Full text of Federal Reserve Governors Conference : Meeting Documents : November 8-10, 1926 : Proceedings, Volume 1: November 8, 1926; November 9, 1926, Morning Session

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Federal Reserve Bank of St. Louis

A CONFERENCE O F GOVERNORS O F FEDERAL RESERVE BANKS

Treasury Building,
Washington,

November 8

D . C.

- 10, 1926.

Walter S . C o x
Shorthand R e p o r t e r

Washington, D.C.


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Federal Reserve Bank of St. Louis

*
A CONFERENCE O F GOVERNORS O F THE FEDERAL RESERVE BANKS

Washingt*n, D . 0.;
Monday, November 8 , 1926.

The Genference o f Geverncrs °“f the Federal Reserve
Banks convened i n the hearing r - mcf the Federal Reserve Board, Treasury Building, Washington, D.C., o n
Monday, November 8 , 1926, a t 1 0 u'clsck a.m,

APPEARANCES :
W. W. Paddock, Deputy Governtr, Federal Reserve
Bank o f Boston,
J. H. Case, D e n u t y G o v e r n ,r Federal Reserve
New York,

Gesrge WW, Norrie, Grvernor o f the Federal Reserve
Philadelphia,
E, R . Fancher, G c v e r n o r

s f t h e Federal Reserve

Cleveland,
Gecrge J, Seay, Govern:r < f the Federal Reserve
Richmond.

iu. B, Wellborn, Gcvernvur o f the Federal Reserve


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Federal Reserve Bank of St. Louis

“Yank o f ftlantea.

J. B. McDougal, Governor o f the Federal Res.rve
Bank o f Chicago (/cting Chairman).
D. C . Biggs, Governor o f the Federal Reserve B a n k
of St.Louis.
R. /. Young, Governor

o f the Federal Reserve B a n k

of Minneapolis.

“. J . Bailey, Governor o f the Federel Reserve B a n k

of Daihsas City.
Lynn P . Talley, Governor o f the Federal Reserve
Bank o f Dallas.

J.U. Osaliins, Governor o f the Federal Reserve
Bank o f S a n Francisco.
G. L . Herrison, D e p u t y Governor o f the Federsl R e serve B a n k o f N e w Y o r k a n d S e c r e t a r y t o t h e C o n f e r e n c e

of

Governors .
»
P R O C E E D I N G

&

.

Governor McDougal. G e n t l e m e n , M r . Case h a s just r e ported a n interview with Governor Crissinger, w h o states
thet t h e Board will b e ready t o respond t o our i n v itation
to come i n s t a n y time i t suits us; that t h e y have b e e n yeory

busy i n the last few days with the other Conference, a n d I


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Federal Reserve Bank of St. Louis

assume from that, Mr. Case, that i f we desire w e ere a t
liberty t o proceed, a n d shell invite the Board t o come i n
leter on?
Deputy G o v e r n o r C e s e .

Y e s , G o v e r n o r MeDougal.

move t h e t Governor McDougal take

Governor Fancher. I

the chair a n d preside o s Cheirman o f this Conference,
Governor Young. I

will second thet.

(The m o t i o n w a s u n a n i m o u s l y c a r r i e d a n d G o y e r n o r

MeDougai t o o k the chair).
The Chairman.

“ e all regret, I

a m sure, t h e absence

of our Chairman, Governor Strong, particularly e s i t t s
caused b y illness, o n d i f it is i n order I would like t o
suggest t h a t Governor Fancher a n d G o v e r n o r S e a y prepare 4
suitable message t o Governor Strong, expressing o u r regret
at h i s a b s e n c e a n d o u r b e a t w i s h e s f o r h i s r a p i d a n d c o m .
plete r e c o v e r y .

Governor Norris. I

will make thet a s a motion, Mr.

Chairman.
Governor Crlizins. I

will s e c o n d i t .

(The motion was carried a n d the following telegram was

sent t o Governor Strong):


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Federal Reserve Bank of St. Louis

"November 8, 1926.
"Benj. Strong,

"270 Park ‘venue,
"New York City.
"The Governors have leerned

o f your recent severe ill-

with oecute regret b u t a r e rejoiced t o know that y o u are
on the r o a d t o recovery.

" i e all miss y o u greetly a n d

our love a n d best wishes.

"MeDougal,
"rating Cheirman."
The Chairman.

the Conference,

Now,

i f i t meets w i t h t h e a p p r o v a l

of

v e will proceed w i t h o u r program i n the

order o f its arrangement.

O n e o f the importent matters

thet w e w i l l h a v e t o c o n s i d e r j a t e r

g n will b e t h e r e p o r t

of the Standing Committee o n Collections.

I t has b e e n cus-

tomery t o invite Mr. Strater, Chairman o f that committee,
to b e present, a n d since there i s a report o f thet character t o b e submitted, s n d also material questions o n which

Mr. Strater will probably b e helpful, will arise, I would
suggest t h e t Mr. Governor Fancher communicate w i t h Mr.
Streter a t once a n d a s k h i m t o b e here tomorrow morning.

If

that meets w i t h the epprovel o f the Conference w e will a s k


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Federal Reserve Bank of St. Louis

Governor Fancher t o d o that.
Governor Fancher. I
The Chairman.
sections.

will b e glad t o d o so, Mr.Chairmen.

T h i s propram i s divided i n t o three o r fou

S e c t i o n 1 , Topqye 1 , i s

Le C R E D I T TRANS‘ CTIONS ‘ N D POLICIES.
’, @ Q p e n Market G p e r r t i o n s .

1. R e p o r t o f Open Market Investment Committee.
Deputy G o v e r n o r C a s e .

M r . Chairman, a

copy o f thet

report h a s b e e n distributed b y the Secretary. I

might s a y

that t h e various members o f the committee m e t yesterday
afternoon

a n d went o v e r this report,

sents t h e views a n d recommendetions
mittee.

a n d the report repre-

o f the O p e n Merket Com-

T h a t report i s a s follows:

Since t h e Governors! conperence l a s t spring there have
been t w o i m p o r t a n t c h a n g e s

i n t h e s p e c i a l i n v e s t m e n t account,--

@ purchase o f securities between March 29 and fpril 15, which
increased the amount from 210 million dollars t o 275 million,
and a sale o f securities between /ugust 7

and September 15,

which reduce the account again t o 200 million dollars.
Purchases i n March and /pril.
The purchase o f 6 5 million dollars o f securities

in

March end fpril was made a t a time when business psychology


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Federal Reserve Bank of St. Louis

6
wes pessimistic, w h e n commodity prices w e r e falling, a n d
when there h a d been a considerable liduidationnof credit
employed i n the security markets, a n d t o a lesser degree i n
commercial loans.

T h e result o f the purchases w a s t o reduce

approximately t o that extent borrowing b y member benks a t
the Federsl Reserve Banks, perticularly i n larger centers, a n d
to operate together w i t h other causes toward slightly easier
money conditions.
Sales i n August a n d September.
fs t h e y o a r a d v a n c e d

n o business r e c e s s i o n s u c h a s h a d

been anticipated b y many esrlier i n the year developed.

The

volume o f trade continued s t a very high level, building

activity and automobile production were well maintained,
commercial loans increased, a n d the volume o f credit employed
in the security markets a g a i n showed a n increase.

Money

rates showed a n advancing tendency a n d the Federal Reserve
Bank o f New York raised i t s discount r a t e f r o m 3 % t o 4 per
cent o n August 12.
The sale o f 7 5 million o f securities f r o m the o p e n market
investment a c c o u n t b e t w e e n f u g u s t 7

and September

1 5 took

two forms; first, t h e sale o f 3 5 million t o foreign correspondents

t o employ »alences

c r e s t e dy
b gold imports i n t o


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Federal Reserve Bank of St. Louis

q
this country.

T h i s sale o f securities merely offset t h e

I n addition 4 0 million o f

effect o f the gold imports.

securities w e r e s o l d t o the Treasury Department f o r account
of the sinking fund a n d the effect o f this sale o n the market
was d i s t r i b u t e d t h r o u g h o u t t h e c o u n t r y ° s t h e Trecssury with-

drew funds f r o m depositery banks i n all districts t o p a y for
the securities.
The s a l e o f sccurities w e s n a t u r a l l y a c c o m p a n i e d

slight further increase i n borrowing b y member banks,

by a

b y in-

ereased offerings o f bills t o the Reserve Banks, e n d b y
slightly firmer money conditions.

T h e reletionship between

open m a r k e t p u r c h a s e s a n d s a l e s d u r i n g t h e y e a r t o changes

in bills discounted a n d holdings o f bankers scceptances,

is

shown i n the ottached' diagram.
The P r e s e n t C r e d i t S i t u a t i o n .

The present credit situation does n o t appear t o indicate t h e desirability o f e n y change i n open market policy.
Business continues t o b e active a n d t h e volume o f trade j s a t
a high level.

T h e ousiness rtmosphere, however,

i s conserva-

tive and there i s some apprehension a s t o the future. T h e r e
were r e p o r t s r e c e n t l y o f s o m e d e c l i n e
duction o f sutomodiles.

I

i n building a n d pro-

n recent w e e k s t h e r e h a s b e e n a

con


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Federal Reserve Bank of St. Louis

8
siderable liquidation o f brokers loans e n d some slight r e duction i n the total volume o f credit outstanding.

The

October period o f largest demand f o r commercial credit a p pears t o have passed without credit stringency and, aside
from a period o f slight e a s e i n the second half o f October,
money conditions h a v e b e e n steady.
Turn o f t h e Year.

In the past t w o years i t has b e e n found desirable t o
sell securities

i n January t o take u p the usual seasonal

slack i n credit resulting f r o m the return o f Christmas c u r rency a n d the usual seasonal f l o w o f funds t o money centers.
Last yeer a

purchase o f 5 0 million dollars o f securities w e s

made during t h e period o f greetest currency demand i n
December, a n d these securities w e r e s o l d i n Janusry a n d
February.

T h e s e transactions appeared t o have e

stabiliz-

ing influence u p o n money conditions, although t h e amount o f
purchases a n d sales w a s n o t sufficient t o prevent a

,on-

siderable tightening o f money rates a t the e n d o f the year
and a considerable easing i n rates a t the beginning o f the
new year.

T h e committee therefore suggests t h a t this year

it m a y b e desirable t o purchase u p t o 100 million o f securities during t h e coming s i x weeks,

t o b e sold agein a t such


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Federal Reserve Bank of St. Louis

9
time e s credit conditions sppear t o make thet course d e sirable.

I f business e n d credit conditions continue a s a t

present i t would s e e m wise t o sell these securitios shortly

after the turn o f the yeer, but i n the event o f a decline i n
business sctivity, s u c h s s some observers t h i n k m a y occur,
4t then might b e desirable t o retain - pert o f these securities i n the Federal Reserve portfolio.

I n any event w e should

be prepared f o r sither course.

Temporary Sales o f Securittes.
ft the June 1 5 tax period t h e usual temporary sales o f
securities w e r e m a d e f r o m t h e o p e n m a r k e t a c c o u n t
money conditions,

t o stabilize

w i t h t h e result t h e t m o n e y rates w e r e

steedy during the period. ‘ / t the September 1 5 tex peried
the N e w Y o r k C i t y b a n k s w e r e s o l a r g e l y i n debt eat t h e R e -

serve B a n k that i t wes felt that temporary sales would n o t
be n e c e s s e r y a n d t h i s p r o v e d t o b e t h e case.
supply o f funds

i n the market,

T h e temporary

d u e t o the redemption o f

maturing issues, w a s offset b y the liquidation o f member b a n k

indebtedness a n d money rates were steedy curing the perind.
The exhibits " 4 " sana "B" attached s h o w i n detail t h e
distribution o f government securities a n d bankers acceptances
among the Federal Reserve Banks; there

i s also attached


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Federal Reserve Bank of St. Louis

10
o f ell

(exhibit "C") statement showing ectual errnings

Federal Reserve Banks f o r the first nine months o f the y e a r
1926 o n d t h e estimeted earnings f o r the entire yesr; a l s o

(exhibit "D") a comparstive statement

o f earning asset hold-

ings o f all Federel Reserve Benks.

Exhibit " / "
STATEMENT SHO” I N G P A R T I C I P A T I O N B Y FEDORA‘ LRUST RVE B A N K S I N
SYSTEM S P F O I ' L I N V E S T M E N T / C C O U N T ‘ N D C L A S S I F I C ! T I O N
OF I S S U " S H E L D O C T O B E R 2 7 , 1 9 2 6 , I N T H f c c o u N r B Y
MITURLT IOS.
r e ae nme cmetiens oF ”
e
e eks cee ate Seen e e
~ see

Holdings
a

H o l d i n g s b y Maturities

9,767,000 December 15, 1926 | 42,802,500

Boston “

New York 5 2 , 7 6 1 , 5 0 0 M e r c h 15, 1927
Philadelphia 4 , 9 2 0 , 0 0 0
Cleveland

Richmond

J u n e 15, 1927

5

4 ,919,2@)
7 ,457,00C

6

1 3 , 2 0 2 ,O00 D e c e m b e r 15, 1927 5 4 , 8 2 1 , 5 0 0

5 , 8 1 8 , 580

ftlanta 0
Chicago

2 6 , 2 5 5 ,000

St.Louis

1 3 , 7 2 5 , 0 0 0

Minneapolis

8 , 9 2 5 ,500

Kensas City 1 7 , 9 9 5 , 0 0 0
Delles

1 8 , 4 6 7 , 0 0 0

Sen Francisco 2 9 , 1 8 7 , 5 0 0

4200 ,000 ,000

§

2

0

0000,@00,

Exhibit "Bp"
PURCH’ SES O F B I NKERS /COEPT'NCFS F R O M J! N U P Y
R 4 T O OCTOBER 27,
1926 / N D “MOUNT ESCH O / MK H'S RECEIVED I N EXCESS O R SHORT O F
ITS P R O R * T
f SHARE UND'R MPPORTIONNMEN? PLAN PUT INTO UFFEOT

J/NUSRY 4, 1926.
Bills O v e r
Pi lia E R t h t i e d

P r o Rata

Bills S h o r t
Pro R a t a

Share
required to Secuine m e n e e
104,836,000 94,664,000 10,172,000 @ 0

Boston *

2,861,600

New York

315,436,000

318,297,000 0

Philadelphia

106,557,000

188 ,188 ,000

Cleveland

133,772,000

135,231,000

1,459,000

Richmond

70,376,000

70,945,000

569 ,000

ftlanta

70,841,000

71,411,000

570,000

Chicago

188 ,637,000

189 ,326 ,000

689 ,000

St.Louis

53,746,000

54,562 ,000

816,000

Minneapolis

56,768,000

57,422,000

654,080

Kanses C i t y

80,155,000

81,140,000

6)

9 8 5COO,

Dallas

57,311,000

57,422,000

0

111,00

121,885 ,000

121,71" ,000

San F r a n c i s c o
Totals


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Federal Reserve Bank of St. Louis

$1,360,320,008

0

17% ,000

1,631,006

2)

*1,360,320,000 (10,545,000 “10,345 ,0C.

The everages shown i n the above statement are being adjusted i n the usual manner.

12
Eenihit * ¢

e

F

O F SLL F E D R'L RK’ SERVE B f NKS
U I!
C TL FRNINGS
STATEMENT SHOVING ‘
O
R TH’ FIRST NINE MONTHS O F TH: YE’R 1926 s/ND ESTIMATED
F’RNINGS F O R TH: FNTIR® Y E A R 1926,
fotual N e t Earn- Estimated N e t E s t i m a t e d N e t
E a r n i n g s .ifter
ings i n Excess E e r n i n g s i n

of Expenses a n d Excess o f Ex- E s t i m a t e d all Charge-off
Dividends, b u t p e n s e s e n d C h e r g e - f ' y a i l a b l e f o r
before Charge- D i v i d e n d s , but o f f s f o r S u r p l u s a n d
offs, 9 Months b e f o r e Cherge- Y e r r V r a n c h i s e T a x
f o r Yeor
Ended Sept.d0, o f f s Fntire 1 9 2 6
1
9
2
6
.
Y e a r 1926.
1926.

Boston 2

535,345

7 4 1 , 2 0 2 137,047 574,085

New York 1,183,296 1 , 5 7 7 , 7 2 4 4 5 5 , 0 0 0 1,122,724
5

8 , O00

6

6

7 ,156

5 2 8 ,870

7 0 5 , 1 5 6

Cleveland

570,000

760,000

372,008

388 ,000

Richmond

533,000

710, 667

105 ,000

605,667

ftlenta

936,426

1,248,564

340,327

9 0 8237,

Chicago

938 ,099

1,250,808

660,197

5 9 0603,

St.Louis

5 9 2684,

790,248

253,591

556,657

Minneapolis

275,612

567,488

95,946

271,542

Kansas C i t y

585,715

778 ,284

166 ,024

612 ,260

Dalles

531,019

708 ,024

41,296

666,728

1,826,687
11,154,754

662 ,000

884 ,667

Philadelphia

San Francisco_1,160,000
Totals


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Federal Reserve Bank of St. Louis

8,366,066

3,306,428 7

,848326,

73
The Cheirman.

Y o u will observe i n the report that,

beginning a t the bottom o f page 2

end going over t o the

next p a g e t o t h e c o m p l e t i o n o f t h e paragraph,

y o u find t h e

récommantet tons o f the Committee, a n d i t i s with respect t o
that paragraph i n particular that w e want careful consideration a n d a c t i o n b y this C o n f e r e n c e .

Governor Callcins.

H a s thet report b e e n discussed

with the Federal Reserve Poard?
The Chairman.

I t h a s n o t been.

I t has b e e n submitted

to the O p e n Market Committee a n d has their approval. I

think

itwould be interesting, and probably helpful, Mr. Case, if
you would make reference,

a s y o u d i d yesterdry,

actions t o o k place sbcut »

t o what trens-

yeer s g o a t this time i n antict-

pation o f the same situstion.
Deputy Governor Case. L a s t year, a n d perhaps a
lator,

i n December, there w a s a

isting i n our district.
chase o f f i f t y million.

little

reel demand f o r credit e x -

T h e committee recommended t h e pur“

e n o t o n l y made t h a t investment,

but w e also had another, a n d rather difficult situation,
with which t o deal, d u e t o the fact that o f recent years
there seems t o b e a tendency t o d o considerable window

dressing throughout the country, a n d the burden o f that


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Federal Reserve Bank of St. Louis

14
falls

o n t h e N e w Y o r k Bank.

L a s t yesr a

certain e m o u n t

of

such window dressing w a s required b y the calling o f upwards
of a hundred millions o f call loans within the last s e n days
ar two weeks o f the o l d year, a n d the situation was n o t t o o
well handled b y us.

