Full text of Federal Reserve Governors Conference : Meeting Documents : April 7-10, 1920, Thirteenth Conference of Governors of Federal Reserve Banks : Joint Conference Proceedings, Volume 3: April 9, 1920

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PROCEEDINGS


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Federal Reserve Bank of St. Louis

OF A

CONFERENCE

O F THE FEDERAL RESERVE B O A R D

WITH

GOVERNORS

THE

O F THE FEDERAL RESERVE B A N K S ©

ASSEMBLY ROOM
FEDERAL

RESERVE

METROPCLITAN

B A N K

BOARD
BUILCING

WASHINGTON, D: C.

APRIL 9, 1920 .

LUCIUS M. HULL

H o H . PECHIN:

G.C.DISMUKES

M

A

I

N 4309

W A L T E R $,.COX
“ R O B E R T F, ROSE

ASSOCIATED SHORTHAND REPORTERS
SUITE 18-23 A P P E A L S BUILDING.
426

FIFTH

STREET,

WASHINGTON,

0 , G.

N . W.,

THIRD DAY.

Friday, A p r i l 9 t h , 1 9 2 0 ,

The Conference reassembled pursuant t o adjournment
at 10 o'clock a.m.
Present:

Mr. E . R . Kenzel.
Present also:
The Governors o f the Federal Reserve Ranks, a s indicated o n yesterday.

The Chairman (Governor MeDougal presiding):
ing will please i u s

t o order.

T h e meet-

J I asked t h e Secretary last

night t o m a k e « & brief m e m o r a n d u m o f t h e p r o c e e d i n g s

o f yes-~

terday, a n d I am going t o ask him to read that.

(Report read b y Secretary. )
(Folloring discussion off the record:)
PENSION FINDS.
The Chairman:

I f you will now turn t o the subject o f

“pension Funds” o n the supplemental list. No. 1 , I would re-~
mind t h e Conference t h a t early i n 1919 a committee w a s a p -

pointed t o consider the matter o f vorking out a satisfactory
and sound, d e p e n d a b l e f u n d a r r a n g e m e n t


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i f possible.

T h e com-

369

mittee worked along, a n d after nine months o f continuous
labor t h e y p e p a r e d a

report, w h i c h went b a c k t o Governor

Strong a n d t h e n was turned b a c k t o the Conference o f Govern-

ors, and finslly went t o the “ederal Reserve Board.

I s

that the sequence, M r . Kenzel?
Mr. Kenzel:

< A committee w a s appointed t o study a n d

investigate the plan, and a t the November conference the
committee’ m
a
d
e its report t o the conference.
The Chairman:

T e have Mr. Kenzel here this morning

who i s better informed o n this t h a n I . ‘ * e shall b e glad,

Mr. Fenzel, i f you will proceed vith the subject.
Mr. Kengel:

V o u vill remember t h a t a t the November

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

o f the com-

mittee and continued the committee t o proceed t o carry out
its own recommendations, subject t o the approval of the
Federal Reserve Bosrd.

I s i t your pleasure that I should

read what t h e concrete recommendation w a s e t the November
conference?
The Cheirman:

My. Kenzel:

T I vould t h i n k that would b e proper.

I t is summed u p this vay:

"that your committee therefore, rather then suggest
a plan, t h a t i f adopted might prove unsound, recommnends
that steps b e taken t o secure t h e service o f a committee


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Federal Reserve Bank of St. Louis

37°
of expert actuaries a n d pension specialists t o advise r i t h
the committee t o b e eppointed representing t h e Federal R e -

serve Board and the Federal Reserve Ranks, e n d that such
committees, together, s h a l l work o u t t h e cost a n d a n equi-

table distribution o f cost between the Federal Reserve
Ranks a n d their officers a n d employes, a n d such other p e r =
sons, i f any, t h a t i t m a y b e decided should b e permitted t o
participate i n contributians

o r benefits o f a pension benefit

cundfritt b e self supporting i n perpetuity a n d embody i n
relative degree a l l t h e benefits

o

f t h e Canadian Renk

plan, *hich a r e hereby recommended, a n d provide meximum
annuities o f "6,000; t h a t such joint committees b e requested elso t o formulate a

further complete p l a n o f organiza-

tion a n d operation o f such fund with d u e regard f o r t h e lars

of the several States, teking legal advice a s may be necesgary, a s Will provide f o r representation o f employes a n d
pensioners

i n the administration o° t h e fund a n d establish

valid contracts between t h e fund o f the contributors a n d

the beneficiaries.”
That i s t h e r e c o m n e n d a t i o n t h a t y o u accepted.
upon t h e B o a r d d e c i d e d t h a t I

There-

should g i v e t h e m a n e s t i m a t e

of the preliminary costs for the employment o f these
Specialists e n d experts before t h e y should g i v e their definite


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Federal Reserve Bank of St. Louis

S71

assent.

T h a t involved necessarily a

c o n s i d e r a t i o nfo the

personnel t o be employed, a n d a t New York, vith our Mr.
Hoff, I

made extensive investigations a s t o who would prob-

ably b e the most desirable e n d expert people f o r u s t o use.

I embodied the result o f that i n a letter t o Governor
Harding, o f date February 9th, which I read t o you.
(Letter referred t o by Mr. Kenzel read, but not included i n this record.)

The Chairman:

M a y I interrupt just one moment? D r .

Miller h a s something here concerning which h e wishes t o s a y
a worde

Mr, Miller: Yesterday morning, Mr. Chairman, i n the
course o f discussion, I called attention t o rhat the tabulated d a t a o f the Reserve Board showed w i t h respect t o the
ratio o f discount paper t o resorve balances o f some o f the

large borrowing banks i n New York and Chicago.

T h e data for

all the twelve districts are now complete and I have gone
over it. T h e revelations are startling, a n d i n some cases
sensational t o the utmost degree. P a c k a g e s have b e e n mede u p


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Federal Reserve Bank of St. Louis

S72
here, addressed t o each o n e o f the Governors, ¥vhich s h o w the
condition o f the banke i n his district, n o t i n the other distriects, s o that t h e information a s t o each district i s guarded a n d given t o the governor o f that district o n l y t o make
such u s e o f a s h e sees fit.

I t takes t h e banks i n detail i n

all t h e m o r e i m p o r t a n t c i t i e s

i n the twelve districts a n d

shors exactly rhet condition t h e y a r e in.
Let m e say, b y way o f explanation, t h a t i n some cases
the very high retio o f discount bills t o reserve balances i s
due t o shortage i n reserves, p h a t appear
possible cases. I

may mention that e

t o b e almost i m -

h e d some cesses where

the banks shoved trentr times their reserve balances, b u t t h e

explanetion is, i n I

f a c t that the bank has not main-

tained i t s reserve balance.
Governor M o r s s :

J I suppose t h e y r e r e a l l t a k e n a t o n e

date?

Mr, Miller: Y e s , March 19th, from the Board's reports.
I thank y o u very much, gentlemen.

LFFPIVG™FLL RESOLTT ION.

Governor V a n Zandt:
Governors

b e appointed

T I move that a

t o frame a

committee o f the

resolution o f regret

to

be forwarded t o Mr. Leffingwell o n his severance o f his con-


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nection with t h e Treasury Department.

(The motion was duly seconded b y Governor Calkins and
was carried unanimously. )
The Chairman: I

will appoint o n that committee Mr,

Van Z a n d t a n d M r . C a s e e

PFNSION FUNDS,

The Chairman: G e n t l e m e n ,
rogular business.

W r . Kenzel,

heve r e a d n o r t h e c o m m u n i c a t i o n

w e will n o w proceed with t h e
i f you rill continue, y o u
t o t h e Board a n d t h e recom-

mendations, h a v e you?

Mr. Poneet: Y e s , sir, T h a t i s the way the matter
stands nov, gentlemen, a n d Governor Harding explained t o me
when h e vas i n New York recently that before taking definite
action o n the recommendations t h a t h e would l i k e t o have i t
discussed a t this conference.
In regard t o the recommendations

i n this pension matter

it seems t o me and the other members o f the committee, rith
whom I have discussed i t , that i t would b e a very tmpartant
thing t o have t h e Actuarial Society o f America give i t s ap-

proveal o f the details o f the plan, that i s the principles o f
the plan, t h e soundness o f it. T h e t i s a society o f the very
highest standing, disinterested


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Federal Reserve Bank of St. Louis

i n every way.

I t has been

O74

Possible f o r m e t o take i t u p vith several members o f that
society i n such e

way that I

feel i t i s very possible t h a t

4f this c a n b e adopted promptly thet t h e Society rill favorebly consider scanning it, criticizing i t e s a society matter, a s a metter o f public tnterest, b u t there i s a change
of officers i n the society a n d i n their committees, a

change

of personnel which tekes place i n May, a n d after those

changes have taken place I do not knov that w e can get such
favorable consideration and action from the Soctety, therefore
I should urge that some prompt action b e taken i n this regard.
Governor Calkins:

M r . Chairmen,

i t eppears f r o m the re-

port that h a s been made that t h e present status indicates
that t h e B o a r d s h o u l d e i t h e r e p p r o v e o r d i s a p p r o v e t h e r e c e

ommendation

o f appointing special committees, a n d that i t

should indicate i t s approval o r disapproval o f the expenditure involved.
The Cheirman:

T h a t i s the point exactly.

Governor Calkins: I

therefore m v e that this Conference

petition the Federal Reserve Board t o promptly consider this
‘proposal a s made and either approve o r disapprove.
The Chairman: Y o u l e you embody i n that a statement expressing t h e conference 4 s being i n favor o f the expenditure


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Federal Reserve Bank of St. Louis

375

and t h e p r o rata distribution o f that expenditure u p t o the
amount estimated?
Governor Calkins:
The Chairman:

Yes.

T h s t 4 8 a thing I

think t h e y want t o get.

Governor Calkins: Y e s , sir; I think that i s quite i n
order. T h a t mey be a little shead o f the game, but I do not
knor a e reason why we should not meke that recommendation,
that w e a p p r o v e o f t h e e s t i m a t e s m a d e a n d o f t h e p r o r a t a d i s -

tribution o f the cost.
Mr. Kenzel:

T h a t i s equally between Federal Reserve

Banks?
Governor Calkins: E q u a l l y , n o t p r o rata.
Mr. Kenzel: E q u a l l y ?

Governor Calkins: Equally, not pro rata.
(The motion was seconded b y Governor C a s e a n d carried

unanimously. )
RANKERS' A C C E P T A N C E S .

The Chairman:

W e agreed yesterday t o postpone consid-

eration o f Topic No. 5 in the hope that Mr. Kenzel might b e
here today.

M r . Kenzel, t h i s subject h a s t o d o with

bankers! acceptances a n d several questions relating t o the

same. F i r s t w e have sub-topic No. 1: " A r e bankers' accept-


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Federal Reserve Bank of St. Louis

O76

ances b e i n g c r e a t e d f o r p u r p o s e s n o t c o n t e m p l e t e d

b y the

Act and are accepting banks abusing the privileges?”
My. Kenzel:

‘ o u l d y o u l i k e me, Governor,

pate i n the general discussion,

t o partici-

o r d o you want m e t o b e o n

the witness-stand here?
The Chairman:

W e vould l i k e y o u t o lead t h e discus-

Mr. Kenzel: I

have prepared s o m e memoranda o n this

sion.

topic. I

should like t o have them read into the record,

or have t h e m read rithout going i n the record.
The Chairman:

T I think y o u had better r e a d t h e m with-

out going i n the record.


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(Folloving discussion off the record.)

The Chairman,
Mr. Kenzel,

W i l l y o u proceed, M r . Kenzel?

T h e next topic i s warehouse acceptances,

(3) w a r e h o u s e acceptances, h o w t o prevent t h e ir
abuse without destroying their usefulness.
The Chairman. I

regret n o w that w e d i d not have t h e

preceding d i s c u s s i o n o f these m a t t e r s p u t i n t o t h e record.

It i s going t o b e very helpful a n d I

would sugrest that the

Ziscussion w h i c h g o e s o n f r o m t h i s p o i n t b e p u t i n t o t h e

minutes and that with respect t o the papers that Mr. Ken.
zel has r e a d that t h e y b e also incorporated into t h e minutes u p t o this point.
Mr. Kenzel.

T h e chief difficulties a s t o warehouse

acceptances are: first, t h e release o f the collateral t o
the d r a w e r a p a i n s t t r u s t receipt;

a n d second,

ences o f opinion a s t o what constitutes a
staple.

t h e differ-

peadily marketable

T h e latter difficulty is, however, disappesring

through t h e a p p l i c a t i o n

o f the rule o f common sense t o the

Board's admirable definition o f a readily mrketable staple.
As t o the release o f security, however, t h e difficulty remains
and o f course there i s the danger t h a t collateral released

by one acceptor m a y be pledged apain as the basis for one
or more other credits.


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Federal Reserve Bank of St. Louis

T h i s , however,

i s largely a plaring

478
example o f bad faith a n d fraud o n the part o f the borrover,
and fraud i n a n y banking transaction i s extremely diffi-

cult t o guard against.
commodities

I t i s difficult t o see just why

i n warehouses pledged t o secure credit should

be released t o the borrorer excepting f o r substitution
or s h i p m e n t u p o n sale.

I n the f i r s t case t h e bank should

receive t h e substituted collaterol immediately a n d i n the
latter case t h e y should receive either substituted collateral

o r the shipping documents a n d draft f o r collection

and a p p l i c a t i o n

o f the proceeds

i n retirement

o f credit.

I t

has a l w a y s s e e m e d t o m e t h a t t h e r e w a s n o material d i f f e r ence b e t w e e n a c c e p t a n c e c r e d i t ¢pranted apeainst g o o d s

i n

warehouse a n d a commodity loan, a n d I have always f e l t that
it Was t h e intention o f Congress t o provide f o r continuing
the security o f such a

credit during i t s life a n d that the

words "secured a t the time o f acceptance” w e r e inserted t o
a the first inception
provide t h a t t h e bank must b e s e c u r e d t
of the credit a s well a s during i t s life.

T h e attached e x -

tracts a r e f r o m the Federal Reserve Board's letters.
To prevent t h i s abuse o f warehouse acceptances i t
seems t o me that the simple t h i n g would b e t o require b y
regulation that f o r eligibility t h e y must remain secured
during their life.

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Federal Reserve Bank of St. Louis

T h i s would n o t o f course prevent tempo-

379

rary release o n trust receipt o r otherwise f o r exchange
of documents f r o m carrier t o warehouse o r vice versa,
Other abuses w h i c h might b e guarded against b y regulation

are the granting o f excessive lines t o one taker o f credit
who i n all cases might n o t appear also a s the drawer, a n d

the granting o f credits for speculative holdings.
proper u s e o f t h e w a r e h o u s e c r e d i t I

conceive

T h e

t o be t o

provide f o r the storing o f staple goods f o r reasonably
short periods pending their seasonal o r reasonably prompt
movement into channels o f distribution, A c c e p t i n g banks

therefore should b e o n their guard a s t o the seasonableness
of applications a n d the reasonableness both as t o terms
and size o f lines applied for.

Deputy Governor Peple, Probably the bankers' acceptafices against warehouse receipts have been more abused
than any other form i n our district, f o r the reason that

the banks have lost s i g h t ,
8 or absolutely ignored the
fact that the bankers' acceptances ought t o be self-liqutdating. I

a m firmly convinced o f the fact that the Board's

rq@ilations ought t o be amended, a t least i n that respect,
and that more emphasis ought t o b e given t o the self-~liqui-

dating character o f bankers' acceptances,


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Federal Reserve Bank of St. Louis

380

Under t h e reguletions a s they n o w exist t h e average
banker feels t h a t i t i s proper t o charge bankers' accept.
ances against stored commodities.

W e have n o t h e d s o

much trouble about t h e character o f commodities,
discussion

o f t h a t point,

i n the

b u t t h e b a n k h a s h a d t h e feel-

ing that a s long 4 s a commodity i s stored t h a t t h e y could
draw bankers! acceptances a n d i t didn't make a particle o f
difference whether there w a s a n y intention t o move o r
sell t h a t c o l l a t e r a l f o r a

yesr

o r two, b u t t h a t t h e y

were complying with the regulations.
Even where t h e more careful banks have read t h e whole

regulation, that the banker's acceptance is drawn for the
purpose o f settling accounts, t h e y have translated i t i n

this way, that the settlement o f accounts means the payment f o r t h e goods themselves,

s o that a@ inman who wants
and

to buy cotton or tobacco or grain, h e does it,/he thinks
that when h e stores i t i n a warehouse a n d draws a banker's
acceptance a n d uses the money t o pay for the goods, that
he has complied w i t h ell t h e reeulations, a n d t h e question
of when h e will sell t h e goods i s dependent u p o n his pleas-

ure, upon market conditions e n d upon various other condi-

tions. I

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Federal Reserve Bank of St. Louis

haven't the slightest doubt that a good many

381
people i n our district have b e e n able t o secure credit
under bankers! acceptances f o r the purpose o f what amounts

to spcculetion i n cotton, w h o would have been utterly unable t o procure i t i n any other way, because the banks
would n o t have loaned t h e m that amount o f money o n warehouse r e c e i p t s u n d e r t h e o r d i n a r y f o r m o f c o m m o d i t y

loan,

Mr. Kenzel. C o u l d not they obtain the same amount
of money b y enlarging their cirele
Deputy Governor Peple,

o n c e

banks?

N o , because t h e y had their

particular r e l a t i o n s w i t h p a r t i c u l a r b a n k s .

Mr.-Kenzel,

Y o u mean they would not have the facil.

ity for borrowing a s much money?
Leputy Governor Peple,

T h e y would n o t have t h e fa-

cilities, yes.
Mr. Kenzél. I
this; i s there @

would like t o have your thoug ht o n

sufficient amount o f abuse i n such cases

to offset t h e requirements f o r elasticity i n srop moving
seasons? I

will explain,

L a s t auturm f

had s o m e b i l l s p r e .

sented t o me, {100,000 worth o f bills, drawn b y a very good
little bank, d o w n i n Texas, a n d w e bought them. A

two aftervards I

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Federal Reserve Bank of St. Louis

day or

had $600,000 worth o f the same paper of-

382
fered t o me, t h e same b a n k a n d t h e same ~dtraver, a

Orre

hundred p e r cent o f their capital and surplus w a s

1,200,000, a n d I thought i t was too much of one name, a n d
I declined t o buy the paper,
broker i n the merket.

I

T h e y were offered b y a

n five minutes I

was called u p

by &@ member bank, o n e o f our large member banks, a n i they
asked m e w h y I

had d e c l i n e d

t o b u y this

p e r

through the

market, that they had it, that they had (300,000 more o f
it, a n d would I

take i t from them. I

not take i t from them.

told t h e m that I would

F r o m what t h e y have t o l d me, t h e y

had (900,000, seventy per cent o f the bank's total accepting
ability o f o n e drawer. I

it. I

wanted t o f i n d o u t s o m e t h i n g a b o u t

communicated w i t h Mr. T a l l y a n d h e told m

that they

found t h a t the bank had extended i t s entire l i n e t o this
one draver, a n d that that .as t h e custom, t h a t unless t h e
banks d i d extend this v e r y large line t h a t the cotton crop

could not be moved. N o w , the same thing has been told me
by the officers o f the Guaranty Trust Company, w h o probably
do t h e l a r g e s t c o t t o n f i n a n c i n g b u s i n e s s

i n t h e countrr,

They Say i t is essential t o leave something t o the imegination t
o move t h e crops,

and I

ment. I

h o w e v e r
any
ta}h
t barf should give


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Federal Reserve Bank of St. Louis

do not shink;,

a m impressed w i t h that state~

585
one hundred p e r cent o f its acceptance l i n e t o one customer.
I dO not think a n y bank should give o n e hundred p e r cent
of its acceptance l i n e o n one commodity.
banking.

I t i s not f00"d

T h e y might assist their v e r y lerge borrower i n

procuring lines that would accommodate, b u t they should distribute i t around a n d split t h e risk.
Deputy G o v e r n o r P e p l e .

matter.

T h e o n l y feature I

Y o u are speaking

o f another

mentioned w a s t h e thought that

I thought i n the Bosrd's regulation i t would be well toenphasize very much more clearly the fad that a banker's acceptance should b e self liquidating, t h a t i t should represent a
transaction which will b e finished a t the time t h e acceptance i s secured, a n d furnish t h e funds o u t o f which the
acceptance i s t o b e made-ir, Kenzel (interposing).

