Full text of Federal Reserve Governors Conference : Meeting Documents : April 12-15, 1921, Fifteenth Conference of Governors of Federal Reserve Banks : Joint Conference Proceedings, Volume 4: April 15, 1921

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PROCEEDINGS


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O F A

CONFERENCE

O F THE FEDERAL

RESERVE

WITH T H E

GOVERNORS

O F THE FEDERAL

RESERVE

ASSEMBLY R O O M
FEDERAL R E S E R V E B O A R D
METROPOLITAN BANK. BUILDING
WASHINGTON, D. C.

APRIL 12-15, 1921.

ASSOCIATED SHORTHAND REPORTERS
SUITE 1 6 - 2 3 A P P E A L S

BUILDING

426 FIFTH STREET, N. W.
WASHINGTON, 0. G.

BANKS

BOARD

733

CONFERENCE @ F GOVERNORS O F FEDERAL RESERVE BANKS.
FOURTH DAY.

Washington,

D . G.,

Friday, A p r i l 15, 1921.

The C o n f e r e n c e

o f Governors r e a s s e m b l e d p u r s u a n t

to

adjournment a t 9 o'clock a. mPresent:

T h e Governors o f the twelve Federal Re-

serve Banks a s previously indicated.
PROCEEDINGS.

The Chairman (Governor Strong).
will come t o order.


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T h e Conference

T h e next topic o n the program,

on the panties list, i s III (se).
{e) C a n the amount o f float carried b y the Federal
Reserve Banks a s a result o f the h o l d i n g f
o
Federal reserve notes b y a bank other t h a n
the bank o f issue b e reduced.

I have a memorandum o n that subject.
Governor Calkins.

of topic {da}?

W h a t disposition,

i f any, w a s m a d e

Governor “cDougal.

»

@ discussed t h a t matter, b u t

no a c t i o n w a s taken.

The Ghairman. I

did not understand t h a t Governor V a n

aandt wanted a n y action taken.
Governor Galkins. I

should s a y i t should b e referred

to the committee t h a t i s handling t h e uniform circular
matter.

i

t is a

part o f t h e c o l l e c t i o n problem.

The Chairman.

D o y o u make a motion t o that effect,

Governor Galkins?
Governor Gelkins. I

do.

Governor V a n zandt. I

will second that motion.

Governor wicDougal. I

think t h e p r o c e d u r e

objectionable,

but I

think i t i s a

i s not

q u e s t i o n t o b e deter-

mined b
y each bank f o r itself.
Governor Calkins. Unquestionably.

Y o u have g o t t o

treat every single check b y itself.
The Chairman.

A r e y o u ready f o r the question?

(The m o t i o n w a s p u t e n d u n a n i m o u s l y carried).

The Chairman.

O u r head accountant calls attention

to t h e f a c t t h a t a p p r o x i m a t e l y o n e - h a l f

o f the float n o w

carried

b y the N e w Y o r k B a n k i s i n fact represented

Federal

heserve notes


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o f other Federal

Reserve banks

by

in

which i
c hawe/processof redemption
bank o f issue.

o r return

t o the

H e makes t h e following suggestions:

"Approximately one-half t h e total float now carried
by the Federal Keserve E a n k o f Nex York its represented
by the Federal teserve Notes issued b y other reserve banks,
received b y this bank a n d i n process o f sorting a n d count~

ing, o r being made ready for shipment o r i n transit.
there i s being carried a t the present time i n the cash
of the bank about 715,000,600.

i n reserve notes o f other

benks issue, a n d i n addition t o this there a r e i n transit
to t h e o t h e r b a n k s

o r t o i a s h i n g t o n a p p r o x i m a t e l y »~35,000,000

more e

"It is the present practice for all the reserve banks
to pay for notes o f their issue received f r o m the other
banks u p o n arrival o f the notes a t the bank o f issue;

or

in the case o f those forwarded t o xashington f o r redemption, u p o n advice o f their receipt a t washington.

T h i s

makes i t necessary f o r the shipping b a n k t o carry t h e float
on the notes i n transit a s well a s those i n process o f
counting, etc.


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Federal Reserve Bank of St. Louis

T h e bank o f issue i s i n a position t o

deduct t h e s e n o t e s f r o m i t s c i r c u l a t i o n
are p a i d f o r b y it.

a s soon a s they

"It i s possible t o work o u t a plan whereby t h e issuing
bank could carry t h e notes o n its books f r o m the time t h a
are shipped instead o f from the time t h e y a r e received.
This could b e done b y having e a c h bank wire each other
bank daily t h e total amount o f its shipment, t h e tank o f


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Federal Reserve Bank of St. Louis

issue i n each d a s e immediately crediting t h e shipping b a n k
with t h e amount.

T h i s would immediately eliminate f r o m

tae f l o a t t h o s e n o t e s “ h i c h a r e i n transit,

a n d i n the

case o f the N e w Y o r k bank this would m e a n a n average o f
between 2 , 0 0 0 , 0 0 0 a n d 3,000,000,

a n d f o r t h e entire sys-

tem probably f r o m ~5,000,000 t o 3,000,000

", further reduction i n the float could b e made b y
speeding u p somewhat t h e operation o f counting a n d shipping
so that there would b e held a s f e w notes o f other banks
issue a s possible.

I t would not, horever,

b e possible

to

entirely eliminate t h e float through this means f o r the
reason that there will always b e o n hand o n e day's entire
receipts o f notes unassorted a n d i t will require o n the
average a t least t w o additional days t o make t h e sorts,
count a n d p r e p a r e f o r shipment.

fence i n New York,

B a s e d

o n the exper-

i t would b e impossible t o reduce t h e

float o n these notes b y a n y speeding u p process t o a

point below f r o m 4 , 0 0 0 , 0 0 0
from ~ 1 0 , 0 0 0 , 0 0 0

t o g15,000.

t o 7,000,000,

o r perhaps

f o r t h e system.

"Another point which has a material bearing o n this
float i s the shipment o f the mutilated notes t o Washing-~
ton for redemption.

I

t occasionally becomes necessary t o

a t a time besuspend shipment f o r a period o f several days
cause o f t h e i n a b i l i t y o f t h e R e d e m p t i o n A g e n c y t o handle

them.

T h i s has recently happened with the result that

there a r e n o w o n hand i n New York approximately gd,000,000
in mutilated notes o f other banks issues f o r which there

is no means o f securing payment until shipment i s permitted b y washington.


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Mme float o n reserve notes c a n be entirely elimiits
nated b y permitting e a c h reserve b a n k t o deduct f r o m

circulation its entire holdings o f Federal Heserve Notes,
not only o f its o w n issue b u t o f all other banks! i s s u e
as well.

“There are two chief arguments egainst this handling:
"ist - The circulation figures o f the individual banks
would n o t b e correct.

"Tt i s true that the circulation figures o f the
individual b a n k w o u l d b e i n c o r r e c t

t o the extent that t h e

758

notes w h i c h i t holds

o f other banks i s s u e m a y b e either

more o r less t h a n t h e notes o f its issue h e l d b y other
banks. N o t w i t h s t a n d i n g this, t h e n e t circulation would
be m o r e n e a r l y a c c u r a t e t h a n i t i s u n d e r t h e p r e s e n t

plan.

"2nd.

I f i t were permissible t o deduct the notes

of other banks f r o m the circulation figures, t h e holding
benks would n o t b e under a s great inducement t o promptly
return t h e n o t e s a s t h e y a r e a t present.

‘This i g entirely a matter o f administration and should
have n o bearing o n the merits o f the discussion.

‘Te Federal Reserve Act provides that Federal Reserve Notes

"shall be redeemed i n gold o r lawful money at
any Federal reserve bank",
and i t also provides t h a t -

"No Federal reserve bank shall pey out notes
issued through another under penalty, etc."
"Tt i s apparent, therefore, that notes issued b y Chicago
and received f o r credit a t New York a r e a s much retired
from the circulation w h e n deposited i n the Federal neserve

Bank o f New York as though deposited i n the Federal


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Federal Reserve Bank of St. Louis

Reserve B a n k o f Chicago.

"Te all o f the reserve notes irrespective o f issue
are t r e a t e d a s a

deduction f r o m i t s circulation b y e a c h

of the reserve banks, t h e consolidated statement f o r the
system will t h e n show a n absolutely correct figure a s t o the
circulation o f the system.

T h e circulstion figures a r e

at t h e p r e s e n t t i m e i n f l a t e d a t l e a s t 2 5 , 0 0 0 , 0 0 0

be-

cause o f the inability t o deduct these notes o r t o return


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Federal Reserve Bank of St. Louis

them p r o m p t l y f o r credit.

A

t times t h i s i n f l a t i o n h a s

amounted t o »~50,000,000 or more."
To summarize, ir. Rounds makes three suggestions.
@ne i s a more prompt accounting a n d shipment.

T h e

second suggestion rill n o t b e necessary 4 f the third i s
adopted.

T h e s e c o n d w o u l d b e t o charge n o t e s r e t u r n e d

to the issuing bank a t once b y exchange o r telegram;
and the third, which seems most comprehensive, would b e
to deduct t h e notes o n hand belonging t o other Neserve

Banks from the circulation of the bank that holds them,
making really a net circulation f o r the whole system.
I am not sure that t h e objects t o b e gained justify
the r a d i c a l d e p a r t u r e f r o m t h e p r e s e n t situation,

but

cirit will give a most accurate picture o f the gross

culation o f t h e w h o l e system.

T h e legality o f i t i s doubtful,

Governor Seay.

Mr. Harrison. I

have a

this o v e r with Mr. Rounds. I
confuse h i s mind,
able,

few views o n that. I

is it

talked

purposely d i d n o t rant t o

o n recommendations t h a t might b e desir-

b y technical, l e g a l d i s c u s s i o n t h a t p r o b a b l y h a d

not been settled a t all.
I think there i s m u m
this particular question.

t o b e said o n both sides o f
O n the first recommendation h e

makes, t h a t is, with reference t o the telegraphic advices


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Federal Reserve Bank of St. Louis

of notes o n hand, there i s certainly n o question legally
or f r o m t h e p o i n t o f v i e w o f procedure.

to the second suggestion,
sibility P a y f e

s i t h reference

i n which h e suggests t h e pos-

o e tmeserve Bank o f New York deducting

notes o f other iederal Keserve Banks f r o m its o w n circulation, I

think myself there i s some real question.

There i s n o doubt, however, t h a t b y these telegraphic
advices--one F e d e r a l K e s e r v e b a n k u p o n a d v i c e f r o m N e v
York,

f o r instance, t h a t t h e y h o l d »~1,000,000

will b e r e q u i r e d i m m e d i a t e l y

its circulation,

o f notes,

t o deduct t h o s e n o t e s f r o m

s o that t h e first recommendation o f

Mr. Rounds would really accomplish t h e second.
The Chairman.

I

t would, except that i t would not

going through
accomplish t h e deduction o f notes which a r e
issue, w h i c h
for redemption o r for return t o the pank o f
have n o t teen p u t i n shape f o r actual shipment.

T h e

the other two.
last suggestion i s more comprehensive than


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Federal Reserve Bank of St. Louis

Governor V a n Zandt.

I

t would wipe o u t those thet

amount entered
are being sent for redemption, because t h e
the sameon wire advice would b e made o n those j u s t
The Chairman.

Yes.

Mr. narrison.

standT h e r e i s n o question f r o m a legal

ion.
point as to the operation of the first rec ommendat
The Chairman.

o f the
T h i s would make t h e entries a s

date o f shipment instead o f the date o f receipt.

That is

all i t amounts to.
Governor Calkins.

k e have advocated a n d s i a c w s e d

effect whatever.
this matter f o r four years without a n y
r e c omnendation
I do not agree that t h e third o r second
other one, t h a t is,
would obviate t h e necessity f o r t h e

one bank t o another,
when the notes are dispatched from
the issuing bank should
they should b e advised b y wire, a n d
make

t h e entries.


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Federal Reserve Bank of St. Louis

Now i f y o u treat t h e whole m s s o f Federal HKeserve
Notes o n hand a s deductible, y o u have n o t covered t h e
omes t h a t a r e returned.

T h o s e entries a r e n o t made

now w h e n t h e s h i p m e n t s a r e m a d e a n d s h o u l d b e made.

adopt t h e second recommemdation o r the third--I d o not
know what t h e numerical order o f the recommendation is-The Chairman.

T h a t i s the third one.

Governor Calkins.
The Chairman.

T h a t i s t h e most comprehermive one.

Yes.

Governor Calkins.

T h e statement o f outstanding notes
in

is and always has been/correct.
Tne Chairman. I

think so, too.

B u t i f y o u look a t

it a s all o n e note issue o f one Federal Neserve E a n k , which
happens

t o b e i n the h a n d s

o f various b r a n c h e s ,

what you

would t h e n d o would b e t o deduct t h e amount o f notes i n
each branch f r o m the total outstanding, a n d that i s

Rounds ' third suggestion.
Governor Seay.

T h a t would confuse t h e account o f

circubtion with e a c h Federal Reserve B a n k a n d would n e cessitate correcting entries w h e n t h e matter w a s settled.
The Chairman.

O h , n o t a t all.


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Federal Reserve Bank of St. Louis

Governor V a n Zandt. T h e r e would b e possibilities o f
having
one b a n k / a m i n u s c i r c u l a t i o n a n d a n o t h e r b a n k a

plus

circulation.
Governor Calkins.

B u t i t would n o t have t o b e cor-

rected.
The Chairman.

Y o u would n o t deduct f r o m the gross

amount o f c i r c u l a t i o n

tion, a

o f a n y o m e bank,

b y t h e recommenda-

greater amount t h a n happened t o b e i n the hands

of the other eleven Federal Keserve Banks.

I t would

always b e some. amount l e s s t h a n t h e t o t a l a m o u n t o u t

standing.
Govermor Calkins.

A n d i t would never have t o b e cor-

rected.
Mr. Harrison.

M y point i s this. I

really agree that t h e procedure t h a t I

complish Mr. Rounds’ purpose. I

think w e all

suggest would a c -

do not remember the

numerical o r d e r o f t h e s e s u g g e s t i o n s , e i t h e r ,

but if

each Federal Reserve B a n k each night telegraphs t h e
amount o f notes o f other Federal Neserve Banks t h a t i t
has o n hand,

a n d t h e b a n k o f issue, u p o n advice, i m m e -

diately a s o f that date deducts those notes f r o m its
circulation, y o u accomplish t h e purpose o f getting a


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Federal Reserve Bank of St. Louis

764:

correct n o t e circulation, w h e t h e r

are i n the h a d s

o r not those notes

o f the other Federal Kheserve Banks o r

in transit.

Governor Calkins. '

#xcend in. s o far a s they have

unassorted notes.
Mr. darrisone E x c e p t i n s o far a s they have unassorted
notes, yes. I

think that

i s the difficulty under which

you will have t o suffer.
Governor Beay.

T h e third recommendation i s that each

pank d e d u c t t h e t o t e l v o l u m e o f o t h e r F e d e r a l N e s e r v e
notes f r o m i t s o w n c i r c u l a t i o n ?
Governor Galkins.

course,

Exactly.

T a a t i s t h e proper

i n m y opinion.

Governor Seay. T h a t vould not corfuse your own
account, i

understand.

The Chairman.

I t would make t w o sets o f figures o n

circulation.
Governor S e a y .

Tne Chairmane
entire system,

T h a t i s correct.

O n e being t h e circulation o f the

f r o m which would b e deducted t h e notes

o n

hand, a n d t h e o t h e r t h e i n d i v i d u a l c i r c u l a t i o n s t a t e m e n t

of each ban«x, f r o m which would b e deducted simply that

amount o f notes which h a d come b a c

t o its hands.

M

y

thought o n this subject i s t o deal with i t b y t w o methods: first,

t o make a

recanmendation that t h e second

plan b e adopted a t once, which would j u s t affect the
bookkeeping adjustment o f the telegraph, and, second,
to recanmend t o the Federal keserve Board t h a t they

consider the practicability a n d legality o f the third
recommendation,

a n d i f i t c a n b e adopted,

t o have i t

adopted.
Governor McDougal. I

will make s u c h a motion.

Governor Calins. I

will second it.

Governor V a n Zandt.

T h e r e i s o n e point u p o n which

I would like t o have information, M r . Chairman.

Y o u

state o n page 2 , o n the t o p o f the page o f your memorandum, that t h e shipments w e r e being held u p b y the Federal Keserve b a n k o f New York because o f the inability

of the exemption agency t o handle them.
The Ghairman.
vashington.

“ 6 had a stop order o n shipments t o

“ 6 Quit s h i p p i n g them, t h e y ‘we s o far

behind.
Governor V a n Zandt.
shipping t h e m i n ?


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Federal Reserve Bank of St. Louis

T h a t is, theystopped y o u from


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Federal Reserve Bank of St. Louis

The Ghairman. Y e s .
Governor V a n zandt.

I t prevented y o u from having t h e m

leave y o u r b a n k ?

The Chairman.
just a s w e did.
currency

Yes.
h

T h e y g o t behind i n their rork,

e had 2 6 , 0 0 0 , 0 0 0 uncounted pieces o f

i n t h e b a n k e t o n e time, a n d t h e y w e r e j u s t a s

badly o f f i n :ashington.
Governor V a n zandt.

Y o u did not put a

stop order o n

currency coming i n t o you simply because y o u rould n o t
send i t out?
The Ghairman.

0 h , no.

i

t simply meant that i t

piled u p w i t u s instead o f piling u o i n the redemption
bureau i n the Treasury.
Governor Young. s o u l d t h a t b e when t h e shipment w a s
ready t o snip o r would y o u handle t h e m before t h e shipment
is m a d e ? I

noticed

i n this r e p o r t p r e p a r e d

b y Mr.

Rounds t h a t h e i s r a t h e r a g a i n s t t h a t plan, b e c a u s e s o m e

of the banws might hold these notes there until they

were able t o sort them. D o n ' t you think that ought t o
be o n the actual shipment w h e n i t i s ready?
The Chairman.

d e says that t h e objection which h e sug-

gests s h o u l d n o t b e u r g e d a s t h e r e a l o b j e c t i o n b e c a u s e

that i s a matter o f administration which each b a n k should
be able t o control.

i

t i s simply a

matter o f dis-

cipling your bank about it.

Governor sicDougal.

I t is my understanding o f this

plan that immediately u p o n the notes being prepared f o r
Shipment t o the issuing bank, t h a t t h e issuing bank b e
notified a n d t h e entries m a d e a t both ends a t that moment.»
The Chairman.

T h e moment t h e shipment leaves t h e

bank a telegram will g o t o the bank t o which they are
Shipped, r e p o r t i n g t h a t a
and t o prepare

certain emount h a s b e e n shipped

t o c h a r g e credit.

Governor V a n Zandt.

T h e same procedure t o take place

in connection with those t h a t are shipped t o washington
for

r e d e m p t ir octhat
nf
bank.
The Chairman.

T h e same procedure.

Under t h e third comprehensive plan, m y thought
would b e t h a t t h e m i n u t e t h e s o r t i s completed, r a t h e r

than t h e shipment made, t h a t i t would b e possible t o
make deduction.


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Federal Reserve Bank of St. Louis

Governor G a l k i n s .

B e f o r e t h e sort is-made?


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Federal Reserve Bank of St. Louis

mean the total sort, t h e sort

The Mhairman. I

of e d e r a l Neserve notes f r o m a l l other kinds o f money.
Governor Calkins.

B u t n o t the sort f o r the various

banks ?
The Chairman.

N o .

Governor Calkins.

The Chairman.

T h a t i s t h e w h o l e point.

A s soon a s y o u determine t h e amount o f

Federal Keserve notes o f other Federal Keserve Banks i n
your hands, t h e n y o u m a k e t h e d e d u c t i o n f r o m y o u r g r o s s
circulation,

A r e y o u veady f o r

u n d e r t h i s t h i r d plan.

the q u e s t i o n ?

(The motion was p u t a n d unanimously carried).
Governor Galkxins. T h e r e a r e some difficulties
carrying

i t out, o w i n g t o d i f f e r e n c e

involved

i n the telegraphic transfer.

posal,

t h e comprehensive proposal,

and that i s the o n e that I

in

i n time a n d t h e t i m e
T

h

e third pro-

w o u l d c u r e a l l that,

think w e should t r y hard t o

get, i n m y opinion.
Governor Norris.
Governor Calkins.

« h i c h o n e i s that?
T h e o n e which permits t h e N e w York

Bank t o deduct a l l Federal Keserve notes f r o m its outstanding circulation w h e n held i n n o matter what bank.


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Federal Reserve Bank of St. Louis

769
The Chairman. I

a m rather inclined t o think, a l -

though Mr. saarrison will n o t agree with me, t h a t t h e provision o f t h e l a w w h i c h r e q u i r e s e v e r y K e s e r v e B a n k t o

redeem the notes o f the other banks might afford a basis
for carrying o u t that plan.
Mr. darrison. I

but I

think t h a t w o u l d b e t h e o n l y basis,

do not s e e h o w that basis would justify o n e bank

deducting f r o m its o w n liability o n its o w n outstanding
circulation, redemption o f notes o f other banks which
it h a s made.
as a

do.

matter

I f w e c a n justify i t under t h e lew, I
o f procedure,

feel,

t h a t i t i s t h e right thing t o

m y only doubt was t h e legality o f it.
Governor Calxins.

be incorrect,

T h e individual deductions m a y

b u t t h e total deduction w i l l b e beyond crit-

icism.

The Chairman. I

am looking a t it not a s notes o f

the Federal Neserve bank, b u t these a r e notes o f the United
States.

T h e y a r e issued t o us, a n d w e are obliged t o re-

deem them, a n d o n e b a n k m i g h t b e c a l l e d u p o n t o r e d e e m

the whole mass.

I f w e p a y o u t gold f o r a United otates

note, w h i c h t h i s i s , I

do not see w h y w e are not en-

titled, when w e pay out that gold,

t o deduct the amount

of that note from the total amount o f notes outstanding
for t h e whole system, because that i n effect i s what
we a r e doing.
Mr. Harrison.

I t will raise t h e reserve percentage

of t h e s y s t e m t o s o m e extent.

Governor Calkins.

s h y should i t not?
am not arguing that point, Governor,

Wir. darrison. I

but simply stating t h e fact.


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Federal Reserve Bank of St. Louis

The Chairman.

L e t u s proceed now t o topic (f)-

(f) S h o u l d wire transfers b e limited.
Governor Calkins.

T h e r e i s a long discussion o f

this matter b y o u r cashier, w h i c h I

will n o t read.

T h e

substance o f i t i s that w e are, particularly i n our part
of the country, b e i n g overloaded w i t h unimportent telegrams r e g a r d i n g s m a l l i t e m s i n v o l v i n g s m a l l transfers.

I think t h e smallest o n e o n record i s less t h a n a dollar.

Governor Seay. O n e o f our itcrs w a s »16.00.
te were asked t o transfer b y wire t o San Francisco, f o r
one bank, 1 6 . 0 0 ,

f o r the credit o f another bank.

Governor F a n c h e r .

D i d t h a t represent t h e proceeds

of collection?
Governor Seay.

No.

T h a t was j u s t a regular

771
transfer f o r t h e u s e o f s o m e i n d i v i d u a l p e r s o n ,
Governor Calkins.

e h a v e s o many,

w

o f »,16.00.

t o m y mind,

utterly absurd requests t o make transfers, absurd because t h e a m o u n t i n v o l v e d i s s o small, t h a t i t does n o t
a n d t h e wires a r e terribly over-

justify u s i n g t h e wires,

loaded.

Y o u probably d o not get i t a s bad back here i n

the East, where y o u are a l l close together,

a s w e d o out

there, w h e r e t i m e e n t e r s i n t o t h e m a t t e r v e r y seriously.

I think a minimum should b e agreed upon and adhered to.
D o you wish t o fix a minimum now o r

Toe Chairman.

have i t referred t o our o l d wire committee?


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Federal Reserve Bank of St. Louis

Governor Galkins- H a v e w e a n old committee o n the
wire s y s t e m ?

The Chairman.

Y e s , w e have one-

Govermor Seay. I

agree w i t h Governor Calkins t h a t

there should b e a limit, a
Governor Fancher. I
that c o m e s u p .

think there i s another feature

A f t e r t h e l s t o f July t h e operation o f

our l e a s e d w i r e s

and I

minimum.

i s g o i n g t o b e v e r y m u c h m o r e expensive,

think w e ought t o d o everything “ e c a n consistently

to relieve t h e congestion o n the wires a n d a t the same time
save considerable expense t o the bank.


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Federal Reserve Bank of St. Louis

WT2

Governor MeDougal.

T h e congestion o n the wire does

not c o m e s o m u c h f r o m t h i s p a r t i c u l a r a b u s e a s i t d o e s
come f r o m t h e u s e o f wires f o r p u r p o s e s w h i c h c o u l d b e

just a n d a s well served through t h e mails.
observation

T h a t i s our

i n thicago.

The Chairman.

J u r experience i n New York i s that the

congestion o n the tire arose f r o m inquiries i n regard t o
non-payments

a n d irregulérities

i n collection items m o r e

than f r o m a n y o t h e r source.

Governor Calkins. A n o t h e r thing i s that t o o many
words a r e u s e d i n the w i r e s a n d t h e u s e o f u n n e c e s s a r y

words causes a

tremendous expenditure.

F o r instance,

when o n e Federal teserve B a n k notifies another Federal
Reserve E a n k o f a n irregularity i n collection a n d tells
it t o i m m e d i a t e l y w i r e a l l branches,

o r words

t o that

effect, that i s not necessary, because i f the bank hasn't
sense e n o u g h t o d o t h a t w i t h o u t b e i n g t o l d ,

i t ought t o

quit.
Governor V a n zandt.

s o n t that b e taken care o f b y the

code that will b e out o n the 15th o f next month?
Governor ticDougal. I
Toe Ghairman.

W

think i t will t o a great extent.

e had a

circular f r o m t h e B o a r d n o t

very l o n g a g o impressing t h e necessity f o r economy i n
the u s e o f messages.

I t seemed t o mean that some g o o d

might b e a c c o m p l i s h e d


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Federal Reserve Bank of St. Louis

i f w e h a d some comprehensive a n d

extensive instructions t o the banks a s t o telegraphing.
Governor Calkins.
Mr. Chairman,
Conferences,

T h a t has b e e n tried several times,

i n various ways, b y resolutions
a n d elsewhere,

b u t s o far e s I

i n these

know t h e y

have h a d n o appreciable effect.
Governor Seay. D e f i n i t e instructions h a v e t e e n
issued t o the heads o f each department i n our bank t o b e
governed,

i n regard t o the length o f messages,

b y the

same principle which governed t h e dispatch o f telegrams
in former times, b e c a u s e

o f t h e cost.

W

e are tryirg

to do it, but whether we succeed o r not I don't know;
but all o f the department heads have quite rigid i n structions u p o n that matter.

The Chairman.

W e are all agreed that something

must b e done a n d i t i s a question h o w t o d o it. ‘ h a t i s
your suggestion, Governor C a kins?
Governor Calkins.
vate wire,

D u e t o the congestion

i t would b e advisable

t o set a

o f the pri-

minimum amount

under which telegraphic transfers o r advising proceeds

of ¢ o l l e e t i o n wili..

not

b e accepted.

As r e g a r d s straight transfers,

w e occasionally r e -

ceive telegraphic transfers o f a fer dollars f r o m other
Federal “eserve Banks while w e endeavor t o keep o u r outB0ing t r a n s f e r s

to a

m i n i m u m o f »2500.00.

Requests t h a t t h e proceeds o f collections o f all
amounts b e remitted b y wire have become s o numerous t h a t
it i s recanmended that a minimum amount b e set f o r transfer over the private wire, collections u n d e r t h e minimum
to b e w i r e d o v e r c o m m e r c i a l w i r e s
I desire

a t expense

o f depositor.

t o call particular attention t o the l a s t para-

graph.

Governor Seay.

D o y o u suggest a minimum?

Governor Calkins. A

m i n i m u m i s n o t suggested,

but

the suggestion i s made that a minimum b e set.


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Federal Reserve Bank of St. Louis

(Apter informal discussion):
The Chairman.

h a t i s your motion?

Governor Calkins.
applied

t o transfers

M

y motion i s that t h e minimum 4 s

b e 1,000.00

a n d »100.00

a s applied

to the collection o f items.
The Chairman.
Wire t r a n s f e r s

T h e n the motion i s that a minimum upon

b e established

a t »1,000.00 a n d u p o n s e t -


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Federal Reserve Bank of St. Louis

tlements f o r collection letters 1 0 0 . 0 0 ,

a n d that é f

transfers a r e d e s i r e d f o r a m a l l e r a m o u n t s t h a t t h e y
should b e m a d e o v e r t h e c o m m e r c i a l w i r e s

of the membor bank.

a t t h e expenses

I s that motion seconded?

Governor Young. I

will second t h e motion.

(The motion wag put and unanimously carried).
The Chairman.

k

M r . Kenzel i s here.

e have o n e

section l e f t o f t h e report, S e c t i o n IIII, a n d w e s t i l l

have t h e meeting w i t h t h e Federal “eserve Board. I
agine i f w e g e t i n t o a

in-

discussion o f t h e pension p l a n

it will consume a l l the time before t h e Board comes t o
the meeting.

“ h a t i s your pleasure?

By the way, Mr. Sayre i s also here.

S h a l l w e ask

Mr. Sayre i n and talk about t h e pension plan?
Conference
(Mr S a y r e a n d M r . K e n z e l e n t e r e d t h e

room).
Toe Chairman. N o w , ire Kenzel and Mre Sayre, the
Status

o f the discussion

i s tnis: A

report

i n detail

the
has been submitted t o each Reserve B a n k a n d t o
material o b Federal Keserve Board, a n d w e have a s yet n o
jections t o theplan other t h a n those raised b y Senator

776

with

Smoot,/which y o u are familiar.

w h a t we are to do at

this meeting i s t o discuss particularly Senator Smoot's
objection a n d w h a t e f f e c t

i t h a s o n t h e plan,

s o that

the report o f this committee m a y b e submitted finally
to t h e B o a r d f o r t h e i r action,

a n d subsequently

Board o f Directors o f each “eserve Bank,

t o the

T h i s meeting

is a day a n d a half behind i n its work, because o f interruptions t h a t have ocmrred, a n d f e have a


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Federal Reserve Bank of St. Louis

very limited

time i n which t o deal with t h e matter, therefore I
going t o a s k y o u i f y o u w i l l m a k e y o u r r e m a r k s

am

a s brief

as possible.

Mr. Sayre.

I T assume what y o u want m e t o d o i s

simply t o ans«er questions.
The Chairman. I

think that i s the particular point,

put i f you could explain theeffect o f Senator Smoot's objection t o the p l a n i t will enable t h s discussion t o de~
velop.
Mr. Sayre.

T h e earlier objections o f Senator Smoot

were t h a t t h e c o r o o r a t i o n s h o u l d n o t b e a

charitable

corporation a n d should n o t b e exempt f r o m taxation,
that s e e m s

t o m e t o b e quite reasonable. I

a difficulty a t the present time i n getting a

a m

think t h e r e w o u l c

charter through


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Federal Reserve Bank of St. Louis

Congress w i t h t h o s e v e x e m p t i o n s ,

a n d o f course t h e y a r e n o t

at a l l n e c e s s a r y s o f a r a s t h e p e n s i o n s y s t e m i s c o n -

cerned. I

think Mr- Curtis h a s arranged, probably,

so

that t h e corporation will n o t b e subject t o taxation i n
any o n e o f the States, a n d s o forth.
Mr. Kenzel.

T h a t i s what h e urges this Conference

to rem mmend to the Board, that Senator Smoot's objections
in that r e s p e c t s h o u l d b e overcome.
Federal taxation,
tion,

k

e have n o fear o f

b u t i f t h a t fund, w h e n i t i s i n opera-

i s going t o b e subject

t o local taxation b y every

State, w e think that the operating difficulties m i g h t b e
ary sorious.
ir. Sayre. I

thought h e had arranged a

plan o f getting

around that b y putting i n the act that i t was only t o be subject t o such Federal taxation a s similar organizations a r e
subject to.

Mr. enzel.

H e has suggested amendments t o the

bill a s dzaftcdwnich will provide that i t shall be exempt f r o m all Federal, State a n d local taxation except
taxes u p o n real estate a n d except t h a t i t shall b e liable
to such Federal taxation a s m a y n o w o r hereafter b e imposed b y Congress.


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Federal Reserve Bank of St. Louis

ir. Sayre.

I f that were p u t i n the act I

think

that would b e a l l right. I

do not think w e are afraid

of u n j u s t F e d e r a l taxation.

B u t i t would b e rather s e -

rious i f the corporation would b e subject t o taxation i n
every State.

I t seems t o me that i s perfectly reasonable.

Governor Morss.

A r e ordinary insurance companies

subject t o taxation i n every State, l i f e insurance com~
panies?

Mr. Sayre.

Y e s sir, o n certain operations within that

Mr. Morss.

T h e n w e would have a

State.
less b u r d e n

o n this

company i n the w a y o f taxation t h a n the ordinary insurance
canpanies h a v e ?

Mre Sayre.

Yese

Nir. Morss. I

wanted t o see i f w e h a d a n y advantage

in that way.
Mr. Sayre.

Y e s , b u t i t i s this way: ordinary i n -

surance companies d o business through agents; they actually
do business «in. t h e state.
tion, f o r instance,
acts without agents.

N o v t h e Garnegie Founda-

i s a n insurance company now, which
I t i s a New York corporation.

It i s subject t o taxation i n New Y o r k like a n y other


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Federal Reserve Bank of St. Louis

T a e S t a t e o f «wisconsin n a s t r i e d

insurance company.

to subject i t t o taxation i n »iscemsin, b u t there isn't
any p r o p e r t y o f t h e C a r n e g i e F o u n d a t i o n

i n iiseonsin

which t h e y c a n attach, a n d a s long a s t h e officers o f
that c o m p a n y s t a y o u t o f t h e S t a t e t h e y c a n n o t s e r v e a n y

process o n them.

T h e situation i s that a n insurence

corporation that deals directly a n d does n o t deal
through agents h a s t h e same status t n a t w e are trying t o

effect through this bill. :
Tae Chairman.

« i t h that explanation, a r e y o u will-

ing t o a c t u p o n t h a t s e c t i o n o f t h e b i l l a s p r o p o s e d

to b e amended b y way o f recommendation t o the Federal
Neserve board;
clude a

i n otner words, t h a t t h e bill shall i n -

p r o v i s i o n s u c h a s ir. k e n z e l n a s j u s t r e a d ?

Governor Norris. I
Governor Morss. I

can see n o objection t o it.
should think i t i s very necessary.

The Ghairman. ‘sill someone make a motion t o that
effect?
Governor S e a y - I

The Chairman.-

s o move.

I t i s moved a n d seconded t h a t t h e

reo m n e n d a t i o n t h a t air. C u r t i s h a s s u g g e s t e d

a s a n a m e n d -=-

ment t o the proposed bill b e recommended t o the Federal

Reserve Board b y the Conference.
M a y I

Governor Galkins.

I s there a n y discussion?

ask whether i t i s i n your

Board a n d
mind t o h a v e t h e a m e n d m e n t a p p r o v e d b y t h i s


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Federal Reserve Bank of St. Louis

then t h e b i l l a p p r o v e d b y t h e B o a r d ?
The Chairman.

Subsequently t h e plan a s a

whole

would b e submitted.
Governor Galkins.

S o far a s I

knor, t h e b i l l h a s

of
never been considered b y the board o r any members
the G o n f e r e n c e e x c e p t i t s committee.

The Chairman.
is p r e l i m i n a r y

to a

I t was understood yesterday t h a t this
further r e v i e w o f t h e p l a n b y t h e

b e submitted
Board. S u b s e q u e n t l y t o that time i t will
their Boards o f
formally t o each bank f o r approval b y
Directors ~

I s that satisfactory?

Governor Galkins.

Yes-

(Toe motion ras p u t a n d carried unanimously).
The Ghairman.e « h a t i s the next o b jection?

Senator
Mr. senzel.e T h e other material objection o f
Smoetais

i n respect

t o t h e accrued liabilities

o n pres-

ent employes.
t o be
The Chairman. “ w h a t i s the total contribution
t h e liability
made b y banks i n behalf o f employes f o r

which they have n o t made b y contribution i n the past?
Mr. e n z e l e R o u g h l y , g2,000,000.00, calculated
up t o t h e d a t e o f t h e l a s t a u t n n n .
The Ghairman.

I n other w o r d s ,

i f the p l a n should b e

adopted a s originally proposed, t h e trelve banks would
make contributions a s o f last fall aggregating about
w2,000,000.00,

w h i c h would represent contributions w h i c h

would have been made b y the employes i f they h a d started
to contribute?
Mr. Xenzel. # m p l o y e s a n d t h e banks.
The Chairman.
had s t a r t e d

Y e s , employes a n d the banks,

t o contribute

i f they

a t t h e t i m e o f t h e i r employment.

How much o f that i s the liability o f the employe a n d
how much theliability o f the banks?

Mre senzel. Roughly, i t is half and half--very
roughly.
The Chairmau.

T h e n i t would b e 2,000,000.00

pehalf o f t h e banks’ contribution a n d

on

# 1 , 0 0 0 , 0 0 0 . 0 0no

behalf o f the respective clerks’ contribution?
Governor Seay.

I s that quite correct?

T h e an-

nual contribution, according t o that plan, would b e

630,000.00.


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Federal Reserve Bank of St. Louis


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Federal Reserve Bank of St. Louis

re <enzel.

T a i s i s not t h e annual contribution;

it i s the accrued liability.
Governor Seay.

T h e accrued liability i s made u p

on the basis o f the annual contribution that would have
been made, a n d i t would appear that the contribution o f
the bank for accrued liability would have b e e n i n the
proportion o f 2

t o l.

I

n o t h e r words,

i f t h e employes

were called u p o n t o pay their contribution o f accrued
liability,

i t would b e i n the proportion o f one part

charged t o the employes a n d t w o charged t o the bank,
would i t not?

Mr. xenzel.
figured

No.

t o last a u t u m n ,

T h e 2,000,000.00 accrued liability,
r e p r e s e n t s w h a t t h e employes

themselves w o u l d have contributed a n d what t h e panks would
nave c o n t r i b u t e d

i n respect

t o t h e p r e s e n t employes.

Now i f t h e b a n k s a r e n o t p e r m i t t e d

there v a s t

t o contribute

t o make

c o n t r i b u t i o n s g o o d o n behalf o f the

employes, t h e r e w i l l b e a n adjustment,

e n d t h e remaining

contribution t o b e made b y the banks w i l l b e some thing
more t h a n half.

I t would require a

very complicated

calculation, b u t i t would b e something more t h a n half.

Governor Galkins.

I t appears t o me that everybody


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Federal Reserve Bank of St. Louis

apprehended that t h e proposal t o pay a lump s u m t o
take caro o f accrued liability might meet w i t h serious
objection. I

d o n o t think that anybody h a d reason t o

doubt that i t vould meet with objection. I

wonder

whether a proposal, described roughly a s one t o spread
that over, say, t e n years f r o m the time o f organization,
would n o t mest with less objection.
A

The C h e i r m a

s I

understand t h e i t u a t i o n , G o v e r n o r

Calkins, Senator Smoot s a i d h e objected t o the banks
making contributions f o r past payments b y the clerks.
no objection t o the banks paying their o w n share
of it, a n d that i f a plan could b e started eliminating
past contributions,

o r i f they were made t o have t h e m

mads b y each bank putting u p its share a n d provide f o r the
clerk, either a t once o r spread over a period,

t o put u p his

share h e would b e satisfied w i t h t h e plan, a n d I would like
to ask Mr. Sayre i f h e will explain t h e effect o f this
proposal

t o Senator Smoot.

Ur. Sayre.

O f course, y o u have g o t t o take care
liabilities

i n some w a y , a n d t h e u n i v e r -


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Federal Reserve Bank of St. Louis

the employdhg corporation o r the government, whichever
the case m a y be, t o bear a l l the accrued liabilities.
Sometimes a n organization i s very o l d a n d t h e accrued
liabilities a r e t o o heavy t o b e borne altogether, b u t
with a

single e x c e p t i o n ,

a n d t h a t i s o n e Australian fund,

the organization does b e a r t h e accrued liabilities.
a rule,

A s

n o accrued l i a b i l i t y n a s b e e n l a i d u p o n e n em-

ploye, because, I

suppose, w i t h t h e underlying idea

that i t i s not quitefair t o have a retroactive provision
of t h a t kind, a n d a l s o t h a t i t i s e x t r e m e l y b u r d e n s ome
on people d r a w i n g s m a l l salaries,
tion h a s n o t h a d t h e f o r e t h o u g h t

system before,

a n d i f t h e corpora-~
t o esteblish a

pension

i t i s not quite reasonable t h a t i t should

lay t h e p a s t p a y m e n t s

for t h e m t o bear.

o n its employes w h e n i t i s s o herd

B u t o f course i f Senator Smoot's a i d

is essential i n the political situation, a n d h e i s absolutely f i r m i n this objection f r o m a n actuarial a n d
mathematical point o f view, h i s objection i s a perfectly
tenable o n e , w h y t h e s e b a n k s c a n s i m p l y b e a r h a l f a n d

then t h e administration o f the n e v pension system will
have t o d e v i s e t h e b e s t m e t h o d

i t c a n o f putting this

thing o n the shoulders o f the employe s o a s t o carry i t


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Federal Reserve Bank of St. Louis

along.

I t is obvious that you cannot get out o f the

employes right a t once, although es suggestion has b e e n
made that i t might b e done through notes.

Governor Calkins.

T h e great objection is, t o use

a popular phrase, t h a t w e will not b e able t o sell the
system t o our employes.
The Chairman.

T h a t thought i s very largely i n m y

mind, G o v e r n o r Calkins.

Governor Morss.
The Chairman.

Y o u will n o t b e able t o d o it.

d e r e i s a voluntary p l a n i n which these

people a r e invited t o participate, a n d i t will b e diffialt,
even d i s t r i b u t i n g

i t over a

period o f years,

them that t h e y are able t o d o it.

t o persuade

T h e y m a y want t o d o

it, b u t they will feel that this accrued liability i s too
great a burden f o r them t o assume.

M y question, w h i c h

was n o t p u t into words, w a s whether Senator Smoot might
not b e satisfied with a n arrangement permitting t h e banks
to care f o r t h e accrued liability b y spreading i t over a

term of years and not to charge off the whole accrued
liability a t once.

, o u l a t h a t meet his objection?

Governor Fancher.

I

n that c a s e t h e Federal Keserve

Bank ultimately would stand t h e accumulation u p t o the


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Federal Reserve Bank of St. Louis

time o f the p l e n being p u t into effect.
wre Sayre. E x a c t l y .

A s a matter o f fact, I

think

there might b e a poss ibility that Senator Smoot could b e
persuaded,

i f all this evidence were p u t before him.

E t

his objection i s t o the cost, there will b e less objectLlonable ways o f adjusting that.
The Chairman.

I t occurs

t o m e that while Mr. Sayre

and Mr. tenzel a r e i n tashington,

a s they a r e especially

familiar w i t h t h i s w h o l e s u b j e c t ,

t h a t i t might b e possible

to arrange f o r them t o see Senator Smoot,

i f possible w i t h

Governor Harding, b e f o r e t h e y r e t u r n t o N e w York, a n d t a k e
this u p ; t h e y c o u l d t a k e i t u p this a f t e r n o o n c o m p r e n e n -

sively with him, explain that w e a r e here, t i n t ve urge
the adoption o f a program which will permit t h e banks t o
make this contribution, a n d that i f h e has objections t o
it being msde i n one lump sun, w a o s t h e r h e would a p prove o f a plan b y which i t could b e dontributed o u t o f
the earnings o f the Reserve B a n k over a period o f years.
Mr. Sayre.

T h a t i s perfectly feasible,

o f course,

the banks being perfectly good.
The Chairman. I

do not like t h e idea o f having t h e

Reserve B a n k s m a k e t h e c o n t r i b u t i o n

a t once a n d take


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Federal Reserve Bank of St. Louis

from t h e e m p l o y e s w h o j o i n t h e p l a n p r o m i s s o r y notes,

payable o v e r a period o f years. I

think that would

be a distinct impediment to the success of the plan.
Governor Galkins.

T h a t almost approaches t h e i m -

moral.

The Chairman.
should

b e asked

Y e s , and I

t o d o that.

do not think t h e clerks

Mr, Kenzel, S e n a t o r . S m o o t ' s objection i s not t o
i

eis

do away directly with the b a n k s m a k i n g contribution

4/15/21 «


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Federal Reserve Bank of St. Louis

at once, whatever contribution t h e y are going t o make
at once, b u t i t was f o r t h e m making what h e believed
and felt t o b e a gift t o the employees f o r this past
service.

T h a t is, what t h e y should have o r would

have contributed,
Governor Calkins,

I t would b e perfectly possible

to defend that procedure o n mahy grounds.

W e all

know w e have overworked and underpaid a very large
part o f o u r staffs u p t o recent time,

E d o not

think anyone will d e n y that. D u r i n g t h e w a r o u r emPloyees were were overworked a n d underpaid, a n d w e might

urge i t under the present condition. I

do not mean

from the ethical standpodtts
Mr. Sayre.

i I think i t would b e possible t o g e t

together s o m e five hundred pension systems o f all

kinds, Governmental and everything else, and vith
one possible exception I

have always felt t h e thing

should start with a clean Skate a s f a r a s the employees
are c o n c e r n e d . I
is w o r t h something.

think t h a t p a s t consensus

o f opinicn


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Federal Reserve Bank of St. Louis

The Chairman. Gentlemen, Senator Smoot cones
from the 12th Federal Reserve District. I

think h e

should b e o n the committee, together with Governor
Harding.

Governor Fancher, I
The Chairman.

so move,

I s there a n y objection, except

from Governor Calkins?
Governor Wellborn. I

second t h e motion.

(The motion was p u t a n d unanimously carrie id.)
The Chairman.

N o w l e t u s deal with other o b -

jections.
Before

Governor N o r r i s .

w e pass f r o m that I

should

like t o ask just this o n e question. S u p p o s e t h a t Sena-

tor Smoot's suggestion is, a S Mr. Kenzel has suggested,
not t o the time payments b y the banks, b u t t o the fact

of payment, a n d that the persuasion o f Governor Calkins
rould f a i l t o r e m o v e i t ?

Governor Calkins,
Governor Norris.

The Chairman.

I t probably will.
W h a t i s the next step?

I t seems t o m e there are just two

Possible w a y s o f dealing r i t h t h e matter.

O n e is to

start t h e p l a n a s though the banks were organized o n


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Federal Reserve Bank of St. Louis

the day o n which the plan was started, which would o f
course b e a n i n j u s t i c e

t o the employees w h o have been

length o f

longest i n the bank, proportioned t o * *

their service, o r the other would b e t o attempt t o
start a plan, w h i c h I would regard a s most unfortunate,

b y asking e a c h employee

to the accrued liability.

t o contribute h i s share

I . think such a pension pian

would fail i n our bank.
think i t would fail i n curs,

Governor V a n Zandt. I
Governor Calkins. I

think your first plan would

fail i n most o f the banks. L

think your employses

would resent anything w h e n asked t o waive t h e seven

years they have served with the bank, o r more; that
that w o u l d a r o u s e

The Chairman.

a s m u c h antagonism a s t h e other,

T h i s i s clearly a case f o r ne-

gotiating something with Senator Smoot.

I f Governor

Harding will join this conmittee a n d take i t up with
Senator Smoot I have some hope t h a t h e c a n b e per-

suaded.

H e i s a very reasonable man, a n d h e i s a

very i n t e l l i g e n t m a n , o p e n t o persuasion. I

d o not

see anything t o d o except t o t r y a good stiff argument w i t h h i m first, a n d I would b e opertito t h e sug-


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Federal Reserve Bank of St. Louis

TO.
gestion that Governor Norris b e added t o that committee,

so move, Mr. Chairman.

Governor Calkins. I

Governor Norris. W o , I would not help any.
The Chairman. T h e motion i s that Governor Norris b e added t o the canmittec,
Governor N o r r i s .

I f I

could b e o f a n y use here

I could not object, b u t I would have n o influence w i t h
Senator Smoot a n d I am not familiar enough w i t h this
pension p l a n t o put u p a n y real argument,

The Chairman.
nor Norris.

T h e old rule will ~~ apply, Gover-

T h i s i s a hard cold organiZation.

Those

in favor o f the motion will please s a y aye.

(The motion was put and was unanimously carried.)
Governor V a n Zandt.

I n view o f the fact that

Gongress has quite a volume o f work o n which it is
engaged, d o you not think, Mr. Chairman, i t would be
best for this committee t o try t o make immediate arrangements f o r a n a p p o i n t m e n t w i t h S e n a t o r S m o o t ?

The Chairman. I

do. G o v e r n o r Harding i s the

best one t o make that appointment,

i s he not?

T h e

discussion that w e have h a d really disposes o f the


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Federal Reserve Bank of St. Louis

chief objection raised b y Senator Smooth t o this plan.

The other two objections which he made ve can meet,
I understand,

o r a t least discuss t h e m with h i m and

probably meet h i s objections,
The next action which might b e taken b y this
meeting i s t o recommend that this p l a n b e consiiered
and adopted,

o r the objection t o i t b e pointed o u t

by the Federal Reserve Board.

T h e y have n o t finally

adted upon t h e plan, a n d that procedure v o u l d follow
a discussion with senator Smoot.

I n other words i

would suggest that this meeting n o v refer t h e p l a n

to the Federal Reserve Board for action, Subject t o
Such s u c c e s s

a s the sub-committee m i g h t h a v e i n

their m e e t i n g v i t h S e n a t o r S m o o t ,
Governe F a n c h e r ,

Mr. Kenzel.

J u s t w h a t h a s b e e n Jone?

I n this presentation o f the report

of the committee o n the plan t o the Board, t h e whole
discussion vith t h e Board evidenced t h a t they were
in h e a r t y a c c o r d w i t h i t .

I

t vas merely a

question

of h o w F o pieb - 1 o v e r . ©

Shovudd t h i n e t h e t v e

his committee now. approved a n d recommended the p l a n


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Federal Reserve Bank of St. Louis

to the Board a s reported, w i t h i t s definite recommen-

dation that the Poard should approve it, that they
would b e i n p r e t t y g o o d p o s i t i o n t o g i v e t h e w r i t t e n

aporoval o f i t which Senator Smoot would require a s
his condition o f sponsoring i t .

The Chairman.

A S far a S we are concerned i n New

o approve t h e p l a n a s submitted, w i t h
York I am r e a d y t
the modifications t h a t Senator S m o o t h a s sugwested,
except t h e o n e a s t o the comtribution f o r accruccd
liabilities a n d taxation.
Governor C a l k i n s , I
guestion.

shouid l i k e t o a s k o n e

T h e p l a n contemplates optional retire-

ment a t sixty-five a n d compulsory retirement a t
seventy.

D o the actuatial calculations consider

the retirement a t sixty-five a s the basis f o r retirement?

Mr. Sayre.

T h e calculation o f the fund: shows

‘that under that provision there i s certain calcu-

lation that a certain percentage will retire at sixtyfive, a certain percentage a t sixty-six, a n d s o on.
The Chairman.

T h e question camp u p yesterday,

Mr. Sayre, a s t o whether i t was necessary that a t
the arrival o f a n y employee a t the a g e o f sixty-five,


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Federal Reserve Bank of St. Louis

it i s u p t o t h e i r d e c i s i o n t o b e m a d e a s t o thebher

he

shoula remain f o r t h e entire further period o f five
years,

o r whether h i s retirement might n o t b e fixed

at sixty-six,

o r sixty-seven, sixty-eight,

o r a n y inter-

vening period before h e reacnes seventy.
Mr, Sayre.

A s I understand v h e n the employee

reaches t h e age o f sixty-five I
has t h e option o f retiring,
claiming retirement,

think h e o r the bank

h e has t h e option o f

o r the bank the option o f re-

tiring him, a n d i f nothing i s done h e just remains
on until t h e a g e o f seventy, t h e n a t the a g e o f
seventy h e h a s t o retire,

The Chairman.

I s there a n y provision b y which

a review o f his case may be had i n the intervening
period o f five years?
Mr. Sayre,

O h , yes, a s I understand i t a n y

time after t h e a g e o f sizty-five,

I f h e joes

n o t

exercise the option o f retiring a t sixty-five h e may
nevertheless

d o S o a t sixty-six,

I

f t h e bank does

not retire h i m a t sixty-five i t may a t sixty-six.
It i s n o t t h o s e t w o periods,

i t i s the whole period


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Federal Reserve Bank of St. Louis

between sixty-five a n d seventy.
The Chairman.
Mr, Kenzel.

T h a t makes t h e subject clearer,

T h a t

h a s been a

matter

o f adminis-

tration covered i n the by-laws w h i c h h°vo been purposely
Nor

left until t h e broad principles a r e decided upon.

the idea o f the t w o periods w a s first t o relieve t h e

bank o f superannuated employees a t the age o f sixtyfive, but not t o put the banks a t a disadvantage o f
having t o retire a

valuable m a n w h o was n o t super-

annuated before t h e age o f seventy.

B o t h ages a r e

considered here ages for retirement o n pension,
but t h e character o f the employment, involving n o
Physical l a b o r , p r o b a b l y m a k e s t h o s e a g e s a p p r o p r i a t e

for the banking industry.

Governor Seay. “ n e n the first sketch was received, a

copy o f which was planed

i n the hands o f

our directors f o r private study, t h e r e w a s some o b o f the pension, I

jection t o t h e l i b e r a l i t y

think.

s i d e r a p improvement, I

The second A

believe, although more

s

o

m

e respects,

other respects i t i s not Guite s o liberal i n its
ment

ultimate p a y / of pension.

I t i s not t o o liberal,

in


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Federal Reserve Bank of St. Louis

ectors

a r e sympatnetic

toward

it, and I

a m quite

safe i n saying i t has the approval o f o u r officers a n d
4
I a m confident i t rould b e accepted b y our bank.
I should like t o ask, although I suppose i t “ould
be s o “ h e t h e r t h e a c t u a r i a l c a l c u l a t i o n s w e r e b a s e d u p o n

the number o f employees

i n each bank o f the eligible

age, that i s from 21?
Mr, S a y r e ,

Y e s .

4 & very l a r g e n u m b e r

Governor S p a y ,

in all banks, perhaps a r e under el,

o f employees

T h e calculations

of contributions a r e based upon the eligibility o f employees t h e n I
Nee payne.

5 5 ,

The Chairman.

T h e Q e s t i o n i s =hether y o u are

willing t o approve this plan for recommendation t o
the F e d e r a l r e s e r v e B o a r d ,

a n d the matter

o f taxes

and computation o f assumed liabilities t o b e taken
up w i t h S e n a t o r S m o o t ?
+
Governor Norris, =Zxcuse me, i f this resolution

is t o b e quoted, I

think w e shiuld just s u y subject

to the satisfactory adjustment o f the questions raised
by Senator Smoot.