“ e d i d not recognize e n d see i t soon

enough a n d a s a matter o f fact those loans pretty nearly went


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Federal Reserve Bank of St. Louis

into o n e bank, which,

i n turn, borrowed f r o m u s one hundred t o

a hundred a n d fifteen million dollers sgainst Government
securities.

“

e hope this year t o handle that situatien i n

much b e t t e r f a s h i o n ; b u t ,

a s this committee r e p o r t suggests,

we think, because o f the extra demand for currency which occurs i n December, w h i c h vsually amounts t o a couple o f
hundred million doellers, plus t h e desire o n the part o f eae good
many banks throughout t h e country t o put their affairs i n

little better shape and show n o borrowings, that i t would n e
desirable f o r the committee t o have power t o b u y u p t o one
hundred million this yooar, i f need be,
The Chairman. ‘ “ h r t does t h e Conrerence w i s h t o d o with
this r e p o r t ?
Governor Young. I

move t h a t t h e r e p o n t b e a p p r o v e d a n d

that t h e committee b e directed t o furnish 9
the F e d e r e l R e s e r v e T o a r d w i t h 2

aopy o f i t t e

statement t h a t i t h a s t h e

unanimous e p p r o v a l

o f t h i s Conference.

Governor Seay.

T h a t seems a

very legical resoluticn,

Mr. Chairman. L a s t year, i f I remember correctly, the earning assets o f the Federal Reserve Banks increased about

“250,000,900 i n the lest two months o f the yeer. T h e y did not
do s o i n the year before, 1924. T h e r e appears t o be some
likelihood thet i t may happen egain, a n d i f for n o other reaso:
than t o b e i n a position t o sell securities a f t e r t h e t u r n o f

the yeer, when money i s likely t o become more plentiful b y
reason o f the return f l o w o f Federal Reserve notes a n d the
paying o f f o f borrowed money,

i t would b e desirable t o b u y a t

least » hundred million. C o u p l e d with the influence, which
Mr. Case has just expleined t o us, I think i t highly necessery
thet the committee should have thet power. I

would like t o

ask Mr. Case if, within the last ten days o r so, the committee
has n o t sold some seventeen millions o f securities, a n d what
the o c c a s i o n o f that was.
Deputy Governor Csse.

Y e s e n d no, Governor Sesy.

sold 2 5 , 0 0 0 , 0 0 0 lest Friday,

“ 8

a n unusual a n d sudden demand o n

the part o f » foreign correspondent; b u t thet was a

temporary

sale a n d that has a l l been replaced, s o m e o f i t coming i n
today.


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Federal Reserve Bank of St. Louis

16
The Chairman. G o v e r n o r Young's motion hes b e e n seconded
by Governor Seay.

I s there a n y further discussion?

(The motion, having b e e n duly seconded, w a s unanimously

carried.)
The Sheirman.

T h e Topic 2 is "Policy", with respect t o

open m a r k e t o p e r r t i o n s .

disclosed here.

T h e source o f thet t o p i c

i s not

D o y o u wish t o discuss i t ?

Deputy G o v e r n o r C a s e .

I s n o t your p l a n t o g o around t h e

table, M r . Chairman?
The Chairman. I

do not know thet that will b e necessery.

Deputy Governor Oese.
policy. I
and I

T h e topic relates t o open market

think i t i s pretty clesrly covered i n the report

do n o t t h i n k i t i s necessary t o have a n y further discus-

sion o f i t . c c T t h o u g h t y o u w e r e r e f e r r i n g t o a n o t h e r t o p i c ,

Mr. Chairman.
The Chairman.

T h e n without o b j e c t i o n t h a t w i l l b e passed

The next i s 1 B, Discount Rates a n d Policies.

D o e s

anyone wish to discuss this topic?
Governor Fancher.

I t would b e interesting t o hear f r o m

Mr. Case with regard t o the v i e w t h e y hold i n New York a s t o
present credit condition a n d rates, w h a t their viewpoint i s
there, together w i t h the foreign viewpoint a s well; t h e


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Federal Reserve Bank of St. Louis

bs
present situation a n d what t h e y think i s before u s i n the
next f e w months.
Deputy Governor Case.

T h e present credit situation, t h e

economic situation, i s outlined, a s we see it, i n New York,
in t h e s e c o n d p a r a g r a p h

o f this r e p o r t ,

o n page 2 : namely,

thet business continues t o b e active a n d the volume o f trade

at a high level; but o n the other hend there i s a more conservative t e n d e n c y i n t h e b u s i n e s s s t m o s p h e r e a n d a
certainly

feeling,

i n some l i n e s , t h a t p e r h a p s b u s i n e s s m a y n o t v e

as active, with a little apprehension e s t o the future.
Thet i s shown i n the fact o f some report o f decline i n the

d

bullding activity/in t h e production o f automobiles.
But the credit situation i n New York i s really a t the
present time a

very comfortable one.

T h e officers a n d direct-

ors o f the Federal Reserve B a n k f o r the last three o r four
weeks have b e e n following the credit situation very, v e r y
closely each week.

I n other words,

i t has n o t been deslt w i t h

at all i n a perfunctory way, b u t i n a v e r y careful e n d thorough

way t o see whether, i n the judgment o f our directors, there
should b e a n y change made i n the discount rate,
operations,

o r a n y thing o f that sort.

thet v e r y careful examination I


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Federal Reserve Bank of St. Louis

i n open ,arket

£ s the result o f

think i t i s a fair statement

18
thet o u r directors f e e l thet while t h e situation a t the moment i s a very comfortable one, i t should b e continued t o b o
followed v e r y closely, p e r t i c u l a r l y a s w e g e t t o w a r d t h e e n d

of the yesr.

Governor Fancher. I

notice, Mr. Case, that the bill

deelers have reduced their rates slightly o n very long time
bills.
Deputy G o v e r n o r C a s e .

Governor Fancher.

D o e s that mean,

little softening o f rates,
Deputy Governor Case.
that wey.

Yes.

i n your judgment, 4

o r how d o you interpret that?
T h e r e h e s been.a slight tendency

Y o u will recell during the summer, g o i n g back

perheps t o fugust, m o n e y rates stiffened quite materially.
Commercial p a p e r w a s p r e t t y f i r m a t 4 - 3 / 4 t o 5

during t h e last month there h a s b e e n a

per cent.,

and

softening tendency

and m o n e y h a s b e e n m u c h m o r e p l e n t i f u l a n d e a s y i n o u r merket.

Call money, w h i c h has b e e n ruling a t 5 to 5%, i s n o w obtained
very freely a t a e , C o m m e r c i a l paper rates have dropped a

bit, ruling now from 44§ to 4-3/4, a n d that i s also reflected
in the bill rates.
Governor Wellborn.

Y o u stated a

few moments a g o that

there i s some thought t h a t business i s slowing down, t h a t


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Federal Reserve Bank of St. Louis

19
I
the c o n s c r v a t i v e e l e m e n t t h o u g h t b u s i n e s s w o u l d b e slower.

would like t o e s k i f you think that i s just a state o f mind
dior whether there a r e ectual conditions t h a t point i n thet
rection?
Deputy Governor Case. I

think a little b i t o f hoth,

have
Governor. B u i l d i n g activities a n d automobile production
that
been running a t a very high pace a n d tuere a r e indications
there i s a slowing duwn i n those t w o respects. I

when y o u see that curve i n two importe nt

a foir statement t h e t

lines--I think there was between 6g and 7
pended,

think i t i s

biliion dollars ex-

o r will have b e e n expended i n building activities t h i s

year--I think when that o c c u r s i n two importent lines there
is just a

little feeling o f apprehension that i t might extena

to o t h e r lines, c e r t z i n l y i f t h e y s h u u i d

g o mich farther a n d

effect the labor situation, either i n building o r automobile
production, a n d thereby creste s o m e unemployment.

Governor “ellborn. I
Cleveland ,

reed a n article b y Mr. Ayers, o f

who seemed t o take t h e view that business i s

slowing down; t h a t i t i s inevitable.
Governor Seoy.
The Chairman.

H e took that same view early last spring.
G o v e r n o r T a l l e y , w h a t i s the situation

down i n your district?


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Federal Reserve Bank of St. Louis


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20
Governor Talley,

T h e c i t y banks represent 7 5 per cent

of our loans and the country banks 25, I

was just thinking,

trade next
ag wit. Case was speaking, t h a t t h e balance o f
u s as it
year won't r u n anything like a s heavily against

be a
has i n the past year, which means that there will
great reduction inexpenditures

i n our district n e x t year,

and o f course that will mean a

great falling o f f i n the con-

sumption

o f goods t h a t a r e p r o d u c e d

i n t h e o t h e r districts,

particularly i n t h e northern a n d eastern districts.
present i m p r e s s i o n

T h e

o f t h e c o u n t r y ban'<s i s t h a t t h e y w i l l

they
have t o borrow a good deal o f money next year, b u t

rather
won't after all, a n d i t would seem that that was
and
contrary t o the present impression i n our district,
than a
would make for a n easier oredit condition rather
more stringent credit condition; t h a t a

market a s large

would
as the Zleventh District for consumptive articles
a n d cause a
naturally affect t h e manufacturing districts
slowing down. I

think that would probably b e true o f Gav.

o a large extent and to Governor
ernor WYellborn's d i s t r i c t t
Seay's District also.
The Chairman, H o w does your Board feel i n regard t o
the 4 per cent rate down there?


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Federal Reserve Bank of St. Louis

aL
Govenor Talley,

A t o u r meeting o n September 7 t h

I strongly recommenced a n increase i n our rate o f one
half o f one per cent.

T h e majority o f the Board d i d not

feel that i t was a n opportune time t o increase rates,
although I

think several o f t h e majority group d i d not

view the rate structure a s I did, t h e y seemed t o think
that because o u r loans were n o t expanding rapidly a t that
time that there w a s n o indication that t h e amount o f r e

discount would becane burdensome, a n d that i n view of the
fact that t h e marketing season w a s just coming o n for cot-

ton, their chief product, that w e should not raise the
rate. A n o t h e r view was that one-half o f one per cent

wouldn't have any appreciable effect.

M

y own position

was I did not care whether i t was raised one tenth of
one per cent, o n e eighth o f one per cent, o r one-half,
just s o i t w a s raised, b e c a u s e I

wanted t h e i n f l u e n c e

of

onincrease in the rate to fall directly upon the attitude
of the reserve c i t y banks.
In October I

repeated that recommendation a n d added

to i t that w e antablieh a four p e r cent rate a s a commo-

di t y rate, particularly o n cotton loans, s o as t o e m
brace t h e cotton loans, a n d a n ordinary rediscount r a t e

of four and a half per cent. T h a t did not meet their


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Federal Reserve Bank of St. Louis

view. I

can see nothing i n the situation that causes

me t o change m y view, b u t Bubsequent developments rather
confirmed that view.

by

T h a t i s illustrated, briefly,

the fact that o u r loans declined t e n million dollars
after t h e veak a n d then i n c r e a s e d four o r five million

dollars after the l o w point, a n d that was exactly the
period w h e n the increase t o rates should have applied.
I wagt t o s a y that I

personally feel that w e are operat~

not like a ship without a rudder, because w e are

ing —

using t h e r u d d e r r a t h e r f r e e l y t o s t e e r a r o u n d s o m e p o i n t s

that look rather shoaly —

but I will say that I feel lige

we are operating sometimes l i k e a ship without a

compass

and d o not k n o w juet where w e are going right now,

W e

have t o intensify o u r administrative control, a n d I think
that would b e especially true along i n the early spring

months.
Deputy Governor dase.

Y o u stated t h a t the Board d i d

not approve o f your recommendations.

D o y o u mean your o w n

Board?

Governor Talley,

O u r own Board, yes.

Deputy Governor Case.
Reserve B o a r d ?

I t never went t o the Federal


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Federal Reserve Bank of St. Louis

Governor Talley, N o , except a s a matter o f record
in the minutes o f t h e meeting.
! G o v e r n o r Fancher.

M a y I

a s k Mr. C a s e a b o u t t h e f o r

eign situation?
Deputy Governor Case.

M r . Harrison i s our foreign e x -

pert i n these matters, a n d i f you have n o objection I will
vass that question o n t o hin.

(Informal discussion followed, which the reporter

was directed not t o take,)
The Chairman,

i t w o u d b e interesting t o xnow from

anyone here as t o whether they think conditions i n their

district justify an increase i n the rate?
Governor Norris.

I

n view o f the interesting state-

ment o f Governor Talley, I would like to hear from Gov—
ernor Biggs a s t o whether,

i n view o f the l o w reserve

ratio i n the 8t. Louis Bank which has existed for some
time they have given any consideration t o a change i n the
Tates.

Governor Biges.

I t was given consideration last W e d

negday b y our Board and there seemed t o be no question
but what w e were doing t h e right thing i n not changing it.
The Chairman,”

W h a t i e your reserve ration, Governor


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Federal Reserve Bank of St. Louis

Biggs?
Governor Biggs.

A b o u t 53.

The Chairman. D o e s that reflect a

demand from the

city o r the country?
Governor Biggs.

O u r reserve percentage h a s been

running around 53, 51, 5 2 and 53.
way a l l through t h e season.

W e have kept i t that

T w o o r three times i t got

below 50.
The C h a i r m a n

T h a t d o e s n o t reflect a

demand f r o m

your member banks?

Governor Biggs.

N o t a t all.

Governor Norris. I

was under t h e impression that f o r

a number o f weeks St. Lovis h a d not participated i n the

purchase o f bills, b u t had sold them at times.

Governor Biggs, W e did sell them to keep from get~
ting t o o l o w i n o u r reserve. I

pretty well.

think I

can explain that

T h e Little R o c k Branch i s borrowing

$3,473,000, Louisvile $7,740,000, Memphis $7,148,000,
and >t. Louis $19,377,000. T

he change i s very little,

with t h e exception o f St. Louis. A

year a g o they were

borrowing t e n million a n d n o w they a r e borrowing about
twice that.

O u r smaller banks a r e paying o f f but o u r


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Federal Reserve Bank of St. Louis

35
larger banks s r e borrowing rather freely.

T h e y are having

a rather good demand f o r money.
The Chairman.

M p a t a r e your total loans t o member

banks now?

Governor Biggs. F o r t y million.
The Chairman,

I f there a r e n o further comments w e

will g o t o t h e n e x t topic.

Deputy Governor Case.

M r . Chairman, before passing

to the next tonic, o n the question o f discount rates,
it might b e interesting t o have a little discussion a s t o
the policy o f the Federal Reserve Banks i n dealing with
member banks i n their denand f u r credit,

ployed, a n d s o on, I

a s t o methods

em

would like t o say a word o r two a s

to what w e have done i n New York, W h i l e I do not meanto
imply that there h a s been a n y tightening o f credit, I
think i t i s a fair s t a t e n m t
ing verhaps a

t o say that w e have been g i v

little more intelligente a n d closer scrutiny

to applications f o r credit. I

think i t was about a

year

ago when Professor Sprague, w h o was here, a n d who made a
report t o the Governor's Conference o n his survey o f conditions throughout t h e country o f Federal Reserve Banks,

commented quite freely o n the number o f banks which were
really continuous borrowers. I

think h e pointed o u t that


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Federal Reserve Bank of St. Louis

26
there w e r e s o m e 800.o0dd m e m b e r b a n k s t h a t h a d b e e n conti-~

nuously i n debt f o r a year o r more,

N o w I recognize v e r y

fully a n d frankly that conditions i n our district a r e very
different f r o m those which obtained i n many other die-

tricts, i n districts like that o f Governor Bailey, Gover-—
nor Biggs, Governor Talley, Governor Wellborn, a n d 6 0 on,
but w e h a v e b e e n s c r u t i n i z i n g o u r a p p l i c a t i o n s m o r e c a r e -

fully a n d have s e t u v a procedure f o r the prevention o f mis.
use O f credit.

W e have b e e n following u p those banks that

were continuous borrowers.

B e g i n n i n g w i t h t h e first o f

the year w e had some 2 2 banks i n our district, only 32,
that h a d b e m continuous borrowers, t h a t h a d been continuously o n our books f o r a year o r more.

W e reviewed t h e

situation i n each particular instance and w e found, f r a n k
ly, t h a t a

number o f banks were borrowing, n o t because they

needed money, b u t because they thought i t was profitable.
There w a s a spread between o u r rate a n d what t h e y could
obtain,

N o w v e have déen gradually dealing w i t h those banks

until today that l i s t o f banks that have been continually
in our debt f o r a

year o r mote h a s been reduced t o two

banks, and we @re working o n those, T h o s e are banks that
were not i n very healthy shape, but w e hope and believe


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Federal Reserve Bank of St. Louis

27
that w e will have those banks o f f o u r books entirely b y

the end.of the year.

W e believe that w e will not, a t

the end o f the year, have any banks i n our district that
are borrowing continuously,

W e submit t o our directors w e e k

ly full information i n addition t o the usual list o f
applications a n d statements o f the borrowing banks i n ian~

hattan, a n d incidentally, a s a matter o f information w e
carry t h e amount o f their Street loans o n that paper,

so

that w e can see t o i t that none o f our city banks a r e steady

borrowers, a n d particular where they have investments that
would enable them t o adjust their position without recourse
to us. Then we review those banks that have been continuously i n debt f o r a year o r more. T h e y come u p before
our discount committee each day, andthen t h e y a r e present~
ed t o t h e executive committee a n d our board o f directors

each weex. I

want t o say that I think this method o f pre-

sentation h a s not o n l y been helpful a n d useful t o the dir-

ectors i n keeping them informed o f the situation, b u t i t
has been educational and helpful t o those o f us who are
responsible f o r the loan operations.

W e also show the

banks that are borrowing i n excess o f their capital and
surplus,

N o w o n our last report w e had about seven banks.


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Federal Reserve Bank of St. Louis

Five o f them were just current borrowings and, beginning
in the month o f October, w h e r e t h e y h a d adjusted their
reserve position a n d were temporarily borrowing i n excess
of their capital.

O n e was i n September, a

bank borrowing

$127,000 with a capital o f $65,000, another bank that had
been o n since Jyne, a bank i n a n agricultural section,
borrowing a hundred thousand against a capital o f $60,000.
In addition t o those lists w e have a list o f banks that
are o n our special list w h i c h a r e not i n good condition
end which w e show u o separately, I

might s a y that while

that list i s perhaps 1 8 or 20 i n number, there are but
six o f that group that a r e borrowing f r o m u s and a s a mat—
ter o f fact t h e y a r e only borrowing about a

million dollars.

I d o want t o say that a s a result o f this more intensive
study,

t h e presentation

t o t h e discount c o m m i t t e e a n d t o

our officers and directors, o u r feeling i s that what w e
have done i n that regard has been v e r y helpful a l l along
the line.
The Cpairman.

