
all commercial paper purchased from brokers or through

-5-

correspondents.

That it should have similar statements

Second:

on file as to the financial condition of customers whose notes
are offered for rediscount for a total amount of :5,000 or over,
or for an amount azIceeding 1070 of the capital stock of the mem-

ber bank making the application;

that is to say, financia=l state-

ments must be held as to all purchased paper, and as to paper
made by the bark's customers where the amount of the customer's
obligation rediscounted exceeds 4.?5,000 or 1O
capital.-

of the bank's

On the other hand, no such statement is required by

this regulation as to customers whose paper is offered for rediscount in smaller amounts than those named, in order that they
should be eligible.
Third:

That the proceeds of the loan must have been

used or be intended for use in some industrial, comercial or
a ricultural transaction, but not for the purchase of land, buildings or ma3hinery, or other fixed or permanent assets or investments, or for the purchase of _oods carried for speculative purposes.

Most bank officers are sufficiently well-acquainted with

those who borrow small amounts, to readily ascertain the purpose
for which the loan was made.

In the caoe of larer borrowers,

this can be best determined by an examination of a statement of
the borrower's financial condition.

His statement should be

-6-

made in such form as to disclose whether the amount of his current
assets, that is to say, cash, bills and accounts receivable, stock
of goods, or raw and partly manufactured material, is reasonably
in excess of his current debts.

Should the borrower's statement

disclose that his short loans and bills and accounts payable, in
other words, his current liabilities, are greater in amount than
his quickly convertible assets, it would necessarily indicate that
some portion of the

prooeeds of his short loans has been invested

in more permanent form in his business.

Such a condition would,

in most cases, render the credit doubtful unless strengthened by
an indorsement.

Notes made by borrowers of that character are

therefore, not eligible for rediscount but if the loan is made to
a good indorser and his statement conforms to the same test of
eligibility that is required of a maker of an unindorsed note, it
then becomes eligible for rediscount.

Firms and corporations engaged in mercantile or manufacturing business as a rule can make statements which can be
readily analyzed to determine this question of eligibility.

With

an individual, and particularly the agricultural borrower, this
seems more difficult.

If the loan is made for a commercial pur-

rose, 6t its proceeds are used in agriculture, its eligibility
can usually be avoertained by inquiry of the borrower at the
time the loan is made.

Encouragement of the practice of requir-

ing financial statements will in itself tend to establish higher

-7-

standards of banking.
not be confused.

Eligibility and goodness, however, should

It is assumed that every loan made by a member

bank is good, but only those made for commercial purposes and
having the self-liquidating charadteristics referred to, are eligible.

There will now be incentive for bank officers to use

greater energy in obtaining definite knowledge of the financial
condition of their customers in order that their banks may have a
considerable percentage of paper eligible for rediscount.

Cus-

tomers of a member bank will likewise be benefitted by the additional assurance afforded to the bank that at times of seasonal
demand and in time of crisis, their bank has an assured means of
converting a large percentage of its paper into credits for the
benefit of its own customers.

Officers of member banks have

frequently stated that they felt obliged to keep a portion of
their resources invested in bonds in order that they might have
collateral readily available at any time for borrowing purposes.
tlith standards of commercial borrowings so establoshed that a
large portion of the

paper held by the

banks is readily con-

vertible at the Federal Reserve Banks, the necessity for carrying a bond account, simply for borrowing purposes, should no
longer exist.

It must not be assumed that these changes can be
brought about at once, nor would the development of the system

-8-

be promoted by attempting to force new methods upon member banks,
without allowing ample time for study and preparation.

But the

mere establishment of a standard for commercial paper which may
be rediscounted, will gradually exert an influence towards the
creation of that class of paper, that will be more effective in
bringing about the desired result than will the establishment of
restriction rules.

Such paper will in time command better rates.

The influence of discrimination will ultimately be irresistible.
The experience of the past six months has 3.iven much evidence of

the desire of member banks to gain a better understanding of what
is required in order to make as large an amount of their assets
as possible available for rediscount with the Federal Reserve

The Reserve banks are at present engaged in the establishment of

a system for collecting checks, the details of

which plan are so well known as to require no particular comment.
Discussion of the plan, however, discloses two strong objections
in the minds of the officers of member banks, - one being the possible loss of revenue from exchange charges now made by the country banks, and the other the possible loss of interest on balances
at present carried with Reserve Agents, through whom collections
are made, and which now count as reserves.

As to the first objection:

Experience must demonstrate

-.9-

whether economies resulting from a more prompt and scientific
system for collecting country chocks, together with earnings
growing out of the enjoyment of other advantages afforded by
the Federal Reserve system, may not entirely make up the loss
of exchange charges to the extent that such aharges are reasonable and legitimate.

As to the second objection:

Some of us feel that

in many cases, the present system of check collection necessitates carrying larger compensating balances than should be required or will be necessary when the Federal Reserve collection
system is in full operation.

To the extent that balances main-

tained solely for collection purposes can be withdrawn and used
locally, additional revenues will accrue to thc member banks.
The statement is, also, frequently made that the

member banks that join the system, are liable to suffer unexpected depletion of their reserve balances, and on that account,
they will find it necessary to carry unaccustomed excess balances
in order to anticipate such depletion.
be tho case.

This, we hope, will not

As stated in our circular to member banks and as

indicated in a more recent circular letter, it is our intention
to cooperate in every way possible with the banks for whom we are
collecting chocks, so as to enable them to maintain the reserve
required by law without unnecessary depletion or unnecessary

-10-

excess.

If a member bank finds, after experience, that the

charges

against its account exceed the amount of the offset

which they are able to remit, it should be possible by arrange/II:Tit with its Reserve Agent to make regular transfers for its

otedit by a simple transfer entry on the books of the reserve
bank.

On the other hand, the Federal reserve bank will eater

into such arrangement as may be desired to make regular transfers from the accounts of member banks to the credit of the
member banks' Reserve Agent, so that excess balances should not
unduly accumulate.

Tile plan should prevent unexpected impair-

ment of reserves, as well as unnecessary loss .f interest on
balances.

It is also urged that, as a considerable percentage

of the checks handled by country banks are drawn on state institutions, and cannot be collected through the Reserve Bank,
country banks must continue existing :;ollection arrangements,

carrying collection accounts with their correspondents, and
that after two years such balances will not count as reserve.

On this account, the claim is made that reserve reauirements
are, in fact, increased by reason of the Act, rather than decreased and that further losses of interest will result from
this cause.

This conclusion anticipates a possible loss to

arise a year or two hence.

The balances will count as reserve

wholly or in part for the next two years.

It also assumes

-11-

that no progress will be made in the next two years in finding a
satisfactory method of dealing with the situation.

It also as-

sumes that state banks will not take member ship in the Federal
Reserve System, and such assumption is far from being justified.

To the extent that the member banks employ the facilities of the
reserve bank for collecting checks on member banks, the necessity for carrying outside balances will be reduced, and to the

extent that state banks take membership, the necessity for carrying outside balances will be further reduced.

In order to mdn-

imize the necessity for carrying additional balances that two years
hence will not count as reserve, member banks should employ the Reserve Bank collection facilities to the fullest extent possible,

rather than to reduce the effectiveness of this collection facility
by withholding their consent to the plan.
Vie also frequently hear the claim made by the country

banker that he will be unable to conduct his business and make his
collections economically on the 12;' reserve now permitted by the law,

and that he is, therefore, unable to take advantage of the reduced reserve requirements.

This claim is based upon a lack of appreciation

of the present flexibility of his position.
If 50;J or more of the commercial paper in the portfolios of

the member banks way be promptly converted into reserve balances by

-12-

rediscounts with reserve banks, the country banker should certainly
be able to take advantage of the reduced reserve requirements without undue apprehension as to his ability to meet unexpected demands
We appreciate very thoroughly that he is obliged

by his customers.

to make every available dollar earn something,

Appreciating, also,

the fears that have been expressed as to the possible effect ,f the
new system of check collection upon the earnings of -ember banks, we
have arranged with competent experts to make carefal examinations of
typical banks in this district in order to ascertain in what respect
economies may be effected and earnings augmented as a

result of the

changes to be undertaken, and its results will be made known to the
member banks.

The experience of the St, Louis district throws some light
on this matter,

The Federal Reserve Bank ff that district undertook

to clear checks for its 459 members some months ago.
asked or obtained.

No assent was

The adoption of the general collection plan has

recently afforded all the member banks of that district opportunity
to withdraw if they so desired.
459 have withdrawn,
tinue the service,

I am advised that only 99 out of the

Presumably, the other 360 are satisfied to conIt will be a

great aid to the officers of the

-13-

bank, if the member banks will give patient consideration to the
work now being dJne and give the new collection system a fair
trial,

One other uLfortunate aspect of the attitude of member
banks toward the system should be referred to.

They have not

yet developed a proper sense of proprietorship and responsibility
as to

the reserve bank itself,

They are too much disposed to

regard it as a government office or department and overlook the
fact that the bank was created by law for the purpose of performing a service to its stockholders and depositors and not to impose
upon then expense and hardship,
phasized.

This c

too strongly em-

All the stock of the reserve banks is owned by member

banks and all the deposits Vr'-the property of the member banks;
two-thirds of the dire
reaponsib
upon the me/

ors are elected by the member banks;

the

ity for the management of the reserve banks rests

r bankers themselves.

It is their duty and responsi-

bility to ae)e that competent directors are elected and that efficient

and
ship

officers are appointed.

ald interest

They should regard their owner-

as a privilege, and they should likewise feel free

igest and criticise - certainly, to a greater extent than they

wo ld feel warranted in making suggestions and criticisms to their
eserve Agent,

The matters I have so far referred to are rather those

which have been a cause of anxiety or criticism in the minds of
bankers as to the future.

Your attention should be directed to

one important thing which has been a cause of anxiety in the past
and which may now safely be forgotten.

At no time since our

Civil War and the financial disturbances which followed it, has
the world faced so many uncertainties regarding future financial
developments as at the present time.

Uncertainty, doubt, timidity,

under old American banking methods have frequently given rise to
occurrences which have been a menace to our whole credit system and
even to the solvency of some of our

The underlying cause has

been doubt in the minds of the b

to his ability on short no-

tice to convert his a
ing medium of undou

at available, into a circulatd acceptability to the people.

The occurrences of last fall, when the fear of what might

happen, gave rise to instant deman for currency, demonstrated that
the ability to promptly satisfy that demand would promptly and effectively allay apprehension.

of 488,000,000. of Aldrich,

Vreeland currency served on the one hand to protect bank reserves,
and on the other hand to meet the demands

machinery then in existence for the issue of this
essarily slow in starting motion and not comp
after the lapse of some weeks.

The

f depositors.

urrency was nec-

tely e fective until

We. have now in

\
ehle most

I- st

-15-

complete machinery with which to meet any normal or exceptional
demand for currency, and it can be put in motion without previous
notice or preparation.

The currency to be issued, that is, the Fed-

eral reserve notes, while at present largely secured by the deposit
of gold, ma y be issued, if required, against deposit of commercial
paper eligible for rediscount and indorsed by member banks, it will
be additionally protected by large gold reserves and it is the direct
obligation of the United States government,

The Federal reserve

banks to-day hold over tir250,000,000, of cash resources, principally

gold, and there is no longer need for anxiety by the member bankers
as to their ability to meet the requirements of their customers and
depositors.

The last six months have been occupied by the members of
the Federal Reserve Board and by the directors and officers of the
reserve banks in painstaking efforts to gradually develop this great
organization, so that it may demonstrate in actual o;)eration what it

was designed to accomplish.

The reserve system was created to perform a service cnd
provide protection directly to the banks of this country and indirectly to the customers of the banks.

However much was accom-

plished by the passage of the Act, it cannot serve its true purpose except by efficient administration;

such an administration

depends for its success upon the cooperation and loyalty of the banks
on the one hand and intelligent work by the manager of the system on
the other.

Of one thing you may be assured:

this statute is on

-16-

the books to stay, in fact, the bankers of the country would not
themselves permit its repeal.

(q_

-1-

You will recall the case of the man who stated in his will,
that he had led a very unhappy life, worrying about things, 90
however, never happened.

of which,

This statement, unfortunately, would equally

apply to the attitude of many bankers toward the Federal Reserve System.
It is, also, true that these same bankers have in the past had many unhappy moments worrying about things which frequently did happen, but
which are not now likely to happen again.

Frank discussion of these

matters with the member bankers would dispel sone of the misconceptions
of the effect of this legislation and make clearer some of the advantages which may not yet have become distinctly apparent.
It has frequently been stated to me that the Federal Reserve

banks will not earn their expenses, much less their dividends, and that
the member banks, either directly or indirectly, must stand some loss.
This surmise is unfounded.

The Federal Reserve Bank of New York in the

past six months, has earned all of its current expenses and a considerable sum to be applied towards liquidating the expenses of organization,
and while it may take some months to extinguish the latter item, it would,
if that were necessary, be quite proper to apportion it over a period of
years, as the greater part of the organization expense consisted of the
cost of preparing an initial supply, and a very large one, of Federal Reserve notes.

The Federal Reserve Bank of New York has total resources

of :,,,140,000,000.

With but 1070 of these resources invested and loaned

the present very low rates of interest, the bank is to-day making earnings
at the rate of about ';200,000. a year, after paying its running expenses.

If from 20% to 25% of its resources were invested at present rates, it

-2-

would earn its expenses and dividends and have something in excess to
add to surplus, and its reserves would still exceed 75% of its liabilities.

It has not, however, been the policy of the bank to force its
funds into use at a time when huge excess reserves are held by the banks
throughout the country.

Had the Reserve banks been in operation a few

years, and accumulated a considerable loan and investment account, their
policy under present conditions should be to withdraw funds from the
money market for the purpose of correcting undue ease of money rates, which
is only too frequently accompanied by unsound expansion and speculation.

In fact, the policy of the reserve banks in using their funds, should be
influenced by the desire to stabilize rates, rather than to employ their
funds at any rate obtainable, for the sole purpose of earning dividends,
without regard to the effect of such a policy.

The statement has also been made by some bankers of our district that very little, if any, of the paper held by their banks is eligible for rediscount with the Federal Reserve Bank.

Those bankers who

make this statement are liable to create the impression that this opinion
is held generally by member banks;

but an examination of statements filed

with us disclosed that only about 80 banIce, out of 480 members, reported
that they had very little, if any, paper eligible for rediscount.

With

these, we have communicated, in order to ascertain upon what theory their

reorts were based.

By correspondence and personal interview with many

of them, we have satisfied them, as well as ourselves, that one-half or
more of the paper they hold is eligible for rediscount.

