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259 CONFERENCE FEDERAL RESERVE GOVERNORS, SECOND DAY. Friday, March 21, 1919. 1o'clock a.m. The Conference reassembled at lo'clock a.m., pursuant to adjournment. Present: The Governors of the e d e r a l Reserve Banks, as indicated on yesterday's record. Present also, Mr· E. R. Kenzel, Manager of Investments, Federal Reserve Bank of New York. Governor Benjamin Strong, Jr:, of the ederal Reserve Bank of New York,(presiding). PROCEEDINGS. The Chairman: The meeting will come to order• Since tho meeting yesterday, Mr· Leffingwell and I have had a little discussion about the status of the bills that Mr· Hines referred to yesterday as under contemplation as a means of helping to finance the railroads. I have t a k e n the liberty of saying to Mr• Hines that the discussion is rather b a r e of details, and necessarily s o , b e c a u s e it was a l a r g e meeting, and t h a t if he would care to join the meeting this morning for a few minutes I thought he might get some information from the officers https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis f o 6 2 the reserve banks as to what could be dore with the bills, and what difficulties he would encounter. I just have word from Mr. Hines that he will be here i n n few moments• Before Mr· Hines comes, I would matter which is not on the program: like to take up a The general propos- al of the D i r e c t o r General of R a i l r d s f o r f i n a n c i n n over a p e r i o d of a few months, c o n t e m p l a t e s , as he ex- plained, two methods· One 1s to issue certificates of indebtednoss, or whatever they may be called, which to some extent will be used as collateral to loans at banks, and to oome extent it is expected they will be purchased by the War Finance C o r p o r a t i o n . They have assured me that no question of legality can possibly arise as to those obligations. The Director General can, it seems, make a certificate or an obligation of the character proposed to t h e Var "{nance Tne War F i n a n c e Cor- r p o r a t ian o n issue * poration is contemplating" me.king of bonds aggregat- 1ng about $ 2 , , , in the expectation that that will reimburse the Treasury for advances made or contemplated to the railroads, and put in their possession sufficient funds to very much enlarge tts purchases of https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 261 existing issues of Liberty Bonds and rather improve the market position of all the issues. I have t a l k e d 1t over w i t h Mr. Leffingwell and Mr. Meyer, of the War Finance Corporation, and they have finally suggested this tentative plan: That an issue of bonds of $ 2 , , b e made and offered, the maturity of which shall be, at the option of the subscriber, either one year or eighteen months; that the notes or bonds s h a l l bear 4-3/4 per cent interest, in order not to cause any unfavorable influence upon the price of existing Government securities (like the uert1f1cntes of indebtedness or t h e Liberty Bonds); that if a n y a d d i t i o n a l concession is made in price, it would be made by a small discount from par. They s u g g e s t , inasmuch as t h e e c r e t a r y p r o p o s e s to withdraw from the market entirely one issue of c e r t i f i cates of indebtedness, that this offer be made now and just exactly as though they were certificates of indebtedness of the Treasury, with a full explanation of the character of the obligation, and with the urgent request that the banks distribute them so as to realize possibly a profit from the discount. Their feeling is, that the organizations of the Reserve Banks, which have been so successful https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis I \ 262 in selling certificates of indebtedness, should find very little difficulty in distributing as much as $ 2 , , o f these bonds or n o t e s , even though t h e y had a year's maturity. c o u l d sell a good many. In our district, I think we It depends a little upon the amount of discount allowed to the banks. The question for us to discuss possibly with Mr. Meyer himself later, is: First, what is the obligation of the War Finance Corporation, and how good is it? Second, are the terms that they are discussing right. Can the bonds be sold on those terms? The p r o v i s i o n f o r t a x exemption is t h e same as in the Second Liberty Loan, complete exemption from all taxes on an income from not over $ 5 , o f these bonds, and I think t h e y a r e also exempt from normal tax. Governor Peple: Is that an additional five thousand or is it a part of the original five thousand? Governor Strong: It would be in addition to the exemption now permitted on Liberty Bonds. Governor McDougal: Do you know what they would be expected to net the banks? Governor Strong: They would be expected to net the banks at least five per cent. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis They have discussed a discount of one quarter to three eighths cf one per cent, de n d i n g upon maturity. After examining the statements of the War Finance Gorporation, and realizing how absolutely good those certificates are, beyond any p e r a d v e n t u r e , and realizing the tremendous margin of a s s e t s , I should t h i n k that f i v e per cent would be all they should pay for a year's loan. Governor McDougal: Governor trong: The Government is behind them? Ipe Government is not directly obligated on the bonds. Governor McDougal: Governor trong: n Governor i Wold: , Are they indirectly obligated? No, except morally. The ,Government 5 has $ capital stock in the War Finance Corporation. \ Governor Strong: If these certificates or bonds should not be paid the Government would lose its capital, of course. Governor Peple: Of course, they would not be eligible• Governor trong: Yes, they would be eligible for • loans by reserve banks. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 264 Governor Wold: Under certain conditions, that is after rediscounting commercial paper first. Governor Strong: The difference would be that borrowing y banks would a pay one per cent d morethan the 9 rate for discount of such loans accrued by th e bonds. Governor Peple: Would they be eligible as collateral for 15 day notes with member banks, if the member banks held them? Governor S+rong: I understand that if t h e y were turned into a reserve bank as collateral the borrower must pay a rate one per cent above the rate for the corresponding period for the other loans. Governor that they Wold: Are you sure there is not a provision shall rediscount their commercial paper fir st. I have a recollection of that, but I haven't looked it up. Governor Strong: I do not recollect. Governor Peple: We ought to be in a position to make it perfectly clear to the banks that we are asking them to subscribe to all these conditions. Governor Strong: The Treasury Department or Corporation will issue a circular which will assist us very much, because it will set up the assets, liabilities and legal status of https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis J 265 n o t e s , and th e personally I b e l i e v e that an i n v e s t m e n t f o r a y e a r or e i g h t e e n months now is about as d e s i r a b l e as a n y t h i n g we c a n buy, b e c a u s e it w i l l j u s t te.ke us over this period of u n c e r t a i n t y and l i q u i d a t i o n , and t h e i n v e s t o r w i l l t h e n have an oppo.rtunity to l o o k i n t o conditions w i t h r e s p e c t to f u r t h e r i n v e s t m e n t of h i s Governor Passmore: money. How soon a r e t h e y l i k e l y to be o f f e r e d ? Governor Strong: R1ght away. Governor McDougal: How c a n t h o s e be e l i g i b l e f o r use at a Federal Reserve Bank? Governor S t r o n g : There is an e x p r e s s provision in the War Finance Corporation Act as to their eligibility. Go ernor " e l l b o r n : Of c o u r s e , it would n o t py the to buy them f o r t h e purpose of r e d i s c o u n t , b e c a u s e banks they would lose tee one per cent. 3 Garernor Peple: But the a b i l i t y to discount them 1n case ar necessity would be attractive. Governor S t r o n g : My b e l i e f is t h i s : The t t h e banks would not need to carry a very large amount of these if they were diligent in offering t h e m to t h e i r customers. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 266 l h i n k in our district they would be taken by investors very generally on account of the date of maturity. Governor Morss: I think they would go pretty well, when they are really understood. Governor S t r o n g : Is there anyone here who believes it will be impossible to place any of them in his dis- trict. Governor VanZandt' I do not think I could place any in my district. Governor Passmore: $ 2 , , The tote.I issue will only 'be ? Governor S t r o n g : Yes. Governor Passmore: I should think they would be placed. Governor Peple: Is it the idea to assign n quota to each district, as has been done in the case of the certificates? Governor t r o n g : S p e a k i n g v e r y f r a n k l y , as we always do at these meetings, my opinion would be't.r:io.t a quota should be assigned, with the expectation that https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 267 p o s s i b l y Boston, Philadelphia, Nev, York and Clevel a n d would take up the s l a c k - Governor P e p l e : We are p e r f e c t l y w i l l i n g to cooperate in any way, but we would not want to have to p l a c e t h e m on t h e same b a s i s as we did t h e c e r t i f i c a t e s of i n d e b t e d n e s s , where, in many c a s e s , we heve had to c a r r y them for the entire time for the subscribers. Governor trong: You would be protected against that on account of the s p e c i s l rediscount rate. The art in the t r a n s a c t i o n , from the r e s e r v e bank s t a n d p o i n t , would be to h a n d l e it it w i t h t h e banks in t h e i r d i s t r i c t j u s t as though were a c e r t i f i c a t e i s s u e , with a full explanation of to terms a n u c o n d i t i o n s , p o s s i b l y w i t h a s t a t e m e n t in e a c h i n s t a n c e of t h e q u o t a of t h e i n d i v i d u a l bank, which would be very small. Most of t h e banks would p r o b a b l y s a y , w e l l , t h a t is o n l y a thousand or two d o l l a r s - - - a n d ve w i l l t a k e it. I think generally it would be done in that way. I am sure they would take them in our district. Governor Lynch: placed in our d i s t r i c t , but the banks would be a. little slow to take hold of them• https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis I would say that they could be It would possibly take some t1me,for t h e m to make up t h e i r minds ebout t h o s e t h i n g s , and by that time Boston, New York and Philadelphia would take them up. Governor trong: There can be no question of the l e g a l i t y of an i s s u e of bonds by t h e Viar Finance Corporation. They are specifically authorized by the statute to do that. The holder of this obligation is not charged with any duty to i n q u i r e as to what t h e War F i n a n c e C o r p o r a t i o n has cb ne with its assets, even if the War Finance Corporation should make a loan to the ha1lroad Administrator which was clearly ultra v1res. That would not invalidate the obligation of the corporation, and besides that, they have their n assets in 1 their treasury. , They ,have nearly 2 Government bonds 1n their treasury. They have loans to railroad corporations; they have some loans to public utilities. Theyare all presumably very good. The mere fact that they are proposing to make additional loans to the r a i l r d s , even if t h e proposed loans were ultra vires, would n o t i n v a l i d a t e t h e bonds* Furthermore, the proceeds of this sale, possibly $ 1 , , , or more, will be invested in Government 5 bonds, which will go into the assets of the war Finance https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 269 Corporation. Go ernor Wold: Will the interest follow the c erti- ficates until maturity, or will there be coupons attached? Governor trong: Governor "old: Gr Voupons. That will help some. emor t r o n g : I am not so sure, thinking the matter over further, whether it would not be wise to issue discount certificates which would pay a better rate when figured as a discount. Governor Wold: I think t h a t would sell them more quickly. Gr e r n o r t r o n g : It may be d e s i r a b l e f o r us to d i s - cuss that with M r · Moyer. Go.rernor Peple: Would we be at liberty, Governor Strong, to handle this in the wo.y that seemed b e s t to us? ' o r instance, I think that we would have a v e r y much b e t t e r chance of placing the quota by offering it to certain banks t h a n we would have by assessing it on a l l of banks of the district. tho There would be a great mnny of the banks that would not touch it• Mr Wellborn: It , would not be a great amount if it was prorated according to capital and surplus. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Garernor °trong: It will afford great relief to the 27 whole situation to have this sale take place, because it will take the cloud off that surrounds the railroad situation and will reassure the public that the ra1lrGads are going to get assistance• G e r n o r Peple: I have the feeling that if these c o u l d be o f f e r e d g e n e r a l l y , to a l l t h e ban k s , w i t h an explanation of the provision that the subscriptions might have to be s ca.led, t h e .t some of t h e l a r g e r banks would be very much more apt to take it. Our difficulty in the certificate issues has been that considerably less than half of the banks of the district have paid no attention whatever to thecertificates. Governor t r o n g : our district. "e have had a s t o n i s h i n g r e s u l t s in Out of eleven hundred banks I think we get as many as n i n e hundred s u b s c r i p t i o n s to c e r t i f i c a t e s . Governor Peple: I do not know the exnct figure, but I e x p e c t t h e s u b s c r i b e r s to certificates 1n our district came nearer one quarter than one half, p r o b a b l y l o s s t h a n onea a r t e r of t h e t o t a l number of b a n k s . Gor e r n o r lVJ.cDouga.l: It occurs to me, in v i e w of t h e fact that most of those persons are talking about a five per cent bond issue, that it might be inconsistent to https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 271 undertake to float this i s s u e at 4-3/4 r.:er c e n t . , even if t h e time 1s s h o r t . I would l i k e s i o n of o p i n i o n on t h a t s u b j e c t . to have an e x p r e s - I may be wrong, but ve have been dis c u s s i n g t h e a d v i s a b i l i t y of a f i v e per cent Government n o t e i s s u e , a.nct would not t h e e f f e c t of it be had if t h e y undertook to put out t h i s i s s u e at 4 - 3 / 4 per cent. On t h e o t h e r hand, would they l o o k upon t h e m 1n t h e same way they do t h e c e r t 1 f 1 c a .t e s or i n d e b t e d n e s s . Governor trong: The idea was to present them t h r o u g h t h e same c h a n n e l , a n d in somewhat t h e same manner as t h e certificates of' i n d e b t e d n e s s were p r e s e n t e d . Governor McDougal: But t h e y " i 1 l be a d i f f e r e n t i n s t r u m e n t , of c o u r s e . Governor S t r o n g : Yes, of c o u r s e . Governor Morss: Because they would be sold at a discount. Governor t r o n g : Yes, Governor McDougal: l h e fact t h a t t h e y are s o l d at discount, and are drawing 4-3/4 per cent, mould seem to me that t h e y might as well be sold at 5 per cent• https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Governor S t r o n g : I t h i n k i t is t h e i r f e e l i n g t h a t 1t would be a mistake to start a five per cent rate yet: I believe so myself. Governor Morss: Of c o u r s e , we would be at qui te a little disadvantage as compared to a Government obligation, because if they were discounted at t h e bank t h e y would carry a one per cent hi@her rate. They are not on the same baais as Go,ernment bonds. Gore:rnor McDougal: :•".hat would you s a y w i t h r e g a r d to d i s c o u n t r a t e s a g a i n s t t l e n o t e s secured b y . t h e s e c e r t i f i ca.t e s a.t Federal Reserve Banks? Governor Strong: That is fixed by law, one per cent above t h e r e g u l a r r a t e . G o v e r o r Peple: Governor trong: Above t h e 9 d a y commercin1 r a t e rt One per cent above the rate that applies oh all transactions, I gather. Governor Poplo: Then if t h e y bore f i v e per cent we would.have to charge s i x per c e n t * It is one per c e n t above t h e 9 d a y r a t e on commercial paper. Mr: Kenzel: If the 15 day rate wes four per cent, then this rate would be f:tve per cent.. Governor Morss: The rates we heve a p p l i e d io dis counts on customers notes refer to notes with overnment collateral. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 273 Thia w o u l a n o t be Governm ent c o l l a t e r a l and it would take a high rate, would it not? Governor Strong: Not n e c e s s a r i l y . D o n ' t you lend for 15 days on other collateral then Government collateral? Governor Morss: Yes. We do for 15 days but not on customers notes for 9 d a y s . Gr ernor t r o n g : Suppos e one of your banks came in with a bundle of commercial paper on which they wanted a 15 d a y loan? Go ernor Morss: That would be t h e same. Governor S t r o n g : Would n o t t h e same rate apply to those? Governor Morss: Yes, it Governor Peple: would, for l5 d a y s . Our rate in reference to t h a t 1s 4-3/4% on 9 d a y discounts, on the paper i t s e l f , 4-1/2% on 15 day notes secured by the paper, because the stamps make up the difference. Would the banks think that a fifteen day note would have to be stamped with this security'? https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Governor Strong: Yes. 