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582 FEDERAL RESERVE BULLETIN. J une, W20. (d) “ What in the effect upon the general situation of for banking credit which are usually made later on in the the increased Treasury borrowings and w'hat should be year. The average reserves of the federal Reserve Banks the policy of the Federal Reserve Banks in establishing are now a little over 42$ per cent, as against 45 per cent at rates of discount on paper secured by certificates of j the beginning of the year and about 51 per cent 12 monthago. indebtedness?” It is obvious that the borrowings of the Treasury have The Federal Advisory Council, which is composed of one the same effect upon the general credit situation as those member from each Federal Reserve district, elected an of other borrowers. The Council w'ould suggest the nually by the board of directors of the Federal Reserve wisdom of congressional relief from the burden of ; Bank, is required by section 12 of the Federal Reserve Government financing by a policy of rigid economy; : Act to meet in Washington at least four times each year the revision of the tax laws for the sake of a more equitable The Council is authorized “ to confer directly with the distribution of the burden without reducing the revenue; j Federal Reserve Board on general business conditions; to the enactment of the budget system, the budget to include j make oral or written representations concerning matters provision for the gradual payment of the short-time obliga within the jurisdiction of said board; to call for informa tions of the Treasury. These would of necessity preclude tion and to make recommendations in regard to discount unwise appropriations, such as the proposed, soldiers’ rates, rediscount business, note issues, reserve conditions bonus. in the various distric ts, the purchase* and sale of gold nr In view of the large volume of Treasury certificates of securities by reserve banks, open-market operations by indebtedness carried by member banks at the instance of said banks, and the* general affairs of the* reserve banking the Treasury Department, we Itelieve that rates estab system.” Upon receipt of a notice that the Council would hold its lished by the Federal Reserve Banks on paper secured by them should not be materially greater than the rates regular meeting on May 17, the Board extended an invi tation to the three Class A directors of each Federal Re borne by the certificates. («) “ Should there be a revision of rates on paper secured serve Bank, who are the representatives of the stockhold ing banks, to come to Washington at the same time for by Lilw*rty bonds and Victory notes?” From a survey of the present rates in force by the conference with the Federal Reserve Board and the Fed Federal Reserve Banks it would seem that fi per cent is eral Advisory Council. This conference was held on the now being charged on paper secured by Liberty bonds and 18th instant and it was developed at the meeting that the Victory notes. In the judgment of the Council, when and present credit expansion is due in great part to the* abnor if any further revision of rates should be marie there should mally high pric«*s of goods and commodities now prevailing be shown due consideration for the original subscriber of throughout the* country and to the congestion of foodstuffs and essential raw materials at. or near, points of produc Government securities. tion because of lack of transportation facilities. Th<* Board is convinced that if the unsold portions of last year’s crops can be brought to market before the new Discount Policy of the Reserve Banks. crop matures, the liouidation of credit* which are now tied up in carrying the old crops will be sufficient to offset to a In response to a resolution of the Senate, considerable degree the credit demands which will be the Federal Reserve Board on May 25 trans made upon the banks in moving the crop of 1920. At the* conference above* referm i to the Board’s views mitted to the President of the Senate the fol were outlined by its governor, substantially as follows: The lowing letter: member banks should lean le*ss heavilv upon the Fe*elerai May 25, 1920 Reserve Banks and re*lv more upon their own re*sources, S i r : On May 17, 1920, the Senate adopted the following unnecessary and habitual borrowings should be discour resolution: aged and the liquidation of long standing, nonessential “ Retohtd, That the Federal Reserve Board be directed loans should procee*d. Banks were cautione*d, however, to advise the Senate what steps it purposes to take or to that drastic steps should be avoided and that the method recommend to the member banks of the Federal Reserve adopted should be orderly, for gradual liquidation will System to meet the existing inflation of currency and result in permanent improvement, while too rapid defla credits and consequent high prices, and what further steps tion w'ould be injurious and should be* avoi<k*d. The it purposes to take or recommend to mobilize credits in Board pointed out the necessity for extending such credits order to move the 1920 crop.” as may be necessary to promote essential production, espeIn response, the Board desires to say that it has recog ciallv of fexxlstuffs. and, that if for any rc*ason it should nized for many months past that the expansion of bank prove impracticable to incre*ase* e*sse*ntiai production, there credits in this country was proceeding at a rate not war should be greater economy in consumption and more ranted by the production and consumption of goods. It moderation in the