-3-

The reports, also, disclosed that the banks outside of the
City of New York, which carry about 010,000,000. of reserve deposits
in our bank, claim to hold no less than ::779,000,000. of eligible paper,

and the banks of New York City which have on deposit with us 0120,000,000.
report 0248,000,000. of eligible paper.

Up to the present time, and until July 15th, considerable latitude has been allowed as to the method by which the eligibility of notes
offered for rediscount, shall be determined.

The judgment of the officers

of the member banks and of the Reserve bank has been exercised broadly,

and I may say, without undue regard to technicalities, few notes have been
rejected on account of failure of eligibility;

some having been returned

owing to carelessness in drawing or indorsing;

and it has been our practice

- which we shall continue - to act upon the application on the day of receipt, and advise credit if so requested by telegraph.

There is, in fact,

no red tape to be untied, nor is there any disposition to use it.

July 15th next, however, Regulation B becomes effective, and to the terms
of that regulation your attention should be particularly directed.

After

July 15th, member banks will be expected to furnish more specific evidence
of eligibility of notes when applying for rediscounts.

As to smaller bor-

rowers whose notes are offered for rediscount, considerable latitude will
still be permitted in determining the question of eligibility;

as to larger

borrowers, the member banks are asked to adopt standards of credit information which will enable them to promptly determine for themselves the eligibility of the paper which they desire to rediscount.

The regulation is

based upon three important general rules:

First:

That the member bank should have in its files an original

-4-

or certified copy of a signed statement disclosing the financial condition
of the borrower in the case of all commercial paper purchased from brokers
or through correspondents.
Second:

That it should have similar statements on file as to

the financial condition of customers whose notes are offered for rediscount
for a total amount of ;5,000 or over, or for an amount exceeding 10% of
the capital stock of the member bank making the application;

that is to

say, financial statements must be held as to all purchased paper, and as
to paper made by the bank's customers where the amount of the customer's
obliation rediscounted exceeds :5,000 or 101; of the bank's capital.

the other hand, no such statement is required by this regulation as to
customers whose paper is offered for rediscount in smaller amounts than
those named, in order that they should be eligible.
Third:

That the proceeds of the loan must have been used or

be intended for use in some industrial, commercial or agricultural transaction, out not for the purchase of land, buildings or machinery, or other
fixed or permanent assets or investments, or for the purchase of goods
carried for speculative purposes.

Lost bank officers are sufficiently

well-acquainted with those who borrow small amounts, to readily ascertain
the purpose for which the loan was made.

In the case of larger bor-

rowers, this can be best determined by an examination of a statement of
the borrower's financial condition.

His statement should be made in

such form as to disclose whether the amount of his current assets, that
is to say, cash, bills and accounts receivable, stock of goods, or raw
and partly manufactured material, is reasonably in excess of his current
debts.

Should the borrower's statement disclose that his short loans

and bills and accounts payable, in other words, his current liabilities,

-5-

are greater in amount than his quickly convertible assets, it would necessarily indicate that some portion of the proceeds of his short loans has
been invested in more permanent form in his business.

Such a condition

would, in most cases, render the credit doubtful unless strengthened by
an indorsement.

Notes made by borrowers of that character are therefore,

not eligible for rediscount but if the loan is made to a good indorser and
his statement conforms to the same test of eligibility that is required of
a maker of an unendorsed note, it then becomes eligible for rediscount.
Firms and corporations engaged in mercantile or manufacturing
business as a rule can make statements which can be readily analyzed to
determine this question of eligibility.

With an individual, and par-

ticularly the agricultural borrower, this seems more difficult.

If the

loan is made for a commercial purpose, or its proceeds are used in agriculture, its eligibility can usually be ascertained by inquiry of the
borrower at the time the loan is made.

Encouragement of the practice of

requiring financial statements will in itself tend to establish higher
standards of baril:in=i;.

confused.

Eligibility and goodness, however, should not be

It is assumed that every loan made by a member bank is good,

but only those made for commercial purposes and having the self-liquidating characteristics referred to, are eligible.

There will now be

incentive for bank officers to use greater energy in obtaining definite
knowledge of the financial condition of their customers in order that
their banks may have considerable percentage of paper eligible for rediscount.

Customers of a member bank will likewise be benefited by the

additional assurance afforded to the bank that at times of seasonal demand

-6-

and in time of crisis, their bank has an assured means of converting a
large percentage of its paper into credits for the benefit of its own
customers.

Officers of member banks have frequently stated that they

felt obliged to keep aportion of their resources invested in bonds in
order that they might have collateral readily available at any time for
borrowing purposes.

With standards of commercial borrowings so estab-

lished that a large portion of the paper held by the banks is readily
convertible at the Federal Reserve Banks, the necessity for carrying a
bond account, simply for borrowing purposes, should no longer exist.
It must not be assumed that these changes can be brought

about at once, nor would the development of the system be promoted by
attempting to force new methods upon member banks, without allowing
ample time for study and preparation.

But the mere establishment of

a standard for commercial paper which may be rediscounted, will gradually
exert an influence towards the creation of that class of paper, that
will be more effective in bringing about the desired result than will
the establishment of restriction rules.
mand better rates.
irresistible.

Such paper will in time com-

The influence of discrimination will ultimately be

The experience of the past six months has given much ev-

idence of the desire of member banks to gain a better understanding of
what is required in order to make as large an amount of their assets as
possible available for rediscount with the Federal Reserve Banks.

The Reserve banks are at present engaged in the establishment
of a system for collecting checks, the details of which plan are so well
known as to require no particular comment.

Discussion of the plan, how-

-7-

ever, discloses two strong objections in the minds of the officers of
member banks, - one being the possible loss of revenue from exchange
charges now made by the country banks, and the other the possible loss
of interest on balances at present carried with Reserve Agents, through
whom collections are made, and which now count as reserves.
As to the first objection:

Experience must demonstrate whether

economies resulting from a more prompt and scientific system for collecting country checks, together with earnings growing out of the enjoyment
of other advantages afforded by the Federal Reserve system, may not entirely make up the loss of exchange charges to the extent that such
charges are reasonable and legitimate.
As to the second objection:

Some of us feel that in many cases,

the present system of check collection necessitates carrying larger compensating balances than should be required or will be necessary when the
Federal Reserve collection system is in full operation.

To the extent

that balances maintained solely for collection purposes can be withdrawn
and used locally, additional revenues will accrue to the member banks.
The statement is, also, frequently made that the member banks
that join the system, are liable to suffer unexpected depletion of their
reserve balances, and on that account, they will find it necessary to
carry unaccustomed excess balances in order to anticipate such depletion.
This, we hope, will not be the case.

As stated in our circular to member

banks and as indicated in a more recent circular letter, it is our intention to cooperate in every way possible with the banks for whom we
are collecting checks, so as to enable them to maintain the reserve

-8-

required by law without unnecessary depletion or unnecessary excess.

a member bank finds, after experience, that the charges against its account
exceed the amount of the offset which tl,ey are able to remit, it should

be possible by arrangement with its Reserve Agent to make regular transfers for its credit by a simple transfer entry on the books of the reserve bank.

On the other hand, the Federal reserve bank will enter into

such arrangement as may be desired to make regalar transfers from the accounts of member banks to the credit of the member banks' Reserve Agent,
so that excess balances should not unduly accumulate.

This plan should

prevent unexpected impairment of reserves, as well as unnecessary loss of
interest on balances.

It is also urged that, as a considerable percentage of the checks
handled by country banks are drawn on state institutions, and cannot be collected through the Reserve Bank, country banks must continue existing collection arrangements, carrying collection accounts with their correspondents, and that after two years such balances will not count as reserve.

On this account, the claim is made that reserve requirements are, in fact,
increased by reason of the Act, rather than decreased and that further
losses of interest will result from this cause.

This conclusion an-

ticipates a nossible loss to arise a year or two hence.

The balances

will count as reserve wholly or in part for the next two years.

also assumes that no progress will be made in the next two years in finding
a satisfactory method of dealing with the situation.

It also assumes

that state banks will not take membership in the Federal Reserve System,
and such assumption is far from being justified.

To the extent that the

-9-

member banks employ the facilities of the reserve bank for collecting
checks on member banks, the necessity for carrying outside balances will
be reduced, and to the extent that state banks take membership, the necessity for carrying outside balances will be further reduced.

In order

to minimize the necessity for carrying additional balances that two years
hence will not count as reserve, member banks should employ the Reserve
Lank collection facilities to the fullest extent possible, rather than
to reduce the effectiveness of this collection facility by withholding
their consent to the plan.

We also frequently hear the claim made by the country banker
that he will be unable to conduct his business and make his collections
economically on the 12% reserve now permitted by the law, and that he is,
therefore, unable to take advantage of the reduced reserve requirements.

This claim is based upon a lack of appreciation of the present flexibility of his position.

If 50% or more of the commercial paper in the portfolios of the

member banks may be promptly converted into reserve balances by rediscounts
with reserve banks, the country banker should certainly be able to take
advantage of the reduced reserve requirements without undue apprehension
as to his ability to meet unexpected demands by his customers.

We ap-

preciate very thoroughly that he is obliged to make every available dollar earn something.

Appreciating, also, the fears that have been ex-

pressed as to the possible effect of the new system of check collection
upon the earnings of member banks, we have arranged with competent experts to make careful examinations of typical banks in this district in

-10-

order to ascertain in what respect economies may be effected and earnings
augmented as a result of the changes to be undertaken, and its results
will be made known to the member banks.

The experience of the St. Louis district throws some light on
this matter.

The Federal :reserve Bank of that district undertook to

clear checks for its 459 members some months ago.
or obtained.

No assent was asked

The adoption of the general collection plan has re-

cently afforded all the member banks of that district opportunity to
withdraw if they so desired.
have withdrawn.
service.

I am advised that only 99 out of the 459

Presumably, the other 330 are satisfied to continue the

It will be a great aid to the officers of the bank, if the

member banks will give patient consideration to the work now being done
and give the new collection system a fair trial.

One other unfortunate aspect of the attitude of member banks
toward the system should be referred to.

They have not yet developed

a proper sense of proprietorship and responsibility as to the reserve
bank itself.

They are too much disposed to regard it as a :-rovernment

office or department and overlook the fact that the bank was created
by law for the purpose of performing a service to its stockholders and
depositors and not to impose upon them expense and hardship.
cannot be too strongly emphasized.

This

All the stock of the reserve banks

is owned by member banks and all the deposits are the property of the
member banks; two-thirds of the directors are elected by the member
banks; the primary responsibility for the management of the reserve
banks rests upon the member bankers themselves.

It is their duty

and responsibility to see that competent directors are elected and that
efficient and reliable officers are appointed.

They should regard their

ownership and interest as a privilege, and they should likewise feel free
to suggest and criticize - certainly, to a greater extent than they would
feel warranted in making suggestions and criticisms to their Reserve Agent.
The matters I have so far referred to are rather those which
have been a cause of anxiety or criticism in the minds of bankers as to the
future.

Your attention should be directed to one important thing which

has been a cause of anxiety in the past and which may mow safely be forgotten.

At no time since our Civil War and the financial disturbances

which followed it, has the world paced so many uncertainties regarding
future financial developments as at the present time.

Uncertainty, doubt,

timidity, under old American banking methods have frequently given rise
to occurrences which have been a menace to our whole credit system and
even to the solvency of some of our banks.

The underlying cause has

been doubt in the minds of the banker as to his ability on short notice
to convert his assets, even the most available, into a circulating medium of undoubted goodness and acceptability to the people.

The occurrences of last Fall, when the fear of what might
happen, gave rise to instant demaaifor currency, demonstrated that the
ability to promptly satisfy that demand would promptly and effectively
allay apprehension.

The issue of '7:38E1,000,000. of Aldrich-Vreeland

currency served on the one hand to protect bank reserves, and on the
other hand to meet the demands of depositors.

The machinery then in

existence for the issue of this currency was necessarily slow in starting

-12-

motion and not completely effective until after the lapse of some weeks.
We have now in existence most complete machinery with which to meet any
normal or exceptional demand for currency, and it can be put in motion
without previous notice or preparation.

The currency to be issued, that

is, the Federal reserve notes, while at present largely secured by the
deposit of gold, may be issued, if required, against deposit of camnercial
paper eligible for rediscount and indorsed by member banks, it will be
additionally T)rotected by large gold reserves and it is the direct ob-

ligation of the United States government.

The Federal reserve banks

to-day hold over :',250,000,000. of cash resources, principally gold, and

there is no longer need for anxiety by the member bAnkers as to their
ability to meet the requirements of their customers and depositors.

The last six months have been occupied by the members of the
Federal Reserve Board and by the directors and officers of the reserve
barLs in painstaking efforts to gradually develop this great organization, so that it may demonstrate in actual operation what it was de-

signed to accomplish
The reserve system was created to perform a service and provide protection directly to the banks of this country and indirectly to

the customers of the bans.

However much was accomplished by the

passage of the Act, it cannot serve its true purpose except by efficient
administration;

such an administration depends for its success upon

the cooperation and loyalty of the banks on the one hand and intelligent
work by the manager of the syJtem on the other.
be assured:

Of ote thing you may

this statute is on the books to stay, in fact, the bankers

-13-

of the country would not themselves permit its repeal.

001,11110

Yen will recall the mese of the rim wile stated in his

will, that he had led a 'WY WOMPIV life, uorrytme about things,

9G; of which, Meweeer, new happened.

This statement, ge.

forts weal sepal, epply to the attitude of mew beakers
toward the Oedema teeerVe ftsten.

It le, alms, tree that theme

sans banners hese in the pest had sew enha4gramots worOpegi
Shout things which

frequently

likely to happen again.

did happen, but *kickers not new

Oro* diagnosis's of these matters with

the member beaters would dispel

some of the mdmeemeeptioas of the

effeot of this legisIstiee sod sake Glasgow owe of the eivaoteges which may not yet balrli beams distinctly apparent.

It has freqeently been stated to we that the federal
Resewee leaks will not earn their it:pewee. 'Rah less their dividends, Lod that the meiber harem, either directly or indirectly,
oust stand sons loss.

This surmise is cofounded.

The federal

Reserve Bank of Now York in the past six month's, has earned all

of Its (wrest expesmee aud a eemeideweble sem to he applied tomato llegidating the expenses of organisation, aad while it mei
take some months to extinguilh the latter item, it would, if that
yew. aeseseawy, be quite proper to apportion it ,,,,vor a period of

Ina

years, as the greater pert of the empaisetice espouse seesisted
of the soot AP

renewing en Initial sepply, sad every large see,

of Federal i=essrve a3tar.

