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Reproduced from the Unclassified I Declassified Holdings of the National Archives
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the New York Times of June 4 which states that there is an unwritten
understanding pursuant to which call money is not allowed to go below
6%.
As I told you over the telephone, this understanding is not
correct.
The fact is, the stock exchange call money market is not well
organized and not infrequently is a most disturbing factor in the whole
financial situation.
I made inquiry as to the basis for the article
to which you make reference and learned from an authoritative source
that on last Friday a certain trust company (which is fiscal agent for
the State of New York) appeared in the market with $8,000,000 at 6^,
at about a quarter of three in the afternoon.
$5,000,000 was all that
was required, which was rapidly taken, supplying the demand and leaving
some $3,000,000 which could not be loaned.
In other words, this one
episode technically created an oversupply of call money.
On Monday,
the next succeeding business day, this $5,000,000 was promptly called,
and as there happened to be but a very limited amount of money offered
at that time the rates immediately shot up to 10/6, reflecting, of course,
a shortage in call money.
As I have previously stated to you, the stock exchange call money
situation forms the nmissing link" in our financial chain and constitutes
a disorder the remedy for which our best banking minds should address them
selves to finding.
It seems absurd that in dealing with a banking unit
that frequently involves a sum of a billion dollars, the matter of lending
or calling a comparatively insignificant sum in one day should necessitate
an interest change winging all the way from
to Z0%»
Its effect upon
the general credit situation cannot be other than bad.
As you know, our
member banks have exercised a pretty steady pressure upon their stock
exchange loan accounts, with the result that there has been a continued
and substantial reduction from the peak which was reached last Autumn.
There has, in consequence, been very extensive liquidation in the stock
market during the last few months, with a considerable reduction in the
price level of securities.
The call money market is operated most un
scientifically, and I am hoping that as this fact becomes more and more
appreciated, some plan may be evolved that will change the present practice
of lending money in Wall Street o n fsharp call^against more or less unliquid
assets.
Honorable R. 0. Leffingwell,
Assistant Secretary of the Treasury,
Washington, D. G.
Acting Governor.
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Dear S ir :Referring to Governor Hardings letter
of f4arch 30th, X-1878,\transmittin® the reply
of the Federal Reserve Board to Senate Reso
lution No. 328, a 1lic it 3d supply of printed
copies of this document has been r3 ce iv e d by
the Board, and I am sending you under separate
cover, t’venty-five copies for uss by your barilr*
Very truly yours,
Assistant Secretary,
To Chairiran of a ll F.R. Banks.
<1
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Reproduced from the Unclassified I Declassified Holdings of the National Archives
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Reproduced from the Unclassified I Declassified Holdings of the National Archives
n
Li j \ I VO
fhe unde
Acceptance Cowell for the puxpose of studying the advisability, ways
and means of modifying the present system of settlements on the How
fork Stock Exchange and substituting therefor some system of periodical
settlement* have heldtwo extended conferences at which the problem was
ffclly disouseed both from the point of view of the banks and of the
3took aacohange*
The members of the Conralttee have unanimously expressed the opinion
that the adoption of a
fem
aettlfcaent by the Exchange would offer
advantages In that i t would eliminate duplication of the handling of
securities and in payments*
tnasmioh as it involves, however,
changes f f great importance both to Banks and to members of the sxohange
it ^ ill require the most careful study of the subjeot by the ocwalttee
mi
in any oase a team settlement cannot be put in operation until the
new system of daily Stock jsxehange settlements through the stock Clearing
Ooxporation has been perfected and in praotioal operation for a reasonable
time*
The Committee inspected the new quarters and the machinery of the
3to(Ck (Hearing Corporation and expressed itm greatly Impressed by the
thoughtfulness and vision with which evexy detail of the new machinery haA
been
ttom&it out.
the Committee received from one of its members, Mr* Samuel * . streit*
Chainnan of the Committee on Clearing Bouse of the stock Exchange, &
detailed report describing the texm settlement operations in London and on the
$Uti$ean Continent*
Shis report is attached, and the Committee reoonaents
DECLASSIFIED
Reproduced from the Unclassified I Declassified Holdings of the National Archives
Authority
(jO iO^O I
that i t ba printed and vldaly circulated amongst the membara of the
American Aoaeptanoe Counoil, the banks and banking and Stock sxohange
houses.
fha Ooramittaa bell eves that the atady of the raport will ba vary
halpfol in aaaaring a more comprehensive graap of the problem, whioh will
ba aaaantial in ultimately paaeing uion the us ^ueation of whether or
not aotiva atapa ahould be taken towarda the adoption of atook exchange
tazm aettelomenta In the United states*
Respectfully sulmltted,
W4l»TER IS,
ja m m m v m
w M m ) CJ. CJSDDSS
GM2I23 MCCUHRAH
W. H. POHfSR
m . h. i m i o K
J O T fl. S01CT3KT
SDC7ABD alUJlBSC®
S im m * r» sTEEIT
£. 7. H.
PAUL M. WaBBETBG, Ohaliman.
Term Settlements
Trading in securities for the account or periodi
cal settlement dates far back in the history o f se
curity transactions; a term settlement having been
provided for by the regulations o f the Paris Bourse
as early as 1724 . The first compilation o f the Rules
and Regulations o f the Committee for General
Purposes c f The Stock Exchange in London be
came effective on February 12 th, 1 8 1 2 , and its
recognition o f settling days indicated that trading
for the account was a well established practice at
that time. Clearing houses were not then known.
The first clearing systems practijrf^cTwere by the
exchanges in Ghtsgow and Manchester in 1848, but
were very primitive. The first complete system of
clearing intermediate contracts in securities was es
tablished in Frankfort in 1867 , and from the
methoHs practiced there the principles o f clearing
were adopted by all o f the principal Bourses and
Stock Exchanges o f Europe within ten years, but it
was not until 1892 that the New Y ork Stock E x
change established its clearing Ijouse.
As the principal trading in securities on European
Bourses and Stock Exchanges is for the periodical
or term settlement, most o f their clearing sysiems
are adapted thereto and make no provision for cash
trades.
The definition “ term settlement" used
herein indicates any settlement for a period that is
weekly, fortnightly, or monthly.
The description given in this pamphlet o f the
operations o f term settlements is based on conditions
as-they existed in Europe prior to 1 9 1 4 , as upon the
outbreak o f the European war all Bourses were
closed and up to the present writing they have only
partially resumed. W ith the exception o f the Paris
Bourse, trading for the account or settlement has
not begun again. In London a resumption is ex
pected as scon as the Defense o f the Realm Act is
.abrogated.
In all markets having term settlements loans on
Stock Exchange collateral are generally made for
the period o f the settlement and substitutions o f se
curities in loans during that period arc- unusual. In
London particularly the purchaser or seller for cash
has to pay a higher or rcceive a lower price, and,
as stamp taxes and additional fees contribute to
making cash operations more expensive, the volume,
o f cash trading is comparatively small.
The call money market is not based on Stock E x
change collateral but the bulk o f the call loans is
made on acceptances and special governmental obli
gations. As in the operations o f a term settlement,
described hereinafter, the brokers know what their
money requirements will be for the ensuing account
a day or two in advance o f the final settlement day
o f the current account, they are enabled to make
their banking arrangements with the least possible
disturbance; the discount market in the final
analysis acting .as the regulator o f excess demand
or supply o f Sto^lc Exchange money.
In addition 1 t t ' banks, many banking /o r semi
banking firms make a practice of carrying brokers
over frqm .one settlement tq another at an interest
charge somewhat higher than current banking rates
fo r the account, as more fully described hereafter
in the operation o f the Contango in London. On
these loans no margin is ■•■gsssaflftiiy required. On
tile other hand, banks ins'-st on margins on Stock
Exchange loans o f about ten points, instead o f the
usual 20 % required by I\ew Y ork institut'ons.
This margin must be kept good.
In a market having a daily settlement as X ew
York, the operations o f a Clearing House eliminate
on ari average C 0 % o f the actual delivery and pay
ment o f daily transactions, leaving only 40% to be
actually settled for the succeeding day.
These
figures vary slightly according to the character of
the market, but- the law o f averages from statistics
during the twenty-seven and a half years that the
Clearing House o f the New Y ork Stock Exchange
has been established show that the variation is
seldom more than 5% above or below the percent
ages g iv en .'
In term settlements o f a fortnight as practiced in
Europe, the elimination is equivalent to 90% o f the
total volume o f transactions in stocks cleared, which
would leave 011 settlement day o f a fortnightly term
about two and one-half to three times the amount
o f securities to be delivered and" paid for on final
settlement day as is put through in a daily settle
ment.
For purposes o f comparison, and to verify for
the X ew Y ork market, figures were prepared for
several periods o f a fortnight at the X ew Y ork
St-ock Exchange Clearing House which show that
the same average percentage o f elimination would
be effective if a fortnightly settlement, were in
operation in X ew York as is now shown in a Euro
pean term settlement o f that period.
T he results o f this additional elimination o f
intermediate contracts through the operation of a
term settlement indicate its efficiency over a daily
settlement in the reduction o f unnecessary labor
and risk in handling securities.
The custom o f London and the Continental
Bourses o f leaving unprotccted^ on tracts fo r pur
chase and sale^or the period .oi.t iip sauleaieat^presents an element o f risk
~a term settlement
should be seriously considered in New Y ork could,
be largely guarded against by the deposit o f funds
with the Stock Clearing Corporation, on the lines o f
the margin required by the Syndicate in Paris,
ircm the members o f the Coulisse trading for the
term settlement, or by a daily clearing, making
down contracts to closing prices each dav. but de
ferring the final settlement to the weekly or fort
nightly period.
The principles o f trading for a term settlement
as practiced in all countries bf Europe are the out
growth o f experience fo r a long period o f time that
has proven its advantages in the saving o f labor and
waste effort.
A s the methods o f trading and settlement vary,
a description o f the principal details o f operation
o f term settlement in London, Paris, Berlin and
yienna are give
irately.
\
London
T h e settlem ent in L on don is fortn igh tly for all
securities except Consols, w h ich are settled
m onthly.
T h e Settlem ent Departm ent of ’~e L on d on
Stock E xchange is under the con trol o f a sub
committee o f the Committee on General Purposes,
with a Manager and subordinates numbering about
thirty fo r the permanent staff, but increased to one
hundred and forty more at the time o f the settle
ment, divided into day and night shifts.
There "Hi two classes o f settlements: one for
the M ining or R egistered stocks, which begins
the first of the four days o f settlement, and the
' ——OttlerTor B e a r e r'll Scrip securities, w hich include
Am erican stocks, and begins on the second day.
T h e number o f securities in the Settlem ent D e
partment in February. 1914, am ounted to 243,
w hich is a fair average. T h e num ber is in
creased or decreased, according to the activity o f
the stocks, b y decision o f the Settlem ent D epart
m ent C om m ittee, acting under suggestions from
the M anager of the Departm ent.
Separate sheets are sent fo r each security, the
average member o f sheets b ein g about tw enty
thousand. There are twelve hundred firms mem
bers of the Departm ent, o f which an average o f
eigh t hundred send in sheets at any one settle
ment. It is not obligatory to be a m em ber of the
Settlement Department, and there are still about
fifty firms w ho do not have their stocks cleared.
T h e num ber o f items at any one clearing varies
largely accordin g to the size o f the settlement,
varyin g from 75,000 items at the end o f January.
1914, to 155,00Q items in the m iddle of February,
1914. Such securities as Canadian Pacific, Union
Pacific and U nited States Steel C om m on contain
anyw here from 12,000 items upward in active
markets, but averaging 6,000 to 7,000 in ordinary
times.
T h e average rate for clearing is tw o pence per
^ item, but there are three charges, A m ericans bein g
£ ‘-th e 1 'lawesfT’R.egistejJfl stocks next, and R ubbers
and Oils the highest. E rrors are not fined, but
a fine o f ten shillings is made for sheets sent
to the Settlement Department after the pro
scribed hour.
Charges received for clearing are used to defray
' /
th e expenses o f the Departm ent. In addition to
the" charge! per item, each firm using the Settle
ment Department has to deposit £1-10 as an orig
inal charge.
A s in all clearing system s, the principle o f the
operation of the Settlem ent D epartm ent is to
eliminate intermediate contracts a id bring the
original seller and the ultimate purchaser together,
but, because o f the tradition that at all times the
continuity o f liability must be maintained until
the final settlem ent is made, the m ethod o f the
Lon don Settlenfent D epartm ent involves cum ber
some detail not considered necessary in other
clearing s3>*stems. T h is is called the trace sys
tem, w hereby the Settlem ent D epartm ent fu r
nishes to the ultimate p u rch a ser‘a mem orandum
or ticket sh ow in g the line o f responsibility from
the original seller to the final buyer, so that in
case o f default the liability can be traced back
to each individual house concerned. Th e detail
necessary to ean.yTTU'l Lhij ouudilimnsTvery great,
and at times makes it alm ost im possible to bring
about a balance in time for the opening of busi
ness the next morning.
Liability
T h e m ethod o f the Lon don Settlement D epart
ment carries to its extrem e limit the theOry of the
original liability on contracts, but while it thus
apparently increases the security m ^case of a
failure, it is placing every house concerned in
danger o f p ossible breakdown o f the clearing
machinery, and in times o f ^ v e r y great activity it
has so fallen down.
T h e alternative o f this system is the pro rata
clearing w hich is follow ed by the Continental
Bourses and b y the Clearing H ouse o f the N ew
Y ork Stock E xchange. This system em bodies
the principles which should be adhered to if a?
term settlem ent is ever adopted in N ew Y ork.
A pro rata cledring was established in L on don
in 1874, but came to an end iir 18S0; and failed
largely because of the fact that there was no
proper line o f liability, and no authority to enforce
it. It was tried in spite of, and alm ost in defiance
of, the Com m ittee at that date, and it has been
stated that “ the Stock E xchange C om m ittee in
tended that it never should succeed.”
It is unnecessary to describe the com plicated
present rules of the L on don Stock E xchange p ro
vidin g for the closing out o f securities in case of
default or insolvency, except to state that they
preserve the liability of the original parties to any
contract.
• T h e principle of original liability on the part
o f contracting parties is carried in Lon don to its
extreme, not merely on '^ne ps.rt o f the Se:tlement
Departm ent, but also to the extent that a cus
tom er, having sold a security through a broker
to a job ber, and the broker, having b ecom e a
defaulter b ein g unable to pay his client, the latter
can deliver the security directly to the jo b b e r or
dealer, w hose name the broker has had given
to him as the p ufPhaser, and the dealer in that
case must pay him therefor, having for his
recourse a claim against the broker.
T h e liability on the one hand for bad stock,
on the other for a bad check, or non-paym ent,
rests on the line of the trace given b y the Settle
m ent Departm ent, and each individual thereon is
liable to his dealer fo r that particular amount
Account Days
T h e Com m ittee d^n General Purposes in each
month fixes the A ccou n t da)rs for the second suc
ceeding m onth. T h e operation o f the settlem ent
occupies four days:
First, T h e M ining C ontango day.
Second, T h e General C ontango day.
Third, T h e T ick e t day.
Fourth, T h e A cco u n t day.
O n the first tw o days the firms send to the
Settlem ent D epartm ent the sheets sh ow in g the
transactions for the period covered b y the settle
ment, and the transactions are separated as to.
the clashes o f securities to avoid congestion. T h e
carryin g out o f the w ork o x *he Settlem ent D e
partm ent is entirely separate for each' class of
securities.
T h e so-called “ C ontango day” is w hen accounts
are made up and arrangem ents are made b y the
brokers fo r the carrying(ove^ o f stocks) into the
n ew account at prices existing as o f tw elve
o ’clock on that day. C ontango is freely translated
as “ carry over,” and is used to mean the rate of
interest fo r a time loan upon securities from one
settlem ent day to another, or, in the case o f a
,fbfear” or short account, the rate at w hich stocks
are borrow ed o r loaned for the same period,
(exa ctly in the same manner as is done from day
to day in the N ew Y o rk m arket). T h e technical
bookk eep in g operation as betw een tw o firms con
sists in selling for cash and b u y in g for the fo llo w
in g account, plus interest, or b u y in g for cash and
selling for the fo llo w in g account, •Hsfck'Tnterest
T he third day, or Ticket day, is when firms
change among themselves tickets (o r what in N ew
Y o rk would correspond with com parisons), for the
purpose o f settling among themselves those con
tracts in securities traded in fo r the period o f the
settlement which are not included in the stocks
.cleared by the Settlement Department.
The fourth day, the Account day, is “ Pay day,”
when securities are delivered and paid for. These
deliveries take place, as in N ew Y ork, by each seller
sending out his deliveries to the ultimate purchaser.
I f the holder o f Settlement Department orders to
deliver securities should allow two clear days to
ek p se without delivering, he releases his buyer
from any loss in consequence o f default o f a mem
ber involved in the contract.
Bank Clearings and Money Payments
Certified checks are not known in London an4
it is customary for brokers to deliver stocks and
have their clerks return later for the check in pay
ment thereof. . U nder London banking practices
there are no priority checks, so that unless a
broker’s balance with his bank at the time o f the
bank clearing is sufficient to warrant the bank to
pay all o f his checks presented fo r payment, none
o f his checks is paid. Securities must be delivered
not later than 2 :3 0 P. M . on week days and 12
o ’clock on Saturdays.
The clearing o f each day’s business by the banks
in* London takes place in the afternoon and not the
next morning as here.
A ccording to the follow ing sections of Rule 94
o f the Rules o f the Committee on General
Purposes!
( 2 ) “ Cheques must be passed through the Clear
ing House, unless the Drawer consent to
their being otherwise presented.
( 3 ) “ I f a Member require Bank Notes in pay
ment fo r Securities sold, without having
made such stipulation at the time o f making
the bargain, he must give notice to his Buyer
to that effect before H alf-past Eleven o’clock
on the day o f delivery, and payment shall be
made upon delivery o f the Securities, or the
Stock receipt.”
Section three o f Rule 94 is practically never insisted
upon.
A s to the volume o f money transfers on the Pay
day o f the settlement, the result shows an increase
o f cash clearing through the banks o f about double,
so that, where on a daily average o f £51,000,000 are
cleared, the average on Stock Exchange settlement
days would be about £98,000,000. (These figures
were secured from the Clearing H ouse o f the
London banks.)
Settlement Department Statistics
It has always been very difficult to secure any
figures as to the volume o f securities traded in on
the London Stock Exchange, but on tw o occasions
more or less accurate figures were kept, the first
being during the panic o f M ay 9, 1901, where the
volume on both sides o f stocks cleared,^ including
balances, amounted fo r the ten days o f the settle
ment to $1,270,000,000. A t another time figures
Were kept o f transactions in Union Pacific and Steel
Common as fo llo w s :
A
verage
F o r t n i g h t l y F ig u r e s
Shares—
Items
Amt. Cleared
$100
t M P ac................ 4,389
$21,368,000
22,800
7,254
50,864,000
46,640
Steel ...................
T he unit of trading on The Stock Exchange in
London varies in different departments, but in that
o f American securities the unit is ten shares.
Broker and Dealer
There is considerable confusion in the minds o f
many unfamiliar with the customs o f the London
Stock Exchange with regard to the distinction be
tween a broker and a dealer. Stock Exchange
members are separated into these two classifica
tions, and the Rules and Regulations state th at:
" N o Member or Authorized Clerk shall carry on
business in the double capacity o f B roker and
Dealer.” A lso “ A Broker shall not make prices or
otherwise carry on the business of a Dealer.SJ
Again, “ A Broker may not put business through for ..
another B roker” ; and, again, “ A Dealer shall not
dea^ for or with a Non-member,”
The nearest
analogy for this method o f business would be found
jQ.n the N ew Y ork Stock Exchange by comparing
the dealer in London to the specialist, and the
dealer in odd lots on the New Y ork Stock E x
change. The dealer does not come in contact with
the public and buys from and sells to brokers who
have orders from their customers. The dealer, or
so-called jobber, in London is accustomed to buy
or sell at close market prices in amounts ranging
from ten shares to many thousands, and he changes
.his position and prices according as to whether the
demand or supply is greater. F or the business o f a
dealer as carried on in London term settlements are
almost a necessity in order that he may have the
opportunity during the interval between two settle
ments to change Tiis position and even up his con
tracts without having to settle each day fo r the pre
ceding day’ s transactions.
Continental Systems
Paris
T h e principles of dealing and clearing for the
-term settlem ent on the continent o f E urope are
fundam entally the same as in Lon don , except that
with respect to the clearing they fo llo w the N ew
Y ork method in having a pro rata settlement
rather, than the cum bersom e trace system of
London.
T h e Bourses o f Paris, Berlin and V ienna are
under governm ent regulation and control, and
they can make no change in their rules and regu
lations w ithout the approval o f the M inister of
Finance in France, or a sim ilar governm ent offi
cial in the other countries.
The best illustration o f a Stock E xchan ge com
pletely controlled b y the governm ent, and regu
lated and restricted, by m ost rigid rules is offered
b y the organization know n as the A gen ts de
Change o f Paris, w h ose regulations, although
revised in 1890 and 1898, have not been altered
m aterially since 1724. In 1898 the num ber of its
members was increased from sixty to seventy,
where it n ow stands. T he A gen ts de Change
have en joyed special privileges for trading in
securities since the fourteenth century. T h e value
o f the privilege o f bein g an A gen t de Change has
been as. high as 2,000,000 francs, but in 1914, prior
to the war, was placed at about. 1,700,000 francs.
Besides this cost o f his seat, each m em ber must
furnish a cash bond of 250,000 francs, and in views
o f the large investm ent thus required m em bers
generally associate w ith them selves other capital
ists w h o are know n as “ silent partners.” T h ese
special partners have no rights or obligations
tow ard thitd parties except with and through the
A gen ts de Change.
Coulisse
T h e so-called Coulisse, or outside brokers, who
trade on the floor of the Bourse not reserved for
th e A gen ts de Change and also on the porch of
the building, are divided into tw o b o d ie s; one
dealing only in securities for the term settlement,
and one dealing for cash or im m ediate settlement.
In 1914, o f the form er there w ere 113 m em bers
and o f the latter about 150, but m ost of the mem
bers o f the first are also m em bers o f the second.
The Syndicat de Banquiers a la Feuille des
V aleurs au T erm e, or Coulisse brokers trading
for the settlement, admits to m em bership only
such persons or firms as have assets equivalent in
cash or proper securities equal to no less than
1,000,000 francs. C orresponding to our G overn
ing Committee, there is a Board o f Direction.
(Cham bre Syn dicale), w hich exercises a very
rigid control over the m em bers. This organiza
tion provides fo r the term settlem ent a protection
not en joyed in London through the enforcem ent
o f a requirem ent obligatin g the deposit w ith the
Syndicat the sum o f 100,030 francs to be held for
the benefit o f all members concerned as a margin
guaranty on trades.
In times o f active fluctuations, the Syndicat has
the right to increase the am ount o f this required
deposit. N o interest is allow ed on this m oney,
such return as is received therefrom form in g one
of- the sources o f incom e from which the expenses
Of the Chambre Syndicale are paid. Th is guar
anty fund is kept on deposit in the Bank o f France.
As in London it is a weak spot in the settlement
methods o f the Coulisse that members under the;
rules o f the Syndicat are not obliged to deliver
security balances to any member designated by th$
Settlement Department unless they have actually
traded with such member during the month. This
defect is overcome by certain members voluntarily,
in the interest o f the organization, agreeing to act
as intermediary, receiving the security from object
ing members, assuming all responsibility, including
payment, and delivering it to the receiver named by
the Settlement Department, or Bureau de Com
pensation.
Certified checks are also unknown in Paris, but
by requiring the Agents de Change and both or
ganizations o f the Coulisse to keep their accounts
with the Bank o f France this difficulty— one o f the
greatest o f the New Y ork system— is overcome.
The volume o f money transferred on settlement
days through the Bank o f France for the monthly,
settlement o f both the Agents de Change and the
Coulisse is about three to four tirnes that o f any
other intermediate day. (M ore complicated than in
London, the operations take five days instead o f
four days.)
The settlements in Paris among the Agents de
Change are both monthly and semi-monthly, with
the exception o f Rentes, which are only settled
monthly, as well as traded in fo r cash. The term
settlement o f the Coulisse is monthly only for all
classes. Through the Syndicat de Banquiers au
Comptant, or those trading fo r cash, a very con
siderable market for immediate settlement has
igrown up, although immediate settlement by this
organization does not mean necessarily the next
business day as in New Y ork, as the rules fo r de
manding delivery are very elastic and so-called
cash transactions generally run from two to five
days before being settled.
The centralization and delivery o f securities in
Paris is simpler and avoids a great deal o f the
congestion on settlement day occuring in London.
The loans by banks, both to the Agents de
Change and to the members o f the Coulisse trading
fo r the term settlement, are made for the period o f
the settlement and as settlement day approaches
and when the Settlement Department has issued its
orders fo r the receipt and delivery o f securities on
final settlement day, the brokers know what their
requirements will be in the money market and
make their arrangements accordingly with the
banks. There is also a money market fo r so-called
call money to take care o f the cash transactions, but
it is very limited as most .of the transactions for
cash are fo r investment purposes.
The unit Of trading Varies according to the value
and character o f stock Iftom ten to fifty shares.
Berlin
On the Berlin Bourse dealings in securities are
both for daily settlement and for the term settletnent, which in this case is monthly. All securities,
can be and are traded in for the daily Settlement,
but only active and well established securities are
admitted to the trading fo r the monthly settlement.
Tfris corresponds with the admission to the Clear
ing House o f' ttr e ^ fe w Yo^k Stock £ x d ia n g e _ a f
only active securities, as a clearing is not effective
or useful unless there is sufficient activity to bring
about elimination o f intermediate transactions,
whether in a daily settlement or in a monthly settle
ment, and experience in London corresponds witfc that in Berlin where the securities admitted to the
clearing account fo r about 90% o f the total trading.
In Berlin the Bourse makes no provision fo r
clearing securities except for those included in the
monthly settlement. The Berlin Bourse as well as
that o f Vienna differs from Paris, London and New
Y ork in allowing banks to be^members thereof. The
Clearing is carried o n (on the pro rata principal as
in Paris and New York.
The unit o f trading varies according to the'
o f the stock, the higher price stock being the smaller
unit, varying from five to one hundred shares.
Vienna
Vienna not only has a considerable market for
cash but also has three additional settlements, each
involving a clearing, namely, weekly, fortnightly,
and monthly..
The unit o f trading is twenty-five shares, except
in securities that are- quoted at very high figures
where the unit i s : five shares, and in the weekly
clearing the unit is sometimes as low as one share.
The principal settlements are monthly and weekly,
the monthly being used for the better class o f active
stocks on which it is not considered the liability for
such a long period o f time is as great as it would be
on the more speculative type, which are confined to
the weekly clearing, but all securities can also be
traded in fo r cash.
A s in Paris, the borrowing arrangements o f the
brokers are made with the banks as soon as the}?'
know their position as the result o f the settlement,
although in Vienna, contrary to London, the loans,
although made fo r the period o f the settlement, can
be called on any day; however, in practice this
privilege is never used.
^
qc
jjt
A s previously stated, the term settlement system
avoids unnecessary duplication o f the handling o f
securities and payments therefor as well as the dis
arrangement o f money markets. It also provides
adequate time fo r the procuring o f the funds re
quired. This paper in describing term settlements
does s o only from the viewpoint o f the practical
operation thereof. It is not within its limits to dis
cu ss th e wisdom o f the adoption ofyferr^settlement
W hich is largely dependent upon the time when it
is to b e applied.
Reproduced from the Unclassified ■Declassified l-ioldinas of the Nat orsal Archives
U H it L A a a u 1L U
Authority £
Q l05 0 \
KOFFICIOMEMBERS *
OAVI
W . P . G . H A R D IN G . GOVERNOR
A L B E R T S T R A U S S . VICE GOVERNOR
OUBTOH
A D O L P H C . M IL L E R
. -itnE TA R Y OF THE TREASURY
C H A R L E S S . H AM LIN
CHAIRMAN
H EN RY A . M OEHLENPAH
F E D E R A L R E S E R V E BOARD
HN SK E L T O N W IL L IA M S
COMPTROLLER OF THE CURRENCY
W . T. C H A P M A N . SECRETARY
R . G . E M E R S O N , ASSISTANT SECRETARY
A D D R E S S REPLY TO
O
FE D E R A L, R E S E R V E B O A R D
W . M . !M i.A » . F
] isc a l a g en t
TJ
March 30, 1920.
X-1S7S
SUBJECT;
Boards reply to Senate Resolution
Dear Sir:
There is enclosed herewith, for your information,
f \ ? i C
copy of the BoardTs reply?to the following resolution adopted
by the Senate on March 6, 1^20:
""RESOLVED that the Federal Reserve Boarci be and
is hereby directed to aavise the Senate what is the
cause and justification for the usurious rates of
interest on collateral call loans in the financial
centers, under what law authorized, and what steps,
if any, are requireu to abate this condition"
Very truly yours,
Governor.
To a ll Agents and Governors.of the F, R« Banks.
Reproduced from the Unclassified / Declassified Holdings of the National Archives
j
U N C L A S S IF IE D
I Authority 1%
Fe d e r a l R e s e
rve
0 (05QI
B oar
W a s h in g t o n
O F F IC E OF T H E G O V E R N O R
March 30, 1920
A>
r4
SUBJECT:
\l
Board’ s reply to Senate Resolution 328.
■j
\ i;
Dear Sir:
There is enclosed herewith, for your information, copy
o f the Board’ s reply to the following resolution adopted by
the Senate on March 8th, 1920;
’USESOLVED that the Federal Beserve Board
be and is hereby c/irected to advise the Senate
what is the cause and ju s tific a tio n for the
usurious rates o f interest on c o lla te r a l c a ll
loans in the financial centers, under what law
authorized, and what steps, i f any, are re
quired to abate th is c o n d itio n .ff
To Federal Reserve Agents and Governors o f a l l F. R. Banks
Reproduced from the Unclassified I Declassified Holdings of the National Archives
j
/
fcQ (0^0
! Authority
^ X-1875
CQPYFEDERAL BESEHVEBQAHD
liar eh 27? 1920 c
S u bject: Reply to Senate R esolu tion Uo« 328,
S ir:
On I.larch 8, 1920, tlie Senate adopted the fo llo w in g re so lu tio n
"RESOLVED that the Federal Reserve Board' be
and is hereby d ire cte d to advise the Senate iihat
is the cause and j u s t i f i c a t i o n fo r the usurious
rates o f in terest on c o lla t e r a l c a l l loans in the
fin a n c ia l ce n te rs , under v/hat law authorized, and
what ste p s, i f any, are required to abate th is
co n d itio n ."
In rep ly the Board d esires f i r s t to in v ito a tte n tio n to the
follo w in g ta bles showing discount and in terest rates p re v a ilin g in
various cen ters in a l l Federal reserve d is t r ic t s during the two
th irty -d a y period s ended January 15, 1920, and February 15, 1920.
It w ill be seen from these ta bles that the maximum and minimum rates
on demand loans secured by c o lla t e r a l are approximately the same as
those fo r cam iercial paper in a l l c it ie s except Boston 'and New York,
\7hile the le g a l rate o f in terest in Massachusetts is 6^, higher con
tra ct ra tes are authorized, and consequently the &fo lim ita tio n is
o cca sio n a lly exceeded.
(Tables re fe rre d to appear on pages 286 and 287
o f Federal Reserve B u lle tin fo r Ilarch 1920o)
The only fin a n c ia l center in th is country in which there is
maintained a c a ll money market o f n a tion a l importance is ITew York
C ity, and while the rates charged there on c a l l loans arc frequently
in excess o f the le g a l rates allowed fo r commercial paper, they are
not ’’usurious" under the laws o f the State o f Hew York, v/hich s p e c if
ic a lly exempt c o lla t e r a l c a l l loans from the 6% lim ita tio n v/hich lend
ers must observe on oth er loans on pain o f Incurring the penalty pre
scrib ed f o r usury. S ection 115 o f the Banking Law (L*1914, Ch« 369;
Consol. L. Ch* 2) provides that upon advances of money repayable on
demand to an amount not le s s than 05,000 made upon warehouse r e c e ip t s ,
b i l l s o f la d in g , c e r t i f i c a t e s o f stock , e t c . , or other n egotia b le In
struments as c o ll a t e r a l , any bank may re ce iv e and c o lle c t as compensa
tio n any sum which may be agreed upon by the p a rtie s to such trans
a ctio n . The se ctio n reads:
from the Unclassified I Declassified Holdings of the National Archives
j
<
Authority
a
u
&0 ( Q
r-V \ 1
I
X-1875
!!Sec«115« In terest on c o l l a tera l demand loans of not
le s s than f i v e thousand dollar-s.
"Upon advances o f money repayable on derrand to
an amount not le s s than fiv e thousand d o lla rs made upon
warehouse r e c e ip t s , h i l l s o f lading* c e r t if ic a t e s of
sto ck , c e r t i f i c a t e s o f d e p o sit, D ills o f exchange, bonds
or other n eg otia b le instruments , pledged as c o lla t e r a l
secu rity fo r such repayment* any bank may receive or
con tract to re ce iv e and c o l l e c t as compensation fo r making
such advances any sun which may be agreed upon Toy the
p a rtie s to such tra n sa ction *”
S ection 201 o f the Banking Lav/, id e n tic a l in language with
S ection 115 above quoted, raises the sane p re v isio n in the case o f c o l
la t e r a l loans by tru st companies * In the G-onoral Business Lav/ (L*1909
Ch« 25; Consol. L.Ch. 20) there is the fo llo w in g general p ro v isio n o f
a lik e character:
perm itt3d
*1Soc. 379, I nt crest /on advances on co llateral security,,
In any case h e re a fte r in which advances o f money,
repayable on demand, to any amount not le s s than fiv e thous
and d o ll a r s 5 are made upon v/arehouse r e c e ip t s , b i l l s o f lading,
c e r t i f i c a t e s o f sto ck , c e r t i f ic a t e s o f d e p o sit, b i l l s o f ex
change, bonds or other n e g o tia b le instruments pledged as c o l
la t e r a l se cu rity fo r such repayment, it sh a ll be lawful to re
ceiv e or to con tra ct to re ce iv e and c o l l e c t , as compensation
fo r making such advances, any sum to be agreed upon in w ritin g ,
by the p a rtie s to such transactioiio”
natio nal Bank A ct.
The n ation al Bank Act provides that nation al banks may re ce iv e
and charge on any loan or d is c cunt in te re st at the ra te allowed by the
law o f the S ta te, t e r r it o r y or d is t r ic t where the bank is located..
The applicable- p r o v is io n reads:
“ Limitation unon rate of intores t which may be taken.
4220 Sec* 3 1 97 .- Any a sso cia tio n may take, r e c e iv e ,
reserve and charge on any loan c-r discount made, or upon any
n o te , b i l l o f exchange, or other evidences o f debt, in te re st
at the rate allowed by 'the laws o f the S ta te, T e rrito ry or
D is t r ic t where the bank is lo ca te d , and no more, cxccpt that
where by the lav/s ox any State a d iffe r e n t rate is lim ited fo r
banks o f issue organized under State law s, the ra te so lim ited
sh a ll be allowed f o r a sso cia tio n s organized or e x istin g in any
such State under th is T it le , \7hen no ra te is fix e d by the lav/s
o f the State or T e rrito ry or D i s t r i c t , the bank may take, re
c e iv e , re se rv e , or charge a rate not exceeding seven per centum,
and such in te re s t may be taken in advance, reckoning the days
fo r ^hich the n o te , b i l l or other evidence o f debt has to run*
And the purchase d iscou n t, or sa le o f a bona fid e b i l l o f
Reproduced from the Unclassified I Declassified Holdings of the National Archives
DECLASSIFIED
Authority
&Q iO^O I
X-1875
•3-
exchange, payable at another p la cc than the p la ce o f
such purchase, d isco u n t, o r .s a l e , at not more than the
current rate o f exchange fo r sig h t d r a fts in a d d ition
to the in t e r e s t , s h a ll n ot be considered as talcing or
r e ce iv in g a g rea ter ra te o f in t e r e s t ."
I t w ill be observed that the e f f e c t o f the fo re g o in g p rov ision s
is to authorize in the State o f Hew York on c o lla t e r a l c a ll loans o f
not lo s s than 05*000 ra tes o f in terest which may be in excess o f those
perm itted fo r loans o f other ch a ra cte r, and. that, such higher ra tes are
not p roh ib ite d as u su riou s.
