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Volume 1
CONFERENCE
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Federal Reserve Bank of St. Louis
O F GOVERNORS O F THE
FEDERAL R E S E R V E B A N K S
TREASURY B U I L D I N G +
W A S H I N G T O N , D. C.
MARCH 22, 23, 24, 1926
WALTER S. COX, S H O R T H A N D REPORTER
472 Louisiana Avenue, Northwest W a s h i n g t o n , D.C.
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Federal Reserve Bank of St. Louis
A CONFERENCE O F GOVERNORS O F THE FEDERAL
RHSERVE BANKS.
Washington, D . ©.,
Monday, M a r c h e2nd, 1926,
10:30 o'clock a.m,
A Conference
o f Governors
i n the Board Room
was c o n v e n e d
o f the Federal Reserve
o f the Federal Reserve
Board, Treasury Building, Washington, D . Ce, o n Monday,
March 22, 1926, a t 10:50 o'clock a.m.
PRESENT : B e n j a m i n Strong, Governor, Federal Reserve B a n k o f N e w York (Chairman).
G, Harding, Governor, Federal Reserve B a n k
of Boston.
George W . Norris, Governor, Federal Reserve B a n k o f
Philadelphia.
E. R. Fancher, Governor, Federal Reserve B a n k o f
Cleveland.
George J. Seay, Governor, Federal Reserve kank o f
Richmond.
M. B. Wellborn,
Atlanta.
F e d e r a l Reserve Bank of
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Federal Reserve Bank of St. Louis
J, B , McDougal, Governor, Federal Reserve B a n k o f
Chi cago.
D. C. Biggs, Governor, Federal Reserve Bank o f St.
Louis.
R. 4. Young, Governor, Federal Reserve B a n k o f
Minneapolis.
W. J , Bailey, Governor, Federal Reserve B a n k o f
Kansas C i t y .
Lynn P , Talley, Governor, Federal Reserve B a n k o f
Dallas.
J. U. Calkins, Governor, Federal Reserve B a n k o f
San Francisco.
George L . Harrison, D e p u t y Governor, Federal Reserve
Bank o f New York, a n d Secretary t o the Conference o f
Tovernors .
&&
The Chairman.
E E R D i xs S
2
A l l members are present, a n d the
meeting will please c o m e t o order. I
a m advised b y
Governor C r i s s i n g e r t h a t t h e B o a r d w i l l j o i n u s later,
and w e may proceed n o w with t h e progrem.
The f i r s t t o p i c i s 1 .
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Federal Reserve Bank of St. Louis
: C R E D I T T R A N S A C T I O N S A N D POLICIES,
A, O p e n Market Operations.
ls R e p o r t o f open Market Investment Committee.
o,.. Peblay,..
Copies o f the O p e n Makrét Committee report a r e before
you.
T h e Committee h a d a meeting o n Saturdey a n d unanimously
W e then discussed i t with the Board.
adopted this report,
As i t contained n o recommendations for immediate transactions,
4¢ Coes n o t require a n y special comment, b u t does express
some views o f the committee a s t o what w e m a y find i t
necessary t o do in the near future.
I f you will glance
through the report possibly w e may take some action o n it,
Governor Young.
T h e report requires
n o action, d o e s
Lt?
The Chairman.
No,
W e have generally submitted i t and
then t a k e n s o m e s t e p s t o a p p r o v e
i t o r disapprove
i t and
PLLS L b ,
Governor Young.
M r . Chairmen, I
move t h a t t h e r e p o r t
ofthe open market committee be approved and filed ,
Governor F a n c h e r , I
s e c o n d t h e motion.
S e
The Chairman,
I
e
S
c e n . ow
MEM reas o e
s there a n y discussion
o f the report?
Governor Bailey, G o v e r n o r Strong, I
would like t o
ask whether o r not this means that you may possibly
have t e
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Federal Reserve Bank of St. Louis
take s o m e u n u s u a l
o r Grastic measures?
D o e s that grow
out o f the stopping o f the boom i n
stocks a n d speculative
real e s t a t e t r a n s a c t i o n s
country?
I s that a
i n several s e c t i o n s
reaction f r o m that? I
o f the
notice y o u s a y
business w e s n o t a s good last month a s i t was i n January.
The Chairman, Well, Governor Bailey, I
ing i n New York,
think the feel-
i n our bank, i s that there h a s been a
change o f public attitude a
little bit, P e o p l e a r e hesitate
ing a n d getting a little cautious about t h e outlook, U n d e r
those conditions, v h e n the member banks o w e u s a s much
money a s they de, sometimes i t leads t h e bankers t o reduce their line o f loens a n d cot o u t o f debt t o us, T h a t
should n o t h a p p e n w h e n p r i c e s a r e d e c l i n i n g a n d
business
good a s a
whole, r e a l i z i n g ,
is
a s y o u do, t h a t e v e r y dollar
of loans p a i d off a t the reserve bank, unless
there i s
gold coming i n t o t h e country, m e a n s a
shrinking o f the
loan a n d deposit account o f the member
banks b y something
like t e n dollars,
Governor S e a y , I
notice s o m e s t a t e m e n t
o f the pros-
pect o f the importtation o f 4 considerable o f
gold from
Japan,
t o the extent o f thirty o r thirty-five million,
Is there a n y intimation o f that?
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Federal Reserve Bank of St. Louis
5
The Chairman.
W e l l , t h e y have n o t t o l d u s what t h e y
propose t o d o beyond saying that t h e Government policy
now o f supporting t h e y e n would probably make:.
i t neces-
sary t o ship cold from time t o time t o the United States.
You have reports f r o m business i n your section,
d o y o u not?
Governor Bailey.
Y e s s
The Cheirman. I
think possibly this cecline i n stocks
may have h a d something t o d o with it, a n d some other
things, probably.
Governor Bailey.
W e have o n our Board a new member,
which i s the head o f the largest store i n Oklahoma City.
He i s a very shrewd fellow.
H e has been a t our bank serv-
ing o n t h e e x e c u t i v e c o m m i t t e e a n d l e a r n i n g t h e w a y s o f
the bank,
H e gets a report f r o m his house showing that
January was a
good month but t h a t February h a d fallen off,
He s a i d t h a t t h i s l a s t w e e k w a s a
little b e t t e r t h a n t h e
week before, b u t there were t w o o r three weeks w h e n
business w a s falling off, I
he could n o t tell.
asked h i m why e n d h e said
H e i s a n o l d timer a t it.
H e says
that condition comes periodically without finding a n y
*.
~~
ar a
=
L o o k
~
ae « 3
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Federal Reserve Bank of St. Louis
had all t h e moisture t h a t w e w e really need a t this time,
although w e h a v e g o t t o h a v e m o r e t o m a k e t h e crop; b u t
there i s n o alarm o r anything o f that k i n d .
W h e n i t gets
too dry, people begin t o husband their resources until t h e
thing opens up, a n d i f w e get o u r seasonal rains f r o m n o w
on business w i l l p i c k u p a n d t h e o u t l o o k w i l l b e good, [
asked h i m w h a t h e t h o u g h t
ae
S
o f that a n d h e said that w a s his
o far a s prices a r e concerned, t h e r e i s one peculiar
condition:
W e don't se“. a
great deal o f corn a n y more,
Wheat i s a good price, a n d w e have g o t t h e hogs i n Kansas
and generally i n the Tenth District.
N e b r a s k a may be a
little s h o r t o n hogs b u t t h e rest o f them have g o t plenty
of hogs,
T h a t bunch that a r e feeding hogs a n d cattle
are o n t h e o p p o s i t e s i d e o f t h e f e n c e a n d t h e c r o w d t h a t h a s
come here f r o m Iowa a r e trying t o put u p the price o f corn,
The Chairman. T h e y haven't g o t t h e hogs t o feed,
Governor Bailey.
T h e y have a n unmarketable corn, a
soft corn.
Governor S e a y .
F r o m what r e g i o n d o e s t h a t revort come »
Governor Bailey?
Governor Bailey. I
Governor S e a y s
a m s p e a k i n g o f t h e T e n t h District,
Y o u spoke o f some gentleman w h o w a s a n
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Federal Reserve Bank of St. Louis
unusually g o o d j u d g e o f c o n d i t i o n s
Governor Bailey.
i n h i s locality,
O h , that was f r o m Oklahoma City.
Governor “fellborn,
t h e agricultural conditions a r e
in very good shape i n Oklahoma, a r e t h e y not?
Governor Bailey.
Yes.
Governor Wellborn.
T h e y raised a
very large c r o p o f
cotton.
Governor Bailey.
Y O S .
Governor iellborn,
D i d they hold that cotton o r sell
Governor Bailey. I
think t h e y have mostly s o l d ite
Some o f them have gone i n cooperative merketing outfits,
A lot h a v e h e l d t h e cotton,
I
n a
general w a y t h e b a n k s
of Oklahoma a r e i n good shape, w i t h a few exceptions t h a t
were busted four o r five years a g o a n d never c a n b e a n y good.
They a r e a liability, t h a t i s all, ‘ T h e y are struggling
along, b u t mostly I
would s a y that t h e banks i n Oklahoma
are i n first class shape, especially the member banks,
Governor Harding. H o w i s the State guaranty fund gettin;
along?
Governor Bailey.
I t has blown up; they don't
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Federal Reserve Bank of St. Louis
pay a n y attention t o it. T h e y just abandoned it.
D o the banks k e e p putting u p for
Governor Harding.
o enforce
N o . T h e y have b e e n t r y i n g t
Governor Setice.
its t h e y have g o t to, b u t t h e o n l y w a y they will ever b e
paid i s b y the State t o make a
ie
bond issue o r find some
w a y t o p a y them, T h e r e a r e t e n people w h o haven'!t
got o n e o f those certificates i n Oklahoma t o every o n e
that has. I
selves, I
do not think they are going t o burden themthink i t has blown up.
O u r guaranty l o a n l a w
in Kansas i s almost e s bad. , I n Nebraska t h e y have gotten
along pretty well.
I t i s hard sledding f o r t h e member
banks against t h e State banks that have really paid, b u t
they have taxed the State banks until they are pretty
nearly taxed t o death.
T h e y have t h e l a w s o fixed that
l l t h e assessments’
they c a n n o t g e t o u t u n l e s s t h e y p a y u pAm a
nme, e m
i g o rts
made against them while they are in, T h e y have a system
now w h e r e t h e y t a k e over’ the i n s o l v e n t s b a n k s a n d t h e
State d e p a r t m e n t r u n s t h e m a n d t a k e s t h e d e p o s i t s a n d s e g r e -
gates t h e n e w deposits a n d holds them, a n d they are running
the insolvent banks.
W e have o n e member that i s a State
bank and I want
ve o
to ur ceett S o m e i n f o r m a t i o n h o|w P e e s
t o unload i t
~Uy
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Federal Reserve Bank of St. Louis
because w e cannot g e t r i d o f it.
Governor Harding.
T h a t guaranty business i s just like
man without
a life insurance company issuing insurance o n a
requiring a n y medical examinations.
I f the banks h a d put
operation
up the money a n d had something t o s a y about t h e
better, b u t t h e y haven't
and charter o f new banks i t would b e
anything t o s a y about i t e
Governor Bailey.
it w a s insurance,
T h a t i s the trouble.
and I
tried t o answer
H e said that
i t b y saying that
f o r life o r fire a n d
an insurance company that insures either
o f the risk would g o
takes n o recognition o f the condition
broke,
town o f t e n thousand
I t i s just like taking a
the life o f every m a n i n
people a n d writing insurance o n
the town o t the same rate.
proke.
T h a t company would g o
that a li- |
No State would grant a n insurance company like
cense t o d o business
i n t h e State.
T h a t i s just what
without reference
they do, T h e y just insurenevery bank
to solvency, conduct o r anything o f that kina, ~
Tt t e a —-
most uneconomical a n d unsound proposition. A r e n ' t they
trying t o g e t i t o u t i n I o w a now, M r . M c D o u g a l ?
Governor McDougal. Y e s .
T h e proposition has been
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Federal Reserve Bank of St. Louis
LO
demonstrated i n every State that has tried i t a s unsound
in principle, a n d that i t would not work o u t i n principle.
Governor Seay,
Y
o
u take a
lot o f sick fellows
like t h e y have i n Iowa a n d they will take a n y kind o f
medicine o n c e o r twice,
T h e r e ought t o b e some effort
made n o t t o have that l a w passed, because i t i s a dangerous l a w oe
Governor Young.
I t has been a
complete f a i l u r e
in
North Dakota, S o u t h Dakote, a n d still Montana t h i s fall
will pass a
guaranty State law,
Governor Bailey.
a
m i n nopes i t will b e repealed
in our State.
The Chairman.
I f there a r e n o further remarks, t h e
motion i s t h a t y o u a p p r o v e a n d f i l e t h e r e p o r t
Committee,
o f the
D o y o u vant t o s a y something about t h e
report?
Governor Norris.
The Chairman,
N o , Mr, Chairman,
W e r e y o u satisfied with i t o n Satur-
day?
Governor Norris, Y e s , a n d I
a m still satisfied with
it o n Londay,.
Governor C a l k i n s , I
would l i k e t o a s k o n e question,
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Federal Reserve Bank of St. Louis
Li
The report says "The release o f funds now employed i n the
security market, a
decrease
i n c u r r e n c y requirements ,.
and some decrease i n bank loans f o r business undertakings
would likely b e partly offset b y increased requirements
for funds t o carry accumulating inventories , "
I s it
the o p i n i o n o f t h e C o m m i t t e e t h a t t h e r e i s a n y e v i d e n c e of.
accumulating inventories a t this time?
Te C h a i r m a n ,
tect.
That is a
rost d i f f i c u l t t h i n g t o d e -
Y o u cannot g e t a r e a l l i n e o n t h e inventory position
of most businesses until t h e y take a n inventory a n d publish
their figures,
T h e y o n l y d o that once o r twice a year,
But I have here a
statement made that sales i n the retail
most merbusiness a r e Sibiacelatine i n some lines; t h a t
about
chants ended the season feeling pretty optimistic
fall,
the outlook when they mede their contracts l a s t
I f
piling u p that
that i s so, y o u might have a n inventory
aid n o t sell.
such
N o w probably t h e o n l y w a y o f detecting
a development would be through some deéline i n prices of
commodities generally a n d with reports which ~ e get every
month o n the l e t u p i n retail sales.
T h e n i f our banks
loans d o not g o down y o u c a n s a y almost certainly that
inventories
a r e increasing a n d goods a r e not being
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Federal Reserve Bank of St. Louis
distributed,
Governor Seay.
D o they make contracts a s far ahead
as that now, from fall t o spring?
The Chairman,
T h e b i g drygoods stores i n New York
send their buyers throughout t h e country, m a d e their c o n —
tracts i n the latter part o f last year f o r spring a n d Easter
trade,
o n silks, a n d their patent goods a n d things that have
to be made up, F o r instance, t h e head o f one o f the biggest ~
nen
i n New York t o l d m e that t h e y had confidently expected
an increase i n the neighborhood o f 2 0 per cent i n sales f o r
their recent business b u t that a s a matter o f fact their
figures showed a n increase o f only three p e r cent, T h a t might
be due t o a‘cold March.
Governor Bailey.
H a v e y o u any well definedidea w h y
business should drop off, Governor Strong?
' The Ohairman. W e l l , i t i s awfully hard t o say. I
think there has developed a feeling o f pessimism that might
partly h a v e come through t h e progressive intrease i n interest
rates,
W e hear a
good deal o f talk about e a s y money; b u t with
four per cent discount rates i n the Reserve Bank, about the
easiest m o n e y i n t h e c o u n t r y i s i n N e w York.
T h a t i s o n the
paper,
very h i g h e s t g r a d e o f c o l l a t e r a l l o a n s a n d c o m m e r c i a l
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Federal Reserve Bank of St. Louis
16
four a n d a quarter a n d four a n d a half p e r cent; b u t
most
all t h e b a n s
i n N e w York a r e charging 5
per cent t o
their customers now, a n d to their good customers. I
not think y o u c a n s a y that 5
do
per cent i s cheap money.
I t
is not a burdensome rate possibly o n industry, but
it is
not c h e a p money.
have a
W e d o n o t f e e l t h a t i t i s possible
to
big change i n the speculative temper o f the country,
such a s took place both i n stocks a n d i n real estate,
without i t being reflected,
Governor Bailey,
Florida.
W e have a
Y
e have sent a lot o f money t o
lot o f call money i n N e w York a l l
the time, b u t whether i t will affect t h e trade o u t there
I do not know,
The Chairman. I
will tel] you, Governor Bailey,
I t
is because 6 0 ner cent o f the money that went i n t o this
Speculation came from all over the United States, a n d
probably a s much,
i f not a lerger percentage o f all t h e
Speculation c a m e f r o m a l l o v e r t h e U n i t e d States,
These
wire houses are doing a n enormous business. T h a t f e e l
ing o f conservatism does spread
a a a
w h e n these fellows
find t h a t t h e y a r e s t u c k o n t h e i r m a r g i n a l accounts.
T h e n
another thing I think i s the feeling that things abroad
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Federal Reserve Bank of St. Louis
14
are not quite a s comfortable a s they have b e e n nolitically.
What seemed t o start t h e stock marxet going t o vieces
was this decision against t h e railroad merger, because t h e
next d a y the stocc market h a d i t s b i g break.
because t h e m o s t o b s e r v a n t v e o p l e d o d e t e c t a
I t may b e
little c h a n g e
in attitude.
Governor Bailey. I
think o u t with u s i t i s largely
this propaganda o f the Des Moines meeting, that farming
dic not v a y a n y more a n d that y o u could n o t maxe a
it.
go o f
I f you believe t h e story that those fellows tell
1 Towa, t h e greatest agricultural State i n the Union,
is i n awful shave, a n d agriculture h a s gone t o vieces.
As a
matter o f f a c t I
hanpven t o xnowm a little a b o u t Iowa.
I think t h e r e a r e m o r e p r o s p e r o u s f a r m e r s
i n Iowa t h a n
there are o f the other xind, b u t you don't hear from them,
Governor szigDougal.
T h e State o f Iowa, generally sneak—
‘ing, i s i n sood condition. T h e r e are 3 9 counties i n the
State and »robadly 8 5 of then are i n excellent condition.
There a r e three o r four counties where t h e banking machin~
ery h a s broken d o w m a n d where t h e recovery h a s not b e e n
as good a s it has been i n other sections o f the country. _
The difficulty t h a t t h e majority o f the well managed banks
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Federal Reserve Bank of St. Louis
‘15
in Iowa a r e having a t t h e present t i m e i s finding a
use
for their money.
Governor Bailey.
people c o m m e n c e
T h a t x i n d o f propaganda gets out,
t o wonder
i f there isn!t something
and t h e y begin t o retrench a
are doing a
little here a n d there.
W e
lot o f this installment buying o u t there a n d
have b e e n f o r t h e last couple o f years a n d I
whether a
i n it
a m wondering
man who h a s anticipated h i s wants f o r three
years, a n d bought o n time, isn't going t o slow u p i n the
interin.
The Chairman.
T h e r e i s another tovic o n the pro-
gram with regard t o that, Governor Bailey,
Governor Bailey. I
a m just ~ondering i f that isn't
one o f the things that i s controlling t h e situation.
The Chairman. T h e thing that interests m e most i n the
present situation i s the question, a n d this i s true a t
this time and almost any time, o f how much goods are being
distributed t o the consumer,
T h a t i s what tells t h e story.
Governor Calxins. T h a t goes backs t o m y question. T h e
fact i s that recent changes i n business orocedure h a v e made
it more difficult t o obtain any dependable information i n
regard t o this inventory question, a n d I was therefore
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Federal Reserve Bank of St. Louis
16
led t o asx t h e question o f the Committee whether i t feels
that i t has enough information o r enough indication toe jus~
tify t h e c o n c l u s i o n t h a t w e a r e i n f o r a
period o f p a y m e n t
because o f accumulating inventortes,
‘Governor Strong. I
thats
think the report does not indicate
I t further voints o u t that there a r e indications
of a tendency, which ought t o become clearer a little
ister,
and I
suppose w i t h i n a
very short time, b e c a u s e
we
are i n t h e s p r i n g s e a s o n w h e r e y o u c a n t e l l p r e t t y w e l l
if t h e soring trade comes across o r not.
A t least y o u c a n
tell that i n New York,
Governor Seay.
D i d w e not have t h e same feeling
of
hesitancy both i n 1924 and 1925 at about this period i n the
year’.
. The Chairman,
No,
I n 1924 w e did, b u t not i n 1925,
About this time i n 1925 i t was just t h e other way. T h i n g s
were going t o o fast,
Governor Seay,
yst,"which I
. I n 1925 s u c h a journal a s "The .Anal—
read f r o m t i m e t o time, w e e k a f t e r w e e k w a s
practically unable t o see ary activity o f business that
was g o i n g o n o r i t h e prosperity.
I
t held that w a y clear
up t o t h e end, w h e n i t transpired that t h e greatest business
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Federal Reserve Bank of St. Louis
ever done was being done.
The Chairman.
T h e r e wasn't any feeling o f hesita-
tion t h a t w e d i s c o v e r e d
o r that w a s reported here early
in 1925, because w e started t o sell some o f our securities i n December o f 1924, a n d b y arch o f 1925 w e had sold
290 million o f the 500 million w e then held. T h e n we put
up our discount rates, first i n New York, a n d then later
in the year i n the other Reserve Banks.
B u t i n 1924, i n
the winter o f 1923 and 1924, there was a very considerable
feeling o f hesitation,
W e had a renort o n the rubber and
automopile business here a n d t h e textile business i n New
England; t h e steel business h a d dronped a
little a n d
there was a slight s l u m under w a y then.
Governor Seay,
T h e borrowings o n the N e w York Bank
in March, April and wey o f 1925, dropoed from the peak i n
February and ranged lor until August, T h e n they went u p
very ravidly.
The Chairman.
Governor Seay,
I n 1925?
I n 1925. B o r r o w i n g s w e r e high i n
February.
The Chairman. T h e y were n o t very l o w a t a n y time i n
1925,
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Federal Reserve Bank of St. Louis
18
Governor Seay,
I f y o u will take t h e blue line y o u
will s e e that t h e y dropped d o w n i n May t o almost nothing,
Governor Calkins. T h e fact i s there w a s n o such marked
hesitation i n 1924 o r 1925 a s appears a t t h e present time.
Governor Seay,
T h e r e w a s i n 1924,
M y recollection
is
that there w a s some doubt i n 1925 during t h e suring a n d
carly summer months, b u t then the activity began and
the volume o f business w a s v e r y high,
The Chairmen.
O f course there i s a seasonal movment
right a t the beginning a n d e n d o f each year.
Governor Seay, Y e s , that i s customary,
The Chairman.
T h o s e a r e purely seasonal.
T h e picture
is that a s the result o f security purchases i n 1923 a n d
early 1924, t h e 1924 borrowings vretty well disavpeared i n
New York.
T h e n beginning after t h e seasonal movement i n
1925 w e started t o sell our securities a n d sold a good
Many o f then.
I t established a
mean o f borrowing through
1925 o f from fifty t o one hundred millions above 1924,
80 the high points i n 1925 a r e pretty high,
Governor Seay,
Y e s . I
was sneacing about t h e time
of the year that w e are i n now, a r c h , A p r i l a n d May,
would s e e m t o m e t h a t t h e r e h a s b e e n a
disposition
I t
i n the
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Federal Reserve Bank of St. Louis
19
last t w o o r three years not t o admit t h e vorosperity that
evidently h a s been here,
o r the tremendous volume o f
business.
The Chairman, What d o you think v e should have a s
a volicy,
i f any?
T h a t d o y o u think t h e outlook indi-
cates?
Governor S e a y , I
think i t i s a n uncertain one; t h a t
we are unable t o »rognosticate. I
will say that the
employment b e i n g a s h e a v y a s i t i s a n d t h e w a g e s b e i n g
as m u c h a s t h e y are, t h a t t h e y a r e t h e e l e m e n t s f o r v e r y
large activity i n business.
T h a t there will b e some
decline f r o m the rate o f activity that h a s prevailed, I
believe i s doubtful.
The Chairman.
W h a t will b e the cause o f the c h a n g e —
Governor Seay, Sentiment, Mr. Chairman,
The Chairman. H a s n ' t that change o f sentiment t o
some extent taxen vlace? H a s n ' t t h e effect anparently
shown i t has taken olace?
Governor Biggs. I
can give you a n illustration,
Within the last ten days our directors have visited, with
the exception o f one, t h e branches a t Memohis, Louisville
and Lyttle Rock.
W e found conditions entirely different
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Federal Reserve Bank of St. Louis
20
in those places, W l e m b e r s a t Little Rock a r e cotton tons.
They have h a d a n enormous cotton crop, t h e biggest I
they have ever h a d i n Arkansas a n d dississippi.
think
Cotton
was a t a good price a n d they picked a little o v e r 5 0 per
cent o f the good cotton a n d then went t o work a n d contracted
and bought goods o n the basis o f 100 per cent o f their
cotton, T h e n the rains came o n and 5 0 per cent o f the
cotton was ruined practically s o that t h e y sold i t o n a n
average o f less t h a n 1 0 cents a vound. T h e r e f o r e t h e y d i d
not g e t t h e high price that t h e y exoected a n d that s e c
tion o f the country found themselves w i t h a lot o f stuff
that they had bought and hedn't vaid for, a n d which they
never d i d g e t t h e m o n e y t o v a y for.
T h e y had a
lot o f
stuff t h a t t h e y h a d b o u g h t w h e n t h e y t h o u g h t t h e y h a d
the cotton,
T h e y h a d the money snent, T h e cotton o u t there
looked fine, w i t h indications o f a big crop.
Then w e jumped over t o Louisville, where conditions
are u n u s u a l l y good.
T h e y h a d sold their tobacco a t a
price, t h e i r corn, a n d everything w a s prosperous.
high
eed
There w a s n o question b u t that i n the Louisville district
business w a s good.
T h e y got a
good price f o r the tobacco
crop o f last year a n d the year before a n d they sold i t i n
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Federal Reserve Bank of St. Louis
es _
different
large quantities, a n d there was a n entirely/situation,
There wasn't a i s Soneauant there, because t h e y had h a d n o
depression i n anything.
And, further, a t every one o f these towns w e found.
building expansion going on.
Y o u never s a w such building
in all these towns. M e m p h i s alone has got a
hotel that
you hardly have anything in New York that will compete with
it. T h e y built t h a t last year.
I t has 8 0 0 rooms.
T h e
same i s true i n Little Rock, they are just laying out subdivisions; t h e building o f houses and apartments has been
going o n and the b o o m has been v e r y high.
in Louisville.
I t i s going o n
I n Memohis, Little Rock and those sections
they h a v e j u s t l e t u p t o a
great extent.
T h e y haven't q u i t
sitirely, b u t they are not going ahead. T h e n y o u can
go north o f u s i n t o Iylinois where they have raised a n
enormous c o r n crop a n d where t h e y were fortunately a b l e t o
get hogs a n d cattle t o feed a n d dispose o f i t i n that way,
So J feel there i s a little n o r e than sentiment i n the
thing w h e n y o u g o into these districts a n d sift down t h e
causes o f why there i s a slackening i n business.
great uneasiness
There is
i n all o f these towns about this install-
ment payment provosition.
T h e y have just gone crazy o n
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Federal Reserve Bank of St. Louis
the subject. E v e r y b o d y i s selling o n installment a n d
selling anything o n arth.
The Chairman.
T h a t i s the «ind o f thing that h a s
got t o correct itself,
Governor Biggs.
J u s t t o give y o u a n illustration,
in
@ little t o w n i n Xentucty t h e y a r e selling lots a t a dol-
lar a week.
T h e y will sell you a lot for $200, l e t you
pay $ 1 0 d o r a n d a
dollar a week, A
man s a i d h e h a d
600 lots that he had sold thet weex and got $600 every week
for a little patch laid out o n the edge o f tom.
That is
the smallest proposition o f i t s kind o n the installment
plan basis, b u t t h e y a r e selling everything o n the installment plan.
Governor YVellborn.
I
n the Atlanta District w e have
not n o t i c e d w o a n y s l e c t e n i n g
way-
u o o f business
in a
general
O u r cities s e e m t o b e very vrosperous, N e w Orleans,
Nashville, Birmingham and Atlanta, B u s i n e s s seems t o be
pretty good. B u i l d i n g overations a r e continuing o n the
seh c i a l
o n which they were going last year.
I n Florida
they have had a cessation o f speculation i n lots, which
had probably reached i t s peak last summer, b u t building
operations a r e g o i n g o n a t a
tremendous r a t e ,
T h e y are
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Federal Reserve Bank of St. Louis
carrying o n the improvements t h a t they have started,
Governor Seay,
A r e a n y o f those large building
companies i n trouble that y o u c n o w of?
Governor Wellborn. B u i l d i n g companies?
Governor Seay, D e v e l o n m e n t companies?
Governor Wellborn.
W o , I haven't heard o f any. I
have
heard rumors coming through N e w York that t h e y were, b u t
that i s the only source f r o m which w e have heard it.
T h e y
seem t o send that persistent rumor o u t o f N e w York about
some o f the development companies domm i n Florida, b u t
they a r e continuing w i t h their development there.
Governor Seay,
D o the peoole continue t o flock i n
and occupy those buildings?
Governor Wellborn.
O h , yes. T h e y are all full up.
The n e w hotels built there last winter a r e full this winter,
The d e v e l o p m e n t f r o m P a l m B e a c h t o miami
i s j u s t o n e conti-
nuous thing, a l l along t h e coast, T h e y a r e spending n o t
‘Only millions o f dollars >but hundreds o f millions.
They
are maxing a regular varadise.
The Chairman.
I w a s
i n P a l m B e a c h l a s t spring,
February o f last year, a n d y o u could n o t g e t a
Palm Beach. A
i n
room i n
friend o f mine h a s just come b a c k from
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Federal Reserve Bank of St. Louis
there w h o s a y s t h a t t h e n e w h o t e l t h a t t h e y h a v e b u i l t
in Palm B
e
ly half full.
a h ct
something
th
iw
lixe a thousand rooms, i s hardT h e y cannot b e naxing money o n »roperty
that h e deen developed a s expensively a s that has been,
with labor a s high a s it is, with a very short season,
unless t h e y are jammed full,
Governor Wellborn. I
was i n Palm Beach i n January a n d
things were very crowded then. T h e hotels w e r e full.
was v e r y difficult t o get a room,
prevail a t miami,
Florida, I
I t
T h e same conditions
I n fact t h e y prevail a l l along through
took a trio o f a month, a n d I went t o every
torn where there was a menber bank, and the hotels were
full a n d the towns crowded,
Governor Seay,
wr. Wellborn.
I n what month were y o u there?
I n January, However, t h e veak o f the
Speculation seems t o have been reached,
The Chairman.
I f there a r e n o further remarts
o n the
revort t h e notion i s t o apnrove a n d file t h e renort i n
the record.
(The motion, h a v i n g b e e n d u l y seconded, w a s unanimous—
ly carried, a n d the revort i s a s follows:)
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Federal Reserve Bank of St. Louis
REPORT O F THE OPEN MARKET INVESTMENT COmuITTEE T O
THE GOVERNORS! CONFERENCE, March 32, 1926.
Since t h e last Governors! Conference t h e changes i n
the special investment account have consisted o f (a) t e m p
Orary readjustments t o offset t h e effects o n fhe money
market o f government financing e t tax periods, (b)purchases
and sales t o offset seasonal changes o v e r t h e turn o f the
year, a n d (c) a reduction i n total caused b y the repayment o f warch 1 5 maturities, ~hitch have not yet been
wholly replaced,
At the December 1 5 tax veriod temoorary sales o f 3 0
Million dollars were made to New York City banks, and at
the siarch tax period temporary sales of $38,000,000 were
made, o f “hich $35,000,000 were made i n New York and
$3,000,000 i n Chicago.
T h e result o f these sales was
to exert a considerable stabilizing influence o n the marxet at. t h e s e veriods,
‘ During t h e l a t t e r p a r t o f D e c e m b e r t h e c o m m i t t e e
purchased 5 0 million o f short-term government securities
to decrease the seasonal strain i n the market, a n d those
securities were resold i n the latter part o f January a n d
early i n February.
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Federal Reserve Bank of St. Louis
26
On slarch 1 5 there matured 6 5 million dollars o f se.
curities h e l d i n ths svecial account, a n d i n addition
$32,500,000 held for foreign account. These amounts have
been fully replaced for the foreign accounts but only
partially replaced a s yet b y the purchase o f $34,355,600
of securities f o r t h e System account. T h i s leaves a
balance o f $31,411,100 t o be purchased for the special
account i n order t o restore i t t o 210 million dollars;
the $38,160,000 o f Treasury notes which matured December
15, 1925, were replaced b y purchase o f othermaturities,
thus causing n o change i n the account.
In the vast f e w weeks, t h e r e has been s o m e change i n
credit conditions, b u t more particularly i n business a n d
naneind psychology.
T h e stock mrcet b o o m has lost its
impetus a n d the amount o f funds employed b y the marxet
has-diminished b y sbout 300 million collars fram the date
when p u b l i c r e p o r t s w e r e -comaenced.
R e a l estate specula.
tion has calmed down somewhat, There are also reports o f
business hesitation, evidence o f which m a y b e found i n a
weakness i n commodity prices, a
decline o f unfilled orders
of the steel Corporation, s o m e recession i n retail trade
and some decrease i n the amount o f building permits t a k e n
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Federal Reserve Bank of St. Louis
i eet
out, although the actual volume o f current business trans—
actions continues v e r y large.
B u t some business hesitation
appears t o b e a not unusual accompaniment o f a rather sharp
arrest o f stock speculation following a
long extended
period o f activity. 3
Thus f a r i t would appear t h a t t h e diminution o f
speculative activity i s wholesome.
T h e movements which
have taken place have been orderly a n d ther? has beennno i n -
dication s o far o f unteward consequences.
I t is not yet
clear how far liquidation will b e continued and i t is, o f
course, still possible that there might b e a revival o f
speculation «ith t h e dangers i t involves.
I t appears more
probable, however, that the peak of this speculative and
pusiness expansion h a s been passed.
I t therefore seems
iqpetpriats i n view o f the above t o discuss a t this time
what our open market policy should b e i n the event a
businesszrecession calls f o r a revision o f policy before
we meet i n another governors! c o n f e r m c e .
Experience i n the vast h a s indicated thet member banks
when i n debt a t the Federal Reserve Bank o f New York, a n d
in less degree a t other money centers, constantly endeavor
to free themselves from that indebtedness, a n d as a conse-
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Federal Reserve Bank of St. Louis
quence s u c h oressure a s arises i s i n the direction o f
curtailing loans.
T h i s i s n o w accentuated o v e r a
year
ago a s the discount r a t e a t N e w York i s a full o n e p e r
cent higher, a n d o n e half o f o n e per c m t higher a t four
other banks.
A s t h e accompanying table o f the earning
assets o f the System shows, t h e amount o f credit furnished
by Reserve Banks o n menber b a n s direct borrowing, j u s t
prior t o the march 15th operations, w a s larger this y e a r
thah o n any corresponding d a t e since 1923,
SARNING A S S E T S —
FEDTRAL RESERVE S Y S T E M
(In millions o f dollars)
M922 1 9 2 3 1 9 2 4 1 9 2 5 1 9 2 6
Mar.8~ Mar. 7 ~ Mar.12~Mar.11—Mar.10.
Discounts
New Y o r (City)
Chicago (City)
Other
Total.
Bankers Accept—
ances
U.S. S e c u r i t i e s
Committee
U.S. Securities~Other
Other Earning
Assets
Total
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Federal Reserve Bank of St. Louis
The total n e a t
a t borrowing undoubtedly exerts
some pressure u p o n t h e business community,
S h o u l d we
gO into a business recession while t h e member banks were
continuing t o borrow directly 5 0 0 o r 600 million dollars,
(if bills are includéd nearly 800 million dollars,) w e
should consider tacing steps t o relieve some o f the pressure which this borrowing induces b y purchasing govern
ment securities and thus enabling member banks to reduce
their indebtednéss,
It i s not vossible t o predict t o what extent member
banks w i l l c o n t i n u e t h e i r b o r r o w i n g
in the event o f a business recess.
o n t h e present s c a l e
T h e release o f funds
now employed i n the security markets, a
decrease i n cur-
rency requirements, a n d some decrease i n bank loans for
business undertaxings, w o u l d likely b e partly offset b y
inoreased requirenents f o r funds t o carry accumulating i n -
ventories. P e r h a p s the major determining factor will b e
the movement o f gold. D u r i n g the first half o f March w e
received 3 0 million dollars o f gold from Canada and this
movement resulted i n easy money rates i n N e w York i n the
second weex o f the month,
I t seems possible thet this
gold movement May b e continued somewhat further, and, i f
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Federal Reserve Bank of St. Louis
S80, i t would correspondingly liquidate the borrowings
Of member banks i n New York,
T h e usual movement o f gold,
however, i f seasonal causes onerate, would lead us t o antiCipate gold exports rather than imports during the summer
months, w i t h perheps further imports i n the fall; W i t h
these conflicting tendencies future changes i n our l o a n
account are especially significant as a guide and we
should see that the tot&l does not bécome o r continue
too burdensome,
FUTURE POLICY.
A S a guide t o the timing and extent
of any purchases which might. appear desirable, o n e o f our
best guides will b e the amount o f borrowing b y member
bans
i n principal centers, a n d particularly i n New York
and Chicago.
O u r experience h a s shown that w h e n N e w York
City banks are borrowing i n the neighborhood o f 100 million
dollars o r more, t h e r e i s then s o m e real pressure f o r r e
ducing loans, a n d money rates t e n d t o b e markedly higher
than the discount rate,
O n the other hand, when borrowings
of these banks are negligible, a s i n 1924, t h e money s i t u a
tion tends t o be less elastic and if gold imoorts take
place, there i s liable t o b e some credit inflation, w i t h
money rates drooping b e l o w o u r discount rate.
W h e n member
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Federal Reserve Bank of St. Louis
31
banks a r e owing u s about 5 0 million dollars o r less t h e
Situation a p p e a r s
t o b e comfortable,
w i t h n o marked pres-
sure f o r liquidation a n d with t h e requisite elasticity,
Under those circumstances n o single bans tends t o be i n
debt f o r a n y extended »eriod a n d borrowings a r e passed
around among t h e different banks.
C a l l a n d time money
rates t e n d t o b e but slightly above o u r discount rate.
With this situation existing i n New York, t h e r e i s less
tendency for funds t o be attracted t o New York (particul.
arly s i n c e c o m m e r c i a l r a t e s a t s u c h t i m e s a r e a p t t o b e
higher than stocx exchange rates for call money) a n d the
situatiog h a s a considerable degree o f stability,
The a c c o m o a n y i n g ‘chart s h o w s t h e a n o u n t
New Y o r k C i t y b a n k s
o f borrowing
b y weeks d u r i n g t h e p a s t f o u r years.
It shows borrowings t o b e lerge during 1923, when, a s w e
all.know, there was some pressure for liquidation.
Allom
ing f o r the seasonal increase a n d decrease i n December,
1923, a n d January, 1924, borrowings were v e r y small during
1924 and w e recall that during the valance o f that year
while there was considerable instability i n money conditions,
i t was accompanied b y a gradual revival o f business
of
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Federal Reserve Bank of St. Louis
over 1923.
I n 1925 borrowings w e r e sufficiently h i g h
during parts o f the year t o place some pressure o n the
New York C i t y bants.
vances w e r e made.
I t was i n this stage thet rate a d
I n t h e event o f business l i q u i d a t i o n
now aopearing i t o u l d s e e m advisable t o keen t h e N e w York
City banks out o f debt beyond something i n the neighborhood
of 5 0 million dollars.
I t mould probably b e well i f some
similar r u l e could b e applied t o the Chicago banks, a l -
though the amount vould, o f course, b e smaller and the
difficulties greater because o f the influence o f the N e w
York money market,
In general i t would avpear t h a t w e should not increase
or diminish t h e special eccount immediately beyond gradual-ly replacing t h e issues which natured o n warch 1 5 a s mar—
ket conditions warrant, but that r e should »repare ourselves n o v for t h e »romot purchase o f some further amount
evidence
of securities i f a n d ~hen there should b e further
i f there
of e recession i n dusiness activity, especially
Federal Reserve
is no further liquidation i n the amount o f
credit employed.