The Yedevei :sewn Deane Sew York

leis total resources of 4140,000,000,

4th bat 14 of them

sesserees Invested sad leaned at the present Very low rates of

Interest, tam bank is today making onstage el the rate of about
4200,001, a year, after paying its running supers.,

If free

to W. af its resouroes were invested at preseut rates, it

would ens its sepenees red dividends end have something to vasees to odd to egegage, and its reserves would still extolled 75

of its liabilities.
It h.a not, beesser, bees the re1107 of the teak to

foroe its funds into WO at a ti A0 ',ben huge ammo resenee ere
held by the beaks throgghout the sountry.

Bed the Assume beam

been is operation a few years, and seeemelated a soasiderable

loam and investment Recount, their policy under Iseseet 'sedition

should be to withdrew funds !meth* new see' not for the purpose
of norrestiag undue ease Jir money rates, whim is only too frequently nessepaniel by unsound expensing and spesulatios6

feet, the policy of the

reserve banks in using their funds, should

be imflesneed by the desire to stabilise rates, rathern then to an
plop their fends at erg rate ebtalmeibie, for the sole perms* of esomm

Log dividends, vitheet Mord is the offset of oath a policy,

The statement has also been mole by s

bankers of our

district that very little, if any, of the paper amid by their banks
is eligible for rediseount with the Federal Reser,* Menke

Those

bankers who maks this statememt are liable to *mat* the *proem
elan that this opiates is held geeerally by aster basks'

but an

easminatien of statements filed with us diseleeed that only about

00 honks, out of 400 meibers, reported that taw bad very little,
if amy, paper-eligible for rediscount,

With these, we have eoe.

molested, in order to ascertain upon what theory their reports
were based,

ly correspondent's and personal interview with many

of them, we helve satisfied thane es well as ourselves, that one-

bpi: or MOPS of the paper they hold is eligible for rediscount,

The reports, also, disclosed that the toes outside
of tho City of New York, whioh carry nbout 410.0U0.000, of reserve

deposits is our bank, claim to hold no lees than 479,J00000, of

eligible paper, and the MOM of lbw York City vtleh ieve OR deposit with ea 4124.000,000, report .:241100.4000,

eligible p' per,

Up to the prone* time, -nd until July 15th, consider.
able latitude has bona allowed as to the method by utieh the aim
gibility of metes offered for redissount, shell be determined,

jadgment of the ()Moore if the asiber boas and of the Loser's
beak has been exercised broadly, end. I meg sop, without undue

The

14-

regard to teeheiealities, foe motes have been rejected as
count of failure of eligibility;

some having been returned opt..

ire; to earelesenees in Arming or indorsing;

and it has been

moo then matinee - to est upon the appli-

our practice - Whleh

cation on the day of receipt, and advise credit if so requested
by telegrsgh.

There is, in feet, no red tape to be untied, nor

is there emy disposition to use it.

On July 15th nest, however,

itef;ulation B becomes effestive, and to the terms of that regula-

tion your attention should be partioularly directed,
15th, member banks will be expeeten t

After July

furnish raore specific

evidence :f eligibility of notes when applying for rediscounts,
,4 to smaller borrowers vitwse notes rare offered for rediscount, eon

siderable latitude will still be peendtted in determining the quells
of eligibility;

as to larger borrowers, the mentoer toes are meted

to adopt standards of credit twOmmmMtiem which will enable them to
promptly determine for themselves the eligibility of the paper which
they desire to rediseount.

The regulation is based upon three

importf42t general rules,
Firsts

That the meMber bank should have in its

filoe an origlual saint or fortified copy of a signed statement dis-

closing the financial oonditioa of the borrower in the ease of
all commercial paper ppreheesd from brokers or through

sorpooposidsoto,

gem*

That it Ohould have similar otatommla

es file ass to the flaancial <loadings of euetonaro Ames Mos
are offered for rodisseant for a total amount of ,15,000 or over,
or tel as amount memedise la% of tho oapital stook of the asa-

ber bask making the applioationi

that is MD my. financlui state-

ments meet be hold as to all per emood paper, aml as to paper
node by the beak's smateomml viler* the meant of tino suatelmarts

oblieKtimiredissonoted em000do #5,000 -or 10% of Whislookft
oapital,

Oa Oa Otkor 3024 ao smah stamina is required by

this resialation as is Oastosers olaa* paper Is of Vuied tor ma.

dim:taunt in nutilor amounts that *Ms mod, in arbor the* tha
&cold be eligible.

Third s

t the

prodigals of Um lora art haft hew

used or be Latendod for use in some industrial, ocnrcroial or
norioultural trammootion, but not for the purslane of load, build,
Inge or naohinerg, or other fixed or perennal' assets sr invest-

earned for sposolotimplor-

ments, or for the yorobase of
pose',

Root bask off Isere are suffioiently vall-aapatatod with

Uses eke borrow small onomsts. to readily ascertain Ur porp000
for chi** tho lose vas Redo.

In the Goa* Of larger borrOWOrs

this sae be beet dotomniaod ky n examination of a statement of
the borrower's finansial osodition.

Hie statement should be

mode in each form as ,o disclose whether the amount of his current
assets, that is to say, oath, bills and accounts receivable, stock
of :goods, or raw and partly manufactured material, is reasonably

in memo of his current debts.

Should the borrower's statement

disclose that his short loans and bills and amounts pcjble, is
other words, his ourreat liabilities, are greater La amount than
his quickly oonvqrtible assets, it would necessarily indicate that
some portliest of the

proceeds of his short loans has been invested

in more permanent form in his business,

3uoh a oonditlen would,

in most cease, render tae eredit doubtful vales* strengthened by
en indorsement,

Notes made by borrowers of that oharooter are

therefore, not eligible for rediscount but if the loan is made to
a good indorser and his statement conforms to the saes tort of
eligibility that is required of a maker of as snindorsed note, it
than becomes eligible for rediscount,

Firms and corporations engaged in mercantile or meow

ufacturiag business as a WA ass make statements altieb can be
readily analysed to determine this question of eligibility.

With

en individual, and particularly the agrisultural borrower, this
seems more diffioult.

If the loan is made for a omoJercial pup-

rose, en its proceeds are used in agriculture, its eligibility
can usually be ameertained by inquiry of the borrower at the
time the loan is made.

Encouragement of the practice of requirh.

Log financial statements will in itself tend to establish higher

-7..

standards of beads&
not be oonfused,

Eligibility and goodness, however, should

It is assigned that every loan made by a member

bank Is good, but only thee.e made for commercial purposes and

having the self-liquidating charadteristies referred to, are eligible,

There will now be incentive for bank officers to use

greater energy in obtaining definite .mowledge of the finanoial
condition of their customers in order that their banks Nay have a
considerable percentage of paper eligible for rediscount,

Cus-

tomers of a member beak will likewise be benefitted by tha additional assurance afforded to the bank that at times of seasonal
demand and in time of crisis, their bank has an assured means of
converting a large oereentage of its paper into credits for the
benefit of its own customers,

Officers of ,member banks have

frequently stated that they felt obliged to keep a portion of
their resources invested in bonds in order that they al6ht have

collateral readily available at my timo for borrowing purposes,
with staadards of commercial borrowings so establAshed that a

large portion of the paper held by the banks is readily con.
vortible at the Amileeel Reserve Banks, the noessalty for carry-

ing a bond account, simply for borrowing purposes, should no
longer exist,

It rust not be assumed that these changes can be
brou ;ht about at once, nor would thy; development of the system

gie

41.
be promoted ly attempting to foreemenetkeisIoNtimminno bake.
'without allowing ample timo ror stmd and yeeperstion,

Bet the

mere ostablinhaent of a atarainri for oammerals& peommrelebai my
;lia,:sally exert au influence towards the

be recitsaountod,

creation of that close of paper, tbst will be more effective in

bringine but the desired result thee will the establishment A°
restrictiou rules,

:AaCh paper will is time ooh better rates.

The influence of discrimination will vatilantely be irrestabible.

The exporieme of the past six menthe hAs 3ivea wait evidence 3f
the desire of comber 'banks to gain & bettor enderstending of what
is required in order to mak* ca lnrce, an aTount of their Resets

as possible ovaliAle for rediseount with the ?edema Reserve
Banks,

The Reserve basks are at present lammed in tILe oe-

tablishmat of

A ejstom for eolleating shooks, the details et

whi& plea ars so dell

un ns to re quire no pertienler 091104

DiedeisiUe of tea plan, Mower, dlsol3oeo two strong Objectless
In the minds of the officers of amber bunks, - one being the ',Om
Bible loss .)f revenue fremesehange charges noW .:fie by the SOW'

try books, and the other the passible lose of interest us Warm
at present carried with deserve -Agents, thregglielbesselleetlems

are Mei% and 'able& nee *aunt as reserves.

As to the first objectiont

Experienee nest demonstrate

-9-

whether economies resulting from a more prompt And scientific
system for collecting country chocks, together with earnings
growing out of the enjoyment of other advantages afforded by
the iederal In:serve system, may not entirely wake up the loss
of exchange charges to the extent that such chmrges are reasou..
Able and legitimate.

AO to tee sego= objection:

some o

ne feel that

in many eases, toe present sjstss of o;eck collection nseeeeitate* carrying larger oompensating bal:.uoes tiain 4';:ould be re-

quired or will be tecooko4ry when the Federal Reserve collection

system is In

operation,

the extent that baltnces

tamed solely for collection purposes can be withdrawn and used
locally, additional revenues will accrue to

member banks,

The statement is, also, frequently made that the
member burrs that join the system, Flre liable to suffer unex-

peeted depletion of their reservo balances, and on that nocaunt,
they will find it necessary tJ carry unaccustomed excess balances
in order to anticipate each depletion,
be the ease.

we hope, will not

As stated in our circular to memiber, beam and as

indicated in a more repent (singular letter, it is our intention

to cooperate in every way possible

ith the banks for whom we are

collecting checks, so as to enable them to maintain the reserve
required by law without uomeolosoary depletion or unnecessary

'WOOS,

if a Theoilber bank finds, after experience, that the

oharKeo

against its account exceed toe ramlant of the offset

which they are able to remit, &t should be possibl by arrang
nr.nt

ith its Reserve Agent to mice regular transfers for its

credit by a simple transfer entry on the books of tho 'reserve
bank.

On the ot.or nand, the Federal reserve bank will

c: .ter

Into suell arrangement ra Aay be desired to make regular trans-

fers from the accounts of member banks to the credit of the

sober banks' .reserve Agent, so that moss belemmes should not

manly uocumulate,

Alas plan should provost onsnooeted impair-

ment of reserves, as wall as unnecessary lose

f interest on

balances.

It is also urged that, as a coasidernble percentage
of the cheeks hnndled by country banks are drawn oft state in..

stitutions, and cannot be collected through the Reserve Bank,
country tqulks maz.t continuo existing enaction arrangements,

oarrring collection accounts ith their correspondents, and
that after two years such balancers will not count as reserve.

On this account, the claim is made that reserve reooiromonts
are, in fact, increased by reason of the Act, rather than decreased and that further losses of interest will result from
this cause,

This canclusion anticipates a possible loss to

arise a year or two hence,

The balances

wholly or in part for the next two :ears,

count as reserve
It also 8118101041

that no progress will be Ilode in trio next two Jeers in finding a

satisfactory method of dealing with the situation.

it also as-

sumes that utete banks will not take member ship is the Federal
Ai.eserve system, and such assumption is far from being justified,

To the extent that the meMber banks employ the facilities of the
reserve bank ror collecting cheeks an meMber banks, the necessity for harrying outside balrices will be redacted, and to the

extent that state banks take membership, the neeeesity for carrying outside balances will be farther reduced,

In order to min-

imize the necessity for carrying additional balances that two years
hones will not count se reserve, meiher banks should employ the Aeserve Bnnk collection facilities to the fullest extent possible,

rather than to reduce the effectiveness of this collection facility
by withholdilw their consent to the plan,

4 also frequently hear the claim made by the country
banker that he will be unable to eondaet his business rind make his
collections eeenemically on the 12;cf reserve now permitted by the law,

and that he is, theref)re, unable to take advantage of the reduced reserve requirements,

This claim is based upon a lack of appreciation

of the present flexibility of his poaltion,

If 50; or more of the commercial taper in the portfolios of
the meAber banks Lay be promptly converted into reserve balances by

-12.

rediscoonts with reserve banks, the country beaker shout e certainly

be able to take advantage of the redwood reserve requirements with)ut endue Apprehension as to his ability to aeet unexpeeted deeands
1ft appreciate very thoroughly that he is obliged

by hie customer*,

to make ev ry available dollar earn soeething,

etwrealetieg, also,

the fears that have been expressed as to the possible effect

,f the

new eyetem of ceeck collection upon the gamines of ember banks, we
bevy arranged with competent exports to make careful examinations of
typical banes in this district in order to areortain in -lent respect

economies mnj be effected Rnd earnings eugecnted as s

result of the

ohmeees to be underteken, and its results will be xAie enon to the
member banes,
::,be experience of the St, Louis aistriot terows some 11;ht

on this eatter,

?he Federal Reserve Bank ef that district undertook

to clear ohecks for its 459 members some mouths ago,
asked or obtained,

3o assent was

The adoption of the general collection plan lins

reoently afforded all the member banks of that distriet opeoetenIty
to withdrew If they so desired,
459 have withdrawn,
tinue the service),

I em edvised that only 99 scat of the

Presunably, the other 360 are satisfied to conIt will be a

great aid to the officers of the

beat, if the member banks will dive patient consideration to the
work now bein6 d ue and give the new collection system a fair
trial,

One other uniortunate aspect of the attitude of ummber
banks toward the system should be -ererred to.

They have not

yet developed a proper sense of proprietorship and responsibility
as to

the reserve bank itself,

They ,a*e too meth tisposed to

regard it as a government office or department and overlook the
fact that the bank was Greeted by law for the eurpose of perform ing a service to its stoekholders 7,nd depositors end not to impose

upon Lee% exoense and nardshlp,
phasized.

This cannot be too strongly em-

Al], the stuck of the reserve banks is owned by member

banks and all the deposits are the property of the medlar banks;
two-thirds of the directors are elected by the member banks;

the

rimary responsibility for the management of the reserve banks rests
span the member bankers themselves,

it is their duty and responsi-

bility to see that competent directors are elected and that efficient
and .reliable. officers are appointed.

2ov should regard their owner-

ship mad interest as a privilege, and they should 11;:swise feel free

to surest and criticise - certainly, to a greater extent than they
would feel warranted in making suggestions z.nd criticisms to their

Reserve

gent.

The matters I have so far referred to are rather those

-14..
11-1040 have beau a mere of anxiety or oritiolem in the minds of
bankers as to the /nature.

Your nttention should be divested to

ono importaat thing which has boon a ea,use of anxiety is t'w sat
had whioh raj wig safely be forgettee,

At no tiqie since Ger

Ciill -;ar and the financial disturbances whiob followed it, has
the Ilerid rhea so 11,47 Uneertalmties regarding future finanoial
develop:Tx:As

at the present time.

