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WASHIKGTON UNIVERSrTY
Department o f
Econoaics
THE FEDERAL RESERVE BANK OP ST. LOUIS
by
Wilber Clarence
Bothvell
A d i s s e r t a t i o n presented
o f Graduate S t u d i e s o f
University in partial
o f t h e requirements
degree o f D o c t o r o f
June,
t o t h e Board
Vashington
fulfilaent
for the
Philosophy
1941
ui*,
Missouri
60
^^
TABLE OF CONTENTS
CHAPTEHS
Psaa
I.
II.
III.
IV.
V.
VI.
^^
An R c o n o a i o Survey o f t h e E i g h t h D i s t r i c t
1
The E s t a b l i s h m e n t o f t h e E i g h t h F e d e r a l
Reserve D i s t r i c t . . .
..................32
O r g a n i z a t i o n and A d m i n i s t r a t i o n .
The Bank i n
.80
Operation........................118
The Member Banks o f t h e E i g h t h D i s t r i c t
C r e d i t P o l i c i e s ^pf t h e S t . L o u i s
Reserve B a n k . . . . . . . . . . . . . . .
8 '
166
.........212
til
LIST OP CHARTS AND MAP
F o l i o w i n ^ Paxe
Map:
Types o f Permlne A r e a s , E i g h t h
F e d e r a l Reserve D i s t r i c t , 1 9 3 0 . . . . . . . . . . . . . . . . .
9
P*R3
Chart 1 .
F e d e r a l Rcaerve Bank o f S t .
O r g a n i z a t i o n Chart
Louis,
103
F e d e r a l Reserve Bank o f S t . L o u i s ,
Chart 2 .
D i s c o u n t e d B i l l s , F e d e r a l Reserve Notes
i n C i r c u l a t i o n , and D e p o s i t L i a b i l i t y ,
1919-1921
245
Chart 3 . Volume o f D i s c o u n t e d B i l l s H e l d and
D i s c o u n t R a t e , 1922-1938, S t . L o u i s F e d e r a l
Reserve Bank
266
Chart 4* Customers' Rates f o r Prime Commercial
Loans i n S t . L o u i s and D i s c o u n t Rate o f
S t . L o u i s F e d e r a l Reserve Bank
267
iv
LIST
OP
TABLES
Page
1.
Annual P r o d u c t i o n o f Seven P r i n c i p a l Crops
E i g h t h F e d e r a l Reserve D i s t r i c t , 1919-1940
2.
M i n o r Crop P r o d u c t i o n i n S t a t e s I n c l u d e d
t h e E i g h t h F e d e r a l Reserve D i s t r i c t
3.
C&sh Income from Farm Markettn%s, Crops and
Livestock, i n States Included i n Eighth
District...
12
Government Payments and T o t a l Cash Incooe
I n c l u d i n g b o t h Government Payments and
Cash from F*rm M a r k e t i n g , i h S t a t e s I n cluded i n Eighth D i s t r i c t
13
5.
Coal Production i n I l l i n o i s
16
6.
C o a l P r o d u c t i o n i n I n d i a n a and Western K e n t u c k y . . . . .
16
?.
O i l P r o d u c t i o n i n I l l i n o i s 1931-1940
18
8.
O i l P r o d u c t i o n i n 1943 o f S t a t e s I n c l u d e d
Eighth D i s t r i c t . . . . .
9.
O i l F i e l d s i n Eighth D i s t r i c t
4.
in
10
**...
in
11
19
Aaone t h e
75 L a r g e s t F i e l d s i n U . S
19
10.
Mine P r o d u c t i o n o f R e c o v e r a b l e Lead i n M i s s o u r i . . . . .
11.
Mine P r o d u c t i o n o f R e c o v e r a b l e Lead
21
in
Southeastern M i s s o u r i Region
21
12.
B a u x i t e Ore P r o d u c t i o n i n Arkansas
21
13.
14.
St. K
L oa u
d rui sntgr i 1929-1937
a l Area S t a t i s t i c s o f
n iusf aIcnt u
S t . L o u i s I n d u s t r i a l A r e a V a l u e o f P r o d u c t s by
I n d u s t r i e s 1937
23
15.
Number o f Package Cars For^^rded from S t . L o u i s
t o v a r i o u s s t a t e s d u r i n g 12-Month p e r i o d
e n d i n g D e c . 31, 1935
29
R e l a t i v e Importance o f V a r i o u s C i t i e s i n t h e
E i g h t h D i s t r i c t i n W h o l e s a l e T r a d e , 1939 . . . . . . .
30
16.
25
17.
S t . L o u i s C l e a r i n g House D i s t r i c t i n g P l a n ,
C a p i t a l , D e p o s i t s , and Resources o f
Ranks A s s i g n e d t o Proposed D i s t r i c t s . .
43
18.
Annual S a l e s o f V a r i o u s Co^^^dities by
S t . L o u i s F i r m s , 1313
46
19.
Loans and Investments o f S t . L o u i s Banks
by S t a t e s , O c t . 21, 1913
4?
20.
Number o f Banks Having Correspondent R e l a t i o n s h i p s w i t h S t . L o u i s i n Proposed
&t. Louis D i s t r i c t , with Balances
M a i n t a i n e d by S t a t e s . . . . . . . . . . . . . . . . . . . . . . . . . .
47
21.
P i r s t C h o i c e V o t e f o r Reserve Bank C i t i e s
D i s t r i c t s , Eighth D i s t r i c t
60
22.
Volume o f t h e D i f f e r e n t C l a s s e s o f Paper D i s counted f o r Member Banks by t h e F e d e r a l
Reserve Bank o f S t . L o u i s and i t s
B r a n c h e s , 1919
by
23.
Kumber o f D i r e c t o r Y e a r s Served by D i r e c t o r s
from each S t a t e . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
24.
C a p i t a l P a i d I n on December 31; Member Bank
96
107
Reserve D e p o s i t s on December 31 . . . . . . . . . . . . . . .
119
25.
E a r n i n g s and Expenses o f S t . L o u i s Reserve Hank . . .
123
26.
E a r n by
i n g sSources
o f P e d e r a l Reserve Bsn* o f S t .
124
27.
P e r c e n t a g e s o f E a r n i n g s f r o a each Source t o
T o t a l E a r n i n g s , S t . L o u i s Reserve Ban* . . . . . . . .
125
28.
P e d e r a l Reserve B o t e s O u t s t a n d i n g , i n C i r c u l a t i o n , and C o l l a t e r a l P l e d g e d ,
S t . L o u i s Bank, 1915-1940
150
29.
P e d e r a l Reserve Bank N o t e s O u t s t a n d i n g and
i n C i r c u l a t i o n , S t . L o u i s Bank
151
30.
P e d e r a l Reserve Notes i n C i r c u l a t i o n d u r i n g
1931, 1932 and 1933, S t . L o u i s P e d e r a l
Reserve Bank
152
Louis
vi
31.
32.
T r e a s u r y C e r t i f i c a t e s o f Indebtedness S o l d
i n 8 t h D i s t r i c t ; L i b e r t y Bonds S o l d i n
E i g h t h D i s t r i c t ; A n a l y s i s o f Payments
f o r T h r e e L i b e r t y Bond I s s u e s - 8th
District
Page
160
T o t a l B i l l s D i s c o u n t e d and B i l l s D i s c o u n t e d
Secured by War O b l i g a t i o n s o f t h e
Government, S t . L o u i s Bank
162
33.
E x a m i n a t i o n s Conducted by t h e S t . L o u i s
Reserve Bank
172
34.
Membership 8 t h D i s t r i c t ,
35.
Size of State I n s t i t u t i o n s According t o C a p i t a l
and S u r p l u s J o i n i n g System i n 8 t h D i s t r i c t ,
1917-1923
182
Number o f S t a t e I n s t i t u t i o n s J o i n i n g System i n
8 t h D i s t r i c t A c c o r d i n g t o L a r g e C i t i e s and
C o u n t r y A r e a , 1917-1923
182
Number and D e p o s i t s o f Member and Non-Member
and Non-Member Banks E l i g i b l e and I n e l i g i b l e
f o r Membership, 8 t h F e d e r a l Reserve D i s t r i c t ,
December 31, 1939
186
Number o f E l i g i b l e and I n e l i g i b l e Non-Member
Banks C l a s s i f i e d A c c o r d i n g t o Amount o f
D e p o s i t s , 8 t h F e d e r a l Reserve D i s t r i c t ,
December 31, 1939
187
Number o f Member and Non-Member Banks i n t h e
8 t h D i s t r i c t C l a s s i f i e d by S t a t e s ,
J a n u a r y , 1939
188
R a t i o s o f E a r n i n g s and expenses, t o L o a n s ,
I n v e s t m e n t s , and C a p i t a l Funds Member
B a n k s , 8 t h D i s t r i c t , 1923-1936
198
O p e r a t i n g R a t i o s o f Member Banks i n t h e
D i s t r i c t Grouped A c c o r d i n g t o Amount
D e p o s i t s , 1937-1940
199
36.
37.
38.
39.
40.
41.
Federal
1915-1938
180
8th
of
42.
Average O p e r a t i n g R a t i o s o f Member Banks i n
a t h D i s t r i c t , 1937-1940, Grouped A c c o r d i n g t o Amounts o f D e p o s i t s . . . * . . . . . . . . . . . . . * . . . . . *
Eage
207
43.
T o t a l Volume o f Paper D i s c o u n t e d by t h e
S t . L o u i s Reserve Bank Each Month, 1 9 1 7 - 1 9 1 8 . . . . . . .
231
44*
Loans and Investments i n War O b l i g a t i o n s o f
R e p o r t i n g Meaber Banks i n F i v e C i t i e s i n
E i g h t h D i s t r i c t , 1919-1920; D i s c o u n t e d
B i l l s Secured by Covernaent War O b l i g a t i o n s
H e l d by S t . L o u i s Reserve Bank, 1919-1920
235
45.
Interest
24O
46.
Loans and Investments o f R e p o r t i n g Member Banks
i n t h e E i g h t h D i s t r i c t , 1921
249
47.
Average R a t e s o f D i s c o u n t under t h e P r o g r e s s i v e
Rate S t r u c t u r e , S t . L a u i s Bank, 1920 . . . . . . . . . . . . . .
253
48.
P u r c h a s e s o f R a n k e r s ' Acceptances by t h e
Rates i n S t . L o u i s , Mo. 1919-1922 . . . . . . . . . . .
S t . L o u i s Reserve Bank, 1915-22
49.
Interest
50.
Loans
of R
e p o1929
r t i n g Meaber Banks
8 t h and
D i sD
t reipcots, i t s1923
and
284
51.
H o l d i n g s o f U n i t e d S t a t e s S e c u r i t i e s at t h e end
o f each Month P u r c h a s e d L o c a l l y o r I n d e p e n d e n t l y ,
and Purchased Through Open Market Investment
C o B R i t t e e , 1922-1930
292
Rates i n S t . L ^ u i s , M o . , 1923-1934
258
268
viii
IMTRODUCTION
A more complete u n d e r s t a n d i n g o f F e d e r a l Reserve
p o l i c y and o f monetary problems i n t h e U n i t e d S t a t e s can be
o b t a i n e d when each o f t h e F e d e r a l Reserve banks has been
studied.
S t u d i e s o f f o u r o f t h e Reserve banks, t h e New York
Bank, t h e San F r a n c i s c o Bank, t h e B o s t o n Bank, and t h e Chicago
Bank, have a l r e a d y been made.
districts differs
resources,
Each o f t h e s e v e r a l Reserve
from t h e o t h e r s i n m a t e r i a l r e s p e c t s ,
i n economic a c t i v i t y ,
and p r a c t i c e .
and i n f i n a n c i a l
C e n t r a l bank p o l i c i e s ,
applied to different
in
structure
t h e r e f o r e , must be
problems i n each o f t h e d i s t r i c t s .
This
s t u d y u n d e r t a k e s t o make some c o n t r i b u t i o n t o a f u r t h e r
un-
d e r s t a n d i n g o f r e g i o n a l problems, w i t h t h e hope t h a t t h i s may
s e c u r e g r e a t e r e f f e c t i v e n e s s f o r Reserve bank
policies.
The study was completed under t h e d i r e c t i o n
P r o f e s s o r J . Ray C a b l e o f Washington U n i v e r s i t y .
The w r i t e r
i s much i n d e b t e d t o M r . W i l l i a m McC. M a r t i n , u n t i l
President
of
recently
o f t h e S t . L o u i s Bank, and M r . C l a r e n c e M. S t e w a r t ,
C a s h i e r and S e c r e t a r y o f t h e S t . L o u i s Bank, f o r
assistance
and a d v i c e a t every s t a g e i n t h e p r e p a r a t i o n o f t h i s manuscript.
pressed.
The w r i t e r
i s alone r e s p o n s i b l e f o r the views
ex-
-1CHAPTER I
AN ECONOMIC SURVEY OF THE EIGHTH DISTRICT
The E i g h t h F e d e r a l Reserve D i s t r i c t
o f one s t a t e and p a r t s o f s i x o t h e r s t a t e s .
A r k a n s a s , a l l but t h e w e s t e r n t i e r
comprises
The S t a t e o f
of counties of
Missouri,
southern I l l i n o i s ,
24 c o u n t i e s i n s o u t h e r n I n d i a n a ,
Kentucky, the part
o f Tennessee west o f t h e Tennessee
western
River,
and n o r t h e r n M i s s i s s i p p i a r e i n c l u d e d i n t h e D i s t r i c t .
a r e a c o n t a i n s 194,810 square m i l e s ,
all
This
and had an e s t i m a t e d
p o p u l a t i o n on J u l y 1, 1937, o f 10,413,000.^
The D i s t r i c t
is
s i x t h i n s i z e o f a r e a , and s i x t h i n p o p u l a t i o n among t h e
t w e l v e F e d e r a l Reserve
districts.
The b a n k i n g and c r e d i t needs o f any r e g i o n are
fundamentally r e l a t e d t o i t s
economic a c t i v i t y .
C e n t r a l banking p o l i c i e s
a n a l y s i s designed t o a s s i s t
of credit
economic r e s o u r c e s and
and c o n t r o l t h e
are i n
welfare
These p o l i c i e s
must,
t h e r e f o r e , be grounded upon a c o n s i d e r a t i o n o f t h e
of the resources, the a g r i c u l t u r e ,
the habits of trade of the region.
serve d i s t r i c t s
acteristics.
It
d i f f e r materially
character
the manufacturing,
and
The s e v e r a l F e d e r a l Rein their
i s necessary t o present
economic
char-
a p i c t u r e of the
^Annual R e p o r t o f t h e B o a r d o f Governors o f t h e
Reserve System. 1939, p . 100.
final
administration
i n such a way as t o promote t h e economic
of the region t o which they apply.
its
Federal
-2r e s o u r c e s and economic a c t i v i t i e s
of the Eighth D i s t r i c t
fore discussing the operation of i t s
be-
c e n t r a l bank.
St. Louis, the p r i n c i p a l c i t y i n the D i s t r i c t ,
l o c a t e d on t h e M i s s i s s i p p i R i v e r ,
o f M e x i c o , at i t s
is
1,270 m i l e s above t h e G u l f
confluence with the Missouri R i v e r .
occupies the c e n t r a l p o s i t i o n i n the M i s s i s s i p p i
S t . L o u i s l i e s a p p r o x i m a t e l y midway between t h e
It
Valley.
geographical
c e n t e r and t h e p o p u l a t i o n c e n t e r o f t h e U n i t e d S t a t e s ,
and
v e r y c l o s e t o t h e c e n t e r o f raw f o o d p r o d u c t i o n i n t h e
country.
The S t . L o u i s M e t r o p o l i t a n D i s t r i c t ,
44 c i t i e s and towns i n M i s s o u r i and I l l i n o i s ,
which contains
had a p o p u l a -
t i o n o f 1,293,516 i n 1930, 821,960 r e s i d i n g w i t h i n t h e C i t y
2
of St. Louis.
The c i t y i t s e l f
lost
population i n the
d e c a d e , t h e number d r o p p i n g t o 816,048, but t h e
last
surrounding
communities g a i n e d s u f f i c i e n t l y t o more t h a n o f f s e t
this
loss.3
T h e r e a r e o t h e r important
Louisville,
Kentucky,
Cincinnati,
and i s
cities
i n the
i s l o c a t e d on t h e Ohio R i v e r
District.
just
an important t r a n s p o r t a t i o n gateway
the Southeastern s t a t e s .
below
into
I t had a p o p u l a t i o n o f 307,745
1930, w h i c h i n c r e a s e d t o 319,077 i n 1940.^
It
in
i s one o f t h e
p r i n c i p a l markets f o r t o b a c c o and f o r l i v e - s t o c k .
EVansville,
B p i f t e e n t h Census o f t h e U n i t e d S t a t e s .
3 s i x t e e n t h Census o f t h e U n i t e d S t a t e s .
The p o p u l a t i o n o f
the S t . Louis I n d u s t r i a l Area, which c o n s i s t s of the c i t y of
S t . L o u i s , S t . L o u i s County, and Madison and S t . C l a i r
C o u n t i e s i n I l l i n o i s i n c r e a s e d i n p o p u l a t i o n from 1,335,158
i n 1930 t o 1,406,526 i n 1940.
^ F i f t e e n t h and S i x t e e n t h Censuses o f t h e U n i t e d
States.
-3Indiana,
i s l o c a t e d on t h e Ohio R i v e r about 200 m i l e s by
r i v e r below L o u i s v i l l e .
I t had a p o p u l a t i o n o f 102,2^9
1930, which d e c l i n e d t o 97,067 i n 1940.
Evansville
i s i n the
c e n t e r o f a c o a l - p r o d u c i n g and a r i c h a g r i c u l t u r a l
Memphis, Tennessee,
in
area.
i s l o c a t e d on t h e M i s s i s s i p p i R i v e r
the southwestern corner of the s t a t e .
at
I t had a p o p u l a t i o n
o f 253,143 i n 1930, w h i c h i n c r e a s e d t o 2 9 2 , 9 4 2 , i n 1940. Memphis
showed t h e g r e a t e s t
last
r e l a t i v e gain i n population during the
decade o f t h e f i v e l a r g e s t
cities
of the
District.
Memphis i s t h e p r i n c i p a l i n l a n d c o t t o n market o f t h e U n i t e d
S t a t e s , and i s
a l s o an important hardwood lumber market.
L i t t l e Rock, A r k a n s a s ,
i s l o c a t e d on t h e south banx o f t h e
Arkansas R i v e r v e r y n e a r t h e c e n t e r o f t h e s t a t e .
population.of
1940.
It
I t had a
81,679 i n 1930, w h i c h i n c r e a s e d t o 88,039
i s a lumber market, and a w h o l e s a l e
c e n t e r f o r c e n t r a l and w e s t e r n A r k a n s a s .
in
distributing
Each o f t h e s e
c i t i e s has a b r a n c h o f t h e S t . L o u i s F e d e r a l Reserve Bank
except
Evansville.
Economic a c t i v i t y
diversified.
There i s ,
i n the Eighth D i s t r i c t
p e r h a p s , no o t h e r d i s t r i c t
System more d i v e r s i f i e d from t h e s t a n d p o i n t
and p r o d u c t i o n .
Agriculture
t h e r e i s no s i n g l e i m p o r t a n t
is
dairy products,
important
Evansville,
highly
i n the
resources
i n the area,
but
production
c o r n , wheat, o a t s ,
livestock,
and v a r i o u s o t h e r farm p r o d u c t s .
There are f o u r manufacturing d i s t r i c t s
Louisville,
of
crop, a g r i c u l t u r a l
consisting of cotton, tobacco,
fruit,
is
and Memphis.
centered i n S t .
The S t . L o u i s
Louis,
Indus-
-4t r i a l Area i s t h e s i x t h most important m a n u f a c t u r i n g area
the country.
in
However, t h e r e i s no s i n g l e predominant man-
u f a c t u r i n g i n d u s t r y i n S t . L o u i s , or i n the other
three
manufacturing c i t i e s ,
as i n t h e case o f c e r t a i n other
cities
i n the United States,
such as D e t r o i t .
is
Manufacturing
h i g h l y d i v e r s i f i e d and i n c l u d e s a broad range o f b o t h p r o ducers'
and consumers' goods.
Eighth D i s t r i c t
include coal,
Mineral resources i n the
lead,
zinc,
oil,
and b a u x i t e .
T h i s broad d i v e r s i f i c a t i o n o f economic a c t i v i t y has been an
important f a c t o r i n t h e economic s t a b i l i t y
I t must be p o i n t e d out t h a t
f o r the Eighth D i s t r i c t
statistics
e n t i r e area.
t o secure.
data f o r the D i s t r i c t
alone.
Most
has
I n some c a s e s ,
s t a t e s p a r t s o f w h i c h are
i n t h e D i s t r i c t 2Mre o f t h e same p r a c t i c a l
included
significance
I n o t h e r cases t h i s
as
i s not
from t h e census o f manufactures f o r I l l i n o i s
Indiana, for
i n s t a n c e , have no s i g n i f i c a n c e
if
Even though t h e d a t a i n t h e census o f
a r e j ^ v e n by c o u n t i e s ,
f o r the parts of
the omission of
it
In a l l
and
manufactures
states included i n the D i s t r i c t
some c o u n t i e s .
true.
g i v e n by
i s not p o s s i b l e t o c o m p i l e
cases t h e
has been h a n d l e d i n such a way as t o i n d i c a t e
for the
material
a r e c o l l e c t e d by s t a t e s , but t h i s D i s t r i c t
of course, data f o r a l l
states.
area.
statistical
alone i s d i f f i c u l t
but one complete s t a t e i n i t s
Statistics
of the
its
figures
because o f
material
significance
District.
AKriculture
The a g r i c u l t u r a l a r e a s o f t h e E i g h t h D i s t r i c t
may
be d i v i d e d i n t o r a t h e r d e f i n i t e r e g i o n a l t y p e s .
M i s s o u r i i s a part of the c o m b e l t .
a l a r g e p o r t i o n of the Midvest
Northern
The c o r n b e l t
includes
region of the United
States,
c o n t a i n i n g e a s t e r n Nebraska, t h e s o u t h e a s t e r n p a r t o f South
Dakota, p a r t o f
s o u t h e r n M i n n e s o t a , a l l o f Iowa,
Missouri, northern I l l i n o i s
Ohio.^^
The l a n d i n t h i s
and I n d i a n s ,
region i s
end n o r t h w e s t e r n
adapted t o t h e
d u c t i o n o f c o r n due t o t h e c h a r a c t e r o f t h e s o i l ,
r i c h i n lime, nitrogen,
northern
and o r g a n i c m a t e r i e l ,
which
is
and t o t h e
s e a s o n a l d i s t r i b u t i o n o f r a i n f a l l and t e m p e r a t u r e . 6
corn i s the p r i n c i p a l crop i n t h i s
pro-
While
r e g i o n other crops
are
grown i n o r d e r t o make use o f l a b o r and equipment i n o t h e r
t h a n t h e sumaer months.
The c o r n c r o p makes i t s heavy demands
f o r l a b o r i n t h e summer months, w h i c h makes i t
produce o a t s and wheat, c r o p s t h a t
at other times of t h e y e a r .
o f o a t s i s next
wheat.7
possible
require labor
In the corn belt the
to
principally
production
i n i m p o r t a n c e , f o l l o ^ ^ d by h a y , and t h e n by
Corn i s a f a t - p r o a u c i n g f e e d , and t h e
livestock
grown i n t h e c o r n b e l t t h e r e f o r e c o n s i s t s o f t h e meat-prog
ducing animals, hogs, beef c a t t l e ,
a r e a i n M i s s o u r i e x t e n d s as f a r
St. Louis i n eastern Missouri,
and sheep.
The c o r n b e l t
south a p p r o x i m a t e l y
as
and c o n s i d e r a b l y f a r t h e r
south
^United S t a t e s Department o f A g r i c u l t u r e , A g r i c u l t u r a l Adjustment A d m i n i s t r a t i o n , R e g i o n a l Problems i n A g r i c u l t u r a l
AaiRstasal* pp. 29-AO.
oiaia., p. 5.
7lbid., p. 16.
Sjbid., p. 16.
-6i n western M i s s o u r i .
The l a r g e s t
p o r t i o n o f t h e cash income
o f farmers i n n o r t h e r n M i s s o u r i comes from t h e s a l e o f meata n i m a l s , and i n t h i s
sense, a g r i c u l t u r a l o p e r a t i o n s may be
s a i d t o be s p e c i a l i z e d .
The s i g n i f i c a n c e o f t h e
difference
between s p e c i a l i z e d and d i v e r s i f i e d a g r i c u l t u r a l
operations
lies
i n the e f f e c t that
on t h e income
changes i n s i n g l e p r i c e s w i l l have
o f an a r e a .
I n t h e t e r r i t o r y between t h e c o t t o n b e l t
South and t h e c o r n b e l t
w h i c h no p a r t i c u l a r
i n the
a t y p e o f f a r m i n g i s c a r r i e d on i n
Q
e n t e r p r i s e i s dominant.^
o f c l i m a t e and s o i l do not g i v e any p a r t i c u l a r
Conditions
advantage t o
any c r o p , and t h e i n d i v i d u a l farm has a d i v e r s i f i e d
production.
T h i s general farming region i s
production
c h a r a c t e r i z e d by t h e
o f c o r n , wheat, h a y , and o a t s .
Much o f t h e l a n d i s kept
p a s t u r e , and h o g s , b e e f c a t t l e ,
and sheep a r e found on most
the farms.
P o u l t r y and p o u l t r y p r o d u c t s a r e a l s o a
cant
source, o f income i n t h i s a r e a .
lies
i n t h i s general farming r e g i o n .
These two a r e a s c e n t e r around S p r i n g f i e l d ,
from
the
activity,
activity.
dairying
r e g i o n s o u t h and west
Springfield.
Southern I l l i n o i s
is
signifi-
I n southwestern M i s s o u r i
growing i s t h e important
r e g i o n e x t e n d i n g e a s t , and t h e f r u i t
of
Most o f s o u t h e r n M i s s o u r i
t h e r e i s an a r e a i n w h i c h d a i r y i n g i s t h e dominant
and a n o t h e r i n w h i c h f r u i t
in
and t h e p o r t i o n o f I n d i a n a t h a t
a part of t h e E i g h t h D i s t r i c t
farming region,
9lbid.,
p . 16
are l o c a t e d i n the
and produce a v a r i e t y o f crops and
general
livestock.
-7The n o r t h w e s t e r n p a r t o f t h e I l l i n o i s
District,
s e c t i o n of the
Eighth
a band c o n t a i n i n g 10 c o u n t i e s e x t e n d i n g northward
a l o n g t h e M i s s i s s i p p i almost t o t h e Iowa b o r d e r ,
the corn b e l t .
in Illinois
is
within
There i s a l s o a small f r u i t - g r o w i n g
region
a l o n g t h e M i s s i s s i p p i R i v e r immediately t o t h e
north of St.
Louis.
All
o f Kentucky i n c l u d e d i n t h e E i g h t h
most o f Kentucky west o f t h e mountains, may be
as a t o b a c c o and g e n e r a l f a r m i n g r e g i o n .
Formerly,
characterized
In t h i s area there
a r e t h r e e t y p e s o f t o b a c c o produced, b u r l e y ,
and f i r e - c u r e d .
District,
dark
air-cured,
a l a r g e p o r t i o n of the dark
air-
c u r e d t o b a c c o and o f t h e f i r e - c u r e d t o b a c c o was e x p o r t e d ,
but t h i s
e x p o r t t r a d e has d e c l i n e d . ^ ^
Domestic
o f t h e s e two t y p e s o f t o b a c c o i s l a r g e l y f o r
consumption
s n u f f and
chewing t o b a c c o , t h e demand f o r which has d e c l i n e d .
probable that
tobacco w i l l
l a n d used f o r growing t h e s e two t y p e s
It
is
of
c o n t i n u e t o be t u r n e d over t o g e n e r a l f a r m i n g
as t h e a g r i c u l t u r a l adjustment program develops.^^
Burley
t o b a c c o i s now used l a r g e l y f o r domestic consumption i n t h e
production of
cigarettes.
The n o r t h e r n boundary o f t h e c o t t o n b e l t
t e r m i n e d l a r g e l y by temperature.^^
t o r y i n which t h e r e a r e at l e a s t
iOiaia*,
pp.
49-51.
iilbid..
pp.
49-51.
i^Ibid..
p.
17.
It
includes that
is
de-
terri-
200 days f r e e from f r o s t .
-aThe w e s t e r n and s o u t h e r n boundary o f t h e c o t t o n b e l t
t e r m i n e d by t h e amount o f
rainfall.it
t h a t has from 20-23 i n c h e s o f r a i n f a l l .
grown on v a r i o u s k i n d s o f s o i l ,
yield.
trict,
A l l o f Tennessee t h a t
that
part
the cotton b e l t ,
territory
but t h e s o i l w i l l a f f e c t
the
i s included i n the Eighth D i s i s located
in
except f o r a s m a l l p o r t i o n i n t h e n o r t h ,
Mississippi,
area.
t h e n o r t h e r n p a r t o f which i s i n t h e
i s a cotton-producing
s t r i p along the Gulf c o a s t .
cotton b e l t ,
de-
C o t t o n can be
east o f t h e Tennessee R i v e r ,
which i s i n the tobacco
District,
includes
is
s t a t e except f o r a narrow
Arkansas i s a l s o w i t h i n t h e
but most o f t h e c o t t o n p r o d u c t i o n i s
concen-
t r a t e d i n the eastern part along the M i s s i s s i p p i R i v e r .
most p r o d u c t i v e c o t t o n l a n d s i n t h e E i g h t h D i s t r i c t
The
are t h o s e
a l o n g each s i d e o f t h e M i s s i s s i p p i R i v e r i n Tennessee,
Mississippi,
A r k a n s a s , and t h e s o u t h e a s t e r n t i p o f
I n t h e cotton area a g r i c u l t u r a l
specialized,
operations are h i g h l y
and income i s t h e r e f o r e l a r g e l y dependent on a
single price.
effect
Missouri.
The p r i c e o f c o t t o n has had a
on t h e need f o r c r e d i t
in this
significant
area.
T h e r e a r e two a r e a s i n t h e S t a t e o f Arkansas t h a t
can be c l a s s i f i e d as s e l f - s u f f i c i n g .
According t o the
o f 1930 t h i s t y p e o f f a r m i n g i s d e f i n e d as t h a t
least
census
i n which at
50 per cent o f t h e farm p r o d u c t s a r e used on t h e farm
where t h e y a r e
produced.^^
Often t h i s type of farming
p r a c t i c e d on s u b - m a r g i n a l l a n d ,
i3ibia., p. 17.
i 4 i b i d . . p. 93.
s o i l which i s
is
so p o o r , or
so
b a d l y eroded and d e p l e t e d ,
as t o o f f e r o n l y a b a r e
t e n c e t o t h o s e who c u l t i v a t e
a r e found i n p a r t
c e n t r a l Arkansas.
of
it.
subsis-
Such s u b - g a r g i n a l
areas
o f n o r t h e a s t e r n A r k a n s a s , and i n west
I n f a c t , t h e r e i s a c o n s i d e r a b l e amount
such s u b - m a r g i n a l l a n d i n v a r i o u s p a r t s o f t h e Ozark
mountain r e g i o n i n southwest M i s s o u r i and northwest
w h i c h s h o u l d be r e t u r n e d t o
forest.
The extreme northwest
as t h e extreme southwest
Arkansas
c o r n e r o f Arkansas as w e l l
corner of M i s s o u r i i s
a region
in
w h i c h f r u i t - g r o w i n g and b e r r y r a i s i n g a r e predominant.
There
is
in
a s m a l l a r e a i n t h e west c e n t r a l p o r t i o n o f Arkansas
which r i c e i s the p r i n c i p a l product.
T h i s area
centers
around S t u t t g a r t , two c o u n t i e s , Arkansas and P r a i r i e ,
being
d e v o t e d almost w h o l l y t o t h e p r o d u c t i o n o f r i c e , w i t h some
production i n the surrounding
counties.
One o f t h e g r e a t problems i n t h e c e n t r a l and
n o r t h e r n a g r i c u l t u r a l areas of the E i g h t h D i s t r i c t
has been
t h e c o n s i d e r a b l e v a r i a t i o n i n t h e y i e l d o f c r o p s from year
t o year.
T h i s v a r i a t i o n i n y i e l d has produced marked f l u c -
tuations
i n a g r i c u l t u r a l income.
weather c o n d i t i o n s
in this
p a r t o f t h e c o u n t r y , which a r e
c h a r a c t e r i z e d by marked v a r i a b i l i t y
1c
cipitation.
T h i s i s l a r g e l y due t o
Years of s u f f i c i e n t
f o l l o w e d by a y e a r o f d r o u g h t ,
i n t e m p e r a t u r e and p r e p r e c i p i t a t i o n are
often
or by a y e a r i n w h i c h t h e r e
excessive moisture i n the harvesting period.
is
The v a r i a t i o n
^^Horton, L o u i s , A n a l y s i s o f t h e S t . L o u i s T r a d e T e r r i t o r y ,
U n p u b l i s h e d m a n u s c r i p t i n t h e Washington U n i v e r s i t y L i b r a r y ,
pp. 3, 4.
-9-
Ma-p: Types o f Farming Areas^ E i g h t h F e d e r a l Reserve D i s t r i c t ,
1930
rfPL Or
ARr^AS^hlGHTH FEDERAL RECER'/t USTRICT: 1930
.^\\
Cotter.
197^.
23I8.
b.
c.
Northeast K a i . 8 a s - N e b r a s k e - M i a s c u r i - - U ^ e a t o c k , cAgh-graim, general
N o r t h e r n M i a s c u r i - I o w a — L i v e s t o c k , g e n e r a l farrrLing.
S i m i l a r t o (a) w i t h l o w e r c o m p r o d u c t i o n and fewer h o g s .
S i m i l a r t o ( a ) , l e s s l i v e s t o c k , mere c a s h - g r a i n and d a i r y .
232a.
233.
235.
236e.
b.
237.
239a.
West c e n t r a l M i s s o u r i - K a n s a s — L i v e s t o c k , g e n e r a l f a r m i n g , s o r e c a s h - g r a i n .
Ozark b o r d e r - - G e n e r a l f a r m i n g , l i v e s t o c k ,
self-sufficing.
Western M i s s o u r i — G e n e r a l f e n r i n g , d a i r y , f r u i t ,
self-sufficing.
M i d d l e Ozark P l a t e a u — G e n e r a l l i v e s t o c k , s e l f - s u f f i c i n g , p a r t - t i m e .
S i m i l a r t o ( a ) , l e s s l i v e s t o c k , more s e l f - s u f f i c i n g ; ^ .
Ozarif P l a t e a u — D e i r ^ / , l i v e s t o c k , o o u l t r y ,
self-sufficing.
C z a r k — G e n e r a l , f r u i t , dair^/, l i v e s t o c k , p o u l t r y ,
self-sufficing.
Ozark--Gener8l farming, l i v e s t o c k ,
self-sufficing.
H i l l cotton area.
O z a r * c — S e l f - s u f f i c i n g , g e n e r a l , soire l i v e s t o c t c , c o t t o n .
A r k a n s a s R i v e r v a l l e y and u r l a n d 8 - - C o t t o n , s e l f - s u f f i c i n g , g e n e r a l f a n n i n g .
O^jachita M o u n t a i n s — S e l f - s u f f i c i n g , c o t t o n , g e n e r a l f a r m i n g .
Southwest A r k a n s a s — C o t t o n , f r u i t ,
truck.
Southern A r k a n s a s - S a n d h i l l s - Ouachita R i v e r V a l l e y — C o t t o n ,
self-sufficing.
Calhoun C o u n t y — F r u i t , l i v e s t o c k ,
general.
M o r g a n - S c o t t - M a c o u p i n — C a s h - g r a i n , l i v e s t o c J c , g e n e r a l , some d a i r y .
Southwest I l l i n o i s — G e r e r a l , d a i r y , c a s h - g r a i n , p o u l t r y ,
self-sufficing.
St. Louis--Dairy, truck, f r u i t , cash-grain, poultry, potatoes.
Centralia—Fruit, dairy, poultry, s e l f - s u f f i c i n g ,
general.
Southern I l l i n o i s — P o v l t r ^ ^ , g e n e r a l ,
self-sufficing.
S o u t h e r ? I l l i n o i s — G e n e r a l , s e l f - s u f f i c i n g , n p r t - t i m e , seme p o u l t r y , d a i r y .
Southern I l l i n o i s — F n i i t , truc<, g e n e r a l n o u l t r y ,
self-sufficing.
Southern I J l i n o i s — G e n e r a l , s e l f - s u f f i c i n g , l i v e s t o c k , p o u l t r y , c a s h - g r a i n .
S o u t h e a s t ^^issouri — C a s h - g r a i n ( c o m ) , c o t t o n , l i v e s t o c k , g e n e r a l ,
self-sufficing.
B l a c k and Cache R i v e r s bottoms and t e r r a c e s — C o t t o n ,
rice.
B l a c k and Cache R i v e r s bottoms and t e r r a c e s — C o t t o n .
Crowley's Ridge—Cotton.
Grand P r a i r i e , A r k a n s a s — R i c e .
Paducah—Dairy, f r u i t , tobacco, p o u l t r y , l i v e s t o c k , part-time.
Purchase—Tobacco
f i r e - c u r e d ) , sowe d a i r y ,
livestock.
Hunboldt—Cotton, truck, strawberries, sweetpotatoes.
Vississippi Delta—Cotton.
Brown l o a n a r e a — C o t t o n .
Yfest T e n n e s s e e - N o r t h M i s s i s s i p n i s i l t and sandy loam a r e a — C o t t o n .
Southwestern I n d i a n a — G e n e r a l , l i v e s t o c k ,
cash-grain.
Union C o u n t y - - L i v e s t o c k ,
self-sufficing.
S o u t h e r n I n d i a n a — G e n e r a l , p a r t - t i m e , s e l f - s u f f i c i n g , some l i v e s t o c k , d a i r y , p o u l t r y .
S i m i l a r t o (a) w i t h more d a i r y and l e s s s e l f - s u f f i c i n g and p a r t - t i m e .
H e n d e r s o n — T o b a c c o ( f i r e - c u r e d ) , g e n e r a l , l i v e s t o c k , some f r u i t and d a i r y .
O w e n s b o r o — T o b a c c o (Green R i v e r ) , l i v e s t o c k , some d a i r y and poultr;^.
Hardin-Larue—General, s e l ^ - s u f f i c i n g , l i v e s t o c k , tobacco.
Louisville—Dair^*^, t o b a c c o , p o t a t o e s , t r u c k , p a r t - t i m e .
West K e n t u c k y — S e l f - s u f f i c i n g , p a r t - t i m e , g e n e r a l f a r m i n g .
Glasgow-Carnbellsville-Lebanon--Tobacco, general,
self-sufficing.
Clarkaville-Hopkinsville—Tobacco,
some l i v e s t o c k , g e n e r a l f a r m i n g .
Bowling Green—Tobacco, general farming, s t r a w b e r r i e s .
Cumberland V a l l e y - - 3 e l f - s u f f i c i D g , g e n e r a l f a m i n g , t o b a c c o .
M i s s i s s i p p i - A l a b e n a Black B e l t — C o t t o n , general farming, d a i r y i n g .
Outer Blue C r a s s — T o b a c c o , l i v e s t o c k , g e n e r a l f a r m i n g .
Outer Blue Gresa—Tobacco, g e n e r a l farming, l i v e s t o c k .
2^4.1.
2L.6a.
250a.
b.
277.
27^.
260a.
b.
2P1.
282.
283.
Animal specisLlty
285.
286.
Crop-epecialty
tobacco
C o i n b i r a t i c n , two
o u t s t a n d i n g typ^s
Self-sufficing^ parttiMB, f o r e s t products
G e n e r a l :r n i x e d
f a r r i iLr
b.
c.
288.
289.
290.
291.
292a.
293a.
320a.
321b.
322a.
b.
323.
326.
327.
329.
329.
330.
331.
332.
333'
3^;lb.
365.
366.
fanring.
Table 1
A n n u a l P r o d u c t i o n o f Seven P r i n c i p a l Crops
E i g h t h F e d e r a l Reserve D i s t r i c t
1919-1940*
Year
Com
(thous.
bu.)
Wheat
(thous.
bu.)
Cotton
(thous.
baleg^
Oats
(thous.
bu.)
, Hay
(thous.
tons)
Tobacco
(thous.
Ibb.)
Potatoes
(thous.
bu.)
1919
1920
1921
1922
1923
192A
1925
1926
1927
1928
1929
1930
1931
1932
1933
1934
1935
1936
1937
1938
1939
1940
380,722
448,909
416,543
394,578
399,009
346,256
404,486
393,007
338,829
358,940
312,580
191,530
382,010
380,505
296,955
167,923
262,799
202,726
366,932
335,912
339,742
326,128
108,022
68,061
66,442
78,326
83,426
53,394
50,034
54,976
42,030
31,398
44,476
44,323
64,317
34,128
38,556
47,237
51,139
60,806
80,184
65,719
60,534
62,608
1,789
2,161
1,662
2,085
1,274
2,198
3,456
3,349
2,319
2,675
3,306
2,440
4,029
2,942
2,554
2,323
2,243
3,404
4,891
3,386
3,429
3,335
63,595
77,864
59,090
37,127
51,635
60,927
64,812
59,031
39,663
64,227
51,166
50,930
63,234
47,062
37,207
18,141
38,122
38,026
55,844
52,596
46,766
60,057
7,595
6,934
8,217
7,863
8,719
6,793
6,801
9/638
7,224
9,057
3,983
5,467
4,962
5,249
4,151
5,835
4,447
6,106
7,071
7,689
8,210
355,508
396,721
338,335
314,997
304,603
166,876
249,356
316,511
306,896
398,272
282,951
277,750
206,861
189,075
176,734
300,855
239,729
282,059
245,430
13,833
18,224
20,930
9,764
13,003
12,932
19,510
13,318
11,141
12,545
13,164
9,107
9,681
13,707
8,333
12,716
13,941
12,068
13,817
" F e d e r a l Reserve Bank o f S t . L o u i s , f i l e s
of S t a t i s t i c a l
Division.
o
-11i n y i e l d can be n o t i c e d i n t h e t a b l e o f annual p r o d u c t i o n o f
seven p r i n c i p a l c r o p s i n t h e E i g h t h
District.
Table 2
M i n o r Crop P r o d u c t i o n i n S t a t e s I n c l u d e d
i n t h e E i g h t h F e d e r a l Reserve D i s t r i c t *
5 year average,
1928-1932
Apples fthous. bu.)
Crapes ( t o n s )
Peaches ( t h o u s . b u . )
Peanuts ( t h o u s . l b s . )
Pears (thous. bu.)
Soy Beans ( t h o u s . b u . )
Sweet P o t a t o e s ( t h o u s . bu.)
Pecans ( t h o u s . b u . )
Cowpeas ( t h o u s . b u . )
15,199
33,010
7,265
33,113
1,870
8,651
17,483
8,815
1,745
T h e r e have been no s i g n i f i c a n t
trends i n the
pro-
d u c t i o n o f t h e p r i n c i p a l c r o p s over t h e whole p e r i o d 19191940, except i n t h e case o f c o t t o n and t o b a c c o .
cotton production during the f i v e years,
1936-1940, was
approximately double t h a t o f t h e f i v e years,
production of tobacco i n the l a s t
Average
1920-1924.
The
f i v e y e a r s has averaged
considerably lower than i n the period of the t w e n t i e s .
There
have been marked changes from y e a r t o y e a r i n t h e case o f
o t h e r p r i n c i p a l c r o p s , but t h e average p r o d u c t i o n i n
years i s
entire
the
recent
s u b s t a n t i a l l y t h e same as f o r t h e e a r l y part o f
this
period.
The d r a s t i c
r e d u c t i o n i n farm income d u r i n g t h e
y e a r s , 1930, 1931, and 1932, i n t h e s t a t e s i n c l u d e d i n t h e
Eighth D i s t r i c t
can be seen from t h e t a b l e on cash income
* F e d e r a l Reserve Bank o f S t . L o u i s , f i l e s
Division.
of
Statistical
Table 3
Cash Income from Farm M a r k e t i n g s , Crops and L i v e s t o c k ,
i n States Included i n Eighth D i s t r i c t *
( M i l l i p n a of
State
Illinois
Indiana
Kentucky
Tennessee
Missouri
Arkansas
Mississippi
Total
1924-28
average
526.5
284.0
159.6
158.3
337.0
187.3
215,9
1,867.7
Dollars)
1920
l?21
1932
1??7
1928
1929
428.7
233.1 '
118.0 ^
108.9
266.0 *
85.7
298.0
176.8
90.8
80.7
193.5
88.9
87.8
204.1
123.0
75.8
62.2
144.0
65.7
64.5
521.7
290.3
166.6
137.0
259.5
147.0
171.1
484.8
263.5
153.9
126.5
236.8
133.0
149.9
484.9
259.9
139.2
115.1
248.4
125.7
132.6
1,016.5
739.3
1,693.2
1,548.4
1,505.8
1,364.4
* S t a t i s t i c a l A b s t r a c t s o f t h e U n i t e d S t a t e s f o r 1924-1932; Bureau of
A g r i c u l t u r a l Economics, The Farm Income S i t u a t i o n . 1936/"1939.
*
M
t
Table 4
Government Payments and T o t a l Cash Income I n c l u d i n g b o t h Government
Payments and Cash from Farm M a r k e t i n g , i n S t a t e s I n c l u d e d i n
, Eighth D i s t r i c t *
,
( M i l l i o n s of d o l l a r s )
Government Payments
State
Illinois
Indiana
Kentucky
Tennessee
Missouri
Arkansas
Mississippi
Total
192?
1938
1933
15*4
9*7
11.2
6.4
13.3
10.4
10.5
11.5
8.6
11.8
12.3
12.1
21.3
23.4
78.9
101.0
*Bureau o f A g r i c u l t u r a l
T o t a l Cash Income
1937
1938
46.4
20.9
11.0
15.7
. 28.1
27.9
34.3
537.1
300.0
177.8
145.4
272.8
157.4
181.5
496.3
272.1
165.7
138.9
248.9
154.3
173.3
-.531.4
280.8
150.2
130.8
276.5
153.6
167.0
134.3
1,772.0
1,649.5
1,690.3
Economics,
1939
.Ipcome S i t u a t i o n .
1936-1939
t
-14f r o m farm m a r k e t i n g s .
Cash income from crops and l i v e s t o c k
i n t h e s e s t a t e s averaged $1,867,700,000 d u r i n g t h e
1924-1928.
By 1932 t h i s
$739,300,000.
It
period
cash income had dropped t o
i s now v e r y s u b s t a n t i a l l y
improved.
The
t o t a l cash income, i n c l u d i n g government payments, f o r t h e
t h r e e y e a r s , 1937, 1938, 1939, ha^ averaged a p p r o x i m a t e l y
t h e same as f o r t h e p e r i o d 1924-1928 i n t h r e e
Illinois,
Indiana,
and K e n t u c k y .
states,
I n t h e case o f Tennessee,
M i s s o u r i , A r k a n s a s , and M i s s i s s i p p i ,
however, t h e average
t o t a l cash income f o r t h e p e r i o d 1937-1939 has averaged
m a t e r i a l l y l o w e r t h a n f o r t h e p e r i o d 1924-1928.
Mineral
Resources
The E i g h t h D i s t r i c t
has e x t e n s i v e c o a l
deposits.
A l a r g e p o r t i o n of t h e Eastern I n t e r i o r Coal F i e l d
located i n the D i s t r i c t .
is
T h i s f i e l d produces over 17 per
cent o f t h e t o t a l c o a l p r o d u c t i o n o f t h e U n i t e d
S t a t e s . ^ ^
B e g i n n i n g at t h e c i t y
Illinois,
l i m i t s o f East S t . L o u i s ,
s e v e r a l t h i c k v e i n s o f c o a l extend a p p r o x i m a t e l y 200 m i l e s
e a s t and 300 m i l e s n o r t h and south.^^^
The I l l i n o i s
mines a r e d i v i d e d i n t o t h r e e c l a s s i f i c a t i o n s :
Illinois
the Northern
Group, t h e I n n e r Group, and t h e S o u t h e r n Group.18
The I n n e r Croup c o n s i s t s o f t h e B e l l e v i l l e D i s t r i c t
Central I l l i n o i s
District.
The E i g h t h D i s t r i c t
i ^ i n d u s t r i a l Bureau o f t h e S t . L o u i s
^^3ustr^a^ Report oR S t . L o u j s .
coal
and t h e
includes
Chamber o f Commerce,
-15t h e Southern Croup, t h e B e l l e v i l l e D i s t r i c t ,
the Central I l l i n o i s
District.
and p a r t
of
Over 30 per cent o f t h e
c o a l s u p p l i e d t o t h e S t . L o u i s I n d u s t r i a l Area comes from
t h e I n n e r Group and t h e Southern I l l i n o i s
The E i g h t h D i s t r i c t
fields.^^
a l s o c o n t a i n s t h e Western
Kentucky f i e l d s and most o f t h e I n d i a n a f i e l d s .
A small per-
centage o f t h e c o a l s u p p l i e d S t . L o u i s comes from t h e Western
Kentucky and I n d i a n a f i e l d s . ^
Reserve d e p o s i t s o f
this
e n t i r e E a s t e r n I n t e r i o r F i e l d are so great as t o a s s u r e an
adequate s u p p l y o f b i t u m i n o u s c o a l f o r a l l needs w h i c h can
be a n t i c i p a t e d ,
Arkansas produces s m a l l q u a n t i t i e s o f a
harder c o a l c a l l e d
seai-anthracite.
Coal production i n I l l i n o i s
dropped t o
approximately
one-half that of the period of the twenties i n the
y e a r s o f 1931, 1932 and 1933.
y e a r s s i n c e 1933 i t
is
still
While i t
depression
has i n c r e a s e d i n t h e
about o n e - t h i r d l e s s t h a n t h e
average f o r t h e p e r i o d o f t h e t w e n t i e s .
The c o m p e t i t i o n o f
o t h e r f u e l s , however, was b e g i n n i n g t o be r e f l e c t e d i n a
decline of I l l i n o i s
the
c o a l p r o d u c t i o n i n t h e l a t e r years
of
twenties.
Illinois
coal is relatively
abundance o f t r a n s p o r t a t i o n f a c i l i t i e s
transportation costs.
c h e a p l y mined, and t h e
has p r o v i d e d low
Much o f t h e c o a l i s h a u l e d
t o t h e M e t r o p o l i t a n S t . L o u i s A r e a by t r u c k s ,
t o p l a n t s l o c a t e d on t h e e a s t
directly
particularly
side of the R i v e r .
With re-
gard t o t r a n s p o r t a t i o n c o s t s the s o - c a l l e d "East Side"
i9lbid.
23Ybid.
of
-16Table 5
Coal Production i n
Illinois*
(thousands o f short
Year
1910
1914
1915
1916
1917
1918
1919
1920
1921
1922
1923
1924
1925
t
40,982
51,419
52,526
59,103
76,964
89,291
60,863
88,725
69,603
58,468
84,000
68,325
66,909
tons)
Year
1926
1927
1928
1929
1930
1931
1932
1933
1934
1935
1936
1937
1938
69,367
46,848
55,948
60,658
53,731
44,303
33,475
37,413
41,272
44,525
50,927
51,602
inary)
41,912
46,450
* S t a t i s t i c a l Abstracts of the United States
f o r y e a r s 1910-1936; Bureau o f M i n e s ,
M i n e r a l s Y e a r b o o k . 1940, f o r 1937-1939, p.781.
Table 6
Coal Production i n Indiana
and Western Kentucky*
(thousands o f net
Ye&r
Ipdiana
1913
1923
1929
1932
1936
1937
1938
1939
17,166
26,229
18,344
13,324
17,822
17,765
14,759
16,650
(prelim-
tons)
Western Kentucky
8,518
10,890
14,437
9,540
8,370
8,583
7,368
8,075
*Bureau o f M i n e s , M i n e r a l s Y e a r b o o k . 1940,
p.781.
-17t h e S t . L o u i s I n d u s t r i a l Area has f o r many years enjoyed an
advantage because o f b r i d g e tolls.^^^
been p a r t l y o f f s e t
T h i s advantage
has
i n recent years by t h e development o f t h e
use o f e l e c t r i c power.
Cheap and e a s i l y a v a i l a b l e c o a l has
been an important f a c t o r
i n t h e development o f
manufactur-
22
ing i n the St. Louis area.
Access t o cheap and adequate
c o a l s u p p l i e s has a l s o been o f s i g n i f i c a n c e i n t h e
ment o f m a n u f a c t u r i n g i n E v a n s v i l l e ,
the heart of the Indiana f i e l d ,
which i s l o c a t e d
and i n L o u i s v i l l e .
advantage o f cheap c o a l e x i s t s whether i t
as a f u e l ,
or transformed i n t o e l e c t r i c
Cahokia plant
i n East
cheaper o r i t s use i s
power where i t s
i n the last
p l o i t a t i o n o f new o i l
The
output
about 4,500,000 b a r r 23
els.
^
developments i n t h e
i n southern I l l i n o i s .
Prior
By 1940 i t
had jumped t o
I n p r o d u c t i o n o f crude o i l i n 1940,
producing f i e l d
states.^^
i n the United States
2lThoma8, L e w i s F . , The L o c a l i z a t i o n o f B u s i n e s s
i n M e t r o p o l i t a n S t . L o u i s , pp. 79-101.
2 2 l b i d . , pp. 79-101.
23The O i l and Gas J o u r n a l . J a n u a r y 30, 1941. p .
^^Ebid., p .
54.
ex-
i n I l l i n o i s had averaged
I l l i n o i s had a t t a i n e d f o u r t h p l a c e among a l l t h e
Tne second l a r g e s t
this
transmission
f i v e y e a r s has been t h e
fields
t o 1937 t h e a n n u a l o i l
146,450,876 b a r r e l s .
directly
preferred.
One o f t h e most s i g n i f i c a n t
Eighth D i s t r i c t
i s used
power.
in
The
S t . L o u i s i s a good example o f
use o f c o a l t o produce e l e c t r i c
is
develop-
is
Activities
54.
-18now l o c a t e d at Salem,
Illinois,
The one at Louden,
I l l i n o i s . ^ ^
ranks f i f t h among t h e l a r g e s t
fields.
The p r o d u c t i o n o f o i l i n Arkansas has a l s o
c r e a s e d i n r e c e n t y e a r s , Arkansas and I l l i n o i s
in-
accounting
f o r most o f t h e p r o d u c t i o n i n t h e E i g h t h D i s t r i c t .
Oil
a l s o produced i n Kentucky,
but
much o f t h i s
largest
Eighth
I n d i a n a and M i s s i s s i p p i ,
i s outside the D i s t r i c t .
producing f i e l d s
is
E i g h t o f t h e 75
a r e at present
located i n the
District.
The development o f t h e o i l
southern I l l i n o i s
difficulties
materially
i n d u s t r y has a i d e d
i n d e a l i n g w i t h economic
a r i s i n g from t h e d e c l i n e i n t h e demand f o r
c o a l , and t e c h n o l o g i c a l changes i n m i n i n g .
p e c t e d t o a f f e c t t h e demand f o r c r e d i t
and i n S t .
I t may be e x -
i n southern
Illinois
Louis.
Table 7
O i l Production i n
1931-1940*
Year
1931
1932
1933
1934
1935
1936
1937
1938
1939
1940
Illinois
Number o f
barrels
4,717,000
4*801,000
4,252,000
4,472,000
4,351,000
4,439,000
7,426,000
22,800,000
91,797,241
146,450,876
^ ^ i b i d . . p . 55
*The O i l and Gas J o u r n a l . J a n u a r y 30, 1941, p .
54.
-19Table 8
O i l P r o d u c t i o n i n 1940
of States Included i n Eighth D i s t r i c t *
Name
Number o f
Barrels
Number o f a c t i v e
w e l l s , Dec. 31
Illinois
146,450,876
Arkansas
25,807,707
Kentucky
5,363,671
Indiana
4,991,763
Mississippi
4,282,318
D a i l y Average
production
per
w e l l , (bbla)
20,227
2,906
14,495
1,339
107
20.09
24.26
l.Oi
7.43
109.34
*The O i l and Gas J o u r n a l , January 30, 1941. p . 54
Table 9
O i l F i e l d s i n E i g h t h D i s t r i c t Among t h e
75 L a r g e s t F i e l d s i n U . S.*
Name
Salem, 111.
Louden, 111.
Rodessa, L a .
A r k . , Tex.
C e n t r a l i a , 111.
Magnolia, Ark.
Smackover, A r k .
Schuler, Ark.
C l a y C i t y , 111.
Production i n Barrels
19A0
1939
Rank i n
1940
70,734,313
26,595,650
14,165,845
50,179,099
13,350,888
20,392,187
2
5
10
10,641,870
7,402,317
6,628,747
6,609,747
3,866,190
2,265,450
3,589,627
6,421,056
6,193,314
6,780,813
15
29
32
33
66
*The O i l and Gas J o u r n a l , J a n u a r y 30, 1941*, p .
55.
-20M i s s o u r i i s t h e most important
state i n the country,
lead-producing
s u p p l y i n g 157,631 t o n s i n 1937, which
r e p r e s e n t e d about o n e - t h i r d o f t h e t o t a l p r o d u c t i o n i n t h e
United States.
Almost a l l o f t h i s l e a d i s produced i n t h e
southeastern M i s s o u r i lead d i s t r i c t .
now produced i n t h e s t a t e i s
The amount o f
s u b s t a n t i a l l y l e s s than the
average d u r i n g t h e p e r i o d o f t h e t w e n t i e s ,
i n c r e a s e d over t h e d e p r e s s i o n l e v e l s .
trict,
principally
trict.
is
just
although i t
has
V e r y s m a l l amounts o f
l e a d a r e produced i n o t h e r p a r t s o f t h e
There i s a l i t t l e
lead
District.
z i n c w i t h i n the area of the
i n t h e Kentucky-Southern I l l i n o i s
dis-
The p r i n c i p a l z i n c - p r o d u c i n g r e g i o n i n t h e
outside the D i s t r i c t ,
the so-called J o p l i n
Dis-
country
region,
w h i c h c o n s i s t s o f t h r e e c o u n t i e s i n M i s s o u r i , Kansas, and
27
Oklahoma.
T h i s T r i - S t a t e r e g i o n s u p p l i e s a p p r o x i m a t e l y 40
per cent o f a l l t h e z i n c mined i n t h e
country.
Arkansas p r o v i d e s 30 t o 90 per cent o f t h e b a u x i t e
o r e mined i n t h e country*
The l o c a t i o n o f t h e s e
important
d e p o s i t s i n Arkansas has caused t h e l o c a t i o n o f aluminum r e duction plants i n the Eighth
District*
Manufacturing
As was p o i n t e d out e a r l i e r t h e S t . L o u i s
A r e a i s one o f t h e most important
ters
i n the country.
general manufacturing
The c e n t r a l l o c a t i o n o f t h e
adequate and cheap s u p p l i e s o f a l l
forms o f f u e l ,
26Bureau o f M i n e s , M i n e r a l s Yearbookf
ITiaid.,
p . 135
Industrial
1940* p .
cen-
city,
superior
135.
-21T a b l e 10
Mine P r o d u c t i o n o f Recoverable Lead i n M i s s o u r i *
(short
1925-1929
1935
1936
1937
1938
1939
tons)
(average)
202,240
97,493
110,428
157,631
122,037
156,281
*Bureau o f M i n e s , M i n e r a l s Yearbook, 1940, p . 112
T a b l e 11
Mine P r o d u c t i o n o f Recoverable Lead
S o u t h e a s t e r n M i s s o u r i Region*
(short
in
tons)
1935
1936
1937
1938
1939
96,941
108,422
153,205
118,870
153,522
*3ureau o f M i n e s , M i n e r a l s Yearbook. 1940, p . 113.
T a b l e 12
B a u x i t e Ore P r o d u c t i o n i n Arkansas*
(long tons)
1913
1920
1925
1930
1935
1936
1937
* S t a t i 8 t i c a l Abstract
169,871
481,279
296,320
315,273
219,791
354,943
402,195
of the United States.
1938.
-22transportation f a c i l i t i e s ,
r a t e s have a l l
and f a v o r a b l e
transportation
c o n t r i v e d t o b r i n g about t h e l o c a t i o n o f v a r -
ious manufacturing e n t e r p r i s e s
in this
i n d u s t r i a l area.
The
I n d u s t r i a l Bureau o f t h e S t . L o u i s Chamber o f Commerce r e marked i n i t s
I n d u s t r i a l Report,
"The a p p l i c a t i o n o f
mileage
r a t e s t o t r a n s p o r t a t i o n i n whatever form has been more f a v o r a b l e t o S t . L o u i s t h a n t o any o t h e r l a r g e c i t y i n t h i s
country."
The & t . L o u i s I n d u s t r i a l Area i s not a s p e c i a l i z e d ,
but a g e n e r a l m a n u f a c t u r i n g a r e a .
As w i l l be seen i n t h e
t a b l e ^ h l c h p r e s e n t s t h e v a l u e o f p r o d u c t s by i n d u s t r i e s
t h e S t . L o u i s a r e a a c c o r d i n g t o t h e census o f
manufacturing
f o r 1937, t h e r e i s no s i n g l e predominant manufacturing
dustry.
Among t h e s i g n i f i c a n t
i n d u s t r i e s are t h e
b o o t s and shoes; c h e m i c a l s ; t r a n s p o r t a t i o n
clothing;
for
in-
following:
equipment;
e l e c t r i c a l machinery; drugs and m e d i c i n e s ; malt
l i q u o r s ; meat p a c k i n g ;
s t e e l works and r o l l i n g m i l l s ;
other
m e t a l w o r k i n g and m e t a l p r o d u c t s i n d u s t r i e s ; p r i n t i n g and
p u b l i s h i n g ; f o o d and f o o d p r o d u c t s .
This diversification
of
i n d u s t r y has p r e v e n t e d S t . L o u i s from s u f f e r i n g t h e economic
d i s t r e s s during depression years that
more s p e c i a l i z e d c e n t e r s
occurred i n
certain
of.manufacturing.
The o t h e r m a n u f a c t u r i n g c e n t e r s i n t h e E i g h t h D i s trict
a r e t o be f o u n d i n L o u i s v i l l e ,
Louisville
i s next
Memphis and E v a n s v i l l e .
i n importance t o S t . L o u i s .
manufacturing i n d u s t r i e s
a r e as f o l l o w s : t o b a c c o
meat p a c k i n g ; plumbing s u p p l i e s ; t r a n s p o r t a t i o n
Its
principal
products;
equipment;
-23
T a b l e 13
S t . L o u i s I n d u s t r i a l Area
S t a t i s t i c s o f M a n u f a c t u r i n g 1929-1937*
Year
Number
of
Establishments
1929
1931
1933
1935
1937
3,287
2,955
2,302
2,543
2,484
Value
of Products
Value
added by
Manufacture
$1,541,953,654
893,945,128
664,584,124
875,227,917
1,202,718,632
{623,981,251
385,373,114
294,472,780
339,116,670
465,274,920
Number o f
Wage E a r n e r s
154,321
117,459
102,354
115,325
140,876
M a n u f a c t u r i n g i n L o u i s v i l l e , Memphis, and E v a n s v i l l e ,
1935, 1937*
Louisville
1935
1937
571
536
32,718
32,896
277,983,724
294,210,542
94,582,681
102,203,360
118,054,892
150,879,273
40,504,404
46,406,786
80,607,030
188,308,542
37,922,879
56,295,786
Memphis
1935
1937
326
317
14,668
16,741
Evansville
1935
1937
172
171
12,792
17,251
*Censua o f M a n u f a c t u r e s . 1937; I n d u s t r i a l B u r e a u o f
S t . L o u i s Chamber o f Commerce, I n d u s t r i a l Report on S t .
Louis.
-24and d i s t i l l e d l i q u o r s .
supplies,
^
Louisville
i s c l o s e t o cheap c o a l
and has e x c e l l e n t t r a n s p o r t a t i o n f a c i l i t i e s .
On
t h e b a s i s o f t h e 1937 census o f manufacturing E v a n s v i l l e
next t o L o u i s v i l l e
i n importance.
is
E v a n s v i l l e has had a
remarkable growth i n r e c e n t y e a r s , t h e t o t a l v a l u e o f
its
manufactured p r o d u c t s i n c r e a s i n g from ^80,607,030 t o
§188,308,542 between t h e 1935 and 1937 c e n s u s e s .
Evansville
i s l o c a t e d i n t h e midst o f a c o a l - p r o d u c i n g r e g i o n .
Memphis
has e x p e r i e n c e d a c o n s i d e r a b l e growth i n manufacturing
ing the last
decade.
dur-
The v a l u e o f i t s manufactured p r o d u c t s
i n c r e a s e d from $118,054,892 t o $150,879,273 between 1935
and 1937.
B o t h Memphis and E v a n s v i l l e are d i v e r s i f i e d man-
ufacturing
centers.
I t may be n o t e d , o f c o u r s e , t h a t
every c i t y
any s i z e has c e r t a i n s e r v i c e i n d u s t r i e s t h a t
l o c a l ; milk b o t t l i n g ,
and o t h e r s .
are
of
essentially
b a k e r y p r o d u c t s , manufacture o f
ice,
The d i v e r s i f i c a t i o n o f i n d u s t r y p o i n t e d out
does not r e f e r t o t h e s e l o c a l
industries.
Transportation
M e t r o p o l i t a n S t . L o u i s i s t h e second l a r g e s t
rail-
PR
road t e r m i n a l i n the U n i t e d S t a t e s . I t
i s the
principal
t r a n s p o r t a t i o n gateway t o t h e whole Southwestern Region o f
the United States.
St. Louis.
Nineteen trunk l i n e r a i l r o a d s
Four o f t h e major e a s t - w e s t t r u n k l i n e s have
t h e i r western terminus i n S t . L o u i s .
Louisville,
enter
and one e n t e r s E v a n s v i l l e .
T h r e e o f them e n t e r
They a r e t h e
2 8 i n d u s t r i a l Bureau o f t h e S t . L o u i s Chamber o f Commerce,
I n d u s t r i a l Report on S t . L o u i s .
-25Table
lA
&t. L o u i s I n d u s t r i a l Area
V a l u e o f P r o d u c t s by I n d u s t r i e s
1937*
Industry
B o o t s and shoes
Boxes and Bags
C a r s , E l e c t r i c and Steam r r .
Chemicals
Clothing, a l l types
Drugs and M e d i c i n e s
E l e c t r i c a l machinery, apparatus
and s u p p l i e s
Feeds and F e r t i l i z e r s
F u r n i t u r e and F i x t u r e s
H e a t i n g and Cooking A p p a r a t u s ,
except e l e c t r i c
Leather
L i q u o r s , malt
Meat P a c k i n g
M a c h i n e r y , Machine T o o l s ,
Machine Shop P r o d u c t s
except e l e c t r i c a l
P a i n t s , Pigments, V a r n i s h e s
N o n - f e r r o u s m e t a l a l l o y s and
non-ferrous metal products,
except aluminum
P r i n t i n g and P u b l i s h i n g
S t e e l works and r o l l i n g m i l l
products
O t h e r M e t a l Working and M e t a l
Products I n d u s t r i e s
Food and Food P r o d u c t , except malt
l i q u o r s and meat p a c k i n g
A l l other i n d u s t r i e s
Value of
§25,299,024
27,107,965
25,969,827
47,542,206
28,606,415
21,161,525
49,919,028
17,700,480
9,512,976
16,090,816
9,689,417
35,451,125
159,681,854
34*146,616
20,103,444
24*899*500
34*769,747
56,391,257
33,261,370
71,363,410
454,050,412
*Cen3u3 o f M a n u f a c t u r i n g . 1937. I n d u s t r i a l
B u r e a u o f Census, 1939.
Product
Areas.
-26following:
The B a l t i m o r e and Ohio R a i l r o a d Co.
C l e v e l a n d , C i n c i n n a t i , Chicago and S t .
R a i l w a y Co.
The New Y o r x , Chicago, and S t . L o u i s
R a i l r o a d Co.
The P e n n s y l v a n i a R a i l r o a d Co.
Louis
T h r e e r a i l r o a d s have t h e i r western and n o r t h e r n terminus
S t . L o u i s and connect t h e C i t y w i t h t h e Southeast.
them e n t e r L o u i s v i l l e
and E v a n s v i l l e .
in
Two o f
They are t h e
follow-
ing:
Southern R a i l w a y Co.
L o u i s v i l l e and N a s h v i l l e R a i l r o a d Co.
G u l f , M o b i l e , and Ohio R a i l r o a d Co.
Four r a i l r o a d s have t h e i r n o r t h e r n terminus i n S t . L o u i s and
serve t h e Southwest and Southeast.
Three of them connect
S t . L o u i s w i t h Memphis, two w i t h L i t t l e Rock.
They are t h e
following:
M i s s o u r i P a c i f i c R a i l r o a d Co.
M i s s o u r i - K a n a a s - T e x a s R a i l r o a d Co.
S t . L o u i s - S a n F r a n c i s c o Railway Co.
S t . L o u i s Southwestern Railway Co.
T h r e e r a i l r o a d s w i t h t h e i r e a s t e r n terminus i n Chicago enter
S t . L o u i s and serve t h e West and Northwest.
They are t h e
following:
C h i c a g o , Rock I s l q n d & P a c i f i c Railway Co.
C h i c a g o , B u r l i n g t o n & Quincy R a i l r o a d Co.
Chicago, & Northwestern Railway Co.
The A l t o n R a i l r o a d Co. and t h e Chicago & E a s t e r n
R a i l w a y Co. connect S t . L o u i s and C h i c a g o .
The Wabash R a i l r
way Co. i s a b r i d g e l i n e which connects S t . L o u i s
D e t r o i t ^ C h i c a g o , Kansas C i t ^ a n d Omaha.
Illinois
The
with
Illinois
C e n t r a l R a i l r o a d Co. i s a n o r t h - s o u t h l i n e e x t e n d i n g from
-27Chicago t o New O r l e a n s .
and L o u i s v i l l e .
It
connects S t . L o u i s w i t h Meaphis
The I l l i n o i s T e r m i n a l R a i l r o a d System ex-
t e n d s from S t . L o u i s t o v a r i o u s p o i n t s i n
Illinois.
The M i s s i s s i p p i R i v e r System, i n c l u d i n g t h e O h i o ,
Illinois,
Missouri,
Cumberland, Tennessee, Wabash, Green,
Y a z o o , and O u a c h i t a R i v e r s ,
trict
p r o v i d e most o f t h e E i g h t h D i s -
w i t h water t r a n s p o r t a t i o n .
A l l of the r i v e r s
mentioned
c h a n n e l , and t h e
principal
have been p r o v i d e d w i t h a s i x - f o o t
p a r t s o f t h e M i s s i s s i p p i R i v e r System now have a n i n e - f o o t
channel.
Four o f t h e p r i n c i p a l c i t i e s
i n the Eighth
a r e l o c a t e d on t h e M i s s i s s i p p i and Ohio R i v e r s ; S t .
L o u i s v i l l e , Memphis and E v a n s v i l l e .
District
Louis,
Some coRmodities
for
e x p o r t move by barge down t h e M i s s i s s i p p i R i v e r t o New
Orleans.
Some shipments o f goods t o t h e P a c i f i c Coast
t r a n s p o r t e d by barge t o New O r l e a n s and by f r e i g h t e r
t h e Panama Canal*
Joint
are
through
r a i l and water r a t e s have been e s -
t a b l i s h e d between many p o i n t s
i n the Eighth
District.
T r a n s p o r t a t i o n by motor t r u c k has been h i g h l y
developed i n most p a r t s o f t h e E i g h t h D i s t r i c t
f i f t e e n years.
i n St. Louis.
i n the
Extensive truck terminal f a c i l i t i e s
last
exist
A network o f p i p e l i n e s now connects
S t . Louis with the o i l
f i e l d s o f Texas and Oklahooa.
D i s t r i b u t i o n o f Goods
The t r a d e t e r r i t o r y
d e f i n e i n terms o f a s p e c i f i c
of S t . Louis i s d i f f i c u l t
area.
The a r e a o f
t i o n o f goods w i l l v a r y g r e a t l y w i t h d i f f e r e n t
ing firms.
J o b b e r s , and w h o l e s a l e h o u s e s .
to
distribu-
manufactur-
Some p r o d u c t s
-38manufactured i n S t . L o u i s , a r e ,
parts of the country.
of course, d i s t r i b u t e d i n
all
The t r a d e t e r r i t o r y i n which S t .
Louis
i s dominant has been d e f i n e d as an area r o u g h l y i n c l u d e d by
a c i r c l e t h a t has a r a d i u s o f 150 m i l e s w i t h i t s
center
2Q
about 30 m i l e s soutav&st o f S t . L o u i s .
'
T h i s area con-
s i s t s o f a l a r g e p o r t i o n o f M i s s o u r i , almost a l l o f
Illinois,
and s m a l l p o r t i o n s o f I n d i a n a , Kentucky,
southern
Tennessee,
and A r k a n s a s .
A study o f t h e movement o f package c a r s
forwarded
from S t . L o u i s d u r i n g t h e 12-Ronth p e r i o d ending December
31, 1935, i n d i c a t e s t h e extent o f t h e t e r r i t o r y t h a t
significant
to St. Louis.
F o u r t e e n s t a t e s r e c e i v e d an a v e r -
age o f more t h a n 10 c a r s o f package f r e i g h t
St. Louis.
is
M i s s o u r i and I l l i n o i s
per day from
r e c e i v e d more t h a n t w i c e
as many as any o t h e r s t a t e , but T e x a s , A r k a n s a s , Kansas and
Oklahoma r e c e i v e d more t h a n 25 c a r s per day.
The r e l a t i v e
the Eighth D i s t r i c t
importance o f t h e v a r i o u s c i t i e s
w i t h r e g a r d t o w h o l e s a l e t r a d e can be
determined f r o a t h e t a b l e which i n c l u d e s a l l c i t i e s
District
in
i n the
w h i c h had an aggregate w h o l e s a l e t r a d e o f more
t h a n !10,000,030 i n 1939.
Memphts i s t h e most
wholesale center outside o f St. L o u i s .
able trade t e r r i t o r y
important
I t has 3 c o n s i d e r -
i n w e s t e r n Tennessee, e a s t e r n Arkansas,
and n o r t h e r n M i s s i s s i p p i .
Louisville
competes s h a r p l y
3ith
29A d i s c u s s i o n o f t h e S t . L o u i s t r a d e t e r r i t o r y may be
f o u n d i n Thomas, L e w i s F . , Tae Geography o f t h e S t . L o u i s
T r a d e T e r r i t o r y , and i n H o r t o n , L o u i s , A B t i y s ^ l p f t^e
St.
