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Fourteenth oAnnual Report of the FEDERAL RESERVE BANK OF PHILADELPHIA MADE TO THE FEDERAL RESERVE BOARD FOR THE THIRD FEDERAL RESERVE DISTRICT BY THE CHAIRMAN OF THE BOARD AND FEDERAL RESERVE AGENT 1928 Fourteenth oAnnual cB^port of the FEDERAL RESERVE BANK OF PHILADELPHIA MADE TO THE FEDERAL RESERVE BOARD FOR THE THIRD FEDERAL RESERVE DISTRICT BY THE CHAIRMAN OF THE BOARD AND FEDERAL RESERVE AGENT 1928 LETTER OF TRANSMITTAL January 31, 1929. Federal Reserve Board, Washington, D. C. Dear Sirs:— I have the honor to transmit herewith the fourteenth annual report on the operations of the Federal Reserve Bank of Philadelphia, covering the year 1928. Very truly yours, R. L. AUSTIN Chairman of the Board and Federal Reserve Agent CONTENTS Page Profit and loss statement 5 Statement of condition 6 Business and financial conditions in the Philadelphia district Discounts and purchases of bills and securities 7 14 Borrowing by cities 16 Classification of rediscounts 17 Discount policy 18 Reserve position 18 Federal reserve note issues 19 Fiscal agency activities 20 Improved methods of handling transit items 21 Departmental operations 22 Personnel 23 Membership 24 Fiduciary powers 26 Acceptance powers 26 Bank relations activities 29 Bank examination activities 29 Member bank earnings and expenses 30 Annual Report of the Federal Reserve Bank of Philadelphia for 1928 The profit and loss account of the bank for 1928 follows, with comparison of the two preceding years: 1928 Gross earnings: From bills discounted From bills bought From United States securities From other sources 1927 1926 $3,498,453 932,744 914,403 48,946 $1,648,548 603,587 970,386 141,105 $2,036,833 661,657 764,324 163,834 Total earnings $5,394,546 Expenses: Maintaining the accounts of the bank.. 96,129 Loans and discounts 52,368 Currency and coin 480,667 Transit and collections 436,352 Fiscal agency functions 48,365 Custody of securities, including purchases and sales 73,950 Transfer and telegraphic service 20,428 Official salaries and supervisory expenses 161,973 Federal reserve agent's department: (Custody of collateral against federal reserve notes, note issues, bank examination, library, statistical and business reporting work) 88,527 Maintaining the general audit 57,405 Bank relations. 19,214 Insurance (other than on currency, coin and security shipments) 33,866 Operation of banking house 182,110 This bank's portion of Federal Reserve Board expenses 66,695 Miscellaneous 168,193 $3,363,626 $3,626,648 95,873 53,097 618,412 436,406 44,006 98,760 52,677 560,972 433,749 39,415 67,970 20,257 155,391 68,720 20,740 149,694 86,009 59,124 12,513 82,235 56,459 12,041 33,292 188,471 31,814 215,960 74,621 161,240 68,636 164,402 $1,986,242 $2,106,682 $2,056,274 $3,408,304 $1,256,944 $1,570,374 $1,481 127,144 $2,646 83,121 $1,130 37,771 $125,663 $80,475 $36,641 Net earnings available for dividends, surplus and franchise tax $3,282,641 $1,176,469 $1,533,733 Distribution of net earnings: Dividends . Paid to government as a franchise tax. Transferred to surplus account $843,755 0 2,438,886 $781,540 0 394,929 $730,598 0 803,135 Current expenses Current net earnings Additions to current net earnings Deductions from current net earnings.... Net deductions Fourteenth Annual Report, Federal Reserve Bank of Philadelphia A heavier volume of discounts for member banks and higher average rates of discount were chiefly responsible for an increase in earnings, which were the largest since 1921. The decline in current expenses was due principally to a reduction in federal reserve note printing costs. New notes of smaller size are in course of preparation and the stock of old notes is being permitted to decline. Omitting the cost of federal reserve currency, other current expenses of the bank were smaller than in any year since 1922, with the exception of 1925. Charge-offs, deducted from current net earnings, included $38,873 of furniture and equipment and a net loss of $87,541 on the sale of United States securities. Following adjustments, $3,282,641 remained for distribution, almost three times as much as was available in 1927. Dividends accounted for $843,755 of this amount, the balance being transferred to surplus, which is not yet equal to the 100 per cent of subscribed capital permitted by the Federal Reserve Act. Statement of condition The year-end statement shows a considerable decline in the total bill and security holdings of the bank during 1928, despite an increase of 17 millions in bills discounted. Purchased bills declined 28 millions and United States securities, 24 millions. The member banks report a material decline in net demand deposits and an increase in time deposits. Their borrowings increased and reserve requirements declined. Notwithstanding this, the reserves of this bank increased 35 millions. Its total deposits on December 31, 1928 were 10 millions smaller than a year earlier, more than balancing an increase in federal reserve note circulation. The smaller total of liabilities, together with the gain in cash reserves, resulted in an advance in the reserve ratio from 52.9 to 66.7 per cent. An increase of $1,299,000 in the capital stock of the bank during 1928 was the largest in any year since 1918. This increase in capital resulted chiefly from changes in the capital and surplus of member banks in the year ended June 30, 1928, as the majority of applications for capital stock of this bank are acted upon after the close of each half year. The banks have availed themselves of the opportunity to increase their own capital stock at a time when stock issues were being well received by the public. Another factor has been the merger of member and non-member banks under the charters of the member banks, with an attendant increase in the capital of member institutions. 