T h a t h a s been your exverience

i n re

gard t o this matter, Governor Seay?
Governor Seay, T h e r e a r e some thirty o r forty in-—
stitutions

i n o u r district w h i c h h a v e b e e n borrowers f o r


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Federal Reserve Bank of St. Louis

29
@ y e a r o r more, s o m e o f t h e m f o r several years.

T h e y clain,

in some cases, that i t i g still the result o f the credit
crisis o f 1921.

W e have h a d these banks under discussion

with our directors, a n d i n September o f this year, under
authority o f our directors they were communicated with t o
the effect that w e should expect them t o liquidate their
accounts during the current year, i n the absence o f any
emergency. I

am quite gure that those banks have been

profiteering. T h e y have veen advised that i t is opnosed t o
the policy o f the directors o f the Richmond Bank t o permit

continuous borrowings; that while the Federal Reserve
Bank o f Richmond was prepared t o grant then reasonable
seasonal accomnodations,

a n d h e l p i n emergencies,

that i t

was ovposed t o t h e cateaiahe o f the Federal Reserve System
to permit b a n k s
purpose

t o continue

o f profit.

W

t o borrow continuously f o r t h e

e have practically t a c e n about t h e

sane action a s that taxen b y the N e w Y o r Bank, w e have

taxen i t u p directly with each individual bank and cefinite—

ly advised them that we viewed with disfavor continuous
borrowing and, a s I have stated, w e have told themthat w e
expected liquidation from them within a reasonable period.
Governor Wellborn. I

wish t o say , dire Chairman, t h a t


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Federal Reserve Bank of St. Louis

30
I have be~m v e r y mach interested i n the statement o f Mr,

Case. W e have been worting along those lines ever since
our bank has been established.

W e had quite difficulty

in holding quite a number o f banks down t o borrowing

moderate amounts, a n d we finally decided that i t would
be the best policy, a n d announced t o them, that w e would
lend t h e m n o more than their cavital a n d surpius,

W e do

not make that a rigid rule, but we want i t understood b e
cause w e believe that doing i t would b e a violation o f the
Federal Reserve Act.

O f course i n emergencies w e g o the

limit t o aid a bank.
The Chairman.

H o w many borrowing banks have y o u d o m

there?
Governor Wellborn.
The Chairman.

W e have about 2 2 0 borrowing banks.

H o w many o f those b a n k s

d o y o u suppose

are borrowing m o r e than their capital a n d surplus?
Governor Wellborn. I

think there a r e about fifteen.

By the way, o n l y three o f those banks a r e i n Florida,
About t h e middle o f September o r first o f October I send
a form letter t o a l l o f these agricultural banks that a r e
borrowing pretty heavily, t h a t w e want a l l o f them t o pay
up i n the Fall a n d clean u o before t h e first o f January.


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We keep after t h e n continuously.

I n a year like this,

when t h e y have a slump, t h e y c o m e back with their tales
of w o e a n d w e t e l l t h e m t h a t t h e y c a n s u b s t i t u t e c o m m o d i -

ties f o r unsecured paper, w h i c h seems t o b e agreeable t o
them.
Denuty Governor caddock.
started after this situation a

I n the First District w e
year a n d a half ago.

A t

that t i m e w e had 2 6 banks which h a d been continuous b o r
rowers f o r over a year, T h a t number h a s besn reduced t o
about half.

W e have not gone after i t formally, b u t w e

have had i n mind those banks which were borrowing larger

amounts and we have taken i t up with t h e m by conversation,
when t h e y happened t o b e in, o r when w e happened t o b e visit—
ing a bank, a n d w e have h a d n o difficulty i n getting t h e m

down when w e have talked with them. With v s the continuous
borrowers a r e mostly those w h o u s e governments a s collater~
al.

O f course that makes a difference i n our attitude i n

handling them.

W e bring those cases u p just about t h e s a m e

way that N e w York does.

W e have a list which comes u n every

two weeks f o r careful consideration.

W e also have a list o f

banks i n the district which w e call our special list, banks
which a r e n o t i n the best condition, b u t I expect within t h e


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Federal Reserve Bank of St. Louis

next s i x Months a l l o f those»banks will b e out o f debt
and will get a

fresh start.

The Chairman.

H o w many member banks have you?

Deputy Governor Paddock.

4 2 0 .

The Chairman. H o w many are borrowing?
Deputy Governor Paddocs.

Governor Cal'sins.

L e s s than 200.

W e have dealt with the matter o f

continuous borrowing a t all times without a n y set rule, r e
viewing e a c h case according t o coaditions a n d dealing w i t h
each case b y itself. W i t h v e r y f e w excentions t h e banks
that a r e i n the continuous borrowing class with u s are banks
which have not recovered f r o m the acute slump o f 1920 and
1921, T h o s e banks a i e being encouraged t o work themselves
out t o a

point o f l i q u i d a t i o n a s r a n i d l y a s possible.

The

condition o f each borrowing b a n k i s before u s a t all times
when w e consider aoplications.
There w a s o n e matter, w h i c h w a s i n d i r e c t l y r e f e r r e d t o ,

about thich I would like t o hear s o m e renorts.

Governor

Talley indicated, a n d I think Governor Biggs too, that
borrowings i n their districts a r e mainly borrowings b y city

banks. I

an wondering whether that i s a general condition

throughout t h e country,

a 8 I believe i t is, that t h e prin-


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Federal Reserve Bank of St. Louis

33
cipal borrowings from the Federal Reserve Banks are city
borrowings a n d n o t country borrowings; t h a t there has been
a rapid a n d almost continuous increase i n the last y e a r a n d

a half i n the borrowings b y country banks and a consider
able tendency t o increase borrowings b y city banks. I
wonder whether that i s true throughout t h e country.

Governor Wellborn. That i s true i n our district.
Governor Seay,

I t is not true o f our district a t this

time. T h e burden of the country banks has shifted to some
extent t o the city banks, b u t that i s not true i n our district.

I t happens periodically, b u t not continuously

through the year.

T h e banks t o which I refer are all

country banks,

The Chairman.

M r . Case, your loans of course are

very largely with city banks. T n e question i s whether o r

not the demand that you usually have comes from the country
or c i t y correspondents.

Deputy Governor Case, I

think i t i s a fair statement

to s a y a t the present time that i t i s pretty well diversified.

O u r city banks a r e borrowing a t t h e present t i m e com-

paratively v e r y small amounts.

$46,000,000.

L a s t week o u r total w a s

I t isa fact that i t fluctuates, that normally


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Federal Reserve Bank of St. Louis

34
our c i t y bants collectively borrow approximately a

b

red million dollars

u

hund—

t just a t present the amount

ig materially b e l o w that.
Governor Biggs.

O u r city bants a r e borrowing quite

heavily now. S i x t y p e r oent o f their borrowings areé o n
Government securities, T h e y bought Government securities

very heavily fot some reason. I do rot know what started
it, but one bank went i n and bought eighteen million, ano-

ther bought twenty million. Three or four of the big banks
bought them, they d o not want t o e l l them at the present
time, t h e y have had their seasonal needs a n d requirements
to take care o f a n d have been borrowing o n these Governments,
It i s only temporary because n e x t week t h e y m a y all b e ous.
One b a n will come i n for t e n miliion a n d o e i n i n three
or four days.

I

n following u p Mr. Oasets statement I

want t o say that w e follow the same plan with our directors.
They a r e i n f o r m e d a t e v e r y m e e t i n g

o f the number o f banks

that a r e borrowing o v e r their capital a n d surplus, Z i g h t

or ten o f them have not been able t o get outs
increased their loans,

W e have not

W e finally get them reduced, b u t

we are not pushing t h e m too hard.
Deputy Governor OGase.

D

o you also give t h e d i r e c t


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Federal Reserve Bank of St. Louis

ors a list o f your continuous borrowers?

Governor Bigs.

O h yes. T h e y have that right i n

front o f them. F o r instance, i f there i s @ bank i n irkan
sas, and we have several down there, then our Arkansas

director i s going t o asx questions about that, The same
is t r u e w i t h r e g a r d t o L o u i s v i l l e a n d Memphis.

W e Keep i n

very close touch with our weak banks, W e have a s many a s
two o r t h r e e o f t h e i r o f f i c e r s c o m e i n t o s e e u s a n d t a l k

the situation over.

I f things don't look good, they tell

us that s u c h a n d such a condition exists i n their particular

territory, a n d sometimes w e will send a man out t o investigate that a n d find o u t what other banke i n the territory
are doing.

I n one o r two cases w e have found that o n e Lank

would b e overmextended a n d that right i n the same county
wnother bank would b e running along fine. T h e a t i s a ques—

tion o f management,

I n every case you will find i t i s a

question o f voor management.

W e are working a t those

things continuously a n d I would s a y w e have about t e n o f
those which a r e over what w e oall t h e danger line i n good
banxing.
Governor Talley, I

think t h e dlaparity i n the amount

of borrowings b y o u r Reserve c i t y banks a s compared with


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36
our country banks i s easily explained i n our case.

I

n the

active borrowing season w e had a good many o f the country
banke coming i n with rather extravagant programs laid out,
which progrems w e declined t o becane a party to.

W é rather

pegged those loahs a n d i n most cases w e pegged t h e m rather

cefinitely, T h e n w e would g o into what tre considered the
fundaments o f their situation and would, i n most cases, sell
them, a t least o n the principles, a n d then they would close.
with the remark that they had t o lend money inj their commun
ity because t h e y h a d t o make a

crop i n their community,

Then they would say that i f that was all the money that
we were willing t o advance that t h e y could get that t h e y
needed f r o m t h e i r correspondents.

W e would t h e n s a y that

we were just a s much concerned with the amount o f their b o r
rowing, regardless o f the source from which they obtained
the advances. T h e cuuntry banks then went t o the city banks
and the city banks made advances f r o m entirely different considerations,

i t seemed, f r o m what w e did.

W e always t r y

to have d u e regard f o r the result o f excessive borrowing t o

the borrowing bank and also t o the community i n which i t i s
located,

T h e reserve c i t y banks, largely through objective

influence, seem t o make advances o n the basis o f the charag-


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Federal Reserve Bank of St. Louis

37
ter o f collateral that they receive and t h e type o f bank

that they were lending to,

O f course w e realized, o r though

we did a t the time, that the more credit absorbed outside
the easier i t would b e for us, and that has been confirmed
in view o f the fact that the reserve city banks now are talk
ing rather glibly about materially reducing their advances
as @ matter o f general policy,

N o w the wunliqvidity o f

the country bank loans i n the reserve city banks has caused
them t o b o r r o w i n d i r e c t l y t o c a r r y t h e i r c o t t o n exvorters.

Ordinarily a t this time o f the year, with liquidation o f
bans loans they can carry their cotton exporters very conveniently,; b u t now, with t h e unliquidity c f the country

bans loans i n the city banks, i t has mide i t necessary ftr
the city banks t o borrow rather heavily f.om us, unusual?y
heavily, i n order t o carry their cotton loans.

O f cuurse

the cotton exvorter h a s taken o n just a s much cotton a s
he c a n finance.

I n some cases I have <nown t h e y are buying

t five dollars a
cotton. a

bale under t h e quotation, w h i c h

gives them an immediate profit o f five dollars a bale o n
their hedges and naturally they are taking o n just a s much
cotton as they can, T h e mill demand has been very brisk
hecause t h e y realize that t h e y c a n purchase l o w priced


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Federal Reserve Bank of St. Louis

38
cotton a n d make a

profit o u t o f it, I

think t h e reserve

city banks will b e pretty well cleaned u p with u s b y the

middle o f February
The Chairman, H o w many have you?
Governor Talley.

1 9 4 borrowing,

The Chairman. H o w many banks have y o u altogether?
Governor Talley.
The Cpairiman.

845.

a n d only about 2 0 0 borrowing?

Governor Taliey.

1 9 4 borrowing banks, fifteen o f them

reserve city banks, and 179 country banks.
Governor Fancher. w W r s Chairman, t h e discussion h a s
taken o n two phases. First g o i n g back t o the matter o f ex-

tended banks, t h e list o f extended banks i s before our dis.
count committee seach day, T h e beginning o f this year w e
had about 3 5 banks that h a d beén o u r books more than @ year.
Quite a

number o f those banks were borrowing o n governments,

That number has been considerably reduced.

I

n some sections

of our district w e had a n unusual wheat crop, which enabled
the country banks t o pay out.

T

e have only a

few cases

where t h e b a n k s a r e p r e t t y p a d l y f r o z e n a n d w e a r e f u l l y
informed a s t o t h e r e a s o n s f o r that.

T h e devressed bitumi-

nous coal situation has resulted i n some o f our banks, i n


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parts o f ovr district, h a v i n g a

very hard time t o get along.

Their deposits are off, their loans are frozen, but that
condition h a s made a marked change f o r the better i n t h e
last t w o months o r s i x weeks, t h e mines have reopened a n d
the price o f coal has advanced v e r y markedly. T h e r e i s a
great b o o m i n the bituminous mines,

I f that should continue

through t h e balance o f the year I think that several o f our
frozen situations would b e liquidated.

Then we have erother list o f banks that are not i n a
healthy condition,

i n a satisfactory condition, a n d that

list we have before us. W e have 853 member banks. A b o u t
300 are borrowing,

O u r totas loans t o member banks a t

the close o f last Friday night was $69,000,000, o f which
fifteen million were loans t o country banks a n d 5 4 millions

to city banks. O y r increased borrowings have largely come
from that source.

O y r loans o n the lst o f way were

about 69 million dollars. They were liquidated down i n
July t o 30 million,

T h e y increased since that date t o

70 million, a n d the increase from July t o the present time
has largely been t h e borrowings o f the city banks.

O u r

country banks have not increased their borrowings more
than t w o m i l l i o n d o l l a r s a n d t h e c i t y b a n k s h a v e i n c r e a s e d


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Federal Reserve Bank of St. Louis

their borrowings nearly forty million dollars, ailthouch
Our borrowingr a r e not arg much i n the aggregate a s they

were & year ago,
Governor Horria,

W e have a total number o f banks

in the District o f 760, member banke.

3 2 0 o f thore n e m

ber banks are borrowing, During the laat month our total

loanshave been a b o u t 5
4 million,’ f
o which 15 million, o r
one third, h a e been t o the city banks, a n d about 3 0 million,
or tyvo-thirda,

t o the country banks,

Owing t o the absence o f the revorter t h e latter pert o f

topic I-B and all o f topica I-(c) a n d 1(j) were discussed
off the record,

The Chairman, I

would like t o 70 back one moment t o

subject w e diecussed a

few momente ago.

I t wae interest-

ing t o hear f r o m those present a c t o the conditione i n respect t o chronic borrowerr, a n d i t worst b e a zood thing, I
believe, f o r all i f w e could come t o these conferenoes o r e ~

pared t o give definite fieures i n repnect t o the number o f
banks i n the district, t h e number o f borrowing banks, a n d
the number a @ thore that a r e continuous offenderg i n the
respect o f borroving,
Devuty Governor Case.

I t would b e interesting i f

that were made o n a comperative baeie e a c h year,


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Federal Reserve Bank of St. Louis

41
The Chairman.

Y e s , and I

would say, t h a t perhaps t o

bring similar figures for the six months previous, o r a
year. T y a t i s a

suggestion.

D o y o u w a n t t o a c t o n that?

If so, let some one maxe the motion.
Governor Wellborn. I

Governor Norris.

s o move.

i l l y o u restate the motion?

be T h e Chairman, T h a t t h e members o f this Board come t o
these conferences prepared t o give definite figures i n r e
spect t o the number o f banxs i n their districts, t h e num.
ber o f borrowing banks, a n d those banxs which have been

borrowing for a year o r more.
Deputy G o v e r n o r Case,

Governor Calcins.

U n a

comparative basis.

s s pointed out, t h e list o f those

borrowing continuvusly f o r a year o r more i s not complete,

as many o f the banks get off the list once a year and then
get back o n again.

The Chatrman.

T h e next topic is 1-(d). Discussion

of the report o f the Agents Committee o n sember Bank
Reserves with a

view t o considering whether n o w i s the

appropriate t i m e t o seek legislation concerning those
features o f the revort which t h e governors have heretofore

approved i n vrinciple, ( S e e paragraphs 3 to 13, inclusive,


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Federal Reserve Bank of St. Louis

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of the Secretary's winutes o f the November 1925 Gover,ors'
Conference. )
That i s another N e w Y o r k topic.

Governor Calxins., T h a t i s rather a

long tonic a n d

as it i s now half past 12, h a d we not better adjourn?
Governor Wporris.

W e probably would n o t have time t o

finish that, but probably w e would have time t o finish
L(E),

a n d i f agreeable I

move w e pass D

for the present

and take u p E.

The Chairman,

L E is: D i s c u s s i o n o f further steps

which might b e taxen b y Federal Resetve Banks t o prevent
member bant failures.
This i s from Atlanta.
Governor Velltora. I

have prepared a paper containing

of m y thoughts o n this subject a n d i f there i s n o objection
I will r e a d it.

The Chairman. H o w long i s it?
Governor Vellborn,

utes t o read.

I t will only take a very f e w min-

I t i s headed "Should not the Federal Reserve

Banks play a greater part in the prevention of member bank
failures. "

In the caption to the Federal Reserve Act, w e read


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Federal Reserve Bank of St. Louis

43
that t h i s l e g i s l a t i o n

i s " A n A c t t o o r o v i d e f o r t h e esstabd-

lishment o f Federal Reserve banks, t o furnish a n elastic
currency, t o afford means o f rediscounting comnercial
paper,

t o establish a

more e f f e c t i v e s u p e r v i s i o n o f b a n k i n g

in the United States, and for other purposes."
I want t o c,11 particular attention t o the last named

of these stated aims, namely, The Establishment o f a more

effective supervision of bancing in the United States, and
I want each o f you gentlemen t o ask himself i f we have done
our full duty toward realizing that aim, I t i s needless for
me t o point out that the Federal Reserve System i s at this
time,

s o t o Bpeak | o n trial before t h e veople o f the United

States.

T h e matter uf’ charter renewal i s now before Con-

gresss: incorporated i n the -icFadden Bill, and you may be
certain that the political enemies o f the system —— many
of whom wield a very powerful influence ~ ~ are exanining
our record with a microscopic eye, and will hold u p t o the
public v i e w any shortcomings o r deficiencies t h e y c a n find.
Accordingly,

i t i s u o t o u s t o d o all within o u r power t o

see that the System as a whole and the individual reserve
banks meet squarely a n d comppetely t h e enormous public

responsibility that has been placed upon us. I t is pupog sible


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of course, that s o young a n organization a s the Federal
Reserve System, charged with the financial administration
of a great nation a n d subjected almost a t birth t o the
stress o
f abnorimal conditions, should work smoothly i n every

detail. D e f e c t s i n the machine are bound t o show up, from
time t o time, a n d i t i s our duty t o benefit b y experience
and t o correct s u c h faults a s the passage o f time m a y
develop.

