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OFFICE OF
FEDERAL
R. WARBURG,
RES ERVE BOARD.
Referred to the Secretary
Acknowledgment
Action of the Board
Preparation of reply and return for signature
Investigation and report
Previous correspondence
Filing
The Committee appointed to report upon the question: "How soon can
the
Federal
preceding
Reserve
such
Banks
opening?"
be
begs
opened
and
what
to report as
steps
must
be taken
follows:
The Committee bases its report upon the assumption that
the Federal
Reserve Banks are to open in the simplest possible form on the basis of
theSub-Committee'sreport to the Board, dated October 2, which report
wasadoptedby the Board.
A plan carrying out t h i s program would have to provide for organizations when opening to fulfill the following functions:
1.
The
receiving
and
safe-keeping
of
lawful
$300,000,000
of the about, $ 2 0 0 , 0 0 0 , 0 0 0 or
money which will constitute the deposits and the
payments on account of capital stock to be received by the Federal Reserve
Banks;
2.Therediscount of paper to be received from: member banks.
The
member banks are e n t i t l e d to pay in 50% of their deposits required by law
by rediscount operations (The question whether the Federal Reserve Banks
can temporarily stop
their
rediscount
operations
at
this
point or whether
theymustbeprepared to go on rediscounting when once they have begun
w i l l be discussed
at
a
later
point
in
this
report.)
(108)
3 . The r e c e i v i n g through the Federal Reserve Board and the issue t o
member banks of
4.
a
The
district
Federal
Reserve
Notes.
transfer of balances from the account of one member bank of
to that of another.
5. The transfer of balances between the F e d e r a l Reserve Banks.
(The
question whether or not any of these functions can be dispensed w i t h , tem
(2)
p o r a r i l y a t l e a s t at the opening of the banks, will be discussed in a subsequent part
of t h i s r e p o r t ) .
6.{The]Clear[ingof]national currency (subject to the adoption of the amendment).
What steps w i l l be necessary to perfect organizations of a capacity to
cope with those six requirements?
In enumerating these steps, the Committee makes free to suggest at
thesametimeaplanof how to deal with the same.
1st:
Constitution
of _ the Boards of Directors. This has been perfect-
ed in almost every d i s t r i c t . Forms of oath of office have been handed to
Class C Directors and in most of the cases the f i r s t meeting of the
direct-
ors[hasoccurred]andthetakingofoathhastakenplace[beenadministered]or will have taken place b
the 20th of October.
In the few cases [illegible strikeout] where Class C Directors did
not find i t possible to dispose at once of their holdings of bank stocks
(for
instance,
in San Francisco) i t has been suggested that t e n t a t i v e elec-
tions take place with the understanding that they will be duly r a t i f i e d by
formal action of the Board asrapidlyaspossible.
2nd:
instructed
The
to
Election of Governors. The Federal Reserve Agents have been
proceed with the election of these officers [Governors] as rapidly as
possible (consulting the F e d e r a l Reserve Board where necessary) and to inform the Directors of the Federal Reserve Banks that a conference will be
held at Washington on the 20th of October, when i t
is
expected
that dele-
gationsconsistingof not less than three members (including the Governor
andtheFederalReserveAgent) from each Federal Reserve Bank will be in
attendance. I t is, therefore, to be expected that the election of
governors
willbepushed[furthered]asmuchaspossible,anditi s to be hoped that on the 20th
(3)
the governors representing [of] a l l Federal Reserve Banks will be present.
.3rd:. Election of AdvisoryCouncil.These[AdvisoryCouncil]members are to be elected
by the Directors of each Federal Reserve Bank. A memorandum containing
the Board's views concerning the
qualifications
of such members and the
principles to be followed in electingthe[m]samehas been sent to each FederalReserveAgent for communication to his Board.
4th:[Bylaws]AdoptionofBy-lawsbythe Federal Reserve Banks must of necessity precede their opening.
Under the law (29) these by-laws are to be
prepared by each Federal Reserve Bank, but, in order to secure uniformity,
tentative by-laws have been prepared and sent by the Federal Reserve Board
to a l l Directors of Federal Reserve Banks. and It i s planned to appoint on
October 20 a smallc o m m i t t e e(No. 1 on Legal Matters) consisting of governors, Federal Reserve Agents, e t c . which will agree on uniform by-laws that
shall be adopted,
temporarily at least, by a l l Federal Reserve Banks.
by-laws are to be simple in
form.
to a permanent committee on by-laws.
