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Reproduced from the Unclassified I Declassified Holdings of the National Archives I l J J i i C I - i A a M r liLD I Authority 1% 0 (0501 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. R e p r o d u c e d fro m th e U n c la s s ifie d / D e c la s s ifie d H o ld in g s o f the N a tio n a l A rc h iv e s j l^ it/C L A S S IF IE D ! 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N |rfU I % M • « tl| » I « l U m Is « i ajporant ttw afrn a a Ma #f «*& l a ■taagr* fit* aaunmp f'wr tfeti |# tkaA tittle msriMfI !• toalX imI a « l u U « m **& m « u l i «fclU * g*«i xoqr > « D m , I n Umi pnmmmw tdf p X ^ flM g n k fn toy l s M ^ l u g y i f c l i i t I j u r ^ i ' m m m k Is t f I i 4^ U M qr oralX«kI«9 fiM tha* Uim« w m d »x*mA tfe# OM 8 t«ok B*ftutopi d iN H ii Bin* tJMr« la an Alt^uathcjr artlflslaX mp#crt giTM i t tiit H M 7 Mtfisfllf # f if tiMi fpAiiHiQr 3w i •f nviObr a d iM u d aum ■w# ao I m w w fM f* tar tlw *$ m t aL r *m% ■tmiwwf* ^ U b i s to«l&g «Ik«r«A t « « Reproduced from the Unclassified ' Declassified Holdings of trie Navona: ."/chives UH^JLAo^IJr I Cj U Authority £ Q f Q S 'Q I M [jO Dear S ir :Referring to Governor Hardings letter of f 4arch 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 u.c unudbbiMea / ueciassmea Holdings of the National Archives D E C L A S S IF IE D Authority 0 (Q S Q j r 4 J V Mutti ft 1$%<X ( f I mat M $ &-* r* & $ * ll&t&rnm to w r totoshom aotnr*nation thla mmirjg, pm h&rm rltb I * latter iki.-Si I &d4xt»«s#d to Seerata.fy Sow*ton m Vftbrttaiy 3.9 Flto*# * * t r a m tferi* s&idb m & la im flnl&ed ifa m y m wltfe. i t * I & y< will b* sj& to aaad m In the w jr '& * «p# m I# m flitoft * driift ©f proi>o«i9d r«pljr to tata/te l*#©Xuii<*t w tiidh ^||_ M f [ of itxlcfe m* taroMttttd to ye* ovor «j» tels$ioj*s» mt§ jsoming* ¥ & v f tx u l? you rat (tammor* j$r* Pt#r** Ja?t Yit&tur&l Se#*rV4i 4$®atf M m d B«»#rva B^nkf Mm Y fc. City* e ox Reproduced from the Unclassified I Declassified Holdings of the National Archives Authority COM ERCIAL PAPER IK E M M 1916 1915 ¥/eek Ending ilar. 6 " 13 " 20 " 27 Apr. 3 " 10 " 17 " 24 May 1 " 8 " 15 " 22 " 29 June 5 • ’ 12 " 19 " 26 July 3 " 10 n 17 " 24 " 31 Aug. 7 " 14 " 21 ” 28 S ep t.4 « 11 1 18 1 ” 25 CXft. 2 " 9 " 16 " 23 " 30 Nov. 6 * 13 * " Week Rate Ending Jan. 1 tt 1 » » 8 15 » 22 ♦ t 29 t Feb. 5 t t 5 t 12 t » 19 t " 26 3J-4 Mttr. 4 » 11 * 3J--4 it 18 3 f4 M 25 3^-4 3b-4 AJJr. 1 t t 3'2*"4 8 t 15 t 3-|-4 tt 22 3 §-4 » 29 3%-4 lay 6 n 13 4 -4 H 13 3^-4 tt 20 3I --4 » 27 t 3|-4 June 3 3^-4 tt 3^-4 3 it 10 3 ^ -4 tt 17 3 ^ -4 t 3 i - 4 ; t 17 it 24 3 § -4 1 July 1 3$***4 3J-4 3^-4 4-4 3^-4 3^-4 3 | -4 3| -4 3^-4 20 " 27 Dec. 4 " 11 " 11 " " " " " 18 18 25 31 31 1917 Week Ending T j Rate iO ^ O YO K R I / 1918 Week Ending Week Ending Rate Week Ending Rate 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 H w o fork Stock Exchange and substituting therefor som system of periodical e 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 m bers of the Conralttee have unanimously expressed the opinion em 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 m bers of the sxohange em 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 Com ittee inspected the new quarters and the machinery of the m 3to( k (Hearing Corporation and expressed itm greatly Impressed by the C thoughtfulness and vision with which evexy detail of the new machinery haA been t o & t out. tmi the Committee received from one of its members, M Sam r* uel * . 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 m bara of the em American Aoaeptanoe Counoil, the banks and banking and Stock sxohange houses. fha Ooram ittaa 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 I , S ja m m m v m w M m ) C . CJSDDSS J G 2 3 MC HA MI2 C U R H W. H. POHfSR m . h. i m i o K J O T f . S01CT3KT l SDC7ABD alUJlBSC® S im m * r» sTEEIT £. 7. H. P U M. WB E B , Ohaliman. AL a BTG 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.S J 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 the N ew Y ork Stock Exchange by comparing .n 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. ^ q c 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 \ KO F IOM M E S * F IC E B R OV AI 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 O BO UT H 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 » . Fi s c a l a g e n 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 BoardT reply?to the following resolution adopted s 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; ’U SO E that the Federal Beserve Board SE LV D 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 & lim ita tio n is fo 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 T the oy 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 *Soc. 379, I nt crest /on advances on co llateral security,, 1 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 w hich m be taken. ay 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«i.it f ^ m i ._» * u _■ ? T f V -r 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\ Ycrl: glee*: Jr:c.r.:-.0o 7 invccnront se t.icse 2a are * ‘.ci.lt .V interest rates cm tliese .o loans, as on other classes cf lo:.ns, a *o on the basis oi a rate w 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 zr r ; o. r 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 ; 1the money post” where through various 1 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 Reproduced from the Unclassified I Declassified Holdings of the National Archives Authorityf j O (0 * 5 0 I X -1 8 7 5 . 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. C U SA A SE T£FE ?M B S H C LI, M M Y RA3SS. Q G IB B I? A OB 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 • for otter u se. r 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 Reproduced from the Unclassified I Declassified Holdings of the National Archives | D E C L A S S IF IE D ! Authority 1% 0 (0501 -1875 ~4 > 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 Reproduced from the Unclassified I Declassified Holdings of the National Archives Authority ^ 0 fO ? Q I X-187&. 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 D and* em 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 Reproduced from the Unclassified I Declassified Holdings of the National Archives j DJECJLASSIFIED Authority 1 ^ 0 f Q 5" 0 I &-1875 * & * * 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,< Irnow as the renewal rate. n The daily borrowings, either in replace ment of loans called for payment or representing new money borrowed, are m ade at rates which may or m not be the sam as the renewal ay e rate and which frequently vary during the sam daye Turning 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 Reproduced from the Unclassified I Declassified Holdings of the National Archives A uthority fO ^O I X-1875 « 7 > $ 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 m uch 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 DECLASSIFIED Reproduced from the Unclassified / Declassified Holdings of the National Archives Authority f j O fO ^ Q I a7* . 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 T E OPERATION H O T E L&7 O SUPHT AKD D M K . F H F B AD 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 DECLASSIFIED Reproduced from the Unclassified I Declassified Holdings of the National Archives A u t h o r it y lO ^ O I X-1875. 9 fiends diminishes in proportion to the volume cE the dens.nl, the l 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* Reproduced from the Unclassified / Declassified Holdings of the National Archives j IJJi-CLAaMFIED I Authority 0 f0 ^0 I X -I S 7 5 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. Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority fO ^ O I X-1875 POSSIBILITIES OF C AN E IN TH CONDITIONS AND M ODS H G E ETH OF TH CALL M N MAMET E O EY 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 Reproduced from the Unclassified I Declassified Holdings of the National Archives j DECLASSIFIED I Authority ^ 0 fO ^ Q j -1 6 7 : 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* TH IMPOBl'MCE 0? A "CALL M E ONEY" M ARKET 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 Reproduced from the Unclassified I Declassified Holdings of the National Archives j liliiCLAaMFIED ! Authority 1% 0 fO^O I x -1 8 7 5 13 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. W have seen that in th is country c a l l .'loans on e 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 E y.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 Reproduced from the Unclassified / Declassified Holdings of the National Archives j D E C L A S S IF IE D |Authority 1% 0 fO ^ Q I Z -1 6 /Z -Ik * 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 Reproduced from the Unclassified I Declassified Holdings of the National Archives j DECLASSIFIED I Authority 1% 0 fO^O I X-1875 -15- 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- Unclassified / Declassified Holdings of the National Archives DECLASSIFIED Authority , ( Q ’S Q I X-1S75 lo For illustration of the subject matter of the discussion there s attached hereto as Exhibit N o* , 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 Corporation1 1 by F. Abbott Goodhue, Vioe President cf tie First National B ank: xf Boston, Mass. , and n The Acceptance as the Basis of the American Discount Market”, by John E. Rovensky, Vice President of the National B^rik of Commerce, N York, in which on pages lb and 22 ew 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, Reproduced from the Unclassified / Declassified Holdings of the National Archives | D E C L A S S IF IE D | Authority £ Q ( 0 ? Q I X -IS 75 !■ 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 ;m d int?sroat m *h>it nta}-*, u * ar* rtttuirad to ub%t* thl* con Jit Ion1 * ' 1 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 Fabrtuay lfi» 1&-0* <l It * lil bo s»«n from toilets tfc& tho rcagfn ftt & t£ m tn h 'm * r t u on fastaftd l«tm» *aowr<<• g oellafeMtel mm a^r©xi^*tiily ths n **’^ r afto 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« tsh lag*! ru # -u£ infc^raat in a tfc is 6$* oimt*4ot rat#® 4tr» Muthori*«d# and ^xm^iw^'itl^ ttw $£ lireit*tlcn la eooa«ioiv«ny * *xo«*&»6« ^ C jlju 1 - t1 / / Vt'Y &'S Z ~ Reproduced from the Unclassified I Declassified Holdings of the National Archives j U H iC L A S M F IE D I Authority 1% 0 (Q5QI T m only f !».-«» Ld o*nt?*r lit % U octantry in h %’ th*»r$ i ■ r^ln* a oaII m m j *t of nation4 hs&ortmo* ia T rtr. City, w while tit® rmtm a’w*rgod lh**ts on e«*ll lornn aro fretn*mtly In »x«o#s at tim logoi mt*« ^lo>r .for cott^ero!.*! ? *ior# ttsy “ re not ml w 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** O 2) ruiw vide* th.it w;on adv^nae** of mrmy rojK4r.*t»lo on «h t<; -m m ia m4 m r% !«*»• thm $5,000 m & n cm wrohonae rmmiptn9 bill,a or 1 # l*r , e*rtiftattoo %* ’ .! of atook* «to*, or otHor n'i.'.atl tbl« imtn«*3tmtft .'% oolJ^ter.il, s i roeolvo aollftCt m comybnnntim **jy tot »v loh »4y.b« <. rat'4 trow * % th» partie* to «uoh trvinft^etiou The flection roatioS *^6# 115* Interest on coll*toral fommi lo mn of rot lata than flv# thm.% m doll &r*» d •Upon mdyfm&m of momy re^jyaldo on dm m to /in '*mm% not m id 1a«« tv 4i ft** dollar* upon worihoivMi r«oi^ ts, M li* of osrtiftoAto* of *to©v# 0f*rtifi©*t0* o 5 fi?>o,4t, hit ♦ * of »***«* o , bo*vi* or oth#r iv^ otlM e tnsini* mtn, ui Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority f i O f Q 5 *Q / ooll^torftl *«otarity for oach *,w& Im hI: roootvo or c o n tr a c t to roo*tvo .-a eol**ot m e o m p ^ m m tlm for mfeteg id s*ooh adranflw o w w o'h M t>» «ft^rw upon i4 tfts p«s*rtlo# to a c3 traMMOttoiw* wa Sootlon 201 %ha 2fcttfcSq$ &*»» t$antlc *1 In Vd^uuago w l& i Ssotlan 115 o& oiro (gaotod* .th* mho f-rotr&iioit I21 tho a4u of ooll&torml loam tg »o r trust ©omp«U<«. In tho G«ror/a Bualnaa* Ltm (£ l£rO§# Qu 3ftg 0oft*ol» I # *• k C * 30) thoro 1* iJ following gonor*l prosrirtio** 00 » iifco otauMotoirt h *o fflM#--^ « . J^toarooi maiiltfeM a *L jtik 9 u a a *± .m Aottatawl. .—gar 1tar. In »n aam heroaftor la whtah «A?.3m«a of raonay, r«f'*^$r o a&lo on ^ a d to m p -m m m t not loa^ %hm t i*<§ th m a &ol~ tiiftv n , < *tu rt 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 m oollntofAl o nowarlty for o o i r?$»-iymntt It *H*11 b?i Imfnl to raeolvo or uD • oontrsvt to roo?lvo a t? eolloot, a* comi^jmvtion for m *. lag to n. *uoh *Ar<«iQo«» ***y sn» to to «&r»o3 mpas in writing, to th* o y r*rtft«*to me &1 tr.vuraotlon^ Rational B inte Jet. Th* Hfctlo&al B n : Aat provisos tint ration**! totfe* a fe roo^ivo tod' ehwgo on m & lo rn or ilaoouttt Intoroot at tho v*t» **llo#»*t to tS t l*ut of y w tho St&to 1 territory or 4i*trlot w hor^ th* tank i# looaioA* fto <*£?:llo*»bl* j-drovloiofr- road* I "»*■» *»*• «> tnta-eit whlah m bo tak—. ar 422« Soo« sm * «* Jay oaaoftlatlon iM • fr rosary• a ^ ohai^ft «»i .«qt loefi or clltooimt mito* or nt Anrnotot b i l l tg of «lot>t,' lut^rimt i4t tho mto of io d fln o> or oth-ar fic k ig alloaoi V th# Jos»o of tlw i torritcfy or M etrict who** tho tantc i« looat#^* «n*t .no «soro» »;«c»pt tlmt v#w Is f t> l^«#o *ro a va of St^t# a itl^foront In Itelto^ -for of inm m o*w g^misod rndor StalM % tm *t tho riit# «o IM toA ab ill hm ?dlc«fod i .for m * <x53UUg*u org.:mi*-: 4 or oiclotii^ in ^ « Stata milor ' thin Tltlo* lfe#n m ##to lo flx » & by tho l^wo 0/ tha St^to or TorrltosT or &Utrlot9 w t,#^# roeol^ot roatnro f or -^r o$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 th« f«l<io# of «o«9i p tx rti'h im 9 *SXmmn%9 & t ».■«!« t -afi 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 31 ©all loans of not , laaa th«*n $ 5 t0 ) - ratea of intareat vrhich m -y b« in excess of those peiv '0 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 ‘v * c imd idiich* h«d- tha Board the requisite authority, would re .of 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 “ tha Federal Beserve £gm % in Ifew York, by 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 Ilw 1M* * & r mm ouly liRi.«rta«t ^ 1 *Nsaa Ism of thtt xm em l laik idii 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©~ <m previottft notice* soosirad b r tt» t g surma©* I*©# &t&^m a*& boa&s, #080r®i% fclios© wkicl* ior» &&at in <& tin t*a f fom * © ® ^ && * » -• ?&* i& fa m m t m % m m t m m a o &* © 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 p t t u imum® wMafe are ae > i;X iborc «£ the- stoote :.^aaaaf‘© m & th# m m y m fym tm m tiL m m ti3K tm 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$rt teisi&fcig £&re!