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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
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o
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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
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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
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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.
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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.
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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
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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.
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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
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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•
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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
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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.
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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
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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•
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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.
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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'?
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Federal Reserve Bank of St. Louis
Governor Strong: Yes.
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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 .
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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
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Federal Reserve Bank of St. Louis
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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
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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-
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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.
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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
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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
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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.
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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
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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 :
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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
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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
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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 .
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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
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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.
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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.
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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.
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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
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.
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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
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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
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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.
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Federal Reserve Bank of St. Louis
has a most
The natural bill to flow into this
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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,
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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.
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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.
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London, represent-
Japaneese, German,
,..
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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
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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,
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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
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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 ?
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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;
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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.
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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
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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
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Federal Reserve Bank of St. Louis
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own funds ana l e v y assessments upon these
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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
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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
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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 .
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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;
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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
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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?
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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
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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
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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
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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.
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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
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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
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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.
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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. •
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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
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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
.
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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
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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,
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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
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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
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\.._
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
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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
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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
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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 .
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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.
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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
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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.
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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-
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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?
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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,
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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.
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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 ,
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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.
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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
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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
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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.
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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.
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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
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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
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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.
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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
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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,"
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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
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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,
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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
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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.
•.
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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
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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
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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.
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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.
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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
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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
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•
r
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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.
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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).
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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
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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
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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.
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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
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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 .
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Federal Reserve Bank of St. Louis
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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 -
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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.
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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*
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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
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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 •
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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
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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.
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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:
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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,
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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.
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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.
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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
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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
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Federal Reserve Bank of St. Louis
9 : 3 o ' c l o c k a.m.
@FedFRASER