I n other words, i n taking i t up


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Federal Reserve Bank of St. Louis

With h i m I think i t would b e a téchnical mistake t o

say to him at once that tro o f his cojections r e have n o
trouble i n meeting a t all a n d are willing t o concede,
J think w e h a d better s e e m a little reluctant a n d have

something t o bargain with a little bit.
The Chairman. Governor Norris i s a member o f the
committee.

H e will look after that.

a r e y o u ready

for t h e question?

(Zhe motion was put and unanimously carrie 4.)
The Chairman.

I s there a n y other discussion o f

the p e n s i o n p l a n n e c e s s a r y b e f o r e a t t e m p t i n g

t o ar-

range a meeting vith Senator Smoot?
Governor McDougal.

M r . Chairman, a t the time

that I submitted t h e Question t o our Board a s t o
¥Fhether t h e y v o u l d b e willing t o v o t e f o r a n appro-

priation sufficient t o take care o f the accrued liability a n d n a t u r a l l y o t h e r f e a t u r e s

o f the p l a n were

gotten into a n d some objections were raised, a n d some

of those objections have since been overcome, a n d I
believe t h a t o u r Board c a n b e convinced o f the plan,
gensrally speaking, b u t there i s one feature o f the
plan which they thought w o u l d b e impracticable t o


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Federal Reserve Bank of St. Louis

798

put i n operation, a n d one n i c h W a s v e r y undesirable,
was t h e duestion o f making i

e n s i o n system avail-

able t o the menber banks, “ h i c h I thought a t the time

was a mistake, a n d I still think i t i s a mistake.

The Chairman.

I t is only permitted.

Governor MeYVougal.

I t is only permitted, o f course,

I understand that, b u t w e ere having some activities
vith m e n b e r b a n k s n o w t h e s e d a y s a n d t h e y a r e i n c r e a s -

ing i n volume, a n d I think w e have g o t about a l l w e
want t o d o with theme I

think i t would complicate t h e

matter a n d n o t r o r k o u t i n p r a c t i c e

a t all. I

do not

mow r h y i t should have remained i n this bill unless i t
was i n t e n d e d t o g i v e t h e m t h e privilege.

The Chairman.
Mr. Sayre.

M r . Sayre?

M r , Chairman,

i n the first place t h e

provision n o w i s simoly not t o shut t h e door against
some p o s S i b l e e x t e n s i o n l a t e r t o m e m b e r b a n k s , I

do

not u n d e r s t a n d t h a t a n y t h i n g w a i l d b e d o n e i n r e g a r d

to the member banks without definite affirmative
action,by those entrusiad with t h e matter,

Mr. Kenzel. T h e y would b e trustees o f the funds,
so t h a t a l l t h e r e i s a t t h e p r e s e n t t i m e i s t h a t i f


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Federal Reserve Bank of St. Louis

this action should b e considered a desirable action
to take later i t rould n o t b e necessary t o g o ahead
and have a n amendment t o the charter a n d g o before
Congress again.

N o w t h e idea i s this,

T h e r e are

& preat m a n y thousand national banks a n d trust companies
through t h e country.

T h e Smaller o n e s simply camniot

have a n y pension system o f their own. A

number o f

the larger ones have pension systems, which i n the
view o f a pension expert would b e very desirable t o
gé, a n d the Federal Reserve B o a r d i s going t o put
out a pension system “hich i s perfectly sounds a n d fair

and rhich i t would seema v e r y good thing i f it were
available.

I

t would really b e a very good thing

looking a t i t from the general point o f view entirely,
apart f r o m your rélations w i t h the Federal Reserve
Banks,

i f the national banks throughout t h e country,

and their employees, h a d their opportunity o f caning
in, a n d o f course bearing their d u e proportionate
share o f costs,

T h a t i s not t h e Guestion now.

I t

is i f such a thing i s feasible i n the future n o t t o
have t o t a k e e n o t h e r l e g a l ste5, b u t I

d o not u n d e r -


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Federal Reserve Bank of St. Louis

stand a n y a c t i o n w o u l d b e t a k e n n o w t h a t i n a n y w a y

commits that to be done in the future.
Governor McDougal.

T h a t i s all i n accordance

with m y understanding o f the plan.

Governor Seay. Suppose the provision being i n
the c h a r t e r w e w e r e i m p o r t u n e d

by a

considerable n u m b e r

of the larger banks t o join, w e would then have t o
take action.

I f i t were n o t favorable a n d w e were n o t

prepared w e would not b e fulfilling t h e provisions o f
the charter. I

very much doubt t h e expediency o f

having i t i n the charter,

I t would b e a suupendous

plan i f any large number o r proportion o f the banks
were t o join i n the operation o f this system.

Governor Norris. I

should like t o ask whether

St would b e t o t h e advantage o f the employees o f the

Federal Reserve Banks t o have employees o f member
banks come in, o r a disadvantage?

T h a t i s to Say,

if the member banks came i n would that decrease t h e
cost o f the insurance t o the employees o f the Federal
Reserve B a n k s ?

Mr, Sayre.

I t could not b e any disadvantage.

The advantage w o u l d b e very slight, probably.

T h e


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Federal Reserve Bank of St. Louis

801

larger spread y o u have t h e better your averages w o r k
out safely, a n d the batter a n d the safer t h e whole

thing is. A l s o o f course i t would b e assumed i f any
banks came i n they would bear their share i n the cost
of administration, w h i c h would reduce t h e cost o f administration a s far a s the Federal Reserve Banks a r e
concerned, b u t there would b e hardly a n y material

ad-

ventage t o the employees o f the Federal Reserve Banks,
except,

a S I say, there would b e a larger spread, a

larger basis o n which t o average, b u t there could n o t
be a n y disadvantage.
Governor Morss,

I s there a n y advantage o f m v i n g
You

this concern f o r t h e benefit o f the rhole public?
get: avery large concern i f a n y number c o m e in.
mould immediately get, I

Y o u

think, t h e antagonism o f all

the established insurance companies, e n d y o u would have
a very large preferred class o f your people, because o f
being exempt f r o m all taxation,

a t leaste I

must s a y

it would appear t o m e t h e thing should b e limited t o
the Federal Reserve Banks, a n d the Federal Reserve

Board, o f course.

The Chairman. T h i s i s a pension plan and does it


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Federal Reserve Bank of St. Louis

802

present a

plan o r a

type o f p r o t e c t i o n w h i c h r e a l l y

woul3 c o m p e t e v i t h e x i s t i n g i n s u r a n c e c o m p a n i e s ? I

do not understand there a r e companiés organize
the purpose o f furnishing pensions.
annuity b u s i n e s s

affected b y this.

C e r t a i n l y the

o f insurance Companies v o u l d n o t b e

I t i s reslly more a savings o r -

genization t h a n anything else, I

thought o f that,

from m y
Governor Morss, - u t I couid a o t discover
of
on experience a n y w a y i n which the interests
by
the insurance companies a r e adversely affected
this plan, evaniif extended t o member banks.
Gevernor Morss.

I f y o u should take the member

step
banks, w h y should you stop? » h e n you take a

locking to taking in member banks I do not see why
you s h o u l d s t o p there,

o r h o w y o u will b e able t o

sei t h e limit there; i f you take i n member banks,
why not take i n ell panks?
sion system.

I t i s a n insurance pen-

I T may b e t o o c o n s e r v a t i v e t h a t way,

7 ho
but I think i t should b e limited t o the people

should n o t g o b e y o n d t h e e m p l o y e e s
Reserve B o a r a ,

o f the Federal


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Federal Reserve Bank of St. Louis

Governor Seaye T h e r e a r e certain forms o f insurance policies,

t e r m policies.

i s s u e d b y the insurance

are i n
companies,for w h i c h the argument i s made t h e y
effect s a v i n g s p l a n s , I

find myself v e r y m u c h i n

concurrence with Governor Morss' position.
Governor Calkins.
gesting another aspect,

o sugF o r the p u r p o s e f
w e are a l l o f u s interested i n

in
the improvement o f the administration o f banking
this country.

T h e r e i s n o Single step, n o single

position that I

can think o f that vould g o further

and a o more f o r the improvement o f the aaministration

the adof the banking business i n this country than
option o f a

at least,

pension p l a n available

‘ W e have a

t o a l l m e m b e r banks,

shining example i n the Canadian

banking system, banking i n Canada i s a

p r o f e s s i o n , --

conthe members o f that profession a r e assured o f
ages,
tinuous employment a n d protection t o advanced

and thére i s no one, I

am sure, that will dispute the

fact that the administration o f the Canadian systems
of banking i s incomparably superior t o that o f the

banks o f the United States. I

repeat, I

can think


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Federal Reserve Bank of St. Louis

a

of no provision available that would s o further a m
accomplish more t o improve t h e administration o f banking i n the United States t h a n the opportunity t o protect
men engaged i n it.
Mr. Kenzel.

a n d that i s absolutely lacking with

preat majority o f the banks, a n d must be.
Governor Fancher,

I t certainly must bee.

Mr. Kenzs6l. N a t u r a l l y i t i s absolutely impossible
for those banks t o provide a n y measure o f protection
against s u p e r a n n u a t i o n o f t h e i r employees.
Mr, S a y r é e

Y o u seé a

cooperation t h a t h a s j u s t a

few hundred i s not practicable a n d very f e w banks have
more a n d c a n n o t i n a u g u r a t e a

The Chairman. I

pension system.

was going t e point out this, which

is the basis that appealed t o me for extending this t o
menber banks. I

happen t o know t h e t i n New York

there have been efforts made, more than one effort, t o
induce t h e e m p l o y e e s

o f banks, i n c l u d i n g o u r o m b a n k ,

to join labor organizations.

N o w a labor organization

is a good thing i n many respects, particularly i n industries rhere manual labor i s performed. I

doubt i f

it i s a good thing i n a bank t o have t h e clerks organized


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Federal Reserve Bank of St. Louis

in a labor union.

T h e purpose o f organization i s

to improve t h e t e r m s a n d c o n d i t i o n s

o f employment,

and every time voluntary steps a r e taken b y employers
to i m p r o v e t h e c o n d i t i o n s

o f work i n a

bank t h e y

avoid t h e pressure t h a t bank fkerks have t o protect
against b y organized methods.
strong influence,

T h i s would b e a very

i n m y opinion,

i f the plan could b e

ultimately deviised b y w h i c h t h e s e p e o p l e a r e p r o t e c t e d

in their o l d age, o r i n case o f illmess o

infirmity

against poverty, and, a s you know the English banking
system, w h e r e t h e y have branch banks a s well a s i n

Canada and i n Germany, a n d I believe i n France also,
where t h e y have a

very largs number o f people employed

in a given bank i t does enable t h e m t o operate a
sion fund,

I n this country, Bithout branch b a n k i n g , -

we h a v e s o m a n y S m a l l u n i t s t h a t a

available

pen-

pension p l a n i s not

i n the great majority o f the banks. I

am

heartily i n favor o f a t least providing f o r that d e s
velopment i n case i t later i s deemed feasible.

Governor Fancher.

w h e n this report was presented

to the Federal Reserve Board this feature Was discussed,
and m y recollection i s that all the members o f the Board


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Federal Reserve Bank of St. Louis

vere v e r y heartily i n accord w i t h the plan.
would m a k e a

real p l a n a n d a

real service

5}

This

t o menber

banks
The Chairmmane i I will remind y o u this bill h a s t o

go before the directors o f the respective banks, a n d

Governor McYougal and Governor Morss have expressed
doubt o n that point.

M a y I ask i f they Want t o se-

cure s o m e modification i n the resolution w e have just
passed?
Governor KkcDougal.
Governor Morss,. I

No, I

think not.

never discussed i t i n m y

ovnm mind until just n o w vhen the Q e s t i o n W a s raised
by this discussion here,

O f course there i s a good

deal t o b e s a i d o n b o t h sides.

M

y opinion i s not

strong enough t o make a n y objection.

Governor Calkins. I

should like to offer just

one m o r e s u g g e s t i o n a s t o t h e d e s i r a b i l i t y ,

There is

& considerable d i s p o s i t i o n a m o n g t h e m e m b e r b a n k s t o
complain

i n regard

t o some o f the operations

o f the

Federal Reserve Bank, and t think if we were able to
say t o them, “Yes, w e have established a pension system for our employees,” they would o f course s a y at our


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Federal Reserve Bank of St. Louis

e. pense, b u t waiving that, i f v e were able t o S a y that
we h a v e e s t a b l i s h e d a

system providing pensions f o r

the employees o f Federal Reserve Banks a n d that system was o p e n t o them o n the same terms,

i t would g o

in a v o i d i n g c r i t i c i s m o f t h a t action.
The Chairman. I

discussed t r i s p l a n i n very

general terms with tro bankers i n New York,
them what t h e y thought o f it, a n d i n both instances

they said "ve have not the resources, the time o r the
opportunity t o m a k e t h e t h o r o u g h s t u d y o f t h e p e n s i o n

plan w e should d o i n order t o justify o u r adopting one,
we have n o t adopted a pension pian o n that acccunt.
when your plan i s adopted,

i f there i s opportunity

us t o join i n it, o r i f i t presents t h e basis f o r
sdoption o f a plan i n our o w n bank,

great benefit tec banking.
‘consent t o n

i t would b e a

I f you did s o w e might not

i n your plan, b u t i t would cive u s a

Plan upon which t o edopt o n e
is m y impression, t h a t large institutions l i k e t h s
National C i t y o r the Guaranty Trust Company, where
they have almest i f not Quite a s many employees a s

we have, I thimk that probably thsy would say, -"This


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Federal Reserve Bank of St. Louis

808

is a good plan for us, let us rum it ourselves."

O n

the other h a n d e small bank Fould probably prefer t o
think y o u rill fimd i t will d o

jot i n this plan. i

more t o clarify the atmosphere @ S . t e pensions b y giving t o a bank the opportunity t o adept a plan o f their
own.
What i s your pleasure, gentlemen.

A r e y o u ready

to have Mir, Kenzel and Mr. Sayre t a k e this matter u p

now with Governor Harding?

I

f entirely agreeable

I a m going t o ask Mr, Kenzel, w h e n h e sees Governor
Harding,

t o suggest that v e are r e a c y for t h e joint

meeting a t any time they want t o have its
Mr, Kenzél,a I

should like t o say just one vord

so all these gentlemen will have i t i n their minds,
i t

in regard t o the standardization o f salaries.

4s intimately: related t o the pension provisions, a n d
in any plan o f standardization o f salarics a n a insurance o r pensions, I

think the matter should b e very

carefully considered,

T h e t w o things a r e really in-

separable from the administration o f the plan.
The Chairman.
aries

i n each

T h e subject o f standardizing sal-

c f t h e banks

w a s referred

t o a

committes


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Federal Reserve Bank of St. Louis

809

yesterday, s n d the Secretary will make a

note o f this

and the committee w i l l b e informed o f the necessity.

Mr, Kenzel.
here I

N o w that all o f these gentlemen are

t mention i t s o i t o u l d n o t
thought i t b e t t e r o

be overlooked,
Governor Seay.

Y o u remarked that the standard-

igation o f salaries w a s referrea t o a cormittee?
The Ch@irman, I
Governor Seay. I

b lieve sc.
made i t a s a memorandum that

it w a s o v e r t o t h e n e x t meeting.

The Chairman. I

thought i t was referres.

The

secretary Fill lock that up,
IV. C R E D I T TRANSACTIONS A N D POLICIES,
{a) E s t a b l i s h m e n t o f uniform practice w i t h
respect t o the indorsement o f notes a n d bills discounted
er bought b y Federal Reserve Banks f o r o r from each other,
{Federal Reserve B a n k o f New York.)
(b) S h o u l d t h e Federal Reserve Banks disContinue rediscounting f o r member banks notes o f nonmember banks secured b y G o v e r n m e n t obligations,

eral Reserve Bank o f Atlanta.)

(Fed-


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Federal Reserve Bank of St. Louis

The Chairman. Gentlemen are you ready t o proceéd
with the next topic o n the program, "(a)" which I am
willing t o pass i n the interest o f progress?

I n fact

it vas suggested i n New York because i t was unfinished
business

of a

previous c m f e r e n c e ,

Governor Norris.
fhe Chairman.

D o we pass t o "(bj)"?

I f there i s n o objection then we

will pass t o *(b),"

Governor Wellborn. L r , Chairman, i t occurred to
me that w e have aided non-menber banks a

sufficient

length o f time i n carrying those bonds f o r them through
their member banks.

w e think w e o w e d some obligation

and duty t o carry them f o r a certain length o f time.
I think n o w the time h a s arrived that w e really ought

to discontinue accepting that kind of paper.

They

have greater privileges t h a n member banks, t h e y give
90 d a y notes t o member banks, a n d that i s rediscounted

to us, whereas member banks c a n only give 1 5 day paper.
The Chairman.

W h a t i s your recommendation?

Governor Wie llborn. Z
that,

mdi

recanmend that w e discontinue

t h i n k i t ought t o be uniform throughout t h e

syStem, was the reason I brought i t before this conference


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Federal Reserve Bank of St. Louis

The Chairman. I

think y o u will find t h e Treas-

ury D e p a r t m e n t v e r y m u c h c o n c e r n e d a b o u t a n y s u c h a c e

tion, and Governor Wellborn, What puzzles m e abat the
proposal i s this.

O f course the conditions d i f f e r

somerhat i n the different districts, but t o carry out
the principle t h a t y o u have i n mind completely a n d effectively i t would b e necessary f o r t h e Keserve B a n k
to decline

t o make a n y discount

o f a n y ius: f e r a n y

member b a n k which a t the time o f a s h e n
money t o a non-member b a n k i n a n y form,

w a s lending
T h e r e is

the effect o f it,
Governor McDougal.

M r . Chairman, t h i s subject

relates directly t o another matter,

w e have f o r a

long period o f time, commencing during t h e war, b e e n
obliced t o recdiscount f o r o u r m e m b e r b a n k s p a p e r r h i c h

originated i n non-member banks, a

question that w a s con-

sidered b y the Federal Reserve Board, and, a s I remember
it, i t was ruled that w e need not decline t o accept that
paper u n d e r t h e c o n d i t i o n s t h a t w e r e t h e n c u r r e n t ,

Te are still doing that, w e are discounting the farmers!
notes and other peper, which are received through member banks, a n d o f course I

mention t h a t because i f we


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Federal Reserve Bank of St. Louis

812

should through a n act favorable t o the suggestion o f Atlanta t a k e t h i s a c t i o n w e h a v e g o t t o g o a

further.

food d e a l

P e r h a p s t h e first s t e p would b e t o consider

the question o f eliminating from our discountable paper,
paper o f the class I
The Chairman.

a m referring to.
I n general, without arguing t h e

many points that are raised b y this question, I wonder
whather this i s any time t o pull any o f the p r o p s out
fren under t h e banking situation o f this caintry?

T h e

Governor o f one Reserve B a n k told m e that i n his opin-

ion, without the Gntinued support o f his bank, which
they were extending t o banks i n a certain territory,
there would b e twenty-five o r thirty b

a

f
toklures
ni a

MOrT OW « A n o t h e r Governor referred t o the f a c t that
he thought there were o n e hundred banks i n his district
that might collapse i f the member Reser¥e B a n k was n o t

generous i n its support, a n d out o f the $1,000,000,°C00
that i s being advanced i n one w a y o r another o n

Government securities t o member banks I have no doubt
that a

considerable p r o p o r t i o n originates d i r e c t l y o r

indirectly
the p a y m e n t

i n non-member b a n k s ,
o f that amount

I

f w e s h o l d require

o f course m a n y o f t h e m could


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Federal Reserve Bank of St. Louis

813

get relief b y going t o other banks t h a t were n o t borrowing f r o m us, I

mean other member banks t h a t rere

not borrowing f r o m us.

But i

a m frank t o say, Gover-

nor iellbom, I would regard i t as a catastrophe t o
employ a rule like t h a t just now,

Governor Wellborn. I

admit i t would b e taking a

prop from under them, because w e are assisting the
non-member banks v e r y materially a t the present time,
and i t would b e a hardship, a n d i t might result i n
their h a v i n g t o s e l l t h e b o n d s ,

T h e y could dispose

of

them a n d tha’ would relieve u s o f the burden o f carrying them,
The Chairman.

S o m e b o d y has g o t t o t u y them,

Governor Vellborn.

I t absorbs our reserves, a n d

it w a l d j u s t m e r e l y f o r c e t h e m t o p u t t h e t o n d s

the market a n d sell them.
Sirable @

on

W h e t h e r that v o u l d b
e de-

n o t i s a Question f o r discussion.

Governor Van Zandt. I

do n o believe that now

is t h e t i m e f o r u s t o c o n s i d e r e a q u e s t i o n o f this

kind; t h a t while i t i s undoubtedly true t h a t w e a r e
technically violating o n e o f the principles o f the Federal Reserve A c t i n that non-member banks a r e receiving


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Federal Reserve Bank of St. Louis

g14

rediscounts through t h e medium o r agency o f member
banks f r o m the Federal Reserve System, b u t the national
system demands i t a t the present time, a n d I move t h a t
this G u e s t i o n b e p a s s e d u n t i l t h e n e x t Conference.

Governor Wellborn. t h a t i s perfectly agreeable
to me. I

to bring i t out o n discussion.

1

¥

Governor Biggs,

i I s e c m d t h e motion.

(The motion w a s p u t a n d unanimously c a r r i e d . ) .
is} D i s c u s s i o n o f methods adopted b y the
Reserve B a n k s

t o develop a n d widen t h e discount mar-

Ket. ( F e d e r a l Reserve Bank o f New York.)

The Chairman.

T h e next i s topic "(c.)" I

believe

it appears a l s o o n the program a s a matter f o r dJiscusSion F i t h t h e F e d e r a l R e s e r v e B o a r d .

g e think 340

should b e considered t m connection r i t h the last topic

on the Board's program, that i s Topic X.

A r e you

willing t o heave i t £ 0 over?
Governor Fancher. I

move t h a t i t be passed for

the time and be discussed a s 2 topic o n the Board's
program.
{The m o t i o n w a s p u t a n d u n a n i m o u s l y c a r r i e d . )
(da) R e p o r t

o f standing committee

o n open


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Federal Reserve Bank of St. Louis

bill m a r k e t c o n d i t i o n s a n d operations,

{a} B a n k e r s acceptances practices (Federal
Reserve B a n k o f San Francisco) a n d regulations w i t h partic
ular regard t o accommodation o f commerce a n d t h e open

market (Federal Reserve Bank o f New York.)
I

The Chairman.

f y o u please w e could p u t over

topic’(a)" f o r consideration a t the same +time.
Governor V a n Zandt, H a v e w e not h a d a report i n
writing f r o m that camittses?
W e have,

The Chairman.

W h a t i s your pleasure a b m t

$£his t o p i c ?

Governor Seay. I

move the same action b e taken,

D o y o u Wish t o act upon che report?

The Chairman.

You all have copies o f it?

Governor Calkins. I

have not had time t o familiar-

ize myself with the report.
Governor S e a y .

I t will undoubtedly c o m e u p i n

connection v i t h that topic, Mr. Chairman. I
it b e c o n s i d e r e d

move t h a t

i n that connection.

(The motion was p u t a n d unanimously carrie 4.)


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Federal Reserve Bank of St. Louis

Governor Calkins, D o e s that include "(e)"?
Governor Seay. T h a t includes "(6)" likewise.
Governor Norris.

D o you wish i t to include "(e)"?

Governor Calkins. k

The Chairmane I

i t should.

should sup:ose t h t"Gc)” “(4)” a n d

)* should all be considered i n connection "ith
no objection t h e n w e will carry those o e r t o the

Reserve B a n k s b e v i t h r e s p e c t
of c o n f i r m e d

t o attempted cancellations

o r i r r e v o c a b l e coimmercial l e t t e r s

o f credit

and with regard t o issues c f credits w h o have defaulted
or refused t o honor their crecits; especially h o w should
the F e d e r a l R e s e r v e B a n k s deal w i t h a c c e p t a n c e s
panks,.

o f such

( F e d e r a l Reserve B a n k o f N e w York.)

The Chairman.

A s t o topic "(f)," I would like t o

word o n that subject myself, I

think w e c a n

onsider t h a t now.

Governor Calkins. C o v e i m o r Fancher being of a
retiring disposition h a s suggested t o m e that the r e ports o f s t a n d i n g committiees---ang I

wish t o add, s t t h

much emphasis, t h a t t h e program f o r the Conference Should


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Federal Reserve Bank of St. Louis

be i n the hands o f the Governors long enough before
the meeting o f the Conference t o permit them t o study
and b e prepared t o act.

I n m y o w n case I sometimes

f the Confersnce i n Chicago,
pick u p the p r o g r a m s o

when they are kind enough t o get i t for me, i sometimes
get i t i n Washington, b u t 1

practically never g e t i t i n

San Francisco i n time t o make a n y use o f it. I
that i s important. I

think

a m not speaking f o r myself alone,

although I may happen t o b e further a w a y than anybody
else.

T h e work o f this conference c o u l d b e expedited,

coula b e more intelligently done, a n d could b e better
done i f w e h a d reports o f standing committees a n d the

program for discussion i n time t o give some real consideration and get the necessary information before
the conference i s held.

The Chairman. Governor Calkins, I agree with you
entirely i n that, a n d of course s o does everyone else
at the mecting here. I

want t o state, however, that

this m e e t i n g w a s c a l l e d u p o n u n u s u a l l y s h o r t n o t i c e a s

the result o f matters which occurred a t Washington which
made t h e Federal Reserve B o a r d feel that i t was desirable t o have a

veview o n very short notice, a n d t o


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Federal Reserve Bank of St. Louis

attempt o n this v e r y short notice n o t o n l y t o get u p
the program, b u t I attempted t o get these reports, a n d
some o f them I regret t o say, I

did not receive until

after y o u reached asnington.
Governor Calkins.

M y remarks, instigated b y Gover~

nor Fancher, carried n o criticism o f what has been Jone,
but w e r e o n l y i n t e n d e d t o b e c o n s t r u c t i v e .

Governor Fancher, M i g h t we, with propriety, suggest t o the Board that i n calling conferences o f Governors t h e d a t e m a y b e p u t a h e a d f i v e o w s i x weeks?

Governor Calkins.
The Chairman.

T w o weeks would b e plenty.

T w o weeks, I think vould not be

enough, Governor Calkins.
Governor Fancher,

No, I

think the date should

be five o r s i x weeks a h e a d o f us.

should like t o outline what

The Chairman. I
is n e c e s s a r y

t o b e d o n e t o p s t c u t t h i s program.

First y o u have t o

s

e

n

d a letter t o e a c h Re-

serve B a n k a n d allow five o r six days f o r t h e letter
to reach them.

T h e n t h e bank rectuires a

few days t o

get u p t h e t o p i c s a n d t o p r e p a r e a n y d a t a i n Support

of those topics.

I t also necessitates t h e conclusion


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Federal Reserve Bank of St. Louis

819

of committees r e p u r t s , w h i c h m a y n o t b e complésted.
They a l l h a v e t o come b a c k t o t h e p o i n t o f o r i g i n

at the meeting, t h e n t h e y have t o b e distributed
reports
back again i n order that t h e program i n the
for
may b e considered, t h e n time h a s t o b e allowea
the Governors t o g e t t o washington,

5 0 I really think

o f time
that five weeks i s about t h e least period
reasonably possible.

Governor Calkins.

R e g a r d i n g t h e program,

I
the discussion initiated b y m y friend here,

at

want

to say that time could, i f necessary, b e shortened
cmsiderand still leave enough time f o r reasonable
ation.

U p o n t h e selection o f a aay tor

t o preference all the Governors might b e notified
pare t o suggest topics a n a t o prepare t h e i n f o r m topics,
tion which t h e y needed i n order t o discuss those

this b y wire, o f course, n o t b y letter.

T h a t would

preshorten the time four o r five days. T o p i c s , when
pared, m i g h t b e sent t o New York, t h a t i s the center

of everything, b y wire briefly outlined, a n outline o f
the topics.

T h a t would save f o u r o r five days more,


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Federal Reserve Bank of St. Louis

820

so that while four o r five weeks would b e desirable,
@ lesser p e r i o d o f time, w h i c h m i g h t b e necessary,
would b e e n t i r e l y f e a s i b l e a n d practical.
had n o t i m e w h a t e v e r

B u t = I have

i n m y case t o take u p t h e sro-

gram i n Chicago, aS. I have several times, a n d it does
not afford a n y opportunity t o b e prepared f o talk intelligently.
The Chairman.
tion, s e c o n d e d

G o v e r n o r Calkins offers a

resolu-

b y Governor F a n c h e r ,

Governor Calkins,

I t should b e t h e other w a y

around.

The Chairman. Recommending t o the Federal Reserve
Board t h a t a s m u c h t i m e a s p o s s i b l e

b e allored

i n the

notices o f conferences o f Governors, five weeks i f
possible.

Governor wellborn.
detailed r e p o r t s ,
large a

M r . Chairman, i n discussing

i t seems

t o me r e have usually too

program o f detailed m a t t e r h e r e u n d e r d i s -

cussion f o r t h e G o v e r n o r s .

T h a t i s t h e w a y i t appears

to me, that i t keeps c u r heads d o w n t o a great m a n y o f
these subjects o f detail matter o n which other m e n
could w o r k w h o a r e m o r e f a m i l i a r w i t h i t t h a n w e a r é e


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Federal Reserve Bank of St. Louis

I lmow that i s the case i n cur bank. T h e s e a r e subjects
with Fhich I hardly ever come i n Contact, a n a I feél,
when I leave a conference, t h a t this, instead o f having
been a

real c o n f e r e n c e

mach conference a t all.

o f things, t h a t w e a i d n o t h a v e

W e have o n e conference w i t h

the Board, end they d o all the talking. h a t I have i n
mind i s especially a t this critical time,

i n a system

where s o many great questions a r e involved, t h a t w e

should have a discussion o f rates among ourselves here
with the bankers,

I

n my own bank, n o w w e want t o

change o u r rate, b u t I have a n open mind o n it. I
like t o discuss those things w i t h the Governors a n d g e t
their views, l e t them express w h a t t h e y think w e ought
to do. I

a m perfectly willing t o discuss t h e matter.

It is a peculiar situation. S i f f e r e n t banks have
different rates, a n d we should consider w h y that should
exist a n d s o forth.

K i g h t u p i n the Richmond district

they have a rate o f 6 per cent, w e have &% per cent, t h e
same k i n d o f business,

the same,

S o u t h Carolina g e t s identically

I t i s o n Questions o f that kind that I

shoul

like t o get the views o f the Governors here, because
they all think a b o t these things,


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Federal Reserve Bank of St. Louis

Hovernor Fancher,

I t sesms t o m @ a very well d e -

fined procedure h a s been adopted i n this conference, t h a t

the Board for the last two o r three conferences has prepared a program o f these general topics a s t o the matters
of rates, p o l i c i e s , o p e r a t i o n o f t h e b a n k s ,

a n d those

are the subjects which the Board wish t o discuss w i t h
think t h e program o f topics prepared

the Governors. i

for t h e d i s c u s s i o n o f t h e G o v e r n o r s thefnselves a s t o o p e r ations a n d m a n y o t h e r m a t t e r s a r e v e r y important. 2

think every topic o n this program i s a very important
nd i f

t

o have t h e benefit o f the various

procedures, a n d h i t h e banks coming here together i n
a clearance o f ide: I

think manifestly v e should have

just this sort o f program a n d come here prepared t o
4iscuss those v e r y topics, I
important, I

think that i s all very

think every topic o n this program i s i m e

portant.

The Chairman. I

believe e 1 1 these m t t e r s arise

where w e really c a m o t discuss t h e m intelligently be-~

cause o f lack o f knovledge o f time, that w e should get
the Conference t o refer t h e m t o committees o f operating

officials who can deal with them and report back, a n d
ight have t h e reports i n time, a n d I believe this


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Federal Reserve Bank of St. Louis

823

W h a t i s your wish, Gover-

matter i s a very serious one.
nor Vellborn,

a s t o the balance o f the program now?

Governor jellborn. I

have no special wish. I

Simply offered those comments.
M a y I

Governor M o r s s .

say t h a t I

sympathize w i t h

ehat Governor wellborn says, that with many o f these
gJetails Governors o f the Banks cannot, i t seems t o me,
be c o n v e r s a n t

a s t o a l l o f t h e various subjects;

require expert attention.

they

T h e s e topics were sent t o

us s o late, a n d I was s o busy o n other matters t h a t I
dia not read over t h e list o f the topics until I

got d o m

here, and the reports o f some o f the committees, gotten u p Eeruusiby some o f our other officers, I

have h a d

to read them here, a n d that i s the first knowledge I
have o f what t h e y are about.
The Chairman.

G o v e r n o r Morss m i c h o f this arises

through short notice?
Governor Morss,

The Chairman. I

i t does, yes.

think you were out o f the room

when w e decided t o make a
Governor M o r s s , I

recommendation t o the Board?

was,

Governor Seay. C o u l d I say, Mr. Chairman, that I


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Federal Reserve Bank of St. Louis

think t h e m e t h o d o f procedure e n d d i s c u s s i o n

i s and

has been admirable, b u t i n the preparation o f a program I a m inclined t o think i t woulda b e advantageous
if t h e s u g g e s t i o n

o f topics

time i n order t o canmolete a

b e closed a t a

certain

program a n d have i t i n

tne hands o f the Governors s a y t e n days o r t w o weeks
ehead,.

M a n y o f the subjects entail t h e preparation

of a r t i c l e s

b y certain definite officers a n d heads o f

liepartments.

Governor Morss,

M r , Chairman, I

Want t o apoli-

gize t o y o u a n c t o this C o n f e r e n c e r o r b e i n g a w a y

from these meetings, I

was a w a y about a n hour at-

tending t o a matter a t the Federal Xeserve Board
about changing t h e discount rate i n Boston, b u t

other matters I have been about are not m y own pérsonal matters, neither have they anything t o do with
the mnference,

b u t t h e y d o have something t o d o

with some o f the departments. I
to attend t o them.

have felt obliged

t f had t o d o a lot o f telephoning,

1 am very sorry I have been cut so much and have missed
So much o f this.
The Chairman.

w

e have recommendations

t o make t o


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Federal Reserve Bank of St. Louis

the Board.

A r e y o u ready t o g o ahead with it?

Governor Calkins.

I t is useless t o prolong the

discussion, b u t a s usual I express t h e contrary vier.
The matter handled b y our subordinates,

b y the heads

of the departments, s h o u l d b e revisucdby t h e Governors a n d discussion i n detail should b e h a d s o far
as necessary t o keep t h e Governors informed i n regard t o what i s goingon, a n d i t seems t o m e t o b e
as n e c e s s a r y a S a n y o t h e r d i s c u s s i o n . T

a m humilia-

ted---I wish t o emphasize that word, t o say i n regard t o a n y topics a n d a n y program that I
anything about it. I
informed

do not know

believe w e should b e a s fully

i n régard t o the details e f . transactions

as possibis,

E v e r y topic o n this program should b e

discussed b y the Governors,
The Chairman. G e n t l e m e n t h e motion i s t o request t h e Board t o give u s ample notice o f meetings.

Are you ready t o vote upon that?
(The motion was put and unanimously carried.)
The Chairman.

W h a t i s your pleasure about the

rest o f t h e program?

Governor Fancher, I

move w e proceed, Mr. Chairman,


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Federal Reserve Bank of St. Louis

until t h e Board meets w i t h us.
The Chairman. I

a m ready a n d willing t o wifthdrar

any topics suggested b y New York; i n fact alli of the
rest o n the program were suggested b y New York with

the exception o f “(g)", which was i n part suggested b y
Cleveland. I

have w o r d f r o m t h e B o a r d t h a t t h e y w i l l

be detained f o r fifteen o r twenty minutes i n a meeting
which t h e y are n o w holding, a n d will b e over here then.
(ge) S t a t u s o r organization a n d activities
of eligibility committees formed i n the reserve banks,

(Federal Neserve Bank o f New York.)
What procedure i f any i s followed b y each
Federal r e s e r v e b a n k t o a s c e r t a i n » h e t h e r a c c e p t a n c e s

made b y its members a r e made i n conformity with t h e

regulations effective since October 25, 1920,
and the Board's rulings, a n d what steps i f a n y are
taken t o g e t Similar information regarding bills a c cepted b y either member o r nonmember banks o r ac-

ceptances offered either t o the Federal Reserve Bank
district i n which the bills originate o r t o other
Federal R e s e r v e B a n k s ,

land, )

( F e d e r a l R e s e r v e B a n k o f Cleve-


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Federal Reserve Bank of St. Louis

Governor Fancher. T h a t part of topic "(g)" suggested b y our bank was more t o get information a s t o
what t h e o t h e r b a n k s w e r e d o i n g , t h a t i s all.

Governor Seay. D o e s that mean, Governor Fancher,
eligibility f o r membership, w h a t k i n d o f eligibility?
The Chairman.

T h a t portion o f the topic sug-

gested b y New York, t h e first paragraph, related t o
the activity o f a conmittee appointed a t the previous

conference, designed t o make uniform throughout the
Federal e s e r v e B a n k s t h e p r o c e d u r e

i n declaring p a p e r

ineligible, a n d we-find, f o r instance, that the paper
made b y certain borrowers, w h i c h w a s commercial paper,

which was offered t o us for rediscount b y member banks,
has i n some instances b e e n declared ineligible

i n

other Federal Reserve districts, a n d i t would b e a n
unfortunate t h i n g a t this present t i m e a n d under present conditions i f the borrower, f o r instance a

packing

or milling concern, i f you should find its notes were
ineligible f o r redisccunt

i n San Francisco b u t were

eligible i n New York,

Governor Calkins, a r e not you slightly missing


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Federal Reserve Bank of St. Louis

t vhen y o u s a y "“eligible3"

Y o u

ility but acceptability?

The Chairman. N o , 1 ammot confusing the tro
points, Governor Calkins,
Governor Calkins.
The Ghairman.e

agree v i t h you.

“ell, I

T h e g u e s t i o n w h i c h comes u p beiore

us i n New Y o r k i s this, t h a t t h e conunercial papsr brokers
are repeatedly reporting t o u s n o w that certain paper
which t h e y handle f o r their customers h a
ineligible a t some Reserve Bank.
Governor C a l k i n s , I

constantly.

think t h e y c o n f u s e d t h e r o r d

y e distinguish v e r y emphatically between

eligibility a n a acceptability,

and I

think brokers

do

not.
Governor wellborn.

w e distinguish between eligi-

They might b e eligible b u t
not desirable Sometimes i n certain amounts, b u t n o t
a n y case,
totally undesirable i n
The Chairman.

M a y I attempt t o clarify discus-

sion o n this paint b y this statement?

[ I understand

that i t is the purpose o f the regulation o f the
Federal R e s e r v e B o a r d t h a t t h e F e d e r a l R e s e r v e B a n k s


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Federal Reserve Bank of St. Louis

should not discount paper, t h e proceeds o f which a r e
shown t o b e u s e d f o r c a p i t a l p u r p o s e s

a s distinguished

from the purpose generally specified i n the act, t h a t
is f o r a g r i c u l t u r e

o r cammercial purposss.

T h e means

of determining eligibility i n the case o f a commercial

note a s distinguished from a bankers’ acceptance can
only b e found i n the statement o f the maker o f the note,

In other words whether the total amount o f his. borrowings
of that character i s i n fact covered b y current assets,
which indicates t h a t t h e proceeds c f the nots have b e e n
used f o r t h e purpose o f producing a n d marketing goods
as a commercial trensaction.

N o w t h e definition o f

eligibility a n d acceptability become inseparable w h e n

you consider the codition statements o f the borrowers,
and w e find obviously t h e case i n the s y s t e m everywhere
when paper i s declined i t i s not declined with a specific
statement t h a t the Rescorve Bank: does n o t consider i t t o
ba good paper, b u t i t i s declined upon the ground that
the condition statement o f the borrower discloses t h a t
it i s not eligible.

V i e all take that position whether

we regard i t as gaod o r bad, because i t would be a
highly d a n g e r o u s t h i n g f o r t h e R e s e r v e B a n k t o s a y t h i s


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Federal Reserve Bank of St. Louis

paper w a s n o t good a n y more.

T h e general reply i s that

it i s ineligible.
Now o u r p r o c e d u r e

i n N e w Y o r k h a s b e e n p r e t t y gener-

ous i n passing upon this Guestion o f so-called eligibility.

T

e Fave a feeling that w e are p o s s i b l y alittle

more generous than some o f the other reserve banks are,
and a t the present moment m y object i n putting this o n
the program was t o t r y and persuade t h e Governors o f

the Reserve Banks, a s I stated yesterday, that this
was n o t i m e t o a p p l y f i n e s p u n theories, r e d u c e d t o

terms o f Quick assets,in determining eligibility o f
paper,

A

s long a s the b a n k indorsement

i s good and

we believe t h é accommodation i s necessary I think w e
should b e pretty generous i n interpreting what i s
and what i s not eligibility, a n d that w e should h a v e
a uniform practice

i f possible.

Governor Wellborn.

T

h

e

n rirstthe statement

of the t w o f o r o n e theory appeared i t was practical,
but these times I

d o not suppose a n y bank i s strict

enough t o hold t o that theory, a n d i f i t shows a reasonably Quick current y o u know w e take that into consideration, a n d the k i n d o f business t h e y are doing a n d


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Federal Reserve Bank of St. Louis

851

the losses t h e y have h a d i n the previous year.

N o w the

statements w e are getting here s h o w a great m a n y c m d i -

tions, they have had tremendous losses, you know, when
we compare t h e m with t h e statements o f former years,

The Chairman.

B u t the paper i s not ineligible

if i t shows a n y percentage o v e r liabilities u p o n a fair
interpretation o f the statement.
Governor Wellborn.

The Chairman.

W h a t i s that?

T h e paper i s eligible i n light o f

the l a w i f i t shows a n y margin a t all o f quick assets,
Governor Seay. R e a s o n a b l e ,
The Chairman. T e c h n i c a l l y i t should.

Governor Seaye Would,"reasonable" mean “any?
The Chairman. T a k e b y way o f illustration a n automobile coanpany---

Governor McDougal.
The Chairman.

T a k e the Ford Company.

W e know a n automobile manufacturer's

inventory, which i s i n fact goods i n process o f manufacture,

w h e n that automobile c o m p a n y stops a s a

business

i t becomes p r a c t i c a l l y w o r t h l e s s , e x c e p t t h e

scrap v a l u e o f t h e m a t e r i a l .

O

going

n the other hand w e

know that a manufacturer o f watch cases, whose inventory


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Federal Reserve Bank of St. Louis

832

is almost entirely gold, i t i s o f almost t h e same value

if he fails a s i t is with a going concern, a n d the test
of t w o t o one applies t o a n automobile manufacturer might
be inadequate, whereas t h e test o f one a n d one-tenth

might b e wholly adequate i n the case o f a watch manu-

Governor Calkins.

T h a t secms t o m e t o call f o r

elucidation o f your statement,

a s I understand it,

that t h e m a k e r s h o w i n g a n y m a r g i n W o u l d m a k e t h e p a p e r
technically e l i g i b l e ?

The Chairman. I

used the word “eligible,” I should

have said “good.”
Governor C a l k i n s .
back p a p e r s h o w i n g a

sonally done that.

& l l right.

Y

e have turned

r a t i o n o f s i x t o one. i

teave -per—

W o w that paper was eligible, vas

it not?
The Chairman.

Y e s , i f the statement w a s voroperly

made a s t o the value o f the inventory,
Governor Seay. “‘jould you regard a n y paper a s eligible where t h e current liabilities w e r e i n excess o f
the c u r r e n t a s s e t s ?

The Chairman. I

would regard any paper a s elibigle

in the light o f the law, the language o f the Act, where


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Federal Reserve Bank of St. Louis

we w e r e s a t i s f i e d t h a t t a k i n g t h e c

u r r e

n sttessaa t

reasonable values the amount o f those current assets~_
exceeded the amount o f the current borrovings, b u t that
would n o t mean necessarily that t h e paper w a s €ood.
Mr. Harrison. G o v e r n o r Seay, t h e Federal Reserve
Board i n its recommendations h a s made that very distinction.

I t provides i n two paragraphs t w o different

things, first a note i s eligible i f the proceeds are
used f o r a commercial purpose, t h a t i s o n test. S e c o n d ,
if a note, o r its proceeds a r e u s e d for 4 capital purpose.

I

n determining t h e second Question y o u m a y con-

sider---you may, n o t necessarily must, y o u m a y consider
a reasonable

excess

o f current

q u i c k liabilitiss

as

evidence t h a t i t i s not used f o r a capital purpose,

But you may technically, under the regulations, have
an inverse excess, that i s excess o f liabilities over
assets, a n d still b e able t o establish the fact under
the particular circumstances t h a t the proceeds were used
for a

commercial p u r p o s e ,

y e t technically,

a s 4 a matter

of law a n d matter o f regulation t h e note would b e eligible
whether o r not i t would b e sood o r desirable i s a n en-


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Federal Reserve Bank of St. Louis

tirely different Guestion.
Governor Seay. I
you o n that.

would n o t b e prepared t o g o with

T h e Board early i n the 5 y S t e m made a n 6x-

ception i n favor o f cotton, said the rule vould b e t o
take t h e s p e c i f i c e x c e s s

o f l i a b i l i t y o v e r c u r r e n t assets,

nevertheless s a y %5.00 per spindle w o u l d leave t h e paper
eligible. I

always thought t h a t a n unfortunate ruling

and contrary t o the soirit o f the act.
Governor V a n Zandt,
instance a

I n that connection take f o r

grain m a n who makes n i s financial statement

at the wind u p o f his season, w h e n h e has none except
fixed assets, a n d a little c a s h o n hand o r something o f

that kind,

H e wants t o borrow a large amount for the

purpose o f buying grain t o put into h i s elevators, a n d
so forth, a n d those notes a r é certainly eligible, a l though the statement t h a t i s before y o u will s h o w a n excess o f current liability over quick assets,
The G u s t i n e

T h e régulation o f the Board defines

the proceeds have t o be, o r are t o b e used, a n d i t seems
to m e that this whole Question o f determining u p o n ths
basis o f s t a t e m e n t s r e c e i v e d a n d u p o n g e n e r a l k n o w l e d g e
of t h e b u s i n e s s

is a

matter

o f common sense

t o b e exer-


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Federal Reserve Bank of St. Louis

835

cised.

W h e r e y o u adopt a n absolute arbitrary per-

centage o f excess o f quick assets o v e r current liabilities,

i n some cases t h i s w o u l d b e doing a

great i n j u s t i c e

to a borrower,
Governor Calkins.

R i g h t there, Mr. Chairman, I

wholly agree w i t h what y o u say, b u t uniformity o f practice, uniformity without t h e application o f common sense
cannot b e secured.

T h e guestion that I

which y o u h a v e i n mind, p e r h a p s ,
practice

see a s one

i s whether a

uniform

i n regard t o t h o s e b o r r o w e r s w h o s e p a p e r i s

presented t o a l l o f u s c a n b e secured. I

cannot g o much further t h a n that.

think y o u

836

Toe Ghairman.

w h a t I

have i n mind, Governor Cal-

kins, i s this: t h a t i t was suggested, I
provided

b y resolution a t a

think i t was

previous C o n f e r e n c e ,

every Keserve b a n k there should b e appointed a

that

in

committee

whose d u t y i t would b e t o pass u p o n paper i n regard t o
which a determination h a d t o b e arrived a t a s t o its eligibility, a n d that w h e n that determination w a s arrived at,
if i t was declared t o b e ineligible,

noticeo
t that

effect would b e sent t o every other Keserve Bank.

N o w

we find that i s not being done i n New York. T h e r e are
a number o f banks t h a t a r e keeping i n close touch-~the
Boston Bank i s one, Gleveland i s one, a n d I think Chicago
is one--but a s t o the other Reserve Banks w e never hear
from them.

s h e n a decision i s arrived a t b y the eligi-

bility c o m m i t t e e ,

i f o n e exists,

w e declare p a p e r i n e l i - ~

gible, a n d w e want t o have that information given out.
Governor Seay.

D o e s t h a t refer t o paper nationally

floated?


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Federal Reserve Bank of St. Louis

The Chairman.
Governor S e a y .

The Chairman.
Governor Seay.

Yes.
I

t does n o t refer t o local paper?

No.
i r . Chairman, t h a t was discussed i n


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Federal Reserve Bank of St. Louis

the g r o u p m e e t i n g

and Richmond,

i n Atlanta b e t w e e n Cleveland, A t l a n t a

a t woich Mr. «ills, representing t h e Uleve-

land Keserve bank, w a s present, a n d t h e conclusion o f
thoss present w a s that i t was desirable t o have unif orm
action o f all the Reserve banks i n reference t o paper
of that character o n the question o f eligibility, t h a t
there s h o u l d b e s o m e a c t i o n r e l a t i v e

t o t h e eligibility

of refusing paper u p o n that ground.
The Chairman, I

think t h a t i s a

good suggestion,

but t h e r e h a s b e e n n o t i m e i n o u r e x p e r i e n c e c o m p a r a b l e

vith t h e present, w h e n i t i s important that w e should

act uniformly i n declaring paper ineligible.
taking paper i n New York, I

a e are

a m free t o say; which has

been declared ineligible t n other districts.

(Governor Calkins made a statement off the record).
The Chairman.

G o v e r n o r Galkins, y o u d o not feel

thet that raises a n y obstacle i n the w a y o f o u r endeavoring
to devise 2

plan b y which information a s t o ineligible

paper shall b e promptly exchanged?
Governor Calkins.

I f w e c a n get cooperation i n all

cases between t h e agents a n d t h e executive department ¢

the banks and get suonport

i n that cooperation b y the


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Federal Reserve Bank of St. Louis

Board, w i t h a n exchange o f viexs, t h a t will lead t o the
acceptance o f paper i n all the banks-The Ghairman.

s o u l d n o t t h e proper procedure

b e for

us t o adopt a plan, a n d p u t i t into operation, a n d i f a n y
Federal Keserve Agent raises objection t o that plan,
take i t u p with the Board?
Governor Calkins.
see done.

T h a t i s exactly what I

would l i k e t o

T h a t was not, s o far a s I know, suggested b y the

previous a c t i o n taken.

Governor Mevougal.

Y o u have made a

very clear state-

ment w i t h respect t o your views w i t h regard t o this subject under discussion.

O

n

e feature, however, related

to a subject t h a t I should l i k e t o b e enlightened on, a n d
that i s this.

T h a t y o u d o not feel that simply because

paper m a y b e technically eligible t h a t y o u are required
to t a k e i t s O f c o u r s e t h e r e m u s t b e s o m e p a p e r o f f e r e d
thet, f o r g o o d reesons,

e v e n though t h e statement shows

it t o b e technically eligible, y o u d o not want.
instance,

y o u may possibly have a

For

lot o f paper o f one

line that y o u d o not went.
Governor Calkins.

Governor McDougal.

T h a t is a

real e a t e s t o consider.

T h a t i s one thing. I

have o n e

839

name i n m y mind that w e have recently requested--a concern w h o s e s t a t e m e n t s h o w s t h a t t h e p a p e r i s t e c h n i c a l l y

eligible, b u t I found w e had a much larger amount o f i t
in the aggregate t h a n w e wanted, a n d I asked that i t
be gradually brought d o w n a n d reduced t o a more conserva#

tive amount.

@ W i l l n o t t a k e a n y m o r e o f t h a t paper.

And there a r e other cases p f the same sort, o f course.
ve a r e n o t obliged,
count p a p e r

i n other words,

t o accept f o r redis-

i n any quantity simply because

technically eligible. I

i t may be

a m sure w e must a l l agree o n

that.

The Chairman.
Dougal, t h a t I

well, I

a m frank t o say, Governor M c -

do not feel, a n d I

do not believe Governor

Calkins feels, t h a t a determination o f eligibility i m poses a n y obligation o n the Reserve B a n k t o take a l l the
paper o f t h a t m a k e r t h a t m a y b e offered.

of fact,

A

s a

matter

i n New York w e are v e r y chary o f rejecting paper

because t h e line i s large, s o long a s w e have good b a k
endorsements o
n it, a n d ,

as I

was s a y i n g t o s o m e o n e t h e

other night, w h e n t h e l i n e s a r e r e p o r t e d r e g u l a r l y ,

as

they are, t o the officers--I noticed w e had 14,000, 000.00
of t h e p a p e r o f o n e a u t o m o b i l e c o n c e r n , - - i t d o e s n o t c a u s e


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Federal Reserve Bank of St. Louis

me a n y concern, b e c a u s e

i n that c a s e i t w a s d i s c counted

with u s b y the largest banks i n New York, t h a t a r e amply
good f o r e v e r y d o l l a r

o f the paper e v e n i f the company

should fail, a n d I regard t h e paper a s good anywaye
But these a r e t h e times w h e n these strict rules might
tead t o t h e r e j e c t i o n o f p a p e r a n d c a u s e v e r y d i s t i n c t
harm,

a n d o u r p o l i c y i s t o make sure, first, t h a t t h e

endorsement w e g s t from the member bank i s sufficient t o
take c a r e o f t h e l i n e e v e n i f t h e p a p e r s h o u i d p r o v e t o

be worthless; a n d then, i f the paper i s eligible,

we

teke i t freely, a n d w e are generous i n our determination
of what i s o r i s not eligible.
Governor Calkins. G o v e r n o r McDougal's discussion,
and yours, M r . Chairman, t o u c h e s 4

v e r y v i t a l question.

Suppose t h a t w e a c c e p t f r o m o n e m e m b e r b a n k 1 0 0 , 0 0 0 . 0 0

worth o f paper o f a concern which shows outstanding bills
payable

o f »500,v00.00,

200,000.00,


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Federal Reserve Bank of St. Louis

a n d w e accept f r o m another b a n k

a d t h e n w e s a y w e have g o t enough o f this

line, a n d a n o t h e r b a n k c o m e s w i t h ~50,000.00,

and we

say n o , w e h a v e e n o u g h o f that, a n d w e m o n t t a k e i t .

Can w e not justify that position?
A voice:

N o e


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Federal Reserve Bank of St. Louis

B41

have maintained t h a t w e would

Governor Calkins. I

be justified i n saying that w e have a l l the paper o f this
kind w e w a n t f r o m o n e c o n c e r n o r party,

a l l w e will t a k e

from this bank, a n d having a 6 per cent rate W e are i n
some c a s e s b e i n g o f f e r e d m o r e p a p e r o f this k i n d t h a n

should b e carried i n this district.
we have n o right legally,

B u t I maintain that

o r otherwise,

t o accept

$450,000.00 worth o f paper o f a concern which h a s ~500,000.00
worth outstanding, a n d t h e n s a y t o another bank Wealth,
this i s good f r o m everybody else b u t you; w e cannot take

it from you". T h a t is a position that has been taken.
The Ghairman.

a n y should i t b e rejected i f the

pank i s good a n d i t i s eligible paper?
Governor Calkins.
Governor tellborn.
we w e r e f o r c e d

I t never should.
w

e h a v e d o n e t h a t v e r y thing,

t o d o i t e L a s t summer t h e packers

i n our

particular
district s e e m e d t o b e l o a d e d d o w n w i t h t h a t

banks
paper a n d they offered i t t o some o f the smaller
with
at 8 per cent, a n d said t h e y would carry a balance
them.