T h a t c a n hardly b e possi ble

when you are granting credit against unsold goods and the law
permits it,

i t specifically provides for the carrying o f un-

sold crops,

Deputy Governor Peple. W e l l , i f the bankers' acceptances are t o be commodity loans, w h y then I am mistaken and
the banks c a n d o just what t h e y Please a n d carry t h e m a s

long a s they please.


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Federal Reserve Bank of St. Louis

Mr. Kenzeél, I

c&8n s e e n o e s s e n t i a l a i f f e r e n c e b e -

tween t h e warehouse credit i n the crop moving
season a n d a
comnodity loan.
Governor Séay,

B u t should there n o t be?

Deputy G o v e r n o r P e p l e ,

W

e think there should b e a

décided difference,
Govérnor Seay,

. A recent attempt h a s b e e n made t o

extend t h e loaning power o f a bank during
t h e c r o p moving

season,
Mr, Kenzel. Y e s ,
Governor Seay,

N o w i f you couPle t h a t with t h e L L i t y

to a c c e p t u n d e r t h e s a m e t e r m s

t o a n amount limited o n l y

by the capital o f the member bank, y o u g e t a n extraordinary
amount o f funds t i e d up, a n amount i n excess o f what
was
in former times considered sefe, a n d i t i s not safe
now-Mr. Kenzel.

Y e s , b u t i n former times t h e y violated

the law, d i d they not?
Governor Seay. S o m e t i m e s t h e y resorted t o devious
weys i n which t o violate t h e law.

Mr. Kenzel,. I
explain


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Federal Reserve Bank of St. Louis

think Governor V a n Zandt can probably

t o u s whet t h e former practice was,

Governor Seay. T h a t was never perhaps justifiable,

385
but it was due, I think, t o the inadequacy of benking faeilities, t h e formation o f small banks, a n d the efforts
of s m a l l b a n k s

t o h a n d l e a c c o u n t s e n t i r e l y t o o lerge, a n d

the lack o f banking capital which: endered t h e banking
business m o r e hazardous.
The Chairman,

M r . Kenzel, a r e y o u through with gub.

topic N o . 3 , s o f a r a s y o u r r e p o r t

Mr. Kenzel,

i s concerned?

Y e s ,

The Chairman, ‘ N o w , gentlemen, I

have a message h e r e

from Mr. Leffingwell, which i s as follovs:

COMBINATION ISSUE.
"5 per cent loan certificates d a t e d April 15, aque
July 15, 1920, subscriptions payable i n cash o r b y credit.

"5 1/4 per cent tax certificates dated April 15th, due
Mareh 15th, 1921, subscriptions payable i n cash o r b y credit,

orin 4 1/2 per cent tax certificates due June 15, or 4 3/4
loan certificates d u e J u l y list.

"The two issues t o produce 250,000,000 excluding exchanges"
,
(After considerable informal discussion the following

occurred).


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Federal Reserve Bank of St. Louis

Governor Norris,

M r , Chairman, I

will offer this

386
resolution:

T h a t this Conference i s unanimously o f the

opinion that the maturities of the two issues shoulda be
three months a n d s i x months, respectively; t h a t there
should b e a

difference

o f one quarter

o f one per cent i n

rate between the two; that there should be n o exchange
privileges

i n favor o f outstanding certificates.

(The resolution, having been duly seconded, was ¢carried).
The Chairman.

N o w , gentlemen, w h a t a r e your r e o nmen-

dations w i t h regard t o the rate?
Acting Governor Case. I

move you, Mr. Chairman, t h a t

the rates b e five p e r cent a n d five a n d one quarter p e r cent

respectively. =
Governor V a n Zandt. 1

will second t h e motion,

(The motion, hiving been duly seconded, w a s carried,
the following banks voting no:

Boston ~ Chicago - Atlanta.)
The Chairman. 1
report


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Federal Reserve Bank of St. Louis

will n o w a s k Governor S e a y t o rake h i s

o n Topic N o , 1 .

I. C R E D I T CONTROL.
(1) E f f e c t o f recent rate increases upon liquidation.
(2)

I n view o f pending amendments t o the Federal Reserve
Act a u t h o r i z i n g p r o g r e s s i v e r a t e s f o r l a r g e b o r .

587
rowings w h a t should b e the basis o f the normal
Line?
(a) C a p i t a l a n d surplus o f member banks,

(b) T o t a l resources o f member bank,
Deposits o f member bank.
Reserve balence o f member bank.

Loan capacity o f Federal Reserve Bank prorated among t h e member banks i n proportion
to the reserve balance o f each,
Governor S e a y .

T h e reports

o f t h e Governors differed

chiefly a s t o the degree i n which liquidation h a d been
brought about b y increases i n discount rates,

Several

Governors reported n o liquidation directly traceable t o that
cause.

A l l agreed that the increase o f rates, coupled

with t h e moral suasion generally employed b y all reserve
banks, h a d acted a s a restraint u p o n expansion which un-

doubtedly would have been greater but for this restraint.
Several Governors reported considerable liguidetion due directly t o increased rates,

The chief causes responsible for increased commercial
loans, i n spite o f warnings a n d increases i n rates, were
considered t o be, first, t h e volume o f credit actually reguired t o conduct t h e volume o f »usiness b e i n g done o n ace

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Federal Reserve Bank of St. Louis

388
count o f high prices a n d a t a time o f the year w h e n business
is heaviest; second, withdrawal o f bank deposits

i n unex-

pected degree t o meet continuance o f rampant extravagance o f
the people generally, a n d t o cirmlation i n all lines o f

business, including real estate, and, third, t h e incereese
in all hines o f business o f a less essential character,
It was agreed that t h e rate i s nevertheless a
effective method o f s o u r e d

most

a c e n a o e a n d i t was t h e

general opinion thet t h e increases

o f rates already made h a d

not yet had time t o become fully effective, d u e t o several
causes, a m o n g t h e m being commitments previously entered
into i n all lines o f trade, t h e t i e u p o f transportetion,
due t o t h e weather,

a n d t h e more serious underlying reason

of a deficiency i n transportation equipment.
With r e s p e c t

t o articles

a , by, ¢ , d , a n d e

i t i s the

opinion o f the Governors that the b:sis o f determination o f
the so-called normal line o f discount f o r t h e purpose o f

fixing a progressive dismunt rate if, and when such rate
is fixed, t h e basis should b e the amount o f the reserve
deposits plus p a i d i n cepital o f exch member bank, t h a t

being the contribution o f each member bank t o the loaning
Power o f the system.


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Federal Reserve Bank of St. Louis

This so-called normal line t o be determined b y each

S89
Reserve Bank. W h i l e i t was agreed that this t e sis should

be the same i n all districts,

i t was unanimously agreed

that the rate, i f and when applied, shoulda b e left entirely t o each reserve bank, b o t h with respect t o matter
aud

of application/the seasons i n which it should be applied.
It was t h e concensus o f opinion t h a t t h e amendment
Led

tothe Act should be stud-/by all of the Reserve Banks i n all
N

N ,

of its angles a n d possible effects before attempting t o
[renee

apply this method o f oredit control, t h e difficulties and
complications l i k e l y t o arise o u t o f i t s a p p l i c a t i o n b e i n g

fully appreciated.
Deputy Governor People. B e f o r e w e leave No. 3 , I
would like t o know whether this i s correct,

T h e Richmond

Bank bélieves that Bankers! acceptances drawn against
stored c o m m o d i t i e s s h o u l d b e d r a w n o n l y u n d e r c o n d i t i o n s

which make them self liquidating a t maturity,

M r , Kenzel,

does not agree, but thinks that they are or m y b e equivalent toa commodity loans.
Mr. Kenzel. I

think t h a t they are equivalent t o com.

modity loans.


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Federal Reserve Bank of St. Louis

Governor Seay, B u t should not be.
ir, Kenzel. I

think »here t h e y are d r a m against un-

sold commodities, t h a t i t would b e pretty hard t o have
them self liquidating i n ninety days.
Deputy G o v e r n o r P e p l e .

T h a t i s what 1

wanted

t o get

in t h e record,
The Chairman,

T h e n e x t i s No, 4 :

( 4 ) Should o p e n market purchases

o f bankers! a c c e p t -

ances b y the Federal Reserve Banks b e curtailed
at this time with a view t o taking more o f such
acceptances f o r r e d i s c o u n t ?

Mr. Ketiek:

M y ansver t o this i s i n the negative

for t h e p r i n c i p a l f o l l o w i n g reasons;

{a} T h a t the o p e n market depends f o r stability u p o n
the willingness a n d ability o f the Federal Reserve Banks t o
render p r i m e bankers!

b i l l s l i q u i d a t some r a t e a t a l l times

through pur chase.
(bo) T h a t member banks almost universally regard re-

Aiscount facilities a t Federal Reserve Banks a s secondary
“line o f reserves

i n service

t o depositors.

{c) T h a t t h e y a r e unwilling, a n d I believe properly

so, t o minimize that resource b y the re-discount o f their
open market purchases either o f bankers! bills o r commercial paper.


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Federal Reserve Bank of St. Louis

S91
Llmight qualify that b y the statement t h a t o u r banks
at l e a s t w i l l n o t b u y c o m m e r c i a l

the purpose o f redismunting

paper

i n the market

for

i t a t the Federal Reserve

Bank, neither will they buy bankers! acceptances i n the

market for the purpose o f rediscounting them at our bank.
The Chairman,

W h a t a r e your r e - d i s m unt rates: on

bankers! acceptances?
Mr. Kenzel.

T h e r e d i s c u n t r a t e under Section 1 3 i s

per cent.
The Chairman.

h e t a m o u n t have y o u accumulated under

re~discount rate?
think a t the present t i m e i t i s about

Mr. Kenzel. I

five o r six million dollars. I

might add that i t is al-

most entirely made u p o f rediscount o f the renewal bills

under the Belgian credit o f March 30th, which, o f course,
were i n a sense banking loans.
Governor “Morss, I
which y o u establish

would like t o ask your theory under

t h t discount rate o n acceptances, where

will i t be needed e n i when should i t be used?
Mr. Kenzel.

I t was established originally a t our

benk i n times o f very different m o n e y conditions, f o r the
purpose o f emphasizing t h e desirability o f venkers! bills

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Federal Reserve Bank of St. Louis

592
as Secondary reserves t o b e covered b y member banks; sec-~
ond,

t o differentiate

o r t o recognize,

i n t h e rates for.

bankers' bills and commercial paper, a portion o f the value
of t h e banker ' s a c c e p t a n c e ~ - t h e b a n k s w e r e g e t t i n g s a y
one a n d o n e h a l f p e r c e n t p e r a n n u m f o r a c c e p t i n g a n d w e

felt that as a back-lors t o the market that that should
be recognized, t h a t i t was a t leastjone p e r cent better

paper than commercial paper, than single-name notes.
Governor-Morss.

T h e a t would s e e m t o b e quite edu-

cational, b u t would have v e r y little practical application.
Mr, Kenzel,

T h e practical application o f i t was

largely psycholorical.

I t came a t a time when money rates

were beginning t o s tiffen up, w h e n w e were petting o u t o f
that season o f great ease, a n d t h e banks w h i c h h a d been
buying these freely, depending u p o n being able t o resell
them t o u s f r e e l y o n occasion, b e g a n t o t a l k t o t h e d e a l ers a n d t o s a y "Now, s e e here,

w e have n o assurance t h a t t h e

Reserve B a n k i s going t o continue t o b u y the bills i n the

market.

I t may raise our market rates, amdiit may do sev-

€ral t h i n g s t h a t w i l l s e r i o u s l y i n c o n v e n i e n c e

u s t o have a

large amount o f bills o n hand- bought a t rates below whet


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Federal Reserve Bank of St. Louis

money i s worth.”

593
Governor Morss.

D o y o u consiger i t necessary t o

protect them against that sort o f thing?
Mr. Kenzel.

N o t a t this time.

Governor ‘.orss.

O

r a t a n y time?

I t seemed t o u s a t that time, b u t w e h a d

Mr. Kenzel,

no idea o f discontinuing o p e n merket purchases a t a rate
within a

reasonable distance o f the o p e n market rates,

W e

could n o t foresee t h e changed conditions w h i c h would result

in all rates being p@t much higher.

I t seemed that i t was

a desirable thing to stabilize the market'sbills with open
discount outside,

b y re-establishing t h e re-discount priv-

jlese a t a preferential rate under t h e rate f o r conmer-~
Cial paper.

B u t I think that time has gone past.

we were discussing rates, I

would s a y that I

I

f

think n o w t h e

discount rates should b e practically the same, i f not the
same, a s comercial paper rates, a n d that as a matter o f
policy the Reserve Banks should b u y bills under t h e diso market conditions f o r t h e stabilicount rate a c c o r d i n g t
zation o f the market.
The Chairman,
My. Senzel.

A n d your ansver t o that was no?

Yes.

L T have s o m e f u r t h e r c o m m e n t s h e r e

referring t o the unwillingness o f banks t o buy bills i n


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Federal Reserve Bank of St. Louis

394
the o p é n m e r k e t f o r t h e p u r p o s e o f rediscount.

d. T h a t i n time o f tight money o r threatened tight
money they would withdraw entirely fro:: the market unless
they felt sure t h a t they could liquidate their o p e n market
purchases o f prime bills i n reasonable quantities through
sale t o the Federal Reserve Banks without impairing their
line o f rediscount credit.

Therefore, a n d with regard t o the consideration o f the
development o f the bankers dollar acceptance i n the open
market, referred t o under t h e first question o f this series,
I believe t h a t i t i s a proper a n d necessary function o f the
reserve sveiban a s a system a n d not merely o f one o r more

banks o f the system, t o at all times reserve a substantial
proportion o f their loanable funds for open market purchases
of bankers bills a n i f o r advances t o dealers u p o n bankers
bills. I

think t h e t i n tight times a s well a s i n timesof

easy money, Gach district bank should participate i n this
broader a n d general support o f the dollar bill o f exchange
and t h e stabilization o f the merket rate f o r t h e m I
think that, teking t h e long view, there i s hardly a n y function
of t h e s * s t e m m o r e i m p o r t a n t

i n policy t h a n s u c h organized

support o f the stability o f dollar exchange i n the world's


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Federal Reserve Bank of St. Louis

markets, I

feel v e r y strongly that a n y change i n policy

thet w o u l d i m p a i r t h e o p e n m a r k e t a b i l i t y o f r e s e r v e b a n k s ,

with the idea of requiring member benks t o discount
rather than sell bills, would not only fail t o stimleate
rediscounting b u t would have t h e ultimate e n d o f driving
out the dollar bill o f exchange i n favor o f the sterling bill
which e n j o y s t h e b r o a d e s t o p e n m a r k e t a n d o n e i n w h i c h o u r

smerican banks coulda rediscount through sale sterling bills
from their customers -

and i t must b e renembered t h a t

trade follows credit.
Governor Seay,

h e

a s k Mr. Kenzel i f h e knors t h e

open m a r k e t r a t e o n bankers! a c c e p t a n c e s

i n London?

and o n e half p e r cent, a n d
money i s t h r e e a n d o n e h a l f p e r cent.

Governor Fancher,

T h e B a n k o f England r a t e

per: cent, is. it. not?
Mra mented. S i g . per cert, y e s s
Cheirman.

B o fer, w e

question o f bankers! acceptances except t o get Mr. Kensel's
report, a
n
d i n order t o get suggestions s b o u t it, w e will

have t o take u p the topics one b y one. I

think

memorandui:s that I have covers w h a t has taken place o n it.


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Federal Reserve Bank of St. Louis

596

Discussion d e elope that abuses wené.aue more t o ignorance
than t o intention.

I

t i s generally felt that american ex-

port bills are feulty i n that there i s little obtainable
evidence t h a t t h e granting o f a specific c-edit ties u p
the specific transaction i n a way t o convince t h e holder
that t h e bill will b e paid a t maturity b y the sale o f the

goods which the draft was issued to finance. T h e r e was
also a

distinct expression

o f the opinion t h a t m a n y do-

méstic bills a r e issued t o carry goods f o r s p e a lation
or. for remote s a l e a n d therefore a r e nothing more than o m -

modity loans. (Upon receiving informtion that Mr. Kenzel
will b e present next Friday morning,

i t was decided t o

postpone further discussion o f topic 5 until that time.)
Governor Calkins, I

would like t o ask Mr. Kenzel

whether i t i s his view that t h e l a w makes a
ceptance a

domestic a c -

commodity loan,

Mr. Kenzel. I

think when t h e teker o f credit i s the

draver o f the bill, t h a t there i s n o doubt that i t i s
equivalent t o a commodity loan.
Governor C a l k i n s .

Mr. Kenzel,

T h a t i s permitted

b y law.

O f course i t i s permitted b y law,

reply t o t h e f o r m e r q u e s t i o n w h i c h y o u a s k e d m e , d i d I

I n
think

-ed

that the rediscount rate should b e eliminut/or not above the

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Federal Reserve Bank of St. Louis

rate, I

397
mean n o t a different r a t e f r o m commercial paper, I

want t o s a y t h a t t h a t i s m y p e r s o n a l o p i n i o n a n d n o t a n

expression o f opinion binding upon our bank a t all.
Governor Calkins. I

understand, I

askea y o u f o r

your pérsonal opinion.
Governor Seay, I

would like t o ask whether o r not i t

is considered that the Federal Reserve Board has t h e right
to determine, define o r interpret t h e l a w a n d make conditions
covering t h e extent t o which banks::
house receipts.

I

m a y accept against ware-

t seems t o m e that t h e principle,

as I

understand it, i s being a b u s e d b
y lack of understanding a n d
Perhaps b y a too liberal interpretation o f the law.

while

it might b e equivalent t o a commodity loan, I cannot conceive
that i t was the purpose o f the law o r the intention o f the
Board t o make i t a commodity loan i n any other form,

I t 1s

our b e l i e f t h a t t h e F e d e r a l R e s e r v e B o a r d S h o u l d r e v i s e a n d

clarify their rulings: and regulations with respect t o domestic a c c e p t a n c e s a g a i n s t w a r e h o u s e r e c e i p t s ,

s o a s t o make

clear t o the member banks t h e conditions under which t h e y
should grant domestic acceptances.

Governor Calkins, W h i l e i t is the function o f the

Federal “eserve Board to interpret and t o apply the law, i t


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Federal Reserve Bank of St. Louis

doesnot a p r a r t o m e t o b e t h e function o f the Federal R e serve B o a r d t o amend t h e law. I

believe i t would require

an amendment t o the law t o bring about the reform that
Governor Seay has i n mind, which i s wholly desirable.
Governor Seay.

T h a t m a y be, a n d therefore I

was

about t o offer o n yesterday, when the discussion was adjourned, a

recommendation t h a t t h e Federal Reserve B o a r d

consider their regulations a n d rulings u p o n doméstic a c ceptances

a n d determine w h e t h e r

o r not t h e y should n o t de-

fine m o r e c l e a r l y t h e c o n d i t i o n s u n d e r w h i c h t h e m e m b e r

banks should make them,

The Chairman,

Y o u are limiting i t to domestic accept-

ances?

Governor Seay.

I a m limiting i t t o acceptances

against w a r e h o u s e r e c e i p t s ,

s o a s t o distinguish b e t w e e n

the commodity loan and a legitimate acceptance, I
lieve j u s t t h e r e i s w h e r e w e a r e p o i n g t o g e t a
expansion,

be-

very g r e a t

i f this l i b e r a l i t y o f c o n s t r u c t i o n c o n t i n u e s .

Governor Wellborn. ‘ W h e a t w o u l d y o u c a l l a

legitimate
ac&

ceptance?
Governor Seay. I

would c a l l a

legitimate

a c c e p t a n c en
a
,
4

acceptance m a d e against commodities w h i c h have either b e e n


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Federal Reserve Bank of St. Louis

sOld o r w i l l b e s o l d f o r a

reasonable pericd,

a n d t h e Fed.

eral Reserve Board hasmade a ruling t o that effect.
Governor ellborn.

T h a t i s what i t means. N i n e t y

days i s a reasonable time.
Governor Seay.

