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6 7 th C o n g r e s s \
4th Session

M ^ A l l!,

/ D ocum ent
N o . 310




MAY 18, 1920

F e b r u a r y 24, 1923—Ordered to be printed



W a s h i n g t o n , D. C., Tuesday, May 18, 19W.
The conference convened at the offices of Governor Harding,
Treasury Building, Washington, D. C., on Tuesday, May 18, 1920,
at 10.30 o’clock a. m., Hon. W. P. G. Harding, Governor of the Fed­
eral Reserve Board, presiding.
Hon. Adolph C. Miller, member of the Federal Reserve Board.
Hon. Henry A. Mohlenpah, member of the Federal Reserve Board.
Hon. John Skelton Williams, Comptroller of the Currency and
member ex-officio of the Federal Reserve Board.
Hon. David F. Houston, Secretary of the Treasury and member
ex-officio of the Federal Reserve Board.
George L. Harrison, counsel, Federal Reserve Board. Also the
members of the Federal Advisory Council:
Philip Stockton, Federal reserve district No. 1.
A. B. Hepburn, Federal reserve district No. 2.
L. L. Rue, Federal reserve district No. 3.
W. S. Rowe, Federal reserve district No. 4.
J. G. Brown, Federal reserve district No. 5.
Oscar Wells, Federal reserve district No. 6.
James B. Forgan, Federal reserve district No. 7.
F. O. Watts, Federal reserve district No. 8.
E. F. Swinney, Federal reserve district No. 10.
R. L. Ball, Federal reserve district No. 11.
A. L. Mills, Federal reserve district No. 12. Present also:
J. H. Puelicher, Marshall & Ilsley Bank, Milwaukee, W
John Perrin, chairman of the board and Federal reserve agent,
Federal Reserve Bank of San Francisco.
Hon. Edmund Platt, chairman of the Banking and Currency Com­
mittee, House of Representatives.
Also the following class A directors of the Federal reserve banks:
Boston: Thomas Beal, Edward S. Kennard, and Frederick S.
New York: J§mes A. Alexander, R. H. Treman, Charles Smith,
and J. H. Sisson.
Philadelphia: Joseph Wayne, jr., M. J. Murphy, and Francis




Cleveland: O. N. Sams, Robert Wardrop, and Chess Lamberton.
Richmond: John F. Bruton, Charles E. Rieman, and Edwin Mann.
Atlanta: J. K. Ottley, Oscar Newton, P. R. Kittles, and W. H.
Chicago: George M. Reynolds, Charles H. McNider, and E. L.
St. Louis: J. C. Utterback and Sam A. Ziegler.
Minneapolis: Wesley C. McDowell and E. W. Decker.
Kansas City: J. C. Mitchell, C. E. Burnham, and W. J. Bailey.
Dallas: John T. Scott, E. K. Smith, and B. A. McKinney.
San Francisco: C. K. McIntosh, J. E. Fishburn, and M. A.

Governor H a r d i n g . Gentlemen, the board desires me to welcome
you to Washington and to express its appreciation of your consider­
ation in leaving your business and coming here to this conference.
We have been very judiciously advised from time to time by the
Federal Advisory Council, which body has always held its four
statutory meetings a year, and at times its executive committee has
come on by request for a special meeting; but the present situation
is such that we felt it would be helpful if we could have with us not
only the Advisory Council but also the class A directors of the
Federal reserve banks. We should have liked to have had all of the
directors, but we could not ask them all to come to Washington at
one time, for it is necessary that a quorum of directors be left at
home to attend to the business of the Federal reserve banks.
The class A directors are the banker members of the boards of
directors of Federal reserve banks. They have a dual relationship.
They are not only directors and, as a rule, very influential directors
of Federal reserve banks, but they are officials of member banks
and thus they see both sides of the picture. So it seems to be pecul­
iarly appropriate, at a time when there is a banking situation to
discuss, to have bankers here to discuss it.
As you are busy men it will be our purpose to detain you for as
short a time as possible, and if it is agreeable to the members of the
conference, we will try to finish our discussion by half past 1 or 2
o’clock so that you can then be free to take afternoon trains home,
if you wish, or to devote your time, if you stay in Washington, to
such other engagements as you may have.
Of course, we all realize that the credit position is extended and
very considerably extended. There is no occasion, though, to be
unduly disturbed over the situation. We want to look at the facts
as they are and not deceive ourselves in any particular. Having
diagnosed the case, then we want to determine what is the proper
policy to pureue. We have had an analysis made of the general
banking credit expansion in this country, and, without going into
details, I am going to save time by stating the result.
After allowing for the normal credit expansion in a growing
country, we find that since the 30th of June, 1914, the expansion of
bank credit in this cotmtry has amounted to about $11,000,000,000.
At the same time the expansion in the volume of currency in cir­
culation, deducting from our starting point the currency" held in



the Treasury, and deducting from the present figures the amount
held in the Treasury and in the Federal reserve banks, has been
about $1,900,000,000. When we remember that during the last three
years the Government has floated $26,000,000,000 of securities to take
care of its own war requirements, and to enable it to make advances
to Governments associated with us in the war, this expansion of
bank credit does not seem to be excessive or disturbing, when looked
at purely .from the standpoint of war necessity, but the situation
that we want to discuss particularly to-day, and which seems to be
disquieting, is the expansion that has taken place in the last twelve
or fourteen months. From the 1st of April, 1919, to the 1st of
April, 1920, the expansion of bank credit was about 25 per cent.
This has been in spite of the very large reduction of the amount of
Government obligations outstanding. The reduction in Govern­
ment obligations has all been absorbed by commercial credits, with
the net result of expansion of bank credits of about 25 per cent.
During the same time there has been an advance in commodity prices
of about 25 per cent. This has been accompanied by a decrease in
production of essential articles.
Assuming for the year 1918 an index number of 100 in each of 10
principal article of everyday use and necessity—not necessarily pro­
duction figures, but distribution and consumption figures, sucli com­
modities as grain, live stock, wool, copper, cotton, petroleum, pig
iron, steel bars—putting them at 100 for the year 1918 we get an
index number for the year 1919, on the average of the 10 commodi­
ties, of 89.07. While these figures can not be accepted as indicating
a positive decline in production, they do indicate a decided trend in
that direction, a certain trend toward a reduction in the distribution
of those products; so to all intents and purposes we may assume
that there was a decline in essential production during the year 1919
of about 10 per cent.
It is this tendency of production to decline, particularly in some
essential lines, which constitutes a very unsatisfactory element in
the present outlook. It is evident that the country can not continue
to advance prices and wages, to curtail production, to expand credits
and to attempt to enrich itself by nonproductive and uneconomic
operations without fostering discontent and radicalism, and that
such a course, if persisted in, will eventually bring on a real crisis.
There is a world-wide lack of capital, and with calls upon the in­
vestment market which can not be met there is an unprecedented
demand for bank credits. The fact must be recognized that how­
ever desirable on general principles continued expansion of trade
and industry may be, such developments must accommodate them­
selves to the actual supply of capital and credit available.
Official bank rates now in force in the leading countries are higher
than at any time during the present century, except during the war
panic week at the beginning of August, 1914. Only within the last
few weeks the official rate in Italy has been raised from 5 to 5J, the
Bank of France rate from
to 6, and the Bank of England rate
from 6 to 7 per cent.
Every effort should be made to stimulate necessary production,
especially of food products, and to avoid waste. Planting opera­
tions in many sections have been delayed because of adverse weather
conditions, and should there be an inadequate yield of crops this year



the necessity for conservation and conservatism will be accentuated.
War waste and war financing result inevitably in diminished sup­
plies of goods and increased volume of credits.
Now I assume, looking at the matter from the standpoint of the
economist, that the trouble with the general situation throughout
the world, and in this country, is the disruption of the proper pro­
portion or relationship between the volume of credit : ”i< the volume
of goods. Whenever that phenomenon occurs, there are two reme­
dies which suggest themselves: First, a reduction in the volume of
credit, credit contraction. That is a drastic remedy, it is unpleasant
medicine, but it may be necessary at -times to take medicine of that
kind. The other and better method is to restore the proper equi­
librium by building up production; in other words, letting the coun­
try catch up with itself. We can approximate this result in two
ways. We can restrict credit and expand production, letting the
expansion of production proceed at a greater rate than the restriction
of credit, and we are then working along in the right direction. This
is our essential problem to-day, the formulation of some constructive
policy to be adopted by the Federal reserve banks which will build
up essential production and at the same time preserve the solvency
of other concerns which may not be essential per se but which are
highly essential as part of the general situation, because there is no
chain which is stronger than its weakest link.
Now, there is undoubtedly, however, a spirit of extravagance in
this country which must be curbed. There are some indications that
the people are waking up to what the consequences will be if this
wild orgy o f extravagance and waste should be continued indefi­
nitely. It may be that some real personal sacrifices must be made for
the general economic good. But it is very clear if we find it im­
possible under the present circumstances to increase the volume of
production of the most essential articles, the only thing for us to do
is to reduce consumption of those articles.
Now, we might as well look at the situation as it is. A prudent
man never lives for the day alone. He always looks to the morrow*
and the months to come. That is the situation in regard to the output
of the mines and of the farms in particular? What has been done
to get normal output and production at the present time and to pro­
vide proper means of distribution of the output in order that there
may be no acute shortage in the fundamental necessities of life next
winter? In this connection, I might call attention to one circum­
stance which has caused a good deal of uneasiness. It may not prove
as bad upon analysis as it appears at first blush, but I refer to the
lack of liquidation which we have experienced during the early
months of the present year.
We all know that normally, after the fall trade is over and the
crops have been harvested and distributed, there is a marked easing
of money accompanied by the liquidation of debts. This occui?
usually in January and February and up to the middle of March of
each year. Liquidation of this kind is entirely natural and is neces­
sary in order that the banks may strengthen their resources in order
to meet the demands which will be made on them later in the year as
the crops are in the process of making or harvesting. This year we
have had no such liquidation. Commercial loans have expanded

fe d e r a l re se rv e board c o n fe r e n c e .


steadily, and, while there has been some reduction up to the las*;
week or so in loans secured by Government obligations, it is notice­
able in the last few days that those loans have been increased. It
would appear that this means an anticipation on the part of the
American people for their requirements for bank credit which they
usually make later on in the year. We may well inquire that, as we
have had this demand at a time when we ought to have had liquida­
tion, what is our situation going to be in the later months, when we
are going to have the demands which we have been accustomed to
having? Now, I hope that the answer to this is—and if this is cor­
rect it is the reassuring feature of the situation—that the demands
which have been made in the past few months, when we should have
had liquidation, are due, at least in part, to the fact that essential
commodities have been held back by lack of transportation facilities.
Then our problem is directed to opening up the transportation facil­
ities in order that these goods may flow to market. This done, we
will get some liquidation which ought to be sufficient to oifset the
demands which will be made upon the banks for essential purposes
later on in the year.
But we have figures to show that the extravagant spirit has not
yet been checked. There are some indications that the peak has
been reached and that people are coming to more realizing sense of
the situation and that they will pursue a sounder and a saner course.
There ought to be a recrudescence of our old war-time spirit, of doing
something that is worth while, and we should get down to work and
solid business. There should be a general spirit of cooperation on
the part of the Federal reserve banks, the member banks, the nonmember banks, and the public to work out a policy which will result
in greater production, less unnecessary consumption, and greater
economy; all unnecessary borrowings for the purpose of pleasure and
luxury should be restricted as far as possible and the liquidation of
long-standing, nonessential loans should proceed.
We should be careful, however, not to overdo this matter of liquida­
tion, because too drastic a policy of deflation, which might result in
crowding to the wall and throwing into bankruptcy legitimate enter­
prises, however unessential their operations may be, would have a
tremendously bad effect and would defeat the purpose of the very
policy which we are trying to have established. There must always
be a wise and discriminating judgment used.
A sensible and gradual liquidation will result in permanent im­
provement, as we all know, but any attempt at radical or drastic
deflation merely for the sake of deflation will result in very serious
consequences, and such a policy should be avoided.
It will be helpful for us to discuss and to understand the parts
which must be played by the Federal Reserve Board, the Federal re­
serve banks, and the member and the nonmember banks in solving the
financial and economic problems that confront us.
Our problems are interrelated, but they are distinctive. The Fed­
eral Reserve Board is a governmental body, sitting here in Wash­
ington. It does not come, except indirectly, in contact with the mem­
ber banks, and it can not be expected to have any intimate knowledge
of the details of your business. And it oueht not to attempt to in­
terfere with the details of your business. The function of the Fed­
eral Reserve Board is to deal with general conditions and principles



and to keep away from the mass of details which it is impossible for
any board sitting here in Washington to digest.
The Federal reserve banks do come in direct relationship and con­
tact with their member banks. They have an intimate knowledge of
the credit policy and of the borrowings of the member banks; they
are kept fully informed from day to day of the change of position of
the member banks, and through their contact with the Federal Re­
serve Board, as the coordinating and supervising body, they keep in­
formed as to the board’s general policy, and they transmit to the
board such specific and general information as may be of assistance in
determining these policies. But the primary banking business of
this country is transacted by the member and the nonmember banks.
Those are the banks which come in contact with the public, which are
the custodians of the funds of the public, put with them on deposit,
and they are the media through which commercial loans are made.
We have heard a great deal about the necessity of discriminating
between an essential and a less essential and a nonessential loan. The
discount operations of the Federal reserve banks and their powers to
make investments are all clearly defined in sections 13 and 14 of the
Federal reserve act. Those sections are permissive and not manda­
tory. A Federal reserve bank is not required to make any particular
loan or any particular investment. The Federal Reserve Board may
define eligible paper, but all rulings and regulations of the board
must be in strict conformity with the terms of the Federal reserve
act. The Federal Reserve Board has no legislative powers what­
ever. It can merely interpret by regulation or rule the enactment of
Now, without discussing any power that the Federal Reserve Board
may have to define essential and nonessential loans, I wish to point
out that section 13 provides, in a general way, that any paper ma­
turing within the prescribed time, the proceeds of which have been
used or are to be used for commercial, industrial, or agricultural pur­
poses, is eligible. There is no specific condition imposed as to whether
or not, in the judgment of any man or body of men, any particular
loan is an essential loan for the well-being of the community-or the
country at large.
The board has reached the conclusion that there is no occasion
now, whatever may be necessary later on, for it to attempt by any
general rule of a country-wide application to define essential anii
nonessential paper. . You remember the difficulties that were expe­
rienced in making such a definition during the war, when we had
the War Trade Board, the War Industries Board, the Capital Issues
Committee, and other temporary boards here passing upon all these
matters. At that time the problem was simpler than it would be
now, because there was a general underlying principle that anything
essential must be something that was necessary or contributory to
the conduct of the war. Now we have no war. The temporary
boards have all dissolved and gone. The Federal Reserve Board is
not a temporary board. It is a permanent organization and it must
conduct its business in strict accordance with the terms of the Fed­
eral reserve act. Therefore, I think we are all agreed that there is
no occasion at the present time, if ever, for the Federal Reserve
Board to attempt to define, by regulation of country-wide applica­

fe d e r a l re se rv e b oard c o n fe r e n c e .


tion, what is an essential and what is a nonessential loan. A Federal
reserve bank is in much better position to undertake this than is
the Federal Reserve Board.
But even here there are difficulties in the way. Some of the Fed­
eral reserve districts cover very large areas. A rule adopted by one
Federal reserve bank may not be susceptible of adaptation in an­
other Federal reserve district, because what seems to be essential
or necessary in one place may not be in another. While there is no
particular objection to a Federal reserve bank, in the wisdom of
its directors, undertaking to make a general discrimination be­
tween loans plainly unnecessary, plainly nonessential, and those
which are less essential or more essential, it seems to the board that
that whole question of discrimination might very properly be left
for solution at the source, as a matter between the individual
banker and his own customer, because the individual banker, par­
ticularly at times like the present, has a very close, confidential re­
lationship with a borrowing customer. They can talk matters over
with the utmost frankness. The individual banker is in position to
give advice. He can accustom his customer to come to him, in ad­
vance of seeking a loan, or of making any commitment involved,
to discuss the situation with him before the commitment is made.
The individual banker in many cases—of course this may not be
possible in the larger cities—but the great mass of banks all over
the country that do mostly a local business can very largely antici­
pate the legitimate and necessary credit demands which are going
to be made upon them; they can estimate the fluctuation in the
volume of their deposits, and they are better qualified than anyone
else to give advice to a borrowing customer. They can often restrict
the amount of a loan before it is made and can persuade a cus­
tomer in very many cases that he really does not need the money
after all.
Then, again, the individual banker can determine, not so much the
essential nature of a loan from an elementary standpoint, as to
whether the loan is going to produce something that is absolutely
needed, but he can decide better'than anyone else whether the loan is
essential or necessary for the public good in his particular locality,
not only as a means of producing something that ought to be pro­
duced, and which is needed for consumption, but as a means of pre­
serving the solvency of his community. We all know that if the
bankers in any community, large or small, were to clasp the screws
on tight, they could bring disaster to the community, which might
spread to other communities.
Of course, there may be cases, and there have been cases, doubtless,
probably in all of the districts, where some of the banks have over
done the matter of extending credits, but there is one very encourag­
ing feature of the present situation, and that is such cases are com­
paratively few. The majority of all the member banks in each of the
Federal reserve districts are not borrowers from the Federal reserve
banks, and the number of member banks which are borrowing from
the Federal reserve banks in an amount exceeding their own capital
stock is not large in proportion to the total membership. Every
banker knows, or he ought to know, what reasonable line of credit he
can get from his Federal re^rve bank, and I want to call your atten*






tion to the power that the directors of the Federal reserve banks
have to limit their loans.
1 referred a moment ago to the fact that there is no mandatory pro­
vision in the Federal reserve act requiring that any particular loan
be mad \ The nearest approach to compulsion in the matter of loans
that you will find anywhere in the act is that provision which per­
mits, and upon the affirmative vote of five members of the Federal
Reserve Board, requires a Federal reserve bank to rediscount for
another Federal reserve bank. With this exception there is no
other mandatory provision relating to loans in the Federal reserve
act. While sections 13 and 14 are permissive, there is, however, a
strict injunction laid upon the directors of the Federal reserve banks
in that part of section 4 which requires the directors of a Federal
reserve bank to administer its affairs without favor or discrimination
for or against any member bank, and in making loans, discounts, and
advancements, which in their opinion may be safely and reasonably
made, to pay due regard to the wants and requirements of other
member banks. Thus the directors of Federal reserve banks are
clearly within their rights when they say to any member bank, u You
have gone far enough; we are familiar with your condition; you have
got more than you share, and we want you to reduce; we can not
let you have any more.” They must exercise their discretion as to the
proper course to pursue, but they have the power, and there are many
cases where the rule ought to be laid down and a member bank ought
to be made to understand that it can not use the resources of the
Federal reserve banks for its own private advantage for profit; that
it must not abuse the rediscount privilege of the Federal reserve
" When a banker understands, just as he did in the old days before
we had the Federal reserve banks, that there is a limit to his borrow­
ing—and you will remember in the old days no national bank was
permitted to become indebted for borrowed money in an amount ex­
ceeding its capital stock—when a banker realizes that if he wants to
expand his business he must do it more and more out of his own re­
sources and not lean so heavily upon the Federal reserve bank, when
he understands that limitations and penalties may be imposed upon
his borrowings, then if I know anything about the psychology of
banking I know that the banker may be depended upon to use a wiser
discretion in the matter of granting credit.
The recent amendment to paragraph (d), section 14, which em­
powers the Federal reserve bank, for itself and without regard to
any other Federal reserve bank, to establish a normal or basic line
of credit upon some principle applicable to all member banks in its
district alike, and to impose a graduated or penalty rate upon ex­
cessive J^rro wings, does not repeal, amend, or modify in any par_t|W
Iarffie provisions of section 4 or section 13, and a P*ederal reserve
. ??Kft3fcas still, even though it adopts the progressive or penalty rate,
- entirely within its rights in declining to take undesirable paper at
'T J - The progressive or penalty rate I will not discuss at this
4sit^>Bsjifmse we will have an open discussion a little later on and we
wi& t^ikejit up then.
be argued that the volume of credit must necessarily be
^pefitSr/'novv than was the case a few years ago on account of the
prices and higher wages which are prevailing, so that any

fe d e r a l re se rv e b oard c o n fe r e n c e .


