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https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis A CONFERENCE O F GOVERNORS O F THE FEDERAL RESERVE BANKS Washircten, D . C. November 2 , 5 , 1927, Vester So, -bex, Washineton, D y Cys https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis A CONFERENCE O F GOVERNORS O F THE FEDERAL RESERVE BANKS, Washington, D . C., Wednesday, November 2 , 1927. The Conference o f Governors o f the Federal Reserve Banks convened i n the Hearing R o o m o f the Federal R e serve B o a r d , T r e a s u r y Building, W a s h i n g t o n , D . C., on Wednesday, November 2 , 1927, a t 1 0 o'clock a.m. APPEARANCES: W. P. G. Harding, Governor o f the Federal Reserve B a n k o f Boston; Benjamin Strong (Chairman), Governor o f the Federal R e s e r v e B a n k o f 'New York; Geo. W. Norris, Gevernor o f the Federal R e serve B a n k o f Philadelphia; E. R. Fancher, Governor o f the Federal Reserve Bank o f Cleveland; Geo. J, Seay, Governor o f the Federal Reserve Bank o f Richmond; M. B . Wellboarn, Governor o f the Federal Reserve Bank o f Atlanta; https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 2 James B . McDougal, Geverner o f the Federal Reserve B a n k o f Chicago; David C. Biggs, Governor o f the Federal Reserve B a n k o f St.Louis; . B . Geery, Governor o f the Federal Reserve Benk o f Minneapolis; W. d . Bailey, Governor c f the Federal Reserve Bank o f Kansas C i t y ; Lynn P. Talley, G o v e r n a o f the Pederal Re- serve B a n k o f Dallas: Wm. A . Day, Senior Deputy Governor o f the Federal R e s e r v e B a n k o f S a n Francisco; G. L. Harrison, D e p u t y Governor a f the Federal Reserve B a n k o f N e w York, a g d Secretary t o the Conference of G o v e r n o r s . C The Chairman, please. I e e ee e e T h e meeting will come t o order, will a s k Mr. Harrison, a s the first order o f business, n o t o n the program, t o read a letter which I have just reeeived f r o m S a n Francisao. Mrs Harrison, (reading); https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis "Wy dear Governor Strong: "I very greatly regret that I am tucapacitated and shall not b e i n condition t e attend t h e conference, N o v e m b e r e d . "Te b a n k will,, therefore, b e represented by Mr. Wm. A . Day, Senior Deputy Governor, a n d I trust thet y o u will treat h i m with a greater degree o f tenderness t h a n I c a n e x p e c t f o r myself, a s well as. extend t o him a n y usual courtesies c f the conference. "Please present m y greetings t o all those attending, a n d express m y regret t h a t ¢ shell n o t b e able t o s e e t h e m o n this occesicn. "Yours very truly, "Jno. U. Calkins, "Governor." The Chairman yesterday, a f t e r receiving this letter, dispatched t h e following telegram: "Many thanks fer your letter just reecived. W e promise t o treat D a y tenderly o u t o f consideration for y o u r t e n d e r f e e t a n d a l l h e a r t i l y j o i n i n r e grets a t y o u r a b s e n c e a n d w i s h e s f o r a speedy a n d https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis complete recovery." The Chairman. I f there {fs n o objecticn, t h e action of the Chairmen i s approved. Governor Bailey. I so move. The Chairman. Y o u see what i s ahead o f yeu, Mr.Day. The Open Market Committee yesterday h a d a meeting which t o o k the entire d a y and considered certain memoranda that were submitted a s a preliminary statement u p o n which the c o m m i t t e e b a s e d a report a n d r e c o m m e n d a t i o n as to policy a n d pregram f o r the next f e w months, a n d I am going t o ask the secretary t o distribute t h e memoranda and urge that t h e members o f the Conference w h e have n o t had opportunity t o read i t study i t i f it is pessible just a s secon as possible. (The Secretary distributed the memoranda referred to.) The Chairman (continuing). I weuld also like t o an- nounce that t h e Federal Reserve Board h a s arranged a meete ing o f the Open Market Committee i n this r o o m I believe, at 1 1 o'clock, a n d that meeting will likely last a n hour o r a n hour a n d a half, a n d then o u r Conference can reconvene. T o p i c s Ne. I A, B and C o n the program, which a p e t h e u s u a l o n e s t h a t a p p e a r a t t h e t o v o f e a c h program, a l l more o r less relate t e the discussion that https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 2 will ensue upon t h e report o f the O p e n Harket Committee, I suggest t h a t w e defer consideration o f these three topics until after t h e meeting o f the Open Market Com. mittee w i t h t h e F e d e r a l R e s e r v e Beard. objection? T h e r e being n e objection, I s there a n y w e will proceed to Topic I-D: I. D. Advisability o f requiring member bank o f f e r i n g f o r r e d i s c o u n t p a p e r o f Corporations having subsidiaries t o have i n i t s f i l e s r e c e n t C o p i e s of separate financial statements o f the subsidiary corporations, w h e n there have been filed with Federal Reserve Banks copies o f the ecerporation's consolidated financial statement a n d the individual financial statements of all subsidiary corporations. The Chairman (continuing). This topic was suggested by the Federal Reserve Board, but I think arose i n cornection w i t h a n inquiry made b y a Federal Reserve Banik. Will t h e guilty party diselose w h o made that inquiry? Governar Geery. I a m guilty. The Chairman, M r . G e r r y o f Minneapolis. W i l l y o u state t h e q u e s t i o n t h a t t h e C o n f e r e n c e Goevefnor,Geery. i s t o ccnsider? T h e question c a m e u p originally on the paper o f the Washburn-Croesby Company o f MinneapoBiss T h e y furnish a consnlidated statement a n d have eight subsidiary cerporations, n o n e o f whieh a s k https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 6 any ercdit whatever f r o m the public aside f r o m what little t h e y m a y n e e d i n t h e w a y o f rental, l e a s e a n d stationery p u r c h a s e s a n d t h a t s o r t o f thing, a n d t h e y furnish u s a n d a l l the other Federal Reserve Banks w i t h individual statements o f all these companies, t h e individual statement o f the Washburn-Crosby Company a n d the ecnsolidated statement, b u t t h e y cbject t o furnishing a l l of t h e s e s t a t e m e n t s may b u y t h e i r paper. their brokers, t o e v e r y Tom, D i c k a n d H a r r y t h a t I n fact, t h e y d i d n e t g i v e i t t o a n d w e h a v e a l w a y s t a k e n t h e paper, and I find that Chicago d i d a n d Cleveland did, under those circumstances. T h o s e were t h e only t w o benks I and the o n l y one that I asked, feund c u t that d i d not was N e w York. n. T h e n w e are t h e other guilty party. Our p o s i t i o n i s , briefly, t h i s , t h a t w e b e l i e v e t h a t i f the regulation a s i t now stands i s enforced, t h a t t h e ¢oncerns w h i c h h a v e s u b s i d i e r i e s a n d wish t o g e inte t h e market w i t h their paper, w i l l i n fact furnish t h e statements t o their banks, t h a t is, t o the member banks w i t h which they keep their accounts, a n d i f they a r e furnished to these panks a n d those banks furnish t h e m t o us, t h a t would satisfy .the situation a s t o the paper t h e y sell https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 7 on t h e maricet. O n t h e o t h e r hard, t h e y a r e unwillizeg to furnish statements, b u t wish t o make paper, whether it i s commercial paper that sells i m the o p e n market or a paper t h a t g o e s d i r e c t l y t o t h e banks, w e feel that we are t o some extent passing o n the credit o f that concerx for t h e benefit o f the member b a n k o r the broker, or the beste Auge t h e paper f r o m t h e broker, a n d w e are sharing i n e less degree, but nevertheless that i s the position w e would b e i n o f passing e n the credit o f a statement from makers o f paper generally i n order t o make them eligible, even though their banks d o not receive that s t a t e m e n t . W e have a case o f that sort t h a t has b e e n u p repeatedly i n New York, a n d that i s McFadden in Philadelphia. I story very fully. think G o v e r n o r N o r r i s k n o w s t h a t T h e y sought t o file a copy o f their statement w i t h t h e F e d e r a l R e s e r v e B a n k o f N e w Y o r k i n order that w e might take their paper, even though that statement w a s n o t o n file w i t h the member bank. Governor Norris. M s y I interrupt y o u there t o s a y that t h e y d o n o t s e l l o r i n d o r s e a n y c o m m e r c i a l paper. The Chairman. N o , but I a m using that a s a n extreme illustration o f a case where t h e y could s a y t o their b a n k "To be sure, w e did net furnish a statement o f our affairs, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 8 but i t i s o n file i n the Federal Reserve Bank, a n d t h e Federal R e s e r v e Banke w i l l t a k e t h i s p a p e r f r o m you," and then the member bank will say, “Of course, i f the Federal Reserve B a n k will take 1¢, thet i s all right." To a less degree that i s true o f such a gase a s t h e Washburn-Crosby Company; York. W a t ieast, w e feel s o i n New e have drawn o f f a list o f the concerns o f like character t o the Washburn-Crosby Company which, because of the regulation, h a v e filed t h e subsidiary statement with t h e i r b a n k s o r w i t h t h e vro,ers. the s t a t e m e n t h a s c o m e t o u s f r o m a bly h a s t h e a c c o u n t I n every instance bank w h i c h presuma- o f t h e m a k e r o f t h e paper. it when w e sit tight o n the regulation. T h e y do T h e question 1s whether i t i s well t o begin t o make exceptions a n d whether w e can d o i t and nevertheless m a k e i t effective. Governor Faneher. D o I understand, M r , Chairman, in your preliminary statement that paper o f a eancern that was sold i n the market, i f this statement was furnished t o the banks w i t h whom they earried their depositary account, t h a t that might suffiee, o r d o you g o s o far a s to make i t a requirement o r think i t should b e a requirement i n the regulation that t h e bank buying t h e note o f such a concern for $5,000 o r $10,000 should i n turm have https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis all those ststements? The Chairman. I f a n y bank offering paper o f the Washburn-Crosby Company should come t o u s with a state- ment i n the form the regulation requires, that would an»swer t h e purpose f o r t h e bank, whether i t came f r o m the bank i n which they kept their account o r a bank that bought i t from brokers, a n d all they have t o d o 41s for the Washburn-Crosby Company t o file a complete statement in accordance with the regulation. Governor Fancher. A complete statement o f the parent company a n d the subsidiaries? The Chairman. Yes, a n d that clears them. Governor Fancher. from a broker, S o that e a c h bank buying that note i t would b e incumbent o n that b a n k t o say that i t h a d the statements pefere t h e paper w a s accepted, or 1 t would n o t b e i n a position t o discount t h e paper? Governor Bailey. Suppose a country b a n k sends i n a $5,000 note o f the Washington-Crosby Company that they have bought from a broker, t o our bank, a n d w e have the Washburn-Crosby reports, both the subsidiaries a n d the original, a n d this 1 s a solvent bank that sends i t t o us, have t h e y g o t t o send i n this report? The Chairman. o u r procedure i n New York would b e https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 10 this, a n d Mr. Harrison will correct m e i f I a m not right, that t h e Washburn-Crosby Company probably have a n account in New York? Governor Geery. The Chairman. W i t h t h e Chese National Bank. I f the regulation w a s complied with it would b e met b y the Chase o r the N e w York Trust Conpawy filing a statement, a n d when that paper c a m e i n from would g o before t h e committee a n d they would We d o n o t r e q u i r e t h e s t a t e m e n t w i t h e v e r y piece o f paper that comes in. Governor Bailey. T h a t i s what I mean. Governor Fancher. Y o u a s k that t h e paper f r o m t h e offoring bank i f they have a statement o n file? The Chairman. YoSGevernor Fancher. D e y o u pursue t h a t t o the point where that i s simply t h e consolidated statement, o r state- ments o f all o f the subsidtlarics? The Chairman. W e always d o . Governor Fancher. I n other words, y o u ascertain what of a statement t h e y have got? The Chairman. Yes. T h e y merely certify-- Governor Fancher (interposing). statement? T h a t t h e y have a https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis oa The Chairman. That they have a statement. Governor Fancher. D o y o u pursue that t o a point where t h e y have simply got t h e consolidated statement o r the consolidated statement a n d t h e statements o f the subsidiaries? The Chairman. N o . T h e n it is a question c f whether we have g o t i t from some other bank. Governor Fancher. A n d the offering bank certifies that t h e y h a v e t h e statement, a n d y o u a c c e p t t h a t “ o n the assumption that t h e y have g o t t h e statement t h a t y o u have got? The Chairman. W e are n o t passing o n the credit f o r them. Governor Bailey. burn-Crosby s t a t e m e n t B u t y o u originally have t h e Washi n the N e w York Bank? The Chairman. Y e s . comes T h e r e i s some o f this paper t h a t i n e v e r y d a y almost. Governor Bailey. I am thinking about our situation, where t h e Washburn-Crosby Company has n o t got a n y account in Kansas City, a n d a member b a n k buys a piece o f paper from a broker a n d sends i t i n for rediscount. W e think it i s good, a n d have w e got t e call o n the member bani that s e n d s i n t h a t {$5,000 n o t e t o f u r n i s h u s i t s s t a t e m e n t https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis in every case? The Chairman. I do not know h o w itt i s done now, b u t the w a y w e used t o d o it, t h e Reserve banks exchanged i n formation about paper i n their respective districts, a n d there 1 s a resolution o n file o f the Governors! Conferencé, w h e r e p a p e r w h i c h o r i g i n a t e s i n another district, and i s distinctively paper o f that district a n d i s offered in o u r district, w e telegraph t h e other Reserve b a n k a n d get t h e statement f r o m them. T h a t used t e b e done. Governor McDougal. D e e s t h e Washburn-Crosby Company file their complete statement w i t h their depositary banks? Governor Geery. T h e y have n o t this year. Governor McDougal, T h a t i s the o n l y weakness i n that case? Governor Geery. 3° J u s t look a t this a n d see h o w b i g a 2 0 46. Governor McDougal. I know what i t is, a n d i t would be useless i n the hands o f most banks, anyhow. Y o u know that. Governor Geery. Yes, sir. Governor iicDougal. a suggestion, M r . Chairman, I i f I may. I would like t o make think this whole matter c a n b e https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 13 dealt w i t h s a t i s f a c t o r i l y a l o n g t h e l i n e s y o u h a v e r e c ommended, a n d here i s a memorandum t h a t w e prepared r e - lating t o the subject, t h a t t h e matter c a n b e satisfactorily dealt with through t h e adoption o f the recommendation made b y the Advisory Council i n September, w i t h a slight modification, t h e Council's recommendation being that s u c h companies should b e required t a file with their banks o f deposit a statement consolidated statement a n d a detailed o f a l l subsidtiaries. I consideration would s u g g e s t f o r t h e o f the Conference t h a t w e adopt t h a t a s o u r procedure with one slight modification, and that is, instead o f saying "banks o f deposit,” s a y "principal banks ofdeposit," and I think that would take care of brokers! paper a l o n g t h e l i n e s w h i c h y o u s t a t e d w o u l d b e satisfact- ory, a n d i t would place i n the hands o f the principal d e positary b a n k s w h a t t h e y d o n o t g e t n o w f r o m s o m e c o r p o r a - tions. Governor Fancher. D o y o u think that would take care of the broker situation? Governor MeDougal. I the broker situation. think t h a t w o u l d t a k e c a r e o f I t i s quite i n accord with Governor S t r o n g ' s n w o recommendation. The Chairman. M r . Harrison h a s t h e record o f that meeting a n d t h e action taken i n the Advisory Council. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 14 Weuld y o u report that, please, M r . Harrison? Governor Seay. T h e danger which y o u have i n mind is not a n imaginary one. I t i s a real one. T h e Federal reserve banks should n o t c o n s e n t ‘ t o be placed in t h e p o s i t i o n w h e r e t h e y w o u l d b e c o n s t r u e d b y their member banks t h a t t h e y passed u p o n t h e credit o f these people. The Chairman. T h a t i s the thought. Mr. Harrison. L a s t September a t the meeting o f the Advisory Council, t h e question h a d been raised whether something ought n o t t o b e done t o alleviate this condition, especially a s the Advisory Council s a i d that this requirement o f the Board was resulting i n a decreasing supply o f eligible: c o m m e r c i a l paper. A f t e r considera- tion b y the meeting, t h i s action was taken: "Attention has also been called t o the Federal Advisory C o u n c i l t h a t t h e v a r i o u s F e d e r a l r e s e r v e banks h a v e d i f f e r e n t p r a c t i c e s a n d r e q u i r e m e n t s to t h e f o r m a n d c h a r a c t e r filed b y the companies. o f the statement as t o be T h e Federal Advisory Council believes t h a t t h e r e q u i r e m e n t s a s t o statements should b e standardized, a n d that companies having https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 15 one o r m o r e s u b s i d i a r i e s s h o u l d b e r e q u i r e d to file with the banks o f deposit a consolidated statement a n d a detailed statement o f all their subsidiaries." That action o f the Federal Advisory Council w a s discussed i n the record over a period o f some t e n pages, a n d at the conclusion, while n o definite action was taken b y the Council, G o v e r n o r S e a y , I think i t was, s u m m a r i z e d t h e discussion b y saying: "The g e n e r a l o p i n i o n i s t h a t t h e r e g u l a t i o n of the Board should b e complied with." That was apparently the consensus o f view o f the Council a t that time. W h e n I reported the discussion t o the Federal Reserve Board, I did not indicate t h a t a n y action h a d been taken, because a s a matter o f fact none had expressly been taken a n d there was n o vote. E v i d e n t l y , in view o f the fact that t h e Conference d i d not formally vote o n compliance w i t h the Board's regulation, t h e matter has b e e n referred back t o us; b u t there i s n o doubt, in reading these t e n pages o f the stenographic record, t h a t this case was precisely t h e same a s the o n e n o w under discussion, a n d s o considered b y t h e Conference, a n d the feeling was that the regulations o f the Board should b e https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 16 complied with a n d that i n all cases-<not j u s t i n New York, a s has b e e n t h e practice, b u t i n all cases==the statemesats o f the borrowers a n d i n d i v i d u a l statements of the subsidiaries should b e o n file with t h e member bank a n d not merely with t h e Federal Reserve Bank. Governor McDougal. I f you take that literally, that g e t e e t h a t every bank offering a paper purchased from a broker would have t o have t h e statement. Mr. Harrison. I think that i s a perfectly accurate construction o f the present regulation o f the Board, The Chairman. I d o not t h i n k that i s what w e ag, < — f think w e accept t h a t l e t t e r S i n the application f o r m a g indicating that a statement i s o n file with the offering member bank, w h i c h i s satisfactory t o that bank, a n d then we turn t o i t i n our credit files t o see whether t h e statement o n file with u s i s satisfactery t o us. Governor Fancher. A n d which has come t o y o u from a member bank? The Chairman. Yes; b u t I do not think w e checked that back. Mr. Harrison. I think i t i s perfectly true that w e do not check back the meaning o r the significance o f the letter S i n the application, b u t i n every case where w e https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis L? have specifically asked t h e question, w h e r e w e have a p y information contrary, w e expect t h e m t o have a consoli- dated statement a n d also separate statements o f the subsidiaries, Governor Bailey. T h a t would revolutionize t h e buying o f commercial p a p e r b y c o u n t r y banks. Governor Fancher. I s i t necessary f o r t h e concern making t h e paper t o furnish a statement o f the parent company a n d t h e subsidiaries, a n d i n addition t o that furnish i t t o t h e p u r c h a s i n g b a n k i f t h e b a n k e x p e c t s to rediscount t h a t with t h e Federal Reserve Bank? The Chairman. T h e actual practice, I think, i s this, that when t h e member b a n k sends i n the application f o r m with the letter S$ on it, i t is assumed that the statement held b y that member b a n k i s i n conformity w i t h the Board's regulation, whether i t is o r not, a n d the responsibility rests u p o n t h e m e m b e r b a n k s t o h a v e t h e s t a t e m e n t form required b y the regulations. i n the W e cannot check u p every transaction t o see that t h e y have. Governor Fancher. The Chairman. W e d o not attempt to. Q u r responsibility i s t o see that a member bank has given us a statement which complies with the regulation, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Governor Fancher. The Chairman. T h a t i s the point, B u t w e d o not require statements f r o m the member bank. Gavernor Geery. M y recollection i s that t h e regula- tion o f the Board requires t h a t bankers! acceptances, to be eligible f o r purchase, t h e Federal Reserve B a n k pur-~ chasing most hévthe statement o f the acceptor showing a s a t i s f a c t o r y condition, strength o f J. P.Morgan & a n d y e t w e b u y paper o n the Company having furnished y o u with a statement. The Chairman. O f course, t h e y are n o t member banks. Governor Geery. N o , b u t i f the First National B a n k of Minneapolis h a s some J . P. Morgan acceptances w h i c h they wish t o indorse-- The Chairman (interposing). history behind that. W e l l , there i s a long I n the early days these b i g bank- ers never made a statement t o anybody i n the world, n o t even t o their o w n banks. T h e y never borrowed o n their paper without collateral, a n d w e had a special rule o f the Board which permitteg t h e Federal Raeserve B a n k o f New Y o r k t o p u r c h a s e a c c e p t a n c e s o f private bankers u p o n the f a i t h o f a n o r a l s t a t e m e n t m a d e t o t h e C h a i r m a n https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 19 and Governor, Now, by & a n d t h a t w a s t h e p r a c t i c e f o r s o m e years. gradual p r o c e s s o f inching o n them, w e have finally g o t written statements, a n d n o bill tis purchased by t h e F e d e r a l R e s e r v e B a n k i n N e w Y o r k t h e t i s n o t b a s e d upon consideration o f a written statement, w h i c h i s i n a special b o x accessible t o only two o r three officers o f the bank, a n d t h a t w r i t t e n statement, as a rule, w h e n i t is filed with us, i s handed t o the Governor o r Chairman, or both, b y a partner i n t h e firm, a n d t h e n w e a s k several] questions about t h e statement, a n d anything material i s dealt with i n a little separate memorandum that the officer makes, a n d except w e could handle t h e matter i n that w a y we w o u l d g e t t h e statements. Governor Fancher. Isn't i t a fect that, with the exception o f J. P. Morgan & Company, a l l o f the private banking concerns whose paper i s accepted, h a v e stixtements o n file with the other banks? The Chairman. T h a t m a y be. Governor Fancher, Tne Chairman. I I t i s a n o u t s t a n d i n g exception. doe not know what t o d o about that. Gentlemen, t h e Board i s waiting f o r me. (Whereupon, oat 1 1 o'clock a.m., a recess w a s taken https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 20 until 1.49 p.m., w h e n t h e following occurred) : The Chairman. Gentlemen, suppose w e adjourn f o r lunch n o w a n d return a t 2 olclock sherp. isfactory? T h e r e being n o objection, I s that sat-« w e will adjourn until & o'clock. (Whereupon, until 2 a t 12.50 p . m , a re otclock p.m.) AFTER RECESS. The C o n f e r e n c e w a s r e s u m e d a t 2 o'clock pem., a t the expiration o f the recess, The Chairman. W e were discussing the question o f the statements o f subsidiaries, before t h e interruption of t h e o t h e r meeting, and I think Mr. G e e r y w a s f i n i s h - ing h i s statement. Governor Geery. N o . I t w a s s u g g e s t e d t h a t t o furn- ish those statements t o the member banks a n d they furnish them i n turn t o the Federal reserve bank, t h a t would cover t h e whole situation. H e does n o t want t o have t o furnish them t o every Tom, D i c k a n d Harry. Governor Bailey. H o w would a broker h a n d l e t h a t ? https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ve Would h e have a lot o f them made a n d furnish o n e every time h e sent a note t o the Federal Reserve B a n k f o r discount? Governor Gerry. No, I do not think that would b e required, provided the depositary banks did and the Federal Reserve B a n k h a d i t from them. The Chairman. O f course, there i s that point that i f we check u p every bank that offers paper’. t o u s t o see that t h e regulations a r e literally complied with i n every particular, y o u will find some banks that have n o t statements o f the subsidiaries. I do not think w e d o i t t o that extent i n New York. Governor Bailey. I f w e had t h e reports o f the subsidiar- jes, couldn't w e copy t h e reports a n d furnish them? Governor McDougal. Y o u would have a hard job i n copying it. The Chairman. Governor Harding, h o w does i t strike you, t h i s q u e s t i o n ? Y o u have that question u p i n New England, with the mills subsidiaries. Governor Harding. M y idea i s that i t i s a goad deal more important t o get paper that i s going t o be paid, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis oe butII c a n see from t h e standpoint o f these concerns that have subsidiaries t h a t t h e y might have v e r y good grounds f o r objecting t o having these statements scattered around i n the hands o f a miscellaneous l o t o f bankers a n d brokers. I t might p u t t h e m i n bad from a competitive standpoint. I also a p p r e c i a t e t h e p o i n t that t h e F e d e r a l R e s e r v e B a n k d o e s n o t w a n t t o p u t i t - self i n the position o f passing o n the credit o f a member bank. B u t i t seems t o m e that a l l o f the requirements of the situation would b e met i f the corporation depeositell with i t s p r i n e i p a l . d e p o s i t o r s a then w h consolidated statement, e : nybroker's n: a paper came i n and they wanted ‘to check that paper up, t h e y would d o a s they d o now a n d write t o their correspondents: " W h a t d o y o u know about this paper?” T h e n let the corporation deposit with the Federal r e s e r v e b a n k o f i t s district, w i t h t h e understand- ing that copies will b e sent t o all other Federal reserve banks, t h e consolidated statement a n d t h e statement o f the subsidiary. N i n e t y nine times o u t o f a hundred a bank extending credit t o a corporation gets a l l t h e information it wants f r o m t h e consolidated statement, and I i n m y judgment, think t h a t w o u l d m e e t a l l o f t h e requireménts. L e t the F e d e r a l R e s e r v e B a n k h a v e t h e c o n s o l i d a t e d s t a t e m e n t https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 23 and t h e s t a t e m e n t s o f t h e subsidiaries, principal d e p o s i t a r y b a n k s a n d let the o f the corporation h a v e t h e consolidated statement. Governor Geery. B u t not t h e subsidiaries? Governor Harding. N o , sir. Gevernor Fancher. T h a t seems t o be a point w h i c h the d e p o s i t a r y b a n k s a r e raising, t h a t t h e c o r p o r a t i o n s furnish t h e i r s t a t e m e n t s furnish t h e statements t o t h e Federal teserve banks a n d o f t h e subsidiary corporations, simply t h e c o n s o l i d a t e d s t a t e m e n t i n s o m e cases, and a n d the bank would like t o have t h e subsidiaries! statements a n d sometimes t h e y get i t and sometimes t h e y d o not g e t it, and I think the depositary bank would like t o have all that i s furnish ° ‘ the Federal reserve bank. I think that is a point that these b i g corporations make, t h a t t h e y furnished t h e consolidated statement t o the Federal reserve bank a n d the statement o f the subsidiaries, a n d have o n l y given t h e depositary b a n k the consolidated statement. Governor Harding. to give a I f y o u require t h e corporations detailed statement t o two o r three o f the larger depositary banks, t h e other banks h a v e t h e same right t o ask f o r i t , b u t y o u c o m e r i g h t b a c k t o t h e s a m e p r o p o - https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 24 sition, t h a t t h e y h a v e t o g i v e t h e i r w h o l e b u s i n e s s to the public. Governor Geery. G o v e r n o r Harding's statement i s just what t h e Washburn-Crosby Company has b e e n doing. They furnish t h e depositary b a n k with the consolidated statement a n d the Federal reserve bank with both. Governor Fancher. A n d y o u find i n some cases t h a t the depositary b a n k would like t o have t h e subsidiary statements? Governor Harding. T h e depositary b a n k c a n get what they w a n t b y a s k i n g s o m e p o l i t e questions. T h e y c a n say, "We have g o t your consolidated statement a n d w e would like t o know something i n addition.” Governor Seay. I t seems t o me, Mr. Chairman, t h a t the regulation a s i t stands i s a good o n e a n the side of s a f e t y a n d f o r t h e p r o t e c t i o n o f t h e F e d e r a l r e s e r v e bank. I t also seems t o m e that i f these corporations d e - sire t o float their paper i n the country generally, t h a t at l e a s t t h e i r d e p o s i t a r y b a n k s o u g h t t o h a v e t h e f u l l statement, t h e consolidated statement a n d t h e statement of the subsidiaries o f the corporation; b u t i t does n o t seem t o m e t o b e s o necessary f o r these small interior https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 25 banks t o have this information, provideq t h e y have t h e consolidated statement. tary bank, I B u t , w i t h respect t o the deposi-~- believe t h a t u n c o n t e s t a b l y t h e y o u g h t t o have those statements. The Chairman. T h e y generally have a line o f credit there. Governor Seay. I believe, A n d w h i l e i t w o u l d n o t b e well, t o make a n y exception i n the matter, as w e all know that practices g r e w u p i n handling these things which are summed u p i n the regulation. I do not believe it t o b e a n y infringement u p e n t h e p r i n c i p l e t o take paper f r o m these small interior banks, w h i c h have n o t got these statements o f the subsidiary companies a n d which w o u l d n o t k n o w e x a c t l y h o w t o protect t h e c r e d i t i f they h a d them~-I think w e might ignore i t provided t h e y have the consolidated statement; but I believe i t would be g o i n g i n t h e w r o n g d i r e c t i o n t o undertake t o alter the regulation. Governor Bailey. Supposing a bank offers you a $5,000 note, a country bank who has bought this through a broker, a n d the broker says "This i s checked b y two or three banks, which are depositary banks." W e write them and they give u s the proper credit information; t h e y https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 2¢@ discount this note, after having carried i t for sixty days, f o r anotheY thirty days. W h a t weuld y o u a s k them about that? W o u l d y o u a s k them i f they have a l l o f these statements? Governor Seay. M y own opinion i s that t h e y should have t h e consolidated statement. Governor Bailey. T h e n t h e brokers would have t o have Governor Seay. Yes, I be e n c o u r a g e d think so, a n d they cught t o t o have i t , too. I f they invest their money t h e y o u g h t t o invest t h e i r m o n e y i n t e l l i g e n t l y a n d with information a t hand a n d ought n o t t o depend u p o n t h e Federal reserve system when t h e y send i t direct. I f they sell that paper t o their banking correspondents, a l l well a n d good; b u t i f they take i t t o the Federal reserve bank for a rediscount, t h e n I think t h e y ought t o b e in a position o f not having t h e Federal reserve b a n k t o pass u p o n it, b u t pass u p o n i t themselves b y reason o f holding the statement. Governor Fancher. W i t h o u t a n y discount a n d purchase of the paper f r o m the small interior bank, i f t n offering that t h e y d o not s a y that t h e y have a statement, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis aa and w e have a statement w h i c h comes f r o m other sources, we a d v i s e t h e b a n k t h a t i t i s i n c u m b e n t ing p a p e r t o h a v e a statement, furnish a statement. I o n t h e m i n buy- t h a t t h e broker should am quite i n accord with the view expressed here b y the Federal Advisory Council that the depositary bank should b e furnished with not only the congolidated statement, b u t a statement f r o m the subsidiaries, a n d w e might g o further, a n d s a y that brokers i n all cases furnish a consolidated statement to the bank that purchases t h e note. The Chairman. W e cannot discount t h e paper unless the member b a n k which has purchased t h e paper a n d submits it s h o w s i n the application that t h e y have a Governor Fancher. A The Chafrman, statement. statement. W e d o not mean t e exemine them, b u t we take their word for it, Governor Fancher. Sure. The C h a i r m a n . I understand a motion h a s b e e n m a d e t h a t the policy should b e t o require these corporations t o file a consolidated statement a n d statements o f their subsid- laries w i t h their depositary bank, w h i c h shall b e furnished to the Federal Reserve Board b y the depositary bank. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 28 Governor ticDeugal. M y suggestion w a s t h e w o r d “principal” b e inserted before the words "depositary bank." The Chairman. Yes. Governor Seay. I hope that Governor McDougal will withdraw t h a t , b e c a u s e h o w c a n y o u m a k e t h e e x c e p t i o n consistently a n d logically? Governor sicDougal. I can answer thet, Mr. Chairman, by s t a t i n g t h a t s o m e o f t h e s e c o r p o r a t i o n s o p e n perhaps innumerable a c c o u n t s f o r c o l l e c t i o n purposes, with the understanding t h a t t h e y will b e remitted f o r twice a week or something l i k e that, a n d that t h e y a r e purely collectfon accounts, a n d I do not think that these banks should be considered i n the light o f depositary banks. Governor Seay. G o v e r n o r McDougal, has s t a t e d t h e matter, a s Governor S t r o n g - w e could n e t handle t h e paper o f these corporations f r a m a n y one o f their depositary banks unless t h e depositary b a n k h a d statements. S o , A t ‘per chance t h e y s h o u l d f i l e t h o s e s t a t e m e n t s o n l y w i t h t h e principal b a n k a n d yet some other o f their depositary benks sheuld b u y the paper, t h e y could n o t redepesit i t with t h e F e d e r a l r e s e r v e b a n k u n l e s s t h e y h a d t h e s t a t e ment. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 29 Governor ilcDougal. T h e y would have a statement o f the borrower, I t might b e t h e corporation operating subsidiarjes, o r i t might b e one o f the subsidiaries which wonedewned b y that corporation. T h e y would have a statement o f that sort, b u t t h e y could not b e expected to have this vast amount o f data a n d other information that a c c o m p a n i e s t h e s e c o n s o l i d a t e d s t a t e m e n t s , w h i c h r e - quires careful examination b y your o w n expert credit m e n in order t o analyze a n d understand t h e situation. Governor Fancher. W h y cannot t h e situation b e cov- ered by "depositary banks which grant lines o f credit?" The Chairman. T h a t w o u l d d o itt. Governor Seay. That i s the point I had i n mind, because a n y other bank would have t o get t h e statement, The Chairman. W i t h depositary banks which grant a line. of: credit? Governor Fancher. T h a t covers i t , a n d I second t h a t motion. (The motion was put and carried.) The Chairman. I will a s k Mr. Harrison t o distribute the. report which has just been made t o the Federal Reserve Board b y the Open Market Committee. That. 1 s Topic https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 14“A o n the progratn. l, C r e d i t Transactions a n d Policies. A. O p e n M a r k e t Operations. 1. R e p o r t o f Vpen Market Investment Committee. Canc P O L E « (The Secretary distributed t h e report referred to.) The Chairman (continuing). T h a t should have b e e n marked "Confidential, " o f course, were. I a s t h e other papers would like t o explain that i t was expected that t h e meeting o f the O p e n Market Committee would b e held t w o w e e k s o r m o r e e a r l i e r t h a n i t w a s held, but the r e p o r t s t h a t w e r e d i s t r i b u t e d y e s t e r d a y o r t h i s morning were prepared some time ago, a n d they have brought d o w n t o d a t e s u c h report, a n d w e anticipated, as the d a y o f the meeting h a d been deferred, t h a t w e would meet w i t h the Federal Reserve Board yesterday afternoon and that the whole precedure would b e i n the usual course o f the meeting o f the Open Market Committee with the Board i n between the dates of the Governors! meeting, b u t t h e Secretary w a s detained a t t h e Capitol yesterday, a n d w e c o u l d n o t m e e t i n t h e afternoon, s o we had t o have the meeting this morning, a n d i t would have taken s c l o n g p r o b a b l y t o h a v e c o n s i d e r e d t h e r e p o r t a t https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Sk this meeting that w e had t o go right ahead with the meeting a n d leave t h e Governors! Conference, a n d these recommendations w h i c h a r e n o w b e f e r e y o u w e r e d i s c u s s e d a couple o f hours this morning, a n d efter w e left t h e Board m e t a n d I now have this communication f r a m Governor Young: Mr. Harrison (reading): "My dear Governor Strong; "At the meeting o f the Federal Reserve B o a r d held todey following t h e conference w i t h t h e members o f your committee, during which the revert o f the committee, deted November 1 , 1927, w e s submitted tothe Soand a n d discussed i n detail, i t was voted b y the Boerd that epproval b e given t o the policy governing o p e n morket operations a s recommended b y your committee i n its report referred to. Very truly yours, (Sed ) A o . Youre. Mr. Penjemin Strong, Chairmen Open Market Investment Committee.” https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 32 The Chairman. Y o u m a y o r m a y n o t h a v e h a d oppor- tunity t o read the memoranda submitted this morning. This report i s the report based upon those memoranda which has n o w been apvroved b y the Federal Reserve Board, and i t will g o forward i n the regular course t o the Federal reserve banks w i t h t h e usual letter f r o m the Chairman o f the Open Market Committee f o r consideration by the respective boards o f directors o f the Federal r e serve bank, a n d this i s the opportunity t o distussuit, if there a r e questions w h i c h are obscure, a n d all t h e committee a r e here t o answer questions. Governor Talley. M r . Chairman, I want t o s a y the tentative d a t e o f March l s t would b e t h e latest d a t e that w e would like t o approve of. The Chairman. T h e r e was a reason f o r putting that date in, because this report h a s a gnod deal o f flexi- bility, a s y o u c a n see from its terms, a n d b y tentatively, subject t o review i f occasion reguires, spanning t h e period t o March lst, i t takes c a r e o f all o f the unusual operations t h a t arise around t h e e n d o f the year a n d the beginning c f the next year, a n d w e should hope that after M a r c h l s t w e w o u l d s a i l o f f i n t o s m o o t h w a t e r s https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 33 without m u c h t o do. A t a n y rate, j u s t p r i o r t o M a r c h ist, i f w e have another committee meeting, w h i c h w e likely would possibly do before that, we will mow a good deal more about developments t h a n w e n o w know. February l s t w o u l d h a v e b e e n e little t o o soon, a n d after consideration i t seemed a s though March l s t was a conservative date. Governor Talley. M a r c h l s t i s quite a n agreeable date f o r us. The Chairman. I t also fixes u p the program s o that before t h e March 1 5 Treasury financing w e c a n have an-. other meeting a n d consider everything again. Governor S e a y . I natice i n the opening paragraph you say "Main Far bie rates for money at about present levels." Y o u mean, I suppese, b y the word "about,"~- The Chairman. (interposing). Oh, yes. Y o u know the money market i s more o r less u p a n d down. I should hope that there would not b e any material change i n the rates for commercial paper, bankers! acceptances a n d the ordinary line o f time a n d commercial loans. I d o not care so much about t h e call rate o n the stock exchange; t h a t goes u p and down, b u t i t takes a little period o f higher https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 34 or lower money o n the call l o a n market f o r the other rates t o respond t o it, a n d I do not think the fluct- uations within moderation i n the call l o a n rate would be important i n the policy expressed there, s o long a s it did not last t o o long. Governor Seay. T h e point that I have particularly in mind refers t o the reserve rate itself. I presume you meant a t o r about t h e present levels. The Chairman. Yes. T h i s does n o t refer t o reserve bank d i s c o u n t r a t e s . T p n i s refers t o market rates. Governor S e a y . Y e s , b u t t h a t i s affected, w e think, to some extent b y the Federal reserve b a n k discount rates. The Chairman. A l l right. I f any occasion came t o change o u r d i s c o u n t r a t e i n N e w York, it without having a w e would n o t d o meeting w i t h t h e cormittee o r con- sulting with the committee. Governor S e a y . T h e present discount rate, o f course, is below what y o u would call t h e general credit market. The Chairman. N o mere t h a n usual. Governor Seay. T h e discount r a t e i s not? The Chairman. N o t i n N e w York. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 35 Gevernor Seay. I t i s below t h e commercial rate, o f course? The Chairman. I t always ts. Governor Seay. I t i s a little b i t lower i n propor- tion than customary? The Chairman. No. T h e commercial paper rate i s 4 or a shade over- [ f t is about t h e same. Gevernor NcDougal. A shade under toe. The Chairman. Yes. S o m e o f the best commercial papers shade a little less t h e n 4 per cent. Governor Geery. I n our district i t i s 4-3/4. The Chairman. I think t h e d i f f e r c n t i a l b e t w e e n o u r rate and the going rate fot commercial leans i s Just about t h e s a m e a s 4 t w a s s h o r t l y p e f o r e w e r e d u c e d o u r rate, Gevernon Seay. I n other words, y o u mean that t h e commercfol r a t e h a s b e e n l o w e r j u s t a b o u t i n proportion with the Federal reserve b a n k discount rate i n your mare ket? The Chairman. Yes, Gevernor Fancher. for s h o r t - t i m e b i l l s ? A n d the rate i s about 3 per cent https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 56 The Chairman. T h e relationship o f the rates h a s b e e n maintained b y the reduction paper which has a i n market r a t e b y t h e g o i n g market rate j u s t about t h e same re- lationship t o o u r l o w e r r a t e a s i t h a d t o t h e 4 rate. per c e n t W h e n w e h a d a 4 per cent discount rate t h e very best commercial paper was selling about 4 4 or a little above. O f course, I a m speaking o f New York especially. Now, i t i s selling a t 4 and sometimes t h e very best paper a little above. Gevernor Wellborn. agricultural banks, W h a t i s the theught about t h e o r banks located i n agricultural sect- ions, increasing their rate before t h e borrowings b e g i n next spring o r early i n the year? The Chairman. W e have not discussed that a t all, Geverner Wellborn. Gevernor Wellborn. W e have n o t noticed i t yet be- cause t h e time has n o t arrived a n d t h e market h a s n o t been affected a t the present time. B u t I have heurd several bankers s a y " I can g o out a n d b u y some bonds a t 4 per cent and rediscount them at 3%." S o they have been thinking along those lines o f making some profit out o f t h i s v e r y l o w rate. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 37 Gevernor Fancher. D o y o u think they are doing Governor Wellborn. N o , n o t t o any apvreciable that? extent. U u r loans are down. W e have had s o many banks t o liquidate their indebtedness fin full this year that o u r loans a r e down. Governor Seay. T h e y a r e investing a considerable p o r t i o nf o their funds i n readily: marketable bonds i n our district, a n d I think they have their eye o n the Federal -reserve rediscount rate. create a T h e i r object i s t o secondary reserve. The Chairman. B u t they are not doing that o n the money they borrow from you? Governor: Seay. N o . Governor Wellborn. T h e y are doing that from their honeuske w h e n t h e proceeds o f the crops have b e e n sold, but a s soon as those deposits begin t e melt away and go out into agriculture again, t h e y will want t e borrow meney o r sell t h e bonds. The Chairman. Haven't t h e y always done that more or less? Governor Wellborn. T h e tendency seems t o b e growing https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis in that respect, about buying bonds. Gevernor Fancher. I s n ' t that d u e t o the lack o f desirable bills s o l d b y brokers a t the present time? Governor Wellborn. I causes. loans, think i t i s due t o several I t i s easier t o handle bonds t h a n t o handle o r t o g o o u t a n d s e e k loans; may not b e considered s o good. o r t o take loans I t i s along t h e line least resistance, y o u might say. Governor Seay. T h e r e i s this eventuality, t h a t having these excess funds i n bonds returning 4 per cent, t h e probability i s that when the occasion comes f o r t h e m t o borrow, i f they c a n borrow f r o m u s a t 3 g per cent, t h e y will borrow 3 o n the bonds. Governor McDougal. Mr. Chairman, I have n o t under- stood a n d d o not understand that t h e adoption o f this plan would necessarily bind a l l o f the banks o r commit them t o a 3% per cent discount r a t e f o r t h e next f o u r months, a n d I do not think that w a s t h e intention. The Chairman. N o . I t i s not mentioned i n the report. Governor McDougal. B u t that question w a s raised b y Mr. Seay, a n d that was m y understanding. Governor Seay. I do not think i t was implied i n https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 39 there that a n y Federal reserve b a n k would take t h e position o f s a y i n g t h a t i t w o u l d v o t e f o r p r e s e r v i n g i t s o w n 3g per cent rediscount rate, because w e would not b e willing t o take that position. The Chairman. W e would not, either. Governor Fancher. T h e rate f o r money means t h e com- mercial rate and has n o bearing o n the Federal reserve bank rate. The Chairman. T h e r e fis a saving c l a u s e i n the report right a t the beginning that conditions m a y change which will necessitate a had n o thought, review o f the matter. T h e committee b y direct commitment o r implication, to bind itself o r any bank t o retain t h e present rediscount rate. Y o u could net d o it, any way, i f you wanted to. Are there a n y other questions? Governor Seay. I have n o further questions, w i t h the understanding, Mr. Chairman, a s I understand y o u t o set forth, that the fixing o f the first day o f March i s simply an a r b i t r a r y fixing, a n d that t h e whole policy o f the committee investments i / subject t o change o n account o f changing conditions. The Chairman. Y e s . https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 40 Governor Seay. W h i c h I ef course would take f o r granted. The Chairman. W e had a period o f three a n d one half months before, I until August Ist. think i t was, o n the last approval, W e met o n Way Oth, a n d that i s about three months, a n d this makes i t four months. Governor Seay. P e r s o n a l l y I think that part o f the interior w i t h w h i c h w e a r e c o n c e r n e d py the 3 4 per cent rate. I i s :not b e n e f i t t e d think i t i s too low a rate, and I thought s o from the beginning, b u t that h a s n o bear~ ing upon t h e general policy o f the Investment Committee from t h e point o f view that i s presented there. I think it 4 s rather harmful t h a n otherwise. The Chairman. Y o u think i t is rather harmful? Governor Seay. Yes, sir. T h e interior which i s accustomed t o lend i t s money a t rates which a r e much higher t h a n those prevailing i n the money centers, is getting a false perspective. Governor Bailey. D o y o u mean t o s a y that t h e country banker finds fault because this rate is lower; that his customer asks h i m t o lower h i s rate t o him o n that a c - https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis count? I s that i t ? Governor Seay. N e . I think i t is giving him a false perspective o f the condition o f money i n his o w n locality a n d i n t h e d i s t r i c t w h i c h t h e F e d e r a l r e s e r v e bank serves. N o matter what h i s customer m a y desire or ask him, h e i s going t c lend his meney t c him at the best rate h e c a n get, a n d i s usually i n a position t e enforce a n y r a t e h e asks. Governor Talley. D o you find that t h e best borrow- ers i n y o u r d i s t r i c t h a v e a c c e s s t o t h e competitive r a t e for m o n e y ? Governor Seay. A l w a y s and a t all times. Governor Talley. I think that money i s worth about the same t h e world over, a s a rental charge. Governor Seay. T h e benefit o f the lower rate reaches the b e s t borrowers, w h o have access t o competitive m a r - kets, The Chairman. T h a t h a s some favorable effect a t times t o have that condition arise, d o e s i t not? Governor Seay. Yes. I t is hard t a define i n per- centages, b u t i t has some kind o f effect. W h e t h e r t h e result o f that effect i s beneficial o r otherwise usually https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis has t e b e proved b y the future. The Chairman. I mean y o u r c a n n e r s d o w n t h e r e w h o buy the food a n d vegetable crop, s o m e o f them have accounts i n New York, Philadelphia, o r other cities, a n d when t h e discount r a t e goes d o w n they borrow their money a Little cheaper. D i r e c t l y and i n a remete w a y t h a t benefits t h e fruit a n d vegetable growers? Governor Seay. The Chairman. I t may o r may not; t h a t i s the point. I t does n o t hurt t h e m any, d o e s i t ? Governor Seay. E x c e p t i n the vague w a y i n which I have endeavered t o give expression. I deadens t h e m t o a think i t scmewhat truse s e n s e o f t h e p r e s e n t d e g r e e o f expansion, w h i c h i s rather large, s a y what y o u will. Governor Talley. T h a t i s what i s happening i n our district right a t the present time. T h e exports o f cotton ere lower t h a n they were last year. The Chairman. I n t h e n u m b e r o f bales? Governor Talley. Y e s , i n t h e n u n b e r o f bales, and the cotton i s being purchased a n d i s going into merchants! stock, a n d i n the last t w o weeks o u r loans have increased about $9,000,000 f r o m the l o w point, a n d the applications come f r o m banks w h o a r e carrying large stocks o f cotton https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 43 for cotton merchants, a n d they a r e buying i t because they c a n g o into stocks o n a lower rate. The Chairman. T h a t m a y b e a good thing f o r your cotton g r o w e r s d o w n there, Governor Wellborn. growers v e r y much. I t helps t h e dealers. Governor Talley. basis. I t does n o t h e l p t h e c o t t o n I t simply avoids the depreciation I t helds t h e b a s i s u p . Gevernor Seay. H e is able t o market his c o t t o n t a good prices, if he has any idea whatever, a s most of them have, t h a t prices m a y increase; a n d t h e carrying charges a r e lower, Governor Talley. Y o u c a n take t h e l a t e ginnings which come o n the market, and that does not affect the basis m o r e t h a n f i f t e e n o r t w e n t y peints, a n d when that ginning report came out you had a little upturn i n the prices right away. Governor Seay. T h a t s h i f t s t h e r i s k f r o m t h e buyers or holders o f cotton. Governor Talley. O h , yes. H o w m u c h better t h a t t s from a n economic standpoint f o r t h e stocks t o g c into the hands o f the merchants w h o are willing t e absorb https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 46 them, a n d the producer i s willing t o sell a t prevailing prices. M t talsssc t h e speculative elemént o u t o f it. The Chairman. Y o u think i t i s a benefit i n your district? Governor Talley. a benefit, b u t I E y think t h a t atbothis t i m e i t 1 s do not think w e c a n s a y arbitrarily that e v e r y f a l l w e s h e u l d l o w e r t h e r e d i s c o u n t r a t e a t the Federal reserve b a n k because that depends o n the circumstances. C e r t a i n l y these same circumstances t h a t we have prevailing i n our district this year d i d not prevail l a s t year, b e c s u s e e v e r y f a c t o r t h a t p e i n t e d a liquidation o f the indebtedness w a s ecbscure. § to This year i t i s entirely patent, a n d while t h e factors a r e operating. Governor Wellborn. S p e a k i n g o f this year a s compared w i t h l a s t year, t h i s l o w r a t e w o u l d h a v e b e e n more b e n e f i c i a l l a s t y e a r t h a n t h i s year. T h e holding of movement then was i n its inception. Governor Seay. Y o u see, t h e r e a r e t w o o p p e s i n g views f r o m different districts, t h e Texas a n d t h e Atlanta view. Governor Talley. I do not agree t o that. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 45 Governor Seay. T h a t would have been t h e time f o r us t o have lowered it, because w e had a tremendous c r o p on hand a n d were n o t disposed t o sell it, a n d this year they w e r e s a t i s f i e d w i t h t h e p r i c e a n d s o l d i t v e r y readily. The Chairman. W e grew 15,000,000 bales o f cotton last year a n d exported a little o v e r 11,000,000. N o w the crop this year i s about 13,000,000, with not quite double t h e price, a n d t h e question is, w i t h 6 0 per cent of cur cotton last year o r more t h a n 6 0 per cent ordinarily going abroad, a r e w e going t o b e able t o export the preportion o f this year's c r o p that w e should. If there i s any delay i n buying i t abroad for any reason obtaining over there--because t h e y stocked u p o n cheap cotton last year o r because money i s dear there, o r for any ether reason,--then i t i s just a s well t o have some cheap m o n e y t e c a r r y t h a t c e t t o n a t t h e p r e s e n t time. Gavernor Wellborn. A t the present time. The Chairman. Yes. Governor Wellborn. I cuts a n y figure. do not know that half a per cent T h e thing thet affects people i s that when y o u raise i t a little. L o w e r i n g i t dees n o t s e e m https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 46 to affect t h e m much, b u t when y o u raise your rate i t startles p e o p l e . later. W e a r e beund t e raise o u r rates W h e n this rate w a s reduced w e had n o idea o f wanting a n y reduced rate a t all. W e have been com- pelled t c d o i t because Kansas C i t y a n d St.Louis a n d Dallas h a d put theirs i n effect, a n d they a r e next door to us. The Chairman. Governor Baitey, h o w d a y o u feel about t h i s r a t e c h a n g e ? Governor Bailey. I would like t o see t h e rate g o back t o 4 per cent some time this winter. T h e thing that h a s h e l d i t u p i s this wonderful c r o p movement. The Chairman. Except maybe t h e cotton m a y b e late. It i s late t o some extent now. T h e movement o f cotton that h a s moved s o far this year represents m o r e money than t h e corresponding date last year, o n account o f the price. Governor Talley. A n d i t puts t h e banks i n a n easier position. The Chatrmari. Yes. T h e cotton erep this year was a problem because o f the possible hang-over f r o m last year's v e r y large c r o p i n bulk, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 47 Governor Talley. T h e movement o f sterling alsc has a close r e l a t i o n t o t h e c a t t o n movement. The Chairman. Y o u think that h a s helped t h e sale o f cotton? Governor Talley. Gh, yes. The Chairman. I about that. have h e a r d s o m e d o u b t e x p r e s s e d W i l l y o u elaborate that a little bit? Governor Talley. I have a brother i n law who has charge o f a certain firms b u s i n e s s west o f the Mississtppi River, a n d I visited w i t h h i m last Sunday i n Houston, and he said this price o f sterling had not been a matter of consideration a t all; h e would simply g o ahead a n d sell his sterling a t a profitable price. The Chairman. I t did not worry him? Governor Talley. I t did net worry him a bit. I said, "That i s something t h e Federal Reserve System i s doing for you that you d e not know about,” and that o f course has b e e n t h e case a l l over t h e district. I n other words, the cotton merchant, t h e cotton exporter, h a s b e e n able to operate this fall with more assurance t h a n h e has within the last five years. T h a t i s t h e w a y h e gets his reimbursement o u t o f a large part o f his exports. The https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 48 higher price h e gets for his sterling the moré points he has got i n his transaction. “Governor Seay. T h a t i s true o n a rising sterling wereck: The Chairman. I t does h e l p t h e export o f cotton, doesn't i t ? Governer Talley. 1 6 8 . The Chairman, Governor Bailey, h o w d o you feel about the effect of the rate r e d u c t i otuno in your district? Governor Bailey. O u r people K a s accepted i t all right, a n d teok i t i n the spirit tnat i t was broadcasted, and the cattle m e n are getting their money f r o m a haif t a one p e r oént cheapes this y e a r than last year. O n e of the big banks sent out a letter saying that f n view of the fact thet t e e Federal reserve b a n k h a d reduced its rediscount rate, i t made that. bank's rate cheaper, I will say, i n view of that, that their rates have been. too high always. Governor Seay. What. are they, f o r instance--8 p e r cont? dovernor Bailey. N o t now. Governor Seay- They have been? https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 49 Governor Bailey. I t was 8 per c e n t r i g h t d u r i n g the hard times after t h e war. Governor Seay. A n d what i s i t now? 73? Governor Bailey. No. I t i s from 6.to % . I t 4s the first time I ever saw a letter g o out saying, " I n view o f the fact that t h e Federal reserve b a n k has reduced its rate w e will have a n enlargoment o f the heart a n d follow suite." The Chairman, A r e there a n y more questions about the report o f the Open Market Committee? T h i s having been a meeting theoretically i n between the Conference of the Governors, i t would not ordinarily be approved b y the meeting b u t would b e submitted i n detail t o each reserve bank, b u t i f y o u wish t o act o n the report i n any way a motion would b e i n order. Governor Biggs. I move the report b e accepted and filed. Governor Talley. I The Chairman. second it. I s there a n y debate o n the motion? A r e you r e a d y f o r t h e q u e s t i o n ? (The motion was put and unanimously carried.) The Chairman.(continuing). T h i s will really cover https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Topics 1 and 2 under A . N o . 3 is--~ Discussion o f method o f appértioning bills a n d Government securities bought by O p e n M a r k e t I n v e s t m e n t Committee. I have asked Mr. Case t o prepare a little memorandum, a s h e does most o f this w o r k i n the bank, a n d I do not know but what i t would b e illuminating f o r Mr. Harrison t o read it, i f h e will. Mr. Harrison: Al] right: "The method o f apportioning purchases made by the Open Market Investment Committee o f bills and Government securities during t h e past t w o years h a s r e m a i n e d p r a c t i c a l l y unchanged. During the f i r s t h a l f o f e a c h c a l e n d a r y e a r a l l p u r c h a s e s made a r e distributed prorata ( 1 , e., i n the proportion that t h e total o f each bank's expenses, dividends a n d chargeoffs bears t o the system total of the same items) based o n the actual figures for the preceding year. "Beginning i n July i t is the practice t o obtain from each bank a n estimate o f its probable income for t n e b a l a n c e o f the year classified according sources, a l s o a n estimate o f its expenses, divi- to https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis $3. dends a n d probable chargeoffs. T h e figures thus obtained a r e combined with t h e actual results shown f o r t h e y e a r t o date, t h e t o t a l r e p r e s e n t i n g the e s t i m a t e d r e s u l t s f o r t h e year. "The estimated surplus earnings o f the system, if any, a r e then distributeg prorata a n d added t o the estimated expenses, dividends a n d chargeoffs of each bank, t h e total representing t h e gross earnings t o which i t i s considered e a c h bank i s entitled. From this total there i s deducted t h e estimated earnings t o b e r e c e i v e d f r o m G o v e r n m e n t s e c u r i t i e s a n d from b i l l s d i s c o u n t e d a n d miscellaneous, t h e balance thus representing the amount t o be earned from bills purchased. T h e ratio o f each bank's balance t o the system t o t a l t s t h e n u s e d a s t h e b a s i s f o r d i s t r i b u - ting current purchases o f bills. "During the second half o f the calendar year similar figures a r e prepared promptly after t h e close of each month, a n d such changes a r e made i n the ratio f o r distribution o f purchases a s the figures justify. O n this basis a l l banks a r e reasonably https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 52 assured o f having e l l charges. provided for.and also o f receiving a fair share o f the excess earn-. ings o f the systcom above charges, i f any. T h e r e is attached a statement showing the estimated results f o r t h e current y e a r { a s o f October e e 8 ie a "In making the distribution of earning. assets no c o n s i d e r a t i o n . h a s been given t o the condition of the surplus accountsof the several banks, as. to d o s o would conceivably affect t h e amount o f franchise t a x t o b e p a i d b y t h e i n d i v t c u a l banks. There i s attached a statement showing t h e subscribed capital a n d the surplus o f each bank a s o f December 51 f o r t h e l a s t f i v e years, a n d also t h e ratio o f subscribed capital t o surplus a s o f December 31, 1926. I t will b e noted that there a r e four banks which h a v e a surplus e q u a l t o 1 0 0 p e r c e n t o f s u b - scribed capital. F i v e banks have surpluses ranging from 9 3 t o 9 6 per cent o f subsoribed capital, while three banks h a v e surpluses ranging f r o m 8 4 t o B86 per c e n t o f s u b s c r i b e d capital. W i t h t h e exception of Dailas e v e r y b a n k h a s a t s o m e t i m e h a d a surplus in excess o f 100 per cent o f subscribed capital. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 53 A study o f this statement w i l l s h o w that t h e present u n e q u a l c o n d i t i o n o f surplus a c c o u n t s i n comparison w i t h s u b s c r i b e d c a p i t a l r e s u l t s m o r e largely from changes i n the subscribed capital account t h a n from inequalities i n earnings,, those banks whose subscribed capital h a s shown t h e largest increase d u r i n g t h e p a s t f i v e y e a r s n o w h a v i n g the smallest ratio o f surplus t o capital. "On the whole it is believea the method which has been followed i n distributing earning assets has been fair and equitable t o all. banks." The Chairman. T h e r e are a few points itn connection with this that I would like t o refer te,, 4 7 I may. One is the ratio i n New York o f surplus t o capital i s very low c o m p a r e d t o m o s t o f t h e o t h e r r e s e r v e banks,. e n - tirely due t o the fact that w e have h a d a large addition to our capital through increase i n capital o f member and banks/in the organization of new banks i n New York. On the other hand, Minneapolis presents the anomalous situation of having a n excess of surplus because of the m o r t a l i t y o f m e m b e r b a n k s a n d w i t h d r a w a l subscriptions t o capital. I o f their do not s e e h o w the appor- https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 54 tioning o f these earning assets, w h i c h roughly f o r m o n e half o f the carning assets o f the System, c a n b e s o affected a s t o c o r r e c t t h o s e inequalities. I t would b e a very difficult thing t o d o and probably would result in injustice i n other d i r e c t i o n s o n t h e basis o f earnings, and Mr. Rounds, w h o has prepared these figures, h a s talked t o m e about 1 t a number o f times, a n d h e assures me that h e c a n devise n o plan o f cauculation that i s a n y fairer t h a n this one, b u t that i f there a r e objections to i t that w e are not aware of, w e would like very much to hear them. Governor Harding. I f a n y bank has a reserve percent- age down t o 5 0 per cent, t s i t a fair assumption t o make that that bank 4 s paying its way and earning its. dividends and expenses? The Chairman. Yes, I think so. Governor Harding. T h a t being the case, i f a bank has 4 reserve u p t o 5 0 per cent, w h a t i s the use o f giving it a n y bills o r Government acceptances? I f i t i s paying its own way, w h y not eliminate from this distribution and let i t catch u p o n its reserves? The Chairman. T h a t i s t h e c a s e w i t h FOU, 1 6 0 7 5 2 t ? https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Governor Harding. Yes. The Chairman. T h e earnings a r e higher a n d h e is getting n o part o f the purchases. Governor Wellborn. H e has been eliminated from any participation, because w e get the benefit o f the other part o f t h e year, Governor Seay. S o there i s n o parcicular i n which that would not b e true, but there t 3 one particular I think that memorandum is not correct in. A s I recall, it has been t h e practice f o r t h e past t w o years t o make t h e a p p o r t i c n m e n t o n t h e status o f earnings f o r t h e first three months, a h d they propose t o wait until the half year t o uake t h e apportionment. I f y o u look back I think y o u will find that t h e apportionment h a s been made o n the first quarter. The Chairman. I think this year and last i t has been six months, a n d prior t o that i t was three. Governor Seay. T h e distribution w a s small i n our Case, a n d t t did not provide f o r the requirements, so that i n the last half i t had t o be raised very consid- erably. O u r reserve was reasonably high in the first apportionment, b u t our proportion was very large i n the https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 56 second half, a n d i t sent o u r reserves low, a n d w e had t o turn extrind a n d d i s p o s e o f a considerable p r o p o r t i o n of our securities w h i c h w e had been allotted. I believe it would b e better t o base i t o n the first guarter. to the manner o f disposition, I The Chairman. A s have n o criticism. W e c a n d o that, b u t I must tell y o u that o n e reason f o r changing t e the s t x months arrangement w a s because o f the immense amount o f work involved in this thing. Y o u d o not realize h o w much work i t takes with these shifting percentages, a n d i f your situation i s such that because o f the peculiar situation in your district, i f you will write u s a letter explain- ing that w e c a n work this o u t a n d not have these changes etcurlfor n i n e m o n t h s r i g h t t h r o u g h t h e year, w h i c h i s a very f i n e j o b . Governor Seay. W e will d o that, o f course, a n d w e would n o t have a n y idea o f asking that t h e method b e changed t o fit t h e circumstances o f a n y particular bank. As t o t h e amecunt o f w o r k i n v o l v e d I was n o t a s w e l l aware o f that a s you, o f course, b u t t h e distribution, to b e made equitably during t h e year, should b e begun o n the second quarter; b u t I am disposed t o withhold that https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis view. The Chairman> I t i s not soa much treuble w i t h Governments, b u t when i t comes t o these bills w i t h all the different denominations, w i t h all kinds o f names-and some o f the banks will take some names a n d some wont-- it is a Chinese puzzle, a n d those fellows have a tremendous amount o f work t o do, a n d t h e changing o f percentages adds t o the amount o f work. flexible thing. T h i s h a s been a very F o r instance, Governor Young telegraphs he i s i n a certain pcsition a n d requires a Fisk 2 b a e change. W e T h e n Governor T a l l e y will telegraph a n d maybe Kansas City, a n d I think t h e committee feels t h a t we are expected i n New York t o adjust particular cases, and w e have always d o n e i t and advised everyhody, a n d there has never been a n y objection. W e have g o t a case r i g h t n o w f r o m G o v e r n o r B a i l e y w h e r e w e h a v e g o t to make a special adjustment, take his Governments a n d give him some bills t o fix u p his portfolio. Governor Seay. Unless i t i s the general feeling that t h e t a d j u s t m e n t s h o u l d b e m a d e o n a quarterly basis, I will withdraw any suggestion o f that kind. I merely put t h a t f o r w a r d f o r c o n s i d e r a t i o n o n the supposition https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 58 that i t might b e somewhat t h e general experience. The Chairman. Wasi fiz. 1 I f y o u will write u s about this w e ueg, Governor Seay. P r i o r t o this year i t has b e e n o f no c o n s e q u e n c e t o u s whether w e received a n y allotment in the distribution o r not, because usually our bank has o p e r a t e d w e l l w i t h i n t h e r e s o u r c e s o f i t s o w n dis-~- trict, b u t owing t o the conditions w h i c h prevailed last year a n d t h e i n v e l v e d c o n d i t i o n s w h i c h w e h a v e b e e n working o u t i n the borrowing class, o u r loans went down t o a very l o w figure, making t h e carning assets for t h e f i r s t q u a r t e r v e r y low, a n d w e w e r e g l a d t o see them low. The Chairman. J u s t write u s a n d w e will take i t up with the committee a n d f i x y o u up. T h e r e a r e times when o u r p r o p o r t i o n o f earning assets i s larger, and while w e have o n l y a very small proportion o f the small bills which cannot b e apportioned v e r y well, w e will fix u p a n arrangement b y which y o u will g e t a special alictment o f bills. Governor Seay. This occasion m a y not arise again, and v r o b a b l y w i l l not. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 59 Governor Talley. Y o u d i d thet f o r u s last spring. The Chairman. Yes. Governor Talley. W e took about s i x million Govern- ments a n d replaced i t with small bills. The Chairman. Yes. W e have h a d every variety o f transaction w i t h vou. G o v e r n o r G e e r y h a s b e e n i n and out with u s i n that way, too, haven't you, o n your portfolio? Have y o u swapped Governments f o r bills? Governor Geery. The Chairman. W e d i d once a couple o f years ago. A r e there a n y other comments o n the apportionment plan here and the figures submitted i n connection with it? Governor Talley. I have nore except t o follow i n a general w a y w i t h G o v e r n o r Seay. experience last year, I ber 2 toor not; W W e h a d exactly t h e same do not k n o w whether y o u remem- e h a d t o crowd o u r allotment p r e t t y heavily i n the last s i x menths o f last year, a n d a t one time I think w e had t o ask t o b e relieved o f about $5,000,000. The Chairman. Y o u would like t o start earlier? Governor Talley. W e would like t o start earlier a n d spread i t out ever t h e year, i f w e could. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 60 The Chairman. od o f apportionment, I f there a r e n e comments o n the meth-~ w e will p a s s that, a n d there i s n o eccasion t o take a n y action o n i t and n o motion before the meeting, a n d t h e question i s whether w e have discussed under A everything that should b e discusseq under B , Discount rates and policies." D o you wish any further discussien o n that subject? T h e r e being n o call f o r discussion, w e w i l l c o n s i d e r t h a t covered. I. Credit Transactions and Policies. C. Relations w i t h Foreign Banks. Report. Status o f agreement w i t h Bank o f Poland. Status o f agreement w i t h National Bank o f Belgium. Purchase b y Federal reserve banks of bills payable i n foreign currenCICS 5 The Chairman. U n d e r Topic co, "Relatitons with Foreign Banks," I will a s k Mr. Harrison t o report o n that. (The discussion o n this matter was, b y direction of t h e Chairman, n o t r e p o r t e d e x c e p t a s follows): The Chairman. T w o boards were good enough t o write u s a b o u t p r o p o s a l s f o r p u r c h a s i n g b i l l s , and I took the liberty o f putting these t w o topics o n the program because i t struck m e possibly that w e might have a n illuminating discussion o n the matter. O n e case was https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 61 at Cleveland. G o v e r n o r Fancher, h a v e y o u a n y discussion of the question o f earsmarked bills? Governor Fancher. U n e o f our member banks made inquiry o f u s a s t o w h a t w o u l d b e o u r a t t i t u d e t f these bills were offered, a n d I thought, before giving him a n answer, I would g e t a n expression f r o m your bank. H o w - ever, there was nothing done. The Chairman. T h a t ends i t ? Governor Fancher. Yes. The Chairman. T h e other was b y Governoy Wellborn about buying documentary cotton bflls. Governor Wellborn. T h a t i s the letter f r o m the N e w Orleans m a n that y o u refer t o ? The Chairman. Yes. Governor Wellborn. I to discuss it. de not know enough about that H e has n o t sent i t t o me. H e i s going to sehd the man i n charge of the foreign exchange i n to our bank t o discuss it, and I have never seen Mr. Pool, t h e man whe wrote t h e letter, him; t h e r e f o r e , I do. I t o discuss i t with d o n o t k n o w e x a c t l y w h a t h e wants to a m inclined t o think that t h e proper procedure, from what I can r e m e b e r o f it, w e c a n make h i m ad- https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 62 vances i f h e w a n t s them. Y o u wrote m e that y e u d i d not have a n y collecting facilities, a n d I think that 4t might b e satisfactory t o h i m i f w e just made a d vances t o him. The Chairman. T h e r e a r e t w o types e f transactions either o f which h e may have h a d i n mind. o n e i s the type that Governor Talley knows a l l about, because h e hes millions o f them. H e buys a dollar draft o n New England o r New York o n a member bank, a n d attached t o that i s the sterling draft, not yet presented for acceptance, representing i n his case a foreign shipment ef cotton, a n d a l l the papers respecting t h e cotton. All that h e does i s t o make a n advance o n the collection item i n dollars, a n d i t i s really collecting a documentary draft i n dollars a n d nothing more, a n d i t comes u p to the N e w York o r New England b a n k o n which i t i s drawn and that ends it. The o t h e r c a s e m a y b e w h e r e s o m e b o d y d o w n i n y o u r district wants y o u t o buy uneccepted drafts representing the value o f cotton sold abroad, w h e r e t h e draft i s payable abroad i n foreign currency. I f w e once start going into that, w e have g o t t e open o u r doors t o going tnto https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 83 the c o m m e r c i a l forceign e x c h a n g e business. know h o w m u c h y o u w a n t m e t o e l a b o r a t e remember L d 0 ° not o n that, b u t I i n t h e B a n k e r s Trust. C o m p a n y i n the ordinary season w e bought a s much a s $200,000,000 o f those. N o bank runs a n open account i n any foreign currency f o r any such volume a s that. of the time. H e i s selling against i t all Y o u b u y your sterling drafts a n d sell your demand sterling and the drafts g o forward b y the same steamer which takes t h e bills against which y o u are drawing, a n d i f w e once g e t t o competing w i t h o u r member banks doing commercial foreign business, w e would b e in hot water a l l the time. B e s i d e s that, w e have n o fae cilities for handling those drafts abroad. T h e banks that w e correspond w i t h over there would never handle these bills i n the world. Governor Wellborn. Y o u mean the collection o f them? The Chairman. Yes. T h e y a r e owned bills a s soon a g they a r e p r e s e n t e d a n d accepted, a n d then w e have t o carry t h e m o r discount them, a n d then w e are always i n the market selling foreign exchange. Furthermore, a l l of the valve i n those drafts expressed i n dollars i s calculated against t h e rate o f discount i n London. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 64 Of course, a Federal reserve bank might b e willing t o do business o n a 3 per cent basis a n d carry those bills to maturity, whereas e v e r y member b a n k has g o t t o figure o n the London discount rate, e r d w e have knocked the stuffing o u t o f all o u r member banks. not compete w i t h us. T h e y could S o i t would b e a very dangerous type o f business f o r u s t o undertake o n that account. The second thing i s that t h e handling o f these cotton drafts involve j u s t a s complete a knowledge o f the credit o f a:cotton shipper a s a n y credit transaction y o u ever had. I well remember cutting o f f ab- solutely a n d d e c l i n i n g paper a b o u t a t o purchase a n y o f M i k e Yancey's year b e f o r e t h e y busted, a n d they had ten or twelve million dollars o u t that went b a d completely. Governor Wellborn. C o u l d y o u gather f r o m his letter what h e wanted t o do, what h e wanted t o ebviate o r rather c h a n g e f r o m h i s p r e s e n t p r o c e d u r e ? C o u l d you gather from his letter what h e really desired? fhe Chairmen. I could not for the life of me tell what h e was driving at. Governor Talley. V e r y likely i t was t h e application of t h e L o n d o n d i s c o u n t r a t e . https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The Chairman. I da not know. Gevernor Wellborn. H e did not write t o me. H e wrate to the Board a n d i t was referred t o m e and I wrote t o you, a n d t h e n I letter, wrote t o him a n d sent a copy o f your a n d h e said h e would have h i s foréign exchange m a n at our next meeting, a n d w e will probably meet i n New Orleans t h e next time a n d then w e c a n get into t h e real merits o f the case. The Chairman. I mind. will tell y o u what might b e i n his H e i s a local dealer i n cotton bills. when h e s e l l s t h o s e b i l l s O f course, t o your correspondent, is a shave o n them naturally. there H e may think that the Federal Reserve B a n k o f Atlanta h a s facilities abroad b y which h e can get a little petter rate for his bills. Governor Wellborn. T h a t i s the question I want t o ask you. S u p p o s e h e was t o ask m e couldn't w e open u p a n account there with foreign banks, with the Midland i n London o r with the National City branch i n Paris, o r banks o f that kind? I want y o u t o u n d e r s t a n d I a m not crazy about getting into anything like that. Governor Talley. I will t e l l y o u w h a t i s e v i d e n t l y the same sort o f a n inspiration, a n d h o w w e worked i t https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 66 out i n principle, although I do not know whether there is a n y business being done along that line o r not. worked i t out with o n e o f our large local banks. W e They purchased t h e unaccepted sterling drafts w i t h t h e documents, a n d then they would issue their, own bill against that, a n d then they sent t h e unaccepted sterling draft acress t o their London correspondent a n d had i t accepted, and then they sold demand sterling, a n d then they scld their own bill i n the market. The Chairman. T h a t i s where t h e exchange transaction is hedged, Governor Talley. T h a t simplifies t h e whole propo- sition. The Chairman. T h e real question t o b e considered connection w i t h h a n d l i n g c o t t o n d r a f t s rencies i s whether in i n foreign cur- w e a r e going right o u t i n competition with o u r o w n members. Governor Talley. T h a t method which I tekes i t clear a w a y from us. have d e s c r i b e d W e d o not have anything todo with it until that bf£1l bobs up in the market and maybe comes b a c k t o us, a n d when i t comes b a c k t o u s indorsed, t h e n w e are a p a r t y t o t h e transaction; o t h e r - https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 67 wise w e are not. H e gets t h e money from the market o n his bill with which t o purchase h i s sterling. question t h a t w a s a s k e d e f us, o f course, The w a s whether that bill was eligible f o r acceptance. The Chairman. A s discount? Governor Talley. N o ; a s t o whether i t was eligible for acceptance. S o I tock i t u p with the Board here and there was n o specific ruling o n i t either way, b u t in principle i t i s exactly t h e same a s a n acceptance i s secured b y a trade acceptance payable i n foreign curremcy. The Chairman. W e have concluded Topic D and n o w pass to Topic E . Credit Transactions a n d Policies. E. Advisability o f standardizing r e - quirements f o Federal reserve banks as t o forms e n d c h a r a c t e r o f credit statements. The Chairman. That has been u p here before, but I think Mr. Harrison can report what the previous action was. Mr. Harrison. was s o m e c e n f u s i o n A s a matter o f fact, I i n the records think there i n the Board's letter with regard t o the action o f the Governors! Conference, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 68 The o n l y reference that w e had t o the matter before a n d the o n e w h i c h i s n o w o n t h e p r o g r a m r e l a t e s t o the act- ion which was discussed this morning a s t o the statements with f member banks. S o that this specific question of standardized forms a n d character o f credit statement has n o t been before t h e Conference i n very recent years. I do not know h o w long a g o i t might have been u p here. Governor McDougal. I think, Mr. Harrison, t h a t was intended specifically t o treat w t t h the same subject t h a t we have been treating i n the former subject I-D. Mr. Harrison. T h e reading o f the Board's letter X-4958 would s e e m t o justify t h e statement t h a t t h e y are referring t o the same thing that w e were discussing this morning. Governor McDougal. F o r t h e reason that t h e y refer to the Advisory Council's treatment o f the subject, w h i c h was confined entirely t o that f o r m o f statement. Mr. Harrison® Yes. The Chairman. O u r position i n New York i n the early days w a s that w e should not attempt t o enforce a uniform statement u p o n borrowers i n our district t o the member bank; that w e should not take the responsibility o f https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 69 doing so. H o w e v e r , w e endeavored t o help t h e member banks t o secure uniform statements f r o m their borrowers by furnishing t h e m with typical forms which they could use i f they were suitable t o the borrower, a n d w e have as a matter o f fact g o t a set o f forms a n d where t h e member banks want t o use those they are a t liberty t o d o it. I f they want t o use some other forms f o r their customers, t h e y m a y d o so. I think most o f the reserve banks d o the same thing. Governor Batley. The Chairman. W e have some. T h e n t h e American Bankers! Association is getting u p forms. Governor F a n c h e r . I n Cleveland t h e clearing h o u s e association worked o u t a form which was i n use b y the larger member banks, a n d also such forms were worked out a s would f i t i n the case o f the small borrowers, a n d when a bank would write i n inquiring about forms, w e have usually referred those communications t o the clearing house and have supplied themselves with those forms i f they w a n t e d t o adopt i t , a n d i n t h a t w a y t h o s e f o r m s a r e now used throughout o u r district. The Chairman. O f course w e could n o t pretend t o https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 70 furnish a pro forma statement t o a concern w i t h a lot of subsidiaries. I t would b e out o f the question. Governor Seay- The forms which have been adopted in the Cleveland district v a r y from those adopted i n the Richmond district. T h e r e have b e e n t w o efforts m a d e t o arrive a t some fairly uniform standard. T h e Federal Reserve Board made some effort here, a n d they asked t h e credit m e n o f s o m e o f t h e b a n k s t o come u p here a n d a i d them, a n d they were here f o r several weeks. B u t I think the general opinion i s that i t i s a n impracticable thing. The Chairman. W o u l d y o u b e satisfied a t this meeting t o pass a resolution that i t is the sense o f the meeting that i t should b e the policy o f the reserve banks t o aid the member banks i n obtaining suitable forms of credit statements f r o m their customers, i f necessary by furnishing forms, b u t that w e should n o t attempt t o force uniformity i n credit statements, a n d our attitude shoulda b e t o render assistant i n getting uniform statements, b u t i t should n o t b e our policy t o require it, and 1 t w i l l b e i m p r a c t i c a l t o d o it. Governor S e a y . T h a t w o u l d b e m y v i e w o f it. Governor Bajley. I would like t o second that motion. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Governor Fancher. I -sécond It. (The motion was put and unanimously carried.) The Chairman. A memorandum I have before m e o n this same subject refers t o a suggestion which was raised I think with the Federal Reserve Board counsel a s t o whether t h e Pederal Reserve System should attempt t o require audited statements. N o w , o f course t h e credit system o f this country i s developed wholly different f r o m that which prevails abroad. M o r e companies a n d corpo- rations especially a r e having public auditors audit their books a n d certify t o them, b u t i t seems t e m e that to require that would b e just a thing. perfectly impossible T n e amount o f auditing required would probably tax t h e audititing facilities o f the country beyond what they are capable o f meeting. Governor Fancher. D o e s net that really get back to the policy o f the bank i n extending credit affecting paper? I f i t feels i t should h a v e a n audited state- ment i t should b e initiated b y the bank. O f course, the f a c t s a r e t h a t m o r e a u d i t e d s t a t e m e n t s a r e b e i n g required. Governor Talley. W o u l d n ' t y o u s a y that more audited https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis statements a r e being made? Governor Fancher. Yes, made, a n d I think required. I think t h e b a n k s i n some states Governor Seay. d o r e q u i r e them. T h e practice i s undoubtedly grow- ing, b u t i f you make i t a requirement t h e banks would rebel. Governor Norris. T h e recommendation c f the Advisory Council was against it. Governor Seay. I do not recall. Governor Norris. Yes, unqualifiedly against it, that i t i s impractical. The Chairman. D o e s someone want t o offer a motion? Governor Wellbern. I think w e a l l a g r e e t h a t t h a t is the best thing t o do. T h e r e i s n o doubt about it, audited statements w e find have been very unreliable, and when a bank fails a n d the real assets o f the debtor are inquired into, t h e y d o not exist. Governor Seay. W e l l , w h a t y o u refer t o i s a collateral question, M r . Chairman, w h i c h i s not embraced-- The Chairman (interposing) . I t i s not o n the program. Governor Seay. T h e n I would n o t think that a n y vote was needed o n thse subject. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 73 Governor Talley. I t was i n the program o f the Advisory Council.. The Chairman. Yes, a n d that i s the w a y i t came up. We c a n pass i t without a n y action, becavse fit i s not on our program, I. C r e d i t Transactions a n d Pelictes,. F. Classification o f deposits i n member banks b y building a n d loan assoctations, mutual savings banks, ccoperative banks, credit unions a n d Morris P l a n banks. Governor Norris. I would suggest that w e hear f r o m the bank that sent that inquiry t o the Board, a s t o the purpose o f it. The Chairman. W h i c h bank made inquiry c f the Board which gave rise t o the Board's suggesting this topic o n the program? Governor N o r r i s . has r e c e i v e d T h e Board's letter s a y "The Board f r o m one o f the Federal reserve banks a n inquiry as to whether deposits o f such and such a kind d be carried l as demand u or o time deposits,’ h s " and s o forth. Governor Geery. That is, demand o r time? Governor Norris. Yes, and I said "and se forth," Governor McDougal. “ A g a i n s t which t h e amount d u e https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 74 from banks cannot b e applied i n arriving a t their re- gerve requirements." Governor Harding. B o s t o n pleads n e t guilty. Governer Norris. Apparently n e bank made t h e inquiry. Governor Geery. I cannot see, f r o m m y point o f view, w h a t difference i t makes. I d o not know o f a n y bank which takes country bank business t h a t has n o t g o t a great deal more country b a n k balances t h a n t h e farm bank amounts to. Governor N o r r i s . C e u n t r y banks, y e s . Governor Geery. S u p p o s e y o u a d d t o this, y o u d o not change t h e reserve ratio a t all, because y c u c a n only deduct t h e ameunt y o u have d u e from banks, a n d t h e rest o f i t would b e demand deposits. the reserve proportions a t all. I t dees n o t change T h e o n l y place T — can see where i t would have a n y effect would b e i n a case in New England. Y o u might have a national b a n k i n Springfield that had an account with a mtual savings bank i n Springfield that h a d n e other b a n k accounts at all, and they would b e allowed t o deduct "due from banks.” https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 75 Governor Harding. W e d i d not raise this inquiry. Governor Seay. M r . C h a i r m a n , t h e Board has ruled that building a n d loan associations a n d mutual savings banks a n d private banks d o net come within t h e meaning of the word "bank" as used i n the Federal Reserve Act. That being t h e ease, I do not. see h o w balances d u e t o those banks could b e deducted. Governor Norris. Counsel f o r t h e Board has given a n opinion that mutual savings banks are banks within the meaning o f the Federal Reserve Act. The Chairman, T h e Board has made t h e ruling that Governor Seay mentions, a n d consequently cannot make the deductions suggested b y this inquiry, whoever m a d e then, and i t involves a change i n the rulings o f the Board, The question now is whether i t would b e wise for this Conference t o recommend a n y such change a s this. This matter was considered a t ene bank, a n d one o f our men expressed his views, w h i c h I think a r e scund, a n d I wonder i f Mr. Harrison will n o t read this. Mr. Harrison (reading): "On the basis of existing rulings, therefore, it seems clear that deposits o f the character under https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 76 discussion cannot b e considered a s balances ' d u e to banks.'