B u t i t d o e s n o t m e a n t h a t i n practice,

Governor Calkins. A

legitimate acceptance,

ernor S e a y has i n his mind,

a s Gove

i s a self-liquidating trade

acceptance.
Gove:nor Seay.
take i t , o f a

T h a t i s t h e underlying principle,

real, g e n u i n e b e n k e r ' s acceptance,’

what

as I

it

should be.
Governor Wellborn. I

think that could b e lerpely cured

or corrected b y the Federal Reserve B a n k officials

i n not

renewing it.
Governor Seay. I

think that i s not so, because w e

are thoroughly familiar w i t h many banks w h o will g o just a s
far a s the l a w will permit t h e m t o go, a n d they have ex-~

pressed that purpose and intention t o their members. N o w ,
with respect t o the handling o f crops i n the south, w e know
that their interpretation i s broadening, t h a t t h e y are

taking licenses under it which we think should be in some
measure r e s t r a i n e d .


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Federal Reserve Bank of St. Louis

W

e think t h a t t h e situation will

460
grow,

Y o u gentlemen i n the north I

believe a r e taking

these a c c e p t a n c e s w i t h y o u r e y e s o p e n ,

o r otherwise, u n d e r

conditions where they are n o more and no less than commodity
loans which,

i n other forms, a r e governed b y Section 5200.

Governor lWellborn, I

should think thet the exper.

lence i n our District would b e similar t o your experience,
Governor S e a y .

v

e have h a d n o contention f r o m t h e member

binks whatever along t h e lines stated b y you.

T h e only

time that w e have e v e r h a d a n y requests f o r renewals o f
bankers' a c c e p t a n c e s w a s l a s t y e a r i n Savannah,
cOuld n o t g e t t h e ships.

when they

v h e n t h e y m d e t h a t request I

wired the Board i n Washington, stating the proposition,
and aske3 t h e m would i t b e proper t o give that reneval under
those circumstences, e n d t h e y said that i t would be.
Governor Seay.

O n e o f the most flagrant «xamples

of t h e violetion o f the acceptance principle,

a s w e inter-

pret it, Was made a member b a n k i n our district acting
oe cotton brokers

i n your district.

Governor Yellborn,.

N

o papers w e r e e v e r s s k e d t o b e

renewed i n our district.
Governor Seay. I
larly t o renewal, b u t I

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Federal Reserve Bank of St. Louis

a m not elludinge a t present particu.
a m alluding t o the a c t o f acceptance.

401.2
our position was fully sustained b y the Board i n a tentative
ruling, Which, I

think, h a s never b e e n promulgated,

to

the effect that acceptances w e r e improperly granted under
those circumstances,

T h a t was a legal opinion b y counsel

of the Board,

The Chairman, G e n t l e m e n , w e Want t o meke progress
if possible.

w e have been dealing w i t h s u b - t o p i c ,
o
N 1

ofNo. 5, Bankers! acceptances, “are bankers! acceptances
being created f o r purposes n o t contemplated b y the A c t a n d

are accepting banks abusing the privilege.”

W

e discussed

the matter yesterday and the informal opinion was a s stated
in the memorandum that I
Governor S e a y ,

read a moment ago.

O u r ansrer

i s emphatically y e s t o

that question.
The Chairman. 1

will resd t h e memorandum again.

(The Chairman thereupon repeated t h e memorandum

previously read.)
(Informal discussion followed).
The Chairman.

T h e n i t i s understood t h a t Governor

Fancher will submit, after recess, a brief statement
eovering this topic, down t o and including sub-topic
No. 4 ,

(Upon motion d u l y seconded, a recess was taken

until 2.30 slelock p.m. of the same dy.)

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Federal Reserve Bank of St. Louis

The Conference reassembled a t 2:30 otclock’p.m., pursuant t o recess.

Governor Fancher: (Presiding:) T h e Chairman is going
to b e delayed a

short h i l e andhas asked m e t o preside i n

his absence.

BANKERS! A C C E P T A N C E S .

Governor Fancher:

I n the absence o f the Chairman v e
think Mr.

will proceed t o take u p some o f these topics. I

topics
Kenzel i s ready here t o offer resolutions covering
1, 2, 3, 4 and 5, sub-topics, under"Bankers' Acceptances”.
Vill y o u read it, Mr. Kenzel?

Mr. Kenzel: (Reading:)"It i s the sense o f the confer
ence that the use and misuse o f bankers! acceptances
limiting
credit m a y b e abated most offoctively a n d without
o f financing
the proper further development o f this system
by a revision o f Regulations, Series o f 1917,

i n those r e -

such
gards, a n d that the Board b e requested t o consider
4
retision a t a n e a r l y date, d r a f t i n g

committee

o r indi-

assist,
viduals f r o m Federal Reserve Banks t o consult a n d


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Federal Reserve Bank of St. Louis

404

if the Board desires s u c h assistance. T h a t , the cardinal
points t o b e covered are:

"1.

T o induce the most specific identification possi-

ble o f the underlying transaction o n the bill.
"2, Accepting banks, granting import o r export credits
without documents a t the time o f acceptance, should require
that w h e n the shipments a r e mado a n d documents a r e issued

that they should be delivered to the acceptor, who would
handle them from that time on, realizing their proceeds
in due course a n d apply such proceeds

i n retirement o f the

credit.

"3. That banks granting warehouse secured credit
should limit their lines a s t o names, commodities a n d

length o f credit term, which should b e limited t o commer¢ial and seasonal usage and i n no case should speculation
in commodities b e permitted

o n bankers acceptance credit,

and that acceptors should remain secured during the life
of the credit.

"4A, T h a t domestic transportation credits should be
limited t o drawings o f tho seller o f goods shipped f o r t h e
credit t e r m granted b y the seller, e n d t h e purpose o f this

credit being t o substitute a banker's name for merchant's
name a s drawee.”"

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Federal Reserve Bank of St. Louis

405
(Resolution offered b y Governor Case; seconded b y
Governor V a n Zandt.

Resolution unanimously adopted. )
Governor V a n Zandt:

I s i t understood that those views

of Mr. Kenzel o n these various sub-topics,

a s read t o u s

today, will be furnished t o each Governor?
Governor F a n c h e r :

V e s .

SHOULD O P E N MARKET PURCHASFS O F BANKERS' ACCFPTANCES
BY THE FEDFRAL RDSERVE BANKS B E CURTAILED A T THIS
TIMP ¥ITH A VIFY T O TAKING M O R E O F STICH ACCFPTANCES
FOR REDISCOUNT.

Governor Fancher:

A s t o Subd-Topic 4

taken formal action o n that.

re have n o t

M r . Kenzel, w h a t i s your

thought o n that topic?

Mr. Kenzel:

I t i s indicated i n the mema andum o f

Nr. Case, which I read here this morning, that w e should
not take s u c h action, a n d I

might speak i n thet connection

of the success thet t h e N e w Vork bank h a s experienced i n

the distribution o f bills o f its member banks through giving
them a service i n the mattor o f purchase o f bills f o r their


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Federal Reserve Bank of St. Louis

406

account a n d t h e holding o f them and collection o f them for
their account.

W e started i n doing that actively last

October a n d w e m a d e a

point o f b r i n g i n g

discussion a t each visitors’

u p es a

topic f o r

d a y that w e had w h e n groups’

of our members spend the day vith us, the subject o f bankers' acceptances and the desirability o f them for investment for the member bankst surplus funds u p to about the
middle o f February w e had forty-three banks aveil themselves o f our offer t o assist t h e m i n purchases o r t o make

purchases for them, and that has increased now t o eightythree banks i n a little over a month, w e have forty n e w
banks that have taken that service, a n d T I expect that w e

shall have maybe a couple o f hundred banks within a few
months.

Governor Miller: T a k i n g those i n the place o f ordinary p u r c h a s e

o f commercial paper.

Mr. Kenzel:
sirable a n d a

Yes.

T h e present rates m e k e i t very de-

very opportune time, I

think, t o get our banks

accustomed t o the buying o f bills for investment; those bills
Stay sold; t h e y d o not come back i n the market;

i t i s a rare

thing t o heve o n e o f our country banks -~--


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Federal Reserve Bank of St. Louis

Governor Miller:

W h e t effect will that have o n the

commercial paper, y o u r 2 0 0 banks?

Mr. Kenzel: I

*200,0C0 apiece.

suppose they will buy °150,000 o r

I t is not a great big item in dollers.

Governor Miller:

I t would b e that much less commer-

cial p a p e r ?

Mr. Kenzel:

Yes. I

think t h e ultimate result o f i t

would b e t o s e e a little narrower market a n d higher rates
for single name commer c1a2 paper.

Governor Wellborn: W h a t would b e the difference i n
rates between that paper a n d bilis?
Mr, Kenzel:

A t the present time prime bills a r e sell-

ing w i t h o u t e n d o r s e m e n t f o r a b o u t s i x p e r cent.

paper i s solling, well, s e v e n per cent, I

Conngakead

should say, f r o m

6-1/4 for short v e r y choice names u p to 7 per cent, about
one p e r cent difference.
Governor “Nellborn:
able t o establish a

B u t o u r banks prefor them.
T h a t i s one reason I

have never b e e n

discount corporation d o w n there a n d g o t

anybody t o take over anything; i t has elways been contended
the b a n k s p r e f e r t h e c o m m e r c i a l p a p e r a t o n e p e r c e n t more.

Mr. Kenzel:
Now our banks, a

W e l l t h e y are buying t h e risk f o r t h e rate.
good m a n y o f them, c a r r y normally compara-

tively large balances that they d o not require. T h e y are over


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Federal Reserve Bank of St. Louis

408

in reserve all the time, betreen 2-1/2 to 3 per cent; there
is a n o p p o r t u n i t y f o r t h e m t o b u y s o m e t h i n g t h a t n e t s t h e m

5-1/2 or 6 per cent and which i s liquid, and they like it.
Governor Miller: T h e y send them to you for colleétion?

Mr. Kenzel:

I f we buy them for them they generally

ask u s t o hold t h e m for collection.

‘ % e just take t h e m and

set them aside f o r collection a n d credit their account a t

maturity, o r whatever disposition before maturity they request u s t o make.

I n some cases t h e y want t o see t h e bills,

and i n a great many cases, having bought paper through u s
for a time they become very good buyers o n their o w n hook.
They have learned whet t h e y are. M o s t country bankers d o
not realize t h e difference between a vankers' acceptance a n d
a trade acceptance, a n d when they learn that this paper t h a t

they can buy at 5-1/2 o r 6 per cent i s the absolute unqualified obligation o f a prime bank t o p a y that money s t matur~

ity, and that i t has the endorsement o f another prime bank,
or maybe more, t h e y d o not need t o b e convinced a s t o the
merits o f thet paper,

Governor Calkins: T h o s e banks give you 4 list o f
acceptors’ names, o r d o you use your usual discretion?


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Federal Reserve Bank of St. Louis

Mr. Kenzel:

F e d o i t i n t w o ways.

I f they ask u s t o

409
use our discretion t h e n v e tell t h e m w e will b u y for v h e m
for their account a n d m risk such paper a s w e buy for ourselves, u s i n g t h e same care a n d attention, a n d that i s al+
ways endorsed paper, b u t i f they trish u s t o buy unendorsed
peper,

o n account o f the little better rate, t h e n w e a s k

them t o give u s specific authority a s t o names.

The Chairman: T h i s discussion o f Mr. FKenzel's also
touches o n Topic 3

of the supplemental list o f topics,

"Should the Federel Feserve Ranks assist i n broadening the

open discount market by offering to purchase benkers' acceptances for the account o f member banks?"
Have w e discussed this enough s o We cen get 4 resolu-~
tion here covering Topic 4 , a n d a t the same time w e might
cover Topic 3

i n the supplementary list?

J I think i t i s

the sense o f the meeting that o p e n markct purchase acceptances should n o t b e curtailed a t this time.


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Federal Reserve Bank of St. Louis

Governor Morss: I

make a

motion t o that effect.

Governor Young’ I

second t h e motion.

"SHOULD T H F FEDERAL RESFRVF BANKS ASSTST I N BROADENING T H E OPFN DISCOUNT MAPKET B Y OFFERING T O PURCHASE
BANKERS! ASCEPTAYCES F O R T H F ACCOUNT O F MYMBFR RANKS?"

The Chairman:

F o u l d y o u want t o couple w i t h that sup-

plementary list No. 3 , thet i t is desirable that the Federal
Reserve Ranks assist i n broadening t h e market b y offering t o
make p u r c h a s e s ?

Governor Morss: Y e s , w e desire t o a d d that t o the motion.
The Chairman:
seconded.

Y o u have heard t h e motion vhich h a s been

A r e y o u ready for t h e question?

(The m o t i o n w a s c a r r i e d u n a n i m o u s l y . )
- -

—-_—=

o O

TRADE ACCFPTANCES.

The Chairman:

W o r sub-topic 5 , "Trade Acceptances",

what i s being done t o encourage their use? "Requirements,
credit conditions, etc., incident t o trade acceptances

offered for rediscount.”
The Chairman: (Governor McDougal presiding:) M r .
Kenzel, h a v e y o u something o n that?

Mr. Kenzel:

i t h regerd t o the first question (Reading):

"oO, (a) That is being done to encourage their use?
"¥b) Requirements, credit conditions, etc., incident
‘tbo trade acceptances offered f o r rediscount.


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411
"A, ( a ) T h e most notable work being done t o encourage
their u s e lies i n the activities o f the American Acceptance
Council.

T h e y have h a d a

severe set-back f r o m two principal

causes; first, t h e elimination o f a small preferential r a t o
for their rediscount a t reserve banks, a n d second, f r o m the

misuse made o f them b y a few shyster concerns.

T h e matter

of a preferential r a t e was fully discussed eat the last quar-

terly meeting o f the executive council o f the American Acceptance Council.

I t was t h e consensus

o f opinion a t that

meeting that a slight preferentisl; say 1/4 of 1 per cent
under t h e rato f o r commercial paper, would b e all that w a s
eminently desirable a n d that i t should b e reinstated; t h a t

it was the quite general practice o f individual banks t o
pass s u c h a slight preferential o n t o their discounting cus~
tomers; a n d that t h e value o f two-name paper over one-name
promissory notes amply justified a

preferential rate f o r

their discount a n d rediscount.
"(b) F a i t h regard t o trade acceptances offered f o r re-~
discount a t Federal reserve banks, I

feel that w e should a p -

e vould t o other
ply to them the same credit tests t h a t . w
commercial paper, a n d require a s w e d o a satisfactory finan~
cial statement a s t o either t h e drawer o r acceptor, a n d pref-


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Federal Reserve Bank of St. Louis

erably both, i f the amounts a r e important.

"Tt 1 s hardly possible for reserve banks who rould see
only a very small proportion o f a n y paper discounted b y memn~

ber and other banks t o ordinarily scrutinize loans, with a
view t o determining t h e relation o f liabilities t o assets
of a n y one drawer o r acceptor ~ - that i s the function o f the
drawer's bank. B u t , reserve banks m a y profitably observe t h e

larger svings o f paper going through them, not only trede acceptances b u t o t h e r o b l i g a t i o n s ,

v i t h regard

t o the known

seasonal o r emergency requirements; a n d through such a broad
survey o f large movements undoubtedly individual instances
of over expansion rould b e observed when they existed and
proper action might b e taken b y reserve banks a s 4 result
thereof, assuring judicious inquiry a s t o conditions, a n d
which might suggest t h e propriety o f conversations v i t h i n -

dividual member banks.”
The Chairman: Gentlemen, i t seems t o me that lr.
Kenzel's reference t o Topic B here covers the entire situation with regerd t o that feature s o admirably thet i f this
body agrees w i t h m e I think that w e should adopt some such
statement a s h e has made.

J I think o n e o f the mistakes t h e t

have b e e n m a d e i n d e v e l o p i n g


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Federal Reserve Bank of St. Louis

o r undertaking

t o develop t h e u s e

418
of trade acceptances i s that t h e advocates have fsiled i n
some i m p o r t a n t p o i n t t o d e a l w i t h t h i s q u e s t i o n o f c r e d i t

responsibility, w h i c h i s very essential.

t e a r e n o t going

to offer preferential rates, o r any rate, t o a trade acceptance because i t bears t h e earmarks o f being a trade a c e
ceptance.
Mr. Kenzel: B e c a u s e i t i s good tvo-name paper?
The Chairman:

Y e s ; w e want t w o good names.

Governor Morss: I

will s a y w e have discussed t h a t ques-

tion i n our district more o r less, b u t i t has n o t been v e r y
favorably received, a n d I
progress.

cannot s a y that w e have made a n y

T h e banks object t o it, some o f the banks, b e -

cause i t may create t w o classes o f paper f o r t h e same ccncern, single-name paper a n d double-name paper, e n d t h e concerns h e s i t a t e

t o p u t o u t t w o k i n d s ‘of paper, b e c a u s e b o t h

banks insist o n having o n l y the best paper t h a t that concern
puts out, a n d t h e y will n o t take single paper i f there i s

double-neme paper outstanding; t h e banks therefore i n our district have not been willing t o d o anything about i t and w e
have come t o the conclusion thet i f anything i s t o b e accomplished i t will have t o b e done b y certain trades getting t o gether a n d agreeing amongst themselves t h a t t h e y will adopt


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Federal Reserve Bank of St. Louis

4.14

that method o f credits for their book accounts. A

single

concern i n a trade vould f i n d i t pretty difficult t o put i t
into effect, where t h e account i s tied u p t o a definite d a t e
of payment, w h e n other members o f the same trade d o not d o
the same thing.

S o i t seems t o u s t o b e quite necessary f o r

trades toget together a n d agree o n a pretty nearly uniform
practice.
Mr. Kenzel:

T h a t h a s b e e n done,

y o u know,

i n some

lines.
Governor Morss: Y e s , i t has been done i n some trades,
but has not been done very much with us.
Governor Fancher:

I n our district w e have had, w e

think, considerable success i n the matter o f encouraging t h o

use o f trade acceptances.

‘ e have been very active, meeting

with different trade organizations and discussing the sub-

ject, and there has been a good deal of interest shown, and
the volume of trade acceptances which is coming into our discount portfolio i s increasing considerably.
the present time w h y w e have a

O n e reason a t

pretty fairly largo volume

of trade acceptances under discount i s that t h e tire concerns
of Akron,

i t i s the sales custom t o give a dating o n their

spring sales o f tires, ---. shipments m a d e through t h e spring


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Federal Reserve Bank of St. Louis

415

are dated M a y lst, vith a trade discount i f paid o n May loth,
and o u r leading tire concerns h a v e commenced, o n e o r two o f
them, t w o o r three days ago, t o t r y i t out, a n d t h e n others
took i t up, a n d this year T I think a l l o f the lerge concerns
in Akron h a v e b e e n covering those sales t o a very large
extent w i t h trade acceptances,

a n d i n turn w e have h a d a

large volume that have not come i n through our portfolio,
and those acceptances,

o f course, a r e drayvn upon dealers

countrywide, covering t h e entire United States, a n d w e have

found i t very desirable paper, and w e are particularly watching t o s e e a s t o the liquidation o f the acceptances;

w e are

going t o keep a very close t a b o n these acceptances a s they

mature and see how large a percentage are actually collected
at maturity, e n d that, w e think, will throw eonsiderablo
light upon it.

W e are confident that these concerns are

going about i t intelligently and ere not covering a n y slow
or doubtful accounts b y acceptances.