Tr44e Teppitpyy*
-39-
Number o f Package Cars Forwarded from
St. Louis t o various states
d u r i n g 12-month p e r i o d
e n d i n g Dec. 31, 1935*
Major
E^strtbutiKK
^rea
Missouri
Illinois
Texas^
Arkansas
Oklahoma
Kansas
Tennessee
Indiana
Ohio
Iowa
Louisiana
Kentucky
Alabama
Mississippi
Total
No, o f Package Cars
12 months
Average Ko, per Day
(300 da/ year)
34,269
32,479
16,656
9,529
8,112
8,700
6,555
5,395
5,785
5,309
3,847
3,704
3,625
3,358
114.2
108.3
52.2
31.8
27.0
29.0
21.9
18.0
17.0
17.7
12.8
12.3
12.1
146,323
487.7
* I n d u s t r i a l Bureau o f S t . L o u i s Chamber o f Commerce,
on 3t 1 ^o^^5
-40-
T a b l e 16
R e l a t i v e Importance o f V a r i o u s C i t i e s
i n the Eighth D i s t r i c t
i n Wholesale T r a d e , 1939*
City
Ko.
of
Estab^ ish^.ents
St. Louis,
MiStSouri
Memphis,
Tennessee
Louisville,
Kentucky
L i t t l e Rock,
Arkansas
Evansville,
Indiana
Springfield,
Missouri
P o r t Smith,
Arkansas
E. St. Louis,
Illinois
Pine B l u f f ,
Arkansas
Paducah,
Kentucky
Quincy,
Illinois
Greenville,
Mississippi
Sales
Payroll
Omitted)
omitted)
etors
2,663
§1,164,102
1,464
34,367
$61,253
6*75
433,354
461
3,937
13,675
-
613
215,936
501
9,173
13,548
243
73,500
143
2,579
3,613
220
51,544
130
2,247
3,352
168
30,363
120
1,315
1,794
115
24,772
73
1,017
1,399
77
22,113
41
638
944
74
14,636
64
339
475
66
14,433
52
545
621
90
13,434
59
797
1,027
41
11,409
25
nit
447
*3ureau of t h e Census, S i x t e e n t h Census o f t h e U n i t e d S t a t e s ,
Wholesale T r a d e , 1939.
-31C l n c i n n a t i i n i t s trade t e r r i t o r y consisting of
Kentucky and s o u t h e r n I n d i a n a .
The t r a d e t e r r i t o r y o f
Rock i s l o c a t e d w h o l l y w i t h i n t h e s t a t e o f
western
Arkansas.
Little
-32CHAPTER I I
THE ESTABLISHMENT OF THE EIGHTH FEDERAL RESERVE DISTRICT
The b i l l t o e s t a b l i s h t h e F e d e r a l Reserve System,
a f t e r f i n a l a c t i o n by b o t h houses on t h e c o n f e r e n c e
report,
was s i g n e d by P r e s i d e n t W i l s o n on December 23, 1913.
The
b i t t e r d i s p u t e over t h e n a t u r e o f t h e reforms o f our banki n g and c u r r e n c y mechanism having been s e t t l e d , t h e
c u l t t a s k o f d i v i d i n g t h e country i n t o r e s e r v e
diffi-
districts
and d e t e r m i n i n g t h e l o c a t i o n o f r e g i o n a l banks had t h e n t o
be f a c e d .
S e c t i o n 2 o f t h e F e d e r a l Reserve Act
provided:
As soon as p r a c t i c a b l e , t h e S e c r e t a r y o f
t h e T r e a s u r y , t h e S e c r e t a r y o f A g r i c u l t u r e , and
t h e C o m p t r o l l e r o f t h e C u r r e n c y , a c t i n g as "The
Reserve Bank O r g a n i z a t i o n Committee," s h a l l d e s i g n a t e not l e s s t h a n e i g h t nor more t h a n t w e l v e
c i t i e s t o be known as F e d e r a l Reserve c i t i e s , and
s h a l l d i v i d e t h e c o n t i n e n t a l U n i t e d S t a t e s , exc l u d i n g A l a s k a , i n t o d i s t r i c t s , each d i s t r i c t t o
c o n t a i n o n l y one o f such F e d e r a l Reserve c i t i e s .
The d e t e r m i n a t i o n o f s a i d o r g a n i z a t i o n committee
s h a l l not be s u b j e c t t o r e v i e w except by t h e F e d e r a l Reserve B o a r d when o r g a n i z e d : P r o v i d e d , That
t h e d i s t r i c t s s h a l l be a p p o r t i o n e d w i t h due r e gard t o t h e convenience and customary course o f
b u s i n e s s and s h a l l not n e c e s s a r i l y be coterminous
w i t h any S t a t e o r S t a t e s .
The d i s t r i c t s t h u s
c r e a t e d may be r e a d j u s t e d and new d i s t r i c t s may
from t i m e t o t i m e be c r e a t e d by t h e F e d e r a l Res e r v e B o a r d , not t o exceed t w e l v e i n a l l .
Such
d i s t r i c t s s h a l l be known as F e d e r a l Reserve d i s t r i c t s and may be d e s i g n a t e d by number. A
m a j o r i t y o f t h e o r g a n i z a t i o n committee s h a l l cons t i t u t e a quorum w i t h a u t h o r i t y t o a c t .
S a i d o r g a n i z a t i o n committee s h a l l be a u t h o r i z e d t o employ c o u n s e l and e x p e r t a i d , t o t a k e
t e s t i m o n y , t o send f o r persons and p a p e r s , t o adm i n i s t e r o a t h s , and t o make such i n v e s t i g a t i o n s as
may be deemed n e c e s s a r y by t h e s a i d committee i n
d e t e r m i n i n g t h e r e s e r v e d i s t r i c t s and i n d e s i g n a t i n g
-33t h e c i t i e s w i t h i n such d i s t r i c t s where Such F e d e r a l
r e s e r v e banks s h a l l be s e v e r a l l y l o c a t e d .
The s a i d
committee s h a l l s u p e r v i s e t h e o r g a n i z a t i o n i n each
o f t h e c i t i e s d e s i g n a t e d o f a F e d e r a l r e s e r v e bank,
which s h a l l i n c l u d e i n i t s t i t l e t h e name o f t h e
c i t y i n which i t i s s i t u a t e d , as " F e d e r a l Reserve
Bank o f C h i c a g o " .
Under r e g u l a t i o n s t o be p r e s c r i b e d by t h e o r g a n i z a t i o n committee, every n a t i o n a l banking
a s s o c i a t i o n i n t h e U n i t e d S t a t e s i s hereby r e q u i r e d ,
and every e l i g i b l e banx i n t h e U n i t e d S t a t e s and
every t r u s t company w i t h i n t h e D i s t r i c t o f Columbia,
i s hereby a u t h o r i z e d t o s i g n i f y i n w r i t i n g , w i t h i n
s i x t y days a f t e r t h e passage o f t h i s a c t , i t s
acceptance o f t h e terms and p r o v i s i o n s h e r e o f .
When
t h e o r g a n i z a t i o n committee s h a l l have d e s i g n a t e d t h e
c i t i e s i n which F e d e r a l r e s e r v e banks are t o be o r g a n i z e d , and f i x e d t h e g e o g r a p h i c a l l i m i t s o f t h e
F e d e r a l r e s e r v e d i s t r i c t s , every n a t i o n a l banking
a s s o c i a t i o n w i t h i n t h a t d i s t r i c t s h a l l be r e q u i r e d
w i t h i n t h i r t y days a f t e r n o t i c e from t h e o r g a n i z a t i o n
committee, t o s u b s c r i b e t o t h e c a p i t a l s t o c k o f such
F e d e r a l r e s e r v e bank i n a sum e q u a l t o s i x per centum
o f t h e p a i d - u p c a p i t a l s t o c k and s u r p l u s o f such bank,
o n e - s i x t h o f t h e s u b s c r i p t i o n t o be payable on c a l l o f
t h e o r g a n i z a t i o n committee or o f t h e F e d e r a l Reserve
B o a r d , o n e - s i x t h w i t h i n t h r e e months, and o n e - s i x t h
w i t h i n s i x months t h e r e a f t e r , and t h e remainder o f t h e
s u b s c r i p t i o n , o r any p a r t t h e r e o f , s h a l l be s u b j e c t t o
c a l l when deemed n e c e s s a r y by t h e F e d e r a l Reserve Board,
s a i d payments t o be i n g o l d o r g o l d c e r t i f i c a t e s
Should t h e s u b s c r i p t i o n by banks t o t h e s t o c k o f s a i d
F e d e r a l r e s e r v e banks o r any one or more o f them be,
i n t h e judgment o f t h e o r g a n i z a t i o n committee i n s u f f i c i e n t t o p r o v i d e t h e amount o f c a p i t a l r e q u i r e d t h e r e f o r ,
t h e n and i n t h a t event t h e s a i d o r g a n i z a t i o n committee
may, under c o n d i t i o n s and r e g u l a t i o n s t o be p r e s c r i b e d
by i t , o f f e r t o p u b l i c s u b s c r i p t i o n at par such an
amount o f s t o c k i n s a i d F e d e r a l r e s e r v e banks, or any
one o r more o f them, as s a i d committee s h a l l determine,
s u b j e c t t o t h e same c o n d i t i o n s as t o payment and s t o c k
l i a b i l i t y as p r o v i d e d f o r member banks
Should t h e t o t a l s u b s c r i p t i o n by banxs and t h e
p u b l i c t o t h e s t o c k o f s a i d F e d e r a l r e s e r v e banks, or
any one or more o f them, be, i n t h e judgment o f t h e
o r g a n i z a t i o n committee, i n s u f f i c i e n t t o p r o v i d e t h e
amount o f c a p i t a l r e q u i r e d t h e r e f o r , t h e n and i n t h a t
event t h e s a i d o r g a n i z a t i o n committee s h a l l a l l o t t o
t h e U n i t e d S t a t e s such an amount o f s a i d s t o c k as s a i d
-34committee s h a l l
determine
No F e d e r a l r e s e r v e bank s h a l l commence b u s i n e s s
w i t h a s u b s c r i b e d c a p i t a l l e s s t h a n $4,000,000.
The
o r g a n i z a t i o n o f r e s e r v e d i s t r i c t s and F e d e r a l r e serve c i t i e s s h a l l not be construed as changing t h e
present s t a t u s o f r e s e r v e c i t i e s , except i n so f a r as
t h i s changes t h e amount o f r e s e r v e s t h a t may be
c a r r i e d w i t h approved r e s e r v e agents l o c a t e d t h e r e in
The Reserve Bank O r g a n i z a t i o n Committee began h e a r i n g s i n New Y o r k C i t y on J a n u a r y 15, 1914, and from t h e r e
proceeded t o o t h e r p a r t s o f t h e country g i v i n g a l l
those
c i t i e s d e s i r i n g a r e s e r v e bank an o p p o r t u n i t y t o be h e a r d .
Almost every community o f any consequence as a f i n a n c i a l
t e r wished t o be d e s i g n a t e d as a F e d e r a l r e s e r v e c i t y .
cenIn
t h e t e r r i t o r y t h a t might have been a s s i g n e d w i t h some r e a s o n
t o a S t . L o u i s bank t h e r e were t e n c i t i e s
claiming
consider-
a t i o n as t h e l o c a t i o n o f a r e s e r v e bank, Kansas C i t y ,
New O r l e a n s , L o u i s v i l l e ,
Dallas,
Indianapolis,
N a s h v i l l e , Houston, and F o r t Worth.^
six cities
Cincinnati,
outside t h i s t e r r i t o r y ,
Memphis,
Chattanooga,
I n a d d i t i o n , t h e r e were
Chicago,
A t l a n t a , Omaha, and Denver, t h a t
Birmingham,
c l a i m e d some
p a r t o f t h i s t e r r i t o r y as b e i n g f i n a n c i a l l y dependent on them.
The Committee met i n S t . L o u i s on January 21, 1914 t o hear t h e
b a n k i n g and b u s i n e s s i n t e r e s t s o f S t . L o u i s and t h e
adjacent
area.
T h e r e was r e l a t i v e l y l i t t l e
of the d e s i r a b i l i t y
St. Louis,
q u e s t i o n a t any time
o f l o c a t i n g one o f t h e r e s e r v e banks
in
and i n consequence most o f t h e d i s c u s s i o n at
^These c i t i e s were l o c a t e d i n t e r r i t o r y t h a t was c o n s i d e r e d
a t one t i m e o r a n o t h e r f o r i n c l u s i o n i n t h e S t . L o u i s d i s t r i c t
-35S t . L o u i s concerned t h e s i z e and content o f t h e r e s e r v e
trict
t o be e s t a b l i s h e d .
dis-
S t . L o u i s had been f o r many years
one o f t h e t h r e e c e n t r a l r e s e r v e c i t i e s
t h e terms o f t h e N a t i o n a l Banking A c t . 2
e s t a b l i s h e d under
I t had commercial
and f i n a n c i a l r e l a t i o n s h i p s which extended w i d e l y through
t h e South and West, and f o r a s h o r t e r d i s t a n c e eastward.
the vote f o r Federal reserve c i t i e s ,
i n the country p a r t i c i p a t e d ,
l a r g e s t number o f v o t e s ,
i n which a l l t h e banks
S t . Louis received the
4,871.3
fourth
o n l y C h i c a g o , New Y o r k ,
and San F r a n c i s c o r e c e i v e d a l a r g e r number o f v o t e s ,
l a r g e s t number 5,844, b e i n g c a s t f o r C h i c a g o .
Committee on O r g a n i z a t i o n ,
In
the
The P r e l i m i n a r y
a body o f e x p e r t s which examined
and a n a l y z e d t h e d a t a c o l l e c t e d by t h e Reserve Bank Organi z a t i o n Committee, remarked i n i t s r e p o r t t h a t ,
"to a certain
e x t e n t t h e s i t e s o f r e s e r v e banks must be regarded as p r a c tically
predetermined,
as i n t h e case o f New Y o r k ,
and S t . L o u i s , t h e present
that
is true,
c e n t r a l reserve c i t i e s .
Chicago,
Whenever
f o r t h e reasons a l r e a d y g e n e r a l l y set f o r t h
the foregoing analysis,
it
i s possible to assign
in
certain
t e r r i t o r y as d e f i n i t e l y b e l o n g i n g t o t h e banks t o be p l a c e d
i n the c i t i e s
aforesaid."4
Kansas C i t y b a n k e r s , who were as
a c t i v e and a g g r e s s i v e as any group i n t h e c o u n t r y i n t h e i r
2 s t . L o u i s was a c e n t r a l r e s e r v e c i t y u n t i l J u l y 1, 1922,
when on t h e i n i t i a t i v e o f t h e banks i n t h e c i t y , i t became
a reserve c i t y .
3 L o c a t i o n o f Reserve D i s t r i c t s i n th^ U n i t e d S t a t e s ,
S c n t t e Document No. 485, 63rd C o n g . , 2nd S e s s . , pp. 343-57.
4Report t o t h e Reserve Bank O r g a n i z a t i o n Committee by P r e l i m i n a r y Committee on O r a a n i z a t i o n f C o n f i d e n t i a l No. 49.
-36e f f o r t s t o get a r e s e r v e bank, d i d suggest t h a t
c o u l d not be p l a c e d i n M i s s o u r i ,
i f two banks
S t . L o u i s c o u l d have a
b r a n c h o f t h e Kansas C i t y bank.
A short t i m e b e f o r e t h e h e a r i n g i n S t . L o u i s t h e
C l e a r i n g House A s s o c i a t i o n sent out a l e t t e r t o t h e
corres-
pondent banks o f t h e S t . L o u i s i n s t i t u t i o n s w h i c h c l e a r l y
d i c a t e d t h e i r v i e w s on t h e d i s t r i c t i n g q u e s t i o n .
quoted i n
I t w i l l be
full:
S t . L o u i s C l e a r i n g House A s s o c i a t i o n
S t . L o u i s , Mo.
January 13, 1914
T o t h e Correspondents o f t h e S t . L o u i s Bqnks:
I n f i x i n g t h e d i s t r i c t s f o r t h e F e d e r a l Res e r v e Banks the i n f l u e n c e o f our correspondents
and t h e i r e x p r e s s i o n s w i l l be more potent t h a n anyt h i n g we may p l a c e b e f o r e t h e Committee p a r t i c u l a r l y
when t h e r e q u e s t s are i n l i n e w i t h t h e n a t u r a l
course o f b u s i n e s s and t h e f l o w o f exchanges.
I t i s obvious that the several d i s t r i c t s
s h o u l d be so c o n s t i t u t e d t h a t t h o s e s e c t i o n s h a v i n g
an o v e r - b a l a n c e d s e a s o n a l demand, sudh as i n v a r i a b l y o c c u r s i n t h e South and Southwest, s h o u l d be
included i n a d i s t r i c t w i t h those having d i f f e r e n t
r e q u i r e m e n t s , and b a n k i n g r e s o u r c e s s u f f i c i e n t t o
e a s i l y absorb such a demand f o r c r e d i t .
Every d i s t r i c t s h o u l d be s e l f - s u f f i c i e n t , u s i n g t h e p r i v i l e g e o f i n t e r - d i s c o u n t i n f r e q u e n t l y and a s k i n g t h e
f o r c e d a i d o f o t h e r s t h r o u g h t h e F e d e r a l Board o n l y
on r a r e o c c a s i o n s .
The s t a t e s o f M i s s o u r i , Kansas, Nebraska,
T e x a s , ArkantAty Oklahoma, K e n t u c k y , Tennessee,
L o u i s i a n a , M i s s i s s i p p i , Southern I l l i n o i s , and
Southern I n d i a n a , w i t h S t . L o u i s as t h e r e s e r v e
c e n t e r , make such a w e l l - b a l a n c e d d i s t r i c t w i t h
ample bank r e s o u r c e s t o make i t s e l f - s u f f i c i e n t .
F u r t h e r m o r e , such a d i s t r i c t f o l l o w s t h e n a t u r a l
c o u r s e o f b u s i n e s s and t h e f l o w o f exchanges.
The S t . L o u i s bankers b e l i e v e t h a t i n such a
d i s t r i c t every p o i n t c o u l d be served more s a t i s f a c
in-
-37t o r i l y t h r o u g h t h e branches o f the & t . L o u i s Reserve Bank t h a n t h r o u g h s m a l l e r banks or through
banks l o c a t e d i n d i s t r i c t s not so d i v e r s i f i e d .
I t i s t h e e v i d e n t and proper i n t e n t o f t h e
law t o a l l o w t h e f r e e use o f branches so t h a t a l l
p r i v i l e g e s c o u l d be c a r r i e d near t o a l l t h e p e o p l e ,
no matter where t h e d i s t r i c t bank be l o c a t e d .
It
i s q u i t e probable that i n the St. Louis d i s t r i c t
t h e r e w i l l be l o c a t e d t e n o r f i f t e e n o f such
branches and t h e r e i s no e s s e n t i a l s e r v i c e which
may not be rendered by t h e branch.
Even t h e
c r e d i t s and r e d i s c o u n t s i n t h e area t o be served
by t h e branch w i l l be passed through a l o c a l
board o f seven — t h r e e appointed by t h e F e d e r a l
Reserve Board and f o u r by t h e R e g i o n a l B o a r d .
For more t h a n h a l f a century S t . L o u i s has
been t h e r e s e r v e c e n t e r f o r t h i s s e c t i o n and t h r o u g h
t h i s c i t y t h e commerce and exchanges o f t h i s
s p l e n d i d d i s t r i c t have p a s s e d . The i n t e n t o f t h e
law i s not t o d i s t u r b o r hamper but t o add a new and
e f f e c t i v e a i d t o t h e n a t u r a l f l o w o f b u s i n e s s , and
we t h e r e f o r e c o n f i d e n t l y b e l i e v e t h a t such n a t u r a l
courses w i l l go u n d i s t u r b e d .
We hope t h a t i t i s
your w i s h t o be i n t h e S t . L o u i s d i s t r i c t , and we
would be g l a d t o have an e x p r e s s i o n from you t o be
p l a c e d i n t h e hands o f t h e O r g a n i z a t i o n Committee
on J a n u a r y 21st when t h e y v i s i t S t . L o u i s .
Such an
e x p r e s s i o n may be w r i t t e n or w i r e d t o your S t . L o u i s
correspondent*5
Very
respectfully,
American T r u s t Co.
Boatmen's Bank
C e n t r a l N a t i o n a l Bank
Commonwealth T r u s t Co.
F r a n k l i n Bank
German American Bank
German Savings I n s t i t u t i o n
S t . L o u i s U n i o n T r u s t Co.
I n t e r n a t i o n a l Bank
Mechanics-American
N a t i o n a l Bank
Merchants'-Laclede National
Bank
M e r c a n t i l e N a t i o n a l Bank
M e r c a n t i l e T r u s t Co.
Mississippi Valley
T r u s t Co.
N a t i o n a l Bank o f Commerce
South S i d e Bank
S t a t e N a t i o n a l Bank o f
St. Louis
T h i r d N a t i o n a l Bank
5Reserve Bank O r g a n i z a t i o n Committee, E x h i b i t s
l e t t e r s s u b m i t t e d at h e a r i n x s .
(St. Louis)
and
-48There was l i t t l e
appearing t o represent
disagreement
among t h e w i t n e s s e s
S t . L o u i s interests.^*
The C l e a r i n g
House A s s o c i a t i o n had a p p o i n t e d a s p e c i a l committee t o
assemble and present
evidence before the
Organization
Committee, o f which F . 0 . W a t t s , p r e s i d e n t
N a t i o n a l Bank, was chairman.
of the T h i r d
F e s t u s J . Wade, p r e s i d e n t
t h e C l e a r i n g House A s s o c i a t i o n ,
appeared as t h e f i r s t
wit-
n e s s , and, t o g e t h e r w i t h W a t t s , p r e s e n t e d t h e e s s e n t i a l
ment and data o f t h e banking i n t e r e s t s .
Among t h e
of
argu-
repre-
s e n t a t i v e s o f t h e b u s i n e s s i n t e r e s t s were A . L .
Shapleigh,
o f t h e S h a p l e i g h Hardware C o . , J a c k s o n Johnson,
president
o f t h e I n t e r n a t i o n a l Shoe C o . , and Murray C a r l e t o n , o f t h e
F e r g u s o n , C a r l e t o n Dry Goods Co.
The S t . L o u i s bankers made t h e f o l l o w i n g
points
w i t h r e g a r d t o t h e g e n e r a l p r i n c i p l e s t h a t ought t o be
f o l l o w e d i n d i s t r i c t i n g the country:
1.
Only e i g h t
r e s e r v e banks i n a l l ought t o be
created i n order that
sufficient
^^
each bank might have
c a p i t a l and r e s o u r c e s t o
adequately i t s
a r e a , and t h a t
serve
excessive
d e c e n t r a l i z a t i o n o f r e s e r v e s might be
avoided.
The s e r v i c e s o f t h e bank
be made more c o n v e n i e n t
the establishment
should
and a v a i l a b l e by
o f branches where needed.
^Most o f t h e m a t e r i a l f o r t h e d i s c u s s i o n t h a t f o l l o w s has been
o b t a i n e d from t h e s t e n o g r a p h i c minutes o f t h e O r g a n i z a t i o n
Committee. These have never been p u b l i s h e d and are c o n t a i n e d
i n t h e f i l e s o f t h e B o a r d o f Governors o f t h e F e d e r a l Reserve
System. The S t . L o u i s R e p u b l i c f o r J a n u a r y 22, 1914 r e p o r t s
t h e h e a r i n g s at S t . L o u i s .
-392.
Districts
s h o u l d be balanced
financially
by i n c l u d i n g b o t h borrowing and l e n d i n g
areas so t h a t t h e d i s t r i c t
nearly s e l f - s u f f i c i e n t
c r e d i t needs.
might be as
as p o s s i b l e i n
C o t t o n or o t h e r
agricul-
t u r a l t e r r i t o r y might be b a l a n c e d by
cluding t e r r i t o r y with large
its
in-
banking
c a p i t a l and r e s o u r c e s .
3.
Districts
s h o u l d i n c l u d e i n so f a r as t h i s
is possible t e r r i t o r y
different
i n which t h e r e
s e a s o n a l demands f o r c r e d i t ,
as a g r i c u l t u r a l crops h a r v e s t e d at
ent
4.
are
such
differ-
times.
The n a t u r a l course o f b u s i n e s s must be cons i d e r e d , but i t
to financial
is
secondary i n
importance
balance.
The C l e a r i n g House Coumittee proposed a S t .
district
which, i t
was a s s e r t e d , was developed on t h e b a s i s
o f t h e above p r i n c i p l e s .
T h i s proposed d i s t r i c t
was t o be c a l l e d D i s t r i c t
Five —
of Mississippi,
—
which
included the cotton
states
L o u i s i a n a , A r k a n s a s , Texas and Oklahoma;
of Missouri; parts of Indiana,
Illinois
which the r a i l l i n e s l e d t o S t . L o u i s .
o f I n d i a n a , bounded by a l i n e
dividing I l l i n o i s
in
The s o u t h e r n p o r t i o n
including Indianapolis,
a l s o t o be a p a r t o f t h e d i s t r i c t .
all
and Tennessee; and a
v e r y s m a l l c o r n e r o f Iowa, i n c l u d i n g t h e Keokuk Dam,
Louis
The boundary
was t o be f a r enough n o r t h t o
was
line
include
-40Springfield.
The Cumberland Mountains r e p r e s e n t e d t h e
t r a d e l i n e i n Tennessee, t h e e a s t e r n oart
ing trade relations with Cincinnati.
Tennessee as f a r east
District
^Therefore,
western
as N a s h v i l l e was t o be a t t e c h e d t o
Five.
There were 6,393 banks i n t h i s
tory,
of t h e s t a t e hav-
suggested
terri-
and o f t h i s number 1,483 were n a t i o n a l banks and
4*910 were s t a t e banks and t r u s t
number o f s t a t e i n s t i t u t i o n s
companies.
Of t h e
3,104 were i n e l i g i b l e t o
t h e F e d e r a l Reserve System because o f inadequate
and s u r p l u s t o meet t h e p r o v i s i o n s o f t h e A c t .
t h e Reserve System at t h e b e g i n n i n g ,
T h i s meant
enter
a l t h o u g h o n l y 1,483
The n a t i o n a l banks had an aggre-
g a t e c a p i t a l and s u r p l u s o f $262,703,000, d e p o s i t s
Pi,010,433,000,
join
capital
t h a t t h e r e were i n t h e area 3,289 banks e l i g i b l e t o
were r e q u i r e d t o do s o . '
total
and r e s o u r c e s o f §1,413,615,000.
of
This
would have g i v e n t h e proposed bank a minimum s u b s c r i b e d
c a p i t a l o f ^15,762,000 w i t h t h e 6 per cent
provided for i n the Act.
subscriptions
The s t a t e banks had aggregate
c a p i t a l and s u r p l u s o f §295,811,000, d e p o s i t s o f
and r e s o u r c e s o f $1,205,621,000.
Kliminating the
and s u r p l u s o f t h e i n e l i g i b l e banks, 6 per cent
tions
$848,657,000
capital
subscrip-
from t h e s t a t e banks would have added $9,437,000 t o
the c a p i t a l o f the bank.
member banks and t r u s t
Wade p o i n t e d out t h a t t h e 62
companies o f t h e S t . L o u i s
Clearing
70nly n a t i o n a l banxs were r e q u i r e d t o j o i n t h e F e d e r a l
Reserve System, s t a t e banks b e i n g p e r m i t t e d t o j o i n i f
eligible.
-41House had an aggregate c a p i t a l and s u r p l u s o f
?73,464,000,
o r one-seventh o f t h e t o t a l c a p i t a l r e s o u r c e s o f a l l banks
i n t h e proposed t e r r i t o r y ,
and d e p o s i t s ' o f $303,000,010,
o n e - s i x t h o f t h e d e p o s i t s o f a l l banks i n t h e
or
area.
The S t . L o u i s p l a n p r o v i d e d f o r d i v i d i n g t h e
country i n t o eight d i s t r i c t s .
Watts submitted an e x h i b i t
t o t h e Committee showing t h e proposed d i s t r i c t s
banking c a p i t a l ,
deposits,
a
a b l e i n each d i s t r i c t .
and t h e
and r e s e r v e bank c a p i t a l
This is
avail-
shown h e r e as T a b l e 17.
The f o l l o w i n g d i s t r i c t s were t o be c r e a t e d under t h i s
arrangement:
t h e New England s t Q t e s w i t h B o s t o n as r e s e r v e
c i t y , Ne^ York S t a t e and t h e t e r r i t o r y d i r e c t l y
tributary
t o New York C i t y , t h e Seaboard-Southern s t a t e s , t h e Ohio
V a l l e y region, the S t . Louis d i s t r i c t
d e s c r i b e d above,
the
N o r t h C e n t r a l s t a t e s w i t h Chicago as t h e r e s e r v e c i t y ,
the
M i d d l e West and Rocky Mountain a r e a , and t h e P a c i f i c
Coast
s t a t e s w i t h San F r a n c i s c o as t h e r e s e r v e c i t y .
No attempt
was made t o determine t h e proper r e s e r v e c i t i e s
for
districts,
and t h e
t h e Seaboard-South, t h e Ohio V a l l e y ,
three
M i d d l e West and R o c k i e s .
T h e r e were c e r t a i n d e f i n i t e o b j e c t i v e s e v i d e n t
this
in
plan:
1.
The New Y o r k Reserve Bank was g i v e n a c a p i t a l
not much l a r g e r t h a n t h e o t h e r banxs by
ing the area assigned t o t h i s d i s t r i c t .
limitThe
^Reserve Banx O r g a n i z a t i o n Committee, E x h i b i t s and l e t t e r s
submitted at h e a r i n g s .
(St. Louis)
-42n a t i o n a l bank s u b s c r i p t i o n s would have p r o v i d e d a c a p i t a l o f $24,100,000 compared
w i t h c a p i t a l r a n g i n g from §14,700,000 t o
$17,900,000 f o r f o u r o t h e r d i s t r i c t s .
final districting
The
p l a n adopted gave New
Y o r k a c a p i t a l n e a r l y t w i c e t h a t o f any
other d i s t r i c t
as a r e s u l t
size of outlying
2.
of reducing the
districts.
The c o t t o n - g r o w i n g r e g i o n was d i v i d e d between
two d i s t r i c t s ,
t h e Seaboard-South
district
b e i n g g i v e n as much crop d i v e r s i f i c a t i o n as
p o s s i b l e , t h e Southwestern c o t t o n area b e i n g
b a l a n c e d w i t h t e r r i t o r y h a v i n g manufacturing
i n d u s t r i e s and banking
3.
capitals
The New England s t a t e s and t h e P a c i f i c
s t a t e s were r e c o g n i z e d as d i s t i n c t
entities with characteristics
4.
economic
of t h e i r
The Ohio V a l l e y and Chicago d i s t r i c t s
given both w e l l d i v e r s i f i e d c r e d i t
and ample banking
Coast
own.
were
demands
capital.
While the St. Louis d i s t r i c t
as proposed by t h e
C l e a r i n g House must be r e g a r d e d as t h e S t . L o u i s p l a n , two
o t h e r p r o p o s a l s were made at t h e h e a r i n g .
A. L .
suggested a t e r r i t o r y w h i c h conformed i n a l l
that
p r e s e n t e d by ^ade and W a t t s ,
Shapleigh
respects
except t h a t he wished t o
i n c l u d e a l l o f K e n t u c k y , and e a s t e r n Kansas as f a r
Wichita,
instead of only that
to
as
p a r t westward t o Topeka.
These
T a b l e 17
S t . L o u i s C l e a r i n g House D i s t r i c t i n g Plan* C a o i t a l , D e p o s i t s ,
and Resources o f Banks Assigned t o P r o p o s e d D i s t r i c t s
District
C a o i t a l & Surplus
Deposits
Resources
ubscriptiogs
"9,150,000
No. 1
Boston
Nat'l
State
$152,555,000
77,665.000
230,220,000
$580,952,000
4S2.676.001
1,063,523,000
^334,934,000
600.119,000
1,435,053,000
No. 2
New York
Nat'l
State
401,492,000
316.702.000
713,194,000
2,066,904,000
2.241.598,000
4,308,502,000
2.694.860.000
2.741.420.001
5,446,230,000
24,100,000
No. 3
SeaboardSouth
Nat'l
State
298,428,000
299.613,000
597,041,000
1,238,410,000
527.799.0^0
2,066,209,000
1,666,901,000
1.278.^50.000
2,945,351,000
17,900,000
No. 4 .
Ohio
Valley
Nat'l
State
251,199,000
236.374.^11
487,573,000
1,032,604,000
153.0^2.000
1,985,646,000
1,526,346,000
1.255,^31,000
2,782,62^,000
22,200,000
No. 5
St. Louis
Nat'l
State
262,703,000
215.811.000
55B,514,000
1,010,438,000
34B.657.000
1,859,195,000
1,413,615,000
1^20'!,621,OOP
2,619,236,000
15,762,000
9,4:7.010
25,199,000
No. 6
Chicago
Nat'l
State
245,000,000
248,733.100
4^3,733,000
1,425,041,000
1.4^6.703.000
2,921,744,000
1,76^,809,000
1.773.80),000
3,541,613,000
14,700,330
125,239,000
81.164.000
215,203,000
573,405,000
673.960.010
1,247,365,000
788,510,000
7,510,000
2.710.003
No. 7
M i d d l e ^est
and R o c k i e s
Nat'l
No. 3
San F r a n c i s c o S t a t e
1,632,196,000
11,475,000
33,600,000
26,900,000
15,100,000
7,13),00?
?2,150,000
10,210,100
*Re3erve Bank O r g a n i z a t i o n Coamittee, E x h i b i t s and l e t t e r s s u b a i t t e d at h e a r i n g s .
(St. Louis)
!
-44a d d i t i o n s S h a p l e i g h regarded as part o f t h e t r a d e
of S t . L o u i s .
Van R i p e r ,
president
territory
o f t h e American T r u s t
Co.,
s u b m i t t e d a p l a n i n c l u d i n g o n l y t h r e e banks f o r t h e West, at
C h i c a g o , St* L o u i s ,
and San F r a n c i s c o .
o f O h i o , e a s t e r n Kentucxy,
He a s s e r t e d t h a t
west
e a s t e r n Tennessee, and a l i n e
drawn from t h e r e t o t h e s o u t h , t h e r e e x i s t e d o n l y 35 per cent
o f t h e a v a i l a b l e r e s e r v e banx c a p i t a l .
Consequently,
t h r e e r e s e r v e banks were regarded by him as a d v i s a b l e
d i v i d e that
p o r t i o n of the
to
capital.
The t e s t i m o n y ta^en at t h e h e a r i n g brought
numerous f a c t s r e g a r d i n g t h e commercial,
industrial,
c i a l importance o f S t . L o u i s at t h i s t i m e .
characteristic
only
out
and f i n a n -
Such t e s t i m o n y was
o f t h a t t a k e n at t h e h e a r i n g s i n each c i t y
v i s i t e d by t h e O r g a n i z a t i o n Committee.
followed s t r i c t l y
Had t h e Committer
such m a t e r i a l i n d e t e r m i n i n g d i s t r i c t s
it
would have been e n t i r e l y l o g i c a l t o have c r e a t e d some 40 or
50 banks, i n s t e a d o f t h e 12 p e r m i t t e d by t h e F e d e r a l Reserve
Act.
I t was s t a t e d t h a t S t . L o u i s was t h e t h i r d l a r g e s t
dustrial district,
in-
that one-third of the population of the
United States resided w i t h i n twelve hours'
r i d e , that
s i x railway trunk l i n e s
The Census o f
entered the c i t y .
M a n u f a c t u r e s o f 1909 showed a t o t a l v a l u e o f
twenty-
manufactured
p r o d u c t s f o r t h a t y e a r o f $327,677,000, and i n d i c a t e d t h a t
S t . L o u i s was f i r s t
of
stoves,
perfumery,
paints,
street
i n t h e U n i t e d S t a t e s i n t h e manufacture
cars, drugs,
chewing t o b a c c o ,
shoes, woodenware, c l a y p r o d u c t s , w h i t e
and c a r s e a t s and f u r n i s n i n g s .
chemicals,
lead,
I t . w a s p o i n t e d out
-45t h a t t h e c i t y was t h e f o c a l p o i n t f o r t h e m t d - c o n t i n c n t
t r i b u t i o n o f goods.
S t . L o u i s l e d a l l o t h e r Markets
shipments o f hardware, a g r i c u l t u r a l
and w o o l .
hordes
s a d d l e r y and h a r n e s s ,
bags and b a g g i n g , and was a l s o important
largest
in
tmplements, c o f f e e ,
and mules, hardwood lumber, m i l l i n e r y ,
o f d r y goods, b e e r , t i n w a r e ,
dis-
i n the
distribution
& t . L o u i s was t h e
primary f u r marxet i n t h e w o r l d , t h e second l a r g e s t
hog market and t h e t h i r d l a r g e s t
c a t t l e market i n t h e U n i t e d
States.
S h a p l e i g h eubmitted some i n t e r e s t t n g m a t e r i a l as
t o t h e t r a d e t e r r i t o r y o f S t . L o u i s and t h e
s a l e s o f goods by S t . L o u i s f i r m s .
geographical
Annual s a l e s o f
commodities i n 1913 amounted t o $567,664,030,
all
approximately
twenty-one per cent h a v i n g been s o l d i n M i s s o u r i .
Eighty-
f o u r per cent o f t h e s a l e s were i n t h e s t a t e s o f T e x a s ,
Arkansas,
Illinois,
Mississippi,
I n d i a n a , Kansas, M i s s o u r i ,
Kentucky, Tennessee,
Oklahoma,
Iowa, and L o u i s i a n a ,
^ith
t h e e x c e p t i o n o f Iowa, a l l t h e s e s t a t e s were i n c l u d e d i n t h e
proposed d i s t r i c t .
This material i s
p r e s e n t e d i n T a b l e 18.
The f i n a n c i a l importance o f S t . L o u i s i n t h e
territory
suggested was u n q u e s t i o n e d .
some bankers* d e p o s i t s because i t
While i t
had a c q u i r e d
was a c e n t r a l r e s e r v e
most o f t h e s e d e p o s i t s had been s e c u r e d becausp l a r g e
vestments had been made by S t . L o u i s banks i n t h e
city
in-
territory.
T h e s e banks had o u t s t a n d i n g l o a n s and investments on O c t o b e r 21, 1913 i n t h e s u r r o u n d i n g t e r r i t o r y o f
$246,434,259.
$63,500,000 o f t h e s e l o a n s and investments were o u t s i d e t h e
-46T a b l e 18
Annual S a l e s o f V a r i o u s Commodities
by S t . L o u i s F i r m s , 1913*
Commodities
Amount o f
Lumber
Dry Goods
B o o t s and Shoes
Groceries
Hardware
Drugs, P a t e n t M e d i c i n e s
and Perfumes
C l o t h i n g , O v e r a l l s and
Shirts
Z i n c and Lead
Vehicles
Leather
Coffee
Sash and Doors
Dry P l a t e and Photo
Supplies
Stoves
S t r e e t Cars
B u i l d i n g Glass
Coffins
D r i e d F r u i t s and Nuts
Sales
§187,830,000
88,600,000
69,722,000
59,000,000
30,265,000
24,500,000
22,210,000
18,000,000
15,197,000
14,955,000
12,920,000
5,200,000
4,792,000
4,675,000
3,700,000
3,403,000
1,545,000
1,180,000
567,664,000
T o t a l Sales
S t a t e s and :Per Cent o f T o t a l S a l e s
Missouri
Illinois
Texas
Indiana
Kansas
Arkansas
Oklahoma
Iowa
Louisiana
Mississippi
Tennessee
Kentucky
$118,851,000
91,676,000
43,398,000
39,195,000
30,617,000
27,876,000
26,373,000
24,147,000
20,164,000
19,753,000
17,853,000
16,092,000
A l l other
*
states
2at94
16.15
7,65
6.90
5.39
4.91
4*64
4.25
3,55
3,48
3,14
2.33
83.83
Computed Rom d a t a i n E x h i b i t No. 19, Reserve Bank
O r g a n i z a t i o n Committee, E x h i b i t s and l e t t e r s subm i t t e d at h e a r i n g s . ( S t . L o u i s )
-47T a b l e 19
Loans and Investments o f S t . L o u i s Banks
by S t a t e s , O c t . 21, 1913*
Misouri
Texas
Arkansas
Southern I l l i n o i s
Oklahoma
Louisiana
Tennessee
Kansas
Mississippi
Southern I n d i a n a
Nebraska
Kentucky
P182,876,625
17,207,858
12,880,545
11,113,102
10,992,466
3,949,283
2,281,122
1,779,196
1,370,673
1,051,877
526,000
A05.512
246,434,259
* E x h i b i t s o f F . 0 . W a t t s , Reserve Bank
O r g a n i z a t i o n Committee, E x h i b i t s and
l e t t e r s at h e a r i n g s . ( S t . L o u i s )
T a b l e 20
Number o f Banks Having Correspondent Rel a t i o n s h i p s w i t h S t . L o u i s i n Proposed S t . L o u i s D i s t r i c t ,
w i t h B a l a n c e s M a i n t a i n e d by S t a t e s *
N a t i o n a l Banks
Missouri
214
462
Texas
S o u t h . I l l i n o i s} 289
Oklahoma
280
117
Arkansas
Kansas
93
37
Indiana
90
Tennessee
Kentucky
35
37
Louisiana
Mississippi
1,&99
$6,725,000
6,014,000
3,621,000
2,564,000
2,171,000
1,361,000
1,089,000
957,000
782,000
677,000
272^000
26,233,000
S t a t e Banxs
1,287
349
419
154
530
93
5
105
21
101
137
3,201
310,669,000
1,946,000
3,840,000
542,000
3,919,000
489,000
24,000
735,000
132,000
662,000
650.000
23,608,000
* E X h i b i t s o f F . 0 . W a t t s , Reserve Bank O r g a n i z a t i o n
Committee, E x h i b i t s and l e t t e r s at h e a r i n g s . ( S t . L o u i s )
-8s t a t e o f M i s s o u r i , w h i l e d e p o s i t s from banks o u t s i d e
of
M i s s o u r i amounted t o $32,400,000, which i n d i c a t e d a net
credit
extended by S t . L o u i s o f §31,100,000.
Correspondent
banks
w i t h i n t h e proposed S t . L o u i s d i s t r i c t
maintained balances
of
$49*841,000, o f which $26,233,000 was w i t h n a t i o n a l banks and
$23,608,000 w i t h s t a t e
banks.
S t . L o u i s had more adequate banking c a p i t a l t h a n
any o t h e r c i t y i n t h e c o u n t r y w i t h a p o p u l a t i o n o f 200,000 or
o v e r , i t s banking c a p i t a l e q u a l i n g more t h a n 25 per cent
i t s t o t a l deposits.
On October 21, 1913 t h e t o t a l
and s u r p l u s was $78,464*000 and d e p o s i t s ,
d e p o s i t s were $304,368,000.
including
of
capital
bankers'
F e s t u s J . Wade remarked,
has never been a day, week o r month, when any banker,
"There
planter,
or farmer i n t h e South or Southwest, banking i n S t . L o u i s and
e n t i t l e d t o c r e d i t , was d e l a y e d one hour i n g e t t i n g a l l
cash o r c r e d i t needed t o move c r o p s i n t h a t
the
l o c a l i t y t o mar9
k e t , not e x c e p t i n g t h e p a n i c k y days o f
1907."
S t . L o u i s was a l s o t h e most important
source o f
f u n d s f o r t h e development o f i n t e r n a l improvements i n t h e
Southwest,
electric
such as h o t e l s ,
plants.
street
r a i l w a y s and gas and
R e p r e s e n t a t i v e s from Oklahoma at t h e h e a r i n g
spoke o f t h e i r dependence on S t . L o u i s f o r
term investment.
capital for
L e o n a r d , o f T u l s a , who was emphatic
longin
s t a t i n g t h a t T u l s a d i d not w i s h t o be a t t a c h e d t o a Texas
city,
s a i d t h a t , w h i l e Kansas C i t y would be s a t i s f a c t o r y
P A d d i t i o n s t o T e s t i m o n y o f F e s t u s J . Wade, E x h i b i t s
l e t t e r s s u b m i t t e d at h e a r i n g s . ( S t . L o u i s )
and
to
..F
-49them as a r e s e r v e c i t y , t h e y were more dependent on S t .
i n a general f i n a n c i a l
Louis
sense.
U l t i m a t e l y t h e great problem i n c r e a t i n g t h e
St. Louis d i s t r i c t
lines.
district
became t h a t
o f d e t e r m i n i n g t h e boundary
On every s i d e t h e d e t e r m i n a t i o n o f t h e l i m i t s o f
the
became s u b j e c t t o s e r i o u s q u e s t i o n , and i n some
cases n e c e s s a r i l y a r b i t r a r y d e c i s i o n s had t o be made.
manner t h a t
is
s t r i k i n g as one examines t h e
& t . L o u i s became t h e "adjustment d i s t r i c t "
d i s t r i c t i n g a l l over t h e c o u n t r y .
p a r t as a r e s u l t
In a
evidence,
f o r problems i n
These problems arose
of the d e s i r e t o s a t i s f y l o c a l p r i d e ,
i n t h e main from p u r e l y p o l i t i c a l
t o u n d e r s t a n d how t h i s
considerations.
s i t u a t i o n developed i t
is
in
but
I n order
necessary
t o c o n s i d e r c e r t a i n f a c t o r s a f f e c t i n g t h e whole problem o f
d i s t r i c t i n g and c e r t a i n p o l i c i e s
adopted by t h e
Organization
Committee*
Political
considerations
work o f t h e O r g a n i z a t i o n Committee*
how any o t h e r r e s u l t
Willis
It
is difficult
to
was, o f p o l i t i c a l l y
said that
political
appointed
c o n s i d e r a t i o n s had
d i c t a t e d a d e c i s i o n from t h e b e g i n n i n g t o e s t a b l i s h t h e
number o f 12 b&nks*^^
see
c o u l d have been o b t a i n e d w i t h a
committee made up, as i t
officials*
came t o dominate t h e
The f i r s t
full
recommendation o f t h e P r e -
l i m i n a r y T e c h n i c a l Committee had been t o c r e a t e e i t h e r 9
o r 10 b a n k s .
W h i l e t h e l o g i c a l p r o c e d u r e , and t h a t
evidently
i O w i i i i s , H . P a r k e r , The F e d e r a l Reserve System, p . 584
y
-50contemplated by t h e A c t , would have been t o work out t h e
tricts
first
and t h e n s e l e c t
a proper r e s e r v e c i t y i n each,
t h e procedure o f t h e O r g a n i z a t i o n Coamittee became t h a t
s e l e c t i n g the reserve c i t i e s
find sufficient
dis-
first
of
and t h e n a t t e m p t i n g t o
t e r r i t o r y t o create a d i s t r i c t
around them.^^
C o m p t r o l l e r W i l l i a m s , a member o f t h e
Committee, was a c t i v e l y working i n b e h a l f o f
Organization
Richmond,
12
Virginia.
No l o g i c a l d i s t r i c t i n g p l a n would have p r o v i d e d
two d i s t r i c t s w h o l l y w i t h i n t h e S o u t h e a s t e r n s t a t e s ,
but
b o t h Richmond and A t l a n t a had s t r o n g p o l i t i c a l b a c k i n g ,
l a t t e r c h i e f l y i n t h e p e r s o n o f Senator Hoke
S m i t h . i n
o r d e r t o c r e a t e a r e g i o n f o r Richmond and s t i l l
as a r e s e r v e c i t y ,
it
became necessary t o f i n d
t e r r i t o r y f o r the l a t t e r
city.
retain Atlanta
additional
That c o u l d o n l y be done at
t h e expense o f t h e S t . L o u i s d i s t r i c t ,
giving Atlanta
p a r t s o f M i s s i s s i p p i , Tennessee, and a p o r t i o n o f
i n c l u d i n g New O r l e a n s .
the
T h i s l a s t was e s p e c i a l l y
large
Louisiana,
unfortunate
because New O r l e a n s had c l o s e c o n n e c t i o n s w i t h S t . L o u i s ,
almost none w i t h A t l a n t a .
Political
and
c o n s i d e r a t i o n s were o f
importance i n t h e p r e s s u r e brought t o bear upon t h e Organi z a t i o n Committee t o c r e a t e a Kansas C i t y d i s t r i c t .
Senator
Reed o f M i s s o u r i was v e r y a c t i v e i n support o f Kansas C i t y .
Willis
i n t i m a t e s t h a t S e c r e t a r y o f War B a k e r , a r e s i d e n t
Cleveland, played a part
i i l b i a . , p.
1 2 l b i d . . p.
i 3 l b i d . , p.
587.
587.
588.
i n the selection of that
of
c i t y as a
-All o c a t i o n f o r a reserve
bank.i^
Tne S t . L o u i s p l a n and t h e t h e o r y upon which
was basediMX^ r e j e c t e d .
It
ts d i f f i c u l t
P r e l i m i n a r y T e c h n i c a l C o a a i t t e e when i t
port,
"If
it
t o understand t h e
remarked i n i t s
recomaendations o f bankers o f New Y o r k ,
re-
Chicago,
and S t . L o u i s were t o be a c c e p t e d , t h e c o u n t r y would p r a c t i c a l l y be d i v i d e d up between t h e s e c e n t e r s except i n so f a r
as a f r i n g e had t o be l e f t
t o comply w i t h t h e requirements
of
15
the law," ^
New Y o r k , o f c o u r s e , wanted a l a r g e
district,
but t h e statement i s o b v i o u s l y i n e r r o r w i t h r e g a r d t o t h e
S t . L o u i s recoomendations.
the f i r s t
providing for
Chicago submitted t h r e e
plans,
8 banks and t h e o t h e r two f o r
a
l a r g e r nuabcr o f banks, and asked
f o r t h e second l a r g e s t
16
bang i n each o f t h e s e p l a n s .
The statement was a gross ex-
a g g e r a t i o n as a p p l i e d t o t h e Chicago recommendations.
S t . L o u i s p l a n p r o v i d e d f o r banks q u i t e s i m i l a r
capital,
i n amount o f
except f o r t h e New England and P a c i f i c Coast
t r i c t s which were d i s t i n c t
increased i n s i z e .
or equivalent
i n size t o the St. Louis d i s t r i c t .
other d i s t r i c t s .
dis-
a r e a s and c o u l d not r e a s o n a b l y be
F o u r o t h e r d i s t r i c t s were e i t h e r
was g i v e n a d i s t r i c t
The
larger
New York
o n l y about o n e - t h i r d l a r c e r t h a n f o u r
In f a c t , the S t . Louis plan provided f o r
b&nka much more e q u a l i n s i z e t h e n t h e f i n a l p l a n adopted by
t h e Committee.
i ^ i a i d . , p . 587
i^Report t o t h e Reserve Bank O r g a n i z a t i o n Committee by Pre*
l i m A n a r y Committee on O r g a n i z a t i o n ^ C o n f i d e n t i a l No. 49.
i 6 6 r i s v o l d , J o h n A . , A H i s t o r y o f t h e F e d e r a l Reserve Bank
qf
chiwax?, p . 30.
—-
-52The p r i n c i p l e o f i n c l u d i n g l e n d i n g and borrowing
a r e a s i n t h e same d i s t r i c t
f o r t h e purpose o f making
s e l f - s u p p o r t i n g was r e j e c t e d .
its
it
The P r e l i m i n a r y Committee
in
r e p o r t d i s m i s s e d t h i s p r i n c i p l e as unimportant and not
c a p a b l e o f b e i n g f u l l y worked o u t .
I t argued t h a t
F e d e r a l Reserve Bank might c a l l upon another t o
for i t ,
one
rediscount
and t h a t a need f o r mutual s e a s o n a l a i d and s h i p -
ments o f c u r r e n c y would be l e s s under t h e System.
ment i s weak.
This
argu-
I f t h e System was t o be regarded as a u n i t ,
o r as one bank w i t h b r a n c h e s , t h e n t h e r e was no need t o
integrated,
self-sufficient
districts.
But i t
construct
must be r e -
membered t h a t one o f t h e p r i n c i p a l o b j e c t i v e s o f t h e F e d e r a l
Reserve Act was t o e s t a b l i s h independent
c e n t r a l banking i n t h e U n i t e d S t a t e s .
objective that
regional-control
I t was l a r g e l y
this
s e p a r a t e d t h e proponents o f t h e A l d r i c h
and t h e group t h a t f a v o r e d t h e Glass-Owen measure.
Committee was c o r r e c t , o f c o u r s e , i n s a y i n g t h a t t h e
Bill
The
principle
o f l e n d i n g and b o r r o w i n g a r e a s was one t h a t c o u l d not be p e r f e c t l y worked o u t , but t h a t was not a v a l i d argument
applying i t
It
as f a r as
against
possible.
i s i n t e r e s t i n g t o note that t h i s p r i n c i p l e of
c l u d i n g b o r r o w i n g w i t h l e n d i n g a r e a s was t h e important
inreason
u r g e d by t h e O r g a n i z a t i o n Committee f o r not e s t a b l i s h i n g
a
Northwest d i s t r i c t
Bank-
w i t h a bank at S e a t t l e o r
P o r t l a n d . i ?
i n g c a p i t a l i n Washington and Oregon was b e i n g s u b j e c t e d t o
s t r a i n as a r e s u l t
o f t h e r a p i d economic development
17 W i l l i s , P a r k e r B . , T^e F t d e f t i 3*t9rve
PraaSiwtp, p. 90.
in
P f &3R
?
-53process,
and t h e r e g i o n was u s u a l l y a borrowing one.
Seattle
w i t n e s s e s f i n a l l y agreed t h a t t h e i n c l u s i o n o f t h e i r
in a district
region
embracing t h e e n t i r e coast would r e s u l t
in
18
g i v i n g them more a i d and b e t t e r c r e d i t
result
t h e P a c i f i c Coast d i s t r i c t
facilities.
As a
e v e n t u a l l y c r e a t e d became
one o f t h e w e l l b a l a n c e d and i n t e g r a t e d r e s e r v e r e g i o n s ,
l a r g e a r e a b e i n g a d e q u a t e l y served by t h e e s t a b l i s h m e n t
number o f
its
of a
branches*
As e a r l y as t h e h e a r i n g i n S t . L o u i s ,
it
was e y i -
dent t h a t S e c r e t a r y McAdoo and h i s committee had some i d e a
of creating a d i s t r i c t
f o r Kansas C i t y .
Kansas C i t y
e s t s were v e r y determined and a g g r e s s i v e i n t h e i r
s e c u r e a bank, a f a c t
remarked upon by a number o f
from Oklahoma and southwest M i s s o u r i .
inter-
efforts
to
witnesses
I n response t o ques-
t i o n s from t h e Committee r e g a r d i n g t h e p o s s i b l e c r e a t i o n o f a
Kansas C i t y d i s t r i c t , Watts r e p l i e d t h a t
made t h e r e s e r v e c i t y f o r D i s t r i c t
i f Kansas C i t y was
No. 7, t h e K i d d l e West
and R o c k i e s , t h a t w e s t e r n M i s s o u r i on a l i n e
50 t o 85 m i l e s
east o f Kansas C i t y i n c l u d i n g J o p l i n , M i s s o u r i ,
included i n that d i s t r i c t ,
as w e l l as p a r t o f
should be
Oklahoma,part
o f T e x a s , and p a r t o f Nebraska, but not Omaha and i t s
tory.
He asked t h a t
district
i f t h e w e s t e r n boundary o f t h e S t .
was changed t h a t
p a r t o f Kentucky i n c l u d i n g
v i l l e be added, s t a t i n g t h a t L o u i s v i l l e would p r e f e r
Cincinnati to St. Louis.
p . 90
Louis
Louisonly
He s t a t e d i n a l e t t e r t o t h e O r -
g a n i z a t i o n Committee o f J a n u a r y 23, 1914,
isibia.,
terri-
-54" I f D i s t r i c t No. 5 i s s t r i p p e d o f Kansas C i t y
and i t s l o c a l t e r r i t o r y , I am of t h e o p i n i o n t h a t
a s i m i l a r community should be added t o No. 5, and
f o r t h a t r e a s o n I have drawn l i g h t e r l i n e s around
t h e t e r r i t o r y o f L o u i s v i l l e , Kentucky.
In other
words, i f a bank i s not t o be l o c a t e d i n C i n c i n n a t i , I b e l i e v e i t would be b e t t e r t o p l a c e L o u i s v i l l e i n the S t . L o u i s t e r r i t o r y ; t h i s i n order t o
give a d d i t i o n a l t e r r i t o r y to the S t . Louis D i s t r i c t
f o r t h e purpose o f h e l p i n g t o c a r r y t h e s e a s o n a l
demands."19
The Kansas C i t y d i s t r i c t
was e v e n t u a l l y c r e a t e d , t h e
t i o n s o f M r . Watts b e i n g l a r g e l y a c c e p t e d , t h e o n l y
being that
suggesexception
a l l o f Nebraska was g i v e n t o Kansas C i t y .
c r e a t i o n o f t h e Kansas C i t y d i s t r i c t
a r e a as a r e s u l t
reduced t h e S t .
of the i n c l u s i o n o f the l a r g e r part
Oklahoma, a s t r i p o f M i s s o u r i ,
size, with r i c h ,
resources.
The
Louis
of
and e a s t e r n Kansas.
The p r o p o s a l o f 4 d i s t r i c t
much g r e a t e r m e r i t .
^
f o r Texas was one having
The S t a t e o f Texas was one o f
a l t h o u g h r e l a t i v e l y undeveloped,
great
natural
The p r i n c i p a l o b j e c t i o n urged by Texas bankers
against being included i n the St. Louis d i s t r i c t
was t h e
d i s t a n c e between S t . L o u i s and many Texas p o i n t s .
The
long
finan-
c i a l and t r a d e c o n n e c t i o n s between S t . L o u i s and Texas were
q u i t e s t r o n g , and Texas was not as y e t independent
its
c a p i t a l and c r e d i t needs were concerned.
v i e w was t h a t t h e e s t a b l i s h m e n t
as f a r
The S t .
Louis
o f branches t a k i n g c a r e o f
rediscounts,
clearings,
of distance,
and t h a t t h e q u e s t i o n o f a s e p a r a t e bank
Texas c o u l d be l e f t
and c u r r e n c y would s o l v e t h e problem
for the future.
for
Brown o f San A n t o n i o ,
19
^ L e t t e r c o n t a i n e d i n E x h i b i t s and l e t t e r s submitted t o
Reserve Bank O r g a n i z a t i o n Committee. ( S t . L o u i s )
as
-55appeared at t h e h e a r i n g and presented a r e s o l u t i o n o f t h e San
A n t o n i o C l e a r i n g House a d v o c a t i n g t h e c r e a t i o n o f a d i s t r i c t
i n c l u d i n g T e x a s , L o u i s i a n a , Arkansas, Oklahoma, and M i s s o u r i .
The r e s o l u t i o n asked t h a t
city.
a Texas c i t y be named as t h e
Under q u e s t i o n i n g Brown admitted t h a t he thought
S t . L o u i s would serve such a d i s t r i c t
city,
reserve
that
it
b e t t e r as t h e
reserve
was l a r g e l y l o c a l p r i d e and i n t e r e s t t h a t
t h e d e s i r e f o r a Texas r e s e r v e c i t y .
o f t h e Texas d i s t r i c t
The f i n a l
prompted
establishment
w i t h t h e r e s e r v e c i t y at D a l l a s
necessi-
t a t e d t h e i n c l u s i o n o f t h e remainder o f L o u i s i a n a not
assigned
to Atlanta,
s o u t h e r n Oklahoma, a l a r g e part o f New Mexico,
and extreme s o u t h e r n A r i z o n a .
Thus t h e S t . L o u i s
again l o s t t e r r i t o r y ; Texas, the rest
rest
of
district
of Louisiana,
and t h e
Oklahoma.
The needs o f t h e A t l a n t a , D a l l a s ,
d i s t r i c t s made t h e S t . L o u i s d i s t r i c t
for a time.
It
and Kansas
seem almost
i s c l e a r that the l a t t e r d i s t r i c t
have been c r e a t e d w i t h o u t L o u i s v i l l e
e a s t e r n Kentucky f i n a l l y
included.
impossible
c o u l d not
and t h e l a r g e part
The s u b s c r i b e d
City
of
capital
e v e n t u a l l y p r o v i d e d f o r t h e S t . L o u i s banx was l i t t l e
over
20
t h e minimum $4,990,761.
Whether i t
was w i s e t o e s t a b l i s h t h e Texas
at t h e t i m e t h e System was o r g a n i z e d i s not at a l l
Texas d i s t r i c t
might have been l e f t
for later
The bank at D a l l a s had g r e a t d i f f i c u l t y
District
clear.
A
consideration.
f o r a number o f
years
2 0 D e c i 8 i o n o f Reserve Bank O r g a n i z a t i o n Committee Determini n g F e d e r a l Reserve D i s t r i c t s and L o c a t i o n o f F e d e r a l Reserve
Banks, A p r i l 2 , 1914i
-V.
-56i n earning i t s dividends.
districts,
Kansas C i t y , D a l l a s ,
System c o n s i d e r a b l y .
it
However, t h e e s t a b l i s h m e n t
of
three
and S t . L o u i s , weakened t h e
Had Kansas C i t y not been g i v e n a ban*
would have been p o s s i b l e t o c r e a t e s t r o n g e r d i s t r i c t s
for
b o t h D a l l a s and S t . L o u i s ,
o r had D a l l a s not been g i v e n a d i s -
trict,
for St. Louis.
a stronger d i s t r i c t
the p r i n c i p l e s
On t h e b a s i s
suggested by S t . L o u i s b a n k e r s , a b e t t e r
would have been t o have e l i m i n a t e d Kansas C i t y , D a l l a s ,
Minneapolis,
and t o have e s t a b l i s h e d a d i s t r i c t
the reserve c i t y ,
tricts.
of
solution
and
w i t h Denver as
e n l a r g i n g both t h e Chicago and S t . L o u i s
dis-
The o r g a n i z a t i o n p l a n d i d not present a c h e e r f u l
p i c t u r e as f a r as t h e South was concerned.
d i v i d e d between f o u r d i s t r i c t s ,
Richmond, A t l a n t a ,
and D a l l a s , w i t h two o t h e r d i s t r i c t s ,
having small p o r t i o n s .
The South had been
St.
Louis,
C l e v e l a n d and Kansas
None o f t h e f o u r s o u t h e r n
City,
districts
had much more t h a n t h e minimum c a p i t a l p e r m i t t e d by t h e A c t ,
21
Richmond h a v i n g t h e l a r g e s t
It
amount,
$6,303,301.
i s now important t o n o t e t h e p r i n c i p l e s o f
dis-
t r i c t i n g developed by t h e P r e l i m i n a r y Committee on O r g a n i z a t i o n .
At t h e c l o s e o f t h e h e a r i n g s t h i s committee a n a l y z e d t h e d a t a
and t e s t i m o n y w h i c h had been c o l l e c t e d and submitted a r e p o r t
t o S e c r e t a r y McAdoo.
I t s report o u t l i n e d the f o l l o w i n g
general
principles:
"The fundamental p r i n c i p l e s o f a p o s i t i v e n a t u r e
upon w h i c h t h e p r o c e s s o f d i s t r i c t i n g should be c a r r i e d
out may now be l a i d down.
-57(a) The Act c a l l s f o r not l e s s t h a n e i g h t or
more t h a n t w e l v e d i s t r i c t s ; i t l e a v e s t h e c h o i c e o f
t h e number w i t h i n t h e s e l i m i t s e n t i r e l y open and t o
be d e c i d e d w i t h o u t p r e j u d i c e .
(b) The p l a i n i n t e n t o f t h e framers o f t h e act
was t o e s t a b l i s h a number o f d i f f e r e n t and independent i n s t i t u t i o n s , each s u f f i c i e n t l y s t r o n g t o care
f o r i t s e l f without t h e n e c e s s i t y i n normal t i m e s o f
depending upon any o t h e r .
(c) The i n s t i t u t i o n s t o be c r e a t e d s h o u l d ,
t h e r e f o r e , be r e a s o n a b l y s i m i l a r t o one another i n
s i z e w i t h o u t a t t e m p t i n g t o b r i n g about any a r t i f i c i a l
s i m i l a r i t y , and s h o u l d be l o c a t e d at such p o i n t s as
w i l l most n e a r l y convenience t h e b u s i n e s s o f t h e
country.
(d) The c r e a t i o n o f any one l a r g e bank should be
a v o i d e d , meaning by a l a r g e bank, a bank so prepond e r a t i n g i n importance as t o make i t i p s o f a c t o t h e
most conspicuous and by f a r t h e s t r o n g e s t element i n
t h e system; w h i l e at t h e same t i m e i t should be sought
t o a v o i d t h e c r e a t i o n o f two d i s t i n c t c l a s s e s o f
banks, one c o n s i s t i n g o f l a r g e p o w e r f u l i n s t i t u t i o n s
l i k e l y t o become dependent upon t h e n e i g h b o r i n g and
s t r o n g e r banks.
(e) W h i l e t h e law r e q u i r e s t h a t a minimum
c a p i t a l o f $4*000,000 s h a l l be present i n each and
every r e s e r v e d i s t r i c t and w h i l e t h i s requirement must
be observed, t h e r e i s no harm i n approaching c l o s e l y
t o i t or even i n g o i n g below t h i s l i m i t so f a r as t h e
banks are concerned, making up t h e d e f i c i e n c y by
p r i v a t e o r government s u b s c r i p t i o n , i f i t be t r u e t h a t
w i t h i n a r e a s o n a b l y near f u t u r e t h e d i s t r i c t w i l l
p r o b a b l y advance i n w e a l t h and c a p i t a l so as t o make
t h e e s t a b l i s h m e n t o f such bank d e s i r a b l e .
(f)
S p e c i a l study s h o u l d be g i v e n b o t h i n
e s t a b l i s h i n g t h e d i s t r i c t s and i n e s t a b l i s h i n g t h e
p o i n t i n each d i s t r i c t where t h e headquarters bank i s
t o be s i t u a t e d , t o t h e f a c i l i t i e s o f speed and t r a n s p o r t a t i o n b o t h between such p o i n t and t h o s e at which
o t h e r h e a d q u a r t e r s banks a r e l o c a t e d , and between
such h e a d q u a r t e r s p o i n t and t h e o u t l y i n g p o r t i o n s o f
the d i s t r i c t i t s e l f . " 2 2
The Committee i n a n a l y z i n g t h e e v i d e n c e found t h a t
22Report t o th^ Reserve Bank O r g a n i z a t i o n Committee by
t h e P r e l i m i n a r y Committee on O r g a n i z a t i o n , C o n f i d e n t i a l No. 49,
pp. 6 - 7 .
.
h
Of
W
A
S
H
I
N
G
LOU'S
T
O
N
-58it
fell
Into f i v e classes:
first,
t h e c h a r a c t e r and volume
o f l o c a l b u s i n e s s ; second, t h e volume o f c l e a r i n g s ;
t h e c a p i t a l i z a t i o n o f banks; f o u r t h ,
third,
railway f a c i l i t i e s ;
23
f i f t h , the e x i s t i n g h a b i t s of borrowing.
As t o t h e
t h e c h a r a c t e r and volume o f l o c a l b u s i n e s s ,
it
and
first,
stated that
t h i s must be measured by t h e e x i s t i n g banking c a p i t a l ,
i n o r d e r t o e n l a r g e t h e r e s o u r c e s o f a r e s e r v e bank
that
it
would be n e c e s s a r y t o develop t h e r e s o u r c e s o f t h e member
banks.
The volume o f c l e a r i n g s was d i s m i s s e d as unimportant
because i t
was a f f e c t e d by many i n f l u e n c e s t h a t would d i s -
appear under t h e r e s e r v e system, or t h a t had no b e a r i n g on
t h e r e s e r v e problem.
Banx c a p i t a l i z a t i o n was o f
i m p o r t a n c e , t h e development o f a p o r t i o n o f t h e
t i o n at a p a r t i c u l a r
secondary
capitaliza-
p o i n t h a v i n g no fundamental b e a r i n g on
t h e p l a c i n g o f a r e s e r v e bank at t h a t
point.
Railway
f a c i l i t i e s t h e Committee thought were o f t h e utmost
p a r t i c u l a r l y because o f t h e c l e a r i n g f u n c t i o n .
importance,
Finally,
it
thought t h a t h a b i t s o f b o r r o w i n g were important as a cons i d e r a t i o n i n l o c a t i n g reserve c i t i e s ,
mary importance i n a l l c a s e s ,
a l t h o u g h not o f
remarking i n t h i s
pri-
connection,
" F u r t h e r , t h e e x i s t i n g b a n k i n g system has i n some cases
t e n d e d t o c e n t r a l i z e funds under an a r t i f i c i a l method, and
80 t o b u i l d up b a l a n c e s i n c e r t a i n p o i n t s i n a way t h a t
would not n a t u r a l l y have
developed."24
The Committee d e v e l o p e d c e r t a i n arguments
^^^ibid., pp. 6-19.
I^iaid., p. 9.
they
against
-69t h e f r e q u e n t l y a s s e r t e d i d e a t h a t l a r g e reserve banks were
necessary t o supply adequately t h e needs o f t h e borrowing
coamunities dependent on t h e n .
However, t h e q u e s t i o n o f t h e
s i a e o f t h e r e s e r v e banks was an important one, and t h i s t h e
Committee d i d not adequately c o n s i d e r .
As has been mentioned,
t h e p r i n c i p l e o f c o n s t r u c t i n g balanced d i s t r i c t s by i n c l u d i n g
b o t h l e n d i n g and borrowing areas was dismissed as not
ticularly
important.
par-
I t recommended that t h e c a p i t a l o f the
l a r g e s t banks not exceed §28,300,000.
The exact
character
o f t h e d i s t r i c t i n g p l a n or plans submitted by t h e P r e l i m i n a r y
Committee i s not known.
H. P a r k e r W i l l i s ,
secretary of the
Committee, s a i d t h a t e i t h e r n i n e or t e n banks was t h e number
recommended.25
It
i s now p o s s i b l e t o understand how t h e boundaries
o f t h e S t . L o u i s D i s t r i c t were drawn.
sufficient
I n o r d e r t o eke out
c a p i t a l f o r A t l a n t a i t was necessary t o give t h a t
c i t y a p o r t i o n o f l o u i s i a n a which c o n t a i n e d New O r l e a n s ,
t h e southern and l a r g e r p a r t o f M i s s i s s i p p i , and a l l
part o f Tennessee east o f the Tennessee R i v e r .
that
Louisiana
had no n a t u r a l r e l a t i o n s h i p s w i t h A t l a n t a and no d e s i r e t o be
included i n a d i s t r i c t
with that c i t y .
S t . L o u i s was the o n l y
c i t y which r e c e i v e d any s i g n i f i c a n t v o t e b e s i d e s New Orleans
i n t h e p o l l t a k e n by t h e O r g a n i z a t i o n Committee among L o u i s i a n a
banks.26
25willis, H . P a r k e r , o o . c i t . , 5. 584
2 6 L o c a t i a n o f R a s t r v e D i s t r i c t s i n t h e U n i t e d S t a t e a . Senate
Document No. 485, 63rd C o n g . , 2nd S e s s . , 1914. F i r s t , Second
and T h i r d C h o i c e V o t e s by S t a t e s .
-60Tabje
First
3i
C h o i c e V o t e f o r Reserve Bank C i t i e s by
Eighth D i s t r i c t
Citv
Ark.
St. Louis
51
Louisville
Chicago
2
Kansas C i t y
Memphis
Cincinnati
Indianapolis
Nashville
1
Dallas
Chicago or
St. Louis
S t . Louis or
Kansas C i t y
Birmingham
Total
54
Districts*
E a s t . South. South. West. West. N o r t h
111.
Tenn. X i s s .
Ind.
43
27
103
30
2
15
29
1
61
13
5
4
1
4
6
3
Total
4
208
77
59
29
14
13
5
4
1
2
2
1
71
135
64
62
15
1
1
1
13
414
* L 6 c a t i o n o f Reserve D i s t r i c t s i n t h e U n i t e d S t a t e s , Senate
Document No. 435, 63rd C o n g . , 2nd Se5 S . , 1 7 1 4 .
I n t h e case o f M i s s i s s i p p i t h e f i n a n c i a l and commerc i a l r e l a t i o n s h i p s were l a r g e l y w i t h Ke^ O r l e a n s , Meaphis and
St. Louis.
A t l a n t a r e c e i v e d no v o t e s i n a p o l l o f
Minsissippi
b a n k e r s , t h e l a r g e s t v o t e b e i n g g i v e n t o New O r l e a n s , and t h e
remainder o f t h e s i g n i f i c a n t v o t e b e i n n cast
St. Louis.
f o r Memphis and
I f n e i t h e r Memphis n o r New O r l e a n s t a s t o be made
a r e s e r v e c i t y , t h e c h o i c e o f M i s s i s s i p p i was,
St. Louis.
Of c o u r s e , t h e i n c l u s i o n o f New O r l e a n s and p a r t
Louiaiana with the A t l a n t a d i s t r i c t
p a r t o f M i s s i s s i p p i be i n c l u d e d ,
have been t h e r e s u l t .
therefore,
made i t
necessary that
of
some
o t h e r w i s e an i s l a n d would
W h i l e S t . L o u i s bankers had regarded
-61N a s h v i l l e as t h e proper d i v i d i n g l i n e i n Tennessee, t h e area
of the A t l a n t a d i s t r i c t
was i n c r e a s e d by moving t h e l i n e
ward t o t h e Tennessee R i v e r .
bankers were w e l l d i v i d e d ,
west-
The v o t e s cast by Tennessee
C i n c i n n a t i r e c e i v i n g the
v o t e o f any c i t y o u t s i d e o f Tennessee.
Louisville
largest
and
S t . L o u i s r e c e i v e d t h e second l a r g e s t number o f v o t e s ,
while
A t l a n t a was t h i r d .
The e s t a b l i s h m e n t
and Kansas C i t y made i t
t h e two c i t i e s ,
Dallas.
o f r e s e r v e banks at b o t h D a l l a s
necessary t o s p l i t
Oklahoma between
and t o g i v e t h e remainder o f L o u i s i a n a t o
I n t h e p o l l Oklahoma bankers p r e f e r r e d
either
Kansas C i t y or S t . L o u i s , Kansas C i t y r e c e i v i n g t h e
number o f f i r s t
largest
c h o i c e v o t e s , and S t . L o u i s t h e l a r g e s t num27
ber o f second c h o i c e v o t e s .
L o u i s i a n a d i d not d e s i r e
be a t t a c h e d t o a r e s e r v e bank at D a l l a s as f a r as t h e
o f t h e O r g a n i z a t i o n Committee i n d i c a t e d .
The
to
ballot
southern
boundary o f t h e s t a t e o f A r k a n s a s , t o g e t h e r w i t h a l i n e
drawn t h r o u g h M i s s i s s i p p i ,
of the S t . Louis d i s t r i c t .
54 f i r s t
t h u s became t h e southern boundary
Arkansas bankers c a s t
choice votes f o r S t .
51 out
of
Louis.
Western Kentucky and s o u t h e r n I n d i a n a were
included i n the St. Louis t e r r i t o r y ,
but i t
i s clear
finally
that
t h i s d e c i s i o n was d i c t a t e d i n l a r g e p a r t by t h e n e c e s s i t y
securing s u f f i c i e n t
c a p i t a l f o r t h e bank at S t . L o u i s .
s t a t e , I n d i a n a s t r o n g l y f a v o r e d Chicago and C i n c i n n a t i ,
of
As a
and
i n a v o t e i n t h e s o u t h e r n p o r t i o n , Chicago was much p r e f e r r e d .
-62r e c e i v i n g 29 v o t e s t o 2 f o r K t .
L o u i s . ^ B
Cincinnati
t h e l a r g e s t v o t e f o r any c i t y o u t s i d e Kentucky.
As was
p o i n t e d out e a r l i e r . Watts i n d i c a t e d t h a t L o u i s v i l l e
p r e f e r r e d t o go w i t h C i n c i n n a t i i f
e s t a b l i s h e d at L o u i s v i l l e .
received
also
a r e s e r v e bank was not
However t h e e v e n t u a l
establish-
ment o f a bank at C l e v e l a n d i n s t e a d o f at C i n c i n n a t i made
the i n c l u s i o n of L o u i s v i l l e
ible.
i n the St. Louis d i s t r i c t
plaus-
The s u g g e s t i o n s made by Watts w i t h regard t o t h e
c l u s i o n o f L o u i s v i l l e and western Kentucky were
f o l l o w e d by t h e O r g a n i z a t i o n Committee.
in-
largely
I n t h e western p a r t
o f Kentucky t h e bankers gave 61 v o t e s t o L o u i s v i l l e ,
one t o
S t . L o u i s , and none t o C i n c i n n a t i .
western
The i n c l u s i o n o f
Kentucky i n t h e t e r r i t o r y gave some l o x i c t o t h e
of adjoining t e r r i t o r y
i n southern I n d i a n a .
t h e e x i s t e n c e o f good r a i l
inclusion
Undoubtedly,
c o n n e c t i o n s on t h e East-West
t r u n k l i n e s between L o u i s v i l l e
and S t . L o u i s , and between
s o u t h e r n I n d i a n a and S t . L o u i s , was another f a c t o r
i n i n c l u d i n g these
territories.