As to the ucause and ju s t i f i c a t i o n ” o f the high ra tes o f in terest
which i t thus appears nay le g a lly be charged on c o lla t e r a l c a l l loans in
Hew York, a.nd as to the "ste p s *** required to abate th is c o n d it io n " ,
there i s , as is w e ll known, a wide d iffe r e n c e o f opinion among persons
v/ho have given thought and study to the qu estion . Indeed, broad and
fundamental questions o f general economic and s o c ia l p o lic y are involved
in the la s t a n a ly s is 9 the vh olc question o f the u t i l i t y o f sp ecu la tive
dealin gs in s e c u r it ie s end commodities on organized exchanges is in
v o lv e d ; and more immediately, the question 01 the methods and p ra ctice s
o f the lead in g sp ecu la tiv e markets o f the cou n try, margining, stock
m anipulation, and kindred matters a lso su s ce p tib le Of abuse. As to
these the Board has never had o cca sio n o f f i c i a l l y to form an op in ion ;
the Federal Reserve Act s p e c i f i c a l l y precludes the purchase or d is
count by Federal reserve banks o f "n o te s, d ra fts or b i l l s coverin g
merely investments or issued or drawn f o r the purpose o f ca rry in g or
tradin g in sto ck s, bonds, or other investment s e c u r it ie s , except bonds
and notes o f the Government o f the United States''''*
The Board could
not undertake to form a judgment upon the matters above re fe r r e d to
without study and in v e stig a tio n o f such a comprehensive nature as would
s e rio u sly in te rfe re with the conduct o f i t s regu lar work and which, had
the Board the r e q u is ite a u th o rity , would require the se rv ice s o f experts
and a ssista n ts fo r the employment o f which the Board does not f e e l au
th orized to expend funds accru ing from sta tu tory assessments on the
Federal reserve banks fo r the purpose o f d efrayin g the ordinary ex
penses contemplated by the Federal Reserve A ct.
There is submitted as an appendix hereto a memorandum prepared
f o r the inform ation of the Board ’by the Federal Heserve Agent in Hew
York, explain ing in general the nature and op era tion o f the Hew York
c a l l money market and causes o f high and flu c tu a tin g rates fo r c a ll
money in that ce n te r.
R e s p e c tfu lly ,
GoHarding
Governor*
The President o f the Senate,
U1L1ASS1F1ED
Authority£ 0 (Q S>Q /
Reproducedfromthe Ur'dassfled *Declassified Koxfc'ss cf *o Natoral Archives
-0P7»
-rr.. .*i» » %*/••»>»•
f *
-<—
*»rif****■■
• f-y
i«*ui.it f ^ m i .__?»■
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Definition of 3s?*j lom a.
Collateral ca ll lerns, in t-:e amoral acceptation <' t5e
tern, arc r&da ch iefly in i:cw Yoik City, -r.ich . s practically
tlie only important ca ll :..one7 rarirot in t.ic united States#
Tlioy arc loans v/r-lc.'. arc payable ta denar.:. < ‘ tie loader with
out previous nctico* socvrod by the plor-p
ctorit ios, i.e* sioclrs and cc::ds,
n on toe 2:e\7 Ycrl: glee*: Jr:c.r.:-.0o
invccnront se
t.icse
2a are *‘.ci.lt
.V.o interest rates cm tliese
loans, as on other classes cf lo:.ns, aw*o on the basis oi a rate
per annur.«
gfco Bo: rc-..Tr3«
2:^0 lorns ai»e .ri.de for fc.‘.e r.cst part t l.ouses ’v.iic!i are
nen'oers o f the St cole Zws.jsc^q an;’ t e r.xr:ay cc bcrrovrou cx*sii
fJites a ^ortior. * * tiie funds erployec1 urC irsrllj in sareliding
and carryiii:; securities ler tie ir c-JLta^orc 1 .: d cc
ti: x-c f
t:xssolvcs«
Thy
Tho -orincip-2 cu^pliis of
v lo*nabl3 funds of
zor.rr ;
r co*i 111 ••1 cJLl loins
yc&Ls ?jtid baifcars
loc *.t3i both in und oat«
Reproduced from the Unclassified I Declassified Holdings of the National Archives
D EC LA SSIFIE D
Authority £
0 (QSQ f
-1875,
side of Hew York C ity , including foreign banks and agencies o:
foreign banks* and sim ilarly the loanable funds of firm s, in
dividuals and corporations seeking temporary investment.
The
proportion of the whole fund loaned by these several: in terests
varies seasonally and in accordance with the attractiveness a
other opportunities for investment, either lo c a lly ' or in other
markets.
The bulk of c a l l money is lent ui the flo o r <f the
Hew York Stock Exchange a ; 11the money post” where through various
brokers loanable funds are of fered and bids for funds are received#
Most c f the business ic done between the hours of 12 noon and
2:45 p.m.
The important r e la tio n to the money market of the
present system of d a ily settlement of balances re su ltin g from the
purchases and -sales of secu rities on the Stock Exchange w i ll be
discussed more f u ll y hereafter-*
Commercial Requirements have the Briar Claim#
In the matter o f the supply or a ttraction of funds to the
c a l l money m arket,.there is generally a d e fin ite and w e ll under
stood obligation on the part of banks to acconmodate f i r s t their
own commercial c l i e n t s , so that i t is only the excess cf loanable
funds which, they may have frcm time i o time that is ava ilab le for
the c o lla te r a l c a l l money market or for the purchase of commercial
paper in the open market,
This excess of loanable funds available
for employment in tho se cu ritie s market v a rie s, th erefore, according
o the commercial requirements, c f the country.
t has lon% been
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recognized that for assurance o
finance the volume <
. su fficien t amount of money t
business i n se c u r itie s, reliance cannot I
placed on a rate of in terest lim ited to the rates which obtain o:
are permitted in commei’c i a l transactions whose prior claim on
banking accomodations is universally conceded.
CAUSES AT£FEQ?MG BIBSBHI? CALI, MOMBY RA3SS.
The reference in the resolu tion io the present M gh rates
fear c a l l money in the fin a n c ia l centers a:xi t e inquiry as t<
their causes require,
; i s f e l t , a survey of the operations
f the money markets and t b r e fle c tio n therein of the under
lying economic conditions which { p vern, in varying degrees, a l l
money rates,,
including those for c a l l money.
gresent Changed Conditions o f Supply»
In former tim es, and s p a c ific a lly prior 1 ) t o in stitu tio n
of the Federal Reserve System, bankers, especially in “reserve
ce n te rs, were accustomed to look upon c a l l loans £ s their p rin ci
pal secondary reserve cn the theory that inasmuch as thosp loons
were payable upon dcmard, funds so invested could al\7£ys b<
promptly obtained on short notice t o meet withdrawals of deposits
•r for otter u se.
In these circumstances there was ordinarily
available for c o lla te r a l c a ll loans a
slijjply
cf funds su ffic ie n t
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fo r ordinary market requirem ents and at low rates, although, at
times the ra te s rose to high le v e ls as the supply of funds dimin
ish ed, or the demands increased*
This a ttitu d e of the banks toward c a l l loans as th e ir c h ie f
secondary reserve has been g re a tly m odified by two causes*
The
f i r s t was the c lo s in g o f the Stock Exchange at the outbreak of
the European War in the summer of 1914, when i t became p r a c t i
c a lly im possible t o r e a liz e on c a l l loans secured by investment
s e c u r it ie s , v/hich became, t h e r e fo r e , “ frozen loans*1.
This re s u lte d
n a more or le s s permanent p re ju d ice a gain st dependence upon
c a l l loans as secondary reserves*
The second and more important
fa cto r was the c r e a tio n of the F ederal Reserve System.
Under the
terms of the Federal Reserve Act p ro v is io n is made for the r e d is
count of commercial paper, but the red iscou n t o f loans fo r the
purpose of carryin g investment s e c u r it ie s , other than United sta tes
Government o b lig a tio n s , is excluded*
Consequently, in order to
maintain maximum li q u id i t y , w ith s u ita b le p ro v is io n far secondary
reserves that can be immediately a v a iled o f , banks, in clu d in g
fo r e ig n agency banks, now invest a grea ter p rop ortion o f th e ir r
sources in a sse ts that can be r e a liz e d upon at the Federal Reserve
Bank.
Another changed fa c to r in the present situ a tio n grows out o
the fa c t that the war ard. post-war co n d itio n s have rendered u n ava il
able su p p lies of money which form erly came from fo r e ig n banks. Since
the summer o f 1914, while t o t a l banking re so u rce s have la rg e ly in -
DECLASSIFIED
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5
creased, the volume of bank money availab le to the secu rities market
t low or normal rates ins not increased proportionately, but o
the contrary has probably decreased.
A l l of these circumstances
explain in some measure, the increased rates which have often been
required during the past year for money loaned in the se cu ritie s
marks t ,
Present Changed Conditions of Demand*
Changed conditions are also present in the fa cto rs governing
the demand for money*
Prior to tl?.e armistice agencies of Govern
ment were employed to r e s t r ic t the issue of new secu rities for
purposes other than those which were deemed e ssen tia l for carrying
n the war«
.t the same tim e, as the Treasury undertook to s e l l la.rge
amounts of c e r tific a te s of indebtedness
a»d lib e rty Bonds bearing
low ra te s of in te r e st, the question arose as to whether the com
p e titio n of the general investment markets might not prejudice the
success of the Government issu es.
In these circumstances, with f u l l
understanding on the part o f the Treasury Department, the o ffic e r s
and members of the New York Stock Exchange undertook to lim it
transactions which would involve the increased use of money for
other purposes in consideration of which the principal banks o f New
York City endeavored t o provide a stable amount o f money for the
requirements of the security market.
A fter the arm istice these re strictio n s were removed and ordii&ry
market forces reasserted th sn seives.
The issuance of new secu rities
was resumed in unprecedented volume and consumed a vast amount o
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ca p ita l and c r e d it, when bank credit v: is already expanded by the
necessity
* carrying large amounts
' Government secu rities which
the investment market was not prepared to absorb.
riius arose
further cause for the increased cost at times of accommodation o:
c o lla te r a l c a l l loans.
Since t e armistice these causes :iv e b-@en augmented
; the
increased volume and v e lo c ity cf transactions i i se cu ritie s generally
Before examining the figures,,
b should be explained that the amoun
>f c a l l money employed by the se cu ritie s market fluctuates according
o the amount c f other funds available f r t M s purpose, i* e . cus
tomers* money invested and time money borrowed;, and e l so as the volume
f business varies.
Volume,
The voluma of money outstanding on call is more or less con
stant, fluctuating only ovar relatively long periods, and the
amount which is loaned from day to day is but a small proportion
of this constant volume.
The constant volume of o\itstanding call
loans bears a rate of interest which is determined daily and i,<
Irnown as the renewal rate.
The daily borrowings, either in replace
ment of loans called for payment or representing new money borrowed,
are made at rates which may or may not be the same as the renewal
rate and which frequently vary during the same dayTurning to the figures, it appears that ever a period of years
during the pre-war period the volume of a ll money, both time and
ca ll, employed in the securities market was estimated at about
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$ 1 ,0 0 0 ,0 0 0 ,0 0 0 * , of which the average on c a l l was about
6 0 f->
and the
average on time about 40^, or a normal volume of c a l l money, say o:
$600,000,000*
The d a ily turnover in c a ll money, i . e . old loans called
•for payment, loans made in replacement thereof, and new money borrowed,
ranged from $15,000,000 to $ 3 0 ,0 0 0 ,0 0 0 ., and aviaraged about $20,000,000*
The d a ily turnover during the year 1919, however, ordinarily ranged
from $25,000,000 to $ 4 0 ,0 0 0 ,0 0 0 , and. averaged about $ 3 0 ,0 0 0 ,0 0 0 .
More
over it is important t d notice there l a s been a disproportionate in
crease in the amount of c a l l loans,
v.s
with the consequence that the former,
distinguished fran time money,
3 now estimated, constitute
about 75% of the to ta l money' employed in the se c u r itie s marfcBt.
At a time o f such heavy credit requ iron a its as the present the greater
volume of borrowings, not only in the aggregate but in the day to day
demands, naturally often resu lts in high rates for the money loaned*
Indeed,
so re lu cta n t' have the bankers been during the past few months
o supply the large demand fo r credit based on se cu ritie s that the
occasional loaning of r e la tiv e ly small amounts o ’ money s t very high
r^tes often represents a desire not t:> secure the high rate cuoted
but to prevent the rate from going very much higher with the consequent
demoralization which might result.
Intermittent Factors*
There are certain other factors, the influence of which is
principally manifested in intermittent wide fluctuations in the daily
rates or in the rates which «ipply for brief periods.
The increased
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volume of demand loans ca lle d daily for payment noted above,
coupled with the decreased amount of time money loaned on se c u r itie s,
produces more c? less apprehension on the part of borrowers as to
their a b ility to re-borrow money c a lle d fo r p a r e n t .
This appre
hension, quickened by the number of in sisten t borrowers bidding
.t times when momentarily loanable funds are exhausted or are
offered in small quantity, frequently r e su lts in competitive
bidding for funds viiich advances the rates for a day or part o:
a day beyond the s.ctual n e ce ssitie s o f the situ a tio n .
Another a ctive and important influence which.has recently
affected the supply of. funds a v a ila b le for c o lla t e r a l loans and
precipitated at times a r is e in the ra te s, lias been the periodic
transfers of Government deposits from depositary banks to the
Federal Reserve Banks in connection with the f i s c a l operations
•f the Treasury*
Such withdrawals re su lt in the depositary banks
ca llin g money from the se cu ritie s market, which causes sharp
♦
advances m
the rate b id -fo r c a l l money in replacement
01
the
loans c a lle d for payment*
RATES ARE DETH.HUHBD Ef THE OPERATION
OF THE L&7 OF SUPHT AKD DBMAKD.
The underlying cause of fluctuations and, especially of
increases in c a l l money ra te s is the operation cf the law o
supply
demand*
a other words, ; i t
5
supply cf loans.ble
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fiends diminishes in proportion to the volume cE
l the dens.nl, the
rate for c o lla t e r a l demand loans advances
f the d a ily borrowings of c a l l money
However, : n the case
• to which -the abnormal
high and low ra te s apply and which represent but a comparatively
small propertien of the to ta l outstanding loans - * other fa c to rs,
incidental to the temporary circumstances and conditions of the
market9 tend in times of stress to greater fluctuations in rates
than resu lt from the more normal operation of the law which j
re fle cte d in the renewal rate for the greater volume c f the out
standing c a ll loans.
The renewal rate is regarded as the r e a l
barometer cf market conditions and its fluctuations throughout
the longer periods more m a rly r e fle c t the r e la tio n between tloe
amount cf the loanable funds and the amount of the demand,
in
other words, high renewal rates are mainly due tD other demands
for cr e d it, r e su ltin g in part from the increased recxuiraneats o:
the commercial community and in part from other tanporary factors
such as depletion of bank reserves resulting either cr both from
credit emansion or loss of reserves thr ougfr.gold expert, specula
tion in com od ities and re a l e sta te , and congestion of commercial
transactions incidental to slow < : interrupted transportation*
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Commercial Rates are S im ila rly and Independently Determined.
The operation o f the law o f supply and demand is e q u a lly
e ff e c t iv e in determining the ra te fo r commercial loans and a l l
other borrow ings.
In fa c t , rates f o r commercial loans and rates
fo r c o lla t e r a l c a l l loans have a common r o c t in the law of supply
and demand, and the co n d itio n s which a f f e c t one, in the main a ffe c t
the other, although not in lik e degree> as i s demonstrated by the
fa r wider flu c tu a tio n of c a l l rates and the higher p o in ts to whicfr
they go.
The ra te s fo r c a ll money do not determine and have not
exerted an important in flu en ce on the ra tes f o r commercial "borrow
ings*
I t is the u n iversal custom of the "bank's, to s a t is fy f i r s t the
commercial needs o f th e ir customers*
They f e e l an o b lig a tio n to
customers but none to those who borrow in the open market on
s e c u r it ie s .
B esides as the resou rces o f the "banks mainly come
from the commercial customers, th eir own s e lf - in t e r e s t compels a
p referen ce in fa vor o f th e ir commercial borrow ers, sin ce fa ilu r e
to grant them reasonable accommodation would induce them to withdraw
th e ir d ep osits and so reduce the a b i l i t y o f the banks to do busin ess.
Although the money o f the banks and tru st companies comprises by
fa r the greater p rop ortion o f the money loaned on the s e c u r it ie s
market, an examination o f the p r e v a ilin g ra tes on commercial paper
at times when the c a ll money market i s p a r tic u la r ly strain ed in d ica tes
that there is l i t t l e causal r e la t io n between the ra tes f o r c a l l money
and those on commercial loa n s.
E xh ibits Nos. 1 and 2, showing
r e s p e c tiv e ly the ra te s f o r c a ll money on the New York Stock Exchange
during the years 19 0 6 -19 19 anc^ the ra tes fo r commercial paper in
New York f o r the p e rio d from 1915 to 19 2 0 , are attached.
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POSSIBILITIES OF CHANGE IN THE CONDITIONS AND METHODS
OF THE CALL MONEY MAMET
So lo n g as c o lla t e r a l c a l l
loans are made under p re v a ilin g
con d ition s i t i s d i f f i c u l t to see how the present s itu a tio n can be
a lte re d , because o f the im p r a c tic a b ility o f c o n t r o llin g the under
ly in g cause o f high ra te s, which in the la s t a n a ly sis, is the
excess demand over supply.
An attempt to co n tro l the ra tes fo r c a ll loans by the e s ta b lis h
ment o f an a rb itra ry lim it at a low l e v e l , without the a b i l i t y t<
m odify the causes above enumerated which operate to increase ra tes,
would be d is t in c t ly hazardous, fo r the reason that up to the p oin t
where the a rb itra ry rate would lim it the supply o f new money,
sp ecu lation and expansion might -p roceed unchecked and the natural
elements o f c o r r e c tio n or reg u la tion would n ot obtain .
In other
words, high ra te s act as a d eterrent to o v e r-sp e cu la tio n and undue
expansion of cre d it*
On the other hand, should the supply o f
money a v a ila b le at a fix e d maximum rate become exhausted, liq u id a
tio n might suddenly be fo r c e d because the demands fo r a d d itio n a l
accommodation fo r the consummation o f commitments already made
could not be met.
The e f f e c t o f such liq u id a t io n would be t
embarrass not on ly in v e sto rs and d ealers in s e c u r it ie s , but
freq u en tly might a f f e c t d ealers and merchants in commodities a
w e ll,
As an example o f the la t t e r , the case might be c it e d
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o f a commitment to purchase a round amount o f cotton on s
ce rta in day.
Many of the houses on the Cotton Exchange are
a lso members o f the Stock Exchange and fre q u e n tly borrow very
la r g e ly on the Stock Exchange against investment s e c u r itie s
to p rovide funds fo r s e t t lin g th e ir tra n sa ction s in co tto n .
I f,
th e re fo re , when an important cotton settlem ent is imminent,
borrowings on s e c u r it ie s could not be a v a ile d o f, the co tto n
tra n sa ction cou ld not be consummated
and a ”, d ra stic liq u id a tio n
through sale e ith e r o f s e c u r it ie s or of the cotton might be
required to avoid default*
Sim ilar consequences might obtain
in the cases o f tran sact!on s by members o f other commodity
exchanges who are a lso members of the Stock Exchange and have
recou rse to the c a l l money market*
THE IMPOBl'MCE 0? A "CALL MONEY" MARKET
C all money in some form is indispensable to every important
fin a n c ia l ce n te r.
There must be not only an o u tle t fo r the employ
ment o f funds tem porarily i d le , but a large volume o f c a l l and
short time money is e s s e n tia l to the su cce ssfu l and econom ical
conduct o f busin ess.
t i s p a r t ic u la r ly e s s e n tia l t o the in tern a tion a l
and domestic commercial business but the d iv e rsio n o f the use of the
major p o rtio n o f such money to the s e c u r it ie s markets i s not in
accordance with sound banking p rin cip le s*
I t is to be noted that
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in no great w orld market, other than New York, is the c a ll money
market so dependent, upon investment s e c u r it ie s and so su scep tib le
-o sp ecu la tiv e in flu e n ce s.
In other markets the reverse i s true,
s th e ir c a l l money i s based p rin o ro a l**■y
> cortmercial paper upon
which r e a liz a t io n can be had at the ce n tra l bank, at a p r ic e , in
case o f need.
We have seen that in th is country c a l l .'loans on
s e c u r itie s lack th is e s s e n tia l q u a lity o f liq u id it y required fo r
quick and ce rta in r e a liz a t io n , and that th is fa c t has now been
more g en era lly taken in to con sid era tion by our len d ers-
But the
safe and su cce ssfu l divorce in th is country of the use o f c a l l
money from i t s dependence upon investment s e c u r it ie s as a b a sis
req u ires ca re fu l study in order that safe and adequate methods
may be su b stitu ted fo r the present mdthods.-: o f the s e c u r it ie s
market.
Term Settlem ents,
The achievement o f t h is end probably depends upon the
su ccessfu l development o f a plan fo r term settlem ents of the
balances r e s u ltin g from operations on the Stock Ey.chcv.nge, in
l i e u o f the present method o f d a ily settlem ents.
The p rin cip a l
e f f e c t o f such a change o f the method of se-ttlements would be
to r e lie v e the c a ll money market from the n e c e s s it ie s o f the
s e c u r itie s market and relea se funds now used in c o lla t e r a l c a ll
loans based on investment s e c u r it ie s f o r employment in c a l l loans
based on the c o lla t e r a l o f more liq u id s e c u r it ie s , o f & commercial
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nature, g en era lly recogn ised abroad as the p re fe rre d bases fo r
demand loans*
From th is change a broader discount market would
n a tu ra lly develop*
Under term settlem ents the borrowing required
by the s e c u r it ie s market would be on the b a s is of short tire?*
accommodation,
t
f o r the tern between settlem ents, whether
they W~^eweekly, fo r t n ig h t ly or e.t other in te rv a lsA g ita tio n fo r the improvement of the present method of.
settlem ent of stock exchange co n tra cts has extended over some
years and as the r e s u lt of extensive studies and d e lib e ra tio n s
of o f f i c e r s and members o f the New York Stock Exchange, as w ell
as bankers, an important step has been taken to provide enlarged
c le a r in g f a c i l i t i e s through th e organization o f a new corp ora tion
known as the Stock C learing Corporation, which is expected t<
begin operations in A p ril, 19£Q.
& general d e scrip tio n of the
purposes and contemplated operations of the corp ora tion is con
tained in the pamphlet attached hereto as -Exhibit No. ,
The
fu n ction s of th is corp ora tion include p rov id in g f a c i l i t i e s fo r
c le a rin g co n tra cts between members, fo r the r e c e ip t and d e liv e ry o f
s e c u r it ie s between members and banks, trust companies and others,
and fo r the cle a r in g o f c o lla t e r a l c a ll loans,
I t is not asserted
. or expected that the in s t it u t io n o f these operations w ill m aterially
a f f e c t e ith e r the amount of money loaned from one day to another
on the c a l l money market or the ra tes o f such loans, but i t is
expected that i t w ill operate m a te ria lly to decrease the amount o f
bank c e r t i f i c a t i o n s on day loa n s, which the present p r a c tic e requires
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in the in te rv a l between paying one c a l l loan and re p la cin g i t with
another on the same day.
I t should "be noted that the mechanism
a fford e d b y the corp ora tion is an .indispensable
p re re q u isite to
the establishm ent o f a system o f term settlem ents.
The more recen t and d e fin it e development toward the sub
s t it u t io n of term settlem ents f o r the present system o f d a ily
settlem ents may he said to have had i t s in cep tion in the a ctio n
of the American Acceptance Council at i t s annual meeting on
December
1919*
At that time the fo llo w in g r e s o lu tio n was
adopted:
“Whereas, The present method o f d a ily stock
exchange settlem ents, with i t s dominating and ofte n
u n s e ttlin g e f f e c t on the c a l l money market, in flu en ces
adversely the development o f a wide and healthy discount
market in the United S ta tes:
"Resolved, That the Chairman o f the Executive
Committee be authorized to appoint a committee c o n s is t
in g o f members o f the -Executive Committee and other
in d iv id u a ls to study the a d v is a b ility , ways and means
o f m odifying the present system o f settlem ents on the
New York Stock Exchange and su b stitu tin g th e re fo r some
system o f p e r io d ic a l settlem ent, with power to take such
steps as may seem advisable in the c a s e .”
A copy o f the annual rep ort o f the American Acceptance
Council i s appended h ereto as E xh ib it No.
in which the
re so lu tio n appears on page 5» «nd the re p o rt o f the Chairman
o f the Executive Committee appears on pages l6 to 27, in c lu s iv e .
The Committee thus provided fo r was appointed and held two
extended con feren ces in which the problem was f u l l y discussed,
both from the p oin t o f view o f the banks and o f the Stock Exchange-
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For illustration of the subject matter of the discussion there
s attached hereto as Exhibit No*
, a detailed report compiled
by one of the members of the Corateittee, Mr. Samuel F. St re it
Chairman of the Committee on Clearing House of the Stock Exchange
describing the term settlement operations in London and on the
European cont5.nsnt, which presently will be published by the
American Acceptance Council
Through its courtesy an advance
copy of the report has been received.
There are also attached,
is ‘ Exhibits Nos. 6 and 7, respectively,two other publications
f the American Acceptance Council, "Acceptance Corporation11
by F. Abbott Goodhue, Vioe President cf tie First National Bank:
xf Boston, Mass. , and nThe Acceptance as the Basis of the American
Discount Market”, by John E. Rovensky, Vice President of the
National B^rik of Commerce, New York, in which on pages lb and 22
respectively, the necessity for term settlements as a means of
relieving the call money market from the necessities of the
securities market and as a precedent to a broad and stable dis
count market is discussed.
The members of the committee have -unanimously expressed the
opinion that the adoption of s term settlement by the Stock Exchange
would offer advantages in that it would eliminate duplication of
the handling of securities and in payments
The committee holds,
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however, that, inasmuch as the adoption o f a term settlem ent
"b*£ the Exchange would in volve changes o f great importance, both
o banks and to members o f the Exchange, i t w il l requ ire the most
ca refu l study o f the su b ject by the committee, and in any case
the term settlem ent can not be put in to op eration u n til the new
system of d a ily Stock Exchange settlem ents through the Stock
C learing Corporation, above r e fe r r e d to, has been p e rfe cte d
and has been in p r a c t ic a l operation fo r a reasonable time*
DECLASSIFIED
Reproduced from the Unclassified I Declassified Holdings of the National Archives
Authorityt\ C i
(O ^ O
I
i
*1
/
■ y
I
S o b jo o t :
Sm m t«
J I t> s o lu tio n Ho* 3 S S .
Sirt«»
O a fcfaroh 8 ,
1236*
tH » (ton&tft
t&a
•HSSQLTffD th^t th*
.« k3 i »
in iha
C o ll w r in g r a n o lx t t ic a t
Board ttt
■Hr<30-fc^d tv
Whs S m a t # « f e f c
mA JiwUirlection or ths toturleaa
c
o
l e**H
in Urn
cantora, mdar v*b»t l.«* m%h£*ri%®&9 ;md
int?sroat m
*h>it nta}-*, u*
ar* rtttuirad to ub%t* thl*
con Jit Ion11* '
la r<iplar th*
first to i m i t a
to the? fel»
la'finr
shading d l « a < m t aret irit$r#at rate* $;r?»v&iljta$ in
v*ari0tt» «<5nt«r« i n ^*11 ?GKtor*J r s m i w d Itifcrlefcm 4t*ring th« &*©
thlfty-jlay 'porloa* ftodod <J«i!ta**y 35* 1230, ,m<l Fabrtuay lfi» 1&-0*
It * lil bo s»«n from
toilets tfc&t tho rcagfnuftt & t£ m tn h 'm * r
on fastaftd l«tm» *aowr<*<*•’^gr oellafeMtel mm a^r©xi^*tiily ths nafto a*
t h o a * f o r d flfv ‘c j r o l .i d
>;%ag>or i n a l l c l t l o a
o m a p t B o a t o n «aad H w T o i% .
fhil« tsha lag*! rutfc# -u£ infc^raat in
is 6$*
oimt*4ot
rat#® 4tr» Muthori*«d# and ^xm^iw^'itl^ ttw* $£ lireit*tlcn la eooa«ioiv«ny
*xo«*&»6«
^ C
jlju
1 - t1 /
/
Vt'Y &'S
Z
~
Reproduced from the Unclassified I Declassified Holdings of the National Archives
j
U H iC L A S M F IE D
I Authority 1%
0 (Q5QI
Thm only f !».-«» Ld o*nt?*r lit %%U’ octantry in
th*»r$ i ■
* r^lna oaII m m j
*t of nation4 hs&ortmo* ia
Twrtr. City,
while tit® rmtm a’w*rgod lh**ts on e«*ll lornn aro fretn*mtly In »x«o#s at
tim logoi mt*« ^lo>rml .for cott^ero!.*! ? *ior# ttsy “wre not
undo* tha low* o t* a St&te of Raw tori', *bSeh *, «1 finally ax#npt col*
l^tur*! o>*ll lo #*» from t&o 6$ Iteit^tior --vhioh ImSor*
ob»<trvo <m
otKwr lo^iia on ,'.ln of Inenrrin^ t>»# penalty *rsm* iteid .for w r j . Suc
tion 115 of
B.*rf-ln^ hm (I*. 1914, Ch. 360$ Comal* I** Oiw 2) ruvide* th.it w;on adv^nae** of mrmy rojK4r.*t»lo on
«h t<; -m mmiar% m4
!«*»• thm $5,000 m%&* n cm wrohonae rmmiptn9 bill,a or’ 1 #.! l*r , e*rtiftattoo
of atook* «to*, or otHor n'i.'.atl tbl« imtn«*3tmtft .'%si oolJ^ter.il,
roeolvo
aollftCt m comybnnntim **jy tot »v loh »4y.b« <*. rat'4 trow
% th» partie* to «uoh trvinft^etiou The flection roatioS
*^6# 115* Interest on coll*toral fommi lo mn of rot lata than
flv# thm.% md doll &r*»
•Upon mdyfm&m of momy re^jyaldo on dmmmid to /in '*mm% not
1a«« tv 4i ft**
dollar*
upon worihoivMi r«oi^ ts, M li*
of
osrtiftoAto* of *to©v# 0f*rtifi©*t0* o 5fi?>o,4t, hit ♦*
of »***«* o , bo*vi* or oth#r iv^ otlM e tnsini* mtn,
ui
Reproduced from the Unclassified I Declassified Holdings of the National Archives
DECLASSIFIED
Authority f i O
f Q 5 *Q /
ooll^torftl *«otarity for oach
*,w& ImhI:
roootvo
or c o n tr a c t to roo*tvo .-aid eol**ot m e o m p ^ m m tlm for mfeteg
s*ooh adranflwo
w wMo'h
t>» «ft^rwi4 upon
tfts p«s*rtlo#
to awc3a traMMOttoiw*
Sootlon 201
%ha 2fcttfcSq$ &*»» t$antlc *1 In Vd^uuago w l& i Ssotlan 115
o&oiro (gaotod*
.th* mho f-rotr&iioit I21 tho a4u»o of ooll&torml loam tgr
trust ©omp«U<«. In tho G«ror/a Bualnaa* Ltm (£*• l£rO§# Qu 3ftg 0oft*ol» Ik#
Ch* 30) thoro 1* iJ*o following gonor*l prosrirtio** 00 » iifco otauMotoirt
fflM#--^ « . J^toarooi maiiltfeM a *L jtik 9 u a a *± .m Aottatawl. .—gar 1tar.
In »n$r aamo heroaftor la whtah «A?.3m«a of raonay, r«f'*^a&lo on ^tiiftvand, to m p -m m m t not loa^ %hm t i*<§ th<m*tuart &ol~
loro* mm im&m upon woraliouiio raoolrta* M il* of la&tng, oorv
tiCie&t#o of otodVt oartl float** of dopoott» M ilo of oxoftan#**
bontla or oth*>r nogotlofelo in*tn*mnt* jpladgtA mo oollntofAl
nowarlty for ouoDi r?$»-iymntt It *H*11 b?i Imfnl to raeolvo or
•to oontrsvt to roo?lvo ant?. eolloot, a* comi^jmvtion for m *. lag
*uoh *Ar<«iQo«» ***y sn» to too «&r»o3 mpas in writing, toy th*
r*rtft«*to me &1 tr.vuraotlon^
Rational Binte Jet.
Th* Hfctlo&al Banfe: Aat provisos tint ration**! totfe*
roo^ivo tod'
ehwgo on m & lo rn or ilaoouttt Intoroot at tho v*t» **llo#»*t toy tSwt l*ut of
tho St&to 1 territory or 4i*trlot whor^ th* tank i# looaioA* fto <*£?:llo*»bl*
j-drovloiofr- road* I
"»*■» *»*• «> tnta-eit whlah mar bo tak—.