These
Their further elaboration can be left
The varying conditions existing in
the[several]districtswhich may render necessary some variations of detail should be
covered as far as possible by rules to be adopted by each Federal Reserve
Bank, but i t i s to be urged that the by-laws of a l l Federal Reserve Banks
may remain uniform.
5th: Uniform Stock Certificates and Receipts, to be adopted by a l l
banks shall be submitted to the meeting and turned over to the same Committee (No. 1). (These are to be prepared by Counsel.)
6th: Uniform Accounting. A set of books and forms necessary for the
opening of the banks will be submitted by Mr. Willis toCommitteeNo.2
for
report.
(4)
7th:
A simple system for (a) s e t t l i n g balances and making t r a n s f e r s
between Federal Reserve Banks and (b) between the member banks of a
trict is
dis-
t o be submitted to the same Committee (No. 2) for r e p o r t . (133)
8th:.
Compensation of Directors and Advisory Council.
This i s to be
fixed by the Federal Reserve Banks subject to the approval of the Federal
Reserve Board. C o m m i t t e e No. 3, on organization, should report recommendations. (50-91)
9th: [Commercial Paper:] a Definition of Commercial Paper and Limit for Six months Paper
drawn against Agricultural Products, etc. are to be promulgated by the Federal Reserve Board.
A j o i n t committee consisting of two members of the
Federal Reserve Board and some prominent Governors :and Federal Reserve
Agents should discuss t h i s problem and report recommendations.
mittee
This
com-
(No. 4, called the Committee on Plan and Scope) might also discuss
and report on the general program adopted by the Board for the opening of
the banks. (97-98-109) .
10th: [Building Vaults etc] General Questions of Buildings, Vaults, Inner Organization, Staff,
Salaries, etc. ought to
be
discussed
and
some
general
principles to be fol-
lowed by all banks ought to be reported by Committee No. 3.
1 1 t h : The form of the weekly statement to be issued by each Federal
Reserve Bank. and the Consolidated Statement to be issued by the Federal Reserve Board ought to be submitted and
discussed.
(Mr.
W i l l i s to prepare
these forms which are to be submitted to the Federal Reserve Board for
cussion
dis-
before the 30th of October).(75)by Committee No. 4.
12th:[CreditBureau]Thequestion of a credit bureau and statements to be made to
member banks by customers rediscounting paper ought to be turned over to
the Committee on Plan and Scope. This question might profitably be d i s -
(5)
cussed at a dinner. It would lead too far To take i t up formally at the
conference[wouldleadtoofar].I t i s necessary, however, to explain to the delegates the
portance of this phase and the future development.
13th: Duties of Federal Reserve Agents. These have been discussed in
a special report which is attached.
A special conference ought to be held
by[illegiblestrikethrough]membersof the Federal Reserve Board with the Federal Reserve Agents
at which their functions will be fully discussed and regulations to be
promulgated by the Federal Reserve Board will be agreed upon. These are in
course of preparation. (The report of the Sub-Committee on Federal Reserve
Agent ought to be carefully analyzed by counsel and regulations ought to
be prepared by him on the basis of this report.) (86. Committee No. 5).
14th: Note Issue and Redemption.
Federal Reserve Agents should take
a prominent part in Committee No. 5, to be appointed to deal with this
question.
The Comptroller of the Currency, under whose charge the law pri-
marily places this phase of the functions of the banks, ought to prepare
forms and regulations covering the issue of the notes to Federal Reserve
Agents (81),the[ir]issue of the note by the Federal Reserve Agents to the
Federal Reserve Banks, the safe-keeping of thesenotes,[andthekeepingof]the gold 5% redemption fund to be kept in the Treasury in Washington, etc. (122)
Note for Comptroller,:
(73)
Under the law there i s to beorganized[*]abureau in charge of the
Comptroller and under the supervision of the Federal Reserve Board which is
to be in charge of theexecution[administration]of laws concerning note issues, ect. This is
(6)
to be done (if i t has not already been done):
Some forms have already been
prepared bytheWillis[Preliminary]Committee, which, if approved by the Comptroller,
could be made the basis of the regulations to be submitted by him to the
Board.
( I t is suggested that Counsel go over the law carefully and point
out the various sections of the law that need to be covered.)
15th:[Clearingcurrency:]Committeeto work out plan for Clearing National Currency to
be dealt with by Committee No. 5 (to be prepared by Gov. Hamlin).
16th: Auditing. [This] should be subject of a special report. Federal Reserve
Agents should play a prominent part in this report and i t is suggested that
i t be turned over to Committee No. 5. The reason why Federal Reserve
Agents should be in particular charge of auditing and why auditors should
cooperate with Federal Reserve Agents has been fully discussed in the special
report on Federal Reserve Agents.