Uncertainty, doubt, timidity,

under .,1d « esrlean bankin4 methods have fre/uently given. rive to

oocurroaoes -0/Aidh have been amemeee t. our %Alois credit system sad
even to 'Lilo solvency of eoae of our b.nam.

Tile underlying cause bee

been doubt in the minds of tins banker as to his ability on short petiole to convert his assets, even the meet available, into a circulating medium of undoubtedneeeftees sad seeeptability to the people,
The

oueurrEctues of last rail, when the fear of what misht

happen, gave rise to instant cleman for ourremey, demonstrated that

the Ability to promptly satisfp that demised would promptly and °free.
tively allay apprehension,

The izleue of .:,588,:r3J,00. of Aldrieb,

Vreeland *arrow served on the ono tLand to protect bank reserves,
road on the other hand to meet the demands of depositors.

The

machinery then in existence, for the imp of this serreuey was neeessarily slow in starting motion and not completely effective until
after 'Ale lapse of some ...maks,

We have now in existence most

-15.

complete machinery yrrith which to meet any normal or exceptional

demand for currency, and It can be put in notion without previous
notice or preparation,
eral reserve notes,

The currency to be Issued, that is, the Fedat present largely secured by the deposit

of Told, AA y be Issued, if required, against deposit of commercial
paper eligible for redinc3unt and indorsed by lambs? banks, it will
be additionally nrotected by large gold reserves and it is the direst
obligation of the United States government,

banks to-day hold )ver

The Federal reserve

25c4000,000, of cash resources, prinotpelly

gold, and there is no longer need for anxiety by the member bankers
as to their ability to meet the requirements of their customers and
depositors,

no last six months have been occupied by the members of
the Federal ieserve Board and by the directors -.lad officers of the

reserve hanks in painstakins efforts to gradually develop this great
orgnisation, 3,) that It may demonstrate in acturl cveretion what it

was dosined
Z4.) reserve systeb vas °rotted to perform a service

provide protection directly to the banks of this country and indirectly to the customers of the banks,

However mach was ACOOMo.

plished by toe passage of the z'.0t, it cannot serve its true pur-

pose exceot by efficient administration;

such an administration

depends for its success upon the cooperation !ad loyalty of the banks
on the one hand and intelligent work by the Reneger of Coo system on

the other,

Uf one thing yeg Rey be assured:

this statute Is an

the books to stay, in feet, the benAere of the country would not
themsolvoo permit its repeal,

MISC 96 (5/81)

FEDERAL RESERVE BANK OF NEW YORK
e
Date

6/16/88

Financial Policy Council

David L. Roberts
From

Mr. Corrigan suggested I circulate
this timely speech by Benjamin Strong.

DISTRIBUTION:
Messrs.

Cross
Oltman
Patrikis
Schadrack
Sternlight
Thieke
Davis
Feldberg

http://fraser.stlouisfed.org/
Federal
t Reserve Bank of St. Louis

should open for business.

On November 2nd,

$3,321,950. of gold was received from the member
banks of this district in payment of the first instalment of our capital.

On the morning of the

16th of November, an organization, largely temporary,
consisting of seven officers and eighty-five clerks
had been assembled, and on that day $99,611,670 of reserves were transferred to the bank by the member
banks.

We had been successful in renting satisfact-

ory offices already equipped with the furniture and
fixtures necessary for our accommodation,

Our tem-

porary organization has since been gradually converted into a permanent organization, consisting now of
five officers and fifty-two clerks, including stenographers, messengers, watchmen and porters.
Two additional instalments of capital have

been received, making the present paid in capital

0,961,650, being 50% of the statutory amount,

Recip-

rocal accounts have been established with the other
eleven reserve banks for the purpose of handling in-

0
total of $300,000,000. of notes of various denominations, determined by e:Terience gathered from
all sources available as to the demand for currency.
This will involve a considerable outlay by the bank,

but the assurance to the member banks that we have or
hand at all times not less than X250,000,000 of currency available against emergencies, well justifies
the cost.

There is at present on hand over

0183,740,000 of notes and the su-2:21y is being in-

creased so as to complete the amount in a few weeks.
To this date there has been issued 034,600,000 in denominations of $5 to $100 inclusive, of Which amount

04,420,000 now outstanding are covered by a like amount of gold deposited with the Federal Reserve
Agent.

Of course the ability of the reserve banks
to increase their gold reserves, beyond the amount
of the member banks' deposits, is dependent upon their
ability to issue notes against deposits of gold.

This

process is now in successful operation, the New York

bank alone having issued, as stated,

34,920,000 of

notes against a like amount of gold deposited with

the Federal Reserve Agen, and all twelve of the
reserve barks show S58,291,000 of gold so held.

The New York Clearing Reuse Association
has admitted the bank to limited merilbeiship, there-

by giving us facilities for clearing checks without
imposing liabilities which WP are not authorized to
assume;

and in all matters pertaining to our or-

ganization and the development of cur business, the
clearing house has given us loyal. cooperation.

The

work of the bank is being carefully departmentalized
under the direction of e7perienced men.

Owing to

the simplicity of the work to be performed and the
machinery for handling it, I am confident that in

due time the bank will be more economically managed
than any other bank of its size in the world.

Sim-

plified methods of bookkeeping, and permanent statistical records, are being studied and adopted

without, however, attempting to burden the organi

S
unless it is in process of solution prior to that
time,

Consequently the country bankers should now

face that issue squarely, and unless you are willing
at the outset to agree that facilities for collecting checks must be created by the reserve banks
before the reserve balances have been entirely transferred, it will be hopeless to e7pect you to view
this matter from a judicial and far sighted point
of view.

Please, therefore, consider that the work
planned by the reserve bank, after conscientious
study of the problem, is undertaken with the object
of performing a necessary service for the member
banks, and not with the object of depriving them
of legitimate revenues.

The chief difficulties to be overcome may
be summarized under three heads:

First, the so-called "float."
Second, the possible duplication of reserves, or necessity for eT:cess

provisions of the act are to be ignored.
To summarize, therefore:

The difticr-

in respect to the "float" is that the member banks

after two years will be obliged to calculate cir
reserves as shown on the books of the reserve tanks.
In the case cf member banks of this district, trey
will not, after two years, be able to count a :,ash

letter as a cash reserve with the reserve bank until
the letter reaches the bank and the checks are
cleared, which means one day's time only,

If this

is a hardship, as it doubtless appears to be, let
me remind you that it is also a hardship for thr
victim of a drug habit to give up the use of drugs.
As to the second point of excess xes(Irves:

The situation appears to be as follows:

The country

banker requires and will continue to require certain
services of its correspondent, which at the present
time, the reserve bank is unable to perform.

The

correspondent is coqiensated for the performance of

rendered for a bank correspondent.
The necessity for a considerable .:,..;:cess

balance, however, grows out of the present inability of the reserve banks t.o handle checks payable

outside of the district or those drawn on non-member
banks.

The development of the inter-district col-

lection plan will come along in due time co that
you may send us checks on member banks located in
the other eleven districts, and the machiaery for
handling these items can be made to reduce the
transit time materially.

It ha$ been estimated that over 50% of the

the checks handled by the country banks are drawn
on banks not now members of the reserve system and
our members have assumed, without good cause, that
the reserve banks will never be able to handle these
items.

This is a pretty broad assumption.

The

problem may solve itself through the admission of
a great body of state banks to membership in the
system.

Failing that, however, if the interests

justly established that no criticism can possibly

arise as a result of preferences shown to Le banks
which are members.

For many member banks, it will be no hardship to carry balances with their old correspondents,
which will not count as reserves.

It has been a

more or less general practice, and will doubtless

continue

The reports of the Comptroller rarely

show reserves held by the national banks, to be less
than $240,000,000 above those required by law.

They have fluctuated from $242,000,000 in 1900 to
$435,000,000 e7:cess in 1911 and

March 4th last.

734,000,000 on

Such encess reserves can be made

the basis for the performance of such services as
the reserve banks may not be able at first to entend
to their member banks.

Every effort will be made to avoid the

necessity for carrying encess balances with the reserve bank merely in order to meet unenpected charges.

We have suggested that this may be accomplished by

almr;ct geometrical progression.

Now as to Exchange Charges:

Undoubtedly the chief objcction to the
collecting plan for many banks of the district lies
in thc third difficulty, that is, the loss of " exchange
charges."

In view of this objection, and in order to

avoid imposing hardship upon member banks, the intradistrict collection plan was made a purely voluntary
matter.

The changes which we hope will result from

the operation of this plan arc fundamental and can only
be brought about gradually by patient effort.

They in-

clude the correction of a number of abuses, such as 07cossivc exchange charges, in some sections of the country, undue lengthening of transit time, circuitous routing of checks in order to avoid points where collection
charges are imposed, drawing against uncollected items
and others with which you arc familiar.

A large voluno of items is now handled by
banks not located at natural exchange centers, which
should go more directly to destination.

Outside of

can be made up out of the use of reserves now released by the statute, and conditions as they now
exist under the Federal Reserve System will enable
the country bank to employ a ma=ximum of its resour-

ces to meet the needs of its own community and at
the rates which there prevail, as it now has the
means of immediately converting a large percentage
of its paper into a reserve balance at the reserve
bank in

of need.

Many of the country banks

receive savings deposits on which only 5

reserve

is now required, and from which hereafter larger profits will be realized.
The customer of a bank now enjoys the :privi-

lege of sending his checks to any part of the
country in payment of bills, and has used this privilege to the point of abuse.

On the other hand,

the charges imposed upon the payee of these checks
are gradually arousing resentment from the public.

It seems to me that we should be able gradually
to change our system so as to eliminate abuses and

appears to be a somewhat prevalent th.ugh err .nevus

belief that the law left the whole matter of state
bank membership tc the discretion

serve Bard.

the Federal Re-

Before c7nsidering the discretionary

p wers dealt with by regulati(n, you dn!uld study
those prYvisions cf the statute as to which the
Board has no. discretion.

The act provides that

any state bank has the right tc make a:plicaticn
for permission to become a member bank, and it requires the Board to establish by-laws t. govern its
action upon such applications.

It specifies the

capital and reserve requirements Which are made to
apply to such state banks.
loans, purchases

It prohibits e=essive

loans by member banks of or upon

their om stock, impairment of capital or payment
of unearned dividends, and certain ether transactions, all cf which 0.777 apply to the business of

national banks.

It authorizes the continuance in

part of existing reset-ye accounts for three years

from the date-the reserve banks are established,

jointly with those of the reserve bank.

Likewise,

it should be possible to have copies of the reports
now regularly made to the state banking department
filed with the reserve bank and with very few, if
any modifications in the forms now used.

In this

connection it must be noted that the new banking law
of this state adopted last year made express pro-

vision for state banks and trust companies joining
the reserve system.

The procedure for admission

in this state, where the examinations have been
thorough and effective will be simple and prompt.
The applying bank` should fill out the application

blank and send it to the Federal Reserve Agent at
our office.

It would be desirable to have an of-

ficer personally explain its contents to our own
examiner, to acquaint him in advance with the char
acter of the business conducted by the applicant

Whatever examination is required by the Federal Reserve Board can then be made.

In most cases,

hope to have such an arrangement with the state

banking department as would enable us simply to review the last examination made by the department,

provided that will be authorized by the Federal Reserve Board.

If a special admission examination

is made it should, if possible, be made jointly at

the time of the regular examination by the department.

The application and en miner's report will

then be passed upon by a committee, composed of the
Federal Reserve Agent, one other director, end the
Governor of the Federal reserve bank.

The direCtor who serves on this committee
shall in no case be an officer of a bank located in

the same city or town, as the applying bank.

report by this committee will then be transmitted
to the Federal Reserve Board for final action.

The

application and report of enamimItion will be intended to disclose the financial condition and character of the management of the al,plicant.

They

must show the nature of the powers enercised, and
make claar that they are not inconsistent with mem

bershi:JJ in the system or indicate in what respect

they are inconsistent.

The Board may impose con-

ditions if thought necessary to insure compliance
with the general standard of membership and to remove any inconsistency.

The Federal Reserve Board

will then pass upon the application, and if approved,
issue its certificate, whereupon the applicant is
required to subscribe for an amount

of stock of the

goal

reserve bank/to 6 per cent of the applicant's capital stock and surplus, of which one-half is at present required to be paid.

It must also open and

maintain with the reserve bank a reserve account
equal to what is now required for national banks.
Each institution applying for membership can be
dealt with under the new regulation, with due ro-

gard to the conditions surrounding the business of
that institution;

its assets, its policy, the char-

acter of its management and its charter powers can
all be taken into consideration under joint or soparpto (1:criraintion and as soon as moq-scrsIli-:, is

clearly indicated that any such restrictions will
be based upon recommendations submitted by the committee of the Federal reserve bank of each district,,

such recommendations, of course, resulting from an
em.amination, which will bring the officers of the

reserve bank in touch with the officers of the
applying bank and afford opportunity for a clear

understanding of the business and the requirements
of the applicant.

The regulation does not contemplate surrendering charter powers which aro not inconsistent
with membership and which arc clearly incidental to
the business of banking.

It does involve protect-

ing the system against membership generally by institutions that are conducting a business involving
special hazards and not incidental to banking.

One effect of a large membership under the

term of this regulation will be to gradually develop
uniformity of methods in banking, tending to security and stability.

not depend solely upon the size of its capital, the
amount of its resources or the character of its
supervision.

Its success really depends upon its

ability to perform satisfactory service to its customers ana to maintain its credit unimpaired.

This will apply to reserve banks as well as to a
national or state bank.

Every banker is conscious

of the necessity of so managing his institution that
he will keep his customers and add new ones.

How,

therefore, may the reserve systei,i expect to succeed

unless it is managed just as though all of its members
were, in fact, voluntary members, notwithstanding what
mey have been the terms of admission in the first
instance?

If the system is badly managed it will

lose membership and fail, and if it is well managed
and performs valuable services to its stockholders
and depositors, it will succeed vnd increase its membership.

Upon this basis, the state institutions

arc invited into membership, as voluntary members,
and upon this basis we expect to retain our national

can be discussed and composed, as would hardly
otherwise be possible.

Where in other cases of

government supervision a line of cleavace has developed between the interests of the government and
the interests of business, in these institutions
the point of contact will prove to be a point of
fusion.

May not this prove to be an entering wedge

by which antagonism between government officers and
business interests may ultimately be removed?

no other section of the country has this prejudice
been so apparent as in New York City, aad if all
such prejudices, political and sectional, against

New York and its bankers can be overcome by such
measures as have been adopted in the Federal Reserve
Act, I should feel that the work now being done has
been well repaid.