There was never any q u e s t i o n but t h a t
a b l e part o f southern I l l i n o i s
f i n a n c i a l l y to St. Louis,
bank at S t . L o u i s .
considered
a consider-
was r e l a t e d commercially and
and d e s i r e d t & be a t t a c h e d t o a
The o n l y problem was t h e
determination
o f t h e boundary l i n e between t h e Chicago and S t . L o u i s
tricts.
dis-
At t h e h e a r i n g i n S t . L o u i s t h e bankers had sug-
g e s t e d t h e d i v i s i o n o f I l l i n o i s by a l i n e drawn r o u g h l y
and west which would i n c l u d e S p r i n g f i e l d i n t h e s o u t h e r n
*
?
east
part.
-63T h e r e was c o n s i d e r a b l e r i v a l r y between Chicago and S t .
i n e f f o r t s t o secure as much as p o s s i b l e o f t h e
territory.
Louis
Illinois
A S t . L o u i s banker remarked w i t h a s o r t o f dry
humor t h a t w h i l e Chicago seemed t o d e s i r e East S t .
S t . L o u i s was not a s k i n g f o r Evanston.
Louis,
The c o n t e s t was r e -
s o l v e d by t h e O r g a n i z a t i o n Committee l a r g e l y on t h e
o f t h e d e s i r e s o f I l l i n o i s bankers i n t h e d i s p u t e d
The O r g a n i z a t i o n Committee p o l l i n d i c a t e d t h a t
s t a t e , Chicago r e c e i v e d 305 f i r s t
basis
area.
i n t h e whole
choice votes,
and S t .
Louis
29
112 v o t e s .
I n the southern counties f i n a l l y assigned t o
the Eighth D i s t r i c t ,
S t . L o u i s r e c e i v e d 103 v o t e s out o f t h e
t o t a l o f 112 v o t e s .
It
i s t h u s c l e a r t h a t S t . L o u i s d i d not
r e c e i v e any more t e r r i t o r y t h a n was warranted by t h e
prefer-
ences o f t h e b a n k e r s .
I n an e f f o r t t o throw f u r t h e r l i g h t
on t h e
prefer-
ences o f I l l i n o i s b a n k e r s , H. D. Sexton, a banker o f East
St. Louis,
submitted a p o l l conducted among members o f Groups
30
6, 7, 8, 9 , and 10 o f t h e I l l i n o i s Bankers
Association.^
These Groups i n c l u d e d 61 s o u t h e r n c o u n t i e s o f I l l i n o i s
c o n t a i n e d 830 member banks o f t h e A s s o c i a t i o n ,
n a t i o n a l and p r i v a t e .
and
state,
B a l l o t s were r e t u r n e d by 592 banks,
t h e r e s u l t s showing 408 v o t e s f o r S t . L o u i s ,
166 f o r
Chicago,
and 18 u n d e c i d e d .
I n Group 6, S t . L o u i s r e c e i v e d o n l y 21
v o t e s out o f 180.
O n l y 2 out o f t h e 10 c o u n t i e s
in
this
I^Ibid.
3 0 L e t t e r t o V i l l i a m G. McAdoo o f F e b r u a r y 11, 191A, Exh i b i t s and l e t t e r s s u b m i t t e d t o Reserve Bank O r x a n i z a t i o n
ComnAtte*.
(St. Louis)
-64Group were f i n a l l y a s s i g n e d t o S t . L o u i s .
most o f t h e c o u n t i e s i n c o n t r o v e r s y ,
particularly
County i n which S p r i n g f i e l d was l o c a t e d .
given a clear majority of the votes.
Group 7 c o n t a i n e d
Sangamon
Here S t . L o u i s was
There *ere 153 member
banks o f which a number d i d not cast a v o t e , S t . L o u i s
c e i v i n g 79 b a l l o t s .
of the 7 counties
The f i n a l d e c i s i o n a l l o t t e d o n l y 2 out
i n t h i s Group t o S t . L o u i s ,
County going t o C h i c a g o .
finally
this
re-
Sangamon
T h e r e were 44 s o u t h e r n
included i n the St. Louis d i s t r i c t .
counties
On t h e b a s i s
of
p o l l o f t h e I l l i n o i s Bankers A s s o c i a t i o n some a d d i t i o n a l
territory,
including Springfield,
might have been
included.
A f t e r a d e c i s i o n was reached t o c r e a t e a Kansas
City district
it
was n e c e s s a r y t o i n c l u d e i n i t
such part
w e s t e r n M i s s o u r i as might be regarded as l o c a l t e r r i t o r y
Kansas C i t y .
The l i n e was drawn almost
of
to
s t r a i g h t n o r t h and
s o u t h , p r o v i d i n g a s t r i p o f t e r r i t o r y f o r t h e Kansas C i t y
district
one county w i d e , except i n t h e n o r t h where t h e
s t r i p widened t o i n c l u d e two or t h r e e c o u n t i e s .
This
was r a t h e r an a r b i t r a r y one, t h e r e b e i n g no r e a l l y
f a c t o r y c r i t e r i a f o r determining i t .
t h a t t h e l e a d and z i n c d i s t r i c t
not
It
is
satis-
I t was u n f o r t u n a t e
i n southwestern M i s s o u r i was
included i n the St. Louis d i s t r i c t ,
f o r t h e s e metals b e i n g i n t h i s
line
t h e p r i n c i p a l market
district.
i n t e r e s t i n g t o note that
i n Texas, St.
Louis
r e c e i v e d by f a r t h e l a r g e s t v o t e o f any c i t y o u t s i d e
of
Texas.31
split
W h i l e t h e Texaa v o t e was f o r t h e most p a r t
-65between D a l l a s , F o r t Worth and Houston, S t . L o u i s
some f i r s t
received
c h o i c e v o t e s , t h e second l a r g e s t number o f
second
c h o i c e v o t e s , and t h e l a r g e s t number o f t h i r d c h o i c e v o t e s .
If
a l l o w a n c e s are t o be made f o r t h e l o c a l p r i d e t h a t
f l u e n c e d the votes cast
i n a l l parts of the country,
c l e a r t h a t many Texas bankers b e l i e v e d t h a t a more
d i s t r i c t i n g p l a n would have i n c l u d e d Texas i n a S t .
init
is
effective
Louis
district.
The Reserve Bank O r g a n i z a t i o n Committee announced
its
d e c i s i o n on A p r i l 2, 1914, and a f f o r d e d
q u i t e general i n character.
explanations
The part o f t h e d e c i s i o n
i n g t o t h e S t . L o u i s bank was as
relat-
follows:
D i s t r i c t No. 8 . — The S t a t e o f ArKansas; a l l
t h a t p a r t o f M i s s o u r i l o c a t e d east o f t h e western
boundary o f t h e f o l l o w i n g c o u n t i e s :
Harrison,
D a v i e s s , C a l d w e l l , Ray, L a f a y e t t e , Johnson, Henry,
S t . C l a i r , Cedar, Dade, Lawrence, and B a r r y ; a l l
t h a t p a r t o f I l l i n o i s not i n c l u d e d i n D i s t r i c t No.7;
a l l t h a t p a r t o f I n d i a n a not i n c l u d e d i n D i s t r i c t
No* 7; a l l t h a t p a r t o f Kentucky not i n c l u d e d i n
D i s t r i c t No. 4; a l l t h a t p a r t o f Tennessee not i n c l u d e d i n D i s t r i c t No. 6; and a l l t h a t p a r t o f
M i s s i s s i p p i not i n c l u d e d i n D i s t r i c t No. 6; w i t h
t h e c i t y o f S t . L o u i s , Mo., as t h e l o c a t i o n o f t h e
F e d e r a l Reserve bank.
T h i s d i s t r i c t c o n t a i n s 458 n a t i o n a l banks which
have a c c e p t e d t h e p r o v i s i o n s o f t h e F e d e r a l r e s e r v e
a c t . The c a p i t a l s t o c k o f t h e F e d e r a l Reserve Bank
o f S t . L o u i s , on t h e b a s i s o f 6 per cent o f t h e t o t a l
c a p i t a l s t o c k and s u r p l u s o f t h e a s s e n t i n g n a t i o n a l
banks i n t h e d i s t r i c t , w i l l amount t o $4,990,761; and
o f t h e S t a t e banks and t r u s t companies which have
a p p l i e d f o r membership up t o A p r i l 1, 1914, t h e t o t a l
c a p i t a l s t o c k w i l l be $6,367,006.
Almost as soon as t h e d e c i s i o n was announced p r o t e s t s began t o be made i n v a r i o u s p a r t s o f t h e c o u n t r y ,
ticularly
i n the Bast,
^buth, and M i d d l e R e s t .
par-
A mass meet-
-66i n g was h e l d i n New O r l e a n s condemning t h e d e c i s i o n o f t h e
Committee.
No a c t i o n was t a k e n w i t h regard t o t h e s e
pro-
t e s t s and p e t i t i o n s , t h e problem o f readjustment b e i n g
t o t h e F e d e r a l Reserve B o a r d .
The O r g a n i z a t i o n Committee
s i m p l y prepared a r e p o r t t o t h e Senate defending i t s
Tlie best t h a t
can be s a i d f o r t h e work o f t h e
Committee i s t h a t
it
left
did a d i f f i c u l t
decision?^
Organization
job r a t h e r p o o r l y .
The
p r i n c i p l e s and s u g g e s t i o n s o f t h e P r e l i m i n a r y Committee were
f o l l o w e d o n l y when p o l i t i c a l
otherwise.
c o n s i d e r a t i o n s d i d not
The whole d i s t r i c t i n g arrangement was dominated
by t h e d e t e r m i n a t i o n ,
f o r p o l i t i c a l purposes, t o s e l e c t
maximum number o f r e s e r v e bank c i t i e s .
first
and d i s t r i c t s
C i t i e s were
c r e a t e d around them.
Banks
b a n k s , at New Y o r k , P h i l a d e l p h i a ,
the
selected
"reasonably
s i m i l a r t o one another i n s i z e " were not p r o v i d e d .
Four
C l e v e l a n d , and Chicago had
54 per cent o f t h e t o t a l r e s e r v e bank c a p i t a l , w h i l e
banks had o n l y 32 per cent o f t h e c a p i t a l .
tricts
dictate
six
Only t h r e e
dis-
can be r e g a r d e d as w e l l c o n s t r u c t e d , B o s t o n , New Y o r k ,
and San F r a n c i s c o .
A majority of the f i r s t
F e d e r a l Reserve Board,
f o u r out o f t h e f i v e a p p o i n t i v e members, were f u l l y aware o f
t h e m i s t a k e s made i n d i s t r i c t i n g t h e c o u n t r y .
A committee
c o n s i s t i n g o f F . A . D e l a n o , W. P . G. H a r d i n g , and P a u l M.
Warburg, was a p p o i n t e d t o study t h e problem o f
T h i s group was aware o f t h e f a c t t h a t
redistricting.
any e f f e c t i v e
revision
3 2 L o c * t i o n o f Reserve D i s t r i c t s i n t h e U n i t e d S t a t e s .
L e t t e r from Reserve Bank O r g a n i z a t i o n Committee t r a n s m i t t i n g
b r i e f s and arguments p r e s e n t e d t o o r g a n i z a t i o n committee.
Senate Document No. 485, 63rd C o n g . , 2nd S e s s .
-67o f t h e d i s t r i c t s had t o be done b e f o r e much time
and t h a t
tricts,
it
elapsed,
would n e c e s s a r i l y mean some c o n s o l i d a t i o n o f
dis-
and t h u s a r e d u c t i o n i n t h e number o f r e s e r v e banks.
D e s p i t e t h e f a c t t h a t a m a j o r i t y o f t h e Board f a v o r e d r e v i s i o n t h e r e were two s e r i o u s d i f f i c u l t i e s
major change i n t h e d i s t r i c t s .
i n t h e way o f any
In the f i r s t
p l a c e , two mem-
b e r s o f t h e O r g a n i z a t i o n Committee were members o f t h e Board,
S e c r e t a r y o f t h e T r e a s u r y McAdoo, and C o m p t r o l l e r o f t h e
Currency W i l l i a m s .
of the Board.
S e c r e t a r y McAdoo was, o f c o u r s e ,
chairman
I t was o n l y t o be expected t h a t t h e s e men
iwould r e s e n t and oppose any c o n s i d e r a b l e changes i n t h e d L s tricts.
As a second d i f f i c u l t y t h e members o f t h e Board who
favored r e d i s t r i c t i n g ,
p a r t i c u l a r l y Warburg, were on r e c o r d
as h a v i n g f a v o r e d e i t h e r t h e A l d r i c h P l a n or a much s m a l l e r
number o f banks t h a n was e v e n t u a l l y
provided.
I t was q u i t e c l e a r t h a t any attempt on t h e part
of
t h i s group t o c o n s o l i d a t e or reduce t h e number o f
districts
would immediately be l a b e l l e d an i n v i d i o u s e f f o r t
finally
accomplish the o b j e c t i v e of the A l d r i c h Plan, a s i n g l e
t r a l bank*
a majority
Knowing t h a t t h e r e v i s i o n i s t
to
cen-
group c o u l d muster
s h o u l d t h e matter come t o a v o t e by t h e Board,
S e c r e t a r y McAdoo and Governor Hamlin f o r e s t a l l e d any e f f o r t
at r e v i s i o n by s e c u r i n g an o p i n i o n from t h e
Attorney-General,
d a t e d November 22, 1915, s t a t i n g t h a t t h e F e d e r a l Reserve
B o a r d was w i t h o u t power t o a b o l i s h any r e s e r v e d i s t r i c t
r e s e r v e bank.
or
33
33The s t o r y o f t h i s r e d i s t r i c t i n g e p i s o d e can be f o l l o w e d
i n Warburg, P a u l M . , The F e d e r a l Reserve System. V o l . 1, pp.
-68The language o f t h e Act on t n i s p o i n t was not
clear
and t h e r e was c o n s i d e r a b l e d i f f e r e n c e o f o p i n i o n r e g a r d i n g
T h i s opinion, together with a l a t e r opinion of
A p r i l 14, 1916
t o t h e e f f e c t t h a t t h e Board had no power t o change t h e
t i o n o f any r e s e r v e bank, prevented any f u r t h e r e f f o r t
make e x t e n s i v e m o d i f i c a t i o n s
i n the d i s t r i c t
it.
locato
outlines.
An o p i n i o n o f an A t t o r n e y General i s n o t , o f
course,
c o n c l u s i v e as t o t h e p r o p e r i n t e r p r e t a t i o n o f a s t a t u t e .
In
v i e w o f t h e importance o f t h e whole d i s t r i c t i n g q u e s t i o n and
t h e need f o r a l t e r i n g and c o n s o l i d a t i n g t h e d i s t r i c t s
that
may a r i s e i n t h e f u t u r e ,
it
i s important t o note t h a t t h i s
is
not a s e t t l e d q u e s t i o n .
Of c o u r s e , any c o n s o l i d a t i o n o f t h e
424-55, and W i l l i s , H . P a r k e r , op. c i t . , pp. 726-36.
The
two o p i n i o n s rendered by t h e A t t o r n e y General as t o t h e power
o f t h e F e d e r a l Reserve Board t o c o n s o l i d a t e any o f t h e d i s t r i c t s and^ t h e r e f o r e , reduce t h e number o f banks, o r t o
change t h e l o c a t i o n o f any f e d e r a l r e s e r v e c i t y can be found
i n t h e F e d e r a l Reserve B u l l e t i n . D e c . , 1915, pp. 396-400,
and i n t h e Annual Report o f t h e F e d e r a l Reserve Boards 1916,
p p . 128-133. W i l l i s i n c l u d e s i n an Appendix what i s ent i t l e d t h e o p i n i o n o f t h e A t t o r n e y General o f A p r i l 14, 1916,
W i l l i s , pp. 758-769. A c t u a l l y what i s p r e s e n t e d h e r e i s a
c o m b i n a t i o n o f t h e two o p i n i o n s rendered by t h e A t t o r n e y
G e n e r a l . T h i s c o m b i n a t i o n o f t h e two o p i n i o n s as a statement
o f t h e o p i n i o n o f A p r i l 14* 1916 g i v e s c e r t a i n erroneous i m - plications.
Warburg i n h i s d i s c u s s i o n o f t h e c o n t r o v e r s y
d e f e n d s b o t h t h e motives o f t h e r e v i s i o n i s t group and t h e
m e r i t s o f t h e p r o p o s a l t o r e d i s t r i c t t h e F e d e r a l Reserve
System. W i l l i s q u e s t i o n s t h e motives o f t h o s e members o f t h e
B o a r d who advocated r e d i s t r i c t i n g , i m p l y i n g i n h i s argument
t h a t t h e r e a l i n t e n t was t o secure i n t h e end a s i n g l e c e n t r a l bank.
An e x a m i n a t i o n o f t h e evidence on b o t h s i d e s o f
t h i s c o n t r o v e r s y does not support t h e i m p l i c a t i o n s made by
Willis.
I t seems r a t h e r c l e a r t h a t t h e Warburg group was
q u i t e s i n c e r e i n t h e i r b e l i e f t h a t t h e d i s t r i c t s ought t o
be r e c o n s t r u c t e d i n such a way as t o r e c t i f y t h e p r i n c i p a l
m i s t a k e s made by t h e O r g a n i z a t i o n CoTmittee.
It i s also
c l e a r t h a t t h i s group was s i n c e r e i n b e l i e v i n g t h a t t h e F e d e r a l Reserve Board had been g i v e n t h e power t o r e v i e w t h e
d e c i s i o n o f t h e O r g a n i z a t i o n Committee.
-69d i s t r i c t s would be attended by many d i f f i c u l t i e s now t h a t
so
much time has e l a p s e d , but c e r t a i n p o s s i b l e developments
in
t h e f u t u r e nay HAke changes e s s e n t i a l .
the
s t a t u t e i n c o n t r o v e r s y i s as
The p r o v i s i o n o f
follows:
"The d e t e r m i n a t i o n o f s a i d O r g a n t s a t i o n Comm i t t e e s h a l l not be s u b j e c t t o review except by the
F e d e r a l Reserve Board when organized; P r o v i d e d ,
That t h e d i s t r i c t s s h a l l be a p p o r t i o n e d w i t h due
r e g a r d t o t h e convenience and customary course o f
b u s i n e s s and s h a l l not n e c e s s a r i l y be coterminous
w i t h any S t a t e or S t a t e s . The d i s t r i c t s t h u s c r e a t e d may be r e a d j u s t e d and new d i s t r i c t s may from
t i m e t o time be c r e a t e d by t h e F e d e r a l Reserve
B o a r d , not t o exceed 12 i n a l l . " 3 4
A r e a s o n a b l e i n t e r p r e t a t i o n based on t h e s p i r i t
and i n t e n t
r a t h e r t h a n t h e l e t t e r o f t h e s t a t u t e would i n d i c a t e t h a t
the
Board had been g i v e n t h e power t o review t h e d e c i s i o n o f t h e
O r g a n i z a t i o n Committee, and t h a t
such changes, i n c l u d i n g a
c o n s o l i d a t i o n o f soo^ d i s t r i c t s ,
were w i t h i n t h e power o f
t h e Board as would serve t o enable i t t o e f f e c t i v e l y
out
its
Act.
policies,
and t o accomplish t h e o b j e c t i v e s o f t h e
The burden o f t h e argument o f t h e A t t o r n e y
r e s t e d upon a s t r i c t
held,
carry
General
i n t e r p r e t a t i o n of tne s t a t u t e .
c i t i n g t h e d e c i s i o n o f t h e Supreme Court i n
He
Interstate
Commerce Commission v e r s u s C i n c i n n a t i , Ne^ O r l e a n s & Texas
P a c i f i c R a i l w a y Co. ( l 6 7 U . S . 479),
(1897) t h a t t h e power t o
c o n s o l i d a t e d i s t r i c t s was not e x p r e s s l y g i v e n , and c o u l d not
35
be i m p l i e d from t h e words o f t n e statute.^^
He argued t h a t
power not e x p r e s s l y c o n f e r r e d c o u l d a r i s e es an i n c i d e n t
34The F e d e r a l Reserve A c t . S e c . 2, Par*.
to
1.
3 5 o p i n i o n o f T . W. G r e g o r y , A t t o r n e y General o f t h e U n i t e d
S t a t e s , The F e d e r a l Reserve B u l l e t i n . December 1915, p . 398.
a
-70t h e e x e r c i s e o f some o t h e r power o n l y because e s s e n t i a l t o t h e
e x e r c i s e o f t h e one g r a n t e d , or because i t
as a l e s s e r power o f a l i k e n a t u r e .
might be i n c l u d e d
The power t o
consolidate
or a b o l i s h d i s t r i c t s he d i d not t h i n k e s s e n t i a l t o t h e e x e r c i s e o f t h e power t o r e a d j u s t d i s t r i c t s ,
t h e power t o r e a d j u s t d i s t r i c t s .
or a l e s s e r one t h a n
A realistic
however, o f t h i s problem i n d i c a t e s t h a t
it
t o have t h e power t o c o n s o l i d a t e d i s t r i c t s ,
c a t i o n of reserve c i t i e s
be made.
if
examination,
was r e a l l y
necessary
o r change t h e
lo-
any e f f e c t i v e readjustment was t o
I t was t h i s l i m i t a t i o n t h a t prevented t h e Board from
making any o t h e r t h a n minor changes i n t h e s e v e r a l r e s e r v e
dis-
tricts.
The B o a r d ' s committee on r e d i s t r i c t i n g
i n a report
on November 17, 1915, recommended t h a t t h e System would be
g r e a t l y s t r e n g t h e n e d by c o n s o l i d a t i n g t h e t w e l v e banks
e i t h e r e i g h t o r n i n e banks.
into
C e r t a i n statements made i n t h i s
r e p o r t a r e worth n o t i n g :
" O b s e r v a t i o n o f t h e a c t u a l working o f t h e F e d e r a l Reserve Banking System and o f t h e f a c t o r s t h a t make f o r
s t r e n g t h and f o r weakness, has s a t i s f i e d your Comm i t t e e t h a t t h e r e i s a l i m i t i n t h e present c i r c u m s t a n c e s o f t h e c o u n t r y , beyond whicn d e c e n t r a l i z a t i o n
may d e f e a t i t s purpose w i t h o u t making f o r independence.
. . . . . . T o a c h i e v e t h e purposes o f t h e Act t h e component
u n i t s o f t h e F e d e r a l Reserve System must be s t r o n g
enough i n themselves t o be e f f e c t i v e , l a r g e enough t o
command r e s p e c t , and a c t i v e enough t o exert a cont i n u o u s and d e c i s i v e i n f l u e n c e i n t h e banking a f f a i r s
of thg d i s t r i c t .
T h i s means t h a t i n t h e l e s s w e l l ^
developed and s e t t l e d p a r t s o f t h e country a w e l l ^
c o n s t r u c t e d d i s t r i c t must embrace a t e r r i t o r y
s u f f i c i e n t l y wide i n extent and d i v e r s i f i e d i n i t s i n t e r e s t s t o g i v e b a l a n c e t o i t s banking s i t u a t i o n , and
not t o o much t i e d up t o a s i n g l e crop o r l i n e o f i n d u s t r y , and t h a t every d i s t r i c t should be f r e e from
any s u g g e s t i o n o f s e c t i o n a l i s m
Of t h e t w e l v e
-71F e d e r & l r e s e r v e banks one h a l f may be s a i d t o be
s t r o n g and t h e o t h e r weak. The remedy f o r t h i s
s i t u a t i o n , i n t h e o p i n i o n o f your Committee, i s
such a readjustment o f the d i s t r i c t s as w i l l
l e a v e us w i t h perhaps eight or n i n e d i s t r i c t s ,
a l l o f adequate extent and banking power and each
a b l e t o support a strong and a c t i v e r e g i o n a l c e n t e r . "
However, t h e r e v i s i o n i s t
group was accused at t h a t time and
s i n c e o f a t t e m p t i n g t o e s t a b l i s h a s i n g l e c e n t r a l bank.
&t t h i s matter from t h e v i e w p o i n t o f e f f e c t i v e
mental a d m i n i s t r a t i o n ,
it
Look-
govern-
was u n f o r t u n a t e t h a t two o f t h e
t h r e e members o f t h e O r g a n i z a t i o n Committee should have been
made members o f t h e Board, as i t
prevented p r a c t i c a l l y
any
a p p e a l from o r check on t h e d e c i s i o n o f t h e O r g a n i z a t i o n
Committee i n a matter o f great importance t o t h e whole banking structure of the
country.
R e g i o n a l c o n t r o l r e s e r v e banking has not
developed
i n t h e U n i t e d S t a t e s as t h e framers o f t h e F e d e r a l Reserve
Act i n t e n d e d .
T h e r e were, o f c o u r s e , many d i f f i c u l t i e s
accomplishing t h i s ,
some more s e r i o u s t h a n o t h e r s .
It
in
i s not
p o s s i b l e t o c o n c l u d e t h a t had t h e d i s t r i c t s been arranged
more s a t i s f a c t o r i l y
It
such r e g i o n a l c o n t r o l would have r e s u l t e d .
i s c l e a r , however, t h a t t h e d i s t r i c t
arrangements which
p r e v a i l e d would have made t h e r e a l i z a t i o n o f t h i s
extremely d i f f i c u l t
objective
even had o t h e r problems not e x i s t e d .
The
c o n t r a s t between t h e l a r g e , w e l l - d i v e r s i f i e d ,
well-balanced
San F r a n c i s c o d i s t r i c t
one-crop,
and some o f t h e s m a l l ,
p o l i t i c a l l y - s h a p e d southern d i s t r i c t s
is a striking
one.
One o b j e c t i v e o f t h e S t . L o u i s bankers as t h e y
36Revised Report o f t h e F e d e r a l Reserve Board Committee on
R e d i s t r i c t i n g , Nov. 17, 1914, Warburg, on* c i t . . p p . 767-74.
-72attempted t o c o n s t r u c t
a St. Louis d i s t r i c t
had been t h e
a t i o n o f a s t r o n g f o r e i g n exchange aarket t h a t
ports i n d o l l a r s .
cre-
could s e l l
ex-
F e s t u s J . Wade had remarked i n a l e t t e r
to
t h e O r g a n i z a t i o n Committee,
"We a r e i n t h e v e r y center o f t e r r i t o r y which
a n n u a l l y c r e a t e s f u l l y 50 per cent o f our f o r e i g n
e x p o r t s from t h e farm p l a n t a t i o n , mine and f a c t o r y ,
and w h i l e i t i s t r u e h e r e t o f o r e n e a r l y a l l f o r e i g n
exchange t r a n s a c t i o n s g r a v i t a t e d t o t h e e a s t , because o f t h e c o n c e n t r a t i o n o f c a p i t a l , under t h e
new l a w , S t . L o u i s can, and I am sure w i l l , develop
a b u s i n e s s i n f o r e i g n exchange b i l l s t h a t w i l l rank
second i n t h e l i s t o f t h e e i g h t r e g i o n a l banks, i f
you g i v e us a r e s e r v e bank and t h e t e r r i t o r y we
suggest."37
The p a r t i t i o n i n g o f t h e suggested t e r r i t o r y among f o u r
d i s t r i c t s made t h e attainment
of t h i s objective
reserve
impossible,
as l a t e r e x p e r i e n c e has demonstrated.
The problem i n t h e E i g h t h D i s t r i c t ,
finally
as i t
was
c o n s t r u c t e d , was not l a c k o f d i v e r s i f i c a t i o n .
_cluded t e r r i t o r y
in-
i n which t h e r e was manufacturing and bank-
i n g c a p i t a l as w e l l as a g r i c u l t u r e .
tory i t s e l f
It
The a g r i c u l t u r a l
was a l s o h i g h l y d i v e r s i f i e d ,
range o f a g r i c u l t u r a l a c t i v i t i e s .
size of the d i s t r i c t ,
terri-
i n c l u d i n g a wide
The problem was r a t h e r t h e
and t h e f a c t t h a t t e r r i t o r y
logically
r e l a t e d and dependent on S t . L o u i s was not i n c l u d e d .
Es-
t a b l i s h e d f i n a n c i a l r e l a t i o n s h i p s were i n t e r r u p t e d .
I n order
t o have developed a number o f t h e l o g i c a l o b j e c t i v e s
of
c e n t r a l banking i n t h i s area i t
was necessary t h a t a l a r g e
and more i n t e g r a t e d d i s t r i c t
provided.
be
On May 11, 1914, t h e O r g a n i z a t i o n Committee d e s i g n a t e d f i v e b a n k s , t h e German N a t i o n a l Bank, o f L i t t l e
letters
s u b m i t t e d at h e a r i n g s .
(St.
Rock,
Louis)
-73Arkansas, t h e Ayers N a t i o n a l Bank, o f J a c k s o n v i l l e ,
t h e Second N a t i o n a l Bank, o f New Albany, I n d i a n a ,
N a t i o n a l Bank o f Kentucky, L o u i s v i l l e ,
Illinois,
the
and t h e F i r s t
Bank, o f Memphis, t o execute t h e o r g a n i z a t i o n
National
certificate.33
R e p r e s e n t a t i v e s o f t h e s e banks met i n S t . L o u i s on May 18th
t o s i g n the c e r t i f i c a t e ,
transmitted i t t o the
Comptroller,
and t h e F e d e r a l Reserve Bank o f S t . L o u i s became a body c o r porate.
The n i n e members o f t h e board o f d i r e c t o r a were
d i v i d e d i n t o t h r e e groups, d e s i g n a t e d A, B , and C,
according
t o the p r o v i s i o n s of Section 4 of the A c t .
Class A directors
were t o be p r i m a r i l y r e p r e s e n t a t i v e s o f t h e
stockholding
banks.
C l a s s B d i r e c t o r s were r e q u i r e d t o b e , at t h e time
of their election,
" a c t i v e l y engaged i n t h e i r d i s t r i c t
commerce, a g r i c u l t u r e ,
or some o t h e r i n d u s t r i a l
The member banks i n each d i s t r i c t
in
pursuit."
were d i v i d e d i n t o
three
groups a c c o r d i n g t o s i z e , and t h e banks i n each group were
entitled to elect
director.
one C l a s s A d i r e c t o r and one C l a s s B
Each member bank was r e q u i r e d t o s e l e c t , at a
meeting o f i t s board o f d i r e c t o r s ,
t o cast t h e v o t e o f t h e bank.
a district
Reserve
elector,
C l a s s C d i r e c t o r s were t o be
appointed by t h e F e d e r a l Reserve Board, one o f which was t o
be d e s i g n a t e d as chairman o f t h e board o f d i r e c t o r s .
C l a s s C d i r e c t o r c o u l d be an o f f i c e r ,
director,
No
employee,
o r s t o c k h o l d e r o f any bank, a l t h o u g h t h e one d e s i g n a t e d as
^SAnnual Report o f t h e F e d e r a l Reserve Bank o f S t .
Dec. 31, 1915, p . 5 .
Louis.
-74chairman o f t h e board, and as F e d e r a l Reserve Agent, was r e q u i r e d t o be a man o f " t e s t e d banking e x p e r i e n c e . "
The term
o f o f f i c e f o r a l l d i r e c t o r s was t h r e e y e a r s , arranged so
t h a t t h e term o f one d i r e c t o r o f eqch c l a s s would t e r m i n a t e
each y e a r .
A c o n v e n t i o n o f member banks o f t h e E i g h t h D i s trict
was h e l d i n S t . L o u i s on June 4, 191A, at which t h e
39
procedure f o r nominating d i r e c t o r s o f the bank was determined.
F e s t u s J . Wade, temporary chairman, appointed a r u l e s
committee c o n s i s t i n g o f one member from each s t a t e i n t h e
trict.^^
dis-
T h i s committee r e p o r t e d r u l e s p r o v i d i n g t h a t no
proxy v o t e s s h o u l d be t a k e n , and t h a t each group o f banks should
meet s e p a r a t e l y and nominate two d i r e c t o r s t o represent
group.
each
A v i g o r o u s p r o t e s t was made t h a t t h i s would g i v e
S t . L o u i s bankers c o n t r o l o f t h e c o n v e n t i o n s i n c e t h e y had
more d e l e g a t e s p r e s e n t .
t i v e from each s t a t e cast
However, a motion t h a t a r e p r e s e n t a a v o t e f o r a l l member banks o f t h a t
s t a t e was d e f e a t e d by a v o t e o f 88 t o 63.
Walker H i l l ,
i d e n t o f t h e Mechanics-American N a t i o n a l Bank, o f S t .
pres-
Louis,
and Murray C a r l e t o n o f t h e Ferguson, C a r l e t o n Dry Goods C o . ,
S t . L o u i s , were & e l e c t e d as nominees by member banks o f
Group 1 .
F . 0. Watts, president
of St. Louis,
and W. B . P l u n k e t t ,
o f t h e T h i r d N a t i o n a l Bank,
president
of the
Plunkett-
J a r r e l l G r o c e r y C o . , o f L i t t l e Rock, were nominated by r e p 3 9 s e c t i o n 4 o f t h e F e d e r a l Reserve Act p r o v i d e d t h a t t h e
b o a r d o f each member bank s h o u l d nominate one c a n d i d a t e f o r
C l a s s A and one c a n d i d a t e f o r C l a s s B d i r e c t o r s h i p .
4 0 s t . L o u i s P o s t - D i s p a t c h . June 5, 1914.
-75r e s e n t a t i v e s o f Group 2 .
president
Group 3 s e l e c t e d Oscar F e n l e y ,
o f t h e N a t i o n a l Bank o f Kentucky,
Louisville,
and former U n i t e d S t a t e s Senator LeRoy P e r c y , o f
Mississippi.
Greenville,
As o n l y one nominee was s e l e c t e d f o r each o f
t h e p l a c e s on t h e board o f d i r e c t o r s at t h e S t . L o u i s meeting
t h e e l e c t i o n was merely a f o r m a l i t y .
A l l t h o s e nominated
were e l e c t e d by t h e p r e f e r e n t i a l b a l l o t s
sent out by t h e O r -
g a n i z a t i o n Committee.
The F e d e r a l Reserve Board announced on September 30, 1914 t h e t h r e e C l a s s C
d i r e c t o r s . W i l l i a m
McC. M a r t i n
was a p p o i n t e d F e d e r a l Reserve Agent and chairman o f t h e board,
W. W. Smith was made deputy F e d e r a l Reserve Agent and v i c e chairman o f t h e b o a r d , and John W. Boehne, o f
Evansville,
I n d i a n a , was s e l e c t e d as t h e remaining C l a s s C.
d i r e c t o r . 4 2
The member banks o f t h e E i g h t h D i s t r i c t
first
were at
c l a s s i f i e d i n t o groups c o n s i s t i n g o f an e q u a l number
^^First Annual Report o f t h e ' F e d e r a l Reserve Bank o f
S t . L o u i s . 1315, p . 5.
^^The f i r s t
men:
board o f d i r e c t o r s c o n s i s t e d o f t h e
following
Class A.
Frank 0 . W a t t s , term e x p i r i n g one year from J a n . 1, 1915.
Oscar F e n l e y , term e x p i r i n g two y e a r s from J a n . 1, 1915.
Walker H i l l , term e x p i r i n g t h r e e years from J a n . 1, 1915.
Class B.
Murray C a r l e t o n , term e x p i r i n g one year from J a n . 1, 1915.
W. B . P l u n k e t t , term e x p i r i n g two y e a r s from J a n . 1, 1915.
Le Roy P e r c y , term e x p i r i n g t h r e e y e a r s from J a n . 1, 1915.
C l a s s C.
W i l l i a m McC. M a r t i n , term e x p i r i n g one year from J a n . 1,
1915.
W a l t e r W. Smith, term e x p i r i n g two y e a r s from J a n . 1, 1915.
J o h n W. Boehne, term e x p i r i n g t h r e e years from J a n . 1, 1915.
-76o f banks as
follows:
No. o f
Banks
Aggregate c a p i t a l and s u r p l u s
o f each member bank
Group No. 1
151
$100,000 or more
Group No. 2
151
Less t h a n $100,000, but more
t h a n §50,030
Group No. 3
151
§50,000 or
As t h e r e s u l t
less
o f an amendment t o paragraph 16 o f
S e c t i o n 4 o f t h e Act o f September 26, 1918, t h e F e d e r a l Reserve Board r e - c l a s s i f i e d t h e banks f o r v o t i n g
purposes.
T h i s change was d e s i g n e d t o g i v e more equal r e p r e s e n t a t i o n t o
t h e s t o c k h o l d i n g banks on t h e b a s i s o f banking c a p i t a l .
Eighth D i s t r i c t
member banks were grouped as f o l l o w s
The
in
1918:^^
Aggregate c a p i t a l and s u r p l u s
o f each member bank
No. o f
Banks
Group No. 1
34
Group No. 2
168
$100,000 t o ^599,000
Group No. 3
307
Below $100,000
I n excess o f
$599,000
T h i s c l a s s i f i c a t i o n has remained unchanged s i n c e 1918 except
f o r t h e number o f banks i n each g r o u p .
The Act d i d not o r i g i n a l l y r e q u i r e t h a t t h e member
banks i n each group e l e c t C l a s s A d i r e c t o r s from men a s s o c i a t e d
w i t h banks a s s i g n e d t o t h e i r own group.
One o f t h e
d i r e c t o r s , Frank 0 . W a t t s , was e l e c t e d by t h e banks
Group 2 , a l t h o u g h he was p r e s i d e n t
w h i c h was a s s i g n e d t o Group 1 .
1918, p r o v i d e d as f o l l o w s :
original
in
o f t h e T h i r d N a t i o n a l Bank,
An amendment o f September 26,
"No o f f i c e r or d i r e c t o r o f a mem-
43AnnuAl Report o f t h e F e d e r a l Reserve Board. 1918, p . 80
-77b e r bank s h a l l be e l i g i b l e t o serve as a C l a s s A d i r e c t o r
un-
l e s s nominated and e l e c t e d by banks which are members o f t h e
same group as t h e member bank o f which he i s an o f f i c e r
d i r e c t o r . A s
a result
or
a Group 2 banker, J . C. U t t e r b a c k ,
o f Paducah, Kentucky, was e l e c t e d t o succeed Mr. Watts
in
December, 1718.
The f i r s t
r e g u l a r meeting o f t h e board o f
directors
was h e l d on October 28, 1914, i n t h e board room o f t h e
M i s s i s s i p p i V a l l e y T r u s t C o . , S t . L o u i s , t h r e e days a f t e r t h e
S e c r e t a r y o f t h e T r e a s u r y had announced t h a t he intended t o
optHi a l l t h e Reserve Banks on November 16, 1914.^^
At
this
meeting a c o r p o r a t e s e a l and by-laws were adopted, and t h e
f o l l o w i n g o f f i c e r s were e l e c t e d :
Hon. R o l l a W e l l s ,
governor;
W i l l i a m W. Hoxton, deputy governor and s e c r e t a r y ; C. E . F r e n c h ,
cashier.
Arrangements were made f o r a v a u l t w i t h t h e M i s s -
i s s i p p i V a l l e y Trust
Company i n o r d e r t o s t o r e t h e g o l d b e i n g
r e c e i v e d i n payment o f t h e f i r s t
installment
of c a p i t a l
stock.
Temporary q u a r t e r s were secured on t h e f o u r t h f l o o r o f t h e
Boatmen's Bank B u i l d i n g ,
l o c a t e d on t h e n o r t h e a s t
O l i v e S t r e e t and Broadway.
corner
of
On November 16, 1914, t h e F e d e r a l
Reserve Bank o f S t . L o u i s opened i t s doors f o r b u s i n e s s
with
a s t a f f w h i c h c o n s i s t e d o f s i x o f f i c e r s and seventeen o t h e r
employees.
The O r g a n i z a t i o n Committee i n i t s proposed b y - l a w s
had suggested an e x e c u t i v e committee o f t h r e e members o f t h e
44The F e d e r a l Reserve A c t . S e c . 4, paragraph 17.
^^Firat AnnuAl Report o f t h e F e d e r a l Reserve Bank o f
S t . L P U l s , 1915, p p . 6, 7 .
1
-78b o a r d , but t h e by-laws adopted at t h e f i r s t
meeting p r o v i d e d
f o r an e x e c u t i v e committee c o n s i s t i n g of t h e g o v e r n o r . Fede r a l Reserve agent, and t h r e e d i r e c t o r s chosen from C l a s s e s
A and B .
B e s i d e s t h e governor and F e d e r a l Reserve Agent,
Walker H i l l ,
F* 0 . W a t t s , and Murray C a r l e t o n were
t o s e r v e on t h e f i r s t
e x e c u t i v e committee*
elected
Shortly after
bank was o r g a n i z e d t h i s committee was g i v e n t h e power t o
the discount
fix
rates.^^
E i g h t days a f t e r t h e opening of t h e Bank i t
augurated l i m i t e d c l e a r i n g f a c i l i t i e s .
the c l e a r i n g f a c i l i t i e s
to collect
the
in-
On December 4, 1914,
were extended, and t h e Bank o f f e r e d
f o r member banks checks and d r a f t s drawn on a l l
member banks i n t h i s d i s t r i c t
F e d e r a l Reserve
B a n k s . ^ ^
and checks and d r a f t s on o t h e r
However, due t o t h e l a c k o f a
development o f a check c l e a r i n g system o u t s i d e o f t h e E i g h t h
District,
t h e S t . L o u i s Bank was soon f o r c e d , on December 18,
1914, t o r e f u s e t o accept f o r c o l l e c t i o n checks drawn on member banks i n t h e d i s t r i c t
b e a r i n g t h e endorsement o f banks
cated i n c i t i e s outside the d i s t r i c t .
The c o l l e c t i o n
e s t a b l i s h e d by t h e Bank i n t h e E i g h t h D i s t r i c t
mandatory on a l l member banks.
was at
lo-
system
first
Ten o f t h e o t h e r F e d e r a l Re-
s e r v e Banks, however, s t a r t e d t h e i r c o l l e c t i o n system on a
voluntary basis.
district
I n o r d e r t o p l a c e t h e banks o f t h e S t .
on t h e same b a s i s as t h e banks o f o t h e r
districts
membership i n t h e c l e a r i n g system was made o p t i o n a l
*6lbid.,
p.
*7lbii.,
pp. 12, 13.
8?
Louis
after
-79May 17, 1915.
At t h a t ttme about twenty per cent o f the mem-
ber banks w i t h d r e w .
A rediscount
r a t e o f 6 per cent f o r paper of
m a t u r i t i e s was e s t a b l i s h e d on t h e opening day.
The
all
first
o f f e r i n g o f paper, amounting t o $1,000,000, was r e c e i v e d two
days a f t e r t h e bank opened.
By January, 1915, lower
rates
f o r paper o f s h o r t e r m a t u r i t i e s were e s t a b l i s h e d , a
per
cent r a t e b e i n g announced f o r paper maturing w i t h i n 30
d a y s . B y
September t h e r a t e had been reduced t o 4 per cent
:for 30, 60, and 90 day p a p e r .
A l s o i n September
preferential
r a t e s were e s t a b l i s h e d f o r 10 day paper, commodity paper, and
trade acceptances.
rediscount
Thus a system o f d i f f e r e n t i a l r a t e s
for different
k i n d s and m a t u r i t i e s o f paper was
e s t a b l i s h e d t h a t p r e v a i l e d f o r a number o f
^Slbid.,
pp. 8,
9.
of
years.
-80CHAPTER I I I
ORGANIZATION AND ADMINISTRATION
The E s t a b l i s h m e n t
o f Branches
I t may be noted from t h e d i s c u s s i o n i n t h e
previous
c h a p t e r t h a t b o t h t h e P r e l i m i n a r y Committee and t h e Reserve
Bank O r g a n i z a t i o n Committee sidestepped t h e q u e s t i o n o f
branches.
The P r e l i m i n a r y Committee s a i d i n i t s
report,
"There i s , however, no purpose t o be
served i n attempting a very c a r e f u l process
o f s u b - d i s t r i c t i n g u n t i l t h e d i s t r i c t s thems e l v e s have been o r g a n i z e d so t h a t what i s
s a i d i n t h i s d i s c u s s i o n has been c o n f i n e d
e n t i r e l y t o t h e d i s t r i c t s themselves w i t h o u t
e f f o r t at t h e d e t a i l e d study o f t h e subd i s t r i c t q u e s t i o n . ***** Care and judgment
s h o u l d be e x e r c i s e d even i n e s t a b l i s h i n g
branches on t h e f i r s t named b a s i s and t h e y
s h o u l d not be c r e a t e d u n l e s s they are a c t u a l l y needed f o r immediate purposes.
Even
i n t h e l a t t e r event, t h e r e should be no undue
h a s t e i n c r e a t i n g them, but t h e headquarters
banks s h o u l d be a l l o w e d t o get a s a t i s f a c t o r y
s t a r t b e f o r e t h e c o m p l i c a t i n g elements i n v o l v e d i n branch o r g a n i z a t i o n are a l l o w e d t o
enter i n t o the problem."!
N e v e r t h e l e s s , t h e problem o f branch banks was one
i n t i m a t e l y connected w i t h t h e number o f r e s e r v e banks t o be
established, the size of d i s t r i c t s ,
the f a c i l i t i e s
district.
and t h e convenience o f
o f t h e R e s e r v e S/stem t o a l l p a r t s o f
T h e r e were many who b e l i e v e d t h a t t h e
each
districts
s h o u l d be l a r g e , but t h a t t h e t e r r i t o r y should be served by
the establishment
o f numbers o f
branches.
The F e d e r a l Reserve Act as o r i g i n a l l y w r i t t e n had
i R o p o r t o f P r e l i m i n a r y Committee on O r g a n i z a t i o n ,
d e n t i a l Wo. 49, p p . 40-42.
Confi-
-81provided t h a t :
Each F e d e r a l Reserve b&^s s h a l l e s t a b l i s h
branch banks w i t h i n t h e F e d e r a l Reserve D i s t r i c t i n which i t i s l o c a t e d and may do so i n
t h e d i s t r i c t o f any F e d e r a l Reserve bank which
may have been suspended. Such branches s h a l l be
operated by a board of d i r e c t o r s under r u l e s and
r e g u l a t i o n s approved by t h e F e d e r a l Reserve
B o a r d . D i r e c t o r s o f branch banks s h a l l possess
tlhe same q u a l i f i c a t i o n s as t h e d i r e c t o r s of the
F e d e r a l Reserve banks. Four o f s a i d d i r e c t o r s
s h a l l be s e l e c t e d by t h e Reserve bank and t h r e e
by t h e F e d e r a l Reserve Board and they s h a l l h o l d
o f f i c e during the pleasure r e s p e c t i v e l y of the
parent bank and t h e F e d e r a l Reserve Board. The
Reserve bank s h a l l designate one o f t h e d i r e c t o r s as manager.^
The f i r s t branch bank was e s t a b l i s h e d at New
O r l e a n s , t h e F e d e r a l Reserve Bank o f A t l a n t a having p e t i t i o n e d
t h e Board f o r a p p r o v a l o f t h e establishment o f a branch i n
that c i t y .
T h i s branch i n s t i t u t i o n opened i t s doors f o r bus-
i n e s s on September 10, 1915 as a f u l l - f l e d g e d branch bank,
h a v i n g as i t s
sub-district
t h e p a r t s o f L o u i s i a n a and M i s s -
i s s i p p i t h a t were i n c l u d e d i n t h e A t l a n t a d i s t r i c t ,
c o u n t i e s i n Alabama.
and two
Undoubtedly, t h e A t l a n t a Bank was o n l y
t o o w i l l i n g t h a t a branch be e s t a b l i s h e d at New Orleans
in
o r d e r t o appease t h e d i s s a t i s f i e d banking i n t e r e s t s o f t h a t
city.
The F e d e r a l Reserve Board, however, regarded t h e New
O r l e a n s branch as e x p e r i m e n t a l .
During t h e year 1916 t h e
g r o s s e a r n i n g s o f t n i s branch were $62,052, and t h e t o t a l
ex-
penses o f o p e r a t i o n $28,645, l e a v i n g a net p r o f i t o f $33,407.
^Section 3 o f t h e o r i g i n a l F e d e r a l Reserve A c t . THie
language o f t h i s s e c t i o n was not c l e a r . Whether t h e Board
had any o t h e r f u n c t i o n t h a n approving r u l e s and r e g u l a t i o n s
f o r t h e o p e r a t i o n o f branches c o u l d not be determined from
t h i s language.
-32This profit
represented a r e t u r n o f 7.5 per cent on i t s
cap-
i t a l o f $445,000, t h e o r e t i c a l l y a l l o t t e d t o the branch bank.
The Board remarked as t o these r e s u l t s ,
" I t i s , however, reasonable t o assume t h a t
much of t h i s p r o f i t would have accrued t o t h e
F e d e r a l Reserve Bank o f A t l a n t a had t h e r e been
no branch at New O r l e a n s , as o n l y §13,871 were
d e r i v e d from l o c a l discount o p e r a t i o n s .
In
v i e w o f t h e experience gained from t h e operat i o n o f t h e one branch bank i n t h e e n t i r e s y s tem, i t would seem w i s e , i n c o n s i d e r i n g t h e
establishment o f other branches, t o t a k e i n t o
account whether t h e r e i s an a c t u a l need f o r
them--immediate or p r o s p e c t i v e — g r o w i n g out
o f t h e added convenience t o t h e member banks
which would n a t u r a l l y f a l l w i t h i n t h e t e r r i t o r y a l l o t t e d t o t h e branch, or whether t h e
a p p l i c a t i o n f o r a branch i s p r i m a r i l y a manifestation of l o c a l c i v i c pride."3
I n I t s r e p o r t f o r t h e year 1915 the Board suggested
as an a l t e r n a t i v e t o t h e expensive, f u l l y - e q u i p p e d branch
bank, t h e establishment
o f o f f i c e s or agencies t o perform
c e r t a i n s e r v i c e s where i t
t h e member banks.
would be o f p a r t i c u l a r v a l u e t o
I n accordance w i t h t h i s recommendation t h e
S t . L o u i s Bank opened an agency i n Memphis on September 25,
1916, t o h a n d l e c o t t o n paper d u r i n g t h e crop-moving season.4
N o t e s , t r a d e acceptances, and bank acceptances, secured by
warehouse r e c e i p t s i s s u e d by t h e Memphis T e r m i n a l C o r p o r a t i o n ,
were d i s c o u n t e d f o r member banks and t h e c o l l a t e r a l h e l d by
t h e agent o f t h e Bank i n Memphis.
S u b s t i t u t i o n s o f one r e -
c e i p t f o r another were t h u s p e r m i t t e d without d e l a y and i n convenience.
The paper f o r r e d i s c o u n t was sent d i r e c t
to
^Annual Renort o f t h e F e d e r a l Reserve Board. 1916, p . 15
^Annual Report o f t h e F e d e r a l Reserve Bank o f S t .
1916, p. 13
Louis,
-83t h e S t . L o u i s Bank, but t h e warehouse r e c e i p t s were h e l d
Memphis.
From t h e t i m e o f t h e opening o f t h e agency
in
until
December 30, 1916, paper t o t h e amount o f 31,640,000 was r e d i s c o u n t e d t h e c o t t o n warehouse r e c e i p t s f o r which were h e l d
i n Memphis.
The success o f t h i s experiment l e d t o i t s
con-
t i n u a n c e t h e f o l l o w i n g year d u r i n g t h e c o t t o n season, which
l a s t e d from about t h e b e g i n n i n g o f October u n t i l
February.^
The branch problem soon came up i n t h e S t .
district.
On J u l y 5, 1916 t h e member banks o f
Louisville
sent a p e t i t i o n t o t h e board o f d i r e c t o r s o f t h e S t .
Reserve Bank,asked f o r t h e establishment
Bank at L o u i s v i l l e ,
Louis
Louis
o f a branch o f t h e
and requested a h e a r i n g . ^
The h e a r i n g was
h e l d on September 20, 1916, i n S t . L o u i s , at which t i m e a
committee from L o u i s v i l l e , headed by Embry L .
president
Swearingen,
o f t h e F i r s t N a t i o n a l Bank o f L o u i s v i l l e ,
arguments f o r t h e e s t a b l i s h m e n t
presented
o f a branch i n t h a t
city.
No
d e c i s i o n on t h e p e t i t i o n was made by t h e board o f t h e & t . Louis
Bank, but a c o n f e r e n c e was c a l l e d t o meet on December 21, 1916,
w i t h t h e F e d e r a l Reserve Board i n Washington.
The F e d e r a l Reserve Board had as yet adopted no
p o l i c y w i t h regard t o t h e establishment
o f branches.
In fact,
t h e B o a r d had no c l e a r i d e a as t o what a u t h o r i t y i t had i n
this
c o n n e c t i o n , except t o l a y down r u l e s and r e g u l a t i o n s
the operation of branches.
S e c t i o n 3 o f t h e Act was not
c l e a r as t o whether t h e B o a r d might a u t h o r i z e t h e
3 l b i . d . , 1917, p .
6 l b i d , , 1916, p .
14.
13.
for
establish-
-84ment o f a b r a n c h except upon t h e i n i t i a t i v e o f a F e d e r a l Res e r r e Bank.
The L o u i s v i l l e p e t i t i o n was t h e f i r s t
one r e -
c e i v e d by t h e Board a f t e r t h e opening o f t h e f i r s t
branch
bank at New O r l e a n s .
therefore,
The L o u i s v i l l e h e a r i n g s a r c ,
i n t e r e s t i n g as t o t h e a t t i t u d e and p o l i c y o f t h e Board at
this
time.
On t h e day b e f o r e t h e h e a r i n g i n Washington t h e
b o a r d o f d i r e c t o r s o f t h e S t . L o u i s Bank passed a r e s o l u t i o n
o p p o s i n g t h e c r e a t i o n o f a branch at
'
Louisville:
Whereas, t h e q u e s t i o n o f t h e e s t a b l i s h m e n t ,
o f b r a n c h banks i s one o f broad g e n e r a l p o l i c y ,
and t h i s board has been g i v i n g the q u e s t i o n o f
t h e e s t a b l i s h m e n t o f a branch bank i n t h i s d i s t r i c t i t s c a r e f u l c o n s i d e r a t i o n , and
Whereas, at t h e recent conference o f Fede r a l Reserve Agents t h e o p i n i o n was expressed
t h a t branches were not needed at t h e present
t i m e and, t h e r e f o r e , s h o u l d not be e s t a b l i s h e d ,
, and
Whereas, at t h e recent c o n f e r e n c e o f
Governors t h e o p i n i o n was a l s o expressed t h a t
branches were not needed at t h e present time
and t h a t a l l t h e needs o f member banks c o u l d be
a d e q u a t e l y c a r e d f o r by agencies and t h a t ,
t h e r e f o r e , at t h e present t i m e branches should
n o t be e s t a b l i s h e d , and
Whereas, t h e e x p e r i e n c e o f t h e F e d e r a l Res e r v e Bank o f S t . L o u i s i n Memphis has been t h a t
t h e r e d i s c o u n t s o f member banks l o c a t e d i n t h a t
c i t y can be passed on so promptly as t o g i v e
e n t i r e s a t i s f a c t i o n t o member banks and t h a t ,
t h r o u g h an agency, t h e present needs o f member
banks can be a d e q u a t e l y cared f o r , and
Whereas, a c o n f e r e n c e has been c a l l e d on t h e
s u b j e c t o f e s t a b l i s h i n g a branch bank at L o u i s ville,
T h e r e f o r e , Be I t R e s o l v e d , t h a t t h e Chairman
o f t h i s Board be a p p o i n t e d t o r e p r e s e n t t h i s
bank a t t h a t c o n f e r e n c e and t h a t he be i n s t r u c t e d
t o p r e s e n t t o t h e c o n f e r e n c e , as t o t h e judgment
o f t h e members o f t h i s B o a r d , t h a t , at t h e present
t i m e , c o n d i t i o n s do not warrant t h e e s t a b l i s h m e n t
o f a b r a n c h bank i n t h i s d i s t r i c t , though f i n a l
a c t i o n on t h e p r o p o s a l be postponed u n t i l a f t e r a
-85r e p o r t has been r e c e i v e d from t h e s a i d conference.'
L o u i s v i l l e i n t e r e s t s presented at t h e h e a r i n g b e f o r e
t h e B o a r d f o u r main arguments i n support o f t h e i r
f o r a b r a n c h bank.
paper o r i g i n a t i n g
First,
i t was a s s e r t e d t h a t much o f t h e
i n t h e L o u i s v i l l e area was o f a p e c u l i a r
n a t u r e , whiskey and t o b a c c o paper.
ville
A l o c a l board i n L o u i s -
would be much b e t t e r prepared t o pass on such paper
rediscount,
it.
petition
for
as th^ l o c a l bankers were t h o r o u g h l y f a m i l i a r
Second, t h e y s t a t e d t h a t bank b a l a n c e s were b e i n g
v e r t e d from L o u i s v i l l e banks t o S t . L o u i s banks as t h e
with
diresult
o f p r e s s u r e e x e r t e d on member banks i n western Kentucky.
In-
s t a n c e s were c i t e d i n which r e p r e s e n t a t i v e s o f S t . L o u i s banks
had s o l i c i t e d b u s i n e s s i n t h e L o u i s v i l l e t e r r i t o r y by a s s e r t i n g t h a t t h e s e banks c o u l d b e t t e r represent them because o f
t h e i r l o c a t i o n i n S t . L o u i s , t h a t t h e y c o u l d get b e t t e r
v i c e from t h e Reserve Bank by "having a f r i e n d i n
Third,
ser-
court".
i t was a l l e g e d t h a t L o u i s v i l l e bankers found i t
necessary
t o keep l a r g e r b a l a n c e s w i t h S t . L o u i s banks, and w i t h t h e
F e d e r a l Reserve Bank, t h a n s h o u l d be r e q u i r e d .
I n order t o
put themselves on an e q u a l b a s i s w i t h S t . L o u i s banks,
L o u i s v i l l e bankers were r e q u i r e d t o keep excess r e s e r v e s
with
t h e F e d e r a l Reserve Bank f o r t h e purpose o f o b t a i n i n g immediate credit
f o r d r a f t s drawn on L o u i s v i l l e banks i n f a v o r
t h e F e d e r a l Reserve Bank.
F i n a l l y , the L o u i s v i l l e
of
bankers
T R e s o l u t i o n passed by t h e Board o f D i r e c t o r s , S t . L o u i s Res e r v e Bank, on December 20, 1916.
I n t r o d u c e d by W i l l i a m McC.
M a r t i n i n t h e h e a r i n g on t h e p e t i t i o n o f L o u i s v i l l e b a n k e r s .
-86o f f e r e d t o guarantee t h e expenses o f a branch bahk so t h a t
would not be a detriment t o t h e Reserve Bank.
it
I t was
suggested t h a t L o u i s v i l l e be assigned a d i s t r i c t
containing
35 member banks i n western Kentucky and southern I n d i a n a ,
T^Rich would p r o v i d e a c a p i t a l o f $502,006, and r e s e r v e dep o s i t s o f $2,072,191.
I t was a l s o s t a t e d t h a t a working
agreement w i t h t h e L o u i s v i l l e C l e a r i n g House would make t h e
expenses o f t h e branch r e a s o n a b l e .
T h e r e was some evidence t h a t d i s s a t i s f a c t i o n w i t h
d i s t r i c t i n g arrangements p l a y e d an important p a r t
s i r e f o r a b r a n c h bank.
Representative Sherley,
remarked d u r i n g t h e h e a r i n g ,
arbitrarily
i n t h e deo f Kentucky,
"We f e e l our s t a t e has Just been
cut i n t w o , f o r t h e r e i s no p o s s i b l e
combination
t h t ^ ci^^Ld h&ve been as u n f o r t u n a t e f o r L o u i s v i l l e as t h e one
9
she drew i n t h e l o t t e r y o f d i v i s i o n o f d i s t r i c t s . "
It
be remembered t h a t t h e r e was evidence t h a t L o u i s v i l l e
will
pre-
f e r r e d t o be i n c l u d e d a l o n g w i t h t h e r e s t o f Kentucky i n a
district
i n w h i c h C i n c i n n a t i was t h e r e s e r v e c e n t e r .
was i n d i c a t e d i n t h e h e a r i n g a b e l i e f by L o u i s v i l l e
There
interests
t h a t I n d i a n a and Kentucky were not adequately r e p r e s e n t e d on
t h e b o a r d o f d i r e c t o r s o f t h e S t . L o u i s Reserve Bank.
W i l l i a m McC. M a r t i n ,
chairman o f t h e board o f t h e
S t . L o u i s Reserve Bank, made an answer t o c e r t a i n o f t h e
H e a r i n g b e f o r e F e d e r a l Reserve Board on b e h a l f o f C i t y o f
L o u i s v i l l e p e t i t i o n i n g f o r a b r a n c h F e d e r a l Reserve Bank o f
t h e S t . L o u i s Reserve d i s t r i c t , Washington, Dec. 21, 1916.
These are stenographic minutes.
Material for a l l t h i s disc u s s i o n o f t h e L o u i s v i l l e c l a i m s was t a k e n from t h e s e m i n u t e s .
p.
46.
-87Louisville
arguments.
He i n t r o d u c e d evidence showing t h a t
(HY^f 12 out o f 59 member banks i n Kentucky, e x c l u d i n g L o u i s ville,
had d e p o s i t s i n S t . L o u i s banxs amounting t o
$96,115, w h i l e 45 o f t h e s e banks had d e p o s i t s i n
amounting t o over
ville
000,000.
only
LouisvLlle
As t o t h e argument t h a t
Louis-
bar^is vMire r e q u i r e d t o Keep excess r e s e r v e s w i t h t h e
Reserve Bank, M a r t i n produced t h e f o l l o w i n g f i g u r e s as t o
r e q u i r e d and a c t u a l
reserves:
St. Louis
banks
R e q u i r e d r e s e r v e s (11,014,000
A c t u a l reserves
13,085,000
Louisville
banks
A l l other
banks
$1,382,030
1,924,000
$9,228,000
10,330,000
M a r t i n s t a t e d t h e p o s i t i o n of t h e Reserve Bank by
making s e v e r a l p o i n t s .
First,
t h e establishment
o f an
agency i n L o u i s v i l l e would p r o v i d e every c l e a r i n g f a c i l i t y
was needed o r wanted.
Second, t h e experience gained at Mem-
p h i s i n d i c a t e d t h a t paper f o r r e d i s c o u n t
c o u l d be passed on so
p r o m p t l y as t o make unnecessary any l o c a l board f o r t h a t
pose.
that
pur-
T h i r d , w h i l e t h e System was o n l y two years o l d he d i d
not t h i n k i t
d e s i r a b l e t o e s t a b l i s h a branch t o c r e a t e bus-
i n e v s t h a t d i d not a l r e a d y e x i s t .
L o u i s v i l l e had contended
tlhat a b r a n c h bank c o u l d c r e a t e much a d d i t i o n a l
business.
P a u l M. Warburg p r e s i d e d at t h e h e a r i n g i n t h e absence o f Governor H a r d i n g o f t h e B o a r d .
The members o f t h e
Board agreed t h a t t h e i s s u e was whether any branches
should
be e s t a b l i s h e d at t h i s t i m e , t h a t
had
l e g i t i m a t e c l a i m s , but t h a t i f
a number o f c i t i e s
one branch was e s t a b l i s h e d
L o u i s v i l l e a number o f o t h e r c i t i e s would a l s o have t o be
in
-98g i v e n t h e same p r i v i l e g e .
They s t a t e d t h e i r b e l i e f
that
the
System needed more f i n a n c i a l s t r e n g t h b e f o r e branches were
instituted,
as a l l t h e Reserve Banks were h a v i n g
meeting expenses and d i v i d e n d s .
regarding the St. Louis
Warburg remarked
difficulty
informally
situation,
" S t . L o u i s i s f a r away from earning i t s d i v i d e n d .
TRhat S t . L o u i s and o t h e r banks are d o i n g — t h e y
are l i v i n g on n o t h i n g . The l o c a l b u s i n e s s i s
p r a c t i c a l l y o n l y t e n per cent o f t h e b u s i n e s s
t h e y are d o i n g . They have i n v e s t e d some money
i n government b o n d s - - t h a t i s not l o c a l b u s i n e s s .
The r e s t t h e y a r e g e t t i n g through New Y o r k .
In
o r d e r t o keep S t . L o u i s going t h e r e i s not
enough l o c a l b u s i n e s s t o earn a f r a c t i o n o f t h e
d i v i d e n d o r t h e running expenses o f S t . L o u i s .
And, s t i l l , you come t o us and say i n t h e d i s t r i c t which i s perhaps the poorest o u t s i d e o f
C a l i f o r n i a , we should go ahead and open a
b r a n c h , and i f we do i t t h e r e , we are i n c r e a s i n g
the charges."10
Warburg o b j e c t e d s t r o n g l y t o t h e p r o p o s a l o f t h e
L o u i s v i l l e bankers t h a t t h e y guarantee t h e expenses o f t h e
branch.
He p o i n t e d out t h a t f o r c i n g b u s i n e s s t o s u s t a i n a
b r a n c h at L o u i s v i l l e would l i m i t the power o f t h e Reserve
Bank t o c o n t r o l c r e d i t .
It
i s w e l l known t h a t Warburg b e -
l i e v e d t h a t a c e n t r a l bank c o u l d not p r o p e r l y perform i t s
functions i f
it
was guided by a d e s i r e f o r p r o f i t s .
Several
t i m e s d u r i n g t h e e a r l y y e a r s o f t h e F e d e r a l Reserve System
he p u b l i c l y urged t h e Reserve Banks not t o attempt t o
earn
t h e i r d i v i d e n d s by encouraging o r s t i m u l a t i n g a demand f o r
credit.ii
iOnia.,
pp.
60-61.
^^One o f t h e s e o c c a s i o n s was on October 22, 1915, i n a
speech t o t h e Conference o f Governors at M i n n e a p o l i s . He r e marked i n p a r t , " E a r n i n g c a p a c i t y must never be c o n s i d e r e d
t h e t e s t o f t h e e f f i c i e n c y o f F e d e r a l Reserve Banks.
Per
s o n a l l y I s h o u l d have f e l t h e a r t i l y ashamed had a l l our banks,
-89To the L o u i s v i l l e
complaint o f l o s i n g
balances,
F . A . Delano, a member o f t h e Board, r e p l i e d t h a t a l l
banks
i^ere l o s i n g b a l a n c e s as r e s e r v e s were being t r a n s f e r r e d t o t h e
Reserve Banks, t h a t t h e l a v intended t h a t s m a l l banks s h o u l d
be f r e e d from t h e n e c e s s i t y o f keeping i d l e b a l a n c e s
c i t y banks.
tlie tntent
The bankers o f L o u i s v i l l e bad contended t h a t
o f t h e Act was d e c e n t r a l i z a t i o n ,
tablishment
with
and t h a t t h e e s -
o f branches would c o n t r i b u t e t o t h a t
Warburg r e p l i e d b r i e f l y t o t h i s ,
end.
"You do not d e c e n t r a l i z e by
h a v i n g 500 c e n t e r s — t h e r e you have none at
all."
F u r t h e r evidence t h a t the Board was not
12
convinced
o f t h e d e s i r a b i l i t y o f branches at t h i s time i s a remark made
by Delano r e g a r d i n g t h e New Orleans bahk,
"We e s t a b l i s h e d a branch i n Kew O r l e a n s f o r a
y e a r . That b r a n c h was a p r e t t y heavy drag
on t h e A t l a n t a Bank. Even now, though i t i s
c o n t r i b u t i n g t o t h e A t l a n t a B&nx, t h e A t l a n t a
F e d e r a l Reserve Bank c o n s i d e r s t h a t i t c o u l d
do e v e r y t h i n g t h a t i t does w i t h t h a t b r a n c h ,
i f i t had a good agent on t h e spot w i t h t e l e phone communication ^ i t h t h e parent bank.
So, w i t h t h e n i g h t l e t t e r s e r v i c e , and a l l
t h a t , t h e y c o u l d perform every f u n c t i o n at
an expense o f perhaps o n e - t h i r d o f what t h e y
a r e now s p e n d i n g . " l 3
c o n s i d e r i n g t h e c i r c u m s t a n c e s under which they began operat i o n s , earned t h e i r d i v i d e n d s i n t h e past y e a r .
Such an e a r n i n g , w i t h a l l i t i m p l i e d , would have been p r o o f t h a t t h e y had
c o m p l e t e l y misunderstood t h e i r proper f u n c t i o n and o b l i g a t i o n s
. . . . . . . . . . U n l e s s i n t i m e s o f great ease o f money F e d e r a l Res e r v e Banks withdraw t h e b u l k o f t h e i r money from a c t u a l employment, t h e y can not p o s s i b l y be prepared t o have t h e i r
funds a v a i l a b l e at t h e t u r n o f t h e t i d e when t h e i r b e n e f i c i a l
powers s h o u l d make themselves f e l t . "
The F e d e r a l Reserve
B u l l e t i n . November, 1915.
i ^ H e t r i n g b e f o r e t h e F e d e r a l Reserve Board on b e h a l f
C i t y o f L o u i s v i l l e , o o . c i t . . p . 81.
i 3 i a i d . , p p . 64-65.
of
-90The h e a r i n g c l o s e d a f t e r L o u i s v i l l e was g i v e n an
assurance t h a t e v e n t u a l l y a branch bang would be e s t a b l i s h e d
t h e r e , l> t h a t no d e f i n i t e t i m e c o u l d be f i x e d as t o t h e
development o f c o n d i t i o n s s u f f i c i e n t t o warrant i t .
stated that
a development o f business i n b a n k e r s '
Warburg
acceptances
Twould b r i n g a need f o r branches, c i t i n g t h e f a c t t h a t New
O r l e a n s and Memphis banks had been buying acceptances
cotton.
against
So, f o r t h e t i m e , t h e problem o f branches i n t h e
Eighth D i s t r i c t
was dropped.
I n J u n e , 1917, t h e F e d e r a l Reserve Act was amended
t o c l a r i f y t h e p r o v i s i o n s r e g a r d i n g t h e establishment
branches.
of
S e c t i o n 3 o r i g i n a l l y p r o v i d e d t h a t each F e d e r a l Re-
s e r v e Bank " s h a l l e s t a b l i s h branch banks" t o be "operated by
a board o f d i r e c t o r s under r u l e s and r e g u l a t i o n s approved by
t h e F e d e r a l Reserve B o a r d . T h e
S e c t i o n , as amended, p r o -
v i d e s t h a t t h e F e d e r a l Reserve Board "may permit o r
require"
any F e d e r a l Reserve Bank t o e s t a b l i s h branches w i t h i n
district,
and t h a t
its
such b r a n c h e s , s u b j e c t t o such r u l e s and
r e g u l a t i o n s as t h e F e d e r a l Reserve Board may p r e s c r i b e ,
shall
be o p e r a t e d under t h e s u p e r v i s i o n o f a board o f d i r e c t o r s
c o n s i s t o f not more t h a n seven o r l e s s t h a n t h r e e
to
directors,
o f Tdhom a m a j o r i t y o f one s h a l l be a p p o i n t e d by t h e F e d e r a l
Reserve Bank o f t h e d i s t r i c t
t h e F e d e r a l Reserve B o a r d .
In A p r i l ,
and t h e remaining d i r e c t o r s by
15
1917, t h e U n i t e d S t a t e s e n t e r e d t h e great
l A A n D u a l Report o f t h e F e d t r a l Reserve B o a r d . 1917.
p p . 24-25.
i S p h e F e d e r a l R t a a r v e A c t . S e c . 3, paragraph 1 .
-91European c o n f l i c t .
The most important f u n c t i o n o f t h e Fed-
e r a l Reserve System became t h a t o f f i s c a l agent t o t h e govern!B&nt.
The System was m o b i l i z e d , as were other American
stitutions,
in-
t o a i d and d i r e c t t h e f i n a n c i n g o f American
p a r t i c i p a t i o n i n t h e war.
I n t h i s new s i t u a t i o n t h e
services
idhich b r a n c h banks c o u l d perform became more i m p o r t a n t .
i s a l s o e v i d e n c e t h a t t h e Board regarded t h e d i s c u s s i o n
There
in
c o n n e c t i o n w i t h t h e amendment o f June, 1917, as something o f
a mandate t o approve t h e establishment o f a d d i t i o n a l b r a n c h e s .
The Board a u t h o r i z e d d u r i n g 1917 branches at Omaha,
Louisville,
P o r t l a n d , S e a t t l e , Spokane, P i t t s b u r g h , C i n c i n n a t i ,
Detroit,
Baltimore,
begin
and Denver.^^ A l l t h e s e branches d i d not
o p e r a t i o n i n 1917, o n l y t h e ones at L o u i s v i l l e , Omaha, P o r t l a n d , S e a t t l e , and Spokane h a v i n g been opened f o r b u s i n e s s by
t h e end o f t h a t
year.
On J u l y 3, 1917, t h e board o f d i r e c t o r s o f t h e Fede r a l Reserve Bank o f S t . L o u i s g r a n t e d a p e t i t i o n f o r a
b r a n c h bank a t L o u i s v i l l e , w h i c h was approved by t h e F e d e r a l
Reserve B o a r d .
I t was d e c i d e d t o c r e a t e a board o f
five
d i r e c t o r s f o r t h e new bank, t h e Act t h e n p e r m i t t i n g a board
17
o f t h r e e , f i v e , o r seven.
The S t . L o u i s Bank e l e c t e d t h r e e
directors,
and t h e B o a r d a p p o i n t e d two d i r e c t o r s .
18
'Fhe
i ^ A n n u a l Report o f t h e F e d e r a l Reserve B o a r d . 1917, p . 25
^^The amended s e c t i o n p r o v i d e d f o r
t h r e e t o seven members, but t h e f a c t
was a u t h o r i z e d t o a p p o i n t a m a j o r i t y
t o c r e a t e a board o f t h r e e , f i v e , or
a board o f d i r e c t o r s o f
t h a t t h e Reserve Bank
o f one made i t n e c e s s a r y
seven members.
i S r h e d i r e c t o r s making up t h e f i r s t board were: George W.
N o r t o n , d i r e c t o r o f t h e N a t i o n a l Bank o f Commerce, L o u i s v i l l e ,
-92t e r r i t o r y assigned the new branch consisted of a l l that part
o f Kentucky i n the E i g h t h D i s t r i c t , and t h i r t e e n counties
I n d i a n a * i 9
in
The bank opened f o r business on December 3, 1917.
On June 5, 1918, the S t . Louis Bank granted a
p e t i t i o n f o r a branch bank at Memphis, which was l a t e r
approved by the F e d e r a l Reserve Board.
The committee appointed
t o consider t h e a p p l i c a t i o n o f Memphis, which c o n s i s t e d of
TPilliam McC. M a r t i n , F . W. Hoxton, and J . G. McConkey, rendered a report g i v i n g t h r e e reasons f o r recommending favorable
20
a c t i o n on th^ p e t i t i o n .
F i r s t , the committee noted the use-
f u l s e r v i c e s performed by the agency at Memphis i n s t i t u t e d t o
handle c o t t o n warehouse r e c e i p t s .
T h i s agency had been i n
o p e r a t i o n during two c o t t o n seasons, and had undoubtedly
played a part i n encouraging state banks t o enter the System.
P r a c t i c a l l y a l l t h e e l i g i b l e s t a t e banks i n Memphis had by
t h i s time become members o f the System.