I t is suggested that the Secretary of the Federal Reserve Board t e l e graph about the 16th of October to a l l Federal Reserve Agents in order to
ascertain what delegates are coming. There will be probably between forty
and fifty men and excellent committees can be composed from this material.
The personnel should be considered in ample time before the meeting. The [A]
plan for the division of the work outlined among the committees is attached (Exhibit I ) .Thec o m m i t t e e swillrequireallof[thewholedayon]the21stto complete
their
reports
which could then probably be acted upon on the 22nd,
after
which the conference would disband with the order to proceed with the greatest
(7)
possible dispatch. The delegates, upon reaching their homes, w i l l promptly
proceed to engage their staffs and perfect arrangements for quarters, vaults,
furniture, books, forms, stationery, e t c .
To perfect an organization both
as to personnel and physical machinery capable of safely handling even in
the most temporary way the problems above outlined will require at l e a s t
from three to four weeks. Men have to be carefully sifted and particularly
those to occupy positions of great responsibility cannot be found within
a day or two, and, i f found, i t takes them some l i t t l e time to free themselves from their present obligations.
As to vaults, The law requires a double set ofthesame[vaults],onefor the
Federal Reserve Agent and one for the general business of the bank.
In
view of the large sums of cash which w i l l be entrusted to their care,
these banks must provide for the greatest possible degree of safety. Of
course,
i t will be necessary totemporize[maketemporaryarrangements]inthebeginning, but, even then,
i t will no doubt be necessary to strengthen e x i s t i n g available f a c i l i t i e s
or to reshape them so as to be available for the changed conditions, and
i t i s most important that, in this respect, the f a c i l i t i e s will be such as
to enable the banks to go on for some time and until permanent arrangements
can be made without being obliged to make frequent, costly and dangerous
changes while
themachineryisalreadygoing[inoperation].Informalinvestigation
carried on by the Secretary of the Board in his discussions with Federal
Reserve Agents bears out this point of view that at l e a s t this period of
time w i l l be required.
Moreover, information so far received would indicate
!
(8)
that the Federal Reserve Notes w i l l be ready for delivery about November
15 and your Committee i s , therefore, inclined to think that this date
should be viewed as the earliest possible moment at which the banks could
safely be opened. This would presuppose that everybody will proceed at
top speed; that the work will be well planned, that duplications of effort and a l l "red tape" will be avoided. In order to dispatch business,
i t is suggested that the services of additional counsel be secured for
the next few weeks.
Legal documents, contracts, regulations, by-laws, etc.
will have to be formulated and the assistance of a man of quick grasp and
energy would be very helpful. The Federal Reserve Board's Counsel i s
apparently unable at this time to free himself from duties already on
his shoulders. During the conference and the weeks of activity preceding
the opening of the banks such additional counsel seems very desirable.
Before the opening of the banks, and, if possible, before the conference, certain regulations and instructions must be agreed upon and
formulated.
The appended l i s t * shows what remains to be done, but i t i s
urged that the Counsel and the Secretary go through the law carefully and
report to theGovernorsuch additions as may be necessary.
It i s most important that the preparation of the program for the meeting be taken up promptly and made out carefully in all its details.
* Will follow.
(9)
It is suggested that papers be prepared to be given to each delegate
stating the paragraphs of the law requiring action, regulation or discussion and the action and regulation proposed, leaving space for amendments
as they may develop in the discussion.
While this may be termed the positive side of the program, there i s
an equally important[negative]side which is the negative one. The Sub-Committee
reported on Ootobor 2 a plan for the opening of the banks which dealt
withthosethings[topics]that were to be taken up now and those which should be
deferred to be taken up only after the opening of the banks.
It is sug-
gested that a clear statement be made to the delegates as to this program,
and i t is most important that uniformity of views be established concerning
those points amongst themembersof the Board. During the conferences
with the Class C Directors i t has been a frequent occurrence that divergent
views were expressed by members of the Board on such questions: as to the
tine of opening, as to the advisability of opening; the entire system simultaneously or piece-meal,[policyinelcting]candidates for advisory c o u n c i l , clearings,
etc.
It i s most important that a definite policy be adopted for the discussion of these points and the Committee submits a LISt of such items as
i t believes should be taken up by the Board from this point of view.