Ye d o meet some discouragement a t times growing out o f
the lack: o f understanding o n the part o f some o f the small
banks t o whom afceptances are forwarded for collection; they
Saco t o think i t i s a peculiar s o r t o f paper a n d d o not s e e m
to understand - w h o t o present i t to, where i t i s made payable,


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Federal Reserve Bank of St. Louis

416

and s o m e t i m e s t h e y a r e r e t u r n e d w i t h n o t p r o p e r p r e s e n c a ~

tion, a n d various ceuses.
I sev a little resume mede b y the treasurer o f the Virestone Tire *

Rubber Company o n his last geason's experience

with trade acceptances, e n d i t was v e r y illumineting, setting
up the various causes that were rather unsatisfactory, a n d
finally rounding t h e paper u p and getting i t collected, a n d
the lack o f understanding o n the part o f the collecting banks

was one o f the things that vere annoying. A l s o v é found that
when these acceptances h a v e b e e n offered t o some o f the other

Federal Reserve Banks b y member banks, thet one o f the reguirements has been not only a statement o f the drawer o f the
acceptances, but also a statement o f the acceptor, where the
amounts a r e a thousend dollars o r more; t h a t i s oftentimes
rather a

hard s i t u a t i o n f o r t h e b a n k t o cover,

I t has seemed

to us, i n our handling a paper o f thet sort i f we had the
statement o f the acceptor, for instance, a n d i t

w

a

s @

the
concern o f high standing, I mean o f the drawer without
amount w a s large w e vere quite rilling, a l l conditions b e i n g
satisfactory,

t o rediscount t h a t p a p e r

the éraver o f the bill.

o n the statement

of

I n some cases where t h e amounts have

been large w h y v e have asked f o r t h e statement o f the acceptor,


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Federal Reserve Bank of St. Louis

417

but t h e ordinary r u n o f bills w e have b e e n satisfied either
with e

statement showing a

good drawer o r a good acceptor,

end n o t requiring both unless t h e amounts w e r e large.
The Chairman: G o v e r n o r Fancher, aside f r o m the manufacturers o f tires what lines o f industry have developed t h e u s e

of them?
Governor Fancher:
know that I

t e have a

can enumerate them.

number o f lines. I

f e have h a d good cooperation

on the part o f our banks i n Cleveland, particularly.
little t i m e a g o w e h a d a

do not

Some

batch o f a c c e p t a n c e s c o m e i n a n d

there rere trelve different lines o f business covered, there
were some paint concerns, I

recall, a n d I

pig iron concern, - - - quite a

think there w a s a

variety o f trades covered b y

those acceptances.
The Chairman:

T i t h o u t going 411 the w a y around t h e

table, I would b e very glad t o hear from anyone else i n regerd t o this subject.
Governor Peple:

W r . Chairman,

w e had a

good deal o f ex-

perience with trede acceptences i n the Fifth District, and we
have noticed several different forms o f abuses.
we had a

A t one time

preferential rate o f one half o f one per cent, a n d

there h a s always b e e n a n advantage i n the condition that


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Federal Reserve Bank of St. Louis

418
while there i s a limit o n the amount which a Federal Reserve
Bank c a n discount f o r a certain member b a n k o n single-name

or even Commercial paper, they can take trade acceptenceas
without limit. T h e r e have been a number o f cotton mills i n
the south that have bought cotton from cotton dealers, a n d
instead o f paying f o r t h e cotton have given trade acceptances,

arranging with their local banks t o discount those trade acceptances for the dealers, w h o were frequently located a t
some distance off, and i n many instances i n other districts.
There has been quite a large accumulation b y individual banks
of lines o f credit far beyond any limit which they would have
been alloved t o give o n ordinary business péeéper.

W e had o n e

case o f a cotton mill whose direct paper was ineligible -«who made arrangements w i t h about s i x banks t o hendle acceptances o f that kind, a n d w e soon found ourselves w i t h a line o f
credit against that cotton mill v e r y much lerger t h a n w e would
have vanted t o carry i f i t had b e e n eligible. e

corrected

that b y n o t i f y i n g e a c h b a n k i n t u r n t h a t w e h a d a s m u c h o f

the paper a s we cared t o handle, until w e got i t down t o what
we thought w a s a safe limit,
Another abuse i s the disposition o f people t o draw
trade acceptances o n themselves, particularly i n the lumber


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Federal Reserve Bank of St. Louis

419
business.

T h e r o i s one concern that I

have i n mind that h a s

deliberately organized f i v e o r s i x little lumber corporations around i n different spots; I

think t h e s o n o f the m a n

who lives i n Philadelphia, o r did live i n Philadelphia, i s
the treasurer o f each o n e o f these lumber concerns, a n d T
suppose each lumber concern i s represented b y some little
local sawmill, a n d they draw a raft o f 9 0 d a y acceptances o n
the m a n himself, a n d h e accepts them; a

good m a n y o f them are

offered t o us b y member banks.
The Chairman:

Y o u c a n stop that?

Governor Peple:

Y o u can.

B u t that i s the point, there

has been that abuse o f seeking t h e f o r m o f a trade acceptance.
Another w a y i n which t h e t r a d e a c c e p t a n c e h a s b e e n a b u s -

ed is the seller o f goods, either raw material o r manufactured, i n sending h i s g o o d s t o a factor f o r sale a n d future
settlement;

h e draws drafts o n his factor representing a d -

vances o n the s t r e n g t h f
o the goods a n d h a s those certified
as t r a d e acceptances.

O f course w e f i s h t h e m o u t a n d t u r n

them down, but there i s a great deal o f trouble involved i n
doing that.

O n the other hand t e have had a good deal o f le-

gitimate u s e o f trade acceptances, representing actual sales
between wholesale a n d retail dealers.


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Federal Reserve Bank of St. Louis

I t has occurred t o us,

420
hovever, t h a t there i s this obstacle, w h i c h h a s reached s o m e
importance

i n o u r d i s t r i c t a n d i s l i k e l y t o h a v e a n increas-

ing importance a n d t o interfere w i t h t h e general u s e of'trade
acceptances

o f t h i s kind. ‘ Y h e r e v e r e

merchant s e l l s o n o p e n

account and the account-is settled a t the end o f the period
by the check o f a debtor w e are clearing that check a t par.

The trade acceptances, however, accepted b y the debtor and
sent t o the local bank f o r collection i s a time rate a n d

there i s n o question i n our minds that the banks will continue t o charge exchange against them, therefore the trade
acceptances will have t o o v e r c o m e that obstacle o f producing a settlement against which a n exchange charge i s impossible when a payment b y a check could b e collected rithout
exchange. ‘ * e do not feel thet i t i s vell for u s t o offer just
at this time a

preferential

i n favor o f trade acceptances.

The Chairman: D o e s anyone else wish t o speak o n the
subject o f Trace Acceptances?

i l l someone meke 8 recommenda-

tion a s t o the best manner o f disposing o f Topics A

and B ?

Vhat i s being done t o encourage t h e u s e a n d what a r e t h e credit
requirements?

I t seems t o m e i n some districts t h e y have m a d e

& good deal o f progress, i n Cleveland district notably.

I n

Chicago w e have n o t h a d t h e cooperation o f our large banks,


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Federal Reserve Bank of St. Louis

and little progress h a s b e e n made.
Governor Case:

M y observation i s i t really i s not

necessary t o d o much t o encourage o r develop t h e u s e o f
trade acceptances.

Y e have learned

eral instances u a e I

i n our Gistrict

o f sev-

think might b e fairly termed a n abuse

of the trade acceptance idea.

S o m e o f our uptown banks

that deal with t h e cutting u p trade s a y that not infrequently
they have s e e n these trade acceptances, t w o o r three o f them,
based u p o n the same piece o f goods, transaction, a n d that
moreover s o m e o f their accounts t h e t have a

line o f credit

with them, say °50,000 o n their own paper, use that line of
credit and then come i n with a great quéntity o f these trade
acceptances.

O n e banker t h i s last week told m e o f a n in-

stance, where h e loaned them “50,000, then they had brought

in “100,000 of trade acceptances, end thought they were good,
but o n the strength o f the plea o f high prices a n d t h e neces-

sity for additional advances they had augmented their line b y
pubiine i n this large quantity o f trade acceptances.
The Chairman:
er here.

M r . Calkins, y o u have b e e n a good listen-

i l l y o u formulate a

motion, based o n the remerks

that have b e e n made o n the subject?


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Federal Reserve Bank of St. Louis

Governor C a l k i n s : I

think I

can d o better t h a n formulate

422
anything. I

a m disposed t o move t h e adoption o f the analysis

that Mr. Kenzel gave us. I

think thet i s quite sufficient.

(The motion was seconded b y Governor Young.)
Governor Calkins: T h a t w e adopt a s our expression o f
views those given u s b y Mr. Kenzel.

(Following discussion off the record.)
Governor Fancher: Underlying this I think that the
trade acceptance i s either a
If w e are going t o have a

good f o r m o f paper o r i t i s not.

procedure whereby t h e discounting

Federal Reserve Bank is going to ask for a statement o f each
acceptor o f “1,000, and you have got a strong, solvent drawer, whose paper y o u would t a k e absolutely - - The Chairman:

J I think, o f course, t h a t i s a n option

which the bank can exercise i f i t wants to, but i t seems t o
me that whero &@ concern i s known t o be i n strong financial
position, t h a t y o u are reasonably satisfied t h a t t h e y a r e

particuler w i t h respect t o the credit they extend, under
those circumstances I

would b e sufficient.

believe t h a t a

statement o f the drawer

T I think, Governor Miller, there i s some~

thing i n the argument y o u heve advanced which would serve t o
oppose t h e suggestion that w e propose t o adopt?


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Federal Reserve Bank of St. Louis

G overnor Miller:

N o , not a t all.

423
The C h a i r m a n :

T h e motion has been made

a n d seconded.

(The motion was carried unanimously.)

PARTICIPATION B Y FEDERAL RESERVE BANKS I N
AGREEMENTS “ I T H BANKS O F FOREIGN GOVERNMENTS.

The Chairman:

? e have a memorandum from which I know

that N e w York rould l i k e t o discuss t h e question o f partici-

pation b y the Fsderal Reserve Banks i n agreements made with
foreign governments o r banks, s u c h a s the Bank o f England
gold account, t h e Argentine deposit, a n d t h e Rank o f Japan,
and I

a m going t o a s k Governor C a s e i f h e will o p e n t h e dis-

cussion.

RESOLUTION R E G A R D I N G R E T I R E M E N T

O F MR. LEFFINGOPLI.

Governor Case. B e f o r e taking that up,the Committee
which y o u a p p o i n t e d t h i s m o r n i n g ,

is Cheirman,

t o draft a

o f which Governor V a n Zandt

resolution regarding t h e departure

of Mr. Leffingwell i s ready t o report.

M i g h t w e have that

report n o w ?


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Federal Reserve Bank of St. Louis

The Chairman:

Yes.

Governor V a n Zandt:

I t developed, M r . Chairman, y o u were

424
not @ very good picker, a n d the committee y o u appointed

sought expert advice and got the assistance o f Governor
forris o f Philedelphia, t o whom we are indebted for this.
The resolution i s a s follows:

"Whereas, the Governors o f the Federal Reserve Ranks
have heard from Hon. R. C. Leffingvell with great regret
that i t i s his determination t o retire f r o m his present position o f Assistant Secretary o f the Treasury,

i n charge o f

fiscal affairs, before the next conference o f the Governors,
and,

"Whereas, w e appreciate the fact that Mr. Leffingwell
accepted this position a t great personal sacrifice, a n d his
contributions t o the successful prosecution o f the war, a n d
"“Whoreas, h i s d u t i e s h a v e b e e n o f &

most o n e r o u s c h a r -

acter, involving great responsibility a n d anxiety, a n d have

been discharged with a degree o f courage and good judgment
that will never b e generally appreciated,
"Resolved t h a t w e make this inadequate expression a

matter o f record and convey t o Mr. Leffingwell a n assurance
of our personal regard, o f our respect for his eble, loyal and
high-minded performance o f his public duties; a n d o f our very

sincere wishes for his happiness i n the future."


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Federal Reserve Bank of St. Louis

Your committee offers that resolution.
Governor Morss: I
Governor Fancher: I

a m glad t o second t h a t s n d s i g n it.
take pleasure i n seconding that,

Mr. Chairman.
(The r e s o l u t i o n w a s a d o p t e d

PARTICIPATION

b y unanimous v o t e . )

B Y FEDERAL RESFRVF R A N K S

I N AGREFMFNTS

WITH BANKS O F FORPIGN GOVERN“ENTS,

“Governor Case:

T h e topic t o which y o u have just a l -

luded, t h e question o f participation b y the other Federal
Reserve Banks i n these various agreements v i t h foreign
governments a n d foreign banks,
into a question o f principle.

i t seems t o m e resolves itself
W e have entered i n t o three s u c h

agreements, one the Argentine Government. T h e y have o n deposit with us now ebout “70,000,0C0, and all of the twelve
Federal Reserve Banks, a l l o f the other eleven Federal Neserve
Ranks, a r e participating i n thet with us. e

Fnglend, German gold account.

h a v e t h e Bank @

W e recently sent t o each one

of the Federal Reserve Banks a statement o f that account 4 s
ve closed i t out rith t h e Grain Corporation.

‘ e have made

settlement, Briefly we have received “175,000,000 there. ‘ Y e
sold “60,000,000 o f that gold i n England and have “112,000,000


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Federal Reserve Bank of St. Louis

426
left.

W i t h this settlement w e received one-half o f one p e r

cent, which w e have s e t u p i n suspense account f o r t h e pro-

tection o f participating banks, all Federal Reserve Banks,
in bringing that back,

a n d the query t h a t w e would

like to raise as to whether the other Federal Reserve Banks
o be brought over now instead
think that that gold o u g h t t
of remaining with the Bank o f England, o r would they like it,

or be willing to leave the matter with the Fedoral Reserve
Bank o f New York? I

take i t before determining t o bring i t

over w e would a t least first make inquiry from the Treasury
as t o whether t h e y would like t o have a n y o f this gold.in
London, a n d that i s a question w e would l i k e t o have 4 n ex-

pression o f views from the other banks on, a s to whether they
think we should bring i t over, o r whether they would b e
willing t o let the matter rest with us-+
The Chairman:

D o you know any good reasons why i t

should remain there, a n y longer, Mr. Case?
Governor Case:

N o , I do not know o f any good reason

why it would be best t o bring i t over.

W e sold one-third

of it a little over that already, but there has not been any
transactions since Februery.


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Federal Reserve Bank of St. Louis

The Chsirman:

M r . Morss?

cannot s a y that I

Governor Morss: I

presume

on t h a t matter. I

have a n y judgment

i t i s p e r f e c t l y s a f e o v e r there.

Of course, a s a general principle, anything thet belongs t o
o have i t under your o w n hand t h a n
you, y o u would p r e f e r t
have i t $3,000 miles away.

I f there w a s n o reason f o r keep-

ing i t there, i t might b e well enougk t o bring i t over, but
if there i s a n y reason a t all i t seems t o m e I vould leave i t

there.

A s a general matter I think I would b e willing t o

leave i t t o the judgment and discretion o f the Federal Reserve Bank o f Now York.
The Chairman:

A n d t h e Treasury officials?

Governor Morss:
The Chairman:

Y e s , e n d the Treasury officials.

A r e there a n y further comments?

Governor Calkins:

T I move that b e done.

(The m o t i o n w a s s e c o n d e d b y Governor P e p l e a n d carried.)

The Chairman:
‘lows t h e m a t t e r

A s I understand i t , Mr. Case, t h a t a l -

t o rest

i n the hands

o f the N e w York bank

and Tregsury Department?
fg@overnor Case: W e l l ,

i n the hands o f the N e w York bank.

We naturally would consult with the Treasury before making
any movee

* e would n o t think o f doing i t without consulting

with them. I


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Federal Reserve Bank of St. Louis

think that could b e understood,

i f you please,

that w e would follow that practice.

The Chairman: Y o u r o w n stetement, however, was that
possibly t h e Treasury Department might have some good rea-

son for wanting i t t o remain there?
Governor Case: Y e s , and I think i f i t i s left with us,
and with t h e understanding that before doing anything w e will

consult with the Treasury Department --Governor Fancher: S h o u l d n o t o u r record b e changed s o

that i t would b e left t o the discretion o f the New York bank?
The Chairman:

I t has been s o changed.

ARGENTINE.

The Chairman:

T h e next question, Mr. Case, i s the

Argentine d e p a r t m e n t .

Governor Case: T h e arrangements everyone knows about

as they are participating i n thet. There are now “70,000,000,
and a s most o f you gentlemen know, t h e Argentine Government

have “50,000,000 of bonds due on May 15th, end T think our
representations h a v e been made t o them that those bonds
should b e paid a t maturity.

O n the other hand, I

understand

they are negotiating for a renewal, either i n whole o r i n
part.


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Federal Reserve Bank of St. Louis

I t is just possible that some o f that balance may be

withdrawn M a y Sth. I
The Chairman:

merely mention thet i n passing.

T h e r e i s nothing t o record?

Governor Case: T h e r e i s nothing t o record i n regard
to the Argentine.

JAPAN.
Governor Case:

T h e agreement which h a s just b e e n con-

is
summated w i t h t h e Bank o f Japan. I

noticed a

reference i n

the minutes o f the w e t Governors’ conference, I

that Governor Strong had spoken on.that.

H e said that i f

the o t h e r G o v e r n o r s w o u l d l i k e t o p a r t i c i p a t e

could d o so.

noticed

i n that t h e y

N o v that arrangement i s a mutual, reciprocal

arrangement, w h i c h provides t h a t t h e B a n k o f Japan m a y de-

posit “20,000,000 with the Federal Heserve Bank of New York,
four-fifths o f which m a y b e invested i n bills, w i t h o u r
guarantee,

T h e agroement o n the other s i d e provides t h a t w e

may deposit a similar amount, “20,000,000, with the Rank o f
Japan,

i f i t suits o u r convenience, they,

i n turn, t o in-«

vest four-fifths o f i t i n portfolio, assuming the bills are
obtainable, a n d similerly with their guarantee.

t o w the

transaction a t the present time i s that they, a fev weeks

ago, deposited °20,000,990 with us, four-fifths o f which
have already been invested i n bankers! acceptances with our


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Federal Reserve Bank of St. Louis

430

guarantee,

O u r published statement l a s t week showed 4

new

ttem, #16,000,000 liability for bills purchased for account
of foreign correspondents, a n d t h e question i s a s t o
whether t h e other banks would l i k e t o participate i n that
agreement.

O f course y o u understand these agreements have

all been approved b y the Federal Reserve Board; i n some instances the initiative i s taken i n Washington. Governor M o r s s :

A m I

correct

i n m y recollection t h a t

Governor Strong reported a t the lest meeting that that arwas
rangement vith Japan, the way h e intended t o make it,
that i f they bought bills the New York benk would not guarantee them?

Governor Case: N o , I have never heerd a discussion
along that line. E v e r since the matter came up, that was
in the original wnderstanding, that each would guarantee
for the other.
Governor Morss:

Then I

a m wrong.

want
Governor Case: Manifestly I think you would not
chose
the Rank o f Japan buying bills a d lib. a n y t h i n g t h e y

to put i n thete without guarantee i f i t suited our convenfence t o invest there, a n d I think with the same line o f
reasoning w e ought t o stand back o f the bills w e purchase


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Federal Reserve Bank of St. Louis

431

for them.

A s a matter o f fact that is taking “16,000,000

of pankers' acceptances right out o f the market.
The Chairman:

M r . Case, w h a t i s the purpose o r intent

of this arrangement,

i s that covered b y your last statement?

Governor Case: I

think t h e intent i s purely a diplo-

matic matter, t h e Japanese were very anxious t o establish
relations w i t h t h e Federal Reserve system, t h e Federal R e ~
serve B a n k o f New York, a n d those arrangements h a v e been
entered i n t o b y agreement, which, a s I say, i s mutual i n
character, t h a t e i t h e r o n e m a y d e p o s i t w i t h e a c h o t h e r a n d

invest four-fifths i n portfolio.
The Chairman:

I t was necessary the bills b e guaranteed?

Governor Case: Absolutely. I

think i f you consider

that carefully, Mr. Chairman, y o u will s e e a n y other p l a n

would hardly b e practicable. I

would not want the Bank o f

Japan buying bills witness their standing back o f them.
The Chairman:.

I s i t your desire t h a t t h e other banks

participate, o r i s that only a matter o f courtesy?
Governor Case: I
not d i s c u s s e d i t . I

think i t is a fair statement.
think i t i s a

that w e are disinterested,

fair s t a t e m e n t .

W e have
to s a y

w e are quite willing t o take t h e

account a n d a s s u m e t h e responsibility,

o r t o have t h e other

banks come in. Y e have already established that principle i n


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Federal Reserve Bank of St. Louis

the two other instinces were ws have belances ---~
a

T

h

e Chairman: ‘ o t h e r banks participating,

o f course,

would have t o publish their liability W e k b e you do?
Governor Case: I

assume they would.

The Chairman: Fell, they would, of course.
Governor Case: Y e s .

Governor h a a :

T o tell the.truth, £ never could sée-a.

special reason w h y the deposits h e l d b y the N e w York bank i n

foreign accounts should b e distributed; I

cout “not see any

advantage t o the New York bank o r t o the o f er banks as a

matter of fact. There is that much gold) if you deposit that,
deposit i t with us, w e have t o pay yout through the gold fund;
you get t h e gold i n either case.

4 . 0 n o t s e a that i t makes
Bogs

much difference. I

never could quite understand t h e princi-

ple that i t was done on.
Governor Calkins:

I t distributes t h e gold through a l l

the banks.