‘Exhibit A
STATEMENT SHOWING PARTICIPATION B Y FEDERAL RESERVE BANKS I N SYSTEM SPECIAL INVESTMENT
ACCOUNT A N D CLASSIFICATION O F ISSUES HELD I N THE ACCOUNT B Y MATURITIES
Holding
Holdings
Holdings b y Maturities
Ratio
Sof
1926
3% c / r
§1,800,000
i o ,
1926
31/4% c/x
28, 900, 000
September 15,
1926
41/att/n
17,901, 000
2,688,000
1.0%
43,733, 900
24.5%
Philadelphia
34, 331,000
ott
Cleveland
9,908, 500
5.5%
December 1 5 , 1926 3 3/4% c/t
Richmond
3,488, 500
1.9%
March
a 3/aZ TA
44,956,600
10, 289, 000
5.8%
December 1 5 , 4927 41/24 TA
35,371,300
Boston
New York
Atlanta
June A
June
15,
1927
47,260,000
Chicago 1 8 , 7 1 8 , 0 0 0 10.5%| September 15, 1928 41/44 3rd L/L = 2, 500, 000
St. Louis 1 6 , 0 4 9 , 500 9 , 0 %
Minneapolis
4 ,
671..0007 3
%
Kansas City 17,726,000 9 . 9 %
Dallas
08,831,. 500
1
1
San Francisco _
29,154,000
6
%
16.3%
$178, 588,900 100.0%
—=
£
1
7
, 588,900
6
S
S
S
This statement includes future purchases t o be delivered o n o r before March 26,1926,
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Federal Reserve Bank of St. Louis
Exhibit B
PURCHASES O F BANKERS ACCEPTANCES FROM JANUARY 4 TO MARCH 10, 1926 AND AMOUNT
EACH BANK HAS RECEIVED I N EXCESS O R SHORT O F ITS PRO RATA SHARE
UNDER APPORTIONMENT PLAN PUT INTO EFFECT JANUARY 4, 1926
Boston
T
Ratios o f
Bilis
Acquired
Participation
(Net)
Bills Entitled
to Acquire
Bills O v e r B i l l s ShorPro rata
P r o f a
Share
S h o r e
i
e
$ 19,830, 000
319,247, 000
4
%
62, 659, 000
65, 992, 000
0
8
%
25, 752, 000
21, 997, 000
3,755, 000 0
Cleveland
27, 395, 000
27, 497, 000
102, 000
Richriond
13, 792, 000
13, 748, 000
0
Atlanta
11, 390, 000
40, 999, 000
0
Chicazo
38, 012, 000
38, 495, 000
483, 000
St. Louis
13, 262, 000
13, 748, 000
486, 000
Minneapolis
10, 691, 000
10, 999, 000
3 0 8000,
Kansas City
15, 908, 000
16, 498, 000
0 5 9 0 , 000
Dallas
10, 732, 000
10, 999, 000
0 2 6 7 , 000
San Francisco
25, 543, 000
24, 747, 000
New York
Philadelphia
Totals
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Federal Reserve Bank of St. Louis
2
3274, 966, 000
Or ee R
s
583,000 3
3
0 )
, 333, 000
796, 000 Q
3274, 966, 000 95,569,000 35,569, 000
ete
Exhibit G,
STATEMENT SHOWING EFFECT OF DISTRIBUTION O F SYSTEM OrEN MAKKET PURCHASES DUKING 1925 TO MEET EXPENSE
“REQUIREMENTS OF FEDESAL KESEAKVE BANKS, WHICH DISTHIBUTION (1) DUKING FIsST NINE MONTHS
WAS ON BASIS OF CURRENT EXFENSES AND DIVIDENDS AND (2) DUHING BALANCE
OF YEAK TO FROVIDE FOK CHAKGE-OFFS AS COMPLETELY AS FOSSIBLE
Charge-offs,
Depreciation
Qnarges, ete,
Current E x ~
Gross
p
Karnines
Boston »
e
n
s
e
s and C u r r e n t Net
D i v i d e n d s
3,288, 546 e
E a r n i n g s
2,528,503 e
e
t After
l l Charges
n d Dividends
» 122,220 @
760,043
New York 4 0 , 2 3 7 , 4 9 8 8 , 2 1 3 , 3 9 8 2 , 0 0 3 , 7 7 6
N
a
e
7
8
8 ,674
637,933
1
, 215,102
Philedelphie
3,335,549
2,709, 480
426,069
21,162
404,907
Cleveland
4,023, 456
3,378,441
635,015
203, 250
431,765
i chaoui
2,182, 460
1,809,776
372, 684
154, 736
227,948
atlanta
2,072, 378
1,502, 220
570,158
820,455
250,297
Chicago
5,424, 663
4,686, 253
738, 410
551,153
187, 257
St. Louis
2,055,637
1,696,853
358, 784
759,078
400,294
inneapolis
1,438,342
1,291, 388
146, 953
105, 558
41,395
Kansas City
2,309, 986
1,985,870
324,116
299,621
24,495
Dallas
1,813, 626
1,478, $83
335,043
312,147
22,896
Sen Francisco
3,848,890
—dL1h, 5
— 211.335
—-$115335
034, 452, 320
— = —
nema net
e mt
e
cna E R P T I
Totals
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
#41, 800, 706
eer rence erence A A R
a m
wT» 348 e 386
SA
RTT
$4,515, 279
Dar cecaciggemeuensamimianecnese
e
e
Le R A R A
oe
NCAR LR SIT
v2, 533, 107 N e t
Se T T OE PERS E D
R
E E SO N D
Exhibit " p "
STATEMENT SHOWING EARNING ASSET HOLDINGS OF ALL FEDERAL RESERVE BANKS MARCH 10, 1926 COMPARED WITH PREVIOUS WEEK AND MARCH 11, 1925; ALSO WEEKLY AVERAGE
OF EARNING ASSETS FROM DECEMBER 31, 1925 TO MARCH 10, 1926 AS COMPARED WITH CORRESPONDING PERIOD AND ENTIRE YEAR 1925
Omi tted)
Boston
Bills discounted
$ 3
e.
2
2
6
,
,
Net Change .
4
,
0
Net Change
, 780" 1,877+ 4 1 8 +
8
. "
7
4
,
8
Total earning assets
“”
”
1
2
,
7
9
8
7
,
0
3 , 8 1 3 ~ 858~ 5 0 3 + 9 2 7 +
7 54,349 19,063 3 1 , 5 5 9
1
8 61,297 2 1 , 3 0 9 3 3 , 4 9 6
1 7 , 2 1 9 46,816 2 7 , 0 4 4 18,078
8 , 3
1 , 3
7
1 , 885+
6
6
9
5
3
, 9.484
2
, 246+ 1 , 9 3 7 +
2 2 9 6 , 5 7 2 9 6 , 1 2 6 1 0 0 ,234
3 2 8 8 , 866 9 6 , 0 2 9 1 0 7 , 453
9
7 , 706~ 9
7 , 219+
8
, 413
6 1 + 4,031-
2 2 , 3 1 2 31,092 13,797 7 , 0 4 7 1 4 , 7 3 9
1 8 , 4 9 9 30,234 14,300 7 , 9 7 4 1 3 , 8 9 6
7
-
S a n Franciféco
T o t a l
9 $172,576 $ 5 3 , 8 8 7 $ 4 8 , 6 2 0 $ 4 3 , 4 1 7 $ 3 3 , 0 5 5 988,667 $ 2 5 , 6 0 7 $ 1 0 , 5 1 8 $ 2 2 , 558 $
6,644 $ 4 1 , 5 7 6 5 8 3 , 2 1 4
1 156,018 5 1 , 1 1 7 5 2 , 0 0 7 4 3 , 6 5 0 3 0 , 3 3 6 6 4 , 5 0 1 2 0 , 2 1 4 3 , 8 7 6 1 4 , 1 4 5 6 , 7 0 5 3 7 , 5 4 5 5 0 2 , 4 2 5
3 ,375 6 7 , 263 19,299 1 9 , 1 2 4
9 5 69,140 19,717 2 1 , 0 0 9
5
2
Government securities
Net Change
8
1
S t . Louis M i n n e a p o l i s K a n s a s City D a l l a s
1 3 , 7 7 8 16,558 2 , 7 7 0 = 3 , 2 8 7 + 2 3 3 4 2 , 7 1 9 24,166— 5 , 3 9 3 6 , 6 4 2 =
Bills purchased
"°
4
Net Change
0
3
N e w York Philadelphia C l e v e l a n d R i c h m o n d A t l a n t a C h i c a g o
5
2
7
6
,
0
6
4
,
2
0
,
,
,
1
0
1
9
4
2
0
5
1
8
8 44,021 2 3 , 9 0 7 1 6 , 5 7 8
+ 2 , 7 9 5+ 3 , 1 3 7 +
3 164,972
6 142,757
3
7 22,215-
4
3
,
4
2 4 , 9 9 1 286,607
2 4 , 5 9 2 284,520
3
4
3
3
,
9
9
9 2 , 0 8 7 =
4
4
1 , 500+
0
4
5
2 1
, 209
,
1
1
9
1
2
h 2 1 2 -
5 3 2 5 , 7 5 8
9 ,643 3 5 9 , 6 6 6
6
1
1
8 0 , 789-
,
,
8
1
3
+
1
8
1
4 3 3 , 9 0 8 +
2 1 , 2 0 7 , 429
7 1,158,559
, 275+
4 8 , 870-
Weekly Average of Earning Assets
Dec, 31, 1925 to March 10, 1926 1 0 9 ,703 2 6 9 ,672 9 3 , 2 8 3 1 0 0 , 275 5 2 , 9 0 9 8 2 , 0 2 3 153,667 6 3 , 7 5 6
Corresponding period 1925 9 2 , 7 8 8 3 2 3 , 9 3 5 7 6 , 0 1 1 1 2 2 , 7 2 4 3 4 , 709 2 4 , 4 2 2 129,811 3 8 , 5 6 8
Net Change
1
6
,
9
1
5
6
1
6
+ 54,263= 17,2724 2 2 , 449~ 18,200+ 57,601+ 23,856+ 2 5 ,088+
, 244+ 1 7 , 461-
,
7
0 2 5 6 , 6 5 4 1 0 3 ,448 1 , 1 8 5 , 0 3 2
5 ,023 4 1 , 7 9 1 1 0 3 , 7 7 5 1 , 0 6 0 , 6 9 0
4
2
December 31, 1925 to Mar.10,1926 109,703 2 6 9 ,672 9 3 , 2 8 3 1 0 0 , 2 7 5 5 2 , 9 0 9 8 2 , 0 2 3 153,667 6 3 , 7 5 6
Entire year 1925
9
3
, 459 2 8 7 , 1 3 3 8 5 , 0 7 8 1 1 3 , 9 0 4 5 4 , 7 3 4 5 6 , 5 4 8 138,045 5 5 , 9 3 6
Net Change
7
6
5
7
7
8 , 205+ 13,629~ 1 , 8 2 5 25,475+ 15,6224 7 , 3 2 0 +
2
,
,
1
, 679+ 1 4 , 863+
7
2
0
9
0
3 2 7
1 2 4 , 342+
2 5 6 , 6 5 4 1 0 3 , 448 1 , 1 8 5 , 0 3 2
3
4 9 ,024 1 0 9 , 866 1 , 1 3 8 , 2 9 1
, 409+ 7 , 6 3 0 +
6
, 418-
4
6
, 741+
Comparison o f Earning Assets
March 10, 1926
2
8
8
,
8
6
6 9 6 , 0 2 9 1 0 7 , 453 6 1 , 0 8 2 6 6 , 4 0 6 142,757 6 1 , 9 3 6
5
4
,
1
2
3 112,387 1 , 1 5 8 , 5 5 9
March 11, 1925
3
8
4
,
7
0
9 8 7 , 6 4 9 125,294 4 4 , 4 6 6 29,501 121,914 31,195
3
2
,
4
6
9 9 1 , 0 6 2 1,114,060
5
,
8
4
Net Change
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Federal Reserve Bank of St. Louis
9
3
~
8 , 380+ 1 7 , 8 4 1 1 6 , 6 1 6 + 3 6 , 9 0 5 +
20,343+ 3 0 , 741+
2
SUMMARY FOR SYSTEM
Bills discounted for week
c
s $
80,789=
2
,
0
8
7
Bille purchased for woek
Government securitiesr
o
f week
3
3
,
9
0
8
+
Total earning assets for week
4
8 ,870~
Weekly average of earning assets Dec.31, 1925 to mar.19/26
against corresponding period 1925
1 2 4 , 3 4 2 +
Weekly average of earning assets Dec.3l, 1925 to Mar.10/26
against entire year 1925
4
6
Comparison of earning assets March 10, 1926
with March 11, 1925
,
4
7
4
4
1
+
, 499+
1
,
6
5
4
+ 21,325+
4
4
, 499+
T
e
?
A
a
a
h
.
”
a
p
e
.
S
e
y
F
TULLIONS
250
200
150
100
oe)
@)
ease
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
JAN
FEB. M A R APR. M A Y “JUN% J U L A U G SEP...OGieaNOV DEC.
Borrowings o f New York City Member Banks a t Federal Reserve Bank »
E
E
N
e t e i r e De a
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Federal Reserve Bank of St. Louis
W e d o not want t o discuss discount
The Chairman.
rates before o u r meeting w i t h t h e Board.
Governor Seay, I
thinx w e might crystallize the
opinion here, Mr. Chairman,
The Chairman. I
suggest w e postpone discussion o f
that until w e meet with the Board, unless y o u want t o
take a
poll t o s e e i f there a r e a n y strong opinions h e r e
about what ought t o b e done.
I f there i s n o call f o r
discussion w e w i l l p u e s t h a t a n d t a k e u p T o p i c 1 0 ,
1. (CREDIT TRANSACTIONS AND POLICIZS.
CG. D i s c o u n t o r Loan Policy i n respect to:
1. C o n t i n u o u s Borrowers.
2. L a r g e Lines,
The Cheirman ( continuing:) I
suggested putting
this o n the vrogram b e c a u s e w e had had a great deal o f
discussion of our policy i n New Yor« recently and I think
we have made progress i n the handling o f some cases
that h a v e been a
little difficult.
Governor Calicins. D o e s this topic refer to conti~ nuous borrowings b y banks o r from banks?
The Chairman,
Banks b y members.
C o n t i n u o u s borrowing
a t the Reserve
W e made u p some figures recently,
or
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Federal Reserve Bank of St. Louis
the Board did, 2 forget which, f r o m thich i t appeared
there were nearly 9 0 0 menber banks which h a d been conti-
nuous borrowers for over a year i n their Reserve Banks,
for the whole system,
T h e number i n New York runs
from eight t o nine, twelve and fifteen. I
are a n y m o r e t h a n that, I
doubt i f there
would l i k e t o t a k e b a c k s o m e
report o f what t h e exoerience o f the other banks h a s been
and what t h e y d o t o these menbers that c o m e i n for a cer-
tain amount o f credit and just stay a s steady boarders.
I mean banks that are i n good condition and can take care
of their obligations.
D o you mean large banks, Mr,Chairman?
Governor Seay,
-The Chairman. O h , the country bans, moderate sized
‘banks and the small banks. |
Governor Norris.
M y recollection i s that those f i g —
ures that you have just alluded t o were gotten u p when the
Reserve Board asked each Reserve Bank t o supply them. I
do not recall whether they have all been supplied o r whe—
ther the banks have been advised o f the results o f the
complete tabulation.
The Chairman.
W e have t h e figures i n New York b u t
P#Ve not semany revort on the subject. |
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Federal Reserve Bank of St. Louis
40
Governor Norris. I
have n o recollection o f having
Teceived o n e f r o m the Board a n d I thin’
i f I had received
One i t would have interested m e a n d I trould have remembered
i,
Governor Calkins.
A
s a matter o f fact a
comoila-
tion o f figures showing the number o f banks that borrow
for more than o n e year continuously, without some d i s c r i m
ination, would not b e informative.
T h e mere fact that 900
banks o f the country have been borrowing for more than one
year does n o t vrovide information o f value.
information that e
T h e only
c a n use i n considering t h e subject
or acting u p o n t h e subject i s discriminating information.
Roughly speaking there a r e about three different xinds
of continuous borrowing banks. T h i s does n o t apply t o those
happy, untroubled spots lice some o f the eastern districts,
but refers t o the larger wart o f the country.
F i r s t there
is the bank that h a s been continuously i n since i t got i n
over i t s head a n d has not y e t gotten out, a n d which cannot
get out.
W e have g o t some o f those i n all parts o f the
country except i n the eastern districts, S e c o n d , t h e r e i s
the bank that i s buying business b y using t h e Federal R e ~
serve B a n k funds a n d doing i t persistently.
T h i r d , there
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Federal Reserve Bank of St. Louis
41
is occasionally,
and I
think o n l y occasionally,
t h e bank
that s e é s a profit i n using t h e Federel Reserve Bank a n d
does i t for no other purpose except the small profit involved,
Governor Norris. I
fication. I
dij n o t catch your second classi-
thought t h e last o n e y o u stated wae your s e -
cond one.
Governor Calkins.
T h e b a n buying business w i t h t h e
use o f Federal Reserve bank funds.
Governor Norris.
W h a t i s the distinction between
your second a n d third classes?
Governor Calkins.
T h e second class i s not necessar—
ily o p e r a t i n g t h r o u g h t h e F e d e r a l R e s e r v e B a n t o r i n a
Federal Reserve B a n exclusively f o r the amount o f profit
but i n order t o get business which i t could not otherwise
Carry.
- I t i s generally a
new o r a
very
e n t e r p r i s i n .k
gnab©
There a r e some o f those i n all districts, a n d I think
theré i s a distinction between t h e t w o classes.
Governor Y o u n g . W e h a v e h a d a
little e x p e r i e n c e w i t h
that i n the Northwest, a n d i f I recall correctly the figures made were asked for o n September 1° o r October 1 of
last year, T h a t w a s not t h e best time t o secure those fig-
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Federal Reserve Bank of St. Louis
42
ures.
F o r instence, I
think w e renorted some 7 5 vanks
that had been i n our debt for a year o f more, a n d just
before I went away I
chected that uv.
A t the present
moment w e have twenty banks that have been i n our debt
for five years, t w o for three years a n d o n e for two years
and o n e for o n e year,
{ f presume t h e same thing i s true
of Dallas, Kansas Oity, Chicago and elsewhere, b u t w e
found i n t h e s t a r t t h a t a
great n u m b e r o f banks a t t e m p t e d
to use t h e Federal Reserve S y s t e m solely f o r profit.
That perhaps had a great deal t o d o with conditions that
developed a n d which I presume a r e the same a l l over t h e
United States,
with them,
W
e got those directors i n and talked
I t required a great deal o f patience, b u t I
think s o far a s our District i s concerned n o w that there
isn't a
single solitary bank that will borrow f o r profit;
there isn't o n e that would n o t v a y u n i f i t could n o t p a y
up» I
find all over t h e District that t h e y will s e n d
United States bonds o r disnose o f prime commercial vaper
or anything else t o avoid borrowing,
Governor ifcDougal, I
have a
memorandum here prepared
by Mr. Blair, w h o i s directly i n charge o f this matter i n
our institution.
H e states t h e r e a r e three classes
of
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Federal Reserve Bank of St. Louis
43
continuous borrowers:
F i r s t , t h o s e banks that have a c c u m
ulated such a line o f slow loans that t h e y have not b e e n
able t o r e d u c e t h e i r d i s c o u n t
t o t h e proper relation € o
their deposits, a n d for that reason have been continuous
borrowers.
W e have a
large number o f this class o f bor.
rowers i n our district, especially i n Iowa, growing out
of the situation i n Wisconsin.
W e have followed t h e policy
of urging the State banks t o make collections a s rapidly
as possible b u t have continued t o let t h e m borrow a s f a r
as n e c e s s a r y t o x e e p t h e b a n k s o p e n , t a k i n g e s p e c i a l c a r e
that w e h a v e a
proper m a r g i n o f c o l l a t e r a l
o n paper d i s —
counted a n d that t h e character o f our securities i s fully
maintained. S e c o n d l y , there are continuous borrowers for
the p u r p o s e
o f making profit
o n t h e rediscount. I
think
that should b e modified t o t h e effect t h a t there a r e tend~
eéncies o n the part o f certain banks t o borrow continuously
for profit.
I t i s our policy t o watch those cases and t o
correct them. T h e n there i s a third class o f country
banks, l o c a t e d
i n places w h e r e t h e demand c o n t i n u o u s l y
exceeds t h e supply o f local cavital, T h o s e banks should
also b e restrained a n d the borrowing b a n c urged t o increase i t s capital, although this class o f banks i s probably
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Federal Reserve Bank of St. Louis
entitled t o more consideration then t h e bank borrowing
continuously f o r profit. G d v e r n o r C a l i n s m a d e reference
I think t o c o n t o n u o u s borrowings being confined largely
to banks that are not i n good condition, i f I understood
him correctly, a n d that i s true i n our case.
Governor Calkins.
the same a s mine. I
M r , Blair's first class i s exactly
have n o case i n mind i n our district
where l o n g continuous borrowing exists i n connection w i t h
any bancs that a r e i n real good condition,
Governor Wellborn. I
d o n o t notice t h a t a n y o f o u r
banss, hardly, a r e borrowing f o r vrofit.
T h e r e a r e some
banks that have n o t gotten o v e r their 1 9 2 0 troubles, a r e
unable t o pay out, a n d they a r e just merely working them,
selves out. Apparently some are borrowing for profit, b u t
not r e a l l y so.
I n our section t h e y cannot a f f o r d t o in-
crease their capital stock. T h e y have t o borrow pretty
heavily every year, b u t that i s not done f o r profit.
I t
is done merely t o accommodate their customers i n the community.
‘he Chairman, Your banks a r e pretty steady borrowers,
probably m o r e t h a n a n y o t h e r R e s e r v e B a n k s
i n t h e System,
are they not? Y o u r discount account h a s been about a s
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Federal Reserve Bank of St. Louis
Steady a s any,
Governor Wellborn,
O u r s h a s b e e n v e r y l o r l a s t year,
We had t o anpeal t o the Committee i n N e w York t o give u s
some o p e n market vaver i n order t o vorovide f o r our Carnings,
because o u r discounts were v e r y low.
B u t their recent
offerings have been quite heavy, a n d they are increasing
now very rapidly,
O u r policy with the continuous b o r —
rower i s t o insist uvon the member banks, which borrow
from u s seasonally,
t o pay u p their indebtedness o n c e a
year, T h a t o f course i s sometimes prevented b y crop fail-
ures and other emergencies.
B u t our experience with the
banks that horrow continuously i s that sooner o r later
they find themselves i n serious difficulties, and it is
therefore o u r practice either t o call t h e m t o the office
for a conference o r send o n e o f o u r officers t o talk v i t h
the d i r e c t o r s
o f t h e mantic + tane a n d e n d e a v o r
t o bring t h e m
in line with o u r policy,
The Chairman.
Governor Seay.
A r e there a n y further remarks?
W
e a r e familiar w i t h t h e three classes
of vanks described b y Governor Calkins. I
think you stated
that your consideration o f t h e matter h a d been vrofitable
and y o u hed arrived a t a nolicy i n dealing w i t h those banks,
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Federal Reserve Bank of St. Louis
is that correct?
The Chairman.
W e l l , w e a r e shaping something u p that
seems t o b e worting b y classifying a l l the banks i n the
District, t h a t i s those that borrow from u s a n d that w e
are watching, I
ultimately
to a
suppose t h e classification will get d o m
consideration
o f t h e circumstances
o f each
individual bans, a s i t should; b u t i n the meantime i t i s
pretty difficult, u n t i l your m e n are thoroughly experienced i n the condition o f each bank a n d its history o f bor—
rowings,
t o pick u p a n individual banc unless y o u have
Some rule o f thumb t o go by.
Governor Seay, I
I f you are interested i n it,
can tell y o u t h e w a y i n which w e are
approaching it,
Governor Seay. I
becsuse I
would lixe t o hear it, ifr. Chairman,
a n interested,
The Chairman.
T h e r e a r e five classes
o f bancts i n
the District t h a t ~ e watch especially i n connection w i t h
their borrowings,
F i r s t o f course a r e those that a r e
on the special list, w h e n t h e examiners o f the Comptroller
indicate that they are not i n tip top condition;second, a r e
those w h i c h s h o w a
tendency
t o borrow a n unduly lerge
amount; third, t h o s e that s h o w a tendency t o = continue
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Federal Reserve Bank of St. Louis
Av
borrowing f o r t o o long a veriod; fourth, a
special group
of b a n s i n the u p t w m section o f New York i n the cutting
up trede, t h e needlettrade,
t h e fur business, a n d s o on,
where t h e y borrow seasonally v e r y heavy amounts, beginning
atthis season of the year and paying off in the fall,
Those fellows a r e a l l inclined t o over—borrow,
J
i
e a lee
the Wall Street banscs “hich lend money o n the Exchange a n d
are i n and out with very large amounts, a n d whom we d o not
want t o ride u s t o death when t h e Stock Exchange rates
go up,
Nov, i n going over this little analysis o f the
types
o f borrowers w i t h P r o f e s s o r Sprague,
h e says t h a t
me should have a sixth class, a n d then h e thinks i t will
be p r e t t y w e l l covered.
T h a t class contains those
banxs which bscome borrowers a n d which give t h e excuse f o r
borrowing t h e fact t h a t they have lost devosits a n d w h e r
the loss o f deposits becomes rather a permanent o r continuous thing, indicating some decline i n confidence i n the
bank,
a n d some reason f o r a
need o f change o f nanagement
or change o f volicy o f the bank. I
a m satisfied nyself,
and have s o stated t o our officers, that the management
of the borrowing account o f a n y member b a n k has got t o b e
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Federal Reserve Bank of St. Louis
j
4
8
judged individually a s t o each bank o n its o m merits i n
each instance, U n l e s s thet i s done y o u might d o a n injus—
tice i n driving those fellows t o vay off when they should
hot,
o r i n some cases t h e banks m a y b e borrowing quite i n
accordance with what w e regard a s the orthodox principle,
anc nevertheless b e borrowing a
Governor Oaltins.
great deal,
O f course this discussion vith re-
gard t o the classification o f vancs i s guestionable, b e —
cause roughly there a r e only t r o classes —
bans, although I
good and bad
will s a y that there probably isn't a n y
probability o r vossibility o f classifying them i n that
way» H o w e v e r , I
Classificvation,
large amounts.
borrowing a
a m particularly interested i n the second
t h a t i s b a n s t h a t a r e borrowing u n d u l y
H o r d o y o u determine whether a
larger amount t h a n i t should?
bank i s
W h a t i s your
standard, a n d that i s the definition o f over—borrowing?
The Chairman. T h a t type o f borrowing has got t o b e
dealt w i t h b y consideration o f the circunstances o f each
bank»
Governor Claxins,
I n other words, y o u cannot classify
over—borrowing,
The Chairman.
T h e r e a r e very f e w banks i n our District
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Federal Reserve Bank of St. Louis
which, i f we anplied a rigid rule, v e r y f e w banks out-—
side o f o e Yor: which would n o t have securities o r bought
pacer, o r something o f that sort, which they could sell
so that they w u l d not need t o borrov a cent from us,
There a r e some that n e e d more money, a n d the situation i s
— about like this;
W h e n t h e country bank apolies: f o r a
dis-
count ~ e l o o k o v e r t h e i r a f f a i r s a n d w e f i n d t h a t t h e y h a v e
got s o m e G o v e r n m e n t v o n d s a n d s o m e g o o d b o n d s
that t h e y can dispose of,
W e let t h e m have a
o r securities
loan a n d
write to» them a t once a n d s a y "This makes your reserve
good, b u t w e w a n t y o u t o l i q u i d a t e s o m e o f that s t u f f a n d
pay u s off,"
T h a t situation would arise with almost
ev-ry b a n k i n the District a n d t h e result would b e that
these c o u n t r y banks, w h i c h b o r r o w a n y w h e r e f r o m e i g h t t o
ten t o twenty o r twenty five millions, a t different times,
would s a y " A l l right,
w e will borrow f r o m o u r N e w York C i t y
banks, o u r old correspondents"; w e would not lend any money
¢0 our country members; they would all borrow i n the City
of N e w Yorx e n d then ~ e sould simoly have t o lend s o much
more t o the N e w Yors City banss.
Y o u cannot c a r r y those
rules t o o f a r o r h a v e t h e m r i g i d o r bureaucratic. I
regard
one o f t h e functions o f the bank a s being that o f supplying
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Federal Reserve Bank of St. Louis
50
the amount o f credit that i s required t o make good t h e re.
serves o f the menber banks, a n d not t o run each bank individually and say that i t should b e the one t o borrow, o r
that s o m e other b a n k i s t o b e the one. T o d a y t h e Reserve
System has got t o furnish eleven hundred million dollars i n
credit o r there will b e a big deficiency i n the .reserves
of the menber banxs a n d w e will have a period o f sharp liquidation,
S o i t i s a question o f which among t h e me:nber
banks, assuming t h e t t h e y are i n zood condition, a r e really
entitled reasonably t o borrow from you, even i f they have
got securities t h a t t h e y could sell,
I t i s just a
tion o f not letting t h e m ride y o u t o death.
ques—
B u t w e could
not call t h e loans f r o m all the banxs which a r e borrowing
from u s w h i c h h e v e o t h e r r e s o u r c e s
t o which t h e y could
turn, because i f v e dij w e would have a
very difficult t i m e
in this country.
Governor Calxins.
I f you said t o a bank that came
to y o u t o b o r r o w " Y o u h e v e G o v e r n m e n t o o n d s a n d c o m m e r c i a l
paper and things that y o u can sell, a n d you don't need t o
borrow", t h e obvious retort would b e "It i s evidently t o
be your policy t o loan money o n l y t o such banks that c a n —
not t a x e c a r e o f t h e p r o v o s i t i o n
i n a n y o t h e r way;
i n other
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Federal Reserve Bank of St. Louis
words y o u are discriminating against y o u r well managed
banx i n favor o f your vadly managed bank,"and that would
be perfectly s o u n d criticism,
The Chairman.
O n the other hand, i f a bank i n first
rate c o n d i t i o n h a s m a d e s o m e S t o c k E x c h a n g e l o a n s a n d c o m e s
to you to borrow two or three times their capital, and
with t h e proceeds o f that l o a n they apvear t o b e buying
more securities a n d comercial paver, a n d are riding you
to death, t h e n there i s something t o b e said t o them, o b viously,
and it is a
question
o f judgment
i n each i n d i v i d
ual case, i s it not?
Governor S e a y , G o v e r n o r C a l c i n s a s k e d w h a t w o u l d b e
the measure o f a banc's borrowing. I
would like t o a s k if.
he does n o t think thet t h e bank's capital funds, w i t h some
consideration a s t o the size o f its deposits,
i s not a
measure o f what t h e bank should borrow, o r be permitted t o
borrow, either occasionally o r with some degree o f continuity?
Governor Calkins.
I t ought t o be some indication, b u t
it could not b e used t o determine a policy.
Governor Seay, Y o u l d n ' t y o u think i t could b e i f i t
was disnosed t o borrow continuously?
I f i t was o u t o f vro-
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Federal Reserve Bank of St. Louis
52
portion
t o t h o s e funds, t h e n t h e r e o u g h t
Governor Calxins.
t o be a
check-up.
B u t w e are n o t n o w talxing about
continuous borrowers, b u t borrowers o f large amounts.
Governor Seay, T h a t would cover both.
The Chairman.
amounts. I
Y e are talcting sbout borrowers o f large
can give a
very good illustration o f the aiffi-
culties o f determining that question.
Y o u ‘now towards t h e
end o f the year i n New Yors there i s a very heavy draft
made b y the interior bancs, which carry balances i n New
Yors, a n d which wish t o pay o f f a t their o w n reserve b a n k
and clean u o their statement o r statement day,
I t happens
cir
that this last year t h e drafts o n New York a n d other
York
cunstances, doubtless owing t o the fact that the New
u s towards
ban«s wevealready borrowing quite heavily f r o n
the fact also
the end o f the year, a s they always are, a n d
about t h e
that w e had been talxing t o some o f our vanks
a consider—
anount they were borroring from us when they had
a l l led
able anount o f money o n call o n the §tock Exchange,
New York City
to a sort o f jam at the end o f the year, T h e
o v e r t h e wire
banks were losing devosits t o t h e interior
borrowing t o o
transfers; t h a t rather checked t h e m u p i n
t h e very last tro.
heavily f r o m u s a little bit, a n d towards
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Federal Reserve Bank of St. Louis
ud
or three d a y s o f t h e y e a r t h e S t o c k E x c h a n g e w a s i n n e e d
of a
hundred o r a
hundred a n d fifty m i l l i o n dollars m o r e
than w a s there, b e c a u s e e v e r y b o d y w a n t e d t o c a l l l o a n s a t
the same time, a n d somebody h a d t o put t h e money up.
pought,
W e
T h e n at
a s y o u know, 5 0 million i n securities.
the last Wilmute t h e deadlock w a s broken a n d one o f our
large banks borrowed a
put t h e money out.
large s u m o f money f r o m u s a n d
T h e r e i s a n illustration o f the
difficulties t h e t a p p l i e s
t o the System a s 4
whole.
gcod
Who i s going t o borrow this money f r o m u s t o make
the reserves o f the banking system a s a whole?
pody h a s g o t t o d o it.
t
S o m e -
f w e took o u r l o a n a n d acceptance
o r t e n milaccount o u t o f the market today, o f say eight
bank loans
lion dollars, w e would have a contraction o f
and d e p o s i t s
i n t h e United States
o f seven o r eight hil-
lion dollars, w h i c h t h e country could not stand.
is another question,
S o there
a s t o whether t h e borrowing bank
i t i s borrowing,
ought t o b e censured, p e r so, j u s t because
Somebody h a s g o t t o b o r r o w t h e money.
Govemnor Wellborn.
W e have h a d a situation i n our
early i n -the
District o f t h e country banks coming t o us
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Federal Reserve Bank of St. Louis
54
year and wanting t o ‘now how much credit they could get,
they anticipate a
certain amount o f business f r o m their
customers, a n d they almost force u s t o establish a line,
just l i k e the N e w Yorse banss d i d when t h e Federal Reserve
System started,
W e gave a good deal o f thought t o the
situation, ~ e discussed i t i n our board, a n d decided w e
would give t h e n u p t o cavital a n d surplus, t h a t i s the invested capital i n the bank, T h a t i s our rule, b u t i t i s
not a
rigid r u l e a n d i t i s a l t e r e d q u i t e f r e q u e n t l y w h e n
an individual case comes up, i f a bank happens t o lose
devosits a n d needs additional accommodation,
have S t a t e f u n d s
o r county funds o r bond issues a n d need
additional credit f r o m us.
that rule.
o r where t h e y
I n cases o f that xind w e relax
B u t a t the beginning o f the year, w h e n they a s k
us how much they can borrow, w e tell them u n to their
capital a n d surplus.
W e find o u t that that ~orks o u t v e r y
well a n d keeps t h e m down t o rzeasoneble borrowings.
Governor Talley,
D o y o u tate into consideration other
‘borrowings that t h e y contemplate?
Governor Wellborn.
I t includes a l l borrowings w i t h
us, a n d outside borrowings.
W e advise t h e banks that w e
do n o t t h i n k i t i s s a f e f o r t h e m t o b e b o r r o w i n g m o r e t h a n
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Federal Reserve Bank of St. Louis
their capital a n d surplus f r o m all sources. H o w e v e r w e
relax o u r r u l e i n snecial cases.
Governor Young, T h a t request h a s coms t o iinneapolis
a great m a n y times a n d w e have never made a voromise a s t o
what ~ée sould lend,
W e tell those banks that v e will l e n d
them w h a t i s necessary, d e o e n d i n g e n t i r e l y
during t h e interim,
o n what t h e y d o
W e find thet i s a pretty good check
to k e e p o n t h e c o u n t r y banks,
W
e d o not want t o say t o
them that w e will n o t lend t h e m $25 , 000 o r that ~ e will n o t
lend another one $50,000.
W
e prefer not t o put any limit
on it, but w e will tell them that a t the time they want
the money they will take t h e question up; t h e t i f they
have been conducting their institution i n the way that i t
should b e conducted that t h e y will find liberal credit a t
our bank; otherwise not.
W e find that t h a t h a s h a d a good
effect, a n d we have never m a d e any definite commitments
for t h e hebure,
Governor Seay, H a v e you ever established a limit i n
their borrowings beyond which y o u would n o t permit t h e m t o
Zo?
Governor Young.
N o , never. W e l o a n e d a bank i n our
District $575,000 that had a capital o f $25,000, a n d any
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Federal Reserve Bank of St. Louis
56
man around this table ~ould have made t h e same loan under
the same conditions.
Governor sicDougal.
O f course y o u d o not extend a n y
further c r e d i t w h e n t h e y h a v e g o n e t h e l i m i t w i t h y o u ?
Governor Young.
O h , no. W h e n t h e y a r e through, t h e y
are through.
Governor wucDougal.
Governor Strong,
Y o u a r e contemplating a
i f I understood
you w o u l d g a u g e t h e b o r r o w i n g s
volicy,
i t correctly, u n d e r w h i c h
o r d e t e r m i n e t h e provoriety
of the borrowings o n the part o f the country banks t o some
extent o n what t h e y h a d i n the w a y o f marxetable stuff
in the w a y o f bills o r other good securities?
The Chairman.
N o , T h e t i s simply o n e o f the factors
to t a x e i n t o c o n s i d e r a t i o n .
Governor wdcDougal.
I f y o u d i t h a t w i t h t h e country
banxss i t w o u l d o n l y b e proper, I
rule t o t h e c i t y banks, w o u l d
The Chairman.
think,
t o aonly t h e s a m e
i t not?
W e have generally s a i d t o the N e w York
City banks that have gotten dom™n i n reserves a n d have c o m e
to borrow fron us, and who have got a lot o f money out o n
call, t o readjust their reserves and not t o borrow continuously f r o m u s w h e n t h e y h a v e c a l l loans.
B u t there
i s no
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Federal Reserve Bank of St. Louis
mathematical r u l e that y o u c a n apply t o it.
Governor wcDougal, W o n e a t all,
The Chairman,
too continuously,
When a
bank i s borrowing t o o much o r
a x there i s ground o f complaint about
the w a y t h a t t h e y r u n t h e i r b o r r o w i n g account,
find t h a t t h e y h a v e o t h e r resources,
and you
y o u h a v e a n argument
to use with t h e n that y o u would n o t have i f they had n o investment t h e y c o u l d c a l l i n a n d w e r e j u s t b o r r o w i n g f r o m
you i n order t o take care o f the local demands o f the community. T h a t i s rather t h e case i n our District, though,
Governor Young.
W e have n o cases a t t h e present t i m e
of long and continuous borrowing o n the vart o f banks located i n a n y o f o u r R e s e r v e c i t i e s .
W
e h a d o n e that
smacked o f that and i t was given the xind o f treatment
that y o u refer to, being one where they were carrying a
very large a n d unjustifiable amount o f Government securi-
ties.
I n that case w e approached the officers o f the bank
and told t h e m that i t had been clearly demonstrated that
they were carrying more o f their securities t h a n they could
carry conveniently without s t e a d y borrowing;
w e asked t h e m
to disnose o f then, a n d that was done.
The Chairman,
W i t h a four p e r cent discount r a t e
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Federal Reserve Bank of St. Louis
58
and t h e present level o f return o n governments, t h e r e i s
very little inducenent t o do that, T h e y were losing money
every day.
Governor Young.
I t was a
case where t h e G o v e r m e n t
securities w e r e bought s o m e time a g o a n d they have carried
them continuously.
The Chairman.
B u t they e r e losing money,
Governor Young. T h e y heven't l o s t money o n these trans~
actions because o f the increase i n valve o f the Government
securities,
The Chairman. I
<cnow, b u t i f they c a n sell the bonds
on a 3.70 basis a n d they a r e borrowing t o carry them a t the
4 per cent discount, t h e y are certainly losing money every
day.
Governor Young.
T h e y ~ e r e n o t b o r r o w i n g f o r profit.
They were borrowing because t h e y did not want t o disvose
of their governaent bonds, a n d t h e y were carrying t o o many
of them,
Governor Calkins, T h e y were borrowing i n anticipation
of a n i n c r e a s e
i n t h e value o f t h e bonds * h i c h t h e y w e r e
carrying which would make u o more than t h e differential
in rates,
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Federal Reserve Bank of St. Louis
Governor Yellborn. I
want t o add t o m y previous
Statement, t h a t i n maxing this rule o f vermitting t h e m t o
borrow u p to the -xtent o f the capital and surplus, w e exceoted f r o m that offerings o f government bonds a n d comnodities, because t h e y a r e self—liquidating paper,
Governor Seay.
A s t o continuous borrowing, t h e r e c a n
be Very little, i f any, difference o f opinion.
I t ought
not t o b e vermitted.
Governor Bailey.
W e have s o m cases where w e would
lixe t o prohibit i t i f we could.
But
Governor Seay,/ As to the size of the borrowings I am
in quite i n agreement t h a t i t depends u p o n t h e circumstano-
es o f each case.
The Chairman.
fully.
W e have discussed this topic pretty
A s t o Topic 1-D, w e will postvone discussion o f
that until wir, Baxer i s here tomorrow,
The n e x t t o p i c i s 1-5.
1. O R E D I T TRANSACTIONS A N D POLICIZS.
He Spyould a Federal reserwe‘iban: m a c e advances t o
member banks o n bills vayable secured b y United States Gov—
ernment securities h e l d i n safeceeping without taking steps
to ascertain that such securities are the property o f the
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Federal Reserve Bank of St. Louis
offering member banks.
Governor Bailey, I
gram simply because I
asked that this b e out o n the pro-
wanted t o find out f r o m the other
Governors j u s t what t h e y d o i n the case o f banxs that leave
securities with t h e Reserve Banks f o r safexeeping.
There
is s o much o f this i n our Banx, t h e leaving o f other
peoples! bonds for safexeeping, that w e are u p against
this oroposition:
T e have p u t o u t a n o p e n letter saying
that v e will o n l y t a k e f r o m n e n b e r b a n x s a n d r e c e i p t
t o
the banx f o r the bonds. T h e y s e n d i n a letter saying that
they a r e transmitting certain bonds,
t e l l i n gs
u who t h e y
belong to, a n d v e will “rite b a c k a n d s a y that w e cannot
take those bonds under those conditions, b u t that v e c a n
only take t h e m a s t h e bonds o f the mnenber bank a n d that
we will receipt t o the menber b a n k f o r t h e bonds.
They
have t o l d u s t h a t t h e y b e l o n g
and
three f o u r t h s o f t h e b o n d s
t o t h e i r customers,
i n o u r pdant n o w “ h i c h r e h a v e
sotten f r o n c o u n t r y b a n k s a r e t h o s e o f f i r m s a n d b u s i n e s s
men who live i n their comnunities, w h o have left their
securities ~ith t h e little country ban':, where t h e y a r e
just a s unsafe a s they c a n be. I
think i t i s one o f t h e
best services that w e are rendering out i n that section o f
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Federal Reserve Bank of St. Louis
61
the country i n taking those securities a n d xeeping t h e m
in our vaults with all the vrotection that w e have.