422« Soo« sm * «•* Jay oaaoftlatlon iMfr
rosary•
an^t ohai^ft «»i .«qt loefi or clltooimt mito* or
Atngrnotot b i l l
of «lot>t,' lut^rimt i4t tho mto
of ioficdkflnigo> or oth-ar
alloaoi V th# Jos»o of tlwi
torritcfy or M etrict who**
tho tantc i« looat#^* «n*t .no «soro» »;«c»pt tlmt v#w*ro Isaf t>va l^«#o
of
St^t# a itl^foront
In Itelto^ -for
of inm m o*w
g^misod rndor StalMi % tm *t tho riit# «o IM toA ab ill hm ?dlc«fod
.for m * <x53UUg*u org.:mi*-:«4 or oiclotii^ in ^
Stata milor
' thin Tltlo* lfe#n m ##to lo flx » & by tho l^wo 0/ tha St^to or
TorrltosT or &Utrlot9
w-^r t,#^# roeol^ot roatnro f or
o$i@»go ^ mto sot ojosoadln^ «ov*it par
w & me&x int#r»ot
m $ \m- % 4km i» a^r-^a10 f rotf-onlntt th« drty« for rihicta
m tof
M llt or othor mfidiwao# of rio^t h m to run* ^
puroi^no
Uaooiirit, or o^lo of a bo»» fiAa M il o^l'ixohm^o,
at
«»otJ»air pi'*00 tH-afi th« f«l<io# of «o«9i p tx rti'h im 9 *SXmmn%9 & t ».■«!« t
at not ^oro thao tli» oiurrtnt rata of o3C»Ij^o ror »i(#vt cJra.ft«
in
to
lnt^r«*tf ohsai not bo aoaoldarod ^ tastec
or roooiirlag a groat#r r«to of Int^root9*
Reproduced from the Unclassified I Declassified Holdings of the National Archives
declassified
Au th ority €
0
(D S C
|
Xt will ba obstrvtd that the effect o :’ the foregoing provisions in
to .authorize in tha State of Hb>v York on collator 3,1 ©all loans of not
laaa th«*n $ 5 t0')0- ratea of intareat vrhich m -y b« in excess of those peiv
mittad for lo $ns of oth^r character , and that Bitch hif;har rates ara not
prohibit ad as usurious*
Aa to tho "causa and ^uatificition* of tha high rata a of interest
which it thus s p e a r s m^gr lag illy bo cfctrged on coilateral call l o m a in
Naif York, m l as to tho "a tar a * * + required to abata this con- it on",
thara i a t &a is wall known* a wide difference of opinion i«nonc paraona
who hava givan tho*ui*ht m d study to tha q,ua»tion* Indeed, broad and
fun&aaaantal cjuaations of general economic
a o c i d policy are involved in the last analysis f tho whola ^uastion of the utility of speculative
dealings in securities mod coiwgodlties on organised exchanges la involved;
tmA esore isrsadiately, th© question of
omJL practices. of the
leading speculative m r k e t s of the country, margining» stock manipulation,
and kindred matters also susceptible of abuse. Aa to these the Board
baa never had occasion officially to form an opinion; the Federal Baserva
Act specifically precludes tha purchase or discount by federal reserve
banks of "notes* drafts aedbllls covering merely investments or issued or
d rm m for the purpose of carry in - or trading in stocks, bonds, or othar
inrestznent securities, except bonds m & notes of the O w e r o ^ c n t of the
United States"* The Board could not undertake to form a judgaamt upon
the matters above referred to without stu$y and investigation of such a
cot&prehsasive nature as would seriously interfere with tha con^hict of its
regular ‘.vo*fc imd idiich* h«d- tha Board the requisite authority, would re
t i r e tha services of experts and assistants ’or tha enxployi^ant of which
the Board, does not feel authorised to expend funds' accruing from statutory
assessments on the Federal reserve banks for tha purpose of defraying tha
ordinary expanse* contemplated by the Federal la serve Act*
there is submitted a* im a$r: sndix hereto a w em r m fh m prepared for
the infonmtion of t)ia Board “by tha Federal Beserve £gm % in Ifew York,
explain!*^ in general tha nature and operation of tha Hew Yor> call r«on:sy
market and causes of high
fluctuating rata a for call taonay in that
canter*
Baapactfully »
Tha President of tha Senate*
DECLASSIFIED
Reproduced from the Unclassified I Declassified Holdings of the National Archives
Authority
^[0 fQ
I
.a n il
collateral
toe*** £»
fc@m* are £&&© ohien^r in Ilwr 1M*
mm ouly liRi.«rta«t
^
1*Nsaa
Ism of thtt
xm em l
laikidii is jar&etia&lly
faanfisf mr’sot in |$m§
Uit©s.
pep8i>3* m &mmk of tfte l&mier wt#**
®f im m tm n t a©~
<mt previottft notice* soosirad bgr tt»
surma©* I*©# &t&^m a*& boa&s, #080r®i% fclios© wkicl* ior» &&at
in <*& tin© t*a®f fom
^a&o&&**»©-• ?&* i& fa m m t m % m m t m m
Im m 9 m m ofctier clattfae ®f loawi, am on t **0 basis of a mte
$ * r &nam«>
H n . J orrovjaaK U
33i» loane or® mo* fbr t ty noet
patet u> imum® wMafe are
i;X3Kiborc «£ the- stoote :.^aaaaf‘© m & th# m m y m fym tm m tiL m m titm m a portion o f m ® im M
m & wmyrim mmrtttm air
m ?l8@ ®cl ordinarily in
x m h o m ** and aooetinea for
& & **& ***§
nm
^ te ip ia t
s m a i& ie e o f m o m ?
m *
m
lim
m
are lann^St ftutit* of M e s anft Im&ere Xoo&tetil
m
l e® n
lo a a s
in, mA o»fc~
«&d* of J*wr f&rfc cif$rt teisi&fcig £&re!$& fcawiai end e&moia* «t
Reproduced from the Unclassified I Declassified Holdings of the National Archives
UJKCIjASSIFIED
j
Authority
^0 iO^O I
2m
otjailartgr fc2bo loaofifelo
of firms, la -
d lv ite ls mm oor^orotlMi »eofc3ai& tm;we&e? taxvesfc^t*
3*a
im port fern o f tli© v&ol* Itoi Immm by tm m mmm& la toa sts
m,rifts
m l la ro o fto p © w ill tfta attract ftroxioso o f
otttfir ©p^ortuaittea for inroatsstiatft eittior local3^r or M ot&or
lassr&efco* it*© tuttft o f eo&l ^aem^r Is t o t or tit# floor o f the
.How tone stooat :aaDe^iMsgo at
nonoy poot* titer* tteoogh varloiift
broker* looovafete Ito&a or* o AhmA suS fetdo for to d s o** roc© trod*
mm o# Hbo btaslao®© is* dota* todtmm th* feuefti** of 12 n&m m&
.-i45 p#ss* 3i© fcagortmt J^atloa to £M m f imstost o f tho
$rooottt s p & tm o f doily oofttlooftiit o f Wiamo© root&ti*& Im t fctio
proiiaooa add s&io© of toe&rltloe o» t"m
xo&aoga mill bo
d i o o o o o o d ?sor© f f e l l y l a n r c ^ t o r *
SB tho
of t&o aa l|r or ofetaaattoii o f foo&o to tfto
mill uoisey sMcot* thoto %»
& doflnito at& m il i*nd®**~
m m & obti&atiMi m tho pari of bonao* to oooor&iodofe) firofc tfrotr
<*m ooMia&rsiai olieoto, oo $*»*!& i t is o&ly the esoeoo o f lo&a&ble
.foodo wM^ they vap fs&ro frees tfeso lo tioo tbot M m&sio&so mt
Wm
©all laonap imsmt or for ©«5 puro&to© o f aor«»reM
jgnpmt ta tho ©poo m m t*
fills oaeooo© o f Xooaofel.© tm$M
for employment la ti*o ooooritloo imaeot w l * o t tliaroforo* ^ ooM ii^
to tfe© ;3<KW»C|al r©(ni$r«iaacit8 Of %iWi 00*221ta?y*
It fi&© losc^ b©uo
rooo^&issod ttet fo r asanvoKtoo o f a mti'lotm.% mtmm o f w a y I©
f.lBoaoo tii© rotor* o f
p l a e o d o n ft * o t o o f
in ooooritloa, roliaas© c&zzaot be
ln t o i* o s t l i m i t o a
to
tlio f ^ t o o ^ i o a
Obfcuim m
JUJfilJLASSUJUfiD
Reproduced from the Unclassified I Declassified Holdings of the National Archives
A u th ority
la oouttovttUd
mpq
s 0 c < r s ,if^ a t
fO ^ Q
|
tabooo prior alalia on
ia m im n s & S fy coa a od od *
Shft reftoraao* la tin© mtXutloft to tha pnmmt MS* ratoa
£ & r c a ll m w y
i n t i* » f i a a a o i & l e n t e r s
$ aA t i i # ls % tp i^ r o a $ o
M r oisaaaa raqaira* it u M t t & surv^r # 1" tim o^r&tiom
of tfea ratmasr mrfss&a aad «h© tatffcaatlaa t ^orela o f t?ic sra&oiw '
3ySag ooonomic eoa&itloflas ntfaak
in m iyiag &S0*©<*% o il
sonsy m tm , imlwtia® tm m fl&r $411 noney*
In foa a r t t o a ,
apaoiftoftlly PPlar to tab® foatHtttten
of %M Jmmma aeaarve yafcata* taxueara, aageeially in poaerva
m m a a e m t m v l to lo©& t&on oall Soaaa as ttiafr p r t m l* *
0X
mm&m m tli0 iJkydfXEg
lfas4KKX0)i && t&oaa Xo&bs
«a*a platan mpoa Oacaand, .fitm&a m liw atocl smM
bo
pfBsgpfcl^r afet&faaft on i ^ t aatftea to naafc withamsaa of flapaait*
or for other wo*
in thaaa
wmm m® osedterHsr
mr&ii&KLa for aali&tcural oall loams ,& aa&.*2y o-f ftwaa aatffiaiattt
for ordter^ mm&t mqMxmm^m w& ■&% %m m tm , &tti0ag& at
tiroes tha rssfcas roso to t*%&
aa tha
of fm&si dlmin~
Iakod, or tfia cte^ius iaora&aad*
.lils a ttlM o of fc^a Saa&ca umad m ill tm m m tMmtr eiitef
aaoai&taf!? raaarvaa £t&a \smn gra&tlp sxullfl&d
tra» «maes*
2tia
Reproduced from the Unclassified I Declassified Holdings of the National Archives
DECLASSIFIED
|
! Authority ^
0 (0^0 I
*4-
Um 010slug of
first
tbs .<*»rQ£*&&
to^c
at fcko outfcrodc of
ia tfto ssteir of l$U * whra it boo&m p r m ti-
o a lly trapuesifcXa to rotslls© on oaXX loa n s ssetirocl 1$r taros &.*mt
soooritios* j:\ioh feooaias, tfc^refor©* Yrosaa loans* # Bits rosultod
in a j*sore or loss pwtaaumt projudlco a^inst Ospsudsao# u .on
o s d l l o o a s &s s o e o o & a x y r o s e n r e s *
’?h s s o o o r a l aoad naoro te § > o r i m &
factor m@ the cro&tton of the Jsdoral Bsoervo ::-ysfcOBu t&xtar fcij©
te a s of tho Mtortil .'toserro Act provision is na&o for ths ro&loooBut of <som.;,j«PoSaX p6povt **** t&s rodtso amt of lonsss for th©
■mutim® of c&rrytsie' invostcxmt soa»iti«of other m m t3fett*& ;:>t&to8
0*0 w* i&nt* obi l&itio&s♦ Is o^eltadM*
onaoquontl#'* in or&or to
-sustain rcjxizsun limpidity* with saitatolo ro rln to n far socastopy
rooorvos th a t om fc© fcnsdti&toly amilod of* tatics, taaludtng
fbrsiggft ogoacp to&WB> turn too©t a grocttoi* liroportlom of fefeoir r©sotarooo to assets
am bo realised wxm at trio t^dorca Vm orvo
mm*
factor In tbs tmso&t situation
im & m *
oat of
ths ftaot tii&t tfeo sw sod T4mt~*«£r conditions Haro reodorets. &msraiX£&lo imgpltos of laonoor vM&h forsasrly m m imm ta m im
Um©
tho a m m t of 1914* *#*11© total twanscliic roaotweso tor© Xsaqgolsr toorooooclt tho folaao of bo«2c money orollofelo to fch® soewitios m & m t
at low o r m m m l vo&ot luas sot fcaoroasod vtfoportion&tefy» fcat <si
the oorstrsjpy has i**ofebb2y doevoaMdU All of il&ose eirc«ast&n&e3t
oat la la in mlosjiO asa«s*ro# the ts*afoaao& rates wMolx liar© oftcm boon
ro;.£
.ii*e& tfumag f.o past
fo m e n t loisaod In tho soouritio©
mor&ot*
tailed o<xrxHtio»s ;<ro ilso & m m t In tho ft^tors p r e t a ^
UJfilJLASSlFlED
Reproduced from the Unclassified I Declassified Holdings of the National Archives
Authority d O
fO ^ Q I
-9 *
ft*
for msmp* "rior to t&o capniatic©
of
to rootriot; tfeo tosue of mm me&tXtim for
mm% mm
pantpo&im otbor thm &mm wMati mm $&w&& mwmtt&l for tarrytug
4t fc&o mm tim § m mo *?swmwp w&ovtotik $o sell
m
mmmt* of oortifioafcoo of fc^Moisoso sad ifborigr Bead* fcooriag
tar rates of iat*r*®ti. tm
®tm® m to «?i»t$ior fcl» e<**-
lotition of tli# ®ea»»& SuwofeMfci mart*
«9oi»ft o f t&o
l«« m »
M/ afi
Jo @i80
officer* ^ ^
K
tiiioi* «omi involve tfco taoroaooft mao
/ W
for
y
it
%j^
A
OttM* jpBfpOWW .la caatU&tfWfct t o o f i&Sfiti ts* 2*tS0l|Al fc&ateo o f
X * * d € A *W L
W m Yttrts •<?!% miiMOMt to gtvtifto it ©tafcio m m m of raoa*? for tho
j^qairocwats o f m o ooeorttgr Hoifcot#
4 fto r tu© na^iot too tiMm rooirioU oa o « ir o naaoeod aoa <m U j^r
smteot forooa
tmtmrrfcoa
tliMssolvoo*
2U© iaoueaoc o f turn ooonrttltti
m o rooawtd m 'oxippooodo^od v o t e * &ad
ammxm&
a m ot aaoe&t o f
oo|fital aai orodit, vt*em b&gae crodn iw oUroa# o»|'«^slod % tit©
mmmttgr o f
tiio
fartfrar
oorryiue S&fga curatst* o f 3ovom #*it aecuritioe mtoi*
msamt ms ***fc laroi.ta^ f» a&ooxfe*
omm
fo r
th* tuorooood
arooo *
o o o t.o f aoaoiKiftdaiioKi on coU &tsral
\
*
©nil loos**
tb B O m iO t iO O t&OOO 0611006 IlSWO lMfl& S 9gaB ttlB & ^
th O
Dn^poaooS ^oHwsb ’aafi. wXooI^r o f tfa i»a > ttes Iti ooew itios gonot^lj^*
@o@bpo fflaiflimiy; sno ri^ixroo*
$.% aiioaia. oo
of o»3,X iimgr 4m&oy*& %sr ^ o 0&<witi00
opp^ iaoo
too iinouiss
flu etetoo MQGW&tng
to tiio azaousit o f otftor Itoi&s »iro^£l>Xo fo r t?^o i«eijooo* l«o«
tosa&r** «an ^ tsmotoa ^a»l ttte wamg b o rro ?^ ^ad aloo oo t&o irolM
f f .
f
DECLASSIFIED
Reproduced from the Unclassified / Declassified Holdings of the National Archives
Authority & . 0 ( 0
I
■
o f Imst 1mm varies*
7 q 1 u
e
» -
Tim mlmm of raonfly attt»ta8&l3g on ©all is r»p© or loss con
stant, flaotnat
onl^r otop pol&titrojy lone periods, &a& th©
arajunt which Is loaaed fpoia day to d£$r la but $ small p**o|)ortlem
o f tM* mm%mk v&twm* 2tn» oo&staast voltm© o f mtstm&ism «a ll
loans bo&p® a pat© of i&toroat «&!£& In dotemisod daily aaad Is
kaova m Pm renewal rate*
Bis daily borrowings, either in replaeo-
mnt of loans sailed for pajfrnoat or xv^voMitiiigr now raoasgr borros*d*
are mad® ist ratos vftloh
m >>W
bo
t&e aajae as tbo reaos^l
rate m l vshiofe fpemamtly msy toping the same dey*
tedi^ig to th® figure®, it a ®©*ps that over a pop Sod of yo&rs
&triag t&e pfo-«*ar i*riod tbo votao o f all imm®* both tta» and
c o ll, «^>loya& in tfc« soetapltloa i^rsot « s ostimoted at about
#,000*000*00©*, of #iioli tfr arearsagd on oall was about &Q$ m& the
awrofje ©& tioe about 40/*, op a norraal voIuk# o f sa il inoney, say of
3^0*000*000*
fop
th© daliy* topaovop in ca ll
money,
i*«# old loans called
loon® sod* 1st peplaoofaoat tfcopoof* assd ao* incraoy borpowd*
Piaa^od froa #115,000*000 to ^>,000*000*, m& aropa&od sfcwit 120*000,000*
i'lso daily turnover daring tlie ysar 1919* hormm** or&iaftPily ranged
from 1^5*900,000 to >10,000,000* and &T©pa®od about $0,000,000* fioromm? it la tm ortm t to nottoo tharo has boon a diappoporUoa&ts Incrooso in tlio mmmt of ©^21 loans, as dlsttagoiaML fpom tliaa noney,
/ith the oonseiaenco tftat t&« forwop* It Is now ©stissatod* constitute
about ?Sp of tn® total raonoy employed in t!i« aocuritias mifeat.
At a %%m of sasli booty opodit
Reproduced from the Unclassified I Declassified Holdings of the National Archives
j
DECLASSIFIED
j Authority & . 0
(0
I
f
At a tine of such heavy credit requirements as the present, the greater volume
of borrowings* not only In the aggregate but in the day to day demands* naturally
often resuite in hirfc rates for the money loandd.
Indeed* so reluctant have the
bankers been during the past few months to supply the large demand for credit
based on securities that the occasional loaning of relatively small amounts of
money at very high rates often represents a desire not to secure the high rate
uoted but to prevent the rate from going very moch higher with the conse uent
demoralisation which might result#
Intermittent Factors*
fhere are certain other factors* the influence of v$hich is principally manifested
in intermittent wide fluctuations in the daily rates a$ in the rates which apply
for brief periods*
Hie increased volume of demand loans called daily for payment
notel above* coupled with the decreased amount o f time money loaned on securities,
produces more or less api rehens ion on the part of borrowers as to their ability to
re-borrow money called for payment*
Hhis apprehension, quickened by the numb r
of insistent borrowers bidding at times when momentarily loanable funds are exhausted
or are offered in small quantity* frequently results in competitive bidding for
funds nfiich advances the rates for a day or part of a day beyond the actual neces
sities of tho situation*
Another active and irnportant influence which has recently affected the supply of
funds available for collateral loans and precipitated at times a rise in the rates*
has been the ♦eriodio transfers of Sovernm&nt deposits from depositary banks to the
Federal reserve banks in connection with the fiscal operations of the Treasury.
3uch withdrawals result in the depositary banks calling money from the securities
market, which cuases sharp advances In the rate bid for ca ll money in replacement
of the loans called for payment*
JUJ&IJLASMFIED
Reproduced from the Unclassified / Declassified Holdings of the National Archives
Authority( i Q f Q ? Q j
M n tm s m
tta & a r ty fc ^ o m m i i i f
mad*
in m il law**? frames t* t&n
a®§fsl^
# f
#£ Sb* la * it
#lniiftfiffr 3H iHn#®1tflpdi* £8i tlJO
of
Sfcutf* ufcatoaafto® ia L*«£>or£M» i t Hs& fQlMI i f tl* taiaacl* tft*
«**» a * ocUXsii^i
lacs**# i i m i ,
mmm$* m Hw mm
mm flagfr lMt**#ta0i 0# ©nl* m ap •*» t* i^ie^ t&» i&mm&
.fclgtt
lav 3ea%^& ci*f3l§r m i t&t&i
tat m
m$&l jw o r t t a i i f ti» $*&&
l«on» <■* attae* tmtmm*
imMonfeol t*»
m& muMWrnm *t tha
mtimt# imsi a® fcfcaet} of &t*oaa So
m m
m m & t t* m
m&tv&ttom m *mm
V & & sad*# w m m l v g rn m % lm
o f t&© t e r w&fe& i n
r^flooiotl &i tl30 iMMfMfft #5ifte ?«* tfte gra^to* *©ls*» o l $&$ <xtfestr^KUnc m£l 1mm* *Zm f M R l *a*& I# tqpaa&ai. a* tn* teat
w w n « r i f viMiM
-
$&i I *******
iM r - M to m m
nni it* nao&mson#
m ® * iy
n l N
l
( M t af'ttaft Xo&iig&U M l a*a& la* i M
i^iatiaa tetn*a& *&©
i f H * Oaa^xi# m
*&$** m rtfai* fclgfe fu am l taafciHi a»# tm i% 4w» $* otfcor tatasii*
ow*m* tm & tiw i& pott ftNtt fcfr* 3mmm«& mwtlmmm a£
t^a c*awaf©i&$. <smmanlfcy and t» j**#t
Ota*#*
l^ lw s i
«k3Ji i*# &a$»latiaa #£ teat ma&rw*- *a&n(ttiai@ atttia# «r fcit& fatan
1waist m£m*tom m Wm •» gw yyws tha***#* g»i4
*torn la d ^ a ^ itiis
mmm&ttom
mpmtet**
it
10 ilo^
Reproduced from the Unclassified I Declassified Holdings of the National Archives
Authority f i O
fO ^ O
I
B m m s s M .M w , ^ „8telterly,aaft,
& t t to *
* » ©*pa& 2 y
w &
Is a^ttistlaiiig w m tut*'fa*
tittm tim
lo & m
& ll
otnar tKjrxmtng** -1* f&ctf *®&m fw mmmmt*i Imm
ft* m
l **&
tta te m
.m&
to m m
h m * *
w m *m
m
o t m
th m
tm
mtom
'o f
#»*% %
wa& tm omM.%ism v&im affect m** .t» tm m$& o£t*&t
otixHf*
not I& 'Ills
is <l<>^stiusfcsrattiHX Ip tin
fia* wiia* £h*0t«&titm M w&% * & m and tii©
&&•
fi*
r& tos fa * o o t t m m ?
m
p&smta t* uhjab
n e t d e t a i t a i a f y f t mfcr* f r » t * v m r
m
portoit totftim m m tsm m tm ■&>* m mrai&X iw rw t lags*
im
onetoo **# tm botfea, to in itia l £i*s&t
m*$» e€ ttitti* «*•&*»*»•
M io to %tm*
it ie
ooMMscciftl
*&*& tmX m m ixnation t * suites**re 1m%
tommt in the m*s* mrnM m m&mitim* rnmi&m
m tin* *«w w i## o f
im m rmlaly ooa» fro® tfte ®m t*G lal «»*-
t a m , .Ht*** ©am
datum
*»*
m w & * -ft $#*&**&* in £aw>* o f ts»i*
l^ r v M fi, siae#
to gwaii thata mmmti®* m wem *
tiafinm ihm to
tfe»ir M gotii* m& i» radios t&»
sfctllty ®f ti* fcsa** t» 4*
Altimgb t^»
osf t&* fefesSoi
amft- tvwrt oan^aiifi® am&tftom W tu t fum &tm%m
of
nm^r iM ied m tlio 0««K»f|tliNi m ^a»^ m mmto&Mm o£ th»
p m <m
f^ e r at times
%imiml$ m m um
tm
m
m *+
u r n -m % m
% m a
l^ e
alal p tiw
im
m oaH mmm& mxmfc is par*
t^aro £$ U tti« c^Ndal
m r c a l l m k ^ s t £&& liid t ® d n a € « i » a » « s i a i t o o a a #
B * tfikfttirtag
y
tim im ^
Him T01SC
r ^ to a
d ib it s
n s r o a l l sao&iiy <ni t l i e lim
190S-l'ii9
tti© mite# ft»r
tto pstIM &m* ISIS ti» Wm* m* mt&xsmti*
JJUCLASSmEJJ
Reproduced from the Unclassified I Declassified Holdings of the National Archives
10
iio long as collateral c a ll loans are made «md*r prevailing
conditions It I » d iffic u lt
to ace her tbo present situation ocsi bo
altered, bocam ® of the impracticability of oontrolliftf the under
lying caaca off hl^fi amtoo,
la the last analysis, is the
excess of dmmii arer myp.ly*
In a t t e s t fc control the rate® fo r c a ll loots by the establish
ment o f an arbitrary lim it a t a I w lc*o lt without i fto ability to
oa»sec abcte fsiufaer&totl t?Mc><
thD
trouM
bo
where
the
oiwr&ta to incrcaso ratesf
distinctly ftatsardoos* iK>r t&e re&s&n
thc-.-i tip to the?
arbitrar;/ rate vjou M lirdt tfr* sarply
of
point
n m noray,
;s|>eoslatlon m& ^anansi on rdffit proceed unc&ceteed and 'the natural
elcEicnte
of
words, M(fs
eacf.anoim
sioni^
tion
rates act
a© a
deterrent
o* credit*
On the otifrftr
available at a
fixed raaj&ram
Biffit
aaddcaily
accoonedation
could
or mrmlati on W‘M not obtain* In
aorroction
for
not bo sot#
be
to
land,
ovor^spoeftilatlon and u:i3ue
tfio swrcply o f
rate boc«aa ee^uauctod, liquida
ftrood because th#- doro&nde
the congurrrntion
$h© offoct
of
oth r
of
for additional
oaBBdtmcnts already ne.de
each liquidation would
bo
to
embarrass, not only Investors aril dealers in s e c u r it i e s , Xtat
frequently mi^ht affect dealers and merohmts in oomodities as
well*
As on eaanple of the la tte r, the
case miifit be si tod
Reproduced from the Unclassified I Declassified Holdings of the National Archives
1
J ^ C L iA a M ^ I H U
A u th ority
f0 ^ 0 I
11
of a eorrdtriKsit to purchase a roa?3d amount of cotton on a
certain day* £Ja»&r o f tho homo® on tfi© Cotton “-iiwfliunce are
also rmmbm-S'Of tho Stock r:&cih&n[*0 ant? frecnigntl? borrow vory
larfjoly or* tfee Stooie ri«a(hfna» aoainst lnvostcmt oecsiritio#
to provide ftm&s for settling th^tfc- transactions in cotton*
I f , ifceroforo, ?t*on m
important cotton, oafctlownt is iminoijt,
borrowings on securities oowld not bo availed o f f the cotton
tro&aaotlaR corad not bo oonsuranatod and a clr^&stio li<?nMation
throng salo oithor o f seowrites or of the eotton M$ifc bo
required to ovoid default*
Similar consoqumces mi&ht obtain
in tho oases of traris&otions hy mttoQt* of ether oonrwditgr
oxohan^es t&o aro ©Iso masbera of tho Stoofc i&cdmnre aad hsseo
recourse to tho ooll mons^ narlrot*
Oall si6n«y in smso fora Is Indispensable to avezy isaportent
fin an cial ocsxtor*
oBrclagprcnt
?€ tects temporarily id l© , hat a la sip
mA sfeoxt tirao
corulaot
of
sono# i s essen tial to tho
business*
national cad
It
domestic
use o f fcfte m j » r
i s not
f3 ioro' m s t bo not only an o u tle t for tho
in aoeotttanoo
n o o d siM axti ooanotaioal
is particularly essential
oosmaroial b&sinoss but
portion
voltsso of oall
of
saoh money
with. sound
to t2io
bandog
tho
to th©
inter
diversion of
tho
sooctritlos mxlcotft
p rin cip le s, si-itt
th» » —u»»..
Reproduced from the Unclassified I Declassified Holdings of the National Archives
Authority f i O
fO ^ O I
IB
t is to bo no toft that ■
in mo cawt world
rvsff&et m
t v ot bt*r Ifcan Mm fork* i$ tlm m il tmmegr
upm l&vmtmmt sooorltlos mti m sasecptlfclo
to spooalcitivo tnflnmo®**
.n ofhnr narfcftts tfc© wworeo i® trm f
as tftoi? m il rm*Q*f I© ba»od prim ltnlXp m ooRnPitiial ?»j>o* wjxst
t^iak realisation em be !$&& at tho oa*it*€&
oas© of iioodU
at & prtoo, la
!© !m*© soim tlmt in tMa county sail lomm on
mm,witrta ladle *Ms ootf ^tial
o f llsiiitUty recaairedl £®r
< j a i o o r t o i n realisation, ntt<l tlmt tM s fiiot hm nm- ticea
raoro fjeuorollsr tafem into oansiaomtitm % our lotiftsi*** Bat tlso
safe &nl iwocoasful ftivose* its tills oountry o f tho use o f oeil
RKMqy frsn Its .»m*rtHtonoQ upon Inimstemt sosoritl^a m a basis
vecTttiros saroffcil sfco&jr In ®xds»r ft*a* s»fte* and adequate rnet^Ods
turn® fee Fwtostitutotf for tlto **t***§-«o1ftoas* of 9 io sooaritftss
m rtet*
patee mhtmmmt of this onfl probably derxwda npm tti®
momm-fal (lm®lap~mt o f a plat* for teisa sottleomfts oar <feo
M l moos rmitl t&xe imm >ivamUms m\ tim atooIt :^tohr^o. In
Hon of ttus nnf*sont sotbod of dally se>ttlfl**ttkS'
3hs rrinol?til
offoot <>t mmh a Quango of tfm m^KHoA of GOttleaemts would b#
-» 3*0! two th# cai I ram-oy mxfcx& tornI tf’o ooeosslttes '■>• fctoo
ssoarltios rasyjnst ana release i’&nds now wood in aollntov&l oa.j:
'iomm hmeA m inmmrrmt soovtrltios far Gaptoynait in m U loam
b a s a l m \ t& m
o o lia to ^ a l
if
| fc»fa ® r® X i o u M
som i3 f it it 5 S # , o o R 5 -)o w lia
^ -
Reproduced from the Unclassified I Declassified Holdings of the National Archives
I
^
a
/
Authority ^ . 0 f p S 0
,
I
33
rooo&tiaed cfexoad m
zvq::-
feaaoa for doaoftd loans*
this otmago a brooder dimoimt
develop
**>*tld naturally
Under teen aottlcrunta fh® borrmrlag required
th<3 Securities mzfcdt would b® m the baslo of af&rt tira®
U
®* f o r tbc?
between s^ttlcinonta*
?£i©thmr thqgr *??©?© woafcly, Jfcrtnightly or at other intervals*
Af&tdtioo for Vfrt* i^provcwBut nf tlm pmwmt method o f
settlement o f stock tsMtatige contract® tma cstoncled over lone
$®&ra BX& as tlm rem it of fatten*!?® atadlea m& dollberatiooa
o f o f floor© aa& mttfo©ra of th<~ Rcw T02* £totifc §Bof&ago, aa woll
as barfrors*
aa
ir(|»rtanfc stop Ms t»o<m tafcai to proirldo cularood
oXoarinr Siaoilitiea tfcrouffi tfc© organisation of & new corporatlfin
fcztotm m the >toofc Clearing 0os?>oratton* ihldh is aa^ote*! to
fce*gin operation* in April* 1920*
. £on®m?.. description o f the
mrpoaoe and oonto^latad crnoratloa# o f $*© corporation Is eoa~
tainod iii tJio rnrapMot attached Loreto as M ilM t Ho* 3*
2feo
fa ctio n s o f Ih li corporation inelttclo jw rid iag fa cilitie s fo*
olcoring contract* hotmm !3o?rfeors* for the* receipt and delivaiy
-m&
o f s e o n r it io s befcmsan
tones* t m o t eosgtfnlo* and
otfc rs* and f o r the c le a r in g o f o o lla t e r a l o s l l lo m a *
I t ia
not a sso rte d o r oxj&eclod t t * t «h o in s t it u t io n o f the®® o jw - t i o n *
K i l l m a te ria lly a f f o o t e itite r th® awmnt o f taoaoy loaned freai
on® day to <mot3i®r on t£© o a l l raoaoy maxlcot o r t&o ra te s o f snob
l o m s , feit i t la ovpootoft th at i t w i l l operate m a te ria lly to
deeraaa® tha snotmt o f bonk c e r t i f i c a t i o n s on da^ lo a n s, whio&
th® proaont p r a c t ic e
wqairm
in th® in te rv a l between |>c^ing
DECLASSIFIED
Reproduced from the Unclassified / Declassified Holdings of the National Archives
Authority
fO ^ Q I
14
on© m il loan and. replacing i t slth another on tho
dagr*
ItsiimaM ho t-.otod tlmt t he srohanism affordsd by the co*r.oratics* is an ilKUspensafcIo* proreijaieitc to Hie o&tahllstanoht of
a system of tern settlements*
•She more rosmt ant! definite dovelopmmt toward the
substitution o f towa settlements for the present tsystm o f
daily iotticfsorits my be tsaid to have M
tlx?
its inaction In
o f tho American Aoocptanoo Council at its eimaal
meeting: on ??soaafc<n* 4t 1919#
t that tines tho following
resolution. \ms ad^ptod*
1‘oroas, fh© present riethod of dalljr stocit
oxoban.-o settle m ta9 «&£h it* dominating and often
uncettlinf ofi'oct on tho ca ll money t&.rloet, i *j.aenees
a/iv- r«ol#
v the dmmlommnt o f a *-Ms and heal# / tiaeount
ncuritet in the United statest
"Ucaolvad, llmt the Chalxman o f the -jcocutive
tJofmiifctee ho authorised to appoint' a oocs»ittos ©onai sting of *m>*stoer© o f tho 'swxmtive Oowrdtto© sad otti^r
Individuals to study the advisability, rrnys and m&mu
nUfyi^ thr presant system o f aettlenente cm tho
?$rtc ^tooic xdhanga and smbstitiitin® therefor sera©
aysto® of periodiool aottlrirmit # with p m r to taj® atjcSh
stops aa m.;y so«s advisable in tho oaoe."
r o f tho ar*ra»ai report of tho Anorlcan Aesoptancs
Oeaancil 1® appended hereto as
-"Xhibit No* 4 f in vrftish tbs
resolution .••'xws on paga S, and tbe report o f tho 0hnirf?w»
o f tho jcncacive Orxnraittso a h iiM t f M M s appears
or
’
-s
16 to I7# Inclusive*
Goersitte® tbits provided for m s appointed and
r* &
two extended soniferanees in triil di the pxi>blon was ta lly 41s-
cucsad, both irm tho point o f view of tho haiSts awl. of tfce
xtoak .Jxohongs*
;%
or lllti&tr&tioti of tho subject matter of
Reproduced from the Unclassified I Declassified Holdings of the National Archives
j
i Authority H
A vn i
Q
(0 ^ 0
I
-15-
tbe dlscusalon the**© is attael^a hrroto as "xMfcit
0 a
detailed report caapXloS hp mw o f ttie mart***® of tJto Oorrlttoo*
55r* SsBfciol .^Strait* Ctaixwi oi’ the Committee m Soaring
tfouao of tbe fltoolc ixobancjo deaaribins ttie t<wa aottlcncnt
iper&t ions in J^wiflon tmd an the :%tr--nom cmtinont* vJKlofc
presently ui'il be pabllghod
tbe AmoJioasa Aooontamo Council*
2hraM$k ito eourteey
an advsnoo crtpgr o f
I t t C * * * ' S '!A :~ L S-{ ">"+■ *{*
the rqport^ '.3\ere ?sr© alao attached, a© d ib it s '.n » 6 and JP
roapeetiwJy tm otfce*r tmblioationa o f the Ata rioem Accapfcsnco
Council, **Aoo0f>tao3G Coi$>omtionswt tty 2* Abbott Goodbwo, Vic#
President of fcbo >*Irst Stitiooal Bank o f Bostonf £fa««* # and
n2t*«? Aoooptaaee as fch© fesis of the •*\»sri«i Maoocmt feileot,#f
Ijgr John &
\loe ! reaidmt o f t&o national B ut o
Gofimmo* & w Y « # In sfcloli am na^oa 14 and 2Z r©s*:oetivolyt
th® nocossitir tor tom settlotueinta as a moana o f rollevins tbo
oall mon^ jaarfcpt frcaa the aooesaltica or t3*e aeearltfea market
and aa a nreoe&ont to a broad and atablo diBoount ®!fcot is i l&eassod*
2ho sapstmrs o f tbe eORmitter b&vo mimiimoasl^ «JCTtros?sfxl tfco
-minion tlmt the sriqptlon of a terra sottlcm vfc by
5toa3t ^change
woald o ffe r s&vmtOQpm 1n tbat it v&uld ollraiimto dt^lioation o f
tbe handling o f aeenritioa ansi in -p^-ntn*
13*© oom ittoe holda9
fcapevor, tbat* inamxtGh s.® tbo adoption of a tons sottl'!*%«nt by
tbo .:issolmn0 no^ld im/ol.'Ts cihangoa of groat lraf»ort$moo9 t»tb to
bank;® ansi to motors of tbo .asoifcsigo, i t w ill menire tbo most
ooroftil stud? nf tbo wab^oct b^ tbo ocnoitteo, and in any case
Reproduced from the Unclassified I Declassified Holdings of the National Archives
DECLASSIFIED
Authority
10 ^ 0 I
R eceived t h is 2 ?th day o f March, 1920,
from the Secretary o f the Governor o f the Federal
Reserve Board a response to Senate R esolu tion
No* 326.
P rivate S ecretary.
Reproduced from the Unclassified I Declassified Holdings of the National Archives
DECLASSIFIED
Authority & 0 ( 0 ^ 0 I
1875
COPt?*BDERAL RESERVE BOARD
March 27, 1920.
S u b je ct; Reply t o Senate R e s o lu tio n No. 328,
S ir :
On March 8 , 1920, the Senate adopted the fo llo w in g r e s o lu t io n :
"RESOLVED th a t the F ed eral Reserve Board be
and is hereby d ir e c t e d to a d v ise the Senate 'trhat
i s the cause and j u s t i f i c a t i o n f o r the u su riou s
r a te s o f in te r e s t on c o l l a t e r a l c a l l loa n s in the
fin a n c ia l c e n t e r s , under what law a u th o riz e d , and
what s te p s , i f any, are re q u ire d to abate t h is
c o n d it io n * "
In r e p ly the Board d e s ir e s f i r s t to in v it o a t t e n t io n to the
fo llo w in g ta b le s showing d iscou n t and in t e r e s t r a te s p r e v a ilin g in
v a rio u s c e n te r s in a l l Federal re s e r v e d i s t r i c t s during the two
t h ir t y -d a y p e r io d s ended January 15, 1920, and February 15, 1920.
I t w i l l bo seen from th ese t a b le s that the maximum and minimum r a te s
on demand loa n s secu red by c o l l a t e r a l are approxim ately the same as
thogo f o r commercial paper in a l l c i t i c s excep t Boston and How York.
W h ile the le g a l rate o f in t e r e s t in M assachusetts is S%, h ig h er con
t r a c t r a t e s are a u th o riz e d , and con seq u en tly the 6% lim it a t io n is
o c c a s io n a lly exceeded.
(T ables r e fe r r e d t o appear on pages 286 and 287
o f F ederal Reserve B u lle t in f o r March 1 92 0.)
The o n ly f in a n c ia l ce n te r in t h is cou n try in \tfiich th ere is
m aintained a c a l l money market o f n a t io n a l im portance i s Hew York
C it y , and w h ile the ra tes charged th ere on c a l l loan s are fr e q u e n tly
in excess o f the le g a l rates allow ed f o r commercial p a p er, they are
not ’’u su riou s" under th e laws o f the S ta te o f How York, which s p e c i f
i c a l l y exempt c o l l a t e r a l c a l l loa n s from the 6$ lim it a t io n which lend
ors must observe on o th e r loa n s on p a in o f in c u r r in g the p o n a lty p r e
s c r ib e d f o r u su ry. S e c tio n 115 o f the Banking Law (L .1 9 1 4 , Ch. 36S;
C on sol. L. Ch. 2 ) p r o v id e s that upon advances o f money rep ayable on
demand to an amount n ot l e s s than $5,000 made upon war chouse r e c e ip t s
b i l l s o f la d in g , c e r t i f i c a t e s o f s to c k , e t c . , o r o th e r n e g o tia b le in
struments as c o l l a t e r a l , any bank may r o c c iv c and c o l l e c t as compensa
t io n any sum which may bo agreed upon by the p a r t ie s t o such tra n s
a c t io n . The s e c t io n rea d s:
Reproduced from the Unclassified I Declassified Holdings of the National Archives
A u th o r ity £ Q
f Q g Q l
^2-
X-1875
1'S ec. 115. In te r e s t on c o l l a t e r a l demand loan s o f not
le s s than f i v e thousand d o l l a r s ,
"Upon advances o f money rep ayab le on demand to
an amount not l e s s than f i v e thousand d o lla r s made upon
warehouse r e c e i p t s , b i l l s o f la d in g , c e r t i f i c a t e s o f
s to c k , c e r t i f i c a t e s o f d e p o s it , b i l l s o f exchange, bonds
o r o th e r n e g o tia b le in stru m en ts, p led ged as c o l l a t e r a l
s e c u r it y f o r such repayment, any bonk may r e c e iv e or
c o n tr a c t to r e c e iv e and c o l l e c t as com pensation f o r making
such advances any sum which may be agreed upon by the
p a r t ie s to such t r a n s a c t io n ."