! "It i s presumed that the Board wishes t o have the matter considered, however, o n its merits and quite regardless o f previous rulings. "It i s understood that the paragraph quoted above f r o m t h e A c t i s the result o f a n attempt t o make legal a practice which h a d existed w i t h the appreval o f the Comptroller o f the Currency prior to t h e e s t a b l i s h m e n t o f the Federal Reserve S y s t e m under which banks h a d been permitted t o offset balances ' d u e t o banks! w i t h balences ‘ d u e f r o m banks! i n computing reserve requirements. This practice p r o b a b l y w a s b a s e d e n t h e t h e o r y t h a t b a l - ances d u e from banks represented i n censiderable part items i n process o f collection, t h a t i s uncollected funds, a n d also t o the extent that i t did not represent uncollected items, t h a t t h e funds w e r e available for t h e liquidation o f deposits. I t may have been argued that s u c h balances ' d u e f r o m banks,' while entitled t o consideration i n the matter o f reserve requirements, o u g h t n o t t o b e permitted a s a deduct- https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis i 4 ion from gross deposits, b u t o n l y from balances due t o banks o n the theory that i n times o f stress there would t o a considerable extent b e a n offsetting o f bank balances. "In the light of present-day banking methods the whele procedure i s unsound a n d antiquated. There ids no basis i n fact warranting the deduction o f balances ' d u e from banks! f r o m anything. D e d u c t iens, i f made a t all, should represent o n l y items i n process o f collection should b e r e q u i r e d o n t h e t h e o r y t h a t n o reserve o n deposits u n t i l t h e d e p o s i t represents c o l l e c t e d funds, a n d s u c h deductions, if permitted, s h o u l d b e from gross deposits rather than balances t d u e t o banks.! I t i s recognized, however, that such a procedure would require a change in the Act which cannet b e a t once accomplished. Therefore, dealing with the question i n the light of the Act a s i t n o w stands, - "It is recommended that f t would b e inadvisable to make a n y more liberal interpretation o f the intention o f the Act than i s necessary a n d inasmuch as t h e p r e s e n t r u l i n g o f t h e B o a r d d o e s n o t permit https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 7S the classificationf o deposits cf the character under discussion a s balances d u e t a banks, it eed be better t o let matters stand a s h a t bing e s than t o further liberalize it. "As t o whether s u c h deposits s h o u l d b e classi- fied a s demand o r time depesits, that obviously would have t o depend upon the ccenditiens under which the depesit i s taken. I f the bank holding such de- posits h a s t h e legal right t o require thirty days! notice o f withdrawal o r i f i n other respects t h e depesits m e e t t h e test o f time deposits, t h e n they should be so considered, otherwise they sheuld be considered demand aceeeken* Governor McDougal. T h a t is a very s e n s i b l e s t a t e - ment w i t h r e g a r d t o t h e w h e l e matter. I d o not bélieve the Beard's rulings, though, covered Morris P l a n banks. Governor Norris. M o r r i s P l a n banks a r e n t banks a t all. Governor McDougal, I n considering t h e application of the provisions o f the Clayton Act, I understand thet Morris Plan banks are considered a s banks. Governor N o r r i s . I t is hard t o know when a ‘bank i s https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis or i s n o t « bank now, Governor Wellborn. Governor Fancher. T h e y a r e not banks o f deposit. O u r c o u n s e l says: "The Supreme Court o f the Upited States had held that banks i n a commercial sense a r e o f three kinds: ( a ) e f deposit; ( b ) o f discount; ( c ) o f circulation. T h e y further h e l d that a bank which exer- cises b u t o n e o f these functions i s a bank i n the strictest commercial sense. W h i l e this court decision i s obviously a n old one i t 1 s quoted b y the Attorney General i n opinion published i n the Federal Reserve Bulletin No. 27, page 268. S i n c e all o f these organizations exercise one o r more o f the three above-mentioned functions, f t clearly follows that Ina technical sense they are banks, a n d f f a n institution where such balances a r e carried choases t a qualify t h e m a s fdaue t o t , I can see n e w a y i n which it c a n b e avoided. "TJ have discussed this matter with Mr. Newell"-Mr. Newell i s our attorney. "..-who has confirmed this cpinion.” https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 80 Governor Seay. T h a t i s not t h e opinion o f our counsel, M r . Chairman, a n d h e gives a n opinion v e r y analagous t o that r e a d b y Mr. Harrison. S u m m e d up in one sentence, it-is t e the effect that mutual savings banks, c o o p e r a t i v e b a n k s , c r e d i t u n i o n s a n d Morris Plan-banks d o n e t u n d e r t a k e ‘the c o l l e c t i o n o f checks on a-large scale, a n d i t seems a deposit balance d u e ‘by & commercial b a n k t o such a n institution cannot ‘be dits-~ ‘tinguished f r o m a deposit balance d u e t o a n y other eustomer. The Chairman. N o n e o f them urdértake t h e collection of checks a s collecting agencies. Governor Fancher. A n d they d o not a s a rule carry checking accounts. The Chairman. M u t u a l savings b a n k s i n o u r district are n o t r e a l l y permitted. Governor Talley. loan association, W i t h reference t o the building a n d t h e y c a r r y n o reserve themselves a n d are not required i n our state. are specified. T h e form o f investments I n view o f the fact that t h e y carry n o reserves a n d their balances w i t h other banks a r e merely investments w i t h t h e banks, t h e banks should carry full https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis reserves a g a i n s t t h o s e balances. The Chairman. W e are n o t lawyers a n d don't y o u think w e are justified i n passing a resolution-that. the Board make n o change in: the existing regulation? Governor Talley. I Governor Geery. I make that motion. second it. (The motion was put and unanimously carried.) I. C r e d i t Transactions a n d Policiés. G. D e v e l o p m e n t o f investment companies for purchase o f bank stocks. The Chairman. This m a t t e r - h a sd a h a v e r y a c t i v e de-, velopment i n our district. Governor Talley. D o yey include investment trusts in that? The Chairman. Yee W Their business i s analyzed. the investors i n quite a e have a l i s t eof all o f them. W e even have a list o f n u m b e r fo them. Governor Seay. H o w many o f them are there, Mr. Chairman, without counting--a hundred? The Chairman. There are sixteen. Governor Harding. That 1 s just the New York district? The Chairman. J y s t N e w York. I d o not know what t o https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis B82 do a b o u t t h i s report, i t i s s o long. P r o b a b l y t h e best thing t o do, Mr. Harrison, w i l l b e t o ask for a n exchange o f views o n this subject. I think y o u h a v e got t e watch it. Governor Fancher. I interesting think t h a t r e p o r t w o u l d b e v e r y t o all o f t h e Governors here. Couldn't we have c o p i e s m a d e ? The Chairman. I t i s thirteen pages. Governor McDougal. D e these sixteen companies y o u refer t o mean companies specializing i n bank stocks? The Chairman. N o t altogether i n bank stocks, no. I can give y o u a lot o f them. (The Chairman here read t h e list c f companies f r o m the report.) The Chairman (continuing). T h i s winds u p with a recommendation which I will have Mr. Harrison read t a you, a n d then, i f you would like a report c n this, w e will b e glad t o have that struck off a n d send i t around. Mr. Harrison. A f t e r reciting these various com- panies t o which Mr. Strong has’ just referred, t h e memorandum c o n c l u d e s w i t h this recommendation: "That a t ur early date there b e held confer- https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 83 ences o f the cfficers o f the Federal reserve banks w i t h the Comptroller o f the Currency, t h e Chief National B a n k Examiners a n d t h e Su:erintendents o f Banks f e r t h e p u r p o s e o f considering this general problem and working out plans for dealing with i t t n each Federal Reserve District. Among t h e m e a s u r e s w h i c h s e e m d e s i r a b l e a r e t h e following: "1, Examinations o r investigations o f companies engaged i n purchase c f bank stocks should b e made b y the appropriate State authorities a n d efforts should b e m a d e t o h a v e s u c h c o m p a n i e s p u b l i s h f r o m time t o time statements o f their financial condition and l i s t s o f t h e s e c u r i t i e s h e l d b y them. "9, Frequent and searching examinations o f banks included i n chains centrolleg b y these com- panies should b e made. "3, T h a t i n the examinations c f all panks, loans t o companies o f this k i n d o r loans based upen their stock should b e set out i n the examination report. "4, T h a t i n case where circumstances warrant, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 84 the attention o f Atborney General o f the state be called t o the operations o f any particular company which i s engaging i n illegal practices." Governor Seay. T h a t i s treating t h e matter quite seriously. Mr. Harrison. W e think i t i s serious. Governor Seay. G o v e r n o r McDougal, there w a s some report i n a t least o n e o f t h e papers eity, I o f parties i n your think, w h o signified their purpose t o organize a national b a n k i n every Federal reserve a n d branch city in t h e country. Governor McDougal. I f that i s this fellow Parker, I think his name is, h e has n e standing and h e is not looked upon with a n y fear o r apprehension a t all. Governor Fancher. H a s n ' t h e transferred h i s activities f r o m Chicago t o New York? Governor McDougal. That I do not know. Governor S e a y . H e i s r e p o r t e d toa have t a k e n t h e view that t h e National B a n k Act required t h e Comptroller to authorize t h e organization o f a national b a n k when the required number o f persons applied tno him for that purpose, a n d that h e had n o discretion; but, a s w e https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 85 know, t h e Comptroller j s beginning t o exercise a very mich c l o s e r s u r v e i l l a n c e o v e r t h e o r g a n i z a t i o n o f n e w national banks. Governor McDougal. T h a t i s the attitude that h e displays w i t h r e g a r d t o this. - discussed a I have h e a r d t h e m a t t e r good deal o u t there, because o f the news- paper publicity t h e y have given it, b u t i t seems t o m e more talk than anything else. Governor Fancher. I do know that t h e Better Busi- ness Bureau i n New York camped o n brother Parker's trail, a n d t h e y h a v e g o t h i s number. H e will have a hard time t o get very far. Governor Norris. I think this i s a n interesting and important development i n American finance. question t h a t a r i s e s i n m y mind, h o w e v e r , T h e i s whether a n y steps that ought t o be taken i n reference t o it should be initiated b y us o r b y state o r national banking au- thorities o r blue-sky commissions, o r whatever they are called, o r b y some organization o f bankers. I it i s a g r e e d t h a t t h i s i s n o t p a r t i c u l a r l y a reserve p r o v i n c e , ment t h a t , suppose Federal a n d i s i t s u c h a n important develop- i n the absence o f a c t i o n b y a n y b o d y else, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 86 there i s a moral obligation o n us t o start sone action? Governor Talley. I would s a y that, inasmuch a s i t affects t h e stockholders't liability i n certain banks, yt i s a Federal reserve matter. Governor Norris. I do net think i t does. I f any one o f t h e s e c o m p a n i e s w a s o r g a n i z e d f o r t h e p u r p o s e of acquiring the stock o f one bank o r one chain o f banks, then would affect t h e stockholders! liability a n d all their eggs would b e i n one basket, a n d i n case t h e bani er chain o f banks went wrong there would b e n e other assets there that y e u could collecs from. B u t most if not a l l o f them scatter their investments a n d hold stocks i n various d i f f e r e n t b a n k s , a n d most o f them not o n l y i n banks b u t i n insurance companies a n d other concerns. S o that thet being t h e case, I d o not s e e that t h e stockholders! liability i s affected, Governor Talley. Of course, w e are pretty f a r from the scene o f action o f such enterprises, b u t w e feel a great deal c f concern about i t a s affecting t h e general banking situation, a n d I have prepared a short memorandum h e r e w h i c h I would l i k e t o read: "Assuming that Topic G, - Development o f https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 87 investment companies f o r purchase o f bank stocks--= ts closely related t o the topic which i s generally current a n d r e f e r r e d t o a s investment trusts, t h e r e are three points w h i c h might b e briefly made. "First | if investment companies which are ormenized f o r t h e purchase o f bank stocks a r e operated along t h e lines o f the socalled investment trust, as such organizations h a v e been recently established, then t h e p r a c t i c e w o u l d b e a matter o f some c o n e cern a n d some sound regulation that would n o t b e irksome t o a sound enterprise, b u t would prevent unsound practices, s h o u l d b e established. "Second, i f the question is. clearly established that stockholders! liability would b e eliminated t h e object o f that provision o f l a w would b e defeated; then certainly investment companies organized f o r t h e purpese o f owning bank stocks are unsound i n principle, i f not. tilegali. "Third, t h e organization o f helding companies for the purpose o f owning the stcecks c f small individual institutions a n d a t the same time owning the control o f e« larger institution i n order that https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 88 such small individual institutions might b e operated for a l l practical purposes a s branches o f the large institution, w o u l d defeat t h e objectives and purpeses o f the Act o f February 25, 1927, k n o w n as the McFadden Act, a n d would b e i n effect detrimentally competitive t o those larger individual i n stitutions w h i c h a r e located i n states which d o not permit branch banking. "The point which i s made i n the second subdivision above would b e ene e f consideration i n connection w i t h this principle. M o r e o v e r , t h e opportunity f o r indulging i n the unsound practices that frequently appear i n what i s known a s chain banking would n o t necessarily b e eliminated b y reason o f t h i s practice. What I see i n t h e t e n d - ency o f the socalled investment trust i s that t h e y are fair weather enterprises a n d a s long a s stocks are moving upward, everything i s lovely." Governor Biggs. M r . Chairman, I would like t o raise t h e p e i n t h e r e a s t o whether t h i s c o n d i t i o n p r e vails i n a n y c t h e r district. T h e s e investment companies have been buying o u r best b a n k stock f o r sixty days. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 89 They have raised t h e price o f four different b a n k stacks from$35 t o $60 a share. O n e concern very frankly stated that t h e y have s o many shares o f the First National Bank, a n d t h e y c o u l d n o t g e t t h e m a n y w h e r e n e a r the m a r k e t a n d t h e y w e r t o u t a n d p a i d a n a d v a n c e of $50 a share for a s much as was advertised for sale. Since then the stock has gone u p $30 or $40 a share o n that situation, a n d all four a r e four o f the largest banks there, a n d o n inquiry I these investment companies. find that i t i s due t o T h e r e i s nothing that would justify that stock going a n y higher, because t h e y are n e t m a k i n g a s m u c h m o n e y o r n o m o r e m o n e y t h a n t h e y were making a year ago, a n d i t i s getting beyond a divi- dend-paying basis, and I was just wondering if thet same thing was hciecon die i n ether districts. Governor McDeugal. I s this a St.Louis enterprise that i s doing t h e buying? Governor Biggs. N o . Company. I t is called the New England T h e y have salesmen going around a n d soliciting peonle t o take what they call a participation, stating they have got s e many industrials a n d then s o much o f the good bank stock, a n d they say, "Here i s what you https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 90 are participating in; y e u know all o f these institutions a n d y o u c a n l o o k t h e m u p a n d m a k e i n q u i r y , ” and they a r e selling real stock there e n that business t o & l o t o f people. The Chairman. Y o u speak o f that development i n St.Louis i n terms that indicate that y e u feel some concorn. Governor Biggs. I The Chairman. certainly do. I f v o u came t o N e w York a n d learned the h i s t o r y o f s o m e o f t h o s e t h a t w e r e d e v e l o p e d York, y o u would g o t o a hospital w i t h concern. i n New What I mean t o s a y i s t h a t o n e i n v e s t m e n t c o m p a n y b o u g h t i n - vestments i n bank stocks,has securities cutstanding today i n N e w Y o r k t h a t h a v e a market v a l u e o f o v e r 9125 ,000,000. Governor Biggs. I n that connection, i n making this inquiry a n d talking t o the officers o f the bank, I found that this fellow o u t i n California h a d been buying b a n k stock i n five o f the biggest banks o f St.Louis for a year, just a s fast a s he could get it. The Chairman. T h e r e seems are elements o f danger i n it. t o b e n o doubt t h a t there O n e o f them t s the one https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 91 Gevernor Talley referred to, that these stocks have double liability. n o M o s t o f them are incorporated in cur state under statutes o r the statutes o f other states w i t h o u t a n y d o u b l e l i a b i l i t y provision, and consequently t h e creditors o f the bank whose stock i s held b y this i n v e s t m e n t c o r p o r a t i o n d o not get t h e benefit o f the double liability i n the same complete sense that t h e y d o i n other cases+ T o b e sure, where the company i s large and they hold a variety o f securities, t h e y would g e t protection, b u t where t h e y confine their purchases t o one o r two banks t h a t might go d o w n i n a crash, t h e p r o t e c t i o n is lost. c f double liability T h a t i s e n e denger undoubtedly, p o s s i b l y a less o n e that some o f the others. The second danger i s that there i s speculation i n this s t u f f , i n the investment ment companies. o f s t o c k o f t h e invest-~ A s they g o u p i n velue t h e y c a n mar- ket more stocks a n d b u y more b a n k stocks a t higher prices, a n d p e o p l e a r e l e d t o b o r r o w i n o r d e r t o specu- late i n these investment company stocks, a n d something might come along and prick the bubble and then the sharp decline i n the stock o f the investment companies https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 92 is very liable t o affect t h e credit o f some bank with which i t i s associated. Gevernor Seay. I f i t controlled t h e hceldings of that bank stock i n the market. The Chairman. Yes. B u t I mean mest o f these con- cerns i n New York have b e e n crganized b y individuals who a r e associated with some particular bank. I went mention a n y names, b u t y o u prebably k n o w seme o f them. Almost e v e r y o n e h a s b e e n o r g a n i z e d a s a n a t t a c h m e n t to @ commercial b a n k o r e« trust company, a n d the development o f the speculation o f this stock a n d the possible collapse i n its value might b e construed b y t h e public to indicate t h a t there i s something wrong w i t h the bank, a n d they might start a run o n the bank itself. Wwe have t a k e n i t u p w i t h s e m e o f t h e s e f e l l o w s and a t l e a s t m a d e i t p e r f e c t l y c l e a r t o t h e m t h a t w e did n o t l i k e t h e w a y t h i n g s w e r e going. T h e question arises a s t o whether i t i s a n y o f our business a t all. I have a feeling that where a concern o f this sort i s organized i n close affiliation with a member bank and that m e m b e r b a n k m a k e s l o a n o n t h e s t o c k o f t h a t concern, and they have a sort o f interlocking arrangement f o r https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 95 transactions o f one kind a n d another i n securities, that i t m a y b e v e r y m u c h o u r business, b u t w e have n o t any f o r m u l a d e v i s e d f o r d e a l i n g w i t h i t , b u t I ginning t o have a a m be- feeling that i f this thing i s going on m u c h f u r t h e r w i t h t h e s t a t e b a n k s a t least, w h e r e we h a v e s o m e c o n t r o l o f t h e membership, w e m a y b e obliged te say to them, “If you want t o continue members o f the Federal Reserve System, w e are going t o have t h e right to examine that investment company.” I t is rather puzzling, because the superintendent o f banks has n o right to examine them, apparently. Governor Fancher. T h e y are organized under t h e general incorporation laws? The Chairman. Yes, sir. Mr. Fancher. With no stockholders! liability? The Chairman. N o . S o m e o f them a r e incorporated under t h e laws o f other states. Governor Seay. If a bank should m a k e l o a n s o n the stock o f a n investment company which held stock i n the bank, i t would b e equivalent t o lending o n its o w n stock? The Chairman. T h e r e w a s a concern organized i n New https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 94 Jersey that bought t h e majority o f the stack o f a bank, about 8 0 o r 9 0 per cent, I think, t h e investe- ment company did. T h e very first crack o u t o f the b o x they went t o the president o f that bank a n d t h e y seid he had t o take t e n thousend shares o f that stock. He said, " I wont d o it." T h e y said, " I guess w e know whe owns this bank, " and h e went t e the court a n d said "How about that?" not. H e said, "They went." A n d they did T h a t i s net t h e present situation. There was a big insurance company and a trust company i n New Jersey where o n e bought t h e stock o f the other, a n d vice versa, a n d t h e courts t o r e that apart and m a d e t h e m separate. I d o n o t l i k e t h i s development. I do not like speculation i n bank stock. T h e fact i s that b a n k stocks in New York have gone u p 50 per cent i n value, but a part o f the advance h a s undoubtedly b e e n d u e t e the unlicensed purchase o f stock b y these investment companies, a n d when y o u l o o k over t h e lists o f the se- curities which w e have o f some o f them, they have millions a r d millions o f dollars o f bank stock a t constantly rising prices. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 95 Governor Talley. Y o u mean t h e y have gone u p i n price a n d n o t i n value? The Chairman: Yes, sir. Governor Talley. I the c p e r a t i o n s would like t o ask Wr. Day about o f t h i s m a n o u t i n California. Geverneor Day. T h e Bank of Italy Corporation was organized i n June, 1919, w i t h a million dollars o f capital, a n d they have gone f r o m 1919 t o Uctober, 1927, t o a fully paid up capital o f $130,000,000, with total surplas o f $235,000,000. T h e last statement w e have i s Lctober SOth, 1926, w h e n they designated t h e y h a d $40,917,000 worth o f domesti¢ bank stock i n their invest- ment trust and $10,751,000 worth of foreign bank stock. They o w n stocks i n every important b a n k . in every important c i t y i n the world. Governor McDougal. W h e r e does this enormous capital and accumulated surplus c o m e from? Gevernor D a y . M e s t l y f r o m t h e public, I should say. Governor lMeDougal: D e e s i t come a t all from washing out t h e book value? Governor Day. I imagine i t does, but I have n o information a s t e that. B u t t h e y a r e continuously giving https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 96 the public opportunity t o participate a t prices slightly below t h e market a n d later o n declaring stock dividends. The Chairman. A n d then they issue t w o classes o f stock, o r more, a n d give t h e dear public a limited par- ticipation i n the appreciation a n d keep t h e unlimited participation themselves? Governor Bank. N e t i n the Bank o f Italy, no. Governor McDougal. I t would b e interesting t e see to what extent somes o f the organizations a r e operating in other cities. W e d o not k n o w o f a n y corporation of that sort i n Chicage o r i n our district. The Chairman. W e l l , y e u know that this California ene m a y o p e r a t e there. Gevernor l i c D e u g a l . W e m a y assume, f r o m what w e have b e e n told b y New York, t h a t t h e operations o f these sixteen c o m p a n i e s h a v e a gocd c e a l t o d e w i t h what h a s happened t o our bank stocks too. Governor Fancher. I think i t i s very significant about t h e attitude o f the public w h e n y o u see t h e Bank of Italy Gorporation trading o n the N e w York curb t o the extent o f 37,000 shares i n one d a y a n d selling https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 115, 1 1 6 o r 117. S o m e b o d y owns t h e stock. The Chairman. Why, Governor Fancher, these banks uptown--there is a small people. S o m e o f t h e smaller uptown banks lat o f speculation u p t o w n among t h e in New Y o r k C i t y i n f o r m e d M r . C a s e t h a t t h e r e a s o n w h y they come t c u s f o r credit more t h a n they usually a r e exnected i s that their customers h a v e drawn their money out i n order t o b u y t h e s e i n v e s t m e n t c o m p a n y s t o c k s a n d bank stocks, a n d their balances therefore a r e reduced to a point w h e r e t h e y h a v e t e b o r r o w m o r e t h a n usual. We asked them all i f they a r e lending very largely, and s o m e o f t h e m a r e i e n d i n g t e o h u c h s W e d o not run every o n e o f the banks i n our district; do m o r e t h a n r e m o n s t r a t e u p to a w e cannot certain point, but we are making i t a little uncomfortable t o some o f them. Governor Biggs. H o w do you make i t discouraging for t h e m ? W h a t d o y o u d o ? The Chairman. W e l l , w e intimate t o them that w e de not like very much, a n d w e are watching how much they borrow f r o m u s when t h e seasonal demand comes along. That i s a pretty strong intimation t o the uptown banks, because t h e y a r e absolutely dependent except during t h e https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 98 season when they are manufacturing i n the spring. N o w they p a y off, b u t i t i s i n the spring that t h e y borrow $t% Governor Seay. They cannot object t o the withdrawal of the money o f their depositors. The Chairman. N a , b u t i f w e find they are lending we have a little t a l k with them. M y recommendation t e the m e e t i n g f o r a c t i o n i s t h a t w e h a v e a little i n q u i r y made i n each locality a n d get o u r reports a n d exchange them between e a c h banks; l e t each bank make u p a dozen reports a n d send t h e m t o each o f the others. Governor Norris. Wouldn't i t b e better t o get u p a questionaire t h a t w e c o u l d a n s w e r , b e c a u s e w e d o not know what points y o u have covered i n your report? The Chairman. What. d o you say, Governor McDougal? Governor McDeugal. I suggest that perhaps those who a r e here a r e i n a position t o report n o w a s t o whether t h e s e c o m p a n i e s a r e o p e r a t i n g The Chairman. I i n t h e i r districts. would like t e see a written report that w e could assemble. P o s s i b l y t h e best w a y t o get a t that would b e for u s t o make o u r report a n d send i t around a n d that would b e a guide. N e w York i s where https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 99 most o f this h a s developed lately i n nuibers, a n d w e could h a v e t h i s r e p o r t e l a b c r a t e d q u i t e a ulars. T h i s report i s rather a b i t i n partic- casual, o f f - h a n d s t a t e - ment, b u t w e will p u t some o f our fellows o n the j o b very t h o r o u g h l y a n d g e t a real r e p o r t a n d s e n d i t around, and i f you gentlemen c a n d e the same thing that will be very helpful. Governor Talley. any district. I t i s a thing that c a n invade I t may have invaded curs, I do not know yet, a n d i t would take a n inquiry t o develop that. Governor Seay. I f i t can g o into 5t.Louis i t can go into o u r district a n d d o the same thing, a n d then you would not have t o make a n inquiry t e find c u t about it. Governor Wellbarn. I da not think t h e y would have the temerity t o come i n t o t h e Sixth District since t h e failure o f t h e Atlanta banksand others i n Georgia a n d Florida. The Chairman. I f you will permit me, w e will have the ceport started a t N e w York a n d send i t around, a n d if w e follow that general l i n e maybe t h a t will b e enough. There i s quite a little inquiry about this i n New York. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 100 The Attorney General o f the state i s making a n investigation. Governor S e a y . T h e r e i s alse a n inquiry into these i n v e s t m e n t t r u s t s . H a v e n ' t questionnaires o f dif- ferent c h a r a c t e r b e e n s e n t o u t b y y o u r s t a t e b a n k i n g d e partment? The Chairman. Yes. ment trusts, T h a t w a s described a s invest- b u t i t includes a l l o f these. Stands a g t h e action o f the meeting, I f that w e will pass t o the next topic, H , preposed b y Dallas. I. C r e d i t Transactions a n d Policies. H.What effect will ruling o f Supreme Court of Texas t h a t t r a d e a c c e p t a n c e s a r e n o n - negotiable which bear the legend - "The obligation o f the acceptor hereof arises out o f the purchase o f goods f r o m the drawer, maturity being i n conformity with the original terms of purchase"--have upon t h e negotiability o f bankers acceptances containing similar language, e. g@- T h i s acceptance arises f r o m t h e domestic storage o f cotton a n d was secured a t t i m e o f a c c e p t a n c e b y docu- ments securing a n d conveying title t o ---bales a n d will remain s o secured through- out the life o f this acceptance." Covernor T a l l e y . I ginning that, would l i k e t o s a y i n t h e b e - i n view o f the fact that w e have h a d this supreme court ruling d o w n i n Texas, cern t o u s thank t h e i n t e r e s t i t i s o f more con- w e have been able t o https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 101 erouse i n the cther districts, b u t the indications o r e thet i t i s a matter o f concern t o the other districts. The copic "that I have p u t o n the program o f course mentions t h e supreme court ruling with reference t o the opinion of non-negotisbility o f trade acceptances, b u t that i s more o r l e s s incidental. O u r counsel h a s g i v e n m e a n epinion that h e has a right serious doubt e s t o the negotisbility o f bankers accaptances o f this character, covering t h e domestic storage o f cotton a n d other commodities e n d secured a t the time o f acceptance b y documents piving title t o the commodity a n d will remein s o secured throughout t h e l i f e o f t h e acceptance. I have sent a copy o f his copinton t o the other banks a n d I think I have t w o opinions f r o m t w o o f the benks which, w i t h ©11 due. respect t o their counsel, s e e m https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis a0 2 to t r y t o e v a d e t h e q u e s t i o n r a t h e r t h a n t o s o l v e i t . Briefly, I have a s u g g e s t i o n h e r e , i r r e s p e c t i v e opinion o f counsel, t h a t might bring a o f the solution toe it, pretty much a s w e changed t h e wording o f the trade acceptance. fhe OhatriianicyGovernor T a l l e y , t s n ' t t h i s r e a l l y a legal question which has g e t t o b e referred t o counsel? Governer Talley. I would b e glad t e refer i t t o the Committee o n Acceptances, ocr something o f that kind. Governor Bailey. I s there a movement o n font t o have a meeting e f all o f the banks! counsel? The Chairman. I t was understord a t one time that that meeting would occur abcut once a year. Mr. Wyatt spoke t o m e about i t d a y before yesterday a n d asked i f there w a s a n y d e s i r e f o r s u c h a meeting, h e c a u s e thought i t would b e very helpful. he I f such a meeting would b e held, t w o o r three questions o n this program and some other matters w h i c h are pending before t h e System could well b e referred t o that meeting. Geverner B a i l e y . T h i s i s o n e o f them. The Chairman. T h i s i s ene c f them. Governor Talley. I t h i n f r o m time t e time w e have https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 102 accumulated some legal questions t h e t i t might n o t be amiss t h a t t h e y have a conference t o arrive a t some uniformity a s t e some o f these questions. The Chairman. W e l l , there a r e three o r four cases n o w t h e t I know of. T h e r e i s t h i s e n e w h i c h y o u raise about t h e negotiability o f the acceptance. There i s t h e q u e s t i o n o f t h e d e c i s i o n o f t h e s u p r e m e court o f Kansas i n Colorada & Southern Railroad Com- pany versus t h e receiver o f the American State Bank, which came up. T h e r e i s still t h e Open, unsettled case o f the state b a n k o f Huge. T h e r e i s the case that i s n o w about t a come u p i n Atlanta o f the pract- ice now adopted o f putting o n checks: "Payable i n New York exchange," and having the customers o f banks draw them o n themselves payable a t banks where t h e y carry their account. Governor Wellborn, That is a n e w departure, that last mentioned draft. The Chairman. Y e s . T h e r e are a ions o f t h a t s o r t w h e r e I number o f quest~ would l i k e v e r y w e l l t o s e e a meeting o f the counsel yeld. Governor Bailey H a w will w e d o that, t h a t this https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 104 Conference recommends t h a t t h e Board call a When i t i s t i m e t o d o that, I meeting? would l i k e t o m a k e t h i s motion. The Chairman. I these questions, do not feel competent t o discuss w h i c h a r e strictly questions o f law, and which will affect a l l the Federal reserve banks. I would really feel more comfortable i f w e could have another meeting with the counsel o f the reserve banks. Governor Harding. I Mr. Wade, have a letter f r o m cur counsel, o n the subject c f this Texas decision, a n d I would like t o hand i t i n t e the Secretary. The Chairman. W h a t i s y e u r pleasure, g e n t l e m e n ? Governor Norris. I The Chairman. second Gevernor Bailey's motion. I s there a n y discussion? A r e you ready f o r t h e q u e s t i o n ? Governor Talley. I would like t o add t o it, f o r a meeting a t a n early date. The Chairman. T h e amendment i s accepted b y the pro- poser. Governor Norris. should c o n t a i n a A n d then I think t h e request statement o f s o m e o f t h o questions. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 10D Perhaps t h e r e a r e s o m e a d d i t i o n a l o n e s t o t h e s e t h a t have already been mentioned this afternoon. Governor Bailey. W e might say, i n view o f the fact that there a r e certain legal questions pending that a r e of interest t a the entire System, well t o c a l l t h e c o u n s e l w e believe i t would b e i n e a c h b a n k together, a n d see if they cannot i r o n them cut. The Chairman, T h e n I weuld propose that t h e resolu- tion b e a s offered b y Governor Bailey a n d amended b y Governor Talley, t h a t t h e Conference recommend t o t h e Federal Reserve Board that arrangements sheuld b e made at a reasonably early date f o r a meeting o f the counsel and of the Federal reserve banks/of t h e System, M r . Baker a s special counsel, a n d that t h e Secretary b e {instructed t o submit t o the Board a list o f these legal questions n o w pending, a n d i n the notice t o t h e reserve banks o f the action taken that e a c h reserve b a n k b e asked t o take u p with t h e i r r e s p e c t i v e c o u n s e l a n y q u e s t i o n s w h i c h t h e y think should b e submitted t o that meeting. Governor Bailey. F o r h i m t o bring o n t o this meeting? The Chairman. F o r h i m t o bring o n t e this conference. Governor Talley. O f course, t h a t will include t h e https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis counsel o f t h e Board, t o o ? The Chairman. M r . Baker a n d Mr. “Wyatt. Governor Talley. M r . Chairman, I attention t e one point would like t o call i n connection w i t h this question I raised w h i c h r a t h e r e m p h a s i z e s i t s severity, a n d that is I would like t o recall that the regulaticns o f the Board d o not specify t h e character o f certificate o f eligibility, b u t i t has left i t t o a form o f certificate that would b e satisfactory t o a Federal reserve bank, and the Federal reserve banks, a s a matter o f uniformity, have adopted t h e certificate n o w i n use. The Chairman. N o t t h e o n e i n Texas. N o t the one complained o f i n this case. Governor Talley. T h e one o f the bankers acceptance, The Chairman. W e l l , t h e f o r m o f acceptance w h i c h was t h e subject o f the litigation i n Texas i s net t h e form which was adopted b y the Conference. Governor Talley. N o » I , d i d n e t mean t e s a y that. I a m referring n o w t o t h e fact that t h e eligibility which appears on a bankers a c c e p t a n c e r e g a r d i n g t h e s t o r a g e transaction, t h e r e i s nething s a i d i n the regulations https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis about t h e form. The Chairman. N o . Governor Talley. T h e reguletions state the Gligi- bility a s follows: "Evidence o f eligibility and requirement o f statements.-~/ federal reserve bank shall take such steps a s i t deems necessary t o satisfy itself a s t o the eligibility o f the draft, bill, o r trede acceptance offered f o r discount a n d m e y require a recent financial statement o f one o r more perties t o the instrument. T h e draft, bill, o r trade acceptence offered for discount a n d may require a recent financial stetement o f one o r more parties t o the instrument. The draft, bill, o r trade acceptance should b e drawn s o a s t o evidence t h e character o f the underlying transection, b u t i f i t 1s not s o drawn evidence o f eligibility may consist o f a stamp o r certificate affixed b y the ecceptor o r drawer i n a form satisfactory t o the Federal reserve bank.” From the above i t will b e observed that the Federal Reserve Board does n o t define b y regulation t h e f o r m o r character o f a stamp o r certificate affixed b y the acceptor 107-a or drawer f r o m which eligibility m a y b e reedily determined but lesves a u c h form o f stemp o r certificate t o b e s o affixed t o one that will b e satisfactory t o 9 Federal reserve bank. T h e present f o r m o f certificate o r stemp i n usé o n benkers acceptances covering t h e storege o f readily marke¥Yable s t a p l e s a n d c o v e r i n g import. and e x p o r t t r e n s - actions, i s one o f uniform adoption b y the twelve Federal reserve benks a s being heretofore satisfactory t o each. It n o w appeers i f this Conference i s impressed i n eny way with the weight o f e n y edverse opinion o f a n y Federel R e - serve Bank's Counsel, o r is impressed with the doubt o r certainty f r o m a consideration o f s summery o f 311 t h e opinions, t h e n the Conference cleerly hes t h e right t o adopt a definite f o r m o f certificate o r t o omit t h e certificate sltogether upon its own motion without controverting o r violating any provision o f the Board's regulation. For o u r o w n part, w e favor t h e elimination f r o m the certificate o f the following language: " x »xsand will remain so secured throughout the life o f this acceptance.” https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 108 The Chairman. W e l l , Governor Talley, i n the cage of a n acceptance w h e r e t h e f o r m o f a c c e p t a n c e i s the legend which makes t h e acceptance non-negotiable, no legend added b y the bank t e assure y o u e r eligibility would cure that bill o f its non-negotiable character. Governor Talley. T h a t i s just t h e peint I a m making. The Chairman, Therefore, i n this particular case in Texas, what i s needed i s a legend which will pass the test o f the courts a s t o negotiability. I s n ' t that i t ? Governor Talley. T h a t i s it. The Chairman. T h e n y o u have a bill o n which t h e member b a n k will affix t h e other legend, w h i c h will satisfy y o u that i t i s e bill which i s drawn i n good faith, and s o on, Governor Talley. A n d our position i s that i n view of that ruling and o f the likelihood that the same court will held t h e bankers acceptance w i t h this legend o n i t nen-negotiable, w e are having transactions a l l t h e time in bankers acceptances t h a t float across state lines. Some o f them originate i n my district and seme i n other districts. The Chairman. T h a t has got t o go before counsel, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 109 and your counsel i s acquainted with this. G i v e him all the data a n d i t will result i n some discussion a n d advice, I hope. Are y o u ready f o r t h e question o n the motion? (The motion was put and unanimeusly carried.) The Chairman. T h i s will alse cover Topic 1 . Governor Talley. T h e point involved there seems t o be a question o f t h e treation o f a trust relationship. Governor Bailey. Y e s } a n d we have cut i t out from our letters that w e send out. ion and remittance.” W e just say "For collect- W e do not say "In Kansas City ex- change." Governor Talley. W e cover that right specifically in cur colleetion citenlar, Governor Bailey. I de not k n o w h o w y o u c a n make the collection circular override a decision o f the court. We are not taking a n y chance o n it, a n d that i s the reason I would like t o get this Conference t o pass u p e n it, b e c a u s e t h i s i s v e r y i m p o r t a n t t o u s o u t there, and we have g o t t h e m broken i n s o that t h e y d o remit i n Kansas C i t y exchange anyhow. T h e r e was a case o u t there which got through t h e courts without u s knowing anything https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 110 about it, o u r attorney never k n e w o f it, a n d all o f these forms were not brought i n at all, a n d i t was decided t h a t way. The Chairman. C a n y o u take a n appeal f r o m that? Governor Bailey. I t i s too late. Gevernor Norris. I t i s through t h e supreme court. Governor Bailey. Yes. T h a t i s the supreme court. I de n o t k n o w w h e t h e r w e could a s k for a new hearing o r not. Governer Talley. I think w e cught t e refer t o this conference o f counsel a l l o f these reports w e n e getting from Mr, Baker o n the matter o f procedure, a n d i t can advise u s i f what w e are doing o n our collections is ali right. The Chairman. T p a t i s just the ebject p f the proposal f o r a report. Y o u know when Mr. Beker w a s present the question was raised whether inadvertently we were not traveling close t o some other pitfalls, and i t w a s u n d e r s t o o d t h a t w e w e r e t o p r e p a r e a report en all the details o f our practices i n handling collect-~ion matters, a n d t h e n w e started t o prepare s u c h a re- port a n d I think i t has b e e n sent t o the other reserve https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis lil banks, s c that b y following o n e o r the cther f o r m w e c a n get uniformity. Governor Talley. I think t h e C o m m i t t e e o n Collect- fons h a s m a d e t h e S a n F r a n c i s c o r e p o r t t h e model. Governor Norris. Yes. The Chairman. W e sent i t t o the Committee o n Col- lections because i t was really their jeb. Governor Fancher. T h e chairman o f the committee submitted your repert a n d o n e from t h e S a n Francisco bank, and h e rather thought t h a t t h e S a n Francisco report w a s the o n e which might b e followed b y the other banks. Gevernor Norris. Now, w e come t o the Strong Stabilization Bill. The Chairman. G e n t l e m e n , I will s u g g e s t t h a t w e make this t h e last topic a n d excuse t h e stenographers f o r the afterneon a n d have this i n executive session. (Whereupon, a t 5 . 