given transaction requires a greater number of dollars to finance it
than was formerly the case. That is true, but I believe that I can
present figures to you that will convince you that if there could be
a freer flow of goods and credit—in other words, a greater velocity
in the turnover of credit—the resources of the banks of this country
are abundantly able to finance all essential enterprises and a good
many of the nonessential as well. The fundamental trouble with the
situation to-day is that there is a large volume of essential goods and
commodities held back from the markets and kept out of the chan­
nels of distribution, either for speculative purposes, being held with
the idea of getting higher prices later on, or where they are held back
of necessity on account of lack of facilities to transport them to
market. In the latter case it is a wise and proper policy to ease the
situation along, to assist the people who are thus compelled to hold
and not throw any obstacles in their way, provided there is a genuine
and sincere disposition to put the stuff in process of distribution as
soon as transportation can be had. But in the case of the hoarder,
who for selfish and profiteering purposes wishes to hold back from
the mouths of hungry people essential articles of food and clothing,
every good banker should exert every influence within his power to
force people of that kind to turn loose their hoards. Here is an
opportunity for wise discrimination, and this discrimination can be
exercised more intelligently and effectively by the individual banker
himself than by any governmental board.
We find instances also which always occur when there is a con­
stantly advancing tendency in the market, where merchants have
stocked up. There are many cases where mercantile loans are too
large and ought to be reduced. There are merchants everywhere
who ought to be reasoned with and who ought to be encouraged to
push their stocks out and get rid of the high-priced' stuff, because
some of these days, it may be sooner rather than later, the reign of
reason is going to be restored and the man in the street is no longer
going to want to pay $25 to $30 for a silk shirt or $20 for a pair of
shoes or $1 for 4 pounds of sugar, and lower prices will be demanded,
and trade will fall off unless lower prices prevail. It seems to me,
from the standpoint of good merchandizing and good banking, that
the merchants should be encouraged to reduce their stocks and not
tempt the passer-by by extravagant display in the windows at high
prices, which under the abnormal state of mind which has prevailed
may themselves help to sell the goods, because you all know cases
where a customer would pass by with contempt a two or three dollar
article and turn his attention to something at $25, although it may
not be one whit better suited to his purposes.
In order to bring about a correct tendency and to lead to a per­
manent cure of our present situation, a campaign of education must
be beiriin and continued. Here, again, there is no agency so well
qualified as the banker, who receives on deposit the money of the
public and makes loans to the public, to give advice, so thus there
should be a concerted effort all over this country on the part of the
bankers to arouse in the public a spirit of common sense. Let us
take our heads out of the clouds and get down to business, and
let us save, produce, and let each do his part in a constructive and
productive way for the community, to add to the volume of goods
and facilitate distribution, thereby doing something to cure the dis­


fe d e r a l reserv e board c o n fe r e n c e .

crepancy, the bad relationship which has existed between the volume
of goods and the volume of credit and money.
In any circumstances, you all know tnat the Federal reserve
banks and the Federal Reserve Board will do their part to coop­
erate with the sound, sensible, and reasonable member banks. In
order that we may accomplish any real results and effect any per­
manent good, there must be cooperation on the part of the public
with the banks, and on their part with the Federal reserve banks
and the Federal Reserve Board. We must all pull together for
sound, economic, and financial principles. We should do all in our
power, and we can do a great deal to check the false ideas which have
gained circulation and inculcate in the minds of the people a sense
of the importance of steady, everyday production and distribution,
and to encourage the avoidance of waste and the elimination of
I have here some charts, which will be distributed among you,
which show the movement of principal asset and liability items of
each Federal reserve bank and of the system, of the 12 banks com­
bined. These figures are taken from July 3, 1919, to April 30, 1920.
They show the gold reserves, the total cash reserves, the member
banks’ reserve deposits, the Federal reserve notes in circulation, the
acceptances bought, paper secured by Government war obligations,
divided into the headings, secured by Liberty bonds, secured bv Vic­
tory notes, and secured by Treasury certificates,, and the total dis­
counted paper on hand. Then there is another table which shows
the volume of bankers’ acceptances purchased from other Federal
reserve banks and the volume of bankers’ acceptances sold to other
Federal reserve banks, figures at the close of business on each Friday
from July 3, 1919, to April 30, 1920.
Now, gentlemen, I declare the meeting open for general discussion.
Mr. H e p b u r n . I would like to inquire if any arrangement has been
made to place your opening remarks before the public, Governor
Harding, because, if not, I think that should be done and that they
should be given the widest distribution.
Governor H a r d i n g . I have a synopsis prepared which was given
to the press on yesterday for release to-morrow morning. It is
rather more abridged than the statement I made this morning, but
it is the substance of it.
Now, gentlemen, I want to introduce our member designate, the
Hon. Edmund Platt, who is at present chairman of the Banking and
Currency Committee of the House of Representatives.
The Federal Reserve Board is greatly indebted to Mr. Platt for
cooperation during all these years, especially more recently since he
has been chairman of the committee, and for the assistance he has
given the board in all matters of legislation. It is with a great deal
of pleasure that the members of the board are going to welcome him
as a member, and I want you to know him.
I have the pleasure of introducing to you Mr. Platt. [Applause.]
Mr. P l a t t . Mr. Chairman and gentlemen, it is a great pleasure
for me to be here. I feel a little bit of trepidation before an audi­
ence made up exclusively of bankers, because I think I may be sub­
ject to a little criticism for not having had a great deal o f banking
experience. In fact, I think my actual banking experience is con­
fined chiefly to acting as teller at a few bank elections. But I have



been interested in banking for a good many years, and, upon coming
to the Banking and Currency Committee in the House in the year
1913, when the Federal reserve act was under consideration, I was
not entirely unprepared.
I have had the great privilege of serving on the committee under
Mr. Glass and in taking part in the preparation of the Federal re­
serve act. I think there are three or four words in it that I wrote
myself, very unimportant words; also, in the farm loan act. I have
got to leave in a minute or two, because the bill of which I am
in charge, under a special rule, comes up just after the opening of
the House to-day, a bill to help out the farm loan system, which,
as you know, is in rather a serious condition because of the failure of
the Supreme Court of the United States to decide on the question of
the constitutionality of the act.
The Supreme Court, on April 26, instead of deciding one way or
the other on that question, asked a reargument of the case, and at the
same time stated that they would hear no more arguments after April
30, so that the earliest possible date at which a reargument can be
made will be October 11, and in the meantime it is practically impos­
sible to sell any more farm loan bonds. We are forced to adopt the
expedient which was adopted as a war measure of allowing the Treas­
ury to buy more bonds, and I think the Secretary of the Treasury
does not hanker after that sort of an investment just now. But ap­
parently there is no help for it, and the best thing w can do is to hold
the thing down so that it won’t be open too wide and so that the bond
issues will only be commitments already made before the Farm Loan
Board shut down on further loans. I am hopeful of getting the bill
through without any very serious amendments. In the meantime I
think the program of legislation for the Federal reserve system is
pretty nearly complete for the session. We have one or two bills that
are not of very much importance that we would like to get through
this year, but everything that the board has suggested, or that any­
body else has suggested, which seemed to have merit enough to make
it worth while to put through, has already been dealt with.
I thank you very much, gentlemen.
Governor H a r d i n g . We will go ahead yith the regular routine.
We have a rule of calling on the different districts, and we would like
to hear from at least one director from each district, or from all three,
if all three would like to say something. We will dispose of one dis­
trict at a time, and j\ the director arises, in order that his name may
appear in the record properly, I request that he give his name, so that
the secretary may get it.
We will call first upon the Federal reserve district of Boston.
Mr. B e a l . Mr. Chairman and gentlemen, it is an unusual honor
thrust upon me to be made the senior director of district No. 1. Just
at present I think district No. 1 is in quite a fortunate position.
Through the active work of our governor and of our Federal reserve
agent we have been able to reduce our liability so that at present, with
the exception of the Cleveland district, I think the Fedemi reserve
bank of district No. 1 is at the top of the reserve list. W e seem to
have been able to have had some liquidation in our district, which
possibly is due to the fact that while last autumn we were low and
borrowing largely, it was chiefly, I think, for the purchase of cotton



and of wheat. All the gentlemen here know that we have large cot­
ton mills in our section of the country and that our section is a very
large user of raw cotton. That cotton, of course, has now been turned
into goods and payments have been made for those goods. As a re­
sult, our bank, as I have already stated, and as the figures show, is in
quite a liquid condition.
Governor H a r d i n g . Are there any questions any members of the
conference desire to ask Mr. Beal ? It would be well, as we go along,
to have a pretty thorough understanding of the problems of each
district. The Federal Reserve Bank of Boston a few months ago
was a heavy borrowing bank and discounting with other Federal
reserve banks, and now it is one of the strongest in the system and
one of the three banks which is extending accommodations to the
11 other banks. Is there another director of the Federal Reserve
Bank of Boston who will favor us with some remarks?
Mr. C h a m b e r l a i n . I have nothing new to say. I am the baby
director on the board and Mr. Beal is our spokesman.
Mr. K e n n .4
- 3f the first Federal district,
and I want
healthy looking baby. I
think I am rather optimistic on this question. I do not think we
should have any undue alarm over it, because I think the question of
supply and demand will finally properly adjust itself. I think the
people of this country are becoming more and more enlightened
with regard to economic conditions. I also think-that the rates for
money should continue on a high level with the hope of causing
liquidation in commodities. Of course, liquidation would result in
low prices and the easing up of business. I do not think this body
should encourage any drastic measures of readjustment. I think the
deflation should be gradual, and I think we should give more care to
the commercial paper that is rediscounted at the Federal reserve
banks. I have an open mind on whether bankers’ acceptances should
be included in rediscounts in computing a member bank’s line of
credit. I think that that is a rather difficult thing to manage, but I
think it would be a good idea for the Federal Reserve Board to allot
a certain amount of Federal reserve notes for each district, and that
they have some responsibility in that matter. I thank you, gentle­
Mr. K e n n a r d . The transportation facilities are congested. At the
district, Mr. Kennard?
Mr. K e n n a r d . The transportation facilities are congested. At the
present time the warehouses are congested and they haven’t the ship­
ping facilities. I noticed on coming here, in passing through the
New England States, that there were several hundred cars on the
siding waiting to be shipped. A railroad man told me a short time
ago that he had 47 cars billed for New York which he was unable
to ship, and that he was obliged to sidetrack that long train 50 miles
east of Portland. The condition in New England is as bad as it is
in any part of the counter, I think.
Governor H a r d i n g . District No. 2, the Federal Reserve Bank of
New York.
Mr. A l e x a n d e r . I take it, Governor Harding, that your address
is to be the keynote of the discussion here this morning. Probably
the facts in the case are well known and your presentation of them
will be quite generally accepted as correct.



I take it we are to give consideration here to what remedies, if any,
can be devised which will be constructive and not disastrous in their
In our district we have to deal with two rather distinct problems,
the one being the problem of the smaller banks in the communities
and the other being the problem of the large banks whose business is
not only country-wide but world-wide.
The banks that are borrowing most heavily in the second Federal
reserve district are the larger banks, the banks that are doing very
largely a commercial business. As we know, there are upward of
30,000 banks in the country, and those banks are not all doing the
same character of business. Many of those institutions will pass
through this entire period without borrowing a dollar from the
Federal reserve bank.
When we consider the matter of rationing credit, figuring perhaps
what the Federal reserve bank can lend from its resources, we are
holding, at the disposal of institutions that will never want to redis­
count, a very considerable amount of credit. In handling the af­
fairs of a commercial bank, we are obligated, if not expressly there
is certainly an implied obligation, to lend to customers some per­
centage of the amount, or rather some multiple of the amount, of
their balance. It may be five times, but we all very well know that
if all the customers should want five times the amount of the money
they have at one time, they wouldn’t get it. Experience has shown
that the careful lending bank, the bank that keeps itself in a liquid
condition, has been able to meet the requirements of its customers on
that basis. Therefore it seems to me that the Federal reserve banks
have resources that are ample to take care of the situation.
A good deal of effort has been made to educate the banks, perhaps
on the part of the Federal Reserve Board, and to educate the mem­
ber banks on the part of the Federal reserve banks. However, the
users of credit are not the member banks. Tue users of credit are
the manufacturers and the merchants of the country; the speculators
of the country, if you please. Therefore, it seems to me to be of
prime importance that these credits should be widely distributed,
not by the banks exclusively but in such a way that they will get
into the hands of the people who are using the money in business
enterprises. During the war, when we put the country on rations
as to the price of coal and other essentials, we could go to the users
of these commodities and say to them “ You must restrict yourself,”
we did not rely upon the hotels and restaurants exclusively and say
to them that they could serve only such and such a thing, but we
approached the actual source of the demand.
It is largely a matter of education. We find to-day, I think, a
hesitation in business. Large users of credit are inquiring as to what
the future has in store for them. I think now is the logical time to
deal with this question, perhaps the best time that has occurred up to
now, to bring this credit situation home to the users of credit,
although while this hesitation is on they will get some loans, prices
are being reduced, but nevertheless unless there is a very substantial
contraction and a very definite and positive announcement made in
some way to users of credit in the country, they may become more
hopeful "again that the situation is not one to be feared and they



will feel justified in going ahead and making very substantial and
enlarged commitments for the future.
Speaking for myself—and I think I voice the sentiment of the
entire board of the Federal reserve district of New York—we think
that at the present time the commercial rate, the discount rate,
should be raised; that it should not be raised to
or 6J per cent as
a measure of our treatment of the situation, but that the rate should
be 7 per cent on commercial paper.
Governor H a r d i n g . May I ask if that raise of rate would penalize
anybody who could not liquidate on account of lack of transporta­
tion facilities, or would it encourage the liquidation and distribu­
tion of goods?
Mr. A l e x a n d e r . Well, I am afraid somebody is bound to be penal­
ized in order to bring about production. A percentage of 1 per
cent is not a very heavy penalty in the way of an interest charge,
but it is a very positive announcement that the credit situation is
such that further expansion must be prevented and that curtailment
should be* had wherever possible.
I do not think we need to consider that question unduly, Governor
Harding, any more than we need to unduly consider the position
of these people who bought Government bonds and who have seen
them fall to 85.
Governor H a r d i n g . I think it would be well for each director, as
he arises, to give his views on the discount rate in his respective
district. That is one of the things that we want to take into con­
sideration. And may I ask you about the transportation situation
in your district, how it looks to you ?
Mr. A l e x a n d e r . There is almost no such thing there now-----Governor H a r d i n g . Everybody is on strike?
Mr. A l e x a n d e r . All tied up. As soon as one strike is settled
another group goes out, and it is a very serious question. There is
one thing, I think, to be feared, and that is that if the transporta­
tion facilities are improved and commodities move freely, and
credits are thereby released, it may make a temporary ease in the
money market and may encourage people to go ahead and expand.
I believe now is the time to put the rates up and to keep them up.
Governor H a r d i n g . Does any other director from district No. 2
desire to make a statement?
Mr. T r e m a n . I think Mr. Alexander has well expressed the gen­
eral sentiment of the directors in our district, that there is a spirit
of hesitation and uncertainty prevailing throughout the country,
and that the business interests are looking to the Federal Reserve
Board arid the Federal reserve banks to indicate what is to be done.
We have felt in New York that it was advisable to advance the
rate further than at present because we got good results from the
action which was taken in the winter. We believe the time is com­
ing when there should be a further warning by the advancement of
the rate throughout the country. Not that it would curtail business,
that is, the advancement of a point or half a point in the commercial
rate, but it would be a warning to a great many banks that will not
be affected by the graduated or progressive rate, that in dealing
with their customers they should recognize what many of them
apparently do not recognize yet, and that i$ that the credit situa­



tion is a very strained one and should be dealt with now before the
conflagration becomes too severe.
As to the particular method to be employed, Mr. Alexander, I
think, has correctly stated the position of the directors of the Federal
Reserve Bank of New York; that is, that there should be an immedi­
ate raise in rate; second, that the position outlined by Governor
Harding with regard to the process and methods of education should
be carried out. We have held many conferences in the New York dis­
trict with the bankers of our district, asking a certain number, gen­
erally from 35 to 40, located at different points in the district, to
come in to New York and have a conference. Personally, I believe
that that is one of the most helpful ways in which we can bring the
exact situation before the bankers; that is, by getting together in a
room, as we are here, and exchanging views, and by having pointed
out to them by the officials of the bank the exact situation, and re­
ceiving from them an exchange of views as to conditions in their
district. To my mind the difficulty at the present time is that there
is no realization of the strained credit position except in certain dis­
tricts. I am in very close touch with certain of the distributing
interests, jobbers in hardware and jewelry and other lines. I sat last
week for two days with a group in Atlantic City discussing the situa­
tion in different parts of the country, and I am sure that they are
disturbed and that they are looking to the Federal Reserve Board
and the Federal reserve banks to outline a remedy which will deal
with the situation in a sound and sane way at the present time with­
out causing undue alarm. We can do that if we begin and restrict,
within reason, the granting of credit through individual banks.
You must do something more than send them requests not to do it.
The way to do it is to bring them face to face with the officials of the
Federal reserve banks in each district and have them understand the
situation and have them in turn go back and deal with the com­
mercial and business interests.
Yre;can, in addition to reaching the business organizations through
their officials, reach the agricultural societies and organizations
through their officials. So that if there should be an effort to get in
touch with the large interests in each district and merely point out
the necessity for a reasonable curtailment of credit, the same as we
curtailed sugar and coal when there was a real need for it, it seems
to me that by the raising of rates now, by the education of bankers
individually and by these group meetings, and by going on further
and extending our suggestions to the business interests of the coun­
try, I believe that we can forestall any very serious disturbance in
the fall. If no action is taken, I should think that we are moving
in the direction of what may prove to be quite a serious situation.
Mr. O t t l e y . Mr. Alexander has suggested a raise in rate from 6
to 7 per cent. In view of the basic line that is under consideration
by the Federal reserve bank, would it be your idea, Mr. Alexander,
to just make a fiat rate of 7 per cent, or start off the basic line at 6
per cent, with a rising scale?
Mr. A l e x a n d e r . Make the basic rate 7 per cent. I am in hopes
that there will be no plan of progressive rates put in effect in New
¥ork. Make the rate 7 per cent. I am speaking of commercial
S. Doc. 310,67-4------2



paper. You will probably want a differential in favor of obliga­
tions secured by Government bonds, and the present rate is
cent, and perhaps you would want the rate on certificates of in­
per cent, but the commercial paper rate is the im­
portant thing. The commercial paper is the thing that is being
created in volume right now, and we want to limit it as much as we
possibly can, limit the creation of commercial paper.
Mr. C h a r l e s S m i t h . Mr. Chairman, I represent on our board
more particularly the banks in the rural communities in the second
district. 1 do not come in quite as close contact with the larger
banks, but I wish to say in passing that the entire board of our
bank is in hearty accord with an advancement of rate, as expressed
by both Mr. Alexander and Mr. Treman.
In representing the smaller banks in the rural communities, we
possibly come in closer touch with our people than in the larger
banks. 1 find in coming in contact with all of our people in our
vicinity and throughout the various sections of the State that they
are all in hearty accord with the idea that the loans should be re­
duced and brought down to a reasonable business basis. The farmers
with whom I have talked are in thorough accord with this. They
accept the situation very gracefully.
The greatest problem that is confronting the farmer to-day, and
the farmer is the original producer to-day, is the labor proposition.
That is a thing in which we are trying to assist him in the rural
districts throughout the State.
Mr. W i l l i a m s . Before we leave this question, Mr. Alexander, as
you suggest a 7 per cent rate, do you not think that one of the
effects of a 7 per cent rate, as a minimum rate for all banks, would
be to discourage essential industries ? Six per cent is the maximum
rate in New York except on bonds and certain other things. A
small bank might have an application from an essential industry,
and it would realize that if it were to lend to that industry the ac­
commodation that is needrd, it could only reimburse itself at a higher
rate or at a loss. It would have to charge that essential industry 6
per cent and would have to pay 7 per cent, and there would therefore
be no inclination to extend the accommodation at a loss, even to
an essential industry. On the other hand, if you put the rate at 7
p r cent, that would not deter the profiteers who are making 70 per
cent profit, 20 per cent or 50 per cent. My apprehension and wonder
is whether a higher rate of interest would not in the long run dis­
courage the essential producers and at the same time have no effect
at all upon the profiteers, upon the men who are making exorbitant
and extortionate profits.
Mr. A l e x a n d e r . In the case of a corporation there can be a con­
tract rate, whatever is agreed upon-----Mr. W i l l i a m s . But the farmers, for example, are not corpora­
tions, and a great many of the smaller transactions are not carried
on with corporations----Mr. A l e x a n d e r . No, I am coming to that point. Between cor­
porations there is a contract rate, but in smaller transactions, where
you are dealing with individuals and with farmers, 6 per cent is the
legal rate. I do not think it makes a particle of difference to any
of those borrowers, certainly none of those with whom we come in



contact, whether they pay 5 per cent, 6 per cent or 7 per cent. The
question is, “ Can we get the money ? ” That is the question to-day.
They say, “ You lend us the money and we will pay the rate.”
Now, there is the objection, as stated by you, of charging 7 per cent
to the member banks when they can only collect 6 per cent. I think
that is a feature of the situation that must be met. In other words,
1 think the purpose to be served is so great and of such prime im­
portance that these other matters must be considered of smaller
importance. I think the bank would have to stand in between with
the of credit for essential purposes, if necessary, or they can
have balances which will justify them in making a loan at 6 per
cent, although they have to pay 7 per cent for the money.
Mr. W i l l i a m s . It seems to me that you will have no effect upon
the profiteer with any rate of interest you elect to charge as long as
he can make the enormous profits which we know are being realized
in certain directions and have been for many months past. It seems
to me the greatest factor would be to restrict arbitrarily the granting
of credit to nonessential industries or those concerns that are making
inordinate profits, especially on products that are not most needed.
*Mr. A l e x a n d e r . That is exactly what you would accomplish by
making a profiteer understand that credit is a luxury and difficult
to get.
Mr. W i l l i a m s . But you can do that better by saying, “ We won’t
let you have the money ” than by letting them have the money, even
at 10 per cent.
Mr. A l e x a n d e r . True. We could say that they couldn’t have the
money, and we should see to it that the profiteer is cut out and that
the essential industry is carried even at the expense of the bank.
We all know, as has been pointed out by Governor Harding, that
during this period of constantly rising prices a great many inter­
mediaries have injected themselves into the situation. There is one
case in point, and I could name another, but this case was a case of
profiteering in silks. A man bought a certain amount of silks, and
later bought them back in the open market at twice what he had sold
them for. He traced that silk and found that the transaction had
passed through the hands of nine dealers, not one of whom had been
in business before this period of rising prices, and none of whom
will stay in business when prices remain stationary or are inclined to
fall. People of that kind will disappear rapidly, I think, under
present conditions, because they will be forced out. It will prove
unprofitable. The profiteer and user of money for speculative pur­
poses will disappear from the situation when he finds that there is no
profit in buying commodities to be held, dealing in commodities
when prices are not rising steadily, but are subject to the usual
fluctuations. That man is going to protect himself by not using
credit, and in my judgment, he ought to be encouraged not to use it.
Governor H a r d i n g . We will now hear from the Philadelphia dis­
trict, district No. 3.
Mr. W a y n e . I do not think we are unduly alarmed in the third
district over the credit situation. We have felt for some time that
it required rationing; the green signal has been out and I think the
bankers generally nave been conducting their banking operations
along proper lines.