I should not permit this opportunity to

pass without referring to one feature of our banking situation of great importance:

The Reserve Act

made careful provision for the gradual transfer of

custody and use impose a hugh responsibility.

The situation is one that might easily lead to a
riot of speculation, inflation and e=xploitation, if

the bankers were so unwise as to permit it.

may, on the other hand, employ this vast credit to
meet the demands of the commerce of the world at a
time when we alone, of all the groat nations, are
able to fill the gap in the world's credit system
which has been created by the European War.

banker at this time should undertake to prophesy
what will be the economic consequences of the War.

The proportions of the conflict are so vastly greater
than anything known in history that precedent affords little guide by which to measure its results.

Study of trade reports, bank reserves and interest
rates, government borrowings and note issues, will
only serve to indicate a tendency;
close the result.

it will not dis-

What now seems to be taking

place all over the world is the general mobilization
of the gold reserves by every effective means, so

S
43

that each party to the conflict may with the greatest degree of security expand credits to the greatest degree possible.

Each nation should be regarded

as a bank, and all the bank, commercial and government obligations of the nation regarded as deposit
and note liabilities:

the gold reserves of the

banks should be considered as an insurance fund established to demonstrate the ability of the debtor
to pay in gold.

By good fortune, due to the pas-

sage of the Reserve Act

the outbreak of

the war, this country has itself mobilized some portion of its gold reserves and the mobilization process is continuing at a satisfactory rate.

Our re-

serves are likewise being augmented directly by gold

imports and potentially by liquidation of our debts
to Europe.

Vie are therefore in posititii to fortify

ourselves against such developments as the war may
bring about.
used.

But these reserveo must not be mis-

The tendency will likely be for them to still

further increase as a result of gold payments now

duty to the rest of the world under conditions now
eyisting as any duty that this country can over perThe extension of our banking credits is equal-

form.

ly a duty, our existing commerce depends upon it, and
we should be about undertaking It.
The Aldrich-Vreeland Act, after having performed a service of value beyond any expectation,
expires in a few days.

Under its protection our

banking system last year withstood a serious shock,

without disaster, largely because our national banks
wore able to promptly convert assets into currency.
0.11_y the resources of our own bflnks wore available,

c.nd fhoy had to be husbanded in order to pay foreign

kieb, while in former emergencies we had been able
to cur or borrow gold abroad.

After having shipped

about $130,000,000 gold to Europe in the; first half

of 1914, we sent about $120,000,000 more after July
1st,

trid were able to pledge a total of nearly

$200.000,000 for payment of maturing foreign debts.

Without the Aldrich-Vreeland Act this would not have

0
46

been possible.

Some doubt has occasionally becon

ability of the Federal Reserve

c.7-.1ressed as to ti-

Banks to deal with
arise.

similar situation shGuld it

These cleub';F' may be dismissc.

Che machin-

ery for issuing 1'_1 .5..rjch-Vrooland currency took time

to prepare and bt,art in -Teration, no banking or credit organizations wol-o aeuraly in e::istence frx,- the

1,11rose, and of coarse, tho associatiGns hod no true
banking reserves.

Ihe reserve banks, however, have

the facilities and will require no further preparation.
Their relations with th3 member banks are established,
credit information regarding their affairs is new boing
systematically assembled, and the Reserve Banks rill

have constantly on hand and ready for prompt issue, an
amount far in cncess of the $500,000,000 of currency

authorized by the 'ldrich-Vreeld Act.

They :ow

hold in their vaults and with t".L. Federal Reserve

Agents $300,000;000 of gold and $35.000,000 of lawful money, a practically untouched reserve.

In ordinary

times, the value of this insurance for the stability of our

Ili'

want to see the system demonstrate its value before
becoming members.

Both attitudes can be overcome.

Neither one is sound if confidence is felt in the
ability and honesty of the managers of the system.

Lack of confidence in the management of the system
indicates lack of confidence in your own ability to
give the system good management - which I am sure
none of you would admit.

I can assure you, gentle-

men, that the management of the bank is working with
an eye single to the strongest and broadest possible
develolment of the system.

But we need the active

and zealous su;ort of our member banks to whom vie
are resonsible and we need the mombershil, and sur,-

port of our state institutions to insure the breadth
and strength that mean success.

4
er

To be released on next
Thursday, June 24th.

- 74ea
FILE ROOM

This is the first general convention of

the bankers-of the State of New York since the establishment of the Federal Reserve Systeffl, and,

therefore, the:first opportunity to address all of
the bankers of the state in regard to the work
which has been done by the Federal Reserve Bank
and in regard to some of the larger aspects of the
system.

Your President has asked me to refer to

our plan for collecting checks and to the new regulation regarding state banks, but I want first to
briefly review some of the work that has been accomplished by the bank since its organization last
November.

On October 26th, 1914, it was decided by
the Secretary of the Treasury that the situation
brought about by the war in Europe necessitated the
immediate organization of the Reserve Banks, and

November 16th was fixed as the date when they

/35'

open for business.

On November 2nd,

,950. of gold was received from the member

of this district in payment of the first inent of our capital.

On the morning of the

of November, an organization, largely temporary,
si sting of seven officers and eighty-five clerks

d been assembled, and on that day $99,611,670 of reerves were transferred to the bank by The member
banks.

We had been successful in renting satisfact-

ory offices already equipped with the furniture and
fixtures necessary for our accommodation,

Our tem-

been received, making the present paid in capital
$9,961,650, being 50% of the statutory amount,

Recip-

rocal accounts have been established with the other
eleven reserve banks for the purpose of handling in-

ter-bank transactions, such as collections and investments.

Through these accounts, the Federal

Reserve Bank of New York has up to this time handled
$426,300,000. of exchange and $25,000,000 of currency shipped to us to create exchange.

Balances

have fluclaated widely, the net amount due the New
York bank at times exceeding 020,000,000.

May 19, 1915, for the purpose of facilitating
prompt settlement of these balances at minimum cost,

there was deposited in Washington by all the Reserve
Banks, and placed under the control of the Federal
Reserve Board, a fund of gold sufficient to enable
them to effect settlements between themselves without transferring any currency and simply by exchange
of telegraphic advice.

These settlements are at

present made weekly, but if a larger volume of
transactions makes it necessary, the fund can be
increased and the settlement effected daily.

After some months of study by the Federal
Reserve Board and the officers of all the reserve

banks, the Federal Reserve Bank of New York, in
common with the other banks, has taken the first
step toward the creation of machinery for collecting checks for its member banks within its own
district.

Plans for establishing a system of bank

transfers have been agreed upon by all twelve of the
reserve banks and will shortly be placed at the disposal of the member banks, to enable them to effect
prompt and economical transfers to all parts of the
This system will be gradually developed

country.

and enlarged.

Service of this character is made

possible largely through the establishment of the

Gold Fund in Washington, by means of which balnces
between the reserve banks created as a result of these
transfers will also be settled.

In the first seven months of our business
the New York Reserve Bank has discounted for its
member banks 1.501 notes, amounting to 1;13,284,349.70.

It has also purchased in the open market 387 accep-

tances of a total value of 0,315,158., and it has

made forty-one investments in short time municipal
warrants of a total value of $11,160,000.

In ad-

dition to the investments made for its own account,
it has purchased $23,697,508.93 of acceptances and
municipal warrants for account of eight of the
other reserve banks, on their instructioAs.

From these discounts and investments, the
bank has to date made gross earnings of 5158,710.58,
its current expenses have been 0116,948.84, leaving
41,761.54 of net earnings, which will be applied
to organization expenses amounting to $181,654.36,

These are partly made up of the cost of initial

purchases of necessary supplies and fitures, and
making changes in our office.

035,424.18

how-

ever, consists of the assessments levied against the
bank for its proportion of the expenses of the

Federal Reserve Board and 098,180.98 represents
the actual cost of preparing Federal reserve notes
issued and to be carried in stock.

The directors

of the bank have authorized the preparation of-a

total of $300,000,000. of notes of various denominations, determined by e:perience gathered from
all sources available as to the demand for currency.
This will involve a considerable outlay by the bank,

but the assurance to the member banks thatwe have or
hand at all times not less than $250,000,000 of currency available against emergencies, well justifies
the cost.

There is at present on hand over

$183,740,000 of notes and the sup -lay is being in-

creased so as to complete the amount in a few weeks.
To this date there has been issued 034,600,000 in denominations of $5 to $100 inclusive, of Which amount
34,420,000 now outstanding are covered by a like amount of gold deposited with the Federal Reserve
Agent.

Of course the ability of the reserve banks
to increase their gold reserves, beyond tie amount
of the member banks' deposits, is dependent upon their
ability to issue notes against deposits of gold,

Thi

process is now in successful operation, the New York

bank alone having issued, as stated,

34,920,000 of

notes against a like amount of gold deposited with
the Federal Reserve Agent, and all twelve of the
reserve barks show $58,291,000 of gold so held.
The New York Clear in

Reuse Association

has admitted the bank to limited mepbeiship, thereby giving us facilities for clearing checks without
imposing liabilitiPs which wP are not authorized to
assume;

and in all matters pertaining to our or-

ganization and the development of cur business, the
clearing house has given us loye.J cooperation.

The

work of the bank is being carefully departmentalized
under the direction of eNperienced men.

Owing to

the simplicity of the work to be performed and the
machinery for handling it, I am confident that in

due time the bank will be more economically managed
than any other bank of its size in the world.

Sim-

plified methods of bookkeeping, and permanent statistical records, are being studied and adopted

without, however, attempting to burden the organi

zation with unnecessary detail.

Credit files

have been started to record the condition of our
member banks, as well as information gathered in
regard to paper offered for discount by -those banks

which avail of our facilities.

In time this rec-

ord will be one of the bank's most valuable assets,

enabling it to promptly and safely meet unusual demands that may be made upon its mambers.
This brief review of the past seven months'

work must not give the impression that it has been an
easy task or accomplished without arduous labor.

Everything pertaining to the organization has been new
and untried.

It may be said that on October 26th

the bank's equipment consisted of little more than
a printed copy of the Federal Reserve Act;

whereas,

to-day, it is a fully equipped bank with an organization perfectly capable of meeting any emergency,

and is promptly transacting the business entrusted
to its care.

CIPBOINVIPW79741114

Any sound system of banking reform for
oal couni.y involves assemeiing our gold reserves.
By that means the foundation is laid for a fle2:i-

ble note issue, and by that means the assets of the
member banks are made liquid and convertible in
time of need.

The reserves so assembled must in

part be those formerly held in Iyink vaults, but

must also largely consist of those formerly redeposited with other banks in the reserve centers.
Of course there will be no difficulty with the reserves which have heretofore been held in the vaults
of the member banks.

But a different question

arises with respect to those that have been on de-

posit with reserve agent banks, which have been used
as the basis for check collection services by the
agent banks.

Two years hence a still larger pro-

portion of these reserves will have been transferred
to the reserve bank, and the problem of check collec-

tions will become acute for the small country bank

unless it is in process of solution prior to that
time,

Consequently the country bankers should now

ferred, it will be hopeless to erect you to view
this matter from a judicial and far sighted point
of view.

consider that the work
planned by the reserve bank, after conscientious
study of the problem, is undertaken with the object
of performing a necessary service for the member
banks, and not with the object of depriving them
of legitimate revenues.

The chief difficulties to be overcome may
be summarized under three heads:

First, the so-called "float."
Second, the possible duplication of reserves, or necessity for el-xess

reserve balances, for collection
pu22oses.
rrdIrLrd,

the fors of revenue from e:'7change
charges.

First, as to the "float:"

the Federal

Reserve Ac;t is silent as to the method which the

country banks shall follow in computing deposited
reserves.

Theoretically, these reserves have in

the past been cash balances in bank;

have not been real cash
extent.

in fact, they

to a considerable

By the old practice, which has always

been permitted, the country bank each day remits a
cash letter to its collecting agent in a reserve
city, and on that day charges the amount of that
cash letter to its reserve agent and considers it
a cash balance, and part of its reserve.

These

checks in transit to the reserve agent constitute
the real "float,"

After they reach the reserve

agent. they become a reserve balance, because the

reserve agent advances the amount of the checks,
for which it gives immediate credit and allows interest on the balance after deducting the time estimated for collecting the checks.

The Federal

Reserve Act provides that the member banks shall
"establish and maintain" reserves on deposit with
the Federal reserve banks;

it does not say that

the reserves so "established and maintained" shall
consist partly. of cash and partly of these uncollec-

ted checks, which are in the post office on the way
to the bank.

Stated differently, I think it means

that the reserves to be deposited in the reserve banks
shall be as shown on the books of the reserve banks,

and not as shown on the books of the member banks.
If this were not so, the amount of reserves
to be maintained on deposit in the reserve banks

would not be as stated in the law, but would be those
amounts, less the amount cf all the checks in the
mail, on the way to the reserve banks from all the
member banks.

Now, if the old method of handling checks
should be adopted by the reserve banks, instead of
the one proposed, these reduced reserve balances

would be further reduced by advances of the amount
of checks received by them for collection, as is

now done by the reserve agent banks, thereby further depleting the resources of the reserve banks
by the amount of checks sent out for collection
for the reserve banks themselves.

Such a re-

serve situation would be absolutely unsound.

The

resources of the reserve banks would be too largely
invested in uncollected checks, and the reserve
balances of the member banks would be too largely
paper balances.

This new definition of what con-

stitutes a deposited reserve is in reality the correction of a banking abuse in the use of checks as
reserve, which should have been corrected before
it reached the present unsafe proportions.

It is,

in fact an unavoidable consequence of the transfer of reserves now being made, unless the reserve

provisions of the act are to be ignored.
Mo summarize, therefore:

The diffic-Jty

in respect to the "float" is that the member banks
after two years will be obliged to calculate their
reserves as shown on the books of the reserve tanks.
In the case cf member banks of this district, they
will not, after two years, be able to count a (.ash

letter as a cash reserve with the reserve bank until
the letter reaches the bank and the checks are
cleared, which means one day's time only,

If thio

is a hardship, as it doubtless appears to be, let
me remind you that it is also a hardship for the
victim of a drug habit to give up the use of drugs,
As to the second point of excess reserves:
The situation appears to be as follows:

The country

banker requires and will continue to require certain
services of its correspondent, which at the present
time, the reserve bank is unable to perform.

The

correspondent is comj.ensated for the performance of

these services by a profitable balance.

The member

bank fears that while it must carry a large

reserve

with the reserve bank without interest, it must also
carry other balances at 2f interest with its old
correspondents in order that it may have these services performed.