S e c tio n 201 o f the Banking Law, id e n t ic a l in language w ith
S e c tio n 115 above q u oted , makes the same p r o v is io n in the case o f c o l
la t e r a l loa n s by t r u s t companies*
In the General B usiness Law (L .1909,
Ch. 25; C on sol. L.Ch. 20) th ere i s the f o llo w in g g en era l p r o v is io n o f
a l i k e c h a r a c te r :
!' S ec. 579. I n te r e s t on advances on c o l l a t e r a l s e c u r it y »
In any case h e r e a ft e r in w hich advances o f money,
rep a ya b le on demand, to any amount not le s s then f i v e thous
and d o l l a r s , are made upon warehouse r e c e i p t s , b i l l s o f la d in g ,
c e r t i f i c a t e s o f s t o c k , c e r t i f i c a t e s o f d e p o s it , b i l l s o f ex
change, bonds or o th e r n e g o tia b le instrum ents p led ged as c o l
l a t e r a l s e c u r it y f o r such repaym ent, i t s h a ll bo lav/fu l to r e
c e iv e or to c o n t r a c t to r e c e iv e and c o l l e c t , as com pensation
f o r making such advances, any sum to be agreed upon in w r it in g ,
by the p a r t ie s to such tra n sa ct ion<>"
H ational Bank A c t .
The N ation al Bank Act p r o v id e s that n a tio n a l bonks may r e c e iv e
and charge on any loan or d isco u n t in t e r e s t at the r a t e allow ed by the
law o f the S t a t e , t e r r i t o r y or d i s t r i c t where the bank is lo c a t e d .
The a p p lic a b le p r o v is io n read s:
“ L im ita tio n upon r a te o f in te r e s t which may be taken.
422. S ec. 3 1 9 7 .- Any a s s o c ia t io n may ta k e , r e c e iv e ,
r e se r v e and charge on any lo a n o r d isco u n t made, or upon any
n o t e , b i l l o f exchange, or o th e r evid en ces o f d e b t, in t e r e s t
at the ra te allow ed by the laws o f the S ta te , T e r r it o r y or
D i s t r i c t where the bank i s lo c a t e d , and no more, excep t th at
where by th e laws o f any S tate a d i f f e r e n t r a te is lim it e d f o r
banks o f is su e org a n ized under State lav/s, the r a te so lim it e d
s h a ll be allow ed f o r a s s o c ia t io n s o rg a n ise d or e x is t in g in any
such S tate under t h is T i t l e . Y/hen no r a t e is f ix e d by the lav/s
o f the S ta te o r T e r r it o r y or D i s t r i c t , the bank may ta k e, r e
c e i v e , r e s e r v e , or charge a r a te n ot exceed in g seven p e r centum,
and such in t e r e s t may be taken in advance, reck on in g the days
f o r vAiich the n o t e , b i l l or oth er ev id en ce o f debt has to run.
And the purchase d is c o u n t, o r s a le o f a bona f i d e b i l l o f
Reproduced from the Unclassified / Declassified Holdings of the National Archives
DECLASSIFIED
Authority
fO ^ O I
M a r ti?
M J ft t t i Bof&jr to Sonato
328
tttv
Or X tf A 1« X920# Hi* Sm alt
tin following n io ltttlo t!
•aBBQOTB
tli* W *4* r a l lm m Board Bo
« i 1« faorotr lif it lc d to aft*£00 Hm S w ito
It tiM O iu t aaft
fir th« m rlO M
ratoo of If t lt n t i aa o o lla la ra l aa ll l«ant in th*
fftw o lo l M B ltrc,
M
Iw m U ttrittd , and
ofeat otopo* If ohqt* aro roquirod lb rfbato thi«
e«ndlU«a**
&l ropJy iMi Board doolroa first to larlto atto&tloa to Hi foXlOviMZ ta k lM afebSMflffitt t l i MMHit jilVI In U v tC l fa ta *
roriooo oontoro to alt M oral rooorro dtotrioto aortas tho too
tBIrtpMtey porlodo omAoA iloNKasir S&$ 2£S0y oad IWBroosyr Xftt 1S80.
X i V$3& Bo 000® 0 POOI tBOOO tOiBlOO tfcftt Iho MftBOMI
S&M&OMR n t t i
-os dooooMI Iomm oooorod Hjr ooX«latora& aso opproBtBoatoSjftBo ooho oo
tBooo fo r oooNorola& swbot Sit ft-fl (fftto i oooort Booto® ond W&w Tw%,
Reproduced from the Unclassified / Declassified Holdings of the National Archives
DECLASSIFIED
Authority
(O^C) I
Ttm onlf fim m lm X Qmtm* %m thtm m im ttf In which th&rm %» maUw
tmtimfi. m m i l
m arket o f n o tio n a l lB^ortane« I* tihm Ivtk. C ity , m i
«d»llo tin rntos ohargod fcham art ©mil loam uro trw%mm%%y In «km«* of
tha l«gol mto# *aiowwi .for ooMrnarol*! po^or, Hiojr or# not •mnurtmis*
\sndor tdbfli lim of th# Sfc*te of Stat Terk, *hio)t ftpoolftaalty
«oXIfttorol ©all Im i* from th» If! limit**!© nvfaU&i Imtdmrn mm% ftbm ry m
Qthmr Xwmm m p a l* o f lu s^ rrlu g tho ponaltjr ^aaorltoM l f a r msmrsr# ©oa*
tloiK 1X5 o f tlmi BHtfctag L.** (X* 2914, Ch» 360 f Cornel* L. Ch* 2 ) pro*
vlAoo tfmfc upm oAvommm of tmmy ro$«t«3»l* m AmmbkI to m mmm% m t
Imm %km $5tGQQ mm&* v<i*m mrzfrmmQ r * e o l$ t « t b i l l # o f IM iu g* o o r t l lo *%m
o f otook , t t e .y o r other aogotlofel* UiotnaMmto m
feonfe
wmy roa o lv o tmd e o l i * o t m aosap^M lloxi ««gr t a which
bo «$ r*«d u an
% fcho im rlim to «*»h
ftm 9m % lm **«&•*
**w«
«
<*>U»*w<a d—ami la « » o f not !»««■ thaa
n r t tiwamwa d aU w w .
•Upon wfcfmne** o f mm:?& ropopofelo on de>R*md t o an Moca&t mot
lo * o than firm thoooanA d o ll* * * a®do wpm mmtnlkmm ro a o lv to * b i l l s
o f ladlssg, mv%%f %&&%•* o f atotffc, * « r U fl* ft t « * o f doposil*. b i l l *
o f oaalM g** tomA* o r othor mgofcta&lo inotrwMMit*# 3>l*4$od n*
Reproduced from the Unclassified I Declassified Holdings of the National Archives
j
DECLASSIFIED
I Authority
0 (O^O I
3
collateral security for such repagvtent* any bank any receive
or contract to m « lf « wd eolltot m ooa^nMtion for
sash adfflDMi any sob which nay be agreed upon by th# partlee
to «soh transection*”
Section 201 of tbs Backing Lam, identical la language with Seotlon IKS
above quoted, aafces th* same provision In the oaae of collateral loans Iqr
trust companies. In the General Business La* (L. 1909* Ch. 25$ Consol. L.
Ch. 20) there Is the following general provision of a like character:
379. Int»r>«t m iM ltfd on adr«no.» on aollatoral —narltr.
Xa any ««•» hereafter la which advances of abney* ^pay
able on deaand, to any » m « l not loss thaa five thousand dollar«i are mads upon warehouse receipts* b ills of lading* cer~
tificates of stock* certificates o f depoait * h ills o f exchange,
bonds or other negotiable instruments pledged as oollateral
security for such rep^nAant* It shill be lawful to recalvs or
to contract to receive and collect, as condensation for making
such advances* any ewa to bo agreed upon in writing, by the
parties to such transaction*.
*»*lonal
Jo t.
the Satioaal Bank Jot provides that national banks nay receive and
oharga on «ay lean or discount Interest at the rate allowed by the law of
the State* territory or district whero the bank Is located. The agnlicable
provision reads:
" i l i j h r t l a B a w n wrt>
t e l a m * «htah a w H trtaa*
422. See* 3197* - Jny association way tak«t receive, reaarve
and charge on any lorn or discount made* or upon any note* b ill
of exchange, or other evidences of debt* Interest at the rate
allowed by the laws of the State, Territory or District where
the 1>ank Is located, sad no acre* except that where by the laws
of any State a different rate Is Halted for banks of issue or
ganised under State laws* the rate so Halted shall be allowed
for associations organised or existing In my mush State under
this Title* When no rate Is fixed by the laws of the State or
Territory or Sletrlot* tfce bank imp t^ ti, receive, reserve* or
charge a rate not esoeedlng seven per centra, and such Interest
aay bo fc&en la advance, reckoning the days for which the note,
b ill, or other evidence of debt has to rua* &*d the purchase
discount* or sale of a bona fide b ill of exchange* sta b le at
another place than the place of «us$i purchase, discount* or sale*
at aot more thaa the current r*te of exchange for sl^ht drafts
la addition to the interest* shall not be considered as taking
or receiving a greater rate of interest*.
DECLASSIFIED
Reproduced from the Unclassified I Declassified Holdings of the National Archives
fO^O I
Authority
4
It w ill be observed that the effect of the foregoing provisions is
to antheris# In tho State of Hew fork en collateral call loans of not
loot than $5,000 rates of Interest which asay bo la s x s h i of those per
mitted for
of other character, and that crash higher ratoo are not
prohibited at wnrlnoi*
As to tho *amme and justification* of the higfr ratoo of interest
which It thus appears nay legally ho charged on col lateral call loans la
Ws» Tork, and as to tho "stops *•* repaired to afeoto this condition*,
there I s , as It well known, a wide difference of opinion aaeog person*
who have given knight and study to tho q.uestloo* Indeed, broad and
fwrtaacatal questions of general economic and social polio/ are involved *
la the last analysis * the whole question of the u tility of speculative
dealings la securities and cocaBOdltles on orgrafcvod exchanges is involved;
and taoro ia&edlately, the question of thoBMffMp^f^P1’1*0* less of the
leading speculaiivo rackets of the country, wargiaing , stock nanlpnlatioa,
end kindred matters also susceptible of abuse. As to these the Board
hue never had occasion off icially to font an opinion? tho Federal Reserve
Act specifically preclude* the porohase or dlooount by Fadoral reserve
bas&s of "notes, drafts ondbill* covering Merely imrostasats or issued or
dram for the purpose of carrying or trading In stocks, bonds, or other
inrestaeat securities* axaopt bonds W& notes of the €h*rem*a*ttt of tho
United States*. fho Board could not undertime to form a Judgment upon
the mattors above rsferred to without stu$r sad investigation of such a
comprehensive nature as would seriously Interfcnt witK* the oondaot of its
regular wortt and sfeich* had tfce Board tho rwgslslto anthoaify, would re
quire tho servloos of exports and assistants for the scaplcywenfc of which
the Board does not fool authorised to expend fundi accruing tr m statutory
assessments on the federal reserve banks for the purpose of defraying the
ordinary easpenee* oontessplated by tho Federal taoearvo Act. __
fhero is sdtalttsd a* an appendix hereto a amorandsn prepared for
the inf emotion of tho Board by tho M o ra l i M t m Agent ia *w Toik,
expl&inlx^ la general «so nature and operation of the Wm fork c a ll m o n ey
market sad canes* of h i# and fluctuating ratoo for call *fin*y ia that
center.
Bespectfally*
Governor.
the President of tho Senate*
DECLASSIFIED
"ftgplftcftrcted from the Unclassified / Declassified Holdings of the National Archives
Authority ^ 0
fO ^~Q |
TREASURY DEPART
WASHINGTON
o«wet er
O O W W ld tU llt o r TM * OUMtCNOV
AJM
M
tM
*
T«
hww»«*« mim«(utMMNcy
March 24, 1920*
dear Governor Harding:
E eferrin g fu rth e r to my l ette?M ;o you o f yesterday, ll beg
leave t o advise that the reports o f co n d itio n received from' fe x io n a l
Banks in Federal Reserve C itie s show, in te r a l i a , the follow in g
a d d ition a l loans made a t ra tes in excess o f those perm itted “by law:
Humber o f Loans
Name o f Bank
--------
— w
'
Aggregate Amount
-------------
® ati ohal C ity Bank
.chmond, Va:
F ir s t n a tio n a l
Merchants N ational (N.Y. c a l l )
lila d e lp h ia , Pas
Broad S tre e t n a tio n a l
T e x t ile N ational
Penn N ational
N ational Bank o f Commerce
Northern National
Manayonk National
Kensington N ational
Girard N ational
Franklin N ational
Fourth S treet
Drovers & Merchants N ational
Cent ra l Nat i onal
Centennial N ational
Bank o f North America
Tenth N ational Bank
Eighth N ational Bank
Second N ational Bank
F ir s t N ational Bank
$ 177,582.06
1
10
37
203,200.
3 ,8 0 0 ,0 00 .
6
12
3
3
3
11
1
7
95
1
14
1
12
5
11
17
55
2
30,000.
281,327.
30,000.
7,636.
15,000.
75,000.
10,000.
421,703.
1741,950.
50,000.
2 5,676.
15,000.
70,000.
85,000.
275,000.
290,000.
482,500.
275,000.
Very t r u ly yours,
U
a
U
Comptroller*
Hon. W. P. G. Harding,
Governor, Federal Beserve Board
I
Reproduced from the Unclassified / Declassified Holdings of the National A ichives
DECLASSIFIED •
Authority 1%. 0
f0 ^ 0 I
TREASURY OEPA
WASMIN
• m o* op
OOMPV9»PLUEI» OF THC QUMICNCV
0
Boar Ooysmor:
Ibr the information of the Board Z beg leave to a d T l s i that, in roply
to Inquiries contained In statement of condition of ftbroary 38, 1920, tho
following banks in Vow Yosk City reported loaaa made by than "including
Items of paper 1bought1, since Deceofeer 31, 1919, at rates (including
interest, discount, and ceomisslon) In wtcass of highest rata p o »lsslb lo
by law under written contract* ware al follow*:
..■
m a or i i m
wmsm car lo a h s
Rational Bank of Commerce,
Seaboard National Bank,
Mechanics and Hotali National Bank,
Lincoln national Bank,
Liberty national Bank,
Coal and Iron Rational Bank,
Chemical Motional Bank,
Chase Rational a*nk,
Bank of Haw York, 1. B. A.
5
30
1
*4
6
15
3
\
38
Sincerely yours,
Hon* W. P. 0, Harding,
Governor, Federal Seserre Board*
nommien *m m .
$1,801,464.86
666,000.
60,000.
5,585,765.48
96,000.
159,393.97
980,000.
34,000.
3,766,605.47
DECLASSIFIED
lassified Holdings of the National Archives
Authority & Q
fQ
5T Q
|
'^*2. G.H^ING^j^RNOR /
A L B E R T S t S A U S S , VICE GO V eH nO B
i F£D£RA!
SECRETARY OF THE TREASURY
CHAIRMAN
:
F E D E R A L R E S E R V E BOARD
C H A R L E S S . H A M LIN
FiLE"
HEN RY A . U OEH LEN PAH
T . C H A P M A N , SECRETARY
R . G . E M E R S O N , ASSISTANT SECRETARY
WASHINGTON
I L A fc F ld ft l. K E N T
March 23,1920*
^X-1870
Slabj e c t :
On March
r e s o lu t io n :
Senate adopted the f o llo w in g
"RESOLVED th at the F ed eral He serve Board
he and I s d ir e c t e d to a d v ise the Senate what i s
,the cause and j u s t i f i c a t i o n f o r the u su riou s r a te s
o f in t e r e s t on c o l l a t e r a l c a l l lo a n s in the f i
n a n cia l c e n t e r s , under what law a u th orized and what
s te p s , i f any, are re q u ir e d t o abate t h is c o n d it io n , 11
In r e p ly the Board d e s ir e s t o say th at i t has no in
form a tion th a t r a t e s o f in t e r e s t h igh er than le g a l r a te s f o r
com m ercial paper have bean charged on c o l l a t e r a l c a l l loa n s
in any f in a n c ia l c e n te r ex cep t New Yorlr C ity ,
The r a te s which
have been charged on c o l l a t e r a l lo a n s in that C ity , however,
are n o t u su riou s s in c e the law s o f the S tate o f New Yorlr
s p e c i f i c a l l y exempt such lo a n s from the s ix p e r ce n t lim it a
t io n which le n d e r s mast observe on oth er lo a n s on p a in o f
in c u r r in g the p e n a lty p r e s c r ib e d f o r usury*
For f u l l e r and fu r th e r in form a tion o f the Senate, there
i s appended h e r e to a statem ent o f the natu re and o p e r a tio n c f
the New York C a ll Money Market.
R e s p e c t fu lly ,
E nclosure*
Governor.
The P re s id e n t o f the Senate,
DECLASSIFIED
Reproduced from the Unclassified / Declassified Holdings of the National Archives
A u t h o r i t y (Q 5 Q
I
x - is ^ c
THE m w YORK CALL HOMEY I1ARKBT
D e fin it io n o f Oe.ll Loans*
C o lla t e r a l c a l l loans, in th o gen eral a ccep ta tion o f th e term, are
mode c h i e f l y in
H oy/
York C it y , which is p r a c t ic a lly the only important
c a l l money market in the United S ta te s,
They arc loans viiicii are payable
on demand o f the lender without p reviou s n o t ic e , secured by tho pledge o f
investment s e c u r it ie s , i . e . stock s and bonds, g en era lly those which arc
d e a lt in on the New Yorlc Stock Exchange,
The in te r e s t ra tes on these
loa n s, as on other cla s s e s o f loans, a re on the b a s is o f a r a te per annum.
The Borrowers*
The loans a rc made far th e most part t o houses which are members o f
the Stock Exchange and the money so borrowed c o n s titu te s a p o rtio n of the
funds employed o r d in a r ily in purchasing and ca rry in g s e c u r it ie s f o r th e ir
customers and sometimes f o r themselves*
The Lenders*
Tho p r in c ip a l su p p lies of money f o r c o ll a t e r a l c a l l loans a rc loan
a b le fu n is o f banks and bonkers lo ca te d both in and ou tsid e of How’ York
C it y , in clu d in g fo r e ig n banks and a gen cies of fo r e ig n banks; and s im ila rly
tho loanable funds of film s , in d iv id u a ls and co rp o ra tio n s seeking tempor
ary investment#
The p rop ortion of the viiole fund loaned by those sev era l
in te r e s ts v a r ie s season ally and in accordance w ith the a ttra ctiv e n e s s of
othor op p ortu n ities f o r investm ent, e ith e r l o c a lly or in other markets*
Tho balk o f c a l l money is len t on tho f lo o r o f tho Hew York sto ck Exchange
a t "th o money p o s t“ where through various brokers loanable funds a re o ffe re d
and b id s fa r funds are received#
Host o f the busin ess is done between the
hours o f 12 noon and 2:45 p . m*
The important r e la t io n t o tho money market
o f th e present system of d a ily settlem ent o f balances r e s u lt in g from the
purchases and sa le s o f s e c u r it ie s on tho sto ck Exchange w i l l be d iscu ssed
I
K eproau cea trom m e unciassitrea / u e cia ssm e a n oiain gs ot ine iNauonai Mrcntves
DECLASSIFIED
X~187$ A
2 •“
more f u l l y h oreafter*
Commercial Requirements have the p rior Claim*
In the matter o f th e supply or a t tr a c t io n o f funds to the c a l l money
market, th ere i s g e n e ra lly a d e f in it e and w o ll lender stood o b lig a tio n on the
part o f banks t o accommodate f i r s t th eir own c o m e r c ia l c l i e n t s , so that it
is only the excess of loanable funds which they may have from time to time
that is a v a ila b le fo r th e c o ll k t o r a l c a l l money market or f o r the purchase
o f commercial paper in the open irarket.
This excess of loanable funds
a v a ila b le fo r employment in -the s e c u r it ie s market v a r ie s , t h e r e fo r e , accord
in g to the c c m e r c i a l requirements o f the country*
I t has long been recog
n ized that for assurance o f a s u ffic ie n t anount o f money to fin a n ce the
volume of business in s e c u r it ie s , r e lia n c e cannot be placed on a ra te o f
in te re s t lim ite d t o the rates which obtain or arc perm itted in commercial
tra n sa ction s whose p r io r claim on banking accommodations i s u n iv e rsa lly
conceded*
THE M.W RESPECTING THE RATES Off 1FP5RBST OH
COLIATERAL CALL LOANS.
Lav/ o f New York*
The sta tu tes o f the State o f New York acknowledge and re co g n ize th is
p r in c ip le in b oth the Banking and Business law in the s e ctio n s regex ding
in te re s t le g a lly r e c e iv a b le .
S ectio n 115 o f the Banking Law (L* 1914 Ch* 369; C onsol. L* Ch. 2)
provides that upon advances o f money payable on demand to an amount not le ss
than $ 5,000 made upon warehouse r e c e ip t s , b i l l s o f ladin g, c e r t i f i c a t e s o f
s to c k , e t c * , cr other n e g o tia b le instruments as c o l l a t e r a l , any bank may r e
c e iv e and c o l l e c t as compensation any sum which may be agreed upon by the
p a r tie s to such tra n sa ction *
The S e ctio n reads*
“ S e ct. 115 J In te re st on c o l l at o r a l demand loand
o f n ot le s s than f i v e thousand d o lla r s *
DECLASSIFIED
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(O^C) I
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X-1 8 7 0 A
Upon advances o f money repayable on demand t o an amount not
le s s than f iv e thousand d o lla r s mad© upon war eh bus a r e c e ip t , 'b i l l s
o f la d in g , c e r t i f i c a t e s o f stoclr, c e r t i f i c a t e s o f deposit* b i l l s
o f 6x£hange* bondJ or 6ther n e g o tia b le instrum ents, pledged as
c o lla t e r a l se cu rity f& t such repayment, any baritr may re ce iv e o t
co n tra ct t o re c e iv e and c o l l e c t as compensation f o r making such
advances any sum which may be agreed upon by the p a r tie s t o such
tra n sa ction .
S ection 201 o f the Banking Law, id e n tic a l in language with Section 115
above quoted, makes the same p ro v is io n in the case o f c o lla t e r a l c a l l loans
by tru st companies.
In the General Business Law (L.
1909 Ch.
25; Consol.
L» Ch. 20) there is the fo llo w in g general p ro v is io n o f a lik e ch a ra cte r5
"S ect. 379- IsterejsX m rm itted . on .advances on c o lla t e r a l security..__
In any case h e re a fte r in which advances o f money, repayable on
demand, to any amount not le s s than f iv e thousand d o lla r s , are made
upon warehouse r e c e ip t s , b i l l s o f la d in g , c e r t i f i c a t e s o f stock ,
c e r t i f i c a t e s of d e p o sit, b i l l s of exchange, bonds or other nego
t ia b le instruments pledged as c o lla t e r a l se cu rity f o r such repay
ment, i t sh a ll be law ful to re ce iv e or to co n tra ct to re ce iv e and
c o l l e c t , as compensation f o r making such advances, any sum to be
agreed upon in w ritin g by the p a r tie s to such tr a n s a c tio n .”
N ational Bank Act*
The National Bank Act p rovides that nation al banks may re ce iv e and
charge on any loan or discoun t in t e r e s t at the ra te allow ed by the law o f the
State, t e r r it o r y or d i s t r i c t where the bank i s lo c a t e d .
The a p p lica b le
p r o v is io n rea d s:
0L im itation upon ra te .o f ,in t e r e s t ,w h ich .may be taken.
U22. Sec. 5197* *• Any a s s o c ia tio n may take, r e c e iv e , reserve and
charge on any loa n or discoun t made, or upon any n ote, b i l l o f exchange,
or other evidences o f debt, in t e r e s t at the ra te allow ed by the laws
o f the State, T e rrito r y o r D is t r ic t where the bank i s lo c a te d , and no
more, except that where by the laws o f any State a d iffe r e n t ra te i s
lim ite d f o r banks o f issu e organized under State laws, the ra te so
lim ite d sh a ll be allow ed f o r a s s o cia tio n s organized or e x is t in g in any
such State uttder th is t i t l e . When no ra te i s fix e d by the laws o f the
State or T e rrito r y , or D is t r ic t , the bank: may tsk e , r e c e iv e , re s e r v e ,
or charge a ra te not
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0 iO ^O I
X-1870A
m
^
. m.
ex ceed in g seven per centum., and such, in t e r e s t may be
taken in advance, re ck o n in g the days f o r w hich the n o t e ,
b i l l , or oth er evid en ce o f debt 1m s to run* And the
p u rch ase, d is c o u n t, or s a le o f a bona f i d e b i l l o f ex~
Chang©, p ayable a t another p la c e than the p la c e o f such,
purchase, d isco u n t or s a l e , at n ot more than the cu rren t
r a t e o f exchange f o r s ig h t d r a ft s in a d d it io n t o the
i n t e r e s t , s h a ll n o t be c o n s id e r e d as ta k in g or r e c e iv in g
a g re a te r r a t e o f i n t e r e s t **’1
I t w i l l be observed th at the e f f e c t
t o a u th o rize in the S ta te o f Hew York on
l e s s than $5,0 0 0 r a t e s o f in t e r e s t w hich
m itte d f o r loans o f o th e r c h a r a c t e r , and
p r o h ib it e d as u su riou s*
o f the fo r e g o in g p r o v is io n s i s
c o l l a t e r a l c a l l loan s o f n ot
may be in .e x c e s s o f t h o s e p e r
that- such h ig h er r a t e s a re n ot
CAUSES AFFECTMG- ffiESMT CALL M O m JtATES
The r e fe r e n c e in the r e s o lu t io n t o the p resen t h ig h r a t e s f o r c a l l
money in the f in a n c ia l c e n te r s ard the in q u iry as t o
th e ir causes r e r u i r e ,
i t i s f e l t , a survey o f the o p e r a tio n s o f th e money markets and the r e
f l e c t i o n th e r e in o f th e u n d e rly in g econom ic c o n d it io n s which g ov ern , in
v a ry in g d e g re e , a l l money r a t e s ,
in c lu d in g th ose f o r c a l l money,
Bresent Changed C o n d itio n s o f Supply*
In farmer tim e s , ard s p e c i f i c a l l y p r io r to the in s t i t u t i o n o f th e
F ederal R eserve System , bankers, e s p e c i a l l y in r e s e r v e c e n t e r s , were ac~
. customed to lo o k upon c a l l loan s a s th e ir p r in c ip a l secon dary re s e r v e on
th e th eory th at inasmuch as th ose loans were payable upon demand, funds
so in v e s te d con Id alw ays b e prom ptly ob ta in ed on s h o r t n o t ic e t o meet
w ithdraw als o f d e p o s it s or fc r
other u s e .
In th e s e circu m stan ces th ere was
o r d in a r ily a v a ila b le fo r c o l l a t e r a l c a l l loans a supply o f funds s u f f i c i e n t
f o r ord in a ry market requaranents and at low r a t e s , alth ou gh a t tim es the,
r a t e s r o s e t o h ig h l e v e l s as the supply o f funds d im in ish e d , or th e demands
in crea sed *
T h is a t t it u d e o f th e banks tow ard c a l l ' loa n s a s t h e ir c h i e f secondary
r e s e r v e s lias been g r e a t ly m o d ifie d by two c a u s e s .
The f i r s t was the c l o s i n g
o f th e StoCk Exchange a t th e ou tbreak of the European Y/ar in the summer o f
X-1870A
•«
5
*"
1914, whan i t "became p r a c t i c a l l y im p o ss ib le to r e a l i z e on c a l l loan s
.secured by investment, s e c u r i t i e s , which became,' t h e r e fo r e , " fr o z e n lo a n s ’1*
This r e s u lt e d in a more or le s s permanent p r e ju d ic e a g a in s t dependency
upon c a l l loa n s as se 6 ondary r e s e r v e s ,
The secon d and more im portant
fa c t o r was the c r e a t io n o f the F e d e ra l R eserve System*
Under the terms
o f th e F ed era l R eserve A ct p r o v is io n is made f o r the r e d is c o u n t of com
m e r c ia l p ap er, but the re d isco u n t o f loan s f o r the purpose of c a r r y in g
investm ent s e c u r i t i e s , otJ)er than U nited S ta tes Government o b lig a t io n s , i s
exclu ded*
C on sequ en tly, in order t o m aintain
l i q u i d i t y , w ith suit*-
a b le p r o v is io n fear secon d a ry r e s e r v e s th a t can be im m ediately a v a ile d o f ,
banks, in clu d in g , f o r e ig n agency banks, nor; in v est a g r e a t e r p r o p o r tio n of
t h e ir r e s o u r c e s in a s s e t s th a t can be r e a l i z e d upon a t th e F ederal R eserve
Bank.
Another changed f a c t o r in th e ix e s e n t s it u a t io n grows out of the
f a c t that the war and p ost-w a r c o n d it io n s have ren d ered u n a v a ila b le s u p p lie s
o f mdney w hich form erly came fr a n f o r e ig n banks.
Since the summer o f 1914,.
w h ile t o t a l banking r e s o u rc e s have la r g e ly in cre a s e d , the volume o f bank
f
money a v a ila b le to th e s e c u r i t i e s market a t low or normal r a t e s has not
in cre a se d p r o p o r tio n a te ly ., but bn the c o n tr a r y has probably d ecrea sed . A l l o f
th ese cirG u n sta n ces, e x p la in in a la r g e m easure, the in crea sed r a t e s which
have o fte n been r e q u ir e d during the p ast year f o r money loaned in the
s e c u r i t i e s market*
Ifreseat Changed C o n d itio n s o f Demand*
Changed c o n d itio n s a r e a ls o p resen t in the f a c t o r s g o v e r n in g the demand
fo r money*
B rier t o the a r m is t ic e a g e n c ie s o f Government'were employed t o
r e s t r i c t th e is s u e o f new s e c u r it ie s f o r purposes oth er than th o s e which
r/ere deemed e s s e n t ia l fo r c a r r y in g on th e w ar-
A t the same t im e , a s th e
rreasu ry u n d ertook to s e l l la r g e amounts o f c e r t i f i c a t e s o f in d eb ted n ess, aod
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D E C L A S S IF IE D
I A u t h o r it v f iQ
(0501
Z - 167L
** 6 —
L ib erty 3onds bea rin g low r a t e s oi' in t e r e s t , the q u estion a ro se as t o
whether the com p etition o f th e general investment markets might not p r e
ju d ice the su ccess o f the Government issues*
In th ese circum stances the
o f f i c e r s and members o f the Now Y ork stock Exchange undertook to lim it
tra n sa ction s which would in v o lv e the increased use o f money fo r otlier pur
poses in co n s id e r a tio n o f v/hich tho p r in c ip a l banks of Nev/York C ity under
took t o p rov id e a sta b le minimum amount of money fa r the requirements o f
the se cu rity m arket.
A fte r , the a rm istice th ese r e s t r ic t io n s v/ere removed ani ordinary
market fo r c e s re a sse r te d thonselves*
The issuance o f new s e c u r it ie s m s
resumed in unprecedented volume and consumed a va st amount o f c a p i t a l and
c r e d i t , whoa bank c r e d it rats already expanded b y the n e c e s s ity o f ca rry in g
la rg e amounts o f Government s e c u r it ie s which the investment market was not
prepared to absorb-
Thus a ro se a fu rth e r cause f o r the increased c o s t o f
accommodation on c o l l a t e r a l c a l l loans*
S in ce the a rm istice those causes have been augaented by the in creased
volume m d v e l o c i t y o f tra n sa ctio n s in s e c u r it ie s g e n e ra lly .
B efore examin
in g th e fig u r e s , i t should b e explain ed that the amount o f c a l l money em
ployed by tho s e c u r it ie s market flu c tu a te s a cco rd in g t o th o amount o f other
funds a v a ila b le fo r t h is purpose, i . e* customers* money in vested and time
money borrowed, and a ls o a s tho volume o f business v a rie s *
Volume*
The volume o f money outstanding on c a l l i s mare or lo s s c o n s ta n t,
flu c tu a tin g only over r e l a t i v e l y lon g p e rio d s, and the anount which i s loaned
from day t o day is but a small p ro p o rtio n o f t h i s constant volume*
The
emsfcant volume o f outstanding c a l l loans bea rs a r a te of in te r e s t v&ich i s
determined d a ily and is known as th e renewal r a t e .
The d a ily borrow ings,
e ith e r in r e placement o f loans c a l l e d f o r payment or rep resen tin g new
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DECLASSIFIED
|Authority£ £ fO 5 Q
I
money borrdwed, are made a t ra te s which may or m y not be the same as the
renewal ra te and which fre q u e n tly vary during the same day.*
Turning t o the fig u r e s , it S p e a rs that over a period of years during
the pre-war p eriod the volume of a l l money, both tin e and. c a ll* employed in
the s e c u r it ie s market was estim ated a t about S,>1,0 0 0,000 40 0 0 ., Of which the
average on c a l l was about 60% and the average on time about 40^>, or a nonral
volume of c a l l moneys say o f ;)600,000,©05.
The d a ily turnover in c a l l money,
i* 9* o ld loans c a lle d f o r payment, loans made in replacement th e re o f, and
new money borrowed, ranged from 015*000,000 to :„>30,0 0 0 ,0 0 0 ., and averaged
about $20,000,000.
The d a ily turnover during th e year 1919, however, ordin
a r ily ranged from $25,000,000 t o $40,000,000, and averaged about $30,000,000.
Moreover i t is important to n o t ic e there has been a d isp rop ortion a te increase
in the anount of c a l l loa n s, as d istin g u ish e d from time money, with the con
sequence that the former, i t is now estim ated, co n s titu te about 75$ of the
t o t a l money employed in the s e c u r it ie s market.
At a time of such heavy
c r e d it requirem ents as the p resent, the grea ter volume of borrow ings, not
on ly til the aggregate but in the day t o day demands, n a tu ra lly often r e s u lts
in high r a te s fo r the money loaned*
In term itten t Factors*
There a re ce rta in other f a c t o r s , the in flu en ce of whidh i s
pr inc Id ^Ulv
m anifested in interm ittent wide flu c tu a tio n s in the d a ily r a te s or in the
r a te s which apply f o r b r i e f p e rio d s.
The increased volume of derond loans
c a lle d d a ily fo r payment noted above, coupled with the decreased amount of
time money loaned on secur i t i e s , produces more or le s s apprehension on the
part o f borravers as to th e ir a b i l i t y to re-borrow money c a lle d f o r payment.
This apprehension, quickened by the number o f in s is t e n t borrowers b id d in g
at
tixsos when, momentarily loan able funds a re exhausted or a re beaag offered
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|Authority f i O
(O ^ O I
-S -
X-1870 c-
in small quantity, freq u en tly r e s u lt s in com petitive b id d in g f o r funds
which advances the ra tes f o r a day or part o f a day beyond the actual
n e c e s s it ie s c f the s itu a tio n Another a ctiv e and important in flu e n ce which has re ce n tly a ffe c t e d
the supply o f funds a v a ila b le fo r c o lla t e r a l loans and p re cip a ta te d at
tiroes a r is e in the ra te s, has been the p e rio d ic tra n sfe rs o f Government
d ep osits from depositary banks to the Federal Reserve Banks in conn ection
with the f i s c a l op eration s of the Treasury.
Such withdrawals freq u en tly
malre i t necessary fo r the d epositary banks to c a l l money from the s e c u r it ie s
market, r e s u ltin g fr e q u e n c y in sharp advances in the ra te b id f o r c a l l
money in replacem ent o f the loans c a lle d f o r payment*
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DECLASSIFIED
Authority& Q
(O ^ Q I
-9-U 7 0
RATES ARE .DETSIft!INED BY THE OPERATION OF
THE. LAV/ OF SUPPLY AliB D5-IAMP.
The u n d e rly in g oaus« c f flu c t u a t io n s and, e s p e c ia lly o f in cro?
in c a l l money r a t e s is the o p e r a tio n o f the law o f supply and demand.
In
o th e r w ord s, as the supply o f lo a n a b le funds d im in ish es in p r o p o r t io n t
the volume o f the demand, th e r a t e f o r c o l l a t e r a l demand loan s advances.
However, in the ca se o f th e d a ily ‘borrow ings o f c a l l money - - t o
which the
abnormal h igh and low r a t e s ap p ly and which re p re se n t but a com p a ra tiv ely
sm all p r o p o r t io n o f the t o t a l ou tsta n d in g lo a n s - - o th e r f a c t o r s ,
in c id e n t
a l to the tem porary circu m stan ces and c o n d it io n s o f th e m arket, tend in
tim es o f s t r e s s t o g r e a te r f lu c t u a t io n s in r a te s than r e s u lt from the more
normal o p e r a tio n o f the law w hich is r e f l e c t e d in th e renewal r a t e f o r
th e g r e a te r volume o f the o u tsta n d in g c a l l lo a n s .
The renewal r a te i s
regard ed as th e r e a l barom eter o f market c o n d it io n s and i t s f lu c t u a t io n s
throughout th e lo n g e r p e r io d s more n e a r ly r e f l e c t the r e la t io n between
the amount o f the lo a n a b le funds and the amount o f the demand.
In o th e r
w ords, h ig h renew al r a te s are m ainly due to oth er demands f o r c r e d i t ,
r e s u lt in g in p a rt from the in cre a s e d requirem ents o f the com m ercial
community and in p a rt from oth er temporary f a c t o r s , such«as d e p le t io n
o f bank r e s e r v e s r e s u lt in g e it h e r or b o th from c r e d it expan sion o r l o s s
o f r e se rv e s through g o ld e x p o r t, s p e c u la tio n in com m odities and r e a l
e s t a t e , and c o n g e s tio n o f com m ercial t r a n s a c tio n s in c id e n t a l to slow
o r in te rru p te d tr a n s p o r t a t io n .