I know that the third district Federal reserve bank has been
more or less criticized for its apparent condition during the past year
or 18 months, due to the fact that we have been borrowers or re­
discounters with other Federal reserve banks. We feel, however,
that our bank has been in a very sane and solvent condition, and
the mere fact that we have been borrowing from other Federal re­
serve banks has not been due to any overtrading on the part of the
merchants of our district. If there, has been any overtrading
on the part of the people of the third district, it has been on the
Government financial side.
The statistics of our banks show, I think, that we have less com­
mercial loans in the Philadelphia Federal Reserve Bank than in any
other reserve bank in the system, and a very much heavier proportion
of Government-secured obligations. We may have been subject to
criticism for not liquidating more promptly the obligations secured
by Government bonds, but we more or less acted along the sugges­
tion of the previous Secretary of the Treasury and the Federal Re­
serve Board at the time those loans were taken, and it now looks
to us to be a pretty bad time to force those bonds on the market.
They are being more or less liquidated. We have been endeavoring
in our own bank in the last month to force Liberty bonds on the mar­
ket, but they do not go on very comfortably. People who have to
part with them and lose 13 points do not part with their money very
gracefully. But as to the district, I think we are in a very com­
fortable position, because if anything should turn up and we" would
have to sell our Liberty bonds we have a margin to go on.
I can not say that I agree with the representative New York bank
on the discount rate. The Pennsylvania district is strictly a 6 per
cent district. We have a legal rate of 6 per cent in Pennsylvania
and we can not make it any higher, by contract or otherwise. There
is practically no profit in borrowing money from the Federal re­
serve bank to-day and loaning it to customers. It is an accommo­
dation to them. I can not see how anything is going to be gained
by raising the rate unless it is absolutely necessary. I do not see how
it will accomplish anything. If it is necessary to borrow money,
the money is going to be borrowed anyway, whether the rate is 7
per cent or not. In our operations we are simply lending the money
necessary for legitimate business, putting our indorsement on the
paper, without a profit. Of course, if there is an advantage in
making the rate 7 per cent, we will stick to it, because we intend in
every way to cooperate with the Federal Reserve Board in doing
what they think is necessary.
Governor H a r d i n g . May I ask if a 7 per cent rate in New York
would force your bank to put in a 7 per cent rate also?
Mr. W a y n e . No; but you know the general custom is that when
one bank raises its rate we usually get a suggestion from the Federal
Reserve Board that they will approve a raising of rate for our
district, and that usually goes through.
Governor H a r d i n g . Not a suggestion, but a mere categorical state­
ment of fact----Mr. W a y n e . We have the privilege, of course, of acting on our
own best judgment when it comes to making rates, and that is the
way I understand it.



Governor H a r d i n g . Would a 7 per cent rate in New York impose
upon your bank the necessity of following suit?
Mr. W a y n e . I would not think so, but probably we would make
the rate 7 per cent if New York made it, because we are pretty
close to each other and it is remarkable how they will switch over
from one district to the other. Everybody thinks that Philadelphia
is a very rich town. When you find money at 6 per cent in Phila­
delphia and higher in New York, Chicago, Boston, and other places,
the merchants will come down to Philadelphia because the rate is
lower than it is elsewhere. Being upon the 6 per cent rate in
Philadelphia you get your money at 6 per cent or you don’t get
it, and very frequently lately they haven’t got it at all, although
we have taken care of the legitimate business and will continue to
do so. We are not unduly alarmed over the situation, but it requires
Governor H a r d i n g . How about transportation facilities with you ?
Mr. W a y n e . Very poor. The freight blockade is serious. I do not
think during the past few weeks that the transportation situation
has shown any improvement.
Governor H a r d i n g . Is there any other director from the Philadel­
phia district who desires to be heard ?
Mr. D o u g l a s . Mr. Chairman, Mr. Wayne has covered the ground
very well so far as our district is concerned, but I would like to
say that it seems to me .that what we need most to-day is the co­
operation of all the banks in this country with the Federal reserve
bank. At the present time I do not think they are having the fullest
cooperation. Some of the banks, of course, are cooperating to the
fullest extent, while other banks I do not think are cooperating.
They are a little half-hearted in it, not, I think, because they are
antagonistic, although there are some banks that are antagonistic.
But it seems to ine that if a letter stating the actual conditions that
are prevailing at the present time in the country were sent to the
various banks, not only member banks but other banks throughout
the country, in the way of a plan of education, showing the banks
the exact condition, that it would be very beneficial and would help
a great deal in the deflation of credit. I think that a great many
of the country bankers, if they understood the situation thoroughly,
would cooperate to a greater extent with the Federal reserve banks.
Governor H a r d i n g . Is there anyone else from the Philadelphia
district ?
Mr. M u r p h y . I think that the Philadelphia situation has been
pretty clearly set forth. There has been some criticism of the district
because we nave been rediscounting, but I think your records here
will show that before the war Philadelphia had perhaps as strong
a reserve position as any other district in the system. There was a
combination of peculiar factors that entered into it. There were a
great many war contracts that were canceled in the district; there
was an oversubscription of Liberty loans, and a very large borrow­
ing coming in from other districts; but all that is being corrected;
the borrowings are going down and production is being kept up, and
it seems to me that the situation will solve itself, so far as our district
is concerned, without any further increase in the rediscount rates.
Governor H a r d i n g . We will hear now from the Cleveland district,
No. 4.



Mr. W a r d r o p . Mr. Chairman and gentlemen, fortunately or un­
fortunately we have never had any trouble in maintaining our 40
per cent in our district. As to the question of an increase in rate, if
we were to take only our own district into account I would say, u No,
it is not necessary to increase the rates ” ; but we must consider what
is best for the entire country, and after hearing what the other gentle­
men have to say who are going to speak I may change my mind and
think that it is necessary to have an increase in rate to-day.
What we lack to-day in this country, as Governor Harding has
said, is efficiency in labor and economy and transportation. I think
that these three things are bound to cause some depression in busi­
ness; in fact, it has already set in. I think a reasonable depression in
business will be a good thing for the country. I think it can be so
handled that it will not be serious. I think the Federal reserve banks
can prevent any serious condition arising; but I think we must get
down to a lower level. There is lots of business in this country, and
I think good times are ahead of us. I really think we would do better
if we could get down to a lower basis, a different basis, and then from
that we can work up again.
Now, on the question of rates, and how they should be controlled,
I think that is a matter that must start at the bank counters. Each
bank must decide, the bankers must decide in their particular banks
with their own customers, as to what loans are essential and as to
what they shall do about them. I think that is the place to start. As
to the question of certain banks that may be overborrowing, I think
that is a matter, of course, that would have to be determined by the
Federal reserve bank and possibly by the Federal Reserve Board;
but as to the local situation, as I see it, I think there is no serious
danger ahead of us. I think if we just keep our heads and are care­
ful in restricting improper credit that the situation is perfectly sound.
Governor H a r d i n g . Does anyone else from the Cleveland district
wish to be heard ?
Mr. S a m s . I agree with Mr. Wayne in his view that the question
resolves itself, in the last analysis, to the work of the individual
bankers over their own counters. We are fortunate, probably, in
having a district that is very symmetrical in its activities, in industry,
commerce, and agriculture. As a group 3 member, I can speak more
particularly for the farmers. The farmers are just at this moment
borrowing more money than they have done in several months, but
that is due to two causes—first, a seasonal cause, the planting of crops
for this year, and, secondly, because of the jam in transportation.
That is not permitting them to market their live stock and their prod­
ucts as promptly as they otherwise would do.
Governor H a r d i n g . I s there anyone else who desires to be heard
from the Cleveland district?
Mr. L a m b e r t o n . I am only the baby director, Mr. Harding. Mr.
Wayne and Mr. Sams have expressed the feeling of the directors of
our district and I will not take up any more of your time.
Governor H a r d i n g . We will now hear from district No. 5, the
Richmond district.
Mr. B r u t o n . Mr. Chairman, I think you will agree with me when
I say that Richmond feels very comfortable, sitting in the same row
of seats with Cleveland. Just at this time we are specially interested



in agricultural demands, and the farmers are getting more loans now
to take care of that than formerly, on account of the large expense
of making the crops. We hope it will not be necessary to increase
the rate of interest for fear that it might be construed as a reflection
upon this great industry, which, in the final analysis, is doing the
work of the country. Probably I am a little old-fashioned, but I
have the impression that some positive relief could be had at the dis­
count table of the Federal reserve bank, by the discounting com­
mittee, in drawing in on a certain few banks in the district and
limiting their borrowings, which would give to their banks the
opportunity to make essential arrangements.
I did not want to go into this progressive-rate proposition. The
more I study it the more it gets to be like the study of real property
that I had to study when I was reading law, rather complex and
complicated; but if we could say to our overborrowing banks that
we would make an appreciable increase in the discounts on them, say
five times the formula that has been set forth, and begin to cut at
the top, it would give some of the smaller banks an opportunity of
borrowing for their needs during the season. We hope that the rate
will not be increased. We feel that it would be a mistake in our
district, and I think the relief can be had at the discount table, if
necessary, by increasing the rate against those banks that are bor­
rowing too much money. Some of them have two feet in the trough
already and it might be advisable to reduce on some of them.
Governor H a r d i n g . Does anyone else from the Richmond district
desire to make a statement?
M r. M a n n . This is a meeting of bankers to discuss banking ques­
tions. I am from the coal fields, and I have made a study of the
situation in West Virginia, and the difficulty with us is the ques­
tion of transportation. The operator is getting out about 50 per
cent of his production—I mean he is getting cars for only 50 per
cent of his production, and he could produce twice as much if he
had the cars ready to transport his material.
Mr. R i e m a n . JV Chairman and gentlemen, the situation of Balti­
more is somewhat like that of Philadelphia and New York, only on
a smaller scale. Some of our large banks are large borrowers, but
chiefly because of their commercial business. There has been some
curtailment with us lately by reason of the 6 per cent rate. I do not
think in our locality we have had the full benefit of that increase in
rate yet. By that I mean that in another month’s time there will be
more loans paid off, by the merchants, on account of the rate. I
hardly see the necessity for increasing the rate at this time. The
transportation situation is bad, particularly in the sections where
the ocean steamers go out. Agricultural conditions in Maryland are
rather bad on account of lack of labor.
With regard to the retail business, I have made a pretty close
examination of it and I do not think the shelves are overloaded.
Governor H a r d i n g . We w i l l h e a r from the Atlanta district, No. 6.
Mr. O n x E Y . Mr. Chairman and gentlemen, the condition of the
fanners, merchants, and manufacturers in the sixth district is gen­
erally good. The condition of the banks throughout the district,
in large majority, is good. The borrowings in excess from the Fed­
eral reserve bamt by the banks of the district are confined to a very
few banks, and through the officers and the board of our bank the



matter has been taken up directly with all of the borrowing banks,
particularly with a few that are excess borrowers, and they have
been told in j^olite but positive terms that there were others who had
to be accommodated later on and that they must get their houses in
Governor H a r d in g . How do you account for the very large bor­
rowing at your New Orleans branch?
Mr. O t t l e y . Well, I am able to give you some late information on
that. The Atlanta board met with the New Orleans branch officers
last Friday and Saturday, and Doctor Saunders, who is well known
to you, got up and made an explanation in behalf of the New Orleans
banks and explained that they were caring for the cotton from
Mississippi, Oklahoma, Arkansas, and even as far out as California,
which was being shipped into that port.
Governor H a r d in g . Was it shipped there to be shipped out? Is
there any sale in prospect, or just being brought in there on
speculation ?
Mr. O t t l e y . They claim that the transportation problem is a
serious factor in their very large holdings. They lay great stress on
the transportation problem, and said that strikes had been in prog­
ress in New Orleans, from one class of labor or another, since last
fall. They seem to think that the situation is better now. They
stated, for illustration, that four ships, which had contracted to
bring in sugar, if I remember correctly, in January, February,
March, and April, all had landed there just a few days ago and
dumped their cargoes, which, of course, had to be cared for.
I will just answer one question that you asked Mr. Wayne.
Speaking from a 6 per cent district, we would not feel at this time,
from an independent standpoint, that a raise in the rate was neces­
sary, other than to put in this basic line and make the penalties very
strong as they progressed. I think that would take care of the ex­
cess borrowing of banks, but the large operators all carry accounts
in New York and Atlanta, and if the rate was raised in New York it
would necessarily cause us to raise the rate in the sixth district,
to protect ourselves, or otherwise we would be swamped.
Governor H a r d i n g . Does any other director from the Atlanta dis­
trict desire to be heard?
Mr. N e w t o n . I come from the agricultural and lumber section of
our district, and one of the sections, the agricultural section, is mov­
ing along in good shape. The crops are in fairly good shape so far.
There is considerable congestion in the movement of lumber and
the shortage of cars has interfered very much with the outgoing
lumber. As Mr. Ottley stated with regard to New Orleans, the grain,
sugar, lumber, and cotton situation has caused these banks to do a
greo.t deal of borrowing.
Governor H a r d in g . Is there anyone else from Atlanta?
Mr. K i t t l e s . The Group 3 banks in the sixth district are in very
good condition.
Governor H a r d i n g . District No. 7, Chicago?
Mr. R e y n o l d s . Governor Harding and gentlemen of the board,
believing as I d8 that if we pass through this crisis successfully and
maintain prosperity in anything like its present level, I think the
first requisite necessary is the maintenance of confidence. Believ­



ing, furthermore, that confidence is to a considerable extent a state
of mind, it seems to me that we people who are from the outside
points here could do more for the state of mind, along the line
of trying to enable the members of the Federal Reserve Board to
look through our glasses and get the focus of things as we see them
at the other end of the line. Those pictures, of course, are all
helpful, and they are necessary, in the last analysis, to the reaching
of a conclusion as to what is necessary to be done.
It seems to me that in the present situation a campaign of edu­
cation is the best means calculated to reach a great many people
and do a world of good. You must not overlook this fact, that
ever since the first agitation of the currency* and banking legisla­
tion, stress has been laid upon the system and its ability, and every
speech made by every man everywhere throughout the country has
been to that effect, and the public has come to believe that there
is no limit to the amount of credit which the Federal reserve banks
can extend.
Now, in the Chicago district, when we found business rather
overextended, we began to ask these people to reduce their loans,
and they rather thought that we were joking with them. There
was a question as to whether or not we were really serious and
whether or not there was a real necessity for our asking them to
cooperate with us.
It is my personal belief that we ought to approach this whole
thing from a broader and wider angle. I say it is an aftermath
of the war. It is one of the conditions that grew out of the war,
and before the war, and during the war itself, there was not a
man anywhere in the country, that stood for anything, that did not
offer his resources and himself to do everything in the world he
could for Ihe accomplishment of the purpose of the Government
in the winning of the war. I think if we can follow out the same
plan in a campaign of education that it will be very helpful, if
we impress upon tne people of this country that this is a war prob­
lem and that there must be cooperation now the same as before,
that they must have the same patriotic spirit in meeting and in
solving this problem that we had in meeting and solving our other
For myself, I think we are making splendid progress in our dis­
trict. The history of the Chicago bank and the record of the Chicago
bank is one of which its directors may well be proud. I know that
for three years prior to the 1st of March, or the 1st of April, at any
rate, the Federal Reserve Bank of Chicago carried large amounts
of rediscounts with other Federal reserve banks in the country, and
it did it with pleasure and pride; it carried amounts varying any­
where from thirty to a hundred million dollars, approximately, and
we did that because we thought it was our duty to do it. Yet," when
conditions obtained, resulting from the war, which made it necessary
for our bank to rediscount a few million dollars, our governor be­
came a little discouraged. He thought that was putting the shoe
upon the other foot. However that may be, I think the Chicago bank
rediscounted perhaps up to $55,000,000, and the statement of yes­
terday morning shows that it has been brought down to $10,000,000,
indicating that we are in very good condition.


fe d e ra l reserve


c o n fe r e n c e .