There are, I think, the follow-

ing services performed:
1st:

The collection of all checks drawn

on non-member banks and on points outside of the

district, which the reserve bank is not now able to
handle.
2nd:

The checking, purchase and collec-

tion of commercial paper.
3rd:

Investigation, purchase, custody

and sale of bonds.
4th:

Making general inquiry regarding

banks and other credits.
5th:

Loaning surplus funds on collateral

security on the New York Stock a:change.

6th:

The collection of notes.

Many of the services above enumerated can,

in time, be performed by the reserve banks, and I
believe with such care and intelligence as will make
the service satisfactory to the member banks.

For

example, when as a result of the establishment of
the reserve system a true discount market is created

with a large volume of bills accepted by banks of
first credit, there will be little difficulty in arranging, if necessary, for the reserve banks to purchase bills for its members and such bills can be

held in portfolio as a secondary reserve available
at any time for rediscount in case of need.

They

should in time, to some extent, take the place of
call loans and purchased commercial paper.

And

it must not be forgotten that the Federal Reserve

Bank of New York at present has only 479 accounts
requiring such services and when New Jersey adds
its quota, 610 accounts.

With this small clientele,

there should be little difficulty in making the ser-

vice the promptest and most efficient that can be

rendered for a bank correspondent.

The necessity for a considerable
balance, however, grows out of the present inability of the reserve banks to handle checks payable
outside of the district or those drawn on non-member
banks.

The development of the inter-district col-

lection plan will come along in due time so that
you may send us checks on member banks located in
the other eleven districts, and the machi aery for

handling these items can be made to reduce the
transit time materially.

It has been estimated that over 50% of the

This is a pretty broad assumption.

The

problem may solve itself through the admission of
a great body of state banks to membership in the
system.

Failing that, however, if the interests

of the member banks demand that they should be -,,c-

mitted to send their items drawn on state banks tc
the reserve banks, I think you may assume that every

effort will be made to enable them to do so.

even doubt whether this would involve any amendment
to the law;

but shoul& this be possible only by an

amendment, you can be assured that the Reserve Bank
of New York will endeavor to have the law amended.
This statement must not be understood to mean that
our collection facilities will be developed for the
benefit of customers of banks which do not join the
system.

If the state banks do not take membership,

under terms which are fair and equitable, and the
member banks find that they will require the services
of the reserve bank to effect economical collection
of non-member checks, the terms upon which this ser-

vice is performed ought to afford some advantage to
the member banks.

But, in my opinion, no attempt

of this character should be made until the basis of
memh.orehip for state banks has been so fairly and

19
justly established that no criticism can possibly
arise as a result of preferences shown to tA_e banks
which are members.

For many member banks, it will be no hardship to carry balances with their old correspondents,
which will not count as reserves.

It has been a

more or less general practice, and will doubtless
continue.

The reports of the Comptroller rarely

show reserves held by the national banks, to be less
than $240,000,000 above those required by law.

They have fluctuated from $242,000,000 in 1900 to
$435,000,000 e::cess in 1911 and

March 4th last.

734,000,000 on

Such encess reserves can be made

the basis for the performance of such services as
the reserve banks may not be able at first to entend
to their member banks.

Every effort will be made to avoid the

necessity for carrying encess balances with the reserve bank merely in order to meet uneypected charges.

We have suggested that this may be accomplished by

arrangements with us and with other correspondent
banks in New York City, to make regular transfers
in order to reduce or restore balances carried with

US.
If the member banks using the system are
unable to send sufficient er:change to offset charges,

we must, of course, consider Ahether it may not also
be necessary to restrict immediate credit of checks
to those which come to us directly from banks that
have adopted the collection plan and give deferred
credit to those Which come to us through clearing
banks but in reality for the benefit of banks which
have not adopted the plan.

This we would be most

reluctant to do unless it was found necessary in the
interest of those banks using our par service.

To the e:Aent that each member bank avails
of our collection service, to just that extent will
it be relieved of the necessity of carrying balances
elsewhere for collection purposes, and as new members

join in the plan the relief in this regard All show

21
goometrical progression.

Now as to Exchange Charg2s:

Undoubtedly the thief objection to the
collecting plan for many banks of the district lies
in the third difficulty, that is, the loss of "e7change
charges."

In view of this objection, and in order to

avoid imposing hardship upon member banks, the intradistrict collection plan was made a purely voluntary
matter.

The changes which we hope will result from

the operation of this plan arc fundamental and can only
be brought about gradually by patient effort.

They in-

clude the correction of a number of abuses, such as excessive exchange charges, in some sections of the country, undue lengthening of transit time, circuitous routing of checks in order to avoid points where collection
charges arc imposed, drawing against uncollected items
and others with which you arc familiar.

A large volume of items is now handled by
banks not located at natural exchange centers, which
should go more directly to destination.

Outside of

the few sections of the country where par collcc i;ions

have been brought about by the establishment of country clearing houses, false exchange point s are being
created., giving rise to a species of inflation which
is bad. enough in itself, and

other abuses.

which also

encourages

Where abuse exists, it must gradually

give way to better practice.

Whore legitimate reven-

ues, however, arc in danger of bcirg lost, we must find.

means to avoid the losses or to create other sources of
revenue which will make them up.
Through the courtesy of some of

our lir mbcr

banks, we now have a staff of experts at work in their
offices, making an analysis of their accounts in order
to assist in a solution of this exchange pro blcm.

plan contemplates ascertaining what is the r al

The

it cf it

from exchange, where these profits can bo trade up if
lost, and

what effect generally the Reserve System will

have on the earnings of member banks.

It is the pur-

pose of the reserve bank to fur nish eiz ry membe r bank

of this district with the best system which c an be

de-

vised for analysis of its business and of the accounts of its customers so as to determine where
economies may be effected, losse8 avoided and new
income created.

The expense of making this study

might be prohibitive to any one of the smaller banks
and will be borne by the reserve -bank for the bene-

fit of all the country banks, who can well afford to
cooperate in order to avail of the results.
In this connection,

I would like to ask the

bankers from the central part of this state whether
they make more money from exchange charges than they
now lose by the payment of excessive rates of interest on deposits.

Too many bankers measure the pros-

parity of their banks by the footing of the balance
sheet, rather than by the annual turnover of profitable business.

If you will exaLiine the statements

and annual reports of the great banks of Europe, you
will find that the managers of those banks point with
pride to the "turnover" and pay much less attention
tt) their ''footings.'

You will find that they publish

elaborate lists in which are stated the mount of
charges for all sorts of services performed for their
You will find that the interest which

customers.

they allow on their deposit accounts is measured by
the profit which they are able to make on the account,
rather than by what some next door neighbor is willing to 1.ay without regard to 1..rofit.

Exchange is not a matter that can be dealt
with by general rule or regulation.

CimAitions in

each bank and each district differ.

An analysis of

the books of one bank may disclose that the loss of
revenues from exchange can be made up by a more conservative policy in the payment of interest on deposits,
In other banks, it may be found that customers receive accommodation and have services performed for
which they do not pay adequate compensation.

still other banks, it may be found that abalances maintained for the purpose of collecting checks are unnecessarily large under the new conditions created by the
Reserve System.

Some part of the loss of exchange

can be made up out of the use of reserves now released by the statute, and conditions as they now
exist under the Federal Reserve System will enable
the country bank to employ a maximum of its resources to meet the needs of its own community and at
the rates which there prevail, as it now has the
means of immediately converting a large percentage
of its paper into a reserve balance at the reserve

bank incase of need.

Many of the country banks

receive savings deposits on which only 5

reserve

is now required, and from which hereafter larger profits will be realized.

The customer of a bank now enjoys the privilege of sending his checks to any part of the
country in payment of bills, and has used this privilege to the point of abuse.

On the other hand,

the charges imposed upon the payee of these checks
are gradually arousing resentment from the public.

It seems to me that we should be able gradually
to change our system so as to eliminate abuses and

26
overcome complaint.

Payments made to distant points

should be effected to a greater ey:tent by bank transfer checks and for this we shall gradually develop:
facilities.

narges for handling checks sent to

distant places should be borne by the person for

whom the service is really lerformed, that is, by
the drawer of the check, and that will aid in develoling the use of bank transfer checks

Some

of the :resent revenue of the country bank from
change charges, if lost, should be replaced by a
moderate charge for effecting transfers, and these
charges should be more equitably based u;. on the cost
of settling net e7:change balances.

Of the $152,621,000. of resources of the
Federal Reserve Bank of New York, only $11,274,500.
are contributed by the country banks of this state.

While an improvement in our collection system may
appear to benefit the banks of the reserve and central reserve cities, the plan now adopted aims particularly to meet the needs of these country banks.

It gives the customer of the country bank the advantages of having his checks handled at par within
the district as freely as the customer of a New York
City bank;

and it will materially strengthen our

banking position by reducing the volume of floating
checks heretofore considered as reserve balances.

In concluding this part of my address, let me sincerely urge upon the country banks that their co-

operation will enable us to perfect facilities which
will minimize loss and inconvenience that otherwise
may be incurred when their reserve accounts are
finally transferred.

A fair trial of the plan

will afford ex-:erience which will facilitate our efforts to make it satisfactory.

One of the objects

be accomplished by

the Federal Reserve Act is "to establish a more effective supervision of banking in the United States,"
and membership by state institutions was rNude a part

of the plan so that our whole system might be bound
together for greater strength and. protection.

There

appears tc be a somewhat prevalent th,ugh errneous
belief that the law left the whsle matter of state
bank membership to the discretin 'fr the Federal Reserve Beard,

Bef:re c-nsidering the discretionary

p wers dealt with by regulatin, you dluld study
those provisicns cf the statute as tc which the
Beard has nc discretion.

The act provides that

any state bank has the right to make a:plicaticn
for permission to become a member bank, and it requires the Beard tc establish by-laws t, govern its
action upon such applications.

It specifies the

capital and reserve requirements Which are made tc
apply to such state banks.
loans, purchases

It prohibits excessive

leans by member banks cf or upon

their cwn stock, impairment cf capital cr payment
of unearned dividends, and certain other transactions, all cf which 11,771 apply to the business of

naticnal banks.

uthorizes the continuance in

part of existing reserve accounts for three years
from the dato-tbe reserve banks are established,

requires compliance with rules for examinations, but

authorizes the acceptance of exainations made by
state authorities.

The Act clearly recognizes, ab

we all do, that a stronger banking systerli and better

banking methods can only be brought about by assembling reserves of bo'i. national :':nd state banks,

and by more uniform methods of supervision and enamination.

To accomplish this, the Federal Reserve

Board has so exercised the discretion conferred by
the statute that no state bank need hesitate in ap-

plying for membership if it belives in the system,
is in sound condition and its business complies with
the law.

The regulation just published will permit
the kind of cooperation between the banking depart-

ment of this state, and the Federal reserve bank
which should insure a munimum of expense -And incon-

venience to state banks Which become members.

hope to see arrangements made by which the regular
examinations by the state examiners can be conducted

jointly with those of the reserve bank.

Likewise,

it should be possible to have copies of the reports
now regularly made to the state banking de:cartment

filed with the reserve bank and with very few, if
any modifications in the forms now used.

In this

connection it must be noted that the new bc.nking law

of this state adopted last year made express pro-

vision for state banks and trust companies joining
the reserve system.

The procedure for admission

in this state, where the examinations have been
thorough and effective will be simple and prompt.
The applying bank' should fill out the application

blank and send it to the Federal Reserve Agent at
our office.

It would be desirable to have an of-

ficer personally explain its contents to our own
examiner, to acquaint him in advance with the char:-

acter of the business conducted by the applicant
Whatever examination is required by the Federal Reserve Board can then be made.

In most cases,

hope to have such an arrangement with the state

banking department as would enable us simply to review the last examination made by the department,

provided that will be authorized by the Federal Reserve Board.

If a special admission examination

is made it should, if possible, be made jointly at

the time of the regular examination by the department.

The application and examiner's report will

then be passed upon by a committee, composed of the

Federal Reserve Agent, one other director, and the
Governor of the Federal reserve bank.

The director who serves on this committee

shall in no case be an officer of a bank located in

the same city or town, as the applying bank.

report by this committee will then be transmitted
to the Federal Reserve Board for final action.

The

application and report of examination will be intended to disclose the financial condition and character of the management of the a2plicant.

They

must show the nature of the powers exercised, and

make char that they are not inconsistent with mem

bership in the system or indicate in what respect
they are inconsistent.

The Board may impose con-

ditions if thought necessary to insure compliance
with t3le general standard of membership and to re-

move any inconsistency.

The Federal Reserve Board

will then pass upon the application, and if approved,
issue its certificate, whereupon the applicant is
required to subscribe for an amount

of stock of the

oval

reserve bank/to 6 per cent of the applicant's capital stock and surplus, of which one-half is at present required to be paid.

It must also open and

maintain with the reserve bank a reserve account
equal to what is now required for national banks.
Each institution applying for membership can be
dealt with under the new regulation, with due ro-

gard to the conditions surrounding the business of
that institution:

its assets, its policy, the char-

acter of its management and its charter powers can
all be taken into consideration under joint or soparntr, (::rarivinqtion and as soon as mcnibcrshi

obtained, future uniformity of supervision is
reasonably assured.

This necessarily involves the sort of cooperation between the federal and state authorities
which has long been desired and vvich has been de-

veloping naturally, quite apart from the provisions
of the Federal Reserve Act.

As to investment and other charter powers:

You will observe by the terms of the regulation that
each applicant for membership must conform to certain statutory provisions made to apply to state
institutions, and that compliance with further conditions imposed by the Board will be determined
only after enamination of the facts disclosed in the
application for facmbership and in the report of the

enamination of the applicant

This leaves it to

the discretion of the Board to determine in each
case to what entent further restrictions authorized

by the Act, should be imposed for the general secririty of the Federal Reserve System.

It is

clearly indicated that any such restrictions will
be based upon recommendations submitted by the committee of the Federal reserve bank of each district,

such recommendations, of course, resulting from an
examination, which will bring the officers of the
reserve bank in touch with the officers of the
applying bank and afford opportunity for a clear

understanding of the business and the requirements
of the applicant.

The regulation does not contemplate surrendering charter powers which are not inconsistent
with membership and which arc clearly incidental to
the business of banking.

It does involve protect-

ing the system against membership generally by institutions that are conducting a business involving
special hazards and not incidental to banking.

One effect of a large membership under the

term of this regulation will be to gradually develop
uniformity of methods in banking, tending to security and stability.

Membership will, in time, come to be regarded as evidence of a standard of condition and
management which will reflect credit on institutions
enjoying it.

The most important matter, however, the
right of withdrawal, is not specifically dealt with
by the Act, but has been well covered by the regulation.

National banks have become involuntary

statutory members of the system.

In order to avoid

or to abandon membership they must surrender their
national incorporation and reincorporate under .7:tate
laws.