N o w w e thought t h e y had t o o much o f our resources.

we had the figures there showing what the different
packers h a d a n d t h e t o t a l amount.

S

o when a

member b a n s

would send i n »~100,000.00 o r ~ @ 0,000.00, except that
woien they h a d a small line, which t h e amount o f that
paper w o u l d increase,
the i d e n t i c a l paper,

a n d another member b a n k would s e n d
w e would reject

i t i n s o m e cases,

and w e had a controversy with t h e banks o n that subject,
but w e f e l t this, t h a t i f w e t o o k t h a t p a p e r f r o m a


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Federal Reserve Bank of St. Louis

differ-

ent one, t h e d i s t r i c t b e i n g f l o m i e d w i t h i t , t h e n w e w o u l d

have a n abnormal amount o f that class o f paper f r o m the
outside coming i n t o o u r district, a n d w e would tell t h e m
that t h e y could send i n other paper that ras eligible.
Governor Seay. I

think there a r e times w h e n that

occasion will inevitably arise.

T h e r e w a s n o subject

which was more carefilly studied i n the early stages o f the
system t h a n t h a t o f t h e d e t e r m i n a t i o n

of paper b y t h e Board.

“unile I

o f the eligibility

a m i n full sympathy with

the view that liberality should b e exercised now, a n d
common sense should b e the basis o f the determination o f
these guestions, s t i l l I

think there i s some danger o f

leaning t o o f a r t o the other side.
A distinguished gentleman recently made a proposal
in a n annual report that w e should b e permitted t o accept
from solvent banks paper n o t eligible a t the present time,


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Federal Reserve Bank of St. Louis

in o r d e r t o render t h e m a i d i n times

is where t h e matter m a y lead, a n d I
called upon, a s I

o f emergency.

T h e r e

think w e are still

a m sure w e a l l d o feel, t o regard v e r y

carefully t h e strict terms o f the regulations o f the Board,
pursuant t o the terms o f the Act.
I cannot s e e h o w i t i s possible f o r u s t o arrive a t
a uniform a c t i o n between t h e Federal Neserve Banks

af

common sense i s t o b e made t h e basis o f o u r final determination.

A t the same time, I

do believe t h a t such uniform

setion a s i s possible should b e taken b y the Federal R e serve Banks, a n d I believe that t h e decision arrived a t

in Atlanta i s at least a good suggestion, a s you do,
that before refusing paper f o r reasons o f eligibility o r
non~eligibility i n any district, w h e n the paper i s made i n
another district, t h a t t h e bank t o which t h e paper i s offered
should first communicate w i t h t h e bank i n which t h e paper
originates,

i n crder t o determine t h e attitude o f that

bank a s t o t n a t p a r t i c u l a r peapere

Governor McDougal. I
Governor S e a y a s t o w h e t h e r

should l i k e t o inquire o f
o r n o t h e takes t h a t paper

the meantime, pending t h e reply f r o m the bank i n the

district i n which i t originates?

in


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Federal Reserve Bank of St. Louis

Governor Seay.

I f r e thought i t ineligible w e

would n o t t a x e i t , n o Governor sicDougal.

You,

o f course, m i g h t e m b a r r a s s

the bank b y the delay, t h a t i s all.
Governor Seay.
uneble

A n d f r o m the beginning w e have been

t o accept p a p e r w h i c h i n t h e o p i n i o n o f t h e o f f e r i n g

bank was stated t o b e as good paper a s a n y i t had a n d
where t h e endorsement o f theoffering b a n k wes undeniably
good, w h e n t h e p a p e r d i d n o t c o n f o r m t o w h a t w e b e lieved

to b e the sound rules o f determining eligibility, a n d d i d
not c o n f o r m t o t h e r u l e s l a i d d o w n b y t h e Board.

N o w ,

of course, t h e endorsement o f the offering b a n k i s t o b e
considered.

A l l the circumstances

be considered.

B u t I

o f the case a r e t o

also feel that w e might g o too far

in the exercise o f a liberal judgment i f w e d o not regard
very s t r i c t l y a s t h e basic, f u n d a m e n t a l r e a s o n s f o r d e -

termination t h e rules l a i d d o w n b y the boards
The Chairman. ‘%ell, there i s n o rule l a i d d o m b y the
Board, G o v e r n o r S e a y .
Governor Seay.

B u t i t anpears

sufficient f o r o u r guidance,

t o m e that i t i s barely

a n d p r e t t y clear.

The e

guide, a

A

s

standard,

i s established,

t h e paper depends u p o n the clear

that t h e elipipil/ .

used.
evidence o f the purpose for which the procoads are
Governor S e a y .

A n d also,

4s I

believe,

u p o n that

a
other regulation o f the Board which gives u s

standard

the purposes
by which t o determine whether i t is used for
deter~
which you have just mentioned, a n d the fact which
mines that, whether i t i s a capital l o a n o r otherwise,
etc., a n d
and i s u s e d f o r o n e o r m o r e o f t h e processes,


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Federal Reserve Bank of St. Louis

I
if we d o not regard that principle a s fundamental,
which,
then w e are i n danger o f going o n the path

think

a s I say,

distinguished gentlehas just been suggested t o us by this
assets o f a good bank
man, w h o would permit u s t o take t h e
n o t eligible paper
in certain contingencies a s acceptable,
as security f o r Federal “eserve notes>

The Chairman. I

think the question arises because

now, which d e of circunstences t h a t a r e apparent j u s t
mand a

character

in the past.

o f treatment t h a t h a s n o t b e e n necessary

o f the
T h e purpose for which the proceeds

make i t eliginote m a y have b e e n used i n one cass which
ble, t o buy grain for a

milling company,

t o buy copper,

or
to put i t i n theprocess o f manufacture, f o r flour

electrical machinery, a n d the value o f that inventory d e clines

t o a point where, u n d e r y o u r r u l e , y o u w o u l d s a y

this p a p e r i s n o j e n n i e l i g i b l e ,

i t is not a

question

then o f the original quality o f eligibility a t all; i t
was eligible w h e n the copper was purchased, b u t y o u


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Federal Reserve Bank of St. Louis

would hold thet i t has become ineligible because the
value o f the inventory has declined.

I t seems t o m e

reasonable i t could b e held t h a t paper was e n d remained
eligible, b u t t h e company h a d sufferedlosses which made
o
the paper o f doubtful goodness, a n d i f that s i t u a t i n
can b e cured b y the endorsement o f a member bank, I

main-

tein that a lot o f that paper i s justifiebly acceptable
by the Federal Keserve Banks a t the present time.
Govery Seay-

Y o u would b e called u p o n then t o

distinguished b e t w e e n p a p e r m a d e a t a

time p r i o r t o t h e

decline o f inventories?
Toe Chairman.
Governor Seay.

O h , no.
A n d suppose t h e paper i s offered t o

you a f t e r t h e i n v e n t o r y v a l u e s h a v e d e c l i n e d a n d w h e n

guch agituation a s has j u s t been described h a s b e e n disclosed,

i s there n o t a

differeme b e t w e e n papsr made a t a

time when values were highly diffdrent from the situation


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Federal Reserve Bank of St. Louis

847

where the paper was made subsequent o
t the decline o f
inventories w h i c h showed clearly a n unliquid condition

of the company making and offering the paper?
The Chairman. I

will warrant y o u that there has

not been a note declared ineligible t h a t d i d not technically show ineligibility w h e n i t was declined o n the statement submitted.
Governor Seay.
depending

O

f course t h a t w o u l d b e a

o n t h e circumstances. I

question

a m not opposing a n

exercise o f liberal judgment, b u t I do find a difficulty
in arriving a t uniform action among t h e Federal Reserve
banks

i n this p a r t i c u l a r .
The Chairman.

T h e members

o f t h e Board s r e hearing

this matter presented, a n d this topic i s o n the program
not f o r t h e p u r p o s e

o f enforcing o n e theory o r another

upon t h e m a n a g e m e n t

o f the respective banks,

to devise a

b u t i n order

uniform system o f reporting paper which i s

declared t o b e ineligible a t a n y Reserve Bank.
Governor McDougal.

T h a t is, paper that m a y b e cir-

culating nation-wide?
The Chairman.

Y e s , n o t l o c a l paper.

T h e plan which

was contemplated a t the previous Conference w a s t o have


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Federal Reserve Bank of St. Louis

848

the committees o f eligibility appointed i n each reserve
vank, w h o s e d u t y i t w o u l d b e t o n o t i f y a l l o t h e r F e d e r a l
heserve B a n k s w h e n p a p e r w a s d e c l a r e d

t o b e imeligible,

and i t i s n o w proposed t h a t t-befere: declaring i t inaligible r e f e r e n c e

b e made t o the Pederal Keserve B a n k i n

whose district t h e organization o r firm o r corporation
that i s s u e s t h e p a p e r h a s i t s office.

Governor Calkins. I
or procedure,

think that a n y such requirement

o r whatever y o u want t o call it, i s impossible

under t h e e x i s t i n g c o n d i t i o n s .

I n t h e f i r s t place, y o u r

committee o n eligibility i n each b a n k would include representatives o f the agents,
agent

o r the agent himself.

I f the

i n o u r b a n k determined t h a t t h e paper w e s n o t ac-

ceptable a s security f o r Federal Neserve notes, h e would
not a c c e p t i t .

The Ghairman.

I s that situation p e m liar t o your bank?

Governor Calkins. I
ported

do not know.

i n t h a t v i e w b y t h e board,

and I

H e has been supdo not see how h e

ceould take a n y other position.
The Chairman.
want t o d e v i s e a

T h e ouestion arises

i n this f o r m .

‘ie

plan w h i c h r i l l eliminate t h e present

difficulty o f having paper declared t o b e ineligible i n

one 'ederal Neserve District which, nevertheless,

i s of-

fered f o r disc ount i n other Reserve Vistricts, where i t
might b e held t o b e eligible, a n d a scheme o f reporting
has b e e n r e c o m m e n d e d t h a t h a s n o t b e e n c o m p l e t e l y f o l l o w e d
out b y t h e d i f f e r e n t R e s e r v e B a n k s .

G o v e r n o r Calkins

raises t h e p o i n t t h a t t h e d e t e r m i n a t i o n

o f eligibility

and goodness o f paper i s not complete w h e n that determination i s arrived a t b y the ¢

ficers o f the bank unless t h e

Federal Reserve Agent has passed u p o n the paper f o r the
purposes o f pledge.
Governor Calkins.

N o t quite that. I

do not take t h e

position that the determination may not b e complete s o
far a s the bank i s concerned, b u t I

do say that i t i s highiy

undesirable t h a t t h e b a n k s h o u l d a c c e p t thse p a p e r u n d e r

rediscount which the Federal keserve Agent will not accept
as security f o r Federal Keserve notes.

A n d that might

bring about a very difficult a n d very serious condition i n
any bank o r i n the system a s a whole.
sirable,

I

t i s highly unde-

i n other vrords, f o r t h e b a n k i n a n y c a s e t o a c c e p t

for rediscount paper which will not b e accepted b y the
Federal Keserve Agent e s security for Federal Reserve


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Federal Reserve Bank of St. Louis

notes.

H o w f a r t h a t h a s b e e n done i n other cases I

®


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Federal Reserve Bank of St. Louis

not know.

Governor o r s s .

O

n tnis question w e have h a d some very

difficult questions t o decide i n the Boston Bank, where
the line was very close, b o t h a s t o eligibility a n d
whether w e wanted t o accept i t o r not.

W e have found

it t o b e helpful t o take t h e matter u p with o u r neighboring Federal Heserve Bank a n d get their point o f view a n d
what t h e y think about it.

w h i l e i t may n o t be a per-

fect way, i t has b e e n a helpful

a r e a

t h e most helpful

way that w e have b e e n able t o think upGovernor Seay.

T n u a t was t h e belief o f the Atlanta

the matter, a n d thet was the
t
ce
Conference i n r e f e r e n o

reason of its conclusion.
Tag Ghairman.

s h e n w e first discussed this topic i t

was proposed that the action o f the meeting-should b e t o
h
t plan o f reporting t h a t was approved
put i n o p e r a t i o n e

at a previous ccnference, a n d i f @ case o r cases arose
where t h a t c a u s e d a

difference

i n point o f view b e t w e e n

the Federal Keserve Agent and the Governor, that s u c
cases b e referred t o the Federal Keserve Boarde
Governor Calkins.

N o t a difference i n point o f

view between t h e Federal Keserve Agent a n d the G o v e r n a .

that would n o t get y o u anywhere, neither o n e i s final i n
the d e t e r m i n a t i o n a s t o t h e p a p e r e

The Chairman.

h a t d o you want t o d o about it, Gov-

ernor Galkins?
Governor icCalkins. I
be dong about it. I

a m not quite sure what c a n

am only presupposing 4 case.

x e

have o n l y s o far avoided t h e acceptance o f paper which
was rejected a s security f o r Federal Reserve notes.

B u t

that situation is in existence and might become active at
any time i n any bank, a n d I thought that some means o f avold~

ing that situation should b e provided. s h a t that means
is I

a m not able t o say.

The Chairman.

I s not the question feasible that when

the question does arise i t b e referred t o the Federal Reserve Board?

¥ h o else could dispose o f it?

Governor Calkins. I

think t h e Federal Reserve Board

is o n record i n a n opinion t o the effect that t h e Federal
Reserve A g e n t i s t h e f i n a l arbiter,

t h a t h i s decision i s

final a n d conclusive a s t o whether h e will o r will n o t ac- cept paper a s security f o r Federal “eserve notes.


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Federal Reserve Bank of St. Louis

Governor itellborn. E v e n though i t ’.ud been approved
by t h e e x e c u t i v e o f f i c e r s ?


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Federal Reserve Bank of St. Louis

Governor Calkins.
Governor Young.

Yes.

L e t u s assume t h a t a n agent refuses

certain r e s e r v e paper,

y o u still h a v e a

leeway o f 4 0

per cent.

Governor Calkins.

O h , yes, w e are n o t talking about

thate

B u t that i s a n undesirable situa-

Governor Young.
tion~+The Chairman.

D

o you think w e should t i e these t w o

questions together?
Governom C a l i i n s . I

think w e s h o u l d d i s p o s e

o f the

first one without disposing o f the second.
The Chairman.

L e t u s d o that.

T h e r e i s n o motion,

but the suggestion i s made t h a t t h e Federal Reserve Banks
be r e q u e s t e d

t o observe t h e procedure recommended

a t a4

previous Gonference, t h a t is, t o have these eligibility
committees a p p o i n t e d a n d h a v e t h e m p r o m p t l y r e p o r t c a s e s
where p a p e r i s d e c l a r e d i n e l i g i b l e

t o all the other Re-

serve B a n k s »
Governor Seay. I

think that i s a reasonable position

and i s perfectly practicable o f being p u t i n operation, a n d
I move t h e adoption o f the suggestion.


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Federal Reserve Bank of St. Louis

Governor Norris.

T h a t is, that where a

bank d e -

clares ineligible paper arising i n its district which
is believed t o circulate outside t h e district, t h a t i t
notify t h e other banks.
The Chairmane N o ; where a

Keserve B a n k declares a n y

paper offered for d i s c o u n t o
t be ineligible, whether
it originates

i n its district o r not, i t should b e

promptly r e p o r t e d

t o other Keserve Banks,

i f i t i s paper

that circulates throughout t h e country i t b e promptly
reported that that paper has b e e n declared ineligible.
Governor Calkins.

T h i s o f course applies o n l y

to commercial paper.
Toe Chairman.
Governor Seay-

I t applies o n l y t o canmercial paper.
A n d applies o n l y t o paper which cir-

culates throughout t h e country; otherwise i t would n o t
be practicable.
The Chairman.

T h a t i s t h e intention.

A r e y o u ready

for t h e q u e s t i o n ?

Governor ilcDougal.

I s that t o work this way? T h a t

if a Federal Keserve Bank, through its committee, declares
a note t o b e ineligible, t h a t t h e y are obliged t o await
the o p i n i o n o f t h e o t h e r e l e v e n b a n k s b e f o r e t h e q u e s t i o n

is finally settled.
The Chairman.

N o t a t all. L

mean,

t o continue

just a s y o u and w e are operating.
Governor McDougal.

T h a t i s m y understanding, too.

At t h e s a m e time, t h a t w i l l n o t a v o i d t h e d i f f i c u l t s i t u ation t o w h i c h y o u h a v e m a d e reference,

u n d e r which t h e

Chicago Bank might declare something ineligible and you
Geclare i t eligible.
The Chairman.

“ell,

all that i s intended, I

i t gives y o u notice.

understand.

T h a t is

I t i s operating b e t w e m

Boston a n d N e w York admirably, a n d w e agree u p o n these

papers.
Governor McDougal.

A n d i t is operating between New

York and Ghicago.
The Ghairman.

I t i s operating perfectly, a n d I do not

anticipate t h a t w i l l a l w a y s
matters,

b e a b l e t o agree a b o u t t h e s e

b u t w e will g e t t h e s i s

o f a

discussion 6 s -

tablished a t orcee

(At this point Governor Harding, Mr. damlin, Dr.
Miller, a n d Mr. Pdatt extered a n d took seats).
Mr. Hamlin.

D o y o u mean b y that th. particular paper

which i s o f f e r e d a t o t h e r b a n k s ?


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Federal Reserve Bank of St. Louis


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Federal Reserve Bank of St. Louis

The Chairman.
There i s a

T h e situation that has arisen i s this.

very l a r g e a m o u n t

o f paper t h a t i s handled b y

commercial paper brokers o r which i s issued b y corporations
or firms which have b a n k accounts i n more t h a n one Federal Reserve District, w h e r e i t has b e e n held t o b e ineligi-

ble i n one district, although i t is offered t o Federal
Reserve banks i n other districts a n d i s accepted, a n d
unless w e compare notes a n d develop a system o f reporting
between Federal Reserve Banks, t h e tendency o f course would

be t o have all the paper o f a given make-up which has a n
inter-district currency, f l o w t o those districts where
it was acceptable.
Mr. Hamlin.

M y point was, suppose y o u had a case

of a commission merchant's paper, where that particular
paper was never offered i n any other district, b u t wheres
there w a s necessarily involved t h e consideration ¢ & the
law, w h e t h e r t h a t c l a s s

o f paper w a s commercial paper,

commission merchants p a p e r a n d cold-storage warehouse
paper,

would

in cases

i t not b e better

t o advise

t h e other banks

o f that kind?

The Chairman.

A s inter-district currency,

and i t would b e covered b y this procedure.

i t would,


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Federal Reserve Bank of St. Louis

856

Mr. Kenzel. I
this r e f e r s

think Mr. Hamlin's ppint is whether

t o specific n a m e s

o r simply classes a n d types

4

of paper.
The C h a i r m a n e

I t refers

t o commercial p a p e r a n d

all rules a s t o eligibility a r e sent t o the Board a n d
sent t o a l l t h e H e s e r v e Banks.

i

f w e pass t h i s resolu-

is
tion a n d p u t the procedure i n practice that/ recommended
we will t h e n get notice of. every case o f ineligibility
that arises where t h e papsr circuletes

i n more t h a n

one district.
Are y o u ready f o r t h e question?

(Toe motion was put and unanimously carried).
Toe Ghairman. I

will n o w call o n Governor darding

to take t h e chair.

(Governor Harding took the chair a t this point).
Governor Harding. I

understand t h a t t h e Confer-

ence has b e e n considering this pension plan.

M r . Gurtis

and I nad a conference w i t h Senator Smoot some time ago,

and Senator Smoot. agreed t o introduce the bill and
sponsor
best m a n

i t u n d e r c e r t a i n conditions.

H

e i s probably t h e

t o undertake that.

Senator Smoot raised two points which I think are


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not satisfactory t o the members o f this Conference. I
telephoned h i m a half hour ago and he said he would b e
committee f r o m t h e C o n f e r e n c e

glad t o r e c e i v e a

a t half

past 9 o'clock tomorrow morning a t his office i n the
Senate Office Building, a n d I shall g o u p there t o o a n d
meet y o u u p there a t his office a t 9:50 o'clock tomorrow
morning.
In your c o n f e r e n c e w i t h A s s i s t a n t S e c r e t a r y o f t h e

Treasury Gilbert the other day I do not know whether h e
discussed with y o u thematters o f acceptance o f Soviet

gold by United States mints and assay offices.

I n any

event h e sent m e a copy o f a letter written b y the
Treasury Department t o the Department o f State a n d &
copy o f the state Department's r e p l y o n the general
question o f the acceptance o f Soviet gold b y the United

States ilint and assay offices.
Would y o u like t o hear t h e views o f the Treasury
Department? I

can read extracts o f the letter,

i f you

desire it, o r we can simply heve i t go i n the record.
Governor M o r s s . I

think i t w o u l d b e w e l l i f y o u

would read i t now.

Governor Harding (reading):

"varch 25, 1921.

"Dear Mr. Dearing:


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"as requested b y you at our conference yesterday,
I a m writing t o indicate t h e position o f the Treasury
Department w i t h respect t o Russian gold.

"The Treasury acts i n purchasing gold at United
States Mints a n d Assay Offices under certain provisions o f
the Revised Statutes, particularly Sections 5 5 1 9 a n d 3545.
These statutes make i t clear, first, t h a t t h e transaction
is not a mere minting operation b u t a purchase, a n d
second,that t h e Treasury i s only authorized t o accept d e -

posits made b y ‘owners’ o f gold.

T h e Treasury is,

therefore, c o n c e r n e d w i t h t h e q u e s t i o n o f title, a n d i n

ordinary course receives a n implied warranty o f title
from the person presenting t h e gold.

T h i s does n o t m e a n

that United States Mints a n d Assay Offices demand a n
abstract o f title for each l o t o f gold presented, b u t
gold o f doubtful title a n d gold known t o have been unlawfully a c q u i r e d i s , o f course, r e f u s e d .

"In view of the actions and theories o f the socalled Soviet Government e n d the fact t h a t t h e Soviets

have never been recognized b y the United States a s even

a de facto government, tenders o f Soviet gold immediately
reised the question o f title.


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S i n c e i t was felt that

this question was largely a n international one, former
Secretary douston wrote t o the Department o f State under

date o f “ctober 9, 1920, stating that the Treasury Department d i d n o t cere t o purchase s u c h gold unless absolutely s a t i s f i e d a s t o title,

a n d t h a t n o complications

would arise b y reason o f its acceptance; a n d requesting
advice a s t o whether there were a n y objections f r o m the
point o f v i e w o f t h e S t a t e D e p a r t m e n t

t o the purchase

of this g o l d b y the Treasury, a n d further a s t o whether
the D e p a r t m e n t

o f “tate would b e prepared

t o assure t h e

Treasury that the title t o the gold i n question, i f purchased b y the Treasury, w o u l d n o t b e subject t o attack
internationally.

T h e State Department replied i n a

letter f r o m iir. Merle-Smith t o ms, under date o f November

8, 1920, that the State Department felt that i t would
be inadvisable i n the present circumstances f o r a n y
branch o r a g e n c y o f t h e G o v e r n m e n t
sponsibility i n v o l v e d

t o a s s u m e tie. 7 o =

i n the possession o f gold which

on its face indicates Soviet origin; a n d that the State
Department could not give assurances that the title t o


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Federal Reserve Bank of St. Louis

such gold would n o t b e subject t o attack internationally.
In accordance w i t h this advice, instructions v e r e i s sued t o the United States mints a n d assay offices t o
purchase n o gold known c r suspected t o b e o f Soviettorigin.
A copy o f these instructions w a s transmitted

Department.

A

t o the State

s t o gold a s t o which a mere possibility

of Soviet origin suggested itself, acceptance w a s authorized provided t h e gold was tendered b y a responsible
party accompanied b y a certificate stating that t h e gold
was n o t o f Bolshevik origin a n d h a d never b e e n i n possession o f the so-called Bolshevik Government o f Russia,
and warranting title t o the United States.

"Mereafter the question arose as to whether the
Treasury Department would purchase g o l d bearing t h e o f ficial S w e d i s h M i n t mark,

i n view o f information t o t h e

effect t h a t t h e Swedish M i n t h a d i n some cases melted

Russian rubles. I

requested the advice o f the state De-

partment i n the matter a n d Mr. Davis wrote m e under date
of December 16, 1920, stating that t h e State Department

had n o objection t o the acceptance b y United States mints
and assey offices o f gold under the coinarye o r mint mark
of ae friendly nation. T h e r e u p o n , t h e instructions t o the

B61

mints a n d assay offices w e r e modified t o provide t h a t
gold bearing t h e official coinage o r mint stamp o f a
friendly government would b e considered a s free f r a n
copy

any suspicion o r possibility o f Soviet origin. A
of these instructions w a s a l s o transmitted t o the
State Department.

"On January 11, 1921, I wrote Mr. Davis stating
that certain German gold marks shipped f r o m Sweden h a d
been tendered t o the Assay Office a n d requested a n expression o f his views a s t o whether t h e y might b e considered a s free f r o m a n y suspicion o f Soviet origin
under t h e terms o f his letter o f December 1 6 , 1920.
Under date o f January 14, 1921, h e replied that there
was n o objection f r o m the point o f view o f the State D e partment t o the acceptance o f these g o l d marks b y the
New Y o r k Assay Office.

"On March 18, 1921, I wrote the Secretary of State
making referaice t o the previous correspondence a n d r e ~
questing t h e views o f the State Department a s t o whether
gold bearing t h e Mexican coinage c r mint stamp might b e


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Federal Reserve Bank of St. Louis

deemed free o f any suspicion o f Soviet origin.
has b e e n r e c e i v e d

t o t h i s letter.

N o reply


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Federal Reserve Bank of St. Louis

862

"On the general question of the purchase o f Soviet
gold, I

think i t i s necessary t o a d d that since t h e re-

moval o f restrictions
transactions

o n transfers o f credit a n d exchange

o n December 2 0 , 1 9 2 0 , t h e r e a r e n o gov-

ernmental r e s t r i c t i o n s w h a t e v e r u p o n A m e r i c a n m e r c h a n t s

who desire t o trade w i t h Russia.

E x c h a n g e s o f commodities

are permitted, a n d there a r e n o restrictions
credit a n d exchange transactions.

o n ordinary

t r a n s f e r s o f credit

based u p o n Russian gold m a y b e also made f r o m e n y o n e o f
a number o f Huropean countries, without ectual shipment
of gold t o this country.

T h e Treasury h a s received a

large number o f inquiries f r o m American

e e

p e o r

who

have desired t o take i n payment f o r their goods Russian
rubles n o w o n deposit i n this country.
sible,

E v e n this i s pos-

i f American manufacturers a r e willing t o take t h e

risk involved i n the acceptance o f Soviet gold, f o r there
are n o restrictions u p o n t h e i m p o r t o f g o l d i n t o t h e
United S t a t e s

o r its acceptance

b y Amsricen manufacturers.

The Treasury enters i n t o the situation o n l y rhen t h e
attempt

i s m a d e t o t r a n s f e r t h i s r i s k t o t h e Treasury,

by t e n d e r o f S o v i e t g o l d t o a United S t a t e s m i n t o r
assay office.

8635

"The amount of Soviet gold i n this country i s comparatively small, probably n o t exceeding ~10,000,000, a n d most
of the inquiries f r o m American interests h a v e b e e n traceable t o agents o f the Soviet Government i n this country
who, i t i s believed, h a v e b e e n seeking t o arouse sentiment
looking toward a

recognition o f the Soviet Government.

In addition, v a r i o u s d e a l e r s h a v e m a d e e f f o r t s f r o m t i m e

to time t o sell rubles o n deposit i n New York (purchased
at a large discount)
various means.

t o the mints a n d assay offices b y

T h e continuance o f inquiries relating t o

the same lots o f Soviet gold, however, indicates that the
Treasury h a s b e e n s u c c e s s f u l

i n a v o i d i n g i t s purchase.

Efforts o f these dealers t o export these rubles t o
Canada f o r r e i m p o r t a t i o n i n t o t h e U n i t e d S t a t e s a p p e a r

to have been thwarted b y the ruling o f the Ganadian Mint
that payment f o r rubles deposited w i t h i t will b e made
only b y check o n the Canadian Treesury.

s o far a s t h e

importation o f Swedish stamped g o l d f o r sale t o the

mint i s concerned the Treasury i s informed that, while
certain shipments a r e n o w o n the w a y from Sweden, t h e
recent publicity relating t o Swedish stamped g o l d has
reduced t h e discount a t which i t could b e purchased there


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Federal Reserve Bank of St. Louis

from 3


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Federal Reserve Bank of St. Louis

per c e n t t o 1

per c e n t w i t h t h e r e s u l t t h a t t h e

transaction i s n o longer profitable t o speculators a n d
may n o t b e repeetede.

"The Treasury desires t o have the advice o f the
State Department a s t o thether t h e rulings previously
made a r e still i n accordance w i t h t h e views o f the State
Department. I

should a l s o like t o have t h e Opinion

of the State Department a s t o the following three questions;

"(1)

G a n the State Department give the Treasury

Department a n y a s s u r a n c e t h a t t h e t i t l e t o S o v i e t gold,
if p u r c h a s e d
will not,

b y United States mints

b y reason o f i t s Soviet origin,

attack internationally,
sia,

o r b y creditors

"(2)

o r a s s a y offices,
b e subject

to

o r b y a n y n e w Goverrment o f Kus-

o f t h e o l d Russian Government?

I n the opinion of the State Department should

the Treasury Department consider g o l d which bears t h e
official coinage o r mint stamp o f ea friendly nation a s
free f r o m any suspicion o r possibility o f Soviet o r i g i n ? -

"(3)

I f so, should it consider German gold marks and

bars o r coin bearing t h e official Mexican stamp a s likxewise free f r o m a n y suspicion o r possibility o f Soviet

origin.

“Very truly yours,

*(Signed) S. P. Gilbert, Jr.
"Assistant Secretary o f the Treasury.

"Hon. Fred Morris Dearing,
“First Assistant Secretary o f State,

“washington, BD. G.


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Federal Reserve Bank of St. Louis

Since writing you the above, a Mr.- 5B.
Brazol has called u p o n m e stating t h a t h e represented a n
association o f 1 0 o r m o r e A m e r i c a n i n d i v i d u a l s

o r corpo-

rations who had claims against the Gzar's Government
represented

b y Treasury certificates

o r bonds, w h i c h as-~

sociation h a s b e e n f o r m e d f o r t h e p u r p o s e

o f enforcing

their claims i n the United States courts against Kussian
rubles a n d perhaps against Swedish stamped Kussian gold

now i n this country.”

Governor Harding (continuing). N o w , Mr. Gilbert
stated h e r e t h a t h e s e n t t h e S t a t e D e p a r t m e n t ' s r e p l y

of April 9th, but that does not seem t o be here-e I

have

sent f o r i t and w e will take t h a t u p later.
Did Mr. Gilbert discuss w i t h y o u the other d a y the
question o f r e d e m p t i o n

o f certain Federal Reserve notes


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Federal Reserve Bank of St. Louis

which h a d been stolen from t h e Bureau o f Engraving a n d
Printing before t h e series o f numbers h a d been p u t o n them?
Governor V a n Sandt. Y e s .
Governor Harding. A

suggestion was made that t h e

employes o f the Bureau o f Engraving a n d Printing w h o come
in contact w i t h these notes b e bonded, a n d o n e o f the
large companies agreed t o write a

25,000.00 .bond a t

a rete o f $1.50 f o r e a c h employe covered, a n d suggested
if the banks were interested t h e y give instructions a s
to their choice.
Governor V a n Zandt» H o w many employes vould this
cover, h a v e y o u a n y i d e a ?

do not know; b u t v e have h a d a n

Governor darding. I

account made o f all the notes t h a t have been stolen i n
the past five years, a n d based o n the five years' experience i t w o u l d haves b e e n c h e a p e r f o r t h e b a n k s

t o have

carried t h e i r o w n i n s u r a n c e a n d p u t u p t h s premium.

Governor Stronge

U p o n what theory would t h e

Reserve Banks b e assed f o r cost o f insuring t h e fidelity
of t h e e m p l o y e s

o f t h e Bureau o f Engraving a n d Printing?

Governor darding. I

cannot see, a n d I

what t h e o r y b a n k s c o u l d b e e x p e c t e d

cannot s e e o n

t o redeem notes w h i c h


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Federal Reserve Bank of St. Louis

867

have n o t b e e n legally issued a n d which have never come
into their possession.
Governor Strong. I

think myself t h e attitude e x -

pressed i n the mecting w h e n sir. Gilbert w a s here was
pretty c l e a r a n d t h a t t h e C o n f e r e n c e d i d n o t believe t h a t

any liability rested o n the Reserve banks t o redeem those
notes.

T h e y never h a d been properly issued t o the Re-

serve Banks, a n d i f they could b e identified a s not having
been properly issued, t h e y were justified i n not redeeming them.
Toe reason why the Conference a c t e d a s i t did i n agreeing t o redeem those notes u p t o a limit was because i t
was feared a t the present t i m e that i f notes w e r e being
rejected, a n d possibly a bill introduced i n Congress t o
afford relief t o the Bureau, t h a t i t might cast some doubt
on the Federal “eserve currency, a n d w e did n o t feel that
as a

matter o f p o l i c y i t w a s w i s e t o h a v e t h a t q u e s t i o n

arise j u s t now.

T h a t was t h e only theory upon which

the Conference t o o k the action that i t did take.
Governor Harding.

D o e s t h e action taken commit

you with respect t o the future a t all?

Governor Strong.

N o sir, I do not understand i t


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Federal Reserve Bank of St. Louis

does»

I t is limited t o a specific amount.
Mr. Harrison.

t i s understood

I

t o b e a b o u t »~20,000.00.

Governor V a n Zandt. S o m e t h i n g less t h a n 920,000.00.
Governor Harding.

H o w d i d y o u egree t o redeem that,

prorate i t among t h e different banks o r just l e t the
banks t a k e care o f the notes t h a t they themselves issued?
do not think thet that was covered

Governor Strong. I
in the resolution.
Governor Fancher.

I t was h e l d i n abeyance.

Governor Seay. I

think the underlying idea was that

each bank should assume redemption-o f its o w n note?

Governor Harding.
Governor Seay.

T o a limited amount.

Governor Harding.

s o u l d i t not b e 8

fairer p r o p o s i -

tion i f t h e l o s s w e r e p r o r a t e d ? F

should think there would b e n o

Governor Strong. I

I t was just a fortuitous a r -

objection t o doing that.
rangement o f loss.
Governor Harding.

Y

o

u ses, b e c a u s e o n e h a p p e n s

to

and
be a note o f the Federal “eserve B a n k o f Richmond
another happens t o b e the note o f the Federal Neserve b a n k
by
of Boston, t h a t d o e s n o t m e a n t h o s e n o t e s w e r e i s s u e d


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Federal Reserve Bank of St. Louis

that bank,

a n d i t i s n o more

a n obligation o f t h e Richmond

Bank o r the Boston Bawk t h a n a n y other bank.
Governor V a n candt. I
much i m p o r t a n c e

think i t i s a matter o f a s

t o one Federal Keserve B a n k a s a

other

Federal Keserve Bank.
Governor Harding.

I t seems t o m e i t ought t o b e

looked u p o n from the standpoint o f system.

Governor Seay. I

think the xeight o f opinion tended

to the belief that they were legal obligations o f the
Treasury.

Governor Harding.
the Treasury,

i t seems

I f they were legal obligations o f
t o m e that there i s another argu-

ment f o r t h e s y s t e m p r o r a t i n g

i t rather t h a n o n e p a r t i c u -

lar bank, because t h e n t h e loss would really come o u t o f
the Treasury, because there i s that much diminution f r o m
the t a x e s

t o b e p a i d otherwise.

Governor McDougal.

I

t was m y understanding that

this w a s o n l y a temporary arrangement, t h a t t h e amount
involved w a s t o b e limited, a n d that ultimately w e would
have relief through some p l a n under waich t h e Government
would assume t h a t liability themsslves.
Governor Harding.

T h a t matter, I

assume,

i s a part


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Federal Reserve Bank of St. Louis

of t h e m i n u t e s a n d w i l l b e reported.

Wow, i n discussing this progran o f topics, "what
consideration c a n b e taken into account before a

change

is made i n the present rate policy o f the Federal Ke-

serve System?", while there has not been a n y specific
discussion o n that particular topic, I

think w e all

have some general ideas o n the subject, brought o u t b y
toese r e p o r t s

w e h e a r d y e s t e r d a y a n d t h e d a y before.

Dr. Miller.
only have a

M a y I make a

suggestion? I

think w e

limited time f o r discussion, a n d the Govern-

ors have been i n session f o r a long tims.

L e t u s see

what topics t h e y have which would b e important t o take
up with us.
V e r y well.

Governor Harding.

Governor ®trong. I
Dr. Millsr.

think the first thing t o take up--

F o u r ~ -

Governor Stronge

Y e s , t h e question o f eligibility

and t h e question o f redemption, t h o s e two.
Governor narding.

D o y o u want t h e subject o f credit

policy t o c o m e u p f o r d i s c u s s i o n ?
I think a l l t h e s e o t h e r p r i n c i p a l t o p i c s a r e v e r y

directly related t o the subject o f your credit policy.


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Federal Reserve Bank of St. Louis

B71

Now, the general principle o f Federal Keserve Bank
iodiscwents i s that t h e Federal Neserve Board finds

eligible paper i n eccordance with the tems o f Section 1 3
of t h e F e d e r a l fieserve Act.

T h a t definition, h o v e v e r ,

does not and cannot impose any duty upon a Federal Reserve
Bank t o discount paper.
to discounts

I n other words, e v e r y reference

i n the entire federal “eserve A c t i s made

in permissive language, nothing mandatory,

i t i s the

Federal “ e s e r v e B a n k m a y d o s o a n d s o , i t d o e s n o t

e e

must?
S e c t i o n 4of the Federal Keserve A c t defines t h e re-

sponsibility o f the Federal “eserve Bank's virectors-

T f

do not think there will b e a n y difference o f opinion,
therefore,

o n this proposdition, t h a t while a

Federal

policy c a n b e formulated a t a conference o f this kind,
or l a i d d o w n b y t h e F e d e r a l K e s e r v e B o a r d , w h i c h h a s t h e

exc iusive pignt t o make these definitions a s t o eligible
paper, y e t i n the last analysis, w h e n action i s taken,
that must b e upon t h e responsibility o f t h e Directors
of the Federal Keserve banks a n d the officers acting
under authority g i v e n them b y their “irectors.
But there i s o n e point w e aught t o consider there


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Federal Reserve Bank of St. Louis

for t h e sake o f uniformity. I

do no& think t h e r e i s

any obligation o n the part o f a Federal Seserve Bank,
any m o r e t h a n t h e r e i s u p o n a

member bank,

excuses f o r n o t r e d i s c o u n t i n g paper.
state r e a s o n s ,
ee

—

t o give

I t i s all right t o

b u t n o t a n excuse.
_

—

If the paper,

_

—

_

-

i n the opinion o f the Directors o f the

Federal t“eserve Bank, i s not eligible, return i t and s a y
SO«

I

f t h e p a p e r i s eligible.

other d o e s n o t a p p e e r

b u t for some reason o r

t o b e desirable,

o f course t h e r e

can be n o objection t o the "ederal teserve Bank returning that paper a n d stating that i t does n o t care t o discount i t , b e c a u s e - f o r s u c h g o o d a n d s u f f i c i e n t r e a s o n

as i t may see f i t t o give; b u t i t would b e very unfortunate i f i n the face o f a generaldefinition b y the Federal
Reserve B o a r d egachuFedetal K e s e r v e B a n k s h o u l d u n d e r -

take for itself to go into these little refinements of
eligibility and have one Federal Reserve Bank say “Yell,
though t h i s p a p e r j u s t s u b m i t t e d doses n o t s h o w 4

certain.

percentage o f quick essets against liabilities which w e
formerly adopted i n considering paper eligibility,

we

will taxe i t , a n d another bank would say "No, w e are
going t o adhere t o our o l d standards,

w e d o not think


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Federal Reserve Bank of St. Louis

this paper i s eligible."

If you bring that matter u p i u the question o f eligibility, t h e n y o u immediately have a conflict, y o u have

one Federal Reserve Bank setting one standard for eligibility a n d a n o t h e r F e d e r a l x e s e r v e B a n k s e t t i n g a n o t h e r

standard f o r eligibility. I

would strongly urge t h a t

in declining t o take paper where i t seems t o b e technically
eligible under t h e definitions o f the a c t a n d the rulings
of the Federal neserve Board, t h a t n o Federal Reserve
Bank s h o u l d o f f e r a s a n e x c u s e f o r n o t t a k i n g t h e p a p e r

that i n its opinion i t i s not eligible.

I f y o u d o not

want t o take t h e paper, s a y so, a n d that does n o t raise
the question o f eligibility, w h i c h would bring about a

conflict among the different banks and would give the
Board a difficult problem t o unravel.
Now, i n a Gonference o f this sort, I

think i t would b e

very appropriate i f there could b e a general agreement
among t h e Governors o f the Federal Keserve Eanks a s t o

their own policy. Admitting that all paper which i s
issued o r drawn, o r the proceeds o f which have been used
or ought t o b e used’ for industrial, commercial o r agricultural purposes,

i s eligible paper, provided i t matures


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Federal Reserve Bank of St. Louis

within t h e t i m e l i m i t s p r e s c r i b e d

b y t h e act, t h e r e i s

nothing i n the a c t which says anything about statements.

You admit the eligibility.
Now,

as a

matter

o f practice, I

hope v e r y m u c h t h e r e

can b e some agreement reached here a s t o your policy.
One o f y o u may have a statement which, a

yeer ago, showed

250 p e r cent o f quick assets. A n o t h e r m a y have a statement which shows 1 1 0 per cent o f quick assets. A r o t h e r
may h a v e a

statement w h i c h s h o w s e v e n l e s s t h a n 1 0 0 p e r

cent q u i c k assets.

Y e t i t does n o t f o l l o w t h a t n e c e s -

sarily t h e statement which shows 2 5 0 p e r cent quick assets
is b e t t e r t h a n t h e s t a t e m e n t w h i c h s h o w s o n l y 1 0 0 p e r c e n t
quick assets. I

saw a

statement t h i s m o r n i n g

which shows 1 8 4 per cent o f quick assets.

o f a concern

O n the face

of i t it would s e e m t o b e excellent paper, a n d yet that
concern i s i n the hands o f a creditors! committee t o work
OUt I t s sifeirs.

S o m e corporations

a n d some firms k e e p

cleaned u p much more closely t h a n others do.


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Federal Reserve Bank of St. Louis

Some p r e f e r

t o anticipate t h e i r l o s s e s ,

a n d others

seem t o w a n t , t o d r a g b e h i n d a n d m a k e a s f a v o r a b l e s h o w -

ing o n the face o f i t a s possible.

This watter has been discussed several times smong
the Board members,and I think w e are all a unity that w e
hope that i n declining paper w h i c h i s technically eligible,
that n o question b e raised b y any Federal Reserve B a n k a s
to the technical eligibility o f that paper; t h a t is, t o
decline t h e p a p e r a n d g i v e s o m e o t h e r reason.

Now,

o n the matter o f direct action policy o f apply-

ing pressure u p o n borrowing member banks,
their customers t o liquidate, I
general way,---and I

believe I

t o compel

want t o indofse i n a
a m representing the united

sentiments o f the entire Board i n doing so, --- what was
said yesterday b y Dr. Miller a n d b y Governor Strong.
In the year 1919, w h i c h was t h e cruical year f o r
the Federal Reserve System, l o a n s were expanded v e r y

greatly. A l s o } ; i n the early part o f 1920, T h e discussion yesterday brought o u t various reasons f o r that
exapansion.

N o w , l e t u s analyze t h e situation.

A s far

as the borrower i s concerned, there i s no doubt i n many

cases that he wishes now, very much, that the bank that


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did accommodate him, h a d not done so, but, the bank
did accommodate him; passed the paper o n to_-the Fedcral
Reserve Bank, w h i c h i n turn accommodated t h e member
bank. T h e r e h a s been some liquidation since l a s t November,

I t was brought o u t v e r y clearly yeaterday

that i n the present circumstances, there c a n be no.
further general liquidation f o r t h e time being.

The

situation h a s passed f r o m a n acute stage t o a chronic
Stage e

w e have a long waiting period ahead o f us.

It takes t i m e t o r e p l a c e a c t u a l v a l u e s w h i c h w e r e d e -

atroyed b y the vorld war,

I t takes time t o effect

the readjustment, t h e levelling o f values, w h i c h h a s
not taken place; because i t was brought o u t yesterday
that while some values have b e e n very thoroughly d e flated, o t h e r s h a d not, a n d that t h e whole situation
presented a

ragged outline.

The situation,

i n the opinion o f the Board, calls

for a very close study o n the part o f the officials

of the Federal Reserve Banks.

I t does not seem to be

one that c a n be handled b y any genéral o r automatic
ULE 6 B a c h situation ought t o b e considered o n its

own merits, b u t the general policy adopted b y the


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Federal Reserve Bank of St. Louis

877

Federal Reserve Banks, t h a t drastic liquidation i s not
advisable, a n d i s not practical, because i t would d e ~

feat its own purpose. T h e r e f o r e , i t seems t o the
Board that the policy o f the Federal “eserve Banks
ought t o b e one o f moderation;

n o particular b a n k

alene t o strengthen a weak position wherever possible,
put t h a t n e e d e d a c c o m m o d a t i o n s h o u l d b e g r a n t e d

all cases where a

in

study o f the situation shows that

the recipient o f that accommodation i s honest, capable,
————

and i n a general w a y worthy o f being assisted.
Production will proceed i n this country.
crops will b e made,

N e w

T h e situation will gradually w o r k

itself,out, b u t i t i s evident now that i t is going t o
be a very gradual process, a n d the banks o f the cain-

try, having taken a part i n géneral conditions which
prevailed a year ago, cannot expect n o w t o bring themselves b a c k u p t o a

position

o f 1 0 0 p e r c e n t o f desir-

ability i n the twinkling o f a n eye.

Y o u &11 have situa-

tions which y o u must b e patient with, a n d which y o u must
nurse a l o n g .

I

n d o i n g this,

i t will p r o b a b l y b e necess-

ary, during the caning summer, f o r some o f the Federal
Reserve Banks whose reserve h a s become deflated,

t o


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Federal Reserve Bank of St. Louis

apply again f o r accommodations f r o m other Federal Reserve
Banks, j u s t a s was done l a s t summer,

I t i s hoped o f

course t h a t t h e amount o f accommodation needed will n o t
be a B large, a n d that possibly more banks will b e able
to participate

i n giving accanmodations t h a n was the c a s e

last summer, s o that the burden will not fall o n a canparatively f e w a s i t a i d before.

There ought t o b e however, general knowledge o n
the part o f the banks throughout t h e country, t h a t i t
is n o p a r t o f t h e p u r p o s e

o f the Federal Reserve S y s t e m

to undertake t o cure existing conditions, w h i c h c a n
only b e cured b y patience, h a r d work, b y bringing about

a new credit expansion, n e w inflation, o r b y the adoption o f a n y Quack nostrums o r artificial remedies,
Dr. Miller, G o v e r n o r Calkins wants t o raise a
question b e f o r e y o u l e a v e G r o u p I V , G o v e r n o r H a r d i n g .

Governor Calkins.
ing, i s this:

T h e Question, Governor Hard-

I n the last analysis, t h e l a w provides

that a Federal Reserve Bank, a n d its representative,
the Federal Reserve B a n k agent m a y determine w h a t
paper i s acceptable a s security f o r Federal Reserve B a n k


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Federal Reserve Bank of St. Louis

notes,

Now, a

contingency might arise,

i n rhich the

directors o f the Federal Reserve B a n k would consider
paper a s acceptable,

a n d t h e Federal Reserve a g e n t o f

that bank would reject it, a s security for Federal Reserve B a n k notes.

I f that contingency arose,

extreme Situation,

i t would o f course immediately pro-

vide a

i n an

limit beyond which t h e bank cqmld n o t go. I

am

unable t o see a n y escape f r o m t h e conclusion that the
Federal Reserve agent i s a court o f last resort, b u t
I would like v e r y much t o have a

discussion a n d t o get

the Board's v i e w i n regard t o the practical situation

which might arise under those circumstances, a n d which,
to a certain extent, h a s hapoened,.
Governor Harding.

I f that view i s taken, t h e Federal

Reserve a g e n t w o u l d h a v e a b s o l u t e v e t o p o w e r u p o n h i s

colleagues, the Yoard of Directors?
Governor Calkins. E x a c t l y ,

i n a n extreme situation.

Now, the Federal Reserve agent o f San Francisco, o f course
maintains that that i s his position, a n d a qQestion has
arisen a n d will arise a s t o whether a

bank i s justified

in accepting paper which t h e Federal Reserve agent rejects


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Federal Reserve Bank of St. Louis

Tt i s a very serious question, a n d one which w e think
is worthy o f very close consideration o f the Conference a n d o f the Federal Reserve Board,

Governor Strong. Governor Harding, t h e aiscussion o f this matter before y o u brought o u t the
fact that i n general,

i n Reserve Banks t h a t dGuestion

had not arisen; but, the theory o f procedure, which

Governor Calkins raises, would indicate that we are
running t w o separate institutions, a n d that the b a n k

itself completes a discount operation, passes upon
the paper, eccepts it, and discounts it, m d that
after that operation i s completed, t h e Federal Reserve
agent i s t h e n i n a p o s i t i o n t o r e v i e w t h e w o r k o f h i s

colleagues, a n d a s y o u say, v é t o it. W e l l , I

d o not

apprehend that the A c t intended that a n y such dual
organization should exist.
Governor Harding. I

Governor Strong.

don't think s o dither.

T h a t when a paper i s discounted,

and its discount i s a p proved b y the Directors o f the
Federal Reserve Bank, o f which t h e Reserve B a n k agent

is one, that h e i s -bound b y the act o f the bank. T h e

act is camplete.

T h e pap er has been discounted, and


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Federal Reserve Bank of St. Louis

that t h e only possible emergency i n which t h e Federal

Reserve agent should then take the position that h e
should reject this paper a s collateral, w o u i d b e that
the Quality o f the paper o r the solvency o f the i n dJorser o f the paper h a d g o materially changed since t h e
time o f its discount a n d its offer a s collateral t o

the note issue, that i t justified him i n rejecting it.
That i s a rather remote possibility, b u t i f re assume
that this i s one institution, a n d that the Reserve
Agent a s a member o f the Board o f Directors i s bound b y

the act o f the institution a s a whole, the Question shouls
not, i n practice, arise. I

would b e amazed i f i t was

permitted t o arise.

Governor Harding.

H a s the qiestion ever arisen?

Governor Calkins.

T h e qQestion has arisen, not

to the extent o f reaching t h e point where t h e Agent
rejected t h e p a p e r t h a t t h e b a n k accepted, b u t , l e t u s

take a

concrete illustration, w h i c h I think i s a n ex.

treme illustration:

T h e agent h a s taken t h e position

that i t was proper f o r t h e bank t o accept, a n d for h i m

to accept a s securities for Federal Reserve Bank notes,


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Federal Reserve Bank of St. Louis

882

the paper o f one maker,
reject

u p t o a certain amount, a n d t o

that same paper beyond that amounte

C

De, M e t e r ,

n what ground?

Governor Calkins.

O n the ground that the bank

had a l l t h a t i t c a r e d t o accspt.

O

Dr. Milier,

n the ground that t h e bank h a d all

that i t wanted t o accept, o r that h e had all that h e
a s security f o r t h e notes?

cared t o accept,

Governor Harding. S o m e t i m e s ,

i n considering q e s -

tions o f this sort, i t is well t o g o back and read the
law, a n d t h e n w e w i l l g e t a

little c l e a r e r l i g h t u p o n

ite

(Reading: )
"any Federal Reserve Bank may make application
to a

Local F e d e r a l R e s e r v e B a n k A g e n t f o r s u c h a m o u n t

of Federal Reserve Bankinotes herein provided for, a s
S u c h application shall b e accanpanied

it may require.

with a tender t o the local Federal Reserve B a n k Agent
of collateral i n an. amount equal t o the sum: o f t h e
Federal R e s e r v e B a n k n o t e s a p p l i e d f o r a n d i s s u e d p u r suant t o s u c h a p p l i c a t i o n ,

T h e collatsral security

thus offered shall b e notes, drafts, bills o f exchange
?


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Federal Reserve Bank of St. Louis

or acceptances acquired under t h e provisions o f Section

13 o f this Act, o r bills o f exchange indorsed b y a
member bank o f any Federal Reserve Bank district, purchased under the provisions o f Section 1 4 of this act,
or bankers! acceptances, purchased under the provisions

ofSection 14, o r gold, gold certificates," and so forth.
"The Federal Reserve Bank, Shall have the right,
acting through the Federal Reserve Agent"---now, h e i s
the agent, a n d not the principal.

H e i s the

m a a

I do not believe t h e Board would concede t h a t a n y agent
would h a v e a

right t o v e t o i n s t r u c t i o n s g i v e n h i m b y h i s

principal. I

do not believe t h a t i s good business o r

good law.

(Reading: )

"The Federal Reserve Board, shall have the right,
acting through t h e Federal Reserve agent,

t o grant i n

whole o r i n part, o r t o reject entirely, t h e application
of a n y Federal Reserve B a n k f o r Federal Reserve B a n k
notes, b u t t o the extent that s u c h application m a y b e

granted, the Federal Reserve Board shall, through its
local F e d e r a l R e s e r v e a g e n t s s u p p l y F e d e r a l R e s e r v e B a n k

notes t o the banks s o applying," and so on.


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Federal Reserve Bank of St. Louis

884

Mre Hamlin.

W h a t does i t s a y about calling f o r

additional collateral?

T h e r e i s a clause there cover-

ing that.
Governor Harding.

W e l l , a g a i n there h e i s acting

as agent,

Governor Calkins, W e l l , Governor Harding, t h e
Board has s o advised the agent i n San Francisco, b u t
he interprets i t s advice a s meaning t h a t h e i s the final
judge a s t o whether p a p e r i s a c c e p t a b l e s
a security for

Federal Reserve Bank notes o r not. N o w , m y interpretazion o f the l a w which y o u have read, a n d what vould

seem t o be the necessary practice under it, would be
that paper accepted b y the Directors ¢
Reserve B a n k , w e r e a c c e p t a b l e
Reserve B a n k notes, r e g a r d l e s s

of the agent o f the Board.

t h e Federal

a s s e c u r i t yr
o
f Federal
o f the individual o p i n i o n

T h e r e i s a very fine

Question there.
Governor H a r d i n g . I

d o not think the Federal Re-

serve Agent would claim that h e h a d a n y such authority

as that, unless perchance i t should be delegated t o h i m
by the Board, b u t I

do not think the Bourd would care

to delegate t h a t authority t o anyone,


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Federal Reserve Bank of St. Louis

885
.

think t h a t m a t t e r s h o u l d b e

Governor C a l k i n s , T
made v e r y clear,

Mr. Hamlin.

o f course, i f that i s true, then these

are really bank notes,
Governor Calkins,

T h e r e i S n o Question whatever,

unfles t h e l a w just read, t h a t t h e Board, acting through
its agent, m a y reject t h e application f o r Federal Reserve
Bank notes,

Governor Harding. ( # e a d i n g : )

"the Federal Reserve kgert shall, each day, notify
the Federal Reserve Board o f all issues a n d withdrawals
of Federal R e s e r v e B a n k notes,

Reserve B a n k t o ®

i

a n d t h e particular Federal

s credited,

T h e s a i d Feder-

al Reserve Board may, a t a n y time, c a l l upon the Federal
Reserve B a n k f o r a d d i t i o n a l s e c u r i t i e s

t o protect Feder-

al Reserve Bank notes issued t o it."
I think this i s entirsly separate a n d apart f r o m
the p o i n t w h i c h h a

Federal Reserve B a n k notes i s not p u r e l y abanking
function,

T h e y a r e n o t bank notes,

T h e y are Government

obligations, a n d a Governmental body, t h s Federal Reserve
Board, h a s some responsibility i n the matter, because


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Federal Reserve Bank of St. Louis

the l a w clearly says that t h e Federal Reserve B o a r d
shall have t h e right, a c t i n g through t h e agent,

to

grant i n whole o r i n part, o r t o reject entirely, t h e
application o f a n y Federal Reserve B a n k for a n y Federal
Reserve B a n k notes,
Governor Strong.
serve Banks have a
of the bank.