6 Fourteenth Annual Report, Federal Reserve Bank of Philadelphia December 31, 1928 December 31, 1927 Changes during 1928 $179,131 6,453 $143,894 6,066 +$35,237 + 387 $185,584 1,486 $149,960 1,490 +$35,624 4 59,548 24,766 50,042 17,329 $84,314 16,234 21,447 $67,371 44,523 45,663 +$16,943 - 28,289 - 24,216 Total bills and securities Uncollected items All other resources $121,995 60,242 2,019 $157,557 63,738 2,009 -$35,562 - 3,496 + 10 Total resources $371,326 $374,754 - $142,948 $137,551 + $5,397 133,515 985 688 143,833 1,242 701 Total deposits Deferred availability items Capital paid in Surplus All other liabilities $135,188 54,342 14,536 24,101 211 $145,776 56,309 13,237 21,662 219 -$10,588 1,967 + 1,299 + 2,439 Total liabilities Ratio of total reserves to deposits and federal reserve note liabilities combined Contingent liability on bills purchased for foreign correspondents $371,326 $374,754 - $3,428 66.7% 52.9% + 13.8% $30,688 $21,963 + $8,725 (OOO's omitted) Resources Gold reserves Reserves other than gold Total reserves Non-reserve cash Bills discounted: Secured by government obligations .. Other bills discounted Total bills discounted Bills bought United States securities Liabilities Federal reserve notes in actual circulation Deposits: Member bank—reserve account Government Other deposits Business and financial conditions in the Philadelphia + + - 9,506 7,437 $3,428 10,318 257 13 district Business in the Philadelphia Federal Reserve District generally showed some improvement in the latter part of 1928. Conditions during the year showed considerable divergence, however, and expansion in the activity of manufacturing industries of the district was not shared by retail and wholesale trade. Our reports indicate that stocks of goods in the hands of manufacturers, wholesalers, and retailers in this district have declined to some extent in the course of the year. Industrial operations in the first half of the year continued the downward trend begun in the latter part of 1927 and in the spring activity failed to measure up to the level of production usual at that season. Manufacturing turned sharply upward in the summer, how 7 Fourteenth Annual Report, Federal Reserve Bank of Philadelphia BUSINESS INDICATORS PHILADELPHIA FEDERAL RESERVE DISTRICT INDEX NUMBER: 1923-25 AVERAGE =100 INDEX Retail sales — ISO I6O 140 1927 120 100 80 60 1928 — Wholesale sales — IOO 95 9O 85 8O 75 70 •••*••• 1927 A7 fa V ^ ^ N--J 1928 - Building contracts awarded 250 1927 200 I5O 0 •• V 1928 IOO -Factory wage payments Pennsylvania IO5 7 IOO 1927 *••• 95 9O 85 / r J \ I92S I i s "Nj. 1 ••*•» ! > V / V 8O JAN FEB MAR APRIL MAY JUNE JULY AU6 SEPT OCT NOV DEC Fourteenth Annual Report, Federal Reserve Bank of Philadelphia ever, and in the closing months of the year compared favorably with that of a year earlier. Nevertheless, the total volume of production was noticeably below the high point attained in 1926. This failure to equal previous high records was due principally to some curtailment of production in most lines of textiles, which are of great importance in this district. Payroll figures show that textile activity in this section was in smaller volume than in 1927 throughout most of the year; this also was true of transportation equipment, stone, clay and glass products, and lumber products. An outstanding exception to this situation was afforded by metal products. In the last half of the year there was exceptional activity in most lines of metal production. The coal situation improved in the latter part of the year and labor conditions were quiet. Despite this improvement, the market for both hard and soft coal was unsatisfactory to the operators. Prices averaged lower than in 1927, and production was smaller. The building situation was one of the brightest spots of the year. In this district, as in the country, contract awards were in larger volume than in any previous year. Construction of residential buildings was especially active. In contrast with this activity in building, however, the real estate market was comparatively quiet. The number of deeds recorded in Philadelphia county was only slightly larger than in 1927, Business indicators Philadelphia Federal Reserve District 1928 compared with 1927 Factory employment, average (Pa.) Factory wage payments, average (Pa.) Productive activity: Shoe production Wool consumption Cotton spindle hours (Pa. & N. J.) Pig iron production Iron casting production Steel casting production Hosiery production Cement production Anthracite production Bituminous coal production (Pa.) Electric power production Building contracts awarded Mortgages recorded, value (Phila.) Properties offered at sheriff's sale (Phila.). Commercial failures, liabilities Freight car loadings (Allegheny district)... Retail sales Wholesale sales Life insurance sales (Pa., N. J. & Del) 9 - 5.6% - 6.0 " - 2.4 " - 7.6" -13.1" - 0.9" + 3.4" - 1.0" + 5.7 " - 6.8 • - 4.2 " - 5.2 " + 12.7 " + 3.4" - 6.3" +39.0 " -20.2 " - 0.03" - 2.4" - 2.0" + 8.2" Fourteenth Annual Report, Federal Reserve Bank of Philadelphia there was a decline in the value of mortgages recorded, and sheriff's sales in Philadelphia reached the highest total on record. The yield of crops was about equal to that of 1927, and was nearly six per cent larger than the average of the last ten years. This compares with a gain of about four per cent for the country. Among the principal crops grown in this section are grains, fruits, truck, and tobacco. Dairy farming also is an activity of much importance. The record of distribution was not as satisfactory as that of production. Retail sales were in slightly smaller volume than in 1927, and wholesale trade also fell below that year. Total car loadings in the Allegheny district, too, were fractionally smaller, although merchandise and miscellaneous loadings exceeded those in 1927. Check payments, as recorded by banks in seventeen cities of the district, were in larger volume than ever before. This reflects increases in physical volume and in prices in some lines of business, but probably is due in greater measure to heavy turnover and higher prices in the stock market. Philadelphia shows an increase of 12.4 per cent in the year, but in the smaller cities the gain was only 4.8 per cent. Commercial failures increased in number, but the amount of liabilities was less than in 1927. The weekly reports of member banks in Philadelphia, Camden, Scranton, and Wilmington furnish a valuable picture of banking conditions in this district. The loans and investments of the reporting