Full text of 1914/1964 : 50th Anniversary Publication
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Contents The Federal Reserve Act of 1913.................. Immediate O rigins of the S y s te m .................. The Banking System in 1914........................... A Note on Gold in 1 9 1 4 ................................... Incorporation of the Federal Reserve Bank of New Y o r k ................................................... Early Response of the Commercial B a n k s .. Organization and First Actions of the Board Chairman Jay and Governor S tro ng ............ Opening Day, Monday, November 16, 1914.. Sixty-Two Cedar S tre e t................................... Early Problems of Check Clearing and C o lle c tio n ............................................... Naming of Reserve Banks as Treasury Depositories and Fiscal A g e n ts .............. Early History of Earnings and Expenses___ Chairmen of the Federal Reserve Bank of New Y o r k ................................................... Bank S u p e rv is io n ............................................. Presidents of the Federal Reserve Bank of New Y o r k ................................................... The Federal Reserve T o d a y.......................... Buffalo Branch ................................................. 1 2 3 4 4 7 8 10 10 12 14 15 15 17 18 19 20 21 1914-1964 In 1964 the Federal Reserve Banks m arked the Fiftieth Anniversary of their opening. Through out the year most of us have been learning, in one way or another, something about the early days of the System. The year in which the banks opened, 1914, was one of turm oil and uncertainty. War had broken out in Europe in August, and the stock m arket was closed. As the holiday season ap proached, business was slow and jobs scarce. Against this setting, the Federal Reserve Bank of New Y o rk -a n d the other 11 Reserve B a n k s opened for business on Monday, November 16, nearly a year after President Wilson signed the Federal Reserve Act. The opening was spoken of as an occasion “ m arking the foundation of financial em ancipa tio n " and as the start of a new era in United States banking. But even the most optim istic observers were unable to foresee the vital role the System was to play in the economy of the country and the world. It was the half century that follow ed that showed the System’s value and potential. A fter one day of business, the assets of the Federal Reserve Bank of New York totaled $105 m illion. At the close of business exactly 50 years later, on November 16, 1964, assets exceeded $14.6 billion. But this difference is m erely sug gestive of the evolution of this Bank and of the entire System. 0 Most of the sketches in this booklet trace the origins of Federal Reserve functions and show how they have developed over the years. These v ig n e tte s o rig in a lly a pp ea re d in this B a n k ’s Monthly Review throughout 1964. They appear here with some additional m aterial giving a vivid picture of the early days of the System and of this Bank. It is with sincere pleasure and a touch of pride that we present you with this memento of our Golden Anniversary. December 1964 A lfred Hayes, President Harris & E w ing December 23, 1963, marked the fiftieth anniver sary of President W ilson’s signing of the Federal Reserve Act. This action by the President fo l lowed many years of concern over the problem of freeing our growing and increasingly com plex economy from the inflexible currency and credit structure that existed under the National Banking Act. The money panic of 1907 under scored the problem and the need for action. Less than seven months after the peak of the crisis, Congress passed the Aldrich-Vreeland Act, which created a comm ission to study and report on central banking systems. By 1912 a commission proposal—the A ldrich B ill-w a s in troduced into Congress. This first legislative effort was unacceptable, prim arily because it called for a single central bank. In 1913 Representative Carter Glass, C hair man of the House Banking and Currency Com mittee, introduced what became the Federal Reserve A c t—providing for a system of regional reserve banks with supervisory power vested in a Board in W ashington. On September 18, 1913, this bill passed the House, and on December 19 it received approval of the Senate. Carter Glass President Wilson Harris & E w ing The Federal Reserve Act of 1913 The w ork of organizing the Federal Reserve System took almost the full year 1914. By April 2, a comm ittee consisting of the Secretary of the Treasury, the Secretary of Agriculture, and the C om ptroller of the Currency had determ ined that there were to be twelve Reserve Banks, had designated the twelve cities in which the Reserve Banks would be located, and had de fined their districts. The d istrict to be served by the New York Bank o riginally included only the State of New York (the northern counties of New Jersey were added in 1915 and Fairfield County, C onnecti cut, in 1916). By mid-August 1914, the national banks in New York had elected six directors of the full nine-man board of the New York Bank. The remaining three directors of the New York Bank were appointed by the Federal Reserve Board on Septem ber 30. The Federal Reserve B o a rd ^ ty a t^ b ^ p fully constituted on August 10, follow ing Senate ap proval of five members appointed by the Presj&\ /it' dent; the other two member^ wer&The S ecretary of the Treasury and the C om ptro lle r1of the Currency. All the Reserve Banks operife<[1&t I^0 v6^be r 16, 1914. At the close of business^on Tfiat first LIBRARY 1 day the balance sheet of the New York Bank showed assets of $105 million, consisting of $103 m illion in gold and lawful money and $2 m illion in bills discounted for member banks. Immediate Origins of the System In the decades p rior to the establishm ent of the Federal Reserve System, it became increasingly apparent that the country’s financial system failed to meet fully the needs of a growing econ omy. These shortcom ings were most dram ati cally revealed in fairly frequent “ money panics.” New York City was the fulcrum of the banking system operating under the National Bank Act. Many out-of-town banks kept large deposits with New York banks, which in turn employed a large part of these funds in stock market call loans. In most years, seasonal currency w ith drawals from the New York banks during the autumn harvest time were met w ithout m ajor d if ficulty. Occasionally, however, the w ithdraw als were so great or came at such a tim e that they triggered a money panic. In the absence of a “ lender of last resort,” the New York banks, undergoing heavydem ands fo rc u rre n c y -w h ic h co n s titu te d th e ir le g a lly req u ire d reserves against demand deposits—would restrain w ith drawals by their correspondent banks. Failure by out-of-town banks to meet demands for cash would then often follow. With the outflow of cur rency from New York, moreover, banks would w ithdraw funds from stock m arket financing, interest rates would rise to extraordinary levels, The New York Times: October 23, 1907 Sinter xk 1907. GIRLS. J e s Insti> le g e . 1 was anlobei t N. :ity, who TW ENTY PAG ES. ONE 2 nstructe4 if Chrisy sect Is nds, but reference Fair to-day and to-m orrow ; fresh northw est to w est winds. CENT In G re a te r N ew Y ork, J e rse y City, a n d N ew ark, the train for New York, telegraphing first to tho local Sub-Treasury to release $8,000,000 of Government money to the banlcs of this city upon thoir deposit with the Sub-Treasury of collateral. The statement which was given out In Washington ran as follows: “ The Secretary of the Treasury Is keep ing In close touch with the business condi tions throughout the country. In the matter of public deposits he will at times consult the needs of legitimate business Interests and will not hesitate to deal promptly and adequately with any situa tion that may arise." After the Secretary had gone there was given out at the department a statement showing that there still remain outstand ing only $6,070,000 of the 4 per cent, bonds, which are being redeemed under the cir cular of April 2. In some quarters this was taken to mean that the $6,000,000 re ported from New York to have been de posited had been sent there for the re demption of these 4 per cent, bonds. I E lsew here, I TW O CTCNT8. KNICKERBOCKER WILL NOT OPEN It Has Twelve Millions, and as Conference of Bankers Deems It Unwise to Aid the Trust Com pany Further To-day. rard Coliively for effective >w Mrs. , I will be the city vlth that ided the le world, i bequest II not be mlnatlon. shall be ■cullar or WEATHER. AID TRUST CO. OF AMERICA ast week, jtlon for THE Much as May Be Needed Is Pledged. J. P. M O RG A N IS TO HELP With Other Financiers He Acts at N ig h t M eeting with Secretary Cortelyou. THE S IT U A T IO N CLEARING T h e E x a m in a tio n . While the flnunclnal community was busy yesterday In watching closely the efforts which were being made to re habilitate the affairs of the Knickerbock er Trust Company. If possible, the State E IG H T M IL L IO N S W IT H D R A W N Attorney General Jacksont Though, Will T ak e No Step to Close the Institution. S T IL L HO PE S FOR T H E B ES T and prices of stocks and bonds would drop sharply. The nation experienced some or all of these conditions in 1873, 1884, 1893, 1901, 1903, and 1907, but each occurrence except the last led to only m inor legislative changes. In 1907, the economy was in a recession and stock prices were trending downward over much of the year. As the seasonal demand for currency and credit built up at crop-harvesting time, a large trust company in New York experienced difficulties and suspended operations on October 23. Runs developed on two other New York trust com panies, and correspondent banks stepped up th e ir w ith d ra w a ls of c u rre n c y from national banks. The net losses of currency from New York banks to the rest of the country increased fourfold over seasonal norms during October and remained at peak levels through November. New York banks strongly discouraged or even rationed currency payments to correspondents, and the usual widespread disruption of pay ments