N o t e s issued t o the Federal R e -

prior l i e n upon a l l o f the assets

T h e o n l y case where t h a t prior l i e n could

not b e exercised would b e where some o f the assets o f
the b a n k were pledged t o some other creditor.

I f the

Board should take t h e view, w h i c h i t seems t o m e i s
quite permitted b y the act, t h a t t h e determination o f
the character o f the paper that w e received a s Security

for the Federal Reserve Bank notes,is that which i s ar.
rived a t when the directors approve i t for discount,

the agent being one o f the members o f the Board o f
birectors,---it seems t o m e that practically this q e s tion w o u l d d i s a p p e a r .
Governor H a r d i n g .

I t never o c c u r r e d t o m e that

any Federal Reserve 4Sgent would take authority o n himself t h a t h e c o u i d a b s o l u t e l y d e c l i n e

collateral specified i n the a c t here.

t o take certain

I

t does n o t


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Federal Reserve Bank of St. Louis

887
say So, I

have b e s n asked t h e question sometimes

by various Federal Reserve agents, I

think two o r

three, w h o have stated t o me that the bank has taken
such and such paper.

I f offered a s collateral for

Federal Reserve B a n k notes, w o u l d t h e Board approve
his t a k i n g t h a t paper. I

remember o n e c a s e h a p p e n i n g

about two years ago, a n d I referred h i m to the Board, ani
we advised this gentleman t h a t i n view o f the fact that

the bank had acQuired this paper
part o f i t s assets, t h a t t h e Board would approve o f his

taking that paper a s collateral security for Federal
Reserve B a n k notes, I

have always thought that i f

any doubtful case arose, where a

Federal Reserve Agent

was n o t certain a s t o t h e propriety o f his acts i n
accepting t h a t paper, t h a t h e would refer i t t o the
Board.
Governor Calkins,

I t i s always desirable t o con-

duct a discussion when all of the parties are oresent.
it i s not desirable t o jiscuss i t e x parte.
Dr, M i l l e r ,

i s n ' t it a

arily b e p u r e l y a c a d e m i c ?

I

question t h a t vould ordinn t h e o r d i n a r y course,

Such paper a s was discounted f o r member banks would b e


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Federal Reserve Bank of St. Louis

unduestionably eligible a s collateral a g a
Reserve B a n k notes.

M

y impression

i s that i t

against the securities, o r else i t has no.practical
Significance, t h e moment t h e banks embark upon t h e
policy which 1 consider sound a n d necessary unisr t h e
existing e m e r g e n c y ,

o f taking paper t h a t i s not

according t o prime tests altogether eligible a n d
would stand for t h e rather strict

peyond GQuestion. I

construction o f the responsibility o f the Federal
Reserve Board, acting through t h e agent,

i n the

matter o f the kind o f collateral that i t held a s security for t h e note holder, I
cause I

stand f o r a

v e1

Governor Harding.

d o that precisely bep o l i c y i n t h e matter,

W o u l d y o u favor giving the

agent absolute authority, o r have h i m act a s agent
of the B o a r d
Dr, Miller.

A c t a s agent f o r t h e Board.

Governor H a r c i n g .

A n d have h i m confer w i t h t h e

Board?
Dr. Miiler, S u r e l y .

Governor Calkins.

N o w i n a n extreme case,

has n o e x c e s s i v e c o l l a t e r a l ,


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Federal Reserve Bank of St. Louis

889

Dre Miller,
extreme,

exlreme

W h a t i s the use o f discussing terms o f
a n d unusual emergencies?

I t should b e provided

Governor Calkins,
Dr, Miller. I

think a t t h e p r e s e n t

shouid

policy /be liberality

m a t t e r of taking paper b y

a bank for discount, a n d a t the same time I would say
that precisely because o f that, t h e Board,should b e
Somewhat more vigilant t h a n i t ordinarily would,

to

see that the paper w a s p u t u p a s security against t h e
issue o f F e d e r a l R e s e r v e B a n k notes,

Governor Harding. 1
poSition i s this: I

think Governor Calkins!

think that h e thinks i t i s im-

portant t h a t t h e m a t t e r

b e settled before a

real emer-—

gency arises,

Governor Calkins, T h a t is it exactly.
Governor Harding.

I t i s t o o late then t o settle

Governor Calkins, T h a t emergency should be provided for, s o that r e know where w e stand.

Governor Harding.

‘ o u l d you suggest that the Board

consider t h i s t h e n a n d s e n d o u t a

statement t o a l l o f

the Federal Reserve B a n k Agents defining i t s views o n


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Federal Reserve Bank of St. Louis

this p a r t i c u l a r p o i n t ?

Governor Calkins. I

think that i s absolutely es#en-

tiale

Mr, Hamlin.

O n two assumptions, one, where there

is n o e x c e s s p a p e r p r e s e n t ,

s o t h a t i n this c a s e i t i s

a hundred p e r cent, a n d o n the other assumption, w h i c h
is true i n fact, t h a t e a c h bank has a considerable e x cess o f paper pledged with the agent. I

think w e

should t a k e u p b o t h o f those.

Governor Calkins. Absolutely.
Mr, Hamlin.

T h e second case would n o t worry m e

very much.

Governor H a r d i n g . w e l l , £

think w e c a n consider

and c l a r i f y t h a t Question.

Now coming b a c k t o this matter I

had u p a while

I now want t o read the reply o f the State Departto Mr, Gilbert's letter,

(Reading: )
"tn reply I desire t o point out that i t is m y understanding that under the law the Treasury Vepartment must
determine f o r itself whether i t will purchase o r reject

gold which i s offered for sale t o the United States


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Federal Reserve Bank of St. Louis

Mints and Assay Cffices, H o w e v e r , i t is hoped that
the possibility o f international c o m p l i c a t i m s ‘ h i c h
might result f r o m the purchase o f gold which there i s
any reason t o believe i s o f Soviet origin, w i l l b e
given d u e consideration b y the Treasury Department

in

dJetermining what i t s practice w i t h respect t o the
purchase o f gold shall be,

T t would appear t h a t the

rulings which t h e Treasury Department h a s issued u p t o
this time w i t h regard t o the purchase o f Soviet sold,
if followed i n the future, w o u l d probably relieve t h e
Government o f a n y diffculties o r embarassment i n this
matter,

ttn reply to the three questions raised i n the latter
part o f your carlier letter o f March 25th, I

beg t o in-

form y o u t h a t t h e o p i n i o n o f t h i s D e p a r t m e n t

i s a s fol-

Lows:
*P(1)

T h e State Vepartment cannot give a n y assur-

ance that t h e title t o Soviet g o l d will n o t b e subject

to attack, internationally,

o r otherwise.

lis

{2)

T h e S t a t e Y“epartment p e r c e i v e s

n o necessity

for the Treasury Department induiring into the origin of


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Federal Reserve Bank of St. Louis

892

#H1ld which bears t h e official coinage o r mint stamp o f
a friendly nation.

I t i s not considered that the pur-

chase o f gold e f this description i s fraught w i t h the

likelihood o f international complications, a s the purchase o f gold o f known Soviet origin would be,

"'(3)

T h e State Department considers that the

observations made i n paragraph 2 are applicable t o gold

bearing the official German o r Mexican mint stamps.'"
Gover Strong.

T h a t i s free o f taint then, ac-

cording t o their view?

Governor Harding. T h a t i s free o f taint, according
to t h e i r v i e w .

(Yontinuing reading: )
"Paragraph 3 above,will a l s o xeply t o your letter
of March 15, 1921, w i t h regard t o Mexican gold.

"vith reference t o the statement made i n the Department's letter o f November 8 , 1920, that i t was felt
that i t “ould b e inadvisable for any branch o r agency
of t h e G o v e r n m e n t

t o assume t h e responsibility i n -

volved i n the possession o f gold which o n its face indi-~
cates Soviet origin, 1

may s a y that i t i s still felt

that i t would b e unfortunate w e r e a n y department o f the


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Federal Reserve Bank of St. Louis

893

Government

t o assist

i n a n y w a y i n the dissipation o f

the S u s s i a n g o l d r e s e r v e
of S o v i e t origin,

b y accepting f o l d k m o w n t o b e

i n payment

o f foods

b y purchase,

o r

otherwise,

"Although I believe that attempts o n the part o f
this Government t o prevent t h e dissipation o f the Russian
pold reserve would b e futile, I

a m nevertheless o f the

opinion that this Government should keep itself technicalliy free f r o m a n y charge t h a t i t had assisted i n
the dissipation o f this g o l d reserve,

"T am interested t o nots b y the oostscript appended
to your letter under acknowledgment t h a t claims against

the Czar's government will probably b e brought i n the
United States against t h e Xussian g o l d n o w i n this country."

Now, while w e are o n this gold subject, y o u know
that t h e importations o f gold are v e r y large,

T h e figure

for the first three months o f this year showed that about
¥182,000,000 o f gold came i n and only abmt $4,000,000
of gold were shipped out.

T h e n e t increase i n the gold

stock o f the country therefore i s $178,000,000,
came f r o m akhuduwarters o f the world, $ 2 0 , 0 0 0 , 0 0 0 f r o m


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Federal Reserve Bank of St. Louis

Canada; %55,000,000 o r §,60,000,000 f r o m France; 46,000,900
from Australia, a n d S o on.
the Federal Reserve holdings o f gold have a l s o
increased v e r y largely.

w

e a r e still carrying upwards

of $200,000,000 I believe o f silver and legal tenders i n
srt

the “ e d e r a l R e s e r v e B a n k s ,

This i s sub-topic’(a)" u n d e r paragraph V:

W2e) S n o u l d reserves o f Federal Reserve
based, a s far a s possible, u p o n holdings o f gold c o i n
and gold certificates, ¢liminating s i l v e r certificates
and l e g a l t e n d e r s

b y ps

Reserve notes?"
I may s a y that t h e B o a r d h a s discussed t h i s matter
and a r e c l e a r l y o f t h e o p i n i o n t h a t i t W o u l d b e desir.

able f o r the banks t o begin t o p a y o u t silver certificates a n d legal tender notes W i t h the v i e w o f letting
our reserves b e based a s nearly a s possible u p o n actual

gold and gold certificates, a n d incidentally, b y the
circulation o f t h e l e g a l t e n d e r s a n d s i l v e r c e r t i f i c a t e s ,

reduce t h e amount o f Federal Reserve B a n k notes that
would o t h e r w i s e h a v e t o b e p u t i n c i r c u l a t i o .

Governor Seay.

M a y I ask whether you have cmsidered


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Federal Reserve Bank of St. Louis

895
the subject whether there i s 1¢gal warrant f o r calculating t h e reserve o n your gold?
Governor Harding.

I f y o u have g o t nothing b u t

fold, y o u have nothing else t o calculate i t o n have you?
Governor S e a y .

But,

i f silver

i s l e g a l tender,

you

have reduced your basis o f calculating t h e reserves,

in

a sense.
Governor Harding. I

d o not think w e have g o t a n y

right, t o discriminate again certain lawful money, a n d
if you have n o t g o t that particular f o r m o f lawful money,
then i t resolves itself v e r y easily.

Gow, there i s a point that we want to discuss with
and t h a t i s t h e m a t t e r

o f o u r c m s o l i d a t e d reserves,

(5) B e a r i n g i n mind that prior t o 1917 Federal Reserve notes were substantially gold certificates,
because o f the percentage o f actual g o l d held b y Feder.
al Reserve Agents against tnem, w o u l d i t b e advisable
to prevent a n y undue increase i n banking reserve b y depositing incoming g o l d with Federal Reserve Agents,

thus strengthening &Speomifitne re&SdérvethgehbistaFeheral
Reserve notes?

T o make s u c h a policy effective i t would

seem that t h e Federal Reserve B o a r d should require t h e


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Federal Reserve Bank of St. Louis

Federal R e s e r v e B a n k s

t o publish actual percentage

of

reserve h e l d against deposits a n d actual percentage o f
gold held against notes,

T h e combined reserve percent-

age c c u l d b e p u b l i s n e d f o r p u r p o s e s
heretoiore.

o f comparison a s

I n order t o equalize t h e reserve p o s i t i o n

of t h e v a r i o u s Federal] R e s e r v e B a n k s ,

a n d t o make i t

to the interest o f Banks t o carry a s large a

gold re-

serve against notes a s possible, consideration should
be given t o the advisability o f adopting a

policy that

any Federal Reserve B a n k whose reserve against notes
falls below a

certain specific minimum should b e com-

pelled t o a p p l y f o r p e r m i s s i o n

t o rediscaint w i t h other

Federal Reserve Banks,"
Governor Harding.

T h e r e d o é s n o t appear t o be

anything i n the Federal Reserve A c t that require o r
even w a r r a n t s r u n n i n g t h e S y s t e n

o n the b a s i s

of a

cm-

solidated reserve agaiust note issues a n d deposit liabilities.

T h e l a w requires banks t o hold not less than 35.

per c e h h against i t s deposit liabilities a n d not less

than 4 0 per cent against its note issue liabilities,
with a certain provision f o r ghing below this required


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Federal Reserve Bank of St. Louis

reserve, a n d certain penalties.
The question h a s been discussed a t Board meetings a s
to whether i t would b e advisable, i n s t e a d o f publishing
our statements e v e r y week, showing what t h e combined reserve is, F i t h a footnote t h a t after setting aside 5 5 per
cent for deposits, &kdoretically w e have a reserve against
note i s s u e s

o f S o much,---whether

o r not i t would not b e

held
petter practice t o ptblish t h e actual g o l d reserve
against t h e notes cutstanding,

a n d the actual larful gold

and lawful money reserve h e l d against t h e deposit liabili-

ties, a n d then we caild publish as the theoretical part
of it, the combined reserve, s o as t o enable the statisticians

t o make c o m p a r i s o n s w i t h p r e v i a s S t a t e m e n t s ,

and

possibly eliminate t h a t i n the caurse o f a few months.

Now, i f that were done, the idea would b e that any
surplus g o l d h e l d b y the Federal Reserve Banks over
and above t h e deposit liability required, W o u l d b e transferred t o the note issue department, a n d that those
reserves w o u l d show approximately, a c t u a l l y what they
now show theoretically.

U n d e r t h e l a w a s amended, there

meed be n o difficulty i n reversing the pump.

I f that

gold were needed, i t could be drawn out again b y the bank.


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Federal Reserve Bank of St. Louis

You remember before the war i n 1917, the Federal Réserve B a n k note was, t o all intents a n d purposes,
gold certificate,

T h e r e were times w h e n o u r theo-

retical statements shoved more t h a n 1 0 0 per cent g o l d
against t h e Federal Reserve B a n k notes.

T p e n , a s the

bond issues accumulated during t h e w a r o u r reserve f e l l
and our combined reserves a n d o u r theoretical reserves
against t h e n o t e i s s u e s

i n the s a m e way.

But.

>

B e t a s

gold comes in, wouldn't i t b e practicable t o p u t that

up against the Federal Reserve Bank notes, reducing
the fiduciary element i n these notes, a n d increasing
the g o l d elements against them, a n d would i t have a n y
practical effect i n avoiding a n y danger o f a n y gold in-

flation, s u c h as was experienced i n 1915 and 1916?
You see, w h e n a @ billion a n d a Guarter dollars o f gold
come i n t o this country i n the course o f two o r three
years filollowing the outbreak o f the w a r i n Europe,

it

was undoubtedly a factor i n the general inflated condi-

tions and formed the basis for the very great expansion
of credit which took place later on, N o w , gold is cont a very rapid rate.
tinuing t o come into this c a i n t r y a
what i s going t o be the effect o f that,influx o f gold?


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Federal Reserve Bank of St. Louis

Isn't i t that sooner o r later w e are going t o b e called
u p o n to redistribute t h i s fold?

I t i s not reasonable

to suppose t h a t t h e rest o f the world i s going t o let
the U n i t e d S t a t e s h a v e a

care t o have a

corner

corner o n fold.

o n gold,

o r that w e rould

W e would find that w e

could use that gold t o m c h better advantage i f it were
sent back t o these cther cauntries,

t o put t h e m o n a

more sound financial basis, B u t , h o w that i s t o be
-accomplished

i s not f o r discussion

a t t h i s time.

S

i

we are t o ret this g o l d a n d sxpect t o use i t i n the w a y

that I have just indicated i n the future, i t is desirable t o have i t placed where w e c a n have o u r hands o n

it vhen we need it. F o r that reason, the Board does
not advocate foiling back t o t h e o l d days a n d éncourage
the member b a n k s t
o call f o r g o l d a n d gold certificates

and pay i t out i n the ordinary course o f business,

I f

there i s some w a y b y which w6é can hoid this gold, a n d
have t h e Federal Reserve B a n k note circulation take i t s

place, a n d bring the Federal Reserve Bank note circulation more nearly o n a n actual 1 0 0 per cent g o l d basis,
than i t i s now, w e feel that our d e : l

d

would b e


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Federal Reserve Bank of St. Louis

accomplished, a n d we would still have the gold i n hand
whenever i t vas needed f o r export,

o r i t would b e avail-

able, a n d that w o l d increase t h e g o l d element i n the
Federal Reserve B a n k notes.

Now, i t has been suggested that another imeans o f
obviating a n y danger o f the @ 1 d inflation would b e t o
stop this g o l d i n transit a n d have i t held i n custody
abroad, f o r account o f the Federal Reserve Banks.

T h e

Board, a S you will remember, last January rescinded
its previous ruling that g o l d held abroad b y authorized
agents o f Federal Reserve Banks might b e counted a s part
of y o u r l a v f u l reserve.

T h e argument h a s b e e n made

that i f gold i s n o w h e l d abroad i n custody o f authoriged agents,

i t will n o t m d cannot b e counted a s a part

n
a i t will b e available f o r
of your lawful r e s e r v e , d

distribution o n the cther side whenever needed, a n d
4% h a d b e t t e r b e k e p t o u t o f t h e c o u n t r y .

I think the Poard would b e interested i n having a
genersl discussion o f that proposition a s t o whether a n y
steps should b e taken t o prevent t h e dangers o f a new
gold inflation, a n d i f s o whether t h e most effective

means Will b e the car marking o f that gold i n foreign


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Federal Reserve Bank of St. Louis

DOL

countries, provided w e count i t a s reserves,

o r whether

we would l e t i t come t o this country, a n d g o t o the
it
Federal R e s e r v e B a n k s a n d s e t i t a s i d e a n d c a r r y

specifically a s reserve against Federal “eserve B a n k
notes a s far a s possible.
Governor Calkins.

F r o m a n accounting point o f view,

the Federal Reserve Bank o f San Francisco does now set
aside a l l gold above 3 5 per cent a s reserve against i t s
reserve against Federal Reserve
Bank noteSe

T h e d a i l y report, a

fragmentary report,

as o f April lst, shows f o r instance 5 5 per cent against
deposit l i a b i l i t y e n d t h e balance, 6 2 . 8 0 a s r e s e r v e

against nots liability.

T h a t i s after t h e transfer o f

all o f that gold t o the actual possession o f the Federal
Reserve Agent; b u t a s far a s accounting i s concerned,
that follows exactly i n that waye
Mr. Hamlin.

Y o u s a y y o u s o transfer i t all t o the

Federal Reserve Agent?

Governor Calkins, N o t t o his possession,
Mr. Hamlin.
Governor Calkins,

T h e larger p a r t c f it, o f course

is i n the hands o f the Federal Reserve Agent, b u t part o f


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Federal Reserve Bank of St. Louis

that r e s e r v e a g a i n s t

Fe

the oessession o f the bank.
Mr. Hamhin.

w i d

i

n t h e g e l d settiement fund,

Of course, u n d e r t h e law, y o u will remember t h a t y o u

ight t o Bivet whether that gold i n the gold
settlement f u n d i s d e p o s i t r e s e r v e

Governor Strong.

o r t h e o t h e r reserve,

I t seems t o m e w e are talking

about t r o Jifferent things, a n d not distinguishing b e treen s e c u r i t y f o r n o t e s a n d reserve.

T h e r e is no

requirement i n the a c t that t h e reserves against notes

shall be i n the hands o f the Federal Reserve Agent i n
excess o f 4 0 per cent, o r a n y part o f it.
understand y o u r s u g g e s t i o n c o n t e m p l a t e s

“ h a t I

i s that the

actual transfer t o the custody o f the agent shall b e
made o f all sold i n excess o f 5 5 per cent, required
for deposit reserve, a n d that i t s h a l l b e actually
held a s security,

i n addition

t h e reserves?

G cvernor E a r c d i n g f a c e s Pee Oa i eeC7
Mr. Hamilin.

s a t i s , that i t should b e put i n

Federal Reserve agent's v o
~~

Governor H a r d i n g .

Mr. Hamlin.

Y e s .

a n d not-in t h e g o l d settlement fund?


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Federal Reserve Bank of St. Louis

Governor Harding.

Wo.

Y o u will notice i n the

second part of paragraph "(b)!"
"tn order to e q u a l i z e e
h
t reserve position of
various Federal Reserve Banks, a n d t o make i t t o the
interest o f banks t o carry a s large a

gold reserve against

notes a S possible, consideration should b e given t o the
advisability o f a d o p t i n g a

policy that a n y Federal Reserve

Bank, whose reserve against notes falis below a certain
specific m i n i m u m s h o u l d b e c o m p e l l e d

t o apply for per-

mission to rediscount with other Federal Reserve Banks.”
You see heretofore, o u r practice h a s been t h a t then
your reserve falls below a
arcund f o r n e w Jisccunts.

certain minimum, y o u reach
N o w , t h i s suggestion i s thet

when your actual reserve agninst Federal Reserve notes
falls below a
aiscount.

certain minimum, t h e n y o u apply for r e -

i L think the main thing i s t o consider first

whether t h e s u g g e s t i o n i s o f a n y p r a c t i c a l value,

o r

whether i t is academic, a n d i f i t has practical value,
just f r o m what angle i t should b e approached.
we S h o u l d e n d e a v o r

“ T h e ther

t o keep t h e gold o u t o f the country

by ear marking i t abroad, o r whether w e should let i t
come i n and make this transfer,

s o a s t o g e t i t out o f


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Federal Reserve Bank of St. Louis

904
the hands o f the banks a n d get
i t into the hands o f the

agent, a S security against Federal
notes,

W h a t is

your opinion o f that, Governor strong?
Governor Strong, w e l l , Governor
Harding, y o u
raised t h i s q u e s t i o n p a r t i c u l a r l y ,

t h a t i s part o f the

subject o f déaling w i t h the
n e w importations o f gold,
Governor Harding.

Governor Strong. I

Yes,

look a t i t i n this way, that

there a r e a number o f DOSSible
methods o f dealing with
the gold that i s coming i n t o
t h e country.

I f w e want

to contract t h e volume o f credit
i n relation t o the
volume o f reserves, t h e n w e
should leave t h e £01ld a b r a d
where i t would not count i n
our reserve calculations,
but
where o u r p a y m e n t f o r t h e
B o l d would actually increase

the amount o f our credits,
supported b y reserves t h a t
we d o count i n cur reserve
calculation, T h e effect
of
that w o u l d b e a c t u a l l y
t o c o n t r a c t o u r reserves
every

time w e get a n addition t o
our gold,

O f course, the

justification f o r s u c h
& policy would b e that
i t would
be contemplated that t h e
g o l d i g later t o b e
returnea

to Burope, when exchange conditions
make i t possible,
and the gold will b e
there h a n d y for return,
a n d w e wil]


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Federal Reserve Bank of St. Louis

905

Save t h e r i s k a n d e x p e n s e

o f Shipping

i t twice across

the o c e a n .

The second method o f treatment o f the imported gold
would b e t o put i t into o u r reserves,
circulation,

o r slse p u t i t into

a n d i n that e n e n t w e increase t h e amount

of

circulation i n the country b y 100 percent o f the amount

ofgold imported, provided the other means, that is, our
general p o l i c y a s t o r a t e s a n d S o on,~-preventes t h e e n -

ployment o f that gold as the basis for the expansion o f
credit

e e n s

o f the increased importation

o f gold.

we have t o admit t h e fact that i f gold cares into
the country, whether i t comes i n t o the vaults o f the

Federal Reserve Banks i

not, i t does inerease the volume

of the circulating medium, a n d i t has, t o a certain
extent, the effect o f expansion.
it b e p u t into circulation, I
effective,

I

T h e suggestion that

do not believe w o u l d b e

t vould simply take t h e place o f other

kinds o f money i n circulation, which would flow back
to the Federal Reserve

The third plan o f dealing «ith t h e matter, a s suggested b y you, o f putting i t behind a note issue a s
actual security f o r t h e notes,

i t seems t o m e would oper~


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Federal Reserve Bank of St. Louis

906
ate o n l y a s a bookkeeping procedure,
effect, nevertheless,

a n d that the

o f the addition o f gold t o the

country would b e dependent entirely upon the policy
of the Reserve Banks a s t o extending credit.
Now,

i f the

i f t h e p l a n w e n t S o f a r a s i t might,

law was amended,---as
Reserve B a n k s

t o make i t impossible f o r the

t o use t h e excess

o f gold covered

b y this

note issue, a s the basis o f the expansion o f credit,
without m a n d a t e f r o m t h e R e s e r v e B o a r d , w h i c h r o u l d

be equivalent t o the usual p o l i c y i
n London, rhere t h e
Bank A c t i s s u s p e n d e d

b y letter

o f indemnity,

s o to

speak, from the Chancellor, then the actual control
of the reserve percentages would be transferred,

in

effect, f r o m the management o f the respective Reserve
Banks t o the Federal Reserve Board.

Governor Strong.

A S a matter o f fact, couldn't

that b e done without a n amendment t o the law, under
the p o r e r t h a t t h e B o a r d h a s t o r e f u s e

t o issue

Federal Reserve Bank notes?
Governor Strong. W e l l , I have n o doubt, i f the
Board d u l y exercised “hat power t h e y have f o r t h a t

purpose, that i t would be effective, b u t I have hesi-


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Federal Reserve Bank of St. Louis

907
tated about going a s far a s that, Governor Harding,
in thinking about these matters, because i t involves a 4
very fundamental change i n the whole principle o f the
Federal R e s e r v e B a n k Act, w h i c h m i g h t b e a

good plan---

ultimately i t might b e a good plan t o make t h e Federal

Reserve Bank notes a gold note; but, i f we do that,
I think w e should d o i t a n d admit t h e f a c t that the

plan, a s generally outlined i n the Federal Xeserve
perfect p l a n a n d s h o u l d b e modified.

Bank A c t i s n o t a

Dr, Miller.

T h a t i s not the proposition a t all,

to make t h e Federal Reserve B a n k note a

gold note,

Governor Harding's proposition i s simply t o take the
gold that, b y the existence o f a n international disturbance, c a m e into o u r temporary possession, a n d use it,
not a s part o f our banking reserves, unless c m d i t i o n s

clearly indicate that it should be used, but to use it
to strengthen t h e Federal Reserve B a n k notes, a n d i n

the meantime, t o put i t where i t will not b e a constant
incentive

t o the expansion o f banking credit,

is all that i t is.

T

h

at
,

I t is popularizing the machinery

of the Federal Reserve Bank Act t o adjust our operations t o a very peculiar situation that nobody o n God's


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Federal Reserve Bank of St. Louis

908

earth e v e r c o u l d h a v e contenplated;.

that I

think i s

entirely i n accordance w i t h the entire structure o f the

Acte

I t is not doing anything contrary t o the prin-

ciples o f the Act.

I t i s something that i s not i n

harmony With our best practice which has been t o pursue
a ratherstrictpolicy i n the matter o f note issues a n d
note r e s e r v e s ,

The Chairman. itiell, before w e enter o n that, suppose w e carry o n this discussion about the e a r marking o f
this g o l d abroad.

A r e y o u i n favor o f that p o l i c y ,

Governor Strong?
Governor t r o n g .

G o v e r n o r Harding,

i t would s e e m

to me a t the outset, when the question came u p that i t
had v e r y p r a c t i c a l a d v a n t a g e s ;

m o r e practical advantages

than other plans t h a t were suggssted, because w e d o

know that whether gold comes into the general reserves
of the Federal Reserve Banks,

o r whether tnyfaftiit i s

segregated a s security for the Federal Reserve notes,
it comes i n t o o u r circulation.

I t does n o t make a n y

difference rhether y o u p u t i t i n one conipartment o r

another o f the Federal Reserve System,
Governor Harding.

T h e r e i s a possibility that


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Federal Reserve Bank of St. Louis

there might b e ¢150,000,000 o r {200,000,000 held abroad
if that policy were adopted,

Governor Strong. w e l l , I would g o s o far as t o say
that w i e

i t t o reach a n y such volume,

w e would b e justi.

fied i n not o n l y arranging i t s safe custody i n Europe,
but having someone there o n the ground t o look after it.
The S i t u a t i o n w i t h r e s p e c t

t o earmarking g o l d

with the Kank o f England just now i s this: u n d e r the
varkous acts o f Parliament e n d o r d e r s ~ i n - c o u n cli
based upon these acts, t h e blanket porer o f licensing

for the exortation o f gold has been granted t o the
Bank o f #ngland, a n d covers o n l y that gold which i s
produced f r o m the ground i n the British Hmpire a n d

its dominions.

T h e gold which has been coming t o

New York through o n e channel under t h e operation o f
that authority t o grant licenses i s principally t h e
gold t h a t i s p r o d u c e d

i n S o u t h a f r i c a a n d Australasia.

There i s n o difficulty about securing licenses f o r that,
even i f w e acquire i t i n London f r o m the bankers t h a t
handle i t for the miners, a n d p u t i t i n the Bank o f
Hngland.

As to any other gold which would normally heve

come direct t o this country f r o m France o r from the
continent

o f murope,

o r from a n y other part o f the

world, s i m i l a r l i c e n s e s

t o export c a n n o t

b e granted

t o

us rithout a complete revision o f the whole seheme o f
licensing g o l d exports applying t o british Banks.

‘So

that t h e plan t o earmark gold i n London would b e
strictly limited t o that woich fell within t h e limitations ‘ o f t h e licenses,

a n d t h a t would b e practically

the gold from South Africa a n d Australasia a n d n o w
amounts,

a s I understand it, t o about »3,000,000.00

a little more every weex.

or

I t probably does not excesd

pl50,000,000.00 a year.
On the other hand i t must b e borne i n mind that some
of that gold i s constantly being purchased b y other purchasers.

N o w t h e parties w i t h s h o m w e have this arrange-

ment do not get it all.
borne

O n the other hand, i t should be

i n mind t h a t e v e r y d o l l a r o f i t w h i c h i s s o l d t o

the London market must come t o this country.
tory l i m i t a t i o n u p o n c o i n a g e

T h e statu-

i n #ngland results

i r the

Bank o f England making a constant offer t o buy sold
at 7 7 pounds,
dealings


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Federal Reserve Bank of St. Louis

1 0 shillings halfpenny a m ounce.

T h e

i n gold being free i n London, t h e value o f gold


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Federal Reserve Bank of St. Louis

in the London market i s alvays fixed b y the exchange
yate o n N e w Y o r k ,

s o that there i s n o possibility

purcnesi n
g of gold which i s offered freely
sale, e x c e p t f o r e x p o r t a t i o n

o f any

i n London f o r

t o t h e U n i t e d States.

That

is what has taken place.
S o long a s the present exchange

Governor Harding.

conditions continue, t h e chances a r e that v e will get, o n e
way o r the other, a l l t h e gold that i s mined i n South
Africa a n d Australasia?
Governor Strong.

sell, I

think w e will g e t practically

all o f it.
Governor narding.

N o w . h a v e y o u i n view a n y fixed

limit o f the amount o f gold y o u would care t o see t h e
Federal neserve System hold abroad i n custody?
Governor Strong.

well, I

would n o t hesitate t o allow

it t o accumulate--of course, s u b j e c t t o withdrawal a t any
moment,

u p t o w100,000,000.00,

@50,000,000.00.

o r possibly start i t e t

T h e objections t o allowing i t t o

accumulate there are almost entirely physical, fron m y
point o f view.

I t should n o t b e permitted t o accumulate

into 6 point where, a t the usual rate o f shipment and
surance, w h i c h i s p o s s i b l e b y t h e faci lities,

i t cannot

be f a i r l y p r o m p t l y m o v e d t o t h i s country.


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Federal Reserve Bank of St. Louis

t o get more

we h a v e f o u n d t h a t y o u c a n h a r d l y e x p e c t

than t e n o r fifteen o r a t the outside twenty million
T h e amount

dollars m o v i n g a t o n e time.

o f insurance r i s k

practically controls that.
Governor Strong.

Y o u would n o t rant the gold held

abroad f o r account o f the reserve, because t h a t would defeat t h e object o f the plan?
Governor Strong.
plane I

T h a t would defeat t h e object o f the

thing this i s a most important point, alvays

pearing i n mind that when w e p a y for that g o l d i n London,
we e x p a n d o u r credit,
consequently

a n d * e e x p a n d o u r reserve,

and

w e reduces o u r r e s e r v e p e r c e n t a g e .

Governor Harding.

t
o u l d y o u want that o p e r a t i o no

be a general operation o f a l l Federel Keserve banks,

or

just o n e f o r the Federal Keserve E a n x o f New York City
alone?
Governor Strong.

I t would b e entirely satisfactory |

to u s t o conduct i t alone,

i f the other Reserve banks d i d

not feel like entering i n t o ite
but what,

i n s o m e respects,

I n fact, I

do not know

i t w o u l d b e bettuir, b e c a u s e

this i s a policy o f a type which depends u p o n a very

close understanding between t h e Keserve Board e n d the
Keserve banks, a n d w e are nearer vashington a n d could
probably a f f o r d t o accumulates m o r e .

Governor narding. I

have b e e n wondering e v e r since

you made this proposition j u s t the number o f Federal Ke-


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Federal Reserve Bank of St. Louis

serve kanxs t h a t would care t o have a n interest i n a
large holding abroad, w h i c h would n o t count a s a part o f
their reserves.
Governor wmorss.

T h e experience I

have alvays h a d

with m y directors i n joining i n any oxhership o f this gold
dhich h a s b e e n h e l d a b r o a d h a s n o t b e e n e x a c t l y d i f f i c u l t ,

but i t has always b e e n entered i n t o with great hesitation
and regret.

“ i t h a l l the troubles there a r e i n the

world, and possibilities of political troubles, they “ao:
not feel quite safe t o have gold that belongs t o them
held a n y w h e r e e l s e e x c e p t

i n this c o u n t r y , rol geGoege ©eas

came t o be a large amount, I
object.

think they would seriously

ard
T h e y h a v e o n l y g o n e i n t o i t e t m y request

because i t was considered a n international operation a n d
was f o r the benefit o f o u r relations i n a n international
way, b u t I very much doubt i f they would accept a n y policy
by which t h e gold was t o b e held abroad f o r a n indefinite

time, o r i n a n indefinite amount. I

do not think they

would accept i t a t all.
Governor Seay. # O o u l d i t subject y o u t o possible
political a c c u s a t i o n o f a d o p t i n g

a n arbitrary p l a n t o

control t h e volume o f credit?
Governor darding.

P o s s i b l y i t would.

Mr. damlin. T h a t i s what i t i s .
Governor Harding.

T h e r e might b e some political

petite ties.
Dr. Miller.

I t contracts credit.

Governor Seay.

d a v e y o u considered t h e probabilities

of a t t a c k o n t h a t scores. w h e n i n t h e p o p u l a r m i n d t h e e x -

pansion o f credit might b e desired?
Governor Strong.
not c o n t r a c t c r e d i t .

E x c u s e m e , Dr. Miller.
I t increases t h e v o l u m e

I

t does

o f credit,

if I might s a y so, b u t reduces t h e reserve percentage.
Dr. Miller.

n e l l , t h e actual conditions w o u l d

distinguish t h e application t o you.
Governor t r o n g .

creating a

w

e p u t i t i n circulation b y

bank deposit a n d against t h a t bank deposit t h e

ususl proportion o f notes w i l l b e ultimately issued;
Federal


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Federal Reserve Bank of St. Louis

heserve notes.

Governor narding. I

think t h e Board would b e

interested i n getting t h e opinion o f the Governors
this p r o p o s i t i o n

on

i n this w a y , a n d w e c a n discuss t h e

other g u e s t i o n afterwards,

b u t l e t u s come u p first

the b r o a d g u e s t i o n a s t o e S

n e

on

o r n o t i t i s desirable

or advisable, u n d e r t h e present circumstances,

t o carry

a considerable amount o f earmarxed g o l d i n custody o f
some agency abroad,


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Federal Reserve Bank of St. Louis

o r whether a i l the gold that i s coming

to us should b e permitted t o come i n i n the natural way;
then w e c a n discuss w h a t v e w i l l d o w i t h i t a f t e r i t gets

heree J u s t o n the first proposition, a s t o whether w e
should l e t the gold came i n i n the natural r a y o r whether
we s h a l l K e e p i t o u t

it abroad.

t o a certain e x t e n t b y e a r m e r k i n g

T h o s e w h o favor t h e policy o f carrying abroad

not t o b e counted a s reserves, b u t earmarxing it, i n
order thet i t may n o t come i n t o this country a n d b e the
cause o f inflation, pleasc h o l d u p their hands.

Governor Calkins.

A n d prorate i t among the twelve

banks ?

Governor darding.

Governor Biggs.
Governor darding.

Y e s sir.

i j ould there b e a limit o n that?
well, I

do not think w e ought t o

discuss a n y limit.
reasonable limit.

% e @ would assume t h a t there would b e a
. h a t v e want t o get a t first i s t h e

sentiment o n the proposition o f earmarking t h e gold abroad,
or permitting i t t o come i n i n the natural wOaY N o w ,
if the concensus o f Opinion should b e that i t should come
in i n t h e n a t u r a l s a y , t h e n w e c a n t a x e u p t h e q u e s t i o n

of how t o control i t after i t got here, b u t I
first t h e p r o p o s i t i o n o f w h e t h e r

want t o get

i t should c o m e

i n in

the natural way, o r whether i t should b e held abroad
in the manner I

have suggested.
would b e i n favor o f alloving

Governor sellborn. I

it t o remain over there i f y o u prorate that among t h e banks
that have t h e high reserves.
Governor nerding.

H o w much d o y o u want t o carry o f it?

Governor Norris.

Y o u think i t would b e a good thing

for the other fellow? (Laughter).
Governor Strong. I
nave a

think, Governor «eliborn, y o u would

pretty h o t s u m m e r d o w n i n Atlante

i f you had t e n o r

fifteen million dollars worth c f gold held i n #nglend.
«@ll, gentlemen, y o u understand t h e question.

i o w

many o f you, j u s t a s a matter o f theory, t h i n s i t rould b e
advisable


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Federal Reserve Bank of St. Louis

t o t r y o u t t h e p l a n o f h o l d i n g t h e g o l d i n custody


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Federal Reserve Bank of St. Louis

abroed,

a s opposed t o t h e i d e a o f letting i t come

i n here?

to
we ¢ a n discuss t h e disposition o f i t later, a s t o what
do w i t h i t , i n case i t comes i n .

s h a t d o y o u say,

Governor McDougal?
a n d n o t t o count i t a s reserve?

Governor icDougal.

Governor Harding.

N o t t o count i t as reserves

Governor Calkins. I

am reluctant t o vote b y holding

which
up m y hand, because there a r e some qualifications
F o r instance,

$ $ t t not

likely t h a t t h e f a c t t h a t t h e F e d e r a l b a n k s ,

o r if you

I thin«x s h o u l d b e considered.

please a

Federal B a n k alone,

carrying @

i s incurring s o m e r i s k b y

hundred million dollars i n gold i n London?

is apt t o arouse some political discussion.
that,

[ t t

A s i d e from

m y hand i s upe

do not thinkz the Friends o f

Governor narding. I

degree
Irish F r e e d o m w o u l d l o o k u p o n i t w i t h a n y g r e a t

of favor.
Governor wicDougal.

I

n case a n arrangement o f that

t o show
sort should b e effected, w o u l d i t b e the intention
Clearly t h e facts i n a published statement o f the Federal
Reserve banks t h a t y o u were holding that gold abroad?

Governor Harding. I

suppose we would show the


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Federal Reserve Bank of St. Louis

facts.

x e would b e asked what w e were driving at.
Governor sicDougal.

simply h i d i n g

T h e r e would b e n o intention o f
stronger r e s e r v e

i t away there a n d naving a

than t h e statement would appear t o reflect?
Governor darding.

I t could n o t b e hidden.

I t would

have t o show o n the statement.

Governor McDougale

I f i t is going t o be hiddem eway,

I should object t o it.
Governor Harding.

H o w would y o u keep inquisitive

people f r o m a s k i n g t h e q u e s t i o n ?
Governor McDougal.

T h a t i s t h e p o i n t exactly. I

feel

thet i f i t i s available o n call, o f course i t does affect
the r e s e r v e p o s i t i o n o f t h e F e d e r a l N e s e r v e B a n k s ,

o r it

could b e made t o affect i t very promptly.
Governor Seayeffective.

T h e question i s whether i t would b e

I s n ' t i t highly probable t h a t t h e public

would f i g u r e

o n the f a c t that y o u d i d have L t ?

Governor Harding.
We c a r r i e d q u i t e a

I

f y o u r e m e m b e r l a s t year, w h e n

considerable a m o u n t

marked i n the Bank o f Sngland,
as reserve,

o f g o l d abroad, e a r -

w e allowed i t t o b e counted

a n d consequently t h e immediate borrower d i d

not raise any objection t o that, b u t there vere certain


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Federal Reserve Bank of St. Louis

inquisitive individuals a n d certain critics o f the System
who were constantly referring t o the fact that i t was
curious t h a t w e had a l l o f this g o l d over there a n d d i d
not bring i t t o this country.
Governor Seay.

a g e were criticised f o r it.

U n d e r this plan, w o u l d i t not b e a fact

that the public would figure o n the fact that you had it
and could g e t i t i f y o u wanted i t and would calculate u p o n
its additional power i f y o u did g e t it, a n d then they
would call upon y o u t o bring i t over?
Governor siarding.

to think about.

N o w , t h a t i s f o r y o u gentlemen

n e are trying t o get t h e concensus o f

opinion a s t o the merits o f the proposition.

N o w you

gentlemen think about a l l o f that yourselves a n d t h e n let
us have your views.

will not vote o n this, for ob-

Governor Strong. I
vious reasons.

am rather opposed t o it.

Governor Seay. I

Governor Harding.

H o w about you, Governor Van Zandt?

Governor V a n Zandt. I

will n o t v o t e o n this, f o r o b -

vious reasons, t h e same a s Governor Strong.

Mr. damlin.

A r e they the same reasons?

Governor V a n Zandt.

Governor narding. I

N o t t h e same a t all.

suppose your reasons are just


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Federal Reserve Bank of St. Louis

contrary t o those o f Governor Strong?
Governor V a n aandt. E x a c t l y .
Governor Harding. G o v e r n o r Calkins, w h a t d o y o u say?
a n y , considered

Governor Galkins.

normal conditions, I

as a

policy, u n d e r

should say. leave i t abroad,

b y all

means »
Governor darding.

U n d e r conditions a s they are, w h a t

do you sey?
Governor Galkins.

I a m n o t i n politics. I

think t h e

given
political a s p e c t o f t h e s i t u a t i o n i s o n e t h a t m u s t b e

consideration. O t h e r w i s e ,

w e will have criticism that i s

not deserved, a n d i t may b e destructive.

O n that account

I a m inclined t o think i t should n o t b e left abroad.
Governor Harding. G o v e r n o r Biggs, w h a t d o you say?

Governor Biggs- I
should h a v e

am inclined t o the opinion that ¥e

i t over here where

Governor Harding.
Goverror Fancher.

w e can see it.

G o v e r n o r Fancher, w h a t d o y o u say?
A s @ matter o f expediency, I

thirk

it would b e desirable t h a t t h e gold b e left abroad, b u t
under p r e s e n t c o n d i t i o n s ,
from v a r i o u s s o u r c e s , I

w i t h t h e System under criticism
a m wondering w h a t m i g h t d e v e l o p

some o f these districts where t h e y e r e down close t o t h e

reserves, a n d holding a little tight o n new credit, and

in

the i t e m o f gold held abroad, n o t brought over here--

whether w e would not be subject t o a good deal o f criticism a n d pressure. I

think w e m i g o t s u b j e c t t h e S y s t e m

to further criticism. I

think a t t h e p r e s e n t t i m e t h e

gold should come ir.
Governor Harding.

G o v e r n o r Young,

h o w d o you feel

about this?
Governor Young. I
Governor Herding.

think t h e gold should come in.
G o v e r n o r Norris?

Governor Norris. I

think i t should c o m e in, Governor

Harding.


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Federal Reserve Bank of St. Louis

Governor Harding. G o v e r n o r ellborn?
Governor sellborn. I
Governor narding.

think i t should come in.

G o v e r n o r McDougal,

¥hat d o you say

about i t ?

Governor MeDougal. I

should b e opposed t o the plan

of earmarking gold a n d leaving i t abroad a n d n o t permitting
us t o count i t i n our reserves.
Governor daerding. G o v e r n o r siorss, what d o y o u s a y
about i t ?

Governor Morsse I
Governor Strong.

have already expressed m y opinion.
I t might b e well for me t o explain


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Federal Reserve Bank of St. Louis

a certain s t a t u s

o f this matter which I

have n o t y e t

done.
Goyernor darding.

Yes.

Governor S t r o n g e I

have m a d e p r e l i m i n a r y i n q u i r i e s

to ascertain what o u r legal position will b e sith regard
to getting export licenses i n case this w a s done, a n d
confidential i n q u i r i e s h a v e b e e n m a d e o f Messrs. R o t h s c h i l d ,

vno handle t h e gold f o r the South African miners; heaving
acquired t h e necessary information,

w e have indicated t o

the Bank o f &ngland t h a t w e did n o t want t o g o any further until t h e matter n a d h a d consideration: Naturally,
in view o f this consideration, I

think the subject i s

completely dismissed, unless t h e Federal Keserve B a n k o f
New York,

o n i t s o w n hook, w a n t s t o d o something.

Governor Calkins. I

should object t o that more

strongly t h a n t h e other procedure.
Governor darding. A s s u m i n g t h a t the gold i s going
to come i n t o t h e country i n the natural way, a n d v e are
going t o get a lot o f it, I

a m going t o asx the Governors

what t h e y t h i n k o f t h e p l a n s u g g e s t e d

i n sub-paragraph

(ob) of Section V, of putting your excess gold with the
Keserve A g e n t , w h e r e

i t will count a s part o f the se-


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Federal Reserve Bank of St. Louis

curity against t h e Federal Neserve B a n k notes outstanding,
and t h e n h a v e a

general a g r e e m e n t t h a t w h e n y o u r r e s e r v e s

against t h e Federal Keserve b a n k notes fall below a certain
point y o u w o u l d h a v e t o rediscount;

o r whether y o u think

you c o u l d c o n t r o l t h e s i t u a t i o n b e t t e r b y h o l d i n g

o n to

your gold a n d n o t loan it, o r whether i t would have a
tendency t o increase t h e pressure o f the borrower.
other words, a

general idea, off-hand,

I n

o f the merits o f

the suggestion i n paragraph (b).
a n opinion?

Governor iforss, a r e y o u r e a d y t o express
Governor Morss. I

feel t h a t t h e c h a n g e o f t h e w a y

of keeping t h e gold inside t h e Federal Reserve Banks i s
pookkeeping

nothing but/.. entry, and it is of no very great importance
to the outside public, because i t can b e changed o n e w a y
or the other,

i n accordence w i t h t h e decision b y somebody

inside the Bank, o r the Federal Reserve board.
will p a y n o attention t o that a t all, t h a t I

T h e public

can see, a s

it i s not a standard practice, enforced b y law, o r a s a
matter o f rule t h a t c a n b e obviated b y the Board o r the

banks, a n d t o me i t is o f n o very great importance.
Governor Harding.
question?

Y o u look upon i t as a n academic


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Federal Reserve Bank of St. Louis

Governor Morss-e- S&ntirely.-

I t might sound good t o

say t h a t y o u h a v e a g a i n s t y o u r n o t e s a

certain percentage

of gold, b u t the public i s educated t o the combined
percentage, a n d that i s the w a y they measure t h e condition o f t h e F e d e r a l “ e s e r v e B a n k s -

I

t has t a k e n q u i t e

a long time t o get t h e public t o understand t h e importany
ance o f that figure, a n d i f y o u g o and change i t b y
excuse

o r hocus-pccus,

t h e public will s a y that none o f

these figures amount t o anything.

T h a t i s what I

a m very

have a
much a f r i a d . o f , F e d e r a l “ e s e r v e B a n k s s h o u l d

method

be
of giving their position t o the public which cannot
good times
changed a n d must b e the same method exactly i n

and bad times. Utherwise, i t i s worth nothing.
you d o n o t d o it,
the c o n f i d e n c e

i n m y opinion,

y o u will l o s e entirely

o f t h e public.

Governor iicDougal.
that t h i s p l a n ,

i f

M

y belief i s , Governor Herding,

a s proposed, w o u l d h a v e n o p r a c t i c a l e f f e c t ,

and I would prefer not t o see the change madeGovernor k e l l b o r n . I

would n o t l i k e t o s e e a n y

change made.
Governor N o r r i s . I

questions.

F i r s t , I

would l i k e t o a s k t w o v e r y s h o r t

assume t h a t after t h e gold has


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Federal Reserve Bank of St. Louis

been d e p o s i t e d w i t h t h e F e d e r a l R e s e r v e A g e n t - - w e l l , I

will a s k the question, c o u l d i t o r could i t n o t then b e
withdrawn

a t t h e o p t i o n o f t h e bank,

a t a n y time,

and

transferred?
Governor McDougal.

Y e s , i t was m y understand ing

that that could b e done, a n d that i s the reason I

thought

it would n o t b e o f any practical benefit.

Governor Norris. J u s t what is the meaning of the
reserve position
last part, t h a t i n o r d e r t o e q u a l i z e t h e

i t t o the
of t h e various Federal Keserve Banks a n d t o make
against
interest o f bawks t o carry a s large @ gold reserve
given t o the
notes a s possible, c o n s i d e r a t i o n s h o u l d b e

advisability o f adopting a policy that a n y Federal Reserve
certain
Bank whose reserve against notes falls belong 4
specific m i n i m u m s h o u l d b e c o m p e l l e d

t o apply f o r per-

Banks?
mission t o rediscount with other Federal meserve
Governor Harding.

T h e W e a was that some fixed

against
reserve, s a y 5 0 per cent--whenever your reserve

note issues fell below 5 0 per cent, y o u would have t o
rediscount.
Governor Norris.

,
I n other words, y o u would raise

that reserve f r o m 4 0 per cent t o 50 o r 6 0 per cent?


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Federal Reserve Bank of St. Louis

Governor Harding.

Y e s

Governor Norris. I

think a t the present time, then,

it would b e inadvisable t o d o that.
Governor Young. I

would n o t like t o see a n y change

at t h e p r e s e n t t i m e .

Governor Fancher.

D o I understand, Governor Harding,

that i f this p l a n were p u t into effect, t h a t t h e banks would
simply carry 5 5 per cent l e g a l reserve egainst deposits
and that t h e surplus g o l d would b e put b a d o f the notes?
Governor Harding.
Dr. wiiller. I

Yese

think that i s a separate question,

as

to w h a t r e s e r v e y o u s h o u l d c a r r y a g a i n s t y o u r deposits.
Personally I

should b e i n favor o f a m u c h h i g h e r r e s e r v e

than Governor darding h a s indicated.
of changing that from time t o time,
conditions,

[ I would b e i n favor
i n accordance w i t h

i n order t o show t h e public a b o u t w h a t r e -

serve w e thoveht o n the whole would produce the right
attitude,

o r a s good a n attitude a s w e could induce t o -

ward t h e Reserve B a n k borrower, a n d a t the present time
I should s a y 4 5 per cent.
Governor Fancher.

T h e point I

was trying t o bring

out was what would b e t h e operation, whatever reserves


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Federal Reserve Bank of St. Louis

percentage y o u m i g h t f i x - - w h a t w o u l d b e t h e p r o c e d u r e ?
Governor darding.
excess

T h e procedure was,

o f g o l d r e s e r v e a g a i n s t y o u r notes,

i f you had a n
i n excess

the amount agreed upon, y o u could take that down.
you g o t d o w n t o a

of

I f

minimum o f theoretical g o l d reserve

arranged for, y o u would have t o rediscount.Governor Fancher.
the board, w

W o u l d that b e o n the request o f

could a bank arbitrarily transfer f r o m its

reserve a g a i n s t notes,

t o t h e g o l d settilemexrt f u n d a g a i n s t

depo its?
Governor Harding. I
own impressi ons.
nated w i t h m e e

can only ansver t h a t from m y

N e i t h e r o n e o f these propositions origiT h e distinguished gentlemen

t o m y right

are the proporents o f this proposition.

Dr. Miller.

L e t me just put it right flatly. I

think Governor Harding has stated the reason for the whole
discussion,

t o wit, t h e i m p e x d i n g f l o o d o f -gold a n d t h e

necessity o f doing something t o handle the situation.
The p r o p o s i t i o n h a s t o b e l o o k e d a t f r o m t h a t standpoint.
The p a r t i c u l a r m e c h a n i s m i s o n e u n d e r w n i c h t h e b a n k s a x d

the Board, through t h e Federal Keserve Agent's Department,

of course, operating a s exchanging gold for commercial


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Federal Reserve Bank of St. Louis

collateral,

o r commercial collateral f o r gold, according

to what they think t h e particular condition a t the time
warrants

o r requires,

i n order t h a t y o u r reserve percent-

age shall b e a n actual index o f changed credit conditions, instead o f simply being a n index o f the disorganization o f the rorid that dumps g o l d i n t o the Federal
heserve L a n k s .

Urdinarily I

should s u p p o s e ,

i n the

case o f the best banks, t h a t is, banxs that a r e operating
on t h e b e s t p r i n c i p l e s a n d b e s t practices,

t h a t that

exchange would b e lergely a matter thet t h e y themselves
vould control.