Commercial Rates are S im ila r ly and Independently Determ ined.
The o p e r a tio n o f the law o f su p ply and demand i s e q u a lly e f f e c t i v e
in determ inin g the r a t e f o r com m ercial loa n s and a l l o th e r b orrow in g s.
DECLASSIFIED
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Authority
0 (O^O j
:
X-1S70 a
c
a
l
l
;
In f a c t , r a te s f o r com mercial loan s and r a te s f o r c o l l a t e r a l /l o a n s have
a common r o o t in the lav; o f supply and demand, and the c o n d itio n s vfoich
a f f e c t on e, in the main a f f e c t the o t h e r , a lth ou g h n o t in l i k e d eg ree,
as is dem onstrated by th e fa r w id er flu c t u a t io n s ox c a l l r a te s and the
h ig h er p o in ts to which they g o .
The r a t e s f o r c a l l money do n ot d e t e r
mine and s in c e the esta blish m en t o f the Federal Reserve Banlcs have not
e x e r te d an im portant in flu e n c e on the r a te s f o r com mercial b orrow in g s»
I t is the u n iv e r s a l custom o f the banks, to s a t i s f y f i r s t the com m ercial
needs of t h e ir cu stom ers.
They f e e l an o b lig a t io n t o custom ers but
none t o those who borrow in th e open market on s e c u r i t i e s .
B esides
as the re so u rce s o f the banks m ainly come from the com m ercial c u s to
m ers, t h e ir oxm s e l f - i n t e r e s t com pels a p r e fe r e n c e in fa v o r o f t h e ir
com m ercial b o r r o w e r s , s in c e f a i l u r e to gran t them rea son a b le a c c o m o
d a tio n would induce them to withdraw t h e ir d e p o s its and so reduce the
a b i l i t y o f the banks to do b u s in e s s .
Although the money o f the banlcs
and t r u s t companies com prises by f a r the g r e a te r p r o p o r t io n o f the
money loan ed on the -s e c u r it ie s m arket, an exam ination o f the p r e v a i l
in g r a t e s on com m ercial paper a t tim es when the c a l l money market i s
p a r t ic u la r ly s tr a in e d in d ic a t e s that th ere is l i t t l e ca u sa l r e l a t i o n
between the r a t e s f o r -c a ll money and th ose on com mercial lo a n s .
Ex
h i b i t s ITos* 1 and 2 # showing r e s p e c t iv e ly th e ra tes f o r c a l l money on
the Hew York S tock Usehange du rin g the y ea rs 1906-1919 and th e r a te s
f o r com m ercial paper in Nefr Yor3^ f o r the p e r io d from 1915 to 1920,
are a tta c h e d .
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;
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X~1870-a
POSSIBILITIES OF CHAISE III THE COKDITIOMS AKD METHODS
OF THE CALL MQITSY MARKETSo lon g as c o lla t e r a l c a l l loans are made under -prevailing con
d itio n s i t is d i f f i c u l t to see how the present s itu a tio n can be a lt e r e d ,
■because o f the im p r a c tic a b ility o f c o n t r o llin g the underlying cause o f
high r a te s , •which, in the la s t a n a ly sis, i s the excess o f demand over
supply.
An attempt to c o n tr o l the ra tes fo r c a l l loans by the e s ta b lis h
ment o f an a rb itra ry lim it at a low l e v e l , w ithout the a b i l i t y to modify
the causes above enumerated which operate to in crease r a t e s , would be
d is t in c t ly hazardous, f o r the reasons that up to the p o in t where the
a rb itra ry ra te would lim it the supply o f new money, sp ecu la tion and ex
pans ion might proceed unchecked and the natural elements o f c o r r e c t io n
s r reg u la tio n would not o b ta in .
In other words, high rates a ct as a
d eterrent to o v e r-sp e cu la tio n and undue expansion o f c r e d it .
On the oth er
hand, should the supply o f money a v a ila b le at a fix e d minimum ra te be
come exhausted, liq u id a tio n might suddenly be fo r c e d because the demands
fo r a d d ition a l accommodation f o r the consummation o f commitments already
made cou ld not be met.
The e f f e c t o f such liq u id a t io n v/ould be to embut
barrass not o n ly in v estors and d ea lers in s e c u r it ie s ,
not infrequent
ly might a f f e c t dealers and merchants in c onm odities as well#
As an ex
ample o f the l a t t e r , the case might be c it e d o f a commitment to purchase
a round amount o f c o tto n on a c e r ta in day.
Hany o f the houses on the
Cotton Exchange are a ls o members o f the Stock Exchange and freq u en tly
borrow very la r g e ly on the Stock Exchange against investment s e c u r it ie s
t* provide the funds f o r s e t t lin g th e ir tra n sa ction s in c o tto n .
I f,
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th e r e fo r e , when an important c o tto n settlem ent is imminent, borrowings
on s e c u r it ie s could not be a v a ile d o f , the co tto n tra n sa ction cou ld not
be consummated and a d r a s tic liq u id a t io n through sa le e ith e r o f s e cu ri
t ie s #r o f the co tto n might be requ ired to avoid d efau lt*
Sim ilar con
sequences might obtain in the cases o f transactions by members o f other
commodity exchanges who are a lso members o f the Stock Exchange and have
recourse to the c a l l money market.
THE IHPORMITCS OF A “ CALL HOMEY1' MARKET>
C all money in some form is indispensable t o every important f i
n a n cial c e n te r .
There must be not only an o u tle t f o r the employment o f
funds tem porarily i d l e , but a la rg e voltcae o f c a l l and short time money
is e s s e n tia l to the su c ce s s fu l and econom ical conduct o f b u sin ess.
It is
p a r t ic u la r ly e s s e n tia l to the in te rn a tio n a l and dom estic commercial b u si
ness but the d iv e r s io n o f the use o f the major p o r tio n o f such money to
the s e c u r it ie s markets is not in accordance w ith sound banking p r in c ip le s
and th e r e s u ltin g ab sorp tion o f funds f o r sp ecu la tiv e uses 1ms at times
re s u lte d in detriment t o commerce and in d u stry.
is a co n d itio n which c a l l s f o r c o r r e c t io n .
The re s u lt o f a l l th is
I t is to be noted that in
no great w orld market, other than 1'Tew York, is the c a l l money market so
dependent upon investment s e c u r it ie s and so s u s ce p tib le to sp ecu la tiv e
in flu e n ce s .
In other markets the reverse is tru e , as th e ir c a l l money
is based p r in c ip a lly on commercial paper upon which r e a liz a t io n can be
had at the cen tra l bank, at a p r ic e , in case o f need.
We have seen
that in th is country c a l l loans on s e c u r it ie s la ck th is e s s e n tia l q u a lity
o f liq u id it y required f o r quick and c e rta in r e a liz a t io n , and that th is
fa c t has now been more g e n e ra lly taken in to co n sid e ra tio n by our lenders*
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But the sa fe and s u c c e s s fu l d iv o r c e in th is cotintry o f the use o f c a l l
money from i t s dependence upon investm ent s e c u r it ie s as a "basis r e q u ir e s
c a r e fu l study in order th at s a fe and adequate methods may be substituted.
f o r the p resen t methods of the s e c u r it ie s market*
TERM 3BTOEIEIMTS,
The achievement o f th is end p rob a b ly depends upon the s u c c e s s fu l
developm ent o f a p la n f o r term settlem en ts o£ the balan ces r e s u lt in g from
o p e ra tio n s on the S tock Exchange, in l i e u o f the p re se n t method o f d a ily
se ttle m e n ts .
The p r in c ip a l e f f e c t o f such a change o f the method o f
s ettlem en ts would be to r e lie v e th e c a l l money market from the n e c e s s it ie s
o f the s e c u r it ie s market and r e le a s e funds now used in c o l l a t e r a l c a l l
loan s based on investm ent s e c u r it ie s f o r employment in c a l l loan s based
on the c o l l a t e r a l o f the more liq u id s e c u r i t i e s , com m ercial paper and
sh ort term Government p ap er, g e n e r a lly re c o g n iz e d abroad as the p r e fe r r e d
’o ases
f o r demand lo a n s .
Prom t h is change a broader d isco u n t market would
n a t u r a lly d evelop .
Under term s ettlem en ts the borrow in g r e q u ire d "by the
s e c u r it ie s market would be on the b a s is o f sh ort time accommodation, i . e
f o r the term between s e ttle m e n ts , whether they were w eekly, f o r t n ig h t ly
or at oth er in t e r v a ls .
A g it a t io n f o r the improvement o f the p resen t method o f settlem en t
o f s to c k exchange c o n t r a c ts has extended over some yea rs and. as the r e
s u lt o f e x te n s iv e s tu d ie s and d e lib e r a t io n s o f o f f i c e r s and members o f
the Hew York S tock Exchange, as w e ll as ban kers, an im portant step has
been taken t o p r o v id e en larg ed c le a r in g f a c i l i t i e s through the org a n iza
t io n o f a new c o r p o r a t io n known as the S tock C lea rin g C orp ora tion ,w h ich
is ex p ected to b e g in o p e r a tio n s in A p r i l , 1920.
A g en era l d e s c r ip t io n o f
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the purposes and contem plated op eration s o f the co rp o ra tio n is contained
in the pamphlet attach ed h e re to .a s E xh ibit No. 3 .
The fu n ction s o f th is
co rp o ra tio n include p rov id in g f a c i l i t i e s f o r c le a r in g co n tra cts between
members, fo r the r e c e ip t and d e liv e ry o f s e c u r it ie s between members and
banks, tr u s t companies and o th e rs , and f o r the c le a r in g o f c o ll a t e r a l c a l l
loa n s.
I t is not a sse rte d or expected that the in s t it u t io n o f these op
era tion s vs i l l m a te ria lly a f f e c t e ith e r the amount o f money loaned from
one day t o another on the c a l l money market or the ra tes o f such loans s
but i t is expected that i t w il l operate m a te ria lly to decrease the amount
o f bank c e r t i f i c a t i o n s on day lo a n s, which the present p r a c t ic e requ ires
in th e in te r v a l between paying one c a ll loan and re p la cin g i t w ith another
on the same day.
It should be noted that the mechanism a ffo rd e d by the
co rp o ra tio n i s an in d isp en sable, p r e r e q u is ite to the establishm ent o f a
system o f term settlem en ts.
The more recen t and d e f in it e development toward the s u b s titu tio n
o f term settlem ents f o r the present system o f d a ily settlem ents may be
said to have had i t s in ce p tio n in the a c tio n o f the American Acceptance
C ouncil at i t s annual meeting on December 4 , 1919.
At that time the
fo llo w in g r e s o lu t io n was adopted;
stock
"Whereas, the present method o f daily^ exchange s e t t l e
ments, w ith i t s dominating and o fte n u n s e ttlin g e f f e c t on the
c a l l money market, in flu en ces adversely the development o f a
wide and healthy d iscou n t market in the United S ta tes:
R esolved, That the Chairman o f the E xecutive Committee .
be authorized t o appoint a committee c o n s is tin g o f members o f
the E xecutive Committee and other in d iv id u a ls to study the ad
v i s a b i l i t y , ways and means o f m odifying the present system o f
settlem ents on the New York Stock Exchange and su b stitu tin g
th e re fo r some system of p e r io d ic a l settlem en t, with, power' to
take such steps as may seem ad visab le in the case.*’
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A copy o f the annual rep ort o f the Amerifian Acceptance Council
i s appended hereto as E xhibit 4 , in which the r e s o lu tio n appears on page
5* and the rep ort o f the Chairman o f the Executive Committee above r e
fe rre d to appears on pages 16 to 27, in clu siv e*
The Committee thus provided fo r was appointed and h eld two ex
tended conferences in which the problem was f u l l y d iscu sse d , both from
the p oin t o f view o f the banks and o f the Stock: Exchange*
For il l u s t r a
t io n o f the s u b je ct matter o f the d iscu s sio n there is attached hereto
as E xh ibit 5 a d e ta ile d re p o rt com piled by one o f the members o f the
Committee, Mr* Samual F* S t r e i t , Chairman o f the Committee on C learing
House o f the Stock Exchange d e scrib in g the term settlem ent op eration s
in London and on the European co n tin e n t, 'which p re se n tly w i l l be pub
lis h e d by the American Acceptance C ou n cil.
Through i t s cou rtesy the
Board has re ce iv e d an advance copy o f the report*
There are a lso a t
tached, as E xh ib its 6 and 7 r e s p e c t iv e ly two other p u b lica tio n s o f the
American Acceptance C ou n cil, "Acceptance C orporations” , by P. Abbott
Goodhue, Tic© P resident o f the F irs t National Bank o f Boston, Mass*,
and MThe Acceptance as the Basis o f the American Discount M arket", by
John E* Rovensky, V ice President o f the National Bank o f Commerce, New
York, in which on pages 14 and 22 r e s p e c t iv e ly , the n e c e s s ity f o r term
settlem ents as a means o f r e lie v in g the c a l l money market from the
n e c e s s it ie s o f the s e c u r it ie s market and as a precedent to a broad and
s ta b le discou n t market is d iscu ssed .
T1& members o f the committee have unanimously expressed the opin
ion that the adoption o f a term settlem ent by the Stock Exchange would
o f f e r advantages in that i t would elim in ate d u p lic a tio n o f the handling
1
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o f s e c u r it ie s and in payments*
The committee h o ld s , h ow ever, t h a t ,
inasmuch as the a d op tion o f a term s e ttle m e n t by th e Exchange v/ould
in v o lv e changes o f g re a t im portance, b o th to banks and to manbers o f
the Exchange, i t w i l l req u ire the most c a r e fu l study o f the s u b je c t by
the com m ittee, and in any case the term settlem en t cannot be put in to
o p e r a tio n u n t i l the new system o f d a ily S tock Exchange settlem en ts
through the S tock C lea rin g C o rp o ra tio n , above r e fe r r e d t o , has been
p e r fe c t e d and has been in p r a c t i c a l o p e r a tio n f o r a rea son a b le tim e.
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TREASURY
DEPARTMENT
WASHINGTON
A ssista n t S ecretary
March 22, 1920.
TO THE SECRETARY:
I have read and return herewith the d r a ft o f the Federal
Reserve B oard's re p ly to Senate R esolu tion No* '$28 concerning ratee
on cr.ll loans.
In your l e t t e r o f March 2nd to the p re sid e n t, d e a lin g with
th is same su b je ct you s a id :
"S p ecu la tiv e purchases o f stocks are la r g e ly ca rrie d by
loans on c a l l . The law o f New York p la ce s no lim it on the
rate o f in te r e s t f o r such loan s*. The law o f the State governs
n a tio n a l as w e ll as sta te banks* Much might be sa id both f o r
and against a p rop osa l to amehd the sta te laws in th is resp ect.
I am b y no means s a t is f ie d th at a change in the sta te usury
laws would be the b e s t s o lu tio n o f the problem. In tin e s when
c r e d it is sca rce a usury law may work a ctu a l d e n ia l o f c r e d it ,
w ith consequent acute d is t r e s s , or i t may be evaded, in which
case the c o s t o f the money to the borrow er i s apt to be in
creased because o f the r i s k involved in the evasion o f the law;
The rea l remedy f o r the g y fa iio n s of the c a l l loan market is to
be found in in s is te n c e upon the fu rn ish in g o f adequate margins
by the brokers ' customers ana. in reform ing the archaic methods
o f fin a n cin g and s e t t lin g sp e cu la tiv e tra n sa ction s in sto ck s.
These views have been brought in form a lly to the a tte n tio n o f
the resp on sible people and I hope p rogress may be msae along
these l i n e s . M
In my memorandum o f January 26, 1^20, to Governor Harding
and Mr. Strauss 1 s a id :
" I am hoping v ery much that the Board w i l l decide to take
e f f e c t i v e steps to require s to c k exchanges to adopt ru les under
which the b r o k e r s 1 customers 1 accounts w i l l be adeq.uately margined.
" I am s a t is f ie d that the method employed during the p ast
two or three months f o r r e s t r ic t in g c r e d it f o r sp ecu la tiv e
tra n sa ction s in stock s is in ju rio u s to the general s itu a tio n
The d e n ia l o r the s t r i c t lim ita tio n o f c r e d it , o r very high
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rates f o r c a l l money f o r s to ck market purposes r e f l e c t unfavor
a b ly upon the market f o r a ccep tan ces, f o r Treasury C e r t ific a t e s ,
Libery Bonds and V icto ry Notes, f o r commercial tra n sa ctio n s.
R efusal o f
c r e a it by New York banks or very high ra te s f o r c a l l
money a t tr a c t money in to the s to ck market from the country banks*
This cre a te s a very vulnerable s itu a tio n . 1 think that at le a s t
u n t il an eq u ilib riu m is stru ck between the supply and demand f o r
commodities there w i l l be a seriou s r is k of a new b u ll movement
in stock s w ith a re su ltin g s t r a in upon c r e d it ana that immedi
a te ly ste-ps should be taken to t?ut in to e f f e c t what appears to
me tto^be the s a f e s t , soundest cu re , naniely, the requirement that
customers 1 accounts be adequately margined” .
Secretary Glass in h is l e t t e r o f November 5* 1919* to
Governor Harding s a id :
r{ We cannot tru st to the copybook te x ts , Making c r e d it more
expensive w i l l not s u f f i c e . There is no precedent in h is to r y f o r
the great war which we have been through nor f o r the co n d itio n s
now e x is t in g . The Reserve Bank governor must ra ise h is mind
above the language o f the textbooks am fa ce the s itu a tio n which
e x is t s . He must have courage to a ct prom ptly and with confidence
in h is own in t e g r it y t o prevent abuse of the f a c i l i t i e s o f the
Federal Reserve System by the customers o f the Federal Reserve
Banks, however pow erful or in flu e n tia l*
"S p ecu la tion in stock s on the New York Stock Exchange is
no more v ic io u s in i t s e f f e c t upon the w elfare o f the people and
upon our c r e d it structu re than sp ecu la tion in co tto n or in land
o r in commodities generally* But the New York Stock Exchange
i s the g re a te st sin g le organized user o f c r e d it f o r sp e cu la tiv e
purposes.
I t i s the organized instrument o f a countrywide
sp e cu la tio n .
I b e lie v e that tfte p ra ctice o f fin a n cin g sp ecu la
t iv e tra n sa ction s in stock s by loans on c a l l , w ith d a ily s e t t le
ments, i s unsound and dangerous to the general w elfa re. C all
money loaned to ca rry sp e cu la tiv e tran saction s in stocks is
on ly liq u id when there is no need* The paper is not s e l f liq u id a tin g and, in the case o f an emergency, a s, f o r example,
upon the outbreak o f the European war, and throughout the p e rio d
o f our p a r tic ip a t io n in the war, such loans are in the mass un
c o l l e c t i b l e , The use o f l i b e r t y Bonds, V ic to ry Notes and
Treasury C e r t ific a t e s as c o l l a t e r a l f o r borrowings made by member
banks from the Federal Reserve Banks f o r the purpose o f ca rry
ing sp ecu la tiv e tra n sa ction s in stocks makes i t the rig h t as
w e ll as the auty o f the F ederal Reserve a u th o r itie s to see to
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- 3 St that the methods of fin a n cin g such tran saction s are
reformed and, reformed immediately,
“ Open and n otoriou s m anipulation o f stock s has been taking
p la ce during the p eriod o f , say nine months, sin ce the removal
o f the c o n tr o l o f the Subcommittee on Money o f the li.berty
Loan Committee.
This m anipulation, \-vhich takes the form
o f p u ttin g up the p rice f i r s t of one s to ck ana then o f another,
no m atter what m aybe the co n d itio n s , f o r the purpose o f stimu
la tin g in t e r e s t on the part o f the u n in itia te d p u b lic , i s , I
imagine, con tra ry to the law of the State o f New York and the
ru les of the New York Stock Exchange, In any event, i t needs
only vigorous a ctio n to put an end to it * The Stederal Reserve
Bank of New York in it s re la tio n t o the Subcommittee on Money
of the L iberty Loan Committee, which Committee was at a l l times
in touch with the o f f ic e r s of the Stock Exchange, n a tu ra lly
sought the views of the Treasury by reason of the f a c t that i t s
prime duty concerned the sa le of L iberty Bonds- A co n tro l
now put in to e f f e c t w i l l be p rim arily f o r the conservation o f
the general c r e d it s itu a tio n and should th erefore be in it ia t e d
and supervised, not by the Treasury, but by the Federal Reserve
B#ard,
nI need not say that such steps should be taken not only
fir m ly but with d is c r e tio n and in such a way as not to in volve
grave hardship to in d ivid u a ls or in ju ry to the general w e lfa re ."
In my memorandum of December 19, 1918, to Mr, Treman, then
A cting Governor o f the Federal Reserve Bani: o f New York I s a id :
"Holding these views, the treasu ry, though not always in
agreement as to the methods pursued, has been h e a r t ily in
accord with the e f f o r t s made by the Money Subcommittee and by
the a u th o ritie s of the s to ck exchange to prevent fu rth e r expan
sio n in the loan account* As to methods, the Treasury has f e l t
and s t i l l f e e l s , that relia n ce should be p la ced rather upon
the requirement of increased margins, made e f f e c t i v e not merely
as regards s to ck exchange brokers but as regards th e ir customers
a ls o , than upon the attempt to ra tion c r e d it to the brokers
The Treasury, however, has not f e l t and does not
f e e l , that i t should seek to impose i t s own views as to the par
t ic u la r methoas to be employed to accom plish the d esired r e s u lt .
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" I t is the earnest hope o f the Treasury'' that, growing out
o f the very sa lu ta ry a ctio n of the Money Subcommittee and of
the s to c k exchange a u th o ritie s during the p e rio d o f the war and
the present p e rio d G f readjustm ent, there may be evolved some
plan f o r preventing the recu rrence, a ft e r the re s to ra tio n of
peace c o n d itio n s , of those e r r a t ic and v io le n t flu c tu a tio n s in
rates f o r c a l l money and those fe v e r is h movements of p r ic e s on
the. stock exchange, which in the past have been the source of
great concern to the ju d ic io u s and in the fu tu re can only prove
a stumbling b lo c k in the e f f o r t of America to-ta k e and keep the
p la ce which she has won in the world !s commerce ana fin a n c e .n
My con clu sion s on reading the proposed rep ly to Senate
R esolu tion No.
1.
are th ree;
High ra tes f o r c a l l money on sto ck s, e t c , , are n ot
usurious because the law does not make them usurious and I do not
thinK the law should be changed in th is re sp e ct.
c a l l money operate as a s a fe ty v a lv e „
High rates f o r
A r e a l c a l l money market is
e s s e n tia l to the proper fu n ctio n in g o f a world fin a n c ia l center*
Without a c a l l money market to act as a s a fe t y valve in time o f
c r e d it strin gen cy we should have unnecessary p a n ics.
No p la ce can
cla im to be a money ce n te r where money can n o t be had at a p r i c e . .
I f money can not be had at a p r ic e > the consequence i s aumping o f
s e c u r it ie s in the e f f o r t to produce cash.
I should say that the
market p r ic e s of L ib erty Bonds and V icto ry Notes woula be the f i r s t
to show the e f f e c t o f an absolute refu sal, of money at any p r ic e ,
ju s t as they r e f l e c t f i r s t e x ce ssiv e ra tes f o r money.
2.
The c a l l money market should be basea on acceptances
and n o t on stock s.
Nothing i s r e a lly liq u id in a time of great
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are more liq u id than se cu ritie s*
3*
The r e a l v ic e in the present s itu a tio n is that the
gambler in stocks is perm itted to have thv f i r s t c a l l on funds in a
p eriod of strin gen cy because he is perm itted t o fin a n c e h is trans
a ctio n s on c a l l and is not required to produce adequate margin,
think the Stock Exchange should be required t o r e f o r t t
I
i t s e l f promptly
by su b stitu tin g term settlem ents and by requiring, brokers 1 custontefist1
accounts to be margined adequately.
It may. u ltim a te ly be n ecessary
to go even fu rth e r than th is and p r o h ib it buying on margin a lto g e th e r.
To go to a bank and borrow money to speculate with is very d iffe r e n t
from buying stock s on margin.
Many a roan who v/ould
n ot have the fa ce
to ask h is bank f o r loans f o r sp ecu la tiv e purposes w il l buy stocks
*n margin, and many a bank which would not think o f lending money to
an in d iv id u a l customer-
to speculate with w i l l lend money to h is broker
to. c a rry him.
I t w i l l be seen from the fo re g o in g that I a iffe r . from the
views in d ica ted in the rep ly to Senate R esolu tion No.
matters o f emphasis than in matters o f d e t a il.
more in
The proposed re p ly
is sound in substance, but i t i s unsound, i t seems to me, in the
general im pression which i t cre a te s that everything is about rig h t
in resp ect to the New York Stock Exchange and the c a l l money market.
i
I t may be that the d i f f ic u lt y coulu be overcome by d e a lin g only with
the s p e c i f i c question raised by the Senate R e so lu tio n , namely, the
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rates f o r t a l l money* and om itting the d is s e r t a t io n about Stock
Exchange p r a c t ic e s .
Turning to matters o f d e t a i l :
Qti page 9 the statement is
made that the op era tion o f the l&vr o f supply and demand is equ ally
e f f e c t iv e in determining the rate f o r commercial loans and a l l other
borrow ings.
T his, o f cou rse, is not the f a c t .
The usury law imposes
a lim it upon the rate f o r commeicial loans and other time borrow ings,
w hile i t imposes no such lim it upon c a l l loans.
I do not share the view advanced in the memorandum, page
12 , f f . , that the organization o f the stock cle a rin g corp ora tion is
an important step towards the s o lu tio n o f the problem.
Undoubtedly
i t is a step towards making more e f f i c i e n t the c r e d it which is made
a v a ila b le fo r carryin g stock s.
It i s n o t, however, a step in the
d ir e c t io n o f lim itin g the amount o f c r e d it usea f o r that purpose quite the con tra ry.
To summarize the whole m atter, I would say that the o b je ct
o f remedial measures should be not to fu rn ish cheap money f o r s to ck
sp ecu la tion , but to prevent the scandalous m anipulation of stocks and
to lim it the stupendous demands f o r c r e d it f o r sp e cu la tio n in stock s-
R- L*
DECLASSIFIED
Reproduced from the Unclassified / Declassified Holdings of the National Archives
Authority 1^.0
(O^O I
X-1S70C
t r e a s u r y
d e p a r t m e n t
WASHINGTON
Office ot
Controller of the Currency
March 23, 1920.
D ear G o v e rn o r:
For the information of the Board I beg leave to advise that, in reply
to inquiries contained in statement of condition of February 28,1920, the
following banks in New York City reported loans maae by them nincluding
itetfcfc of pagpef bought1, since December >1* 19*9* at rates (including
interest, discount, and commission) in excess of highest rate permissible
by lair under written contract** were as follows;
NAME OF BANE
NUMBER OF LOANS
National Bank of Cosineree,
Seabosrd National Bank*
Mechanics and. Metals National Bank,
Lincoln National Bank,
Liberty National B-nk,
Coal and Iron National Bank,
Chemical National Bank,
Chase National Bank,
Bank of New Tork, N. B. A*
5
20
1
74
5
15
3
1
38
Sincerely yours,
(Signed)
Hon. W, P. G- Harding,
Governor, Federal Reserve Board*
J, S. Williams
AGGREGATE AMOl
$1,601,464.86
655,000
$0*000
5.585,765-te
95.000
159.292.9T
980,000
2 4 ,0 0 0
DECLASSIFIED
Reproduced from the Unclassified / Declassified Holdings of the National Archives
Authority
iO ^ O I
/( G
/
to tbs
nMk *n4 ftiani iwiMiili tho 4raft of th« N U itl
XiMm Bm<,« ropiy It SMiii Roooiutlon He* MU ooi»oor*ing itiit
m m il lota**
Xn your U llir of MuMi laA i t
IM» mw
ProoiAont, 4o*ling witfe
ym Milt
•SpooiOatif* $*tfol!*§#o of itMki *m fcorgoly oarrio4 Iy
lonno mi o*U# , fl» Ian
ite* Ynrb pi&ooo no U iil mi' tf*
n it of
f»r ouofc lo*rv*. . tfco in* of ito lint* i«ron»§
nttiOfwU *o mil. «• vlilt take* Mnolt *i«bt bo »*44 b«l)> f*r
and ogninot ft propooni to *aond %fN» «Ut« l«vi in ifcio
X *a if m mnm ontlofiod %M & ofennfo in tbo «iil« %
wm$
ia*o would bo tkt bi«l ool«tion of ito §>rob;Ua« Xn ti«oo ifeon
•r«4it 1« iw n i t sturjr l*v any tirk m IpI do«l*X of «n 4 ii,
nitli o*noo*«»nt m i l diair«i»| or it «*? I# oVAdod* in wfciol*
•m the m t of ttm mmmj t i tfeo borrow*r li npt to bo la*
ironood boonuoo of tho nob ixnrolrod in tl» ovnoion of tuo iso*
fbo m l ronody for tho gyritlm of tbo onU loon anriot io to
bo tow* in iiioiotoftoo wjon tfeo furnlofciBg of lAi^tto ntfflM
bjr tbo brofcoro* onotonoro and In roformisf tfeo nroMlo aotfcodo
of flatnolne and oftttliftg •joouloti’ro tiunonotlona in otooko#
Tfcoo* viovo ten boon brought InfotiAlljr i t il« *ttontton of
tfeo rotftntlbit
«xidt X fenpo $irog*o«* #*y bo mdo niong
tfeooo liati**
Xii «r noanftiMlw of Itnnrjr U t lttd, to $ovor*or M it |
m l $tr* 0tr*!*«o X onidt
•X «ms hoping vory mmh ttent tN» Son** will dooiio to tnfeo
offootiro otopo to roiguiro oteofe oxolwngoo to *do*4 miot undor
vMob tho brotatro* m lM tX i1 aooohhIo « ili bo *4o%n*toljr «it*
•X «mi ontiofiod tfcitt tho aothod o«$X«y*d during ^ $**t
two or throo tost ho for rootriotiag orodit for opoonlntivo
tmnonotlono in otoobo io injnriotto to tfco gonoral oitnatiftii*
Ttso dom*i or ttso otriot limitation of orodit, or tovy felgb
Reproduced from the Unclassified I Declassified Holdings of the National Archives
i
DECLASSIFIED
Authority
(0 ^ 0
m%
ftr n i l «t»ty ftr lin l anvfett pwrp— 9
nteijr ttftn tht aarfctt ftr attt^innttt* ftr Trtnttsy Otrtifitnttt,
Lifctrty Btndt mnA Vitt try Ntttt, ftr « « M ir » lA | i i t n « i i t l 9 A » «
BtfutaX tf in d ii hjr KtwTiri H ill tr wry hi$h mUc ftr t*U
i>my a ltn ti unqr into tht » i« il
trm tfct ««milry fennfct#
TfeM im t M * **»jr wrti*r*M»
I think nf»t »l
Ifl.MMM
ScirtUry ftintt in hi* ittttr if Km i i f 5# l l l l 9 it 8 «*
i n i r M I b i iM 4 i
**t ««m«l IfwH tt 4b# ttpybttk tnstt* Ming
ntrt
it y m ifi «U1 b«I lulfiit* Ihir* it m pr»n4tat in fcitttry
tht g m i w»r vt&tfe m hntt In b through air ftr tht natillia*
»««r ixiiling, Tht R»nf9« M im m ir awl r*itt hit Mini
afctvt tht iftngungt 11 Uii timtfcttki and ft n tht titnt&itn vhith
taitrtt* Ht m»M% h**t ttnrtgt it *tt promptly nwl iritis tonfidtntt
in hit own inHfrilr it rrrnnt nfetttt 11 tht fntUltltt tf IH
M v i l Htttrrt Syttos toy Hit tutitntrt tf tht IWtrai fttttrvt
Bankt, htnvir ptttrfnl tr influential*
*Sfttw&*tien in ttttk t m tht Utw Tork Sink Eftih&ngt it
nt «trt ritloti* in l i t t ff t t t iiftn th® «§U *i« tf tht pttyit *«d
«ptft Mr trtdit ttratturt than «g*t«l&tion in ottttn tr in X*n&
tr in t w attillH ftHfftUjr* But tht Wtw Tort Stook Ixthangt
it tht g n tiM l lin g li trgnni»td uotr tf trtdit ftr tpttttUUT*
jwrptttt* f t it tht crginltid inttrwennt tf * cowntrywidt
•poaul*ti<m* I
iM i tht p m itlii tf fintating tpttnlntir t trantattiona in ttotka fcy liana on o*U* with daily a#ttl/t~
ntntt, i t untound and 4««|tr««» I t tht gttiaral w llifi* 0tU
t nty ItaaM i t tarry tpatttlatiYt tnmoaotioao in otttka it
tnJLy liquid than thtrt it nt naad* Tht pajstr It ntt t t lf*
liquidating «nd9 in tht taat if «e oatrgtnty, na, ftr ti«tp2i|
n$t» tin twtfcmak tf tht Eurt|#«n n»r» a*sd thro*#rss*t tht ptriod
tf tur partiti|»atlon in th* anr* awth Im m art in tlit matt tut**
ttU m tiU f* Tlit ana tf U t tH f Btttdt* fU tsry fititt «al
Tramaury Cartlfiaatto nt tellaiar&l ftr btrrt^ngt aodt by aaafetr
hankt tr m tht Ft4trti Etttrrt Banks ftr ifct purpttt tf tnriy*
iag tpttninti«t tmntnttiont in ttttk t safett it tht right tt
t tU t* tht 4iitf tf tht ffc&ttil Btttrtt autfetriiit# t t ttt to
Reproduced from the Unclassified I Declassified Holdings of the National Archives
I
DECLASSIFIED
j Authority 1%
0 (0 5 0 1
it tfcnt %im wotfetAt tf fl»*fi*Uq; oath tranoaoUono mm ft*
maA rtftrmod lmodlatoly * .
*%tn am! i*ttorlops *aju*.u;uti o» tf ototko fc*o fcoon tnk~
lug fintt Staring tfct j>»rlod of# tty, nlm otoatho, tlntt tfet
n i m l tf tho ««Rlril ^ ifct SahooiBfflittoo in X«liy •( tho
Lltorty litnn C«*atio<j, tfet* i&oiiisini&tioii, wUoh takto tkt ftr*
if pitting Hf tk« prin firwt tf «m ottok and tfctn tf tmihiri
«t antttr itent »*y *•
oowiitiono, ftr tiit purpttt of «*!■*»
latin* ioltrtH fn tfco port tf tN> uninitl*fcod ptbllo, it* I
*fl*gjjtot oostrary t t tfa§ In* tf tfet St*t* tf Stow York «*£ tfeo
ntltt of tht Htv Ytrfc Stttk I*tkmis$t* In nif o*oist, li ntndt
Ottlf VS|«P(WI i l i l i i to |)Wi *** tnd to it* ft* ftMttml H m n
B*nk tf fit* Tort In lit roX*ti«a tt tfet Sufcttwaltttt on ttoaoy
tf tilt Uborty Loan Cotmlttot, wfriofe Conwlttto tnt nt *tt iintt
lit touih «l tli tt* tfflttrt tf tho Stook £*tJ**figO|
tottglJt t)it fittn tf tit Trtntiury If rtnoon tf tfct fntt ffent Itt
prlwt inty oonttnat& tfco tnlt tf Lilirty itnit* I oontrol
now fwt into of root til* too primarily ftr tfeo ttnntrvntltn of
tilt |pn»«ml trt< titnnkion *«4 ofcouid thortforo bo initiator
uni ouporriood, ntt if ttio froaoary * bwt If list Fo4oral fttntrvt
Board.