followed. Call loan rates at one point w ere rep orte d at 125 per ce nt per annum, and price declines in the securities markets worsened rapidly. Eventually, the panic was stemmed. Gold flowed in from abroad, partially reflecting a balance-of-trade improvement and higher inter est rates. Treasury deposits of currency in New York banks reduced the pressure on the central money market. Clearing houses served as self assistance groups for local banks by placing the credit of the group behind each member. Nevertheless, in New York City alone three national banks, eight state banks, and four trust companies, with total deposits and other lia b ili ties of about $110 million, had either failed or tem porarily suspended operations. The panic of 1907 spurred serious study of the basic problem. By May 30, 1908, a means of creating an emergency currency to stem panics had been provided in the Aldrich-Vreeland Act. This act of Congress also established the Na tional Monetary Commission, to consist of nine Senators and nine Representatives, for the pur- pose of examining the monetary and banking system and reporting on needed changes. The monumental study of this commission (twentyfour volumes of published material) and its rec om m endations for a central banking system became—in a greatly m odified form —the basis for the Federal Reserve Act of 1913 which was “ to furnish an elastic currency, to afford means of rediscounting com m ercial paper, [and] to es tablish a more effective supervision of banking in the United States.” The Banking System in 1914 In early 1914, the nation’s com m ercial banking system was very different from the system we know today. For one thing, there were almost tw ice as many com m ercial banks—25,500, com pared w ith 13,400 to da y. A b o u t 7,500 had national charters; the remaining 18,000 were chartered by states. Demand deposits and currency totaled $11.6 billion in 1914, compared with the current money supply of about $160 billion. Currency then in cluded national bank notes, gold coin, and gold c e rtific a te s -a ll of which have now disappeared —as well as the still-fa m iliar United States notes, silver certificates, and silver and m inor coins. Federal Reserve notes, the bulk of today’s cur rency, were of course unknown. Banking services were neither as flexible nor as diversified as they are today. Bankers’ ac ceptances, which were often used in Europe to finance dom estic and foreign trade, were not commonly created by national banks until after passage of the Federal Reserve Act, or by New York State banks until shortly afterward. The Federal Reserve Act contains specific authori zation for national banks to create bankers’ ac ceptances. In New York, the State Banking Law of 1914 contains sim ilar authorization for New York banks. At the time these acts were passed, one-third of the nation’s exports and more than one-half its im ports passed through the port of New York. Markets in which banks could readily obtain and dispose of short-term earning assets were poorly developed by to da y’s standards. Most of the relatively small amount of United States G overnm ent s e c u ritie s held by c o m m e rcia l banks was unavailable for trading, because these securities were required as legal backing for the outstanding notes of national banks. Even in 1914, payments by check were esti mated to account for about 90 per cent of all b u s in e s s paym en ts. Loca l c le a rin g -h o u s e arrangements were efficient, but the collection of out-of-town checks often proved slow and costly. Many banks, particularly those outside financial centers, deducted exchange fees from the facevalue of checks drawn on theirdeposits. To avoid these charges, banks sought to route checks only to correspondent banks, and some of the travels of individual checks through these correspondent links proved absurdly tim e con suming. Lending co n siste d p rim a rily of s h o rt-te rm com m ercial financing based on promissory notes or secured by m arketable staples. These notes were generally not very liquid; corre spondent relationships - under which sm aller banks could rediscount this paper with larger banks when pressed for funds—were of extreme importance in providing what liquidity there was. Correspondent deposits and discounting concentrated in money centers—especially New York C ity—where the banks did not themselves have ready access to a source of liquidity in times of stress. One of the purposes of the new Reserve System was to fill this void. As the Wall Street, Panic of 1907 Reserve Bank Organization Committee, estab lished under the Federal Reserve Act, began to deliberate on how many Reserve D istricts to create (the law specified a maximum of twelve and a minimum of eight) and where to locate the Federal Reserve Banks, it was certain that New York City would have one of the Federal Reserve Banks. A Note on Gold in 1914 4 Gold played a key role in the dom estic as well as in the international payments system in 1914. This brief note touches on only a few facets of a vast and complex subject. As a result of the resumption of specie re dem ption in 1879 (follow ing its suspension dur ing the Civil War) and with the enactment of the Gold Standard Act of 1900, the United States was on a full gold standard, characterized by free coinage and circulation of gold and the convertibility of paper currency into gold coin. In November 1914, as the Federal Reserve Banks prepared to open for business, the United States had an estimated $1,835 m illion of mone tary gold. Of this amount, $666 m illion was in the form of gold coin held by com m ercial banks and the public, $256 m illion in uncommitted Treasury balances, and $913 m illion in circu lating gold certificates issued to the public and secured 100 per cent by gold in the Treasury. Gold coin and certificates outside the Treasury —roughly $1.6 b illio n -m a d e up more than 40 per cent of the nation's supply of coin and cur rency. An estimated $800 m illion of the gold and certificates outside the Treasury was held by banks, serving as part of their legally required reserves. The first Annual Report of the Federal Re serve Bank of New York stated that “ gold is the most uneconom ical medium of hand-to-hand circulation since, when held in bank reserves, it w ill support a volume of credit equal to four or five times its own volum e.” The Federal Re serve Act made possible more effective use of gold as a foundation for the dom estic payments system. The expectation was that this improve m ent—and the base for a “ more fle xib le ” cur rency provided by Federal Reserve rediscount ing of com m ercial paper—would contribute to the avoidance of money panics. The Federal Reserve Act required that capital subscriptions of member banks be paid in gold or gold certificates. The Federal Reserve Board also urged m em ber-banks-to-be to pay as much as possible of their required reserve deposits in gold or gold certificates. By December 31, 1914, the Reserve Banks held $229 m illion in these a s s e ts -m o re than 12 per cent of the nation’s monetary gold. Required by the Federal Reserve Act to maintain gold reserves equiva lent to at least 40 per cent of their outstanding notes and 35 per cent of their deposit liabilities, Resolution adopted by the New York Clearing House Association, Nov. 13, 1914 "RESOLVED, The Federal Reserve Bank of New York having applied for the clearing facilities of the Clearing House, the Clearing House Comm ittee is hereby authorized to arrange the details to accomplish this ob ject, under such regulations and for such annual compensation as the Comm ittee may prescribe.” the Reserve Banks had, on this basis, excess gold reserves of about $138 million. One of the uses to which the Reserve Banks applied their gold was the establishm ent of an Interdistrict Settlement Fund, maintained in Washington. It was easy and inexpensive to settle payments between d istricts arising from check collections by notifying the Fund to transfer gold reserves from the account of one Reserve Bank to an other. In time, these transfers replaced the ex pensive and cumbersome shipments of gold and gold certificates around the country that were co m m on p rio r to th e e s ta b lis h m e n t of the System. Incorporation of the Federal Reserve Bank of New York The seal of the Bank indicates that the Federal Reserve Bank of New York was incorporated on May 18, 1914. This m ajor step toward the opening of the Bank for business on November 16, 1914 required a number of prelim inary ac tions. For example, the Organization Committee established by the Federal Reserve A c t—com posed of the Secretary of the Treasury, the Secretary of Agriculture, and the C om ptroller of the Currency —had to com plete the w ork of designating Federal Reserve D istricts and of fixing the location of the new Reserve Banks w ithin the Districts. The Com m ittee then had to file with the C om ptroller a certificate containing this information. National banks, which were required to be come members of the new system if they were to keep their national charters, had been given sixty days follow ing passage of the act in which to signify their acceptance of its terms and pro visions. The action was not required of state banks and trust companies, which were free to decide individually w hether or not to apply for membership. By April 2, 1914, when the lines of the new D is tric ts and lo c a tio n s of Reserve Banks were announced, 477 national banks had subm itted their assent in this District, which then encompassed only New York State. Based C ircular No. 1 of the Bank, which was addressed to the Presidents of the member banks, set November 2, 1914, as the date for payment of the first installm ent on the capital stock of the Bank allotted to them. As the circu la r points out, the law required that be made in gold or gold certificates. payment C ir c u l a r N o. i . FEDERAL RESERVE BANK O F NEW YORK TEM PORARY O F F IC E . 