« h e n they had gold that they did not

desire t o show i n their deposit reserve, t h e y would simply
taxe d o w n s o m e c o m m e r c i a l c o l l a t e r a l a n d p u t i t i n t h e
note reserves.

A t other times y o u would reverse t h e

process.
Governor Fancher.

I

f t h a t i s m a d e v e r y flexible,

in favor o f it.
Governor Harding.

Y o u a r e i n favor o f t h e p r o p o s i t i o n ?

Governor Fancher.

i e s sir.

Governor Biggs. I

a m against a n y change a t this time.

Governor Galkxins. Theoretically, I
Practically, I

a m i n favor o f it.

a m afraid t h a t t h e first effect o n the


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Federal Reserve Bank of St. Louis

public--I m e a n t h e p u b l i c t h e t i s i n t e r e s t e d - - a n d
i s becoming interested d a y b y day--

more o f t h e p u b l i c

would b e t o direct a t t e n t i o n

t o t h e i n c r e a s e d reserve.

The p u b l i c w i l l n e v e r l o o k a t t h e s m a l l e s t fieure.e

I t

will alwveys l o o k a t the largest figure, a n d the dispomake
sition w i l l b e t o s e e t h e i n c r e a s e d r e s e r v e a n d
furtoesr d e m a n d s

o n the Systeme

S

o tnat t h e psycho-

logical effect would b e the reverse o f that,
it. V U t h e r v i s e I

a m i n favor o f it.

Governor aarding. T h e o r e t i c a l l y y o u are i n favor
hesitate.
of it, b u t a practical consideration leads y o u t o
lav, w o i c h p r e p o n d e r a t e s ?
Governor Calkins. I
thet w a g e I

did n o t m e a n t o p u t 1 4 exracuLy

think t h a t t h e r e a s o n s

reasons, b u t I

i n the main are sound

think that t h e practice suggested would

not operate today. I

a m against it.

Governor V a n Zandt. I

would n o t l i x e t o s e e a n y

change s t present.
Governor narding.

N o w , Governor strong, I

guess«you

can v o t e o n this p r o p o s i t i o n .

Governor otrong. I

just suggested t o Pr. Miller

that h e and I better get a new business department, a s


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Federal Reserve Bank of St. Louis

am op-

both o f o u r plans s e e m t o b e i v disrepute. I
posed t o t h e p l a n f o r t h e reason, w h i c h I

do not think

hag b e e n fully developed--let m e state t h e w a y I think
this would operate i n practice.
Assume t h a t t h e amount o f our deposit liabilities
will fluctuate f r o m time t o time, a n d they d o fluctuate
very greatly i n New York, t h e actual amount i n dollars
of g o l d r e q u i r e d

t o maintain a

g i v e n reserve,

s a y 5 0 per

cent, behind c u r deposits, w o u l d change f r o m d a y t o day,
and i n actual practice t h e amount c f gold which would
toted back a n d forth between t h e note issue a n d t h e bank
department would charge.
Dr. siiller.

Y o u misunderstand it.

O n the contrary,

your r e s e r v e p a t i o . should n o t b e m a i n t a i n e d
limit, t r r e s p e c t i v e

o f your liabibitiese

fixed

at a

Y o u should b e

governed, f r o m time t o time, b y a mutual understanding
ag t o w h a t the. s i t u a t i o n

working reserve ratio,

o n the whole warrants,

i n order that t h e expansion o f

your l i a b i l i t i e s s h a l l s h o w i t s e l f
your r e s e r v e r a t i o , , w h i c h

time.

as Lo

i n the decline

of

i t does n o t d o a t t h e p r e s e n t

Y o u r reserve ratio i s utterly misleading t o the

present moment, except t o the amount that i t indicates


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Federal Reserve Bank of St. Louis

dumped i n t o the Fedthe extent t o which gold i s being
eral K e s e r v e b a n « o f N e w York.

Y o u r reserve r a t i o i s

worthissse

may n a v e m i s u n d e r s t o o d y o u r

Governor S t r o n g . I

t h a t y o u had i n statement o n this, b u t I understood
o f gold should b e
tended that t h e fixed percentage
maintained behind t h e deposits.
N o , no.

Dr. iiiller.

percentage,

a s I stated, I

time 4 5 p e r cent,

would suggest a t the present

t o stert with-~

Governor Strong.
start with. I

fixed
F r e m timo t o time t h a r

I
T h a t i s the figure t h a t

want t o

b u t starting a t
admit that i t will changs,

untilchanged, isn't it?
45 per cent, that i s fixed,
O h , no-

Dr. Willer.

Governor t r o n g .
Dr. Miller-

determine it.

day?
“ o u l d 4 % change e v e r y

N o t a t all.

I

ret i s fixed until w e

determined Fhen
I t is fixed until someone

that gold shell b e released.
Governor Seay.

determine i t
T h e n y o u will have t o

o f gold?
according t o the valuations
Dre Miller.

N o t a t alle

‘ a e determine

t h e futures
it remains t h e r e f o r

i t now, and.


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Federal Reserve Bank of St. Louis

Governor Strong.

« 6 change every day, millions

of dollars.
Dr. iilller.

T h e n ,

i f your deposit liabilities

are r u n down, y o u r r e s e r v e s a i s o w i l l r u n u p , a n d i t w i l l

go about 4 5 p e r cent.

K e e p i n g t h a t additional gold

vhere i t goes f r o m the fluctuations

i n your liabilities.

If your liabilities r u n up, y o u r reserve runs down.

I t

will g o o n running down, a n d i t will t h e n b e for t h e
Keserve board t o determine f a e n y o u get i n the neighbornood o f 4 0 p e r cent, whether t h e expansion o f credit
toat i s running u p your liabilities a n d running y o u r
ratios down, entitles y o u t o substitute commercial collateral f o r gold,

i n order t o replenish y o u r reserve,

o r

entitles y o u t o rediscount.
Governor “ t r o n g .

Y o u s a y that t h e reserves

to

be maintained against t h e deposits b y t h e Federal Keserve
bank o f N e w Y o r k w o u l d b e 4 5 p e r cent, w h i c h t o d a y
represents

s o m a n y millions,

a n d that number

o f hundreds

of millions dollars should b e maintained without regard
to fluctuations
br. M i l l e r .

i n deposits?
N o , n o t s t all. I

statement i s misleading.

.

think t h e w h o l e

@ have t o make a start


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Federal Reserve Bank of St. Louis

somewhere.

L e t moe state t h a t a c t u a l l y a t t h e p r e s e n t

time t h e bulk o f our gold i s allocated t o the deposit
reserve,
gold i s a

i f w e set u p a deposit reserve.
eredit

T h e bulk o f t h e

o n o u r b o o k s a n d t h e statement:

a s show

here belongs t o the deposit reserve; n o t t o the note
reserve»

N o w I

suggested 4 5 per cent.

50 per cent i s better, I

I f you t i n k

d o not object t o it.

S o m e

w e will s a y

allocation o f this method should b e made.

45 per cent o f the gold i s henceforth t o b e credited t o
the deposit reserve.

T h e remainder o f the gold, what-

ever i t may be--in some cases i t will b e 5 0 o r 6 0 per
cent, a n d i n other cases i t will b e barely 4 0 per cent-shall b e credited t o the note reserves.

N o v , then, y o u

start a t that point.

Governor darding. S u p p o s e y o u had 4 5 per cent gold
reserve allocated against the deposits.

A

s a matter

of fact, isn't every dollar o f that gold back of the
Federal “eserve bank notes, o n account o f that section
of the l e w shich says that t h e Federal keserve b a n k note

is a prior lien o n all the assets o f the bank?
Dr. Miller. Technically every asset o f the bank,
whatever

i t is, i s a v a i l a b l e

i n t h e e v e n t o f liquidetion,


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Federal Reserve Bank of St. Louis

to p a y notes, y e s .

Y o u spoke o f 4 5 per cent.

Governor Strong.

percentage o f what?
Dr. tiller.

T h a t

O f the deposit liability?

Absolutely.

N o w I still think that you do not

Governor trong.

understand the point that I make, which is this: i f you
i s t o b e main-

say t o d a y t h a t 4 5 p e r c e n t o f o u r d e p o s i t s
tained a s a
then a

reserve u n t i l t h a t p e r c e n t a g e

i s changed,

different a m o u n t o f g o l d m u s t b e h e l d tomorrow,

because o u r deposit liability changes.»
Dr. Miller. I

still d o not make myself clear. I

not know t h a t i t i s worth attempting t o d o so.
Governor F a n c h e r u n d e r s t a n d s m e e
eliminate t h e c o e f f i c i e n t
cally,

T I thins
to

I t i s a n attempt

o f error, p u t t i n g i t techni-

i n our reserve percentage

a t t h e p r e s e n t time,

because w e are constantly t h e victim o f superfluous
w

gold, b u t that has nothing ©
mestic situation.

I

f we

s

i
rg

t
g

h t h e doto have a

better ondition o f banking i n the Reserve System,

to

my m i n d i t i s m o s t i m p o r t a n t t h a t t h e r e s e r v e r a t i o

should b e a reserve ratio, w i t h some significance a s
to the credit situation.

N o w , then, f o r that reason,

do

I propose that o n a siven date w e shall determine w h a t

we think i s a fair working ratio t o saow i n the deposit d e p a r t m e n t

responsible
Let


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Federal Reserve Bank of St. Louis

o f t h e bank,

a n d t o hold t h e bank t h e n

f o r whatever happens t o its reserve ratio.

t h a t reserve r a t i o reflect accurately t h e expansion

of the notes a n d liabilities,

s o that when that gots

down t o 4 2 o r 4 3 o r 41, y o u know i t i s because t h e
liabilities a r e going up.

w h e n i t gets up, y o u knew

that y o u are getting genuine liquidation i n the reduction o f y o u r liabilities,

n o t because

o f the

c b a ta9. aeee3 i

gold, b u t because o f the cancellation o f credits t h a t your
banks h a v e established w i t h you.
low, then, I

propse t h a t frankly f o r this reason,

in order t o put teserve banks, m o r e particularly y o u
Governors,

o n your g u a r d

t o give close attention

t o each

situetion and not let you feel that whatever gold i s
there i s y o u r g o l d t o b a n k with.

« s h e n your reserves r u a

down t o below 4 0 per cent, y o u will begin t o feel a
degree o f anxiety that y o u d o not a t the present time,
and your member banks w i l l soon come t o understand t h a t
that reserve ratio i s a real significant ratios I
say, f o r myself, I

will

would n o t g o s o far a s t o raise t h e

question a s t o whether o r not a bank that gets d o w n t o
35 per cent i s obliged t o rediscount, a n d the Federal


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Federal Reserve Bank of St. Louis

Reserve board should n o t serutinize v e r y carefully t h e
operations t h a t your bank i s indulging in, i n order t o
determine whether o r not y o u are entitled t o rediscount.
Also,

i f you get t o that point a n d state that y o u w ant

more gold, t o determine whether o r not y o u should b e
permitted t o substitute t h e commercial collateral with
your F e d e r a l “ e s e r v e A g e n t ,

a n d t o take d o m e some o f

the gold that h a d been lodged there a t the time w h e n
gold was accumulating.

M

y hope would b e that i n pract-

ice the system would s o operate t h a t t h e allocation o f
the gold, t h e incoming gold, t o the note reserve, w o u l d
be a t your instance rather than o n the request o f the
Neserve Bank.

I n other words, t h a t y o u would want t o

manage y o u r g o l d s o t h a t y o u r d e p o s i t r e s e r v e r a t i o

would b e always a n indicator t o y o u and t o your member
banks o f exactly w h a t your reserve position was.
from t i m e t o t i m e y o u w o u l d determines w h e t h e r

But

o r not y o u

wanted t o taxe down some o f the gold that y o u had se-

questered i n the Federal Keserve Agent's Department, o r
vhether,

o n the whole, y o u thought i t would produce a


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Federal Reserve Bank of St. Louis

healthier condition o f mind o n the part o f your borrowing banks t o leave i t there a n d l e t them see i n the movement o f y o u r d o p o s i t w i t i o ' e x a c t l y w h a t w a s t h e c h a n g e

from day + o day o r week t o week,

i n the credit position

of y o u r F e d e r a l N e s e r v e b a n k .

As I

look a t it, f r o m the point o f view o f the Federal

hessrve bank, t h e Governor w h o sees t h e strategic a n d
psychological a d v a n t a g e

Governor, I
wanted. I

o f this,

i f I

were a n o p e r a t i n g

should s a y that i t vas j u s t the t h i n g that 1
should t h e n s e t a b o u t t o d o w h a t I

could t o

educate t h e banking business community t h a t I "as serious
about looking t o the reserve ratio i n the bank, a s disa s t h e indicator

tineuished f r o m the note department,
of w h a t c r e d i t c o n d i t i o n s w e r e .

T

h

e moment y o u r reserve

ratio b e g a n t o r u n down, y o u r c o m m u n i t y , e x a c t l y e s t h e

anglish banxing business community, w o u l d begin t o take

notice. T h e y would say "This thing goes much further.
A raise o f rates i s more o r less inevitable".
Governor Galkxins. I

rould like t o ask Dr. Miller

is inoés your opinion that a t the present t i m e
the p u b l i c w o u l d l o o k a t t h e l a r g e l y i n c r e a s i n g r e s e r v e s

behind t h e notes a s a n opportunity f o r further expansion?


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Federal Reserve Bank of St. Louis

Dr. Miller. I

think not. I

think t h e p o l i c ymldc

be presented t o a community i n a way that would,

whole, meet their approval.

o n the

I n brief, that under the

stress o f var w e had taken t h e gold o u t o f the notes.
Under a

reversal o f conditions,

w e were beginning t o re-

store t o the Federal HKeserve Kank notes i t s original quality.
Governor riarding.

d e y I interrupt a

moment. I

would lizxe t o call your attention t o the fact that i t i s
nalf p a s t l .

Governor Seay.

M e y I

register m y position o n this

matter?

Governor dardinge Y e s e
Governor Seay.

I t seems t o m e that there a r e several

objections, o n e o f which i s exemplified b y the difference
of opinion. I

cannot help feeling t h a t t h e public v o u l d

look a t i t a s s o m e a r b i t r a r y o p e r a t i o n
Board,

o n the p a r t o f the

t o confuse t h e m o r d e c e i v e t h e m a s t o t h e r e a l

position o f t h e F e d e r a l h e s e r v e Bank.

adopted a

n

e have recently

new policy, b a s e d o n the reserve against o u r

immediate liabilities.
Governor Harding.

% e will reconvene, gentlemen,


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Federal Reserve Bank of St. Louis

et 2:30.

Governor otrong.
ceed a t 2:30,

T h e Governors!

a n d o n e hour will dispose

o f t h e balance

of our progrem, a n d t h e n the Federal Neserve Board will
join u s a t 3:50.

{.hereupon,

a t 1:30 p m ,

t h e Gonference adjourned.)

AFTER RECESS.

The Conference was resumed a t 2:30 o'clock p m.
The Ghairman (Governor Strong).

L e t u s deal with

one o r two o f the less important o f these subjects. S u b j e c t
“IV. (xk) o f t h e routine program i s sales o f bills reported


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Federal Reserve Bank of St. Louis

as re@iscounts.

Iv. C R E D I T TRANSACTIONS AND POLICIES.

{k) Sales o f bills reported as rediscountse
The Chairman. I

have taken the liberty o f putting

that o n f o r t h e p u r p o s e
agree w i t h me,

o f a s k i n g t h e Board,

i f y o u will

a s t o t h e w i s d o m o f it, t o change t h e c a p -

tion o n thsir report o f inter-reserve b a n k discount transactions a s applying t o bankers’ acceptances,

s o that i t

will road "“Aeceptances rediscounted with o r purchased by’.

Itnow reads “Acceptances redisc counted with or sold to”
other Reserve Banks.

T h e implication f r o m t h e language n o w

employed i s that every transaction between t h e Reserve Banks
in bankers’ acceptances i s i n fact a sale o f acceptances
to t h e o t h e r R e s e r v e B a n k :

o r a

rediscount

with that Re-

serve Bank, whereas the great majority o f the transactions
we have i n Now York are really purchases for account of-


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Federal Reserve Bank of St. Louis

Do y o u see a n y objection t o that?
Governor McDougal.

s h a t i s t h e suggestion a n d

the changed language?

Toe Chairman.

M a k e the caption i n the Board's state2 4

ment, w h i c h i s g i v e n t o t h e public, r e a d “ A c c e p t a n c e s r e -

discounted with o r purchased by" instead o f the present
caption, which i s "Acceptances rediscounted with o r sold
to other Reserve Banks".
Governor Morss.

S a l e s

o f bilis r e p o r t e d f o r r e -

disc cunt?

Toe Chairman.

Yes.

Governor Fancher. I

see n o objection t o that. 3

think that really states m o r e clearly t h e nature o f the
transaction.
The Ghairman.
reasonse

I

I t indicates t h a t t h e y h a v e t w o

n t h e o n e c a s e t h e b a n k w h i c h g e t s t h e bene-~

fit o f the transaction i n cash i s actually doing i t for

the purpose o f building u p its o w n reserve i n the first
case, a n d i n the second case i t i s the purchase b y the
bank that got t h e bill a t its o w n motion a n d a t its o w n
suggestion.
purchased

I

n other words,

o n order.

i t i s a bil? which i s


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Federal Reserve Bank of St. Louis

Governor Norris. I

move that that change b e rec~

ommended t o the Board.

ing this, w o i c h I

selfish purpose i n suggest-

have a

The Chairman. I

want t o explain, a n d that i s that t h e

Federal Keserve B a n k o f New York i s accused o f having borrowed a l l o f this money f r o m other Reserve Banks, n o t
only what i t secured b y rediscounting with other Reserve
Banks, b u t whet appeared i n the statement toa be 3 rediscount, b u t i n point o f fact was simply t h e purchase o f the
bill m a d e a t t h e d i r e c t i o n o f t h e o t h e r R e s e r v e Barks »

Governor McDougal.

T h a t would affect, then, a i i O F

your bills t h a t were parcelled o u t o f your bank which
were becoming a

part o f that--

The Chairman (interposing).

I t would not affect the

transaction.
Governor McDougal.

I t would affect t h e showing i n

your credit statement, a n d I
The Chairman.

I

think i t should b e cleared up.

t would n o t represent

u s a s being

borrowers o f this money, a s i t now does.
Governor McDougal.
Governor Biggs. I
second

t h e motion.

No.
can see n o objection, a n d I


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Federal Reserve Bank of St. Louis

Governor Calkins.

The Chairman.

M a y I be informed what t h e motion

T h e motion i s t o change t h e caption

in the weekly statement issued b y the Federal Keserve

Board, b y using the language "Acceptances redisc ounted
with o r purchased by" instead o f "Acceptances rediscounteda
with o r sold to" other Reserve Banks, a s i t now ise

T h e

items included i n figures under that caption a r e c o m p r e
hensive e n o u g h t o include t n e b i l l s w h i c h w e b u y f o r o t h e r

Reserve banks, a n d i t puts u s i n the position o f borrowing t h a t money, w h e r e a s ,

as a

matter

o f fact,

w e are n o t

doing so.
Governor Norris. I

is
believe that/the o n l y reference

on the program to the weekly statement, therefore I will
take this opportunity o f making a suggestion, a n d l would
like t o know h o w i t strikes t h e other members, t h a t t h e
day o f publication o f t h e statement b e changed.

T h e

statement comes o u t n o w o n Saturday afternoons, w h e n i t
is inconvenient t o handle i t locally, w h e n i t i s inconvenient f o r the newspaper people t o handle it, a n d i t
is p u b l i s h e d

r
a mestly crowded
o n the d a y w h e n t h e n e w s p a p e r s

and w h e n b u s i n e s s m e n a r e l e a s t l i k e l y t o r e a d t h e f i -


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Federal Reserve Bank of St. Louis

nancial a n d b u s i n e s s i t e m s

i n newspapers,

a n d w e are

a n d s u c h newspaper m e n a s w e

strongly o f t h e opinion,

have talked t o are also, t h a t a n y othsr d a y o f the week
would b e a better d a y t o publish t h e weekly statement
than Sunday.
Governor Morss.

w

e have b e e n talking about t h e

same thing i a our bank, wr. Chairman.
The Chairman.

tu

A Y e there a n y other experiences

o n this?

report

(The motion was put and unanimasly carried).
Governor McDougal.e T h e result, M r . Chairman,
change

of a

o f t h e p l a n under which t h e figures s h o w i n g t h e

condition o f the combined banks a r e released n o w Saturday afternoon rather late, instead o f permitting u s t o
release o u r figures earlier, h a s b e e n that o u r statement
receives v e r y little publicity b y the press. I

had 4

memorandum here t o bring this matter u p myself i f t h e
opportunity o c a r r e d .

t

e took t h e matter

u p with t h e

Federal neserve Board, suggesting t h a t i f the statement
could a p p e a r a s o f t h e c l o s e o f business T h u r s d a y a n d b e
released

o n Friday,

t h a t i t would b e cerried t h e n b y

the a f t e r n o o n p a p e r s a s i t h a d b e e n previously,

and


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Federal Reserve Bank of St. Louis

moreover would b e given full notice i n the morning
papers,

A

a l l editions.

the T r i b u n e

s i t i s now, t r e g n i c a s s p a p e r s - -

o n l e s t Sunday,

and I

think p e r h a p s p r e v i o u s

to

that, h a s n o t published t h e figures o f the statement;
d o publish
they s i m p l y p u b l i s h e d c o m m e n t s - w h a t t h e y

editions. I
does n o t g e t into all o f their country
as I
rather assumes that t h e fact that t h e iigures
vith the
understand i t are n o w published simultaneously
Associated Banks’ s t a t e m e n t

o f iNew Y o r k m i g h t b r i n g a b o u t

a s relating
some complication, a s they are iteresting
to each othere

A s I remember it, t h e Board replied that

and i n
it might b e best t o give the whole matter 2 trial,
through the
our district w e are not getting the publicity
a n d that
press t h a t w e h a d under t h e o l d arrangement,
b e pushed forcould b e overcome i f the publication could
ward t o Friday instead o f Saturday afternoon.
Governor Fancher.

T n a t i s o u r experience also.

I t

is too late Saturday t o get into the papers, and only an
usu~
Associated Press statement Sunday a n d the comments
ally i n the Monday morning papers

a s t o the change

in our particular condition.

The Chairman.

T h e original discussion o f this matter


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Federal Reserve Bank of St. Louis

which t o o k places s o m e y e a r s a g o r e s u l t e d

i n the prepa-

ration o f the figures a s o f Friday night, efter canvasses h a d been made, w h i c h indicated t h a t almost a l l
of t h e i m p o r t a n t c l e a r i n g h o u s e s p u b l i s h e d t h e i r f i g ures s o t h a t t h e y a p p e a r e d
I think,

o n Saturday,

a n d t h a t was,

t h e reason f o r t h e adoption o f t h e present

plan.
Governor Fancher.

I n Gleveland o u r association

changed i t s date a n d t h e figures which a r e published
now a r e a s a t t h e c l o s e o f business T h u r s d a y a n d a r e

usually commented o n o n Saturday.
The Chairman.

I t occurs t o m e that i n the early

days the clearing house statement was regarded a s o f
some i m p o r t a n c e a n d a s m e a n i n g something,

b u t the im-

portance o f the clearing house statement h a s v e r y largely
disappeared, a n d i f w e change o u r d a y I
almost disapoear c o m p l e t e l y .
this, G o v e r n o r ilorss?

Governor Morss.

think i t would

s h a t i s your wish about

Y o u r a i s e d t h i s question.

No, I

beg your perdon.

I t was

Governor Norris.
The Cheirman.

G o v e r n o r Norris, e x c u s e me.

Governor N o r r i s .

I

f the other Governors

are

i n


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Federal Reserve Bank of St. Louis

agreement, I
requested,

will move that t h e Federal keserve Board b e

i f possible a n d convenient,

o n some o t h e r d a y t h a t Saturday.

consolidated s t a t e m e n t

Toe Chairman.

t o publish t h e

I s that seconded?

Governor Morss. C o u l d n ' t i t get into the papers
Saturday i f published early enough?
I t cannot b e published early enougn,

Governor McDougal.

for t h e reason that t h e figures d o not reach here i n time
for t h e press.

Governor Norris.

T h e n y o u would have t o make i t

Thursday night.
Governor McDougal.
Governor Norris.

Yes.
I t does n o t make a n y difference,

except a s relating t o the other banks' statements.
Governor McDougal.
Governor Norris.

No.
A s Governor Strong has j u s t sug-

gested, a n d a s I have often said, locally t h e N e w York

Bank used t o be the significant one, but i t has now very

largely lost its significance, and we have been trying
to educate t h e people locally that t h e statement o f the

Reserve Banks was insignificant, o u d the gain o r loss
of reserve simply indicated t h a t that bank was doing mors


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Federal Reserve Bank of St. Louis

948

or less discounting with t h e other banks, a n d that the
consolidated statement o f the Reserve Banks was t h e
one important financial statement o f the week.

Now,

as I say, a t the present time that goes o u t a t a n inconvenient t i m e t o handle, a n d i s published o n Sunday
with a l l t h e comic supplements a n d everything else, a n d
When business m e n are n o t reading business items t o the
extent that t h e y d o a t a n y other d a y i n the week.
Tne Chairman.

T h e motion was seconded, I

believe.

Is there a n y further discussion?
Governor Seay» D o e s N e w York share i n the view?

[ I

did n o t get a l l o f the discussion.
The Chairman.

I t i s really immaterial

t o us.

b e Fs,

not t h i n k i t i s important.

(Toe mction was put and unanimously carried).
The Vhairman- T h e next thing o n the program i s I V ({f),
the policy o f Keserve Banks w i t h respect t o attempted
cancellations

o f confirmed irrevocable commercial letters

of c r e d i t .

IV.

G R E D I T T R A N S A C T I O N S A N D P O L I C Iss.

(f) W h a t should the policy o f the Federal Reserve B a n k b e with respect t o attempted


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Federal Reserve Bank of St. Louis

949

cancellations o f confirmed o r irrevocable commercial letters o f credit a n d with
regard t o issuers o f credit w h o have d e faulted

o r r e f u s e d t o h o n o r t h e i r credits;

especially h o w should t h e Federal Reserve
Banks d e a l with acceptances o f such banks.
The Chairman.

T h i s topic came u p i n connection with

the statement o f the Federal Keserve Board published o n c e

a week, which arose i n our discussion o f topic (x), which
had t o d o with t h e sale o f bills reported a s rediscounts.
Governor slorss « i c h

i s the o n e y o u are discussing

now?

The Ghairman.
that t o p i c because,

( f ) . I

may say that w e suggested

a s y o u know, A m e r i c a n v a n k i n g w a s g e t -

ting a bit disagreeable i n other parts o f the world b y
reason o f the widespread repudiation o f contracts o f banks
which h a d issued o r confirmed irrevocable letters o f
credit a n d then declined t o accept bills w h e n they were
presented.

b

e have h a d some cases t h a t were absolutely

inexcusable, a n d h a d determined i n certain o f those cases
that, after explanation o f reasons, t h e banks which were
guilty o f those practices should n o t heve t h e advantage


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Federal Reserve Bank of St. Louis

of having their bills purchased b y our bank.

A n d if

you gentlemen know o f cases which justify a course o f
that kind a n d your bank will advise us, w e will d o the
same t h i n g w i t h t h o s e banks.

C a r e ,

o f course,

has got

to b e exercised t o make sure that t h e ground o f this action
is thoroughly justified, a n d i f y o u would cars t o have
us advise y o u o f cases o f that character,
M r . Chairman,

Governor Calkins.

w e c a n d o that.

w e had o n e extreme

case, a s y o u know.
Toe Chairman.

Yes, I

Governor C a l k i n s .

remember that.

A n d while I

a m always v e r y m u c h

adverse t o threatenixg, a n d prefer t o d o something a n d
take t h e consequences, I

tried t o p o i n t o u t t o o n e o f t h e

junior officersof t h a t institution t h e conssquences.

I said "The first consequence perhaps you will meet is
that t h e Federal Reserve B a n k o f New York will o f its
own motion refuse t o buy a n y o f your bills i n the market,
but i f i t does not, i t will b e sdvised b y the Federal
Reserve B a n k o f S a n Francisco n o t t o buy a n y o f your

bills for our account”.

O f course, the net result being

that i n a very short tims their bills would n o t b e sale-

able i n the market. I

think w e have got t o take ox-


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Federal Reserve Bank of St. Louis

951
actly that course i n such cases.

O f courses, a s y o u say,

it i s necessary t o b e sure o f the facts before taking
any such extreme action.
Governor Fanchere I
our policy.

a m sure that that should b e ;

W w e should n o t “ U y t h e bills.

suggest a resolution which will

Tos Chairman. I

have substantially t h e same effect i n respect t o those
bills a s i n respect t o paper declared t o b e ineligible,
that w e r e f e r ‘such c a s e s

t o the eligibility committea

and include those i n the reports *+o be made t o the Re¥ i l l someone offer that resolution?

serve Banks.

Governor Fancher. I
Governor Biggs. I
Toe Chairman.

will offer that resolution.
second it.

T h e r e being n o further discussion,

I will p u t t h e question.

(fhe motion was put and unanimously carried).
Toe Chairman. I

might add that i t would b e our under-

Standing o f the effect o f this action that w e would
t o b u y t h e bills. I

decline
e

e

t

e

m

hope e v e r y b o d y u n d e r s t a n d s

a

thate

Governor Biggs. I
Tos Chairman.

Yes»

think w e ougiit to.


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Federal Reserve Bank of St. Louis

Mr. Harrison.

Shall I

make that a s a part o f the

resolution?
Governor Fancher.

The Chairman.

Yes.

T h e next item was a part o f (g), re-

lating t o eligibility committee activities,

a n inquiry b y

Governor Fancher o r b y the Federal Keserve B a n k o f Cleveland, a s t o the procedure followed b y the different Reserve
Banks t o ascertain whsther t h e regulations o f the Board
are being observed b y the banks which accept,
bills which t h e y accept a r e eligible.

s o that the

Y o u understand,

of

course, Governor Fancher, t h a t t h e definitions o f eligibility a n d the psrmission extended b y the statutes a s t o
acceptances a r e n o t e x a c t l y t h e same,

s o that banks m a y

accept paper which i s not eligible under t h e strict regulations o f the Federal Neserve Board.

Iv. C R E D I T TRANSACTIONS A N D POLICIES.
(g) w e e n

h h a t procedure,

i f any, i s allowed

by each Federal “eserve B a n k t o ascertain
whether acceptances m a d e b y its members

are made i n cmformity with the Board's
regulations effective since October 25,


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Federal Reserve Bank of St. Louis

1920, a n d the Board's rulings, a n d what
steps a r e taken,

i f any,

t o g e t similar

information regarding bills accepted b y
either member o r non-member banks o r acceptances offered either t o the Federal
Keserve B a n k o f the district i n which t h e
bills originate o r t o other Federal Heserve
Bans «
Governor Fancher.
was this.

f

W h a t brought t h a t u p i n our bank

e found, after making some inquiry a s t o the

nature o f certain bills t h a t were offered us, t h a t t h e
bank h a d not received o r had entirely overlooked t h e n e w
rulings o f the Federal “eserve Board which had been promulgated u n d e r d a t e o f Vetober 2 5 ; t h e y w e r e s t i l l p r o c e e d i n g

under the old regulations.
ticular p a i n s

w e i n our bank took par-

t o send o u t a

copy o f t h e regulations,

and

a letter t o our Lank, pointing o u t the fact that t h e Board
had s e t u p a new s e t o f rulings a n d t o read t h e m earefully,
and i n future t o b e guided accordingly, a n d I

a m wonder-~

ing i f that was the procedure pursued generally b y the
other banks.

N

e have found

i n a number o f cases t h a t

the banks w h o were accepting h a d not h a d t h e n e w regula~


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Federal Reserve Bank of St. Louis

tions o f the board brought t o their attention.
The Chairman.

G o v e r n o r Fancher,

t h e question o f the

wisdom o r unwisdom o f the terms o f the existing regulations
will b e discussed o n the program o f items f o r discussion
T h a t comes u p a s a part

with t h e Federal “eserve Board.
of their program.
York,

D o y o u wish t o know what w e d o i n New
o f the accepting

a n d t o i n q u i r e a s t o t h e practices

banks ?
Governor F a n c h e r . . Yes.
information,

M r . Chairman,

A

and I

e p u b i t o n here j u s t f o r
40 n o t want t o give a

great d e a l o f t i m s t o it.«

The Chairman.

% e h a v e n o t got a great deal o f time.

Governor Fancher. I
The Chairman.

a m willing t o let i t b e passed.

M r . senzel c a n answer t h e question nov,
€e

if t h e C o n f e r e n c e w a n t s t o c o n t i n u s t h e discussion.

make i t a s short a s possible. M r . denzel.

Mr. <enzel.s ikhen we buy bills, i f the bill does nov
disclose what t h e character o f the underlying transaction
is, w e make inguiry o f the accepting bank, n o t i n any way,
horever,

t o indicate that w e have suspicions a s t o the

propriety o f their having accepted i t , b u t j u s t t o «now
the character o f it.

T h e y s a y that i t i s warehouses o r


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Federal Reserve Bank of St. Louis

955

domestic transportation o r importation, a n d that i s a s
far a s W E {Oc
Governor Fancher.

w

e h a v e f o u n d upon. maxing i n q u i r y

in some cases t h a t the late regulations o f the Board h a d
a n d t h e y have b e e n pro-

not c o m e t o t h e b a n k ' s a t t e n t i o n ,

ceeding under the old regulations.

T h e r e seemed t o be

a lack o f knowledge o n the part o f some o f the acceptirg
banks a b o u t t h e n e w r e g u l a t i o n s h a v i n g b e e n p u t o u t b y t h e

Board.
Mr. senzele

O f course, t h e benxks come i n and dis-

cuss with u s a s t o the propriety o f their entering i n t o
any particular arrangement. I

sit d o m a n d talk i t over

with t h e m very carefully.
The Ghairman.

I s there a n y further discussion?

Governor Calkins. I

had b e e n l e d t o the conclusion

that t h e r e h a d b e e n s o m e u n c e r t a i n p r a c t i c e s

a s t o the pur~

chase o f acceptances, a n d w e made some investigations,
which brought o u t the fact that large N e w Y o r k banks ‘ e r e
accepting

o n conditions t h a t w e c o n s i d e r e d h i g h l y i m p r o p e r .

I do not know whether t h a t has been disc mtinued. I

have

a feeling that i t vill b e cured b y the new requirement o n
the bill itself.

I t probably i s not necessary t o g o into


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Federal Reserve Bank of St. Louis

the matter o n that account; otherwise, I

think i t ought

to b e c l e a r e d u p .
The Chairman.

G o v e r n o r Calkins, M r . K e n z e l

Lord digh Priest o f the acceptance business
Governor C a l k i n s .

Y e s sir; I

i s the

i n New York.

have l e a r n e d a

great

deal f r o m him.
Toe Chairman.

A n d i n those cases t h a t c o m e u p , i f

you will refer t h e m t o him, e c will investigate it.
Governor Calkins. I

have learned a

great deal from

Mr. senzel.
Governor F a n c h e r . I

think i f a

stamp i s p u t o n the bill

giving t h e nature o f the underlying transaction,
go a

long ways

i t would

t o cure t h e evil-

Governor Galkins. B e t t e r still would b e t o have t h e
bill drawn over t h e signature o f the drawer indicating t h e
nature

o f t h e transaction.

Governor Fancher.

Yese

Governor Calkins.

L a c k i n g that, t h e acceptor would

have t o c i r c u l a t e

The Chairman.

i t b y t h i s n e w f o r m o f stamp-

I t might well be. I

have no suspicion

of this, b u t suggest i t a s a possibility, t h a t some o f these

New York Banks, feeling that the Lord High Priest has &

bis

k e e n e y e a t these things, rather attempted t o see that


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Federal Reserve Bank of St. Louis

certain bills were floated in sthéy\districis than their
ORN
Governor C a l k i n s .

The Chairman.

Yes.

T h a t puts i t u p t o Mr. Kenzel.

Governor Fancher. I
suggestion

T h e s e b i l l s y o u bought.

T h e y were a l l ours?

Governor Calkins.
The Chairmen.

N o .

believe, M r . Chairman, t h a t 4

o f t n e s o r t w h i c h h a s b e e n m a d e i n o u r discus-

sion which was n o t recorded, t h a t somsore o u t o f each o f
these b a n k s , : i n w h o m t h e m a t t e r
matter

o f purchase

o f azceptances a n d t h e

o f acceptances, a

m a n w n o s p e c ialized

in that f o r m o f investment i n the bank, i f they Were

brought together and i f Mr. senzel o r someone i n the New
York bank could really take t h e m i n hand a n d g o through
this whole thing i n e very cereful w a y a n d show your
procedure d o w n there, a n d start a t the bottan a n d g o

straight through, I

think i t would b e tremendously help-

ful t o everybody concerned. .
The Chairman.

Y o u have heard that Mre Kenzel

has t h e degree o f B. A. conferred u p o n h i m b y a number

of universities, a n d i t stands for "Bankers Acceptances".


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Federal Reserve Bank of St. Louis

Governor Seay.
for a c c e p t a n c e s

M r . Chairman,

i n o u r district,

particular i n t e r e s t

w e have n o open market

a n d therefore w e have n o

i n t h e present discussion,

b u t w e are

perfectly s u r e t h a t w e agree with t h e suggestions t h a t
have b e e n made.

A n y bills t h a t a r e brought t o us are

offered with theinformation which will show t o the bank
whether i t i s acting under t h e regulations o r not, a n d
will certainly shor t o us whether i t i s eligible.
Governor Calkins.

Y o u buy those bills without e n -

dorsement?
Governor Seay. Y e s e .

Governor McDougal.

D o y o u buy bills without endorse-

ment f r o m the bank which accepts them?
Governor Seay.

Y e s , directly f r o m the bank.

O n e

reason w h y there h a s b e e n n o open marxet developed there
was a t the beginning t h e banks were n o t acquainted a t all
with t h e regulations governing eligibility, e n d they d i d
not pursue correct practices,

a n d w e were compelled t o

take steps t o c d u m t e t h e m i n that a n d require t h e m t o got
information.
direct;

F o r that reason t h e y offered their bills

s o far a s eligibility standards g o , t h e bills a r e

all right.


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Federal Reserve Bank of St. Louis

The Chairman.

M r . gKenzel, e m I authorized t o accept

this invitation i n your behalf,

t o receive a

class i n

your bankers’ acceptances?
a m very glad t o have a

Mr. senzel. I

post-graduate

course, M r . Chairman.

Tae Chairman.

M r . Calkins, t h e suggestion i s agree-

able a n d gladly accepted, t h a t y o u send a

man t o New York,

any

anad/other banksmay d o the same, either togsther o r singly.
we w i l l p u t t h e m i n t h e d e p e r t m e n t a n d p u t t h e m r i g h t

are
through a n d send them out t o investigate bills which
education.
doubtful, w h i c h i s a very good w a y t o get a n

Mr. sensel.

I t might b e o f interest t o know that

I a m now starting t o encourage a

practice i n our o w n bank,

department
having t h e likely chaps i n the g@iscount a n d bills
who are really interested t o devote half a n hour e v e r y
just t o
Friday afternoon t o a study o f this matter, a n d
conduct a n informal clinic.

Tie Chairman. T h s next topic i s IV (n), the desirafor t h e relief
bility o f developing a systemetiec program
of e m b a r r a s e d m e m b e r b a n k s

i n difficulties c a u s e d b y

deaths, defalcations, explosions, e t c e


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Federal Reserve Bank of St. Louis

Iv. G R E D I T TRANSACTIONS A N D POEICIES.

(n) Desirability o f developing a system program
for t h e r e l i e f

o f enbarrassed m e m b e r banks

in difficvities caused b y deaths, defalcations, e x p l o s i o n s , e t c .

The Chairman.

T h i s i s suggested b y New York, a n d

grew o u t o f the fact that emergencies d i d arise beyond t h e
control o f the bank where t h e y might b e i n desperate c i f ficulties unless t h e y h e d a Reserve E a n k t o help them,
and a S a

matter o f f a c t w e h a v e l o a n e d m e n w h e r e o f f i c e r s

have b e e n t a k e n s i c k o r s o m e t h i n g h e s happened,

gets short-handed w e send a man u p there t o help t h e m r u n
the bank, a n d i t has worked s o well with u s that, a s a
o f interest,

matter

i t was p u t u p o n t h e p r o g r a m t o i n -

quire w h e t h e r t h e r e w a s s u c h a
system.

F o r instance, a

practice d e v e l o p i n g

i n the

bank w a s burned d o w n a n d loses

its records, a l l sorts o f things m a y happen where the
responsibility a n d c o o p e r a t i o n

o f t h e Reserve B a n k might

save i t f r o m r e a l disaster.

Governor Galkins. I

think t h e idea i s a very good

one, except that i t should n o t b e permitted t o run over
into t h e idea that i f a bank was i n difficulty w e might


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Federal Reserve Bank of St. Louis

furnish ae man t o pull i t out.
that responsibility. 8

*

@ Cannot b e loaded with

h a v e h a d many requests,

doubtless y o u know, t o this effect,

as

“ i e have got a man

down here w h o i s not a very good man, and we would like t o
have y o u s e n d s o m s o n e d o w n h e r e w h o i s competent".

w

e

cannot m e e t a n y s u c h s i t u a t i o n a s that.

The Chairman.

W e Cane

w h e n a bank gets i n t o diffi-

culties w e have b e e n able t o mest the difficulty b y sending
a mane

Governor Calkins. D o n ' t you think that you are assuming &@ responsibility i n doing that?
The Chairman.

do not know about that.

“Nell, I

think t h e philosophy i n the Federal Keserve B a n k o f New
York has b e e n that t h e remedy o f the Comptroller f o r a

bank that i s i n difficulty i s t o close i t up, but the
remedy w i t h u s i s t o k e e p i t o p e n a n d t o g i v e i t a

management. I

think w e have h a d quite a

from the very besi nning where,
of steps o f t h a t character,

good

number o f cases

b y some s t e p o r variety

w e have b e e n a b l e t o save a

bank, very recently, d u e t o the bad business o r possibly
default o f the president o f a bank which w a s o n the verge

ofclosing, and the president was examined by the Gomp-


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Federal Reserve Bank of St. Louis

troller,

a n d h e confessed t h a t t n e b a n k h a d b e e n vorse

than badly managed, a n d w e sent t w o m e n u p there. I
think t h e Comptroller s e n t @ man o r two, a n d t h e y t o o k
the money w i t h them, a n d a r v e r a few days t h e y kept t h e
bank o p e n a n d n e w capitel was p u t i n and n e w management
was o u t in, a n d i t i s n o w sailing along a l i right. I
think t h a t i s a

public s e r v i c e t h a t w e c a n perform.

Governor Fancher. I
cases.

might s a y thet w e have h a d t w o

O n s w a s a n apparent h o l d - u p

50,000.00

o r »60,000.00

in a

bank where

o f s e c u r t i e s w a s taken.

T h e

national b a n k examiner g o t t o the b a n k a n d
liminary report a n d was satisfied t h a t i t was a hold-up.
I suggssted t o our examiner that h e g o down. L
he followed a

think

day later after t h e national b a n k examiner

was there, a n d before h e left h e h a d a confession f r o m
the c a s h i e r t h a t i t w a s a

hold-up,

a n d that was v e r y

quistly h u s h e d u p , t h e d i r e c t o r s w e r e c a l l e d together,

and t h e y put u p 60,000.00

o r 70,000.00,

was t u r n e d o v e r t o t h e examiner,

ment o f Justice now.

%

a n d t h e matter

a n d i t i s i n the Depart-

e have h a d other cases along that

line, a n d w e have helped o u t i n different kinds o f ways.
The Chairman.

G o v e r n o r Young could n o t tackle t h e


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Federal Reserve Bank of St. Louis

whole State o f North Dakota.
Governor Calkins. I

would n o t indicate that w e

would n o t d o all that Fancher h a s described.
gone t h a t far. b u t

x

e have

w o c o u l d n o t assume t h e responsibil-

ity o f substituting a

management a n d having t o manage t h e

bank.

The Chairman.

w e have-never done that.

Governor Calkins.

W

e have quite a novel case,

which i s known t o many o f y o u gentlemen, t h e bank i n
Seattle, where w e compelled a

change i n management a n d

inercaso o f 100 per cent o n its capital.

Governor Seay- ‘ w e have several patients o f the char-

acter described by Governor Fancher.
; the d i r e c t o r s

a n d officials

A t the request of

w e have more t h a n once h a d a

man from our bank t o aid i n reconstruction.
Governor Young. I

would say, Governor t r o n g , t h a t

that i s all I have done f o r t h e last s i x months, f r a m
early morning until late a t night.

«

@ cannot handle t h e

situation ourselves, because t h e eligible paper i s limited,

and naturally w e have t o get the other banks that are interested and get them t o go their proportion o n it.

n e

usually have t o l a y our cards o n the table a n d tell them


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Federal Reserve Bank of St. Louis

what i s necessary : t o handle t h e situation, b u t t o actually s e n d a

m a n o u t t o r u n t h e bank,

W w h a v e always

felt that that was taking t o o long a chance a n d could
not

d o that,

although

W e nave h a d c u r m e n there

t o keep

the books streight, a n d w e have also had t h e m e n there
watching what t h e y were doing but offsring n o advices
Toe Chairman. I

think w e have gone pretty f e r i n

actually running t h e bank.
Mrs u e n z e l .

Y e s , I

remember a

the president w a s nearly dead,

case o n L o n g i s l a n d

o r away, a n d t h e cashier

was rather old, o r sick, a n d died, too, a n d there w a s n o
ik‘

one at the bank, and the directors said F o r heaven's sake,
can't you send a man down here t o run this until fe can
get someone t o do it?"
Governor Norris.
the i n f l u e n z s e p i d e m i c ,

n e r a n a bank i n New Jersey during
and now we set a

box o f stray-

berries f r o m them every spring.

Ta¢ Chairman. Topic (i) is ea suggestion made by Mr.
Pulicher,

o f the a. B. A-, t o Governor iarding, t h a t a

conference o n the f o r m a n d substance o f financial statements
be held before t h e managers o f the credit departments
of the Keserve banks a n d representatives

o f commercial


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Federal Reserve Bank of St. Louis

965
banks . I

suppose t h a t i s intended
f o r the benefit o f
the American Bankers! association,
i s i t not, Mr. Kenzel?
Mr. nenzel. I
The Chairman.

imagine so.
* h a t d o y o u propose t o d o
about this,

gentlemen?
Governor Seay. T h e i r idea,

i n some cases, Mr. Chair-

man, has been that w e might encourage
the adoption o f a
high-class credit Statement
b y giving a preferential
rate
to t h e p a p e r wheres t h e Conferences
furnished t h e statement

of the cheracter prepared
b y the 4 . B. A.
Governor V a n Zandt. I

think that i s i n violetion
of

Governor Seay.

understand t o b e o n e o f the

lawe
That I

Suggestions t h e y heave made.
Coming p r e s i d e n t

#

@ have i n our city t h e

o f t h e A . B . A., a n d I

a m quite s u r e t h a t

that i s o n e o f the stands
t h a t they have taken.
The Chairman.

h a t d o y o u wish t o d o about
thig?

you want t o turn i t down? A
Governor Seay.

resolution will d o it.

N o action, Mr. Chairman.

The Chairman. G o v e r n o r Seay
recommends n o action.
that s e c o n d e d ?
Governor V a n Gandto I

second i t .

f g


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Federal Reserve Bank of St. Louis

966

(The motion was put and unanimously carried).
The Chairman.
to a

T h e last item i s (j), which relates

r e c a n m e n d a t i o n f o r a n amendment

the R e v i s e d Statutes. I

o f Section 5202 o f

will a s k Mr. H a r r i s o n t o e x p l a i n

thate

IV. C R E D I T TRANSAGTIONS A N D POLICIES.

(§) amendment o f Section 5202 to Revised Statutes
SO tnat endorsements o f national banks o n
bankers’ acceptances w i l l b e excepted f r o m
the l i m i t a t i o n o f t h e s e c t i o n i r r e s p e c t i v e

of the place where payable.
Mr. darrison.

Y o u m a y remember t h a t a year o r g o

ago, u p o n recommendation, I
council,

think i t was,

O f t h e advisory

t h e Federal Reserve B o a r d prepared

a n amendment

in the terms which they proposed, a n d submitted i t t o Congress,

a n d i t w a s enacted, w h e r e b y t h e r e w a s a

seventh

exception added t o Section 5202 reading a s follows:

"Liabilities created b y the endorsement o f accepted
bills o f exchange payable abroad actually owned b y the en-

dorsing bank and discounted a t home o r abroad".
There h a s b e s n c o n s i d e r a b l e c r i t i c i s m o f t h e amendment,


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Federal Reserve Bank of St. Louis

in t n a t i t h e s b e e n c o n s i d e r e d

t o b e restrictive,

and

that t h e term "payeble abroad” shovld b e eliminated.
I believe m y s e l f u e t t h e F e d e r a l “ e s e r v e B o a r d w o u l d b e
giad t o r e c o m m e n d a

further a m e n d m e n t

by eliminating those t w o words.
whether

t o that exception

I t was j u s t a question

o r n o t t h e Conference d e s i r e d

t o r e c anmend s u c h

a change.
Governor Calkins. I

move a

recommendation

t o that

effect.
The Chairman.

I s that seconced?

Governor F a n c h e r . I

The Chairman.

second i t .

I s there a n y discussion?

(The motion wes put and unanimously carried).
ir. Harrison. I
the m e c t i n g s

would like t o say that a t one o f

i t was m o v e d a n d c a r r i e d t h a t I

should p r o c u r e

& letter which ir. Gilbert h a d sent t o the Federal neserve
Board

o n the question

o f these defective notes,

we wrote t o h i m i n connection w i t h that letter.
is w o r k i n g

a n d that

M r . Emerson

o n that a n d h a d i n t e n d e d a n d s a i d t h a t h e w o u l d

definitely g e t t o u s a

memorandum

o n t h e subject.

has n o t y e t b e e n a b l e t o p r e s e n t t h e letter,
know q u i t e w h a t a c t i o n t h e G o n f e r e n c e

wants

s o I

H

e

do not

t o take. I


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Federal Reserve Bank of St. Louis

think that perhavs i t might b e postponed until w e get
Mr. Emerson's recommendation, a n d that t h e n i t might b e
circulated.
Tae Chairman.

O u r action i n regard t o these notes, a s

I recall it, was t o express a

willingness

liability f o r t h e i r r e j e c t i o n

u p to a

t o assume t h e

limited a m o u n t ,

but

that i t was s u c h a matter a s y o u had presented i n writing
and t h e secretary o r someone w a s requested t o get such
a letter.
Mre darrison.

N o , ir. Gilbert w a s here, a n d said t h a t

they h a d prepared s u c h a letter, a n d said that h e addressed
it t o Governor H a r d i n g s o m e t i m e a g o , a n d I

was r e q u e s t e d

in conjunction with wr. L o g a n t o prepare a

form o f reply

to Mre Gilbert. I

have been uriable t o get that letter,

Mr. Kmerson hes b e e n working o n the matter, a n d I just
wanted t o report that t o the Conference, t h a t t h e thing i s
not hanging i n the air.

T h e r e i s another metter still

left i n the air, a n d that i s the preparation o f a letter

byMr. Young with reference to the ~5,000.0C*Richmond notes
shipped

t o h i m i n error.

Governor Youngs I

have n o t t h e information a t alle

I will have t o get i t when I

get back t o tinneapolis. I


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Federal Reserve Bank of St. Louis

have nothing b u t a memorandum which was dictated before
I left Minneapolis.
Mr. d a r r i s o n .

T

h

e

n

i t was n o t intended that that

should b e taxen u p again b y t h e Conference. I

just want-

ed t o get i t straight o n the record.
went t o m a k e a n i n q u i r y w h i c h

Governor Norris. I

t o answer t h a n anyprobably y o u are i n a better position
pody e l s e a r o u n d t h e poard,
provement c a n b e m a d e

a n d t h a t i s whether a n y i m -

i n the method o f collecting coupoms

member banks
through Fed3ral Reserve banks s o a s t o afford
enjoy through comfacilities comparable t o what t h e y now
mercial banks.

Toe Chairman.

H a v e y o u exemined t h e collection d e -

partment d f the Heserve B a n k i n New York?
Governor Norris.

No.

Toe Chairman. I

suppose w e have g o t t h e largest

coupon collection department i n ths c o u n t r y
Governor Norris.

Y e s , b u t I understand t h a t t h e

the l s t d a y o f the
practice i s t o present coupons o n
a n d then leave
month a t the bank where t h e y a r e payable,
them t h e r e f o r verification,

c a l l b a c k t h e n e x t day,

the
and then take a draft that i s not payable until


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Federal Reserve Bank of St. Louis

day after, a n d w e find that i t i s from three t o $cven
days before w e actually g e t credit f o r coupons s e n t t o
New York.

The Chairman.

T h a t i s n o t the case where t h e cou-

pons r e a c h u s i n advance,

t o be.

o r i t i s n o t supposed

T h a t i s just the thought i n m y mind.

Governor Norris.

Tae q u e s t i o n c a m e u p t h a t o n e o f o u r S t a t e v a n k ' s m e m b e r s

said that they were n o t getting anything l i k e t n e benef it
they h a d e x p e c t e d

t o g e t f r o m th, F e d e r a l R e s e r v e S y s t e m

because t h e y still h a d t o maintai. their accounts w i t h
correspondent banks f o r collection purpuses, particularly
for the collection o f coupons; t h a t o u r collection o f
coupons w a s m o s t unsatisfactory.

Toe Ghairman.

I

t i s a little b i t like a man “ h o

has h a d t h e r o o f o f h i s h o u s e b l o w n off, a n d v e c o m e
along a n d p u t a

new roof

o n h i s n o u s e and. p e n d i n g t h e

time w h e n w e c a n finish i t with shingles a n d s o forth,
he s a y s h i s r o o f leaks,

a n d that w e have n o t done a

good

job f o r him, a n d i f i t h a d n o t b e e n f o r t h e j o b w e d i d

for h i m h e could n o t have lived i n his house.

I t is a

fact t h a t w h e r e c o u p o n s r e a c h u s e f t e r maturity,

i t is

necessary t o taxe time t o present them, g e t a check o n

052

t h e c l e a r i n g h o u s e f u n d s , a n d i t takes a


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Federal Reserve Bank of St. Louis

to get t h e credit, a n d I
get advice.
maturity,

couple o f d a y s

suppose another d a y f o r y o u t o

I f coupons a r e sent t o u s i n advance o f

t h a t i s a l l obviated.

« g e send t h e m o u t a s

before a n d g e t the check o n the date o f maturity.

dere-

tofore t h e commercial banks bought .these¢ bonds a n d gave
immediate credit f o r them, b u t w e d o not d o that.
Governor Norris.
.

The Unairman.

Governor Norris.

T h e y d o that still.
@ ado not d o i t with checks.
« h a t I was wondering w a s i f w e

notified member banks a n d they sent coupons t o u s three
or five days o r any other period t h a t was reasonable

in

advance o f maturity, t h e y could g e t credit f o r them o n
Gate o f maturity.