Second, the committee
thought t h a t f a c i l i t i e s f o r c l e a r i n g checks would be of
W. C . Montgomery, v i c e - p r e s . o f the F i r s t - H a r d i n N a t i o n a l
Bank, E l i z a b e t h , K y . , W. P . X i n c h e l o e , a n a t i o n a l bank exami n e r o f L o u i s v i l l e , F . M. Sackett, p r e s . of the L o u i s v i l l e
Board o f T r a d e , and Charles E. Hoge, p r e s . o f t h e F i r s t
State N a t i o n a l Bank, F r a n k f o r t , Ky. Kincheloe became
Manager.
^^The t e r r i t o r y assigned L o u i s v i l l e as of March 1. 1938
c o n s i s t e d o f t h a t part o f Kentucky i n the 8th D i s t r i c t ,
except t h e town o f M o r g a n f i e l d , and the f o l l o w i n g counties i n
Indiana: C l a r k , Crawford, Dubois, F l o y d , H a r r i s o n , Jackson,
J e f f e r s o n , Lawrence, M a r t i n , Orange, P e r r y , S c o t t , S w i t z e r l a n d , and Washington.
20Report o f the Committee o f t h e F e d e r a l Reserve Bank of
S t . L o u i s on t h e A p p l i c a t i o n o f Memphis, Tenn., f o r a branch
bank. T h i s report i s contained i n t h e f i l e s o f miRutes o f
the Board o f Governors o f the F e d e r a l Reserve System.
-93Advantage t o the Memphis banks i n that th$y<hoald reduce f l o a t
and add a d d i t i o n a l par p o i n t s .
I t was also pointed out that
the branch should be able t o reduce expense i n the handling
of c o i n i n t h i s t e r r i t o r y .
The t h i r d reason was one that
v o l v e d Arkansas banking law.
in-
The Arkansas banking statutes
r e q u i r e d that banks c a r r y i n g reserves f o r Arkansas banks had
t o keep an 3 per cent cash reserve i n t h e i r v a u l t s .
The
3ank Commissioner ha^ r u l e d , however, that i n c i t i e s where
t h e r e iM^ a F e d e r a l Reserve bank or branch, deposits with
such Reserve banks would be considered as equivalent t o cash
i n the v a u l t .
As the banks i n Memphis h e l d considerable
re-
serves f o r Arkansas banks, the establishment of a branch
would r e l i e v e them from t h e n e c e s s i t y of h o l d i n g t h i s 3 per
ciMTt v a u l t r e s e r v e .
The committee concluded i t s report by
i n d i c a t i n g t h a t f o r the four and one-half month period,
December 1, 1917 t o A p r i l 15, 1918, the revenue from r e d i s c<MHits of Memphis banks had been $69,669.
As the estimated
expenses o f o p e r a t i o n o f a Memphis branch, i n c l u d i n g dividend
requirements, f o r t h a t p e r i o d were $22,648, a net g a i n of
$47,201 would have r e s u l t e d .
The committee thought that t h e
added b e n e f i t s t h a t would accrue t o Memphis banks might
set t h e i n c r e a s e d c o s t s o f
off-
operation.
The Memphis branch opened f o r business on September 2, 1918.^*^
liAnr^^I
1918, p . 22.
The S t . L o u i s Bank e l e c t e d three d i r e c t o r s .
o f t h e F e d e r a l Reservt Ban* o f S t ,
Souit,
-94and t h e F e d e r a l Reserve Board appointed two directors.^^
John J . H e f l i n became t h e f i r s t manager of the Memphis branch.
The t e r r i t o r y now assigned t o the Memphis bank includes those
p a r t s o f M i s s i s s i p p i and Tennessee i n the Eighth D i s t r i c t ,
and 10 counties i n
A
r
k
a
n
s
a
s
.
S h o r t l y a f t e r the d e c i s i o n on the Memphis branch
bank, on June 19, 1918, a p e t i t i o n t o e s t a b l i s h a branch bank
i n L i t t l e Rock was
g r a n t e d . ^ ^
The S t . Louis Bank e l e c t e d
t h r e e d i r e c t o r s , and the Board appointed two directors,^^
John M. Davis became the f i r s t
manager.
The t e r r i t o r y now
assigned the L i t t l e Rock branch c o n s i s t s of t h e State of
Arkansas w i t h the exception o f 24 c o u n t i e s .
26
The war-time expansion i n c r e d i t provided earnings
f o r t h e new branches which f a r exceeded the estimates made
^^The f i r s t board o f the Memphis branch bank c o n s i s t e d of
the f o l l o w i n g : John J . H e f l i n , J . D. McDowell, R. B.
Snowden, T . K. R i d d i c k , and 6. E . Ragland.
^^As o f March 1, 1938, the t e r r i t o r y of the Memphis branch
c o n s i s t e d o f that part o f M i s s i s s i p p i i n the D i s t r i c t ,
t h a t part o f Tennessee i n the D i s t r i c t w i t h the exception
of Union C i t y and P a r i s , and t h e f o l l o w i n g counties i n
Arkansas: Craighead, C r i t t e n d e n , Cross, Lawrence, Lee,
M i s s i s s i p p i , P h i l l i p s , P o i n s e t t , S t . F r a n c i s , and Woodruff.
24Annual Report o f t h e F e d e r a l Reserve Bank o f S t . L o u i s .
1918. pp. 22, 23.
25The f i r s t board o f t h e L i t t l e Rock branch bank c o n s i s t e d
o f t h e f o l l o w i n g : John M. Davis, Edward Cornish, W. L .
Hemingway, Moorehead W r i g h t , and George W. Rogers.
^^As o f March 1, 1938, the t e r r i t o r y of the L i t t l e Rock
branch c o n s i s t e d o f a l l o f the State of Arkansas except the
f o l l o w i n g c o u n t i e s : B a x t e r , Benton, Boone, C a r r o l l , Clay,
Craighead, Crawford, C r i t t e n d e n , Cross, F u l t o n , Greene,
Lawrence, Lee, Madison, Marion, M i s s i s s i p p i , P h i l l i p s ,
P o i n s e t t , Randolph. S t . F r a n c i s , Sebastian, Sharp, Washington,
Woodruff, t h e f o l l o w i n g towns are a l s o excluded: DeValls
B l u f f (assigned t o Memphis), Mena, and Newport.
-95b e f o r e t h e y were e s t a b l i s h e d .
For the f i r s t
f u l l year of
o p e r a t i o n , 1918, the gross earnings of the L o u i s v i l l e
its
branch
amounted t o 3166,666, the expenses were (61,841, and t h e net
27
e a r n i n g s , $104,825.
During the year t h e L o u i s v i l l e branch
had d i s c o u n t e d Rx' member banks paper amounting t o
$83,438,291,
and had purchased $804,907 o f bankers' acceptances.
The Mem-
p h i s bank was i n o p e r a t i o n o n l y f o u r months by the end o f
1918, but i t s
earnings amounted t o $155,974.
Net earnings o f
$87,634 were l e f t a f t e r t h e d e d u c t i o n o f expenses o f
t68,340.
During t h e four-month p e r i o d the branch d i s c o u n t e d
§71,166,365 o f paper,
acceptances.
and purchased $820,489 o f bankers'
A l l t h r e e branches were i n o p e r a t i o n d u r i n g t h e
whole o f t h e year 1919, the L i t t l e Rock branch having been
opened on January 6, 1919.
The volume of o p e r a t i o n s and
e a r n i n g s i n c r e a s e d c o n s i d e r a b l y over t h o s e o f 1918.
T a b l e 22
g i v e s a comparison o f t h e o p e r a t i o n s o f t h e t h r e e branches
d u r i n g 1919.
At the end o f t h i s year 95 banks were assigned
t o t h e L o u i s v i l l e branch, 42 banks t o the Memphis branch,
and 57 banks t o t h e L i t t l e Rock branch.
Two types o f branches have been e s t a b l i s h e d by t h e
F e d e r a l Reserve banks.
Those e s t a b l i s h e d at
Cincinnati,
P i t t s b u r g h , Birmingham, J a c k s o n v i l l e , N a s h v i l l e and Oklahoma
C i t y do not d i s c o u n t paper, but c o n f i n e t h e i r o p e r a t i o n s
t h e c l e a r i n g and c o l l e c t i o n o f checks, and t o
supplying
^TAnnual R i n o r t o f t h e F e d e r a l Reserve Bank o f S t .
1919, pp . 15-13.
to
Louis,
T a b l e 22
Volume*of t h e D i f f e r e n t C l a s s e s o f Paper D i s c o u n t e d f o r Member Banks by
t h e F e d e r a l Reserve Bank o f S t . L o u i s and i t s Branches, 1919*
(Thousands o f
Member banks* c o l l a t e r a l n o t e s
secured by war o b l i g a t i o n s
dollars)
St. Louis
parent
Louisville
Branch
Memphis
Branch
$1,114,791
$ 431,333
3 237,353
3,743
65
235
Member banks* c o l l a t e r a l
n o t e s o t h e r w i s e secured
Customers* paper secured by
Government war o b l i g a t i o n s
L i t t l e Rock
Branch
a
78,637
!
15,917
2,999
12,032
2,034
A g r i c u l t u r a l and l i v e s t o c k paper
2,347
15
550
850
T r a d e Acceptances
2,717
307
2,140
2,282
111.009
31.217
33.935
12^473
$1,251,524
466,436
236,295
96,326
Other
discounts
Totals
B a n k e r s ' Acceptances Purchased by Branches
By L o u i s v i l l e
ffPH
$1,074
branch
By Memphis branch
from members
By L i t t l e Rock branch
from members
275
3
* Annual Report o f t h e F e d e r a l Reserve Bank o f S t . L o u i s . 1919, pp. 31-34.
-97currency t o the member banks i n the branch t e r r i t o r y .
28
Tl^e
other branches render p r a c t i c a l l y the Si&ae s e r v i c e s t o the
member banks assigned t o them as does the parent bank.
These
branch banks carry the reserves of member banks on t h e i r books,
discount paper f o r member banks, p a r t i c i p a t e d i r e c t l y i n i n t e r district
c l e a r i n g settlements, as w e l l as perform the routine
f u n c t i o n s of supplying c o i n and currency, and c o l l e c t i n g and
c l e a r i n g checks.
The branch banks of the Eighth D i s t r i c t , Memphis,
Louisville,
and L i t t l e Rock, have as complete powers and
f u n c t i o n s as any of the branch banks i n other d i s t r i c t s .
discount paper f o r the member banks i n the t e r r i t o r y
They
assigned
them, although the d i r e c t o r s o f the parent bank must approve
29
these d i s c o u n t s .
Reserves of member banks are c a r r i e d on
the books o f the branch, and the routine f u n c t i o n s of a
serve bank, which i n c l u d e the c l e a r i n g and c o l l e c t i o n of
checks, and the supplying of currency, are a l s o performed.
The f o l l o w i n g s e r v i c e s are a l s o provided member banks i a tlae
branch t e r r i t o r y :
the t r a n s f e r of funds, safe-keeping of
33A^n^al*ReBort o f the F e d e r a l Reserve Board. 1920, p. 92.
^^The term " d i s c o u n t " , used here and i n l a t e r d i s c u s s i o n s ,
r e f e r s t o both discount and r e d i s c o u n t . The Reserve banks,
of course, rediscount commercial paper and discount member
bank n o t e s . The procedure does not d i f f e r except i n t e c h nical details.
P a r t i c u l a r l y i n recent years, member banks
have g e n e r a l l y p r e f e r r e d t o borrow by means of discounting
t h e i r own notes accompanied by c o l l a t e r a l i n t h e form of
commercial paper or government s e c u r i t i e s . There are
s e v e r a l reasons f o r t h i s p r a c t i c e , the most important one
being the greater s i m p l i c i t y and convenience o f i t .
-98s e c u r i t i e s , the purchase and sale of s e c u r i t i e s , and the
c o l l e c t i o n of non-cash items.
Each branch now has seven d i r -
e c t o r s , f o u r appointed by the parent bank and three appointed
by the Board of Governors.^^
The By-Laws that govern the Eighth D i s t r i c t
are p r a c t i c a l l y i d e n t i c a l f o r each branch.
The four
branches
directors
appointed by the S t . Louis Bank may be persons experienced i n
banking or engaged i n a g r i c u l t u r e ,
i n d u s t r y , or commerce.
The three d i r e c t o r s appointed by the Board of Governors must
be persons not a c t i v e l y engaged i n banking, although they
may be stockholders or d i r e c t o r s of banks.
A l l the d i r e c t o r s
must be persons whose f i n a n c i a l and business i n t e r e s t s are
r e p r e s e n t a t i v e o f the branch t e r r i t o r y , and must r e s i d e w i t h i n
t h i s branch t e r r i t o r y .
One o f the d i r e c t o r s appointed by the
parent bank nMSt r e s i d e outside the Reserve branch c i t y . ^ i
The term of o f f i c e f o r t h e Managing D i r e c t o r s i s three years.
No d i r e c t o r who has served continuously f o r s i x years may be
reappointed except a f t e r an i n t e r v a l of three years.
Managing
The
D i r e c t o r , who i s t h e a c t i v e executive of the branch,
i s designated by the S t . L o u i s Bank from the d i r e c t o r s
appointed by i t ,
and serves a term of only one year; but he
may be reappointed without l i m i t a t i o n .
The Chairman of the
branch board i s chosen by t h e branch d i r e c t o r s from the t h r e e
appointed by t h e Board o f Governors.
30RtDort t o Stockholders. F e d e r a l Reserve of S t . L o u i s , f o r
the year ended December 31, 1938, p. 7.
3lBy-Law3 Governing t h e Operations o f the L o u i s v i l l e Branch
o f t h e F e d e r a l Reserve o f S t . L o u i s , as amended J a n . 21, 1939.
-99The board of d i r e c t o r s of a branch bank may elect a
C r e d i t Committee, c o n s i s t i n g of the Managing D i r e c t o r and not
more than t h r e e other d i r e c t o r s .
T h i s Committee meets at the
c a l l <xf the Managing D i r e c t o r whenever any c r e d i t matter a r i s e s
concerning which he would l i k e i t s advice i n making recommendations t o t h e parent bank.
Immediate c r e d i t i s given a mem-
btHT biM^c idhen paper i s discounted, although the discount must
be approved by the board o f the parent bank.
In practice,
if
the S t . Louis Bank f a i l e d t o approve a p a r t i c u l a r discount
it
iMyuld simply ask that d i f f e r e n t c o l l a t e r a l be substituted by
the member bank.
I n e f f e c t , c r e d i t i s extended by the branch,
Ibut the c r e d i t p o l i c y i s determined by the St. Louis Bank.
The operations o f the branch banks are c a r r i e d out
iHMier the d i r e c t i o n and c o n t r o l of the S t . Louis Bank.
The
t e r r i t o r y served by the branch i s that which may be assigned
to i t
from t i a ^ t o time by the parent bank.
The o f f i c e r s of
the branch are chosen by the d i r e c t o r s of the parent bank, and
i n c l u d e t h e Managing D i r e c t o r , a Cashier, and an Assistant
Cashier.
The s a l a r i e s of a l l o f f i c e r s and employees are
l^bHsd by t h e d i r e c t o r s o f the parent bank, and a l l expendit u r e s are subject t o t h e i r
approval.
A l a r g e part o f the work
the branches i n recent
years has been devoted t o the performance of f i s c a l agency
functions.
The growth s i n c e 1930 of f e d e r a l agencies and
government c o r p o r a t i o n s d e a l i n g w i t h the economic l i f e of the
country has g r e a t l y i n c r e a s e d the amount
c^ the Ped-
t r a l Reserve System i n i t s c a p a c i t y as f i s c a l agent f o r the
-100F e d e r a l Government.
While the parent bank handles the r e -
demption, exchange, refunding, ami issue of s e c u r i t i e s
for
the T r e a s u r y , the branch banks handle only the redemption of
matured or c a l l e d s e c u r i t i e s .
Both the parent bank and the
branches pay matured coupons on s e c u r i t i e s and treasury
checks.
The branches as v e i l as the parent bank c o l l e c t
re-
mittances and cMk^ payment f o r the Reconstruction Finance
C o r p o r a t i o n an^ r e l a t e d agencies, such as the D i s a s t e r Loan
C o r p o r a t i o n , the R . F . C . Mortgage Company, and the Federal
N a t i o n a l Mortgage A s s o c i a t i o n .
Considerable work i s done f o r
the Commodity Credit Corporation i n the handling o f loans on
a g r i c u l t u r a l crops.
The warehouse r e c e i p t s f o r cotton and
other crops are h e l d by the branch or parent bank, d e l i v e r e d
t o t h e proper person i f t h e borrower s e l l s the commodity, and
handled f o r the Corporation i n case the cotton or other
commodity i s concentrated f o r sale by the Corporation.
Among
the other f e d e r a l agencies f o r which both the parent bank and
t]he branches perform s e r v i c e s are the f o l l o w i n g ;
Home Loan
Bank, Farm C r e d i t A d m i n i s t r a t i o n , Home Owner's Loan Corpora t i o n , U n i t e d States Housing A u t h o r i t y , Federal Housing Adm i n i s t r a t i o n , F e d e r a l Land Bank, Federal Intermediate Credit
IBank, P u b l i c Works A d m i n i s t r a t i o n , C o l l e c t o r o f I n t e r n a l
Revenue, J o i n t - S t o c k Land Banks, Federal Farm Mortgage Corp o r a t i o n , F e d e r a l Deposit Insurance Corporation.
rendered d i f f e r f o r the s e v e r a l agencies.
The services
They i n c l u d e the
acceptance o f d e p o s i t s , the payment o f checks, and the making
of c o l l e c t i o n s .
The d i s t r i b u t i o n of f i s c a l agency work
-101betveen the parent bank and i t s branches i s determined by the
parent bank.
I n the case of the Reconstruction Finance Cor-
p o r a t i o n , the F e d e r a l Home Loan Banks, and the Federal I n t e r mediate Credit Banks, a l l the Federal Reserve banks and
branches are r e q u i r e d t o make a v a i l a b l e t o these
institutions
any records or other information they may have as t o the cond i t i o n o f i n d i v i d u a l s or corporations who are a p p l i c a n t s f o r
l o a n s , or whose o b l i g a t i o n s are o f f e r e d t o , or held by these
i n s t i t u t i o n s , and t o make examinations f o r these
a g e n c i e s .
There i s a question as t o whether the increased
amount of f i s c a l agency work may have made the branch bank
laore e s s e n t i a l than b e f o r e .
The work o f the branches has been
measurably increased as a r e s u l t o f the a c t i v i t i e s of new
f e d e r a l agencies.
However, i t appears that most of t h i s work
&ould be done as w e l l by the parent bank.
I n some cases
t h e r e i s only a s l i g h t added convenience i n the performance
o f f i s c a l agency work as a r e s u l t o f the l o c a t i o n of branches
i n v a r i o u s p a r t s of t h e D i s t r i c t .
I n considering the estab-
lishment or e l i m i n a t i o n o f a branch t h i s i s one o f a number
o f f a c t o r s which must be taken i n t o account, but
csnsideration
should be given only t o the added value o f having such serv i c e s performed by a branch r a t h e r than by the parent bahk.
The p o l i c y w i t h regard t o the establishment and
maintenance o f branches cannot be decided s o l e l y w i t h r e f e r 328ec. 8 o f R e c o n s t r u c t i o n Finance Corporation A c t . Jan.
22, 1932; Sec. 22 of F e d e r a l Home Loan Bank A c t . J u l y 22, 1932;
Sec. 208e o f f e d e r a l Farm Loan A c t . June 3, 1935.
-102<MM?e t o c o s t s ag^ the p r o f i t a b l e n e s s of Reserve bank operation.
Rather t h e v a l u e o f the services which may be rendered by a
branch bag^ t o member banks, and t o the Government, mu.st be
against
c^y Increase i n c o s t .
I f t h e value o f the s e r -
v i c e s i s g r e a t e r than the increased c o s t , the branch should be
maintaijMKl.
Conversely, i f the cost of maintaining a branch
exceeds t h e v a l u e o f the services performed i t
should be
eliminated.
3Kember banks located i n Reserve bank or branch c i t i e s
have 3<H&e advantages that other member banks do not have.
The
r e c o g n i t i c M i o f t h i s s i t u a t i o n l e d the Board t o a u t h o r i z e the
F e d e r a l ]&eserve banks t o pay charges on t h e shipment of
33
currenK^ t o and from member banks.
As i t
i s c l e a r l y im-
p o s s i b l e t o e s t a b l i s h branches i n every case where some a d d i t i o n a l s e r v i c e BM^ be performed f o r member banks, i t has been
jpolicy
t h e Board, and the S t . L o u i s Bank, t o adopt pro-
cedures vRiii^i iwould place a l l banks on as equal a f o o t i n g as
p o s s i b J ^ Iba making use o f the f a c i l i t i e s of t h e Reserve System.
Administration
The management of the Bank i s c a r r i e d on under the
s u p e r v i s i t M i iMad c o n t r o l of i t s board o f d i r e c t o r s ,
subject t o
stM^ !M^pervision as i s vested by law i n t h e Board of Gove r n o r s o f t h e F e d e r a l Reserve System.
I n the f i r s t
election
nomixMMas l^or t h e board o f d i r e c t o r s were s e l e c t e d at a con33For tiMS purpose of discouraging t h e c i r c u l a t i o n of s i l v e r
d o l l a r s IHie Bank does not pay t h e charges on t h e shipment of
t h e s e c o i n s t o mMiber banks.
-103ventlon held i n St. L o u i s .
Since that time the procedure f o r
nominating and e l e c t i n g directors has followed that aet f o r t h
i n Section 4 of the Federal Reserve Act.
Every year two of three groups into w^lich a l l member banks are divided elect one d i r e c t o r each, e i t h e r a
Class A d i r e c t o r or a Class B d i r e c t o r .
Each member bank i a
permitted t o nominate one candidate, the nomination being
made by r e s o l u t i o n of the board of d i r e c t o r s of the member
bank.
A l i s t of the candidates together with a p r e f e r e n t i a l
b a l l o t i s mailed t o each bank.
The b a l l o t i s executed by an
o f f i c e r of the bank designated f o r that purpose, and must be
cast w i t h i n f i f t e e n days a f t e r r e c e i p t .
On the day aet for
the p o l l s t o close the b a l l o t box i s opened i n the board room
of the Federal Reserve Bank, the votes counted and the r e s u l t s
announced.
L i t t l e i n t e r e s t i n these e l e c t i o n s haa been ahown
by the member banks.
O r d i n a r i l y , agreement i s reached by
them on the person t o be placed on the board before the
e l e c t i o n i s held.
Only one or two contests f o r places on the
board have occurred i n the h i s t o r y of the Bank.
In the case
o f d i r e c t o r s elected by Group 1 a candidate i s usually sel e c t e d by members of the Clearing House Association i n
S t . L o u i s , and he i a u s u a l l y unopposed f o r e l e c t i o n .
Correa-
pondent r e l a t i o n s h i p s play a large part i n ' t h e e l e c t i o n of
d i r e c t o r s by Groups 2 and 3.
Re-elections of members of the
board have been q u i t e common and memberahip haa shown considerable
stability.
-104During the f i r s t twenty-five yeers of the operation
o f the Bank twenty-eight men have served on the board of d i r e c t o r s , Including the present members.
There have beiMi eleven
Class A d i r e c t o r s , nine Class B d i r e c t o r s , and ton Class C
d i r e c t o r s , two mm serving both aa a Class B d i r e c t o r and as
a Class C d i r e c t o r .
The average term f o r Class A d i r e c t o r s
has been 6.8 years, f o r Class B d i r e c t o r s 8.3 years, and f o r
C l a s s C d i r e c t o r s 7.5 years.
Ti^s average term o f service f o r
a l l d i r e c t o r s has been 7.5 years.
A number o f d i r e c t o r s served f o r many year* on the
board.
W. B. Plunkett was a member from the t i n e of organ-
i z a t i o n o f the Bank u n t i l 1936, a continuous p e r i o d o f service
o f twenty-three years.
John W. Boehne and John G. Lonsdale
were on the board f o r continuous periods of eighteen years.
LeRoy Percy was a member of the board f o r f i f t e e n years,
I P i l l i a m McC. M a r t i n f o r fourteen years, and a present member.
Max B . Nahm, has served f o r twelve years.
In a l l , t e n members
have served terms o f t e n years or more, while f i f t e e n men have
served more than s i x years, or more than two terms of three
years each.
These long terms o f s e r v i c e on the board have t o a
c e r t a i n extent represented a r e c o g n i t i o n of a b i l i t y and i n terest
i n Bte work of the Federal Reserve System on the part
of i n d i v i d u a l s , b u t , i n a measure, they are merely evidence
of a l a c k
of i n t e r e s t by the member banks.
Class C directors,
The terms of
except the Chairman and Deputy Chairman,
are now l i m i t e d by t h e Board o f Governors t o a p e r i o d o f
six
-105years.
I t i s q u i t e c l e a r that men should not be r e - e l e c t e d t o
the board unless they have shown i n t e r e s t
i n , and a t t e n t i o n t o ,
the d u t i e s o f the board.
Tenure of Service of D i r e c t o r s of S t . Louis R e s e r v e Bank^^
Class A D i r e c t o r s
19H-19A0
Pirictpp
Residence
TpnMf9
Frank 0 . Watts
S t . L o u i s , Mo.
Oscar Fenley
Louisville,
Walker
S t . L o u i s , Mo.
November, 1914December, 1918
November, 1914December, 1916
November, 1914December, 1920
January, 1917December, 1922
January, 1919December, 1927
January,
1921December, 1938
January,
1923April,
1932
January, 1928present
June,
1932December, 1937
January, 1938present
January,
1939present
Hill
Sam A. Z e i g l e r
A l b i o n , 111.
J . C. Utterback^
Paducah, Ky.
John G. Lonsdale
S t . L o u i s , Mo.
John C. M a r t i n
Salem, 111.
Max B . Nahm
Bowling Green, Ky.
F . Guy H i t t
Ziegler,
G. R. C o r l i s s
Anna, 111.
Sidney Maestre
S t . L o u i s , Mo.
Class B D i r e c t o r s
111.
191A-19A0
ISBSiES
Director
Murray C a r l e t o n
W. B . P l u n k e t t
LeRoy Percy
Ehvid C. Biggs
S t . L o u i s , Mo.
L i t t l e Rock, Ark.
Greenville,
Miss.
L o j i s , Mo.
November,
December,
November,
December,
November,
December,
January,
February,
1914r?15
19141938
19141929
19161919
*Compiled from Annual Reports o f the Federal Reserve Bank o f
S t . L o u i s . 1915-1940.
-106-
Cjas* B D i r e c t o r * 191A-19A0 (Cont'd.1
Pireptpf
R9ti49RCt
Ttnuy^
R o l l a Wells
St. Louis, Mo.
J . W. Hai^l^
S t . L o u i s , Mo.
M. P. Sturdivant
Clendora, Miss.
Harvey C. Couch
Pine B l u f f ,
Ark.
John R. Stanley
Evansville,
Ind.
April,
January,
January,
present
February,
December,
January,
present
January,
present
Cltt* C Pirtctprt
19191929
192919301938
1938^
1939-
1914-1740
PirevtPP
R9!id9nC9
Ttnur?
W i l l i a m McC. M a r t i n
S t . L o u i s , Mo.
Walter W. Smith
S t . L o u i s , Mo.
John W. Boehne
Evansville,
C. P . J . Mooney
Memphis, Tenn.
Paul D i l l a r d
Memphis, Tenn.
R o l l a Wells
S t . L o u i s , Mo.
John S. Wood
S t . L o u i s , Mo.
John R. Stanley
Evansville,
W i l l i a m T . Nardin
S t . L o u i s , Mo.
Oscar G. Johnston
Scott,
Douglas W. Brooks
Memphis, Tenn.
November,
January,
November,
January,
November,
December,
August,
November,
November,
December,
January,
May,
June,
December,
January,
December,
January,
present
January,
present
January,
present
Ind.
Ind.
Miss.
19141929
19141917
19141932
19171926
19261937
19291930
1930
1936
19331938
193719381940-
Membership on the board has been f a i r l y w e l l d i s t r i b u t e d among t h e several s t a t e s comprising the Eighth D i s trict.
During HMst o f the p e r i o d of the bank's h i s t o r y each
s t a t e has been represented by at l e a s t one d i r e c t o r .
S t . L o u i s has, o f course, f u r n i s h e d a l a r g e number of the
-107d i r e c t o r s , twelve i n a l l .
four d i r e c t o r s ,
I l l i n o i s has been represented by
Indiana by two, Arkansas by t*o,
Kissisaippi
by t h r e e , Kentucky by three, and Tennessee by two.
TABLE 23
Number of D i r e c t o r Years Served by D i r e c t o r s
from each State*
Number of D i r e c t o r
Years
St*t9
Missouri
Indiana
Illinois
Arkansas
Mississippi
Kentucky
Tennessee
*Compiled from
St. Lpuls.
&L
25
23
26
26
23
20
R*"orta of f t ^ t r * !
Rin^ Tf
The i n t e r n a l o r g a n i z a t i o n of the Federal Reserve
Bank of & t . Louis was patterned on the plan suggested by the
P r e l i m i n a r y Committee on Organization.
M o d i f i c a t i o n s and
changes of a minor character have been made from time to time,
but a major change occurred i n 1935 when the
responsibility
f o r c a r r y i n g out a l l the f u n c t i o n s o f the Bans was c e n t r a l i z e d
i n the hands o f the P r e s i d e n t .
T h i s was done t o comply with
the p r o v i s i o n s o f the Banxing Act o f 1935 which changed the
t i t l e of the Governor t o that o f P r e s i d e n t , and made him the
c h i e f executive o f f i c e r of the Bank.
There i s no r i g i d and unvarying scheme by which
c e r t a i n f u n c t i o n s are supervised by c e r t a i n o f f i c e r s and
s p e c i f i c work n e c e s s a r i l y assigned t o each p o s i t i o n .
a considerable f l e x i b i l i t y
i n the a d m i n i s t r a t i v e
There i s
structure
FEDERAL RESERVE BANK OF ST. LOUIS,
ORGANIZATION CHART
4/1/40
r
Functions supervised: General Service; P r o v i s i o n of Space; P r o v i s i o n of Personnel; Furn i t u r e and Equipment; Currency and Coin; Lotns, Rediscounts, and Acceptances; Check
C o l l e c t i o n ; Non-Caah C o l i e c t i o n ; Wire T r a n s f e r s ; Safekeeping; Purchase and Sale of Government S e c u r i t i e s ; F i s c a l Agency, Custodianship and Depository; Accounting; Legal;
P u b l i c Relations; Examination; and S t a t i s t i c a l and A n a l y t i c a l .
CHART 1
-119which p e r a l t s * l t h t n U n i t s th* Adaption o f
t o the character of th* personnel.
reaponaibilitita
"The chart on page 108
shows i n general o u t l i n e the i n t e r n a l o r g a n i z a t i o n at the
present
*
The board of d i r e c t o r s i a the p o l i c y determining
body.
Tb^ Chairman o f the board i s alao the Federal Reserve
Agent.
The Agent i s no longer an executive o f f i c e r o f the
Bank, h i s non-statptory d u t i e s having been aaeuaed by the
President.
Much of the work of the board i a delegated t o an
executive committe*, conaiating of three d i r e c t o r s , which
meets r e g u l a r l y with the P r e s i d e n t , - other o f f i o e r z of the
Bank being i n attendance.
R e s p o n s i b i l i t y f o r the operation and a d a i n t t t r a t i o n
o f the Bank i s c e n t r a l i z e d i n the handa of the P r e z i d n n t .
U n t i l r e c e n t l y the President was W i l l i a m McCheanay Martin,
the f i r a t Agent and an executive o f f i c e r of the Bank since
i t s establishment.
Upon the r o t i r e a e n t o f Martin i n March,
1941, the board e l e c t e d Chester C. Davis aa P r e s i d e n t , who
a c t i v e l y assuned h i s d u t i e s i n A p r i l , 1941.
Davis was, u n t i l
h i s e l e c t i o n aa President o f the S t . Louis Ran*,$ aenber of
t h e Board o f Governora of the Federal Reserve Systoa.
Di-
r e c t l y under h i * i a the P i r a t V i c e - P r e s i d e n t , P . Guy H i t t ,
the V i c e - P r e a i d e n t , O l i n M. Attebery, and the Secretary and
C a s h i e r , Clarence M. Stewart.
There are f o u r Aasiatant
Caahiera, A. H. H a i l l , B. F . C i l a o r e , P . N. H a l l , and
C. 0 . H o l l o c h e r .
Other o f f i c e r a include the General Counsel,
L . H. Oarstarphen, t h e General A u d i t o r , L . H. B a i l e y , and the
-110Assiatant Vice-President, H. H. V e i e e l .
Fach o f f i c e r
super-
v i s e s c e r t a i n of the various functions performed.
There are seventeen departments, each of which i s
i n the charge of a department head, or manager.
ments are as f o l l o w s :
Theae depart-
Banking House; Personnel; Furniture and
Equipment; Currency and Coin; Loans, Rediscount^and Acceptances; Check C o l l e c t i o n ; Non-Cash C o l l e c t i o n ; Wire Transfers;
Safe-keeping; Purchase and Sale of Government S e c u r i t i e s ;
F i s c a l Agency; Custodianship, and Depository; Accounting;
Legal; P u b l i c
Relations; Examination; Auditing; Research and
Statistics.
The General Auditor i s responsible only t o the board
of d i r e c t o r s and the auditing committee, composed of three
directors.
The branch bank o f f i c e r s report mainly t o the
President, the F i r s t Vice-President, and to the branch board
of d i r e c t o r s .
The branch d i r e c t o r s are responsible t o the
d i r e c t o r s of the parent bank.
The I n d u s t r i a l Advisory Committee
appointed by the St. Louis Bank under the provisions of
Section 13 (b) of the Federal Reserve Act makes recommendations
t o the executive committee with regard t o d i r e c t loans t o i n dustry.
A number of prominent and able St. Louis bankers
have served as the representative f o r the Fighth D i s t r i c t on
the Federal Advisory C o u n c i l .
R o l l a Wells, *t that time
Governor of the Bank, was the f i r s t
representative on the
C o u n c i l , serving one year, December, 1914 t o December, 1915.
F . 0. Watts, president of the T h i r d National Bank, served on
- l U -
the C o u n c i l f o r *ix y e t r s , A p r i l , 1916 t o Jun^, 1"22.
F t s t u s J . Wide, of the M * r c * n t i l t Truzt Coaptn/ and pr*aid*nt
o f the C l e a r i n g House A s s o c i a t i o n *t the time of the hearings
before the Organization CowMittee, served from June, 1922 t o
December, 1924.
B r e c k i n r i d g e Jones, president o f the Miss-
i d s i p p i V a l l e y Trust Company, was the Eighth D i s t r i c t
s e n t a t i v e from January, 192% t o December, 1927.
repre-
Jones ves
p a r t i c u l a r l y i n f l u e n t i a l i n inducing state banks t o j o i n the
System.
Walter W. antth, president o f the F i r s t
National
Bank, vas a member o f the Council f o r twelve years, January,
1928, t o December, 1939.
The present Eighth D i s t r i c t
s e n t a t i v e , S. E . Ragland, president o f the P i r e t
repre-
Waticnal
Bank i n Memphis, i s the f i r s t ban&er outside of S t . Louis t o
serve on the C o u n c i l .
He was elected i n January, I340.
One o f the most serious problems of s d m i n i s t r a t i o n
i n most o f the Federal Reserve banks f o r s number of years
concerned the r e l a t i o n s between the Oovcmor and the Federal
Reserve Agent.
The F e d e r a l Reserve Act provided f o r * Fed-
e r a l Reserve Agent i n each bank, who, as chsirman o f the
board o f d i r e c t o r s , was t o be the t i t u l a r h$ad of etch bank.
F u r t h e r , t h e Agent was t o be the representative o f the f e d e r a l Reserve Board and t o act as the l i s i s o n agent between
oQCh bank and the Board.
The Agent was t o make reports t o
t h e Board and t o see that i t s p o l i c i e s were c a r r i e d out.
The
Act made no reference t o the p o s i t i o n o f Oovernor, and i t was
not c l e a r whether the Asent was t o be the r e e l operating head,
or some operating o f f i c e r was t o be chosen by t j e board of
- 2 d i r o c t o r a i n each bank.
A* i t was the evident i n t e n t i o n of
the framers of the Act that there thould be an independent
operating head, and aa t h i a was c l e a r l y the deaire of the
member banks, the Federal Reserve Board came t o the conclusion
tlaat such a head should be chosen and assigned h i a the t i t l e
of G o v e r n o r . A s t o the question of the r e l a t i v e status of
the Agent and the Governor the Board " f i n a l l y resolved to say
t o a l l i n q u i r e r s that the d i a t i n c t i o n between the federal reserve agent and the operating head of the bank was to be i n a
general way the d i s t i n c t i o n between the maker of a p o l i c y or
the developer of a general system of organization and the
f a c t o r employed t o carry i t out."^^
While t h i s would seem t o
imply that the Agent should be the r e a l head of the Bank the
s i t u a t i o n was f a r from being c l e a r .
As a r e s u l t the r e l a t i v e importance of the Agent
and the Governor v a r i e d as among the several banks f o r a number of years, depending upon the circumstances of personnel
i n the i n d i v i d u a l bank.
Eventually the p o s i t i o n of Agent
became subordinate t o that of Governor i n a l l the banks, t h i s
being the r e s u l t of a number of f a c t o r s .
In the f i r s t
place
the s a l a r i e s of the Agents were f i x e d at l e s s than that of
the Governors i n a l l the banks except Kansas C i t y and Richmond, i n f i v e o f the banks the salary of the Agent being only
one-half that of the Governor.^^^
The Federal Reserve Board
3 4 w i i i i a , H. Parker, The Federal Reserve System, p. 688.
3 5 i h i d . , p. 639.
36Annual Report o f the Federal Reserve Board. 1915, pp. 139
190.
1
-Inf i x e d the s a l a r i e s of the Agents, and while i t took account
of the neceasity of paying aalariea a u f f i c i e n t t o a t t r a c t able
men i n the banking f i e l d , i t did not provide aalariea equivalent t o those paid t o the p r i n c i p a l executives of banking i n a t i t u t i o n a i n the various Reserve c i t i e a .
There waa undoubt-
edly a f e e l i n g on the part of membera of the Board that the
Agenta, as fepreaentativea of the Board, ahould not receive
a a l a r i e a i n exceaa of thoae of membera of the Board, aa only
i n the caae of the New York Bank waa the aalary of the Agent
f i x e d higher than the $12,000 received by Board membera.
The
a a l a r i e a of the Governora, however, were f i x e d by the boarda
of d i r e c t o r a of the several Federal Reaerve banka aubject t o
the approval of the Board.
The Board approved aalariea for
the Governora that were i n moat inatancea equivalent t o those
paid t o the heada of member banka i n the aeveral d i a t r i c t a .
Thua, i n the very beginning the Governor was given a p o s i t i o n
of greater prestige by v i r t u e of aalary than waa the Agent.
Secondly, there waa a strong f e e l i n g , p a r t i c u l a r l y on the
part o f the member banka, that i f the Agent waa t o become the
r e a l head of the Bank, becauae of h i a r e l a t i o n a h i p t o the
Board aa i t a repreaentative, the i d e a l of decentralized
r e g i o n a l banking would be a a c r i f i c e d t o c e n t r a l i z e d adalniat r a t i o n o f the Federal Reaerve Byatem by the Board.
Only by
e s t a b l i s h i n g the Governor as the r e a l head of the Bank could
independence of the Board be maintained.
T h i r d , the Board,
even i n the e a r l y period, undermined the p o s i t i o n of the
Agent by eatabliahing d i r e c t contacts with the Governora.
-114F i n a l l y , In a s i t u a t i o n i n which doubt existed as to the
a u t h o r i t y of the two positions the dominant personality was
l i k e l y t o become the r e a l head of the Bank.
In some cases
d i f f e r e n c e s of opinion and f r i c t i o n became the source o f
serious d i f f i c u l t y , but eventually one of the two men i n each
biMik came t o predominate, and usually t h i s was the Governor.
In several instances where the Agent was the stronger man he
l a t e r became Governor.
There was never any d i f f i c u l t y i n the r e l a t i o n s between the Agent and the Governor i n the St. Louis Federal
Reserve BsMk^.
W i l l i a m McC. Martin, who had been connected
i^Uth tl^e M i s s i s s i p p i V a l l e y Trust Company as Vice-President,
became the f i r s t Chairman and Federal Reserve Agent, and the
BiMhk was organized and opened under h i s d i r e c t i o n .
The f i r s t
Governor was R o l l a W e l l s , who held t h i s p o s i t i o n u n t i l Febr u a r y ' s , 1919.
Wells accepted the post as Governor under
considerable pressure from the Board i n Washington.
He was
equipped w i t h a broad experience, having served as a d i r e c t o r
of several banks, and having financed and promoted a number
o f business e n t e r p r i s e s .
His father had been the f i r s t
to
develop p u b l i c t r a n s p o r t a t i o n f a c i l i t i e s i n the c i t y of
S t . L o u i s , and R o l l a Wells himself had spent the e a r l i e r part
37
of h i s l i f e i n the street railway business.^
Wells served
two terms, 1901 t o 1909, as Mayor of S t . Louis during one of
i t s most important periods of development, and was respons i b l e f o r many public improvements, both i n material f a c i l i t i e s
37wells autobiography. Episodes of Mv L i f e , was published
i n 1933.
?
-115-^
and i n the character of municipal government.
He was one of
the guiding s p i r i t s of the World's F a i r of 1904, which i n
s i g n i f i c a n c e f o r i t s time and i n influence has not been
equalled since.
The a b i l i t i e s and experience of these two
men. Wells and Martin, provided an excellent combination for
the development of the technique of central banking.
Wells resigned December 18, 1913, t o become
e f f e c t i v e when a successor was named, and on February 5, 1919,
David C. Biggs was appointed Governor.
Biggs had worked i n a
l^ank as a young man; had served three years as a Class B
d i r e c t o r from January, 1916, and was Vice-President of the
Lnternational Shoe Company before h i s appointment as Governor.
The same s p i r i t of cooperation prevailed between the Governor
and Agent a f t e r Biggs became Governor.
Another problem that caused considerable d i f f i c u l t y
i n the other banks was the r e l a t i o n s h i p between the executive
committee of the board of directors and the Governor and Agent.
T h i s was s e t t l e d very early and without d i f f i c u l t y i n the
S t . Louis Bank, and i t had some bearing on the status of the
Federal Reserve Agent.
The by-laws proposed by the Organ-
i z a t i o n Committee suggested an executive committee t o be composed of three d i r e c t o r s , but the by-laws passed at the f i r s t
meeting of the board of d i r e c t o r s provided for an executive
committee t o consist of the Governor, Federal Reserve Agent,
and three d i r e c t o r s chosen from Classes A and B.^
The
3 33By-laws of the Federal Reserve Bank of St. Louis,
^h^^ual
Federal Reserve Bank of St. L o u i s .
tual Ren^rt"of"the
Reno
.5, p. 20
-116-^
Governor was t o act as chairman of the executive committee.
Unlike the s i t u a t i o n i n most of the other banks the Federal
Reserve Agent had a place on the executive committee, and
tJhus d i d not become an outsider by being omitted from t h i s
39
very important mechanism.^^
Although t h i s w^s not the case
at the outset, the executive committee was given during the
f i r s t year the right t o f i x the discount
r
a
t
e
s
.
Biggs submitted a l e t t e r t o the d i r e c t o r s on
December 5, 1928, stating that he did not wish t o be re-elected
Governor, and on January 16, 1929, William McC. Martin was
elected t o that o f f i c e .
T h i s change brought the r e l a t i o n be-
tween A gent and Governor i n the St. Louis Bank into t e c h n i c a l
conformity with the rest of the System.
By t h i s time the
p o s i t i o n of Federal Reserve Agent had become d e f i n i t e l y subordinate t o that of Governor elsewhere i n the System.
Rolla
W e l l s , who had served as a Class B d i r e c t o r since h i s resign a t i o n as Governor, was appointed Federal Reserve Agent on
January 23, 1929.
As he could not f i n d time t o devote a c t i v e l y
t o h i s duties he resigned on May 6, 1930.
Federal Reserve Agents since Wells.
There have been two
John S. Wood, of &t. Louis,
was appointed on June 2, 1930, and served u n t i l the end of 1936.
W i l l i a m T . Nardin, Vice-President and General Manager of the
Pet M i l k Company, was appointed at the beginning of 1937, and
i s the present Agent.
39ln most of the other banks the Governor was a member of
the executive committee, frequently the chairman, but the
Agent was u s u a l l y not a member. W i l l i s , H.P., op, q&t., p. 696.
^OAnnMP^ Racort of the Federal Reserve Bank of St. Louis.
1915, p. 8.
?
-117-^
The duties of the Federal Reserye Agent, i n addition
t o h i s r e s p o n s i b i l i t y as chairman of the board of directors
and as the representative of the Federal Reserve Board, f o r merly consisted of taking charge of Federal Reserve note
issues and the reserve and c o l l a t e r a l against them, and handling
member bank r e l a t i o n s , bank examinations, auditing and s t a t i s tics.
The Banking Act of 1935 created the o f f i c e of President
t o supplant that of Governor, and made the president the chief
executive o f f i c e r of the Bank, a l l other o f f i c e r s t o be responsible t o him.^^
Although the Act made no change i n the
functions of Federal Reserve Agent, the Board of Governors
by regulation made the p o s i t i o n an honorary one.
The non-
statutoTy functions of the Agent, other than as Chairman of
the board of d i r e c t o r s , have been transferred to the Bank.
Martin became President of the Bank i n March, 1936, under the
terms of the new A c t .
4iparagraph 4* Section 4, The Federal Reserve Act, as amended
by act of August 23, 1935.
-118-^
CHAPTER rv
THE BANK IN OPERATION
Source of funda
The funds of a Federal Reserve Bank come from a
iMMRber of sources;
amounts paid i n on c a p i t a l stock sub-
s c r i p t i o n s by member banks; reserve deposits of member banks;
deposits of the United States Government; deposits of f o r eign banks; and othar deposits, the p r i n c i p a l item of which
consists of the deposits of non-member banks for clearing
accounts.
Reserve deposits constitute by f a r the largest
source of funds.
On December 4, 1914, the Federal Reserve Bank of
Louis had a p a i d - i n c a p i t a l of $923,000, or one per cent of
the c a p i t a l and surplus of member banks.^
During 1915 addi-
t i o n a l c a l l s were made on subscriptions, increasing the required payments on c a p i t a l stock t o three per cent of the
c a p i t a l and surplus of member banks.
On December 31, 1915,
2
the Bank had a p a i d - i n c a p i t a l of $2,781,000.
Although by
the provisions of the Federal Reserve Act the member banks subscribed t o the c a p i t a l stock of the Federal Reserve Banks an
amount equal t o 6 per cent of t h e i r c a p i t a l and surplus, no
a d d i t i o n a l c a l l s have been made on these subscriptions.
On
December 31, 1940 the p a i d - i n c a p i t a l of the Bank amounted t o
$4,211,650.^^
Table 24 indicates the changes from year t o year
lAnnual Report of the Federal Reserve Board. 1914, p. 197.
Z l h i d . , 1916, p. 360.
R*Port t o the Stockholders f o r 19A0. St. Louis
Federal Reserve Bank, p. 4.
-119-^
TABLE
21
C a p i t a l Paid In on December 31*
(thousands of d o l l a r s )
1915
1916
1917
1918
1919
1920
1921
1922
1923
1924
1925
1926
1927
32,781
2,800
3,475
3,800
4,064
4,365
4,603
4,827
5,009
5,129
5,127
5,293
5,342
1923
1929
1930
1931
1932
1933
1934
1935
1936
1937
1938
1939
1940
$5,403
5,268
5,053
4,693
4,360
3,944
4,088
3,757
3,732
3,863
3,946
4,073
4,212
Member Bank Reserve Deposits on December 31*
(thousands of d o l l a r s )
1915
1916
1917
1918
1919
1920
1921
1922
1923
1924
1925
$13,077
30,925
45,797
52,831
72,283
66,903
64,613
73,798
70,100
80,511
81,447
1927
39,862
1926
82,116
1928
1929
1930
1931
1932
1933
1934
1935
1936
1937
1933
1939
1940
$33,560
79,771
69,521
59,456
62,027
97,260
129,419
159,725
132,277
204,984
209,543
270,676
326,872
"Compiled from Annual Reports of the St. LoRis
Federal Reserve Bank. 1915-40
-120-
i n the amount of p a i d - i n c a p i t a l of the Bank.
The i n i t i a l reserve payments made by member banks
of the Eighth D i s t r i c t amounted to $10,759,277, of which a l l
but $260,451 was paid tn
from the member banks' v a u l t s ,
the remainder having been deposited by correspondents to the
c r e d i t of member banks.^^
After .hBMS, 1917, the member ba^ts
were required t o keep a l l t h e i r l e g a l reserves i n the Federal
Reserve Banks, and by December 31, 1917, the reserve deposits
of the &t. Louis Bank had increased t o $45,796,968.^
Member
bank reserves increased r a p i d l y during the war period and
reached a high point of $72,282,788 at the end of 1919.
Re-
serve deposits decreased i n 1920 and 1921, but increased
g r a d u a l l y during the l a t e r twenties.
During the early de-
p r e s s i o n years member bank reserves dropped sharply, but
i^nter 1932 increased enormously.
Reserve deposits, which
amounted t o $62,027,000 at the end of 1932, increased t o
$326,872,451 at the end of 1940.
T h i s has been due t o the
d i f f i c u l t i e a member banks have experienced i n investing t h e i r
funds without great uncertainty as t o the r i s k s incurred, and
t o several f a c t o r s which have contributed t o increase member
bank reserves, such aa open market purchases of
securities
l^y the Federal Reserve System, and the large importation of
gold since the beginning of 1934*
^Letter of Federal Reserve Agent t o the Federal Reserve
Board o f December 30. 1914, F i r s t Annual Report of the Fede r a l Reaerve Board. 1914, p. 201.
^Annml penort of the Federal Reserve Bank of Pt* LouAs*
1917,^p. 33.
-121-^
A f t e r 1933, government deposits increased consideri n amount, and now represent a larger proportion of the
Ihmds of the St. Louis Bank than during the twenties.
While
during the period before 1933 Federal Government deposits
d i d iRot usually exceed one or two m i l l i o n d o l l a r s such dep o s i t s at the end of 1940 amounted to $23,892,502.^
Since
1935, the deposits of foreign banks have shown a marked i n crease, due t o the unsettled p o l i t i c a l conditions abroad and
the events leading up to the war which commenced i n the late
summer of 1939.
Foreign deposits had declined to $141,000 at
ti^a end of 1933, but at the end of 1940 amounted to §23,248,036.
Foreign deposits had, of course, declined to less than normal
working balances i n 1933, and these were restored after the
devaluation of the d o l l a r i n January, 1934* but the great
tMiUK <&f the increase i n foreign deposits came a f t e r 1935.
The Bank,w&s i n operation f o r the last month and a
la&lf of 1914, and during t h i s time earned $9,463.
The only
source of earnings at f i r s t was t o be found i n discounting
notes f o r member banks, except f o r investment i n government
securities.
IhuriJ^ t*M early months of 1915, however, the
Federal Reserve Banks were authorized t o purchase tax warrants
i&&d acceptances based on the importation and exportation of
goods.
Earnings f o r 1914 and 1915 amounted t o $87,603 while
6 A n n u a l
Renort to the Stockholders f o r 1910. St. Louis
Federal Reserve Bank, p. 4.
^The f o r e i g n deposits shown on the books of the St. Louis
<are p a r t i c i p a t i o n s i n such deposits with the Federal
Reserve Bank of New York.
-122-^
expenses during t h i s period were $184,773.
The d i f f e r e n c e of
$97,169 was regarded as organization expense, and was paid
out o f the net earnings f o r 1916.
Por 1916 the Bank showed
net earnings o f $141,013, and was enabled not only t o meet
the l o s s f o r the f i r s t fourteen months but t o pay a small
dividend.
Earnings increased greatly i n 1917 due t o the large
d<HMMMl f o r funds f o l l o w i n g our entrance i n t o the war i n A p r i l ,
1917.
Net earnings f o r 1917 amounted t o $502,156.3
For the war and immediate post-war years the earn-
iiags o f the Bank were enormous.
For 1917 the net earnings
e q u a l l e d 14 per cent of the p a i d - i n c a p i t a l on December 31 of
that y e a r .
I n 1918 the net earnings were nearly four times
those o f 1917 and amounted t o 51 per cent of the p a i d - i n
capital.
For 1919 the net earnings equalled 67 per cent of
the c a p i t a l .
Th^ Bam^ had the largest net earnings i n i t s
h i s t o r y f o r 1920, $5,255,661, which represented a return of
UK) ]per cent on i t s c a p i t a l .
70 per cent o f the c a p i t a l .
For 1921 net earnings equalled
During these years the Bank was
enabled t o pay a l l i t s back dividends, and add a t o t a l amount
o f $9,375,475 t o i t s surplus account.
Earnings were never as l a r g e a f t e r 1921.
Net earn-
Ibms f o r the years 1922 through 1929 were s u b s t a n t i a l , except
t h e year 1924, and tended t o f o l l o w somewhat the trends
of business.
I n 1924 the net earnings were $247,607, which
was not a s u f f i c i e n t amount t o cover dividends.
In the
3A11 f i g u r e s f o r earnings were secured from the annual r e p o r t s o f the F e d e r a l Reserve Bank of S t . L o u i s , 1915-1940.
-123-^
TAPER
Earnings and Expenses
Xear
1914-15
1916
1917
1918
1919
1920
1921
1922
1923
1924
1925
1926
1927
1928
1929
1930
1931
1932
1933
1934
1935
1936
1937.
1938
19391
1940
T o t a l Earnings
87,603
297,949
738,713
2,676,828
3,834,478
7,180,117
5,166,315
2,456,447
2,753,435
1,638,143
2,055,637
2,511,509
2,228,079
2,901,925
3,247,936
1,745,683
1,133,631
1,625,432
Net
Current Expenses EarninKS
134,773
156,931
236;557
726,021
1.174.793
1,924,456
1,961,250
$ -97,169
141,013
502,156
1,324,453
1,350,595
1,363,217
1,302,734
1,564,273
1,609,930
1,473,311
1,455,534
1,564,933
1,450,635
,1,371,093
1,415,267
1,357,979
1,950,307
2,709,635
5,255,661
3,205,065
333,225
1,280,760
247,607
665,533
1,131,405
359,415
1,565,131
1,309,519
346,749
-162,293
264,322
155,325
363,919
235,657
412,533
431,641
149,011
251,951
1,920,779
1,373,203
547,571
1,629,136
1,623,222
1,472,675
1,440,536
1,390,099
1,380,104
1,363,664
1.336.794
1,438,417
1,398,936
1,350,924
1,360,610
ai
of St,Loui* Rtterve BanR*
Net E a r n i n g s a f t e r
43, 348
502, 156
1,777, 310
2,355, 154
4^ 875,) 566
2^,951, 926
617, 572
1,132,163
203, 937
-93^ 540
633, 022
775, 631
735, 159
335,! 334
1,!114
-^61,1263
243,465
-90, 766
139, 996
235, 233
225, 165
362, 957
254, 607
457, 430
986,
372
Dividends
P^jd
$
31,100
284,566
404,833
234,663
253,711
270,253
233,166
296,310
304,976
306,753
314,420
317,727
321,355
319,231
315,339
239,409
263,505
246,643
241,009
236,137
225,724
229,420
234,433
239,363
248,242
Transferred
t o Pupplut
$
12,743
217,590
1,372,973
2,120,494
4,621,354
1,042,564
276,450
407,070
-101,039
Franchise
IM
$
1,639,109
87,956
473,233
-400,293
363,602
457,954
423,011
56,665
-314,725
-350,672
-25,020
40,293
509,933
-337,409
-100,966
-399 (sec* 13 b]
-559 (sec* 13 b;
129,335
13,323
224,725
-6,663
(Pd. t o Treasury)
4,152
1,796
734,005
-5,675
^rhe f i g u r e s under "net earnings" i n d i c a t e net o M r a t i n g e a y i n M . Th€ f i gures l i s t e d "nat earnings a f t e r a d d i t i o n s and deductions" are
the r e s u l t of adding or s u b t r a c t i n g from net earnings the f o U ^ i n g
it$a n
,
d e p r e c i a t i o n on bank premises,
d e,p r e c i a t i o n of f u r n i t u r e
a^nd equipment, reserve f o r probable l o s s e s , assessments o f Board o f Governors, fund f o r s e l f - i n s u r a n c e , p r i o r s e r v i c e c o n t r i o u t i o n s
to Retirement System, Loss on s a l e o f U. S. S e c u r i t i e s , P r o f i t on saj^*
^^ourities, p r o f i t on f o r e i g n exchange, withdra!!n from
reserve f o r l o s s e s .
Source; Annual Reports of the Federal R^aerve Bj^MM
Eh< vPRin*
-124T^LE
E a r n i n g s of F e d e r a l peserve Bank o f
XjBRX
On Discounted B i l l s
1914
1914-15
1916
1917
1918
1919
1920
1921
1922
1923
1924
1925
1926
1927
1923
1929
1930
1931
1932
1933
1934
1935
1936
1937
1938
1939
1940
3
9,463
54,298
46,041
358,239
2,218,017
2,918,462
6,382,357
1,140,662
837,819
1,258,227
815,951
1,928,302
2,508,133
660,996
388,769
496,823
133,497
12,520
992
1,493
5,075
2,893
1,992
2,332
Bills
Purchased
$
6,387
81,599
170,233
226,164
564,496
273,425
41,427
253,750
253,773
141,778
434,423
340,394
331,302
206,700
153,653
235,169
177,420
108,496
44,693
4,762
734
793
662
9
14
0
S t . Lou^s by Sources*
U. S.
P r o f i t on s a l e o f
S e c u r i t i e s U. S.
Securitietrwarrants
S
7,483
70,362
21,630
89,096
320,412
391,612
284,151
332,169
320,730
332,632
712.033
341,143
999,636
723,490
339,673
753.034
360,693
930,177
1.372.392
1,741,353
1,723,739
1,304,143
1,752,810
1.323.393
1,335,350
1,394,330
133,306
115,324
39,059
303,050
244,733
308,766
116,947
335,033
201,044
323,303
110,301
*MnnMAl Reports o f t h e F e d e r a l Reserve Bank o f S t . L o u i s
26
16,325
31,619
13,691
Transfersnet earnings
3,071
30,000
57,920
48,209
10,570
Reserve
Penalties
I n d u s t r i a l Advances
and Comoitnents t o
I n d u s t r i a l Advances M i s c e l l a n e o u s
2,036
14,968
52,107
52,373
104,164
80,640
45,915
38,857
27,441
24,475
22,017
16,189
15,023
22,740
17,431
21,800
40,251
9,938
699
543
8,877
45,639
38,121
27,315
14,953
5,844
3,923
34
14,641
13,361
43,184
18,166
28,560
21,065
18,805
-28,763
25,650
26,830
49,826
64,981
26,410
23,683
29,055
33,544
55,369
68,616
55,740
73,948
18,658
16,872
17,826
16,730
19,994
-125-^
TABLE 27
Percentages of Earnings from each Source t o T o t a l E^RMinRS. S t . Louis Reserve Bank*
Total
XSM
1914
1914-15
1916
1917
1918
1919
1920
1921
1922
1923
1924
1925
1926
1927
1928
1929
1930
1931
1932
1933
1934
1935
1936
1937
1938
1939
1940
3
9,463
87,603
297,948
738,713
2,678,777
3,884,479
7,180,118
5,166,315
2,456,447
2,782,198
1,688,143
2,055,637
2,511,509
2,228,079
2,901,925
3.247.936
1,745,685
1.341.937
1,740,956
1,668,195
2,132,503
2,095,350
2,171,983
1,919,663.
1,949,361
1,810,974
2,448,987
Discounted
Bills
100.00
61.98
15.45
48.50
82.86
75.13
88.89
91.73
53.08
70*76
67.57
40.76
50.10
36.62
66.45
77.22
37.86
28.97
28.54
8.00
.59
.05
.07
.26
.15
.11
.10
Purchased
Bills
7.29
27.39
23.04
8.45
14.53
3.81
.80
10.41
9.12
8.40
22.11
13.55
'14.87
7.12
4.73
16.34
13.22
6.23
2.68
.22
.04
.04
,*03 ,
(.0005
(.0008]
0
U. S.
Securities
8.55
23.62
14.93
3.33
8.25
5.45
5.50
33.88
18.72
20.89
34.64
33.49
44.87
25.00
16.62
43.14
41.78
52.85
82.27
81.68
82.50
83.06
91.31
78.42
87.54
77.36
P r o f i t on
U. S.
Securities
Warrants
18.64
10.61
1.85
7.27
!
t
;
11.42
6.64
2.34
14.45
11.68
14.22
6.09
19.75
11.10
21.57
!
)
TransfersNet Earninxs
3.51
10.07
7.84
1.80
.27
Reserve
Penalties
.07
2.03
1.95
1.35
1.45
1.56
1.87
1.40
1.63
1.19
.88
.73
.52
.70
1.00
1.62
2.31
.60
.03
.03
I n d u s t r i a l Advances
and Commitments
Miscellaneous
.03
4.91
1.81
1.61
.47
.40
.41
.77
1.52
1.31
1.98
2.92
.91
.73
1.66
2.98
.42
2.18
1.76
1.42
.77
.32
.16
^Figures f o r t o t a l earnings i n c l u d e p r o f i t on sales of U. S. s e c u r i t i € s , and do not agree w i t h f i g u r e s f o r t o t a l earnings i n T a b l e 25.
Computed from previous t a b l e s on earnings.
3.43
4.11
2.61
3.53
.86
.88
.91
.92
.82
-126-^
other years net earnings varied from §665,538 i n 1925 t o
$1,809,519 i n 1929.
Ekcept for 1924
the B*nk was
enabled t o nake additions to i t s surplus account.
Since 1929, the Bank has experienced d i f f i c u l t y
in
making s u f f i c i e n t earnings to cover dividends and t o meet
various deductions on account of depreciation.
The Bank ex-
perienced a net operating loss only i n the year 1931, when
current expenses were greater than earnings by $162,293.
In
the other years since 1929 net earnings have varied between
$155,825 i n 1933 and $547,571 i n 1940.
I t must be pointed
out, however, that the discussion so f a r has referred only to
net operating earnings.
No account has been taken of deductioRs
from these earnings f o r such items as depreciation on bank
premises, depreciation
of furniture and equipment, reserves
set aside f o r losses, or losses on the sale of United States
securities.
Neither has account been taken of certain
additions t o these earnings such as p r o f i t s on the sale of
United States s e c u r i t i e s .
I f these items are taken i n t o con-
s i d e r a t i o n the record during the depression years u n t i l 1937
does not appear so favorable.
In order t o pay dividends i t
was necessary f o r the Bank to withdraw varying amounts from
surplus i n seven years, 1930-1936.
During the period before
i t was necessary f o r the Bank to make withdrawals from
surplus only i n two years, 1924 and 1925.
In order t o get a clearer picture of the earnings
experience of the St. Louis Bank i t i s necessary t o study the
sources of i t s earnings and the basic factors which have
-127-^
brought about changes i n these sources.
During the period
of approximately twenty-five years marked changes have
occurred i n the importance of various sources of earnings.
T h i s , i s evidenced p a r t i c u l a r l y i n one comparison that can be
made between the year 1921, which was a year of considerable
depression, and the year 1937 i n which a considerable recovery
had occurred from the depression conditions of the early
thirties.
In 1921 nearly 32 per cent of the earnings resulted
from the discounting of b i l l s for member banks, while i n 1937
nearly 92 per cent of the earnings consisted of interest on
investments i n United States s e c u r i t i e s .
During the f i r s t two years of operation the p r i n c i p a l
problem of the St. Louis Bank was to induce the nember banks
of the d i s t r i c t t o make use of the rediscounting p r i v i l e g e
and borrow from the Federal Reserve Bank instead of commerc i a l banks outside the d i s t r i c t .
On March 4* 1915, reports
1ko the Comptroller of the Currency indicated that rediscounted
paper with the Federal Reserve Bank of St. Louis represented
18.40 per cent of the t o t a l borrowing by member banks i n the
district.^*
On Woveaber 10, 1915 t h i s f i g u r e had increased
t o 25.17 per cent.
The banks i n Tennessee had made most use
of the rediscounting p r i v i l e g e , and the banks i n Kentucky the
l e a s t use.
In t h i s early period^ the smaller banks rather
than the larger banks showed the greatest tendency to use the
Reserve Bank.^^
pAnn^a^ Ranort of the Federal Reserve Bank of
1915, p7 11
i O l b i d . . 1915, p. 10.
Louis.
-123The Bank pointed out i n i t s report f o r 1915 that
member banks i n the d i s t r i c t
if
borrowed from the Reserve
Bank the $7,330,000 which they secured by loans from banks
outside the d i s t r i c t during 1915 the earnings of the Reserve
Bank would have been increased by $52,200.^^ During 1916 the
percentage of rediscounts t o t<^;al borrowing by member banks
i n the d i s t r i c t
showed a tendency to increase.
On March 7,
1916, paper rediscounted with the Reserve Bank equalled 30.6
per cent of t o t a l borrowing, and on November 17, 1916, i t
12
represented 53.6 ppr cent.
The t o t a l paper rediscounted
f o r member banks during the t h i r d quarter of 1915 amounted t o
$1,631,000, while f o r the t h i r d quarter of 1916 i t
increased
t o $3,054,000.^3
During 1915 the Bank purchased 32,264,823 of tax
warrants, and $1,300,565 bankers' acceptances, but most of
the warrants and a l l the acceptances were purchased outside
the d i s t r i c t through the Federal Reserve Banks of New York,
Boston, and Atlanta.^^^
this district
Tax warrants were not much used i n
f o r financing l o c a l governments, and the
bankers* acceptance had not yet been developed to any apprec i a b l e extent.
During 1916 the Bank purchased $20,681,822 of
bankers' acceptances, but only $243,500 were bought i n t h i s
d i s t r i c t , the remainder being purchased through the Reserve
^ I h i d . , 1915, p. 12.
^^Ibid.. 1916, p. 9.
i3compiled from Federal Reserve B u l l e t i n s . 1915, 1916.
i^An^^*! Report. Federal Reserve Bank of 8 t . L o u i s . 1915,
p . 15.
1
-129Banka of New York and Boston.^^
the f i r s t
The St. Loiiis Bank had from
sought t o encourage the use of bankers^ acceptances,
and r e s u l t s were eventually secured.
Duiing 1917 the Bank
purchased $29,732,272 of bankers' acceptances, and of t h i s
amount $7,590,201 were purchased from banks i n t h i s
district.^^
In i t s report f o r 1918 the Bank indicated i t s interest i n the
development of the open market throu;^ the purchase of bankers'
acceptances.
I t s p o l i c y was t o avoid as much as possible the
d i r e c t purchase of b i l l s from the accepting banks, taking
b i l l s only from those banks which found i t
t h e i r o b l i g a t i o n s on the open market.
impossible t o
sell
I t also assisted l o c a l
dealers i n carrying the acceptances i n t h e i r p o r t f o l i o s by
17
means of a 15-day purchase and resale agreement.
During the f i r s t fourteen months discounted b i l l s
accounted f o r 62 per cent of the earnings and warrants f o r
nearly 19 per cent.^^
In 1916, while the volume of r e d i s -
count ing increased s l i g h t l y over the i n i t i a l period, only
15 per
cent of the earnings came from t h i s source.
The Bank
had invested during 1916 much larger amounts i n acceptances
and United States s e c u r i t i e s .
Twenty-seven per cent of the
earnings were derived from b i l l s purchased i n the open mark e t , and 24 per cent from investment i n government bonds.
I n 1917 earnings from discounted b i l l s were approximately one-half of the t o t a l earnings, 48.5 per cent, which
i S i b i d ^ , 1916, p. 5.
i 6 i b i d . f 1917, p. 5.
i T j a j g ^ , 1918, p. 9.
I^Fijyures as t o the per cent of earnings from each source
t o t o t a l earnings are given i n Table 27 f o r each year.
-130-^
r e f l e o t e d the increased demand for funds r e s u l t i n g from wartime a c t i v i t y .
The marked increase i n the volume of r e d i s -
count Ing may be seen by comparing the amounts of paper
discounted by quarters during 1917:^^
F i r a t quarter, 1917
Second quarter, 1917
T h i r d quarter, 1917
Fourth quarter, 1917
$
3,012,074
14,425,230
55,512,198
108,168,147
Earnings from b i l l s purchased on the open market represented
23 per cent of the t o t a l , while earnings from investment
in
United States s e c u r i t i e s declined to 15 per cent.
During the period from 1918 through 1921 earnings
from discounted member bank paper assumed a p o s i t i o n of predominant importance.
Earnings from t h i s source represented
83 per cent of t o t a l earnings i n 1918, 75 per cent i n 1919,
89 per cent i n 1920, and 92 per cent i n 1921.
This develop-
ment r e f l e c t e d the tremendous expansion i n bank credit which
took place during these years, occasioned i n part by the i n creased p r i c e l e v e l r e s u l t i n g from the s h i f t to production of
war materials, but due i n greatest measure to the financing
of the war by means of bank c r e d i t .
The post-war i n f l a t i o n
and l i q u i d a t i o n , 1919-1921, resulted i n the greatest use of
Federal Reserve credit i n the h i s t o r y of the System.
A
large portion of the L i b e r t y bonds and other government war
s e c u r i t i e s absorbed by the general public were purchased by
borrowing from the bahks, and these banks iRl^um 3Mde use
of Federal Reserve Bank c r e d i t .
In 1918 a t o t a l of §1,085,000,000
ITCompiled from the Federal Reserve B u l l e t i n f o r 1917.
-131-^
of paper was discounted f o r member banks, and of t h i s amount
$773,000,000 was secured by Liberty bonds and Treasury cert i f i c a t e s of i n d e b t e d n e s s . i n 1919^ $1,895,000,000 of a
t o t a l of $2,101,000,000 of discounted paper was secured by
such government o b l i g a t i o n s .
This s i t u a t i o n continued during
1920 although a somewhat smaller portion of member bank paper
discounted was secured by government o b l i g a t i o n s .
In 1920
the St. Louis Reserve Bank discounted $1,350,000,000 of
f i f t e e n - d a y member bank c o l l a t e r a l notes, almost e n t i r e l y
secured by government obligations, and $1,083,000,000 of
commercial paper, which was secured by government obligations
t o the extent of l e s s than 10 per cent.
The peak of expansion
i n bank credit was reached i n 1920, and thereafter the volume
of discount operations declined.
Government obligations con-
t i n u e d to be of major importance as c o l l a t e r a l f o r member
bank rediscounting u n t i l 1923.
During the years from 1922 through 1929 earnings
from discounted b i l l s continued to be the most important source
of earnings, although of l e s s significance than i n the previous
four years.
With the decline i n borrowing i n 1922 the
!&t. Louis Bank increased i t s purchases of government securi t i e s and bankers* acceptances i n order that expenses and
dividends might be covered.
Thus earnings from investment
government s e c u r i t i e s again became important.
in
In 1922 earn-
lUags from such s e c u r i t i e s represented 34 per cent of the t o t a l ,
20These f i g u r e s and those immediately following are from the
annual reports of the Federal Reserve Bank of a t . Louis.
-132-^
and earnings from purchased b i l l s represented 10 per cent.
The Federal Reserve Board during 1923 formulated
a d e f i n i t e p o l i c y with regard to the purchase and sale of
government s e c u r i t i e s and commercial paper on the open market.
In 1922 a committee of o f f i c e r s of the Reserve banks had
been established, but i t s function had been l i m i t e d to the nurpose of coordinating transactions i n government s e c u r i t i e s by
the Reserve banks with similar transactions conducted by the
21
banks f o r the Treasury.
In A p r i l , 1923, the Board estab-
l i s h e d as a general p r i n c i p l e the policy of coordinating d i s count operations and open market operations i n t h e i r e f f o r t s
t o c o n t r o l the general credit s i t u a t i o n .
Purchases and sales
of s e c u r i t i e s by the Reserve banks were t o be made with p r i imary regard t o t h e i r broader consequences and i n accordance
i f i t h the general credit policy of the System.^^^
The Board
r e a l i z e d that there was a relationship between the volume of
s e c u r i t i e s held by the Reserve banks and the volume of rediscounting by member banks, the sale of s e c u r i t i e s leading
t o a d d i t i o n a l borrowing by reducing the reserves of member
banks, and the purchase of s e c u r i t i e s leading to a possible
repayment of borrowed funds.
The committee of Reserve bank
o f f i c e r s became the Open Market Investment Committee.
A* a r e s u l t of the establishment of t h i s open market p o l i c y t h e proportion of earnings of the St. Louis Bank
^I^^rt of the Federal Reserve Board. 1923, p. 13.
I I l h i A . , 1923, p. 15.
-133-^
due t o investment i n government securities tended t o f l u c t u ate with the credit policy of the Federal Reserve System.
Because the sale or purchase of securities by any Reserve
bank tended t o a f f e c t the reserves of member banks throughout the country, i t was impossible for any purely d i s t r i c t
c r e d i t p o l i c y to be carried out by means of open narket operations.
Government securities sold by a Reserve bank on the
open market, f o r instance, are not necessarily purchased by
member banks i n i t s d i s t r i c t , or by individuals with funds
drawn from member banks i n i t s
district.
Due t o improvement i n business and an increase i n
member bank borrowing, the St. Louis Bank during 1923 gradu a l l y l i q u i d a t e d i t s investments i n government s e c u r i t i e s
iH^^il l^y tlhe end of the year i t had completely disposed of
them.
A f t e r 1923 most of i t s purchases and sales of s e c u r i t i e s
were made through the Open Market Investment Committee and i n
accord with i t s p o l i c y .
Earnings from investment i n s e c u r i t i e s
increased considerably i n 1925, representing 35 per cent of
t o t a l earnings, dropped s l i g h t l y i n 1926, and increased i n
1927 t o 45 per cent of t o t a l earnings.
The e f f o r t s of the
Reserve System to checx the development of speculative uses
of c r e d i t during 192% and 1929 were r e f l e c t e d i n a decline of
earnings from s e c u r i t i e s to 25 per cent i n 1928, and to 17 per
cent i n 1929.
Open market purchases of acceptances were also
supervised by t h i s Committee, and the St. Louis Bank purchased
most of i t s acceptances through the Committee.
The p o l i c y with
-134-^
regard t o open market purchases of acceptances was affected,
however, by the desire of the Reserve System t o encourage
the use of t h i s type of commercial paper.
The Reserve banks
stood ready at a l l times t o purchase such acceptances as
were offered t o them by member banks or dealers at the buying
23
rates f i x e d by each Reserve bank.
Further, the Reserve
banks followed a practice of holding these purchased b i l l s unt i l maturity, never s e l l i n g them i n the open market.
In open
market transactions i n government s e c u r i t i e s the i n i t i a t i v e
was exercised by the Reserve banks, while i n the case of open
market purchases of acceptances, except for the influence of
changes i n the buying rates established by the Reserve banks,
the i n i t i a t i v e was taken by the member bank or dealer.
Earn-
ings from purchased b i l l s were p a r t i c u l a r l y s i g n i f i c a n t
in
1925, 1926, and 1927, represen;ting 22 per cent, 14 per cent,
and 15 per cent, respectively, of t o t a l earnings i n these
years.
learnings from purchased b i l l s dropped to less than
5 per cent i n 1929.
Earnings from purchased b i l l s thus tended
t o f o l l o w earnings from s e c u r i t i e s i n these years.
The decade of the t h i r t i e s presents a very d i f f e r e n t
p i c t u r e with regard t o earnings.
The speculative boom and
the prosperity of the twenties came to an end i n the f a l l of
1929.