Governor Morss: Y o u pay it through the gold fund. I
cannot see it makes any difference to the New York bank, or
to us, whether w e get a deposit i n gold and pay for i t through
the gold fund --- I cannot s c e where w e are ahead a bit.
Governor Case: I

think several o f the Governors will

recall i n the Argentine agreement the matter was not taken


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Federal Reserve Bank of St. Louis

433

up for some months after t h e transaction w a s consummated,
and some little criticism was offered o n the part o f some
of the Governors, a n d I

feel personally that w e had n o t been

very prompt i n the distribution o f it; thet t h e y would l i k e
to participate, a n d i t seems t o m e that i n matters o f this
sort that t h e banks should a s a whole, a s a system, participete i n agreements o f this sort. I
want to.

should t h i n k t h e y would

M y o w n feeling i s i f I were i n the Roston Bank TI

would like t o participate i n it.
Governor Fancher:
situation,

M r . Case, t a k e i t i n the N e w York

i s not t h e situation there comparable t o a com-

mercial bank having a very large balance and having a large
amount and very seriously affecting your reserve position?
Governor Case: Y e s .
Governor Fancher:

I f you h a d deposited w i t h t h e Argen-

tine Government “75,000,000 o n one dey, t h e n withdraw

*50,000,000 i n gold, that affects your situetion. N o w if it
is distributed o v e r t h e twelve banks,

w e a l l contribute a

part o f thet?


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Federal Reserve Bank of St. Louis

Governor Case:
The Chairman:

I t lightens your load.
A s I understand Governor Morss, h e has

a very different opinion f r o m mine.

I t seems i n the

Ar gent ine a g a c h a t your reserve a n d o u r reserve will both
be strengthened proportionally b y reserving a

part o f that

gold.
Governor Morss: I

studied i t over a t the time, that

wes m y impression, t h a t that would w o r k o u t that way, b u t
when I came t o see that w e had reduced o u r gold settlement
fund b y a n equél amount - - -

Governor Peple:

Y o u did not i n the Argentine, y o u did

in German gold.
Governor C a s e :

Y o u g o t credit,

y o u got a

deposit j u s t

as though you got a new bank t o come i n and i t contributed
some e

e

Governor M o r s s :

Y o u h a d t h e deposit

o n i t from the

German gold, and when you transferred that deposit t o us v e
had t o p a y - t o y o u ,

Governor Case- T h a t i s the other side, t h a t i s the

agreement, but i n the Argentine i t was a deposit.

I f a new

bank were organized i n Boston a n d came i n and deposited

*2,000,000 i n gold with you, that i s what will take place i n
the T a p a n matter.


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Federal Reserve Bank of St. Louis

Governor Fancher:

A s I

understand Mr. Case, t h i s contract

435

with t h e Bank

of Japan i s practically along t h e same lines

with t h e Bank

of England?

Governor

Case:

Governor

Fancher:

chase f o r us,

Yese
I n the purchase o f bills, t h e y pur-

they guarantee the bills.

Governor

Case: Y e s .

Governor

Fancher:

I f w e purchase f r o m them t e guarantee

the bills.
Governor

Case.

Governor

Fancher: I

Yes.

think a precedent h a s been establish-

ed b y a division o f these deposits, p r o rating t h e deposits
among t h e banks, a n d I would think that policy should prevail
in t h e m a t t e r

of

these foreign balances and that w e should

have o u r proportion o f the deposit, a n d w e also should assume
our liability

in the guarantee o f the bills.

Governor

Case: I

Governor

Morss:

liability y o u
Governor

think that i s the correct principle.
D o y o u get a n y compensation f o r this

assume.

Case: N o , we have the “14,009,000 Heposit

balance free o f interest, which swells our resources, a n d

you would have your share of it.
bills a r e a l l


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Federal Reserve Bank of St. Louis

As &

prime e n d o r s e d bills.

matter

o f fact these

O f course that i s the w a y

you protect yourself.
Governor Case:

M a y w e have some action o n that, Mr.

Chairman?
The Chairman:

J I think I

cen remerber having a t one o f

the Governors’ conferences discussed this subject i n a general way, and i f I am not mistaken the conclusion was that i n
handling these foreign transactions that the New York bank
would take t h e initiative o n bchalf o f all o f the reserve
banks.

D o e s anyone else have a n y recollection o f such a n

action?
Governor Morss:

T I think w e have said w e would b e ready

to stand behind t h e N e w York bank i n any general transactions
of that sort i f they requested i t .
Governor Case: I

think Governor Harding w a s present a t

the t i m e w e d i s c u s s e d t h a t , a n d h e e x p r e s s e d t h e o p i n i o n - - -

The Chairman:

T h e question i n respect t o the Japan

transaction, t h e motion i s that w e all participate, p r o rata.
Is that motion seconded?
Governor Fancher: I

Governor Peple:
to t h e a p p r o v a l

second t h e motion.

I s i t not understood t h a t i s subject

o f our boards

o f directors,

t h e Governors

here w o u l d n o t h a v e t h e r i g h t t o d o t h o s e t h i n g s w i t h o u t a p -


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Federal Reserve Bank of St. Louis

peal t o the directors.

Governor Calkins: T h e y would have a right t o accept a
gold deposit, vould they not?
Governor Peple:

I t i s a matter o f endorsing bills.

Governor Case: I

think that would b e entirely satis-

factory t o us.

Governor Peple: T h a t i s a matter o f form, o f course,
but i t i s a matter o f principle involved also, i t seems t o

Me «
The Chairman: W h a t i s the motion then?
Mr. Hoxton:

T h e motion b y Mr- Fancher i s that a l l banks

participate ratably - - - I suggest t h e better w a y i s t o say,

"Should participate retahia".
The Chairman:

T h a t w o u l d g i v e u s opportunity t o refer

it back t o our banks.
Governor Peple: I - t h i n k so.
The Chairman:

I n the meantime, M r . Case, i f y o u would

be good enough t o write the banks o r inform the banks with
respect t o the arrangement,

o f course i t will help t h e matter

out.
Governor Case:

A l l right.

Governor F a n c h e r :

M y recollection is, I

a m not clear

on Japan, b u t i n England a n d Argentine, t h a t this matter h a s


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Federal Reserve Bank of St. Louis

438
been referred t o our board, and, a s far a s our bank i s con+
cerned,

w e are o n record t o participate.

Governor Case: I

have a n extract here f r o m the last

Governors! Conference:

"Governor Strong seported the contemplated agreement
With tho Bans o f Japan and said: ' B e f o r e the arrangewent
is concluded I would naturally submit i t t o the other Dederal

Reserve Banks for their participation, i f they care to par-

ticipate.'

T h e agreement has been concluded in substan-

tially the form outlined a t the last conference,

W e have

invested about $15,000,000 i n bills for the Bank of Japan,
payuent o f which w e guarantes, a n d $4,000,000 i s held i n
current account with us."
Governor Morss, A n ¥ agreement y o u should have a certain amount o f deposit all the tine?
Acting Governor Case.

Y e s .

T h a t account i s limited

definitely to $20,000,000. T h a t is the maximm, four-fifths
of which may be invested i n bills, a n d i t is a fair assumption they will always have that percentas


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Federal Reserve Bank of St. Louis

The Chairman,

I

s i t asking too mich, Mr. Case,

Since the agreament h a s been comlsted a n d i s in

force, t h a t y o u inform t h s other D a n k s

the terms?
Acting Governor Cass,
The QGhairman. I

3 6 .

think that covers these thre;

poims y o u had.


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Federal Reserve Bank of St. Louis

OPEN MARKET PURCHASES O F BANXERS! ACCEPTANCES,

Acting Governor Case. Y e s .
Having adopted that principle, I

would like t o raise

the question s i t h regard t o our open market purchases o f
W

bankers! acceptanoes.
should obtain thers.

e f35l that t h s same principle

T h e r e h a s dbsen a good deal o f in~

formal discussion o f that matter with the Governors pres~
ent.

Y o u all know when t h e Faderal Reserve System W a s

established, a l l

chases.

o f the banks d i d participate i n our pur-

W e are very glad to do so.

Deputy Governor Pepls.
Acting Governor Case.
there Was any exception,

E x c e p t Richmond?
1

1 right; I did not m o w

T h a t Was during a fair weather

period when they were very glad t o gst them; nut, a s we
ran into clouds and stormy weather during the war period,

440
many of the banks dropped out o f that, a n d v e have D3an
in the position o f sitting there holding ths bag, and

eur portfolio recently ran up +O more than §200 ,000 ,000;
and we fesl that this principle i s correct, a n d I think
it is, t h a t w e are t h e financial oenter, a n d theses bills

flow i n there, a n d a t a time when they could not ‘2e ab=


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Federal Reserve Bank of St. Louis

sorbed b y member banks, a n d were not arsoroed, w e stood
in the dreach and were a place o f last resort.

N o w , we

think that those purchasss should d e for ths accouns o f
all the Federal Reserve Banks. I

know that several o f

the Governors have that feeling avout it, and I would
in
like t o offsr that suggestion f o r consideration and,

that connection, My. Chairman, J

have just reesived a

communication from Governor Harding a s follows:
Mr.
" I enclose ssveral copiss o f a report m a d e » y

Patrick regarding bankers! acosptances

p u r c h a s e d

New
in the opon market b y the Federal Ressrvs Bank o f
York.

this
Y o u may use your discretion a s t o yringing

matter t o the attention o f the o o
bankIt is a merorandum regarding the purchase o f
illuminating
ers! acceptances, a n d I am sure i t Will oe
will
to the other Governors, a n d the other Governors

44),
doubtless o e glad t o have i t and I shall v e glad t o ses
that they are distri cuted,

I

n the msanwhile I should

like t o have consideration given t o that.
Governor Calkins.

M e . Chairman, I

havs always

n strongly impreased s y ths prépriety o f adopting
the principle t h a t Governor C a s e has referred to; a n d t h e

Federal Reserve Bank of San Francisco has always acted
Danks
upon that principle, a n d I belisve t h a t a l l o f ths


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Federal Reserve Bank of St. Louis

should d o so.

A

s a watter o f fact, there i s one reason

which i n m y mind i s sufficient t o astablish t h a t

practice; and that reason is thet if we do not adopt that
posipractics i t will n e v e r dan possivls t O oOnpars t h e

not
tions o f the twelve Federal Reserve Sanks; they can
New York
be compared i n the avsence o f participation i n
purchases bacause a s Governor Cas? has just
Federal Reserve Bank o f Naw York, Yeing
center,

i n

i
23
i n order t o s u p p o r t t h e situation, m a y

t o carry,
overloaded, qhile the rest o f us have n o load
comare our
The illustration o f the fact that w e can not
positions i s apparent t o all o f us.

T h s reservs per-

Fra@cisco a t
centags o f t h Federal Reserve Bank o f San


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Federal Reserve Bank of St. Louis

443
this time may bs about 4 4 per cent.
participated,

I

f i+ had not

i f i t h a d n o t takan i t s propoztion o f New

York's purchases, i t s reserve percentages mizht d e sixty

per cent; I
be.

am not quite sure a t this time what i t would

T h a t I

a m just sentioning a s a n entirely suffi-

cient illustration o f m y point that ths position o f the
twelve Federal Reserve Banks c a n not 5 8 compardsis umless the purchases i n the open market are distributed
proportionally among then.
The Chairman. f

think thsre i s a question o f

principle h e r e that should v e considarad; t h a t is, a s t o

whether o r not the twelve banks are o f orig wind a s to
whether they should support themarket wier wll conditions.
I realize that i t is impossible t o
at present, perhaps, although progress i s »eimg m d e i n

that dirsotion, u t m y thought is that cecause they are
fm a position that several of the danks, thsy should 2
out o f the markst and, notwithstanding t h e fact, w e are

still rediscounting; w e are still taking a reasonable
proportion o f Naw Yor: purchas6s, a n d w e have, I

most of the time, Mr. Case?
Assistant Governor Case. I

think Bo.

think,


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Federal Reserve Bank of St. Louis

Mr. Kenzel knows a l l about that.
a m sure t h e thoucht o f our Board

The Chairman. I

is that i n tines liks the present w e really ought t o °
out o f the market.

W e lave not g o t out o f the

On the other hand, t h e r e a r e other changes that have

been affected during ths last two years, ir. Chase,
Waile, o f cougse, t h e volume o f busimess w i t h u s i s not
very great,

as

w e d o b u y a good many Dills i n Chicago,

you know, and the cuestiona naturally arises as to
Whether w e ars goin, t o dé p b mitted t o distribute those
pills.
Acting Govarnor Case. T
interesting a n d illumimting;
ask lr, K e n g e l

t o say a

have just raised,

think it. might be. very
i f you think i t wise,

to

word o n that question, w h i c h y o u

Y o u are temporarily oslow your re-

serve; y o u are not i n a confortable »osition; a n d y o u
raises the question Whether y o u u c t

ticipate under thos? circumstances.

$ o continus t o par-

I h a v e a very

strong fesling that that i s the reason you shojld continue t o varticipate, that i f the vanzs take any other
as
attitude, t h e whole t h i n k i s all off, and you might


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Federal Reserve Bank of St. Louis

Well s a y good night t o your bankars! accentances.
The Chairman. I

a m mindful o f ths polic;

have t o follow, L r . Case, t h r o u g h thick and thin. I
realize t h s effect, a n d that y o u would never would have

to rediscount e x c e p t from the fact you continued t o
and did carry a large amount o f Dills.
Acting Governor Gase.

i r . Kenzel, Z I know, has

followed that thing v e r y carefully,

a n d has much

more full. irformation upon that.
The Ghairman.

W h a t I

have not Withdrawn even
ditions.

u

wish understood i s that w e

n

d

e

r the present con-

Governor Fancher,

t a : thoroughly i n +: ccora
with

whe t Governor Calkins said.
I

Obligation involved,

W

also think there i s another

e have a preat number o f
benks

in our district that a r e accepting
a n d their bills £ 0

Out into the mrket,.

N

e d o not buy unendorsea bills

ang t h e y g o o u t into t h e open
market. I

think there

is a n obligation u p o n o u r bankto
a t e a s t c a r r y a n amount
of bills equal t o the amount t h a t
i s made a n d f e d o u t inte
the open market, I
upon u s ,

B i l l s

think t h a t i
s a fundamental obligation

g o t o N e w York; t h a t i s w h e r e
they all

center, that i s the market, a n d I think
there i s a n obligation u p o n u s thet w e Should
carry i n our portfolio a n
amount o f bills equal a t least t o the
emount o f bills
made i n our district,
ve are o n e o f the banks t h a t hes
participated a n g
taken t e n p e r cent o f the purchuses
r i g h t along.

A t

times w e have taken more t h a n that,
a n d I feel a s Gove-nor
Case, t h a t simply because o n e o f t h e
banks o r two o r three
of the banks m a y b e l o w a a their reserves,
t h a t the l o a d
should not b e dumped upon N e w York.

T h e y might b e low i n

their reserves a t the s a m e time,
b u t they are i n a pesi-


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Federal Reserve Bank of St. Louis

tion Where t h e y cannot evoid i t .

T h o s e bills have g o t t o

f i n d amerket.
Acting G o v e r n o r C a s e . M o r e o v e r ,

that will not vork both ways, a n d I

i t is a

poor r i l e

think t h e tire i s

coming when this i s going t o be a very desirable thing
for the bank and they will say "Let us i n o n it," ana I
think a

precedent s h o u l d b e e s t a b l i s h e d j u s t a s i t h a s

been i n these other matters,
Governor Calkins.

Y o u cannot know o r s a y what your

reserve position i s a t this moment, unless y o u take i n t o

consideration the bills bought i n the open market a s
be: ring o n all the twelve banks.

T h e y may b e u p o r they

may b e down, a n d y o u d o not know w h a t your reserve condition i s a t this moment.

The Chairnan.

v h a t banks a r e participating, M r .

Kenzel?

Mr, Kenzel,

S a n Francisco, Ghicago, a n d Clevelan3,

taking ther across country.

Governor Young. I

would like t o explain the posi-

tion o f t h e M i n n e a p o l i s B a n k o n t h a t matter,

W

e have

purchased bills liberally from January 1 , 1919, t o December,®th

and w e have not been taking what w e wanted i n the market,

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Federal Reserve Bank of St. Louis

but w e have been taking what New-York gave us, carrying
at one time a s high a s thirty eight o r thirty nine millions o f dollars.

N o w o n December 2 O t h those bills a l l

originated i n other districts--I d o not think w e h a d a n y
of o u r o m ,

a n d o u r reserve position a t that time w a s

such t h a t i f w e t o o k a n y m o r e b i l l s

o r participated

longer with N e w York that w e would h a v e been compelle4a
to re-discount w i t h some other Federal Reserve Banks.

While w e have not participated since December 20th, a t
the Same t i m e t h e o n l y w a y the banks i n our district c a n
dispose o f their bills i s t o take a like amount o f bills
from other districts, a n d w e have b e e n doing thet and
discounting those bills.

W h i l e w e have n o t participated

directly with N e w York, w e have indirectly.

B u t I would

not object t o a general participstion b y all the banks.
I do not know whet more w e could have done under t h e circumstances, M r , Kenzel,
Acting Governor Case, I

think y o u have m d e a

preat

argument f o r distribution.
Governor Young. Y e s , I
wanted
ter.

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Federal Reserve Bank of St. Louis

agree w i t h that, b u t I just

t o e x p l a i n w h a t w e h a d d o n e i n t h e a c c e p t a n c e mat-—

Mr, Kenzel.
tlemen?

M a y I say a werd i n that regard, gen-

M r . Peple brought o u t the fact that t h e Richmond

bank n e v e r h o d perticipated.
Deput G o v e r n o r P e p l e .

Except

o n temporary occasions,

at the request o f the N e w York bank, t o relieve t h e m o f
bills.

Mr. Kenzel, I

would like t o remind this Conference,

and also t o inform some o f the Governors w h o were n o t here
in the early davs, t h a t t h e basis o f distribution was

through a distributing committee, o f which Governor Seay
was chairman, a n d was o n the duet ioteney o f their earnings.
The Richmond bank was t h e o n l y bankrwhich h a d a n y earnings,
and t h e r e f o r e t h e y n e v e r w e r e p e r m i t t e d
in t h e a g r e e m e n t .

t o p a r t i c i p ae
t

O t h e r w i s e t h e y w o u l d h a v e b e e n i n it.

Deputy G o v e r n o r P e p l e , I

want t o c o r r e c t t h a t t h i s

far, b y saying t h a t m y recollection i s that i n the discus-~sion o f this matter i n our eyecutive committee w e d i d not
ask t o participate

a t that time because

w e felt sure that

the time would c o m e that i t would n o t b e convenient f o r
us t o péerticipate,

w e would h a v e gommitted ourselves

to

participation i f we h a d asked a t that time, a n d w e h a d
that i n m i n d a t t h e time.

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Federal Reserve Bank of St. Louis

449

Me

Renzol
. Well,

titled t o p u r t i c i p a t e

o n t h e record,

y o u were n o t en-

a t the t i m e w h e n t h e proportionment

of b i l l s w a s f i x e d b y q u a r t e r l y s t a t e m e n t s

o f deficit

in

earnings.

Governor Morss.

T h e statement which N e w York

makes hasnever seemed t o m e t o b e quite fair.

A s I re-

member t h a t situation, t h e Federal Reserve Banks vere

short o n earnings; that i s true. They were coming into
the N e w Y o r k m a r k e t t h r o u g h o t h e r b r o k e r s a n d c o m p e t i n g

on the r a t e with N e w York, w i t h the N e w York banks f o r
those acceptances,

I t was a s much for t h e protection o f

the New York bank a s anything, t o protect the rates, a n d
that w a s a part o f that operation.

Mr. Kenzel.

I t was a question, then, Governor,

of stabilization o f rates, t o prevent t h e m getting t o o
low,
Governor Morss.

T h a t was f o r t h e benefit o f the N e w

York bank a s much a s for t h e benefit o f the other banks.
Governor Calkins.

I t was f o r t h e benefit o f all the

banks,

Governor Morss. Yes, and just as much for New York
as for the other banks, t o maintain rates, beceuse a t

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Federal Reserve Bank of St. Louis

that t i m e rates o n money were.very easy, things were selling very cheap, a n d competition f o r these bills would
have sent t h e m down t o I do n o t know what price.

w e

bought | ! m u n i c i p e l notes-~-1 was o n l y a director o f the
pank t h e n - - a t a b o u t t w o o r s o m e t h i n g p e r cent.
Govermor Calkins. I

think i t w a s o n e a n d t h r e e q u a r -

ters p e r cent.