The Chairman.

T h e y c a n get credit f o r them o n the

next day, i f w e get clearing house funds,

o r o n the same

day i f w e get keserve B a n k funds.
Mr. odarrison. I

had: t h o u g h t

u p this q u e s t i o n o f

collection o f coupons a n d other maturing items w a s a

matter that would properly come within the jurisdiction
of the committee t h e Conference appointed earlier i n the
session,

a n d t h a t w a s o n e o f t h e subjects t h a t w e h a d


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Federal Reserve Bank of St. Louis

for c o n s i d e r a t i o n

i n o w r district,

pons a r e concerned,

a n d s o far a s cou-

t h e N e w Y o r k District

i s perhaps

the o n e most vitally interested; because t h e majority
of coupons a r e p e r h a p s p a y a b l e there.
the s a m e p r i n c i p l e s a r e a p p l i c a b l e

Nevertheless,

t o bankers! a c c e p t a n c e s

and other maturing items, a n d i f i t i s proper I

would

like t o think that the committee o f which I was appointed
a member h a s ‘urisdiction over thet particular subject.
would b e very glad t o have i t

Governor Norris. I

a
referred t o that committee i f Mv. Harriscn will make
memorandum o f it.
The Chairman.

Y o u would n o t advocate t h a t r e cash

these coupons, w o u l d you, a n y more t h a n a check?
Governor Norrise N o . s h a t I was wondering w a s
whether i f y o u got t h e m inadvance y o u could g e t payment
on the first o f the month.
Tne Chairman.

w e could g e t payment i f v e could g e t

the money, w h i c h i s a credit.
credit.

O n our o w n books w e give

I f v e d o not g e t anything b u t a check o m a

bank which goes through t h e clearing house t h e next
day, w e treat that check j u s t a s w e d o any other check.
Governor N o r r i s .

O

f course, p e o p l e t h a t h a v e


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Federal Reserve Bank of St. Louis

coupons a s s u m e t h a t t h e c o u p o n i s g a i n g t o b e p a i d a n d

will b e available t o them o n the d a y that i t i s due,
of

and when i t i s not for nearly a veek aftervards,
course there i s s good deal o f criticism.
Toe Ghairmane

v e give credit f o r coupons t o all

the issues o f United states bonds.
Governor tiorris.

The Chairman.
mercial benk.
coupons e

Yes.

b u t i t rests entirely “ith t h e com-

I f i t can educate i t s customers t o deposit

sufficient l e n s t h o f t i m e

i n advance

o f maturity,

he gets credit o n the d s y o f maturity o r the d a y following
at the Keserve b a n k o f New Yorw, b u t i f they come i n after
maturity t h e unavoidable delay cannot b e escaped.
Governor Norris.

O

f course, I

assume that t h e

delay i s not as great i f they come i n after maturity
as i f they come i n o n the d a y o f maturity.

J n e bank i n

wen Y o r x will nave a hundred o r more different issues
of bonds o n which t o p a y coupons o n a certain day, b u t
they w i l l h a v e h u n d r e d s

issue coming in, a n d I

o r thousends

o f coupons

o f each

supvose there i s some delay unavoidably

there i f those things a r e rushed i n i n a mass o n the first
day o f the month.


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Federal Reserve Bank of St. Louis

The C h a t r m a n e

W e l l ,

i t i s guite t r u e t h a t there

colmay b e a few bonds deposited w i t h u s that cannot b e
lected o n the same d a y they a r e deposited. I

think a s a

o r it is
general rule w e get everything o u t the same day,
supposed t o b e gotten o u t that daye
Wir. Xenzele T h a t i s what w e a i m t o do, unless t h e y
come i n guite l a t e .

Governor Norris.
the G u a r a n t y T r u s t

I f you take a lot o f coupons t o

o n the first o f the month--

i e get a check the same

Mr. <enzel (interposing).
day.
Governor Norris.
verification

b o they give y o u a check subject t o

o f t h e coupons?

Mr. Senzele O h , no-

I f i t i s a large lot, t h e

teller,
coupons a r e left a t the coupon window w i t h t h e
a n d gets
and later o n that same d a y t h e messenger calls
a checix f o r them, a f t e r t h e y h a v e h a d a n o p p o r t u n i t y

to

check t h e m u p a n d e x a m i n e them.

Governor Norris.
Mr. tenzel.

T h e y give y o u a check t h e same day?

Yes.

Tae Chairmen.

T h e r e i s o n e exception t o the statemant

made,which M r . H a r r i s o n c a l l s

m y attention t o e

I t has b e e n


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Federal Reserve Bank of St. Louis

our p r a c t i c e

i n t h e c a s e o f coupons t h a t c o m e i n c a s h

letters t o give credit t h e d a y received, b u t w e are n o t
t e a r e going t o stop it. T h e r e

going t o kesp i t up.

is n o r e a s o n r h y w e s h o u l d c a s h a

coupon a n y more t h a n

cashing te: c h e c k a n d giving immediate credit.
Governor Noa-ris.

N o , b u t there i s a reason w h y

the i n s t i t u t i o n t h a t i s u n d e r t a x i n g

t o p a y the coupon

should actually p a y i t o n the d a y that i t i s due.
Toe Chairman.

A n d not give a check?

Governor Norris.

The Chairman.

Yes.

T h a t raises the wnole field o f dis-

cussion which was touched u p o n the other day.
rison's i d e a - ~ a n d I
endeavor

M r . dar-

think i t i s t h e c o r r e c t o n e - ~ i s

t o get payment f o r these coupons

to

a s far a s

possible i n Federal keserve funds, a n d i f w e are able
at any time t o develop o u r collection system s o that w e
get r e t u r n s

o n checks s e n t f o r c o l l e c t i o n

Keserve funds universally,

in practice.

i n Federal

w e have made a clear advance

i e have not yet reached the point where

we c a n d o that.

Mre darrison. I

have talked with a

number o f people

in the New York Bank, a n d while some o f them were a t first


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Federal Reserve Bank of St. Louis

a

opposed, t h e y e r e r
otrong,

uow, Goverrior
r
t f htheeoopinion

t h a t w e c a m perhaps p r o c u r e payment

o n collection

items d u e a t banks i n New York i n Federal Reserve funds,
and v e c a n i n s i s t u p o n i t .

w h e t h e r

o r n o t v e can,

i n

o r other t h a n m e m b e r s »

the c a s e o f p r i v a t e c o r p o r a t i o n s

is a different question a n d o n e that will have t o b e taken
up separately.
Governor Calkins.

w

e h a v e f o u r minutes,

and I

find

that there i s one topic f o r discussion that has n o t been
completed f r o m o u r point o f view-

I t was o n e o f o u r

topics, a n d I would l i k e t o bring i t up.
conference o f Governors

I t i s that a t a

o n October 14, 1920, i t was rec-

ommended t h a t n o Federal Keserve B a n k should accept telegraphic t r a n s f e r s f o r t r a n s f e r o v e r t h e private w i r e s

except f r o m member a n d non-member clearing banks, which
recommendation w a s s u b s e q u e n t l y a p p r o v e d

al Keserve Board.

b y t h e Feder-

T h a t practice i s not being adhered

to, a n d I think i t should be-

W

e have g o t t o draw t h e

line somewhere o r draw i t nowhere a n d take telegraphic
transfers f r o n everybody, m e m b e r , n o n - m e m b e r , n o n - b a n k i n g
concerns, i n d i v i d u a l s ,

The Ghairman.

a n d postoff ices.

s H o w d o y o u propose t o draw i t ?


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Federal Reserve Bank of St. Louis

Governor Calkins. -

N o t t o uccept telegrapiic t r a n s -

from anyone except member bankse
O f course, anyone c a n procurs con-~

The Chairman.

from a member bank-Yes, I

Governor Calkins.

recognize that.

T h e n y o u will confine t h e action o f

The Chairman.

specific r e q u e s t a d d r e s s e d

Bank t o a

institution. I

t o ge

do not s e e w h y that

is not a l l right.
Governor C a l k i n s .

Toe Chairman. I

* h a t

i s that?

do not see r h y that i s not all right,

I said.
s e have discussed that very thoroughly

Mr. Kenzel.

and that i s what w e heve approved a s the best practice.
Governor Calkins.

N o t t e accept except f r o m a

member b a n k ?

Mr. tenzel.

Yese

Governor Calkins.

w

e have quite frequently received

from t h e F e d e r a l R e s e r v e B a n k o f N e w Y o r k t e l e g r a m s s i m i l a r

to the following, which was received March 23, 1921.
The Chairman.

H e a d ite

Governor Calkins (reading):

‘ N u m b e r four.

‘ h e


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Federal Reserve Bank of St. Louis

your account 300,000.00, deposited b y J - P.
& Gompany,

N e w York, f o r a c c o u n t

3

o f Bank o f Cal-

ifornia, S a n Francisco, f o r the credit o f Bank o f Gali-

fornia o f Portland, Jregon".
That i s selected simply a s a n illustration.
L e t u s s t e p o n that, M r . Kenzel.

Toe Chairman.

Mr. sienzel.

Governor C a l i i n s e
Tne G h a i r m a n -

T h e incicent

i s closede

% e a r e n o t s u p p o s e d t o d o it.

Governor Calkins.
n

will s t o p that.

Y e s sire I

w e had guite a n active dis-

t n ca t
a t o the ilast s Conference
s
u

eren o u t o f a n a c t i o n

oO

of our own, which brought o u t very strong t h e fact that
we s h o u l d n o t a c c e p t a

telegraphic c o m m u n i c a t i o n e x c e p t f r o m

a member bank.
Governor ticDougsl. I

remember t h a t very well; member

and non-member clesring banks.
Governor C a l k i n s e

Y e S e

ang
<<
otGY

e

4/15/21.
fls.

(At this point Governor Harding, Mr. Hamlin anu

DizZe
Se

D

r

. Miller entered the Conference room, Governor Harding

3.00


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Federal Reserve Bank of St. Louis

taking the Chair.)
T h e r é i s one matter not o n

Governor Harding.

the list o f topics which relates t o t h e routine operation o f the banks which I
Quickly.

think c a n b e disposed o f very

T h e Board would like t o have some knowledge

of the routine

a t p a ‘ f e r e d f o r discount goes

through before i

t h e credit o f

:

the bank, a n d the letter inclosing t h e notes t o b e discounted.

W

e Hould like t o know “hat direction i t

takes a n d rhat the functions o f the discount committee
or executive conmittee o r executive committee,

o r the

senior officers o f the b a n k are with respect t o that

paper,
I will ask Governor Morss t o tell us what the
process i s i n Boston.
Governor Morss.

s

i

n with o u r Executive Committee.

We prepare a statement for the Executive Committee,
giving t h e total amount o f the transactions w i t h each

bank since the last meeting,

T h e meetings are held every


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Federal Reserve Bank of St. Louis

980
*

week.

A l s o the total amount o f borrowings o f ¢ach

bank o n the same sheet,

s o that t h e uxecutive Gommittec

follow t h e conditions o f the banks a n d the amount that
they are borrowing.

T h a t same sheet i s put before t h e

D i r e c t o s when t h e y come i n session.
notes a r e n o t b r o u g h t

The

t o t h e attention o f t h e Lxecutive

Committee unless t h e y see f i t t o a s k f o r them f o r some
reason o r other, a n d t h e n w e have t h e m o n a side
if they want t o see them.

“hen the note i s sent i n for rediscaint i t goes
to the “iscount Department a n d ths Viscount Department
has a

List,

i n the first place

i t is a

and i f i t i s n e c e s s a r y a n y n e w l o a n s
bank s h o u l d b e r e f e r r e d t o a

There i s also a
question

abmt

of t h e b a n k ,

list o f banks

o f that particular

s@nior

list o f notes,
i t that

i s referred

to.a senior officer

b u t i f there i s n o question o

senior o f f i c e r d e c i d e s f a v o r a b l y ,

i f the

t h e transaction goes

right through t h a t daye

The next day, however, there i s a committee c a n

posea of the Assistimt Cashier i n charge o f the Discount


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Federal Reserve Bank of St. Louis

Department, a n d credit men, a n d the bank credit men, ‘ho
h
e d a y before a m
take every note that h a s been a c c e p t e d t

examine i t very closely and examine statements,
there i s anything i n these notes t h a t they think requires

attention they bring them to the attention o f the senior
officers.

T h e s e lists which are made u p for t h e i m -

mediate u s e “ o f the Discount Department, b o t h a s t o t h e
panks a n d banking concerns, a r e made u p from this investigation t h e next day, w h i c h i s done v e r y carefully a n d
very coolky, without a n y hurry o r anything o f that sort.
By t h t method, w i t h the. volume which w e have i n
our bank, w e think w e keep oubee @

close c m t r o l o f a n y

credit that i s issued,
The Chairman.

T h e Board fecls t h a t t w o things a r e

important; o n e i s that n o note should b e discounted rhich

ought not t o b e taken, a n d the seonnd thing i s that a
note which should b e taken ought n o t t o b e thrown out,
And either y o u a s Governor,

o r some d e p u t y governor

of

your bank, actually sees all these notes, where there
is a n y question that c a n b e reisesd sither way?

Governor Lorss, Y e s , either way, either for
gibllityo
r for a n y other purpose t h e bank should


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Federal Reserve Bank of St. Louis

them.

The Chairman.

T h a t includes the note that those

Lower down think ought t o b e rejected a s well a s those
that t h e y think ought t o be accepted?

Governor Morss. Y e s . Those lower down, however,
have quite complete instructions a s t o what t h e y should
present t o t h e s e n i c r o f f i c e r s ;

b u t t h e real investi-

gation i s made the next d a y b y this committee, o f h i c h
the head o f theiscount Department i s one, m d a credit
man a n d a bank credit m a n a r e o n the committee, w h o s e
whole business i s t o g o about collecting information.
The Chairman.
revocation

of a

Y o u have n o difficulty a s t o the

credit t h e n e x t d a y ?

Governor Morss.

W e l l , w e never nave.

to have worked very well.
Governor Harding.

H a v e y o u a list showing t h e

borrowings o f all your member banks s o a n y one o f your
dsputies c a n keep

i n touch with t h a t list?

Governor Morss, Y e s ,
is m a d e u p o n c e a

week a n d oréesented t o t h e E x e c u t i v e

Committse,

Gowérnor Harding

T h a t shows their basic line, I


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Federal Reserve Bank of St. Louis

presume, a n d shows what their borrowings were this time
a year a g o o r some time i n the past,

i n order t o compare

their b o r r o r i n g s t h e n a n d now?

W o , i t only shows t h e total amount

Governor Morss.

of t h e t r a n s a c t i o n s f o r t h e p r e v i o u s w e e k a n d t h e t o t a l

amount o f their l o a n this week, a n d a week ago, t o shew

what changes there have been.

O n the other hand, this

list i s read b y mé in detail for every bank, the total
transactions a n d s o forth.

T h a t m a y b e a rather old-

fashioned way, b u t i t i s the c n l y w a y w e have been
able t o make a committee o r the Directors listen a n d
pay a t t e n t i o n t o t h e l o a n s .

of paper, a

Y o u can. h a n d t h e m s h e e t s

list, a n d they will turn t h e m over like

tmt (indicating). ,

They may induire about one o r two,

but it takes me half a n hour o r more t o read the list,
GoveSnorrHanding.
an active i n t e r e s t

D o you find your Directors take

i n it?

Governor Morss.

T h e Executive Committee do, b u t

the Virectors, there a r e s o many other things,
say that t h e y do.
Governor Harding. G o v e r n o r Mcbougal, y o u have
already e x p l a i n e d y o u r m e t h o d a n d s o v e w i l l n o t a s k y o u


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Federal Reserve Bank of St. Louis

to repeat, unless y o u care to.
Governor W
Governor j i
once a
meet.

i s , w h a t i s your method?
s x e c u t i v e Gommittes meets

week o n alternate weeks when the Board J d
N o t t h e notes themselves, b u t the schedules a r e

gone over.

T h e notes With us come i n mostly i n the

latter p a r t o f the day.

T h o s e t h a t come i n early enough

are first gone over i n the Viscount Department for eligibility, a n d I gather from the discussion that occurred
here this morning that w e drav a

rather more distinct

ine betveen eligibility & n d what w e call acceptability
than some other banks do.

s o the exanination a s t o

6ligibility i s really a n examination a s t o whether t h e y

comply With the terms o f the act and the Kegulations o f
the Board rather t h a n a Question o f credit.
&ta

quarter p a s t three o r half past three a

sort

of Discount Committee, consisting o f the Governor, t h e

Deputy Governor, and the Federal Reserve agent meet, and
we g o o v e r t h e s c h e d u l e s u b m i t t e d
for r e d i s c o u n t s t h a t d a y .

w

b y e a c h bank applying

e e d over G a c h i t e m o n each

one o f those schedules, a n a w e almost never have occasion


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Federal Reserve Bank of St. Louis

to reject a n y paper,

Je a r e rather fortunate i n having a

district where

the bankers a r e experienced a n d conservative, a n d they
offer u s their best paper,

s o that i t i s realiy o n l y i n

the case o f the country banks, w h e r e t h e amounts a r e

small, that w e have any occasion t o consider tle credit
of the md&ker o f the paper.

vie have sheets, files, i n which w e keep the amount
of the borromings o f each bank, e a c h day, t h a t i s o f t h e
city banks; a n d w e have another l i s t o n Yhich w e keep
the names o f the country banks, t h a t w e feel w e want t o

watch for one reason o r another, a n d we watch carefully
each d a y whether a

bank is-~-what t h e total o f its loans

is and whether i t is going u p or down, m d canpare i t
with i t s previous w e e k o r month,
months.

o r i t s record for s i x

P a p e r that there h a s not beén time t o éxamine

for eligibility i n the “Viscount Department before w e
hold our meeting i s passed subject t o the examination

later, that afternoon o r the following morning, o f the
Discount Department, a s t o eligibility.
Governor Harding, T h e s e offerings a l l come under
the scrutiny o f some senior officer o f the bank?


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Federal Reserve Bank of St. Louis

Governor Norris, T h r e e ; - - - t h e Governor, D e p u t y
Governor a n d Reserve agent.

Governor Harding. Governor Young, what i s your
practice?

Governor Young.

T h e s e rediscounts usually come

in e a r l y i n t h e m o r n i n g f r o m t h e c o u n t r y banks.

They

go to the Discount Department with our notes, ani w e
require a

statement w i t h e a c h u n s e c u r e d note.

we have a

great m a n y chattel mortgages

O f course

i n our district.

Vie have s o m e people i n the Discount Department t h a t
analyze those chattel mortgages.

T h a t i s a very slor

job, t o p i k o u t the number o f horses a n d number o f
cattle a n d put that o n there i n a large blue pencil.
They also analyze those notes f o r so-called technicalities.

I f there i s a material alteration i n the note

or a material alteration i n the d a t e t h e y pick thet

out, a n d also watch the maturity.
the Discount Departme

P

i I

I f those people i n
t h i n g they put a

circule around i t and mark i t “returned,”

The actual credit part o f it, assuming that the

notes are technically eligible, i s up to the Deputy


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Federal Reserve Bank of St. Louis

987
Governor, a n d one assistant cashier, except o n some banks,
where w e have placed a limit, banks t h a t are n o t i n the
best o f condition.

B e f o r e t h a t paper goes through thet

goes t o our Executive Committee, which meets every noon

from trelve-thirty o'clock on, lasting about an hour, and
they actually initial each application for rediscount,
Our a p p l i c a t i o n f o r r e d i s c o u n t

It requires a

i s rather elaborate.

detailed balance statement o f the b a n k

at the close o f business t h e d a y they offered the paper,
the d a y t h e y s e n t t h e paper.

v i é a l s o h a v e a n clabpor-

ate record which shows what that bank h a s done f o r the
past seven years, whether their loans have increased o r
decreased, particularly over t h e last s i x months,and
Similar i n f o r m a t i o n

o n their d e p o s i t s ,

The a p p l i c a t i o n a l s o s t a t e s w h e t h e r

i t i s a n in-

crease i n the l o a n o r whether t h e y have decreased i t
materially i n the last thirty o r sixty o r ninety days,
and i t pives the information o f the basic line.

I t

requires the bank to report what they owe to other
institutions, either directly o r indirectly.
It requires t h e m t o report paper t h a t t h e y have
placed with the indorsement o f their Directors o r offi-


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Federal Reserve Bank of St. Louis

988

cers f o r the benefit o f the institution, a n d each individual a p p l i c a t i o n

i s initialled

b y a t least t w o members

of the xecutive Committes,
The Executive Committee o f the Bank i s composed o f

the agent and Governor a n d one other “irector,
Gowernor Harding. G o v e r n o r Fancher?
Governor F a n c h e r .

W h e n paper i s received

bank i t goes t o t h e Discount Department.

i n our

T h e items a r e

first e x a m i n e d f o r a n y i r r e g u l a r i t y a s t o i n d o r s e m e n t

and date a n d other irregularities,
application.

T h e n i t passes

a n d s o noted o n the

o n t o t h e Credit Depart-

ment, a n d the statements a r e examined a n d there i s a
transcript m a d e f r o m t h e s t a t e m e n t s t h e m s e l v e s

ona

card drawn from the files, a n d also the bank's card show-~
ing i t s b o r r o w i n g s

i n we¢ékly p e r i o d s o v e r a

term o f

months, indicating whether i t had borrowed a s much a
year a g o o r three months ago.
Also a t t a c h e d

t o the application

i s t h e statement

as t o the bank's present borrowings, a s t o unsecured
security a n d a s t o i t s basic line,
Then with that information i t i s taken before a

committee, consisting of the Deputy Governor, who has


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Federal Reserve Bank of St. Louis

989

charge o f the Department, t h e Cashier, the assistant Federal Reserve Agent, a n d they g o over the applications t o
the b a n k a n d i n i t i a l t h e a p p l i c a t i o n s .
Wie require

o n the application a

statement f r o m t h e

bank a s t o the borrowings w h i c h t h e y have with other banks,
as t o the direct borrowings a n d discounts, a n d then all
the applications o f the banks which w e feel are somewhat
over-extended,
ation,

t o which w e are siving special consider-—

a r e p u t a s i d e a n d t h o s e -applications a r e r e v i e w e d

by the Committee, but are not passed, and come before
the Governor f o r determination.
Also i f the question arises a s t o the eligibility
of a n y notes that comes t o me, i
statements,

might .add that o n t h e

i f w e find i n the credit file that w e have

not g o t a statement o f the b a n k that w e should have that
is s o noted o n the application a n d then w e determine
whether w e shall d i

n

t t h e oaper subject t o receiving

a statement f r o m the b a
paper u n t i l t h e s t a t e m e n t
Our E x e c u t i v e

o r whether w e shall h o l d the
i s furnished,

committee consists

o f five members,

the members being t h e Chairman, Governor a n d three
directors.

T w o

o f t h e n u m b e r Yfrotate f r o m m i r B o a r d ,


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Federal Reserve Bank of St. Louis

990
a resident Class C

Director being a permanent member

of the committee, a n d under t h e by-laws o f our Executive
Committee a

committee

o f three i s authorized

t o pass

on

paper,

This i s reviewed a t the full meeting o f the Executive Committee, w h i c h w e hold tuice a month, a n d this committee w h i c h p a s s e s

o n paper m e e t &

i n t h e morning, p a s s -

es o n t h e o f f e r i n g s c o m i n g i n b y mail,
in t h e a f t e r n o o n

t o pass

s n d meets a g a i n

o n offerings w h i c h c a e

i n from

our c i t y b a n k borrowers.

The following d a y this sub-committee o f the Executive Committee meets a n d the transcript o f the previous

dayts work i s gone over and initialled b y the members o f
the committee,

Governor Harding. G o v e r n o r Biggs?
Governor Biggs.

O u r paper i s received b y the

Discount Committee, w h o make a record o f i t and turn
it over t o the Credit vepartnent.,

T h e y g o through their

files a n d statements a n d i f i t i s approved i t i s checked
as a p p r o v e d ,

filed m s t

B y t h e way; t h e s e i t e m s b e f o r e

n e c e s s a r i l ye
b approved

t h e y are

b y the entire Credit

Lepartment, which consists o f the Assistant Cashier,


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Federal Reserve Bank of St. Louis

the Governor a n d the
aig o g

A n y n e w paper,

no s t a t e m e n t - - - 1 e

any

require

it is run that day, a n d is attached t o the offerac

ing, $

every afternoon,
is p a s s e d

r e

b

y a credit committee, w h i c h meets

a n d a l l paper received auring t h e d a y

o n that d a y b y the @redit Eommituee »

We-only

have a n Executive Committee meeting

Mondays, .ednesdays s n d Fridays, a n d they i n turn approve t h e action o f the Credit Commivtee.

I n the event

that there i s anything Questionable t a t t h e Credit Committee a r e not jJecided o n o r not i n accord on, i t i s held
over f o r t h e Executive Committee.
All offerings, however, must n e c e s s a r i l y b e approved
at least three officers o f the bank.
Governor Harding. G o v e r n o r Calkins?
Governor Galkins,

P a p e r received for rediscount

secured h a s t h e s e c u r i t y r e m o v e d a n d a c c o u n t e d f o r

by receipt i n the Security Department,
held e l s e w h e r e
Department,

i n t h e bank.

I

n o securities being

t t h e n goes t o the Credit

w h i c h examines i n t o i t f o r technical irregu-

larities, attaches statements digested a n d a blank o n


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Federal Reserve Bank of St. Louis

which comments a r e t o be made.

T h a t paper contained

in t h e a p p l i c a t i o n f o r r e d i s c o u n t v h i c h c o n t a i n s t h e

usual information regarding t h e condition o f the b a n k
and its borrowings i s passed o n b y a

makes camments.

I t then goes t o the Governor o r a rep-

resentative o f the Governor, t h a t i s a deputy governor
or assistant deputy governor, a n d t o a representative
of the Federal Reserve agent, cither t h e Assistant agent
or a

o f his.

representative

The application w h e n signed b y both o f them i s
passed.

Our Executive Committee consists o f five members,
the Governor being Chairman, t h e Federal Reserve Agent,
d

i
three directors, n I t mects once a a aweek,

s furnished

with a list o f all the banks discounting i n the district,
Showing their condition a s of that week and the previous w e s k ,

and a

special l i s t o f a l l banks

i n the

district discounting i n excess o f 100 per cent o f their
capital a n d surplus,
basic l i n e , r e s e r v e

t

h

d e sits,

e sapital

n d surplus,

a n d percentage

o f capital

and s u r p l u s u n d e r t h e i r d i s c o u n t ,

That list istreviewed b y the Executive Committee a n d


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Federal Reserve Bank of St. Louis

passed b y them. A

Similar l i s t i s furnished t o the

Board o f Directors a t its meeting and is passed b y then
o t h e recommendation o f t h e ®xecutive Committee,

Items i n doubt, open t o question, o r especially

banks, are referred to the Governor and the Federal Reserve agent.
po Tax, n o t w i t h s t a n d i n g

m y d i s c u s s i o n t h i s morning,

the Federal Peserve agent a n d Governor have practically
agreed that n o paper ought t o b e passed that i s n o t
acceptable

t o b o t h o f them.

I think that i s all.
Me, Hamlin.

W h e n a note i s rejected w h o i s the

first officer o r board that has t h e power t o throw o u t
paper?

Governor Calkins, w h e n a note i s rejected for
obvious t e c h n i c a l d e f e c t a - -

Mr. Hambin( interposing) I

do not mean that---

Governor Calkins. (continuing)
jected b y a
thing e x c e p t

junior o f f i c e r ,

I t m a y b e re-

w h e n r e j e c t e d f o r any-~

a n obvious technical d e f e c t

i t i s re-

jected b y a deputy povernor o r a n assistant deputy

FOVEINOY «


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Federal Reserve Bank of St. Louis

Mr. Hamlin. T h e n where does that note gok doses
it g o t o the Executive Committee,
rejection

d o they knor o f the

o f paper?

Governor C a l k i n s .

Dr. Miller.

N o t i n detail.

D o t h e senicr officers o f the b a n k

y¥about paper t h a t

i s rejected?

Governor Calkins. H i t h e r the Governor o r Deputy
Governor o r assistant D e p u t y o n the o n e side a n d t h e
Agent o r representative o f the Agent o n the other,
Dr, M i l l e r ,

B u t i t may not come t o t h e attention

of either the Chairman o f the Board o r the Governor o f
the B a n k t h a t t h a t o a p e r h a s b e e n r e j e c t e d ?

Governor Galkins,

N o , unless i t i s a case o f

real importance, which i s discussed; there :is w o o
large a

number o f small items t o make t h a t possible,

or p r o f i t a b l e

i f i t were possible,

L a r g e items,

items w h i c h a f f o r d o p r o r t u n i t y f o r discussion,

are

brought t o the attention o f the oxecutive Committee,
Governér-Herfing. Have you any reason t o believe
that there i s a n y rejection o f paper vhich y o u would
have p a s s e d i f i t h a d c o m e u p t o y o u ?

Governor Calkins,

T h a t i s a rather interesting


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Federal Reserve Bank of St. Louis

question, o v i n g t o t h e f a c t t h e t m a c h t o m y surprise

I discoverea t h e other day, I

think, three items rere

rejected which would have b e e n accepted i f they h a d
come t o me, a n d t h e y v e r e a c c e p t e d u p o n Complaint.
that i s e a s i l y e x p l a i n e d ,
that a

I

B u t

t w a s d u e t o the f a c t

c o m p a r a t i v e l y n e w a s s i s t a n t d e p u t y governor,

who i s a n expert c r e d i t m a n , w a s

i n Charge a n d h e

had ideas that rere a littic t o o stiff o n the subject
of eredit a n d h e rejected thes3 items,

I t should n o t

have b e e n done, b u t that w a s o n e o f those unavoidable
accidents,
Governor V a n zendt,.

w h e n a n offering f o r redis-

count i s received a t out bank i t goes inne diately t o

the Greidt Bepartment.

T h a t Department i s i n charge

of a n assistant sashier,.

T h e r e e a c h item i s worked

up from both a creait point o f view, a n d technical
regularity point o f view, a n d eligibility voint o f
view,

W h e n i t i s presented t o o u r committee, w h i c h

meets daily, consisting o f this assistant calshier i n
charge o f the Credit Department, t h e Federal Reserve
agent a n d t h e Governor, a

completei detailed l i s t o f


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Federal Reserve Bank of St. Louis

996

every note i n the offering i s furnished, showing t h e
amount o f that maker's borrowings a n d o f all details
in connection with that item.

T h e notes that have

peen c r i t i c i z e d f o r a n y r e a s o n w h a t e v e r

b y the C r e d i t

Department a r e i n a separate bundle f r o m the remainder
of the netes a n d 6ach o f these items i s gone o v e r b y

the assistant Cashier, the Governor and the Federal
Reserve a g e n t a n d t h o s e i r r e g u l a r i t i e s

o r criticisms

discussed.
ie also have prepared a n d presented a t that time

what w e call a "need sheet" which shows the reserve
balance, t h e required balance o f that bank, t h e maturing
items, t h e collection letters t h a t have b e e n sent t o
that bank that have n o t b e e n paid for.

I n order that

we w a y see that there i s apparent n e s d for the 2 ccommodation i n s o far a s the b a n k i s concerned this sheet
is g o t t e n u p i n t h e w a y I

have d e s c r i b e d ,

T h e basic

line o f that bank i s Shown, i t s maximum borrowings a n d
its recent maximum, a n d whether i t i s eoing down o r going
up i n . i t e 1 i n e ,

after going over the entire matter, a n d looking
over t h e list o : a l l the notes included i n the offering--


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Federal Reserve Bank of St. Louis

re d o n o t l o c k o v e r t h e n o t e s t h e m s e l v e s t h a t heave b e e n
accepted a r o a s s e

e e e

D e p a r t m e n t ,

except oc-

casionally a larger i t e m t o which o u r attention m a y b e
Look a t a

£

a l l o f then

then s e e p h a t r a t e o f i n t e r e s t t h e y b e a r a n d h o r
are s e c u r e d a n d t h e a m o u n t s ,

W

o note i s ever returned

thet has not been inspected b y those officers.
Then t h i s

officers mentioned

m d t h e n that, w i t h t h e notes t h t

have b e e n accepted, g o e s t o t h e D i s c o u n t D e par tment
for t h e n o t e

t o b e discountéd.

Governor Seay.

A l l paper offered t o the Kichmond

Bank i s listed upon application sheets, " h i c h gives a

full statement o f the liabilities o f the offering bank,
a statement

o f commercial p a p e r u n d e r

rediscount,h
t
i
w

the Federal Reserve Bank, paper secured b y Government

obligations, s n d also a statement o f the bank's liability t o outside banking institutions.
That paper goes t o t h e Discount Department, t h e
Credit Department acting i n c o n j u n c t i o n h
t
i
w the Discount
Department.

E x a m i n a t i o n s a r e made f o r technical ir-

r e g u l a r i t yd
n
a slips a r e a t t a c h e d

t o a l l defective n i e c e s


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Federal Reserve Bank of St. Louis

998

of paper.

T h e paper t h e n requiring credit statenents

to determine eligibility, s u c h Statements a r e gotten
out,and statements a r e also made showing t h e borrowing

position o f the bank.
Those credit statements a n d those statements shoring the borrowing position o f the bank are t h e n carried
before a

committee consisting o f the Deputy Govermor

and Assistant Federal Reserve agent, t h e Cashier a n d
Assistant Cashier,

U s u a l l y about four officers, b u t

sometimes m o r é p a s s u p o n t h a t paper.

That committee determines both the eligibility
and t h e a c c e p t a b i l i t y o f t h e p a p e r .

I

n doubtiul cases

they a r e a l w a y s r e f e r r e d e i t h e r t o t h e G o v e r n o r

o r to

the tederal Reserve agent,
I d o not remember a

case i n which a n y paper h a s

ever b e e n r e t u r n e d a s i n e l i g i b i e w h i c h a f t e r w a r d s

haa

to come before t h e Governor o r Federal Reserve agent.

Governor Strong. G o v e r o r Harding, i t may be
that conditions i n New york a r e a Little different f r o m
these i n o t h e r d i s t r i c t s a n d t h a t i t h a s n e c e s s i t a t e d

@ Little differsnt procedure,

The large banks i n New York City borrow from us


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Federal Reserve Bank of St. Louis

999

make good reserve deficiencies after t h e day's business
concluded a n d o n t h a t a c c o u n t w e w a k e i t a p r a c t i c e

far as oossible t o the amount
the l o a n o r discount t o the b a n k a n d i f there a r e i r regularities discovered i n the paper, a s some times happens,
such irregularities a r e corrected after t h e credit i s
given.
But t h e p r o c e t u r e i n t h e b a n k i s t o r e q u i r e e v e r yJ
member b a n k t o submit a

2

written application accompanying

the p a p e r s e n t f o r jJiscount a n d t h a t a p p l i é a t i o n g i v e s

a variety o f information.

B u t t h e important information

4s t o classify t h e p a p e r a s t o whether i t i s purchased
paper o r customers! p a p e r o r i s secured
bonds

o r other securities,

also s h o w s t h e a m o u n t

b y i Government

A n d the application form

o f borroving o t h e r t h a n t h e t

from the Federal Reserve Bank.
ie h a v e a

form o f that application rhich g o e s t o

the Credit Department and one which goes t o the Discount Department and i s examined, about a s has been
described b y tre others here,
These applications g o before a

committee o n eligib-.


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Federal Reserve Bank of St. Louis

ility, w h i c h consists o f Mr. Harrison, o n e o f the deputy
governors c f the Bank; t h e h e a d o f the Credit Departnent,

. ibrris, a n d the head o f the Discount Department,
Mr. Chapin.

S i t t i n g w i t h that committee a r e Mr. Kenzel,

one o f the deputy governors, a n d Mir, Hart, t h e b a n k counsel’

These applicatiiona, w h e n t h e y h a v e p a s s e d t h r o u g h
tris c o m m i t t e e ,

a r e submitted

t o the Senior Beputy

Governor o f the Bank, Mr. Case, a s h e i s generally

in charge o f that department o f the Bank's business,
and everything important i n relation t o applications
is brought t o h i s attention.
Qur Executive Committee meets every d a y a t tro-

thirty o'clock, that hour being the most convenient
for the mémber banks, becausé i f a n important a c t i o n
is r e q u i r e d

b y the committee

o n t h e applications

it

is possible t o have i t just before t h e close ¢ € business,
The Executive Committee consists o f three permanent members---the Chairman o f the Board, t h e Class
& Director, w h o i s located i n New York, representing


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Federal Reserve Bank of St. Louis

1001

the large banks o f N e w York City, a n d t h e Governor's

Bank, a n d the other members o f the Committee rotate.
They are generally appointed once a month, b y this
arrangement.

E v e r y day at tvo-thirty o'clock there

is l a i d before t h e R x e c u t i v e C o m m i t t e e t h e a p p l i c a t i o n s

themselves, with the analysis I have referred to, and
a statement o f all logns made t o each bank that day,
which statement analyzes t h e condition o f each bank a s
a borrower.

indicates, f o r instance, t h e type o f borrowing,
whether

bonds;

i t i s u p o n secured discount p a p e r o r Government

i t indicates t h e total amount borrowed from t h e

Federal Reserve B a n k a n d the total amount borrowed ¢lse-

where,

m d i t indicates a t the same time the relation

of borrowing t o the basic line, whether i t is i n excess
of the basic line o r not.

At the same time those applications are cmsidered

there i s laid before the Executive Yommittee
which b h o w s

t h e amount

o f the debit

o r credit balance

ofthat member bank at the clearing house, and alongside
of that a statement o f the change i n the amount o f that


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Federal Reserve Bank of St. Louis

bank's loans upon the stock Exchange,
By assembling these figures r e g e t a little
picture o f the condition o f each large N e w York
City borroving bank, a n d whether t h e borro'ving
indicates t h a t i t i s necessitates b y a Sebit balance a t the clearing house o r *#hether i t i s increasing i t s Stock Exchange l o a n account,
AS a matter o f fact i n practice i t i s duite
impossible f o r m e p e r s o n a l l y t o p a s s u p o n t h e d e -

tail o f these applipations a n d [I do not atten
; but they are passed upon b y men infinitely
more c o m p e t e n t

t o d o s o than l a m . T h e y are passed

upon b y the Credit a n d Discount Departments, u n d e r
the supervision o f the senior officers o f the bank.
T usually confer w i t h Mr. Case u p o n
ful c a s e s o f e l i g i b i l i t y

of

as wholly competent t o pass
puted cases,

i f they are disputed, :and I

general i t may b e saia that w e have occasion t o reject a

very small amount

eligibility.
son?

o f the paper because

o f in-

I s not that about correct, M r . Harri-


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Federal Reserve Bank of St. Louis

Mr. Harrison.

T h a t i s Quite correct.

Cur

culty, i f any, n o w i s the l o w ratios,
Governor Strong.
examination

Y e s ; b u t the real technical

o f the paper a s t o ¢ligibility passes

through the hands o f a committee, 1
stated, w h i c h o f cousse bases i t s judgment u p o
very carefully compiled figures a s t o the c o m e r cial paper that comes t o us,

w

e have statemen

of a l l borrorers a n d with the usual information t h a t
originates i n the bank.
Governor Harding.
to y o u r c o u n t r y b a n k s t o o ?

Governor Strong. Y e s , quite the same
we d o this with the caintry banks,
place t h e r e a r e a

I n the

great m a n y c o u n t r y b a n k s t h a t

borrow f r o m u s that have excess collateral v i t h us,
éither

i n connection w i t h Government deposits

otherwise, t h a t have a

or

good margin o f security, a n d

if something i s wrong about vaper that caies i n from
these country banks w e d o not d e n y them the c r e d i t
they w a n t b u t w e s e n d i t b a c k t o t h e m a n d l e t t h e m


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Federal Reserve Bank of St. Louis

substitute s o m e t h i n g

e l s e , r
o v e a s k them t o substi-

tute something ¢isé a n d hold the note until w e reéce6ive the n e w paper,
Governor H a r d i n g . I

a m v e r y m u c h o b l i g e d t o you.

Now, the Comptroller o f the Currency wanted to
bring u p his matter again.

(The Comptroller o f the Currency, w h o had previously entered, t o o k a seat a t the conference table.)

Governor Harding.

t e discussed this matter

n
a here i s the w e y the l a w stands,
with h i m y e s t e r d a y d

HiscComptroller o f the Currency i s obliged, under the
provisions o f Section 5240, t o make t v o examinations
a year a t least.
member banks,
Shall b e made,

H e levies a n assessment u p o n t h e

T h e l a w dées n o t provide j u s t h o w that
H e c a n levy i t o n the basis o f capital

and surplus, o r he can levy i t o n the basis o f gross
assets, o r he can take a double basis i f he wants to,
make such assessments a s are necessary t o get the
money.
Under t h e l a w t h e F e d e r a l R e s e r v e B a n k m a y e x -

amine the member banks also, b u t that i s not mandatory.


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Federal Reserve Bank of St. Louis

In some cases’ the Federal Reserve B a n k has t a d “to g o
ahead a n d m a k e e x a m i n a t i o n
perhaps

o f t h e member banks because

o f the unsatisfactory reports

bank examiners.

o f t h e national

g e have not been getting the yellox \

sheets, s o called, which sometimes contain the most
vital part o f the information.
THe B o m b i n o i a e e

o f ths Currency Said t o the

and y o u will correct m e i f I a m mistaken i n this Mr.

Comptroller---that h e wanted the Federal Reserve Banks
to have all the information that came t o his office,
he wants t o cooperate - in t h e fullest degree.

T h a t in-

cludes t h e yellow sheet a n d everything h e has got.

H e

put this u p t o u s a s a business proposition, t h a t until

h e c a n get his office straightened o u t a n a get

these a s s e s s m e m t s

o n the menper banks regulated

so

that t h e income o f his office rill b e sufficient t o

meet expenditures, sane little time will b e necessary,
and he i s poing t o need some additions ©
He wants t o employ acaditional examiners,
improve t h e s e r v i c e

i n e v e r y respect.

h i s revenue,
h e wants t o

H e looks upon

it a s a business proposition a n d h e asks t h e Federal


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Federal Reserve Bank of St. Louis

Reserve B a n k s w h o are vitally interested i n getting
this information t o contribute f o r the time being t o

a part o f the expense incurred, until

h e cam make

the arrangements w i t h the national banks.
Looking a t i t from t h e standpoint o f the Federal
Neserve Banks, t h e Question immediately arose i n the

Board as to why a Federal Reserve Bank Should pay for
service that i t was really entitled to. W e l l , the
counter t o that is, i t has been h e l d b y a former
Comptroller t h a t they were n o t really entitled t o

this but they were petting this information a s a natter
of courtesy o n his part.
factory position,

W e l l , t h a t i s a n unsatis-

i t seems t o me, s o far a s the Fed-

eral seserve Banks a r e concerned,

T h e y want t o know

whether t h e y are going t o get this infirmation a s a
matter o f right o r whether i t i s soing t o b e a matter

of courtesy, dependent upon the whim o f a n individual.
The present Comptroller s a i d the p l a n h e arranged here vould give y o u this information a t a cost

not. exceeding 1 0 per cent of what if would cost you


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Federal Reserve Bank of St. Louis

_ b o ~ g o a h e a d a n d make t h e e x a m i n a t i o n s y o u r s e l v e s ,

ably not a s much a s 1 0 per cent.

prob-

w h i l e o f course h e

admits t h a t the service charge w h i c h h e wants t o make
is greater t h a n the actual c o s t o f making a

copy o f the

report, y o u must c m s i d e r t h e expense o f getting the
basis o f that report, a n d o f making t h e examination,

and o f the value o f the report t o the Federal Reserve
Banks.

I think the board agree with him that the charge
ought n o t t o b e uniform.

T f a uniform charge should

be agreed upon for a l l banks,

n o metter whether their

capital was 2 5 , 0 0 0 o r 50,000 o r ¥25,000,000,C6#
wo0,000,000 y o u would f i n d that i n Some districts
which h a d a number o f small national banks a s members
they w o u l d b e p a y i n g a n undue p r o p o r t i o n

o f this charge

compared t o t h e i r o w n assets,

For that reason I

think t h e Board w a s inclined t o

look with favor u p o n the i d e a o f a graduated clarge
being m a d e ,

b a s e d somevhat

o n the s i z e

o f the banks ex.

amined, w h i c h would also prorate t h e expense i n a n eduit-

able manner among the different banks o f the system,


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Federal Reserve Bank of St. Louis

How, t h e a m o u n t t h a t t h e C o m p t r o l l e r
to h a v e c o n t r i b u t e d

i s anxious

b y the Federal Reserve B a n k s t o

his examining service this year i s h o r much, Mr. CompLreilier?

L think y o u have that.

Governor Hardi

C

h

, here i t is. T h e Comp-

troller shows the number o f people employed a n d the
expenditures f o r t h e c a l e n d a r y e a r 1 9 2 0 a s follovs:
Number

o f BxXaminers

Number o f Assistants
umber

o f Clerks

Expenditures f o r 1920:
Salaries

=:w

579,275.32

o f Examiners

380,701.07

assistants

Transportation = x a m i n e r s &

128,177.15
252,981.00

per D i e m A l l o w a n c e
Miscellaneous &

Assistants

Equipment

43,331.15
18,703 .85

Renbn

$1,403,4094
5
.
The l a w r e q u i r e s

each bank

t o b e examined twice

a year, b u t last year 1 , 7 7 banks were o n l y examined


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Federal Reserve Bank of St. Louis

once,

I

f these b a n k s h a d b e e n e x a m i n e d trice

it

would h a v e c a u s e d a n a d d i t i o n a l e x p e n s e , f i g u r i n g

on

the average examination,

.

of

1

7

0

,

5

6

5

0

1

On February 1 , 1921, M r . Williams approved
increase

o f salaries

to t h e a m o u n t

o f examiners a n d assistants

of

6

5 ,000,00

TOTAL

$

1

, 638 .974.55

This shows t h e cost o f examinations using t h e present f o r m o f report.

T h e f o r m used b y the Federal R e -

serve Board would involve t h e examiners ppending additional time i n examination a n d i t would increase t h e

cost possibly t e 2,000,000 a year.
Here i s a statement showing t h e receipts f o r t h e

year ending December 31, 1920:
{Reading from memorandum furnished b y the Comp.
troller: )

Receipts for year ending December 31, 1920 $1,280,339.36
Disbursements a n d bills d u e a n d unpaid f o r t h e
year ending Dec. 31, 1920

1

,

4

4

1

,

9

5

57
3
.

0

1

Showing a n excess o f expenditures a n d bills
unpaid over receipts f o r t h e year ending December

31, 1920 of

1

6

1

,

6

1

6

.


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Federal Reserve Bank of St. Louis

On

the s u m o f

2

9

,

4

1

0

.

7

2

Allowing f o r checks c u e t h e fund off account o f exXaminations m a c e b u t n o t r e c e i v e d

total assets a s o f Jan. 1 , 1921

59,410.72

to December i

45,760.50

Uscember e x p e n s e s

assistants

4

5

,

0

0

0

Payroll, December 1 5 t o Vecember
Due o n réfunds

7

,

0

.

4
0

3

0

,

0

7

6

.

0
8 .81

0

0

139,529.31
Deducting t h e approximate 3

5 9 , 4 1 0 . 7 2

& 80,118.59
In January, expenditures excseded
receipts b y
In February, expenditures exceeded
receipts

by

Deficit J a n u a r y 1

8

0

,

2

1

5

.

2

1

$118,215.21


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Federal Reserve Bank of St. Louis

“s

During 1 9 2 0 there were 14,571 examinations made
and there were 1,771 banks w h i c h received o n l y one
examination.

T h e r e w a s o n l y o n e b a n k i n the N e w Y o r k

Gity district w h i c h was examined twice during 1920 .
the National C i t y Bank.
Chief Examiner Sherrill Smith was examining S o u t h
american branches o f the National C i t y Bank o f N e w York

during the last half o f 1920,

T h e result was that a

great m a n y o f the banks i n New Y o r k City, w h i c h would
otherwise h a v e been examined, twice, received o n l y
one examination a n d the examining f u n d suffered accord.
R e oys
aaa

Balance o n hand close o f business March 2,

1921

$10,500.04
t

Mr, Crissinger, I

think there i s a little g a i n i n

March,
Governor Harding,

T h e balance i s the same.

F r o m

these figures i t woulda appear t h a t t h e funda a t the close

of business March 2nd, 1921 was insolvent b y about

$118,000.


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Federal Reserve Bank of St. Louis

Governor Harding (continuing reading: )

"During March there were 1,540 examinations made
and t h e r e h a s becén a n i n c r e a s e
tures,

o f receipts o v e r expendi-~

s o that t h e f u n d a t the present t i m e i s in-

solvent t o about 990,000.

I f a fund o f »75,000 was

made available for immesiate use, either b y a service
fee paid b y the Federal Reserve Banks o r b y a deficiency assessment levied o n the banks o n the basis o f the

bank's assets, current bills could b e kept u p and i t i s
believed t h e r e c e i p t s f r o m t h i s t i m e t o t h e e n d o f t h e
year t o u l d m e e t t h e e x p e n d i t u r e s , ”
Governor H a r d i n g .

I

n order t o meet this m t t e r

and t o e n a b l e t h e C o m p t r o l l e r

t o send the ¢xaminers

checks f o r t h e i r e x p e n s e s - - - a n d I

understand a

good m n y

of t h e m w o u l d b e g l a d t o g e t t h o s e checks-—--it h a s b e e n

suggested that t h e Comptroller communicate this t o the
appropriate c a n m i t t e e

o f the H o u s e o f Representatives

and a s k t h a t r e i m b u r s a b l e a p p r o p r i a t i o n s

b e made t o

relieve his necessities, t h e understanding being that
the assessments

o n the national banks would b e rsised

So as t o enable h i m to, within the course o f a year, p a y


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Federal Reserve Bank of St. Louis

the Treasury back this money s o advanced,
Now, the Question comes u p what i s proper and right
for t h e F e d e r a l R e s e r v e B a n k s

t o p a y for these reports

which t h e C o m p t r c l l e r u n d e r t h e l a w d o e s n o t s e e m t o b e
obliged t o g i v e y o u b u t h a s b e e n g i v i n g y o u a s a

matter

of c o u r t e s y a n d w h i c h t h e p r e s e n t C o m p t r o l l e r a n d t h e

nink would b e better r e c e i v e d a
s a matter o f right,
and have a

Guid p r o G u o about it, t h a t i s you p a y for i t

and y o u have a right t o get it.

T h e examiners u n d e r

stand that a n d you would probably get better cooperation
on t h e p a r t o f t h e examiners,

Governor McYougal.

A s a matter o f interest I would

like t o report that i n our district where w e call upon
the state departments f o r reports w e p a y for those r e ~
ports excepting with t h e State o f Illinois.

T h e fee

pald ranges from 30 eents a pags u p t o $10.00 a report,
In some §tates w e pay $10.00 a report.

I n one State w e

Pay 50 cents a page, a n d i n the State o f Illinois they
have asked for nothing and received nothing.
Mir, Crissinger,

W e have taken a number o f small

banks o f from $25,000 t o $50,000 capital, and then from


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Federal Reserve Bank of St. Louis

650,000 t o $200,000, T h e r e are 4,601 o f the first class,
from {25,000 t o 450,000 capital.

t i e figured i t out at

%5.00 a report, which "ald make for one examination

& 23,005 .00.
There are 2697 banks of the $50,000 to $200,000
capital class, that we have estimated at ()10.00 apiece,
and this would give u s %26,970.
There are 550 banks with capital fpom 3200,000 t o
500,000, a n d charging them 420.00 apiece for the report
this would give 1 1 , 0 0 0 .
There a r e 1 6 1 banks o f 5 0 0 , 0 0 0

t o 1 , 0 0 0 , 0 0 0 capi-

tal, and charging them $50.00 apiece, this would amount
to $4,850.
There a r e 9 9 banks w i t h a capital o f from 41,000,000

to $5,000,000, a n t a t $40.00 apiece for these reports
this would amount t o $5,960.

There are 1 8 banks with a capital o f $5,000,000 and
over, a n d a t 450.00 each this would make (900.
The total o f that f o r o n e examination would b e

$70,665, and if tro exaninations were mede the total

would Be ¥141,330.


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Federal Reserve Bank of St. Louis

Now, I

want t o call attention t o the fact that

the cost, i f w e p u t o n new examiners a m d make these
examinations a s they ought t o be made---we a r e g
a great m a n y what I

would call inferior examinations,

and they ought t o b e spyrred u p and cleaned up---Will

be $1,750,000.

T h e statistician has estimated

&1,638,000, b u t h e does not fisure o n making a little
examination.
So t h a t t h i s e s t i m a t e t h a t &

a d n e r e w o u l d approx-—

imately be 8-4 per cent o f the total cost that would
be chargeable t o the Federal neserve

As has been suggested, t h e law m a
for y o u t o make these examinations yourselves.

I f you

hired somebody t o make t h e m y o u would have t o pay the

expenses, t h e salaries o f the men who meé t h e examinations.

& S I view it, under t h e law, y o u would

the right t o make contracts, a n d you would have

right t o buy these reports, i f you wanted to do
Governor Fancher,

D i d y o u state t h e cther d a y

that you had decided to raise the rate o f assessment
apeainst the banks?


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Federal Reserve Bank of St. Louis

\. Orissinger.

W e have done So, b u t the resources

have fallen o f f s o that i t would n o t G o u s a n y

1017

Governor rarding.

T h e question v e were t o put

to the Governors i s this, whether o r not this being
just for t h e year 1921 alone, cannot some arrangement
be made w i t h t h e Comptroller t o make contribution f o r
these reports.

T h a t would enable t h e Comptroller

to

220; t o Congress m o r e definitely i n ricard t o thir
advance s o h e could clean u p his present deficiency,
otherwise y o u would have t o p a y t h e m back.

Governor Strong.
Governor Harding.

%

@ shall b e glad t o do that,

A n o t h e r point s e raised was about

the establishment-Governor darding.
Mr. Grissinger. I

H e i s going t o cover thate
think y o u are right about that,

and I will make a n order that you get all these yellow
sheets. I


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Federal Reserve Bank of St. Louis

believe I

showed Governor worss a

set o f

them this morning, that should have opened his eyesThere i s really something i n the yellow sheets.
Governor Seay. G o v e r n o r darding, I

think i t ought

to b e distinctly understood t h a t i t i s i n the nature o f

a service charge and payable i n advance, and involves
nothing w h a t e v e r

i n the nature

Governor Harding.

o f a n y assessments.

I t is valuable information you

1018

neede

Y o u are f s t paying f o r information.

i

t is

understood because i t does n o t mean y o u are going t o
Keep t h i s u p permanently,

i t is just a

one-year emergency

proposition, because n o question before t h e e n d o f the
present year i s over that t h e proposed office w i l l either
be reorganized o r done ayvay with.
Governor F a n c h e r . I

very urgent. I

understand t h e n e e d s a r e v e r y ;

think i n our bank w e could determine v e r y

readily h o w many reports, according + o schedule,

w e have

received since t h e l s t o f January, a n d w e couid make that

sdvance and then get i n the next two o r turee weeks copics
of the Federal sheets, w h i c h would complete o u r file commencing January lst.
Mr. Grissinger.