A s
a matter o f fact t h e y r i t e a n d tell u s that they enclose
bonds belonging t o s o and s o and w e always write back and
Say that ~ e cannot receive t h e bonds except bonds o f the
menber banks.
that a
A n d then this question comes up: S u p p o s e
bank t o whom w e have sent such a letter comes i n
and wants t o borrow a hundred thousand dollars, a n d w e will
Say that they have $200,000 o n deposit f o r safexeeping with
us, $100,000 o f which i s their ow. T h e y come i n and want
to borrow a hundred thousand a n d w e loan t h e m a hundred
thousand. Those bonds are not segregated, b u t are just
allowed t o stay i n safekeeping.
N o w i n case the bank
should fail, a n d w e have that balance o f bonds that ~ e could
take, b u t sunvose i t develons t h a t the hundred thousand dollare that e
have t a k e n a s security belong t o the customers
of the denositing b a n k a n d were n o t t h e property o f the
bank?
W h e r e w o u l d w e be?
The Chairman.
I t would denend o n whether y o u had notice
Or HOt.
Governor Bailey,
I s that notice?
The Chairman, S u r e l y .
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Federal Reserve Bank of St. Louis
62
Gogernor Young.
T h e r e a r e t w o means o f checting that
Governor Bailey, J u s t a moment. W h e n w e make a loan
of that ‘ind w e make t h e m certify that t h e y a r e his bonds.
We always make t h e m d o that.
The Chairman. Y e s , but h e certifies that they are
his bonds sometimes when t h e y a r e not.
H i s certificate
isn't a n y good.
Governor Bailey.
T h e point i s how a r e y o u going t o
get around that? T h e y may n o t have been h i s bonds w h e n h e
sent t h e m t o you,
H e may have bought t h e m afterwards.
are w e going t o tell? f
H o w
the member d a n k comes i n a n d says
they a r e h i s bonds, w h e n h e h a s t o l d u s a
year b e f o r e t h a t
they were not, would that constitute notice?
The Chairman,
' to b e d e c i d e d
tell y o u this:
[ I do not t*now. T h a t i s a nice guestion
by a
jury,
I t is a
legal question. I
will
I f y o u maxe l o a n s t o your member banks
where there i s doubt i n your o w n mind a s t o the title t o
the collateral,
i f y o u have records i n your o w b a n k that
puts y o u o n notice o f that fact, y o u want t o b e very care-
ful that y o u don't lose that collateral, because the chances
are that t h e Court will taxe i t away from you.
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Federal Reserve Bank of St. Louis
63
Governor Bailey. I
that k i n d but I
hadn't r u n against anything o f
xnow r e have t h e m i n there.
T a k e the
First National B a n x o f Kansas City, t h a n which there i s n o
petter b a n k than I know of. I
presume t h e y have 2 5 millions
on d e p o s i t w i t h o u r b a n k f o r s a f e k e e v i n g a n d w e h a v e
receipted f o r them, T h e i r statement w i l l shor that t h e y
own about t e n million dollars.
N o w , t h e First National
Bank c o m e s o v e r t o borrow, w h i c h t h e y d o e v e r y o n c e i n a
while, five o r six million dollars for two o r three days
to keep u p their reserve, a n d w e have got their $25,000,900
there, h a v e w e got t o senarate o u t t h e securities t o cover
the five o r s i x million dollars a n d make a
that i n order t o maxe a
new record o f
loan f o r five days? I
think w e would ever have a n y chance ¢
do not
losing anything w i t h
the First National Bank, but that i s a point I want t o hear
discussed here,
t h e experience
The Chairman,
yer a n d a
o f y o u o t h e r gentlemen,
A s iir, Harrison.
good p r a c t i c a l m a n .
H e i s 4 eood l a w
D i d you follow the s t a t e
ment, wr. Harrison?
wir. Harrison.
J I followed pvart o f it.
T h e same ques-
tion c a m e u p some time ago, G o v e r n o r Calkins h a d a case
out i n Seattle i n which there w a s some ground f o r doubt
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Federal Reserve Bank of St. Louis
64
as t o who were t h e owners o f the bonds, a n d I think there
was discussion a s t o whether o r not a
bank should adopt 2
policy o f requiring every member bank t o certify that t h e
bonds belong t o it.
T h e general feeling,
a s I remember i t
at that time, a n d certainly i t i s m y feeling now, w a s that
it would b e impolitic f o r the Reserve b a n k t o require s u c h
a certificate,
i t being a
very much better vosition f o r
the Reserve bank t o ssumethat t h e bonds presented t o i t
by its menber banks were t h e member banks!
o w bonds, u n -
less, a s a matter o f actual fact, the Reserve bank was o n
notice t o the contrary, ~ or on notice t o question the fact.
I myself h a v e t h o u g h t t h a t w e w o u l d b e i n a
better p o s i -
tion t o assume that t h e bonds a r e the bonds o f the member
bank unless y o u have «xnomledge that t h e y a r e not.
I f you
do have such cnowledge, t h e n ~ e should n o t taxe them,
Governor Calkins. ‘Wouldn't y o u g o a step further a n d
say t h a t i n t h e s d s e n c e
o f tnorledge
t o t h e contrary y o u
are s a f e i n a s s u m i n g t h s t t h e b o n d s a r e t h e p r o p e r t y o f t h e
pledging b a n k ?
Mv. Harrison.
Y e s ,
Governor Calkins.
I n the absence o f cnowledge t o t h e
contrary, G o v e r n o r 3ailey indicated that t h e y had records
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Federal Reserve Bank of St. Louis
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Showing that t h e bonds belonged t o somebody else.
records a r e i n t h e b a n t h e n I
ly precarious condition.
I f those
think y o u a r e i n a n extreme~-
I f h e has m d e a
sufficient
analysis t o find that t h e bank thet borrows t e n million
dollars does not own the ten million dollars i n securities,
is o n notice, a n d that i s the nost dangerous thing
that w e meet i n litigation.
Governor Young. I
think y o u have f o u r very safe checks.
The first i s that when t h e b a n offers t h e bonds a s collateral f o r their government denosits o r bills payable, y o u
have a
statement f r o m the institution showing that t h e y
own S O Many bonds.
I n addition t o that y o u have the E x a m
iner's r e p o r t s h o w i n g t h a t t h o s e b o n d s a r e p l e d g e d f o r
public funds, a n d i t i s very easily t o determine whether
the bank has sufficient bonds left s o that t h e y can put
thei up,
The Chairman.
W e ordinarily have a lbst o f all t h e
bonds t h a t t h e y d o own.
Governor Young.
Yes.
I n addition t o that, that
bank. never <nows when i t i s going t o be visited b y a
National B a n : E x a m i n e r
or a
fourth proposition i s that I
State b a n c examiner.
T h e n the
never i n m y experience s a w a
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National o a n k o r a State bank that h a d a n y United States
Government bonds unless they were pledged w i t h the Secre—
tary o f t h e T r e a s u r y o r p l e d g e d w i t h a
that y o u are very well protected.
c o u n t y official,
s o
‘ Y e check u n every l o a n
that goes through.
Governor Bailey,
O f course y o u may have a
statement
from the dant, b u t i t is nrobably six months old, a n d
Since that last statement t h e y m a y have bought those bonds,
and t h e y a r e t h e i r b o n d s a s a
Governor Young.
I
matter o f fact.
n that c a s e y o u c a n ask t h e m whe—
ther they a r e pledging t h e right b o d s o r not.
W e can
tell those banxs t o describe t h e bonds b y number a n d issue.
Governor Bailey.
T h a t i s the point.
I f they tell
us when they come there that t h e bonds belong t o them.
For instance, h e r e i s a letter t h a t w e have received, " W e
are s e n d i n g y o u t o d a y b y exoress U.S. counon b o n d s t o t h e
amount o f $11,300 a s per enclosed descrivtions o f said
coupons.
W e u n d e r s t a n d y o u w i l l t a e c a r e o f this, c l i p
the coupvons a s they become d u e a n d notify u s o f the amount
due € a c h c u s t o m e r . " W e r e c e i v e d t h a t l e t t e r a n d ™ e a n s w e r
ed it b y saying that w e did not clip counons, that w e would
not taxe the bonds o n that basis, b u t would only take them
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Federal Reserve Bank of St. Louis
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and r e c e i p t f o r t h e m a s bonds o f t h e m e m b e r bank.
T h e n
in our gencral circular o r letter w e s a y that this i s a
service rendered t o member banxs o n l y a n d insofar a s t h e
Federal Reserve b a n k i s concerned t h e securities deposited
for safe-keeping will b e considered the property o f the
depositing bank a n d a custody receipt w i l l b e issued a c cordingly.
W e write t h e m a n d s a y unless t h e y leave t h e m
there a n d take a
receipt f o r t h e m w e cannot handle them,
and o f course they always leave them. S i x months after
that that m a n m a y have sold h i s bonds.
N o w the question i s
when a mesber b a n comes there, o r sends i n a hundred thousand o r t e n thousand o r five thousand dollars i n Government
bonds as collateral for his note, i t is fair t o assume
that t h e y a r e his bonds,
W e are innocent purchasers.
I f
they have been l e f t b y : the customer o r h e has stolen t h e m
and hypothecitated t h e n with u s w e d o n o t k n o w the differ—
ence. T h e r e wouldn't b e any difference f r o m a man going
over t o a broker a n d selling them and using the money.
Governor ‘Yellborn, I
shéuld think that mould p u t
you o n inquiry a n d y o u should g e t a
personal letter f r o m
the bank saying t h a t t h e y had bought t h e bonds i n the meantime,
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Mr. Harrison. I
think y o u were o n notice that t h e
bonds a c t u a l l y d i d b e l o n g t o t h e c u s t o m e r
——
Mr. Bailey, T h e y did belong t o the customer when h e
put them i n there, b u t the customer sold the bonds t o the
bank, a n d the bank bought them.
I f the bank wrote u s a letter l i k e
Governor Norris.
that w e vould decline t o accept t h e bonds a t all.
@iov, Bailey. W o u l d n ' t y o u accept t h e m i f they would
take a
custody receipt?
No.
Governor Norris.
W e mouldn't accept a n y bonds
except those that belonged t o t h e bank.
T h a t i s the question. S h o u l d w e
Governor Bailey.
taxe a n y bonds that ~ e ‘now are not t h e oroperty o f the
bank?
Governor wicDougal.
Governor Harding.
W e w o u l d n o t t a x e them,
W e would n o t acceot custody o f a n y
securities except t h e property o f the bank.
The Chairman.
Governor Seay.
T h a t i s o u r »osition,
W e had occasion recently t o investi-
Bate the ownership o f bonds that wereheld i n custody and
we found a very confused situation among our member bans.
There i s no doubt i n my mind, o r i n the mind o f our counsel,
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that w e will b e charged with knowledge w i t h whatever i n formation w a s i n our yossession a s t o ownership o f those
bonds a n d i t i s o u r responsibility t o make a
records a n d find out.
W
search o f our
e recently nrovounded eight i n -
quiries t o the several Federal Reserve banxs a s t o what
course t h e y p u r s u e d w i t h r e s p e c t
possession a n d w e found quite a
t o securities
i n their
variety o f courses fol-
lowed b y the various Reserve banss. T h e r e has grom™m up,
among the country banks i n our District, a
practice o f
permitting t h o s e b o n d s t o b e s e n t t o t h e m t o b e h e l d f o r
their customers, a n d they have a rule i n the receiot which
they give for those bonds, sometimes, that although they
hold t h e m merely f o r safe-keeping f o r their customers,
but that nevertheless they have the right t o borrow o n
those bonds. T h a t i s a very renrehensible practice engazed i n b y some o f the country b a n s ;
i t i s rather spread—
ing, a n d T have arrived a t the opinion t h a t there i s n o
safe course, w h e n w e are maxing loans u p o n securities i n
our possession, o t h e r t h a n toescersain ourselves that t h e y
are the property o f our member banks ma‘sing t h e borrowings,
and t e should nursue that course,
Mr. Harrison.
D o y o u mean affirmatively taxe t h e
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Federal Reserve Bank of St. Louis
steps t o that effect?
Governor Seay. Y e s , affimmstively.
W e feel that i f w e have t o d o that
Governor Norris. -
that w e would g o o u t o f the custody business altogether.
Governor Seay,
W e have t h e statement f r o m the b a n
that i t owns them,
W e get thet statement i n advance.
Governor Harding.
W e found that t h e oractice i n the
Governor Seay,
various Federal Reserve banxs varies a n d that Cleveland
was perhaps t h e o n l y bank that required a
certificate o f
ownership a t t h e t i m e o f deposit.
The Chairman, G o v e r n o r Bailey, y o u have suggested
another topic, 4-A, "Should a
Federal reserve b a n accept
for safe-keeving securities w h i c h a r e not t h e property o f
the depositing bank?"
T h a t appears a s another topic o n
the program.
Governor Bailey.
I t i s t h e same thing a n d should n o t
have been sevarated. I
Mr, Harrison.
do not “now why i t was done.
T h a t was d o n e i n error.
The Chairman. ‘that i s your oronosal with regard t o
the topic w e are nov discussing, Governor Bailey?
Governor B a i l e y . I
just w a n t e d t o g e t a n exoression
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Federal Reserve Bank of St. Louis
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as t o what t h s rest
o f the banks were doing, I
xnow that
we a r e taxing f r o m our country banks bonds that belong
to their customers i n the country, t h a t t h e y are oretty
well scattered through the farmers and one thing and
another.
T h e y leave t h e m with their country bank.
are n o t safe there.
They
T h e y elect t o send t h e m t o u s o r t o
one o f the danks i n Xansas City, w h i c h will deposit t h e m
with us. P e r s o n a l l y I
think i t i s one o f the best servic-
es that w e are rend?ring,
Governor Young,
Y o u c a n check i t u p all right.
Governor Bailey. I
don't ~orry s o much about that.
There a r e very f e w o f our country banks borrowing o n G o b
ernment bonds, S e v e r a l o f the big bancs have bonds with
us, but they omm their bonds.
get a t i s w h e n a
T h e point I an trying t o
bank c o m e s a n d s a y s t h e b o n d s b e l o n g t o
and axs u s t o loan money o n them whether i t i s neces—
for u s t o g o back a n d d i g u o information that w e m a y
had previous t o that o f a different «ind?
W e only
the information f r o m the vanx depositing them.
They
come over a n d s a y that they a r e their bonds a n d sign a
certificate
t o t h a t effect,
lieves u s o f liability,
I t seems t o m e that that
r e
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Federal Reserve Bank of St. Louis
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wir. Harrison.
N o t i f y o u are o n notice t o the c o n
trary.
Governor Young,
i r . Chairman,
w e have h a d a good
deal o f experience o f that i n the Ninth District,
A s Gow
ernor Bailey says, l o t s o f these small country banxs h a v e
nothing b u t c r a c k e r b o x e s f o r safes,
a n d they send those
bonds t o us, ‘ Y e check t h e m u v and call attention t o the
fact that t h e bonds cannot possibly belong t o them.
N e
got i n bad “ith ev=rybody i n the Northwest s o m e f o u r o r
five months a g o b y doing that, a n d m y directors t o l d m e
to accept the ponds o f the customers o f the bank, realizing
that there w a s a slight liability, b u t figuring that there
were t w o w a y s o f l o s i n g money,
o n e b y taxing that vosition
and the other b y verhaps losing something o n the bonds.
So w e are taxing anything s e n t i n t o u s b y our member banks.
The Chairman,
I t i s awfully difficult t o »vrotect
yourself w h e n y o u have a large business o f that kind. A
letter may come i n accomoanying a shinment o f bonds; y o u
heve n o t b e e n a d v i s e d o f a n y d i f f e r m t ownershipv a n d y e t
a letter m a y come i n with a memorandum attached t o i t saying that t h e bonds a r e t h e property o f s o and so, some clerk
will overlook it, i t will b e left with the bonds, t h e bank
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Federal Reserve Bank of St. Louis
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will borrow o n them a n d then later somebody will come i n
and claim the bonds a n d the first t h i n g y o u xno~ they have
sot p r o o f
i n the trial
of a
suit t h a t t h e r e w a s a
notice
attached, a n d then you have lost entirely. N o t i c e o f that
sort i s almost invariably lixely t o be construed against
you.
Governor Young. T h a t i s true, b u t there i s very little
chance o f that,
Governor Calxins. I
think w r . H a r r i s o n h a s e p i t o m i z e d
the proposition i n saying that i n the absence o f notice t o
the contrary the assumptiog that the bonds are the property o f the borrowing bank i s the best security o r brotection that y o u can have.
Governor Seay. W h a t i s notice t o the contrary?
Governor Calxins. A n y t h i n g that i s notice t o t h e contrary.
Governor Seay,
D o you agree that v e a r e vroperly
charged w i t h w h a t e v e r i n f o r m a t i o n w e h a v e
i n our nossession
as t o the omnership o f those bonds?
Mir. Harrison. Y e s , I think that i s true,
Governor Seay, S u p p o s e u p o n a search o f the records
of the bank i t i s determined that w e have among those r e -
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Federal Reserve Bank of St. Louis
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cords s o m e notation that those bonds a r e n o t t h e nroperty
of the menber bank? D o n ' t y o u b e l i e v e t h e courts w i l l
hold u s r e s p o n s i b l e f o r t h a t f a c t ?
wirs Harrison. Y e s , I think that i s very true.
Governor Norris.
A n d going o n e step further: S u p p o s e
a dans deposits 25,000 o f Government bonds with y o u a n d y o u
see a
contemmoraneous s t a t e m e n t
have o n l y 10,000 i n governnents,
o f theirs s h o w i n g t h a t t h e y
i s that notice that 15,000
‘of those bonds d o n o t belong t o them?
Mr. Harrison. I
should think not, because very often
these member banks d o legitimately borrow bonds, just for
the purvose o f hyvothecating them,
I n that case they would
have f u l l authority t o d o i t a n d your title would b e e n t i r e
ly valid. I
do not think that a
showing o m n e r s h i o
contemoraneous statement
o f bonds w o u l d o u t y o u o n notice
o f the
equities o f the third person.
Governor Calxins.
I t would not unless
i t was actually
a contemporaneous statement, a n d that you mould never have,
probably.
Governor Norris. ‘ W o u l d t h e y b e under a n y liability
to investigate a n d analyze t h e statenent o f every m e nber
bank u n d e r t h a t s i t u a t i o n ?
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Federal Reserve Bank of St. Louis
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wir. Harrison.
v o , 7
Should think not, T h a t i s a
posi-
tion I think t h e Federal Reserve B a n k should avoid.
Governor weDougal. I
thinx that i s where t h e danger
lies.
dr, Harrison,
I f y o u are going t o establish a
volicy
of thet *cind y o u ‘vould vlace t h e burden n o t o n l y o f asking
the Menber »ban's t o inform y o u about title t o the bonds
but also the burden o f analyzing their statements a n d o f
getting contenmmoraneous statements. I
think t h e whole
thing would b e immossible o f operation.
Governor Norris.
I t seems t o m e the safest p l a n i s
to take t h e certificate t h a t t h e bonds belong t o them a n d
maxe n o further investigations.
ir. Harrkson.
A n d i n the absence o f the certificate
assume t h a t t h e y b e l o n g t o t h e m e m b e r b a n k u n l e s s y o u h a v e
in y o u r b a n k r e c o r d s s h o w i n g t h a t t h e y d o not.
Governor Seay.
I t m a y b e incumbent u p o n t h e bank t o
search t h e records t o satisfy itself o n that point o r
otherwise i f they transfer that anount o f bonds, without
knowledge, t h e n someone might g o t o our records a n d find
that they did not belong t o the b e n and hold us for them,
Me, H e r r i s o n , I
think t h a t i s true.
I t i s imoortant
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Federal Reserve Bank of St. Louis
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to make a n intcrnal search i n the Reserve b a n k i f that
does n o t involve going t o the b a n x that sends them.
Governor Seay,
W e have found also i n quite a
number
of cases that ban*ts have borrowed bonds a n d have n o t s h o w
them a s a liability i n their statement,
I n fact w e found
a very mixed u p condition a n d I believe t h a t a n y o f t h e
other r e s e r v e b a n k s t h a t d e a l w i t h c o u n t r y b a n k s v e r y
largely would find t h e same thing.
wiv. Harrison.
T h e liability o f the member b a n k f o r
bonds which i t has borrowed i s nothing b u t what t h e Compa
troller calls a menovan/ liability, w h i c h f o r a long time
yas n o t ° s h o w n , b u t which i s shorn now.
The Chairman.
What I
don't l i x e about Governor
Bailey's c a s e i s that h i s circular i s anbiguous a n d sug—
gests possibly t h a t t h e language has v e e n used i n order
to get around the situation,
H e says, a s I renenber the
language, t h a t these securities will o n l y b e received
as the property o f t h e menber bank, a n d y e t h e admits
that h e received notice i n many cases that t h e y were n o t
the property o f the menber bank.
N o v i f h e said i n his
circular t h a t u n l e s s h e i s n o t i f i e d
t o t h e contrary i t
is understood that they are the proverty o f the member
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Federal Reserve Bank of St. Louis
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bank i t would not appear t o b e dressing u p t h e situation.
Then when h e gets notice t o the contrary h e mill b e
governed accordingly i n case t h e bonds a r e used a s collateral,
Mir. Harrison. I
den "
a m afraid h e trys . tothe equity o f
third »nerson o y merely saying that h e will n o t recog—
The Chairman,
H e quoted a
letter i n rhich t h e bank
said they w e r e offering t o deposit t h e bonds, stating
they understood h e was t o receive then for safekeeving,
Clin the couwnons, a n d advised h i m of the customers that
omed t h e bonds,
n the rorld would oroN o w no c i r c u l a r i
tect y o u against notice lixe that. N o r , ~ e decline t o
receive a n y securities except t h o s e which a r e the property
of the menber bank.
Y e will receive n o n e f r o m the banks
in N e w Yors C i t y excent those which come i n incident t o
our devosits a n d borrowings.
Governor Seay.
Y o u have n o t issued a
circular t o that
effect. Y o u reolied i n the negative t o that inquiry from
our dank.
The Chairman,
Mr. Harrison.
T h e n w e have not done So.
W e assucse that they a r e t h e oroperty
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Federal Reserve Bank of St. Louis
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of the nenber ban< unless v e have some notice i n our o m
bank, s o m e memorandum attached t o the bonds,
o r some other
data.
The Chairman,
I n h i c h event t h e y g o back,
Governor seay,
Y o u just assume t h a t t h e y ‘ n o t h a t
is y o u r g e n e r a l n o l i c y ?
ir. Herrison.
T h a t i s correct.
Governor Norris.
W e give then a receint stating that
are t h e i r vroverty.
Governor Seey.
mr. Harrison.
D o you d o that, wr. Harrison?
Yes, 6
Governor .fdcDougal.
d o that.
I t seems t o m e w e are going f a r
beyond t h e text o f the inquiry I mede.
T h e question i s
whether o r not t h e Reserve banks should maxe edvances
against securities h e l d f o r safekeening without taxing
steps t o escertain that s u c h securities a r e t h e property
of the offering meaber >oan's.
The Chairman. N o , Governor sicdougal.
W e sxinped that
topic a n d t o o k u p t o n i c 4 - 4 o n t h e n e x t page.
Governor .icbougal.
A l l right. I
cuss i t from this standyoint anyhow,
sent t o u s f o r s a f e x e e n i n g
—
would like t o dis-
W e require securities
t o b e acconmmanied b y a
statement
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Federal Reserve Bank of St. Louis
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in w h i c h t h e r e i s i n c o r p o r a t e d a
declaration
o f ownershin.
We would n o t hestitate under those circunstances t o make
advances
o f t h e “ind. r e f e r r e d t o -in this Toouic L-h. I
thins e s a matter o f fact that a
bank i s endangering i t s
own position if, b y corresvondence,
i t questions t h e ormer—
Ship i n the way that h a s been mentioned. I
think w e c a n
safely procesd along t h e lines o f commercial banking pvractice a n d a c c e n t t h e s e s e c u r i t i e s
menber b a n k u n l e s s
a s t h e property o f t h e
w e d o h a v e n o t i c e t o t h e contrary.
Governor Norris. B e f o r e t h e discussion o n this s u b —
ject i s concluded, a n d I sunpose i t i s about a t a n end now,
I want t o o f f e r a
but I
suggestion w h i c h m a y n o t b e o f a n y value,
want t o give i t t o you i n case i t is.
W e have h a d
the imoression that there might b e a minor distinction
made between t h e degree o f caution a n d care required o f
us i f the word "safexeeping" were not used and the word
"custody" was used.
Y e never use the word "safexeeping.
We accept securities f o r custody, n o t f o r safexeening.
The Chairman. I
Governor Bailey,
think t h e t i s a very good voint,
d o y o u wich this subject t o b e discussed
further?
Governor Bailey. N o , Mr. Chairman.
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Federal Reserve Bank of St. Louis
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have n u t o n the »vrogram Topic 1-fF,
The Chairman. I
1. O R S D I T TRANSACTIONS A N D POLICIES.
F. S t o c k Exchange L o a n Account. —
Its relation t o the
Nev York money market a n d t h e crewit situation i n gen=sral.
I put t h a t o n m o r e t o o f f e r o n v o r t u n i t y f o r e n y q u e s -
tions that y o u might w i s h t o as* m e then because I had
any particular statement t o meke about reporting loans a n d
sO on.
Y o u may a l l o f you b e intcrested i n the mere fact
of the reoort from the loan account, t h e history o f it, its
significance,
a n d s o on. I
d o n o t m a n t t o bother y o u w i t h
a long talk about the matter, b u t i f i t i s a matter o f interest I
will b e glad t o answer a n y questions.
Governor Calrins.
I t seems t o n e i t i s a matter o f
vital interest t o all o f u s a n d thet a n y information y o u
can give will b e o f very great value, wir, Chairman,
Governor Seay» I
7ould lice t o ask i f you think t h e
information finally arrived a t i s misleading o r i f i t
gives t h e information that i t was desired t o obtain.
The Chairman.
sorry t o say.
I t i s still somewhat misleading, I
am
I t will i n due time correct itself w h e n w e
have t h e basis f o r comparison w i t h previous periods.
T h e
i s this:
history o f macing the report, s o far a s I know it,
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Federal Reserve Bank of St. Louis
81
Doctor Stewart h a d long h a d a feeling that t h e publice—
tion o f the stock exchange l o a n eccount w a s a desirable
thing; t h a t i t would inform t h e nubdlic about a
very i m
portant i t e m o f credit conditions o n which n o information
which was densndable w a s being published, a n d that t h e information that t h e y d i d get f r o m the Yall Street p u b l i c a
tions, a n d s o forth, w a s «knov™n t o be decidedly nisleading,
We took t h e vosition i n the N e w York bank that w e would
not o p p o s e t h e n u b l i c a t i o n
o f t h : fiesures b u t w e w e r e i n
great doubt o f ths wisdom o f having the Federal Reserve
System collect the ficures and b a responsible for the nub-~lication,
a n d assume s o m e responsibility f o r t h e Stock Ex.
change L o a n account which t h e y could not nossibly discharge,
That w e would much prefer t o use o u r best efforts a n d v e r
Suasion o n the aenagement o f the Stock Exchange t o have
them compile t h e information e n d »vublish t h e figures.
T h e
Board considered all this carefully, -rote u s a letter say—
ing that t h e y had decided t o collect t h s data a n d pubdlish
with
it. W h e r e u p o n w e g o t i n touvh the President o f the Stock
>
Exchange, explained the situation; h e tooc i t w o with the
management o f the Exchenge a n d they agreed t o collect t h i s
information a n d publish it.
Y e worked o u t a plan b y h i c h
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Federal Reserve Bank of St. Louis
82
the figures would a l l come o u t together, a n d that i s the
figures collected o y the Board a n d t h e figures collected
by the Stock Exchange a n d f r o m the operators,
tion fell dorn.
T h a t proposi-
T h e Board notified u s that they would n o t
publish their figures e s was originally intended when the
Stock Exchanges figures were t o b e nudlished, b u t would de-
fer publication.
S o the Stock Exchange figure o f $3,513,000,—
000 was published first.
T h a t included a l l the borrowings
by t h e members m a d e i n New Yor's from N e w York bancs, b e i n g
loans for account o f New York banxs, f o r account o f their
out—of—-tomm »oank corresnondents e n d for account o f other
customers w h o were n o t banks;
i t included also many nri-
vate concerns l i s agendies o f foreign banks, a n d s o forth,
which d o n o t r e p o r t
t o u s a t all. T h e r e f o r e t h e S t o c k i x .
change figure o f $3,513,000,0CO proved.
e
a good deal
larger figure t h a n t h e one w e svbdsequently nublished, i n asmuch a s i t t o o x i n all’ loans
t o borrovers a n d o u r revorts
did n o t cover a l l t h e lendings o f the lenders.
T h a t i s a reoort o f the borrowings
Governor Seay.
of the members o f the sntire Exchange?
The Chairman.
Yess
Governor Norris.
Y o u used t h e expression j u s t n o w
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Federal Reserve Bank of St. Louis
that i t included a l l o f the borrowings i n New York,
The Chairman, I
was just going t o answer that.
The
Stock Exchange o f Naw York made a n announcenent that their
figures d i d not include borrowings f r o n out o f t o m because
many firms i n N e w Yors have branches i n different cities
and their branches borrow money locally,
a s i n Boston, P h i l —
adelphia, Chicago a n d elsewhere. T h o s e figures have not y e t
been compiled a n d i f they were i t would mexe t h e accounts
Still larger.
T h a t i s the situation today. S i n c e t h e
first figure w a s reported t h e size o f the account avpears
to have decreased,
s o far a s the reports, still rather in-
complete, indicate, b y nearly %400,000,000, d u e o f course
to the decline i n the'values o f stock traded in, which requires more margins t o b e naid in. That h a s t h e effect o f
reducing t h e deposit a n d loan account, a n d that, together
with sales o f stock that have taxen slece b y real c a s h buy—
ers i n this veriod o f decline, h a s brought t h e account
down.
N o w ~ e have a
Quite a
feeling i n New Yor t h a t there i s
little danger i n tating part i n getting reports,
especially f r o m i n d i v i d u a l b a n k s , w h i c h w o u l d a p v e a r
t o be
a voluntary assumption o f responsibility f o r controlling t h e
management o r limiting the amount o f loans that banks may
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Federal Reserve Bank of St. Louis
on the stock Exchange.
ariss,
L e t u s suppose,
Y o u see how the danger might
a s was »yroposed a n d discussed a t
one time, t h a t ev-ry Federal Reserve b a n k required i t s
member bank, w h e n submitting a n application for discount
or loan,
t o out o n the anolication a
statement o f the amount
of money that i t was loaning o n the Sxchange.
are t h r e e v o s s i b l = c o u r s e s
N o w there
o f action b y t h e Reserve B a n k
when i t gets that ‘«<nowledge. F i r s t i s t o ignore it.
I f
it i g n o r e s t h e i n f o r m a t i o n v h i c h i t g e t s a n d t h e g e t t i n g
of the information imolies admission o f resvonsibility,
then indsed t h e Reserve Bank avpears t o b e avoiding t h e
‘discharge o f that responsibility.
I f o n the other h a n d
whenever w e get a n application f o r a discount f r o m a member bank which showed t t a m o u n t
o f money loaned o n the
otock Exchange, a n d all the other Reserve banks a n d all
branches should ceclins t o mexe loans t o those banks which
had Stock Exchange loans, y o u can see what a calamity i t
would bring about,
A l l those loans would have t o b e
called o r something done.
I t would “rive t h e loans o n
the Stock Exchange b y those banxs which d i d borrow from u s
into o u r hends.
T h e third course a n d t h e o n e that really
the
I would consider/less dangerous o f the three would be
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Federal Reserve Bank of St. Louis
85
recognition o f the responsibility o n the o n e hand a n d a n
attemot
t o meet i t o n t h e o t h e r h a n d b y a n e f f o r t
to
ration t h e Exchange a n d s a y h o w much credit t h e y should
have.
W h e n wre start o n the Stock Exchange t h e n r e have
got t o g o i n t o o t h e r things,
extent t o which a
a n d t h e r e i s n o limit t o t h e
bureaucratic v i e r o f that sort would go.
That i s the position t h e matter i s i n a t t h e present moment.
Governor Young.
M r , Chairman, I
move y o u w e adjourn
at t h i s t i m e w m t i l 2 : 1 5 t h i s afternoon.
(Whereupon, upon motion duly seconded, the Conference
recessed f r o m 12:40 ofcloc’ p.m., until 2 : 1 5 ofclock p.a,
of the same day.)
O
C
: 3°59 S o
The C o n f e r e n c e r e a s s e w b l e d n u r s u e n t
t o recess
at
2:30 ofclocr: o.m,
Governor Norris. I
will call the meeting t o order,
and I move that Governor wichougel taxes t h e Chair until 7
Governor Strong arrives.
(The motion, h a v i n g b e e n duly seconded, w a s unani-~
mously carried. )
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Federal Reserve Bank of St. Louis
Govermor icfougal (Presiding.) T o p i c 1 G i t is
understood w e will pass until tomorrow.
will p a s s b e c a u s e
T o p i c 2-A we
i t i s u n d e r s t o o d t h a t Mr. S t r a t e r w i l l
be h e r e t o m o r r o w morning,
T h e next topic i s 2-B-—
i t h
drawls f r o m the P a r List,
II. C O L L E C T I O N S A N D CLEARINGS.
b. W i t h d r a w a l s f r o m the Par List.
Govemor Biggs.
T h a t tonic i s submitted here f o r dis-
cussion rather t h a n a n y action.
W e heve found that i n
Mississivoi varticulerly ~ e have h a d a large number o f
withdrawls i n the last year.
I n other words, w e h a d 159
banxs t h a t w a r e n o t o n t h e v a r l i s t i n o u r D i s t r i c t a
year a g o a n d n o w v e have 401. I
wanted t o know whether
that s a m e thing w a s occurring i n the other districts o r
not.
I t hes vractically a l l texen vlace i n dississippi.
We h a v e h a d t h r e e o a n k s w i t h c r a w f r o m t h e S y s t e m a n d 2 5 0 odd t h a t h a v e w i t h d r a m n f r o m t h e v a r list.
Governor icDougel (Presiding.) W o u l d you like t o
canvass t h e situation?
Governor Biggs.
J u s t i n a gensral way, yes.
Governor wcDougal (Presiding. ) M r . Harrison c a n
speak for New York.
T h e question i s whether o r not there
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Federal Reserve Bank of St. Louis
have b e e n a n y withdrawals f r o m the par list.
war. Harrison.
i n the N e w Yors District there h a v e
been n o w i t h d r a w a l s f r o m t h e p a r list,
W e have h a d a
mlete v a r l i s t i n t h e D i s t r i c t f o r s o m e years.
com
T h e r e has
peen n o indication o n ths vart o f any o f o u r meabers that
they contemplated withdrawing,
Governor Bailey.
Y o u mean non-inembers?
dir, Harrison. W o n e o f the banks i n our district, m e m
or non-members.
Governor Harding,
Governor Norris.
Governor Biggs.
practically.
J e have had n o withdrawals.
N o n e a t all,
T h e s e banks give t h e same reason
I f one ban« i n a locality does it, t h e n a l l
the banks around there s a y that t h e y are forced into it,
Governor Seay.
‘ W e only have a n occasional withdraml.
Sometimes there i s some involuntary withdrawals o f banks
which d o not remit t o our entire satisfaction.
Govemor wicDougal (presiding. ) B u t n o general tendency?
Governor Seay, N o . ‘ Y e rarely have a withdrawal,
Governor Fancher.
V e have h a d a
the p a r t o f o u r non—-menber b a n k s
f e w withdrawals
i n Yentucty,
but the
on
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Federal Reserve Bank of St. Louis
88
nunber i s inconsequential,
I
n a few cases w e have s u g —
gesved that they discontinue relations w h e n t h e y were n o t
remitting satisfactorily.
Governor Wellborn.
W e have h a d n o withdrawals t h a t
have amounted t o anything,
Governor wsigDougal (presiding:)
260 banks not o n the var list.
I
n Chicago m e have
W e have 8 6 9 o n the p a r
list, Ofthose 260, 3 6 have been renoved because w e preferred
not t o handie checxs o n them o n account o f their unsatis—
factory condition, a n d ~/ the remaining 2 2 4 would not remit
at par,
Governor Fancher.
T h a t i s o f the banks originally
on
your p a r list your list h a s shruns« that number o f banks?
Governor MpDougal (presiding.) Y e s .
Governor Biggs.
O u r s has c o m e from practically t w o
States, Mississiopi and Tennessee, particularly Mississippi.
They are just like a lot o f sheep, ‘ h e n one fellow starts
the rest follow him. I
i other Districts
was w o n d e r i n g f
had h a d the same experience.
Governor idcDougal (presiding.)
Y o u have had some~
thing over 4 0 0 withdrawals i n a comparatively short time?
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Federal Reserve Bank of St. Louis
89
Governor Biggs. N o .
W e have had 401 at the present
time a s against 1 5 9 a year ago, s o that w e have h a d practically 2 4 0 withdrawals.
N
Governor Young.
list.
e have 1070 banks off our var
S o m e have b e e n tacen o f f but many have withdramn.
H o w many have y o u o n the var
Governor iicDougal.
list?
Governor Young.
3 1 0 6 banks,
T h e r e a r e 1070 o f f
and 2036 on, which i s just 2 5 5 t o o many.
265 more o f f I
W h e n I get that
a n going t o b e appy.
Governor Talley.
W e have h a d n o withdrawals.
that d o not remit properly ~ e just drop off.
Those
I n a little
while they come around and want t o get bac« o n again.
have h a d n o ‘withdrawals.
the list.
W e
I n Nebraska there a r e 179 o n
A t o n e time Oklahoma h a d the entire list, K a n —
sas the entire list, Colorado the entire list. A l i o f
them that were off were over i n Nebraska, a n d some o f them
have c o m e on.
A s f a r a s that i s concerned w e haven't l o a t
where they d i d
any unless ~ e have asce* t h e n t o ~ithdraw
had a little
not properly remit. A b o u t s i x months ago w e
epidemic o f withdrawals among the non-member b a n s o f
Texas, b u t i n the last t w o o r three months there has been
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Federal Reserve Bank of St. Louis
90
a tendency f o r t h e m t o want t o get back, I
think that
is due t o the fact that i t i s t h e nolicy o f our larger
banks t o draw too heavily o n checks drawn o n banks t h a t
are n o t o n the p a r list, w h i c h i s objectionable t o their
customers, w h o object t o having t h e check discriminated
against, although t h e y nev-r g i v e u s their reasons.
A t
nresent w e have 760 o n the list out o f 942, o r 182 off
the p a r list. R e c e n t l y w e have dropped more banxe f r o m
the p a r list t h a n w e have h a d withdrawals.
Y e lost three banks i n the last
Governor Calxins.
year a n d n o w h a v e 6 4 o n t h e n o n - p a r l i s t ,
and 3 5 i n Washington.
3 1 i n Oregon
I t was oractically a s a consequence
of a little disturbance w e had i n Oregon.
Governor wcDougal. ( p r e s i d i n g )
I
s there anything
further o n this subject, Governor Biggs?
Governor tiggs. N o t h i n g a t all, I
just wanted t o
et t h e g e n s r a l i d e a o f t h e situation,
Rie
Governor .icDougal (presiding. ) T h e next is 2-0,
Desirability o f final settlement o f controversy regarding
non—cash collections. I
think Governor Strong ought t o
be here when w e discuss that s o we will g o to No. 3 , Coin,
currency and circulation.
A . under that, Gold holdings
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Federal Reserve Bank of St. Louis
and payments, will v e held over until Governor Strong
gets here, b u t w e will taxe u p B., absorption o f shipping
charges o n siiver dollars.
IIft. G O I N , CURRENCY AND CIRCULATION.
B. A b s o r p t i o n o f shinning charges o n silver dollars.
Governor Bailey.
W e are paying i t outgoing and they
W
have t o v a y i t c o m i n g i n .
e feel t h a t w e ought t o either
cut i t all off o r vay i t coming in, because i t works a
hardship o n commercial centers like Tulsa, Wichita and
Hudson, a n d other places, where w e send the free silver
back
out, load them down with it, and they have t o ship i t
and p a y f o r it.
A s I remember it, * e dia i t a t the r e -
these s i l —
quest o f the Treasury Departmat t o try t o force
ver dollars i n t o circulation.
Governor Young.
I
t did not work.
T h e menber banks i n Tulsa c a n ship
to. Y o u
those silver dollars free from charge i f they want
haven't a n y option i n the matter.
in payment o f transit items,
T h e y can ship them i n
s o y o u might j u s t a s well p a y
it b o t h ways.
Governor Bailey, They don't texe advantage of it, but
I guess t h e y could d o that,
We have fircured that o u r member
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Federal Reserve Bank of St. Louis
bans v a i d $1600 last year i n shipping silver i n t o us,
Governor wicDovgal (presiding.)
T h a t i s entirely
in agreement w i t h t h e policy agreed upon b y the System,
that t h e charges would b e paid both ways o n silver dollars
and a l l other classes o f currency.
Governor 3ailey.
B o t h ways?
Governor wcDougal (presiding. )
Governor Young.
S
.
I % was left optional o n silver dollars.
Governor sicbougal (presiding.) G p v e r n o r Bailey, what
would y o u l i x e t o d o a b o u t t h i s ?
Y o u have t h e privilege
of doing a s y o u please.
Governor Young.
Governor Ualxins.
W e pay both ways.
N o t o n l y c a n h e d o as he pleases
about it, but all the banks are doing exactly a s they please.
There i s n ' t a n y i n i f o r m i t y a b o u t i t .
Governor Bailey. ‘Well, i f i t i s the consensus o f
opinion thet v e have the authority t o do it, why a t 1 8
perfectly satisfactory t o us.
wr. Uarrison T h a t ras voted w o n i n way o f 1922 and
it was decided that we would pay all costs both incoming
and outgoing o n all <inds o f currency a n d coin with t h e
exception o f silver dollars, i t h regard t o which i t was
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Federal Reserve Bank of St. Louis
left discretionary w i t h each Reserve Bank.