Governor Morss, W e l l , whatever i t was. I
want t o be disagreeable a b o u t it, b u t I

do not

really think t h a t

New Y o r k m a k e s r e t h e r t o o m u c h o f t h a t argument -

Governor Calkins.

“ h a t would t h e situstion b e i f

in
New York Zid not buy the ecceptances that were offered
?
the m a r k e t
The Chairman.
Mr. Kenzel. I

T h e r e w o u l d n o t b e a n y rarket.
will t e l l y o u w h a t I

think w o u l d h a p -

which
Pen, and that i s that a great amount o f financing
w o u l d conis now being done i n the f o r m o f acceptances
notes, t h o s e
tinue t o r e v e r t t o f i n a n c i n g u n d e r : promissory
notes w o u l d c l o g u p i n t h e d i s t r i c t s ,

a n d t h e other dis:

tricts would b e re-discounting promissory notes instead

ofbankers! bills.
Governor Calkins.

T h a t means,

i n its l a s t analysis,

that t h e Federul Reserve B a n k o f New York, b y buying & c 
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Federal Reserve Bank of St. Louis

ceptances

i n New York i n the o p e n market,

i s carrying 4

part o f t h e l o a d o f e a c h o f t h e o t h e r e l e v e n b a n k s ?

Mr. Kenzel.

T h a t i s i t precisely.

Governor Sgoaer

“ h y d o y o u want t c finance i t b y

acceptances i f i t c a n b e done cheaper b y commercial paper?

You say that i f there wasn't a n y acceptances that i t
would b e handled through commercial paper.

W h a t i s the

odds w h i c h way i t i s handled.
acceptMr. Kenzel. B e c a u s e through t h e medium o f
ances w e provise a n open market instrument t h e t w e c a n
~-if w e - c a n p r o v i s e

i t i n sufficient v o l u m e v e w i l l h a v e

an o p e n r e r k e t a n d w i l l a l s o p r o v i c e a

s t a b l e o p e n market,

perticularyfor import a n d export trade.
(informal g i s cussion followed).
Governor j o r s s .
and I

think p e r h a p s I

P e r h a p s o u r position m a y b e unique
had better state i t . I

should n o t

b y the New York
think of participeting i n bills bought
bank.

“ e g have a n open market o f our own, a n d w e take

care o f t h a t n e r k e t a s b e s t w e can. S o m e t i m e s

better a n d sometimes w e c a n d o worse.
participate

w e can d o

I f we agree t o

i n the purchases b y New York, w e might a s well

e n d w e are
give u p o u r o w n o p e n m e r k e t o v e r t o N e w Y o r k ,

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Federal Reserve Bank of St. Louis

not w i l l i n g t o d o t h a t a n d s h o u l d n e t t h i n k o f doing i t .

At times w e have been very free buyers o f bills, a s a
Federal Reserve Bank, when w e felt that w e were able t o
do it.

a t other times w e have been less able t o do it.

I.cannot s e e h o w w e could agree t o t:ke a n y amount o r
cértain p r o p o r t i o n o f a n y a m o u n t o f bills b o u g h t

b y the

New York b a n k a n d pretend t o take c a r e o f our o w n market
at all.

Furthermore, w e d o not always agree with the rate
at which New York buys the bills. T h e r e was a very noticeable c a s e o f that.

B e f o r e y o u p u t your price u p t o

four and three quarter a n d five p e r cent w e thought t h a t
it should h a v e been p u t u p before.

T h a t o f course i s

simply a matter o f judgment, b u t I cannot see any reeson

why the Boston "ederal Reserve Bank should be allotted
@ p¥oportion o f purchases b y New York i f i t doesnot agree
with thelr juderent.
Mr, Kenzel.

I t should net.

Governor Morss,. T h a t i s whet w e would d o i f we should
to t a k e a

certain proportion,

Mr. Kenzel, . You should not d o so. I

feel this way,

that i f we take the larger view o f it, o f the necessity for


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Federal Reserve Bank of St. Louis

stabilizing t h e o p e n nmerket a s a n o b l i g a t i o n t o t h e system,

a way should b e worked o u t whereby all t h e Reserve Banks
would b e c o n s u l t e ? e n d w o u l d f o r m u l a t e p o l i c i e s a n d s o

forth.

{ d o n o t w i s h t o assume t h e responsil@ity, a c t i n g

for t h e R e s e r v e B e n k o f N e w York,

o f dictating policies

for t h e system.

The Chairman, (after further discussion). Governor
Calkins, h a v e y o u a motion that y o u c a n make o n this subject?

Governor Calkins.

i t seems t o me that the diversity

of opinion i s s o wide t h a t some common ground should b e
found b e f o r e

a n attempt

i s m a d e t o c o v e r i t w i t h & motion.

As I understand i t , t h e system has s e t u s what i s known
as a
Lines

pipe l i n e , a n d t h e p u r p o s e
i s t o establish a

Reserve banks,

level

i n other words,

o f that system o f pipe

i n all t h e twelve Federal

t o operate t h e banks a s

one system, a n d t h e failure o n the part o f the twelve

banks t o carry their part, each one, o f the bankers! a c ceptance load, i s going t o put the pipe line o u t o f commission s o t h a t i t w i l l n o t operate, I

maintain t h a t

when t h e federal Reserve B a n k o f Chicago's reserve pets
down b e l o w t h e h a p p y p o i n t a n d i t - s t o p s b u y i n g i t s p r o -


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Federal Reserve Bank of St. Louis

o bankers! acceptances, that i t has put the
p o r t i o nf
pipe l i n e o u t o f commission.

E x a c t l y t h e same situa tion

arises w h e n a n y Federal Reserve B a n k stops d o i n g that.
Now i f i t 1 8 desirable t h a t the reserve o f the Federal
Reserve B a n k o f New York s ' ould sink below t h a t o f the
Bank o f San Francisco, t h e n o f course w e should stop participation a n d the Board would call upon u s t o rediscount

with the Federal Reserve Bank o f New York.
ing t o m a k e t h e piye l i n e work,

t e are try-

e n d t h e question

i s whether

it is desirable t o have a very wide difference i n the reserve positions o f the trelve banks o r whether i t i s desirable t o have a fairly level position o f the twelve banks,
That i s the principle involved.

I f i t i s desirable t o

have t h e level i n one district widely different f r o m the
levels i n all the other eleven districts, w h y certainly»

we could not m k e a n y such agreement. I

believe the

Fezeral Reserve B o a r d i s more o r less committed t o the
view t h a t i t should b e kept up, T h e r e a r e difficulties,

to be sure, i n the mutter o f adjusting thebasis, because
of the fuct that i n some o f the districts there i s sonething approgching a n open market, S o m e o f the districts

besides New York, but that i s a matter o f easy adjustment,


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Federal Reserve Bank of St. Louis

Acting Governor Case.

1 t seems t o me there i s a

455

basis f o r a

motion

i n t h e s u g g e s t i o n a d v a n c e i / iby
r, N e n z e l

as t o t h e a p p o i n t m e n t

The Chairman.

of a

committee.

T h e suggestion o f Mr, Kenzel i s

that i t i s the sense o f this meeting that stabilization
of t h e o p e n b i l l r e r k e t

i s incumbent u p o n t h e s y s t e m a s a

whole a n d that a committee b e appointed b y the Chairman
to
develop a n e q u i t a b l e b a s i s f o r m a k i n g s u c h s u p p o r t e f f e c t ~

ive. 7
Acting Governor Case.
Governor Young. I
The Cvairman,

I w i l l opfer t h a t a s a motion.

will second it.

I s there a n y further discussion?

Governor V a n Zandt. V Y o u l d i t not b e well t o add that
the r e p o r t o f t h e c o m m i t t e e

b e subject

t o t h e a p p r o v a l fo

the Federal Reserve Board?
Governor C a l k i n s . I

would s u g g e s t t h a t t h e c o m m i t t e e

report beck to the Conference o f Governors,
The Chairman,

V h a t w a s that suggestion, Governor

Calkins?
Gove rnor Calkins . _ M r . V a n Zandt h a s suggested that
the report o f the committee .

n o t b e put i n t o operation

until the approval o f the Federal Reserve Board,

M y sug-

gestion i s that t h e report should b e made t o this Gonfer-


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Federal Reserve Bank of St. Louis

456
ence o f Governors before i t i s put into operation.
Governor Morss,. Y e s .

W e should n o t vant t o b e

bound b y t h e r e p o r t o f t h a t committee.

The Chairman,

M

y thought i s that i n some instences

the Governors h e r e will want t o refer this matter b a c k t o
their Boards.
that

I t i s a n important matter, a n d I think

s h o u eldone.
bd
Governor Biggs. I
Governor

would like t o d o that,

V a n Zandt.

S o would

I.

Deputy Governor Peple, A n d I would too,
Governor Norris.

V o u l d i t not cover t h e point t o just

say t h a t t h e c o m m i t t e e w o u l d r e p o r t b e c k t o this C o n f e r -

ence o f Governors?
Governor Calkins.

I n order t o g e t a

working a p p a r a t -

us going here, would i t not b e vell t o have t h a t committee
formulate a

report t o b e submitted i n writing t o the Govern-

ors, t o b e acted u p o n a t the next Conference o f Governors,

or Submitted i n advance t o that, s o as t o give the Governors a n opportunity t o discuss : t with their boards o f di.
recotgs?


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Federal Reserve Bank of St. Louis

The Chairman, I

think that i s a very good suggestion.

Acting Fovernor Case.

C o u l d w e not have the conmittee

formulate a

report a n d perhaps r e p o r t t o m o r r o w t o t h e

Conference, s o that the Governors m a y take the report
home with t h e m and submit i t t o their directors?

I n

that w a y w e could avoid waiting three o r four months?
The Chairman.

‘ i e will appoint a committee a n d s e e

if that could b e done.
The motion h e s been state?, a n d I would suggest
that t h e c o m m i t t e e m a k e i t s r e p o r t a t t h e e a r l i e s t possi-.

ble moment a n d advise t h e banks b y mail i f necessary. I
think t h e motion h a s been seconded.
(The motion, h a v i n g been d u l y seconded, w a s carried).
Deputy Governor Peple. I
voting n o o n thet subject.
the program and I

would like t o b e recorded
I t i s not s topic which i s

have n o t h a d opportunity t o jJiscuss

with the other officers o f the banks a n d I

prefer t o

recorded a s not voting.
itt. C L E A R I N G A N D COLLECTION SYSTEM,
(2) A s s u m i n g t h a t the provisions o f the Federal
Reserve a c t with reference t o exchange cherges w i l l remain
unchanged:


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Federal Reserve Bank of St. Louis

(a) W h a t w i l l

b e the most effective method o f con-

tinuing t h e campaign f o r w r points?

458

Vhat w i l l b e t h e b e s t p r o c e d u r e

t o meet

and prevent t h e recurrence o f the charges
of c o e r c i o n m a d e b y n o n m e m b e r banks.

(c) S h o u l d t h e banks n o w publish a

non par

List inste:d o f a par list?

Board's inter, >.district time schedule.
(a) S h o u l d i t b e published i n the Bulletin?
(bd) C o r r e c t i o n o f errors.

£¢) R e l a t i o n t o intra-district schedules.
The Chairman. G o v e r n o r Young, a r e y o u prepared t o

submit t h e report o f the committee composed o f Governors *
Seay, Wellborn a n d yourself o n these topics?

Governor Youne.

Y e s sar.

The Committee composed of Governors Seay, Yellborn
ang Young, t o prepared r e m mmendation o n sub-topics 2
and 3 o f topic 3 , under Clearing a n d Collection System,

beg t o offer the following recommende tions:
(2)

( a ) W h a t w i l l b e t h e m o s t effective m e t h o d o f
continuine t h e c a m p a i e n f o r p e r p o i n t s ?

While t h i s c o m m i t t e e r e a l i z e s t h a t t h e c a m p a i g n f o r

Par points i n certain districts h a s b e e n delayed because o f the

action o f non-par banks and legislation, still they feel that
the recent @ecision rendered b y the Vistrict Judge o f the

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Federal Reserve Bank of St. Louis

United States C o u r t i n Atlanta establishes t h e lerality o f the

Federal Reserve Banks’ position and i t is therefore recommended t h a t e v e r y e f f o r t b e e x e r t e d t o p l a c e a l l o f t h e

remaining non-par banks o n a par basis a s quickly a s possible,
Several Governors w e r e consulted about the methods e m ployed

i n their o w n d i s t r i c t s a n d i t i s o u r o p i n i o n t h a t t h e

/ non-par b a n k s s h o u l d b e a p p r o s c h e d f i r s t t h r o u g h p e r s o n a l
sOlicitation,

s e c o n d through correspondence,

a n d i f these

methods a r e n o t successful, t h a t every non-par b a n k i n a
given State should b e notified t h a t o n a certain date t h e

Federal Reserve Banks will handle checks o n their institution f o r member banks o n a par basis, stating t o the nonpar bank t h a t i t i s optional w i t h that bank whether t h e y
remit a t par o r checks a r e presented a t their counter f o r
payment i n cash, a n d requesting reply a s t o which m e t h o
of p r o c e d u r e t h e y p r e f e r

follow,

t o have t h e Federel Reserve B a n k

T h e Federal Reserve Banks should t h e n proceed

to c o l l e c t t h r o u g h t h e e x p r e s s c o m p a n i e s ,

p o s t offices,

or private agencies, t h e checks o n those banks t h a t d o
not signify their intention o f remitting a t par.


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Federal Reserve Bank of St. Louis

(o) t h a t will b e t h e b e s t procedure t o meet a n d

prevent the recurrence of, the charges o f ¢coercion made b y non-member banks?

The Charges generally are unfounded and anything that
tends towards intimidation o r coercion c a n b e avoided
through t h e selection o f proper solicitors a n d i n exer.
cising care i n correspondence.
(¢) S h o u l d t h e Banks n o w publish a non-par l i s t
instead o f a par list?

Inasmuch as some of the districts have not progressed a s rapidly a s others i n securing p a r points,

i t is

the opinion o f this committee t h a t t h e banks should con-

tinue t o publish a par list for the present. Nevertheless,
because o f the banks o f doubtful standing, y o u r committee
recommends t h e t a non-per l i s t should also b e published

ofbanks i n States where practically all banks are o n a
par basis.

(3) Board's inter-district time schedule.
(a) S h o u l d i t be published i n the Bulletin?
It i s t h e recommendation o f your committee t h a t such

schedule should not b e published i n the Bulletin.
(b}. C o r r e c t i o n o f errors.
Inter-district t i m e s c h e d u l e s s h o u l d b e e x a m i n e d

promptly b y each Federal Reserve Bank and if discrepancles o c c u r t h e s a m e s h o u l d b e c o r r e c t e d p r o m p t l y a n d t h e


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Federal Reserve Bank of St. Louis


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Federal Reserve Bank of St. Louis

carrection made i n the next schedule.
(c) R e l a t i o n o f intre-district
Each Federal Reserve B a n k should
ules t o i t s o w n m e m b e r s
The C h a i r m a n .

in regard

i n e s .
t e sched—

p e a n

# 8 s o o n a s possible.

W h a t i s the w i s h o f t h e Conference

t o this committee r e p o r t ?
would like t o ask

Acting Governer Case. I

i f the

committee h e s given very careful consideration, w i t h re-

gard t o their recommendation thet e« per list should b e
published rather t h e n the abolishment o f the p a r list
and merely t h e publishing o f a

non-par list.. T h e r e a r e

thirty s i x o f the forty eight Stetes completely

o n the p a r

list a n d twenty seven t h o u s a n d o u t o f thirty theusend
banks.

Manifestly

i t is ©

much more s i r p l e p r o p o s i t i o n

to

publish e non pear list o f those three thousand banks, t e n
per cent e f the whole, t h a n 4 4 would b e

list. I

t o pubdlish a par

do not think s per list means anything today.

in.
It i s a non-par list t h a t everybody i s tnterested
The Cheirman.

Except

i n divided States.

“ W e heve t w o

4
or three d ¢ them, o r four, e n d i t i s necessary t o publish
t o sort
per list i n order that o certain b a n k m a y know hor
and rate i t s checks.
te. do. -toaws

Without e

par list i t would n o t b e s -

Acting Governor Case. I

d o not quite s e e why.

Governor Young. Y i s c o n s i n might b e i n our district and i t might b e i n the Chicago district.
The Chairman.
and Michigan.

T h e same w a y with Indiana, Illinois

k 6 Would have a complication there that

Perhaps would n o t arise i n other districts.
Governor Fancher. I

think there i s this further

question involved: W h e r e some of the districts have
fifteen p e r cent o f the banks o n the p a r list with eighty
five p e r c e n t o f t h e b a n k s y e t t o b e a p p r o a c h e d

o r brought

in, t h a t woul:' mean t h a t y o & would h a v e t o publish t h e
individual bank, a n d i n that case y o u would have a
large p a r list.

very

Y o u might have i n some cases f o u r o r five

hundred non par banks, which would mean a pretty lerge
PES

a e tere L e

Governor V a n Zandt, I

might suggest t h s t t h e publica.

tion o f a non-per l i s t would n o t a i d u s i n extending o u r
par list.

The Chairman. I

think you are right about. that,

Governor V a n Zandt.
Governor V a n Zandt. B e e a u s e those banks would take

itas being put out to make them md.


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Federal Reserve Bank of St. Louis

4353
The Chairman.

T h e question

i s o n the adoption o f

this r e p o r t ,
Governor C a l k i n s , I

move t h e a d o p t i o n o f t h e report.

Acting Governor Case. I
Deputy Gevernor Peple.

second t h e motion.
T h e r e i s another topic cla@ely

related t o this question a l s o introdjuced b y the committee
in i t s report.
The C

h

a

i

r t mt oapai chni s‘. that?

Deputy G o v e r n o r P e p l e ,

Number 6

o n t h e f i r s t supple-

mentary list, "Method o f making collection o f checks d r a w n
on Weak banks i n whole p a r °tates." T h a t nas a bearing o n
n
i
the committee's report, inasmuch s s they are r e c o m m e r i dg
the p u b l i c a t i o n

non-par list.

of a

(Further discussion followed).
The Chairman. I

think t h a t will have t o b e dealt

with i n d e p e n d e n t l y o f this s u b j e c t ,

w h e n w e c o m e t o it, M r .

Peple.

(Calls f o r t h e Question).
The Chairman,

T h e question i s o n the adoption o f the

report.
(The motion, h a v i n g b e e n duly seconded, w a s carried
ang the report was adopted).


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Federal Reserve Bank of St. Louis

464
The Chairman,

or Fancher, I
topic 4

W

e h a v e another committee.

Govern.

presume y o u are n o t resdy t o report o n sub-

of topic No. 3--(4) D i r e c t rating

items o f m e m b e r b a n k s

o f collection

i n one FeAéral Reserve District

member a n d n o n - m e m b e r b a n k s

to

i n another F e d e r a l R e s e r v e d i s ~

trict f o r wire transfer o f proceeds t o sending banks,
Federal n e r v e Banks,

( @ ) A r e t h e fecilities afforded

being abused b y non-mermer banks?
Governor Fancher, “ T h a t w a s a comuittee appointed
by three banks--

The Chairman,

Y o u are going t o take that u p later?

Governor F a n c h e r .

Yes.

T h a t report will b e made t o

another Conference.

The Chairman,
not appointed a

.

G

Z I have just been reminded that I have

committee o n bankers! acceptences. I

o

v

e

r

n

o

will

r

appoint

o n t h e t c o m m i t t e e G o v e r m o r s F a n c h e r ,/Morss,and M r .

Kenzel,

i f that i s agreeable t o the Conference.
Governor F a n c h e r , M r . E r e r s o n

i s h e r e a n d perhaps y o u

had better introduce y o u r subject now.


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Federal Reserve Bank of St. Louis

EFFECT O f C L O S I N G O F B O C K S B Y NE" P L A N O F SOTTLET ENT

THROUGH GCID SETTIEMENT FUND. (Supplementary
Topic),

Governor F a n c h e r .