27 P IN E STREET N e w Y o rk C i t y , O ctober 28, 1914. To th e P r e s id e n t , D e a r S ir : R eferrin g to the notice sent you by the Federal Reserve Board, calling for payment on N ovem ber 2, 1914, o f the first installment on the amount of capital stock o f the Federal Reserve Bank o f N ew Y o rk allotted to your bank by the O rganization Comm ittee, you are now advised that the amount to be paid should be one-sixth o f the par value o f the am ount allotted to you without regard to any changes which m ay have occurred in the amount o f the capital stock or surplus o f yo u r bank since the date o f allotment. T h e law requires this payment to be made in gold or gold certificates, and you are requested to make such payment, so fa r as m ay be practicable, in gold certificates of large denominations from the reserves held in you r own vaults. These should be delivered on N ovem ber 2d, to the Federal Reserve Bank o f N ew Y o rk at the office o f the N ew Y o rk Clearing H ouse Association, N o. 77 Cedar Street, N ew Y o rk C ity, where, through the courtesy o f that Association, arrangem ents have been made to receive the pay ment o f the first installment o f the capital stock. Fractional amounts which cannot be paid in gold or gold certificates m ay be paid in law ful money. T h e Federal Reserve Board has authorized the Federal Reserve Banks to pay the express charges involved in m aking this payment. T h e amount o f such charges should not be deducted from the amount remitted, but a statement o f the amount paid fo r expressagc should be rendered a fte r N ovem ber 16th, fo r which rem ittance will be made or credit given in you r account. Unless otherw ise requested, certificates o f payment (w hich are not transferable) w ill be m ailed to member banks, at their risk w ithout registration. A form o f letter to be returned with you r remittance is herewith enclosed, which you are requested to complete by filling in the blanks. In accordance with the desire which the Secretary of the T reasu ry has expressed to the Board o f D irectors o f this bank, that the operation of the Federal R eserve system shall be declared established on N ovem ber 16th, the D irectors are endeavoring to complete the neces sary organization to receive the reserves to be transferred by member banks, and to transact such business as w ill be undertaken at the outset. Further notice in relation to the transfer o f reserves w ill be sent you at an early date. FEDERAL RESERVE BANK OF NEW YORK, B e n j . 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This C ertificate form ally authorized the Federal Reserve Bank of New York to “ comm ence business and to exercise all pow ers granted to it by law .” John Skelton W illiams, C om ptroller of the Currency, and also a m em ber of the Federal Reserve Board, signed the certificate on Saturday, November 14, 1914, two days before the Bank opened. The No. 2 at the top of the ce rtifica te refers to the Second Federal Reserve D istrict. on the provision that subscriptions equal 6 per cent of capital stock and surplus of each mem ber bank, the capital subscription of this Bank was estimated to exceed $20 m illion. With the minimum subscription requirem ent ($4 m illion for each Federal Reserve Bank) thus satisfied, the Organization Committee desig nated as incorporators five of the com m ercial banks which had filed applications for mem bership. The five incorporators of the New York Bank, in the order of their listing, were the National Commercial Bank, Albany; National Park Bank, New York; Marine National Bank, Buffalo; First National Bank, Syracuse; and Irving National Bank, New York. (As a result of various changes in organization, none of these banks survives under the same name today.) These incorporators executed a certificate of organization specifying the name, the ju ris d ic tion, the capital structure, the membership, and other attributes of the new Bank. The certificate also stated that it “ is made to enable those banks executing same, and all banks which have subscribed or may thereafter subscribe to the capital stock of such Federal Reserve Bank, to avail themselves of the advantages of this [Federal Reserve] act.” The completed certificate was filed with the C om ptroller of the Currency on May 18, 1914. Under the term s of the Reserve Act, incorpora tion was autom atic upon this filing. Although the corporate life of this Reserve Bank began on that day, much remained to be done before the November opening. In the in tervening time, positions on the Board of D irec tors were filled as prescribed by the Federal Reserve Act, bylaws were adopted, and account ing procedures established. The franchises of the Reserve Banks were o rig in a lly g ranted fo r a sp e c ifie d p erio d of twenty years—perhaps an echo of the historical controversies involving the first and second Banks of the United States, and quite possibly also a reflection of the uncertainty of how the new System would work out. This lim iting fea ture was removed by Congress in 1927. Incorporators of the Federal Reserve Bank of New York None of the five incorporator banks that ex ecuted the Certificate of Organization of the Federal Reserve Bank of New York is doing business under the same name today. ■ The National Com m ercial Bank, Albany, is now the National Com m ercial Bank andTrust Company, Albany. ■ National Park Bank, New York, merged into the Chase National Bank, which is now The Chase Manhattan Bank. ■ M arine National Bank, Buffalo, converted to a state bank and is now the M arine Trust Company of W estern New York. ■ First N a tio n al Bank, S yracu se, m erged into the First Trust and Deposit Company of Syracuse. ■ Irving National Bank, New York, converted to a state bank called the Irving Bank of New York, which is now the IrvingTrust Company. Early Response of the Commercial Banks During 1914, as the Federal Reserve System was about to be launched, one of the m ajor questions was how well the System would be accepted by prospective member banks. There existed considerable evidence that not all im portant com m ercial banking interests were in a c c o rd w ith the p rin c ip le s o f th e F ed era l Reserve Act. W hile the measure was being dis cussed in Congress in 1913, an apparent con sensus among bankers had favored the earlier A ldrich proposal, which had pointed toward a more centralized institution with greater repre sentation for banking interests. Even Benjamin Strong, then president of Bankers Trust Com pany, New York, and shortly to become the first Governor of the Federal Reserve Bank of New York, had expressed serious m isgivings about the Federal Reserve System as it had emerged from Congressional debate. In addition to disagreem ents on principles, there were also practical questions of potential disadvantages of membership, such as the ab sence of interest payments on reserves de posited with a Federal Reserve Bank and the expected adoption of a par check collection mechanism among member banks by the Fed eral Reserve System. Under the earlier National Banking Act and existing state banking laws, a considerable portion of required reserves could be—and usually w a s—deposited in earning ac counts. Furthermore, the sm aller banks in par ticu la r looked with disfavor at the possibility of par check collection, since many obtained a sizable portion of th eir earnings from exchange fees deducted from the face value of the checks sent to them by other banks for payment. These banks were also apprehensive over the addi tional supervision of the Federal Reserve au th o ritie s , w h ile b o th la rg e and s m a ll sta te chartered banks felt further uncertainty as to whether or not they could legally w ithdraw from the System once they had accepted membership. There were, of course, powerful factors w ork ing toward broad bank membership. These in cluded the service fa cilitie s that the new System was about to develop, and the knowledge that membership contributed to an over-all strength ening of the com m ercial banking structure. Of even greater im portance was potential access to the Federal Reserve “ discount w indow .” The previous absence of a “ lender of last resort” had often led to embarrassm ent for individual banks and had contributed to damaging money panics affecting the entire financial system. The first evidence of the response of the banking com m unity proved highly encouraging. By April 2, 1914, no less than 7,471 national banks had applied for stock in the Federal Re serve Banks, leaving only 15 choosing to relin quish their charters rather than join the System. Since national banks held about half of the banking system ’s deposits, acceptance of 7 m embership by this overwhelm ing m ajority was of critica l importance. The pace of entry proved considerably slower among the estimated 9,000 state banks and trust com panies who met the Reserve A ct’s capital requirem ents for membership. By the end of 1916, 37 state-chartered institutions had joined the System and 119 more had become members by converting or reorganizing as national banks. Meanwhile, however, evidence was accum ulat ing that membership did provide tangible bene fits to offset some of the apparent disadvan tages. Moreover, the passage of an amendment to the Reserve Act on June 21, 1917—when the number of state-chartered members had risen to 53—assured state members that they could w ithdraw if they desired. Between that date and the year end 197 banks entered the System, and in 1918 an additional 686 became members. By the fall of 1919, five years after the inaugu ration of the Federal Reserve System, it was clear that com m ercial banks generally sup ported the System. Its m embership included almost one-third of all com m ercial banks, and these members held over 70 per cent of all de posits in such banks. Today, a half century later, 45 per cent of all com m ercial banks, ac counting for over 83 per cent of com m ercial bank deposits, are Federal Reserve members. Organization and First Actions of the Board Many im portant Washington figures gathered in the office of the Secretary of the Treasury on Monday morning, August 10, 1914, to witness swearing-in of the new Federal Reserve / Board.. It must have been a solemn occasion. War had broken out in Europe the previous week, bringing with it great uncertainty and perplexing financial problems. The men who were to confront these prob lems had come to W ashington from different backgrounds and regions. The Federal Reserve 8 LtfltfPnad specified that no two of the five men Second District M em bership National Year State Banks Banks & Trust C o ’s. Total 1914 480 0 480 1915 615' 1 616 1916 6232 2 625 1917 624 43 667 1918 622 101 723 1919 636 122 758 1 131 banks in New Jersey added through re adjustm ent of district boundary to include the eleven northernmost counties. 