$& fcaw end e&moia* «t iai Reproduced from the Unclassified I Declassified Holdings of the National Archives UJKCIjASSIFIED j Authority ^0 iO^O I 2m otjailartgr fc2 o loaofifelo b 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 Is t o t or tit# floor o f the ^r .H tone stooat :aaD iM at ow e^ sgo nonoy poot* titer* tteoogh varloiift broker* looovafete Ito&a or* o AhmA suS fetdo for to d s o** roc© trod* mm o# H btaslao®© is* dota* todtmm th* feu bo efti** 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 * S tho B 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 % i 00*221ta?y* iW 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 JU JfilJLA SSUJ fiD U 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 * S ft reftoraao* la tin mtXutloft to tha pnmmt MS* ratoa h © £ & 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 ratm mrfss&a aad «h© tatffcaatlaa t ^orela o f t?ic sra&oiw ' asr 3ySag ooonomic eoa&itloflas ntfaak in m iyiag & 0*©<*% o il S sonsy m tm , imlwtia® tm m fl&r $411 noney* In foa a r t t o a , apaoiftoftlly PPlar to ta ® foatHtttten b of %M Jmmma aeaarve yafcata* taxueara, aageeially in poaerva m m a a e m t m v l to lo©& t&on oall Soaaa as ttiafr p r t m l* * 0X mm&m m tli0 iJ y fX g kd E lfas4K X & t&oaa Xo&bs K 0)i & «a*a platan mpoa Oacaand, .fitm a m liw atocl smM & bo pfBsgpfcl^r afet&faaft on i ^ t aatftea to naafc withamsaa of flapaait* or for other wo* in thaaa wmm m® osedterHsr mr&ii&KLa for aali&tcural oall loams ,& aa&.*2y o-f ftwaa aatffiaiattt for ordter^ mm&t mqMxmm^m w& ■% %m m tm , &tti0ag& at & tiroes tha rssfcas roso to t*%& aa tha of fm&si dlmin~ Iakod, or tfia cte^ius iaora&aad* .lils a ttlM o of fc^a Saa& umad m ill tm m m tMmtr eiitef ca aaoai&taf!? raaarvaa £ a \smn gra&tlp sxullfl&d t& tra» «maes* 2tia Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED | ! Authority ^ 0 (0^0 I *4- Um 010slug of first tbs .<*»rQ & £*& to^c at fcko outfcrodc of ia tfto ssteir of l$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 ::-y B t&xtar fc sfcO u ij© te a s of tho Mtortil .'toserro Act provision is na& for ths ro&loo ooBut of < m,«PoSaX p6povt **** t&s rodtso amt of lonsss for th© so .; j ■mutim® of c&rrytsie' invostcxmt soa»iti«of other m m t3fett*& ;:>t& to8 0*0 w i& t* obi l&itio&s♦ Is o^eltadM* * n 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 T4m t~*«£r conditions Haro reodorets. &msraiX£&lo imgpltos of la n o vM&h forsasrly m m imm ta m im o or Um© tho a m m t of 1914* *#*11© total tw scliic roaotweso tor© X an saqgolsr toorooooclt tho folaao of bo«2c m oney orollofelo to fc ® soewitios m & m t h 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 w olx liar© oftcm boon M ro;.£ .ii*e& tfumag f.o past fo m e n t loisaod In tho soouritio© m or&ot* tailed o<xrxHtio»s ;<ro ilso & m m t In tho ft^tors p r e t a ^ U filJ A S lE J L S lF D Reproduced from the Unclassified I Declassified Holdings of the National Archives Authority d O fO ^ Q I -9 * ft* for msmp* "rior to t& capniatic© o of to rootriot; tfeo tosue of mm me&tXtim for m % mm m p tpo& otbor thm &mm w ati mm $ w & mwmtt&l for tarrytug an im M && 4t fc& mm tim § m mo *?swmwp w&ovtotik $o sell o m mmmt* of oortifioafcoo of fc^Moisoso sad ifborigr Bead* fcooriag tar rates of iat*r*®ti. tm ®tm® m to «?i»t$ior fcl» e<**- lotition of tli# ®ea»»& SuwofeM mart* fci «9oi»ft o f t&o l«« m » M/ afi Jo @i80 officer* ^ ^ K tiiioi* «omi involve tfco taoroaooft m ao / 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 Wm Y ttrts •<?!% 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 g e crodn iw oUroa# o»|'«^slod % tit© &a 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* $% aiioaia. oo . of o»3,X iimgr 4m&oy*& % ^ o 0&<witi00 sr opp^ iaoo too iinouiss flu etetoo M QGW &tng to tiio azaousit o f otftor Itoi&s »iro^£l>Xo fo r t?^o i«eijooo* l«o« tosa&r** «an ^ tsmotoa ^a»l ttte wamg b o rro ?^ ^ad aloo oo t&o irolM f f . f DECLASSIFIED Reproduced from the Unclassified / Declassified Holdings of the National Archives Authority & . 0 ( 0 I ■ o f Im 1mm varies* st 7 q 1 u e » - Tim mlmm of raonfly attt»ta8&l3g on ©all is r»p© or loss con stant, flaotnat onl^r otop pol&titrojy lone periods, & th© a& arajunt which Is loaaed fpoia day to d£$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 a a Is ad 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 m ad® 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 & $ m& the Q 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 $0,000,000* fioromm? it la tm ortm t to nottoo tharo has boon a diappoporUoa&ts Incrooso in tlio mmmt of ©^21 loans, as dlsttagoiaML fpom tliaa noney, /ith the oonseiaenco tftat t&« forw op* It Is now ©stissatod* constitute about ?Sp of tn® total raonoy employed in t!i« aocuritias mifeat. At a % m of sasli booty opodit % Reproduced from the Unclassified I Declassified Holdings of the National Archives j DECLASSIFIED j Authority & . 0 (0 I f At a tine of such heavy credit requirements as the present, the greater volume of borrowings* not only In the aggregate but in the day to day demands* naturally often resuite in hirfc rates for the money loandd. Indeed* so reluctant have the bankers been during the past few months to supply the large dem and for credit based on securities that the occasional loaning of relatively small amounts of money at very high rates often represents a desire not to secure the high rate uoted but to prevent the rate from going very m och higher with the conse uent demoralisation which might result# Intermittent Factors* fhere are certain other factors* the influence of v$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 num r b 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**? fram t* t&n es 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$* m Hw mm m flagfr lMt**#ta0i 0# ©nl* m ap •*» t* i^ie^ t&» i&mm& m .fclgtt lav 3 a ^ ci*f3l§r m i t&t&i e%& tat m m$&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 iM fM #5ifte ?«* tfte gra^to* *©ls*» o l $&$ <xtfeM fft str^KUnc m£l 1mm* * f M R l *a*& I# tqpaa&ai. a* tn* teat Zm w w n « r i f viMiM - $&i I ******* iM r - M to m m nni it* nao&mson# m ® * iy n l N l ( M t af'ttaft Xo&iig&U M l a & la* i M *a i^iatiaa tetn*a& *& © i f H * Oaa^xi# m *&$** m rtfai* fclgfe fu am l taafciH a»# tm i% 4w» $* otfcor tatasii* i ow*m* tm & tiw i& pott ftNtt fcfr* 3mmm«& mwtlmmm a£ t^a c*awaf©i&$. < m sm anlfcy and t» j**#t Ota*#* l^ lw s i «k3Ji i*# &a$»latiaa #£ teat ma&rw*- *a&n(ttiai@ atttia# «r fcit& fatan 1waist m£m*tom m Wm •» gw yyws tha***#* g»i4 *torn la d ^ a ^ itiis mmm&ttom mpmtet** it 10 ilo^ Reproduced from the Unclassified I Declassified Holdings of the National Archives Authority f i O fO ^ O I B m m s s M .M w , ^ „8telterly,aaft, & t t to * * » ©*pa& 2 y w & Is a^ttistlaiiig w m tut*'fa* tittm tim lo & m & ll otnar tKjrxmtng** -1* f&ctf *®&m fw mmmmt*i Imm ft* m l **& tta te m .m& to m m h m * * w m *m m o t m th m tm mtom 'o f #»*% % w tm omM.%ism v&im affect m** .t» tm m$& o£t*&t a& otixHf* not I& 'Ills is < > stiu fcsra X Ip tin l< ^ s ttiH 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 m w & * -ft $#*&**&* in £aw>* o f ts»i* l^ r v M fi, siae# tiafinm ihm to datum to gwaii thata mmmti®* m wem * tfe»ir M gotii* m& i» radios t&» sfctllty ®f ti* fcsa** t» 4* Altimgb t^» osf t&* fefesSoi a ft- tvwrt oan^aiifi® am&tftom W tu t fum &tm%m m of nm^r iM ied m tlio 0««K»f|tliNi m ^a»^ m mmto&Mm o£ th» p m <m f^ e r at times %imiml$ m m um tm m m *+ u r n -m % m % m a l^ e alal p tiw im m oaH m m mxmfc is par* m & 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 ^ H T01S im C 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 & ISIS ti» Wm* m* mt&xsmti* m* 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 am too, 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 o i t frftr 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 $h© offoct of oth r of for additional oaBBdtmcnts already ne.de each liquidation would bo to embarrass, not only Investors aril dealers in s e c u r it i e s , Xtat frequently mi^ht affect dealers and merohmts in oomodities as well* As on eaanple of the la tte r, the case miifit be si tod Reproduced from the Unclassified I Declassified Holdings of the National Archives 1 J ^ C L iA a M ^ I H U A u th ority f0 ^ 0 I 11 of a eorrdtriKsit to purchase a roa?3d amount of cotton on a certain day* £ a r o f tho homo® on tfi© Cotton “ fliunce are J »& -iiw also rm bm-S'Of tho Stock r:& & [*0 ant? frecnigntl? borrow vory m cih n larfjoly or* tfee Stooie ri«a(hfna» aoainst lnvostcmt oecsiritio# to provide ftm&s for settling th^tfc- transactions in cotton* I f , ifceroforo, ?t*on m important cotton, oafctlownt is iminoijt, borrowings on securities oowld not bo availed o f f the cotton tro&aaotlaR corad not bo oonsuranatod and a clr^&stio li<?nMation throng salo oithor o f seowrites or of the eotton M$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 sm fora Is Indispensable to avezy isaportent so 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 m cawt world o rvsff&et m t v ot bt*r Ifcan Mm fork* i$ tlm m il tm egr m 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, n l tlmt tM s fiiot hm nm- ticea tt< raoro fjeuorollsr tafem into oansiaomtitm % our lotiftsi*** Bat tlso safe &nl iwocoasful ftivose* its tills oountry o f tho use o f oeil R M frsn Its .»m tonoQ upon Inimstemt sosoritl^a m a basis K qy *rtH vecTttiros saroffcil sfco& In ®xds»r ft*a* s»fte* and adequate rnet^Ods jr turn® fee Fwtostitutotf for tlto **t***§-«o1ftoas* of 9 io sooaritftss m rtet* p mhtmmmt of this onfl probably derxwda npm tti® atee 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 H of GOttleaemts would b# > ^K oA -» 3*0! two th# cai I ram-oy mxfcx& tornI tf’o ooeosslttes '■ • fcto > o 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 tb * c? between s^ttlcinonta* ?£i©thmr thqgr *??© woafcly, Jfcrtnightly or at other intervals* ?© Af&tdtioo for V i^provcwBut nf tlm pmwmt method o f frt* settlement o f stock tsMtatige contract® tma cstoncled over lone $®&ra B & as tlm rem it of fatten*!?® atadlea m& dollberatiooa X 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 H 3* o* 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* • h more rosmt ant! definite dovelopmmt toward the Se 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# the dmmlommnt o f a *-Ms and heal# / tiaeount v 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 m & u 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® a h tjcS 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 o r ’ -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 aw of tfce l. xtoak .Jxohongs* ;% lllti&tr&tioti of tho subject matter of or 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 th e**© is attael^a hrroto as "xMfcit 0 a detailed report caapXloS hp mw o f ttie m art***® of tJto Oorrlttoo* 55r* SsB fciol .^Strait* Ctaixwi oi’ the Committee m Soaring tfouao of tbe fltoolc ixobancjo deaaribins ttie t<wa aottlcncnt iper&t ions in J^w iflon tm an the :%tr--nom cmtinont* vJK d lofc presently ui'il be pabllghod tbe A oJioasa Aooontamo Council* m 2hraM$k ito eourteey an advsnoo crtpgr o f I t t C * * * ' S '!A :~ L S-{ ">"+■ *{* the rqport^ '.3\ere ?sr© alao attached, a© d ib it s '.n » 6 and J P roapeetiwJy tm otfce*r tmblioationa o f the A rioem Accapfcsnco ta Council, **Aoo0f>tao3G Coi$>omtionsw tty 2* Abbott Goodbwo, Vic# t President of fcbo >*Irst Stitiooal Bank o f Bostonf £fa««* # and n2 Aoooptaaee as fch fesis of the •*\»sri«i Maoocmt feileot,#f t*«? © 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^ «JC tros?sfxl tfco T -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* 1 * oom ittoe holda9 3© fcapevor, tbat* inamxtGh s.® tbo adoption of a tons sottl'!*% by «nt 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 afeb M S flffitt 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 o AA iloN asir S $ 2£S0y oad IW mo K & Broosyr X 1S80. ftt X i V$3 Bo 000® 0 P O tBOOO tOiBlOO tfcftt Iho MftBOMI & OI S&M M n t t i &O R -os dooooMI Iomm oooorod Hjr ooX«latora& aso opproBtBoatoSjftBo ooho oo tBooo fo r oooNorola& swbot Sit ft-fl (fftto i oooort Booto® ond W&w Tw%, Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED Authority (O^C) I Ttm onlf fim m lm X Qmtm* % thtm m im ttf In which th&rm %» maUw m tmtimfi. m m i l m arket o f n o tio n a l lB^ortane« I* tihm Ivtk. C ity , m i «d»llo tin rntos ohargod fcham art ©mil loam uro trw%mm%%y In «km«* of tha l«gol mto# *aiowwi .for ooMrnarol*! po^or, H iojr or# not •mnurtmis* \sndor td fli lim of th# Sfc*te of Stat Terk, *hio)t ftpoolftaalty b «oXIfttorol ©all Im i* from th» If! limit**!© nvfaU&i Imtdmrn mm% ftbm ry m Qthmr Xwmm m p a l* o f lu s^ rrlu g tho ponaltjr ^aaorltoM l f a r msmrsr# ©oa* tloiK 1X5 o f tlmi BHtfctag L.** (X* 2914, Ch» 360 f Cornel* L. Ch* 2 ) pro* vlAoo tfm upm oAvom m of tmmy ro$«t«3»l* m A m fc m m bkI to m mmm% m t Imm %km $5tG Q mm&* v<i*m mrzfrmmQ r * e o l$ t « t b i l l # o f IM iu g* o o r t l lo *%m Q 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$od n* Reproduced from the Unclassified I Declassified Holdings of the National Archives j DECLASSIFIED I Authority 0 (O^O I 3 collateral security for such repagvtent* any bank any receive or contract to m « lf « wd eolltot m ooa^nMtion for sash adfflDMi any sob which nay be agreed upon by th# partlee to «soh transection*” Section 201 of tbs Backing Lam, identical la language with Seotlon IKS above quoted, aafces th* sam provision In the oaae of collateral loans Iq e r trust companies. In the General Business La* (L. 1909* Ch. 25$ 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 ew to bo agreed upon in writing, by the a 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 w tak«t receive, reaarve ay 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* W hen 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 H fork en collateral call loans of not ew loot than $5,000 rates of Interest which a ay bo la s x s h i of those per s mitted for of other character, and that crash higher ratoo are not prohibited at wnrlnoi* As to tho *amme and justification* of the higfr ratoo of interest which It thus appears nay legally ho charged on col lateral call loans la Ws» Tork, and as to tho "stops *•* repaired to afeoto this condition*, there I s , as It well known, a wide difference of opinion aaeog person* w have given knight and study to tho q.uestloo* Indeed, broad and ho fwrtaacatal questions of general economic and social polio/ are involved * la the last analysis * the whole question of the u tility of speculative dealings la securities and cocaBOdltles on orgrafcvod exchanges is involved; and taoro ia&edlately, the question of thoBMffMp^f^P1 *0* less of the ’1 leading speculaiivo rackets of the country, wargiaing , stock nanlpnlatioa, end kindred matters also susceptible of abuse. As to these the Board hue never had occasion off icially to font an opinion? tho Federal Reserve Act specifically preclude* the porohase or dlooount by Fadoral reserve bas&s of "notes, drafts ondbill* covering Merely imrostasats or issued or dram for the purpose of carrying or trading In stocks, bonds, or other inrestaeat securities* axaopt bonds W& notes of the €h*rem*a*ttt of tho United States*. fho Board could not undertime to form a Judgment upon the mattors above rsferred to without stu$r sad investigation of such a comprehensive nature as would seriously Interfcnt witK* the oondaot of its regular w ortt and sfeich* had tfce Board tho rwgslslto anthoaify, would re quire tho servloos of exports and assistants for the scaplcyw enfc 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 AMt * JM M T « hww»«*« mim (u Mc « tMNy 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 “ law: by 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 V Yosk City reported loaaa m ow ade by than "including Items of paper 1 bought1, 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 im wmsm car lo a h s Rational Bank of Comm erce, 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 H w York, 1. B. A. a 5 30 1 *4 6 15 3 \ 38 Sincerely yours, H on* 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. GH IN ^ R O / . ^ G j^ N R 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 , 1 1 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 H M I1ARKBT O EY 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 RESPECTING THE RATES Off 1FP5RBST O .W H 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 Reproduced from the Unclassified I Declassified Holdings of the National Archives (O^C) I Authority -3 - 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 ' Reproduced from the Unclassified I Declassified Holdings of the National A ich ves DECLASSIFIED ■ I Authority -K 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 1 s to run* And the m 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 Reproduced from the Unclassified / Declassified Holdings of the National Archives J 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 Reproduced from the Unclassified I Declassified Holdings of the National Archives i 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 ^Ul v 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 Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED |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* Reproduced from the Unclassified / Declassified Holdings of the National Archives 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 Reproduced from the Unclassified / Declassified Holdings of the National Archives 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 IT os* 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 . Reproduced from the Unclassified I Declassified Holdings of the National Archives ^ ; ^ i Authority - 11 . X~1870-a POSSIBILITIES OF CHAISE III TH COKDITIOMS AKD M ODS E ETH OF THE CALL M ITSY MARKETQ So 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, Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority & 0 f 0 ^ 0 X-1870-a -12 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. TH IHPORMITCS OF A “ CALL HOMEY1 MARKET> E ' 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 1 ms 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'T York, is the c a l l money market so ew 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* Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED ! Authority& Q 10 ^ 0 ■13 X -1870-a 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 Reproduced from the Unclassified / Declassified Holdings of the National Archives j DECLASSIFIED Authority 1% 0 fQ 5 * 0 ■X-1820-a 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.*’ DECLASSIFIED Reproduced from the Unclassified / Declassified Holdings of the National Archives A u th o r ity (0 ^ 0 I _ 15 - x “ 1870-a 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 M The 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 . T & members o f the committee have unanimously expressed the opin 1 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 Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority fO ^ O X -1870-a -i 6- 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. Reproduced from the Unclassified I Declassified Holdings of the National Archives j DECLASSIFIED ! Authority (Q 5 Q I X-1S70 TREASURY DEPARTMENT W ASHINGTON 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 DECLASSIFIED Reproduced from the Unclassified / Declassified Holdings of the National Archives Authority iO ^O I 3U1S70 - 2 - 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 W cannot tru st to the copybook te x ts , Making c r e d it more { e 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 Reproduced from the Unclassified I Declassified Holdings of the National Archives I DECLASSIFIED I Authority 1% 0 (Q*2Q ( X-1S70 - 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 . DECLASSIFIED Reproduced from the Unclassified I Declassified Holdings of the National Archives Authority fO ^ O / X-rl£>7C 1 - u " 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 Reproduced from the Unclassified I Declassified Holdings of the National Archives I DECLASSIFIED I Authority (P^O I X-1&7Q t - 5 world c r i s i s suck as the outbreak o f the war in Europe; but acceptances 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 Reproduced from the Unclassified / Declassified Holdings of the National Archives j DECLASSIFIED |Authority dQ fQ 5 Q / X-Xg? 0'b . b - 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 W S IN T N AH GO 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 N York City reported loans m ew aae 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; N M OF B N AE AE 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 N Tork, N. B. A* ew 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 H M ooi»oor*ing itiit e* U m m il lota** X your U llir of M i laA i t n uM IM» mw ProoiAont, 4o*ling witfe ym Milt •SpooiOatif* $*tfol!*§#o of itMki *m fcorgoly oarrio4 Iy lonno mi o*U# , fl» Ian ite* Ynrb pi&ooo no U iil mi' tf* n it of f»r ouofc lo*rv*. . tfco in* of ito lint* i«ron»§ nttiOfwU *o mil. «• vlilt take* M olt *i«bt bo »*44 b«l)> f*r n and ogninot ft propooni to *aond % » «Ut« l«vi in ifcio fN X *a if m mnm ontlofiod %M & ofennfo in tbo «iil« % wm$ ia*o would bo tkt bi«l ool«tion of ito §>rob;U X ti«oo ifeon a« n •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 w fciol* •m the m t of ttm m m t i tfeo borrow*r li npt to bo la* mj 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 «x t X fen $irog*o«* #*y bo mdo niong id po tfeooo liati** X «r noanftiMlw of Itnnrjr U t lttd, to $ovor*or M it | ii m l $tr* 0tr*!*«o X onidt •X «m hoping vory mmh ttent tN» Son** will dooiio to tnfeo s offootiro otopo to roiguiro oteofe oxolwngoo to *do*4 miot undor vMob tho brotatro* m lM tX i1 aooohhIo « ili bo *4o%n*toljr «it* •X «m ontiofiod tfcitt tho aothod o«$X«y*d during ^ $**t i two or throo tost ho for rootriotiag orodit for opoonlntivo tmnonotlono in otoobo io injnriotto to tfco gonoral oitnatiftii* T dom*i or ttso otriot limitation of orodit, or tovy felgb tso Reproduced from the Unclassified I Declassified Holdings of the National Archives i DECLASSIFIED Authority (0 ^ 0 m% ftr n i l «t»ty ftr lin l anvfett pwrp— 9 nteijr ttftn tht aarfctt ftr attt^innttt* ftr Trtnttsy Otrtifitnttt, Lifctrty Btndt m Vitt try Ntttt, ftr « « M ir » lA | i i t n « i i t l 9 A » « nA BtfutaX tf in d ii h K Tiri H ill tr wry hi$h mUc ftr t*U jr tw i>my a ltn ti unqr into tht » i« il trm tfct ««milry fen fct# n TfeM im t M * **»jr wrti*r*M» I think nf»t »l Ifl.MMM ScirtUry ftintt in hi* ittttr if K i i f 5# l l l l 9 it 8 «* m 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* H m % h**t ttnrtgt it *tt promptly nwl iritis tonfidtntt t »M in hit ow inHfrilr it rrrnnt nfetttt 11 tht fntUltltt tf IH n M v i l Htttrrt Syttos to Hit tutitntrt tf tht IWtrai fttttrvt y 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 W Tort Stook Ixthangt tw 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 tn L liquid than thtrt it nt naad* Tht pajstr It ntt t t lf* Jy liquidating «nd9 in tht taat if «e oatrgtnty, na, ftr ti«tp2i| n$t» tin twtfcmak tf tht Eurt|#«n n»r» a*sd thro*#rss*t tht ptriod tf tur partiti|»atlon in th* anr* awth Im m art in tlit matt tu t** ttU m tiU f* Tlit ana tf U t tH f Btttdt* fU tsry fititt «al Tramaury Cartlfiaatto nt tellaiar&l ftr btrrt^ngt aodt by aaafetr hankt tr m tht Ft4trti Etttrrt Banks ftr ifct purpttt tf tnriy* iag tpttninti«t tmntnttiont in ttttk t safett it tht right tt t tU t* tht 4iitf tf tht ffc&ttil Btttrtt autfetriiit# t t ttt to Reproduced from the Unclassified I Declassified Holdings of the National Archives I DECLASSIFIED j Authority 1% 0 (0 5 0 1 it tfcnt % wotfetAt tf fl»*fi*Uq; oath tranoaoUono mm ft* im m rtftrmod lmodlatoly * . aA *%tn am i*ttorlops *aju*.u;uti o» tf ototko fc*o fcoon tnk~ ! lug fintt Staring tfct j>»rlod of# tty, nlm otoatho, tlntt tfet n i m l tf tho ««Rlril ^ ifct SahooiBfflittoo in X«liy •( tho Lltorty litnn C«*atio<j, tfet* i&oiiisini&tioii, wUoh takto tkt ftr* if pitting Hf tk« prin firwt tf «m ottok and tfctn tf tmihiri «t antttr itent »*y *• oowiitiono, ftr tiit purpttt of «*!■*» latin* ioltrtH fn tfco port tf tN uninitl*fcod ptbllo, it* I > *fl*gjjtot oostrary t t tfa§ In* tf tfet St*t* tf S w York «*£ tfeo to ntltt of tht Htv Ytrfc Stttk I*tkmis$t* In nif o*oist, li ntndt Ottlf VS|«P(W i l i l i i to | i * * tnd to it* ft* ftMttml H m n I )W * B*nk tf fit* Tort In lit roX*ti«a tt tfet Sufcttwaltttt on ttoaoy tf tilt Uborty Loan Cotmlttot, w friofe 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 * bw If list Fo4oral fttntrvt t Board. *1 ntt* art oay ttent ouoh otopo oteonid In tnktn tit only i 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 H f«w«nn* thtn r# Atting Otftmtr tf t^t IM tiii Htttm B ank 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 ak ^ott ntt s4 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# m and ar thi prtttni f«rii4 tf yt«djnl«itii| thin «ay In artlvad ««m i 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 .w la tht vtrld’ t amatrtt and f iitaaaa** on % 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 w fca*# 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 $• t* a bank and borrow fttnty t« tpM M with it ftry dlfftwnt M lata fra* baying titti* *a Marfln* ifexy * aaa wh* would ntt hairt tki* fata t* aak lil* bank far Ioann ftr tftttilatl?* pur^tata «1U buy ttttfca id aaxigin, m& mt# a bank whith wtald a*t think tf landing a& t# nty a» individual wm%mmr t« tjatalatt with w ill land »#nty tt hi* brtktr tt tawy Xt will b* taaa fr*» tht ftrigting that I d ifftr f n s tht ▼laws laliaatad lit tht t t Stnatt Btatlutlan W MS mart in t# aettttrt «f tag>t*aia than In m tart tf 4 tt*il« at ?i»* jrtptttd rtply It 99m& In *ubttanttt but It it wmmm&§ It tttmt i t *a» la th* gtn tf*! ii*s»rtt*l*a wfeith i t trtattt that artrythisg I* abtut right In iwtpfit i t tht H t i r l Stttk SSM aw fcaaga and tht ta ll ataay aarlai* It nay bt that tht d lffita liy *eu!4 bt tvtrtan* by (Staling taly with th* tp a tlflt <*utttlon raitt* b y tht Stnatt Bttelution, mumXf$ 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 Reproduced from the Unclassified I Declassified Holdings of the National Archives i DECLASSIFIED Authority 1 . 0 % [Q ^ Q I - 3 - 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* TH LA’V RESPKGTIKO TU BATblS OF HIGHEST OK uQLLAODRAL E B 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* ^ e s e ctio n readst fih "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: DECLASSIFIED Reproduced from the Unclassified / Declassified Holdings of the National Archives Authority & 0 (Q ^ Q j "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 - Reproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED Authority f iO (P S Q I - 5- 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 Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED j Authority € - 6 0 iP S Q I - 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 DECLASSIFIED Reproduced from the Unclassified / Declassified Holdings of the National Archives Authority d Q (Q ^ Q j j - 7 - 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 Keproduced from the Unclassified / Declassified Holdings of the National Archives DECLASSIFIED I Authority - 8 0 (O ^ Q / - 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 the money loaned. 'r 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. 2 is apprehension, quickened by the number o f in s io te n t borrowers bidding h 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 Reproduced from the Unclassified I Declassified Holdings of the National A rchives DECLASSIFIED I Authority 0 fO^O I j I - 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 . DECLASSIFIED Reproduced from the Unclassified I Declassified Holdings of the National Archives Authority f j O ( 0 ^ 0 I - 10 | - 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* DECLASSIFIED Reproduced from the Unclassified / Declassified Holdings of the National Archives Authority I 11 0 n j J - POSSIBILITIES OF CHAEGE IN TH COFPITIQITS AND M E ETHODS OF O E K CALL MONEY STAR ET. K 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 - DECLASSIFIED Reproduced from the Unclassified / Declassified Holdings of the National Archives Authority 0 fO ^ Q j j 12 /S 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 m eTTihers 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 'jt f& 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 a..f &■ t-s- & 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* W have seen that in this country c a ll loans e on securities lack this essential qu a lity.of liq u id ity requi/ed for quick aiA certain realization , and that this fact has now been more generally d 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* 3 i principal effect of such a change of the method 3e 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* ugh the organization of a new 0 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 h more recent and definite deyelopment toward the substitution !e 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 i present method of daily stock exchange *e 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 # * Reproduced from the Unclassified / Declassified Holdings of the National Archives 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 Reproduced from the Unclassified / Deciassif ed Holdings of the National Archives Authority fQ ?Q I 1L that the adoption of a term settlement by the Stock Exchange 'would offer advantages i a that it would eliminate duplication of the handling a of securities and in payments* fie committee holds, however, that, fi 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. j V On March 8th, 1920, the Senate adopted the following resolution! i i •ftSSQLVED that t o f Federal Baserve Board he and ts 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* l . Oh. Z) provided that upon advances of i 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, I payable 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 " it through levies on the Federal by 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 Reproduced from the Unclassified I Declassified Holdings of the National Archives 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 w as %? %*«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 O I fraj K Flarost tkalr surplus faado^wHto *«eoi>taaiooH, w t f sxparlspdo kao mhmm a * * mok ««vt ll$U d ten lBrt»tet»l a«onrl» hce 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»# a t c a s tkaro any %a a eoaoarrotit Xhr^k groat daanad far aoanomlal eradtt*, %*wk* all ator tko country kaio kooa t tod ta plaoo tkalr fctads fa tko Wm* Y«vk a*rfcot to *soars tko nap 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 t i i lar 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 Xow rata* ta ar tkalr rognlar oaataaors. fklla it it difficult t doviso ado«aata o 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 t M 0ar r m o f aad IlM 3B^arlataadoats of t e otata k&aics, raapoatlY^y, li fo It wartd go far toaardo okoaklag tMo aall* A aorabaat w *pplloo ko far a ooaaorolal loon fro* his %a*§ aad Is altlaor rafaoad ky tl« kanfc o p glvoa a loaa at ratoo hig^or t a a lio fcolloTO® ta % aarraatad^ la a Reproduced from the Unclassified I Declassified Holdings of the National Archives 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* bm m tto* %tm my sfc 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* 4 ? go 1 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# Reproduced from the Unclassified / Declassified Holdings of the National Archives | DECLASSIFIED |Authority 1% 0 fQ ?Q !3arch Subject: I v 1920 ‘ ly to :>onate Hosolution V.o* 320 Tier 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. l »e rates which have been charged on collateral loans in that f 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 f general acceptation of the torsi, are rs.e chiefly in Tw: York iHt^# t?hich is Xra^tically the only ini.50rtant txi ' call money ; r i 3 o in the-United states* they are loans which are payable -irct on derxwid of t i lender without previouinot ice, secured b ? the ple&^e of le , investment securities, 1* e« stocks and bonds, generally those which are dealt in on the T o ; Yorl; Otock ISxchan'ip# 2ho interest rates on these loans, tv 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 Reproduced from the Unclassified I Declassified Holdings of the National Archives 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 Reproduced from the Unclassified I Declassified Holdings of the National Archives j D E C L A S S IF IE D j A u th o rity £ Q f O 5* 0 / 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._ de^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 l eserve System by the ci«stoxers of the Federal Reserve i Banks, however powerful or influential* wSpeculation in stocks on the lew York Stock Exchange is no s cre vicious in its effect upon the Tselfare of the people and i upon our credit structure than speculation in cotton or in laad or in e € . r o i j e £#o&rol.;.y* Hut the Hew York Stock Exchange cE?,difs 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 l eserve Banks for the purpose of carry i 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 Reproduced from the Unclassified / Declassified Holdings of the National Archives j 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 i fi h the officers of the Stock Exchange, naturally t t 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 e » York I said? 'v "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 Reproduced from the Unclassified / Declassified Holdings of the National Archives 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 i e should have unnecessary panics* s 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* i c call monsy market 3hould b . based on acceptanoas fe e and not <n clocks* Nothing I re&13 .v«uid - virrp ? grsai j DECLASSIFIED ! Authority£ . 6 (O^Q Reproduced from the Unclassified I Declassified Holdings of the National Archives I - 5 - world crisis such as the outbreak of the ’v in Europe / but acceptances . ar 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 . o cx>c nior® i J* mtters of eirohasis than in matters of detail* The proposes reply is sound in substance, but J t is unsound, i c seenn to ;$&, ii t i f general impression which creates t i c in respect t? t > 'Isw York Stock Exchange everything i 3 aooufc right 3 t * call a a j ir? ifac rcf * y be that the difficulty could * * overcome ’ y dealing only ;it : i e the specific question r&xsed by I e Senait I^eoiutio- ; iy, DECLASSIFIED Reproduced from the Unclassified I Declassified Holdings of the National Archives 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+i is t i 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. Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority 0 fO ^ C ) I 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 i l my l 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 DECLASSIFIED Reproduced from the Unclassified I Declassified Holdings of the National Archives Authority 0 (Q j .ci- 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." Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority 1 ^ 0 f O ^ O I 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 f a k , which show iat 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 7 8ft. 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. X « J s v 1915, the tetal money loaned by Hatlonal Banks "on demand" on bonds i tn, 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, t y totals wore $1,134,000,000, of which 40$, or $455,000,000, fs were demand, and 60$, or $679,000,000, time* So far from demand loans having increased more rapidly than the time loans, as stated in the memoranda* referred t , we find that between 1915 and 1919 the o IfH leans secured br bonds aad stocks in the national Banks of Hew York City a have increased only JgjL while liofe Iwif secured by bonds and stocks Increased in the same period 173&. Please note the following table: j s m m mrnstn Bara*....... . *!»• ....... 7,/l^SL m as a s ® a m m m . s& m i m sm*. 1915 1919 Increase S#> 397 ailllons; 40% 466 mlllloa; 98 Billion*, 27* 41* atA Billions; 60$ f Z nillion;121 million., lA 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, i abe&t One Billion s Dollars is, I think* underestimated In view of the fact that the figures show that tf JMtfloal Bam* • n lt . i 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 t tationil Banks, as a role* I* my 'fcdoBent* It Is 9 *ite posAlble that nil C ^ f e Banks in New York ftc are l dl , on bond and stock collateral, not less than Two Billion Dollars en n|[ 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 Reproduced from the Unclassified I Declassified Holdings of the National Archives J DECLASSIFIED Authority £ 0 f0 3 Q j -4- "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> Reproduced from the Unclassified I Declassified Holdings of the National Archives DECLASSIFIED Authority 1% 0 (QS^C) ( ( I ffowrafcU Ckorg« A. Satviertvn, Sacratary, Washington, Sirs Sec#tpt Besol“ ttlon Ho. 33#, ftelcoo^l«f4g«d -of S«sRi<s I e r f 8 t 19*0, ficc <r^tiag corfc&ia infor&trtlcm with reispeai % th« o «<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 DECLASSIFIED Reproduced from the Unclassified I Declassified Holdings of the National Archives Authority 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* Reproduced from the Unclassified / Declassified Holdings of the National Archives ! j DECLASSIFIED Authority £ 6 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 I o 328, adopted March 8, 1920, requesting T* certain information with respect to the usurious rates of interest on collateral call loans* Time: DECLASSIFIED Reproduced from the Unclassified I Declassified Holdings of the National Archives Authority £• UNITED STATES 0. (QC ( ~>0 SENATE Washington D. C. March , 1920. Eeceipt is acknowledged of Senate Reso lution No. 3 S, 2 adopted March S, 1920, requesting certain infomation with respect to the usurious rates of interest on collateral call loans. Time: DECLASSIFIED Reproduced from the Unclassified / Declassified Holdings of the National Archives .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 lv/ authorized and what steps, if any, as ' are required to abate this condition, Attest: Secretary, DECLASSIFIED Reproduced from the Unclassified I Declassified Holdings of the National Archives fO^O Authority jli k S , i 'h L c t V ~A-, Hi i r [L; rJ .t n .