I might say that so far as I am concerned, I am ready and willing
to do anything and everything necessary to help correct the situation.
If it is necessary to have penalties, to take a loss of profits, or to put
Government restriction upon business, anything necessary to do, 1
am ready to do my part, and I think I have always been ready to do
it. But I would not be honest with myself if I did not express my
own frank opinion on some of the questions that have been raised
here. I have not lost my belief in the theory that the yardstick is
the interest rate,- which is after all the best means for controlling
demand for money. If these conditions are such that it is necessary
to raise the rate to 7 per cent, let us raise it to 7 per cent, and in our
district we will be perfectly willing to do whatever is necessary.
Now, on this question of graduated rates of interest for loans by
Federal reserve banks, I hope the Federal Reserve Board and the
other people interested in this problem will not overlook this one
principle: As 1 understand it, reserves are kept and enmassed and
impounded for the purpose of loans in times of emergency. Now we
all know that the country banker that is not borrowing now is in the
little restricted districts where there is no occasion for it, but when
you talk about the New York situation, as expressed by Mr. Alex­
ander, they are operating world-wide; they are dealing not only in
their own States, but almost over the entire world, and it stands to
reason that they are the strictly commercial institutions that must
bear the brunt of this burden. Take the central reserve cities and
there are deposits in those banks, as you know, secondary reserve
deposits, which since the organization of the system have been lying
there dormant. In times like this, when there is an emergency, there
is a shrinkage first in deposits, and then many of these institutions
come back on us for credit requirements which are not borrowers
ordinarily. We have that situation in this crisis. Many of the large
banks, metropolitan institutions in their communities, have come to
us for help, and we have had to give them help because they have
had reserve balances. We regard it as our duty to help those banks
and to prevent failure. They come to us and say frankly, “ We have
got to have help; we admit it from the beginning, and. we can not
give you paper that is eligible.”
That is the principal trouble, and it is the trouble with all the big
institutions in other cities all over this country. A man will come
to us and want a million dollars. He has had a large balance with
us, and we talk to him and ask him to get along with as little as he
can. We say to him, “ Don’t take all this money now; take a little of
it and come back a little later, and if you need it we will try to help
you through with it.” In every institution in this country there is
a large amount of paper which is not eligible for rediscount at the
Federal reserve bank, but at the same time it represents the very
cream of paper in so far as the question of safety is concerned—I
do not say liquidity—but in so far as safety is concerned. At times
like this of course that is a burden on the banks, and it is those con­
ditions with which we have had to contend. We have been for three
or four weeks past holding the loans down; in other words, there has
been no increase, but there has been a little diminution in the loans,
and we think that is making splendid progress.
Now, it may seem to you people here that under conditions which
arise whereby there should be deflation rather than inflation, that



ihe banks should stop loaning money. That is just as impossible,
without trouble, as it is for us to fly out of this room, but I think
the banks in the seventh district and the bankers in the other parts
of the country, so far as I know, are doing their utmost to cooperate
with each other in this matter, and I haven't one particle of fear
about the outcome. It is just a question of using what we might
call horse sense and not getting stampeded, or excited, doing some­
thing under stress of excitement, or going off, as we sometimes say in
the country, half-cocked.
I think we are making progress. I am not worrying about what
the fall demands for money are going to be. Let us go ahead and
correct this condition. I think we will find that the fall condition
will adjust itself along with these other things.
With regard to Mr. Williams’s question to Mr. Alexander, I want
to say one thing on that, and I think I can say it without fear of
successful contradiction, and that is that profiteering is not confined
to the small operations, but if you will look at the books and records
of a great many of the high-class institutions you will find there that
they are making enormous amounts of money, and you have got to
leach them somehow.
Mr. W i l l i a m s . I a g r e e w it h y o u f u l l y .
Mr. R e y n o l d s . That is the situation. Those are the people we
have got to get after, too. W have an illustration of that condition
in the sugar situation. I heard of a case in the Northwest the other
day where the sugar was passed around and yielded a profit to half a
dozen middlemen----Mr. W i l l i a m s . Before the consumer got it?
Mr. R e y n o l d s . Yes; before the consumer got it. WTien I came
home from my vacation in California I found there were rediscounts
higher than they should be, and in one instance I was given an ex­
They said to me, “ Mr. Reynolds, we had to loan between $25,000,000 and $30,000,000, approximately, to take care of the tax require­
ments of our customers.” I said, “ You do not have to pay the taxes
of your customers.” He said, “ We realize that is an obligation of
the public to the Government; we know the Government is having its
difficulties in financing; we know the Secretary of the Treasury put
out Treasury certificates last May and wanted us to carry them, and
the Feneral reserve banks heretofore had been carrying them: there­
fore, we thought we were serving the general condition.” That is
the situation. The great majority of big corporations to-day who
had to pay a large amount of taxes had to borrow a very large amount
of money. How we are going to pay the next tax which comes due
in June "is not bothering me just now. I bring these things to your
notice because I believe this meeting ought to be one that will enable
us to give a viewpoint of things we get at the other end of the line.
I said to a banker the other morning, “ How do you like being a
banker nowadays? ” He said, “ Sherman said,4War is hell; ’ ” but,
he said, “ I would rather be in the trenches on the other side than
loaning to the banks these days.” That illustrates the state of mind
toward the people and in our institutions in Chicago, and I think
in all institutions we do not go down so deep to analyze to any great
extent as to whether this is a nonessential or an essential, but we take



it right by the scruff of the neck and try to .determine whether that
fellow must have that money, and if he does not have to have it, even
though it is essential, we put him on the waiting list. That is my
theory, of the way to correct this situation, and I give ymi my obser­
vations, thinking after all this whole thing is very largely a matter
of sentiment and very largely a matter of determination on the part
of the bankers to cooperate with the board and of the board to co­
operate with the banks, and if that could be done we will sail through
automatically, and we will have a little demobilization in business
without any apparent damage to any particular class of business.
It is a case where you can not get “ George ” to do it; everybody has
got to do his part if a reduction of the loans is to be brought about.
I thank you, gentlemen. [Applause.]
Governor H a r d in g . Is there any other Chicago director to be
heard ?
Mr. M cN idek. We heartily concur in Mr. Reynolds's statement. I
want to say further we are pleased more than I can say at the attitude
of the Governor of the Federal Reserve Board. Your talk, Mr.
Governor, is one which should be in the hands of every banker in
America. You have reflected the sentiment as it should go to every
bank. The good sense, the intelligence, and the courage of that talk
should be distributed. It is educational in its way and should reach
The mid-West is not disturbed materially. We are suffering, as
other districts are, by lack of railroad facilities. Iowa, for example,
has a lot of live stock and grain that is unmoved, and it will come in
as the railroads are able to handle the situation.
We believe that the Federal Reserve Bank of Chicago has been
handled with sanity and courage; that they have taken care of the
conditions as the conditions arose; that they have not been fearful of
the things that come up, and we believe we have in our organization
a lot of brains, a lot of banking courage, and a lot of banking ability,
and out of that we expect that the position of the Chicago banks
will be one that will meet with the approbation of almost everyone.
We are agricultural largely. Our principal industry in the seventh
district is agriculture. What we need more than anything else is
a statement to the people that they may be educated along the right
lines of what the real conditions are. When we have that you may
rely upon the sanity, the courage, and the reason of the seventh dis­
trict to do its part.
Doctor M i l l e r . What would Chicago suggest as the method of
educating the people to an appreciation of the existing emergency?
Mr. M c N id e h . In Iowa just now we are holding a series of group
meetings, 11 groups in the State, and in those meetings talks are
being made to the bankers of the entire State, 2,000 in number, along
the lines Governor Harding so well advocated this morning. We
feel there must be reason, there must be sanity, that the essentials
must be taken care of, that there can not be an extraordinary cutting
down of credits at this time, because that would create disaster, but
we feel it must lie in the judgment of the banks themselves as to
how they may extend their lines and how to curtail them. The
banker at his counter must meet the individual cases as presented
to him.



In general the governor’s line is one we firmly believe in. We
believe there should be reduction; that there is too much inflation,
but that we ought to deflate in a sane and reasonable manner.
Governor H a r d i n g . I s there any other Chicago director to be
Mr. J o h n s o n . Gentlemen, I do not know that there is any more to
be said than what has been said, but the governor in his speech has
gone right to the point, and I believe it should be distributed and
it should be emphasized in part. You said, sir, there were 300 banks
that were exceeding their capital and surplus probably in their
rediscounts and there are 7,500 other member banks not doing that,
and 23,000 nonmember banks not bound at all by the system. Now,
it would seem to a good many that the proper thing to do would
be to put our finger on the sore spot and press it until we cured it,
but I do not think that possible. I believe that education and propa­
ganda must be carried on, with authority and with strength, car­
ried on from this board and from these gentlemen here down to all
the nonmember banks on to the small business man in the small
The assets of the nonmember banks, -^ith which I am acquainted,
are very largely in nonessentials. The borrowing was done for the
purpose of carrying property and not for the purpose of producing
anything except speculative profits.
One great thing we need is leadership. I think that our chairman,
in pointing out what the Federal Reserve Bank of New York is
doing with its people, pointed out the way to develop leadership for
the banks. Every one of them is more or less of a leader in his own
community, and that leadership should be developed, and through
them the education carried out, because it has brought us to the
situation where we are—that may have been diminished, but we are
still operating, and whatever we may do the possibilities are that
in six months we will be in no better position than we are now. The
reserves are exhausted; they must be restored; they can only be
restored from the bottom: the top is doing the best it can: the man
in charge of the important bank is struggling with the situation
and doing his best and doing it successfully, but there is a glacial
movement underneath which has got to be controlled; it has got to
be controlled through this board and these banks and through these
gentlemen and their associates reaching down to the bottom, I be­
lieve, and I believe, Mr. Chairman, that your speech, properly dis­
seminated among them, with the show of authority, even if you do
not have it, will bring it about.
Now, as to discount rates, of course with 300 banks borrowing
above the limit and 7,500 not, the remedy is obvious, but I agree
with Mr. Alexander that the psychological effect of the raising of
the base rates to 7 per cent would be—it was suggested at 8 per cent
from the Federal Reserve Bank of St. Louis.
Governor H a r d i n g . Is there somebody here from the eighth dis­
trict, St. Louis?
Mr. Z i e g l e r . The eighth district is unfortunately not being repre­
sented by Mr. Walker, of St. Louis. However, I should be glad to
have you hear Mr. J. C. Utterback, of Kentucky.
Governor H a k d i n g . Mr. Utterback.



Mr. U t t e r b a c k . Mr. Chairman and gentlemen, it seems the peak
of this credit expansion has moved in circles, starting at Dallas
coming on over to Richmond, Boston, New York, Philadelphia, until
at present it seems to be resting at St. Louis, and I believe that we
are bearing the burden at this time* The St. Louis district, its
directors, and its officers are bending every energy to meet this
situation, and I have no apprehension but what they are going to
meet it successfully and very quickly.
We have a varied commerce to deal with, agriculture and lumber,
jobbing and manufacturing, and tobacco. In the western part of
Kentucky, from where I come, the tobacco situation has been most
serious and most appalling, due to the foreign exchange situation.
1 presume that we have west of the Tennessee River—we do not
reach into Tennessee—$ 2 0 ,0 0 0 ,0 0 0 to $ 2 5 ,0 0 0 ,0 0 0 worth of tobacco
that has not yet moved. I would hate to see the discount rate raised,
for the reason that in Kentucky we are limited to 6 per cent, and
we can not pass it on to the borrower.
I believe that large borrowers in the Federal reserve bank system
to-day should receive the most earnest consideration of the directors
of those banks. If you will take the large banks of Louisville, and in
Memphis, and in St. Louis they have a world of country corre­
spondents that are not members of the Federal reserve" system,
although those banks are carrying the burdens of the country banks,
which in turn are carrying the burdens of commerce and of trade
and of production, and I believe that when a bank gets over its
bank line it should not be arbitrarily dealt with, but it should be
dealt with in the most exacting way, in a way that will enlighten the
directors of that bank as to just the exact cause of that situation.
I believe that St. Louis will in a very short time begin to build
its reserve up and be out of discounting with other Federal reserve
Governor H a r d i n g . District No. 9 , the Federal Reserve Bank of
Mr. M c D ow ell of North Dakota. M r. Chairman and gentlemen,
it is just like going to school to me to be at a Federal Reserve Board
meeting of this kind, because I live in a little country town of 3 0 0
people, where I farm 9 0 per cent of the time and run a bank morn­
ings and evenings. M r. Decker is here from Minneapolis and he will
give you the classic talk on banking, the same as Messrs. Alexander
and Reynolds have done for New York and Chicago.
I just want to say to you that I do not like this increase in rates.
Out in our part of the country we have been going a little bit wrong
in our thinking, so much so that we have established a bank of our
own, called the “ State Bank of North Dakota,” and the farmers,
seven-ninths of them pay all the taxes in our State, and they are
looking for something with which to shoot it into the big business
and into the banker, and I think that any method that would raise
the rate arbitrarily when he has had four or five years of poor
crops—any of the 700 or 800 small bankers over that State, whose
average deposits probably do not exceed $200,000; when he is com­
pelled, after the stress of those four poor crops; when it costs $15
to $20 an acre to plant an acre of wheat up in our State; when hay is
$25 to $30 a ton; when oats are $1.25 a bushel; when it costs $5 an



acre to sow an acre of wheat; when barley is $1.T5 a bushel; when
farm labor is $100 to $125 a month; when those conditions prevail
it looks to me like the institution that they told us when we started
the Federal reserve system that was going to take care of us and
prevent panics was now going to fall down and penalize them just
the moment that the Giver of All Good Things had failed to give us
our share of prosperity during this war.
It seems to me that now is a poor time to penalize the little fel­
low, and I am afraid we are just going to create a little more un­
rest out in the Northwest, where socialism has got such a strong
foothold now, if we do not look at this thing not from any other
standpoint except that of safety. The Federal Reserve Bank of
Minneapolis is making $10,000 a day. Is that profiteering when they
have been using our money without any interest ever since it started?
Is the Federal Reserve Board going to be put in the same class as
the sugar profiteer and the manufacturer who has been making big
money ?
Only just the other day down in Chicago a Federal judge took
judicial notice of the fact*that the Federal bank employees were too
lowly paid and let a man go who was charged with an offense because
he had not been getting money enough.
Governor Harding, if your address could be published over North
Dakota in substance and in detail just as you have delivered it this
morning I know of nothing better to cure the conditions up there and
get people to understand. We have been accustomed to read the
reports and interviews of the New York Wall Street people; our
people have become surfeited with them and have revolted against
it; we have had the opinions of railroad kings and big men down
there, but your bank is known over our country as a Government
institution in which the people have something to say about its
management, and out in our country to-day the men whose sayings
are read the most now, since the passing of that great man, J. J. Hill,
who was a bigger business man than even a railroad man—the men
whose interviews are read the most are the interviews of men like
Mr. Decker and Mr. Rich of the Federal reserve bank.
So I say again that it does not seem to me that now is the proper
time to increase our rate. We want to cure that unrest out there
more than we do anything else. We want to stop some of this high
finance in politics, in business. We want to do as Mr. Reynolds so
well said, we want to learn to stand together now in times of stress,
the same as we did in times of war, and I think we should move
very, very slowly in that regard. [Applause.]
Governor H a r d i n g . Is there any other director from the Minneap­
olis district to be heard? District No. 10, Federal Reserve Bank of
Kansas City.
M r . M i t c h e l l , of Denver. M r . Chairman and gentlemen, I hap­
pen to be a class A director of the Kansas City district, representing
group 1. About a month ago in our meeting there in Kansas City
we thought we were rapidly reaching the danger line; our reserves
were very, very low; I think on that day they were below 40 per
cent. We felt that it was necessary to rediscount, and we did re­
discount to the extent of $15,000,000.
I was in Kansas City on last Thursday; I found that our redis­
counts had been paid off to the extent of $10,000,000 and our loans



had been reduced to about that same amount, while our reserve was
pretty well maintained; I think it was about 47 per cent. Gentle­
men, in my opinion we corrected the trouble there by putting in the
progressive interest rate; we felt that we had to do something. We
considered it a little bit drastic, but we thought we would try it,
and we did try it. On last Thursday in Kansas City—we heard
nothing but words of commendation even from the banks; they were
paying a good, high and stiff rate of interest; but I heard nothing
but commendation of that policy, so I believe it is one of the remedies.
Our situation in Colorado, I think, is very much better than,
almost any other portion of the tenth district. We are not large
borrowers in Colorado. Our Denver banks are, I believe, only bor­
rowing about $7,000,000, with over $100,000,000 of deposits. The
entire State, I think, is borrowing something like $8,000,000, or the
entire district the Denver branch represents borrowing about
$8,000,000, so that it is pretty light.
Conditions in Colorado are very good. So far as the water situa­
tion is concerned it looks as though we would have an absolutely
full reservoir, every reservoir in the State. W e have never had so
much moisture. Conditions are a little bit backward; we are about
30 days behind. We never have had anywhere near approaching
the acreage which will be planted for sugar beets. The Great West­
ern Sugar Co. alone fias over 300,000 acres contracted.
The situation in Wyoming and in Montana, which is not in my
district but we are closely in touch with them, the cattle situation
there is very bad on account of the drought last year. The stockmen
have lost millions of dollars by death and by having to ship these
cattle out before they were mature for the market, and the conse­
quence is the herds there are very much depleted and they have got
to have some relief from some quarter or other and it means, in my
opinion, we have got to finance them and take a good many chances
on their being good.
Governor Bailey is here and Mr. Burnham.
Governor H a r d i n g . Governor Bailey.
Mr. B a i l e y . Governor Harding and gentlemen: I would be just
reiterating what Mr. Mitchell has said in regard to conditions in
Kansas City. First, I want to say that if we had ample railroad fa­
cilities to relieve our situation in Kansas City, speaking for my own
State alone, our agricultural report is that we have got 27,000,000
bushels of wheat in the elevators and in the bins adjacent to the rail­
roads ready to go. I think it is nearer 40,000,000 bushels of wheat
that could go to market at once if we could get railroad facilities.
I will give a little concrete example of my own case. I loaned a
man $25,000 in October on wheat at a station only 60 miles from
the Missouri River, for 30 days. No note was ever given in better
faith or was contemplated to be paid at the end of 30 days on the
theory that he would ship the wheat. I have renewed that note for
him consistently every 30 days since and it is still unpaid and the
wheat is still in the elevator. We are soon going to have two crops of
wheat in Kansas, and I have discovered this situation: A little
banker, that lives north of me, to whom I loaned money, went up to
Falls City, which is the headquarters of the officer of the Missouri
Pacific who distributes cars for that division, and he begged him for
some cars* He said, “ I would be glad to do it, but I have just come



back from the East and they have taken 200 box cars off of my di­
vision and sent them to Minneapolis.” I do not know who told him
to do this, I did not learn then, but he said he had been East and
somebody had told him to do it, but I should like to have somebody
analyze to me the philosophy of sending 200 box cars to Minneapolis
when their harvest is three weeks shorter than ours, and we have got
two crops of wheat in Kansas to go pretty soon.
I just want to emphasize this railroad situation, gentlemen, be­
cause that would solve very largely the financial stress of the Mis­
souri River.
As Mr. Mitchell said we are the initial bank of this graduated rate.
We have been talking deflation to every one of the men who have
borrowed more than their capital and surplus that was the old basis
we figured on—and you can take it from me that you may talk
patriotism and conservation taa man who can make money until you
are black in the face, and you have got to make it unprofitable for
him to stop it, and when we ha-d put that progressive rate in a couple
of days I went through the banks of Kansas City, and when I would
go in they would say, “ Governor, we do not know what this is going
to mean to us, but we want to tell you that our bank is in fine shape,
and tell me how much automobile paper and how much wheat paper,
and I do not know how jnuch other paper, and they had discovered
it within five days from the time we put this rate in. It means also
that they have gone through their portfolio and made a difference
between essentials and nonessentials and reduced discounts in those
banks a great many million dollars to the detriment of nobody.
I am well convinced, gentlemen, that you will bring the Federal re­
serve bank system back to a reserve system rather than a commercial
system if you will make it unprofitable for certain great banks to use
the funds of other banks.
I run a country bank, with about $3,000,000 average deposits. I
do not use the Federal reserve bank. I am one of the kind that
George Reynolds says lives in a provincial community where they
do not do anything, but we have got a pretty good community up
there all the same. But I have got the fear of God in my heart, and
I went out in the highways and byways and listened to the siren who
brought big business to me, and I thought it was fine business when
he will deposit his great volumes of money and laid this obligation
of credit. I have not got him on my hands to a very large extent,
but I am running on the lower reserve on the theory that I have
down there $500,000 credit in the Federal reserve bank, if somebody
does not use it when I want it, and if I did not have that, instead
of going on 20 per cent reserve I would be running on a 50 per cent
reserve, but if I should go down there some day and find out that
Brother Smithy—if they were all the same kind of banks he has got
we would have no trouble—but if the men who have abused that
privilege, having used all the funds and taken the resources out of
the bank, I am confident that I, with every other conservative
banker in the tenth district would feel aggrieved, and justly so.
So I say, gentlemen, I think the real remedy is in a graduated
rate. Of course, make the basis line whatever you want, and let us
say you would raise the rate to 7 per cent. Now, the only complaint
we have among our banks is, there ought to be a maximum rate. T
S. Doc. 310.67—