2 15 banks in Fairfield County, Conn., added as a result of change in district boundary. appointed by the President could come from the same Federal Reserve D istrict and that two should be experienced in banking or finance. The new body was to exercise general super vision over the Federal Reserve Banks. President Wilson had spent several months making the selections, and the Senate did not confirm all the appointm ents until the end of July. Charles S. Hamlin, a Boston lawyer who was then serving as an Assistant Secretary of the Treasury, was designated Governor of the Board (equivalent to the present Chairman). The Vice Governor (Vice Chairman) was to be Frederick A. Delano, a railroad executive from Chicago. Paul M. W arburg, a member of a New York banking firm, and W. P. G. Harding, president of a national bank in Birmingham, Alabama, were selected as the members with banking or financial experience. The fifth ap pointee was A. C. Miller, a form er professor of econom ics at the University of C alifornia, who was serving as Assistant to the Secretary of the Interior. Under the new law the Secretary of the Treasury and the C om ptroller of the Currency were ex-officio members. Thus, Secretary W illiam Gibbs McAdoo and John Skelton W illiam s com pleted the “ Supreme Court of Finance,” as the Board was inform ally called. (The Federal Re serve Act was amended in 1935, removing the provision for ex-officio membership, making all seven positions appointive, and changing the official title to the Board of Governors of the Federal Reserve System.) When the members of the new Board assem bled for th eir first meeting the Thursday after being sworn in, they had to make a choice be tween im m ediately com pleting the organization of the Reserve Banks or developing emergency program s to counteract the financial d isturb ances caused by the war. The latter course was adopted, resulting in the establishm ent of a gold pool and a cotton loan fund. One of the earliest and most trying financial consequences of the war was a highly abnormal condition in the foreign exchange market. The balance-of-paym ents position was deteriorating seriously in August 1914, with both the trade and capital accounts contributing to a large deficit. Exports declined sharply because of the disorganization of ocean shipping and the v ir tual collapse of European credit markets, the usual source for United States export financing. At the same tim e Europeans were dum ping holdings of Am erican securities in the New York market, and a large amount of Am erican obligations held by foreigners was scheduled to mature in the near future. Discussing this situation, the first Annual Report of the Federal Reserve Board observed: “ The securities mar kets were badly dem oralized, prices fell with alarm ing rapidity, and the country was exposed to a serious and disastrous drain of g old.” In response to th is problem the Federal Reserve Board took the initiative in calling a conference of private bankers to discuss emer gency action. The larger banks throughout the country agreed to subscribe $100 m illion to a gold pool, which could be used to settle Am er ican debts to Europe and thus help restore con fidence in the dollar. In addition, a very serious problem confronted the cotton-producing states. Since 60 per cent of American cotton production was norm ally exported, interruption of Atlantic shipping and the closing of the United States and British cotton exchanges resulted in a m ajor financial crisis in the South. Cotton exporters needed credit to finance their higher-than-norm al in ventories, but Southern banks were already overextended.To provide relief, the m ajor banks in the North, cooperating with the Federal Re serve Board, agreed to establish a $100 m illion cotton loan fund, from which credit could be made available to the cotton exporters. Operations actually required under the gold exchange fund were small, and under the cotton loan fund virtually zero. However, the two plans had a highly beneficial psychological impact. Thus, even before the Reserve Banks opened, the new System had dem onstrated its useful ness to the country. The original Federal Reserve Board, 1914. Standing: Paul M. Warburg, M em ber; John Skelton Williams, C om ptroller of the Currency, Mem ber; W. P. G. Harding, Mem ber; A. C. M iller, Member. Seated: Charles S. Hamlin, Governor; William G. M cAdoo, Secretary of the Treasury; Frederick A. Delano, Vice Governor. 9 Opening Day, Monday, November 16, 1914 c 3 ( D Cl i o 0 Cl 9 ° C 3 Q0 ) 1 o o CL Pierre Jay, this Bank’s first Chairman and At 10 a.m., Monday, November 16, 1914, the Federal Reserve Bank of New York opened for business. The Bank had been incorporated May 18, 1914 and its d irectors elected and ap pointed by September 30. Pierre Jay had be come Chairman of the Board of D irectors and Federal Reserve Agent. At the first board meet ing, on October 5, Benjamin Strong, Jr., Presi dent of Bankers Trust Company of New York, was elected Governor of the Bank. An acting deputy governor and a secretary-counsel also w ere a p p o in te d d u rin g O ctober. T em porary offices were located at 27 Pine Street. On O ctober 26, Secretary of the Treasury Benjamin Strong, Jr., was founder and prin Federal Reserve Agent, served in those offi cipal guiding spirit of this Bank in the form ces 12 years — longer than any other man. ative years of the Federal Reserve System. At the time of his appointm ent by the new The Bank’s directors at their first meeting Federal Reserve Board on Septem ber 30, named Mr. Strong as Governor. That was 1914, he was vice president of the Bank of six weeks before the Bank opened for busi The Manhattan Company. He left the Fed ness. Governor Strong was 42 then and pres eral Reserve Bank of New York at the end ident of Bankers Trust Company. of 1926, when he was appointed American Governor Strong was a man of energy and m em ber of the Transfer Comm ittee of the c ou rag e. H isto rian s say no one ex e rte d more influence on the early developm ent of Reparation Commission. Chairman Jay was credited with making the R eserve System and that no c entral scholarly and painstaking studies of a mul banker has been more influential to this day. titude of novel and com plex problems of During his 14 years as Governor of the Bank, early Federal Reserve operations. One of he was a dominant force in Am erican mone these was explaining to the banking com tary and banking policies. munity and various sectors of the public the During the 1920’s, G overnor Strong was significance of the new Federal Reserve the leader of a move to promote more effec System. tive cooperation among the w orld’s central Benjamin Strong said that he worked so quietly and modestly that few people outside his imm ediate circle of associates realized the influence he exerted in the Bank, the banks, and he traveled extensively to carry out this objective. Governor Strong kept this rem inder in the top draw er of his desk: System, and the whole business community. To th e G o vern o r of this B a n k : N e v e r fo rg e t Chairman Jay had a broad knowledge of th at it was c re a te d to se rv e the e m p lo y e r econom ic matters, fine analytical abilities, a n d the w o rkin g m an, th e p ro d u c e r an d the and c o n s u m e r, th e im p o rte r a n d th e e x p o rte r, was a master of tactful diplomacy. He was 79 when he died in 1949. th e c re d ito r a n d th e d e b to r; a ll in the in te r e s t o f the co u n try as a w h ole. Governor Strong died in office in 1928. 10 The telegram on the rig h t was the Bank’s authority to “ commence business’’ on Monday morning, November 16, 1914. It was sent from Washington at 6:40 p.m. on the Saturday before. The certificate or charter that the telegram refers to is reproduced on page 6. Note the typographical e rror in the Bank's name on the second line of the telegram. W. G. McAdoo notified the twelve Reserve Banks that the C om ptroller of the Currency planned to authorize their opening on November 16. Chairman Jay replied that he would endeavor to assemble a tem porary organization so that the Bank could, in fact, begin to operate that day. Governor Strong wired Secretary McAdoo that the need to provide suitable safeguards for handling the amount of money involved in the Bank’s opening m ight make it impossible to com ply literally with the opening date an nouncement. Mr. Jay and Governor Strong promised, however, to do everything possible to meet the date. Two weeks before the scheduled opening banking rooms were subleased at 62 Cedar Street. (The site of that building —a block from ||j! ^ the Bank’s present 33 Liberty Street a d d re s s was on what is now the Chase Manhattan Plaza.) The Bank moved into the Cedar Street quarters only one week before opening day. On Satur day, N ovem ber 14, John S kelton W illiam s, C om ptroller of the Currency, signed the cer tificates authorizing the twelve Banks to open, as provided for in the Federal Reserve Act. Secretary McAdoo commented that the open ing of the Banks marked a new era in the his tory of business and finance in this country. Paul M. W arburg, closely identified with the birth of the System and a member of the first Federal Reserve Board, declared that coming generations would comm em orate the date as the beginning of financial em ancipation. The Wall Street Journal said the openings marked WCSTERM UNION te A 7/ am q u o WO« w . t . ATKINS. vic» w>«»io «mt______________ NtW COMB CAWLTON. w w i e n r ________________ ■BLVIPWW ■WOOKC OTC^gwwtwaw 16 D l Y S T . p a .V . WASHINGTON D C NOV U T T T T 9 1 4 ----------------------------------- ■ — s PicRRE J VCHAjRMAN B0ARJ) 0F J ), r e c t o r s FEDERAL RESERVE BANK OF NEWYORK L T H IS IS TO