Beginning with the l a s t two months of 1929 the Federal
Reserve System reversed i t s open market policy and began t o
make large purchases of s e c u r i t i e s .
1925,
p. 8.
These purchases, together
-135-^
v i t h gold imports which began i n 1930 and continued into 1931,
enabled member banks t o reduce greatly t h e i r borrowing from
the Federal Reserve banks.
Earnings of the St. Louis Bank
from rediscounted paper f e l l to 38 per cent of t o t a l earnings i n 1930, and t o 29 per cent i n 1931.
Meanwhile, the
&t. Louis Bank participated i n the open market purchases of
s e c u r i t i e s , and i t s earnings from s e c u r i t i e s increased t o 43
per cent i n 1930, and 42 per cent i n 1931.
By 1932 the Fed-
e r a l Reserve System had d e f i n i t e l y adopted a p o l i c y of
attempting t o stimulate recovery by pumping funds i n t o the
member banks through open market purchases.
The easy money
p o l i c y of 1930 and 1931 had f a i l e d t o arrest the decline i n
business.
Purchases of securities on a much larger scale were
made i n 1932.
Earnings from s e c u r i t i e s increased to 53 per
of t o t a l earnings i n 1932, and to 83 per cent i n 1933.
The export of gold i n the f i r s t h a l f of 1932 and the large
currency withdrawals f o r hoarding occasioned some borrowing
by member banks i n 1932.
The actual amount of earnings from
rediscounted paper of the St. Louis Bank increased from
$388,769 i n 1931 t o $496,823 i n 1932, although the earnings
from t h i s source remained the same per cent of t o t a l earnings.^^^
There was a sharp increase i n the amount of borrowing i n
March, 1933, during the bank c r i s i s , but, thereafter,
counting declined t o i n s i g n i f i c a n t proportions.
redis-
Large pur^
chases of acceptances were made by the St. Louis Bank i n 1930
24AnnuA^*B^nort of the Federal Reserve Btnk of St+JLouis.
1932, p. 17.
-136-^
and 1931, and earnings from t h i s source were 16 per cent and
13 per cent, respectively, of t o t a l earnings.
After 1933, the only s i g n i f i c a n t sources of earnings were investment i n United States securities and p r o f i t s
on the sale of these s e c u r i t i e s .
Due to the appreciation i n
the value of government bonds as interest rates declined and
i d l e funds seeking opportunities f o r investment
increased,
the transactions of the Federal Reserve banks i n government
s e c u r i t i e s became the source of considerable earnings.
These
earnings f i r s t became of importance i n 1931 when they
amounted t o 11 per cent of the t o t a l earnings of the St. Louis
Bank*
Since then they have varied from 2 per cent of earnings
i n 1933 t o 22 per cent of earnings i n 1930.
Income from i n -
vestment i n s e c u r i t i e s has varied from 78 per cent to 91 per
cent of earnings during these years.
In no year since 1933
have the combined earnings from discounted paper and purchased
b i l l s been as much as 1 per cent of t o t a l earnings.
On June 19, 1934, there was added to the Federal
Reserve Act Section 13(b) which authorized the Reserve banks
t o a i d i n providing working c a p i t a l f o r established indust r i a l or commercial enterprises.
Under t h i s provision a
Reserve bank might make direct advances to such business enterp r i s e s i f i t appeared that credit could not be obtained at
reasonable rates from the usual sources: or i t might discount,
purchase, or make advances on paper acquired by banks or
other f i n a n c i a l i n s t i t u t i o n s i n providing such working c a p i t a l .
Loans under t h i s Section were not t o be made f o r periods
-137-^
exceeding f i v e years.
The St. Louis Bank encouraged the banks
i n t h i s d i s t r i c t either to make and hold such loay^s under
commitments from the Reserve Bank, or to p a r t i c i p a t e with the
Reserve Bank i n making joint advances.^^
I f a bank obtained
a commitment from the Reserve Bank i t could make such a loan
f o r a period not exceeding f i v e years, and at any time within
the period of the commitment turn the asset into cash, receiving the e n t i r e interest u n t i l the commitment was exercised.
The amendment provided, however, that
tile Federal Reserve
Bank could not assume more than 80 per cent of the loss that
might be sustained i n the case of loans made by banks and acquired by the Reserve Bank.
By the end of 1934, the St. Louis Bank had entered
i n t o commitments with respect t o §1,348,800 of loans under
Section 13(b), and had made direct advances to business enterp r i s e s of $474,000 f o r working c a p i t a l .
In most cases the
d i r e c t advances had been made i n instances i n which banks had
provided a d d i t i o n a l funds j o i n t l y with the Reserve Bank.
In 1935 the Bank executed $4,423,000 i n commitments, and made
$290,000 i n d i r e c t advances.
27
The largest earnings from
t h i s source were i n 1935 when the Bank earned a t o t a l of
28
$45,639 from commitments and direct advances.
In no year
l^Mre the earnings from t h i s source amounted t o more than
approximately 2 per cent of t o t a l earnings.
2 5 i h i a . , 1934, pp. 8, 9.
3 6 i a i g . , 1934, p. 9
3 7 l & i d . , 1935, p. 8.
ISiaia., 1935, p. 17.
-138-^
There i a , of course, no ioaediate prospect of a^y
s i g n i f i c a n t change i n the present complexion of earnings of
the St. Louis Bank.
As long as the debt of the Federal Gov-
ernment i s being increased, p a r t i c u l a r l y i n view of the fact
tliat a large part of outstanding government s e c u r i t i e s bear
very low rates of i n t e r e s t , i t would be d i f f i c u l t f o r the
Federal Reserve banks t o divest themselves of t h e i r holdings
of Government s e c u r i t i e s without seriously a f f e c t i n g the
market for government bonds, the commercial banks, and the
f i n a n c i a l structure of the government.
Excess reserves of
member banks are very large, the largest i n the history of the
Federal Reserve System, so that there can be no prospect
in
iMhe immediate future of much borrowing from the Reserve banks
Iby meaber banks.
The possible changes i n the more distant
future w i l l be discussed i n a l a t e r chapter on credit
policies.
The earnings of the St. Louis Bank have been s u f f i cient t o cover current operating expenses except i n the f i r s t
year of i t s operation and i n 1931.
The expenses increased
r a p i d l y during the war years due to the tremendous volume of
operations, and t o the additional services provided free t o
member banks.
A f t e r 1921 the t o t a l expenses were materially
reduced, but continued at a much higher l e v e l than before the
IRtr.
Since 1922 the current operating expenses have been r e -
markably constant, varying by only about 16 per cent from the
average f o r these years.
Expenses were lowest i n 1928,
-139-^
$1,336,794, and highest i n 1935, $1,564,933.^^
Expenses do
not tend to vary with the amount of business a c t i v i t y , or
the d o l l a r volume of the Bank's transactions.
Approximately
two-thirds of the t o t a l operating expenses are represented by
salary and wage payments.
While depreciation on bank buildings and equipment
i s not regarded as operating expense, nevertheless, expenditure f o r t h i s purpose has been s i g n i f i c a n t i n the t o t a l expenses of bank operation.
U n t i l 1935 the St. Louis Bank
occupied rented quarters, at f i r s t the fourth f l o o r of the
Boatmen's Bank Building at the corner of Olive Street and
Broadway.
In December, 1915, i t moved into quarters i n the
New Bank of Commerce Building on the northeast corner of
Broadway and P i n e .
This building was renamed the Federal
Rpserve Bank B u i l d i n g , which the Bank continued to occupy,
taking over a d d i t i o n a l space i n t h i s building and the adjoining b u i l d i n g as i t s needs increased, u n t i l June 1, 1925, when
i t moved into i t s own b u i l d i n g .
In December, 1913, and i n
November, 1919, the Bank concluded arrangements for the purchase of the land and buildings on the north side of Locust
Street with frontage on both Broadway and Fourth Street.
Construction on the new building was not begun u n t i l 1923,
however, and the b u i l d i n g was not f i n a l l y completed u n t i l the
summer of 1925.
"The new, permanent quarters f o r the Bank are located
39Annual Renorts of the Federal Reserve B*nk of St. L o u i s .
-140-^
i n the center of the f i n a n c i a l d i s t r i c t of St. &ouis.
The
b u i l d i n g was w e l l designed and arranged for the work of the
Bank.
The exterior of the building i s a t t r a c t i v e , but not
elaborate or imposing.
The conservative t r a d i t i o n among
&t. Louis bankers has never permitted the construction of
expensive and impressive bank buildings.
In t h i s respect the
Reserve Bank b u i l d i n g was s u f f i c i e n t i n structure to maintain
the prestige of the Bank, but conformed to the t r a d i t i o n of
St. Louis banking.
The t o t a l cost of the land and the b u i l d i n g ,
in-
cluding f i x e d machinery and equipment, amounted t o $4,593,220,
of which §1,354*874 represented the cost of the land and of
the buildings d e m o l i s h e d . T h e St. Louis Bank also constructed buildings for i t s branches i n L i t t l e Rock and Memphis.
The b u i l d i n g f o r the L i t t l e Rock branch, located at
T h i r d and Louisiana streets, was completed and occupied
March 16, 1925.
The t o t a l cost of the building,
including
31
equipment, was $421,694*
The building f o r the Memphis
Branch at J e f f e r s o n avenue and T h i r d street was not completed
iRntil June, 1929, and cost $378,613.33
The L o u i s v i l l e Branch
waa the f i r s t unit of the Bank t o transact business i n i t s
^O^nnuAl Resort of the Federal Reaerve B^ard. 1925, p. 122.
The cost of v a u l t s , machinery, and other f i x e d equipment
amounted to $1,272,175, and the costs of construction of the
b u i l d i n g , including a r c h i t e c t ' s fees, amounted to $1,966,171.
3 i l 3 i a . , 1925, p. 122.
Baport of the Board of Governors. 1935, p. 102.
-141-^
ovn q u a r t e r s .
In May, 1919, the &t. Louis Bahk purchased f o r
i t s L o u i s v i l l e branch the s i t e , banking house, and equipment
formerly occupied by the National Bank of Commerce at F i f t h
and Market Streets i n L o u i s v i l l e .
ing vas completed i n 1925.
An a d d i t i o n t o t h i s
build-
The t o t a l investment i n the b u i l d -
ing and equipment of the L o u i s v i l l e branch amounted t o
$392,496.33
The t o t a l expenditures f o r b u i l d i n g s and f i x e d equip,
inent made by the Bank thus amounted t o $5,736,023.
I n 1919
$335,000 vas deducted from net earnings f o r d e p r e c i a t i o n on
bank premises.
In nearly every year t h e r e a f t e r down t o and
i n c l u d i n g 1935 v a r i o u s amounts have been deducted f o r such
depreciation.34
By the emd of 1935 the t o t a l amount charged
t o d e p r e c i a t i o n o f bank premises vas $3,365,552.
On Dec.,
31, 1933, the v a l u e o f bank premises vas c a r r i e d on the books
of the Bank as $2,291,335.35
There are several other items of importance i n the
expense o f bank operation.
U n t i l 1922 expenditurefbr
furni-
tiRre and other equipment vas regarded as a current expense.
Ihurlng t h e t h r e e years, 1919, 1920, 1921, a t o t a l of $303,992
T*as spent f o r t h i s
purpose.3^ Beginning i n 1922 v a r i o u s
iM&ogats were deducted annually from net earnings t o cover such
expenditures.
I n 1925, the year the Bank moved i n t o i t s own
b u i l d i n g , $257,373 was deducted f o r expenditures on f u r n i t u r e .
33Annual Report o f the Federal Reserve Board. 1925, p. 122.
psports of the S t . Louis Federal Reserve Bank.
the Stockholders of the Federal Reserve Bank,
o f S t . L o u i s , 1938, p . 4.
3 6 A n n i f i P*porta o f t h e S t . L o u i s Federal Reserve Bank.
-142-^
During the years 1919 to 1935 a t o t a l of ?1,048,117 was spent
f o r f u r n i t u r e and equipment.
Since 1935 such expenditures
seem to be regarded again as current expense.
Each of the
Federal Reserve banks are assessed to meet the expenses of
the Board of Governors of the Federal Reserve System.
In
recent years the annual contribution of the 3t. Louis Bank
has been approximately $50,000.
Another item of importance
i s the expense of p r i n t i n g , issuing, and redeeming Federal
Reserve currency.
In the last f i v e years t h i s expense has
v a r i e d between approximately $50,000 and $100,000 annually.
!&a 1936 the Bank i n s t i t u t e d a retirement fund system f o r employees of the Bank, as provided by Congress f o r a l l Reserve
banks.
P r i o r service contributions by the Bank to t h i s fund
(iaring the three years, 1936-1938, amounted to $579,602.
Since 1920 the St. Louis Bank has d i l i g e n t l y
striven
t o reduce i t s expenses at the same time that i t increased the
services offered t o member banks.
Economies have been
e f f e c t e d whenever they d i d not mean withdrawing or c u r t a i l i n g
a service of value t o the meaber banks or to the government.
Expenses were reduced considerably by 1923, and since then
]hKve not increased despite an increase i n the number of
services o f f e r e d .
A study of the operation of the St. Louis
BiM^^ cannot but give one the impression that there are few
instances where more value i n services i s rendered f o r the
expenditures incurred.
Pivi3tB49
No dividends were paid u n t i l the end of the year
-1231916.
In the f i r s t year of operation the Bank had a net
operating l o s s of $97,169, but earnings f o r 1916 were s u f f i cient t o provide f o r the d e f i c i t
i n the f i r s t year, and t o
enable the Bank t o pay the 6 per cent dividend f o r the period
-from the opening of the Bank to March 31, 1915.3?
Earnings
increased i n 1917 and the Bank paid a dividend on March 31
:&or the period from A p r i l 1, 1915 to June 30, 1915, a d i v i chMMl <3R .June 30 f o r the period J u l y 1, 1915 to December 31,
1915, an^ a dividend on December 31, 1917, for the year of
1916.33
JM; ithe end of 1918 the Bank paid dividends f o r the
39
years 1917 an^ 1918, amounting to $404,838.
Since then the
Bi&hk Ibas paid the maximum 6 per cent dividend provided by the
Aot i n every year.
Funds have been withdrawn from surplus t o
pay dividends i n nine years, 1924, 1925, and 1930-1936.
Net
operating earnings before deductions were s u f f i c i e n t to pay
dividends i n 1925, 1930, 1934, 1935, and 1936.
Purpiup
The Federal Reserve Act o r i g i n a l l y provided that
a f t e r a l l expenses and the 6 per cent cumulative dividend
iMMl been paid by a Federal Reserve bank the remaining earnings
should be iMd^ over t o the government as a franchise t a x , exc<^pt that one-half of the earnings should be assigned t o surl^bAS Tgntil i t equalled 40 per cent of the p a i d - i n c a p i t a l .
37Annual Report of the Federal Reserve Bank of S t . Louis,
1916, p. 1
3 S i a i a . , 1917, p. 1.
3 9 i h i a . , 1918, p. 1.
*Osec. 7, F94*ral Reserve A c t .
-144-^
The S t . L o u i s Bank was one of s i x o f the Reserve banks t h a t
had f a i l e d by the end o f 1917 t o pay a l l i t s
dividends.
accumulated
I t had n o t , t h e r e f o r e , p a i d any f r a n c h i s e t a x ,
although i t bed assigned $230,000 t o surplus by the end o f
1917.
An amendment t o the Federal Reserve Act o f March 3,
1919, changed t h e requirement with regard t o s u r p l u s ,
provid-
i n g t h a t a l l net earnings a f t e r dividends should be assigned
t o surplus u n t i l i t
e q u a l l e d 100 per cent of the
subscribed
c a p i t a l of t h e bank, and that t h e r e a f t e r 10 per cent o f
audh earnings should be assigned t o surplus and the remainder
p a i d t o t h e government as a f r a n c h i s e tax.^^
T h i s amend-
inent a p p l i e d r e t r o a c t i v e l y t o 1918 earnings.
I n 1918 t h e earnings of the S t . Louis Bank were much
l a r g e r enabling i t t o pay a l l back dividends and a s s i g n
$1,372,973 t o t h e s u r p l u s account.
The f o l l o w i n g three years
brought l a r g e earnings due t o the heavy r e d i s c o u n t i n g o f member bank paper i n c i d e n t t o war f i n a n c e , and the Bank assigned
a t o t a l o f $7,784,912 t o the surplus account i n these y e a r s .
.At t h e end o f 1921 the surplus equalled 102 per cent o f t h e
s u b s c r i b e d c a p i t a l stock o f the Bank.^^^
T h i s l a r g e surplus
iMts p a r t i c u l a r l y advantageous i n view o f the l a r g e expendit u r e s t h e Bank had been making and was t o continue t o make
d u r i n g t h e t w e n t i e s f o r b u i l d i n g s and equipment f o r i t s e l f
i t s branches.
and
Had t h e reserve banks been permitted t o accumu-
S. S t a t . 1314, Ch. 101.
^^Annual Report o f t h e F e d e r a l
Board. 1921. p . 49.
-145-^
l a t e a surplus equal t o only 40 per c<M^ of t h e i r p a i d - i n
c a p i t a l as the Act o r i g i n a l l y contemplated the St. Louis Bank
would have had i t s c a p i t a l funds f o r the most part invested
i n r e a l estate f o r some years.
The surplus f e l l s l i g h t l y below 100 per cent of
subscribed c a p i t a l during the years 1924, 1925, 1926, and 1927.
T h i s was occasioned i n part by withdrawals from surplus t o pay
dividends i n 1924 and 1925, and i n part by the increase i n
the amount of c a p i t a l stock as the Bank reached i t s peak membership during these years.
After 1927 the amount of surplus
continued t o be more than 100 per cent of subscribed c a p i t a l ,
despite withdrawals a f t e r 1929, u n t i l the Bank subscribed
one-half of i t s surplus i n 1934 f o r the stock of the Federal
Deposit Insurance Corporation.
This subscription to the
stock of the Federal Deposit Insurance Corporation was required by the Banking Act of 1933.
This reduced the surplus
t o $4,655,000 on December 31, 1934, which was somewhat larger
tlian the p a i d - i n c a p i t a l of $4*038,000^^ or 57 per cent of
subscribed c a p i t a l .
An amendment t o the Federal Reserve Act
<&f .Tune 19, 1934, authorized the Secretary of the Treasury t o
reimburse th^ Federal Reserve Banks over a period of time f o r
the amount paid by them for stock i n the Federal Deposit Inaurance Corporation, such funds to be used by the Banks i n
lacking advances under Section 13(b).
By December 31, 1933,
43Annual Renort of the Federal Reserve Bank of St, Louis.
1934, p. 19.
-146-^
the S t . Louis Bank had received from the Treasury $545,151,
TdhiCh was carried i n a special surplus
account.^^
on Decem-
ber 31, 1940, the t o t a l surplus funds of the Bank amounted
t o $5,457,788, or 65 per cent of the subscribed
c a p i t a l . 4 3
Franchise Ta^
The St. Louis Bank paid a franchise tax to the Fede r a l Government i n f i v e years, 1921, 1922, 1923, 1928, 1929.
'These payments amounted i n the aggregate to $2,755,629, of
Twhich more than one-half, $1,639,109, was paid i n a single
year, 1921.
The Banking Act of 1933 repealed the provision
f o r the payment of a franchise tax.
Note Issue
In order t o provide a greater e l a s t i c i t y i n the
currency of the country the Federal Reserve Act i n Section 16
authorized the issuance by a Federal Reserve Bank of notes
against the deposit of an equal amount of commercial paper.
A reserve of 40 per cent i n gold had to be maintained i n
a d d i t i o n by the Bank against the Federal Reserve notes i t had
issued.
These notes were l i m i t e d i n volume only by the amount
of gold reserves and the amount of commercial paper held by
the Federal Reserve banks, and t h e i r c i r c u l a t i o n could vary
with the seasonal, c y c l i c a l , and emergency needs f o r currency i n business and commerce.
Since the establishment of
the National Banking System u n t i l the passage of the Federal
Reserve Act the only bank note i n our currency had been the
AAinnual Report t o the Stockholders. Federal Reserve Bank
of S t . Louis, 1938, p. 4.
4 5 i h i d . , 1940, p. 4.
-147-^
imational bank note, secured by government bonds bearing the
circulation privilege.
These notes were limited i n volume by
tiie amount of bonds bearing the c i r c u l a t i o n p r i v i l e g e , and
numerous occasions before 1914 severe currency shortages
had occurred.
The St. Louis Bank issued these notes during i t s
f i r s t year of operation, but deposited gold instead of commerc i a l paper with the Federal Reserve Agent as c o l l a t e r a l for
the notes.
Section 16 of the o r i g i n a l Federal Reserve Act
i*as interpreted as permitting t h i s i n i t s statement that a
per c<H^
reserve had to be maintained against notes
i n actual c i r c u l a t i o n , "not offset by gold or lawful money
deposited with the Federal reserve agent."
The objective of
the SKb. jLmiis Bank, l i k ^ timt of the other reserve banks,
during th^ early years was t o secure the withdrawal of gold
and gold c e r t i f i c a t e s from c i r c u l a t i o n and substitute Federal
Reserve notes, thu^ enlarging the gold reserves of the System.
The deposit of gold instead of commercial paper against the
note issue f a c i l i t a t e d t h i s e f f o r t to conserve the gold i n
the Federal Reserve banks, because i n the early years the
Reserve banks had l i t t l e commercial paper to use as c o l l a t e r a l .
In i t s report f o r the year ending December 31, 1916,
the S t . Louis Bank remarked,
"However, the s u b s t i t u t i o n of Federal Reserve
notes f o r gold has not progressed as rapidly
or gone as f a r i n t h i s d i s t r i c t as we would
l i k e . I t i s s t i l l not uncommon to f i n d gold
c e r t i f i c a t e s paid out over the counter f o r
pocket money by both member and nonmember
l&Mdks when Federal Reserve notes would serve
^RPt as w e l l . While member banks are believed
-143t o be making an e f f o r t to deposit t h e i r gold
i n t h i s bank, nonmember banks seem to have
quite a number of gold c e r t i f i c a t e s which
they are paying out freely."46
JM the end of 1917 the BanR stated i n i t s report that most of
the gold i n the d i s t r i c t had been turned over to i t , that
p r a c t i c a l l y a l l the member banks and many nonmember banks had
turned t h e i r gold i n and had taken Federal Reserve notes i n
exchan^^
it.^^^
The Federal Reserve Act was amended i n
;1917 t o provide that gold or gold c e r t i f i c a t e s might be dep o s i t e d against the issue of Federal Reserve notes as w e l l as
commercial paper, the gold being counted as part of the reserve as w e l l .
I t became possible, thus, t o issue the notes
against a deposit of 60 per cent commercial paper and 40 per
cent gold without providing any a d d i t i o n a l gold reserve; or,
t o deposit more than 40 per cent i n gold and reduce correspondingly the per cent of commercial paper c o l l a t e r a l .
The S t . Louis Bank did not experience any consideri^yLe demand f o r notes u n t i l the entrance of the United States
i n t o the World War i n the spring of 1917.
"The amount
notes of the S t . Louis Bank i n actual c i r c u l a t i o n on December 31 increased from $13,849,730 at the end of 1916 t o
$59,053,430 at the end of 1917, and t o 3126,129,875 at the
end o f 1918.
T h i s v e i y large and rapid increase i n the use
o f Federal Reserve notes came as a result of the r i s e of
p r i c e s and the increased economic a c t i v i t y incident t o the
iMur.
The iMnount o f Federal Reserve notes i n c i r c u l a t i o n
^d^nnM^tl ^^"Ort of the Federal Reserve Bank of 8 t . Louis,
1916, pp. 18-19.
4 7 i h i d . , 1917, p. 20.
-149-^
reached a peak i n December of 1919, when on December 26
there were $148,452,000 of notes i n circulation.^^
The aoount
of notes i n c i r c u l a t i o n i n the Eighth D i s t r i c t remained high
during 1920, but declined rapidly i n 1921 u n t i l on December 31, 1921, there were only $95,246,200 i n c i r c u l a t i o n .
The Federal Reserve note had demonstrated i t s capacity to cont r a c t and expand with the need for currency.
"The Bank continued to use gold considerably as a
deposit against Federal Reserve notes,
"rhe war-time expansion
i n the n^tte issue was based for the most part on commercial
paper, but a f t e r 1920 the gold cover was larger than the deposit of commercial paper except i n 1923, 1925, 1926, and
1928.
Since 1933 the notes outstanding have been almost com-
p l e t e l y covered by the deposit of gold c e r t i f i c a t e s .
The amount of notes i n c i r c u l a t i o n remained approximately the sag^ during 1922, except for seasonal movements,
but declined sharply i n 1923, 1924, and 1925 t o an amount
l e s s than h a l f that i n c i r c u l a t i o n at the end of 1922.
The
trend *^n6er 1925 was gradually upward, ending i n a sharp
expansion of the note issue i n 1929.
After 1929 the amount
of notes i n c i r c u l a t i o n declined s l i g h t l y , but the developments incident to the banking c r i s i s caused a rapid expansion
the laote issue i n 1932 and 1933.
An increase i n the num^
ber (xf lhahk f a i l u r e s i n 1932 made necessary the use of a
greater amount c^ currency.
A growing fear as to the s o l -
vency of i^Ll banks caused a considerable amount of hoarding
4 3 l h t i . , 1919, p* 27.
-150-^
TA3LE 23
F e d e r a l Reserve Notes Outstanding, i n C i r c u l a t i o n ,
and C o l l a t e r a l Pledged, St. Louis Bank, 1915-19A0*
(thousands of d o l l a r s )
Dec.
21
1915
1916
1917
1918
1919
1920
1921
1922
1923
1924
1925
1926
1927
1928
1929
1930
1931
1932
Outstanding
3
Actual
Circulation
Gold
Cover
8,950
16,890
61,863
129,120
164,719
155,392
114,103
113,038
92,259
64,600
46,530
53,504
63,681
76,261
111,580
94,370
91,301
111,371
$13,350
59,053
126,130
145,293
135,785
95,246
93,659
75,372
57,812
40,305
48,396
56,666
64,463
94,744
84,599
86,940
103,930
1933
150,092
144,308
124,682
1934
147,362
142,880
141,936
1935
171,816
163,303
169,632
1936
196,265
183,914
171,632
1937
1938
1939
1940
197,474 ^
201,116
205,560
234,319
182,765
184,202
194,697
221,143
200,632
207,000
209,000
244,000
3
8,950
12,543
32,366
66,674
61,625
49,337
66,158
70,573
49,424
56,590
15,320
. 19,509
41,207
29,986
84,630
74,885
64,835
73,255
Commercial
Paper
$
4,351
29,909
75,086
110,358
116,080
63,240
43,110
57,301
31,494
45,325
39,072
24,419
46,821
27,599
20,427
27,287
6,202
32,500
5,725
22,000
2
3,000
8
3,000
30,000
1
735
211
55
t
paper
securities
paper
securities
paper
securities
paper
securities
securities
paper
paper
paper
paper
*Figure3 f o r 1915-1935 compiled from Annual Reports of
t h e F e d e r a l Reserve Banit of S t . L o u i s . Figures f o r 19361910 are from the Federal Reserve B u l l e t i n , and date
v a r i e s from Dec., 27, t o 31. A f t e r 1933 the gold pledged
t o secure t h e note i s s u e consisted of gold c e r t i f i c a t e s
only.
-151-^
TABtB 39
Federal Reserve Bank Notes
Outstanding and i n Circulation, St. Louis Bank*
^
^^
339'
putPtaRdiKK
Actual
Circulation
1918
1919
1920
1921
36,472,000
16,608,000
9,608,600
4,077,600
$6,216,000
15,498;324
9,486,750
3,923,429
1933
1934
8,233,700
t
8,066,700
1922
* *
*Annual Reports of the Federal Reserve Bank of St. Louis.
**During 1922 the special 2 per cent c e r t i f i c a t e s were redeemed by the Treasury, and the St. Louis Ban^ eliminated
i t s l i a b i l i t y f o r the notes by depositing lawfulmoney with
the Treasury.
40n June 21, the St. Louis Bank extinguished i t s l i a b i l i t y
f o r these notes by depositing lawful money with the Treasury.
of a l l forms of currency as w e l l as of gold.
The peak of ex-
pansion i n the note issue was reached i n March, 1933, when a
general banking holiday was declared by the President.
The
d a i l y average of notes i n c i r c u l a t i o n during March, 1933,
was $116,113,000 as compared to a d a i l y average of
$77,259,000 f o r March, 1931.
Since 1933 the amount of Federal
Reserve notes i n c i r c u l a t i o n has not declined, but instead
has increased.
The amount of notes of the St. Louis Bank i n
c i r c u l a t i o n i n the last two years has been approximately
$200,000,000.
This can be explained for the moat part by a
change i n habits i n the use of currency, the withdrawal of
gold c e r t i f i c a t e s from c i r c u l a t i o n , and the retirement of
n a t i o n a l bank notes.
The establishment of service charges
on demand deposit accounts by commercial banks has caused
"1
-152many small depositors to close t h e i r accounts and use currency
instead of checks.
Buaineaa firma iMX* tM)re frequently pay
t h e i r employees i n currency instead of by check.
There i s a pronounced seasonal v a r i a t i o n i n the
note c i r c u l a t i o n of the St. Louis Bank.
Notes are issued
p a r t i c u l a r l y i n the f a l l months when the crops are being
moved.
The volume of notes i n c i r c u l a t i o n i a smallest usually
during the months of June and J u l y .
In August a demand f o r
a d d i t i o n a l notes appears,, and the note c i r c u l a t i o n increases
through the f a l l months reaching a peak usually i n December.
TA34E
30
Federal Reserve Wotea i n C i r c u l a t i o n during
1931, 1932 and 1933*
St. Couia Federal Reaerve Bank
(monthly averages of d a i l y figures)
i n thouaanda of d o l l a r a
January
February
March
April
May
June
July
August
September
October
November
December
_1931
382,4^5
79,470
77,259
76,307
74,609
72,988
72,853
73,225
76,039
81,546
85,958
86,929
1
1933
$91,04?
93,216
92,822
91,048
90,430
91,032
98,216
100,872
101,082
100,807
101,491
103,318
. 1933
3122,&53
136,155
166,113
150,457
146,980
142,580
139,053
135,172
134,582
139,515
143,264
144,861
*Compiled from Federal Reserve B u l l e t i n s f o r 1931, 1932,
1933.
-153-^
Notes are returned t o the Bank during the l a t e winter and
spring months, the volume of note c i r c u l a t i o n continually
declining u n t i l the middle of the summer.
This seasonal
movement i s to be explained by the predominantly a g r i c u l t u r a l
character of the d i s t r i c t .
This seasonal movement seems to
coincide with the fluctuations of " c i r c u l a t i n g deposits"^^ of
member banks i n the Eighth D i s t r i c t as indicated i n the
studies of James W. Angell.
Angell found c i r c u l a t i n g deposits
i n the St. Louis d i s t r i c t to be r e l a t i v e l y low i n June and
high i n December.50
The seasonal v a r i a t i o n i n the note c i r c u l a t i o n has
been less i n recent years.
This has been due i n part to the
increased c i r c u l a t i o n of Federal Reserve notes i n urban cent e r s , the result of influences noted above.
The seasonal
v a r i a t i o n i n currency c i r c u l a t i o n i n urban centers d i f f e r s
from that i n a g r i c u l t u r a l areas.
I t might also be pointed
out that the St. Louis Bank provides member banks with
currency issued by the Treasury i f i t i s available, because
of the cost i t must incur i n securing Federal Reserve notes.
The Treasury has issued a larger amount of currency i n recent
years i n connection with the s i l v e r program.
Another form of Federal Reserve currency was authorized by the Act, known as the Federal Reserve bank note.
'This note was to be secured, as was the national bank note.
49Net demand deposits less bankers' balances--equivalent
t o the aggregate of deposit currency.
50Angell, James V . , The Behavior of Money, p. 69.
-154-^
by government bonds.
The national banks were not required to
r e t i r e t h e i r bank notes, and none did so i n the Eighth Dist r i c t u n t i l the bonds bearing the c i r c u l a t i o n p r i v i l e g e
matured, and the c i r c u l a t i o n p r i v i l e g e was withdrawn i n 1935.
However, under the terms of the Pittman Act of 1918, which
provided f o r the sale of s i l v e r by the Treasury, and the
issuance of Federal Reserve bank notes to prevent currency
contraction, the St. Louis Bank issued such notes secured by
United States c e r t i f i c a t e s of indebtedness.
On December 31,
1919, there were $15,498,324 of such notes i n c i r c u l a t i o n ,
which was the largest amount i n c i r c u l a t i o n at any time.^i
The l a s t of these notes were r e t i r e d i n 1922 by depositing
l a w f u l money with the Treasury for t h e i r redemption.
The
St. Louis Bank began issuing Federal Reserve bank notes again
on March 18, 1933.^^^ By the end of 1933, $8,340,000 of these
notes had been issued.
On June 21, 1934, the Bank extin-
guished i t s l i a b i l i t y f o r the notes by depositing l a w f u l
53
money with the Treasury.^^
The Glass-Steagall Act of 1932 made government bonds
e l i g i b l e as c o l l a t e r a l f o r the issue of Federal Reserve notes
T h i s provision was o r i g i n a l l y l i m i t e d t o a period of two
years, but subsequent l e g i s l a t i o n extended the period of
e l i g i b i l i t y of government obligations.
An Act of June 30,
1939, provided that u n t i l June 30, 1941* the Board of GovSl^n^MAl Rl^^rt of the Federal Reserve Bank of St. Louis.
1919, p. 12
5 2 i a i d . , 1933, p. 11.
53iaid.* 1934, p. 10.
-155-^
ernora of the Federal Reserve System could authorize the
Federal Reserve Agent t o accept government obligations aa
c o l l a t e r a l security for Federal Reserve notes.
The St. Louis
Bank used 332,500,000 of bonds i n 1932 as security for notes.
Such provision for the e l i g i b i l i t y of direct government obl i g a t i o n s has given greater power of expansion to the Federal
Reserve note issue i n a period in which the Federal Reserve
banks have had l i t t l e or no commercial paper to use aa
collateral.
The Federal Reserve note should not be Made a
bond-secured currency, but as long as gold c e r t i f i c a t e s and
commercial paper are also e l i g i b l e as security t h i s w i l l not
be the r e s u l t .
The q u a l i t y of greatest importance i n any currency
issue i s e l a s t i c i t y .
Nearly a l l the assets of a Reserve
bank are now e l i g i b l e as c o l l a t e r a l security for the issue
of notes.
This s i t u a t i o n has increased the e l a s t i c i t y of the
Reserve bank note issue rather than diminished i t .
The sig-
n i f i c a n t fact about the Federal Reserve note i s not the
c o l l a t e r a l behind i t , provided s u f f i c i e n t e l i g i b l e c o l l a t e r a l
i s a v a i l a b l e , but the fact that i t i s a l i e n on the assets
of the Reserve Bank.
I t i s i n a very r e a l sense an asset
currency.
Financing the War
The Federal Reserve Act authorized the Secretary of
the Treasury to use the Federal Reserve banks as f i s c a l
agents iMvi IHi^f ivere designated as f i s c a l agents beginning
January 1, 1916.
However, u n t i l our entrance i n the war In
-156-^
A p r i l , 1917, the $ub-trea*uri*t *nd th* n A t i o n t l bAnx* continued t o perform moat of the work as f t s c a l agents for the
government.
When the Treasury undertook the tremendous
problem of securing funds to finance the war e f f o r t of the
United States, i t determined to negotiate a l l loans through
the Federal Reserve banks.
The Reserve banks were i n a
p o s i t i o n not only t o handle e f f e c t i v e l y the sale and d i s t r i bution of government bonds and short-tera obligations, but
t o provide the credit by means of which meaber banks and i n d i v i d u a l s could quickly absorb large quantities of government o b l i g a t i o n s .
The Federal Reserve banks assisted the program of
war finance i n several ways.
P r e f e r e n t i a l rates were estab-
l i s h e d f o r the discounting of member bank notes secured by
government war o b l i g a t i o n s , and f o r the rediscouKting of
customers' notes secured by such c o l l a t e r a l .
Thus the
Reserve banks extended credit not only to member banks i n
order that they might buy bonds, but i n d i r e c t l y to i n d i v i d uals who borrowed from the banxs i n order to buy bonds.
Further, non-mcBber banks were permitted to borrow from the
Reserve banks on notes endorsed by member banks.
The Re-
serve banks themselves bought government o b l i f a t i o n s
considerable amounts.
in
F i n a l l y , the Reserve banks i n each
d i s t r i c t organised the campaign to s e l l government bonds
t o the public and t o banks.
In carrying out the program of large-scale borrow^
ing f o r the government the Reserve banks caae to perform
-157-^
many f i s c a l functions.
large amounts.
They accepted government depoaita i n
They handled a l l d e t a i l s connected with the
sales and allotments of Treasury c e r t i f i c a t e s of indebtedness, received subscriptions for Liberty bonds, and made
d e l i v e r i e s of bonds and Treasury c e r t i f i c a t e a .
They collected
a l l payments f o r bonds and c e r t i f i c a t e a , and redeposited the
funds collected with banka which had q u a l i f i e d as deposiThey held the c o l l a t e r a l which was offered aa
t a r i e s . ^ ^
security f o r government deposits by banks that q u a l i f i e d t o
hold such deposits.
Transfers of funds were made by t e l e -
graph through the gold aettlement fund of the Federal Reserve Board from banka i n one part of the country to Federal
Reserve banks i n other parts of the country where diaburaements were being made by the government.
The Federal Re-
aerve banks thua became the p r i n c i p a l f i s c a l agenta of the
Federal Government.
In the Eighth D i a t r i c t the organization that waa
f i r s t constructed t o s e l l the Liberty bond issues was composed of an executive committee, and a central committee.
R o l l a Wella, Governor of the St. Louis Bank, appointed to
the executive committee the presidents of the IB clearing
house associations i n the D i a t r i c t , and f i v e other representatives from c i t i e s with no clearing houses.
Each member
of the executive committee was assigned the counties adja-
Report of the Federal Reaerve Board. 1918,
p. 1.
UBRARY
Of
WASmNGTON
HY. UOUtS .
-158-^
cont t o h i s
c i t y . 5 3
T^e central committee was composed of
nine St. Louis men who devoted a l l t h e i r time to the work of
placing the loan.
The proportion of the t o t a l amount of the
f i r s t Liberty bond issue that should be taken by the Eighth
D i s t r i c t was determined on three bases, banking strength,
wealth, and population.
as the minimum.
The banking strength basis was used
Quotas were then assigned to each of the
l o c a l d i s t r i c t s i n charge of a member of the executive
committee.
For the second Liberty loan the organization was
somewhat changed.
There were three committeest
a general
committee composed of 38 men representing various c i t i e s
in
the D i s t r i c t , an executive committee composed of 20 men,
most of them members of the general committee, and an administ r a t i v e committee composed of 16 St. Louis bankers and
brokers.^^^
The general committee and the executive committee
both served i n an advisory capacity, the administrative
committee a c t i v e l y carrying on the work.
For the t h i r d and
fourth Liberty loans t h * organization was s t i l l
changed.
further
The actual administration was conducted by a cen-
t r a l committee, composed of three o f f i c e r s , a chairman for
each state, and d i r e c t o r s i n charge of various departments.
Treasury c e r t i f i c a t e s were equally as important as
the long-term L i b e r t y bond issues i n financing the war.
These c e r t i f i c a t e s were issued i n a n t i c i p a t i o n of each of
55AnnM§i Rtpoft of the Federal Reserve Bank of St. Louis,
16.
1917,, pp. 15, 16*
3*Ibid.. 1917, pp. 16, 17.
^^Ibid., 1918, p. 15.
57
-159-^
the bond issues, and also i n anticipation of tax receipts.
The c e r t i f i c a t e s could be used i n payment f o r the bonds,
and the payments were thus spread over a considerable period
of time, preventing any undue disturbance of the money market.
The St. Louis Reserve Bank urged a l l the banks i n the
D i s t r i c t to set aside funds every two w eks to invest
in
these c e r t i f i c a t e s , and met with a very favorable response.
The percentage of a l l banks i n the D i s t r i c t subscribing to
the various issues of Treasury c e r t i f i c a t e s varied from
58
56.8 to 90.6.
Only i n the case of the so-called "loan
c e r t i f i c a t e s * issued i n 1919 after the Victory bond issue
59
d i d the per cent of banks subscribing f a l l below 50.
This
may be explained by the reluctance of the banks to invest
further i n low-yield government securities a f t e r the war was
over.
The proportion of national banks subscribing to the
c e r t i f i c a t e s was generally higher than i n the case of the
state banks and t r u s t companies.
In the case of many banks
acting as government depositaries the c e r t i f i c a t e s were purchased by c r e d i t i n g the government with a deposit on the
books of the bank.
At the end of 1913, 53^ banks and trust
companies i n the D i s t r i c t had q u a l i f i e d as depositaries out
of a t o t a l of 3,092 institutions.^^
The work of the St. Louis Bank i n connection with
the sales of the f i v e Liberty loan issues was highly e f f e c t ive.
In each case the quota assigned to the Eighth D i s t r i c t
38Annual R s n o r t s o f t h e F e d e r a l R e s e r v e Ban* o f S t ,
1913, p p . 33-9; 1919, p . 45.
5 9 l h i a . , 1919, p. 45.
60iaia.,
1913, p .
14.
Louis.
-160-
T t b i * 31
TroAtury C t r t i f i c i t c * of Indebttdnca*
' Sold i n 8th D i a t r i c t *
T o t a l amount aold
i n United B t i t t t
Amount aold i n
9th P i ! t r i c t
$3,880,570,000
10,660,743,030
11,177,33?,599
$82,728,000
406,790,000
399.33?,309
$23,718,642,500
$877,857,500
1917
1918
1919
Liberty Bonds Sold i n 8th D i s t r i c t *
T o t a l Salea i n
Vnit9d B t P t i t
laaua
$1,989,453,550
3,307,865,000
4,158,599,100
6,959,337,300
4,471,344,339
Firat
Second
Third
Fourth
Victory
$21,406,799,800
Subacribed
Sth P i 9 t r i ? t
Allotted9th U s t r i c t
86,134,700
184,280,750
199,835,900
295,329,750
319.419,709
$ 65,469,600
150,169,250
199,835,930
295,329,750
391,737,699
$ 975,999,800
$912,592,100
$
Analyaia of Paymenta f o r Three Liberty
Bond laauea - 8th D i a t r i c t *
ISSKS
Third
Fourth
Victory
S&ah
CESdn
$ 56,290,303
54,313,998
41,499,32?
389,421,597
133,959,027
100.910.271
$152,013,130
$324,290,895
Certificatea
of
Balance
npt dut
$ 54,124,000
82,274,000 324,782,723
3?.463,399
$195,866,500
*Compiled from ^nnual Reporta of the P e d t r s l Reserve Board
and AnMMli Reoorta of the F e d t r a i Rastrvt Ban* of Rt. LouiaJ
1917-1919.
-161-^
V&3 considerably over-subscribed.
For the last three of the
Liberty loan issues the Eighth D i s t r i c t was the f i r s t of the
d i s t r i c t s to reach i t s quota.
The t o t a l amount of Liberty
bonds sold i n t h i s d i s t r i c t was $912,592,100, which represented 4.3 per cent of a l l the bonds, sold.
The per cent of
bqnks subscribing to the Liberty loan issues was higher than
f o r the Treasury c e r t i f i c a t e s , nearly 100 per cent of the
banks p a r t i c i p a t i n g .
The Treasury c e r t i f i c a t e s were p r a c t i c a l l y a l l purchased by the banks, only a n e g l i g i b l e portion being purchased
d i r e c t l y by i n d i v i d u a l s or corporations.
In the case of the
L i b e r t y bonds the banks were the largest purchasers i n the
first
instance.
Almost h a l f of the bonds were paid for by
means of crediting the government on the books of the bank.
Approximately $697,000,000 of the Third, Fourth and Victory
bond issues were sold i n the Eighth D i s t r i c t , and of t h i s
amount $324,000,000 were paid f o r by means of credit on the
books of banks.
The use of the credit of the Federal Reserve Bank
of St. Louis f o r the purchase of Treasury c e r t i f i c a t e s and
L i b e r t y bonds can be seen i n the proportion of paper d i s counted by member banks that was secured by there war o b l i gations.
P a r t i c u l a r l y during 1918 and 1919 most of the
discounted paper consisted of customers' notes and member
bank notes with war paper as c o l l a t e r a l .
-162-
Table 32
T o t a l B i l l * Discounted and B i l l s Discounted Secured
by War Obligations of the Oovernment,
St. Louis Bank
1917
1918
1919
1920
Total B i l l s
Pi9Q0Mnt9d
Secured by War
Oblisations
131,117,651
1,085,137,254
2,100,630,595
2,438,040,714
108,592,719
777,982,269
1,895,246,179
1,441,230,964
While both Treasury c e r t i f i c a t e s and L i b e r t y bonds
were sold l a r g e l y by means of expanding bank c r e d i t , the
large amounts of government obligations were absorbed by the
p u b l i c i n the Eighth D i s t r i c t i n a s a t i s f a c t o r y manner, and
as q u i c k l y as could have been reasonably expected.
The
&t. Louis Bank estimated that at the end of 1918 about
$800,000,000 of war o b l i g a t i o n s were outstanding i n the
Eighth D i s t r i c t . T h e
banks i n f i v e f i n a n c i a l centers i n the
d i s t r i c t , St. Louis, L o u i s v i l l e , Memphis, L i t t l e Rock, and
E v a n s v i l l e , held approximately $75,000,000 of war obligations
at the end of 1918.
62
T h i s indicated a probable absorption
by the p u b l i c of some 500 t o 700 m i l l i o n s of d o l l a r s of such
obligations.
On December 31, 1918, the t o t a l amount of b i l l s
discounted by the S t . Louis Bank held on that date was
$70,702,654, of which $53,117,641 was secured by war o b l i g a t i o n s , or 75 per cent.
63
6iAnnuai Report of the Federal Reserve Bank of St. L o u i s .
1918, pp. 20-21.
6 2 l h i d . , 1918, p. 21.
6 3 i h i d . , 1918, p . 21.
-163At the end of 1919 there were ApproxiaAtely
$1,047,000,000 of wer obligation* outstanding i n the d i s t r i c t . ^ *
Banks i n the saae f i v e f i n a n c i a l centers held a t o t a l of
342,530,000 of war obligations at the end of 1919, which was
$29,014,000 l e s s than the aaount held at the end of 1918.^^
T h i s would i n d i c a t e an absorption of nearly a b i l l i o n d o l l a r s
i n government s e c u r i t i e s .
On December 26, 1919, the t o t a l
loans and investments of the 35 reparting banks i n these f i v e
c i t i e s were $591,306,00Qof which $79,079,000 or 13 per cent
was represented by war obligations or loans secured by war
obligations.^^
On December 31, 1919, the t o t a l borrowings
of member banks amoumted t o $77,679,473.
Discounted b i l l s
secured by war obligation* a&ounted t o $45,063,227, or 58 per
cent of the t o t a l borrowicgs.
War o b l i g a t i o n s , however,
continued t o support the i n f l a t e d credit structure i n a considerable way during 1920, as i s indicated by the large prop o r t i o n of paper secured by such o b l i g a t i o n s discounted by
the Bank i n 1920.
The use of Pederal Reserve bank credit i n financing
the sale of government s e c u r i t i e s enabled the bank* to avoid
c u r t a i l i n g c r e d i t f o r ordinary coamercial and i n d u s t r i a l purposes.
Credit was a v a i l a b l e f o r a l l reasonable business needs.
The expansion of bank c r e d i t was not i n i t s e l f the cause of
the i n f l a t i o n o f prices which occurred.
I t was the expenditure
o f funds secured from an expansion i n bank credit by the
1919,^PP. 21-22.
1919, p. 2 a
6 6 l b i d . , 1919, p. 22.
6 7 i b i d . , 1919, p. 22.
-164-^
govornmeat i n the purchAse of i**r BAtoriAla and tuppliea,
creating a flow of aonetary consumer purchasing power.
This
monetary purchasing power wss not offset s u f f i c i e n t l y by taxa t i o n , or by savings of current inco^^, but was directed to
the markets f o r consumer goods.
O r d i n s r i l y , the effect of
war expenditures on prices i s largely determined by the prop o r t i o n of funds secured by taxation t o those secured by
borrowing.
I f a l l the funds spent Ipr war purposes were
secured by taxation the a r t i f i c i a l monetary purchasing power
created would be o f f s e t by taxes, and the program would not
be i n f l a t i o n a r y .
I f the funds, however, ere secured by cre-
a t i n g bank c r e d i t , or by borrowing past AccuMulsted savings,
the flow of money purchssing power from the war industriea
i s not o f f s e t .
The result i n the l a t t e r case i s the enforced
spending of past savings and of a r t i f i c i a l bank c r e d i t .
If
the government borrow* funds that represent savings of current
consumer income, the result i s an o f f s e t to the flow of
a r t i f i c i a l money purchAsinx po*er.
I t i s possible by the use
of various techniques i n s e l l i n x government s e c u r i t i e s to i n duce the consumer t o save current income to purchase such
securities.
The result of the lerge use of Reserve credit
in
the purchase of government s e c u r i t i e s during the period 19171919 was t o effect a gradual absorption of these s e c u r i t i e s
by the p u b l i c .
To a l i m i t e d extent the extension of bank
c r e d i t f o r the purchase of s e c u r i t i e s emcouraged the saving
i&P current consuaer income t o make payaent, but a r t i f i c i a l
-165-^
money income waa not offset i n great measure by such saving.
A program of heavier taxation and of direct absorption of
current savings would have prevented much of the i n f l a t i o n
of the period 1917-1920.
The policy of government borrow-
ing by means of credit i n f l a t i o n once having been determined,
however, the use of Reserve credit enabled ordinary business
enterprise t o secure credit at reasonable rates of i n t e r e s t .
During most of 1918 a sub-committee of the Capital
Issues Committee, appointed by the Federal Reserve Board,
functioned i n the Eighth D i s t r i c t .
An act of Congress of
A p r i l 5, 1918, gave t h i s Capital Issues Committee a l e g a l
status, and i n J u l y the D i a t r i c t sub-committee became the
" D i s t r i c t CoRmittee on Capital Issues".
The purpose of
t h i s Coamittee was to discourage unnecessary undertakings i n v o l v i n g c a p i t a l expsnditures, or the issuance of new securi t i e s , so as t o conserve c a p i t a l , labor, and materials f o r
war purposes.
During the year the Committee considered 233
formal applications, approving 210 involving $65,378,677,
and disapproving 73 involving 327,039,354*^^
In addition,
the Coomittee secured the postponement, informally, of about
140 projects involving the expenditure of approximately
$40,030,000.
^^Annual
Annual Report
Hepor of the Federal Reserve Bank of St. Louis.
1918, pp. 17-18.
1918, p. 18.
-166-^
CHAPTER V
THE MEMBER BANKS OF THE EIGHTH DISTRICT
A l l national banks are required to become members
(Xf the Federal Reserve System.
Banks chartered under state
liMvs are permitted to become members i f they f u l f i l l the
ri&Quireaents f o r membership as provided by the Act, and coni^)3na t o the regulations proscribed by the Board f o r the admission of attR^ banks.
It was believed at the time the
Federal Reserve Apt was enacted that a large number of
state i n s t i t u t i o n s tK^J^ j o i n the System imaediately, and
thi^t eventually nearly a l l the banks i n the country would
CCMM& iMMier i t s j u r i s d i c t i o n .
This hope was not realized,
as vei^f ;few state banks joined the System i n i t s early years,
1MM3 a large number s t i l l remain outside the System today.
TMrile member banks held 87 per cent of the deposits i n a l l
operating commercial banks at the end of 1939, they cons t i t u t e d only 44 per cent of the number of such banks.
Many steps have been taken t o encourage, and to
o f f e r incentives t o these banks t o j o i a .
Regulations have
beiHi !&M3e f o r the purpose of meeting the objections offered
t^f the state banks.
Some Reserve banks have devoted much
e f f o r t t o the task of persuading these banks of the value
(^r the services offered to member banks i n r e l a t i o n to the
o b l i g a t i o n s imposed by membership.
This task has been par-
t i c u l a r l y d i f f i c u l t i n the Eighth D i s t r i c t , as i n other d i s t r i c t s i n th^ Middle West and South, because of the large
-167-^
number of sa&ll banka.
S t r v i c t a Offered Mcm^^r XanS*
The St. Louia Reserve Bank offers a number of serv i c e s to member banks that are not required of i t by the
terms of the Act.
The objective of the Bank has always been
t o provide such additional services to member banxs as i t
was f i n a n c i a l l y able to undertake, i f these services could
be provided more e f f e c t i v e l y , or at less expense, by the
Reserve Bank.
Some of these voluntary aervices may be enumerated
aa f o l l o w s :
1.
Non-caah c o l l e c t i o n f a c i l i t i e s .
The Bank
receives f o r c o l l e c t i o n from member banks
notes, d r a f t s , acceptances, bonds, and other
non-cash items.
service.
No charge i s made f o r t h i s
A member bank may send direct to
other Reserve banks items payable i n t h e i r
districts.
With a few exceptions no charges
are made by these other Reserve banks.
2.
Hire t r a n s f e r s .
Transfers of funds between
member banka i n the D i s t r i c t are made through
t h e i r reserve accounts, of course.
Transfers
of funds from one d i s t r i c t to another may be
made over the leased wires of the System i n
multiples of
ber bank.
without cost to the mem-
-178-^
3.
Exchange drafts on the Reserve Ban*.
Mem-
ber banks may issue exchange drafts on t h e i r
reserve accounts to supply funds for the
iaaediate credit i n the 36 Federal Reserve
bank and i t s branch c i t i e s .
4*
Safe-keeping.
Member banks may deposit f o r
safe-keeping s e c u r i t i e s , commerciil paper, and
bankers* acceptances owned by them.
5.
Investment services.
The Reserve Bank w i l l
buy and s e l l f o r member banks government securi t i e s and acceptances without any charge for the
service.
6.
Charges on currency shipment.
The Reserve
Bj&hk pays a l l transportatioa and insurance costs
on the shipment of paper currency and coin to and
from member banks, except i n the case of s i l v e r
dollars.
7.
Reporting and research services.
Monthly
reports on a g r i c u l t u r a l , business, and f i n a n c i a l
conditions are oade available.
Annual studies
of operating costs and p r o f i t and loss experience
of member banks have been aade since 1937.
Tlhs S t . Louis Bank has endeavored to inform banks
i n the D i s t r i c t *s f u l l y as possible of the various serv i c e s a v a i l a b l e through the Reserve System i n order t o
enable them t o r e a l i s e the maximum advantage of membership
lUa the System.
C i r c u l a r s explaining various phases of the
operation of the Reserve System have be^m sent t o the member
-169-^
banks.
Personal contacts between o f f i c e r s Mrd represen-
t a t i v e s of the St. Louis Rank and the member and non-membar
banks have been emphasized.
La
1922, a regular system
of v i s i t s t o member banks was inaugurated.
The D i s t r i c t
was divided tnto four sections, and a traveling representat i v e was assigned t o each.^
Representatives were required
t o cover t h e i r sections at least twice yearly.
Non-member
banks as w e l l as member banks were called on i n those towns
where member banks were located.
In 1926 the number of
representatives was reduced and th^ v i s i t s were made but
once,a year.
Regardless of questions as to the a d v i s a b i l i t y of
e s t a b l i s h i n g the three branches at L o u i s v i l l e , Memphis,
and L i t t l e Rock, the existence and operation of these
branches has aided considerably i n maintaining closer relation^ between the Reserve Bank and the member banks.
It
xmast be admitted, o^ course, that member banks located i n
reserve c i t i e s have an advantage i n u t i l i z i n g the services
of the Reserve bank.
The establishment of the branches,
tl^erefore, made these services more available to the banks
located
these c i t i e s , and undoubtedly had some influence
lUa increasing the membership of state banks i n these c i t i e s .
The S t . Louis IBank was the f i r s t of the Reserve banks to
inaugurate a conference between o f f i c e r s and directors of
tiie Reserve Bank ai^ o f f i c e r s and directors of the branch
ii^Mnuil RaoJrf
1922, p. 16.
"f
P'd^ral
R e s e f t t P*B* o f S t ,
Lo^is,
-123biM^is.
Such a conference was f i r s t held i n St. Louis on
A p r i l 16, 1919.^
Examinations
The Federal Reserve Act i n Section 9 o r i g i n a l l y
required that at least two examinations a year be made by
the Comptroller of the Currency of a l l national banks and
state member banks.
The Federal Reserve Board was permitted,
however, t o accept the examinations of state authorities f o r
state member banks.
One of the several amendments made i n
1917 :&or the purpose of encouraging state banks to j o i n the
System provided that i f a Reserve bank approved the exami n a t i o n s made by a state authority, they could be accepted
i n place of examinations by the Comptroller, or by the
B o a r d . 3
Thds placed the control of examinations of state
member bank^ i n the hands of the Reserve bank.
This amend-
BMKR i^Lso provided that reports of condition were to be
made t o the Reserve bank.
lå 1918 the St. Louis Bank made no separate
laxaminations, but accepted the reports of examinations made
l^f the various state banking departments.^
However, near
t h e close o f 1918 the St. Louis Bank organized an examina t i o n department, and made an arrangement with the Missouri
State Banking Department to have an examiner of the Reserve
Bank p a r t i c i p a t e with a state examiner i n examining member
i R H a . , 1919, p. 18.
3s$ction 9, paragraphs 5, 6, and 7, federal Reserve ^ct.
'^hqaual Report of th^ Federal Reserve Bank of S t . L o u i s .
1913, p. 12.
-123s t a t e banks i n Missouri.^
During 1919 similar arrangements
were made with the banking departments of other states i n
the D i s t r i c t . ^
Edging the twenties the St. Louis Bank par-
t i c i p a t e d i n a large portion of the examinations made by
s t a t e banking departments of member banks, but not i n a l l
of them.
The Bank usually made an independent examination
of a bank applying f o r membership, and i n a few cases made
Independent examinations of state banks already
members.^
In recent years state member banks have been examined r e g u l a r l y once a year by Federal Reserve examiners
i n conjunction with state examinations.
This j o i n t exam-
i n a t i o n i s desirable f o r a number of reasons: f i r s t , because
t&ore information can be obtained at less cost; second,
because a bank should not be needlessly subjected to
a d d i t i o n a l v i s i t s of examiners; t h i r d , because i t promotes
igniformity of standards i n examination work; and, f i n a l l y ,
because o f the need
cooperation between the Reserve
Bag^c iMvi the several state banking departments.
M^p^^rshjp
JMt the time of the announcement of the decision of
t h e Reserve Bank Organization Committee there were 458
i i a t i o n a l banks i n the Eighth D i s t r i c t with aggregate c a p i t a l
!Mid surplus of $83,179,350.
At the end of 1915, a f t e r the
f i r s t JhiLL jfear of operation of the Reserve Bank, there
^E&Ld., 1918, p. 12.
6 l b i d . . 1919, p. 10.
Trhe Board o f Governors of the Federal Reserve &yst6n n^y
make en independent examination of any member bank with i t s
<yMa examiners i f i t deems i t necessary.
-123TA9&3 3?
E3MLalnAtians Conducted by the St. Louis
Federal Reserve Rank*
Number of
Member
Stat? PtRkt
1919
1920
1921
1922
1923
1924
1925
1926
1927
ParticipatlPMS
63
91
105
121
129
133
130
123
111
43
30
39
119
122
90
107
63
71
Independent
12
12
18
12
9
8
13
3
Examinations
Applytpg pan^s
12
15
16
11
8
8
3
* Compiled from Annual Reoorta of the Federal Reserve Bank
9f
were 4^7 meaber banks.
A l l were national banks except one,
the Mercantile Trust Company of St. Louis.
T h i s state i n -
s t i t u t i o n had joined the System at the time of i t a organization.**
At the end of 1913 there vere 935 state banks
tiHRSt companies e l i g i b l e f o r membership on the basis of
c a p i t a l requirements.
They had a combined c a p i t a l and sur-
p3aM! <&f $109,580,557.^
In addition, there vere 1,588 state
banks and t r u s t companies i n e l i g i b l e for cuMabership, with
t o t a l c a p i t a l and surplus of $51,274,963.
The Federal Re-
serve Bank i&f S t . L o u i s , therefore, began operation with a
taemberahip having only about 35 per cent of the banking
c a p i t a l of the D i s t r i c t .
Had a l l the e l i g i b l e state banka
S^nnnal
of the y^deral Reserve
1 9 1 ^ ^ 16.
7777^
<MEaii.* 1915* pp. 15-16.
of p t , ^p^^^s,
-173-^
jolned the Syatea the St. Louis Reserve Bank c a p i t a l would
have been more than doubled.
An important problem was thus presented t o the
St. Louia Bank.
I f i t waa t o secure control eventually of
the majority of banking c a p i t a l i n the D i a t r i c t , and thua
make central banking more e f f e c t i v e i n t h i s area, i t had t o
indue* a considerable number of the state i n s t i t u t i o n s t o
j o i n the Syatem.
No more state banka joined i n the Eighth
D i s t r i c t u n t i l 1917.
'There vaa no direct hindrance t o membership of
state banks i n the banking laws of the several states of
the Eighth D i s t r i c t .
In Arkansas, I l l i n o i s , Indiana, and
Tenneaaee no a p e c i f i c l e g i s l a t i o n was enacted, but state
a u t h o r i t i e s ruled that state banks might subscribe f o r stock
i n the Federal Reaerve Bank under existing laws.
There was
a diapute i n Miaaouri as t o whether state banks could j o i n ,
which waa reaolved by amending the banking statutes to
authorise state banks^^ and t r u s t companies^^ to enter the
system.
A proviaion of the K i a s i s a i p p i banking law enacted
i n 1914 stated, *No part of the stock of any bank, except
regional reserve banks, doing business i n t h i s State,
shall
12
be owned by any bank under the provisions of t h i s a c t . "
Kentucky i n 1914 also paaaed an act authorizing state banka
and t r u s t companies to aubscribe f o r stock i n the Reserve
i O A r t i c l * I I , Sec. 66, BanKtRK
9f MilswMft, Revision
of 1915.
i i l b i d . . A r t i c l e I I I , Sec. 167.
i^Sec. 64, Banking Law of 191A. M i s s i s s i p p i .
-174-^
3&nk.
BtAte banks offered * nuaber of objections to the
provision* of the Act that related t o state banx membership.
Breckenridge Jones, president of the M i s s i s s i p p i Valley
Timet Company of St. Louis, was one of the important leaders
i n the opposition of state banks throughout the country to
membership i n the Reserve System.
He made numerous speeches
i n various parts of the qountry suggesting changes that
*ere necessary before state i n s t i t u t i o n s would f i n d i t advantageous t o
j o i n . J o n e s
quite i n f l u e n t i a l among
state bankers i n the Eighth D i s t r i c t , and undoubtedly h i s
opposition discouraged applications for membership.during
1915 and 1916.
Breckenridge Jones advanced three basic objections
t o membership.
F i r s t , he asserted that the Federal Reserve
Board had imposed s t r i c t e r requirements f o r membership than
those o r i g i n a l l y s p e c i f i e d i n the Act.
The f i r s t
position
taken by the Board had been that i t could prescribe what
part of the charter powers of a state bank or t r u s t company
could be exercised i f i t became a member of the Federal Reserve System.
L a t e r , the Board abandoned t h i s position,
and declar*d that i f , i n the opinion of the Board, the
exerois* of any of the charter powers of a state bank i n t e r i3"The R e l a t i o n of State Banks and Trust Companies to
the P t d t r a l Reserve Act", Address before Alabama Bankers'
Convention, May
1914. "Does the Federal Reserve System
Need the State Banks", Address before Kansas State Bankers'
Convention, A p r i l 22, 1915.
-175-^
fered with the l i q u i d condition of the bank, a i i a i t a t i o n
might be pieced on the rediscounting p r i v i l e g e of the bank.
The i t a t e banks feared, however, that the regulatioas aight
be changed a f t e r they entered the System, and that they
aight be r e s t r i c t e d i n the exercise of those powers which
*ere not enjoyed by the national banks.
Second, state banks,
i f they became members, would be required to send reports
iMMd l&e exeained by, the Comptroller of the Currency.
T h i s , i t was thought, would introduce a control not responsive t o l o c a l conditions.
Third, Section 22 of the Act had
the e f f e c t of p r o h i b i t i n g the payment of interest on the b a l ances of d i r e c t o r s , o f f i c e r s , employees, and attorneys, and
p r o h i b i t i n g loans t o d i r e c t o r s , o f f i c e r s , and attorneys.
T h i s would have constituted a considerable handicap to many
small banks.
I n response t o these objections amendments to the
Act were recommended by the Board and enacted by Congress
<Mi
21, 1917,^^ and on September 26, 1918.^^
Section 9
was amended t o read as f o l l o w s ,
"Subject to the provisions of the Act and the
regulations of the Board made pursuant therbto,
iM^f hank becoming a member of the Federal Reserve System s h a l l r e t a i n i t s f u l l charter and
statutory rights as a State Bank or Trust
Company, and may continue t o exercise a l l corporate powers granted i t by the State i n which
i t was created, and s h a l l be e n t i t l e d to a l l
p r i v i l e g e s of member banks.*
i4*lnnual Report of the Federal Reserve Board, 1917,
pp. 13-14.
I S i b i d . * 1918, p. 81.
-176-^
T h l s p r o v t s i o n was held t o exempt state banks from Section
8 of the Clayton Act p r o h i b i t i n g i n t e r l o c k i n g
directorates.
Of more importance t o the state banks, however, was the
freedom which i t granted from r e s t r i c t i o n s on loans t o any
one person i n excess of 10 per cent of c a p i t a l and surplus.
The amendments of 1917 a l s o substituted reports of conditton
t o the Reserve banks, and examinations T^y t]he Reserve banks,
or the Board, f o r examinations by and reports t o , the
Comptroller.
S e c t i o n 22 waa amended i n 1913 t o permit the
aM^tlUm o f loans ^nd the payment of i n t e r e s t t o d i r e c t o r s ,
o f f i c e r a , and employees, except that such loans had t o have
t h e approval of a majority of the board of directors.^^
.After i t became c l e a r , as the r e s u l t of recommendat i o n s by the Board, that the objections of the state banks
ifo&id be s a t i s f i e d ; Breckinridge Jones becase one of the
most a n t h u s i a s t i c supporters o f the Federal Reaerve Syatem.
THhe bank of which he was president, the M i s s i s s i p p i V a l l e y
T r u s t Company, became a member on May 4, 1917.
Between
A p r i l and November, 1917, seven l a r g e state banks i n
S t . Louis with an Aggregate c a p i t a l and surplus o f
318,800,000 were admitted t o membership.
Three other l a r g e
banks, one i n L o u i s v i l l e , one i n Meaphia, and one i n Quincy,
13
I l l i n o i s , became asmbers i n 1917.
i^toans t o executive o f f i c e r s o f a member bank were
l i m i t e d t o *n amount not exceeding 32,500 by amendaenta made
i n 1933 and 1935* Sec. 22 (g), P?daral Reserve A c t .
t** P e d t r a l Reserve
of S t , hogja,
1917, p. 11.
I S l h i A . , 1917, p. 11.
-177-^
In an address i n Septeaber, 1917, Breckinridge
Jones remarked concerning the entrance of h i s own bank i n t o the Systea,
"On which of two correspondents would you pref e r t o r e l y i n times of stress — the member
that you Know has the right t o rediscount wita
the Federal Reserve Bank and get needed money
f o r you, or a non-member, who has no such
r i g h t , and who may have to depend on the
courtesy of one of i t s correspondents or dep o s i t o r i e s who i s a meaber? I believe i t
t r u e that p r a c t i c a l l y every large trust
company keeps the majority of i t s reserve
accounts with National banks, or with state
banks who are members. This i s not alone f o r
the reasons of reciprocal business, but because those large i n s t i t u t i o n s r e a l i z e that
they need the protection of the Federal Reserve System, i n d i r e c t l y , at l e a s t . I t s&ems
reasonable that customers, e s p e c i a l l y those
whose business requires large l i n e s of c r e d i t ,
should do business with a bank which, i n times
of drought, has the right t o go d i r e c t t o the
r e s e r v o i r . Before we became members, we cert a i n l y f e l t that way. I could not answer the
argument. We thought that i n the long run our
customers would arrive at the same conclusion,
so we joined the System, and ever since have
been glad that we did.*19
Jones enumerated c e r t a i n s p e c i f i c advantages that
membership i n the System provided f o r state banks at that
time.
They were as followst^^
1.
Acceptances of a member bank could be sold
on the open aarket at rates between ^ and f per
cent lower than the s i m i l a r obligations of nonmember banks.
Kon-member banks were l i m i t e d i n
i9jonas, Breckinridgc, Address t o American Bankers*
A s s o c i a t i o n , Septeaber 25, 191^^ p. 21.
^Ofbid., ( e n t i r e address).
- 7 - ^
tradtng i n acceptances because they had no
f i x e d channel t o dispose of t h e i r acceptances
except i n the open discount market, which iM^!
l i m i t e d and precarious i n times of f i r m money
rates.
2. State banks would be l i m i t e d i n the expansion
of t h e i r commercial business unless they had
rediscounting
facilities.
3. I f a state bank i n a reserve c i t y wished t o have
large deposits from member bank correspondents,
i t needed t o j o i n the System, as member banks
could not deposit an amount greater than 10 per
cent of t h e i r c a p i t a l and surplus with nonmember banks.
4. 'The p r i v i l e g e of borrowing on c o l l a t e r a l loaas
from the Reserve bank constituted an important
p r o t e c t i o n against sudden withdrawals of
reserves.
5.In securing Federal Reserve notes and other
currency the member bank was r e l i e v e d from dependence on the convenience or a b i l i t y of a
city
correspondent.
6. P o s t a l Zavings deposits could be placed only
with member banks.
7.
Member banks could make d r a f t s on the Reserve
bank ^hich were a v a i l a b l e f o r immediate c r e d i t
at any Reserve bank or branch.
-1798. A aesber b&nx was not required t o use the
check clearinx and c o l l e c t i o n f a c i l i t i e s
of
the System, but the p r i v i l e g e was a valuable
one.
During 1918, 31 a d d i t i o n a l state banks and trust
companies i n the Eighth D i s t r i c t joined the System.^*^
The
p e t i t i o n f o r the Memphis branch bank was approved on June 5,
1918.
Shortly p r i o r or soon a f t e r the granting of t h i s
p e t i t i o n one large bank and two medium-sized banks i n Memphis
joined the System.
On June 19, 1918, the p e t i t i o n f o r a
branch bank at L i t t l e Rock was approved, which was followed
by the entrance of f i v e medium^sized banks i n that c i t y during J u l y and August.
Undoubtedly, the establishment of
branches i n these two c i t i e s was one important factor
in
b r i n g i n g these banks i n t o the System.
The rapid growth i n membership of state banks cont i n u e d during 1919 and 1920 with the entrance of 27 state
bangs i n 1919, and 24 i n 1920.
The number of state banks
entering the System dropped noticeably i n 1921, when only
14 j o i n e d .
The war was an important f a c t o r i n the increase i n
membership, 1918-1920.
An appeal by President Wilson was
Addressed t o a l l stste banks t o j o i n the System on grounds
of patriotism.
The SAle of L i b e r t y loans and other war
s e c u r i t i e s through the banks brought about s closer
^^Ann^Ml
191$, p. 38.
rela-
o f the PedtrAl Reserve BAR* of S t . L o u i s .
-IbO-
Merabership 8th District,1915-193.
1916
Keoberahip at the
be-inning of year
1916
1917
191B
1919
1920
467
469
478
513
540
6
1921
1922
1923
1924
1925
1926
1927
571
588
610
330
628
628
C18
1928
1929
1930
1931
1932
1933
1934
1335
1936
1957
1938
593
579
552
465
433
412
3J7
390
368
392
C
6
12
26
3
otals
)
JAina
j}
5
Mew aationAl
4
11
14
14
9
11
15
5
10
6
4
4
9
10
2
186
1
17
!
Convoraion atatc
to DAtioD&l
AdmiaBioa of stata
bank or truat co.
Total gaina
9
4
1
4
1
12
51
27
24
14
17
17
10
5
4
16
42
41
39
23
28
3c
15
15
11
1
1
4
1
3
8
9
1
1
21
5
8
17
19
7
7
33
1
1
2
3
3
1
7
' 10
4
8
20
28
16
14
9
12
3
6
16
1
3
9
5C
34
39
39
1
1
4
33
3
6
2
220
9
2
423
:
Loaaes
Marker of oenbcra
Voluntary liquidation
7
Suapcnaion
7
6
1
1
7
7
5
3
5
2
7
11
2
1
'
2
Abaorption by
non-mamber
Coaveraion national
to atata bank
28
1
7
4
2
3
211
6
2
7
1
6
^it^idrawl of
atate ban!
1
1
3
2
4
4
3
2
4
2
1
4
11
2
3
47
Total loaa
7
7
7
14
8
6
6
16
17
IS
21
24
14
31
46
74
54
59
53
10
2
5
3
cnange
2
9
35
27
31
17
22
20
2
-0
-10
-19
-6
14
*-27
-67
-47
-26
-13
-7
-2
4
-1
*€!^crahip at
of year
467
469
478
813
540
671
586
610
630
628
628
618
599
593
579
552
435
436
412
397
3J0
3-^8
3*92
391
!!aticQal
436
468
465
469
472
480
483
489
501
495
498
495
488
486
474
448
393
360
340
324
323
31^
317
314
1
1
13
44
68
91
105
121
129
133
l&O
123
111
107
105
104
92
78
73
70
70
75
77
2,7.1
+2,803
^,475
$3,799
^4,054
$4,366
$4,603
$4,627
$5,009
$5,129
$5,127
$5,293
#5,342
$5,406
(^8,268
$5,053
i $4,693
$4,3G0
^3,7.7
$3,7b2
State
^^id in capital
end of year
hw
(^000 )
(omitted)
AMMAl Reports of the Federal Reserve Bank of St. Louis.
198
B^
{
(
^3,
$3,94^
499
-181-^
t i o n s h l p between the state banxs and the Federal Reserve
22
3aiiK.
W^^tle non-mesber banks v^ere permitted to rediscount
paper based on war s e c u r i t i e s i f the paper was endorsed by
a meaber bank, Federal Reserve credit t o carry war s e c u r i t i e s
could be obtained more e a s i l y i f the state bank joined the
System.
By the end of 1921 there were 105 state member
banks.
The d i s t r i b u t i o n of these state aember banks by
states indicates a d i f f e r e n c e i n a t t i t u d e toward membership
i n the System.
iMnns
Approximately two-thirds of the t o t a l number
i n M i s s o u r i and Arkansas, 3323
and 36 banks, r e -
s p e c t i v e l y , i n these states had joined.
15 banks i n
I l l i n o i s and 11 banks i n Tennessee had become members.
How^
<Mfer, only 8 banks i n the states of Kentucky, Indiana and
M i s s i s s i p p i were members.
I t i s i n t e r e s t i n g t o note i n t h i s
connection that the parts of Indiana and Kentucky included
i n the Eighth D i s t r i c t were not regarded o r i g i n a l l y by the
i&t. Louis bankers as t e r r i t o r y l o g i c a l l y 'to be included i n
the i&t. Louis D i s t r i c t .
Indiana and Kentucky were added t o
t h i s D i s t r i c t p a r t l y t o secure s u f f i c i e n t banking c a p i t a l t o
meet the terms o f the A c t .
The period of growth i n the aeabership of state
banks and t r u s t companies i n the Eighth D i s t r i c t
from 1917 u n t i l approximately the end of 1923.