do not believe that, gentlemen. I would put a danger signal here,
and another there, and another up here—that is, death; and he will
never go against the death signal. You have made the Federal Re­
serve Bank of Kansas City a broker shop, you have changed it from
a reserve bank to a commercial bank, and I want to get it back, and
that is the reason I am in favor of the graduated rate. [Applause.]
Governor H a r d i n g . Mr. Burnham, of Kansas City.
Mr. B u r n h a m . Mr. Chairman and gentlemen, I simply want to
repeat what Governor Bailey has said representing the group 3
banks; and living in Nebraska I can probably be accused of being
one of the main offenders Nebraska has in the overextension, but
that, gentlemen, has been owing to the transportation conditions.
Possibly Govemor'Bailey’s story of the banker up there who went
out in the sand hills and solicited business was true at the time that
that was done. He has learned a lesson and he has not been a very
pronounced offender during the last year. The offenses that have
come from Nebraska have been by reason of six weeks of the very
worst roads that ever were thought of in the history of the State. It
has been an impossibility to market any grain or to move any live­
stock. The northern part of the State has been inundated; rail­
roads have been washed out; in fact at the present time the North­
western System has got no service west of Long Pine and does not
expect to be able to establish a connected service for the next two
or three weeks. Tracks have been washed out for two and three
miles, and the bridges over the Cheyenne and the White Rivers have
been lost. On the main line, from Omaha west, we have had at
one time not one bridge in 80 miles across the Elkhom River that
was passable.
Now, we have got in the neighborhood of twenty-five to thirty
million bushels of corn yet to be marketed. That will not be con­
sumed by feeders, but will actually go upon the market. We have
got what is estimated to be four to five thousand cars of live stock.
Now, if we can be given the privilege of marketing our stuff, Ne­
braska, from being an offender for having overextended, will be col­
lected very rapidly, and we do not have any fear, if we are not re­
stricted at the present time with regard to the live stock in the west­
ern part of the State going onto the pastures.
The very necessity under this graduated form of interest rates has
restricted loans out of Omaha. We find that it is almost an impos­
sibility to get money for the purpose of purchasing cattle to go in
onto the pastures and ranges. I f we could have some assurance at
the present time for that essential purpose I am confident that we
would go by in a very short time; in fact, with decent road conditions
30 to 60 days will see us, as far as we are concerned, in a very much
healthier and more satisfactory condition.
I thank you. [Applause.]
Governor H a r d i n g . May I say right here that at the recent con­
ference of governors of Federal reserve banks in outlining the finan­
cial requirements for the present season they all expressed the
opinion that come what may the reserves of the-Federal reserve
banks ought to be kept approximately equal, that they should go up
and down together. Now the Federal Reserve Board is not par­
ticularly concerned as to the source of the reserve so long as the



situation is properly and wisely handled, and it seems to me that
in this live-stock situation, which is a very serious situation from
all we have been able to hear, and it is an important matter, it ought
to be taken care of; that those banks which are most familiar with
the industry, the districts in which that industry is domiciled, should
be expected to do everything reasonable to take care of it, and
that if by reason of a Federal reserve bank in a particular dis­
trict taking care of the banks which are discounting for live stock
men, their own reserves are depleted, why then they should be ex­
pected to rediscount with some other Federal reserve banks who are
going to get the benefit of the live-stock product later on, and then
those banks in turn may have to rediscount with others, just as we
have seen the situation shift—there are only two banks in this system
which have never rediscounted. We have had all other banks, in­
cluding New York and Boston, as heavy rediscounters with the
South and West; then we have the present situation when New York,
Boston, and Cleveland are rediscounting for the other seven reserve
There is one thing, though, I want to get out of your heads. We
have observed situations here pretty closely; we have heard what the
Secretary of the Treasury has said and there is not any prospect
whatever of any Treasury funds being deposited in the cattle dis­
tricts. The Secretaiy has very strong reasons for that and I think
they would be convincing to most people. The Government itself
is a borrower now at
per cent; it has no funds, and he takes the
view that the Federal reserve banks of cattle districts should take
care of the live-stock situation in that district out of its own resources
as far as possible, that if it needs any assistance, should rediscount
with some other district.
Before we hear from Dallas and San Francisco, and in order to
save time, I understand that there is a resolution to be introduced.
It is very evident from what has been said here to-day that the tie-up
in transportation facilities is a very important factor in the present
financial situation, and I understand that a resolution is going to
be introduced relating to that subject. You might consider that
resolution, or those resolutions and then go on and hear from Dallas
and San Francisco. Does anyone present wish to offer a resolution
regarding, or submit a memorandum regarding anything?
Mr. P t j e l ic h e r . Governor Harding, I desire to o f f e r a resolution,
but not on the subject suggested.
Governor H a r d i n g . Suppose we dispose of the transportation
situation first.
Mr. F o r g a n . Mr. Chairman, I move you should appoint a com­
mittee of five to prepare a resolution in regard to the effect that the
present transportation situation is having on the expanded condi­
tion of credit in the country with a view to placing such a resolu­
tion before the Interstate Commerce Commission, requesting them
to do what in their power they can to relieve the situation by in­
creased freight rates, or otherwise; also, that it should be put before
the Shipping Board, so that they can provide, as far as they can,
vessels at the principal shipping ports to relieve the congestion there.
I move that such a committee oe appointed by the Chair, and that



they be requested to retire and prepare their resolution, and when
they have it ready, offer it.
(The motion was duly seconded and agreed to.)
There were appointed by the chairman the following members of
said committee: F. O. Watts, chairman; W. J. Bailey, George M.
Reynolds, R. H. Treman, and E. W. Decker.
The C h a i r m a n . Is there anything else on that?
Mr. P u e l i c h e r . I was going to hold this resolution until all dis­
tricts had been heard from, but inasmuch as there has been a general
approval of the spirit of your address, Mr. Chairman, I should like
to offer it now.
Resolved, That the bankers here assembled in their capacity as members of
the Federal Advisory Council, in their capacity as directors of the Federal
reserve banks of the country, in their capacity as members of the orderly de­
flation committee of the American Bankers* Asociation, and in their capacity
as officers and directors of banks doing business in the various cities of the
country, approve the sentiments expressed in the very able address of Governor
Harding as representing the views of the Federal Reserve Board, and
Resolved, further, That they believe that the widest publicity should be given
the address, and, further, that they hereby agree to abide by the spirit of the
address in their own affairs, and that they will encourage its general adoption
by bankers and people of our country.

I move the- adoption of the resolution.
(The motion was duly seconded.)
The motion was put by Mr. Puelicher and unanimously agreed to.
Governor H a r d i n g . Gentlemen, I am gratified that our views meet
with your approval.
Are there any other resolutions? If not, we will hear from dis­
trict No. 11, Federal Reserve Bank of Dallas.
Mr. S cott. Governor Harding and gentlemen, the hour is growing
late and I will detain you only a moment. The situation has already
been very fully covered, it seems to me, Governor, by some able ad­
dresses here, your own, for instance, and others following.
I wish to say for the Federal Reserve Bank of Dallas, eleventh dis­
trict, as the board knows and as perhaps the members of other banks
here also know, that that district is in a very large live-stock and
agricultural country. The district furnishes approximately 30 per
cent of the cotton that is raised in this country and exported, 85
per cent of which is sent abroad; that forms a very material part of
the credit balances that we get from the other side. Naturally, there
are times in the year when our bank must borrow from the system.
It is also true that when our crops begin to move *that we can pay
back our borrowed money and then assist financing in other districts.
Perhaps six months in the past year we not only were not borrowers,
but we were assisting in lending money in other districts.
We have recently begun to borrow again by reason of the fact that
our farmers are needing money with which to make the crops; also
a great deal of our cotton has not yet moved out, approximately a
million bales of cotton being carried in Texas to-day, one half of
which is for sale, but there seems to be no immediate market for it;
we simply have to wait until the market abroad will absorb it. A
great deal of cotton has been sold for future deliveries, and within
the next 90 davs a considerable portion if it will move out.
I do not believe that it will be necessary for us to borrow unduly
in the eleventh district. It will be necessary to rely upon the Federal



Reserve Board, and through it upon some of the other banks to assist
us in the next four months.
Speaking of the increased rates proposed by some of the districts,
I can not find myself in agreement on that proposition. We have
already increased the rate, and the mere increasing of the rate is not
going to correct the evil unless the member banks all cooperate. We
might increase the rate to seven, and then to eight, nine, and ten, and
the situation would still be uncorrected.
I believe we ought to continue our efforts with our inember banks
throughout the country ^nd induce them to curtail their loans as
far as possible to only the legitimate needs of legitimate business,
and by that means we can bring about in a normal way deflation of
credits. We must remember that this inflation has not taken place
overnight; it has been going on for three or four years and it is
going to take some time to correct it* We can not hope to correct
this situation in a day or a month or six months; we have got to
go at it in a sensible way to bring it about in a gradual way, rather
than to attempt to correct it within a short period of time. The
Federal reserve banks have been charged with profiteering by rea­
son of the rates they are now charging. We are making in the
neighborhood of 100 per cent on our capital. We know that any
increase in the rates is passed on to the consumer and has a great
deal to do with adding to the burdens of the high cost of living,
so that I say a great deal more good can be accomplished by edu­
cating the business man and the people than by simply putting in
higher rates.
The Federal Reserve Bank of Dallas has already adopted the
progressive rate proposition to be put in whenever the executive
committee finds it necessary to do so, even pending or before our
next meeting. We have a few banks in our district that are borrow­
ing unduly, out if their situation should be examined into you will
find that they are carrying a great many of the country banks,
small banks who have not the proper eligible paper to offer the
reserve banks, a great many nonmember banks, and they are in a
measure extending the help to the communities which would come
ordinarily througn the Federal Reserve Bank of Dallas, but those
cases are very few. We have a great many banks in our district
that are not borrowing at ail, and perhaps will not find it necessary
to borrow this year. They had good crops in their districts last
year and were able to take care of their customers out of their own
I think our situation is sound and we are all cooperating. We
have sent out two letters within the last three months to the mem­
ber banks; the last one was sent out at our last directors’ meeting,
under the order of the board of directors to be sent under personal
cover to the president of each member bank and by registered mail,
so that the letter would receive attention, and they were requested
to read thdSe letters at the next meetings of their board.
We find that our member banks have fully awakened to the situ­
ation and they are going about this thing in a sensible way and we
look for early relief in that direction. [Applause.]
Governor H a r d i n g . Mr. McKinney.



M r . M c K i n n e y . I would only stress Mr. Scott’s reference to the
fact that by reason of cotton being our chief crop that our business
ebbs and flows once in 12 months. So it was in last August, as he
referred, we were rediscounting with other Federal reserve banks
to the extent of $30,000,000, perhaps $35,000,000. In three months
from that date we paid all that back by reason of liquidations that
ensued from sales of cotton, principally, and then got on the other
side of the proposition, and I think perhaps we have rediscounted
to other Federal reserve banks about $20,000,000.
It has been my honor to represent the Group 3 banks from the
Dallas district ever since the organization of the Federal reserve
banks, and from a study of the condition of those banks I can say
that throughout all the district they are in stronger condition to-day
than they were a year ago. Of course those banks are in com­
munities that have nothing but stock raising and crops; there are
no manufacturing industries of any consequence, and the one point
that I would like to make with reference to those communities is
the extent to which labor is being drawn from the farms to come
to town to engage in carpenter work and other labor of that char­
acter. In our communities down in northern Texas and southern
Oklahoma it is one of the most serious problems that confronts us.
I was talking to the cashier of a bank in a county seat town in
northern Texas the other day, who told me it was his sincere judg­
ment that one-sixth of the tillable land of his county would he
out this year by reason of the lack of farm hands. It is a wheatgrowing county, and he went on to explain that they failed by
reason of wet weather to get their wheat crops in, but that same situ­
ation has happened in times when labor was more plentiful and the
fields that were reserved for wheat were put into other crops.
I thank you. [Applause.]
Governor H a r d i n g . The Federal Reserve Bank of San Francisco,
district 12.
Mr. M c I n t o s h . Mr. Chairman and gentlemen, we are not so far
removed as to be immune from the same conditions developing in
other situations. We are thoroughly in accord with the resolution
adopted and with the speech of Governor Harding outlining the
methods that are desirable for us to proceed upon. We can see the
problem and we know fairly well some of the causes. We know that
there is a demand that exceeds the supply of credit; we know
there must be discrimination, and we are ready to join in any propo­
We can not quite agree to the theory that the question of rate is
the most essential one, although we are not unmindful that in former
times, under all normal conditions, when production is normal, that
that is an effective method, but while the statement of taxes, which
are levied upon profits which are upon the books and not in the
books is a factor, and while transportation is a very important factor,
with one of those we can do nothing, with the other we can assist
by the stimulation of production, which would tend to obviate or to
relieve the situation which causes us to be in the position that it takes
$2 and $3 and’ $4 of credit to do the former dollar’s unit of mer­
chandise traffic; that we can do, and that is part of our job to help.
We can stimulate our assistance to production. We can do that



by the discriminatory extension of credits, yes, but inasmuch" as the
credit shortage is inevitable and is there, if we have good credit
without regard to the character of the enterprise we would find it
impossible for us to stimulate production or to use the means at our
disposal in the most intelligent way.
I can hardly conceive that it is wise in the endeavor to keep out
the undesirable feature to permit it to be rocked, even though the
rocker is willing to pay 7 per cent for the privilege. I find it hard to
convince myself that it is the most intelligent restraint to wield a
club on the heads of friends and foe alike. A rate which applies
beyond a certain arbitrary and calculated line has its effect, yes,
but without regard to what the man on the other side of the line is
doing. It may well be that my neighbor is bearing his share of the
load, struggling under his attempt to bear his share of the com­
munity burden, and I am sitting pointing smugly to a large reserve
and not doing my share. My neighbor will be punished if he carries
out his full share of the line and goes above that line.
It is something like running into a melee with a club in one’s hand
to assist in quelling it, and making up your mind you are going to
strike every fellow on the other side of the fence whether he has his
coat off helping you reduce the melee or whether he is one of the
main instigators. It seems to me the character and not the amount
of opposition should be the prevailing factor in penalties.
I realize the difficulty of the Federal reserve banks going into the
minute detail of inquiry in every case, but the work must be done, it
seems to me, by ourselves as bankers with our clients and with our
bank connections in the smaller centers—that we can do. We can
pass on our own transactions with inevitableness, reasonably so; we
can not compile a list of essentials and nonessentials, it would not be
wise to do so, but we can tell, as Mr. Scott has said a moment ago,
and the necessity of loans that are asked for us, and we can restrain,
as far as may be, those things which are not a necessity, but there is
one other factor which must be a corollary to that, and that is that
in our help and in our aid and protection of the essential and quickly
assimilable products we must have the assurance, or should have the
assurance that we may have the unqualified support of the Federal
reserve banks in our district, because that is their job also; the re­
serves are not sacrosanct. They are not to be framed and hung on
the wall, that given the purpose, given the fact that the real purpose
is being served by the advance of the Federal reserve bank must help
us, must help those who are doing that thing, and must decline when
discrimination is practiced against those not doing that thing. The
fact that it is sent to the larger center means nothing, and the fact
that New York—I use that as an illustration and not in any other
way—is bearing a large burden, does not disabuse our minds of the
knowledge that a large portion of that work is ours that they are
That is a misfortune in one way, but it is our burden and our duty
too, and that is so of the banks and larger centers as compared with
those in smaller centers, and if we can go to our people with the as­
surance that there is credit available for the protection of essential
and quicldy assimilable things, and that as compensation for that use
we must ask them to refrain from the demand for credit for those
things not essential, or for those which in our minds are not essen­



tial, we shall have gone a long way toward solving the difficulty as
far as it is within our power to do so. [Applause.]
The C h a i r m a n . I s there any other director from San Francisco
to be heard ?
Mr. P e r r i n . Mr. Chairman and gentlemen, there are just two
points I should like to touch on very briefly. It seems to me it is
not clearly enough expressed by a number of those who have spoken
that the Federal reserve banks are really reserve banks. Penalties
are referred to for our loans made at high rates by Federal reserve
banks. When the vault reserves were formally invaded, it was not
expected that that condition would be free from penalty. Governor
Bailey, I think it was, who referred to making Federal reserve banks
commercial banks, and I think it should be clearly borne in mind
that they will not be classed in the same category as commercial
banks, but that their organization has brought into existence a large
new supply of currently loanable funds, that when we do invade the
reserve held by Federal reserve banks it is only for meeting peak
You all know, doubtless, that the total of vault cash and the
deposits in Federal reserve banks combined represent a less per­
centage of deposits than the vault cash alone did in October, 1914.
If a definite program is outlined, it is always easier to work to
that than to an indefinite one. Mr. Jacobson was good enough to
make some studies for me yesterday of the changes in loans of na­
tional banks. There is not much light to be obtained taking the
low point, the midsummer point of the five years before the war,
and the peak point in the fall. Beginning with 1915 and running
through the successive years, this may not be uninteresting, that
from June, the peak in June, 1915, there was an increase in loans
of $697,000,000 of national banks in 1916; that increase was $666,000,000 from June to the peak time, with an additional amount of
funds delivered from rediscounting amounting to $48,000,000, mak­
ing something over $700,000,000 in 1917, $247,00,000 from discounts
in 1918, $476,000,000 with $629,000,000 from rediscounts, that is
1919, and $211,000,000 with $973,000,000 of discounts. That makes
something over $2,000,000,000 difference between the low point last
year, that is the midsummer point last year, and the peak in the fall,
and at the peak there were $11,700,000,000 of loans, that represents
an increase of considerably more than 10 per cent. Mr. Reynolds
spoke of not letting George do it, but each one to do his own share,
8, 10, or 12 per cent.
It would seem to me the concrete problem now is to determine
whether our present condition is approximately the extent of ex­
pansion that we would like to have this fall rather than a more or
less acute condition. If so, the way to meet that problem is to
bring about in the next three or four months a definite amount of
contraction, which would permit us to expand correspondingly in the
fall. I f it were possible for every bank in the country to reduce
its loans during the next three or four months to the extent, say,
of 10 per cent, there would be a total expansion in the fall possibly
of approximately $2,000,000,000. In other words, if, without dis­
turbance, we could prevail upon each bank, or upon the average
have the banks reduce their loans 10 per cent within the next three



or four months, and that is what we have spoken of in the Federal
reserve system as orderly liquidation, -we could then make all rea­
sonable expansion that would be required to meet the situation in
the fall, which is bound to come, and yet not create any greater
stringency than we now have.
If transportation difficulties are rectified somewhat obviously
there will be a good deal of liquidation from that source, which
would make possible a considerable reduction of loans. It occurs
to me if a definite program of that sort were undertaken, and I do
not suggest 10 per cent, but whatever per cent might be thought
adequate, that the smaller as well as the larger bank does not need
to go into the analysis of economic aspects and the economic rela­
tions of all those things, but they simply have one definite problem
to work to and are more apt to do something than if they are left
to try to digest and to try to understand the larger aspects of the
Recurring for a moment to the matter of reserve banks being re­
serve holding institutions, I agree with what Mr. McIntosh has so
well said in regard to this whole situation. I do not find myself,
however, in agreement with the idea of not advancing the rate. I
find my own inclination toward establishing a 7 per cent rate for
commercial business. [Applause.]
Governor H a r d i n g . We have a committee here from the American
Bankers’ Association and would like to hear from any representative
of that committee.
Mr. F o r g a n . I am chairman of that committee, Mr. Chairman.
I would like an opportunity to say, Governor and gentlemen of the
Reserve Board and delegates of this convention, that the convention
has stirred up a good deal of sentiment through the country, and
there has been some thought, I think, of a misapprehension of what
we were going to do when we got here. The fear got out that we
were going to meet here and in some way were going to classify
loans into essentials and nonessentials, and with that even send an
order through the country that there were to be no loans made on
what we would term nonessentials. In your speech, sir, you have
covered that already, and there is no use saying anything more
about it.
I have several documents that have been sent to me here, I do not
know in what capacity, whether as chairman of the American Bank­
ers’ committee or whether as chairman of the Federal Advisory
Council; at any rate I have been getting these, and I should like to
read them to you, because I feel in duty bound that you should know
what the borrowers are thinking.
The National Implement & Vehicle Association had a convention
in Chicago last week, rnd they appointed a committee to interview
me so that I would come posted to this convention as to what they
thought about it, and I said “ Put it in writing,” and the committee
got busy and wrote me this letter:
N a t io n a l I m p l e m e n t & V e h ic l e A

s s o c ia t io n ,

Chicago, I I I Ma y JJ, 1920.
Hon. J. B. F organ, Chicago, III.
D ear Sib : Reports thftt have reached this association within the last few
days regarding the difficulty experienced by farm implement dealers in financing
the movement of agricultural machinery from tiie manufacturer to the farmer



led to the calling of a meeting of the executive committee yesterday, May 13,
and the appointment of an emergency committee, specially charged with the
duty of directing attention to the seriousness of the situation thus created with
respect to the country’s food supply in the immediate future.
The difficulty appears to be that in many rural communities bankers are
failing to extend adequate credit to implement dealers to enable them to
secure the prompt delivery of machinery which is essential to the production
of our crops. This action on the part of the bankers is perhaps due to a recent
rumor that Federal reserve banks would not rediscount paper given either by
farmers or dealers for farm machinery. In one or two Federal reserve dis­
tricts, we are informed, this erroneous impression has been officially corrected.
We are not advised as to the extent to which it prevails in other districts.
It is scarcely necessary to point out that anything which interrupts the supply­
ing of agricultural implements to the farmers is a menace to the Nation’s food
supply. The situation to-day is particularly acute because of the abnormal
shortage of farm labor and the present extraordinary congestion of freight
traffic. Further, there has been extreme difficulty in obtaining the materials
needed for the manufacture of farm machinery and all manufacturers are
working on so close a schedule that if there is any delay in financing delivery
of machines they will reach the farmers too late for use this season.
Most manufacturers are at this time so heavily burdened by the large in­
vestment resulting from the high cost of material and labor that they find
themselves unable to extend to customers the credits that have heretofore
prevailed. Both manufacturer and dealer must, therefore, depend upon the
banks—and particularly local banks—to a greater extent than ever for aid in
marketing farm machinery.
The shortage of farm labor has reached a point this year where the farmers*
need of labor-saving machinery is imperative. Only by adding to their mechani­
cal equipment, and particularly their power machinery, can the farmers of the
country maintain production in the face of a falling supply of man power.
Without an adequate supply of farm machinery, there can not be an adequate
supply of food. Farm implements and food products should receive equal
consideration. This committee feels it would be most helpful in the present
situation if the banks of the country would give to the movement of farm
machinery the same consideration which is given to the movement of farm
If it should now or later become necessary to establish any order of prefer­
ence among industries, we respectfully call your attention to the fact that
during the war the United States War Industries Board placed farm machinery
in one of its most essential classifications, at one time even placing it on a
parity with food supplies and ahead of railroad transportation.
We earnestly request that this subject may receive your special attention,
and hope that we may have your cooperation in our effort to secure adequate
financing for the distribution of these essential machines.
The members of the emergency committee are: H. M. Wallis, Racine, Wis.,
president of J. I. Case Plow W orks; George A. Ranney, Chicago, secretary and
treasurer, International Harvester Co.; F. R. Todd, Moline, ill., vice president,
Deere & Co.; G. N. Peek, Moline, 111., president Moline Plow C o.; C. S. Brantingham, Rockford, 111., president, Emerson-Brantingham Co.; W. H. Stack­
house. Springfield, Ohio, French & Hecht Co.
Very respectfully yours,
H. M. W a i x i s , Chairman.