1 0 Pem., t h e C o n f e r e n c e w e n t into executive session, a f t e r which a n adjournment w a s t a k e n u n t i l t o m o r r o w , T h u r s d a y , November 3, 1927, a t 10 otclock a.m.) https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SECOND DAY. A CONFERENCE O F GOVERNORS O F THE FEDFRAL RESERVE BANKS. ereasury Bulicing, Washington, D . C., Thursday, N o v e m b e r 3 , 1927. The C o n f e r e n c e o f Governors o f t h e Federal Reserve Banks convened i n the Hearing Room o f the Federal Reserve Board, Treasury Building, Washington, D . C., a t 10 o'clock a.m., Thursdey, November 3 , 1927, pursuant te adjcurnment o f yesterday. APPEARANCES ; AS i n d i c a t e d ’ n i the first day's proceedings. The Chairman, G e n t l e m e n , to order. I have h e r e a t h e meeting will kindly come set o f t h e reports o f the sub- commitvee o f the General Acceptance Committee o f the Federal Reserve Board, made following the meeting held i n New Y o r k a n d a conference w i t h t h e officers, v i c e - p r e s i - https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 113 dents,of a l l t h e banks t h a t accept there, w h i c h report contains t h e substance o f recommendations w h i c h have been preposed a number o f times t o liberalize o n e o r two o f the rulings o f the Federal Reserve Board a s t o acceptance credits. G e v e r n e r Young has just handed this t o me, w i t h t h e suggestion that this c a n b e considered a n d then commented upon, a n d that t h e Board will thereafter t a k e action right away. I also have a rough draft o f regulation K , series o f 1927, relating t o the collection c f maturing notes a n d bills. T h i s brings u p that old bird "ncen-cash collectione<" T h i s i s t o b e distributed alse, Mr. Harrison. After t h e t h a s b e e n read, p e s s i b l y a t a maybe I can suggest a later session, method o f dealing w i t h it. I will try to, anyway. The l a s t r e g u l a t i o n n o w u n d e r c o n s i d e r a t i o n regulatian D . I is have also b e e n handed tentative draft, which w a s a p p r o v e d b y t h e Federal Reserve B o a r d J u n e 2l, 1927. Accompanying that is a suggested alternative substitute o f Section 2-D, prepared b y the Board's counsel, and t h e f i n a l d r a f t of regulation D n a w before t h e Federal Reserve Board is the last draft submitted b y their https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 114 counsel. set, I t takes o n e o f e a c h o f t h e s e t o m a k e a s o that w e c a n consider t h e proposed r e v i s i o n o f the r e g u l a t i o n a s n o w b e f o r e t h e R e s e r v e Board. This i s the impertant regulation having t c d o with the reserve a n d deals w i t h the question c f window dressing, that is, t h e weekly a n d bi-weekly reports o f reserves i n the cities where there a r e branches, a n d the Board would like t o have t h e Conference g i v e expression c f views o n that, a l l o f w h i c h I think w e s h o u l d t a k e u p tomorrow, after w e have h a d a chance t o read these matters. In t h e a b s e n c e o f t h e c h a i r m a n o f t h e A d v i s o r y Come- mittee o f the Conference o n Legislative matters, suppose we t u r n t e t h e s e c o n d g r o u p o f topics, the Standing Committee o n Collections. A , Report o f I s Mr. Strater available? Geverner Fancher. M r . Strater i s here, M r . Chairman. The Chairman. B e f o r e t a k i n g t h a t u p , y e u w i l l b e i n - terested t o know that Mr. Newten D . Baker i s i n New York. I had hir o n the telephone this morning and h e will likely b e here this afternoon, n o t with t h e idea o f attending t o any business, b u t I told h i m that w e were a l l here a n d I theught that everybody would b e glad t o see https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 115 him i f h e was i n the building. H e said h e would proba~ bly b e i n the building some time this afternoon. Governor McDougal. I understood that Mr. Baker was t o discuss this topic 2 - B with t h e Conference. The Chairman. I Governor Fancher. did not know about that. H e d i d not s o understand it. Coming d o w n c n the train Monday I asked h i m i f h e expeot- ed t o a t t e n d t h e C o n f e r e n c e a n d h a v e a discussion o f a n y topic w i t h u s , a n d h e s a i d t h a t h e d i d n o t s o u n d e r s t a n d Gx The Chairman (after discussion). W i t h o u t dissent, it i s agreed that Topic II-B, Nos. 1 , 2 and 3 , will b e referred t o the meeting o f counsel o f the Federal reserve banks. I have mentioned that matter t o Governer Young and, expressing h i s personal view, h e said h e thought i t would b e a good plan t o have s u c h a meeting. We w i l l n o w t a k e u p T o p i c @ £ - C . II. C o l l e c t i o n s a n d Clearings. C. Duties a n d liabilities o f Federal r e - serve banks with regard t o shipments of cancelled Government warrants a n d checks. Governor Talley. M e m b e r s o f this Conference a r e of course familiar w i t h the procedure o f paying Government https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Li6 checks, a r r a n g e d i n schedule form, a c c o r d i n g t o the requirements o f the Treasury, a n d sending t h e m to Washington f o r credit. I f any o f those checks were lost, i t would create a good deal o f inconvenience, i f not some embarrassment. T h e y r u n into very large amounts and v a r y i n character, I t seems t o u s that s o m e sort of accommedation ought t o b e reached with t h e Treasury as t o just what our duty i s and what our liability might be. W e have made a n arrangement--I d o not know whether it has been extended t o the other banks o r not--but would be o n request, n o doubt--with insure these warrants, I a n insurance c o m p a n y t o think f o r 1 0 per cent o f the face amount, t a caver a n y expense of interest, o r obtaining o f duplicates, a n d s o forth. i n connection w i t h loss I have a memorandum from m y counsel which I would like t o read. "The warrants being cancelled and e f no value other t h a n f r o m a n a c c o u n t i n g s t a n d p o i n t , lon a r o s e a s t o whether t h e quest-~ o r not a n y s u m would h e re- coverable f r o m t h e insurance company without t h e policy expressly s o providing. W i t h this point i n view Mr. S w a n s u g g e s t e d t h a t t h e p o l i c y h a v e a t t a c h e d https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 127 to i t a rider reading substantially a s follows: "'It is agreed that securities, bank checks or commercial paper that i s not negotiable i n form m a y b e i n s u r e d f o r n o t l e s s t h a n t e n p e r cent o f t h e i r f a c e amount. I n case o f l o s s o f a n y such shipment t h e assured shall b e indemnified for t h e total cost o f procuring t h e reissue o f the property insured, including t h e legal a n d advertising expenses, l o s s o f interest a n d all charges directly resulting f r o m t h e loss e r from the d e l a y i n replacement, s u c h total c o s t n o t to exceed t h e amount o f insurance.! "We think the rider suggested i s sufficiently broad t e cover t h e purpeses desired. H o w e v e r , occurs t o us that a it much b r o a d e r q u e s t i o n t h a n t h a t of insurance h a s b e e n raised a n d w e are writing y o u with reference t o the matter i n order t o get your views. "We heve consistently taken the position that, in t h e p a y m e n t o f Government warrants a n d checks under t h e i n s t r u c t i o n s o f t h e T r e a s u r y Department, we are acting mercly a s a n agent i n the performance of ministerial duties. W i t h this peint i n mind https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 118 the Treasury Department w a s induced, s o m e time aga, to reverse t h e pesition that i t had formerly taken with reference t o its right t o arbitrarily charge back G o v e r n m e n t w a r r a n t s w h i c h u p o n i n v e s t i g a t i o n proved t o b e forgeries. “While the Treasury's instructions a t this time permit t h e various Federal Reserve Banks t o charge the a m o u n t o f G o v e r n m e n t w a r r a n t s p a i d u n d e r s u c h instructions t o the account o f the Secretary o f the Treasury, this charge is not fully acquiesced i n by the Treasury Department until t h e instruments s o paid have reache, Washington and have been inspected. As f a r a s w e k n o w t h e r e h a s n e v e r b e e n a transit o f s u c h shipments, loss i n b u t t h e question occurs to u s t h a t i n t h e e v e n t t h e r e s h o u l d b e a loss o f a substantial amcunt o f these instruments between Dallas and Washington, what would b e the status of the charge, under the present practices, which the Federal Reserve Bank o f Dallas has made because of the payment o f these warrants. I n ot*er words, would the Treasury Department permit the charge to s t a n d sheculd t h e F e d e r a l r e s e r v e b a n k b e u n a b l e https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 19 to p r o c u r e d u p l i c a t e i n s t r u m e n t s a n d e n d e r s e m e n t s ? In the event o f a large shipment i t i s entirely possible that t h e payee a n d endorser o f many o f these knstruments c o u l d n e v e r b e lacated a n d t h e questicn would arise a s t o what would b e t h e status o f the charge representing these ameunts. "We are o f the opinion that, i n view o f the fact that Federal reserve banks a r e acting a s fiscal agents i n the payment o f these obligations, t h e Treasury Department should give explicit instructions as t o h o w they wanted shipments m a d e a n d that w h e n a Federal reserve b a n k had followed these instructions its d u t i e s w o u l d h a v e b e e n d i s c h a r g e d a n d i n t h e event o f loss t h e charge would b e final a s between the Federal reserve b a n k a n d the Treasury Department. O f course, t h e r e i s n o o b j e c t i o n as t h e F e d e r a l R e s e r v e B a n k o f Dallas to d e f r a y i n g t h e c o s t o f i n s u r a n c e Department c a r e s i n s o far i s eencerned i f the Treasury t o have t h e s a m e t a k e n o u t i n reasonable ameunts n o r i s there a n y cbjection t o lending every effort i n the case o f loss t o secure the execution o f duplicates, b u t w e think that t h e https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 120 Treasury Department should require ncthing further of the Federal reserve banks.” Governor McDougal. F r o m what I have heard, I think the Dallas b a n k locked a t thie f r o m a different angle than the angle f r o m which w e look a t it. sider that w e p a y the checks a t all. W e d o net con- W e consider t h a t we cash them a n d they are n o t paid until t h e y get t o Washington. W e never cancel them. The Chairman. I t i s not a question o f our power t o construe t h e proposition. T h e l a w o f the United States, passed i n the days o f Alexander Hamilten, provides t h a t no payment should b e made out of the general fund o f the United States except i n Washington. I exactly, b u t t h a t i s t h e substance do not state i t o f it. What w e d e i n New York i s t o prepare t h e account i n exact f o r m asiipreseribed b y the Treasury, g i v i n g a l l the particulars c f the check, including t h e symbols. W e retgin copies o f the account i n New York, a n d a copy accompanies the shipment, o r may g o separately, I which. I forget think i n one instance w e Had something l i k e a million dellars o f transit stuff taken o u t o f a mail sack. T h e y thought they were getting good securities, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis J21 and they were just getting vouchers. with the Treasury. W e had n o trouble I t was attended to, b u t I remember j u s t how. I do not think i f t h i s m a t t e r i s t a k e n u p with t h e Treasury Department b y any bank that h a s a n y feeling o f uncertainty about t h e right t o maintain t h e charge against t h e Treasury account, t h a t t h e Treasury will give t h e m assurance, a l l t h e assurance t h e y need. Governor Fancher. T h e thing that h a s b e e n i n m y mind, Mr. Chairman, g c i n g b a c k t o the experience o u r bank had some years ago, w a s t h e question o f the mail burning up. T h a t i s the thing that gives m e concern, i f we should have a large batch o f these Government warrants burned, t h e time required i n getting duplicates a n d things of t h a t sort, w o u l d c o v e r a lot o f correspondence, The Chairman. I long period, w o u l d e n t a i l a a n d s o forth, a b o u t t h e charge. cannot t e l l y o u a n y o f t h e d e t a i l of what happens, b u t I think with duplicates o f the accounts i n New York, I would n o t anticipate a n y difficulty about t h e charge. T h a t i s m y understanding. T h e report I have here o n i t does n o t g o into that feature o f it, but m e r e l y d e s c r i b e s t h e method. Governor Harding. H a v e a n y o f y o u looked into this https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis l2e arrangement f o r making films o f the Government warrants s o that y o u c a n have photostatic copies o f them made? The Chairman. P h o t o s t a t i c c o p i e s ? Governor Harding. Yes. T h e r e was 8 man i n our effice n e t long a g o w h o h e d a very attractive little d e vice. I t did net take a s Icng a s keeping t h e reeecrd o f the endorser, t h e drawer, a n d a l l that sort o f thing. It is just a little bit o f a thing; they take them and run them right threugh t h e machine, a n d they g e t this film a s they g o i n the mechine. by date. Y o u file t h e films a w a y I f you have a loss a n d want a phetostatic c o p y of a n y o f t h o s e t h i n g s , y o u take t h e films o u t a n d send them t o this m a n a n d h e w i l l e n l a r g e t h e m f o r you. The Chairman. W e sometimes p a y forty o r fifty theusand Government checks i n a day i n New York. Gevernor Harding. T h i s m a n says h e i s prepared te handle a n y a m e u n t o f then. The Chairman. Sometimes, o n b i g days, w e p a y a s many a s 6 fiillion a n d a half t o two million i n a day o f coupons. Governor Harding. T h i s m a n has cffered t o give https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 123 a demenstration a n d I a m going t o lock into i t when I go back. Governor Talley. D e y o u recall w h a t happened i n your case i n reference t o reimbursement? The Chairman. No, I do not remember. I am very’ vague. I know that a mail s a c k was slit o p e n a n d a million dollars of c a n c e l l e q a n d m u t i l a t e d s t u f f w a s t a k e n cut. Geverner Norris. I f you had lest a million d o l l a r s you would have remembered it, Mr. Chairman. The Chairman. I think I would have remembered that. But I think this c a n b e worked c u t with the Treasury, if there i s a n y d o u b t i n anybody's m i n d a b o u t i t . Governor Bailey. W e carry o u t their explicit i n - structions telling u s how t e do it, i n order t e relieve cur mind o f it. B u t i f there was a n y w a y t o make a n agreement, w h y net have t h e counsel f o r t h e Board o r our counsél make a n agreement w i t h the Treasury that would cover a l l o f the banks? Governor Norris. O h , I do not think i t i s a legal matter. Governor Talley. M y idea i n b r i n g i n g t i u p was that https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 124 it teuches e v e r y bank; e v e r y b a n k h a s t h e s a m e preblem. The Chairmay. Certainly. D o you have a bosd eov- ering Lt? Governor Talley. insuring e a p e W e put this rider o m our pelicy r c e n t o f t h e f a c e amount. The Chairman. B u t your loss i s liable t o b e 100 per c e n t oar hnane. Governor Talley. T h a t i s true. The Chairman. A n d 1 0 per cent would n o t help very much. Governor Fancher. Y o u are pre,eeding o n the theory of t a k i n g c a r e o f i n t e r e s t f r o m i n t e r e s t c h a r g e , e x p e n s e ofgetting duplicates, amd all that sort of thing. Governor Talley. Yes, Gevernor licDougal. Most o f the banks are sending their cheeks b a c k b y mail. W e think there i s a greater element of securing i n using express company, a n d i t i s very much m e r e e c o n o m i c a l Mr. Harrison. t o s e n d t h e m b y express. W e da, too. Governor Norris. W e a l s o u s e t h e express companies. The Chairman. O u r s a r e sent b y express. Governor Fancher. W e u s e t h e mail, d o w e not, M r . https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Strater? Mr. Strater. W e send ours b y registered mail. That comes about largely because t h e Treasury insists o n getting o u r warrants t h e following d a y and w e could net g e t them here b y express. The Chairman. W h a t would y o u like t o have done about this, Governor Talley? Governor Talley. I would like t o get some suggesticns and advice about it. The Chairman. W h i l e y o u are here, w h y don't y o u take that u p with t h e m e n i n the Treasury that have t h e handling o f these things, a n d report b a c k t o u s what y o u learn f r o m them? Governor Talley. I The Chairman. line o n that. will make a n effort t o d e that. M r . Mills will undoubtedly give y o u a I t has just occurred t o m e that w e have always invited Mr. Mills t o come inte t h e meeting a t his convenience, t o discuss a n y T r e a s u r y m a t t e r s t h a t w e w o u l d like t e discuss w i t h him, a n d I will appoint Mr. Talley a cemmittee c f one t e convey thet information t o the Under Secretary, a n d t o de i t now. I f that will b e satisfactory, Governor Talley i s n o w a p p c i n t e d acommittee https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis of o n e b y unanimous acclaim. The Chairman. G o v e r n o r S e a y , h a v e a l l t h e members of the Advisory Conmmittee o n Legislative Matters examined and appreved t h e €hairman's report? Governor S e a y . Mr.Chairman, t h e report i s the exe pression o f t h e v i e w s w h i c h c o m e f r o m t h e d i f f e r e n t n e m bers o f t h e A d v i s o r y C o m m i t t e e , w i t h t h e e x c e p t i o n o f ycur- self. The Chairman. I a m for t h e report. Governor Seay. I s the Conference r e a d y f o r m e t o present m y report? The Chairman. Y e s . Report o f the Advisary Committee o n Legislative M a t t e r s . Governor Seay. T h e report i s a s follows: "tDesirability of amending that part of Section 13 relating t o discount o f demand a n d sight drafts secured b y shipping documents covering domestic shipment o f agricultural preducts s o i t will include all staple non-perishable commodities, s u c h for example a s flour, bran, cottonseed meal, etc., a s well a s r e i m b u r s e m e n t d r a f t s f o r t h e p r e c e e d s of https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Le other bills earrying shipping documents.* "(See paragraph 19, page 1 1 of the Secretary's Minutes.) Subsequeatly i n the Conference ( s e e paragraph 24, page 14), upon motion o f Governor Harding, i t was ! "t¥oted that the Federal Reserve Board b e asked to reconsider i t s previous ruling t o the effect that bran, flour, cottenseed meal, etc., are nonperishable, products within t h e meaning o f Séotkee 13, i t béing pointed out that the particular paragraph i n question does n e t coatain t h e limitation fin the raw state! a s i n the previous paragraph of the law. I t was understood that this action dees n o t revoke t h e action taken Tuesday, M a y 10, under Yopic I.G.§ "The action o f the Conference referred te, taken Tuesday, M a y 10, w a s a reference o f the topic t o the Advisory Committee o n Legislative Matters. "The Beard has previously ruled upon the construction o f the term tnonperishable, readily mare ketable agricultural products! o n page 2 7 6 o f the April, 1924, Bulletin, a n d page 8 5 4 o f the December, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 128 1926, Bulletin. I n t h e light o f the ruling o f the B o a r d i n April, 1 9 2 4 , a b o v e r e f e r r e d t o , wherein t h e Béaard stated: "tThe Board i s o f the opinion, therefore, t h a t Federal reserve banks should n o t refuse t o discount sight o r demand bill o f lading drafts mezely because the agricultural products covered thereby a r e n o longer i n a téchnically r a w state, b u t have passed through the initial stages o f refinement o r pro- cessifig subsequent t o their actual harvest?; "and i n view o f the wording o f the present law, 1 ¢ is b e l i e v e d t h a t t h e B e a r d h a s t h e p o w e r t o make a ruling sufficiently broad te meet the legitimate demand f d r t h e d i s c o u n t o f sight a r d demand drafts secured b y shipping documents covering agricultural products, a s deseribeda i n t h e t o p i c r e f e r r e d Advisory Committee for consideration. t a the I t is not belfeved to be necessary o r advisable a t this time to seck a n amendment t e Sectioh 1 3 ef the Act relating t e this subject." Now, the Beard, i n the opinion rendered i n 1924, stated t h a t a Federal reserve b a n k should n o t refuse t o https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Leo Ciscount sight o r deisand oi11 c f lading drafts, b u t they have somewhat modified their pesition, a n d i n the opinion o f members o f the committee, a s I gathered i t by correspondence, t h e r e i s nothing i n the present l a w which would prohibit t h e Beard from meking t h e ruling sufficiently b r o a d t e c o v e r t h e n e c e s s i t i e s o f the trade in the matter. The Chairman: T h e r e i s a little difficulty there. Apparently t h a t r u l i n g o f t h e B o a r d m a d e i n December, 1926, i s based, o r was based, o n the decisien o f the Supreme Court o f the United States i n the case o f Getty against C . R. Barnes Miliing Company, i n which i t was held thet flour w a s n o t e n agricultural preduct. I neverthe- less apvreve o f this report c f Gevernor Seay's, because the e n t i r e m e t h o d o f d e a l i n g w i t h t h a t i n v e l v e s a n act ef Congress, a n d none c f u s want t e g e before Congress for a n y emendment j u s t now. Gevernor Seay. T h e ruling c f the Board i n 1926 was something o f a reversal o f a previous ruling o f the Board, but t h e o p i n i o n i s t h a t t h e r e i s n e r e a s o n i n t h e l a w w h y the Board might n e t revertte i t s former decision. The Chairman. T p a t i s = recommendatica o f the report, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis is i t not? Governor Seay. T h a t i s the recommendation o f the report. The Chairman. I s there a n y further discussion o f this report? Governor Bailey. I Governor Seay. would like t o ask “question o f D o you know w h y thi8 td: that under t h e McFadden A c t a man c a n loan-25 per-cent o f his profit a n d surplus o n paper properly s e c u r e d , t u b they c a n only rediscount 1 0 per cent. Governor Seay. T h a t i s the l a w with us.. I t always h a s been. Governer Bailey. B u t i f they a r e permitted t o loan 25 per cent, ‘why should n o t t h e l a w b e corrected? I think t h e M c F a d d e n A c t d i d n o t g c f a r e n o u g h a n d d i d net m e e t t h a t s p e c i a l point. W h y should t h e y not b e permitted t o rediscount w i t h u s 2 5 per cent o n a prop- erly secured note? Governor Seay. I t could be, but for myself I hope it never will be.: Geverner Bailey. W h y ? Gevernor Seay. W e l l , f o r o n e thing, w e d o not want to take; a n d w e d o n e t take, a s a. matter o f practice, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 151 the entire l i n e discounted b y a n y member b a n k f o r any particular c u s t o m e r , a n d w e d e n o t w a n t t e d o that. We take a reasonable amount of it. Gevernor Bailey. B u t i f the note i s absolutely s e - cured f o r 1 0 p e r c e n t a n d i s a geod note, t h e n i t i s g o o d for 2 5 per cent,.and i t works a hardship o n chose fellows out there, The Chairman... B u t when t h e nete i s good a n d y o u only take 1 0 per cent o f it, eof course y o u dontt l o s e s o much. Governor B a i l e y . I have y e t t o s e e t h e f i r s t cattle feeder l o a n which f s net good. Gevernor Seay- S i n c e y o u a s k m e the question, Governor Batley, i t i s a question c f « fundamental policy ef the System. I dare say i t can be done, but person- ally I weuld not like t o see i t dene. The Chairman. W e l l , this i s a digression from the report o f G e v e r n o r Seay. discussion o f it. abeut this repart? T h e r e seems W h a t i s t h e nleasure t o b e n o further e f t h e Conference T h e report contains a recommenda- tion and tne adoption o f the report will inciude endorsement o f t h e recommendation. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 132 Governor Fancher. I move that t h e report b e adopted. Governor Wellborn, S e c o n d e d , {The motion, having been duly seconded, was unanimously carried.) The Chairman. Now, Mr. Strater, w e will have t h e report o f the Standing Cammittee o n Collections. II. C o l l e c t i o n s a n d Clearings. A. R e p o r t o f Standing Committee o n Collections. Mr, Strater. M r . Chairman a n d gentlemen, t h e Standing Committee o n Collections b e g s t o submit herewith its report o n the following topics: "Revision o f time schedules w i t h a view to reducing float a n d aveiding existing inequalities. "At the Conference o f Governors held i n November, 1925, i t was voted t o request the Stand-: ing C o m m i t t e e o n Collections t o make a study o f the p r e s e n t t i m e s c h e d u l e s a n d p r e p a r e a scientific revision o f t h e m i f t h a t s h o u l d b e necessary. I t was understocd that t h e Committee should consult o r advise with a n y o f the Federal reserve banks, when- ever i t might b e helpful fer the Committee t o d o https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 133 so, a n d that tentative schedules b e submitted t o each b a n k f o r r e v i e w b e f o r e a n y f i n a l s c h e d u l e s were submitted toa the Conference. "In this Committee's report t o the November, 1926, Conference o f Governors, i t expressed i t s opinion a s t e how a scientific a n d accurate time schedule s h e c u l d e b constructed ‘ n order t o extend the benefits o f the check collection system equis+ tably a n d i m p a r t i a l l y t o all member banks a n d a t the s a m e t i m e r e d u c e f l o a t t o t h e l o w e s t p o s s i b l e point consistent w i t h expediency o f operation, w h i c h epinien i t deems advisable t o repeat. T h e logical and scientific basis f o r a n accurate intra-district time s c h e d u l e m u s t b e t h e a v e r a g e t i m e r e q u i r e d by each Federal reserve b a n k t o ecllect checks payable in each state o r part o f state within i t s o w district, a n d the logical a n d scientific basis f o r an a c c u r a t e i n t e r - d i s t r i c t t i m e s c h e d u l e m u s t b e the t i m e r e q u i r e d t e reach t h e Federal reserve bank o r b r a n c h o f t h e d i s t r i c t i n which t h e checks are p a y a b l e s l u s t h e d e f e r r e d t i m e g i v e n b y s u c h Federal reserve bank o r branch after t h e checks https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Peeen it. "In order t o obtain accurate figures showing the average time required b y each Federal reserve bank a n d b r a n c h t e cecllect c h e c k s p a y a b l e State o r p a r t o f s t a t e i n i t s territory, i n each t h e Com- mittee obtained f r o m each Federal reserve b a n k a n d branch a n analysis covering a and, u s i n g t h i s a s a period o f one week, basis, p r e p a r e d a tentative inter-district t i m e schedule f o r each Federal r e serve b a n k and branch, copies e f which i n duplicate were f o r w a r d e d t o e a c h o f t h e Governors accompanied by an interim repert explaining the manner i n which these tentative schedules h a d been prepared, a n d requesting that t h e y b e reviewed a n d returned t o the Committec,with s u c h corrections a s were necessary in o r d e r t o m a k e t h e t i m e s c h e d u l e s acceptable. When t h e c o r r e c t t i m e s c h e d u l e s w e r e r e t u r n e d the Committee, to i t was f o u n d t h a t m a n y o f the minor inequalities pointed out i n the report t o the Conference o f Governors h e l d i n March, 1926, h a d been eliminated b y the acceptance o f the Committee's recommendations. T h e major irregularities still exist https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 135 in certain districts a n d the Committee finds i t self unable t o accomplish t h e object which i t was directed b y the Conference t o attain. "The Committee feels that i n the case o f seven c f t h e F e d e r a l r e s e r v e b a n k s , t h e time s c h e d - ules finally approved a r e a s accurate a s they c a n be made, a n d t o a l l i n t e n t s a n d p u r p o s e s t h e d e f e r - red time shown f o r checks payable i n states o r parts o f states wholly outside o f their respective districts, i s the correct average t i m e required t o collect. C e r t a i n major inequalities w h i c h existed in the time schedules o f several o f the Federal reserve banks w h e n t h e Committee first undertook to m a k e a n e x h a u s t i v e s t u d y o f t i m e s c h e d u l e s s t i l l exist, a n d believing t h a t t h e Governors w i l l b e interested i n having t h e m peinted out, t h e y are shown below under a separate heading f o r e a c h o f the five Federal reserve banks, which, f o r reasons considered b y them t o b e expedient, d o not feel that they are i n a position t o accept the Commiutee's recommendations: "Boston. C h e c k s d r a w n o n banks i n the https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 136 states o f Delaware, N e w Jersey, N e w York, and Pennsylvania a r e given a deferred availability o f two days whereas i t i s physically impessible t o collect a n y e f these items through existing channels in less t h a n three days a n d a substéntial volume in less t h a n four days. C h e c k s d r a w n c n country banks i n all o f the cther states cutside o f the First Federal Reserve District a r e given deferred availability o f either four o r eight days a n d none o f the resulting inconsistencies have been corrected. "A few Lllustrations will suffice: C h e c k s payable i n the state o f Arkansas a r e given a deferred availability o f four days whereas s i x days a r e re- quired. C h e c k s payable i n the state o f Tennessee are given deferred availability o f four days whereas five o r six days are required t o collect. C h e c k s peyeble i n the state o f Oklahoma a r e given a defer- red availability o f eight days whereas they can readily b e callected i n five o r six. "New York. C h e c k s payable i n all six o f the New Ergland states a n d Delaware, District c f Columbia, Maryland, t h a t part o f New Jersey i n the Philadelphta https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 137 district P e n n s y l v a n i a , a n d Virginia a r e given a deferred availability o f two days whereas they can in n e case b e collected i n less t h a n three through existing channels. A l l other minor inconsistencies which f o r m e r l y existed, h a v e b e e n corrected. I t should b e noted that t h e tine schedule o f the Buffalo Branch does n o t contain t h e inconsistencies which are pointed o u t i n the schedule o f the parent bank, except t h a t c h e c k s d r a w n o n points i n that p a r t of t h e s t a t e o f N e w J e r s e y w h i c h i s i n t h e Phila- delphia district a r e given a deferred availability of two days whereas a t least three davs a r e re-~ quired t e collect. "Philadelphia. C p e c k s payable i n all six of t h e N e w E n g l a n d states, Maryland, a n d District o f Columbia, t h a t part o f N e w Jersey i n the N e w York district, N e w York, t h a t part o f Pennsylvania in the Cleveland district, a n d Virginia are given a deferred availability o f twe days whereas i n no case c a n they b e collected i n less t h a n three. All other inconsistencies h a v e b e e n corrected. "Chicago. C h e c k s drawn o n points i n those https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 133 parts o f t h e s t a t e s o f Illineis a n d Indiana w h i c h are i n t h e S t . L o u i s d i s t r i c t a n d t h a t p a r t o f t h e state o f W i s c o n s i n w h i c h i s i n t h e M i n n e a p o l i s d i s - trict, a r e given a deferred availability o f two days whereas t h e actual time required f o r collection is not less t h a n three days. I n order that scien- tifically c o r r e c t t i m e s c h e d u l e s m a y b e constructed, the C o m m i t t e e b e l i e v e s t h a t i t i s n e c e s s a r y to consider parts o f states lying outside o f a Federal reserve district o n the same basis a s though t h e y were s e p a r a t e s t a t e s w h e n e v e r t h e v o l u m e i s of material size. "Kansas City. Checks drawn o n points i n that part o f the state, o f Misseuri outside o f the Tenth Federal Reserve district, a r e given deferred availaobility o f two days whereas three days a r e required for collection. “Pabulations, showing the time schedules which each bank will agree t o adopt b u t which still centain in the case o f five banks t h e inconsistencies inequalities described above, a r e attached t o made a part o f this report a s follows: https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 139 "(1) T i m e schedules showing deferred availability given b y each Federal reserve b a n k a n d branch for checks payable i n cther Federal reserve bank a n d b r a n c h cities; and "(2) T i m e schedule showing deferred availability given b y each Federal reserve b a n k a n d branch for. checks payable i n states o r parts o f states wholly cutside o f their respective districts. "With respect t o item (1) the Committee i s of the opinion that the deferred availability given in e a c h i n s t a n c e i s accurate, a n d , i f adopted b y the Cenference a n d each o f the Federal reserve banks concerned, w i l l result i n a n almost entire elimination o f float o n this class o f items a s between Federal reserve b a n k a n d branch cities. With respect t o item (2) a l l that h a s b e e n expressed i n this report applies, a n d the Committee desirés t o again state that this particular schedule 4s not scientifically accurate a n d that the inaccuracies contained therein, w i l l result i n the creation o f a considerable volume o f float which must be c a r r i e d b y t h e F e d e r a l R e s e r v e System. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 140 "Having presented to the Conference the result of its investigations a n d efforts, a n d believing that t h e Conmittee c a n make n o further progress i n this connection, b o t h schedules a r e submitted with- out a n y specific recommendation. "A study o f the whole question of t h e c o l l e c t i o n o f c a s h items. "The Conference o f Governors o f November, 1926, voted t o request t h e Standing Committee c n Collections t e continue its study o f the collection problem, having i n mind particularly whether a Federal reserve b a n k m a y not shorten t h e actual transit t i m e b y sending direct t o member banks located i n o t h e r d i s t r i c t s u n d e r crprangements w i t h the Federal reserve banks o f those districts, a n d 4 £s to consider also what, i f any, modifications or improvements might b e made i n order t o effect a better a n d m o r e s c i e n t i f i c c o l l e c t i o n system. "In the Committee's report t o the Conference cf Gevernors c f May, 1927, a brief resume o f the Committee's a c t i v i t i e s i n this connection w a s pre- ince t h a t Conference, e a c h o f the Federal https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 141 reserve b a n k s h a s b e e n r e q u e s t e d t o furnish t h e Committee w i t h its ideas a s t o what change would best t e n d t o improve t h e collection machinery. M o s t of the banks have r e p l i e d o t the Committee's request and t h e consensus o f opinion appears t o b e that t h e direct routing o f checks i n t o other districts m a y tend t o reduce t h e collection time b u t that s u c h a practi¢ée i s not altogether desirable i n every instance. "In the opinion o f the Committee, inequalities and inconsistencies appearing i n the existing time schedules o f a number o f the Federal reserve banks are very closely connected w i t h the subject o f d i r e c t routing b y Federal reserve banks i n t o other districts.. It i s quite ecbvious that s u c h a n arrangement c a n not be made without t h e consent o f the paying bank inasmuch a s under t h e Federal Reserve A c t a n d Regulation J of the Federal Reserve Beard, t h e nermal channel of c o l l e c t i o n i s t h r o u g h t h e F e d e r a l r e s e r v e b a n k of t h e d i s t r i c t i n w h i c h t h e c h e c k s a r e payable. I f the time schedule o f the bank s o attempting t o collect c h e c k s p a y a b l e i n other districts i s based https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 142 upon t h e time required t o collect through t h e Federal reserve b a n k o f the district i n which t h e paying b a n k i s located, t h e paying b a n k may b e the duced t o a g r e e toa s u c h a n a r r a n g e m e n t p r o v i d e d i t s checks a r e g i v e n f r e e r c u r r e n c y b y r e d u c i n g t h e d e ferred t i m e o n t h e t i m e s c h e d u l e c f t h e Federal r e - serve b a n k attempting t o make s u c h a n arrangement. "Tf the deferred availability o n checks payable in any considerable a r e a immediately adjoining a given F e d e r a l r e s e r v e d i s t r i c t i s a t present equiva- lent t o the time required toe collect b y direct routing, t h e m e m b e r o r non-member b a n k w i t h which a direct routing arrangement i s sought m a y be induced to agree t o such a n arrangement i f it 1s pointed out that unless a majorityf o the banks i n such ad- joining territory agree t o a direct routing arrangement, i t will b e necessary t o increase t h e period o f deferred a v a i l a b i l i t y toc c o r r e s p e n d w i t h t h e a c t u a l methed c f collection. "The Cemmittee i s o f the opinion that t h e practice o f a Federal reserve b a n k sending direct to member banks, a n d possibly t e non-member banks, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 143 in another district under arrangements w i t h the Federal reserve b a n k o f that district a n d t h e paying bank, i s worthy o f a trial a t least i n those districts w h i c h f e e l t h a t t h e y c a n n o t c c r r e c t t h e i r time schedules t o harmonize w i t h the actual time now r e q u i r e d toe collect. isting Regulation J I t i s trve that under e x - of the Federal Reserve Board this practice i s not permitted, b u t inasmuch a s i t is now being done effectively t o a very limited e x tent i n several o f the Federal reserve districts, it i s believed that t h e practice could b e extended within certain o f the districts a n d a t the option ef the Federal reserve banks concerned with very good results; t h e Committee believes t h a t a very material reduction i n . float c a r r i e d b y t h e S y s t e m w o u l d b e effected thereby. "The Committee recommends that the Federal reserve banks b e authorized a t their discretion, conduct to a n e x p e r i m e n t a l o n g t h i s l i n e i n a n attempt to arrange f o r t h e collection i n this manner o f checks drawn o n the principal o r larger cities i n states adjoining their districts. S u c h a n experiment should https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 144 not b e undertaken without first ecbtaining a n opinion from Counsel f o r t h e Federal Reserve Board a s t a the legality o f such a n arrangement, a n d , if. such opinion is: favorable, to modify Regulation J i t would first b e necessary to permit s u c h a procedure. "The Committee regards a s highly dangerous a n y attempt t o inaugurate radical changes without a thorough a n d careful study o f the possible r e s u l t . "Withdrawals f r o m the p a r list. " I n i t s report t o the November, 1924 Conference of. Governors, t h e Committee recommended that t h e following procedure b e adopted b y the Federal reserve banks a n d branches in. order t o protect t h e sending bank a s w e l l a s t h e r e c e i v i n g F e d e r a l r e s e r v e b a n k o r branch against the possibility o f loss when checks are recefived drawn o n banks which have b e e n removed from the p a r list between issues o f the Federal Reserve Board's semi-annual p a r list o r the monthly supplements thereto: "1. Any item under $50C,00 should b e charged back a n d returned t o the direct sending member bank. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 145 with a memorandum o r notation t o the effect that the b a n k u p e n w h i c h t h e i t e m i s d r a w n h a s b e e n removed f r o m the p a r list and, therefore, t h e i t e m is net collectible through t h e Federal Reserve System. "2, A n y item o f $500.00 o r over should b e held by the receiving Federal reserve bank c r branch, a n d the direct sending member b a n k fram which t h e i t e m was received should b e notified b y wire, t h a t t h e bank upon which t h e item i s drawn has b e e n removed from t h e par list a n d that t h e item i s not collectible through t h e Federal Reserve System, a n d should be requested t o forward instructions a s t o the dispesition o f the item. "The Committee has been asked b y one o f the Federal reserve banks t o interpret o r amplify i t s recommendation. T h e request i s the result o f one Federal reserve b a n k having concluded t o give t h e forwarding member conte the choice o f t w o alternatives only when wiring f o r instructions a s t o the dispo- sition o f any item o f $500.00 a n d over; namely, that the i t e m b e returned t o the sending member b a n k https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 146 or that i t b e turned cver t o one o f the commercial banks or that i t b e turned over t o ane o f the c o m m e r cial banks i n the city i n which t h e Federal reserve bank o r branch i s located, a n d declining t o act on instructions t o forward t h e item t o the drawee bank t e b e accounted f o r direct t o the endorsing bank from w h i c h t h e instructions w e r e received. "The Committee t s of the opinion and therefore recommends t h a t a n y instructions t h e forward- ing member bank may give, should b e complied with by the receiving Federal reserve bank o r branch providing t h e instructions a r e net incensistent w i t h the law. "Respectfully submitted, "Standing Cammittee o n Collections Strater, Chairman Attebery Walden, J r . Coe M.Toy." Governor Norris. Now, Mr. Chairman, I that i f a n y o n e h a s a n y q u e s t i o n suggest t o a s k that w e take u p page l , e n d then g o t o page 2 , a n d s o on. « Time Schedule Showing Deferred Availability Given by Federal Reserve Banks and Branches for Checks Payable in States or Parts of States Wholly Outside of Their Respective Districts Boston Drawn o n Se S E § E Be h Ee H G e ta se Be S R 1 elk Oa OE 8 o t, giw s.6S U 9 h ib ke S .4CHE 6 eaG ,EWN OS0R 8 S ne We Ae S 9 a ea A Aa ES w ree Se Ls CUt sm E O Md e d E wO e e . 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Seattle |Spokane e i n s Salt Lake Los Angeles R O n 0 0 0 O K K O N O W O O K R i d k h I R R R R O K T O K R R O K T T O R K R R O K N N D O D O O K N D T O R R J O O O C O R O R K R O O O O O N ‘ C O D S C K O R R R O M O H O M W O N ( C O D W M M M O K R O H K R O N N O S ‘ C O D C O K O R K R N R N O O M N C O O D M O O K R K R O C O O O O K R R E R R O O N O ‘ R R R R O N O O ‘ h O n N O O H N O O S ‘ R R R K R O K O O ‘ O O O O K N N I N I D ‘ R R O K R ‘ R R O O N D ‘ R M N R O N K O ‘ O N O R E E ‘ ' R R O N K N O } O O R N O O ‘ R R O O N O ‘ H K ‘ R K ‘n e ‘ R R ‘ O O ‘ R R W O W ‘ O O M ‘ h i e ‘ D O W ' R N O ‘ W O O O O R C K R M M O O G O O O M M O M I N M R O K O M O O D O R R I N W O O O M 1 9 ‘ O O O n R n R M O E W H O M Time Schedule Showing Deferred Availability Given by Each Federal Reserve Bank and Branch for Checks Payable in Other Federal Reserve Bank and Branch Cities i yS g Q) e i ° 2| o o omiQ8 a ; P r : ie S op iA e 2O $ a a as o a e e ree 6 s r e o c mha)ae8 3 er N e <S i n o ie C ie8 B e p eate s se ? 