Very few of the national banks have done so,

in fact no tendency in that direction has developed.

State institutions, however, have hesitated to subject themselves to dual supervision, and to possible

future regulations of the Reserve Board, the terms
of which arc not yet disclosed, without some defin-

ite means of withdrawal, which would not involve
their liquidation.

They could not reincorporate

as state banks without abandoning powers and good

of too great importance to be jeopardized.
This situation has incorrectly been assumed to be an absolute bar to membership by state
institutions.

One of the main purposes of the

Federal Reserve Act, in fact, could not be properly
accomplished were state banks required to take membership without means of withdrawal.

On the other

hand, the interests of e:tisting members had to be

regarded and no undue advantages extended to state
banks which might operate to the disadvantage of the
national banks.

By the terms of the regulation,

a method of withdrawal is provided which should relieve state institutions from doubt as to the effects
of dual supervision or the effect of future restrictive regulations.

Its terms arc sc conservative,

however, as to protect the interests of existing
members and protect the system as a whole against
excessive reduction of its resources as a result
of indiscriminate withdrawals.

The success of a banking institution does

not depend solely upon the size of its capital, the
amount of its resources or the character of its
supervision.

Its success really depends upon its

ability to perform satisfactory service to its customers and to maintain its credit unimpaired.

This will apply to reserve banks as well as to a
national or state bank.

Every banker is conscious

of the necessity of so managing his institution that
he will keep his customers and add new ones.

How,

therefore, may the reserve system empect to succeed
unless it is managed just as thol:zh all of its members

were, in fact, voluntary members, notwithstanding what
may have been the terms of admission in the first
instance?

If the system is badly managed it will

lose membership and fail, and if it is well managed
and performs valuable services to its stockholders
and depositors, it will succeed and increase its membership.

Upon this basis, the state institutions

are invited, into membership, as voluntary members,

and upon this basis we expect to retain our national

ank members, whose membership was involuntary.
It may be that the involuntary character
of the national bank membership has been responsible

for the prevalent feeling that these reserve banks
arc departments of the government.

Such an atti-

tude on the part of member banks might lead them to
disavow their responsibility for the management of
the reserve banks when, in fact, the primary responsibility for the character of their management

rests upon the members, who own all the capital
stock, and in fact all the assets of the reserve
banks.

Many members have not yet recognized the

responsibility of ownership which properly rests
ipon them.

As stockholders, they elect two-thirds

of the directors by whom the officers of the reserve
banks are in turn appointed.

It is clearly the

duty of the member banks to elect competent directors and see that efficient and reliable officers
are aapointed.

They should

feel free to make sug-

gestions and criticisms regarding the management of

the banks and equally free to make the greatest possible use of their facilities.

To these banks, the government in a sense
has entrusted its credit.

They cre authorized to

act as its fiscal agents and through them are issued
notes which the government is obligated to redeem
The government should, therefore, assume

in gold.

a partial responsibility for their management and
supervision.

It appoints three of the directors

and a board of seven men to supervise the whole system.

Concerning this feature of the Reserve Act,

after cr_perience with its operation,
strong hopes.

I entertain

Heretofore government regulating

bodies have been brought too much into antagonism
with the business interests which they arc appointed
to supervise.

In the reserve banks, they are

brought into contact with the member banks by participation in the actual managpment of the reserve
banks.

They sharp the responsibility for their

management.

Difficulties and differences of opinion

can be discussed and composed, as would hardly
otherwise be possible.

Where in other cases of

government supervision a line of cicavace has developed between the interests of the government and
the interests of business, in these institutions
the point of contact will prove to be a point of
fusion.

May not this prove to be an entering wedge

by which antagonism between government officers and
business interests may ultimately be removed?

no other section of the country has this prejudice
been so apparent as in New York City, aad if all

such prejudices, political and sectional, against
New York and its bankers can be overcome by such
measures as have been adopted in the Federal Reserve
Act, I should feel that the work now being done has
been well repaid.

I should not permit this opportunity to

pass without referring to one feature of our banking situation of groat importance:

The Reserve Act

made careful provision for the gradual transfer of

reserves by the member banks, but permitted the
reduction in required reserves to take effect at
once, so that at present large excess reserves are
held by member banks, a part of which within the
next two and one-half years must be transferred.

The amount of those later transfers and the amount
of funds required to eliminate the "float" from reserve balances, will make quite a hol,

in present

excess reserves, and should be allowed for in future
calculations.

The Federal Reserve Act on November

16th released cash and deposited reserves in the
national banks, amounting to $465,000,000.

The

Comptroller's report of March 4th, showing the con
dition of national banks, disclosed that this excess
reserve had increased to $734,000,000 held by the
national banks alone.

It may be assumed that an-

other very large excess reserve, but probably less
than this sum, is also held by state institutions.
There is, in fact, held in trust by the banks of this
country a credit of such vast proportion that its

custody and use impose a hugh responsibility.

The situation is one that might easily lead to a
riot of speculation, inflation and eI:ploitation, if
We

the bankers were so unwise as to permit it.

may, on the other hand, employ this vast credit to
meet the demands of the commerce of the world at a
time when we alone, of all the great nations, are
able to fill the gap in the world's credit system
which has been created by the European War.

banker at this time should undertake to prophesy
what will be the economic consequences of the War.

The proportions of the conflict are so vastly greater
than anything known in history that precedent affords little guide by which to measure its results.

Study of trade reports, bank reserves and interest
rates, government borrowings and note issues, will
only serve to indicate a tendency;
close the result.

it will not dis-

What now seems to be taking

place all over the world is the general mobilization
of the gold reserves by every effective means, so

that each party to the conflict may with the greatest degree of security expand credits to the greatest degree possible.

Each nation should be regarded

as a bank, and all the bank, commercial and government obligations of the nation regarded as deposit
and note liabilities:

the gold reserves of the

banks should be considered as an insurance fund established to demonstrate the ability of the debtor
to pay in gold.

By good fortune, due to the pas-

sage of the Reserve Act prior to the outbreak of
the war, this country has itself mobilized some por-

tion of its gold reserves and the mobilization process is continuing at a satisfactory rate.

Our re-

serves are likewise being augmented directly by gold
imports and potentially by liquidation of our debts
to Europe.

Ue are therefore in posititil to fortify

ourselves against such developments as the war may
bring about.
used.

But these reserves must not be mis-

The tendency will likely be for them to-still

further increase as a result of gold payments now

being made to us by debtor nations for the goods
being exported to Europe at an unprecedented rate,
and the temptation to expand will increase with the
enlargement of our reserves.

In our trade relations with the rations
of Europe, it seems likely that the settlanalt of

balances due us will be effected by one or more of
four methods,

We are now probably purchasing and

will continue to purchase large amounts of our securities held in foreign countries.

This is one

of the most natural and desirable p/ocesses.

may continue making direct loans to foreign countries
which to some extent will offset our trade balances.

To some extent, also, we arc receiving payment in
gold, $100;000,000

having come to our shores since

the first of January.

All three of these opera-

tions together have been hardly sufficient.to effect

payment of current accounts being created every day
for purchases now being made.

The fourth method

of settlement depends upon the activity and enter

prise of our large banks and is the one which I am
most anxious to see employed.

We should a:,; once

use a part of our great credit power to finance
our own world commerce, instead of continuing to entrust to others this manifest duty.

Our banks do not seem to realize that of
our $4,000,000,000 of foreign commerce, over 20%,

that is, over $800,000,000, is ccnductcd with the
republics to the south of us alone;

and this great

trade represents 30% of all the foreign trade of the
Central and South American Republics.

It has large-

ly been conducted upon credits established in foreign lands with foreign banks.

It is our trade,

and we should extend the credit upon which its contincance depends.

If we do not do so, some part of

that trade will surely be lost.

The same is truo

with respect to a large part of our commerce with
other parts of the world.

This country's position,

both domestic and international, would be vastly
stronger were we able to employ at once a large part

of our surplus banking credit in financing our own
foreign commerce.

Our past dependence upon for-

eign credits is no longer as necessary as it was,

and our customers have a right to expect accommodation, new that we can afford to extend it.

What is most needed is banking machinery
and men of export

knowledge.

The Federal Reserve

Act confers enlarged powers upon the national banks
to enable the creation of this machinery.

If the

powers thus permitted arc not sufficient to enable
its prompt creation, the member banks should point
out the deficiency, and effort should be made to
secure any necessary amendments.

Experienced men

must be developed in the school of experience as
promptly as possible.

This subject must not be

viewed with a narrow vision.

This country and

its bankers must not be considered to be algaged in
an unlawful and underhanded competition in undertaking at last to conduct the business Which belongs
to it.

The extension of our commerce is as much a

I
47

duty to the rest of the world under conditions now
oristing as any duty that this country can over perform.

The extension of our banking credits is equal-

ly a duty, our existing commerce depends upon it, and
we should be about undertaking it.
The Aldrich-Vreeland Act, after having performed a service of value beyond any enIectation,
expires in a few days.

Under its protection our

banking system last year withstood a serious shock,

without disaster, largely because our national banks
were able to promptly convert assets into currency.
0114 the resources of our own b-nks were available,

they had to be husbanded in order to pay foreign
deb'i,, while in former emergencies we had been able
to -cud or borrow gold abroad.

After having shipped

about $130,000,000 gold to Europe in the first half

of 1914, we sent about W120,000000 more after July
1st, and were able to pledge a total of nearly
200,000,000 for payment of maturing foreign debts.

Without the Aldrich-Vrecland Act this would not have

been possible.

Some e.ov_bt has occasionally been

c7Iressed as to to rIbility of tho Federal Reserve
Banks to deal with
arise.

similar situation sheul d it

These cletE may to eliswisscO.

:he machin-

ery for issuing .-.1.i_rich-Vr::oland currency took time

to prepare and btart in 1:reration, lin banking or credit organizations 701'0 aeolally in 0::istence fo7.- the

purpose, and of course, the aasociations hod no true
banking reserves.

ac reserve banks, horievor, have

the facilities and wi17 require no further preparation.
Their relations with the member banks are established,
credit information regarding their affairs is new being
systematically assembled, and the Reserve Banks rill

have constantly on hand and ready for prompt issue, an
amount far in o::cess of the $500,000,000 of curro-Lcy

authorized by the Aldrich-Vreeld Act.
hold in their vaults and with

They :ow

Federal Reserve

Agents $300,000 000 of gold and $35,000,000 of lawful money, a practically untouched reserve.

In ordinary

times, the value of this insurance for the stability of our

crocli t position would be well worth the cost of its

establishment and maintenance.

At the present time

its value cannot be estimated.

To what extent may

not the complaisancy with Which our bankers are viewing possible consequences of the war be due to the
assurance that at last we have at hand the means to

protect our own banks without regard to affairs in
foreign countries, - self-reliant and self-sufficient?
In that assurance lies tho answer to those

members whose allegiance to the system has been in
doubt, and the strongest argument for membership
those who hesitate.

Most of the member banks of

this district I believe are giving us their loyal
support.

Some have withheld it, as have the state

institutions up to this time.

I have made an earnest

effort to satisfy myself as to the cause of this at-

titude, and now believe that there are but two reasons
worth mentioning.

As to the member banks, some of

them fear losses growing out of the collection system.

As to the state institutions, most of them

want to see the system demonstrate its value before
becoming members.

Both attitudes can be overcome.

Neither one is sound if confidence is felt in the
ability and honesty of the managers of the system.

Lack of confidence in the managemont of the system
indicates lack of confidence in your own ability to
give the system good management - which I am sure
none of you would admit.

I can assure you, gentle-

men, that the management of the bank is working with
an eye single to the strongest and broadest possible
dovelolment of the system.

But we need the active

and zealous su:,-.,;ort of our member banks to whom we

are responsible and we need the mumbershil, and sup -

port of our state institutions to insure the breadth
and strength that mean success.

et?

6,0

bzzt-ke_

The 2ederal Reserve Banks have no,,7 bean in ororatien about one year.

that time, so much.discussion has taken place an

During

so much has been

written in regard to the important features of the Act and the oper-

ations of the banks, that one runs the risk of tiresome reiteration

in any norther discussion of thaausubject.;

::or can very much be

said in regard to the business actually conducted by the bunks in

t'ie period, for the volume has been inconsiderable and its char-

acter of slicht importance, compared to the volume and character

of the work of orcnnization.

Few difficulties are presented in employing men and organizing the machinery

to enable one bank to conduct - large business.

A great nrny

difficulties were presented, how-ver, in organizing twelve banks

on very short notice, an0 so developing their machinery that they

will wort: in harmony an unison.

I shall not attempt any detailed

review of the methods that have been employed to bring about the

results so far accomplished.

The policy of the system as a whole,

has been very lerroly determined by the Federal Reserve 7oard as

-2-

expressed in the various regulations which it has issued.

physical anC; mechanical organization of the banks an

The

the plans

for their harmonious operation h-v,, been perfected through fre-

quent meetings of the Governors of the banks, as well as of various

members of their staffs, such as auditors, and in other ceses,
175i,

'frt.. transit managers and assistant cashiers.

It may be asked why so much time has been devoted to organization in a bank

such as ours, which has but :12,000,000 invested at interest, an('

whre the balance of its assets, consist simply of

in cash.

200,000,000

In other words, why hasten organization work any faster

than th- business develops?

I think a complete answer to this

islostion can be made by calling your attention to they r.sl-onoibil-

itios which will rest anon ti-is country an(' upon the Foderal 2eserve

Banks as an important part e" its banking machinery, in effecting

necessary readjustments which ultimately must be made as a result

of the war.

It would be foolhardy to prophesy what this process of rea'justment will be,

but some of the effects of the readjustment I think con be discerned

at this time.

People who have been accustomed to doing business

-3with banks, to a great

extent measure the
ability of the
banks

to met their
liabilities by the
sources.

The degree

arivunt of the bank's

of confidence

gold re-

felt in a bank by
its

cu-tomers,
may also be felt in
n/
a large way by
an entire nation
as to its
banking system, and
this is

particularly true in
those countries

whose banking
systems are based
uron a
reserves which

are held by

right of note issue.
ing vast

cntralized control of
cola

central banks that
have the

During this present
period, we are
export-

quantities of goods
to :rope and

loans which we are

e7:clusive

extending to foreign

notwithstanding the huge

nations and banking
insti-

tutions and

notwithstanding our -o,rchases
of large
icrm

securities formerly
held abroad,
our customers

countries find it

gold_

reserves in payment
for their

movement started in
our favor, we have

A-00,000,0n in this
w-y.
immediately finds
Banks.

in foreirm

necessary to ask their
banks to ship us
large

amounts of those gold
Since the

amounts of Amor-

received about

Luch of this gold,
if not all of
it,

lodgement in

In other words,
our

purchases.

banks, and to some

,tarier'

extent in Re7erve

Triaerri of reserves to
bank

len4/
liabilities is become unduly large, and the pia-srrfrtilyft abroad is

being correspondingly reduced.