't ' 274 Gr ernor Morss: They have no.t any of the b e n e f i ts which come f r o m o t h e r or ernment obligations in t h a t r e s p e c t . Governor Strong: Governor Morss: No, they have not. 4 We have got to a c c e p t those d i s - advantages. Governor Wold: I+ Ls contemplnted t h a t t h e s e notes, if d i s t r i b u t e d 'y the banks to i n d i v i d u a l customers, t h a t t h e bank g e t s t h e d i f f e r e n c e between t h e par and t h e discount at which they are sold• Governor Strong: Yes, possibly. Governor Wold: It is not expected that they will be lodged in t h e banks t h e m s e l v e s ? Governor Strong: I am urged to suggest to the meeti n g t h a t t h e d i s c u s s i o n of t h i s r a 1 1 r c n d s i t u a t i o n 1s most c o n f i d e n t i a l , and I hope everyone u n d e r s t a n d s t h a t . There is one o t h e r m a t t e r t h a t Mr. L e f f i n g w e l l asked me to bring up this morning and get an expression of views from the Governors The Treasury has money piling up too fast as a result of the success of the two recent issues of oert1f1cates of i n d e b t e d n e s s , and the c o n t i n u i n g r e c e i p t of i n t e r n a l r e v e n u e s . https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis It is c o n s i d e r i n g t a k i n g 275 aotion indicated by this statement which is supposed to be given to the press today. The statement is as follows: "Treasury Certificates of Indebtedness of Series VA mature May 6, 1919. In view of the determination to open the Victory Liberty Loan campaign April 21, 1t is apparent that t h i s issue must be refunded before the proceeds cf th l o a n can r e a c h t h e Treasury. Accordingly, the Secretary of the Treasury has authorized the Federal Reserve Banks, until f u r t h e r notice, to redeem, in c a s h before maturity at par and accrued i n t e r e s t to date of redemption, Treasury certificates of indebtedness of Series V A , dated December 5, 1918, at the holder's option, the right being reserved, however, to make such redemption o n l y a f t e r ton d a y ' s n o t i c e , f rom t h e holder j to the Federal Reserve Bank of the district, of the intention to exercise such option." v. I.effingwell's ·feeling is that he :111 not get many certificates as a result of that offer to redeem, but t h a t he w i l l s t i f f e n t h e whole s i t u a t i o n as to h i s certificate program, and p o s s i b l y assist in the sale of these war finance corporetion bonds. . A l i t t l e p r i v a t e i n q u i r y d i s c l e s t h e f a c t t h a t the https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 276 banks do not want to sell all their short maturity certificates. Last night Mr• Wing was not interested in selling any of the May sixth maturities. If, on the other hand, we should have a large number offered for sale, it would have the effect of s q u e e z i n g out a certain amount of expansion in t h e b a k s ' p o s i t i o n by reducing both t h e Government o b l i g a t i o n s and the Government deposits, and would improve t h e r e s e r v e µ o s i t 1 o n * The r e s e r v e bank would have the right to require ten days notice in advance of t a k i n g up t h e c e r t i f i c e t e s : g e t c a s h at The h o l d e r c o u l d o n c e , but we would reserve t h e r i g h t to o n l y ouy c e r t i f i o a t e a a f t e r · t e n d a y s n o t i c e of t h e i n t e n t i o n t sell to us. Gov ernor Fancher: That is to p r e v e n t them being dumped? Go.rernor S t r o n g : Yes. I think the proposition is to see what happens, and t h e n if https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis t h e y come in t o o f a s t , put t h e b r a k e s on. • How d s t h e p r o p o s a l impress you? Governor " o l d : How many were exchanged l a s t month? Governor S t r o n g : Governor Fancher: I haven't the f i g u r e s . Mr.Leffingwell estimated not more • 277 ' than $ 1 , , Governor Wold: How l a r g e an issue was put out on December 5th? Governor c o u g a l : Governor Wold: $ 6 1 8 , , . There a r e $ 5 1 8 , , , o u t ? Governor Fancher: Yes. That $ 1 , , w a s an estimated figure. Governor McDougal: thing to do. I t h i n k t h a t would be a v e r y r o o d I believe it would bring in certificates from the smaller b k s , although perhaps not from the large banks, and I think it would give a very good impression. Governor t r o n g : The moral e f f e c t of it w o u l d be g o d . Governor McDougal: You were speaking about the number of subscribers. we have about tour million, four hundred thousand of these c e r t i f i c a t e s in the banks) a n d I think it would bring out some of those. ( The It would be a .a;ooo thing. ut::fe.rence went 1nto i n f o r m a l d i s c u s s i o n w i t h Mr• Walker D. H i n e s , D i r e c t o r General of R a i l r o a d s ) . Garernor S t r o n g : W i t h o u t objection, I will make this statement to the Federal Reserve Board: While the Reserve Banks would like to have a favorable opinion from the Attor- https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 27 ney General on the question of the legality of the Railroad bills, they are not so much concerned with that phase of the matter as t h y are with the possibility that t h e s e b i l l s m i g h t be i s s u e d a n d f a l l d u e w i t h o u t an app,o- priati on provided by o n g r e s s to meet them, in which case the banks would have to look to the endorsers to pay them. We would regard that as an unfortunate situation for the Reserve System if it should occur: We have here a program, and Mr· Kenzel 1s here from New York, at Governor Harding's suggestion, to join us in the discussion of some of the 1tens, which were not touched or yesterday at a1ll. I think it "ould be wise to undertake a discussion of that now, keeping a record of the proceodings, which may lead to some suggestions to the Federal Reserve Board. 2. BANKERS AUGEPTANCES OPEN MARKET: a. Development of open market. T a t d@ s n o t i n d i c a t o j u s t what the B a n d desires to bring out in the discussion, but undoubtedly it involves a discussion of what steps, if any, can be taken to improve the open market for bills, and whether the matter should be dealt with by rates or otherwise. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 279 I b e l i e v e me had b e t t o r s t a r t our d i s c u s s i o n w i t h snb-topic b.. b. Ig a l o w r a t e at " e d e r a l Reserve Banks n e c e s s e r y to develop the acceptance market? Governor Fancher: Mr. Chairman, t h e r e is a. feeling in our bank that t h e r e should be a r e a s o n a b l y low rate in the matter of development of the open market acceptances. f<:r' We rather feel, by reason of the artificial conditions in our r a t e s , made necessary by Gover•nment financing, that there h a s not been the proper spread [ b e t w e e n t h e r a t e s , g i v i n g proper p r e f e r e n c e to bankers ac- ceptances and that class r:€ paper• When we get to the time when we can take up an adjustment of these rates, when the Government's needs have been further provided f o r , we will provide for a prop r spread in rates looking to a rate that will be fair and will develop and make that class of paper popular. Go, ernor Morss: We have not f e l t so. The Bankors acceptance is a very good piece of,paper, and it is entitled to a very good rate• I It ought to have the benefit of its quality, and, of course, to t a e a basis of 4-1/4 per I cent. On that baaia.,a.bank's prime acceptance b:tll bas been https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis t u s e l l i n g at o 5-1/4 pr b a 8 2 c e n t when commercial paper of t h e c l a s s has bee:n s e l l i n g p e r ] u p s at 6 per c e n t , and t h e min- ute the strain is off it is 5-3/4 to 5-1/2 per cent· It seems to me tha.t is enough advantage to bankers' acceptances, the a d v a n t a g e it gets from i t s quality. I do not know whether t h e r a t e f o r t h e " e d e r a l Reserve Bank to buy s h o u l d be lower as compared to what t h e b i l l would se11 f o r on t h o market. Our policy has been to keep the rate at which we buy t h o s e b i l l s h i g h as compared to t h e r a t e at which they would sell in the open market- In other words, we have c a r r i e d out the t h e o r y of the Bank of ngland whose rate is h i g h , w i t h t h e i d e a of t o k i n g t h e s u r p l u s : been able to do that in B o s t o n * We have I would like to have you a s k Mr. S p o n c r , who has g i v e n h i s best time and efforts to t h e a c c e p t i n c e q u e s t i o n , es has Mr. Kenzel, how he feels 1 t. Governor M i l l e r : that nature. We have v e r y l i t t l e b u s i n e s s of Webuy most of our h i l l s throup-h you, Gore:rnor Strong. Governor Wellborn: our section We really have no open market in We have t a k e n a l l of our a c c e p t a n c e s f r o m mem- ber banks, just like a loan. We protect the acceptance https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 281 of our member banks. If the b i l l s a r e offered in New York we buy t h e m so as to p:rctcct 1:;hem. I do not t h i n k we ought to oha.nge the r a t e at t h e p e s e n t t i m e . Gov ernor P e p le: I am very g l a d , Mr: Chairmen, to have an opportunity tos tate the position of the Federal Reserve Bank of {chmond on this question. We have not apparently cooperated with the other banks on the open market proposition. It has not been because of any selfishness on our part, but we have h a d two reasons for not doing it. In the first place, we have al ways been b o r r a v e r s , a n d , c o n s e q u e n t l y , we have h e s i t a t e d to take participation in purchases which would necessitate an increase in our r e d i s c o u n t . That, however, has been a minor consideration. Our main reason is, t h a t we have gone very ca. refully, for a lone time, into this whole situation with our member banks, and we are convinced that the banks in our district need a great desl of education before we can rely on them to put into t h e market barkers acceptances that we really think carry with them the qualifications that a bankers acceptance should have. I have been in correspondence with the Federal Reserve. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ... 282 Board for some time in an endeavor to get a more defint ite and specific ruling as to what a bankers' acceptance ought to be. With us, in many instances, a bankers acceptance is nothing more nor less than a collateral loan. Under the former regulations of the Board, the B a r d held that a bankero acceptance should arise out of a transaot1on involving a c e r t a i n thing. In t h e d r a f t of t e n t a t i v e r e g u l a t i o n s recently s u b m i t t e d t h a t p r o v i s i o n was l e f t out e n t i r e l y , and I have a s k e d t h e Board d e f i n i t e l y and p o s i t i v e l y if t h e B a r d had any o p i n i o n as to whether t h e r e was any difference between an acceptance and a collateral l o a n , and if so the. t t h a t d i f f e r e n c e ought to be made a p p a r e n t in t h e r e g u l a t i o n s . I received a s h o r t time a s o t h i s l o n g opinion from the counsel f o r the Federal Reserve Board as to t h e surrender of collateral in connection w i t h b a n k e r s a c c e p t a n c e s : You are all familiar with t h a t . I i m m e d i a t e l y wrote to Governor H a r d i n g and told h i m t h e t a p p r e n t l y the counsel had overlooked our particular point, and I got a letter from him in which he said that t h a t point end all othe r s was i n t e n d e d to be ered• There is n o t h i n g in t h a t opinion which we can use with our member banks as a stoppage https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 283 of their idea that a bankers acceptance can benothing more nor less than a loan. I will give you one or t w o i n s t a n c e s t h a t have occurred d u r i n g t h e l a s t few d a y s . A s h o r t time ago one of our bankers' large banks o f f e r e d us tb.t'ee/acceptanoes, amounting 1. to $ 1 1 , . Governor of i n t e r r u p t i n m . Mr• P e p l e , may I t a k e the l i b e r t y We have under i t e m 4, t h e s u b j e c t of u s e and abuse of domestic acceptances, and I wonder if we had b e t t o r n o t d e f e r t h e d i s c u s s i o n of t h i s p a r t i c u l a r s u b j e c t until we get down to it on the program. Governor P e p l e : That is entirely agreeable to me, but I do wish to bring this up at some time and find out whether or not we have been too strict in our interpretation of 1t. We want to get a clear and specific regulation from ' the Board that will support us in this campaign of education that we have been conducting, if we have been doing the right thing. Governor Strong: On the question of developing the open market, I u n d e r s t a n d t h a t you have quite a large volume of acceptances? Governor P e p l e : https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis We have, and we have endeavored to keep 284 the possibilities of the market development open in t h i s way. we have ta.ken t h e p o s i t i o n tha. t when we buy a b a n k e r s • a c c e p t a n c e f r o m one of our member bmks, t h e bank is acting as the age•t of the drawer for the sale of t h e accepte.:rce. We have t a k e n t h e p o s i t i o n t h a t t h e y should come to us di:reot f r o m t h e ba.nk beoo.use we r e q . 1i r e &:L t h 6 time a s t a t e m e n t of a l l of t h e c o n d i t i o n s under which that acceptance was drawn; we require a positive s t a t e m e n t as to t h e collateral that t h e b a n k holds, and we have made r e g u l a t i o n s as to t h e amount of margin t h a t t h e b a k could h o l d . Governor Strong: What do you do about rates? Governor Peples: Our rate is 4-1/2 per cent. Governor "old: On what maturities? Governor P e p l e : On e.11 m a t u r i t i e s . In many oases we require that the collateral be lodged with us, and to stay mith us during the life of the bankers' acceptance. Governor Strong: Is there any market for bills m o n g the banks or your distriit, outside of the Re8rve Bank? Gowernor Peple: Not that we know of. Oocas1onally we have t h e a c c e p t a n c e of one bank o f f e r e d to us w i t h t h e https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 285 endorsement of another hank. Governor Strong: But the feet 1s, the rnnrketing of bankers bills in your district is largely confined to making a rate at which the Reserve Bank will take them, a f t e r careful inquiry and s c r u t i n y of t h e character of the transaction underlying the acceptances'? Governor Peple: Yes. Governor trong: There is no influence to be exerted in the development of an open market through your rate, as a r e s u l t of deo.11nr·s between ba.nk1nr; institutions'? Governor P e p l e : 'here is n o t , f o r the reason t h a t we thought it best to make this campaign of education before we endorse anything looking to an open market, so t h a t we could be s u r e that the things that are being sold are real bankers acceptances. We prefer to keep absolute control of the s i t u a t i o n until we are satisfied that our banks have learned h a t should constitute the proper form of a bankers' acceptance. Governor t r o n g : In v i e w of t h e f a c t t h a t t h i s is a l a r g e s u b j e c t , I am g o i n g to ask that the expression of opinion be directed directly to this one point, as fur as possible,(that is of an open market and the infinence of the Reserve Bank rate) in order that me may get some https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 286 rocommondation on the matter. Governor Passmore: Answering your specific question, I have an open mind on the matter, but I presumed it was essential that a low rate should obtain to continue the development of the acceptance market. Governor Strong: You mean as compared with the commercial paper rate? Governor Passmore: I e s . Governor McDougal: The Reserve Banks have b e e n the means t h r o u g h which t h e a cceptance market has b e e n d e v e l o p e d , and my impression is that until the market develops to a much 4 broader and bigger one it would be desirable to continue a low rate. Governor Biggs: Our bankers have taken a very keen interest in acceptances. It has been a matter cf education for several months, and I think every banker in the clearing house, p r o b a b l y , has someone working on this. ward to a l a r g e amount of 1 t, We l o o k f o r · e s p e c i a l l y a f t e r · t h e Govern- ment's financial obligations are taken care of. I am not in favor of a n y special change in rates. t h i n k it s h o u l d be q u i t e t-. l i t . t l e lo:·,e:r t h a n t h e commercial pa.per rs. t e . https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis I A 287 Gavornor Lynch: I think a market for acceptances is very desirable. I think for the present, and for some time to come, it may be necessary to have a distinctly preferential rate by the Federal Reserve Banka. In other words, it is something we have got to foster. Governor Vanzandt: I think without a very low rate for bankers acceptances that we will not get the bankers acceptance business developed throughout the entire country as it should be. You can educate the bonkers in New York, but you cannot educate them out in our part o:r t h e c o u n t r y , u n l e s s it 1s t h e c a s e of an acceptance of some bank that they know, in their own country, which they c a n t a k e in t h e i r p o r t f o l i o and be p r e p a r e d a.ny time to t u r n them over to the Federal R e s e r v e Bank or dispose of them to some member bank at a low rate, based on the Federal Reserve Bank's rate. Governor Wold: I a.asume "the development of an open market", refers to the distribution of acceptances among the member banks. An extremely low rate will not be helpful in distributing those among the banks looking for investments. Unless the rate 1e somewhere near the commercial rate they wi11 buy commercial pat https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis and wont buy the acceptances. We 288 have been making q u i t e an effort through one of our brokers, to distribute some of these acceptances, and have been successful in having some sold. If the rate is too low, as compared to the rate on commercial paper, t h e banks looki n g f o r i n v e s t m e n t s w i l l hwy the commercial p a p e r , because they are 1n the habit of buying commercial paper and know how to hand1e i t . Governor Morss: The reason that I do not believe in extremely low rates for acceptances is the fact that if you fix an artificially low rate on any class of paper the borrowers will go after that, and the abuses that may be connected with acceptances will be exaggerated because of the low r a t e . $ If the rate is too far out of line, as compared to the commercial rate, you cannot hope to have an open market with the member banks, but the paper will all come into the Federal Reserve Bank. There are two very good reasons to make the rate in relation to the oornmarcial r a t e , and t h e primo reason is t h a t it is b e t t e r than the r e g u l a r commercial note because it is a banker's acceptance,it is secured, and that gives it a preference in rate. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis I do not believe we should put an artificial 289 ¢ # r a t e on i t . Governor trong: It seems to ma tha.t t b e d1st1not1on has not been c l e a r l y brought out as to what is accomplished by e low rate for bankers acceptances, spoaking of those a r i s i n g out of i n t e r n a t i o n a l t r a d e . The chief advantage of the low rate is the Advantage of having a volume of bills c r e a t e d by having c r e d i t opened in d o l l a r s r a t h e r t h a n 11 s t e r l i n g or in some o t h e r market. If our r a t e f o r bills is too high the business w i l l naturally drift to the cheaper money market, which doubtless will be London. P e r s o n a l l y , I ugree entirely with you, Governor Morss, that if the r a t e is too l o w 1t has a restricting effect upon the market because all of the b i l l s will go to the Reserve banks, just as now t h e Government certificates of indebtedness come to us at a still lower- ra to than t h e acceptances. Governor Morss: It seems to mo t h a t an open market for acceptances is strictly a competitive proposition, and it has got tostand on its own feet in competition: When you come right down finally to your being able to hold your own in dollar acceptances against sterling, it is going to be a question of general interest rates in all countries. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis It has got to be stabilized, and if we cannot e t e p m o c 9 2 we will lose the business. Governor Strong; In the long run I think we are going to have a cheap rate. Governor Morss: It is a matter of competition, and you must get down to a competitive basis. Governor Passmore: But is not the rate artificially low in London, Mr. Strong? Governor Strong: It is just now. Governor Passmore: I do not mean just now. Has it not 8ll along been much lower than the general discount rate? Governo Strong: The London m a r k e t Ls so differently organized from ours--Governor Passmore: Don't they deliberately bid for these bills in order to control certain situations? Governor Strong: You have got to distinguish between conditions of today and those that were normal, prior to the war. Governor Passmore: Yes. Governor Strong: Just now there is such a small volume of bills in the London market, on account of the scarcity of the ordinary commodity paper, that it is given a much l v e r r a t e t h a n any o t h e r paper in t h e market. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 291 The rate that you refer to, Mr. Passmore, is j u s t now more artificial than itever has been in the history of the business. There is no doubt about that. It is possible, fer instance, to remit a bill in sterling to London from this country, and get discount for it, if it is an eligible bill, so to speak, at 3-7/8, or 3-3/4 per cent, or something like that, and turn right around and deposit the proceeds of that bill in a Joint Stock Bank at 4-1/4 per cent. Of course, that is purely an artificial situation, and that is done for the spocial purpose of keeping foreign balances in London. Deputy Governor Spencer: I have felt all along, with respect to the development of an open market, that we were running w i t n a r t i f i c i a l r a t e s , b u t if we attempted to lower those rates we would entirely close the open market. They would all converge into the reserve banks With the rate as it is now, in competition with the commercial paper. we have made some strides---although not very long strides---and they are distributing the bills in the New nglana market. Mr• Kenzel: I do not believe it is reqiired that there should be a very low rate at Federal Reserve Banks f<r https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis I - . . . . . - . . 292 bills, but the rate at the Federal Reserve Banks for the bills should reflect, I believe, the difference in rates between the bill rate and the commercial paper rate, and should reflect the f a i r market value of the bankers c r e d i t which the p u r c h a s e r of the c r e d i t has bought and paid for when he drew the bill. I , The present scale of rates, I think, is wrong. We have 4-3/4 per cent for 9 d a y , single name notes, a n d a 4-1/2 per cent discount rate or a 4-1/4 per cent purchase rate for prime 9 d a y bankers bills. That rela- t i v e l y h i g h r a t e h e l p s t h e d i s t r i b u t i o n of b i l l s in t h e open m a r k e t , b e c a u s e t h e open marlot is d e a l i n g in i n d o r s e d paper and the rate for bills w i t h the b e s t prime names is r i g h t at our r e d i s c o u n t r a t e or p u r c h a s e r a t e f o r i n - dorsed paper. We have paper with bankers indorsements at a rate higher than the open market. The normal reserve bank rate should be a little higher than the open market. When it comes to very short maturities 1 t is a d i f f e r e n t t h i n g • I believe on short b i l l s , nor- mally, in a rising money market, the reserve rate should be lower than the open market- eoently, we have seen commercial paper of four, five and six months selling for.s-i/4 per cent, and coating the borrower https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis . I 293 5-1/2 per cent per annum. That is cheaper money than he could get through taking domestic bankers acceptances, which would cost him at least one per cent per annum I for the credit and at least four and five-sixteenths per c e n t pr a n n u m for t h e d i s c o u n t , making f i v e and five-sixteenths, per cent at the minimum. If we had to pay one-half per cent higher for the credit, as most of them do, it mould put the cost above the single name paper rate. There are a great many technicalities connected with t h e business which borrowers seek to avoid. If t h e y could borrow money, as they always have borrowed it, on six months paper, at approximately the same :rate that they could get the domestic credit, without being required to put up collateral and assign documents, and interfere in any way with their customers, they would prefer the commercial paper. In regard to the international bills, I think the situation is different. Looking at it from the International standpoint, we have goL to provide an open market, I an it 1f t h e r e s e r v e r a t e s r e l a t e to t h e open market r a t e , w i l l permit t h e d o l l a r . b i l l to compete w i t h s t e r l i n g bills and other currency, if we want to have the dollar https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis IIIE!ZPfZWI -IB 294 currency availed of. Looking at it a little f u r t h e r , if we want to d eve lop t h e e x p o r t t:c-1::1d•__ ,, we have got to develop imports o l s o , .'.C• that t h e u r e a i i o n o: unwield" t r a d e b a l a n c e s will be a v o i d e d . To make t h i s a d e s i r a b l e market f o r f o r e i g n p u r c h a s e r s to s e l l t h e i r goods 1 n , we have g o t to make a d i s c o u n t mar- • ket here in which their bills, drawn against their imports, can be d i s c o u n t e d f a v o r a b l y in comparison w i t h any o t h e r open market in t h e world. Governor 1 o r a e : Bow a r e you g o i n g to c r e a t e an open market h e r e f o r foreign bills if the discount r a t e or p u r c h a s e r a t e of the " e d e r a l Reserv Bank is c o n s i d e r a b l y below what it would be for a d o m e s t i c b i l l ? Mr. Kenzel: I do not think there can be any distinc- tion made in our market rates betweenthe domestic a c e p t a n c e of a primu vank h e r e and t h e f o r e i g n a c c e p t a n c e of a prime bank. Governor Strong: No suggestion has been made, in die... c u s s i n g t h i s m a t t e r , of t h e b e a r i n g upon t h e d e v e l o p m e n t of American c r e d i t s of t h e d e c i s j . o n by f o r e i g n Governments to p u l l t h e peg out of t h e exchange r a t e , and it important bearing. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis has a most The natural bill to flow into this -295 market is the bill drawn and accompanying a shipment of goods to this market. Conversely speaking, the bill to be drawn on the London market 1s a bill covering movement of goods from this country to the London mar-· ket, or the French market. The bills that were customa- rily drawn in connection with sales of cotton in England, France, Germany and Italy, you know, created a great volume of exchange in this country, because they were drawn in the currencies. of those countries and discounted there, and created balances in favor of our banks abroad. The d i s t u r b a n c e s in t h e exchange s i t u a t i o n a r e g o i n g to have a very m a t e r i a l e f f e c t upon the drawing of bills. I have always felt that we had two objects to gain, by t h e m a n i p u l a t i o n of our r a t e , which were i n c o n s i s t e n t with each o t h e r • A high r a t e f o r t h e discount of b i l l s in this country will widen the market for them. A low ' rate will increase the volume of credit# and bills drawn. Possibly if we had the courage to accept the situation, we might be able to stimulate the opening of dollar credits by having the r eserve banks stand ready w i t h the bag and take everything that comes out at an abnormally low rate, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis \ 296 and admit the necessity for doing it in order to develop the business, and stick right tight to that program until merchants a n d manufacturers a n d exporters of the w o r l d became accustnmed to drawing in dollars for reimbursement on their exports to this country. Geography has a lot to do with it. We cannot expect to finance t h e movement of goods between A f r i c a and Europe with bills drawn on this country. tion. That is out of the aues- We might expect, possibly, to finance the goods mov- ing from the West coast of South America to Europe that VTOuld go through the Panama Canal. It m i g h t be, with a cheaper money market here than the London market, we would be able to get a large part of that business, and a large' part of the Eastern business, and we might be able to get the financing centered in this country for practically all of our own imports in time. In order to do that, we have got to make a rate that will take the business away from the markets where the rate has been cheaper, ae in London. If we make a. rate that stimulates the flow of credits to this country, we restrict the market for the bills which result from those credits. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis I cannot see it any 297 other way. Deputy Governor Spencer: And we would practically c l o s e the open market. Governor Strong: It would 1n effect restrict the open market. From private correspondence, I am led to believe that when the artificial character of the London market is eliminated they are going to h a v e higher rates over there than they have ever known in the history of that market. r a t e s , when we g e t our liquidation over here Our , v r i l l be lower than we have ever known them to be for bank credits Tiith a resultant flow of bills to this country. I may be mistaken but I think that is true. Furthermore, with regard to the s ubject of d eve1oping the open market in this country, there is one thing that we should do right away, and that is to get legislation that will permit foreign banks to open branches in this country for the purpose of handling bills just as is done in the London market. The bills do not flow to the London market through the agencies of the British banks alone* T h e r e a r e p r o b a b l y 1 5 b a r k a g e n c i e s in ing banking business the world over. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis London, represent- Japaneese, German, ,.. i e 298 French, Italian and other banks are pouring bills into the London market all the time because it is a cheap and reliable discount market. Our problem is to develop a policy not for the moment but for the long future, and the q).estion 1s how much of our resources can we appropriate 1n order to get that business. Governor Morss: Of c o u i s e , what I said ith regard to the way it ought to be done had no reference to immedia t e market conditions. Mr• Kenzel: In the long run we must develop a cheaper money market for strictly liquid commercial bus1te noss as distinguished from having the s t o c k exc}-1...ange ra. dominate all rates. The Canadian banks have shifted absolutely away from carrying reserves in New York in stock exchange loans and are buying bills to carry 1n their portfolios at a rate 2-1/2 pr cent lower. Go ernor Strong: There is another very important development in the rate for bills. It is possible that by reason of special things that are d eveloping, t h e r e w i l l be a special market for t l l s k i n of paper that wont apply to any other kind of paper. The amendment to the banking laws permitting savings ' banks to buy just t h i s t y p e of hill, v r i l l mnke a. market for https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 299 a very large volume of this paper* It hasn't come yet• The savings banks have been putting all of their money into Government loans, and as long as they are expected to do that, and are charged with being unpatriotic if they do not, that special market will be deferred. Mr• Kenzel: There has been a perfectly good, steady, demand for bills at the market rate, bills of corporations, some individuals and savings banks, and up until a short time ago from foreign banking agencies. The reason there has been consider&ble buying for foreign account was that there are few institutions t h a t carry reserves in bills and throughout the country more and more banks are buying and carrying bills as reserves. a There 1s good demand. (Governor Harding, Mr: Hamlin, and Mr. Miller of the Federal Reserve Board, entered the conference room). le, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Hull 12m lar 21 . r A. C. Miller. the fact in your forecast M 3 Have you taken into reckoning in the prospective development, and especially 1n dealing in foreign bills that the moment we get the courage and the wisdom and the prudence to put ourselves uncquivocu11yon the basis of tree finances that we are going to have tremendous power, and are going to be able to know precisely what the dollar is today, what the dollar will be one week hence, and one month hence. The f r a n c and the pound sterling are probaoly going to be for some little time of a fluctuating value. know what the sterling exchange will be. We do not If a man buys 1t today, what it will be three weeks or three months hencethat we do not know. I think thlt is going to be a factor of very distinct importance; it is going to make this market a contractive one to a n y one accumulatin exchange, or who is engaged in dealings where it is of conseqence that the unit of value in the terms of the bill drawn is absolutely known to be a.definite quantity, not susceptible of any contingency of international commerce. There is another thing that occurs to me in connection with what Mr. Kent said. I think it is ordi- n a r i l y overlooked to what extent the operrdisoount market https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 31 bas f l o u r i s h e d in London is coupled w i t h the fact that they had the open trade market• That is the reason why an enormous amount of financial business congregated there-t h e enormous amount of o r d i n a r y commercial b u s i n e s s done with the open p o r t s . We do not know what the tariff p o l i c y will be in the future-Governor Strong: I hope they do away w i t h i t . Doctor lv111ller., ..,here is one development which we can now watch with the greatest possible interest as to the London market, viz: the unpegging of sterling exchange, the control of rates of insurance, and of rates of ocean transportation of gold. The high cost of transporting gold has made a new parity for sterling exchange in this country. Mr* A. C. Miller: Certainly. Governor Strong: So that the arbitrary level fixed by a combination of rates of discount in London with the cost of exporting gold and the pegging of exchange after the level was established at 4.76+1-4, for awhile has resulted really in relieving the Bank of ngland nominally of i t s normal demand f o r gold f o r e x p o r t . The minute t h e y teke the peg out of exchange the demand again a r i s e s . bank of England g i v e up g o l d f o r e x p o r t ? https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Will the 32 Mr• A. c. Miller: If she does not, what becomes of foreign exchange? Governor Strong: That is the point. The senti- mental influence 1s one t h i n g ; the influence in fact is another thing; and the favorable feature of this situation from our standpoint lies in my mind in this fact,- if England now must rely upon an arbitrary embargo upon gold exports rather than an artificial exchange rate, the must announce to the world that she is internationally suspending g o l d payment, and, going a step further, in order to g e t b a c k upon h e r g o l d b a s i s , s h e h a s g o t to do t h e v e r y t h i n g t h a t w i l l e s t a b l i s h dollar c r e d i t in this c o u n t r y ; in other woras, she has got to put her interest rates up. Mr• A. C. Miller: Governor trong: u p , it is That is rinht. And when she puts her interest rotes coincident w i t h a period of liquidation in this country, which will lower our rates. Mr• A· c. Miller; That 1s all definitely foreshadowed in the report; ngland says she has got to do that in order to recover her gold strength and her position in the international money market* That might take two or three years• In t h e meantime,business h a s largely headed in t h i s direction; https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 33 4 our exchange had to be used first as a matter of necessity, and then it will become, if we are wise, a matter of s u p e r i o r i t y . Governor Strong. We have come to no conclusion in the discussion of this matter at this meeting; I do not know whether in putting this topic on the program, 1t was intended to have any conclusion stated; an exchange of views. This is but rather a very fluid situation, as Mr. Leffingwell said yesterday, and I think all we can do 1s to watch the developments from day to day and govern our policy accordingly. Governor Harding. The Treasury is in communication with Lamont, Strauss and Davis and Harris, asking their advice as to taking off all restrictions off the export of gold. The only question of any concern seems to be in S o u t h America, but it is very clear, so far as Europe is concerned, we a r e not going to lose any gold there. Under t h i s t a r i f f in England and F r a n c e , nobody is g o i n g to want to ship any gold from America, to use their balances here to p r o t e c t against i t . We a r e t r y i n g to f i n d out about how mu ch g o l d Japan will draw; lem. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis t h a t s e e m s to be t h e main prob- 34 Governor Strong. 