The next is from the National Federation of Constructive In­
dustry. They write a letter and they give the following reasons for
the high cost of commodities: Underproduction, particularly of ne­
cessities; overproduction, particularly of luxuries; inefficiency of
labor while on duty; part time work by labor; strikes; greed; profit­
eering in some lines of business; excess profits taxes as such.
Then, I have here from the Studebaker Corporation and from the
General Motors Corporation statements indicating that what they
produce, namely, automobiles, have been mentioned as luxuries, and
they say they are not luxuries, but are necessities.



I then received this telegram since coming here, from Indianapolis,
Ind. This is addressed to me as chairman of the advisory council
of the Federal reserve system:
In considering restrictions of extensions of credit to nonessential industries,
please remember the manufacture of tires for cars already in operation would
appear highly essential industry because old tires can only be replaced by new.

That is signed by the Majestic Tire & Rubber Co., of Indianapolis,
Mr. S c o t t . There are no letters from consumers there, but all
from manufacturers?
Mr. F o r g a n . All from manufacturers; yes.
Governor H a r d i n g . I will place in the record at this point the
following telegrams:
C h i c a g o , III., May 17, 1920.
Governor H a r d i n g ,
Federal Reserve Bank, Washington, D. C.
Credit situation as affecting live stock is critical. Movement of wool is slow
from car shortage and bear tactics of buyers, and steers can not be marketed
until next fall. Last year Governor Calkins, twelfth district, wisely advocated
by circular .letter July 15 that banks extend credits to breeders of live stock
that production may be sustained and increased. Cattle and sheep paper is
necessarily, especially on breeding stock, long term, as sale periods of products
only occur yearly and expense accounts accumulate and must be carried for
long periods. Merchants and certain manufacturers can curtail stocks or
operations, but live-stock breeder can not, without disaster, market his product
until conditions are right. We bespeak from you and your associates of Fed­
eral reserve banks unusual consideration at this time.
F. J. H a g e n b e b t h
P h o e n i x , A b iz ., May 18, 1920.
Hon. D a v i d F. H o u s t o n ,
Secretary of the Treasury, Washington, D. C.:
The prevailing financial stringency has resulted in stopping movement of
our young steers from these breeding grounds to pastures where they are
matured for beef. These cattle were contracted early by Texas, Colorado,
and northern pasture men and advance payments made. Now they are being
forced to sacrifice advance payments owing to their inability to secure funds
regardless o f collateral rate of interest or amount of margin in steers, the Fed­
eral reserve board having stopped loans on cattle security. This spring move­
ment of young steers is not speculative but occurs every year, and heretofore
has been financed without difficulty. To stop it will not only throw many in
Arizona out of business but will certainly bring about eventually an upheaval
in beef conditions generally. It is just as important to the Nation as the
movement of any crop. Our breeding ranges are stocked to capacity and the
breeders can not finance this, but on the contrary need money badly for operat­
ing expenses. Can not this disaster be forestalled by some‘provision allowing
member banks to accept enough well-secured cattle paper to permit this normal
movement of steers to pastures from whence they go to market one or two
years hence? Your interest and assistance greatly needed and will be deeply
A r iz o n a C a t t l e G r o w e r s ’ A s s o c ia tio n ,
C h a s . P . M u l l e n , President.
C h i c a g o , May 17, 1920.
Mr. W. P. G. H a r d i n g ,
Governor of the Federal Reserve Board, Washington, D. C
Firmly believing that the Federal Reserve Board has more power than any
other commercial element to correct the evil of high prices and stabilize ne­
cessities, we respectfully suggest that if all loans to profiteers and speculators
in the essentials of living made on warehouse receipts were called it would
without doubt force an emptying of the cold-storage houses and amply meet



the necessities of the consumer at reasonable prices without injury to any
legitimate industry. This was recently done with the lumber speculators on
the Pacific coast and resulted in a decline of from ten to thirty dollars per thou­
sand feet in the price of lumber within 60 days. Speculators find it all too
easy to borrow money at low rates on warehouse receipts and hoard the ne­
cessities of life at a profit of one to three hundred per cent and if this borrow­
ing were made impossible by you commodities would immediately begin to
tumble and conditions rapidly head toward normal.


J. S h e a d ,

President Shead Lumber Association.

Gentlemen, are you ready to hear the report of the committee on
the transportation situation?
Mr. W a t t s . The unanimous report of your committee is as fol­
lows :
The whole country is suffering from inflation of prices with the consequent
inflation of credit. From reports made by the members of this conference rep­
resenting every section of the country it is obvious that great sums are tied
up in products which, if marketed, would relieve necessity, tend to reduce the
price level and relieve the strain on our credit system.
The congestion of freight is found in practically all of the large railroad
centers and shipping ports. It arises chiefly from inadequate transportation
facilities available at this time and is seriously crippling business. We are
informed that the per ton mile of freight increased in three years—1916, 1917,
and 1018— 47 per cent, while the freight cars in service during the same period
increased 1.9 per cent.
A striking necessity exists which can only be relieved through the upbuild­
ing of the credit of the railroads. This must come through adequate and
prompt increase in freight rates. Any delay means the paying of greater
cost directly and indirectly and places a burden on the credit system which
in the approaching time for seasonal expansion may cause abnormal strain.
Even under the load of war inflation, high price level, and extravagances the
bank reserves would probably be sufficient if quick transportation could be
assured during the time of the greatest strain: Therefore
Be it resolved, That this conference urge as the most important remedies that
the Interstate Commerce Commission and the United States Shipping Board
give increased rates and adequate facilities such immediate effect as may be
warranted under their authority, and that a committee of five be appointed
by the chair to present this resolution to the Interstate Commerce Commission
and the United States Shipping Board with such verbal presentation as may
seem a^)ropriate to the committee.

Mr. S c o t t . Just for my information, who is going to pay us for
all these goods moved to market?
Mr. W a t t s . Some of the commodities there is no market for.
There is some short-staple cotton and colored cotton, but neverthe­
less there is a great quantity of goods that is held which requires
bank credit. That would be a subject that would take a great deal
of time to cover, Mr. Scott.
Mr. S c o t t . Are our neighbors on the other side prepared to pay
us for it?
Mr. W a t t s . Well, I should say they are not, but they are not the
only customers for those commodities. We can get just as near our
own circle, I presume, as we want, for that. For instance, I know a
wholesale grocery man who is accustomed at this season of the year
to not be in the bank at all, except for small sums, and he prac­
tically has his entire line of credit, which is due entirely to domes­
tic business and is not foreign business at all. It is due to the fact
that he has paid for those goods and that the goods are somewhere
between the point of production and his warehouse. He has orders
for those goods and requires bank credit.



Mr, S c o t t . I a m s u r e t h a t w o u l d te n d t o r e lie v e th e s it u a t io n , b u t
I d o u b t w h e t h e r it w o u l d go all th e w a y a n d b r i n g th e r e l i e f t h a t
p e r h a p s is c a lle d f o r .
Mr. W a t t s . My judgment is that in the St. Louis district, to use
that as an example—St. Louis is a point which produces much more
than it consumes. I am not talking about the city of St. Louis, but
I am speaking of the Federal reserve district, and I refer to the
manufacture of shoes and different products of every kind. Now,
there has been such a congestion in the transportation facilities in
that district that it has caused the St. Louis district to-day to be the
largest, or rather to have the lowest adjusted reserve of any of the
Federal reserve districts, which is not a natural condition. Take
the cotton, tobacco, and rice, or any of the products of that district.
It is quite true that of this cotton there is probably 80 per cent that
is short staple or colored cotton and the remaining 20 per cent prob­
ably has been sold, but can not find its wav to the purchaser and
therefore must be carried by the banks. Probably a part of the
short cotton has been sold now. The St. Louis banks in the district
and the reserve banks must carry that credit pending restoration
of transportation facilities. That is true of the wheat section. Mr.
Decker referred to the fact that in the Northwest there was possibly
$200,000,000 in grain products tied up for lack of transportation.
Governor H a r d i n g . Is there a second to the adoption of the reso­
lution ?
(The resolution, being duly seconded, was unanimously adopted.)
Governor H a r d i n g . Does the conference wish to do anything
with the suggestion offered by Mr. Perrin, which, as I understood
it, was that there be a program laid down that every bank be re­
quested to have its loans reduced by a certain percentage?
Mr. S c o t t . I think there is a different problem in e a c h district.
Governor Harding.
Governor H a r d i n g . There is no motion before the meeting. I
was just wondering if Mr. Perrin wanted to make a motion. He
has come a long way to attend this meeting, and I merely want to
call attention to the fact that he has made the suggestion.
Is there any other business that any member of the conference
wants to bring up?
M r . W a y n e . The question of graduated rates on borrowings or
rediscounts has been touched on, and I would like to know whether
in the districts that have adopted this procedure they have elimi­
nated the question of borrowing on Government securities from
calculations as to the line of credit granted to a bank.
Governor H a r d i n g . In the Kansas City district, and the Dallas dis­
trict, in their tentative plans, they have eliminated entirely borrowing
on Treasury certificates of indebtedness and on Liberty bonds actu­
ally owned on the 1st of April, 1920.
Mr. W a y n e . Owned by the bank or by the customer ?
Governor H a r d i n g . A s I understand it, by the bank.
Mr. W a y n e . Have they made any reference to collateral notes o f
customers that have been discounted by the banks as a result o f
Liberty loan subscriptions?
Mr. B a i l e y . They have to belong to the bank on the 1st day of
April. We have made that rule.
Mr. S c o t t . It is the s a m e w a y in the Atlanta district



Mr. W e l l s . He wants to know if customers’ notes secured by Lib­
erty bonds are exempt from the application of it.
Mr. B a x l e y . They are not.
Mr. W e l l s . They come the same as commercial paper ?
Mr. B a i l e y . Yes.
Governor H a r d i n g . If there is nothing else to bring up, I presume
the advisory council will finish its session this afternoon. I am in­
formed by Mr. Forgan that the council has finished its work.
Mr. F o r g a n . Unless the board desires to consult with the council.
Mr. W i l l i a m s . Mr. Chairman, it is a little past lunch time and I
suggest we take an adjournment of an hour and a half and meet
again at half past 3. We have had some very interesting talks from
bankers from all over the country. It has been very instructive,
and I think if we come back after lunch, after we have had an op­
portunity to think over what has been said, that some additional
ideas may be suggested of a constructive character. This is an exceed­
ingly important conference and I would dislike to see it adjourn sine
die at this moment. These gentlemen have come from'all over the
country, and I move you that we adjourn at this time and have
another session this afternoon for the purpose of taking up any new
matters that any member may desire to bring up after he has an op­
portunity to think over what has been brought out at the conference
this morning.
(The motion, having been duly seconded, was carried and the con­
ference adjourned at 2 o’clock p. m. until 3 o’clock p. m. of the same

The conference reassembled at 3.15 o’clock p. m. pursuant to
Governor H a r d i n g . Yesterday, in the Senate, Senator McCor­
mick, of Illinois, moved that the Senate take up Resolution 363,
which reads as follows:
Resolved, That the Federal Reserve Board be directed to advise the Senate
what steps it purposes to take or to recommend to the member banks of the
Federal reserve system to meet the existing inflation of currency and credits
and consequent high prices, and what further steps it purposes to take or
recommend to mobilize credits in order to move the 1920 crop*

The discussion is rather brief and I will take the liberty of reading
it from the Record.
(The discussion on the Senate floor was thereupon read by Gov­
ernor Harding.)
I presume m answering that resolution the board can take as a
basis remarks made here this morning, and with reference to the
transportation it can incorporate the resolutions which were adopted
about the tie-up of the railroads, I think it would be well to nave
a committee of three appointed to wait on the Interstate Commerce
Commission and formally present those resolutions to-morrow, and
as I have been given the names of some of the gentlemen that will
remain over to-morrow in any event, if the conference wishes I
suggest that they authorize me to appoint a committee of three to
present this matter.
Mr. W a t t s . A committee of five has been authorized by resolution.
We might change that to three.



The C h a i r m a n . Five would be more impressive. I had in mind
asking Mr. Decker to serve as the chairman of that committee, and
Governor Bailey of Kansas and Mr. Ball of Texas, Mr. McNider,
Mr. Rieman, and Mr. Perrin to compose that committee.
I would also suggest that a committee of three be appointed from
this conference to prepare some kind of a statement or memorandum
to be submitted back to the conference, which we can use as a basis
of a press statement, and which you can all use as a basis of a state­
ment of your own banks when you get back home touching the situ­
ation as you see it, and forstalling any more remarks such as were
made in the Senate yesterday as to all kinds of trouble coming, yet
being careful not to stir up another bomb.
Doctor Miller suggests a committee of five, with definitive powers,
to draft a memorandum and resolution and transmit it to the board,
then we can make them public and send each Federal reserve bank
a copy.
Mr. D e c k e r . I should like to amend that by suggesting that the
Governor of the Federal Reserve Board be an ex-officio member of
that committee. I think it is conferring rather broad powers to
put into the hands of the committee a commitment of this whole
conference on perhaps the most important matter of all.
(The proposed amendment was accepted.)
Governor H a r d in g . I w o u l d be very g l a d to sit with the com­
Mr. P t j e l ic h e r . Governor Harding, do you want to be chairman
of that committee?
Governor H a r d i n g . No; I do not want to b e a m e m b e r .
Mr. P u e l i c h e r . I m o v e y o u t h a t w e a p p o i n t a c o m m it t e e o f fiv e ,
a n d t h a t t h e g o v e r n o r o f t h e b o a r d b e a s k e d t o s it o n t h e c o m m it t e e
in a n e x - o f f ic io c a p a c i t y .
Governor H a r d i n g . Had you not better ask one of the other mem­

bers of the board to sit with that committee?
Mr. D e c k e r . A l l of them, for that matter.
Governor H a r d i n g . The chair would like to have some suggestions
as to the membership of that committee. I think it would be well if
nominations for that committee be made from the floor.
(The following named members were selected as members of said
committee: Mr. Joseph Wayne, Jr., Philadelphia; Mr. Beale, Bos­
ton; Mr. Perrin of San Francisco; Mr. Forgan of Chicago, and Mr.
Treman, New York.)
Governor H a r d i n g . It has been suggested by Doctor Miller that
before the committee retire we would better have them have the bene­
fit of the general discussion here for a few minutes so they may have
the advantage of various views that may be expressed. The con­
ference is now open for informal discussion. We would like to hear
from anybody who wishes to talk.
Mr. W a t t s . We have heard discussion from members, and now
perhaps other members of the board would like to say something
following the discussion by the delegates from the various districts.
I think we would like to hear from Doctor Miller.
Doctor M iluer. I think the morning’s conference has pretty well
developed the things that bulk largely in our estimation of the
general situation, and anything that any of us could say beyond



that would be little more than repetition, or perhaps give only added
emphasis by a personal word.
I think it is clear what is wrong in the situation, but it is not quite
so clear as to what is going to be the most effective method of ad­
dressing the united power of the board and the reserve banks and
the member banks of the country toward any improvement of the
A good deal has been said about rates, and New York has rather
taken the position that that has got to be the main reliance in bring­
ing about both a reduction in the rate of growth of credit—I do riot
say a reduction in the total volume, I do not expect that, but at any
rate the diminished rate of increase, and also they seem to think
that that will prove to be if not in itself, at any rate the first step
toward the exercise of greater discrimination by member banks
either in opening new credits or in the renewal of existing credits.
The latter seems to me to be the more important problem and the
more difficult one, and the one upon which bankers throughout the
country need to get all the light and leading that they can from this
conference, and that also is the question I think upon which the
borrowing public of the country will be most eager to get informa­
I was left at the close of our conference this morning with the
impression that the majority of the men that spoke were inclined
to take a more optimistic view of the problem with which we are
confronted than I think conditions actually warrant. I was also
led to the impression that we were in danger of going away feeling
that having discussed the situation and interchanged views, and
having enlightened ourselves, we had done our duty and for the
rest we could safely trust in God. I think the problem is one that
requires not only understanding of what we are going to do, but
delicacy of discrimination in undertaking to apply a test to the legiti­
macy of credit demands, energy in developing and carrying out a
policy, but patience in awaiting fruition of results.
Credit is the most delicate institution in the world—“ opinion,” as
Alexander Hamilton put it in one of his great reports, “ is the soul of
credit” ; you can very easily injure it; on the other hand, by proper
treatment, you can very easily support and maintain a good condi­
tion of mind.
I think the analogies of other countries and other times do not
furnish us very much guidance for the present. This is a very
unique situation. As was said three or four times here this morning
it is really a condition of mind we have got to address ourselves to
in this country. Our morale, economic, psychological, and political,
is pretty low. We do not want to run it still lower by any in­
temperate attacks or any assault upon either the business or the
credit of the country; on the other hand, we want to maintain a
very serious attitude of mind as to what we may expect unless we
address ourselves pretty seriously to the immediate improvement
of the situation.
Sometimes on occasions of this kind you want a word or a phrase
upon which to hang things, and I was struck in the course of de­
liberations this morning with the frequent occurrence of the word
“ discrimination.” I think the country will accept that as on the
whole indicating a temperate and responsible attitude on the part