Y o u are interested i n knowing these

salaries a n d i f y o u will l o o k over this l i s t y o u will see
that v e r y m o d e s t s a l a r i e s a r e b e i n g p a i d t h e s e e x a m i n e r s ,

with v e r y f e w exceptions.
Governor Harding. I

will s a y the Federal board has

great responsibility i n regard t o these salaries, because
under t h e l a w t h e y h a v e t o b e s u b m i t t e d

t o t h e Board f o r

approval, a n d have been.


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Federal Reserve Bank of St. Louis

Mr. Griss inger. I

doubt whether t h e salaries a r e


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Federal Reserve Bank of St. Louis

adequate t o get the best information.
Governor Morss.

I n case w e e x a m i n e d t h e s e b a n k s o u r -

selves, w e would assess t h e nora o f i t against t h e banks,
would w e n o t ?

“ g e are entitled t o under t h e law.

Governor hHarding.

In somes cases w e prefer n o t t o d o it, though»
Governor V a n aandt.

a

e d o not d o it.

want t o know, t h o u g h , w h e t h e r

Governor Morss.e I

fe

have t h e legal right t o d o it.

Governor Harding. I

will refer y o u t o Mr. Hamlin o n

that.
Governor worss.

A n d b e y o n d t h a t , G o v e r n o r darding,

year,
if h e gets a n appropriation o f Congress f o r last
should r e proposes t o reimburse t h e Treasury, a@nether h e

he raises
imburse u s for any money w e advance, because i f
his charges sufficiently y o u vould have enough t o cover
the whole charge o f the year.

ir. Grissinger.

T h e way I expect t o reimburse the

Treasury i s b y w h a t m o n e y I

Governor narding.

get f r o m you.

d e proposes t o give you goods

all there
the worth o f the money you pay for them; that i s
is t a it, a one-year accident insurance.

L e t m e ask


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Federal Reserve Bank of St. Louis

Governor Hamlin i f h e sees a n y legal objection t o this ar-~
rangement.
ir. damlin. I

do not s e e a n y legal objection. I

think

it would b e well i f the Governors w e r e t o proceed o n the
assumption that w e would procure t h e m a legal opinion without further effort.
Governor Harding.

D o y o u see a n y objection t o it, Mr.

marrison, f r o m a legal standpoint?
Wr. Harrison.

N o . i

t h a t legally t h e Feder-

al Reserve Banks c a n bry anything a s a matter o f contract

which i s conducive t o good operation o f the Federal Keserve Banke I

think, however,

i t ought n o t perhaps b e

put o n t h e b a s i s t h a t w e a r e g e t t i n g i n f o r m a t i o n t h a t

we would g e t i f w e examined t h e banks ourselves, b e cause i t begins

t o look,

i f i t i s p u t o n t h a t basis, t h a t

we are really contributing t o the expense o f the exami-~
nation o f national banks which b y l a w ought t o b e assessed upon the national banks. a n d i s declared t o b e assessed u p o n the national banks. Theoretically,

i f we can

justify t h e charge o n this scale which i t ought t o b e
dons, I

think something l i k e t h e resolution t h e Govern-

ors' C o n f e r e n c e p a s s e d y e s t e r d a y ,

w h i c h w a s t o the


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Federal Reserve Bank of St. Louis

following effect:

"Moved i t i s the sense o f this meeting that Federal
Reserve Eanks should make n o contribution calculated t o
make g o o d a

deficit o f t h e a d m i n i s t r a t i o n

o f the office

of Gomptroller o f the Currency, b u t that Federal Keserve
banks will p a y any charges m a d e b y t h e Comptroller o f the
Currency

t o cover t h e expenses i n v o l v e d

i n furnishirg

egpies o f future complete reports actually t a k e n b y them”.
In other words,

i f this i s the schedule o f charge

the Comptroller o f the Currency i s prepared t o make apd
to f u r n i s h r e p o r t s a r d t h e r e i s n o q u e s t i o n t h e F e d e r a l

keserve banks could p a y for t h e m and nothing more b e said
about it.

Governor Strong. Undoubtedly i t is a fast that i t

costs more t o merely transcribe the report of a large,
bank then a small bank, a n d probably o n that basis alone

a schedule c f 50.00 might be partly justified, possibly
not w h o l l y j u s t i f i e d ,

but I

do n o t feel a n y concern

about t h i s q u e s t i o n o f legality,

i f w e c a n secure t h e com-

plete information which will b e discleed b y furnishing t h e

in
reports b y the Comptroller o n examination c f the banks
our district.


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Federal Reserve Bank of St. Louis

Governor darding.

I

f assistance i s afforded

the Comptroller, t h e Board h a s n o t t h e slightest doubt
that y o u will receive full information.
Governor Morss. 4

ould there b e a n y objection t o

the Comptroller notifying t h e Federal Keserve Banks
that f o r t h e future,

i f w e want t h e s e reports,

v e must

pay this schedule o f prices? T h a t puts u s i n the p o sition o f being obligated t o pay them, because w e have
got t o h a v e t h e m a n d w e c a n n o t g e t t h e m w i t h o u t b u y i n g

them.

B u t t h e other w a y puts u s i n the position,

Seems

t o me,

o f contributing,

w h i c h w e are n o t necessarily

obliged t o do; i t puts t h e Federal Reserve Banks,
my mind,

it

i n a v e r y Gaifferent position.

<

in

@ G a n n o t agrees

to p a y for a thing w e c a n get for nothing.
Governor Harding. I

should think t h e Comptroller

would rant i t understood t h a t i t i s n o t a n y unfriendly
attitude

o n his part, s i m p l y @

matter

o f reammendaton

here under this present emergency, a n d h e would want
it distinctly understood h e was n o t trying t o hold y o u
Up.
Governor Strong. G o v e r n o r darding, I
resolution,

i f some o n e will b e good enough

offer t h e
t o second


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Federal Reserve Bank of St. Louis

it, that t h e charges suggested b y t h e Comptroller
response

t o the resolution passed

in

o n y e s t e r d s y a r e ap~-

proved, a n d that v e recommend t o our respective directors
that t h e p a y m e n t s

b e m a d e i n accordance w i t h t h a t s t a t e -

ment o f charges.

(The motion was put and carried unanimously).
Governor S e a y .

T h e r e i s o n e point, G o v e r n o r H a r d i n g ,

which i t may b e thet does n o t cover.
to realize a
realize a

certain fund,

I f 1 % i s desired

i f the Comptroller desires t o

certain fund, t h a t resolvtion does n o t contem-

plate that w e pay i n advance, b u t acparently a s i t i s
framed now, a s I understand t h e Gomptroller desires u s
to pay perhaps i n advance.
A

tir. Crissinger.

t least these reports--I supposed

this w a s t o date back before January Ist.
Governor Harding.

G o back and p a y for t h e information

you get from January lst.
Governor Seay.

But I

think i t well t o b e understood

whether o r not that will furnish sufficient funds.
ir. Grissinger.

I t would i f w e had i t u p t o the I s t

of July.

Governer.danding.e T h e Comptroller will try t o get


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Federal Reserve Bank of St. Louis

this reimbursible appropriation o f Congress.
Mr. Crissinger. I

will t r y t o get this reimbursible

appropriation o f Congress, t h e n I will p a y i t back.
Governor Seay. M i g h t I

ask the Comptroller h o w much

he s a i d i t w o u l d i n c r e a s e t h e e x p e n s e s
by t a x i n g o n a

o f his department

sufficient n u m b e r o f e x a m i n e r s ?

ir. Crissinger.
increase t h e e x p e n s e

z e have estimated here i t rill
o f t h e d e p a r t m e n t a r o u n d ~p225,000.00

or 250,000.00,

b u t m y notion about this t h a t i t i s n o t

high enough. I

thinx w e are going t o have t o pay t h e

right xind o f examiners a

little b i t more money,for

some o f these high class examiners, t h a n w e now dO-5.
have scarcely examiners t o send o u t t o difficult positions r i g h t n o w ;

w e have a

l o t o f n e w fellows,

cannot half determine o n them.
out o f one district a

and We

I a m going t o have t o take

lot o f n e w examiners a n d send o u r

best e x a m i n e r s f r o m s o m e o t h e r districts, w h e r e t h e y

are really needed, too, b u t t h e emergency seems t o b e
greater a t the other district.
a position, I

N o w w e ought t o b e i n

think t h e Federal Keserve System reeds it,

to get a little bit higher grade examiners.
nave t o p a y m o r e m o n e y t o d o that.

i e shall


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Federal Reserve Bank of St. Louis

Governor Seay.

I t will p r o b a b l y require a b o u t

@2,000,000.00 t o properly administer your office i n the
long r u n according t o the estimates y o u make?
Mr. G r i s s i n g e r e

Yes.

make
Governor »trong. Governor darding, I have t o
committee o r
tois suggestion, v u t i f v e c a n appoint a
do anything t o dispatch this matter,

W e should b e glad

discuss t h e
40 d o so, a s w e are exceedingly anxious t o
matters

o n the program.

Governor Harding.
the a b s e n t G o v e r n o r s

T h a t motion has b e e n carried, a n d

a n d other interested parties w i l l

be notified.

(c) s h a t changes i n policy o f rediscounting
advisamong F e d e r a l R e s e r v e B a n k s a p p e a r

the
able o n the basis o f experience during
last year.
7 per
Are y o u i n favor o f continuing t h e uniform
psy i o r discounts?
cent rate paid b y banas t h a t offer t o
Governor otronre.

= e have n o changes t o suggest.

Governor Harding.

d a s a n y b o d y a n y changes

t o sucgest

as t o that?

Governor strong. No, they remain unchanged.


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Federal Reserve Bank of St. Louis

1026

syeGovernor n a r d i m m T h o s e i n favor will say
Governor Young. I
thing elsee I

thought that referred t o some~

thought i t referred t o the immense amount

notes,
of w o r k i n c o n n e c t i o n w i t h r e d i s c ounting

and I

i t i s aegreewas going t o offer t h e suggestion that i f
t h a t the
able t o the other Governors, a f t e r discussion,
present l a w b e a m e n d e d

s o t h a t * n e r e o n e #Federal K e s e r v e

another,
Bank found i t necessary t o borrow f r o m
on eligible notes secured b y paper- I

t o borrow

think that would

v e r y much.
cut down the work connected w i t h rediscounting
Governor darding.

T h a t matter has b e e n discussed.

Do y o u #ish a n amendment offered?
Governor Norris. i

should s e y i t would b e 8 good

impr ovement.

Governor Harding.

I s i t the general concensus o f

Gongress t o give
opinion i t would b e advisable t o ask
us that amendment?
Governor V a n aandt. I

believe i t would simplify

matters considerably, Governor darding.
Governor narding.

I f y o u want t h e amendment, n o w i s

the time t o get it, because y o u c a n say t o them i t i s
going t o fecilitate cxtension o f the credit a n d i t wili


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Federal Reserve Bank of St. Louis

go turough. (Laughter).
think, before y o u a s k for amendments,

Mr. darrison. I

I should a s k Mr. L o g a n whether y o u cannot d o i t now, i f
you a r e w i l l i n g

t o admit t h e n o t e o f a

member b a n k o n

discount right, you can d o i t

which y o u make advanceitis a

without t h e law, because t h e l a w says o n the affirmative
vote o f a t least members o f t h e Federal Keserve Board t o
require Federal xeserve Banks t o redise ount thepaper o f
other Federal “eserve Banks. I

do not think i t would

take much o f a stretch o f legal imagination t o get t h e
proper r u l i n g

o n thet.

Governor darding-

¥ e might s e e what kind o f legal

imeginetion o u r counsel has, a n d o u r l a w committes.Governor Young.
Governor darding.

T h i s i s what happens quite frequently,

“ w e have borrowed some money f r o m Cleve-

land and w e naturally put u p the largest notes, a n d

Gleveland's security comes i n and pays g2,000,000.00 o f
those notes.

Governor darding.

k

e understand that.

matter o f revenue stamps, I

A s t o the

presume y o u would b e exempt,

under t h e provision which releases y o u from all taxes
except t a x e s

o n real estate.

H o w a b o u t that, M r . darrison?


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Federal Reserve Bank of St. Louis

Mr. darrison.

T h a t would apply t o those notes, I

thinx, under t h e terms o f that provision o f Section 17,
or whatever i t is, o f t h e Federal Neserve Act, which
exempts Federal Keserve banks f r o m taxation.
Governor Harding. I

do not think y o u would b e bota~

ered a b o u t t h e r e v e n u e s t a m p s
Mr. Harrison.

o n that.

J u s t a s w e found r e were exempt

on

our certificates of:stock a n d other such papers.
move that t h e Federal Keserve board

Governor e a s I
aed

be e e

t o c o n s i d e r w h e t h e r t h e y can,

b y regulation,

of
permit o n e F e d e r a l “ e s e r v e b a n k t o d i s c o u n t t h e n o t e

‘another.
Governor Harding.

D o y o u think i t would b e desir-

able exchange i f they could d o that?
Governor Seay.
If I

I t nould certainly facilitate matters.

of
remember, t h i s w a s s u b m i t t e d e a r l y i n t h e h i s t o r y

the Federal Reserve S y s t e m a n d determined i n the negative.

Governor Strong. I
decide h e r e i s w h e t h e r

Governor Harding.

think tne only point * e need
w e a r e i n f a v o r o f t h e exchange.

Y o u are i n favor o f i t as & matter

of p r i n c i p l e ?

Governor Strong.

Y e s , w e have t h e process simpli-

sapScls a e


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Federal Reserve Bank of St. Louis

I

Governor Harding.

s there anything t n a t ocairs

you i n c o n n e c t i o n v i t h t h a t ?

A r e y o u i n favor o f d i s -

counting a s much a s y o u did last year?

M r . Fancher,

you W a n t t o t a k e a s m u c h a s y o u d i d l a s t y e a r ?

can I

Governor Fancher. « h e t h e r I

d o not know.

Governor Seaye G o v e r n o r Harding, I

think t h e

will have t o b e tempered t o the saorn lamb.
dere is a

Governor Herding.

suggestion t h a t c a m e f r o m

Chicato about setting u p a reserve r o r franchise tax.
you considered that?

d a v e y o u read this program?

large earnings o f the Federal Reserve Banks have eaused
much comment.

T h e franchise t a x t o b e paid b y t h e Federal

keserve b a n k s

t o the United States Government

i s fixed

b y

law a t 9 0 per cent.

"It is customary with many member banks t o set aside
each m o n t h a
desirable
books a

reserve f o r taxes.

{ o u l d i t b e feasible a n d

t o have t h e Federal Keserve Banks s e t u p o n their

‘reserve f o r f r a n c h i s s t a x ' , a n d s h o r t h i s i t e m

in their weekly stetoements.

I t has been suggested t h a t

shown weekly
an approximate reservation f o r franchise t a x
would give t h e public a

better idea: as t o the disposition


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Federal Reserve Bank of St. Louis

of the-earnings-of t h e Federsl_‘eserve p

a

n

d n
se
k
gred-

ually dissipate t h e idea that these banks a r e profiteering a t the expense o f commerce e n d industry -"
move that b e donee

Governor t r o n g . I

(The motion was put and unanimously carried).

P A K COLLECTION SYSTEM.

VII.

(a} S t a t u s o f litigation.
(vo) &ffect o f laws enacted b y various Southern
States,
Risks a n d losses incurred b y Federel Keserve B a n k s

H o w

i n making collections.

to minimize them.
(a4) A r e non-par lists necessary?
(Following a resume o f the legal proceedings had):
should l i k e t o r e p o r t s o m e th ing

Governor Calkins. I

which I

think i s a subject f o r commendation.

islature

o f the °tate

o f Arizona.

T h e leg-

T h e a t was a

similar

law a n d the Governor vetoed i t promptly, a n d with good
r e a s o n s e«

of

Governor darding. I

am told the Governor/Floride

will probably veto it. A n y h o w , a
to s e e h i m a n d e x p l a i n

i t t o him.

man i s going down tners


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Federal Reserve Bank of St. Louis

Governor Seay.

T h e Governor o f North Carolina h a s

no v e t o p o w e r e

Governor Harding.

d e probably would have vetoed

it otherwise?
Governor Sesy-

d e probably ‘ould.

Governor Harding.

T h e m a i n proposition here i s

tteserve Banks
risks a n d losses incurred b y the Federal
them.
in making collections, a n d hoy t o minimize

Governor otrong.

s e have taken action o n this subject,

Governor
which c a m e u p i n another w a y o n t h e program,

darding,

i n point o f fact b e i n g t o appoint a committse

i n differto review t h e practices which a r e n o v current
ent reserve banks,

t o revbw t h e circulars o f all the

heserve banks a n d t o submit-a report.
Governor Harding.

I s that a

s000 idea?

T h e counsel

t o b e satisfied t h a t
for s o m e o f t h e R e s e r v e b a n k s s e e m
Federal heserve
an agreement c a n b e m a d e b e t w e e n t h e
protect t h e
bank a n d t h e v a r i o u s m e m b e r b a n k s w h i c h

direct t o
member Heserve H a n k i n sending i t s checks
the b a n k o n wnich

i t i s dramn.

I n other cases, n o v e

o f that.
ever, t h e c o u n s e l a r e n o t s o s u r e
to think,

T h e y seem

rulings
i n view o f t h e p r a c t i c e a n d r e p o r t e d


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Federal Reserve Bank of St. Louis

of courts, t h a t there i s negligence wherever a
sends

o n e direct

t o the bank

o n which

bank

i t i s drayn.

o F

course, t h a t i s the very foundation o f o u r p a r collect-

ion system. Y o u have got to send the item to the bani

i
~.
a

on which i t i s drawn.

D o y o u think i t would b e advisable

to try t o see i f Congress vould incorporates i n section 1 5
an additional clause distinctly authorizing Federal keserve
Banks,

i n order t o maxe t h e s e collections,

t o send items

direct t o t h e b a n k o n w h i c h d r a w n a n d a b s o l v e f r o m t h e m

any liability f o r fees i n s o doing?
Governor V a n zandt.

Governor Harding,

I f such a

l a r c o u l d b e obtained,

i t would undoubtedly relieve u s from

heving t o fight thet identical matter o u t i n the courts
later on.
Mr. Hamlin.

Suppose

* e fail

i n getting t h e amend-

ment, t h e t w o u l d t h r o w u s i n vorse condition.

Governor otrong.

I

n m y opinion,

i t would b e bound

to r a i s e a n o t h e r d i s c u s s i o n a n d d i s p u t e ,
of success,

a n d some danger

b y those w h o a r e constantly advocating

changes f o r g u a r a n t e e

o f b a n k deposits.

M

y belief

is

that after this committee reports i t i s going t o b e pos-~
sible t o use o u r collection system a s a lever t o apply


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Federal Reserve Bank of St. Louis

to b a d l y - m a n a g e d b a n k s , t h a t d o n o t p e r m i t u s s a t i s f a c t orily t o i m p r o v e t h e i r m a n a g e m e n t ,

a n d ab: turtprevious

meeting i t developed t h a t the u s e o f the so-called nonpar l i s t w a s a

rather s a l u t e r y m e a s u r e f o r d e a l i n g w i t h
o r are unwilling

banks t h a t d o n o t remit,
pernaps

d o not remit

t o remit,

o r

satisfactory manner.

i n a

should t h i n k t o put the bank o n

Governor Harding. I

a non-psr l i s t a f t e r i t h a s b e e n r e m i t t i n g a t par, t h a t

they would s e e t h e point.

Governor Seay. I

do not believe, a s I recall, n e

have taxen a n y action tovard expressing e n opinion o f the
Governors a s t o a non-par list.

Governor »otrong.

I s that not referred t o the com-

mittee t o which those other matters were referred?
Governor darding.

w

e have a

concrete c a s e %t¢

sc heres S o m e t i m e a g o the Federal Keserve Bank o f
New York sent a n item t o the Federal Keserve Bank o f
Dallas, d r a w n o n one o f their member banks.

I t seems

that member b a n k hed n o t been remitting promptly a n d the
service

f a s v e r y unsatisfactory,

a n d t h e Governor

o f the

Federal “ e s e r v e B a n k o f Dallas d i d n o t f e e l l i k e t a k i n g

the risk of sending thet check over theres he had no


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Federal Reserve Bank of St. Louis

other w a y o f collecting, a n d returned t h e check.

T h e

Federal Keserve Agent a t New York wrote a letter saying
in v i e w o f t h e f a c t t h a t t h i s w a s a
charged

member b a n k t h e y

i t u p t o t h e F e d e r a l k e s e r v e B a n k o f Dallas

to

collect o n its member bank; t h a t i f they thought i t unsafe
to send direct, t h e y might s e n d a n agent over.
w

Governor S e a y .

e have s o m e which c o s t a s high a s
hundred

five o r s i x d o l l a r s a

t o colle

n

a great

many cases i t coct »1.00 a hundred, »20.00 a thousand.

Governor darding-

I s i t your view, i n order t o

maintain t h e integrity o f t h e p a r collection system,

it

is proper i n the case o f some o f these banks t o g o ehead
and c o l l e c t

o n the member bank?

Y o u r casss a r e non-

member banks, a r e they not?
Governor oeay-

T h e s e were non-member banks, yes.

The n o n - p a r l i s t w e l o o k u p o n a s t h e i n e v i t a b l e o u t c o m e .

Governor Strong.

I f w e have a

non-par l i s t these

items would b e taken for collection a n d t h e actual c o s t
of collection would b e assessed u p o n the bank.

T h a t would

probably drive t h s m for collection through other channels,
to s o m e extent,

a n d relieve

Governor Harding.

u s o f t h e risz.

O f course, t h a t non-par l i s t will


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Federal Reserve Bank of St. Louis

have a double effect. I

think i n some cases a

bank vill

not want t o have cases o n that list, a n d i n other cases
just exactly w h a t they want.
Governor V a n Zandt.
put a

I n a n y event, w r e c o u l d n o t

member b a n k o n a n o n - p a r l i s t .

Governor Harding. ‘ould this not be possible, i n
case o f a

member b a n k i t i s obvious

w e could n o t p u t them

on u non~-par list. b u t would n o t a n y Federal keserve b a n k
have t h e same right that a member b a n k would have i n simi-

lar circumstances? S u p p o s e i t gct a check o n some member b a n k i t wes a f r a i d o f a n d d i d n o t w a n t t o a d v e r t i s e t h e

fact, b u t suppose i t sent a telegram o r a letter a s soon
as i t received that check,

t o tne sending bank, whether

the member bank i s o n e district o r the Federal “eserve

Bank i n some other district, a message i n code, somewhat
as follows:

"For good and sufficient reasons, w e do not care t o
assume the risx o f taxing this check a s a cash item.
less i n s t r u c t e d

b y y o u t o t h e contrary,

U n -

F e Will, h o w e v e r ,

forward i t for collection a t omner's risk, a n d w e will

remit the proceeds after they have been received".

Any bank that received that telegram would comm-


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Federal Reserve Bank of St. Louis

nicate t h e intelligence t o the depositor d o m t h e
line.

Governor Calkins.

D o e s n o t t h e a c t pretty

fairly i m p o s e ’ : n
o Federal t e s e r v e B a n k s t h e o b l i g a t i o n
to accept s u c h d r a f t s

o n member b a n k s a n d t o r e m i t w i t h -

out deduction?
Governor darding.

« i l l y o u please repeat?

Governor Galkins.

D o e s n o t t h e a c t impose o n the

Federal Neserve B a n k t h e obligation t o take a n d collect
such checks?

Governor Harding. I

em talking about a member bank's

checke T h e r e would b e n o deduction.

T h e member b a n k

would h e v e t o remit j u s t t h e same, a n d t h e m e m b e r n e e d

not know whether i t was taxen f o r cash o r sent f o r collection.

Governor Young.

T h a t i s shave w e have done with

some member banks.
Governor darding.

I t occurs t o m e that i s shat I

would d o ; f i have d o n e i t i n t h e past.

Governor Seay- I

thins w e have t h e right t o d o

that under t h e law.
Mr. n a r r i s o n .

T a k e a

check

o n a

member

bank

for


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Federal Reserve Bank of St. Louis

collection?
Governor Seay. Y e s .
Mr. darrison. I

think s o , w i t h o u t question.

Governor Seay. I

should lixe t o feel w e agreed

was right.
Mr. darrison.

S e c t i o n 16, that speaks o f checxs o f

member banks a t par, says y o u shall receive o n deposit
at p a r c h e e k s o f m e m b e r banks.

B u t t h a t i s referring

merely t o the fact that y o u must receive i t a t par i f
take i t o n deposit.

T h e r e a r e other features

Governor darding.

o f the

L o o k a t Section 16. Y o u will

@ clause i n there:
"Any Federal keserve B a n k m a y receive f r o m a n y o f
its member banks a n d from the- United States deposit o f
current funds i n lawful money, national b e n k notes,
Federal “ e s e r v e n o t e s , c h e c k s a n d d r a f t s p a y a b l e u p o n
presentation,

a n d also for collection maturing notes

and bills".
Now i n Section 16:

‘avery Federal “eserve Bank shall receive o n deposit a t p a r from member banks o r from Federal Keserve
Banks c h e c k s a n d d r e f t s d r a w n b y a n y d e p o s i t o r

i n any


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Federal Reserve Bank of St. Louis

other F e d e r a l “ e s e r v e b a n k o r member b a n k u p o n f u n d s

to

the credit o f said depositor", a n d s:
Section 4 contains a

provision which I

think has some

bearing o n that general subject i f y o u ere i n doubt a s t o
the p o s e r s g i v e n y o u i n these o t h e r s e c t i o n s h e r e .
are t h e g e n e r a l p o v e r s
adopt a n d u s e @

o f t h e Federal heserve B a n k t o

corporate s e a l , m a k e contracts,

sued, a n d d e f e n d a n d b e defended,

"Sixth.

n e r e

sue and be

a n d s o on:

T o prescribe b y its boards o f cirectors,

by by-laws n o t inconsistent v i t a lan, regulating t h e
manner i n which i t s general business m a y b e conducted,
and the privileges granted t o i t b y l a w m a y b e exercised
and enjoyed.

"Seventh.

T o exercise b y its board o f directors,

or duly authorized officers o r agents, a l l powers specifically g r a n t e d b y t n e p r o v i s i o n s

o f this a c t a n d

such incidental povers a s shall b e necessary t o carry
on the business o f banking within t h e limitations prescribed b y t h i s Act.
“avery “ e d e r a l h e s e r v e b a n k s h a l l b e c o n d u c t e d u n d e r
the s u p e r v i s i o n a n d c o n t r o l

of a

board o f directors.

"The board of directors shall perform the duties


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Federal Reserve Bank of St. Louis

usually eppertaining t o t h e office o f directors
banking associations a n d all such duties a s are

scribed b y lav."

iow member banks frequently s e n d items f o r collection.

If there i s any reason why 2 Federa
does n o t vant t o take this r i s k i n
member bank, w o i c h i s n o t r e m i t t i n g p r o m p t l y ,

to m e i t i s clearly within i t s porers,
of its board o f directors,

i t seems

b y resolution

t o authorize i t t o take those

items f o r collection a n d notify t h e s ender.

Governor wcDougal. T h a t puts the deposit bank o n
notice t h a t t h e d r a w e e b a n k i s n o t i n s a t i s f a c t o r y
condition,

c f course.

Governor narding.

O f course, before t h e

other
each M e d e r a l K e s e r v e B a n k m i g h t n o t i f y e v e r y

Federal teserve B a n k that until further notice items
on the following banks w i l l n o t b e received a s cash

items, but will b e for collection only a t sender's


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Federal Reserve Bank of St. Louis

risk.

Governor Fencher. I

want t o ask Governor Strong

what e f f e c t t h a t w o u l d h a v e o n t h e N e w Y o r x c l e a r i n g

house adjustment where i f any number o f points i n the

State were accepted for collection and not credited,
what bearing would t n a t have o n your e w Y o r k schedule
of c h a r g e s ?
Governor S t r o n g .

I t would nave a

would have t o deal with it.
recently appointed a

bearing,

and we

T h e clearing house has

committee t o confer with t h e

officers o f neserve Banks i n regard t o various matters
of c o m m o n interest,

a n d w e expect

t o take t h i s u p vith

that committee.
Governor Harding, I

have t h i s f e s l i n g a b o u t t h e

whnole subject o f our collection operatms, t h a t with
the magnitude o f the business n o w being conducted b y
the Kkeserve b a n k s
items

i t i s inevitable t h a t v e should h e v e

o n every practically e v e r y b a n k t h a t comes

i n

contact w i t h u s ,

s o f r o m n o w o n , a n d o n t h a t account,

we s h o u l d m a k e a

thorough, c a r e f u l s t u d y , b o t h f r o m

the s t a n d p o i n t

o f practice a n d f r o m t h e standpoint

our legal position o n this whole subject.

of

F o r that


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Federal Reserve Bank of St. Louis

reason t h e committees w h i c h w a s a p p o i n t e d i n c l u d e d ,

board shall approve it, mr- L o g a n t o advise v i t h t h e
officers

o f t h e kKeserve bank,

to serve

o n t h a t committee. I

a n d tir. d a r r i s o n i s a i s o
was g o i n g t o s u g g e s t t h a s

as soon a s arrangements c o u l d b e made f o r that meeting-and they will have o n s o r two others f r o m the Keserve
Bank here thoroughly acquainted with t h e technique o f
c o m m i t t s e w o r k o u t recommendations

that business, 3

eirculars u s e d , a n d a s t o t h s

poth a s t o t h e for) i

procedure, a n d submit i t t o the Federal Keserve Board
k

for i t s consideration.

e ougnt t o d o something p r e t t y

oromptly, but I feel it is going t o require a lot of
close a p p l i c a t i o n a n d study.

s o u l d i t b e satisfactory

t o have this matter delivered

you, sire Gomotroller,

to

to

the c o m m i t t e e f o r t r e a t m e n t ?

Mr. Grissinger.

Yes.

Governor narding.

I t i s referred t o the committee,

then, f o r f u r t h e r c o n s i d e r a t i o n .

VIII.

SHIPMENTS

O F COTH A N D CURRENCY

NON-MEMBER B A N K S U P O N R E Q U E S T

OF A

T O MBMbER A N D
M E M B E R BAN:

(a) « h y should there not be a uniform policy with
respect

t o s u c h transactions?


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Federal Reserve Bank of St. Louis

Governor dardings= T h e a t case was brought t o the
board's attention b y a member bank i n Cincinnati.
After getting t h e usual reply f r o m the Board referring
the m a t t e r b a c k t o t h e F e d e r a l “ e s e r v e B a n k , t h a t
particuler b a n k v r o t e

t o the Treasury Department a n d

set u p the claim that they hadalways h a d a sub-treasury
in Cincinnati a n d that t h e Federal “eserve E a n k there
was exercising sub-treasury functions now, a n d that t h e y
were being denied a

privilege t h a t they h a d been accustomed

to, a n d i n their letter t o m e they s a i d they would n o t
care s o much about this except taat other Federal Keserve
Banks h a d been extended t h e same privilege t h a t h a d been
denied t h e m and they felt t h e y were being discriminated
ageinst.

F o r t h a t reason i t has b e e n p u t o n the docket

without a n y r e c o m m e n d a t i o n

o n t h e p a r t o f t h e Board,

further t h a n the suggestion that there ought t o b e some
uniform p o l i c y

i n respect

t o these s h i p m e n t s

i n all

districts.
Governor t r o n g .

z

e happen also t o have that o n

our program.
Governor Harding.
Governor t r o n g . A

Y o u settled t h a t then?
resolution, w a n i m o u s l y a d o p t e d ,


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Federal Reserve Bank of St. Louis

Which w i l l r e s u l t

i n t h e a d o p t i o n o f u n i f o r m practice.

Governor Fancher.

N o t t h i s p a r t i c u l a r feature, I

think, Governor trong.
with a

#

@ settled the methods o f

non-member b a n x ,

b u t this i s a

question

of member banks making request o f the Federal “teserve
Bank t o make shipments t o other member banks a n d nonmember banks. :

s r o w s o u t o f o u r circular which w e

sent o u t e
Governor Seay. I
lr. darrison. 1

believe y o u a r e q u i t e right.
am

p e c a u s s I

made n o t e n e r e

that this w a s only partly covered b y o u r previous action.

Governor Strong. T h a t was discussed at great length
and I

thought i t was covered.
Governor Fancher. I

suggested,

a s the subject w a s

on the program o f the board, t h a t w e did n o t give i t consideration until i t was taxen u p o n the board's program.

Governor Strong.

i l l you offer a resolution that

Will dispose o f i t ?
Governor Fancher.
matter

here xhether

G o v e r n o r trons,

t h e b a n k : wants

ure W e have s e t u p here. I
our currency circular,

i t is

t o follow t h e proced-

might say, i n getting o u t

w e had t h e matter o f service,


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Federal Reserve Bank of St. Louis

we stated thereunder what t h e conditions were, shipping
and receiving currency a n d coin without charge.

x e

take t h e position that w e want t o get all t h e contact
we p o s s i b l y c a n w i t h e a c h o f o u r m e m b e r banks.
that

i n the conduct

o f o u r member

partment t h a t w e h a v e s t i l l

they d o i s simply carry a

b a n k relations

: e

f i n d

de-

got member banks t h a t a l l

fixed r e s e r v e w i t h u s ; t h e y d o

not discount; t h e y d o not use o u r collection facilities;
in fact, w e have n o t a n y contact r i t h them.

f e a r e 6en-

deavoring i n all ways t o get contact with member banks,
we f e e l h e r e i s a

service

o f p a r currency

i n and out

that t h e m e m b e r b a n k i t s e l f

should deal with u s t o get

that c o n t a c t a n d n o t h a v e a

city bank with a number o f

country correspondents c o m e

to u s with a

list o f its

currency symptoms, a n d dump mt o r us and say, "Ship

these banks this currency”.

we further found, before

we put o u r circular out, n e

did m a k e s h i p m e n t s u n d e r

these requests,

one c a s e Z h e r e w e m a d e t h e

w e found

in

shipment a t our expense a n d

the bank made a charge t o

its correspondent.

r o
Strong.
n r e v oThat
G
thought i t was disposed of.

was a l l d i s c u s s e d a n d I


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Federal Reserve Bank of St. Louis

nave t h e vote right here. "Voted

Mr. darrison. I

on motion o f Governor Fancher a n d seconded,

t o b e the

sense o f the meeting that Federal keserve bonds should
not absorb t h e expenses o f shipments o f currency o r coin
to and from member banks, except t h e expenses

o n ip-

coming shipments made i n vayment o f collection items a n d
o f transportation

except t h e e x p e n s e s

o n receiving g o h d

and gold certificates.
"Voted that requests o f non-member banks f o r shipment s h o u l d b e r e c e i v e d a n d h o n o r e d o n l y a t t h e e x p e n s e

of the member banks and only after collection o f the
accompanying draft."
Governor Strong. D o e s that not cover this?
Mr. darrison.
was

N o , because t h e question o n the

Board's p r o g r e m / s p e c i f ically r e f e r r e d
and i t w a s u n d e r s t o o d t h a t w a s a
shipments m a d e

o n requests

t o a t that t i m e

separate item, i n v o l v i n g

o f member banks n o t covered

by p r i o r motion.

Governor darding. T h i s i s i n Governor Fancher's mind
and will be agreeable t u the rest of you, i t seems t O me.
Suppose we adopt another motion t o the effect that the
Federal “eserve B a n k would charge a l l charges o n currency

1046

shipped

to a

member b a n k a t t h e m e m b e r b a n k ' s r e q u e s t ,

that i f a n y m e m b e r b a n k s d e s i r e d t o h a v e c u r r e n c y s h i p p e d
for t h e i r account, e i t h e r t o a n o t h e r m e m b e r b a n k o r t o a
non-member b a n k , t h e t t h a t s h i p m e n t w o u l d b e m a d e c h a r g e s

collect.


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Federal Reserve Bank of St. Louis

Governor Seay.

T h a t i s the practice.

Governor V a n Zandt.
Governor Seay.

T h a t vould cover it.

T h a t i s the practice o f t h e Cleve-

land bank a n d o u r practice, a n d t h e Richmond b a n k i s i n
very f i r m agreement w i t h t h e Cleveland B a n k o n that submay s a y t h e complaint arose f r o m a bank which

ject. I

has been trying t o do several things with the Keserve Bank
of Richmond wnich are not i n conformity with Reserve Bank
practice.

I

t has t r i e d t o establish direct r o u t i n g

in 2

manner n o t acceptable w i t h t h e Richmond Bank, a n d n o t i n
conformity w i t h t h e practice o f the Keserve banks.
Governor darding. I
Banks,

imagine s o m e large Keserve

i f y o u give t h e m a n ell will take a yard, a n d t h e

more y o u d o the more t h e y want t o use youas a
Governor Fancher.

I f w e d i d this t h e y might come t o

us a n d a s k u s t o foot their pay-roll,
Sorte

convenience.

o r something o f that


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Federal Reserve Bank of St. Louis

C e e

e

e

T h i s i s rather a n importent gusstion

}

with o u r branch banks.
banks

w e had a n arrengement v i t h t h e

i n our district t h a t w e would

mip

t o member b a n k s

or non-member banks u p o n request o f the member bank, n o
charge f o r shipment t o member banks, b u t a chergs t o the
non-member b a n k .

E d o n o t know #

n e a r bhat i s that y o u

not u n d e r s t a n a t h a t a s e

T h a t

in t h e northwest.

Governor sarding.

C a n t e n o t g e t back a minute a n

analyze t h e reasons w h i c h first l e d the banks a n d t h e
board t o approve these shipments o f currency a t the Federal Keserve bank's expense?
not d o that.

Y o u know originally v e d i d

i a s i t not done w i t h t u g idea t o bring

about a better feeling a n d a closer relationship betveen
the Federal “eserve banks a n d the different member banxs+
It seems t o me, i f you make this shipment f o r t h e large
city banks,

y o u a r e d e f e a t i n g t h e v e r y purposes t h i s w a s

done f o r originally.
Governor Seay- A b s o l u t e l y .
Governor Fancher.

Y e s , absolutely.

Governor Galkins .» T h e r e q u e s t o f t h e T r e a s u r y B e pertment,

w h e n t h e bank t o o k over t h e sub-treasury


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Federal Reserve Bank of St. Louis

functions,

w a s t h a t h e should m e e t t h e s a m e conditions

that h a d been met, a n d this i s n o t one o f the conditions
that h a s b e e n met.
Governor H a r d i n g »

S o m e people h a v e insinuated

that t h e F e d e r a l “ e s e r v e S y s t e m h a s b e e n r u n v e r y l a r g e l y

in the interest o f the two large member banks.

i

f

i t might g i v e s o m e d i f f i c u l t y

this a c t i o n w e r e t a k e n ,

i n

refuting t h a t charge.
\

Governor

h

a x h ¢

A\ \w

taking this actibn.

I

f I

may e x p l a i n w h a t p r o m p t e d o u r

L a s t fall w e were pretty hard press-

ed and w e had borrowed a great deai o f money a n d w e made
an analysis

o f the situation

Duluth a n d S i o u x Falls,

i n t h e T w i n Cities a n d
a n d w e wondered

a n d o t h e r points,

why t h o s e b a n k s w e r e c a r r y i n g

s o m u c h Currency.

N o w

they carried i t simply t o cover shipments t h a t were
made i n the afternoon, t h a t necessitated a

double hand-

ling, t h e y c a m e o v e r i n t o o u r b a n k a n d g o t t h e money,

took i t t o their institution e n d shipped i t out again.
ke f i g u r e

w e have relieved t h e situation

i n the Twin

Gities alone between »2,000,000.00 a n d ~3,000,000.00
by taking this over.

J u s t whet has been accomplished

in Sioux City, Mankato,

o r these other points, I

cannot


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Federal Reserve Bank of St. Louis

say just a t the moment, b u t i t seemed unfair t o a s k sither
the T w i n C i t y b a n k s

t o carry ¥2,000,000.00

o r »~35-000,000.00

extra i n currency o v e r night; t h a t was that they c i d every
night. I

do not see that this interferes w i t h a n y other

Federal Keserve B a n k a t all.
Governor V a n 4andt.

W O u l d n o t t h e shipping h a n k

be a t the same expense i f i t made t h e shipment?
simply r e l i e v e d

I t is

o f t h e necessity o f making u s e o f these

shipments i f i t gets t h e Federal Keserve B a n k t o make

them, both the expenss and the work.
DA

Governor Waite
ER
\\

a n o t h e r point t o make. F o r

\

instance, a member bank just hes a sufficient balance
with u s , t h e y n e v e r c a r r y a n y excess,

a n y reserve w i t h

us, a n d they s e n d i n a draft o n the Twin City banks
late i n the afternoon a n d want a shipment a n d w e make

4; w e have not collected that draft; while really the
request c o m e s t h r o u g h t h e m e m b e r benk,

w e gst.

o u r money

right away; when the request is sent over from the Twin
City bank. I

think i t has a

good deal o f bearing. I

should not like t o see i t discontinued.
Governor Fancher.

I t might meet your situation,

but w e touch four other districts, St. Louis, Chicago


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Federal Reserve Bank of St. Louis

and A t l a n t a .

Governor Harding.

‘ h a t i s the practice i n Chicago

On taaet?

Governor McDougal.
we h a v e b e e n r e q u e s t e d

k e have h a d a few cases where
by a

member b a n k t o s h i p t o a

member b e n k a n d have complied w i t h that request.

h e have

also had requests t o ship t o non-member banks, a n d i n
those cases w e have complied a n d have charged t h e member
bank w i t h t h e e x p e n s e s i n v o l v e d .

a

k

tised that, w e have thought i t was a

e haves n e v e r a d v e r -

service t h a t w e

Gould properly render, a n d there was very little o f i t
done, b u t i t has b e e n done i n a few cases.
Governor Harding.

T h e n i t appears t h e r e

i s not any

uniform practice about this a n d hardly a n y likelihod
of getting a n y uniform practice right away?
Governor Seay. T n o i s i s a question o f bank administration. I

do not think i t i s vital.

of the member banks a r e not a t stake.

T h e interests
I t can b e served

if i t will comply w i t h reasonable conditions impos ed
by the Federal “eserve Eanks.
Governor Harding. I

think i t i s a local question

that i s n o t required t o have a n y more uniform action

than u n i f o r m d i s c o u t r a t e s

i n every c a s e

think w e m a y pass t h a t b y without

Governor Seay. I
action.


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Federal Reserve Bank of St. Louis

think w e shall have t o d o sO.

Governor darding. I
Governor Seay. I

move that i t b e passed without

action.

(The motion was p u t a n d unanimously carried).

Iv. C R E D T ? POLIGY.

(po) Discussion o f sovelied “direct action",
toat i f , p o lscy =

apviying pressure u p o n

borrowing member barks t c compel their
customers

Governor t r o n g e

t o liquidate.

% o u l d y o u b e willing t o take u p

IV (bd), Governor Harding?
Governor Harding. C e r t a i n l y .

Governor Strong. G o v e r n o r darding, E V (b), direct
action, w a s referred t o a t the couference w i t h t h e Class

B Directors, a n d especially a t luncheon, a n d there apf ams
to b e s o m e c l a i m m a d e o n t h e p a r t cof t h e g e n t l e m e n f r o m

Toe Farm Loan Bureau organization, a n d I thought o n the
part o f o n e o r t w o Class B

Directors,

f e t t h e neserve

Banks w e r e r e s p o n s i b l e f o r f o r c i n g p a y m e n t

o f loans

in

some cases t h a t resulted i n very severe hardship u p o n
the b o r r o w e r s

i n c o m m e r c i a l banks. I

ras l e d t o p u t

this topic o n the program n o t s o much b y what I
in New York, but, strange t o say, w h a t I
Mr. R o b e r t F l e m i n g ,


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Federal Reserve Bank of St. Louis

or b y reputation,

heard

heard i n London.

w h o m y o u probably k n o w personally

handed m e a

c o p y o f a letter, w h i c h I

had i n New York, f r o m a traveling representative o f a n
organizetion which makes t h e mortgage loans i n part o f
the Middle .est,

i n which h e definitely stated that the

banks throughout t h e section through which h e had trav~
eled were demanding payment f r o m the farmers o f loans
which t h e y c o u l d n o t meet,

a n d h e k n e w o f cases w h e r e

the farmers h a d gone t o their banks and said “Come and
take what w e have got, y o u vill find s o many mules and
some g r a i n a n d f a r m implements,

a n d a n unharvested crop;

or one thet has b e e n harvested a n d not sold, a n d sltogether

they are not worth enough t o pay the loan, but come and get

it if you. went it".

I t was a very striking illustration

of the penalty o f too severe enforcement o f the demand.
Governor Harding.
with a

T h a t appeals t o the member bank

good d e a l m o r e f o r c e t h a n i t does t o t h e Keserve

because t h a t i s t h e l a s t t h i n g t h e m e m b e r b a n k w a n t s

I t does n o t vant t o run a farm, t a k e a lot o f

to do.

live stock;
that farm,

i f there i s a n y chance o f getting a tenant o n
o r i n the case o f a factory t o get somebody t o

run and manage i t and work i t out gradually,

i f i t came

down t o thet point, t h e bank i s going t o waive i t s
elaim f o r i m m e d i a t e payment.


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Federal Reserve Bank of St. Louis

Governcr Strong. I
in the country grows slowly a n d
that sentiment which has developed i n the course o f the
last s i x o r e i g h t m o n t h s w a s i n f l u e n c i n g b a n k e r s possi-~
bly t o enforce p a y m e n t o f l o a n s p r e t t y actively,

and if

i n the
that is supported at the present time by anything
nature o f pressure u p o n the Reserve Banks b y the member
banks,

i t would s e e m t o b e fortified, t h a t policy,

by

authority o f the Reseve »ystem.

Governor sarding.

Y o u may be interested t o know

that last January a committee from New Orleans came t o
see me, I

thinx o n e o f t h e L o u i s i a n a S e n a t o r s a n d t w o

or three Congressmen, a n d then some sugar planters,
about their sugar situation i n Louisiana.

T h e y were

very m u c h d i s t u r b e d o v e r i t , b u t i t d e v e l o p e d

i n the

o f t h e c o n v e r s a t i o n t h a t t h o s e planters,

course

w h o were

solvent a n d w h o c o u l d b e m a d e t o p a y i f t h e i r m o r t g a g e s
were f o r e c l o s e d ,

w e r e t h e ones that were

o n the anxious

bench; t h a t i n those c a s e s w h e r e t h e r e w a s s o m e v e r y

grave doubt about t h e security pvaying the obligation
off, t h e y w e r e e a s y , b e c a u s e t h e p a n k w a s t h e o n e t o

worry about that, a n d they were n o t going t o foreclose,
they were going + o carry t h e m olorg..


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Federal Reserve Bank of St. Louis

D o you think this i s 4 time a t

Governor Strong.

which t h e Heserve System c a n taxe t h e responsibility o f
encouraging t h e policy o f enforcing payment?
what I

have t n mind.

not t h e t i m e a r r i v e d

T h a t is

d a s n o t that time passed?
t o accept t h e f a c t s

d a s

o f the situation

and give everybody time i n which t o turn around, p a y
ag c o n d i t i o n s e n a b l e t h e m t o pay, r a t h e r t h a n p a y d u r i n g

a period o f the utmost pressure o f prices?
Governor Hardinge

breaking point?
Governor “trong. I

do not know.

B u t that i s possible.

Sometimes a 2 hint f r o m t h e R e s e r v e B a n k i s c o n s t r u e d

a command. I

as

was told i n New York that i t was rumored,


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Federal Reserve Bank of St. Louis

at l e a s t in..ons district; t

h

aletter
t ” h aad b e e n s e n t t o

all borrowing banks t h a t they must reduce their borrowings t o their basic line. I

do not know whether t h a t

i s

- +

trues o r not, a

e

w e r e done, I

should regard i t a s a cal-

amity f r o m which t h e whole S y s t e m would suffer.
Governor Harding. I

raferred this t o a gentleman

that i s not here today, i f that vere true with respect t o
nis district, a n d h e said i t was nut. I

also heard o f sa

communication o n the way t o the Board, which has not b e m
yet received, w h i c h goes i n t o some specifications.
Governor Seay. I

with Governor Strong.

think I

a m i n very close agreement

t e

T a k e this case, hoaiever,

have p r a c t i c a l l y t v o e n t i r e S t a t e s w h e r e a l l t h e b a n k s a v e

excessive borrovers. A
have made,

very large number o f those banks

i n s o m e cases, i m p r o p e r ,

a n d i n many i m -

prudent loans, n o t f o r t h e purpose whieh i s calling u p o n
us n o w f o r additional eredit, n o t f o r agricultural purposes, although t h e y a r s agricultural States.
these banks c o m e t o u s for additional credits.
put a

least,

N o w
I

natural t h i n g t o s a y t o s o m e o f these b a n k s ,

t is
at

“ n y d o you not obtain some payment o n account

of this improper l o a n i n order thet y o u c a n get t h e


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Federal Reserve Bank of St. Louis

funds t o lend t o these m e n who must have it, a n d need

it for more leudible purposes?”
Mr. Hamlin.

‘ h y are they improper?

Governor Seay.

L e t u s s a y excessive loans t o cert-

ain industries.
Me. rlamlin.e.

I s that paper y o u hold?

Governor Seay.

N o , t h a t i s paper i n their o w n pert-

folio, w h i c h w e m i g h t n o t take, w h i c h t h e y c a n e o l i e e t
they t r y properly.

I n fact, s c m e o f t h e m h a v e t o l d u s

they h a v e b e e n s u r p r i s e d
liquidation

occurred «

if

t o find ‘ S s latent p o w e r o f

i n their communities

o f such paper when need

N o w that i s something which needs t o b e

handled w i t h great discretion.
Governor t r o n g .

D o y o u consider t h e responsibil-

ity o f the Reserve B a n k extends t o inquiring i n t o detail
as t o t h e p r o p r i e t y o f a l l l o a n s m a d e b y m e m b e r b a n k s ?
Governor S e a y e

N o , but I

do consider w h e n a

bank

calls frv-us f o r one, t w o , t h r e e , f o u r o r s i x t i m e s i t s

pank line, w e are called u p o n t o find w h a t disposition
that bank has made f o r its loanable funds,
place,

i n the first

a n d t h e p u r p o s e f o r w h i c h i t wants f u n d s f o r w h i c h

> «
ithas applied» T h a t is the position we take, Mr. Stron BR

Governor S t r o n g e

M

y suggestion does n o t apply t o

a c a s e o f that sort.


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Federal Reserve Bank of St. Louis

Governor Seay. I
demonstrating a

do not think i t does- I

a m just

no
condition o f which you, perhaps, h a v e

parallel a n d n o knowledge.

w e , harvever, I

might say,

are n o t taking a n y direct action t o force loans.
Governor McDougal. I

have @ memorandum here o f

a r e among 2
something l i x e fifteen o r more banks t h a t
t h a t are oververy large number o f banks i n our district
expanded,

a n d w e have f o r a

l o n g time, s i n c e l a s t

t h e m around
December, b e e n endeavoring a t least t o bring
to a better condition,

t o bring their porrowings d o w n

to a more reasonable basis.

I n many o f these cases W e

Directors,
asked the officers o f the bank, sometimes the
a n d we
to come i n i n order t o explain t h e situation,
that were t o b e
have told t h e m that i n s o far e s loans
stock w a s
liquidated f r o m the finishing o f t h e Live
t o let them g o
concerned, w h y w e were perfectiy willing
on; w e have urged them, though,

i n eases where their

vhich they
borrowers a r e holding either oats o r corn,
had t o be
were holding t o some extent, surplus which
i t go,
moved a n d was n o t t o b e fed, t o begin a n d l e t


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Federal Reserve Bank of St. Louis

because othervise t h e y were inflicting a nardship o n us
and a t t h e s a m e t i m e w e F

b e c aning 8

waiting f o r higher prices.

W

party t o simply

e have done that, a n d

if i t L s direct pressure--late l e s t year w e had a meeting i n Chicago a n d I
which w e i n v i t e d

think i t was a helpful meeting,

to

a n officer o f e a c h o f t h e banks l o c a t e d

in the several Reserve cities c f the district.

T h a t

was a t the opening c f the season ween grain shculd have
commenced t o mova, a n d this was i n Icwa, n o t t h e rest o f
the district, a n i w e urged u p o n them t h e necessity o f encouraging movement o f the surplus g r a i n t o market»
the m e e t i n g I

think t h e y a f f o r d e d u s a

A t

very great oppor-

tunity o f explaining t o them the necess ity a n d importance
of adopting e

policy under wnich gradually t h e y could

bring themselves d o m t o a point somewhat nearer their
own loaning p m e r s t h a n t h e y h e d veen f o r a long time.
n

Tf t h a t i s d i r e c t action,

o toet 21Sc.

There a r e many cases, though, where w e have been
justified, I

think,

i n asking t h e officers, a n d sometimes

tae Directors o f the bani,
wn interest.

I

t o come in, i t was i n their

f some o f these banks,.one t h a t closed

yesterday, f o r instance,

a t warcus, t h e i r deposits o n


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Federal Reserve Bank of St. Louis

1059

o

Pebruary 20th were »640,000,
were

~143,000.00.

n March 23rd they

e were loaning t h e m very heavily.

a

ke loaned t h e m t o the point o f taking practically a l l
the p a p e r t h e y h a d t h a t w a s s a t i s f a c t o r y ,

a n d some paper

thet was n o t entirely satisfactory, relying o n the oxcess o f p a p e r

i n the w a y o f collateral

t o p r o e c t US,

ané also o n the directors’ guarantee, which we had for
the w h o l e amount.

B u t there a r e cases t h e r e where b e -

cause o f d e c l i n i n g d e p o s i t s

w e h a v e h a d t o l o a n a n extrems

amount, a n d i n these cases w e have urged t h e m t o sell
grein where that grain could n o t b e p u t into livestock,
and w h e r e t h e o w n e r s

o f that grain were 2

party t o the

indebtedness v h i c n v e held.
think t h e thing boils itself

Governor Harding. I

down t o exercising discretion i n each individual caseGovernor McDougal.

I n each individual case.

Governor Harding.

O

Bank t h a t h a s a

f course, t h e Federal Aeserve

large n u m b e r

o f large notes,

c a n hardly

its own
be expected t o exercise that discretion, b u t
member b a n k o u g h t t o b e t o l d i t i s e x p e c t e d

t o exer-

cise that digcecthed: and that where a man can pay and
he does
will not pay, then i t is u p to i t t o see that


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Federal Reserve Bank of St. Louis

paye

T a k e a

situation l i k e lest fail, f o r instance,

¥
down i n tne cotton ssction, «hers there were some people

ho could have gotten 1 5 cents a

pound

for their cotton w h e n i t first came in, b u t they h a d n o t

sotten this 3 0 o r 40 cent stuff out o f their heads, a n d
they seid, "No, w e d o not want t o sell our cotton, because
it is going t o go up, i t is going t o hold.” L e n i e n c y
towards those people n a d the adverse effect, because those
very p e o p l e n o v a r e s o r r y t h e y v e r e n o t m a d e t o sell.