I^Lhid., p. 12
^^Ibid.. 1921, p. 20.
extended
The moveaent
-182-^
TA3&3 3$
Size of State I n s t i t u t i o n s According to C a p i t a l
and Surplus J o i n i n g System i n 8th D i s t r i c t ,
1917-1923*
Year
Un4er H00,9P9
1917
1918
1919
1920
1921
1922
1923
Total
$100,0003500.000
Over 3500,000
2
6
17
10
8
3
5
22
8
14
5
12
—
51
72
19
10
3
2
1
2
^
*Compiled from Annual Reports of the Federal Reserve Bank
of St, ^o^Aa
TA9^P 36
Number of State I n s t i t u t i o n s Joining System i n
Sth D i s t r i c t According t o Large C i t i e s and
Country Area, 1917-1923*
No. of Banks
S t . Louis Metropolitan Area
Louisville
Memphis
L i t t l e Rock
Evansville
Country Area Outside
4
4
6
1
85
*Compiied from Annual Reports of the Federal Reserve Bank
9f S t . bPMAs.
-183-^
o f state i n s t l t u t t o n a i n t o the System which developed during
the war and post-war adjustaent period continued through
1922 and 1923, 17 banks j o i n i n g i n each of these years. Only
10 state i n s t i t u t i o n s joined i n 1924, and, t h e r e a f t e r , no
considerable number o f banks joined the System u n t i l recently
except i n 1933 when 21 state banks were admitted.
An a n a l y s i s of the state i n s t i t u t i o n s entering the
System du^iag t f ^ period 1917-1923 indicates that the l a r g ea^ !MH^3er of banks j o i n i n g were medium-sized i n s t i t u t i o n s
w i t h c a p i t a l and surplus of §100,000 t o $500,000.
Of the
142 state banks admitted t o membership during these years 72
were of t h i s group.
The smaller banks, those having c a p i t a l
and surplus under $100,000, evidenced l i t t l e interest i n the
System.
While by f a r the largest number of banks i n the
Eighth D i s t r i c t were small banks of t h i s type only 51 joined
the System.
Of the 19 large i n s t i t u t i o n s that entered during
t h i s period 13 joined during 1917 and 1918.
Pt i s i n t e r e s t i n g t o note the influence of the
l o c a t i c M of the Reserve Bank i n St. Louis on the membership
of state banks i n that c i t y .
Of the 142 banks admitted t o
laeabership i n the period 1917-1923, 42 were located i n the
S t . Louis metropolitan t r e a .
15 of the banks were located
i n L i t t l e Rock, Memphis, L o u i s v i l l e , and E v a n s v i l l e , and 85
i n the smaller communities of the D i s t r i c t ,
i^f t!M5 <MMl <xr
1923 p r a c t i c a l l y $11 the banks i n S t . Louis were members of
the System*
jha iMBsndaent t o the Pedersl Reserve Act on March 4,
-134-^
1923, p e r a i t t e d state banks and t r u s t companies t o become
members i f they had c a p i t a l equal t o 60 per cent of that required of n a t i o n a l banks f o r the community i n which they were
l o c a t e d , provided the c a p i t a l was increased t o IM^a
amount required w i t h i n f i v e years.^^
T h i s modification of
the requirements f o r membership d i d not induce any s i g n i f i i&a&t number of state banks t o j o i n the System i n the Eighth
District.
Only 2 banks took advantage of t h i s p r o v i s i o n
i n 1923.^3
THae membership of state banks and t r u s t coapanias
reached a peak i n 1924 when 1J3
t o the System i n t h i s D i s t r i c t .
i n s t i t u t i o n s belonged
At that time the number of
i&ember banks represented 26 per cent of the t o t a l number
e l i g i b l e f o r memberahip, but the resources of theae member
banks represented 66 per cent of the resources of
e l i g i b l e banks.
all
T h i s demonatrates a substantial gain
compared with the s i t u a t i o n at the time the Bank co&menced
operation when the resources of member banks represented
only 43 per cent o f the resources of a l l e l i g i b l e banks.
A f t e r 1924 the number of state member banks declined
s t e a d i l y u n t i l 1935.
The d e c l i n e of state bank aembership a f t e r 1924
^The Banking Act of 1933 eliminated t h i a provision, but
added a proviso t o Section 9 of the Federal Reserve Act
mitting
banKs t o become members with a c a p i t a l of not
l e s s than $25,000 i f located i n a coMmunity of not more than
3000 i n h a b i t a n t s , unless the bank was not e l i g i b l e f o r
deposit insurance.
of the F t d e r a l Raserve
of Ipt. L o u i s .
1923, p. 16.
2 6 i b i d . f 1924, p. 13.
-165-^
i s not t o be a t t r i b u t e d i n large measure t o a withdrawal of
these banks.
The number of withdrawals was small i n every
year except 1933 when 11 banks relinquished membership, the
number ranging from 1 to 4 i n every other year from 1922 to
1935.
The number of admissions exceeded the number of with-
drawals i n every year except 1927 and 1932.
During the period f r o a the establishment of the
BtuJc iM^Ml tlae end of 1938 a t o t a l of 220 state i n s t i t u t i o n s
i*ere admitted t o membership, and of t h i s number 47 withdrew
from tb^ System.
end of 1938.
There were 77 state member banks at the
The remaining 96 banks suspended or went into
voluntary l i q u i d a t i o n , except i n a few instances i n which one
bank was absorbed by another bank.
The number of member banks, both national and
s t a t e , declined from 630 at the end of 1923 to 388 at the end
of 1936.
During the period 1915-1938 a t o t a l of 198 member
blanks were v o l u n t a r i l y l i q u i d a t e d , and 211 member banks were
compelled t o suspend.
A large portion of the voluntary
l i q u i d a t i o n s occurred during the l a t e r twenties, but most of
the suspensions occurred during the years 1931 t o 1934*
A
t o t a l of 56 member banks suspended i n 1931, 34 In 1932, 39 i n
1933, and 39 i n 1934.
Eighth D i s t r i c t
There have been no suspensions i n the
since 1934.
On December 31, 1938, there were 392 member banks
i n the Eighth D i s t r i c t , which represented 26 per cent of the
t o t a l of 1,513 comaercial banks.
However, member banks held
$1,724,838,000 of the t o t a l deposits of $2,301,673,000 h e l d
-186-^
TAP^3 37
^^ Member end Non-Member Benka and NonM<MR)er B a n K s B l i g i b l e and I n e l i g i b l e f o r Memberahip,
8th Federal Reserve D i s t r i c t ,
December 31, 1939*
Number
A l l Commercial Banks
IMational Banks
State Member Banks
E l i g i b l e Non-Member Banks
Insured
Uninsured
I n e l i g i b l e Non-Member Banks
Insured
Uninsured
Deposits
1,513
^^^^2*301*573*
314
1,195,740
78
529,098
664
428,385
634
30
412,366
16,019
457
148,450
398
59
140,210
8,240
*Coapiled from f e d e r a l R99?pv? PMA^fStR* June* 1940, pp. 602-4.
by i^il T&aaks.
'This represented 75 per cent of the deposits of
i^Ll biMhks, %hich i s somewhat l e s s than the 87 per cent of
all
deposits held by member banks i n a l l Federal Reserve d i s t r i c t s
on that date.
TThe smeller proportion of deposits held by member
banks i n t h i s area i s t o be explained by the prevalence of
iMie small state bank i n t h i s D i s t r i c t .
The existence of *
l a r g e number o f small state-chartered banking i n s t i t u t i o n s
i s c h a r a c t e r i s t i c o f the Middle West and South.
The small
i^Ei^te banker has never shown much interest i n membership i n
the Federal Reserve System.
Of the t o t a l number of
eligible
iMNa^Eeaber banks 62 per cent had deposits of l e s s than
-137-^
TABLE
38
Nuabtr of E l i g i b l e And I n e l i g i b l e Non-Member
Banks C l t a s i f i e d According t o Amount
of Deposits, 8th Federal Reserve
D i s t r i c t , December 31, 1939*
Deposits of - -
B U n i ^ i t San^?
Under $190,000
$100,000 - $249,000
$250,000 - §499,000
$500,000 - $999,000
31,000,000 - $1,999,000
32,000,000 - $4,999,000
$5,000,000 - $9,919,000
Over $10,000,000
19
183
209
167
55
19
4
3
l a e l l e i b l e Ranks
111
202
66
45
33
R*13rV9 PutiVtiB* June, 1940, p. 605<
$500,000, And 88 per cent had deposits of l e s s than §1,000,000
At the end of 1939.
Of the non-member banks i n e l i g i b l e f o r
membership nearly three-fourths had deposits of l e s s than
$250,030.
b&nk membership i s l a r g e l y concentrated at the
present time i n M i s s o u r i and I l l i n o i s .
1939,
At the beginning of
62 o f the 77 member state banks were located i n these
two states*
The lack of state bank membership i n several
s t a t e s , p a r t i c u l a r l y Tennessee and M i s s i s s i p p i , has resulted
i n producing a s i t u a t i o n i n which a very small per cent of
l^ie ti^H^L iRuaber o f banks are members, including nationAl
hank members.
At the beginning of 1939 there were 10 member
iMMaks out of A t o t a l of 109 banks i n that part of M i s s i s s i p p i
i n the Eighth D i s t r i c t , and 12 member banks out of a t o t a l of
100 banks i n western Tennessee.
-188-^
TAPSE 39
Number of Member and Non-Member Banks i n
the 8th D i a t r i c t C l a s s i f i e d by Statca,
January, 193?*
All
State
Arkansaa
Illinois
Indiana
Kentucky
Miasiasippi
Missouri
Tennessee
Totals
State
Non-Member
HAiKibie
239
277
120
242
109
469
.13?
50
105
39
45
9
54
13
7
17
0
7
1
45
9
106
111
67
109
65
198
...42
77
44
14
81
34
172
3?
1,536
314
77
704
461
* P i l e a of the Federal Reserve Bank of St. L&Ris
Reasons f o r P a i l u r e of State I n s t i t u t i o n a t o J o i n Svste^
'The reason most often given by bankers f o r
failure
t o j o i n the Federal Reserve System has been the fact that the
Reserve l&M^&s do inot pay interest on reserve balances, while
balances with correspondent banks, which can u s u a l l y be
(KKMRiMi aa part of the reserve under state banking lawa,
earned i n t e r e s t .
T h i s has undoubtedly been the most important
f a c t o r i n preventing atate banks from joining the System, but
<Uta importance has been very g r e a t l y reduced since the BanklUm Act of 1933 p r o h i b i t e d member banks from paying intereat
<Ma demADd d e p o s i t s .
T h i s p r o h i b i t i o n of interest payaent has
had the e f f e c t o f both inducing some banks t o j o i n and i n a
few instances causing banka t o r e l i n q u i s h meabership. Another
f a c t o r of alaost equal importance has been the f e e l i n g on the
laf 3&N3f bankers that most of the services provided by
-139-^
the Reserve bank can be secured from correspondent banks.
In a l e t t e r addressed t o the Congressional Committee
i n v e s t i g a t i n g membership i n the Pederal Reserve System i n
1923, Covernor Biggs of the S t . Louis B&nx indicated the
p r i n c i p a l reasons that i n h i s opinion had prevented a l a r g e r
membership o f s t a t e banks i n the Eighth D i s t r i c t .
letter
Part of h i s
follovs:^^
" I n ay judgment, the p r i n c i p a l reasons which
r e s u l t i n e l i g i b l e State banks and t r u s t companies f a i l i n g t o become aembers of the Federal
Reserve System are, i n the order of t h e i r importance as f o l l o w s ;
(1) No i n t e r e s t paid on reserve balances.
At l e a s t t h i s ts the reason nost o f t e n given,
j^r&a the viewpoint of both the prospective member and the member bank t h i s l o s s i s something
t a n g i b l e , and i t i s rather d i f f i c u l t f o r the
average banker t o get a c l e a r idea of the o f f s e t t i n g advantages of aaabership, ^hich require
explanation, and unless the banker i s w e l l
s k i l l e d i n banking he can not comprehend them
at a glance as he can the l o s s of i n t e r e s t .
"To pay i n t e r e s t on reserve balances
would n e c e s s i t a t e increased revenue on the part
o f Federal reserve bank i n times o f easy money.
THiis iMould e a s i l y r e s u l t i n a c t i v e competition
between Federal Reserve Banks and aaaber banks.
I t i a wrong i n p r i n c i p l e t o pay i n t e r e s t on
reserves, and, as a r u l e , meaber banks appreciate t h i s when the matter can be f u l l y explained
t o them.
(2) Lack of knowledge of the system. Lack
o f knowledge of the system i s Rradually being
overcome, although i t i s a slow process, as i t
i s educational i n i t s nature. I t a p p l i e s t o
both members and non-members, although n a t u r a l l y
t o a greater extent t o the l a t t e r . T h i s bank
from t h e opening of i t s doors has t r t e d t o meet
t h i s problem and has done and i s doing everything
i n i t s power t o have member banks. non-Bember
l&aak*, and the p u b l i c understand the system.
-190-^
(3) No d i f f i c u l t y i n obtaining necessary *ocommodation through correspondents, and knowledge
tlbat the majority of the f a c i l i t i e s of the system
can be so obtained.
T h i s requires l i t t l e further elaboration
except t o add that many banks have had r e l a t i o n s
with correspondents of long standing and they
h e s i t a t e t o take any steps that may i n t e r f e r e with
such r e l a t i o n s even when they r e a l i z e that member^
ahip i n the system does not necessarily i n t e r f e r e
with th^ r e l a t i o n s already established. They seem
t o be a f r a i d that i t may have a tendency that way.
Correspondent banks have not always encouraged them
t o think otherwise.
(4) Requirements i n respect to paper o f f e r e d f o r
discount* The requirements i n respect t o e l i g i b i l i t y
of paper are now extremely l i b e r a l , ami
tl^e
only States that t h i s applies to are those where the
i n d i v i d u a l loan l i m i t i s considerably i n excess of
10 per cent.
The r e q u i r i n g of f i n a n c i a l statements of
customers comes under t h i s heading. In fact wherever
the requirements r a i s e the standard of banking there
i s l i a b l e t o be the unfounded objection of "red tape".
(5) Needs of community or p o l i c y of bank does
not make rediscounting necessary.
(6) Objection t o par clearance of checks. The
o b j e c t i o n t o par clearance of checks, so f a r as t h i s
d i s t r i c t i s concerned, i s , i n my gudgment, of minor
importance.
(7) Propaganda of those opposed t o the system.
Propaganda of those opposed t o the system has undoubtedly created a c e r t a i n amount of d i s t r u s t on
lUhe part of some bankers as t o the motives and purposes of the Federal Reserve Board and the management
of the Federal reserve banks. I t takes time t o cure
such matters. A more thoroughly informed understanding of the system and a word from a s a t i s f i e d member
w i l l accomplish more than anything e l s e . "
'The system of correspondent relationships which had
Ibeen h i g h l y developed i n t h i s country before the e s t a b l i s h ment o f the Federal Reserve System has persisted i n the
s t r u c t u r e of American banking.
The correspondent system as
i t e x i s t e d before 1914 provided a sort of c e n t r a l banking
mechanism, and enabled the banking organization of the country
-191-^
t o provide * c e r t a i n measure of autual aid and protection.
It
Tfaa believed by some that i t was the intent of the Federal Reaeinre Act that the Reserve banks should take over almost ent i r e l y the functions performed before by the correspondent
banks, and provide the services formerly rendered by the corres28
pondent banks.
Mhether or not t h i a was true i t i s quite
c l e a r from the experience since 1914 that any aggressive attempt
(Ml 1HM& ]part of the Reserve System t o break down the correapondiM^t system would have aroused great opposition, and would
probably have r e s u l t e d i n many strong state-chartered i n s t i t u t i o n s rx^ j o i n i n g the System, and perhaps some n a t i o n a l
banks re-incorporating under a state charter.
Consequently,
the Federal Reserve System d i d not attempt to destroy the
correspondent system, but devoted i t s e f f o r t s t o constructing a c e n t r a l banking mechanism i n which the Reserve banks
were t o be the most important element while at the same time
correspondent r e l a t i o n s h i p s were t o be retained.
Thus i t
happened that many services provided by the Reserve System
became supplementary t o the services provided by the correspondent system.
The maintenance of the correspondent system a f t e r
1914 acted as a deterrent t o any considerable membership o f
those state banks that d i d not act aa correspondents.
The
small or medium-size state bank found no comoelling reason
t o J o i n the System when p r a c t i c a l l y the same services could
3 * W i l l i s , Henry Parker,
Rankin*, pp. 91-93.
Thtorv and P r a c t i c e of Central
-192-^
b$ obtained from a correspondent bank as were provided by the
Reaerve banka, and when acceaa t o Reserve bank c r e d i t could
be obtained through a aember correspondent b&nk.
T)ie
accounts of country banks were p r o f i t a b l e t o the large banka
t)he reserve c i t i e s , and theae large bank* d i d not encourage
t h e i r country correspondents t o become members of the System
because of fear that t h e i r accounts might be l o s t .
In f a c t .
In many instances membership was frankly discouraged by the
c i t y banks.
i s very doubtful whether many a d d i t i o n a l atate
tMMUcs iwould ]have joined the System even i f the Reserve banka
had paid intereat on reserve balances equivalent t o that paid
on deposits by correspondent banks.
Of course, i t has been
o f t e n demonstrated that the earnings of the Reserve banks
hiMre iMMfiar Ibeea s u f f i c i e n t t o do t h i s , but had they been
sufficient it
i s yet very doubtful that any material i n -
crease i n memberahip would have reaulted.
The St. Louis Rank
pointed out i n d e s c r i b i n g the advantages of membership i n a
statement issued i n 1933 that a state bank by becoming a mem!&sr could operate with l e s s reserve, and then lend or invest
iMie released funds.^^^
The banking laws i n a l l the atates i n
^Ths reserve requirements f o r non-member state banks i n the
several states o f the Eighth D i s t r i c t as of 1930 were as
followst
Arkansas - - reserve agents, 20% of demand and time depoaits,
2/5 i n v a u l t : other banka 15% of demand and time d e p o s i t s .
I l l i n i o s - - 15% o f demand and time depoaits.
Indiana - - 12&% of demand deposits, 3% of time deposits.
Kentucky - - reserve c i t i e s , 10% of demand and 3% of time deposits,
i n v A u l t i elsewhere, 7% of demand and 3% of time
d+posits, 1/3 i n v t u l t *
M i s s i s t i p p i - - c i t i * * over 50,000, 25% of
-193-^
the Eighth D i s t r i c t , except i n the case of I l l i n o i s i n which
the law i s s i l e n t on the matter, provide that when a state
bank becomes a member of the Reserve System i t i s required
t o maintain only those reserves required by the System.
Charles Tippets has pointed out i n h i s study of the membership problem that a large proportion of the state banks could
lhave o f f s e t the l o s s of interest on reserve balances by i n creased earnings on funds released since the reserve requlreiMMMts of member banks we^'e generally lower than those of
non-member banks.30
o f course, the increase since 1935 of
member bank reserve requirements, and the prospect that these
reserve requirements BMy be s t i l l further increased has
lessened the advantage of membership i n t h i s one respect.^^
time deposits; c i t i e s l e s s than 50,000, 15% of demand and 7%
o f time d e p o s i t s .
M i s s o u r i - - c i t i e s 200,000 or over, 13% of demand deposits,
7/18 i n v a u l t ; c i t i e s 25,000 t o 200,000, 15% of demand dep o s i t s , 2/5 i n v a u l t ; c i t i e s l e s s than 25,000, 15% of demand
deposits; anywhere, 3% of time deposits i n v a u l t .
Tennessee - - 10% of demand and 3% of time deposits.
Federal Reserve Bank of S t . Louis, Advantages of Membership i n
Federal Reserve Svstemf A p r i l , 1930.
^^Tippetts, Charles S., State Banks and the Federal Reserve
gxates, pp. 179-182.
Banking Act of 1935 authorized the Board of Governors
t o increase reserve requirements f o r member banks i f th^r
deemed i t necessary t o prevent i n j u r i o u s credit expansion up
t o a imaximum of twice the present statutory requirements. The
requirements are now 22 3/4* n i , and 12 per cent of demand
deposits f o r c e n t r a l reserve c i t y banks, reserve c i t y banks,
iMRd country banks, r e s p e c t i v e l y , and 5 per cent f o r time dep o s i t s . A s p e c i a l report t o Congress by the Board of Gover!M3rs on January 1, 1941, recommended that the Open Market
Committee be given the power t o r a i s e the requirements t o
t w i c e the present maximum l i m i t .
-194-^
As long as the Aaerican banking structure conttnues
t o be based l a r g e l y on the unit bank, i t i s not at a l l c l e a r
thi^^ i t
would be advisable t o destroy the ayatea of correspon-
dent r e l a t i o n s h i p s .
Important functions i n integrating the
operation of the American banking organization are performed
by the correspondent system.
But membership on the part of
a Si&Rll state bank i s not incoapatible with the maintenance
of i t s correspondent r e l a t i o n s h i p s , nor i s i t
u n p r o f i t a b l e t o the bank.
i n the long run
A vigorous educational program
among state bankers t o acquaint them with the importance f o r
the e f f e c t i v e operation of ABerican banking of Reserve megbers h i p , iMMi tl^B long run advantages of such membership t o themselves may be productive of r e s u l t s .
One very important d i f f i c u l t y u n t i l recent years was
t o be jKHBMl bi the unsatisfactory condition of many of the
smaller s^U^Ee Ibahks.
Many of them, although meeting the
t e c h n i c a l c a p i t a l requirements, could not have been admitted
t o membership without lowering the standards because of the
u n s a t i s f a c t o r y character of t h e i r assets.
To l^Mre diN&s
iMMild have weakened the Reserve System instead of strengthening i t .
Governor Biggs i n commenting on the a d v i s a b i l i t y of
attempting t o increase membership i n 1923 stated,
*rhis r e s p o n s i b i l i t y i s one t o be gravely considered i n view of the fact that State banks are
under State examination and supervision, and the
character of t h i s service varies greatly i n the
d i f f e r e n t States. In some States i t i s good, i n
others i t i s very l a x , due t o lack of proper
a p p r o p r i a t i o n f o r the procuring of competent
exaainers, p o l i t i c a l c o n t r o l , and, i n some i n stances, inadequ*cy of the State law i t s e l f
under which the State banking departaent operates.
-195-^
A c a r e f u l plan w i l l have to be devised on the
part of the Federal Reserve System i n order
that i t may keep i n accurate touch with the
c o n d i t i o n of many small State banks i n order
ti^^t the system may not be weakened by t h e i r
membership rather than strengthened." 32
IPntll recently the St. Louis Bank never s o l i c i t e d
membership among the state i n s t i t u t i o n s because i t d i d not
i*ish t o encourage a p a r t i c u l a r bank to j o i n , and then have t o
r e j e c t i t on examination.
The s i t u a t i o n i s now quite d i f f e r -
of t]he weak and unsound banks were eliminated during
the period 1931-1934*
The establishment of the Federal Deposit
Insurance Corporation subjected a l l the insured banks t o the
examination and supervision of t h i s Corporation.
An adequate
system of examination has been developed by the S t . Louis Bank,
and Federal Reserve examiners regularly p a r t i c i p a t e with state
examiners i n a l l examinations of state member banks.
When an
insured state bank j o i n s the System the Federal Deposit Insurance Corporation turns over the examination of the bank t o
the Reserve examiners i n order t o prevent unnecessary examinations.
As a r e s u l t of these changed conditions the St. Louis
Bank r^w engages i n an a c t i v e program of s o l i c i t a t i o n of members iMMN&g IMie state banks.
Since January 1, 1940, 25 state
blanks have been admitted t o membership, 21 during the year
1940, and 4 during the f i r s t three nonths of 1941*
Most of
these banks iMH-e small, only 3 having c a p i t a l and surplus of
more than $100,000.^^
The remaining 22 banks had c a p i t a l and
32H**rlMKS pursuant t o P u b l i c Act TKo.
3 3 y i i o s of the Federal Reserve aqnk of
oPt cj^** P* 64
Louis.
-196-^
surplus of l e s s than $100,000.
"The F i r s t Bank and Trust Co.,
of C a i r o , I l l i n o i s , admitted on December 31, 1940, had the
l a r g e s t amount of c a p i t a l and surplus, $303,000.
These 25
new state bank members were a l l located i n Missouri,
and Indiana.
Illinois,
Ten were located i n Missouri, 8 i n I l l i n o i s , and
7 i n Indiana.
T h i s represents the f i r s t substantial gain i n
inembership since the early twenties.
There are now more than
100 state bank members.
BArninxs and Expenses of Member Banks
Tlhe Federal Reserve Board has c o l l e c t e d data with
regard t o the earnings and expenses of member banks i n the
several reserve d i s t r i c t s since 1923.
The St. Louis Bank be-
gan making studies of operating costs and p r o f i t s and losses
of i t s member banks
1937.
The data c o l l e c t e d by the
Board i n d i c a t e the experience only for the member banks as a
Tdhole i n the Eighth D i s t r i c t , but the studies of the S t . Louis
BiMnk make p o s s i b l e a comparison of the experience of member
banks of d i f f e r e n t s i z e on the basis of the amount of deposits
held.
During the years 1923 through 1929 current earnings
iwere r e l a t i v e l y constant i n r e l a t i o n to t o t a l loans and i n vestments.
Losses were largest i n 1924 when the losses on
iLoans amounted t o 1.14 per cent of the loans, and losses on
investments were .47 per cent of the t o t a l investments.
Net
p r o f i t s v a r i e d from 7.41 per cent i n 1927 t o 9.57 per cent
19;H? <xr t o t a l c a p i t a l funds, with the exception of 1924
idien net p r o f i t s were only 5.48 per cent of c a p i t a l funds.
-197-^
Earnings declined and losses increased a f t e r 1929.
Losses on investments were substantially larger than losses
OK loans during 1931 and 1932, but during 1933 and 1934 losses
<Hi loans were q u i t e large and were considerably greater than
losses on investments*
In 1931 losses on investments equalled
2.12 per cent of investments, while losses on loans were only
1.05 per cent of loans.
In 1933, however, losses on invest-
isere 2.97 per cent, while losses on loans amounted t o
cent.
Net p r o f i t s dropped t o .59 per cent of c a p i t a l
:f^ads .in 1931, and n^^ losses were sustained i n three years,
1932, 1933, and 1934*
ci&^b of c a p i t a l funds.
In 1933 the net loss was 10.57 per
The effect of the elimination of the
weaker banks i s noticeable i n the fact that net p r o f i t s
in-
creased t o 6.91 per cent of c a p i t a l funds i n 1935, and t o
10.91 i^er cent i n 1936, although earnings were lower and losses
were greater i n r e l a t i o n to loans and investments than during
the t w e n t i e s .
T o t a l current earnings i n r e l a t i o n to loans and
investments were highest i n 1929, 6.71 per cent, but declined
In every year a f t e r 1929 t o 4*29 per cent i n 1936.
Current
expenses, which had averaged about 4*80 per cent of loans
and investments from 1923 t o 1930, were reduced t o about
3 per cent of loans and investments i n 1935 and 1936.
In the studies of the experience of member banks
begun i n 1937 by the St. Louis Bank, the banks were divided
Into 7 groups on the basis of the amount of t h e i r
deposits.
Group I c o n s i s t s of the large banks with deposits of over
-198-
TABL3 4 0
R a t i o s . o f Earnings and Expenses, t o Loans, Investments, and C a p i t a l FundLs Member banks, 8th D i s t r i c t ,
1923-1936*
Patios t o T o t a l Loans and Investments
1???
1-924
1923
1936
1927 il923
1939
1923
1931
1923
1922
^924
1925
1926
T o t a l current earnings
T o t a l current expenses
Net earnings
Bkt p r o f i t a f t e r l o s s e s
6.69
4.33
1.86
1.34
6.53
4.75
1.80
.91
6.62
4.75
1.86
1.34
6.56
4.79
1.78
1.27
6.47 6.49
4.87 )4.73
1.60 1.77
1.15 1.32
6.71
4.80
1.91
1.46
6.20
4.66
1.54
<80
5.87
4.31
1.56
.10
5.51
4.32
1.19
-.48
5.03
3.70
1.33
-1.80
4.78
3.38
1.40
-.58
4.56
3.12
1.44
1.09
4.29
2.97
1.32
1.64
.59 -2.75
1.05 1.53
2.12 1.96
5.21
3.51
-10.57
3.47
2.97
4.95
3.31
-3.54
3.06
2.47
]^Rerest and discount t o loans
Interest and dividends t o investments
Net p r o f i t t o c a p i t a l funds
Losses on loans t o loans
Losses on investments t o investments
-
8.00
.73
.38
5.48
1.14
.47
8.66
.79
.21
"Compiled from The F e d e r a l Reserve B u l l e t i n , 1923-1936.
8.29
.69
.24
7.41 3.73
.60 . .51
.23 j .24
9.57
.46
.57
5.03
<64
.89
4.68 4.67
3.14 2.71
6.91 10.91
.92
1.77
1.68
.81
-199-^
Operattng Ratios of Member Ranks i n the 8th D i s t r i c t
Grouped Aceordin^^ t o Aaom^
Deposits, 1937-1940*
yor Behks i n JM^ Croups
Ratip? t o t o t l i ttrniMK?
from current onerations*
Interest and discount on loans
Interest on bonds, dividends, etc.
T o t a l current expenses
Net earnings f r o a current
operations
Net a d d i t i o n s t o p r o f i t s
A?27
%
A?49
%
%
%
50.9
34.3
71.6
53.2
32.0
70.9
55.3
23.3
70.7
58.1
26.5
71.6
28.4
21.4
29.1
23.1
29.3
26.5
28.4
25.7
discopnt^*
Interest and discount on loans
Net l o s s or recavery on loans
6.1
6.0
6.0
6.0
-0.5
-0.3
-0.4
-0.1
3.5
3.3
3.3
3.1
-0.5
-0.6
-0.5
-0.3
3.8
3.7
3.6
3.5
1.1
0.8
1.1
0.9
1.1
1.0
1.0
0.9
8.8
6.6
8.8
6.9
3.9
7.7
8.6
7*6
16,1
15.5
15.0
383
331
394
R i t t p t t 9 hQBdt tn4 pt&pf
stcurittin
Interest and dividends
Net l o s s or recovery on
aecuritie*
T o t a l earnings from current
operations
Net earnings from current
operations
Net additions t o p r o f i t s
R l t i P * t a t T t t l 3*3ittA yuR4tt
Net earnings from current
operatiana
Net a d d i t i o n s t o p r o f i t s
RltiW 9f
Number o f Ranks
fWMdl t a
384
^^federal Reserve Bank of 8 t . Louis, PM
TABLE
fCant-l
Group I
Average Deposits of $10,000,000 aad over
R^^ip? t^o t^ot^l tlpxitMRS
from c u r r e n t
ODerations:
Interest and discount on loans
Interest on bonds, dividends, etc .
T o t a l current expenses
Wet earnings from current
operations
Net a d d i t i o n s t o p r o f i t s
1928
1937
%
%
1939
1949
%
%
44.9
35.5
70.2
47.6
32.9
73.4
48.1
31.2
71.7
50.4
29.6
71.8
29.3
25.0
26.6
17.6
28.3
25.1
28.2
24.8
4.0
^0.03
4.0
-0.2
3.9
-0.1
3.9
-0.1
2.9
2.6
2.6
2.5
-1.0
-0.9
-1.0
-0.9
Ratios t o t o t a l loans and
discounts:
Intereat and discount on loans
Net l o s s or recovery on loans
R a t i o s t o bonds and other
S33uriti9i:
Interest and dividends
Net l o s s or recovery on
securities
Ratios t o t o t a l assets:
T o t a l earnings from current
operations
Net earnings from current
operations
Net additions t o p r o f i t s
-
2.9
2.6
2.5
2.4
0.8
0.7
0.7
0.5
0.7
0.6
0.7
0.6
8.0
5.3
8.8
7.6
8.7
7.5
10.0
9.2
8.8
24
25
26
R a t i o s t o t o t a l e a n i t a l funds:
Net earnings from current
operations
Net a d d i t i o n s t o p r o f i t s
-
9.8
7.7
R a t i o of c a p i t a l funds t o
t o t a l deposits
Number of banks
24
-201-^
TAPL3
(Pvnt.)
Croup I I
Average Deposits 65,000,001 t o 310,000,000
from current operetionaR
I n t e r e s t and discount on loans
Interest on bonds, dividends, i
T<ytal current expenses
Net earnings from current
operations
Net a d d i t i o n s t o p r o f i t s
i?27
%
i?49
%
%
%
38.3
45.5
70.5
39.9
41.9
74.0
45.1
34.6
72.1
49.6
30.2
72.3
29.5
24.4
26.0
13.0
27.9
24.3
27.7
27.3
5.2
-0.1
5.0
-0.2
4.9
-0.6
4.6
0.0
3.4
3.1
2.9
2.6
-0.9
-0.6
-0.7
-0.4
3.4
3.3
3.1
3.0
1.0
0.3
0.9
0.6
0.9
0.7
0.9
0.3
9.5
7.7
8*3
5.3
3.6
7.5
3.1
7.6
12.3
12.8
12.6
15
13
19
t 9 tPtP^ iPMRP and
giasam&s:
Interest and discount on loans
Net l o s s or recovery on loans
^ti^lo? t p
atcvKitiea*
ether
I n t e r e s t and dividends
Net l o s s or recovery on
securities
3 A t i p t t o t p t t i i^twta*
T o t a l earnings from current
operations
Net earnings from current
operation*
Not a d d i t i o n s t o p r o f i t s
Ratios to total r a n i t t l
fUnAt:
Net earnings from currant
operations
Net a d d i t i o n s t o p r o f i t s
t n t a l dapaatt*
Number of bank*
14
-202-^
TABLE A1 fCont.l
Croup I I I
Average Deposits $2,000,001 to $5,000,000
1927
RatAoa t o t o t t i etTBinga
from current operations:
Interest and discount on loans
Interest on bonds, dividends, i
T o t a l current expenses
Net earnings from current
operations
Net a d d i t i o n s t o p r o f i t s
1929
1949
%
%
%
%
43.2
39.3
70.9
43.3
38.5
70.9
48.6
33.7
70.5
52.0
28.5
71.0
29.1
22.6
29.1
26.3
29.5
27.7
29.0
25.0
5.4
-0.2
5.3
-0.3
5.3
-0.3
5.2
0.0
3.3
3.1
3.2
2.9
-1.0
-0.5
-0.5
-0.5
3.6
3.4
3.3
3.1
1.1
0.8
1.0
0.9
1.0
0.9
0.9
0.8
9.5
7.3
9.1
8.1
9.2
8.4
9.4
7.9
13.8
12.9
12.2
48
55
60
Rattps t o t p t a l IpaRp and
discounts*
Interest and discount on loans
Net l o s s or recovery on loans
R a t i o ? t o b9n43 apd pt^pr
gSciiXities:
Interest and dividends
Net l o s s or recovery on
securities
P t t i p ? tQ^t9tt^
T o t a l earnings from current
operations
Net earnings from current
operations
Net a d d i t i o n s t o p r o f i t s
R a t i o s t o t o t A l c a p i t a l funds:
Net earnings from current
operations
Net a d d i t i o n s t o p r o f i t s
R a t i o of c a p i t a l funds t o
t o t a l deposits
Number of Banka
49
-203-^
TABLE
rcont,^
Croup ^
Average Deposits $1,000,001 t o $2,300,030
K.+ t . + + + 1
<
R a t j o i tp
earnlMRS
from current operations:
Interest and discount on loans
Interest on bonds, dividends, e t c .
T o t a l current expenses
Ket earnings f r o a current
operations
Net additions t o p r o f i t s
%
.KLg
%
1242
%
<^3.7
35.4
<^.3
52.4
32.3
69.2
53.5
29.7
69.1
56.4
27.1
70.9
23.7
23.4
30.8
25.2
30.9
26.4
29.1
26.3
5.9
-0.4
5.9
-3.1
5.9
-0.1
6.0
-0.2
3.3
3.2
3.2
3.0
-0.3
-0.7
-0.7
-0.4
3.6
3.6
3.5
3.4
1.1
0.9
1.1
0.9
1.1
0.9
1.0
0.9
9.1
7.2
9.7
7.8
9.8
a.i
9.0
7.8
14.2
13.6
14.0
78
81
85
%
a^tlq? t o t q t a j jqaa? and
diSSoig&g:
I n t e r e s t and discount on loans
Ket l o s s or recovery on loans
R l t j p a t9 bpR^t WRd pthep
sec^rltlea:
Interest and dividends
Net l o s s or recovery on
securities
RltiO* t? tptiA
issqti:
T o t a l earnings from current
operations
Net earnings from current
operations
Net a d d i t i o n s t o p r o f i t s
R a t i o s t o t o t a l c a p i t a l funds:
Net earnings from current
operations
Net a d d i t i o n s t o p r o f i t s
R§tt9 Vf
Number o f Banks
fMRd* tP
79
-204TABLE
fCont.l
Group V
Average Deposits 3500,001 t o $1,000,030
Retioc t o t o t a l esrnings
f r 3 3 current ooerstions:
Interest and discount on loans
I n t e r e s t on bonds, dividends, etc.
T o t a l current expenses
Net earnings from current
operations
Ret additions t o p r o f i t s
1?38
%
%
1?40
%
%
49.8
36.1
'71.4
53.1
33.0
71.2
56.0
30.2
71.0
58.3
27.3
72.1
28.6
23.2
38.8
22.0
29.0
26.3
2T^9
26.1
6.3
-0.5
6.2
-0.5
6.3
-0.5
6.4
-0.3
3.6
3.4
3.5
3.4
-0.4
-0.7
-0.6
-0.2
3.9
3.9
3.9
3.7
1.1
0.9
1.2
0.9
1.1
1.1
1.1
1.0
9.0
7.5
9.1
6.8
9.0
7.9
3.3
3.0
15.7
15.6
15.1
110
107
110
^ttjop t p t o t p l ipaps *K4
Interest and discount on loans
Net l o s s or recovery on loans
Ratios t o bonds and other
sssmAlias:
Interest and dividends
Net l o s s or recovery on
securities
R a t i o s t o t o t a l assets:
T o t a l earnings from currant
operations
Net earnings from current
operations
Net a d d i t i o n s t o p r o f i t s
R a t i o s t o t o t i l c a p i t a l funds*
Net earnings from current
operations
Net a d d i t i o n s t o p r o f i t s
R a t i o o f c a p i t a l funds t o t o t a l
6epo§Hl
'
Number of
Sank*
106
-205*
TABLE
fContJt
Croup VI
Average Deposits $250,001 to $500,000
Ratios t o t o t a l earninzs
fr^q eqyr^Kt operatjoRg:
Intereat and dlacount on loans
Interest on bonds,dividends,etc.
T o t a l current expenses
Ket earnings from current
operationa
Net a d d i t i o n s t o p r o f i t s
R§tA9# t 9
JLm
%
i l R
%
%
%
57.4
30.5
71.7
59.1
28.5
70.0
62.0
26.0
70.9
64.7
23.7
71.1
28.3
24.4
30.0
24.6
29.1
27.9
28.9
28.4
6.7
-0.3
6.8
-0.3
6.6
-0.3
6.9
0.0
3.7
3.4
3.4
3.4
iPQRi
I n t e r e s t and discount on loans
Net l o s s or recovery on loans
I n t e r e s t and dividends
Net l o s s or recovery on
securities
-0.1
-0.4
-0.3
-0.3
4.1
4.0
3.8
3.8
1.2
1.0
1.3
1.0
1.3
1.1
1.2
1.1
8.4
7.1
8.9
7.1
8.5
7.6
8.4
8.0
17.2
16.8
17.2
74
66
69
Pt^ipi tp t p t a j
T o t a l earnings from current
Net
operatioBS
earnings from current
operationa
Nvt i d d i t i o n * t o p r o f i t s
Ratio* t o ti^^A e a o i t a l fundst
Net earnings from current
operations
Net a d d i t i o n s t o p r o f i t s
R a t i o o f c a o i t a l funds t o
t p t a i ^^iPTitta
Number of Banks
77
-206-^
TABM
(gout.)
Group V I I
Average Deposits up to $250,000
A937
1933
A939
1940
%
%
%
%
65.1
23.0
75.2
65.9
21.2
73.0
67.6
19.2
71.9
71.5
17.8
74.0
24.8
0.2
27.0
19.5
28.1
23.5
26.0
15.2
7.1
^2.8
7.1
7.4
-0.6
7.1
-0.3
Interest and dividends
3.6
Net l o s s or recovery on s e c u r i t i e s - 0 . 4
3.6
3.9
0.3
3.1
-0.7
Ratios t o t o t a l earnings
from current onerations:
Interest and discount on loans
Interest on bonds,dividends,etc<
T o t a l current expenses
Net earnings from current
operations
Net additions t o p r o f i t s
R a t i o s t o t o t a l loans and
^isgSNRta:
Interest and discount on loans
Net l o s s or recovery on loans
R a t i o s t o bonds 134
SaSKEitiss;
R a t i o s t o t o t a l assets:
T o t a l earnings from current
operations
Net earnings from current
operations
Net a d d i t i o n s t o p r o f i t s
4.3
4.3
4.5
4.3
1.1
0.2
1.2
0.9
1.3
1.0
1.1
0.6
5.8
^L.3
6.0
4.5
6.1
5.0
5.4
2.9
Z3.1
^y.u
34
29
R a t i o s t o t p t a l p a o i t a l funds:
Net earnings from current
operations
Net a d d i t i o n s t o p r o f i t s
R l t j o p f p+pttaA fuRds t o
t n t * l deposits
Number of Banks
35
TABLE
A2
Average Operating R a t i o s of Member Banks i n Bth D i s t r i c t ,
Grouped According t o Amounts of Deposits*
Group
t y t a l t*rp4aK§
PUnrep^ ppePHtPRtt
Interest and discount on loans
Interest on bonds, dividends, etc
T o t a l current expenses
Net earnings from current operations
Net a d d i t i o n s t o p r o f i t s
%
Croup
11
%
Croup
lit
%
Croup
IV
%
1937-1940,
Croup
V
%
Group
VI
%
Croup
VII
%
47.3
32.3
71.8
28.2
23.1
43.4
38.1
72.2
27.8
23.5
46.8
35.0
70.8
29.2
25.4
52.8
31.1
70.1
29.9
25.3
54.4
31.7
71.4
28.6
24.5
60.8
27.1
70.9
29.1
26.3
67.5
20.3
73.8
26.5
14.5
3.95
-0.1
4.9
-.2
5.3
-.2
5.9
-.2
6.3
-.5
6.8
-.2
7;2
-.1
2.7
-.95
3.0
-.7
3.1
-.6
3.2
-.5
3.7
-.5
3.5
-.3
3.6
-.25
2.6
.7
.6
3.2
.9
.7
3.35
1.0
.85
3.5
1.1
.9
3.85
1.1
1.0
3.9
1.25
1.05
4.35
1.2
.6
8.8
7.0
9.3
8.6
7.15
12.6
Ratios t o t o t a l lo^na and diecounte:
Interest and discount on loans
Net l o s s or recovery on loans
R#ti.PS t o bpMdi and pt^ep 999MrAtitt:
Interest and dividends
Net l o s s or recovery on s e c u r i t i e e
p a t j p t t 9 t o t t i a393tp;
T o t a l earnings from current operations
Net earnings from current operations
Net a d d i t i o n s t o p r o f i t s
Ratios t o t o t a l c a p i t a l funds:
Net earnings from current operations
Net a d d i t i o n s t o p r o f i t s
Ratio of c a p i t a l funds t o t o t a l deposits
http://fraser.stlouisfed.org/
*Computed
Federal Reserve Bank of St. Louis
from Table 41*
9.3
7.9
13.0
9.4
7.7
13.9
9.0
7.6
15.5
8.6
7.45
17.1
5.8
2.8
28.1
M
O
-208-^
310,000,000, while Group V I I consists of the smallest banks
w i t h deposits of l e s s than $250,000.
The period covered i s
not s u f f i c i e n t t o indicate any particular trends, but i t
is
adequate t o compare the experience of banks of d i f f e r e n t
size.
The proportion of earnings derived from interest and
discount on loans, and that derived from interest or d i v i dends on s e c u r i t i e s v a r i e s with the size of the bank, except
:for the l a r g e s t banks.
Banks i n Croup V I I , those with de-
p o s i t s o f $250,000 or l e s s , received the largest
proportion
of earnings from discount on loans, averaging approximately
68 per
cent, and the smallest proportion of earnings from
investments i n s e c u r i t i e s , approximately 20 per cent.
Banks
In Group I I , those with deposits of $5,000,001 t o $10,000,000,
received the smallest proportion of earnings from loans,
approximately 43 per cent, and the largest proportion of
earnings from investments, averaging about 38 per cent.
For
iMMiks I n Groups I I , I I I , IV, V, V I , and V I I , earnings on
JU&ans decreased and earnings on investments increased as the
s i z e o f the bank increased.
Banks i n Group I had larger earn-
ings from loans and smaller earnings from investments than
l&Ehks I n Group I I .
There does not seem t o be any d i s c e r n i b l e r e l a t i o n a h i p l&etween losses on loans and the size of the bank.
The smaller banks d i d not have any consistently unfavorable
l o s s experience QS compared with the larger banks.
The banks
t n Group V I I took very heavy losses on loans i n 1937, 2.8 per
-209-^
c e n t , which produced a net d e f i c i t for the year f o r the group.
Losses on investments varied with the size of the banks.
Croup I banks having the largest losses, and Croup V I I banks
the smallest l o s s e s .
T h i s i s probably influenced, however,
by d i f f e r ^ c e s i n accounting practice i n handling losses on
securities.
The operating r a t i o of current expenses t o current
operating earnings d i d not d i f f e r greatly among the several
groups.
Banks i n Groups I I I and IV had the lowest r a t i o of
expenses t o earnings.
The smaller I^M^cs aRd the largest
banks had s l i g h t l y higher r a t i o s .
The difference between the
lowest and the highest r a t i o s of expenses t o earnings averaged
l e s s than $ per cent, the lowest r a t i o In m^r year f o r any
group of banks being 69.2 per cent, and the highest r a t i o jUa
any year being 75.2 per cant.
The average rate of earnings on loans varied i n v e r s e l y and c o n s i s t e n t l y with the size o^ the bank.
'The
r a t i o o f i n t e r e s t and discount earned to the t o t a l loans
averaged s l i g h t l y over 7 per CM^
tMuA^ i n Group V I I ,
w h i l e f o r banks i n Group I i t averaged 4 P&r ctxR.
For the
other groups of banks the rate of earnings on loans varied
between 4 and 7 per cent according t o the size of the banks.
T h i s i n d i c a t e s , o f course, that interest rates charged on
customer loans are higher i n the smaller communities and
lower i n the l a r g e r communities.
-The r a t e of earnings on investments also v a r i e d
w i t h the s i z e of the bank, although to s less extent than the
-210-^
rate of earnings on loans.
Banks i n Groups V, V I , tm^ V I I
had the highest r a t i o s of interest and dividends t o the
bonds and s e c u r i t i e s owned, and the r a t i o tended t o decline
as the amount of deposits became l a r g e r .
TlMs iM)!^ marked
d i f f e r e n c e existed between banks i n Groups Df and V .
The
rate of earnings on investments was materially lower for the
l a r g e s t banks than f o r those i n Croup I I .
TMiis r e f l e c t s tlie
d i f f i c u l t y experienced by the large c i t y Iha^cs
investing
t h e i r much l a r g e r funds with safety i n securities with a
good y i e l d .
The greater need f o r l i q u i d i t y and the lack of
s e c u r i t i e s that do CK^ carry too much r i s k have caused them
t o invest h e a v i l y i n low interest-bearing government o b l i gations.
BiM^ks i n Groups I I I and IV, those with deposits of
$1,000,001 t o $5,000,000, have shown on the average the
!&ost p r o f i t a b l e operation.
related to
I f net additions t o p r o f i t s are
t o t a l assets of the banks the r a t i o s f o r
biu^ts i n Groups I I I , IV, and V and VI are approximately the
same, avei^aging about 1 per cent.
Banks i n Croups I ,
II,
and V I I had decidedly lower r a t i o s of p r o f i t s to t o t a l
a s s e t s , about .6 t o .7 per cent.
I f net additions t o p r o f i t s are related t o the t o t a l
capital
of the banka the showing made by the largest
biM^cs i s improved and that of the small banks i s made worse.
The c a p i t a l funds o f the larger banks are small i n r e l a t i o n
t o t h e deposits h e l d .
Banks i n Group i had c a p i t a l funds i n
1933 ^^ich equalled only 10 per cent of t h e i r t o t a l deposits.
-211-^
banks i n Group I I
12.3 per cent, banks i n Group I I I
banks i n Group IV
14.2 per cent, banks i n Group V
cent, banks i n Group VI
VII
28.1 per cent.
13.8,
15.7 per
17.2 per cent, and banks i n Group
Banks i n Groups I I I and IV were thua
!&3re p r o f i t a b l e on the average because of larger p r o f i t s
in
r e l a t i o n t o t o t a l assets than i n the case of the larger
banks, and a smaller r a t i o of c a p i t a l funds to deposits than
jUi the case of the smaller banks.
For the member banks i n a l l groups the r a t i o of
p r o f i t s t o c a p i t a l funds was 6.6 per cent i n 1937, 6.9
per cent i n 1938, 7.7 per cent i n 1939, and 7.6 per cent i n
1940.
Net p r o f i t s f l u c t u a t e d more i n the case of the largest
banks than i n the case of the medium-size banks.
Banks i n
Croup I had net p r o f i t s of 8.2 per cent i n 1937, 5.3 per
cent i n 1938, 7.6 per cent i n 1939, and 7.5 per cent i n 1940.
-212^
CHAPTER VI
CREDIT POLICIES OF THE ST. LOUIS REBKRVE 3ANX
'The objectives of the credit p o l i c i e s of the Federi^L Reserve System have undoubtedly undergone some change
during the period of twenty-five years that has elapsed since
the System was o r i g i n a l l y established.
The a t t i t u d e that
p r e v a i l e d among Reserve authorities in the early years was
that the p o l i c y of the Reserve Systea i n the administration
o f c r e d i t ahc^Jd be l a r g e l y a passive one.^
The function of
the Reserve System was t o aid i n the adjustment of the supply
of c r e d i t t o the changing needs of trade, and t o f a c i l i t a t e
the IHxnw o f ;funds from one part of the country to another *s
they were needed.
The determination of the quantity of
c r e d i t if^ich should be created by banks, or the a l l o c a t i o n
o f c r e d i t among various uses was t o be l e f t t o the working
of economic f o r c e s , except that undue diversion of credit
from l e g i t i m a t e a g r i c u l t u r a l , commercial, or i n d u s t r i a l
a c t i v i t i e s t o tlte speculative markets f o r s e c u r i t i e s was t o
l&e prevented.
T h i s i s w e l l expressed i n the requirement that
JPedertl Reserve Banks should f i x t h e i r rates "with a view of
accoomodating cosBaerce and business."
As the Reserve banks and the Federal Reserve Board
atteRgRi^ t o tdminister credit and t o develop d e f i n i t e c r e d i t
p o l i c i e s i n the d i f f i c u l t period of post-war adjustment, and
iHardy, Charles 0 . , pr*dit P o l i c i e s of t h i P i d i r t i R$3trve
pp. ,3-17.
-213-^
In the period of severely depressed business conditions f o l l o w ing 1930, the objectives of credit control became more and
more r e l a t e d t o the s t a b i l i z a t i o n of prices, and the encouragement and d i r e c t i o n of production.
In recent years the Board
of Governors has d e f i n i t e l y enunciated as an objective of i t s
c r e d i t p o l i c y the maintenance of economic s t a b i l i t y , and the
improvement of consumer purchasing power.2
In the attempt t o
achieve these objectives the Reserve System has assumed the
f u n c t i o n of regulating the volume or quantity of c r e d i t , and,
t o a l i m i t e d extent, the i^MOtion of i^^^Aating the use of
credit.
I t can not be stated that there i s at the present
time agreement as t o the proper objectives of central bank
credit control.
Whether credit should be a "neutral" f a c -
t o r , ^ of whether c r e d i t should be so administered as t o cont r o l movements i n p r i c e s and changes i n the lev^L of economic
a c t i v i t y , i s a question d i f f i c u l t to determine i n these times.
Indeed, the question as t o whether i t i s possible by means
o f c r e d i t c o n t r o l t o s t a b i l i z e prices or consumer income to
any appreciable extent ca:i not be answered f i n a l l y by studyi n g the experience gained under the unusual conditions of
recent years.
^Hersey, Arthur, " H i s t o r i c a l Review of Objectives of Federa l Reserve P o l i c y " , Federal R^^serve B u l l e t i n , A p r i l , 1940,
pp. 279-289.
^ h e concept of n e u t r a l i t y should not be "^^ed t o describe a
p r a c t i c a l m o L t a r y p o l i c y , rather o^Y ^ p o s s i ^ e object^^ of
a monetary p o l i c y , perhaps one of s e v e r a l objectives,
it
^ h o S r ^ l L ' b i u^ie^stood that the concept does not ^
the
absence o f a c t i v e c r e d i t c o n t r o l techniques. See Hayek,
F r i e d r i c h A . , f r l c t a and f r o d u c t i o n . pp. 129-131.
-214-^
There are a number of s p e c i f i c techniques of credit
c o n t r o l a v a i l a b l e to the Federal Reserve a u t h o r i t i e s , some
of iRiich have been provided i n the Federal Reserve Act, While
others have been developed i n practice.
These may be l i s t e d
/
as follows:^
1.
Development of the t r a d i t i o n against borrowing
2.
Changes i n the discount rabe
3.
The use of open market operations
4*
Direct dealing with individual banks
5.
Publicity
6.
Use of the power to increase reserve requirements
7.
The determination of margin requirements on
loans t o carry securities
The Board of Governors of the Federal Reserve System was given
the power t o increase the member bank reserve requirements,
and t o f i x margin requirements for loans on s e c u r i t i e s by the
Banking JUrts ^of 1933 and 1935, and the Securities Exchange
Act of 1934.
The other techniques of credit control have been
Ibt use during a l l or most of the period since the e s t a b l i s h ment of the System.
The two most s i g n i f i c a n t techniques of c o n t r o l that
cM^r be exercised by i n d i v i d u a l Reserve banks consist of the
power t o JHLx the rate of discount, and direct dealing with
Ibadividual member banks.
As i t was pointed out i n a previous
4Burgess, W. Randolph,
Reserve IKa^ss ipd the ^ORey
Marketf
chap. 14, PP* 219-232.
-21.5-
chapter open market operations for the purpose of a f f e c t i n g
the supply of credit cannot be carried on e f f e c t i v e l y by the
i n d i v i d u a l Reserve bank.
The buying and s e l l i n g of govern-
ment s e c u r i t i e s and^acceptances i n the open market by one
Reserve bank would necessarily affect the reserves of membanks i n other d i s t r i c t s as w e l l .
Some kind of open market
committee f o r the purpose of correlating the open market
operations of the Syatem has existed since 1923, when the
Board formulated d e f i n i t e p o l i c i e s as to the use of t h i s
technique of c o n t r o l .
The Banking Act of 1935 provided that
no Federal Reserve bank should engage or decline to engage i n
open market operations except i n accordance with the d i r e c t i o n
of the Federal Open Market Committee.^
There has always been a question as t o the amount
of c o n t r o l which the Board had the right to exercise over
the rates of discount f i x e d by the Reserve banks.
The
o r i g i n a l Act provided that each Federal Resenre bank should
hiwe 1Mie power t o e s t a b l i s h from time to time, subject t o
review agxi determination by the Federal Reserve Board, rates
o f discount t o be charged f o r each class of paper.
The Bank-
ing Act of 1935 added the f o l l o w i n g phrase, "but each such
bank s h a l l e s t a b l i s h such rates every fourteen days, or
oftener i f deemed necessary by the B o a r d . T h i s
amendment
tk)es laot c l a r i f y the issue, but i t does give the Board the
opportumdty t o review frequently rates established by the
Ssection 12A, paragraph 2 (b). Federal Reserve A c t .
^Section 14, paragraph 5 (d),
Reserve A c t .
-216-^
Reserve b&nxs.
The Boerd c l e t r l y h&s
i^ght t o d i e -
approve * change i n rate voted by the directors of a Reserve
ban*, but whether i t May order a rate change not authorized
by the d i r e c t o r s of a Reservp
ia
* question.
Board has ordered a rate change i n two instances.
THie
In Jan-
uary, 1920, i t refused t o approve an increase i n the discount
r a t e f o r paper based on government securities whic^ was proposed by the New York Bank, and instead ordered an increase
i n the rate a p p l i c a b l e t o discounts of conmarcial
p a p e r . ^
Rn September, 1927, the Chicago Bahk i^as ordered t o reduce
i t s r a t e from 4 t o
been reduced t o
i n c l u d i n g New York.
per cent
per cent at
* tisM when the r^Ee hi^
c^her Reserve banks,
The international s i t u a t i o n ,
involving
a dangerous growth of foreign funds i n the New York money
market, was given as the reason f&r ti^Ls action by the Board,
but i t
i s probable that a flow <&f ;KMM!s from New York to
8
Chicago a l s o played a part i n the decision.
THM action i n
the Chicago case aroused considerable disapproval.
The vote
of the Board on t h i s a c t i o n was four to three.
9 Secretary
M e l l o n being out of the country at the t i a e .
There are some who believe that regional differences
jjR tiae discount p o l i c y are no longer of any s i g n i f i c a n c e ,
SRd tiM^ a u n i f i e d discount rate policy has i n r e a l i t y evolved.
Bu& IR i s c l e a r that the Act s t i l l contemplates that the i n T&urgess, W. Randolph, RRt
p. 323.
^Griswold, John A . , A, H l ' t o r v of the f t l V f t A P l l t r v ? &MK
pp*
9 i b i d . . p. 165.
lOa^rdy, Charles 0 . , SB. 9 i t ' * PP' 2^3-307.
10
-217-^
I t i & t i v e i n making rate ch&ngee e h e l l be l a r g e l y undertaken
by the Reaerve banka, and that the determination of diacount
r a t e p o l i c y a h a l l be a matter i n which both the Reaerve banka
and the Board a h a l l have a part.
Under the conditiona a**
i a t i n g since 1933 rate p o l i c y has had l i t t l e importance since
excess reserves have been large.
In order to determine t h i s
i s s u e more d e f i n i t e l y i t w i l l be necessary to await a period
i n which the discount rate i s used to tKmtrol a credit expansion.
The most important problem with regard to credit
p o l i c y that presented i t s e l f t o lMie
LouiaBiM^t l^t^te
f i r s t two years o f i t s operation was that of getting the member banks t o use the credit f a c i l i t i e s of the Reaerve System.
As was pointed out i n the discussion of earnings i n a
previous chapter the member ba^KS contin^Mlto borrow most
o f the funds which they needed from correspondent banks.
The
system o f correspondent relationships bad been w e l l implem^mted i n the American banking system prior t o the e s t a b l i s h ment o f the Reserve System, and the commercial banka had become accustomed t o r e l y on t h e i r correspondent banks i n
v a r i o u s f i n a n c i a l centers f o r st^atever funds they needed.
In
t h i a aystem the banks i n i n t e r i o r f i n a n c i a l centers depended
upon t h e i r connections with banks
York C i t y , and the
demand f o r funds thus centered i n New York.
The f i r s t task
o f t h e S t . Loui* Bank was therefore to ikhMSte the member
bank* t o r t i y upon the Reserve Bank IK^ whatever funds they
-218-^
needed t o borrow.
T h i s task was of further importance to the
Bank i n that the earnings necessary to pay dividends would
probably not be forthcoming u n t i l a considerable use of the
c r e d i t f a c i l i t i e s of the Bank was made.
As the discussion in a previous chapter related,
the S t . Louis Bank was able t o secure a larger proportion of
the demand f o r borrowed funds.
While the t o t a l amount of
paper rediscounted i n 1916 was only s l i g h t l y larger than f o r
the f i r s t fourteen months of operation, $8,842,667 as compared with $8,231,083, the t o t a l borrowing by member banks
:from a l l sources was smaller i n 1916.^^
During the l a s t four
months <&f 1916 the amount of borrowing exceeded $1,000,000
i a each month.
I t was frequently the case during t h i s early
period that i n d i v i d u a l bankers d i d not know, or d i d not take
the t r o u b l e t o inform themselves, as to the proportion of
t h e i r paper that was e l i g i b l e for rediscount.
Many believed
that very l i t t l e of t h e i r p o r t f o l i o would meet the t e s t s of
e l i g i b i l i t y set up i n the regulations of the Board.
Con-
sequently, the Bank undertook t o show i n d i v i d u a l bankers
tlbat much of t h e i r paper was i n fact e l i g i b l e f o r r e d i s count.^^
From.the beginning the S t . Louis Bank adopted the
p o l i c y of r e q u i r i n g f i n a n c i a l statements of the customers of
member banks, nade either by the borrower or by the borrowing
llAnMV*! Reports of the Federal B^^^rve Bank of i K . l^M^Ls
f o r the years 1915 and 1916, pp. 22 and 35, r e s p e c t i v e l y .
i n l a i d . , 1916, p. 19.
-219-^
biMik, whenever the paper of such a customer waa presented
f o r rediscount.!^'
T h i s had the result of causing a number
of banks r e g u l a r l y t o require such atatements when they had
iK^ (^Hie so before.
I t also had the effect of standardizing
c r e d i t and securing the d e f i n i t i o n of credit terms.
lyhen the S t . Louis Bank was opened f o r business on
IMovember 16, 1914, a uniform rate of 6 per cent was established
a l l classes and a l l maturities of paper e l i g i b l e for rediscount.^^
The basis f o r setting the rate at 6 per cent was
jUa the i n t e r e s t rates then prevailing i n the larger
centers of the Eighth D i s t r i c t .
This rate was s l i g h t l y below
the commercial bank rates to customers i n many instances, and
approximately equal t o the rates on commercial paper s e l l i n g
t^ie op<&R market i n the D i s t r i c t .
In December money became
imore p l e n t i f u l aj^ i n t e r e s t rates began to d e c l i n e .
Conse-
quently, the Bank reduced i t s rate to 5i per cent on
15
December 10, 1914, and t o 5 per cent on December 21
on paper
maturing w i t h i n 30 days.
During the l a t e winter and early spring of 1915 the
reserves and deposits of member banks increased rapidly and
i n t e r e s t rates i n the D i s t r i c t continued to d e c l i n e .
From
January t o March bank rates t o customers were 5& t o 6 per
c<M^b, and commercial paper was s e l l i n g at 4^ to 5 per cent.16
13ibid.. 1916, p. 20.
Report
o f t h e F e d e r a l Reaerve Bank o f S t .
Louis.
1 9 1 5 , p . 8.
R a t e s o f t h e F e d e r a l Reserve Badk (Xf i K .
Federal
Reserve Bank of St. L o u i s . 1915, p.9
-220-^
t n M&rch the cuatomer rate declined t o $ per cent end the
comaercial paper rate t o 4 per ccnt.
On January 7, 1915,
the Reserve Bank introduced a system of p r e f e r e n t i a l rates
based on the maturity of the paper.
Rates were established
cent on paper maturing within 30 days, 5 per cent
on paper maturing w i t h i n 60 days, and 3 i per cent on paper
iRaturing w i t h i n 90 days, while the o r i g i n a l rate of 6 per
caR on a g r i c u l t u r e ! ag^ livestock paper running from 90 days
17
t o 6 iMxRhs ipas retained.
On February 4* 1915, the rate
isas reduced t o 4 per cent on paper of a l l maturities up t o
60 days, iM&d t o 4^ per cent on 60 to 90 day paper, and t o
5^ on a g r i c u l t u r a l paper from 90 days t o 6 months.
the remainder c^
slightly.
During
market rates of interest tended to
fall
O r d i n a r i l y , they would have r i s e n during the crop-
:MyviRg period, Ibut a l a t e harvest reduced the demand f o r
f^KKts
t h i s purpose.
Customer rates during the l a t t e r
pa3^ of ;1915 were 4^ t o 5 per cent and coaaercial paper rates
19
iMH^E
t o 4 per cent. ^ The rediscount rate structure re-
mained e s s e n t i a l l y the same during the rest of 1915 except
JHor the i n t r o d u c t i o n of s p e c i a l rates f o r c e r t a i n classes of
paper.
The close r e l a t i o n s h i p between the rates of r e d i s i&MNAt e s t a b l i s h e d by the Bank and the market rates of i n t e r e s t
iTpiscougt ^ates of t^e Federal Reserve Paak of St. Louts,
1914—21,pp. l o , 19.
M^cata., pp. 18, 19.
l^AnnMi
o f t h f Federal Restrve 9aR5 3? $t* LPUiS*
1915, p . 17.
-221-^
i s clearly discernible.
The Reserve IBank rates i^&ne bounded
l^f the commercial paper rate as a lower l i m i t and the customer iN^te as the upper l i m i t .
A d e f i n i t e rate p o l i c y thus
appears t o lhave been established during t h i s i n i t i a l period.
lan June 24, 1915, a 3 per cent rate was established
f o r paper maturing w i t h i n 10 days.
The purpose of t h i s rate
TMSS t o enable large c i t y banka t o borrow at a lower rate t o
i&eet demands f o r very short term payments, such as a heavy
dtaxM:
the c l e a r i n g
house.^^
i t was continued u n t i l
&eptember 16, 1916, when a 15-day rate was substituted.
P r e f e r e n t i a l rates f o r two s p e c i a l classes of paper
TMsre introduced on September 14* 1915.
One of these was f o r
s o - c a l l e d "commodity paper" having a maturity of not more
21
tl^Rn 90 days.
Ij^
order t o secure t h i s rate the bank o f f e r -
t o c e r t i f y that the loan was o r i g i n a l l y made at a
^bove 6 per cent.
The purpose of t h i s s p e c i a l rate
TMas t o a s s i s t those who wished t o carry cotton, wheat, and
other s i m i l a r commodities.
The rate provided was 3 per cent,
Twas increased t o 3^ per cent on December
22 29, 1916, and
diacontinued altogether on November 7, 1917.
THhe other p r e f e r e n t i a l rate introduced at t h i s
t J j M iKis <3n "trade acceptances".
Trade acceptances are help^^
t o the s e l l e r because they convert the open account i n t o
a discountable pi^ce of paper, and are desired by the banker
because they bear two names instead of one.
,
l O i a i d , , p. 9
21lbid.^. p. 9
The S t . Louis
*** Ptderal Reserve Ban* of 3 t i houj*.
-222-^
Bank determined upon a p o l i c y of encouraging t h i s type of
paper i n the Eighth D i s t r i c t i n the financing of the sale of
goods by manufacturers, jobbers and wholesalers t o t h e i r customers.
A p r e f e r e n t i a l rate f o r the trade acceptance was
continued u n t i l January 27, 1920.
By t h i s time the d i f f e r -
e n t i a l rate structure had been almost e n t i r e l y abandoned,
the only p r e f e r e n t i a l rates continuing beyond t h i s time being
tihose on bankers* acceptances and on paper having government
s e c u r i t i e s as c o l l a t e r a l .
The rate established f o r trade
acceptances cm September 14, 1915, was 3 i per cent, and the
tMKHxR (xf preference was either ^ or ^ per cent u n t i l the
23
r a t e was discontinued. ^
TI^B Bank was never successful i n securing a wide
tM^ c^ l^M) trade acceptance i n the Eighth D i a t r i c t .
The ex-
p l a n a t i o n i&or t h i s i s t o be found i n the attitude of customers c^ l^Ms banks, not i n that of the banks.
Most business
fiinas preferred t o eMRcg^ credit to t h e i r customers on open
book accounts, CM^ tiMm discount t h e i r own notes at the bank.
One reason commonly given i n support of t h i s practice was
tjhat salesmen found i t much easier t o hold customers i f they
i*ere indebted t o the f i r m on i t s books.
Another reason un-
doubtedly i s t o be found i n the psychology of the customer.
He was r e l u c t a n t t o sign h i s name t o a draft thus agreeing
t o laake payment on a c e r t a i n date i f he could avoid t h i s by
securing c r e d i t on open book account.
I t should not be un-
derstood, however, that the trade acceptance has l i t t l e use
^^Ibid., pp. 13, 19.
-223-^
today i n the Eighth D i a t r i c t ; rather, that i t a laae i a l i m i t e d
t o cei^tala t r a n s a c t i o n s .
The trade acceptance i s commonly
used today i n t h i s area i n financing the movement of grain,
and t o a c e r t a i n extent i n the handling of other a g r i c u l t u r a l commodities.
During 1916 there was a continuous increase i n the
volume of business from month t o month, and at the end of the
2/
year production was at a high l e v e l . ^ Prices f o r
all
commodities had r i s e n , including those of the major a g r i c u l t u r a l crops, and conditions were generally prosperous.
De-
s p i t e t h i s expansion i n business bank reserves increased and
money was q u i t e p l e n t i f u l .
The explanation f o r t h i s i s to be
found i n the f a c t that payments f o r materials purchased by
the b e l l i g e r e n t countries i n Eurpoe were l a r g e l y made i n cash ,
a^ t h i s tii&B — sometimes cash payment was made before d e l25
ivery.
The i n f l o w of gold from Europe was very large during 1916.
As a
r e s u l t i n t e r e s t rates i n the D i s t r i c t declined.
Cus-
tomer rates i n the l a r g e r c i t i e a were about 5 per cent
January, 1916, but declined t o a range of 4 t o
in
per cent by
the end of the year.
Rediscount rates at the St. Louis Bank remained
s u b s t a n t i a l l y the same during 1916, and the general r e l a t i o n ship between the rediscount rate and market rates of
interest
^^^Annual Report of the Federal Reserve Bank of S t . LouiSf
1916, p. 6.
23Annu*l Report o f the Federal Reserve Board. 1916. pp.
1-3.
^^AMHMlA Report o f the Federal Reaerve Bank of S t . L o u i s ,
1916, p . 7.
-224-^
continu^d t o be e s s e n t i a l l y the same as that described f o r
1915.
The rate on paper maturing from 16 t o 90 days con-
t i n u e d at 4 per cent.
The rate on a g r i c u l t u r a l and l i v e -
stock paper running over 90 days was reduced t o 4^ per cent.
As the result o f an amendment t o the Act #iich permitted the
discounting odT member banks' 15 day notes with e l i g i b l e
paper as c o l l a t e r a l , the Bank established a 3 per cent rate
f o r such notes on September 16, 1916, and f i x e d the same rate
27
:for rediscounted paper maturing w i t h i n 15 days.
THhe early part of 1917 was a period of great uncert a i n t y amd apprehension.
The European war had provided an
TRnprecedented expansion i n production and business a c t i v i t y ,
a l a r g e i n f l A M c^ gold, and a considerable volume of foreign
borrowing;.
P r i c e s had r i s e n considerably and were continu-
jbag t o increase, and t h i s had been followed by increased
costs of production.
One of two developments appeared l i k e l y ,
the conclusion c^ a general peace i n Europe or the entrance
of the United States i n t o the c o n f l i c t .
peace a d i f f i c u l t
ticipated.
In the event of
readjustment and d e f l a t i o n had to be an-
In the event of war t h i s country had to be pre-
pared t o ezpSMd production s t i l l further and extend much
t
l a r g e r c r e d i t s t o the A l l i e d countries.
cessation
In either case a
of gcdd imports was t o be expected.
In order t o
strengthen i t s p o s i t i o n to meet these expected demands the
37ibia., p. 6.
-225-^
Federal Reserve System took steps t o improve i t s reserve
position.
The Reserve banks disposed of holdings of munici-
p a l warrants an^ bonds which they had bought as investments.
IPith the entrance of the United States i n t o the war
i n A p r i l , 1917, the c r e d i t p o l i c i e s of the System came to be
guided by ome o b j e c t i v e , namely, the e f f e c t i v e prosecution of
the vnar.
The System undertook the management of the sale of
bonds and notes t o finance the war, and endeavored to admiRister the c r e d i t f a c i l i t i e s of thecountry i n such a way
as t o secure the maxiaum production of war materials.
With
regard t o discount p o l i c y the Federal Reserve Board stated
^a i t s report f o r 1917,
l^^NR the Federal Reserve Board has f a l l e n the
r e s p o n s i b i l i t y of d i r e c t i n g the p o l i c i e s of
the system so as to insure prompt accommodation
t o Ibahks whose customers require assistance
e i t h e r i n providing f o r commercial demands
caused by increased business a c t i v i t i e s , or i n
making t h e i r payments f o r bonds, as w e l l as t o
l&ahks which bought bonds for t h e i r own account.
I t was important that there be no disturbance
i n the money market and that interest rates
should be normal and as free as possible from
f l u c t u a t i o n . The Board accordingly, before
tlae subscriptions t o the f i r s t Liberty bond
issue were closed, and i n a n t i c i p a t i o n of the
amendments which became law on June 21, establ i s h e d a p r e f e r e n t i a l rate of discount f o r
notes of member banks secured by Government pg
o b l i g a t i o n s , whether c e r t i f i c a t e s or bonds.
One of the p r i n c i p a l objectives of the Board was t o
prevent i n t e r e s t rates from r i s i n g any more than was necessary
under the circumstances of the war.
High interest
would have hampered the development of productive
rates
facilities
iSAnnual R+oort of the Federal Reserve BQAPd. 1917. p, 5
-226-^
f o r war m a t e r i a l s , and would have caused war a c t i v i t y to
c u r t a i l f u r t h e r the production of consumer goods.
F^gther,
the development of much higher interest rates would have
forced the government to pay higher rates on I t s obligations,
thus increasing the cost of the war.
I t therefore determined
t o permit the use of Federal Reserve credit on easy terms i n
order that funds might be available f o r the purchase of
government s e c u r i t i e s and the financing i&f business a c t i v i t y .
On May 25, 1917, the St. Louis Bank established
p r e f e r e n t i a l rates of 33 per ceht <Hi
rediscounted paper
which was secured by Treasury notes, c e r t i f i c a t e s , or Liberty
29
bonds.
A rgte of 3 per cent was f i x e d for the discount of
the notes of member banks f o r 15 days with such government
s e c u r i t i e s as c o l l a t e r a l .
These rates continued u n t i l
December, 1917, when the rate f o r rediscounted paper with
maturities from 16-90 days was raised to 4 per cent, and the
r a t e on 15-day member bank c o l l a t e r a l notes was raised t o 3^
per cent.
No change was made i n the rates on commercial paper
iMKtil November and December, 1917.
During these two months
the in^Ee <3n paper maturing w i t h i n 15 days was increased t o
4 l^er cent, the rate on 16-90 day paper to 4& per cent, and
t?^ iM^te <3a a g r i c u l t u r a l and l i v e s t o c k paper t o 5 i per cent.^i
The p r e f e r e n t i a l rate on trade acceptances was also raised t o
4 per cent at t h i s time.
IPpiscount Rates of the Federal Reserve Bank of !&t. L o u i s .
1914-192A,PP' 18-19.
3 0 i a i a . , pp. 18-19.
3 i l h i a . , pp. 18-19.
-227Rates were again increased on A p r i l 8, 1918, by
amounts of i or ^ per cent.
The rates on rediscounted paper
of 16-90 days were increased from
to 4 3/4 per cent, and
the rate on trade acceptances was increased from 4 to
32
cent.-^^
per
The rate was raised from 3^ to 4 per cent on 15-day
member bank notes, and on customers^ paper of 15 days or less
when secured by government war paper.
A rate of 4^ per cent
was established f o r customers' paper of 16-90 days maturity
having war s e c u r i t i e s as c o l l a t e r a l .
On October 5, 1918,
a s p e c i a l rate was provided for paper with 16-90 days
maturity, secured by Fourth Liberty bonds, provided the paper
had been taken by the member banks at a rate not i n excess of
the Fourth L i b e r t y Loan coupon rate of
per cent.^^
The general objective of the policy with regard t o
paper secured by government war s e c u r i t i e s was to adjust the
discount rate t o the rate of interest on the bonds and
Treasury c e r t i f i c a t e s .