of the Federal reserve system and member banks of the country in
dealing with this problem, and on the whole that is the one thing
that would seem to me worth specifying as a general objective in
any report a committee of this conference might make in the way
of a recommendation to the Federal Reserve Board as to what in its
opinion must be done to handle conditions successfully in this coun­
try so as not to dampen the ardor of enterprise, not to throw any
chill over industry, but also with the constant suggestion that banks
are to use such influence as they have to restrain the unproductive
use of credit, applying the test of unproductiveness under existing
conditions and not under normal conditions, and to restrain the
reign of extravagance.
I have no hesitation in saying for myself that I do not feel at all
optimistic about the outlook. I do not for a moment expect that we
are going to deflate in this country, and I think we are only deceiv­
ing ourselves if we talk about deflation. We must, however, arrest
the rate of growth of credit and we must expect that with the swell
in the productive activities of the country that come with the ap­
proaching crop season there will be a natural swell in the volume
of credit, which need not alarm us. I am not at all worried if our
Federal reserve bank liabilities run up and our nominal reserve
position appears to be weakened, provided we have the assurance and
the right to feel the assurance that such credit as is being extended
by the member banks and immediately supplied to them by the
reserve banks is credit that rightly functions in industry in the
production of things that in a reasonable view are wanted at the
present time, and in a minimum degree in supplying extensions in
industries which, at the present time, are contributing nothing toward
the essential processes o f economic recuperation.
As I see it, beyond that the problem is to present this in such a way
to the bankers of the country as will secure their cooperation, and
with their aid also to present it to the user of credit. After all, credit
is given only as somebody wants credit, and to a certain extent our
problem is to restrict the appetite for credit, and it is not the banker
that borrows credit, or i f he borrows it from the reserve banks he
borrows it only as the first step in the process of lending credit to
somebody else. Eventually, it is the user of credit that has got to
be brought into a more o r less responsive and acquiescent attitude in
this policy of control. There is no use attempting to evade the fact
that control, if it is anything more than a process of self-deception
means actual control; that somebody has got to go without the credit
he thinks he is entitled to or the credit he would like to get. But it
would, I think, be a mistake to treat this simply as a quantitative
problem instead of, as I think it is primarily a qualitative one.
I would not be at all alarmed at the growth of credit in this country
if we had the assurance that credit was only going to the users of
credit contributing to the production of those things the country
badly needs at the present juncture.
I come back, therefore, to the word u discrimination ” in the exten­
sion of credit, as on the whole pointing the way toward the road
that we have got to travel, and perhaps in some parts of the country
even blaze, in order to get back to the situation that the governor
S. Doc. 310,67-4---- 4



very happily described this morning as the restoring of a more nor­
mal relationship between the total volume of credit in existence and
the total volume of production. I would amend it only in one par­
ticular, the production of those things that people who care for the
country, who are sensitive to the requirements of the times and who
are willing to cooperate in a great national endeavor will not quarrel
with, the production of things that immediately are more important,
and the postponement of things that for the moment are less impor­
tant. [Applause.]
Governor H a r d i n g . Mr. Comptroller.
Mr. W i l l i a m s . Mr. Chairman and gentlemen, I do not know that
I have anything special to add to the very excellent presentation of
the whole subject which you gave this morning, which was supple­
mented by the various speakers who have preceded me.
There are one or two aspects of the situation, however, to which I
think I would like to direct your attention especially* You have been
speaking of extravagance and the production of nonessentials and
luxuries. It seems to me it would be very helpful if every bank in
the country should constitute itself a missionary for thrift and
saving and try to urge upon the workers, upon the laboring people,
and upon those whose incomes have been swollen, the importance of
laying up for the rainy day and for old age. It seems to me that
with the large wages that are being paid now in industrial establish­
ments that it offers a splendid opportunity for you to increase and
build up the savings deposits in your banks. I was very much dis­
gusted the other day to hear of my chauffeur buying about three silk
shirts at $10 a piece. I made that the text of a little lecture.
Governor H a r d i n g . He must have got a cut price.
Mr. W i l l i a m s . That is going on on all sides. I think that if when
these individual cases of extravagance and luxury come to our at­
tention, if we would call the attention of the spendthrifts to the
importance of starting a savings account, that it would be helpful.
It seems to me that the banks could very well afford to do some little
additional advertising in behalf of thrift and saving, and appeal to
the laborers, who are getting more now in their daily wages than
they ever dreamed of in the years gone by.
One difficulty of the present situation is that the conditions of
which we complain in this country are world wide. We have not
simply to remedy things within our four borders, but they are over­
lapping in all the civilized and uncivilized countries. I was reading
an extract from a Japanese paper the other day that the cost of
living on the Yantze Kiang River in China had gone up about 300
per cent in four or five years; I also noted recently, as illustrating the
extravagance of impoverished France, that there was one store in
Paris which last year sold 1,100,000 pair of silk stockings at an aver­
age of 30 francs per pair. They seem to be returning to sanity over
in Paris, though, to some extent; there are beginnings of it, as per­
haps a reflex of the overall campaign, I see they have started the
cotton stocking association in Paris to remedy the extravagant use
of silk, I think it would be very well if we should adopt that over
As. illustrating the embarrassments against which we have been
working, I would call your attention to the enormous cost in this



country at the ports. I have a national-bank examiner who is in
Europe at the present time, and in a letter received from him
within the past few days he calls my attention to the very sharp com­
parison between the cost of transferring cargo in New York, or
some of our other ports, as compared with Antwerp. At Antwerp
they have a wonderful harbor; about 6 miles of piers, and a rail­
road track lying between the great warehouses which line the harbor
and the pier itself, and the cost of transferring freight in New
York, I understand, is more than 1,000 per cent above the cost of
transferring freight per ton in Antwerp. Those are symptoms of
commercial extravagance which we have got to correct when we get
down again, as we will in the course of time, to hardpan and begin
to strictly compete with the other countries.
Some one asked me the other day what I thought of the outlook,
and I told him that I could best express it in the language used
by Cato in his soliloquy, in which he said, “ The wide, unbounded
prospect lies before me, but shadows, doubts, and darkness rest upon
it.” Now, unquestionably, there are shadows, doubts, and darkness
that rest upon the prospect, but those shadows, doubts, and darkness
can be blown away, and they should be blown away; they should be
I do not think myself that there is any ground for expecting a
commercial cataclysm or crisis such as some people are predicting;
particularly a very well-informed and responsible man expressed
the opinion not long ago that we may have such a crisis between
now and election, or if we did not have it before the election we
would have it worse afterwards. I do not think those fears are jus­
tified. I see nothing in the situation to justify the fear of such a
commercial crisis or financial catastrophe as we had either in 1873
or in 1890, or in 1907. If anything of that sort comes, it will be our
fault, the fault of those who are in charge of the banking find com­
mercial interests of the country, and I do not believe they are going
to bungle it.
I do think it is tremendously important that every individual
bank, besides being a missionary for thrift, should each admonish
and warn and hold the strings of their moneybags with a very dis­
criminating hand, and should bring about a proper and reasonable
degree of contraction. I think my friend, Doctor Miller, expressed
the view of the meeting yesterday, that he was not very hopeful of
our ability to bring about much contraction—about as far as he went
was to desire and hope that we would not inflate any further.
I think, though, that we should go further; I think we should, and
must, bring about a reasonable degree of deflation or contraction.
I do not think that the inflation is as grave as soms experienced
people think it is. I will give you now some figures, which I think
are rather reassuring, at least for the time. Speaking of the elas­
ticity of bank credit, it is a fact, whether you have noticed it or not,
that in the first 50 years of the National banking system the maxi­
mum play, as expressed by notes, rediscount and bills payable of the
national banks, the borrowings from other banks, was only about
$100,000,000. That represented the largest amount, or practically
the largest amount that the National oanks of the country ever
borrowed at any time on their bills payable or rediscounts up to the
panic of 1907. There was no elasticity; we were in a strait-jacket.



That perhaps represented an expansion of 1 per cent of our total
In 1914 the notes rediscounted in the national banks and their bills
payable increased in the emergency created by the European war
to "about $150,000,000, which was the maximum up to the opening
of the Federal reserve system. Since the beginning of the Federal
reserve system the maximum of notes, rediscounts, and bills payable
of all the national banks has amounted to about $2,000,000,000, or
about 20 times as much as their total borrowings up to 1907, and
I believe that the amount at the present time stands at about
$2,000,000,000. But a very significant feature of that situation is that,
that if we should deduct from the—or if the national banks should
be reimbursed the money which they have invested in Victory bonds
and Liberty bonds and loaned on Liberty and Victory notes they
would be able to pay off their entire indebtedness to the Federal
reserve banks, and to all other banks.
To my mind those are very hopeful figures and indicative of a
pretty solid situation. In other words, if the banks should be reim­
bursed the money that they now have in the war issues they could
pay off every dollar they owe to the reserve banks or to any member
banks. Of course we are not expecting them to be reimbursed for
those bonds and loans immediately, but in the course of time they
will be liquidated; the Liberty bonds and Liberty notes will find
their way to investors and the banks will have got back their capital
in liquid shape.
I personally have no doubt in my own mind that the next two or
three years will probably find our Liberty bonds and Victory notes at
a premium. You all remember very well that it was not more than 20
years ago when your Government 4 per cent bond sold above 140;
while they carried circulation privileges they had no Federal reserve
system where they could be used as collateral either.
My parting words is to urge that the member banks keep them­
selves in solid condition and lean as little as possible upon the Fed­
eral reserve banks, and that the member banks do not undertake to
make their loans year in and year out, or month in and month out,
except on unusual calls and in emergency cases, from the Federal
reserve system. I am reminded, in conclusion, of the hopeful and
reassuring lines of the old hymn:
Ye fearful saints fresh courage take;
The clouds ye so much dread
Are rich in mercies and shall fall
In blessings on your head.

I think the time will come, and soon, when these clouds will pass
away and we will get down to the solid foundation we desire.
Governor H arding . Following our comptroller’s suggestion that
the banks of the country are making an intensive campaign to keep
up their savings department especially, I wish to call attention of
the members of the conference to the fact that the Federal reserve
note issues outstanding are nearly $3,100,000,000, and that in en­
deavoring to locate the whereabouts of those notes we failed to see
where there can be more than about $1,750,000,000 of them held in the
vaults of the banks of the country, so that leaves about $2,300,000,000
in the pockets of the people, or in circulation somewhere. We all



know the habit that has grown up in the last two or three years on
the part of people carrying large amounts of notes upon their per­
sons, and it gives you a very good idea of the possibilities of a cam­
paign to increase your deposits if you can induce people who carry
money around with them, or who have it stuck around the house
somewhere, to come around and deposit it with the banks. It will
increase your deposits and will be a very large reduction in the
Mr. W i l l i a m s . A small bank in Michigan recently reported to my
office about $4,000,000 in the vicinity of this small town which was
carried in old stockings or in safety deposit boxes; that there was
being hoarded $4,000,000 in the vicinity of that one small place.
Governor H a r d in g . Mr. Mohlenpah, will you make some re­
marks ?
Mr. M o h l e n p a h . Mr. Chairman and gentlemen, I am sure no
man in this conference would expect anything from the newest
member of the board. I think it would be right to say that there
is no member of the board at this time that has been related to your
problem so directly as perhaps I have been, because I have just come
from the desk and I have, during the past six months, visualized
the proposition you were up against, and I want to say right here,
gentlemen, that I refuse to be a pessimist. I quite agree with the
comptroller. That does not mean that I am an expansionist or an
inflationist, but I do believe in the broad, general proposition that
we have just as much right to take stock of our assets and of our
privileges and of our opportunities as we have of the darker phases
of the question. [Applause.]
Now, gentlemen, I believe out of this situation will come a stronger,
higher morale on the part of the bankers themselves. We saw our
people at the highest point during the war. We have a right to
expect the business men, particularly the bankers, will come to their
highest point now in this financial war. I believe the bankers will
clean house; I believe in this trial or strain or stress they will become
better, safer custodians of the people’s money.
May I illustrate just what came to me from one of your men yes­
terday ? He said, “ I believe that our bank will be a better bank; that
our men will be better bankers in handling the people’s money.” He
said, “ For years in our bank we carried a loan of $30,000 for one
very wealthy person in our city. When this strain came on I called
her in. She was a veiy wealthy real estate owner, and I told her
frankly our problem. She said,4I’m very glad you told me this; I
will gladly and willingly make a mortgage upon my property so that
your needs over the counter will be more liquid and that you will be
relieved of that much.’ ”
I am only indicating that as just a suggestion of what will happen
over the counters one way or another during the next six months of
30,000 banks and bankers relating themselves to their business. That
is to be desired. I believe the bankers, if this educational propa­
ganda you are talking about is put out, will become something bet­
ter than bankers; you will become community leaders and not just
community advisers, but you will ^become community directors. The
ve*y im£ute of your business in discriminatingupon your loans will
mate you thatl and that is good thing. It is just exactly, to my
mind, what this situaiionneeds; not a contraction that is going to



hurt: it needs the steady nerve of the bankers just as they faced their
problems in 1903 and 1907.
May I remind you gentlemen again that we have reason to be
thankful for our position as a Nation at this time as over against any
other period in the history of the world ? And I would not want to
see the bankers as a fraternity, privileged to lead the people as you
are, to go out and take a backward step to hurt our people as they try
to relate themselves to their business in this most wonderful country
of ours.
And right here, as we think of this community program and com­
munity interest; as we see the banks of the industrial centers like
Boston and New York and Cleveland at this time; as the great agri­
cultural districts of our country are now about to go at a new season,
the seed going in the ground, that you are in a position now to help—
if I would say one tking above another it would be this: That we
lay stress upon the first prime importance of seeing to it that we
produce all those things related to food and clothing, the funda­
mental need not only of our own country and every other economic
interest of our country, manufacturing and everything else so inti­
mately related to that of the program of the agriculturist, but be­
cause of the need of the world. And I appreciate, gentlemen, the
suggestions that I have heard and the things you have said here to­
day, and it would be my privilege and pleasure and in any way I
can, in any small way I am able, to assist. Let us be optimistic and
not altogether pessimistic. [Applause.]
Governor H a r d i n g . I wish to convey to the gentlemen of the con­
ference the greeting of our absent member, Governor Hamlin. He
left about three weeks ago to go to a hospital near Boston, where
he underwent quite a painful operation. I am glad to say it was
entirely successful and he is now out of danger. He will be con­
valescing several weeks, perhaps, before he will be back with us,
but he assures me when he does come back he will come entirely re­
stored to health. I am sure that all miss him to-day, and I am sure
all will be glad to hear he is past the danger point and will be restored
to us for many years of usefulness.
Mr. J o h n s o n . May I ask a question? The comptroller spoke in
regard to this matter. Upon this last page of the chart it would
show that the borrowing for commercial purposes by the Federal
reserve banks through all the member banks from July to about
September ran along about $250,000,000, and from that point on
there was a steady expansion until now the borrowing for com­
mercial purposes is about $1,000,000,000, and this chart does not in­
dicate there is to be any diminution of that increase. Now, as a
practical question, where is that going to lead us? I would like to
ask the comptroller what he thinks about it.
Governor H a r d in g . That means there must b e some liquidation o f
commodities held up.
Mr. J o h n s o n . A s a country banker my observation is that the
mass of borrowers in the country banks do not have much to do with
commodity product
Mr. W i l l i a m s . The figures I gave referred more to the national
banks and did not refer to the other: member banks. O f the total
borrowings of national banks of $2,000,000,000, bills rediscounted
and bills payable of all kinds, if tkere should be * conversion of a



thousand millions in Liberty bonds, or if they should sell them to
savings banks and to investors, that would pay off one billion. If
the borrowers with the banks should pay on the billion which they
are borrowing on war issues, that would pay off the other billion.
Mr. J o h n s o n . That is not quite the point. The expansion for
commercial purposes, as shown by this chart, from last summer until
now, is from two hundred and fifty million to one thousand million
dollars for commercial purposes.
M r. W i l l i a m s . T o w h ich chart d o y o u r e fe r?

Mr. J o h n s o n . That expansion is still continuing, so far as this
chart shows, and if it continues during the summer as it has been
continuing during the spring it seems to me it will put us in quite
an extended position.
Mr. W i l l i a m s . Which of the charts are you looking at, Mr. John­
Mr. J o h n s o n . The last one, the bottom chart on the last page,
showing the condition of all the Federal reserve banks.
Governor H a r d in g . You mean the total discounted p a p e r on hand?
Mr. J o h n s o n . The bottom chart on the last page, showing all the
Federal reserve banks together.
Mr. W i l l i a m s . The total discounted paper on hand.
Mr. J o h n s o n . The^total discounted paper on hand is $2,500,000,000,
of which $1,500,000,0*00 represents Government securities and $1,000,000,000 represents commercial paper apparently, as I read the chart.
Governor H a r d i n g . Last September it was about $1,560,000,000.
Mr. J o h n s o n . The difference between the two top lines on the
bottom of the chart is what I am getting at. Last September it was
$260,000,000 difference, but now the difference is $1,000,000,000.
Governor H a r d i n g . Has anyone any suggestions to make to the
committee which is going to draft a report?
Mr. O t t l e y . There was one point that was taken up this morning
and discussed by several of the directors. As I understand it, when
we get back from this conference the vital question is going to be
what action if any this conference is going to take on the question of
rates under the graduated scale. I would like to ask at this juncture
whether or not this committee is going to make a report to the con­
ference touching that point ?
Governor H a r d i n g . I should not think so. The rate making power
in its initiative rests with the directors of each of the reserve banks
independent of any other Federal reserve bank. The amendment
which authorizes a normal credit line and a progressive rate dis­
tinctly says that each bank for itself may determine this without
reference to any other Federal reserve bank. I do not believe that
any Federal reserve bank would care to lose its autonomy to the ex­
tent of putting its policies in the hands of a committee represent­
ing all of the Federal reserve banks, but I think they would prefer
to stand on their own basis and carry out the intent of the act, solv­
ing their own problems on their own responsibility.
Mr. W i l l i a m s . In answering Mr. Scott’s question a s to the in­
crease of seven or eight millions in the loans and discounts of the
banks, there was a suggestion made this morning by some one that the
banks might be asked to reduce their loans ana discounts by 10 per
cent* That would come pretty nearly wiping out the whole busi*



ness; 15 per cent would almost wipe it out. I would suppose that
the loans and discounts resources of all the banks, national and State,
are about $45,000,000,000. I suppose that the loans and discounts
are somewhere between thirty and forty billion, so that an 8 or 10 per
cent reduction in loans or 5 per cent would cause the payment of an
immense amount of paper.
Mr. S c o t t . H o w many banks have established a progressive rate
thus far?
Governor H a r d i n g . Kansas City established it and has it in effect,
and Dallas has paved the way for the establishment of it.
Mr. S c o t t . Those are the only two %
Governor H a r d i n g . Yes; those are the only two. They have not
put it into effect, but all preliminaries have been carried out. I
understand the Federal Reserve Bank of Atlanta has the matter
under consideration. Is that right, Mr. Ottley ?
Mr. O t t l e y . Yes. At the last meeting of the board, it was the con­
sensus of opinion of the board that a progressive rate was correct
in principle. I feel sure that it would have been put into effect at
the last meeting of our board in New Orleans, except for this confer­
ence here. It was postponed because of this conference. But it is
proposed to put it in in order to be in line with the various Federal
reserve banks, particularly with the St. Louis .bank and the Dallas
Governor H a r d i n g . Would you object to saying, after you have
heard this discussion here to-day, what your attitude, as a director
of your bank, will be toward the establishment of the progressive
rate? What will your advice be when you go back?
Mr. O t t l e y . I would not hesitate to say that my recommendation
will be to put in the progressive rate. On the question outlined
by Mr. Alexander—that is, a 7 per cent rate as a flat rate—I do
not believe that would be in the interest of the system. From the
information we have in the sixth district, and I believe this applies
in the other districts, the overborrowing by banks, regardless of any
basic lines, is confined to a small number of banks and I think it
would be in the interest of the system to put in a schedule of pro­
gressive rates as applying to those particular banks but not to raise
the rate and just make it a flat rate. As I said before I believe, as
a result of this conference, so far as I am concerned, that my opin­
ion would be that it would be good business at this time to do that,
so far as the Atlanta bank is concerned.
Mr. S c o t t . You would not favor leaving your rate at 7 per cent
for the normal line and then penalizing excessive borrowings-----Mr. O t t l e y . Absolutely n o t .
M r . S c o t t . I a m in f a v o r o f t h e p r e s e n t r a te .
Mr. W a y n e . I would like to say a word on this progressive dis­
count rate. It does not appeal to me as a director of the Federal
reserve bank at all, at least for operation in our district. I am afraid
it will do just the opposite for which the Federal reserve act was
enacted. In other words, the act was proposed to enable the banks
to cater to commercial business. I know m the operation of our
own bank we were very often called upon to borrow quite heavily
and we cut it down as fast as we could, but if we are going to accumu­
late a batch of commercial paper, either by direct transactions lor



customers or by purchase on the market, because our borrowings at
the Federal reserve banks happen to go beyond a certain limit, we are
going to be heavily penalized, we are going to stop buying the paper,
and we are going to invest our money in call loans on Wall Street,
which is exactly what the Federal Reserve Board does not want the
member ban Its to do. We are not going to be penalized, but we are
going to put our so-called su 1
* investments that we can
readily realize on without
I think the situation
can be handled, at least in <
tout recourse to the im­
position of the penalties that have been proposed. I think when a
member bank over borrows that it is up to the officers of the Federal
reserve bank to find out the reason for it, and I think in 9 cases
out of 10 it can be corrected. I think that you are going to defeat
the very purpose of the act, which was to enable commercial banks
of the country to do a safe commercial business. We will simply be
driven into call loans on Wall Street for our surplus money if they
are going to penalize us.
Governor H a r d in g . There is another important question, gentle­
men, and that is the question of bankers’ acceptances. It might be
of value to have a brief discussion of that here this afternoon; that is
as to whether or not there should be a differential in the rate in favor
of acceptances in consideration of the fact that commissions are
charged for the acceptances. Then the question as to whether or not
acceptances purchased are taken over by a Federal reserve bank
from a member bank should be charged as a part of the discount loan
of the accepting bank, or whether it should be kept entirely separate.
The directors of the Federal reserve banks of New York and Boston
I think are particularly interested in that question and it may be
of advantage to have the discussion opened by Mr. Treman.
Mr. T r e m a n . I think the sentiment in New York is not in favor
of having acceptances charged against the individual bank. I think
it is quite a unanimous sentiment there that that would be a mis­
Mr. F o r g a n . D o you mean charge against the accepting bank?
Governor H a r d i n g . Charged against the selling bank.
Mr. F o r g a n . The indorsing bank.
Governor H a r d i n g . Yes.
Mr. F o r g a n . The accepting bank has nothing to do with it.
Governor H a r d i n g . I meant the indorsing bank.
Mr. T r e m a n . With regard to the development of acceptances we
have always favored in New York the encouragement of the accept­
ance market on the theory that it was a right and proper develop­
ment of a credit line; and while it has been abused in certain cases
we do not think it has been abused to such an extent that it should
be discriminated against.
The acceptance market is crowing very rapidly. We have found
that whereas only a few of the banks in the New York district are
buying acceptances as means of investing their funds for short periods
that the country banks are coming in in quite large numbers. We
have now I should think something like a hundred banks out of
740 banks in the New York district that are buying acceptances as
a means of investing their short-time funds. There are also cominginto the New York market a great many acceptances that are initiafedixi other districts and they gradually find their way to the New