When the System was established, i t was i n the minds
of the public that t h e Federal Reserve Sanks could a n d would
to a greater extent prevent b a n k failures.

T h e large number

of failures that h a s taken place i n the vast five years h a s
tended t o dissipate this confidence,

I n coversing casually

with those not connected with the banking business, I

find

that t h e y are surprised a t t h e number o f failures among
banks which aremembers o f the Federal Reserve Systen.

f e

have always urged state banks t o become members, a n d we
have consistently t o l d them that t h e time would s o o n cane
when t h e vublic would learn t o discriminate between banks
that belonged t o the System a n d those that d i d not.

I t is

undesirable that the large number o f failures i n the past
five years h a s robbed this argument o f much o f ite force.


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Federal Reserve Bank of St. Louis

45
I feel quite sure that every Federa 1 Reserve B a n k has
taxen t h e prover interest i n their members which get i n t o

an extended condition, a n d that the Federal Reserve officers
usually g o a s far a s they think t h e y safely c a n t o help t h e

member banks. Perhaps sometimes wemight stand back o f them
toa greater extent b u t f o r t h e fear o f risking a loss.
of this, o f coursé,

All

i s a matter o f judgment i n the adminis—

tration of each Federal Reserve Bank. I n his
discourse before t h e davernchat Conference l s t warch, Hon.

Newton D, Baker exotessed the opinion that it might be better
for t h e reserve bants t o tare some ris* a n d lose sSomenoney

rather than that the Federal Reserve should "be in a state
of rigidity with regard to banks that are i n trouble." J
believe that ar. Baker out the matter very frankly, and that
in the main h e i s right.
trouble,

for aid.

h e n w e find a meuber bank i n

W e are like t h e doctor t o whom a patient comes

W e ought t o give the closest attentiou and study

to every case, a n d take the greatest interest i n the welfare
and financial recovery o f that member bank,

O f course i

do not advocate the rediscounting of worthless paper, o r
the throwing away o f money i n a case where there i s not a
reasonable chance that the institution can b e saved. B u t ,


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Federal Reserve Bank of St. Louis

there are times when 4
4n order t o be of real value,
banks
risk a loss. T h e regional
reserve bank simply h a s t o
instithtions; a n d
were n o t created a s nrofit-—making

judgment o f reserve bank
when, i n the calm and deliberate
officials, a

&
member's failure would have

serious effect

are convined that i t s officers
upon i t s community, w h e n w e

honest and willing t o cooperate
and directors are capable an¢.
situation that arises throug}.
with u s t o save the bank froma
there i s a reasonable chance
adverse conditions, a n d when
the
the reserve b a n c will pull
f
r
o
m
advance
further
a
that

I think w e are only
circumstances
such
i
n
through,
menber
o u r existence when w e
fulfilling o u r d u t y and justifying
our
menber b a n k requires. W h e n
maxe t h e advance t h a t t h e

and the bank i s saved,
judgment i s vindicated b y events
has
anyone a n d t h e community
no l o s s i s e n t a i l e d u p o n

and suffering that g o
been preserved from the hardships
hand i n hand with failure.
number o f failures among
It seems t o m e that t h e large

years has attracted the attenmenber banxs i n the past few
list that follows, I give the
tion o f the public. I n the
i n the United States b y years
total number o f such failures
from 1 9 2 1 t o date}


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Federal Reserve Bank of St. Louis

S

National

. sember

t

40

1

29

1

6
0
33
37

1925

2

8

1926
15th

1

5

Total

5 8 9

4

5

3

1

4

3

6

The largest number o f failures o f national banks i n
any five consecutive years prior t o 1925 occurred i n the

5-year period ending October 31st, 1897, i n which there
were 187 such failures.

The Chairman. ‘ h a t are your recommendations, M r Well.
born, with the view of preventing bank failures?
Governor Wellborn. W e l l , that i s a matter that [ simply
wanted t o call t o the attention o f the Confermce,

I t is

a matter f o r u s t o work o u t ourselves, a n d I think w e should
pay a little more attention t o it, perhaps.
our b e s t b u t s o m e t i m e s I

W e have done

have s a i d t o t h e c o m m i t t e e w h i l e

we have done our best w e have not done our very best, a n d
perhaps s o m e banks have failed that perhaps w e should have


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Federal Reserve Bank of St. Louis

48
gone a little further t o save.

I t i s a matter o f judgment

and I have n o panacea t o offer, but I think i t i s remarkable
that s c m a n y b a n s

h a v e failed,

a n d i t has t h e effect

preventing g o o d state banks joining.

of

I f National banks fail

they o a n well taxe t h e position that t h e y have n o particular
reason f o r joining, t h e r e i s n o very good talking point t o wards inducing t h e m t o join.
The Chairman.

a r e there a n y other suggestions f r o m

any source?

Governor Norris. I

have one. I

am i n agreement with

everything that h a s been s a i d i n Ggvernor Wellporn's statement, b u t I think t h e emphasis should b e put u p o n t h e i m

portence o f preventing a menber bank from getting into a des
parate situation rather than helping i t o u t after i t has

got there.
Governor Wellborn. I

agree with you o n that, a n d I

think that i s one thing w e should give careful attention
to.

W e should probably d o a s wir. Baker pointed o u t i n

his discourse last spring; instead o f sending the exam@ners
to a bank when w e s e e the first indication o f trouble I
think w e ought t o send some executive officer f r o m o u r bank
and take that b a n k a t the very beginning, a n d take a deputy


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Federal Reserve Bank of St. Louis

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governor o r cashier of the bank, end that sits around the
executive comnittee and cnows the policy of our bank, and
en

i f the cause o f the trouble i s excessive borrowing o r

mismanagement, That i s one o f m y ideas o f correcting t h e

situation. O f course after a bank gets i n trouvle i t is
very difficult t o correct anything; b u t I think a t the
very inception o f it, when w e s e e that a
to get into trouble,

bank is.liable

w e ought t o take active measures b y

our executive offioers, and otherwise ] want t o see us do
all w e can to prevent bank failures,
Governor Norris.

W e have a record i n the third dis-

trict that ] imagine is not touched i n any other district,
except nossibly t h e first a n d second.

I n t h e twelve years

since the institution of the Federal Reserve S y s t e me
w have
only h a d t o o nem e x banks closed, a n d o n e o f them reopened,

So there has only been one bank failure i n the district i n
twelve years, N o w , a very small p a r t . o
f that i s to our

credit. Over 99 per cent of it is due to the intelligence
and care with which the banks o f the district are operated,
B,t w e watch them very closely all the time, a n d whenever
we see any evidence o f the existence o f practices o r the

holding o f an office b y a man who does not seem to be quali-


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Federal Reserve Bank of St. Louis

fied, w e take i t u p with the bank ourselves and i n the
put
case o f a National bank w e get t h e Chief Examiner t o
them o n the list f o r special examination a n d make a n immedi~

ate examination, w e tell him what our doubts are and get
him t o have his examiner anphasize those points with the
bank.

I f i t i s a State bank w e d o the same thing w i t h t h e

otate banxing department, a n d w e try t o catch all those
things a t the very beginning, t h e moment w e see evidence
of anything that m a y i n the future g e t t h e bank into trouble
I think that h a g been o f some little help i n bringing about
the record w e have i n the District.
Governor Wellborn.

Governor Seay- I

Y o u have a magnificent record.

imagine i f a list were made o f shose

banks which have b e e n prevented f r o m Closing b y the Federal

Reserve Bank, b y advice o r other assistance which they had
no right t o expect,

i t would m a k e a very. respectable list

in comparison w i t h t h e numbers o n the list o f failed banks.

It i s our experience a t the banks which failed, failed
u
b from mismanagement, a n d
not only from bad m a n a g e m e n t . t
in some cases i t has been a question w i t h u s whether i t

would not have been a good thing for the science o f bamking
if more o f them had not been allowed t o fail.

h e n I say


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Federal Reserve Bank of St. Louis

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prevented f r o n closing I mean temporarily prevented f r o m
closing.

I t i s a question o f change o f management i n many

cases, a bank may have t o close i f there i s no change o f
management.
The Chairman. T h e most important f e ctor i n contributing

to the failure o f something like 3,000 banks i n this country since 1984 has been inefficient management,

I t seems

to me that there are two things that might work towards
the accomplishment o f what sir. Wellborn desires. O n e ,
greater caution i n the matter o f granting bank charters,

or care i n granting them, a n d the other i s a close relationship a n d complet: cooperation w i t h the State a n d National
bank examining authcrities. T h o s e t w o things I

think a r e

worth while considering.
Governor Seay, w r . Chairman, there i g one thing I
would like t o call attention t o and that i s that Federal
Reserve banks have n o power o v e r t h e management o f t h e banks
except a

moral power,

t h e i n f l u e n c e t h e y m a y exert, a n d

very often i t i s a great responsibility i n keeping u n mis-

managed banks, banks that have gotten themselves into a desparate condition f r o m mismanagement.
Governor Calxins.

4 n d t h e y have n o control over t h e


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Federal Reserve Bank of St. Louis

grahtinz o f charters cither t o National o r “tate banks.
The Chairman.

J e have a situation i n the State o f

Iowa where a few years ago they had not less than 1900
banks. T h e y have h a d a great m a n y bank suspensions b u t
Iowa, o n the whole,

i s i n good condition a n c the d a n s , g e n -

erally speaking, h a v e been i n good condition; t h e banks t h a t

have susvended and the large number o f banks i n that territory n o w t h a t a r e i n u n s a t i s f a c t o r y

o r desparate c o n d i t i o n

find themselves there because o f inefficient management.
That i s the greatest factor t h a t contributes t o their

condition a t the present time, a n d I think the State author
ities a n d National authorities should exercise more c a r e
in the granting o f charters, a n d that could b e stopped a t
the beginning.
H a s not that been handled pretty well

Governoz Young.

in the last f e w years?
The Chairman,

I t has been handled pretty well i n our

district.
Governor Bailey.

T h e economic conditions following t h e

War a r e r e s p o n s i b l e f o r t h e w h o l e thing.

T h e y were almost

negligible after w e got over t h e flurry o f 1907 u p t o the
beginning o f the W a r o r after t h e War. I

was going t o s a y


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Federal Reserve Bank of St. Louis

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that I

know o f men i n m y district w h o had a wonderful r e -

cord — - and the same i s truco o f Iowa -—but t h e inflation
just swept t h e m off their feet; a n d o f course everybody

got pinched some; b u t I think i t is more the aftermath o f
the War than the shrinking o f values,
they h a d a n i n t r i n s i c v a l u e o f $ 1 5 a

i d e n who thought
hindred

i n steers h a d

to sell for six or seven dollars a hundred.
Governor Seay, I n e x p e r i e n c e a n d incapacity a r e what

call commercial failures, and bank failures also result
from inexperience a n d incapacity.

T h e public has g o t t o

learn, e v e n b y a severe lesson, t h a t competence a n d proper

management i s the only safeguard t o a successful banking
business, a n d that t h e bancing business, l i k e most everything
else, i s aquestion o f the survival o f the fittest.
The Chairman.

D o e s this discussion satisfy you,

wr. NVellborn?

Governor Jellborn, Y e s , i t has been very good.
Governor Young, I

move that w e take a recess until

o'clock.

(The motion prevailed, a n d at 12:50 p.m., a recess
was taxcen until 2 o'clock p.m.)


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AFTER RECESS.
The Conference reassembled a t 2 >'clock p.m., a t
the expiration o f the recess.
The Chairman, G e n t l e m e n , a r e y o u ready t o proceed?
1. C R E D I T TRANSACTIONS A N D POLICIES.
D. D i e c u s s i o n o f the renort o f the Agents C o m —
mittce o n Member Bank Reserves w i t h a view
to considering whether n o w i s the appropriate time t o seek legislaticn concerning those
features o f the rerort which t h e Governors

have heretofore aprroved i n principle. ( S e e
paragraphs 3 t o 13, inclueive, o f the Secretary's minutes o f the November, 1925, G o v -

ernors! Conference, )
The Chairman

T h e next topic I

believe o n the pro-

gram i s I-D: "Discussion o f the report o f the Arente
Committee o n Member Bank Reserves w i t h a view t o consider-—
ing whether n o w i s the appropriate t i m e t o seek lezisla~
tion concerning those features o f the renort which t h e
Governore have heretofore apnroved i n principle."

That

is put o n b y N e w York,
Deputy G o v e r n o r Case.

T h e i d e a o f this topic i s t o

consider whether w e shruld seek n o w legislative enactment
dealing with th: se rec-mmendati-ne which were approved
in principle a t the lart C
tee madé a

nference,

T h e Agents' Commit—

tcc
very careful study c f this ouesticn c f reserves/

55
a number o f years.

T h e i r repert w e s submitted nesrly a

year a g o t o the Joint Conference, e n d this w a s p u t o n merely
to s e e w h e t h e r t h e C o n f e r e n c e w e s n o t r e c d y t o e c t u p o n i t .

The Chairman.

I t might b e well t o point o u t t h e spesuppose y o u have them; i f you have

cific recommendetions. I
not, I

can give t h e m t o you.
Deputy G o v e r n o r Case.
The Chairmen.

ments

“ e l l ,

g o ahead.

T h e report recommends t h e t t h e require.

o f the Federel Reserve ‘ e t relative

t o member b a n k r e -

serves shall b e changed e s follows:
1. D e d u c t i o n o f Checks i n Process o f Collection.

Permit the deduction rrom demand deposits o f («)
exchenges f o r clerring house, (b) checks o n other banks
in the same place and (c) checks i n process o f collection
(whether with Federal Reserve Banks o r correspondent banks )
according t o Federal Reserve schedule o f time required f o r
collection o f checks.
2. N e t d i f f e r e n c e

o f amounts d u e t o a n d f r o m o t h e r

benks.

Retain the present provision of the law thet "the
net difference o f emounts due to and from other banks" shall
be taken a s the basis o f escertaining the net amount o f yal-


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Federal Reserve Bank of St. Louis

ences d u e t o boenks.

3. I n c r e a s e i n Reserves »gsainst B a n k Belences.
Provide t h e t t h e reserve required t o b e held against
net balences d u e t o banks b e 1 0 ner cent. f o r s l l member banks
except those i n New York C i t y a n d Chicego.

T h i s involves

en increase f r o m the present requirement o f 7 per cent f o r
country banks.
4. R e s e r v e s against Government Deposits.
Provide t h e t reserve shall b e carried sgrinst Goyernment deposits a t the same rate a s pgainst demand deposits.
There m a y b e some other recommendstions
but i f there a r e I

do not k n o w whet t h e y are.

Deputy G o v e r n o r C a s e ,

The Chairmen.

i n thet report,

i

B u t y o u have t h e recommendation

t the last meeting this report

o n the

agents was considered end scted upon, but, e s I remember it,
Mr. Case, i t wes thought thet the time was not opportune t o
esk for legisletion where s u c h legislstion would b e unnecessary.

I s n ' t that i t ?
Deputy G o v e r n o r C e s e .

Yes,

a s t o c e r t a i n items.

‘Ss

to others, w s coneurred i n the recommendation o f the committee.
I a m not a t a l l sure whether t h e t recommendetion included t h e


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ides o f getting a new report.
M r . Chairmen, I

Governor Sesy.

letter w h i c h I

have a

should like t o reed, which bears o n this subject.

Y o u

will recall that there i s what n e s b e e n claimed s n advisory

committee o n legislation, t h e exect standing o f which I
have b e e n unable t o determine t o m y own satisfaction, although
I a m its cheirman.

T h e a t committee w a s working i n connection

“ith Professor Sprague under t h e Federal Reserve B o e r d stself

I would like t o rend, therefore, a short letter from Pro.
fessor Sprarue besring o n this subject. I

wrote h i m and

asked him i f he hed eny report t o make t o this committes,
and h e r e p l i e s t h a t :

"I have no definite proposeis to bring to the attention
of the ‘dvisory Committee o n Legisletion a t the present

time . T h e present Congress will have n o time for eny
banking l e g i s l a t i o n o t h e r t h a n t h e McFadden,

a n d t h e slight

interest o f the Boserd i n the propasals m a d e last year does
not encourege t h e formuletion c f further suggestions.

"““hile i n Maine this summer, I made some study of the
simple savings assets segregation system i n that Stete. I t
seems t o b e regarded w i t h satisfaction b y bankers, a n d t o
-ive a rensonehle messure o f security t o the depositor. I


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58
em more t h a n ever convinced thet t h e Maine l a w might well b e
taken a s a model f o r national legislation, b u t t h e time

does not seem ripe for making any move i n the matter."
Then again a letter i n reply t o one f r o m m e t o the
Secretery o f the Boerd:

"TI acknowledge receipt o f your letter of the 5th instant,

i n which v o u e s k whether Professor Sprague h a s meade

any formal reports o n the matters w h i c h vere referred t o h i m
for study which come within t h e accivities o f the Advisory
Committee o n Legislation.

"Since the suomission o f his reports which formed the
basis o f the Bosrd's letter t o the Benking a n d Currency
Committee, with respect t o the iicFedden Bill, t h e contents
of which y o u are familiar with, n o formal reports h a v e
been made b y Professor Sprague.

"During the spring, w e referred t o him end t o one o r
two officers o f the Boerd a matter concerning t h e Board's
organizsation e n d subsequent t o the rendition o f thet r e port t h e services o f Professcr Sprague were discontinued,
es there were n o other matters before t h e Boerd requiring

his expert edvice."
“hat I

refer t o p a r t i c u l o r l y w a s P r o f e s s o r S p r a g u e ' s


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59
opinion that t h e present Congress w i l l have n o time f o r
further legisletion other t h a n the McFadden bill.
Governor Case.

T h e McFadden b i l l i s the m o s t import-

ant eutstanding piece o f legislation t o b e considered b y
Congress.

I t seems t o m e i t would b e a mistake t o inject

any new €lement i n t o this short session.
action,

" e ought t o defer

s o far a s Congress i s concerned, until after this

McFadden bill i s gotten o u t o f the way.
Governor Seay. P e r s o n a l l y I

thought t h e same w a y

about t h e motter, a n d therefore thought t h e t this subject
might b e held i n abeyance, probably.
Governor Norris.

I s i t agreeable t o y o u i f w e pass it,

Mr. C a s e ?

Deputy Governor Case.

Yes.

M r . Harrison I

know

hes a n interest i n this topic and h e has carried o n some
conversstions a n d correspondence w i t h Mr, Curtiss.

I t

might b e interesting t o get his view ebout that, Mr. Chairmen
Mr. Harrison.

M r . Curtisswrote m e some time a g o when

he wes preparing o r aiding i n the prepsration o f the program
for t h e f g e n t s ' C o n f e r e n c e ,

a n d asked whether w e desired t o

put the tople o n our program.

I t was his feeling thet a s

long a s the Federal Reserve fgents a n d the Governors!


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60
Conference h e d l a s t f a l l e a c h m a d e s e p a r a t e r e c o m m e n d a t i o n s

to the Federal Reserve Bosrd, a n d a s long a s the Federal
Reserve P o a r d h a d not acted o n either s e t o f recommendations,

i t might b e advisable t o bring t h e matter u p again,

first,

t o determine whether n o w i s a n anpropriste t i m e t o

ask f o r l e g i s l e t i o n e b o u t t h e s e m a t t e r s

o n which there i s

agreement, and, second, ~hether o r not n o w i s the right
time t o a s k for legislation,

w o m i g h t n o t reach s c r

common p o i n t o f v i c w a b o u t t h e q u e s t i o n o f reserves,

that w e could present a

s o

system front w h e n the appropriate

time does errive.
Now, there a r e before u s specific recommendet ions
thet w e r e t a k e n u p a

year apo.

T h e f/gents' C o n f e r e n c e

approved a l l four recommendetions o f the committee.

The

Governors’ Conference diffcred i n principle a s well a s
on the question o f legislation,

o n whet t h e ‘gents c o n -

sidered t o b e the most important a p e

T h a t was the

first o n e t o which Governor McDougsel referred.
to recapitulate, I

I n order

might r e e d that particular recommendation

egein:

"Permit the deduction from demand deposits o f (a)
exchanges f o r clearing house, ( b ) checks o n other banks

61
in the seme place a n d (c) checks i n process o f collection
(whsther w i t h F e d e r a l R e s e r v e B a n k s

o r correspondent b a n k s )

eccording t o F e d e r a l R e s e r v e s c h e d u l e

o f time required

for collection o f checks."
The Governors!

a c t i o n o n t h e t t o p i c w a s that,

i n the

opinion o f the Conference, t h e recommendation o f the committee

i s inconsistent w i t h t h e fundemental principle t h a t

s check i n the process o f collection i s not a balence d u e
from 6 bank, a n d that therefore t h e recommendetion should
not b e approved.
The / g e n t s ' C o n f e r e n c e

o n the other hand epproved t h a t

recommendation o f the committee, a n d I think unanimously,
and recommended t o the Federal Reserve S o a r d thet t h e y
adopt i t b y ruling,

i f possible.

Mr. Curtiss feels that i t c a n b e done b y ruling, a n d
that w e have never been sdvised b y the Board's counsel
that t h a t i s impossible.

“ h i l e I

a m not certain a s t o

that, i t i s m y impression that Mr. “yett h e s ruled that w e

cannot d o i t b y a ruling, a n d that i t does require legislation; b u t t h e Governors, y o u will remember, discussed
whether this principle t o which t h e y referred i n acting
on this r e c o m m e n d a t i o n ,


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i s n o t e q u a l l y applicable

t o the


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62
present provision e f the l a w which authorizes t h a t same
deduction i n the case o f those banks which have g o t balances
due t o other banks, .

I t is m y memory o f the discussion

that w h e n t h a t c u o s t i o n w a s p o i n t e d o u t t o t h e Conference,

it was stated that there w a s n o use i n making a
pie a n y worse b y extending it.

bad princi-

T h a t i s the w a y the matter

was handled b y the Governors! Conference.
But here i s the point.

I t i s one o f the most conten-

tious matters o n the question o f reserves n o w before t h e
System,

a n d y o u have t w o different b o d i e s

o f the System

making diametrically opposite recommendations.

I f the a p -

propriate t i m e f o r legislation arises, wheat i s going t o b e
the position o f the System i n the matter? I

have a

feeling

that the ‘gents perhaps will reaffirm thei: earlier decis:on,
It might b e that t h e Governors w o u l d want t o take u p the

question again and reaffirm their judgment o n the matter.
The o n l y other questiens w h i c h came before t h e Conferenc:
were those Governor McDougal refers t o , a n d i n each other
case t h e Governors agreed w i t h the recommendation o f the
fgents' committee i n principle, b u t suggested deferring any.
action because t h e y thought i t was a n inappropriate t i m e t o
ask for legislation.


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63
It i s our feeling i n New York that the McFadden bill i s
in such a precarious situation a t the moment that a n y further r e q u e s t f o r l e g i s l e t i o n r e l a t i n g

t o the Federal Reserve

System might only muddy the waters and seriously endenger
the enactment o f the McFadden bill, without accomplishing
anything o n the other matters.
Governor Seay.

M r . Chairman, I

offer t h e motion that

it i s the consensus o f opinion o f this Conference t h a t n o w
is not a n appropriate t i m e t o seek legislation concerning
the report o f the Agents' committee o n member b a n k reserves,
Before putting that, I
you I

would like t o s a y that a l l o f

a m sure a r e aware that w h e Chamber o f Commerce o f

the United States h a s appointed a

series o f committees, c o n -

sisting o f bankers a l l o v e r t h e c o u n t r y ,

ent phases o f the Federal Reserve fct. I

t o consider differ-

know that I

heve

been held u p b y members o f two o f theses committees t o answer
questions w h i c h practically would involve writing a
on the Federal Reserve Systom.

thesis

S o they are studying those

matters a n d bringing t o bear t h e wisdom o f the benkers o v e r
the country.

B u t I share t h e opinion that h a s b e e n ex-

pressed h e r e t h a t i t i s n o t a n appropriate t i m e t o s e e k

legislation, a n d that i t i s the consensus o f this meeting


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Federal Reserve Bank of St. Louis

that w e give i t t o the Board.
The Chairman.

D o y o u offer that a s a motion?

Governor Seay. I

offer thet a s a motion; yes, sir.

Deputy Governor Case. I
Governor Norris. I

second it.

think w e are a l l i n agreement w i t h

thet motion, but I think we ought t o cohsider whether it
might not be i n lihe t o amend i t in sine with Mr. Harrison's
suggestion, t h a t , g r a n t i n g n o w i s n o t t h e s p p r o p r i a t e t i m e ,

it might n o t b e well t o have semetning i n the nature o f a
conference committee between t h e Governors a n d the ‘gents
and see whether t h e y could come t o a n agreement o n those
points

t o which w e a r e a t present opposed,

s o that w h e n t h e

time does become appropriate, w h i c n might b e next March,
which will b e before t h e next Conference,

w e would t h e n b e

in a position t o a t least think what t h e legisletion was
that w e desired.

Governor Seay. I

have a feeling, Mr. Chairman, that

the matter should b e left t o the advisory committee. I
how deeply w e have gone i n t o this subject.

know

C e r t a i n matters

in the report o f the committee w e r e left t o this advisory
committee o n legislation f o r further study.
The Chairman.

I s there a n y further comment o n this


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Federal Reserve Bank of St. Louis

question?

(The motion was put and unanimously carried.)
is C R E D I T TRINS/CTIONS ‘ N D POLICIES.

F. fsmendment t o Regulation ‘ to make eligible
for r e d i s c o u n t o r purchase b y Federal r e s e r v e
banks. a bankers! a c c e p t a n c e d r a w n b y a n elevator o r warehouse c o m p a n y a n d s e c u r e d b y
terminal w a r e h o u s e r e c e i p t s o f t h e e l e v a t o r

or warehouse company that draws t h e draft.

The Chairman. T h e next i s I-F, "/mendment t o Regulao purchase b y Fed.
tion / to make eligible fer rediscountr
eral reserve banks a

bankers! acceptance d r a w n b y a n eleva-

tor o r warehouse company a n d secured b y terminal warehouse
recéipts o f the elevator o r warehouse company that draws
the draft.

That is one of uhe Board's subjects.
Governor Young. I

think, M r . Cheirmen, t h a t e v e r y o n e

is familiar with that topic.

f l l the information has been

forwarced t o each Governor, a n d a l l have h a d a n opportunity
to look i t over. I

think t h e whole thing centers d o w n a s t o

whether i t i s advisable t o amend t h e regulations,

o r t o get

the Board t o waive that requirement.
In this particular c a s e i t i s pointed o u t b y some o f
the G o v e r n o r s t h a t i t m i g h t b e dangerous

t o amend t h a t


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66
regulation.

M r . “'yatt has told me--he t o l d m e this noon_-

that i t would b e oossible f o r the Board t o waive that r e quirement.

N o w , this i s a good bill.

I t i s protected a s

well a s any bill could possibly b e protected.

I t has the

approval o f Mr. Kenzel o f N e w York, Mr. Zurlinden, M r . McKay,
Mr. Y e r b u r g a n d Mr. K e n t , a n d others. I

attempt t o mention a l l o f them. I

a m not going t o

therefore suggest that

the Conference request t h e Federal Reserve Board t o waive
the requirements o f this regulation, insofar a s registereg
warehouse terminal receipts e r e concerned, whether t h e title

to the grain absolutely leaves the custody o f the drawer g f
the draft. I

make t h a t a s a motion.

The Chairman.

T h e elevator company i s also a

merchandis

of grain, i s i t net?
Mr. Young.

Yes.

Governor Seay.

I t m a y o r i t m a y not be.

M r . Chairman, I

would like t o amend

that proposal just slightly, toa this effect, t h a t t h e Federal

Reserve Board consider whether i t may not -+and this i s a
specific case--waive t h e requirements o f the reguletion.
Our study o f the practice,

a s explained b y the Minneapolis

bank a n d b y its counsel, rather tends t o convince u s thet t h e
practice a s carried o n there i s es safe one.

T h e banks a r e


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67
practically willing t o operate under it, a n d the purpose
of the Board's regulation i s t o further t h e various p r o w
cesses o f commerce i f the banks i n that district a r e
entirely satisfied that i t i s « safe practice f o r them,
and the Federal Reserve B a n k o f Minneapolis s l s o regards

it as a sefe practice, a n d I for one cannot see that the
matters Might not b e s o arranged that the Federal Reserve
Bank o f Minneapolis should discount this paper.
Governor Bailey. I

would like t o put Kansas C i t y i n

the same situation.
Governor Seay. I

would n o t like t o g o s o far a s t o

sey that this Conference recommends t h a t t h e Federal Reserve
Board d o t h i s t h i n g , b u t t h a t i t suggests

t o the Federal

Reserve Soard whether they might not d o it.
The Chairman,

“ e l l , t h e y are considering it.

Governor Seay. T h a t i s as far ss I believe that w e
might w i t h propriety g o o r w e would like t o go.
The Chairman. I

think what t h e Board would like,

Governor Seay, i s a n expression o f opinion here a n d ao rec-

ommendation.
Governor Fancher.

M r . Chairman, I

have s e e n G o v e r n o r

Crissinger a n d discussed w i t h h i m these several topics


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68
suggested b y the Board o n this program, a n d i t i s his desire that w e proceed a n d discuss t h e m a n d make recommenda-

tions.

H e said that perhaps i n discussing topic "H" i t

might b e thought advisable t o bring Mr. “yatt i n o n that.
That is, "Notes secured b y adjusted service compensation

certificates", a n d after w e have discussed the topic and
have m a d e o u r r e c o m m e n d a t i o n s ,

meeting with t h e Board. I

t h a t w e t h e n have a

joint

teld him, however, t h a t h e neeg

not feel that h e could n o t come i n and s i t i n with u s i f
he d i d n o t have a
The Chairman.

formal invitation.
T h e Conference w i l l proceed accordingly.

Mr. Young, w i l l y o u name some o f the elevator companies?

I remember one o f them, but will you name some o f them that
might b e involved i n this question?
Governcr Young.

T h e Concrete, t h e Atiantic, t h e

Pacific.
The Chairman.

f r e t h e y a l l o f the class known a s the

regular terminal warehouses?
Governor Young. Y e s .
The Chairman.

T h e y are n o t all, though, engeged i n mer-

chandising grain, a r e they?
Governor Young.

No, I

do n o t think so. I

think some


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69
of them are pure storsge warchouses.
draft,

t h e y must be.

N o , i f they draw t h e

Y e s , t h e y a r e a l l engaged

i n per-

chendising grain.
Governor Seay.

M r . Chairman,

i n i t s f i n a l analysis,

this matter will have t o b e given a n opinion upon.

I t is

cne o f State law, and i t seems t o me i t ought t o be determined
by the Board.

O u r counsel i n his opinion states t h a t h e

concurs w i t h the counsel o f the Board, t h a t t h e Board has
the power t o amend t h e regulation a n d t o sanction t h e u s c
of s u c h receipts, p r o v i d e d t h a t t h e r e c e i p t s t h e m s e l v e s

thus issued a r e sufficient under t h e l e w o f the State i n
which t h e y are issued t o convey o r secure title t o the
grain o r o t h e r c o m m o d i t y w h i c h t h e y p u r p o r t

t o represent.

In most o f the Staves i t has b e e n held that a

warehouse

receipt issued b y one engeged i n a general warehouse business c o v e r i n g g o e d s w h i c h a r e t h e p r o p e r t y o f t h e w a r e h o u s e -

man i s not sufficient t o convey title t o such goods t o a
creditor o f the warehouseman t o whom such receipt i s given
es a pledge.
This i s 9 matter o f law, a n d i t seems t o m e thet i f the
Board d e s i r e s

t o solve t h a t t h e better course w o u l d b e t o

invite t h e c o u n s e l

o f the Federal Reserve R a n k t o consider


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Federal Reserve Bank of St. Louis

the matter jointly with its o w n counsel.
Governor Calkins.

H a s t h e validity o f that receipt

been psssed u p o n b y a court?
Governor Young. I

cannot answer that. I

expect so,

that those receipts h a v e b e e n passed upon, because t h e y have
elways passed a s s o much money u p there.
Governor Calkins.

I t seems t o m e that i s really the

vital question.

The Chairman. J

do not suppose t h e t there i s a n y termi-

nal where t h e rules a n d regulations releting t o the operation o f public warehouses o f this character a r e i n any
better shape t h a n they are i n Minneapolis a n d St.Paul. I
can see, though, where i f the Board rules t h a t receipts o f
thet sort o r a draitt o f thet kind would b e eligible, t h a t
it might possibly involve embarrassment

i n some other d i -

rection where t h e regulations a r e n o t s o good.
Governor Seay.

O u r counsel further s a y s t h a t i f the

receipt b e issued b y a warehouseman u p o n his o w n goods,
it i s obvious t h a t i t does n o t transfer t h e person's possession o f such goods actually o r symbolically, b u t merely
agrees t o hold his o w n property a s a special trust f o r a
particular creditor.


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71
Governor Calkins.

I

security
t adds nothing t o the

already given.

Governor Seay.

i t is a
S o therefore I maintain that

decided f r o m a legal standmatter o f law a n d ought t o b e
point. I

favor o f the
should like t o see i t decided i n

t h e p e o p l e o u t there, I
Minneapolis B a n k o r t n f a v o r o f

Bank, which merely
“ould say, a n d not merely t h e Minnesplis

its customers.
desires t o accommodate i t s people a n d
The Chairmen.

motion, Mr. S e a y
M r . Young has made 2

has suggested a n amendment o f it.

T h e amendment v i l l n o t

satisfy Mr. Young.

motion? “ 4 1 1
Governor Fancher. “ h a t was Mr. Young's
t h e Secretary?
he state i t agein, o r will
Mr. Harrison.

Reserve
T h e motion was that t h e Fedoral

o f Repulation /
Board b e asked t o waive t h e requirements

so

these particulor wareas t o except f r o m t h o s e r e q u i r e m e n t s
Y o u n g has referred to.
house r e c e i p t s w h i c h G o v e r n o r

i n

require thet receipts m u s t
other words, t h e regulations n o w
o f the borrower--{n
be issued b y a warehouse independent
i s the borrower--bdut
this particular case t h e warehouse
there a r e p e c u l i a r c i r c u m s t a n c e s

a n d regulations o u t there

o f the goods under
which make t h e control o f the delivery


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73
the warehouse r e wipt a

matter independent c f the Dorrower,

so that they really comply with the spirit o f the Board's
regulation o n that point, a n d the only auestion f o r consider-—
ation i e whether t h e Board shouid s a y that a s lonz a s they

do comply with the rpirit o f tse Board's regulation they
should n o t waive that technical reouirement t h a t t h e warehouse must b e independent o f the borrower.
Governor Fencher. I

notice here i n a cow.unication

from t h e counsel o f the Board under date o f auguat 1 0 t h
that h e suggests a n amendment t o the regulation along t h e
line recommended b y tne lart Governors! Conference,

Governor Young. I

have talked with xr. jyatt sinoe

then, a n d h e euz°este that w e nroceéd this way.
Governor Fancher, I
Governor Seay.

eee,

I t anpears

t o us, M r . Chairman,

that

the amenduwent a s proposed b y ir. ‘ y a t t does n o t fully meet
the oase, t h a t there i s etill a

ouery there a s t o whether

the amendment would meet t h e situation i n that district,
as t o whether those receipts a s they stand would actually
convey title a r defined b y the Soard's regulation.

The Chairman. ‘ V e l l , they would convey title. H e r e
is a oase where a nublic warehoure, organized and operating


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73
unden lsws which afford every protection, i s engaged i n
two classes o f business.

I n the first place, t h e y are

8 public warehouse a n d store grain.

I n addition t o that,

they are buying grain themselves a n d storing i t and issuing
the r e c e i p t s

t o themselves,

a n d those receipts t h a t t h e y

hold o f course presumably are safeguarded through t h e State
custodian a n d such other safeguards a s they m a y have, t o the
seme extent thet t h e y woyld b e safeguarded i f they were
held b y © third party.
Governor Seay. C o u n s e l h e s given the opinion thet i f

the receipt b e issued b y a werehouseman ypon his own goods-~which i s the case here--it 1 s obvious that h e does not transfer the possession o f such goods actually o r symbolically,
but merely agrees t o hold his o w n property a s e special trust
for e particular creditor.
The Chairmen.

H

e does n o t transfer t h e m out there.

Governor Seay.

‘ n d therefore i t i s not security arsinst

general creditors.

Governor “iellborn.

H

e has actual physical control o f

the p r o p e r t y , n o t w i t h s t a n d i n g S t a t e l a w .

The Chairman.

O n l y subject t o the cancellation a n d

return o f the receipts, t h a t i s all, a n d their organization


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Federal Reserve Bank of St. Louis

is not i n charge o f that elevator.
Governor Norris.

M r . Chairman,

i t seems t o m e that

the amendment proposed b y Mr. Vyatt safeguards t h e existence
end the custody o f the grein, b u t that i t does n o t meet t h e
point raised b y Governor Seay, a n d I would move that t h e
amendment b e approved a s f a r a s this Conference i s concerned
provided that t h e following cleuse b e added t o it:

"Provided, That under the law o f the State i n which
such grain elevator o r grain warehouse i s located s u c h receipts g i v e t h e holder a

good legal title o r a n effective

lien upon the grain."
Governor Seay.

Y o u make i t a s I d o ,

a s a matter o f law.

Governor Norris. Y e s .
Governor Young. I
Governor Calkins.

a m afraid o f that.
I t i s very doubtful, M r . Chairman,

whether t h e State l a w does o r perhaps c o u l d determine t h a t
fact.
Governor Seay.

I n its present shape.

Governor Calkins.
Governor Norris.

I n its present form.
I f the State l a w does n o t give u s

either a title t o the grain o r a n effective l i e n o n it, d o
we w e n t t o d o t h e b u s i n e s s ?


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75

Governor Young.

Y o u are beginning

to r u n into some

throw o u t e v e r y acceptance
trouble t h e r e t h e t m a y

you have.

some cotton c a n follow i t
o
n
mortgase
chattel
e
man with
can o n
grain a n d I assume h e
enywhere, o r he c e n with the
cotton.
Governor Seay.

I f i t i s recorded.
chattel m o r t g a g e T h i s i s not a

Governor Calkins.

Governor Young. I

5
know, put i t is the same.

ee

can follow
some grain i n Montana I
heve # chettel mortgage o n
it o n t o Minneapolis
Governor Seey.

or anywhere else.
a r e some liens
I n some States there

superior t o 4 chattel m o r t g a g e
Governor Young.

Y s S , put I

do not think y o u want

certain
- T h e r e i s always 4
regulations
the
i
n
to put thet
than
g e t a clearer proposition
reason, b u t y o u cannot
with i t
w e ere getting t o o technical
afroid
a
m
I
a
n
d
this,
eltogether.

Governor Galkins. I

with
a m i n entire agreement

i n the
proposition # s outlined
t
h
e
thet
Young
Governor
a n y unreasen~
a n y considerable o r
Twin Cities i s without

put thet i f the amendment
5 le risk attechine t o it,
permit t h e acceptance
is s o amended «cs t o

o f the ware-


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Federal Reserve Bank of St. Louis

76
houseman's receipt w h o i s also the owner o f the goods,
wotild b e extended t o other lines.

it

“ e wont k n o w anything

about where w e stand a s t o securities.
Governor Young.
proposed a m e n d m e n t

T h a t i s why I ask that y o u g o t o this

t o t h e regulation,

a n d w e sugpest

to

the Board that t h e y waive this requirement insofer a s those
perticular bills s r e concerned, w h i c h Mr. “ yatt says t h e
Board c a n weive.
Governor S e a y .

T h e t i s , waive t h e requirement t h a t i t

be stored i n a warehouse, leaving i t t o the Federal Reserve
Bank t o determine i t s o w n course.
Governor Young.

T h a t i s i t exactly.

Governor Bailey I
City.

T h e r e is a

wont i t exactly that w a y i n Ksaasas

volume o f business t h a t w e c a n n o t r e -

Giscount, because i t i s within t h e prohibition o f this regulation.

I t i s protected b y the State law, a n d I

it i s p h y s i c a l l y i m p o s s i b l e

think

t o g e t t h a t g r a i n o u t o f that

elevator w i t h this warehouse receipt egesinst i t until i t
is p e i d f o r .

Governor Csllins. I

have n o doubt whatever that

Governor Seey's counsel h a s advised h i m correctly when h e
says that i t does n o t convey a good title.


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77
Deputy Governor Case. I

think a l l o f those w h o have

studied these particular bills secured b y a warehouse r e «
ceipt a r e satisfied t h a t i t i s a very good obligation, a n d
4t seems t o m e that this whole situation, a l l the views
that have b e e n expressed b y Governor Young a n d Governor S e a y

and Governor Norris, might b e met b y some such resolution a s
this, t h e t i t i s the sense o f this Conference t h a t these
particular warehouse receipts a r e wholly within t h e spirit

of the Board's regulation, a n d that therefore the Board
should rule that ecceptances secured b y them are eligible,
provided, o f course, that they comply with the requirements
of the law.

B y that w e merely express the sense o f the

Conference that they are within the spirit o f the Board's
regulation, a n d that t h e y should rule, therefore, a n d i n

this instance that they are eligible, provided they are
not o u t o f line with the requirements o f the law.
Governor Calkins.

D o e s n o t that proviso destroy

what goes before i t ?
Mr. Harrison.

I f I may s a y something, M r . Kenzel,

who studied this thing more perhaps t h a n a n y other person

perhaps than Governor Young, h a d a long discussion with m e
hefore I came t o .ashington, a n d he said "You have got t o


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Federal Reserve Bank of St. Louis

78
remember there e r e t w o things t h e t a r e involved: first,
the law, a n d then, secondly, t h e regulations o f the Board.
On the question o f the l a w w e are asking f o r nothing.

The

acceptance t o b e eligible m u s t b e secured b y a warehouse
receipt which c a n pass a

good title.

T h a t i s a matter o f

law, a n d nothing c a n b e done about it.

T h e o n l y other

thing i s the o n e o f regulation, a n d the reguletion n o w
provides t h a t t h e particular warehouse receipts m u s t have
been issued b y a warehouse independent o f the borrower,
the p u r p o s e

o f that regulation b e i n g t o insure t h a t t h e

borrower could not snatch the goods.”
‘tl that Mr. Young wants a n d what Mr. Kenzel has recommended i s that t h e Board change o r waive t h e t particular

requirement t o suit a case like this, where even though
the w a r e h o u s e r e c e i p t s a r e i s s u e d b y t h e b o r r o w e r h i m s e l f ,

nevertheless t h e control i s free o r independent o f the
borrower, a n d that therefore t h e y comply with t h e spirit o f

the Board's regulation, a n d that regulation should b e i n
some w a y o r another interpreted s o a s t o cover this particular case o r a n y other similar case.

T h e l a w still stays t h e

same, buteGovernor Calkins.

B u t d o they comply with the law?


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Federal Reserve Bank of St. Louis

79
Mr. Harrison. T h a t i s a question f o r every F e d eral Reserve R a n k t o determine i n this case a s i n every other
case, t h a t v e buy--first,
law, and, secondly,

d o the investments c o m p l y with t h e

d o they comply with the rogulations o f

the Board? ‘ \ e are assuming that Governor Young i s not going

to buy any bills that do not comply with the law. T h e only
thing w e are talking about i s whether w e should have a n
interpretation o f the regulation which would enable h i m t o
buy these particular acceptances e v e n though t h e y are secured

by warehouse receipts which are issued b y the borrower himself.

Governor “ellborn.

I t seems t o me, gentlemen, t h a t t h e

borrower would have i n this case physical control o f the
prorerty.

T h o s e receipts b e i n g out,

h e c a n hold u p cars

from delivery.

Governor Young.

N o chance.

Governor “ellborn.

“ h y can't h e d o i t i f he hes control

of them?

Governor Young.

H e hasn't it. T h e State department

hes control.
Governor “‘ellborn.

Governor Young.

D o t h e y heave m e n t h e r e a l l t h e t i m e ?

/ 1 1 the time.

I n m y originsl letter


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Federal Reserve Bank of St. Louis

I said there w a s n o t a man there a t night. There is. T h e r e
is a watchman there a l l night.
Governor “‘ellborn.

f n d h e has n o control o v e r these

men a t all?
Governor Young.

T h e m a n that draws that draft h a s n o

more chance o f getting that grain than I have o f being the
Pope o f Rome.

Governor Seay. T h e r e i s n o question o f the l a w being
deficient.

I t i s not mandatory that these receipts b e reg-

istered?
Governor Young.

No.

The Chrirricna

A

class o f these loans.

n

d there i s n o question e s t o the

T h e y have b e e n regarded f o r many

years a s a very desirable class o f loans.
Governor Seay.

S o i t i s clear that t h e elevator a u -

thorities c a n issue two classes o f receipts, o n e o f which
I understand t h e b a n k w o u l d n o t t a k e a n d t h > o t h e r t h e y
would take.

Governor Young.

No.

Governor “ellborn.

I t looks t o m e like a l l o f this t a l k

is for nothing.
The Chairman.

M r . Norris, a r e y o u resdy t o recall


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Federal Reserve Bank of St. Louis

your suggested amendment?
Governor Norris.

S e l l , d o I understand t h e n that

it i s not proposed t o d o this a t all b y a n amendment t o the
regulsetion?
The Chairman.

N o ; i t i s supposed t o d o i t b y a n amend-

ment .
Governor Young.

No.

Governor Norris.

O n e authority says "yes" and the

other s a y s “ n o .

Governor Young. I

do not think we need a n amendment

to the regulation.
Governor Norris.

Governor Young. I

T h e n h o w d o y o u propose

t o d o it?

think Mr. Case stated the proposition

accurately.
Mr. Harrison.

M r . K e n z e l a n d M r , ':yatt h a v e b o t h s a i d

thet y o u c a n accomplish what y o u want t o accomplish b y a
ruling, either affirmative o r negative,

i n che nature o f a

to s a y

waiver, a n d all y o u have g o t t o d o is/that a s long a s these
particular acceptances a r e secured b y warehouse receipts

which comply fully with the spirit o f the Board', reguyations,
which require independence, t h a t t h e n this particular pro-

vision o f the regulation which requires that the receipt b e


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Federal Reserve Bank of St. Louis

82
issued b y the warehouse independent o f the borrower jis
not prohibitive o f the acceptance o f this dreft i n that
particular case.
Governor Norris.

T h e n i t will b e done b y a

separate

I t would not b e a n amendment o f the

ruling o f the Bearé.
reguletion?

think a l l that would b e necessery

Mr. Harrison. I

would b e a letter f r o m the Federal Reserve B e a r d t o Mr.
Young, a n d with a copy t o each Governor, t h a t these receipts
comply with t h e regulations.
Governor Seay. T h e r e would b e some obscurity i n that,
the legal doubt a s t o whether these warehouse receipts c o n vey o r secure title according t o tne requirement o f the law.
Mr. Harrison.

B u t that i s a seperate a n d independent

question, Governor Seay.
Governor Seay. Y e s , I

know i t is, b u t I

believe there

would b e some obscurity about the right o f the Board t o
make t h a t s p e c i f i c w a i v e r .

Mr. Harrison.
Governors!

M r . Kenzel's feeling was that n o

Gonference

o r even t h e Federal Reserve B o a r d itself

should b e asked t o pass u p o n the interpretation o f the State
Jaw i n Minnesota, t h a t that i s a question f o r the Federal


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Federal Reserve Bank of St. Louis

83

Reserve Bank o f Minneapolis t o satisfy itself a s to.
also,

S o

i f Governor B a i l e y i s g o i n g t o b u y a n y acceptances

secured b y any warehouse receipts, whether independent o f
the borrower o r not, h e has g o t t o determine, a n d each
bank has g o t t o determine, whether i n that particular case
it conveys t i t l e .

Governor Seay. I

would like t o a s k this question,

the opinion o f his counsel,

in

d o the warehouse receipts c o n v e y

or secure title?
Governor Young. I

cannot answer that.

Governor Seay. B u t , fortified b y the practice t h a t pre-

Vails there, I think that question can be answered.
Governor Young. S u p p o s e I wire tonight t o Mr. Ueland
and find out. Perhaps they have had some case i n Minnesota
which has been adjudicated, b u t I know this practice has
been i n operstion there f o r thirty o r forty years, a n d n o
one has ever lost a five cent piece o n these receipts, a n d
they must give y o u title.
Deputy G o v e r n o r C a s e .

That is a

good suggestion.

Governor Seay. M r . Case's resolution, which i s a
most excellent one, I think, has this proviso, that i t be
issued i n cofiformity t o law. N o w , m y query is, does that


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Federal Reserve Bank of St. Louis

receipt secure a n d convey title?
H e has reference t o the Federal R e -

Governor Young.
serve f&ct.
Governor Seay.

S o d o I. T h e A c t requires t h a t i t

convey a n d secure title.

N o w , t h e question o f law is, does

a Minnesota l e w d o that thing a s against general creditors?
Governor Young.
is done.

I f you pass this resolution,

n o harm

I f those receipts d o not convey title, why, w e

haven't done a n y harm b y this resolution.
Governor Seay. I

acknowledge that, b u t a s f a r a s the

Board i s concerned i t i s still involved i n some obscurity.
Deputy Governor Case. Y e s , possibly.
Mr. Harrison.

T h e motion is: that i t b e the sense o f

this Conference t h a t these particular warehouse receipts a r e
wholly within t h e spirit o f the Board's regulation a s t o
the independence o f the warehouse w h i c h issues t h e receipts,
and that therefore t h e Board should rule that acceptances
secured b y these warehouse receipts a r e eligible, p r o v i d e d , .
of course, t h a t t h e y c o m p l y w i t h a l l t h e r e l e v a n t r e q u i r e ments

o f t h e law.

Deputy Governor Case. I

cannot s e e a n y harm.

Governor Seay. “ i o u l d y o u b e willing t o put i n there


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Federal Reserve Bank of St. Louis

85
these receipts
"Under the practice which prevails that
regulation?"
comply with the spirit o f the
Governor Young. I

the
a m afraid that w e are discussing

this bill, a n d I therefore
law rather than the merits o f
until tomorrow morning o f
suggest that w e withdraw this

wire Mr. Ueland and find
tomorrow afternoon, a n d I will
after I
out just that part o f it, a n d

get his opinion I

I
w i l l dispute i t , a n d
suspect t h a t s o m e o t h e r c o u n s e l

do

but
a n y further ahead o r not,
not know whether w e w i l b e
we m a y be.

The Chairman.

with the resoY o u would not b e satisfied

lution a s offered b y Mr. Case?

Governor Young. Yes, I

am entirely satisfied with thet,

vote for tnat.
put I do not think they want t o
think t h e y do.

The Chairman. I

/ 1 1 right.

Governor Young.

T h e n I will withdraw m y

previous motion a n d second it.
The Chairman.

Mr. Nerris?
D o y o u withdrew yours,

Governor Norris.

Yes.

M y amendment w a s toward a

offered with the thought
totally different thing. P h a t was
t o the regulation.
that this was t o a n amendment

I f it

simply
the regulation, b u t 4 s
is not t o b e a n amendment t o


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Federal Reserve Bank of St. Louis

86
to b e a n expression o f opinion b y the Board i n a separate
ruling, t h e n I

do not think m y amendment i s apprepriate

to that a t all, a n d I withdraw it.

The Chairman.

T h e n i t comes t o the motion o f Mr. Case.

Mr. Harrison.

I t i s moved t o b e the sense o f the Con-

ference t n a t these perticular warehouse receipts a r e wholly
within t h e spirit o f the Board's regulation covering t h e
independence

o f t h e w a r e h o u s e w h i c h i s s u e s t h e receipts,

and that therefore t h e Federal Reserve B o a r d should rule that
acceptences secured b y these receipts a r c eligible, provided
of course t h e y comply with all the relevant requirements o f
the Federal Reserve ‘ct.
do not see, a s a matter o f fact,

Governor Norris. I

how the Board i s going t o rule that a

receipt issued b y the

owner f u l l y c o m p l i e s w i t h t h e r u l e t h a t i t s h a l l b e i s s u e d

by a n independent person.
Governor Young.

M r . “yatt t o l d m e n o t o v e r t w o hours

ago that t h e Board could waive that requirement,
Governor Norris. T h a t i s waiving a
Governor Young.

requirement.

T h a t i s something f o r a n attorney t o

determine.
Mr. Harrison. I

do not s e e that.

T h i s resolution


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Federal Reserve Bank of St. Louis

8"
does n o t s a y that.

I t seys that t h e warehouse receipts

are within the spirit o f the Board's regulations a n d that
therefore t h e Board should rule n o t that t h e y are issued
by the warehouse independent borrower, b u t merely thet
these acceptances themed b r these warehouse receipts a r e

discountable.
Governor Sesy. I

cannot bring m y mind t o the conclusion

that t h e y are within t h e spirit.
Governor Bailey.
Governor Seay. I

B u t t h e y are absolutely safe.
agreé w i t h y o u o n thet, b u t t h e y a r e

not c e r t e i n l y w i t h i n t h e s p i r i t o f t h i s r e q u i r e m e n t w h i c h
reads t h a t t h e y s h o u l d b e i s s u e d indepenkéent.

T h e y are safe

under the practice which prevails--I believe that i f I be 1lLev«

enything--but I cennot bring myself t o sey that i t complies
with t h e r e q u i r e m e n t

o f t h e B o a r d w h i c h shows t h a t i t shall

be used b y a party independent o f the customer.
Governor Young.

“ h y did the Board issue that ruling

in the first place?
Governor Seay.

Governor Young.

I t does n o t s e e m t o follow logically.

T h e Board issued that for the reason

thet they wanted t o get these goods away from the owner.
Governor Seay.

f l l right. I

a m i n favor o f this, b u t


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I cannot believe t h a t i t complies w i t h t h e rulings
Governor Norris.

T h e y have here another rule that a

receipt m u s t b e i s s u e d b y a

party independent

o f the cus-

tomer, a n d n o w they find i n a particular section o f the
United States t h a t a custom has grown u p o f issuing a

re-

ceipt o y a customer, b u t that, o w i n g t o the restrictions

by

which i t i s hedged around, notwithstanding t h a t fact, i t
is still sefe.

T h a t i s a distinct exception t o that previous

regulation.
Governor S e a y .

T h e a t i s the w a y I

Governor Calkins. I

think sahout i t .

believe t h a t t h e practice i s safe,

but I also believe t h a t this resolution, reduced t o its
actual content, s a y s that t h e y are eligible i f they ere
eligible.

T h e y certsinly cansot b e eligible unless t h e y

comply with t h e law, a n d the Board cannot make t h e m eligible
by rulings,

a n d this resolution

i n its actual content

48 an

attempt t o s a y that t h e y are eligible i f they sre eligible.
Governor ‘iellborn. D o n ' t y o u think this resolution
waives t h a t p a r t ,

a s t o the independency?

Governor Calkins.
The Chairman.

I t cannot.

T h a t i s a very delicate question, a n d I

would like t o s e y this, y o u would handle this thing a n d


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inject some common sense i n t o i t and find some w a y t o rule
that these bills involying that class o f warehouse receipts
are eligible.
Governor ‘iellborn. I

put I

do n o t l i k e t o oppose this,

a m afraid i t will g e t u s into trouble i n our district

on cotton warehouse receipts.

" “ e have a

Orleans t h a t w a n t s u s t o t a k e r e c e i p t s

big firm i n New

o f warehouse c o n -

trolled b y them, a n d v e nave ruled against it. I

a m afraid,

if they heard o f a change o f idea b y any other district,
will g i v e u s a

it

l o t o f trouble.

