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332.3-1 - Member Bank Notes secured by
Government Bonds
(Aug. 1920 - date)

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April 23, 1357

Honorable Mlburn CartwriOat
Rouse of Representatives
Yashington, D. C.
Dear Mr. Cartwright:
This relers to your letter of April 20, 1957 enclosing
a letter received by you from Vice Presieent Caldrell of The National Bank of McAlester, McAlester, Oklahoma, relAing to the
acceptance of Government bonds by the Federal Reserve bank at par
as security for member banks' notes. It is understood that Mr.
Caldwell refers to the Federal Reserve Bank of Kanras City in whose
district McAlester is located.
Mr. Caldwell's reference to an existing agreement on the
part of the Federal Reserve bank to accept Government bonds at par
Is apparently based upon a misapprehension, as the Federal Reeerve
tank has not entered into any agreement or understanding of this
kind. However, it has been the policy of the Federal Reserve Bank
of Kansas City for a number of years past to accept Government bon,is
at par as collateral for member tanks' notes and, while the matter
is one primarily for the consideration of the board of directors of
the Reserve bank, I have received no indication that a change in the
present policy in this respect is in contemplation at this time.
I am advised that, in response to an inquiry recently received from Mr. Caldwell, a letter has been addressed to him by
President Hamilton of the Federal Reserve Bank of Kansas City explaininv the situation with respect to this matter.

desired.

I trust that what has been raid above 0.ves the information
Mr. Caldwell's letter is returned herewith for your files.
Sincerely yours,

r-ft.". y.r2rz
‘kj

M. S. Eccles
Chairman

enclosure
LC/fgr




kl ,
,

......

WR 22 1937
Ir. U. L. Martin,
112 West 72nd Street,
New York, New York.
Dear Sir:
This refers to ygur_letter
1937 addressed
0
to the Secretary of the Treasury, regarding the right of member
banks of the Federal Reserve System to obtain the rediscount or
redemption by Federal Reserve banks of United States Government
bonds. Your letter has been referred to the Board of Governors
of the Federal Reserve System for reply.
The Federal Reserve banks, actin7 as fiscal ajents of
the United States, handle the redemption of natured and called
Government bonds, but the right of member banks to obtain the
redemption of Government bonds through the Federal Reserve barks
is no different from that of other holders.
The law does not provide for the discount by Federal Peserve banks of Government bonds held by member banks but does
authorize the Federal Reserve banks, under certain conditions,
to discount for rerber banks notes, drafts, and bills of exchange
secured by Government bonds and to make advances to member banks
on their promissory notes secured by 7(evernmert bonds. However,
the law contains no provision as to whether Government bonds shall
be accepted by Federal Reserve banks as collateral security at
their face value.
Where a neither bank obtains an extension of credit from
a Federal Reserve bank upon the security of Government bonds, it
has no legal right to require the Federal Reserve bank to accept
the bonds in payment of the member bank's obligstien, although,
of course, if the member bank should default on its obligation,
the Federal Reserve bank would have the right to foreclose the
pledge of the bonds and apply the proceeds from the sale thereof
to the debt awed by the member bank.
It is hoped that the above irforration will answer the
Questions which you have in mind.
Very truly yours,
(Sigred) i. P.
JTO:am

BETHEA

iletbea,
Secretary.

/

\
WILBURN

CARTWRIGHT

CHAIRMAN COMMITTEE ON:
ROADS

3D OIST. OKLAHOMA
MARION UPSHAW
SECRETARY

CHAIRMAN COMMITTEE ON.
INDIAN AFFAIRS

VICE

SEVENTY-FIFTH

GOLDEN FREEMAN
CLERK

CONGRESS OF THE UNITED STATES

MEMBER COMMITTEE on:
INSULAR AFFAIRS

HOUSE OF REPRESENTATIVES
WASHINGTON, D. C.

April 20 1937

Hon. Yarriner S. Eccles, Chairman,
Board of Governors,
Federal heserve bystem,
Washington, D.C.
My dear Mr. Eccles:
I am enclosing for your consideration a letter
from Mr. Boy Galdwell, Vice Pr?sident, The'ati-np:1
Ban of iviclestr, OklaJoInc, urging an extensiJn
of ine 1ederaliteserve bank's agreement to accept
government bonds from member banks at par as collateral
on bills payable.




Sincer'? v yours,

barn Liartwright.




•
COPY

THE NATIONAL BANK OF McALESTER
McALESTER, OKLAHOMA
April 2, 1037

Honorable Wilburn Cartwright
Washington, D. C.
Dear Mr. Cartwright:
The Federal Reserve Bank's
agreement to accept government bonds from
member banks at par as collateral on bilis
payable, will expire on June 1, 1937. In
view of the tremendous amount of government
bonds held by the banks, it may become
necessary for some to use a part of their
government holdings to meet the demand of
the depositor. I will deeply appreciate
your assistance in getting this agreement
extended.
With kindest regards,
we are,
Vdry truly yours,

(signed) Roy Caldwell
Vice President

RC:AMY




PR
Honorable Josh Lee,
United States Senate,
Washington, D. C.
near Senator Lees
This refers to your comunication of April 5, 1937, inclosing a letter receivel by you. from Vice i'residert Cald-Nell of
The National Eank of (3A1ester, IcAlester, (Iclahoma, tcv,ethor
with a copy of your roily thereto, relatir to the acceptance of
overnment bonds by the Federal eserve bank at par as security
for member banks' notes. It is understood that :r. Caldwell retern to the Federal ;:ifiserve l.ank of ' ansas City in whose district
.
cli_estor is locate.
:r. Caldwell's referenoe to an existing agreement on the
Pert of the Federal !4iserve bank to accept .Government bonds at par
is apparently based upon a misaporehension, as the iederal Tieserve
bank has not entered into any aLreement or understandinc, of this
kind. Jovor, it has been the nolicy of the l'ederal r!eserve "ank
of :ansaa CIty for a number of :ears past to acceo. :•ovorn-.1eut 1- ords
at par as collateral for member banks' notes and.
the matter
is one primarily or the consideration o the board of directors of
the Reserve lank, 2 have received no indication that a change Ln the
Present policy in this respect is in contemalatIon at this tics.
am advised that, in res2onse to an inquiry recently received from ,-r. Caldwell, a letter has been addressed to hin by
?resident Hamilton of the ederal eserve lank of Kansas City
exPla;nin:L the cituatIon with respect to this matter.
I trust that what has been said above gives the
information
desired. In accordance with your request, r. .;a1d-viel1's
letter and
the copy of your reply to him are returned horewith for your
files.
Veri truly yours.

(71e(i) Maffiner S. Eccles
-. S. :;colee.
Chairman.
Inelosure
GBV:1i .EllEr?Ai.COUNSELrnictatf,.d

Qeviscd LI!

G'

Form F. R. 131
BOARD OF GOVERNORS
OF THE

FEDERAL RESERVE SYSTEM

Office Correspondence
To

Chairmall Eccles

From

411
Date

I
s
APrU 14 1957

Subject:

Mr. Carpenter

There is attached an excerpt from the minutes of the meeting of
the Board held yesterday with respect to the policy of the Federal Reserve
banks in making loans to member banks on Government securities. It will
be noted that no objection was made to your ascertaining the present
policy of the banks and, in the event that any of them do not have a
policy of lending at par, suggesting that they consider the advisability
of adopting such policy.

Attachment.
Seb







Excerpt from the minutes of the meeting of the Board held
op April 15, 107

Chairman Eccles referred to the question considered at the
neeting of the Board on April 9, 1957, of the policy of the Federal
reserve banks with respect to making loans to member banks on Gov—
ernment securities at par.

The Chairman said that he recalled that

at a previous time when he made inquiry regarding this matter it ap—
peared that there were to or three banks that did not have a def—
inite policy of loanim: at par and that he would like to com-aunicate
informally with these banks for the purse of ascertainin

their

present policy in this respect and in the event that any of them
did not have a policy of lending at par to suggest that they con—
sider the advisability of adopting such a policy.

The question

was discussed and no action was taken but no objection was made to
the Chairman's making the inquiry if he so desired.

WV,

I )

TREASURY DEPARTMENT
WASH I NGTON
APR 1 0 1937

Hon. Yarriner S. Eccles,
Chairman,
Board of Governors,
Federal Reserve System,
Washington, D. C.
Sir:
There is enclosed for your attention a copy of a
letter dated April 5, 1937, from Mr. H. L. Martin, 112 West
72nd Street, Nev York City, requesting certain information
concerning the operations of member banks of the Federal
Reserve System.
Mr. Martin has been informed that a copy of his
letter has been referred to you for reply, inasmuch as the


http://fraser.stlouisfed.org/
Au .1t,61:1.3.,fr.
Federal Reserve Bank of St. Louis

Federal Reserve System operates under the supervision of your
Board.
Very truly yours,

:etl -

Enclosure.

;)

7

Administrative Assistant
to the Secretary.

FEDERAL RESERVE BANK
F-

77

KANSAS CITY

/

April 10, 1937

Mr. Chester Morrill, Secretary
Board of Governors of the
Federal Reserve System
Washington, D. C.
Dear Mr. Morrill:
This will acknowledge receipt of your wire of April 9
wherein you quote from a letter written by Vice President Caldwell of the
National Bank of McAlester, Oklahoma to Senator Josh Lee of Oklahoma.
Apparently Mr. Caldwell is laboring under a misapprehension as evidenced
by copy of a letter enclosed herewith addressed to me.
In my reply to
his letter, a copy of which is enclosed, I endeavored to disabuse his
mind of the notion that he had, and probably if my letter is convincing
we will hear nothing more abut it.
His letter to me was probably written
about the same time that he addressed one to Senator Josh Lee, and it is
likely that Senator Lee will hear nothing further about it.
I have received two or three other letters from country
bankers in various parts of the district similar to the one from MT.
Caldwell from which it is evident that the impression prevails that the
Federal reserve banks have by regulation or otherwise agreed to accept
Governments at par for security for a member bank's note.
I have no idea
where this theory originated for we have not by circular letter or otherwise
indicated that there was such an understanding in effect, and I doubt if
any commitment of the kind has been issued in any of the Federal Reserve
districts.
It is true that we have accepted, for collateral, Governments
at par since August 1922, and I can see no reason for changing this policy
at this time, but we have never committed ourselves to any member bank to
an indefinite continuation of the policy.
As far as Mr. Caldwell of the National Bank of McAlester
is concerned, I believe the incident is closed, and I doubt the advisability
of taking the matter up with him again in the absence of further communication from him.
Yours v ry tr ly,

/li. Hanilton
President
enc. 2




• 12M • 2 36




FEDERAL RESERVE BANK
OF
KANSAS CITY

April 3, 1937

Mr. Roy Caldwell, Vice President & Cashier
National Bank of McAlester
McAlester, Oklahoma
Dear Mr. Caldwell:
There is no agreement on the part of the Federal Reseive
banks to accept goverment bonds from member banks at per
as
security on bills payable nor is there a regulation to this effect
.
endin
y of
serv -blink within any
DiIt.
wh
oi the directors of
/
, su jec
res
all
tations as are
in the Fdral eerv
The Baid of Governors thereno
ssu
egi, aion concerning collateral to loans as
of a
Resppe bank are responsibile for the
sufficiency of collateral.

Federa
said b
provi
fore d

There seems to be a quite widespread belief that the
Federal Reserve banks have agreed or announced that they
will
accept government bonds at par as collateral to a member
bank's note,
but such is not the c ase, and I doubt the advisability
of a Federal
Reserve bank making such an unqualified promise.
From 1920 to August 1922 this bank had a rule that
it would
lend 85% to 90% of par on governments, but since 1922
it has accepted
at par all governments as collateral to a member bank's
note.
I
cannot, of course, speak for our board of directors,
but it is highly
improbable that the policy which has been followed since
1922 will be
changed.
Yours sincerely,

Geo. H. Hamilton
President




COY/

3
THE NATIONAL BANK OF MO ALESTER

McAlester, Oklahoma
April 2, 193?

Mr. George H. Hamilton, President
Federal Reserve Bank,
Kansas City, Missouri.

Dear Mr. Hamilton:

Will you please advise us when the agreement
to accept government bonds from member banks at par as
If you have a
security on bills payable will expire.
copy of this regulation, Mr. Hamilton, I will deeply
Do you think there
appreciate your sending it to me.
is a possibility of this privilege being extended?
With kindest regards, I am

Yours very truly,

/s/ R. C. Caldwell
Vice President

Form F. R.148 b




TELEGRAM
BOARD OF GOVERNORS
OF THE

FEDERAL RESERVE SYSTEM
LEASED WIRE SERVICE

WASHINGTON

APR 5

IWILTON KAMAS CITY
Senator Josh Lee of Oklahoma has referre6 to Tioard
letter received by him from Vice President Caldwell of tile
National

of VcAloster, Oklahoma, readinc, as follows:
"The Federal :teservo 3ank's agreement to accept
government bonds from member banks at par as
collateral on bills payable, will expire on
June 1, 1937. in view of the tremendous amount
of c
sovernmont bonds hold by the banks, it may
become necessary for some to use a part of their
Eovernment holdings to meet the demand of the
depositor. i will deeply appreciate your assistance in getting; this agreement extended."

Caldwell is apparently under a misapprehension, but it will
be appreciated if you will supply any information Which you :nay
have

as

to any agreement or understanding which :r. CRldwell

7).ay have ir mind in this connection or as to what :aaz, have
.
prompted his inquiry.

GBV:1i
GENERAL COUNSU
Dictbd by.

‘zi
•• r

,
fe

110
Office Correspondence
ForinFAL 131

BOARD OF GOVERNORS

copy
mvq

To_
From

OF THE

FEDERAL RESERVE SYSTEM

Mr. Morrill

Date April 7, 1937

Subject :_

Mr. Clayton
COPY
The Chairman would like the following items put
on the
docket:
1. The question whether the Board should make a
prompt effort to brine about a uniform examining policy
in the FDIC, the
Comptroller's office and throughout the Syste
m with reference to
the valuation by examiners of government bonds
held by all insured
banks. If such bonds are listed at par or at
the bank's book
figure, whichever is the lower, it might
strengthen and supplement
the action of the Federal Open Market Commi
ttee with reference to
the government bond market.
2. In connection with this same problem,
should the reserve
banks notify all member banks that should
they prefer to borrow
against their governments instead of dispo
sing of them on the
present market, they can borrow up to par
at the prevailing rate
for fifteen day advances.
L. C.