In order `hat those payments may

be made, the belligerent nations hay. induced their citizens to
A.

give un their gold to the banks, thereby enab/in^ the banks to

enlarge their loans and note issues at the same time that they are

shipping gold to us.

The result is plain onon-h to he seen:

Liabilities, both national and banking in belligerent countries,

are out of usual proportion to gold reserves; our gold reserves,

in a sense, are out of ufmal proportinn to

,04, bank liabilities.

also, know that there is nothing onite so fluid or which readjusts

multe so promptly as cra-it.

In normal times, when credit be-

comes extended and money rates are abnormally high in one Part of

the globe, money is attracted to that point.

Balances o" trade,

financie' operations, the expenditure- of tourists and investment

qbwattir
transactions o "fset each other, just as in the clearings at the

A
Clearing J.:ousel debits offset cre(-its and but a very small balance

is settled in (7010.

Just now, however, in an international sense, the clearings are not of bal-

ance.

7:e are pre-enting more checks at th: Clearing House than

-5are

being
presented

our foyer
and gold

That

gill.

atathe

against

us, the

balance

are

constantly in

mover in o"r

On OM

direction in

be the

A
volume.
reaction from
this
development and
Lt
in what
Ted-ral
way
'reserve
doGiamaligladitil

flanks

seems to
me that

our

export

to take

foreign

their

Ainvolved

when

war is

thWoreration?

over, or at

balance of
trade

place.

This -ill
be the

nations and

readjustment will

worle"s

institutions

Borrowings in
this

cheap

normal

emerge from

market

or sales

volume or

market or the

internatinnol

sequence as we
the

restore

depleted brtk
reserves.

nations an

tine in
our

express it in
the

history,

'Unduly

begin to
letotithilk
bend ur *6414,"
0\
gold re-

credit, or the

ennble them
to

gold

simrlest

which hove

a. $i-retf*h

,7oor's,

*ill

forecast will

return of
some part
of this

institutIees
liabilities, Till

efhich

'annot now

trans-

batkin7

expanded their
serves, if
they have

resumed.

goods in this

Chata

promptly

those

or ot;'-or

tow/a:Z.:a/4'4*

language,

the7ar with

oneratinns

securities to
this
en ntry

market.

credit

re-sale of

actions in
such

moeny

begin

banking

maintained,

m101

whenever

r'isappears,

credit

begin very

any rate,

or
securities to
sell

ac-uiro the

gold.

with the
exception or the

It will
be the

first

-6-

outbreak of the war, when this country will be called upon to

exhibit its strength and resourcefulness in international fi-

nance.

I feel very certain that with the immense resources

in gold now being accumulated by the Federal Reserve. Banks,

we will be able to bear our part in this readjustment with

credit to the country and to the system.

tion will occur cnnot be prophesied.

Just how the opera-

From the standpoint

of the member banks, it seems to me that we can feel great

satisfaction and assurance, as well as a security never before

felt, ii having

command of the resources of institutions

which can convert bank assets of a liquid character, such as

commercial paper, into credit or currency at notice.

It seems

to me that we should then be able to demonstrate, as I have no

d.ubt we will, that proper banking machinery will enable us to

meet the demands upon our banking resources which may then be

made without the shock and confusion and without the humiliation

which we suffered in 1893 and 1907.

-Mile it would, as I have

stated, be hazardous to attempt to forecast the various steps

or oder of events by which these adjustments will be required

-7-

of us, we can, neverthelesD, face with equinimity, the necessity

of a large loss of gold if we have gold on hand and in our custody.

&Li

0:4414

ti,)

Mitt

61:,30

4,:ects tryPew, egli dwell

q! (A-P

No small part of the work of the last year has been directed toward

providing both the machinery and the material means of pyotecting

4)01 hail
be made

1/11*the interests of member banks against demands which
0\

upon them as a cos.sequence of the war.

It may be that some of our members have allowed their attention to be direct-

ed too intently upon other considerations

than those which are of

national, as well as individual, importance.

I am reminded of this

by a letter just received from a banker in this state who calls my

attention to the dissatisfaction of some of the member banks, aris-

ing from the possible loss of interest and possible loss of exchange

profits, as a result of the gradual transfer of reserves and the

enlargement of the collection system.

will not

91MAralAw,
I hope the .tallar banks

permit this consideration to influence them too strongly

in their attitude toward the system and I particularly hope that

they do not assume that the difficulties, and all of the difficul-

ties which they have been discussitg_among themselves are not quite

as fully well-known to the management of the Teserve Banks.

-3-

The work of the past year h.s developed a belief in the minds of :many of us

that we have not yet established as close relations with the member

banks as are necessary to a complete mutual understanding, this

being due no doubt, to the engrossing character

organization and the

of the work of

.a.ck of time for more frequent meetings

than has heretofore been possible.

Steps have been taken, how-

ever, to overcome this difficulty.

At the last meeting of the

American Bankers Association, a National Bank Section was organ-

ized and an "Xecutive Committee representative of the National

bank members appointed.

This is an encouraging development.

For the first time, the entire membership of the Fe,eral Reserve

System is organized and has appointed a representative body with

which we can deal.

You will be interested to learn that the of-

ficers of our bank have already held one meeting with the members

of the Executive Committee of the rational Bank Section.

have further arranged for a Conference # the Cove_nors of the

Federal Reserve Pnnks with this Committee to be held in .ashington

next week.

At the conclusion of the meeting, a joint conference

-9-

will be hold with the Members of the Federal Reserve Board.

Thus, for the first time, opportunity is presented for an organ-

1WWW4ivT
ization

all the member banks to discuss n11 of those problems

face to face willIwboth the body which supervises the system in

434147

Washington and the officers who are running the banks in the difse

ferent sections of the country.

a.7: hopeful that these meetings

will be productive of satisfactory results.

We, furthermore,

have under consideration, a plan by which the Federal Legislative

Committee of the American Bankers Association may hold a similar

conference sometime during the month of J'Inuary.

These meetings

will be devotd to making earnest effort to reconcile conflicting
7-0- -

views as to the meaning of the statute and how it should be put

into practical operation and careful consideration will be given

by the officers of the reserve banks to such recommendations as

are submitted.

403,7pe-triwb the membersift in this district will accept my assurances,

w!iich I earnestly make, that every effort will be given to make

the operation of the banks in every way satisfactory to them and

to their lewitimate interests so far as the law permits.

You

should not lose sight of the fact that all of our stock is owned

by the member banks, tat

11 of our deposits belong to them, -

the member banks elect two-thirds of the directors, by whom the

officers are selected and our direct responsibility is to our

own membership.

theirs.

have no objects or interests to serve eve

aka

I hope, th-,/,,Pure, that the various steps which we are

taking to put the law Lit° operation, as required by the terms

'yea, ,144,0 arz,
of the statute, can be undertaken with the cooperation of our
6".

tOrr.

(1a

stockholders and that we can develop relations of mutual confi-

dence and cooperation.

ADDR7:SS AT NEW YORK STATE /3:111CRS A3 :::0OIATION

GROUP VI,

HOTPI, 14RTINIWE, NE. YORK CITY,

DEC. 9, 1915.
Delivored by Lir, Benj.4min Strong, Jr,

The Federal Reserve 13 uks have now boon in operation about one year.

Daring that tire, so much discuosion h.s taken place and so much has boon
written in rognrd to the important for.tures of the

rn,t and tho operations of

the banks, that one runs the rink of tiresome reiteration in any further discussion of thetesubjects.

iior can very much be s:AA in reg%rd to the busi-

ness actually conducted by the banks in this period, for th!7 volume h.s been
inconsiderable and its character of alight, importance, compared to the volume

and character of the work of organisation.
Few difficulties are presented in em,loyin?7 men and organizing the

machinery to enable one bank to conduct a lore business.

3.reat crny

difficulties .ore presented, however, in organizing twelve banks on very

short notice, and so developing their machinery tht thoy will work in harmony and unison.

I shall not attempt any detailed reveiew of the methods

that have been employe) to bring atout the resalts 30 n:r aocomplished,

The

policy of tho system an a whole, h u boon very Lrivly determined by ti

Fed-

eral aecorvo Board no expressed in the various regulations Nhich it has lasued.

The physical and men

organizatiAn of the banks and the plans

for their harmonious operation have be ,n perfected through frequent meetings
of the -ovornora of the banks, as well as of various members of their st.%.;:fs,
such

the auditors, and in other oases, the tranuit manager.' and the as:Ast-

ant cashiers.

It may be A3ked why so much time has beoa devoted to organization
in a b nk such as ours, which h-s but 112,000,000 invented at intorost, and
where the balanc^ of its aa:;ets consist simply of

200,000,000 in cash,

other words, why hasten organization any faster than the business develops?
I think a complete answer to this question can be made by cA.ling your at-

tention to the responsibilities which will rest upon this country and upon
the Federal Reserve Banks as an inr)ortant pert of its banking machinery, in
re-

effecting necessary.' adjustments which ultimately must be mede es a result
of the war.

It would be foolhardy to prophesy what this procos

of readjust-

ment will be, but somo of the effects of the readjustment I think can be
discerned at this time.

People who have bean accustomed to doing busi-

ness with banks, to a great extent measure the ability of the banks to
meet their liabilities by the amount of the bank's gold resources.

The

degree of confidence felt in a bank by its customers, may also be felt in
a larger lay by an entire nation as to its banking system, and this is particularly true in those countries whose banking systems are based upon a
centralized control of cold reserves which are held by centrel banks which
have the exclusive right of note issue.

During this present period, we are

exporting vast euentitiee of goods to Europe and notwithstanding the huge
loans which we are extending to foreign nations and benking institutions
and notwithstanding our purchases of large amounts of American securities
formerly held abroad, our customers in foreign countries find it necessary
to ask their banks to ship us large amounts of these cold reserves in payment for their purchases.

ince the gold movement started in our favor, we have received
about 4400,000,000 in this way.

iluch of this gold, if not all or it,

immediately finds lodgement in the banks, end to some extent in Reserve
Banks.

In other words, our ratio of reserves to bank liabilities is be-

come unduly large and the ratio abroad is being corresi:;ondingly reduced.

In order that these payments may be made, the belligerent nations have
even induced

their citizens to give up their gold to the banks, thereby

-3-

enabling the brinks to en]..rge their loans and note issues at the same time

that they are shieping gold to us.

The result is plain enough to be seen:

Liabilities, both banking and national in belligerent countries, are out of
usual proportion to gold reserves; our gold reserves in a sense, are out of
usual proportion to bank liabilities.
We also

now that there is nothing quite so fluid or which readjust.

quite so promptly as credit.

In normal times, when credit becomes extend-

ed and money rates are abnormally high in one part of the globe, money is
attracted to that point.

Balances of trade, financial operations, the ex-

penditures of tourists and investment transactions generally about offset
each other, just as in the clearings at the Clearing House, debits offset
credits and but a very me_11 balance is settled in gold.
Just new, however, in an international sense, the clearings are
out of balance.

":o are presenting more chocks at the Clearing House than

are being presented against us, the balances are constantly in our favor
and sold moves in our direction in unprecedented volume.

-.het will be the

reaction from this development, and in what way will the Federal T:eserve

Banks be involved in the opertion?

It seems to me that when the war is over,

or at any rate, whenever our export balance of trade diseppeare, readjustments
will begin to take place.

This will be the world's cheap money market.

foreign nations and banking institutions emerge from the war with their credit
maintained, normal credit operations will be resumed.

Borrowings in this

market or sales of goods in this market or the re-sole of securities to this
country, or other international transactions in such volume or sequence as

we cannot now forees** will beein very promptly to cause the return of some
part of this gold to restore depleted benk reserves.

To express it in the

simnlest language, those nations and banking institutions which have kaaa unduly expanded their liabilities, will begin to build up a stronger founda
tion of

gold reserves, if they have credit, or the goods, or securities to

-4-

sell which will enable them to aconite.) the gold.

It will be the first

in our eistory, with the exception of the developments at the out-

break of the iar

hen this country will be called upon to exhibit its
in international finance.

strength and re

I feel very

certain that w ith tie immense resources in gold now being accumulated
me,

by the Federal Reserve Banks, we will be able to bear our pert in this
and to the system.

readjustment with credit to the cc

the operation will occur cannot be prophesied.

.rom the s

Just how
dpoint of

the member banks, it seems to me that we can fe 1 great setisfacti

and

assurance, as well as a security never before felt, in having the command of resources of institutions which. can convert benk assets of a

liquid character, such as commercial paper, into credit or currency at
It seems to me that we should then be able to demonstrate, es

notice.

I have no doubt we will, that proper banking machinery will enable us to
meat the demands upon our banking resources which nay thee be made without the shock and confusion and without the humiliation which we suffered

in 189: and lee%

7hile it world, as i have stated, be hazardous to at-

tempt to forecast) the various steps

order of events by which these ed-

juatmeets will be required of us, we con, nevertheless, face with equanimity, the neceesity of a large lose of gold if we have gold on hand and in
our austody, and that ie where the Federal Reserve System will demonstrate
its value.

No small pert of thework of the past year has been directed

toward providing both the machinery and the material means of protecting
the interests of member banks against these demands which vein likely be
made uoon them as a consequence of the war.

It may be that some of our members have allowed their attention
to be directed too intently unon other considerations than those which are

of national, as cll es individual, importance
by e letter just received from a banker in thi

am reminded of this

who calls my atten-

-6-

iurtherrore, have under consideration, a plan by which the Federel Legialative ()ommittee of the .Americen Bankers Association may hold a similar con-

feronco some time during the month of January.

These meetings will be de-

voted to making earnest effort to reconcile conflicting views as to the
meaning of the statute and as to how it shorzld be put into practical operation and careful consideretion will be [liven by the officers of the reserve
banks to such recommendations us are submitted.
I trust the members in this district will accept my assurances,

which I enrnestly make, that every effort will be given to

leke the opera-

tion of the banks in every way satisfactory to them and to their legitimate
interest': so f.r ae the law permits.

You should not lose sight of the fact

that all of our stock is owned by the member banks, that all of our deposits
belong to them, -- the member banks elect two-thirds of the directors, by
whom the officers are selected and our direct responsibility is to our own
membership.

7;e have 71

objects or interests to servo save theirs.

I hope,

also that the vrious stens whl.ch we are taking to put the 17:e! into opera-

tion, es required by the terms of the statute, can be undertaken with the
cooperation of you who are our stockholders

and that we can with your aid

develop relations of mutual confidcnee and cooperation.