M y reason f o r putting t h a t topic

on the program was this:

t o find o u t whether o r not i t

would n o t b e possible, t h r o u g h s o m e o t h e r o p e r a t i o n o f

the gold settlement fund, t o permit earlier closing o f the
books o f the banks t h a n n o w takes place. B e c a u s e o f the rediscounting w e are called u p o n t o make t h e following d a y
for some b a n k t o restore i t s reserve,

w e find lately that

it h a s n o t b e e n p o s a b l e f o r u s t o close o u r b o o k s u n t i l
ten o r e i e v e n o ' c l o c k o f t h e f o l l o w i n g d a y , w h i c h d e l a y s

our statements, reports, a n d things o f that sort, and
rather s e r i o u s l y h o l d s u p o u r operations.

I t occurred

to

us that there might b e some w a y b y which w e could make

transfers t o the gold settlement fund and get these transactions through o u r books earlier.

O n e suggestion h a s been

rade here that there might b e some o n e working later, c a r rying o n the gold transfer operations later i n the evening,
and then sending t h e b e n k a commercial w i r e s o that w e would
have t h e informetion early i n the morning and could make
our e n t r i e s p r o m p t l y t h e f o l l o w i n g d a y .

The Chairman. I

think thet would solve t h e whole mtter.,

I talked the matter over with Governor Harding, a n d his reSponse w a s t h a t t h e r e w a s n o d o u b t t h a t t h a t c o u l d b e e a s i l y


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Federal Reserve Bank of St. Louis

466

arranged and that all that would b e necessary would h e t o
mention the matter t e you, Mr, Emerson.

T h e ldea i s that

if we could use the commercial wire, a n d keep your men
at work a t night long enough t o compile their fipures and
send ther. over the comnercial wires,

s o that they would

be i n San Francisco and Shicago when w e got down i n the
morning. I

think i t i s a very good suggestion.

Mr. Emerson, I

think the whole difficulty w e have

had i n this p a s t m o n t h h a s b e e n d u e t o t h e s e t w o factors:

first, o u r wires f r o m S a n Francisco have b e e n down. U n d e r

the present arrangement w e keep our men here a t night t o
effect S e t t l e m e n t a n d t h e w i r e s a r e d e l i v e r e d

t o our tele-

graphic office before t h e m e n g o home a t night, anda the
arrangerent w i t h the Eastern banks i s that they have t h e
wires c o m e i n half a n hour before t h e banks open.

The

wires c a n b e dispetched, entries made and the books closed
before t h e officers arrive a t t h e bank.

I n the case o f

the westerm banks, where t h e time i s later t h a n ours, t h a t
automatically t a k e s c a r e o f itself.

B u t within t h e past

two weeks o r so, o n account o f the tornadoes

i n the ‘est,

which h a v e r a i s e d h a v o c w i t h o u r w i r e s y s t e m ,

i t has n o t

been p o s s i b l e

t o g e t o u r S a n Francisco wires o u t until t h e

following morning over t h e commercial wires.


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Federal Reserve Bank of St. Louis

w e have

gotten v e r y g o o d s e r v i c e f r o m t h e e s t e r n U n i o n ;

i n Fact,

one night w e g o t a wire through t o San Frencisco o v e r
the «western Union i n eighteen minutes.
delays o u t t h e r e

B

u

t due t o the

o n b o t h o f t h e systems, t h e s e w i r e s

have not been getting i n here until 7 or 8 o'clock the
following morning, a n d I have h a d m y men come down a s
early a s 7

o'clo&

i n the morning

t o w o r k u p t h e settile-

ment a n d t o get t h e books closed a n d t h e figures back t o
the b a n k s a s s o o n a s possible.

if our telephone wires were working, t h a t is, o u r
own telephone wires, w h i c h a r e the wires o f the telephone
company, w e r e working,

w e would have these firures f i l e d

and ready for y o u the first thing i n the morning.
In the second place,

w e have h a d o n e o r two banks w h o

have h a d t o redis® unt this month, a n d t h e y have-not h a d
to r e d i s m unt b e f o r e

i n a l o n g time; t h e y p e r m i t t e d t h e i r

reserves t o fall a little t o o close t o the margin, with
the result that w e have h a d t o arrange a

rediscount t h e

following morning a s o f the previous day. I

think that

matter h a s b e e n s t r a i g h t e n e d o u t ; t h e B o a r d ' s p o l i c y h a s

been explained t o them, t h a t t h e banks would maintain their
reserve a t about forty p e r cent, w h i c h would give t h e m a n
<a

o

apes
Leip Oop 8


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Federal Reserve Bank of St. Louis

x

exc€ss s o that i f their debit i n the settlement i s a lit-

tle bit heavier than they had anticipatea, they would
still have sufficient free gold t o take care o f the s ituation.

I think w e have had the most strenuous test possible o f this n e w gold settlement p l a n this. month, t h e most
strenuous t h a t w e possibly could have expected t o g o

through, a n d I think when our wire system i s restored that
it will work itself out without any difficulty,

V e would

be glad t o send wires b y Western Union a t night, under ordinary circumstances not later than 1 0 o'clock, but I de not
think a s efficient service w o u l d b e rendered t h e banks a s

would b e renjered them bysending the wires early the followlng morning, because w e have found elways t h a t the
western U n i o n o p e r a t o r s w e r e n o t a s c a r e f u l

o f the messages

as our o w n operatorshave been,

Governor Fancher.

T h e particular transaction I had i n

mind was the fact that w e had our books closed the other
day and I think about 1 1 o'clock o r 10 o'clock w e were
called upon t o arrange a

rediscount f o r one o f the other

banks a s o f the d a y before.


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Federal Reserve Bank of St. Louis

Mr, Emerson.

I n the last two weeks, i n handling trans~

fers i n the gold settlement fund a n d r e d i s m u n t transactions, W h i c h have been more t h a n w e have ever had, t h e

men have been down until 1 1 o r 1 2 o'clock, t h e wires did
not come i n beceusé 6 f conditions, e n d I have sent them
home and told them t o come d o w a t 7 o'clock i n the morn.
ing. T h e y have done that, g o t t h e telegrams, prepared
the firures a n d sent t h e m back t o the banks. I

felt t h a t

it would b e desirablefrom time t o tire t o eliminate S a n
Francisco altogether, p u t their figures through w h e n w e

could get them, b u t the wires h a d drifted in, s o that we
could t h e telegrams b a c k t o the other banks b y not later

than 1 1 o'clock, a n d I thought i t would be more desirable
to clean u p each day'stransaction even i f there was some
delay.
Governor Fancher.

O

f course t h a t keeps t h e books

opén until nearly n o o n the next dey-Mr. Fmerson.

J I appreciate t h e t , b e c a u s e

w e have been

up against a serious situation here, a n d i n 611 o f our
experience w i t h the lecsed wire s y s t e m r e have never h a d
the conditions t h a t w e have h a d during t h e p a s t t w o weeks
with o u r western wires.

A t the same time t h e comnercial

telephone service w a s v e r y poor, a n d I fw rsonally feel


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Federal Reserve Bank of St. Louis

470

thet i f we continue our present system for another month
that a t the end o f that time w e will b e working v e r y smooth‘ly. T h i s i s the first m o n t h o f operation under t h e n e w
system, e n c w e expect some difficulty, a n d i n the tine
it has been operating w e have h a d everything happen that
could possibly happen.
Governor Fancher. I

will s a y that for t h e first

week o r ten days I was surprised the way the new scheme
started off.

I t worked very nicely.

w e had the wire

very promptly the following morning and the books were
closed, a n d i t has o n l y been lately that they have come
in late i n the day.

Mr. Emerson,

I t has been a very unfortunate situation.

The system that we originally worked out I think woulda
cover everything v e r y well provided w e c a n get o u r wires
in

h e r e i n time.

W e a r e prepared t o keep t h e nen here a l l

night i f necessary t o get the wires b a c k the first thing
in the morning.

I f w e c a n get o u r S a n Francisco wire b y

8 or 8:50 i n the evening w e can eircet & settlement i n a n
hour o r a n hour and a half, and the wires will b e ready
to b e dispatched when t h e wires o p e n u p i n the morning.

Of course i f the system does not work out i n any particu-


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Federal Reserve Bank of St. Louis

lar t h e Board will b e p i e s

o s g o back t o the o l d basis,

but I think another month, which will b e a fair test, will
find i t workin’

v e r yell1 indeed.

Governor Calkins. M r . Chairman, I
beginning

did not hear the

o f t h i s d i s c u s s i o n , t i e d Mr, E m e r s o n h a s r e f e r r e d

to receiving wires f r o m S a n Francisco b y 8 or 8:30 i n the
evening.
T h e question v a s whether

The Chairman.

o r not w e

should adopt the u s e o f commercial wires i n the matter o f
informing t h e banks a s t o their status i n the g o l d settlement fund e a c h dey, rether t h a n wait until morning a n d
use o u r o w n system.

Governor Calkins.
ing here,

B u t h e said 8 o'clock i n the even-

I d o n o t know whether y o u have deylight ssving

here o r not, o r are foing t o have i t ?
\

Wr, Drereons =

do not believe s o , Governor.

Governor Calkins.

a t any rete, t h t means 5 o'clock

in San Francisco, w i t h another h o u r o f f which t h e y have i n
New York, w h i c h means 4
it\is a


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Federal Reserve Bank of St. Louis

o'clock i n Sen Fraenisco. I

think

jJoubtful proposition.

My, Emerson.

D u r i n g t h e first week o r ten days, G O V -

, o f rthe n eow plannw e received
r e /RasS a n Francisco

rire

by 8 or 8:50. I

do not know whether that entailed a preat

deal o f difficulty i n your w o r k there o r not.
Governor Calkins.

getaway with it.

T h a t i s not important,

i f r e can

B u t just now your trouble i s the con-

dition i n the Vest. I

have j u s t traveled over a few thous.

and miles o f territory a n d I

have s e e n t h e destruction o f

the telephone wires, causing interruption t o service, a n d I
think i t will b e a long time before service i s fully re-

stored.

1 t may b e a month o r two months,

Mr. Emerson. L a s t night we had all the gold settle.
ment Wires i n here a t 2:13, including the San Francisco,
and the men were out o f the office last night a t 9 o'clock.
The wires were dispatched this morning. I

do not believe

there was-a b i t o f trouble a n d that conditions a r e v e r y much
better now.

T h e telephone company h a s done wonderful vork

in restoring the wires which were down i n the lest, and I
feel v e r y confident t h a t when t h e telegraph system i s
straightened o u t that w e will not have a n y difficulty. I
do n o t l o o k f o r a

recurrence,

e x c e p t occasionally, p e r h e p s ,

of the redisounting situation that we have been through,
because [ I think we got i t all i n the last two weeks.


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Federal Reserve Bank of St. Louis

Governor Calkins.

T h e suggestion i s that t h e come.

mercial wires should b e used when necessary?

The Chairman,

N o . T h e suggestion i s that the com-

mercial wires b e used regularly.
Mr. Bmerson.

W

e could have made o u r settlerent

i n

the last t w o weeks without t h e S a n Francisco figures.
Governor Fancher,

+ f y o u get the wires b a c k t o ‘iash-

ington a s promptly a s y o u d i d the first w e e k o r t e n days,
the use o f t h e comvercial vires will n o t b e necessary a t all,

because w e have our operators there a half hour earlier i n
the morning t o receive t h e wire o v e r t n e leased wire.
The Chairman, U n d e r t h e situation, would i t be entirely satisfu.ctory t o give t h e matter further trial?
Governor Fancher.

Y e s , give i t further trial a n d s e e

how i t works out.


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Federal Reserve Bank of St. Louis

The Chairman.

T h e n t h a t disposes

o f t h a t question.

we will n o w take u p No. 10,

X, RESERVE SUPPLY OF CURRENCY.
(as

I n view o f present insufficient supplies o f new
eurrency,

i s i t desirable t h a t all Federal Reserve

Banks a n d branches adopt a uniform policy o f paying
out n e w a n d redeeming unfit currency?

Acting Governor Case, L a s t evening I distributed t o

each member o f t h e C o n f e r e n c e c o p i e s

o f recommendations

based o n Gonference h e l d i n our office. egarding the
matter.

T h e r e i s a specifie:.becommendation i n the bottom

of that a n d I would like t o offer i t as a resolution.

I t

is as follows;
Whereas t h e current supply o f currency i s ample for
ordinary n e e d s a n d

Whereas t h e reserve s t o c k i s below that which i s
thought t o b e adequate f o r a n y great emergency i t is, therefore, t h e sense o f this Conference t h a t @¢s a common precaution a n d also a s a matter o f practical economy the following propram b e put into e f f e c t s soon a s possible.

First.

L e t each Federal Reserve Bank report for

itself a n d branches t h e d a i l y a m o u n t s

o f currency p a i d o u t

by months during January, February a n d march, 1920, a n d b y

denomine tions o f {1 up t o and including {100
(a)

N e w

(Ok P i t t e r use
and also t h e amounts received (not including n e w issues f r o m

Washington, % . C., nor issues o f Federal reserve notes o f
other Federal eserve Hanks, )


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Federal Reserve Bank of St. Louis

(a) F i t for use

(bo) S e n t t o Tas ington f o r redemption
Second.

A g r e e a s t o what percentage o f new money

should b e paid o u t that would b e fair t o all and w h i c h
could b e maintained b y the Bureau a n d yet allow f o r a .

large margin t o be accumulated for s tock.
Third, a g r e e u p o n a standard o f unfitness f o r circulation o f currency that would result i n e s l o w a percentagent o f r e d e m p t i o n a s possible,

Fourth. R e q u e s t the Treasury Department through
the Federal Reserve B o a r d t o make a l l its shipments t o
banks arising o u t o f redemptions through t h e respective
Federal Reserve Banks o f their Districts p o e aa Supply such
Federal Reserve Banks w i t h t h e kinds a n d denominations necessary t o d o so.

Fifth. U r g e the Treasury Department t o keep o n printing.
Sixth.

Appoint a

committee

t o perfect t h e details

and follow t h e progress o f this program and t o report t o
each Governor w h e n a n d what chanses might b e made i n order
to effect the most gradual return t o normal conditions.
Governor

or motion.


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Federal Reserve Bank of St. Louis

V a n Zandt.

I . w i l l second t h a t reanmendation

The Chairman,

4 s there a n y discussion,

(There vas n o diseusdon, a n d the motion, being duly
seconded, w a s carried.)

The Chairman. I
statement

would like to hear Mr. Emerson's

o n this s u b j e c t .

Mx. Emerson. M r . higgins

f r o m the New York Bank

camé t o Washington t o go over this currency situation,

in

view o f the fact that t h e N e w York B a n k h a d adopted a
very definite program w i t h reference t o handling their
currency.

T h e y head a d o p t e d t h e p r o g r a m o f paying, o u t

only t e n p e r c e n t o f n e w m o n e y a n d n i n e t y p e r c e n t o f

fit money. M r . Higegins' proposition was that perhaps the
Governors would consider i t feasible f o r a l l the Federal
Reserve Banks t o adopt a definite p r o g r a m n
i paying o u t n e w
and f i t money.

i n view o f the fact that t h e N e w York B a n k

is p a y i n g o u t t e n p e r c e n t n e w m o n e y a n d n i n e t y p e r c e n t

fit money, they sre not getting a fair proportion o f the
new currency thet i s being printed, w h i l e another b a n k i s
paying o u t fifty per cent o r one hundred p e r cent n e w
mone y. T h e t was t h e idea i n securing these fipures a n d
in having this m t t e r c o m e u p for discussion b y the
Governors, w i t h t h e view o f adopting a uniform currency


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Federal Reserve Bank of St. Louis

policy a t a l l o f t h e F e d e r a l R e s e r v e B a n k s ,

t h e feeling

being that i f that were done w e might have a more equitable distribution o f the pwinting,

i n order t o accumulate a

reserve s u p p l y f o r a l l t h e F e d e r a l R e s e r v e B a n k s w i t h s o m e

degree o f fairness.
The Chairman, . iI will appoint a committee consisting
of r e p r e s e n t a t i v e s

f r o m t h e N e w Y o r k Bank, t h e B o s t o n B a n k

and the Chicago Bank, and also Mr. Emerson. 2
Acting Governor Case. I

would name Mr. Higgins f o r

the N e w York Bank.
Governor Morss,
The Chairman,

A n d Mr, Chase f r o m Boston.

a n d hr, Netterstrom o f Chicago.

That aisposes o f topic No. 10.
(12). R e d e m p t i o n o f National B a n k Notes.
(13). C o l l e c t i o n o f total Federal Reserve Notes out-

stending (supplewental list).
Governor Calkins. I

would move t h a t topics l e m d

13 o n the suppkemental l i s t b e considered b y the committee
appointed t o consider t h e currency matter.

(The motion, being duly seconded, was earried).
Acting Governor Case, B e f o r e proceeding with other
topics, M r . C h a i r m a n , I


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Federal Reserve Bank of St. Louis

want t o . e f e r t o t h e a c t i o n t a k e n

478

this morning with regard t o the rates o n certificates,
Secretary Houston j u s t called m e i n a few moments a g o
and asked m e i f the Governors h a d considered t h e fact

that a six months! certificate would mature i n a cropmoving p e r i o d . I

told h i m w e had n o t discussed thet par.

tiqilar phsse o f it, although w e had considered the fact
of the large maturities o f September 15th, a n d the assunp-tion t h a t t h e T r e a s u r y would,

a s those September 1 5 t h

certificates matured, possibly offer new certificates
which W o u l d p r o v i d e t h e r w i t h f u n d s

t o redeem t h e October

certificates either a t that time o r possibly o n October a t ,
if they cared t o move i t ahead; t h a t also,

i n that connection,

there Wis @ large amount o f these Anglo-French bonds maturing i n October w h i c h w o u l d p o s s i b l y h e l p t h e situation,

assuming o f course t h a t a large amount o f those bonds w i l l
be paid,

i f n o t a l l o f them, I

told h i m t h a t i f h e esared

to discuss t h e matter further w i t h the Conference t h a t w e
would b e very glad t o have h i m d o so.

H e said h e would

think t h e t over a n d possi bly might come i n t o talk t o us
in the morning.
The Chairman.

T h e r e i s n o action necessary a t this

time, i s there?


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Federal Reserve Bank of St. Louis

Acting Governor Case.

No.

473

The Chairman,

W e will n o w proceed w i t h the s pple-

mental list o f topics.
Fopie No, 1 ,

(1) Inter-federal Reserve Bank Pension Fund.
That topic h a s been dispesed of.

No. 2 % ( 2 ) C a n market for Liberty Bonds b e strenghtened b y educational p r o p a g a n d a a m o n g p r o s p e c t i v e i n v e s t o r s

in the several districts?
&cting Governor Case, I

move t h a t Question No. 2

be

answered "Yes,"
(The motion, being duly seconded, w a s carried).
The Chairman.

T o p i c No. 3S.

(3) S h o u l d t h e Federal Reserve Banks assist i n
broadening t h e open discount m r k e t

b y offering t o pur-

ehase bankers! a c c e p t a n c e s f o r t h e a c c o u n t

o f member banks,

That h a s b e e n d i s p o s e d o f .

The next i s No. 4 ,
(4) C a s h i n g Government warrants a n d cheeks d r a w n

on the Treasurer o f the United States for disbursing officCre »
acting gicocsee Case. ‘The N e w York B a n k has prepared
a memorandum o n that subject a n d I


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Federal Reserve Bank of St. Louis

will b e v e r y plad t o fol-

low t h e course t h a t w e d i d last night a n d distribute
copies o f the memorandum amonrst t h e Governors a n d l e t
the m a t t e r c o m e u p t o m o r r o w morning.

The Chairman.

V e r y well.

No, 4

witl g o over until

tomorrow morning, t o be taken u p before w e meet with the
Boérd a t 1 1 o'clock.
ane. next t e Noy 6 :
(5) C o n d e n s e d financial statement f o r m approved
and recommended b y Clearing House Section o f the American

Bankers' association,

That topic hes been disposed of.
Thesnext i s No, 6 .
(6) m e t h o d o f making collection o f checks drawn o n
weak banks i n whole p a r States,
That t o d i c h a s b e e n d i s p o s e d o f .

“The next is:

(7) T h e propriety of Feseral Reserve Banks sending
collection items direct t o member a n d non-member banks with
instructions t o remit t o the nearest Federal Reserve B a n k

for the credit of the sending Federal Heserve Bank.
Mr. Hoxton,

T h a t topic was disposed o f i n the action

taken O n Topic 3 , sub-section 4 , t o b e considered b y Gov-


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Federal Reserve Bank of St. Louis

ernor Fancher's committee.
The Chairman.

T h e next i s No. 8 .

(8) D i s p o s i t i o n o f old records, reports o f e x a m i n a tions, a n d s o forth.
Governor Biggs.

T h a t w a s p u t o n there b y the Cheairmm

of the Bosrd i n a letter written t o the Board-The Chairman,

L

Governor Biggs.
The Chairman.

o y o u wish a

discussion

o f that?

N o t a t ell, Mr. Chairman.

T h e n there w i l l b e n o action taken o n

The Chairman, T h e next is No. 9:
(9) Clearing member accounts,
Governor V a n Zandt, I

had that topic p u t o n there

for t h e r e a s o n t h a i w e h a v e h a d a

v e r y g r e a t d e s i r e t o have

put in, a t the earliest possible moment, s o m e syste~ where~

by we could handle clearing member eccounts.

T

e have had

some voluminous correspondence w i t h the Federal Reserve
Board o n the subject, including e legal opinion f r o m coun-

sel for the Federal Reserve Board, a n d i t appears from the
opinion o f counsel that a clearing member m u s t carry with
the Federal Reserve B a n k a n amount sufficient t o offset

the item which the Keserve Bank i s sending t o the clear-


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Federal Reserve Bank of St. Louis

ing member, w h i c h places i t a t a very great disadvantage
as compared With other non~member banks.

I f w e have

«LO, 000 worth o f items o n a little bank a t Podunk that i s
not a clearing member, w e can send those items t o them,
but i f i t is a clearing member w e cannot send those items
to i t unless i t hes a balance o f (10,000 w i t h us.

T I would

like t o know what t h e experience o f the Federal Reserve Banks

has been i n carrying clearing member accounts,
The Chairman.

v e have o n l y had, I

accounts, a n d h o w t h e y have acted I

believe, t w o such

cannot report.

A r e

‘eny o f the other banks carrying clesring member accounts?
Governor Calkins,

V e have a

number o f those accounts,

but they are all local accounts i n cities where branches are
located,

Governor Young.

w e have some, all local.

Governor V a n Zandt.

w e have a

demand f r o m a l a r g e

number o f our banks, non-member banks which are not eligible t o membership t h a t want t o carry clesring accounts w i t h

us.

T h e Banking Commisdoner of texas, the Banking Com.

missioner o f New ~exico, a n d the Banking Comrissi oner o f
Louisiana--maybe n o t Louis#ene, b u t New wiexico, arizons

and Texas, have all agreed t o approve the *ederal Reserve


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Federal Reserve Bank of St. Louis

Bank a t Dallas a s the “*ederal Keserve spent for those Stete
banks, a n d therefore a n y balance t h e y m a y carry with u s i s
a part o f their legal reserve a n d w e are having a

demand

from &@ great many banks, but I do not know how t o compute
the a m o u n t

o f balances w h i c h w e h a v e t o a c c e p t

Governor ellborn,

o n them.

i d I understand y o u t o say that

if they have a balence with you of $5,000.00 and i f you
get 10,000 worth o f items o n them, youcannot send them t o
them?
Governor V a n Zandt.

I t says t h e t t h e y m u s t c a r r y a

balance sufficient t o offset t h e items t h a t y o u send them.
The Chairman.
peculiar
y

T h a t i s a difficulty that seems t o b e

t o y o u r district,

and I

do n o t think w e c a n help

o n uthat.
o

Governor V a n Zandt. I
our district.

do not think i t i s peculiar t o

I t i s a ruling b y counsel f o r t h e Federal

Reserve Board.
The Chairman, I

understand, b u t w e are n o t having t h e

d i f f i c u l t i e st
a
h
t you are having.

V o u l d y o u like a n y action

taken?


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Federal Reserve Bank of St. Louis

Governor V a n Zandt.

No.

I w i l l f i g h t i t out d o m there.

Acting Governor Case, T h e r e i s one mtter which I

would like t o ask t o have referred t o
the Currency Committee t h a t has been appointed b y this
Conference, a n d

that i s
vs

a

ye

Q J E S T I O N O F DEALING W I T H UNFINISHED CIRCULATION
FOR A C C O U N T O F N A T I O N A L BANKS.

This topid apparently d i d n o t g e t o n the
list, a l though I sent i t in,

Y o u have referred these other mat-

ters, recemption o f National B a n k notes, a n d
s o on, t o

that committee, a n d i t seems t o me appropriate
that this
matter should also b e referred t o that committee.

The Chairman,

I f there i s no objection, t h e topic

referred t o b y acting Governor Case will b e referred t o
the
Currency Committee,
The next topie o n the supplement l i s t i s No. a0,
(10) M e m b e r banks! promissory notes secured b y
borrowed Government securities,
Governor V a n Zandt,

T h a t w a s n o t o n the program

that was originally forwarded t o m e and I did
not bring m y
data o n that along with me,


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Federal Reserve Bank of St. Louis

The Chairman,

B o you wish the subjed possed?

Governor Van Zandt. I

woulda like t o have i t passed,

The Chairman.

T h e next i s No. ll.

(ll) Charges for wire transfers for the account
of individuals, a n d s o forth.
Governor Calkins. I

would like t o have t h a t passed,

Mr. Chairman,
The Chairman, T h e r e will b e n o action taken o n No. ll.

Acting Governor C a s e . I
ommendation,

which I

have a memorandum, a rec-

would l i k e t o submit.

J t i s recommended

thet the f a d lity f o r m k i n g telegraphic transfer a t par b e
not offered t o banks t h a t are known t o charge f o r this
service,

f o r i t v e r y much weakens t h e position o f t h e Fed-

eral ‘ e s e r v e B a n k i n e n f o r c i n g t h e p a r c h e c k c o l l e c t i o n
system, i n a s m u c h

to m k e a

as a

bank w o u l d h a v e j u s t a s m u c h r i g h t

charge f o r remitting itsown draft i n payment o f

its check a s i t would i n making a n exchange charge o n
transfers w h i c h cost i t nothing.
The Chairman,

I t would b e very Jdiffilailt t o d eter.

mine w h i c h banks d o c h a r g e , f
i any?
Acting Governor Case.

Y e s , b u t the language is,

“which are known to charge for this service." I

think

the general sentiment pevails thatordinarfly t h e member
banks d o not charge, b u t i f a bank does, f o r instance,
the C h i c a g o C l e a r i n g H o u s e a d o p t e d a

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Federal Reserve Bank of St. Louis

if

rule t h a t a l l b a n k s

charge o n e tenth o f one per cent, I

think i t would b e a

very a p p r o p r i a t e m a t t e r f o r y o u t o take c o g n i z a n c e

of

and t h e question would arise whether those banks should

have the privilege of using the wire transfer. That is
the o n l y p o i n t I

desire t o r a i s e

The Chairman.

i n connection w i t h it.

D o y o u offer t h a t a s a motion, Govern

or Case?
Acting Governor Case. Y e s , Mr. Chairman.
Governor Calkins. I
the G o v e r n o r s p r e s e n t

would like t o make inquiries o f

a s t o what t h e practices

spective districts are.

i n the ir re=

D o the member banks chirre c u s toners

for W i r e t r a n s f e r ?

Acting Director Case. I
saying t h a t s o f e r a g I

would l i k e t o answer that b y

know t h e m e m b e r b a n k s

i n our district

do not. H a v e y o u ever heard o f a n y doing so, Mr, Kenzel?
Mr. Kenzel. I

have never heard o f a charge being

Governor Fancher.
The Chairman, I

S o f a r s s w e know, o u r banks J o not.
have never heard o f @ charge being

Deputy G o v e r n o r Peple.,

knows,


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Federal Reserve Bank of St. Louis

S o f a r a s the Richmond Bank

n o charges h a v e been made.

The Chairman.

+ s there anysecond t o this < ; otion?

(The motion was dulyseconded).
(Acting G o v e r n o r C a s e t h e r e u p o n r e p e a t e d h i s motion).

Governor Calyins. I

agree w i t h that i n principle, b u t

I think i t i s entirely beyond t h e control o f the member
banks o r o f the “teserve Board.
(On a Aivided vote, s i x voted i n favor o f the motion

and five voted no, and the motion was carried.)
The Chairman. I
because I

am going t o vote against t h e motion,

do not knor o f a n y instunces where a

charge h a s been

made.

I would now like t o bring u p Topic No. 14.
No. 14. M o d i f i c a t i o n o f Bosrd ruling giving
prefrrence i n routine checks t o member b a n k s .
I n the development o f the check colThe Chairman.
lecting system,at t h e outset i t ras decided b y the Governors,
as I remember it, that preference should b e given t o the
member banks.
Governor V a n Zandt.

T h a t i s a regulation o f the Federal

Reserve B o a r d ,

The Chairman.

Y e s , i t 1 s made a matter o f regulation.

The p o l i c y

i n Chicago h a s always b e e n i n accordance w i t h t h e

following:

M e m b e r banks a r e piven preference i n the col-


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Federal Reserve Bank of St. Louis

488

®

l

e

c

t

i

o

nf
o checks d r a w n o n t h e n o n - m e m b e r b a n k s o f t h e i r

cities,
When a

member b a n k r e q u e s t s

u s t o s e n d t o i t checks

on & non-member b a n k which are being collected direct,

items are diverted to the member bank and the non-member
benk i s edvised o f the change a n d t h e reason therefor, a n d
is thanked f o r its m s t services.

Where a non-member bank's checks are being collected
through a n o t h e r n o n - m e m b e r b a n k i n the s a m e p l a c e a n d

wishes t o receive t h e m direct, t h e y are favored if, after

writing, t h e collecting bank does not object,
Where t w o o f i t s o u t - o f - t o w n m e m p e r b a n k c o r r e s p o n d ents w i s h t o r e¢éceive c h e c k s

o n a

non-member bank,

w e are

guided b y the wishes o f the non-member bunk i n routing its
items.

This question @rises because of the fact thet we had
one bank i n wisconsin and one i n Iowa, non-member banks,
which m i e a

request t h a t w e take t h e items a w a y from the

member b a n k a n d g i v e t h e m t o t h e n o n - m e m b e r b a n k .
was s o m e e v i d e n c e

t h a t members

o f the Board wanted

T h e r e
that

done, a n d i n order t o t r y the matter o u t w e made a n exceptjon

i n those t w o cases. I

would l i k e

t o know what t h e

policy o f theother Federal Negerve Banks hasbeen W i t h re
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Federal Reserve Bank of St. Louis

.

spedit t o adhering t o this regulation?
Governor Fancher.

I n s tarting t h e collection system

and i n gradually building i t up, w e have,

i n spirit, f o l -

lowed that regulation o f the Board, b u t w e have found cases
where

to a

d i v e r t i n g checks

non-member b a n k w a s a n i n -

fducement t o membership, a n d our policy h a s been r e t t y
flexible, a n d where w e thought i t was a matter o f sweetening
up .an eligible b a n k b y giving 1 t checks w e have done 60,

and have not adhered to the Board's rulings strictly.
The Chairman.

C n e o f the things I

to d o with a bank which, a

have cited h a d

number o f months ago, advised

us that they had acted, that their Board had acted i n
favor o f a p p l y i n g f o r membership,

a n d G r i e r ‘ h e c i r c u m s tences

they thought w e might begin sending i n their items djirect.
Ve d i d so, a n d a number o f months later v e found that the
bank h a a t a k e n n o f u r t h e r s t e p s t o w a r d s m e m b e r s h i p , A

member bank i n the same t o w n ssked f o r t h e items a n d w e
began sending t h e there. I

think myself instead o f

rig inducement t o membership, t h a t i t i s a concession
perhaps w o u l d i n t e r f e r e w i t h treiprospect

o f securing

bers.


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Federal Reserve Bank of St. Louis

Governor Fancher.

I c e not

q u i t e a g r e e w i t h that, b e -

cause I

am sure that that has been a contributing i n -

fluence t o several memberships o f eligible State banks.

That i s one o f the things that they asked for, and I am
sure i t has been o n e o f the reasons o f their coming in.
The Chairman.

W h a t i s your opinion with respect

to the policy, generally speaking,

o f fevoring t h e member

banks ?
Governor F a n c h e r . i

think as. a general: p o l i c y it. i s

sound.

The Chairman.

T h e acceptances have been few i n

your case, h a v e t h e y not?
Governor F a n c h e r ,

Yes, I

should s a y c o m p a r a t i v e l y

few, b u t a s I say, w e have observed a very flexible p o l i c y
in t h a t respect,

The Chairman, Governor wellborn, what has been your

policy?
Governor Wellporn.

T e have follo.ea the Board's rule

strictly, a n d w e believe t h a t i s t h e best thing t o id.
The Chairman. G o v e r r o r ‘lorss?
Govermor Morss. I

believe w e send a l l o f our checks

direct t o the bank, whetharmember o r non-member.
think w e make a n y distinction.


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T I do not

The Chairman, G o v e r n o r Norris, I

presume y o u cannot

ansver t h a t .

Governor Norris.
The Chairman,

No, I

camot, M r . Chairman.

“ W h a t h a s b e e n y h u r policy, G o v e r n o r

Young?

Governor Young,

T h e Board has ruled thet w e should

give t h e member banks preference, a n d i f I a m correctly informed t h a t i s what w e have done i n Minneapolis. C r i g i n a l l y
we Offered these checks t o thermembe r banks.

I f the mem~

ber banks refused t o handle ‘ i n o n the non-member banks
then w e m d e

& n arrangement w i t h the G e e l a :

take t h e checks.

bank t o

T h e n later i f the member banks decided

that they wanted t h e checks, w e refused t o give t h e checks
to them o n the ground that w e d i d offer ther t h e prefer.
ence.

J I think thet i s a fair interpretetion o f the Board's

Yul tags

The Chairman, ‘ W h a t i s your policy, Governor B i g s ?

Governor Biggs.

T e folloy t h e Board's ruling pretty

closely, w i t h v e r y f e w exceptions,
The Chairman. G o v e r n o r Calkins?
Governor Calkins. 1
question h a s b e e n r a i s e d ,


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Federal Reserve Bank of St. Louis

cannot recall a case i n which the
b u t o f course w e should b e i n -

clined t o follow t h e Board's rulings.
The Chairran,

H o w a b o u t y o u , G o v e r m o r V a n Zandt?

Governor V a n Zandt,

@ u r belief

i s t h a t t h e régula-

tions o f t h e F e d e r a l N e s e r v e B o a r d a r e j u s t a s m u c h a

of the l a w a s i f written i n t o t h e act. R e g u l a t i o n J

part

states

that i n the selection «© of collecting egents f o r handling
checks o n non-member banks which have n o t become cletring

members, t h e member banks will b e given preference.
are just exactly like Governor Young, I

think.

“ e

" e offer

the checks t o the member bank, a n d i f the member bank refuses t h e m t h e n r e offer t h e m t o t h e non-member bank.
we have,

But

i n the selection o f our agent f o r the collection

of those checks, g i v e n preference t o the member bank.

The

member b a n k having feiled t o eveil himself o f the opportunity,
we therefore g a v e t h e m t o thenon-member bank.
The Chairman, G o v e r n o r Case, w h e t h a s been your policy?
acting G o v e r n o r C a s e .

O u r m e m b e r banks,

found, d o not care f o r the privilege. I
banks d o w n along t h e cosst,

w e have

remember t w o member

t o which w e were sending non-

member bank items, sent back word they wished for heaven's
sake w e would take them away, t h a t t h e y were a

nuisance.

In each instence t h e non-member b a n k agreed t o remit a n d
we s e n t

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Federal Reserve Bank of St. Louis

t h e m to the n o n - m e m b e r b a n k ,

A

S a

general practice,

I think i t i s safe t o s a y that ninety-cight p e r cent o f

our checks are sent direct.
Mr. Kenzel. 1
The Chairman.

I s that not so, Mr. Kenzel?

think t h a t i s so, yés.
B u t i n cese y o u r member banks a s k e d

for t h e items, w o u l d y o u pive t h e m t o them?
Acting Governor Case, L i k e Mr. Young a n d Mr. VanZandt, w e would not, i f the non-member b a n k i s now remitting.
The Chairmen.

M r . Peple, w h e a t i s the policy o f y o u r

Deputy Governor Peple.

I n the t ginning w e offered
banks

generally the privelege to the member / , put with the development o f our collection system w e believedthat a n arrangement w i t h t h e b a n k direct would b e t h e more permenent scheme, a n d consequently menhave never gone back again
and u r g e d a n y o f t h e m e m b e r b a n k s

t o t a k e t h e items. /

Te

have h a d several cases i n which member banks, a f t e r having
actually o r constructively refused t o handle t h e items,
have asked b e e them,,and when w e h a d @ satisfectory arrangement w i t h the non-member b a n k w e have refused t o interrupt
that a r r a n g e n e n t

b y g i v i n g t h e m t o t h e m e m b e r banks.

The Chairman,

T h e discussion h a s apparently developed

the fact t h a t most o f the banks a r e making some exceptions


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Federal Reserve Bank of St. Louis

to the rule,
The Chairman.

i e n o w come t o the second topic o n

the Second supplemental l i s t o f topics, submitted b y
Governor Fancher,
PERSONNEL O 2 VELFARE.
Acting G o v e r n o r C a s e , I

move t h a t t h e s u b j e c t o f per-

Sonnel o r welfare b e left t o a committee t o b e appointed
by the chair,
(The motion, b e i n g d u l y seconded, w a s carried).

The Chairman. I

supgest that that committee b e rep-

resentative o f the Cleveland, N e w York and Chicago Banks.
I would name ir. Cremer.

acting Governor Case. I
The Chairman.

the moment.

would name Mr. Hopfy4

G o v e r n o r Fancher

i s n o t present

at

T h e understanding i s thet this committee will

consider t h e matter a n d report back t o the Governor's
conference,

The next topic, a l s o submitted b y Governor Fancher,

Should F e g e r a l R e s e r v e B a n k s a c t u n d e r i n s t r u c t i o n s
from d e p a r t m e n t s o t h e r t h e n t h e s e c r e t a r y o f t h e Treasury.


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Federal Reserve Bank of St. Louis

“i:
A
:
.
&
S,
Ve
Will
n o t discuss
t h a t topic i n the websence o f

Governor Fancher and i t may be fm ssed until tomorror
morning,

The next topic, a l s o sugrested b y Governor Fancher i s

Advisability o f Federal Reserve Banks absorbing
Float

o n currency shipments

t o member b a n k s .

That w i l l a l s o b e passed,

Mr. Hoxton,

T h e understensding i s that topic

on the supplemental l i s t submitte2 b y Governor F a
be carried over until tomorrow m o m i n g .
The Chairman, G e n t l e m e n , y o u have n o doubt been supplied w i t h a copy o f s memorandum submittes t o Covernor
Harding. I

I t has t o d o with bank

have n o t read it.

acceptances, a n d i f anybody has read i t i would l i k e t o
know i f there i s anything i n that w e should consider i n
eonnection w i t h a c c e p t a n c e s .

Governor V a n Zandt. I

think that might b e referred

tothe committee thet hes to do with the subject of bankers'
acceptances, a
and a

question t h a t w e are going t o have studied

report m a d e upon.

that b e a r s s t r i c t l y o n a

There is a

s t u d y o f t h a t question.

Acting Governor Case.

T h a t i s a matter that was j u s t

sent over b y Governor Harding?

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Federal Reserve Bank of St. Louis

lot o f this memorangur

The Chairman,

Yes.

Deputy Governor Peple. I
of Governors t h e r e w a s a
question o f t h e r e l a t i o n s

think oat the last conference

committee a p p o i n t e d

t o consider t h e

o f t h e Federal Reserve B a n k w i t h

the Treasury Depurtment, t h e handling o f accounts a n d s o
forth. I

know t h a t the Federal Reserve B e n k o f Richmond

made a report t o that committee o f their experience, a n d
think the conmittee w a s supposed t o have reported

t o this

conference,
The Chairman,

T h e n w e will pase this matter until

tomorrow morming.

Governor ‘“eéllborn,

M r . Chairmen, I

mo‘e you that we

now a d j o u r n u n t i l 1 0 o ' c l o c k u n t i l t o m o r r o w morning.

The Chairman.

T h e r e i s a motion that v e now e d Journ.

(Tre motion t o adjourn, h a v i n g been d u l y seconded, w a s

carried, a n d a t 6:35 o'clock: © a aMe the conference adjourned
until tomorrow, Saturday, April 10th, 1920, a t 1 0 o'clock


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