(Governor weDnvgal retired f r o m the Chair,)
Governor McDougal. s i r . Chairman, I
return t o Topic 2 - U , p l a c e d
suggest t h a t w e
o n t h e n r o g r a m b y N e w York.
ah C O L L E C T I O N S A N D CLEARINGS.
GC. D e s i r a b i l i t y o f final settlement o f controversy
regarding non-cash collections.
The Chairman, T h e r e seems t o b e a n impression still
in the minds o f some members o f the Federal Reserve Board
that t h i s m a t t e r i
s up t o the Governors.
I t has been i n
the l a p o f the Board, a s I recall, f o r a good while, a n d
unfortunately h a s t h e appearance n o w o f being held u p
because o f this last questionnaire s e n t o u t b y the Barton
Comnittee.
T h a t cuestionnaire produced s u c h results, w h i c h
did
were sent t o me in confidence b y ifr. Wells. A n d / h e also
sené i n t o you, Governor Harding?
Governor Ferding.
The Chairman.
N o .
W h e n you come t o consider that that
questionnaire was prepared and sent out with the argument
of the Barton Committee without a n y reference t o t h e brief
Thich w e h a d .
orepared and which had been furnished t o
them b y t h e F e d e r a l R e s e r v e B o a r d ,
i t s t r u c k Mr. H a r r i s o n
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Federal Reserve Bank of St. Louis
94
and m e a s leaving matters i n such shape that w e were n o t
justified i n asxing f o r a n y further consideration b y the
Board, except a final decision.
I f the Board still con-
siders that this i s unfinished business, I
do not see why
we would n o t again urge t h e m t o nut a final e n d t o this
thing a n d cecide w h a t should b e done about it.
Governor Seay,
S h a t h e s t h e Barton Committee d o n e
in reference t o it? H a v e t h e y reported t h e results o f
the qguestionneire?
Governor Young, Y e s , t h e y have renorted i t t o t h e
Board,
The Chairman.
Yes.
Governor Bailey. I
have a
copy o f i t here.
I n favor
of continuing the service a s at present 779, i n favor o f
discontinuing, 2,804.
i n fevor o f continuing w i t h t h e charge
covering cost, 831; i n favor o f discontinuing entirely unless the service i s charged for, 208.
4 , 4 2 0 banks
answered out o f a possible 3,000.
Governor Harding,
in B o s t o n t h a t w a n t e d
T h e ficures shoved 80-odd banks
t o discontinue i t . T h a t r a t h e r a s -
tonished me, i n view of the fact that a t a stockholders‘
meeting t h e y w e r e u n a n i m o u s l y
i n f a v o r o f it.
S o l
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Federal Reserve Bank of St. Louis
95
canvassed e v e r y m e m b e r b a n k i n t h e D i s t r i c t a n d o n l y g o t
three o f then t o s a y that t h e y answered t h e questionnaire
in favor o f abolishing it, and that they did not really
understand t h e questionnaire a n d were really not i n favor
of 3%,
Governor Seay. H a v e you the figures for each district, Governor Bailey?
Governor Bailey.
Yes.
Governor Harding.
O n l y three admitted that t h e y h a d
voted that way, and they said they didn't understand the
proposition, a n d meant that t h e y were i n favor o f c o n t i n u
ing the service.
Governor Fancher. I
think t h e manner i n which t h e
questionnaire w a s o u t o u t w a s v e r y nisleading,
The Chairman, V e r y misleading and very unfair.
Governor Seay. H a v e y o u the Fifth District there?
Governor Bailey,
4 8 i n favor, 1 4 9 i n favor o f discon-
tinuance, 5 2 i n favor o f continuing ~ith a charge t o cover
cost o f service, a n d s i x favoring discontinuing entirely
unless there i s a charge.
Governor YVellborn.
trict?
‘ h a t a r e the fieures f o r m y Dis-
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Federal Reserve Bank of St. Louis
96
Governor Bailey. 2 8 2 in favor, 1 8 0 i n favor o f dis—
continuing,
2 4 i n fevor o f continuing w i t h a
cover cost, a n d t h r e e
unless a
charge t o
i n favor o f discontinuing e n t i r e l y
charges i s made.
Governor Wellborn,
1 8 1 i n favor o f discontinuing?
Governor Bailey. Y e s .
think undoubtedly t h e t this method
The Cheirman, I
of a questionnaire i s e n unfair a n d misleading w a y t o d o
it, because t h e banks themselves a r e divided i n their p e r —
sonal interest i n the matter.
S o m e benefit b y it;some lose
by it, and many d o not understand h a t i t i s all about
anyway.
H e r e i s a case where a
certain class o f ban*ts get
a service which they want a n d claim they need a n d i n per—
forming thet service for the banks that want i t and claim
to need i t w e apnear t o b e injuring other ban*s a s a result.
The Federal Reserve A c t snecifically provides that this i s
a service that w e should offer t o our meanbers a n d f o r u s
to decline t o offer i t o r t o discontinue i t i s simply t o
veto t h a t v r o v i s i o n
o f t h e Act.
Governor C a l <ins.
T h a t i s more,
>
t h e service i s s e t
up a t t h e request o f the Federal Reserve Board i n order t o
meet n e e d s o f n e m b e r b a n k s w h o a r e e n t i t l e d
t o t h e service.
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Federal Reserve Bank of St. Louis
97
Governor Fancher.
N o t a t t h e request, b u t a t the
direction o f the Federal Reserve Board.
Governor Calkins. T h a t i s true.
The Chairman. I
do not s e e why t h e Board does not
settle i t one w a y o r the other.
Governor Harding.
like t o offer a
I n v i e w o f that statement I
would
motion that i t i s the sense o f this Con-
ference that the service should b e continued a n d that t h e
Board i s resvectfully requested t o take steps t o end the
agitation against it,
Governor wicDougal, I
The Chairman.
will second that.
I s there a n y discussion o f the motion?
Governor Young. M r . Ohairman, I think this had better
be handled with a good deal o f care. I
have been one who
has been opvosed t o the non-cash collections.
T h e others
have b e e n i n favor o f i t and f o r that reason [] have continued it. O u r directors have gone s o far a s t o pass a
resolution discontinuing non-cash collections, with the
aoproval o f the Federal Reserve Board.
Governor Bailey.
Governor Young.
this. I
S o has o u r Board,
I t i s best t o g o back a little o n
originally brought t h e question before this Con-
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Federal Reserve Bank of St. Louis
98
ference because t h e banxers conventions i n innesota,
North Dakota and South Dakota and, i f I remenber correct—
ly, i n siontana, ovassed resolutions discontinuing non—cash
collections,
o r requesting t h a t they b e discontinued, I
came before this Conference w i t h that information; present—
ed it, and i t was argued that these people did not know
what t h e y were voting for, t h a t t h e y thought i t wes p a r
collections which t h e y thought t h e y were getting r i d of,
and I accented that view of it. T h i s Gomfstrénce appointed
& committes t o investigate a n d s e e what t h e sentiment w a s
with some o f the member bancs. I
the w a y i n which that was done. I
a m not going t o criticise
think i t was done i n
a fair way, C e r t a i n results were shown, that the non-cash
collections were desired b y the bans.
G a t e s
I
B a n k e r s ! Convention passed a
continuing non-cash collections.
n the face o f
resolution dis-
T h e American Bankers!
Associatioyg i s not satisfied r i t h the vote that t h e System
got; t h e y d o not believe i t was a fair vote a n d they sent
out a
circular, t h i c h they attempted t o make a
circular, I
read t h e thing.
fair «:7~
I t seemed t o b e a fair pre-
sentation o f the entire case, a n d they g o t these results.
The astounding nart o f i t i s that half o f the member banks
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Federal Reserve Bank of St. Louis
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in the United States have replied t o this, a n d the other
astounding nart i s that the great majority o f them are not
in favor o f non-cash collections. I
let that report g o unnoticed. I
give some consideration t o it.
do not think you can
think y o u have got t o
V e want a
few friends i n
the American Bankers! Association, whether a s representatives o f the Association o r a s individuals.
The Chairman, Governor Young, suppose a vote o f the
American Bankers! Association o r of the member oanks, o n
the question o f “hether w s should buy and sell government
obligations, o r whether the Reserve bank should d o 80,
was t w o t o one i n favor o f o u r discontinuing t h e buying
and selling o f Government ecurities? W o u l d y o u b e guided
by that vote?
Governor Young. W o , sir.
The Chairman. They would vote against it, many of them—
I think possibly a majority o f them, because they think i t
affects their earnings t o heve u s do it. Congress gave
these nowers t o the Reserve banks f o r purpos¢s, s o m e o f
which appear t o b e hostile t o the menbership o f the System.
If the majority o f the banks v o t e d t o discontinue t h e collection o f checks i n the country y o u wouldn't f o r aminute
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Federal Reserve Bank of St. Louis
exovect t o discontinue t h e collecting o f checks?
Goveincy Y o u n g . I
could g i v e m y opinion
I wouldnit waste a n y time o n it.
Sion f r o m m a s
in a
minute.
I f y o u wanted a n erpres—
t o whether w e s h o u l d t a x e t h e v a r c o l l e c t i o n
of checks o u t o f the Federal Reserve S y s t e m I would give i t
to y o u i n a hurry,
s o f a r a s m y v o t e i s concerned.
The Chairman. C o n g r e s s h a s said that those banks ~..
A
o
e
1
; -
that w e n t t o s e n d y o u t h e s e u a t u r / i t e m s a n d i t e m s p a y a b l e
on presentation,
a r e entitled
t o collect t h e m ,
Governor Young. W e l l , there i s a question a s t o the
interpretation o f that,
Governor Bailey.
is n o t a
I f y o u read t h e act y o u will s e e i t
mandatory thing.
The Chairman N o , but nothing i n the act i s mandatory,
practically.
T h i s i s a privilege w h i c h i
s extended t o
those banxs w h o rant t o enjoy it, a n d those w h o d o not want
to use t h e system d o not have to.
T h e y a r e objecting
because t h e y t h i n k y o u a r e t a x i n g b u s i n e s s a w a y f r o m them,
Governor Young. D o e s t h e a c t s a y that y o u should d o
it gratuitously?
The Chairman. N o ,
I t may be desirable t o make a
charge, a n d that question i s o v e n t o discussion,
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Federal Reserve Bank of St. Louis
101
Governor Y o u n g .
I f y o u charge y o u will g s t r i d o f i t
in that way.
The Chairman,
A s I understand t h e position taken
in this meeting i t i s the same a s it has been before, nine
banks thinxing this i s a service that should b e continued
and three thincing that i t i s not. ‘ Y e cannot expect all
the b a n k s t o a g r e e a l w a y s
a s t o what i s w i s e a n d w h a t i s
not wise. Conditions differ i n the different districts.
Take t h e q u e s t i o n o f h o l d i n g s e c u r i t i e s f o r safexeening.
The F e d e r a l R e s e r v e B a n c o f N e w Yors e n c o u n t e r e d t r e m e n —
Gous opposition i n New Yors t o having any securities from
Our m e m b e r s c a r r i e d i n custody, b e c a u s e
i t took business
away from the banks,. Conditions i n your District and Gow
ernor Bailey's District are very different,
I f it came
to a vote where w e were controlled b y ths votes o f our
menbers m e would have t o vote against t h a t thing right
along because o f the opposition i n New Yorx; bu} that does
not justify m e i n voting against i t because I
think i t i s
a service that I thins t h e System a s a whole believes ought
to b e extended t o t h e neunbers.
Govemor Harding. I
have understood the Board has
felt that this was u p to the Governors.
N o w I ‘now the
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Federal Reserve Bank of St. Louis
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Board itself i s not always unenimous a n d I don't expect
this resolution w o u l d b e carried unanimously,
i f carried a t
all; b u t i t does s e e n t o m e that t h e Board i s entitled t o
cnow just h o w this d o c y stands o n the yroposition.
you t a k e a
When
vote t h o s e w h o w a n t t o b e r e c o r d e d a s a g a i n s t
it c a n b e s o recorded.
The Chairman, ‘that i s troubling m e about the situa-.
tion, G o w e r n o r H a r d i n g ,
i s this; I
do not s e e a n y means
by which t h e Federal Reserve B a n k o f N e m Yors c a n s a y t o
a member b a n k i n the country,
o r i n the city, a s the case
may be, that sends u s a n item for collection i n Governor
Bailey's District, w h i c h the A c t says that w e may collect
for our members, that w e shall decline t o receive it, just
because w e may vote n o t t o d o s o o r because t h e member
banks may vote that w e should not,
I f we are t o take a
position a s to non-cash collections which i s consistent,
if we believe i t i s a detriment t o the System, then w e
ought t o g o t o Congress a n d get t h e Act amended, E v e r y time
~+ i t comes u p w e find that there a r e nine banks w h o believe i n the thing a n d three w h o d o not.
I
t has dragred
along n o v for two years, i t i s i n the hands o f the Federal
Reserve Board,
Y e have voted o n i t repeatedly here.
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Federal Reserve Bank of St. Louis
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Governor Harding. P o s s i b l y w e might g e t somewhere
if w e pass o n e resolution expressing t h e sentiment o f
this body o n the question and then offer a s a separate
resolution t h e request that t h e Board take final action
on i t one w a y o r another.
The Chairman.
W e have never committed ourselves a s t o
charges and the question o f whether o r not w e shall p e r
form t h e s e r v i c e a n d c h a r g e f o r i t i s s t i l l ovez.
Governor Seay.
W e have, h o w e v e r , a d o o t e d t h e r e n o r t
of the standing committee o n collections which i s against
charging,
as I
remenber i t .
wr. Harrison.
T h a t was qualified t o this extent,
there should b e n o charge *imposed unless w e decide:
the investment policy of the Reserve System should b e
affected b y i t one way o r another.
Governor Seay. T h e r e i s n o subject within m y recollection which has been considered more carefully than this
subject,
n o subject which h a s b e e n handled b y a n abler
committee. I
understand h o w there m a y b e differences o f
opinion i n our body, b u t I
d o share t h e oninion that i t
is desirable t h a t there should b e a final settlement o f
this controversy.
I t is disturbing t o have i t continually
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Federal Reserve Bank of St. Louis
104
before u s and I ain throughly i n sympvathy with Governor
Harding's resolution, a s first offered.
than express a
majority opinion upon it.
W e can d o no more
V e are clearly
divided,
Governor Harding. I
arated.
think the motion should b e sep—
« i y first motion i s that i t i s the consensus o f
Opinion o f this b o d y that t h e collection system should
be continued a s at present, t h e non-cash collections,
and secondly, t h a t i n view o f t h e fact that this question
has been thropoughly discussed and has been before the
Board f o r two years, t h a t w e respectfully request t h a t
they taxe final action upon it.
Governor Wellborn.
pay a
I
little m o r e a t t e n t i o n
t seems t o me that w e ought t o
t o t h e committee o f the Ameri-
can Bankers! Association. I
thins this whole question i s
very d i f f e r e n t f r o m e y t h i n g e l s e i n t h e F e d e r a l R e s e r v e
System because i t i s doing »usiness with the pudlic, and,
so f a r a s m y observation goes, i t i s very unpooular w i t h t h e
public.
T h e y d o n o t l i x e 1%. T h e r e i s a
satisfaction i n our District,
make these collections;
great d e a l o f dis-
i n all the cities where w e
w e have a great deal o f trouble
mith t h e veoole w o o n whom the drafts a r e d r a m , a n d t h e r e
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Federal Reserve Bank of St. Louis
105
fore I
would have t o vote against Governor Harding's motion
The Chairman.
D o you think w e are doing business
with the pudlic, Governor Calkins, when w e collect a draft
off a member bank?
Governor Wellborn.
Yes.
The Chairman. T h a t i s not payable a t a bank?
Governor Wellborn. Yes. I
think also that it is not
fair t o the member banks i n that i t discriminates against
them.
I t doesn't a p p l y t o banks i n other places, b u t o n l y
where there a r e Federal Reserve Banks o r branches.
Governor Calkins. I
would like t o a s Governor HYard—
ing i f he minds expressing a n oninion o n whether the Board
hes a u t h o r i t y
t o order discontinuance
o f this service
in
view o f the language o f the Act?
Governor Harding, I
Governor Bailey.
any one thing. I
do not think so.
I t irritates o u r people more t h a n
have a letter w r e with regard t o a case
that hanpened d a y before yesterday,
(Governor Bailey thereuvon read two letters which
were not handed t o the Reporter.)
The Chairman.
I t is a very curious thing, out d o
you c n o w t h a t t h e r e i s n ' t a n y t h i n g
i n t h e r u l e s o r regula.
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Federal Reserve Bank of St. Louis
106
tions with regard t o non-cash collections t h a t prohibits
the imposition o f these charges u p o n the banks; n o t a
thing?
Governor Bailey.
B u t w e have g o t t o send a man o u t
in the city o f Omaha t o collect them, W e cannot charge
them.
Governor Young.
M y directors have gone o n record a s
to h o w they feel about this. T h e member banscs i n m y territory have expressed themselves, n o t only once but twice,
have m y o w n
and thwrovghly understand this subject. I
views about it.
O u r banks h a v e voted n o o n this e v e r y
time i t hes coms u p and will vote n o o n it, and then w e
will attempt t o continue t h e work. I
was simply expressing
the sentiment i n m y District a n d trying t o correct a n y
erroneous o p i n i o n t h a t t h e r e m i g h t b e h e r e
o r a n y erroneous
view a s t o n o v our banks felt about it, I
«snor how they
feel about it. There isn't any question about that, I
not thin:
i t i s right f o r this System t o hold that a
do
dank
is not antitled t o pay for sending a n iten out o n the
street a n d collecting it. I
had a rather peculiar e x p e r
sence w i t h o n e o f your member banxs. A
short thile a g o w e
had a couple o f hundred bond m e n i n Minneapolis a n d St.Paul
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Federal Reserve Bank of St. Louis
107
sélling securities o u t through t h e country. T h e y collected
those securities b y drawing drafts, w i t h securities a t —
tached, a n d ceooriting t h e n i n one o f your nenber banks,
which would then g o through y o u and b e vresented t o our
Dan,
The Chairman, They did not come through us.
Governor Young. Then they ceme t o us direct. I
do not
cnow h o w they sot t o us, b u t t h e y got t o us, T h a t necessi-_
tates a collector a n d handling something thet r e did not
xnow-r, a n y t h i n g t o o m u c h about.
W e asked f o r acertified
s, which irritates then, a n d they throw all the ob~
stacles they can i n our way t o delay giving the certified
check, a n d finally tells o u r m a n that i f h e wants a certi-
fied check t o go o n dommstairs and get i t certified.
Now
the m a n has vot t o stay there with the securities, b u t
h e goes downstairs a n d tries t o gst i s certified,
y l l a n i f&
ideganwhile the dealer has made earrancemints i t h the ban’
and t h e y fuss a n d fool around f o r t r o o r three hours a n d
finally v e get t h e certified check. Therefore a
few months
ago ~ e told the collection devartment t o simmly call u p
these dealers a n d tell t h e m that t h e draft w i t h security
attached w a s there a n d that t h e y could bring a
certified
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Federal Reserve Bank of St. Louis
108
cheek o v e r t h e r e
B j
L
O n e o f the renresentatives
of t h e N e w Yor: ocans c a m e t o m e a n d t o l d m e t h a t I
was i n
bad w i t h everybody i n the community a n d I explained t o
him w h y w e hac t o d o it.
W e have h a d exactly t h e same e x
Governor Bailey.
perience,
ir. Yarrison.
T h a t “ould t h e comnercial banks d o ?
Governor Young,
T h e a t d o y o u mean?
Mr. Farrison. S u o n o 0 s e these drafts were routed through
a
h
t ~hat w o u l d havpen?
a member b a n c i n - w i i n n e a p o l i s , n
Mr. Young. T h e y would charge o n e tenth o f o n e per cent.
Governor Fancher.
T h e y o u l d have a
certified check,
Governor Young. Certainly they rould, b u t let them d o
Governor Seay, I
have v e r y great respect f o r t h e ad-
verse opinion, verticularly f o r the oninion o f those Gov.
ernors w h o hold that adverse oninion.
B u t I thins w e have
every r e a s o n t o b e l i e v e t h e t t h e g o o d a c c o m o l i s h e d
b y this
far outweighs t h e disadvantages a n d objections that a r e
urged against it, a n d I think ~ill continue t o far outweigh
the disadvantages a n d objections. I
that i t will become a
believe after while
recognized function o f the Xeserve
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Federal Reserve Bank of St. Louis
1093
and I also believ: that i f i t were discontinued t h a t
roula mace a
vary mich greater fuss than i s now being
against i t .
Governor Harding.
o u l d not the averaze country bank
to ay
feel that i t wes discrimineted against i n having
the Federal Reserve Bant one-tenth of one per cent t o get
the service, and being called o n at the sane time t o remit
for checks drarm o n h i m a t par?
Govermor Seay. I
velieve 80. I
w could d o
believee
no more here than t o tate the majority a n d minority ovinion
on this subject.
again
J e have discussed i t time and time
start.
and we alvays come right bact t o where w e
I n the
beginning o f this thing I thins I recall correctly that ‘ve
were n o t i n f a v o r o f u n d e r t a c i n e t h e o u s i n e s s
against individuels.
o f collecting
S i n c e ~ e have undcrtacen
ooinion hes undergone nodification.
i t m y own
h a v e o-xanined a s
t h e reasons w h i c h
carefully e s ~ * c o u l d t h s r e n o r t s a n d
collections,
have been before the comiittee o n non-ofsh
2nd.
naiority o f t n e dancers
+s5tes a n n a r e n t l y a r e a g e i n s t i t s
came u p a t one o f
Governor Yardine. T h i s matter
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Federal Reserve Bank of St. Louis
110
stockholdexs! meetings t w o o r three years ago. B e f o r e i t
came u p w e had several protests f r o m the city banks i n
Boston about undertacing t o make these collections. T h e y
said w e were ta’ting business a w a y f r o m then, T h e n i t came
up a t t h e stockholders!
m e e t i n g a n d t h e curious n a r t w a s
that there was a chorus o f country banks i n favor o f it,
the motion w a s put, a n d everyone o f the Boston banks voted
in favor o f it. They did not want t o go contrary t o the
wishes o f these country bankss that hadreserve accounts
with them,
Goveznor Wellborn. I
haven't heard mentioned t h e
foundation f o r this vractice t h a t w e are engaged in.
M y
recollection i s that that amendment w a s put into t h e Act,
that t h e B o a r d r e q u e s t e d t h a t i t b e put i n t o e f f e c t
on
the ground that there would b e a good m a n y member banks
that d i d n o t h a v e c o r r e s p o n d e n t s ,
t h a t t h e y would discon-
tinue their correspondents a n d d o business entirely w i t h
the Federal Reserve System; t h a t therefore t h e y ought t o
have s o m e means o f transacting their business through t h e
Federal Reserve system.
B u t that i s not t h e case. E v e r y
menber b a n k has i t s correspondents i n the cities.
The Chairman.
W o u l d y o u b e i n favor o f discontinulug
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Federal Reserve Bank of St. Louis
it entirely, Governor Wellborn, arbitrarily?
Governor Yellborn.
Y e s , entirely; c u t i t out entirely.
The Chairman, I r r e s p e c t i v e o f what t h e Aot says?
Governor Wellborn. I
tional. I
think i t i s a
think t h e Act just mekes i t opb a d p r a c t i c e a n d i s useless
on
the ground that I have stated, that every bank has its
correspondents,
The Chairman.
D o you know that more than a
majority
of our banks are using the service?
Governor Bailey. I
The Chairman. I
do not believe so, iir. Chairman.
believe s o and I think t h e committee's
reoort shoved that,
Governor Bailey, ‘ N o t t e n per cent o f them i n the Tenth
District,
Governor Calkins.
T h i s matter h a s been pretty thorough-
ly discussed over a considérable length o f time.
I n regard
to Governor Wellborn's recollection, t h e fact is, a s I
recall it, that this function w a s undertaxen a t t h e direc.
tion o f the Federal Reserve B o a r d a n d o n e o f the reasons
advanced w a s that inasmuch a s all member banks were compelled
to carry their entire reserve i n the Federal Reserve B a n k
they would not b e a n t t o carry a s many correspondents!
4
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Federal Reserve Bank of St. Louis
112
accounts a s they h a d theretofore. I
do n o t xnow whether
Governor W e l b o r n intended t o s a y that t h e memberbanks d o
maintain a s many correspondent accounts a s they d i d before
the inauguration o f the Federal Reserve System, but I a m
quite sure, myself, that they d o not; they have not the
same facilities f o r collection that t h e y h a d before a n d
therefore t h e y a r e entitled t o this service a s a matter
of l a w and a s a matter o f equity.
The Chairman.
“ o u l d y o u decline t o accept items
from b a n k s t h a t t e n d e r e d t h e m t o y o u f o r c o l l e c t i o n ?
W e are doing i t now.
Governor Young.
The Chairman.
I f we vassed 2 resolution n o m t o dis-
continue this service, w o u l d y o u b e willing t o say t o these
member banks y o u would not handle them?
Governor Young.
Y e s , sir.
Governor Bailey. Y e s , sir.
Governor Harding.
T h e stat
ago that this Act w a s not mandatory b u t left i t t o the
option o f the Reserve Bank, I
want t o read a part o f sec-
tion 1 3 o f t h e Act:
any o f its
NAny Federal Reserve Ran* m a y receive f r o m
member banks, a n d from the United States, devosits o f c u r
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Federal Reserve Bank of St. Louis
113
rent funds i n lawful money, National Bans notes, Federal
Reserve notes, o r checks, a n d drafts, payable woon presentation, a n d also, f o r collection, maturing notes and
bills. "
i o w if there i s any option i n receiving notes
andbills for collection, that same option mist necessarily
go t o receiving deposits a n d current funds ofr lawful money
or checks and drafts payable o n presentation.
to m e t h i s i s meant
I t seems
t o b e mandatory, b e c a u s e c l e a r l y w e
have g o t t o r e c e i v e t h o s e o t h e r things.
Governor Wellborn. I
would b e willing t o d o this:
If counsel decide that i t is mandatory I will have noth.
ing more t o say about it.
T h a t "nay" aoplies t o both, a n d
Governor Harding.
the may" i s equivalent t o "shall".
Governor Norris. T h e y are all o f the same parity,
mith the word "may" anplying scually t o both.
Governor YVellborn,
3 u t thet word "may" c a n b e used
in a different s e n s e under different circunstances,.
Governor Norris.
Y e s , b u t i t i s used only i n the
one circumstance there.
Governor Young,
law right now,
I f that i s true I
a m breaking t h e
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Federal Reserve Bank of St. Louis
114
Governor Wellborn. I
i l l k e e p quiet i f i t i s de-
cided that i t i s mandatory.
The Chairman, I
think i t i s m a n d a t o r y
t o this
e x
tent, i f there i s a n y meaning i n the ~ords a t all; t h a t
is when y o u say " m a y receive o n deposit", a n d s o forth,
National ban’ notes and items Dayable o n demand, that i t
at a n y rate gives those banks that want t o mexe those deposits t h e right t o d o so.
Governor Yellborn.
W h y should n o t t h e Federal R e —
serve Board undertake t o give u s special instructions o n
this?
The Chairman. Well, t e ~ere declining t o receive anything o f this sort a n d then t h e y said y o u have g o t t o
receive t h e m from those banks that want t o deposit them.
Gov-rnor Harding. I
thins a n y menber d a n k that
wanted y o u t o tare t h e m could force y o u t o d o it.
Governor Young.
tion w o u l d d e v e l o p ,
W e feel that a very dangerous situaT a c s t h e odanzs o f M i n n e a c o l i s
a n d St.
Paul a n d they will l e n d a great deal o f money t o the country
banks o n the bills payable basis.
T h o s e notes a r e n o t d u e
when t h e y c o m e t o you, a n d i f t h e menber b a n s
i n the large
centers o f the United States l e a r n that t h e y c a n send i n
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Federal Reserve Bank of St. Louis
115
those notes f o r collection a n d that y o u have got t o take
them, w h y then y o u are going t o get them, a n d that i s the
easiest m a y I <now o f o f getting t h e m paid. I
remenber
mating inquiry o f this Conference a t one time a s t o what
you would d o i n a case o f that k i n d a n d y o u were a l l
unanimous i n saying that you would not taxe the notes o f
a member bank, a
the country,
matured note, payable a t a ban out i n
I f y o u have got t o take these others y o u
have got t o take them, a n d you would b e flooded i n 2 4
hours.
W e had one bank d o m i n Illinois that was pretty
smart. T h e y had some $72,000 worth o f notes drawn o n Sid—
ney, wontana.
T h e y s e n t t h e m t o Chicago; C h i c e g o s e n t
them o u t t o Helena, H e l e n a s e n t t h e m d o w m t o Sidney, a n d ,
to make a long story short,
~ e were put t o the expense o f
$170 t o $175 t o go down and get those notes, a n d I simply
told Chicago i f any more o f thet stuff came i n that they
could keep them; that ~ e did not want them.
The Chairman,
L e t u s s e e about t h a t voractically.
A bank i n Connecticut, w e will say, sends t o its New York
correspondent a
bundle o f receivables a n d s a y they want
to borrow $50,000 o n them?
Governor Young.
Y e s ,
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Federal Reserve Bank of St. Louis
116
The Chairman, T h o s e things h a v e a l l sorts o f maturities.
S o m e fall d u e before t h e collateral n o t e falls d u e
and i n that case they substitute other collateral, a n d
those that fall d u e subsequently a r e held until the l o a n
18 Heid. off.
Governor Young. Y e s , sir.
The Chairman,
When a
note w h i c h f o r m s a
part o f t h a t
collateral f o r that loan becomes d u e the bank that holds
the notes, that made the loan t o the country bank, i s not
going t o bring that note over t o u s for collection.
Governor Young.
B u t suopose t h e y do?
The Chairman.’ T h e y could not nossibly d o that.
Governor Fancher.
Governor Young.
Y o u ‘*ouldn'tt taxe nast d u e paver.
N o , b u t w e would t a k e paver that i s
not due,
The Chairman,
T h e n o t e g o e s out,
i s presented,
not
paid, a n d comes b a c again i n t o your hands, a n d that encs
its
Governor Young.
B u t suvpose that b a n k closes during
the interim?
Governor Strong. I s n ' t that one o f those awful
Calamaties that a r e constantly h e l d u p before u s a s
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reason f o r not doing things which d o not materalize?
Goveinor Young. W e l l , i t materhalized out i n San
Francisco t o the extent o f $332,000.
Governor Cal'cins.
T h a t h e s not t h e renotest relation
to t h e v o i n t u n d e r discussion,
Governor Young. I
Governor Calcins.
Governor Young,
thought i t hed.
N o t t h e slightest,
I % doesn't make any difference whe-
ther you send a “transit. item o r a non-cash item to a
bank t h a t i s i n b a d c o n d i t i o n .
Those are the only xind o f
notes you get. Y o u don't get then on the good banks,
Governor Galcins.
bank,
W e dic not send anything t o the
W e took i n something f r o m the ben:«, unfortunately.
The Chairman,
T
t etrixes m e thet t h e r e a r e a
of ways o f dealing vith this.
variety
W e have voted o n it s o often
that t h e little black b o x i n which t h e ballots a r e deposited h a s a hole worn i n the vottom o f it. B u t i t does
seem t o m e t h a t i t c a n b e h a n d l e d
i n this m a y :
First we
can g o t o Governor Harding's first motion, w h i c h again
makes a
record o f approval o f continuing t h e servics; t h e n
vote o n a second motion asxing t h e Federal Reserve B o a r d t o
end t h e discussion b y submitting a
final ruling o n it;
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Federal Reserve Bank of St. Louis
118
third,
w e c a n taxe u p the question o f whether o r not w e
should impose a
charge f o r t h e service; fourth, w e could
discuss a n d vote o n the proposition o f asking Congress
to repeal this vart o f the Act; fifth, w e could vote o n
a motion ascing Congress t o qualify it, b y saying that
as t o those items w e might take those which w e want a n d
not take those which w e didnot want.
We have t w o motions before the meeting.
O n e is to
reconfirm o u r vosition that this service should b e continued.
H a s that motion been seconded?
Governor Fancher. I
Governor Biggs.
will second it.
I t has been discussed a
great m a n y
times, Mr. Chairman, a n d i f you will g o back over the record y o u will find thet t h e same arguments h a v e been vresented.
Governor Norris.
A n d I
believs t h e y w e r e f o r t h e
Same vote o f nine t o three.
Governor Biggs.
I t i s not doing t h e System a n y good,
and t h e matter ought t o b e settled.
Governor Fancher.
D i d y o u have a
communication f r o m
the president o f the American Bankers! Association i n connection w i t h t h e m a t t e r ?
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Federal Reserve Bank of St. Louis
The Chairman,
Y e s ,
(After informal discussion:)
T h e question before
the meeting i s uvon Governor Harding's motion.
(The motion, having been duly seconded, w a s carried,
nine voting i n favor o f the notion a n d three against i t ,
Governors Young, B a i l e y a n d Wellborn voting w y }
The Chairman,
T h e second motion was t o request t h e
Federal R e s e r v e B o a r d t o t a k e s t e n s t o b r i n g t h e d i s c u s —
sion t o a conclusion a n d settle t h e matter.
Governor wcDougal. Seconded.
The Chairmnan,
I s there a n y discussion
Governor Calcins. I
o f that motion?
think the Board might well b e
questioned i f they are disposed t o consider t h e matter a s
to whether they have authority t o order the discontinuing
of a function which is, i n my own opinion, made mandatory
by t h e Federal Reserve Act.
The Chairman.
I s there a n y further discussion?
(The motion, having been duly seconded, was carried,
there being 1 1 votes i n favor o f it, a n d o n e against i t ,
Governor Wellborn voting no.)
Governor Wellborn,. I
vote n o b e c a u s e I
do not think
the Federal Reserve has the right t o mace i t mandatory.
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Federal Reserve Bank of St. Louis
The Chairman | T h a t disposes o f that topic.
Governor Norris.
H a d y o u finished y o u r statement
in reference t o 1-F, Stock Exchange l o a n accounts, M r .
Chairman?
The Chairman,
No, I
was interrupted. I
just concluded
a statement o f what position w e rould b e i n witn t h e information o f t h e c h e r a c t e r t h a t I
have described furnished
the menber banks o n their aoplication blanks,
by
N o w I would
like t o explain t o y o u how entirely ineffective i t would
be anyway.
L e t u s suppose that t h e Mellon National B a n k
of Pittsburgh h a s a n account w i t h a very r i c h concern o r
Man who accwnulates a balance o f a million dollars, that
the wlellon National B a n s o f Pittsburgh i s lending n o money
on the Stock Exchange a t all; t h a t t h e customer draws a
check f o r a million dollars o n his balance i n favor o f
the U n i o n T r u s t C o m o a n y t o v a y f o r a
there, a
loan t h a t h e h a s
real estate mortgage, vossibly; t h e Mellon National
Banx h a s n o t s u f f i c i e n t f u n d s i m m e d i a t e l y a v a i l a b l e
on
that d a y a n d sends some commarcial vaver o v e r t o the Pitts—
burgh branch o f t h e Federal Reserve B a n k a n d borrows 4
Million dollars t o make good its reserve?
T h e U,ion Trust
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Federal Reserve Bank of St. Louis
121
Company, h o w e v e r ,
w h i c h h a s borrowed nothing f r o m the R e —
serve Bank, h a s a large amount o f money a n d i s lending
money o n t h e S t o c k Exchange,
i t has t h e mortgage p a i d o f f
and i t sends the money t o its N e w Yorx correspondent a n d
increases its loans o n the Stocx Exchange a million dollars.
N o w i f there i s t o b e a
minute a n d a c c u r a t e c o n .
trol o f the tyoe o f loans o f the member banxs, i t has g o t
to be by some other method than that of having the member
bank report, because t h e money will g o into t h e Stock Ex.
change anyway.
I n o t h e r words, a n y t h i n g
t o effect t h e
control o f the Stock Exchange l o a n account h a s got t o
deal w i t h t h e borrowers a n d not with the lenders.
the fact o f the matter. I
That is
thins w e have had enough ex-
perience i n New York t o cnow that that i s so, because dur-
ing the war w e actually did deal with both the borrowers
and t h e lenders a n d t h e borrowers w e r e placed under r e straint b y the Stock Exchangemanagement limiting t h e amount
that e a c h house covld borrow o f the total borrowing.
W e
had t o deal with t h e bank a n d the management o f the loan
account simply meant that w e arranged how much o f the
total l o a n account e a c h o f o u r b a n k s s h o u l d carry.
There
is a good deal o f rather loose thought, I think, about the
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Federal Reserve Bank of St. Louis
1228
whole question o f control o f Federal Reserve Bank credit.
We cannot control i t once i t leaves o u r doors.
I t i s un-
fortunate that t h e discussion s o frequently i s i n the
direction o f indicating that t h e Federal Reserve System
in some way, i n oublished figures a n d s o on, h a s assumed
some responsibility t o control t h e account itself. I
not want t o see that a n d I d o not want i t done. I
do
think i t
would b e dangerous a n d ineffective.
Governor Norris.
I s the rule o n the N e w York Stock
Exchange still i n force limiting members! t o t a l borrowings
to a certain oronortion?
The Chairman,
T h e rule t o which I referred was t h e
rule thet limited t h e borrowing o f sny house t o a n amount
not i n excess o f the amount w h i c h they were borrowing o n
@ certain date, a f t e r ~ e got i n t o the war,
Governor Norris. I
thought they had e rule that lim-
ited t h e anount o f borrowing b y nembers i n nroportion t o
their cavital.
Governor Young.
A t ten times their capital, s o I am
told,
The Chairman.
T h e business conduct committee
o f the
Exchange n o w requires regular renorts f r o m all members i n
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Federal Reserve Bank of St. Louis
123
which certain information i s given. I
and i t i s quite elahorate.
have seen the f o r m
O n the basis o f the informa-
tion repoited, t h i c h i s e x a m i n e d
b y experts
i n the Stock
Exchange management, where a house appears t o be borrowing
an amount which i s ereater i n proportion t o their cavital
than t h e Stock Exchange believes justified, t h e n they call
them in, maxe inquiry about i t , and, i f necessary, correct
its T h a t i s where t h e effective control o f this borrowing
account really lies with the Stock Exchange.
Guvernor Seay. d l e m b e r s h i p i n the Stock Exchange i s
individual.
borrowings
D o e s t h e report o f the member cover only t h e
o f the member o r t h e borrowings
ment house t o which he belongs?
o f t h e invest—
I f they are members they
are members merely throvgh one o f the menbers o f the firm.
The Chairman, They report just the same.
Governor Seay, D o e s that revort cover t h e borrowings
of the firm?
The Chairman, A l w a y s ,
T h e member i s s i m l y a
representative o f t h e firm.
Governor Seay, T h e n the revort to the Stock Exchange
does include the borrowings o f the investment house?
The Chairman. ‘ W h e r e they have members o n the Exchange,
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Federal Reserve Bank of St. Louis
Governor Norris.
D o those figures that have been
published incluae borrowings o f the investment houses w h o
do not have membership o n the Exchange?
The Chairman,
N o .
Governor Norris.
Company h a d a
4
S o , f o r exanple,/Huhn, L o e b &
member o f t h e i r f i r m w h o i s a
menber
Stoct ixchange their borrowings would b e included;
o f the
i f they
had not a member o n the Stock Exchange they would not b e
included?
The Chairman,
T h e y would n o t b e included. I
put
this o n the tovic not t o nezte a n y apologies about what
was done, b u t I wanted t o explain i t a n d give y o u opnort—
unity t o ass a n y questions.
\ G o v e r n o r Fancher. I
wasn't here during some
discussions this morning, M r , Chairman.
T h a t has
the effect o f the puolishing o f those figures?
The Chairman, I
think t h e first effect m a s t o
startle veople a bit a s t o the size o f the account, w h i c h
had been variously estimated, b u t the highest figure o f
which h a d not b e e n over t w o t o t w o a n d a half million,
when i t developed that i t was a
billion dellars above t h e
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Federal Reserve Bank of St. Louis
highest figure.
D o e s t h e opinion prevail that w e
Governor Seay.
are o n Gebatable ground i n asxing for this information?
The Chairman. I
don't « n o w that i t orevails. I
not answer that question. I
can-
think i t was very well re-
ceived generally that t h e figures should b e published.
The next tovic i s 3-A.
III. COIN, CURRINCY AND CIRCULATION.
A. G o l d holdings a n d payments.
Mr, H a r r i s o n ,
T h i s t o v i c w a s put o n largely because
of the fact that w e have had i t o n the program for the
last three o r four meetings a n d with a view of discussing
two features o f the,question.
T h e first i s the total amount
of gold held i n relation t o t h e total amount o f monetary
gold in the ¢oumtyy,, thich is controllable b y us through
our policy o f gold payments. S e c o n d , t o consider again
the percentage o f payable gold t o the total amount o f gold
held b y t h e F e d e r a l R e s e r v e banks. I
d o n o t k n o w h o w deeply
the Conference would care t o go into that, b u t ourdirectors
have shomm considerable interest i n i t lately f r o m both
aspects.
You will remenber, t a t i n g u o the last feature first,
£
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Federal Reserve Bank of St. Louis
126
that t h r e e o r f o u r y e a r s a g o w e w e r e a l l v e r y m u c h s u r —
prised t o find out t h e small percentage o f Payable g o l d
the System held i n vroportion t o the total amount o f cold
beid,
a
t that time t h e average f o r t h e System was o n l y
ll per cent o f their total liabilities, that is, their
note a n d deposit liabilities, T h r o u g h some arrangement
with the Treasury, which began a fairly substantial coinage program,
w e have gradually increased t h e vercentage
up t o 18 per cent, b u t even now, i n the case o f some Re—
serve Banks, the vercentage i s fairly low.
I t occurred t o
us that perhaps those Reserve Bancs might c a r e t o review
the situation a
little bit a n d study thsir o w n condition
with regard t o the anount o f payable gold held i n relation
to the total g o l d held.