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SP O C DN OT D O O HS g e M H g MH E IH D IDEN ac d ( h a e eN q t e P E R L S T oP H g c da em t u P T a n th 1 9 3 s H S E 1 9 1 0 H O D 1 9 1M S HS R dU M dU tN A ia g s( HA a Q s HM a g w o s W H M ON C W a g H I 1 9 1 9 1 9 DE OA ON M W a i s t H O O G :O S R O O V I O U O SG D ! G ! A R o H CU n Da H H ta t A OM t LV LA CA e R a g M a g s H e ON s O r e e e L e e l l | SO o S )R i eA e eR O o l iv e CO M H O D E D T H AO M DO 6 e e e s n https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 147 The Chairman. G e n t l e m e n , a r e t h e r e e n y auestions as t o page 1 ? I f not, w e will g o t o page @. Governor licDougal. W h e r e i t speaks o f several banks whose time schedules a r e accurate, I think w e might give consideration t o the schedules o f the other banks that a r e not accurate. Y o u h a v e e n u m e r a t e d t h e m i n t h e report, My. Strater? Mr. Strater. Yes. The Chairman. Now, w i t h regard t o page 3 , which refers t o Boston a n d N e w York, a r e there a n y comments? Governor Harding. Mr. Chairman, t h e banks i n the N e w England district will object v e r y strenuously t o a n y change i n cur time schedule. ; had a careful an- alysis made o f that, going back over 2 period o f years, and we find that our average float, that is, the difference between t h e transit items a n d t h e deferred credit items, amounts t c about $60,000,000 a day i n deferred credit items; the average always is about $60,000,000, put t h a t t h a t i s o f f s e t o n the other side w i t h the ex- ception o f o n e m i l l i o n d o l l a r s , a n d o n e millien dellars is our averege float. Mr. Strater. Y o u ere speaking o f the aggregate d e - https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ferred i t e m s o n b o t h sides. Governor Harding. Yes. float w e a b s o r b t s a I n other words, t h e average million dollars. I t i s not excess~ ive a n d does n o t mean a burden t o us. ‘ f o change this will c r e a t e a considerable a m o u n t would involve extra expense, I o f dissatisfaction, have checked that u p and it would cost u s more t h a n the interest o n the million dollars. Governor F a n c h e r . Y o u spoke abeut cutting your fleat down t o s a y a million dollars a day o n the average. Governor Harding. Yes, i t is about $60,000,000. Governor Fancher. O n one h a n d y o u receive t h a t f o r two d a y s ' d e f e r r e d , w h e r e i t takes t h r e e d a y s t o collect, and there i s constderable float, a n d i n the other schedule y o u d e f e r f o r a longer p e r i o d t h a n i t requires to cellect t h e checks, s o one offsets t h e other a n d reduces the total. Gevernor Harding. Yes. A scientific adjustment o f that thing I have estimated would cost us in the neighborhood o f $40,000. a year. Goverr.or Fancher. Y o u mean 4 t would cost your bank that? https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 249 Governor Harding. Yes. Y o u gentlemen d o not under- stand h o w hard i t i s t o change things u p i n the N e w England states. They are set i n their ways, a n d i f you change anything i t raises a racket. Governor Fancher. V e r y naturally, w h e r e a bank c a n get credit i n two days, w h e n i t takes three days t o collect, t h e y are going toa object t o a n y change. Governor Harding. There i s a great deal o f offset to it. You must admit that o n a n average volume o f $60,000,000, y o u only have one million float, that i t is not excessive. Governor Fancher. There h a s always b e e n o n e feature of this time schedule o f the Federal reserve banks about which I have been a little fearful. T a m afraid that it will b e litigated some day and the time schedules will be brought in. T h e test o f a time schedule i s what actual time i s required t e coliect items, a n d then when it i s f o u n d t h a t w e d e c l a r e a n item o n one point i n two days a n d collect i n three, o r defer i t s i x days a n d collect i t i n four, I a m a little fearful t h a t t h e schedule i s not going t o stand up, unless i t pretty nearly measures u p t e the actual time required i n collecting https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis the checks. Governor Seay. Mr. Chairman, a t this juncture, it will prebably b e o f interest t o the Conference t o have me state that I have just h a d a conversation w i t h Mr.James, whe i s a member o f the Federal Reserve Board committee which has special supervision over o u r district. T h e oc- casion f o r m y c o n f e r e n c e w i t h h i m w a s t h e n e a r b y o p e n i n g of t h e C h a r l o t t e b r a n c h a n d t h e n e c e s s i t y f o r e s t a b l i s h - ing a time schedule. I thought probably t h e Board m i ght desire t o b e consulted about t h e fixing o f the time schedule, a n d I brought i t u p with Mr. James. that h e has b e e n making a H e said study o f time schedules f o r some months; t h a t h e has recently sent Mr. Snead around te all t h e Federal reserve banks, of their. fleat. I t c make a n analysis think h e h a s b e e n t o c u r bank. H e said h e d i d not speak for the Board, b u t h e believes t h a t the B o a r d would, a t a n e a r l y date, t a k e u p t h e q u e s t i o n of the float i n the System a s a System matter. The Chairman. W h a t i s the tetal ameunt o f it? Dees anybody know? Gevernor Seay. A b e u t $70,000,000, h e said. H e sug- gested thet a s far a s w e were concerned h e would n o t b e https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Lol disposed t o take u p our case a n d made t h e suggestion that w e analyze t h e float ourselves a n d that later, w h e n the B o a r d t o o k up, a s h e b e l i e v e d i t would, t h e question of the float i n the System, t h a t w e wruld have a hearing befcre t h e Board. The Chairman. Y o u r problem i s a very minor one, Governor. Governor S e a y . Very. The Chsirman. B e c a u s e that n e w branch will handle very f e w cnecks compared t o the number t o b e dealt w i t h by all e f the twelve Federal reserve banks. Governor Seay. I t i s a very minor preblem a n d I did net h a v e a n y i d e a t h a t i t w o u l d a f f e c t t h e S y s t e m g e n e r - ally. B u t the Board likes t o be consulted with regard te the establishment o f these things, a n d I therefore took the matter up, with t h e result I have stated. The Chairman.They have t o approve the time schedule. Governor Seay. Yes. H e intimated that h e thought the Board would net interpese any objection, b u t h e said he had that stuuy before h i m end that t h e whole matter o f the System fleat would come up. H e believes, a s Mr. Fancher h a s said, thet w e were acting contrary t o the l a w https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 152 in carrying a gocd deal o f float i n the System, a n d intimated t h a t i t w a s t h e opinion, a t least o f many o f the c o u n t r y banks, t h a t w e a r e c a r r y i n g a very large pro- portion o f that float f o r t h e benefit e f the c i t y banks. The Chairman. I am afraid that i s s o i n our dis- triet. I s n ' t t h a t s o , M r . H a r r i s o n ? t h a t t h e c i t y b a n k s get t h e benefit o f the float i n our district? Mr. Harrison. T h e y all do, because t h e country banks t h a t a r e sending t o u s get t h e benefit o f one day's s a v i n g s o n all points Governor Talley. i n t h e i r t w o - d a y schedules. M r . Chairman, M r . Mills n a s s a i d that h e would like t e come over within t h e next t e n o r fifteen minutes. Gevernor Harding. I would like t o remark that a n y extension c f c u r t i m e s c h e d u l e o n certain points i n New York state, Pennsylvania a n d N e w Jersey, w o u l d result in a very material increase i n the burden o n New York, because a great m a n y o f our banks would send directly t o New York. The Chaicman. in some way. W o f course w e would hope t o change ours e have a float now o f about $20,000,000, ef which, accerding t e the calculations Mr. Harrison https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis OO just gave me, t h e float within t h e district o r the intra- district float i s @ix and a quarter million and the inter-district float i s fourteen million. T h i s arises frem various reascns, w h i c h a r e described here a t length. The intra-district float o f $12,800,000, i n the week when t h e analysis w a s made, arose i n items s e n t t o four peints. Geverncr Harding. I f this thing ever comes u p before the Board and I am asked to discuss i t with the Board, fam geing t o call their attention t o the fact that there i s a peculiar relationship between t h e N e w England territory a n d New York; t h a t b u t f o r t h e desire o f Coneress b a c k i n 1913 t o h e l d N e w Y o r k d o w n t o t h e l o w e s t minimum p e s s i b l e a s t o size, t h e r e w o u l d n o t h a v e b e e n any Boston district. T h e r e wasn!t a in N e w E n g l a n d f o r a reserve b a n k there, lot e f enthusiasm and I think they would have been entirely satisfied t o have been a part o f the N e w York district, a n d then this question would never have arisen a t all. The Chairman. Geographically i t is a sort o f uneconomical thing. Governor Harding. T h e banking interests o f N e w https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 154 England h a v e g n t t o k e e p c o n s t a n t l y i n mind w h a t t h e y are doing i n New York. Mr. Harrison. B e f o r e t h e Federal Reserve A c t was passed w e c o l l e c t e d t h e i t e m s o n those points i n t w o days through t h e country collection denartment o f the clearing house. Physically, t h e Federal] r e s e r v e b a n k s o f N e w York, of Philadelphia o r o f Boston could col7ect t h e s e same {tems i n t w o days, w e r e i t n o t f o r t h i s a r b i t r a r y d i s - trict line which was drawn, n e t s o much f o r collection purpeses, b u t wholly regardless o f collection purpeses, and solely f o r credit purposes. The Chairman. O r pelitical purposes. My. Harrison. Y e s . i y en w e s u b s c r i b e w h o l l y t o t h e no principle that w e should/make payment for cheeks i n a time s h o r t e r t h a n i t takes u s % n t h e a v e r a g e t o collect them, nevertheless w e d o feel that befcre w e change f r o m the twe-day point t e the three-jay peint, t h e System should consider first whether i t i s possible t o 2ell23t a good vercentage o f those items b y direct sendings, or some other process, without a n amendment t o the law, second, i f w e cannet d o i t without amending t h e law, whether o r not i n the interest o f expediting a perfect https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 2.55 collection s y s t e m w e s h e u l d n o t s e e k s o m e other, p e r - haps drastic amendment~--not new, b u t later on--amendment t e the l a w which will permit o f a more scientifif collection system. I t i s a questiconc practical con- venience a t the moment, whether w e should give u p the twe-day points under a l l t h e circumstances a n d subject curselves t o very serious a n d bitter criticism e f all these banks i n this whele area, o r whether w e should continue tc hope that w e could eventually justify cur two-day peint b y mcre speed} collections i n some o n e c f the ways that have been suggested a n d discussed. Governor Fancher. D i d your ccuntry clearing hcuse in New York collect e n all this area that y o u are collecting o n now, o n two days! basis before? Mr. H a r r i s o n . O n two-day basis. Gevernor Seay. T h e y got returns, but did they get immediately available funds? Mr. Harrison. Y e s . I t haprens that { n New York they got returns o n New Yerk peints where t h e y h a d accounts in New York. Governor Seay. D i d they get them i n time for the clearing house? https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 156 Mr. Harrison. A s a rule, I The Chairman. I understand t h e y did. think the rules o f the country collection division o f the clearing house reoguired New York f u n d s i n settlement o f items s e n t t h r o u g h t h e country clearing house. Governer S e a y . H a v e y o u e v e r m a d e a n y analysis determine whether t h e y merély received a to return o r whether t h e y received return i n funds available o n the day o f receipt? The Chairman. T h e y got clearing house funds. There wasn't a n y other kind then. Governor Seay. A s I say, d i d t h e r e t u r n s c o m e i n in time t e cleer o n the d a y o f receipt? Mr. Harrison, W e have estimated, f e r instance, that i f w e could s e n d directly t c about twenty different land citfes i n New E n g / w e could collect between 6 5 and 70 per cent o f the total dollar value c f all items o n these points o n o r i n New England, i n two days. Governor Harding, A n y lengtheningcef our time schedule w o u l d c e r t a i n l y i n c r e a s e t h e b u r d e n Governor F a n c h e r . o n N e w York. U n d e r thet method c f collection you have given t h e Boston banks a n advantage t h e y d i d https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 157 not have under t h e N e w England e a r i n g House Assoclation, b e c a u s e t h a t w a s c o n f i n e d s i m p l y t e N e w E n g l a n d cities. Governor Harding. W e did net give t h e m a n y advant- ages that they cculd n o t g e t independent o f us. Gevernor Fancher. B u t t h e o l d system o f clearing on the two-day basis o n New England through t h e clearing heuse association-- Governcr Harding. I wasn't there then and I do not remember abcut that. Gevernor Fancher. I t did not g o outside o t N e w Ragland, as I recall; The C h a i r m a n . M r . Harrison and I have discussed t h i s at great length, and I think what we weuld like t o da, agreeing, as we do, with the committee entirely i n principle, w e would like t a try t o work out a scheme t o get mest o f thet stuff threugh i n two days. W e might have to get a little cooperation f r o m Governor Harding a n d Geverner Norris. J u s t h o w i t would b e done I do not know. Governor Harding: I think tae situation o f New York, Philadelphia a n d Boston should b e considered separately https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 156 from t h e s i t u a t i c n i n t h e r e s t o f t h e country. I to s a y o n e t h i n g further. fron Boston t o New York. past 5 or 6 o'clock W want e have a i r mail service I t leaves Boston about half i n t h e afterncon. A n y bank i n Boston could collect a l l items payable o n New England just a s quickly b y bunching t h e whole thing o n New York as they could b y sending i t t o the Federal Reserve B a n k of Beston. The Chairman. A n d get N e w Yerk funds i n two days. Governor Harding. Yes. The Chairman, A n d t h a t w o u l d s u i t t h e m perfectly. Gevernor Harding. Absolutely. Mr. Harrisen. I n changing t h e schédule f r o m twe t e three days i t will simply b e a n admission b y the Federal R e s e r v e S y s t e m t h a t t h i s i m p r o v e d c o l l e c t i o n s y s t e m that w e have given t e the country cannot d o for t h e banks in t h a t a r e a w h a t t h e y h a v e a l w a y s b e e n a b l e t o d o f o r themselves i n t h e past, a n d w h a t t h e y w o u l d d e f o r t h e m - selves i n the future, should w e institute t h e three-day peint. G n the other hand, I think there igs n o denia] ef t h e f a c t t h e t o u r p r e s e n t s c h e d u l e equivalent t o giving a o f t w o days i s $14,000,000 surplus reserve t o https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis the m e m b e r b a n k s i n t h o s e areas. i t I e m e r e l y « a dife ference o f degree o f what w o contended f o r i n the. Pas- cagoula ease, what w a contended should net b e done under any circumstances, a n d that i s o r immediate sredit f o r aid. item, The Chairman. I fleat. I a m very anxious t e get r i d o f the think t h e difficulty i n New England i s more deeply rooted i n a way than i t i s i n N e w York. I do rot believe t h a t w e w o u l d h a v e t h e g r e a t d i f f i c u l t y t h a t w e would have had a few years ago i n the New York Clearing House. Governor Harding. Y o u c a r see o u r difficulty. The Chairman. I appreciate y o u r difficulty perfectly, GCvernor . , Mr. Harrison, B u t incidentally i t will n o t b e a bed of roses f o r us. Tho Chairman, N o , i t will not. I offer this suggest- ion a s t o the three districts, beeause t h e y d e interlock eloser t h a n a n y o f the others. M y suggestion i s that Mr. S t r a t e r m e e t w i t h t h e m e n i n c h a r g e o f o u r t h r e e banks a n d work c u t some scheme o f cutting c u t this float together, e s a local problen. W e must boa able t o iron https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis out a great m a n y o f these difficulties, M r . Strater. Governor Harding. I think t h e three districts r e - quire special study. Mr. Harrison. W e might have o n e collection agency for these three districts, t o which practically a l l t h e member banks could send their {ftems, j u s t a s they d o now under t h e present s e t up, a n d they could actually collect t h e items probably i n two days. Mr. Strater. W i t h t h e excepticn o f t h e banks o f New York, B o s t o n a n d Philadelphia. Mr. H a r r t s o n . Mr. Strater. I W i t h t h e e x c e p t i o n o f t h e i r h o m e C l b i, cannet quite s e e Governor Harding's point o f the Boston banksusing a i r mail a n d accomplishing t h e s a m e t h i n g a s i f t h e y d e p o s i t e d t h e i r c h e c k s i n the Boston reserve bank, bevause i f that plate leaves a t 6 o'clock a t night i t makes t h e m unavailable f o r u s e until t h e following morning. T h a t i s really neo quicker than train service t e N e w York a n d therefore there i s bound t o b e a less cof one day. Harding correctly, I f I understocd Governor h e said t h e banks o f his district comie, collect o n N e w England cities a s quickly b y sending https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis them t o New York. Gevernor H a r d i n g . New England cities. No, I said w i t h t h e e x c e p t i o n o f Y o u did not criticise our time schedule i n the N e w England states-~ Mr. Strater. N o , t h e committee h a s n e t eriticised any a 8 @ matter o f fact. I t i s j u s t t r y i n g t o discharge its duty b y pointing o u t things a s t h e y are. The Chairman. W h e n does that aernplane g e t back t o Boston? Governor Harding. I do not know, b u t a geod many o f the larger banks i n Boston have b e e n using i t t o a limited extent. Governor Seay. Mr. James mentioned, i n the course of his conversation, t h a t o n e very small banker i n Texas was complaing that the Texas reserve bank, o r the reserve bank o f Dallas, d i d not carry for its member banks t h e s a m e v o l u m e o f f l o a t t h a t c e r t a i n o t h e r r e serve b a n k s c a r r i e d f o r t h e i r member banks. Gevernor Talley. You cannot please everybody of course. I was just about t o s a y that, sco far a s the Dallas bank i s concerned, w e wouid b e willing t o recognize this special condition which y e u have i n these https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 162 three districts, a n d subscribe t o a n y n e w arrangement, without a n y idea that w e ave sacrificing uniformity. The distances i n our district a r e s c great, a n d aprlying the r u i e t h a t t h e m e r e r e m o t e t h e p o i n t t h e l e s s t h e volume, o u r analysis s h o w s t h a t i t would b e cbjection- able t o u s t e ungertake t a route direct i n t o other distriéts, b e c a u s e t h e m a t t e r i s o f s u c h s m a l l c o n s e a u e n c e to us. F o r that reason w e would b e very glad f o r the three districts u p there, o r even including t h e Richmond district, o r any other district, t o work out a plan that would overomme the difficulty. I think Mr. Harriscn said quite a n important thing when h e said that w e could not suppert the principle o f a n tmproved collection system, making comparison with foriel conditions a n d get to the point where t h e present collection system i s not a s efficient a s the other one, without these reserve banks carrying a n encrmous amount o f float. I even g o so fer i n the analysis t o express t h e thevght that chose three districts c o u l d clear these items, c h e c k against each other i r the three districts, a n d settle t h e balances, because t h e y a r e a l l practically equi-distant from t h e s a m e point. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 163 Mr, Herrison. W e would b e satisfied t o have a n amendment c f the law, o r a ruling, o r agreement, t h a t would p e r m i t u s t e s e n d d i r e c t l y t o a n y p o i n t we have over-night train service. t o which A n arbitrary re- striction through district lines prohibits u s from doing that, a n d i t defeats t h e entire pessibility of a perfect o r improved collection system. Y o u people in the bigger districts out West have that solved merely because your gecgraphical, limits a r e s o great. You e a n send direct t e a n y point which i s within overnight t r a i n s a e e f you, b u t w e c a n n o t d e f t merely because o f this a r b i t r a r y barrier. Geverncer Talley. N o t o n l y that, b u t c u r improvement enmes through constant improvement i n the mail services, putting o n new trains, shortening schedules, and all that sort o f thing. Gevernor Bailey. S p e a k i r g o f available exchange, I used t o s h i p a carload o f corn d o w n t o Alabama a n d they would send m e a cashier's check, a n d charge f o r it, and I would send i t back a n d they would s e n d m e a draft on New Orleans a n d charge f o r it, a u d b y the time I get m y money finally i t was t e n days. T h e r e i s more https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 164 difficulty i n getting i t just a s quickly a s w e to under t h e o l d clearing house system, b u t w e exchange better; Governcr Talley. I think Mr. S t r a t e r w i l l b e e r m e o u n t ithe statement that w e have shown a vast improvement i n cur timé schedules i n the last four c r five years. Mr. Strater. I think so, .Geverner Talléy. I think it has b e e n constantly improving. Governor Talley. W h a t i s t h e difference i n princi- pis between t h e N e w York bank sending checks directly inte the New England district-+ (At this point undersecretary Mills e f the Treas~ ury entered t h e Conference r e o m a n d t h e following proceedings w e r e had):~ The Chairman. M r . Mills, a q u e s t i o n c a m e up’ some few minutes a g o which necessizated discussion w i t h the Treasury D e p a r t m e n t 'd n a w e thought w e would tak: ad-vantagef t h a t a n d extend t o y e u o u r customary invita- tion t o address the meeting o n any subject that you have i n mind having t o d o with t a e Treasury Department er r e s e r v e banks. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 165 The q u e s t i o n t h a t a r o s e w a s this. U n d e r t h e s t a t - ute o f the United States, w h i c h date back t o the deys of Alexander Hamilten, n o final payment o f a n eobliga- tion o f the United States i s made anywhere b u t a t the Treasury Department i n Washington. T h a t means t h a t t h e coupons which w e pay, a n d all t h e Treasury checks a n d Warrants a n d s o on, a r e charged t o the Treasury's a c @ count. T h e y are stamped, b u t n o t cancelled, a n d are sent t o Washington for examination. T h e n the charge which 1 s made t o the Treasury's accaunt becomes final. In the case o f loss o r destruction o f a package o f these vouchers, t h e question esrese a s t o whether thet charge against t h e Treasury's account would become final, o r what process would b e followed i n recovering f r o m the Treasury i n t h e a b s e n c e o f t h e vouchers. We have had the subject u p t n New York and worked eut a plan, W e send t h e m cut b y express a n d insure them f o r a theusand dollars. T h e r e a r e copies made of the accounts k e p t i n the bank, sco that everything is identifiable b y symbol, a n d s o forth, a n d w e have never had any trovble. T h e r e may be some question ine volved. I think a bend i s t a k e n t o c e v e r p o s s i b l e https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 166 loss, a n d w e p a y a very s m a l l premium. S o m e o f the reserve b a n k s a r e i n doubt a s t o w h e t h e r e w are proe tected i n the event o f a train burning u p and a complete destruction o f all t h e evidence o f payment. I suggested t a Governor Talley, w h o raised t h e questicn,, that h e might t a k e i t u p with the proper cfficers of the Treasury while h e i s here, ascertain their v i e w about it, and make a repcrt. Undersecretary Mills. I think Mr. H a n d i s the best man. The question has never arisen s o far as I know. fhe Chairman. W e had one case i n New York where the cancelled papers c r mutilated papers o r whatever it wasy amounting t o the neminal value o f a million dollars, i n a mail. bag, was stolen. T h e bag was slft Open a n d dropped e u t o f the mail c a r alengside t h e track. I do not know h o w i t worked cut, b u t I a m certain that w e d i d n e t l o s e a n y m o n e y i n censegquence o f that. Undersecretary tills. to m y attenticn since I T h e question h a s never come have b e e n i n the department, but I will reserve that t e look it up and get Mr.Hand to talk i t o v e r w i t h Gevernor Telley before h e leaves, if that i s satisfactory. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Oe Governor Bailey. I would like t o hear t h e report o n that, b e c a u s e w e a r e t n t h e s a m e f i x t n Kansas C i t y . Undersecretary Mills. A l l right, I will s e e that 4 t goes t o all o f the Governors. The Chairman. M r . Mills, a r e t h e r e a n y matters w i t h relation t o the Treasury a n d the reserve banks t h a t y o u would l i k e t o t a k e u p now? Undersecretary Mills. I do not k n o w o f anything. The Cheirman. Anything i n connection w i t h t h e pending financing? Undersecretary. N o , I de net k n o w o f anything that I consider o f sufficient importance t o warrant m e i n taking up y o u r time. Governor Bailey. W h a t about the new currency? Undersecretary Mills. T h e n e w currency i s coming along. They are meeting with any number o f mechanical aifficulties, b u t they are gradually cvercoming them and we hope t o begin issuing t h e n e w one dollar bills some- time during the course cf the next fiscal year, I should say about January 1 , 1929. Governor Geery. W i l l i t be pessible o r the desire ef the Treasury t o redeem fit-for-use bills e f the o l d https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 168 promptly, o r will t h e y b e wern o u t first? Undersecretary Mills. N o , w e will redeem them a s as w e can, o n c e w e have a n adequate supply o n of n e w ones. The Chairman. I n connection w i t h t h e plan o f reducing t h e size o f the currency, I American Bankers! understecd t h e Association passed a resolution b a s e d on the rettrement o f national b a n k notes. I s that a fact,Gevernor Talley? Gevernor Talley. I did not know about it. The Chairman. T h e r e was a n account o f i t i n cne o f the newspapers. Undersecretary Mills. I Governor T a l l e y . I think I s a w that. usually a t t e n d t h e A . B . A . sessions, l i k e everyone else, i n the hetel lobbies, a n d read the decisions afterwards. The Chairman. I think t h e question m a y come up. I do not think i t is the general understanding that w e are t o reduce t h e size o f national b a n k notes. Undersecretary ijills. Streng, I T h a t i s e a question, G o v e r n o r d o net t h i n k w e went t o raise a t this time, as t o what w e are ultimately going t e de with the https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 169 naticnal b a n k notes. 1950. I t really will n o t b e a n issue until W e are not i n position really t o retire t h e m until 1930, and a premature discussion might very well put t h e whele question i n t o pelitics. I assume a good many c f the national banks will g e t very busy~-they a r e getting b u s y now. W e d o not want t e see a political issue m a d e o f t h e question. I think w e c a n g o a l o n g f o r a considerable t i m e with t h e national b a n k notes o f the present size, e v e n i f w e have a smaller currency. I do not think i t would tend t o increase their popularity, but that 4 s something for time t o develop. Treasury i s concerned I S o fer a s the think w e are prepared t o g o along and work out our small currency program and leave the national bank currency i n a class b y itself. while w e c a n s e c w h e t h e r S h e r e t e a I n the mean- solution o f t h e m e - chanical end of {t, and we will have an opportunity to judge public sentiment o n the question o f retirement in the course o f the next t w o a n d a half years. Governor Harding. D e y o u t h i n k t h e t i m e i s aprroach- ing when i t wiil b e advisable t o put Section 1 8 o f the Act into operation, b y offering these banks t o take their b o n d s ? https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 170 The Chairman. i t i s approaching. T h e twos have gone up. Governer Harding. U f course that would o n l y take care o f 2 5 million. The Chairman. A n d t h e threes h a v e also gone un, I think. Governor Harding. I think i f meney ever gets t o the point w h e r e y o u c a n p u t t h a t s e c t i o n b a c k i n t o e p e r a tion t h a t y o u w i l l g e t a good m a n y v o l u n t a r y cffers. Undersecretary Mills. Yes, but i t will b e a very slow process t e work i t out a t 2 5 million a year. The Chairman. W e are limited t o twenty years, and that will retire 5 0 0 million. Governor Harding. I t would o n l y retire about 1 5 0 million now. The Chairman. T h a t i s all. Governor Harding. B u t still i t would b e a step i n the right direction, Governor Norris. Mr. Secretary, a r e y o u personally femiliar w i t h this reserve s t o c k o f n o w one dollar silver certificates t h a t a r e being establihed a t the reserve banks? https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Undersecretary wills. Yes. Governor Norris. . plaint h a d a gocd deal o f com- i n o u r o f f i c e c b o u t that. T h e y understocd t h a t it was t o b e really a reserve stock, b u t a s a matter o f fact, i n September t h e r e w e r e t w e n t y o n e withdrawals, and i n the first twenty four days o f Ucteber there were fifteen withdrawals, and, o w i n g t o the directions a s t e how i t shall b e handled when n e w netes a r e received, it is necessary t c have a n assistant Federal reserve agent, an a s s i s t a r t c a s h i e r , and a n auditor, a n d three extra employees t o open the pouches a n d witness t h e receipt cf the money. I n addition e a c h package must b e inspected in the case o f withdrawal i n the presence o f the same number o f persong mentioned. made daily, a n d therefere W i t h d r a w a l s a r e generally a n certain d a y s t h a t shipments are received, b o t h i n and c u t transactions a r e necessary. Now, I be p o s s i b l e want t e ask the question whether i t would n o t t e make t h a t a real r e s e r v e s t o c k f r o m w h i c h withdrawals w e r e o n l y t o b e m a d e i n c a s e e f a n emergency, instead o f deity. Undersecretary Mills. T h a t w a s t h e c r i g i n a l fintene tion, a n d that i s w h y I would l i k e t e lock inte it. Will https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 172 yeu l e t m e h a v e y o u r memorandum, G o v e r n o r N e r r i s ? Governor Norris. I Governor Seay. once. will b e very glad to. I n Richmond w e have t h e same experi- I t i s practically a Mr. Harrison. continuous p e r f o r m a n c e . I s n ' t i t due t o the fact, o r a t least i s not this o n e o f the reasens f c r it, that t h e soealled r e s e r v e s t o c k w a s r e a l l y e t build u p t h e supply in t h e t w e l v e r e s e r v e b a n k s o f u n i s s u e d n o t e s , w h i c h would b e issued f r o m the reserve banks a n d not become a n outstanding liability o f the Government until fissued b y the reserve banks, a n d thereby saving float, w h i c h would be quite considerable i n amount between t h e banks a n d the T r e e s u r y ? Undersecretary Mills. That was one feature o f it. Mr. Harrisen. I did net think you had gat to the point where y o u had heped t e build u p a reserve s t o c k in reserve banks. I theught that was the prime feature o f it a t the time. Undersecretary. Mills.. No, t h a t was o n l y one o f the features. because i t was alse the. question c f space which was invelved. such s i t u a t i o n W e h a d not certemplated a n y a s Governor Norris h a s described. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis L735 Mr. Harrison. York. W e have t h e same difficulty i n New I t requires t h e services o f two o f our officers on a n average o f four hours a day, each, t o handle it, but that situation i s no doubt due t e the fact that the Treasury, i n issuing currency, hes got t o issue the lowest number first, t h e lewest seria] number, a n d t h e result i s that i f y e u d e have a steck there o f a n y kind there i s beund t e b e a turnover i n i t owing t o that difficulty i n having t o issue t h e lewest serial number first. Undersecretary i l l s . T h a t m a y b e the answer t e it. The Chairman. I s there a n y further d i s c u s s i o n o f this currency m a t t e r ? Governor Bailey. I would like t e know what our cbligation i s t o t h e T r e a s u r y w h e n w e h a v e p a i d t h e s e v o u c h - ers, stamped them paid, a n d put them i n the express office a n d sent t h e m back. T h a t i s where o u r connection with t h e thing stops. Undersecretary Mills. T h a t w a s t h e question Governor Talley raised, w a s i t not? Governor Talley. Yes. Governor Norris. cashed t h e m . Y o u h a v e n e t p a i d them; y o u have https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 174 The Chairman. Gentlemen, i f there i s n o further discussion e f this matter, t h e r e f s c n e topic o n the program that I am geing t o ask tir. Harrisen t e pring up while Mr.Mills i s here. T h a t 4 s III, sub-topic B , Treasury practice i n making purchases o f geld a t mints and assay offices. T h a t i s especially Mr. Harrisen's topic. III. C o i n , Currency a n d Circulation. B. T r e a s u r y practice i n making purchases of gold a t Mints a n d Assay Offices. Mr. Harrison. F o r a period c f two o r three years, perhaps longer, w e have been discussing tnformally with officials o f the Treasury t h e practice o f the Treasury ‘comparison w i t h other Department i n making purchases c f gold i n / g o l d centers, such a s London, Berlin, Amsterdam, a n d soa forth. A s we all know, t h e Treasury has,in buying gold, p a i d mint parity for the gold and made a n immediate advance o f 98 per cent o f thot mint parity when the gold i s deposited, paying t h e final 2 per cent w h e n t h e final report o f assay i s received. T h e result c f the difference i n practice at these centers h a s b e e n that t h e United States pays more f c r gold than a n y other the world. g o l d market i n T h i s practice w a s first started a w a y back i n https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis L75 1878, w h e n there was perhaps a real reason f o r t h e Treasury making t h e immediate advance, a n d that was t o enceurage deposits o f gold a t the Treasury a n d not t o discourage it. T h e Secretary w a s given authority, under the law,--while net a mandatory one--he was given permissive autherfity under t h e l e w t o make advances o f 98 per cent for the full face value ef the gold tmmediately upon receipt o f the depasit. New, a s you all know, w e have i n the United States over h a l f o f t h e w o r l d ' s m o n e t a r y s u p p l y o f gold. the moment w e are n o t desirous, certainly, A t c f creating any artificial encecuragement o f the flew o f gold i n this way, a n d i t has occurred t c us, therefore, t h a t there might b e seme advantage, naticnally and internationally, i f w e could edapt c u r practice somewhat to the practice o f other markets c f the world, a n d not make immediate advances, b u t ewait final assay. soa that t h e result would b e equivalent t e making a dis- count } rom t h e full face value o f the gold purchased b y the Treasury. In Lendon, a s y o u perheps e 1 1 know, t h e discount that t h e Bank c f England pays i s equivalent t o one e i g h t https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis E76 per cent c f the mint parity. T h a t discount, w h i c h they make i n their buying price, w a s designed t o cover t h e less o f interest t h a t would b e suffered b y a depositor if heshould take his gold t e the Reyal Mint, wait for the gold t o b e minted, a n d get his money b a c k i n geld. The same practice prevails i n other markets, a n d I have the figures. I n The Netherlands, t h e ciscount, in- stead e f being . 1 6 , 1 8 . 3 5 per cents i n Switzerland it is. . 4 3 ; d n Bertin, 1t¢ is . @ 1 , a n d i n the United States t h e d i s c o u n t i s ..013, o r a p p r o x i m a t e l y o n e ‘tenth ef what i t i s i n Londen, which i s the largest o f our gold markets. Now, under t h e law, w e feel that i t i s competent for t h e Treasury t o issue a defer t h e t r a d v a n c e s f o r a regulatien whereby t h e y will period o f f i v e t o t e n days, or perhaps m a k e n e advance a t all o n acceunt o f gold deposited, a n d make final payrent w h e n t h e final a s s a y is néceived.oniy. T h e r e a r e a number e f disadvant:ges te that, peliticel a n d etherwise, b u t that i s the thought in the minds o f all o f u s whe have censidered it. W e have estimated that the demestic production ef gold i n this country i s appreximetely $50,000,000 annually. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis L77 All o f those domestic producers o f geld would ratse a howl immediately 1 f there was a regulation o r law equivalent t o a discount e f . 1 6 per cent, o r a n y other discount o n the gold that t h e y produced. T h e question came up, then, whether i t might n e t b e possible t o give up the practice o f making immediate advances o n enly the coin or imported menetary gold, and whether i f that were done there would b e a n y legitimate complaint by anybody. T h e only enes that could preperly complain would perhaps b e the importers o f gold te this country, but they are merely acting a s a g e n t s e t bring the gold in because o f the fact that i t i s profitable t o them t o do s o at a certain given peintin the exchange rates. If we changed that practice the result might merely be that w e would lower the gold export peints fer those various fereign markets. I and I think t h e e t h e r s do not believe myself, o f u s f e e l t h e s a m e way, t h a t there would b e eny real crmplaint e n the part o f the fereigners generally, i f w e should change o u r practice, because s u c h things a s w e hear n e w about o u r gold policy are that w e are hoarding the gold o f the world rather t h e n t h e fact that w e are repelling it, s o that https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 178 a change c f p r a c t i c e than g i v e f u e l , a t this t i m e might answer, r a t h e r t e some o f t h e discussicns t h a t w e hear abroad about o u r gold practice. Governor Seay. I s there a similar practice i n Canada, M r . H a r r i s o n ? Mr. Harrison. I d o net know what t h e practice i n Canada amounts toe, Geverner Seay. W e might well l o c k inte that. To p u t i t a little d i f f e r e n t l y , s t e r l i n g e x c h a n g e has g o t t o g a down only a point a n d a half before i t reaches the gold export point from Lendon, The Chairman. B e l o w mint-pearity, y o u mean? Mr. Harrisen. B e l o w mint-parity, y e s . R e f c r e we lese gold t o Lendon sterling exchange has get t o g o up twice that amount, o r pretty nearly three cents, a n d while s e m e c f t h a t d i s p a r i t y i s d u e t o d i f f e r e n c e i n freight rates between eastern a n d western shipments, most o f i t i s due t e the fact that w e have this practtee o f m a k i n g i m m e d i a t e a d v a n c e s o n account o f geld peught. The Chairman. T h e r e i s e n e paint also, a n d that 43 t h a t i f t h e T r e a s u r y s h e u l d d e c i d e t o abandon t h e https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis L179 practice o f making c a s h advance o f 9 8 per cent, guarr anteed value c f the gold, t h e Federal reserve banks would t h e n b e i n a position t o step i n and t o make a bank price f o r cash, p a y cash f o r that gold, w h i c h would send all the gold t o the reserve banks, because they weuld b e the cash market. I t happens i n all the ether markets t h e t t h e gold gees t o the cash custcmer, the bank c f issue, a n d that i s now t h e statutory practice in England. Mr. Harrisen, A survey o f the different mints and a s s a y offices s h o w s t h a t i n N e w Y e r k t h e f i n a l a s s a y is ysually received abeut t e n days after t h e deposit. That i s a much len,er peried t h a n i s the case j n any other mint o r assay office, a n d t h e practical effect o f this i s that t h e discount which a depositor would have to suffer would b e greater i n New York than anywhere else. C o n v e r s e l y , t h e contro! w h i c h t h e reserve b a n k would have over the monetary price o f gold would b e greater i n New Yerk, because the discount i s greater. We d i d n o t f i n d t h a t t h i s d i f f e r e n c e i n the vractice different m i n t s w o u l d h a v e a n y m a t e r i a l e f f e c t u p o n what w e are desiring t e accomplish, because i f the at https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 180 practice i s limited t o the menetary g e l d i t will b e practically iimited t e New York, such a big percentage i n any event, because o f the imported g c l d comes i n t o New York, The Chairman. T h e Treasury, some interest b y this, b u t I amount te. e f course, w o u l d save do net k n e w what i t would I f this practice h a d been established scme years a g o with t h e geld that w a s coming in, i t would have saved a great d e a l o f interest. T h e r e was 2 lot o f money invested i n geld that w a s n o t available tec the general fund. Mr.Harrison. I n effect, i n t h e past, a l l g e l d c o m i n g inte t h e ceuntry hes b e e n put into t h e melting p o t because there was n e real market f e r i t cther t h a n t h e assay effices a n d t h e mint. T h a t was done neo matter what kind o f gold i t wes, e v e n i f i t was perfectly satisfactory g o l d b a r s o f t h e b e s t a s s a y e r s a b r o a d . T h e goid would b e destroyed, remelted i n Up,ited States mints. Just t o show you how sensitive the market is, twe years ago, when w e went i n t o t h e market f o r foreign bars, possibly a l l o f t h e b a r s t h a t c a m e t e N e w Y o r k w e r e s o l d to u s rather t h a n t o the assey office, because t h e https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Lol final t w o per cent payment, w h i c h was deferred t e n days in t h e a s s a y office, w a s d e f e r r e d o n l y t w e d a y s i n t h e reserve bank, pending t h e weighing o f the bars that were bought. T h e differénce b e t w e e n t h e t w e days a n d t e n days i n the final twe per cent has breught u s the gold rather than bringing i t t o the assayers. T h a t plus the fact a l s e t h a t t h e member banks w e r e v e r y d a n tn cai o f cooperating with us fn any event. The Chairman. I n commenting o n this proposal t h e twe things that stand cut i n my mind sbout i t are, first, the matter Mr.Harrison mentioned a s t o domestic protection. There has b e e n s o much discussion e f the plight o f these people that i t would hardly b e advisable t o adopt a regulation which would penalize them i n the price they get for thetr gold. T h e second i s i t means a reduction i n the price that w e pay fer gold i n this country o f maybe one-eighth o f one per cent. That i s the way i t figures eut roughly. Mr. Harrison. Yes. I t would be .16, or about oneeighth of one per cent. The Cheirman. I t would naturally create comment abroad that w e were doing something that was quite https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ive unusual. S o m e of the nations have deliberately reduced t h e price e f gold b y 5 per cent. N o w Switzer- land has p u t a n embargo o n the impertation o f geld, a n d we are taking it. Mr. Harrison. T h e r e i s another important considera- tion, a n d t h a t i s this, t h a t i f w e p u t a handicap on gold bars, o r make t h e m less valuable i n the geld market, net there is geing te be a tendency/tc withdraw the bars ‘for export a n d expert U . S . geld coin, a n d that i s going t o be a more e x p e n s i v e p r e c e s s t h a n m a k i n g bars. T h e Bank ef England h a s been able t o centrol that largely because they would pay out light weight coin. W h e n I say"light weight” I mean within the limit of telerance, but abraded CON. W e could follow t h e game practice w e r e i t not fer the fact that w e haven't a n y e l d c i r c u l a t @ ® coin. Mest o f t h e c e i n t h a t w e h a v e g o t n o w i s n e w coin. proposition h a s b e e n p r e s e n t e d T h e t e u s very concretely in an order f r o m Brazil f o r a n expert c f some thirty s i x millions i n cein, a n d w e have o n l y twenty millien i n circulat®@ c o i n that w e can pay out and w e have get t o pey cut t h e balance i n new coin, whether w e want t o Air W A G . https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 183 The Chairman. T h e circulated c c i n that w e have had experience shows a n abrasion value o f abcut cne- fourth o f one per cent and some three-eights. T h a t i s abeut d o u b l e t h e m i n t r e d u c t i o n i n the price c f gold a n d that would overcome t h e disadvantage a n d stimulate t h e taking o f bars rather than the gold coin. B u t we haven't g o t t h e a b r a d e d c o i n t o p a y out. Gevernor Seay. Y e u furnish t h e circulated, coin a t face value? The Chairman. Oh, yes, a s leng a s i t is within onehalf c f ene per cent, w h i c h i s the limit o f tolerance. Mr. Harrison. T h e Bank of England used to grade their c i r c u l a t i e d n i o c inte varieus groups within che limit c f tolerance, depending u p e n whether t h e y wanted to lose o r keep gold, a n d depending upen that, they would p a y c u t l i g h t g o l d o r h e a v y g e l d accerdingly. The Chairman. there. T h e y understand t h e prepdsition T h e y h a d tons o f abraded c o i n o v e r i n those countries where t h e y have t h e m i n circulation, s u c h a s Germany. I imagine they have all got ample supplies. Hereafter, w h e n t h e y s e n d t h e sbraded e o s n o v e r here, will k e e p i t a n d s e n d i t b a c k t e trem. we https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 184 ip. Harrison. E v e n with i t s disadvantages, t h e r e 13 s o much t a b e said f e r this program, i f i t i s feasible, that w e are mest hepeful t h e t i t will b e peussinle f o r the Treasury t o work cut, perhaps n e t this precise ProO= grem, b u t some program that will have seme n e t effect c f reducing t h e price that w e are n e w paying f o r geld i n competition w i t h all the rest o f the world. I instance, t h a t a know, f o r goed part o f the gold that w e got early last spring a n d late last winter f r o m France, w o u l d n o t have come t c this country were i t net f e r t h e fact that we paid more than a n y cther market, a n d there was a shipment c f practically 130,900,000. involved, The Chairman, A s Mr. Herrison says, t h i s matter h a s ween d i s c u s s e d f o r a l o n g time, a n d t h e f e e l i n g h a s b e e n thet t h e r e w e r e sec m a n y e l e m e n t s i n v e l v e d i n tis that i t might b e unwise f o r t h e Treasury t e issue a new regula+ tien out o f a clear sky, a n d s o w e have preposed t h e prepapingcf a very careful article, describing t h e whele problem hypcthetically, h a v e i t published semewhere where i t weuld heve wide circulstion, a n d s e e what t h e publie r e a c t i c n w a s h e r e a n d abroad, M r . Willis h a s suggested that t h e article sheulc appear i n the Bulletin. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 185 That struck m e a t the time a s a gard plan. reflection, however, O n further w e are l e d t o belteve t n New York that t h a t w o u l d m a k e f t a p p e a r a s t h e u g h t t w a s r e a l l y @ propesal o f the Gevernment b e i n g p u t c u t b y the Fed4 eral reserve board, a n d w e believe w e should secure t h e publication o f i t i n some magazine o r publication with very wide biseudatien ameng people w h o study these things and p r e b a b l y g e t a to i t a t all. better r e a c t i o n , w i t h e u t a n y k i c k b a c k T h a t w a s t h e l a s t w o r d i n N e w York, as I remember it. Mr. Herrisen, I have f e l t t h a t w a y m y s e l f v e r y strongly a n d I think the others f e e l that. The Chairman. D r . Burgess feels that way. H e w d o you feel about i t now, Mr. Mills? Undersecretary Mills. I have n e t felt that i t weuld be quite a s much cemmented o n i n this ccuntrysThe Chairman. I t will b e abread, a great deal, a n d it might b e eenstrued a s a possible difference between the T r e s s u r y a n d t h e r e s e r v e S v s t e m , fully y e u w o r d t h e article. n o m a t t e r h o w care- I t will b e very difficult get a c r e s s w h a t w e h a v e i n m i d g e t t i n g a c r e s s w i t h o u t giving t h e i m p r e s s i o n t h a t w e a r e p t o u t s w i t h t h e te https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Treasury. Undersecretary Mills. T h e Treasury Department its whelly symoathetic w i t h the idea, b u t w e did feel that inasmuch a s t h e m a t t e r d i d n o t p r i m a r i l y c o n c e r n t h e Treasury, b u t rather c l e a r l y c a m e w i t h i n t h e jurisdict- ien c f the Federal Reserve System, t h a t i t would b e better if the suggestion emanated f r o m the Beard i n the form of a suggestion, s i m p l y f e r discussion, a n d then s e e what the public reaction weuld be. I de not think i t i s a matter o f great consequence whether i t appears i n the Bulletin o r i n some cther publication that will fnsure public discussion. fault i n it. W e have n e t been able t o see a n y I t looks t e u s a s a whelly sound proposi- tion. The Chairman. T h e r e has b e e n seme complaint abroad that t h e r e i s n e gquetation f e r g o l d i n t h e U n i t e d S t a t e s in t h e f o r e i g n markets. W h a t i s meant y y that i s t h e fact that t h e whele werld lecks e t the Lenden market where gnid i s seld publicly. E v e r y Henday c r Tuesday all geld which gees t o Lenden i s seld a t what i s equivalent t e a n auction a t t h e Rethchilds! C o m p a n y offices. There t h e bidders f o r geld make cffers o f the bank's https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 187 statutory price, w h i c a i s 8 4 Shillings 1 0 pence, f o r a fine ounce, p l u s a n y premium that t h e y are willing t o pay. T h e gold which is. not sold ta be taken to India, Germany, o r wherever i t 1s wanted, o r taken b y the manufacturer t o manufacture i n a n industrial art, goes auto- matically te the Bank of England at its statutory price of 84 shillings and 1 0 pence. W h e n the bank takes the gold t e t h e mint, t h e c o i n t u r n e d b a c k i n sovereigns te the bank a t the rate o f 8 4 shillings a n d 1 1 ha'pennies in gold coin, a difference o f cone and a half points, which is the equivalent o f the interest yest during the time that t h e c o i n i s m a n u f a c t u r e d , and a difference c f that same character, pessibly i n exactly t h e same ameunt, which this plan would produce i n our practice, would result, a n d then i f a n y buyer e f gold wanted t o buy geld We might i n the course e f time develop a practice i n our market semewhat similar t o what preveils ebroad. Mr. Harrisen. I n that connection I think i t i s worth mentioning, teo, that i t hes been @ great help in the situation t o have the Treasury remove the bar charge e n the gold seld b y the Treasury. W e never h a d eny basis eon which t e t r y t e persuade t h e foreign buyers https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 188 of our gold t o take bars instead o f coin when w e h a a an extra charge o n the bars; a n d while w e are n o t making very much progress now, w e ere making some progress i n getting t h e m t o take bars rather t h a n coin, a n d w e hope to make a great deal mere progress a s time gees along. The Chairman. I n that cennecticn, what i s the stetus ef the supply c f geld cein, Mr. Harrisen? Mr. Herrisen. eoncerned I t i s very bad, s e far a s w e are i n N e w York; i t i s weak. L o o k i n g at it nationally, t h e situaticn i s very much better t h a n i t was t w o yeers age. T h e Treasury h a s minted, I sheuld i m - agine, i n that time aporoximately $200,000,000 i n gold coin, a n d while most cfthoeir coin i s n o w used a s t h e base for certificate issues, nevertheless the coin is here and is available i f we have te have i t qn an emergency, either b y some method of reducing the ecin base ageinst the certificates o r a pelicy of retiring certificates i n order t o release t h e gold coin. T h e ameunt o f excess c e i n i n t h e country, o v e r a n d a b o v e t h e b a s e f o r certificates, f s not nearly a s large a s w e would like t o see it, a n d i n the N e w Yerk bank, while w e were able t o build eur supply o f colin up t e about $80,000,000 a https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis J&9 shert while age, nevertheless withdrawals c f $31,000,000 for the Argentine and new $36,000,000 for Brazil, has made c u r pesition very much weaker again, a n d I do not believe that there will b e mere t h a n about thirty-five or ferty millions i n coin left i n New Yerk, including what i s i n the assay office a n d the Federal reserve benk, after this shipment i s made t o Brazil. I have j u s t r e c e i v e d a cable, w h i c h w a s j u s t h a n d e d to me, that w e would b e called upon next w e e k for fifteen millien f e r Poland. I here ‘and expect that Peland will take bars. O f course they have the right t c take coin, but with these immense balances t h a t w e heve o f the banks e f issue i n New York, seme o f which banks may want ecin and expect u s t e ship coin, o u r position i s not a bit tee streng and i n my epinicn i t is quite dangerously weak, The Chairman. W e have these obligations sgainst us, a n d anyone abroad c a n demand coin, a n d legally de- mand it. suppese, a I f these fereign banks o f issue which have, I billion dollars e f demands u p e n u s sheuld suddenly decide that t h e y want t o take their geld, o r any considerable p a r t o f it, t h e y heve a perfect right https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 130 ta p r e s e n t t h e i r d e m a n d t o t h e F e d e r a l r e s e r v e b a n k and a s k fer coin, a n d t h e coin dre3 n e t exist t o meet that demand. Governor Fancher. M a y I gnquire i n what f o r m y e u ear-mark this gold? Mr. Harrison, T h e r e i s a small part c f gold that we have ear-marked i n ccin, b u t t h e great b u l k o f i t i s fin bars. A l l t h e eeremarks w e a r e making a t t h e pres- ent time a r e i n bars. The Chairman. I de not think t h e situation would be quite a s bad a s i t appears f r o m t h e figures, because the mint c a n turn e u t about fifty milliens a month, a n d there i s a limit t o the shipping facilities employed i n carrying t h e gold, t e any one peint, certainly. we c o u l d k e e p u p w i t h t h e demand, While i t might b e v e r y i n - cenvenient a n d pessibly embarrassing. Mr. Harrison. I n this connection I think i t would be interesting t o censider, f r o m the System print c f view, t h e status o f our gold reserve, W e have approxi+ mately three billion dollers i n reserve. W e speak o f a System reserve ratio o f around 7 5 t c 8 0 per cent. a matter o f actual f a c t t h e p e r c e n t i g e A s e f payable g o l d https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Les reserve i s very, v e r y small, a n d o n the last figures we have i t i s about 2 0 per cence, speaking roughly. Governor Bailey. T h e rest e f i t i s i n bars? Mr. Harrison. T h e rest o f i t i s i n bars, a n d i n ten thousand dellar gold certificates, which w e d o net consider i n the class o f payable g o l d reserve. I give t h e figures f o r i n d i v i d u a l b a n k s , b u t thet worth while. T h e a v e r a g e f o r t h e System, i s not t h e percentage of payable g o l d reserve f o r t h e whele System, last figures, w a s 19.5 p e r cent. can o n the T h e compesiticn o f the gold reserve f o r t h e System a s a whole i s this: 6 5 per cent i s i n the gold fund, 8 per cent i s i n Frllien i n vaults o f the reserve banks, & per cent i s i n coin, a n d 19 per cent i s i n geld certificates. T h e vercentage in the gold fund t s net a s great a s i t was two years age, I think t h e r e h a s b e e n a considerable i m p r e v e m e n t in converting from the gold fund t o the vaults o f the banks i n the past eighteen menths. W e ourselves have at different times taken appreximately 150 t o 200 million of gold bars from the ssay office and taken them t o our vaults, and reduced eur geld fund acecrdingly. While w e d e n a t f e e l t h a t t h e s a m e r e c e s s i t y e x i s t s https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 192 fer t h e o t h e r r e s e r v e b a n k s reserve i n t o vault reserves, t e convert t h e i r g o l d f u n d i t i s true nevertheless that s o m e o f t h e m a r e v e r y l o w i n vault r e s e r v e a n d might, j u s t a s a matter o f recerd, consider building up their bullion c f coin reserve. A s a matter o f fact, the weak peint o f attack a t the moment i s the N e w York bank a s far a s gold c o i n reserve i s concerned. Geverner Wellbern. I should think that t h e foreign governments w o u l d p r e f e r b a r s t e ccin. The Chairman. Unfortunately t h e y d o nat, because they enticipate t h e pessibility e f having toe shift i t back here. Governor Fancher. O u r Beard started ebout t w e years ago t o increase our supply c f coin u p t e #25,00C,000, but w e haven't b e e n a b l e t o g e t a n y c f it, s o t e speak. ‘The Chaizman.. A n c t h e r unfertunate situetion abeut the geld settlement fund, especially, 48s the very high percentage o f cur reserve i n that fund, w h i c h reduces the properticn c f geld available f o r expert i n case a heavy demand arcse, because while i t i s a part o f the reserve w e ceculd net take i t out a s leng a s w e maintain so m u c h o f i t i n t h e s e t t l e m e n t fur.d. A t times w e have https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 193 debated i n New Yerk whether i t might n o t later b e desir- able t o have n e geld settlemens fuiad at all, but have settlements between t h e Federal reserve banks effected by b e c k entries, w h i c h c o u l d v e r y r e a d i l y b e dene, a n d some regular methed devised f o r dressing t h e reserve conditien b y shipments o f gcld that ultimately became necessary between t h e reserve banks, c u r shipments ef certificates, w h i c h e f course would b e much better. Mr. Harrison. S i n c e s l l e f the reserve banks have their n e w buildings a n d t h e mest impreved f o r m c f vaults, from the viewpeint c f naticnal interest w e have censidered the question c f whether i t i s necessary t c have over three billicn dollars e f geld i n ene place, a s is now t h e case, W h i l e w e have n o ceubt a t all that these vaults i n which the three billicn is new put are the best and mest adequate kind c f vaults, nevertheless, i f it is feasible, i t might b e a wise thing t e distribute seme e f thet metallic gold ameng cther vaults, which are at least equal ter, if net better, than the enes i n w h i c h i t i s n o w located. A few moments a g o I mentioned, i n discussing t h e pregress that has been made b y the Treasury i n building https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 194 up their steck o f gold coin reserve, w h i c h they have dene quite considerably i n the last year, t h a t there has b e e n a large imprevement e v e r what t h e situaticn was a t that time, just received, I n reviewing t h e statement I have o f November 1 , f r o m the Treasury, I that t h e i m p r o v e m e n t i s e v e n m u c h better t h a n I indicated i n talking t e the Conference a find had few moments ago, a n d i n d e e d b e t t e r t h a n I myself t h e u g h t i t was when I was discussing it. : £ e c e r d i n g t e the cal- culations here, t h e ameunt c f gold certificates cout- standing i s $1,613,000. T h e tetal amount c f gold coin in the Treasury i s $692,900,000, which weuld make a n excess o v e r t h e base required f e r certificates o f $160,000,000. W h i l e , therefore, I pictured a very gloomy situatien i n New York, i t - i s chiefly geographical,and eculd b e quickly remedied b y shipments f r e m t h e mint at PRhitadelvnia, w h e r e t h e b e t t e r p a r t e f t h i s g o l d new .exists. O n e o f the influences t h a t perhaps h a s contributed t o m y f r a m e o f m i n d a b o u t i t h a s b e e n t h e fact that t h e Treasury has h a d serious difficulty i n getting s u f f i c i e n t a p p r o p r i a t i o n s about, t e move t h e g e l d and in t r y i n g o t suppert t h e c e n t e n t i o n t h a t https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 195 it i s a Treasury expense rather t h a n a reserve b a n k expense w e h a v e c e n s i d e r e d perable e b s t a c l e t e getting i t a t t i n e s a n almost i n s u 6. B u t bhetaute p u r e l y a n internal preposition between u s and the Treasury. between t h e U n i t e d S t a t e s a n d f o r e i g n b u y e r s A s o f geld coin, semehew, s o m e way, e v e n i f w e have t o p a y the ex- penses ofrselves i n getting the coin, elther i n PhilaCelphia o r N e w York the cein i s abetlable new, t e the amount c f $160,000,090 excess. The Chairmen. I s there anything further w e wish t o take u p before Unde: secretary Mills? I f net, w e are very much cbliged t e you, Mr. Ilills. Undersecretary iiills. Thank y e u very much, gentlemen. Governor Talley, venience i f you will come i n a t yrur con- w e w i l l s e e w h a t w e c a n f i n d cut. I a m taking Governor Nerris! memorandum with me. (Undersecretary Mills thereupon left the Cenference room, and the preceedings continued a s fellews): The Chairman. N o w , Mr. Strater, w e are back t o your repert, a n d w e were discussing this question c f combining t h e t h r e e d i s t r i c t s Philadelphia. c f Boston, N e w York a n d https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 196 Geverner Talley. M r . Chairmen, I was i n the midst of a n o b s e r v a t i o n w h e n M r .Mglls c a m e i n . I any d i f f e r e n c e cannot s e e i n principle b e t w e e n t h e F e d e r a l r e s e r v e bank sending direct t e a member bank f n another district and a member b a n k i n another district sending direct t o another Federal reserve bank. I de net s e e where y o u have t e have a n y amendment t o the a c t t e permit sending between districts a s y e u might desire. Mr. Harrison W e have always assumed that w e have had legal autherity t o send t o the bank i n opPringTield, for instance, providcec t h e Federal Reserve B a n k o f Boston would authorize u s t e use a devble erdorsement stamp. I knew there a r e certain objections, double e n d o r s e m e n t s t a m p , i n principle, t o this b u t t h e y a r e i n u s e already, and I understand s o m e o f the reserve banks authorize their o w n member banks t c use t h e endorsement stamp, a n d have i n the past authorized them t e use the double endersement, including t h e Federal reserve b a n k endorsement. I f , f o r instance, w e have authority; from the Federal Reserve Bank o f Boston a s their agent, i f you will, t o send items direct t e a bank i n Springfield, Mass., a n d have remittance either t r Boston o r N e w York https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis “ funds a s t h e y Cheese, I think t h e r e c o u l d b e neo legal obstacle t o our verking i t that way. Indeed, i t already has been dene i n the past a n d i s being done n e w i n some districts, although t e « limited extent only. Geverner Seay. That is, sending yeur cwn checks o r checks received frem yeur o w n member banks. T h e sericus objecticn would come from the member bank, a s I take it, which might b e oppesed t o direct sendings because t h e checks w o u l d r e a c h t h e m o n e d a y sconer, Mr. Harrisen. T h e a n s w e r w e u l d b e this: p e r h a p s the greatest bulk or their own items that they are sending to the reserve banks are en the same scaedulegna that they are n o w receiving o n e d a y earlier credit, o n the bulk e f their o w n collections f o r which they tnemselves are suffering a n offset, o r would b e suffering a n offset by p a y i n g e n e d a y earlier. Governer Norris. B u t suppose i t is not a member bank, Mr. Harrison. I think fhe majority c f the nenemember banks g e t t h e benefit e f thet o n e d a y saving o n e w a y o r another. Governor Seay. I de net think a s a that t h e r e e x i s t s t h a t right. matter c f law https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 198 Mr. Harrison. Y o u d e net think what, Gevernor Seay? Gevernor Seay. T h a t a s a matter o f fact a Federal reserve b a n k c f o n e d i s t r i c t c a n f o r w a r d i t s c h e c k s f o r collection d i r e c t l y t e a There i s r o o m f o r a member b a n k i n another district. difference c f opinion. W e d e net think t h e right exists, Mr. Harrison. I er the cther, I d e n e t t h i n k i t i s clear-cut a n e w a y agree, b u t m y thought i s , having a c k tend in eur o w n mind that i t i s legal f e r u s t e act a s the agent o f the Federad Roserve B a n k o f Boston, a n d the Springfield b a n k would cbject e n d s a y that w e have n o legal authority, t h e n would come t h e question i n the court a s to whether o r not Beston could autherize u s a s their agent t e send direct. Gevernor Seay. B u t could y o u act a s agent f o r t h e Federal Reserve B a n k o f Boston w h e n y o u are forwarding yeur own checks? I f y e u were forwarding something t h a t came te yeu from t h e Federal Reserve R a n k o f Bosten--but h o w could y e u f o r w a r d y o u r o w n c h e c k s a n d a c t a s t h e i r a g e n t ? Mr. Harrisen. B e c a u s e t h o s e checks a r e checks w h i c h ctherwilse w e w o u l d s e n d t e t h e F e d e r a l R e s e r v e B a n k o f Boston a n d have t h e m send them t e Springfield. I f Boston https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 199 says i n s t e a d Springfield, e f sending t h e m t e u s t o ferwerd t a s e n d t h e n C i r e c t f o r o u r account. Gevernor Seay. T h a t i s true, b u t t h e y a r e y o u r o w n checks. I doubt v e r y m u c h i f y o u w o u l d have, u n d e r t h e act a s i t i s werded now, authority t o ferward those direct t e that member bank. B e s t o e n has n e control o v e r then. Governor N e r r i s . I believe t h e committee opinion t h a t i t c e u l d n e t b e dene. O n page 6 was o f t h e y say: "It is quite obvious such a n arrangement could not b e e without the d consent o f athe paying bank,’ m ' and s e forth. Mr. Harrison. Y e u can d e a let b y this principle of agency, previded i t dees not vinlate seme other vested right c f some third party. N e w a t the present t i m e w e authorize t h e Albany banks t o send direct t o Chicago items payeble i n the Chicage district. T h e s e items, under the law, a r e technically suppesed t o come directly threugh us, r a t h e r t h a n t h r o u g h t h e C h i c a g o banks, b u t w e short- circuit i t i n the iabavene c f expediting the collection system. T h e r e is a difference t e the third party in- volved, a n d the third party might crject a n d bring t h e https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis matter u p f o r t e s t i n t h e courts. The Chairman. Gentlemen, w h e t i s yeur pleasure with regard t e Districts 1 , 2 and 3 ? Gevernor Seay. T h e r e i s one thing I would like t e refer t o and that i s the fact that ouite a bit o f embar- Passment a r i s e s f r o m t h e facut o f c o m p e t i t i o n b e t w e e n the member b a n k s f e r b a n k account. I n times p a s t w e h a v e hed compleint f r o m the Baltimere banks that t h e Philadelphia banks w e r e willing t a take their items o n certcin places i n cur district a n d credit t h e m cne d a y sooner than they ceuld 1eceive crecit f o r that Ceposit i n their o w n branch bank o r the i'ederal Reserve B a n k o f Richmend. T h e y have invited accounts o n that basis. Where i n New York, f o r instance, o r Philadelphia, f o r instance, i s over night from the member banks, they have a n advantage cover t h e member banks i n Richmond and i n Baltimere, a n d t h e y have solicited accounts o n that besis. The member banks i n Baltimore have objected. Governor Nerris. T h e Baltim.re banks opject t e the competition o f Philadelphia o n a Philedelphia objects t e the competition o f the N e w York banks. Governor Fancher. A n d Pittsburgh objects t e https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Philadelphia. The Cheirman. G e n t l e m e n , the t h r e e g r i m i n a l s a t o n e stroke, teke them u p separately? wrapped u p t e g e t h e r s r e y e u ready t o dispatch o r d e y e u want t o I t is all the same preblem, i n c n e bundle. W h a t d o y o u suggest, Mr. Strater? Mr. Strater. I weuld r a t h e r n e t m a k e a n y suggest- ion, because t h e committee h e s gene a s f a r a s i t c a n and t h i s i s l a r g e l y a matter e f pelicy, s o m e t h i n g w h i c h the Gevernors r e a l l y should decide. The Chairman. D c y o u think there i s anything i n m y suggestion o f l o c k i n g f o r s e m e s h e r t c u t s w i t h t h e i d e a af speeding u v collections i n the three districts? Mr. Slater. Outside o f what t h e ccmmittee h a s already suggested I really could n e t s e e that anything m u c h c a n be accemplished. T h e committee o f course weuld b e very glad, I t e render w h a t e v e r a i d a n d a s s i s t a n c e a m sure, it can, b u t i t seems t o m e that t h e preblem really lies with t h e m a n a g e m e n t The Chairman. I c f t h e t h r e e b a n k s cencerned. den't suppese t h e banks i n the other cistricts complain w h e n they get credit a earlier o f their items, d e they? day https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 202 Mr. Strater. N o , b u t a s a matter o f fact dotthe banks i n the other districts h a v e t h a t adventage? Governor F a n c h e r . S o m e o f them complain i f they have t o p a y them a day earlier. Mr. Strater. T h e banks i n the Cleveland district cannot v e r y well s e n d N e w England checks tre New York. That i s prehibited under t h e previsicons o f the act. T h e y can get n e benefit c u t o f the time schedule a s i t applies to edjeining districts. The Chairman. W e have a n inter-district fleat o f $16,000,000, a n d al? thet means i s that w e have given the other reserve banks credit f o r $26,009,000 a day earlier t h e n they c a n collect t h e checks within c u r district, d e e s i t not? Mr. Harrison. N e . I t means t h a t c u r member banks get the benefit c f that. The Chairman. P h e n w e shall n o t raise t h e question. Mr. Harrison. I have given cur platferm, a s I see it, and that i s that w e shculd attempt t o ultimately-I de net know h o w socn-<adjust t h e time schecules c f the reserve b a n k s t o © peint where they give credit cnly for t h e t i m e t h a t i s t a k e n t e e c l l e c t t h e c h e c k s « n the https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 293 average, t h a t w e should attempt t e d e that before changing c u r two-day schedule t o a three-day schedule, and cause t h e resulting hernets! n e s t that I would b e raised a s a result c f that. a m sure I n cther words, we ought t o de two things before w e d a it. First, s e e whether i t i s practical t o d c what t h e committee suggests we might t r y with the consent o f the paying banks i n other districts, send direct t e those banks and thereby collect the majority o f the items i n these other districts actually i n twe days; a n d i f it i s impossible t o do that, then I think t h e q u e s t i o n b e c e m e s a System question, t e see whether we want te admit tot only to New England and the eleven Nertheastern States, b u t t e all the country, that w e h a v e aslow, c u m b e r s o m e d n a inefftcient enllection system merely because o f these arbitrary | district lines and see whether i n the process o f time-maybe n e t t h i s year, but. whenever i t i s feasible--1t wont be wise te go tc Congress with a view of changing the .colleetion system and inaugurating o r attempting i n a u g u rr adopting a t i c n seme g sort.of collection function that. would work irrespective o f district lines. I de, net think .the time is ripe yet, and there will be less https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 204 objecticn e n the part e f member banks. I feresee c b - jection e n t h e p e r t e f s o m e o f t h e r e s e r v e b a n k s , very properly. b u t clearly, and i f Cengress h a d been devis- ing a collection system a n d not a reserve system, it would n e v e r h a v e m a d e t h e s e d i s t r i c t l i n e s a s t h e y h a v e meade them a n d limited t h e collection facilities t e are bitrary, g e c g r a p h i c a l l i m i t s , t h a t w e r k « a hardship cn these districts which are the most eengested banking areas c f t h e ceuntry. New, a s I have said, i t works practically a l l right eut West because t h e districts a r e s e large that t h e y ean send direct t e all over night peints, b u t because ef o u r e x t e n s i v e b a n k i n g r e s o u r c e s a n d t h e n e c e s s i t y f e r congested district lines, geographically, i n the North- east, w e have a t the same time a n erbitrarily a n d unnecessepily limited collection line, o r lines, a n d I hate te stir u p ell t h e trouble t h a t I think weuld arise i n the Nertheast i f w e gave u p t h e two-day peints, withcut first being certain--fer this cencerns t h e System as a whele a n d n e t m e r e l y t h e t h r e e n e r t h e a s t e r n b a n k s - - thet there might n o t b e seme advantage i n a general r e e erganizetion o f the eellecticon system i n a way that will https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 205 adapt t h e c o l i e c t i o n S y s t e m t c ' . needs r a t h e r t h a n te t h e c r e d i t needs. Governor Seay. Mr. Chairman, p l a i n l y t h e committee has gene just a s far a s i t c a n g o a n d has discharged i n & most e f f e c t i v e m a n n e r i t s duties. mé, I t i s plain t e a t least, t h a t w e c a n n e t c e m e tec a n y a g r e e m e n t as to changing tho Buetbnt conditicns witheut further deliberations. I concur i n what Mr. Harrison h a s said. I am profoundly convinced t h a t there i s nething w e c a n d o a t the present. time t c bring abeut the desired end. There-~ fore I move that t h e repert e f the committee b e accepted, be received a n d filed ane stucted, a r d that this Confer- ence extend i t s thanks t e the varicus members. ef t h e committee f o r t h e f r e x t r e m e l y e f f e c t i v e w e r k . Governor Harding. I will second that meticn. The Chairman. I s there any further discussion? (There was ne further ciscussicn, and the motion, having b e e n d u l y secended, The Chairman. w a s u n a n i m e u s l y carried.) W e have n o t finished consideratton of the whcle repert i n detail. W e have read it, and are prepared t e adopt i t s recemmendations, stand: 1%. D a s I under- e y e u w i s h t e censider a n y orecedure w i t h https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 206 the F e d e r a l R e s e r v e F o a r d i n d e a l i n g w i t h t h i s n e w t i m e schedule a n d t h e i n e q u a l i t i e s w h i c h a r e p r e s e n t e d a n d discussed i n the report, because t h e adoption o f a new time s c h e d u l e r e q u i r e s a c t i o n b y t h e F e d e r a l R e s e r v e Board? Gevernor Talley. is making a study o f the fleat a t the present time. The Chairman. the repert, T h e Beard has indicated that i t W e u l d i t b e proper, having adopted t c ask the Standing Committee c n Cellections to take i t u p with t h e Federal Reserve Board a n d t e d o whatever i t thinks i s necessary i n connecticn with 4 t ? Governor Harding. I did net understand that w e had adopted t h e report, b u t merely that i t had been accepted and filed. Gevernor Seay, Accepted and filed fer study, a n d I will add t o that that a copy o f it be submitted t e the Federal Reserve Board. Governer Wellbern. I think it would be a goed idea te s u b m i t t h e i d e a e x p r e s s e d b y Mr, H a r r i s o n , t h a t is, the pessibility o f going before Congress a n d getting a n amendment t o éffecffacbcientific ceellection system. I think w e s h e u l d c o n s i d e r t h a t . https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 207 The Chairman, T h e m i n u t e w e attempt t h a t n o w w e are going t o have t h e whele p a r collection business coming up again. Gevernor Wellbern. I Objection doe net think there i s s e much t e it. The Chairman. T e t h e p a r eellection system? Gevernor Wellborn. I never hear very much about that, only from a certain group that prought these suits. The Chairman. T h e r e a r e about 1200 banks d o w n i n your country that are raising cain all the time. Governer W e l l b o r n . Twelve hundred c f them? The Chairman. A r e there 1ct? Governor Wellbern. N e , abeut three. The Chairman. H o w many d i d y e u have i n that organized assault o n the p a r cellecticn system? Governor Wellborn. along that line. I T h e r e w a s n e concentrated effort have never heard a banker s a y a word about it. The Chairman. H a s that committee bee: disbanded? Governor Wellbern. Yes. T h e y were a l l broken u p when t h e Manley banks failed. Manley business. T h e y were a part o f that https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 208 Geverner Seay. G e v e r n e r Wellbern's district i s not new attempting a n d never has attempted t e collect c n the bulk o f the banks i n that district, a s i s t h e case with all the other Federal reserve banks. I think h e has a limited number o f par banks i n his district. Geverner Wellborn. A limited number? Governor Seay. Yes, t h e minimum number. T h a t is, I think y o u heve fewer relatively t h a n a n y other district in ‘the country, Governor Wellborn. W e have h a d a gerd many state banks withdraw f r o m t h e System, A very f e w o f cur nen- member p a r remitting banks have rescinded their action. Mr. Harrison. I my remarks, had heped, Geverner Wellbern, in t e indicate that under n e circumstancss s h e u l d we g o t e Congress f o r a n y revision c f the l a w o n eccllectlens until after w e h a d exhausted every cther prssibility ef impreving the System without a n amendment. I sheuld hepe that w e will take a sufficient time t e enable ill the ebjecticns t e the p a r ¢cllectien system t e have settled d o w n befere w e think o f a n y revision aleng t h e Utopian lines that I discussed e a few moments ago. Governcr Wellborn. I d o net ecnsider i t Utcpian. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis I think i t i s rather prectical. Governor Harding. A s between t h e choice o f evils I think i t i s better t e absorb some float rather t h a n t e advertise t h a t w e have a cuwnbersome collection machinery which d e p r i v e s t h e b a n k s e f getting collections a s quick-. © ly as they did get them when we didn't have any callectien system, Gevernor Seay. E s p e c i a l l y w h e n w e have boasted about the superiority of the system over the former method. The Chairman. I t i s superior. T h e r e 1 s n e question about that. Governor Seay. Yes. The Chairman. program? A r e w e ready t e preeeed w i t h the T h e next tepic i s 2-D, direct sendings o f cash letters. II. C o l l e c t i o n s a n d Clearings. D. Direct Sendings c f Cash Letters. It i s suggested that e a c h Federal reserve b a n k m a k e a survey a n d r e + port o n the questicns ( a ) whether it i s receiving t o c many cash letters p e r d a y from a n y one direct sending member bank e f anether dis« trict, a n d (b) whether a n y c f its ewn member banks a r e making a practice o f sending daily letters o f trifling ameunts direct t o Federal tfeserve banks c f cther cistricts. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 210 The Chairman. T h a t topic w a s suggested b y a statement m a c e t o m e b y Governor Young, i n which h e said, speaking f r o m memcry, t h e t t h e y were doncks t h 1 8 0 0 cash letters a d a y o u t there. I s that a fatr s t a t e m e n t , Geverner G e e r y ? Governor Geery. I cannot tell y o u about t h e tetal, but just for tllustration, o n uctober ist w e received 52 cash letters f r o m the Chatham a n d Phoenix a d totied Bank o f N e w York for tmmedfate opel T h e t means bicke drawh o n St.Paul a n d Minneapelis. The Cheirman. T h i r t y two? Gevernor Geery. T h i r t y two. H i t h e r o n e c f twe things h a s happened. department m a k e s a E i t h e r every time their e e n e r s run t h e y wrap i t - a n d make I f a letter a n d send i t cout, o r else c a c h one c f their branches sehds o u t a tronedt L E T T er. The Chairman. T h a t t s what happens, Governor Geery. B u t here i s the week beginning October 3rd. W M e n d a y we had 32 lhngidata credit l e ters, Tuesday ll, Wednesday 22, Thursday 12, Friday 14. Mr. Harrison. A l l from t h e Chatham a n d Phoenix Bank? Governor G e e r y . Y e s . we 205-7, 1 3 , 1 1 and 9 . et F r o m t h e B a n k o f Manhattan S o m e e f these letters a r e https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ein petty items. U n e letter f o r immediate credit o f $5.60 from the Chatham and Pheenix Bank. A half a dezen were $57, $59, a n d $67, $76, $14, and $67. The Chairman. T h e topic w a s placed o n the program in order t e develep this v e r y thing. A r e there a n y other districts t h a t have h a d experience similar t e that of ‘inneapclis? Geverner Seay. T h e r e i s nothing t e complain o f o n the p a r t o f t h e R i c h m e n d bank. Gevernor McDeugal. O f the direct sending banks lecated i n New Yerk City there a r e twenty eight which appear t c b e sending c u t more c a s h letters t h a n neces- sary. T h e y send u s a n average o f 144 deferred letters and 110 immediate credit letters e v e r y day. W e seemingly get mere letters than necessary from the New York banks. The Chairman. I t i s prebably explained i n all cases by the branches sending direct. Governor McDeugal. That I de net know. Geverner Geery. T h a t dees n c t apply t e the National City Bank. T h e y have a number c f branches. The Chairman. A n d they send only c n e letter? Governer G e e r y .y -T h e y s e n d f o u r o r five. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 212 Governor Herding. W o u l d i t b e possible t o limit direct sendings t e items e f certain amount? The Cheirman. I think i t cught t e b e dene i n some Gevernor Geery- O n the other side o f the case, e f our banks sending direct, h e r e i s one week's letter o f the Nerthwestern Netional B a n k c f Minneapclis, Federal Reserve B a n k e f Richmond. t o the T h e y senf direct a letter each day itn amount a s follows: $88, $154, $631, $1477, $183, o n d $985, T h e r e i s ne excuse for a member bank sending a n $88 direct t e the Federal Reserve B a n k ef Richmend, Mr. Streter. There is a physical p r e b l e m i n v e l v e d there, sir. Geery. Y o u will find that t h e banks i n New York, like the banks i n all the lerger cities, have their direct routing arrangements s e t u p mere cor less automatically. Y o u r bank i n Mihneapelis, f e r instance, that sends s e many letters, might have e n cne d a y a n $80,000 item o n Richmend and the next day a n £88 item. The result eof thet i s that they cannot pessibly tell until t h e clese o f the d e y what t h e y ere geing t o have in a n y g i v e n F e d e r a l r e s e r v e bank. I f they wait until https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis “213 they have prepared a l i o f their letters a n d then cull out t h e small ones, t h e y have g o t t e rehandle everything that they have already started a n d put through the mill. S e far a s cur bank i s cencerned i t deesn't make a particle o f difference whether w e get o n e letter or twenty. W e consider i t quite a simpie matter t o put twenty letters through the mail. putting down a few more figures. I t just means O u r transit man teld me the other d a y h e would lots rather g e t t e n letters of $200 than cne o f $20,000, because i t is much casier te verify ond fellow through 2 number c f small letters than i t is one large one. The Chairman. A t the Conference i n November 1925 there was a discussion of this, resulting i r resolution which was passec, indicating thet each Federal reserve b a n k could take u p with a n y member bank, guilty o f sending trifling items, t a k e i t u p with thet bank a n d c o r r e c t i t . I hewever, notice w i t h s e m e amusement, t h a t Geverner Y e u n g w a s t h e o n l y c n e w h e v e t e d against that. Hewever, I de net believe that any bank in New York sheuld send direct a n item o f $11.14. seems t o m e t h a t i s e n a b u s e o f t h e p r i v i l e g e I t c f direct https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis sending. Mr. Herrisen. M r . S t r e t e r a n s yered t h a t q u e s t - ion v e r y s a t i s f a c t o r i l y f r o m m y pceint o f vicw when h e said t h e t i f a bank sheula w e i t u n t i l t h e l a s t minute to find c u t whether e r not i t sheuld b e sent @irect or s e n t t o the Federal reserve b a n k that i t weule i n - volve double handling a t the lest minute e f all these letters, which, a t the last minute, t h e y found o u t were n e t b i g eneugh t e g n direct. W e feel i n New Yerk best w a y t e d e w o u l d b e t e l e t t h e matter g e unless c h r o n i c a l l y a bank c r b r a n c h i s s e n d - ing t e e m a n y s m a l l letters, w h i c h indicates t h a t a benk hasn't get a sufficient velume o f items e n a given peint t o justify direct sending. T h e y sheuld i n that case s e n d t o the Federal reserve bank. it 1 s ecenstant a n a chronic, B u t unless w e think the best thing to d e i s t e let them g o threugh, e v e n i f t + dasa respit i n seme eases t o which Gevernor G e e r y has re- ferred, where t h e items a p e quite small. Mr. Strater. T h e thing will have « tendency to c o r r e c t i t s e l f , b e c a u s e i t 4 s exncnsive t e send https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 21S a l o t o f s m a l l letters. I t seems t o m e t h a t i f anyene called their attention tec the apparent abuse o f the Cirect sending privilege, a n d would peint cut t e the member bank thet i t i s costing t h e m t e e much t e eollect items f r e m certain points b y sending direct, e n d that it weuld b e more t e their advantage t e cut dewn their direct sendings and pick cut these points where they dc not have very many items, climinete these peints f r o m Cirect sending a n d include t h e m i n the cash letter to us, t h a t t h e y w o n l d b e v e r y g l a d t e h a v e t h e suggestion made, a n d t h a t i t w e u l d t a t e c a r e o f i t s e l f naturally. Geverncr Seay. I t i s evident that w e cevered t h e matter b a c k i n 1925, a s w e understeod t h e situation then, as well a s i t could b e dane, I t i s « metter c f pure mechenies w h e n onee a direct reute h a s b e e n established, It i s then carried o u t b y miner clerks i n the transit department, a n d until attentien i s called b y the reserve bank t e the other effending reserve bank o r offending member b a n k i n ancther district, nething c a n b e done. I think i n t h e t r e s c l u t i e n w e heve cone 2 8 near a solution https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis of { t a s w e c a n get. Governor Harding. I submit, w h i c h I have o n e other suggestion t e think obviates t h e mechanical sugzesticn which "ny, Strater reises. S u p p e s e direct sending were limited.in this wey, t h a t there sheuld b e n o direct sending e f a n y i t e m l e s s t h a n $500. T h e n a n y bank getting an item ¢ f $2.40 would p u t i t i n one pigeen hole, t e g o te the Federal reserve bank, a n d i f it gets a $500 item it g e e s i n another o l g e e n hele, a n d tn: that: w a v e a l ) o f the little items will g e t e the Feceral reserve b a n k and there wont b e a n y harcship i n that. Governor McDougal. O u r preeecdure conferns t e the recommendation c f the committee o n ccllectiong, a s sume marized i n paragraph 2 9 o f the Secretary's minutes o f November Conference, 1925. T h e committee expressed t h e opinien that there should b e n o limit placed o n the dollar amount c f cash items t h a t a rect. bank might s e n d di- A n d where i t appears t h a t a direct sending member bank sends more letters e a c h d a y than should b e necessary, o r a s a regular practice sends letters o f trifling amounts, t h e Federal reserve b a n k c f the district i n which https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis out said m e m b e r b a n k i s l o c a t e d s h a l l t a k e t h e m a t t e r with thé. b a n k i n q u e s t i o n a n d e n d e a v e r The Chairman. t e recrncile i t . T h a t i s the minute I moment ago, Governor McDeugal. up referred t e a N e w , there a r e three courses that have been suggested o r inti,ated. O n e i s the action propesed a t the former meeting o f the Conference i n November, 1925,under which t h e reserve banks shall call each cther's attentien t e abuses; t h e second i s toe adept some practice s u c h a s Governor Herding suggests a n d limit t h e ameunt, splitting t h e letters between t h e Federal reserve b a n k a n d the direct sendings; a n d t h e third w o u l d b e t e refer t h i s subject to t h e c o m m i t t e e a n d a s k t h e m t e s e c u r e m o r e d a t a t h a n we have here a n d submit « until t h e n e x t Conference. formula, without waiting T t t9 a cauesticn o t w h e n course t o pursue. Gevernor Seay. I believe t h e Standing Committee on Collections m a d e a very complete s t u d y o f this matter in 1925. T h e recommendation w h i c h t h e y t h e n made con« forms t o what I know i s the experience o f our o w n bank, and I deubt i f any of us can g o any further than that. I will move, $M3 r . Chairman, t h a t w e refer t e t h e https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 218 recommendations of the Standing Committee cn Collections , made i n November o f 1925, a n d fallow t h e practice there recommended. Governor McDougal. I The Chairman, will second that metion. Y e u understand t h a t t h e o n l y cemplaint that I know o f paving been made t c us was the statement ef Gevernor Young some time ago, which resulted i n this topic being placed c n the pregram. T h e idea i s that these abuses w i l l b e reported more frequently a n d mere prompily and taken up. I s that t h e ides? Governor Seay. T h a t i s the idea. Governor Talley. I think i t w o u l d b e b e t t e r f o r t h e complaining F e d e r a l r e s e r v e b a n k t o t a k e i t u p d i r e c t l y with t h e Federal reserve banks e f the other districts rather t h a n with its members. The Chairman. T h a t i s what I mean, a matter between the Federal reserve banks entirely. (The motion, having b e e n duly seconded, w a s unanimously carried.) Governor Harding. I should like t e b e recorded a s https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis not voting. The Chairman. Now, gentlemen, I call your atten- ticn t e the fact that three tepics, III-A, I I I - B a n d III-C, h a v e a l l b e e n d e a l t w i t h w h i l e M r . M i l l s w a s here. T h e next i s IV, t h e Board's regulations, a n d this must b e dealt w i t h after w e have read them. Topic E V - B remains c n the program f r o m the former Conference, a n d i s raised again b y the Beard's letter X-4957. I dressed. a m not sure t e what bank that letter w a s a d e T h e topic raises t h e inquiry o n reimburse- ment o f expenses rendered Government agencics. Governor Norris. The Chairman. I t was Philadelphia, M r . Chairman. W i l l y o u discuss t h a t , p l e a s e , Governor Norris? IVs. Operation a n d Administration. B. Reimbursement o f Federal reserve banks for expenses c f services rendered f o r Gevernmental agencies. Geverner Norris. A t the last Governors! Conference, the auestion w a s raised whether t h e Federal reserve banks s h e u l d n o t b e r e i m b u r s e d b y Federal l a n d b a n k s for expense involved i n paying Federal f a r m loan coupons. Governor S e a y moved that t h e y should b e reimbursed, and Gevernor Talley amended b y suggesting t h a t they b e https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 220 reimbursed serve bank. i f a n d when requested b y the Federal r e - A f t e r s o m e discussion u p o n t h e volume c f these services, a n d the cost o f rendering them, Governor S e a y stated t h a t his principal purpose w a s t o get t h e opinien o f the Conference a s t o whether i t was n o t a correct principle that reserve banks sheuld, as a rule, b e reimbursed f o r services w h i c h t h e y render- ed t e other governmental agencies w h i c h were sustained by their o w n income. A motion was finally -ffered b y Gcevernor Calkins that "In principle, t h e Federal reserve banks should b e reimbursed f o r services performed f o r goverrmental agencies o t h e r t h a n t h e Treasury, w h e n t h e expense i s suffi- cient toa justify t h e filing o f a claim b y the individual bank concerned." T h i s substitute m e t i o n w a s accepted by Governer Seay, a n d adopted. Under date o f June 24, 1927, b y letter X-4887, t h e Federnl Reserve Board advised t h e Governors t h a t i t was n o t i n harmeny with this view. After receiving that letter I Crissinger, a c k n o w l e d g i n g r e c e i p t wrote t e Governor o f t h e letter, and inquiring whether i t would b e i n order t e ask why the https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 221, Board was n o t i n harmony with t h e resolution adopted by t h e Conference. T h a t w a s n o t a n s w e r e d apparently. I wound u p that l e t t e r b y saying " I have taken t h e liberty o f stating these considerations a t some length because w h i l e t h e i m m e d i a t e m a t t e r i s o f small import ~ ance, t h e principle involved i s e f very great importance. I t occurs t o m e that possibly a l l o f these i m - plications w e r e n o t f u l l y c e n s i d e r e d b y the Board pricr to the action stated i n your letter X-4837. I f the conelusicn stated 1 n that letter i s the considered judg- ment c f the Board, I tnink that the matter would b e worth discussing a t the Joint Conference next fall." it was i n answer apparently t o that letter that this subject w a s put o n the program. Governor Wellborn. D i d y e u get a reply t e your letter? Governor Norris. S i m p l y a reply i n the way o f putting t h e subject o n the program f e r discussion. Governor Wellborn. B u t they did not give any reasons f o r t h e i r c o n c l u s i o n ? Gevernor N o r r i s . The Chairman. N o n e whatever. W e have had about a s much o f that, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis B22 if not more, t h a n a n y other bank, possibly, w i t h the exception o f Minneaplis. Governor Bailey. M r . Chairman, t h e pelicy c f the Federal l a n d banks i n calling their bends f o r redemption before d u e date i s causing considerable confusion f n redeeming t h e coupens clipped f r o m Federal L a n d Bank bonds. There f s outstanding a large number o f these bends of the various serfes that have not been presented for redemption, a n d i t i s necessary f o r t h e employees hand- ling coupons t o check each coupon against various lists received f r o m the different Federal l e n d banks, We are i n receipt o f a ietter f r o m the Federal Land Bank o f St.Paul regarding coupon redemption, a n d there i s quoted below a portion o f tneir letter: "Due t e the fact that some o f the Federal reserve banks have transmitted coupons t h a t should riot have b e e n paid w e have a request t o make a n d that i s that the coupons b e forwarded t o us i n the original envelopes i n which t h e y are delivered t o the Federal Reserve B a n k o r its branches, bearing the n a m e o f t h e d e p o s i t o r o r correspondent o f such https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 225 ‘bank o r branch, a n d also t h e number o r initial of the clerk b y whom t h e ceupens a r e checked in. If a n improper i t e m 4 s then cashed a n d forwarded to us, i t c a n b e r e t u r n e d i n the s a m e envelope and the forwarding bank o r branch will i n turn be able t o recover f r o m its correspondent a n d sustain n o loss. G r e a t e r c a r e i n handling t h e s e coupons will n e deubt b e taken i f the clerk has to affix his number o r initial t o the envelope. We hope that a l l Federal reserve banks a r e willing to cooperate w i t h u s i n this manner, a n d w e assure you t h a t s u c h e c o p e r a t i c n w i l l b e g r e a t l y a p p r e - ciated.” The request o f the St.Paul b a n k 1 s impessible, as our member banks forward these coupons t o u s listed o n a coupen schedule a s t e denominations, a n d d o not attempt to list e a c h Federal l a n d bank coupon separately. As t h e r e d e m p t i o n o f Federal l a n d b a n k b o n d s and coupons i s becoming more a n d more complex, a n d the volume will n e deubt t e n d t e increase, i t seems o n l y fair that t h e Federal reserve banks should cbtain some relief either b y being reimbursed for clerk hire, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis or a change i n the method o f handling. Governor Harding (after discussion). M r . Chairman, I meve t h a t i n t h e o p i n i c n o f t h i s C e n f e r e n c e t h a t i n cases where a n y Federal reserve banks incur a n y unusual or.substential e x p e n s e i n rendering services t o any bureau or.agency o f the Treasury e f the United States, that it- is p r e p e r f o r s u c h b a n k s t o submit d i r e c t to the T r e a s u r y any. c l a i m f o r r e i m b u r s e m e n t w h i c h i t m a y make. The Chairman. Governor Harding, a t the M a y meeting of 1927, w h e n t h e question came u p a s t o the expense cof paying F e d e r a l l a n d b a n k coupons, out disapproval, i t w a s voted, w i t h - t h a t i t was t h e sense o f the Conference that i n principle t h e 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 b e reimbursed f o r s e r v i c e s p e r f o r m e d f o r g e v e r n m e n t a l agenctes o t h e r t h a n the Treasury when t h e expense involved is suffictent t o justify such bank asking for neimbursement. N o w the Beard says i n their letter that t h e y were n o t i n h a r m o n y w i t h that. T h e Beard does n o t as- sert a n y jurisdiction over t h e question, Governor Harding (after discussicn). T h i s i s merely reaffirming that, Mr. Chairman. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 225 The Chairman. M r . Harrison tells m e that this w a s not s u b m i t t e d t o t h e B o a r d b u t t h e y s i m p l y r e a d i t i n the minutes. T h e Board h a s simpiy expressed t h e view that i t was o u t o f sympathy, a n d I do not believe i t gave much consideration t o it. G o v e r n o r Harding's motion n o w i s t o reiterate t h e a c t i o n t a k e n b y t h e C o n - ference ttn May o f 1927. Governor Harding. T h a t t h e Conference reaffirms a n d reiterates t h e action e f the Conference t a k e n i n May, 1927, a n d believes i t i s e n t i r e l y p r o p e r f o r a n y Fed- eral reserve bank, performing a n y services f o r a n y governmental agency, t o claim reimbursement f o r such expense. Governor Wellborn. I will s e c o n d that. (The motion, having b e e n duly seconded, w a s carried.) The Chairman. Gentlemen, i t is time t o recess for lunch. (Whereupon, a t 1.05 etclock p.m-, u p o n motion duly seconded, a recess w a s taken until 2.15 o'clock p.m. o f the same day.) https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis AFTER RECESS. The hearing w a s resumed a t 2.30 p.m. The Chairman. T h e meeting will come t o order and we will proceed toe Topic IV-C, suggested b y Philadelphia. Governor Norris? IV. O p e r a t i o n a n d Administration. Cc, Standardization o r abandenment o f Functional Expense Reports. Gevernor Norris. reports. T h a t I s the functional expense W h e n t h e system o f making t h e s e functional expense reports w a s started, I was quite strongly i n favor o f it- I n fact, I think that Dr. Miller and I were t w o o f the members o f the first committee o n the subject. T h e r e were some changes made afterwards, a n d I stili stuck o u t f o r their value after I think a good many othefs h a d lost a n y opinion that t h e y ever h a d o f their valve. Now, i t has been going o n for h o w long--four years? If it is net four years i t ts about four. I think i t started i n 1923 o p 1924, a n d I recently compared the figures a s t o where unit costs a r e given, w h i c h presumably a r e t h e most definite, taking c o i n counting, where the cost i n the highest cost bank i s over three https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 227 times t h a t i n t h e lowest. I n city c h e c k clearings the highest i s three times t h e lowest:and t h e lowest i s only one half o f the average. I n check collection, city checks, t h e highest i s nine times t h e lowest a n d the lowest i s two thirds o f the average. I n Government checks the highest i s three and one half times the lowest and the lowest 1 s only one half o f the average. I n country checks outgoing, t h e highest i s more t h a n three times t h e lowest a n d the lowest i s one half o f the average. In non-cash collections, city, t h e highest i s five times the lewest a n d the Lowest i s only a little over o n e third the average, altheugh that i s n o t a fair comparison, b e cause t h e lawest there i s Minneapolis, a t a time when they were n o t doing that business. Governor Harding. D o you think a n y o f those a r e comparable basis? Governor Norris. ures that I a m giving. Y o u can judge that from the figI n non-cash collections, country, the highest i s nearly four times t h e lowest, a n d the lewest i s hald t h e average. I n coupon collections ether than Government, t h e highest i s three times the lewest and the lewest i s half e f the average. I n https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 228 Governmert coupons, t h e hignest i s three times t h e lowest, and the lowest a little over half of the average. In loans, rediscounts a n d acceptances, discounts a n d recerds, t h e highest i s nearly four times t h e lowest and the lowest i s less than half of the average. I n counting currency, the dirferences run from .052 to 064. T h e r e t h e evidence i s that t h e cost i s o n a come parable basis. uf course, discrepancies w e r e inevitable i n the beginning o f the thing. a h d after a while a mani} w a s gotten c u t t o instruct t h e banks h o w t o make these calculations. S o m e a t least o f the banks a r e i n some re~- spects paying littie o r n o attention t o that manual. For example, t h e employees i n General Brocks' u n i t Bestoen reports o n l y e m p l o y i n g o n e a n d c n e h a l f e m p l o y - ees i n the last half o f 1923, a n d then t h e manual specified thet certain things, f r o m four t o eleven things, should b e grouped under that heading, b u t t h e inclusion or the failure t o include a l l e f those things h a s o n l y brought Boston u p from 1.50 t o 1.95, t h e general average being 4.18. I de not give a n y o f these figures b y way o f re- https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 229 flection o n any bank, o r eritigism, b u t o n l y a s evi-~ dence that t h e manual i s not being followed, t h a t t h e results « r e not comparable: Now, I asked t h e a s s i s t a n t c a s h i e r i n charge o f our accounting t o give m e a n estimate o f the cosv t o us of making u p these functional reports, a n d h e replies, anong o t h e r things, t h a t i t i s n e c e s s a r y t e keep dally reports i n some fifteen departments o f the bank i n order that, a t periodical times, a report may be furnished t o our accounting departmert, where t h e actual final repert is prepared, s h o w i n g t h e v o l u m e or pieces. o f work handled i n numbers T h e time represented i s approximately equiva- lent t e that o f three persons f o r each working d a y i n the year, a n d figuring this e n a n average salary basis the cest t o us i s about $4,300 a year. I find a s a rule our figures o n almost anything represents about o n e tenth o f the System, s o that w e would suppese thet i t was costing the System somewhere between $40,000 and $50,000 a year. It seems perfectly obvious t o m e that i t i s net worth $40,000 o r $50,000 a year t o the System to keep up the https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 230 making o f t h e s e r e p o r t s , w h i c h a r e n e t p r e p a r e d made o n t h e s a m e basis, a n d a r e t h e r e f o r e n e t comparable, and b y w a y o f b r i n g i n g t h e t h i n g t e a this resoluticn--I or head I would o f f e r a m net particular about t h e werding oY it, b u t this. i s . a drafts "Whereas, t h e making o f the functional expense reports i s cesting t h e Federal reserve banks a sum which may be estimated a s between £40,000 and $50,000 a yeor; a n d Whereas, t t has not been found practicable t e assemble t h e figures o f these repcrts o n the same in all t h e banks, thereby destroying their usefulness f e r p u r p o s e s o f comparison; and “Whereas, t h e ineuguration c f the budget system in all o f the banks n o w serves t h e purpose intended to b e s e r v e d b y t h e f u n e t i o n a l e x p e n s e reperts: "Resclved, that the Federal Reserve Beard be requested t o discentinue t h e requiring c f the making of these reports." Gevernor Seay. I would like t o ask, Mr. Chairman, if Mr. Nerris a n d h i s officers h a v e a n y particular critcism ef the manual, «or i s his criticism directed t a the fact https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 252 that i t scems t e elicit different methods o f reports and a cifferent organization i n the several banks, s o as to r e n d e r i t i m p r a c t i c a b l e t o get their reports o n a comparable basis? Gevernor Norris. I lies, a n d therefore I do net know where t h e fault do not undertake t e allocate it. Either t h e manual 4 s defective o r the banks have chosen to ignere the manual. I and I de not knew which i s the fact, de net care, b u t t h e result i s that t h e figures are not comparable, a n d i f they are n o t ccmparable I can~ net s e e that t h e y are o f a n y value. Governor Fancher. I second t h a t motion, i f i t has already been seconded. Governor Welliborn., D o n ' t y o u think t h e functional reperts a r e beneficial t e the banks i n their c w n work, as w e l l a s i n t h e c o m p a r i s o n w i t h o t h e r b a n k s ? D e n ' t you think that they tend t o bring about a better perfection? Governor Norris. Ne, I do not. F o r a great many years, for almest every quarter o r half year since these have been i n existence I quote from, the items where we a r e h i g h e r t h a n t h e a v e r a g e o r particularly where we are higher t h a n Boston, because t h e conditions a r e s o https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 202 similar i n Beston a n d Philadelphia t h a t I feel t h a t pretty nearly t h e same average results ought tec be worked o u t i n these t w o banks, a n d knowing t h e able w a y in which t h e Beston bank i s run, I want t o keep a s close t e them a s I can: s o wherever o u r figures a r e abeve t h e m o r o n the average, I have b e e n i n the habit of taking i t u p with c u r people. Gevernor Harding. I is the answer I are higher, I have done t h e same thing, a n d have got. I n cases where c u r fig- have g o t a satisfactory explanation, the system cannot b e changed, a n d s e on. The Chairman. I would l i k e t e r a i s e o n e q u e s t i o n about t h i s t o p i c w h i c h I have n o t r a i s e d neretofore, but Mir. Rounds, w h e h a d much t e d o with t h e crganization o f this thing, makes this suggestion. H e says that t h e reperts h a v e b e e n i n operation since 1922, a n d b y this time t h e s e i n e q u a l i t i e s s h o a l d h a v e b e e n i r e n e d c u t tf there was a n y methed c f bringing about uniformity ef accounting. I t t s obvieus t h a t t h e exiscence o f uni- formity i s sufficient t o defeat it, o r that uniformity ts not pessible i f w e attempt t o iron i t out, a n d I think t h e latter i s the case; b u t h e says that t h e report https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 233 dees serve a useful purpose b y reason o f the fact that by @ reasonably uniform methed w e are enabled t o de~ termine t h e System costs o f things l i k e transits, and so on, a n d that i f this i s abandoned s u c h uniformity a s we have i n comparing t h e ccst o f this service would b e last. We w o u l d a d v o c a t e c o n t i n u i n g this report unless some methed c a n b e d e v i s e d f o r s u b s t i t u t i n g t h e u s e f u l f e a . tures o f i t i n place o f such a n elaborate report, My belief 1 s that i t would b e a mistake t o abanden entirely a method o f dividing u p the expenses o f the reserve banks s o that w e c a n report o r get some understanding o f what t s being done. Governor Bailey. W e get this through F o r m E e The Ghairman. Yes, Schedule E , geocd plan, G o v e r n e r N o r r i s - - I W a y would i t not d o n o t w a n t t o inter- with your metion prevailing. Governor N o r r i s , I said t h a t I only offered t h a t m o - to bring the matter u p for a concrete discussion, a n d perfectly willing t o accept a n y amenduent that i s suggested t o that motion o r a n y change i n its phraseology. Governor Wellborn. I would offer a n amendment t o that, that w e c a n eliminate s o m e o f these statements where t h e y https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis are n o t comparable. Governor Norris. T h a t would eliminate 9 0 per cent Ot 33, Governor Welilbern., I think there i s n e use o f having them unless i t is comparable. Governor N e r r i s . I t i s net. Gevernor Wellbern. Y e u take m y friend from Richmend, his bank and mine, the Atlanta bank. N e have got so much expense there fer offices. T h a t is‘en account o f the numercus branches w e have. Y o u could n e t ccmpare that e x p e n s e w i t h a n o t h e r b a n k w h i c h h a s o n l y o n e b r a n c h bank, and that is all useless work. I would not put such a n item a s that i n the report. The Chairman. Y o u take a l l t h e foreign business of the System, you have a department which spends money er else you would abserb the e x p e n s e n i some department to d e whatever acceunting o r whatever w o r k i s necessary in that connection, and we have segregated the whele thing, a n d n o w w e have g o t a lot o f clerks a a considers able expenses There is nec basis of comparison between the banks i n thet department, a n d i t is rather misleading than o t h e r w i s e . https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 235 Governor Wellbcrn. I should think w e could keep up t h e c o s t o f t r a n s i t ‘ t e m s a n d h a n d l i n g c u r r e n e y a n d things o f that kind. W e have s e n t i t t e the m e n who have charge o f those departments, a n d i t has resulted in our bank i n them trying t o make a The Chairman. I good record. would like t o see this resalution modified t o this extent, t h a t w e are i n favor o f abandoning the report unless t h e committee, i n collaboration, say with the gentlemen who work o n ite-and i t would b e Mr. Smead a n d Mr. Rounds=«can devise o r simplify « method which would accomplish t h e results which a r e still o f value. By t h e way, M r . J a m e s a s k e d m e a t l u n c h i f w e w o u l d not get Mr. Smead i n te discuss this metter, a n d I had everlecked i t entirely. I think w e cught t e de that, Mr. Norris. Governor Norris. Yes. we should; particularly, I f h e asked you, certainly i f w e are going t o pass a n y resolution i n any way adverse t o the making o f these reports, w e ought t o give Mr. Smead a n opportunity t e b e heard first. The Chairman. W o u l d yeu be willing t o defer further https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis discussion until w e get Mr. Smead here? Gevernor Norris. Certainly. The Chairman. I n that case w e c a n g e ahead with the next ften, wetch io<. IV. O p e r a t i o n a n d Administraticn. D.Report o f Leased Wire Committee. The Chairman (continuing). B r o t h e r McDeugal, have you a report t e make? Governor McDeugal. I have a repert which has been submitted a n d I think passed around b y the Secretary. The Chairman. W h a t t s your pleasure? Gevernor Nerris. I move that i t take t h e tsual course, whatever that is, that i t b e accepted a n d ftled. The Chairman. I s that seconded? Governor Talley. W h a t w a s t h e inciease i n t h e volume? Seven a r d The Chairman. /Seven-tenths p e r cent, due principally to fiscal agency operations. Gevernor Talley. I not s o m e o p p o r t u n i t y merely wanted t o a s k i f there was t e restore s a m e o f t h e service to the leased wire which were formerly performed a n d later taken out. N e c e s s a r i l y that question w a s based o n the assumption that t h e volume, through t h e coding o f messages, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 37 hed declined, b u t i f the renvort itself shows a n increase of o v e r s e v e n p e r cen’, I will n o t g o a n y further. The Cheirman. T h e motion i s thet t h e report b e accepted a n d filed. (The motion w e s p u t a n d unanimously carried.) The report o f the Leased ‘ire Committee i s a s follows: "Report o f leased “ire Committee. "To the Conference o f Governors: "Since t h e l a s t r e p o r t r e n d e r e d b y your commit- tee there hseve beer n o changes i n the circuits c o m prising the Leased “lire System, excepting t h e addition of the S a n fntonio-Dalles circuit. "Mere was a n increase o f 7.7 per cent i n the volume handled f o r the first eight months c f 1927 compered with t h e same period o f 1926. T h i s increase wes d u e largely t o Fiscal fgency operations. “The system i s apparently opersting satisfectorily and the facilities i n use eppesr t o b e ample, "Respectfully sabmisted, "(Signed) J . B . McDougel, "Gheirmen, Leased “ire Committee." https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 237-8 The Chairmen. T h e ncxt i s E, t h e report o f the Insurance C o m m i t t e e . IV. O p e r a t i o n a n d *fdministretion. R e p o r t s o f Insurance Committee. Governor Norris. I think t h e Insurance Committee simply r e p o r t e d t h a t n o t h i n g h a d b e e n b r o u g h t t o their a t - tention, a n d there w a s n o t h i n g t o report. I s a f t that t h e mopart? The Chairmen. meke. That: i s right. T h e r e w e s n o report t o T h e next i s Topic F , t h e report o f the Pension Committee, e n d that h a s b e e n distributed. IV. O p e r a t i o n e n d fdministrsetion. F. R e p o r t Governor Seev. o f t h e P e n s i o n Committee. P h e basis o f contribution h a s n o t yet been worked out. I s thet correct, Governor Strong? The Chairman. tions. I t cannot b e b e c a u s e o f t h e saccumula- Y o u see, t h e accumulations n o w sre v e r y large, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 20% and thoy have t o b e considered over t h e ectuarial life of the payments, a n d until w e get t h e d a y fixod a n d calculate t h e a c c r u a l s a n d t h e n s p r e a d t h o s e o v e r t h e contributions b y t h o b a n k a n d o f e a c h empleyce, y o u can- net tell what t h e centribution will be. Governer Seay. - Do yeu know whether i t i r contem- puatcd t o make a large lump sum contributicn i n the case of officers w h o have b e e n with the bank a long time, o r to make a n annual eentribution, proerata, w e will say? Gevernor McDougal. The Chairman. I T h a t has net been taken up. think the assumption has always been that t h e amount t o b e ecntributed will b e the amount which should have Econ provided a t the origin o f the servic3, plus a sum t o make u p the arrears, c o te speak, which s u m would b e approprfated o v e r t h e actuarial l i f e of the plan t o each individual. Geverner Seay. o n e e f cur officers w a s i n Now York recently a t your benk, a n d had some conversation with Mr. Koawzel,. and ™ understeed h i m t o s a y t o a t i t w a s then t n contcmplation that t h e contribution i n the case ef s u c h efficers w o u l d b e a b o u t 1 0 p e r cent. know whether they have got that fer o r not? D o you https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 259 Governor Fancher. I The Chairman. I never h e a r d o f s u c h a Governcr McDougal. The Chaizman. do not think they have. thing. W e have n o t gotten that far. A s i t stoed originally 1 t was slightly 6 p e r cont. Governor McDougal. a million dollars a The Chairman. I t i s going t o b e a t the vear o r mere now. A n d t o make u p these accruals, I do net know, but i t mipht b e around 4 % or © per cent. Governor Seay. I s i t expected that i t would b e worked out prior t e the presentation o f the bill i n Congress? The Chairman. Yes. Gevernor S e a y . The Chairman. Governor Scay, S e c that y o u w i l l h a v e y o u r w h o l e p l a n ? T h e m e n have been working o n it. t f mean, i t will b e worked out b y the time i t i s presented t o Congress? The Chairman. Yes. T h a t was t h e object o f the ap- propriation i n the last Congress. They are taking a hypothetical date i n the future t e work te, s o that the error in the accrual will b e a s small a s possible. Governor Seay. What I meant w a s chiefly, i s it thought t e b e necessary t o present t h e details o f the https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis plan along with the introduction o f the bill? The Cheirmen. O n e o f the committeemen wented t h e deteils incorrporsted i n the bill e n d w o endeavored o r w e ere poling t o endeavor t o pet a w e y from incorporeting a n y detail i n the bill b y submitting i t t o the committee e s @ sort o f » representation o f what i t involves, a n d leave t h e deteils entirely for the discussion o f the Federal Reserve Board, s o thet there w o u l d b e n o materiul departure f r o m whet i s t o b e r e n r e s e n t e d t o t h e committee. fre t h e r e a n y f u r t h e r r e m a r k s ? “ h e t i s your plessure about t h e c o m m i t t e e ' s r e p o r t ? Governor Figgs. I move thet i t be accepted and filed. The Cheirman. T h e usual course, m a d e b y Governor Biggs. seconded? Governor Talley. I second t h e motion. (The motion wes put and cerried.) The report o f the Pension Committee i s a s follows: "Mhe r e p o r t s u b m i t t e d a t t h e l e s t conference r e - vivwed i n sone detail t h e history o f the Pension Cummittee e n d i t s work. A t that time counsel f o r the c o m m i t t e e w a s e n g e red i n r e v i s i n g t h e p e n s i o n bill i n c e r t a i n resnects, b e s e d u p o n c r i t i c i s m s https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 40-a Encountered b y the originel bill i n the House C o m mittee o n Benking a n d Currency. discussed i n considerable d e t c i l will not, therefore, T h e s e chenges w e r e disc i n thet report a n d b e repeated now. "Sice the last conference copies o f the revised bill have b e e n submitted t o each o f the governors for his individuel sugrestions o r criticism o n d the bill i s n o w rerdy t o submit a t the opening o f the next session o f Congress. "In its last report the committee recommended that there b e approprieted e n edditionsal $10,000 f o r expenses, 2 necesssry recelculetion o f the pension deta including secrued liabilities being contingent upon this eppropriation. T h e eppropriation w a s a p - proved b y the conference a n d Subsequently b y the Federsl Reserve Boerd. / ' 1 1 o f the banks have n o w submitted t h e dete required b y the actueries f o r 2 recalculation u f the secrued lisbilities e n d f o r testing t h e soundness o f the p l o n originally pro- posed. T h e tesk o f determining the accrued lirbility https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 2£40=-b es o f July 1 , 1927, h e s b e e n complted within t h e lest f e w devs e n d comperes w i t h previous calculations e s follows, e l l f i g u r e s b e i n g i n r o u n d numbers: "Originel calculation e a o f October 1, 1920, $1,973,000 "Estimated tabulstion s s o f October . “ i" "¥oetuel a o 9 2 6,C82,000 S e m m o r y 1 9 2 6 , 7,400,000 u i y 1, Vet, 8 , 1 0 0 ,00C "It will thus b e seen that the accrued liability continues steadily t o mount, e n d o f course t h e longer we a r e delayed i n making the p b h operstive, t h e ereeter will b e the problem o f teking care o f this liebility. “ h i l e t h e actusries heve n o t v e t com- pleted t h e tabulrtions f o r a complete t e s t o f the original p l e n t o the present conditions, t h e y advise thet t h e actuel experience appears t o justify the original tabuletions mede, a n d i t i s believed that no v e r y d r a s t i c c h e n g e s i n t h e p l a n w i l l b e necessery. "The actuery states: 'PThe check o n experience shows thet t h e actuel number o f separations r r o m service o n eccount o f resignetion e n d dismissrl which occurred during t h e p a s t s i x y e r r s w a s m o r e t h e n e x p e c t e d scecord- ing t o the rates prepared o n the besis o f the exper- https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 240e¢ lence investisation covering t h e period prior t o 1920. T h e experience e l s o showed thet t h e deoth r e t e s in-use e r e conservetive.~ T h e results o f the check o n the expericnce s h o w thet h a d t h e fund been estoblished a t the retes o f contribution originally set i t w o u l d t o d a y b e i n * v e r y f a v o r e b l e position.'! "The actueries expect t o have the dete completed within « very short time t o the point o f making defin- ite recommendations e s t o the contribution retes necessery t o b e used t o take care o f both t h e eccrued ond c u r r é n t l i a b l l i t i e s . Y o u r committee expects heve o l l o f thits w o r k f i n i s h e d to s o 3 s t o have c o m - plete date aveileble w h e n the bill i s introduced i n the f o r t h c o m i n g s e s s i o n o f Congress. "Respectfully submitted, 2. MeDougel, "Th. R. Kenzel, Choirmen." The Chairmen’ T h e next i s V, *. Future public program. V. R e l s t i o n s w i t h M e m b e r @Bsnks a n d t h e Pubdlic. f« F u t u r e p u b l i c i t y progzam. The Chrirmen (continuing). T h i s i s t o b e discussed et the Joint Conference tomorrow, according t o m y under- https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis e241 standing, a n d the revert o f the committee will now b e distributed, a n d you are asked t e read i t before the Joint Conference tomorrow, a n d I weuld like t o announce that i t is arranged that the J o i n t .Conferonce will ob bus a t 10.30 tomorrow morning. V. R e l a t i o n s w i t h Membcor Banks a n d the Public. B.A s u r v e y o f t h e B a n k R e l a t i o n s D e p a r t e ments o f the Federal reserve banks. The Chairman. T o p i c V - B i s a survey c f the Bank Re- lations Department c f the Federal reserve banks, suggested by Philadelphia. I n anticipation o f the meeting, reperts have been received f r o m all reserve banks a n d were distributed this morning. G o v e r n o r Norris, discussion o f that report? d o y o u wisn a n y I T have net had a chance t o read i t . Governor Norris. N e t unless somebody else wants t o discuss 1t. I would only like t e s a y oword i n explana~ tion o f my reason for putting i t o n the program. time t h a t I did i t I A t the overlooked t h e f a c t t h a t i n most of the banks that work i s n o w under t h e charge e f the Foderal R e s e r v e Agent. I believe t h a t i n eight O L <The banks i t i s under t h e Federal Reserve Agent a n d i n four under t h e Governor o r the eperating side. W e have a https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 242 feeling that o n e c f the duties o f the senior officers of a reserve b a n k i s t o populrsrize t h e S y s t e m w i t h t h e public, a n d that that must necessarily b e dene t o a very great extent, particularly outside o f the large cities, through t h e o f f i c e r s o f t h e member banks; t h a t i f t h e y are i n a frame o f mind t o speak kindly o f the System a n d of the operation o f the reserve banks i n their district, that t h e general public sentiment i n their respective ccmmunities i s apt t o b e friendly. T h e r e f o r e , w e feel that the Bank Relations Department i s mest useful a n d valuable part o f the work. W e feel that w e were deing i t i n a satisfactory way, judging f r o m the results i n our o w n district, b u t w e were anxiovs t o ascertain t o what extent it was being dene i n cther districts, a n d i n particular whether there was work boing denc i n othor districts a l o n g those l i n e s t h a t w e h e d n o t t h e u g h t o f , a n d w h i c h w e could a d v a n t a g e o u s l y adopt, a n d i t w a s w i t h those thoughts in mind that I put i t o n the pregram, a n d while I have net h a d time a s yet t e study these reports, a n d while i t is cvident that i n some minor details t h e y a r e subject to the same criticism that I made a few moments a g o about the functional expense reports, t h a t t h e y are net absolutely https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 243 comparable, I eral c h a r a c t e r think c n the whole, considering t h s gene o f the auestions,that t h e y have b e e n made u p o n very fairly comparable basis, a n d I a m glad to seo that pretty much all c f the banks a r e alive t o the necessity o f the work, e n d I hope, i n going over t h e reports n o r e c a r e f u l l y a n d r o a l l y s t u d y i n g t h e m , w e w i l l bu able t o get some valuable suggestions o u t o f the replies that have been made b y the other banks. The Chairman. W h a t a c t i c n d e y o u desire, G o v e r n o r Norris? Governor Norris. N o n e a t all. The Chairman. T h e reports h a v e b e e n distributed a n d ne action i s desired. (At this point wr. Smead entered t h e Conference room, ) The Chairman. Gentlemen, w e have now got Mr. Smead hore, and, Mr. Smead, this i s the situation: Governor Norris had a topic o n the program suggest~E ing e reorganization o r a discentinuance c f the Schedule report. B e f o r e you got here h e read a n analysis o f the showcomparable unit costs 4 s reported i n that schedule, ing the ebvious inequalivies o f the cost d u e t o different https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 244 methods o f accounting a n d s e on, a n d h e has made a calculation that i t costs t h e reserve banks somewhere between 540,000 ard $50,000 a year t e maintain these reports i n over bank. Much o f the material i s collected a s t h e result o f a daily system o f reporting certain work. question arose a s t o whether, continued, T h e n the i f i t were completely dis- w e would b e able o n even a reasonably compar- able basis t o get t h e total aggregate costs o f the various f u n c t i o n s , w h e t h e r s e m e c o n t r o l w o u l d n o t b e lost, end whether i n potnt o f fact there was n o t a value i n maintaining a t least a portion o f Schedule E system o f reporting, e v e n though a very large part o f i t was elimineted, s o a s t o reduce t h e cost. I discussed this with Mr. James a t iuncheon, a n d h e said that h e had had a talk with you about i t and pence we called o n yeu t e come aver here. J ] think o n a matter cf this sort w e are very liable t o pass s n a p judgment in passing a resclvtion. I a m not ready t c vote t o abandon t h a t report. Governor Beiley. I The Chairman. a m not, either. A r d maybe s e m e o f t h e others https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Rnel.the s a m e way; I Gevernor S e a y . de not know. W e f e e l t h e s e m e way, iim. Cheirman. Governor Bailey. I t i s very valuable t o us. o f course, w e eliminate some o f the things called for. Every t i m e w e g e t t h a t F o r m E the h e a d o f e v e r y d e p a r t - ment scans it, a n d w e talk i t over a t our mcrning meetings and a lot o f i t i s eliminated because w e cannot furnish it. But, after all, i t seems t o b e something t h a t keeps o u r fellows i n line f o r economy a n d efficiency. W e would miss i t and w e do not wane t o abandon i t s o far as w e are concerned, a n d I should certainly vote against i t s abandenment. The Chairman, is now. W e l l , I should v c t e a g a i n s t i t as it I f w e cculd substitute s o m e system o r some scheme of reporting which would eliminate those things which a r e obviously o f no value, I would b e i n favor eof that. Governor Norris, r e a d some o f these figures t e Mr. Smead, Governor Norris. bound t o b e variations M r . Smead, o f course there a r e i n t h e c o s t o f different functions in t h e d i f f e r e n t banks. I of them, b u t I wont d e t a i n y o u b y reading a l l have here a n anelysis o f all t h e figures where u n i t c o s t s a r e calculated. i have n o t s e l e c t e d https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 246 any extreme cases. I have taken t h o m all, a n d without specifying what t h e y are, i n the first b h e highest bank is 3-1/3 times the lowest; i n the next the highest bank i s three times t h e lowest, a n d t h e lowest i s only half o f the average o f the System. i n the third the highest b a n k i s nine times t h e lowest, a n d the lowest is only ywo thirds c f the average f o r the System; a n d se i t goes through t h e t e n o r twelve sectiens t h a t a r e itemized here. As I say, s o m e variation i s bound alweys t o exist, and a t t h e s t a r t o f t h e systen, w h e n t h e b a s i s u p o n w h i c h the reports w e r e t o v e made w a s n e t fully understcod, those v a r i a t i o n s w e r e b e u n d t o b e v e r y greet; b u t after four years a n d the issuance o f a manuel a n d t h e assem- bling o f these figures i n ycur Beard here and the mailing of t h e m t o t h e banks, a n d s c cn, i t would s e e m t o m e that e n e c f two things shovid have resulted, either that w e should get closer together e n these things a s we are, o r that w e sheuld have t e admit that w e are attempting t o compare things which a r e incapable o f being compared. Now, that frankly i s m y feeling about it. I would https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 247 like very much, a s w e all weuld, t o heve your views o n it a s t e why these extreme discrepancies still exist after four years o f attempted correction, a n d whether you think y o u ever will b e able t o get them down t o the same basis e f reporting. fir. Smead. I would b e glad te, Governor Norris. realize e n d have right eleng that seme wide differences i n costs e r e reported t e u s o n these W have g o n e i n t o t h e m a t t e r and we o n s e v e r a l eccasions, e know o f céurse that t h e very wide differences w h i c h you reac there a r e generally d u e t o ene o f the banks having 2 large volume and another bank a very small volume c f work. T h a t i s n o t a l w a y s t h e case, b u t y e u will find a geod many times where the bonk has a small volume c f business a n d only cne o r two employees i n the given departnent, t h a t t h e figures w i l l b e very much out o f line a n d must necessarily b e sc. Governor Norris. May I interrupt y o u f o r j u s t a moment ? T h e a t , f o r instance, w o a l d n e t a p p l y t o c o u n t r y I sheuld judge, where St.Louis reports t h e case as e 2 5 e n d C h i c a g e Vir. Swteed. i s .629, That scents https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 243 Governor Norris. end .629 f o r Chicago. C o s t p e r unit... . 2 5 0 for. St.Louis N o w , Chicage must b e including in-that c o s t some items that t h e rest a r e not including, or St.Louis m u s t b e omitting some items that t h e others are including, I Mr. Smead. should think. Y e s ; t h o s e differences there, i n that particular unit, a r e much more than could b e properly reported i f they were doing t h e same kind o f work, a n d it must b e that there i s something wrong i n those t w o functions. I off~hand cannot tell what i t 4s, but these are country checks, y o u said? Governor Norris. T h o s e a r e country checks outgoing. Mr.Smead. I couldc n o t a t t e m p t Governor Norris. Mr. Smead. O f course, I t o explain that right ynderstand that. I t m a y b e that i t is, e s y o u say, b e - cause t h e y are doing some werk i n thecountry check deépartment i n Chicago that t h e y are not doing i n St.Louis, and that will have t o b e looked into; but, s o far a s the funetional expense reports a r e cencerned, w e here have thought that prebably the greatest value i n those reports would b e derived b y the Federal Reserve Banks https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 249 themselves i n comparing their costs a s reported w i t h the costs a s reported b y other rederal reserve banks, and where t h e character o f work done s n a given unit or department seems t o b e t h e same, t o find o u t exactly what w a s t h e c a u s e f o r t h e difrerence, a n d whether o n e bank h a d a better system t h a n the other, a n d probably avall t h e m s e l v e s o f that. H o w extensively that h a s b e e n done o f course w e have never made a n y survey t o find out, but w e c o know i n a number o f cases v e r y merked savings have been rade through those very means. Whether t h e functional expense reports h a v e very largely outlived their usefulness i s a question about vhich a good m a n y people will very naturally have a difference o f opinion. W e here i n the Boerd h a v e felt that they have i n the past served a very valuable u s e in the System, a n d they have b e e n o f importance i n enabling t h e banks t o cut down their expense quite materfeliy. Most o f the banks I imagine d o net make the same use o f them n o w that t h e y cic some tine ago. T h a t m a y mean that the form o f the report, a s Governor Strong suggested, m a y need revision. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 250 We have thought h e r e also that t h e budgets w h i c h the Federal reserve benks h a v e p u t into u s e i n recent periods o f ene t o five years have b e e n extremely benefietai. Governor Norris. Y e s . Mr. Smead. I know thet officials i n a number o f banks have t o l d m e that since putting t h e budget t n t o use t h e y d i d n e t r e a l l y h a v e m u c h u s e f o r i t b e c a u s e they feel that t h e y have a l l t h e control o v e r their e x penses t h a t t h e y could reasonably get, b u t that after they p u t i t i n t o u s e a n d w e r e o p e r a t i n g i t for a while, they found that t h e cepartment managers w e r e taking a n entirely different attitude toward t h e costs o f their d e partment, a n d they were having very valuable results. I persenally would hesitate v e r y much t o see t h e banks d o away with Form E entirely. I it i s quite likely that a feel myself that substantial revision might b e made, The Chairman, H o w would y o u like t o have t h e Con- ference pass a resolution requesting you and Mr. Rounds-Mr. Rounds w a s with y o u i n this matter, wasn't h e ? Mr. S m e a c . Yes. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 251 The Chairman. T o ask y e u a n d Mr.Rounds t o take it u p w i t h t h e B o a r d t s c o m m i t t e e a n d s e e i f w e cannot have a pretty t h o r o u g h r e v i s i o n t h a t w o u l d n o t a t t e m p t to change a l l t h e practices i n the reserve hanks, b u t eliminate the things where comparisons cannot well b e made, a n d just take total figures f o r comparison a n d reduce t h e c o s t o f t h e w o r k i n v o l v e d i n making u p the Form E? I n other words, retain what i s good and useful? Mp. Smead. Y e s ; a n d I might make this suggestion, Governor Strong, that you would not lay down too much o f a straight-jacket with respect t o the matter, b u t i t would probably b e a good idea for you t o ask the committee to report t o the Governors! Conference a t the nextmeeting, s o t h a t y o u w o u l d h a v e a n o p p o r t u n i t y t o pass u p o n the work that t h e committee might do, a n d give t h e committee f u l l f r e e d o m t a m a k e s u c h s u g g e s t i o n s a s occurred to them, a n d I think also i n that connection i t might be a good idea that y o u should have some resolutions t o refer t o t h e committee. The Chairman. E v e r y bank n o w has a budget system of s o m e kind, h a s n ' t i t ? Governor Norris. Y e s , s i r , I think so. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 252 Governor Seay. M r . Chairman, t h e r e recently oc- c u r r e d Ithink i n Chicago a conference between t h e oper- ating men o f the Federal reserve banks with tir. James, upon t h e very subject, d i d there not? Mr. Smead. W h e n that conference w a s ¢alled t h e functional expense reports were not specially o n the pro« gram, b u t t h e y w e r e d i s c u s s e d t h e r e , a n d a t that confer- ence there was some doubt a s t o the value o f the reports as made u p 4 n their present form. S o m e o f the members of t h e c o m m i t t e e t h o u g h t c h a t i t w a s p r e t t y n e a r t i m e t o discontinue them, others thought t h a t t h e y should b e continued a s they are, a n d others t h a t t h e y could b e revisec properly; b u t t h e final result w a s that w e wrote a report t h a t w e should n o t change t h e m just a t this time, a n d I think that t h e members o f that committee feel that within a reasonable time i n the future that would h a v e t o b e t a k e n u p a n d i f p o s s i b l e a Governor Fancher. r e v i s i o n made. A t that meeting h a d all o f the banks g o t t h e budget system installed? Mr. Smead. Yes. Governor Fancher. I got i t i n mind that perhaps there were still t w o o r three banks t h a t h a d not g o t t h e https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis budget system installed. Mir. Smead, Well, I think there were t w o o r three that m i g h t n o t h a v e h a d t h e b u d g e t w o r k i n g i n a d e s t r a - ble menner, b u t t h e y were operating under some f o r m o f budget. M o s t o f the banks I think have a very gaocd forn, and t h e o p e r a t i n g d e p a r t m e n t s h a v e b e e n t a k i n g a very d e - cided interest i n it, a n d a s a result o f i t have achieved some very desirable results. Governor Talley. M r . Chairman, referred to, I a s budgets h a v e been would like t o s a y that a s a matter o f fact in our bank w e base o u r budget u p o n t h e results t h a t w e obtain f r o m these reports, a n d that budget i s the l i d to the box, instead o f the botton. I had i n mind--there is a motien before t h e Conference already--but I mind offering a substitute, b u t I had i n think this suggestion which t h e C h a i r m a n h a s j u s t m a d e i s a l l right, b u t that we defer a n y action o n this until a t least t h e next Conference, a n d that i n the meantime w e ask the Beard t o ask its examiners t o 3ee i f each bank i s following t h e manual and m a k i n g u p t h e schedules. I think t h a t i s w h e r e t h e difficulty lies. Governor Norris, I was about t o ask a question along 254 thet line, Mr. Smead. I presume t h e t y o u accept these r e - ports e s t h e y sre made b y the banks. This happens t o b e a cese s u c h 9 8 m y eye falls o n a t this minute, where t h e cost per unit o n Government coupons i s .174 i n Dslles a n d .514 et ftlantea. “couldn't i t b e possible f o r y o u t o a s k Dalles whether t h e y a r e sure that everything hes been included in thet i t e m thet ought t o b e included, a n d elso t o a s k ftlente w h e t h e r t h e y heave n o t i n c l u d e d s o m e t h i n g t h e t o u g h t to h a v e g o n e t o s o m e o t h e r f u n c t i o n ? I https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis went t o rercd this: "In connection with Generel Books now the menual stetes t h a t t h e following work, n o matter where done £#n the benk, shell b e charged t o Genersl Books unit: First, generol a n d subsidlery ledger; second, officers c h e c k register e n d paying t h e officers checks; third, preperetion o f deily stoetements; four, daily telegrems t o Feder] Reserve Board and Treasury Depertment; f i v e , préeparrtion o f w e e k l y p r e s s s t a t e - ments; six, deily trenscript o f United States Treasury account; seven, capitel s t o c k applications issued e n d surrendered; e i g h t , m e i n t e n a n c e a c c o u n t s w i t h b r e n c h e s and checklug o f brench trinscript; nine, reports e n d statistics f o r the Federel Reserve https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Board o r for their o w n use; ten, a l l other work incident toa the maintenance o f the general books at the Bank." One o f the larger banks i n the System reports t h a t they d o that work with 1.95 employees. O f course, i t is manifest t h a t t h e y are n o t charging t o that function a l l the things t h a t t h e manual says t h e y must. The Chairman. W e could not pesibly d o it. Gevernor Norris. C a n ' t y o u take that u p with that bank, and i f you cannot, what i s the use o f having a report o n the expense o f that function , f one bank yuts three things i n i t and another b a n k puts fifteen o r twenty? Mr. Smead. Y e s , that could not b e done. take u p a l l o f t h o s e m a r k e d d i f f e r e n c e s W e could i n t h e report, but it is a very difficult thing t o d o that from this end, because i f you write t o a bank about these things i t i s pretty h a r d t e p u t t h e i n q u i r y i n such way that will get a satisfactory reply, because the banks think a t the p r e s e n t t i m e t h e y a r e f o l l o w i n g t h a t manual, The Chairman. I do not think w e do. W e could n o more make u p a n expense account uncer that heading,that would i n v o l v e c u t t i n g o u r d e p a r t s a l l up. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 256 Mr. S m e a d . What I mean b y t h a t i s t h a t t h e y a r e following i t t o the best o f their ability, d o i n g their work i n ten different places, a n d there i s a let o f allocating. The Chairman. Y e s , w u t t h e application o f the di- vision o f e x p e n s e w o u l d b e m o r e t h a n i t i s w o r t h t o c o m pile t h a t i n f o r m a t i o n Mr. Smead. o n t h a t basis. T h a t a l l goes t e show that i t may b e advisable t o materially revise t h e report. Governor Harding. D o e s t h e manual s a y anything abowt postage o n country b a n k checks? Mr. Smead. T h e manual i s pretty clear o n that, Governor Harding. Governor Harding. W h a t does i t s a y about that? Mr. Smead. I f m y recollection i s correct, of t h o s e u n i t s t h e p o s t a g e item. i s taken care o f a s a I t is quite complicated. I o n most separate know postage i s not handledt h e seme w a y i n all o f the units o f the bank, and h o w i t i s o n that proposition I Governor Harding. ual t o t h e l e t t e r cannot recall. I f w e were t o carry o u t t h e man. i t would involve considerable expense in putting u p all o f these different items. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 257 Mr.Smead. O f course, i f y o u keep a n accurate rec- ord, t h e cost would b e prohibitave. The Cheirman. D u r i n g the war the regulations o f this d e p a r t m e n t r e q u i r e d t h e t w e s e n d a duplicate b i l l for all telegrams i n one continuous sheet, a n d dupligates of all telegrams, s c a s t o check up. W e sent a n e bill t o Washington which was forty-six feet lone, and three trunks w i t h copies o f the telegrams. T h e y took a year a n d a half t o check i t u p and for o n e company w e were $40 over i n the payments, a n d f o r t h e other company we were $20 under, a n d I suppose t h e Government spent $20,000 and got $20 back fer “t. In these items w h i c h y o u read, t a k e t h e report, t h e reports i n connection w i t h t h e business doing f o r a l l t h e r e s e r v e b a n k s buying bills, a n d s o on. that w e are now i n foreign matters, i n T h e y a r e a l l made b y mani- folding machines, a n d o f covrse t h e y g o out from the department t h a t h a n d l e s t h e m . partment i s carried w i t h a T h e expense o f the de- certain allowence o u t o f t h e revenue f r o m t h e a t h e r r e s e r v e b a n k s , able a p p o r t i o n m e n t a n d t o make a suite o f t h e cost o f veporting a n d passing it b a c k t o t h e r e s e r v e b a n k s , w o u l d b e a very n i c e p i e c e https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis £o3 of cost accounting, a n d w e just have t o ignore these things: . roo believe, Ib e l l @ g o m e r - i n a f a m s ?s u m i n t h a t dase. ’ i n your Cevartment, M r . Harrison. I “fF just have a feeling that i f those things w e r e eliminated f r o m the report a n d m a n y o f t h e i t e m s o f t h e r e p o r t a r e s t u d i e d with a view t o getting a calculation c f tne total costs of some o f the departments where t h e departments a r e thoroughly uniform, t h e n y o u could g e t a comparison o f the number o f clerks empleyed a n d t h e number o f items handled that would give a rough check, without imposing all o f this work and expense o n us, Governor Fancher. T h e r e a r e three o r reur operating departments o f t h e banks t h a t y o u should m a k e v e r y favor- able c o m p a r i s o n s o f , a n d t h a t i s i n y o u r c h e c k c o l l e c t fons a n d p a r t i c u l a r l y i t n your c u r r e n c y operations. The Chairman. T h e surrency works o u t mathematically, put t a k e t h e c o u n t r y checks. Governor Fancher. J think there éan bé singled out three o r four o r five o f the important functions o n which t h e r e o u g h t t o b e a basis o f comparison, and then abandon a l l o f thise other wo:-k that i s done a n d information w h i c h i s o f n o v a l u e a n d o n w h i c h t h e r e i s https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 259 no basis o f comparison. A s G o v e r n o r B a i l e y says, he has singled o u t certain things t h a t h e i s interested in a s a basis o f c o m p a r i s o n w i t h s o m e o t h e r banks. The Chairman. H e r e i s one bank handling unbroken packages o f checks, where w e count a package a s rcoally containing 750 o r 1000 items, a n d another bank will weigh that a n d s a y there a r e 2,000 items i n it. Governor Fancher. A b s o l u t e l y . B u t i f y o u have no basis of compiling the information, what value t s it? Governor Norris h a s calculated that i t 1 s costing f r a m $40,COO to 850,000 ta prepare this information which is hot comparable. I f that i s true, a n d i t probably is, how much c a n b e eliminated f r o m that which i s o f value and that which i s o f n o value? Mr. Smead. I would like t o s a y i n connection with that cost, I have pérsonally asked a number o f banks how much this report was costing them, including your bank, Governor Strong, a n d i t was almost always t h e answer, "Probably very little." T y e y did it along with some other work that they would d o a n y way, a n d i f there i s ah additional cost i t i s s o small that i t i s pretty hard t o i r o n i t out. T h a t m a y depend very largely o n https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 260 how a given bank i s doing t h e work. S o m e bank might do the work i n such a way a s t o cost t h e m several thousand dollars. O t h e r banks, l i k e N e w York, f o r instance, {it would n o t c o s t b u t v e r y little. I have n o t t h e slightest i d e a o f what t h e System cost is, b u t i f i t 4scosting $50,000 a year i t is an item that is well worth while looking into t o see i f we cannot cut down the cost. Governor Norris. T o the best o f our ability w e have been following and observing the manual. I t ap- pears t h a t a t least t w o banks here a s t o certain things at least have b e e n attempting t o follow t h e manual. course, f i w e threw t h e manual aside, our costs, I w e could reduce suppose, q u i t e materially. cost depends a o f S o that t h e good deal o n whether y o u are observing the manual and doing all o f this cost accounting, o r whether y o u are just ignoring t h e manual. Mr. Smead. A n o t h e r thing, i t depends v e r y largely on how closely a bank's organization corresponds w i t h t h e set-up o f f u n c t i o n a l e x p e n s e reports. I understand in Governor Fanchev's bank that i t dees, consequently the cost i n his bank would b e very, very slight, whereas https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 261 in another b a n k i t i s quite likely that t h e cost would be very great. Governor Talley. I s there anything i n this thought, to let the banksprepare t h e facts o r material f o r this report, v e r y largely i n accordance w i t h their o w n organization, a n d then l e t y o u compile i t here? I you a n example o f what I will give mean there. F o r instance, t h e general books items, a s described iin the manual, a r e not anything like o u r general books, because a l l o f that work is not done i n that department, b u t now i f we could get up our costs based upon what o u r general bocks department is a s i t exists, t h e n o f course, a s applying t o our bank, that would b e general books expense. T h e n aren't w e going a b o u t i t p e s s i b l y t h e w r o n g w a y ? c o u l d n ' t w e give the i n f o r m a t i o n t o y o u h e r e a n d l e t i t b e c o m p i l e d h e r e ? Mr. Smead. W e here a r e very well aware o f just what you say is very, very true, and that i n itself is one reason why w e are pretty strong for the budget. When you have a budget i n your bank you put that o n the line at which your bank i s organized, over t h e p a r t i c u l a r e x p e n s e s o you c a n have control i n mind, b u t w h e n y o u f a k e the function expense report and you throw costs o f oper- https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 202 ations t h a t a r e c a r r i e d ent units, check. c n under f o u r o r five differ- i t i s impossible t o get a very satisfactory T h e banks w o r k u p their o w n orzanization, a n d having t h e Board heve a t Washington t r y t o put i t tozéther i n such a way that anything o f a comparable nature between banks would b e the result, would b e I think o u t of the question. to atterpt a W e think i t would b e rather unwise thing like that, because w e certainly can- not p u t i t together a s the banks themselves would. The Chairman. Gentlemen, I have guaranteed a number of y o u t h a t w e w o u l d c o m p l e t e t h e p r e g r a m t h i s afternoon, and this i s a kind o f a thing that w e could discuss i n detail a n d c o u l d n e v e r settle. do it. T h e question i s h o w toa O n e way i s t o recommend the banks doing i t and another i s t o revise i t and then again t o suggest h o w it should b e revised. I Governor Norris. do not mean t h e actails. W e have stated t o Mr. Smead the thoughts t h e t a r e running i n our-minds a n d t h e dif- ficulties that have led t o the introduction o f this topic i n t o this Conference's program, a n d i f h e has any suggestion t o make a s t o what would h e the best way o f getting a t a further standardizaticn, in} i f possible, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 265 of these renorts, o r the cutting o u t o f such parts a s cannot b e standardized, I the suggestion. I would b e very glad t o have imagine w e would a l l b e glad t o adopt a n y r e s o l u t i o n t o t h a t effect. The Chairman. T h e proposal, was t o pass a a s I understand it, resolution indicating that t h e adoption of the budget p l a n b y every reserve b a n k h a d n o w i n a measure accomplished t h e results t h a t were sought f o r by Schedule E , e n d that t h e time h a d arrived t o endeavor to effect a revision o f the method o f reporting Schedule E that w o u l d b e m o r e e c o n o m i c a l a n d r e q u i r e l e s s w o r k a n d simplify it, a n d that w e would request Mr. Smead a n d Mr. R o u n d s t o make a s t u d y o f it, I suppose i n con- nection with t h e Board's committee t h a t has charge o f this, s o that before t h e next Conference w e could have a recommendacion o f e plan. I s that about what covers the ground? Governor Nornis. T h a t i s perfectly satisfactory t o me, and i f you will just put that i n the form o f a motion i will withdraw t h e motion that I The Chairman. I have previously made, will g e t Mr. MNarrisen t o d o the putting o f the form, a n d I will p u t t h e motion. What https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 264 is your pleasure, gentlemen? D o e s anybody want t o second t h e motion? Governor Fancher. I The Chairman. second that motion. I s there a n y further discussion? (The motion was put and carried.) VI. Supplementary Topies. B. Proposed revision o f Regulation D dealing with reserves o f member banks.. The Chairman. W e have t h e revised drafts o f regu- lations and one i s headed "Collection o f maturing notes and bills." cS% * = The Cheirman. awe t i t+ * A f t e r d i s c u s s i o n o f f t h e record, It was agreed that t h e following motion should b e submitted t o a vote: "Resolved, t o recommend t o the Federal Reserve B o a r d t h a t n o r e g u l a t i o n b e issued cover- ing the collection o f non-cash ftems. "Further Resolved, that the questions of (a e uniform circular and (b) limitations upon the *"-: character o f the items t o b e handled, b e referred t o the Standirg C o m m i t t e e n o Collections f o r study a n d recommendation t o t h e n e x t Conference. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 265 "Further Resolved, that without waiting for such repert, t h a t 7 % b e the policy o f the System -to gradually discontinue t h e handling o f drafts with bonds a n d stocks attached. "Further Resolved, that i t is the sense o f the Conference t h a t n o Federal reserve b a n k should be e x p e c t e d t o collect n o n - c a s h i t e m s p a y a b l e at points where adequate a n d satisfactory facilities do not exist.” Governor Fancher. I move t h e a d o p t i o n o f t h e f i r s t separate resolution. Governor Talley. I The Chairman. second it. T h e first separate resolution i s as follows: "Resolved, t o recommend t o the Federal R e - serve Board that n o reguiation b e issued covering the c o l l e c t i o n s " n o f n o n - c a s h items. v (The motion was put and carried, Governor Seay voving "No.") The Chairman. T h e second resolution i s a s follows: "Fuither Resolved, that the questions o f (a) a uniform circular, a n d (b) limitations u p o n the https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 266 character o f the items t o b e handled, b e refer- red t o the Standing Committee o n Collections f o r study and recommendation t o the next Conference.” Governor Geery. I Governor Seay. I offer that. second it. {The motion was put and carried.) Tho Chairman. A n d the third one: "Further Resolved, that without waiting for such report, t h a t i t b e the policy o f the System to gradually discontinue t h e handiing o f dra?ts with bonds and stocks attached." Governor Wellbcrn. I Governor Bailey. I move t h e adoption o f that. second it. (The motion was put and carried.) The Ghairman. A n d t h e next one: "Further Resolved, t h a t i t i s the sense o f the gonference t h a t n o F e d e r a l r e s e r v e b a n k s h o u l d b e expected t o collect non-cash items payable a t points where adequate a n d satisfactory facilities d o not exist." Gevernor Geery. I Governor F a n c h e r . I make that motion. second it. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Governor Bailey. I second it. (The metion was put and carried.) The Chairmen. N o w w e come t o Regulation D . Mr. Harrison. T h i s regulation t s i n precisely t h e form that was submittec t o the O p e n Market Investment Committee, when five members o f the Board and I think five members o f the committee a n d t w o other members o f the Governors were present, a n d i t was agreed t o i n form by everybody present i n that meeting. The Chairman. W h a t this proposes i s that i n those cities where there i s a reserve b a n k o r a branch, t h e ad- justment shall be twice a week, and otherwise I believe it is all left unchanged, isn't it? Vr.Harrison. Yes. T h e y decided t o eliminate a l l that proposal t o define time deposits, feeling that 1 t was quite difficult t o de anything that would satisfy everybody under t h e present terms o f the law. Governor McDougal. I think t h i s r e s o l u t i o n s h o u l d be considered very carefully. The Chairman. W h e n would y o u like t o consider i t ? Governor McDougal. I n the tantative draft which was approved by the Board defining "savings" there was one https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 268 provision that I that d e p o s i t s think was a very wise o n e a n d that was o f o n e b a n k i n another s h a i l n o t b e i n a n y case considered a savings account. protection, I T h a t would give think, against s o m e o f the abuses t h a t have crept in. I do not k n o w whether t h a t would f i t Boston's c a s e i n some way, b u t I think that ought t o stay in, a n d i t ought t o g o further a n d state that deposits o f banks a n d corporations shall n o t b e includeg as savings accounts, because there i s a great tendency on the part o f the banks t o solicit business o n the strength o f issuing savings pass books against deposits o r corporations, made b y banks w h i c h i n reality a r e paya- ble o n demand. fhe Chairman. T h e r e a r e really f a u r points i n connect- 40on with this n e w regulation, Governer McDougal, w h i c h are possible changes o r suggestions t h a t require consideration. I will e n u m e r a t e t h e m , if I may. O n e i s the change t o the semi-weekly reserve report i n cities where there a r e reserve banks o r branches. T h e second i s the adoption o f a scheme o f penalties f o r deficient reserves by 4 progressive rate, w h i c h may, however, b e waived i n individual cases upon application to the Federal Reserve https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 269 Board. T h e third i s a provision f o r giving security for t h e deposit o f trust funds, w i t h which Governor Norris i s quite familiar. W h e r e a bank which exercis- es trust powers makes ceposit o f funds i n some other bank, I believe this regulation proposes t h a t t h e de- positary b a n k gives t h e depositing b a n k security f o r the deposit. T h e fourth i s the question o f definition of time a n d s a v i n g f o deposits, r a i s e d b y Governor Me Dougal. I would like t o sey that I believe w e are all agreed u p o n the semi-weekly arrangement o f adjusting reserves, a n d i f you are ready t c vote o n that, w i l l someone make t h e motion? Governor Wellborn, I The Chairman. make that motion. I s that seconded? Governor Fancher. I second it. (The motion was put and carried.) The Chairman. T h e second point i s this progress ~ ive penalty, a n d I would like t o state I think that i s a very great mistake t o have any progressive penalty i n any regulatior o f the Federal Reserve Board, a n d I believe i t will come back t o haunt t h e Board, because y o u https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 270 will f i n d t h a t e v e r y f a i l i n g m e m n e r b a n k b e f o r e i t fails will subject itself t o a progressive penalty w h i c h may g o u p t o 1 0 per cent, o r something l i k e that, a n d then there will b e a howl. Governor Harding. I move that w e advise t h e Board against it. Governor Fancher. Don't t h e y cover that b y a waiver provision a t the request o f the Federal Reserve Board? The Chairman, T h e n w h y put in? Governor McDougal. T h e provision f o r a n accumulated penalty, M r . Chairman, h a s been i n the regulation a l l along. Mr, Fancher. A b s o l u t e l y . Governor McDougal. Y o u h a v e i t now. W e have lost 1 5 0 member banks, and J think w e have never h a d a n y come-back that I Governor Bailey. I know of. was wondering w h y that was p u t in there. Governor McDougal. This i s a re-graft o f t h e regu- lations. Governor Harding. T h e y have a the Federal Reserve Agent, to notify t h e directcrs. provision requiring i n case o f a deficient reserve, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The Chairman. T h a t ought t o b e enough. Governor Seay. D o I understand t h a t y o u a r e o b - jecting t o t h e p r o g r e s s i v e p e n a l t y u p t o 1 0 p e r c e n t ? The Chairman. the previous o n e , I t i s mandatory h e r e a n d optional in H e r e y o u have g o t t o impose i t , u n - less y o u g o t h r o u g h t h e p r o c e d u r e o f reporting i t t o the Federal Reserve Board a n d having i t waived. Governor Norris. W e have always treated t h e prev- lous regulation a s mandatory, a n d have never h a d a kick. Governor Fancher. Governor Seay. S o have we, S o have we, a n d w e have never h a d a kick, Governor Talley. W e have always considered i t a s mandatory perhaps, because w e approved o f it. W e have assessed t h e penalties a n d collected them. I do not say that w e have done s o without a Governor Wellborn. complaint. T h e penalty i s not s o great after all, except that i t is i n excess o f the regular rate. I a m opposed t o a The Chairman, progressive r a t s , I think. W e l l , w e have discussed it, and I think w e unders*and about it. Suppose w e vote o n it. Governor Bailey. D o e s that include that w e will https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis have t o come t o the Board t o get a rebate? The Chairman. Yes. Governor Bailey. I a m against it. Governor Harding. I offered a resolution that w e advise t h e Board n o t t o incorporate it. Governor F a n c h e r . Y o u make i t permissible rather than m a n d a t o r y ? Governor Harding. Yes, permissive rather t h a n mandatory. Governor Bailey. L e t i t stay just a s i t f2. The Chairman. A r e y o u ready f o r t h e question? The motion { s t o a d v i s e t h e B o a r d t h e t i t i s t h e s e n s e o f t h e Conference that t h e penalty f o r defecient reserves should n o t b e mandatory, b u t optional, a s a t present. Is that seconded? Governor Bailey. I second i t . (The motion was p u t a n d carried.) The Chairman. T h e third question relates t o the giving o f security f o r t h e deposit o f trust funds. U n d e r the p r e s e n t r e g u l a t i o n , a s y o u a r e aware, a exercises trust powers--that i s , a Governor Seay (interposing). member b a n k member national bank-- D o you intend b y that https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 273 resolution t o eliminate t h e waiver o f 4 penalty f r o m this, Mr.Chairman? The Chairman. W e intended b y that resolutian ta put i t just back where i + i s now. Governor Seay. T h a t would eliminate t h e waiver penalty. The Chairman. T h e Federal Reserve Board under this regulation proposes t o make t h e progressive penalty mandatory o n us, t h e Board only reserving t h e right t o waive i t . Governor Seay. Tyat would eliminate this provision in here, I take 1 ? The Chairman. Yes. G o v e r n o r Norris, a r e y o u pre- pared t o speak o n this subject o f giving security f o r trust deposits? Governor Norris. I have been studying the regulae tion o n that, a n d s o f a r a s I out. I can s e e that h a s b e e n thrown understood that t h e L a w Committee o f the Board was o f the opinior that they had n o authority t o impose such a regulation a s that, a n d t h e l a t e s t n e w s t h a t I have h e a r d o n i + I discarded. I think w a s t h a t i t h a d p r o b a b l y b e e n cannot f i n d i t i n here. T h e provision https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 274 of Section TET~A, 2 s given o n page 4 o f X-4988, r e - fers o n l y t o reserves against t h e trust funn. T h e r e is nothing s a i d there aLout security a t all, a n d then in Mr. Wyatt's memorandum o f August 15th, XK--4915, the only change that h e suggests i n that is, t n order t o make t h e language c f the section conform more nearly t o that o f portions o f the regulations, h e recommends that the word “carry” be substituted for "maintain." I would like t o b e sure that that its corrected o n the paper b e f o r e s a y i n g t h e t vorovision f o r s e c u r i t y h e s b e e n elimineted. The Chairman. W e u l d v o u care t o invite Governor Young t o j o i n u s t e discuss t h i s r e g u l a t i o n ? Governor Norris. I would b e very glad to, a r I think perhaps i f Mr. Hamlin i s here, h e i s more familiar with it. The Chairman- I do not think w e can invite Gov- ernor Hamlin without inviting Governor Young. Gevernor Norrts. O f course, w e sheuld b e glad t o have G o v e r n o r Y o u n g . The Chairmun. i mean t o s a y that, i f w e are going to confer with a representative o f the Foard, w e ought to confer with the head o f the Board, i t seems t o me. Governor Norris. G o v e r n o r Fencher calls m y ate tention t o the fact that t h e security o f uninvested trust funds i s i n regulation (F) end not i n this section, a n d that h a s n o t been referred to. T h i s i s simply a question o f the reserves. The Che irman. I f you please, w e will wait until Governer Young comes in, t o continue the discussion o f Regulation (D), and I wovld .like t o take u p now the re- port o f the Subcommittee o f the General Committee o n Penkers Acceptances:: H a s that b e e n distributed? Mf. Harrison. Y e s , sir. VI. S u p p l e m e n t a r y Topics. A. R e p o r t o f s u b - c o m m i t t e e Pankers f a c s p t a n c e s . The Chairmen. T h i s i s a report, o n a s v o u know, which was made b y the Special Committee o f officers o f five o f the banks, I think, which met i n New York, and hadéas.. conference w i t h t h e vice-presidents a n d pertners o f the nrincipal accepting banks and firms, reviewed all of the rersulations and ‘pulinrs o f the Federel Reserve Poard releting t o the scceptance practice, a n d after a good déel of study have submitted a report, o f which you h a v e @ https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis copy. The r e p o r t o f t h e G e n e r r l ‘ c c e p t a n c e C o m m i t t e e a n d t h e Sub Committee o f the General Committee o n Benkers Scceptance https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis is a s follows: "October 28, 1927. "Report b c the Governors Conference o f November 2, 1927, b y the Cheirmen o f the General ‘eceptence C o m mittee s n d the Sub-Committee o f the Generel ‘cceptance Committee. "Since the last Gonference o f Governors the only matter thet has b e e n referred t o either o f these committees w a s t h e juestion o f whet impediments, i f eny, existed thet restricted t h e free competition O o f fmericen doller scceptence credit w i t h sterling o r other foreign currency credits issued b y foreign bankers i n connection with foreign trade. T h e Fed- erol Reserve B o e r d requested consideretion o n d reeommendetion b y o n e o f these c o m m i t t c e s i f possible piior t o the presence Conference. "*ecordingiy the matter was considered b y the Sub-Committee o n October 21, 1927° a n d recommendation in t h i s r e g o r d m s d e t o t h e F e d e r a l R e s e r v e B o a r d . Copy o f the report o f the Sub-Committee t o the Federal https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 275-b Reserve Boerd, which i s self-explenrtory, i s at- teched hereto a s supplementing e n d completing this report o f the Sub-Committee t o this Conference. "Respectfully submitted, "E. R. Kenzel, "Cheirmen."” "Report o f the Sub-Committee o f the Generel /eceptence Committees t o the Federel Reserve B o e r d October fig. 1927. "The Sub-Committee o f the Genersl /eceptenc? Com- mittee held a meeting i n New York on October 21, a t which t h e following were present: M e s s r s . Zurlinden, Peddock, M c K a y e n d “yett, M ur. Kenzel cheirman, e n d Mr .O'Here, s e c r e t e r y . "Consideretion wes given t o * proposel t o recommend to t h e F e d e r s l R e s e r v e B o a r d c e r t a i n m o d i f i c a t i o n s of its existing rulings w i t h reference t o sceceptsnces growing o u t o f the importation a n d exportstion o f foods w h i c h w i l l m a k e i t p o s s i b l e f o r f m e r i c e n b e n k s to recespt bills drewn u p o n t h e m f o r the purpose o f finencing s u c h t r a n s e c t i o n s w h e r e i t i s necessrry for such bills t o b e drawn efter t h e goods have https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 275-c recched their aestinetion, i n order t o conform t o uguel c o m m e r c i a l a n d -credit practices. "tfter full discussion o f the subject a n d consideration o f a stetement o f facts releted b y the Cheirman substentially e s expressed i n the accompenying memorandum i t was unenimously voted b y the Committee t o recommend t o the Bosrd e s follows: "hat t h e Board revoke its previous rulings t o the effect thet e bill cannot b e eligible for. acceptance e member bank o r for rediscount o r purchese b y 4 Federal reserve b a n k 9 s s bill growing o u t o f the im-~ portetion o r exportstion o f goods i t i s i s accepted after the goods have reeched their destinetion, e n d rule i n lieu thereof; "Met benkers sceceptance m a y properly b e considered es growing o u t o f transections involving t h e importation o r e x p o r t e t i o n o f soods w h e n g i v e n f o r t h e p u r - pose o f f i n e n c i n g t h e s e l e e n d d i s t r i b u t i o n o n usual credit terms o f imported o r exported goods i n t o t h e chennels o f trede, whether o r not t h e bills s r e secept- ed efter the physicel importction o r exportetion has been completed. " https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 275-d "Menorandum o f Statement b y the Choirman o f the Sub-Committee o f the Genersl feceptence Committee a meeting o f the Committee i n New York o n October 21, 1927. "The question o f the monner »nd extent t o which use of ‘merican acceptance credit w a s hindered i n competition w i t h f o r e i e n c r e d i t i n finencing foreign trade was t h e subject o f inquiry recently mede b y the Fed. erel Reserve B o a r d o f vour Chairman. "On a visit t o “eshington lost week, y o u r Chairmen exnlained t o Governor Young e n d t o the Federal Reserve Bosrd that, sccording t o his observetions e n d from informetion gained f r o m interviews w i t h m a n y bankers * from Englend, Hollend, Switzerland, Germeny, France end Itely, t h e o n l y precticel obstacles l a y i n rulings of t h e B o s r d w h i c h h e d t h e e f f e c t o f prohibiting bills f r o m being atcentsd s t all b y nationel banks o r *8eligible b y other venks and benkers after the physLesl e x n o r t a t i o n o r importation o f goods w a s completed. "He steted thet these foreign benkers hed told him thet industrucy i n the industrisl counties o f the Continent hed always had t o look t e foreign credit https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 275<e for the pusrchese o f imported r a w materials a n d i n the export o f finished g o o d s ; t h a t d u e t o verious c o u s e s , Such c r e d i t w e s r e q u i r e d f o r l o n g e r p e r i o d s t h a n w e s customsry i n the United States. f m o n r the ceuses nemed were leck of working cppitel i n the ‘mericen sense, s l o w t r a n s p o r t a t i o n , c e okoatne o f river nev- igation during the c o l d months, a n d t h e e c o n o n t i cm i precticobility o f industries closing down temporerily or for longer periods, a s i s frequently adiee i n the United States without serious economic consequsntes. The combined effect o f these conditions requires manufecturérs sersonelly t o corry row meterisls f o r six months o f o p e r s t i o n e n d they, s e c o r d i n g l y , r e q u i r e eredit u p t o s i x months w i t h respect t o » considerable portion o f their purcheses. "The fact that banks o n the Continent = r e much more closely identified with the industries t h e n i s the generel cese i n fmerica normally permittcdthem t o discount f r e e l y f o r t h e i r m i n u f e c t u r i n g c l i e n t s s n d e l s e to procure f o r them from ebronad t h e additionel foreign credit thet they required. Englend, Hollend, Switzerlend, enil to some extent, France, were normelly the ereditor https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 275-f countries o n d the first three continue e t the present time t o extend t h e kinds o f credits f o r the time required t o the Continental industries; generslly through the medium o f Continentel benks. "It was expleined thet, owing t o the higher price ‘evel s t t h e p r e s e n t t i m e a s c o m p a r e d w i t h pre-war, the v o l u m e o f domestic b i l l s industrial s e c t i o n s i n Germeny e n d other o f the Continent represented e a Physicel volume o f goods considerebly less, perheps 75 per cent o f the quentity o f goods, t h e n vould heve been represonted b y e n equal emount o f bills pre-wer, end that, sccordingly, t h e rise i n the price level re- quired relstively greeter reccurse t o foreign credit then before t h e wer. "It wes explained thet b o t h before s n d since t h e w e r it wes t h e prectice o f London benks e n d bankers t o ex- tend commereiel scecentence credit for the benefit o f Continental industry a n d trede freely a n d thet t h e re- strictions i n the ‘mericen prectice h a d d o u b t l s caused & preet d e e l o f f i n s n e i n e t o g o t o London t h e t otherwise would h e y e c o m e t o N e w Y o r k o n s c c o u n t o f the sbility uf fmericen t o crerte credit end the lower *merican diseount r e t e s . https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 275-2 "Me cutting o f seceptance commissions b y London benks f o r Continentsl banks t o atbroct this k i n d o f business t o London wes a l s o referred t o e s consti- tuting 9 substantial competition b u t o n e which would not b e s o serious i f ‘merican benks could give t h e credits t h e t t h e Continental trade requires c n terms otherwise e q u s l w i t h London. "Since your Cheirmen advised the Roerd i n these respécts, h e hes confefred with a considersble number of prominent N e w York benkers w h o creste t h e large bulx o f fmerican scceptences t o inquire o f them what i n their experience h a d prevented t h e m f r o m giving acceptence credits sbroad s u c h e s London bankers hebituslly great, o n d h e was informed b y eech o f them thet t h e rule segeinst accepting after goods h e d srrived i n the country o f import e n d the rule egsinst permitting customers t o redraw ofter goods h a d errived { n the country of import were t h e o n l y t w o points u p o n which t h e y felt their d i s e b i l i t y doperded. "They felt that they would net wish t o extend credits in Europe. f o r pureiy domestic purposes, expleining thet b y thet t h e y meant t h e vurchsse o f goods o f domestic https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 275-h origin, t h e fabrication o f such goods a n d fits sale for domestic consumption within a n y European country, but thet t h e y did feel thet t h e y should b e permitted to finance through ececeptance credits the sale within Europeen c o u n t r i e s o f goods o f o r i g i n f o r e i g n t o t h o s e countries, and the fabrication and sale o f goods for export. M a n y o f them eited t h e familiar problem o f American cotton which i s now sent g e largely t o European countries o n consignment b y fmerican shippers snd i s sold t o Europesn spinners out o f warehouses i n Europe. S p i n n e r s require credit o f ninety days o r more. Under t h e p r e s e n t r u l e s , ¢émerican b a n k s c e n g i v e s u c h credits where t h e cotton crosses a frontier i n Euorpe, that is, where i t is exported from one European country to another, but they cannot give such credits i f the cotton i s sold t o spinners located i n the same European country i n which i t is stored pending sale. / similer negative position arises w i t h respect t o cotton which is sold snd shipped from ‘merica o n terms that have become quite usuel, i.c., that a t the buyer's option h e may p a y cash o n arrival o r give ninety days benkers credit. I t frequently heppens t h a t t h e cotton has a r - https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 275-4 rived sand s o the nhysicsl export completed before t h e buyer e l e c t s h o w h e s h a l l pey. I f h e elects t o give ninety days bankers eredit t h e benker m a y not accept the bill i f the cotton has arrived s t the foreign destination named i n the shipping documents. \The American bankers consulted felt that the time nes certainly arrived i n the development o f American acceptence b u s i n e s s w h e n f m e r i g a n a c c e p t i n g b a n k e r s should b e p e r m i t t e d t h e f r e e e x e r c i s e o f their discre- tion within t h e l a w a n d regulations a n d that, within ‘those limits, f u l l latitude should b e granted t h e m i n the accommodstion o f business a s i t i s done i n foreign countries. T h e y stressed pertioularly t h e point t h a t they regarded i t e s preferable t o give a three months credit with a renewel for a further period, i f i t were found that a renewal were required e t the expiration o f the original period, t h a n t o grant t h e eredit originally fcr a period o f six months, a n d that i f the rule sgainst eccepting « bill after t h e goods h a d arrived were rescinded, t h e e n d sought would b e practically acgomplished without © bills. specific ruling @ n fevor o f renewal I t w a s p o i n t e d o u t t h a t f r o m t h e bankers! point https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 275-4 of view i t was prefersble t o b e able t o review credits a t more frequent intervals t h a n i s t h e c a s e when credits u p t o s i x months e r e being insisted upon b y the borrower a s a precaution against being unable t o redraw a t the e n d o f a shorter p e r i o d in case o f need even f o r a small part o f the credit. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis {At this point Governor Young came ‘nto the Conference R o o m . ) The Chairman. Governor Young, w e a r e struggling with some regulations, a n d I will tell yeu what w e have done t o date a n d then w e struck a snag a n d thought w e had better have y o u in. A resolution passed I think almost i f not quite unanimously suggesting t o the Board that n o regulation be i s s u e d g u s t n o w o n n o n - c a s h c o l l e c t i o n items. have g c t t e n a l o n g a f c e r a fashion f o r t e n years, W e and we thought w e might struggle along a while longer, a s there was some question abcut t h e position that i t might leave t h e banks i n i f such a regulatien were issued. T h a t i s the first resolution passed b y the Board. There were three other resolutions passed, t h e first referring t h e matter t o the Committee o n Non-Cash Collections; a n d , s e c o n d , t h e enumeration o f items which i t was undesirable t o handle; t h e n a resolution was passed accepting t h é sense o f the Conserence t h a t it should b e cur policy gradually t o discontinue t h e handling o f these stock a n d bond security drafts. T h e https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis e777 volume i s increasing v e r y rapidly, a n d there i s a great responsibility a b o u t i t , a n d w e h a v e j u s t g o t t o s t o p it i n New York, t h e r e i s n e question abetit; a n d finally we passed a resolution that i t was t h e sense o f the meeting that n o reserve b a n k would b e expected t o collect items o n points where there were n o satisfactory collection facilities, a r d i t seems t h a t that general expression giving the committee stx months t o work o n it and report t o the next Conference, i n the meantime without a n y regulation and then graduaily cut down and eliminate the security drafts. W e are not asking you t o express a n y v i e w a b o u t i t , b u t w e a r e j u s t r e - porting informally o n what w e d i d o n that o n e subject. Now, w e took u p the question o f regulation o n re- serves, and we have just unanimously agreed that the provision f o r semi«weekly reserve adjustments o f the member b a n k s branches, i n cities w h e r e t h e r e a r e r e s e r v e b a n k s a n d i s satisfactory t o everybody. W e felt that there w e r e t h r e e o t h e r i t e m s f o r conside:ation, I find i s not i n this regulation. I b u t one did not realize it. The one that i s i n Regulation F is the one requiring security f o r deposit f o r trust funds. T h e other t w o items https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis are here i n this regulation are, first, t h e question o f the definition o f time and savings deposits, e n d w e wanted t o a s k y o u t o m a k e a n e x p l a n a t i o n o f that, a n d the third item i n this regulation o n reserves i s t h e manner b y which there i s provided a mandatory pro- gressive penalty for deficient: reserves, with the exception that t h e Federal Reserve Board might waive t h e penalty o n application f o r cause, a n d s o on. We b e l i e v e t h a t t h a t i s a mistake, a n d that i t would b e better t o have t h e penalty optional, a s i t is now, a n d not mandatory, j u s t t o avoid possibly getting into a jam o r a criticism a t this time, a n d that was reported u n a n i m o u s l y a s o u r r e c o m m e n d a t i o n t o t h e Board. We pave come t o the subject o f the definition o f time and savings depesits, and accepting i n principle that the deposits o f banks could not b e construed a s savings deposits, Governor McDougal suggested that that should be extended td include corporations, and at that peint I needed a fel that w e were getting i n t o deep water a n d little b i t o f dtséudaion w i t h y o u a s t o how this thing h a d developed. Governor Young. I cannot discuss t h a t particular https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 279 part c f the regulations. A s I recall, t h e regula- tion was sent out limiting every savings account t o $5,000, and innumerable suggestions, a n d limiting corperations cther t h a n religious o r charitable organizations. a n d all such ideas a s that. T h e comments c a m e in from all t h e Federal reserve banks o n that, a n d i t was t h e conclusion o f Mr. Ylyatt a n d the Board that w e might better eliminate a l l those provisions rather t h a n to attempt t o discriminate, a n d what they have really done i s t> go back t o the old regulation, that i s Just about what * t amounts to, a n d they attempted t o cover the California situation, a n d when t h e y got a l l through it they found o u t that t h e y could n o t cover i t very well, a r d found o u t that there i s only o n e w a y y o u c a n handle this. T h e description o f savings accounts a n d time deposits that is in that regulation now is as good as anybody can describe it, i n our opinion. Governor McDougal. M r . Wyatt's idea, Governor Young, {3 that these cases c a n b e dealt w i t h b y a ruling, a n d it 1 s better t o h e handled that w a y than i n a regulation. In the tentative draft that w a s approved b y the Board, there was one very good provision, I think, contained https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 280 in that, b y which deposits m a d e b y one bank i n another could n o t b e under a n y conditions considered a s savings acceunts, a n d I think that i s a very wise precautionary measure t o adopt, a n d beyond t h a t I had m a d e t h e s u g - gestion here that deposits o f corporations cught t o b e and could properly b e included i n this same category as not being savings accounts from the standpoint o f the question involved here, t h a t o f determining t h e reserve requirements, a n d I think i t would b e very much more e f f e c t i v e a n d s a t i s f a c t o r y i f t h a t c o u l d b e c o v ered b y a regulation, b e c a u s e t h e t e n d e n c y w h i c h w e s e e in one o f our banks apparently 4 8 t o b e found i n other districts too, whereby banks a r e encouraging t h e deposits by banks a n d b y corporations a n d issuing i n this case a special s a v i n g s b a n k check, u n d e r w h i c h t h e y m a y o r they m a y not have t h e right t o take thirty daystnotice or require thirty days! notice, but: with: vespect t o which they p a y them without presentation o f the nass-book excepting b y the bank itself, a n d making them i n fact subject t o check, a n d they are checking accounts. I would like t o see that safegaarded. B y a ruling it i s going t o b e very difficult t o handle, because y o u https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 281 will have t o take i t u p with each bank a n d y o u will have t o ‘send y o w examining officers o r detectives i n t o the Dunk t o see whether i t i s being done o r not; whereas if it is i n the regulations i t witl b e right t a r e Governor Young. S o far a s the deposits o f one bank with another i s concerned, m y reaction agrees w i t h yours; fin s o f a r a s t h e c o r p o r a t i o n s a r e concerned, t o cotrect the abuse o f a few corporations, y o u would penalize m a n y institutions t h a t h a v e bona-fide transactions. Northern Michigan t s just filled with corporations savings accounts that have been there for ten, fifteen o r twenty years. Governor Seay. N o t commercial corporations? Governor Youwhp. Yes. Governor McDougal. Y o u would n o t penalize t h e m a t all, b e c a u s e y o u c o u l d t a k e t h a t c l a s s o f deposits a n d convert t h e m into time deposits instead o f savings. they a r e t i m e deposits, t h a t c o u l d b e s o adjusted, I If am sure. Governor Yucung. since I I t is almost three o r four months went over this whole matter, a n d i t i s not fresh in m y mind. I read t h e r e g u l a t i o n t h i s m o r n i n g a n d r e a d https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 282 Me. Wyatt's Peport: I think i t might b e t o the advant- age o f the Conference t o Have Mr. Wyatt c o m e in--I think I coud get him t o come in--because those things are all fresh i n his mind, a n d h e has been wrestling w i t h then, and h e c a n give y o u a better answer t o that t h a n I can. Gevernor McDougal. I think his answer i s pretty well covered i n the memorandum which h e prepared. idea i s that, His b y dealing with these questions b y a ruling rather t h a n b y a regulation, probably t h e Board is keeping o f f dangerous ground, f o r t h e reason that t h e danger o f l a w s u i t s a n d t h i n g s o f t h a t sort, h e says, are n o t s o great when y o u are dealing w i t h a ruling a s i t would b e i f there should b e a blanket regulation. H e argues a t least along those lines. Governor Young. I a m sorry that a t the moment I not give y o u a n y more information t h a n I have now. can- I t is out o f m y mind a n d i t has been three o r four months since I have considered t h e problem. Governor Geery. G o v e r n o r M e Dougal | o n page 2 under section I I (d), 3 appears the following; "Deposits which are permitted t o be withdrawn by check o r otherwise, without the .ctual presen- 283 tation o f thé check book, certificate o r other similar form o f receipt whenever a withdrawal i s made, shall n o t be considered 'savings accounts! within t h e meaning o f this regulation,” D o e s n ' t t h a t cover your point? Governor McDougall. W e l l , there i s a question about that, G o v e r n o r , b e c a u s e i t i s contended O n One side that the pass book i s presented. The Chairman. T h e case where t h e original pass book is lodged i n the bank a n d remains there, a n d a duplicate is sént ous. Governor Geery. I t says right here, "The retention of the pass book, certificate o r other similar f o r m o f re- ceipt, o r a duplicate o f same, b y the bank and the presentatior o f same b y the bank t o itself i s not a n Tactual presentation’ within t h e meaning o f this regulation." Governor Young. M r . Wyatt i n his memorandum cuts thet o u t . Governor Strong, i f I uaderstand this correctly, the new regiiation i s practically t h e same a s the o l d regulation, with t h e e x c e p t i o n t h a t t h e r e i s a mandatery provision f o r penalty? https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The Chairman. A n d t h e s e m i - w e e k l y plcvosition, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 284 Governor Young. Yes. T h o s e a r e t h e things t h a t a r e really u p t o the Board. I do not think i t i s advisable to actempt t o change t h e regulation. I on t h e p e n a l t y o n reserves. I agree with y o u think t h a t i s e x t r e m e l y dangerous, f r o m long experience i n the Northwest. Y o u get a bank that i s slipping and you think that you can help t h e institution out, a n d frequently y o u refuse t o lend money because y o u want t o keep t h e m short i n reserve. That i s one o f the strongest weapons y o u have with a weak bank. goes down, & T h e bank cennot weather t h e storm a n d finally receiver comes in, a n d the steckholders, through a n investigation a n d what-not, f i n d that under those unusual conditions t h e Federal Reserve Board penalizes that institution 1 0 per cent. I t i s a n argument that you cannot justify, a n d i t will cause a lot o f trouble. I f a good bank slips i n its reserve y o u are always i n a position t o deal w i t h that institution without a progressive penalty. I had rather s e e i t left out, and I a n g l a d t e krow that that i s a majority view. Governor KeLDougal. been--ontional? have n o w . J t i s t o b e left just a s i t has S o m e banks have epplied i t and some https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 285 The Chairman. That answers the two matters you submitted t o me, except t h e question o f giving security for trust deposits. Governor Young. A l l . the banks a r e i n agreement about that, with the exception o f Cleveland and Philadelphia, a n d I do not think that their Governors wanted t a bother with that. M a y b e w e can straighten i t out. The Chairman. Then w e will pass that. T h a t leaves only the regulation about liberalizing the rules o n ac~ coptances.You have j u s t read t h e report, a n d w e are just about ready t o vote o n it. A r e y o u ready t o take some action o n the report o f the committee? T h e report has been distributed. Governor McDougal. I Governor Fancher. I move t h e a d o p t i o n o f t h e report. second it. (The motion was put and carried.) The Chairman. Governor Young, w e passed a resolution indicating t o the Board that w e thought t h a t a meeting of t h e c o u n s e l o f t h e f e s e r v e b a n k s w o u l d b e a very desir- able thing, a n d there i s just one topic left o n the Governors! program o f a legal c h a r a c t e r w h i c h w e w o u l d ordinarily leave t o that meeting i f i t 1 s t o b e held. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 286 Iam taking i t for granted that i t will have serious consideration b y the Board, a n d I a m going t o a s k this Board t o refer Topic VI-C t o the meeting o f the counsel. Is there a n y objection t o that? Governor S e a y . T h a t i s t h e c o u r s e I myself, s o I recommended make t h e m o t i o n t h a t i t b e referred. (Motion p u t a n d carried.) The Chairman. A t the meeting tomorrow morning, Governor Young, w h a t would y o u like t o have u s deal with? Governor Young. T h e o p e n market topic here has al-~ ready b e e n d i s c u s s e d b e f o r e t h e Board. T h e r e i s n o use going a n y further about that. The Ghairman. I t has b e e n discussed w i t h this mect- ing, a n d w e s u c g e s t e d t h a t i t w o u l d t a k e t h e u s u a l c o u r s e - - the report was received ani discussed i n much detail, and that i t now g o t o each bank for action b y the directors. I mean, t h a t cannot b e finally approved here, b e - cause a l l o f these proposajs a r e subject t o the action of t h e b o a r d o f directors o f e a c h bank. Governor Young. " R e l a t i o n s w i t h foreign banks" h a s already h e e n r e p o r t e d a n d d i s c u s s e d ? The Chairman. Yes. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis £87 Governor Y o u n g . The Chairman. uation. W h a t w e r e your conclusions o n ID? W h y , i t i s a rather interesting sit- W h e n a member b a n k submits a n application f o r discount, i t will submit a n item with the letter P indi- cating that i t i s purchasing t h e paper, a n d S indicates and that a statement i s o n file. that i t has been discounted/ I f that i s a corporetion, say for instance a milling company out there, with subsidiaries, t h e question arises a t once i f that i s a complete s t a t e m e n t w h e n t h e p a r e n t c o m p a n y f i l e s i t s s t a t e - ment. W h a t actually happens i s that w e decide,whether that i s logicel o r not, b y looking u p our files t o see whether there i s a statement o n file, a n d t o see whether it conforms t o t h e regulation, t h e statement having b e e n “furnished t o us b y a member bank, a n d we will assume that t h e m e m b e r b a n k w h i c k b u y s t h a t p a p e r i n the market has got ‘ @ statement o n file which conforms t o the regulations. I t may have the consolidated statement o r it m a y h a v e t h e c o n s o l i d a t e d s t a t e m e n t a n d t h e s t a t e m e n t of a l l o f t h e subsidiaries, b u t when this paper comes in, when i t i s offered t o us, w e are not going back a n d say, "What iebha o f a statement h a v e y o u ? the regulations?" D o e s i t comply w i t h W e have got ore which complies with https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 268 the regulations, a n d w e got i t from a member bank, a n d it seems t o m e that that meets t h e situation. Governor McDougal. Governor Strong, Then then. thet. W w e went fur- e went t o the point w h e r e i t was moved that complete statements b e filed with a l l t h e depositary b a n k s w h i c h p u r c h a s e d c r e d i t loans. Governor Geery. H e r e i s a copy o f the resolution as passed (handing paper t o the Chairman). The Chairman. I f there i s nothing further, I declare t h a t t h e C o n f e r e n c e (Whereupon, adjourned.) o f Governors will i s adjourned, a t 5 . 2 0 p.m., t h e C o n f e r e n c e o f Governors https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis