Full text of Federal Reserve Governors Conference : Meeting Documents : May 2-4, 1922, Seventeenth Conference of Governors of Federal Reserve Banks : Proceedings, Volume 1: May 2, 1922

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Voiume 1

PROCEEDINGS

CONFERENCE O F GOVERNORS O F THE FEDERAL RESERVE B A N K S

TREASURY BUILDING
WASHINGTON, D. C.

MAY 2, 3, 4, 1922

WALTER S$. COX
SHORTHAND REPORTER
COLUMBIAN BUILDING
WASHINGTON, D. Cc.

PROCEEDINGS O F A CONFERENCE WITH T H E FEDERAL RESERVE. BOARD
OF GOVERNORS O F THE FEDERAL RESERVE -BANKS,

Washington, D. 0.,;
T u c s d a y , . ,- M
1922,
2a y

The c o n f e r e n c e w i t h t h e F e d e r a l Reserve. Board o f
the F e d e r a l R e s e r v e G o v e r n o r s
called t o o r d e r

o f t h e Reserve Banks w a s

i n t h e B o a r d R o o m o f t h e Federal Reserve

Board, Treasury Building, Washington, D. C., at 10 o'clock
Ge Me, O n Tuesday, M a y 2, 1922,


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Present:

Hon, W. P. G. Harding, Governor o f the Federal
Reserve Board,
Edmund Platt, Vice-Governor o f the Federal
Reserve Board,

A. C. Miller, Member o f the Federal Reserve
Board,

John R, Mitchell, Member o f the Federal
Reserve B o a r d ,


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Hon. D . R. Crissinger, Comptroller o f the
Currency a n d ex-officio member o f the
Fedcral R e s e r v e B o a r d ,

Also:
Charles A , Morss, Governor, Federal Reserve

Bank of Boston,
Benjamin Strong, Governor, Federal Reserve B a n k
of New York,

George W. Norris, Governor, Federal Reserve
Bank o f Philadelphia.

E. R. Fancher, Governor, Federal Reserve Bank
of Cleveland,
George J . Seay, Governor, Federal Reserve B a n k
of Richmond.
M. P . Wellborn, Governor, Federal Reserve B a n k
of Atlanta,
J. B. McDougal, Governor Federal Reserve B a n k
of Chicago.

D. C . Biggs, Governor, Federal Reserve B a n k o f
St. Louis.
R, A. Young, Governor, Federal Reserve B a n k o f
Minneapolis,


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J. Z. Miller, Governor, Federal Reserve Bank o f
Kansas City.
B. A. McKenney, Governor, Federal Reserve B a n k

of Dallas.
J. U. Calkins, Governor, Federal Reserve Bank o f
San Francisco,

Governor tarding:
per

e

T h e Conference w i l l cane t o order,

e s o m e o f the topics t h a t y o u have u p for

consideration w e r e s u s g e s t e d

w y t h e F e d e r a l R e s e r v e Board,

The first i s
Desirability o f the adoption b y Feceral
Reserve banks o f policy o f paying o u t
gold certificates i n ordinary course
of business.
There i s n o w being printed a memorandum, w h i c h has been
‘approyeds by the Secretary o f the Treasury a n d b y the Federal
Reservé Board, copies o f which will b e distributed t o y o u

probajly before you adjourn this m e e e ,
This i s a

memorandum suggesting a

currency cistribu-

tion a n d payment policy f o r t h e Fsceral Reserve banke.
The committees o n currency s u p l y anc Gistribution, w i t h
menbershic r e p r e s e n t i n g t h e T r e a s u r y a n d t h e F e d e r a l f.eserve
3

Board,
«at a meeting i n the Office o f the Commissioner o f
we
,

the Public Rebt, in
>

Federal Reserve -Bankse present i n accordance with a minute
adogted b y +: 4 conference ofGovernors o f the Federal Nezerve
Banks Held i n Jashington i n October, 1921, addpted three
* a s
spec#fig wecoriendations, T h e Secretary o f the Tressury
ana t h e F e d e r a l R e s e r v e B o a r d h a v e c o n s i d e r e d t h e s e r e c o w e n c a -


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after a

further c o n f e r e n c e w i t h t h e c o .mittee

é
i

and after further e t u d y o f the whole currency situstion,

have agreed upon the following program which it i s believed

will: fu¥ther the- effective, gound and econorical distributlog of currency through the Federal Reserve Banks.

I n

order, however, t h a t t h e execution o f the program will a t t a i n
its maximum good, i t igs necessary that e a c h Federal Reserve
Bank agree t o adopt a n d uniformly carry o u t t h e procedure

or policies outlined herein,

T h e y are;

1.STANDARDS OF FITNESS OF CURIENCY
Paper c u r r e n c y t e n d e r e d f o r r e d e m p t i o n

i n order

t o be

claesed a s fit f o r further circulation must b e fairly clean
+

so that i t s class, denomination a n d genuineness c a n b e Cxter-

mined without difficulty, a n d wuet contain a sufficient
amount o f “life o r “sizing” t o permit its being hancled with.
facility.

I t shoule not contain heavy creases which break

the f i b r e o f t h e p a p e r a n d i n d i c a t e t h a t d i s i n t e g r a t i o n h a s

begun.

a A fit note when held b y one end i n one hand and

pressed i n t o a slightly concave shape lengthwise should sus-

tain itself substantielly o n a line with the hand. I t should
not present a

limp o r rag-like appearance,

I f a note h a s

retained a fair amount of the original strength or “sizing”
it i s fit unless i t i s s o badly soiled a s t o b e offensive,


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‘or if torn, perforated o r otherwise mutilated. t i e r e —
creasing o r wrinkling that has not broken nor s e r i o v e l y

weakened the note does not make it unfit.

Sosballek “dig ~

ears” o r bent cornere d o not rerider notesunfit.
(a) T h e standard o f fitness éefined above shall anply

toall forms and Genominations of circulating currency.
Test e x a m i n a t i o n s f
o each kind and each cenonina~
tion o f paper currency presented f e r redeniption :

by each Fed-ral Reserve Bank will be made under
the general supervision o f the Treasury a n d Fecer--:

al Reserve Board Currency Committee, a n d the results
of s u c h e x a m i n a t i o n s w i l l b e r e p o r t e d

a t the end

of each month t o the Federal Neserve e e e for t h e
information a n d guidance o f iederal Reserve Banks.

II, E

T H FODISTRIBUTION
DO S

In order that t h e estandarcs o f fitness i n the circulation outstanding i n the several Fedsral Kheserve Districts
shall b e a g n e a r l y u n i f o r m a s pessible,

a n d i n order t h a t

there may be a uniform policy i n 411 Gistricts a s to the different kinds o f currency t o b e put i n t o c i r c u l a t i o n ,:weh“.


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a


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i
Banks a n d n o t direct f r o m the Treasury except f o r purely local
needs.

III. OKDEK O F PAYMENT O F DIFFERENT KINDS O F
CURRENCY.
Federal Heserve Banks,

i n making payments o f currency,

should distribute currency i n the following owder o f prefer-

ence;
(a) 5 ' s and over #
(1) n a t i o n a l bank notes
(2) F e d e r a l Reserve Bank notes

(3) Silvers
(4) L e g a l s
(5) F e d e r a l keserve notes

(6) Gola @ertificates
1's and 2's
(1) e e r e l kheserve Bank notes
(2) S i l v e r s
(3) L e g a l s
# Notes- Since t h s maximum denomination o f national b a n k
notes, silver certificates a n d legal tenders i s 1,000, p a y -

ments i n denominations higher then thacamount must b e made

in Federal Reserve notes and Gold certificates, i n the order
named e


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IV. NATIONAL BANK NOTES
While i s i t believed t h a t national b a n k circulation
ultimately w i l l b e e l i m i n a t e d e n t i r e l y ,

i t i s felt that this

may b e accomplished o n l y through Congressional action a n d
not otherwise.
Meanwhile, F e d é r a l k e s e r v e B a n k s s h o u l d n o t d i s c r i m i n a t e

against the national b a n k currency, whether f i t o r unfit,
either

i n respect

t o its receipt f o r deposit

o r i n respect

to its shipment t o the Treasury f o r redemption.
ard o f fitness prescribed i n paragraph I

T h e stand~

must apply equally

to national bank currency a n d a l l other forms o f currencyr

Ve SILVER CHRTIFICaTES»
It has b e e n estimated t h a t t h e normal requirements f o r
the # 1 and $ 2 denominations o f currency approximate $400,000,000.

I t i s believed that s o far a s legally possible

United States currency o f these denominations should consist
of g i l v e r c e r t i f i c a t e s ,

a n y oxcess

o f demand o v e r s u p p l y

being filled b y the issue o f United States notes (legal tenders) rather than any other form of currency.

VIe UNITED STATES NOTES (Legal Tenders)
It i s believed that this f o r m o f currency may. be elimin-

ated at} some appropriate time i n the future but that until

Giiminated i t should b e the policy o f ths Treasury t e ¢snfins
the printing a n d circulation o f United States notas t o the
denominations o f wl, $2; # 5 and p10, w i t h preference f e r ’ n e
wl and 2

denominations,

a s mez b e required.

VII. F E D E R A L K E S H R V E B a N K NOTES.
In v i s w o f t h e f a c t t h a t t h e p r e s e n t p r o g r a m o f t h e

Treasury contemplates a

retirement, within t h e near #fnture ,

of all Pittman A c t certificates against which Federal Reserve
Bank notes a r e issued, a l l Federal keserve banks should p a y
out a n y such bank notes o n hand i n order t o use them u p and
have t h e m permanently retired during t h e period w h e n t h e

Treasury i s paying off the certificates.
Neither t h e Federal Reserve Banks n o r t h e Federal

Reserve Board should place any more orders for the printing
of F e d e r a l R e s e r v e B a n k notes.

VIII. rKINTING PkOGHaM (Federal Reserve Notes)

(a) S t a n d i n g agreement - Hach Federal keserve Bank
should advise the Federal Keserve Board o f the amounts o f
Federal Keserve notes i n each denomination that i t desires t o
have i n its reserve stock o f unissued notes, specifying how
much o f each denomination i s t o b e held i n washington.
Orders for printing o f Federal keserve notes should b e aute-


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10

matic, s o that any deficiency i n the agreed Washington stock

of any denomination shoulda be tantamount to an order to
print sufficient amounts to’ bring that stock u p t o the agreed

minimum.
wor

( b ) Manufacturing program for 1922.

I n order, however,

to facilitate the manufacturing program of the Bureau of
Engraving a d Printing, e a c h Federal Reserve B a n k should,
before J u n e l , 1922, estimate a n d advise t h e Federal Reserve

‘*rPoerd,.of*the amounts o f each denomination o f Federal Keserve
notes that i t will requisition f r o m iashington during t h e re-

mainder o f the calendar year.

v i t h such estimates a t hand,

the Federal Reserve Board will place orders t o Yave printed
for e a c h b a n k e a c h m o n t h t h e p r o p e r p r o p o r t i o n

o f tre amounts

of each denominations w h i c h the bank estimates i t will with-

draw from tte ‘ashington reserve stock during the balance o f
the year.

I f a t a n y timedwring t h e remainder o f the year,

a Federal Reserve Bank finds 1 t necessary t o increase o r de-~
crease its estimates i t should s o advise the Board b y telegram o n the last business d a y o f any month stating t h e amount
of each denomination which i t expects t o withdraw f r o m t h e

¥ashington reserve stock during the remaining months o f the
year.

T h e Board will t h e n adjust printing orders according-~

ly- a l t h o u g h this program m a y result i n a temporary increase


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Bok

in the reserve stock of some of the banks over and above the
fixed minimum figure,

i t will accomplish a n orderly operation

of the printing process f o r the balance o f the year, a n d will,
leave each Federal Reserve B a n k with its agreed minimum r e -

serve stock o f notes a t the end of-the calendar year. ( T h i s
plan s u p e r s e d e s t h e F e d e r a l R e s e r v e B o a r d ' s l e t t e r X - 3 3 8 1

of april 11, 1922).
IX. DISTHKIBUTION @

UNITED STATES CURRENCY

BYTREaSURY DEPARTMENT.
United States currency -3Each Federal Reserve Bank
will advise the Federal Reserve Board (for head office and

each branch separately) o f the amounts of #1 and $2 bills
estimated t o be sufficient for one month's reserve supply and

will now place orders with the Board (for head office and
each branch separately)

t o create c a s h reserves o f these

amounts. Hereafter, each bank will telegraph t o the Federal
Reserve Board onthe l a s t business d a y o f each month t h e

amount o f each denomination o f #1 and $ 2 notes (United States
currency) estimated a s sufficient t o maintain reserve stocks
at the head office a n d branches a t the fixed figures.

Monthly orders to the Fedeiial Reserve Board for United States


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currency from the Treasury must b e confined solely t o the

12

$1 and $ 2 denominations, a n d must not include requisitions
for higher denominations, b u t i f a h any time the Treasury find


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it necessary under the law to issue United States notes o r
other kinds o f United States currency i n denominations a b o v e
$1 and #2, s u c h notes will b e apportioned a m o n g t h e twelve
Federal keserve Banks, w h i c h willagcept t h e m and p a y them

out a s contemplated i n paragraph III.

(Signed) .

S.- BROUGHTON,
Chairman.
RALTER Le. EDDY
We BE. BUELL
Ce S e PEARCE
CURRENCY COMMITTEE.

April 26,
APPROVED:

(Signed) a A . W. MELLON,
Secretary o f the Treasury.
APPROVED:
Federal R e s e r v e B o a r d
Governor.

It is suggested that there b e n o discussion o f this mat~
ter until y o u have received y o u r printed copies.
The second topic i s

Policy of: some Federal Reserve Banks
to invest i n Government. Securities

‘in ordor t o increase their earning
assets,
f will l a y b e f o r e t h e C o n f e r e n c e s e v e r a l c o m m u n i c a t i o n s
from ‘fhe T r e a s u r y D e p a r t m e n t

o n t h i s subject, i n c l u d i n g a

let-

ter received yesterday f r o m t h e Cecretary o f the Treasury,
in which h e acknowledges receipt o f m y lstter o f April 2 9 t h
‘and says:
“£pral 29th, l9ee.

liy dear Governor:
I received your letter o f April 29, 1922, a n d have noted
the attached copy of the recommendations made b y the Federal
Acavisory Council t o the Federal Reserve Board a t t h e conclu-

gion of yesterday's meeting of the Council.
TIhave noted with particular interest the resolution of
the Council under Recommendation 9 , a s t o Federal Keserve
Bank investments i n Government securities, a n d shall b e interested t o know what position i s taken i n this regard b y the
Federal Rensres Banks a n d the Federal Reserve Board a s a re-

sult of their further consideration in the matter in the
light o f the r e c o . m e n d a t i o n s f
o the Federal Advisory Council.


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Very truly yours,

A.ti, HSLLON, Secretary.*

14
‘Phere i s also a statement hereof t h e amount o f gevernment becurities h e l d b y each Federal Reserve Bank, a n d the.
Couficil's reco: ;.sndation o n that subject, which’ is a

follows:

RICOLL.ENDATION No. 9 : T h e Council h a s read w i t h interest
the ‘Letter o f the cecretary o f the Treasury t o the Gov=rnor
of the Fedsral Tieserve Board cated .pril 25, 1922, relative
to investments o f Fed ral Reserve Banks,

i n which t h e Secre-

tary reavested t h e consideration o f the subject b y the Federal
Advisory Council.

The Council congratulates t h e country u p o n enjoying a
financial administration h i c h takes t h e enlightened point
of v i e w t h a t t h e F e d e r a l l.eserve G y s t e m s h o u l d n o t b e u s e c

for t h e purpose o f carrying t h e Government's obligations.
“any countries i n surope would have been saved f r o m some o f
their most serious financial cifficultiss i f equal wisdom h a d
governed their policies.
The Council i s also i n syrioathy with the point o f view
‘essed b y the Uecretary o f the Treasury that t h e Fedéral
should a v o i c e x c e s s i v e i n v e s t m e n t s

even o f a-.1 ort maturity,

i n Govern-

T h e Council

is fully i n accord w i t h t h e views implicd that t h e Federal
Reserve Banks should b y preference s e e k investments


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i n the

15

e

a

i n the
a a they can purchase
&thange
o
f
y bills

“open, mapket.
tHe Council i s o f the view, hoifever, that, the #rtieular

circumatances prevailing at.present must be Rorne in mind,
especially t h e present h i g h percéntage o f reserves o f the
system.

nioweover, i f the Federal Reserve Banke should entirely
liquidate their holdings o f Government obligations, they
would thereby lose all power o f influence o n the banking
situation o f the country, i n case excessive ease o f money
should develop, threatening a
times,

new e r a o f inflation.

I n such

i t i s o f the utmost importance t h a t t h e Federal Ressrve

System should be able t o dispose o f its holdings, thereby
throwing t h e burden o n the member banks a n d thus exercising
a restraining influence,

T h e floating supply o f bills a t

present i s extremely Limited. A g g r e s s i v e buying o f acceptances would, n o coubt, tend further t o reduce the rate a t
which these acceptances could be bought, s n d it might deetroy t o a certain extent a t least t h e distribution o f acceptances a m o n g a large part o f buyers -

the so-callsa acceptance

market + which has been built u p with n o little effort.


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the same time that the
While the Couned} believes at

16
Fedotal Réserve System would be well advised i n making
efforts to.increase i t s holdings o f acceptances, t h e r e i s
no Goubt that t h e Federal Reserve Banks a s # @ whole c a n not

avoid a t this time, for the reasons above explained; investrs “ a

i

p

s

ing v e r y substantial®
either i n Government Bonds g
s
eamounts
’
Certificates o f indebtedness,

o r warrants.

O f these three,

no doubt, t h e short t e r m Treasury Certificates a r e t h e most
suitable a s investments f o r t h e Federal Reserve Banks.
Bearing i n mind that t h e capital a n d surplus o f t h e combined
Federal Reserve Banks ¢Smount t o approximately 3300,000,000,
the Council does n o t feel that there i s just cause t o criticise
the Federal Reserve Banks f o r having invested i n Treasury
Certificates

a n d short t e r m Government obligations

u p to an

amount w h i c h i s n o t largely i n excess o f their capital e n d
surplus, s n d which, c o n s i d ring t h e amount o f their assests,
constitutes o n l y a small part oftheir resources,
The Council i s still o f t h e opinion that t h e Federal
heserve Banie shoulc avoid investing i n long term Government
bonds,

T h e Council further urges t h e Fedsral Iteserve Banks

when making a n y purchases S o p a e s t e r m Government obligations,

that such purchases should not interfere with TreasBry
operations.


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By
In giving this view, the Council i s i n no way moved b y
any consideration o f earnings o f the Federal Reserve Banks,
but stands entirely b y the opinion expressed i n its resolution
of November 21, 1921, a s follows:

"The Board brought t o the attention of the Council the
matter o f the increase i n thereserves o f the Federal Reserve
Banks,

a n d t h e a p p a r e n t a p p r o a c h o f t h e t i m e when,

as a

ree

sult o f the liquidation o f borrowings b y member banks, t h e

Federal Reserve Banks will b e seeking investment for their
idae funds. T h e Soard requested the Council's opinion a s t o

the wisdon of the Feéeral Keserve Banks! investing these
funds i n United States Government bonds.

"The Council stated that i t is not disturbed b y the fact
that the earnings o f the Federal Reserve Banks are desreasing
because o f the accumulation o f idle funds.

T h e Federal

Reserve Banks were n o t created f o r profit a n d t h e Council i s
mindful o f the fact thaty. a s past experience h a s shown, times

of temporary idleness of funds are bound t o be followed b y
periods

o f greater d e m a n d s f o r money,

b e they seasonal

o r emer.

gency requirements.
| 'yhenever i t may appear necessary f o r Federal Reserve
Banks


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Federal Reserve Bank of St. Louis

t o seek investment

i n t h e o p e n market,

t h e Council

18
would r e c o r m e n d t h a t »wrefersnce b e g i v e n t o o b l i g a t i o n s

such ag:
& Acceptances.

United States Certificates o f Indsbtedness,
Such short t e r m State a n d ..unicipal

B e a t a

a s

are permitted b y the FPederal Reserve Act."
I have 4 letter f r o m the under Secretary o f t h e Treasury,
which y o u will find here, iherein h e takes t h e position, c u i t e

strongly, that the Fed-ral Reserve Danks should proceed t o
liquidate their holdings o f Government obligations,

a n d point-

ing out that t h e y should b e careful t o c o i t i n such a way

as t o not affect the market, o r t o affect i t as little a s
possible, a n d expresses t h e opinion that t h e liquidation o f
Government oblisations w i l l probably increase t h e discount
demand,

O f cou:' e the Federal Reserve Banke must consider

this proporition f r o m every angle,

T h e Treasury's. position

is n o coubt theobetically correct,
tical side t o the u e s t i o n which, h o coubt, h a s b e e n considered b y the officers o f t

f e d e r a l Leserve Banks, a n d that

is t h e q u e s t i o n o f m a k i n g t h e i r e a r n i n r s s u f f i c i e n t

t o pay

xpenses a n d dividends.


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Federal Reserve Bank of St. Louis

The e x p e n s e s o f the Federal Reserve Banks a r é not. a t all

Bo
comparable t o what t h e y were a : t h e beginning o f 1917.

W e

cannot t a k e a statement showing t h e reserve p o s i t i o n s . fo
the Federal Reserve Banks a n d compare t h e m with the reserve
position o f t h e F e d e r a l R e s e r v e B a n k s a t t h e b e g i n n i n g o f t h e

war o r early i n the war a n d draw a similar parallel t o the
expense accounts o f the Federal Reserve Banks,

T h e Under

Secretary o f the Treasury t o l d m e t h e other d a y that h e
thought t h e y would b e able t o have a n appropriation which
will enable them, after t h e close o f the present fiscal year,

after the 20th of June, t o reimburse the Federal Reserve
Banls f o r fiscal agency expenses.

O f course that will help

some,
The Board requested its geveral counsel s o m e time ago
to give a n opinion a s t o the legal right o f the Federal Reserve
Banks

t o p a y a c c u m u l a t e d d i v i d e n d s o u t o f surplus a l r e a d y

acquired, a n d lir, Logan gave t h e epinion that t h e Federal

Reserve Banks had such a right.
The Board transmitted a copy o f that t o the Secretary
of the Treasury, w h o submitted i t t o the Attorney General

of the United States, asking him whether o r not h e concurred
in that opinion, |

zesteraay t h e Secretary o f the Treasury

gent mé. & copy of a letter h e had received from the Attorney


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Federal Reserve Bank of St. Louis

ln-waten she: .tiermey Gensral,
simpls lenguage, pointed o u t t h e reasons
conewe:

i n that opinion.

S

Oi

:

t h e h i v hest legal
cjetermination,

legally p a y their
surplus, sithout
GO

L, thet opens u p another auestion,
discussions t h a t h a v e

t a6

i n view o f the

throvghout t h e country a n d

in Congress Lately, a 8 t o tus Governmen
GieoseoU i e s c o n s ic
would b e v o o n p u b l i c s e n t i m e n t

i f you have

to take five o r s i x million dollars o u t o f your surplus fund,
for t h e purpose o f paying expenses a n d cividends t h i s year.
There m i g h t

b e some unpleasant cevelopments f r o m

Cannot G e h l =

Of course t h e earnings o f the
always

going

t o b e eratic,

T h e i r re-discounts

are

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

Giscountse o f the member banks...

T h a t i s axiomatic a n d needs

no explanation, s n d the carnings o f t h e Federal Ressr
Banke will, o f course, d e p e n d upon their invest:


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Federal Reserve Bank of St. Louis

Noi, the coml*tee o f the Board o n Stiiciency..and
uconomy, w h i c h has been a t vork f o r some months, recently
héld a conference w i t h operating officials f r o m sach o f the
Federal Neserve Banke,

o n April e 4 t h i n Chicago, a n d the

aémbers o f the cormmittse reported t o the Board that t h e y were
very much iImprestec vith t h e sarnsetners a n d sincerity o f
purposes w i t h v h i c h its c o n f r e r :

a r e g o i n g t o t h e i r work,

and

expressed t h e hope that there would b e some v e r y substantial
curtaliment i n the expenses o f t h e rederal Reserve: Banke,
“t t h e es a m e t i m e v e s l l k
e n o w t h a t i t i s impossible
h

t o reduce

the forces i n a drastic manner i f w e wish t o retain t h e
raorale o f the organization,

(

@ agree that i t might b e pos-

sibls asa matter o f fact, t o make s radical reduction i n
your expense account, b u t i t might b e open t o grave doubt

whether, after all, that should be ths true measure of econony,
because y o u mighs tear your organization t o pisces a n d your

best men woulc be

S e

srouncd for outside employment a n d

you would b e apt t o have, i n s t e a d a
zation, a

very efficient organi-

mere shell o r s l e t o n aganization.

Those a r e a l l matters w h i c h are v e r y important a n d which
are laid before this confe:ence f o r i t s consid:ration,


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Federal Reserve Bank of St. Louis

The third topic i

practicability o f action b y FPed:ral Ksserve banks, without additional legislation, looking t o retirement o f nationa
bank note circulation.
That w a s a

suggestion which came t o the

from Treasury sourcert, a e t o whether o r not i t wotildabe possible f o r Pedcral b e e

a n k s t o adopt a

policy o f taking

for member banks
notes i n circulation,

t o depress t h e m

consols, a n d for federal iieserve banke t o buy bonds direct
from the member banks, w h i c h trould retire their circulation.
That w a s submittsd t o the Acvisory Council a n d y o u have

heard the Council's reco:.-endation o n the subdis

d

o

not think there i s a n y cifference o f opinion o n the part o f
members o f t h e B o a r d t h a t . e s h o u l d n o t a t t e m p t
on s o m e t h i n g t h a t

t o accomplish

i s , after all, a

ibjact

for legislation, a n i that t h e banks s h o u l d carry o u t t h e
pirit a n d letter

o f t h e Act, t h a t t h e y a r e p e r m i t t e d t o

receive N a t i o n a l b a n k n o t e s

o n deposit,

and I

think t h e

Board i s prepared t o rule that t h e y should c o so.


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Federal Reserve Bank of St. Louis

Wumbser 5

is

Desirability o f reestablishment By”
Federal Reserve banks o f special
trade acceptance rate,

You will find in the recosmendations of the Advisory

20
Souncil w h e r e
acc*ptances

a d v i

a

t a n o p e n marist r a t e f o r t r a d e

b e established,

I

t i s n o t t h e i d e a t o reestab-

lish the preferential rate o f discount for re-discount o n
acceptances, b u t t o put them i n the class with bankers
aceeptances
The B o a r d w o u l d l i k e v e r y m u c h t o h a v e t h e s p e c i f i c r e c o n

mendation o f the confe:ence o n that subje
Now G 1 8

tion sof 4.5 B.-4<. N U P ical syecem
8 t o make provision f o r Federal

rve Banks and Branches,
That s u g g e s t i o n that came fivet from a bank i n
Southern Catifornia, attached t o the Log angeles branch, a n d
we h a d s e m e c o r r e s p o n d s n e e

w i t h Governor Calkins

o n the sub-

ject and also some correspond-nce with the 4. B. «
it would b e convenient,
notation

i f i t were practicable,

I t seems

t o have some

o n t h e b a n k check, i n c i c a t i n g t u s t w h a t b r a n c h i t
A

should b e s e n t t o f o r p r o m p t c o l l e c t i o n ,
ssemg

t o be a

matter

B u t after allthat

f o r t h e . m e r i c a n Bankere!' A s s o c i a t i o n

rather than for the Mederal leserve system, but i b requires
cooperation f r o m the f e d e r a l Reserve Bank® i n order t o make
s

any recommendation effective.


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Federal Reserve Bank of St. Louis

Here i g a statement o f United States

24

each Federal Reserve B a n k a s o f April 17, 1922, t h e total

being 527,203,463, o f which amount 86,000,000 are o f one
year certificates under the Pittman Act, leaving 3441,000,000,
exclusive o f the Pittman A c t securities,
There i s also a matter w h i c h t h e Governors m a y b e inter~
estsd in, a n d that i s that notwithstanding t h e lijuidation
which has t a k e n place, t h e strong reserve poftition o f the
Federal Reserve Banks a n d a great m a n y o f their member banks,
snd t h e sase o f money i n the warket,

i t i s noteworthy that

of t h e 9872 member banks about o n e fourth o f that, o r
es4] were, o n :.arch $1, re-discounting w a t h their federal
»eserve b a n k s

i n amounts

i n excess

o f their normal

o r basic

The total average borrouings f o r t h e t w o weeks,
sixteen d a y period,

o r the

o f those 2341 banks, amounted t o

3340,518,000 against °168,976,000 a s their basic line.
You vidi: find 1 5 i n 21h o f t h e die tricts.

B o s t o n h a s 42,

having something over 36,000,000 against a basis line o r
average borrowings o f 7,784,000;

N e w York has 6 7 banks,

with a basic l i n e o f 512,434,000, average borrowings

19,988,000; Philsdelphia has 110 banks, basic line
" 1 7 , 9 6 8 , 0 0 0 ,


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Federal Reserve Bank of St. Louis

a v e r a g e

b o r r o w i n g s

3 0 1 , 1 5 6 , 0 0 0 ;

C l e v e l a n d

i e s

25
banks, basic line #11,195,000, average borrowings %14,352,000;
Richmond, 2 1 2 banks, basic line $22,964,000, average b o r r o w

ings, 53,527,000. T o t a l lending o f the Richmond bank with
member banks i n the district o n the date o f march 3 1
wag
75,476,000,

o f which 53,000,000.

t a s f o over-extended banks.

Atlanta, 2 3 2 banks, b a s i c line 913,315,000, t o t a l average borrowings, ~36,560,000, o u t o f a total lending o f

947,857,000.
Chicago, 4 1 2 banks, basic line 24,690,000, average
borrowings 250,277,000, o u t o f a total o f $118,483,000 t o
1440 banks.
St. Louis,

1 4 5 banks, b a s i c l i n e 9 , 7 7 0 , 0 0 0 ,

a v vrape

borrowings 20,612,000, o u t o f a total lending o f » 27,805,000
to 594 member banks.
Minneapolis, 3 0 2 banks, basic line 8,639,000, average

borrowings 22,067,000, a total lending of 27,716,000, to
1026 member banks.
Kansas City, 251 banks, basic line 10,374,000, a w erage
borrowings ‘16,708,000 out o f a total o f 33,996,000.
Dallas, 3 2 2 banks, basic line 12,417,000, average borrowing 29,478,000, o u t o f a total lending b y the bank o f

$34,949,000 t o 860 banits.


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Federal Reserve Bank of St. Louis

26

Can Francisco, 1 8 5 banks, . basic line .19,259,000,
average borrowing (38,009,000, total 54,823,000,

t o 845

nemnber banks,

So i t would s s e m that y o u have still i n all t h e district
sone problem with your over-extended b a z

T

h

i

s table w a s

submitted t o the ..dvisory Council w h e n they werehere t h e
other day, a n d their opinion w a s asked 2 s t o the best means
of restraining those banks f r o m engaging t o o heavily i n new

operations when business should pick up, and what would be
the best w a y o f eff -cting a bett2r distribution o f the burden,
Their opinion was ssked a s t o the propriety o f considering
at t h e p r o p e r t i m e r e e s t a b l i s h m e n t

of a

progressive r a t e

ais
vith limitations, t h e idea being that i n case a n y further r e ductions i n rates were made, o r a n y #dvances i n rates should
be made, t h a t notice should b e given that i n case o f reduction
the n e w rate would b e applied t o t h e basic line only, o r i n
case o f odvance, t h a t t h e advancec rats should apply o n l y t o
excess l i n e s .

F o r example,

t h e y w o r e a s k e d t o consider t h e

propriety o f fixing a rate o f ons-hslf o f one p e r cent greater
on t h e f i r s t e x c e s s o v e r basic’ lins a n d s e c o n d a

maxinum rate

of a n o t h e r o n e h a l f o f o n e p s r c e n t o n excess a b o v e a n e x ceees Line,


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Federal Reserve Bank of St. Louis

es
The Advisory Council,

i n its recoimendation o n that sub-~

ject, s a i d i n the judgment o f t h e Council t h e most effective
vay t o handle t h e situation i s b y the personal influence o f
the Governor o f cach Federal Reserve B a n k o n the member bani:
borrowing t o excess,
Now, t h e B o a r d h a g h a d s o m e c o r r e s p o n d e n c e w i t h t h e
Under S e c r e t a r y o f t h e T r e a s u r y a s t o t h e p r o p e r p r o c e d u r e

in handling Geposits m a d e b y Federal Reserve Banks f o r account
of National Banks i n the five per cent redemption f u n d for
board
redenption o f national b a n k notes, andthe h a s suggested a
modification o f the present arrangement.

T h e Treasurer h a s

agreed t o the Board's suggestion, a n d there i s now submitted
for consideration b y this conference a proposed letter which
will b e presented first t o t h e Board f o r i t s approval, a n d
after i t i s a p p r o v e d w i l l b e s e n t t o e a c h F e d e r a l R e s e r v e

Bank.

T h e letter i s a s follows:

Wiew 2, 1928.
Dear Sir:
Practically a l l deposits f o r e¢gBedit o f national banks

in the Five Per Cent R e d e m p * i
o
n Fund against national
bahk note circulation are made through the Federal ressrye

banks and branches,


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Federal Reserve Bank of St. Louis

T h e Treasury Department has advised

28
the Board that i t i s desirable t h a t funds

d e p o s i y tnationeb d

al banks with Federal reserve banks and branches for credit

in the national banks' Five Per Cent Redemption Fund_accounts
should b e covered into t h e Five P e r Cent Redemption Fund
against national b a n k noté circulation o n the d a y they are
received

b y t h e F e d e r a l r e s e r v e b a n k s a n d branches,

the p r e s e n t p r o c e d u r e t h i s i s i m p o s s i b l e a n d a

Under

new procedure

has, therefore; b e e n suggested a n d has t h e approval o f the
Treasury Department a n d the Federal Reserve Board,
Commencing with M a y 16, 1922, e a c h Federal reserve b a n k
and branch will wire direct t o the Treasurer o f the United
States, National B a n k Redemption Agency, Washington,

a t the

close o f business e a c h d a y the total amount deposited w i t h
national

it by/banks for transfer t o the Treasurer o f the United
States f o r credit i n their Five P o r Cent Redemption Fund
accounts a n d i n t h e s a m e t e l e g r a m w i l l a u t h o r i z e t h e

Treasurer o f the United States t o charge t h e given total t o

the Federal reserve bank's (head office) Five Per Cent Redemption Fund account against Federal reserve notes a n d request
him t o cover a

like amount into t h e Five P e r Cent Redemption

Fund against netional b a n k notes.

T h e necessary authority

to authorize t h e Treasurocr o f the United States t o charge


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Federal Reserve Bank of St. Louis

29

the parent bank's Five Per Cent Nedsmption u n d account against
Federal reserve notes should b e given t o all branch banics.
nach Federal reserve b a n k a n d branch will mail direct t o t t
asurer o f t h e United States, National B a n k Redemption
vle giving t h e names o f national banks
to b e transferred
es for credit i n their
Gent Redemption F u n d accounts a n d the amount £ 0
ited b y each national b a n k named should also b e indicated,
The folloving code w o r d will b e used b y the Federal reserve banks a n d brsnches i n their telegrams t o the Treasurer
or

n

i

states:

DURB.AR C h a r g e o u r (head office) F

G

e

n

Redemption Fund account against Federal
a

t e e oe S N COVER like-etount 8 . Five P e r e n s

Redemption Fund against national b a n k notes.

U p o n

receipt o f schedule mailed y o u today please credit F i v
Per Gent Redemption F u n d accounts o f banks n a m e d i n
amounts indicated,

Upon receipt b y the Treasurer o f the United States
bank, o r a branch.
the above telegram from aFederal reserye

ox‘branches. thereof, the Treasurer will telegraph the Federal


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Federal Reserve Bank of St. Louis

reserve b a n k a s follows, u s i n g coce word:
DUSKY

H a v e today charged your Five P e r

1ecdemption Func account against Federal :eserve n o t e s
the following amounts,

i n accordance w i t h telegraphic

of t h i s d a t e m a c e b y ‘sour b a n k a n d branches:

(Name o f city i n which head office i s located) 4 »
(Name o f c i t y i n w h i c h b r a n c h i s located) $
:

Total amount chargeca has been covered i n Five P e r Cent
Redemption P u n d a c c o u n t a g c i n s t n a t i o n a l b a n k notes.
Upon r e c e i p t

o f schedules n a t i o n a l banks n a m e d therein

WLLi D e given credits,
Very t r u l y yours,

2 Od,
That i s submitted f o r consiceration b y the CGonferen
A&A statement h a s been prevared b y the Board's Division
of Reports a n d Statistics, g i v i n g first a

conparieson o f gross

earnings, current expenses a n d current n e t earnings o f
each Federal Reserve B a n k for

m o n t h s o f January, February

and a r c h 1 9 2 1 a n d 1922, a n d secondly a
agency d e p a r t m e n t e x p s n s e s

comparison o f fiscal

o f t h e Pederal heserve B a n k s f o r

khe first quarter of 1921 and 1922, showing for the latter
year ghe Samiount which has been absorbed by thé Federal reserve


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Federal Reserve Bank of St. Louis

ee
banks o n d the amount reimbursable b y the Treasury Department.
The F e d e r a l R e s e r v e Banks!

g r o s s earnings f o r t h e month

of January alone, 1922, w e r e ;5,232,000 a s against 415,406,000
for:-1921,

For Pebruary, 4,234,000 i n 1922 a s against :13,124,000
Soro soe:
larch, 24,468,000 i n 1922, 9 8 a g a i n s t »15,837,000 f o r
i9ek,
Gross expsnsés f o r January, 32,656,000 a s against
Se pea y O .

Gross exp?

i

n February, §2,500,000 a s against

2,649,000,

Gross expe) .

2 , 4 9 1 , 0 0 0 a s against 32,958,000,
~2,000,000 i n January, +3922, a s against

year 1921; February, 31,733,000 i n 1922
OG eeathet 210,067,000 i n 1921; ~ H a r c h 5315927 ,000,-14 1042

ag agsinst 210,878,000 i n 1921.
Here a r e t w o memorancums f r o m t h e D i v i s i o n o f Reports
anc sStatletics;

n

e f i r s t m e n o r c u d u m islatos

t o t h e res¢rve

for Government franchise tax, w h i c h refers t o this table which
I just b r o u g h t


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Federal Reserve Bank of St. Louis

t o y o u r attention,

bi
hie statement i t will b e noted that o n l sisht

32
of the banks h a v e “ e s s r v e d y
n
a amounts f o r Government franchise taxes.

I

n t h e c a s e o f Chicago, I

am advised that t h e

acerued portion o f end-of-year charge-offs a r e calculated o n
the assumption that authority would b e re.ussted f r o m the
federal R e s e r v e B o a r d t o s e t u p a veserve f o r p r o b a b l e l o s s s s

of .3,000,000 a t the end of 1922. C e r t a i n o f the other
norms

banks, o n t h e other hand, h a v e taken n o account a * all o f
special r-serves w h i c h i t may b e found necessary t o set
up o u t o f current n e t e a r n i n s s

a t t h e e n d o f t h e year,

By reference t o the regular weekly statements published

by the Board, i t will be noted that the amounts reserved for
Government franchise taxes h a v e fluctuated materially during
the past f e w wreke, s o m e o f the banks frequently showing reGuctions i n the amounts o f such reserves, d u e primarily t o
the fact that t h e bank's personnel i s paid o n the 1 5 t h a n d
last d a y o f the month a n d that t h e amount o f such payments
sometimes exceeds earnings C u r i n g t h e report weel.

T h e

amount ressrved for franchise t a x i s also réduced occusionally a s a
of a

consequence

o f a n incrsase

réserve b a n k , w h i c h r e s u l t s

i n the subscribed capital

i n a

like increase

i n the

amoynt-that thay be transferred t o normal surplus,


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Federal Reserve Bank of St. Louis

Corrent n e t earnings o f nearly a l l o f b a g Podsrh. reserve
‘eo

O58
banks

a e

nor cown

point

t o a

l

banks,

sars

same policy regard-

available f o r franchise
ing e n d - o f - y e a r

alm o uan t m
s

chargse-offe, e t e . ,

not followed b y all

is

the information published i n the weekly stateme nts
ong i t i s b s l i z v e d d o s e m o r e h a r m

eomewhat m i s l e a c i n g ,

we bl b e e x Aeclec t o U n d s r e t a n d

ag the public cannot
why freivent recuctions
for G o v e r a n c a t

f r enehnise

n h e amount ressrved

i

should

te

Gaxse

DOMES a l e o Liema4y
ment t h a t

Lal iy lees

sarnin. <

‘ n i n c e r t a i n ovnsn

banks,

tr
s accordingly
amounce r e s e r v e d
emer

thet the-pub l i c a t i o n

forGoverniasnt

b

ees

francnai

e ciscontinuea

of

Ola osuky

as

the publication o f the separate i
amounts

r e s erveca f o r G o v a r n n e n Ger o n

by t h e Governors a n d
ton beginning

Agente

at t h e i r confs:snce

Cstirable

i n Washing-

thought t h a t pcrhaps

Sees
egSa

_you m a y d e e n i t

WAH r e c o r m e n d e a

btiay au p before’
i
H the

t o briag

forthcoming Governors! conference,"


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Federal Reserve Bank of St. Louis

The B o a r d

t a syefore

w a oie. n

a

d

e
c

a

t

i

o Pn from the

Governors o n this memorandum,
The o t h e r c o m m u n i c a t i o n f r o m t h e D i v i s i o n o f Neports a n d

~vtatistics i f o n *he s u b j

i

n

g o f books o f Federal

reserve banke,

Ag y o u know t h e Federal reserve banks have b e e n closing
(on June 3 0 a n d December 3 1 ) coincident w i t h the declaration o f the semi-annual Ccivicenad.

I

n

the past this semi-annual closing o f books h a s b e e n o f some
advantage, h a v i n g enabled t h e banks t o build u p their surplus
funds formally uithovt avoiting t h e close o f the fiseal year

a whole, N o v , hovever, a l l o f the Fedzral reserve banks
except Dallas h a v e accumulated surplus funds equal t o 100
per cent o f their subscribed capital, s n d i t would therefore
seem that there i s n o longer a n y Good x 2ason
reserve banke' closing their books oftener t h a n once 2 year.
On t h e o t h e r h a n d , t h e s e t t i n g u p o f r e s e r v e s f o r d t p r e c i a -

tion a n d other losses o n June .

i

nsidsrable

confusion a n d m a y n e c e s s i t a t e t h e c o m p l e t e r e v e r s a l

o f exten-

give modification o f entries w h e n t h e books a r e finally closed
for the year, i n view o f t h e fact that amounts a s tentatively
set aside o n June 350 are merely estimates a n d have n o t been

approved b y the Fedsral Reserve Board,


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Federal Reserve Bank of St. Louis

Repréesntatives f r o m several o f the Federe
banks h a v e s p o e n t o r e g a r d i n g
from the closing o f books o n June

or not i t would b e possible t o obtain the Board's authorization f o r t h e b a n k s

on that date, I

t o ciscontinue t h e closing o f their books

can see n o acvantage i n closing t h e books

fyice 8. veer, a n d i n view o f t h e fects stated a b o v e i t i
recommended t h a t t h e b a n k s

b e instructed

t o close their books

Sh-oOf Vecenber S l only hersafter,
AueeCned Nereto i e a craft o f a Letterte b e sont o o
each P e d o r a l r e s e r v e a g e n t

i n case t h e Board approves t h e

endation, w h i c h i g submitted a t t h e present
88 i t may b e thought desirable t o bring t h e

the forthcoming Governors! Conference,
Ie
SUBJECT:

C l o s i n g o f books,

st i t has been the policy o r the
Go close their books o n June 3 0 a s u é
December 5 1 o f s a c h year, although t h e calendar y e a r h a s b e e n
considered a s the £


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Federal Reserve Bank of St. Louis

6

s

4

& number o f t n e banks n o w

sary t o setup substantial amounts o s reserves

MNaAanar
D 2 ¢
a m

aAvlount o f

ce-on June 2 0 have. 7 0

b

m a t e o r i a i l y

She books a r e finally

o

the booke o f
that- 45, o h peesernbss St,
de y
C she

payment

Of

o f the usual

r r serore

first h a l f

o f the

the Board not later t h a n June 20, 4
Very truly yours,

G o v e

This memorandum a n d the o n e I

b e f o r e were not

esived i n my office i n “ime t o be submitted t o the Board,


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Federal Reserve Bank of St. Louis

o
o
e y

they are submitted t o this Gonrerence without a n y

n

OT
Board a n d n o action b y the Board h a s been
ind time -to.get.to i t the
or
up f r o m G s l i f o r n i

dinary savings

checks agcoinst this account m a y be paid without
esentation oo. the p i

the matter

o

u

and a threat @

G o v e r n o r Calkins c a n

“ - e have one o f the pass books
v Ei

t a t e b a n k that i t w i

withdraw f r o m the
three p e r cent ressrve instsad o f a ten psr cent
They claim that t h e y a r e time deposits b u t t h e y
c i s e t h s i x

o p t i o n ,

B

u

t

(Sig: G a t m a t t e r

o f

f a c t

t

h

cy

d o

exercise their option a n d there i s n o limit t o the amount
leposite cemenced,

:

€

9

¢9

a

way o f having what t h i s t o m e r r e g a r d
demand c e i t , carry a t i m e de;

F

rather ingsnuous
w a e } i e , i n -ertect,

E

S

T

Perrin t a s t<fa-coe i

h

e Board

w a y clear

at the present t i m e t o modify i t s regulations,


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Federal Reserve Bank of St. Louis

There i s a matter which came u p recently f r o m one o f the

o8
to the: e f r e e b t h a t a b o u t a 2 montn

of t h e Federa
fo o n and complain that t h e order w a e x e c u t e d promptly,
PAs SxSeyutsd t w o
, the market h a d adva c s d a n d they wers
200,
Board,

T h a t i s not the iuestion which concerns

T h e question i s o s t o the p r a c t i c e o f Pedseral Neecrvse

Banks receiving ovders f r o m menber banks f o r t h e purchase a f
and s e c u r i t i e s ,

I

t may

be a

necessary service

order t o m a k e t h e s m a l l e r m e m b e r banks f e s

i n

i e t h e y ors

etifisd i n closing their accounts w i t h their o l a city corthere m a y b e some banks that h a v e n o city correslook t o the Federal Rese

B a n k t o perform this
Boarc n o t only a s

propristy

Banks p3rforming

the matter b e considered b y the Conference,
report 2 s t o what t h e practice i s i n each bank,


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Federal Reserve Bank of St. Louis

& bank i n Oklahoma writes “ I t h a s come t o m y attention

og

shat banks are very hegligent i n taking chattel mortgages
purporting t o give t h e m a prior l i e n when i n reality there a r e
sometimes numerous mortgages n o t released (and some representt

ing v n p e i d

stood los

e

h

x

r

i

s

e cagsse w h e r e t h e b a n i

e

t

i

g cebts a n d mortgages

n

on cattle t o twice their worth,
rediscovunting n o t e s s e c u r e d b y c h a t t l e mortgages,

require a

certificate o f prior lien,

B

t h e y should

y “they® I

mean the

The F e d e r a l L a n d Banke r e q u i r e t h i s

certificate a n d I think i t i s a very i s e precaution."
The writer o f that lstter w o s informed that t h e matter
would b e brought u p a t the Conference o f Governors,

Then I have here some correspondence with the
american Banizrs! Association regarding t h e ¢xt¢i
numerical

s :

s

o a g t o make provisions f o r Pederal

Reserve Banks a n d their branches,
I also have covrespondence h e r e which relates t o the payment t o the Comptroller o f the Currency o f certain amounts

for copiss o f reports made b y Hational bank
aré a l l familiar w i t h the situation which l e d t o the payment

of the amounts, a n d i t seems t o be the understanding o f practically a l l t h e banks t h a t t h a t w a s a


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Federal Reserve Bank of St. Louis

t e m p o r a r y crrangement,

40
and that t h e emergency which called f o r that p l a n having
been met, t h a t i t s h o u l d n o w b e discontinued,

that y o u appoint a

I

t i s suggested

committce t o confer w i t h t h e Comptroller

of t h e Currency o n thet subject.
Referring a g e 1

L é

i n c ® cepor4

a telegram which h a g just cone i n from ur, Perrin:
Your L e t t e r A p r i l -tywsnty s i s c n .

H a v e r e c e i v e d follow-

ing communication f r o m a n a g e r L o g Angeles Branch:

' 4 1 1 na-

“ional banks L o s Angeles h a v e regular savings accounts
three p e r c e n t n i n s t y uv days, f o u r p e r c e n t s i x months,

books presented f

é

C O T

per c e n t r e s e r v e c a r r i s d ,

a

n

d uwith-drawals a n d

pi
a

A l l national banks except

ave s p s c i a l a c c o u n t s

o n which three p s r

paid upon minimum balance o f five hunared dollars,

T h e s

| in commercial cepartment s n d ten per cent
Citizens N a t i o n a l h a s s a m e a c c o u n t e x -

minimum balance o n e thousand dollars a n d tio per cent

which they s a y intend t o maintain o n l y shree p e r cent resorve
unless s t a t e m e m b e r b a n k s a r e r e q u i r e d

we@serve a g a i n s t thsir special accounts.


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Federal Reserve Bank of St. Louis

t o w a i n t a i n t e n p e r ecsnt

T e l s p h o n e d ot ir.

Stern w h o states statement made t o y o u relative t o carrying
reserve o f three p s r cent w a s based o n misunderstanding o f
qaeeticon, L Y . C a r t o r i e c h a r g e e

o f diser

first t h a t n a t i o n a l b a n k s m a y c d v e r t i s e a n d accept s a v i n g s
accounts a n d i n v e s t f u n d s s a m e a s c o m n e r c l a l a c c o u n t s s e c o n d

that n o effort h a s besn m a c s s c e r t a i n custom o f national

banks a s relating t o savings dei B e l i s c v e s many
checking against savings accounts a n d that
should n o t require something f r o m them which
requiring f r o m netional banks.

F u . shermore b e -

special accounts a r e truly savings deposits b y
nature o f csegregation a n d investment

and

is u n n e c e s s a r i l y t e c h n i c a l a n d restrictive.

f

kger ene CdEe nee

writing y o u today requesting arrangement b e made whsreby h e
and kr. S t e r n argue thisquestion bofors Federal Reserve Board
immediately p r e c e d i n g o r s u b s e q u e n t
seventeenth.

P r i n c i p a l differei

t o June fifteenth t o
i

n terms o f s u c h deposits

is t h a t a t present s p e c i a l a c c o u n t s a r s a c c e p t s d b y national
banks w i t h o u t a g r e s m e n t a n d t e n p e r c e n t r e s e r v e maintained.

State banks a t least t h e security, accept special deposits
subject

t o resolution

o f B o a r d o f Directors

a n d signed agree-

ment b y depositor that thirty days notice may be required and


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Federal Reserve Bank of St. Louis

42
presentation o f p a s s - b o o k m a y b e required.

r e s e n t terms

secounts i n national banks o n which three p e r cent reserve
is m a i n t a i n e d t h i r t y c a y s n o t i c e a n d p a s s - b o o k required,

However,

b y uneerstanding, pass-book m a y b e left a t bank

and checks d r a w n ,

T h i s feature

i s n o t e n c o v r a g e d a n d report

of national banks is, i t i s used i n velatively f e w instances,"
Gentlemen, I

belisve that covers a l l o f the topics which

the Board wishes m e t o bring u p for your consideration this
morning, a n d unless t h e members o f the Board desire t o have
general discussion, I

would suggest t h a t t h e Board withdraw

in order that t h e Governors c a n get d o w n t o work,
Governor Seay: G o v e r n o r Harding, d i d you considsr Topic

No. 4 on the board's program a t all?
Governor larding:
I could s a y a b o u t that.

but I

T h e r e isn't anything definite that
o

f course,

a l l t h i n g s a r e possible,

do not think a n y legislation o n the par collection

system i s a t a l l prebableat t h e present time.

T h e Licwiadden

Bill w a s considered b y the committee a t o n e meeting, b u t n o
action w a s taken;

i t was pigeon-holed s n d nothing was done

with it.
(Whereupon,

a t 11:30 o'clock a , m., t h e members o f the

Reserve Board retired f r o m t h e conference r o o m , )


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Federal Reserve Bank of St. Louis

FEDIRAL RESSRVE BANKS

Hearing Room, F e d e r a l R e s e r v e B o a r d ,
Washington,
Tuesday,

D y Gy;
M a y 2nd, 1 9 2 2 ,

& conference o f Governors o f the Federal Nessrve Banks
convened i n the hearing foom o f the Feder
Treasury Building, YVashington, D .

at 11:40 o'clock a. m.


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Federal Reserve Bank of St. Louis

Present:

Benjamin Strong (Chairman), Governor, Federal
Reserve B a n k o f N e w York.
8 4, sores, Governor, Federal Restrve B a n k
of Boston,
‘George W . Novris, G o v e r n o r ,

of Philadelphia,
Rh. Pancher, Governor, Federal Reserve B a n k
of Cleveland.
George J . Seay, G o v e r n o r , F e d e r a l
of Richmond,


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Federal Reserve Bank of St. Louis

M. P . Wellborn, G o v e r n o r , F e d e r a l
Bank o f Atlanta.

J. B. McDougall, Governor, Federa
Bank o f Chicago.

Rh. &. Young, Governor, Federal Reserve B a n k

Bank

of St, L o u i e .

J. U. Calkins, Governor, Federal Reezrve B a n k
of S a n Pranc2e£co;

George L , Harrison,

D e p u t y Governor, F e d e r a l

Reserve B a n k o f New York, Lecretary t o theo
7
Conference,

eet i e ©fee gece cn Ssbe TR ners ee

The Chairman:

T h e Conference will come t o order.

Governor Harding has submittea quite a nuiwber o f topics
which were n o t o n the program seat t o the Governors prior

to the meeting,

T h e topice that were

rPeacral Ressrve Board, however, appear
title o n the program which y o u have, a n d I think w e probably
will h a v e t i m e t o defer c o n s i c s r a t i o n o f t o p i c s t h a t w e r e
not o a t h e p r o g r a m u n t i l a f t e r « e h a v e f i n i s h e d

r e g u l a r

order o f business,
Tf t h e r

W

i

L

L will start w i t h t o p i c « .

NWS AND POLICIgs,
A, B a n k e r s A c c e p t a n c e s
tS

s i g n - Operations u n d e r n e w :
tions o f F e c e r a l Reserve ssi.

Richmond a n d San Praacisco h

s u s g s e t e d this topic.

Governor Seay: G o v e r n o r Strong, I
be a n error i n the

think there must

e m s : t h a t that subject h s e come f r o n

Richmond,
The Chairman: I

h a v e before m e a

menorandus

arch 50th, addressed t o ir, Harrison f r o m the Pederalnessrve
Bank o f Ricamond, w h i c h w a s t h e result o f the conference,


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Federal Reserve Bank of St. Louis

46
g

e

v

r

e

tnh a ti t th e sp r ae c tgi c ec iun ts

,
as

s
with aec c e p t R
ances

should b e brought u p a n d
co n o b s u p p o s e t h i s n e s d b e

you, b u t i t cane fro. t h a t meeting a t

Governor S e a y :
“ichmond,
e Chairman:

h

T to p a g s i t o n t o

Governor C o l k i n s ?

ronreTéa
voG
The Chairman:

Governor Calkins I

Go not know that
Tt appears t h a t there i s still op-

constructive t o offer.

portunity f o r u s t o learn a
ances,

d d e a l aob o u t b a
on k s r s ga c cept-

u y own view i s that there should b e n o unnec
L

e a t i oC
n,

S f e a r y
wee

p u r-c h a s e -9 O F Ghahever
S
Q you

export transactions,
and w a t c h v e r y c l o s e l y t


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Federal Reserve Bank of St. Louis

o get i n t o a

c=

Sc

v e r y l o o s e practice,

v e r y u iNuss

Sp Le practices,

district t w o examples o f first, u n familiarity o f bankers w i t h t h e u s e o f acceptances;

a n a

a disposition tovse t h a n for iliproper purposes, I
believe that t h e late ruling o f t h e Federal Reserve Board
leaves t h e guestion o f what i s o r what i s not a

bankers accspt-

ance t o the judgment o f t h e individual Federal veserve banks,
T c a n s e e n o better p r o c e c u r e t h a n t h a t t h a t b e a c c e p t e d

our action taken inds osndent ly. h a g y proposal o f the
topic w a s l a r g e l y f o r t h e p u r p o s e o f b i i n g i n g o u t d i s c u s s i o n
to g e t t h e e x p e r i e n c e a n d p r a c t i c e

The Chairman:

i n the other districts,

p p o s e 2 s t o the foreign bill t h e

principal business c o n d u c t e d o r originates o r arises i n
San Francisco a n d

of exchange, I e n ' t that true?
Governor Calkins: I

think &6,

place i n which considerable influence m a y b e used, a n d that
ie i n regard t o the syndicates’ acceptances.

T h e practice

so far a s w e know it, i n regard t o syndicate acceptances,
has b e e n t o leave a l l o f the details «egurding t h e acceptance
to t h e p r i n c i p a l b a n k i n t h e syndicate,

a n d i n many cases

the other accepting banks i n the syndicate h a d -no information


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Federal Reserve Bank of St. Louis

48
and simply actedupon t h e judgnent o f a Now York,

o r some

other bank.

The Chairman:

a f t e r all, t h e r e not a

of t h o s e s y n c i c a t e a c c s p t a n c e s . :

very great number

B E particularly s u g a r ,

it not?

Governor Calkines:

N o t a t the praesent tine, T h e r e

have b e e n i n the past o f course,
now, I

i

t i s particularly sugar

do-not b e l i s v e t h e r e i s a n y p l a c e a t t h e p r e r e n t

time for

e r s ! acceptances i n cone

that t h e u s e o f b a n k s r s a c c e p t a n c e s

a

d

i

. think

i n domestic t r a n s a c t i o n s

has b e e n a misuse v e r y gensrally.
not v e r y many, t h a t have come t o our attention,
Governor Calkins, t h e cifficulty about
precise r e g u l a t i o n a b o u t d r a w i n g b i l l s a n d a

letter

Lit issusd f o r the purpose o f moving co:wodities l i e s
in the fact that that bill naturally originates

in a

country i n relation t o imports t o this
quite impossible t h a t corimercial concerns, disposing o f goods,
or even banks, scattered throushout t h e sorl¢, s h o u l d undsr-

In gensral I
countries u n d e r


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Federal Reserve Bank of St. Louis

believe t h a t shippers o f goods i n forsign
n

d t h e bankers a c c s p t a n c e s

i n

49

ereat deal better than w e do and that thers will not be many
of bills c o m i n g t o t h i e market, r e p r e s e n t i n g imports,

that a r e n o t generally drawn i n conformity t o accepted banking practice,

I f w e recognize t h a t fact w e will remove a n

obstacle to. t h e d i r e c t i o n o f a

certain f l o w o f b i l l e - t o t h i s

country that w e all vegard a s desirable.
The export bill i s a n unusual instrument t h a t h a s really
grown ovt o f the war,
be v e r y m u c h G i f f i c u l t y
sent regulations,
senting e x p o r t

E K do not. believe there i s going t o
i n controlling that under t h e pre-

T h o s e banks t h a t grant acceptances repre-

o n cotton a n d other commodities

i n New York

know p r e t t y w e l l n o w h o w t o h a n d l e t h e c r e d i t s a n d w h a t t h e

bill should be like, a n d where they don't know they come t o
us a n d aek,

I

T apprehend t h a t t h e c h i e f d i f f i c u l t y g r o w i n g

out o f t h e u s e o f a

bank's l e t t e r

o f credit

i n coanect ion

with the moving o f goods, i s going t o be the domestic transaction t h a t y o u r e f e r t o ,

to handle.

I

t is a

mighty d i f f i c u l t t h i n g

Y o u cannot d o it by regulation.

of education;

i t is a

matter

I t is © matter

o f setting u p a

tystem o f ex-

perience w i t h certain conditions.
we have tried t o reduce this program t o such shape that
we W i l l d i s c u s s s p e c i f i c t h i n g s


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Federal Reserve Bank of St. Louis

i f poseible,
£,

a t t h i s Sm e e t i n e

s

50
ana I

have t a k e n t h e l i b e r t y o f makings.» r e c o n m e n c a t i o n f o r

action b y the conforencs, i

n o r e than a

o a s t o h a v e somethings

would like t o have your views about i t s n d know what y o u
think a f t o whether i t vould inset t h e v e n t i o n which y o u
mentioned a n d which w e are quite conversant w i t h i n ifew
York,
Our view i s just about
at is, that there i s n o occasion f o r
n discussion t o any considerable extent i n regard t o bills
import p u r p o s e s ,

export purposes;
call i t a

regulation,

a

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

t t h e regulation,

o f bills m a S

i f . e have t o

for c o m e e t i c p u r p o s s e

will necessarily b e left f o the incivicual judgment o f t h e
al ressrve banks,

T h e y willl have t o t r y t o

correct abuses w h e n t h e y find t h e m b y such means a s
for c o r r e c t i n g s u c h abuses,


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

a n d w e h a v e sample means,

siviced, y o u will notice, i n t o t w o
first action might
foreien D a d , t u e t 4

e

import a n d

ovr v i s w t h a t t h e c o m e s t i c

iifferent category.

bill

I inquire w h a t i s t h e
policy?

v

h

a

t e x t e n t t h a v e t h e largsr b a n k s i i

in g r a n t i n g e x p o r t c r e c i t s , c h a n g e d t h e i r j
ence t o cocwmients;

t o «what e x t e n t a r e t h s y m o d i f y i n g t h e i r

ith segard t o sxport bills?
uncer t h e n e w r e g u l a t i o n ?
uncsr

The Chairman:

t T Go not think

Governor Fancher:

offering o f documents?
The Chairman:
Vernor

F o n

we uncovered b a c k t r >

three years ago, t h a t

some abuse i n :egard t o export bills; that they
in some instances, : e a l bills,
The Chagrnans G o v e r n o r Fancher, l e t u s
a bill i s draun i n connection w i t h t h e export o f goods.
Jhen i t reacnes t h e Pederal reserve b a n k w e d o not l o o k t o
security o f t h a t b i l l a t a l l . ‘ i g l o o k t o t h e v a l u e

acceptance o n the face o f t h e bill, t h e bank, a n d
another baxzk, a

think invariably nou, i n Hew York, t h e y have thres obligors,


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

52
drawer, t h e acceptor

n d t h e encorser, a n d I

a m wonder-

whether i t i s goings t o b e wise, a s a permanent policy,
for t h e F e d e r a l r e s e r v e b a n k s

t o g o too ceeply i n t o t h s

question o f documents anyway.

Governor ..cDougall: I

belisve, i n the

regulations, t h e Fedsral Reserve banks t h e m
been tolc that t h e y a v e a t liberty t o engage i n this
ar t h e terms o f t h e ! j
quite right, t h a t a s

a

fn

GO,

t

h

n

a

e

t y o u are
w order o f

things i s soing -into =< e t , thet w e should b e careful w i t h
POEDIOt t o the: nen t h a t appear o n the bills.

un, hovever s a
quote i t accurately, ‘ u t i n connection w i t h t h e N e w York
letter, t h a t w a s p u t o u t f o l l o w i n g t h e w i t h d r a w a l

o f the old

regulations, I . think c o n i m u n i c a t i o n w a e sent t o those o f
the banks which wers engaged i n acceptances,

tha

husiness, calling attsation t o ths vithdrawal o f t h e regulation a n d stating i n effect t h e t those o f y o u who intsnd t o
inc Bate -c4as8 o f pus inéses: bac better coerie s o e

th

eserve B a n k o f N e w
may a r i s e w i t h r e s p e c t


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Federal Reserve Bank of St. Louis

The Chairman: I

to
think w e c i d n o m o r e t h a n t e l l t h e n

ovlad b s glad t o
Governor iicDougall:
The Chairman: I

do not think w e went

acsume responsibility o r pass generally o n credits,
Governor :.cDousall:

L e a i n right i n m y under:ta
circular w h i c h y o u d i d

egard t o t h e matter.
Thos Chairman:

“611,

w e have t o deal w i t h t h e question

not p s r m i t u s

touch with t h e accsstance proposition, t h e
that accspt, a n d see i n a gener:
conducted i n conformity w i t h t l

y a y t h a t t h e business

a w

v

e have certainly

now t h e responsibility o f makina
ux. arbutrg,who h a s

very much e r e s t e d i n having the old vsegulations
to propose v e r y seriously that
have a

all t h e


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Federal Reserve Bank of St. Louis

board o f sxaminzors w h o « o u l d v i s i t

s e e that w e a c c e p t i n g bills a n d t h e banks, a n d

4:
Look inte thsir methods t o see whether t h e y were sound, a n d
BO On, I
Tt i s a

do not agree that that i s t h e wise w a y t o d o it.
sort o f p a t e r n a l a t t i t u d e t h a t w e }

n o t assume

toward t h e member banks o r t h e accepting houses.
all w e c a n d o i s t o gensrally keep i n touch, a n d n o w a n d then
will have
offered t o u s which < o not
y o nttheir
i faes,
l
i

b

i

g

i

l

weewill

put o n notice that p e r h
in accorcance w i t h t h e intention o f the law, a n d then wwoe
vill have t o send f o r a responsible psrson a n d find out.

Governor licDougall:

“ i t h respect t o bills éhaged o n

sxport, Gocuments i n the f o r m o f bills o f lading must come
into existence a t o n e time o r another.

C a n y o u conceive

of a n y w a y i n which t h e member b a n k c a n b e sure o f its ground
Inless i t continuss
these bpiitis, 2 1 r

a h n e r e t o the o l d p
a t t h e time o f the acc2ptance o r later?

The Chairman:
hadéLed.

I m tue s A p o r t s i r a d e . o 0 n Cleanibills.

n
e r v e the cred
3

of t h e c l i e n t o f t h e b a n k t h a t i s s u s s t h e l e t t s r o f c r e d i t
surficient

t o justify a

c l e a n bill.

T h a t has not been

unconmon i n the history o f craving bills o f exchange,


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Federal Reserve Bank of St. Louis

PRS w a n O L e point. 4

h a r e

o l a rtee. vowune c o t

“

accepted, doses thse ersdit c o n d i t i o n o f t h e exporter,
She v o l u i e o f business

o r t h e character

O r Coes

o f t h e transaction

the aocuments

a e

bilt-and

truat receipt i m speek a vay
YO v e Want f o g o

OF S6curity o n d
SF

Rat essa?

the ¢xport bill hoi feasible i s i t t o d o that a n y
normal procecure i n treating s bill o f exchange
nerestion i n wollen ths

the goods
See

e u verso.

f e r e r e h s

B i e ,

possibly,

o f pacar

going t o ..frica, ‘ingland o r G e r m a n y » i t h b i l l s densertured

anc ciscountsc i n Hew York, a n d b y Ceianding t h e documents
4.

titles

t o t h e goods, w h i c h i s i n a

acd inims

A e

value
Governor
to h a v e r e c o u r s e


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Federal Reserve Bank of St. Louis

O

w

C o e

ioreizn c o u n t r y

C u e s PF. Naving F E c o u r s s

to

58

CALL ECuLtY.

Y o u know t h e w a y ovr cotton business

was handled i n Liversool i n past years.

v

e

n

t

Liverpool o r London a n d t h e docur.ents w e n t there,
cotton a r r g

i

s o l d a n d then a whole n e w s e t o f

wags frejiusntly c r a w n o n wianchester, L i n c o l n s h i r e

o r other

mill people w h o were buying t h e cotton.
Governor H o r g s ;

I

n Boston w e g o t t h e impression f r o m

he New York Bank's letter that i t was a wise thing t o do;
reading a copy o f the letter which has been referred t o
which t h e New York Bank sent out, i t seemed t o indicate a
very c a r e f u l o v e r s i g h t

The Chairman;

J

o f a l l b i l l s a n d i n y u i r y a b o u t then.

e are going t o d o i t a s well a s w e can,

Governor Horses: n

that letter, “That

the responsibility i s placed more cirectly t h a n heretofore
on the Fedsral xeserve b a n k t o pass o n the s i b i l i t y o f
import a n d export acceptances, a n d t o avoid possible misunderresulting embarrassment y o u are invited a n d
to consult t h e orficere o f this
biice t o time under consic.ration involving

the point,

w e invited t h e m t o

Cone 1 0 .


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Federal Reserve Bank of St. Louis

Govérnor i o r s

T

h

e impression i t made o n u s w a s that

and i f

ery bank t o cous i n
your acceptances 3

‘a!

7

A

bi i

a l a e g a m ess
ei
eepra

.

GOVEYrnNnor

:

that the h o l e
brouzht u p a n d

brougly L i Boston,
sive y o u a n i l l u s t r a t i o n

of

SL boo a w a d -OL-tbhe
faire.

e e e e e e

large corporation h e d outstanding a great m a n y bills, v e r y
large i n total o f dollors, drawn agsinst 9


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Federal Reserve Bank of St. Louis

imately t o b s g o l d a :

product which

n o v e d T h o s e bills ters

o8
beo w e t .

w T

t wta e o n e

Governor C a l k i n s r a f é s r r e d

ciftieulty

s t the. t i m s

find o u t b s f o r e t h s s e
S n o t -leos-tboan

knot, 2374

o

office, show3d us

v

h

u

r

a

t their p

up o u r m i n d s t h a t

not t h i n k

ue 6

your cocuments
certain condition a n d they must b s atts: Y
PWG enous p i l i a s e :
Governor horses:

1 2 tat
O

in

to- the Bitia,”*

a e d ee

f course w h e n “ o v take =

case

o f

, they a r e extraordinary operations,
not o n l y

‘ L . a r i l y large, b u t l i a b l e t o h a v e c o n z i t i o n s

attached t o them which are out o f the ordinary. I
say that i t would b e very proper,

o f course,

t o consult ¥ 3

the Pederal Reserve b a n k a n d get i t cown right,


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Federal Reserve Bank of St. Louis

should

B u t w e got

9
which, “ou-ho

m

n "OUr- Evabonens h e r e w o r y much

ocifiec, t h e t t h e ordinary commercial business, w h i c h i s
carriea

o n n o w a t a n y r a t e b y banksrs w h o u n d e r s t a n d t h i s

thoulc agrse, t h a t that
bo all inten#s a n
transaction--+-

natural, Governor iiorss,

also t h e banks t h a t
ave going into this busines
eicsration o r un:

1 0 u L C S

i o pYrseiec

a n d i n g ag t o just h o w they s h o u l d ;
opine plsee

feetly natural thing, b u t

i

s wholly s n impotsible t h i n g

You cannot m e e t a l l t h e s e b o r d e r L i n e

constantly arising b y a n oxact regulation
every case hypothotically,

£ 0 how c a n w e deal vith it?

ie haven't built u p a long expsvience a i d eustorn i n the

market, a n d I thin

a t u e have got t o deal sith i t i n a

general w a y b y keeping i n contact « i t h t h e market.
an i l l u s t r a t i o n of- how. ths

i n g e c im

some years a g o when I wes i n London I

o t h e r markete,

went i n t o t h e office

of t h e U n i o n D i s c o u n t C o m p a n y - - - i w . s u g e n t


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Federal Reserve Bank of St. Louis

T u t t ag”

t

h

e head o f

60
and h e brought o u t a portfolio o f bills,

o r at

3 e n t through t h e m togefrom ail over t h e wokld, r e p r
goods imported into t h e London
criticise t h e m a s h e o r a
ag t o
according

t o th:

Thsyre was Just one bili which
and that hanpened t o b e a bill crawn
american corporation i n Brazil, represenuz ' u b b s r e x p o r t s
to London,

w h i c h W a s a r a w n v v o n anoth:
wa

B

of accepting ! >

k

r e p r e s e n t i a g rubber exported

n e f ei

good and ..ell ¢ n ]
that i s ,

i t

h

e e s Ol o r

a
e

s vhat w e call 'pig o n pork',

G r a t e 2

I

t w

i , G r a w n o n B,

1in6 b a n k e r s w i l l

exp.rience o n this t y p e o f bill that
discrimination,

p u r p o k r e

bill which 1 s perfectly

e same concera,

and 4 owned B, y o u see,

e e k

i c o r p o r a -

tion i n London, w h i c h

from Brazil.

i

v

l e a d t o very

b u t i n ths n e a n t i n e

in touch a s those things c o m e u p
with t h e best means t h a t w e can, a n d gradually w e w
velop a


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Federal Reserve Bank of St. Louis

practice t h a t a l l the banks underst

Oo

voy o r coiling it, -Gne that i s t t e r o f ours: sirpiy
invites t h e m t o c o m e i n a n d confer w h e

Governor Seay: i

s

=

n e y a r o d n doubt.

‘uestion o f practice which

With respect t o Szport bills.

t T Re licvs t h e
over t h e

rule, %
i-tbink: i n geusral i t voulG, yar,
Gvawer, accestor a n d @ncorssr, I
Governor o £
the “vestion

n

think i t could,

e exporter o f tobacco t o Japan brought

w i Weowsyatieet

i f GLE tr

T

i

e had a

scaneaction bassd upon s i x months consu..mation, I n a s m u c h a s
&@ninety d a y bill pzrhapsat a

little better

months bill, h s wantezd t h e bank t o make a
sy acesntance a n d p r o b a b l y renew that, i f the bank

did not take it up itself.

D o you iieet vith that practice,

and d o y o u vegard that a s 5

leg

The Chairin

T

h

m e practice?

s Board h a g ruled o n that #anyway.

Gover ~ e a y : b r a v i n g two bills a t ninety days each
when t h e t r a n s a c t i o n avowedly,

f r o m t h e beginning,

w i l l re-

quire s i x months i n consummation,
The Chairman:

T h e B o a r d r u l e d u p o n that, p r i o r t o walk

ing the ruling i n regard t o our purchase o f s i x months bills,
and the ruling was substantially t h a t that venewal bill was


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Federal Reserve Bank of St. Louis

62
alt ciple g o

u k 3

‘epresentec a

senswal that w a s neces-~-

sary t o t h e complstion o f t h e transaction.
I think
Governor Seay: / Phat w a s t h e position r e took i n the

hairman:

Governor scay:

a

t w a s t h e p o s i t i o n o f t h e board.

T h a t «would bscome conmon practice,

if

had a transaction requiring s i x months t o consummate, a n d
day bills, w h i c h voulc probably have a betta

The Chairnan: I
Governor e a y :

think that v i l l happen,
s n d y o u c o not regard tnat w i t h disfavor

a great m a n y such bills m a y b s
to get t h e credit.
Governor Calkins:

T h a t k i n d o f subterfuge cannot b e

avolasc


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Federal Reserve Bank of St. Louis

The Chairiian: I
Governor

think not.

Ca

we u O T a l o

t o e ed

of t h e transaction,

but f

how that proctice c a n beavolced, a n d w e d i d not

think i t wag a t 211 unsound,
The Chairman:

A f t e r all, Governor Seay, y o u have got

to g o back t o the real origin o f t h e bill o f exchange, w h i c h
Wos some hundreds o f ysars ago, w h e n a concern i n one place
sold a bill o f soods t o a inerchant i n another place, shipped

bill, the bill was paid out o f the prothe g o o d s w h e n i t s r r i v - d a t destina-

That w a s t h e origin o f t h e bill o f exchange, a n d a s
the bills conform t o that principle, t h e y appear t o
be reasonably sound.

‘ h a t action d o y o u wish t o take, Gover-

nor C a l k i n s ?
Governor Calkins: T

move t h e r i r s t r e c o m m e n d a t i o n s u b -

mitted b y New York, t h a t o n e officer i n each Federal weserve
bank b e appointed t o b e res :onsible f o r s u c h operations, t h i s
o:ficer t o keep i n touch with each other bank's representatives, a n d with the counsel o f t h e Board, a l l t o meet w h e n
& a cormittee,
Governor icDous: T
The Chairman:

I

will s e c o n d t h a t motion.
e there a n y further discussion o f t h s

motion?


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Federal Reserve Bank of St. Louis

(Theere was no Ciscussion and the motion was unanimously

The Chairman: N o w , g e t e t a s second gart
tion, Governor Calkins, t h a t a subcoumittee o f
uting n e a r b y b a n k s b e a p p o i n t e d

Governor Calkin I
i Suppose

t o meet

do not know what i g

i t i s m e r e l y coneuitation,

that a

subcomiittee o f officers represen
to mest w h e n occasion srisss,
Sevubconmitt<e w o u l c t a k s t h e p l a c e

of t h e comuittce first « e r e r r e d to.
The Chairman: I

I s that t h e icea?

think t h e point

arise f r o m t i m e t o t i m e s h o u t o i i i e s h i

1

S

lly ieeued: i n New York, b u t ©
in ciffeyent districts around N e w York, l i k e
Boston, Philadelphia, Cleveland, fichmond a n d s o forth,

in

thoge cases, i f t h e jonfsrence felt i t desirable t o d o it,
a subcommittee o f officers w h o are near N e w York vould meet
casége, consider t h e m
laformal a d v i e e

Governor Calkins: I

t o the rssérve

belisve t h a t t h e practice among

the m e m b e r b a n k s o f p u r c h a s i n g b
5 ills h a s been more esneral &


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Federal Reserve Bank of St. Louis

65
in the S a n Francisco District t h a n i n any oher, except N e w
York a n d possibly Boston,

g o that “ve are very much concerned

in that dsvelopment.

The Chairman:

V e want t o keep that iarket straight,

Governor Calkins, a n d this would b e a means o f doing it, w i t h
the cooperation o f representativ

o f nearby districts,

Governor lioets

vould i t not?

The Chairman: i

think so.

Governor liores:
The Chairman:
when i t bsgan

b e n p o r a r y co.mittese.
I

t o ork

t would b e a
we

o

s t a n d i n g committee,

O vefsr m a t t a r e

and

t o the comitte

that w e might otherwi
at these meetings.

Governor i.cDougall: I

have a memorandum which has beer

prepared about this matter w h i c h I would like t o put i n the
assumed that nearby
ral resorve banks,

T h e might

bs desirable, b u t A f t h e committee provided f o r under t h e
first recommencation i s active e n d maintains a

central of-

fice, t o which special inquiries can be addressed, thers
WOuld b E n o n e e d f o r a


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Federal Reserve Bank of St. Louis

subcommittee, I

d o n o t k n o w whether

you contemplate a

central office o r anything o f that sort,

but i f s o the central office c o u l d communicate w h e n necessary
with t h e members o f the committee, sending copies o f inquiries
and decision reachec t o all federal reserve banks f o r their
information,

T h e mainkenance o f such a central office w o u l d

probably save consic rable expense w h i c h otherwise w o u l d b e
incurred t h r o u g h attendance

elisipility o f .pilis,

2

8 t o passe u p o n t h e

s h o u l d a subconmittse b e established
would still remain t h e
action would b e approved b y

the gensral committee.
sary thot a

L t , r s f o r e , w o u l d s e e m unnece

subcommittee b e

ment o f a general committee havin , ¢
cesirable,
The Chairman:

“ h a t d o y o u propose, Governor icDougalP

Governor “icDougall:

Y e want t o know vhat y o u propose,

as t o uhether y o u h a d i n i

havins h s a d q u a r t e r s

place where stameone would r ¢

The Chairman:

2

a t some

c o m m i t t e e o f twelve,

8 C o m m i t t e e would have t o have

headquarters,

Governor lcbougs1ll:

“ e think that might b e done, a n d

if s o , t h e n p e r h a p s t h i s s u b c o m m i t t e e w o u l d n o t b e necessary.


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Federal Reserve Bank of St. Louis


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Federal Reserve Bank of St. Louis

S7
Governor Calkins:

W i t h regard t o the subcommittee,

if that i s approved, I

would like t o add a provision that that

subconmmittse k e e p all t h e other banks informed a g
taken,

v

e cdo n o t w a n t a

t h e action

subcommittee o p e r a t i n g t h a t n e k n o w

nothing about,

Governor N o r r

e

think i t w o u l d b e r a t

y

: £

P

E Iew

covubtful question u ¢
to t h e subcommittees

The Chairman:

should

t o cetermine whether a

referred t o the one o r the other,
s

P

b o t h committser I

h

e g e n e r a l conmittee?

E a x thie i s intsnded i n the first

rssolution, t h a t
bank w h o will b e o f f i c e r t o keep i n touch with thi
ter, a n d t o w h o m c o v m u n i c a t i o r s v o u l d b e addr<

sub fect,

H

it might b e a

e will b e the go-bstween,

T t i s indi cated that

good t h i n g f o r t h a t committsze t o m s e t s o m e t i m e

and get a better comnon understanding c

i e subiect, a n d

that o n c e having met--- pirhaps v e r y infrequent meetings--avenue o v source

o f inrormetion w o u l d b e entirely through

subcommittee, w h i s o u l d b e more active a n d relieve
meeting,
in p r a c t i c e q u e s t i o n s w o u l d

68
gens

r

e

f

e

r

r

e

d

t o the subcommittee

and.a mseting

of

the general committee w o u l d n o t b e necessary unless there
wexve s o m e b a n k s t h a t d i d n o t a p p r o v e t h e : e c o m m e n c a t i o n s

of

the subcommittee,
The Chairman: I

should s a y that w o u l d develop naturally,

Governor Norris, a n d £ 8

f

e questions w e r e referred t o the

designatec officers o f the Federal reserve banks, a

gre

many questions would accumulates, a n d after a while
of the larger committee might b e necessa
Governor Calking:

I

n other w o r d s i n operation i t would

appear t o me that t h e general conmittee might deal w i t h principiss,

i f y o u w a n t - t o c a l l i t that, a n d t h e s u b c o r m i t t e s

would deal w i t h practice?
The Chairman:

W a t h individual cases,

Governor Calkins:
Governor iorss:

w i t h the individual cases, yer.
I f y o u h a d a n officer, n o t f r o m each

pank, b u t f r o m banks that a r e near t o New York, a n d could be
4

concentrated t h e r s - - -

The Ghairman:
do not want

=

a

tG Io sugez¢

t i s exactly whe
N e w Y o r k necessarily,

to have t h e committee m s e t a t some other point.


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Federal Reserve Bank of St. Louis

Governor Mores

N e w York i s a natural place.

Governor N o r r i s ;

T

L

E

second

m o t i o n ,

there a n y further d i s c u s s i o n ?
the m o t i o n w a s

your v i s w a b o u t
TAVOuULe b a k e s

suges

i

s procedure,

that

Gd2signate
resolution, a n d 4 d
I will d e s i m a t e

wr. Kenzgel i n ovr bank, a n d as
Ave reesived w e would then send a n invitation f o r a
ve designated i n such banks t h a t a r e near enough

“0 NewYork t o cnable them t o attend, a n d ve would probably
invite m o r e b a n k s t h a n w o u l d c a r e t o a

So g o a e far 5 5 Chicago,
Governor

Calkin

y

t

C


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Federal Reserve Bank of St. Louis

T

6

i t would

bs

S a th h e e e e m e e t i n g ; p e r h a p s

not a t a n y other mesting, b u :
““@overnor ifcDouga

would l i k e

i f they care t o come,

r e s i n s 6

sO h a v e a l l b a n k s repr:

s n d , but I

t h e first meeting,
f

S

r

i

O e a

e e eae
£ committee,

ean a l l m a k e c d e r i e n a t i o n s

now it


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Federal Reserve Bank of St. Louis

Governor

HeKenney: i

will - c cbienate e o

e r ron.

covernor

Mi Lier: I

Governor

Wellborn:

J B e x rile ierd epee rele urcartes someeeiels
= oa
v

Governor

Fancher:

E

will d.:eignete lr. Jorthington.,

i Will-éesienate- r y , s u r ilinden,

t tili teeienate 17, Abteroury,

Governor

arentonantasimmnad

Governor

Calkins:

Governor

Young: 1

Governor

LieDougaLll:

Governor

peeys

Governor

our

and s r r a n g e
oO

O

Norvis ; P

Tne Chairman:

e yee

-VAee

l RRs

Governor

completes

h

Ure

t

B u eien.

en Ge Axon

C a e nny :

< haves c e s i t nated i2, Renze2.

committees a n d i f satisf c t o r y w e will s o shead

for a meeting a n d let t h e m work o u t t h s subcommit-

tse,
will c o m e

Governor

their m e n b e r s h i p ,

Gobaadee
,

The C h a i r m e n :

this

committee

point a

o f

chairman

twelve.

g seu b c o m i t s sse

gt might
o b e oai

pro t e i until t h e y

eee. s

chairman,
Governor }iorss:

w i l l cYo n e f r o m

i would nominate it:

d itd e a

c

o ap-~

t their o w n

for t h a t position,

Governor Calkin

I

t wouldb
e necessary t o secure t h e

approval o f the Federal Reserve B o a r d before a

meeting could

Re: Heid:
The motion n o w i s t o appoint Mr. Kenzel
irman p o t e n
any further discussion?
no further cis cussion a n d the motion w a s unanimously carried, )

airman:

N o w , No, 2 under 4 is “Domestic

Governor Calkins, what a

h a v e you t o recomend w i

regard t o that?
Governor Calkins;

O n this p r o g r a m t h e reconsndation

is mace b y llewYork,


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Federal Reserve Bank of St. Louis

The Chairman:

T h a t i s merely a

suggestion Looking

ward progrere i n gstting action o n it,
Governor Calkins;

T

a ;

know what t h e intention
there i s a t t h e

‘ssent t i m e practically n o place f o r coiestic bankers

There a r e various instances t h a t w e have obthat l e a d t o thst c o n c l u s i o n ,

a n d t o the opinion that

72
cGomestic b a n k s r s a c c e p t a n c e s w i l l b e abused, I

s6ént t w o examples,

can o r e -

O n e case h a d t o d o with a n acceptance

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

matter

o f specula-

tion a n d which was carried probably for a ysar a s export, a n d
another c a s e i n which a n acc-ptancs
on j a m i n storage,

I

n both cases i t happens that w e discus-

the matter v i t h t h e operating officers o f the bank a n d
tted a t once that t h e acceptances w e r e improper,
ineligible a n d illegal a n d everything that t h e y should n o t
bs, a n d that t h e y would n o t d o i t again,

I T could not s e e

anything that would convince m e that i t was necessary o r cesirable f o r the board t o extend t h e u s e o f domestic bankers a c céptances

b y r e g u l a t i o n o r otherwise,

The Chairman;
acccptances

w e will probably fina, i f w e are t o have

i n connection w i t h comsstic transactions, t h a t

they w i l l b e t r a d e acceptances,

a n d that w e will n o t i s s u e

any banle rea credit. a t ali,
Governor Calkins:

t h e y h a d better

Governor Fancher: I
Governor ‘“ellborn;: s
aomestic bankers acceptances,
Scope of: tnem?


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Federal Reserve Bank of St. Louis

b e t r a d e acceptances.

think t h e y h a d better be,
i t your i d e a t o d o away with
o r just simply not extend t h e

73
The Chairman: I

think i f t h e y are g o i n g t o disappear

fill cisappear o f their o w n volition, without a n y
aid f r o m us,
Governor . i e l l b o r n :

are concernec,

The Chairman:

t h e y a r e neglicible,

D r a w n o n a banker's letter o f

Governor Wellborn:

N o . I

mean the bankers

for t h e assembling o f cotton, f o r instance, preparatory t o
making shipment.

The Chairman:
GO n o t

1

S

d

o

: Sth.

Governor .ellborn:;

e

s t h e bank issue t h e errdit i f

6 2 - Geeta’

I f i t i t & cotton shipment i t draws

on the bank, especially v i n the smaller conmunities
banks w o u l d n o t c a r e t o v i o l a t e t h e t e n p e r c e n t limitation,

but where t h e y c a n afford greatsr acco.modation t o
in a s s s i b l i n g t h e cotton,
bales

o f cotton t o gst a

F o r instances,
decent s h i p m e n t ,

y o u take a

t o gst t h e ciffer-

ia assembling, a n d i t gives c r e d
The Chairman:

D o e s t h e bank issue a

thousand

s h i p p e r - - ~ lett: f

credit

in c o n n e c t i o n


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Federal Reserve Bank of St. Louis

Governor
The Chairman:

v h e }

t h e t e r m s o f t h e credit?

p o

they just say, “draw o n us"?
Governor. .¢iliborn:

i

s that t h e y deposit

,arshouse receipus.
Gov-ornor i:ckenney:
The Chairman:

T h e r e is a

T h s contract

contract.

i s t h e l e t t e r o f credit.

to Goecribe t h e very

Governor

f

e

c

t

me o c c u u a
, L b 4 s T o r o t a s ours

, w h e n a bank follows t h a t
o

f loaning somebody else's

ioney.
Governor ceay;

T h e purpose o f i t i s t o enable t h e

bank t o l o a n t h e b o r r o w e r m o r e m o n e y t h a n i t c a n l o a n u n d e r
regulations.

r C a l koi n s :
ay:

r

o

n

r

c

h

n

e
i

v

s

o

s money.
G

f purpose o f it, a n d

At t
r h e saine
e
tine,
v
Governor
o
GSeay,

not the same char-cter o f loan that vould require t h e
ten per cent limitation, because i t i s th: e s e m b l i n g o f a
staple f o r s a l e e n d shipment.


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Federal Reserve Bank of St. Louis

own

r o n rwesvaoy G
3

r

V e lo l b o rn n :

r

e

v

o

G

good p u r p o s e

&

in

15
our district a n d I would ifnot like t o see i t Changed.
The Chairman: 1

-d@ notes a d

a n y question about that.

The o n l y gvwstion i s h o w carefully
it a o n é u n d e r a

careful c r e d i t i n s t r u m e n t t h a t c e f i n e s t h e

the credit a n d the security a n d s o on, i t may have
a vsry legitimate function t o psrform, b u t i f i t i s
without contract, w h i c h w e cormonly call a letter o f credit

issued b y the bank, i t i s capable o f great abuse,
ernor ocay:
it n e c e s s a r y

I t i s a practice w h i c h w e have found

t o s c r u t i n i z e v e r y closely, b e c a u s e

i t has been

abe ed,
Governor Young:

F o r seasonal demands

i n mMinneavolis

& necessary t o use a domestic transaction,
The Chairman:

Yer.

Governor Young: :

desvued i n the right w a y and

there i s nothing wrong Fie i t at all.
cured a n d states t h e security,

I t is properly se-

a n d i t onlyhappeng

i n the fall

of the year, w h e n t h e movement o f flour i s on,
The Chairman:

l

y question particularly arose through

the statement o f Governor wWellborn that n o letter o f credit
was issued,


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Federal Reserve Bank of St. Louis

Governor Young:

T h e r e i s a contract issued t o the

bank,
Governor v e l i l b o r n :
LSET Sr O f = Cre Ce G L

z

p

veEN

a

p

e

on u a r s h o u s e r e c e l ;
Cent. 1m. 0 u r G i l tr.

c2ut o f t h e market v a l u e .
concernsa

v e nave round ea

think t h e B o s r a
E recall
carations

Governor
I move t h a t

no present occasion t o consider t h e
1

the s e o p e o f d o m e s t i c b a n k s r s a c c e p t a n c e s ,


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Federal Reserve Bank of St. Louis

r that they
wa

p

gSatEr Roy
p r o p r i y mGe
a rGiie

t

i

Governor Young:

V

i s s c o n d t h e motion,
any G

Governor f e : 6

slight a l t e r a t i o n

o f that
L

u

is that w
governing Gornestie oecaptances rather t h a n extending t h e use,
The Chairman:

Y o u r proposal would be, a s I gather fro.

whst y o u p r e v i o u s l y said, t h a t t h i s m s e t i n g m i g h t a d o p t a

resolution t o provide thet t h e Pederal t i c s e r v e Board might
ider a modification o f t h e present resulation governing
f Comestic bankers accsptances

s o that t h e extension

of the practice might b e safely concucted.
Governor say: I

think that would cover the situation

in the w a y i n which I

would like t o sse i t covered, a n d i n

the w a y i n which I believe t h e Board i s now considering it.
Governor Calkins:
Governor Seay:
something t h a t I

T h a t covers t h e sane sround:

T h e extending o f t h e use o f accsntances
have n o t i n contsmplation.

Governor C a l k i n s ; T h e r e c o m m e n d a t i o n

b y New York i s

that the Board b e reéyuestsd t o consider the advisability o f
extending t h e use o f domestic bankers acceptances,


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Federal Reserve Bank of St. Louis

Governor Seay:

A n d my suggestion was that that recom-

mendation b e a l t s r e d e o m e w h a
Governor Calkins:
Governor “eslilporn:
to e x t e n d i t ?
Governor &

j

e

x

Governor McDougali:
Governor

r

e

s

o

l

u

B y regulation o r b y

ellborn: I

ent f r o m what i t i s now.

would n o t w a n t t o

s e e m s t o be all

I vould n o t l i k e t o s e e f i h a n g e d ,

b u t would 1ike t o see

yemain a s i t
Governor S e a y a p p a r s n t l y h a s b e f o r e h i m

change i n the régulation.
Governor Seay:

T h e Board i s considering a

change i n

regulations w i t h rsspect t o forsigh acceptances, a n d now
he question comes u p ‘tihethsr i t i s desirable f o r t h e Board
to consicer
with a

r e g u l a t i o n s governing domestic accsptances

view o f d s t e r m i n i n g h e s t h s r o r n o t i t s a m e n d m e n t

alteration should b e mace,
Governor Biggs:

Governor Seay:

N

T h a t i s what I

o ch: x

N o t prefel I

or

have i n mind.

scommended,

L s there?

haven't a n y i n

mind,


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Federal Reserve Bank of St. Louis

The Chairman:

T h e n your purpose i s t o pass a

resolu-

tion t o the effect that i f any change i s made i n the
tions i t should b e o f a character t h a t would protect a n y further d e v e l o p m e n t

i n t h e b u s i n e s s f r o m abuse,

Governor Seay:

Y e e , a n d refer i t t o the Federal reserve

banksbefore promulgation,
The Chairman:

s n a t i s your pleasure, Governor Calkins?

Do y o u accept t h i s n e w r e s o l u t i o n ?
Governor Calkins:
mors fully, I

S i n c e Governor ‘ e a y h a s

a m inclined t o t h i n k t h a t i t i s undesirable

to open t h e subject now, f o r t h e purpose o f closing i t a

Little further than i t i s now closed, a n d that i s what i s
aimed a t , o f course, I

ado n o t b e l i s v e t h e r e i s a n y nsceg-

sity a t t h e present t i m e f o r a n y more ¥

r i c t i v e regulations

end I belisve w e will perhaps start s o m e
that. I

i

f u é propose

think I will stick r e s o l u t i o n , w h i c h was

seconded,

(The motion w a s
The Chairman; T
Governor Seay:

w a s seconéed b y Governor licDougall,
U i t h respect t o the u s e I

would b e i n agreement w i t h G o v e r n o r C a l k i n s ,

belisve I

b u t w i t h respect

to considering regulations governing domestic acceptances,
I think that t h e y are t h e subject f o r consideration, elabora-~


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Federal Reserve Bank of St. Louis

ELON

o F G e t int bacon.

EUppose w e vote o n that,
tion was carried.)
The Chairnrian:

N o w , a r e there a n y further resolutior

GOVernor c e a y: I
d b e r e i u s s tre d
respsct

voulc s u s s e s t t h a t t h e F e d s r a l Res-crve

t o c o n s ia
der

o their » - g u lBa t i o n s w i t h

t o comsstic acceptances m i g h t b e amended o r d e f i n e d

view parti £

avoiding abuses ofthe domestic

acceptance,
The Chairman:
Governor Fancher:

t
t

o that?
h

a

w a s p u t o n Tayes
e question h

t

.
noes
(
a n d the

(Bloless rie reiikees eae

rchases o f Government cscurities b y
f
o
r t h e i r o w n account,
s a l Ress
ererve
a
Banks
and for account o f Treasury.
eee

e e e ee
Benks t o
in o r c e r

That i s a general topic propos

Board, but under the sub-hsading 1,
ina little different aspect bythe N e w Y o r k a n d Philadelphia


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Federal Reserve Bank of St. Louis

“should i t b e policy o f lieserve
Government securities i n ordcr t o increase

iisportent s u b j e c t

p r o p o s e dy
b

of much covresponcence b y the Boarc
and Governorharaling
maiipsre o f t h e Boara, h a s arkec
sividual sxpression f r o m t h e Goveinor
Se f o thein poesicy ia: m
ehat

n

e

Governor .:ckennsy?
Kenne 8
other b a n k s

4
3

138K

n t b s l y o u t o f touch with

that

tantial
very well look for-

ward t o the matter o f investing i n s o m f
Government obligations w i t h a Yiew o f kespi
earnings t o take care o f expe


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Federal Reserve Bank of St. Louis

a

n

the short tiie
u p ovr sYrogss

d divicend

a little t o take c a r e o f these p o s s i b l e
The Chairmen:

D

o y o u m a k s y o u r purchassse w i t h i n

District f r o m thebanics?
‘11 t h e purchases o f Victory
CLEtPIeGt.

Governor .iLller?
Governor iiiller;

V i e have purchased about twenty

wirTions-of
but

n

m bot

h eG

a s o District a n d the

of revenue--he C
to cover your expenses
GOVeELNOr:

aww:
Governor e ¢ l l b o r n ?

Governor. -

sii bere: :

o c c a gion t o make a n y

purchasss y e t e a u s e o u r reciscounts provice enoush t o pay
end dividends a n d
I would f a v o r

for t h e bank.
The Chairman:

t

governor Fancher:

y

a v e you t

a y , G o v e r n o r Fancher?

O u r boord early i n t h s year, know-

ing t h a t w e w e r e l i k e l y t o h a v e v e r y m a r k e d l i q u i d a t i o n


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Federal Reserve Bank of St. Louis

on

83
the part o f loans t o nember banke, determined o n a policy
ofi n v e s t i n g i n short t e r m Government securities

i n

suificient t o provide revenue sufficient t o provide
es a n d i c e : i
ing a

some dspreciation item,

total o f b e t w e e n f i f t y a n d s i x t y m i l l i o n d o l l a r s

of

short time certificates a n d Victory notes, a n d a few T r
notes accruing i n 1924 a n d 1925,

h e s e purchases h a v e

been mace within t h e cistrict f r o m our meiber banks a n d dealthe cistrict through t h e Federal Reserv
Banks o f New York a n d Chicago.
a certain amount

T

t i s our policy t o kes)

o f invastec funds a n d 2 s o u r loans a r e

further liquidated w e shall continue t o fill i n the vacuum
by t h s p u r c h a s e

o f acditional s h o r t t i m e government securities,

Governor Biggs:

w e find abouts the same condition,

have bought probably twenty millions o f short t i m e certifieates o f indebtedness a n d one s n d two year notes,

7

5 per

cent o f ovr loans mature i n t:elve months,
Our government l o s n s a r e sbout eyusl t o our discounts

with our member banks, a n d w e buy a sufficient amount t o give
us t h e revenue t o take care o f our current expenses a n d divi-~

dends,

T h e y have all been purchased through local dealers

or f r o m m e m b e r B a n k s ,


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Federal Reserve Bank of St. Louis

i l e h a v e b o u g h t aquite a

few i n small

84
quantities f r o m our member banks ina % l i g s r r i c t , a n d more
particularly i n the agricultural s e c
The Chairman:

G o v e r n o r Calkins?

Governor Calkir
if y o u please,

O

v

r board has ado}

S

o f investing f o r revenue only,

bsing t o k e e p u p o u r e a r

e s2

a

s orincipic,

t h e purposes

t

cover current expenses
bought certificates a n d notes, Victories a n d a few third
sentiment o f our board is, o n c : lways
has been, favorsble t o investments

i n banker

ORY oaig

€ scurfrom iecbéer banks,ia t h e l

market a n d through

Chicago, m a i n l y through N e w York,
Governor Y o u n g ?
Governor Young.

w

e have purcha

LLOW 208 GEG
ecceptances,

W

o advances &

l y momber banks have

aown t o about twenty-seven millions, w h i c h i s not
ineome t o c o v e r o u r expenses,

W w e have p u r c h a s e d m o s t l y

o~1/4 Victories t h a t a r e d u e Tune Loon, which? is about t h e


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Federal Reserve Bank of St. Louis

85 |
time t h a t o u r d e m a n d s t a r t s i n - o u r

Gis

A

b

o

u

t a

week

ago w e started purchasing some o f t h e issued o f 4-1/4 p e r
cent U n i t e d S t a t e s G o v e r n m e n t b o n d s

o f l o n g maturity.

are buying those from our member banks o # they offer them to
uss

T h e y save a

coimission a n d w e saves a

give t h e m a little better price,

I

comiission a n d

t doesn't amount t o very

much, o n l y about ;450,000 that w e have s o far purchased,
we feel with a capital o f three a n d a half million a n d a
surplus

o f s s v e n million, a

surplus t h a t w e w o u l d n é v e r b e

called u p o n t o pay, t h a t w e w e r e j u s t i f i e d
portion o f t h a t i n l o n g t i m e securi

t

i n investing a

o take c a r e o f some

of the lean years that w e might have. n e t h e r 1.¢@ build o r
not i s a

guestion t h a t w i l l n o t b e d e c i d e d f o r s o m e time.

Governor i:cDouvgall:

n

o

n

t

h

s a g o o u r Board gave

very careful c o n s i d e r a t i o n o
t this question because o f t h e
continvation o f liquidation o f our

a i a n d because o f

our commitments f o r expenses a n d Cividends, a n d they were
strongly o f t h e opinion that t h e t i m

a d c o e w h e n w e ought

to avail ovreslves o f the privilege accor 1

to g o into the open market,
first

t o acceptances

securities


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Federal Reserve Bank of St. Louis

a f

z

i

i n the act

i

r attention

a n d secondly t o short t i m e government

i n the form o f Treasury certificates a n d Victory

86
In the mean time w e h a d purchased Treasury certi-

ficates, a l l of which mature not later than Warch 16th o f
next year, t o the extent o f approximately sight million dollare, Victory notes t o the extent o f ticnty-eight million.
I think t h e purchasss, b o t h o f the Treasury certifica
Vietory notes h a v e a l l bsen m a d e i n the local market,
beon given t o brokers
ut they a r e bought i n We:

Governor i.cDoug

come t o “ e w Y o k , I

c o n o t k n o w , t h a t t h s r e i s any e r o u n d
—

for complaint a b o u t that, b u t i t i s a very difficult matter
to control, a n d w e will have 4 1ittis ciseussion o f that
Ace
oyorer
Governor i i c D o u r e as
i
l

question about i t being trues all over t h e country.
thought o f that a n d belitcve y o u a r e right about it.

The Chairman:
Chicago Bank, t h e n ,

investments

A s I uncerstand the policy o f the
i t is n a i n t a t r s u f f i c i e n t line o f

i n short time maturing bills a n d Treasury certi-

ficates t o give i t earnings enough t o p a y its


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Federal Reserve Bank of St. Louis

Governor fticDougall:
because w e feel that w e ought t o pay
pvesent a t least.

Governor vLeay: l i v , Chairman, o v r bank has made n o
purchases

but I

o f government securities f o r purposes

a m quite s u r e that I

voice

o f revenue,

o p i n i o n which would b e

the opinion o f our Board o f Directors, a n d that i s that the
Federal Reserve Bank should b e left a t full liberty i n the

ciscretion o f their directors, t o make such investments a s
are permissible under t h e Act f o r t h e purpose o f providing
revenus f

n e c e s s a r y operations, whether o r Government
I a m inclined t o the opinion

Ghat w e should gonfine ourselves always t o short t e r m
because o f the necessity o f keeping a l l o f our assets

liquid 2 s possible. I

do not see any reason why the liberty

of t h e F e d s r a l R e s e r v e B a n k s s h o u l d b e i n a n y w a y c u r t a i l e d

with regard t o making s u c h investisents a s a r e permissible
under t h e act.
The Chairman:

“ h a t about Boston, Governor ijor

Governor M o r e s ;

“

e h a v e f o l l o w e d t h e policy,

the First o f the year, o f buying Government securi


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Federal Reserve Bank of St. Louis

88
in the amount o f ovr
from our loans a n d
from our securiti

s o u l d give u s a sufficient amount o f

income t o pay for o v r expenses a n d divid-nds f o r t h e year,
Our

a r

a v e g o n e d o w n :ecently a

considerable a m o u n t a n d

recently t e n o r fifteen million dollars o f
» and w e now hold something over forty million dollare i n certificates a n d notes.
maturity t h :
hag issued

b h y r e :

W o n e ofthem a r e o f longer

four year notes w h i c h the

3 2 4 a n d 1 9 2 a n d o f thse amount. that v e hold all

put five o r s i x millions become d u e i n 1922,
directly f r o m our o w n asaler

p

‘

e have bought

t t h e first pur-

uhich w a s mad: t h r o u g h t h e F e d s r a l

Governor M o w

“

r

s Chairman,

t h i s is-a subject u p o n

w h i c h I entertain v e r y G e c i d e d opinions,

a n d »:;gard a s i n v o l v -

ing a n important j y e s t i o n o f p r i n c i p l s a
Solscy.
@ancher a n d

The A c t provides t h a t ¢ v e r y Federal Reserve B a n k shall b
soncucted under t h e supervision a n d control o f the Board o f


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Federal Reserve Bank of St. Louis

ore, w h i c h s h a l l p e r f o r m d u t i e s u s u a l a n d p e r t a i n i n g


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Federal Reserve Bank of St. Louis

to the offices o f directors o f banking associations.
iow, o u r board feels that that vusts them, subject t o
the limitations t h a t are written i n t o t h e act, w i t h a l l the
powers ordinarily possessed b y the board o f directors o f a
commercial b a n k , a n d t h a t o n e o f t h e i r d u t i e s

i s t o keep their

assets reasonably invested, bearing i n mind always,

o f course,

the fact that while discounts a r e running o f f now, t h e time
may come a n d presumably will come when t h e member banks

will b e calling upon u s for very large accommodations, a n d
that o u r first duty i s t o keep ourselves

i n a position t o

take c a r e o f a n y d e m a n d s t h a t m a y b e m a d e u p o n u s i n t h e

future, w e reel that w e would b e subject t o very great
criticism o f w e had a very large,

a n unnecessarily large pro-

portion o f our assets lying idle when investments that we
are authorized t o make were available t o u s i n the market,
and that i t i s our duty, i f w e c a n d o i t with due regard t o

the fubtws' demands o f our members, t o do even more than simply
earn o u r 6xpénsées a n d dividends.
we have bought, I

I n pursuance O f that policy

think, s e v e n o r eight millions o f the three

and four year notes, a n d about sevon millions o f the Victory
4-3/4

g

e have respected t h e views expressed b y the Board

and b y the advisory Council a n d have not bought a n y Government

obligations r u n n i n g l o n g e r t h a n f o u r years,

Now, t h e Act provides a s t o Giscounts, t h a t w e shall make
them a t r a t e s

t o b e established

b y a c h Fedsral Reserve B a n k

sevbisct t o the review a n d determination--- that i s the wording o f t h e Act<=<« subj;
Federal Neserve Board;

e

wi

dstermina n

o f the

t h a t o p e n markst transactions a r e t o
ations prescribed b y the F e d e r a l

Reserve Board,

t h e p u r c h a s e a n d s a l e o f bankers a c c cptancesg,

covernment o b l i ations,
The act provicss t h a t
we may b u y o n d sell bonds a n d notes o f the United States
uncer this limitation:

S u c h purchasee t o b e made i n accord-

e with the rul:s a n d regulations prescribed b y the Federal
Reserve Board, “

e u m e that t o mean that t h e ¥ederal

rve Board has power t o prescribe rules
which will control u s i n any puxchases o r sales

obligations z
rules a n d r e g u

e r mad

1

M s s v e n ec] i

o f government

t that i n the
by t h e B o a r d w e h a v e a n abso-

lutely unlimited power t o buy a n d sell Government bonds, a n d


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Federal Reserve Bank of St. Louis

we have lately h a d a letter f r o m Governor larding, stating
of the Board approves t h a t position, t h a t

addsd that this

was t o come u p for Cigcussion

t h i s confer

of that x e have
bought a n y Government bonds,
i@ are confronted
acceptances,

i t h the condition that i n buying

a t least, w e c a n only make a n investment
a very limited amount
ury c e r t i f i c a t e s
per cent,

o n Treasury notes

on the third Libsrties
1.00,

N o w , w e a r e uiia

e r

consultation w i t h the Boara,


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Federal Reserve Bank of St. Louis

e

we

we

w e c a n only

v e c a n get 4,50 t o

e a n y xreason why, w i t h o u t

l

d b e l i m i t e c t o buying

year notes paying us 4-1/3 t o 4-}/4, but should
eu tiberty t o bey

a

n

d a half yoar bonds paying

“fe cannot s c e a n y cistinction i n principle

sively i n our o w n
are perfechly willing

t o ages,

9 2 a matter

comity, t h a t o u r transactions ought n o t t o interfere w i t h

the Treasury, a n d that a t a time when the Treasury
conducting a n y r e - f i n a n c i n g opo2rationsor o t h e r o p s r a t i o n s

would b e interfered with b y any such purchasss o r ga
iol

ue would make, t h a t : |

tin

a s those

deference a n d courtesy t o the Treasury w e ought t o ksep

out o f the market;

b u t a t any time that w e could make those

nurehases o r ealées without interfering with the Treasury w e
feel that w e have t h e r i g
Ley tor up-to do-it,
purchases

W

t o d o i t a n d that i t i s good pole would like t o make some additional

a n d t o m a k e t h e m o f t h i r d Liberties,

little informal discussion, u p o n motion d u l y
mace a n d secondéd, t h e Coufsrence adjourned a t one o'clock

Dp. m. until two o'clock p. m. o f the same day.)

The Conference reconvened a t 2:20 o'clock p. m.
The Chairman:

T h e conference w i l l come t o order,

All

of theGovernors h a v e stated their policy w i t h regard t o investments e x c e p t m y s e l f ,

a n d bsfore r e f e r r i n g

cone i n New York I would like t o make s

t o what w e have

s

t

a

t

e

ment about it,
You. know I

hesitate sometimes t o express m y o w n views

oh any mgbter o f p o l i c y a
s to any-other reserve bank, and I
ace

a

a

t

i

P e a t as We 7

d :

s

;

i

r

e

a

c h y , phe 3

;

a

e

h

h

a >

¢

co not want a n y o f Fags to Shink i t i s anything more th-n-an


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Federal Reserve Bank of St. Louis

~

93
n

pression o f p e r s o n a l v i e w s , w h a t [ I sin going t o g a y a b o u t

Eemencously enlishtening t o m e

i$5 n %t p a I

cogmatic o r pendsaatic,

have fom:

a t least y o u have been

in not eriticising n
in t h i s m a t t e r

of

e T L look s t i t , e n t i r e l y b e y o n d a n d outside
Ly

the q u e s t i o n o f o u r sarnings,

a n d t h e y a r e question

would most naturally dsvelop i n New York, a g cistinguished
a

from the other cistricts, just bscause Ecw York i s a larger

o the execution o f orders f o r

we have cone ninety per cent o f that business both
in the buying o f bonds ond dealing i n Treasury certificates,
very Lor pe: -seFics
mornins s
i
a
B
iatter o f courtesy a n d comity,
of avoiding sxscutine orders f o x account o f a bank that might
in a n y w a y conflict w i t h t h e o v d s r s b e i n g e x e c u t e d f o r t h e

Treasury account.


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Federal Reserve Bank of St. Louis

Now, I have a littls ciffs

e

w

h a t matter, par-

ticularly because o f the language o f the statute,

The Federal Reserve ict provides that t h e Secretary o f
the Treasury m a y require t h e Federal [

r v e Banks t o act+--

note this--- a s fiscal agents o f the United States;
may require t h e m t o act--~ n o t request them;

that he

a n d behind that

provision which i s mandatory, t h a t is, which g i v
dsfinite power t o require u s t o act, i s the whole
the Federal banking system which rests u p o n a very well known
n rendered i n the case o f the First B a n k o f t h e United

known age the HcCullough Case, which i n effect
to corporations a n d agencies employed b y the Federal
government;

t h a t i s t o say, t h e states h a v e surrendered cer-

tain p o w e r s o
t ths F e d e r a l G o v e r n m e n t a n d t h e S u p r e m e C o u r t

of t h e United States h e l d that t h e Federal Government h a d

the right t o create age
powers,

n

a

b

l

e them t o exe

T h a t i g about t h e substance o f that

it not, ix. Harrison?
ir, Harrison;
The Chairman:

S

o t h a t y o u h a v e t h i s situation,

V e r e

it not f o r t h e fact that w e act a n d have t h e power t o act a s

fiscal agents o f the United States, w e “isnt have n o right
‘of existence; a n d inasmuch a s w e are, f o r o u r existence, d e -


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Federal Reserve Bank of St. Louis

95
pendent v p o n t h e right o f t h e Secretary o f t h e Treasury t o
mploy ve, Congress h a s s a i d i n this A c t that h e has t h e
right

t o r e q u i r e u s t o act.

Therefore I

think t h e r e i s

eyusetion o f courtesy o r comity involved i n i t a t all.
agent, p r o p e r L
y S221
woulc have t h e r i g
something that h e bou-ht a t a. siven moment shouldbe purchased
for

orn account,/hie o w n advantage anc his own profit
whether h e would turn i t over t o his principal.

T h e

isn't any mistake about
Bank which attempted
itssif o r was acting
a ory s e e r s
whan i t h a d absolutely n o right
to i n m y opinion, unless
plain u t y . I

v e r e a c t i n g i n default o f its

a m saying that pretty Cefinitely 2 n d posiae c i v e n v e r y c a r e f u l c o n -

mnand inquiry i n the N o w York bank, a n d i t h a d t o
Snormous
for t h e Tressu I
been c a l l e d u p o n t o :
have,


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Federal Reserve Bank of St. Louis

co not know
t

{

C

‘ a s

1

6 some c r

Governor jicDougal:
not,
Governor lickonney:
The Chairman;

w e have not,

S o m e o f t h e other banks h a v e undoubtedly

received orders, b u t I

do not knot which banks t h e y are.
we have, b u t t o a very limited extent,

The Chairman:

o f course this i s a situation that will

natvorally arise w i t h we.

‘ n a t [ I am saying i s more o r less
t is a matter o f courtesy

or Ccouity between the reserve banks a n d the Treasury.
ig n o westion o f courtesy a w comity involved i n it.
a question really o f violating t h e first principles o f
because o f the mandatory provisions o f the Fedar

att, that is,\if a reserve bank bought securities f o
in the face o f e x i ;

orders f r o m t h s Tressury which might

be filled i n these same transactions,
Governor Calkins:

v e have intorpreted i t t o mean that

we cannot b u y for our o w n account u h e n w e have a n order
from t h e Treasury,

n o matter v h a t 2

teins o f t h a t o r d e r

were,
The Chairman;
Ome

w

h

a

t t h e situation shoultpe,

I think that w i t h this r e a s nable modification reason i s


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Federal Reserve Bank of St. Louis

97
but c e r t a i n l y

¥elationshiz

a

g

e

n

any 2

use,

t f r o m invosting f o r his o w n

a¢count,
9 character t ' e t c o u l d n o t
that v o u l d t h e n b e a n u n r s 2 s o n a b l o s x t 2 n s i o n
buat a p p l i s s a n d c o n t r o l

of

i n the c a s e o f

doubt t h e fact that w h e n w e
and boncs

o f the

in N2w York, possibly f o r our o w n account, t h a t those orders
reilected b e c k i n t o o t h e r
puychsseed n o bonds f o r o v r o w n a c c o u n t

and a l l bond puxchasss t h a t w e n c u c t f o r t h e Treasury
o V
a matter

o f f a c t a r e c x e c u t s d u n d e r yvory c a r c f u l l y safescu:

all plscec through menbor
‘18 G O n o t e v e n

on the board
that m e m b e r


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Federal Reserve Bank of St. Louis

e

s eelscta msmbsr b a n k and,

bs
tnem a

Limit?

It depends entirely u p o n t h s character
It m a y b e limited,

o r there m a y b e 2

partial

96
depends u p o n w h a t
an i d e a o f t h e m a c n i t u d e
resia wenayehon:
s
c . i l i n g a

billion collars o f that character, a n d s o far

jeconcerned, our ticory s h a t cverything
exsecute,

fo-our

o r n D U S ines 1

t r a n s a c t i o n s

on thse stock exchanges,
\

rectiy with ceelers o r bonking
the o r d e r s n a y r s a c h t h e hands o f broksrs
daalers v h o h a v e o f f i c e r s

i n more t h a n o n e district

if G h : yeannot-2111 t i e -orcer 1 h eae ole orict. ii
office i n anovhere1e Tict, 2 1 1 o f :hich, a f cowed,
2 gituation that i s untortuiate, b e c a u s e u e misht
peting i n a n uiwholssone s a c unaatur:
bo: DUY O F SE11,

f a y snong our-

I T am not preparsd t o propose 4 s solu-

tion o f that i n the courses o f this ciscussion,


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Federal Reserve Bank of St. Louis

not a i r e c h l ; b e a r u p o n t h e i n v e s t m e n t p o l i c y

leral Recerve Banks, b u t I

think -later o n i n the program

99
get i t i n a

Now, asf t o t h e t o p i c s p e c i f i c a l l y , I

want t o a s k y o u

lenen t o consider this very striking thing
atomsnt m a c e h e r e t h i s morning,

ws

about t h e

t h a t there wagn't o n e m a n

statement i n any

Se

I a m anxious

o
a

n

b

j

y

O E S or

a

n

k

s

e

c

t

i n New York,

a v o i a impinging u p o n its sur-

plus Sither t o pay its divic-nds

o r

aré o t h e r c o n s i d e r a t i o n s i n v o l v e d

i n this p o l i c y t h a t

are o f the greatest importance t o this country.

F o r instance,

the principal stock market o f the country
and w e get
BEOCH

eports

o f t h e total loans o n the

oC!

4 Pid c n a ?

Now, suppose that w e - - a n d not w e alone--- t h a t a l l o f
pour t h e i x
secur

a
n
ities without
Limit

simply a

mand,

credit o u t b y investing i n
d that t h e fund s o

manufacturec eredit,

n o t otherwise

e m p l o y m e n t o n the stock 2xchange.

creating possibly--- I

W e would b e

won't s a y certainly, b u t there i s a

possibility that v e might b e creating a epscilative movement,


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Federal Reserve Bank of St. Louis

magnitude b y & purely orti
enployment o f ovr credit i n orcer t o p a y sxpenss

same thing might not b e cou!
5h a period i n 1920 . h e n v e s a w the bank
n this country m o u n t b y leaps a n d bounds
Pons S T Pact w o 6 8

ible o r
makes earnings,

t o pour o u t

control o r coordination, a n d .ithout Limit,
eertainly a

period o f speculation i n this country

be a desirable t h i n g

L e :

Sore.

just another aspect o f this yusstion o f
it seems
O

V rSre

shis have?

e e

F o r instance, t a k e o u r csse

have money inverted

t n scecuritis f

our percentage b e today?

o

a

m

thet k i n d where

% your percentage

up t o 8 5 o r 9 0 psr cent, t h e n o u r b a n k
that y o u have 4 ninety per

n

e i n and say

n t r e s e r v e a n d w e ought t o borrow

money a t three per cent o r three a n d a half. v


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Federal Reserve Bank of St. Louis

Oe
to reter t o t h a t i n cowunecnext m a t t e r ,

Governor Bigs:
>1
Ct o u r

board, t h a t

T h a t i s one o f the things
i s H O U . 1eb- our

but t o keep i t around seventy i f w e coulc, d y inves

to a w Y o r k
not-nssded.
no i n v e s t m e n t

h

e

x

a t s

P

h

e -Ceuntry, sno: G a y

w

c

w York bank -- n e h a v e macs

which h a r a m e s t
investrente b e i n g

have resulted prscticaity
being poid-ort
position,

been right along.
that nofition b s
being 61tner-3
dent-thine for us, e v e n i f occasion arotrs


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Federal Reserve Bank of St. Louis

L102
vise desirable,

t o increase o v r ciscount rate,

T h a t i s to

say w e have n o t bsen able t o gst below four a n d a half i n New
York a n d u e w o u l d n o t d a r e g o s n y l o w e r t h a n f o u r a n d a

half

nov,
Sometime a g o I

we p i n g

a t t e eould,

s o that w e

Low enoush s o that i t w o u l d b
e possible
later t o sdvancs the r a t e . T a s r s t o r e , L f , f o r political o
any othsr reasons,

i t e s :sms“ impracticable
t o exp2ct
3

7 a

Gan i n e r e a s e o u r race. 4 3 ;

h

e demand f o r o u r cr:

in c a s e t Psh i

ng a t t h e bank especially
three things.

O n e

i s thestock “ x c h a n g e l o a n account,

has h a d a n enormous i n c r e a s e

in 4

another t h i n g i s the gonsral condition o f the b
deposits a n d reserves throughout t h e country, a n d
the third

p

r

a

n

d I

a m stronsly o f t h e opinion that

Le c o m i n g w h e n s o m e o f u s o r a l l o f u s m a y h a v e t o

-~- cortainly cis continus
making a n y more just f o r t h e s a k e o f scarnings--- o r w e will
be doing voluntarily what «.e did involuntarily i n 1919 a n d


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Federal Reserve Bank of St. Louis

want t o make clear m y feeling and position, which i
a Coursey

I f

and a d e p t i t e - - t h e r e i s a

course

reasonable carnin:s can be msde
vhich v e c a n a v o i d a n d

=

Pederal R e s e r v e B a n k

This matter h a s been i n ovr minds
while,

T h e policy o f the NewYork banl

hich really began i n the p r i n g o f 1920, shortly
-@Lion t o o k office, w a s t h

w e d i d not want. t o rsduce

cLlecount rates t o o promptly, espstcially a s they
vacer t h e market rate f o r money. ©

laid out 4

progren o f

investing tempovarily i n certivicates w h e n t h e y were offered,
insuring a good imarkct f o r
progrs:sively

S i a n d 2nasavoring t o gat a

i n p r o v i n s mort:

n

d g r a c u a l l y t h e market c i d

improve, f

cannot s a y what infeluence t h e ba:

but a t t i m e s

w e bought v e r y l a r g e amounts

of

I remember a t o n e clip u e bought f o r t y millions.


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Federal Reserve Bank of St. Louis

p o l i c y hsd,

wn w e p u t o u r r a t e c o w n , a n d w e m a d e
in t h e m f o r o u r

1Oee,

See B e 6s

c n account until after

“ i n c e t h s n w e have gradually

an i n v e s tneat a c c o u n t w h i c h h a s

aking t o the member b
g

havs

P=
:UOW
o3

ea
m
Les

n
i t who huncr
t
e
over

11S t e

D

m iol l i s
o n s

e mee s

Boos

the i n v e s t i n e n t
a matter

o f

o f polier

to carnings, b u s

She petites ens

the T r s a s uEr yp

at £

S

[ Quaice L i K s

ditions os “ o d a y ’ .

hao
cons


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Federal Reserve Bank of St. Louis

Wo

s a m e

HO C R L L
r t h e moment,
o

Tt l o o k s

speaking v e r y frankly,

e temporary

aCS767

Ya

time, w h i c h would b e

be

more C i s a s t r o u s

ehcaev
d

n

ancinug b y which, w h e n t h e tims comes,

Oi

not a l l

tte ott

of

Goures,

sfa d

fam

a 8 i f w e h a d pretty nearly
n
a
d
i
e > gales apYelWo

I

t may b e only

syvelopment o f essiser m o n e y a n d

3


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Federal Reserve Bank of St. Louis

105
of a n unlimited market f o r good bonds, b u t w e find o n inquiry
among t h e dealers i n New york that t h e y a r e pretty well loadec,
up w i t h t h e s e s h o r t T r e a s u r y obligations.

w e find that four

or five dealers, j u s t among themselves, h a v e a total o f sixty
millions o n hand a n d a r e facing some loss i n them.
Governor Seay:

Y o u are referring t o Treasury obliga-

tions p a r t i c u l a r l y ?

The Chairman: E n t i r e l y , y e s e W h e n this sort o f movemént gets i n your blood, y o u cannot escape t h e swing o f it.
Of all classes o f institutions a n d individuals i n the country,
I think t h e F e d e r a l r e s e r v e b a n k s a n d t h e i r m a n a g e r s h a v e

got t o learn t o keep themselves a little detached from the
incsption

o f this t h i n g o f a l l s w i n g i n g

i n o n e direction.

Iam not a t all sure that w e may not have t o put a little
erimp i n the w a y this thing i g going.

I f all o f you sudden-

ly woke o n e morning t o find that your member banks were knocking a t the door f o r discounts, a n d y o u all started t o sell
your holdings o f government obligations a t the same time,

we would b e a pretty spectacle, wouldn't we? i l y thought
is t h a t w e s h o u l d h a v e a

policy,

a n d that that policy should

be the result o f discussion a n d mutual agreement among oursélves a s t o that i s wise, a n d you, yourselves, f i n d a

way o f

106
putting i t into execution,

¥ e d e r a l Reserve Cysten

tocay has invested voluntarily i n bills a n d certificates i n
the neighborhood o f five hundred m i l l i o n s . f
o dollars,

That

is a n awful l o t o f money t o pump into this country--~Governor L.cpousall:

i

n

r

e

s

p

e

e

ti
v
e
. of V i c tories

and Liberties?
ave holdsingse o f government
gecurvities s n d bills exélusivs- o f Pittman A c t
Governor “alkins: >6,286,000,000 approximately?
The Chairman:

y e e .

T i e fear o f having n o earnings

tO pay expenses with i s t o be considered a little bit i n
connection with t h e facts w h i c h were r e a d t o y o u this morning.

I n the month o f warch a l l reserve banks w e r e earning

at t h e rate o f 22.4 p e r c e n t o n their capital.

T h e Lowest

earners w e r e St. Louis, 1 5 per cent, Dallas, 15.35, S a n Fran~

cisco 16.8, New York 17, Cleveland 18, and all the rest were
over 2 0 p e r cent.


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Federal Reserve Bank of St. Louis

Governor C a l k

The Chairman:

T h o s s s r e n o t n e t earnings?

N e t carnings.

Governor Calkins:

The Chairman:
Governor Horses:

The Chairman:

Y e e .

Governor Jellborn:

The Chairman:

.

Y o u m e a n a t t h a t r a t e p e r annum:

t that r a t e p e r annum, yes,

the figures w h i c h y o u report

H e r e

t o t h e board,

sh vs total earnings 5362,000 and total expenses o f j257,000,
neat earnings %105,000, which, o n their paid i n capital o f
7,400,000 i s 16.8 per cent. T h e r e may be inaccurac
not taking care o f accruals i n some way.
Governor Calkins:

e r y dstided inaceuracisg,

not take care o f accruals o r cividends,
The Chairman:

I t leaves o u t dividends,

Governor iicDougall:
The Chairman:

I

"

g

e

,

N o , that incluces ditidends.

t includes everything that y o u

men s e t u p o n your b o o k s

i n your regular r e p o r t s

to

ton o f earnings e@nd expenses, wheres all accruals arse
to g o in, e x c e p t reserves,

Governor Calkins:

T h e accrual figure: will make a very

large hole i n it.
“e a c c r u s e v e r y t h i n g w i t h t h e e x c e p t i o n

of writing down---~-


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Federal Reserve Bank of St. Louis

Governor Caliins:

w . i f i n g d o w n t h e reserve f o r losses---

ve set u p five hund: d

thousand reserve f o r losses i t

a considerable h o l e i n it.
The Chairman:

T e s

Governor C a l k i n s : I

The Chairman:

did not m e a n t o interrupt you.

B u t e v e n allowing f o r a l l possible accrvu-

als, there isn't any doubt that the earnings o f the system 7
as a whole a r e not very much bslow double their dividend requirements,

i f any,

Governor Young:

T h a t i s less than five hundred millions

of g o v e r n m e n t

The Chairman;
Governor Miller:

i x , Chairman, w h a t d o you think the

impression o u t i n the country would b e i f the system were t o
run a t a loss?
The Chairman: I

think i t would b e very bad, b u t I

have

gained t h i s impression, s p e a k i n g f r a n k l y w i t h e a c h other,

that there i s a great hazard about having n o under standing
about investing our funds;

t h a t there i s a greater hazard

in having n o uncerstanding a s t o how w e shall dispose o f our
invsstments,

Governor °%alkins:
The Chairman:

O r purchases,

Y e s ,

OF E e a

1

o r e

runaing a good deal o f risk b y veason o f having n o sys


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Federal Reserve Bank of St. Louis

F3

109
policy, c r e a t i n g a

to the Treasury,

situation w h i c h « o u l d become intolarable

Y o u ses what I mean?

Governor Norris:

N o , I do not understand that.

How will i t become intolerable t o the Treasury?

The Chairman:

W e l l , let u e suppose that, with n o

policy whatever, a n d with a desire t o insure ourselves
making earnings w e s o consistent i n the purchaser i n

the market for such large amounts o f these certificates,
anc with n o regulation a s t o the competition between t h e

reserve banks i n buying them, that w e establish a n artificial r a t e f o r t h e s e g o v e r n m e n t s e c u r i t i e s ;

a n d then

when w e discontinue buying them and they g o back to
their
mnatrual rate, somebody i s going t o say what under the
Eeavens h a s happened t o the market?

T h s ccertificate

market h a s gone t o smithereens.

t f e just inviting

I

trouble,

Governor Norris:

I t seems t o me that you are

assuming t w o things that have never existed with us,
and ought t o exist, a n d which I

had not Supposed existed

in any other district, first, that w e effected the rate
for T r e a s u r y C e r t i f i c a t e s ,

Y

e n e v e r subscribed-»for a n y

Treasury Certificates when they are offered.


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Federal Reserve Bank of St. Louis

W e make the

110
best division that w e can, a n d i f w e have a

hundred a n d

twenty five thousand o r two hundred thousand over w e
take them, o r some trifling amount l i k e that.

W e never

put i n ovr o w n subscriptions f o r a n y Treasury Certificates,

If the market does not take them entirely outside o f us,
they Would n o t go.

T h e n w e have n o t Dought, a n d do n o t

expect t o buy, a n y investment w h i c h w e c a n contemplate t h e
possibility o f our having t o sell.

O f t h e investments

that w e have made w e cannot imagine a n y condition under
which w e would not b e able t o hold them until maturity.
The Chairman:

B u t thie i s a collective matter - -

Governor Norris:

The Chairman:

Yee.

D o n ' t y o u think that i f seven o r

eight o f the Federal Reserve Banks went i n t o t h e market
at t h e same time t o execute orders i n a n aggregate o f
four hundred million dollars f o r certificates, w i t h i n a
period o f three months,

i t i s going t o have a n effect

vpon other market values?
Governor Norris:

I

t must have,

The Chairman: A

month a g o I

said no, that there were

not enough o f them; b u t t h e y have b e e n piling u p so. fast

lately that I am beginning t o think that


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Federal Reserve Bank of St. Louis

Governor McDougaly. I

i t -might.

think there i s a good deal i n

ae
what Governor Norris states, t h a t this situation,

at

the moment a t least, although i t may become different,
ie not quite s o bad a s w e might infer.
in going around t h e table, I

f o r instance,

think i t was v e r y clearly

this morning that s o m e o f the banks, Chicago
being one, h a d been v e r y careful i n the matter o f taking
nothing but short t i m e Treasury Certificates.

F o r in-

stance w e have n o maturities b e y o n d liarch o f next year;

we have bought them s o that they run off gradually.

A s

a matter o f fact, w e bought t h e m quiékly I

believe before

any o f the other banks w e r e i n the market.

v e have d e -

clined t o g i v e f a v o r a b l e c o n s i d e r a t i o n
buying l o n g e r t i m e c e r t i f i c a t e s ,

t o t h e matter o f

e v e n three o r four y e a r

notes, largely for t h s reason that y o u have distlosed,
that w e d i d n o t b e l i e v e t h a t t h o s e w e r e g o i n g t o b e

available w h e n w e wanted them.

Y e thought t h a t w e might

have t o turn them o n the market, »orobably a t a time when
we needed t h e m most, w h e n conditions w o v l d not b e such

as t o warrant o u r doing so, and those conditions might
be c a u s e d b y a l l o f t h e b a n k s g o i n g i n a n d b u y i n g l a r g e

amounts o f securities running for long periods o f time,
which t h e y might have t o dispose o f a t the same time - -


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Federal Reserve Bank of St. Louis

The Chairman:

B u t l e t u s s e e what t h e facts a r e

112
about coipetition.

I

t i s competition i n these certi-

ficates t h a t w o u l d r u n t h e m u p i n t h e m a r k e t v a l u e t o o

Ve h a d a n order f r o m the Treasury a t one time
for sixty million, w h i c h wae a big order, a n d a t the time
that order w a s i n the market i n New Y o r k i t became k n o w n

to u s that there were other banks buying i n the New York
market through brokers t h a t h a d offices scattsred throughout t h e country, b u y i n g certificates, a n d the existence
fay for ten, fitte 1

twenty millions,

outside N e w York, together w i t h o v r sixty millions f o r
the Treasury w a s bound t o creates a change i n the market
orice o f t h o s e c e r t i f i c a t e s ,
“6 h a p v e n t o k n o w r i g h t n o w t h a t t h e T r e a s u r y w i t h i n

a short time i s going t o call upon u s t o make a n investment
of fifty millions f o r t h e m i n the market.

Y e have n o

means o f knowing t o what extent t h e other reserve banks
may b e i n t h e m a r k e t f o r c e r t i f i c a t e s
and I

a t t h e s a m e time,

want t o t e l l y o u t h a t i n bonds a n d c e r t i f i c a t e s l a s t

year w e executed orders for the Treasury alone exceeding
a billion dollars,

Y o u c a n see h o w i t would be. S u p v o s e

a quarter o f that fell d u e within a period w h e n w e were
buying certificates f o r ourselves,


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Federal Reserve Bank of St. Louis

Governor Calkins:

s

m

e t o me i t i s unnecessary

115

the auount, b u t rather t h e danger Luvolved i n
Foe dese s a t nMtVeto
AiI nSwaae

situation e x i s

w h e r e the

n0
efteet, k n o w nothing about t h e situation, a n a
uping also,

y o u h o v e a u i u p o s s i b l e situation.

he Chairman:

Absolutely.

C L PUutts
C

Chairman:

T h a t 2

if w e can.

Governor ..cvougali:
from the N e w Y o r k bani a t t h e t i m e this first order
VOU} 2
enough t o l e t u s know. O t h e r w i s e


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Federal Reserve Bank of St. Louis

the

5

C e n c yon: were

w e would n o t have

s other eleven

same

varket, that could be
this incident happened i n connection w i t h
siven y o u t o buy for t h e Alien Property
you were g o o d enough t o inform u s i n regard at

L1é

think u n f o r t u n a t e

that N e w Y o r k w a s
aniount

o f

asaler t a a t

sovernor i:cvougaly.. j e l l , i t cane
tuo dealers;

but I

from a t l e a s t

a m mentioning t h i s

ing that w e c a n a t
necessary t o insure a

receury wae i n

condition s o

banks,

market, woulec vithdrayw,

Governor N o r r i

way i s t o
4

pursue t h e policy that w e
that w e h a v e n e v e r b e s n i n t h

serket f o r a

dollar's w o r t h
in t h e U n i t e d

worth o f them.
been c e r t i f i c a t e s


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Federal Reserve Bank of St. Louis

n o t e s that were

hea

o
t

bout, a


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Federal Reserve Bank of St. Louis

T
a
t

e
L 2a
>)

en

e

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E-poOe

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banks w e r e advised that t h e Treasury w a g i n the market,
because Boston, Cleveland, S a n Francisco a n d Chicago
might buying a t t h e same time, a n d w e will have t h e
objectionable situation.
it; w e h a v e h a d it. T

Y o u are going t o have

know e n o u g h a b o u t t h e s i t u a t i o n

to know that w e have h a d just exactly that
Treasury was i n the market,
The Chairman:

I

t i f L i k e t h e L e a g u e o f Nations.

Soms gentlemen i n the United States h a d a feeling that
we were surrendering o v r sovereignty b y entering into
an arrongement w i t h t h e other nations,

h e y

w

e were,

svery time that w e agree among ourselves t o adopt a
common, uniform policy a n d t o abide b y it, w e are certainly surrendering o u r autonomy t o sach other, t o a
league,

i f vou please o r t o a confereration,

a matter t h a t p r e s e n t s o n e t h i n g w h e n i t i s a
of f o r m o r m e t h o d
It i 8 a

This is
question

i n c o n c u c t i n g habkansisndbbemblem,.

matter t h a t i n v o l v e s v e r y d e e p p r i n c i p l e w h e n

it c o m e s

t o the directors

¢ x e r c i s i n g Oot©

r i g h t s conferred

upon them under the act o f earning their dividends, f o r
instance,

B u t I

assume t h a t t h e c a s e i f t h e s a m e w i t h

you a s i t i s with us,

v

e have a lot o f very intelli-

gent inen o n our board w h o are anxious t o exercise their


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Federal Reserve Bank of St. Louis

117

duties i n the very largest way with regard to the welfare
of e s country. a n d iff having a system policy which they
will abide b y i s t h e necessary thing, w h y w e ought t o
find o v t w h a t t h a t p o l i c y i s a n d g e t o u r d i r e c t o r s

to

adopt i t ,
Governor Calkins:

T h e s e q u e s t i o n s p r e s e n t them-~

selves more forcibly a t times than they c o at other times.
For instance a t the present t i m e w h e n w e are a l l interested i n this propositon f o r t h e purpose o f earnings
are n o t very Geeply concerned about a

rate.

we

modification i n the

O n the other hand when w e are all dispose t o sell

for t h e purpose o f operation,

w e might b e deeply concerned

about t h e loss involved.

Governor Seay:

B u t what i s the probability o f such

an occasion a g that arising?

Governor Calkins:

T t i g not a very great probability

but i t i s certainly a possibility.

The Chairman:

L e t u s see about that.

men c o n v e r s a n t w i t h t h e f i g u r e s

of the country?

A r e you gentle-

o f t h e s u r p l u s b a n k reserves

I n New York t h e last clearing house

statement showed the surplus reserve t o be $2,000,000 a n d
on the same d a y the N e w York City banks w e r e borrowing f r o m

us36,000,000; that is the New York City banks, N o w


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Federal Reserve Bank of St. Louis

118
suppose t h e tide turns a n d the reserves become impaired
day after day, a s they are liable t o do, i f w e have a
movement f o r planting o r a crop movement o r anything o f
that sort, o r just because business springs u p , t h e o n l y
way that demand c a n b e met i s b y borrowing f r o m the
Reserve Banke, I

a m not s o sure that this t h i n g i s

going along i n the happy fashion that i t has been, w i t h
our reserves o i l i n g u p and our losses b e i n g paid off every
day - - not a t all,
Governor Calkins:

T h a t i s equivalent t o saying that

you. are not s o sure that w e are going through a
of b u s i n e s s s t a g n a t i o n .

long period

I f w e a r e going t o have a

period

of stagnation w e are probably pretty safe i n ovr present
positions, b u t i f w e are going t o have a

revival o f a n y

dimensions, t h e n w e wovld f i n d i t necessary t o sell securities.
Governor S e a y :

U n d e r t h e praesent a r r a n g e m e n t ,

d o you

think i t a t all likely that t h e N e w York banks, f o r instance,
will e v e r h a v e a

The Chairman:

greater e x c e s s r e s e r v e ?

N O .

Governor Seay: S i n c e nothing but Pederal Reserve B a n k
walances count naturally t h e y will nevor have a n y excess
Feserves,.


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Federal Reserve Bank of St. Louis

The Chairman:

N o .

Governor Seay:
The Chairman:

I t will never show hereafter.
C o n s e q u e n t l y , inasmuch a s the banks

of the country a s a rule, especially the member banks, a r e
lending a l l o f their resources a n d gust
reserve p o s i t i o n e v e r y week,

t

h

e

i

a n y demand that springs

r
u p

will b e reflected i n borrowing f r o m us, will i t not?
Governor Seay: A l w a y s .
The Chairman:

T h a t w a z n o t s o before t h e reserve

act W a s passed,

Governor Seay:

W o , there h a s been a

transformation

absolutely f r o m that.
The Chairman:

T h e r e f o r e t h e situation c a n underg

a transformation over night, almost.
I just want t o s a y this further.

I

n view o f the

fact that i n New York w e are obliged t o d o such anlarge
amount o f this business f o r t h e Treasury v e have necesserily h a d a long correspondence, cormencing sometime i n

Harch, with the Treasury, with ur, Gilbert a n d ir,
ie@llon a n d have been corresponding w i t h t h e Federal Reserve

Board about the matter o f the reserve banks! policy i n
making investments, w h a t t h e necessities o f the Treasury

are
Gy
, a n d whether our policy i s a wise one and whether i t


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Federal Reserve Bank of St. Louis

120
might n o t present s o m e dangerous features f r o m the
Treasury standpoint,

N o w when questions o f that k i n d

come u p I think y o u will agree w i t h m e that t h e wisest
thing i s t o find t h e solution a n d not t o fall back right
away upon t h e question o f what your rights are,

I f we

adopt that policy o u r relations w i t h t h e Treasury a r e
certainly going t o b e o f a very unsatisfactory character,
We have discussed a t a t great length a t the bank
in N e w York,

a n d l e t m e point o v t what seems

t o us t o

be t h e p o s i t i o n a s t o t h e r e l a t i o n s w i t h t h e Treasury.

Here.is a n act off Congress w h i c h rests f o r its constitutional Justification u p o n t h e McCullough case t o which
I have referred,

I t contains a

mandatory provision which

requires u s t o serve t h e Treasury i n fiscal matters,
financial m a t t e r e ,

S u p p o s e t h e Treasury officials f e e l

justified i n saying that the independent action o f ovr
agents, created b y act o f Congress, a n d required t o serve

us b y that act, are a source o f peril t o the Treasury interests?
to u s ,

S u p p o s e t h e y w r i t e t o us, a s iir, G i l b e r t h a s

in a

very nice way, b u t complaining about i t ,

stating that h e i s viewing t h e situation w i t h grave concern, a n d w e d o not agree w i t h you; w e think y o u are a l l


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Federal Reserve Bank of St. Louis

“121
wrong; w e refer fouyto section 1 0 or whatever i t may be
of t h e F e d e r a l R e s e r v e A c t w h i c h g i v e s o u r p o w e r s w h i c h

Congress intended that w e should exercise, a n d I guess

you have got nothing t o gay.
secretary o f the Treasury,

T h e n a conscientious

i t seems t o me, must t h e n g o

to the Keserve Board a n d endeavor t o effect a n arrange-

ment with the Reserve Board b y which these agents will
behave themselves - ~ I

a m speaking f r o m their point o f

view, a n c i f the Federal Reserve Board provides n o
remedy o r takes t h e position that t h e reserve banks a r e
within their legal rights, t h e n t h e only recourse t h a t

the Secretary has, i t seems t o me, i s the President,
uay b e the President w o u l d have t o g o t o Congress;

he

might h a v e t o g o t o the extreme o f removing some people
from office, I

a m simoly figuring a n extreme case where

the Reserve Banks a n d the Treasury could not agree o n
these matters a g they should, I

think that i s a develop-

ment that would be s o foolish, a n d s o unnecessary that i t
the slightest possibility o f

is up to us to find a way to avoid/any such situation,
iiy understanding i s that both ir. iwellong and Mr. Gilbert
fesl v e r y strongly that t h e method pursued i n making i n vestments

i n government o b l i g a t i o n s

b y t h e R e s e r v e Banks,

and possibly t h e extent t o which they have made investments,


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Federal Reserve Bank of St. Louis


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Federal Reserve Bank of St. Louis

122
is becoming hazardous t o the Treasury, a n d I told Mr. Gilbert
that I

thought t h e best thing was for u s t o have 4 discus-

sion o f the matter here a n d t o see whether w e could not
upon a policy a n d a method which would reliave h i s
mind o f that anxiety.
Governor iiorgss: I
that I

would like t o say, ir. Chairman,

have h a d t h e pleasure o f hearing Governor Strong

talk about this before, I

got u p a fine theory o f m y own,

that v e should deny 911 rights o f the Treasury
to interfere s i t h our opsrations. I

referred i t t o our

counsel a n d i t w a s d i s c u s s e d q u i t e thoroughly,

and

the f i n a l outcorie w a s t h a t w e h a d n o rights e x c e p t s u b ‘ e c t
—

to the fiscal agency relations w i t h t h e Treasury,
tically n o rights;

o r prac-

t h a t svsrything was subservient t o t i t

part o f t h e l a w which says that t h e Secretary m a y require
the federal reserve bank® t o act a z fiscal agents. 1

BG

enough o f that t o satisfy m e that that w a s about where w e
stood,
Governor Norris;

i r . Chairman, I

have b e e n following

the figures, o n d I ain surprised t o learn that t h e investmentsof t h e t w e l v e f e d e r a l r e s e r v e b a n k s

i n government s e c u r -

ities have reached s u c h a n amount a s 5480 ,000,000,

A g sI


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Federal Reserve Bank of St. Louis

123
said before lunch, o u r total investments are, I

think,

about sixteen million, a n d I had roughly assumed that t h e
investments o f the total s y s t e m were probably n o t much,
if anything, o v e r twelve times that,

N o w , i t seems that

they a r e thirty times ours, a n d w e have apparently o n l y
invested t o the extent o f about o n e third compared w i t h the

other banks o n the average,

W

e have protected ourselves

from the possibility, s o far a s human foresight c a n go,
of having t o sell any of our investments,

I n addition t o

that w e have about twenty millvons o f bankers acceptances

and after that a reserve percentage o f over seventy-sight
per cent,
I a m s u r p r i s e d also,

a t your view, w h i c h G o w r n o r L o r s s

says i s confirmed b y their counsel,

o f t h e extreme effect

ofthe provision that the Secretary of the Treasury may
require u s t o perform fiscal agency functions. I

have n o t

had oce: sion for same years t o read the decision i n the
u.cCollough Cage, b u t m y recollection o f i t i s that i t was
neld i n that case that a

banking system w a s essential t o

any civilized community, t h a t i t was necessary that t h e
government s h o u l d have cepositaries f o r i t s money, a n d that
it was o n those principles t h a t t h e right o f t h e government


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Federal Reserve Bank of St. Louis

124
to confer o n banks inmunity f r o m local. taxation, W A S SUS}

tained,

M y impression has always been that t h e right t o

require federal reserve banks t o act a g fiscal agents was
altogether optional, n a t o n their part, b u t o n t h e p a r t o f
the Government, b u t that t h e existence o f the Federal reserve banks, their l e g a l right o f existence, w o u l d b e <just

az strong, even though they never were called o n to exercise those functions,

o r e v e n i f there w a s n o right reserved

in the Secretary o f the Treasury t o require t h e m t o exercise those functions.

ra A s long as they ha@ the right t o exercise them I would have supposed that the constitutionality
of the Act w o u l d e
b dsfended, e v e n i f that clause w a s n o t
in i t a t all, e v e n i f the Sseretary h a d n o right t o call
on them t o exercise t h e functions o f fiscal agentes.
The Chairman:
ferent f r o m that.

N o , I

think t h e point i s a little dif-

I t happens t o b e expressed i n this l a w

as c i v i n g t h e S e c r e t a r y o f t h e T r e a s u r y t h e r i g h t t o r e -

quire t h e m t o act,
Governor HMorss:
The Chairman:

Y O s «

A r d every o n e o f these corporations

that h a s besn ersated b y Congress I

think rests f o r i t s


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Federal Reserve Bank of St. Louis

95
constitut o n a l justification u p o n t h e MeCollough cage,
They a l l contain t h e prpvigion that t h e y are a u t h o r i z e d o
t

act a s fiscal agents,

I

n this case i t makes i t all the

stronger, because w e are required to, <

a

authorized

toy
Governor Norris:

T h e g a m e provision exists

as to

the Federal L a n d Banks.
The Chairman:

Y e s , a n d as t o t h e War Finance Corpora-

tion.
Governor Yorris:

yes.

them t o act a s fiscal agents,

T h e Secretary m a y require

o f course when the con-

stitutionality o f the Act w a s discussed a n d decided b y the
Supreme C o u r t 1
right

e h e last year i t was admitted that t h e

t o require t h e m t o a c t a s fiscal agents strengthensd

the constitutionality of the .ct, but the decision of the
court i n that case wag that they were constétutional corporations even without that. H o w e v e r , that i s a purely
eal point t h a t I

do not think w e need, a s layzen, t o waste
If the Seerstary o f the Treasury, h a v -

ing the right, b u t n o obligation o r cuty, t o employ u s a s
fiscal agents, chooses t o employ us, i t would s e e m t o m e
that h e r a n t h e same r i s k that a n y business iman o r corpora-


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tion would run when i t aihcs a corporation o r a n individual
to transact business f o r i t which that corporation o r
pusiness w a s a t t h a t t i m e t r a n s a c t i n g f o r itself.

e a r

want t o b u y leather a n d I go a n d give m y order t o a leather
merchant I

a m not entitled t o expect that h e will ahandon

his o w n business until h e has canplsted t h e execution o f
my order;

a n d s o i f t h e Secretary o f the Trea

to g u e a

reserve b a n k a n order w h i c h h e might g i v e directly

to a broker, o r which h e might handle--- I think h e did
handle t h e sinking fund account during t h e previous administration--- t h r o u g h t h e fiar F i n a n c e C o r p o r a t i o n ;

i f he

chooses t o give that t o the fedsral reserve banks h e
realized t h e g o o d faith, i t ssems t o me, o f t h e banks t o
execute that conscientiously a n d honorably t o the best
interests o f the g w ernment, b u t i t sesmed t o m e a rather
extrene v i e w o f this t o s a y that h e i s eutitled t o insist
or expect t h a t curing that t i m e t h e banle s h a l l absolutely
be under their functions a n d rights i n making purchases o f
government securities,
The Chairman:
orders I

w h e e t h e y conflict w i t h t h e Treasurer's

think there i s not t h e slightest doubt o f it.

Governor Norris;

W e l l , w e d i d last November a n d $


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December, through orders t h a t y o u turned over t o us, b u y

some thirty millions i n government bonds i n our local markete,
as a

A t t h e time that w e were buying those thirty millions
matter o f g o o d faith, o r ,

a8 I

expressed i t this m o r n -

ing, o f comity, a n d t o avoid a n y possible Suspicion o f our
having u s e d t h e s e o r d e r s

o

w

n advantage,

w e d i d not

buy o r sell a government b o n d o n our o w n account.

B u t I

Would n o t h a v e s a i d t h a t w e w e r e u n d e r a n y l é g a l o b l i g a t i o n
NOG. FO: do-it; I

cic i t m o r e t o a v o i d t h e p o s s i b i l i t y o f

criticism,

The Chairman: ‘Yell, our counsel and the counsel for
the Boston Bank both have held very clearly and very strongly, and without the slightest qualification, that there
is the strongest kind o f legal obligation resting upon us.
Governor liorss;
that Governor Norris h a s just expressed, a n d I did t h e best
fscould t o make o v r counsel accept i t , b u t I

could not.

_ o u r Gouncil
ir, Weed/talked i t over with Mr* Harrison and iir® Harrison
knows m o r e a b o u t i t t h a n I

do, I

remember t h e c o n c l u s i o n

very clearly.
Governor Norris:

T

o g e t d o w n t o soanething practical,

has t h e Treasury anything t o camplain o f u p t o cate?

H a s


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there been a n y operation b y a n y Federal reserve bank, o r
any ageregate operation b y all that i n any way prejudiced
or interfered with the Treasury Department?

The Chairman:
mine. I

I t i s a very difficult thing t o deter-

have s o many letters h e r e f r o m ir> Gilbert o n the

subject t h a t I

won't attempt t o read them, b u t t h e Treasurer

maintains t h a t o u r transactions h a v e already o r are i n

danger i n the near future o f developing into a situation
where i t will interfere w i t h t h e Treasury, a n d t o some extent I

feel that t h e y already have,
Governor Seay:

O n the other h a n d could i t not b e

contended with success t h a t t h e situation h a s been a n advantage a n d blessing t o the Treasury?

A n d , might there

not b e t h e possibility o f its working around t h e other w a y
and w e believe that t h e Treasury i s partly indebted t o

us for its ability t o operate a s successfully a s i t has
ope rated?
Governor iieDougall: I
sent c l e a r l y d e v e l o p s

thinka canvass o f those pre-

a n attitude

o n the part o f t h e

several boards o f directors with respect t o their desire t o
snter t h e m a r k s t u n d e r c e r t a i n c o n d i t i o n s

a n d avail t h e m

selves o f the privilege o f buying certain securities

in

the open market, including government securities,
There h a y h a v e b e e n d i f f i c u l t i e s a r i s i n g naturally, b s c a u s e

of what has been done, owing t o the fact that the twelve
banks have n>ver b e e n apprised 2 s t o when t h e Treasury was
in t h e market, I

belisve t h a t a l l p r e s e n t w o u l d c o n c e d e

that when the Treasury i s i n the market for securities that
it might b e confronted b y difficulties a n d dangers, affecting their interests a t least, f o r t h e banks themselves t o
emain i n the market, C o n s e q u e n t l y I

would suggest f o r

the consideration o f t h e conference that w e g o upon record
as being willing a n d desirous o f working w i t h t h e Treasury
Department t o t h é extent that w h e n w e are aware o f the
Treasury being i n the market f o r securities w e will either
retire o r w i l l c e r t a i n l y g i v e p r e f e r e n c e

t o their demands

before f i l l i n g o u r o w n wants, r e g a r d l e s s

o f the law o r

technica lities
Governor lMorgs;:

I t seems t o m e that w e could g o a

little furthsr t h a n that,

I t seems t o m e w e might c o m e

to some understanding with the Treasury a s t o how much o f
the securities w e needed t o buy as well a s when w e shoulda
buy them, I

had some fipures m a d e u p some time ago, which

ran o n the basis o f 1921, a n d showed that the Federl resave


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banks needed about 342,000,000 i n sarnings t o pay their
dividends a n d expenses,

T h a t i s four p e r cent o n one

billion a n d fifty million dollors,

N o w , i f t h e loans

and securities w e r e lumped together,

require 31,054,000,000.

t o earn that i t would

N o w , i f we could get a t the basis

of what o u r loans were, together w i t h s u c h acceptances a s
we naturally g e t i n the markst,
amount

w e could come a t the

o f securities t h a t w e w o u l d n e e d t o h o l d t o make u p

the total amount necessary f o f earnings.
fact I

A s a matter o f

think today that t h e holdings o f acceptances a n d

loans, discounts, a r e about a

billion dollars, a n d that

the holdingsof certificates are nearly 5500,000,000,.
Governor Calkins:

T h e total earnings assets o f the

twelve banks o n April 1 9 was .31,172,548,000, w h i c h represented total earning assets o f all classes,
Governor Morss;

D o e s that include certificates?

Governor Calkins:

Y e s , t h e total bills o n hand o f

that date, 3640,000, w h i c h would include those bought,

United States bonds a n d notes 254,000,000, Pittman Act
Certificates 386,000,000, a n d all other $192,000,000, mak-

ing a teal of 31,172,000,000.
Governor Morges:

I

f w e need a

billion d o l l a r s

of


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1351
earning assets o f all kinds t o earn our necessary expensss

and vididends, i t seems t o me that w e could make some sort
of a basis o r could arrive a t sane sort o f a basis o n
which t o deal with t h e Treasury,
stand h o w m u c h w e needec,

b y which t h e y could under-

a n d probably arrange f o r u s t o

gst them at some time that was convenient t o the Treasury.
That i s o n the theory, o f course, that t h e directors o f the
various federal reserve banks would b e content t o buy n o
more s e c u r i t i e s t h a n w o u l d s e c u r e o u r e a r n i n g s f o r t h e

banks. I

haven't g o t i t worked out very carefully, b u t

that i s the general idea, that you could make a n arrangement w i t h t h e Treasury a s t o how m u c h y o u should carry,
as well a s when y o u should b u y them.
Governor Norris: I

think t h e trouble w i t h Governor

iiorse' suggestion i s that assuming, f o r t h e sake o f t h e

discussion, h i s figure o f $1,054,000,000 a s the total
amount o f esrning assets w e require, t h a t might m e a n that

if ovr discounts a n d bills purchased ran off t o 354,000,000,
for instance, t h a t t h e n w e would b u y about a

government securities,
on the program I

billion o f

N o w , when this subject w a s put

thought I

which
would make a suggestion, i n view

of t h e figures w h i c h have b e e n given here toduy I

am afraid

132

would not be seceptable to some, but which would be perfectly acceptable t o us, a n d that i s that the banks should
- Limit their holdings o f Government obligations t o the amount
of their capital a n d surplus, w h i c h would mean a limit o f

3300,000,000 for the system,

O u r holdsings represent

about t w o thirds o f cur capital a n d surplus,

Governor Morss:

W e need about 375,000,000 o f earning

assets a t four p e r cent t o cover o u r dividends a n d expenses,

A few days ago our loan account w a s $18,000,000, plus
39,000,000 i n acceptances, making (327,000,000. 2 2 , 0 0 0 , 0 0 0
or 2 3 , 0 0 0 , 0 0 0

i n addition t o that w o u l d b e o n l y $50,000,000

and that would not earn o u r expenses a n d dividends o r anywhere near it,
Governor Norris:
trict a

I f y o u h a d temporarily i n your dis-

condition where none o f t h e member banks were bor-

rowing a n y money f r o m you, instead o f investing a large
part o f your resources i n government securities, w h y would

you not either buy bills or if you could not get them,
run short o n your dividends?
Governor fiorss:

T h a t i s t h e alternatise,

Bills

are things which you can get only according t o the market,
There have b e e n very f e w bills lately, a n d they have b e e n


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133
at low prices, a n d to go into the market a n d buy them
heavily would put t h e m down artificially just a s much a s
it would bonds,
Governor Yorng:

Y o u are satisfied that t h e purchase
by the twelve federal reserve

a8e a s e d credit t o such a n extent t h a t there i s
more o r less stimulation o n the N e w York Stock Exchange?
The Chairman:
Governor Young:

I

e that 4
F e s ;

The Chairman; I

think this,

I t i s a very difficult

matter f o r u s t o have a n y convincing figures o r t o g e
anything that i s a cemonstration conclusively o f what i s
taking place, b u t I

think that w e made n o investments o f

this kind, a n d had we been satisfied t o let our loans and
discounts r u n d o w n t o a b o u t f i v e h u n d r e d o r s i x h u n d r e d

millions, that the liquidation vould have proceeded without
ag much tase of money a s has developed, that the speculation wouldhave b e e n deferred somewhat;

b u t o n the other

hand that the recovery o f business would have been somevihnat slower,

M

y belief

i s that t h e policy o f t h e system

in reducing rates a n d i n keeping this amount o f funds

available t o the country--- this i s only a n opinion-~- hag


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134
been o n e o f t h e influences t h a t h a s hastened a n d facilita-

ted the recovery o f business that has taken place, W h e ther i t will b e permanent o r not i s another question,
Certainly w e o u g h t n o t t o d r i f t i n t o a

period o f such specu-

lation that t h e prices o f commodities w i l l h o p u p without
limitation a n d w e will have a recurrence o f what happened
two years ago,

T h a t will b e disastrous,

Now, I have a lstt r that has just been received b y
Governor Harding that bears upon this whole matter, a n d
I will a s k ime Harrison t o read it, a n d I

a m going t o a s k

you t o consider this letter specifically a s a subject b y
itself, a s i t indicates,

s o far a s fiscal agencyzs expenses

are concerned, t h a t w e may get reimbursement, w h i c h will
reduce t h e n e c e s s i t y f o r earnings a n d c o n s e q u e n t i n v e s t -

ment,
Governor Biggs:

I s there a n y desire o n the part o f

the Treasury t o purchase these certificates l o w e r t h a n the
market rate?

The Chairman:

N o .

Governor Biggs: I
The Chairman:

mean lower t h a n par?

N o ,

Governor Biggs:

V e have figures o n our year's re-


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135

quirements, crop moving periods, a n d s o forth, amd out o f
the twenty-five million i n governmsén&s o f various kinds w e
have o v e r t e n m i l l i o n r u n n i n g t o J u n e 1 5 t h , a n d t o September

and u p t o October, w h e n our seasonal demands c o m e o n us,
if w e have t h e m this year.

w e c a n take care o f those,

Then w e h a v e f i v e o r s i x m i l l i o n o n e y e a r n o t e s t h a t c a n

be disposed o f i f w e have a

demand f o r money.

those even a t a little loss, i f necessary,

W e c a n sell

I f demand

ws w e c a n sell t h e m even a t a little l e s a n d
keep o v r reserve position i n good shape,
The Chairman:

T h a t i s all right, b u t suppose w e all

cid that a t t h e same tame?

t

e have g o t t o think o f t h e

effect u p o n the government's position.

Governor Seay:

H o w about the banks o f the country

that hold them? T h e i r position has far more influence
than anything t h e Federal reserve S y s t e m c a n do.

T h e y

are holders o f them and a great many o f them are independent

The Chairman: I

am not s o sure o f t h a , but still they

are n o t subject t o the limitations t h a t w e are,
Governor Seay:

T h a t i s true,

them a n d y o u c a n control us.

Y o u c a m o t control


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Governor Calkins:

T h e y are notunder the same necesity,

because they can borrow from the Federal reserve banks,
The Chairman:. I

do not think t h e positions a r e com-

parable,
Governor Seay: I
but I

do not mean t o make a comparison,

was c a l l i n g a t t e n t i o n

before i t happened t o us.

t o what w o u l d happen t o t h e m

T h a t demand would b e reflected

vpon t h e banle cof t h e country.
befors t h e bank®,

T h e y would b e sellers

i n turn, w o u l d apply t o the Federal le-

serve banks ---

Governor Calkins;

B u t they souldn't sell them while

they covld borrow,
Governor Seay:

T h e y vould sell a four per cent secur-

ity before t h e y vould borrow a t four a n d a h a l f p e r cent
at the reserve banks,
Governor Calkins; I

am not s o sure about t h a ,

They haven't done that i n
Governor seay:

T h e r e 1 s a pretty strong probability,

I think, t h a t t h e y w o u l d f i g u r e

The Chairman:
this, T

have a

o n t h a t o n e h a l f p e r cent.

w e c a n spend a long time die cussing

fseling that i t i s rather a

new point o f

view, certainly to sane of those a t the meeting, a n d I do


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not knor b u t what w e might defer actual disposition o f
this topic until tomorrow a n d give everybody t i m e for a
little reflection,
Governor Norris:
lution, I

G o v e r n o r licDougall o f f e r e d a

reso-~

d o n o t r e c a l l n o w e x a c t l y w h a t i t was, L

remember t h e beginning o f i t but not the snding o f it,
The Chairman:
and the point I

T h a t resolution was not seconded,

want t o make i s that i f w e are going t o

do anything i t will have t o be done i n the form of a more
carefully worked o u t plan than c a n b e stated offhand,

T f

‘oO not think Governor ::cDougall really intended that a s
& resolution, b u t w a s offering i t a s a suseestion,

Governor Young:

M a y I offer this sug: etion:

ment b y eredit produces a

certain amount o f inflated Creatty

I do not think there i s any w e s t i o n sbout i t i n liin 6apolis a n d st. Paul, a n d then money coes d o w n o n the call
loan market i n Wew York,

c o u l d not t h e Secretary o f the

Treasury a t this time abolish payment b y credit? T h a t
woulc h e l p t o 6 c e r t a i n extant,

The Chairman:
tions,

J u s t o n that point, t h e s are two objec-

if
O n e i s that t h e Treasury abolished payment b y cre dit

they would get .500,000,000 balances i n ths reserve Danks


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1358
when a sale t o o k place, w h i c h would b e disastrous t o the
money market , and besices t h a t t h e Treasury would have

3500,000,000 o f idle balances with n o intersst a t all,
Governor Young: I

would g o a little further with it.

The Secretary o f t h e Treasury h a s s t t h e present t i m e

"250,000,000 t o ::300,000,000 o f deposits i n member banks,
which i f a fictitious deposit.

take i t any other way,

T h e r e l s n o use trying t o

H e created those balances because

he wanted t o call t h e m i n certain amounts a l l the time.
Now t h e Secretary o f t h e Treasury apparently wants t o

tell bank: t o stay oub o f the Government bond market.
why couldn't h e abolish payment b y credit, pull down
those balances a n d save that m u c h money i n interest c
and a s h e nesds t h e money borrow directly f r o m t h e Federal
reserve banks, recognizing that t h e Federal reserve banks
should employ a certain amount o f their funds i n government

obligations,
thing?

I

“ h y isn't that a solution o f the whole

t keeps “ v e r y b o d y o u t o f t h e c o m p e t i t i v e m a r k e t .

The Chairman: i

i

s a vicious t h i n g for t h e

Tyeasury t o b e borrowing directly f r o m a bank o f issue.
It i s manufacturing reserve monsy.

Y o u s a y that t h e de-

pobite b y the T r oaeury i n the member banks a r e fictitious.


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That i 8 n o more fictitious t h a n a n y balance made b y borrowing.

Governor Young:

T h a t i s quite true, a n d that was a

large part o f ovr trouble i n 1919 a n d 1920,
The chairman: B e c a u s e i t was conducted o n such a
large scale,

Governor Young:

Y e s ,

Governor Wellborn:
maturities,

T h e trouble w a s t h e n they h a d n o

T h e y could issue short t e r m paper a n d w e

could absorb them,

Governor Young:

W e are talking now about commercial

credit,
The Chairman:

N o t commercial borrowing.

How d o y o u gentlemen feel about letting this g o over
for f i n a l c i s p o s i t i o n u n t i l tomorrow,

Governor Young: I

think that would b e better,

simply threw that o u t a s a suggestion.
The Chairman:

O f courss, y o u have i n mind t h e opin-

ion of the Attorney General bearing o n this, that is, i f
we h a v e a

d r o p i n e2rnines a n d h a v e t o u s e s u r p l u s t h e r e

would b e n o oojection t o doing it,
Governor Calkins: I

a m wondering what t h e individual


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opinion o f t h e m e n a r o u n d t h i s t a b l e i s o n t h i s subject,

The directors o f Federal reserve bank® a r e inevitably
reluctant t o see their earnings f a l l below s u c h a point
az t o n o t c o v e r e x p e n s e s a n d dividencs,

but I

think t h e

officers o f the Federal reserve banks are less concerned
about that, T

do not know that i t i s a

cient interest t o discuss, b u t I

matter o f suffi-

got ahead o f the Attorney

General o f t h e United States b y s e v e r a l laps because I

handed down sxsctly the same opinion which has now been
handed down b y the A t t o r x . e y General some time a g o a n d found
that most people w e r e o f a different opinion, t h a t i s
people w i t h w h o m I discusssd t h e matter,

discuesed b y ovr directors I

a n d when i t was

found that everyone o f the

directors w a s v i o l e n t l y o p s o s e d t o p a y i n g d i v i d e n d s o u t o f

surplus, a n d that t h e l a y directors w e r e quite complacent
about it,

I t was rather a

curious state o f mind o n the

part o f both of them. P e r s o n s l l y I think i t might b e a
to e a r n i t e

he matter g o over,

{ am not inclined

t o delay


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the proceedings,
(Whereupon, t h e conference went i n t o informal execvutive session, t h e proceedings o f which were n o t reported, )

and at the conclusion o f which the conference was resumed. )
The Chairman:

W e will postpone a n y action o n Topic

B, a n d w e come n o w t o Topic C ,

C, Amendment t o permit Member Banks
to borrow o n own collateral note
drawn for a n y period u p t o 9 0 days
vith Government securities a s collateral,
That originates w i t h Clevd and.
Governor FPanchr;

i r . Chairmen, t h a t h a s been a

mat-

ter that h a s been discussed informally a t various tiines.
We get a

continuous corplaint f r o m our small member banks

about their borrowings o n governnient bonds.

W

e d o loan

thea ninety dsy nioney, and they complain that i t subjects
thei: t o continuous renewals a n d things o f that sort a n d

they belicve i t would b e a gree convenience i f they could
borrow f o r ninety days,

T h a t i s put o n the list o f topics

just t o see what t h e foeling o f the other Governors i s a t
this time,

T h i s i g a continual complaint o n the part o f

the smaller banks w i t h regard t o the fifteen d a y renewals,
They claim that t h e y could offer f o r re-discount custoners'!


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142

ninety d a y notes secured b y government bonds, o r that t h e y
can offer t h e note o f a non-member bank, a n d they s e e m t o
think i t i s rather queer that t h e y cannot borrow themselves
for t h e same length o f time o n government securities,
Governor Norris:

The Chairman:

T h a t tould require a n amendment t o

Y e s .

Governor hic henney:

i g h t n o t that b e a n opening

wedge, a n d the next thing they would want would b e nin:ty
day notes w i t h roceivables?
T h i s w o u l d b e restructed t o notes

Goyérnor Mores:

secured b y government obligations only.
iy. Harrison:

W h y i s i t limited t o government secur-

ities o n l y ?

Governor Fancher: I
to that,

do not k n o w that i t i s limited

B u t t h e y would like t o borrow f o r ninety days

on their collateral, l i k e they cdo other things, a n d their
only w a y o f b o r r o w i n g

day note,

o n government b o n d s

is on a

fifteen

T h a t i s the o n l y v a y they c a n borrow a t t h e

present tine,

T h a t i s the longest advance y o u c a n make

to a member b a n k o n a g o vermment bond,

T h a t does n o t mest

the seasonal requirsments o f t h e small banks a n d they want


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Federal Reserve Bank of St. Louis

tO borrow o n t h e i o w n notes,
The Chairman; I

would prefer, i f w e open t h e collateral

“oor, t o see the borrowing o n collateral notes limited t o
other kinds o f eligible collateral exclusive o f gaernment
bonds,

Governor Calkins;

T h e amendment permiting t h e fifteen

day notes w a s a war measure a n d was a n invasion o f the
principles

o f t h e Peceral Reserve Act, a n d i f extended

would b e a further breaking d o w n o f those principles, [
would like t o read a notation o n that i f I may, briefly,
"The consideration o f a n y wove t o facilitate t h e reciscounting o f member b a n k notes secured b y Government
ties i n v o l v e s a

consiceration

o f t h e original pur-

of p e r m i t t i n g P e c s r a l h e s e r v e B a n k s

t o rediscount

any obligations collateralec by, a n d presumably given f o r
carrying o f , G o v e r n m e n t s e c u r i t i e s ,

Probably t h e most imoortant obisect o f the Federal Reshe machinsry n:
lastic i n that i t would b e
based o n self-liquidating ciedit instruments arising
out o f ths production a n d distribution o f coiumodities.
on obligation o f the United States d o e s n o t represent


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144

a transaction o f this charocter seven though i t may b e
argued t h a t i t i s f i n a l l y p a i d o u t o f c u r r e n t p r o d u c -

tion through the medium o f taxation; a n d t o theextent
such obligations b a c k the currency,

t o that extent

euch currency l e flat cusrency.
Thefefore, t h e rediscounting o f a n y paper secured b y
Government securities b y the Federal Reserve B a n k a n d use
by i t a s a basis f o r note issues i s economically unsound
and c a n only b e ‘ustified o n the theory that a t times t h e
financing o f the Government out-ranks economic considsra-

tion i n importance, P o s s i b l y thse thought o f meeting such
emsrgenciss, w h i l e protecting t h e currency t o the fullest
extent,

w a s t h e reason f o r limiting t h e period t o fifteen

days f o r which a member b a n k note secured b y Government

bonds could be rediscounted#s within’ which period the
banks, a c t i n g merely i n the capacity o f distributing agents,
a nexus between t h e Government n s e d a n d the
a

coulc. effect t h s d i s t r i b u t i o n

eecuriti

o f such

a n d wW e u c h distribution retire such fiat

currency a s |

i s s u s d against them,

The limitations o f this period d i d not prove a

barrier

or a n impeciment d u r i n g t h e greatest crisis o f this Govern-


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Federal Reserve Bank of St. Louis

145
ment's financial history and there i s surely n o existing
condition o r threatened emergency requiring greater facility o f operations

o f t h i s kind.

A

n extension o f the per-

lod coulc very reasonably b e interpreted a s specific a p proval a n d réco. ::sndation o f Federal Reserve authorities
of t h e unsound practice o f commercial banks u s i n g commercial funds f o r investment i n securities t h a t should b e
absorbed b y the investing public, w i t h ite consequential

artificial stimulus a n d depression o f the whole securities!
market, a n d the corresponding wide-spread price variations,

which sound economy sesks t o avoid.

T h e assumption that

greater investment i n Government securities b y National

banks would follow i n the degree that such securities would
be mace more available a s collateral w i t h the Federal Reserve
Bank i s b o r n e o u t i n practice,

for a

survey o f t h e borrow-

member banks from the #ederal Neserve Bank would
disclose that i n a very large majority o f cases the member
borrow first against t h e i r Government securities,
exhausting their collateral valus, before submitting their
eligible o n d accertable p a p e
If argued f r o m t h e standpoint o f opsrating facility,
which could support s u c h a n argument could be,


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Federal Reserve Bank of St. Louis

with equal validity, advanced f o r a like extension o f a
maximum period o f a member b a n k note secured b y Slisible
paper corresponding:

t o the eligible maturities o f the

notes ceposited a s collateral, ( n i n e t y days a n d six months)
and b e cven less objectional, f o r i n this svent, t h e collateral wouldbe paper s u c h a s would have the sanction o f
sound economic reasoning a s a basis f o r currency.
The conclusion i s that t h e u s e o f G o v e r n m e n t securitiss
aga

basis f o r currency i s sconomically unsound i n any

nstance; t h a t there i s neither necessity i n existing conditions, n o r threatened emergency, warranting t h e proposes
at such extension would b e interpreted a s
aporoval

o f larger investment

i n Government

bonds b y comnercial banks, a n d that this would b e a practicwith t h e consequent :false stimulation o f a n d
s permanent placement o f Government bondsl

a n d that n o

operating advantage w o u l d accrue other t h a n t h e very slight

one o f less fre“vent renewals o f mowber bank notes.’
~

e4 i

a
s 4Mr >
Chairman
°

a r a wt? v e a f a n n i n e ‘
y
:
j “ euT r
v Yeh y
w o fu s Lw Sh rU r
b i
a n
e Bg
s 4 i Tn that memorandum
H hi

to t h e c o l l a t e r a l n o t e a m e n d m e n t
reserve b a n k s

o r t o investments

i n governmsnt b o n d s ?

Governor C a l k i n s :

Pal

s

j

o f f2dsral.,


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147
Federal Neserve B a n k investisents a r e n o t used for t h e
purpose o f supporting notes f o r circulation a n d there-

fore that practice i s lese objectionabls than the
practice proposed. I

bslieve a sound amendment would be

to take i t out o f the Act altogether,

t h e permission t o

buy a t fifteen d a y maturity o r a n y other maturity w h e n
secured b y government security.
Governor Fancher:

I

n effect w h a t h a s b e e n done b y

all the banks with regard to the 15-day advance has simply
been a subterfuge, that i s discounting the note 1 5 days,
and renewing it, s i x months a n d sometimes a

year,

Governor Calkins: A d m i t t i n g that i t i s bad practice,
why extend i t ?
The Chairman:

w e have s e e n t h e t i n

cent o f the resources o f the Federal Neserve Banks were
comprised o f loans vpon'Govern.ent securities

i n one

form o r another,
Governor Calkins;

Y e s , everybocy looked upon that

condition w i t h apprehension,
Governor Biggs:

The Chairman:

W h a t i s the p e r c e n t a g e

o f loans n o w ?

I n ovr district i t A s about fifty-

fifty, a s I recall; about h a l f a n d half.


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Governor Fancher:

I t i g a little less t h a n half

in o m district,
Governor Calkins:

o u r total bills discounted, s e -

cured b y government obligations

o n April 1 9 t h was

°201,000,000 a n d other bills .,351,000,000.
Governor Fancher:
The Chairman:

I t i g about 4 0 a n d 6 0 with us.

I s there a n y further discussion o f

Governor Fancher's proposal?
Governor Seay: I

cannot h e l p feeling that notwith-

standing t h e inconsistencies t h a t i t m a y present t o our
member banks, since t h e y discount t h e paper o f the nonmember bank, t h a t i t would b e injudicious a n d unsound
in the first place a n d wovld involve a n amendment t o the
Act, w h i c h would b e hazardous t o a s k for.
Governor Calkins:

W e d o not want a n y amendment t o

the Act,
Governor Seay:

I n the second place, I

a m mite i n

agreement w i t h t h e article r e a d b y Governor Calkins.
The Chairman:

A r e there a n y further remarks?

There i s n o resolution offered, Governor Fancher,
Governor Fancher:
wanted t o present i t ,

I t m a y b e passed.

[ I simply

The Chairman:

T h e next t o p i c is:

D. K i t i n g Operations.
Ll. D i s c u s s i o n o f importance o f Federal Reserve
Banks taking steps t o detect cases o f
kiting.
As t h a t s u b j e c t w a s p u t o n t h e p r o g r a n

b y New York

for t h e r e a s o n t h a t t h e q u e s t i o n o f k i t i n g c o m e s

u p in

New York i n considerable amount a s a result o f direct
sendings. I

a m not g o i n g t o r e a d t o y o u t h e c a s e s

i n de-

tail, that have been detected o f kiting a n d stopped, b u t
in every instance t h e y arise f r o m operations

i n more t h a n

one Federal Neserve district, a n d unlecese circumstances

arise which brin-s something t o our notice that w e can
take u p with t h e other districts o r with some other Bederal R e s e r v e B a n k ,

y o u c a n never b r i n g t h e s e things togeth -

er i n order t o detect a

case o f kiting a n d stop it.

Here i s o n é c a s e w h e r e b e t w e e n N e w Y o r k a n d L o s

Angeles t h e y had 3965,000 i n the air floating a s a kite,
Governor Calkins:

The Chairman:

B e t w e e n N e w Y o r k a n d Los Angeles?

N e w York a n d Los Angeles.

Governor McKenney;

I n what k i n d o f items, iir, C h a i r -

The Chairman: T h e i r o w n checks very largely. I

re-

gret t o s a y t h a t i n s o m e i n s t a n c e s w h e n t h e y w e n t t o t h e


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150
bank itself t h e bank that w a s carrying this kite that
t h e y admitted that t h e y knew it.

I n one o r two cases

. they did not realize quite what i t meant, and in other
cases t h e y were doing exactly what happened o u t i n San
Francisco w i t h regard t o gold --- t h e y were passing the
buck along i n the hope that w h e n t h e string was c u t i t
would fall o n the other fellow.
W e r e t h e y kiting between banks,

Governor Seay:
bank drafts?
The Chairman:
different banks.

Yes.

I n one case i t involved five

I n another c a s e w e h a d ,300,000, w h i c h

involved three towns i n our district outside o f New York
and one I

think i n the Boston cistrict, a n d involved

checks o f not less t h a n seven different concerns.

$300,000 was the total i n that case,

I n another case,

which was conducted between t h e N e w York district a n d

the Boston district, there wag ,150,000 i n the air; a n d
in another c a s e which was conducted between southern N e w
Jersey,

i n the Pennsylvania district, a n d New York, - - -

I think o n e o f those banks w a s i n the Philadelphia distrier; D u t .

o m not eure.

we, Harrison: I
Mr. Chairman,

think those a r e a l l i n our district,

"152
The Chairman: Very well, all in our district,
‘The aggregate was $583,000, and there was forty o r fifty
oethousand dollars i n the air a t o n e time,


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There was another cane u p i n our district that a -

mounted to 372,000, and at one time it ran =

t o $100,000.

Those a r e c a s e s t h a t w e h a v e d e t e c t e d a n d Stopped. I

am

not sure that I have any suggestion t o offer a s t o what

kind of a test yeu could apply in the bank, what kind of
examination a n d s c r u t i n y i s n e c e s s a r y

ly discover those
Governor Seay:

i n o r d e r t o prompt-

o y
Y o u said that i t came u p a s a

result

ofdirect sending?
The Chairman:
arisen a s a

T h e s e cases h a v e t o some extent

result o f direct s e n d i n g s .

Governor McKenney:

T h e bank sends its own drafts

to ite correspondent principally.
running a

J o h n Smith, who wag

kiting operation, w o u l d deposit i n say the

First National B a n k a n item made o n Los Angeles, a n d

they would send that directly there instead o f
through us, W h e n you get the item itself i t is easier
ts detect i t than when B a e r advice o f it.
The Chairman:

I s i t n o t t h e sense o f t h e Conference

L152

that the Federal Reserve Banks should u s e every possible
- precaution_to d e t e c t c a s e s o f k i t i n g e i t h e r

b y member

b a n k s - . o r - c u s t o m e rr
se~
‘banks.
bo
mefm and ought to. do whatever m a y b e necessary i n the circumstances
tm

s

s

|

ggheey hacen

eases o f that character,

t o break u p

A l s o that w e designate a man

in cach bank whose d u t y i t i s t o follow this matter u p
corresponding with a similarly designated official i n
every other Reserve Bank,

s o that w e would g e t a set o f

men i n the system w h o a r e looking f o r i t a n d who are scting under instructions t o look for kiting?
Governor lticDougall:

of experience I

A s a

result

of a

good m a n y years

can s a y that t h e only w a y t o discover o r

detect things o f that k i n d i s t o pursue a

policy o f vigi-

lance,
The Chairman;

Yes,

Governor icDougall:
for a

W e have a t all fimes, a t least

long period o f time, b e e n o n the alert.

figures

t o present,

b u t w e have h a d quite a

perience i n v o l v i n g s m a l l e r a m o u n t s ,
every e f f o r t

T I have n o

similar e x -

a n d w e are making

t o r u n d o w n anything w h i c h looks Bugpicious

and which might b e connected w i t h a chain o f this sort o f
kiting, I


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do not know o f a n y other w a y o f getting a t it,


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153

Governor Calkins: I

would like t o offer t h e reso-

lution suggested b y the Chairman,
Governor Young: I
The Chairman:

will second it.

I t i s a n immense undertaking t o de-

velop a system of checking u p o n the checks passing
through t h e bank.

W e are n o w able t o detect t h e m b y re-

curring items coming through, a n d things o f that kind,
but I

think w e ought t o have some m a n i n each bank who

ig specially responsible for that, a n d who i s i n touch
with a

similar m a n i n a l l o f t h e o t h e r r e s e r v e b a n k s ,

Governor Biggs:

W h e t action d i d y o u take i n the

case o f those banks where t h e y knew that t h e y were kiting?
Did y o u admonish t h e m i n some w a y o r get after them?
The Chairman:

T h e y have b e e n admonished a l l right,

Governor Biggs:

I t looks t o m e like t h e y would

have t o b e gone after pretty strong,
he Chairman:

T h e y were.

i f they knew it.

S o m e o f them have been

admonished and at considerable loss, too.
Governor Calkins:

A l l parties t o the transaction

should b e admonished,

Governor Seay: T h e privilege o f direct sending
could b e withdrawn,


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The Chairman:

W e had a

case i n N e w Y o r k w h e r e w e

had charged back a n item o f fourteen o r fifteen thousand
dollars a n d they disagreed about i t and said that w e were
guilty o f negligence.

T h e matter w a s finally sent t o a

referee a n d the member b a n k paid the bill.

I t taught

them a lesson, T h o s e were collection items i n that cage,
drafte,
what i g your pleasure about this, gentlemen?
Governor Calkins:

T h e r e w a s a motion which has b e e n

seconded,
The Chairman:

I s there a n y further discussion o f it?

(There w a s n o further discussion, a n d the motion w a s
carried, )
The Chairman:

J I will a s k i f y o u will s e n d the desig-

nation o f a man t o the Secretary, a n d h e will notify each
of those m e n

o f the respective designations

i n the other

banks,
Governor Fancher: I

think ths motion should cover a

man i n each branch also.

The Chairman: Y e s ; a man i n each branch as. well,
The next topic is:
E. R a t e s o f Discount.
oe G O u e r a l Poiicy,

156’
This i s proposed by Boston. Governor Mongs?.-Governor liorss: I

haven't very much t o say about it,

and the only way i t happens t o be charged t o Boston o n
the program i s because o f some letter which I wrote t o
you o r t o lir, Case,

i n which I

said that I

thought i t

would b e u p for discussion a s a matter o f course,

We have a rate today of 4161/2 per cent, and I have
never heard a Reserve B a n k m a n talk o f the probability
or n e c e s s i t y o f r e d u c i n g i t .

B u t t h e newspapers a r e con-

tinually a t it, saying that w i t h our increasing reserves
that n o doubt t h e discount r a t e wovld b e reduced within a

short time. I

simply thought that w e could talk about i t

here and understand just the reasons w h y we feel that i t
should not b e reduced,
Governor Seay:

D o y o u think that your member banks,

especially t h o s e n o n S b o r r o w i n g ,

would like t o see a

reduc~

tion, o r would l o o k with disfavor u p o n i t ?
Governor ijorss: N o n e o f the bankers t h a t I

have

talked t o think that t h e rate ought t o b e reduced.

A s a

matter of fact, a 4-1/2 per cent rate seems to be a
pretty reasonably l o w rate f o r a Federal Reserve B a n k rate,
Commercial paper h a s come d o w n t o 4=1/2 p e r cent a n d i n
some cares [


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suppose lower,

l i y personal judgment is. that


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156
there i s n o need for reducing t h e rate a n d n o call far
he I

fear something t h e same a s expressed b y Governor

Strong, t h a t before w e get o u t o f this thing w e may have
a kind o f boom o n ovr hands i n regard t o commodity
prices, w h i c h certai nly would b e unfortunate, a n d w e d o
not want t o cdo anything t o encovrage it,

The Chairman: Governor iorgs, don't y o u recognize
that w e have greater power t o induce s u c h a development
by ovr o p e n market operations t h a n w e have b y a discount
rate?

Governor i:orss: W e l l , t h e y are t w o operations t h a t
work together,

I f y o u b u y i n the o p e n market a n d then

reouce your rate,
of it.

i t i g simply increasing t h e momentum

O n the other hand, i f you d o not reduce your rate

it seems t o m e that tends t o offset what y o u d o i n the
open market,

The Chairman:

Y e s , but

<

S a r e reluctant t o

borrow - - - o t h e r t h i n s s b e i n e q u a l a n é w h e n t h e r e i s a

rate providing inducement

- - - t h e banks a r e r e l u c t m t

to borrow a n d d o not borrow i n Boston, Philadelphia, N e w
York, Cleveland, Chicago, a n d most o f the districts, a n d

phe existence o f the reserve bank i s sort o f needless,


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Federal Reserve Bank of St. Louis

157
unless t h e y u s e i t - - - b u t w h e n w e g o i n t o t h e m a r k e t

and b u y investments a t a n y rate above t h e market rate, w e
certainly a r e doing t h e equivalent o f what happens w h e n
a member b a n k does borrow,

Governor liorss: Y e s , i t all works t o the seme end,
but until quite recently i t d i d have more effect o n the
price o f investment m o n e y t h a n i t d i d o n commercial money.
That e f f e c t

i s being s h o w n i n commercial m o n e y n o w pretty

etrongly, a n d w e have s e e n those rates g o below 5

per

cent i n a comparatively short time.

The Chairman:
upon what I

K y feeling about the rate i s based

told y o u i n Boston, t h a t i s o n the condition

of the commodity market, a n d there I think w e have got
to b e exceedingly careful.
Governor ijorss: T h e r e a r e some signs o f increases
in c o m m o c i t y prices,

F a r m products h a v e a l l increased

quite considerably i n price within a

few months, cotton,

wheat, a n d ali those things. B u s i n e s s i s somewhat bet-

ter, and if you talk too strongly and put down your rates
too low you might get that idea started quite easily;
but the continual notes and articles that you seé i n the

papers about lower discount rates of the Fedeval Reserve
Banke all say that they are coming next w e e k . r
o next


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Federal Reserve Bank of St. Louis

month o r something like that,
Governor Fancher: P a r t i c u l a r l y a z bearing o n the
New York rate,
Governor iiorss:

Y e s , e v e r y w e e k t h e y s a y something

about t h e meeting o f the directors

i n New York, b u t t h e y

did not reduce t h e rates a s was expected.
Governor Wellborn:

I n our district w e think the rate

ie very satisfactory, a n d I think t h e next change w i l l b e
to raise t h e rate instead o f lowering it. T h a t i s the
idea o u r Board has.

T h e y would rather s e e a raise t h a n

a reduction,
Governor licDougall:

W h a t would y o u s a y i s the aver-

age rate p a i d b y the borrower f o r t h e notes that y o u
are holding under rediscount?
Governor Jellborn:

e l l ,

a t t h e present time, w i t h

all ovr rediscounts from country banks, I
average rate i s about 8
Governor hieDougall:

suppose the

per cent.
T h e y ought t o b e pretty well

satisfied,
Governor wellborn:

I t i s from 7 t o 8 per cent,

Governor MeDovgall: H r . Chairman, I think it might
be interesting t o the Conference t o know that o u r
average rate a t present i s 7 or very close

t o 7per cent,


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Federal Reserve Bank of St. Louis

159
for t h e same reason, t h a t is, that t h e country never
changes t h e rate,
The Chairman:

T h a t i s the reason w h y there a r e

2300 banks working t h e system.

N o t that t h e y could not

liquidate, but that they did not want to.
Governor HeKenney:

S o m e o f t h e m coulc n o t liquidate.
to

Governor dellborn:

I n lowering our rate 4-1/2

por cent w e felt i t necessary with the smaller banks because t h e y h a d a load that t h e y were obliged t o carry
all the year, T h e y could not g e t f r o m under it. T h e y
are n o t secured b y commodities; t h e y are just notes, l o t s
of them, a n d w e just thought i t would b e a help t o them
to c a r r y t h o s e a t a

lower rate.

T h e y have lost a

great

deal o f money i n the last two years, a n d we thought i t
would b e friendly and would help them t o give them a
lower rate,

The Chairjan; G o v e r n o r i.orss, d o y o u wish a n y further discussion o f this topic?
Governor iJorss: I

do not s e e a n y reason f o r it,

tir. Chairman.

The Chairman: T h e next i s Topic 2 under Rates of
Discount:

160

ts preferential rate o n Trade Acceptances,

‘That- i
s a part o f the Board's program.

‘ t h i n k that that topic has been pretty well dis-

_“posedf
o by the’-action-of the Advisory Council, but I
“would like to report that the question of preferential


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rates on trade acceptances was proposed for the program
by our member o f the Council, hr. Warburg; t h a t prior
to the meeting h e attended a meeting o f our Directors a n d
wag inclined t o advocate t h e adoption o f the preferential
rate i n order t o develop t h e u s e o f t h e trade acceptance.
After fzome discussion a t the bank I
here convinced that a

think h e came over

better means, a

better instrument

for developing their use, which would n o t sacrifice o u r
policy o f a uniform rate, w o v l d b e t o establish a
factory r a t e u n d e r S e c t i o n

satis-

1 4 and try t o get t h e trade

acceptance under t h e market w i t h t h e same reqmirements
as t o b a n k e n d o r s e m e n t s t h a t w e a p p l y t o a
to a

banker's a c c e p t a n c e ,

foreign b i l l @

a n d t o see i f the use could

not b e stimulated i n that way.

I t has a little element o f

artificiality about i t , b u t o n the other h a n d i t i s a good

instrument t o use i n the country's commerce, a n d we would
like t o see i t used i n larger amount.

B u t t h e Advisory


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161

Council h a g taken t h e position that w e should not
have a n y preferential discount r a t e f o r trade acceptances b u t should stimulate their u s e b y T e A e
open market rate,

H o w d o y o u gentlemen feel about i t ?

Governor Wellborn:
ceptance I

e e a n e le

W i t h regard t o the trade a c -

have f o u n d t h a t w h e r e t h e y a r e s e c u r e d b y

commodities,

a n a c t u a l sale secured b y commodities,

that there ought t o be a preferential rate i n order t o
encourage t h e m ,

I n fact, I

regard a

trade a c c e p t a n c e

that i s secured better than a banker's acceptance. I
think i t is a higher clases o f paper.
Governor S e a y :

H o w a r e y o u g o i n g t o have t h e

trade acceptance secured b y commodities?
Governor Wellborn:

W e require t h e m i n that way,

in a cotton transaction,

Soper hee Calkins:

B u t the definition o f "trade

acueokancu ae supposes a commodity that i s sold.

I t

states t h a t o n its face,

Governor Wellborn:

I n the itlanta district

ie have always h a d the rule i n our bank that where the
trade acceptance i s more t h a n 1 0 per cent o f the capital
and surplus that w e reqiire t h e commodity b a c k o f it,


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162
The Chairman:

W h a t shall w e d o about this topic.

suggested b y the Board a n d endorsed b y the Advisory Coun-~
Ci?
Governor HceDougall: I

would move that w e concur i n

the action o f the Advisory Council.
Governor Fancher: I

second that,

Governor Seay: S u p p o s e y o u offer a
endorsed b y two banking institutions.

trade a c c e p t m c e

T h e rate would b e

as l o w a s a banker's acceptance rate, w o u l d i t not?
The Chairman:

T h e open market rate?

Governor Seay: Y e s .

The Chairman: T h a t I do not know.
bills t h a t have a

number o f endorsements

W e get banker's
o n them, I

do

ae t h i n k that i t i s a matter o f mathematical calculation,
Governor Seay:

T h e point I

kind o f d i f f e r e n t i a l

have i n mind i g what

i s i n contemplation,

h o w m u c h dif-

ferential would have t o b e paid? W o u l d that b e a wide
Bplit?
The Chairman:
possibly,
Like that,

Y o u would h a v e t o have a difference,

o f three-quarters o f one p e r cent, something


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163

Governor Fancher:

W o u l d n o t t h e rate b e some-

where bslow t h e discount r a t e o r the rate f o r prime
commercial p a p e r ?

The Chairman:

I

f i t i s a rate b y preference,

order t o stimulate t h e d e v e l o p m e n t

ceptance,

o f the o i s

in

ac=

i t would b e a rate somtwhat b e l o w t h e discount

rate o f the bank a n d somewhat d o v e t h e rate a t which
you were buying banker's acceptances
Governor Calkins:

i n the open market,

T h e advantage

o f applying a

rate t o open market purchases i s that the bank will
have effective control i n every case, a n d there will b e
no demand made that you take these a fixed rate.
Governor Seay;
buy a

I s i t contemplated that you would

trade a c c e p t a n c e d i r e c t f r o m t h e b a n k t h a t w a s

making i t ?

The Chairman:

Y o u buy i t with the endorsenent o f

the bank just a s y o u b u y a banker's acceptance now,

What we understand to be a trade acceptance is simply a
bill o f exchange drawn b y the seller o n the buyer 8 " a
bill o f goods,

T h e seller h a s that i n his portfolio

and h e m a y sell i t t o a bill broker, a n d i t m a y g o right

into the market when i t gets bank endorséhient, what we


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164

call a satisfactory endorsement.

will
T h e n w e buy

i t as we

buy banker's acceptances,
Governor Seay:

t is not
T h e point I make i s t h a t i

proposed t o b u y i n t h e o p e n market , trade a c c e p t a n c e s

not endorsed b y a bank,

The Chairman:

N o , T h e y have t o be endorsed just

as bankers bills are.
Governor Young: i f r . Chairman, I

would like t o

think that over a littke while before the resolution i g acted upon.

W e have a number o f associations

t use trade
out i n the northwest t h a t have a t t e m p t e d o
acceptances,

T h e y c a n arrange t h e matter i n such a way

that t h e y meef a l l the reqmirements l a i d down, a n d that
woulé put i t i n the hands o f the non-member banks u p
there, a n d the pressure would b e s o strong that i t would
be very embarrassing f o r u s i f w e d i d not b u y a certain
amount o f them, w h e n a s a matter o f fact w e would not
want t o buy them i n a great majority o f cases,
Governor leDougall: I

think, i r . Chairman, t h a t

Governor Y o u n g i s m i s t a k e n there. I

remember v e r y w e l l

that w e had a p r e f e r e n t i a l e
t
a
r for somethingepver
three years o n this kind o f paper, a n d i t did dé “one


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Federal Reserve Bank of St. Louis

thing,

1 6 stimulated their use,
The Chairman:

Yes,

Governor licDougall. T h o s e who are most enthusiastic
in advocating the use o f trade acceptances, a n d some o f
them pretty high authorities, failed, mmi i n their propaganda work at least, t o give due consideration t o the

fact that the element of eredit enters into thése pills
just a s i t would enter into any other bill, a n d when i t

came to this question of preferential rate,
be very carefully looked into.

e e

Y o u would not b e obliged

to buy something simply because someone created. it,
Governor Young: T h a t i s quite true.

I f I under-

stand the law correctly, w e are permitted, with the
approval o f the Federal Reserve Board,

t o purchase trade

acceptances,

The Chairman: Y e s ,
Governor Young:
permission.

T h e Board has never g i v e n that

T h e Council recognized that t h e Federal

Reserve Bomld gave the Federal Reserve Banks authority

to do that, to purchase trade acceptances, and It dm-¢bncerned about the effect that i t will have ‘of: dur digs

trict.


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Federal Reserve Bank of St. Louis

166
The Chairman:

Well,

y o u d o not have t o tell t h e m

in a very active a n d aggressive w a y that y o u are buying
them,

Y o u c a n control i t anyway b y your rate, b y mak-

ing the rate h i g h enough,
Governor Calkins:

I n making open market purchases

vou. control b y the same means t h a t y o u control i n the
purchase o f bankers acceptances.

Y o u d o not feel under

any obligation t o b u y bankers acceptances w h i c h y o u are
not s a t i s f i e d a r e prime.

Governor Young:

T h a t i s quite true.

H o s t o f ovr

State banks i n Hontana a n d Worth a n d South Dakdta a n d
liinnesota a r e n o t permitted t o accept,
it t h e r e legally.

N o w this opens

to b u y trade acceptances

s o w e get r i d o f

i t up, a n d permits

i n our district.

us

W e have some

3,000 State banks out there and i t i s rather a serious

thing.
The Chairman:

i e have t h e power t o d o i t now,

Governor Young.

Governor Young:
The Chairman:

W h a t i s that?

Y o u have t h e power t o d o i t now,

and I think i t i s a great question whether o r not any
regulation i s req ired,


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167
Gowernor Young:

w e have power t o buy bills o f

exchange arising o u t o f commercial transactions.
Governor Calkins:

t e not o n l y have t h e power t o d o

that, b u t w e have bought then.
The Chairman: G o v e r n o r Young,

d o you think that

the situation i n your district w o u l d make i t inadviasable f o r t h e reserve banks t o actually b u y bills o f

exchange arising out o f commercial transactions, a s a
poliey?
Governor Young: W e l l , a s I said, I
think about this a
The Chairman:

would like t o

little bit.
D o y o u want i t t o g o over?

Governor Young: i

would l i k e t o have i t g o over

until tomorrow.
The Ghairman:

T h e n i t w i l l g o o v e r a t y o u r reugest,

The next topic is: thea m a m b o

II. COLLECTIONS 4ND ULBARINGS.
Cheek Collections,
Uniform c h e c k c o l l e c t i o n c i r c u l a r a n d
proceaure,

That i s suggested b y isinneapolis.

Governor Young: i J e had some correspondence with
ir, H a r r i s o n a b o u t that.

W e h a d approved t h e check


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168
collection c i r c u l a r p r e p a r e d

b y Lr. H a r r i s o n a n d h i s

committee, w i t h o n e o r two exceptions, a n d i n a letter

from :ir. Harrison o f November 18th h e said, “ I have gone
over e a c h o f the suggestions w h i c h y o u have made, a n d
offhand t h e y all seem t o b e very satisfactory. I

am

waiting f o r t h e comments o f sach o f the other banks a n d

of course have t o delay any final action until they
have all been received."
since then, I

ed on it.

W e have not heard anything

do not know that other banks h a v e report-

W e are anxious t o get out a new circular

and w e would like t o have t h e matter cleaned up.
lir. Harrigon: I

would like t o report that while

the last conference o f Governors referred t o each
Pederal Reserve Bank, f o r consideration b y the respective operatin:; men, certain forms a n d letters relating

to collection matters, a n d also a uniform clause t o be
inserted i n each circuler, I have received replttsfrom
only six of the Federal ieserve Banks a n d the rest o f
them have n o t reported t o u s o n e w a y o r the other, I
am frank t o s a y that w e were 7
new check collection circular,

forced t o issue a
b y circumstances

i n con-

nection w i t h s o m e T r e a s u r y i t e m s - - - n o t f o r c e d b y t h e


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Federal Reserve Bank of St. Louis

‘169
Treasury,

b u t f o r c e d b y circumstances,

a n d w e have issued

that n e w collection circular w i t h t h e n e w uniform clause

in it, although it has not been approved by all the Federal Reserve Banks.

N o n e o f the banks t h a t h a v e reported

to u s h a v e c r i t i c i z e d i t i n a n y v e r y s u b s t a n t i a l w a y , j u s t

minor

making/suggestions about words here and there, «=; p r a c tically a l l ofwhich could b e adopted - and; : 3
Governor Calkins:
-“. Harrison:

o v e n in.

W h i c h banks have approved 1 0 2

B o s t o n , Chicago, S t . Louis, Minneapolis,

Dallas a n d San Francisco,
Governor S e a y :

Y o u s a y they have n o t approved i t o r

havé a p p r o v e d i t ?

u%. Harrison:

T h e y have. Philadelphia, Cleveland,

Richnond, A t l a n t a a n d K a n s a g C i t y h a v e m a d e n o report,

Governor Seay: I

thought that matter was referred

to the collection conmittee about a

year ago,

My: Harrison: = Yeu.
Governor Seay:

O n e o f our m e n was o n the committee,

The committee d i d not meet, b u t o n one occasion w h e n y o u
were i n Washington here conferring w i t h hr, Logan, short
nmto our inember o f the committee
to come up, b u t h e could n o t come a t the time; i t wag


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Federal Reserve Bank of St. Louis

170
impossible. I

do not know whether y o u finally cane t o

any agreement a s a result o f that conference, o v r member
of t h e committee never having b e e n present. D i d the comnittee adopt anything cefinite?
My. Harrison:

T h a t a l l came u p a t t h e last Gover-

nor's Gonference, a n d I plead guilty a t that time t o
not having called a formal meeting o f the committee,
except h e r e i n i/ashington o n one occasion, w h e n Mr.
valds-

W a s unable t o attend.

A s I

explained a t the last

conference, iir, Logan a n d I nad gone over a number o f
matters o n occasions w h e n I
fact that I

had been i n Washington.

T h e

had been i n Vashington s o much o n other

matters i s one o f the reasons w h y w e h a d never h a d a meeting o f the committee,

i r . Logan a n d I conferred about

a number o f matters b e f o r e t h e committee,
presented o u r r e c o n m e n d a t i o n s

a n d when I

t o t h e conference l a s t

October i t was with the special understanding that i t
as
was n o t a formal recommendation o f the conmittee /2. whale
but a n informal recommendation o f tir, Logan a n d myself,
under t h e circumstances w h i c h I
Governor S e a y : I
2. H a r r i s o n :

explained then,

do n o t recall w h a t t h é result was,

T h e Conference v o t e d that t h a t

being so it would refer all of these recommiendationsot


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Federal Reserve Bank of St. Louis

the respective reserve banks for comment, a n d we have
not received comments except f r o m s i x o f then.

Governor Fancher; I

might say that the suggested

forms a n d letters outlined have b e e n passed o n b y our attor=
neys a n d approved b y them.

I f I understand i t correctly

hooked u p with this i n the original report that was referred t o the committee appointed a

year a g o " a y

c e r a

forms t o use i n connection with certain colléetion trans=
actions, a n d that all o f that i s still im-abeyances |

Mr. Harrison: T h a t was the direct sending of noncash items.

T h a t was another thing referred t o b y this

informal committee.

T h a t was referred back ‘to each resaérvo

bank for report t o me.

A s I say, only six of the banks

have reported t o me, New York has gone ahead, with its
cirghimr, a n d i n order, perhaps, t o expedite éetkon b y

some of the other Federal reservo banks, i t even sent out
one o f the other letters recommended b y the committee which
contained a list o f the member banks which we had authorized
to send cash items direct t o other reserve banks. That excited
quite a bit o f comment o n the part o f two banks who felt, per--

haps, that it was a n inadvisable thing ta. .do. because ef the in-~
=panke t h a t

possibility of checking up the names of ‘ue/heg authority
fe P t s


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Federal Reserve Bank of St. Louis

‘172

to send -dirzct, Imdther words if we sent, out..a Tist of.
two ar:.three hundred member banks whom we-had authorized

to. send direct it might be difficultr
o
f Sek ot tie ohher
reserve banke,

i n receiving items direct f r o m our distuet,

to check u p ovr suthorities

t

banks were properly authorized

o see whotheror not the

t

f all twelve of the

reserve banks would d o the same thing i t might become a

very Gifficult problem as to how best t o handie k e
The Chairman:

I s not this another case where w e real-

ly need a uniform circular a n d uniform procedure?
Governor Fancher;

A n d where w e should use unif orm

forms?
The Chairman:

a n d uniform forms,

H e r e a r e five

banke that w e have not heard from. O u r bank has gone:
ahead without waiting for t h e others, a n d ’ I would like t o
avoid doing that i f w e can,

Governor Fancher:

I f you had those ‘favorable replies

from the banks that you have not heard fron, just: Ron
would the matter stand at present?
time i n the air,
tr. Harrison:
of those banks I

I ta

b e e n a long

W h a t would b e done?
I f w e h a d favorable replies f r a m each
think t h e best thing t o d o a s a matter


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Federal Reserve Bank of St. Louis

173
of o p e r a t i o n w o u l d b e t o h a v e m e a d v i s e c a c h r e s e r v e b a n k

that w e had favorable replies o n all of these things
and fix a date o n which they should become operative.
Governor Fancher:

H o w would t h e forms b e then?

ould t h e forms t h e t w e previously recommended a n d adopted

b® approved?
ir, Harrlegon:

B i c e

Governor Fancher:

T h e banks w o u l d b e £ 0 advised

anc you would p u t t h e forms i n us6?
iy” Harrison:

Yes.

Governor Fancher;

Y e h a d a meeting o f t h e committee

which a p p r o v e d t h e f o r m s a

year

m d a

h a l f o r t w o years

ago.
Governor Seay:

O n e o f o u r m e n w a s o n t h e conmittee,

i inquired a b o u t t h a t b e f o r e l e a v i n g a n d h i s o p i n i o n w a g
that p e r h a p s t h e s e t w o c o m m i t t e e s w e r e w o r k i n g s o m e w h a t
at c r o s s purposes;

t h a t b o t h o f t h e m i n v o l v e d u s i n g forms,

ana that t h e coimittes w h i c h w a s organized a year a n d 4 lwif

ago had made 4 cefinite report, b u t that nothing definite
:

w

a

s

had ever come o f it, I t @oupled with the work that this
collection co:mittee h a d t o do, which involved t h e use
of forme, s o that t h e matter i s i n confus:on now,


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Federal Reserve Bank of St. Louis

174
lux. Harrison;

T h a t c a n b e explained i n one word,

The conmittse, t w o years ago, o r however l o n g a g o i t was,

made a certain report a n d recommended certain forms, a n d
the reserve b a n k s n e v e r d i d a n y t h i n g a b o u t i t .

O v r Ccom-

last year
mittee /merely reconsiended that that recommendation o f t h e
earlier committee b e adopted a n d all w e want 1 s t o have
the O.K. o f sach Pederal reserve b a n k o n that point, a n d
if each o f the banks that hasn't m a d e a

report w i l l make

a “sport t o m e i t c a n b e disposod of.
Governor Calkins:

i f . Chairman, I

move that t h e

secretary b e rejucsted t o correspond w i t h those banks f o r
the purpose o f having a uniform collection circular prepared
and approved b y all a t ths earliest possible moment, a n d
then issued,
Governor seay: I

will second that,

(The motion,being f u l y seconded, w a s carried.)
The Chairman:

I t i s understood w h e n ir, Harrison

receivee f i v e m o r e r e p l i e s n e c e s s a r y

h e w i l l b e i n posi-

tion t o advise w i t h t h e Federal reserve banks a n d s a y that
the forms r e c o m e n d e d b y the Forms Committee a r e adopted
and will b e put into use, a n d givethe date,
Now, Sub-topic A

under No. 1

is


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Federal Reserve Bank of St. Louis

(a) D i s c u s s i o n i n rélation t o
gratuitous services t o member b a n k .
This a l s o appears under topic V I I - A a n d i f Governor
iiorss i s willing w e will postpone Giscussion o f this until T o p i c V I I - 4 c o m e s u p .
Governor Liorgs;:

The Chairman:

T h a t i: satisfactory.

T h e next i s

(b) R e p o r t s o n reco. .enéations o f
Collection Cormittse made a t last
conference,
:Y, Harrison: I

have just ciscusesd that, ir.

Chairman,
The Chairman:

T h e n that i s dsalt w i t h b y the action

taken i n the previous resolution.
is BOUyY Leon

Y e e sir,

Governor i.cbougall: I

am not quite clear a s t o what

disposition h a s besn made o f Tapic (b).
The Chaixmian:

T o p i c ( b ) i s simply a recommendation

of t h e C o l l e c t i o n Committees u h i c h h a s n o w b s e n a c t e d u p o n

by reyusstin:, "ne secretary t o write once more t o the fiv e
banks a n d j e t answers a n d p u t t h e recoimisndations i n t o e f ~
LeOCbi«

Wee

D a n


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Federal Reserve Bank of St. Louis

2, F i l i n g claims o n behalf o f member
banks

o n account

o f checks d r a w n

on f a i l e d banks.
;

Governor Calkins, y o u h a d that u p a t t h e last conference,

Governor Calkins: a

g tat d e a l o f correspond-

here, but I will only rsad a part o f it.
“-t t h e r e c c a t Governors’

'Shat a

C o n f e r e n c e h e l d i n October

uniform policy »23 -dopted whereby e a c h

Pederal Reserve B a n k will file c l a i m for its endorsers
(including other Federal fNeserve Banks a n d branch
banks,

a s well a s member banks), whether o r not r e it has b e e n expressly i n -

structed n o t t o d o so.
The p o l i c y s u z s e s t e d i s d i r e c t l y t h e o p p o s i t e

o f that

this bank which i e t o file cisine f o r iteme
involved

i n the failure o f a

bank o n l y u p o n s p e c i f i c

ions f r o m our inmasciate endéusers t o d o s0,

The o2.2ctions t o the proposed plan may be briefly
outlined 3 s follows;
The functions werformed b y Federal Reserve Banks

transit items are performed under a limited


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Federal Reserve Bank of St. Louis

177
agency f r o m ovners o f such items.

T h e sole d u t y o f Federal

Reserve Banks i n this capacity i s t o promptly present t h s
items f o r payment;

t o receive payment; a n d i f payment i s

refused o r the items a r e dishonored b y r e a s o n f
o t h e failure o f the drawee b a n k o r for other reasons,

t o protest a n d

promptly notify t h e encorsers, simultaneously charging back
the amounts t o their immediate endorsers, thereby terminating their agency,

T h e unpaid items a r e t h e property o f

prior parties i n which t h e #edsral Reserve B a n k has n o
propristary interest,
2. I n filing claims, regardless o f whether o r not
authorizations

a r s received

b y us, w e w o u l d a p p e a r

t o be

assuming responsibility f o r t h e items f r o m the time that
we originally received t h e m until final settlement h a s been
effected between themakers a n d the pay2es,
dends have b e e n paid b y the Recsivers.

o r until final
T h i s respon-

eibility has been o n e thst w e have b e e n particularly
G sirous o f avoiding a t 2 1 1 times. T h e r e a r e t w o agency
relatior w h i c h should b e distinctly separate;

t h e one

to cease entirely a t t h e time o f our charging back
the iteme t o our Sndorsers u p o n receipt o f information
that a

bank h:

@

} ;

t h e other t o b e taken u p


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upon reqjuest, o r upon especial authorization t o file c l a i n
with the Receiver.
3. I n t h e a b s e n c e o f a n y a u t h o r i t y o r r e q u e s t f r o m

the owner o f the ite s, the Federal Reserve Bank would be
acting as a voluntary agent, and, i n our Opinion, i t s
authority t o bring suit against t h e rejection o f a claim,

without authority from the owner o f the item, would b e
subject t o question,
4, w h e n our endorsers a r e notified that t h e items
have been dishonored o r are unpaid b y reason o f the failure o f the drawee bank, t h e y m a y prefer t o file claims i n
their o w n behalf,

I n the absence o f definite knowledge

that w e were t o file claims f o r them, i t would, undoubted-

ly result, i n many instances, i n a duplication o f claims
and needless expense t o t h e endorsers.

I n our experience,

cdwe might s a y almost invariably, w e have been author-

to file claims f o r approximately 50% of the items
involved i n closed banks. T h e other 50% have been adjusted i i m e manner between the prior parties, thus avoiding
the necessity o f our filing the claims.
5, I n filing claims sithout specific instructions,
it would b e necessary,

i n the event t h a t ’ aFederal Reserve


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179
Bank desired t o obtain a spscific authority f r o m its o w n
member banks,

t o follow u p each particular i t e m involved

' dn the failure o f a bank.

I f claims a r e filed o n l y upon

specific instructions t o s o file, i t i s not necessary t o
£0 follow u p each item, a s , a t the time t h e i t e m i s charged
back t o the endorser, t h e endorser i s notified that w e
Will present c l a i m i f s o dtsired, u p o n receipt o f written

authority t o d o so,

I n other words, having offered t o

file the claim, i t is the endorger'’s privilege t o accept
out offer o r not, without furthsr action u p o n our part,
6. W e have h a d instavces where o u r o w n member banks,
upon advice o f their counsel, h a v e positively refused t o
permit u s t o file claims i n their behalf, t a k i n g t h e

position that upon charging the items back t o their endorsers, t h e i r agency was terminated a n d that future action

should b e had b y the holder o f the check directly with tle
failed bank.