•

'S., 7 •
4
•
)/,
•

0

112 West 72nd Street,
New York, N. Y.

April 5, 1937.

Honorable Henry Morgenthau,
Secretary of the Treasury,
Washington, D. C.

Dear Sir:
Are member banks of the Federal Reserve System offered
an option of rediscount or redemption in connection with their
U. S. Government bond issues? To clarify this question, let us
assume a member bank desires to increase its fund for commercial
loans by $5,000,000 and withdraws from their investment portfolio an equal amount of U, S. Government 2?4 1953-49, currently
selling at 97.12. Has this bank the privilege of
(a) Redeeming through the Federal Reserve
System the tender at par and accrued
interest.
(b) Discounting the tender at par and receiving therefor $5,000,000 in currency,
giving in exchange the usual approved
form of collateral note duly executed,
and

)

the legal right to determine at maturity
of the note (referred to in paragraph "B“)
whether to pay the collateral note and receive the bonds back into their account or
offer the issue pledged in full payment of
their maturing obligation - with adjustment
of interest.
Very truly,

(Signed) H. L. MARTIN

d,2( 0,1e.,401


e
d/ ,
/4


/77

Jr

" #A
4-,

-t,

ti

CHAIRMAN ECCLES' OFFICE
Gov. Broderick
Gov. Davis
Gov. McKee

411

Gov. Ransom
Gov. Szymczak

Mr. Bethea
Mr. Carpenter
Mr. Clayton
Dr. Currie
Mrs. Fitzgerald
Mr. Foulk
Dr. Goldenweiser
Mr. Hamlin
Miss Lally
Mr. Morrill
Mr. Noell
Mr. Parry
r. Paulger ,
Miss Rackstraw
Mr. Smead
Mr. Thurston —
Mr. Wyatt
REMARKS:







•

p.

niteb

tate55 mate

Washington, D.C.,

193"

Respectfully referred to
Mr. Rarriner S. Eccles
, Chairman
Board of Governors,
Federal Reserve System
.
Please return all
corresnondence for my
files.

J L.
.

/7--

/
41
/

Respectfully, I
2
E

O. S. GOVERNMENT PRINTI
NG 01101

9-345




:3 2> 2-

(
3

April 5, 1937

Tr. Roy Caldwell, Vice President,
The National Bank of McAlester,
McAlester, Oklahoma.

Dear Mr. Caldwell:

May i acknowledge receipt of your favor
of April 2, regarding the agreement of the
Federal Reserve Bank to accept government
bonds from member banks at par as collateral
on bills payable.
I appreciate being advised of your views regarding this matter, and am taking the liberty
to forward your letter to Mr. -larriner S. Eccles,
Chairman of the Board of Governors of the Federal
Reserve System, in order that he may annrise
himself of your wishes in this matter.
Whenever I can help, do not hesitate to
call on me.
Yours very sincerely,

JL:(
1JM

Josh Lee,
U. S. S.




THE NATIONAL BANK OF McALESTER
McALESTER, OKLA.

April 2, 1937.

Honorable Josh Lee,
T2). C.

Dear

. Lee:

The Federal Reserve Bank's
agreement to accept government bonds from member banks
at par as collateral on bills payable, will expire on
June 1, 1937. In view of the tremendous amount of
government bonds held by the banks, it may become
necessary for some to use a part of their government
holdings to meet the demand of the depositor. I
will deeply appreciate your assistance in getting this
agreement extended.
With kindest regards, we are
Very truly yours,
(Signed) Roy Caldwell
Vice President.

RC:AY




•

•

TO
FROM.

REMARKS:

APR
NIIMBLR.tur:

37
...........

CHAIRMAN'S OFFICE

TELEGRAM
FEDERAL RESERVE SYSTEM
(LEASED WIRE SERVICE)

RECEIVED AT WASHINGTON. D. C.

16--704

153gfa
StLouis Feb 7

7

_TA 2 08

Black
WashinFton
Our Board passed the following resolution this
morning "Be it
resolved that the general policy of
this bank shall be to loan
par on Government securities offered as
collateral by member banks",
Martin
208pm

U. S. GOVERNIMIT riturma orrics: 1933




16-704

FEDERAL RESERVE BANK OF PHILADELPHIA
925 CHESTNUT STREET

GEORGE W. NORRIS, GOVERNOR
WILLIAM H. HUTT, DEPUTY

RICHARD L.AUSTIN
CHAIRMAN OF THE BOARD AND
FEDERAL RESERVE AGENT

GOVERNOR

CAMP ILHENNY, CASHIER
ASSISTANT CASHIERS

ALBA B.JOHNSON
DEPUTY CHAIRMAN OF THE BOARD

ARTHUR E.POST
ASSISTANT FEDERAL RESERVE AGENT

JAMES M TOY

W. J. DAVIS

ERNEST CHILL
R. M. MILLER,JR.

ASSISTANT FEDERAL RESERVE AGENT

S.P. EARL

January 31st, 1934.

My dear Governor Black:—
24th inst.,
I have delayed itplying to your wiie, of
,
on government bOiles- --be6ause,
in reference to loans to member banks
of what our present policy
before replying, I wanted to make sure
is, and what was the view of our Board of Directors as to our
future policy.
Our Minutes show that the subject came up for discussion
in October, 1931, when a motion was adopted that we should "con—
tinue to accept government obligations at their par value, when
making loans to member banks". The matter came up again in March,
1932, at which time some of the Treasury obligations were selling
between 82 and 90. A resolution was then adopted, rescinding the
resolution of October 21st, 1931, and providing "that discretion be
left with the officers to loan on governments above the market
prices where such loans can be made with safety, and the equities
of the situation seem to call for it."
This last resolution was practically a resolution to loan
on governments at the market, but with the power reserved to the
officers to loan above the market "where such loans can be made with
safety, and the equities of the situation seem to call for it."
I brought the matter up at our Executive Committee meeting 'this morn—
ing, and the feeling was that this arrangement had better be con—
tinued unless and until the discretion vested in the officers became
burdensome to them, and they desired further and more explicit in—
structions from the Board.




In practice, it amounts to this — that we accept governments
at par, unless the particular notes or certificates offered are sell—
ing at a heavy discount, and the borrowing bank is in such condition
that the application for a "loan" appears to be practically a sale
to us above the market. The resolution, as we now have it on our
Minutes, avoids the constant friction that would result from taking

2

such securities only at the market, but does not constitute a com—
mitment to take them at par. I am,
Very truly yours,

Governor

Hon. E. R. Black, Governor,
Federal Reserve Board,
Washington, D. C.




•

TELEGRAM

FEDERAL RESERVE SYSTEM
(LEASED WIRE SERVICE)

RECEIVED AT WASHINGTON, D. C.

16-794

413ghb
Sanfrancisco Jan 30 411pm
Governor Black

1934 JAN 36 PM 8

16

7ashington
Replying your wire twenty fourth It has been our policy to accept
Governments as security for member bank notes at market not exceeding
par. Mile we think this ordinarily the consistent policy,we are
willing to join in making a system policy that of accepting governments
at par in all cases.
Calkins
8pra

U.

8. auvLRNMICNT p8r8-rma orricc: 1.3




16194

•

TELEGRAM
••••-,

FEDERAL RESERVE SYSTEM
(LEASED WIRE SERVICE)

RECEIVED AT WASHINGTON

16-794

D. C

162bmr
Boston Jan 24-323p

1934 JAN 2 PM 3 39
-4
Black
dashinton.
In reply to the First part of your telegram of this morning
I advise that it has not been the policy of the Federal Reserve
Bank of Boston to lend to member banks on United States Government
uccurities at par if the market was below par.

However, after

discussing the situation with our dire-ctors today they have
authorized the officers in their discretion to lend at par.
It will be the policy of the officers for the present to lend
at par.
Young


U. a Gov:Rim:we raerrxmo °Priv, tvis


33Sp
15-794

TELEGRAM

410

FEDERAL RESERVE SYSTEM
(LEASED WIRE SERVICE)

RECEIVED AT WASHINGTON, D. C.

18-794

96bs
New York 111P Jan 24
Black
dashington
Replying to your today's telegram it is our present policy to
_
loan to member banks at par on Government Securities. We are
following your suggestion regarding subscriptions to current
Government offerings which have been well received here and
indications point to substantial oversubscription will wire
you at three o'clock today amount of subscriptions received
on each class of offering


V. w vovvwxware mornxo omen


Burgess
132PM

im

16-794

••••••••-

•

TELEGRAM

FEDERAL RESERVE SYSTEM
(LEASED WIRE SERVICE)

76dea
Cleveland

an 24

314p

1934 JAN 24 PM 3 32
RECEIVED AT WASHINGTON, D. C.

13-704

Black,
Washn
Replying your wire today on policy in connection with loans on
UnitedL)tates Government securities, last circular letter from
this bank to all members July 10, 1922, was notification that we
would lend par on bonds, notes, certificates of indebtedness and
Treasury notes.
This has been our general policy since except that early in 1932
certain members whose condition was unsatisfactory and whose
borrowings were out of ran ep with capital structure and reserve
balance were notified that the loan value would be predicated on
market. Each loan was handl d on its own merits, and many banks
so notified are now in hands of conservators or receivers.
Some of our directors have, in the past expressed themselves as
of the opinion that loan value on governments, especially long
term, should be predicated on market not to exceed
u. a

SOY1.1111rt mimeo orrin,ii




18-794

I

TELEGRAM

•

FEDERAL RESERVE SYSTEM
(LEASED WIRE SERVICE)

RECEIVED AT WASHINGTON, D. C.
13-704

par.
As a general policy loans to member banks will be made at par on
short-term issues . Shall be glad to place whole matter before
our directors at next meeting.
Have been keeping close check on subscriptions to current government
offerings.

ur totals at three oclock are 0_40,000,000

for notes and "75,00C,000 for certificates. All our large
banks have responded adequately.
Fancher
330p

u. 'mamma rurnx• uric.. 201, 16-794




•

TELEGRAM •

FEDERAL RESERVE SYSTEM
(LEASED WIRE SERVICE)

RECEIVED AT WASHINGTON, D. C.

16-794

b6rh m

1934 JAN 24 PM 12 15
Richmond 12p ;ran 24
Governor Black
7ashn

Answering your telegram Te approve the general policy of 1,mding
on governments at Dar and even up to present conditions have
pursued that policy with only an occasional exception.

"re will

follow your suggestion and renuest with respect to subscriptions
and reports.

-Tote you yesterday about matters closely wound

up with this subject

geay
1214p

soonstrver PRINTINO °mos: 1033




18-794

TELEGRAM

O.

FEDERAL RESERVE SYSTEM
(LEASED WIRE SERVICE)

RECEIVED AT WASHINGTON, D. C.

16-794

46fy
Atlanta 1047a Jan 24

1934 JAN 24 PM 12 26

Black
Washn

It is the policy of the Federal Reserve Bank of Atlanta to
lend our member banks at par value on Goverment securities
and in my opinion no change in this procedure is contemplated
at this time. The amount of all subsdriptions received at this
bank will be advised as requested

U. S. OOTLINIIETT erturrixo(mum



Johns
1226p

Int

16-794

TELEGRAM

ft.

411110

FEDERAL RESERVE SYSTEM
(LEASED WIRE SERVICE)

RECEIVED AT WASHINGTON, D. C.

13-794

122gb
Chicago Jan 24 1129am

1934 JAN 24
PM 12 34

Black
Thshn

Federal Reserve Bank of Chicago loans to member banks at par on
government securities and approves as general policy stop.

Reception

of present issue favorable will advise you further this afternoon

I+. a gemming',11111ITIMI OVTIOM NIS



Schaller
1234p

18-794

TELEGRAM
FEDERAL RESERVE SYSTEM
(LEASED WIRE SERVICE)

230gb
RECEIVED AT WASHINGTON, D. C.

16-794

Stlouis Jan 24 230p

2
1934 JAN .-4 PM 3 47

Black,
Washington.

,\

Answering your telegram , our present policy is to lend on government
bonds to member banks at market or par, whichever is the lowest.
This has seemed reasonable to member banks and it is thought by
some of us that a change in policy will not affect subscriptions.
Will take matter up with our executive committee Friday morning
and advise you later.
satisfactorily.

Subscriptions have been coming in very

Up to two oclock our time there have been fourteen

million for notes and nine million for certificates.
three million.

Prospects are there will be liberal subscription.

Will wire you again three oclock our time.
Martin
347p
U. S. oovinunacir?ammo omen: 1033




Total twenty

16-794

TELEGRAM
FEDERAL RESERVE SYSTEM
(LEASED WIRE SERVICE)

RECEIVED AT WASHINGTON, D. C.

1200
Minneapolis Jan 24 1113um

1934 JAN 24 PM 12
30

Black
Washn

We are loaning par on 0;ov
ernments and see no reason
to change our
policy stop,
Will wire as requested at
three °clock. Have
edvised local banks to get in
their subscriptions as
early as
possible.
Geery

U. a acvsuotare morrow CIYICI im



1226p

16-794

•

TELEGRAM

FEDERAL RESERVE SYSTEM
(LEASED WIRE SERVICE)

121gb

RECEIVED AT WASHINGTON, D. C.

13-704

Kansascity Jan 24 1110am
Governor Black

1934 JAN . 4 PM 12 32
2
Washn.
For several years we have followed policy of lenuing to member banks
at par value on ,7overnment bonds and see no reason to charwe policy
now.

On loans to indivicuals secured by -overnments we adopted

policy of requiring ten percent margin chiefly for reason that
such loans should be carried by member banks.

Have had no

applications and made no loans to individuals stop.

Will edvise

you at three oclock today the amounts of all subsc2iption received
on each class of current offerings.

u. a sorounnwe ram].orrscs• ler



Hamilton
1232p

18-794

•

TELEGRAM

FEDERAL RESERVE SYSTEM
(LEASED WIRE SERVICE)

RECEIVED AT WASHINGTON, D. C.

2494gb
Dallas Jan 24 253p
Black
Washn

1934 JAN 2- PM 4 47
1

Replying your telegram! McKinney who is out of city.

It has been

the general policy of this bank to lend to member banks
at par
against government securities ever since we were authorized
to
make loans of that character except for period during
1921 and
1922.

Think it would be helpful if all reserve banks
followed

that general policy subject to such changes as conditions
might
require.

Will be glad to submit this matter to our board
for

consideration at next meeting if you desire.
Gilbert
447p

U. S. GOV 6/IN

L.,

rercrixo orrics: igs,




16 —794

•
, Form 1 Oib




TELEGRAM

FEDERAL RESERVE BOARD
WASH 1 NGTON

Jan-x,ry L4 1934.
:

Young - Tiostan
Harrison - New York
Norri;3 - Philnelphia
F&ncher - Cleveland
Seay - Richmond
Johns - Atlanta

SchallL - Chicago
,r
Martin - t. Louis
Geery
anneapolis
Hanilton
Kzinsa City
i, cKinney - Zallas
I
Calkins - San Francisco

Most of the reserve banks lend to member banks at
par value on Government bonds. It would be helpful if this
were made
the policy of all reserve banks. Please 7.,
Ivise your ?recent policy
in this respect md whether your bank would approve the general
policy
of lending to member banks ab par.

?lease ksep clof,c check today

on subzeriptions to precent Government offerings and 7ben requested
suggest advisability of early subscriptions as it would be advants
zeous
for the offeria , to t,e quickly absorbed.
o'clock toav amount

Kindly advise at three

of all cubscri,:tions received at your bank on

each clas: of offering.
;
Black

COY

-

v
February 19, 1932.

Hon. Guy E. Campbell,
House of liepresentatives,
'Aishinr.i:ton, D. C.
Dear Hr. Canpbell:
In accordance with your request, the subject matter of
the letter of February 11 addressed to you by Er. Harry R.
Hosick, Vice President and :1:ecretary of the Potter Title and
Trust Company of Pittsburgh, Pennsylvania, which was transmitted
with your letter of February 12, VW brought to the attention
of the Federal Reserve Board, Er. Hosickts letter is returned
herewith.
The Federal Reserve Act contains no provision to the
effect that the privi1e7e of borrowing on the security of United
States Government bonds !hall be granted to member banks on the
basis of the par value of alch bonds.

However, the law does

place upon the board of directors of each Federal reserve bank
the responsibility of determining what discounts, advancements
and accommodations may be safely and reasonably granted to each
:ember bank with due rega4 to the claims and demands of other
member banks, and the Board feels that the question whether the
privilege of borrowing on the security of Government bonds should
be granted to a particular neither bank on the basis of market or




I

par value is one primarily for the exorcise of the judr;ment
of the board of directors of the Federal reserve bank concerned.
In the circumrtances, it is suggested that, if Vr. Hosick
desires to pursue the question further, he take the matter up
directly with the federal Reserve Bank of Cleveland, in order
that its officers may have an opportunity to discuss it more
fully with him.
Very truly yaars,
•




(Signed) Ch3ster Morrill

!ecretary.

FC1 AFF;',07;11_
Gov, Meyer
r. liarr,:in V__

rr, James
r.

_
_____

MaQCC

_

ra,

_

,

/
Lr
Flag., note - initial and
%
hat) Stercty. ; Office

-=

COMMITTEES:
BANKING AND CURRENCY
EXPENDITURES IN THE
EXECUTIVE DEPARTMENTS
ENROLLED BILLS

GUY E. CAMPBELL
36T“ D I STR ICT
PENNSYLVANIA

Conctres45 of tbe aniteb

tate5

3i)oui4e of 13epref‘entatibe5
litrusbington, D.C.
February 12, 1932.

Honorable Chester Morrill,
Secretary, Federal Reserve Board,
Treasury Department,
Washington, D. C.
My dear Mr. Morrill:

Pursuant to conversation had with you over the telephone on the 10th, I desire to invite your attention to the inclosed letter I have received from the Vice President and Secretary of the Potter, Title and Trust Company of Pittsburgh, Pa.,
which you will find to be self-explanatory.
I will greatly appreciate your presenting this matter
to the Board of Governors, and advise MB of action taken.




Appreciating your courtesy and cooperation, I am,

Sincerely yours,

COPY

POTTER TITLE AND TRUST COMPANY
Fourth Avenue and Grant Street
Pittsburgh, Pa.

February eleventh,
Nineteen thirty-two.

Honorable Guy E. Campbell,
House of Representatives,
Washington, D. C.
Dear friend Guy:
I certainly appreciate your prompt reply to the matter
referred to in our telephone conversation yesterday.
The position taken by the Federal Reserve Bank of Cleveland,
Fourth District, requiring coverage on Government bonds between the
par value and the market value, is in my opinion, a very serious matter,
especially during the existing business conditions throughout the country.
I simply refer to our own institution, which as you well know
is one of the smaller banks, for an example of how unfair and injurious
this rule is at the present time. Although organized under the Pennsylvania State Banking laws, we have been a member of the Federal Reserve
System since 1917, having joined the system in great part through patriotic
motives. We were given to understand at the time of our becoming a
member that we would always have the privilege of borrowing on Government
bonds at par. It is our understanding that this provision is apart of
the original act creating the Federal Reserve System.
We have always made it a rule to sibscribe very liberally to
practically all of the Government Bond issues as we felt free to do this
knowing that we could always borrow on the Government bonds at par. At the
present time our statement shows over $4,000,000.00 of invested securities,
$2,100,000.00 of which consist of Government Bonds, all of which were purchased by us at par through the Federal Reserve Bank at Cleveland. At the
present time there is an average of ten percent depreciation on Government
Securities, and the enforcement of this rule will cause us to decrease our
cash reserve by at least $200,000.00 When you consider an institution
of this size which carries $1,000,000.00 for cash reserve and other requirements, if compelled to decrease its cash position to the extent of $200,000.00
for the coverage required by the Federal Reserve Bank of Cleveland, it not
only creates a serious hardship on the bank, also increases the burdens upon
the general public which are already entirely too Leavy to be borne.




Potter Title and Trust Company
Hon. Guy E. Campbell

page 2.

The municipalities are requiring deposit of Government bonds
to secure deposits, accepting them at par, as are also the State and
Postal Savings system, if, however, the word gets out that the Government
itself, through the Federal Reserve System, is not recognizing its own
securities at par, they in turn will take similar action. In my opinion
this is a severe blow and really an attack upon the stability and confidence
of the people in our government.
According the information received by us, every banking institution in the City of Pittsburgh has extensive loans, most of it represented
by Government securities. It is hard to understand why the Federal Reserve
System, which should be constructive and helpful, is taking a step which makes
the transaction of business and accommodation of customers still more difficult.
While we wish to state that we are bitterly opposed to the action
taken by the Federal Reserve Bank of Cleveland, and consider it a serious
mistake, yet you can appreciate the fact that this letter should be considered
entirely confidential. It might not tend to increase our popularity with
the officials of the Federal Reserve Bank of Cleveland if a communication
of this kind were brought to their attention.




Very truly yours,

(Signed) Harry R. Hosick,
Vice President and Secretary.

Form No. 131

Officik;C0 respontnce
ere of the Board

FEDERAL RESERVE
BOARD

AllDecember 24
4_1931.

Subject:

—

-

.

cClelland
3-8495

\2,
There is attached hereto, for the infopattion of the members of the
Board, copy of a memorandum, prepared in Cou;Ael's office at the request of
Mr. Hamlin, with reference to the positio;yi which the Federal Reserve Board
has taken from time to time on the quesyfon whether Government securities
given as collateral to member bank0 0'ranissory notes or as collateral to
/
paper rediscounted by one Federal dReserve bank with another, should be
valued at par or at current marIvA price.

/".

/ Governor Meyer V
7
.
41,
, 1-.-Ean11411-1/
Mr. Miller
Mr. James
Mr. Magee'
Mr. Pole..."

Please circulate promptly and return to the Secretary's office.




Dec. 15,1931.
:Cositions 1)oard has taLen
Mr. '.:eitz

re value of Goverment securities.

In accordance with your request, there are susrprized below
the various positions which the Federal Reserve oard has ta1-..en from
time to time rith reference to the question whethe
r Government securities given as collateral to member banks' promis
sory notes or as
collateral to paper rediscounted by one Federa reserv
l
e bank rith
another, should be valued at par or at current market
price.

The

only kinds of Government securities with which the Board
was con corned from the standpoint of value were Liberty Bonds
and Victor;
,
Notes and, therefore, wherever the term "Government securi
ties" is
used below it refers to these particular classes
of obliGations.
SUUUABY
The :Soardss first circular letter on this subject
was that
of JanuArig2, 1920 (k-1784), wherein the Governors and
Chairmen of
oil the Federal reserve banks sere advised that the
Board concurred
in the su&gestion batch a Federal reserve bank made
to a member Sauk
that credit for 'Government securities which it had purcha
sed in the
open market and sished to use as collateral to its 15-da:
note, should
only oe allowed at the market value of the securities.
The next and final circular letter the Board sent out was
that
of June 15, 1920 (X-1954), 'wherein the Chairmen of all
the _Federal
reserve banks were instructed that collateral notes
discousited by one
7edera1 reserve bank for another should be fully
secured from the




standpoint of market value.

These instructions were modified to some

extent by a plan which the Board sent to some of the Federal reserve banks under which they could discount for another -lederal reserve bank, notes of member bank?, secured by bonds at their par
value, but would only pay the offering '?ederal reserve bank an
amount equal to the market value of the bonds, the difference between such market value and the face of the notes being retained until payment was received on the notes.
The Boara later instructed certain of the Federal Reserve
:.eents that, in issuing Federal reserve notes against bond secured /
collateral, they should insist that the market value of the bonus dqual
the face amount of the notes tendered as security for the 7ederal reserve notes.

Subsequently, a few Federal lieserve Agents were advised

that they could for a short time accept as security for Federal reserve
notes, member banks' notes deficient in market value collateral, if the
margin of collateral carried by them against issued federal reserve
notes equalled or exceeded the difference between the market value of
the Government bonds and the face of the notes which the bonds secured.
It also appears that the 3oara advised a few of the Federal
reserve banks that they should bring about a condition whereby their
transactions with member 'Auks would be fully secured with market value
as a standard.

Purthorilore, the Board later gave advice to two of the

edoral reserve banks Which ih effect authorized the temporary reeeisitoon
7
or suspension of all requirements Which it had previously imposed upon
telq) %demi reserve banks.




43.

-5..

The Boeuidts records on this genoral subject aro not ccrIplete in
:..‘,ztaricose but* e oept as to thcce •;..c.oral reserve agents and Federal
,
reserve banks to whom or

the specific ailvice or instructions above re-

ferred to Ind been givens it would seam that tie only general rcyll,_Iro:ao.lt
ad was that which was laid down in. circular letter

the Board

DISCUS:7.7E31:
The cluestion of the wale of Gower- :lent securities :then
A
used as 0011a-1:oral was first 7)recolat,od to the 3or...rd in 1. ,
)?esc:Lbor of
L.:1, by :.1r, lleatho l'o0cral Reserve Agent at Chicago, 1.1.r. Leath
asked Wlictri.er (1) he could accept as collateral for Federal re
servo notes a note of a :. ember bank soc.w..ed by Gavermlent socuritias
,
i
at their face value whaa he had lawaledge that the securities 1D.d
been purchased by the merber bank at Jess thnn :)ar, and. (2) the Federal rez:orve bank c:- uld loan against Government soc'uritios at par
;
when

1zmr Uut such sea.lritics had been purchased at a discount.
-.to of Dc:colier 27, 1310, Governor Iiardint!, replied
Under d1,,

that:
(1)

The rmlber Le.nkos :Ike ia tle collateral upon yr !oh

Federal reserve notes c.re issued a. d

they nay be istmed upon

the face value of the rener bo.nkos .lute even t,ough the Government
securities socurinc it are gelling below par.

Zhe 3oards 'ouevars

later gave advice to some of the Federal reserve agent:), including
the Federal ReserVe Agent at Chicago, which is directly oppose0 to that




e 4

which it gave in this particular
instance.
(2) The .
.ederal ?Algarve Bank could lawfully meee
an advice
te a member bank on its notes secured
by Covernment securities even
tholeeh such securities might be below
par.
eubsequeetle.,

r. Heath advised that his inquiry was occasioned

by the action of a member Uank in buyine, Gover
nment bones in the ()eau
•
market below par and ueieg such bonds at their
par value as security
to its promissory note which it presented
to the Federal ,
eazerve bank
of Chicago. Mr. Heath stated that in this parti
cular case the needs of
the member bank were taken care of; but when it
was suggested to the
member bola:: that, because itn acquisition of the
bonds was in the open
market, it Should either deposit additional colla
teral to margin the
transaction up to 100,7 or reduce it to the marke
,
t value of the col lateral, the merber aih eizrecd to comply with
the suggestion.
In replying under date of December 31. 1919, Gover
nor Harding
said:




The Board takes the view that the attitude of
the Tederal Ileaerve Lank was entirely &Dune.. The
underlying principle of a collateral loan is
that
aside from the value of the 11:Aker's name
from u
morel standpoint the chief reliance for secur
ity is
placed upon the collateral, and collateral notes
provide as a rule for the maintenance of a certa
in margin
and for the calling for additional security
should the
aarket value of the collateral decline.
"We are now gettinG away from war financing
and from the principles which governed the Feder
al
eeserve :dale:s in facilitatin6 such financing.
It is quite probable that there are no longe
r
existent any commitments to carry securities,
and the Board feels that it is sound banki
ng policy

to require notes secured by Goverment bonds to
be limited to the market value of the bonds. It
assumes, of course, that it is not the policy of
the Tederal :ileserve BaniLe, as it certainly is not
the loard'e policy, to do anythiree to reflect on the
value of '.1 overnment obligations, but the banks have
,
already established hit her rletes of discount for paper
;
secured by Government bonds than rere in effect several
month; to and the adoption of a well -established banking principle as to adequacy of collateral does not
constitute, and should not be regardeO ae any reflection upon the collateral itself,4
The facts of 14r. Heath' letter ana the text of Governor i-eIrdingls

topty

were sent in the form of a circular letter on Janmar

2.

1920 (4-1784), to the Chairmen and aovernors of all the '''ederal reserve
banks.
The language used in this letter is general in its terms and
soe:ewhat misleading.

In other words, it mi,Eht be interpreted as re..

quiring that all notes of mlelber banks secured by Government bonds should
be fully secured with market value as a criterion when taken b;;,- Federal
reserve banks; and the following eeicerpts free: two letters which were
addreseed to Senator ChamberIain under dates of 7ebruary 2 and 7. 1920,
seem to indicate that the Board intended the letter to require such aecarity at least in cases where the bonds had been leurchaeed at less than
pan




nour eorrcepondent lees quoted correctly e. ;part
of a circular letter seat to all iederal Reserve
7
Banks by the ?ederal Reserve Board under date of :January 21, (2) 1920. It has coK.ae to the knoelee.ge of the
Board that baLika and individualc have been buYinE
Government bonds at the market price and then Liou6ht to
rediscount note with the 'Aare." reserve banks for the

"the full face value of the bonds attached s
security. The Board has been infomed of an instance where bonds of the face valtze of $100.000
were bbought at around 1;92,000, and the purchaser
then aesired to borrow $100,000 on the becurity
of the bonds. I think- you bill agree with me
.
that it is necessary to put a check on transactions
of this kind." (I'mm letter of 70brmry 2. 1920.)

"I have deceived your letter of the 4th instant and have discussed it with r.v. colleacues on
the Yederal Reserve Board,
tiWhile the i!card is anxious to do everythiniz
that it can consistently to sustain the value of Government bonds, and while it believes that present conditions
are only tezporar,7 and that the bonds are worth intrinsically much more than present quotations and will
ultimately go to par or better, ILilfttla, nlvortheless,
that it would be a veri unsound poliqy to permit the
Federal reserve banks to make loans up to the face value
of the bonds in cases where it is known that the have
been bought at the ;revalling discounts. In view of pre ant conditions, it seecis to the hoard that any attempt
to stabilize the bond market by -artificial measures.
either aa to the value of the bonds or discoumt rates on
paper secured by bonds, mould be an incentivc for borrowing on a vast scale resulting in further expansion and
further disturbance of zice levals, td if carried to
extreme would jeopardize our credit structure," (Yrom
letter of Yobraary 7, 1920.)
On the other hand, letters which the Boltrd later a'jdressed to
certain of the Federal reserve acents (hereinafter referred to

ciearly

short that the Board had never intended to proscribe the terms on which
7ederal reserve banks should take notes from mec:ler banks which were secured by Government obli4ationa.

It appears, therefore, that the pur-

pose of Xr1784 was merely to brine; to the attention of the other 7ederal
reserve banks the fact that the Board approved of the position which the




-7..

Federal lieserve Bank of Chicago had taken in the case described.
On Yay 27, 1920, Mr. Heath suggested that he should not accept as collateral to ?ederal re4erve notes agy paper vhich wa3 not secured by Government securities at their market value; and on May 2B, 1920.
Governor ifarding sent Aim the fo1lowil4,r telegram -Ahich had been approved
that day at a Board lEeeting:
"board believes that nere you accept collateral notes
as security for rederal reserve notes issued to Yederal
serve Bank, that collateral security securing such notat.
slIould be accepted on basis of 'Ler...et value, and 2,:o:aid al, proves your contemplated action".
The Board of A.rectors of the ,ederal 1(eserve Bc.111:. of Chicago then in structed its uovernor and :Federal Rezervt, ,cent to bring about u conchi thou ynereby loans on collateral would be based or. its rarket value; and
on ,'111.e 4. 1920, tae vederal Aeserve

of .L,estcr. also advised that it

had adopted a similar policy.
On 4une 11. 1920,

r. . or. Governor of the

,scieral :'.eserve

Bank of Doston, advised that his balik had discounted for the :federal 2eserve Bank of Mchmond certain notes secured by Governmelit securities and
that, figurini; the value of the collateral 'it the market price. there
a deficiency of approximately 70.

Ho stated that Federal reserve notes

werc issued mainst mach notes and collateral for the full amount of the
notes, and requested advice as to whetaer his ban,: should require collnt,,ral from other ,;ederal reserve ban.cs at wore than the ward.et price.
•




-8-

The question presented by Governor Mcxss was considered
by the zoard at it

ILeetini; of junt 15. 1V2O, and as a result.

.lovernor Harding on that se day transu.itted a circular letter
(X-1954) to the Chaimen of all the ,Tederal reserve banks advising as follows:
"The Board has considered this question zInd
desires tnat all Federal :deserve bauka be 14formoc.
that they are expected in their discount traneactiona for other Federal Reserve laWcs to require
that all collateral notes discounted be fully secured, that is, that the rearket price of the collateral be equal to the face of the notes. The
Board would suggest, however, that "qtderel Reserve l'ailks which hold collateral notes discounted for other Yederal Reserve Banks give the borrowing banks a reasonable time, say uutU July 1st, to
make good any deficiency in collateral."
On Juno

1920, in accordance with action taken by the

Loard at its Lleeting of the preceding day. Governor Rarding advised
the Iiederal Reserve Ac
;ent at Atlanta to the followin,u effect in connection with an inquiry he had made regarding the value of Government
bonds:




fee
.ou are advised that after careful consideration vf the matter the Board has reached
the conclusion that in receiving collateral
notes from a Adore.' reserve tank as security
for 7ederal reserve notes, a iecterel reserve
itotat Should satiay himself that the rankest
value of the collateral is equal to the face
of the notes tendered as security for Pederal




reserve notes."

Governor Ilarding raw) statea:
"While the Board does not undertake at
this time to lay down any rules to govern the officers and directors of liederal reserve banks in passInc on the vriluo of eligible paper offered for discount, it wishes to point out that acting throw;h the
Tioderal Reserve Agent it has the right Ito grant in
whole or in part, or to rejecz entirely the application
of any Federal F.eserve Bank for Yederal reserve notes',
and has, therefore, the right to give a 7ederal eserve
Lert general instructions to guide him in passing or
the notes, drafts, bills of exchange, etc. offered by
a federal reserve bank as collateral security for ,
)ederal reserve notes."

Under date of June ;A. MO. Governor Harding said the follo'
ing to the - "ederal P.eserve Agent at 14nsas City:
,,so far the Board has been inclined to the view that
each vederal qeeerve Dank should detenaine for itrielf the terms onshich it will take notes secured
by zovernment obligations. It is of tao opiuion,
however, that ?ederal '?eserve Aeents should not
take from the banks collateral notes as security
for Pederal deserve notes unless the market value
of the collateral is equal to the face amount of the
note pledged."

Similar advice was given to the Federa
l Ileserve X;ent at Danes
by Governor Thrdiet in a letter dated Jun
;
o 26, 192D. It efts stated thn
t
while the Board felt it doeirable that all
collateral dhauld be valued
at it market price
it hls not so far undertaken to
determine such
a policy for the liSderal reserv
e banks in their
own transactions with members"
but "that lederal
Reserve 4gents in taking notes fro
m their msmbers
to secure 7ederal reserve notes
should feel assured
that the market value of the sec
urity held as collateral for notes is eeual to
the face of the notes."
These t'lree letters show con
cluoively that the Boiabd had nev
er
laid dewn any rules gavrnin:
transactions
lederel reserve LUT11.3
and their nembor banks and
, therefore, support the con
cleeion that circular letter X-17.64 norely
advised the Aielerel reserve een
ks of t.e position vihich the 7 rel
ede
eser7e Dank of Celeage had ta._
en in the case
described.
On July 6, 19j0„ the qvv
erner of the Yederal Aeserv
e bank of
koston advised that his 11-114
1 had diecounted eaeer
for the Federal Reserve Bank of Dallas which
was not secured on the
ceisie of your letter"
(X-1954). He stated that
the Dallas Bunk had inforeie
d him that its directors were averse to cha
ngik; its policy of talank; nAe
s secured by
Gov.)rnment bonds at the fac
e value of the bonds and tha
t it haZ offered
to give additional collat
eral in the form of raeial.),,r baris
:
,
notes secured by Government bonds
to nal_o up the deficiency in the no1,e5 dia.counted. Because the D has
ben;: did not Give its oun note to the
Boston
bank, the Governor of
the latter bank felt tlmt the additional
collateral
should be deposited wit
h some form of agraement to pledge it
for any
debts owed to his bank
by the offering Federal reserv
e bank, and. he







submitted this propositioto the Board for its c:.11, ideration.
As a result,

r. tan, the Board's ilenoral Counsel at that

time, ens requested to give hi, o-linion

s to the 10011 considerations

involved in the following plan t
Yederal Reserve Bank A desires to rediscount with iederA
Reserve 1, n

13 15- day notes of nal,,.r banks ac,roating ):511000,000
}

>hich are 2 cared by Govarnment bonds of a face amount of 44,00 *00',
but of e. cr.lrat value of e_ily

,530,030. The LIttr bai

desires to

makc s"ch liscount but .ds:les to abide by the turms of circullr lotter
X-1954. It was - )roloosed, therefore, that both Lanhz aL
;ree that Balk B
pay for the notes by tr

.:orrin

$4,aX,cXX throuh tIle Gold Settlemant

Pond and creditin,, the account of Bank A with .:ZDO,W3 on the books of
Bank B, it Lein,yandertood by wth banks that this credit 'MUs to ,?rotect
Bank i for any deficiency in the uarket value of tIls collateral, and.
that Bank A would not &taw upon it until Bank B had received o_lyment on
the not

discounted.
Mr. Loden also considered the question Nhether„ if

fail after such transaction had been carried out, Bank
agAinst the $5000000 credit the

liability of

Waoald

could. set off

,.,. as indorser of

the !totes rediscounted; aiid., in the me2orc.ndum he audrossed to (;overnor
larding under date of July idO, 1920, discussikc this li3.an4, he con sidered that thi asset of Bank A las a debt due from a:atill 14 and Bank
B had the rilt to offset ..14;3inst this debt any debt from Lank A to
it.

He held, therefore, that no ar)ecial t16reeuent between the two

-12 -

:Federal Reserve Banks was necessary to Etre Bank B protection under
the :500,000 credit.

Mr. Logan also stated that:

tn nrder to comply with the present requireoents of
the "loard with regard to collateral security for 7edera1
reserve notes, the Eeserve Aent for Yederal Reserve :thank
B should issue. 7edoral reserve notes against the collateral
notes rediscounted for Federal Re6erve
only up to the
market va1ue of the security behind such collateral notua.
In other words in calculating the collateral for Yederal
reserve notes collateral notes secured by Liberty bonds
and Victory notes Should Le put in at the market value of
the security held therefor."
The details of this plan together with Yr. Lo'an's comments
were sent to the Governor of the Easton tank and he adv:Lsed that the
nlan
would be put into operation the next time his bank discounted for another 'Federal Reserve Fank notes rhich were deficient from a market
value standpoint.

The plan 177•Is also sent to the Pederal Reserve Bask
.

of Dallas and paper was subsequently rediscounted by that bank with
the
Boston bank under the procedure outlined therein; but it does
not
appear that it was brought to the attention of and other federal
reserve banks at that time.
in s'nort, the plan provided that, instead of a 7ederal reserve
bank requiring notes discounted for another 7aderal reserve
bai-k to Le
fully secured from a marl:.et value standpoint b it clisdouht the notes
tendered but pay to the offering bank only an amount equui.
to the
market value of the security, and credit the differoLce
between such
market value.and the face of the nctes to the account,
of the offerin&bank to become available upon pa:;r%ent of the
notes.




It, therefore,

- 13 -

qualified to some extent the requirement which the ,oard had laid
do‘in in circular letter X-1954.
In the me:Intime, the entire question of how member banks'
notes secured by Government bonds should be treated had been under
c,
usideration by the Federal

oserve Board; and as a 13roposed solu-

tion of the nroblell, a plan (X-1972) uas sent by

vernor 1:arding

on July 3, 1920, to the ..e6.era1 Reserve .s:Inkir, of rhiladelphia,
mond, htlauta and Dallas. in '4hose districts the bond question was
mo2t important.
,auks mentioned
That plan suczested that the 7ederal Reserve 7
establish preferential rates for 15-daY notee of member banks secured
by oovernment bonds if they were willing to adopt the policy of declininG to discount tnese notes unless they were secured by
bonds of an equal mer4et valuc; wnici. were actually subscribed for
ancl onned by the oorrowing bank or taken by it from defa.ulting
s.scribers before a certain designated date.

If the notes were

not to secured thh deficiency was to be made up by the pledge of
additional United States bonds or notes, or by such notes. drafts9
etc.. as were eligible for purchase or rediscount by Yederal reserve
bankso
The 'eder.:, .,eserve Banks of Philauelphia and aichmond
1
vere strongly opposed to adoptin ; any such plan.
,

The 7.rederal

serve Banks of Atlanta and Dallas, hbwcver, submitted proposed
changes in their discount rates to th3 Board for its approval in




-14 -

accordance with its suggestions; but after sore correspondence with
these -rederal reserve bans, Governor aarding advised the respective
'Federal Reserve kgents under date of July 14, 1920, that the approval
of the plane "woulu invite pressure for like action in other districts and there are so many possible complications that (the) Board
desires further time to investi6ate (the) proposition from (the)
standpoint of (the) system as a whole."

These letters, which were

substantially the same, were approved by the Board at its nieeting
of July 15. 1920.
Governor Harding referreu to the difficulty that would
be encountered in the !Alanta and Dallas districts in making effective
a policy of requiring full market value security without at the same
time making some concussion in discount rates, and auvised that the
Board had decided to modify its requirement covering the issuance of
Federal reserve notes in cases where Government sedurities v4ere involved.




He said:
"* * * The Board realizes, however, that in a few of
the districts, including yours. it would be difficult
to make this Policy effective at this particular time
of the year with the absence of some special inducement
in the way of a lower discount rate. Therefore pendinf., final action on the recorn:endations made by your
.)ard of Directors and awaitinE =ore favorable conditions for making the new policy effective, in case the
Board should find itself unable to approve the plan
recommended, it has been decided for the present not
to require you as Federal Reserve Agent to insist that
each collateral note offered by * * * (your) 'Pederal
ederal reserve
heserve Bank • * • as security for 7
notes be in itself fully secured, but you should require that in each instance the aaregate of notes,

(counting collateral rtes as being worth
the market value of the bonds attached thereto) be
equal at least to the amount of Federal reserve
notes released by you to the bank. The Board's
fluxes show that at present you have in your
possession as Federal Reserve Agent an apparent
excess of * * * (mount given) million dollars
face value of paper above the amount of Federal
reserve notes issued. This would indicate that
you have ample Largin."
With reference to rediscount transaction with other Federal re-

serve banks, Governor Hardi,E said:




"In your rediscount transactions tith other
Federal reserve banks, however, it will be necesary
for you to meet the requirements of tbetnH whidh
rediscount for you. The Board does not feel disposed
to compel any Federal reserve bank to discount collateral notes for another Federal reserve bank rhich
are inadequately secured. Perhaps the wIsiest way
for you to arrange with other banks Which may discount
for you would be for your hank to leave with the
re(liscDunting bank a balance as an offset. or exacole,
in case you should rediscount five million dollars
of member banks' collateral notes with Boston and
the collateral to the notes is iAmth only four and
a half million dollars. it is the Board's view that
you miht arrance with Boston to transfer four and
a half million dol:ars for you thruugh the Gold Settlement Fund and to retain five hundred thousand
dollars as a book credit. While the five million
dollar transaction would go through at the regular
rate. the Board would have no objection to the
lending bank making you the proper reduction on
account of the free balance left with it."
With reference to the value of the collateral behind
&member bank's note, Governor Hardin, made tne following rwaek5:
'!It is the view of the Board that when a Federal
reserve hank discount:: a member bank's note secured
by collateral the market value of the collateral
to the note ought to be equal at least to the
face of the note discounted.* * *

"The c.eard desires, however, to cell the attention of
your directors to the desirrlility of invina all member
bankul colJuteral notol. fully secured with mtrket value as
a st%ndard, and will expects regardless of ally action
which Nay final1y be ten on the proposition to roduce
rediscount rateu, thert your officers will be able during
the next few. months to have all collateral notes fa-1.1 secured."
.y
one of
/copy o these letters was also sent to the 7edaral Reserve A,;ents
at New Tork: and ?hiladelplia.
The 1Tedaral Reserve Bank of Atlanta seemed to be satisfied with the
decision oi tha ;oar as above expressed. The Federal Reserve ;Aak.. of Jallas,
however, throut itu . lederal htserve Ant, repeatedly urpl ea the board to
‘h
2
;
ale.:Ircve its preferential rate plan; Ilut on August 4, 19201 the lio.e.rd
,
:ltirt2. neservo Agent as follows:
the %
The :hoard is not yet pre-Arad to approve resolution adopted
by your board of directors * * * and would seat that you deer
• for the present and until credit situation eases in your district
enforcing lequirement that notes secured by Government obligations be Zu14 :;ecured on busts of market value. General proposition will come up for discussion at meetings of Federal Reserve \gents and Gov.znors some time this Fall.
This advice had the effect of sus?endina, until after tha 1920 .Tall
Conferences of Federal Reserve Agents and Governors, all requirements which
the Boaed. had Irevious4 imposed Arlon the Tederal Reserve Biak of Dallas.
It does not appear that the Board ever approved either of the proposed plans referred to above.
also wish to call yeur attention to certain remarks which

were

mde by Governor Harding in a letter he addressed to !Ir. gorss, Governor
of the Boston bank, und,3r date of August 18, 1920.
requested by the Federal Reserve Bank of

This han; had been
:
,

to rediscount its bond se-

cured paper at thJ face value of the bonds and Governor Mores advised
Governor Harding that ha was zoin6 to zubmit the'mattar to the 3xecutive
Com2ittee




of he bank for its consideration. Be also mdd:
"It will brine; up tho question of whether we
our;ht not roeodo fron our position in this Distr*ct
of requiring r.t..lost value of bonds for collateral.
If the New 1
70k bunk and otbat banks think it in
guff:lc:Lent to allow par veluo on 'omits for collateral,
why should this District not follau the courno, which
is nore favorable to our 7.T.T.taber banks?"
In replyinz, Governor HardiA; said:
.
"*
* * it is noted that you Intend to put the 1.71olo
question up to your 'Lx.ecutive Ca:zaittee at the no t
:aoefinc, and the Bo:_rd will be satisfidd to let.v....o the
matter entire
on. I
a to va.ow of
- a qu
We 4)oar ez!lat ii
neoossarily involved
when a 1;'odol.al recorvo bunk rediscounts for a ner.ber bank,toLx)rts note which has Govormont obligeticxas attached
our..
,
an collatoral, for the note may havo been made for one of
the L.,..)urposon outlinos in 6ection 13 of the Federal 1, .eserve
:
:blo wit.out security.
Act, and iaiht, t!Aerefore, be eiigIn any event the Federal reserve bz.z12.: vr;uld havo double
protection, the obligation of the nr32:er of the nc:to as wall
as that of the no.-.1x)r bruit: endorsino it. Thor() Lr,r, hccrover,
be a local quostion involvod in discouatinG a viembor bank's
co '! lateral note,
* 1

*it

* ii *

"It Boons clear that a Federal reserve bank could
not discount the straicht note of a rieriber bank =scoured
and that it could not discount tho note of a .lezibor Janl:
for 100,000, socueod by ,.,85,000 par value of Treasury
oertifieates.
question arises, therefore, whether a note
of a ...iainbor bank for ;`,:100,0,0 socurod by the 0111.10 amount
par value or Liberty fonds, thich are actually orth on
the markot, Lowever, only 80,000 can be locally discounted
by a Federal resorve bank. In either case It would seom
that an advance° of !::,'.15,000 would be :lade upon tho unsecured
obligation of the morabor bank, . -1.ich the law does not appear
to permit.
"Horravor the Board in content to laave the ratter
to the discretion of our ir.eca,fve 5rw-rutteo mai the question
Ir.M. be scusse( a
le Gon'oronoo
r)cv000r."
Ti;

would 0007.1 that this latter authoriod the suspension, until

altor the 1920 Fall Conforoncosof .A.gonts and Governors, of all requirements which the I3oard had proviously irnoced won the Federal Reserve
:lank of iloston.




-18-

The question "Should member banks' collateral notes be fully
secured, taking market value instead of face value as a basis" along
with certain other related questions were discussed at the October,
1920, joint conference of the Governors and Agents of the Federal reserve banks (pp. 207-239, Part B. Vol. 1 of Stenographic Report of
Proceedings); but it does not appear that any definite recommenda tionn were made In the premises.
Copies of the above mentioned circular letters (X-1784 and
) and memorandum containing the Boards suggestions for preferX-1954,
ential discount rates on bond-secured paper (Xf1972) are attached
hereto for your further information.
Respectfully.

S. E. Seitz
Circular letters and
memorandum attached.

SES/gacv°Inc




o' TEL
ist
FEDERAL

•

ESE VE SYSTEM
•‘,

(LEASED WIRE SERVICE)

0
.
A PMIltelr. 4

1
RECEIVED AT WASHING1OI‘tr6

1
•...Iva,

TAR1

281fmt
Linneuoolis

105D dec 14
ral-dinL7
'Jahn

Our e::ecutive committee today laassed resolutions to loan ninety
five on Liberty bonds as su7:ested in your teloram of this
•

morning
-•^,--,
-----•-•,..--

:Lich




2152

•
liorin 148

FED

AL RESERVE BO AD
LEASED WIRE SERVICE
WASH I NGTON

The telegram given below is hereby confirmed.
December 14, 1921

Rich
Minneapolis
Am informed that yaur.bank is still lending only ninety on Liberty
Bonds. Other Federal Reserve barks are lending at least ninety-five
and I would earnestly suggest that your bank make loans on such
paper based more nearly on present market values. This will silence
complaints which vee cannot answer as long as present loan basis is
sustained




HARDI'S

2-9444

Noverber 30, 1921.

11E110'3,AITT'Irli _F(71. 771. C 0)13EY:
Renlyint; to your rellost made aver the telephone,
there is given bolam the basis on which the several 2edera1 Reserve banhs listed A.11 accept (accordinc; to the most rodent
information on file here) Liberty Bonds and Victory Notes as
collateral on eligible notes of member banks and customers thereof:

a4q4kLBTY
Boston
:low York
Cleveland
Richmond
Chicago
:Anneapolis
Hannan City
Dallas

BUia),S

:larl-et Value
ft

ff

90 °or cant
ti
95 it
fl
tf
95
if
90 tt
ft
It
90
ti
9b “

Mart IMES
arot Value
ft

ff

J:, per cent
Par
ft
ff
ft

si

:he l'ord has no in:ornation an file with respect
on vilich the above bonds and notes are accepted by
Lo the bnsis
the Philadelphia, St. Louis and San Francisco banks.




Walter L. Eddy.

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•
FEDERAL RESERVE BAN K OF CH ICAGO
79

WEST

MON ROE STREET

November 21, 1921.

Mr. Edmund Platt,
c/o Federal Reserve Board,
Washington, D. C.
My dear Mr. Platt:
I have received your letter Of the_18th instant and
note therefrom that, in reviewing the circulars sent out by some of the
reserve banks, relating to the matter of loans based on Liberty bonds
and Victory notes, you find the last circular on this subject issued by
the Chicago bank bears date of June 8, 1920, at which time we were
loaning 85 and 95, respectively, against Liberty bonds and Victory notes.
The facts are that because of the substantial increase
in the market value of such securities, I recommeilded to our Executive
Committee on November 15th, the acceptance of Liberty bonds at 95 and
Victory notes at par. This suggestion was promptly approved, effective
November 16th, and, consequently, a new bulletin (No. 175) was immediately issued. It is our intention to furnish your Board with copies of
all bulletins issued. However, the one referred to may not have been
received, or may have been delayed, and, therefore, I shall enclose a
copy herewith.
I also observe from your letter that in conference
with Representative Green of Iowa, you were informed of a complaint
originating from some rather obscure source within his congressional
district, indicating that banks were requiring a margin of 25 per cent
in connection with 1Gans made to cattle feeders, and that this was made
necessary by the requirements of the Federal Reserve Bank when such
paper was offered for rediscount.
I am very glad to inform you that the foregoing is
not at all in keeping with our practice and, consequently, the complaint
is not justified.
It is quite likely that the report may have originated in connection with the transactions of the Stock Growers Finance
Corporation, which corporation, at the outset, required a 25 per cent
margin in the security in connection with loans based on live stock,
and I understand that, while some concessions have since been made, a
substantial margin is required in all cases.




FEDERAL RESERVE BANK OF CHICAGO
U

21.
#2 - Mr. Edmund Platt - 11/21/

The facts are that we have accepted and are willing to
accept for rediscount, notes, the proceeds of which have been used in
the purchase of cattle for feeding purposes, even though the notes
represent the full purchase price, provided the 7Th9rker himself is responsible.
As a rule, such paper offered here is not accompanied by
a chattel mortgage and, under such circumstances, ordinary banking
prudence demands that we give consideration to the responsibility of
the maker.
While, as indiceted, the policy which we are pursuing in
connection with loans based on live stock, does not justify the complaint to which you have made reference, nevertheless I am very glad to
have been afforded opportunity of replying, and earnestly hope, in case
similar questions arise in the future, we may be advised thereof.
Very truly yours,

7
-

EL
Enc.




•
Governor.




Novrxber 18, 1921.

Dear Governor McDougal:
Recent circulars sent out by some of the
Federal Reservu RAnks '71.th regard to loans based
upon the collateral of Liberty bonds, Victory notua,
,
etc., caused me, a fea el!.ys ago, to look over the
ciroulare fran other banks, and in the mw.ultime a
com2laint came in that the Minneapolis bank vas reauiring a 20 per cent marin on both Liberty bonds
MaxneApolis has since than
ard Victory note parer.
notified us that they are now loaning par on VictorIt appears that
ies And 90 per cant on Liberties.
Boston, Nev York, San Francisco, Richmond and Kansas
City are loaning at approximate market value, Kansas
City defining market value to ee 90 per cent on
Liberties ,,nd par on Victories, while Richmond defines
it as 95 on Liberties and par on Victories.
Apparently thel last circiAvr we have from the Chiaggo
bank is dated June 8, 1920, when you were loaning
Does
only 85 on Liberties nnd 95 on Victories.
that circular govern at present, or have you since
In view of present
then chqnged the mrgine?
market conditions it would seem to me that the policy
of June 8, 1920 wan certtinly out of date pnd the
bank might safely define market value as 95 and par.
By the -may, a week or so ago, Representative
7en of Iowa crane into see me and stated that he had
Gr,
a complaint from somebody in his Congressional district
to the effect that the banks were requiring when they
made loans to cattle feeders a statement that 25 per
cent of the purchase price of te cattle had been paid
He said that the statement made to him vas
in oh.
.ve Bank required this payment
that the Federal Restr
,
though he did not pers.: nally believe it to be the fact
!xnd thought thet the lcmning mer,iber bank mit probably
I told him I would inquire
making that as an excuse.
frIn rau 7rhat the policy of member banks and. the Federal
Ho fat2,ted that it had alwnys been
Reserve Bank mts.
the custom to loan about the full purchase price of the
mettle on the theory that they would adrancs by feeding,
ircrease in -/eight, etc., about 25 per cent in selling
value by the time of sale.
Yours very truly,
7:1r. James B. !le Dougal,
"
Ge vernor Federal Reserve Bank. Y.- rrt
\.,J •
Chicago. Ill.

111

TE

RAM

FEDER IRES(VE SYSTEM
EASED ViIRE SERVICE)
• ...v....*

RECEIVED AT WASHINGTON. D. C...

--

643fy
LInneapolis iov 17 145p
Platt
7/Lshn
are today notifyine our member banks that until furthur notice we will
discount ali.siblo notes secured by at least par value of Treasury certificates
of ind.obtednoss, Treasury notes and victory notes pledged, and eligible notes
not in excess of ninety per cent of the par value of liberty bonds pled.L ed.
;




Young
340p




NOveMb5r IS,

W
•

dear

me.

Clague:

In the absence of Governor Harding I mm
answering your letter of the 14th with regard to
the polio' of the Federal Rweerve Bank of Minneapolis
in loans on the collateral of Liberty bonds and
Victory notes.
I confess I am surrizad to find that
the Reserve bank of Minneapolis iu still loaning
only SO per cAlt of par value.
Several of the
other Federal resetve banks have recently sent out
circulars stating that they are prepared to loan
95 per cent on Liberties and par on Victories,
which in view of present bond prices would seem to
me to be about right.
These same banks were, I
think, before that loaning tither 85 or 90 on
Liberties and 95 on Victories.
I tiust add, however,
that I don't quite understand why tha member banUe
in the Minneapolis district who elect the directors
of the Federal reserve bank have not taken this
matter pp with their own directors.
The:7 should
have been able to correct the matter in that ws4r
without appealing to anyone else.
I shall, however,
write Governor Youn nnl call his attention to the
fact that other Reserve banks are now lo,
Aning, as I
said above, 95 per cent on Libertios !tnd ar on
Vict:vies.
Yours vary truly,

tt.,...„.t(
Vice Gov3rnor.

Hon. Frank Clagle,
House )f Representativ,,.*.

tA---)




r

November 16, 1921.

Deur Goirnor Young:
It seams to members of the Board that
rgin on loans secured by Liberty boniz and
your
Victory notes is a good deal larger than necasoary,
and is certainly larger than mny other Federal
reserve bank requires so far AU I can find fram
circulars before vs.
The Richmond bank issue
circular on November 12th atating that they
a
were loaning market value on notes secured by
Liberty bonds and Victory notes, which until further
notice would mean 95 per cent on Lthertiei and
Boston, New York ani San
par on Victories.
lounr approximate mar'zet value, which
Francisco
with the market as it now stanAs =ust mean prf.tctically
Kansas City on
the same na the Richmond figurQs.
defining thu approximate
November 13n6 istiusd h. circular
value az 90 per cent on Libel
-ties lind par on Victories.
Cleveland loans 90 and 95.
Vis seem to 4,7u no
oircalAr from Chicago later than June 8, 1920, which
gives 85sud95, the largest margin of which we em
to have a record exiopting that of the Minneapolis
bank.
The Board would lila, to kno:; whether there
is any good realion for retli.ining the large m-rgin of
20 per cent at the Exesent time?

1
Yours YArY tri,49
Vice Governor.

R. A. Young,
Governor Federal Reserve Bank,
Mir,neapuliz, Minn.




b147f fa
Minneapolis 422p Nov 15

Platt

Washn

Or latest circular was issued November seventh the last time we changed
ciur rates.

On Notes secured by liberty bonds and victory notes we aril

still requiring margin of twenty percent of Ter value.

Young
555pm

COPY FOR GENERAL FILES,
VNWINAL IN SE(..iii.TARY'S FILE.

1-, di
ts

144
r

•

TELEGRAM
FEDERAL RESERVE 'BOARD
LEASED WIRE SERVICE
WAS Hi N GTO N

Novambor 15, 1921.

Young,
Minnevolis.

Ia your circular May tunth Liberty bond loans your latest.
Aro you still lo-ning only 80 par cunt par vtlue.




Platt.

.
FRAk ..4CLAGUE
,

COMMITTEE:

2D DIST. MINNESOTA

AG R ICULTURE




Congo:4E4 of the

Elniteb

tatec

3bouct of ileprefsentatibe5
tiatiobington, Ai.C.
14 November 192'

The Federal Reserve Board,
Washington, D. C.
Gentlemen:
I have had many letters from banks
in my District in southwestern Minnesota, complaining as to the loans made by the Pederal .
Reserve Banks, and particularly the Federal
Reserve Bank at Minneapolis, on Liberty Bonds
and Victory Notes pledged as collateral.
The last circular sent out by the
Federal Reserve Bank at Linneapolis contains
the following:
"Until further notice, member bank's
15 day collateral notes will be accepted only
when the amount of the note does not exceed
80, of the par value of the Liberty Bonds or
4
0
Victory Notes, pledged as collateral thereto.
In other words,. a member bank's collateral note
for ,g3,000 must be secured by at least n0,000
par value Liberty Bonds or Victory Notes to be
acceptable."
Tome, at this time, in allowing
only a* to be loaned on the par value of Liberty
Bonds or Victory Notes is not understandable.
It is very diffibult for farmers and business men
in southwestern Minnesota and in many of the :*
southern and northwestern states to make loans
upon personal property such as livestock and

• _41.)
fkeli!!!iit .
i$
/. •••

......
,
•
•




Federal Reserve Board #2
grain by reason of the low prices thereof. Many
of these men and many of the bankers are compelled
to borrow money on their Liberty Bonds or Victory
Notes.
And for the Federal Reserve Bank to make
a ruling that only. 80% of the par value will be
loaned upon, seems very stringent and -a mighty
severe ruling at this time.
Liberty Bonds and Victory Notes are,
In my opinion, the best collateral in the world.
And why a bank, to-wit: A member bank is not
allowed to borrow to the full extent of the Bond
or Note is unexplainable to my people. Your Federal Reserve Banks certainly know the financial
standing of the member banks. Are not th6se member banks entitled to any credit?
There is much criticism in my District
and throughout the Northwest regarding the action
of the Federal Reserve Banks in the making of
their loans to member banks in the country and to
me, much of the criticism is just.
It is necessary for me to make a reply
to these banks and before doing so, I would like
to get your views or reasons why only 80% of the
par value of Bonds or Victory Notes can be loaned
on the same.
Thanking you for a prompt reply, I am
Very truly your:,




3

;
-

Ootobor 25, 1920

Dear Mr. CCord:

acknoTloace rocoi:t of your letter of the
22nd instant, and note the anount of e:cess ool•••••40.4.1,

,
1,40=1 in bills receivable held by ;, ou over WA
,

above v. r- t azT,ears to tio to be a reasonable allowL
ance of ikprealation of that amount of the collateral which is bond-secured parer.

Verw truly jaurs,

Governor

Mr. Joseph A. lieCord, Federal T:esorvo
Federal Reserve Bank,
Atlanta, 'teorgia.

L

•

•

N, GOVERNOR
DEPUTY GOVERNOR

N. BELL CASHIER
B. ROP R. ASST CASHIER
L • PATTERSON, ASST CASHIER
SiMS. ASS'T CASHIER

AMPBELL, ASST CASHIER
DNNIFF, ASST CASHIER

FEDERAL RESERVE BANK

JOS. A. McCORD,
CHAIRMAN OF THE BOARD AND
FEDERAL RESERVE AGENT

EDW. T. BROWN.
DEPUTY CHAIRMAN

OF ATLANTA..

WARD ALBERTSON.
ASST

FEDERAL RESERVE AGT.

CREED TAYLOR,
GENERAL AUDITOR

. SLATTERY, SECRETARY




October 22, 1920.

,

Dear Governor Harding:
tiq •
i
I
t,

Referring to your instructions that I
should Keep a sufficient amount of excess collateral in
bills receivable, for Federal Reserve notes, wish to say
that my estimite as of close of business yesterday, was
as follows:
'le have practically ,;65,000,000 bond
secured loans, which are made up of 1st, End, 3rd and 4th
Liberty Bonds and Victory Notes, and some secured by Treasury certificates. Therefore, it would be a reasonable conclusion that „;7,500,000 would cover any depreciation from
this source.
I wish to advise that the excess collateral in my hands at the same time was practically
26,000,000, leaving me an excess of ,„:18,000,000 or :A9,000,000
above any depreciation.
Very truly yours,

Federal Reserve Agent.

Hon. W. P. G. Harding, Governor,
Federal Reserve Board,
Washington, D.C.




33
• -.-_ zzINPA) VILE
/

;(5,Ttember 7, 192

Dear *Javernor :Torss:
1
I ackne;:ledge roceilt of your letter of
the 3r1 instant, el- clos.
c4Lies of your correspondence with loverter
Van1;andt, of the
Federal reserve na,11? of Dallas. I think
you have been very liberal
in your treatmolet of the r4a1las bank end want
you to know that I ai7rec,
rith you thorcugh.Ly in your remarks as
to the function of discount
ratos and with :jour clear ztatement of the
principle that sl ist a tote
.
13 secured it mlat be secu
red for one hundred
This
is, In my judonent, notrnerely one of prac
tice
but of 1=7* The ?sclera' :leservo :.ct
did not oricinallj Iemit Pederal
reserve ban,:s to make alvar,ceo to memb
er banks at their pra4issory
notes; it ;rovilled morel; for the redi
scount of ral.er endorsed k- the
ember banks* l'he a7ietdrsett which nay
permits advances to be made to
:ember banks an their Dralissorw note
s for a period not exceedi:Ig
fifteen days contains a proviso that
such prcmissorz: notes must be
Lgtuallby such notes, drafts, bills of exch
ane or bankers' acceptan are eligible for reliscount or for purc
hase by Federal reDerv° banks under tae -orovisiona of the
Act, or by the del.osit or
lodge of bands or notes of the United Stat
es. 1 do not think that
anyone would contend that a Federal reserve
hank has the richt to
lend a member bank. :,1...)0,0,).0 an its proaisso
rw note secured by cj15,000
Dar value of United Jtates certificates
of indebtedness* ais would
be equivalent to a loan by the Federal rese
rve be.1::: to the menlber ban::
of '21.5,030 on its unsecured rro.nissory note
,
* 7ho laiv is explicit that
a nember bank's promissory note must be secu
red. I do not bellow;
that the law intended to r.ermit a 2eleral
reserve bank to lend a mol:er
ben% 100,000 on its promissory note secu
red by the s=e amount, p,lr
value, of United .Aates bonds, the mark
et value of whidh, however, is
only ('05,000, for hero acain there woul
d be an unsecured lear, of 15,333*
Very truly yours,

r.alarles
Llorss, i:lovernor,
2ederal 'Reserve Ean:tt,
Boston, Laws*

C-overnor

(

•

•

FEDERAL RESERVE BANK OF BOSTON))/
53

STATE

STREET

IN REPLY
PLEASE QUOTE

flaCSIVP,P

1t 7-10o
tot

Jeptember 3, 1920

Honorable W. P. G. Harding, Governer,
2ederal i'Leserve Board,
Washington, D. C.
Dear Governor Harding:
Enclosed herewith I are sending yuu copy of the letter which
I have received from Governor Van Zandt under date of august 26
and the copy of my reply which I um sending today.
The two
letters explain themselves.
I lill say, hoJever, that in my letter to Governor Van 2;andt
on August 21, I agreed to rebate all of the discount which We
had received from him on the balances which we had retained
from their discounts, although I suLgested that he might be
willing to pay the discount on the 35 per cent reserve ghich
we are required to carry against deposits. As he has cleclined
to ac, _un _I2222_22mpromise I have acceded tp his wiphaAL.
c t
Very truly yours,

Charles A. Lerss,
0AM:R
Enclosures 2




Governor




September 2, 1920.

:Ir. R. L. Van Landt, Governor,
Federal eserve Bank of Dallas,
Dallas, Texas,
Dear Governor Van ...andt:
I received your letter of August 26 replying to my letter of
August 21 and have read your letter with great interest.
In accordance -aith my letter of Lugust 21, I have instructed
our officers to return to the Federal 2eserve Ba.nk of Dallas
4716.66„ being trio amount of discount 4hIch we have received
from you on the balance of your loan ahidh we have retained,
to make un the difference between the market and the par value
Of United jtates bonds -/hich secured these loans.
In reviewing tne correspondenoe betaeen us, I am impressed by
trio fact that there seems to be a fundamental difference between
the Boston bank and the Dallas bank as to the theory and practice of the use of the discount rates. Our theory in Boston is
that the primary use of diseount rates is to control oredite
When the use of credit is greater than it should be, and is
leading to too =oh expansion and inflation, the rates of discount are raised and it Is made expensive for our member banks
to borrow, and through them expensive to the commercial community,
and by this method the amount of credit asked for from us is kept
down to essential necessities. The earnings of the Federal
Reserve Bank are not considered but only the effect on the borrowing community*
The result of this practice is that today we have a 7 per cent die-'
count rate on commercial paper, a 6 per cent discount rate on notes secured by United otates bonds, and a 51 per cent rate on notes secured
by Certificates of Indebtedness, without any system of graduated discount rates. We are maintaining those rates today not because we
think it is necessary for the benefit of the first district, but because we believe that with the low average of the whole Federal
Reserve system, it is necessary for the g._neral good to maintain
these rates.




-2-

Governor Van ,,,andt

September 2, 1920.

On turning to the practice, however, of the Dallas bank, we find
a district which iu ovorloaned, although it may be only temporarily,
and while it has a system of graduated discount rates which puts
pressure on individual banks, still the standard rates are one-half
and one per cent lower than our rates except on loans secured by
Certificates of Indebtedness, and therefore the discount paid by
member banks in the 14al1as district to the Dallas bank must average
to be considerably lower than that paid by the member bank* of the
Boston district. It is for this reason that I say that the theory
on which the Dallas bank establishes its discount rates must be
different from the theory Of the Boston bank.
The question of security is a different question in my mdnd. is
follow the general practice that -linen a note is secured, it must
be secured for 100 per cent. If you get away from that principle
and say that 85 per cent is sufficient, there is no limit to the
percentage that could be deemed sufficient. This practice also
may lead to abuses for VD have known of instances in the Boston
district where banks have bought bonds at the market price and attempted to borrow here on the par value of the bonds, before we
required notes secured by market value of bonds.
However, the directors of each bank control in their own district
and no question arises between us except when there are direct
transactions between the 2ederal Aeserve banks.
I have conceded the point of the amount of discount on these balances dhich you have paid to us and have returned to you the amount
which you have so far paid us, but I have maintained the principle
that the notes which we discount should have collateral at the
rate of 100 per cent of market value. As I explained in a previous
letter, considering the policy adopted by the directors of this
bank and the collateral ahich we exact from our mieber banks, I do
not feel justified in conoediag this point.
The other points Which you discuss in your letter, while interesting in taenmelves„ are not to me a part of this fundamental question
and I shall be very glad to discuss them with you in detail shen we
meet in *iashington iu October.
I see that this matter is one of the suggestions for discussion in the
joint conference and I hope it mill be thoroughly thrashed out in that
meeting.
Very truly yours,

OaLrles
CAM:R

:Zorss,
Governor.




COPY
Federal Reserve Bank of Dallas'
,luL,last 26th, 1920.

Dear Governor Idorss:
This will acknowledge receipt of your valued letter of ugust
21st in further reference to matter of balances retained by your bank to
offset depreciation of Liberty Loan Bonds securing member banks' notes
rediscounted with you by this bank.
First of all, I wish to assure you that there is no disposition.
whatever on our part to enter into any controversy with you over this matter. I also desire to express my appreciatien of your suggestion that you
are willing to alio-sills a rebate of discount on the full amount of these
balances in the event we are unable to agree with you that rebate should
not apply to 35% of the amount which it was necessary for you to carry
as reserve against deposits.
While it is our understanding that the Board's circular letter
X-1954 of JuAel5th is not mandator
nevertheless we fully appreciate the
fact that it i3 optional with the bank granting the accommodation, and entirely within the discretion of its management, whether it shall require
that paper offered by rediscounting bank be secured by bonds having a
market value equal to the face amount of the notes offered. As an alternative, of course, if the rediscounting bank is unable to furnish
notes fully secured, it may leave on deposit with the bank from which it
receives the accommodation an amount sufficient to cover depreciation.
'he fact remains, however, that it is compelled to pay discount on round
amounts that it never uses and, again, it suffers a hardship by having
its ability to rediscount reduced accordingly.
You have stated that it is the policy of your bank to require
that notes of your member banks carry a margin sufficient to make the
market value of Liberty Loan Bonds securing them equal to the face amount
of the notes themselves. We cannot doubt the wisdom of this policy, and
this bank is sorking to the same end. As explained to you in previous
correspondence, our Board of Directors passed a resolution to this effect,
but, owing to the fact that the matter of a preferential rate of discount
was incorporated in the resolution, the Federal Reserve Board failed to
approve it. $ince that time we have been unable to obtain a quorum for
another Directors' meeting owing to the absence of several of our Directors,
and have, therefore, been compelled to make the best of the situation as it
exists.
We believe you will willingly agree with us that the average
commercial, agricultural and live Jtock paper does not present the same
delpee of strength as notes of member banks secured by a like face amount
of Liberty Loan Bonds, regardless of depreciation. You would undoubtedly
rediscount the first named class of paper, relying largely, of course, on
the endorsement of the Federal Reserve Bank, and without raising the




•
-2-

question of margin, notaithstanding the fact that a large portion of the
paper might be *lolly unsecured. If tnis is true, I will ask you whether,
in your judgment, it is consistent to require a margin in the case of
member banks' notes likewise bearing the endorsement of another Federal
Reserve Bank, and all of which are secured by a like face amount of obligations of the United jtates. This is certainly not a parallel case
to that of notes offered you by your member banks without the endorsement
of another Federal Reserve Bank, and we do not believe that we should be
put in the same category.
It is true that the law requires that Federal Reserve Note issues
be fully secured, but it is our understanding qf t4e Board's ruling that
this requirement is fully met alien excess collateral in the hands of
...
fibertv Loan
a- .
i
-'Federal Resery;.4nis is 'LlffiCieni--O-COei:... epreciailiii- in .
.
.,
______—____4"......—........... ..._...... - '
Jith the strong position
notes held by them
Bonds securing member banks'
thatai been shown by your bank, undoubtedly this excess has been thore than
I sufficient.
As explained to you in previous correspondence, the demand on us
prior to crop moving time is very heavy indeed, and will probably continue
for the next thirty or forty days, at the end of which time ae hope for a
substantial liquidation. In the meantime we will be compelled to rediscount
extensively. Under these circumstances, while me must, of course, conform
to the requirements of the Federal Reserve Banks from whom we receive accommodations, with our reserves declining it is needless to say that it is
highly essential that we secure the full benefit of paper rediscounted. xLs
stated before, it works a hardship on us where ae are compelled to leave a
good percentage of the proceeds on deposit during the periOd of accommodation,
and particularly so when called upon to also pay discount on the amount of
such deposits withheld.
In the course of the next three mottns, we expect to be doing our
part toaards helping other Federal Reserve Ban4s carry their burdens, and
until that time we do not feel that we should be penalized in our efforts to
relieve the situation at home. Frankly, Are lin state that were we at this
time in the position of the Federal Reserve Bank. of Boston, should we be
called upon to rediscount for them under si liar circumstances, ae aould not
.
.with_other_Federal aeserveanks
require a mallsin, kal.q_in our txansactions
our desire to reconcile our vivas with your
it is not re_guired. dhile it is
()In as far as possible, from a standpoint of equity and fairness we do not
believehat Are should be compelled to pay discount on funds that ae lure
never allowed to use.
7iitn this letter before you, we hope that you aill see the „justice
of our position and we stand ready to cheerfully and willingly abide by your
final decision.

Thanking you in anticipation of your reply, and with kindest
personal regards,
Sincerely yours,

(jic;ned) R. L. VAN ZANDT,
Mr. Charles A. Merss, Governor,
Federal Reserve Bank of Boston,
Boston, Mass.

Governor.

Luo..i. 18, 120

1




Dear '017 rnor "Jorsc,

.
r:.01 7.wr1.edge recte.pt of your letter _e the 1r44.1J2Annt, enclosIng
e lti.turs
lovermr VELICAnat of Dallas, cold Deputy
vrlAInller of Iv.er York4XIt i3 note tLnt ycu 1nte:4 to I-ut the
'ihale quostion up to ;7o-i...r nxoc..LtIve Conwi't.tai.: at the aet moi:Qtiag and
Vie lozrd
Icv zat;.01, to leave the
NI
ttr ontircai to
deterrxting.tion. It :7-7i t
view of Vie 7:.)ar. that 314.i le6?.1 v,- 4cstion is neces,
v:.ril i?Ivolved tiroC. rniarn1 m33r7c In.qk r(1711ceynLs
melber
baak t oustmleev, noe whlo% 117.s timrrolent. 0)116:ts attached as
,
0011m1, for the notor4c
,
lrle for ore or tm 1::rposse
outlintd in Section 17 of the 7edortl nererve Act and riAdit, therefore,
71t!lov.t
7.;z t vont as .11,e0s;ral ri,
Lii.::rve bank
4oula hslys% eon,blo 2rotectlon, t'fie obliyAtion of the
or the note
as 7rAl t,74 thrA, of t%e nwlbor
tatoraLig !,4 . Thom may, however,
6
he n 3x,szal rNastion iavolvea in dinovautlng a mlnbnir bevik'n oalateral
noted(Tho Ime (Ltd not on
:.1y
mtt thl c1ct of i-Noh a note
and. %he ono:lament contains a.2rovi'zo that th.ltned)er bcni:es note must
. I11! iirlcuroa by such notts, drafts, billa of exellaaix, or bankers aoceptemces a
re eligible for rr):21fleount or :=0..trobase by n rOeral rebezt, un&'r the orcvlsionc of this hot, or by the Oeposit or
1P
of bonds or notes of the iri.it
of
tatcsw.
It peens cleLr that a rederal regJerve bent: coule not discount
the Itrit;ht note of a :lember bunk unneolred ard tbnt it could not
-1:1nnount the note of m meMber bank for a00,000, scoured by ::136,000
per 7alue of Treat-cry oertificates. A queetion nrises therefore,
rhother e. note of a namber bank for 1.00,000 ceoured by the sace amount
par value of Libert; Zonds, which are actually worth on the market,
,
however, only 485,000 can be legally discounted by a rederal reserve
hank. In either ease it would somm that an advance of 45,000 would
be wade upon the unsecured obligation of the member bank, which the law
does not appear to permit.
However, the Board is content to leave the matter to the discretion
of your Tixeeutive Committee and the question will be discussed at the
conference in Ootober.
Very truly yours,
Mr. Charles L. Uorse, Governor,
Alders" Reserve Bank,
Boston, BMus*

•

Governor




•

Date

August 18, 1920.

FTTERAL RESERVF .0ARD
FOP ME GOVERNOR:
At a meoting of the
held on

Aug. 18, 1920

Federal Reserve Board
, thj follo:;ing natt::r

was ref3rr.zd to you for reply:
Letter dated August 16th from the Governor,
Federal Reserve Bank of Boston, in re rediscounting
relations with the Federal Reserve Bank of Dallas,
with particular reference to the rediscounting of
customers' notes secured by Government obligations.
(l'apers in your hands)

Secretary.

Please roturn thie mi.Jtorandum with copy of
accum3nts resulting fron action taken, if any.
.
Ekte
Documo
Sipmature

FEDERAL RESERVE BAN K OF BOSTON
53

STATE

STREET

RECMED
IN

REPLY

PLEASE QUOTE




August 16th,

AUG 1 6l2fl
192
,0-ticEoI
THE GOVERNOR.

Hon. W. P. G. Harding, Governor,
Federal Reserve Board,
Washington, D. C.
Dear Governor Harding:
I wish to cknowledge receipt of your letter
of August eleventh, in reply to my telegram of the tenth
instant, relating to the adjustment of discount rates
with the Federal Reserve Bank of Dallas.
Enclosed herewith I am sending you copies of
two letters received from Governor Van Zandt, the first
is a copy of his own letter under date of August ninth,
and the second is a copy of a letter to Governor Van
Zandt from Deputy Governor Sailer of the Federal Reserve
Bank of tew York, dated August fifth.
You will see by Governor Van Zandt's letter
how he feels about this matter, and the reasons that he
brings up for our being easy with them, and he is very
much encouraged in continuing his policy and in asking
us to treat him liberally by the letter from the Federal
Reserve Bank of Yew York.
He see'.7.s to feel that we
are unreasonably severe on the question which is academic
today because there is no question about the value of the
endorsements, and if we press our views on him, we shall
sim)ly get his ill will.
This is something that I do not
want to do as there does not seem to be sufficient reason
to warrant it.
T shall put this whole matter up to our Executive Committee at the next meeting, to be held on Thursday
morning, and see what they think should be done.
It will
brinE_ up the _question of whether we ought not recede from
our positiOnin this DistriCt—of - requirine; market value of
ónfoFThoflateral
If the New York bank and other banks
think it is_ sufficient 'GO—allow par value on bonds for collateral, why should this District not follow the course which
is lore favorable to our member banks?




Governor Harding - 2.

August 16, 1920.

Probably you can hardly appreciate the
criticisms that we are under in maintaining our present
high discount rates, together with our high reserve position.
The fact is, there is a disagreement on this subject in our own Board of Directors, and scarcely a meeting
goes by but the question is brought up as to whether we
should not reduce our discount rates.
I should not believe
in reducing our present discount rates at this time, but
the pressure grows stronger as liquidation in New England
continues.
I am sure that after reading the letters
which I enclose, you will appreciate the reason why we
feel as expressed to you in this letter.
Very truly yours,

ta,
Charles A. Morse,
Governor

COPY

August

9, 1920.

Dear Governor lorss:
With the regular seasonal licuidation in this
District not haying taken place last 7 -ear, necessitating
the financing of a new crop before returns have come in
from the old, with there being no market for wool, and
neither cars nor ships for our grain, we are confronted
with the necessary of rediscounting withoter Federal
reserve banks to a very much greater extent than was ever
This condition will probably obtain
anticipated by us.
f.)r some forty-five to fifty days longer, by which time
some real liquidation should take place.
Owing to the splendid reserve position of your
bank, most of our rediscounts are arranged with you by the
Federal Reserve Board.
New York is taking a part and
Cleveland the remainder.
The Federal Reserve Board has
positively refused to approve the resolution of our Board /.
of Directors which I quoted to you in my letter of July 10,'
and owini_, to absence from the District and from the United
States of a number of our directors, it will be impossible
to get another dir ctorsl meeting before early in September.
Owing to the fact that this matter was so thoroughly discussed
and so definitely acted upon by our directors at their last
meeting, we are without authority to adopt the policy of receiving Liberty Bonds and Victory Notes as collateral at the
market value only.
Ly attention has been called to the fact that in
our rediscounting with you we are required to carry a free
balance amounting to the difference between the amount of notes
rediscounted with you and the market value of the Liberty Bonds
In some
and Victory "fats attached thereto as collateral.
For
instances this brings about a glarin_, inconsistency.
instance, one of our directors who lives in Fort Worth is a wealthy
cattle man.
Desiring funds with which to operate his ranch
business he goes to the First National Bank of Fort Worth and
borrows ,?100,000, attaching thereto as collateral a00,000 in
Liberty Bonds.
The First National rediscounts this note with
us with its endorsement thereon; we in turn add our endoBement and
rediscount the note with you, and although we only received interest at the rate of 5,1
2 we are required to pay you 6; on the entire
$100,000 and get the use of only 485,000, while if this director
had given the First National Bank of Fort Worth his straight note
for :5.100,000, with no security attached, and the First National
had rediscounted that note with us, you would have given ub the
use of the entire ;,'
?100,000 in case of our rediscounting with you.




•

•

Our advances are to such an overwhelming extent made
up of small notes rediscounted for our member banks that it
requires a very great amount of clerical work to prepare an
offering of paper of that kind, and therefore we have to
"scrape the bottom" to find enough member bank promissory
notes and large loans to meet our rediscount requirements.
Bearing that in mind, I am wondering if you can't
go a li
e easy on us and accept the endorsement of our
member bank and the endorsement of this bank as furnishing
sufficient strength to these notes to make up for the difference in the market value of the Liberty Bonds and Victory
Notes. I am certain, like all other Federal reserve banks,
you keep a sufficient margin of collateral with your Federal
Reserve Agent so that no question would arise concerning the
security which you have pledged against your Federal Reserve
note issues.
For your information in connection with our request,
I am enclosing herewith copy of a letter which I have just
received from Yr. L. F. Sailer, Deputy Governor of the Federal
Reserve Bank of New York.