Exhibit III
The question has been raised whether or not i t would be advisable
to c a l l immediately for the f i r s t payment on account of
the
capital
stock of the Federal Reserve Banks while deferring u n t i l a somewhat
l a t e r date the transfer of the reserve money to the Federal Reserve
Banks. It would not appear that much is to be gained by such [an] early
call
I t could not be made immediately because in order to carry the [it]
[illegiblestrikethrough]intoeffectitwouldbenecessaryt o perfect the organization t o
that point at l e a s t that [where] Governors, cashiers, accountants, auditors,
would have been engaged and
the
vaults
or
other
facilities would be
available to take care of the about eighteen millions of d o l l a r s of
gold which would constitute the f i r s t payment on account of
stock
capital[wouldbeavailable].Butnothingistobegained by such payment. The money
would lie idle, the banks would take the responsibility for funds for
the receipt of which they could hardly be adequately prepared, the
completion
of the organization would be pushed at the sacrifice of the
greater care in selecting the proper men to f i l l the offices, and,
moreover, the withdrawal of eighteen millions of dollars of gold would
crowd [cramp] the
reserves of
the
member
banks
because
the
reduction
of reserve
requirements would not go into effect until later on.
It is the opinion of the Committee that the f i r s t call for payment on account ofthestockcapitalshouldbemadeinconjunction[simultaneously]
with the ANNOUNCEMENT of the Secretary of the Treasury that the banks
have been organized, so that payment for stock capital and deposit of
reserve money could be made simultaneously, or in quick succession.
The Committee has been asked to report upon the question
whether i t would recommend the opening of the banks piece-meal. It is
11
clear that a s t a t e of conditions which would reduce reserves and inaugurate a system of rediscounting in one part of the country, while
the very section so opened might draw for gold on other sections in
whichreserverequirementswould[had]not yet have been reduced, would
easily lead to confusion.
The Committee would recommend that unless there be the most
urgent reasons to the contrary, all efforts should be bent on that [directed to]
[opening the banks of] the system be opened simultaneously. The only exception might possibly be [found in] the San Francisco District where the delay caused by the
great distance t o be covered by delegates and communications may possibly bring about the necessity of opening a
Federal Reserve Banks.
It
is
little
later than the other
to be hoped that the San Francisco Bank
may succeed in keeping pace with the other eleven banks, but in case
THIS
should not be possible the Pacific Coast district forms a unit
almost by Itself and while undesirable, i t is very conceivable that
this district [bank] should open up some weeks later than the other[s] banks
Should the banks open in case the Federal Reserve Notes are not
ready for delivery[?] and Should they open for the mere purpose of
receiving the deposits from the member banks and such amount of rediscounts as may be
[offered]
to complete the balance to be kept with
theFederalReserveBanksprescribedbythe1aw?[Shouldtheyopen]upona plan of
sus-
pending any further operations u n t i l such time as the Federal Reserve
Notes would be ready for delivery?
To receive the deposits of the banks and to continue discountoperations without being able to furnish Federal Reserve Notes
would be an unfortunate procedure. Any additional rediscount granted
to any
member bank would mean a depletion of the gold [supply] of the
12
Federal Reserve Banks because instead of issuing Federal Reserve Bank
Notes, they would have to pay out lawful money.
If,
on
the
other
hand, the Federal Reserve Banks stopped taking further d i s c o u n t s the
effect
would
be
an
equally unfortunate one. The Federal Reserve Banks
could not permit the member banks to draw against their
balances,
these
would be tied up and the member banks would be reduced t o dealing with
their cash in vault
alone
and
any
further
withdrawal
of gold would be
felt by them only so much more acutely. Moreover, i f the member banks
in order to produce the required balance with the Federal Reserve Banks [had]
would have rediscounted
$250,000,
for
illustration,
maturing
in
fifteen
days, the Federal Reserve BANKS would collect this paper after fifteen
days without being in a position of [able to] rediscounting new paper against
the amount that i tcould[might]c o l l e c t .
'They
would therefore withdraw so
much more lawful money from circulation.