The other question, t h a t i s the gold payment volicy
of the System, y o u will remember i n May o f 1922 w e a d o p t
ed a payment orogram which vlaced gold a t t h e bottom o f
,
the list:
w
i n o t h e r words,
’ >
o
. =
w e w e r e n o t nav’.
P
:
o u t gold
certificates until after w e h a d exhausted a l l other forms
of currency available, which was equivalent t o a n agreement t h a t y o u would not v a y o u t gold certificates a t all.
At that time Governor Strong m a d e a reservation w i t h regard
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Federal Reserve Bank of St. Louis
127
to N e w York, because h e anticipated that o n account o f
large increases i n the gold imoorts i t might b e advisable
for u s i n New York t o pay o u t enovgh i n certificates t o
offset imoorts.
A s a result, i n August o f 19232, w e com-
menced a gold naynent volicy,whichfor a period o f two
years and a haif w e followed,
we h a d vaid out n e t a
ficates,
~ ~ -.- A t the end of 1924
little o v e r 7 0 0 millions i n certi-_
A t t h e e n d o f that period t h e gold held b y the
System was, t o a dollar, t h e same amount t h a t w a s held i n
August, 1923, i n spite o f the gold immorts.
I n other
words, w e started out i n August o f 1922 with three billion,
71 million, gold i n the System and, i n spite of the im-
ports, during that two and a helf year period we ended
up i n December of 1924 with exactly the same amount,
$3,071,000,000.
I t might b e exolained that during 1924
the efforts of New York were helved b y Chicago, who commenced payment o f gold some time i n February o f 1924. D u r ing t h e year Chicago vaid o u t over $800,000,000 net, N o n e
of the other Reserve Banks a t that time w e r e vaying o u t
any gold.
A t the e n d o f 1924 w e ended a l l square.
Then
came the question, i t h the shift i n the f l o w o
f gold from
the i m p o r t
t o t h e export trend, w h a t o u r p o l i c y should t h e n
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Federal Reserve Bank of St. Louis
128
be.
W e discussed i t at one meeting here. ‘ T e had long
talks w i t h t h e Treasury about it. T h e Treasury program
coincided with ours, a n d I think was agreed t o b y some
of the other Governors, a n d that was that w e should pay
out just enough tertificates i n 1925 t o maintain the gold
certificate circulation a t about t h e level i t was then,
or a billion dollars, D u r i n g 1925, o w i n g t o the fact
that some o f the other Reserve Bants, particulerly Boston,
commenced g o l d payments, t h e gold certificate circulation went u p t o pretty nearly $1,100,000,000.
now t o a
billion, f i f t y million,
a n d still
I t i s down
i t i s o u r feel-
ing that w e should continue that vrogram, which i s p a y
ments b y the S y s t e m i
n amounts sufficient t o keep t h e
gold certificates i n circulation a t a billion dollars.
It might b e well worth while f o r the conference n o w t o
review it.
I f w e oroceed under that volicy then a n y gold
flow, whether i t i s i n or out, will manifest itself i m m e d
lately i n the total gold holdings o f the System.
I n
other words, i f w e just keep .our present certificate c i r —
Culation a t about a billion dollars, a n d d o not try t o
offset either t h e imports b y further payments o r the e x
ports b y further contraction, t h e n a n y change i n the
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Federal Reserve Bank of St. Louis
international f l o w o f g o l d w i l l n e c e s s a r i l y r e f l e c t
itself i n the § ystem's holdings. I
think I am cor-—
rect i n saying that, s o far as w e have reviewed it, w e
feel that w e should continue o u r present policy a n d main-—
tain that certificate circulation a t about a
billion dol-
lars.
Inthat connection, and reviewing a little bit, when
the System was first orgenized the total monetary gold i n
the country a s estimated b y the Treasury w a s a billion,
eight hundred million.
I n 1917, when the rst 8Ptftin r e
serve took place, t h e total amount o f gold was about
three billion.
ment policy,
I n 1922, when w e commenced our gold vay—
i t was.three billion, e i g h t hundred million,
and a t t h e present t i m e i t i s estimated t o b e about f o u r
billion, four.
W e have four billion, four, a n d the Sys~
tem a S a whole holds a
little under three billion —
[I
think i t is about t w o billion, eight hundred million, a n d
of t h a t t w o billion, e i g h t h u n d r e d million,
w e have o n l y
about seven t o eight hundred million i n payable gold,:.: .
fhe rest i s i n bullion i n the gold settlement fund.
Governor Harding.
I t would b e heloful t o us i n the
gold p r o g r a m i f y o u w o u l d l e t u s ‘ n o w w h e n y o u g e t a
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Federal Reserve Bank of St. Louis
130
gold movement i n N e w Yor<, either incoming o r outgoing.
It m a y b e several days before w e are affected i n Boston.
So far i n our gold Payments w e have just had t o be a
little arbitrary, b u t i f w e could g e t f r o m you, j u s t a s
we get o u r allotment o f acceptances bought, j u s t a s w e
get a
statement about t h e probaocle amount o f Federal R e -
serve notes that w e will have outstanding during t h e coming
months,
i t would b e a pretty good guide t o u s i n our pay—
ments.
W e d o not vant t o overdo i t o r underdo it.
the Treasury wants t o keep a
I f
billion dollars i n gold i n
circuletion i t ‘would b e very helpful t o u s i f you would
figure what our proportion would be, let u s ‘know, a n d w e
could work o n that during t h e month.
wr, Harrison, I
thins i t would b e most helpful,
certainly t o our program i n New Yorx,
i f w e could have a .
Little closer cooperation between Chicago and Boston,
Governor Harding.
I f y o u would g i v e u s those figures
we would b e very g l a d t o cooverate with you.
W e would
like t o have sonething t o guide us, because a s it i s now
we are going i t biind a n d d o not know,
Governor Fancher.
wir, Harrison.
W e would like t o have that too,
I n the latter part o f 1924, i n the last
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Federal Reserve Bank of St. Louis
131
two o r three months, t h e Cleveland Bank v a i d out bet ween
forty a n d fifty million dollars. |
Mr. Harrison. I
think y o u r net figures f o r 1924 were
in the form o f receipts rather t h a n i n the form o f payments. I
may o e mistaken.
Governor Fancher. N o , Mr. Harrison.
1924 but gained i n 1925.
W e lost o n the
W e vaid out liberally i n the
last three o r four months o f 1924.
idr. Harrison.
T h e n I must i i s s
m y statement t o
the extent that i t was a fairly insignificant amount i n
comparison with t h e total n e t vayments b y t h e System,
Governor Harding.
I f we are going t o have a System
gold volicy i t seems t o m e i t i s important t o have t h e
several banks informed a s t o what they shall do.
Governor Fancher. J I think that is a very good suggestion, Governor Harding.
‘ T e could operate o u r gold.
payments possibly more intelligently,
ity. Harrison.
T h e difficulty
i n the past h a s been
that w h e n w e took t h e matter u n i n the Conference here ~ ~
I remember Mr. Winston avpeared before t h e Conference —
there wags n o t ° .
very much symmathy expressed b y the
other G o v e m o r s towards a n y gold payment program.
I n
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Federal Reserve Bank of St. Louis
fact I
o o
think w e r a n contrary t o the general thought
the Conference,
expressed
b u t there w a s nofobjection
o n the part
of the others t o our continuing t h e payments.
Governor Young.
‘ V e have tried t o p a y out gold o u t
there and issued certificates, b u t i t i s extremely hard
in our District,
T h e banks o u t there want t h e five dollar
bills a n d w e cannot v a y them i n gold.
ever w e can,
W e vay i t out w h e n
W e were i n sympathy v i t h t h e program,
we
tried t o do it, but cmld not d o it.
The Chairman,
H e r e i s the real situation that pre-
sents itself, a s ~e figure i t out i n New York. B e f o r e the
War gold-paying countries l i k e England h a d but t w o cinds
of currency, gold coin and national bank notes.
N o w the
‘ind o f currency that always reached t h e saturation point
was the gold pin. T h e y always had all the gold coin that
they could use because they would g o t o the bank and get
the g o l d c o i n w h e n e v e r t h e y w a n t e d i t . C o n s e q u e n t l y
circulation
i n tngland w a s v e r y stable a n d a
fairly d e f i n i t e
amount, w i t h gold c o i n circulation always a t the satura.
tion point. O v e r here, i n contrast, w e have all kinds o f
paper money i n circulation, a n d the kind that fluctuates
is t h e F e d e r a l R e s e r v e notes.
B u t i n a s m u c h a s o u r g o l d cit...
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Federal Reserve Bank of St. Louis
133
culation i s simply a
different colored piece o f paper,
they c a n n o t d i s t i n g u i s h b e t w e e n a
niece o f p a p e r w h i c h
is gold a n d a niece o f vaper w h i c h i s a Federal Reserve
note,
s o there i s n o such thing a s a saturation point i n
this country o f gold coin circulation.
T h e n another thing,
in the Federal Xessrve System w e pay out Federal Reserve
notes and taxe i n gold certificates and pay out gold c e r
tificates a n d taxe i n Federal Reserve notes and, according
as w e d o o n e o r t h e other, o u r r e s e r v e g o e s u p o r d o m .
Our reserve nercentage will increase quite ravidly a s
we tase i n gold certificates a n d pay out Federal Reserve
W e get d o l l a r f o r dollar, w h i c h i n c r e a s e s o u r v e r
notes.»
centage.
S o we have got the choice of having the fluctu-
ation take place i n the amount o f gold currency i n circul-—
ation o r i n our reserve.
I t i s a question o f nolicy whe-
ther i t i s wiser t o have t h e reserve fluctuate, especial.
ly when the gold movement becomes slacx r o some extent,
or whether i t i s better t o have a lot o f gold certificetes
bn circulation fluctuating,
Governor Seay, ‘ h e n d i t y o u begin t h e volicy o f vay—
ing o u t gold notes?
The Chairmen.
I n 15%22. ‘ % e felt that during this
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Federal Reserve Bank of St. Louis
134
heavy g o l d i m p o r t a t i o n i t w a s b e t t e r n o t t o h a v e i t p i l e d
up i n t h e R e s e r v e Bants, j u s t t o b e a
s h o w piece a l l
through this couatry a n d i e conan o f the world a n d have
then think that there was unlimited credit available here,
and w e paid out, a s ifr. Harrison said, some $700,000,000.
Now v e have got t o the point where t h e gold movement i s i n
doth directions, instead o f just coming i n all the time,
and w e feel that t h e time has come t o have t h e amount o f
gold i n circulation constant a n d t o have t h e changes
brought about b y gold imports s h o w n i n our reserve.
8 0
™e are trying t o ceeo t h e amount o f gold certificates i n
circulation a t a billion dollars.
I f w e have a
of gold b y export o u r reserveswill c o m e down.
a lot i n our reserves will g o uv.
big loss
I f w e get
I t probably i s a more
illuminating situation for the nuolic than i f we handle
it i n a haphazard manner without a n y volicy, o r if we had
the amount i n circulation the fluctuating item, because
no one will k n o w about that,
Governor Fancher.
H a v e y o u e n y fizures t o indicate
how this Treasury volicy i s working o u t o f xeeping u p the
amount o f gold certificates?
T h e bancs a r e all paying
gold, a r e they not, and have y o u any figures t o show?
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Federal Reserve Bank of St. Louis
135
Governor Seay,
I f you have t h e Bulletin before you,
on page 2 1 5 y o u will s e e the variation i n gold certificates.
air, Harrison. I
have here @ chart which w e follow
pretty closely i n New York.
of m o n e y i n c i r c u l a t i o n
I t gives t h e additional amount
i n r e l a t i o n first,
t o t h e general
price level, a n d second, i n reletion t o the gold imports.
It also shows t h e gold certificate circulation i n contrast w i t h the Federal Reserve notes circulation,
I t
illustrates what Governor Strong has just referred to,
that when w e pay out gold certificates the Federal Re—
serve notes come in, a n d vice versa.
I f y o u are i n t e r e s t
ed i n it I will b e glad t o send you one o f then.
Governor Norris. I
would lixs t o have a covy o f that.
I would also like t o « n o w o n what basis t h e Treasury
reaches t h e o n e b i l l i o n d o l l a r s
a s the emount
o f gold cer—
tificates desirable t o have i n circulation.
div. Harrison. That haopened t o be the figure a t which
the circulation stood at the end of 1924, when the flow
in gold changed f r o m a n imnort f l o w f o a n export flow.
In order t o shor the imorts i n our reserve a n d to give:
up payments i n order t o offset imports w e thought w e
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Federal Reserve Bank of St. Louis
136
would xeep t h e certificate circulation a t i t s then figure
of o n e b i l l i o n dollars.
Governor Seay,
I n December, 1924, i t was $933,000,—
Governor Calcins. I
chart.
would lixe t o have a copy o f that
T h e C h a i r m a n ' s v i e w a t t h e present t i m e i s t h a t
it 1 s probably unnecessary t o conceal t h e gold that i s com.
ing into t h e country.
T h a t w e should only xeep concealed
that which i s already concealed i n the billion dollars i n
circulation a n d l e t t h e balance o f the flow, which e v e r
way i t may be, anpear i n the statements o f the banks,
The Chairman,
Yes.
Governor Calkins.
I n other words,
t e c a n probably
continue t o d o anproxinately what w e have been doing, v a y
out a s nuch as we ta’ce in, unless there i s s o m consider—
able movement, a n d that would then b e adjusted i n New York.
The Chairman.
Y e s ; w e would then take u v the n e w
policy.
Governor Calxins.
ment
I f there was a considerable move-
i t could b e taken c a r e o f b y the b a n k i n N e w Yor* a n d
the others could continue t h e same practice?
The Chairman.
W e could compensate for it, yes.
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Federal Reserve Bank of St. Louis
137
Governor Seay.
T h e important thing t o m e seems t o
be t O continve t h e n o l i c y t h a t h a s v r e v a i l e d s i n c e i t
would bring about confusion i n the situation i f you changed
it.
The Chairman,
Yes.
O n e o r the other figure has
got t o b e constant i n order that t h e other one, w h i c h i s
not constant, s h a l l n e a n enything,.
Governor E e a y ,
I t h a s t o be.
I f y o u change t h e
policy i n that respect t h e result vill b e a change i n
the reserve a n d there will b e some inquiry a s t o the r e a
son for the change which does not show o n its face, which
would n o t perheos b e a g good a
The Chairman,
thing a s might be.
W e are not figuring o n any change i n
New Yor: just now.
W e will j u s t rock along a s w e have
been and to suoply the other Reserve banks with these
figures,
i f y o u w a n t then.
Governor Cal’sins.
I t sppears t o n e i f the other
banxs continues t o carry o u t t h e volicy t h e y heve been
carrying o u t aoproximately, t h e t is, o f vaying o u t a s
much g o l d a s t h e y receive, t h e t a l l t h e a d j u s t m e n t n e c e s —
Sary w i l l b e m a d e i n N e w Y o r k a n d w i l l a n v e a r
Yors reserve figures.
i n the N e w
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Federal Reserve Bank of St. Louis
The Chairman T h a t i s so.
Governor Calxins.
jt m i g h t
I f a very great change should c o m e
b e necessary t o change t h e volicy o f the other
banks, b u t not otherwise.
wir. Harrison.
T h e r e w a s o n e practical t h i n g that
would have helped u s i n 1925, a n d that was i f we had cnown
a little b i t i n advance that Boston w a s going t o commence
a substantial vayment policy w e would have checked up:
9 little i n N e w Yors s o thet t h e total circulation would
not have bounced u o a hundred aillion dollars, a s i t did,
without o u r osine able t o checks i t until i t was t o o late.
Governor Harding.
Y o u could have t o l d i t from our
weecly statement, c o u l d y o u not?
air. Harrison.
we realized it.
reflected
T h e circulation had gone uv before
Y o u r gold vaynent nolicy would n o t b e
i n y o u r w e e t l y statement, G o v e r n o r .
Governor N o r r i s .
W h e r :
~ould y o u find out i n your
statement h o w many gold certificates y o u were ~maying out?
Governor Harding.
H e could n a v e found o u t whet o u r
outstanding note issue w e s t h e weer before.
Governor Norris, Y e s , b u t that may heve gone out
through the gold settlement fund.
Y o u couldn't tell
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Federal Reserve Bank of St. Louis
whether o r not i t was going i n t o circulation.
Governor Fancher. I
would lite t o ask Mr. Harrison
@ question a s t o t h e amount o f minted g o l d a n d a s t o the
holdings o f the banctsin the natter o f coin.
presenting n i n t i n e v r o v r a m ?
W h a t i s the
H a v e they got a
surplus
of
‘old, d o you ‘now?
wir. Harrison,
A t the present t i m e t h e Treasury h a s
a surplus o f about $50,000,000 i n coin over and above the
base required f o r certificates, t h a t i s all.
Governor Fancher.
T h a t i s quite a n imoroveent.
2. Harrison. T h a t has been reduced b y $20,000,000
in the last t w o deys o n account o f a withdrawal that N e w
York h a s -tade, s o that there i s really o n l y about $30, 000,—
OCO nom.
Governor Norris.
A r e they minting g o l d this year?
Wr. Harrison. I
believe t h e y h a v e m i n t e d t h i s y e a r
on the sense program shat trey have followed i n the last
tro years, Governor Norris.
The Chairman N o w gentlemen, i f there i s nothing
further o n this w e will nass t o Tonic 3-C.
III. C O I N , CURRENCY A N D CIRCULATION.
GC. C u r r e n c y counting machines.
V o l u m e o f work v:2r—
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Federal Reserve Bank of St. Louis
formed a n d estimated savings.
wr. Harrisou.
T h e s e currency counting machines h a v e
been discussed a t a previous meeting, A
Reserve Ban<cs have sent representatives
see t h e m i n operation,
mechines
number o f t h e
t o N e w Yorx t o
S i n c e t h e n ~ e have sent trial
t o f i v e . o f t h e R e s e r v e Banks.
W e have h a d i n
operation f o r a year n o m 4 0 machines i n the N e w York
Bank.
# 6 have h a d a »oretty feir test t o detsrmine h o w
much these mechines have increased o u r outout, a n d w e
have estimated that o n five collar bills, f o r instance,
the c o u n t e r s h a v e i n c r e a s e d t h e o u t o u t
So that whereas a
b y 6 4 p e r cent,
girl was. counting, soreading, bundling
and sealing eleven vackes o r 11,000 notes a day before
we had the machine, w e have increased that t o 18,000
notes o n the averaze.
T h e r e a r e some girls w h o have
been o n machines longer than others w h o a r e averaging
between 2 2 and 2 4 thousand notes a
day,
J e firure that
is a little hich a n d that after t h e cirls have h a d ade—
quate e x p s r i e n c e t h a t t h e y w i l l » r o b a b l y a v e r a g e a b o u t
20,000 notes a day. T h a t i s almost double what the
counters w e r e a b l e t o d o b e f o r e t h e advent
chines.
o f these m a -
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Federal Reserve Bank of St. Louis
141
The only nurnose i n bringing t h e question u o again
is t o refer t o ths contract w h i c h w e have w i t h t h e inventor.
A t t h e time w e negotiated f o r these machines w e
orovided n c t only f o r a possible 1 0 0 m c h i n e s f o r N e w
York b u t also, a t a special orice, w e ~crovided for t h e
other Reserve banxs i n the e«vmt that t h e y would give a n
aggregate order f o r t h e entire System f o r 2 0 0 machines,
including t h e 100 that “ e w Yors night order.
O u r oro
oan h a s been a little bit delayed owing t o the fact that
the inventor, having almost a unique »vroduct, t t i s al—
most exclusively f o r u s e i n the Reserve Banks, h a s n o t
been willine t o build u p his aanufacturing vlant t o a
point w h e r e h e c a n p r o d u c e a s quicsxly o r e c o n o m i c a l l y
as h e M i g h t o t h e r w i s e h a v e d o n e i f h e h a d s e c u r e d t h e
order for the other Reserve Banks. W h i l e w e anpreciate
the desire o f the other bantes t o try the machine o u t a n d
see h o w i t r o r r s
of y o u could,
i n their om™m shop, n e v e r t h e l e s s
i f all
i n s o m e w a y o r another, s a t i s f y y o u r s e l v e s
as t o t h e effectiveness o f t h e machine i t would b e very
heloful t o us i n vetting our ot™m 100 machines and very
heloful t o the inventor if, within the reasonably near
future, v e could give a n order for the System,
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Federal Reserve Bank of St. Louis
142
m +
e
47- x
Cheirm
an.
2
w t h.r =T @? r
r i sao n e ~ o 2r Te s s e s t h e s%e t h.i2 n g s
in u c h gentler ~hraseology t h a n I do, T h e fact i s
this:
If w e s e n d t e s t m a c h i n e s
t o a l l t h e reserve b a n c e i t
is going t o materially increase t h 2 cost o f the thine
and
delay t h e p r o g r a n m a t e r i a l l y a n c t h r o w u s o u t o f
line i n
New York,
W o w v e have h a d the zechins g0ing f o r a year,
40 machines, a n d w e are absolutely satisfied with t h e d e m o n
stration that - e have had. e
h a v e vulled a
mchine
to
pieces t o see hor i t stands up, and i t stands u p beautifully, I
thinc t h e o t h e r R e s e r v e B a n c s c n u l d s e t t l e t h e
guestion quicter o y sending someone t o N e w Yore t o test
it out, because I
do not believe a test i n the other banks
would b e anywheres near a s satisfactory a s the one that w e
have made i n N e w Yor’.
wir, Harrison.
W
e brought t h e metter
u n because
ost
of y o u h a v e n o t r e a l i z e d t h a t t h i s d e l a y i s b e i n g e x .
pensive
t o a l l o f us. I
d o n o t think r e have received
an order other t h a n f o r a trial machine f r o m any Reserve
Ban ce
Governor Harding.
O u r »oeople have b s e n turning o u t
twenty t o twenty-ons thousand bills a
about 14,000 before.
day o n i t a s against
Y e found there w a s a little prejudice
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Federal Reserve Bank of St. Louis
143
against i t a t first,
T h e girls h a d a n idea that i t was
a labor saving machine and would throw a lot o f them out
of jobs. 1
tolé t h e n t h e y n e e d n o t b e u n e a s y a b o u t t h a t ,
because w e have a
pretty considerable turnover u n there,
of neople getting married a n d taxing other positions, a n d
so forth,
a n d that this ~ould undoubtedly require l e s s
operators i n the long run, I would see t o it that the
use o f t h e s e m a c h i n e s w o u l d n o t t h r o w a n y b o d y o u t o f a
job.
The Chairman. I
thin: t h e m c h i n e s h a v e pretty
nearly p a i d for themselves this year.
wir, Harrison.
W e figure w e are saving $830 a year
per counter,
Governor Bailey, H o w much does the machine cost, sir,
Harrison?
air. Harrison. $1500.
Governor uicDougal, Theat saving is based on what
hand c o u n t v e r i n d i v i d u a l ?
Mr. Harrison. 128,000.
Governor MicDougal.
O u r s i s about 13,500.
W e have
figured a saving o f about 2 5 per cent, a n d then there a r e
other advantages, d o i n g avay with t h e drudgery, a n d things
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Federal Reserve Bank of St. Louis
144
of that sort. I
do not think w e are ready t o give a n y
substantial order f o r those machines b u t I
think w e will
be i n a position voretty soon t o give a n order f o r ma~
chines
i f y o u desire a n answer
o n it.
The Cheirman, T h e voint i s we have m e d e a contract
with this m a n which i s t o a certain extent depandent u v o n
his being able t o make a manufacturing program a n d build
either a hundred machines,
number.
t o hundred, o r some definite
W e oxvobably will need a hundred machines anyway.
Mr. Harrison.
W e have a total o f fifty now. W e have
40 i n our o m vlace a n d five i n the other Reserve Banks.
We have ordered forty more, o r a total o f 90 mechines f o r
our o w n use.
Governor Calcins.
Mir. Harrison.
‘ W h e n does t h e contract expire?
t was a
I
three-year c o n t r a c t a n d w e
made i t about a ysar and a half ago,as I remember,
Governor Fancher.
H o w soon oould w e g e t delivery o n
machines?
Governor. Seay,
W e have been waiting f o r o n e f o r
eight months o r more.
wir, Harrison.
B u t t h e reason y o u have h a d t o wait
is the fact that h e has h a d t o out o n some sort o f a sne-
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Federal Reserve Bank of St. Louis
145
cial adjustinent | o u account o f the fact that y o u have a n
alternating c u r r e n t ,
m
Governor Seay.
sal motor a n d has h a d t
alternating current.
a
g n o t able t o sunply a univer—
j e e a soecial motor f o r t h e
J I thought i n most cases that the
tendency h u d been t o change t o the alternating current
and I
was surprised woen h e could n o t d o it.
T h e main
question i s t o determine h o w many machines v e need i n
the bank and w e can hardly deteraine that until our machine h a s been n u t i n wor’cing condition.
wr. Harrison.
E v e n i f you only estimated a
conser—
are
vative number that y o u might b e sure t o need, i f you
give him an order
to tase any at all, which would
him
which would be a minim order and which would enable
to build u o his organization.
H e was just a n inventor.
h e first started.
He h a d n o orgenization a t all when
has been working along a
advanced him,
blame h i m —
H e
nend t o mouth o n the funds we
a n d I do not
H s h e s n o t b e e n willing ~ t o ovild w m a n organization f o r the »nuroose
three or four hundof building quickly an@ economically
red machines,
Governor S e a y ,
T h e voint
o f vnoertainty w i t h u s i s
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Federal Reserve Bank of St. Louis
whether this motor will operate w i t h o u r mchine.
wit, Harrison. I
thine t h e r e i s g o o d r e a s o n f o r R i c h
mond t o hesitate because i t i s necessary t o have this
new adjustment, h i c h has not been tried out.
Governor Seay, T h a t i s the point ~ i t h us, wr. Harri-
Governor Vellborn.
H a v e y o u been able t o det: rmine
the reduction t h a t h a s been m a d e i n t h e unit c o s t o f this
WOrk?
Mr. Y a r r i s o n . I
d o n o t ‘“<now quite w h a t y o u m e a n b y
unit c o s t .
Governor Vallborn.
T h e cost v e r nieces handled.
‘ e
express i t i n our ban*x e s the unit cost.
air. Harrison. I
thin’ f o r your purposes y o u could
tell better b y letting m e tell y o u shat h a s been t h e increase o e r emmloye rather t h a n trying t o estimate t h e unit
cost.
Governor Yellborn.
T h e t a l l enters i n t o t h e unit
cost, o f course.
Governor Biggs.
V e have h e d o n e o f the m.chines f o r
three months b u t o n l y o n e operator, w h o hes grom™n t o b e
very efficient.
I n that three months w e have m d e a
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Federal Reserve Bank of St. Louis
147
saving o f 5 0 per cent,
I t sorts unfit money according
to m y judgement b e t t e r }>
1
s good,
a s t h e t i l l noney.
The m a n i n charze o f tha currency recomnends i t very highly.
H e h e s h a d n o mechenicalntroubl>? “ h a t e v = r w i t h i t ,
It worts every day- I
cut I
do not <nov how nany Nore w e want,
will find o u t a n d let y o u « n o w later.
W e are very
much oleased with it.
The Chairnan,
Y o u have a basis for maxing a calcula
tion, »ecause y o u c n o v how many counters y o u have, h o w
much currency t h e y handle a n d then what t h e aechine does.
Y e have saved 5 ¢ ver cent i n a ner—
Governor Bigts.
iod o f t h r e e months.
wir. H a r r i s o n .
W e have s h o w n e
Governor Fancher.
5% wer cent.
6 4 v e r c e n t increase.
Y e have shovn a n increase o f
I t i s 20,300 b y sechine and 12,930 b y hend,
Governor Seay,
y
n a s it is deternined whether
the adjustneat necessary i n the notor i s successful, I
believ= w e can give a nretty quick reoly.
O f course i t
has g o t t o b e tried o u t first.
H a s t h e electric commany given
Governor Norris.
you t h e alternating current?
Governor Seay,
Y e have that, and that necessitated
a change i n the ‘notor,
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Federal Reserve Bank of St. Louis
148
Governor Talley,
M r . Harrison, ~ h a t w i l l o s the
marxet f o r this machine after t h e Federal Reserve Banks
and t h e Treasury have been supplied?
wr. Harrison.
H e estimetes that h e i s not going t o
have a n y M a r x e t o t h e r t h a n t h e F e d e r a l B a n k s a n d t h e T r e a s -
ury, t h a t i s any substantial marcet, F o r that reason h e
is not vrepared t o build u o a n organization t o supply u s
with these machines a s rapidly a s w e would lixe t o have
them i n N e w Y o r ,
Governor Talley.
T h a t i s ~hat I gathered. ‘ W h a t
provision i s there f o r maintenance a n d reolacement?
Mr. Harrison.
W e have found i n our o n e year's exper-—
jence t h e r e i s v e r y l i t t l e w e a r o n t h e machine.
W e took
one Machine d o m m entirely a n d t h e wear o n the varts w a s
hardly noticeable a t all.
T h e inventor himself estimates
thet the life o f the machine vill b e about 1 5 years, a n d
I thinzx that i s fairly. conservative.
Governor Talley,
A f t e r t h e o r i g i n a l output, w h a t
Will xeeo h i m going?
wir. Harrison.
H e figures that t h e r e will b e enough
of demand for the outnut, even after w e are sunplied, t o
keep h i m going.
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Federal Reserve Bank of St. Louis
149
Governor Nerris.
U n t i l t h e time comes that w e will
want n e w ones.
Mr. Harricon. T h e r e are certcin businesses, s u c h
as l a r g e d e p a r t m e n t s t o r e s , t h a t h a v e c o n s i d e r e d t a x i n g
them up, and he might get a marxet there, T h e n h e figures that there will always b e a sufficient market w i t h
the Reserve Benks t o justify h i m i n maintaining a r t s .
At t h e p r e s e n t t i m e h e s e n d s t h e s e p a r t s a r o u n d a n d h a s
the machine manufactured.
his
o m
H e hasn't a n y organization o f
a t all.
The Chairman u r . Harrison, have y o u consulted Mr,
Derey a s t o w h e n h e wishes
Wr, Harrison,
t o avvear?
H e exvects t o come tomorrow, b u t will
be willing t o come ‘today, sir, Chairman.
The Chairman,
T h e next t o p i c i s 4 B .
OPERATION A N D A D u w I N T S T R A T I.NO
B. S h o u l d n o t t h e Fedsrul r e s e r v e b a n t s b e reimbursed b y Federal L a n d B e n k s f o r e x n e n s e i n v o l v e d
i n pay—
ing Federal F a r m Loan counons?
Governor w c D o u g a l ,
T h e Federal F a r m L e a d coupons
have b e e n n a i d t o t h e F e d e r a l R e s e r v e Banxs.
U n d e r exist—
ing arrangements Reserve banxs sent t h e coupons, c a n c e l
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Federal Reserve Bank of St. Louis
150
them a n d return t h e n dirsctly t o the issuing banx, maxing
a charge f o r t h e anount thereof against t h e Federal Reserve
Bans i n New Yor’, w n e r e t h e funds a r e carried t o cover t h e
various issues o f farm loan bonas that h a v e been called f o r
redemotion, m a t i n g i t necessary f o r the clercvwho handles
the counons t o check carefully t h e serial numbers,:. —
in order that t h e coupons detached f r o m t h e called bonds
May n o t o e paid.
A t t h e »resent t i m e t h e L a n d Banks a r e
not Maxing a n y reimbursement f o r th> time o f the clerks
in handling t h e coupons.
T h e expenese w i t h u s i s estimat—
ed t o b e from seventy—five t o a hundred dollars a
month,
it seems t o u s that w e might reasonably a s x f o r reimbursement o f this item,
T h e amount w i t h u s would only b e
$1200 a year perha vs, but it maxes eight t o ten to twelve
thousand dollars f o r the system,
I t i s simply submitted
for consideration,
The Chairasn.
W e vay about 600,000 counons a year,
to the value o f $18,000,000, a n d r e estimate the cost t o
us t o b e about $2350.
Governor Seay,
The Chairman,
A r e y o u reimbursed f o r that?
No,
Governor iicDougal,
T h e 3 y s t e m mould s a v e orodadly t e n
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Federal Reserve Bank of St. Louis
or twelve thousand collars a yeer, a n d i t seems t o me
that i t v o u l d b e v e r f e c t l y p r o p e r t h a t w e s h o u l d a s k f o r
reimbursement. I
simply submit this f o r consideration.
Governor Norris.
‘ h e situation h a s vhanged i n two re-
syects f r o m wiat i t ras i n the beginning.
I n the beginning
of course there were n o call bonds s o that there w a s n o o c
casion for that handling o f coupons t o whicm Governor Mc.
Dougal h a s referrec.
A t that time a l s o t h e Federal l a n d
banks w e r e young a n d comaratively poor.
N o w they a r e
Tich, T h e y have taxen all t h e expenses o v e r that t h e G o w
ernment fornerly naid voluntarily a n d I d o not imagine
that t h e y would have a n y objection t o maxing reasonable compensation t o the Reserve Banks f o r this extra service that
they a r e n o w rendering. I
suggest, b e f o r e
w e nass a
Teso-
lution o n the subject, t h a t w e take i t u p with t h e G o v e r
nor o f the Federal’ Farm Loan B e a d .
The Chairman.
D o I understand y o u m a e t h a t i n the
nature o f a motion?
Governor Norris.
The Chairman,
Yes.
T h e moticn
i s that t h e circumstances
justify t h e u n u s u a l orocedore o f anvointing a
commitiee o f
one t o handle this matter, namely, Governor Norris; that
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Federal Reserve Bank of St. Louis
152
the whole subject b e referred t o Governor Norris, w i t h
power.
Governor Fancher. I
a m arreeable t o that, I
Governor Seay, I
to s a y t h a t i t o c c u r s
second that,
t o m e that a s a
matter
would like
o f ovrinciple
these v a r i o u s o r g e n i z a t i o n s m g h t t o b e a r a l l t h e e x p e n s e s
which a r e i n c i d e n t
t o t h e i r operation,
am f r a n k t o s a y t h a t t h i s a r r a n g e -
Governor Norris. I
ment w a s made i n the beginning n o t with a
anything
view o f imposing
o n t h e W e d e r a l R e s e r v e B a n k s o r t o g e t their. ser-—
vices free, but i t was simply one o f the additional advant—
ages that i t was sought t o get f o r the bonds t o assist i n
their sale, t h e statement that coupons coulc b e cashed a t
any Federal Reserve Bank,
Norris..
The Chairman T h e r e i s one other point, Governor
.
s o on,
In order t o avoid the mltiplicity o f accounts, a n d
come
this echeme h a s been s e t w o b y which a l l t h s coupons
to us, w e check u n o n it, a n d send them in.
D o y o u send
any d i r e c t ?
d o n o t <now.
Governor Norris.
T h a t I
The Chairman, I
thins y o u a l l s e n d y o u r c o u p o n s
Governor S e a y , I
t O Use
think w e do, a n d s e t t l e w i t h y o u
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Federal Reserve Bank of St. Louis
through t h e gold settlenent fuad,
The Chairmen.
A l l these coupon accounts, w h i c h o f
course a r e s e v a r e t e a c c o u n t s f o r e a c h c o u p o n payment,
s o
far a s t h e F a r m L o a n S y s t e m i s concerned, a g g r e g a t e n o w
sonething lixe $2,000,000, a n d m y attention i s called b y
this menorandum t o the fact t h a t i f w e impose t h e charge
these fellows might s a y that t h e y c a n g o into a n y bank
and g e t t h e m t o pay these coupons vithout a
balance,
I t
wouldn't break m y heart t o have another bank pay the
coupons a n d t a x e t h e balance,
b u t t h a t i s probably t h e
answer that y o u would get.
Governer Norris. I
do not thins so, because o f the
fact that t h e y c a n b e cashed a t a n y Federal Reserve Bank.
That i s of advertising value.
I n the beginning they want_
ed t o establish a connection with the Fed2ral Reserve System,
and because o f that advertising value I
want t o continue it.
O f course I
think they would
was going t o sug zest
to you that i t gave you a nice deposit, twice a year, b u t
a very temoorary devosit.
The Chairman.
Yes.
Governor W o r r i s . I
days before counon day,
suovpose t h e y o n l y p u t i t i n a
few
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Federal Reserve Bank of St. Louis
154
Mr. Harrison. N
; thet i s their a v e r a g e balance,
Governor Talley.
I t night immose a small loss o n
us, Mr. Chairman; i t will probabtly cost u s more t o get
reimbursement t h a n i t w i l l t o h a n d l e t h e coupons.
The Chairman, Y o u heve heard t h e motion, w h i c h h a s
been d u l y seconded.
(The motion, having b e e n duly seconded, w a s unanimous];
carried. )
The Chairman. T h e next i s 4-0.
C. P r o g r e s s i n budget control o f Federal Reserve
Bank Exoenses.
Are there a n y remarss f r o m whose banks which have
recently undertacen budget control o f expenses,
their exoeriences
a s to
i n doing s o ?
Governor Vellborn.
T
e adopted i t several years ago,
ir. Chairman, e n d h a d i t ooerating o m a cuarterly basis.
Now ~ e are operating i t this yoar o n e monthly basis a n d
4t¢ has overated v e r y well:
i n our danz.
W e are very well
satisfied w i t h i t a n d I a m sure i t will helo u s t o xeep
dewn exoenses.
Governor Calcins.
W e operated t h e pudget system i n
the S a n Francisco B a n k i n 1935,
I t was satisfactory, a n d
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Federal Reserve Bank of St. Louis
155
think I might s a y successful, T
he variation i n expense
betreen the actual exoense and the budget was $14,000, a l l
due possibly to fluctuations i n the cost o f currency.
The C h a i r m a n
A r e your people trying t o keep within
the budget?
Governor Calxins.
The Chairman.
Yes.
D i d t h e budget figure represent a
save
ing O v e r t h e o r e v i o u s y e a r ?
Governor Gal’sins.
T h e budget figure for 1925 was
$205,000 less than t h e cost o f 1924.
Chairman.
4D
A n y further remarks?
I f not, t h e next
n
t the steps
Further exchange o f vievs r e l a t i v e o
ta'’cen a t each Federal reserve b a n x t o mace sure that t h e
bans a n d the “ystem are n o t »roverly subject t o criticism
because o f the practices @
the ban’c o r its personnel.
This was discussed a t the laut meeting, that discus—
sion being followed u p by our sending a memorandum t o the
other A e s e r v e B a n k s a s t o a
ered b y the New Yor« Bans, I
certain f i e l d o f inquiry c o v -
would lixs t o «now whether
you got a n y definite reactions where t h e matter w a s taken
un with the officers a n d clerks o f the banke
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Federal Reserve Bank of St. Louis
156
Governor Talley. &
@ report h e r e which I would
Llixe t o quote.
"Governor Talley msde
action o f the O o n f e r e n c e
o f Governcrs o f t h e
srve Banks L e s t fall u p o n t h é subject o f t h e
conduct o f directors, officers c n é employees o f Federal
The v a r i o u s p o
raised w e r e f u l l y
bs i n t s
discussed ond, upon moticn of Director Patrick, seconded
by enothsr dir-ctor,
i t wes voted that t n e metter b e re~
ferred t o t h e Chzirmen o f t h e Bosrd f o r such investigation a n d survey f r o m tine t o tims as m i g h t b e de-
sirable."
Thatis
taken from a n
O
L
O u r Board
o f sie boa: -
Of course there w a s a great deal more discussion
of this matter t h a n i s reflected i n these minutes.
The Chairman,
H o r was t h e suggestion received i n
general, Governor Talley?
Governor Talley,
I t w e s r i g h t c o r d i a l l y received.
The chairmen o f the board, heving i t brought t o his
attention, s t a t e d that worcing through t h e executive
committee
w e could w a t c h f o r s u c h violations
o f certain
ethical vrinciples that n o t o n l y aight b e laid down i n
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Federal Reserve Bank of St. Louis
the Schedule, o u t arrived othervise, a n d bring t h e m
he board imnediately a s soon a s noticed.
Governor Young. s i r . Chairmen, I
would like t o
report that I did not refer this t o the directors a t
@emeeting b u t I
have t a l x e d w i t h t h e v a r i o u s d i r e c t o r s
about it. T h e y thousht your rules were a little b i t
officers o f the bank t o watch
situation, b u t they thought i t wae impossible t o
lay dorn any fixed rules, that each individual case hed
to b e handled o n its merits.
Gone w i t h it. I
T h a t i s all that I have
assume f r o m that that t h e reaction w a s
not e n t i r e l y favorable,,
Governor Caltins, I m i g h t s a y that v e are entirely
in accord with the outline o f the New York Bans i n vrinciple.
A S I indicated a t the tine ~ e discussed t h e
matter osfore, w e aight find cases i n which i t o u l d not
be expedient t o b e quite a s rigid a s you heve been i n
New York i n some cases.
The Chairman, I
think it is a fect, Governor Cel—
‘ins, t h a t whsre y o u ere right next t o a great big, active
Stocs Zxchenge,
t o a n atmosphere
o f speculation,
when
stocts a r e going u p a n d money seems easy, t h a t there a r e
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Federal Reserve Bank of St. Louis
158
tenjtations vresented t o the enoloyes o f banks that m a y
not b e t h e c a s e “ h e r e t h e y a r e f u r t h e r a r a y f r o m t h a t
stmosvhere.
Givernor Fencher.
A r t e r t h e ciecussion o f this
matter a t t h e o t h e r c o n f e r e n c e
ciel a t t e n t i o n
t o t h e losns
v e have b e e n D a y i n g spe-—
o f o u r smoloyes, h a v i n g o u r
examiners when t h e y went i n t o t h e bants give u s a list.