NOTIFY YOU 911 | IN ACCORDANCE WITH THE PROVISIONS. FEDERAL RESERVE. ACT HAS BEEN ■ YOU AS IT IS IMPOSSIBLE OF NEWYORK TO COMMENCE BUSINESS OF SECTION 4 OF THE OFFICIALLY SIGNED AND EXPBESSED TO TO HAVE THESE CERTIFICATES IN THE POSSESSION OF ALL FEDERAL ' NY THAT THE CERT IF I C(TEjQR__CHARTE^ AUTHORIZING THE GENERAL RESERVE BANK In NEWYORK RESERVE BANKS BY THE MORNING OF rOVEWBER SIXTEENTH TH IS TELEGRAM WILL BE YOUR AUTHORITY P£NDING THE/ RECEIPT OF THE CERTIFICATE REFER?EB TO FOR THE «*EDE*AL RESERVE OF NEWYORK TO COMMENCE BUSINESS ON THE MORNING OF NOVEMBER SIXTEENTH NINETEEN FOURTEEN. JOHN SKELTON WILLIAMS COMPTROLLER OF THE \ P JR R E B C Y M 0 PM ftV Q a new banking era and commented, “ with the opening of the Federal Reserve Banks through out the country today the consummation of the long standing agitation for currency reform in the United States may be said to have been attained.” Seven officers and eighty-five employees, mostly borrowed from banks and the subtreas ury, made up the New York Bank’s opening day staff. A permanent staff was organized during the next eight weeks. The main business dur ing the opening day was accepting reserve de posits from Second D istrict member banks. The National City Bank of New York was the first city member to deposit reserves ($21 m illion including $16 m illion in gold). By the end of the day, 221 of 480 Second D istrict members had deposited about $100 m illion in reserves, including $82 m illion in gold and gold c e rtifi cates and $11 m illion in silver and silver cer tificates. The Chemical National Bank of New York made the first application for rediscounting for the stated purpose of dem onstrating its desire to support and use the fa cilitie s of the new reserve banking system. The bills subm itted and accepted for rediscount under this a pp li cation totaled $2,182,500—the largest such oper ation by the New York Reserve Bank in its first year. At the close of business the first day the Bank had total assets of $105 million, including payments on capital subscriptions received earlier in the month. By 8 p.m. the books had been proved and balanced, and the first daily report and balance sheet were sent to Wash ington. Chairman Jay and Governor Strong were quoted in the newspapers the next m orn ing as comm enting that everything had gone off as sm oothly as if the Bank had been open for six months. Years later, Governor Strong recalled the early days of the Bank in these w ords: “ ...w e were a lot of ‘greenhorns’ with no guide or compass, no experience, no cohesion —with everything to learn and, frankly, everything to lose as the result of our inexperience.” 11 Sixty-Two Cedar Street 12 The first banking office of the Federal Reserve Bank of New York was at 62 Cedar Street. The building was a six-story, white marble struc ture considered “ well a ppointed" in its day. It was located on the south side of Cedar, between Nassau and W illiam Streets. Across the street was the main office of Mutual Life Insurance Co., which built 62 Cedar for Harvey Fisk and Sons in 1903. The site of the old Fisk building is now part of Chase Manhattan Plaza, only a block from the present home of the New York Reserve Bank at 33 Liberty Street. The Bank subleased from Fisk the basement and a vault, the ground floor banking rooms, the mezzanine, and a second floor board room. The lease, dated November 6, only 10 days before opening day, called for an initial annual rental of $39,000, with increases to $41,000 for the final year ended May 1, 1918. There was con siderable discussion over price, and at one point negotiations were suspended. These negotiations and other organizational work were carried on from tem porary quarters at 27 Pine Street, the first home of the Bank. Clinton and Russell, New York City architects who designed 62 Cedar, told the Bank before the move that the structure was built “ in accord ance with the very best modern practices. It is thoroughly substantial and extra strong . . . no expense was spared in the construction of this building, and the workm anship and m aterials which entered into it were of the very best.’’ “ We know of no building in the city of New York that is better constructed than this build ing,” the architects wrote the Bank. The building had a private elevator connect ing the basement, ground floor, mezzanine, and second floor. The elevator was “ capable of carrying four people and specie and securities from one floor to another,” one description said. But the Bank soon found the elevator inade quate for its needs, and a new one was installed. Veteran employees can still remember the old elevator getting stuck between floors. 62 Cedar St. is the second building on the right. Office area During the first year at 62 Cedar, the Bank spent $9,644 for alterations, improvements and changes. On December 16, 1915, a little more than a year after moving in, the Bank signed a lease for larger offices at 15 Nassau Street, which is at the Pine and Nassau corner of the Equitable Building. In 1918 the Bank acquired the m ajor portion of the site of its present quarters at 33 Liberty Street. The cornerstone was laid May 31, 1922 and the building finished and in full use on October 6, 1924. Some years later, a small par cel of land at the W illiam Street end of the present site was acquired, and an addition to the building was erected. This addition was completed in 1936. Board room Vault Officers of Bank on Opening Day Benjamin Strong, Jr., Governor (form erly President, Bankers Trust Company, New York) W illiam W oodward, Acting Deputy Governor (form erly President, Hanover N ational Bank) An executive office James F. Curtis, Secretary and Counsel G. E. Gregory, Acting Cashier (form erly Cashier, National City Bank of New York) B. W. Jones, Acting Assistant Cashier (form erly Assistant Secretary, Bankers Trust Company) R. H. Giles, Acting Assistant Cashier (form erly Assistant Treasurer, Bankers Trust Company) S. A. Welldon, Acting Assistant Cashier (form erly Assistant Cashier, First N ational Bank of New York) __________________________________________ 13 Early Problems of Check Clearing and Collection The use of checkbook or deposit money was firm ly established in this country by the time the Federal Reserve Banks began operations in 1914. Five years earlier a National Monetary Commission study estimated that 95 per cent of the deposits received by banks was in the form of checks. The system of clearing and co l lecting checks nevertheless left much to be desired. In most m ajor cities the banking community had established adequate fa cilitie s for clearing and collecting local checks. But problems arose when checks had to move from one city or region to another. Many banks levied exchange charges on these out-of-town ch e cks—“ nonpar co lle ctio n .” These charges were defended on the ground that payment of out-of-town checks involved costs, including maintenance of outof-town balances with other banks and the shipm ent of currency. In an effort to avoid such charges, banks would often send checks to banks with which they had par collection agreements (collection at face value), rather than to the banks on which the checks were drawn. In extreme cases, the results were ludicrous. For example, Governor W. P. G. Harding, one of the original members of the Federal Reserve Board, gave the fo llo w ing illustration: I recall an instance where a national bank in Rochester, New York, sent a check drawn on a bank in North Birm ingham , Alabama, to a cor respondent bank in New York City, by which it was sent to a bank in Jacksonville, Florida, which sent it for collection to a bank in Phila delphia, which in turn sent it to a bank in B alti more, which forw arded it to a bank in Cincinnati, which bank sent it to a bank in Birmingham , by which bank final collection was m ade.1 14 Such circuitous routing was costly for the banking system as a whole, since the interm e diate banks were burdened with unnecessary expenses in the handling of checks. Moreover, Birm ingham C incinnati Rochester Philadelphia New York some bank customers, confident that checks would wander around for a week or more, drew checks on nonexistent deposits in the expecta tion of depositing the money before the checks were presented. After the new Reserve Banks opened for business, the necessity of establishing an effi cient national clearing and collection fa cility was quickly recognized, and par collection be came one of the System ’s m ajor operational goals. To achieve this end, the costs regarded by banks as justification for exchange charges had to be minimized or elim inated. Since each member bank had to maintain a balance (re serve account) with its Reserve Bank, checks could easily be paid by debiting these accounts, thereby reducing the member bank’s need for correspondent balances and cutting the related costs. Thus, with the creation of the Federal Reserve System and its centralization of reserve balances, one im portant reason for exchange charges was elim inated in the case of member banks. The Federal Reserve Banks, nonetheless, moved only cautiously tow ard the goal of actu ally requiring par collection. By June 1915, each Federal Reserve Bank had established a system of par check collection for its members. But participation in these clearing systems was vol untary, and by the end of 1915 only 25 per cent of the member banks had agreed to par co l lection. In 1916 the Reserve Banks began to absorb the charges on currency shipments from mem ber banks to cover reserve deficiencies caused by check clearance. This elim inated a second cost justification for exchange charges. There upon, and in the same year, the Federal Reserve Board adopted a regulation requiring member banks to pay at par all checks drawn upon th e m s e lv e s and p re s e n te d by the R eserve Banks. To broaden the par collection system further, Congress amended the Federal Reserve Act in 1917 to perm it a nonmember bank to use the System ’s collection facilities, provided it main tained a clearing balance at its d istrict Reserve Bank and paid at par checks received from the Reserve Bank. These early efforts to establish a national par collection system were quite successful. By 1921, all member banks and 91 per cent of some 'W . P. G. H arding, The Form ative P e rio d o f the Federal Reserve System (Boston, 1925), p. 51. 