The only advantage to be gained by the opening of the Federal
Reserve Banks in this crippled condition would be to bring
the
reduction
reduction
is
appears most
of
reserve
immediately
desirable
requirements.
into
effect
I t does not appear that t h i s
required at t h i s time; quite the contrary, i t
that
all the gold be held together as much as
possible until the opening of the 'Federal Reserve Banks so
THAT
the abil-
ity of the member banks of [to] putting the largest possible amount of gold
i n t o these banks should not
lessened.
of the reserve requirements might in
ON
certain
the
parts
one
of
hand
the
reduction
the country have
the effect of creating [tend to produce] expansion without the control[to be] later and to be ex
ercised
by the Federal Reserve Banks; on the other hand, the anxiety ex-
isting in the larger centers concerning the effect
serves would
http://fraser.stlouisfed.org/
few weeks i n
Federal Reserve Bank of St. Louis
of the s h i f t i n g of re-
be increased. Great headway has b e e n made during these last
a l l a y i n g t h i s fear and this has been a very helpful factor
13
in bringing about willingness on the part of the banks to help liberally
in the present situation. This effect isliable[likely]tobelost and the
criticism will be leveled at the Federal Reserve Board or the Secretary
of the Treasury because it would be plainly advertisedallover[throughout]thecountry that the only reason for opening the system in so crippled a form
would be THE inability on the part of those in charge to deliver in time
the Federal Reserve Notes.
The Committee i s strongly of the opinion that i t will be a grave
mistake to contemplate the opening of the banks without being able to
issue Federal Reserve Notes, which as a matter of fact wouldbeparamount[tanta-]
mount to the opening foroneday,[andthen]closingagain "pending repairs." It
wouldgive[hurttheprestigeof]thesystemablackeyea l l over the world.
THE Committee suggests that it would have a very unfortunate
effect upon those who are to be entrusted with the running of the system
i f they should feel that on questions of such importance in which the
responsibility of the perfection of the organization and for the running
of the same rests on them, the would not have been [had not been] consulted.
Moreover, the Committee makes free to suggest that in the negotiations with stating definitely when we expect to open a strategic advantage in ourfriendsacrossthewater[foreigners]weshouldlose instead of giving
them the feeling that our position will depend somewhat on their
actions
and that the measure of relief which will come to their own markets [as the]
[resultof]reflex action from ours will largely depend upon their own actions. them.
*
YourCommitteefurthermoredrawsyour attention to the fact that
when before the House Committee members of the Board stated clearly
that i t would be necessary for the Federal Reserve Board to
24
the f a t e of the pending amendments before being able to
establish
the
policy to be pursued by the Federal Reserve Banks. From t h i s point
of view it wouldbeu n f o r t u n a t eat this time to make any definite
announcement. In case the amendments should not be
SECURED
i t would be
necessary t h a t the Federal Reserve Board agree on a definite policy as t o
the i n t e r p r e t a t i o n of its power t o
suspend
reserve
requirements.
If
i t should be decided to proceed boldly in exercising the powers granted
by this clause, and if counsel advises the Board that it has the power
necessary to meet the situation, this phase ought to be fully discussed
a t the coming conference so that the governors and members of the Boards
be f u l l y apprised of the policy to beadoptedbythem.few«u
It would be very helpful to know on how much gold from the Treasury
the Federal Reserve Banks could count when opening.
W.P.G. Harding
Paul M. Warburg.
EXHIBIT I .
No. 2.
No. 1.
Committee on Local Matters
1. By-Laws
2.
Stock
1.
Books and forms
2. Settling balances and
between member banks
certificate
transfers
3.
Settling balances and transfers
between Federal Reserve Banks.
4.
Definition "Net Balances of Deposits"
. 4.
(166)
Committee on Organization
Committee on Plan & Scope.
1. Buildings, Vaults, Staff,
Salaries (room for F.R. Agent)
1.
Definition Commercial paper
Open market transactions
Bank acceptances
2. Compensation for Directors and
Advisory council
Restriction a g r i c u l t u r a l p a p e r
2.
Weekly statement
3.
• 5.
Credit
4.
"Program
Federal Reserve Agents
1.
Duties of F e d e r a l Reserve Agents
2. Note issue and redemption
3.
Auditing
4. Clearing National Bank Currency.
bureau
for development of banks
FEDERAL RESERVE
ORGANIZATION
BANKS
Counsel
Uniform stock certificates and receipts to be adopted
by banks.
Duties F. R. Agents. Prepare regulations based on analysis of report of Sub-Committee. 86.
Form of weekly statement. Prepare and subDo our minutes contain the communication of the Comptroller of the Currency to effect that organization
c e r t i f i c a t e s have been filed by a11 F.R.Banks. 22-23
I t is urgently required that we get counsel's opinion
about the powers of the F.R. Board to suspend reserve
requirements having particular reference to the requirement with respect to cash in vault kept as balance with F. R Bank.
Give opinion concerning last paragraph of 163 and give
opinion concerning 177, regarding directors' fees.
Are the books, forms, etc. covered by paragraphs 6 and 7 Committee report prepared in
sufficient number? Submit for approval to
committee preliminary to conference.
mit for discussion by Board prior to conference October 20th. 75.
Communicate to each bank the number and distinctive letter assigned
to i t for note issue
Advise all F. R. Agents to notify as to
classification of A B & C Directors. 52.
EXHIBIT II
Page two.
Is requested to secure from Mr. Ralph definite statement as to when F. R. Notes w i l l be ready for
delivery and in what amounts.
Prepare forms and regulations covering note issue. 122-81-73.
Expense printing notes to be levied and assessed on F. R. Banks. 128.
The law r e q u i r e s that the Comptroller shall appoint examiners and the Federal Reserve Board shall
fix salaries upon the recommendation of the Comptroller. Is the future title of these examiners
to be "Federal Examiner" and has the Comptroller any plan in mind which he desires to submit?
EXHIBIT III.
Until after the opening of the banks, the following functions s h a l l not be
taken up,
and it is
and e f f o r t s , t h i s
1.
SUGGESTED THAt,
discussion
be
in order to avoid s c a t t e r i n g of a t t e n t i o n
refrained
from by the conference:
Opening of branches;
2. Special
3.
permit to National Banks to act as t r u s t e e ,
executors,
etc.;
Upon market transactions (including foreign exchange)
4.
Purchase
and s a l e of U. S. bonds and revenue bonds, e t c . ;
5. Appointment of
foreign
agents;
6. Charges to be c o l l e c t e d by member banks from patrons whose checks
are cleared through Federal Reserve Banks;
7.
Note:
of
Charges to be imposed for service of clearing or
dered by F e d e r a l Reserve Banks.
collection
ren-
I t is very important t h a t an understanding be reached upon the question
clearings.
There
is
evidence
that there e x i s t s a strong tendency on the
part of the banks to dump upon the F e d e r a l Reserve Banks their e n t i r e transit
business, which
is
not a profitable one to many now and w i l l not be a p r o f i t -
able one a f t e r the inauguration of the system. The Federal Reserve Banks i n
taking
ovor the c l e a r i n g house functions and the c o l l e c t i o n business of the en-
tire c o u n t r y might e a s i l y undertake for the benefit of' the banks a burden for which
they would receive very insufficient remuneration and which would force them t o
create an enormous and very
expensive
crease the r e s p o n s i b i l i t y
those in charge of
of
organization.
the
It would. very heavily
and
SYSTEM
ses and interfere with the banking and earning power of
the
Federal
to i t s
in-
expen-
Reserve Banks.
I t is therefore suggested that t h i s subject be approached only a f t e r the most
careful study and i n v e s t i g a t i o n and t h a t no single Federal Reserve Bank be authorized to take t h i s problem up before, as a matter
will
have
been discussed.
of
principle,
the
entire
subject
There are certain powers given to the Federal Reserve Banks which
should be exercised only upon some joint plan of operation.
Amongst others
are the following:
Dealing in gold coin or bullion at home or abroad, making loans thereon
and contracting for loans of gold.(1ll)
To buy and sell United States bonds and notes (and warrants
having
to run not to exceed six months, issued by municipalities, etc.) (112)
The opening and maintaining of banking accounts in foreign countries
and the establishment of
agencies.*
To purchase and sell foreign exchange.
THE purchase of bank acceptances.
Exchanging of 2% Government Bonds into 3% Bonds and one-year notes.
The Committee recommends that the suggestion be made to the conference that an Executive Council of the Federal Reserve Banks be created to
consist of the twelve governors, of which seven s h a l l constitute a quorum.
I t should also be provided that the banks may delegate a deputy to take
the place of the Governor and that they might vote by l e t t e r , telegram or
proxy in case the question
to
be voted upon will have been previously
communicated to the Federal Reserve Banks.
This Executive Council should have power to deal with these and similar
questions delegated to i t by the Federal Reserve Banks.
In case this Council
*The Board ought to be prepared to answer the question: whether "agencies"
means foreign branches to be opened by the Federal Reserve Banks. I t is suggested that this would be inadvisable for the Federal Reserve banking system
and that i t would be better to follow the system of the European central
banks that employ other existing banks and private firms to act as their
agents or agencies.
(3)
should decide to carry on operations of this kind for the joint account of
a l l Federal Reserve Banks, they should be apportioned pro rata the stock
capital of the Federal Reserve Banks.
The Board will have to discuss with counsel paragraph 163:
"Nomemberbank shall act as the medium or agent of a nonmember
bank in applying for or receiving discounts from a Federal Reserve Bank under the provisions of this Act except by permission of the Federal Reserve Board."
Evidently this i s not to be interpreted as forbidding the rediscount by
member banks of bank paper endorsed to them by non-member banks but i t i s
vary difficult to define what i s termed "medium or agent" in this case.
Member banks are entitled to a ruling inasmuch as the power is vested in
the Federal Reserve Board to give same.
Clause 164:
"The reserve carried by a member bank with a Federal Reserve
Bank may, under the regulations and sub]act to such penalt i e s as may be prescribed by the Federal Reserve Board, be
checked against and withdrawn by such member bank for the
purpose of meeting existing l i a b i l i t i e s , etc."
ought to be studied by the Federal Reserve Board or possibly by one of the
committees.
The Committee has suggested that the question of how to define "net
balances of deposits" be referred to the Committee on Accounting. The
Federal Reserve Board w i l l have to decide whether or not i t wants to prescribe that each bank state daily at the close of each day to the Federal
Reserve Bank the amount of i t s net balance, stating at the same time the
amount of the balance due to the Federal Reserve Bank under the provisions
(3)
of the Act and the actua1 balance kept for that day. It may be a routine
matter for each bank that, at the close of the day. I t should send such
statement over the signature of its president or cashier. The penalty to
be imposed, however, for encroaching upon the required balance should be
fairly heavy because that would be conducive to a policy to be adopted by
the banks of keeping their balances rather in excess of the minimum required.
Respectfully submitted:
(Signed) Paul M. Warburg
(signed) W. P. G. Harding.
Committee.
P. M. W.
10-13-14
The main problem confronting the Federal Reserve Board is the question
of whether the Federal Reserve Banks should be opened in the near future or
whether their establishment should be indefinitely postponed.
I say indef-
initely because I believe that if these Federal Reserve Banks are not opened
now it may be impossible to open them for a year, or possibly even longer}
because with all the emergency currency that will be outstanding within a
few months, with our gold supply more badly scattered than ever (in all probability we shall have substantial premium on gold unless we open the Reserve
Banks), our position will be so weak when the moratoria in Europe shall have
been lifted and the demand for gold in that quarter will be so enormous that
the Federal Reserve system if in operation at that time, having no control
whatever upon the American market, would be in an extremely precarious situation. To my mind it would be helpless and it would not be long before its
own position would become involved. If we want to open, I believe we shall
have to open now, and the sooner the better.
But we could not think of opening now unless the law be radically amended
in some respects. If the banks opened under the present law they would have
a capital paid in of about $19,000,000 and deposits of about $250,000,000, Under present circumstances a very large portion of these deposits would be paid
in by way of rediscounts, so that one might expect that the actual gold held in
the aggregate by the new banks would amount to around $150,000,000. Against
this there is at present a gold obligation due in London of $80,000,000, and
it has been figured that our total indebtedness, though partly covered by the
present moratorium, amounts to $500,000,000. While I am confident that through
the shipment of our food supplies this indebtedness will be gradually liquidated,
the immediate drain on our gold supply might prove very embarrassing, and
-2whether or not we might be able to meet the present situation, past and present
experience shows conclusively that a gold reserve of $250,000,000 i s not sufficient to safe-guard the immense financial structure of currency and bank
credits of the Halted States.
The United States is rich in gold. I t s entire gold holding, including
the holdings of a l l banks, the free Treasury balance, and gold in circulation,
is estimated to amount to upwards of $l,500,000,000.
I t i s apparent how inade-
quate is a. system which assembles. only $250,000,000 of this gold and leaves
about $l,250,000,00 free as an absolutely useless and wasted asset of the
nation.
It
should be the object of the Owen - Glass b i l l to consolidate as
much as possible a l l gold in the Federal Reserve banks and the Treasury and to
get i t away from the cash vaults of the National banks, the State banks and
the trust companies and out of circulation.
From this point of view I believe
that the Federal Reserve Act ought to be amended, provided i t does not already
clearly vest in the Federal Reserve Board the power to do the following things:
To change at i t s discretion the dates upon which the further installments
of the capital stock of the Federal Reserve Banks are payable and. furthermore
to postpone the dates when the reserve requirements of the member banks shall
go into effect and to modify such requirements to meet the situation by unanimous
vote of the Federal Reserve Board. The Federal Reserve Board with such powers
vested in i t could rule that Federal Reserve bank notes should be counted as
reserve of member banks (the Owen-Glass b i l l itself does not specifically state
anything to the contrary) and i t could furthermore rule that whether the reserve
be held as balance with the Federal Reserve Bank or in their own vaults be optional with the member banks.
This would bring about a most desirable change,
that i s , the transfer of the gold from the member banks to the Federal Reserve
banks.