York market because it is practically the only open market at the
present time. I am sure that our directors feel that we should en­
courage, within a reasonable degree the development of the accept­
ance business in this country.
Mr. B e a l . In the matter of acceptances I think I quote our direc­
tors correctly in saying that they should not be counted against any
line of discounted paper allowed to member banks and that a prefer­
ential rate of discount for acceptances should not be allowed.
Governor H a r d i n g . I think y o u have a preferential rate, b u t i t
has not been availed of to any great extent.
Mr. B e a l . Very little.
Mr. F o r g a n . In Chicago we are developing some market for ac­
ceptances. Our country banks are buying them and learning to rely
upon them in that way. They think they are the best secondary re­
serve that they can have in their portfolio and the reason for that
is that they can be readily disposed of. The same of course applies
to commercial paper. There was supposed to be some difference, but
they were found to be more convertible, and should be more readily
convertible, than commercial paper. An acceptance is more strictly
a document that represents a transaction that is to be liquidated at its
own maturity, much more so than even our commercial paper. We
know that the operators in commercial paper put their paper in a
broker’s hands and raise money to meet that paper as it matures;
but an acceptance is more along the line of a special transaction rep­
resenting goods that are to be either exported or moved from one
part of the country to another, and that the goods will be sold and
the acceptances will be paid promptly at maturity.
I say this because it is a good argument why the acceptance, if it
is to be considered the best kind of secondary reserve, should have no
restrictions of any kind put around the ability to get rid of it,
especially if you adopt this plan of graduating the rates above a
specified line of discount. When a bank gets up to its nominal line
it might have quite a line of acceptances and it might have to con­
vert at a rate as high as they were paying out in Kansas City.
Governor H a r d i n g . What is your view of the rate at which Fed­
eral reserve banks should buy acceptances?
Mr. F o r g a n . I think just at the current rates.
Governor H a r d i n g . Y o u m e a n t h e c u r r e n t r a t e s f o r c o m m e r c i a l
Mr. F o r g a n . For commercial paper; yes.
Governor H a r d i n g . What is your view of that, Mr. Tremani
Mr. T r e m a n . I w o u l d s a y t h e s a m e .
Governor H a r d i n g . Mr. Bailey, is that your view o f it?
Mr. B a i l e y . Yes.
Governor H a r d i n g . We sent out a questionnaire two or three
weeks ago to some of the acceptance houses, dealers in acceptances,
asking a good many leading questions on the whole subject, not only
as to rates but as to whether the acceptance was really what it pur­
ported to be, whether it was actually a self-liquidating instrument.
We want to find out particularly whether an acceptance against
export, for example, was really paid by the importer on t h e other
side, actually liquidated, or wnetiher a t the end of the life of t h e
acceptance, a t its maturity, the form of the credit w a s c h a n g e d ,
that it became a fixed l o a n i n the hands of some member b a n k in



this country. The replies are coming in. They are going to be
tabulated in the next day or two and we will have some further
information on it.
The domestic acceptance particularly seems to have been abused
in some cases. It is being used as a method of granting credit in
excess of the limitations of section 5200. Acceptances have been
made against warehouse receipts where there was no intention of
sale or no prospect of sale.
I have here, gentlemen, a rather severe arraignment of the pro­
gressive rate plan if you would like to hear it. It is written by the
governor of one of the banks which was opposed to putting the
idea in.
That amendment was drawn in order to meet that objection and
counsel says that it does meet it. If a bank agreed to make a rule
that any bank should be exempt at one and the same time from
the operation of the progressive rate that they could make that
exemption, that all banks in their district must be treated alike. That
is the only requirement. It does not seem practicable to give the
member bank the option of picking out what time of the year it de­
sired to be exempt, but if the Federal reserve bank wished to put in
a normal credit line with a progressive rate and the rate put in,
say, during the month of September or October or November, the
normal line would be extended to a larger amount, or the whole
lan should be held in abeyance during those three months, it would
e entirely competent for the directors to do so.
Mr. S c o t t . We find that about 80 per cent of our members are
small country banks with a small capital and small deposits and
that therefore, figuring on the Kansas City plan, their normal line
would be almost negligible. A great many banks having $100,000
capital would have a normal line of only $12,000 or $15,000 under
the Kansas City plan. They are the ones that we really need to
help out, in the farming communities. We had a complete list made
up of every borrowing bank, showing what its rates would be if
they were under the Kansas City plan, and we found that some of
them ran up as high as 18 and 19 per cent. If that plan were ap­
plied it would mean the ruination of the agricultural districts.
Governor H a r d i n g . Governor Wellborn, of Atlanta, told me that
he had reached the same conclusion.
Mr. Scorr. We find our plan works to the detriment of the larger
banks because the larger banks, which are about 15 per cent in num­
ber, could get a larger line under the Kansas City plan than they
could under the plan we finally adopted, but the line that we adopted
was for the benefit of the largest number of banks, and we conse­
quently adopted it.
Mr. U t t e r b a c k . What is your p l a n , c a p i t a l and surplus?
Mr! S c o t t . Capital and surplus. That would be the normal credit
line and every 25 per cent over that 1J per cent.
Mr. M o h l e n p a h . I would like to ask Governor Bailey if in his
judgment the banks that are not using the Kansas City plan at all
for rediscount have, because of this progressive rate, anticipated at
this time th&r full needs? Do they do that in any way?
Mr. B a i u s t . I think they will. We have discovered since this rate
was put in that the bank—in the first place, the Kansas City bank
people have gone out through the country and said to hint—they




have had this long time relation with them and have taken their
rediscount paper. The Kansas City banker calls at a meeting of
these country bankers and says to them, “ Just forget that, we will
take care of you; bring your paper down here.” They have done
that and now the Kansas City bank finds itself loaded up with it.
Then the country bankers come to town and they say to him, “ John,
you have not used your rate at the Federal reserve bank,” and he
will say “ no,” and they will say, “ You will confer a great favor on
us if you will just do that and relieve us this time.”
Now, we have figured in Kansas City that the member bank was
entitled to take from the Kansas Citv bank just the proportion that
it had contributed to the Kansas City bank. That Kansas City
bank has to keep 35 per cent of that as dead money. That is its
reserve. They take the reserve that each member bank carries there
and add to that the capital stock and take 35 per cent of that as
reserve. It seems to us that it is a fair proposition that the member
bank should be entitled to its just proportion of what it had contrib­
uted to the Federal reserve bank in Kansas City and that if it took
any more and used it that they ought to pay a penalty for it. I have
been forced to that conclusion, gentlemen. Perhaps our conditions
are different than they are in the East. Perhaps they are not any
different from those in St. Louis and Dallas, but my goodness alive,
those fellows out in Kansas, Oklahoma, and around there would pass
the buck in a minute and we would never get any deflation or any
contraction. You have to put up the danger signal big enough so
that it means danger if you keep going and won’t slow down. I
have been around to these various bankers’ conventions and meetings
and have talked to them personally, and every one of them will take
the attitude, when we tell them that we must not expand, of u letting
George do it,” and would go on making money just as long as we
would let him. But as soon as he discovers that it is going to
become unprofitable for him to do it, he finds right away that he
can get along without making so many loans. At a meeting not
long ago I was asked the question, “ Do you think we are loaning
this money for providence?” and I said, ‘*1 don’t know how to an­
swer that question as to what you are doing now, but consciously and
unconsciously you have been doing it for the last two or three years
while you have had this opportunity to do it.”
Now, when these fellows come in to make big deposits and you
accept them, every time you accept a big deposit there is with it
an obligation to make a loan. I happen to know of one bank in
Kansas City that accepted a $500,000 deposit of the General Motors
Co. and they thought it was fine business. They carried it for six
months at a low rate of interest, and right during the time of stress
the $500,000 was called for and they asked for a $500,000 loan. It
was just that kind of condition that was brought about there, and
they bring the stuff over to us to rediscount.
Mr. D e c k e r . I think this is a matter that differs in different sec­
tions. In Minneapolis I have found nc sentiment whatever in favor
of the graduated interest rate, for the reason that our big strain
comes almost at once, during the crop-moving season. For instance,
a year ago last fall the rediscounts of the Federal Reserve Bank of



Minneapolis for its member banks were $97,000,000 in the middle
of September and they were down to $3,000,000 by the middle of
Now, we think it would be a very great mistake to say to the
member banks, who are financing these crops and against whom any
charges made will naturally sooner or later go back and then to the
producer of the crops, to say to the bank for nine months of the
year they shall pay a certain rate and then when they come in to
move the grain of the country and borrow a large amount of money
that we will stick them 12 per cent. It would not work in our dis­
trict at all. It would work just exactly the other way. I agree
entirely with what Mr. Reynolds said this morning. I do not
think that a bank that is located in a district where they never have
to borrow any money is entitled to any more credit than a bank that
is located in a district where they have at times to borrow their heads
off. One is just as much a necessary part of the commerce of this
country as the other. Therefore, I do not think we should say to
some little bank in the State of Minnesota, for instance, where they
have no demand for money at all, but just enough to take care of
their own deposits, that because they have never been a borrower and
possibly never will be, that we must forever leave the reserve there
tor them because they are entitled to it, when a bank in Minne­
apolis or St. Paul, at certain seasons of the year has to extend its
loans tremendously in order to furnish food for the people of the
world. We must look after those things, it seems to me, and care
for the conditions in the district. In the Minneapolis district
I find no sentiment in favor of it at all. We may reach a point
where it may be necessary; and if that point should be reached, I
would not hesitate for a moment to put it into effect.
If you want to restrict the borrower of a certain sort, do not penal­
ize the seasonal borrower who has need of a large line for a small
time. For instance, assume a bank with a normal line of $50,000.
If that bank borrows nothing for, say, 10 months in the year, then
for 2 months in the year it borrows $250,000, you could establish a
rule where the penalty rate did not apply to that $250,000 of seasonal
two months borrowing. If, on the other hand, you had a bank whose
normal line was $50,000 and carried $125,000 or $150,000 all of the
year through, it would apply to that bank. In other words, you give
the benefit of the exemptions you see of the freedom from loans to
the peak of the load.
Mr. F o r g a n . I should like to suggest just one question. I put the
question t o the Dallas representative. My recollection is that some
time during the winter, when the Dallas district got to the height of
its season on cotton and was carrying cotton, it practically used up
every dollar of reserves it had. If it had not borrowed from other
banks in other districts it would not have had any reserve at all,
which means, of course, it could not have done what it did do, take
care of the cotton situation. Was it general? Were all the banks
in the district borrowing t o create the need, or were there only a few
of the larger banks in the centers, in Dallas?
Governor H a r d i n g . Comparatively few of the larger banks are r e ­
sponsible for that.



Mr. S c o t t . Yet a great number of interior banks were borrowing
too. I suppose one-fourth of the banks were borrowing at that time.
Mr. F o r g a n . But a few large banks that went under that l o a d .
Mr. S c o t t . Yes.
Mr. F o r g a n . Now, then, do you contemplate taking advantage of
what Governor Harding has drawn attention to ? When that situa­
tion arises again, are you going to let these large banks do the same
thing again and waive your regulation in regard to the progressive
rate, or how are you going to get through? If the big banks are
not allowed to get this big rediscount, how are you going to carry
that cotton? You can not expect them to do it at 7 per cent and pay
you 15.
Mr. S c o t t . We are g o i n g to let the larger banks pay the progres­
sive rate.
Mr. F o r g a n . How can they do it ?
Mr. S c o t t . That is not such a grave penalty.
Mr. F o r g a n . The progressive rate?
Mr. S c o t t . N o .
Mr. F o r g a n . They are paying 15 per cent in Kansas, though.
Mr. S c o t t . Under the Kansas City rate they would, but not u n d e r
Mr. F o r g a n . Where d o y o u get the limit?
Mr. W a t t s . Y ou reduce the l in e s t o your b i g b a n k ?
Mr. Scorr. Here we take a bank that under the Kansas City plan
might have three and a half million normal line, but using the capi­
tal and surplus have got a line of two and a half million, if the
present rate continues, that is, at 6 per cent. Now, on every 25 per
cent increase the rate goes up one-half of 1 per cent, so that by the
time that bank has $5,000,000 borrowed money it is paying 8 per cent
on the last 25 per cent, or an average of 7 per cent on the five million.
I do not contemplate any bank in our district, whose normal line is
two and a half million, that is going to borrow to exceed five million.
We have never had, and I do not presume we will have* so that our
progressive rate after all would not be any higher than the basic rate
that Mr. Alexander proposed this morning to put it for the New
York district, the 7 per cent rate.
Mr. M o h l e n p a h . Might not this be true, that the little banks
would be borrowing through the central bank, getting their lines
there at a higher rate of interest, and the city banks rediscounting
at the Federal reserve bank at a lower rate of interest, would that
not be true in a large number of small banks in the Texas district?
Mr. S c o t t . In the Texas district, under the plan we propose to put
in, the country banker might be borrowing money cheaper than the
city banker; in other words, he has got a line of $75,000 in his
capital and surplus, and he is getting that at the current rate, which
is 6 per cent. Of course, if a city banker is borrowing double his
amount he is paying 8 per cent on some of his money, so it will
tend to encourage the country banker by the persuasive method that
was suggested coming from the city banker to borrow as much as
possible direct from the bank and to leave the city bank’s line open
for local business.
Mr. M o h l e n p a h . I had had the complaint from several country
banks in different districts that the city banker was raising his rate



up on them. For instance, the commercial rate made at the Federal
reserve bank to Kansas City, Chicago, and St. Louis, that raised the
rate to 6^ to 7 per cent on the country banker; that is, it is rather
an automatic proceeding.
Mr. S c o t t . We have not got a bank loan in our portfolio giving
over 6 per cent.
Mr. M o h l e n p a h . I am not talking about the city banker.
Mr. S c o t t . Ours is the city banker.
Mr. W a t t s . That is absolutely true, the city banker is raising the
M r . M o h l e n p a h . I had one man tell me he put up $500,000 Lib­
erty bonds and charged 6£ at the city bank, as security, and the
excuse he said was given to him, the reason, rather, was they had to
pay a higher rate for the Federal reserve bank. The point I would
like to make, is it absolutely necessary in every transaction made in
a Federal reserve bank that it has got to be made on the basis of
profit to the Federal reserve bank, or is it not time that these reserve
banks will have to forego their profit in this overplus of borrowing
when the country banks have to move crops or other commodities ?
Mr. S c o t t . I said a moment ago wib did not have a loan on our
portfolio—I meant of the banks. Of course, individuals are getting
a little higher rate,
per cent instead of 7 per cent.
Mr. B a i l e y . Is it good business to raise the rate in New York to
7 per cent? The fellows doing the mischief are the fellows that are
extending the credit all over the country. If you do not raise the
rate of interest to him, how are you going to get this effect of slow­
ing down?
Mr. M o h l e n p a h . I am not contending against it. I am trying
to show up the modus operandi, how this thing increases there as it
is related to the country banker who is taking care of the man who
is raising the crop.
Mr. B a i l e y . I want to give a concrete illustration. I had a mer­
chant, a good man; he had been getting a rate of 6 per cent as long
as I remember, and he came in and we said “ We are going to charge
you 7 per cent; we have raised on all of them.” He said, “ My God,
are you going to charge 7 per cent? I won’t pay it. I can stand 6
per cent I can get along with less money.” And he just up and
paid his note, all m good nature.
Governor H a r d i n g . Gentlemen, is there anything more the con­
ference wishes to discuss?
Mr. U t t e r b a c k . I should like to ask one question in regard to
rates. If New York should put on a 7 per cent rate, do not 5 l rates
have to finally be approved by the Federal Reserve Board?
Governor H a r d i n g . Oh, yes.
Mr. U t t e r b a c k . I s it not the policy of the Federal Reserve Board
to make all rates uniform in the district ?
Governor H a r d i n g . Not necessarily. All in a district?
Mr. U t t e r b a c k . I mean over the system?
Governor H a r d i n g . Not necessarily. There is no obligation on
the part of any district to have uniform rates.
Mr. B a i l e y . Would not this obtain? Suppose I carry a balance
in New York City and expect to rediscount on it and they put the



rate to 7 per cent and Philadelphia is kept at 6, would I not probably
transfer my balance to Philadelphia ?
Mr. S cott, They would not raise them to 7, would they?
Mr. B a i l e y . I do not know.
M r. S cott . I f they d id raise it, th ey w o u ld reduce it quite sh ortly .

Governor H a k d i n g . I would suggest, gentlemen, that you be care­
ful not to give out anything about any discussion of discount rates.
That is one thing there ought not to be "any previous discussion about,
because it disturbs everybody, and if people think rates are going to
be advanced, there will be an immediate rush to get into the banks
before the rates are put up, and the policy of the Reserve Board is
that that is one thing we never discuss with the newspaper man. If
he comes in and wants to know if the board has considered any rates,
or is likely to do anything about any rates, some remark is made
about the weather, or something else, and we tell him we can not dis­
cuss rates at all, and I think we are all agreed it would be very illadvised to give out any impression that any general overruling of
rates was discussed at this conference.
We have discussed the general credit situation, and your committee,
which has been appointed with plenary powers, will prepare a state­
ment which will be given out to the press to-morrow morning, and
we will all see what it is. You can go back to your banks and of course
tell your fellow directors as frankly as you choose what happened
here to-day, but caution them to avoid any premature discussion of
rates as such.
We have had an exceedingly interesting day, gentlemen. The sug­
gestions which have been made have been valuable and we have
profited by your visit here. I wish to express on behalf of the board
our appreciation of your coming here and to thank you for the un­
selfish and loyal interest you have taken in the Federal reserve bank
situation throughout the country in giving this matter the careful
thought and consideration that you have, and I am sure that the
spirit which has manifested itself at this meeting here to-day will
spread throughout all the country to the member and nonmember
banks, and if it does, we can look the future in the face with courage
and confidence.
(Thereupon, at 5.03 p. m., the conference adjourned.)