use of c m lit. The problem of the has repeatedly admonished the Federal Reserve Banks banking syste*m of the country is to chc*ck further expan that influence should be exerted upon the member banks sion and to bring about a normal and healthy liquidation to induce them to avoid undue expansion of loans and to without curtailing e*sse»ntial production and without keep their volume of outstanding credits within moderate shock to industry*, and, as far as possible, without dis bounds. turbance of legitimate commerce and business. In order Beginning six months ago the rates of discount on various to effect this it seems necessary to distinguish between classes of paper at the Federal Reserve Banks were ad essential and nonessential loans." but the Federal Reserve vanced. During the latter part of January the present Board feels it would be a most difficult task, which it rates w’ere put into effect. These advances, while un should not unelertake to attempt by general rule of eoundoubtedly checking credit transactions which otherwise try-wiele application to make this distinction. During would have been made, have not been entirely effective the war there* was a broael underhung principle that essenin bringing about the reduction in loans desired and which tials must be “ necessary or contributory to the conduct might normally have been expected during the early of the w*ar,” but notwithstanding the sharp outline of months of the year. Liquidation during these months is this principle much difficulty was experienced by the entirely natural and healthy and is necessary in order various war boards in elefining essentials and nonesse*ntials. that the banks may be prepared to meet the demands All the more difficult would -it be for the Federal Reserve made upon them during the crop making and harvesting Boarel to make such a general elefinition in the present seasons, but there has been no such liquidation and on circumstances the contrary commercial loans have steadily increased Section 13 of the Federal Reserve Act defines the eli Thus it appears that the public has anticipated demands gibility of paper for discount by the Federal Reserve JT «, 1920. FEDERAL RESERVE BULLETIN, 583 Bank'< and lays down a general rule that any paper mat ur resources of the member and non member banks would ine within the time prescribed and ‘‘ issued or drawn for be ample to take care of the essential business of the coun agricultural, industrial, or commercial purposes, or the try and to a large extent of nonessentials as well if there proceeds of which have been used, or are to be used, for were a freer flow of goods and credit. If “ frozen loans” such purposes" is eligible. No expressed condition is were liquefied, and if commodities which are held back made regarding the essential or nonessential character of either for speculative purposes or because of lack of trans the transactions giving rise to notes which may be offered portation facilities should go to the markets: and if large for discount, and the Federal Reserve Hoard is not re- stocks of merchandise should be reduced, the resultant <l'iired, and properly could not he expected, generally to release of credit would hax’e a most beneficial effect upon adopt such a criterion of eligibility. It is too much a the general situation. In the meantime everything must matter of local conditions and local knowledge to justify be done to expedite the release of these credits and to at this time any general country wide ruling bv the Board restrict nonessential credits in future. even if such a ruling were deemed helpful. While the problem of credit regulation and control is On the other hand, there is nothing in the Federal R e national and even international in its scop*, y’et in the last serve Act which requires a Federal Reserve Hank to make analysis it Is merely an aggregation of individual problems, ,mv investment or to rediscount any particular paper or and the proper working out of the situation must depend class of paper. The language of both sections 13 and 14 upon the public and upon the banks which deal with the i- permissive only. Section I of the Federal Reserve Act, public. The public must be made to realize the necessity however, requires the directors of a Federal Reserve of economy in expenditures and in consequent demands for Bank to administer its affairs “ fairly and im partially and banking credit. The banks themselves are best able to without discrimination in favor of or against any member impress the importance of this policy up>n the public. bank." and subject to the provisions of law and the orders For the further information of the Senate the Board cf th e Federal Reserve Board to extend “ to each member quotes from the report of the Federal Advisory Council bank such discounts, advancements, and accommoda made to it on May IS , signed by’ James B . Kurgan, tion* a* may be safely and reasonably made with due president: regard for the claims and demands of other member banks. ” “ The Council has given consideration to the matters Thus the directors of a Federal Reserve Bank have the included in your communication of April 17 and begB to power to limit the volume and character of loans which reply’ thereto in the following manner, following the order in their judgment may be safely and reasonably made to sellout by you. anv member bank. “ (a) ‘Causes of continued expansion of credits and of The recent amendment to paragraph (d) of section 14 Federal note issues.’ distinctly authorizes each F'ederal Reserve Hank on its “ There an* many contributing causes of which the own account, without reference to action taken by any following may be regarded a« paramount: other F'ederal Reserve Hank, to establish a normal dis “ (1) We recognize, of course, that the frrst cause ip the count or credit line for each member bank, and permits Great War. the imposition of graduated rates on discount lines in “ (2) Great extravagance, national, municipal and excess of the normal line. Thus amendment, however, individual. does not repeal or modify sections 4 and 13, and a F'ederal “ (3) Inefficiency and indifference of labor resulting in Reserve Hank is still free to decline to discount any paper lessening production. which in its judgment d<x*s not constitute a desirable “ (4) A shortage of transportation facilities, thus pre investment for it or which in its opinion would not consti venting the normal movement of commodities. tute a safe and reasonable investment within the meaning “ (5) The vicious circle of increasing wages and price*. of section 4. “ (b) ‘How can the reserve position of the Federal It is the view of the Board, however, that while Federal Reserve Banks be materially strengthened before the Reserve Banks may properly undertake in their trans seasonal demand sets in next fall without undue dis actions with member banks to discriminate between turbance of the processes of production and distribution?’ essential and nonessential loans, nevertheless that dis “ B y urging upon member banks through the Federal crimination might much better be made at the source by Reserve Banks the wisdom of showing borrowers the the member banks themselves. The individual banker necessity of the curtailment of general credits, and espe comes in direct contact with his customers: he is better cially’ for nonessential uses, as well as continuing to qualified than anyone else to advise the customer, because discourage loans for capital and speculative purposes; by of his familiarity, not only with the customer’s business checking excessive borrowings through the application of but with the general business conditions and needs in his higher rates. immediate locality. In making loans he is bound by no “ (c) ‘If steps can not be taken at this time leading to a general rule of law as to the character of the purpose for more normal proportion between the volume of credits which a loan is being asked. Fie is entirely free to exercise and the volume of goodp, when can they be taken?’ discretion, and can make one loan and decline another “ In our opinion steps should be taken now, as outlined a.* his judgment may dictate. He can estimate with a fair in answer to the last question. degree of accuracy the legitimate demands for credit “ (d) ‘What is the effect upon the general situation of which are liable to be made upon him, as well as the the increased Treasury borrowings and what should be fluctuations in the volume of his deposits. He knows the policy of the Federal Reserve Hanks in establishing what industries sustain his community, and is thus quali rates of discount on paper secured by certificates of in fied to pass upon the essential or nonessential character of debtedness?’ loans offered him. He knows, or should know, what “ It is obvious that the borrowings of the Treasury’ have ^discount line he may reasonably expect of his F'ederal the same effect upon the general credit situation as those Reserve Bank, and he ought not to regard this line as a of other borrowers. The council would suggest the wis permanent addition to his capital. With knowledge of dom of congressional relief from the burden of Government The limitations or penalties put upon his borrowings from financing by a policy of rigid economy; the provision of fhe Federal Reserve Banks the banker may be depended the tax laws for the sake of a more equitable distribution up«n to use a more discriminating judgment in granting of the burden without reducing the revenue; the enact credit accommodations to his customers, and that judg ment of the budget system, the budget to include pro ment he must exercise if the present situation is to be vision for the gradual payment of the short-time obliga remedied fundamentally’. tions of the Treasury’. These would of necem ty preclude It Is true that under existing conditions the volume of un wise appropriat ions, such as the proposed soldiers’ bonus. 1redit required in any’ transaction is much greater than “ In view of the large volume or Treasury certificates of "a* the case in prewar times, but it is also true that the indebtedness carried by member banks at the instance of 584 FEDERAL RESERVE BU LLETIN . J r v K, 1 9 ^ the Treasury Department, we Relieve that rate? e*ial»The methods which are followed in the Inhed by the Federal Reserve Hanks on paper .secured extension of accommodation to hanks differ by them should not be materially greater than the ratios in important particulars from those followed borne bv the certificates. ” The ftoard feels assured that the banks of the country in extending accommodation to mercantile now realize the necessity of more conservatism in ex houses. With the latter, borrowing is tending credits and of a reasonable reduction in the assumed to be only a natural and recurring volume of credit? now outstanding. The Board will not hesitate, so far as it may be necessary, to bring to bear all operation. The general operations of the its statutory powers in regulating the volume of credit, enterprise are eonsidered, and on this basis but wishes to point out that the more vi’ al problem.® , the fine of credit is extended. Borrowing relating to the movement of the l'LH) crop are physical by a hank, however, is in general not so rather than financial. Instead of viewing its trans This was the unanimous view of those present at the regarded. conference on the IKth instant, at which the following actions as a whole and on this basis deter resolution was adopted: mining the line of accommodation, st 1The whole country is suffering from inflation of prices with the conse desired rather to g o hack of the general quent inflation of credit. From reports made by the inemt»ers of this conference, representing every section of the country it is obvious that operations and to consider the specific trans great sums are tied up in products which if marketed would relieve actions which occur, to tin* extent at least necessity, tend to reduce the price level, and relieve the strain on our credit system. of having the paper representing this trans This congestion of freight is found in practically all of the large railroad centers and shipping ports It arises chiefly from inadequate transmu action as collateral, ami analyzing these hilltation facilities available at this time and is seriously crippling business In consequence We are informed that the per ton mile of freight increased in three years — | receivable to some extent. 1916, 1917, and 1918—17 per cent, while the freight cars in service during no line of credit is in general fixed, hut each the same period increased 1.9 per cent. A striking necessity exists which can only t>e relieved through the individual case is considered on its merits, upbuilding of the credit of the railroads This tnus» come through specific amounts being granted as needed. adequate and prompt increase in freight rates. Anv delay means the paying of greater cost directly and indirectly and places a burden on The line of credit then is employed only in a the credit system whic h in the approaching time for seasonal expansion I restricted sense. The position mav cause abnormal strain Even under the load of war inflation, somewhat high price level, and extravagances the bank reserves wotfld probably I which is assumed with respect to hank bor be sufficient if quick transportation could be assured during the time of j rowing is well stated by one institution in th e greatest strain. Therefore be it resolved, T hat this conference urge as the moat impor the following words: “ We avoid as far as tan t remedies th at the Interstate Commerce Commission and the United States Shipping Hoard give increased rates and adequate facilities such possible suggesting lines or limits as to the Immediate effect as may be warranted under their authority, and that a committee of five, representing the various sections of the country, extent we would serve the borrower, simply be appointed by the chairman to present this resolution to the Inter state Commerce Commission and the United States Shipping Hoard indicating our disposition to fully meet their with such verbal presentation as may seem appropriate to the committee. reasonable requirements in liberal proportion Much will depend upon the restoration of the normal efficiency of railroad and steamship line® If adequate transportation facilities can be provided, the Board sees no occasion for apprehension in connection with the movement of crops now being grown. Respectfully, W r T he P r esid en t of the G H ardi nu , Governor. S en ate . Methods Followed by City Banks in Granting Accommodation to Correspondents. Herewith is presented a first installment of the results of a study made by the Division of Analysis and Research of the Federal Reserve Board of the methods pursued by city banks in granting accommodation to their correspond ents. Tno particular object of this inquiry is to ascertain the extent to which relatively standardized methods are in vogue and how the practice of banks has developed since the adoption of tho Federal Reserve System. The following installment of this study presents the results of inquiries made with the assistance of leading New York City institutions. Similar inquiries into the situa tion in the South and West are now in prog ress, and the further results of the investiga tion will he published in a later issue. to balances maintained and with due regard to amount of their capital investment and borrowings elsewhere, out quite frequently the borrowers suggest lines themselves which we agree to if circumstances warrant, con ditioned on everything continuing satisfac torily." One institution, however, regularly fixes lines for its hank borrowers as well afor its mercantile accounts, while another quite frequently fixes lines in the case of hanks, especially southern, western, and south western hanks which are regularly in need of funds each year. The amount which is loaned is also often limited by law. In tho case of national banks section 5202 of the Revised Statutes limits the indebtedness for loans or rediscounts, other than with the Federal Reserve Bank, to the amount of unimpaired capital, ami in many States t here art* provisions covering t his matter A leading institution state's that when a State hank appears to be borrowing or rediscounting to an amount in excess of its capital and surplus it is generally made the subject of special con sideration and inquiry. Another institution also states that it endeavors to limit accommo dation to the capital investment, while in the cast' of a third bank the accommodation granted is always less than the capital. With another hank, the line granted is limited to the capital J
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