- 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 A t specifically exempt such loans from the limit which lenders must ob- < -■ Q i it - - serve on other loans & t penalty of violating thw usury prohibi Lion. f 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. f d on it.l a u U f basis^ iifT ^ Interest rates ar® - The loans are made for the most part to bouses which are mem- DECLASSIFIED Reproduced from the Unclassified I Declassified Holdings of the National Archives Authority 1 ^ 0 iO^O I 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— f h i c ei * 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 DECLASSIFIED ^ R ^ fB 9 ^ ^ o rn " t!T 6 ^ 'Dfi'cj!S§Sifi©d Debrassified Holdings of the National Archives Authority £jQ 10 ^ 0 I 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. DECLASSIFIED Reproduced from the Unclassified / Declassified Holdings of the National Archives j Authority £ 0 (O^O ( _4~ 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 1later l . demand, loans of _ a, 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 Reproduced from the Unclassified I Declassified Holdings of the National Archives I DECLASSIFIED I Authority 0 (0^0 I -5- tSec. 57g, Interest permitted on advances on t 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.1 1 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.1 1 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 $5,000. rates of interest which may be in excess of those per- U N C L A S S IF IE D Holdings of the National Archives Authority 1% 0 (O^O I -6 - mitted for loans of other character, and that such higher rates are not prohibited as usurious. CAUSES AFFECTING PRESENT CALL MONEY RATES. The reference in the resolution to the present high rates for call money in the financial centers and the inquiry as to their causes require, it is felt, a survey of the operations of the money markets and the reflection of the underlying economic conditions which govern, in varying degree, all money rates, including those for call money. PRESENT CHANGED CONDITIONS OF SUPPLY In former times, and specifically prior to the institution of the Federal Reserve System, bankers, especially in reserve centers, were accustomed to look upon call loans as their principal secondary reserve on the theory that inasmuch as those loans were payable upon demand, funds always could be promptly on short notice to meet /< withdrawals of deposits or for other use. these circumstances there was ordinarily available for collateral call loans a supply of funds sufficient for ordinary market requirements and at low rates^ ^ *^s« r>C. fa cu) C'$ __ ___ 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 from the Unclassified / Declassified Holdings of the National Archives I DECLASSIFIED 1 Authority 1% 0 f O ^ O -7- 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* DECLASSIFIED rceproaucea Trom tne unciassinea / ueciassitiea holdings of tne National Archives Authority f 0^0 I ■^8 to- 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 T out int** r 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 UUCI^AfciSmED Reproduced from the Unclassified I Declassified Holdings of the National Archives Authority (P^Q I -9- 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, Reproduced from tile Unclassified I Declassified Holdings of the National Archives I DECLASSIFIED 1Authority -K v * 0 (O^O I f 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 l i w t f y high rates for the money loaned. iwr1 r 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 <. ( i'/' '/ &l . - cC , r to re-borrow money called for payment. This apprehension, fy 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 - i the Federal reserve m banks coMStH, ,!!, ffgr,' t l pir^h.ia.a \ n ~ y th^ a a--rp.. .............j " ...wwvi&y'r-'pn?7r2,1r --& 1 fs ,, j ,n ifchi 0 h ^ n r r ^ T fT ^ T T l^ ^ r r iT ^ T * ^ j lllit II t g ‘»L» , g >y» yy ej i 1. 1 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 D TE M E BY TH O E R IN D E PERATION O T E F H OF'supply A D DEM N AND,~ ffii w ,1 h n r > - c vh&~TWJ!G~iA ca.i | 1 l ii'r 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. A b ( 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- caW* , f *■ ■ ..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"r tmnfirrni«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 f s b u s i n e s s .— 4 4 . ahauM a A b'0'i>> *d. . ao frh 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- £tii * i l.iii wmni p&|"er"l wMdflTail bwiuidiicountgd A0-. §in*ml-ruftty thar r r r | nrm-i . .0 frr i 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 h wrt/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>r4fiee a r»^fg wiuui £ r ' Win . Wfce»et t that there ie little <a. tm causal relation i y"uf » t M. 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 rl speculation and expansion might proceed unchecked and the natural M*4*s of correction or regulation would not j & m * ff--* trTf. 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, i c h liquidation would suddenly be forced, because i 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 o i the f 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 lo c i n r in fk.r - i - --------------------------------------------- ^ ■ ^ ■ a . T T ^ 1 .T r .1 n T |.r r T || | [| | T T T 1 T , ,T 1 n n ..T | | j j |||) p | | ) | J | | j ( ||||i J J L j aiau w 'w m s nm % ' H * m [ b y iniimi mux m 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>1 financial center. " i 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 i e ig-nafe f ’ 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 • * ' tv. -* hnwatTo^y careful study, Hat • i i *"uf the present methods of tne securities i]r, ^ J < s J market, u i m u * 1** p a S T m ....... .......... ^ ». 1 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 frr » ee 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 i e - paying Jt# one fe call loan and is r replacing it with another on the same day. he 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 (m A* copy of ffr-e report la ccaf , 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. -J l ,M Warburg, which is considering the question or the inaugura : au . 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 " ' X ' f 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, > Harding, r. Jovernor, federal -Reserve -3oard, Washington, D, 0. V dear iovornor Harding: .iy Your leuter of the 24th instant .3 received in the absence o f Sena tor '-W and w ill bo brought to. his en 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^ M E&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 % ra»t** m$. bands of th* Tfaitod St&toa, 9io laa* o# y lb * fork *hi4k ft* tfce 1«&% r*t* o f lntdtast la ffcat X 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» BM hH W Ovoa* m I 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 O E , OLHM WN KAOA . C AR A . HI MN '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. G Harding, Gi-overnor, / r. F ederal Reserve Board, Washington, M dear Governor Harding: y 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 < Wc ,;ci. .ys in transportation. As a conse ;o 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: 1 1 Tne reason for the advance in rates announced today by the Federal Reserve Ban^c of New Yorit is ’ the evidence that som part e 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 Bu ard 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 m ade 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*