Such member banks as would not cooperate with this could be easily
brought in line by the power of the Federal Reserve Bank of refusing them notes
or rediscounts.
Member banks now hold in their vaults about $970,000,000 of
specie and legal tender notes, and i t would be safe to figure that the Federal
Reserve Banks could control no less than $800,000,000 of this amount.
unnecessary to enlarge upon the effect.
It
is
If $80,000,000 be withdrawn in this
case the gold cover is only weakened by ten per cent.
If $80,000,000 be with-
drawn out of $150,000,000 the gold cover would be reduced by fifty p«r cent and
the structure would either be dangerously weakened or a contraction would become necessary so great that it might bring about general confusion and panic.
There is no reason whatsoever why Federal Reserve bank notes should not be
counted as reserves just as much as the notes of the German Reichsbank and the
Bank of France are counted as reserves in those countries.
There is even more
reason for counting them here as reserve money, because the German and French
notes are notes of private institutions while the American notes are obligations
of the United States, While national banks should certainly not be permitted
to count their own obligations as reserve, there is no reason whatever why they
should sot count the United States obligations as reserves, for which as entirely
independent institutions the Federal Reserve banks are primarily
responsible.
This principle has been recognized by the law when i t permits a large part of the
reserve to be kept as balance with the Federal Reserve Banks, which as a matter
of fact, under the system as i t stands now is not different from Federal Reserve
bank notes, inasmuch as balance can be converted into notes and notes can be converted into balance.
There is only one reason why the member banks should wish not
to part with their gold and that is because they have the obligation of redeeming
their national bank currency in gold.
If, however, they agree to put a l l
their
gold holdings into Federal Reserve Banks, the responsibility of providing the
gold for the purpose of redeeming ought to be thrown upon the Federal Reserve
Banks and thememberbanks should be permitted to redeem their national bank
currency through the Federal Reserve Banks or by payment in Federal Reserve
bank notes.
The federal reserve
bank-notes must gradually become the c i r -
culating medium of the entire country. The gold notes must be withdrawn and
assembled in the Federal Reserve Banks, and the national bank currency will be
gradually withdrawn.
The Owen-Glass b i l l should be attended so a* to give the Federal Reserve
Banks with the approval of the Federal Reserve Board, discretionary power to
begin to purchase at a price not to exceed par, the United States Government
bonds a g a i n s t which currency has been issued. The Federal Reserve banks ought
to be permitted to purchase these bonds at any time (not only after the
expira-
tion of two years) and their purchase ought not be limited to $25,000,000 per
year, because i t may become very necessary for the Federal Reserve Banks to
bring about contraction in order to find effective means of reducing the vast
volume of currency which will have been issued.
I t is a thought well worth
considering whether the Federal Reserve Banks should not gradually assume by
same method to be further developed the Aidrich-Vreeland circulation.
I t would
give a very much desired revenue to the Federa1 Reserve Banks und i t would put
t h i s circulation under the control of the Federal Reserve Banks. While i t might
reduce to a marked extent the gold cover behind the notes, I believe we are only
deceiving ourselves if we leave this circulation outstanding and do not figure
against the t o t a l circulation the gold reserve which exists to cover a l l
standing circulation.
Moreover, the obligation is the same if we consider
that on the one hand we have a l l the member bunks united as currency
out-
associations
-5and liable for the circulation and on the other we have the same member banks
united as Federal Reserve banks responsible for the Federal Reserve notes. The
currency associations will have to fall back on the Federal Reserve banks anyhow,
for the redemption of their notes, and I believe that we would get a clearer
vision and better results by having at least the power to assume this entire
circulation.
I do not deny that unless the Federal Reserve Board is fully
conscious of the terrific responsibility which it would undertake in permitting
inflation that the system would be a dangerous one. But past and present experience
has shown that in establishing a system of this kind, we have to see to it
that the greatest possible power is vested in a central organ, whatever that way
be, and that only is vast power lies safety in critical times, and that for normal
time one must rely on the ability and conscientiousness of the man in charge
to bring about the necessary contraction. In this case it is, to my mind, a much
safer system to corral all the gold and operate the system normally with a gold
reserve of 80 to 100 per cent rather than to let the gold be scattered and believe
that there is safety in permitting to each bank to needlessly hoard a vast amount
of gold and let the gold reserve in the general reservoir consist of 50 or 60
per cent subject to reduction 20, or even 10 per cent in case of emergency. To
my mind there cannot be any doubt as to which of the two systems is the safer and
more conservative.
@FedFRASER