banks make up about 46 per cent of the total for all member banks in the district, and the records are available at close intervals. The changes which take place in their condition ordinarily are more extreme than in smaller cities, and find quick reflection in the condition of the Federal Reserve Bank. From a high point in the first report of the year, the loans and discounts of member banks in the four cities receded during January and remained low in February. Thereafter the trend was upward till early in July, but over the balance of the year loans were steadier. The trends of loans and deposits were somewhat alike in the first four months of the year, but in succeeding months there was a decline in deposits which lasted until October. The ratio of loans to deposits rose from 78 per cent at the end of April to 86.8 per cent at the close of September. In this period, indeed over most of the year, investments declined, probably reflecting the efforts put forth by the banks to meet deposit losses. The sale of investments was not nearly sufficient to accomplish this, however, and recourse was had to borrowing from the Federal Reserve Bank. The decline in investments contrasts sharply with the accumulation of securities in 1927. 10 Fourteenth Annual Report, Federal Reserve Bank of Philadelphia REPORTING MEMBER BANKS MILLIONS OF DOLLARS PHILADELPHIA - CAMDEN - SCRANTON - W I L M I N G T O N 19 28 1300 1200 Total loans and i nvestments "V—** <%/• Total deposits I 100 1000 Total loans 900 800 7OO DIVISION OF LOANS AND INVESTMENTS 48O 460 440 420 f**j 400 Other (largely commercial) loans 380 360 340 JAN FEB MAR APR MAY JUNE JULY AU6 SEPT OCT 11 NOV DEC Fourteenth Annual Report, Federal Reserve Bank of Philadelphia In October and November deposits rose slightly, but total loans and investments declined, and the banks availed themselves of this improvement in condition to reduce their borrowings. This was shortlived; loans increased somewhat in December concurrently with a demand for currency. The banks increased their borrowings, although the total did not rise as high as in September. The marked decline in deposits over much of the year partly may be accounted for by the withdrawal by depositors of their funds for loaning for their own account in the stock market and for investment in securities. Such investment demand may have provided the market through which the banks reduced their holdings of securities. This loss in deposits was particularly marked in Philadelphia, deposits in cities of less than 100,000 population in general showing an increase. An increase in loans and discounts in the course of the year was in evidence in many parts of the district. Loans on securities were in larger volume than in 1927. A high point was reached on January 4, 1928, immediately following the yearend financial transactions and large interest and dividend disbursements. A decline followed, but on July 3 a new high point was attained, again at a time when heavy interest and dividend payments were being made. There was a gradual decline until November. Toward the close of that month and in December loans on securities advanced, reaching the peak for the year on the 26th and exceeding considerably the figure of a year earlier. "Other loans," largely commercial in nature, followed an upward trend from February until the fall, and high points were reached in September and in November. In times of active business a peak in commercial loans is to be expected in the fall. The situation in 1928 contrasts with that in the previous year, when business in the last six months failed decidedly to equal seasonal expectations, and the peak of commercial loans was reached in August. Although rates on commercial loans increased during the year, there is little reason to feel that higher costs for funds exercised a restraining influence on business. The figures of reporting member banks in twenty-one of the leading cities of the district are given in the following table, which shows changes in the year ended December 12, 1928: 12 Fourteenth Annual Report, Federal Reserve Bank of Philadelphia Changes in condition of reporting member banks from December 14, 1927 to December 12, 1928 (In thousands of dollars) Number Loans and of banks discounts AUentown Atlantic City Bethlehem Chester Easton Harrisburg Hazleton Johnstown Lancaster Lebanon Norristown Philadelphia Reading Scranton Trenton Wilkes-Barre Williamsport Wilmington York Other cities Totals Time deposits Investments Net demand deposits 6 8 3 4 4 3 5 4 3 3 3 32 6 4 3 5 4 6 11 3 + 2,363 + 108 + 1,480 + 931 + 978 + 15 + 1,706 654 + 1,356 + 479 + 379 +24,968 + 1,934 + 2,480 - 2,539 + 2,185 167 +22,257 + 3,332 - 1,318 + + + - 196 316 298 27 603 73 431 313 64 + 339 + 1,347 -39,052 + 747 - 2,178 444 421 - 2,041 - 2,368 21 - 2,542 + 1,153 854 + 367 124 + 156 525 + 276 687 492 + 384 + 98 -69,100 + 1,020 - 4,895 - 4,976 + 1,354 + 74 + 4,748 + 1,322 487 + + + + + + 120 +62,273 -48,363 -71,188 + 6,891 + + + + + + + - 617 477 905 443 65 149 306 18 1,537 302 604 11,292 343 2,129 820 789 2,401 584 935 5,511 MONEY RATES PERCENT i 8 Call money new loans \ Commercial paper / I A \ i i \ r / Phi la. disco jnt rate L- /» , r— J it* 1926 1927 13 / N 1928 Fourteenth Annual Report, Federal Reserve Bank of Philadelphia Rates reported by large member banks in Philadelphia give evidence of firmer monetary conditions. Loans to customers on their prime commercial paper were quoted at 434 to 43^ per cent in the week of December 15, 1927, but in the corresponding week of 1928 the prevailing rate was 5 ^ P e r cent. Market rates for commercial paper advanced from 4 per cent to 534-53^2 per cent in the same period. Sales of such paper to Philadelphia banks were much smaller than in 1927. Discounts and purchases of bills and securities Although year-end figures of this bank show a decline in total holdings of bills and securities, daily averages for 1928 were larger than in any year since 1921. Comparative average holdings for the past three years follow: 1928 1927 1926 $75,400,000 24,500,000 26,400,000 * $42,100,000 17,400,000 29,300,000 1,000,000 $50,900,000 18,600,000 21,300,000 2,900,000 $126,300,000 $89,800,000 $93,700,000 