5 And Argentine- Governor Harting. They cannot withdraw it under six months? Governor Strong. Part of 1 t they can withdraw at once, about $ 2 , , t h e y can withdraw at once. Governor Harding. Do you think they will draw it right away? Governor Strong. withdrawal of I do not think so. I think the $ 1 7 , , w a s due to the same impulse that led them to bring their gold over from the other side. Governor Harding. If they went to save the ex- change, they are getting a premium on it, are they not? Governor Strong. I do not know what the exchange situation is now. Governor Harding. The question is whether they want to bring that gold down there in the present condition. Governor Strong. Governor Harding, there were two matters that came up at the meeting this morning, and one yesterday, on which I should like to make a report, if I may, at the meeting. Late in the afternoon yesterday, the proposal in regard to architectural supervision of building plans of https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 36 reserve banks was fully discussed, and it was the unaniMous view of the Governors of the twelve banks that the suggestion which you made, that a supervising architect should be retained by the Board to act as a clearing house for the exchange of information, and in an advisory capacity to the Board in passing on plans, would be a desirable thing. The view expressed was, as I understand it, that it would not only be a protection to the system to be able to state t h a t supervision was obtained for a l l the b u i l c ing program but it really would have the effect of facilitat- ing prompt action in getting plans approved. They would come before the Board through a channel which would be thoroughly acquainted and posted. Governor-Harding: We are very glad to know that. Governor trong: And we further thought it would be moat desirable to employ Mr• Trowbridge, who made a very favorable impression. Governor Harding: The members of the Board have reached the same conclusion, and we had a talk with Mr. Trowbridge, and I think we can make an arrangement with him at a very reasonable figure, so that we would pay him out of the outside https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Board's own funds ana l e v y assessments upon these 36 7 banks, and the burden would not fall very hard on any bank. Governor Strong.. Of course, Mr. Trowbridge is a member of the staff of the Federal Reserve Bank of New York. He is on salary; a rather small salary now, because he has o n l y been giving a portion of his t i m e , but it woult be a greatmisfortune to us to have a man who had worked for six months andstudied our problems taken away from the bank. Governor Harding. I hope you gentlemen understand the Board's proposition. We are not interested down here in deciding whether the toilet rooms and lockers are located exactly in the right place. The main thing we are concerned in is this, that in the last analysis, these are government buildings; we want the Secretary of the Treasury to be familiar w i . h e v e r y t h i n g t h a t is done, and to have his seat w i t h the Board, and approve e v e r y t h i n g t h e Board does in this matter, and the main thing that concerns the tioard is this: We want these buildings to be adequate; we would not want a building put up at a cost of 8 , o r a mil- lion, and then have it develop as soon as it was finished that it wastotally inadequate and then have to be torn down https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis A 37 8 or done all over again, nor would we want a building, on the other hand, to overdo the proposition. Then there is a third alternative, we would not want to go into a proposition of say a million and a half dollars, which amount we might think was a proper amount for a bank in a given district to expend, and approve those plans without any estimate at all as to whether or not it could be built for that estimated cost, and then find out. aa soon as the contracts were let, and the matter had p r o gressed too far to rescind our action, that the thing was going to cost two and a h e l f million dollars. act intelligently. We want to If this were a law p o i n t , we would t a k e tre advice of counsel, and on this building project, we want t h e a d v i c e of an a r c h i t e c t . Another point which Mr. Trowbridge brought up was this: These b a n k s have complete plans. It is pretty h a r d 'to make any radical change without incurring a good deal of expense on account of drawings and so on, but as to those banks v-,hi ch have not made plans, if rough, preliminary sketches were submitted first, andthese suggestions made, then before you go i n t o these elaborate d r a w i n g s , you will get the benefit of Mr. Trowbridge rs suggestions and views https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis I 38 y 9 b e f o r e the scale drawings are made" do you not see? Governor S t r o n g . Governor Harding. Yes. There would certainly be a valuable interchange of ideas in this way; you gentlemen havin an independent architect and this general consultant we are going to get, I think the plan is the best of all the ideastht have developed. Governor Strong. I would assume, asfar as the New York bank is concerned, that it wasgenerally understood we would pay the greater part of Mr. Trowbridge's salary and employ the greater p a r t of his time. Mr. A. C. Miller. Can we not determine what por- tion of his time we shall want d e v o t e d to this general work and then pro rate the e x p e n s e ? Governor Strong. I could not agree to t h a t very well, because he is now employed by the directors of the bank, and I am not authorized to say that we w i l l give this man up. Governor Harding. We would expect to a r r a n g e w i t h you b e f o r e we made any arrangement with Mr. Trowbridge. our t a l k w i t h h i m was a l l t e n t a t i v e , b a s e d upon your c o o p e r a t i o n and a p p r o v a l . https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis We would not want to t a k e your time. we - 1 would want f i r s t to r e3a c h a d e f i n i t e conclusion and9 f i n d out what Mr. Trowbridge 1s w i l l i n g to d o , to be a b l e to s a y to him, "Here 1s t h e proposition; how does t h i s s t r i k e you?" Governor S t r o n g . I a n t i c i p a t e no difficulty with our d i r e c t o r s about it. Mr. A. C. Miller. My own t h o u g h t was t h a t onet h i r d of his time would answer our requirements, possibly leas. Governor Harding. You see it would p r o b a b l y re- dound to your own advantage, because he would be given t h e advantage of an e x a m i n a t i o n of t h e s e v a r i o u s p l a n s , and u n d o u b t e d l y some p a r t of those p l a n s could be u s e d in your bank. Governor S t r o n g . That would be an a d v a n t a g e . is a n o t h e r v e r y important a d v a n t a g e . There We a r e p r o p o s i n g to have a c o m p e t i t i o n of some k i n d , and t h e a r c h i t e c t who is awarded the contra :twill step i n t o a situation where a n o t h e r a r c h i t e c t is a l r e a d y at work, a n d I do not want on q e s t i o n to a r i s e about having two a r c h i t e c t s on t h e same job, and it w i l l r e l i e v e us of t h a t embarrassment by giving a different status to Mr. Trowbridge's employment; https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis . 1 - 1 1 3 to be able to state that he is acting for the system, so it would be a condition precedent of the program of competition that Mr. Trowbridge would be in t h i s relationship to it. Governor Harding. What would be the ideas of the Governors, assuming the Board and yourself reach an agreement on this proposition, and Mr. Trowbridge be employed, would it be your idea that ell the banks interested s h o u l d agree to pro rate the amount of the salary that the Board would pay him, or would it be paid out of the Board's general funds? What is your i e a about t h a t ? Governor Strong. May I suggest this on that subject? We will of course get the major benefit of his t i m e , a n d t h a t portion of h i s c o m p e n s a t i o n that r e p r e - sents t h a t contribution to our p r o g r a m by M r . Trowbridge we should pay; as to the balance of his services that should be apportioned among the other reserve banks that propose to put up buildings. On that basis, let the Board make the assessments. Mr. A. C. M i l l e r . e x p e n s e s to too council. We might as well assess the I t h i n k it J is c l e a r he is to be here as our adviser and supe.visor, and probably we might https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 3 I 311 12 want to make larger demands on his time than he could grant. How about a bank that has a Governor Strong. building already f i n i s h e d and would g e t no benefit w h a t ever, as is t h e c a s e with Atlanta? Mr. A. C. Miller. That is tbe1r loss and our g a i n . Governor Wellborn. Governor Strong. I suppose we would be exempt. I do not m i n d ; of course it reduces our expenses. Governor Harding. I do not think, if we figured it out, that t h e Atlanta part of it would be over 3 o r 4a year. Governor Strong. Well, I will submit anything you propose, of course, to our directors. I would be very re- luctant, as I have said a. number of times, to have Mr. Trowbridge drop his work with us. Governor Harding. Here 1s t h e situation. We have got to negotiate with you in the Trowbridge matter, and 1n order to save a lot of correspondence, would it be possible for the Governors to put t h e i r case in your hands, and l e t you r e p r e s e n t a l l of t h e Governors in .,vhe negotia- tions with the Board in this proposition? https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Governor Strong. I think they would be willing to 312 13 do that; they have done it before. M r . A. C. Miller. the other angle. I would rather approach it from This is not their proposition; it 1s rather the Board's proposition, and the Board's architect. Tt is not the banks cooperating with the Board; it is the Board cooperating with the bunks in trying t· fulfill its part of the responsibility in seeing that these banks are within reasonable requirement. Still, whatever is p,id to Governor Harding. the architect will be paid by the banks, anyway. M r . A. C. Miller. Whatever is paid anybody is out of the Reserve Board's fund. GovErnor McDougal. I um inclined to agree with Dr. Miller that this is a board matter, and anyway you see fit to adjust it will certainly be satisfactory to all concerned. Governor Harding. Of course we could make this a matter of special assessment and say we pro rate this amen·· the other banks, all to make a special remittance, that would not be included in the general assessment. Governor Lynch. It appears to me that this being a Board matter is a matter of general interest to the entire https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 14 313 system, and if t h e Board desires advice on any one p a r - ticular p o i n t , they would have to c a l l in an e x p e r t on t h a t point a n d pay him, a r i it is a matter o f e z p e n s e to a l l of the banks in the system as well as it ls of some one bank or some few banks that are not interested in that particular point. Governor Wellborn. Governor Harding, I may say for the gentlemen who are letting our contract, we submitted everything to the Board in Washington, you w i l l remember, all t h e p l a n s and everything, and the total cost of ltl we did not let any contract without the approval of t h e Fede :i-a.l Reserve Boa.rd. Governor Harding. Yes; the architect of the Treasury. Vas t h e r e a n o t h e r m a t t e r you wanted to bring up, Governor S'rong? Governor S t r o n g . The q u e s t i o n a g a i n a r o s e , Governor Harding, 1n regard ta these bills t h a t were under comtemplat ton to be accepted by the Director General of Railroads, and a f t e r some d i s c u s s i o n we a s k e d Mr. Hines if come over a n d c l e a r up one or two p o i n t s , r https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis he would llie was anxious to get expressions of opinion'as to the busine: 314 aspects of the program as distinguished from the legal aspects, and I am frank to say that I think he got them at the meeting. As I understand the feeling of the Governors of the banks, it is this: Immediately upon receipt of the r u l i n g of the B o a r d , which quoted Mr. Hines ' letter, in which he referred to Judge Payne's opinion, the question did arise in every one of the hanks as to the powers of the Director Ueneral to make this obligat i o n , and in some of the banks that subject has been referred to counsel f o r i n v e s t i g a t i o n . Now the Governors of the Reserve Banks, I think, feel that even if the Attorney General gave an opinion that the Director General had power to accept bills 1n this transaction, that question of legality, pure and simple, is nevertheless a rather minor consideration; that the principal consideration involved in the purchase of these bills, or their discount with the Reserve Banks, is really this: That nobody knows whether the funds will be provided by Act of o n g r e s s to meet the bills when they mature; that cannot be told; and even if a syndicate of banks is organized to undertake to purchase renewal bills for another ninety days, nevertheless it is an undesirable thing for the Reserve System, and for their banks to be in the position of buying https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 315 some hundred millions of bills which are dependent fer their payment at their real maturity upon an Act of Congress, which might not be promptly passed, for various reasons. As we all now r e a l i z e , there is a certain reluctance on the part of the Governors of the reserve banks to say that they want the reserve banks, or their member banks, to buy bills s u b j e c t to Congressional a c t i o n st a time of a good deal of controversy. Governor H a r d i n g : I think. That is a r e a s o n a b l e position, The Governors all understand, do they not, that when the Board gives a ruling that a certain class of paper is eligible, that no obligation rests on the bank to take that paper. The banks are all charged with notice of conditions attending the paper. If the paper were technically eligible, and you m i g h t have an averse opinion of t h e solvency of the maker, and so forth, you would not acoept it• We do not want the impression to get out that if the paper is technically eligible and you ask for an opinion, the fact that the ruling is that the Paper 1s elip.1ble, does not mean that i t . i s a desireble investment for the bank. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 316 Governor Strong: It complies in form with the law? Governor Harding: Governor D t r o n g: That is all. There 1s another practical aspect to this particular transaction that 1s important. These bills would be very largely marketed in New York, and it is contemplated drawing nearly $ 3 , , o f them. Let us suppose that we were satisfied with the opinion of the Attorney General, and undertook to buy these bills, and the other reserve banks were not satisfied, as m i g h t be the case, and the groat mass of the bills come east to the New York Reserve Bank? The o n l y outlet we would have for the whole operation, if they did come to us, would be by endorsing those bills, or borrowing on other paper from other reserve banks in order to escape the objec, tion they had raised, and which we had I,, not. It struck me tha.t t h e g.iestion f o c u s e d a. l i t t l e b i t in New York. It is a case where we should hang together or h a n g sepa- ,., 1 , rately. I should not like to have the New York hank under- NS write the whole issue and endorse all that paper in order to https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 317 distribute it throughout the system. Mr• Harrison: Your position would not be cone lus ive. Governor Strong: I realize that, but after all, I think everyone feels that reliance can be placed ultimately upon Congress to make good an obligation incurred by an o f f i c e r of t h e Government "ho is expressly author- ized to enter into such obligations, but who has not been put in funds. That is the whole controversy. Mr. Harrison: I mentioned that merely so there would not be any misunderstanding. The opinion of the Attorney General is not any more conclusive than the opinion of Judge Payne. Governor S t r o n g : Mr: Harrison: the appropriation. No; it is helpful, that is all. There is another thing in reference to I am not very familiar with this particular point, but I r e l i e d solely on the opinion given me by t h e r a i l r d a t t o r n e y s t h e m s e l v e s * Legally, the Director General has a perfect :rifht to enter into cert a i n contracts If it were conceivable t h a t t h e rd l r d s were running at a considerable net profit themselves, there would be no occasion for an appropriation by Congress what https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 318 19 ever, and the right of the Director General to accept or to purchese is no more dependent upon the appropriation of ©ngress than it ls on the operating incomes from the railroads, so that it is conceivable that if they were running at a tremendous profit, or at a reasona b l e profit, t h a t a l l t h e s e expenses vould be p a i d out of the operating income rather than out of any appropriation of Congress at all. Therefore to say that because Congress h a s not appropriated any money tor the . r a i l r o a d s , the Director General shell not enter into obligations\ Governor Strong. That becomes academic when we consider the fact that all their earnings are absorbed in betterments and improvements, and they will not get those earnings back until Congress appropriates money to pay their t h e m compensation f o r / s h a r e of t h e e a r n i n g s . Mr. Harrison. But in the discussion of the legal right of the Director General it is important. The mere fact that Congress has not appropriated does not bear on the legality or these contracts. Governor Strong. Yes; Mr. Harrison. I see. Because all t h a t money would be paid out of the income of the railroads. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis And that is t h e i r 319 strongest point and the one they rely on a great deal. I mention that just as a matter of interestwhether or not The fact ongress has appropriated should not be ta.ken a.s "conclusive one way or the o t h e r as to t h e right Of· the Director General. Governor Strong: The pract1oal aspect of the m a t t e r is t h i s , no more and no l e s s as I v i e w i t , nd I think every man in the room in this discussion will agree wiin it: If the Federal eserve Bank alone should say to the banks of New York City, having received the o p i n i o n of the Attorney e n e r l , that the Director General has t h e power to do this, "we will buy t h e s e bills", then they would buy them. If we said we would not buy them, then they would not buy them, and the responsibility is right up to our bank. Are we justified in s a y i n g that we w i l l buy a bill vrithout know:tng whether it will be paid at maturity, and when we do not know whether Congress w1l1 a p p r o p r i a t e t h e money? General of ''a.1 lroa.ds himself The Directa." I says he will have no money . to pay the bills unless he gets the appropriation from Congress, which he thinks Mr. A. • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Miller: he will g e t . How about t h e French b i l l s ? We e r e w 2 3 two or three years in getting renewal drafts• Governor S t r o n g : Mr- A. c. Miller: Yes. There was a hazard t h e r e that was not very unlike this. Governor Harding: The amount was v e r y much s m a l l e r in the first place. Mr. A, O. M i l l e r : It mas s m o l l e r ; it was guaran- teed by the French Government. a Governor S t r o n g : That w a s a v e r y d i f f e r e n t s i t u a - t i o n , Doctor M i l l e r , because t h e b a n k of France a greed to 'furnish the gold in case the bills were not met with exchange at maturity, and all necessary acts by the French Goverment had been taken to secure our getting that gold. Here, there are not only no earnings available, no fund available to pay the bills at maturity, but our Government has not yet taken the necessary atop to provide payment of the bill#. Mr. A. C. M i l l r : S t i l l t h e r e is a. q u e s t i o n ' t h e r e as to the certainty of the F r e n c h Government making good. our- c a s e t h e h a z a r d w i t h t h e roi l r a d s is ef ongress to support a himh officer t h e good f a i t h of the Government in doing t h i n g s t h a t a r e n e c e s s a r y to https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis In 321 22 s u s t a l n t h e f u n c t i o n i n g of a. most important elemen•i _:oi· trade. I should say I w o u l d r a t h e r take the chance of the government of the United States violating its faith t h o n I would t h e a c t u a l p h y s i c a l capacity of most Euro- pean governments to make good. Governor Strong. As to the French c r e d i t , I think that was so copper-fastened that it was absolutely secure. You know in a l l those credits, we got t h e obli- gation of the Bank of France, approved by the Minister of F i n a n c e , and t h e gold was a c t u a l l y segregated a n d it I was merely a q u e s t i o n of i t s physical transportation a c r o s s the Atlantic, as to whether the bill should be met in g o l d , or whether it s h o u l d be p a i d out of exchange in c a s e t h e F'11an ch governmen t h a d c r e d i t s h e r e f o r t h e p u r p o s e , and those bills, as a m i t e r of fact, were all identified with specific e x p o r t s of goods abroad. Mr. A. C. M l l e r . Yes, by the tim the last re- newal was made, tbe goods were gone, gone before that. Governor S t r o n g . meny, many of them. Yes; t h e y moved over into Ger- However, Mr. Hepburn raiued the under- l y i n g , fundament al question yesterday, when he inquired whether it would be a good thing for the Federal Reserve . https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 322 System to have notes outstanding, Federal Reserve notes outstanding, in part secured by these acceptances, where their payment was absolutely dependent upon the willing- ness of Congress.to appropriate the money. Mr• A. c. Miller: I should say this was one case t h a t had been r a i s e d where t h e r e might perhaps be some v i r t u e in t h e f a c t that t h e s e n o t e s were the obligation of the United States Government. Governor Strong: Yes; we get Uncle Sam obligated anyway, do we not? But then we have to put up the gold to redeem the notes, so it goes around the circle back to us. Governor Harding* How do t h e other Governors f e e l about this? Governor S t r o n g : They have a l l expressed themselves to Mr• Hines as being desirous of doing anything that is feasible to meet the situation. They pointed out to him the difficultio; it is really right up to the Federal Reserve \ Banks to decide whether this is a practical transaction or not they have asked opportunity just to give him an impression of the sentiment t h a t now e x i s t s about i t , and he is going to meet his finance committee and have a https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 323 24 further t a l k about it. I think he will probably see you, Governor Harding. I think the position of the Governor Harding. Federal R e s e r v e Board in regard to it unfortunate that there u y possioility ofa necessity lb of recourse to this e x p e d i e n t , but if it is that it isvery on t h e o t h e r hand is n e c e s s a r y to do something of t h i s sort to avoid even worse conditions that might follow, even a delay in Congress to make this appropriation, you ought to put the full circumstances 1n the scales and weigh them very carefully, and possibly do it if we feel Congress ultimately is going to make the appropriation, even if it involves a few renewals. Governor Strong: I askedir. Wing l a s t nighthow • he f e l t about t h e b i l l s , a n d h e said, "I would not t o u c h them with a ten-foot pole." I said, "Would you buy a bill °r and drawn by the American/Foundry Company on a railroad where I the Director General d i d al1?" 3 11 appear as the o b l i g a t o r at He said, "I would buy all those bills I could get," but, he said, uI do not l i k e the i d e a of h a v i n g a bill in my portfolio that will only be paid in case Congressgets in the humor to p a s s that appropriation bill, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 324 25 and a great many banks are going to feel the same way about it." Governor Harding. Of course, Mr. Hines made the statement yesterday which I think is absolutely true, t h a t in c a s e we s h o u l d p a s s t h i s m a t t e r , t h e r e is no opposition ths.t has developed to too bill itself; that the bill was defeated because of a situation which ho.d developed, but we cannot tell just what the Congressional humor is going to be; we do not know what feeling may be aroused or how this next Congress may look at the entire proposition. Governor Strong. may They/get to squabbling about so that many t h i n g s / t h e y may never reach this. Governor Harding. It may be two years b e f o r e they do it. Governor Strong. I, personally, am convinced t h a t in a v e r y short time Congress w i l l p a s s t h a t bill. It would be a monstrous situstion if they did not. Do you not t h i n k s o , Doctor M i l l e r ? Mr. A. C. Miller. I should expect s o , but if they do n o t , I t h i n k we had b e t t e r t r e a t t h i s as a p a r t of t h e work Congress has got to do after getting an attitude on https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 325 26 publ1o cp est i o n s . I f e e l t h a t the s l i g h t r i s k , or if you want to put it so, tre considerable risk, the Federal Reserve System is taking on these bonds, I think every one would admit that the bad banking that the situation has forced is trivial as compared with the horrible situation that w i l l be c r e a t e d if t h e r a i l r o a d s cannot be f nenced. It 1 s more important t h e .t the r a i l r o a d s of t h e c o u n t r y should be safe than that the Federal Reserve System should be s a f e . Governor Strong. You think that it is more import- ant? Mr. A. C. Miller. Governor-Strong. I do. I am not so sure about that. L e t us look at another aspect of it that we have not discussed at all. congress used the power of appropriation as a club over the President to call an extra session, very succesr u i 1 y ' 7 n e y a r e going to get t h e i r e x t r a s e s s i o n I have no doubt. Now let us suppose thatthe purpose which congress h a d in mind, whether it is a malign purpose or n o t , Was de- f'eated by the Rese ve System stepping in to relieve the r a i l road d i f f i c u l t y , among o t h e r s , and t h a t it d i d it on t h e basis of a transaction where there was a question as to its https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis \.._ 326 being ultra v i r e s . 27 May not some p a r t i s a n newspapers in t h e United S t a t e s , not t h a t + c a r e a r a p about what t h e newspapers s a y , ) may t h e y not s a y t h a t t h e F e d e r a l Reserve System is being prostituted for p o l i t i c a l purposes? "Yr. A. C. Willer. If we have taken every reasona b l e p r e c a u t i o n to g e t compe t e n t le gal' o p i n i o n , a n d t h e ' l e g a l o p i n i o n is t h a t it is not u l t r e vi r e s , t h a t is t h e assumption on which we are proceeding in the discussion, a n d t h a t it is t h e n p u r e l y a q u e s t i o n or Judgment of the banking hazard, I think we are on the whole in a very defensible position in saying, taking account of th whole s ituation, as we have in several o t h e r mat- t e r s t h a t hove co ma up d u r i n g the war, I have thought t h e F e d e r a l Reserve S y s t e m v a s j u s t i f i e d in d i s c o u n t i n g t h e s e b i l l s knowing t h e r e was a h e z a r d t h e r e . The A t t o r - ney General as well as the railway counsel all take the view t r a t the Director General has an undoubted power to accept these drafts. Governor Strong. I did not want to raise the ques- tion for discussion when the Director General was here about t h e p o l i t i c a l a s p e c t of it https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis at a l l , but you can see 327 the possibility that if there is danger of the charge being made that a compliant Attaney eneral, with a fertile minded Director of hgilroads, and a supine Fed- eral Reserve System get their heads together and put it over on Congress, we might be: in a rather unpleasant situation. Mr» A. C, Miller: Of course, as to the Federal Reserve System, there is no such thing as a compliant Attorney General. His o p i n i o n is the o p i n i o n of the Attorney General. Mr. Hamlin: You mi@hi n a v e each p a r t i c u l a r road put its name on these acceptances. Governor Strong: I did suggest to Mr. Hines the one thing that seemed to me would cure all doubts of this business, but I am afraid from what he says that it is not feasible. It is to have the railroad companies to whom the equipment is allocated,enter into an arrangement with the equipment company to draw a draft,to draw bills, which the Railroad Company would accept. That would be a bill representin t h e c o s t of f;:oods , s o l d , f : r o m t h e s e l l e r to t h e b u y e r . Have t h e b i l l a c c e p t e d by t h e buyer and have the Director Gen- eral simply endorse on the back,"This represents a part of https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 328 ! t h e c o s t of t h e equipment purchased by such. and s u c h a railroad, and that t h e cost of equipment s o \ p u r c h a s e d will not be exceeded in these drawings." There would not be any possibility of a question a.rising the. It is such a transaction as a railroad might enter into anyway, and a I very customary n e t h o d of f i n a n c i n g t h e b u i l d i n g of s h i p s in England. It is done constantly. Mr. Hamlin: We ruled two y e a r s ago they c o u l d do that. Governor McDougal: I think Mr. Hines made it very clear t h a t could not be arranged. Governor trong: Except as to a p a r t of i t . Governor McDougal: A v e r y s m a l l part, 1 5 , 2 o r 25 per cent of i t . Governor Strong: 25 per c e n t . Mr• Hamlin: If that is so, then they would be simply financing building. Governor Harding: Have you gentlemen considered paragraph A on this page here, and the desirability of the Federal Reserve Banks ma.kine miscellaneous Gales of bankers' acceptances to members, and so f o r t h . We have heard of c a s e s where banks have been g i v e n an o p p o r i u n i t y to s e l l https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 329 3 a c c e p t a n c e s to member banks in their own d i s t r i c t , or- buy and sell acceptances in other districts through brokers. I should like for Mr. Kenzel to present his viewpoint on t h a t . trict. That is t h e main a c c e p t a n c e dis- The i d e a h e s been suggested t o m that it would bedesirable, as far as possible, to confine all these accemtance transactions to the Federal Reserve Banks, all member reserve bar.1ks . n one district t h a t want any \ acceptances from New York, for instance, to communicate with the Federal Reserve Bank of New York, with the idea of giving each Federal Reserve Bank a kind of control of acceptances in its own market. My feeling, Governor, is that it would d1stinctly not be d e s i r a b l e f o r Federal Reserve Banks to make miscellaneous sales of bills from its portfolio or to become market dealers in bills. That is a function of dealers in discount, and I do not think it is t h e proper f u n c t i o n of banks to d i s t r i b u t e b i l l s . That is a specialized business and belongs to the deal- ers in the market, and who should be recognized in it, and the Federal Reserve Dauks should not of t h e i r s . https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis be competitors They may, however, I t h i n k , v e r y p r o p e r l y be 1 3 3 b u y e r s in the market for member banks. 3 We a r e d o i n g t h a t right along, every once in a while a member bank w i l l come in, become i n t e r e s t e d in acceptances, it w a n t s to knw what they are a n d we go over it w i t h them. s a y , "We w o u l d l i k e to h a v e some of those." They Yu assist them in purchasing them, very often buy them for them, charge their account andhold them until maturity and collect them for the bank, sometimes buy them back from them. Here 1s a little bank at Mt. Vernon, New York, c a r r y i n g a p o r t f o l i o of f l , C a l l t h e t i m e . I do not know that it is necessary to make this of record. Governor Harding. You feel that it is important you know something about the t r a n s a c t i o n and the rates t h a t r u l e in the s a l e of t h e s e b i l l s in the Wew York marke t? Mr. Kenzel, Yes. Governor Harding. Would you not prefer 1f the Federal Reserve Banks were to either buy or sell bills in your ma:rlcet to let you know something about i t ? Mr. Kenzel. I think the sales between banks should be known to the Reserve Bank in the district where the transaction is to take place. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis . Governor H a rd in g . 32 I want to e x p l a i n to t h e g o v e r n - o r s t h a t t h e Board d e s i r e s to be i n f o r m e d f i r s t about t h e s e s p e c i a l s a l e s of' a c c e p t a n c e s between b a n k s . It does not a r i s e f r o m any d i s p o s i t i o n to i n t e r f e r e w i t h your independence of a c t i o n at a l l , but it comes f r o m t h i s r e a s o n , t h e r e a r e a number of banks d o i n g a. l o t of i n t e r banking d i s c o u n t i n g and r e s e r v e s a r e r u n n i n g l o w in some banks. Now if one bank h a d d e a l i n g s with a n o t h e r bank f o r a le.rge a mount of a c c e p t a n c e s and we d i d not irnow anyt h i n g a b o u t i t , we would n o t know about t h a t u n t i l t h e ne:xt d a y , then an application f o r r e d i s c o u n t would come a l o n g , and we might make a r e q u e s t of a bank t h a t had a l r e a d y bought t h s e b i l l s t h a t would b r i n g t h e i r r e s e r v e s down b e l o w the p o i n t , we would be working at about it. cross purposes So if we were a d v i s e d in advance of t h e s e propo- sitions, we can keep tab on our sheet as to how t h e s e reserves a r e going. Mr. Kenzel. We know how to put i t . And l think if o t h e r r e s e r v e banks want to buy b i l l s ln t h e m a r k e t , we a r e perfectly g l a d and w i l - ling to work for them, and I think probably it would be b e t t e r f o r t h e whole system t h a t t h e r e s h o u l d be c o n s u l t a t i o n and c o n c e r t e d a c t i o n of t h a t sort, rather t h a n one https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 332 bank buying bills in the New York market or in Boston or in the Cleveland m a r k e t , and a n o t h e r bank b u y i n g t h e same bills at possibly a different rate through some other broker, dealing in these bills. Governor H a r d i n g ! The Board would be g l a d if the Governors would discuss that at your· convenience and nBn if some u11de:1standing o a n n o t be r e a c h e d on t h a t a s p e c t of the case. Governor S t r o n g : We nud an u n d e r s t a n d i n g o r i r i n a l l y and had a committee on t h i s subject of which Governor Seay was the chairman, but when the government came into the money market our agreement went overboard. the early days we were called while in upon to give up every dollar of acceptances we could a f f o r d to spare, and more, later on we had to take them all, and the account has since fluctuated b a c k and forth: Sometimes t h e o t h e r banks want them, sometimes they do n o t . Governor H a r d i n g : You have a s t a n d i n g agreement " i t h some of the banks to take a proportion of them? Governor· S t r o n g : Yes; s t i l l t h a t is fairly flexible nowadays. arrangement We take them when we have to w i t h o u t l i m i t in New York, aud s i m p l y s u p p l y o t h e r r e s e r v e hanks when t h e y want them. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 333 Mr. A. C. Miller. Item l, Iaragraph E, as I remember the question, wes put up by the Federal Reserve Bank of San Francisco as to whether or not there should De a sale by a member bank of acceptances to its member banks. I wondered if anything was done there that has given rise to the question, or whether it is purely in anticipation of what might later develop. Governor Lynch. We consider it desirable that member banks should be customers 1n high grade bankers' acceptances. We think they are probably the most depend- able resources they should have, and for that reason I think it is desirable we should act as a dealer in thom for our members, that is, if they come to us, as sane banks have already d o n e , and s a y , "We desire to invest so much money; can you give us bankers' acceptances?" There is not any objection to our selling them. And we assumed t h t when a market was developed and the banks grew accustomed to these acceptances, we would drop that as something no longer necessary. But you see our con- dition out there is very different than Mr. Kenzel has described in New York. We are dealing with people who do not understand these acceptances andhave no habit of buy- https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 35 ing t h e m . r. 334 A. C. M i l l e r . And t h e y cannot t a k e a t r a i n and come down to your office and inform themselves? Mr. Kenzel. No; some of them are too far away. Governor Wold. There is a disadvantage, though, in the Federal Reserve Bank only buying endorsed bills, and how are we going to get distribution of bills except through discounting these, selling unendorsed bills to banks, and coming back to the member banks endorsed. The San Francisco bank, in order to make it profitable for member banks, will have to buy endorsed bills, will it not? Govemor Lynch. That is about a l l we deal i n , en- dorsed bills. Governor Wold. You buy endorsed bills. I am not speaking of the endorsement of the Federal Reserve Bank. Mr. Kenzel. But your member bank, Governor, could buy a bill in the market at a better rate than you could afford to sell it to them. Governor Lynch. Mr. Kenzel. On the other hand, t h a t would be On the Coast there are some houses dealing there, a r e t h e r e . not? https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Governor Lynch. Yes; but occasionally they have bills andoccasionally they have not. Then, again, the member bank would have more confidence in a bill we would offer them, if we had it all ready in our portfolio, than they would in a bill that was offered by a dealer, so that condition, I think, is a temporary one. Mr. Kenzel. It should be very temporary. Governor Harding. There is another question in connection with domestic acceptances, against warehouse receipts, especially, there seems to be a disposition on the part of some member banks to avail themselves of the right to accept up to 5J per cent of their cash and surplus merely to evade the requirements of Section 6 2 , Revised Statutes. With the semi-colon there, it looks as though, on a strict construction of the act, that member banks would have the right to accept up to 5 p e r cent merely for holding purposes, even if there is no intent to transfer or sell the goods in contemplation. What is the view of the banks on these domestic acceptances? If you have a member bank that sends up warehouse receipts for cotton or grain and they accept against those warehouse receipts up to 5 p e r cent of their capital and surplus, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 336 37 do you look into it to find out whether there is any sale in prospect or whdher it is a temporary condition, or whether it is merely a holding proposition? Governor Lynch. Speaking of our institution, we would look into all those acceptances with a great deal of c a r e . Last year we d i d same t h i n g s t h e t were perhaps a little bit of a stretch, but it was to assist the holding of goodsthat were sold to the government until such time as the government would requisition them. It was not possible to s e l l t h e m under usual trade t e r m s . The goods had already been commandeered in the sense that the government had given notice they were going to take them, but the day they were going to take them was entirely uncertain, and in order to facilitate that we did pass bankers' acceptances which were really a holding proposition. Governor Harding. This question is of importance partilarly in the cotton districts. The board cannot legislate, and does not feel justified in ruling that acceptances against warehouse receipts must be only where t h e r e is a s a l e p e n d i n g , or shipment in t h e near f u t u r e is certain to come. It comes up dn the Richmond andAtlanta districts very frequent!y. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 337 Governor Wellborn. 38 Yes. In answer to your q e s - tion, we can nearly tell from the source from which it comes, the bank and the size of the credit, whether it i s a shipment or not. Freqently it is the case t h a t 1t 1s j u s t f o r holding purposes. Governor Harding. What do you do in those cases? . Governor s Wellborn. y We accept a the paper d for 9 When it comes from Savannah we know it is a shipI ment, a small amount, l b a l e s , s a y . Where we observe that it comes in pretty full amounts from interior towns, some small t o w n s , we judge it is s i m p l y held for storage p u r p o s e s , p r a c t i c a l l y a l o a n , but they have complied w i t h the regulations, they have put up their warehouse re- ceipts, and the bank accepts it. Mr. Kenzel. Does the bank in that case accept for one drawer in excess or its capital end surplus as a rule? Governor Wellborn. Oh, yes; they usually aveil t h e m s e l v e s of t h a t . the acceptance. That is t h e a t t r a c t i v e f e a t u r e of It gets them over th 1 p e r cent rule. There are a great many small banks, you know, that otherwise would not be able to handle the c o t t o n , https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 338 39 Governor Strong. Is that h a v i n any influence upon holding cotton for the market in the South now? Governor Wellborn. Governor Strong. considerable. The ability to borrow beyond the 1 p e r cent l i m i t in t i i s form? Governor W e l l b o r n . Formerly t r e y d i d , but Mr. Williams' rulings heve been very strict with them, they had no other recourse until the Federal Reserve Board provided this avenue t h e y vould have been almost helpless, those small towns such as Athens, Huntsville and Selma, and so f o r t h , t h e y c o u l d not have c a r r i e d t h e cotton at all. Governor Wld. p u l d it not h a v e forced a l i q u i - dation if you had not allowed those bills to go on the market, if you had said that you only bought endorsed bills? Governor Wellborn. recourse; They would have found some other t h e y would not have s u b m i t t e d to t h e r u n o v e r in that way; they would probably have shipped to Atlanta and borrowed f r o m the l a r g e r banks. It would take t h e business from the smaller banks to the larger banks at the ports in. larger cities. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis They could easily send cotton to Birmingham 339 4 w h e r e the banks are borrowing no money at all except on government securities, and could accommodate them very easily. Governor Harding. I believe Richmond and Dallas both have a great many bills in other banks secured by government obligations which were given them to enable them to carry cotton. I believe i the cotton situation were paid up you could pay up your discount. Governor Lynch. They have loaded up with cotton. Governor Pepie. I think you s a i d , - Strong, you would give me an opportunity when you discuss the qstion of bankers ' acceptances. Governor ilaraing. Would it be agreeable this afternoon if you should have a discussion among yourselves and we meet you tomorrow or tonight? Is there any special topic here you wish to advise the Board on now? Governor Strong. There is one matter that has just came up, it is rather confidential, and I expect ;;gf the cable t m t brings t up in just a minute. In the early days of the wer, when tbere was difficulty in settling with Holland for securities that the Dutch were sending over here for sale in this market, we enteredinto an https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis t n m e e g a n r r a 4 3 with the Bank of the Netherlands to receive gold in preference to shipping gold, (on account of the difficulties of the B r i t i s h embargo), and we have accumulated six, seven or eight million dollars in gold for the account of the Bank of the Netherlands which does not appear in our statement and 1s held for safe keeping. It was received prior to the passage of legislation au• thorizing the embargo on exports of gold, and I understand that on the ruling of the Board it is not subject to the limitations of the embargo on that account. Two sug- gestions have been made in regard to that gold, one that it might be p u r c h a s e d f r o m t h e Bank of the Netherland against some German gold that will be provided by the German Government to pay for foodstuffs. In other words, we "ill use gold in t h i s country against gold d e l i v e r e d , say, to the Bank of the Netherlands by the ]erman Government on the other side of the water. further action has That suggestion is pending, and no been taken on it. Governor Harding: You would like to carry that gold off of your reserve? Governor Strong: it If that transaction were made, would depend on whether itwas an a c t u a l p u r c h a s e of https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 341 42 t h e g o l d or not. It probably would be 1n t h i s c a s e . Governor Harding. We have already discussed t h a t , and a. second alternative relating to it was where you make a l o a n a g a i n s t thA.t g o l d , t h e o t h e r 1s where you would buy that g o l d from m m b e r banks under repurchase. Covernor Strong. gold. You see t h i s • That w o u l d not a p p l y to t h i s g o l d would be a b s o l u t e l y r e l e a s e d to us a g a i n s t t h e d e p o s i t of g o l d w i t h t h e Bank of t h e N e t h e r l a n d s , and we would s imp:1.y pu 1 t in our r e s e r v e and be free of any o b l i g a t i o n . Governor Harding. it Would you be w i l l i n g to carry in t h e Bank of the N e t h e r l a n d s ? Governor Strong. We would not e x p e c t t o . Governor Harding. You would r a t h e r h a v e it in Lend- on? Governor S t r o n g . In se the German Government d e p o s i t s e q u i v a l e n t g o l d w i t h t h e Bank of t h e N e t h e r l a n d s , t h a t would be s i x , seven or e i g h t m i l l i o n d o l l a r s of f r e e &old h e r e , and we would f u r n i s h s i x , s e v e n or e i g h t m i l l i o n dollars to pay for foodstuffs, t h e t r a n s a c t i o n would wash itself and clean up the Netherlands account. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis But now another situation arises. We have a cable, 342 just received from the Bank of the Netherlands, inquiring whether we will take that gold, or some portion or it, over, and invest it in prime American bills for the account of the Bank of the Netherlands, and hold them for their account to maturity, or, in case of need, if we will enter into an agreement to discount the bills for them, and against the proceeds of discount whip gold as they need it• Of course, it 1s a v e r y ordinary transaction* Now, there are peculiar r e a s o n s in the present situati° which led me to believe it thing to do that. would be a very desirable We will have no difficulty, I believe, 1n working out an arrangement with the Bank of the Netherlands about acting as their agent to purchase bills, but I would not want to enter into an arrangement under which they should really use us, (this really being an open gold market) to give them the proceeds of discount of their bills, if they discounted them with us, or sold them to us. u n l e s s we c o u l d actually ship the gold. That is the c rux of the whole situation. Mr: A, C. ML11or: Here is your chance to s t a n d on the basis t h a t this is a free g o l d market. Governor Strong: a free gold market. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis To convince H o l l a n d t h a t we are - -- . -- -- ..- ::-- -- - ..- - -- ,., / 343 Mr. A. C. Miller: If you will say no to this, it is equivalent to saying that we are not a free gold market? Governor Strong: Yes. Mr. A. C. M i l l e r : That is t h e p o i n t t h a t is e m b a r r a s s - 1ng. Governor Strong: Yes. My disposition is, provided we are assured of no difficulty about the embargo on gold, to say yes, we will do it, and our rate ls so and so. Governor H a r d i n g : What is t h e amount of g o l d i n - volved? Mr. Kenzel: About 9 Governor Harding: , , . I had this confused with the other p:-•oposition of $ 7 , , . Governor Strong: It bears on that, because if we ha.d $ 7 , , g o l d ear-marked for the Bank of the Netherlands now, the Germans would turn over their gold to the Bank of the Netherlands; we would take the gold deposited here, settle with the Bank of the Netherlands, and s e n d f o o d s t u f f s . That we cannot do, simply because we have not enough gold, and if we do t h i s , it https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis w i l l p r e c l u d e our d o i n g - . - I 344 45 the other. Governor Harding. would this be just a single transaction, or would there be more? Governor Strong. Our relations with the Bank of the Netherlands are very friendly, and I have no doubt if we put through t h i s transaction it w i l l lead us into a moru or l e s s a c t i v e arrangement w i t h t h e m , and what I regard as a very desirable arrangement. Mr, Kenzel. The n a r k o t here would lose no gold? Governor Strong. Governor Harding. We would gain gold. Have you discussed this with Mr. Kent? Movernor Strong. Yes; Governor Harding. Governor Strong. cable. he called up. What does he advise about it? I have just got a copy of the I did not discuss it with him, and I nm to call him up later. If the gold committee makes it clear, which is my present understanding, th t the embargo does not appl1'to tb.:d, g o l d , and it certainly should not, because 1t woula be a disulnct violation of the contract Governor Harding. I think this, if you thought the transaction was suh that you would like to engage in it https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 46 345 and cannot advise that it be done, I am s a t i s f i e d the gold committee would approve. Governor Strong. discuss it with Mr. I would need a little time to He is going b a c k t h i s a f t e r - Ient. noon on the 4 o'clock train. Governor H a r d i n g . I s u g g e s t you d i s c u s s it with Mr. Kent, b e c a u s e if it comes up we would confer with him before we took any action on it. Governor Strong. suppose I go to the Treasury Department right after luncheon and ask Mr. Kent to have a conversation with you about i t , Governor Harding? Governor Harding. All right; I can see him be- fore he leaves and call a m e e t i n g of the gold committee t h i s afternoon. Governor Strong. This is a splendid opportunity to put this country on a definite gold basis with Holland, right and d o i n g it w i t h t h e government bank of H o l l a n d , t h e / a t mosphere would be created rightaway. Governor Harding. It looks very good to me. But I make no pretentions of being an expert on foreign exchange policy; we have got an expert advising us. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Governor S t r o n g . If t h a t is e n t i r e l y a g r e e a b l e , I 346 will come in after luncheon. Governor Morss: Could any program be laid when we f i n i s h here? Governor H a r d i n g : Bo f a r as I know, we sha.11 f i n i s h tomorrow. Governor S t r o n g : Gove.nor H a r d i n g , if we now have one of our old-fashioned meetings and control t h e d i s c u s s i o n , we might got through most of this p r o g r a m tomorrow a f t e r n o o n . But I t h i n k we have g o t to expedite t h e d i s c u s s i o n by r a t h e r a r b i t r a r y methods. Governor H a r d i n g : We have laid o u t a l l t h e topics here and I do not think there is anything in the program that needs any explanation. minor p o i n t h e r e . There is only one little A good many banks, n o t l o c a t e d in branch bank towns, do not like this discrimination against them by the Federal Reserve; they would like to be on the discretionary list. We are having a.good many applica- t i o n s f o r b r a n c h e s , and t h a t , by t h e way, is a q u e s t i o n I s h o u l d l i k e t h e Governor te d i s c u s s end a d v i s e us upon, as to what policy should be pursued in determining whether or not branches should be established. There are a great many ambitious towns, you know, with civic pride that think https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 347 48 they want a branch, who really do not need any branch, but t h e y t h i n k s o , so it makes the pressure j u s t a b o u t a s b a d . There are o t h e r towns t h a t have no ambition to have a b r a n c h and they do not want to l o s e their acceptances to the reserve cities. Take cases like Roanoke and Richmond, for instance, the National E.JCchange Bank of Roanoke has made arrangements, as I understand it, with the Federal Reserve Bank at Richmond, that any check coming into Richmond drawn on t h e Exchanga Bank, t r . a t Richmond may immediately charge i t s r e s e r v e a c c o u n t w i t h it. Governor Peple. There are two banks in Roanoke. Governor. Ha.rd i n g . Su t it d o e s not do t h e m any good, b e c a u s e these checks g o i n g i n t o New York have to wait the t i m e allow·ance. 'Il1ey want to be p u t ' on the exact Richmond b a s i s , and of course t h e r e 1s serious objection to having anything stamped on a check payable at the Reserve Bank in Richmond. They raise t h e point t h a t the Richmond bank signifies to the New York Glearing House its willingness to g i v e immediate c r e d i t t Richmond on a. check drawn by e i t h e r one of t r e s e banks, which had stamped or printed on +he f a c e of i t , "Amount of t h i s check is immediately avail- able upon presentation at t h e F e d e r a l R e s e r v e Bank of R i c h mond," https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Of course, t h a t would b r i n g a b o u t a pretty tremend- 49 348 ous enlargement of your d e a r i n g system. Governor Lynch. It l o o k s to me l i k e that 1s a too f a r reaching proposition. Governor Vold. T h e y c o u l d not g i v e final credit u n d e r t m t check until it had gotten to Roanoke, either that r tm Roanoke Bank would h a v e to take t h e chances of the F e d e r a l Reserve Bank in Richmond p a y i n g a f o r g e r y . Governor H a r d i n g . A l l t h e y want Richmond to do ls to absorb the float, h e n the contingent liability would exist u n t i l it was finally p a i d . Governor Wold. Would the endorsing bank g i v e c r e d i t b e f o r e t h e ultimate payment was made? Governor H a r d i n g . I presume t h e e n d r s i n g bank does g i v e credit subject to any allowances. Governor Wold. They could not r e d u c e t h e time al- lowance until the check was absolutely p a i d at Richmond. Governor Strong. If t h a t p r i n c i p l e is applied throughout the c o u n t r y , we would g r a d u a l l y have all checks drawn and made avo119.ble a.t New York, a n d we would h a v e t tote tho loat. Governor P o p l e v n + to s a y we were rather forced into trot arrangement early in the collection system with https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis t • . 349 5 r e f e r e n c e to Roanoke And R.ltimore. In Baltimore we were very careful andhad the arrangement made by every I bank in the city. By some oversight, I do not remember now why 1t w as whet 1 t was, they o n l y took two of the Or three Roanoke banks. We have positively refused i n s . number of other cases to par the checks unless the entire city would go into it, and, frankly, we do not want to do any of i t . We w o u l d be glad if Roanoke would stop i t . The aituation has been cleaned up ln Baltimore by the establishment of the Baltimore branch. We are now taking Baltimore checks on one day deferred, and Baltimore t a k e s Richmond checks on one day deferred, and we would be very glad to get rid of those two Roanoke banks, and I had a talk with one of them andtried to persuade him to stop it. Governor Wellborn. I suppose the Roanoke bank does that for the purpose of holding balances? Governor Wold. For holding balances. Governor Harding. If you can work out the rest of these topics yourselves, I think the board will leave you alone. There will be two or three governors, I take it, who will remain over until Monday, anyway, andif your finance committee has anything further to communicate to the Board, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis . 1 5 5 - 3 we can take it up at our conveniehce on Monday. not t h i n k t h e r e is meeting. I do a n y f u r t h e r occasion f o:r a n y j o i n t If you will let us know at any time that you want any member of t h e Board over h e r e , we can cane ·over. (Whereupon, at 1:3o'clock p. m., recess was taken until 3 o'clock p https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis m ., on t h e same d a y . ) 351 AFTER RECESS The c o n f e r o n c o r o a g s o m b l e d , p u r s u a n t to r e c e s s , at 3 ' c l o Ck p.m. Governor t r o n g : The m e e t i n g w i l l come to o r d e r . Gentlemen, these meetings; as they were held some- time ago, were run rather arbitrarily in order to reduce d i s c u s s i o n t o e minimum. If it is a g r e e a b l e to everyone we w i l l go throuh the program spoedily. Governor Biggs: I would like to make a motion that we send a suitable telegram to Governor Seay. Gor e r n o r F a n c h e r : A s e l f - a p p o i n t e d committee has already attended to that• The committee consisted of Governor Wold a n d myself. Governor S t r o n g : We will have the telegram inserted in the record at this p l a c e : Geo° J. Seay, Clifton Spr:tngs, N . Y . C o Clinton Springs Banitorium. Governors in conference miss your presence and counsel extend their warmest regards and hope for your speedy recovery. Fancher & Wold, March 2 1 , 1919. •. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Commit t e e .. " 352 It h a s a l s o b e e n s u g g e s t e d t h a t v,e g e t t h r o u g h in time to a v a i l ourselves of the i n v i t a t i o n to visit the Bureau of E n g r a v i n g and P r i n t i n g * Now, gentlemen, the topics suggested for the conference that were taken up at the meetin on Tursday, c o n t a i n e d on t h e first page of the p r o g r a m , have been pretty e l l covered and, unless requested, we will omit a n y discussion of those matters of g e n e r a l 1 . n t e r e s t • The first topic is discount policies. 1. DISCOUNT POLICIES. This topic has been d i s c u s s e d , b u t in order to complete the record, it might be that you will want to pass some resolution in line with similar action taken by the Federal A d v i s o r y Council. The a c t i o n of the Federal Advisory Council 1s as follows: "U"til t h e Liberty bonds already issued and the Victory bonds to be issued are distributed among permanent i n v e s t o r s a n d paid f o r by t h e m and u n t i l t h e hanks a r e relieved of the obligation they are uncer to carry such large lines of them for their patriotic customers who have gone in d e b t for them, and u n t i l our "overnment gets t h r o u h with i t s temporary f i n a n c i n g on short time https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 353 certificates, the discount rate at the Federal Reserve Banks should continue to show some preference on loans covered by Government securities. The rates might well be continued as they now are until after the next bond issue has been placed, but there will come a time when such preference should not be continued, otherwise \ l o a n s on Government securities will continue to form too large a proportion of the federal Reserve Bank loans to the d i s a d v a n t a g e of i n d us trial a.nd commercial enterprise. The financial necessities of the Government for the payment of its war debts will, however, have to be met and provided for before such discrimination in favor of loans ca.rared by Government securities as will induce people to b o r r o w to pay for them in anticipation of their future earnings and incomes, can be discontinued. (After informal d i s c u s s i o n , t h e f o l l o w i n g a c t i o n was taken on topics, a, b, c, a, and e of Topic 1.) a. How long should reserve banks continue the present differential rates in favor of n o t e s s e c u r e d by Government obligations. Governor Strong: It is the opinion of the meeting t h a t present d i f f e r e n t i a l r a t e s in f a v o r of not e s , secured https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 354 by Government obligations, should be continued until after the fifth loan is placed, and for such reasonable period thereafter as will permit a.considerable liquidation of such borrowings without imposing undue penalties upon t h e banks which are required to rediscount with the Federal Reserve Banks. It is further suggested that no recommendation for a change in the present differential rates can well be made until it is known at what?ate the next loan will be offered, at which time some readjustment of rates for loans to be secured by bonds of that issue may be necessary. The e s t a b l i s h m e n t of a different rate for loans secured by the bonds of the Fifth l o s n may necessitate a review at that time of rates applying to loans secured by bonds of the earlier issuesb. Current rates of member banks for bank loans in t h e several reserve districts, and their relation to p e s ent rediscount rates of Federal Reserve Banks. The c u r r e n t r a t e s of member banks r e f e r r e d to are regularly reported by the r eserve banks to he Reserve Board, and it is not understood t h a t any recommo.:-. dation isrequested on this topic. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ederal 355 c. Liquidation of Government secured paper. at Reserve Banks. d. E x p r e s s i o n of opinion as to t h e l e n g t h of time which will be required to make a permanent distribution of the Government securities held by member banks. Governor Strong: It is t h e o p i n i o n of t h e m e e t i n g t h a t if no f u r t h e r permanent borrowing is r e q u i r e d by the. Government a f t e r t h e f i f t h l o a n is pl9ced, end p r o v i d e d the g e n e r a l t e n d e n c y toward a. g e n e r a l commercial l i q u i d a t i o n continues as e x p e c t e d , t h e amount of unliquidated paper h e l d by member banks and by t h e .r"eserve banks at the end of a period of say a y e a r f r o m June lst, n e x t , w i l l be so s m a l l as to be a negligible f a c t o r in t h e p o s i t i o n of t h e "ederal r e s e r v e banks and c a n be r e a d i l y d e a l t w i t h at or before the expiration of that year by rea.cjustment of r a t e s . e. Discussion of recommendations made by Advisory Council as to di count rates a.nd p o l i c i e s . Governor trong: Tne answer to t o p i c (a) fully ·answers topic (e), except that it is the unanimous opinion of t h e m e e t i n g t h a t t h e r a t e s to be a d o p t e d a n d maintained by the reserve banks, for loans secured by Q@wernment bonds 1 * • and notes should be uniform in a l l t h e reserve banks. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 356 2. BANKERS' ACCEPTANCES -- OPEN MARKET. a. Development of open m a r k e t . b. Is a l o m r a t e at F e d e r a l * ' e s e r v e Banks necessary to develop th acceptance market? Governor S t r o n g : It is recom.rr.ended that in g e n e r a l the present policy as to rates for bankers acceptances be continued. The present development in foreign exchange may, however, p r e s e n t t h e o p p o r t u n i t y f o r s e c u r i n g a large increase in the volume of bills drawn in dollars, of which advantage s h o u l d be taken, in case it does a r i s e , by quoting f a v o r a b l e r a t e s f o r opsm mnt·l:et p u r c h a s e s , • und p a r t i c u l a r l y f o r w a r d r a t e s f o r b i l l s to a r r i v e , e v e n t h o u g h t h a t involves a l a r g e r a c c u m u l a t i o n of b i l l s by the Reserve market for b i l l s . It is further recommended that in or@er to develop an active market for bills in the different reserve districts, that steps should be taken by the reserve banks to insure dealers in bills a sufficient supply of credit with Which to c a r r y them, without penalty of a high r a t e , until they are able to market them• It is suggested that the 'eserve banks can facilitate the development of carrying arrangements far dealers https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis by making arrangements for special purchases of bills from them under contract to repurchase within fifteen d a y s , in c a s e s where member banks a r e not w i l l i n g to make collateral loans on bills at reasonable rates. o.. Reserve Bank-policies in ma.king purchases. 1. Direct from accepting banks. Mr• Peple calls attention to the fact that the immediate discontinuance of this practice in the hichmond district would cause undue hardship upon the member banks. 2. F r o m Member B a n k s , w i t h or vrithout enda sement. (Miscellaneous bills other than own acceptances). It is recommended that the purchase of bills be made freely from member banks, with their indorsement, unless bearing otherwise satisfactory indarsements, those bills , ' however, to be other than those accepted by the selling banks. 3 3. Through Brokers and Accepting Houses. It 1s recommended t h a t s t e p s be t a k e n by t h e Reserve Banks to encourage the d evelopment of the business of d e a l - 1ng in bills in each of the reserve bank cities, as a facility for the development of this market and that dealers https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis nm • r • 358 be e n c o u r a g e d by h a v i n g f r e e a.coess to Ped e r a 1 r e s e r v e { a n k s , to sell bills end to carry them under a 15 day repurchase arrangement4. Through other Federal R e s e r v e Banks .. 5. Through brokers or bunks, other thn.n reserve banks, of Acceptances of member banks in other districts. It is recommended that F e d e r a l not a p p e r e s e r v e Banks s h o u l d as p u r c h a s e r s of b i l l s in o t h e r F e d e r a l h e s e r v e d i s t r i c t s , o x c o p t t h r o u g h ' h e F e d e r a l R e s e r v e Banks of t h c s e 7 districts. d. Bills of acceptances to other Reserve Banks, with or without r e s e r v e bank endorsement. It is recommended t h a t where v o l u n t a r y open market p u r c h a s e s a r e made by one r e s e r v e bank through another r e s e r v e bank, no endorsement be e x p e c t e d or required. Where snles of b i l l s by one r e s e r v e bank to another r e s e r v e b a n k a.re made by mutu1:.1.l arro.ngement, 1nc1orsement may be required by the purchasing reserve bank and such transactions should promptly be reported to the Federal Reserve Board. That where :red.1scounts a r e arranged through the heserve Board, at rated fixed by the Board, endorsements should always be given by the borrowing bank. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis e. Expression of opinion is asked as to desira b i l i t y of r e s e r vr e banks _moking• m i s c e l l a n e o u s sales of bankers acceptances. 1, To member banks in its own district. F a r ( 359 2. To other banks, bankers, brokers, or a c c e p t i n g houses in i t s own district. 3. To bunks, bankers, brokers, or accepting houses in other districts. It is recommended tha.t it be the policy of the System t h a t ho s a l e s of b i l l s to be made by r e s e r v e banks out of t h e i r portfolios, e xcep' to other reserve hanks; but as a temporary matter, to aid in the development of the market for bills among member banks, certain :reserve banks ma.y find it necesst=1ry for the time being to act as the agent of member banks in making p i u c h a s o s of bills and to some e x t e n t to a c t as d e a l e r s in b i l l s f o r t h a t p u r p o s e . Federal That s e r v e Banks may v e r y p r o p e r l y buy b i l l s f o r member b a n k s , a s s i s t t h e m in t h e i r purchases by g i v i n g a d v i c e and t a k i n g d e l i v e r i e s f o r them. f. Necessity f o r general c o o p e r a t i v e policy covering all interdistrict purchases, sales and rediscounts. Governor S t r o n g : It is t h e s e n s e of t h e meeting t h a t where one F e d e r n l r e s e r v e banlr t a k e s 1 ts b i l l s in another F e d e r a l reserve d i s t r i c t , it should be t h r o u c h t h e b a n k of that district. ( / h e r e u p o n , at 6 : 1 5 o ' c l o c k p . m . , t h e conference adjourned until 8,o'clock p.m. of t h e same day). https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis e h T 6 3 EVENING SESSION conference reassembled, pursuant to recess, at 8 o'clock p . m The m e e t i n g w i l l come to o r d e r . Governor S t r o n g : Governor- P a s s m o r e : I move that a recommendation be made to t h e Board t h a t t h e f e d e r a l r e s e r v e ba:nks be p e r m i t t e d , as l o c a l c i r c u m s t a n c e s w a r r a n t , to e stablish free l u n c h e o n facilities f o r t h e i r e m p l o y e e s , in t h e b e l i e f t h a t t h e e xpend1 ture i n v o l v e d will be more t h a n o . f f s e t in economy of time and increased control of the efftciency of the w o r k e r s . (The motion, h a v i n g been d u l y s e c o n d e d , was c a r r i e d ) . Governor trong: 3. The n e x t 1s nmnber 3. BANKERS ACCEPTANCES---GENERAL. There are two sub-topics under this: a. To what e x t e n t is i n q u i r y made by r e s e r v e banks to d e t e r m i n e e l i g i b i l i t y of b a n k e r s ' acceptances. That topic w i l l r e q uh e a 11 t t l e i n q u i r y a r o u n d t h e table. Mr• K e n z e l : w i l l be good enough to e x p l a i n what we* do in New York. Mr. K e n z e l : Our p r a c t i c e is to 1nq u1:re of t h e a.c- cepting bank, in every instance where t h e b i l l i t s e l f https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ) 361 I d o e s n o t d i s c l o s e t h e n u t u r e of t h e transaction, or if 1 t i s . w i t h r e g a r d to c o m m o d i t i e s , what t h e commodity i s ; and if 1t 1s an import or export bill we inquire as to the country of origin and the country of destination. e seldom have occasion to go into the question of•the agreement which the bank h a s with its client. Occas- ionally, in our general inquiries, we turn up the fact that the bank has accepted under a.misapprehension, and we then take it up w i t h the individual bnnks to c o r r e c t a n y err-or t h o .t t h e y have b e e n f o l l o m i n g in o r d e r to bring about a correct practice. Deputy Governor P e p l e : Do you do that before you have bought the bill, a f t e r you have bought ir, or how? Mr• Kenzel: Our purchases from dealers in the market a r e s u b j e c t to approval when t h e paper is f i n a l l y delivered to us. We buy names from them, b u t 1t is uncerstood 1t 1s subject to being satisfactory to us when we examine 1t. Governor Fancher: Governor Strong. That is about our procedure, Je try to satisfy ourselves in all cases. In t h e c a s e of b i l l s in l a r g e volume " h i e h come f r o m New York, your schedule g i v e s t h a t i n f o r m a t i o n ' When b i l l s a r e o f f e r e d by a member bank we are v e r y p a r t i c u l a r https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ,,, IF '"" 362 about g e t t i n g i n f o r m a t i o n on t h e underlying transaction. Where it is not c l e a r we w r i t e to t h e a c c e p t i n g bank. If it is a. cp est1on of commodities b e i n g s t o r e d , we b r i n g out t h e p o i n t t h a t t h e y must remain s e c u r e d u n t i l the obligation is liquidated. In t h a t connection, it might be of assistance to us if the Board incorporated in its new ruling a pro. v i s i o n that the a c c e p t i n g b a n k i n d i c a t e on t h e i n s t r u m e n t the n a t u r e of the underly1nc; :ranso.ction• l think it would h e l p v e r y much. Governor S t r o n g : There is a q u e s t i o n involved t h e r e of impairment of n e g o t i a b i l i t y , " h i c h w o u l d make it serious. Governor Wold: now. Some of t h e m c a r r y t h a t i n f o r m a t i o n Nearly all the f o r e i g n bills indicate what the n a t u r e of t h e t r a n s a c t i o n i s · I t h i n k it is co1nrn.on Pt'f3c- t 1 c e with f o r e i g n bills. Governor F n n c h e r : They g i v e t h e commodity and J?Y e the nature of the transaction. Why could that not be fol- lowed in domes t i c e.ccepta.nces? S e v e r a l of our member ban ks who a r e d o i n g a good dea.1 o.f a c c e p t i n g a r e d o i n g , that. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 363 Mr• Kenze1: Several exporters in New York have a form bill which they provide their customers, on which space is provided to show the nature of the transaction. Deputy Governor Spencer: We satisfy ourselves as to the underlying commodity credit- In the case of a new bill we usually send for the form and satisfy ourselves that they hove started out right. Every two or three months we go through the portfolio, pick out one bill from each exporter, send them a form letter in iring as to the transaction, and ask for the underlying commodity. Governor Miller: We b u y our b i l l s f r o m New Y o r k , Governor Strong. Deputy Governor Peple: We tuke those bills from the accepting banks, as I stated when t h e m a t t e r was referred to before, considering that they act as the agents of the drawer to sell us the bill. We require the bank, in a letter, or frequently in a memorandum attached to the bill, to state the entire nature of the transaction, the kind, amount, and v a l u e of the security, and frequently state that the security will be held f o r the payment of the bill. have thought it https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis As I stated before, we necessary to follow that direct purchase 364 p r a c t i c e f o r a w h i l e Ln o r d e r to g e t our ban!