That h a s been going o n for sone tine.
was submitted t o o u r naenaging m u n i
T h i s memorandum
o
n receint o f
Mr. Harrison's jetter enclosing
eration a n d our feeling w a s that verhans y o u g o 4
further i n New Yors than conditions r o u l d warrant i n
however, w a t c h very cerefully t h e
outsides o p e r a t i o n s
o f o u r e n o l o y e s a n d a l s o t r y t o «<eep
close t a b o n their bdorrovings f o r member banks.
The Gheairmen,
I f t h e r e i s n o further d i s c u s s i o n
this topic v e will taxe u o 4-7.
Federal R e s e r v e z a n c
of t e n a n t s .
ceipts f r o m o t h e r e x p e n s e a n d i n c o m e accounts,
SB. C h a r g e o f f s o n account o f depreciation i n
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Federal Reserve Bank of St. Louis
machinery.
We have been asrer
of times about tenants 2
ing,
s e question i n N e w York a nunber
2
Federal Reserve B a n k B u i l d
a s t o whether o r not they were suitable tenants,
and i t i s difficult t o answer t h e question.
W e have h a d
One o r tvo cases Llixe that o f Governor wcDougel's, b u t
we have adonted a
vlan i n N e w Yors o f having n o financial
houses i n the bullding a t ali.
I f w e get inquiries o f
thet s o r t f r o m t h e o t h e r R e s e r v e Banks, I
just want t o
make clear thet i t i s not orijudice o n our vart a t all,
It i s a principle under “hich r e d o not think w e c a n
‘ Y e had a n offer t o rent a n en-
have financial houses.
tire floor i n our building the other day from the Trust
Company of New York for some of their clerxs out we do
not t h i n k w e c a n afford’
t o heve o u r building occupied
by
institutions o f thet ‘sind.
T e have t h e General sdotors A c
Governor Galins.
ceaptance Corporation, .ir. Chairman.
The Chairman,
1 2 do not think r e would taxe them,
Governor Wellborn,
W e have tried t o rent sone o f
our vacant space but are unable t o do so, because w e
have b e e n s o c r i t i c a l
i n g e t t i n g t h e i g h t < i n d O f -tér«
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Federal Reserve Bank of St. Louis
160
ants.
V e have tried t o rent i t t o gen-ral agents f o r
urance cowmanies o r for t h e zeneral offices o f a
railroad commany,
o r soacthiuge o f thet *ind, b u t w e
hav> n o t succeedsd i n getting enybody
Governor Calcing. I
t r
Z e
e é snace.
would lixs t o nursue t h e sub-
ject a little further, sr. Cheirmen, since you have e x
ed your disopproval,
I t wee difficult f o r u s t o
fine a n y reason f o r objecting t o the Gen=ral Motors
Acceptance Cornoration o r t o f i n d a n y more desirable
tenants t h a n that corvoration,
‘ V e heve a
freight tariff
bureau, which i s just a fe~ steps further removed from
a finance c o r n o r a t i o n , I
would l i x e t o n a v e y o u i n d i -
cate w h y y o u “ould n o t loox w i t h favor u n o n t h e General
motors Accentance Corporation,
might
o e gained
b y tas
a¢
f s ) s i m i l s r cornoration
reason o f their o c c w m a n c y
t
n
by
a F e d e R e s e r v e Bank
building?
The Chairman.
T h a
a t h s r e borderline case.
Concerns engevzed i n selling securitiss
Governor Calcsins. W h i c h t h e y a r e n o t —
The Chairman, T h e y are not, but those that are, o r
dealing i n margin accounts, represent t o n y mind nretty
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Federal Reserve Bank of St. Louis
fairly t h e t y o e o f t e n a n t t h a t w e s h o u l d n o t have.
Governor weDovgal. t h i s question I
think verhans
arose i n Chicago Sefore i t cic i n m y o f the other dis—
tricts.
W e adonted a
nolicy there under which w e de.
clined t o accept f o r tenants -—- " e are n o w running five
floors o r thersabouts - ~ those sho were engazed i n the
investment business, o r i v a t e b a n t i n g
sort.
o r anything o f that
v e heve adhered t o that u p t o the vresent time,
Six months o r more ago we decided t o rent, i f vossible,
the first floor o f our ovilding, vhich was set aside
for o u r fiscal agency activities, a n d which i s not n o w
used t o a n y great extent.
Y e reversed o u r volicy a n d “ e -
cided that there would b e n o objection t o accepting s o m e
investment concern a s a tenant vrovidec t h e y h a d been
long enough established and that the character of their
business was satisfactory. I
think »vossidly this has
happensd since y o u a n d I discussed t h e matter i n Chicago,
Mr. C h a i r m e n .
The Chairman,
D i d y o u tase t h e f i r m about m h i c h y o u
made inquiry o f me?
wr. MeDougal,
T e din
k
e them,
A s a Met—
ter o f fact t h e y were not willing t o come i n o n the tsrms
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Federal Reserve Bank of St. Louis
mhich w e offered.
The Chairman, They d o a very heavy sveculative
business,
o f course,
J
wr, wcDougal.
e have thought o f the railrosds, b u t
they will not v a y a n y rent.
T h e quarters
w e have a r e
nancial district a n d are better a d a p t e d ©
to something o f thet sort than anything else, exceot cigar
Y e haven't h a d a n y success i n
stores a n d littls shovos
getting a n y tenants.
The Chairman,
some devartaent
C o u l d n ' t y o u occupy t h a t floor w i t h
o f your bank a n d get t h e tenants f o r u p
stairs?
Governor uicDougal. ‘ % e could ¢ o that, but a s a mat_
ter o f fact ~ e are nretty w e
manently fixed.
The Cheirnen,.
Y o u brought w o this Np. 2 , segregation:
of building e n v a n heunee a n d reccivts f r o n other expense
and i n c o m e accounts, G a v e r n o r e t o u g a l ,
Governor. «w.ctovugal,
T h a t w a g nut o n the orogram b y
t i m e a l l expense
reason o f t h e f a c t t h a t a t t h e p r e s e n t
incurred
i n the operation
o f t h e d a n ‘ pbuilding i s c h a r g e d
a n c the income
to the general exvense account o f the bans
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Federal Reserve Bank of St. Louis
received f r o m syace leased t o tenants i s credited t o
income from banc ouilding, “hich i s grouped with other
earnings a n d results i n a n incorrect showing,
W e have
given s o n e consideration t o this a n d believe that those
banes, s u c h a s ours, t h a t are r e n t i n g l a r g e amounts o f
space, t h a t t h e i r accountin:
m e t h o d would b e imoroved
if
they would treat t h e building a s though i t were a sevar—
ate corporation, crediting that account m i t h all reccinte
for rent, crediting i t also perhaps f
a m o u n t o f rent
of that part o f the bank thich t h e banc uses itself, a n d
charzing i t with t h e expense, including alteration,
changes, a n d s o forth, settling t h e account possibly
once a
month o r once i n every s i x months.
present f o r n s i t i s n o t voracticel
U n d e r the
t o d o that a n d I
would
suggest that ouilding operating expenss a n d i n c o m b e
segregated f r o n o t h e r c u r r e n t e x o e n s e a n d i n c o m e a n d
the Board b e requested t o adiust their accounts a c c o r d i n g
ly» T a n subaitting thet for the consideration o f the
Gonference..
I f w e were
u
d a duilding account a n d
on
orejvit i t i t h income f r o n tenants a n d rould agree w u
a fair rental c h a r g e f o r t h e s v a c e occupied
b y the b a n i
itself and credit i t “ith that, then charge the account
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Federal Reserve Bank of St. Louis
164
with the exoense involved, I
thins i t would vresent even
a better accounting method t h a n a nore correct statement
of the real condition. I
thins this question h a s been
before t h e Conference a t least o n c e before b u t I
do n o t
rene aber whether a n y action was ever ta¢en.
Governor Bailey,
f e tried t o heve t h e ooard segre-
gate it, b u t t h e y wouldn't d o it.
Govermor x
]
I
Governor Pailey, I
say.
understand that,
am i n eympathy w i t h what y o u
W e d o a lot o f leasing,
Governor sichougal,
‘ V e lease nine floors,
Y o u a r e t h e largest landlord i n
the system.
Governor Seay. U n d e r t h a t v i e w o f the vroposition
you would have t o charge t o expense o f operation t h e r e n t
al o f y o u r o w n quarters,
m o u l d y o u not?
Sovernor .cDougsl, A p s o l u t e l y .
Governor Bailey.
Governor sicDougal.
I t s o u l d a l l c o m e o u t i n t h e wash.
Y o u vould credit i t with a fair
rental a n d the account would t h e n reflect a t any time
the accurate results f r o m operating t h e building.
The Chairman,
I t would s h o w a much heavier exnense
account t h a n y o u s h o w now,
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Federal Reserve Bank of St. Louis
165
Governor Seay:
I t would swell t h e gross ¢xpense
of the Chicago B a n k a n d o f ‘the
The Chairman.
Y a a t i s your rent roll now, Governor
McDougal?
Governor icDougal, A y o u t $240,000.
The Chairman,
Y o u are getting $240,000 f o
floors?
Governor wctougal.
The Chairman,
rent i f y o u made a
Y28~e
T h a t woule y o u charge yourself a s
charge against y o u r o v n occuvancy?
W e haven't made a calculation
Governor wcDougal.
of that,
The Chairmen,
I t would b e four o r five hundred
thousand dollars.
Governor sicdougal,
I f we cherged ourselves with
tvo dollars and a half a foot _ The Chairmen,
t h a t vould i t amount to?
Governor McDougal,
I t vould amount t o enough t o give
little profit i n that onvsration.
The Chairman.
T h a t would t h e total figure de?
Governor sicPougal, I
The Chairman,
do not ‘now,
H o w many feet d o y o u occupy?
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Federal Reserve Bank of St. Louis
Governor McDougel, I
ine Chalrman,
I
do not x n o w that,
t would b e something around f o u r o r
huncred thousand dollars, s a y 400,000?
Governor wicDougal,
The Chairman,
I t mould b e more than that.
$ i x hundred thousand?
Governor wzicDougal, I
would g u e s s t h a t w e w o u l d
ge o u r s e l v e s s i x o r s e v e n h u n d r e d t h o u s a n d
o r more.
I would estimate 600,000.
The Chairman,
I f you collected 240,000 f r o m your
tenants and charged yourself with 600,000 rent you would
increase your expense b y over $400,000 a year?
Governor wicDougal, N o , ~ * would not, wr. Chairman.
The Chairman, I
thinkx y o u mould.
I t i s only e boox—xcecening matter.
Governor “cDougal,
It keens a
more accurate account o f the building.
method
t would change your book—xeeving
I
The Chairman.
a n d the result w o u l d
b e t o show a
heavier e x p e n s e
account.
Governor .cDougal,
expense a c c o u n t
No, I
think
h
o
w a
heavier
a s i t i s no”,
The Chairman,
N o , Governor.
Governor Young,
Y
o
u a r e not charging yourself n o w
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Federal Reserve Bank of St. Louis
with a n y investment t h a t y o u have there. U n d e r your
other scheme y o u would.
Governor wcDovgal,
I n the interest o f keeving a n
accurate record o f the receipts a n d income o f the vduilding
I think i t would b e a n imorovement i f w e s e t t h e building
out a n d kept i t just a s though i t was a sevarate c o r p o r a
tion, s e t t l i n g t h e a c c o u n t p s r h a o s o n c e a
month o r m a y b e
once €very s i x nonths.
The Chairman,
W h a t i s t h e cost o f t h e building s e t
up o n y o u r b o o k s t o d a y ?
Governor .icDougal. A b o u t nine million,
The Chairmen.
I f y o u charge yourself f i v e per cent
interest i t would amount t o $450,000.
Governor .icDougal.
The Chairman. I
W e are not going t o d o that.
cannot s e e out what t h e vlan would
make y o u r a c c o u n t l o o x m u c h worse t h a n i t d o e s now,
Governor icDougal, I
d o n o t t h i n k i t would,
The Chairman, T h e r e i s a vlan that could b e adopted
that would imorove it, thich ‘would b e t o segregate all
expense o f operating t h e ouilding i n a n account a n d credit
it with rent collected, charging yourself w i t h the n e t
amount a s cost o f space.
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Federal Reserve Bank of St. Louis
T h a t i s what h e wants t o do,
Governor Norris.
s that what y o u really m e a n t o do?
I
The Chairman.
T h a t i s o n e plan.
Governor McDougal.
W e could
charge ourselves w i t h a rent agreed upon a n d then teke
o r teke a
credit,
4t w e s a
penalty,
i f t h e n e t result showed that
loss r a t h e r t h a n profit.
I
Governor N o r r i s .
fair r e n t a l
f y o u charge yourselves w i t h a
i t would increase y o u r expense, b e c a u s e
in
determining that f a i r rental y o u w a l d h a v e t o take y o u r
plant
£ 5 0 BeCOUNL.
a n d investment
Governor Seay.
A n d would h a v e t o credit yourself
with interest o n the investment.
Governor McDougal.
O h , no.
W e are n o t going t o p a y
any attention t o the a m o u n t invested,
of t h e R e s e r v e B a n k s a r e d o i n g thet.
and figure a
o f course,
N o n e
T h e y c a n n o t d o that
profit.
Governor S e a y .
I
f you charge yourself
with the ex-
pense y o u have t o credit yourself w i t h the interest o n
the investment.
Governor McDougal.
ance a n d e x p e n s e
Y o u charge expense o f mainten-
o f alterations
Governor Seay.
N o , I
a
a n d repeirs.
mean occupancy.
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Federal Reserve Bank of St. Louis
189
Governor wucLbougal, I
thins there should b e a n ac-
established o n the books
show t h e results
o f co¢
The Chairman,
s h e bank which will
t h e building.
t h y i s n o t t h e best w a y t o d o i t t o
segregate the expense o f the building, that »ortion o f
the e x p e n s e w h i c h a n p l i e s
t o t h e tenants; c h a r g e t h a t t o
your real estate a n d tenant account a n d credit rents t o
it. T h a t would have t h e *ffect o f reducing t h e exnense
of o p e r a t i n g t h e b u i l d i n g
b y t h e amounte
o f t h e rents,
or thereabouts, a n d adjust t h e balance a t the end o f
the y e a r t o nrcfit a n d loss,
Governor .icDougal, T h a t i s what w e a r e doing now,
all o f us.
The Chairman, , No, w e are carryii
r e n t s a s in-
come and charging all expense t o zen-ral exoense.
Governor Young,
I
n iinneavolis w e have three
million dollars invested i n t h e siildine a n d w e have n o
tenants.
E x p e n s e o f operation o f the building i s all
that w e have.
L e t u s assune that v e arrive a t a conclu.
sion a s t o what o u r
o m rent should be, a n d i t would just
increase o u r expense f i v e per cent o n three million dollars,
o r four p e r cent, o r ™hatever i t might be, a n d that
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Federal Reserve Bank of St. Louis
is a l l t h e r e i s t o it,
Governor McDougal, ‘ t h e r e i s n o intention here o f
Charging expense asccunt w i t h five per c e n t o r a n y other
per c e n t ,
Governor Young.
I f you v a y yourself a n y rental y o u
are bound t o d o i t and cannot g e t a w a y f r o m it.
Governor Norris.
Y o u cannot f i x the rent without
taxing that i n t o account,
A
n accounting system c a n b e
set u p that will s h o w more clearly t h e results o f operating t h e ouilding,
The Chaizman,
Governor McDougal.
vested
a n d i t s h o u l d b e m a i n t a i n e d separately,
L e t m e illustrate’it
i n this way,
Y e have g o t 6 0 million dollars i n -
i n real e s t a t e a n d building.
S u o o o s e w e said,
rouhgly, t h a t w e would v a y 5 per cent interest o n that
as o u r rent,
V e would a d d three million dollars expense
to the gross expense account o f the Federal Reserve Sys~
tem n e x t year.
T h e n y o u o u l d s h o w i n your income
interest o n the amount invested j n this property,
a t five
per cent, a n d you will increase the income o f the Federal
Reserve System b y three million dollars a
year.
A l l
you would d o would b e t o pad both sides o f the account.
Then t h e critics would s a y "That i s a bad system,
Loox
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Federal Reserve Bank of St. Louis
avs
at what t h e buildings a r e costing.
T h e i r r@mts a r e going
up three million dollars a year."
T h e y would not analyze
the p r o p o s i t i o n
a t all. I
think w e h a d m u c h b e t t e r l e a v e
it alone.
Governor .icDougal, There i s no intention t o mace a
charge o f five p e r cent o r o f any other p e r cent.
The Gheirmen,
B u t t h e n e t a m o u n t s h o w s a s a n expense,
Governor -icNougal.
N o .
T h e cost o f operating t h e
building i n our case exceeds o f course t h e amount t h a t
we g e t f r o m
requirement
F e n a i
h
P a r t o f that i s c o s t b y t h e
e v a n t a n d t h e other part i s cost o f
our occupancy o f our vart o f the building,
I + seems t o
me that i f w e would s e t u p a ouilding account a n d credit
that account with the income that w e get, a n d mith a
reasonable charge f o r rental - - ~ e are not considering
investment
a t a l l — — t h a t 7 e ~ o u l d t h e n heave a
more a c c u r —
ate account o f the cost o f operating o u r building.
A
s
itis n o w a t times o u r exoense account i s very ‘ u c h padded
because o f mintenence, alterations and repairs.
The Chairaan, I
do not g e t thet voint.
to t h e a c c o u n t i n g v a r t o f it.
L e t u s stick
Y o u s a y y o u ere*it y o u r
building account v i t h t h e rent collected?
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Federal Reserve Bank of St. Louis
L172
Governor wicDougal.
The Chairman,
S u c h reats a s w e receive, yes.
A n d y o u would include what y o u vay?
Governor weDougel,
T h e y ¢ o t o building income aoc-
count ~ —
The Chairman.
r i g h t . ‘theres would y o u charge
your rental?
Govermor wzcDougel.
Y
e would cherge o u r rental t o
exnense.
The Chairman.
T h e n your exmense "ould g o u n b y t h e
difference between what y o u credited a n d what y o u collect_
ed fromyour tenants, w h i c h would b e 400-odd thousand d o l —
lars, assuming your rental t o b e $650,000.
Governor xicDougal.
I t wouldn't g o un, because i t
goes u p a s i t i s now.
The Chairman,
B y t y o u a r e soing t o p a y your o w n rent
for t h e building i n adcition,
Govermor .icDougal. T h a t i s o n l y a
boox—‘ceeping m a t t e r
which i s washed out when the books are balanced either
once a
month o r o n c e i n e v e r y s i x months.
Governor Cal’sins.
B u t a t t h e e n d o f the ysar
penses o f your b a n k ‘ould b e much greater t h a n they a r e
at t h e present time.
I t doesn't maxe a n y aifference
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Federal Reserve Bank of St. Louis
whether i t i s o n a »nercentege basis o r what basis.
Governor dchbouz3l, I
d o nut think t h e y would be.
¢
ive Shans: 3
r o u l d rork o u t w o u e
thi W h e a t _
ever amount ~ e set w o for rent f o r the bank would b e
charged where i t belongs,
i n the general expense account,
and once a month t h e oxoense o f operating t h e duilding
would b e credited t o that.
Governor Seay. E u t you mould have to ouolish both
sides o f the account.
The Cheirtun, T h e result “ould b e that y o u rould b e
simly increasing t h e account ~ithout accomplishing a n y _
thing.
think w e are doing that a s i t
Governor .cDougal. I
ie n o t h i n g f u r t h e r
perhans
o n this
we
count o f Cepreci
m e . c h i n w y .
Our directors e r e tating t h e oosition v i t h u s that
two p e r e s n t d e p r e c i a t i o n
o n buildings a n d f i v e v e r c e n t
on machinery a n d office equivment i s not m o u g h .
W
e
heve asked t h e n not t o disturb t h e two ver cent a r r a n g e
ment b e c a u s e
i t i s uniform,
h a s avparently b e e n accepted
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Federal Reserve Bank of St. Louis
L174
by the Treasury a n d coes not raise a n y difficult question,
Governor Fancher.
The Chairman,
equipment,
T v o per cent o n the buildings?
Y e s , D e p r e c i a t i o n o n machinery a n d
u n d e r t h e B o a r d ' s ruling,
ten per cent per annum.
i s not t o exceed
W e only charge off five per cent,
because w e had t h e thole subject reviewed b y the contract—
or and builder a n d t h e engineers a n d they s a i d that fiwe
per cent was a m l e o n our building, because s o much o f
the equipment i n the building i s really n o t subject t o
very great deterioration.
T h e engines a n d boilers a n d
elevators have a n estimated e x e c t a n c y o f 3 5 years, w i t h
a salvace value after t h a t .
B u t w e are willing t o g o
shead a n d increase this t o 1 0 ner cent i f our directors
want t o d o it, i f i t does not throw some o f the other
Reserve R a n x s o u t o f s t e p a n d c a u s e s o m e discussion.
Governor Fencher.
D o y o u mean depreciate a t a higher
percentage?
Chairman, Depreciate equioment a t a higher rate.
earnor Fancher.
W
e a r e devreciating certain
10 a n d c e r t a i n p a r t s
a t 5.
The Chairman. Taxes the sngines and boilers i n our
building.
O f course y o u have g o t t o nut i n new tubes i n
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Federal Reserve Bank of St. Louis
176
the boilers, b u t that i s charged t o operating expense,
in our building a r e t h e same type a s
weré p u t i n the Bunkers! T r u s t C o m a n y i n 1911. T h o s e
engines were examined t n d i t w a s discovered that t h e e x
pense o n them had only been $45 i n renairs, which might
be called cavital revairs, o r due to defects, a n d those
engines a r e just a s good n o m a s they were when t h e y were
put in. T h o s e arc the Providence engines, the best i n
the country.
W h e y xecp nutting i n new tubes and keep
them i n good condition, t h e water i s cept clean, a n d
ose boilers will last for yeers and years.
W e think
ten p e r cent deoreciation o n o u r engines i s t o o much t o
set a s i d e a n d w e d o n o t w a n t t o d o i t u n l e s s t h e r e i s
some object t o b e gained, I
do not see any object t o
at a n y g r e a t e r r a t e ,
be gained i n cherging the buildings off/ ‘ Y e have all got
large survluses a n d the building would vrobably g o t o the
Governinent i n the case o f liquidation anyway.
Governor swictovgal.
T e a r e charging 6-2/3 per cent
to equinment, wr, Chairmen,
Governor Youn;
W
Governor Harding.
e are charging ten,
W e charge ten.
Governor Seay, F i v e a n d ten,
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Federal Reserve Bank of St. Louis
Governor Wwellborn. T e n .
Governor Calcins. I
Governor Fancuer.
think w e charge o f f ten,
W e chazxge five a n d ten,
Governor Taliey.
W e have a
schedule based o n a n
estimate m a d e b y t h e equicment p e o p l e t h a t p u t t h e e q u i p m e n t
in and we charge two and ten. A
good deal o f it we
Charge c r f a t ten,
The Chairman,
H a v e y o u started yours yet, G o v e r n o r
Biggs?
Governor
% e charge t e n o f f f o r machinery.
Governor Bailey,
The Chairman, A n d D a r e n t l y t e n p e r c e n t i s t h e o r e t t y
well settled figure o f the dans.
thins that figure w a s arrived a t
Governor Seay, I
simply b e c a u s e
i t was approved a n d has been taken a d —
vantage o f because i t i s permitted.
The Chairman, I
have gotten a l l t h e information I
want o n this matter.
Governor icDougal.
A s I understand it, y o u are
charging f i v e ner cent, wr, Chairman?
The Chairman,
Y e s .
Governor :icDougal.
Etz
?
P a t 4 4
f e are charging 6.2/3, a n d all
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Federal Reserve Bank of St. Louis
the other banks anpear t o b e charging ten.
The Chairman,
T h e r e a r e t w o banks t h a t charge f i v e
and ten, f i v e o n oart a n d ten o n vart,
Perhaos w e should g o ahead with o u r orogram a n d r e —
view it.
W e have left f o r discussion t h e subject o f
discount rates, which I think y o u are all i n favor o f
leaving until w e meet with t h e Board.
W e have t w o tovics
that w e can consolidate a n d Giscuss w i t h ifr. Baker tomorrow.
W e have t h e revort o f t h e committee o n collections,
Mr. Stxratér: will b e here tomorrow and w e have t h e dis—
cussion o f t h e T r e a s u r y c u r r e n c y p r o g r a m w i t h uf. D e w e y ,
Then w e have t h e comaittee revorts.
Governor Calcins. d i r . Chairman, I nove that w e adjourn until tomorrow morning.
( Yhereunon, u p o n m o t i o n d u l y seconded,
the
Conference adjourned a t 5:40 o'clock o.m., until
Tuesday, wiarch 23rd, 1926, a t 10 o!clock a.m. )
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Federal Reserve Bank of St. Louis
Washington, BD. ©.,
Tuesday, march 23, 1926,
A O l CLOCKS...
The C o n f e r e n c e
o f Governors m e t v u r s u a n t
t o adjournment
in t h e H e a r i n g R o o m , F e d e r a l R e s e r v e B o a r d , T r e a s u r y
Building, Jashington, 0.C., a t 1 0 o'clock a.m,
APP TARAI CSS:
The Chairman.
( A s indicated i n yesterday's record.)
T h e meeting will wlease come t o order.
stratier i s here a n d w e will texe u n Topic 2 A ,
II. C O L L E C T I O N S ANID CLEARINGS.
A, R e v o r t o f “tanding Comnittee o n Collections.
The Chairman,
T h e first section o f the report i s
the r e v i s i o n o f t i m e s c h e d u l e s w i t h a
view t o reducing
float and avoiding existing inequalities.
m r . Strader,
we will b e very g l a d t o hear f r o m you.
ir. Strater.
merely a
M r . Chairman and gentlemen, this i s
revort o f progress.
T h e Committee h a s not
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Federal Reserve Bank of St. Louis
ate
able t o g e t t o g e t h e r e n o u g h d a t a y e t t o submit a
eport.
complete
W e are going about i t very carefully because
we feel that t h e Governors want something that will cover
the whole subject, i f possible, a n d v e would lixe t o be
in a position t o give i t t o them.
Governor Young, I
move that t h e report b e approved
and filed.
The Chairman,
T h a t i s the first part o f it?
Governor Y o u n g .
C o u l d w e n o t a c t o n t h e whole report?
It has been read b y everyone.
The Chairman. I
do not think t h e motion i s i n order
now. G o v e r n o r Fancher, y o u are chairman o f this commit—
tee,
Governor Fancher.
N o , iir. Strater i s chairman o f
the committee, M r . Chairman.
It wouls n o t taxe v e r y long t o g O over
the report,
T h e r e m a y b e some voints t h a t t h e Governors
would lixe t o question t h e committee on, particulerly i n
the report o f progress,
Governor Wellborn, I
will s e c o n d Governor Young's
not Lon,
Governor Y o u n g .
I t i s v e r f e c t l y a l l r i g h t w i t h me.
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Federal Reserve Bank of St. Louis
180
thought e v : r y o n s h a d r e a d i t a n d t h a t t h e q u i c k e s t w a y
to dispose o f i t would b e t o dispose o f the whole report
at once,
s are only four o r five mejor
r
Governor Fancher.
matters a n d I thought perhaps i t would b e bettar f o r ur.
Strater t o touch o n them,
Governor
n g . I
will writhdraw m y notion a t this
time.
Governor ‘Yellborn. I
will ~ i t n d r a w m
y second
temporarily,
wr. 3+rater.
T h e Committes cave a lot o f study t o
the facts that would b e necessary t o arrive a t t o form
a foundation
o n w h i c h t o build.
T h s y have asked each
Federal R e s e r v e B a n s t o f u r n i s h t h e c o m n i t t e e w i t h
tabulation shoving t a s exact t i m e required t o collect
States i n their districts.
It was not a t
i
d
e
a o f the comnittee t o ex-
ceed i t s authority a n d ettemet t o revise t h e t i m s c h e d
ules o f each Federal Reserve S a n k a s
own districte, b u t there a r e s o many solit States a n c
much difficulty i n worsing u o a n intra-district t i m e
schedule t h a t t h e Comnittes f e l t i t might b e materially
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Federal Reserve Bank of St. Louis
181
éided b y having all o f the date at its disposal s o that
me could oronose s u c h changes here a n d there i n i n t r a
district schedules that would nerhavs t a c e u v a little
float a n d a t least m a c e i t a little more intellizibdle
to t h e m e n b s r b a n k s .
The Cheirman,
I n connection w i t h t h i s t i m e schedule
I have often wondered whether i t might not b e nossible, b y
a very Dainstacing canvass
o f t h e bvanxs o f t h e country,
with the aid of the American Banters' Association, t o
have s y m b o l s
o n checks
t o facilitate a c c u r a t e s o r t i n g
and routing o f all checks.
I n “Sngland t h e checks bear
one o f three symbols, P r a c t i c a l l y a l l o f the checks g o
through t h e L o n d o n C l e a r i n g H o u s e , T h e y h a v e t h r e e s y m -
bols.
O n e is a square, another i s a circle, a n d the third
is e triangle. I n s i d e are the letters 06, M a n d P, T h a t
renresents city, .istrodolitan a n d provincial, t h e vrovincial being
e s seme a s our country bans.
T h e y have
three clearings a n d t h e symbol i s i n the sane place o n
all checks. E v e r y checx has a symool o n it and when they
get t o the clearing house i t i s the simolest thing i n the
world t o handle t h e m . r
e & customer o f a b a n i n Yuddles—
field sends a check i t bears t h e P symbol;
i f h e xeevs
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Federal Reserve Bank of St. Louis
182
an account i n e bans i n t h e city o f London i t is a 0,
and i f i t i s vvt a t Keysbridge i t i s a n wi.
I t would b e
very advantageous i f w e could g e t o u r banks t o adont a
symbol pilin,
S e v e r a l ysars a g o t h e Federal
Governor Harding.
Reserve Board worked u p a scheme which dic not seen t o
create “uch interest.
each chec',
as a
good w
T h e i d e a was t o have a
symbol o n
o v have each checx bear t h e district number,
o
f t h e m d o now, a n d a l s o a
symbol s h o w i n g
which branch i t was t o be sent to; then there was a further s y m b o l s h o w i n g t h e n u m b e r
o f days! t i m e allowance.
A good deal time was soent o n that back i n 1918 and 1919.
The Chairman, I
remeuber something about that,
I t
took a
long time t o get t h e banks i n England t o cooperate
on it.
T h e main difficulty
i s that t h e banks a r e n o t
interested i n the clearings, a n d i t has got t o come from
the banks themselves, I
Mr. Strater.
think.
M r . Chairman,
i f I nay b e oermitted,
o
the committee has had a comaunication from tir. A m b r o s e f
Sanfrancisco o n that subject, a n d the American Bankers!
Association Bulletin No. 4 3 takes u p the question o f stanc..
ard sizes f o r checks.
T h e r e i s also a paragraph i n i t
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Federal Reserve Bank of St. Louis
which i t might b e well f o r m e t o refer to. " T r a n s i t
nuaber should anoear i n Gothic o r Roman tyne a n d not i n
Script a n c should »rovsrly include,
i n adcition t o the
trensit nuuder o f the bank o n which the check i s dram,
the n u i b e r o f t h e Pederal R e s e r v e D i s t r i c t a n c t h e b r a n c h
Federal Reserve symbol i n which such Federal Reserve B a n k
is located,
s y c h Federal Reserve District number a n d
symbol s h o u l d a v o c a r i m m e d i a t e l y D e n e a t h t h e t r a n s i t n u m -
ber o f the bank o n which the checc i s dram," F o r example,
638-12 i n line, with 5 below that, showing the Federal
Reserve District.
lr. Amorose in'his letter t o the committee says
i n
part, " W e will i n ell vrobability have a number o f inquiries f r o m b a n s w h o are about t o renumber their chscks
and who should b e i n a vosition t o give some definite
wit, AMoros¢
action should b e taren o n the subject i n ordcr t o
get something a c c o m l i s h e d w h i l e i t i s possible t o d o it.
j t + a a subait
He suggests that t h e standing committee
ter t o the Conference.
c
e
l
the m a t i
h i s letter t o o late t o
nut i t before t h e last meeting o f our committee a n d 1 %
was therefore n o t vossible t o get i t into o u r report.
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Federal Reserve Bank of St. Louis
184
The Chairman, M i g h t i t not b e possible t o pass a
resolution relating t o this first part o f the report a n d
refer t h e subject o f symbols generally t o this committee
with power t o take i t w o with t h e American Bankers! A s s o ciation?
Governor Young. I
will make such a motion,
Governor Talley, I
will second it.
(The motion, having been duly seconded, was carried,)
I s that what you wanted,
Strater?
W h a t I had i n mind was i f
c o n f e r
The Chairman.
Mr. Strater.
ence wanted t o do. anything t o hely along t h e American
Bancers! Association scheme, w h i c h w e believe t o be agood
one, that now would b e the time t o do it.
The Chairman.
A n d the resolution passed would e n —
able y o u t o d o i t e
diz. Strater. Y e s . O u r committee c a n g o ahead, i f
that meets i t h t h e desire o f the Conference.
The Chairman,
T h e seconc tonic i n the report i s —-
Governor Young,
M r . Cheirman,
had commleted t h e first tonic.
The Chairmen,
W e have not i f you have something
to s a y about it, Governor Young,
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Federal Reserve Bank of St. Louis
Governor Young. I
note f r o m the report o f the
standing commitiee o n collections, f r o m the time sched—
ule p r i n t e d f o r t h e F e d e r a l R e s e r v e B a n k o f Minneapolis,
that i n t h e c u s e o f i t e m s o n t h e S t a t e o f N e w Y o r k w h i c h
are sent t o the Federal Reserve Bank o f New York, that
they s h o w t h e t o u r t i m e s c h e d u l e c a l l s f o r a n a v a i l a b i l —
ity on such items in four days, while the actual time re~
quired t o collect,
comes
a s they s h o w it, i s five days.
T h a t
u p because w e have a d d e d t w o days t o o u r N e w York
schedule —
t h e N e w York schedule i c three days — ~ f o r
the s i m p l e r e a s o n t h a t w e c a n n o t g e t t h e m a i l i n t h e r e
-
<
in t i m e t o collect,
0 |
s o that s o f a r a s N e w Y o r k C i t y i s
concerned they could be collected i n four days. T h a t
also a p p l i e s
t o several o t h e r noints.
I n o t h e r words,
the schedule should b e corrected,
Mr. Strater. I
might explain the trenendous work
in connection w i t h compiling t h a t schedule.
O f course
we h a d t o use that ~ e could f i n d i n the w a y o f data t o
make i t up,
W e used t o begin w i t h t h e latest t i m e s c h e d
ule o f each Federal Reserve Bank, I
do not « n o w whether
we were able t o get the very latest o r not.
prepared first i n our bank and then checked over a t a
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Federal Reserve Bank of St. Louis
mesting o f the couimittee later; i t was then taxen t o
Richmond a n c r e c h e
number o f inacouracies i n i t because w e d i d not have
absolutely accurate information w i t h which t o build i t up.
Governor Svay. T h e r e were about 4,000 items t o be
checked,
Wir. Strater.
Yes.
I t was a
tremendous job.
T o w
what t h e committee would like t o have d o n e next would b e
to have s a c h Federal Reserve B a n s check this o v e r v e r y
carefully a n d recort a l l inaccuracies s o that w e can c o r
rect t h e m i f »nossible a n d r e c o n c i l e t h e n a s b e t w e e n d i s —
tricts.
I t i s going t o b e very difficult. T h e s e split
States a r e going t o yresent »~robably t h e greatest diffido not x n o w h o w ~ e a r e going t o b e able t o
culty. I
work t h e m o u t o n a
s o u n d basis.
i
s not a
that d o e s not have a t least o n e solit State, I
lieve.
District
do not b e -
I n working u p a n intra—cistrict t i m e schedule t h e
simplest thing t o do, a n d the thing that rrould aopeal t o
the menber banks, wrould be t o have a n entire State o n
e basis,
i f i t c a n n b e done; b u t i t i os really essen pegpese=
=
that e a c h R e s e r v e
B e n k a n d brench checr these scheduiss
over c a r e f u l l y a n d report i n a c c u r a c i e s b a c k t o u s s o “lL,
'
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Federal Reserve Bank of St. Louis
187
we c a n c o r r e c t t h e m , I
vanted
to m e n t i o n i t t o t h e G o v e r n o r s
t o take t h i s o p p o r t u n i t y
s o that i t w o u l d n o t b e
overlooked,
Governor Talley, I
presume t h e committee h a s given
consideration t o the fact that t h e further away a
State
is f r o m the District t h e volume o f items decrease i n voroPorc Lon,
That i s true, b u t m e exnect t o get
volume, o r at least some idea o f the volume, f r o m
figures thet y o u are n o w compiling i n your District,
Dallas District i s going t o be the most difficult
one t o work i n i n a n intra-district t i m e schedule because
you have s o many different divisions f o r your o m states.
If w e cannot w o r k o u t a n a v e r a g e t i m e f o r t h e State,
we
might h a n d l e i t s o m e v h a t a f t e r t h e f a s h i o n o f S a n F r a n c i s —
co — —
Governor Talley,
J e are not very m u c h concerned
about the time schedule for the State o f Washington,
MY. Strater.
N o , y o u t w o a r e far away. I
do not
think Boston, Philadelphia, N e w Y o r o r Cleveland are,
but Xansas City, Minneapolis a n d St. Louis mizht bs.
Governor Norris. I
notice t h e report states "Ihe
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Federal Reserve Bank of St. Louis
138
committee i s vreparing t o obtain certain data f r o m each
bank which will enable i t t o continue the study, looking
completion o f the final renort."
A s I understand
the Chairman o f the committee, that data i s now being
collected?
Stratar.
Yes.
Governor Norris,
A n é that will eneble t h e C o m m i t
tee t o m e x e t h e i r f i n a l renort,
o r a t least a
supplemental
report, w e l l i n sdvance o f t h e next Conference, I
Mr, Strater.
V e l l , I
would n o t undertake
suppose?
t o say
that i t would b e well i n advance o f the next Conference,
because i t will require a
nesting
o r tro o f the committee
to a s s e m b l e ~ h a t
Norris. I
in advance
mean a
sufficient length o f time
o f the next Conference
t o enable y o u t o place
that report i n the hands o f t h e menbers o f the Conference
before
i t assembles.
wr. Strater.,
W e hope t o d e a b l e t o d o that, Governor,
Governor Calkins. I
would l i v e t o S a c tt. o f r aaer
whether i t would b e o r t h wnile, o r
have a
conference
o f those officsrs
Bank w h o onverate t h e var collection
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Federal Reserve Bank of St. Louis
Ss189~-
committee m
a x es tfinal
si
report,
I n other words, they
could get these m e n together a n d reconcile a n y differ~
ences that m i g h t exist.
My. St-rater,
T h a t might o e t h e quickest w a y o f
ironing o u t t h e difficulties.
Governor Calkins.
I
t seems t o m e that more p r o
gress and better »nrorress would b e made b y that means than
by having the Conference o f Govemors attempt t o iron
out the differences i n detail; that a conference o f oper
ating m e n with iir. Strater's committee would probably a o complish more thau would b e accomplished b y any other
mean.
8
The Chairman, I
think that i e the best way t o d o it,
Mr. S+rater, A f t e r the work has been partly complet
ed. T h a t i s I do not think i t really ~orth while t o have
a meeting o f that s o r t a t the beginning because there a r e
s0 m a n y p r o b l e m s andi there w i l l b e s o m a n y q u e s t i o n s raised,
and I
a m afraid i t would simply delay progress,
Governor Caltins.
l f y idea, Wr. Strater, w a s that
aftsr y o u r c o m n i t t s e h e d orettiy n e a r l y c o m p l e t e d i t s w o r k
and w a s o s r h a v s r e a d y t o p u t i n a report, t h a t t h i s c c n -
ference o f operating men might b e helpful t o you.
Mr. S t r a t e r , i
think .60,
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Federal Reserve Bank of St. Louis
190
Mr. Calkins.
A n d i t would s a v e t h e time o f this
c o n f e r e.
e
c
The Chairman. G e n t l e m e n , Mr. Baker f r o m Cleveland
is here.
B y an arrangement ‘ith him we are t o have a
Giscussion o f t h e G r i m o - a l f a l f a c a s e a n d i t s e f f e c t
on
our loan operations, and I think i t would be well to interrupt t h e nrogram a t this t i m e a n d invite h i m t o come
in, o r w e c a n conclude this particular subject b y a
reso
lution thet s u c h a meeting b e called.
Governor Calkins. I
maxe a
call o f wr. S t r a t e r , c h a i r m a n
on collections, a
motion that, u p o n t h e
o f the standing committee
conference o f operating officers b e
held with his committee f o r t h e purnose o f ironing o u t
any differences t h a t might h a v e arisen i n the matter, a n d
that the Conference b e called a t the call o f Mr. Strater,
the c h a i r m a n o f t h e committee.
Governor Seay.
™ y u l d y o u b e willing t o add i f h e
thinks o n e desirable?
Governor Calxins.
i r . Strater h a s exoressed h i s
opinion o n that a n d I do not imagine h e will change
Governor Norris.
A s i t i s t o b e a t his cali,
does n o t t h i n k i t o r t h t h i l e
h e will n o t G a l i t s
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Federal Reserve Bank of St. Louis
second that motion.
(The motion, having been duly seconded, was carried.)
The G r a irman,.
W
e w i l l n o w invite M r . B a k e r
take u v this discussion o n the Grimm-alfalfa case,
i n and
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Federal Reserve Bank of St. Louis
192
(Governor Orissinger, Vice-Governor Platt, Messrs.
Hamlin, Milier, James, Cunningham,
o f t h e Federal Reserve
Board, e n d ir. Newton Dp. Baker, o f Cleveland, Ohio,
entered the Conference room, a n d the following nroceedings
were had:)
Governor Crissinger, M r . Baker i s here a t the request o f the Governors,
t o give a n account o f the Grinn-
alfalfa case, a s t o the effect i t might have uoon the rediscount operations o f the Federal Reserve Banks.