20,000 nonmember banks were paying checks at par. Today, in addition to the 6,200 member banks, there are 5,800 nonmember banks clear ing at par, 125 of which keep clearing balances at a Reserve Bank. There are still some 1,600 nonmember banks which do not remit at par. Naming of Reserve Banks as Treasury Depositories and Fiscal Agents The authors of the Federal Reserve Act were aware that the methods employed in managing the Treasury’s finances had serious defects. Many of the Governm ent’s fiscal affairs were handled by the Independent Treasury System, which had been established in 1846 to provide places other than private banks for the safe keeping of Government funds. The defects of that system had been described in a study pub lished by the National Monetary Commission. Most of the Treasury’s revenues from cus toms and taxes were collected in currency and coin, and it was Treasury practice during most of the pre-W orld War I period to hold this money in the subtreasury offices located around the country until it was needed for disburse ments. Hence, w henTreasury receipts exceeded disbursements and the surplus was held in the subtreasury vaults, money in circulation de clined. Since currency and coin were also an im portant com ponent of bank reserves, its w ith drawal from the banks contracted the reserve base, and there was no central banking m echa nism through which this effect could have been offset at tim es when reserve w ithdraw als were inappropriate in the light of current econom ic developments. Successive Secretaries of the Treasury had attempted on occasion to relieve undesirable contractions of the bank reserve base by trans fe rrin g funds from the su b tre a su rie s to the national banks, which had been used as de positories since the passage of the National Banking Act. These attempts were only par tially successful. The establishm ent of the Fed eral Reserve System itself was, of course, a m ajor step in com bating this and other inflex ibilities in the co un try’s money and banking structure. An early version of the Federal Reserve bill required that all general funds of the Treasury be deposited in the Federal Reserve Banks within twelve months after passage of the act. This provision was successfully opposed by Secretary of the Treasury McAdoo as being too rigid. Thus, the final version of the bill left the amount and tim ing of the transfer of funds up to the discretion of the Secretary of the Treas ury, thereby perm itting him to continue using the subtreasuries and national banks as de positories. This earlier draft of the bill also appointed the Federal Reserve Banks as fiscal agents, whereas the final act authorized the Secretary of the Treasury to require the Banks to act as fiscal agents at his discretion. In actual fact, the Secretary of the Treasury began using the new Reserve Banks as depositories in 1915 and as fiscal agents in January 1916. At first, the fiscal services perform ed by the Reserve Banks were lim ited to receiving de posits of Government collectors of customs and internal revenue and to paying checks and w ar rants drawn upon the United States Treasury. However, after the United States entered W orld War I, Secretary M cAdoo turned to the Reserve Banks for other services. In particular, the Banks were authorized to sell, issue, exchange, and convert Liberty bonds, and they became the focal points for local Liberty Loan committees, which made a vital contribution to the financing of the war. Another useful service perform ed by the Federal Reserve Banks was the transfer of money around the country by w ire and book keeping entries. This procedure — made pos sible through the deposit of gold and gold certificates by each Reserve Bank in the gold settlem ent fund in W ashington—elim inated the necessity for expensive shipments of coin and currency between subtreasuries. It soon became evident that the Reserve System could perform many of the fiscal agency functions at least as efficiently as subtreasuries, and that having both was an unnecessary ex pense. In May 1920, therefore, Congress passed a bill directing the discontinuance of the nine subtreasuries on or before July 1, 1921. The Secretary of the Treasury proceeded to carry out this task by transferring many of the re maining fiscal agency functions from the sub treasuries to the Reserve Banks. The last sub treasury, located in C incinnati, was closed on February 10, 1921. Early History of Earnings and Expenses Relying in part on the experience of other cen tral banks, the legislators and banking experts who drafted the Federal Reserve Act expected that the earnings of the new Reserve Banks would tend to average higher than their ex penses. The distribution of these earnings was therefore carefully specified in the act. First there was provision for a 6 per cent cum ulative dividend on capital stock purchased by member banks. Earnings in excess of these dividend payments were then to be paid to the United States Treasury (except that one-half of the excess was to be retained until the surplus account equaled 40 per cent of paid-in capital). Until 1933 these payments to the Treasury rep resented a “ franchise tax.” In that year the tax was repealed to perm it the Federal Reserve Banks to replenish th eir surplus, which was substantially reduced when an act of Congress required the Banks to subscribe $139 m illion to the capital of the new Federal Deposit Insur ance C orporation. Since 1947, payments to the Treasury have been made as “ interest on Federal Reserve notes.” Although the sources of potential Reserve Bank earnings—loans and rediscounts for mem ber banks and interest on securities acquired in open m arket operations —were well known from the outset, a few member banks were pes sim istic about the prospect of receiving the 15 16 return specified by the statute. In New York State, the directors of one member bank stated p ublicly that they were w riting down to zero the value of their Reserve Bank stock since they did not foresee any dividend payments. In late 1914 and through 1915, such pessi mism proved tem porarily justified as total earn ings of the Federal Reserve Banks were in fact small. The Federal Reserve Act had lowered reserve requirem ents of national banks, and this step, coupled with an inflow of gold, brought about conditions of monetary ease so that there was little need for rediscounting. Through the end of 1915, the twelve Reserve Banks accom modated 2,073 member banks, but these dis counts had totaled only $183 m illion. With respect to the acquisition of earning assets through open m arket operations, the New York Federal Reserve Bank noted that suitable investments were in strong demand, causing in terest rates to decline. In its first Annual Report, the Bank stated: Realizing the influence which the reserve bank m ight have upon these rates if it pressed its funds upon the m arket, it has been the p o l icy of the bank to follow rather than lead the m arket in its decline. In these circum stances, no thought could be given to earning dividends. Thus, from the beginning, the System felt that central bank decisions should not be in fluenced by considerations of earnings. In the aggregate, current expenses of all the Reserve Banks exceeded earnings by $141,000 between the beginning of operations in Novem ber 1914 and the end of 1915. Reflecting re gional conditions, results varied among the Banks and two Banks actually posted sufficient earnings after expenses to initiate dividend payments. However, it was estimated that addi tional net earnings of approxim ately $3.4 m illion would have been needed to meet dividend re quirem ents of all twelve Banks. In 1916, earnings of the Banks rose while expenses, no longer affected by organizational outlays, rem ained steady. The tw elve Banks were therefore able to declare partial dividends of $1.7 m illion on member bank stock. In 1917 war financing swelled earnings, and at the year end the Reserve Banks made their first trans fers to surplus and payments to the Treasury. By June 1918 all the Reserve Banks had brought dividend payments up to date. Since that time, there have been four years in which Reserve Bank earnings have not cov ered expenses and dividends. Over the past fifty years as a whole, however, the System has paid into the Treasury more than $9.3 b illio n — an amount that far exceeds the $590 m illion in dividends paid to member banks on capital stock during the same period. In 1964 the Re serve Banks’ current earnings were $1.34 billion, their current expenses $197 m illion, dividends $31 million, and payments to the Treasury $1.58 billion. Statement of Condition of the Federal Reserve Bank of New York (In millions of dollars) November 16, November 16, ASSETS 1914 Gold certificate a c c o u n t ...................... 1964 55 3,366 Redemption fund for F. R. n o t e s ......... — 345 Total gold certificate reserves . . . . 55 3,711 F. R. notes of other B a n k s .................. — 165 Other cash ................................................. 6 39 Discounts and a d v a n c e s ...................... 2 185 LIA BILITIES 1914 Federal Reserve n o t e s ........................... 8,057 102 4,650 Deposits: M em ber bank reserves .................... U. S. Treasurer—general account . — 83 Foreign — 32 .................................................... Other ........................................................ Total deposits .................................. Acceptances: 1964 — - 132 102 4,897 1,236 Bought o u t r ig h t .................................... — 40 Deferred availability cash it e m s ......... — Held under repurchase agreem ent - 32 O ther liabilities and accrued dividends — 28 102 14,218 Total Liabilities ............................... CAPITAL ACCO U NTS U. S. Governm ent securities: Bought outright— Bills ...................................................... - C e rtific a te s ........................................ — 1,263 - Capital paid i n .......................................... 3 137 Surplus ........................................................ — 264 O ther capital accounts ......................... — 22 105 14,641 Notes ................................................... — 5,897 Bonds ................................................. — 1,225 Total bought o u trig h t.................... — 8,385 Held under repurchase agreem ent — 210 Total U.S. Governm ent securities — 8,595 to deposit and F.R. note liabilities Total loans and s e c u r itie s ........... 2 8,852 combined Cash items in process of collection . . 42a 1,805 Bank p re m is e s ........................................... — 8 O ther assets ............................................. — 61 Total A s s e ts ...................................... 105 14,641 Total Liabilities and Capital A c c o u n ts .................... Ratio of gold certificate reserves ............................................... 5 4 .2% b 28.6% a Represents total of “Clearing House Certificates.” b If calculated as done currently (this figure was not computed at the time). Chairmen of the Federal Reserve Bank of New York Gates W. McGarrah was named to succeed Chairman Jay in 1927, when Mr. Jay ac cepted appointm ent to the Reparation Com mission’s Transfer Comm ittee. The new chairman, then 64, resigned as chairman of the executive com mittee of the Chase National Bank to accept the appointment. The next year, upon the death of Governor Strong, he was appointed Acting Governor. He remained chairman until 1930, when he becam e Am erican Director of the Bank for International Settlements. Upon his departure, fellow Reserve Bank directors lauded Mr. McGarrah for “ rare judgm ent and an unselfish loyalty to the public good; sound and unswerving in prin ciple, yet very cooperative in attitude.” Be fore serving with the Federal Reserve, Mr. M cG arrah had been president of the New York Clearing House Association in 1917-19 and Am erican m em ber of the Reichsbank’s General Council in Berlin. He was a class A director of this Bank from 1923 through 1925. Mr. M cG arrah started in banking as a clerk at the Goshen National Bank, was president of the Leather M anufacturers Na tional Bank of New York and then chair man of the M echanics and Metals National Bank until it was merged with Chase. He died in 1940. Besides Pierre Jay, only two others served as fu ll time chairmen of this Bank: Gates W. McGarrah, whose tenure ran from 1927 to 1930; and J. Herbert Case, who served from 1931 through part of 1936. When signed into law in 1913 the Federal Re serve Act required the “ chairman of the Board of D irectors of the Federal Reserve Bank and ‘Federal Reserve A gent’ ” to maintain a local office, make regular reports to the Federal Re serve Board, act as its official representative, and carry out other official duties. His chief statutory jobs related to the custody and issu ance of Federal Reserve Notes, and holding collateral behind them. At the direction of the Federal Reserve Board, the Chairman and Fed eral Reserve Agent assumed responsibility for the bank supervision and the research (then called statistics) functions, as well as for mak ing reports under several Board regulations. When the chief executive officer of each Reserve Bank was given the title of President under the Banking Act of 1935, the Chairman and Federal Reserve Agent ceased to be a fu ll tim e officer. Today, the Chairman in his other capacity as Federal Reserve Agent is respon sible chiefly for representing the Board of Gov ernors in the custody and issuance of Federal Reserve Notes, and holding collateral. Chairmen of this Bank since the office ceased to be a full-tim e position were: Owen D. Young, (1938-1940), Honorary Chair man of the Board, General Electric Company. Beardsley Ruml, (1941-1946), Chairman, R. H. Macy & Co., Inc. Robert T. Stevens, (1948-1953), Director, J. P. Stevens & Co., Inc. Jay E. Crane, (1954-1956), Vice President, Standard Oil Company (New Jersey). John E. Bierw irth, (1957-1959), Chairman, Na tional D istillers and Chemical Corporation. Philip D. Reed, (1960), Former Chairman of the Board, General Electric Company. J. Herbert Case, who is now 92 and living in Plainfield, N. J., served the Bank almost 20 years. He was named Deputy Governor in 1917 and in 1930 becam e a class C direc tor, Chairman and Federal Reserve Agent. Mr. Case spent his entire business life in banking. A native of Elizabeth, N. J., his first job was as a clerk with the City Na tional Bank of Plainfield, N. J., in 1887. Fif teen years later he helped organize the Plainfield Trust Co. which he served as secretary and executive vice president for 15 years. In 1906, he was instrumental in organizing the Peoples Bank and Trust Co. of Westfield, N. J. He later becam e vice president of the Franklin Trust Co. of New York and the Farmers Loan and Trust Co. of New York. During his years as Deputy G overnor of this Bank, Mr. Case served many times as Acting G overnor during the absence of Governor Strong. As Chairman, he had an important role in World W ar I and post-war financing operations of the Treasury. When he left the Bank, Mr. Case joined the invest ment banking firm of R. W. Pressprich & Co. His son Everett N. was named Deputy Chair man of the Bank’s Board of Directors effec tive January 1, 1965. 17 Bank Supervision The fundamental objective of bank supervision is to foster and maintain a sound banking sys tem. One of the basic purposes of the Federal Reserve System, as stated in the pream ble of the Federal Reserve Act, was “ to establish a more effective supervision of banking’’ in the United States. “ More effective” were the key words, because banking had long been under the supervision of state and Federal govern m ents when the Federal Reserve A ct was passed in 1913. Some banks had been operating under vary ing degrees of state supervision since the early and mid-1800’s, when a number of states passed laws relating to bank chartering and opera tions. Indeed, the unique nature of banking tended to stim ulate governmental supervision although many states were slow to react. The National Bank Act was a m ajor step to ward improved supervision. Nevertheless, na tional bank exam ination methods had left some thing to be desired. In pre-Federal Reserve days, national bank examiners worked under a system of fixed fees for each examination, a faulty system in the opinion of John Skelton W illiam s who, as C om ptroller of the Currency, was responsible for the adm inistration of the National Bank Act. In the C om ptroller’s annual report for 1915, it was stated that, under this arrangement, “ the exam iner necessarily made either a very super ficial and hasty exam ination of the bank or remained for closer consideration, at his own expense, to perform a gratuitous service for the Governm ent.” The Federal Reserve Act authorized the Board of Governors of the Federal Reserve System, upon recomm endation of the C om ptroller of the Currency, to fix salaries for national bank exam iners. Later the act was amended to direct the C om ptroller to set these salaries. The act also gave the new Reserve Board the power to “ ex amine at its discretion the accounts, books, and 18 for FRASER Digitized affairs o f...e a c h member bank and to require such statements and reports as it may deem necessary.” The process of bank exam ination is prim arily concerned with an evaluation of assets, pro cedures, policies, and the effectiveness of man agement. Examinations also provide the bank supervisory authorities with the basic inform a tion necessary to perform other functions such as issuance, interpretation, and enforcem ent of regulations; merger and branching decisions; and decisions concerning capital and corporate structure requirements. The intim ate inform ation on bank operations derived from bank exam inations also is useful in the form ulation of monetary policy. Actually the System was slow to move into the field of supervision. Regular exam inations of nationally chartered member banks were being made by national bank examiners. In 1917 the Federal Reserve Banks were specifically authorized to accept exam inations by state authorities of state member banks in place of exam inations made by Board-appointed exam iners. The same year, the directors of the Federal Reserve Bank of New York authorized the acceptance of exam inations and reports made by state authorities in the Second Reserve District. For the next decade and a half, the Reserve Banks confined themselves largely to special credit investigations of member banks, gener ally undertaken in cooperation with state au thorities but sometimes independently. These credit checks consisted m ainly of a review of the quality of member bank loan portfolios. In addition to serving as a method of supervision, they provided the Reserve Banks with supple mental inform ation that could be used when the member banks applied for discounts or advances. In 1933, when it became apparent that a strengthening in supervision was necessary— especially with respect to trust operations — the Board asked the Reserve Banks to expand their examining facilities. The follow ing year, the Federal Reserve Board directed that at least one regular ex amination of each state member be made yearly by Federal Reserve examiners, inde pendently or in conjunction with state authori ties. Joint state-Federal Reserve exam ination of state member banks continues today, w hile na tional bank members are still examined by the C om ptroller’s national examiners. The System ’s supervisory responsibilities as delineated by the Federal Reserve Act in 1913 have been expanded by various acts of Con gress. The additional supervisory functions, to name a few, include the processing of merger applications of state member banks, the char tering and supervision of com panies organized by banks to do a foreign banking and financing business, the registration of bank holding com panies, and regulation of bank loans for pur chasing or carrying listed securities. The absence of restrictive definitions of the supervisory duties and responsibilities of the Federal Reserve System and the gradual broad ening of the Congressional mandate have been helpful in perm itting the System to adapt its su pervisory functions to the far-reaching changes in banking that have taken place since the pas sage of the Federal Reserve Act. Presidents of the Federal Reserve Bank of New York George L. Harrison becam e ch ie f e xecu tive officer of the Bank upon the death of Governor Strong in 1928. For 13 years, first as Governor, and then as President when the title was changed, he guided the Bank through the trou bled tim es of the stock market collapse in 1929, the Banking Holiday of 1933, the m ajor revisions in organization and operations in 1935, and into the start of W orld War II. Mr. Harrison left the Bank in 1940 to become president of the New York Life Insurance Company. After graduating from Yale, and the Harvard Law School, Mr. Harrison for a year was legal secretary to Justice O liver Wendell Holmes of the United States Supreme Court. He joined the Federal Reserve System in W ashington in the fall of 1914, two weeks before the opening of the 12 Reserve Banks, and was general counsel of the Federal Reserve Board before coming to this Bank as Deputy Governor in 1920. Mr. Harrison was instrumental in solving many problems concerning foreign relationships of the Federal Reserve. He died in 1958. Allan Sproul has been called one of our out standing central bankers. He spent almost 36 years in the Federal Reserve System, all but 10 at this Bank. Mr. Sproul was President of the Bank for 15 years, from Januaty 1, 1941 to June 30, 1956, a period covering W orld War II and the Korean conflict. He has been credited with making m ajor contributions to our knowledge of mone tary problems and policies. Mr. Sproul joined the Federal Reserve System in 1920 as head of the Division of Analysis and Research of the Federal Reserve Bank of San Francisco. He came to this Bank in 1930 as Assistant Deputy Governor and Secretary. Six years later he was named Deputy Governor, and in 1936 when official titles were changed, he was appointed First Vice President. He was named Vice Chairman of the Federal Open Market Com m ittee in 1941. In 1956, Mr. Sproul resigned to return to his native California, where he is serving as d irec tor of a bank and an industrial corporation. Alfred Hayes became President of the Bank on August 1, 1956. He came from the New York Trust Com pany—now the Chemical Bank New York Trust Com pany—where he had been vice president in charge of the Foreign Division for seven years. He is a native of Ithaca, New York, and the son of a professor who taught constitutional law at Cornell. Mr. Hayes graduated from Yale. After a year at the Harvard Business School he received a Rhodes Scholarship and spent two years at New College, Oxford, studying economics. He began his banking career in 1933 as an analyst in the Investment Department of the City Bank Farmers Trust Company. Seven years later he transferred to the Bond Department of the National City Bank, and in 1942 he joined the New York Trust Company as Assistant Sec retary in the Investment Department. Mr. Hayes has been Vice Chairman of the Federal Open Market Committee since becom ing President of the Bank. 19 The Federal Reserve Today 20 Today’s Federal Reserve System includes the Board of Governors, the Federal Open Market C om m ittee, and the tw elve Federal Reserve Banks. Also included is the Federal Advisory Council. Membership in the System totals about 6,200 co m m e rcia l banks, w hich a cco u n t fo r about 85 per cent of the nation’s com m ercial bank assets. The Board of Governors has seven members who are appointed for 14-year term s by the President of the United States, with the advice and consent of the Senate. The Board is an agency of the Federal Government, reporting directly to the Congress. Besides fillin g a m ajor role in form ulating monetary and credit policy, the Board has certain supervisory responsibili ties over the Federal Reserve Banks and the com m ercial banks that are members of the System. The Board has a role in the adm inistration of all the monetary instruments of the Federal Reserve. The seven Governors are members of the Federal Open Market Committee which is responsible for the form ulation of policy d irec tives governing Federal Reserve buying and selling operations in the Government securi ties market, and since 1962, in the foreign ex change m arket as well. The Board has always had the responsibility of reviewing and deter mining discount rates established by the d irec tors of the Reserve Banks. Since 1933, the Board has been responsible for establishing, w ithin the lim its authorized by Congress, the amounts that member banks are required to maintain as reserves in relation to their deposits. Prior to the Banking Act of 1933, a change in reserve re q u ire m e n ts needed C on gre ssio na l action. Since the mid-1930’s, the Board has been re sponsible for establishing stock m arket margin requirements. The Federal Open Market Committee as we know it today dates essentially from 1935. It has become the prim ary policym aking body of the System. It com prises the seven members of the Board of Governors, the President of the New York Bank, and four of the other Bank Presi dents, who serve on a rotational basis. The other Presidents regularly attend all meetings, how ever, which in recent years have been held at intervals of approxim ately three weeks. Today’s FOMC is a descendant of a Com m it tee of Governors of four, and later five, of the Reserve Banks appointed by the Governors of the twelve Banks in 1922. The task of the Com m ittee was to coordinate purchases and sales of Government securities at the request of vari ous Reserve Banks. The Com m ittee was estab lished in 1922 after what was called an almost accidental discovery that Reserve Bank pur chases of Government securities, which were being made at the tim e partly to improve earn ings, could be used, because of their effect on the level of com m ercial bank reserves, as an instrum ent of monetary policy. A fter about a year of operation, the Com m it tee of Governors became the Open M arket In vestment Committee, consisting of five Reserve Bank Governors appointed by the Federal Re serve Board. This Committee, unlike the first, was under the general supervision of the Board and was directed by the Board to conduct its purchases of securities “ with prim ary regard to the accom m odation of comm erce and busi ness, and to the e ffe c t...o n the general credit situation.” Later, the Committee was enlarged to include the Governors of the twelve Banks and was re named the Open Market Policy Conference. At this time, it was still possible for individual Re serve Banks to w ithdraw from participation in any operation recommended by the Committee. The Banking Act of 1933 narrowed the possi b ility somewhat, but the Banking Act of 1935 removed the possibility com pletely. The Federal Reserve Banks issue Federal Re serve notes and introduce other currency and coin into circulation. The twelve Banks and their 24 Branches operate a nationw ide check co lle c tion system and a system for other transfers of money and securities. They are bankers for the Government and for banks. They are the Sys tem ’s direct links with the 6,200 member com m ercial banks in the Federal Reserve’s super vision of banks. The Boards of D irectors of the Banks have responsibility, as noted, for establishing dis count rates, subject to the review and deter m ination of the Board of Governors. Since the passage of the Banking Act of 1935, the d irec tors of each Reserve Bank are required to es tablish a discount rate for the d istrict at least once every 14 days. The directors of each Bank appoint a repre sentative to the Federal Advisory Council, the twelve members of which meet in W ashington at least four times a year and advise the Board of Governors on m atters affecting the affairs of the System. The Federal Reserve today embodies many changes that have occurred during the last half century. Perhaps the most significant of these is described by W. Randolph Burgess, a form er Vice President of this Bank and Manager of the System Open M arket Account, who wrote in this Bank’s M onthly Review for November 1964: Over the fifty years of its life, the Federal Reserve System has gradually been forged into one of the most im portant instrum ents fo r m ak ing money serve the econom ic goals of dem oc racy. Nowhere is this process better depicted than in open m arket operations. For in them are interwoven two great endeavors. One of these has been the effort to manage money in the pub lic interest rather than treat it as a sem iautom atic and somewhat occult mechanism. The se con d s tru g g le has been to s u b je c t money m anagement to an effective unified con trol, while preserving the local and practical particip a tion which is inherent in our concept of dem ocracy. This is, in effect, the story of how the twelve Federal Reserve Banks, conceived in the dem ocratic tradition as regional in spirit, learned to act in coordination with a Govern m ent Board, as one unit, inspired wholly by pub lic motives. Buffalo Branch In 1919, four and a half years after the Bank opened, a Branch was established at Buffalo “ to make the fa cilitie s of the Federal Reserve Bank more readily available to banks in the western part of New York State.” The Annual Report of this Bank for 1919 stated that ‘‘the Branch was placed in Buffalo a city of more than 500,000 people whose industries are unusually diversified because of its com m er cial and banking im portance.” For many years the te rrito ry of the Branch covered the 10 westernm ost counties of the State; in 1954 it was expanded to in c lu d e 4 more. There were 75 member banks in the te rrito ry when the Branch opened. The Branch was first located in the Buffalo Chamber of Com m erce Building at 240 Main Street. Nine years later it moved to a building on the same block at the Swan Street corner. The present building was com pleted in 1958. The Branch opened with a staff of 40. At the end of the first year, it totaled 113. Today, it numbers 236. There were 53 member banks in the Branch te rrito ry at the end of 1964. Buffalo Branch, 160 Delaware Avenue Form er Location at Main and Swan Streets 21