With kind perspnal regards, I am,
Yours very truly,
(Signed) R. L. Van Zandt
Governor.

COPY

August 5, 1920.

Dear Yr. Van Zandt:
We regret exceedingly the delay in replying to
your letter of June 29th with reference to the Federal
Reserve Board's Letter X1954, dated June 15, 1920, your letter havinL, been received during Li. Case' absence for a
month.
•
The policy of this bank in making advances to
our member banks has not been changed, and we are still
making advances on Liberty bonds and Victory notes for the
full face value of the bonds.
We have been advised by the Federal Reserve Board
that the Board's letter of July 15th was not intended to be
mandatory and that if any Federal Reserve Bank desires to
effect rediscounts for other federal reserve banks when the
paper is secured only by a like face amount of Government
bonds, it may do so.
We have not deemed it necessary to require 100% collateral at market value on our rediscounts or
loans for members and see no rqggo_aer_q„ different attitude
.
on .our par_t_taffar.d_redico,unts ---for your bank if you rediscount
th us this season.
_ _
With reference to the ruling of the Federal
Reserve Board that collateral pledged with the Federal
Reserve Agent as security for Federal Reserve notes in turn be
secured by a like market value of Government bonds, we have
also been advised that the Board had modified its ruling so
that this requirement might be waived in any case where the
aggregate of all collateral held by the Federal Reserve Agent
exceeds the amount of Fdderal reserve notes issuedi by an
amount greater than the discrepancy between the market value
of the bonds and the face value of the notes for which they
are pledged as collateral.
As our excess of security with
the agent seems ample to cover any probable deficiency of
collateral market value, we apprehend no difficulty or embarrassment on that score.
I trust that this letter answers your inquiry
fully, and with kind personal regards, I am,




Very truly yours,
(Signed) L. F. Sailer,
Deputy Governor.




rclOral)
S
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111,
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VE BANK "

ALLAS

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AUG 1 102o
copicv.

4u6ust 16, 1920.

THE GOVCIMOil.

p. G. Harding, Goveror,
Federal Reserve Bo,rd,
Washington, D. C.
Lear Governor iiurcling:
, iyour letter_of_the_llthreferring to
I 4Ave)
mine of tb.e 4th rid Governor Van zandt's telegram, Of
the
I ',all discuss this matter - ith----Gov-ernor------4
•Vnzand't,uii
e may conclude to take the matter up
directly zith the Federal Reserve
of Boston. In
fact, the Governor Ihrote them the other day that I
thought vaAs a very fine letter, and it may be, as a
result of this ceirespond.ence, that the attitude of
the Fe0.era1 Reserve Bank of Boston will be changed.
Yours very truly,

2ederal

eserve

.gent




August 11, 7090

Saar &dee Itastse;i:

Referring to your letter of the 4th instant and
to Governor VanZandt's telegram of the 6th, i would
ntato that it is not fetid:tilt to conentratio all of
,
your rre! reunt transaotions with Cle7eland.
A telegram uas sent to Cvovernor !fort's of Boston
yesterday, nekin if his bank would be rifling to sake
some conoesoion in di*soulA rater; on transactions with
Your bank in oonsideration of this free balanoe left
%ith it.
rerlied that kw felt if *Jarman°e should
bc made, it ought sliot be made on 35!.) of the deposit
which they are required ta carry as reserve against
the deposit. The Board decide.d at the meeting this
morning that the entire mattilx had better be left to
the determination or the bank makin,f; the loan and I
would sugge3t„ therefore, that you negotiate dIreet
With the roderal Reserve 3ank of Boston.

Very trily 7ov7st

•overnor

V P. Ransey, Federal Reserve Agent,
Pederal Reserve 13.9.1,k,
Dallas, Texas.




Allzust 110 192c;

`'..)ear Govrnor Mores,
Tour telegram of the loth instant vas *considered
by the Board at the meeting this morning and it was
decided that the matter of any speeial adjustments in
discount rates on inter-bank transactions be left to
the bank making the loan. The Board therefore leaves
the entire natter in your hands for suoh determination
us you say deem proper.
The Board considered your suggestion that advances be made only up to the market value of the bonds
securing the notes offered, leaving the question oft
deposit out of consideration entirely. After discussing the matter with Counsel, hol,ever„ it was decided that it would not be practicable to de this.
Very truly yours,

Governor

Mr. Charles A. Nem, Governer,
Pederal Reserve Bank,
Boston, Mass.

•

TELEGRAM

•

FEDERAL RESERVE SYSTEM
(LEASED WIRE SERVICE)

Wahb

:! 4715
---

RECEIVED AT WASHINGTON, D. C„

Boston 5m AuL; 10th
1:ard.inL;
ThshinL;ton
;_nswerinc your telec,romiaboutal1owncc toil Dallas on -portion of rediscount not
covered by ::larLet value., of collateral left with us on de)osit,our letter to you
of July twent thi
any discount.

m claimed full amount of discount. Dallas objects to .dayinc;

think the Board should settle this matter,but if an allowance
is

to be made to Dallas it should not be made on the thirty five percent
of the
deposit which we are required to carry as reserve against deposit. Would it
he
feasablo for us to advance only the market value

of the Londs and leave out tio

question of the deposit. In this way no dispute could arise as to the amount
of
discount.
7orss




•

Forii48 A

•
FEDPRAL._ RESERVE BOARD
art...., •

LEASED WIRE SERVICE
WASHINGTON

The telegram given below is hereby confirmed.

-Ow
Auzust- 10, 19-2

Assistant Secretary.
2-9454

MORSS
Boston
,
Dilas expects considerable liquidation in near 1 1tu3.71 an cotton
freely. Liaanhile bank complains that in your ractiacount transactions
moving
with it you make no allowance for balance maintained. If you are willing
to ma17:e reasonable allowance Board will interpose no objection.







FL ;ARAL

Assist 30, 1920

Bear Sir:
aoknowledze receipt of your Utter at ma...ka instant.,
in I/LA.0h you question the oorreotneseifihe palmy of the Federal Reserve Bank of :It. Louis in requiring notes secured by
Liberty Bonds and Victory Notes discounted with it to be secured on the basis of market value. The law permits member
"banks to offer to Federal reserve banks for discount their
fates maturing within fifteen days when secured by overnment
bonds as oollateral. It does not authorise Federal reserve
banks to discount the plain note of a member bank without collateral. Is it not a reasonable construction of the law to
hold that collateral notes must be fully secured, not on the
basis of values two years ago or three years hence, but on the
basis of present values?
If a roderal reserve bank should take from a member bank
e mote '2or $10,000 secured by #10,000 par value of Liberty Bonds,
which are worth on the market only #8,500, it seems clear that
it would be discounting $1,500 of the amount merely on the bank's
name without security. NO doubt the Federal reserve bank would
be perfectly safe in most oases in doing this, but the Board
questions the authority of a Federal reserve bank to do so under
the law. However, the mutter is one which is prinarily for the
determination of the Board of Directors of the Federal reserve
bank, as the Federal Reserve Act inposes upon the Board of
Directors the responsibility for the conduct of the bank and
assigns to them the duties usually appertaining to the office
of directors of banking assoCiations and all such duties as are
prescribed by law.
Very truly yours,

Governor
Mr. O. C. Agee, President,
The First National Bank,
Helena, Ark.

ILE

• TELEGRAM

•

•

FEDERAL RESERVE SYSTEM
(LEASED WIRE SERVICE)

c

RECEIVED AT WASHINGTON, D. C..

'BONI- 3A00
1 SOIA.40
40
--me
1
OZ6t,

2, 0(1\1
:
Ct3AISOSIi

Dallas 41u0.„) ,,.u.,.; 6
5 ?
J- D
-

2,3 _

Harding
Washn
Relative last sentence penultimate paragraph your letter to Judge Ramsey dated July
14th. In rediscount with Doston that bank requires free balance left on deposit as
(
suggested but charges regular rate on entire amount with no refund on account of free
balance. This results in our paying rediscount rate one half of one per cent higher
than is received and gives us use of only ninety per cent of amount borrowed. Will
appreciate more satisfactory orranganent if possible to make same. Suggest reduction
in rediscount rate account free balance or arranging all rediscounts for us with
Cleveland.
.

Van Zandt




610P

•
FEDERAL RESERVE BANK
OF DALLAS

_ugust 4, 19.20

. G. Harding, Governor,
e deral e serve Board,
-Zashington, 1).•
Dear Governor Harding:I am just in receipt of your teleg2am, of this date, /in
which JG11 advise that the Board is not yet DreiyareE to aBiOe
resolution adopted by our Board of Directors on July 7th, and
, suggesting that_, defer, for the present and until credit situation
Ae
i
-okii Distienforcing requirement that notes secured by
// 66 es iH
/ I Government obligations be fully secured on basis of market value.
On receipt of this telegram I advised our _,oard thrt
there will be no meeting an the 7th, as that was practically the
only matter of inroortaxice to Be considered, and su..e . of them, if
they could have curie at all, wolad only have done so at a great
inconvenience.
As I wrote you ouite a while ago, we can get along very
well, under present conditions except for the embarrassment of the
requiremants of other 2ederal _ieserve banks touching our rediscounts.
nave noted 'Gib reluaan 30 of the Board t:-o maize anraig&alliii 177)Ther
21edera1 bserve banics ofithe desirability of modifying their attitude
and decision, and that qi .e not at all -orepared to urge that this
be done. Hov.over, if the Board could see its way to dro- , a/gentle
9
hint to the Fede
leserve bans rediscountinr4; with ils,7ie might,
-y
with safety state, with our endorsement, that notes secured by Liberty
bonds
and Victory notes be accc stod at one-hundred cents an the dollar,
it would
make our cour se much easier.
'"'e had, an yesterday, rediscounts in the sum of „23,500,
000,
as I recall. This will some higher, just how much higher
I do not 'rmow.
- are in a way to have fairly considerable liciaidation
e
soon, but in the
meantime cotton wil1 be moving in substantial volu2..e within
10 days, and
this always calls for a good deal of moiiey until the cotton
can be assembled and ready for shipment to ultimate ym.r;mts.
ny way, I am e4
reminding you of the situation, so that
if the Board cares to tol:e any action, they can do
so.




Yours very truly,

J'ederal deserve

gent

Forra8 A

FEDERAL RESERVE BOARD
LEASED WIRE SERVICE
WASH!NGTON

The telegram given below is hereby confirmed.
Assistant Secretary.
2-94.54

RAMSEY
Dallaa
Your telegram third. Board is not yet Trs:pared to ap; rove resolution
adoyted by your board of directors July 7th as quoted, and would suggest that
you defer for the present and until credit situation eases in your district
enforcing requirement that notes secured. by Governmant obligations be fully
secured an basis of market value. General proposition will core up for discussion
at meetings of Federal Reserve Agents and Governors soTTe time this Fall.




HARDING.

TELEGRAM
•

S.

FEDERAL RESERVE SYSTEM
(LEASED WIRE SERVICE)

rfaCial

11 G

WED AT WASHINGTON, D. C„

- 192P

OFFICE::

301fly

Var,RE

9-41111

OP

Dallas 354m Aug 3
Harding
Washington.
Your telegram this date just received. It seems important if not indispensable
that we take some action conforming our treatment of collateral value of government securities to that of other banks. Our board due to meet next Saturday. In
advance of settlement of whole rate problem is the board prepared to approve following resolution adopted by our board of direckors at reetiic July seventh
Quote That within fifteen days after approval fderal reserve board and. until
further notice advances on member banks fifteen day notes secured by victory
)
notes or liberty bonds either or both shall be made at a valuation of eighty five
dents on the dollar for liberty bonds and ninety five cents on the dollar for
victory notes and that member banks desiring to borrow the full anount of the
bonds offered shall be required to pledge an additional amount of eligible paper at least equal to the difference between the marloat value of the bonds and
the face of note, and that the discount rate on notes secured by at least the
face value of liberty bonds or victory notes shall be five per cent UNQUOTE.
Am anxious to have some definite pro gram and expression from the Board 'then
our directors meet on the 7th.




Ramsey.
520p

•

•

Form 148 A

FED
itiR AL. RESERVE BARD
^-)

LEASED WIRE SERVICE
WASHINGTON

The telegram given below is hereby confirmed.
Assistant Secretary.
2-9454

A1.1.:ust 3, 10.
RAI1S.EY
DALLAS
Your telegrm July 28th. Board discussed this morning
your letter
July 14 but is not yet prepared to apyrova recorzzendationa :ado.
No immediate
action seams probable.




ITARDING




•
3662
C.C.AG E E, PRE.ST.

T.H.FAU

W.N. STRAU B.VicE-PREsT.

N ER

aivED
jit 1')Pivita, AfIV.G 5 -1920
ROBT.G0E-V DON,

:first Natittitat ilank
CAPITAL

ormcuor

200,060

SUR PLUS & UNDIVIDED PROFITS S240,00.0.-- -

nOVEPINOR.

helena,Arkansas.
2lugust 2,1920.
14/..vi.P. G. Harding,
Governor, rederal lieserve bank,
vmshington,D.C.
Dear sir:I notice that the branch bunks of the
Federal iieserve system have decreased the amount
loaned on Liberty and Victory bonds;, namely, they
loan 85 /0 on Liberty bonds and 96 70 on Victory
Bonds of their face value.
I would like to have an axpression from you
as to whether you think this is fair when the banks
have bought these bonds outright and have paid par for
same that they are not permitted to borrow their
face value. dhen these bonds were being sold , everyone expected that they would always remain at par,
and possibly sell for a premium, as that has been the
case with government securities in former years.
1 feel that where we have bought these bonds
for the account of the bank,and are carrying same at
fact value , that we should be permitted to borrow
their value from the rederal neserve Danks. Of course
where people go in the open market and buy these
bonds for less than the par value, I don't feel that
they should be permitted to borrow more than the market value of same.
me

Aanking you in advance for your reply giving
your idea in this matter, we are,
fours very ti47,,
-

President.