*1 ntt* art oay ttent ouoh otopo oteonid Ini tnktn tit only
f truly tout with 4lttrotlon and In wmk a **y ao not to inrtlvt
gm t hardoMp tt latfitiinnlt tr Injury It tkt jgtntfn* ntlfnft**
In ay atntmaAtiot of Btttnfenr Xf, ltie p to Hr# f«w«nn* thtn
Atting Otftmtr tf t^t IM tiii Htttm Bank tf it* York I tnlAr
*fttUtni thito Tit«ov tfct ti*a»uryt though ntt &l«nyt In
tffwoflomt nt to tlit notlstdt |nrtuo49 Nit Utit Itttftlly In
ntttfg vith th» t fft r t t nnit %y t i t ISonty Si^MJamltttt *M by
t)st ftnthtrltlto if t it otook tntlHMt t t pftftnt furtlior tn^nn*
tltn In tM tmm ntt unit* At to aothodo* tlit frtnoury tent ft it
nni « t !U foolt # tj&nt rollawoo
kt ^Intti rotfcor «pwi
tilt f*%t4rtJ»xst tf intftftotd mrgtno* omit t ff t t t lt t not aortly
nt ftgnrit otook t*tknn$t tortkoro knt nt ro$ur4t thoir ouottwort
n lttf tuan
tfet nttin^t I t rmtlon oro^it to tfco brokoro
thoattlT«t* fkt ffw m u fft hw am r9 Itnt ntt f t lt aks4 ^ott ntt
f t t l # tlttt It okonid otok t t In^ttt |tt o^u t lt t t nt t t tht ftr titu lar iw t^ o to kt titpltyti t t oooonplloh t it ittlvtS rtouit.
t
O
O
0
t
DECLASSIFIED
Reproduced from the Unclassified I Declassified Holdings of the National Archives
Authority
d.0 fO^O I
*Xt 1» Hit tarratt hop# tf iht frtaaiiry that, grtvlag wl
at tht wrjf iHnUrjr MltM tf iha X«»»y Sul-C*n&liitt a»£ if
il» aittfc tx^tagi aniltariiitt during iht parted tf th# mar and
thi prtttni f«rii4 tf yt«djnl«itii| thin «ay Ini artlvad ««m
plaa ftr j>n«»ntifig it* n im n ii i &ft«r tht ra«ttrail»a tf
ptatt ttadliit«iaf tf ihttt • m ill u i vlHint flatiaaiitaa la
rtlM far tall atn»y and iltttt ftvtrlife atvtaaaii if irlttt ta
ilia itMk tathungtf vM# la iht put fcata lata th» ttaraa tf
gpaat ttnatra i t iht Jadialtat and la it* fuiart taa mXf prtta
a •taafrllng llttk la tht tfftri tf Aatrida it taka aiut katp iht
platt whi«h tht hat .won la tht vtrld’ t amatrtt and f iitaaaa**
% taatltiaitat ta rtading iht prtf.ttad rtpljr i t Siaata
fitaaliitlett lit* 3t@ ara ihrtti
l« High raitt far tall atnty ta tittkt* tit#* art ati
wwrtwm bttautt iht law dtaa ati aakt ihta atarieu« tad 1 da ati
tkdnfc iht lav thtald bt tltaagtd la ttti rttptti« High raitt ftr
m il atnty tptrait at a taftiy itlii*
A #aal «all mtaty atrfcai la
tttanUal i t ilia prtptr fuaetltnlng tf a vtvli fiaattaial ttaitr*
Hihwt a tall ataty aaffctt it ait at a taftty w in la ilat tf
ttadii tiringtnty tt thtald haft aaattattary paalta* Kt platt taa
tlaiat* it tot a atnty taaitr wfca*# ataty ammti la Ml ai a pritt*
tf iMijr taai*' ati bt tea* ai a pritt, iht toattqutntt it daqplag tf
ttaariilat la iht tfftri it prtdaaa taah* I thtald aajr that iht
mrivt prittt tf UHrty Btndt and titttry Htitt would It iht flrti
i t tho* iht tfftti tf aa alttluit rtfatal tf nmmf **
pHaa,
Jati aa ihty rtflatt firti txttttlwt raitt ftr sttnty*
i* Tht taU atnty aarkti thtald la lata* ta ataaptaaaaa
a»l ati m tittkt* Nothing la rtally liquid la a ilaa tf graai
DECLASSIFIED
Reproduced from the Unclassified I Declassified Holdings of the National Archives
Authority
(jO
fO ^ Q
I
m| *
aariU tria lt *u*h m tht tatbraa* tf tht m r in Sarqpa* but atttptanttt
aft mm
than tattnrltitt*
)•
In
fht rtal vitt in tht prtttni *itnation it t hat ill*
atttlt it p#niltt«4 f t haft tht fir*t tall *n M i In *
if ttrlngtnty fettaiitt
pario*
Is*
it pafmiittd t t fixaantt HI* traxm*
attltnt m m il an* is net rt%uirtd t t £*>*£**«# adt^u&t* narfiit*
thin* tht ftttli
1
Inthfttigt thtuM bt rtf**!**# t* mimm itaalf
If aabaittwlijis ttm ttttltawnta m& by rt^uiring brtfctrt* Dtf&Jttycfc*
atttWMbt t t
bt atSFgliaMi a^M^^p*ttt|yit f t m j altiaataly bt ntttttary
t* $t mm forth#r than tut* an* prohibit buying *a aargin alttgtthtr*
f t $•
t* a bank and borrow fttnty t« tpMMMlata with it ftry dlfftwnt
fra* baying titti* *a Marfln* ifexy * aaa wh* would ntt hairt tki* fata
t* aak lil* bank far Ioann ftr tftttilatl?* pur^tata «1U buy ttttfca
id aaxigin, m& mt# a bank whith wtald a*t think tf landing a&nty t#
a» individual wm%mmr
t« tjatalatt with w ill land »#nty tt hi* brtktr
tt tawy
Xt will b* taaa fr*» tht ftrigting that I d ifftr f n s tht
▼laws laliaatad lit tht
t t Stnatt Btatlutlan Wt# MS mart in
aettttrt «f tag>t*aia than In mattart tf 4 tt*il«
?i»* jrtptttd rtply
It 99m& In *ubttanttt but It it wmmm&§ It tttmt i t *a» la th*
gtn tf*! ii*s»rtt*l*a wfeith i t trtattt that artrythisg I* abtut right
In iwtpfit i t tht Haw t i r l Stttk SSMfcaaga and tht ta ll ataay aarlai*
It nay bt that tht d lffita liy *eu!4 bt tvtrtan* by (Staling taly with
th* tp a tlflt <*utttlon raitt* b y tht Stnatt Bttelution, mumXf$ tht
DECLASSIFIED
Reproduced from the Unclassified / Declassified Holdings of the National Archives
Authority
fQ gQ
- 0 -
m too fo r «<*ll money, ar4 o n lttin r the (U aaortatlon &bcut Steel?
£*tfcanga ^.raatloao*
Turning t o matters of do t a l l t
0r» pafgo 9 the » ta t ament is
mad© that tfca op©ration of tho law of *un -ly a«4 damnd ia a dually
a ffa o t lv e in datoradnr tho rata f o r oomaarolal l**na and a l l othar
borrowings*
Thl*§ of c o u r ts , la not tho fm%*
The uoury law In'*
l-os#® a lif s it upon th.a rata f&r eo«#n&re!>*•! loans ani at bar tiuao bor~
ro*tlnfot t/M ie i t imr o«e© no auoh lim it upon e& ll loam«*
I
do not a hare tho viaw adv&nooU in tho rawaoranduifc* pago
1C-1 f f # , that th* orga n la a tl on of ^ -to o k o la a rin f 'f p l a lW i t fcoa lo
an important s t o - towards th<& s o lu tio n of the ? roblom*
Undfcubtaclly
i t is a step, to^ ird a m kln g moro a f f l e l o n t tho eroilit which,
^Yttilabl© f c r tarrying? sto ck s.
i&
m d *
I t is n o t, h o «t9 * rf si otop in tho
41r o o tio n of li& it in r th# aciount of t r o d it uood fo r thmfc purpoM *
quit* tho contrary*
To ow»nari*o tho wholo m t t « r # 1 would oay that th* ©bjoat
of ramodial
m a n u re*
etrould b« not t o fu rn ish oh**? money fo r otook
sp ecu la tion * but t o prevent tha ee*»ridaloue ^ n l f u l a t i o f i of a t oaks and
t o lim it the otuf.ondoua do»iinde f o r c r e d it fo r apooulatlon in otoeke.
(X
w u '.m
v
^
U
z
^
f ®
l
4
l
Reproduced from the Unclassified I Declassified Holdings of the National Archives
i
j
DECLASSIFIED
Authority
(Q Z Q I
s ir :
in March St^h, 1920, tho Senate adopted the fo llo w !: 3 r e s o lu t io n :
that the fe d e r a l He serve Board be and
i s h ereb y d ir e c t e d to a d v is e the sen ate what i s the cause
arid j u s t i f i c a t i o n f o r the u s u rio u s r a te s o f in t e r e s t on
c o l l a t e r a l c a l l lo a n s in the f in a n c ia l c e n t e r s , under
vh at law a u th o ris e d and v/hat s te p s , i f any, are r e q u ire d
to abate t h is c o n d i t i o n . ”
\
In r e p ly the Board d e s ir e s to say th a t i t has no in form a tion th at
r a t e s o f in t e r e s t h ig h e r fc^ian le g a l r a te s f o r com m ercial paper have been
charged on c o l l a t e r a l c a l l \J.oans in any f in a n c ia l c e n t e r e x ce p t Eew York
C ity * Ifhe r a te s which have \ eon charged on c o l l a t e r a l loa n s in that
c i t y , how ever, are n o t u su riou s s in c e the laws o f the S ta te o f Hew Yvrk
s p e c i f i c a l l y exor.pt such lo a n s \from the s ix p e r ce n t lim it a t io n w hich
le n d e rs mi s i observe on o th e r lefcans on p a in o f in c u r r in g the p e n a ltj
p re s c r ib e d f o r usury*
For f u l l e r and fu r th e r in fo rotation o f the S enate, th ere i s ap; ended
h e r e to a statem ent o f the nature
o p e r a tio n o f the Hew York G a ll Honey
I.larket*
Be sp e ct f u l l y ,
She P re s id e n t o f the Senate
g o v e r n o r
TEE i:ir ' YORK CALL IICZM MAItKSS
D e fin it io n o f G a ll limans.
C o lla t e r a l c a l l lo a n s , in the g en era l a c c e p ta tio n o f the term, are
made c h i e f l y in Hew York C it y , which i s p r a c t i c a l l y the o n ly im portant
c a l l money :::arket in the U nited S tates*
They are I^ans which are p a ya ble
on demand o f the len d er w ith ou t p reviou s-n o t i c e , secu red by the p le d g e o f
investm ent s e c u r i t i e s , i* e* s to c k s and bon d s, g e n e r a lly th ose which are
d e a lt in on the ITe\v York S tock Exchange. The in t e r o s t \ r a t e s on these lo a n s ,
as on o th e r c la s s e s o f lo a n s , are on the b a s is o f a r a t k p e r annum*
\
\
The Borrowers*
The loa n s are made f o r the most p a r t t o houses which a r k members o f
the S tock Exchange and the money so borrowed c o n s t it u t e s a p o r t io n o f the
DECLASSIFIED
Reproduced from the Unclassified / Declassified Holdings of the National Archives
Authority 1% 0
-
2
(Q S Q j
-
funds whijsJfs^tehBy employ o r d in a r ily in pu rch asin g and c a r r y in g s e c u r it ie s
f o r t h e ir custom ers and sometimes f o r them selves,
The Lenders*
Hie p r in c ip a l s u p p lie s o f money f o r c o l l a t e r a l c a l l loa n s are lo a n
a b le funds o f banks and bankers lo c a t e d b oth in and o u ts id e o f Kev; York
C it y , in c lu d in g fo r e ig n banks and a g en cies o f fo r e ig n banks; and s im il
a r ly the loa n a b le funds o f fir m s , in d iv id u a ls and c o r p o r a tio n s seeking
temporary investm ent*
The p r o p o r t io n o f the whole fund loaned by these
s e v e r a l in t e r e s t s v a r ie s s e a s o n a lly and in a ccord a n ce v/ith the a t t r a c t
iv en ess o f o th e r o p p o r t u n itie s f o r investm ent, e it h e r l o c a l l y o r in o th e r
m arkets.
She bulk o f tfwr c a l l money i s le n t on the f l o o r o f the Few York
S tock Exchange a t "the money p o s t ” , v^ere through v a riou s b rok ers lo a n
a b le funds are o f f e r e d and b id s f o r funds are r e c e iv e d .
Host o f the
b u sin ess i s done between the hours o f 1 £ noon and 2:45 p . m.
Die im port
ant r e la t io n to the money market o f the p re s e n t system o f d a ily s e t t l e
ment o f bala n ces r e s u lt in g from the purchases and s a le s o f s e c u r it e s on
the S tock Exchange w i l l be d isc u s s e d more f u l l y h e r e a f t e r .
Commercial Requirements Have The P r io r Claim .
In the m atter o f the supply o r a t t r a c t io n o f funds to the c a l l , money
m arket, th ere i s a d e f i n i t e and w e ll u n d erstood o b lig a t io n on the p a r t o f
banks to accom odate f i r s t t h e ir own com m ercial c l i e n t s , so th a t i t is o n ly
the e x ce s s o f loa n a b le funds v;hich they may have from time to time that
i s a v a ila b le f o r the c o l l a t e r a l c a l l money market or f o r the purchase o f
com m ercial paper in the open m arket.
This e x ce ss o f loa n a b le funds a v a i l
a b le f o r employment in the s e c u r it ie s market raasV-vajfy, t h e r e fo r e , a c c o r d
ing to the com m ercial requirem ents o f the country*
I t has lon g been r e
co g n iz e d that f o r assurance^ o f a s u f f i c i e n t amount o f money to fin a n ce
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the volume o f business in s e c u r it ie s , re lia n ce cannot be p laced on a
ra te o f in te r e s t lim ite d to the ra te s which obtain o r are perm itted in
commercial tra n sa ction s whose p r io r claim on banking accomodations i s
u n iv e r sa lly conceded*
THE LA’V RESPKGTIKO TUB BATblS OF HIGHEST OK uQLLAODRAL
GALL L0AIT5.
Law o f New York.
!£he sta tu tes o f the State o f New York acknowledge and recogn ize th is
p r in c ip le in both the Banking and Business Law in the s e ctio n s regarding
in t e r e s t le g a lly r e c e iv a b le .
S e ctio n 115 o f the Banking Law (L* 1914 Ch* 369; Consol* L* Ch* 2)
p rov id es that upon advances o f money repayable on demand to a& amount not
le s s than £5,000 maJe upon warehouses r e c e ip t s , b i l l s o f la d in g , c e r t i
f ic a t e s o f stock , e t c # , o r oth er n e g o tia b le instruments as c o l l a t e r a l , any
bank may re ce iv e and c o l l e c t as compensation any sum which may be agreed
4upon by the p a r tie s o f such transaction* ^fihe s e ctio n readst
"Sec* 115* In te re st on c o lla t e r a l demand loans o f
not le s s than fiv e thousand d o lla rs*
Upon advances o f money repayable on demand to an
amount not le s s than fiv e thousand d o lla r s made upon ware
house r e c e ip t s , b i l l s o f la d in g , c e r t i f i c a t e s o f sto ck ,
c e r t i f i c a t e s o f d e p o s it, b i l l s o f exchange, bonds o r other
N egotiable instrum ents, pledged as c o lla t e r a l s e cu rity f o r such
repayment, any bank may re ce iv e o r co n tra ct to re ce iv e and
c o l l e c t as condensation f o r making such advances any sum which
may be agreed upon by the p a r tie s §£ such transaction* **
S e ctio n 201 o f the Banking Law, id e n t ic a l in language w ith s e c t io n
115 above quoted, makes the same p r o v is io n in the case o f c o lla t e r a l c a l l
loans by tru st companies*
In the General Business Lav/ (L* 1909 Ch* 25;
Consol* L* Ch* 20) there i s the fo llo w in g general p r o v is io n o f a lik e
ch a ra cter:
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"Sec# 379. In te re st perm itted on advancedon c o ll a t e r a l
secu rity*
In any case h e re a fte r in which, advances o f money, re
payable on demand, to any amount n ot le s s than fiv e thousand
d o lla r s , are made upon warehouse r e c e ip t s , b i l l s o f la d in g ,
c e r t i f i c a t e s o f sto ck , c e r t i f i c a t e s o f d e p o s it, b i l l s o f ex
change, bonds or oth er n eg otia b le instruments pledged as c o l
la t e r a l se cu rity f o r such repayment, i t s h a ll be lav/ful to
re ce iv e or to co n tra ct to re ce iv e and c o l l e c t , as compensation
fo r making such advances, any sum to be agreed upon in w r itin g ,
by the p a r tie s o f such tra n sa ctio n ."
N ational Bank Act*
•i5ie N ational Bank A ct-provid e a that n a tion a l banks may re ce iv e and
charge on any loan o r discoun t in te r e s t at the ra te allow ed by the law
o f the S ta te , t e r r it o r y o r d i s t r i c t where the bank is lo c a t e d .
'J5ie ap
p lic a b le p ro v is io n reads.
"L im itation ut)on ra te o f in te re s t which may be taken.
422* S ec. 5197. - Any a s s o c ia tio n may take, re
c e iv e , reserve and charge on any loan or discou n t made,
o r upon any n o te , b i l l o f exchange, o r other evidences
o f d ebt, in te r e s t a t the ra te allow ed by the laws o f
the S ta te, T e rrito ry o r D is t r ic t where the bank i s l o c
a ted , and no more, except that where by the laws o f any
S tate a d iffe r e n t ra te is lin iite d f o r banks o f issu e
organized under State laws, the rate so lim ite d s h a ll
be allow ed fo r a s s o c ia tio n s organized o r e x is t in g in
any such State under th is T it le , "'hen no rate i s fix e d
by the laws o f the StatefrJ-!Iterritory, or D i s t r ic t , the
bank may take, r e c e iv e , re se rv e , or charge a ra te not
exceeding seven p er centum, and such in te re s t may be
taken in advance, reckoning the days f o r which the n o te ,
b i l l , o r oth er evidence o f debt has to run. And the
purchase, d isco u n t, o r sale o f a bona fid e b i l l o f ex^
change, payable a t another p la ce than the p la ce o f such
purchase, d isco u n t, o r s a le , a t n ot more than the cu r
rent rate o f exchange f o r s ight d ra fts in a d d itio n to
the in t e r e s t, s h a ll n ot be considered as taking o r re
ce iv in g a g rea ter rate o f in t e r e s t. n
I t w i l l be observed that the e f f e c t o f the foreg oin g p ro v is io n s is
to authorize in the State o f Hew York on c o lla t e r a l c a l l /o a n s o f not
le s s than $5,000 ra tes o f in te r e s t which may be in excess o f those p e r -
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m itted f o r loans o f oth er ch a ra cter, and that such h igh er ra tes are not
p ro h ib ite d as usurious*
CAUSE3 AffH-CTIITG P.RB5EITT CALL :JQI!EY HATES.
Uie referen ce in the re s o lu tio n to the present high ra te s f o r c a l l
money in the fin a n c ia l cen ters and the inquiry as to th e ir causes re q u ire ,
i t is f e l t , a survey o f the operation s o f the money markets and the r e
f l e c t i o n th erein o f the underlying economic co n d itio n s ^hich govern, in
varying d egree, a l l money r a te s , including those fo r c a l l money.
Present Changed Conditions o f Supply.
In former tim es, and s p e c i f i c a l l y p r io r to the in s t it u t io n o f the
Federal Reserve System, bankers, e s p e c ia lly in reserve ce n te rs , were
accustomed to lo o k upon c a l l loans as t h e ir p r in c ip a l secondary reserve
on the theory that inasmuch aa those loans were payable upon demand, funds
so in vested co u ld always be prom ptly obtained on short n o tic e to meet
withdrawals o f d ep osits o r f o r oth er use*
In these circum stances there
was o r d in a r ily a v a ila b le f o r c o lla t e r a l c a l l loan s
a supply o f funds
s u f f ic ie n t f o r ordinary market requirements and at low r a te s , although
a t times the ra te s rose to high le v e ls as the supply o f funds dim inished,
or the demands increased*
'Chis a ttitu d e o f the banks toward c a l l loans as th e ir c h i e f secondary
reserves has been g re a tly m odified by two causes.
2 ie f i r s t was the c l o s
ing o f the Stock Exchange a t the outbreak o f the European ^ar in the
summer o f 1914, when i t became p r a c t i c a lly im possible to r e a liz e on c a l l
loans secured by investment s e c u r it ie s , which uecame, th e re fo re , "frozen
lo a n s ”*
This re su lte d in a more o r le s s permanent p re ju d ice against de
pendence upon c a l l loans as secondary reserves*
Ihe second and more im
portant fa c t o r was the cre a tio n o f the Federal Reserve System*
Under the
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terms o f the Federal Reserve Act p ro v is io n i s made fo r the red iscou n t o f
conm ercial paper, but the red iscou n t o f loans f o r the purpose o f ca rryin g
investment s e c u r it ie s , oth er than United States Government o b lig a t io n s , i s
excluded*
Conse quently, in order to maintain maximum l i q u i d it y , with s u it
able p r o v is io n f o r secondary reserves that can be immediately a v a ile d o f ,
banks, in clu d in g fo r e ig n agency banks, now in vest a g rea ter p ro p o rtio n o f
th e ir resou rces in a sse ts that can be re a liz e d upon a t the Federal Keserve
Bank.
Another changed fa c t o r in the present s itu a tio n grows out o f the
fa c t that the war and post-w ar co n d itio n s have rendered un available su pplies
o f money which form erly eame from fo re ig n banks*
Since the summer o f 1914,
&&&&£&&&, w h ile t o t a l banking resou rces have la r g e ly in creased, the volume
o f bank money a v a ila b le to the s e c u r it ie s market a t low o r normal ra te s has
not increased p rop ortion a tely * but on the con tra ry has probably decreased,
ihese circum stances, o f them selves, e x p la in , in large measure the increased
ra te s which have o fte n been required during the p ast year f o r money loaned
in the s e c u r it ie s market.
Present Changed C ondition o f Demand.
Changed co n d itio n s are a lso present in the fa c t o r s governing the demand
f o r money*
P r io r to the a rm istice agencies o f Government were employed to
r e s t r i c t the issue o f new s e c u r it ie s f o r purposes other than those which
were deemed e s s e n tia l f o r ca rry in g on the war.
At the sane tim e, as the
'rreasury undertook to s e l l la rge amounts o f c e r t i f i c a t e s o f indebtedness and
L ib erty Bonds bearing low ra tes o f in t e r e s t, the question arose as to whether
the com petition o f the general investment markets might not p re ju d ice the
success o f the Government is s u e s .
In these circu m stan ces the o f f i c e r s and
members o f the New York Stock Exchange undertook to lim it tra n sa ction s which
would involve the increased use o f money f o r oth er purposes in con sid era tion
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o f which the p r in c ip a l banks o f New York C ity -undertook to p r o v id e a s ta b le
minimum amount o f money f o r the requirem ents o f the s e c u r it y market#
A ft e r the a r m is tic e these r e s t r i c t i o n s were removed and*
r e a s s e r te d them selves*
33ie issu an ce o f new s e c u r it ie s was resumed in un
p reced en ted Volume and consumed a v a st amount o f c a p it a l and c r e d i t , when
bank c r e d i t was a lr e a d y expanded by the n e c e s s it y o f c a r r y in g la r g e amounts
o f Government s e c u r it ie s which the investm ent market was n o t p repared to
absorb#
‘I bus a rose a fu r th e r cause f o r the in cre a se d c o s t o f aQQaraodatinff
on c o l l a t e r a l c a l l loans#
S in ce the a r m is tic e these causes have been augmented by the in crea sed
volume and v e l o c i t y o f tr a n s a c tio n s in s e c u r it ie s g e n e r a lly .
B efore examin
in g the f ig u r e s , i t should be ex p la in ed th at the amount o f c a l l money em
p lo y e d by the s e c u r i t i e s market flu c t u a t e s a c c o r d in g to the amount o f o th e r
funds a v a ila b le f o r t h is p u rp ose, i . e* custom ers* money in v e ste d and time
money borrow ed, and a ls o as the volume o f b u sin ess v a rie s *
UTolume *
'Ihe volume o f money ou tsta n d in g on c a l l i s more o r le s s c o n s ta n t,
flu c t u a t in g o n ly ov er r e la t iv e ^ lo n g p e r io d s , and the amount which i s loaned
from day to day i s but a sm all p r o p o r t io n o f t h is con sta n t volum e.
Ohe
con sta n t volume o f ou tsta n d in g c a l l loan s bears a ra te o f in t e r e s t which i s
determ ined d a ily and i s known as the renew al rate*
'J3ie d a ily b orrow in g s,
e it h e r in replacem ent o f loan s c a lle d f o r payment or r e p re s e n tin g new money
borrow ed, are made a t r a t e s which may ormay n ot be the same a s the renewal
I
ra te and -which fr e q u e n tly va ry d u rin g the same day.
i*uming to the fig u r e s , i t appears th at over a p e r io d o f yea rs d u rin g
the p re-w ar p e r io d the volume o f a l l money, both time and c a l l , employed in
the s e c u r i t i e s market was estim ated a t about f l , 0 0 0 ,0 0 0 ,0 0 0 ., o f which the
i
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average on c a l l was about 60^# and the average on time about 40%, o r a
normal volume o f c a l l money, say o f $600,000,000.
Bie d a ily turnover in
c a l l money, i . e . o ld loans c a lle d f o r payment, loans made in replacement
th e re o f, and new money borrowed, ranged from $15,000,000 to § 3 0 ,0 0 0 ,0 0 0 .,
and averaged about $20,000,000.
dhe d a ily turnover during the year 1919,
however, o r d in a r ily ranged from $£5,000,000 to $40,000,000, and averaged
about $30,000,000,
Moreover i t is important to n o tice there has been a
A isp roportion ate increase in the amount o f c a l l lo a n s, as d istin g u ish ed
from time money, with the consequence that the form er, i t i s
estim ated,
co n s titu te about 75% o f the t o t a l money employed in the s e c u r it ie s market*
At a time o f such heavy c r e d it requirements as the p resen t, the g rea ter
volume o f borrow ings, n ot o n ly in the aggregate but in the day to day de
mands, n a tu ra lly o fte n r e s u lts in high ra te s f 6'r the money loaned.
Interm ittent F actors.
lhere are ce rta in other fa c t o r s , the influ en ce o f which i s p r in c ip a lly
m anifested in in term itten t wide flu c tu a tio n s in the d a ily ra tes o r in the
ra tes which Apply fo r b r i e f p e r io d s .
Bie increased volume o f demand loans
c a lle d d a ily fo r payment noted above, coupled with the decreased amount o f
time money loaned on s e c u r it ie s , produces more or le s s apprehension an the
p a rt o f borrowers as to th e ir a b i l i t y to re-borrow money c a lle d f o r payment.
2h is apprehension, quickened by the number o f in s io te n t borrowers bidding
a t times when momentarily loanable funds are exhausted o r are being o ffe r e d
in small q u an tity, fre q u e n tly r e s u lts in com petitive biddin g f o r funds which
advances the ra te s f o r a day o r p a rt o f a day beyond the actu a l n e c e s s it ie s
o f the s itu a tio n .
Another a c tiv e and important in flu en ce which has re ce n tly a ffe c t e d the
supply o f funds a v a ila b le f o r c o lla t e r a l loans and p r e c ip ita te d a t times a
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- 9 r is e in the r a t e s , has bean the p e r io d ic tra n sfe r o f governm ent d e p o sits
V, tt. » d . «
freq u en tly make i t necessary f o r the d ep osita ry banks to c a l l money from
the s e c u r it ie s market, re s u ltin g freq u en tly in sharp advances in the rate
b id fo r c a l l money in replacement o f the loans c a lle d f o r payment.
BASES ARE DETERMINED i r THB OPERATION OF IS .E
LAW OF SUPPLY Aim DEHAM).
She u n d e r ly in g cause o f flu c tu a tio n s and, e s p e c ia lly o f in crea ses in
c a l l money ra te s i s the iaB9B3J3a!ba.e op era tion o f the law o f supply and demand*
In oth er words, as the supply o f loanable funds dim inished in p ro p o rtio n to
the volume o f the demand, the ra te f o r c o lla t e r a l demand loans la t w i W l y .
advances*
However, in the case o f the d a ily borrowings o f c a l l money — to
which the abnormal high and low ra te s apply and which represent but a comn-t. &Ztp a r a tiv e ly iati l g n iJ Isan ^ f t
o f the t o t a l outstanding loans — oth er f a c t o r s ,
in c id e n ta l to the temporary circum stances and co n d itio n s o f the market, tend
in times o f s tr e s s to g re a te r flu c tu a tio n s in ra tes than r e s u lt from the more
normal op era tion o f the law uhlch i s r e fle c t e d in the renewal rate f o r the
g rea ter volume o f the outstanding c a l l loans*
The renewal ra te i ^ t h e re a l
barometer o f maifcet co n d itio n s and i t s flu c tu a tio n s throu^iout the lon ger
p eriod s apenttPRSEtacrtti j r e j u l r e f- the r e la t io n between the amount o f the loan
a b le funds and the amount o f the demand*
In ^ther words, high renewal ra tes
are due to Pm n nnnlly e r c r e d it , w ^ i r e s u l t s i n p a rt from the
^
A
requirements o f the commercial community and in p a rt from other
temporary fa c t o r s
IJUsu, such as (tiMljdepletion
o f bank reserves r e s u ltin g e it h e r or Virtls from c r e d it expansion o r lo s s o f
reserves through g old e x p o rt, sp e cu la tio n in commodities and r e a l e s ta te , and
con g estion 6 f commercial tra n sa ction s in c id e n ta l to slow o r interrupted trans
p o r t a t io n .
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Consnerdlal Bates are S im ila rly and Independently Determinted.
fiie op era tion o f the law d f supply and demand i s e q u a lly e f f e c t i v e in
determining the ra te f o r commercial loans and a l l oth er borrow ings.
In
fa ct* ra tes f o r commercial loans and ra te s f o r c o lla t e r a l c a l l loans have
a common r o o t in the law o f supply and demand, and the co n d itio n s which
a f f e c t one9 in the main a f f e c t the o th e r, although n ot in lik e degree? as
i s demonstrated by the fa r w ider flu c tu a tio n o f c a l l ra te s and the h igh er
p o in ts to which they go*
She Mates f o r c a l l money do n ot determine and but
, the ra te s
coam ercial borrowings*
It is
the u n iv e rsa l custom o f the banks, to s a t is f y f i r s t the commercial needs
o f th e ir custom ers.
Biey
an o b lig a tio n to customers but none
to those who borrow in the open market on s e c u r itie s *
Besides as the r e
sources o f the banks mainly come from com nercial custom ers, t h e ir own s e l f in te r e s t compels a p referen ce in fa v o r o f th e ir commercial borrow ers, sin ce
fa ilu r e to grant them reasonable accomodation would Induce them to withdraw
t h e ir d e p o sits and so reduce the a b i l i t y o f the banks to do business* A l
though the money o f the banks and tru st companies com prises by fa r the g rea ter
proportion* o f money loaned on the s e c u r it ie s market, an examination o f the
p r e v a ilin g ra tes on com nercial paper a t times when the c a l l money market i s
p a r t ic u la r ly stra in ed in d ica te s that there i s l i t t l e causal r e la t io n between
the ra tes f o r c a l l money and those on commercial loans*
E xh ib its Ho s . 1 and
2, showing r e s p e c tiv e ly the ra te s f o r c a l l money on the Mew Yoxfc Stock Ex
change during the years 1906-1919 and the ra te s f o r conroercial paper in Hew
ynwv fo r ttotepsriod from 1915 to 1920, are attached*
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POSSIBILITIES OF CHAEGE IN THE COFPITIQITS AND METHODS OF OKE
CALL MONEY STARKET.
So lon g as c o l l a t e r a l c a l l loa n s are made under p r e v a ilin g c o n d id A ' seem im poaaiM g*~tu
the p resen t s it u a t io n , because
'
o f the im p r a c t ic a b ilit y o f a l t e r ing the u n d erly in g cause o f h igh r a t e s ,
w hich, in the la s t a n a ly s is , is
the e x ce s s o f deu«and ov er supply.
An attem pt to c o n t r o l the r a te s f o r c a l l loa n s by the esta blish m en t
o f an a r b it r a r y lim it a t a low l e v e l , w ith ou t the a b i l i t y to m odify the
jn stiT E a l causes^which op era te to in cre a se r a t e s , would be d i s t i n c t l y undo« ± r *
y & r "axrri-'dairgereus, f o r the reason that up to the p o in t where the a r b it r a r y
rate would l i ^ i t the supply o f new money, s p e c u la tio n and expansion might
p roceed unchecked and the n a tu ra l elem ents o f c o r r e c t io n o r re g u la tio n
would n o t o b t a in .
In o th e r w ords, h ig h r a te s aud-ihs- ove-r-p yooon t r o o c i b i 11 ty
a d e te rr e n t to o v e r -s p e c u la t io n and undue expansion o f
c r e d it #
On the oth er hand, should the supply o f money a v a ila b le a t IIpP C^,
L
fix e d maximum ra te become exarfusted, liq u id a t io n would suddenly be fo r c e d
-
because the demands f o r a d d it io n a l accommodation f o r the consummation o f
commitments a lre a d y made c o u ld n ot be met.
The e f f e c t 0^3 such liq u id a t io n
v would be to embarrass not on ly in v e s t o r s and d e a le r s in s e c u r i t i e s , and
. a
, d e a le r s and merchants isi com m odities as w e l l .
- v>^"
As
an example o f the l a t t e r , the ca se issaght be c i t e d o f a commitment to purchase
a round amount o f c o t to n on a c e r t a in day.
Btauy o f the houses on the C otton
Exchange are a ls o members o f the S tock Exchange and fr e q u e n tly borrow v e ry
la r g e ly on the S tock Exchange a g a in s t investm ent s e c u r it ie s to p ro v id e the funds
f o r s e t t l i n g t h e ir t r a n s a c tio n s in c o t t o n .
If,
t h e r e fo r e , when an im portant
c o t to n settlem en t was imminent, borrow ings on s e c u r it ie s co u ld n ot be a v a ile d
o f,
the c o t t o n tr a n s a c tio n c o u ld n o t be consummated a«d a d r a s t ic liq u id a -
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tion through 6ale e ther of securities or of the cotton might "be re
quired to avoid default*
Similar consequences might obtain in the cases
o f transactions "by ienbers o f other commodity exchanges who are also
I
meTTihers o f the Stock Exchange and have recourse to the c a ll money market.
: UTOZ m i C E OF A
,&
.c ,.
0
CALL KQKEY MARKET.
11 money rrn**t is i^dispenld^ble to every important financial
center# "
not only vtr jr outlet for the employment o f funds
temporarily id le, but a large volume of c a ll and short time money is es
sential to the successful and economical conduct of tfee business^e^HAie
it is particularly essential to the international and domestic
/
/
commercial business, a*?l‘ the diversion of the use of the major portion o f
such money to the securities markets is not in accordance with sounc
■banking p r i n c i p l e d
'fj&t
5 JL* «LqZU
iao
great
world
market, other than New York, is the
<V<
*.* . v
7^.
c a ll money.market^dependent-pw^ea^sciiy upon investment securities*
i
f
at.-.sf- &&■
f " . -■ A-
In
/^'v ' c^"'n,A~-e-&*■*-
' %€>
other markets the reverse is true, as their c a ll money is based prin cipally
^ ______
I
on commercial paper upon which realization can be had at the central bank,
at a p rice, in case of need*
We have seen that in this country c a ll loans
on securities lack this essential qu a lity.of liq u id ity requi/ed for quick
aiAd certain realization , and that this fact has now been more generally
taken into consideration b:;1 our lenders*
But the safe /and successful
divorce in this country o f the use of c a ll money from its dependence upon
investment securities as a basis requires careful st^dy in order that safe
and adequate methods may be substitute! fo r the present methods o f the
sQcurltie s marke t •
Reproduced from the Unclassified I Declassified Holdings of the National Archives
DECLASSIFIED ■
j
Authority
h O f0 ^ 0
I
IS
Term
Settlements*
fhe achievement of this end probably depends upon the successful
development of a plan for term settlements of the balances resulting
from operations on the Stock Exchange^ in lieu of the present method of
daily settlements*
33ie principal effect of such a change of the method
of Settlements would be to relieve the call money market from the neces
sities of the securities market aud release funds now used in collateral
call loans based on investment securities for employment in call loans
based on the collateral of the more liquid securities* commercial paper
aiid short term Government paper, generally recognized abroad as the pre
ferred bases for demand loans#
would naturally develop#
From this change a broader discount market
Under term settlements the borrowing required
by the securities market would be 02a the basis of short time accommodation,
i. e* for the term between settlements, whether they were weekly, fortnightly
or at other intervals.
Agitation for the Improvement of the present method of settlement of
stock exchange contracts has extolled over squg years and as the result
of extensive studies and deliberations of officers and members of the Mew
York Stock Exchange, as well as bankers, au important step has been taken
to provide enlarged clearing facilities th1*0ugh the organization of a new
corporation known as the Stock Clearing Corporation, which is expected to
begin operations in April, 1920.
contemplated operations
A general description of the purposes and
of the corporation is contained iu the pamphlet
attached hereto as Exhibit STo# 3#
The functions of this corporation include
providing facilities for clearing contracts between members, for the receipt
Reproduced from the Unclassified / Declassified Holdings of the National Archives
DECLASSIFIED
Authority
f
0^0 I
14
and delivery of securities between members and banks, trust companies
and others, and for the clearing of collateral call loans.
It is not
asserted or expected that the institution of these operations will
materially affect either the amount of money loaned, from one day to
another on the call money market or the rates of such loans, but it is
expected that it will operate materially to decrease the amount of bank
certifications on day loans, which the present practice requires in the
interval between paying one call loan and replacing it with another on
the same day.
It should be noted that the mechanism afforded by the
corporation is an indispensable, prerequisite to the establishment of a
system of term settlements#
2!he more recent and definite deyelopment toward the substitution
of t e m settlements for the present system of daily settlements ntay be
said to have had its inception in the action of the American Acceptance
Council at its annual meeting on December 4, 1919.