7. Owing t o the fact that only 50% of the endorsers
file claim through us, w e would incur a n untold amédunt o f
complications i n withdrawing claims a n d issuing waivers
for items u p o n which claim h a d already béen.. Filed without

epecific authority o f our endorsers, E v e é d at the present


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180
time where w e d o obtain specific authority before filing
claims, there a r e numerous instances where claim f o r t h e

items i s subsequently withdrawn, which involves t h e issuance

ofwaivers, correspondence with the Recetvérs*d
n
a correspondence w i t h t h e endorsers,
It is, therefore, recomended:
That Federal Reserve Banks d o not file claims u p o n
items involved i n the failure o f 4 bank unless specific
authority t o s o file h a s been obtained f r o m its immediate

It i s further recormended:
That i n transactions between Federal Reserve Banks,
in order t o o b v i a t e t h e n e c e s s i t y o f e x e c u t i n g s p e c i f i c

authorizations covering each item which one Fed-ral lteserve
Benk desires another Federal Reserve B a n k t o file c l a i m
upon, a

uniform form o f authorization b e adopted whereby

each F e d e r a l R e s e r v e B a n k w i l l g i v e e a c h o t h e r F e d o r a l R e -

serve B a n k a general authorization t o file claim i n its
behalf.
when i t i s d e s i r e d t h a t c l a i m b e f i l e d u p o n a n y p a r -

ticular item, i t will merely b e necessary f o r the Federal
Reserve B a n k cesiring t h e c l a i m filed,

t o notify,

b y letter,


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181
the Federal Reserve B a n k which will file t h e clain,
the claim being filed under t h e general authorization,

previougly lodged,"
We have a volume of correspondence about i t with
Kansas City, Dallas, a n d perhaps o n e o r two other banks,
This proposal that w e now make i s exactly t h e reverse o f
the action taken a t the last conference, w h i c h I fully
belisve «sag wrong.
The Chairman:

I s i t not a fact a e s

ing t o assume quite a

w e are volunteer-

lot o f work none: that w e a a a

avoid

by pursuing t h e plan that y o u offer?
Governor Calkins:

Y e s sir, w o r k i n volume a n d obli-

gations i n volume.

Governor Fancher:

A s I understand the suggested

form t o be used between t h e banks i e a general authorization, b u t y o u would i n addition t o that require a specific
authorization,
Governor Calkins: A

general authorization that y o u

will a c t u p o n vbdon request.

Governor Seay:

D o you mean from other Fédéral re-

serve b a n k s n o w ?

Governor Calkins:

Yer.

W e will: S p
ed

BRST #VAN ABLE DOCUMENT

o

n


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Federal Reserve Bank of St. Louis

182
Feceral reserve bank a general authorization authorizing
them t o file a claim when reiuested t o d o s o b y u s a n d
when properly executed.
Governor Seay:

A r é yott also speaking w i t h reference

to a c t i o n i
n regard t o your own member banks?
Governor Calkins:
Governor Seay:

N o .

T h a t i s what I

uncer stood w a g passed

at the last meeting.
Governor Calkins:

T h e recommendation i s n o w that n o

claims b e filed except uron specific suthorization from
endoreers,

The Chairman;

T h e proposal which came u p a t the last

meeting w a s t h a t u n l e s s s p e c i f i c a l l y s u t h o r i z e d n o t t o d o
£0 w e w o u l d f i l e c l a i m g a g a i n s t f a i l e d b a n k s

i n behalf

of

our members, N o w , the proposal i s that w e only file them
if r e q u e e t e d

t o d o <5. b u t t h a t w e i n t h e m e a n t i m e l o d g e

a general authority between ourselves, t h a t is, between
the reserve banks, a n d that w h e n w e request e a c h other b y
telegraph o r informally t o file a
authority,

claim thst t h e general

i n express terms, w i l l cover t h e action o f

the bank which is acting ss agent.
Governor Calkins:

T h i s reconmendation w a s made, o f


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183
course, after t h e matter h a d been reviewed b y our counsel
anc with his advice,
Governor iicDougal:

Y o u s a y v o u find i t necessary

to obtain specific information w i t h respect t o each check
Lauvolved?

Governor Calkins:
Governor i:cYougall:
Governor Young:

d

e heve not f o u n d 1 t s o a t all.

‘ 6 have,

Governor iicKenney:

i e have found i t b y letter rather

than b y item.

Governor &

i

r e s p e c t t o filing between t h e
that what Hr, Calkins con-

very proper.

v i t h respect t o filing clains

for member banks , they usually arise undsr t w o heads,
items

i n our c a s h letter which have b e e n cancelled a m
account o f t h e drawers,

en made, 21

i

b u t n o remittance

n our cash letter which have

been cancellsa s n d charged t o the account o f t h e drawer
emittonce craft h a s b e e n sent t o u s which
been dishonored,

I n each-cate y o u cannot g e t b a c k

ordginal check, 4 c c o r d i n g t o our counsel,

i n such cases

we h a v e notirfisca o u r m é m b s r b a n k s t h a t w e i n t e n d e d

t o file


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Federal Reserve Bank of St. Louis

184

a Claim for the amount o f our c a s h letters, distributing t o them any dividends received, unless t h e y should
instruct u s t o the contrary.

I

n m y judgment,

w e need

no express authority for our action i n this case, w h e n
we receive a

check w e are authorized t o collect it, a n d i n

my judgment w e are still authorized t o collect t h e checks

or any dividends which may accrué, unless a n d until our
authority i s expressly revoked, I

may add that, although

we have filed claims i n nine cases a n d i n many have collected a n d d i s b u r s e d dividends,

n o party interested h a s chal»

lenged either our right t o file a claim without ¢xpress
authority o r the propriety o f ovr action i n so doing.
Now, i t seems t o me that with respect t o filing for
our member banks, that i t would be safer for us t o abide
by the decision o f the last conference.

Governor Calkins:
banks,

I n respect t o filing for member

w e claim t o have t h e right t o act u p o n that c l a i n

and t o charge those items back, whether t h e y a r e original
items o r not, a n d w e mist maintain that.

H a v i n g charged
x

them back w e have n o grounds o n which t o file c l a i m unless
we are specifically requested t o d o s o and authorized b y
the immsdiate endorser, b u t w e are just standing o n thin


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Federal Reserve Bank of St. Louis

alre--

The Chairman: I s n ' t this the solution o f this difficulty, eepecially a s counsel s e e m t o disagree,

t o pass a

resolution leaving t h e policy f o r decision b y ¢ach bank
in its o w n district?
Governor Seay:
The Chairman:

W i t h respect t o sach other?
W i t h respect t o its o w n members a n d

as t o a n arrangement between t h e reserve banks, l e t Governor
Calkins' proposal b e adopted,
Governor Calkirs:

Governor Fancher:

Governor beay:

T h a t i s satisfactory.

a n d 1 would so move, Mr, Chair -

O u r member banks t a k e t h e position

that inasmuch a s you have obtained the remittance a n d inasmuch a s y o u have n o t t h s check t o return t o them, a n d inasmuch 8 s you have charged t h e thing back t o them, t h e n y o u
ought t o take sams steps t o protsct them,
The Chairman:

v e l l , that

Governor jiores:

T H E 66404

cGifferent d i s t r i c t s ,

Governor jickenney:

v e d o not file a n y claims f o r our

member banks u n l e s s specifically authorized,

W

e d o not


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Federal Reserve Bank of St. Louis

do i t <utomatically.
The Chairman:

T h e n t h e motion is, a s offered b y

Governor Calkins a n d seconded b y Governor Seay, t h a t e a c h
Federsl Reserve b a n k adopt i t s o w n policy f o r dealing with
ite o w n member b a n k ® w i t h i n i t s o w n cistrict,

a n d that a s t o

filing claims arising i n interdistrict transactions
bstween t h e reserve banks, t h a t t h e blanket authority proposed b y Governor Calkins b e adowed,

s o a s t o place

each bank i n the position t o ect i n the filing o f claims
for other reserve banks a s occasion arises t o d o ;

but they are not t o d o it unless specially requested, s o
that t h e r e - u e s t w i l l h a v e t o b e m a d e i n s v e r y case,

Governor Norris;

T h a t means t h a t i t would not b e

cone unless t h e request i s specifically made?
The Chairman:

Y e s

Governor Norris:

I

t seoms t o m e that t h a t will mul-

tiply t h e labor involved,

Governor Fancher:

i r . chairman, I would like to

submit amemorandum prepared b y our attorney.

Before the development o f the Federal reserve system
we believe i t was t h e general practice a m o n g commeretal

banks t o file claims i n behalf o f their endorsers with tle


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Federal Reserve Bank of St. Louis

187
liquidating official o f failed banks without obtaining
specific s u t h o r i t y f r o m t h e s n d o r s e r s

noted below,

t o d o £0, e x c e p t a s

T h i s practice developed because t h e collect-

ing bank was t h e logical person t o asssrt t h e claim, ‘ C l a i m s
of this character a r e o f three classes:
First:

O n checks w h i c h have n o t been surrendered t o

the drawse bank,

A s t o there items, t h e practice i s t o

return t h e m t o the endorser a n d t o file a

claim only i n

the event that t h e y a r e sent t o the collecting bank with
the request t h a t c l a i m b e filed.
Second:

O n dishonored Grafts o f the failed bank issued

by i t i n settlement f o r checks sent t o i t b y the collecting bank,

A s t o these items t h e collecting bank i s the

logical p*rson t o file t h e claim because i t alone h a s ppssession o f the data a n d record o n which the claim c a n properly b e predicated.
Third.

O n checks f o r which t h e endorsers h a d been

eredited with conditional payment b y charging t h e credit
balance o f t h e drawee b a n k with t h e amount thereof where
it was subsequently 2is covered ti.:t t h s actual balance
wag n o t sufficient t o clear t h s check.
4t t h e present t i m e t h e several Reserve Banks have n o


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188
uniform method o f procedure w i t h respect t o the filing o f
Claims o f this character,

T h i s bank has, u p t o the pre-..

sent time, f o l l o w e d t h e p r a c t i c e

o f filing claims

on

checks Which have been surrendered t o the failed bank w i t h -

out requiring authorization from the endorsers that the
claim b e filed,

T h i s bank has received f r o m other Federal

Reserve Banks requests t o sigh various instruments i n
which the other Federal Reserve Banks h a v e attempted t o
define a n d prescribe t h e terms under which claims shall
be filed b y this bank for t h e m o r b y them for this bank,

It seems t o us that the practice throughout the Federal
Reserve System should b e uniform i n this regard a n d that
one o f t w o courses s h o u l d b e adopted:

A l l Federal Re-

serve Banks should, without requiring written avthorization s o t o Go, f i l e c l a i m s

o n items o f this character,

all F e d e r a l R e s e r v e B a n k s s h o u l d r e f u s e

or

t o file a n y claims

of this character without obtaining written authorization
SO b o de,

W

e f e e l t h a t t h e f i r s t c o u r s e i s preferable,

Up t o date, w e have followed this practice without becoming
involved i n a n y difficulty.

I t seems t o b e recognized b y

commercial banks that t h e Fedsral Reserve B a n k making t h e

collection i s the logical and proper pérvoiiita: Pile the

189
claim,

I f the conmercial bank,

stance, h a s a

i n any particular i n -

reason f o r wishing t h e claim t o b e filed i n

some other manner, w e think i t is fair t o assume that i t
will s o notify t h e collecting Fed-ral Reserve B a n k a n d w e
do not believe t h e assertion o f the claim i n another manner will b e prejudiced b y the fact t h a t i n ordinary course
the claim has been filed b y t h e Federal Reserve B a n k with-

out knowledge o f the endorser's wishes,
If t h e p r a c t i c e

i s adopted o f rexuiring written

authorization i n each instance f r o m the endorsers t o file

the claim, t h e result will be t o add materially t o the
burden o f t h e Federal Reserve Banks i n performing this
gratuitous service without giving t o the Federal Reserve
Banle a

compensating benefit,

Governor Seay:
The Chairman:

v e fully endorse that opinion,
I s there a n y objecticn

t o leaving i t

to seach Federal reserve bank t o d&termine the policy within
its own district? T h e r e seems t o be n o objection,
Is there a n y objection t o filing t h i s blanket authority?


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Federal Reserve Bank of St. Louis

Governor Norris: T h e r e is, lr. Chaitrnian,
Q wee, t
The Chairman:

I s there any objection to. adopting the


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Federal Reserve Bank of St. Louis

190.
plan that o n e federal reserve b a n k shall not file a
claim f o r a n o t h e r F e d e r a l . r e s e r v e b a n k u n l e s s

i t i s ree

quested t o d o so?

Governor Norris:
The Chairman:

Y e e sir,

T h e r e i s objection to-that?

Governor Norris: Y e s .
The Chairman:

T h o s e w h o object

t o that w i l l please

raise their right hands.

(The shate ‘counted three, )
In other words, y o u three gentlenen think that a

different rule should apply t o items which are collected
outside o f your district t o the rule which shall apply t o
those within your district?

Governor Seay;

N o ; w e file without suthority i n

our district,

The Chairinan:

T h e n you would like t o have the Federal

resorve banks g o right ahead, without authorization,

a d

file elaimns?
Governor Seay:

a

t w a s t h e p o l i c y w e adopted a t

the last confexsnce,

The Chairman:

T h i s i g not a matter .in which we have

just n o w a n y very great concern i n New York .snd- E- hope w e


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Federal Reserve Bank of St. Louis

néver d o .

Governor Norris:

W e have never h a d one, b u t it.

affects you, lir. Chairman, a s i t does u s i n the other disEN C t s .
go N e s

Governor Seay: Y e s .

I t don't come until it “feppens.

Mr, Harrison: Thereig this about it. _ .the counse 1
for two of the reserve banke have advised/in their. parti~

cular district it is necessary, and why. might £t not be
solved i n this way, that those banks that want the general
authority i n the form that Govérnor Calkins suggested--Governor Norris:

T h e r e are three, Philadelphia,

Richmond a n d Cleveland.

Mr. Harrison:

went
T h e y are tho three banks: that.do not/t

general authority i n the form that Governor Calkins has
suggested,
Governor Calkins:

T h e position o f those three banks

is practically that t h e y wish u s t o file claims o n all
failed banks,

o n checks t h a t come i n t o our hands, tegard-

less o f whether t h e y come f r o n u s o r New York o r anywhere
£6?

The Chairman:
thing for them,

A n d they vrmt all o f us t6 do thé gane


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Federal Reserve Bank of St. Louis

12.
Governor Calkins:

O u r position is exactly. e
h
t revefse.

.@ do not want them to file unless instructed to'doso.
There is a lot of correspondence here which soueoee
ought t o read, I

would like t o s a y this -much, t h a t this

grew out o f a discussion a t the last Governors! Conference,
and I will read this notation.
At t h e r e c e n t G o v e r n o r s ' C o n f e r e n c e ,

s o I

a m informed,

& Suggestion was made that hsreafter Federal Reserve Banks

should file claims against failed banks o n behalf o f endorsers, without specific authority from such endorsers,
Governor V a n Zandt o f t h e Federal Reserve B a n k o f
Dallas, Texas, objected t o this procedure, a n d under date

of December 22, 1921, r o t e t o you transmitting certain
correspondence previously passing between himself a n d Governor Harding o f the Federal Reserve Board, relative thereto,

The Federal Reserve Bank o f Dallas intends t o continue its
former practice o f requiring written authorization from
its endoreers before filing claims.
In m y opinion, t h e position t a k e n b y t h e Federal Reserve B a n k o f Dallas i n this matter i s correct,
The functions performed b y Fedaral Reserve Banks
in handling transit i t e s a r e porfmied under a

limited arency


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Federal Reserve Bank of St. Louis

193

from owners o f such items,

T h e sole duty of Federal Re-

serve Banks i n this capacity i s t o promptly present t h e
items f o r payment;

t o receive payment;

a n d i f payment

i s

refused o r t h e items a r e dishonored b y reason o f the fail-~
ure o f the drawee b a n k o r for other reasons,
promptly notify t h e endorsers,

t o protest a n d

T h e unpaid items a r e t h e

property o f prior parties i n which t h e Federal podeets
Bank has n o proprietary interest .

In many instances, t h e endorsers o f the Federal Reserve B a n k charge t h e items b a c k t o their endorsers a n d

S0 on, until the original holdor i s reached.
It has, I

believe,

b e e n t h e practice

o f this b a n k i n

the past, after having charged t h e items back,

t o immediate-

ly notify our endorsers that w e will present claim i n théir
behalf u p o n receipt o f written authority S o t u do.

T h e

endorser i s fully informed o f the items involved, a n d
is g i v e n v e r y o p p o r t u n i t y

t o avail himself

o f o u r services

se t h e p r e s e n t a t i o n o f c l a i n s i f h e s o desires,

Inthe absence of any authority or request from the
owner o f t h e items, t h e Federal Reserve B a n k would b e ‘actvoluntary agent and, i n m y opinion, i t e authority
suit against t h e receiver o f a n insolvent institu-


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Federal Reserve Bank of St. Louis

194

tion upon the rejection o f the claim without suthority

from the owner of the item, would be subject to juestion,
A further o b j e c t i o n a r i s e s f r o n t h e f a c t t h a t w h e n o u r

norsers a r e notified that t h e items have been dishonored
or are unpaid b y reason o f t h e failure o f the draws b a n k ,
they may preferto f i l e claims i n their o w n behalf,

I

n

the absence o f ¢ 3finite knowledge t h a t tie ners t o file c l d
claims f o r them, i t would, undoubtedly, result,
many instances,

in

i n a duplication o f claims,

In t h o s e csss: w h e r e t h e r e i s s n y u e s t i o n c o n c e r n i n g

the liability o f the Federal Reserve Bank for neglisence
in connection v i t h handling items i n transit, t h e
tion o f a claim without proper authorization might, v e r y
probably,

b e construed a g a n admission o f liability

part o f t h e F e d e r a l Iieserve B a n k ,

on th

a n d might p r o v e v s r y

embarrassing t o the Péderal Reserve B a n k i n the event o r
& suit f o r loss sustained,
The o n l y benefit t o b e derived f r o m folloving t h e
Seeeted p r o c e d u r e

o f filing clains without specific

ruthority i s that t h e necessity o f obtaining authorization
in each case would b e obviated, I

fsel that t h e risk sn-

tailed i n following this piiocedaure a n d the confusion


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Federal Reserve Bank of St. Louis

195
which would, v e r y probably. result therefrom much more t h a n
counterbalances t h e benefits t o b e derived through avoiding the necessity o f obtaining specific suthority.

That i s our attorney's position. D b a l l a s takes the
position a n d maintains i t that t h e y will n o t file claims
unless specifically authorized t o d o s0, a n d we cssire t o
be i n the same position.
Governor Fancher; I

would like t o inquire h o w many

banke signed that agreement w h i c h Dallas furnished t h e
other banks ?

Governor McKenney: B i g h t , I believe.
Governor Fancher:

O u r counsel advised u s not t o sign

Governor iMeKenney:
not.

Y o u are o n e o f those that d i d

R i c h m o n d , S t . Louis, B o s t o n ,

N e w York, P h i l a d s l p h i a ,

Dallas, Kansas City and Chicago executed the general authorization.

Governor Fancher;

O u r counsel reviewed that very

carefully and saw some very serious objections t o it,

Governor Norris:

‘ J e got San Francisco's letter o n

this subject a day or two ago, enclosing the circular, and
went over ;it carefully, and naturally if they required it


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thore w a s nothing for u s t o d o but t o give i t t o them,
Governor Calkins:

" g e ought

t o reach a

uniform prac~

tice, i f possible,
Governor Seay:

A s I understand Governor Calkins h e

wants e a c h Federal Reserve B a n k t o file a blanket authority
vith h i m t o d o this, b u t nevertheless h e will take n o
action unless re-vestsd t o d o 0

i n specific cases,

T h a t i s w h y h e i s suggesting t h a t y o u

The Chairman:

sign t h e general suthority.
Governor Calkins: O t h e r w i s e y o u would have t o file
suthority e a c h time.

Tne Chairmen;

E v e r y roju-stt
o file a claim will

made u n d - r t h e t e r m s o f t h e g e n e r a l authority,

a n d thst

all i t amounts to.

Is not the procedure just about what i s suge
question:

T h a t i f the authority b e filed i t shall

used for all claims i n the cases o f those banks that
want clains filed without special : aquest, a n d that t h e

terms o f the suthority will b e applicable t o those cases
where s p s c i a l r e q u s s t

i s made;

t h a t e a c h Federal ressrve

bank shall adopt a n y policy i t pleases a s regarcs claims

within its own district, i t s own i t e m s , ‘
a
n
d that otherwise


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the policy shall b e that claims will not b e filed between
Federal reserve banks f o r each other, x c e p t w h e n specially
requested, except i n t h e three cases where t h e y want claims
filed without special request,
Governor Calkins:

T h e o n l y cisadvantage t h a t this

procedure imposes u p o n those banks which object,

i s that

somebody will have t o follow u p t h e checks o n which they

want the claims filed, instead o f ssying, " G o t o i t and
file a claim o n everything that comes in”, s n d they will
have t o say, “Please file claims o n this, o n that, a n d so

forth,"
Governor Norris:

s h a t i s your objection t o taking

from Philadelphia, Cleveland n d Richmond, a t the same
time that y o u get t h e gensral authority, a
Governor Calkins:

well, I

general request?

think w e might b e willing

to d o that i f you assume 4 1 1 responsibility incident t o

the transaction, b u t not otherwise, because w e certainly
if v e adopt t h e practice o f
making claims o n 411 cheeks,
The Chairman:

T h e general reyusst i s made subject

to all the vesponsibilities a n d liabilities, limitations
and £ 0 o n t h a t a o p l y t o 9 special v e s Suer s s t f o r a

particular


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Federal Reserve Bank of St. Louis

item,

Governor Calkins: I
to d o that, b u t I

say we p r o b & l
y would be willing

think i t inadvisable,

Governor Seay: I

think uniformity o f practice i s

cesirable, arm notwithstanding the fact that I hold a con-

trary view I will be willing to give this general request
and follow i t u p b y specific requests,
Governor Calkins: I

suggest t h a t a g there i s a dife

ference o f opinion about this, that ir. Harrison b e requested t o r e v i e w t h e l e g a l a s p e c t s

o f t h e matter a n d make

2 rscormendation regarding it.
iy. Harrison: I

can answer t h a t now,

T h e law i s

apparently different i n different jurisdictions, a n d i t
would n o t b e covered b y a n y uniform ruling o f a n y kind that
would b e applicable to’all states, except--Governor Calkins:

I t would b e covered b y the uniform

ruling that w e propose, because i t i s more than the law
of each state,

ir. Harrison: Exactly.

Governor Seay: I

would be perfectly willing, if. 22

I am one of the minordtyr
o majority, whichever it is, tom
give a

general r e q u e s t a n d t h e n f o l l o w i t up--- g i v e a

gen-


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199
eral authority a n d then cali f o r action b y a specific reaquest.
The Chairman;

T h e avthority either contains a

quest o r 2 5 Goes not,

re-

I f i t i s just a n authority, Govern-

or Seay, t h e n lodge w i t h i t a general request,

I f y o u with-

hold the general request t h e n t h e authority oxists t o d o
so, b u t i t won't b e exercised unless y o u reivest it.

Governor Seay: I

understand h e wmts a

general

authority a n d i n addition t o that wants specific request

to act under the general authority.
Governor Norris:

H e contends that while this i s a

general authority, t h a t n o action will b e taken under i t
unless specific request i s made i n each case,
Governor Fancher: I

would l i k e t o inquire

o f Gover-

nor i.cKenney whether his banks would file under a general
authorization?
The Chairman; G e n t l e m e n , I

think y o u a r e talking

about t w o different things, t w o wholly different things.
Let m e take another h a c k a t this, G o v e r n o r Calkins proposes, inasmuch 2 s the filing o f these claims i s a technical
matter involving a lot o f considerations, t h a t e a c h Reserve
Bank s h o u l d f i l e w i t h a l l o t h e r r e s e r v e b a n k s t h e t e r m e o f


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200
an authority granted t o file claims,

a m t h a t t h e termes

of that suthority shall specifically show that this
authority will n o t b e exercised unless request i s made t o
exercise it, a n d therefore w e have a l l authorized,in terne,
each other t o act i n case : e request t h a t action,
Now, t h e question comes u p what f o r m o f request shall
we make i n the exercising o f that authority?

S h a l l it

be specific a s to sach item, o r shall it be genoral as to
all items?

T h e r e a r e three banks that s a y they believe

& gsneral outhority o r general request s h o u l d é
b made, a n d
if they make that i t will result i n n o confusion;

b u t all

the rest o f the banks w i l l simply file specific request
when t h e occasion arises,
Governor Norris:

T h a t could cause trouble i n San

Francisco a s t o nine o f the banks, a n d they would have t o
60 b a c k a n d s s e v h e t h e r t h e i t e m s c a m e f r o m n i n e b a n k s o r

fron t h e three b a k s ,

Governor Liorss:

T h e y could refer t o the particular

case i t came from, because t h e instructions would b e right
on 2c,
Governor Norris:
records

T h e y sould have t o refer t o their

t o s e e “ h a t t h e inetructions w e r e f r o m z a c h b a n k


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201
and t o see which o n e w a s f r o m the three bank: a n d which
was f r o m the eight banks.
The Chairman:

“ o u l d y o u take a general authority

under general request, Governor Calkins?
Governor Calkins: I
aear I

haven't examined that aspect o f

can ‘see objections,

rsal objection,

o f course,

W e Will unless there i g some
T h a t , however, d o e s n o t g o

to the root o f the matter, w h i c h i s that w e should have
uniform practife i n the matter,
Governor Fancher: I

had started t o a s k Governor

seKenney i f his bank would take a general suthority.
Governor iicKenney:
Governor Calkins;

e f , w e will.
O L Course-we- W111, i f i t i e the

view t h a t w e should,

The Chairman:

i l y own inclination leans toward t h e

specific request f r o m t h e member bank,

s o m e Limitations

would apply between t h e reserve banks b e c a u s e its trikes
me that t h e argument o f Governor Calkins, t h e one which h e
read, hovever g o o d i t may b e legally, i s conmon sense,
You either have title t o t h e paper,

Governor Calkins;

o r y o u d o not.

I t i s our practice t o a c t i n a

zeneral manner i n regard t.o things l i k e that, anyway.


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202
Governor Norris:

W e have never h a d a case, except

where w e have just gone ahead and done it, and they have
always s a i d t h a t t h e y w e r e v e r y m u c h obliged.

Governor Calkins:

W e could probably furnish more

experience t h a n a n y other district i n this matter, a n d i f

“you would 1ike to ieed a. voltae Be speeches, we will furnish y o u t h e material,
The Chairman:

G o v e r n o r Calkins, a r e y o u willing t o

BC CEDtee=
Governor Calkins: I

have a l r e a d y a c c e p t e d that.

Mr. Harrison told t h e whole s t o r y when h e said that o u r
proposal covered t h e differentiation i n the laws o f the
various states, a n d that n o other proposal does that.

Mr. Harrison:

I t does, but i t involves more work

upon t h e p a r t o f t h e banks,

Governor Calkins: I

will undertake t o actvept t h e

variation, objectionable a s I believe i t t o be.
Governor Norris:

T h a t is, y o u will take general

authority a n d a general request.
Governor Calltins:
Governor Norris:

Yes.
E v e r y bani will d o that.


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Federal Reserve Bank of St. Louis

The Chairman:

N o , I do not think so,

Governor Calkins: I

know what w e will d o s o far a g

our o w n procedure i s concerned, b u t o f course w h e n y o u
ask whether,

i f specifically requested b y the Federal Re-

serve Bank o f Cleveland~-- w i t h all the crime wavers a n d

so forth that Governor Fancher's attorney c a n provide--to file, whether requested o r not, I

a m bound t o s a y that,

ae b a d a g that practice i s , a n d a s loose a s I think i t i s

on the part o f Cleveland, I

guess w e will have t o let i t

go that way.
Governor Norris:

i

Governor Calkins:

Y

Governor Norris: I

t g o i n just what way?
e h a v e c l a r i f i e d t h e matter

to

think y o u have

aiffsrences,

yovernor Calling: I

Go not think t h e thing ought

to b e left suspended i n t h e s i r i n this way, simply because
it i f t o o m u c h t r o u b l e

of it. I

t o inquire i n t o t h e various aspects

think i t ought t o b e submitted t o the managers

of the various banks, reco.imendationus made a n d reconcilements m a d e i f possible.

Let m e try t o state the proposaél-again


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Federal Reserve Bank of St. Louis

a8 @ resolution b y numbers,

First, that a general authority b e filed between the
Reserve banks,
Second, t h a t those banks which desire t o d o s o file
in addition a

general reyuest t o file clains without special

reyjuert,
Third, t h a t those banks which are unwilling t o file
&@general : squest f i l e a eps cial vequest f o r e a c h failed
bank item;
Fourth, t h a t e a c h Vederal reserve b a n k within i t e

own district pursue such policy a s i t determines for itself.
Governor Norris: _

That d o e s n o t cover it, because

you said second o r third that those banks t h a t would not
give a general request--- S a n Francisco will expect t h e n

to send a general “eyuest, a n d one o r two voices a t the
other e n d o f t h e table s a i d they would not.
Tne Chairman; I

think i n those cases where a n y re-

geerve bank i s unwilling t o act o n a general request t h a t
special requssts should b e

Governor Calkins: I

think the matter would b e clari-

to use a much used word, i f Governor McKenney and I


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Federal Reserve Bank of St. Louis

and such others a s see fit, would say that w e would i n
no case a c t without a

special rquest.

the right t o d o that.

A n y holder o f 5 check has the

right t o demand special authority.
day conmon sense a g

i

t

W

e certainly have

T h a t i f a plain, e v e r y

, aside f r o m the legal aspect

ogeae: &ge
The Chairman:

T h e n w e throw i t right b a c k where i t

fs now, w i t h n o uniformity. I

would like t h e idea o f

a gonsral authorit. that outlines t h e » sponsibility, b u t
maybe that i s not possible.
Governor Lorés:

S u p p o s e that e a c h bank h a d eleven

gcneral authorities f r o m each o f the other Fedsral reserve
banks,

a n d that i n t h e avtority itself w e r e instructions

as t o just h o w i t was t o act f o r that particular bank,

whether undsr a general authorization for all claims, o r
to file o n l y o n specific r e j u

N

o

w

, i f you have

anything t o d o with that federal :essrve b a n k y o u will
go that authority a n d find out. what t h e instructions a r e
and y o u w i l l f o l l o w t h e m ,

Governor Calkins:

T h a t w o u l d not happen,

Governor -eDougall:

M r . Chairman, I

think there i s a


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Federal Reserve Bank of St. Louis

206

motion before the house, t o the effect that this que
be r e f e r r e d

t o tir, H a r r i s o n f o r c o n s i d e r a t i o n a n d f o r recor-

mendation,

i f I am correct, i f there i s such a motion,
a epee cnaented. eeentnnn
eaSenn
n

4+

I would like to second it.
The Chairman: I

would like t o put i t a little dif-

ferently, that is, that tir, Harrison, having heard all of
the discussion o n d being familiar w i t h conditions,
to prepare a

special resolution,

b e asked

t o b e submitted a t the

ext mseting, w h i c h may have sane chance o f passage.
Governor icDougall:

mean tomorrow,

B

y s a y i n g t h e n e x t meetings y o u

o f course?

T o m o rT r o w , yes.
e Chairman:
h
5

I f that i s satisfac-

tory, t h e Chair will entertain a motion t o adjourn.

(/nsreucin,

a t 6:20 o'clock p . m., u p o n motion d u l y

mace a n d seconded, t h e Confsrence adjourned until 9:30
o'clock a , m. o f .ednesda
place,)

w a y ord, 1922, a t the sane


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