The Chairman. I

do not know whether w e h a d better p u t

this t o a vote o r not.
Governor Norris. I

make t h i s s u g g e s t i o n .

“ould 46

enswer Governor Young's purpose i f this Conference were t o
adopt a

resolution expressing t h e belief that these particu-

lar warehouse receipts t h e t a r e i n question here a r e
prectically safe, a n d suggesting that t h e y authorize
their p u r c h e s e

b y such amendment

t o the regulation

or

ctherwise a s they think best?
Governor Seay.

M r . Chairman, I

imagine t h a t i f w e

were t o receive a reply from Mr. Ueland, the counsel o f
the M i n n e a p o l i s b a n k , s u c h e s h a s b e e n p r o p o s e d

by


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these receipts d i d not
Governor Young, t o the effeat that
n o t vote f o r this resolucomvey a n d secure title, w e would
tion.
good title. I
The Chairman. T h e y d o convey 4

can

for twenty years.
answer that.Thoy have been doing i t
Governor Seay.

counsel here b y
I t i s the opinion o f

which we. ere guided.
Governor Bailey. I
in t h e l a w s c o n t r o l l i n g

Governor Seay. I
Governor Bailey.

think there i s a lot o f difference
wheat a n d cotton.

a m not thinking o f cotton.
o u t i n Kanses
“ e c a n take t h e wheat

State law, e n d the board
City, w e have g o t a verv rigid
o n e o f those receipts, a f
of trade checks w i t h them every
to
b e a s impossible f o r h i m
Governor Young says, 4 t would

Pope o f Kome, a n d we all know
get them a s for him to be the

for him. Now, i f it
thet would be a very hard proposition
is sefe, w h y not take them?

“ i g are taking a

lot o f them,

banks d o w n East, a n d
and t h e y are sent o n b y commerciel
t o do.
thing i n the world f o r u s
I believe i t i s the finest
Governor Seay. I

t h e Federal
a m perfectly willing that

this
should b e permitted t o b u y
Reserve B a n k o f Minneapolis
these
that t h e y are safe, b u t
pill, a n d I a m o f the opinion


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Federal Reserve Bank of St. Louis

> |
facts d o not justify the alteration o f the Federal Reserve
Board's ruling.
Governor B e i l e y .

I t i s not a

regulation, w h e r e S t a t e

law safeguards them.
Governor Seay. T h a t is, I

say, a

stated w h a t I

The Chairman. I

matter o f law.

did, M r . S e a y , b e c a u s e

I a m o f the belief that this matter has b e e n settled l o n g

ago.

I t must have been, end i f by any chance i t should r e

discovered n o w that those receipts d i d n o t convey sand secure title,

i t would certainly revolutionize o u r method o f

doing business.
Governor Calkins. I
interesting,

think, while y o u r argument i s

i t i s not conclusive, because m a n y practices

heve gone o n for many years and then have been shown t o
be unsafe a n d illegal.
The Chairman.

B u t this h a s b e e n shown t o b e safe.

Governor Calkins.

f n d the others were too.

Governor Fancher.

M i g h t i t not b e brought out, i f

Governor Young should wire h i s counsel, t h a t t h e courts have
passed

o n these w a r e h o u s e r e c e i p t s ’

H

e m a y have s o m e d e -

cision t o which h e c a n cite u s which would control i n the
matter.


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02
Governor Calkins. I

would say, i f Governor Young's

counsel advises t h a t these receipts c o n v e y title, I

am i n

favor o f t h e resolution.

Governor Seey. I

would, too.

T h e n I

believe i t

would come within t h e spirit o f these resolutions.
I. O R @ D I T TRSNS'CTIONS / N D POLICIES.
G. N o t e s o f parent corporations representing
borrowings t o b e advanced t o subsidieries.

The Chairman. T h e next title i s 1-G, "Notes o f parent
corporations representing borrowings t o b e sdvanced t o

subsidiaries.” G o v e r n o r Fancher, w e will ask you t o lead
this discussion.
Governor Fancher.

M r . Chairman, y o u m a y recall that

this topic came u p a t the last conference a n d was n o t given
consideration.

T h i s w a s referred t o the Conference b y

the Board, a n d i t was n o t received b y some o f the Governors
in time t o give t h e matter consideration.

I t was suggested

by the Board i n their letter dated December 50, 1925, X 4484.
You will recall that throughout t h e discussion this
perticular note w r s discussed b y the members o f the Board
with t h e members o f the O p e n Market Investment Committee,
and i n t h e t d i s c u s s i o n t h e q u e s t i o n o f b o r r o w i n g

b y the


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Federal Reserve Bank of St. Louis

93
parent corporstion that controlled subsidiaries w a s under
consideration.

A t that time n o fixed percentage e s t o

the capftal stock ownership w a s mentioned. &

S h a e , 2t. 5

recall the words, substantially were controlled was used,
and efter further consideretion b y the Board this ruling
was p u t out, whereby t h e y propose t h e addition o f 7 5 per cent

stock ownership, thus limiting the parent corporation t o
making a n y additions except t o those subsidiaries.
Governor Calkins.

‘ g s t o which i t owned more t h a n 5 0

per cent.

Governor Fancher. Now, that matter has b e e n discussed,
and i t turns o u t that t h e paper o f a number o f corporations
in our State under t h e ruling becomes incliribis.

This

matter w a s referred t o the “dvisory Council e t the last
meeting,

a n d i n discussing

i t i t was brought out--for i n -

stance, i n one case the paper o f “ilson & Company would b e

ineligible because i t had advanced $50,000 or $100,000
to s o m e r a i s e r o f turkeys

shape f o r market.

i n Texas

t o g e t h i s turkeys

i n

T h e y had advanced certain moneys, a n d

at the last part o f the season there were some sdvences

made t o the customer,and the vedy:feet that those advances were made made t h e paper o f Wilson & Company 4nel-


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Federal Reserve Bank of St. Louis

igible
It i s found thet that preveils i n the general practice
of o t h e r c o r p o r a t i o n s .
This m a t t e r w a s d i s c u s s e d i n f o r m a l l y w i t h s o m e m e m n e r s

of the Board o n l y lest week b y our member o f the ‘dyisory
Council, a n d this suggested substitution f o r the Board's
rerulation w a s suggested.

I t i s found o n page 1

of the

letter X-4484

"Tat the Federal Reserve Board will not consider,
first, financisl paper, notes o f a parent corporation t h e
proceeds o f which have b e e n edvanced b y and loaned t o
a subsidiary corporation i n which t h e parent corporation
owns s t least 5 1 per cent o f the s t o c k , -

Theat would take the place o f 1, 2 and 3. T h e t makes
no mentien about t h e parent corporation making advances t o
its o w n subsidiaries.
subsidisries

I

t puts t h e parent corporation's

i n a position o f making t h e paper ineligible.

Governor Calkins.

“ h y not change 5 1 t o 50?

I t is

a perfectly absurd c a s e t h a t y o u want t o deal w i t h right

there. I

have o n e defore me. I

have before me, Mr.


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Federal Reserve Bank of St. Louis

95
Chairman, a

case which i s informing, I

think.

H e r e is

a concérn w h i c h o w n s i n t h e i r e n t i r e t y e i g h t s u b s i d i a r i e s

and 5 0 per cent e f one subsidiary.

T h i s concern has a

consolideted n e t working canital o f over ©6,000,000,

is

engeged wholly i n merchandising w i t h but small fixed
highest
investment,

a n d i s i n the/credit s t a n d i n g .

T h e parent

company has mede sdvances t o 211 subsidicries

i n varying

amounts, t h e t d u e t h e 5 0 per cent owned subsidiary being

°100,000. F i v e o f the wholly owned subsidiaries d o not
show @ n excess o f quick assets o v e r their current liabilities
to t h e p a r e n t concern.
Under t h e f o r e g o i n g f o r m o f anelysis,

t h e peper o f

this concern would b e ineligible o n two counts:
First, i t had loaned t o a subsidiery i n which 4 t d i d

not have a t least a 75 per cent interest; a n d
Second, t h e borrowings o f five o f its subsidiaries h a d
not b e e n used f o r a n eligible purpose i n s o much a s the
borrowings f r o m t h e p a r e n t c o r p o r e t i o n w e r e
sented

b y assets

i n part r e p r e -

o f tam: i n e l i g i b l e n a t u r e .

To s a y t h e t t h e y s h e l l m a k e n o advances w h a t e v e r
a subsidisry unless t h e y o w n 7 5 p e r c e n t i s t o apply a

to
rule

thet nobody could apply i n practice i n banking o r otherwise.


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Federal Reserve Bank of St. Louis

96
Governor Peudeee: I

would say, Mr. Chairman, t h a t

this i s a matter thet h a s b e e n discussed. I

have discussed

1t a t considerable l e n g t h severel times w i t h Mr. “iyatt. I
could n o t convince h i m i n going over the matter with h i m
severe] months a g o that this Board's regulation should b e

modified.
4t could.

H

e thought the Boerd hed gone about a s fer as

B u t I

undsrstend that h e has a little different

view o f the situation now, a n d I have n o t h a d a n opportunity
of discussing this w i t h him.

“ h e n Mr. Cotton was here i n

YVashington o n Thursday Mr. “yatt w a s o u t o f the city, a n d

he had hoped t o have Mr. .yatt i n at the discussion, and:
then i t was hoped thet Mr. yeatt would come t o Cleveland o n
Saturday, b u t h e was colfed t o Indiana a n d h e d i d n o t
have opportunity, a n d I have n o t h a d the opportunity since
I have b e e n here,
In d i s c y s s i o n i n f o r m a l l y w i t h s e v e r a l m e m b e r s

o f the

Board o n Thursday, t h e y rather thought that perhaps w h a t I

had suggested i n the discussion last December would answer
the q u e s t i o n d
n
a clear t h e situation up, i f Mr. “yatt could
be convinced that t h e y should n o t specifically make mention
of sdvances t o corporations o t h e r than subsidiary.
Governor C a l k i n s .

T h e question showld

b e determined


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Federal Reserve Bank of St. Louis

9"
by them without question e s t o whether t h e money hes b e e n
used o r should b e used b y a n investor f o r s commercial purpese.
Governor Fancher.

than 5 1 per cent.

I n this p r o p o s i t i o n t h e y a w n e d m o r e

T h e other i s e smaller ownership, a n d i n

that p a r t i c u l a r c a s e i t i s a

matter w h i c h c a n b o v e r y r e a d i l y

handled, and with this modified reservation i t would fit their
particular c a s e ; a n d t h i s w a s t h e p a r t i c u l a r s i t u a t i o n w h i c h

was discussed, and the object of the discussion during the
consideration o f this regulation o f the Board.
Governor Seay. T h i s woutd n o t i n any way alter your
practice requiring statements f r o m related corporations?

Governor Fancher.
The Chairman.

N a t a t sll.

T h e n e w point submitted i n connection

with the Hanna paper was t h e w a y t o furnish such company

with all funds they need for the production of coal and iron,
and that t h e cosl a n d i r o n i s scld t e the Hanna Company b y
contract before t h e contract i s made, a n d i t could n o t b e
held t o b e a financial transaction.
Governor Fancher.

N o t a t ell.

T h e Hanna Company

were selling agents under contrect w i t h certain furnace

concerns t o sell its pig iron.

O n the other hand, i t is


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98
under c o n t r a c t w i t h c e r t a i n o r e p r o d u c i n g c o m p a n i e s

its d r e n ore.

t o séll

“ h e t takes place during t h e winter seeson i s

that t h e s e o r e c o m p a n i e s

u p o n the range c o m e a l o n g a n d g e t

ready f o r shipping early i n the spring a

styck o f ore,

which i s ready s s soon a s the nevigation seesen opens, e n d
they ship t h e o r e t o the docks a n d i t i s loaded into t h e ship
and b r o u g h t d o w n o n t h e l a k e s d u r i n g t h e s e a s o n o f naviga-

tion, a n d from the proceeds o f the o r e o f this company,
acting a s s

sales a g e n t ,

t h e a d v a n c e s a r e repaid.

ation w i t h t h e f u r n e c e c o n c e r n - - i t
cannot c l o s e d o w n a

T h e oper-

i s appreciated t h a t y o u

furnace w h e n t h e m a r k e t b e c o m e s 6

little dull o r the price i s off, a n d they g o o n and operate
end oftentimes s t a c k u p pig iron i n the yard, e n d advences
are m a d e b y Henna &

Company t o t h e s e f u r n a c e c o m p a n i e s

to

help t h e m carry this p i g i r o n until favorable market conditions erise, a n d then they are repaid.
Thet i s o

picture

o f the operrtions

o f the Hanna Company

and I think that i s a legitimate business a n d their paper i s
eligible.
The Chairmen.

T h e Hanne paper was thrown o u t because

they w e r e l o a n i n g m o n e y t o c o r p o r e t i o n s o t h e r t h a n those w h i c
they o w n e d a n d contrelled. I

think t h a t t h i s n e w informa-


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Federal Reserve Bank of St. Louis

99
tion i n relation t o their operations i s not o n l y desirable,
but i t makes their paper elyéible.
Governor Fancher.

T a ' t e t h e situation o f the much-talkec

ef Nilson paper i n Chicago. I
ago.

T h e r e comes a

spoke o f thet a

little while

time w h e n the man, i n crdér t o get his

turkeys r e a d y f o r market, h a s t o have some advances, a n d
under t h e ruling o f the Board t h e paner v f “4lson &

Compeny

is ineligible because t h e y made those advances.

are
Governor Talley.

“ h y i s not this a factor= proposition:

It i s exactly the same principle,

i t seems t o me.

was a m e n d e d s o a s t o a c c o m m o d a t e f a c t o r - — “ S p e r .

T h e fct

Poet ta

exactly whet happened i n connection w i t h the production e n d
storage o f cotton.

T h e concerns borrowed m o n e y from their

local banks, a n d with the proceeds

i n their hends t h e y used

it t o make savaneos o n cotton.
Governor Fancher. I

have ti:is thought i n mind, t h a t

before ~ e take formal action I

be given a n opportunity t o

git i n and discuss t h i s matter a little further with Wr.
‘yett a n d just see t h e frame o f mind h e i s i n and wi.ether
he believes t h e t this sort o f recommendstion would f i t the
case o n d whether h e would favor it, s o thst i f ve made a
recommendation w e could make i t with the thought thet some-


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Federal Reserve Bank of St. Louis

thing would b e adepted b y the Board.

The Chairman.
come i n here.

“

I t might b e well t e ask Mr. “'yatt t o
e a r e going t o have h i m o n the next topic,

anyway.
Governor Fancher. Perheps,

i n view o f the discussion

Thursday with various members o f the Board, w e would like
to have a

little light e n that. I

portunity, I

would c o that,

think,

i f I had the o p -

i f this topic could b e passed,

unless s o m e member o f the Conference h a s some other suggestior
Y o u move t o defer consiJeration o f this?

Governor Seay.

Governor Fancher. Yes, unless s o m e member o f the Conrerence h a s some better suggestiun t h e n this.
Governor Seay. I
The Chairman.

“ h a t i s the movion?

Deputy Governor
The Chairman.

secend that motion.

T

o defer action.

U n t i l when?

Deputy Governor Cease. U n t i l h e has a

chance t o discuss

it with t h e Federal Reserve Boerd.
The Chairman.

H e i s going t o discuss this with Mr. yatt?

Governor Fancher.

I f the Conference wishes, I

endeavor t o see h i m and discuss i t with him. I

will

had t w o o r

three discussions with him a t various times, a n d I will


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Federal Reserve Bank of St. Louis

take another crack a t it.
The Chairman.
its order,

/ 1 1 right,

I

f we take this propram

in

w e s r e r e a d y f o r Mr. ‘yatt.

Governor Fancher. I

do not know that h e does want t o b e

here, b u t G o v e r n o r C r i s s i n g e r s u g g e s t e d t h a t p e r h a p s

i t might

be w e l l f o r h i m t o b e h e r e w h e n t h a t t o p i c w e s discussed.
The Chairman.

C a n w e take u p anything else n o w ?

Deputy G o v e r n o r C a s e .

“

@ c e n t a k e u p I t e m f t -@nd s k i p

CREDIT T R A NS/CTIONS ‘ N D POLICIES.
I. R a t i o o f Bank Capital t o Deposits.
Review o f steps t a k e n b y t h e F e d e r a l r e s e r v e

banks t o urge member banks t o incresse their
capital a n d surplus t o a t l e a s t 1 0 p e r c e n t
of t h e i r d e p o s i t l i a b i l i t y a s r e c o m m e n d e d

at the November 1925 Governors! Conperence.
The Chairman.

T h i s topic I

reads a s follows:

"I, Ratio of Bank Copitalto Deposits. R e v i e w of
steps t a k e n b y the Federal reserve banks t o urge member banks

to increase their capitel and surplus t o a t least 1 0 per cent
of their deposit liability a s recommended a t the November 1925

Governors! Conference."
't t h a t C o n f e r e n c e c o n s i d e r a t i o n w e s g i v e n t o t h i s s u b -

ject, a n d i t wes voted that i t should b e the policy o f the


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Federal Reserve Bank of St. Louis

102
Reserve Panks whenever épportunity arises i n their d calings
with member banks t o urge t h e m t o increase t h e i r capital a n d

surplus, gradually, i f necessary, t o a t least 1 0 per cent
of their deposit liability.
That i s where t h e matter was left, a n d N e w York wants
to know what w e are doing about it.

“ h e t a r e y o u doing

about that, Mr. Case?
Deputy Governor Case.
have a

“ e a r g a t work o n it, a n d I

short memorandum here t h a t I

‘the subject.

would like t o read o n

O n October 6 , 1920, s i x years ago, w e sent

to all member banks i n the district a

circular containing

a reprint o f the article b y Professor Kemmerer o f Princeton

on "The ratio o f benk capital t o deposits."
this year,

M o r e recently

i n our circular 750, issued J u l y 26, 1926, a

o banks i n the district
chart w a s given showing t h e n u m b e r f
which have capital stocks i n excess o f their deposits.
This i n d i c s t e d t h e t 8 4 p e r c e n t o f t h e b e n k s
have a

i n o u r district.

capital r a t i o o f 1 0 p e r c e n t o r more, a n d t h e a v e r a g e

ratio f o r 811 banks i n the district i s 1 6 per cent.

I t

is stated also that i n the past five years more t h a n 200
banks i n the district have increased their capital other
than through morrers. f
the files.

copy o f these circulars i s i n


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Federal Reserve Bank of St. Louis

103
Governor Norris.

/ s o f what date w a s that 1 6 per cent,

Mr. Case?
Deputy Governor Case.