Baker will explain t h e situation t o you.
wiv. Baker. G o v e r n o r Crissinger, a n d gentlemen, t h e
Grimm-elfelfa c a s e i s largely a
lewyer's brief t o me.
so far a s that particular c a s e i s concerned I
confess I
thought t h e Supreme Court would hear i t o n a writ o f
certiorari, because I
believed t h e n a n a believe n o w that
while i t does n o t change t h e lew, that i t i s a misappli-
cation o f the law to the facts i n that particular case.
+
States
My hope w a s that t h e Supreme Court o f the United
would regard t h e legal orincinles i n that c a s e a s s o vital
be
to the ousiness o f the country that t h e y would not
of
willing t o let that case stand w i t h the possibility
the confusion that i t might cause throughout t h e Federal
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Federal Reserve Bank of St. Louis
193
Reserve System.
J I suspect t h a t t h e Supreme Court e x -
Cluded i t for t w o reasons.
I n the first place t h e dock-
et o f the Court i s very heavy a n d they a r e excluding
all cases that they can.
I t was easy for them to exclude
this c a s e because i t i s a question which arises more o n
a determination o f the facts i n the lower court t h a n determination o f principles o f law,
I f one takes t h e
opinion o f the Circuit Court o f Avpeals a n d takes t h e
statement o f l a w made b y i t n o varticular exception c a n
be tacen to what they state the law to be, with the
single exception that i n the opinion written b y Jydge
Rodman they d o s a y that t h e Federal Reserve B a n t witting—
ly o r u n w i t t i n g l y b e c a m e p a r t y t o a
fraud w h i c h w a s c o m -
mitted b y the § tanrod Bank, rhich wes the member bank
in the case, B u t i f you read the rest o f the Judge's
opinion, a n d of course the Supreme Court did, i t seems
fairly clear that they held that there were facts enough
‘to
g o to the j u r y o n the question o f fraud.
Now with recard t o the Grima-Alfalfa case, taking
italtogether, I think it is fair to say this: That the
ttial Judge, with great respect t o him, floundered a
gogd deal i n the trial o f the cause,
T h e case involved
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Federal Reserve Bank of St. Louis
194
some drafts which h a d been deposited w i t h t h e Stanrod
Bank b y t h e G r i m m - A l f a l f a A s s o c i a t i o n a n d a
deposit l i a b -
jlity created f o r the vroceeds o f those drafts i n favor
of the Grimn-Alfalfa Association,
T h o s e drafts h a d been
discounted a t the Federal Reserve Bank, a n d when suit
was orought after the Stanrod B a n closed, there were six
causes o f action, based w o n t h e three drafts i n question.
The odd-nunbered ones, 1 , 3 and 5, applicable t o separate
drafts, rather irregularly charged t h e insolvency o f the
Stanrod Bank a t the time that t h e y were deposited there
and inferentially charged, t h o u g h they d i d not directly
do it, t h e pleadings w e r e n o t clear, t w o things:
That
the drafts were only deposited for collection purposes
and a l s o t h a t t h e r e h a d b e e n a
fraud u p o n t h e G r i m e - A l —
falfa Association i n the creetion o f a deposit liati lity
and t h e acceptance:
o f that devosit after. the imsolvency
of the Stanrod Bank was “ n o m t o its officers, a n d that
the Federal Reserve B a n k c<new that also,
The e v e n a u n b e r e d d r a f t s w e r e dismissed.
T h e y set
up causes o f action o n another theory, they mere dismissed
ultimately a n d d i d not figure i n the l a v suit.
T h e Judge
allowed the cause, however, t o be brought o n the six
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Federal Reserve Bank of St. Louis
195
causes o f action, a n d allowed all the evidence t o go before t h e jury, s a y i n g that h e did not c n o w whether h e
should t r y t h e case i n equity o r a t law, t h a t instead o f
trying t o decide t h a t question, w h i c h would have cleared
the decxss, h e decided h e would try i t both ways; that
if it was a law question the verdict o f the jury would
stand a s a law verdict, a n d i f i t was a n equitable q u e s
tion h e would regard t h e jury a s having b e e n empaneled
as a n a i d t o the Chancellor i n determining t h e question
of facts; t h a t h e would adopt t h e decision o f the j u r y
on the question o f fact a s t h e Chancellor's decision,
Judge Rodman i n the Circuit C o u r t o f Anpeals s a i d that
he was i n c l i n e d o
t thins that t h e case w a s a t law, b u t
that i t wasn't necessary t o decide that, since the double
cour.se which the Chancellor h a d taxen was enough t o justify
the judgmemt i f i t ~ould s t a n d o n other grounds,
: Out o f thet somewhat confused situation i n the lower
courts, c a u s e d b y the determination o f the Trial Judge n o t
to decide exactly what xind o f case h e had, i t was very
difficult t o conduct t h e case a n d i t i s very difficult t o
aoply f a c t s t o t h e law,
N
o
w the net result
o f all o f
that i s this, t h a t t h e C i r c u i t C o u r t o f Appeals h e l d t r - *
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Federal Reserve Bank of St. Louis
196
a jury having passed o n the question t h e o n l y thing t h e y
would det2riaine w a s whether there was enough evidence t o
question o f eithéria tort o r a
fraud, o r a tort i n the nature o f a fraud, a n d they de—
cided that there w a s enough evidence.
N o w that evidence
which the Circuit Court o f Appeals reviews, i s based o n
two o r three things. First, t h e application that w a s made
for discount o f this caper a t t h e Fedsral Reserve B a n k o f
San Francisco,
o n which mas the letter "D", which indi-
cated t o everybody i n the Federal Reserve System,
so
far a s I xnow the origin o f the paver, that i t had come
from a depositor.
T h a t fact z o t twisted around ultimete—
ly and t h e Court o f Appeals thought that i t belonged t o
the depositor instead o f belonging t o the Federal Reserve
Bank,
I t would seen very imortant, therefore,
future course o f action,
i n your
t o clarify that misunderstanding
end either exolain it on the anolication o r take out of
the application that designation o f source which i s eonfusable i n t o a designation o f ownershiv, t h e r e b y overcoming
that difficulty.
The next thing that t h e Court o f Appeals comnented
on w a s t h e f a c t t h a t t h e S t a n r o d B a n k h a d e n d e a v o r e d
to
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Federal Reserve Bank of St. Louis
197
borrow money f r o m t h e Federal Reserve B a n k o f gan Francisco
and h a d been t o l d b y the Federal Reserve B a n k that t h e y
would n o t lend t h e m any more money, t h a t their directors
must p u t i n sane monsy t o get t h e bank o u t o f its difficulty;. t h a t t h e y m u s t h a v e a
statement s i g n e d b y e v e r y m e n b e r
of the board o f directors t h a t t h e y would reform their
conduct, a n d growing out o f that transaction there was
the
corrésvondencs b e t w e e n / U t a h b r a n c h o f t h e F e d e r a l R e s e r v e
Bank o f San Francisco and the Stanrod Bank which indicated
to the Court o f Avpeals ‘“nowledge o n the part o f the Utah
branch o f the condition o f the Stanrod Bank.
Then there were o n e o r t w o other transactions,
one
the failure o f the Stanrod Bank t o vay a draft which had
been presented to it for payment woon which it had failed
tb remit, a n d which fact w a s within t h e <cnorledge o f the
Federal Reserve Ban«,
A l l o f those things »ut together,
the Court o f Aposals held, constituted s o m e evidence, a n d
enough evidence t o ¢ o t o the jury, e n d t h e j u r y having
determined the facts, they o u l d not disturb i t as a
question o f fact.
SO m u c h f o r t h e G r i m m - A l f a l f a c a s e a s a case. I
thinx i t lsaves the lav exactly where i t has always been,
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Federal Reserve Bank of St. Louis
which you gentlemen « n o w as well a s I, and that i s this:
When a bank i s i n fact insolvent a n d i s ‘*nown b y its
officers and directors t o be insolvent, t h e creation o f
deposit liability b y that bank, with <novwledge o f its
condition o n the vart o f the officers and directors, i s
a fraud o n the denositor.
A n y body that taxes evidence
oy which that fraud was possible t o be committed, like
the p a v e r t h a t w a s d e n o s i t e d a n d s o l d t o t h e S t a n r o d
Bank, a n d takes i t with ‘norledge o f the condition o f
the bank, a n d elso o f the fact that the officers and
directors o f that b a n k itself h a d “novlecgs o f its in-
solvent coniition, becomes a party t o the fraud. T h e t
has a l w a y s d e e n t h e l a w a n d i s s t i l l t h e l a w ,
in the Grim-Alfalfa case,
e s stated
a i y judgnent therefore is,
as Isaid at the outset, thet the Grima-Alfalfa case
has. not cheng2d the law and w e must meet the question
you have raised,
siderations.
i t seems t o ne, f r o m another s e t o f con-
T h e Grimm-Alfalfe c a s e may b e guoted here—
enouzh
after i n sone cases lize it, o u t i t i s not strong
opinion
in itself t o the change t h e v e r y authoritative
of the Supreme ¢
t
h
e United States i n favor o f t h e
law es I have stated i t t o you; that is, that mere sus-
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Federal Reserve Bank of St. Louis
picion i s not e
x
c o n d i t i o n o f insolvency i n a
bank O r a condition o f suspicion i n @ bank which i s bad
enough t o challenge the suspicion and alertness o f the
Federal Reserve Bank, w i l l n o t b e enough, T h e r e m s t
be
actual insolvency and i t must b e drought home t o the Fed.
eral R e s e r v e B a n k i n o r d e r t o c r e a t e liability,
T h e
Grimm-Alfalfa case, while i t m a y b e cited t o shor that a
less degree o f <nomledge t h a n h a s heretofore b e e n supposed
to b e e n o u g h t o c h a r g e a
ledge,
Federal R e s e r v e B a n k w i t h «nom.
i s not enough t o overcome a n oft—reveated decision
I think the next time a
case arises i n any o f t h e
Federal Reserve Banxs which. involves this question i n
any o f i t s forms, t h a t i t o u g h t
matter
i n what f o r m i t a r i s e s
t o b e regarded a s — - n o
o r there i t a r i s e s —
i t
ought t o b e regarded a s a n onvortunity t o bring about a
conference o f lawyers representing t h e banks, a n d should
become,
call a
i f I may nmaxe a
s y s t e m matter,
througn t o e
suggestion, w h a t I
think y o u would
s o that f r o m its incevtion 6 L e a r
e @ i t c a n haves t h s a t t e n t i o n o f t h e e n
tire systen with a view o f getting,
i f y o u c a n get, a
decision f r o m some other Circuit Court o f Anpeals which
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Federal Reserve Bank of St. Louis
BO o e
will clarify the atmosphere,
T h e decision i n the G r i m
Alfalfa case has n o t i n any decree affected t h e integrity
and validity o f those ~ell established principles o f l a w
which I
think t h e Grimm-Alfalfa c a s e does n o t undertake
to alter, b u t m a y b e regarded a s having altered the situa—
tion o f the anplicationof those nrincivles t o these facts,
so I would sugcest t h a t the v e r y next time a
case arises
anywhere i n the System that involves this question, t h a t
it be made a System matter, and that from the very out—
be
set t h e record molded with a
view o f presenting i t t o the
last court that will hear it, t h e Circuit Court o f Appsals,
o r the Suprene Court, a s the case m y be.
T h a t
this precise question b e extracted a n d mace a s mach a n
issue a s possible i n the case i n order that ‘ve will g e t
an authoritative determination o f it.
ig not with the GrimmAlfalfa case,
T h e difficulty
I t i s t h e difficulty
inherent i n the system, T a x i n g the law as I have stated
it t o you, where a Federal Reserve Y a n hes actual x n o m
ledge o f the insolvency o f a nenber bank, i t takes b y
discount paper f r o m that b a n ,
i t incurs Liability.
Now that i s t o be said o n the question o f a statute
giving t h e Federal Reserve B a n k t h e right t o examine t h e
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201
menber bans and t o become acquainted with the condition
of the member vank, a n d where t h e Federal Reserve banks
have access t o examinations m a d e b y the Comptroller a n d
by State bank examiners, even worxcing i n concert with
thosé examining bodies i n maxing a
joint examination?
Does that attrbbute cnowledge o f the o n d i t i o n o f a bank
to the Federal Reserve S y s t e m o f a ‘sind that c a n b e pleaded i n a suit o f this sort? I
Gifficult and, perhaps, a
think that raises 4 a very
very parlous question. T h a t
question wes not raised i n the Grimm-Alfalfa case. T h e r e
was n o suggestion i n that record,
o r i n any o f the briefs,
that the Federal Reserve Bans o f Sen Fyancisco had any
‘novwledge of the condition of the Stanrod Bank by reason
of a n y examination i t had ever made,as a
mere examina-
tion, T h e y attributed t o i t «nowledge growing o u t o f
transactions “ h i c h i t h a d with t h e Stanrod B a n b u t i t
never attributed t o it any <novledge growing out of its
function as an examiner, o r the fact that i t had examined
the bank.
T h a t question i s going t o b e raised some time.
A suit i s going t o bs filed i n which the Federal Reserve
Bans will be held accountable b y reason of the fact that
it h a s <cnorledge which i t has gained through a n examination
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202
of a bank, o r that i t ought t o have had it. T h a t is,
that i t ought t o have had tnowledge i f i t had examined
the bank a s i t h a d vower t o do, T h e t i s going t o make
it more difficult. I
be conclusive.
do not mean t o say that that would
[ I thinks i t would not b e conclusive, 5
think i t is going t o maxe i t more difficult t o get b y a
court o n a motion t o arrest t h e case f r o m the jury o n
the usual ¢grounds o f such a motion, that there i s no
evidence which would justify subnission o f the question
to the jury, C o u r t s a r e going t o raise t h e question a s
to whether there i s not always some evidence o f xnowledge
on the part o f a Federal Reserve Bank where a Federal
Reserve B a n c has been examining a n d has h e d t h e fruits
of the exaninetion made b y the Cozmtroller o r the State
bank examiners,
a s the case m a y be. ‘Shether there i s
anything y o u could d o t o moderate that responsibility I
do not ‘now.
I t i s a curious «xind o f responsibility.
You have the power t o examine and obviously you have the
Guty t o examine, b u t y o u have n o visitorial »xover i n the
sensé that y o u can close the bank.
Y o u can expel i t from
the Federal Reserve System i f i t fails t o live u p t o its
condition o f m e n b e r s h i p b u t y o u a r e n o t g i v e n p o w e r t o
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close ban*s b y reason o f any condition disclosed b y such
an examinetion o n your part.
Y o u r pow3sr a s examiners
falls short o f being a visitorial »nower, a n d yet i t i s
& nower that i s very essential t o you i n order t o enable
you t o help banks f o r o n e thing a n d t o deal sefely w i t h
bans
f o r a n o t h e r thing.
You have that nower under t h e statute. I
should think
+ would b e undesirable t o surrender that power, although
it i n e r e a s e s y o u r d i f f i c u l t y
i n defense w h e n y o u a r e
charged with heaving ‘rnowledge i n any Situation where ynos—
session o f xnovledge imooses liability. N o w , I
am not
a nractical banker. I
can merely state t o y o u what t h e
orincioles o f l a w are,
A s I have tried t o thin* i t over
it seems t o m e thet t h e only answer that there could b e
mould b e t o put a
red ticket i n your o w n banxs unon
every b a n k a n e x a n i n a t i o n o f which, c i t h e r b y t h e C o m p
troller o r b y the FeGeral Reserve B a n k o r State Examiner,
or because o f the condition o f its reserve account, s h o w
ed that the bank was extended and i n trouble, a n d that
in dealing with any such institution a n abundance o f
caution should b e used with regard t o paper offered b y
then f o r Giscount
o r a s collatezvel t o t h e F e d e r a l R e s e r v e
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Federal Reserve Bank of St. Louis
Bank, T h a t i s a statement o f princivle which i s very
easy t o m a c e a n d v e r y d i f f i c u l t
t o apply.
T h e yroblem
you h a v e o f c o u r s e i s whether y o u s h o u l d p l a y h i g h e x e —
cutioner t o a bans that i s i n trouble —
a n d i s not in.
solvent, b u t i s i n trouble ——- but m y g e t o u t o f trouble,
and make a
catastrophe because o f your xnowledge o f the
bank b y closing i t s doors a n d refusing t o heln it. I
not think there i s any set rule y o u could apoly,
do
Y o u have
got t o exercise j u s t human judgment i n each o n e o f those
cases a n d continue constantly t o exercise t h a t judgment,
Doubtless i t may mean some losses t o the Federal Reserve
Bank, b u t those loses will b e moderated a n d m i n i m i s d i f
i
care i s used,
I n m y judgment i t would b e very much bot.
ter f o r y o u t o take some risks a n d lose some money t h a n
it would b e t o put t h e Federal Reserve B a n k i n a situa
tion o f rigidity w i t h regard t o banxs that a r e i n trouble.
I should b e very happy t o answer a n y questions.
Governor Crissinger.
I
n a ones where a bank proves
to be insolvent, a n d there has »veen indication all the
time that something i s going wrong, a n d t h e Federal Reserve B a n k neglected t o supervise t h e examination, w o u l d
you tell u s what vosition y o u would g e t into?
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Federal Reserve Bank of St. Louis
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wir, Baker. I
thin’ failure t o examine i s just a s
bad a s that *cind o f examination. T h a t i s to say, where
you have t h e nowexr a n d d o not u s e i t I think y o u would
be charged with responsibility j u s t a s though y o u did
have <cnowledge.
Vice Governor Platt.
o u l d t h a t anoly t o your Nation-
al Banks a s wsll a s your State doanks?
Governor Orissinger. R i g h t i n the beginning o f the
Statute the Statute says i t i s for the vurnose o f creating
better supervision o f banking and a better system o f
banxing, o r sonething o f that cinc.
Vice Governor Platt. Y e s , i t does say that.
wit. Baker. I
would n o t s a y that i t wes t h e duty
of the Federal Reserve Ranks t o conduct indevendent e x -
aminations, o r that they vould b e held to responsibility
for not doing that where examinations are being made b y
others i f they are perfectly free t o take those examinations. I
thin< the statute gives you that power.
Governor Platt. Y e s , i t does.
iit. Baker.
S o thet whore a Federal Reserve B a n k
relies u p o n exemination e n d revoft o f the Comotroller'!s
office, then I think you would have a verfectly zood
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Federal Reserve Bank of St. Louis
alibi.
Governor Crissinger.
the G o m o t r o l l e r
lax banxing s
A s s w u a i n g t h a t t h e report
of
o n ons o f these examinations d o e s s h o w
i n t h e »dan kK, ana does s h o w that a
m
thers a r e t h i n g s ¢
s
o n t h a t a r e b e i n g criticised,
of the Federal Reserve B a n k t o take
notice o f that fact?
wir, Baker. O b v i o u s l y I
think where y o u find i n the
Comptroller's report o r the Exsminer!s report s u c h conditions a s would p u t a n ordinarily prudent m a n o n guard,
that y o u are t h e n cherged w i t h a n y knowledge that y o u
might. discover b y a n indenvendent examination.
Governor Calxins. I
would lixe to asx a question
’
with n o regar@ t o the sinc o f exanination y o u were just
speacing of. I n a s m u c h a s the Federal ““eserve Banks o r
the Federal Reserve Board have t h e vover t o accept t h e
examinations o f State and National deoartnents, a r e they
not charged with responsibility o f detemining whether
those examinations are sufficient o r not, a n d whether they
are acceptable examinationsY ‘ Y e »elieve t h a t w e are. I
thins i n reviewing t h e reports o f examinations that come
to us, 5m a i in l y o \f r o m S t a t e devartmenss,
>
a n d
Some c a s e s f r o m t h e N a t i o n a l c e p a r t m e n t ,
that we ar
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Federal Reserve Bank of St. Louis
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charged w i t h r e s p o n s i b i l i t y
o f determining whether t h e
examination i s a sufficient examination, whether i t i s
a dependable examination, and whether we can accept i t
or not.
I s that y o u r idea?
wir. Baker. I
thin:
i n view o f the fact that t h e
statute gives you the option t o decice whether you will
reky u p o n the examination o f others, t h a t i t also imposes
an obligation o n you t o determine whether that examina~
tiln i s reliable, o r one that you can rely on.
Governor Celxins.
T h e other question that I
have i n
mind, and I would appreciate i t very much if you would
elucidate i t for m y benefit, i s the question o f how, previous t o t h e d e c i s i o n
i n the Grimn-Alfalfa case, i n s o l —
vency might b e determined o r should b e determined;
in
other words, what are the determining elements o r factors,
by which insolvency w a s determined i n the absence o f
the actual closing o f a n institution?
Mr. Baker,
O f course t h e l a w i s verfectly e a s y t o
state, b u t t h e aoplication i s again difficult.
I n the
Grimm-Alfalfa case there never was, and has not to this
was
date been, a n y determination t h a t the Stanrod Bank
insolvent.
T h e r e n e v e r h a s b e e n t o this h o u r a n y d e t e r m i n a -
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Federal Reserve Bank of St. Louis
tion that t h e Stanrod Bank w a s insolvent.
W h a t took
nlace there a s t h e bank closed i t s doors; I
think i t s
elderly oresident g o t scared a n d i t s principal directors
got together o n Thantsgiving Day, t h e y decided that t h e
situation w a s nretty dangerous, t h e y d i d not want t o d o
anything wrong a n d they closed t h e doors. ‘ I w o o r three
months after that had taxen place, when their assets h a d
obviously lost a great deal o f value, a
schedule o f their
assets, with the appraised values then fixed, was exhibited
in the case and i t showed, o n the basis of t h e valuation
made t w o months after t h e banc closed i t s doors, t h a t
the b a n could b e inferentially regarded a s having b e e n
insolvent
a t t h e t i m e i t d i d c l o s e i t s doors.
B u t they
never d i d d e t e r m i n e t h e i n s o l v e n c y o f t h e b a n k a s o f t h e
date w h e n those drafts were deposited i n the bank.
Governor Calxins. I
had i n mind, :ir. Baker.
think y o u missed t h e noint I
I n practice w e may say that a
bans i s insolvent under two conditions, F i r s t when i t
has committed t h e unmistarable a c t o f insolvency b y being
unable t o meet t h e demands o f its devositors, A
bank
that cannot meet t h e current a n d Local demands o f its
depositors i s a n insolvent institution i n practice.
Secondly,
i t m a y b e Aetormined
b y constituted authority,
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Federal Reserve Bank of St. Louis
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such a s the Comptroller o f the Ourrency o r the State sup-
eri_ntendent o f banxing, t o be insolvent,
B u t a s applied
to banks f r o m a practical point o f view I do not x n o w o f
any O t h e r k i n d o f b a n k i n s o l v e n c y e x c e p t t h o s e t w o kinds,
ir. Baker. I
would p e r h a p s
be a
think there i s a third sind, w h i c h
rare o c c u r r e n c e ; t
u
b y o u c a n imagine
a bank i n such a n extended condition that every member
of the board o f directors would feel hopeless about being
able t o rescue i t and yet b e unwilling t o face the music;
where y o u would s a y there w a s nothing t o d o but close
the doors, and they would s a y we know we have t o do i t
but w e are not going t o do it, w e just cannot face the
wrath o f this community.
W e will not d o i t today. M a y b e
something will havpen tomorrow.
‘hen a
bank i s i n a n
obviously hovelessly insolvent condition a n d yet they
adopt a Micawber attitude toward it, and put off the
evil day hoping that something will happen, then I think
you k n o w that b a n s i s insolvent,
Govemor Crissinger. ‘That would you say a s to the
effect o f evidence against a bank which ‘emanded and was
receiving a large amount o f excess collateral for loans?
Would n o t that b e a fact that would b e taken a s charging
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Federal Reserve Bank of St. Louis
the bank with xnowledge there w a s something wrong?
Mr. Baker,
inger.
ell,
i t does n o t s e e m s o t o mé, ar, Criss-
I t may b e verhaps that I
do not a o p l y that a s I
Ought to.
Governor Crissinger. I
criticism, through a
mean a
bans that cnows o f
National B a n k Examiner,
o f that i n -
stitution, x n o w s i t i s very much extended, a n c because o f
that fact demands a large amount o f excess collateral,
order t o mate t h e oank a
in
vreferred creditor? A r e n i t
those some facts that »oule g o t o a jury t o determine t h e
question o f w h e t h s r t h e ban’s i s o n notice?
ait. Baker. I
should thins s o i f that were a n excen—
tional case; i f you made a n exceotion o f that o a n a s
against o t h e r b a n s .
Governor Crissinger. T h e y a r e not excentional cases.
There a r e a
great m a n y c a s e s
o f that x i n d , w h e r e t h e
Fedsral “eserve Banks d o xno™ that those banrs a r e largely
extended and, f o r t h e purpose o f trying t e null t h e m
through t h e condition i n which t h e y find thea, t h e y demand
large excess collateral, sometimes a l l o f the resources
of the banc, t o secure the deniing bans? I s n !
of the things — - a t least i t i s so d o w n i n Chio, i f
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Federal Reserve Bank of St. Louis
211
member i t correctly — — which would reflect u p o n t h e ques—
tion o f <nowledge o f that bank's insolvency o r solvency?
ir. Baker. I
think i t would be, although a s I un-
derstand i t t h e F e d e r a l R e s e r v e Benks, w h e n t h e y d o g e t
marginal o r excess collateral, g e t i t not only t o secure
the existing obligations but future obligations a s well.
I think i f we were arguing t o a jury ve might well s a y
that the reason for the excess collateral was not t o take
care o f this varticular claim, b u t that the Federal Re~serve Bank was more o r less a
continuing creditor o f t h e
bank i n question, e n d the excess collateral was deposited
for that »urpose a s well, I
understand, f r o m something
vir, Mason said t o me, that banks very often, o f their
own motion, deposit excess collateral a s convenience
for themselves,
s o that I should think that was a “ore
or less equivocal circumstance i n any varticular c a s e
where excess collateral was demanded, unless i t was done
regularly i n regard t o a bank o f which y o u otherwise had
xnowledge o f its extended condition.
Governor Seay.
I t has really become a
banxing prac-
tice,
Governor sicDougel. R e q u i r i n g additional collateral
is common bancing oractice.
I t has always been required
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by commercial banks, w h i c h have required a
of collateral,
large margin
i n connection with advances t o other banks.
Governor Crissinger. I
understand that, b u t I
am
inquiring about this because thers are cases, about w h i c h
you g e n t l e m e n
o f t h e Northwest xnow, w h e r e nearly a l l
the p a v e r o f t h e b a n k h a s b e e n t a x e n b y t h e F e d e r a l R e serve Ban's, a t l e a s t v a p e r t h a t i s w o r t h anything,
yet t h a t b a n s i s n e r m i t t e d
wiv. Baker.
t o r u n a n d r e c e i v e devosits.
O f course, Guvesnor Crissinger, t h a t
is a different c a s e f r o m the o n e I was discussing.
are a
and
hundred m e n b e r b a n s ,
Here
T h e Federal Reserve B a n k
comes t o the conclusion that Eanxs A
o r Mo. 1 , i n that
hundred, i s i n a different situation from all the other
99 banks,
I t s a y s t o B a n c A , " Y o u m u s t p u t u p m o r e col-—
lateral t h a n anybody e l s e i n this whole l i s t o f a hund—
red bankxs, i n vroportion t o the service t h a t y o u get f r o m
this bank,"
t h i n k t h a t olaces y o u i n a prejudicial
position a n d I think i t mould b e prejudicial t o argue i t
to a n y jury.
Nom the condition o f the reserve account o f nenber
banks i s a circumstence t h a t y o u a r e zoing t o have t o
face before juries.
T n e statute mskes i t obligatory t o
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Federal Reserve Bank of St. Louis
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maintain those reserves, a n d a bank which over any sub-—
Sstential period o f time i s l o w i n its reserves a n d some—
times has a n overdraft i n its reserves, creates a situation that challenges the attention o f the Reserve Ban's t o
the condition o f that bank, a n d i n some suit that w e are
eoing t o have t o face some d a y w e are going t o have t h e
lawyer o n the other side g e t u p and produce i n court t h e
state o f the reserve o f the bank i n question a n d the
cyreumstance which w e ought t o have taxen notice o f
which ought t o have n u t u s o n our guard,
The Chairman,
O f course t h e reserve banks a r e loan—
ing a hundred million dollars a n d i t i s natural I
for e v e r y b a n s i n g o f f i c e r
safe
think
i n t h e Reserve S y s t e m t o feel
i n observing t h e rules w h i c h h a v e always a o p l i e d t o
the loaning o f noney i n commercial banks.
W e have n o w
learned that those rules d o not anply t o the Reserve
Banks because w e are charged with certain spvecial know.
its
ledge w h i c h t h e c o m m e r c i a l b a n k n e v e r vyeceives f r o m
panting customers, a n d therefore e
have got t o con-
sider t o what extent, unwittingly,
~ e m a y b e building
up e v i d e n c e
i n o u r onmmn transactions a n d i n o u r m e t h o d
of conducting them which, even under the most excessive
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Federal Reserve Bank of St. Louis
care, will caus? losses t o us shich
& comercial
from +
Here i s q u e s t i o n o f the
OS “Very C a r e
.
h a v e t h e t c n a n z e c i n such @
aveinst o u r ~
Then comes t h e question o f examination, t h e
exantiner's revort,
our d i s c u s s i o n a n d
mf
gensral princinles
O
s
3
e
norts that w e .et w h e
rould n u t u s t o
ties o f t h e vank,
T h e n thers i s «he question o f
additional collateral, ~here w s mads collateral
additional colletsral above t h e face atznount o f the vaper
Giscountsd, w h e r s
evidenée against oursslves o y giving s o t i o n a l treat—
—
Under t h e ssn-ral f o r m o f
our liability contract, ~hich many o f J
the additional collet+ral o n ons loan must serve a s
collatsral o n other loans which they may maxes, and
which maces securities held i n custody f o r a
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Federal Reserve Bank of St. Louis
215
pledges i n effect o f those securities f o r loans.
There
is a difficult question a s to information disclosed
in connection v i t h collections w e are maxing f o r
banks, i n cases where i t is difficult t o get checks
paic, a n d which sometimes are held up. I
have a feeling
that w e have sot t o have a very careful review o f the
practices o f reserve banxs s o a g t o safeguard ourselves
against m a c i n g u n n e c e s s a r y r e c o r d s a g a i n s t ourselves.
It seems i n cases o f failed banks o r where w e have e a r n
estly endeavored t o help a member bank a t times, that
our v e r y e f f o r t s
i n that d i r e c t i o n m a x e u s Liable,
I t
is a case o f where o u r liability increases with the degree o f c a r e w i t h
so tO speak,
knowledge
~ h i c hw
e conduct o u r b u s i n e s s inoreases,
I f we do business blindly, without any
o f t h e c o n d i t i o n o f t h e banx, a n d l o a n m o n e y
to it, w e are safer than
Mr. Baker,
w e a r e i f w e k n o w all about it,
I s it nossidle t o see difficulties aris-
ing o u t o f another situation t h a n ths creation o f deposit
liability? I
mean, f o r instance this;
T h e r e y o u have
demanded excess collateral, i s i t possible for the
title t o that collateral t o b e attached b y the general
creditors o f the failed bank o n the theory that your
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Federal Reserve Bank of St. Louis
knowledge o f the extended condition o f tre bank t o
which y o u were giving accomnodations w a s indicated b y
your Cemar
t e r a l , a n d were assisting
e 3
a
in continuing t h a t failed b a n x beyond a »xoint where i t
shoulda have continued,
t o the
ereiitors, w h o coulc thus a s
lateral 1
in preference t o yous I
do not know whether
that i s a practical proposition, b u t perhaps i f i t i s y o u
bankers have met it.
The Onairman. I
wir. Wyatt.
should t h i n k t h a t i t wrould arise,
W e have a cuit o f that x i n c nor pend—
Governor Harding. I
would like t o asx a question
with regard t o this excess collateral.
T h e banks i n
Artoostook County, Mains, t h i c h i s purely a n
section, producing one crop, potatoes, u n t o last fall
h a d been
were i n 6 very badly extended concition a n d
for about f i v e years.
« © T h e Federal R e s e
Bank o f
year
Boston, ever since 1919, which was t a ? last good
thet they had, c a r r i e d those banks along, ats times
carrying t h e m for as m u 6
®
million dollars, f o r those
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Federal Reserve Bank of St. Louis
217
managed t o get those loand down, i n 1923, t o $750,000.
But i n 1924 they were u p again, caused b y a crop o f
potatoes the prices for which were a s low a s 60 cents
a barrel.
T h e condition o f those banks a
year a g o was
such that i f they h a d had another l o w priced croo o r
avery short crop those banks would have been insolvent,
In other words, there was n o actual insolvency a t the
time,
b u t t h e r e w a s prospective i n s o l v e n c y i f those
adverse conditions continued, F o r t u n a t e l y t h e y sold
their crop a t $6 a barrel, they have all paid out, their
deposits have increased 50 per cent and the automobile
agents a n d radio agents a r e traveling u p through there
and selling t h e m stuff.
T h o s e banks will certainly
be back s o m e time this sumner f o r more money. T h e y dontt
any o f them owe anything now, but I have made u p my mind
when they come back that w e will take excess collateral
right f r o m the start a n d while t h e y are i n perfectly g o o d
condition, b u t while w e are i n a position t o point o u t
that while w e d o not need i t n o w that they a r e liable
+o have a repetition o f that same thing and may have
some b a d years, a n d those veople m a y g o crazy again a n d
Spend t h e money that they have made, I
want t o establish
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Federal Reserve Bank of St. Louis
218
@ precedent b y demanding excess collateral right a t
the start.
h
e
r
e i s a n y objection t o the demand
for excess collateral against rediscounts w e will just
taxes their bills payable, a n d they c a n make a 15-day
paper a n d nut u p collateral
o n the basis o f one a n d a
half for ons, o r something o f that sort.
ir. Baker.
I n order t o get m y o m m i n d clear, t h e
excess collateral y o u are n o w speaxing o f i s a n 6 x @ss
of paper?
‘Governor Harding.
Yes.
O n the theory that i f hard times come
ir, Baker.
up there again y o u will have established t h e precedent?
Governor Harding.
I f the 1924 conditions h a d con-
tinued t h o s e banits w o u l d h a v e a l l b e e n i n s o l v e n t
b y this
time. Theyr liabilities were s u c h that t h e y coulc n o t
nossibly have nulled through,
waite Bakor.
Y o u rroulLd make this distinction:
they o f f e r e d G o v e r n m e n t b o n d s
I f
a s collateral y o u would
not want a n y excesses
Mr. Harding.
N o , n o t o n G o v e m m e n t bonds, b u t t h e y
do not have Government bonds. A l l they h a v e g o t are t h e
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Federal Reserve Bank of St. Louis
219
notes
o f t h o s e farmers.
h
e farmers h a v e a l l g o t t h e i r
land morte
wit, Baker,
T h e n your question comes domm t o this:
Is there a n y imoutation o f ‘cnorledge against your vank
erowing o u t o f the fact that y o u demand excess collat—
eral o f t h e k i n d w h i c h e x p e r i e n c e h e s s h o w n y o u h a s a
tendency t o ses frozen from seasonal causes?
I n answer
+40 that question I would say no, there i s no imputation
of that kind. I
think the oroper administration o f
your bank wouled require y o u t o exact o r e o f that i n d
of collateral, w h e n i t depends w o n anything a s seasonal
as the success o f the votato crop i n Aroostook County,
Maine.
Governor Harding. -
S o u t h , when oenks lend
money not against the crop,actually made but against
a cron that they hove i s going t o be made, they always
demand three f o r one,
Mr. Baker, T h e y demand that excess collateral because o f the nature o f the colletsral rather than the
condition o f the bank, I believe.
Governor ferding, H e r e i s another situation, a n d
a oracticel case,
T h e First National Ban: o f Putnam ,
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Federal Reserve Bank of St. Louis
230
1924.
Sonnecticut, g o t i n trouble i n Auzust o f
nesday a f t c r n o o n
B x a n xi xn e5 r
~~”
w a s in. *
ital 4
L
O n Yed—
SV1LoOUS
=
S
aminations h a d s h o r n
aw
~
O
-
a
r
t
xtendsd
but t h e reserved were always c e
r
e
a
i pt h
—
p
t tuh e Federal R e s e r v e
Sood. naper
practically a l l o f it.
y
e
hish»eculatious,
t
es
Examiner s t a t e d
were
ent; t h a t t h e
that
$40,000, waich
losses t h a
a
pS ae h
3
-
Tne checks
e
in through t h e Bos
e
n
a
v man
tO hams:
giving u s
hac a n account.
y
o
t
Bass:
t+v o
comm t h e r =
tasy
TAS
a
e
y
dicntt h a v e a n y
e
in ann y o D am n =
e
a
v o l u m ce .
i n i n mi n c reasing
Ps
>
e
Ci. ae h
a m ee n d e d payaent i :
tested non-payment, w e vould
mornings.
50
H @ ban’c i n Boston w h e r e
m
t
n
T o u
can s o s
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Federal Reserve Bank of St. Louis
221
covered losses amounting t o a hundred a n d twenty thous.
anc. Gollars, but they still thought the bank was solvent,
He said they were going t o get t h e directors together
to d o somsthing. That day we had $49,000 worth o f checks
on the bank thich w e sent d o w n there.
comm there, o n e o f our o m officers t o send the checks
to. I n order t o taxe care o f the checks t h a t w h a d o n
we had them
them/send i n some paper, n o t b y way o f excess collateral,
but merely paper that w e could put t o their credit i n
case w e needed t h e funds t o p a y these current checks
that were coming in. T h e point I want t o »ring out i s
this:
T h e paper w e took was not paper that the banx
had taken a
day o r two before t h e y finally closec;
was n o t s i g h t d r a f t
it
o r demand draft, b u t i t w a s paper
of the manufacturing concern which they had there for
over t w o months, a n d was renewal o f paper t h a t they h a d
been carrying f o r a year o r 50.
W e toox care o f those
checks and finally o n Tuesday the oank directors closed
the bank.
W e h a d n o trouole w i t h t h e c h e c k s t h a t w e g o t
on Monday because o u r man d o m there protested t h e m all
and they were sent back.
T h e voint w a s that w e had
@ little dispute w i t h the peoxle whose note w e had dis-
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Federal Reserve Bank of St. Louis
2228
counted o n this higncay, T h e y a i m e d that o u r discount
had ceprived them of their right o f offset; that they
had a deposit o f $4500 i n the Putnam Bank a n d that w e
had tacen $15,000 worth of their paper; they said if
we h a d not taken t h e paper t h e y would h a v e h a d a n offset against t h a t pani o f $4500 that that b a n k owed them.
They said our taxing the paper deprived then o f this
tight o f offset. W w e t e m l
wi
e
n by telling
é2 that i f w e sanaged t o collect o u r d e ot in other
ways t h a t w e would b e glad
thing w a s finally adjusted a n d w e came o u t without a n y
very ticklish situation,
Loss, a
A s I under
stang it, i n the Grima-Alfalfa c a s e the discounts w e r e
demand drafts.
Mire Baker.
Yes.
Govermmor Hardin. T h e discount hers w a s 10% s i g h t
ov demand draft b u t part o f a customer's regular l i n e
of paper. T
he bank !
t h i s varticular paper i n its
possession f o r o v e r t w o m o n t h s anc. i t w a e a
renewal
of
do not s e e any spée-
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Federal Reserve Bank of St. Louis
2335
cial differsnce between the two cases, that i s to say,
if y o u believed that this particular ban’s was insolvent
at the time y o u were tacing i t s vapers
Governor Yarding.
W e did not xnow whether i t was
W e were i n a bad fix, because the
insolvent o r nots
Exeniner d i c not <now. T h i s m a n d i c not s e s p a n y books
of these transactions, b u t a s cashier h e received deposits a n d put t h e n i n his pocket a n d they were n o t shown
on the books. T h e bans had a liability which was n o t
shown o n its books.
Mr. Baker,
- --
Tt 4 8 a Aifficult question.
The
elements necessary for liability are three. First, t h e
bank must i n fact b e insolvent; second, its own officers
and directors must know it i s insolvent, o r believe i t
+0be; third, you mst know both that the bank is insolvent a n d that i t s officers x<now it.
put t h e o f f i c e r s a n d d i r e c t o r s
I n the case y o u
o f the bank itself d i d not
‘now that i t was insolvent, d i d not believe i t was in-
solvent, but believed otherwise.
Governor warding, T h e only man who ‘new it was insolvent h a d s h o t h i m s e l f
i n the head a n d was then i n a
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Federal Reserve Bank of St. Louis
comatose condition.
wir. Beker,
T h e case that y o u put plainly w a s not
the ‘ind o f knowledge, a s a matter o f abstract law, that
the statute covers.
B u t i f that case h a d ever gotten b e -
fore a jury, a n d they had had a l l the n o w l e d g e produced
before them which you had, whether o r not they would have
taxen t h e position that y o u should have known,
i s a ques—
tion that deals w i t h t h e human element a n d which n o one
can answer.
Governor Harding,
lateral,
O n the question o f excess col-
i f a bane i n a n arricultural r e g i o n takes ex.
céss collateral o n a farm crop which i s not nroduced,
why i s not t h e Federal Reserve B u n k clearly entitled t o
take excess collateral f r o m the bank whose entire loans
are with those farmers o n their crops?
Mr. Baker. I
think i t is. I
think wherever t h e
Cenand f o r excess collateral i s due t o the character o f
the collateral that you.are perfectly within your tights
. there i s no indication o f ‘xnowledge i n that demand
excess collateral.
The Chairman.
I f it were »ossible ~ ~ I do not know
whether i t would be,because practices o f reserve bank
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Federal Reserve Bank of St. Louis
225
differ cuite ‘aaterially a n d t h e situations
deal differ i n the d i f f e r m t districts —
were p o s s i b l e
t o preparé a
i n which they
but i f it
statement w h i c h w o u l d m a k e
fairly clear what t h e vractices o f each Federal Reserve
Bans were o n these various »noints, i f that could b e
assemoled i n such shape that i t would d e illuminating
as t o any danger, a n y special danger t o be guarded
against, d o you think it would b e yossible for you to
review a l l o f t h e m a n d g i v e u s s o m e s o r t o f s u g g e s t i o n
of h o r t o shape o u r course?
vir, Baker,
naire?