At that time,
fnglHg-
was adopteds
"Whereas, 2*ie present method of daily stock exchange
settlements, with its dominating and often unsettling
effect on the call money market, influences adversely
the development of a wide and healthy discount market
in the United States;
Resolved, 02iat the Chairman of the Executive Committee
be authorized to appoint a committee consisting of members
of the Executive Committee and other individuals to study
the advisability, ways and means of modifying the present
system of settlements on the Kew York Stock Exchange and
substituting therefor some system of periodical settle
ment, with power to take such steps as may seem advisable
in the case7*#
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DECLASSIFIED
Authority
0 f0 ^ 0 I
15
A copy of the annual report of the American Acceptance Council is
appended hereto as Exhibit 5, in which the resolution appears on page
S9 and. the report of the Chairman of the Executive Committee above re
ferred to appears on pages 16 to 27, inclusive#
the Committee thus provide! for was appointed and held two extended
conferences in which the problem was fully discussed, both from the point
of view of the banks and of the Stock Exchange.
For illustration of
the subject matter of the discussion there is attached hereto as .Exhibit
6 a defraM ed report compiled by one of the me nbers of the Committee, Mr.
Samuel P. Streit, Chairman of the Committee on Clearing House of the
Stock Exchange, describing the term settlement operations in London and
on the JSuropean continent, which presently will be published by the American
Acceptance Council*
Through its courtesy the Board has received an advance
copy of the report,
©lere are also attached, as Exhibits 7 and 8 respectively
two other publications of the America^ Acceptance Council, "Acceptance Cor
porations", by P. Abbott Goodhue, Vice President of the First national Bank
of Boston, joass., and w®ie Acceptance as the Basis of the American Discount
Market", by John E* Bovensky, Vice President of the national Bank of Com
merce, Mew York, i*i which on pages 14 and 22 respectively, the necessity
for term settlements as a means of relieving the call money market from
the necessities of the securities market and as a precedent to a broad and
stable discount marinet is discussed.
The mebibers of the committee have unanimously expressed the opinion
DECLASSIFIED
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Authority
fQ ?Q
I
1L
that the adoption of a term settlement by the Stock Exchange 'would
offer advantages iaa that it would eliminate duplication of the handling
of securities and in payments*
ffiie committee holds, however, that,
inasmuch as the adoption of a term settlement by the Exchange would invoke
changes of great importance, both to banks a^d to members of the Exchange,
it will require the most careful study of the subject by the committee,
and in any case the tern settlement camiot be put into operation until the
new system of daily Stock Exchange settleiuents throu^i the Stock Clearing
Corporation, above referred to, has been perfected and has been in practical
operation for a reasonable time*
j
Reproduced from the unclassified / Declassified Holdings of the National Archives
DECLASSIFIED
Authority
0 (0^0 I
I
Fe d e r a l R e s e r v e B o a r
W a s h in g t o n
l&roh
Subject:
Sir*
1920*
Beply to Senate absolution Ho. 328.
jV
On March 8th, 1920, the Senate adopted the following
resolution!
i
i
•ftSSQLVED that ttosf Federal Baserve Board he and
is hereby directed to fdvise the Senate What is the
cause and Justificatio|t for the usurious rates of
interest on collateral!call loans in the financial
centers, under what law authorized, and what steps,
if any, are required tq abate this condition.*
j
Xnr-rfply, the Board desires to say that the only
financial center of the countiy \in which a call n^ney mrket
is maintained and^ihere rates fir call money are published
is Few York City. Hew Sbrk is, jtherefore-, the only financial
center with respect to whioh^thejrMes charged on collateral
call loans can be ascertained^wfrpont detailed inquiry. Suoh
information as the Board possiss^s, however, does not indicate
that rates of interest higher thfn the rates charged for
oongmrolal paper are~charged on Collateral call loans in angg~
financial centers of the country dmtside of Hew York.
I
As to Hew York, while the ijates charged there on call
loans are frequently in excess ot the legal rates allowed for
commercial paper, they are not “Usurious* under the laws of
the State of Hew York, which specifically exempt collateral
call loans from the six per cent, jlimitation which lenders
must observe on other loans on pain of incurring the penalty
praaoribed for usniy. Section 1X3 of the Banking Law (li.1914
0h. 369; Consol* li. Oh. Z) provided that upon advances of
money repayable on demand to an amount not less than $5,000
made upon warehouse receipts, bills of lading, certificates of
stock, etc., or other negotiable instruments as collateral,
any bank may receive and collect as compensation any sum which
Reproduced from the Unclassified I Declassified Holdings of the National Archives
I
DECLASSIFIED
I Authority
0 (O^O I
where by the laws of any Statd a different rate is limited
for banks of issue organized /under State laws, the rate so
limited shall he allowed for/associations organized or exist
ing in any such State under Jthis Title. When no rate is fixed
by the laws of the State or/Territory, or District, the bank;
may take, receive, reserve,lor charge a rate not exceeding
seven per centum, and such interest may be taken in advance,
reclaming the days for whicji the note, bill, or other evidence
of debt has to run. And thi purchase, discount, or sale of a
bona fide bill of exchange, Ipayable at another place than the
place of such purchase, disaount, or sale, at not more than the
current rate of exchange fod sight drafts in addition to the
interest, shall not be consijdered as taking or receiving a
greater rate of interest." \
I
It will be observed that ihe effect of the foregoing pro
visions is to authorize in the Sts|te of Hew York on collateral call
loans of not less than $5,000 rates of interest which may be in
excess of those permitted for loai.s of other character, and that
such higher rates are not prohibited as usurious.
S
As to the “cause and justification” of the high rates of
interest, which it thus appears makr legally be charged on collateral
call loans in Hew York, and as to the ‘*steps * * required to abate
this condition," there is, as is will known, very wide difference
of opinion among persons who have given thought and study to the
question.. Indeed, broad and difficult questions of general economic
and social policy are involved^ as tp which the Board has never had
occasion officially to form ane-opinion and as to which it could not
reach a judgment without undertaking; such comprehensive investigations
and hearings as would seriously interfere with the conduct of the
Board’s regular work and which woulc. require the employment of experts
and assistants, for the employment cf which the Board does not feel
authorized to expend monies raised "by it through levies on the Federal
Reserve Banks for tha purpose of defraying the expense of administering
the Federal Reserve Act.
!
i
For the information of the Senate there is, however, appended
hereto a memorandum prepared at the instance, and for the use, of the
Board explaining in general the nature and operation of the Hew York
call money market and causes of high and fluctuating rates for call
money.
Bespectfully,
Gove
The President of the Senate.
THE HBV YORK CALL MDHSY MARKET
rnor
DECLASSIFIED
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Authority 1 ^ 0
^
lO^Q I
Prior ta tfea w o te ftl of tfea foda«a& Vm+mm A il,
jastlfloatloa fo* the M a g
M
was
%? %*«k* I* ti* *«w York aall
Sl4d4A4j%£tj
Imm aarkot^ far tko raaoaa that at tlaoa «h«t th*d««aad for c«uiroU l
oradlts m i saftll, kaaka aould ooad
to Xooaad oat m
fluids to Ifaw Tark to
vktok^rtrffa oaftsldarad to I t litjald,
fit
Todoral lasarao S/stoa, tepriar. bat* prwrldod ft dl*c<wa»t aarkat, la
/U*»
aklak M i OKI fraj
Flarost tkalr surplus faado^wHto *«eoi>taaiooH,
whtcfe sxparlspdo kao mhmm a * * mok ««vt ll$U d ten lBrt»tet»l a«onrl»
tlos
#f »ti*o*s aad pajaic.j It U undoubtedly iraa tkat tadka,
fr«a lia* ta tlaa, kava aoad tka fa cllltls» «f tka low York o*XX Im m
anrttot ta Hi# dotrlanat af tko iaAiiIrr,
««4 ngrlaaltara of
tte couatry; *t tlans, far oxaaplo, if fovorlsk spooulatlai wklek kara
aftaa oooarrod la tka Unitnd Stata»# aXthcra^sk tkaro any %a a eoaoarrotit
groat daanad far aoanomlal eradtt*, %*wk* all ator tko country kaio
kooa tnaptod ta plaoo tkalr fctads fa tko Wm* Y«vk a*rfcot to *soars tko
t a » f t t of tko *t>aom*Xly Mfk lataraet ratao* vMttl at suok tlaa*
pra*a||. Vhli« It aaf ko traa tkat tkooa katftn do aot noglsot tliair
rognlar aaotonuaro, fat tkora is littla doabt tkat if tkis naanon
surplus af fnad* waro k«f>t at kanot It alght rn&alt la Xowar rata* ta
tkalr rognlar oaataaors. fklla it it difficult to doviso ado«aata
aomi« for akookiag tkdo uadouktad a tli, it to kollorod that if tko
loans of nil kaako, national aad stato, «j>oa tka law York o*XX lass
aada jafelie at fro^oat iatorrals %f tlM CoaptraUor of
tlMi 0ar r m o f aad IlM 3B^arlataadoats of tfeo otata k&aics, raapoatlY^y,
It wartd go far toaardo okoaklag tMo aall* A aorabaat wko *pplloo
far a ooaaorolal loon fro* his %a*§ aad Is altlaor rafaoad ky tl«
kanfc
op
glvoa a loaa at ratoo hig^or tlaaa lio fcolloTO® ta %a aarraatad^
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i
DECLASSIFIED
Authority
m
fcJa®
of
o i a r M if,
(0 5 * 0 I
h h m ikm r i g h t to b *
laferaMht ** te th* irnrnm of ffeais *hi#J* hi* bmsfc m tto* %tm my
b# leaning u p m thm
th ttk c *A d » off a d lo s *w q r«
York, o&ll t o m
pttrimiw &w»dr*<t* or
Small p u b l i c i t y w oral 4 u s M a u b t* 41? go
to m u rd * p v « r * n t la g t e a k * f r a * f lo r e t in g a n a b a o x w a p s r t i m
roaoaro** to ffe»
of
in
o f tta ilr
«4I tom ®&rfc#t#
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|
DECLASSIFIED
|Authority 1%
0
fQ ?Q
!3arch
Subject:
I
v 1920
‘Tierly to :>onate Hosolution V.o* 320
t»ir:
On Maroh 8 th, 1920, the Donato adop ted the folluv inn resolution:
'ffcQLVED that the i^deral Heserve Board bo and
is horuhy itsfceted to advise the yenate h*£iat is the cause
end justification for the usurious rates of interest on
collateral call loans in the financial centers# under
^hat las? authorised and what stojs* if any, are reuuirod
to abate this condition*0
In reply the Board desires to say that it has no information that
ratesref interest M $ i e r than legal rates for comasrclal paper have been
charged on collateral call loans in any financial center except Hew York
city. lf»e rates which have been charged on collateral loans in that
city* homsver, are not usurious since the la%?s of the istate of Hew Yrak
specifically exeunt such loans from the six per cent limitation r?hIch
lenders m s t observe on other loans on pain of incurring the penalty
prescribed Ugrrlusury*
u
For fuller and farther information of the Senate, there is ap ended
hereto a statement of the nature ar.d operation of the Slew York Gall Ufoney
I&irket*
Besreetfully,
the President of the Senate*
G o v e r n o r
r::v yott ; c a l l rrrsY biaiikeb
Definition of iJall k>ans*
Collateral call loar^t in the fgeneral acceptation of the torsi, are
rtsx.ie chiefly in Tw: York iHt^# t?hich is X'ra^tically the only ini.50rtant
call money ;-riir3cot in the-United states* they are loans which are payable
on derxwid of tlie lender without previouinot ice, secured b,? the ple&^e of
investment securities, 1* e« stocks and bonds, generally those which are
dealt in on the Ttov; Yorl; Otock ISxchan'ip# 2ho interest rates on these loans,
as on other classes of loans, are on the basis of a rate per annan*
*ihe Borrowers*
the loans are m d e for the most part to houses ^ i c h are raeabers of
the Stock ivxefctfige and the njoney so borrowed constitutes a portion of the
DECLASSIFIED
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Authority
fO ^ Q |
1 R EAS U RY D t: PARTM E NT
W a s h in g to n ,
I have read and return herewith the draft of the Federal
X Ii'iO
'!>/> *
Reserve Board *s j?eply|to Senate Resolution Ko* 328 concerning rates
on call loans#
In your letter of March 2nd to the President, dealing with
this same subject you said:
"Speculative purchases of stocks are largely carried by
loans on call* The law of New York places no limit on the
rate of interest for such loans. The law of the State governs
national as well as state banks. Much might be said both for
and against a proposal to amend the state laws in this respect.
I am by no means satisfied that a change in the state usury
laws would be the best solution of the problem. In times when
credit is scarce a usury law may work actual denial of credit,
with consequent acute distress, or it may be evaded, in which
case the cost of the money to the borrower is apt to be in
creased because of the risk involved in the evasion of the law.
The real remedy for the gyrations of the call loan market is to
be found in insistence upon the furnishing of adequate margins
by the brokers* customers and in reforming the archaic methods
of financing and settling speculative transactions in stocks.
These views have been brought informally to the attention of
the responsible people and I hope progress may be made along
these lines.**
In my memorandum of January 26, 1920, to Governor Harding
and Mr. Strauss I said:
"I am hoping very much that the Board will decide to take
effective steps to require stock exchanges to adopt rtales under
which the brokers* customers1 accounts will be adequately mar*
#
*
*
"I am satisfied that the method employed during the past
two or three months for restricting credit for speculative
transactions in stocks is injurious to the general situation*
The denial or the strict limitation of credit, or very high
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j
D E C L A S S IF IE D
j A u th o rity £ Q f O
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/
2 •
rates for call money for stock market purposes reflect unfavor
ably upon the market for acceptances, for Treasury Certificates,
Liberty Bonds and Victory Notes, for cosanerci&l transactions*
Refusal of credit by Kew Ycrk banks or very high rates for call
money attract money into the stock isarket from the country banks*
This creates a. very vulnerable situation* I think that at least
until an eouilibriuis is struck betiaeen the supply and demand for
commodities there will be a serious risk of a new bull movement
in stocks%&th~a resultl^^ strain upon credit and that imediL
t
o
put into effect what appears to
m ":to be t h y & a f e o T r ¥ ^ ndyst*curer~ amdlx.*.£ke.
customer;:'. accounts te a.d_e^i_elr JArjOnag'i
Secretary "lass in his letter of November 5, 1919# to Gov
ernor Harding said:
"Vie cannot trust to the copybook texts* taking credit more
expensive will net suffice* There is no precedent in history for
the great rar v;hich «e have beer, through nor for the conditions
new existing* The Eeserve Bank governor must raise his mind
above the language of the textbooks and face the situation which
exists* Be must have courage to act px*c«r,ptly and with confidence
in his own. integrity to prevent abuse of the facilities of the
Federal lieserve System by the ci«stoxers of the Federal Reserve
Banks, however powerful or influential*
wSpeculation in stocks on the lew York Stock Exchange is
no sicre vicious in its effect upon the Tselfare of the people and
upon our credit structure than speculation in cotton or in laad
or in ec€E.?r,odiijfes £#o&rol.;.y* Hut the Hew York Stock Exchange
ic the greatest single ox*gar«i£eo user of ci'eclii for speculative
purposes* It is the organized instrument of a countrywide
speculation* I believe that the practice of financing specula*
tive transactions in stocks by lea?.3 on coll, vith daily settle
ments, is unsound *»d dangerous to the general welfare* Call
money loaned to carry speculative transactions in stocks is
only"liquid when there is no need. The paper is not selfliquidating &.id, in the case of an emergency, as, for example,
upon the outbreak of the European var, and throvshout the period
of our participation 1;: the w , 3«ch loans are in the &&se un
collectible* The use of Liberty Bonds, Victory !>otes and
Tx*easury Certificates as collater.il for bc-XTOv/ings rrade by .csember
bank« from the Federal lieserve Banks for the purpose of carry
ing speculative transactions in stocks mlies it the ri£bfc as
u e H as the dutv cf the Federal Eeserve authorities to see to
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D E C L A S S IF IE D
| A u th o rity ±
$ j 0 5 0 j_
-3 •
it that the methods of financing such transactions are re
formed and reformed immediately*
"Open and notorious manipulation of stocks has been tak
ing place during the period of, say, nine months, since the
removal of the control of the Subcommittee on Money of the
Liberty Loan Comiitee• This manipulation, which takes the fora
of putting up the price first of one stock and then of another,
no matter trhat may be the conditions, for the purpose of stimu
lating interest on the part of the uninitiated public, is, I
imagine, contrary to the law of the State of Hew York and the
rule? of the New York Stock Exchange* In any event, it needs
only vigorous action to put an end to it* The Federal Eeserve
Bank of Itev York in its relation to the Subcommittee on Money
of the Liberty Loan Committee, which Committee was at all times
in touch itfith the officers of the Stock Exchange, naturally
sought the viera of the Treasury- by reason of the fact that its
prime duty concerned the sale of Liberty Bonds* A control
now put into effect will be primarily for the conservation of
the general credit situation and should therefore be initiated
and supervised, not by the Treasury, but by the Federal Be serve
Board*
"I need not say that such steps should be taker, not only
finely but vith discretion and in such a vay as not to involve
grave hardship to individuals or injury to the general ^Ifare*"
In my memorandum of December IS, 1918, to Mr* Treman, then
Acting Governor of the Federal neserre Bank of l'ev» York I said?
"Holding these vises, the
though not zlv&ya $
agreement as to the methods pursued, has been heartily in
accord with the efforts made by the '.-xmy 5ub-Ccecities and by
the authorities of the stock exchange to jre-vent fart ter s c a n
sion in the loan account# As to methods, tfc© Treasure has felt
and still feels, that reliance should be rJU;ce3 rather upon
the requirement of increased margins, saie effective not sorely
as regards stock exchange brokers but as regards their customers
also, than upon the attempt co rati on ere-:lt to the- brokers
themselves* The Treasury, hor*ever, has not felt and does not
feel, that it should seek to impose its ovm views m to the par
ticular methods to be employed to accomplish the desire:! result*
j
DECLASSIFIED
1Authority £ 6 [Q'SQ
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I
HXt is the earnest hope of the Treasury that, growing out
of the very salutary action of the Money Sub-Committee and of
the stock exchange authorities during the period of the m r and
the present period of readjusttieni, there may be evolved some
plan for preventing the recurrence, after the restoration of
peace conditions, of those erratic and violent fluctuations in
rates for call money and those feverish movements of prices on
the stock exchange, which in the past have been the source of
great concern to the judicious and in the future can only prove
a stumbling block in the effort of America to take and keep the
place which she has won in the world*s coramerce and finance♦"
My conclusions on reading the proposed reply to Senate
Bes duties* '!o* 328 are three:
1*
High rates for call raoney
i stocks, etc*, are not
usurious because the lav/ does not m k e them usurious and I do not
think tk* la** should he changed in this respect*
call money operate as a safety valve.
High rates for
A real call money market is
essential to the proper functioning of a world financial center*
Without a call money market to act as a safety valve in time of
credit stringency ise should have unnecessary panics*
No place can
claims* to be s money center where money cannot be had at a price*
xt money
not bn had at a price, t. e consequence is dumping of
securities in t : effort *
iro&u* 3
. should say that ths
market prices of Liberty Bonds a i Victor/ Hotes t/ould ba t s first
o
shosr
effect of a
absolute refusal of aoney «
any price,
just os they reflect first excessive r&tes for money*
2*
ifce call monsy market 3hould be. based on acceptanoas
and not <n clocks*
Nothing I
re&13
.v«uid -
virrp
? grsai
j
DECLASSIFIED
! Authority£ . 6 (O^Q
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I
- 5 -
world crisis such as the outbreak of the ’.var in Europe / but acceptances
are more liquid than securities#
3#
The real vice in the preen at situation is trust th?
parabler in stocks is permitted to have the first call on funds in
period of stringency because ha is peraittei to finance his trar.s
actions on call and is not required
produce adequate r/argin*
think the Stock Exchange should b j required t > reform itself
by substituting tenu settleisents
accounts to
1 hy r& gulfing brokers*
taargined ade^uafcaly*
It way ultimately ba necessary
to go even further than this and prohibit buying on margin altogether*
lo go to a bank and borrow money to speculate with is very different
from buying stocks on margin*
&ny : man W o v/ould not have the face
to ask his bank for loans for speculative purposes will buy
ni&r^in,
nuiny a bank ^hich
.os’:
o'ild n i- ;«hink of lending :aon&y t
an individual customer to speculate urith will len3
* o ^*3 broker
to carry hisu
It will be seon from the foregoia^
:st ‘ differ ?rora t:
views indicated in ths reply i o Sen&ts r*esolution .Jo* cx>c nior® i
mtters of eirohasis than in matters of detail*
The proposes reply
is sound in substance, but Jit is unsound, ifc seenn to ;$&, ii t
general impression which
creates t ic
in respect t? t > 'Isw York Stock Exchange
everything i 3 aooufc right
3 t * call aiarj?
irfcafc
*:i y be that the difficulty could * * overcome ’
ey dealing only ;it
the specific question r&xsed by I e Senait I^eoiutio-
; iy,
DECLASSIFIED
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Authority
^ 0 iO^Q I
rates for call money, and omitting the dissertation about Stock
Exchange practices.
Turning to matters of detail:
On page 9 the statement is
made that the operation of the law of supply and demand is equally
effective in detern&ng the rate for commercial loans and all other
borrowings*
This, of course, is not the fact*
The usury law im
poses a limit upon the rate for commercial loans and other time bor
rowings , while it imposes no such limit upon call loans.
I do not share the view advanced in the memorandum, page
12, ff•, that the organization of £ stock clearing wgafliiatitfr+iti is
an important step towards the solution of the problem.
Undoubtedly
it is a step towards making more efficient the credit which is made
available for carrying stocks.
It is not, however, a step in the
direction of limiting the amount of credit used for that purpose quite the contrary.
To summarize the whole matter, I would say that the object
of remedial measures should be not to furnish cheap money for stock
speculation, but to prevent the scandalous manipulation of stocks and
to limit the stupendous demands for credit for speculation in stocks.
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T R E A S U R Y DEPARTMENT
WASHlNGTOi
O F F I C E OF
CO M PTRO LLER O F T H E CU R R EN C Y
March 1'
A DDRESS R E PLY TO
COMP TFtOLLEft OF TH 6 CURRENCY
iteflHANDOM FOB GOVERNOR BARBim.
I have read with much interest the preliminary draft which
you were kind enough to furnish me yesterday afternoon of your proposed
reply to the Senate in regard to the Owen Resolution on call money rates,
ate. You have made a very able and interesting presentation of the subject,
and while I agree with many of your conclusions, I am afraid that I will
have to dissent from that portion of your report contained on pages 11 and
12. I do not agree that it would be either "undesirable or dangerous* to
attempt to control the rates for call loans even though we may not have
power over the numerous natural causes which may operate to increase rates,
including among these natural causes the propensity of lenders to charge all
the traffic will hear or all they can get within the law, and sometimes with
out the law, I see nothing in the situation in New York which should serve
to give that market immunity from the laws against usury. The excessive call
rates which in times past have been as high as 100$ in New York, are unknown
elsewhere in this country, or in any other Quarter of the globe, and ill my
judgment they can be and should he restrained in New York City, whether we
have fortnightly stock settlements or do not have them.
The establishment and exaction of an excessive rate does not increase
the money supply. Intelligent and prudent administration on the part of the
banks in curtailing or refusing loans would be or should be just as effective
as a"deterrent’to o*a&'speculation and undue expansion of credit"as the
granting of loans at two, three, five or ten times the usual rate. You say;
"On the other hand, should the supply of money available at the
€ixed maximum rate become exhausted liquidation would he suddenly forced because
the demands for additional accommodation for the consummation of commitments
already made could not be made."
Under such conditions the banks could with moderation call in some of
their loans and increase the supply of funds available for those whose needs
were most urgent for legitimate requirements. That does not mean that all
loans should be called at once, or that the bottom would be knocked out of
everything. It is assumed that the banks would have intelligence enough to
proceed with caution and wisdom in meeting such a situation and provide credit
for those entitled to it, and at the normal and legal rate. It is not supposed
that there would be any concert of action on the part of the banks to call in
loans in a wholesale fashion to precipitate a crisis, as it is charged has
been done in times gone by. You say;
"The effect of such liquidation would be to embarrass not only investors
and dealers in securities, but also it should be noted dealers and merchants
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in commodities as well. As an example of the latter, the case might be
cited of an agreement to purchase an amount of cotton on a certain day.
Many of the houses on the Cotton Exchange are also members of the Stock
Exchange and frequently borrow very largely on the stock exchange against
investment securities to provide the funds for settling their transactions
in cotton. If, therefore, when an important cotton settlement was
imminent, borrowings on securities could not be availed of the cotton
transactions should not be consummated and a hasty liquidation through
sale either of securities or of the cotton might be required to avoid
deficit".
I cannot agree with this argument. It should be much easier to obtain
money on cotton warehouse receipts or bills of lading than on securities*
Why should a Hew York banker borrow money on securities to carry cotton?
Why should not he borrow his money on the cotton?
A member bank could af
ford to lend a customer money on cotton when it could not afford to lend him
money on securities because the lending bank coujd get a rediscount from the
Federal Eeserve Bank on cotton bills but could not get it on a collateral
loan made on bonds and stocks.
You suggest that "high rates and the ever present possibility of high
r a t e s a deterrent to over-speculation and undue expansion of credit."
Within certain limitations, an increase in interest rates is at times
salutary and beneficial; but I have been unable to see the justification for
the general marking up in rates on call loans secured by bonds and stocks
which it is understood has taken place in New York so generally in the past
few months the increased rates not only applying to new loans but to loans of
long standing which are carried on call, perhaps in many cases originally
placed at four or five percent.
During this period of more stringent money, many banks *r© reported
to have marked rates up each day to the rate fixed by a select committee of the
stock exchange of 12$, or 15$ or 18$ or 20%>, as the case may be.
It has been suggested that some banks have discriminated as to the loans
upon which the advanced rates are charged; but it is understood that the impo
sition of the increased rate has been very general as applied to the great mass
of call loans carried by the banks and trust companies in New York City.
In your memorandum you say:!
"It appears that over a period of years during the pre-war period, the
volume of ail money, both time and call employed in the securities market was
estimated at about $1,000,0^ 000, oFwkich the average on call was about 60$,
and the average on time about 40&, or a normal volume of call money say of
$600,000,000."
Your statement further says "it is important to notice there has been a
disproportionate increase in the amount of call loans as distinguished from
time money, with the consequence that the former it is now estimated con
stitutes about 75$ of the total money employed in the securities market."
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Are not these figures erroneous?
The statament which I have before me suggests that the/ are* I hat# not
before me the figures for the State Banks and Trust Companies of Hew York City
as of Juae' 30, 1919, bat I have the figures for frtloiml fiaakt, which show
that on the date mentioned the total amount loaned on bonds and stocks by the
national Banks in New Tork City was $1,134,000,000, of whleh $455,000,000, or
400 of the total, not 78ft. were being loaned on call and $679,000,000, or 60$
on time*
Furthermore, the statement that "’there has been a disproportionate in
crease in the amount of call loans as distinguished from time money” would
not apply If we consider the whole country instead of the City of How York.
Xi« Jtsnv, 1915, the tetal money loaned by Hatlonal Banks "on demand" on bonds
and stocks was $883,000,000; on June, 1919, this had increased to $1,307,000,000,
or about 48$ increase. In the same period the time loans on bonds and stocks,
which were on June 30, 1915, $866t000,000, increased on June 30, 1919, to
$3,130,000,000, an increase of about 146%.
In June, 1915, total loans on Bonds and Stocks by Hatlonal Banks in How
Tork City were $605,000,000, of which the demand loans were $357,000,000, or
59$, and time loans $348,000,000, or 41$;
In June, 1919, tfys totals wore $1,134,000,000, of which 40$, or $455,000,000,
were demand, and 60$, or $679,000,000, time*
So far from demand loans having increased more rapidly than the time loans,
as stated in the memoranda* referred to, we find that between 1915 and 1919 the
IfH leans secured bar bonds aad stocks in the national Banks of Hew York City
have increased only JgjL while liofe Iwif secured by bonds and stocks Increased
in the same period 173&.
Please note the following table:
j s m m
mrnstn
Bara*....... .
*!»•
.......
7,/l^SL
m
as a s ® a m
m m . s& m
i m
sm*.
1915
1919
Increase
S#> 397 ailllons; 40% 466 mlllloa; 98 Billion*, 27*
41* atA Billions; 60$ flZA nillion;121 million.,173*
605
1,134
639
The statement furnished you to the effect that the volume of all money,
both time and callf employed in the securities market, is abe&t One Billion
Dollars is, I think* underestimated In view of the fact that the figures show that
tlftJMtfloal Bam* •.in
alone In June last were lending 1*184 Million Dollars
on the securities of Bonds and Stocks* It is well known that the Trust Coup*
panies make more o£ * specialty of lending on bonds and stodks than do the
ttationil Banks, as a role*
I* my 'fcdoBent* It Is 9*ite posAlble that nil Cf^tfce Banks in New York
are lendln|[, on bond and stock collateral, not less than Two Billion Dollars
instead of One Billion,if we Include the Trust Conapanies and State Banks*
In speaking of this matter before the Board, you suggested that the One
Billion Dollars referred to as being loaned in the Securities Markets were
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"brokers loans" and not loans made directly to holders of bonds or stocks, wheth
er they be investors or speculators*
In my opinion, there is not mich difference between a loan of a
Hundred Thousand Dollars made to John Smith & Company for the purpose
of carrying a Hundred Thousand Dollars* worth of stocks bought by them for
Jihn Brown, and a loan of a Hundred Thousand Dollars made b;/ the Baak to
John Brown direct secured by stocks purchased by him i the market*
a
% suggestion is that it might be well to give a little further con
sideration as to whether it is desirable under these circumstances to
use the figures of One Billion Dollars as representing the "volume of
money, both time and call, employed in the Securities market* (see
pag# 8 of your letter)*
V>
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DECLASSIFIED
Authority 1%
0 (QS^C) (
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ffowrafcU Ckorg« A. Satviertvn,
Sacratary,
Washington,
Sirs
Sec#tpt
Besol“ttlon Ho. 33#,
ftelcoo^l«f4g«d -of S«sRi<s
Ifeircfc 8 t 19*0,
<r^tiag corfc&ia infor&trtlcm with reispeai %o th«
«<harl.o*a» rai«s pt intermit <m
T im * .
e**ll lonae.
,9.15 R e t o o k A.M . * Marefe f , IflHO .
Basket-Mir,
S«er«tai»y*
«fC M
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0. fO
f
G E O R G E A. S A N D E R S O N ,
SECRETARY.
'Ultwiieh
O FFIC E
OF
THE SE CRETARY.
March 3, 1920*
BtciivEU
afiffetof
TWt nOvffWN*™.
Gentlemen:
I have the honor to hand you herewith
a resolution of the Senate of the United States,
dated March 8, 1920, requesting certain information
with respect to the usurious rates of interest on
collateral call loans.
Will you kindly acknowledge the receipt
of the resolution upon the enclosed form?
Please address the response to this reso
lution to the President of the Senate*
Respectfully,
Secretary*
Federal He serve Board,
Washington, D* G*
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fO S Q
I
G F " ^ G E A. S A N D E R S O N ,
SECRETARY.
'l&tnileb ^<E>laie& ^ e n a i e ^
O FFIC E
OF
THE SECRETARY.
Washington, D* G*,
March
, 1920,
Receipt is acknowledged of Senate Reso
lution ITo* 328, adopted March 8, 1920, requesting
certain information with respect to the usurious rates
of interest on collateral call loans*
Time:
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UNITED
STATES
0. (QC
~>0 (
SENATE
Washington D. C.
March
, 1920.
Eeceipt is acknowledged of Senate Reso
lution No.
32S,
adopted March S, 1920, requesting
certain infomation with respect to the usurious
rates of interest on collateral call loans.
Time:
DECLASSIFIED
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.0 (0^0 j
Authority In
RE!
338.
J n
tht
Jlntate
0f
the
K
n
M
Jitateji,
March 8, 1930.
RESOLVED, That the Federal Reserve Board 'be, and
is hereby, directed to advise the Senate what is the
cause and justification for the usurious rates of in
terest on collateral call loans in the financial cen
ters, under what lavs/' authorized and what steps, if any,
are required to abate this condition,
Attest:
Secretary,
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irn-rJ, H
[..L
it-;
MEMORANDUM FOR REPLY TO TIE SENATE RESOMTION REVESTING ADVICE
FROM THE FEDERAL RESERVE BOARD RELATIVE TO THE HATE^~OF TITEREST~*-----________ OH COLLATERAL GALL LOANS II THE FINANCIAL CENTERS
Th+
rnrHftt-
"ftesivfto
W A r IS 1920
"RESOLVED that the Federal Reserr(
and is hereby directed t© advise the Senate
cause and justification for the usurious rates ofintereson collateral call loans in the financial centers, under
what law authorized and what steps, if any, are required
to abate this condition."
It say be observed at the outset that so far as tiwwSweewweeri.
, New York, is concerned,
k
*""
1
yiny nf nnniimur rates on^
■*
■
collateral call loans since, ^
M-
the l&ws of Mew York
At
specifically exempt such loans from the
limit which lenders must ob-
<-■
Q
i- i-t
serve on other loans &ft penalty of violating thw usury prohibi Lion.
THE NEW YORK CALL MONEY MARKET.
DEFINITION OF
CALL LOANS
Collateral call loans, as referred to in the resolution,
are principally those made in New York City, which is practically the
only call money market in the United States.
They are loans which
are repayable on demand of the lender without previous notice, secured
by the pledge of investment securities, i. e. stocks and bonds
which are dealt in on the New York Stofek Exchange.
^
THE BORROWERS
it.it.fld on
aiuiUffT basis^
^
Interest rates ar®
-
The loans are made for the most part to bouses which are mem-
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bers of the Stock Exchange and the money so borrowed constitutes a por
tion of the funds which they employ ordinarily in purchasing and carrying
securities for their customers and sometimes for themselves.
THE LENDERS
The principal supplies of money for collateral call loans are
loanable funds of banks and bankers located both in and outside of New
York City, including foreign banks and agencies of foreign banksj and
similarly the loanable funds of firms, individuals and corporations seek
ing temporary investment.
The proportion of the whole fund loaned by
these several interests varies seasonally and in accordance with other
j—
opportunities^ aad— fcheii*
or in other markets.
for investment either locally
The bulk of call money is lent on the floor of the
New York Stock Exchange at "the money post,w where through various brokers
loanable funds are offered and bids for funds are received.
Most of the
business is done between the hours of 12 noon and 2:45 p. m.
The impor
tant relation to the money market of the present system of daily settlement
of balances resulting from purchases and sales of securities on the Stock
Exchange will be discussed more fully hereafter.
COMMERCIAL RE
QUIREMENTS HAYE (
THE PRIOR CLAIM
In the matter of the supply or attraction of funds to the call
money market,
in
in mini that there is a definite
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and well understood obligation on the part of banks to accommodate
first their own commercial clients, so that it is only the excess of
loanable funds which they may have from time to time that is available
for the collateral
H T T tffr
m
the purchas
^
^
__
_____ __
____
funds available for employment in the securities market must vary, there-
fore, according to the commercial requirements of the country.
long been r e c o g n i z e d , t h a t
It has
for assurance of a sufficient amount
of money to finance the volume of business in securities, reliance cannot
be placed on a rate of interest limited to the rates which obtain or are
permitted in commercial transactions whose prior claim on banking accom-
C
modation is universally Qas^pesad.
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THE LAW RESPECTING THE RATES OF INTEREST OH COLLATERAL CALL LOANS.
LAW OF NEW YORK
The statutes of the State of New York acknowledge and. recognize
this principle in both the Banking and Business Law in the sections re
garding interest legally receivable.
Section 115 of the Banking Law (L. 1914 Ch. 369; Coneol. L.
Ch. 2) provides that upon advances of money repayable on demand to an
amount not less than $5,000. made upon warehouse receipts, bills of lad
ing, certificates of stock,"etc., or other negotiable instruments as
collateral, any bank may receive and collect as compensation any sum
which may be agreed upon by the parties to such transaction.
The section
reads:
nSec. 115. _ Inter_e&t_ on co 1lateral,. demand, loans of
not lees, than five_ thousand^ do 11 ars.
Upon advances of money repayable on demand to an amount
not less than five thousand dollars made upon warehouse re
ceipts, bills of lading, certificates of stock, certificates
of deposit, bills of exchange, bonds or other negotiable in
struments, pledged as collateral security for such repayment,
any bank may receive or contract to receive and collect as
compensation for making such advances any sum ?jhich may be
agreed upon by the parties to euch transaction."
Section 201 of the Banking Law, identical in language with Section 115
above quoted, makes the same provision in the case of collateral call loans
by trust companies.
In the General Business Law (L. 1909 Oh. 25; Consol.
L. Oh. 20) there is the following general provision of a like characters
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ttSec. 57g, Interest permitted on advances on
collateral security.