S

o

it i s a pretty difficult proposition t o say that a general,
rigid p o l i c y m u s t b e adgpted;

i t seems

t o m e y o u have g o t

to refer i t back t o the individual cases.
ming t h e r e a r e somes c o n d i t i o n s
you d o a t t e m p t

S u t bear i n

y o u cannot e S ses. a n d i f

t o force i t , y o u b r i n g d o v n y o u r w h o l e

credit structure.

Governor wcDougale
other d a y affecting a
been closed.

w e had a n interesting case the

bank a t Ambia, Indiane.

I

t hes

‘ @ fere loaning t h e bank pretty liberally,

a very small bank; w e were loaning probably p 4 3 ,000-00The affairs o f the bank sere n o t being nandled satisfact-

orily, a n d they had been reporting o u r letters t o them
n
a w e invited t h e president o f the
vere n o t r e c e i v e d , d


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Federal Reserve Bank of St. Louis

bank t o c o m e i n a n d t a l k o v e r t h e situation,

brought o n e o f his directors w i t h him.
very f r a n k statement.

I

and he

T h e y made a

t developed, w h i l e t h e y under-

stood our letters had not been received, that the banx's
books h a d n o t been posted f o r a few days, a n d thet t h e
only m a n i n the bank # h o knew h o w t o post t h e books
had l e f t o n Saturday last, l e f t a note behind that h e
vas sick, w a s going t o LaFayette, a n d would b e back
Monday morning.

d e did not come, a n d a s a matter o f fact

this president and director, I

do not know whether they

were very suspicious w h e n they came t o Ghicago, b u t =
asked t h e m a s t o whether

o r not there could b e a n y danger

there o f any manipulation o r perhaps misappropriation o f

the bank's funds.

e l l , they said they did not think so,

but said, w e will hurry back and v e will get someone t o try
to get o u r books posted u p and see ¥hether o r not your
letters have t e e n received a n d xhether o r not the books
have b e e n manipulated.

T h e next day, o r the d a y following,

without a n y action from us, a n y formal action, t h e y telea
phoned a n d s t a t e d t h e y b e l i e v e d t h e b a n k h a d h a d

loss

to this man, and they asked t o have the bank closed.
had nothing t o do with it, but just through a simple
discussion o f the status o f our relations w i t h taat bank
and w i t h t h e p r e s i d e n t h a d c a u s e d t h e i r suspicions,
nad r e s u l t e d i n that b a n k failing.

and


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Federal Reserve Bank of St. Louis

Governor Gaikins. I

think t h e m e m b e r b a n k s

Sometimes docus a great deal o f harm.
ask t h a t I

write a

T h e y oftentimes

personal l e t t e r w h i c h h e c a n s h o w

to his customers, demanding that they sell their wheat

T h e y have said to me "You do not knor

and liGuidate.

how helpful that vould be t o us,”

" T e cannot com-

pel them t o d o that, because v e would make enemics
x

if w e d i d i

i

i

f w e h a d letters

f r o m the

Federal R e s e r v e B a n k t o S h o t t o o u r c u s t o m e r s
rould b e a

simple m a t t e r

it

t o induce t h e m t o sell their

wheat and liquidate." N o w , without the letter I
have n o doubt t h a t h e has gQuoted the Federal Reserve
Bank f o r the purpose o f inducing people t o sell their
crops a n d liquidate. A

great deal o f that i s being

done a s w e all knov.
Governor Strong.
said, t o suggest that I had s p e c i f i c reports i n mind.
I wanted p a r t i c u l a r l y

t o discuss

t h e policy

o f the

Federal Reserve System, because t h e t banks t h a t might
appear t o b e extended i n their borrowings f r o m us,
whether s o m e o t h e r c o n d i t i o n m i g h t h a v e b e e n o u r b e s t


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Federal Reserve Bank of St. Louis

policy,

i t was n o w a burden, w i t h conditions a s t h e y

are, t o seek t o establish,

o r t o continue a

general, throughout t h e System,

policy i n

o f reducing those bor-

rowings . B a n k s t o which Governor Seay refers a s at
present b o r r o w i n g f r o m t h e F e d e r a l R e s e r v e B a n k a t
Richmond m o r e t h a n t h e y s h o u l d b e borrowing, n e v e r t h e .

less a r e borrowing that money. I

have n o doubt that

some o f our banks a r e borrowing m o r e than w e might feel
would b e justified under t h e conditions o f today.

I f

they have gotten the money improperly and we are guilty
of overloaning t o them, I maintain that this i s
time t o press them; certainly n o t the time t o press t h e m
to the point o f working a

hardship u p o n t h e community

in Which t h e y are doing business,

Governor Harding,
borrowers generally?

w h a t i s the frame o f mind of
A r e t h e y anxious t o liquidate

if they can, o r have t h e y got t o the point where t h e y
do n o t c a r e ?

Governor Strong. W a l l , i n our district, t h e
principal b o r r o w e r s
cerned a t t h e a m o u r t

a b o u r banks a r e v e r y much cono f t h e i r b o r r o w i n g s f r o m us.


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Federal Reserve Bank of St. Louis

“They are seéking b y every reasonable means i n t h e i r
power t o r e d u c e i t ; b u t I

d o not want t o see t h a t

even extended t o the point that they a r e putting
pressure u p o n p e r f e c t l y l e g i t i m a t e b o r r o w e r s , a n d ,

if y o u please, driving t h e m t o make almost fatal sacriLed

fices o f inventor+# goods under present conditions, s o
as t o p a y u s off. I

think the result o f s u c h a

policy generally will b e t o impair t h e value o f the
security that w e n o w hold, a n d i t certainly will not
improve t h e price situation.
Governor Seay.

Governor Harding, I

T h a t there m a y b e n o mistake

would like t o say that w e bhhink

4t little short o f a crime t o force t h e liquidation

of commercial commodities a t this time, andithat w e
are loaning n o w more m o n e y t o those banks which were
excessive b o r r o w e r s ,

a n d w e expect

t o have t o c o n -

tinue t o loan them more m o n e y during this period;
but what I

do mean t o s a y i s that i t calls f o r same

watchfujness; s o m e restraint.

W h i l e y o u are giving

them mors, t o see that the application o f the funds

as far a S you can, are for laudable purposes, reQuiring some watchfulness o f the banks i n order that


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Federal Reserve Bank of St. Louis

1065
they m a y n o t p e t t h e m s e l v e s

in a

Worse p o s i t i o n b y

borrowing more money than w e are allowed,

I n one

State where there a r e 9 7 menber banks, 9 0
o f which a r e
borrowing excessively f r o m us--_Governor S t r o n g .

H o w d o t h e y h a p p e n t o b e bor.

rowing excessively?

Governor Seay. B e c a u s e o f thsir excessive
needs,
due t o credit conditions,

Dr. Miller.

A r e they needs?

Governor wseay.

T h e y were Supposed t o be needs,

®r., Miller. j e l l , were they?

Governor Seay. tekl, I am prepared t o
think that
they w e r e ,

Dr. Miller,
whole question,

e l l t h e n I think y o u have
answered the
i f they were needs a n d y o
a r e satis.

fied t h a t t h e y w e r e néeeds-—..

Governor Seay. i

think o u r loanings were justified

to those banks, because t h e y themselves
h a v e gotten them.

selves i n a position where they Were compelled
t o have
funds, t o provide for another Set
o f their customers who
had n e t g o t t e n j u e treatment,

a n d w e believe t h a t i n
many


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Federal Reserve Bank of St. Louis

cases, w h e r e t h e y a p p l y t o u s n o w it: i s f o r n e e d s w h i c h

were immediate,

m d when w e d o believe that, w e let

them have t h e moneye
br. Miller. I

a m always impressed with this fact,

that i t takes t r o t o make a

rediscount; t h a t t h e bor.

rowing bank applies for a rediscount and the Federal
Reserve Bank: grants t h e discount.

I f a bank i s over-

extended, t h e Reserve B a n k i s a partner i n the overextension,

e
i
l with the
P a r t o f the r e s p o n s i b i l i t ys

Reserve Bank.
at t h e t i m e ,

I f the over-extension v a s legitimate
t h e presumotionnis t h a t t h e Reserve B a n k

is not justified i n shifting o r changing i t s policy
with reference t o that particular bank,

I f i t was n o t

justified a t the time, a n d i t i s badly extended, t h e
condition i s i n part y o u r fault,

a n d then I

think t h e

Reserve Haniaiis’ subject t o very severe criticism i f
it further imperils t h e position o f that bank o r its
borrowers,

b y reversing i t s policy a n d putting o n

pressure under t h e f o r m o f direct action. I

think

direct action h a s a certain place i n good Federal
Reserve banking, b u t f o r t h e most part, I

think direct a


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Federal Reserve Bank of St. Louis

action i s m o s t i n place w h e n i t i s t a k e n w i t h t h e v i e w o f

preventing t h e development o f a bad situation, rather
than trying t o correct o n e which i s bad, a n d which i s bad
partly through i t s o w n fault,

o r possibly aggravated

through nobody's fault, but through the precipitating
of a general situation that i s utterly b e yond the Federal Reserve Banks!

o r anybody's control.

4

t a time like

this, direct action, unless i t is applied with the utmost discrimination a n a the fullest knowledge, n o t o n l y
of the external condition o f the bank, b u t o f i t s purposes a n d motives, I

think i s little s h o r t o f destmuuctive

and a l m o s t c r i m i n a l .

Governor Seay. I
to that.

a m prepared t e subscribe f u l l y

D i r e c t action, s u c h a s was taken almost al-

wayS relates t o the past.

Y o u must not Forges,

I a m s u r e y o u d o n o t forget,

t h a t these banks which are

excessive borromers n o w were banks which fully expected

to liquidate their accounts back i n November, December
o liquiand January, but were deprived o f the a b i l i t y t
date their accounts b y the v e r y rapid fall o f commodities f o r which t h e y h a d advanced funds t o produce,


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Federal Reserve Bank of St. Louis

—Governor Strong.

T h a t “is the Teast bank t o press.

Governor Seaye T h a t i s the l a s t bank t o press,
and that i s t h e last bank w e are pressing; b u t that
bank, since then, h a s b e e n campélied t o apply for
further a i d i n order t o meet t h e decline o f its deposits, v e r y n a t u r a l l y u n d e r t h e c o n d i t i o n s , A

bank

therefore, w h i c h was a n extensive borrower a t ons time,

has been obliged t o refuse additional borrowers for
those réasonse

B u t , t o apply direct action now, t o

produce liquidation under those circumstances, i s
Little short o f a crime a n d i t i S not being dons a s
far a s I know,
Governor C a l k i n s ,

application a

S h o u l d y o u not carry your

little further?

Y o u S a y that where

the F e d e r a l R e s e r v e B a n k h a s p a r t i c i p a t e d
or p e r m i t t e d o v e r - e x p s n s i o n

o f a

o r assisted

member bank,

i t should

take care o f ite S h o u l d i t not also take care o f it,
if possible, i f the bank i s becoming o v e r - e x t e n d e d ,-dangerously over-extended, “ithout t h e participation
and without t h e permission o f the Federal weserve Bank,

but by borrowing elsewhere? I s n ' t that obligation


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Federal Reserve Bank of St. Louis

just t h e same?
Dre Milier.

think that presents a n

No» I

altogether different situation.
Governor Calkins.

N o t altogether t h e same, b u t

just a s much a n obligation. T h e r e are many cases where
banks h a v e b e e n compelled t o g o t o the Federal Reserve

Bank, relactantly, because they had become over-extended

by borrowing, ¢lsevhere, and cannot continue t o get assistance.
Governor Seay.

T h e matter i s a n individual problem

I think, Dr. Miller.

Governor Calkins.

E a c h individual case presents a

particular difficulty.

Governor Seay. E a c h case stands o n its omnifeet,
and has t o be treated so.
Dr. Milier,
ment,

Y e s , using discrimination m d judg-

i n dealing with e a c h individual case.

Governor Seay. I

think r e can justify any case

that y o u m a y pick o u t a s a n
very d e t a i l e d r e c o r d o f t h e c a u s e s w h i c h i n d u c e u s
to e x t e n d t h e m .


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Federal Reserve Bank of St. Louis

Dr. M i l l e r ,

M r . Chairman, before a

for the sake o f the record, a n d the incompleteness

of

the discussion that v e h a d just before adjournmant, I
would like t o return t o t h e Question o f currency a n d
say

gold policy and just/a few rords.
Governor Harding.

M a y I inguire before y o u d o

that, what action will b e taken o n the bankers! acceptances?

H a v e y o u discussed that?

Wr, Harrison. N o .
topic

o n this p r o g r a m e

T h a t was left a s the last
I

t is o n e o f the three topics

on the Governors! program that was postponed until
1 0 o n their

the B o a r d s h o u l d c o n s i d e r t h i s t o p i c n u m b e r

ovn program.
Governor Harding. I

just w a n t e d t o c a l l a t t e n t i o n

to t h e f a c t t h a t t h a t h a s n o t b e e n discussed.

Governor Worris, B e f o r e m e close, I

Would like

to make a personal statement that Governor “ellborn
asked m e t o make f o r him.

H e asked m e t o s a y this

afternoon t h a t t h i s w a s t h e f i r s t c o n f e r e n c e
ever l e f t b e f o r e t h e c o n f e r e n c e a d j o u r n e d ,

h e had

a n d h e was

only leaving because h i s wife w a s i l l a n d h e h a d t o b e


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Federal Reserve Bank of St. Louis

away from her for nearly tyvo weeks.
Governor

1

S this conference w i s h t o

consider t h a t Question o f bankers!’ acceptances first?
Governor Strong.

G o v e r n o r Harding, I

matter i s i n your hands,

think the

Y o u will determine which,

a whether b o t h subjects should b e considered, a n d w e

Will besgoverned accordingly.

T h e y are both vor

portant,

Governor Harding.
both, I

Wal,

w e might

sugrest that w e consider the bankers’ accept-

ances first, because I

think that will involve probably

less discussion t h a n the other,

i4iey With it. I

Y o u are a l l more fam-

knoe some o f you are,

X. B A N K E R S ' ACCEPTANCES.
(a) S h o u l d t h e Board's Regulations b e modified
so a s t o make elipible f o r purchase o r discount ac.
ceptances o f member banks having n o t longer t h a n

six months t o run, i n cases where bills are d r a m
against export and import transactions,
Governor Strong.

M a y I report what I understand t o

be t h e desire o f some o f the N e w York institutions, banker:


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Federal Reserve Bank of St. Louis

who-are Interested i n this matter, a t thé momert, t o
deal with a situation which they feel i s developing,
and that i s that the Board's Regulations s h o u l d e
b
modified s o a s t o maks eligible f o r discount, acceptances d r a w n f o r longer u s e t h a n three months,

u p to

a maximum o f six months, provided iff the statute, o f
course w i t h the anderstanding t h a t a s far a s i t i s possible t o d o so, t h e t e r m for which t h e bill i s d r a m
should not exceed a reasonable p e r i o d o f time w h i c h i s
required t o complets t h e transaction f o r which i t i s
drawn e

Mre Kenzél a n d I have discussed this a good deal

at aifferent times, a n d I think w e are caning t o féel
tt

s u c h a different s e t o f conditions a p p l y t o ex-

port bills t h a n apply t o import Hills, t h a t i t might
be desirable f o r t h s Board t o consider whether separate r e g u l a t i o n s s h o u l d n o t b e m a d e t o g o v e r n t h e t w o

types of bills. But, a t the moment, I believe that
the situation i n i »

and the general developments

in regard t 6 the use o f bilis covering both imports a n d
exports c o u l d b e pretty well covered b y a regulation o f


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Federal Reserve Bank of St. Louis

the c h a r a c t e r

that I

mentioned.

T h i s would not con-

template using a renewal bill, e v e m for a n y part o f the

time o f six months.
I t does n o t contemplate t h e

Governor G a l k i n s .

extension o f the same regulations t o domestic securities?

N o sir.

Governor Strong.
plicable

T h i s vould b e wholly ap-

t o export a n d import transactions.
I t i s your v i e w t h a t t h e regu-

Governor H a r d i n g .

lations ought t o b e modified t o that extent?
Governor Strong.

y e l l sir, I

a m prepared t o

go a good deal further than that, but not yet.
Governor Harding,

Governor Strong.

H o w f a r a r e y o u prepared t o go

I n general Governor Harding I

think that the development o f the technique o f regulation i s reaching a

point where i t i s going t o be a

distinct interference w i t h the development o f international banking.

i e are discounting eévery day com-

mercial paper f o r the member banks which t h e y take i n
their entire discretion. %

have n o doubt that some

of t h e r e s e r v e b a n k s h a v e h a d i n t h e i r p o r t f o l i o s f o r


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Federal Reserve Bank of St. Louis

some years, paper o f the same makers; w h i c h i s constantly
in the market, a n d generally speaking, t h e American b a n k
is not suffering great distress because i t has permitted
banks that loaned the m o n e y t o b e the judge o f how l o n g
this paper should run, o r what lines t h e y should have.
We m a y h a v e s o m e b a d d e v e l o p m e n t s

i n the acceptance b u s i -

ness for a while, b u t I a m rather inclined t o let thes
member banks decide w h a t t h e y should accept a n d what
they should not accept, w i t h a great d e a l more freedom
than i s now t h e case; a l s o loosen u p the rules o f eligibility a great deal. I

would o n l y consider this a s

the first step i n that <cirection.
Governor Harding.

W h a t i s your v i e w o f it,

Governor C a l k i n s ?

Governor Calkins. t h y , I think I agree, except
with t h e d i s t i n c t u n d e r s t a n d i n g t h a t t h i s i s n o t t o
in a n y w e y a p p l y t o a n y t h i n g e x c e p t i m p o r t a n d e x p o r t

transactionse

Governor Strong. T h a t i s all that I intended.
Governor Calkins. T h e r e are too many exceptions
in m y Statement, b u t I would b e very reluctant t o see
the regulations regarding domestic paper widened.


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Federal Reserve Bank of St. Louis

1075

Mr. Hamlin.

Y o u refer to the purchase, d o you

rather than the sale, o r t o both?
Governor Strong.

Mr. Hamilin.

Bothe

T h a t i s the first question that came

before us, o n the Question o f aiscount.
Governor Strong. W e l l , n o t beyond the fact,---discounting o f a c c e p t a n c e s

v e r y m i n o r operation.

is a

T e

have felt i n New York, t h a t t h e a c t contemplates t h a t w e
should eeoviae the rate a t which these bills could b e djis-

counted, i f a member bank which ovned them, wanted t o
discount them.

T h a t is, more a s a matter o f right than

is t h e c a s e w h e n w e s i m p l y b u y t h e m a s a

matter

o f bargain.

ing a n d selling a t the credit rate,

Governor McYougal. I

take i t there roul

discount bankers! acceptances a t the present time under
the p r e s e n t r a t e s w o u l d t h e r e ?

Governor Strong,

r y

o n o t think w e have a n y a t

j

ee ee

Mr, Kenzel.

W e

f

whose bills would n o t s e l l i

e

w bills o f small banks,
1 @ market, t h a t were

taken b y merber banks generally.
and discount t h e m occasionally.

T h e y indorse t h e m


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Federal Reserve Bank of St. Louis

Gowernor S t r o n g .

W h a t m y remarks a r e a d d r e s s e d

to i S t o a l l o w t h i s t o d e v e l o p a

little m o r e n a t u r a l l y

than i s possible under t h e v e r y finely d r a m distinction
as t o mhat i s and w h a t i
s not eligible.

L e t the banks

learn a little more b y experience t h a n i s possible a t
present.
Governor Seay.

D o y o u mean a S t o the character o f

the business, o r as t o the time, o r both?
Governor Strong.

& 8 t o the business generally.

Take t h e case o f a n exporter f r o m Penang,

o f rubber o r

tin, what does h e know about the Regudations o f the Federal Reserve Board?

H o w c a n h e possibly get a n y knowl-

edge o f the Regulations o f the Board? U n d e r the Regulations

a s a t present d r a w n ,

i t i s n o t possible f o r a n

american bank t o accept a series o f bills, possibly tvo,
covering a period o f s i x months f o r the purpose o f making
the Cuban sugar crop, a n d exporting it, unless t h e bill
Somes t o u s under t h e guise o f a bill d r a m f o r the p u r pose o f c r e a t i n g t h e d o l l a r e x c h a n g e ,

W e l l , that i s an

anomalous Situation, y e t i t i s a fact, under the present
Regulations.

N o w , t h e c u s t o m h a s gro#¥n u p a r o u n d t h e


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Federal Reserve Bank of St. Louis

1077

world that seems t o b e a desirable banking custan,
that the financing, making, production a n d movement

of a r e a crops shouid b e done b y bills o f exchange,
and i t i s very difficult t o distinguish, unless y o u
know t h e intention i n the mind o f the drawer o f the
bill b e t w e e n a

bill d r a w n B y r a C u b a n d r a w e r w h o i s s e e k

ing t o reimburse himself f o r advances m a d e t o tenants

on the sugar plantation, a n d his intention when h e
draws a bill authorized b y the regulations i n regard
to t h e dollar exchange.
But, I

would b e Quite satisfied a n d I think the

Situation f o r the moment would b e immediately met b y
broadening t h e Board's Regulations

s o a s t o make s i x

months papér eligible a t the Reserve Banks.

Governor Calkins. Governor Strong, i n your
reference t o bills drawn t o make the sugar crop, and
what you said following that, d i d I catch the sug-

gestion that the doors should be opened to a regula-~
tion of something that might b e labelled "Finance bills"¢
Governor Strong. Well,theyhave a perfectly proper
places i n a banking system.
years. A

T h e y have been drarm for

finance b i l l seems t o have gotten a

bad name


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Federal Reserve Bank of St. Louis

l i k e “a mad dog.

Governor Calkins. Another refulation o f the Board
Y o u could hardly s a y that s

would have t o b e modified,

finance b i l l was made f o r the financial investor f o r
commercial

purposes,

Governor trong. I

do not understand that a bill

drawn f o r the dollar exchange i s d r a m f o r a n y Such purpose. I

think that t h e bill that i s d r a m t o enable t h e

sugar planter i n Cuba t o make advances t o his tenants
for t h e purpose o f making p
agricultural purpose,

d G r a y n for a n

i f it

cultural purpose.

Governor Calkins, T h e Board has ruied that the
funds must b e used i n the first instance, f o r the agricultural investor.
Governor Strong.

B u t for t h e purpose o f réloaning

for that purpose,
Governor Calkins,

H o t f o r the purpose o f réloaning

for that purpose.

Governor Strong. W e l l , that i s a distinction
which I

think i s going t o encounter a

culties before w e g e t through.

good m a n y idiffi-


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Federal Reserve Bank of St. Louis

Governor V a n Zandt.

“ y o u l d not this require a n

amendment t o the Federal Reserve Bank act?

T h e dis-

count o f a c c e p t a n c e s h a v i n g m a t u r e d u p o n n i n e t y days?

Governor Calkins.
Mr. Harrison.

Noe

T h a t i s under section 1 4 Governor

Van Zandt.

Governor Van Zandt. B u t this says "discount."

I t

"Purchase o r discount."
Governor Harding.

Yes. I

guess t h a t i s right.

That i s only meant f o r the section
er y o u want i t discounted o r purchased,
does n o t make m u c h difference, b u t that regulation,
it was originally made, related solely t o purchases
under section 14. I

understand that Governor Strong's

remarks o n this whole subject cannot o r Shouia n o t b e
intended t o infer that h e meant t o make s i x months bills
eligible f o r rediscount, because t h a t i s immaterial,

and that would have t o be corrected, even i f desirable,
by amendment.
Governor S t r o n g . I

a m referring o n l y t o making s u c h

bbhlls eligible f o r purchase o r discount under that sectior


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Federal Reserve Bank of St. Louis

not
of the act which authorizes bills t o be purchased;
discounted,
Mr, Harrison.

S e c t i o n 14?

Governor Strong. S e c t i o n 14.

‘ o u l d y o u like t o

have m e offer a motion, Governor Harding?
Governcr H a r d i n g .

you d o that,

Yes. I

i n order t o get the sentiments.
therefore m o v e t h a t t h e Board

Governor Stronge I
pe r e q u e s t e d

would like t o have

t o modify t h e regulations covering o p e n

market transactions

i n acceptances,

s o that acceptances

dram f o r a period c f not over s i x months b e eligible

for purchase b y Federal Reserve Banks and sith such limitations

a s t o the relation

o f the period f o r rhich t h e

draft i g drawn t o the periods required t o carry o u t the
transaction f o r w h i c h i t i s drawn,

Governor McDougal. I

a s t h e B o a r d s e e s fact

second the motion.

Governor V a n Zandt. W o u l d n ' t y o u put i n there

something about these acceptances being limited t o export a n d i m p o r t t r a n s a c t i o n s ,

Governor McVougal.

Governor Harding.

a s i s stated

i n here?

W e l l , t h a t i s the topic,

A n d not domestic acceptances?


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Federal Reserve Bank of St. Louis

Governor strong.

No.

H o t

BYICeS »
Governor °eay.

T h i s matter w a s voted o n favor-

ably b y the advisory council, wasn't it?
Governor Harding.

Yes.

I n order t o get the

sentiment o f the Governors, I will put this motion
to a vote.

( The motion was put and unanimously carried.)
Dr. Miller.

I n regard t o the statement t h a t

I made this morning, there are only two brief rem:
that I

wish t o make,

The loan account o f the Federal Reserve Banks
in 1920 reached i t s maximum o n the 1 5 t h o f October,
Generally speaking, t h a t w a s also true o f the member
banks o f the Federal Reserve System,
be determined, ‘

>

454

a s far a s c a n

c f -Cets oer a n d 2 p £ 6

the l s t o f A p r i l t h e Federal Reserve S y s t e m has added

over $250,000,000 t o its holdings o f gold.

T h e great

bulk o f that, (210,000,000 u p t o the first c f 4pril,
represents the acquisition o f gold since the first o f
this year,

I

t i s mainly gold, a s was said this mozna-

ing, t h a t has been p u t i n the London market f o r Ame


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Federal Reserve Bank of St. Louis

account, S o u t h African gold, because o f the premium

I t represents therefore a very

on the gold dollar.
important,
p 3

i

n§ o t t o say p r e s s i n g c o n d i t i o n

f we are

not t o b e caught a s w e were i n 1915 a n d 1916
unawares, a i d helpless t o d o anything i n the matter.

Ine Governoss this morning called attention to
the f a c t t h a t w e w e r e L i k e l y t o b e m a d e t h e v i c t i m

of this new gold influx, a n d that i t would show its
effect i n the inflation a n d expansion o f credit a n d
currency i n n o essential respect,---and I

a m now adding

to t h e s t a t e m e n t , - - - d i f f e r e n t f r o m “ h a t w e w e n t t h r o u g h
in t h e e a r l y p a r t o f 1 9 2 0 a n d t h e l a t t e r p a r t o f 1919,

except that the reserve position o f the Federal Reserve
Banks w a s stronger, a n d o n the whole, w o u l d n o
Close t h e full dimensions o f the situation.
think

r

e

]

S e A e n e = 2 Gat.

4 s

SSsticnsfoar discussion a r e

whether there i s anything w e can d o usefully t o protect o u r s e l v e s a g é

a

n

y improper expansion

o f our

loan account t h a t m a y b e d u e t o this ficticious a p pearance o f health a n d strength o n the part o f the


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Federal Reserve Bank of St. Louis

Federal Reserve System, a n d i f so, what i t shall be,
Governor S t r o n g p r o p o s e i c a r r y i n g t h i s g o i d

in a foreign account, c a r mark i t i n the Bank o f 4
That doesn't seem t o meet with very much favor here,
Personally I

woulda b e g i a d t o s a y a m e n t o t h a t m e t h o d

eof dealing w i t h the g o l d acQuisition,

i f n o other method

were available, b u t with a very strong suspicion that
it would n o t b e found t o b e v e r y long a directly effective method, m a i n l y because i t seems t o m e t o involve t h e non-use o f gold that i s the property o f the
Federal Reserve Banks.

T h a t is, this g o l d must b e used,

and the question i s i f w e c a n find some method o f using
the gold that does n o t p u t u s t o o mich o n the defensive f o r j u s t i f y i n g apolicy that i s manifestly resorted
to i n order t o accomplish something t h a t v e think good,
but which v e think the public will n o t understand o r
Will n o t s u p p o r t u s i n .

Now, m y proposal t o reshape o u r Reserve System
and our reserve practices w a s largely encouraged,
my o w n mind,

in

b y reason o f theffatt t h a t under the pecul.

iar structure o f the Federal Reserve System, w e had


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Federal Reserve Bank of St. Louis

very g o o d expedisents f o r p u t t i n g

a way
in a way that would not embarass us, a n d i n
that w o u l d n o t p r o v o k e a n y c r i t i c i s m o n the p a r t

of the public.

F o r that reason, I

it t o s t r e n g t h e n t h e n o t e r e s e r v e s

propose u s i n g
o f the Federal

Reserve Banks o n the supposition t h e t w e were going
to build u p andshow sepanéistdsyosit reserves f r o m
inthe note reserves, n o t because w e feel a n y great
terest

i n simply accumulating a

note r e s e r v e

as a

note reserve, b u t because thse setting u p o f a note
reserve p r o v i d e s a

v e r y c o n v e n i e n t expedmkent f o r

a t the
allocating t h e g o l d t o the note department

seem
time, o r when there are times when i t does not
4
to u s o n the whole desirable t o show t o o strong
banking department.
most i
sideration

o f Questions

divest ourselves o f the

m p e r tn t
a h eni ct m -

o f this s o r t that w e should

f t i n e v i t a b l e prejudice

that w e are a l l subject to, t o play o u r o w n hand, o r

to aggrandize that particular section of the Federal
Reserve organization t h a t w e happen t o b e identifi


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Federal Reserve Bank of St. Louis

with, I

cannot help tut feel t h a t Mr. Strong's propo-

sition t o c a r r y t h e f o l c abroad, i n s t e a d o f a l l o r i n g

it

agents! Department
practically r e d u c

trust t h e Bank o f
the

B

Des

to.

o

a

r

e i ,

d

,

T h a t is

’

T h a t i s r e a l l y r h a t i t reédices i t s e l f

" I a m willing t o put m y gold where I lmow I can

get t h e use o f it, b u t I

a m not willing t o nut i t into

the reserve account where I

a m not altogether 8

I can get control o f i t shen I want
would b e

i t

v e r y regrettable J I th

a n d w e will

never rerk out anything i n the nature o f a food vorking
Federal Reserve » y s t e m i
f we f i
working a t cross purposes
mental a n d a

f a r rea

of treating n e v gold.

i n natte

a

n
a

y necessity o f
b a r e a s funda-

n e importance a s this matter

F o r that reason, I

say Z o should

be perfectly rilling t o g0 along with you and keep this
gold abroad i f I felt t h a t w e could get a w a y ¥
Bntirely apart f r o m the fact that i t might cause political
criticism a n d suspicion a s t o what this meant, ---thi


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Federal Reserve Bank of St. Louis

accumulation o f 4 large volume o f gold i n the
uid b e c o n s t a n t l y

on

to the man “ho seys “thy don't you shor this fold a s
4

part o f your reserves, w h e n t h e Reserve a c t prescribes

that cold is your fundamental reserve money?”
vhen y o u use f o l d t o deposit a s collateral
security against reserve notes, y o u ere u s i n g y o u r fold
and you are using i t i n a way that o n the whole commends
to the judgment o f a pretty considerable section
americen public, e v e n a t the present
to t h i n k f o r t h e g r e a t e r p a r t o f t h e A m e r i c a n
Dips

Y o u ere not embarassed

i n defending y o u r p o l i c y

Peaeral Reserve
in building u p the g o l d quality o f the

Bank not¢,when you can Show that you are doing that,
aid o f gold that i s being dumped into o u r laps,
so t o speak, because o f the disrupted condition o f
international exchanges, a n d the f a c t that gold has become m i o d i t y

a n a the o n l y country that c a n afford t o

take t h e g o l d i s the United states o f =merica.
In m y own mind, a n d I

d o not think this i s fine


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Federal Reserve Bank of St. Louis

theoretical s p i n n i n g , - - - I c o n c s i v e

o f the wederal

Reserve Agents! Department 2 8 Something that i s a
mighty convenient compartment
under these conditions.
you c a n store gold.

i ir

Y o u have a

Y o u have a

can release g o l d a s conditions,

benking, mechanism
place i n which

place f r o m which y o u
i n the judgment ¢

the

Federal Reserve B o a r d a n d the advisory council a n d ths
Governors o f the Banks think i s desirable.
I have h a d s o m e c o m p u t a t i o n s m a d e t o s h o w t h e e f f e c t
that t h e i n f l u x o f g o l d h a s h a d ubdon o u r r e s e r v e S a t i c ,

It i s a n amaZing thing. I
UD.

F o r t h e most part,

think w e have been cleaned
i t i s the distressed foreigner

that h a s been doing t h e cleaning u p for us,
From the l o t h o f October l a s t year t o the list o f
April t h i s year, t h e r e s e r v e p e r c e n t a g e f o r t h e S y s t e m

as a whole,---stating the reserve percentage a s reserve account behind notes a n d deposit l i a b i l i t i e s ,-has increased b y a n amount o f 2 8 per cent.

F o r the

Federal Reserve Bank o f New York, the increase i s no
less t h a n 535 p e r c e n t ,

Y o u reserve ratio:

V a s 357

on the 1 5 t h o f October, a n d i t was 56.7 o n the l s t o f
April.


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Federal Reserve Bank of St. Louis

Governor Strong.

That is

the repayment. o f loans a n d retirements o f circulation.
Dr. Miller, Y e s . I

a m Going t o tell y o u rhat

the f a c t o r s a r e i n that.

Now, i n the improvement o f 2 8 per cent o n the
1 0 per cent o f i t i s due t o t h e

System a s a whole,

retirement o f Federal Reserve Bank notes, 3 S per cent
of i t i s due t o the decline i n deposit liabilities,
and 1 5 per cent o f i t i s due t o the increas i n the

absolute reserve monies, s o that more than one-half o f
the i m p r o v e m e n t

i n the reserve r a t i o o f the twelve

banks consolidated,

i s due t o the increase i n reserve

money e
Governor Norris.

W i l l y o u give m e those figures

again please?

Dr. Miller.

T e n , three, a n d fifteen.

T h e pro-

portionate increase o f the reserve percentage from the
15th o f O c t o b e r

cent,

t o t h e l s t o f April, 1 9 2 1 i s 2 8 p e r

1 O per cent o f thet i s t o b e credited t o the

decrease

i n circulation. S

per c e n t t o the decrease


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Federal Reserve Bank of St. Louis

in deposits a n d 1 5 per cent t o the increase i n
In the N e w York Bank, t h e increase i n the
ratio w a s 5 5 per cent.
the d e c r e a s e

O f that, 7

per cent i s

i n circulation; &

in deposits a n d 4 0 p e r c e n t i s

PESErVES ©
Now that,

t o m y mind, i s a pretty startling narra-

tion, a n d i t indicates t h a t w e have a

reserve ratio a t

the present time that i s a very effective mirror o f the
changes i n the domestic credit situation; phat,l take
it, a t the present time, a n d bp a b l y for some years t o
going t o b e a n important matter i n connection

reserve ratio, a n d i f our reserve ratio i s not
indicator o f domestic credit conditions t h a n
present t i m e ,

i t is a

v e r y f a u l t y indicator,

I think w e c a n safely
difficulties
in 1916 a n d the
Either t h e F e d e r a l R e s e r v e S y s t e m h a s t o a i s c a r d f o r

itself t h e reserve ratio a s a matter o f n o particular

consequence i n determining its discount and credit
policy, o r it has got t o face the extremely difficult and


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Federal Reserve Bank of St. Louis

I think impossible t a s k o f maintaining h i g h rates w i t h
a rising reserve ratio.
I should s a y Governor Strong, particularly i n your

case, that the 7 per cent rate i n New York i s going to
destroy i t s e l f

b y process

o f hari-kari

i f your reserve

goes o n swelling a s i t has been during the past three
months

b y r e a S o n o f t h e s t e a d y thepouring o f gold.

t i n maintaining a
cannot defend yourself a g a i n s t . i

Y o u

rate

of 7 per cent with reserves t h a t before l o n g will b e
up t o 6 0 per cent, assuming a s I think there i s every
warrant f o r expecting, t h a t w e g e t the b u l k o f t h e H e w
South A f r i c a n g o l d .

U n l e s s y o u have great expansion

in your liabilities, y o u r reserves w i l l g o u p t o 6 0
per cent a n d well over 6 0 per cent i n the course o f a
year.
Governor Strong.
from t h e c l a s s

T h e pressure i n New York

o f people W h o h a v e p r a c t i c a l l y n o

political i n f l u e n c e ,

a n d w e a r e n o t a f r a i d o f them,---

the stock exchange fellows.
It i s these farmers t h a t I

w e have g o t them tamed.
a m afraid of, a n d w e will

buy paper from the other Reserve Banks just as fast as


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Federal Reserve Bank of St. Louis

they get it, t o k

e

er reserve
up o
dorn. I

a m not afraid

of that,
Dr. Miller,

A l l right.

T h e n y o u simply have a n

instance o f chasing t h e r a t around the house again.

Y o u

cannot g e t i t out o f the System.

Governor Harding.

D o you think that the average

reserve for the System i s g&o i n g t
o be maintained
£
over
50 per cent during this summer?

Dr. Miller. I
but I

doubt very much whether i t is,

think t h e L i a b i l i t i e s w i l l b e k e p t m u c h m o r e

hand, a n d w e will have a

in

much more respectable atti-~

tude toward t h e Reserve B a n k borrower i f w e have a
reserve t h a t i s a

little l o w r a t h e r t h a n i f w e h a v e o n e

that i s somewhat high.
Governor Calkins,

H o w c a n w e have a

reserve that

is low i f we continues t o get gold a t such a rate a s w e
have b e e n getting i t now?

Dr. Miller, L e t me say when I say that, I an
Saying i t o n the assumption that our method o f reporting the reserves will b e changed, s c that w e should
show a

net reserve a n d deposit reserve separately,

as


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Federal Reserve Bank of St. Louis

I think w e have always b e e n content t o do, i n accordance
with the Act.
reserves.

T h e A c t does n o t call f o r E t e grett cat

{ T t calls f o r s p e c i f i c reserves.

I

t specifies

U n d e r those circumstances, w e would

the note reserves.

i was not advisable t o
out a n y gold that i n our j u d g m e n t , t
show a s part c f o u r working reserve,

i n ths note reserve

reand gradually educate t h e public t o look t o the b a n k
serves rather t h a n the note reserve,

o r theoretically

combined reserve, w h i c h I hope w e c a n d o without e x -

citing suspicion that w e are constantly tinkering with
our ReserveSSystan;

t r y t o educate t h e banking business

community t o look t o the b a n k reserves a s a n i
of the credit situation,

a s far a s i t i s reflected i n

the statements o f the Federal Reserve Banks.
Governor Calkins,

W h a t I am asking i n that i s

whether y o u c a n e d u c a t e t h e p u b l i c

t o l o o k a t anything

except t h e h i g h reserves, wherever i t appears.

Dr. Miller. Y e s , I think you can,

I f you cannot,

I do not s e e v e r y much future f o r t h e Federal Xeserve
Bank System. I

think w e m a y a S well admit t h e fact

thé public and member banks are going t o run the

& e e s

2R e

wyscomn,


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Federal Reserve Bank of St. Louis

instead o f the Federal Reserve
L e t u s g o t o the m a t o n that

Governor strong.

think t h i s i s t h e t i m e t o f i n d

riow, L

conning it.

m t eho is

be straining t h e patience o f this

“ould I

meeting b y making a
poctor M i l i e r ?

Dr. Miller, N

a

8

m concerned,

cer

tainly.
4 s t o trusting t h e Board, 1

Governor Stronge
admit t h e a p p e a r a n c e

o f that situation a n d there

might b e more truth than poetry i n what y o u say, b u t
not from the standpoint t h e t appears i n that bald
language.

Dr. Miller.

I n your case, I will amend the state-

ment b y saying that y o u will n o t trust yourself,
Governor S t r o n g .

T h a t I

think i s the more correct

statement, b u t the fact i s Dr. Miller, that this plan
which I have suggested,

o f keeping t h é gold i n London,

was p a r t l y i n s p i r e d b y t h i s fact.

admit that.

I t i s not

I t is a n expedient, b u t i t has

vantage o f putting t h a t gold i n cold storage, w h e r e


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Federal Reserve Bank of St. Louis

oa

just a s you say, i t i s not used,

I t does n o t e v e n fur-

nish 6 0 per cent expansion o f its volume, where, w h e n the
time comes, w e c a n take i t out o f cold storage a n d return
people w h o some d a y will g e t it, without t h s
stroke o f a pen o n our books,
System.

a s affecting o u r Reserve

N o v that strikes me, i f i t i s défensable f r o m a

political standpoint,

a n d i f i t i s safe t o d o it, t h a t

Y o u actually take t h a t

it would b e idle n o t t o d o it.
gold o u t o f use i n the world.

w e consider t h a t i t i s a

trust.
The g o l d i s held i n trust, mifthvoat
putting t h e money i n our assets,

i n the sense h e r e b y

it permits a n y expansion, a n d i t goes back t o its owners:
where t h e y are able t o get i t back, without a t the time
requiring a n y contraction,
occurred.

i n case expansion should have

T h a t was really the purpose o f whe suggestion.

Now, a s t o the question o f trusts, there i s Ssomething i n that. I

think w é should b e frenk about it.

What this system requires i s protection against misled
public opinion, w h i c h will b e reflected i n Congress,

in

some foolish a c t b y Congress, a n d I must s a y i n all frank.


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Federal Reserve Bank of St. Louis

ness, t h a t [I believe t h e Federal Réserve B o a r d i s very
vulnerable,

i f i t exercises t h a t control; m u c h more s o

than a r e t h e s e t w e l v e r e s e r v e b a n k s u n d o u b t e d l y .
the F e d e r a l R e s e r v e B o a r d i s i n a

position

I f

t o Say i n

response t o these demands "We d o not control these
reserves;

w e have n o t g o t the power t o shovel a hundred

or two hundred o r five hundred millions o f gold into

the reserves o f the Reserve Banks," t h e Question i s
answered a t once, a n d m y experience, through every

administration that I have béen through, indicates that
there i s always going t o b e pressure applied t o the
Federal R e s e r v e B o a r d ,

Dry Miiier.

L e t m e interrupt there, I

objection t o that.

have n o

I t i s not that I view this thing

as sométhing t h a t t h e Board imposes u p o n you. I

am

simply presenting this a s a device f o r Federal Reserve
Banks t h a t d o n o t w a n t t o s h o w t h e s e e x c e s s e s

o f gold.

You say, p u t this into t h e note reserve a n d not s h o w i t
in o u r d e p o s i t r e s e r v e ,

Governor Strong,

T h a t i s the greatest danger t o

our reserve position, w h i c h will come f r o m the pressure
of the p u b l i c upon t h e banks generally t o d i s c a m t w i t h


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Federal Reserve Bank of St. Louis

us, o r i s the most dangerous pressure t h a t would b e
to Congress b y this Federation o f Farm Bureaus a n d Likes
bodies. I

apprehend that the great danger o f the con-

trol o f the System will center i n washington u p o n the
Federal seserve Board, w h i c h i s a changing body, a n d which.
in time, m a y b e subject t o certain political domination.
Dr, M i l i e r ,

D

o you think that y o u c a l d

gst by

with two or three hundred millions of gold deposited in
the Bank o f England? D o n ' t you think that criticism roul:
be just a s effectiv
Governor Strong. I

think i t would permit o f a

more direct a n d explicit expression o f the policy f o r
the l o n g future;

t o s a y that g o l d some d a y i s going back

to Europe, a n d w e nave l e f t i t there f o r that purpose.
Dr, Miliex, I

d o not believe t h a t w o u l d c a r r y a

particle o f conviction t o the Farmers' Alliance.

They

are not concerned with the long future,
Governor C a i k i n s , I
Strong i f y o u w e r e

would l i k e t o a s k G o v e r n o r

a n agitator, a t t e m p t i n g

t o bring pres-

sure upon Congress t o permit further expansion, o r t o
provide for further expansion, what better illustration


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Federal Reserve Bank of St. Louis

Reserve
would y o u W a n t t h a n t h s f a c t t h a t t n e F e d e r a l

Bank o f New Y o r k held i n gold,

i n England,

whi
and fifty o r tvo hundrea million dollars,
o f its reser
not being shown o n its books 4 s parh
raise t h e G a n
There v o u l d b e n o b e t t e r o p p o r t u n i t y t o

was presented b y that situation.

am ready t o abandon that

Governor Strong. I
entirely.

Y o u have b e e n asked t o subordinate y o u r
*

+
individual opinion t o the majority, e n s

ated mine. I

have e v e r y intention o f going nore

sending a cable t o london that that
be adopted.

Governor Calkins, I

am not asking because 1

am

my
desirous o f setting u p m y opinion, b u t simply f o r
own information.

(Discussion o f f t h e record.)
Governor S t r o n g .

h

y e i n k about this really

poils down t o this, s o long a s w e import
it i n circulation,
rency,

i t camts

a s expansion o f

t o the extent that i t i s put i n our accounts,

You c a n p u t i t i n any compartment that y o u please i n


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Federal Reserve Bank of St. Louis

the Reserve Bank, b u t i t has ths effect o f c a m t i n g ag expansion o f the currency.
c a n n o t agrees w i t h y o u there,

De. W e a ter. I

Governor Strong.

H o w d o w e p a y for it?

Y o u pay for i t i n the same way as you

Dr. Miller.

do i f you leave i t i n Sngland.
Governor Strong.

N o e Exeuse ;

Sir.

You give credit f o r i t o n your books.

Governor Strong.

W h e n Kuhn-Loeb & Company hand

us $10,000,000 i n gold we give them a check
and i t makes a

deposit liability.

Dre Miller.

I t i s immaterial whether

in London o r whether i t comes o v é r here.
Governor Strong. I m m a t e r i a l , e x c e p t when i t comes
over h e r e w e p u t i t i n r e s e r v e a c c o u n t ,
the b u l k o f t h a t r e s e r v e
to o u r d e p o s i t
eQuivalent

and

b y S o mach.

o r our bank note circulatim,

a n amount

t o t h e g o l d imported,

Dr, Millier. N o . I
ation there.

think you misconceive the oper-

Y o u d o not a d d t o your drculation.

Y o u ac


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Federal Reserve Bank of St. Louis

co f o u r

P o s e rev;

Governor S t r o n g e

itwith a bank check.
UGe

L e r

Y o u G o G i s t i m e l cner case,

for i t With a bank check.
Governor Strong.

B u t i n that case r e d o

@old t o tie reserve.
Dre Miller,

1

¢ other case

Y e e ; a d d 1 % t o the reserve, d a t

treat does n o t a d d i t t o your c i r c u l a t i o .

I t does n o t

G43 t o your liabilities beyond what i t dJoés i f you

leave i t i n England.

Y o u bring the gold over here

and you substitute g o l d f o r a part o f the commercial
cOllatsral that y o u have u p nor

Banks «

I f you bring i n 100,000,000 o f fold that you

do n o t w a n t t o k e e p i n y o u r b a n k i n g reserve,

y o u deposit

that w i t h t h e F e d e r a l R e s e r v e B a n k A r e n t a n d t a k e d o r n

#1L00,000,000 o f paper,

Y o u eannot a d d a dollar t o

your outstanding note circulation.

Y o u have simply

increased t h e proportion o f gold t h a t y o u show among
the special assets t h a t secure y o u r already outstanding
note i s s u e s ,


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Federal Reserve Bank of St. Louis

Governor Strong. " s l l , I

have t o differ @

you, but the fact i s this, i f the First National Pank
gets t h e gold

l e w %

i

P

t comes i n 4

I t doesn't

o

n

y difference

happened pricr t o

r ei

p

r

i

us a n d get creait

i

off o f a ship.

n

g thet

t o n o u r books a s

they want to they can say to us “Yon't give us Federal
Reserve Bank notes for that."
Dr, Milier.

T h e y c a n d o €xactly the s a m s thing

thé g o i d i s i n London.
Governor Strong. E x a c t l y , I

admit that, a n d I

admit

that t h e y do, b u t the point isS,---what distinguishes t h e
tro transactions

i n the case c f the g o l d which w e bring

it i s a d d e d t o o u r r e s e r v e

i n some f o r m o r other

in the case o f the gold which w e d o not bring, t h e
expansion t a k e s p l a c e w i t h o u t

addition

t c o i r reserves,

br, Mitlers
some
fore

s o i n g

a

k

e o u r {100,000,000 o f circule-

tione
Governor Strong.

I t takes

m t a

bank deposit, w h i c h


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Federal Reserve Bank of St. Louis

is the sams tringe

fold t o reduce i t s imuediateltiabilit

Governor Strong. w e l l , that has the sane effect.
Dr. Miller.

I t has indirectly that effect, yos.

a c c o u n t w i t h you,
It e i t h e r a d d s t o t h a k b a n k ' s d e p o s i t

o m which i t has
or i t takes u p a part o f the Aiscounts
paid t h e 7

n e r c e n t r a t e o f interest, u n l e s s

i t has

that anount t o
need for those funds i t i s going t o use
reduce i t s liability t o you.
what d o you d o with the g

N o w t h e g m estion i s

o

the thing that w e c a n control.

m y mind i s
n i? t
l u d-That..b0
T h e action o f the

First National Bank r e camot control, but we c m
control o u r o w n action.

T h a t d o you c o “ith the gold?

Be y o u l e t i t remain i n your bank reserve a n d show
your r e s e r v e

u p o n e o r t w o p o i n t s f o r t h e n e x t week,

or are y o u going t o follow t h e alternative procedure
and lodge i t with the Reserve agent, shoWing h i s net
reserve

u p With y o u r deposit reserve practically sta-

tionery?
Governor S t r o g .

N o w w e come t o the point, a n d


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Federal Reserve Bank of St. Louis

is this;

s my view about this matterr
whichi

i t

not make a n y difference rhat you d o with it, a s
as y o u put i t i n your reserve.

T h e o n l y thing

is controlling i s the rate policy o f the Federal

Reserve System.

I f the effect o f the importation o f

the g o l d a n d p u t t i n g i t i n t o o u r r e s e r v e

i s t o make a n

inerease i n our reserve a n d i n our reserve percentage,
no damage w i l l b e done t o the credit situation, unless

it leads us, b y reason o f our own volition, o r by
public p r e s s u r e

o r b y political p r e s s u r e

t o put our

rates d o w n a n d r e d u c e e x p a n s i o n .

Dr. Milter.

Yes. I

think that i s a n important

matter, a n d I would say, d o you think y o u ¢cm1a maintain
a % per cent rate w i t h a reserve o f 6 0 o r 6 5 per cent?

Governor Strong, Y e s . I
that o u t

think we ought t o fight

w
o
n
r i g h t e

Dr. Miller, I

think y o u are v e r y optimistic,

Governor Strong. N o w , i f we are t o d o that, your
theory i s that i t i s safer t o put that g o l d i n the cus-

_tody of the Federal Reserve Board, because the Board


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Federal Reserve Bank of St. Louis

Fill b e able t o resist that pressure. i

say, leave

of these Reserve Banks w h o m a y differ
possibly a s t o rate policies, b u t who i n the l o n g
run are i n a better position t o escape t h e most dangerous kind o f pressure, n o t the pressure o f member banks,
but ths pressure r i g h t u p here i n the Capitol.

Dr. Miller. B u t , I think you overlooke< something
there,

“ w & Cannot force t h e g o l d out.

V e cannot force

you t o take t h e g o l d a n d substitute commercial c o l lateral.

I

t i s y o u r h o h a v e t o d o that.

vho have t o réspond t o the pressure,

i

t i s you

Y o u have p u t

%100,000,000 o f gold into the note reserve, and you
have taken down your commercial paper,

A l l that t h e

Federal Reserve S o a r d could g o vould b e t o force y o u
to put i n the gold,

T h a t i s all.

Governor Strong.

Dr. Miller,

T h e y cannot force the gold out.

Governor Strong,
Dr, Miller,

N o sir.

T h a t i s where w e parte

T h e y cannot force t h e gold out. T h e y

can hold i t back, b u t t h e y cannot force i t out,


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Federal Reserve Bank of St. Louis

a m nOtcafiraid o f what you.

Governor Strong. I
Will d o vith t h e gold. I

a m afraid o f vhat some-

pody w i l l f o r c e y o u t o d o w i t h o u r rates.
Dr, Miller.

i t may b e that y o u are Qiite right

in saying that there i s nothing re c a n d o t o protect
ourselves against politic&él o u r outside pressure
through a n y distribution o f our reserves; S u t i f you
are a b l e t o r e s i s t p r e s s u r e w h e n t h e g o l d i s i n y o u r

deposit reserve, I

think b y parity o f reasoning y o u

are i n a still stronger position t o resist i t when
it i s actuelly i n your note reserve a n d your b a n k
reserve funds s h o w a s high a s a reserve a s i t does
at the present time.
Governor Strong.

Fal,

y o u know I

a m s o heartily

in sympathy with anything t h a t c a n b e done that “ill
enable u s t o sscape p o s s i b l e p r e s

in this country just now, that I

for l o w e r r a t e s

j o h e a r t i l y i n any

scheme, even i f I do not believe i n the technique o f
that scheme, n o t this one,~---if i t were n o t that I
am v e r y m u c h a f r a i d t h a t i t w o u l d Y e t h e v e r y t h i n g

that w e want t o escape.

T h e reason w h y I say i t i s


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Federal Reserve Bank of St. Louis

rat 2

peen

Ss
Situation w h e r e I

believe t h e Govern

s

In

f a i d =t5s

serve Banks have felt t h e influence o f pressure
ns
b
e
:
directly through t h e Board f o r rate pelicies t h a t

inspired

b y the Treasurer,

C e r t a i n l y the policy

the Federal Reserve »ystem, a s t o rates was considerably controlled b y the Treasurer auring t h e war, a n d
fo b O tie. Derios..t

d e

t h i n k w é c a n raise a

very

J u s t a S soon a s the F a r was over,

valid objection.

I think then the danger arose, and I think i t has
peen i n the earlier p a r t o f that period that t h e
greatest damages w a s done t o this country,

a s a result

of the inability o f the Federal Neserve Board t o reSist that pressure
persmally
afraid

W o w , {

have stated i t frankly

t o y o u a n d n o w a t t h i s meeting,

o f the p

P

and I

am

Gts continuation.

think i t i s well Forth
recalling that t h e Treasury g r i p d i d not relax until
the reserve ratio o f the Federal Reserve S y s t e m g o t
perilously n e a r t h e minimum.

some impression u p o n them.

T h e reserve r a t i o made

I f w e h a d entered the


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Federal Reserve Bank of St. Louis

year 1 9 2 0 w i t h a s h i g h e

reserve

a s w e have now,

largely d u e t o the influx o f gold, I

doubt v e r y much

whether w e would have advanced t h e rate t o 6 per cent
on the 2 3 r d o f January, 1920.

T h e reserve g a v e u s

a talking point.

(Here ensuec a n informal discussion which was not
recorded. )
(tihereupon a t 6.40 o'clock p.m., April 15th,
1921 t h e Conference adjourned sine die.)


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Federal Reserve Bank of St. Louis