The Board " f e l t i t to be i t s duty t o
adjust i t s discount rates i n such manner as t o assist the
d i s t r i b u t i o n of the various Treasury
issues."34
The amount
of preference i n the rate f o r paper secured by government
war o b l i g a t i o n s was § per cent f o r the most ^a:^ during 1917
and 1918, although a f t e r A p r i l 8, 1918, there was ino d i f f e r ence i n the rates f o r paper with a n^turity of 15 days or
less.
32i3ad., pp. 18-19.
n^p^rt of the Federal Reserve Ban^ of St, Lou^s,
1918, p. 36.
^ ^^^^
^^port of th* Federal Ht^^Mve 9o*rd,
p, 3.
-228-^
Intereat rates did not r i s e to abnormal levels i n
the Eighth D i s t r i c t .
At the beginning of 1917 interest
rates t o customers i n St. Louis were 4 t o
money was
easy.35
per cent, and
In other sections of the D i s t r i c t
cus-
tomer rates were somewhat higher.
By the end of 1917
customer rates had increased by H
per cent, rates i n St. Louis
beij^ 5y t o 6 per
cent.36
commenting on the sale of the two
L i b e r t y bcm^ issues and the withdrawal of funds from the banks
t^f ttie government, the St. Louis Bank stated i n i t s 1917 report:
^This showed i t s effect on the reserves of the
banks throughout the d i s t r i c t , but because they
could rediscount with the Federal Reserve Bank
of S t . Louis, business f e l t l i t t l e , i f any,
e f f e c t . In f a c t , the increase i n rates t o customers i s probably due more to delay in t r a n s p o r t a t i o n than to the bond issue. M a i l i n
t r a n s i t i s aAl behind time, making the " f l o a t "
i n checks on the average a day late i n t h i s d i s trict.
Cars can not be obtained for shipment,
'MMi t h i s requires that the commodities, greater
i n value than f o r years previous, be c a r r i e d
longer."37
IPuring 1918 interest rates showed very l i t t l e
crease i n the Eighth D i s t r i c t .
in-
Customer rates i n the large
centers were about 6 per cent during the year, rates i n the
country areas being somewhat
h i g h e r . T h e
issue of coRmer-
c i a l paper was considerably below normal throughout the year.
35Annual Report of the Federal Reserve Bank of S t . L o u i s .
1917, p. 8.
361313., 1917, p. 8.
3 7 i b i d . f 1917, p. 8.
38Annual Report of the Federal Reserve Bank of St. L o u i s .
1918, p. 7.
-229-^
The rate on commercial paper i n the &t. Louis market remained at about 6 per cent u n t i l December, when i t dropped t o
a range of
t o 6 per
Brokers encouraged the issue
cent.39
of commercial paper of short maturity i n order to make such
paper r e a d i l y a v a i l a b l e f o r rediscount
t?^ Reserve l&M^c.
I t w i l l be r e a d i l y seen from the above analysis
that the r e l a t i o n s h i p between market rates of interest and
the rediscount r a t e structure changed materially during our
war years from that which had been developed i n the Eighth
D i s t r i c t during 1915 and 1916.
The structure of rediscount
rates which had been f i x e d with customer rates as the upper
l i m i t and commercial paper rates as the lower l i m i t became
m a t e r i a l l y lower than either of these
3^M7 and 1918.
T h i s development during the war years, however, may be
j u s t i f i e d as a proper p o l i c y .
The objective was t o provide
the necessary c r e d i t f o r both government and ordinary business
a c t i v i t y at normal rates of i n t e r e s t .
achieved i n the Eighth D i s t r i c t .
This objective was
A material r i s e i n interest
rates was prevented by making funds available through easy
access t o the u^^ c^ Reserve bank c r e d i t .
A marked credit
expansion was c l e a r l y necessary t o support the greatly i n creased volume of production, p a r t i c u l a r l y i n view of the
great r i s e
prices.
The Federal Reserve System was with-
any power t o prevent t h i s p r i c e i n f l a t i o n , inasmuch as
it
was the necessary accompaniment of the governmental
1918, p. 7.
-230-^
p o l i c i e s adopted t o prosecute the war.^O
i t i^oes iM^ f o l l o w ,
however, that the same j u s t i f i c a t i o n can be given f o r the
rate p o l i c y adopted i n 1919.
The d i f f e r e n c e between rediscount rates and market
rates of i n t e r e s t may be c l e a r l y seen by noting the average
annual rate of earnings on discounted b i l l s of the St. Louis
Bank i n 1917 and 1918.
In 1917 t h i s average rate on a l l
b i l l s discounted was 3.85 per cent, and i n 1918 the rate was
4.29 per cent.^^
T h i s compares with market rates of interest
In St. Louis of 5 i t o 6 per cent during the l a t t e r h a l f of
1917, and 6 per cent i n 1918.
The major portion of the borrowing from the Reserve
t a Iboth 1917 and 1918 was done by discounting paper
secured by government o b l i g a t i o n s .
In 1918 t h i s paper repre-
sented $777,982,269 out of a t o t a l of 31,085,137,254 of d i s counted paper.
The rate of discount on war paper was thus
the more s i g n i f i c a n t rate, but t h i s was less true during the
war years than i n 1919.
Period of Post-Var Readjuatment. 1919-1921
I t might be expected that the readjustment to
peace-time conditions would have brought quickly a reduction
of prices and a lessening of business a c t i v i t y .
However,
the accumulated wants r e s u l t i n g from war r e s t r i c t i o n s , the
very
large purchasing power due to high wages, high prices
40Thi3 point was discussed i n the section on war finance
i n a previous chapter.
4lDi3count Rate^ of the Federal Reserve Bank of &t. L o u i s .
1914-1921, pp. 2d-29.
-231-^
TABLE
43
T o t a l Volume of Paper Discounted by the St. Louis
Reserve Bank Each Month, 1917-1913*
1918
January
February
Xarch
April
June
July
August
September
October
November
December
$605,729
568,829
1,337,517
3,933,355
5,949,072
4,542,803
15,331,406
15,104,344
25,026,443
25,371,747
32,313,695
§38,197,208
30,350,961
43,403,410
62,992,886
59,554,252
94,624,576
105,035,837
92,059,649
117,349,235
154,399,519
155,524,752
133.6A4.917
$131,117,651
31,035,137,254
*Annual Reports of the Federal Reserve BiM^c of SR. Louis
f o r 1917 and 1913.
f o r farm products, and war-time savings, created a large
demand f o r goods.
The volume of business increased fnxa
month t o month during 1919, and prices rose r a p i d l y .
TlM9
p r o s p e r i t y of the Eighth D i s t r i c t was due l a large measure
t o the high p r i c e s received f o r farm products.
crops were smaller than i n the year before,
While some
particularly
cotton, the hig^ prices received maintained farm purchasing
power at a very high level.^^
A s c a r c i t y of goods i n most l i n e s soon developed,
TMlth raw materials and labor becoming d i f f i c u l t t o obtain.
A s e l l e r s ' market developed i n which the s e l l e r s could
^^Apnual Report of the Federal Reserve Bank of St. Louis.
1919,^p. 23.
-232-^
p r a c t i c a l l y d i c t a t e t h e i r own terms.
The St. Louis Bank
remarked i n i t s report, "The advancing market caused many
buyers t o order more than they needed, so as t o avoid r i s i n g
p r i c e s , and t h i s k i t e d prices s t i l l higher.
There were nMrny evidences of speculation and of the
use of c r e d i t f o r speculation.
The Board i n i t s 1919 report
gives an excellent picture i n the following:
^The purchasing power of the public growing out
of high wages and large p r o f i t s i s greater than
i t Jhas ever been before; and t h i s purchasing
power, competing with export demands a r i s i n g
of the necessities of Europe, has raised
p r i c e s t o a point that takes no account of
prudence. B&eiy element of increased cost i s
added t o p r i c e , and there i s , therefore, no
incentive t o manufacturers to produce cheaply
or t o hold back because of any element of
c o s t , whether of c r e d i t , labor, or material,
as they can always s e l l t h e i r output at a
p r o f i t . There i s p r a c t i c a l l y unlimited demand
f o r c r e d i t not only f o r the manufacture and
d i s t r i b u t i o n of goods, but also f o r speculation
i n commodities and i n the s e c u r i t i e s representing ownership of the industries producing those
commodities and which p r o f i t by t h e i r production
and sale."44
I t was clear that increasing costs of production,
i n f l a t e d p r i c e s , and speculation i n commodities and securi t i e s were not providing the proper conditions f o r an orderly
readjustment t o peace-time conditions.
Higher interest
rates
were c l e a r l y needed to discourage the holding of commodities,
t o encourage t h e i r movement to consumer markets, and to check
speculation.
Despite t h i s need interest rates i n the Eighth
4 3 l & i d . , 1919, p. 23.
44Annual Renort of the Federal Reaerve Board. 1919, p. 3.
-233-^
D i s t r i c t d i d not increase, b ^ instead declined.
C^LStomer
r a t e s at banks i n S t . Louis and rates f o r commercial paper
which had stood at 6 per cent during 1918 declined t o between 5 and 5 i per cent i n the LaiR
months of 1919.45
The only explanation of t h i s would seem t o l i e i n the easy
money p o l i c y enforced by the Board.
The Federal Reserve Board decided that discount
r a t e s should not be r a i s e d even though the credit
which was t a k i n g place seemed t o warrant i t .
expansion
Its f i r s t
duty,
as the Board conceived i t , was to aid the Treasury i n i t s
financing
o p e r a t t o n s . ^ ^
The Board iMas f e a r f u l that higher
r a t e s o f discount would prevent the absorption of the large
iKnount o f govemo^Mt s e c u r i t i e s already outstanding and the
new s e c u r i t i e s t o be issued.
The sale of the $4,000,000,000
V i c t o r y loan began i n A p r i l , 1919.
The a t t i t u d e of the Board at t h i s time i s best seen
i n the f o l l o w i n g statement i n defense of i t s p o l i c y i n the
1919 r e p o r t :
" I n o r d e r t h a t t h e member banks might c a r r y ^
t h e burden o f undigested Government s e c u r i t i e s
t h e y were o b l i g e d t o rediscount w i t h the Fede r a l Reserve Banks, and i n order t h a t such
r e d i s c o u n t i n g should not i n v o l v e them i n
heavy l o s s i t was e s s e n t i a l t h a t as long as
t h e banks were l e n d i n g t o bond s u b s c r i b e r s at
coupon r a t e s t h e rediscount r a t e should be
r e l a t e d t o t h e bond r a t e . The rediscount r a t e s
o f F e d e r a l Reserve Banks, t h e r e f o r e , i n s t e a d o f
b e i n g h i g h e r t h a n t h e market r a t e s , as i n
4 5 F e d o r a l Reserve Bank o f S t . L o u i s , Monthly Revjew o f
B u s i n e s s C o n d i t i o n s i n t h e E i s h t h D i s t r i c t , March t o Decemb e r . 1919.
46Annual Reo^^t nf the Federal Rettrvt P9*rd, 1919, p. 2.
-234-^
theory and i n normal practice th^f should have
been, were made lower than the market rates.
T h i s circumstance i s enough to prevent a normal
functioning of a Federal Reserve Bank, whose
rates should be so f i x e d that resort thereto i s
u n p r o f i t a b l e t o the borrowing i n s t i t u t i o n and
thus has a tendency to check expansion. The
remedy f o r t h i s condition i s the absorption by
investors of the undigested s e c u r i t i e s . This
process could not be accelerated, as i n normal
times, by sharp declines i n value, as the
large volume t o be digested precluded that
p o s s i b i l i t y . Absorption can be brought about
only by time and saving; and i t often happens
that a r i s i n g price causes better absorption
than a f a l l i n g quotation."*'
iMhile absorption of government s e c u r i t i e s by the
p u b l i c was undoubtedly important the evidence i n the Eighth
D i s t r i c t does rK^ i n d i c a t e that war obligations constituted
a heavy burden on the member banks during 1919, or that the
low rates of discount maintained during 1919 encouraged the
absorption of war s e c u r i t i e s by individuals and corporations.
The aggregate of war o b l i g a t i o n s owned and loans secured by
i*ar paper d i d not constitute more than 23 per cent of the
t o t a l loans and investments of the reporting member banks
I n S t . Louis, L o u i s v i l l e , Memphis, L i t t l e Rock, and Evans/a
v i l l e on any monthly reporting date i n 1919.
Such assets
v a r i e d from 12 t o 23 per cent of t o t a l loans and investments,
and averaged about 18 per cent during J u l y , August, and
September of 1919, a f t e r the V i c t o r y loan had been placed.
A study of the monthly statements of the reporting
member banks i n the Eighth D i s t r i c t and of the paper d i s counted by the Federal Reserve Bank of St. Louis indicates
4 7 l b i d . . 1919, p. 2.
43Computed from Monthly Revt^w of Business Conditions. 1919.
-235-^
TABLP AA
Loans and Investments i n War Obligations of Reporting
Member Banks i n Five C i t i e s i n Eighth D i s t r i c t , 1919-1920^^
(thousands of dollars)
1212
March 7
A p r i l 11
May 9
June 6
July 3
August 8
Sept. 5
Oct, 3
Nov. 7
Dec, 5
War Obligations
Owned
$88,757
92,072
95,215
89,131
62,896
64,526
66,893
48,857
41,137
33,397
L^^ns Secured
by War Paper
A l l other
Loans
$22,556
26,509
25,489
26,366
28,682
26,366
27,753
29,847
28,187
30,644
$380,686
388,035
385,533
386,813
390,064
410,288
402,088
418,555
438,588
455,413
1233
Jan. 9
Feb. 6
March 5
April 9
May 7
June 4
July 2
Aug. 13
Sept. 10
Oct. 8
Nov, 12
Dec. 10
50,190
40,081
36,153
31,136
29,562
25,165
19,622
21,006
21,590
19,671
20,185
20,367
30,571
482,471
30,023
489,394
28,918
500,069
28,657
498,287
(including rediscounts hereafter)
39,030
550,213
39,102
545,360
37,112
537,743
33,534
536,635
31,790
543,580
31,858
544,378
31,940
526,953
32,399
509,523
Discounted B i l l s Secured by Government TMar
Obligations Held by St. Louia Reserve B ^ , 1919-1920*
(thousands of dollars)
1220
i2i2
May 16
June 13
J u l y 11
Aug. a
Sept. 12
Oct. 10
Nov. 14
Dec. 12
$56,383
62,903
47,711
59,490
60,400
58,095
43,055
36,126
Jan. 9
Feb. 13
Mar
^
^ 14^
A p r i l 16
May 14
June 18
July 16
August 13
$45,640
50,405
55,493
50,319
56,816
55,250
49,002
41,547
*F*d*rH Reserve Bank of St. Louis, Monthly R ^ ^ ^ o f Businew
Conditions i n the Eighth D i s t r i c t , 1919-1920.
dnnstvt o f S t . Louis, L o u i s v i l l e , Evansville, Memphis and L i t t l e
http://fraser.stlouisfed.org/
Federal Reserve
Bank of St. Louis
Rock.
1
-236that the low discount rate probably delayed the digestion
of s e c u r i t i e s by the p u b l i c .
THie
were not unwilling
t o continue t o carry a considerable volume of government
o b l i g a t i o n s bearing interest up t o 4 3/4 per cent as long
as these s e c u r i t i e s could be used as c o l l a t e r a l to borrow
a d d i t i o n a l reserves from the Reserve 3<M^ at a rate of d i s count equal t o or s l i g h t l y less than the interest earned oa
the s e c u r i t i e s .
As long as government bonds could be carried
w i t h loans from banks at rates no greater than the coupon
r a t e on the bonds, purchasers were not l i k e l y to p^y
these loans i f funds could be more profitably used i n
business t r a n s a c t i o n s .
War obligations against which banks
had extended c r e d i t , or which had been used t o secure paper
discounted by the Reserve Bank can not be regarded as
digeated.
They are as much undigested as securities owned
outright by the banks.
As i s indicated by the table shoMbm 1(MMM ag^
inveatments i n iM^ obligations of the reporting member banks
IMie volume o f these s e c u r i t i e s owned by the banks continued
t o be l a r g e during the l a t t e r part of 1919 and the early
months o f 1920.
The changes from month to BKMth are for
the most part accounted f o r by fluctuations i n the amount
o f Treasury c e r t i f i c a t e a held, the volume of Liberty bonds
and V i c t o r y notes held remaining remarkably constant.
The
amount o f loans secured by United States bonds and c e r t i f i cates d i d not d e c l i n e , but tended t o increase s l i g h t l y
during the l a s t h a l f of 1919.
The St. I^Mis Bank continued
-237-^
t o hold between 50 and 60 m i l l i o n d o l l a r s of discounted
b i l l s secured by war paper u n t i l November and December of
1919, when the amount declined substantially only to return
t o nearly the previous levels i n the f i r s t half of 1920.
Nearly a l l the member bank borrowing i n 1919 was
done by discounting notes secured by war obligations.
Of
the t o t a l of $2,100,630,595 b i l l s discounted by the St. Louis
Bank i n t h i s year $1,895,246,179 were secured by war obligat i o n s . ^^ T h i s was, of course^ inevitable with a preference
of ^ per cent f o r such paper.
That the e f f e c t i v e rate of
discount was that f o r war paper i s even more c l e a r l y seen i n
the fact that the average annual rate of earnings on d i s counted b i l l s during 1919 was 4*25, which compares with a
rate of 4^ per cent on 16-90 day paper secured by any kind of
war obligations.^^
I t i s quite clear that the member banks
were discounting paper secured by war obligations t o secure
reserves t o provide a d d i t i o n a l credit to customers.
A l l loans
lyther than those secured by war paper increased from
$380,686,000 on March 7, t o $455,413,000 on December 5, 1919.
TlMs represents an increase of 20 per cent i n a period of
nine months.
Early i n December the Board n o t i f i e d the Federal
Reserve banks that i t would consider suggestions f o r rate
increases, although i t wished t o keep the rate on paper secured
498ee Table 33 on Page 162.
pp. 28-29.
R a t e s o f t h e F e d e r a l Reserve Bahk o f S t .
Louis^
-248-^
by Treasury c e r t i f i c a t e s equivalent to the interest on these
o b l i g a t i o n s , as they were held largely by the banks.^^ Accordi n g l y the discount rates of the St. Louis Bank were advanced
i n December and January t o 6 per cent on commercial paper
w i t h the exception of bankers' acceptances, to
per cent
on paper secured by L i b e r t y bonds and Victory notes, and to
4 3/4 per cent on paper secured by Treasury certificates.^^
During 192^ the r a t e on the l a t t e r paper was gradually increased, and on January 21, 1921, the rate was f i x e d at 6 per
cent.
Th^
on paper secured by Liberty bonds and
V i c t o r y notes s^m increased t o 6 per cent on May 21, 1921.
Immediately a f t e r the discount rates were raised, market
rate^ of i n t e r e s t
in
Louis increased.
TMie customer rate
and the open market commercial paper rate increased by ^ per
cent i n January, 1920, and by June the customer rate stood at
7 per cent and t h e commercial paper rate at 3 per cent.
I t may be concluded that the easy money policy of
the Board i n 191^ caused interest rates i n the
Eighth Dis-
t r i c t t o be a r t i f i c i a l l y lower, and encouraged the development of a c r e d i t
inflation.
T h i s policy did not encourage,
but r a t h e r delayed the absorption of government war obligations.
I t would appear that the Reserve banks did not
determine r a t e p o l i c y during t h i s period, but were dominated
by t h e Board w i t h i t s p o l i c y of giving support to the
^^Annual Report o f the Federal w^aerve Board.
P P *
3 - 4 .
SSpiscount
1 9 1 4 - 2 1 ,
p p .
Rates of th* Federal
1 3 - 1 9 .
$1"
-239-^
Treasury without regard to general credit conditions.
The
Board had not developed any d e f i n i t e credit policy up to
t h i s time, and i t s p o l i c y i n 1919 may best be explained by
i t s over-powering f e a r of a decline i n the government bond
market.
'
During 1919 a marked i n f l a t i o n had developed i n
p r i c e s , c r e d i t , and wages.
Cost was of secondary consider-
a t i o n i n a s e l l e r s ' market f o r a l l kinds of goods.
These
developments wer^ accentuated i n the early months of 1920.
Production was speeded up as much as possible i n order to
r e a l i z e t o p p r i c e s before the expected l i q u i d a t i o n took
place.
The peak of the upward movement was reached about the
middle o f J u n e . H o w e v e r ,
soon after the beginning of 1920
a consumers' s t r i k e against the high cost of l i v i n g began to
develop, ar^ spending f o r consumer goods decreas&d.
W^eek^y
d e b i t s t o i n d i v i d u a l bank accounts i n the Eighth D i s t r i c t
d e c l i n e d throughout the year 1920.^^
After the middle of the
summer l i q u i d a t i o n began, and prices of basic commodities
declined.
A sharp r e a c t i o n commenced i n IHie l a t t e r pa^
October which continued through November and December.
This
r e a c t i o n was accompanied by d r a s t i c reductions i n prices
and c o n s i d e r a b l e l i q u i d a t i o n i n stocks of goods.
The rate
of d e c l i n e slowed down i n the early months of 1921, and
toward t h e end o f 1921 i t became evident that l i q u i d a t i o n
bad run i t s course i n a number of important industries.
" 53AnmMA la^^irt o f th^
1919, p . 5.
3 4 l b i d . , 1919, p. 54.
Rearrv*
The
pt, &o^ls,
-240TRRLB 46
I n t e r e s t Rates i n S t . L o u i s , ]&).*
Customer
Commercial
Rate
Paper Rate
(30-90 da. loans)
March
5^-6
8^ . 8 i
1919
H
April
5
-
8*
May
5
- 8^
4& - 6
June
5
- 8^
8
July
8
- 8^
8
- 8^
8
Aug.
Endorsed Bankers*
Aoceptanoes
-8i
-
Qommodity
PtDtr
8t . 6
4i - 8
B& - 6
4^-8
- 6
8i - 6
-8&
Sept.
8i
- 8^
8i
84 - 6
Oct.
5i
- 8i
8i
6
Nov.
Dec.
4 i -4^
6
4^ . 4 i
6
4^ - 4 i
6
8
6
7
6 i -84
6*
7
a
6
8 i -8&
5
1920
Jan.
-
6
Feb.
-
6
M&rch
^
April
6
-
e
6
May
June
July
-
7
e
- 7
8
-
6
7
-7
7
-7
64 - 7
Aug.
-
7
e
^
Sept.
-
7
a
-
Oct.
7
8
Nov.
7
8
7
64 - 7
7
8
7
64-7
Deo.
-
^co^^cpiied from the M^^thly Review
E i g h t h D^at^jS^^^ 1919-1.928.
7
7
^^ T^t^a^eaa ^^"Aitiona i n the
-241T&BLE 48 (Cont.)
1921
Customer
Rate
Commercial
Paper Rate
Endorsed Bankera
AcceDtancea
P*p*f
Jan.
- 7
7g - 0
Feb.
- 7
7^ - 8
March
- 7
7^ - 8
Si
April
6& - 7
7& * 7$
-
6* -
8 i - 8^
- 7
Sg - 8%
- 7
May
- 7
-
- 7
- 7
- 7
6i - 7
June
6 - 7
-
July
6 - 7
6i - 7i
Aug.
6 - 7
6
6i
8
Sept.
6
- 7
6
- 6&
-
Oct.
6
- 6^
5^-6
4% - 4*
Nov.
Dec.
1922
6$ - 6&
- 6
3* - 6*
4 * - 4^
7i
. 7
- 6
5
Feb.
5 - 5 3
5
4
March
8
5
4
April
4$ - 8*
- 8
-
4* - 4&
June
-
4i -
4
-
4^^ - 8*
4
- 4i
Aug.
4
4
-
Sept.
5
4
- 4i
-
Oct.
4 - 5
4i- - 4 i
-
Nov.
4
Dec.
4 - 8
5 - 7
6
8
. 8
8
. 8^
8 - 6
8
- 8
4^ - 8
6
$
4
July
- 8&
- 7
- 5^
May
-
^ - 7
-
Jan.
-
- e
-
8
. 6
6
-
8
. 8^
8
'
8 - 6
-242-^
St. Louis Bank remarked with regard to November and December
of 1921:
" I n t e r e s t s holding out to the very Lai^ i n hopes
of r e a l i z i n g the extreme high prices, and thus making big
p r o f i t s , had t o bear the brunt of the radical reaction of
the two c l o s i n g months of 1920.
most d i f f i c u l t
The year closed with the
stages of readjustment successfully disposed
of."55
In the Eighth D i s t r i c t the l i q u i d a t i o n of 19201921 proceeded i n a rather orderly way, due i n greatest
measure t o the assistance and support rendered by the
St. Louis Bank.
The S t . Louis Bank i n the l a t t e r half of
1920 urged the commercial i n t e r e s t s , p a r t i c u l a r l y i n
St. L o u i s , t o l i q u i d a t e stocks of goods by aggressive sales
campaigns and by reducing p r i c e s .
In many instances IMM*
salesmen of S t . Louis firms went out into the Southwestern
t e r r i t o r y two or three weeks before the representatives of
Chicago f i r m s .
While losses were taken i n ccmducting "sales"
of merchandise, the losses were less than i f inventories had
been h e l d i n an attempt t o get higher prices.
The very
large amount o f Reserve bank credit extended by rediscounting
enabled what might be regarded as forced l i q u i d a t i o n to be
held t o t h e minimum.
One o f the most d i f f i c u l t problems that presented
itself
i n the Eighth D i s t r i c t was the situation with regard
to agriculture.
In 1920 the crops were planted and har-
vested during t h e period of highest costs, while the market-
55ibid., 1919, p. 6.
-243-^
ing of these crops took place during the period of
Crops were of record proportions In 1920,
decline.^^
drastic
slump i n p r i c e s reduced a g r i c u l t u r a l income considersbly.
Cotton was produced at heavier expense than i n iM^ precwMb^
year, and the r e d u c t i o n i n the price of (xRton caused l^tsses
t o many p l a n t e r s .
The marketing of crops iMSS sl^w i M ^ t h i s
made necessary longer and more extensive financing.^^
In
1921 the low p r i c e s f o r a l l crops together with the f a i l u r e
of the f r u i t
crops and a reduced cotton crop brought con-
s i d e r a b l e depression i n the agriculturaL sections of the
District.
A l a r g e amount of cotton carried over from 1920
had t o be s o l d at lower prices i n 1921.
Credit La large
volume was extended f o r the purchase of
stock i n order
that farmers might take advantage of the cheap fei^ crops.
The S t . L o u i s Bank rendered great assistance to
a g r i c u l t u r e during 1920 and 1921.
l&dle i n
the Bahk
discounted only $4,762,082 of a g r i c u l t u r a l or l i v e stock
paper, the amount of such paper discounted i n 1920 increased
t o $24,591,095, and i n 1921 1MM3 iMK^mt was
191,415.
These f i g u r e s do not show the f u l l extent of the assistance
rendered t o a g r i c u l t u r a l communities.
Much of the borrow-
ing of country banks was done by means of discounting t h e i r
own promissory notes, the proceeds of id^U^were u^sed to
^^Annual Report of th^ Federal
1920, p. 6.
5 7 i a i g . , 1920, p. 6.
^ ^^Annual Reports of the
1920, p . 10, 1921, p. 11.
^^
Reserve Bank of
Louis.
, <
Lou^?,
-244-^
extend c r e d i t t o a g r i c u l t u r a l i n t e r e s t s .
An analysis iMM^
by the Bank i n December, 1920, indicated that about 29 per
cent of the t(R;al i&mount borrowed from the Reserve Badt Iba
that year was used f o r the benefit of
agriculture.^^^
a n a l y s i s of the l i q u i d a t i o n of 1920-21 the Bank stated:
i^fhe marked l i q u i d a t i o n which began the l a t t e r
part o f October, 1920, took place mainly i n
the parent bank and was due largely to l i q u i d a t ing s a l e s , e t c . , on the part of commercial int e r e s t s i n S t . Louis. The decrease h i paper
discounted by the L o u i s v i l l e , Memphis, and
L i t t l e Rock branches, ^t^ich serve largely the
tobacco, cotton and r i c e interests, was comp a r a t i v e l y small, showing that there was very
l i t t l e l i q u i d a t i o n on the part of a g r i c u l t u r a l
^
i n t e r e s t s and c e r t a i n l y none of a forced nature."
The amount of Reserve bank credit extended by the
S t . Louis Bank during 1920 was very large.
The t o t a l amount
of paper discounted f o r member banks was $2,438,040,713, and
i n a d d i t i o n the Bank purchased $35,769,617 of bankers'
acceptances from banks and dealers i n the Eighth District.^^
The volume o f borrowing by member banks reached a peak i n
May and June, and again i n October, equalling approximately
$160,000,000 i n both o f these peak periods.
It was necessary
f o r the S t . L o u i s Bank t o rediscount large amounts of paper
w i t h other F e d e r a l Reserve banks i n order to provide t h i s
a s s i s t a n c e . , I n 1919 the S t . Louis Bank had been rediscounting
f o r other Reserve banks i n following the policy of the Board
of e q u a l i z i n g thte reserve p o s i t i o n of the several Reserve
1920, p. ID.
60s
^OSee t h e
<Mi the page following.
^lAnnual p^pny^
F^^^r^l Resirr^t
1920, pp. 10-11.
^^ St. Louis
Char 2.
F e d e r a l Reserve Bank o f S t . Louis,
Discounted B i l l s ^ Federal Reserve Notes
i n C i r c u l a t i o n , and Deposit L i a b i l i t y ,
I9IP-I92I.
^ FEDERAL^ RESERV-E BAMK OF ST. LOUis.^
DI5CCUNTE0
BILLS
-.J-',.
/J?
that in I?19 t*-!-
-
— ^ A t s ^ r
^faecWM,
fM't
ScMS.!*,
Urge:? thw
/M
V*'
FEDERAL
RESERVE
N0TE5
IN
CIRCULATION.
//o
/M
DEPOSITS.
Feb MAT.
MAt)
^nn
i q ^ o .
f-
Oct
Bee.
-246-^
banks.
During 1919 i t had taken $53,500,000 of paper from
the Federal Reserve 3ank of Piiiladelphia, and ^86/709,000
of paper from the Federal Reserve Bank of Richmond.^^
Even
as l a t e as January, 1920, i t had discounted ^13,000,000 of
paper f o r the New York and Philadelphia
B a n k s . ^ ^
During the
remainder of 1920, however, i t was necessary t o rediscount a
t o t a l of $315,498,735 of paper with other Reserve banks,
most of the paper being taken by the Boston, New York,
Cleveland, and Philadelphia Banks.^^
The reserve p o s i t i o n of the St. Louis Bank dec l i n e d r a p i d l y during the f i r s t part of 1920.
On January 2,
1920, the actual reserve was 46.8 per cent and the adjusted
reserve^^ was 58.5 per cent, the Bank holding at that time
$23,789,634 of paper acquired from other Reserve banks.^^
On March 23 i t became necessary to rediscount :^2,529,000 of
paper with other Reserve banks, and the adjusted reserve f e l l
t o 38.5 per cent.
By May 28 the adjusted reserve position
had f a l l e i t t o 13.9 per cent, and approximately $50,000,000 of
1919, p. 6.
1920, p. 36.
1920, p. 36.
^^he a c t u a l reserve consists of the gold, gold c e r t i f i c a t e s ,
and l a w f u l money a c t u a l l y held exclusive of the gold reserve
required against Federal Reserve notes. The actual reserve
r a t i o consists of the r e l a t i o n of t h i s reserve held to the reserve deoosits of member banks. The adjusted reserve r a t i o i s
determined by adding t o the actual reserves
t?^ proceeds
of b i l l s discounted f o r other Reserve banks, or subtracting
from the reserves the proceeds of b i l l s discounted with other
Reserve banks. The adjusted reserve r a t i o shows the r&^L
p o s i t i o n of the i n d i v i d u a l Reserve bank with regard t o theTn^lume of borrowing by member banks i n i t s d i s t r i c t .
66AnnMal Report of the Federal Reserve Bank of S t . Louis.
1920, p. 9.
-247-^
paper was under rediscount with other Reserve banks.
I t was at t h i s time that the St. Louis Bank i n augurated the progressive discount rate syatem by which i n creased rates of discount applied on borrowing by member
banks i n excess of t h e i r basic l i n e . 6 8
The reserve r a t i o
improved almost Immediately a f t e r the progressive rate was
introduced, although i t declined again i n October.
By
December 31, 1920, the St. Louis I^M^ iMts out of debt t o
other Reserve banks, and both the actual and adjusted reserve
69
r a t i o s stood at 44.3 per cant on that date.
The amount of
borrowing by member banks continued to be large i n 1921, but
it
d e c l i n e d almost constantly during the year, and the r e -
serve p o s i t i o n improved.
On December 31, 1921, the resei-ve
r a t i o stood at 64.8 per cent.
Once the i n f l a t i o n a r y boom had developed i n 1919,
i t was necessary f o r the St. Louis Bahk to i^se
t o a s s i s t and support the process of readjustment.
credit
I t would
be d i f f i c u l t t o imagine the chaos and forced l i q u i d a t i o n
t h a t would have r e s u l t e d i f the Federal Reserve Bank had not
existed with
f a c i l i t i e s to enable member banks t o borrow.
The d r a s t i c readjustment of p r i c e s and production was
necessary and e s s e n t i a l , and was due t o basic economic f o r c e s .
ThjLs tiie Reserve Bank could not have prevented, nor would i t
6 7 i a i d . , 1920,
6^1bid.. 1920,
the laaxt s e c t i o n
6 9 l b l d . , 1920,
T O l b i d . . 1921,
p. 9.
p. 9. T h i s progressive r*te i s discussed i n
following.
p. 9.
p. 10.
-259-^
hsve been desirable to do &3.
iM^ the function of the
Resei-ve Bank t o see that the l i q u i d a t i o n was carried out as
orderly as possible, and that the iMKKxR of bank credit was
reduced gradually, not c u r t a i l e d suddenly.
The figures on
loans and investments of the reporting member banks i n the
fbre large centers i n the D i s t r i c t during 1919, 1920, and
1921 indicate that the amount of bank credit was reduced
more gradually i n the l a t t e r part of 1920 and i n 1921 than
i t was increased i n 1919 and the early part of 1920.
Market rates of interest i n 1920 and 1921 were
considerably above the rates of discount of the Bank.
The
rediscount rate on comoercial paper was 6 per c&hb during
1920 and 1921, and the rate on paper secured by government
o b l i g a t i o n s was 5 t o
1921.
per cent i n 1920 and 6 per cent i n
The progressive rate increased the e f f e c t i v e rate f o r
so:ne banks above these f i g u r e s .
The difference i n the
e f f e c t ivQ^^ rate of discount between 1919 and the two years
following; i s dhown i n the increase i n the average annual
r{^:e of earnings on discounted b i l l s from 4*2$ i n 1919 to
5.S3 i n 1920, and t o 5.97 i n 1921.^^
crease <yf oyer
This indicates an i n -
per cent i n the e f f e c t i v e rate of discount
between l^M^ tu^ 1920.
While the discount rates were
i n a t e r i a l l y below market rates u n t i l the last part of 1921
term " e f f e c t i v e rate" i s used here to mean the
actual
paid f o r additional borrowed funds by most ban^^,
or the a c t u a l rate paid by a particular bank f o r a d d i t i o n a l
funds.
Rates of ths Federt] ntservel3aak <3f tK. Louis.
1914-1921" p p . 2 3 - 2 9 .
-249-^
TABLE 46
Loans and Investments of Reporting Member Banks
i n the Eighth D i s t r i c t , 1921*
Bats
1921
Loans
secured
by war uaner
Jan. 7
Feb. 11
Mar. 11
April 8
May 11
June 8
July 6
Aug. 10
Sept. 14
Oct. 12
Nov. 9
Dec. 14
27,623
25,460
22,416
23,480
20,570
20,780
30,343
19,103
18,637
19,220
18,840
19,642
Loans secured
All
by other
other
stocks and bonds
loans
(thousands of dollars)
121,947
112,672
121,119
120,513
118,708
117,847
119,710
118,512
118,622
118,549
122,220
123,783
357,525
360,921
339,220
328,774
320,095
312,872
312,002
304,596
304,157
300,952
297,871
297,096
T o t a l loans
and
Investments
605,134
597,267
582,165
569,523
565,529
548,564
550,190
540,678
539,085
541,208
543,260
541,720
^-Federal Reserve Bank of St. Louis, Monthly Review of Business
Conditions i n the Eighth D i s t r i c t . 1921.
there i s much evidence i n the material discussed above t o i n d i c a t e th^R the Increased discount rates were l a r g e l y responsible f o r the increased market rates.
The Progressive Rate of Discount
An amendment t o the Federal Reserve Act approved
.April 13, 1920, permitted the Federal Reserve banks, subject
t o iRhe approval of the Board, t o establish graduated rates of
discount,
IFour of the Reserve banks, namely, Atlanta, D a l l a s ,
l&ansas C i t y , and SR;. Louis, established a system of graduated
rates.
iULl
these plans went into effect i n A p r i l and May
of 1920, i^t a time when the reserves of these banks were
-261-^
being s e r i o u s l y depleted.
Four other Reserve banks. Hew
York, Boston, Chicago, and Minneapolis, increased rates on
the rediscount of commercial paper to 7 per cent i n June,
1920, but d i d not e s t a b l i s h a system of graduated rates.^^
The adjusted reserve r a t i o of the St. Louis Bank
had f a l l e n t o about 14 per cent i n May, 1920.
Faced with
t h i s s i t u a t i o n the Bank elected t o establish a plan of
graduated, or progressive, rates instead of r a i s i n g the rate
t o a jHU^s 7 per cent.
It was thought that t h i s plan would
be more equitable i n that some banks had borrowed much more
tiuan o t h e r s .
The progressive rates were established on
ahrr 26, 1920, by the S t . Louis Bank.?*
The plan inaugurated by the St. Louis Bank provided
that a member bank would be charged the normal discount rate
(Ml I t s borrowings up t o the amount of i t s baaic l i n e .
Thia
b a s i c l i n e was determined by the t h e o r e t i c a l amount that the
IKeserve BiH^c could lend any one bank provided a l l banks c a l l e d
accommodation at the same time.
It was calculated by
t a k i n g iHi iMROunt equal t o 65 per cent of the required reserve
o f a bag^c, adding the amount paid on i t s stock subscription
75
t o tiae Reserve Bank, then multiplying t h i s t o t a l by 2 t .
The reserve balances and the reserve requirements i n the
E i g h t h D i s t r i c t were computed as an average of a 7-day
the Federal Retepv? R o T d .
p. 60.
T^Ann^^l
1920, p . 12.
7 3 i 6 i a . , p. 12.
the
Reserve Bank of St, Loujs,
-251-^
p e r i o d f o r banks In St. Louis, L o u i s v i l l e , Memphis, and
L i t t l e Rock, and as an average of a 15-day period f o r
other banks.
all
Consequently, the charges under the progress-
i v e r a t e s were f i g u r e d on the average borrowings of member
banks f o r the same periods.^^
p^p
a d d i t i o n a l 25 per
cent o f i t s b a s i c l i n e borrowed by a member bank 4 per cent
T*as added t o the r a t e .
Thua, i f the average borrowing of a
member bank f o r a 7-day period waa twice i t a basic l i n e i t
would pay a r a t e of 6 per cent f o r the amount of borrowing
equal t o
basic l i n e ,
f o r the f i r s t 25 par cent i n
excess o f i t a b a s i c l i n e , 7 per cent f o r the second 25 per
cent i n excess, 7^ per cent f o r the t h i r d 25 per cent i n exc e s s , iMKi 8 per cent f o r the f i n a l 25 per cent i n excess.
A weakness of the progressive rate as i t was
a p p l i e d i s found i n the exemption of member bank notes
wjUbh government s e c u r i t i e s as c o l l a t e r a l .
L i b e r t y bonds or
V i c t o r y notes owned by the borrowing bank on A p r i l 1, 1920,
iMMl Treasury c e r t i f i c a t e s owned by the bank on the date of
hypothecation were exempted from the a p p l i c a t i o n of the
progressive rates.
T h i s , of course, was i n l i n e with the
^Board's p o l i c y of protecting the market for government
securities.
The SR. Louis Bank stated i n i t s r e p o r t , "The
number o f iMMiks which borrowed i n excess of t h e i r basic
l i n e s IMS always l a r g e r than the number subject t o the
p r o g r e s s i v e r a t e s o f discount because of the exemption of
77
c o l l a t e r a l notes secured by Government war o b l i g a t i o n s . *
7 6 i a i d . , p . 12.
7 7 i a i a . , p . 13.
-252-^
The e f f e c t of t h i s exemption was to discriminate i n favor of
those banks who were holding these war obligations, and
against those banks that had attempted to secure the abs o r p t i o n of these war obligations by the public.
Thia was,
of course, d i r e c t l y contrary to the objective of the Board's
policy.
The average rate of earnings on a l l b i l l s discounted
f o r the l a s t
s i x months of 1920 exclusive of the interest
earned by progressive rates was 5.64.
I f the earnings due to
progressive rates are included the average rate of earnings
amo^mted t o 6.13 f o r the last s i x months.
The graduated
r a t e strvicture thus increased the average cost of borrowing
during the l a s t h a l f of the year by .49 per cent.
The aver-
age rate of earnings f o r the entire year 1920 was 5.83, thus
i n d i c a t i n g that the average rate f o r the f i r s t s i x months was
5.53 compared t o 6.13 f o r the last six months.
However, the
e f f e c t i v e r a t e of discount f o r those banks subject t o the
progressive rates i s not to be found i n the average rate on
a l l borrowings, but i n the rate applicable to marginal i n crements i n the amount borrowed.
I f a bank has t o pay 7§
per cent on the a d d i t i o n a l amount borrowed that becomes the
e f f e c t i v e rate of discount f o r i t at t!MR tJ^M.
While the
average rate on a l l b i l l s discounted was3M* as high as 7
per cent i n any month i n 1920, the effective rate of discount
f o r many banks subject t o the progressive rates was much
higher than 7 per cent.
p. 13.
-253-^
TABLE 47
Average hates of Discount under the Progressive
Rate Structure, St. Louis Bank, 1920*
Month
No. of banks
'
' Average rate '
borrowing i n 'No. of banks ' of earnings
'Average rate
excess of b a s i c ' subject to 'on discounted 'of
earnings
l i n e on the 1st'progressive ' b i l l s exclu- ' including
of each month '
rates
' sive of pro- 'progressive
'xreasive r a t e s '
rat
May
June
July
August
September
October
November
December
132
149
154
159
166
172
179
182
28
79
77
89
106
109
111
111
Average per cent July-Dec.
%
%
—
.-
5.68
5.70
5.41
5.47
5.79
5,93
6l 07
6. 03
5. 74
5. 86
6. 80
6, 47
5.64
6. 13
ihbinual Report of th^ Federal Rtserve Bank of S t . Louis.
1920, p. 13.
(ha
21, 1921, the progressive rate plan was
inodified t o provide that a rate of 7 per cent would apply on
79
j&verage borrowing i n excess of the basic l i n e .
The progress80
i v e r:^;e iMSS abolished e n t i r e l y on June 29, 1921.
The use of progressive rates aroused considerable
antagonism i n SKMM d i s t r i c t s where they were applied.
The
Kansas C i t y Bank p a r t i c u l a r l y pointed out that i n i t s d i s t r i c t the psychological effect of the progressive rate was
badt, that i t caused i l l - f e e l i n g between member banks, and that
7 9 l b i d . . 1921, p. 12.
S O i b i d . , 1921, p. 12.
-254-^
ip&malized small banks for the most part.^i
i n the ques-
t i o n n a i r e submitted to the Federal Reserve banks i n 1931 by
the Senate Committee on Banking and Currency the snsvers i n d i c a t e d that of the four Reserve banks using the progressive
rtdne i n 1920-1921 only the St. Louis Bank favored the further
use o f i t . ^
The New York Bank, although i t had not used the
iprogressive r a t e , stated that i t s experience indicated that
small country banks generally borrowed proportionately more
than large c i t y banks, and that the c i t y banks would seldom
be subject t o any progressive rate plan which did not impose
83
a lhardship on the small banks.
IMiile the progressive rate would be useful i n d i s couraging that borrowing which i s done for purposes of p r o f i t ,
a l l borrowing, or even a large portion of i t ,
i s done f o r p r o f i t .
usually,
I t would not be wise to penalize the
Iborrowing dor^ t^ banks for the purpose of rendering a s s i s t ance t o an area i n f i n a n c i a l d i f f i c u l t i e s .
Under ordinary
circumstances tha basic discount rate should be made high
enough i n r e l a t i o n t o market rates to discourage borrowing
for p r o f i t .
C e r t a i n l y , i t was inequitable to exempt from
the a p p l i c a t i c M of progressive rates borrowing by member
iMM^ts on notes with government securities as c o l l a t e r a l , as
the progressive plan provided i n 1920-21.
a^HearintJ^pursuant t o S. Res. 71, 71st Congress, 3rd Sess.,
Operation of L e National and federal Reserve Banking Systems, pp. 788-89.
3 2 i a i a . , pp. 787-89.
p. 789.
-255-^
I t might be suggested that i f the progressive rate
i s ever used i n the future the baaic l i n e of c r e d i t ought t o
be determined f o r the member banks, c l a s s i f i e d i n groups, mi
t h e b a s i s of t h e i r borrowing experience.
It would thus not
d i s c r i m i n a t e against the country banks.
Bankers' Acceptances
P r i o r t o the passage of the Federal Reserve A ^
American banks had acquired p r a c t i c a l l y no experience with
acceptances.
1913 most
Under the banking LMfs
banKS
on themselves.
existence before
were prohibited from accepting d r a f t s drawn
The Federal Reserve
however, cmthorized
member banks t o make acceptances f o r the financing of f o r e i g n
t r a d e up t o 100 per cent of t h e i r c a p i t a l arnR surplus under
r e g u l a t i o n s provided by the Federal IKH^rve Board.
At f i r s t
these acceptances were l i m i t e d to transactions involving the
a c t u a l importation or exportation of goods, but amendment a
were soon enacted t o permit the making of acceptances to prov i d e what was c a l l e d " d o l l a r exchange*, ami a l s o t o permit
the accepting of b i l l s a r i s i n g
tl^ domestic shipment
or storage o f goods.^^
The S t . Louis Bank undertook to develop an acceptance market i n the Eighth D i s t r i c t , b ^ BM* with
response at f i r s t .
little
The banks i n t h i s D i s t r i c t knew but
l i t t l e o f t h e technique of the acceptance, tu^ th^lng 1915
no acceptances were created.
The Bank purchased $1,800,565
SAActs o f March 3, 1915, September 7, 1916, and June 21,
1917.
-256-^
of acceptances i n 1915, but t h i a wae done through the Fede r a l Hesprve Banks of New York, Boston, and
A t l a n t a . * 3
During 1916 n^ acceptances were created i n Mie D i s t r i c t
based on the import or export of goods, but toward the close
of the year some banks began t o make domestic acceptances.
Domestic acceptances amounting to $1,231,600 were made i n
1916, most of them by the banks i n Memphis to finance the
storage and movement of cotton.
The St. Louis Bank pur-
Chased a t o t a l of $20,681,822 of acceptances i n 1916, but of
t h i s amount only $242,500 was purchased from banks i n the
District.
I n 1917 the practice of making acceptances had
developed somehwat, and the Bank purchased $7,590,201 of
acceptances o r i g i n a t i n g i n the Eighth D i s t r i c t at rates
87
ranging from 2^ t o 4 per cent.
Something of a l o c a l market for bankers' acceptances had developed by 1918.
The St. Louis Bank attempted
i n v a r i o u s ways t o secure support for the open market i n
accepta3K^)S.
F i n a n c i a l i n s t i t u t i o n s i n the D i s t r i c t ware
iMMiouraged t o purchase bankers* acceptances f o r investment.
Ln order t o discourage banks from investing i n t h e i r own
b i l l s , which was, of course, an absurd and roundabout
process of lending t h e i r own funds, the Bank avoided the
d i r e c t purchase of b i l l s from accepting i n s t i t u t i o n s as much
Report
o f t h e F e d e r a l Reserve Bank o f 5 t ,
1915, p. 15.
RdABBUMA ^aport of
tH^BaH., 1917,
p. 9.
Louis.
Federal Hissrvs Bank of S t . Louis.
-237*
as p o s s i b l e . B i l l s
were purchased from accepting banks
o n l y when they found i t
impossible to s e l l thea. i n the open
market, and when t h i s was done the rate on commercial paper
was charged i n s t e a d of the rate on acceptances.
In 1918 the
Bank adopted the p o l i c y of a s s i s t i n g l o c a l dealers t o carry
bills
i n t h e i r p o r t f o l i o by making a 15-day purchase and re-
s a l e agreement w i t h them.^^
Thus the dealers could carry
t h e acceptances u n t i l they could be disposed of i n the open
market.
The l a r g e s t use of the acceptance ever made by
banks i n t h i s D i s t r i c t
occurred i n 1919.
I t was estimated
by the S t . Louis Bank that approximately $80,000,000 of
acceptances were created by banks i n t h i s D i s t r i c t
year.^^
trict
i n that
The Bank bought from banks and dealers i n t h i s D i s -
a s l i g h t l y l a r g e r amount than was created here,
$81,783,086, which i n d i c a t e s the large amount of support which
iMis rendered the market i n t h i s area.^i
I t does not
indicate,
o f course, that the St. Louis Bank absorbed a l l the b i l l s
created i n t h i s area, as many b i l l s were sold by dealers t o
biM^cs I n other d i s t r i c t s
just as many b i l l s created elsewhere
TM&re purchased by dealers or banks i n t h i s D i s t r i c t .
The
S t . L o u i s BsMk encouraged the i n t r a - d i s t r i c t d i s t r i b u t i o n of
b i l l s by g i v i n g preference i n the purchase of b i l l s t o those
b e a r i n g t h e laame of one bank i n the Eighth D i s t r i c t and of
^^L&La., 1918, p. 9.
3 9 i 6 i d . , 1918, p. 9.
9 q a a i a . , 1919, p. 7.
91ibid.. 1919, p. 7.
OF
WA$H'N6T(
*Ttou s . '
-258-^
Purchases of Bankers' Acceptances by the
S t . Louis Reserve Bank, 1915-22*
Y ^
Total
P^rpbaped
1915
1916
1917
1918
1919
1920
1921
1922
31,800,565
20,681,822
29,732,272
30,647,633
127,822,917
36,019,617
21,187,538
32,441*031
Purchased from
banks and dealers
i n 8th D i a t r i c t
none
3242,500
7,590,201
26,096,120
81,783,086
35,769,617
20,187,470
l e s s MiMitHU^ of the
t o t a l purchaaed
Ratea
1 7/8 2*
3 3/8 4
4 5/164 1/8 -
3i
4
4 3/4
5
6 3/4
6*
*Compiled from Annual Reports of the Federal Reserve Bank
of S t .
1915-22.
L
o
u
i
S
f
one name i n another Federal Reserve District.^^
The rate on open market purchases by the Bank waa
made by contract at the time of o f f e r i n g .
t h a t t h i s gave i t
use of b i l l s . ^ ^
The Bank indicated
some measure of control over the improper
Usually the buying rate on acceptances
f o l l o w e d the open market rate, and was approximately equal
t o the r a t e on endorsed, or three name, acceptances i n the
market.
I n the case of the 15-day repurchase agreements with
dealers the purchases were iMM^ by agreeme^ on the basis of
a r a t e equivalent t o that at which the dealer bought the
bills.^^
The only exception t o t h i s rate p o l i c y , as was
mentioned above, was that i n order to discourage the inveatment by a bank i n i t s own b i l l s , the rate of discount on
93^hid., 1919, p. 7
t o 6. Res. 71, <M, t i t . , p. 942.
-259-^
commercial paper waa charged ^ e n such b i l l a were offered
f o r purchase.
Later, following a r u l i n g by the Board that
a Reserve bank might refuse a b i l l bearing only the endorsement of the accepting bank, the St. Louis Banx adopted a
p o l i c y of n e i t h e r buying b i l l s d i r e c t l y from an accepting
bank, nor discounting such b i l l s for the accepting bank.^^
In 1920 conditions became less favorable for the
development o f the acceptance i n the Eighth D i s t r i c t .
Mem-
ber banks d i d not have the surplus funds to invest i n such
bills,
and the Bank d i d not encourage the endorsement of b i l l s
f o r p r o f i t by the buying rates i t established.^^ A preferent i a l r a t e f o r the discount of bankers' acceptances maturing
w i t h i n 3 months was established on January 24, 1920, which
provided a rate of 5 per cent as compared t o 6 per cent on
commercial
p a p e r . ^ ^
^his rate was increased t o 5^ per cent
i n May, 1920, and abolished altogether when a l l rates were
Qg
made 5 per cent i n November, 1921.^
The purpose of t h i s
p r e f e r e n t i a l discount rate was to sustain the acceptance
market, and t o encourage the investment of funds i n l i q u i d
assets.
TMhen the progressive rate plan was introduced i n
1920 BMMqr l&Khks which had borrowed i n excess of t h e i r basic
^^Ibid., p. 899.
p^port of
federal Reserve
of St, ^^oujs,
1920, p. l A .
^^ibid.^ 1920, p. 11.
Rft** of t b t
Reserve BSMk of St, Louts,
1914-21, pp. 18-19.
-260-^
l i n e sold acceptances t o the Reserve Bank at t h e i r buying
r a t e because such sales were not discounts, and, therefore,
were not subject t o the progressive rates of diacount.^^
A d d i t i o n a l reserves could thua be secured at a cheaper rate
by these banks even though a preferential rate of diacount
e x i s t e d f o r acceptances.
The t o t a l purchases of acceptances
by the Bank from dealers and member banks i n 1920 declined to
l e s s than h a l f the amount purchased i n 1919.
The acceptance market continued to decline in the
E i g h t h D i s t r i c t during 1921 and 1922.
During these years the
S t . Louis Bank continued to support the acceptance with cons i d e r a b l e purchases from l o c a l dealers and banks.
Almost
all
i t s purchases of acceptances during 1921 were from dealers
and banks i n the D i s t r i c t .
However, i t became clear that
fewer acceptances were being created i n t h i s area, and that
the market was becoming very " t h i n " .
The Bank remarked i n
I t s report f o r 1922 that the demand for bankers' acceptances
u s u a l l y exceeded the supply during the year.^^^
Cornments i n
the Monthly Review of Business Conditions i n the Eighth D i s trict
during ISMR indicated that there was l i t t l e
activity
lUa the acceptance market, and that the number of acceptances
created
t h i s D i s t r i c t was d e c l i n i n g .
Ln the early months of 1923 the St. Louis Bank
purchased some acceptances from l o c a l sources, but a f t e r
t h a t tjU&e o f f e r i n g s of acceptances by member banks and dealers
99A3KKMH Re^^rt of the Federal
1920, pp. 11, 12.
^"X^EMLi., 1922, p. 11.
Resipvt 3*9* of St, hput?,
-261-^
i n t h i s D i s t r i c t were made on rare occasions and i n n e g l i g i b l e amounts.^^^
In the early years, as iHM oMMRioned above, tlMs
rate at which acceptances were purchased by the St. Louis
3ank was determined by contract at the time of o f f e r i n g ,
thus providing some discrimination with reference t o the
character of the b i l l s offered.
IK i s not clear Ju^
long t h i s p r a c t i c e continued, but by the l a t t e r part of 1921
a schedule of buying rates
with the maturity of the b i l l s .
been establi^i&a which varied
These rates iM&ns changed
f r e q u e n t l y , 29 changes being made i n the schedule h i 1922.^^2
The buying rates i n 1922 equalled the open market rates on
endorsed bankers' acceptances h i fK,. Louis,
Changes i n l&^yhm
103
rates were numerous but less frequent thereafter.
Ordi-
n a r i l y a spread of ^ t o ^ per ce^t existed i n the buying r^tes
between b i l l s of very short maturity and b i l l s having a
maturity of 121 t o 180 days.
Since 1923, no open market for acceptances has exi s t e d i n the Eighth D i s t r i c t .
Tj^e i K . Louis
stated i n
1931,
"In the early days we encouraged several
dealers who t r i e d to b u i l d up an acceptance
business, but they soon gave i t up as the
banks i n the eighth d i s t r i c t displayed very
l i t t l e interest i n the acceptance business.
In the infrequent instances where banks or
others were Inquiring about the market they
lOlRearinaTl^^rsuant t o S. Res. 71, Pp, c H . , pp. 918-19.
i O a i b i a . , p. 918.
i 0 3 n a a . , pp. 918-19.
-262-^
seemed t o prefer to go tolWewYcMk."^^^
The Bank has had no resale agreements with dealers since
105
January, 1924,
and except for approximately $700,000 i n
January, 1924, no acceptances have been held under resale
agreement since
1922.^^^
stated i n 1931 that i n
attempting t o f i l l orders of member banka for the purchase of
b i l l s they had
not found i n recent years any b i l l s being held
107
i n S t . Louis.*^"^'
Between the beginning of 1924 and the end
of 1930 the t o t a l acceptance l i a b i l i t i e s of member banks i n
the Eighth D i a t r i c t aa shown i n the c a l l reporta
108 never
amounted t o more than 3 or 4 m i l l i o n dollara.
The reasons for the f a i l u r e to develop the use of
the acceptance i n t h i s D i s t r i c t are several.
Normally the
acceptance has i t s most important use i n the financing of
foreign trade.
The buaineaa of financing foreign trade
tends t o flow t o the large bm^M located b i t h ^ p r i n c i p a l
ports of the country.
The financing of foreign trade has
never been an important part of the business of banka located
i n S t . L o u i s , or i n the D i s t r i c t .
Had Louisiana and Texaa
been included i n the Eighth D i s t r i c t as was o r i g i n a l l y proposed, which would have reaulted i n the inclusion of New
Orleans and the Texas ports, the development of an important
f o r e i g n b i l l market i n t h i s area would have been much more
iOAjaid.,
i05lhia,,
i06lbid..
iOTibid.,
i08ibi^.,
p.
p.
p.
p.
p.
852.
943.
938.
929.
875.
-263-^
probable.
The development of cuch a b t l l market waa en-
v i s i o n e d b/ the St. Louis bankers at the ttae the problem of
d i s t r i c t i n g was under consideration.^^^^^ character of the
E i g h t h D i s t r i c t as i t was f i n a l l y determined had auch to do
w i t h the f a i l u r e t o develop a foreign b i l l market.
Most acceptances created i n t h i s D i s t r i c t have
be&K domestic acceptances.
Domestic acceptances tend to be
created by tMuUn idh&K t h e i r reserves become depleted, and
they can not lend t h e i r funds but can lend t h e i r c r e d i t .
In
t h i s sense the acceptance becomes a method of monetizing
a d d i t i o n a l c r e d i t by u t i l i z i n g funds outside the banks.
The
r i s k i n the investment of such funds i s largely undertaken by
the bank by i t s guarantee of the payment of the b i l l .
The
banks i n t h i s area have generally regarded i t aa more p r o f i t able t o lend t h e i r funds than t h e i r credit when that waa
possible.
Th^ large volume of acceptances created i n t h i s
D i s t r i c t during the period 1918-1921 i s largely to be exp l a i n e d as a monetization of additional credit when the banka
were not able t o supply the funds themselves.
To a large ex-
tent these funds were supplied by the Reserve Rank i t s e l f ,
and the acceptance became another means of access to Reaerve
bank c r e d i t .
The develoj^Msent of the acceptance i n t h i s period
i s , perhaps, a l s o t o be explained by the e f f o r t s of the
S t . L o u i s Sank t o construct a market, and by the experimentat i o n o f the member banks with the use of the acceptance.
Ban^c.
The
f
-264-^
Bank stated tn 1931 that i n the majority of instances b i l l s
accepted by banks i n t h i s area represented substitutions for
other forms of c r e d i t instruments.^^^
To most banks located i n ti^ i n t e r i o r of the country
the acceptance has not been an attractive investment under
ordinary circumstances because of the opportunities for the
more p r o f i t a b l e employment of funds elsewnere.
In order for
an acceptance market to exist there must not only be a
steady source of supply of these b i l l s , I^R there must also
be a strong investment demand for them.
This has not been
t r u e In the Eighth D i s t r i c t .
The acceptances created i n t h i s D i s t r i c t have been
s e l f - l i q u i d a t i n g bills.^^^
The only abuse of t h i s instrument
occurred i n the early years i n connection with the practice
of some banks i n purchasing or discounting t h e i r own acceptances.
T h i s p r a c t i c e was sometimes a subterfuge f o r evading
t h e s t a t u t o r y r e s t r i c t i o n on loans to any one person or corp o r a t i o n of 10 per cent of the c a p i t a l and surplus of the
bank.
The acceptance, i f based on actually e x i s t i n g values
i n goods, was not subject to t h i s r e s t r i c t i o n .
When a bank
purchased i t s own acceptances i t was, of course, only making
an ordinary loan i n a roundabout fashion.
The P*r1od 1922-1929
A business r e v i v a l developed i n 1922 throughout the
country, and i n no part of the country was i t more i n evidence
IlOHearini^''^ pi,irsuant t^ g- Res. 71. <M, c i t . , p. 862.
iiilhid.,
p. 864.
-265-^
than i n the i^ighth D i s t r i c t .
It was accompanicd by increased
production and consumption of commodities, increased employlaent of l a b o r , restored confidence i n values, and l i q u i d a t i o n
117
o f extended c r e d i t s . T h e
drastic decline i n prices which
began i n October, 1920, and continued through 1921, came t o
ail end i n the summer of 1922, and prices then began to turn
upward.
Credit l i q u i d a t i o n continued through the f i r ^ iutJUf
o f 1922, loans and discounts of aember bangs d e c l i n i n g u n t i l
the l a t t e r part of June.
^Ith the usual demands f o r currency
and c r e d i t i n financing the movement of crops, loans increased
i n the l a s t h a l f of the year, but the increase was more than
seasonal, the volume o f loans and discounts being considerably
higher i n December than at the beginning of the year."
Interest rates which had begun to decline i n the
l a s t h a l f of 1921 continued t o decline throughout 1922.
Customer rates of interest on commercial loans i n St. Louis
had remained remarkably steady at a high l e v e l during the
3JMM hi^Ur of 1920 and the f i r s t h a l f of 1921.
Commercial
paper r a t e s , which hs^ reached 3 per cent during the c r i t i c a l
period t a the l a s t h a l f of 1920, declined e a r l i e r than customer r a t e s , but t h i s i s not surprising i n view of the f a c t
t h a t theae rates were 1 t o l i per cent higher than customer
rates.
SkM** abnormal rates on coamercial paper could not be
expected t o continue beyond the period of c r i s i s .
The progressive rates of discount had been eliminated
^^^^^mill^l M i r r ^ ^^ the Federal R w r v ^ Bai^k of St,
1922, p . 5.
Vt
i i 3 i b i a . , pp. 7, 8.
266.
Chart 3 .
Volume o f Discounted B i l l s ^^eld and
Discount Rate, 1922-1938, St. Louis Federal
Reserve Bank.
Ii<7
100
90
30
4
19^3
193 J
39 3 4
19^7
19^?
19-?
IPJ^
29 37
19 3 J
19 3 7
19j.y
267.
Chart
Customers' Rates f o r Prime Conmiercial Loans
i n S t . L o u i s and Sicount hate o f S t . L o u i s
F e d e r a l Reserve Bank.
c
4 ^
V
JO
FiteJ
/lAtrt
0/fcr/^e ?
1
/^/Jt
733 3
73.??
yj^
/j^?/
/3JP
/J^!-?
'^JM
y^jjf
/J?3?
APJ^
/J?.?/
/j?j}?
-268-
TABLE
49
Interest Rates i n S t . Louia. Mo.. 1923-1934*
Customer
1923
Rate
Jtua.
-
T^sb.
Commercial
Paper Rate
Endorsed Bankers'
Acceptances
Commodity
Paper
4& - 4% !
4^ - 5
April
5
-
i&iy
5
-
JiM&e
6
- 5i
July
j^Ag.
5
6
- S^
-
Sept.
5i -
Oct.
5i -
T^yv.
5
Dec.
4i -
- 5i
1924
.Lan.
- 5
Feb.
- 8
March
4^ - 5
April
4^-43
May
June
4
-
Jhily
- 4
Aug.
3 - 4
Sept.
3 -
Oct.
3
IKyv.
3 i - 3$
- Sg
Dec.
4
iTnannPSI-nSSeyve Bank of S t . L o u i s , Monthly Review of Business
the E i ^ t h D i s t r i c t . 1923-1934.
http://fraser.stlouisfed.org/
Conditiona i n
Federal Reserve Bank of St. Louis
-269-^
T M H g l M tCont.)
i925
Jan.
Customer
Rate
(Prime com'l
loans)
Conmerciel
Paper Rate
Live Stock
Loana
4
Fob.
- 4
March
4
April
4i
May
4
June
4
July
- 4
Aug.
1 - 4i
Sept.
-
4^
Oct.
4^
Nov.
4^
Dec*
4^
Jan.
Collateral
Loans
'
-
Feb.
4
4^
March
4
- 4^
April
4
- 4^
4
- 4i
4
- 4i
4& - 8^
May
June
June
-
July
Ig -
4
- 4i
8
- ai
Aug.
5
-
4i
. 4^
8
-
Sept.
6
-
4i
8
- 8i
Oct*
6
-
8
8
- 8i
Nov.
8
-
8
8
8i
Dec.
8
-
8
8
- 8^
5 - 6
-BTO3AHLE
Caatomer
Jan.
(Prime com'i
loana)
CoHateral
Loana
(piMii
iaana (MWKH^^ by
Varchouaa reoe^pt§
Live stock
Loana
6
- 6^
6
- 6$
6
- 6t
^ C
6
- 6t
May
4i ^ 6
6
- 3^
44-34
3
Jtme
4i - 5
3
- 6^
44-34
3
Jtily
* B
3
- 3^
3
3
Aug.
4i - a
4{ - 3 i
43-3
34-3
Sept.
4 - 0
4*-3
44-3
34-3
Oct.
4 - 6
44-3
44-3
34-3
Nov.
4 - 5
4*.3
4i - 3
34-3
Dec.
4
- 6i
4i
44-34
33-3
Jan.
4
-
44-34
34-3
Fab.
4
- Ci
44-34
34-3
March
4i - ei
4^.3^
44-34
34-3
Aprii
4* * a*
4^-3^
44-34
34-3
May
4* - 5 i
3
- 3^
3 - 3 4
34-3
JUnc
4* - 5*
3
- 33
3 - 3 3
33-3
Juiy
6 - 3 3
3 i -3
3 - 3
33-3
Aug.
5 i - 33
3i - 3
3i - 6
34-3
Sept.
6* - 6S
3i - 6
34-3
34-3
Oct.
6^-6;
3^-6
34-3
63 -3
Nov.
3^-3;
5& . 3
34-3
33-3
D*o.
3^ ^ $
34 - 3t
34-3
33-34
?*b.
e
.
March
April
3
-271-
TABIE 49 (Contt)
1929
Jan.
Customer
Rate
(Prime com'l
loans)
6i - 6
Collateral
Lcana
Loans aecured by
Warehouae receipts
Live Stock
Loans
5^ -
5^
- 63
53-7
5^
53
53
63
March
65 - 63
53-7
5^
53
5:
53
April
5& - 6 i
53-7
6^
6 - 7
53
6
6
7
Feb.
May
- 6&
53
6
June
53 -6*
6 - 7
53
6
6
7
July
53 - 6 i
6 - 7
53
6i
6
7
Aug.
53 - 6 i
6 -7
6
7
6
7
Sept.
6
- 6i
6
- 7&
6
7
6
7
Oct.
6
- 6i
6
- e
6
7
6
7
Nov.
83 - 6&
6
- 7i
53
7
6
7
Doc.
6 - 6
53 - ^
6
6
5& - 6
6
1930
Jan.
8i
6
- 7
Feb.
5i
6
5^ - 7
5* - 6 i
6
Mar.
6
5^ - 6 i
5 - 6
6
April
53
5
-
6
4^-53
53
-
May
4
5^
5
6
4i - 5*
5^
53
June
4
5^
43 - 6
4i - 5*
5i
6
July
4
5
4 i - 53
4 - 5&
5
6
Aug.
^
6
4^ - 53
4 - 5^
5i
6
8
4^ - 53
4 - 6i
5^
6
Sept.
Oct.
3
5
4i - 53
33-5^
5
6
Nov.
3i
6
4 i - 53
33 - 4^
5
6
Dec.
23
8^
4^ - 6
33-53
5
6
-272-^
T&BLB 40 (Cont.)
Customer
Rate
(Prime oom'l
loans)
Jan.
2i - 5
1931
Collateral
Loans
Loans secured by
Warehouse rooeipta
Live Stock
Loana
4
- 6
54 - 44
5 - 6
Feb.
2& - 5
4
- 54
3
- 5
6
March
2g - 5
4
- 54
3
- 5^
6
April
2g - 0
4
- 54
3
- 5
54 - 6
44 - 54
3
- 5
54 - 6
May
- 5
6
June
2* -
44 . 54
3
- 5
54 - 6
July
2 - 5
4
3
- 5
5
-
Aug.
2 - 8
34 . 54
34 - 54
5
- 6
Sept.
2 - 5
3
. 54
- 54
6
- 6
Oct.
3 - 5
3^ . 54
4
- 54
5
- 6
Nov.
4
44 - 6
44 - 6
6
Dec.
4^-6
44 - 6
44 - 6
54 - 6
Jan.
4^^ - 6
43 - 6
43 - 6
54 - 6
Feb.
4^-6
44 - 6
44 - 6
5
- 6
. 6
5
- 6
- 5&
- 54
6
1932
5
March
- 6
5
April
44-6
43 - 6
44 - 6
5
- 6
May
44 -54
44 - 6
44 - 53
5
- 7
June
4 - 5 4
44 - 54
44 - 6 i
5
-
July
34-54
4^ - 6
4 i - 53
5
- 6
August
3 i - 54
44 ^ 6
44 - 53
5
- 6
Sept.
4
43 - 6
44 - 64
5
- 6
Oct.
4 - 5 4
44 - , 5 3
44 - 5^
5
- 6
Nov.
4 - 6
4
- 6
4
- 54
54 - 6
Deo.
4 - 5 3
4
- 6
4
- 6^
5
- 54
6
- 6
-273-^
TABLE 49 (Cent.)
Customer
Rate
(prime com'l
loans)
Jan.
8i
1933
Feb.
March
-
5
April
-
Collateral
Loans
Loans aecured by
Warehouae receipta
Live Stock
Loans
4
-
6
-
6
-
6
4
-
6
-
6
-
6
-
6
-
6
6
-
6
4
-
6
4i
-
ci
B
-
6
4
-
6
4
-
6
6
-
6
4
-
6
4^
-
$
5
-
6
-
6
4
-
6
6
-
4
-
5i
2
-
5
-
6
H
-
6
-
6
6
-
5
-
6
-
$
May
4^
-
June
4^
-
July
4
-
5i
Aug.
4
-
6
Sept.
3
-
5
Oct.
3
-
4
-
6
-
4
-
6
-
5
-
6
-6
-
6
-
6
6
-
6
5
2
-
6
5
-
6
Nov.
Deo.
3
-
Jan.
3
-
Feb.
2i
-
March
3
-
April
3
May
5i
1934
-
6
-
4
-
4
-
6
2
-
6
5
-
6
-
4
-
6
2
-
6
5
-
6
2
-
4
-
6
2
-
5
-
6
June
3
-
4
-
6
July
2
-
3
-
6
Aug.
li
-
6
-
Sept.
li
-
6
3^
Oct.
2
-
Nov.
1
-
Dec.
li
5
5i
5i
-
6
5
-
6
2
-
6
5
-
6
6
2
-
6
5
-
6
-
6
2
-
6
4
-
6
4
-
6
2
-
6
5
-
6
4
-
6
H
-
6
5
-
6
3
-
6
li
-
6
5
-
6
-274-^
i n June, 1921, and, i n November, 1921, the d i f f e r e n t i a l rate
structure was entirely eliminated and a l l rates reduced to
5 per cent.
In A p r i l , 1922, the rate ^as again reduced t o
4^ per cent because of the reduced volume of borrowing and
lower interest rates.^^^
i&MK^R for the decline
commer-
c i a l paper rates from abnormal levels i n the f i r s t part of
1921, there was a marked tendency for reductions i n the
discount rate t o lead those La interest rates.
Customer
rates on commercial loans tended t o follow the reductions i n
the rate of discount.
The volume of borrowing at tiMs Reserve
Bank f e l l sharply from the beginning of 1922 u n t i l the end of
August, then increased during the remaining months, but the
volume of borrowing was substantially less at the end of the
year than at the beginning.
Conditions i n agriculture presented the most important problems i n the Eighth D i s t r i c t ^a 1922.
The severe
reductions i n the prices of a l l a g r i c u l t u r a l products had
r e s u l t e d i n a considerable disparity i n the prices of a g r i cultugaJL commodities and manufactured goods.^^^
Prices of
goods sold by the farming population f e l l much more than the
p r i c e s of goods bought by t h i s group, and purchasing power
i n the a g r i c u l t u r a l portions of the D i s t r i c t was therefore
much reduced.
This s i t u a t i o n , together with unsatisfactory
t r a n s p o r t a t i o n conditions and high freight rate^ served t o
produce c<msiderable discontent i n the r u r a l areas.
^i^Baia., p. 11.
i i s i a i g . , pp. 5-7.
A marked
-275-^
increaae i n the p r i c e of cotton i n the f a l l of 1922 and the
winter of 1923, and aome advances i n the prices of other
crops improved conditions i n the farming areas, and aided
business r e v i v a l .
A g r i c u l t u r a l income i s an important
element i n the prosperity of the Eighth D i s t r i c t .
While the
D i s t r i c t has important i n d u s t r i a l areas and i s considerably
more d i v e r s i f i e d than some other d i s t r i c t s , changing cond i t i o n s i n a g r i c u l t u r e exert a pronounced effect on business
trends i n the area.
Conditions of marked prosperity developed i n 1923.
An important f a c t o r i n bringing increased business a c t i v i t y
was the remarkable increase i n b u i l d i n g and construction of
a l l kinds.
In the f i v e largeat c i t i e s of the Eighth D i a t r i c t
t h e r e was a gain of 26.3 per cent over 1922 j i n the number of
b u i l d i n g permits issued, and an increase of 21.6 per cent
the cost of these p r o j e c t s . ^ ^
in
An increase i n the average
p r i c e s of a g r i c u l t u r a l products improved a g r i c u l t u r a l income
and tended t o reduce the d i s p a r i t y i n a g r i c u l t u r a l and i n dustrial prices.
Speculation did not develop to any appre-
c i a b l e extent, although commodity prices were increasing,
and stocks of goods were not excessive at the end of the
year.
There was a marked u$e of Federal Reserve c r e d i t
i n the Eighth D i s t r i c t i n 1923.
In the l a s t several months
o f 1923 t h e volume of discounted b i l l s held by the S t . Louis
H 6 j a i d . , 1923, p. 4.
i i T j a i a . , 1923, p. 4.
-276-^
BanK was equal to the highest levels reached i n the last
months Of 1929.
m f a c t , the average volume of borrowing
during the l a s t h a l f of 1923 was considerably greater than
the average borrowing i n the last half of 1929.
The r e l a -
t i v e increase i n borrowing was greater i n t h i s D i s t r i c t then
i n any other d i s t r i c t i n the System.
The average v.lume of
borrowing f o r a l l d i s t r i c t s increased from $547 millions
in
January t o $873 millions i n October, an increase of 60 per
cent.
The average volume of borrowing in the Eighth D i s t r i c t
increased from $17.6 millions i n January to $72.7 millions
in
October, an increase of over 300 per cent.^^^
This tremendous volume of borrowing i s to be explained by a number of factors.