D o y o u mean i n the w a y o f a question-
w r . W y a t t h a s practical knowledge o f these
things, a
n
d if they
Some time with them.: I
e
%
h i m he and I could s,end
think h e w o u l d e
b glad t o d o
that,
The Chairman. T h a t i s exactly that I
had i n mind;
That w e arrange a t this meeting some scheme b y which
each Federal Reserve Bank could submit t o My. Wyatt a n
accurate statement o f their attitude o n these natters,
how they handle t h e n i n the b a n s ,
a n d i n fact g e t t h e
information u w i n intelligible form so that you would
not have t o g o over a mass o f papers. I
was wondering
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Federal Reserve Bank of St. Louis
Pa
whether ur, “Wyatt a n d yourself might
in this matter.
aker. I
an wondering, a n d I a m willing t o
think o u t l o u d a b o u t i t , a n d s o m e o f t h e q u e s t i o n s I
ask m a y b e very foolish t o you practic
am wondering whether i t w o u l d be »vossible t o nut i n the
application a
*
csrtificate t o b e signed b y the avplying
Chairmen, Quite »ossibl
That avoids t h e question a s t o whether
the paper i s there f o r collection o r whether i t i s paper
that i s owned b y the ban!
I
n this case, f o r instance,
if the Grimn-Alfalfa paper h a d been sent t o the Stanrod
Bank a n d the Stanrod
Reserve Bank with a statement o n the application that
i t wovld have eliminated
it was the o m e r o f that paper,
p>
half a
dozen c o n f u s i n g q u e s t i o n s f r o m t h e c a s e w h e n i t
came t o b e tried.
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Federal Reserve Bank of St. Louis
PeBb=229
oe
S L
of f e c t i o n 4
at.
of the
any bearing
on t h e s e m a t t e r s ,
cirection
ths cCirsctors o f th: Reserve
4o t h e menbder
bank such advances a s :aay safely
I can conceive t h a t a
ee
loan might
to
aad. r e a s o n a o l y b e made,
p2 M a d e b y @
nsser
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Federal Reserve Bank of St. Louis
250
Ban
n é a b e r b a n k which i s close t o the point o f in~-
s0lvency a n c vet i t b e a n incividual l o a n i n the sense
it
no
D
o
e
s this m e a n that such l o a n shall b e
a oank which i s not safe, although the indivicual l o a n m a y b e safe?
D o e s i t mean that
Reserve Bam: must make a loan, a c c o r c i n g t o the language i n the Act, shall extenc
é a c h menber Dank such
discounts, a n d s o forth, a s may v e safely made? T h e
question that i t raises i n m y mind
circumstances t h a t l e a d the member bancs t o come t o a
Federal Reserve Bans for accommodation, what constitutes
a safe loan?
Governor Strong, Gertainly a loan
with fraud vroulcd not d é e@ Safe loan.
W h e r e t h e circun-
stences o f this Grium Alfalfa c a s e aoplied t h e y were
2
charged with «nowledge that i t was distinctly unsafe, t h e
Statute would not impose a n y mendatory obligation t o make
@ loan under those circumstances,
Mr. Miller. I
wonder whether there i s anything
mandatory there,
Mir. Baxor, I
think not.
T h a t statute has t o b e
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Federal Reserve Bank of St. Louis
251
read as though i t was turned about, that the Federal
Reserve B a n k s h a l l n o t refuse t o extend t o a member
bank a n y discount o r advancement
o r neccune®
e a e
other ground than that i t i s not safe o r reasonable.
The Mandate i s that y o u are t o assist t h e dank where i t
can safely and reasonably b e done, but you are not under
mandatory obligation t o assist banks i n all cases,
W h a t d o y o u s e y a s t o the distinction
sr, Wgller,
between a Laan thet i s safe and a bank that i s not safe?
Wr. Beker. I
do not think that distinction i s there,
I think the reasonableness o f the extension o f the discount o r the advancement o f the accoumodation h a s t o d o
with t h e concition o f the bank.
Miller.
Baker,
W i t h the condition o f t h e bank?
Y e s , Obviously
i t w o u l d never b e
that they should accept a piece o f paper that was not i n
itself safe,
Mr, Miller,
O f course that i s done, t h e oaper i s
not safe i n the sense that i t unquestionably will liquiGate itself a t maturity, a n d the Reserve Bank therefore
demands what i s called excess collateral, because i t has
doubt a s to that paper,
I n addition t o that, i . Baker,
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Federal Reserve Bank of St. Louis
ation, a l l o f t
*
of course w i t h t h e menber bankz!s sndorsement, a n d the
‘
minute i t exacts excess collateral Goes n o t that s u g _
gest a
question i n the mind o f
wir. sillez.
ir. Baker,
not necessarily.
h i n z
illustrates t h e situation.
e r n o r Odalzints » r o v o s i t i o n
H i s Uteh banc h a d been i n
the center o f the Cistrict w h e r e sverything w e s
and evservthing frozen, a n d t h e duty o f that vans, u n d e r
this A c t a s a part o f the general fiscal agency o f the
Government, s e e m s t o a ¢ t o have dScen
thet situation i n the national h i :
I
think that
ne first d u t y o f that vank.
Tics w i t h i t t h e r e s p o n s i b i l i t y a a d L i x e L i h o o c
of
anc such loss a s t h e Federal Reserve B a n k o f San Francis—
co hés suffered b y reason
seens
t o me a
loss t h a t
ea
i s
t
s desire t o tide over a
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Federal Reserve Bank of St. Louis
233
¢ Ban's should sustain.
T h e most that t h e
statute o a n require o f a bank dealing r i t h that situation
is that i t act with caution and reasonableness, Fortun.ately t h e statute uses t h e word "reasonable" a s well a s
the word "safe."
S o that i f there i s reasonable hove,
based o n any facts that Governor Calcins could show
that t h s situetion that hanpened i n the Midcle West that
happened i n such a n d such a year, t h a t t h e situation h a d
changed favorably a n d h e could o n past history anticipate
a sufficiently favorable ciange i n the situation t o just.
ify the extension o f oredit, t h e n I thins that history
of what had happened i n the past would impose that
liability u p o n hin,
Governor Calzins.
w r . Bakor, I would lixe t o say
that y o u talk e s i f you had been running the Federal ReServe Banc o f San Francisco Curing t h e period t o wnich
you h a v e referred,
Y o u havé stated t h e volicy followed
by the Federal Reserve Banks i n that situation almost ex.
actly» H o w e v e r , I
mould L i x e t o return t o t h e crucial
question vith which we are dealing, a n d that i s what i s
the ground upon which y o u must determine t h e solvency
or insolvency o f a member bank.
T h i s Grimm Alfalfa
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Federal Reserve Bank of St. Louis
~
1
case, a n c the other cases w e have b e s n talxing
hingec entirely u p o n th¢e question
question w a s s o l v e n t
Now I
statedm
y two caus c
vency, a n a y
that.
o r insolvent
a
a ta
3;
i n moment.
r o m y swo <inds o f i n s o l -
6 c . o n s more.
n wondering i f y o u will wndertake t o say
ths Federa ‘
a n i t was chergeable with ‘mnomlecge o f
~
insolvency unésr certain conditions a s y o u cescribed,
for the purpose o f illustration, I
woulc
We have another bank, a n d this i r a good
a m trying t o mace,
of the point I
i n the
which t h e Stanrod B a n k i s locatec, t h e officers o f which
b
desparately i n c o m e
extended condition,
a
of this bank, a
k w a s i n a terribly
i n fact i t found itsel
Gifficult s i t u a t i o n
self,
n
i n which t h e Stanrod
B u t i t happened t h a t t h e President
man 86 years old, i s a mean with a n ample
said
fortune, a n d that man
close;
protect a l l o f its
i t o r s a n d stooxhoiders, I
ak
pledge, without a n y reservatioa, everything that I
to o r o t e c t t h e c r e c i t
will
have
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Federal Reserve Bank of St. Louis
B35
And h e did that, T h a t bank tocay i s i n first class condition a n d coesn!t o w e a cent t o anybody,
N o w b y the
usual test o f the condition o f a bank, t h e xnorvledge o f
its officers and the knowledge that w e hed, that bank was
as truly insolvent a s the Stanrod Bans ever was, a n d yet
it never w a s insolvent.
T h i s i s a crucial question i n our
dealings i t h t h e member banks i n extended condition.
What puts u s o n notice that a
bank i s i n a dai
dition first, because then we must exercise additional
caution, a n d second, wnat puts u s o n notice that a bank
is insolvent, b e c a u s e t h e n w e m u s t s t o p m a t i n g a n y f u r
ther advances t o it. T h e thole thing boils itself down,
in m y opinion,
this:
i n these cases a n d comparable cases t o
W h a t facts m a y w e apply t o determine t h e solvency,
or more parkicularly the insolvency, o f a mesber Dank?
I g o back a n d s a y that there a r e two cinds o f bank i n solvency known t o those w h o practice banking,
O n e is
the insolvency a s evidenced b y a n act o f insolvency a n d
the second i s insolvency because o f the declaration o f
the constituted authority, such a s the Comptroller o f
the Currency o r the superintendent o f banking, that a
bank i s insolvent, I
a n still s o m e w h a t
at a
Loss t o f i n d
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Federal Reserve Bank of St. Louis
some Cebatable ground w o o n which w e may determine
& bank i s insolvent.
ansver
I thins eac!
is just a
g
:
L e o
n
d o n its
question o f exsrcising sound
judgment w i t h regard t o each case.
Baniz case.
Y o u
do, but someone sent
and dollars t o b e collected a n d t h e proceeds ranitted.
Governor Csl'sins.
as would anpeal t o a jury a s const
solvency but which, a g a mattcr o f f: c
not consti-
tute a n a c t o f insolvency, b e c a u s e a s y o u w i l l recall,
the reason that that draft was not »naid was that a junior
officer o f the Stanrod Bank h a c wisapnliec t h e funds
provided t o meet t h e draft a n d t h e other officers h e l d
back payment o f that draft i n order t o apply pressurs t o
the father of the junior officer wio had misapplied the
funds, i n order t o ‘nake him g e t ths money back. T h a t
was not i n fact a n act o f insolvency, b u t i t appeared
to the jury a s such a n acta.
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Federal Reserve Bank of St. Louis
257
Mr. Baker.
W h i l e t h e explanation i n regard t o the
pressure being applied t o the father i s not i n the re-
cord i n just that form, i t was a circumstance that was
known, b u t not nut i n the record i n that form.
The
naked facts that stood i n the record were these, a n d the
Circuit Court o f Avpeals puts t h e m i n alongside o f o n e
another: A
draft f o r t e n thousand dollars w a s sent t o
the Stanrod Bank and n o remittance followed.
mitter o f the draft sent a
T h e trans—
personal agent d o w m t o find
out w h y they didn!t g e t their money.
T h e y were told
by the cashier o f the Stanrod B a n k that t h e y could n o t
pay i t immediately b u t ~ovuld i n a fer cays,
I n a few days
they did. B u t concurrently vith that, about the same
time, t h e Stenrod Rant was endeavoring t o borrow $10,000
from the Federal Reserve Bans a n d the Circuit Court o f
Anpeals nut those two circunstances together and held
that t h e y were i n effect committing a n ect o f banxruptoy
by failing t o renit t h e proceeds o f that draft a n d a t
the same time trying t o borrow ten thousand dollars from
the Federal Reserve Bank.
W h e n things c o m e a s close to-
gether a s that i t i s not strange that a
as related t o one another.
jury regards t h e m
I f you are unfortunate enough
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Federal Reserve Bank of St. Louis
to have those t w o things happen a t t h e same t i m e the
freedom o f your judgment i s not always credited.
Governor Young. N a t u r a l l y ifinneapolis i s very m u c h
interested i n this question.
W e attempt t o work i t out
as well a s w e c a n ourselves a s t o when a
vent, b u t I
think I
bank i s insol-—
can s a y with safety that s o far a s
reports o n National banks a n d State banks a r e concerned
that I
have never s e e n o n e which showed a n insolvent
N o w that i s not
condition, even with 206 closed banks.
any r e f l e c t i o n
o n t h e Comotroller's o f f i c e o r the National
Bank Examiner.
I t i s a n extremely difficult thing t o set
up losses i n a bank unless t h e directors o f that institution want t o admit t h e losses.
hes a n e x t r e m e l y d i f f i c u l t j o b .
losses u n l e s s t h e c i r e c t o r s
A
n examiner
H e cannot s e t u p a n y
o f the vank admit those l o s —
S o far a s t h e Bxeminers! reovorts a r e concerned I
never
think o u r bank could safely s a y that w e have /had a n y
ses,
knowledge o f insolvency o f any o f the 206 banks that have
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Federal Reserve Bank of St. Louis
2359—-240
Let u s assume that a
man discounted a
note i n a
menber ban, »vayable t o the bank, that they sent i t t o
us a n d w e r e d i s c o u n t e d i t .
H e could n o t s e t u o the de-
fense v e r y well that h e had nut his o m n o t e i n the bank
and could collect i t uoon himself, I
do not think,
so
far a s 9 9 per cent o f the notes that w e cet a r e concerned
in the Ninth District, t h a t w e a r e assuming a n y liability,
But
Those veople have got to vay those notes. /in the transit
may,
e
e
department I think there/bo
liability.
ir. Baker. I
c o not feel a s confident a s y o u seem
to feel ebout your safety when i t i s a custo mer's
o m
note that i s ciscounted.
Governor Young.
the ban’cs a t all.
B u t sunvose
H e i s simmly a
h e h a s n o dealings w i t h
customer
o f the bank
and w e take that a s a negotiable instrument,
H e does not
lose anything.
ii, Baker, T h e t i s a different question,
Governor Young, O n 99 ner cent of the notes they
have the offset balence, w e get then to pay down t o the
amount thet w e have advenced collateral - — r e get i n a
position w h e r e v e c a n r e t u r n t h e n a p e r t o t h e R e c e i v e r
so that i t worts out from a practical standpoint,
But
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Federal Reserve Bank of St. Louis
taere
i s enother feature
a-
o f the situation that has
concernea u s a good deal.
W e . are Gealing w i t h a great
number o f b a n s t h a t a r e s l o v i n »~aying.
west t h e g r a i n t r a d e i s f i n a n c e d
I n the N o r t h
b y t h e c o v n t r y elevators.
They d r a w a draft o n a car o f wheat with e 2111 o f lading
*
attached a n d send that i n t o u s for collection, t h e same
as i n t h e G r i m m A l f a l f a case.
T h e y d o not a s x f o r a n y
time crecit, t h e y d o n o t a s c u s t o r e d i s c o u n t b u t s i m o l y
want u s t o prssent it, cellect the nroceeds and place t o
their credit.
N o w i t seems t o m e that there i s a great
liability o n our part i n handling these non-cash items
and ~ a s s i n g c r e d i t
is insolvent, Y
wir. Baker.
c o r r e c t i n that?
D o y o u thinks t h e r e i s
you d o n o t v a s s c r e d i t
the c o l l e c t i o n
menber d a n k t h a t v e a r e o n n o t i c e
to a
t o the mender vans until after
i s mace?
Governor Young, I
I vould like t o xnow, I
should thins so, T h a t i s what
do not x n o w hethel
to the b a n o r belongs 2
istemerz. H e r e i s a n insol—
vent b a n k and w e have z o u t o
e nendling millions o f dollars worth o f that every
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Federal Reserve Bank of St. Louis
6423
Mr. Beker. "That does not seem to me te impose liability.
Y o u have done what y o u were asked t o do, Y o u
are selected a s t h e agent t o collect t h e money,
Y o u have
turned t h e m o n e y o v e r t o t h e p e r s o n y o u w e r e a u t h o r i z e d
I t certainly cannot
to t u r n i t o v e r to.
b e your d u t y
+o g o t o the m a n who started that collection a n d tell h i m
that the agent that h e wicked out and selected was not
worthy, t h a t y o u could not operate through h i m and that
therefore y o u w o u l d h a v e t o s e e x h i m o u t a n d t u r n i t
over t o him personally.
Governor Young.
A n d there would b e n o liability i n
that?
Mr. Baker. I
should n o t think so.
@overnor Young, T h e n I a m satisfied,
wr. Baker, I
think i t would b e important f o r y o u t o
get s o m e concurrence,
i n m y judgment, I
to follow i t through a s you stated it. I
a m just trying
had not thought
of i t before,
Governor Seay, W o t t o multiply suppositious cases,
but along the lines o f Governor Calkins! inquiry as t o
what definite thing constitutes notice o f insolvency,
when the Comptroller's examiner reports that h e has as-
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Federal Reserve Bank of St. Louis
243
certained that t h e doubtful vaper i n the bank i s more
than sufficient t o wipe out the capital o f the bant,
and yet t h e Comotvoller h a s taken n o steps t o close that
bank, w o u l d thet constitute,
of insolvency,
i n your opinion, notice
o r merely evidence o f insulvency?
Mr. Baker. I
should think that t h e wiping o u t o f
the complets capitel a n d surplus o f a bank would b e s o
strixing a
suggestion that i t would impose t h e duty
upon y o u o f a s s u r i n g y o u r s e l f
o f cordisions
b y proper
do not think the impairment o f capital
inquiry. I
would b e enough t o put y o u o n inquiry. I
a m surprised
that n o Comptroller!s report e v e r showsd that.
speak o f never having seen a
W h e n you
report which shoved a n in~
solvent condition, i t seems t o me o f course that that
is s o because i f t h e Examiner's reoort showed insolvency
the C o m t r o l l e r w o u l d c l o s e t h a t b a n k p e f o r e h e m a d e t h e
report
t o you.
Governor Young.
doubtful paper. I
G o v e r n o r S e a y was inquiring about
d o not x n o w whether y o u would b e justi-
fied i n calling i t dovbtful p a ner,
the p a v e r
i n the Northwes%
es
Cifficult/tell whether i t i
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Federal Reserve Bank of St. Louis
ir. Baker.
I t depends o n whose doubt i t is.
Governor Young.
Y o u have t o wait t o s e e whether i t
is bad o r not bad. T r h a t i s the only way y o u can deter—
mine whether i t i s good o r not,
fir, Bakers
A s I say, i t depends o n whose doubt i t
is. Oertainly a Federal Reserve Bank i s not clothed
with s u c h c n o w l e d g e
o f the widespread Clientile
of a
menber b a n x s u c h a s t o e n a b l e
i t t o a s s a y a l l t h e commer.
cial Paper that i s oresented.
T h a t i s a human element
and y o u haventt t h a t information. I
do not believe
the burden goes that far, Y o u r examination o f the bank
shows apparently good paper end nothing about t h e paper
or nothing about t h e banks t o suggest t h e
the paver being bed. I
nossibility o f
do not thine i t i s u p to you t o
trace out each viece o f pacer and find out for yourself
that i t i s g o o d paper.
U n t i l y o u r attention
i s challenged
by something i n the bank which shows i t t o b e indulging
in a dangerous practice o r i s i n an extended condition —
and i f t h a t i s c a l l e d t o y o u r attention,
t h e n you are put
on notice,
Governor Young.
department.
Y o u always have that i n the transit
Y o u cannot avoid notice.
I t i s right there.
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Federal Reserve Bank of St. Louis
245
Governor MoDovgul.
T h e practice established m a n y
years a z o b y ths Comptroller's Department, a n d I think
lixewise b y many o f the State Copart.raents, t o devermine
solvency o r insolvency,
w a s f i r s t t o aetezmine a
fair a p -
praisal o f the assets a n d then t o find o u t whether those
assets, b a s e d o n that aovpraitsal, w e r e o f s u f f i c i a t v a l u e
to nrotect the denositors; or, i n other words, i f the
xnown losses were equal i n amount o r greater t %
capital a n d s u r o l u s t h e n t h e b a n s w a s d e s l a r e d t o
solvent.
N o w i t seems t o n e that a c t h e result
decision t h e Federal Reserve Banks have a
greater respons—
than ever >dsfore i n the matter o f extending
credit t o their menber danks.
I
t seems t o m e also that
we nrobably have greater responsibility t h a n ‘re have been
aware o f i n the natter o f determining soivency a n d insol—
vency, I
think w e ought t o have some understanding about
that a n d I would lixe t o get y o u r viers u o o n what constitutes insolvency.
T h e r e have been times w h e n a bank i n
sh been able to vay at the
Gifficult c i r c u m s t a n cseanov
moment the checks that were orcsenicd, b u t hours later,
or possibly t h e next day, t h e y have been a b l e t o vay t h e m
I have cnown cases o f that sort t h a t aight constitute i n -
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Federal Reserve Bank of St. Louis
246
solvency according t o the decision quoted i n this opinion,
would lixe t o xnow i f that constitutes insolvency
but I
in your own mind, Mr, Baker,
Mr. Baker.
V o u l d y o u mind reserving t h a t question
until Governor Strong's suggestion i s carried out, that
is that a n examination b e made o f the oractices o f all
the banks, with a view of maxing suggestions that will
protect t h e banks s o far a s they c a n b e protected i n
these situations? I
want t o include i n that t h e tradition.
al and established definition o f insolvency a n d ascertain
if they apply t o the Federal Reserve Banks i n view o f
the facilities nlaced a t their disposal.
Governor wicDougal, T h a t would b e entirely satisfactory
to mé. I
should like t o go a little further and say
that m y exoerience o v e r a number d
years h a s been i n
accordance with that o f Governor Young. I
seen a
report
have never
o f t h e National B a n k Examiner w h i c h r e p o r t
ed a case o f insolvency f r o m the standpoint t h a t I have
pointed out, with respect t o which we have been called
upon t o render a n y assistance, and, o f course, u n d e r
those circumstances, w e could not and would not d o its
Governor Crissinger.
T a x e a bank o f that kind that
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Federal Reserve Bank of St. Louis
was running along f o r t w o o r thres years t o your +.i0%
2 Very extended condition; y o u k n o w that things
Lipshod i n the bank, and you max¢ n o effort
to ascertain f r o m your o w n examiniug department t h e condi-
tion o f the bank, a n c %
you t h i n c r e a t e Liability
in that way?
wr. Baker,
Y o u cannot e s t a b l i s h i n s o l v e n c y
Governor G r i e s i n
N
make yourself negligent
o
, y o u canno.,
b u t you can
i n not checking v p o n that bank,
can you not?
Governor wcDougal.
T h e r e ars n o c a c
o f that s o r t
where w e d o not check t h e m up.
wir. Baker,
I
n the Grimm Alfelfa c a s e
fied with t h e appraisal made b y the bank authoriticis
Governor w D o u g a l
necessarily insolvenoy,
has demonstrated ,
B u t i t does not constitute
4 s a matte
fact, 2
f a c t s experience
n a c c t i o n with c l o s e d banks,
that their insolvency frequently i s no: bnorn b e f o r e t h e
closing b u t c a n o n l y b e determine’
b y oc. i n g t h e bank
and thereby forcing them t o m e s a n aporaeisa® o f the
assets o f the bans through a n t e i d e e a : 5
t h e bank
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Federal Reserve Bank of St. Louis
examiner o r somebody else.
Vice Governor Platt,
I f that i s true, when a bank
is c l o s e d a n d t h e y s u b s e q u e n t l y p a y o n l y 4 5 t o 5 0 c e n t s
on the dollar,
i t would s e e m t o indicate that the b a n k
must h a v e been insolvent f o r a year, anyway, before i t
was closed,
Governor wcDougal,
B u t i n most c a s e s t h e o f f i c e r s
and directors themselves d o n o t admit insolvency a n d the
reports o f the Examiners d o n o t show insolvency-
Mr. wijller, D o e s i t not mean a little more than that?
Isn't insolvency something like human death?
W e don't
have t o wait until somebody certifies t o t h e death o f a
man i n order t o satisfy ourselves that h e i s dead.
I t
is a question o f judgment o f value o f assets set along—
side liability,
Mir. Baker,
I t i s a question o f judgment, u n t i l a n
act o f insolvency i s committed, a s Governor Calkins has
said.
Mr. Miller. I
rather refer t o your statenmmt t o the
effect that a s t h e Federal Reserve banks legally a r e
equipved w i t h t h e p o w e r t o i n f o r m t h e m s e l v e s
a t first hand,
if they s o desire, o f the condition o f their member banks,
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Federal Reserve Bank of St. Louis
249
they a r e i n a
to w h e t h e r
solvent,
position w h e r e t h e y c a n f o r m a
judgment
o r n o t t h e b a n k i n c u s s t i o n i s solvent
as
o r in-
o r ayoroaching insolvency, a n d ther
are not obliged t o wait until t h a t fact i s
some authority. I
do not understaua t h e t tus declaration
of that fact b y a State superintendent o r b y the Comotrol—
ler o f t h e Currency makes a banks insolvent.
I t i s simply
a public announcement o f the fact, made ucon his best
belief a n d judgment after a n examination o f the bank a n d
after certain facts have been brought t o his attention,
or after s o m e actual a c t shors t h a t the bank cannot v a y
its obligations and, a s @ nastier o f fact, i s insolvent.
Mr. Baker. I
think that i s perfectly true.
determination b y the C o m t r o l l e r
T h e
o r the State bank exam-
iner that a banx i s insolvent, m a y i n fact b e erroneous.
wr. sigller. Y e s , i t may.
iv. Baker.
B u t i t i s rarely erroneous,
Governor Seay,
J p u l a y o u thinc i t desirable t o
attemot b y statute t o define technical insolvency o f
a dan?
vic. Baker, I
do not tuink so. I
think the Supreme
Court o f the United States ~ ~ a n d I aia speaking n o w just
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Federal Reserve Bank of St. Louis
350
from general recollection —
h a s stated what constitutes
insolvency s o authoritatively, t h a t a statute could not
clarify i t very much,
Governor Norris, T h e Federal Reserve Act, i n its
general title, states that there shall b e a more effective
supervision o f ban*ing, a n d then i t vrovides, a s a condition o f menbership, that such bank shall likewise b e subject t o examination made a t t h e direction o f the Federal
Reserve Board o r t h e Federal Reserve bank.
T h e n as t o
State bancs i t orovides that when the directors o f the
Federal Reserve B a n k shall apvrove e x a m i n a t i o n s m a d e b y
State authorities, t h e y m a y b e accepted i n Lieu o f examina.
tions tade b y the examiner o f the Board.
Y o u do not think,
do you, that anywhere i n that act there i s any duty i m
posed upon us, o r even authority given to us, i f we wanted
to exercise, t o constitute ourselves the pewer and author
ity t o determine w h e n a banx i s insolvent a n d t o take s u c h
action a s would result i n closing thet bank?
wr. Baker,
No, I
think not. I
think that statute
was plainly vassed f o r the purpose o f enabling youto
exclude the banks fran the vrivileges o f mentership i n the
system w h i c h d i d n o t l i v e u p t o t h e c o n d i t i o n s i m p o s e d u p o r
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Federal Reserve Bank of St. Louis
251
members; a n d when y o u have de%sermined that y o u w n ' t h a v e
a bank i n the System I think that i s a s f a r a s y o u c a n
go, T h e question o f determining t h e insclvency o f that
bank is, i n the case o f the nationel ban’ placed u p o n t h e
Comptroller a n d i n the case o f a state bark ‘pon the State
bank examiner, b y authority o f Congress, a n d not upon
the Federal Reserve B a n .
Governor Norris.
O n e more question, a s to banks
that a r e n o t o n t h e s p e c i a l cxaminuation l i s t o f t h e C o m p
troller o r o f the State department. T h e y certainly a r e e n
titled t o a nresumotion o f solvency witil t h e y s h o w some
evidence o f insolvency.
I f i n the course o f operations
of their transit department o r othervise a n y suspicious
circumstances arise that give u s e doubt a s t o the condition o f a bank that i s supvosed t o b e i n good condition,
we immediately request either the local chief examiner
or the State banking department t o make a
special e x a m i n a
tion o f that bank; i f the circumstances t h a lead u s t o
make that request a r e substartial,
while —
o r they think i t worth
i n fact, almost withcut erception they have
always made those examinations, there never has been a
case w h e r e s u c h a n e x a m i n a t i o n d i s c l o s e d t h e f a c t t h a t t h e
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Federal Reserve Bank of St. Louis
253
bank was insolvent, but i t shows that there i s a certain
amount o f paver i n which certain loss i s estimated,
or
there i s a certain paper that i s slow, b u t the Comptroller
or the State department does not regard that bank a s insolvent a n d does n o t make a n y objection t o the bank con-
tinuing i n business; t h e y may impose some conditions with
regard t o a change o f officers o r a change o f policy o r
something o f that sort; b u t t h e y d o not report that bank
as insolvent, a n d i f that report appears o n its face t o
us t o be a fair and intelligent report, made b y proper
authority, a r e w e not absolutely justified i n relying o n
it?
Mr. Bakez, E n t i r e l y so, i n m y judgment.
Y o u have
met t h e entire burden b y your action.
Governor Young.
I s my interpretation o f the ruling
of t h e S u p r e m e C o u r t c o r r e c t , t h a t i n s o l v e n c y m a y b e d e -
termined b y the inability o f the bank t o meet i t s due ob.
ligations?
wir, Baker.
Yes.
Governor Young. T h a t i s correct?
Mr. Baker, Y e s .
Governor Young.
L e t u s assume that w e take t h e spe-
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Federal Reserve Bank of St. Louis
cific c a s e t h a t G o v e r n o r N o r r i s h a s cited,
sume that w e find t h e assets o f the bans satisfactor
but w e find that t h e bank has u o reserve, that i t has
many c a s h i t e m s u n p a i d h i c h h a v e b e e n u n v a i d f o r s e v e r a l
Gays, haven'+ y o u got oretty g o o d xnowludge that that
banc i s insolvent
m
a financial standpoint? I p , other
words, y o u have g o t t o lend t h e m some money t o pay those
obligations.
The Chairmen,
N o bank c a n vay all o f its devositors
overnight i f they have a run.
Wo, i t i s a quessicn o f judgment,
Y o u
you f i n c t h a t t h o s e a s s e t s e r e
perfectly g o o d according t o thi
‘
¢ judgment y o u c a n ex.
but they a r e not sufficiently fluid a n d flowing
meet t h e demands e s rapidly a s applications a r e made,
then y o u can tide that b a n k over with perfect safety,
If y o u n a x e e a mistake w h e r e y o u h a v e e x e r c i s e d r e a s o
discretion, I
liability.
thin y o u have relieved yourself o f any
D o e s thet answer t h e question?
wr
Governor Young, Y e s , { £ thin
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Federal Reserve Bank of St. Louis
204—=255
Mr «
/ Bakor; But the question I w
do i t for m y o w n information,
a n d I want t o
no raise,
tt
a
i s a practical question.
situation would arise lixe that i n the case
Suppose a
of the Stanrod Bank, a n extended bank where, due to the
view o f the Circuit o f Appeals, t h e Federal Reserve Bank
had xnowledge o f the perilous, i f not the insolvent condition, o f the Stanrod Bank, i s i t impracticable for the
Federal R e s e r v e B a n k , w h i c h i s a p p e a l e d
t o f o r assistance,
to say t o the bank, with regard t o the paper mesented,
"There did you get this; h o w did you come t o have it?
Was there any devosit liability created a t the time you
got it, which still omists?"
A
n
d to taxe only paper
which d i d not c o m e concurrently with t h e creation o f a
condition
deoosit liability after the dangerous/of that bank was
known?
I
s that imoracticable?
Governor Seay,
A s to the existing deposit liabil-
ity, I think that i s impracticable; b u t i t certainly
is not impracticable t o require a statement that the
paver was discounted, because w e have already done that
and d o i t now.
W e d o require t h e s t a t e m m t t h a t this
paper has been discounted for s o and so, but w e do not
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Federal Reserve Bank of St. Louis
and nevrr have, n o r do I believe has any Federal.
Reserve Bans, required a n y statement a s t o the contingent
at
eposit liability o f the avplying bank.
. Baker.
Tid b u t at. w o u l
S u c h a rstatenen + Grecuirec.
u i w might b e h e l p
T hTi34, e
n o t b e concinsive.
Stanrod B a n k
mould undoubtedly have told t h e S a n Francisco B a n x that
s the o m e r
o f t h a t paper.
Governor Bailey, Didn't t h e evidences
never lost title t o that vaper until t h e y
the money? D i d n ' t they have that xind o f a n agreement?
wir. Beker.
T h e r e i s a statement o f that xind i n the
opinion o f t h e C i r c u i t C o u r t o f Avpsals,
o r something
that loote i n that direction i n the evidence; b u t i t i s
Grimm
t
Alfalfa
y
AssoC1ation
o the bene 2 5 2
t
t
a n d nh a d c o u
n e n o t hoi n g
t co
s
Federal
i
Rd
eserve
Bank o n notice t h a t t h e y h a d a n y c l a i m t o t h e vaver.
Governor Young.
F r o m a practical standvoint,
:>
said before, i n our district
betvreen, because t h e borrowers e s
depositors.
f
w and far
e
n
W h a t w e d o i s t o just get i t
a s I
t heavy
o
d
e offset, g e t the money
h
anda turn the tdala:
o
o
r
m to
f i t back
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Federal Reserve Bank of St. Louis
357
to the receiver,
i n cases where w e are not going t o get
it vaid out i n full, W h e r e w e think w e have the right
to collect from the banker, which may involve a hundred
dollars o r two hundred dollars, a n d i t i s a question o f
paying a n attorney a
thousand dollars t o collect t h e
$200, we just forget i t and xeep o n forgetting it.
Governor Orissinger.
T h a t i s rather hard o n the at-
torneys,
Mr. Baker. Y e s , but i t i s good for the bank.
Governor Harding, W i t h regard t o the Grimm Alfalfa
case, suopose instead o f drafts t h a t they h a d made their
fifteen d e y note a n d nut t h e drafts u p a s collateral
for t h e note; t h e n t h e n o t e w i t h d r a f t s a t t a c h e d w a s s e n t
to t h e F e d e r a l e c h o e s ) B a n k , T h e ban’s c o u l d h a v e c o l l e c t e d
the d r a f t j u s t t h e same, a n d i t s e e m s t o m e t h a t t h e y
would have been barred f r o m making t h e ovlea that t h e Fed.
eral Reserve Bank had ‘discounted a note of an institution
that t h e y k n e w was insolvent» t h e y could n o t have s a i d
that t h e bank was o n notice t h a t this w a s their vroperty.
Mr. Baker.
W h y not?
I n the case a s you put i t they
deposited t h e draft a s collateral security.
Governor Harding B u t i f they made their fifteen-day
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Federal Reserve Bank of St. Louis
258
note t o the Stanrod Bank, w h i c h discounted t h e nots a n d
gave t h e m credit for t h e proceods, a n d pus u p a s col-—
lateral the dvafis, then they would send the note with
drafts attached t o the Selt L a k e C i t y branch o f the R e —
serve Bank o f San Francisco, t h e Salt Late City bank would
give t h e Stamrod B a n k credit f o r the proceeds o f the note,
and t h e n » r o c e e d
vir. Baker.
t o collect t h e collater
H o w ~ould t h e Stanrod B a n k get title
to t h a t collateral w i t h t h e reserve bank’
Governor Harding. ‘ W h e n they discounted the note
+0 which t h e drafts were attached a s collateral.
Mr. Baker.
T h e n the Grimm Alfalfa Association n o t e
is i t s e l f d i s c o u n t e d w i t h t h e F e d e r a l R e s e r v e B a n k ?
Governor Marding, Y e s .
wr. Baker.
A n d carries t h e collaterai w i t h it.
Governor Seay,
T h e note o f the menber v a n k i s dis—
counted f o r the member bank a n d carries t h e assignment
of t h e G r i n m m A l f a l f a Association.
Governor Harding. I n s t e a d o f putting the draft u p
they g e t t h e Stanrod Banz t o taxe their n o t e f o r fifteen
days.
Governor B a i l e y .
T h e Court want s o f a r a s t o say
the Stanrod Bank was n o t r i c h enough t o loan $30,000.
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Federal Reserve Bank of St. Louis
259
ir. Baker, I
think i m p l i c a t i o n o f x n o w l e d g e
that c a s e i s very remote.
i n
T h e Circuit Court o f Appeals
says that t h e Federal Reserve B a n k h e d knowledge o f the
fact that t h e Stanrod Bank could not have vaid the note
because i t didn't h a v e money enough t o n a y it, a n d I
think that i s going pretty far.
Governor Bailey. O r d i n a r i l y i f notes o f that ‘ i n d
come t o our bank w e give them credit, i f they have drafts
attached o f that xind, but ve. don't pass the money over.
ir. Baker.
T h e case which Governor Yarding h a s n u t
I have not gotten straight i n my head.
T h e Grimm Alfalfa
Association maxes i t s o w n note f o r $30,000?
Governor Harding.
ii?. Baker,
Yes.
A n d discounts that w i t h t h e Stanrod
Banks
Governor Farding. Y e s .
I t taxes credit for i t and
secures that note with these crafts.
Mr. Baker,
‘ h a t relation does t h e Stanrod Bank have
to the Federal Reserve Bank o f San Francisco?
Governor Yarding,
T h e Stenrod B a n k would s e n d that
collateral note — -
With the collateral, the note amd the
collateral?
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Federal Reserve Bank of St. Louis
260
Yes, t o
which w o u l d i a m e c i a t e l y n u t t h a t
of collection, a n d when t h e y collected t h e collateral
they w o u l d v a y o f f t h s note.
ur. Baker. J
don't quite s e e that t h e fact that i t
was t h e note o f t h e Grinm Alfalfa Association which w a s
discounted would make i t a n y differm+t f r o m the draft o f
an outside party, because the note i s a ccllectable note;
the Grimm Alfalfa Association would have t o pay that
note unless i t was naid o u t o f the collateral. I
do not
ses that i t would make a n y substantial difference whether
it i s a
note o r w h e t h e r
i t was a
ircft c u d o r s e d
Theré m a y b e something vractical thet I
b y it.
have missed i n
it, but I do not see that i t would b e different,
Governor Harding.
S u p p o s e i t had been a case o f
bonds; that they had the bonds i n the bank for safekeeping,
the bank h a d sent t h e bonds t o the Reserve B a n k a n d b o r
rowed money a n d sold t h e bonds t o the Reserve Bank? T h e n
the man could say "Those are not the »vroverty o f the
bank; t h o s e a r e m y bonds. I
h a c thea there f o r safekeeving
end they h a d n o authority t o n e L a t h e m , "
man h a s gone ahead a n d made
O t : 1
B u t i f that
nut t h e bonis u n a s
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Federal Reserve Bank of St. Louis
261
collateral back o f the note, h e certainly would b e barred
from showing that t h e bank h a d made a n y improper u s e o f
the bonds,
wir, Baker, Y e s , I
that.
thins h e would b e barred from
T h a t i s not quite t h e question, Governor Harding.
The question that faces u s i s the relation between t h e
first bank o f discount a n d the customer.
N o w if those
relations a r e fraudulent a n d t h e Federal Reserve Bank
has knowledge o f the fraud, then thet transaction i s a
thing that becomes infirm.
I f I g o t o a bans a n d give m y
note f o r $30,000 a n d deposit Government bonds t o secure
that note; they discount i t and vlace t o m y oredit $30,000
and fail the next day, and <new at the time that I put m y
note i n there and they put that $30,000 t o my credit a s
a depositor that they were going t o fail, a n d that they
were insolvent, that i s certainly fraud.
Governor Harding. I
can see where y o u might raise
the question that t h e o a n h e d deprived y o u o f your right
of offset,
Governor Crissinger.
I t goes further t h a n that,
goes t o a question o f fraud,
ever passed.
I t
t o the condition that nothing
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Federal Reserve Bank of St. Louis
Nothing e v e r passed,
¥ h a t they a r e
peck i s their note a n c their bond a n d
deposit cancelled a s though i t h a d never b e e n
nove a n d those bonds h a d g o t t m i n t o t h e
hands o f t h e Federal Reserve B a n k with notice o f fraud,
then t h e y a r e entitled t o come back f r o m the Federal R e —
serve Bank. a n d i f the Federal Reserve Bans, with xnowledge o f the fraud, has Cisvosed o f those bonds ana
changed that situation, they are liable t o make good
out o f their
o m fimds that i s due t o the d e p o s i t o r b y
reason o f t h e i r x n o w l e d g e o f a n d n a r t i c i p a t i o n
i n the
original fraud. T h e a t i s the w a y t h e mroposition works
out.
wr. wjller.
I s i t going t o b e annealed?
Alfalfa case?
Mir. Baker,
United S t a t e s
W h a t i s going t o havpen i n the Grimm
W e t r i e d t o g e t t h e Suoreme Court o f t h e
t o t a k e i t in. G o v e r n o r Cel'tins d i d n o t
thins t h e y would. I
think I told Governo
thought w e had a fifty--fifty
than a
fiftyefifty chance t o
chances t o r e v e r s e
iér. Miller.
O n what grouncs d i d
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Federal Reserve Bank of St. Louis
263
Mr. Baker.
T h e y never assign grounds w h e n they d e
cline a writ o f certiorari.
w
y best judgment i s that
they toox the statement, a s conteined i n the opinion o f
the Circuit C o u r t o f Appeals,
t h a t t h e verdict
o f the
jury was taken as a Special finding o f fact, and they
took that statement o f fact a s being some evide
let it go on the question cf fact.
Governor Crissinger.
I s there anything else that
you want t o bring u n a t this meeting?
I f not i t i s about
time t o adjourn f e r lunch,
(Whereupon, a t 12:56 ofclock o.m,, the Conference
recessed until 2:30 ofclock p.m. o f the same day,)
the m e m b e r s
o f t h e Federal R e s e r v e B o a r d a n d iit. B a k e r
retiring from the conference room.)
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Federal Reserve Bank of St. Louis