In any case hereafter in which advances of money,
repayable on demand, to an amount not lees than five thousand
dollars, are made upon warehouse receipts, bills of lading,
certificates of stock, certificates of deposit, bills of ex
change, bonds or other negotiable instruments pledged as
collateral security for such repayment, it shall be lawful
to receive or to contract to receive and collect, as compen
sation for making such advances, any sum tobe agreed upon
in writing, by the parties to such transaction.11
NATIONAL BANK|i
The National Bank Act provides that national banks may receive
A c t"
and charge on any loan or discount interest at the rate allowed by the
law of the State, territory or district where the bank is located.
The
applicable provision reads:
"Limitation upon rate of interest which may be
taken.
4ZZ. Sec.5197. - Any association may take, receive,
reserve, and charge on any loan or discount made, or ujx>n any
note, bill of exchange, or other evidences of debt, interest
at the rate allowed by the laws of the State, Territory, or
District where the bank is located, and no more, except that
where by the laws of 8,ny State a different rate is limited for
banks of issue organized under State laws, the rate b o limited
shall be allowed for associations organized or exising in any
such State under this Title.
When no rate is fixed by the
lav/s of the State, or Territory, or District, the bank may take,
receive, reserve, or charge a rate not exceeding seven per centum,
and such interest may be taken in advance, reckoning the days
for which the note, bill, or other evidence of debt has to run.
And the purchase, discount, or sale of a bona fide bill of ex
change, payable at another place than the place of such purchase,
discount, or sale, at not more than the current rate of exchange
for sight.drafts in addition to the interest, shall not be con
sidered as taking or receiving a greater rate of interest.11
It will be observed that the effedt of the foregoing provisions
is to authorize in the State of New York on collateral call loans of not
less than $5,000. rates of interest which may be in excess of those per-
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mitted for loans of other character, and that such higher rates are not
prohibited as usurious.
CAUSES AFFECTING PRESENT CALL MONEY RATES.
The reference in the resolution to the present high rates for
call money in the financial centers and the inquiry as to their causes
require, it is felt, a survey of the operations of the money markets and
the reflection
of the underlying economic conditions
which govern, in varying degree, all money rates, including those for
call money.
PRESENT CHANGED
CONDITIONS OF
SUPPLY
In former times, and specifically prior to the institution
of the Federal Reserve System, bankers, especially in reserve centers,
were accustomed to look upon call loans as their principal secondary
reserve on the theory that inasmuch as those loans were payable upon
demand, funds always could be promptly
on short notice to meet
/<withdrawals of deposits or for other use.
these circumstances
there was ordinarily available for collateral call loans a supply of funds
sufficient for ordinary market requirements and at low rates^ ^
*^s«r>C. fa
cu)
C'$
__ ___ h
This attitude of the banks toward call loans as their chief
secondary reserves meg greatly modified by two causes.
The first was the
closing of the Stock Exchange at the outbreak of the European War in the
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1 Authority 1% 0 f O ^ O
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summer of 1914, when it became practically impossible to realize on call
loans secured by investment securities, which ware, therefore, "frozen
!."
This resulted in a more or less permanent prejudice against
dependence upon call loans as secondary reserves.
The second and more
important factor was the creation of the Federal Reserve System.
Under
the terms of the Federal Reserve Act provision is made for the rediscount
of commercial paper, but the rediscount of loans for the purpose of carry
ing investment securities, other than United States Government obligations,
is excluded.
Consequently, in order to maintain maximum liquidity, with
suitable provision for secondary reserves that can be immediately availed
of, banks, including foreign agency banks, invest a greater proportion of
K
their resources in assets that can be realized upon at the Federal Reserve
Bank.
Another changed factor in the present situation^63e*s*e=in the fact
that the war and post-war conditions have rendered unavailable supplies of
money which formerly came from foreign banke*
Since the summer of 1914,
therefore, while total banking resources have largely increased, the volume
of bank money available to the securities market at low or normal rates has
not increased proportionately, but on the contrary has probably decreased.
These circumstances, of themselves, explain, in large measure the increased
rates which hav^ been required for money loaned in £he securities market.
CHANGED
CONDITIONS OF
DEMAND
Changed conditions are also present in the factors srovernin*
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the demand for money.
It will l)B TSWHlHll blia-l^j^rior to the armistice
agencies of Government were employed to restrict the issue of new se
curities for purposes other than those which were deemed essential for
carrying on the war,
Qdk
j
It 1wi
tlTin r m m try Trout int**
ttw^SSP^tad the Treasury undertook to sell large amounts of Liberty
K
bonds bearing low rates of interest, the question arose as to whether
the competition of the general investment markets might not prejudice
the success of the Government issues.
these circumstances the
officers and members of the New York Stock Exchange undertook to limit
transactions which would involve the increased use of money for other
purposes in consideration of which the principal banks of Uew York City
undertook to provide a stable minimum amount of money for the require
ments of the security market.
After the armistice these restrictions were removed and natural
laws reasserted themselves.
The issuance of new securities was resumed
in unprecedented volume and consumed a vast amount of capital and credit,
when bank credit was already
UiaiHUd by the necessity of carrying large
amounts of Government securities which the investing market was not
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prepared to absorb.
Thus arose a further cause for the increased
cost of accommodation on collateral call loans.
Since the armistice these causes have been augmented by the
increased volume and. velocity of transactions in securities generally.
Before examining the figures, it should be explained that the amount
of call money employed by the securities market fluctuates according
to the amount of other funds available for this purpose, i. e.
customers* money invested and time money borrowed, and also as the
Y o L v N\E
volume of business varies.
Dhe volume of money outstanding on call
is more or less constant, fluctuating only over long periods, and the
amount which is loaned from day to day is but a small proportion of
this constant volume.
The constant volume of outstanding call loans
bears a rate of interest which is determined daily and is lenown as the
renewal rate.
The daily borrowings, either in replacement of loans
called for payment or representing new money borrowed, are made at
rates which may or may not be the same as the renewal rate and which
frequently vary during the same day.
Turning to the figures it appears that over a period of years
during the pre-war period the volume of all money, both time and call,
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employed in the securities market was estimated at about $1,000,000,000.*
of which the average on call was about 60$ and the average on time about
4 0 or a normal volume of call money, say of |;600,000,000*
The daily
turnover in call money, i. e. old loans called for payment, loans made
in replacement thereof, and new money borrowed, ranged from $15,000,000.
to $30,000,000.* and averaged about #20,000,000.
The daily turnover
j.
during the year 1919, however, ordinarily ranged from ^25,000,000. to
#40 ,000,000., and averaged about $30,000,000.
Moreover it is
important to notice there has been a disproportionate increase in the
.amount of call loans, as distinguished from time money, with the con*-
sequence that the former, it is now estimated, constitute about 75$
CtA- x
of the total money employed in the securities market.
i
I
The greater *
volume of borrowings, not only in the aggregate but in day to day de-
mands, »
Intermittent
Factors
naturally gnl liiwwrt1fry high rates for the money loaned.
Tliere are certain other factors, the influence of which is
principally manifested in intermittent wide fluctuations in the daily
rates or in the rates which apply for brief periods.
The increased
volume of demand loans called daily for payment noted above, coupled
with the decreased amount of time money loaned on securities, produces
^
f
Reproduced from the Unclassified / Declassified Holdings of the National Archives
DECLASSIFIED
A u t h o r i t y lO^O
I
more or less apprehension on the part of borrowers as to their ability
0
f
<&.l(.i'-r/c'C'/,
to re-borrow money called for payment.
This apprehension,
f-y
by the number of nanaa skfretts borrowers bidding at times when momentar
ily loanable funds are exhausted or are being offered in small quantity*
frequently results in competitive bidding for funds vtfiieh advances the
rates for a day or a part of a day beyond the actual necessities of
the situation.
^
UiJjL
Another active and warn important ^^eTaff^ctiw| the supply
of funds available for collateral loans and^precipitatfi^ at times a
/
y
DECLASSIFIED
Reproduced from the Unclassified I Declassified Holdings of the National Archives
Authority
&0 (0 ^ 0 j
■10 -
,v >> A....Cr>!
+.1
rise in the rates, M'Sfr-k thesVi^ferirawal^of
Government deposits from
*A..
depositary banks to mpi eni,nh T r->,,atrr3Ti^ifa!cneBfli -mi the Federal reserve
banks
coMStH,t ,!!,lffgr,'
pir^h.ia.a \ n ~ y
th^ a
a--rp.. .............j " ...wwvi&y'r-'pn?7r2,11rfs--&-
,, j ,n ifchi 0 h ^ n r r ^ T fT ^ T T l^ ^ r r iT ^ T * ^
j lllit II
-tg
‘
>e»yL»j»y,
yig
11.
frequently bectrms necessary for the M ^ W r to ca ll t&e- money from the
in
securities market^
resu 11, o # -
frequently vt sharp
J
ri»e in the rate bid for ca ll money in replacement o f the loans called
fo r payment.
RATES ARB DETERMINED BY THE OPERATION OF THE
OF'supply AND DEMAND,~
fcfai.iliw|,11 h n ri>i-'crvh&~TWJ!G~iA
cause o f fluctuations and,
i-he underlying
o f increases in ca ll money rates
is the unescapable operation o f the la?/ o f supply and demand.
In other
words, as the supply o f loanable funds diminishes in proportion to the
icolume o f the demand, the rate for colla teral demand loans inevitably
increases.
in the case
o f the fe iiy borrowings o f cal l money—to v;hich the abnormal hi eh
ana
low rates apply and which represent but a comparatively in significant
j
from the'Unctassified / Declassified Holdings of the National Archives
DECLASSIFIED ■
Authority 1% 0
-
iD^O I
11-
part ©f the total outstanding loans— other factors, incidental to the
temporary ciruumstances and conditions of the market, tend in times of
stress to greater fluctuations in rates than result from the more nor-
aal operation of the law
reflected in the renewal rate for the
greater volume of the outstanding call loans.
The renewal rate is the
real barometer of^K^^^arket conditio^and ite fluctuations throughout
the longer periods are the natural result of the relation between the
amount of the loanable funds and the amount of the demand.
In other
words high renewal rates are due to the scarcity of credit, which results
in part from the prior satisfaction of the requirements of the commercial
community and in part from aiwh other temporary factors me may be injected
from time to time^
Amhrfl
^
depletion of bank
reserves resulting either or both from credit expansion or loss of reserves
through gold export, speculation in commodities and real estate, and smL*«
of commercial transactions incidental to slow or interrupted
transportation.
GOMHERCIAL RATES
The operation of the law of supply and demand is equally
ARE SIMILARLY AHD
INDEPEHDEIffLY
DETERMINED
effective in determining the rate for commercial loans and all other
borrowings.
In fact, rates for commercial loans and rates for col
lateral call loans have
a common root in the law of supply and demand,
Reproduced from the Unclassified I Declassified Holdings of the National Archives
DECLASSIFIED
j
I Authority
-
¥• 0 (0 ^ 0
12 -
and the conditions which a ffe ct one, in the main a ffect the other, a l
though not in like degree, as is demonstrated by the far wider fluctua
tion o f ca ll rates and the higher points to which they go.
Ii^ahniil4
pxsaaad, rates for c a ll money do not determine and but sligh tly influence,
i f at. a ll , the rates on commercial borrowings.
Ab
(
is the universal custom o f the banks, jPWBl to satisfy the commercial needs
A f"'»
)
0
o f their customers.
n~itilirf] 11y
"'
f* i
d»uioa.
Nofr-oftly the
4^
>v,,
the leiA/tr-of mgB'b ato-tors
th"4, Ann
g W-fcaW* ,
*■■
..tnrftih-itfrrm..t,h»iir
m i 4—fm»ti4K>rTPfnT*o
lAmi*
x*-n /
the resources o f the banks mainly come from com- ^
w v --
mereial customers,
0JV.4,
us £..#-Av*/
^
rt
frrr1"rtmnfirrni«1 »^^-on)mo- ■
buteffifee self-in terest
compels a preference in favor o f il&. commercial borrowers, since
fa ilu re to grant them reasonable accommodation would induce them to witht At
draw their deposits .and so reduce
a.«h the
i-w./l-i
a b ility to do
fs
b u s i n e s s .— 4 4 . ahauM a.Aao b'0'i>>frh*d.
o f its l>br'I^W^^7,
t»a
1
r c - .o r
....a .i..P ^ ......,
^ ^
,
/,v
■^
j
Reproduced from the Unclassified I Declassified Holdings of the National Archives
DECLASSIFIED
|Authority 1%
-
0 (P^Q I
13-
£lt.iiii*iiwmni p&|"er"lwMdflTail bwiuidiicountgd
A.0..0 §in*ml-ruftty thar rfrrrr| nrm-ii
n f t r jp
L
f
t ,h o
c
i d b i h it w I n
f
a
T i- r m
r f f f t f lt r r n ^
11 j w n r .f i f r o n n
m f i fc ^
d ir e c t^ l y
hwrt/the money of the banks and trust compa ies com
prises by far the greater proportion of money loaned on the securities
market*
£tn examination of the prevailing rates on commercial peper at
times when the call money market is particularly strained ve>r4fieer»^fag
wiuui £iry"'uf Win .
»Wfce»ettt that there ie little <Ma.. tm causal relation
between the rates for call money and those on cominercial loans.
Ex
hibits Ifos. 1 and 2, showing respectively the rates for call money on
«
M r»A«~'
Y
the
took Exchange during the years 1906-1919 and the rates for commer
cial paper in New York for the period from 1915 to 1920, are attached.
P0S8IBJLIT1FS 0F_CHANGEIN THE CONDITIONS AND METHODS OF THE CALL MONEY
MARKET. ~
So long as collateral call loans are made under prevailing
£1BIIRconditions it would seem impossible to alter the present situation, be
cause of the impracticability,,
sj£», of altering the underlying
cause of high rates, which, in the last analysis, is simply the excess
of demand over supply.
DECLASSIFIED
Reproduced from the Unclassified I Declassified Holdings of the National Archives
&0 (Q5Q I
|Authority
-14-
An attempt to control the rates for call loans by the establish—
raent of
arbitrary limits at a low level, without the abil
ity to modify the natural causes which operate to increase rates, would
be distinctly undesirable and dangerous, for the reason that up to the
point where the nrti fi tiH-1 rate would limit, the supply of new money,
/)
*1-/r'l , .
speculation and expansion might proceed unchecked and the natural M*4*s
of correction or regulation would not j & m * ftfr-T-f*.
In other words,
highjpK rates and the ever-present possibility of higher rates are a
deterrent to over-speculation and undue expansion of credit.
On the
other hand, should the supply of money available at the fixed maximum
rate become exhausted, iic h liquidation would suddenly be forced, because
the demands for additional accommodation for the consummation of commit
ments already made cauld not be met.
The effect of such liquidation
would be to embarrass investors in securities, and also it should be
A-
^
noted, dealers and merchants in commodities as well.
As an example
of the latter, the case might be cited of a commitment to purchase a
round amount of cotton on a certain day.
Many of the houses ofi the
Cotton Exchange are also members of the Stock Exchange and frequently
borrow very largely on the Stock Exchange against investment securities
to provide the furids for settling their transactions in cotton.
If,
DECLASSIFIED
i
Reproduced from the Unclassified/Declassified Holdings of the National Archives
j Authority -K
0 10 ^ 0 I
-15-
therefore, when an important cotton settlement was imminent, borrowings
on securities could not be availed of, the cotton transaction could not
be consummated and a drastic liquidation through sale either of securi
ties or of the cotton might be required to avoid default.
Similar con
sequences might obtain in the cases of transactions by members of other
commodity ftxoh&nges who are also members of the Stock Exchange and have
recourse to the call money market.
.
______
THE
9SSS OF ¥&Ef GALL
HONEY MARKET
lofcki.nrr in
- i - --------------------------------------------- ^
■
^
■
a
. T T ^
1 .T r .1 n T |.r
r
T
||
| [ | |,T T T T 1 T ,
1 n
n ..T | | j
j
|||) p | | ) | J
| | j ( ||||i
J J L j
aiau w 'w m s nm % 'm H * m [ b y iniimi mux
T 4,
*
r
i i ... iTiriiiii)
mu i 111 in.... y\ 11 m m | i i m ..... n ......... .—
.
~rTr)
A call money market is
indispensable to every i\0SS\i"i>1 financial center.
It serves not only
as an outlet for the employment of funds temporarily idle, but a large
volume of call and short time money is essential to the successful and
J
economic^conduct 6f the business of the country.
It is particularly
essential to the international and domestic commercial business, and the di-
vfcr&ion of the use of the major portion of such money to the securities
markets is not in accordance with sound banking principle.
-
Tr rriiI....
j„ inj; u lm u f
,
-n
i,
■
r
In
K
ife i’g-nafe
J
markets the
L J
*
'
DECLASSIFIED
Reproduced from the Unclassified I Declassified Holdings of the National Archives
Authority 1%
-
0 (O^O j
10-
reverse is true, as their call money is based principally on commercial
paper
upon which realization can be
had at the centra} bank, at a price, in case of need.
We have seen
that in this country call loans on securities lack this essential qual-
ity of liquidity required for quick and certain realization, and that *l*pr
^
"Kcrvf
fact has been more generally taken into consideration by our lenders.
safe and successful divorce in this country of the use of call
money from its dependence upon investment securities as a basis reauires
•
' *
t-v*.
hnwatTo^y careful study, Hat •ii]ir*,"uf the present methods of tne securities
^
J < s J
market, u»i. m u * 11** p a S T m ....... .......... ^
TERM SETTLEMENTS
The achievement of this end probably depends upon the success
ful development of a plan for term settlements of the balances resulting
from operation! on the Stock Exchange, whic,h mtgiit bu adopted in lieu of
the present method of daily settlements.
The principal effect of such
a change of the method of settlements would be to relieve the call money
market from the necessities of the securities market and release funds
now used in collateral call loans based on investment securities for
employment in call loans based on the collateral of the more liquid
securities, commercial paper and short term Government paper, generally
recognized abroad as the preferred bases for demand loans*
from thiB
i
Reproduced from the Unclassified I Declassified Holdings of the National Archives
w
H i L L A a a U lJ iiU
DECLASSIFIED
|Authority 1%0
(O^O j
-1 7
change,
develop.
l
a
»■»a. broader diecouiit market would naturally
Under term settlements the borrowing required by the secur
ities market ?fould be on the basis of short time accommodation, i. e.
for the term between settlements, whether they were weekly, fortnightly
or at other intervals.
Agitation for the improvement of the present method of settle-
ment of stock exchange contractr has extended over some years and as the
result of extensive studies and deliberations of officers and members
of the New York Stock Exchange, as well as bankers, an important step has
been taken to provide enlarged clearing facilities through the organization
of a new corporation known as the Stock Clearing Corporation, which is ex-
pected to begin operations in
A. general descrip-
tion of the purposes and contemplated operations of the corporation is
contained in the pamphlet attached hereto as Exhibit No. 3.
It n»i.ll ferer
itfrntrrrH- Vtant *Jhe functions of this corporation include providing facili
ties for clearing contracts between members, for the receipt and delivery
of securities between members and banks, trust companies and others, and
for the clearing of collateral call loans.
It is not asserted or expected
that the institution of these operations will materially affect either the amount
Reproduced from the Unclassified / Declassified Holdings of the National Archives
i
DECLASSIFIED
I Authority £ 0 (0?Q
I
-18-
of money loaned from one day to another on the call money market or the
rates of such loans, but it is expected that it will operate materially
to decrease the amount of bank certifications on day loans, xhich the
present practice requires in the interval between ifee- paying Jt# one
call loan and isher replacing it with another on the same day.
It
should be noted that the mechanism afforded by the corporation is an
indispensable.prerequisite to the establishment of a system of term
settlements.
The more recent and definite development toward the substi
tution of term settlements for the present system of daily settlements
may be said to have had its ince|)tion in the action of the American
Acceptance Council at its annual meeting on December 4, 1919.
At that
time, following the observations of the Hon. Paul M. Warburg, chairman
of the Executive Committee and Committee on Policy and Operations, in
which the defects of our present system! were referred to, the following
resolution ?fas adopted:
"Whereas, The present method of daily stock exchange
settlements, with its dominating and often unsettling
effect on the call money market, influences adversely
the development of a wide and healthy discount market
in the United Statesj
^Resolved, That the Chairman of the Executive Commit
tee be authorised to appoint a committee consisting
of members of the Executive Committee and other indi
viduals to study the advisability, ways and means of
U
J L L L A f l a U IH iJJ
DECLASSIFIED
I
Reproduced from the Unclassified / Declassified Holdings of the National Archives
I Authority 1%0 f Q S j Q
j
19-
-
modifying the present system of settlements on
the Ne^r York Stock Exchange and substituting there
for some system of periodical settlement^with power
to take such steps as may seem advisable in the case."
A copy of the annual report of the American Acceptance Council
is appended hereto as Exhibit 5* in which the resolution appears on page
5, and the report of the chairman of the Executive Committee above re
ferred to appears on pages 16 to 27, inclusive.
The committee
skt
provided for was appointed and 2± held two
extended conferences in which the problem was fully discussed, both from
the point of view of the banks and of the Stock Exchange.
For illustra
tion of the subject matter of the discussion there is attached hereto as
Exhibit 6 a detailed report compiled by one of the members of the com
mittee, Mr. Samuel F. Streit, chairman of the Committee on Clearing House
of the Stock Exchange, describing the term settlement operations in London
and on the European continent, which presently will be published by the
Americai Acceptance Council
(Am*
copy of fcfcra-fe report la
,
T
h
e
r
e
are also attached, as Exhibits
7 and 8 respectively, two other publications of the American Acceptance
Council, wAcceptance Corporations,n by F. Abbott Goodhue, vice president
of the First National Bank of Boston, Mass., and nThe Acceptance as the
Basis of the American Discount Market," by John 3. Rovsnsky, vice president
Reproduced from the Unclassified I Declassified Holdings of the National Archives
1
DECLASSIFIED
Authority f j O
-
(0 ^ 0
I
20-
of the National Bank of Commerce, New York, in which on pages 14 and 22
respectively, the necessity for term settlements as a means of relieving
the call money market from the necessities of the securities market and as
a precedent to a broad and stable discount market is discussed.
The members of the committee have unanimously expressed the
opinion that the adoption of a term settlement by the Stock Exchange would
offer advantages in that it would eliminate duplication of the handling of
securities and in payments.
The committee holds, however, that, inasmuch
as the adoption of a term settlement by the Exchange would involve changes
of great importance, both to banks and to members of the Exchange, it will
require the most careful study of the subject by the committee, and in any
case the term settlement cannot be put into operation until the new system
of daily Stock Exchange settlements thi'ough the Stock Clearing Corporation ,
above referred to, has been perfected and in practical operation for s
reasonable time.
Reproduced from the Unclassified / Declassified Holdings of the National Archives
!
DECLASSIFIED
i Authority 1^.
EXHIBIT 1; Showing
0 (Q5Q I
from a Reliable Source, the Hipffu Low and Average
Rates for Gall Money on the Stock E-xchan^e. Arranged by Weeks during the Years.
1906 to 1919:
V
Reproduced from the Unclassified I Declassified Holdings of the National Archives
i
DECLASSIFIED
I Authority
IIHXBIT 2 :
f-.Q (P5Q I
;
i
Showing the Pates for Goranercial °aper In Mew York by
for the
Reproduced from the Unclassified I Declassified Holdings of the National Archives
i
DECLASSIFIED
I Authority £
EXHIBIT 3:
0 (0^0
General Description of the Stock Clearing Corporation of Hew York
Reproduced from the Unclassified / Declassified Holdings of the National Archives
DECLASSIFIED
Authority
EXHIBIT 4 :
(iQ (O^Q j
Peport o f Mr. Samuel F. S t r a i t . Chairman o f the Committee on C learin g
House o f the Stock Exchange. d escribin g .the..term .asttlemant QQera.tiQ.ns in .London and
continental.-cantflEfl. published by ..the American Acceptance ■Qoanc.il^ .witlL-a CoreraQxd—
submit.tad by the committee o f bankers and Stock Exchange Members> under tiia c m i i m n ship o f the Hon. -:Jau l ,M. Warburg, which is considering the question or the inaugura
tion o f term settlem ents on the lew York. a took Exchange:
R ep rod uced from th e U ncla ssifie d / D ecla ssified H oldings o f the N ational A rch ive s
)
D E C L A S S IF IE D
A u th o r ity &
0
( 0
^ 0
;
(
j
EXHIBITS 5. 6. and 7:_
EXHIBIT 5 :
Annual report o f the American Acceptance C ouncil,
Dec ember 4* 1919, report o f chairman o f the Executive Committee,
recommending term settlem ents, pages 16 to 27 in c lu s iv e ; resolu
tio n au th o rizin g tne appointment o f comraitteo to study a d v i s a b i li
ty , ways and means o f modifying the present system o f settlem ents,
e t c ., and statement o f the personnel o f the committee appointed,
/
- yC-'ir"*- '1' " ' Xf
page 5.
EXHIBIT 6 : pamphlet e n t it le d "Acceptance C orporation s'’, snowing on
Page 14 the n ecessity fo r term settlements as a preceuent to a suc
cess fu l aiscount market.
EXHIBIT 7 ;
pamphlet e n t it le d "The Acceptance as the Ba^is o f the
American lisc o u n t Market, n discu ssin g on Page 22 the n ecessity fo r
term settlem ents as a precedent to a successfu l discount market.
DECLASSIFIED
' ■R§prcS}tfced"from the Unclassified I Declassified Holdings of the National Archives
Authority& Q ( 0 ^ 0
Hon, u. P, >r. Harding,
Jovernor,
federal -Reserve -3oard,
Washington, D, 0.
V.iy dear iovornor Harding:
Your leuter of the 24th instant
.3
received in the absence o f Sena
tor '-Wen and w ill bo brought to. his
attention upon his return to Wash
ington,
Yours very tru ly ,
I
DECLASSIFIED
Reproduced from the Unclassified I Declassified Holdings of the National Archives
Authority ^ 0
fO ^ O
a *** Somtor Owom
\
t kup lo ttor
m M r
roooflprt* and X t
o
g
y
o
u
In
pof»oa
md* therein*
It £o#e not onpftsr tfeusi M ft t r fcsalBi In
t&o City of Bto* fork
&ay aentrol t u t tfc® ~<yv<*rn*«at
o f tha ttoe^ ME&usnffje, and * • you know, aotthor ttui
Jte^orr© Board nor tfco JWU»r»X Sooorvo teak lut*
way Jurltilctlon in tLo ta^tt#** - lotoa
t<y in Vdatnent s*euritl9» of any l&xsd axh» I n l l f l t t f fo r i i * eonsxtt at » HotaraS, Btnoanr# b£&ife$ q**isi% fhao* w m f ii
%y ra»t** m$. bands of th* Tfaitod St&toa, 9io laa* o#
lb * fork *hi4k ft* tfce 1«&%X r*t* o f lntdtast la ffcat
ctito at
and ici39«8 .» moat rigid penalty fo r
violation, iy p tm i-H m fv** th« forfeit's** of bolfe tho
prliseil^i a d lxttom t* wle® an «ts«rlle R o f demand noto*
of $6»0QC or 8Kw»#?fcidh. im socortA by oelt&totssi* and
iapo*« m lim itation «fcatw#r tapoa M » r o f fe lt ®l*to»
%m Sfcrvinod 3tv£iite» of *ht Hal tod 3tat««
a natlocua t u i to d b r g i mtos o f ia e t m l
powdtttd ly feo X*wt o f tfe* stota in vfctcfo it It
io a le iM
I 4hftll fc® slssd to <U«aua» t&® qnostioii of
4';« m u I m lM at tbft I b t o t l Booorvo festal wife you at
aqr tin * wbttb M y bo flNtaa&ly ow ytn lw t .
f**y truly yoor»f
OoTomor.
Son» BMmhHI W Ovoa*
3 b it*& Sto&oo Svm to,
feahtngton* B* C«
ft'^rbdilc&d from tile Unclassified / Declassified Holdings of the National Archives
DECLASSIFIED
Authority
fQ 5 * Q f
__—— ---- fVut\
r '- 'm
OWEN, OKLAHOM
A.
CHAIRMAN.
'H i t n i l e b P i e t i e s . J S y c r x c tle ,
;***“
'
C O M M IT T E E O N F IV E C IV IL IZ E D T R IB E S O F IN D IA N S .
January 17, IS 20
r e c e iv e
JA.#ti)f02O
oprig^Qp
t h e cov/e ^ nqij.
Mon. V/. P. Gr. Harding, Gi-overnor,
F ederal Reserve Board, Washington,
My dear Governor Harding:
My atten tio n has been c a lle d to the gradual r a is e of the in
t e r e s t ra tes through the Fed eral Reserve Board.
I
agree that the sp e cu lativ e s p i r i t on the Stock Exchange has
( been going too f a r but a rule could be imposed re q u irin g the banks
to demand a la rg e r amount o f c o l la t e r a l and check the speculative
fe v e r th ere.
When the ra te is ra is e d by the Federal Reserve banks i t has
i
the e f f e c t o f ra is in g the rate on every commercial tran sactio n in
the country, which I think is very much aga in st the in te re s ts o f
the producing element o f the Nation.
I think the jumping o f the
ra tes backward and forw ard by the banks on c a l l loans is merely
a mechanism by which the weak sp e cu lativ e element i s separated
from i t s money and I very u rgen tly p ro test again st this p ra c tic e
and appeal to the Boar4 to put a stop to high rates on these c a l l
loans.
The Stock Exchange ought to be required to have bi-w eek ly
. settlem ents as in London and have a fix e d rate o f in te r e s t that
^ should only vary through reasonable margins and without v io len ce .
Your s re s p e c t fu lly ,
n x //!m
'
Reproduced from the Unclassified / Declassified Holdings of the National Archives
DECLASSIFIED
! Authority
&.0 (0^0 (
6" *>
Cup
YJ
November 17 > 1919*
x~i 727
My dear Senator:
Receipt is acknowledged of your le t t e r of the lUth instant*
The Federal Reserve Act is intended fo r the "benefit of commerce
and in du stry and not fo r the stim ulation of the investment market or of
specu lative movements. The short t i t l e of the Act re ad s, as fo llo w s :
"An Act To provide fo r the establishm ent of Federal Reserve Banks,
to fu rn is h an e la s t ic currency, to a ffo r d means of rediscounting
commercial paper, to e s t a b lis h a more e ffe c t iv e supervision of bank
ing in the United S tate s, and fo r other purposes*0 Section 13 of
the Act provides in p a rt that Federal Reserve Banks may discount
notes, d r a ft s , and b i l l s of exchange a r is in g out of actu al commercial
tran saction s; that i s , nofces> d r a ft s , and b i l l s of exchange issued
or drawn f o r a g r ic u lt u r a l, in d u s t r ia l, or commercial purposes, or the
proceeds of which have been used, or are to be used, fo r such purposes*
I t provides fu rth e r that nothing contained in the Act s h a ll be con
strued to p ro h ib it such notes, d r a ft s , and b i l l s of exchange, secured
b y stap le a g r ic u lt u r a l products, or other goods, wares, or merchandise
from b ein g e l i g i b l e f o r such discount; "b u t such d e fin it io n s h a ll not
include notes, d r a ft s , or b i l l s covering merely investments or issued
or drawn fo r the purpose of carry in g or trading in stocks, bonds, or
other investment s e c u r it ie s , except bonds and notes of the Government
of the United States” The Board has re p ea ted ly c a lle d atten tion to the fa c t that resources
obtained from the Federal Reserve Banks should not be used f o r specula
tiv e purposes, and at various times when there has been unusual specula
tiv e a c t iv it y i t has issued p u blic warnings as to the bad e ffe c t of
such a c t iv i t ie s upon the banking situ a tio n .
The f i r s t warning of th is
kind was issued as long ago as October, 1915» and the warning has been
repeated on se v e ra l occasions since that date when conditions made i t
necessary.
On June 10, 1919i the Board made p u b lic a le t t e r , which i t had
addressed to a l l Federal Reserve Agents, reading as fo llo w s :
"The Federal Reserve Boara is concerned over the e x is tin g
tendency towards excessive sp ecu latio n , and while o r d in a r ily
th is could be correetea b y an aavance in discount rates at the
F ed eral Reserve Banks, iz is not p ra c tic a b le to apply th is check
at th is time because of Government financing#
By fa r the la rg e r
Reproduced from the Unclassified I Declassified Holdings of the National Archives
DECLASSIFIED
Authority f%.Q (Q S > Q j
X-1727
- 2 part of the invested assets of Federal Reserve Banks consists of
paper secured by Government obligatio n s, and the Board is anxious
to get some information on which i t can form an estimate as to
the extent of member "bank borrowings on Government c o lla te r a l made
for purposes other than fo r carrying customers who have purchased
Liberty Bonds on account, or other than for purely commercial
purposes.”
This le tte r was sent out for the purpose of ascertaining to what extent
Government obligations were being used to secure loans from Federal Reserve
Banks fo r other than commercial purposes or for carrying subscriptions.
In i t s monthly publication, the Federal Reserve B u lletin , the Board
has ca lle d attention repeatedly since that date to the dangerous specula
tiv e tendencies which have been prevalent*
In a printed statement during the summer, the Board made the sp ecific
announcement that i t would not sanction any p o licy which would require the
Federal Reserve Banks to withhold cre d its demanded by cOEmerce ana industry
for the processes of production and d istrib u tio n in order to enable member
banks to furnish cheap money for speculative purposes.
In ordinary circumstances and normal times one check would have been
to advance discount rates, but owing to the fa c t that the Government has
sold over twenty-one b i llio n dollars of Liberty Bonds and Victory Notes,
many of which secu ritie s have been sold to persons who were unable to pay
for them in f u l l but were obliged to pay for them in instalments out of
savings or accrued incomes, i t was f e l t that an advance in the discount rate
on notes secured by Government obligations should, so far as possible, be
avoided.
The speculative movement continued; i t s demands on the banks for
credit coming on top of commercial requirements, of the seasonal crop moving
demand, and of demands arisin g out of the unusual congestion of export
coroir.odities at ports
<;o Wc ,;ci. .ys in transportation. As a conse
quence of. these conui u ic is , tne reserves of the Feaerrl Reserve Banj&s oe^an
to declin e, and those of the Federal Reserve Ban*, of New York, in particu
lar, dropped to such an extent chat the Boaru, about two we iks ago, approved
an increase in discount rates of that in stitu tio n averaging about one-naif
of one per cent. A ll other Feaerai Reserve Banks, shortly afterwards,
expressed the desire to put into e f f e c t a similar advance in their rates,
which the Boara approved.
The Federal Reserve Baiuc of New YorE., on Novenxer 2 nd, the date on
which tne advance in i t s rates was maue public, issued the following state
ment supplementing the repeated warnings of the Board:
11 Tne reason for the advance in rates announced today by the
Federal Reserve Ban^c of New Yorit is ’ the evidence that some part
of tne great volur.e of cr e d it, resu ltin g from both Government
and private borrowing, waich war finance required, as i t is released
from tiiLe to time from uovernr'.ent needs, is oein^ diverted to
speculative employment raw er than to reduction of ban*, loans.
As the to ta l volume of tne Government *s loans is now in course
of reduction corresponding reductions in ban.«: loans*and deposits
should be made in order to insure an orderly return of normal
cre d it conditions,”
«otwithstanding tnis n o tice, a c t i v i t i e s on the exchanges continued
and t .ie reserves of the Feuer:.i Reserve Baniv s t i l l declined* During the
weeiC ending November iich che Federal Reserve Buard sola oo other Feaer^l
Reproduced from the Unclassified / Declassified Holdings of the National Archives
'
D E C L A S S IF IE D
I A u t h o r i t y iO ^ Q
I
XrX7c-,
Reserve Banks ninety m illion d ollars of acceptances for account of the
Federal Reserve Bank of New York, but in spite of th is action the reserves
of the New York hank f e l l to fo r ty per cent*
In these circumstances, in
order to prevent further expansion, i t became necessary to c a l l the
attention of the large rediscounting bani£s to the situation*
The high rates for c a l l money which have prevailed continuously for
the past two weeks and in term ittently for several months past, were in
themselves very clear indication of the strained position into vtfiich the
unbridled speculation had thrown the stock market and rendered a readjust
ment inevitable unless the resources of the Federal Reserve Banks were to
be in d ir e c tly drawn upon for stock market purposes. The public has had ample
notice of the Board*s policy*
You are so fam iliar with the Federal Reserve Act that i t is hardly
necessary to c a ll your attention to that paragraph of Section 4 , which treats
of the duties of the board of directors of a Federal Reserve Bank and which
provides that lfSaid board sh a ll administer the a ffa irs of said bank f a i r l y
and im partially and without discrimination in favor of or against any
member bank or banks and sh a ll, subject to the provision of law and the
orders of the Federal Reserve Board, extend to each member bank such d is
counts, advancements and accommodations as may be s a fe ly and reasonably made
with due regard for the claims and demands of other member banks” * This
would, of course, afford means for a s t r i c t rationing of credits should
such an extreme course ever become necessary. I t is interesting to note
that there no longer ex ists in the mind of the public or in fa c t a connection
between c a l l money rates and the commercial jmper marked, and i t must be
g ra tify in g to a l l those interested' in sound banking methods that the events
of the past week have had no e ffe c t upon the market for commercial paper#
Very tru ly yours,
Governor.
Hon. R.L. Uwen,
United States Senate*
@FedFRASER