{s educa.t e d in r e s p e c t to what t h e y should do and what they should n o t do. I will take up the results of that practice when we discuss the question of abvse of hankers a c c e p t a n c e s , Governor Passmore: We do not h a n d l e a large volume, and what we handle are usually bought through Mr. Kenzel. As t h e y come to us f r o m member b a n k s , we f o l l o w t h e same procedure as o u t l i n e d by Mr. Fancher and o t h e r Governors• Governor icDougal: We have not made a p r a c t i c e of investigating the underlying transactions except in exceptionalc a s e s ' I do not know what it ts w o r t h , but we have an arrangement w i t h our Chief Examiner under which he looks very cnrefully into these matters as he goes around• We are not doing a great deal of it, but in the early stages exceptions were taken to the plan and operation there, a form was agreed upon which all of the Chicago Banks are using. We co n o t i n v e s t i g a t e e v e r y t r a n s a c t i o n . Deputy Governor Peple: I would like to add to my s t a t e m e n t , that in very many c a s e s , particularly w i t h small banks, which we do not consider to be very well managed, we r e q u i r e thed e p o s i t of t h e s e c u r i t y w i t h u s . https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis J Governor B i g g s : them very c l e l y . "e make an e f f o r t to i n v e s t i g 8 te . We p u r s u e a b o u t t h e c o u r s e o u t l i n e d by Nr. K e n z e l , and i n v e s t i g a t e a l l of them. My answ·er vrould be n b o u t Governor- Lynch: as Governor m c D o u g a l ' s . r u d i m e n t a r y , ond it t h e same Our c r e d i t d e p a r t m e n t is v e r y is n o t p r o p e r l y o r g a n i z e d . upon Mr• Kenzel in very c o n s i d e r a b l e measure· We d e p e n d In t h e case of b i l l s t h o t we t a k e d 1 r e c t l y , we, of course, i n v e s ti ... g a t e unless we know t h e p e o p l e well. Governor VanZand t: He i n v e s t i g e .te tr).nsn.c t i o n s on a l l b i l l s w h i c h we b u y , e x c e p t t h o s e thu.t come fr-om your br,1.nk, and t h o s e a r e o u t l i n e d in t h e s c h e d u l e Governor " o l d : submitted* We a r e n o t b u y i n g any now, a.ncl Mr• Kenzel c' ce s t h e i n v e s t i g a t i n g . We do i n v e s t i g a t e when we buy. b. D i s t i n c t i o n . - - F o r e i g n and D o m e s t i c A c c e p t s n - ceo as to Security Required at the timo of and subsequent.to A c c e p t c n c e .. Mr. K e n z e l : Our g e n e r e l p r a c t i c e is to buy b i l l s on t h e s t r e n g t h of t h e c r e d i t of t h e names on t h e b i l l . Such i n q u i r y a.s is made as to t h e p r a c t i c e of member banks in accepting is more of an e d u c a t i o n a l c h a r a c t e r to i n - https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 366 sure that the banks are following sound practice, and the i n q u i r y is c o n d u c t e d w i t h e . good d e a l of d i l i g e n c e . 4. a. BANKERS' ACCEPTANCES--DOMESTIC. Use and aouse of domestic acceptances. b. Custody of collateral. (c) Discrimination in purchases by reserve ba.nkt; .. The d i s c u s s i o n at the meeting developed the fact that there 1s a growing tendency on the part of member banks to m i s u s e , and p o s s i b l y a b u s e , t h e r i h t of granting a c c e p - tance credits in domestic transactions. T h e s e abuses doubtless grow, in many cases, out of a lack of knowledge of what are correct practises, and to some extent out of difficulties incident to the war. The principal abuses noted were in the employment of acceptance credits for transactions which are in fact loans upon commodities. In such cases the use of accep- tance credits is frequently a subterfuge to escape the p r o v i s i o n s of s e c t i o n 5 2 o f t h e N a t i o n a l Dank A c t , a n d in o t h e r c a s e s an improper d r a w i n g of b i l l s a g a i n s t d o m e s t i c s h i p m e n t s of goods. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis It is t h e b e l i e f of t h e m e e t i n g t h a t 367 it w o u l d be a m i s t a k e to e n d e a v o r to correct these practices through general r e g u l a t i o n s a p p l y i n g to t h e . purebase of bills by the reserve b a n k s . fore, recommended Ii is, there- t h a t the Reserve Board obtain ihe ser- vices of bankers who are thorouphly famil1ur with both domestic and f o r e 1 c n a c c e p t a n c e c r e e i t s , to prepare l i t e r a t u r e f o r u s e by t h e reserve ba:1ks in e d u c a t i n g t h e i r member banks in s o u n d methods to be employed in a11 b:ra.nches of the acceptance. bus iness. It is f u r t h e r recommended t h a t no a ttempt he nw.de, by regulation of t h e };l'ederal h e s e r v e Boa.re, to c o n t r o l t h e method employed by member banks in condw ting t h e i r business, until the l i t e r a t u r e above referred to h a s been prepared, A t t e n t i o n is- d i r e c t e d to t h e f o l l o w i n g memorandim in regard to the ruling by the Comptroller of the Currency. If this ruling is strictly construed, no bank buying the acceptances of another bank, in excess of 1 p e r cent of its own capital, would be able to ascertain whether the provisions of section 5 2 h a d been violated or not, without inquiry as to every transaction under which these b i l l s originated* https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis T n e d e n g e r l i e s in t h e p o s s i b l e Ell 368 1mpa.1rment of t h e m a r k e t o . b i l i ty of t h e b i l l s , r e s u l t i n g from the fear of g r u n t i n g e x c e s s i v e l o a n s to member b a n k s through the a c c o u n t " b i l l s purcha.sea ". The ruling by the Comptroller or the Currency is as follows: "Subject: a .Limitattons a of 2 ection 5 applied to b a n k e r s 1 acceptances. " R e c e n t l y M r * Newnhan, s u p e r v i s i n g examiner of t h e C o m p t r o l l e r ' s ' f i c e , c u l l e d to d i s c u s s t h i s s u b j e c t in t h e l i g h t of p r e s e n t p r a c t i c e a n d r u l i n g s of t h e F e d e r a l R e s e r v e B o a r d , a n d t h e t h e o r i e s of t h e C o m p t r o l l e r ' s office. "He e x p l a i n e d t h a t had in t h e o m p t r o l l e r ' s o f f i c e 1t b e e n h e l d f o r many y e a r s t h a t o n l y p a p e r which r e - sulted f r o m t h e s u l e of goods could be classed as commerc 1a.l p a p e r , a c t u a l l y owned, e t c . , or if b i l l s of e x c h a n g e as b i l l s of e x c h a n g e dro.wn a g a i n s t a c t u a l l y e x i s t i n g v a l u e s , the. t t h e mere f a c t t h a t the:r·e w e r e goods as c o l l a t e r a l security pledged to a bill of e x c h a n g e would.not constitute actually existing v a l u e s . 1 ' T h e o p i n i o n of c o u n c i l p u b l i s h e d in t h e F e d e r a l R e s e r v e B u l l e t i n of March 1, 1 9 1 7 , c i t i n g f r o m t h e d e c i s https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 369 iom of the case of the Second N e t i o n a l Bank of Oswego, versus Burt, 93 N.Y. 233, is considered affirmative of t h i s view. Mr. Nemnhan a l s o i n c l i n e d to t h e h e l i e f tho.t m i t h regard to n c o e p t a n c e s d i s c o u n t e d f o r or purchased from the acceptor, such purchase or discount constitutes a l o n n to the acceptor and would be liable to t h e l i m i t a t i o n s of t h e s t a t u t e as borrowed money; that t h e y c o u l d n o t be c o n s i d e r e d as commercial paper a c t u a l - ly owned, etc., by the accepter.offering them for sale or r e d is c o u n t • " A l s o , that w i t h regard to b i l l s drown on a n a t i o n a l bank against the pledge of goods in warehouse owned by the drawer: (a) If the bill is taken by the a c c e p t e r t h e t 1t is m e r e l y a secured l o a n end f a l l s , 1 t h i n t.he 11m1 t a t tons af the.s t c t u t e . (b) Thut in the hands of a third party, as there is no s n l e f o r goods antecedent to t h e i n s t r u m e n t 1 t is w i t h i n t h e l i m i t a t i o n s of t h e s t a t u t e a n d c o u l d n o t be h e l d by a n a t i o n a l bank p u r c h a s e r f o r en amount in e x c e s s of 1% of t h e c a p i t a l s t o c k and s u r p l u s of t h e national bank p u r c h a s e r • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis rt . a 5. 7 3 LOANS TO MEMBER BANKS. What is the policy with respect to ciscounts by reserve b a n k s of n o t e s and b i l l s s e c u r e d by commodities; margin required. Deputy Governor Peple: The loans we have now are the r e s u l t of t h e c o t t o n s i t u e . t i o n , anc -rne have required margin of at l e a s t 2 % . a We have r e f u s e d lately to take any 1.oans at more than 2 c e n t s a pound on cotton. ' • This same m a t t e r will come under the next heading. Vie have always followed the practice, whenever t h e commercial and a g r i c u l t u r a l l o a n s of a b a n k resches t h e amount of 1 ts cap1 ta.1 stock, to r e q u i r e m a r g i n a l s e c u r i t y of their bills receivable. e a l w a y s have excluded Govern- ment l o a n s f r o m t h a t amount, and cotton. l a s t year we e x c l u d e d This year we made no exception of cotton. As the loa.ns increase we increase the percentages of me.rg-in• 1'e up w i t h us 1% absolute have a. number of banks now t h a t a r e p u t t i n g . marginal paper, with the idea of securing s a f e t y f o r o u r s e l v e s , a l t h o u g h "e i n t o t h e s e c u r i t y on t h e notes an borrovrers, r.rhere t h e b a n k is as 1% of https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis get lk carefully statement of the moaninp. t h e borrower a.s much i t s c a p i t a l s t o c k , or $ 5 , . . 1:?e ala.ys get t h e n e t wor-th 2 n d "f'e f r e q u e n t l y make i n q u i r i e s in a d d i t i o n to t h o t * We r e q u i r e a m a r r i n ana a. s t a t e m e n t , Pl r t l y f o r t h e secu.ri ty u:no, in e x t r e m e c a s e s , to et the p a p e r amny f r o m t h e b a n k so t n e y w i l l n o t hove a n y more of it to o f f e r • a n d L i t t l e * o c k , on 2%. ·.-,;e have a l i t t l e c o t t o n t e Governor B i g g s : "e a i m to k e e p 8 Memphis mar@in of a b o u t have no f i x e d pro.ctice , b u t we crm l o n n a c c o r d i n g to the grsde of t h e c o t t o n . D e p u t y Governor Pep1e : Governor Biggs: That is t h e s ame rrey vri th u s . Some of the bunks in the c o t t o n s e c t i o n , a b o u t 6 d a y s a g o , were e x t e n d i n g a l i t t l e t o o much. They were b o r r o w i n g w h a t "e t h o u g h t ws we p r o b a b l y hr e i e h t or t e n at vrha t ve cons 1c:1ered a b a s ic t o o much. one time t h a t g o t above l o a n , and we w r o t e and t o l o t n e m they r o u l d have to check it. We checked 1t in ten days and e x p e r i e n c e d no trouble. The Memphis banks were heavy b o r r o w e r s , but t h e y are borrow1ne: now l a r g e l y on Government s e c u r i t i e s and have gotten in b e t t e r shape. In some of the sections in the smB.ller towns, where the banl!s 1 capita.l a.re n o t much but there is a great d e a l of c o t t o n a n d rice b e i n g moved, they are getting in better shape. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ' They were b o r r o w ' n g in e x c e s s 372 of h a t we thought should be t h e i r requirements, and in t h a t c a s e we r e q u i r e d 8l. t h e m to put up a d d i t i o n a l collater- We did n o t r e q u i r e them to put up over 5% . "e would ask them for additional collateral and t h e y would s e n d it to us. We not require them to put up as much as do Governor P e p l e has s t a t e d . We h a v e t h r e e or f o u r banks where a d d i t i o n a l c o l l a t e r a l has b e e n put up. They a r e s m a l l b a n k s , and me t h i n k t h e commodities ore p e r f e c t l y good. We h a v e h a d the f e e l i n g that it has not been so much the q u e s t i o n of abuse by these people in the c o t t o n s e c t i o n as it has been a question of n e c e s s i t y ; they have had to meet a necessity; I think that is what the reserve banks a r e f o r . and as l o n g As We are perfectly safe in those matters 3 t h i n g s o r e r u n n i n g l o n g s m o o t h l y and re can help the", I think it is the thing to do. Governor VnnZundt: It all depends upon the worth of the borrower, as shown by his statement, as to the amount of margin that we require on a note; an in the c a s e of a b a n k a ta tement, t h e s h e w i n g of the bank i t s e l f , h o w good a. b a n k it is. We investigate very carefully the margin on each note, and investigate the commodity, just the s ame as we do on cattle, sheep, etc. Governor Wold: https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis we have very little of this business. We have had a fem thousand dollars on grain. When wheat is a dollar a bushel, or leas, the margin is ten cents a. bushel. When wheat is over a. dollar a bushel, it is ten per cent. We do n o t c o n s i d e r warehouse receipts, outside of terminal or regular houses, a collaterul. That is, registered terminal houses. Governor Strong: In v i e w of t h e s t a t e m e n t s made, it seems to be the opinion of the meeting that special conditions exist in only one or-two of the Federal reserve districts, and they had best be dealt with directly by the Reserve Board with the banks in those districts, rather than be made the subject of a recommen- dation by this meeting. b. The attention of the Board has been called to what has been termed " e x t r a o r d i n a r y liberality" of loans to small member ban ks , The margin between t h e r e s e r v e bank discount rate and the rate charged to customers of rediscounting banks, tends to encourage e a s y credit. Governor McDougal: +here is no h a r d and f a s t r u l e that can be applied by the reserve bank granting credit to member institutions• Each case must be considered separately and decided according to its merits. In the case of banks which a p p a r e n t l y a r e in weak or over-extended condition, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ' \ 374 it is a general custom among the reserve b a n k s to secure either a d d i t i o n a l collateral or to strengthen the paper a d d i t i o n a l i n d o r s e m e n t s or guarantees of by directors. Governor Strong: It is the sense of the meeting that during the period vrhen the Government is malting such heavy demand upon the b m k s , it is impossible to restrict the lines to individual borrowers, as would otherwise be the c a s e , and i n d i v i d u a l i n c µ icy and r e m o n s t r a n c e as o g e n e r a l practice is checking the tendency on the part of member banks to profiteer• The development t h e s p e c i a l department of exam- ination in the reserve banks has provided facilities for making not only special credit investigations in cases where eded, but examinations of member banks themselves, rith a v i e w to checking up their condition and improving their banking practice. In general, the examining Board for the e s e r v e Banks cooperates with the examiners of the State Banking Department. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 6. CREDIT STATEMENTS. a. Extent to which reliance is placed upon the standing ana condition of an indorsing bank and its certificate as to eligibility 375 of n o t e s s u b m i t t e d for t h a n . d e t e r m i n a t i o n as we11 a.s d e s 1 r e . b l 1 i t y , f1nancl9.l statement of rediscount, rather to e l i g i b i l i t y as throup-h a n a l y s i s of the.p a y e r s of t h e n o t e s rediscounted. Governor » t r o n g : D i s c u s s i o n of this t o p i c d i s c l o s e s t h e f a c t t h a t a 11 t h e r e s e r v e b a n k s r e q u i r e f i n a n c i a 1 s t a t e - ments f o r a l l commercial paper d i s c o u n t e d , where the reg u l a t i o n s of t h e Boa rd r e q u i r e i t . In the c a s e of some of the reserve b a n k s , s ta. t e m e n t s are r e q u i r e d where the amount of t h e n o t e t a k e n is considerably l e s s than the miximum r e q u i r e d by the regulations of t h e Board* In g e n e r a l , a l l l a r g e l i n e s of paper t&ken throug, the member banks are considered not only upon the standing and cond i t i o n of t h e i n d o r s i n g b a n k , b u t a l s o t h e v n l u e and q u a l - ity of the paper d i s c o u n t e d . b. Corporstions opera t i n g s u b s i d i a r y companies; s u g g e s t e d r e q u i r e m e n t , t h t s u c h companies f u r n i s h to E e s e r v e b : m k s , sepe.rq,te f i n a n c i a l statements of parent and ell p r i n c i p a l s u b sidiary c o r p o r a t i o n s as of thes ame date. Governor S t r o n g : In t h e o p i n i o n of t h e m e e t i n g , it is d e s i r a b l e t h a t s e p a r a t e f i n a n c i a l statements of parent and p r i n c i p a l subsidiary c o r p o r a t i o n s , as of t h e same d a t e , be furnished. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 376 7. RE-DISCOUNTS BETWEEN RESERVE BANKS. At present when the reserve bank per-centage against combined note and deposit liabilities is reduced to ubout forty per cent, bills are sold to or rediscounted with otherFederal reserve banks. At present, the t n e r e c e r v e percente.ge of a. number, of r e s e r v e banks is in e x c e s s of 65%. It has been s u g g e s t e d t h a t t h e r e d i s c o u n t i n g p o i n t be raised from 4 t o 45 per cent. • Governor t r o n g : It was t h e unanimous v i e w of t h e m e e t i n g t h a t t h e r e · s h o u l d be no change in t h e p r e s e n t practice. CREDIT 8. BAEOMEThICS. Consideration of t h e suggestion made by A. Wall of Detroit, that a Bureau of Barometrics be established by the Federal Reserve Boara. Would t h e b e n e f ' i t s w a r r a n t t h e expense? Governor Strong: It is the unanimous belief oft h o m e e t i n g that the benefits of' the employment cf this servt e would not warrant the e xpense involved. 9. RESERVE BANK BUILDINGS. Need f o r c o o p e r a t i o n and i n t e r c h a n g e af i d e a s in the development of plans far· the erection of new bn.nk b u i l d i n g s , i n s t a l l o t i o n of v a u l t s and o t h e r equipment. Governor Strong: unm imous o p i n i o n of t h a t it https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis After full discussion, it was the t h e Li-overnors of a 11 t h e reserve b a n k s , would be d e s i r le to a d o p t t h e s u g g e s t i o n of t h e 377 F e d e r a l R e s e r v e B o a r d , t h a t an a r c h i t e c t be employed to a.ct as a cler1.rine house f o r 1.nforma t i o n in r e g a r d to b u i l d i n g plans between all of t h e reserve banks, and to act as a d v i s e r to the F e d e r a l Reserve B© rd in giving approval of certain plansThe meeting o.lso favored the employment of Mr. Alexander B. Trowbridge, as recommended by the Board. 1. RESERVE BANK INEUx©NOE. Governor Passmore o f f e r e d a r e s o l u t i o n o v e r i n g t h i s t o p i c one t h e s e v e r a l s u b ...t o p i c s t h e r e u n d e r , t h a t Mr. Kenz e l be a p p o i n t e d C h a i r m a n of o c o m m i t t e e , w i t h a . u t h o r i ty to s e l e c t r e p r e s a n t o t i v e s f r o m two o t h e r r e s e r v e bo.nl-rs, to a c t w i t h h i m as a committoe in making r e c o m m e n d a t i o n s , "which recommendations a r e to be s u b m i t t e d in w r i t i n g to the reserve banks at a later date. ( The m o t i o n , h a v i n g b e e n d u l y s e c o n d e d , # a s carried). The c o n f e r e n c e e n t e r e d i n t o i n f o r m e l d i s c u s s i o n i t h Mr• Meyer, D i r e c t o r · of t h e War F i n a n c e C o r p o r a t i o n , at the 7 conclusion of which i n f e r n a l iscussion, at 11:25 o'clock p . m . , t h e c o n f e r e n c e a d j o u r n e d u n t i l tomorrow, Saturday, March 2 2 , 1919, at https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 9 : 3 o ' c l o c k a.m.