Bills discounted Bills bought.. United States securities Other securities Totals *Less than $100,000 BILLS AND SECURITIES FEDERAL RESERVE BANK OF PHILADELPHIA MILLIONS OF DOLLARS I4O Total \ ISO i i A 100 80 Bil s discounted 60 40 20 * % *Other bills and securities 1925 1926 1927 14 1928 Fourteenth Annual Report, Federal Reserve Bank of Philadelphia From an average of 130 millions in December, 1927, the bill and security holdings of the bank receded to 112 millions in April, but over each of the first four months of this year were from 30 to 40 millions in excess of the same months last year. This was followed by an advance to 142 millions in September. The average did not fall below 122 millions in October and November, and rose to 129 millions in December. The number of banks which borrowed during 1928 was 562, or about 72 per cent of all member banks in the district. Holdings of bills discounted in 1928 were much in excess of 1927. There was a decline to 29 millions on January 26, but during February, March, April, and the greater part of May discounts hovered between 40 and 65 millions. Late in May there was a sharp turn upward and in September the daily average was in excess of 100 millions. The reports of member banks in leading cities of the district show that loans expanded in this interval, but that net demand deposits declined materially. In October and November deposits of the weekly reporting banks increased slightly, loans were comparatively stable, and the banks disposed of some of their investments. The borrowings of all member banks were reduced to 68 millions late in November. The increased need for currency in connection with the holiday season began to manifest itself in increasing measure and, chiefly to meet this demand without impairing reserves, member banks borrowed more heavily, the total of bills discounted rising to 102 millions before Christmas. Holdings of other bills and securities declined almost steadily from an average of 82 millions in December, 1927 to 35 millions in August and September, reflecting smaller holdings of both purchased bills and United States securities. Subsequently this average increased slightly. Monthly averages of the bill and security holdings of this bank follow: Bills discounted 1927—Dec 1928—Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec Bills bought United States securities $47,854,000 $36,738,000 $45,740,000 44,376,000 35,990,000 41,604,000 53,062,000 32,855,000 35,027,000 49,157,000 29,753,000 33,840,000 52,707,000 28,638,000 30,807,000 60,433,000 36,603,000 23,994,000 80,201,000 28,676,000 21,709,000 93,811,000 19,253,000 21,788,000 99,125,000 13,949,000 21,322,000 106,486,000 12,562,000 22,916,000 93,701,000 17,900,000 21,209,000 79,289,000 22,028,000 21,410,000 91,338,000 16,107,000 21,934,000 15 Other securities Total bills and securities $93,000 0 0 0 0 10,000 67,000 0 0 21,000 30,000 118,000 116,000 $130,425,000 121,970,000 120,944,000 112,750,000 112,152,000 121,040,000 130,653,000 134,852,000 134,396,000 141,985,000 132,840,000 122,845,000 129,495,000 Fourteenth Annual Report, Federal Reserve Bank of Philadelphia Under the federal reserve system well operated banks have found that they may, with perfect safety, work close to the limit of their reserves, depending on the reserve banks to care for the usual ups and downs of business and such emergencies as may occur. A loss of deposits which is temporary in nature does not, as in former years, mean necessarily a contraction of loans and a change in loaning policy, as the reserve banks can furnish the necessary funds to keep the banks' reserve position properly adjusted. BILLS DISCOUNTED MILLIONS OF DOLLARS FEDERAL RESERVE BANK OF PHILADELPHIA 70 60 Philadelphia 5O A / \ V \> 40 20 cities outside Phi la. 30 A 2O / I O 0 '""•t|,.lH»"»' > ** All other j 1927 I92S Borrowing by cities Year-end figures show little change in the borrowings of Philadelphia banks, although sharp fluctuations during the year were largely the results of their operations, as the accompanying chart shows. Banks in many other cities on December 31, 1928 were borrowing more actively than a year earlier. 16 Fourteenth Annual Report, Federal Reserve Bank of Philadelphia December 31, 1928 December 31, 1927 December 31, 1926 Allentown Atlantic City Bethlehem Chester Easton Harrisburg Hazleton Johnstown Lancaster Lebanon Norristown Philadelphia Reading Scranton Trenton Wilkes-Barre Williamsport Wilmington York Other communities $768,000 2,014,000 149,000 1,800,000 474,000 0 873,000 0 0 115,000 600,000 43,066,000 2,026,000 6,195,000 2,187,000 790,000 521,000 920,000 839,000 20,977,000 $77,000 1,943,000 585,000 1,583,000 945,000 0 534,000 60,000 0 150,000 150,000 43,893,000 240,000 1,318,000 1,193,000 250,000 395,000 85,000 160,000 13,810,000 $330,000 3,341,000 612,000 625,000 1,354,000 0 721,000 40,000 0 200,000 270,000 36,509,000 1,572,000 540,000 671,000 756,000 1,240,000 190,000 655,000 18,215,000 Totals. . . $84,314,000 $67,371,000 $67,841,000 Classification of rediscounts As in 1927, manufacturers and dealers in textiles and textile materials and in foods and food products were heavily represented in the paper which was offered to this bank for rediscount, making up 38.5 per cent of the total in 1928. The following percentages are the proportions which the paper of firms in the lines indicated bore to total bills rediscounted: Agriculture Automobiles Building materials Chemicals and drugs Cigars and tobacco Contractors and builders Department stores Food and food products Furniture Hides, leather and shoes Metals and metal products Paper and printing Rubber Textiles and textile materials Miscellaneous 7 Totals 17 Fourteenth Annual Report, Federal Reserve Bank of Philadelphia Discount policy The discount rate of this bank at the opening of the year was S}4 per cent. Effective February 16, May 17, and July 26, advances of one-half of one per cent each were made, raising the rate to 5 per cent. The Federal Reserve Bank has been alert during the year to avoid as far as possible the use of reserve credit for the support of stock market operations, and at the same time to maintain an adequate supply of credit for commerce and business at reasonable rates. Reserve bank credit reaches the ultimate user through the banks. It does not flow continually in predetermined channels; from the support of current business it may be diverted to the purchase of capital equipment or to stock speculation. In passing upon the applications of our member banks for rediscounts, it only is possible to be assured that the proceeds are to be used for commercial or agricultural purposes. Within the limits of the law, the banks are at liberty to invest in whatever manner their judgment may indicate to be sound and profitable. During the past year collaterally secured loans have offered satisfactory investments at most tempting rates. Much self control has been exercised by the officers of our member banks in resisting the temptation to borrow from the Federal Reserve Bank and to obtain large profits by using the proceeds in making such loans. The officers of this bank have given constant and careful scrutiny to the borrowing banks in the endeavor to see that the credit extended to them has been used properly. We have met with general acceptance of the principle that reserve bank credit is not to be used for speculative purposes. Reserve position Although the reserve ratio of the bank rose from 52.9 per cent at the end of 1927 to 66.7 per cent at the close of 1928, the average for the year was lower than in 1927. Daily averages of the reserve ratio and the items used in its computation follow: 1928 Reserve ratio Total deposits Federal reserve note circulation. Cash reserves 1927 63.6' 0 75.8%/c $138,800,000 $139,800,000 132,000,000 130,300,000 172,300,000 204.600,000 The January average of total deposits was higher than at any time in the past four years, but the tendency over the rest of 1928 was 18 Fourteenth Annual Report, Federal Reserve Bank of Philadelphia RESERVE POSITION FEDERAL RESERVE BANK OF PHILADELPHIA PERCENT 80 Federal reserve note circulation 1925 1926 1927 1928 generally downward, reflecting chiefly a decline in reserve requirements arising from a falling off in the net demand deposits of member banks. Federal reserve note circulation tended upward from a low point late in January and exhibited the usual changes before and after the Christmas holidays. Federal reserve note issues A statement of the federal reserve agent's accounts at the close of each of the past three years follows: 19 Fourteenth Annual Report, Federal Reserve Bank of Philadelphia December 31, 1928 Notes received from comptroller Notes on hand . . . Notes outstanding December 31, 1927 December 31, 1926 $221,234,000 $211,867,000 $203,542,000 30,300,000 33,100,000 27,700,000 $190,934,000 $178,767,000 $175,842,000 Collateral held: Gold and gold certificates on hand Gold redemption fund Gold fund—Federal Reserve Board... . Discounted and purchased bills Total collateral held 0 $13,357,000 101,777,000 76,072,000 0 $8,990,000 65,777,000 106,059,000 0 $8,965,000 96,877,000 70,763,000 $191,206,000 $180,826,000 $176,605,000 Nearly 150 millions of new federal reserve notes were issued in 1928, as compared with 131 millions in 1927. The increased use of new federal reserve notes is to be explained partly by heavier redemptions than in 1927, and partly by smaller receipts of new notes of other types from the United States government. Of these varieties, which include United States notes, and gold and silver certificates, the bank received about 50 millions during 1928 in denominations ranging from $5 to $100, as against 64 millions in 1927. Changes in federal reserve notes outstanding are detailed below: 1928 1927 1926 Outstanding at beginning of year $178,766,785 $175,841,510 $195,800,860 Unfit notes redeemed Fit notes returned to agent $140,632,480 $124,974,725 $142,819,350 0 3,000,000 3,000,000 Total returned $143,632,480 $127,974,725 $142,819,350 New notes issued to bank Fit notes reissued to bank $149,800,000 $130,900,000 $122,860,000 0 6,000,000 0 Total issued $155,800,000 $130,900,000 $122,860,000 Outstanding at end of year $190,934,305 $178,766,785 $175,841,510 Fiscal agency activities Bonds of the Third Liberty Loan issue matured on September 15, 1928. The original allotment to this district was $361,963,500, and redemptions totaled $100,932,750. Holders were given the opportunity of exchanging their bonds and purchases were made for various accounts, in addition to direct redemptions on the maturity date. The details follow: 20 Fourteenth Annual Report, Federal Reserve Bank of Philadelphia Exchanged for: Treasury notes, C-1930-1932 Treasury bonds, 1940-1943 Certificates of indebtedness TJ-1929 Matured, September 15, 1928, redemption Optional redemption at par Purchased: For sinking fund at 100^ 2 From surplus money at 1008 , From surplus money at 100 A $16,510,500 3,521,950 4,266,350 66,008,000 1,452,450 5,015,350 3,187,050 971,100 Total $100,932,750 Redemptions of six maturing certificate issues totaled $38,453,700 in the course of the year, which compares with original allotments of these issues to the district of $161,923,600. Ten new issues of securities were offered at rates varying from 334 to 4% per cent; subscriptions amounted to $462,450,200 and allotments to $211,349,150. Other fiscal agency activities included the payment of 2,545,000 government coupons, the handling of 1,963,000 government checks and warrants, and operations in connection with currency and coin which formerly were handled by the local subtreasury. Improved methods of handling transit items This bank recognizes it as a duty to take every opportunity to acquaint member banks with the facilities for conducting business to which their membership entitles them. Before the establishment of the federal reserve system, many hundreds of millions of dollars of float was shown in the statements of the banks. This was recognized as an evil and the federal reserve system was expected to correct it. The method of collecting checks followed by the system, known as its transit operations, has shortened the time in transit by sending checks to their destinations by the shortest routes and has reduced the risk and float by the daily telegraphic settlement of balances. It can be reduced further by the development of county and regional clearings on a broader scale and the more wide-spread practice of sending checks, payable in other districts, directly to those districts. Under the direct sendings plan, an arrangement is entered into between the member bank and the Federal Reserve Bank whereby the former may forward checks drawn on banks in other districts directly to the reserve banks in those districts. At least one day of transit time is saved thereby. The checks do not come through this bank at all; the member bank simply advises us of the total amounts and destina 21 Fourteenth Annual Report, Federal Reserve Bank of Philadelphia tions of the letters accompanying the checks which they have sent to other districts. More than three hundred banks in this district are now following this plan and it is urged that others avail themselves of it. The majority of the checks handled by nearly all country banks are on banks comparatively nearby. In handling such checks through the usual channels, a period of three or more days is required before payment can be received. Country banks within a given area may enter into an agreement whereby they may send checks directly to one another by mail and, by daily advices of these sendings to the reserve bank, have the balances resulting from these interchanges credited or debited to their reserve accounts one day later, thus saving at least two days. If any of the banks cooperating in such a clearings system are not members of the federal reserve system, the balances of such banks can be settled through their city correspondents. In this district four county clearings systems, including 43 banks in 21 cities, are in operation outside of Philadelphia. Departmental operations Over the past five years there has been a large increase in the activities of many departments. Comparisons over a brief term are more or less inconclusive, because of the influence of bank consolidations, the direct sending of checks, and the use of the county clearings plan, which tend to diminish the volume of work handled in some departments. Comparisons follow of operations in 1928 with those in 1927 and in 1923: Operations in 1928 compared with 1927 1923 Number Dollar Number Dollar of items amounts of items amounts Bills discounted Currency received and counted Coin received and counted Transit checks handled (including return items, but omitting government checks) . . Collection items handled (other than government coupons) Transfers of funds Fiscal agency activities: U. S. securities issued, redeemed, canceled and exchanged United States coupons paid Government checks and warrants handled.. - 2" + 2" +37" +69" -23% +71% +21 " +89" - 3" + 13 " +35" +82 " + 1" + 7" - +44" +57" +36" +78" 2" -27" - 2" -36" - 9" - 2" - *In 1923 war savings stamps were redeemed. 22 1% + 150% + 3" + 9" j a 2" -92 " * - 1 2 " -45" -60" + 1" - 1 4 " Fourteenth Annual Report, Federal Reserve Bank of Philadelphia The vault department reports an average balance of $229,500,000 in securities held for member banks during 1928; this compares with $223,400,000 in 1927. The duties of the bank as fiscal agent of the United States government entail a great deal of work in the handling of issues and redemptions of securities, the oversight of deposits of government funds, the payment of government coupons, and the handling of government checks and warrants. Although the work has declined in volume in recent years, it still calls for a considerable staff. The bank is reimbursed for only a small portion of the expenses incurred. To expedite the work of the bank, many types of labor saving machinery have been installed. Large numbers of currency and coin counting, adding, calculating, bookkeeping and check endorsing machines are used. A check photographing machine has been added to the equipment of the transit department that automatically makes a detailed record of the items sent, thereby avoiding much hand work. Personnel Board of Directors Class Residence Name Term expires Group 1 Joseph Wayne, Jr., president, Philadelphia National Bank, Philadelphia, Pa. December 31, 1929 Philadelphia, Pa. George W. Reily, president, HarA. Group 2 risburg National Bank, Harris- Harrisburg, Pa. December 31, 1930 burg, Pa. Group 3 John C. Cosgrove, vice pres., First Johnstown, Pa. December 31, 1928 National Bank, Hastings, Pa. C. Frederick C. Stout, member, John R. Evans & Co., Phila- Ardmore, Pa. December 31, 1928 delphia, Pa. Group 2 Arthur W. Sewall, president, General Asphalt Co., Phila- Philadelphia, Pa. December 31, 1929 delphia, Pa. Group 3 Arthur C. Dorrance, general manager, Campbell Soup Co., Riverton, N. J. December 31, 1930 Camden, N. J. Group 1 C. Richard L. Austin, chairman of Philadelphia, Pa. December 31, 1929 the board Alba B. Johnson, deputy chair- Rosemont, Pa. December 31, 1930 man of the board Bridgeville, Del. December 31, 1928 Harry L. Cannon The terms of John C. Cosgrove, C. Frederick C. Stout, and Harry L. Cannon as directors of the bank terminated on December 31,1928. Elections held in November resulted in the reelection of Mr. Cosgrove 23 Fourteenth Annual Report, Federal Reserve Bank of Philadelphia to represent the group 3 banks as a class A director, and of Mr. Stout to represent group 1 banks as a class B director. The Federal Reserve Board reappointed Mr. Cannon as a class C director for a term of three years from January 1, 1929. By appointment of the board of directors of this bank, Levi L. Rue, chairman of the board of directors of the Philadelphia National Bank, represented the Third Federal Reserve District on the Federal Advisory Council during 1928. Mr. Rue has been the representative of this district since the opening of the bank and his able services have been highly appreciated by the directors and officers. Richard L. Austin was designated by the Federal Reserve Board as chairman of the board of directors and federal reserve agent during 1928, and Messrs. Arthur E. Post and Ernest C. Hill were designated as assistant federal reserve agents for like terms. At the first meeting of the year the officers of the bank were reappointed to serve during 1928. The staff of the bank at the close of the year included 12 officers and 700 employees, which compares with 12 officers and 717 employees on December 31, 1927. Membership On June 30, 1928 member banks held 61 per cent of the loans and investments of all banks in the district. The loans and investments of members in this district also were 7.5 per cent of the total for all member banks in the country. During 1928, the number of active member banks in this district increased from 777 to 778, despite consolidations and several withdrawals. Additions to membership included the formation of eleven new banks under national charter, the conversion of three non-member banks into national banks, and the admission of four state banks to membership. Consolidations accounted for most of the losses in membership. In five instances national banks consolidated without liquidation, and in seven other cases member banks liquidated prior to consolidation. One national bank took out a state charter without retaining membership, and three state members withdrew from the system. One national bank suspended operations; only three member banks in this district have suspended operations since the start of the system. Changes in membership during 1928 are summarized in the following table: 24 Fourteenth Annual Report, Federal Reserve Bank of Philadelphia National State membanks ber banks Active membership, December 31, 1927 Changes during 1928: Gains— New national banks Non-member converted to national bank.. . National bank converted to state member.. New state bank members Losses— Suspension. . Withdrawal of state member banks Liquidation and consolidation with member. Consolidation of national banks Liquidation and consolidation with nonmember bank National bank liquidated and converted to state member bank National bank liquidated and converted to non-member state bank Active membership, December 31, 1928 Totals 687 90 111 11 3 0 0 0 0 1 4 11 3 1 4 14 5 19 1 0 2 5 0 3 1 0 1 3 3 5 4 0 4 1 0 1 1 0 1 14 4 18 687 91 778 This statement does not reflect gains to membership resulting from the absorption of non-member state banks by member banks. The resources of all member banks increased by 158 millions in the year ended October 3, as the following figures, taken from the call reports, show: October 3, October 10, 1927 1928 (Dollar figures in millions) Assets Loans, discounts and overdrafts Bonds, stocks and securities Banking house, furniture and fixtures Other real estate owned Cash in vault Reserve with Federal Reserve Bank Items with F. R. Bank in process of collection. Due from banks, bankers and trust companies. Exchanges for clearing house and checks on other banks in same place Outside checks and other cash items Other resources Total assets 25 $1,732 964 93 14 41 142 63 120 $1,620 970 84 14 41 142 56 106 64 3 44 $3,280 47 3 39 $3,122 Changes +$112 6 + 9 0 0 0 + 7 + 14 + 17 0 + 5 +$158 Fourteenth Annual Report, Federal Reserve Bank of Philadelphia October 3, 1928 (Dollar figures in millions) Liabilities Capital stock paid in Surplus and undivided profits Reserved for taxes, interest, etc., accrued.. . Due to Federal Reserve Bank Due to banks, bankers and trust companies Certified and cashiers' checks outstanding. . Demand deposits Time deposits United States deposits Bills payable and rediscounts Acceptances executed for customers National bank notes outstanding Other liabilities Changes + + + 204 22 ,118 ,107 8 114 13 55 40 $164 380 10 8 204 18 1,145 1,026 42 39 13 55 18 $3,280 5,122 +$158 $173 398 20 Total liabilities October 10, 1927 + + + + $9 18 10 0 0 4 27 81 34 75 0 0 22 Fiduciary powers The right to exercise fiduciary powers has proved attractive to national banks in this district. Excluding grants of powers which were the result of consolidations of banks previously having them, 33 original applications for full fiduciary powers were granted in 1928, and 4 banks with partial powers were granted full powers. Reductions in the number of banks having full powers included the liquidation of 3 national banks and the loss of 4 others through consolidation within the system. The net gain for the year was 26. At the end of the year, 286 of the 687 national banks in the district had these privileges. The steady increase in the number of banks having fiduciary powers is shown below: Full powers Partial powers Totals 124 150 169 195 224 254 47 46 45 43 36 32 171 196 214 238 260 286 December 3 1 , 1923 . . . " 1924 " " 1925 " 1926... " " 1927. " " 1928 Acceptance powers No additional banks were granted the right to accept up to 100 per cent of capital and surplus, and the number was reduced from six to five during 1928 through the consolidation of two large banks, each of which had this privilege. The volume of acceptances outstanding of banks in this district on December 31 was larger than a year earlier, but the proportion to 26 Some of the methods and modern office appliances used by this bank in carrying on its operations were demonstrated at an exhibit held in the bank in October, 1928, while the convention of the American Bankers' Association was in session. What Kind of Paper May Be Rediseounted at the Reserve Bank? V ' I » used for business <>r agricultural purposes-exiept capital outlay to purchase i>oo<lf, ami pay current expenses i com|wm:v to M-CUN f « " l l s which ar« to IK lit of maker of al or industrial This is a picture of a placard distributed to all member banks in the district illustrating the kind of paper which is eligible for rediscount at a federal reserve bank. 28 Fourteenth Annual Report, Federal Reserve Bank of Philadelphia the total for all banks in the country was only 1.4 per cent, although the banks in this district have about 7.1 per cent of the deposits (exclusive of bank deposits) of all banks in the country. Bank relations activities A bank relations force of three men is maintained to visit banks of the district, looking to the development and continuance of good relations between those banks and the Federal Reserve Bank. In the course of the year more than 1,700 visits were made, of which about 1,100 were to member banks. On several occasions special trips have been made in response to requests from our members to assist them in meeting special problems, such as the installation of accounting systems, an activity in which members of the bank examination force also join. Further contact with the district was obtained through nearly 1,500 visits to this bank by bank officers in the course of the year. We find that the efforts we make to have our member banks understand the mechanics of the system's operations are often misunderstood and sometimes misinterpreted. In presenting the advantages and opportunities of the system to members, it is not primarily with the idea of getting more business, but to acquaint member banks with the amount and kind of work this system will do for them. As stockholders it is only right that they should be made familiar with all the facilities the institution provides for the conduct of their operations. After we have made known to our member banks what can be done for them, we regard it as a matter for their own particular judgment whether or not they should take advantage of the services this bank offers them. During the annual convention of the American Bankers' Association, which took place early in October in Philadelphia, an exhibit was held in the bank to draw to the attention of visiting bankers the methods and procedure followed in furnishing these services to member banks. Nearly five hundred people attended the exhibit. A chart illustrating the classes of paper which are eligible for rediscount and those which are not eligible was found to be of particular interest. This chart has been elaborated somewhat and will shortly be distributed in placard form to the member banks to assist them in determining upon the eligibility of paper which they carry in their portfolios. It is reproduced on a reduced scale on page 28. Bank examination activities The bank examination department is not only concerned with the verification of the assets and liabilities of banks, it also stands ready and is constantly being called upon to render assistance in the improvement of methods and operating policies. 29 Fourteenth Annual Report, Federal Reserve Bank of Philadelphia In the course of its routine work, the department cooperated in 94 examinations with the state banking departments and the national bank examiners; 8 complete examinations were made of banks which were contemplating membership, and in a few other instances our examiners assisted in audits upon request. The department was called upon to investigate nine applications for the formation of new national banks, and five applications by state banks which desired national charters. In numerous cases national banks requested the privilege of exercising trust powers, and many applications under the Clayton Act for permission to hold directorships were received, all of these necessitating individual investigation and action. Member bank earnings and expenses Increasing attention is being paid by banks to income and expenses, but the individual bank lacks the figures which are necessary to enable it to determine whether or not its earnings and expenses are unduly large or small. To give a basis of comparison, this bank has made elaborate statistical surveys of the operating results of member banks in the years 1925 and 1927. In these studies the banks have been grouped according to size, measuring this by average loans and investments. The national banks also were divided according to the proportion of time to gross deposits in the latest survey. Some of the figures for 1927 are summarized below: National banks—1927 Third district Percentages of time to gross deposits 0-20% Number of banks included 24 Percentages of total loans and investments: Interest and discount earned on loans and investments 5.18% 5.72 " Gross earnings 3.59 " Total expenses .36" Net losses 1.77" Net profits Capital funds to gross 26.85" deposits Investments to loans 31.69" and investments Loans and investments 433.77 " to capital funds Net profits to capital 7.22 " funds Salaries to gross earnings 20.64 " Interest on deposits to 1.50 " gross deposits 20-40% 40-60% 60-80% 80-100% 40 167 342 70 5.50% 6.21 " 4.04 " .29 " 1.88 " 5.52% 6.30" 4.28 " .32" 1.70" 5.56% 6.27" 4.19 " .35" 1.73 " 5.59% 6.42 " 4.33 " .22" 1.87 " 26.99 " 22.94 " 21.49" 18.21 " 33.62 " 36.84" 48.08" 54.89" 429.16 " 495.68 " 526.67" 612.52 " 8.12 " 21.83 " 8.35" 20.77 " 9.08" 17.22" 11.37" 14.40" 1.55 " 1.96 " 2.47 " 2.85 " 30 Fourteenth Annual Report, Federal Reserve Bank of Philadelphia The following figures, prepared by the Federal Reserve Board, give a summary of the earnings of member banks in this district during the years ended on June 30, 1928, 1927, 1926, and 1925: Amount per $100 of earning assets: Interest received All other earnings Gross earnings Interest on deposits Interest on borrowed money. . Salaries and wages . Taxes Other expenses 1927 1926 1925 $5.26 .96 $5.40 .93 $5.29 .92 $6.23 $5.40 .84 $6.24 $6.32 $6.22 $2.03 .09 1.08 .34 $2.01 .09 1.09 .31 $1.98 .11 1.07 .33 $2.00 .07 1.07 .30 $4.17 $4.13 $4.10 $4.06 $2.06 $2.10 $2.22 $2.16 .47 .15 .39 .13 .47 .19 .32 .15 .32 .27 .28 .17 $1.74 $1.84 $1.94 $1.99 .62 Total expenses Net earnings Total losses Recoveries Net losses . Net addition to profits 1928 31 .62 .62 .62 Federal Reserve Bank of Philadelphia Directors and Officers Appointed and Elected for the Year 1929 DIRECTORS Class A Class B John C. Cosgrove, Johnstown, Pa. George W. Reily, Harrisburg, Pa. Joseph Wayne, Jr., Philadelphia, Pa. Arthur C. Dorrance, Riverton, N . J. Arthur W. Sewall, Philadelphia, Pa. C. Frederick C. Stout, Ardmore, Pa. Class C Richard L. Austin, Philadelphia, Pa. Harry L. Cannon, Bridgeville, Del. Alba B. Johnson, Rosemont, Pa. Member of Federal Advisory Council Levi L. Rue, Philadelphia, Pa. OFFICERS Richard L. Austin, George W. Norris, Chairman and Federal Reserve Agent Governor Alba B. Johnson, William H. Hutt, Deputy Chairman Deputy Governor Arthur E. Post, Assistant Federal C. A. Mcllhenny, Reserve Agent Cashier and Secretary Ernest C. Hill, Assistant Federal Reserve Agent W. J. Davis, Assistant Cashier J. M. Toy, Assistant Cashier R. M. Miller, Jr., Assistant Cashier F. W. LaBold, Assistant Cashier S. R. Earl, Assistant Cashier William G. McCreedy, Comptroller
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