During the period June, 1922,
t o J u l y , 1923^ the Sustem as a whole sold $525,000,000 i n
government securities.^^^
The St. Louis Bank had a p o r t f o l i o
of $26,755^600 i n government securities at the end of January,
1923, but by October, 1923, i t had liquidated i t s entire
p o r t f o l i o of these s e c u r i t i e s .
This undoubtedly reduced
member bank deposits and reserves, and forced them t o borrow.
Loans and discounts of reporting member banks in the D i s t r i c t
increased from $437,782,000 on January 10, 1923, t o
$473^216,000 on December 26, 1923, the high point for theyear.^^^
^^^Figures on the holdings of each Federal Reserve bank of
b i l l s discounted f o r member banks by months from January,
1922 through October, 1936, are taken from Turner, Robert C
Member Bank Borrowing. Appendix, Table l l A , pp. 208-15.
'
These f i g u r e s are monthly averages of d a i l y f i g u r e s .
pursuant t o S. Res. 71. (M^ c i t . , p. 795.
^^^Annual Report of the Federal Reserve Bank of St. tfOni,?,
1923, p. 6.
-277-^
T h i s expansion i n credit would not i n i t s e l f explain the
l a r g e volume of borrowing.
Deposits of reporting member
banks, however, dropped sharply during the year.
On Jan-
uary 17 deposits amounted t o $578,800,000, but on December 26
stood at only $538,217,000, and reached a low point f o r the
year of $522,295,000.^^^
This decline i n deposits r e f l e c t e d
the sale of s e c u r i t i e s by the Reserve banks, an increase i n
money i n c i r c u l a t i o n , and some flow of funds out of the
District
as w e l l as t o the country banks i n the D i s t r i c t .
Interest rates increased i n 1923, commercial paper
rates r i s i n g t o a range of 5 t o 5^ per cent i n St. Louis,
customer rates i n St. Louis r i s i n g to as high as 6 per cent.
Outside S t . Louis, rates for customers were 1 t o 2 per cent
higher i n such centers as Memphis, L i t t l e Rock and elsewhere
i n the D i s t r i c t .
L o u i s v i l l e generally had lower rates be-
cause of a l e g a l l i m i t of 6 per cent on the rate of
i n Kentucky.
The rate of discount remained at
interest
per cent
during 1923, which d e f i n i t e l y put i t below both customer
r a t e s and commercial paper rates by a minimum of ^ per cent.
The unusual amount of borrowing probably can be accounted f o r
i n part as borrowing f o r p r o f i t by some member banks, and by
some non-member banks having access to Reserve c r e d i t through
correspondents.
In the spring of 1924 a recession developed i n
business, and commodity prices turned downward.
i ^ i i b i d . . 1923, p. 6.
i ^ ^ i b i d . . 1922, p. 8.
The con-
-278-^
sumption of goods did not decline, however, end most of the
decline i n business was due to a lack of forward buying i n
view of uncertain prices.
The prices of tt^ p r i n c i p a l a g r i -
c u l t u r a l products of the D i s t r i c t increased in the f a l l of
192A, and conditions i n the a g r i c u l t u r a l portions of the
D i s t r i c t were more prosperous than
au^ tin^ since 1920.^^^
Certain noteworthy developments were taking place
during t h i s period with regard to agriculture.
The i n t r o -
duction of improved methods'of c u l t i v a t i o n and the development of d i v e r s i f i e d farming becaae significant as early as
1922.
A program of s c i e n t i f i c farming, including proper
r o t a t i o n of crops and more intensive use of the land, was
introduced i n many parts of the D i s t r i c t .
As a result crops
were planted and harvested at lower cost.
A considerable
growth i n specialized farming operations occurred, such as
d a i r y i n g , l i v e s t o c k raising, poultry raising, and the growing of f r u i t s and vegetables.
dependent on staple crops.
Many communities became less
Certain sections of the D i s t r i c t
were p a r t i c u l a r l y adaptable t o such specialized operations
i n farming, and i n these sections a g r i c u l t u r a l income was i n creased more by t h i s factor than by any other.
this District
The fact that
includes more c i t i e s of considerable size than
some of the other a g r i c u l t u r a l d i s t r i c t s has enabled a
greater development of such specialized farming because i t
dependent t o a considerable extent on l o c a l markets.
Diver-
s i f i e d farming continued to develop throughout the twenties
i 2 3 i b i d . . 1924, p. 6.
is
-279-^
and played a large part tn whatever prosperity existed i n
the a g r i c u l t u r a l portions of the D i s t r i c t .
One of the p r i n c i p a l problems i n a g r i c u l t u r e at
the beginning of t h i s period was the unfavorable r e l a t i o n ship between the prices of a g r i c u l t u r a l products and of manuf a c t u r e d goods.
Between 1922 and 1926 price adjustments
tended t o reduce t h i s d i s p a r i t y , and i n 1926 a more favorable
relationship existed.
general business
This had a considerable e f f e c t on
conditions.
The volume of borrowing dropped sharply throughout
1924, and, by January, 1925, was at the lowest l e v e l of any
month i n the whole period from r?!^ t o 1930.
However, the
loans and discounts of reporting member banks increased from
3473,216,000 i n December, 1923, t o $499,713,000 i n December,
1924.^^^
T h i s i s t o be explained by the growth i n deposits
from $532,056,000 i n December of 1923 to $626,328,000 i n
December of 1924.^^^
^^^ increased reserves thus obtained
enabled the banks t o reduce t h e i r indebtedness at the Reserve
Bank.
Interest rates f e l l sharply i n 1924, commercial paper
r a t e s i n S t . Louis dropped to as low as 3 to 3 3/4 per cent
i n the l a s t h a l f of 1924.
The rate of discount was reduced
from 4 i t o 4 per cent by the St. Louis Bank i n June, 1924.
The reason f o r t h i s change was stated by the Ban* as f o l l o w s :
,rune 19, 1924, we decreased our rate from 4 i t o 4 per cent,
since Cleveland, Atlanta, and Chicago, a l l of which have
l^arts of States i n t h i s d i s t r i c t , had decreased t h e i r
i 2 4 i b i a . , 1924, p. 6.
i l S l h i d . , 1924, p. 6.
rates.
-293*
hoped t o give agriculture .nd business the benefit of
lower r a t e i n crop-moving ti.e.'^^^
.
^^^^ ^^^^ ^^^ reduction
t o 4 per cent i t was unprofitable t o borrow fron the Reserve
BanK as funds could be obtained more cheaply by the s a l . of
assets.
Higher l e v e l s of business a c t i v i t y and generally
prosperous conditions characterized 1925 and 1926.
The v o l -
ume of b u i l d i n g and construction reached new high l e v e l s
the Eighth D i s t r i c t
in
i n 1925, and was substantial i n amount- i n
1926 although l e s s than i n 1925.
This was an impoi^ant
f a c t o r i n the prosperity of the period.
Commodity prices
were s t a b l e on the average, although the trend was s l i g h t l y
downward i n 1926.
Prices of com, cotton, and tobacco were
much lower i n 1926 than i n the several preceding years, and
i n some sections a g r i c u l t u r a l income was reduced, but i n
other sections heavy production made up for lower prices.^^^
Loans and discounts of reporting member banks i n creased i n 1925 t o $524,412,000 i n December.
A further
in-
crease i n loans developed i n 1926, although i n December of
1926 the t o t a l amount of loans was somewhat less than at the
1
end of 1925.
Deposits increased s l i g h t l y during both 1925
and 1926, although they were somewhat less at the end of 1926
than at the end of 1925.
sh(arply i n 1925 and 1926.
Interest rates increased rather
During the last h a l f of 1925 and
I26Hearinga pursuant t o S. Res. 71. op. c i t . , p. 764.
^^"^Annual Report of the Federal Reserve Bank of S t . Lou^^^
1926, p. 6.
i 3 8 i b i d . , 1926, p. 6.
-281-^
a l l of 1926 both commercial paper rates and customer rates
In St. Louis were above the discount i^te of 4 per c e ^ .
the l a s t h a l f of 1926 commercial paper rates were
per cent and customer rates were 5 to
per cent.
La
to 5
It was
thus p r o f i t a b l e t o borrow at the Reserve Bank, and t h i s was
probably one f a c t o r of inportance i n the increased volume of
borrowing by member banks during these two years.
A business recession occurred i n 1927, but the
evidences of i t were not marked i n the Eighth D i s t r i c t .
The
volume of commercial and i n d u s t r i a l a c t i v i t y was below that
of 1926, but i t compared favorably with the average of the
129
period 1922-1926.^
A strike occurred i n the bituminous
c o a l f i e l d s i n I l l i n o i s and Indiana, and there were floods
of the M i s s i s s i p p i River and i t s t r i b u t a r i e s .
Agricultural
y i e l d s were reduced due to unfavorable weather and floods,
l&Rt prices were higher o f f s e t t i n g i n large measure the effect
of smaller y i e l d s on a g r i c u l t u r a l income.^^^
The loans of reporting member banks averaged 3 per
cent l e s s i n 1927 than i n 1926.^^^
Demand deposits showed
no change, but time deposits averaged 8.2 per cent higher i n
1927.
Savings deposits were the highest on record at the
end of 1927.^^^
The increase i n time deposits increased the
reserves of member banks, and money became d e f i n i t e l y easy.
The volume of borrowing from the Reserve Bank was considerably
i 2 9 i b i d . f 1927, p.
i 3 0 l b i d . , 1927, p.
1927, p.
i 3 2 i a i d . , 1927, p.
5.
6.
6.
5.
-282-^
l e s s than tn 1926, reaching a peak of about r30 millions i n
July.
Interest rates f e l l during 1927, and the spread
between the discount rate MMl customer rates i n &t. Louis
was reduced.
On August
1927, the St. Louis Bank reduced
i t s rate of discount from 4 to 3 i per cemt.
Rates were re-
duced at the other Reserve iMMucs to 3i per cent at approximately the same time.
This r:^^ channe was made, "hoping
i t would give cheap money for crop purposes and business, as
13*3
there was plenty of money." ^^
The increased business a c t i v i t y of 1928 was
characterized by the St. Louis Bank as a "moderate business
expansion".^^^
Building and construction in 1928 exceeded
that of 1927 and was at least equal to that of 1926.
The
bituminous coal areas were depressed because of over-production an^ labor troubles.
Excessive production i n the
zinc mining areas caused the price to f a l l , thereby reducing
the returns i n t h i s industry.
A g r i c u l t u r a l income i n 1928
was somewhat greater than in the two preceding years.
The
t o t a l crop production and the income received for i t exceeded both that of 1927 and the average of the preceding
five
years.
Prosperous conditions i n industry and trade cont i n u e d u n t i l the last quarter of 1929.
In some industries
pprsua^t to p. Res. 71. op. P i t . , p. 764.
of the Feder&l Reserve Bank of St. Louis.
1928, p. 7.
1928, p. 8.
-283-^
the volume of production in 1929 exceeded that of any preceding year, such as boots and shoes, e l e c t r i c a l supplies,
drugs and chemicals, and the metal working
industries.136
The volume of building and construction f e l l sharply, part i c u l a r l y i n the last half of 1929, and i n consequence the
production of b u i l d i n g materials, such as cement, lumber, and
f i r e clay products, was considerably reduced.
Farm income i n
the D i s t r i c t , exclusive of Lhre stock, dairy, and poultry
products, was estimated to be 4.5 per cent higher than i n
1928.^3^
A credit i n f l a t i o n did not develop i n the Eighth
D i s t r i c t during 1928 and 1929.
The t o t a l loans of reporting
member banks averaged only 1 per cent higher in 1928 than i n
138
1927, and 1.4 per cent higher i n 1929 than i n 1928.
The
highest mid-month figure for t o t a l loans iMts tfM^ fbr October 16, 1929, $546,082,000, which compares i?M:h $532,838,000
f o r January 18, 1928.
However, loans on securities were
considerably larger i n 1929 than i n 1^28, and commercial
loans were considerably less in 1929.
Loans on securities
remained r e l a t i v e l y constant a l l during 1928, but increased
abruptly i n January, 1929.
Security loans on December 19,
1928, amounted to $216,247,000, but increased by January 16,
1929, t o $245,591,000.
A l l other loans amounted to
$312,736,000 on December I t , 1928, but dropped to ?287,564,000
1929, p. 7.
i 3 7 i b i d . ^ 1929, p. 8.
i 3 8 i b i d . . 1928, p. 8 aad 1929, p. 8.
-284TABLE 50
Loans and Deposits of Reporting Member Banka
Sth D i s t r i c t , 1928 and 1929-^
(thousands of dollars)
1?2$
( i n c l u s i v e of rediscounts)
Total
loans
Security
A l l Other
and discounts
Loans
Loans
J a n . 18
Feb. 15
Mar. 14
Apr. 18
May 16
June 13
J u l y 18
Aug. 15
Sept..19
Oct. 17
Nov. 14
Dec. 19
Net Demand
Deoosits
532,838
528,290
520,471
523,245
512,817
514,644
525,645
521,697
532,071
532,023
526,161
528,983
216,413
213,826
203,429
210,235
208,572
216,794
223,385
222,841
216,931
214,486
217,335
216,247
316,425
314,464
317,042
313,010
304,245
297,850
302,260
298,856
315,140
317,537
308,826
312,736
430,509
429,215
414,501
404,332
405,548
392,864
375,476
377,972
379,910
392,322
392,598
409,233
533,155
531,810
527,923
529,160
523,925
512,741
515,597
528,171
539,453
546,082
544,266
539,002
245,591
255,887
242,563
237,118
241,303
227,295
233,538
240,591
238,244
243,096
249,092
253,546
287,564
275,923
285,360
292,118
282,621
283,446
282,059
287,580
301,209
303,000
295,174
285,456
416,557
402,334
384,768
37^,652
3^7,357
373,697
362,315
368,238
360,643
380,000
382,346
392,053
1929
J a n . 16
Feb. 20
Mar. 20
Apr. 17
May 15
June 12
J u l y 17
Aug. 14
Sept..18
O c t . 16
Nov. 13
Dec. 18
^Federal Reserve Bank of St. Louis, Monthly Review of
Business Conditions. 1928, 1929. The figures f o r loans and
d i s c o u n t s were revised i n January, 1929, t o exclude acceptances
of other banks and b i l l s of exchange sold with endorsement,
and t o include mortgage loans that had previously been reported as investments. The f i g u r e s f o r the Eighth D i s t r i c t
were most a f f e c t e d by the i n c l u s i o n of mortgage loans as
loans i n s t e a d of as investments. The figuy^e i n t h i s t a b l e
are the r e v i s e d f i g u r e s , and are therefore comparable.
-285-^
on January 16, 1929.
Security loans represented 40.6 per cent
of t o t a l loans on January 18, 1928, and 40.9 per cent of
t o t a l loans on December 19, 1928.
Security loans increased
t o 46.1 per cent of t o t a l loans on January 16, 1929, and to
47.0 per cent on December 18, 1929.
Demand deposits of reporting meober banks declined
from §430,509,000 on January 18, 1928, to ?375,476,000 on
J u l y 18, 1928, then increased u n t i l they reached $416,557,000
on January 16, 1929.
During 1929 demand deposits declined
s t i l l f u r t h e r , reaching a low poU^ of 5360,643,000 for midin^&th figures on October 16, 1929.
This considerable re-
duction of deposits reflected the flow of funds to New York
and t o Chicago.
There was, of course, a marked flow of funds
t o New York f o r purposes of speculation i n the securities
market.
I t also reflected the open market operations of the
System during t h i s period.
Between January, 1928, and
A p r i l , 1929, the System sold 2405,000,000 of government sec u r i t i e s . ^39
The St. Louis Bank advanced i t s discount rate
three times i n 1928.
On February 21 the rate was increased
t o 4 per cent a f t e r the rate had been raised at a l l Reserve
banks except Cleveland, and there was danger that the Eighth
D i s t r i c t would be burdened with borrowing that belonged to
other d i s t r i c t s . O n A p r i l 23 the rate Was increased t o 4^
per cent "because there was an unseasonable amount of borrowi39HearinP* r^rsuant
i ^ O l b i d . , p. 764.
S. Res. 71. OR_cit., p. 796.
-266-^
ing which we hoped to check; also, because there was some
flow of funds between St. Louis and Chicago.
a
Chicago with
per cent rate might have diverted some borrowing to
a t . Louis i f we continued a 4 per c<MR rate."^^^
On July 19
the rate was raised to 5 per cent for reasons e s s e n t i a l l y
s i m i l a r to those that prompted tlbe increase i n A p r i l .
'The
Bank stated, "Discounts were increasing, tt^ reserve r a t i o
was low, and funds were going from t h i s d i s t r i c t to the N^rw
York market, where the rate was higher.
Market rates of intere&t, which had declined during
1927, began to increase at tl^e beginning of 1928, ami
tinued t o r i s e sharply u n t i l the l a t t e r part of 1929.
Cus-
tomer rates i n St. Louis tended to follow the rate of d i s count as i t was increased during 1928.
After the middle of
1928 customer rates for prime commercial loans were i to 1
per cent above the discount rate at the minimum of the range.
Rates i n St. Louis for security loans were higher than for
commercial loans a l l during 1928 ami 1929, varying from 4
to
per cent higher during 1929.
The volume of borrowing increased sharply from
January, 1928, and reached a peak i n September, 1928, of
about $65 m i l l i o n s .
Borrowing then declined sharply u n t i l
January, 1929, a f t e r which i t increased to a peak i n
September, 1929, of about *73 m i l l i o n s .
After September,
1929, the volume of borrowing declined abruptly to l e v e l s
1 4 1 i b i d . . p. 764*
i 4 2 i b i d . . p. 764.
-287-^
i n 1930 which were below any ye&r except before 1917.
The
amount of borrowirig i n September, 1929, was no greater than
that i n October, 1923.
In fact, the average volume of
borrowing i n the last half of 1929 was considerably less than
In the l a s t h a l f of 1923.
For Mie System aa & whole borrowing
was considerably greater i n both 1926 and 1929 taari i n 1923.
Tj&e eastern d i s t r i c t s ^ere the ones using large quantitiea of
reserve credit i n 1928 and 1929.
During these years the
volume of borrowing; was materially greater than i n 1923 i n
the New York, Boston, Philadelphia, Cleveland, Chicago, and
San Francisco d i s t r i c t s .
The increased borrowing i n the
S t . Louis D i s t r i c t was occasioned, not by the creation of
a d d i t i o n a l bank c r e d i t , but b/ the loss of reserves due to a
flow of funds t o eastern centers and the sale of government
s e c u r i t i e s by the Reserve System.
The wisdom of Federal reserve policy during 1928
and 1929 has been much discussed.
There ar^i aany who have
c r i t i c i z e d the System for not adopting a raore aggressive
p o l i c y i n making advances i n the discotmt rate.
It has been
suggested that the discount rate was not advanced as ouch as
it
should have been i n order to checK speculation, and that
the adv nces were not made quic<^ly enough.
However, i t must
be remembered tiiat the Federal Reserve System was not i n a
p o s i t i o n t o cope with a l l the problems presented i n t h i a
period, p a r t i c u l a r l y the flow of funds into tne security
markets.
A fim-aoncy policy was applied i n the f i r s t h a l f of
-301-^
1928.
Discount rates were increased by successive steps from
3 i t o 5 per cent.
Sales of government securities amounting
t o $405,000,000 were made by the System u n t i l by the end of
the f i r s t h a l f of 1928 the System p o r t f o l i o was p r a c t i c a l l y
exhausted.^^^
At the end of August, 1928, the St. touis
Bank had l i q u i d a t e d a l l i t s p o r t f o l i o of government securities.
The result of t h i s policy was to increase interest rates u n t i l
at the beginning of 1929 they were at higher levels than at
any time since 1921.
However, there was s t i l l need t o check
the flow of funds into the market for securities.
There re-
mained but two methods by which the Federal Reserve banks
might attempt to control the situation, an increase i n the
discount r a t e , or the use of direct pressure on member banks
t o c u r t a i l c r e d i t f o r speculative purposes.
As the Board
stated i n i t s report for 1929, "There was nothing in the
p o s i t i o n of commercial credit or of business to occasion concern.
The dangerous element i n the credit situation was the
continued and rapid growth of the volume of speculative
security
credit.
The Federal Reserve Board did not favor further
advances i n discount rates because i t did not wish to i n crease further the cost of credit to commercial and i n d u s t r i a l
enterprises.
It therefore refused to approve the rate ad-
vances voted by some of the reser/e banks, such as Boston and
New York.
I t f i n a l l y approved an increase i n August, 1929,
R^nort of tiie Federal Reaerve Board. 1929, p. 2.
p. 2.
-289-^
at the New York Dank from 5 to 6 i^r cent, at a time
open market rates had advanced to this
p
o
i
n
t
.
<
r
h
e
great
d i f f i c u l t y the Reserve Systea faccd was tiM2 existence of
large funds available for investment in the c a l l - l o a n market
over which the Syston had no control.
Many corporationa had
possession of considerable cash balances which had been der i v e d from large issues of securities in a favorable nar<et,
iM^l f r o n e a r n i n g s . T h e volume of brokers' loans could
therefore increase even i f ban^k credit was not increased.
The largest proportion of funds invested i n security loans i n
1929 came from non-banking lenders.
Rates might have been raised to 6 per cnnt early
i n 1929 at the New York and Boston Banks, but i t i s quite
c l e a r that t h i s would not have solved the problem of the
use of credit f o r speculative purposes.
The Federal Reserve
banks d i d not have the controls available to then by which
the speculative boom i n the market for securities could
been prevented.
Any analysis of the banking conditions prevailing
i n the Eignth D i s t r i c t at the beginning of 1929 would ind i c a t e taat no advance i n the rate of discount was desirable.
The volume of coHMercial loans declined in January, 1929, and
continued at a much lower l e v e l than 1928 throughout 1929.
Customer rates of interest f o r cooriercial loans had advanced
t o a high l<.vel, and were considerably above the rate of d i s i ^ ^ i a i a . , p. 8.
pp. 6-7.
-290-^
count.
Rates on security loans vere above those for commer-
c i a l c r e d i t , and they continued to r i s e during the year.
Member bank borrowing was not excessive.
Any increase i n
the discount rate would only have tended to force interest
rates s t i l l higher, and t h i s ^^^Id have created additional
d i f f i c u l t i e s f o r the business community.
No discount rate policy could have prevented, i n
i t s e l f , the excessive use of credit for speculative purposes.
The System did not possess the controls i n 19^? which would
have enabled i t to prevent the stock market boom and collapse.
Even had t h i s been possible the serious depression which
followed 1929 could not have been avoided.
This depression
was the result of deep-seated and far-reaching maladjustments
that w^^^ rK^ peculiar to the United States, but irere chara c t e r i s t i c of the international economic structure of the
twenties.
In large part these econonic maladjustments were
products of tne war of 1914-13.
Central bia^c policy cannot
be expected, no matter how effective and far-sighted the
p o l i c y may be, to provide alone the remedies needed to bring
i^30ut such readjustHents as to prevent a serious disturbance
the general economic equilibrium.
Open Market operations 1922-193Q
Purchases and sales of government securities by
the S t . Louis BanK i n 1922 and 1923 were made independently
of the other Federal Reserve banks.
Between January and
August of 1922 holdings of such securities
were increased
irrom 38,247,000 to $29,225,000 for the purpose of acquiring
-291-^
earning assets as borrovying decltned.
the System purchased $400,000,000.
From January to May
This was followed by an
abrupt decline i n borrowing from January, 1922, u n t i l August,
1922.
Holdings were then reduced to $19,551,000 at the end
of December, which was followed b/ an increase i n borrowing
u n t i l the end of the year.
The System as a whole was
l i q u i d a t i n g i t s p o r t f o l i o during the last half of 1922.
During January and February of 1923, the St. Louis
Bank increased i t s holdings to $28,839,700, which was
accompanied by a decline i n borrorin^; during these months.
Between Febi-uary and October of 1923, the Bank liquidated
i t s entire p o r t f o l i o of government securities.
This was
accompanied by a sharp increase i n borrovrin,^ reaching i t s
peak i n October, 1923.
From June, 1922, u n t i l J u l y , 1923,
the System sold ^525,000,000 of securities.
In 1924 the St. Louis Bank did not purchase any
s e c u r i t i e s independently, but, beginning i n January, 1924,
p a r t i c i p a t e d i n purchases through the Open Market Investment
Committee.
By September, 1924, i t had acquired through the
Committee a p o r t f o l i o of $16,769,000 of securities ^lich was
h e l d f o r the most part u n t i l the end of the year.
Borrowing
declined throughout 1924 except for a slight interruption i n
September iM^ October.
In the f i r s t three months of 1925, holdings of the
S t . Louis Bank were reduced to $8,889,000, during which time
the System was s e l l i n g over $200,000,000.
mained f a i r l y constant i n amount.
Borrowing re-
There were no further
major operationa i n the open market by the Syatem as a whole
-292-^
TA3LE
51
St. Louis Reserve Bank
Holdings of United States Securities at the end of
each Month Purchased Locally or Independently,
aiid Purchased Through Open Market Investment
Committee, 1922-1930^^
At end of
Month
Purchased through
Open Market Committee
Purchased
Independently
Total
Portfolio
1922
8,247,000
14,719,000
20,579,000
24,963,500
29,144,800
25,507,500
26,457,050
29,225,500
26,563,500
23,684,550
21,710,000
19,551,500
January
February
March
April
May
June
July
August
September
October
November
December
1222
26,755,600
28,889,700
25,522,700
18,203,900
14,933,400
7,250,600
7,250,600
3,668,300
3,668,300
January
February
March
April
May
June
July
August
September
October
November
December
122A
1,794,800
3,230,100
6,747,800
6,965,800
6,965,800
8,089,100
13,694,300
J anuary
February
March
April
May
June
July
pur9^*"+
8. Res. 71. O R ^ ^ . , PP. 838-9-
-293-^
At end of
Purchased through
Purchased
Total
Port^piip
297,900
577,900
670,400
721,400
721,400
1,200,500
1,290,500
1,290,500
1,515,000
9,450,500
3,839,900
296,900
35,099,400
30,478,400
30,953,500
30,867,500
19,163,000
20,387,500
20,437,500
24,347,000
132A
August
September
October
Hovenbcr
December
14,873,800
16,769,000
16,769,000
16,439,000
15,087,500
laaa
January
February
March
April
Kay
June
July
August
Septenber
October
Kov'rmbcr
December
10,169,500
9,152,500
January
February
March
April
20,783,500
18,872,500
18,872,500
18,872,500
18,872,500
18,872,000
18,872,930
15,299,500
13,450,500
13,725,000
13,792,000
14,569,500
3,991,300
5,035,000
6,6^0,500
6,869,500
9,869,510
7,5^9,100
5,456,600
5,883,250
5,^^3,250
5,884,750
6,073,250
6,502,850
13,793,500
13,725,000
14,158,500
13,817,500
13,590,000
10,371,500
7,039,650 20,833,150
8,790,300 22,515,300
13,841,700 28,000,200
13,841,700 27,659,200
13,841,700 24,473,700
1^^461,700 24,833,200
11,063,950 27,181,950
13,569,000 33,116,500
16,619,500 36,398,000
June
July
August
September
October
November
December
r
8,312,000
8,626,500
34,378,000
29,753,000
29,753,000
29,577,030
18,872,500
18,872,500
18,872,500
21,872,500
1,615,000
2,474,500
24,^75,000
23,907,500
25,543,000
25,742,000
28,742,000
26.^51.100
26,451,100
24,328,600
21,182,750
19,243,750
19,600,750
19,865,250
21,072,350
12^
January
Febmary
March
April
May
June
July
August
September
16,118,000
19,547,500
19,778,500
-294TABLE
At end of
Month
Purchased through
Open Market Committee
F^^rhased
Independently
Total
Portfolip
1227
October
November
December
20,669,500
21,280,000
21,543,500
16,619,500
16,619,500
16,619,500
37,289,000
37,819,500
38,163,000
JanuaryFebruary
March
April
May
June
July
August
September
October
November
December
15,294,000
13,909,000
13,517,000
8,142,000
18,009,500
18,009,500
16,625,000
16,625,000
10,625,000
7,125,000
7,125,000
33,303,500
31,918,500
30,142,000
24,767,000
4,151,000
4,591,000
4,417,500
11,625,000
16,625,000
16,625,000
16,625,000
20,776,000
21,216,000
21,042,500
1222
January
February
March
April
May
June
July
August
September
October
November
December
4,417,500
2,542,500
16,625,000
16,625,000
16,862,500
11,337,500
13,625,000
13,625,000
13,625,000
21,042,500
19,167,500
3,942,000
8,446,000
8,625,000
8,625,000
8,625,000
12,567,000
17,071,000
29,266,000
10,641,000
8,625,000
8,625,000
8,625,000
8,625,000
8,625,000
8,625,030
8,625,000
8,625,000
8,625,000
19,266,000
19,266,000
19,267,500
19,267,500
19,267,500
22,642,500
22,642,500
23,899,500
23,899,000
23,899,000
20,641,000
12^
J anuary
February
March
April
May
June
July
August
September
October
November
December
10,641,000
10,642,500
10,642,500
10,642,500
14,017,500
14,017,500
15,274,000
15,274,000
15,274,000
17,757,500
aL625,000
8,625,000
8,625,000
26,482,500
-295-^
al^er March, 1925, u n t t l May, 1927.
However, the St. Louis
Bank made a large purchase through the open narket comr^ittee
i n May, 1925, increasing i t s p o r t f o l i o to #35,099,400 at the
end of May.
There were some sales during the remainder of
the year, approximately $10,000,000 in September, but holdings
were #24,347,000 at the end of the year.
Hov^er, borrowing
increased r a p i d l y from March to September, 1925.
It w i l l be
remembered from the previous discussion that there was a
marked expansion i n production i n the Eighth D i s t r i c t
during
t h i s year, the loans of reporting member banks increasing
approximately ^25,000,000 between December, 1924, and Decersber,
1925.
Funds were p l e n t i f u l , but interest ratea were increas-
i n g , and the purchase i n May was probably made t o r e l i e v e t h i a
tendency toward higher rates.
Holdings of government securities were gradually
reduced a f t e r reaching a peak of $28,742,000 at the end of
May^ 1926.
The System was reducing i t a p o r t f o l i o during 1926,
but independent purchases of the St. L o i i s Ban^ during the
first
f i v e months of the year increased i t a
Borrowing
increased sharply
from January
portfolio.
t o September, 1926.
As borrowing f e l l o f f i n the last three months of 1926, hold-
ings
of s e c u r i t i e s
were
s l i g h t l y increased to ^21,072,000 at
the end of the year.
In March, 1927, the St. Louis Bank purchased i n dependently about $ 5 , 0 0 0 , 0 0 0 of government
Borrowing
securities.
had declined abruptly since January and reached a
low point i n March, 1927.
BegH^ing i n May the System i n -
-296-^
augurated a major purchase operation which resulted i n the
a c q u i s i t i o n of $230,000,000 of securities by November.
The
S t . Louis Bank continued to make independent purchases up t o
tlie end of Septeaber, aM that by the end of the year ^ tM^
the l a r g e s t p o r t f o l i o of government securities that
it
possessed at any time during the period 1922-1930, ^38,163,000.
Borrowing increased froa March to J u l y , and then declined t o a
f a i r l y low point i n JanuAry, 1928.
In January, 1928, the OpMi Market CoMaittee determined t o s e l l s e c u r i t i e s extensively i n order to make rate
advances e f f e c t i v e , and sold $405,000,000 by A p r i l , 1929,
most of which was sold dui^ing the f i r s t h a l f of 1928.
By the
end of May, 1928, a l l the securities which the S t . Louis Bank
had purchased through the Open Market Committee had been cold.
Sales of sect^rities which i t had purchased independently were
not commenced u n t i l March, but by the end of August, 1928, the
Bank had l i q u i d a t e d i t s entire p o r t f o l i o .
Borrowing had i n -
creased sharply during these months, of course, and reached a
p<&ak i n Septeaber, after whidh there was an abrupt dp^line
u n t i l January, 1929.
In September and October, a f t e r the
peak i n borrowing was reached, the Bank made independent
purchases of (^16,625,000 i n s e c u r i t i e s .
This was probably
done t o check r a p i d l y r i s i n g interest rates, i n order to aid
crop-moving.
Interest rates, however, did not respond, but
continued t o increase, although borrowing declined.
From January t o August, 1929, the S t . Louis Bank
l i q u i d a t e d the
c
o
n
s
i
d
e
r
s
b
l
e
p o r t f o l i o whicn i t had acquired
-297-^
i n the f a l l of 1926, #13,625,000 being aold in the month of
August, 1929.
This undoubtedly increased the volume of borrow-
ing which rose rapidly u n t i l September.
Beginning i n October
the System made extensive purchases of securities to prevent a
money panic and a complete collapse of the securities markets.
The S t . Louis Sank made an independent purchase of $8,625,000
i n October, and by the end of December, 1929, had a .portfolio
of $29,266,000.
Borrowing declined rapidly from Septeabcr,
1929, t o January, 1930.
The Bank sold through the Open Market Coiamittee
$10,000,000 of securities i n January, 1930, and i t s p o r t f o l i o
remained constant u n t i l June.
The volurae of borrowing ceased
<
t o f a l l i n the early months of 1930, and increased s l i g h t l y
i n May and June.
A l t e r June purchases through the Open Mar-
ket Coiamittee were continued and the portfolio of the Bank
amounted t o ^26,^82,000 at the end of 1930.
The volume of
borrowing did not fluctuate ^rnich during the last h a l f of
1930.
There i s evidence i n t h i s record of & tnarked
r e l a t i o n a h i p between changes i n tne holdings of government
s e c u r i t i e s by the St. Louis Bank and the volume of borrowing,
except i n the years 1925 and 1926.
The relationship was
most marked during 1922, 1923, 1928, and 1929, although some
e f f e c t can be noticed following every significant change i n
the p o r t f o l i o .
It w i l l be noted that i n a few instances the
independent purchases and sales d i f f e r e d from those under
the d i r e c t i o n of the Open Market Committee.
These open market
-298-^
operations undoubtedly had soae effect on interest rates,
but i t
i s d i f f i c u l t to trace amy effect certainly to t h i s
aource.
Ppyro^^^^ for P r p f j t
Federal Reserve policy has always been directed
toward the r e s t r i c t i o n of the use of Reserve bM^c credit to
the needs of member banks i n meeting the legitimate and
reasonable credit degands of business ^Mi industry,
rt has
always discouraged oeMber b&^ts fr^M borrowing for ourpoaes
of p r o f i t , that i s , borrowing additional funds from the Reserve banks i n order to lami or invest these funds at a
higher rate of interest than that paid for the use of the
funds.
The p o s s i b i l i t i e s of borrowing for p r o f i t depend, of
course, in large measure upon the relation between the rate
of discount and market rates of interest.
I f there i s a con-
siderable spread between discount and ma^oR rates i t
is
d i f f i c u l t t o prevent borrcnlng for p r o f i t , because of the imp o s s i b i l i t y of knowing i n ead^ individual case the purpose
f o r which a member bank borrows.
There i s a difference of opinion as to the factors
that determine the amount of member bank borrowing.
Those
id^o adhere t o the "need theory" of borrowing hold that banks
are at a l l times reluctsiit t o borrow, and do so only when
necessary t o accommodate customers i n t h e i r legitimate demands
for c r e d i t . B a n k s
are anxious t o reduce t h e i r borrowing.
i47Turner, Robert C., %a^ber Bank Borrowing, p. 67.
-299-^
and w i l l repay borrowed funds whenever i t i s possible to do
so without putting pressure on customers to repay loans.
Con-
sequently, cost of borrowing i s not a major factor i n determining the amount of i t .
Those who adhere to the " p r o f i t
theory" hold that memoer banks borrow? when i t i s
profitable
t o lend or invest the borrowed funds, and repay the borrowed
funds when i t
i s unprofitable.
The cost of borrowing then
i)ecomes the major determinant of the volume of borrowing at
&ny given time.^^S
^^
theory i s accepted the r e l a t i o n
between the discount rate and market rates i s one of the major
problems of c e n t r a l bank p o l i c y .
Robert C. Turner has made an interesting and valuable s t a t i s t i c a l analysis of the r e l a t i o n between member banK
borrowing and the " p r o f i t spread" i n each of the Federal Reserve d i s t r i c t s . O n
the basis of the theory that mexber
banks adjust t h e i r reserves noriaally either by borrowing from
the Reserve bank or by contracting and expanding open aarket
l o a n s . Turner has attempted t o determine whether the r e l a t i v e
p r o f i t a b i l i t y of these two alternatives a f f e c t s i n any cons i d e r a b l e way the amount of borrowing.
Turner has computed
c o e f f i c i e n t s of c o r r e l a t i o n between the amoT.mt of borrowing
and the " p r o f i t spread" on the basis of a direct
comparison,
and a l s o c o e f f i c i e n t s of c o r r e l a t i o n between the data a f t e r
i n t r o d u c i n g various leads and lags of one to several months.
THie " p r o f i t spread" i s determined f o r each d i s t r i c t by subl A S i a i g . , p. 91.
I 4 9 i b i d . . pp. 109-44.
-313-^
t r a c t i n g the raonthly average discount rate tn that
from the weighted average open market rate.
district
The average open
market rate i s computed by including with appropriate weights
the monthly average rates on prime 4-6 monthB coocorciai
paper, 60-90-day time loans on mixed c o l l a t e r a l at the New
York Stock Exchange.
The figures on borrowing used arc tne
monthly averages of d a i l y figures cm holdings of discounted
b i l l s at each of the Federal Reserve banks.
A l l the data are
made comparable f o r purposes of study by conversion into
standard deviations
t h e i r respectire arithmetic means.
The c o e f f i c i e n t s of correlation for the Eighth D i s trict
var^ as f o l l o w s for eadh
several periods:^50
January 1922-October 1936
.823
January 1922-December 1929
.637
January 1923-Docenber 1930
.688
January 1930-0ctober 1936
.592
The c o e f f i c i e n t s of c o r r e l a t i o n were increased s l i g h t l y by
i n t r o d u c i n g a lead of one month f o r the p r o f i t spread, although
the d i f f e r e n c e was not great enough to e s t a b l i s h d e f i n i t e l y
a one-month l a g i n discounting.
The c o e f f i c i e n t s were as
follows:
P r o f i t spread leading by:
1 a^nth
2 aonths 3 xonths
January 1922-October 1936
.832
.824
.805
January 1923-December 1930 .695
.672
.623
i S l i b i d . . p . 119.
-301-^
I f the entire period, January 1922 to October 1936,
i a considered, the coefficients of correlation with or without
lead ai^d lag were d e f i n i t e l y higher than for any other d i s t r i c t s except Boston and Chicago.
The correlation for the
period a f t e r 1930 was not very great i n any of the d i s t r i c t s ,
however, and i f the period whicii shoved the Most consistent
c o r r e l a t i o n f o r a l l the d i s t r i c t s is used, January 1923-Decenber 1930, the St. Louis D i s t r i c t ran*ced seventh.
The Boston,
Cleveland, Philadelphia, Chicago, New York, and San Francisco
d i s t r i c t s evidenced higher aaximum coefficients of correlation
than the St. Louis D i s t r i c t , i n that order.
The d i f f i c u l t y i n using such s t a t i s t i c a l analysis
as that developed by Turner i s indicated clearly by the figures
f o r the St. Louia D i s t r i c t .
While the coefficient for the
period January 1922-Deceaber 1929 was only.637, and the coe f f i c i e n t f o r the period January 1930-0ctobcr 1936 was even
l e s s , .592, the coefficient for the entire period was .823.
T h i s same difference i n the coefficients i n greater or lesa
degree was evident i n aix other d i s t r i c t s , Chicago, Richcaond,
A t l a n t a , iCansas C i t y , Minneapolis, and Dallas, and was part i c u l a r l y pronounced i n the case of Richmond, Xansas C i t y ,
Minneapolis, and Dallas.
The coefficients were uaually auch
improved by leaving o f f the year 1922 and adding the year
1930.
It w i l l be noticed that these d i s t r i c t s are the a g r i -
cultural districts.
The very great influence on the co-
e f f i c i e n t s of broad c y c l i c a l movements i n economic conditions
i a c l e a r l y evident.
In the Richmond, Minneapolis, and Dallaa
-302-^
d i s t r i c t a very I t t t l e correlatton i s sho^^ for the period
January 1322-Decenber 1929.
The coefficients of correlation determined by such
s t a t i s t i c a l analysis are iMRM^ to be auch affected by the fact
that i n periods of business recession interest rates are l i k e l y
t o f a l l below the rate of discount, thus eliminating or ma'ting
negative the p r o f i t spread, while th^ volume of borrowing i a
greatly reduced because of excess reserves iM^ a lac* of deaand f o r c r e d i t .
Likewise, i n a period of prosperity interest
rates ar^ l i K e l y to r i s e , increasing Une profit spread, while
the volume of borrowing i s increased due to a number of fact o r s , inherent i n such a period, which cause reserves to f s l l .
While these criticisms of any results obtained by
t h i s method ^uat be a&de, i t i s ^^^ the purpose here to ind i c a t e that no conclusions can be drawn from such a s t a t i s t i c a l analysis.
It i s d i f f i c u l t not to see in t h i s analysis
lUae p r o b a b i l i t y of considerable borrowing for p r o f i t at cert a i n times.
I t i9 also important to note that the p r o f i t a b i l i t y
of borrowing played a more significant role i n the volume of
borrowing i n the eastern d i s t r i c t s , Boston, Res Yorx, P h i l a d e l p h i a , and
districts.
C
l
e
v
e
l
a
n
d
,
than i n the western and southern
I f the c y c l i c a l movements could have been
eliminated from the data significant positive correlation
would probably s t i l l exist, particularly i n the eastern d i s tricts.
Turner indicates that h i s analysis shows no
c o r r e l a t i o n between the.profit spread on customers' loans and
the volume of borrowing.
In f a c t , the coefficients are small
-303-^
and
n e g a t i v e . ^ ^ ^ ^
^^^^ analystR is not done b/ d i s t r i c t s ,
but f o r a l l banks i n the country, the average customer rate
at banks i n New York City, 6 other northern ^mi eastern
c i t i e s , and 27 southem and western c i t i e s being used.
It
is
probable that the diversa^factors that influence custoner
rates i n various parts of the country would destroy any r e l a t i o n s h i p that Right otherwise exist i f rates for individual
c i t i e s were used.
The St. Louis Ban^ when asked what rates of i n t e r est i n i t s d i s t r i c t should be taken as constituting a aeaaure
of market rates of interest, replied as follows:
"The rate
charged by banks to customers able to take advantage of a
competitive money market.
As these ans mostly located i n
&t. Louis, t h i s aarxet rate generally exists nere.
^ c i t i e s i n the d i s t r i c t usually have a higher narxet
Other
r a t e . " 1 5 3
^ Therefore, the monthly range i n rates to customers for prime
^ commercial loans i n St. Louis i s compared with the discount
rate of the St. Louis Ban* i n IB^M^ 4*
T*^ monthly ranje of
customer rates i s shown for the period boginning with March,
1919, and ending with December, 1934*
The aonthl/ range was
not a v a i l a b l e f o r the period January, 1923, to J u l y , 1926,
"so the monthly range for coamercial paper rates in St. Louis
isas substituted.
Coamercial paper rates were indicated in
a d d i t i o n f o r the period March, 1920, to June, 1921, because
E they became considerably higher than customer rates.
. i52ibig., pp. 97-8.
^
t^^^r^MH^ ^^
Res. 71.
For the
p. 786.
-304-^
p e r i o d 1919 t o t h e end of 1922 the lainimuja of the r^ngc i s
the lo^ r a t e and t h e
of the range the cuctoaAry rate.
A f t e r 1922 t h e rang^^ ii; the monthly
Monthly Peviaw o f Business Conditions.
as r^jported i n the
Before Jnne, 1921,
t h e r e was no s i n g l e rate of discount, the rate structure being
c h a r a c t e r i z e d by d i f f e r e n t i a l rates and by the progressive
rate.
The r a t e before June, 1921, i s approximately tho
effective
a p p l i c a b l e to borrowing on the average during
each nonth.
Customer rates i n St. Louis were materially above
the rat(^ o f discount during the following periods:
a l l of 1919
and 1920, except f o r those banks subject to progressive rates
tn t h e l a s t h a l f of 1920; except f o r banks subject to prog r e s s i v e r a t e s , the f i r $ t f i v e months of 1921; 1923, at w^^ich
time commercial paper rates were also materially above d i s count r a t e s ; t h e l a s t h a l f of 1923, 1926, and the early months
of 1927; t h e l a s t h a l f of 1927 and January, 1923; the last
h a l f o f 1928 and a l l of 1929 u n t i l December; November, 1^31 to
Septeraber, 1933.
I f account i s taken of seasonal influences
on borrowiy^g ^ i c h are p a r t i c u l a r l y marked i n the Eighth District
i t i ? i l l be se:3n by exa^nining the two charts on the
volume o f borrowing, 1919-1921, and 1922-1936, that these were
the p e r i o d s o f greatest
K
borrowing.
i s probable that the p r o f i t spresd bttwssn d H -
count r a t , , and r a t e , on eustoa.rs' . . E M . r e i H 1°*"' e°rr*H t s . tKK:h * o r . . i t h t h . v . l U K . of b.rro.iKS i " t h . S t . Lout.
Di^rict. t h ^ ta t h . .aatem districts.
T h i . i . prob.bly a l . .
-305-^
t r u e i n some of the oth^r a g r i c u l t u r a l d i a t r i c t a .
Customer
ratea i n c i t i e s i n the D i s t r i c t other than St. Louis are
u s u a l l y higher, and are more i n e l a s t i c .
The p r o f i t
has been greater, and has varied somewhat from that
St. L o u i s .
spread
in
This analysis would indicate that reserves of mem-
ber banks arc adjusted somewhat more through customer loana
i n the St. Louis D i a t r i c t than would be indicated by the atudy
made by Turner f o r the whole couiitry.
I f a considerable p r o f i t spread exists between the
coat of borrowed f^mds and customer rates, many banks are
l i k e l y t o extend credit t o customers that would not otherwise
be extended, and to secure the funds by borrowing fi^m
Reserve Bank.
the
It i s d i f f i c u l t , of course, to define what i s
meant by lending to customers f o r p r o f i t , because the line
between the reasonable and unreasonable demands of customers
f o r c r e d i t i s d i f f i c u l t to draw.
cannot be denied.
That i t exists, however,
Cuatomer loans are much more important and
predominant than open market loans i n the d i s t r i c t s of the
South, Southwest, and Middle r e s t .
This i s due to differences
i n banking and business practices.
When banks borrow for p r o f i t from the Reserve banks
the r e s u l t tends t o be an i n f l a t i o n of bat^k c r e d i t , and t h i s
i n t u r n has aii i n f l a t i o n a r y influence on prices.
Central bank
p o l i c y , as regards rates and other techniques of control,
ahould have as i t s objective the prevention of borrowing for
profit.
In general, dlacount ratea during the period 1919-
1929 were not high enougli t o discourage i t .
The S t . Louis Bank
-306-^
h*3 recognized t h i s , tnd i t * p o i i c y hee long been t o diecour*ge borrowing f o r p r o f i t by i n d i v i d u a l dealing with HMMber
banka.
Both p r o f i t a b i l i t y and need are factors that exp l a i n borrowing by aember banka.
The poiicy of
individual
member banka varies considerably in t h i s respect.
Borne banks
are reluctant to borrow, and n*ver do so unless i t
ts necessary
to provide f o r demands upon them that cannot be refused.
Put
the t r a d i t i o n against borrowins ts by no aeans universal.
Some banks borrow whenever anything can be earned by so doing.
T M P t r i p P l?30-i?31
Following the stock marxet collapse in October, 1929,
security prices declined, banxs suspended, hoarding set i n ,
and business recession developed throughout the country.
In
1930 a severe drought in t h i s aree which reduced tne y i e l d of
the p r i n c i p a l crops to the smallest amount i n a number of
years served t o aake economic condition! i n t h i s D i s t r i c t somewhat worse than i n the country generally.
Due t o the reduced
y i e l d s and lover pricea the farm value of the p r i n c i p a l crops
dropped 43 per cent below that of 1929.^34
para income was
further reduced by smaller receipts f r o a other a g r i c u l t u r a l
a c t i v i t i e a , such as l i v e s t o c * r a i s i n g , dairying, f r u i t
and poultry r a i s i n g .
growing,
The b u i l d i n g industry declined at a more
rapid rate than during the last months of 1929.
Contracts l e t
f o r construction were o n e - f i f t h aa large as i n 1929.
134AnnuallReEort of the Pederal Rewtrve Bank of S t . Lou^^,
1930, p. 8.
-307-^
Thc loan* of r t p o r t i n g ao*b*r banka avtragtd 4.9
per cent leas than i n 1929.^^3
peaand depoaita averaged 2.4
per cent leas, while t i a e depoaita war* 1 per cent higher.
Money waa p l e n t i f u l and interest ratea declined abruptly
throughout 1930.
The rate of diacount waa reduced t o 4* per
cent on February 11, t o 4 per cent on A p r i l 12, and t o
cent on Auguat 7.^36
per
At f i r a t the diacount rate l e d interewt
ratea i n the downward aoveaent, tnen tntereat ratea f e l l more
r a p i d l y than the diacount rate.
Bank f a i l u r e s increased con-
siderably, p a r t i c u l t r l y i n the l a t t e r part of the year.
In
the seven states included i n the Eighth D i a t r i c t 358 banks
suspended with an aggregate of %268,507,000 i n depoaita i n v
o
l
v
e
d
.
T
h
e
demand for currency increased aa banks f o r -
t i f i e d t h e i r p o s i t i o n with increased holdings of caah.
The recession continued i t s downward trend i n 1931
without i n t e r r u p t i o n .
A g r i c u l t u r a l production waa the largest
i n many years, favorable weather and an increastd acreage cont r i b u t i n g to i t ; but pricea were the lowest since the early
years of the century.
The f a r * value of a l l crops waa 20 per
cent l e s s than i n 1930 and 31 per cent leas than i n 1929.^38
Lowered costs of producing the crops and abundant feed cropa
somewhat r e l i e v e d the s i t u a t i o n , however.
Construction con-
t r a c t s were 42 per cent aaaller than i n 1930.
Production of
bituminous c o a l , lead, and ainc declined markedly.
The d o l l a r
137^h* Federal Rtacrve B u l l e t i n . September, 1937, pp. 868-77.
R-^ort of the Federal Rea+rv* Bank of S t . La^^a.
13r
1931
)31, p. 8.
-321-^
voluo* of th* *holwa*l* *nd Jobbing trade vt* i 6 per cent iet*
i n 1931 then i n 1930, end r e t t i l tred* dropped 13 per cent.^^?
Loan* of reporting member bank* averaged 16.4 per
cent leaa than i n 1930.^^^ Invettawnt*, hove**^ incretaed by
33.5 per cent, r e f l e c t i n g the lack of deaend f o r c r e d i t .
Demand deposit* averaged 3.5 per cent l e s s , snd time deposits
were .9 per cent higher.
Bank suspansions increased, a t o t a l
of 621 banks suspending i n 1331 i n the seven states of the
Eighth D i s t r i c t ,
involving deposits of 3325,722,000.^61
B+nk
suspensions and business f a i l u r e s caused * tightening of
credit p o l i c i e s of coaaercial banks i n the l a s t quarter of
1931, and cuatomer rates at St. Louis banks increased abruptly
i n the l a s t thre* months. .hoarding by individuals
increased
i n the l a s t . h a l f of 1931, and demands f o r currency were l a r g e .
Borrowing by member ban*s incresses sharply a f t e r June, l a r g e l y
because of the a d d i t i o n a l need f o r currency.
The discount
rate,
which had been lowered t o 3 per cent on January 8 and t o 2t
per cent on May 9, was restored t o 3t per cent on October 22.A bottom i n the depression was reached i n J u l y , 1932,
followed by some recovery i n August and September, accompanied
by soae increase in cowaodity p r i c e s , but * further decline
set i n during the l a s t three months of the year.
Unemployment
was very large, and wage rates were considerably reduced
during 1932.
R e t a i l trade suffered a 23 per cent reduction i n
139l^id.. 1931. p. 7.
I 6 0 l a i a . , 1931, p. S.
l A l T h t P?d*rAl R i s i r v a B u H e t i p . September, 1937, pp. 868-77.
^tttfT* PARK
St. LWVit,
i63AaaM4i
1931, p. 8.
-309-^
volume from 1931, while wholesale trade dropped 25 per cent.^^^
B u i l d i n g a c t i v i t y waa at a low ebb, conatruction contracta
dropping 50 per cent from 1931.^^^
In a^^riculture there waa a
a h i f t froB the production of cropa f o r aale to the production
of feed^ cropa.
Farm income waa very low, and the number of
forecioaurea on farma incrcaaed greatly i n 1932.
Loana of reporting member banka averaged 23.4 per
cent lower than i n 1931.^^^
Demand depoaita averagt#d 19 per
cent leaa, and time depoaita 12.6 per cent leaa.
Ba^^k aua-
penaions were amaller i n number i n 1932 and involved a smaller
amount of depoaita than i n 1930 or 1931.
In the aeven statea
included i n the Eighth D i a t r i c t , 438 banKa ai:ap€!nded with
deposits of #194,165,000.
T^^e demand f o r credit waa amall,
and Cuatomer ratea of intereat i n St. Louia tended t o decline
tn the laat h a l f of 1932.
The volume of borrowing from the
Reaerve Bax^ declined a l l through the year 1932, moat of i t
being due t o the loaa of reserves aa the reault of noardlng.
The f i r a t two montha of 1933 r e f l e c t e d a c<mtinued
downward movement i n i^roductti^n and e^tploy^^ent.
bottom waa reacned i n the depreaaion i n February.
A second
A banking
panic occurred In S t . Louia i n January, 1933, characterized
by many runa on banka.
Aa a reault a number of the amaller
outlying banka f a i l e d .
An i n c r e a ^ number of bank suapensiona
i n a l l parta of the country, and a general losa of confidence
1932, p. 7.
l 6 4 I E i a . , 1932, p. 7.
l 6 5 i a i A . , 1932, p. 3.
166rht Federal Rtaerve
September, 1937, pp. 863-77.
-310-^
tn the benking eytten precipiteted the Benklng Holidty i n
the e&rly pert of Kerch.
rapidly n
Btnk* were licensed t o reopen **
they could be determined to be i n * *Ati*f*ctory
condition.
Many bank* vere xerged with atronger
inatitutiona,
and a considerable nuabtr, of course, never reopened.
In a l l
E73 banks suspended during 1933 i n the seven statea included
i n the Eighth D i s t r i c t , involving $477,539,000 of deposits.^^^
These figures for suspensions include those banks that were
merged with other i n s t i t u t i o n s , and a l l banks which were not
granted licenses t o reopen by June 30, 1933, *ven though they
may have be n re-organized and raopened at a l a t e r date.i^S
The banking systea was very much stronger subsequent t o the Banking Holiday due t o the e l i a i n a t i o n of amny
weak banks.
P u b l i c confidence nad bean largely restored by
the time the banks were reopened, and a rapid iaproveaent
in
business ensued. P u b l i c psychology with regard to pricea resulted i n speculative buying and a boom i n coMaodity prices
i n the early sumaer, but t h i s had disappeared by f a l l .
For
the last h a l f of 1933 production and aales w*re d i s t i n c t l y
above the l a s t h a l f of 1932.
Much of the iaprovement i n the
Eighth D i s t r i c t was due to increased income i n the a g r i c u l t u r a l areas.
Crop production, except for wheat and tobacco,
wit l e s s than i n 1932, but higher farm prices and the aid extended through The A g r i c u l t u r a l Adjustaent
resulted i n greater farm income.
1671bid., pp. 863-77.
366.
p
.
Administration
The farm value of
11 crops
-Hii n th* itAte* p t r t l y or wholly ta th* Eighth D i a t r i c t wa* *atimat*4 at $767,635,300, an incraaa* of about 44 per ccnt over
that of 1932.169
Interest rates i n S t . Louis iacreased sharply i n
March, 193), due to the strained f i n a n c i a l s i t u a t i o n , but
declined throughout the remainder of 1933.
The volume of aea-
ber bank borrowing dacliaed further i n 1933 **c*pt f o r a b r i e f
upward apurt i n Uarch due t o the large deaands f o r currency.
The discount rate of the St. Louia Ban* waa reduced from 3 i
per ccnt t o 3 per cent i n June.
Recovery i n 1934 *as i r r e g u l a r but quite d e f i n i t e .
The upward trend during the early months of 1934 was i n t e r rupted by a recession i n May, June, and J u l y , which was
170
occaaioned by a aevere drought i n tho apring and summer.
The drought waa confined l a r g e l y to the northern part of the
D i s t r i c t , the southern part being l i t t l e a f f e c t e d .
3y August
and September t i e trend i n business was again upward.
Despite
reduced crop production incidant t o the drought, the d i s t i n c t l y higher prices received f o r the crops, and the payments
made t o farmers i n connection with th* a g r i c u l t u r a l program
cauaed farm income to be much great*r.
The f a r a value of
all
crops i n the s*ven states p a r t l y or wholly w i t h i n the D i s t r i c t
waa estimated at $963,934*000, an
increase of 27 p^r cent over
171
1933 and 82 per cant over 1932.
Senefit payments i n theae
169Annuar"R*nort of the f e d e r a l Reserve Bank of S t . L o u i s .
1933, p.
p* 3.
ITOgRia., 1934, p. 5.
I T l y b i d . t 1934, p. 6.
-325-^
atatec by th* A g r i c u l t u r a l A^juatocnt A d a i n i s t r a t i o n SMO Mttd
t o $102,686,000.^73
Banx f a i l u r e * p r e c t i c e l l y ceased i n 1934.
There
no f a i l u r e s of ntabtr ba^^s i n 1934, and the f a i l u r e s
aaong the non-acmber banks i n the D i s t r i c t vera n o K l i g i b l e .
Interest rates continued t o decline throughout 1134, reaching
the lowest l e v e l s i n th* n i s t o r y of the Eighth D i s t r i c t at the.
end of the year.
Borrowing by aoabor b^nXn i n 1934 was so
s u a l l as to bo of no s i r n i f i c a n c o .
A nunber of factora have csnbined to create large
excess reserves for ncaber banks since 1933.
Heavy open oar-
ket purchases of governaent s e c u r i t i e s , p a r t i c u l a r l y i n 1932,
designed to s t i o u l s t e rMCOvery h/ forcing credit
expansion,
and the large i n f l u x of gold which coaaanccd i n January, 1934,
are the aost iaportant of these f a c t o r s .
Because of these
large reserves borrowlna by aMaber banks has been n o R l i g i b l e
sincc 1933.
As t r e s u l t , the f t . Louis Bank now has no ^ay
i n which t o influence e f f e c t i v e l y the general credit
situation.
The only techniques of credit control available
t o the Reserve System i n recant years have been the use of
open market operations, the power t o chAnge aeaber bank
reserve requirements, and the power t o f i x aargin requirements
on loans t o carry s e c u r i t i e s .
As these techniques of control
are exercised by the Federal Open Market Co^mitt^e and by the
Boerd of Governors, the i n d i v i d u a l Reserve banks have had
i73ibid.J*1934* p. 6.
l i t t l e influence.
poiicy.
The only c r e d i t p a l i c y has been % Systea
In f a c t , due to the very l a r g e excesa reserves held
by ae%ber banks, the Reserve Systea has l o s t such o f the cont r o l over the c r e d i t and banking mechanism of t h e country.
The important probleoi that the Reserve §yste^. nov f&ees i s the
establishmaat of c o n t r o l over c r e d i t .
The t r a d i t i o n a l theory o f the discount r a t e , or the
"bank r a t e " , as i t
i s c a l l e d by t h e B r i t i s h , was developed from
the p r a c t i c e of the Bank of England.
market e x i s t s i n London.
A highly organized money
S u b s t a n t i a l c o a p e t i t i o n e x i s t s be-
tween the v a r i o u s demands f o r funds, such that an increase
the cost o f borrowing on
t o other types of paper.
in
type of paper w i l l be t r a n s f e r r e d
Thus, the Bank of England may, by
means of changes i n the rate at which i t w i l l buy bankers'
acceptances, or lend on bankers* acceptances, secure changes
i n the rates of i n t e r e s t charged f o r funds i n the London money
market.
The B r i t i s h banks adjust t h e i r reserves by means of
buying and s e l l i n g bankers* acceptances, Treasury b i l l s ,
by increaaing or decreasing loans t o b i l l brokers.
brokers i f
and
The b i l l
i n need of funds s e l l bankers! acceptances t o the
Bank o f England, or borrow from i t on sjcn b i l l s .
The discount
rate o f the Bank o f England i s always above the open market
rate on such bankers' acceptances, thus preventing the use o f
the funds o f t h e c e n t r a l bank except i n cases o f need*
yhe
t r s n a f e r . o f changes i a t h e bank r a t e t o aarket r a t e s o f
iater-
est i s e f f e c t i v e because o f the u n i f i e d and competitive
'
-314s t r u c t u r e of t h * money m&r%*t.
The i l t u A t i o n i n t h i * country i * very d i f f e r e n t .
Due t o the d i v e r s e economic c h a r e c t e r i s t i c e of v a r i o u s
parts
of the country, and t h e great number and heteregenoua character
of American banking i n s t i t u t i o n a , a number o f money market*
e x i s t , although the one i a Wew York i a by f a r t h e most important*
I n aome f i n a n c i a l centers t h e r e i $ I t t t l e
f o r customer l o a n a .
than a market
Theae money marketa are not h i g h l y com-
p e t i t i v e w i t h each o t h e r ,
and w i t h i n eacK market a l i m i t e d
amount o f competition e x i a t a between the v a r i o u s deaanda f o r
c r e d i t , greater i n the caae o f aome market* than i n o t h e r a .
Aa a r e a u l t the p r a c t i c e of ^he 3&nk o f England c o u l d not be
transferred t o t h i a country.
Wo c l e a r understanding o f t h e exact f u n c t i o n o f r t h e
r a t e o f diacouat o f t h e aeveral,Reaerve banks i n
controlling
t h e money supply o f t h i a country haa ever emerged.
Thia
ia
c l e a r l y deaonstrated i n t h e r e p l i e * r e c e i v e d t o the queationn a i r * aent t o the aeveral Reserve banka i n connection w i t h t h e
hearinga i n 1931 before the aeaate C o a a i t t e e on Banking and
Currency.^^^
thought t h e B n g l i a h t h e o r y o f t h e discount
r a t e a p p l i c a b l e t o t h i a c o u n t r y , othera thought i t was n o t .
gome tho^u#^t America^i diaco^mt r a t e p o l i c y waa esa€9f3tially
aimilar i n ita^effect t o B r i t i a h rate p o l i c y , othera d i d n o t .
The aeveral Reaerve banka thought t h e discount r a t e should be
above, equal t o , or below v a r i a u a market r a t e a o f
173H**ringa nurau&nt t o a . Res. 71.
interest.
Si^*, pp. 748-93
-315Th* S t . Louis 3*n* i n d i e a t t d i t * b e l i e f i n * pena l t y rate i n i t a etatenont i n raply t o on* of the question*
put before th* Re**rv* b*nK* tn the 1931 h*aring, " I t would b*
d e s i r a b l e alway* t o hav* a diacount rat* about th* rat* that
can b* procured by cuatoaera who ar* enabled t o gat the b e n e f i t
of a competitive money market."*?^
gueh a competitive money
market f o r cuatomer loana exiated i n S t . L o u i s , the Bank
175
thought.
The importance of the cuatoaer rate f o r prime
commercial loana aa a aeaaure of aarket ratea o f i n t e r e s t
in
many d i a t r i c t a i n t h i a country ought not t o be overlooked.
In
t h i a respect the s i t u a t i o n i n many parts of t h i s country d i f f e r a
m a t e r i a l l y from that i n England.
While the S t . Louis Ban* e v i d e n t l y b e l i e v d that the
diacount rate should be above the customer rat* f o r
prize
commercial loans, t h i a r e l a t i o n s h i p has not u s u a l l y
existed
i n the Eighth D i s t r i c t .
I t w i l l be remembered that i n the
several years before our entrance i n t o the war the Bank developed a p o l i c y of s e t t i n g the diacount rate between the open
market commercial paper rate and that f o r loans t o customers.
Between 1917 and 1920 the r a t e p o l i c y of a l l the Reserve banks
was dominated by the o b l i g a t i o n a wnich the System b e l i e v e d i t
owed t o the Treasury i n a s s i s t i n g i n the finance of the war.
During the period of the twenties the discount r a t e o f the Bank
was u s u a l l y below the customer r a t e , and o f t e n below the
commercial paper r a t e .
Since 1933 there haa been a wide v a r -
i a t i o n i n the ratea charged customers f o r commercial l o a n s .
I T l i b i d . . B. 780. *
1 7 3 i b i d . . p. 786.
-316-^
Except In 1932 and 1933 the discount rate hew been equal to,
or above, the lowest rates charged customers.
A number of reaaons may be given for the f a i l u r e of
the 8 t . Louis Ban* t o apply a rate p o i i c y to which i t appeared
to subscribe i n theory.
It haa been suggested that
legal
l i m i t a t i o n s on rates of interest found i n state laws presented
an obstacle to a higher discount rate p o i i c y .
In t h i s D i a t r i c t
only Kentucky haa imposed a / l i m i t aa low as 6 per cent.
As
the discount rate baa never been as high as 6 per cent i n the
Eighth D i s t r i c t since 1921, t h i s would not appear t o be a
serious d i f f i c u l t y .
It ts true, of course, that any one Re-
serve bank cannot pursue a rate policy that d i f f e r s widely
from that followed by the other Reaerve banks, aa t h i s would
tend t o s h i f t unduly the demand for funds t o the other d i s tricts.
The easy money policy pursued generally by the System
during the twenties offered, therefore, c e r t a i n l i m i t a t i o n s
on th* rates that could be f i x e d by the St. Louis Bank.
The
Syste* rate p o l i c y constitutes a framework, i n a sense, t o
which rates i n the several d i s t r i c t s must generally conform.
In several instances during the twenties the S t . Louis Bang
found i t necessary t o c&aage i t s rate because of the changea
made by other Reserve banks.
On several occasions the Ban*
set A low rate f o r the express purpose of encouraging lower
interest rates f o r the benefit of
agriculture.
E f f e c t i v e a d n i n i s t r a t i o n of the diacount rate requires an understanding of the d i r e c t e f f e c t s of a
i n the rat*.
change
There are those, of course, who believe that
change* i n rates have l i t t l e other than a psychological e f f e c t .
-317-^
but * close exsminstton of Aaertcen benxlng p r a c t i c e deaonstrates certstn direct e f f e c t s .
I t i s not p o s s i b l e by aeens
o f s t A t i s t i c s l a n a l y s i s t o show the exact e f f e c t o f a
s p e c i f i c rete change because o f the nM**rous f a c t o r s that
bear upon market rates of i n t e r e s t end the voluae of bank
credit.
The discount rate w i l l
i n f l u e n c e aeaber banks i n
t h e i r choice of methods of a d j u s t i n g reserves.
I f a member
bank f i n d s i t s e l f i n need o f addit*onal reserves, there ere,
i n a general way, two e l t e r n s t i v e s open to i t
i n securing
these a d d i t i o n a l funds* one, adjustment of i t s own u s e t s f
two, borrowing funds from * Reserve bank.
A maaber benx may
secure a d d i t i o n a l funds t o increase i t s reserves by Adjusting
i t s assets i n several ways: f i r s t ,
loans t o customers might
be c a l l e d ; second, open aarket loans Might be reduced, part i c u l a r l y by s e l l i n g open aarket coamerciAl paper; t h i r d ,
176
long-term or s h o r t - t e r * gov*rn^ent s e c u r i t i e s aight be s o l d .
Each o f these methods of Adjust ng th* assets of the ban* e n t a i l a
c e r t a i n c o s t s , which are coapared w i t h th* cost of
securing
funds by borrowing f r o a the Reserve benk.
The s a l e o f open aarxet c o a a e r c i a l paper i s
generally
the aost s a t i s f a c t o r y aethod o f g e t t i n g cash becsuse of the
impersonal Character of the a s s e t . And becAuse the r i s k o f
176* member bank aay a l s o borro* funds from another commercial
bank. The r a t e s charged f o r such inter-bank loans are o r d i n a r i l y r e l A t e d t o aarket r e t e s o f i n t e r e s t , As the rate A bank
would be l i k e l y t o charge f o r such loans would depend upon the
p r o f i t a b l e n e s s of A l t e r n a t i v e uses o f i t s funds.
-331-^
loss i a alight i n the caae of such a l i q u i d kind of paper.
I f the diacount rate i s above the rate on cosmercial paper
*uch paper w i l l be sold before the bank ^ i l l borrow f r o a the
Reserve bank.
I f , however, the discount rate i s below the
rate on commercial paper, the ban* i s l i k e l y t o borrow fram the
Reaerve bank instead of a e l l i n g the paper.
In f a c t , i f the
meBber bank has no reluctance t o borrow, i t might secure funds
from the Reserve bank t o Lnvest i n coamercial paper.
The re-
lationahip between the diacount rate and the open market rate
thus becomes of great importance.
I f the member bank i s en-
couraged t o s e l l commercial paper by a higher discount rate
the supply of money on the open market w i l l be reduced, and
interest ratea are l i k e l y t o be increased.
There are important region 1 differences i n the
character of the assets of aeaber banks, and therefore,
diff-
erences i n the available means of securing reserves by adjusting aaseta.
In the eastern d i s t r i c t s a larger portion of the
funds of meaber banka are invested i n open aarket loans
ordinarily.
P a r t i c u l a r l y i n the a g r i c u l t u r a l d i s t r i c t s , how-
ever, customer loans are much more ioportant r e l a t i v e to open
market loans than i n the eastern d i s t r i c t s .
While member
banks do not attempt t o secure funds by c a l l i n g customer loans
except i n an emergency, the p o l i c y of the member bank i n extending a d d i t i o n a l c r e d i t t o customers may be greatly i n fluenced by the cost of aecuring a d d i t i o n a l reaerves.
The
cost of mazing an a d d i t i o n a l loen t o a customer i s l a r g e l y the
coat of securing the a d d i t i o n a l funds, because the coats of
operation i n a bank are f i x e d costs for tho most part and do
-319B^t vary d i r e c t l y with the volume of business.
The marginal p r i n c i p l e i s as much applicable t o
the aale of credit by a bank as i t
by a manufacturer.
i s to the sale of goods
A manufacturer i s w i l l i n g to produce and
s e l l a d d i t i o n a l u n i t s of a good
only i f His extra, or mar-
g i n a l costs are more than covered by the p r i c e received f o r them.
In a l i k e manner, a bank i s w i l l i n g t o extend a d d i t i o n a l credit
only i f the a d d i t i o n a l costs of making the loan are more than
covered by the interest on the loan.
A commercial bank does
not spread the costs of securing a l l i t s reserves over a l l
i t s loans, rather comparing the coat of securing a d d i t i o n a l
reserves with the return that may be secured i n lending the
a d d i t i o n a l funds.
I f the rate of discount i s to be e f f e c t i v e , then,
i t must be f i x e d at any time i n r e l a t i o n t o the rates of ret u r n on thoae asaets which member banks are a c t u a l l y using t o
adjust reserves.
I f reserves are being adjusted through the
purchase and sale of commercial paper, then the discount rate
must be set i n r e l a t i o n to the rate on t h i s paper.
I f re-
serves are being adjuated l a r g e l y by means of the policy
in
extending c r e d i t t o customers, then the rate must be set i n
r e l a t i o n t o the rates charged customers.
The discount rate cannot determine market rates of
i n t e r e s t , but i t can a f f e c t them by increasing or decreasing
the coat of securing a d d i t i o n a l reserves from the Reserve
bank.
An excellent example of t h i s influence of the discount
rate on market ratea of i n t e r e s t i s provided by the experience
in thia Diatrict
i n 1919.
Despite an unusual demand f o r c r e d i t
-320i n that year, tntereat rates did not r i s e es long as
a d d i t i o n a l funds could be borrowed from the St. Louis Bank at
a low r a t e .
As soon as the cost of borrowing was increased
interest rates rose r a p i d l y .
The St. Louis Ban^ atated tn the hearings i n 1931
that customer rates i n St. Louia, where there i a a competitive
aarket for customer loans, tended t o move i n accord with the
17*7
discount rate of the Ban*.
A study of the chart which com-
pares the aonthly range of customer rates i n S t . Louis with
the diacount rate of the Bank, indicatea i n the case of a
number of the turning points i n interest rates a tendency f o r
the discount rate to lead and the market rate t o f o l l o w .
This
i s p a r t i c u l a r l y evident i n 1920, 1921, 1922, 1928, and 1931.
The discount rate i s but one of aeveral techniques
a v a i l a b l e t o the Reserve Systea i n i t s e f f o r t s t o c o n t r o l
credit.
The theory of the discount rate has been obscured
on the one hand by those Who b e l i e v e that i t s influence
is
at most paycholocical, and on the other hand by those who expect too much t o be accomplished by rate p o l i c y .
Other im-
portant techniques of c o n t r o l now a v a i l a b l e t o the Reserve
System consist of open carket operations, the nower t o change
the reserve requirements of member banks, and the power t o
regulate the amount of c r e d i t flowing into the security markets.
The use of each one of theae techniques nay accomplish
c e r t a i n t h i n g s , and a combination of c e r t a i n of these techniques at a given time may enable the Reserve banks t o achieve
771.
-321-^
certaln s p e c i f i c
objectives.
It seems necessary, however, i n view of much of
the discussion i n recent years, to c a l l attention to the fact
that economic s t a b i l i t y , or price s t a b i l i t y , or a number of
other very desirable economic objectives, cannot be achieved
by central bank policy alone.
A central bank cannot stave
o f f the economic consequences of a war, or the consequences
of governnental p o l i c i e s designed t o avoid meeting the economic costs of a war.
The f a i l u r e of the Reserve System to
prevent the economic collapse i n the United States after 1930
cannot be c i t e d as an evidence of the f a i l u r e of central bank
p o l i c y , but as the f a i l u r e of economic and s o c i a l p o l i c i e s
in
nearly a l l countries i n meeting the problems of readjustment
a f t e r the war of 1914-1918.
Central bank p o l i c y may affect
p r i c e s , but i t cannot s t a b i l i z e the price l e v e l .
A central
bank lacks control over many of the elements of cost that
enter i n t o p r i c e .
Prices are the result of both monetary and
non-monetary f a c t o r s , and the non-monetary f a c t o r s are not
subject t o the c o n t r o l of the c e n t r a l bank.
In recent years the power of the Board of Covemors
t o change reserve requirements f o r member banks has become one
of the most important techniques of control, because of the
large excess reaerves held by member banks.
It has recently
been proposed t o extend t h i s nower further by amending the
Federal Reserve Act t o enable the Board of Governors or the
Federal Open Market Committee t o increase the reserve requirements t o twice that which might now be required.
Serioua
-322-^
consideration ought t o be given t o the p o s s i b i l i t i e s of making the use of t h i s power as f l e x i b l e as possible.
It
is
suggested here that greater f l e x i b i l i t y might be obtained by
permitting regional differences i n reserve requirements.
The
several Reserve banks might be given the power t o change reserve requirements f o r central reserve c i t y banks, reserve
c i t y banks, or country banks, subject to the approval of the
Board, or the Federal Open Market Committee.
The procedure
would closely resemble that now used i n determining discount
rates.
It might be pointed out that these two techniques of
control are very cloaely r e l a t e d .
It may be desirable, for
instance, t o change reserve requirements f o r banks i n the .
eastern d i s t r i c t s , which, i f applied t o the banks i n the
a g r i c u l t u r a l d i a t r i c t a , might work great hardship..
-323BIBLIOCRAPHY
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