“

e sent o u t a circular J u l y

26, a n d t h i s i n f o r m e t i o n w a s c o m p i l e d

b y our Statistical

Department j u s t prior t o the sending o u t o f this circular.
Governor N o r r i s .

f n d t h a t w a s y o u r m e m b e r banks,

or

all banks?
Deputy Governor Case. / 1 l 1 the banks, e l l the banks i n
the district.
Mr. Harrison.

M e m b e r banks.

Deputy Governor Case.

I t does n o t s a y so. T h e diagram

indicates that a large majority, i n fact 8 4 per cent, o f the
banks o f the district have a
The Chairman.

capital ratio o f 1 0 per cent.

T h e t does n o t include t h e surplus?

Deputy Governor Case

I t includes capital funds--

cepitel a n d surplus.
“Our efforts t o w a r d s h a v i n g b a n k s b r i n z t h e i r e f p i t a l

funds i n t o suitable relation t o their deposits have b e e n

most effectively exercised, first, i n connection with the
application o f banks f o r membership i n the System,

i n which

case w e have uniformly insisted that capital funds y e i n
satisfactory proportion t o deposits a n d not materially below


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Federal Reserve Bank of St. Louis

104
10 per cent thereof a n d second,
plicetions f o r fiduciary powers,

i n connection w i t h api n which case w e have i n -

sisted t h e t t h e n e t c a p i t e l f u n d s s h o u l d

i n all cases h e e t

least equal t o 1 0 per cent o f deposits."
The o n l y exception w e have made there i s where a

bank

was well managed, h a d a little b i t under t h e 1 0 yer cent
ratio, a n d w e h a d their agreement t o effect o n improvement.
Governor B a i l e y .

get a t this relation?

H o w long a

period d i d y o u c o v e r t o

Y o u know deposits fluctuate a

whole

lot.
Deputy Governor Case.

I n case o f @ bank that i s low,

and w e have i n several instances grented fiduciary privilege
in cases w h e r e w e h a v e m a d e a

direct a p p r o s c h

t o memyer

banks, v e have m e t with success i n some cases a n d polite
feilure i n a few others.

I n grenting these eccommodations

to member banks, w e heve o f course taken into considerstion
the amount o f their eapital funds, a n d i t i s probebie t h a t
as time goes o n this will also prove a n effectual influence
to b r i n g s b o u t c o r r e c t i o n s w h e r e n e e d e d .

I

n one instance

“e@ have constantly i n our diccussion w i t h the »ember banks
brought t h i s t o their attention.
Here i s the chert, a n d 8 4 per cent o f the banks thet


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Federal Reserve Bank of St. Louis

1*5
have 1 0 p e r c e n t o r m o r e i s r e p r e s e n t e d

b y this l a r g e

greup, a n d t h e other 1 5 per cent--there s r e five banks that
have 4

per cent capital, gerern banks w i t h 5 per cent, t e n

banks with 6, and s o on.
whole

S

i n our district h a v e a

o you see thet the banks a s a
v e r y s a t i s f a c t o r y ratio.

This circular which w e have sent o u t hes created
very fevorable comment, because i t contains tables o f average
opersting raties o f representetive member banks i n different
groups,

s o a s t o enable t h e b a n k i n ony perticular group t o

compere their o w n figures w i t h the average w n i c h w e have made
up.

“ e really made this table which w e sent o u t a yehicle

for conveying o u r ideas o n this capital retio, a n d i t has
proven quite effective.

Governor Fancner. M i g h t I inquire i f the State banking
department o r the superintendent o f banks h a s t h e policy o f
suggesting t o banks, w h e n t h e y are a little c u t o f p r o p o r -

tion, t o increase their capital?

I s that « policy o f that de-~-

pertment?
Deputy G o v e r n o r C a s e .

Yes,

i t is.

where t h e b a n k i s v e r y m u c h o u t o f line,

cuss s u c h a case with him.

f

s a

matter c f fact,

w e f r e q u e n t l y diss:

H e says that h e recognizes i t

and s a y s h e w i l l b e g l a d t o undertake

t o d o what h e c a n t a


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Federal Reserve Bank of St. Louis

bring a h o u t a

c o r r e c t i o n o f t h e situation.

Governor Fancher.

“ e have b e e n doing what y o u have

been doing i n New York where a

bank applies f o r membership.

The matter c a n very appropriately b e discussed a t that time,
and as also applied t o the fiduciary t h e proposition.

“

e

have h e l d u p applications w h e n i t was n o t i n the proper ratic.
“‘e have n o t g o t t h e State b a n k superintendent t o become v e r y
H e admits that i t i s good policy, b u t

much interested.

we have n o t y e t got the department t o take m u c h interest.
“here t h e y really know that i t i s a situation thet i t i s
simply o u t o f line, t h e examiner suggests t h e t s
edjustment.be made.

capitel

D o y o u know whether there i s a n y policy

on the part o f the Comptroller's office?
Deputy G o v e r n o r Case. I

cannot s p e a k f o r t h e C o m p -

troller, b u t for the chief examiner o f our district, with
whom w e have a

very satisfactory patayiovenio.

most s y m p a t h e t i c .

end he is

T h e r e i s one rether substantial b a n k un-

town i n New York where t h e y herd but a 5 per cent ratio, a n d
I had occasion t o talk,

i n fact I

talked several times,

with t h e chief examiner, a n d I tslked about a
with Colonel McIntosh. I

year a g o

saw h i m seversl days a g o i n the

bank a n d h e says there h e s b e e n n o improvement i n that


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Federal Reserve Bank of St. Louis

1¢7
situation, e n d h e said h e was going t o get after that b a n k
now.

T h a t indicates t h a t t h e Comptroller h e s a

pathetic s t t i t u d e a n d t h e y a r e b r i n g i n g a b o u t 6

very symbetter r e -

lationship i n regard t o this capital ratic.
The Chairman.

I n considering this matter, have y o u

not found i t adviseble, instead o f dealing with capital
account, t h a t y o u d e a l w i t h s u r p l u s a n d u n d i v i d e d p r o f i t s ?

Deputy Governor Case.

No. I

think that would b e ao mis-

take.
The Chairman.
bank, though,

I t would strengthen t h e position o f the

i f they would increase t h e capital f r o m their

surplus.
Deputy Governor Case.
upon u n d i v i d e d p r o f i t s ,

Y e s , b u t most banks t o d a y look

s n d t h e Comptroller rules

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

i n regard

i s t h e yardstick.

They will tell you t o fix your own bank u p first i f you went
to them o n thet plan.
The Chairman.
The s u r p l u s

“ e cennot g o o n thet argument.

I f you d o not, y o u would meke a

i s subject

t o withdrawel a n d i t i s 8

mistake.

much easiér

proposition than reducing your capital,
Governor Fancher.

H a v e y o u g i v e n a n y thought

t o any

pian o f getting t h e matter before t h e Comptroller a n d before


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Federal Reserve Bank of St. Louis

the various depertments?
Deputy G o v e r n o r Case.

N o .

f l l w e have undertaken

to d o i n the ordinary course o f business i s t o d o what w e
regerd e s good missionary work, t o bring this metter t o their
attention. f

yeor a g o w e telked o f sending o u t some cir-

cular’, b u t Governor Strong h a d some question i n his mind
about it, a s t o the desirability o f it, a n d then w e thought
that v e might take i t u p with particuler banks, a n d h e pointec.
out thet that was n o t nesrly a s good e s a circular.
Governor Fancher.

T h e point I

wented t o make w a s that

if the State b a n k superintendent h a d some fixed policy i t
would h e l p u s very much.

“ e have t a k e n u p particular cases

and w e have h a d some success, a n d i n some other cases w e
heave not.
Deputy Governor Paddock.

“

@ took i t u p i n two cases

of consolidation.
The Chairmen.

D o y o u want t o g o s n y further o n this

matter, M r . Case?

Deputy Governor Case. N o .
I. O R DIT TRINS'CTIONS " N D POLICIES.
H. Regulations covering rediscount o f notes
secured b y edjusted service certificates
under t h e p r o v i s i o n s

o f Section 5 0 2 o f the

“orld “ a r ‘djusted Compensrtion ‘ct.


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Federal Reserve Bank of St. Louis

109
The Chairman.

M r . “yatt i s here,and w e are ready t o

start with topic I-H, "Regulations covering rediscount o f
notes secured b y adjusted service certificates under t h e
provisions o f Section 5 0 2 o f the “orld “ a r fdjusted Compen-

sation ‘ct."

T h e Board hes had that under consideration

and they presented this topic f o r discussion.
Mr. “.yett. “ h a t d o y o u wish m e t o tell you?
The Chairman.

“

e went y o u t o tell u s what i s the

status o f i t now. T h e r e i s a letter here, I
Mr. “yatt.

thin’:.

N o loan c a n b e mede o n these certificates

before January 1 , 1927, a n d the Board i s deing nothing until
it hears f r o m the Governors! Conference a n d knows what their
desires are.

T h e ccrrespondence w h i c h y o u see here i s the

lest correspondence w h i c h t h e Board has had.
Governor Fancher.

T h e compensation l a w m:kes t h e loans

eligible, subject t o the rules e n d regulations prescribed

by the Federal Reserve Poard?
Mes F a t t . ..VYes, six.
Governor Fancher.

/ n d that i s the thing thet i s t o b e

worked o u t before January 1 ?

Mr. yatt. Y e s , sir.

T h i s i s the reason why the

Board wished t o put i t u p t o the Governors! Conference.


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Federal Reserve Bank of St. Louis

110
General Hines, t h e Director o f the Veterans! Bureau, a s k e d
the Board t o assist h i m i n two respects: first, w i t h respect
to a campaign o f publicity t o educate t h e people a s t o the
conditions
cates;

o n which t h e y could make loans o n these certifi-

a n d t h e other was t h e question whether

o r not w e could

make o u t a uniform f o r m o f promissory note, a n d I think that
both o f these questions a r e practical questions rether t h a n
legal questions,

a n d t h e B o a r d f e l t t h e s a m e way, a n d t h e y

thought t h e y would p u t i t o n the program o f the Congerence
here s o a s t o get a n y recommendetions t h e Governors m i g h t
meke a s t o the k i n d o f regulations t h e y would like t o seo
promulgeted, a n d such suggestions s s the Conference would
like t o make f o r educating t h e public e s t o making these
loans.

T h e Boserd feels o f course t h a t t h e Federsl Reserve

Benk w o u l d b e i n a better p o s i t i o n t o d o t h a t t h a n t h e

Federel Reserve Board.

‘ n o t h e r question i s whether t h e

Board cen perticipate i n esking people t o borrow.
Governor Fancher.
are e x p e c t e d

‘ ' s I understand, under t h e ‘ c t w e

t o rediscount f o r non-member banks?

Mir. “‘yatt.

T h e peper i s eligible, elthough i t i s offered

by a non-member bank.
The Chairman.

“ h a t i s the aggregate amount o f these


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Federal Reserve Bank of St. Louis

certificates?

Governor Fancher. J a n u e r y 1, 1927, #262,000,000, a n d
of course

i t w i l l i n c r e s s e e a c h year.

T h e l o a n value d u r i n g

the yeor 1927 will be about (262,000,000.
Governor Seay.

$370,000,000 i n 1928, #482,000,000 i n

1929, and $590,000,000 i n 1930.
Mr. “‘yatt

O

f course y o u realize thst t h e l o a n value o z

each decetticies r T very small.

T h i s year i t i s probably

less than a hundred acllars. I t will mean a lot of little
notes. Sersonatly I do not feel you will get s o much o f
them, because i t will b e too mach trouble fer the m e mp,er
banks.

Y o u m a y get some f r o m non-member benks.
Governor Calkins.

‘ o u l d w e n o t b e compelled t o take

them from non-member banks?
Me. “yatt. - No; sirs
Governor Seay.

T h e y are made simply eligible.

I t would make a

very wide distinction

ifthe Board provides, and I hope they will, that they will
be eligible only for member banks.
Mr. “yatt.
promulgate a

I f the Boad@d does that, t h e y will have t o

repulation right i n the face o f the law. I

heve s o m e d o u b t a b o u t t h e P o a r d ' s p o w e r t o m a k e t h a t k i n d

of a regulation. I

do not think they could. I

have not


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Federal Reserve Bank of St. Louis

lle
gone into i t enough t o render a

final decision, b u t that i s

off-hand opinion.
Governor Calkins.
Mr. “yatt.

I t would certainly b e inexpedient.

T h e r e i s one thing y o u have almost g o t t o

do for your o w n protection, a n d that i s t o reguire a n y bank
to furnish right a l o n g with t h e note a n affidavit t o the
effect that t h e y have n o t charged a n y commission o r any

interest i n e x c e s s f
o that allowed b y lew, because y o u have
to have that affidavit.

The Chairman.

T h i s should b e done b y all banks o n some

uniform basis.
Mr. “yatt.

Q h , yes.

The Chairman.

B a t i t seems t o me that this l e w which

permits non-member banks t o inflate t h e paper o f the Federal
Reserve B a n k i s unsound.

I d o n o t think that t h e y have any.

right t o come i n and e s k for the business w h i c h originates
with o u r member banks, a n d these things a r e going t o amount

not only t o millions, but: to billions o f dollers, e n d the
average vetersan will take whet h e c a n get immediately o n
these certificates, a n d that will b e true every year. I
think the Board should n o t d o anything t o encourage t h e rediscount o f these instruments w i t h t h e Federal Reserve Bank,


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Federal Reserve Bank of St. Louis

113
and i f t h e y c a n d o e n y t h i n g

do it.

t o discourage

i t I

hope t h e y w i l l

I f “ e are presented w i t h this f r o m s non-member

bank w e d o not have t o take it.
Deputy Governor Case.

I t secms t o m e thet there i s a

erest inconsistency, Mr. Chairman, i n taking from a non-member
bank these sdjusted service certificates a n d then declining
to loan the same nonemember banke-very properly a s I see ite-

ageinst Liberty Loan bonds, enother form of Government obligetion.
The Chairman.

T h e discounting o f these certificates

by

Reserve Banks i s i n m y opinion unsound.
Governor Celkins. T h e unsoundness i s i n the law, however.
The Chairman.
paper r e c e i v e d

T h e intention o f the l a w i s that a l l

b y the b a n k s h o u l d

i n all cases b e self-

liquidating, e n d i n the case o f bonds there i s always a value.

These kind o f loans against adjusted service certificates
can a b s o r b a

v e r y l a r g e a m o u n t o f b a n k credit,

a n d t h e y extend

over a period o f 1 8 years, a n d instead o f being self-liguidating t h e y are just t h e contrary.
Governor S e a y .
questions.

T h e r e are 4

“ h a t i s t o become

does n o t p a y i t ?

good m a n y practical

o f t h e n o t e i n aese t h e v e t e r a n


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Federal Reserve Bank of St. Louis

114
Mr. “yatt.

Y o u take i t t o the Veterans! B u r e a u a n d they

pay it.

The Chairman.

“ e d o not want t o d o business w i t h them.

Governor Sesy.

“ e d o not want t o d o that.

“ h y not

require t h e m e m b e r b a n k t o d o i t ?

Ur. “yatt.
do, b u t I

T h a t i s what y o u ought t o b e permitted t o

a m telling y o u what t h e l o w says.

“ h e n the note

is not paid, y o u c a n take i t t o the Veterans! B u r e a u a n d i t
will b e paid.
fovernor Norris.

T h e Director m a y p a y i n his discretio

Mr. “-yatt. T h a t i s right,
Governor Seay.

i t i s discretionary.

H e c a n require, b u t I

do a o t know what

effect t h e r e q u i r e m e n t w o u l d h a v e , t h e b a n k t o s u p p l y u s
with f u n d s

e t maturity t o p a y the note.

“ t e are n o t required

by l a w t o collect t h e m for the non-member bank, b u t i t i s
rendered eligible.
Governor Young.

T h e Foard has t h e right t o limit t h e

amount o f a g r i c u l t u r e ] p a p e r , h e s n ' t i t ?

ie. “yatth.°. F e e s
Governor Young.
Mr. uyatt. I

B u t they could n o t limit this?

think they can.


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Federal Reserve Bank of St. Louis

115
Governor Young. T h e s e notes a r e n o t collateral f o r
Federal R e s e r v e n o t e s .

Governor Seay.

I t i s a n instrument o f infletion t o

begin with, o f course.
Governor Young.

D

e y o u think i t policy t o turn i t down

eltorsther?

Governor Sesy.

M y idea i s that both member a n d non.

member h a n k s w i l l e n d e a v o r

t o c u r r y favor,

a n d that t h e y

will discount this paper freely, a n d I believe they will
have i t t o offer t o the Federal Reserve Penk.
estimated b y sctuaries I

I t has b e c n

think that about one-half o f the

loan value o f these certificates, which i s .260,000,000,
will probably b e offered i n the first yeer. There i s infla-

tion t o the e x t e n t f
o ¢130,000,000.

T h e Federel Reserve

Banks a r e g o i n g t o b e a s k e d t o p a s s t h i s p a p e r ,
they m a k e n

a n d unless

retirement t h e n o n - m e m b e r b a n k s w i l l e s k f o r

funds.
The Cheirmen. I

just w e n t t o p o i n t o u t t h a t i t i s

not compulsory, but i t i s discretionery with the Veterans!
Bureau, whether they pay us o r not.
Governor Seay. U n l e s s t h e regulaticns provides t h e
manner i n which those things w i l l b e dealt with, there i s


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Federal Reserve Bank of St. Louis

216
poing t o b e grest pressure o n the Federal Reserve Banks t o
take them.
Mr. “yatt.

O f course t h e non-member b a n k will b e lia-

ble e n its endorsement.
Governor Seay.
very much.

O f course, b u t that does n o t amount t o

I t puts i t o n you t o take i t u p b y correspond-

ence.
Mr. “ y a t t . I

a o n o t t h i n k t h e r e i s a n y difference

i n

epinion s s t o the undesirability o f this, b u t the thing j s
you have g o t i t and what sare y o u going t o d o with it.
sincerely trust thet t h e Federal Reserv

Governer Seay. I

Bank will discount t h e m only when offered b y member banks.
Governor Calkins.
Governor Seay.

Y o u have t o get t h e l a w changed.

No, I

do not think y o u do. T h e y are

simply made eligible.
Governor Calkins.
Mr. “yett. I

‘ h a t d o y o u say, Mr. y a t t ?

did not g e t the questior..

Governor Calkins.

H e v e w e the option o f refusing t e

rediscount t h e s e f r o m n o n e m e m b e r b a n k s ?

Mr. “Iyatt. Y e s , I think you have.
Governor Calkins.
Governor Seay.

“ h e r e d o y o u g e t that o u t o f the law?

“ e a r e simply n o t required t o disceunt


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Federal Reserve Bank of St. Louis

them a t all.

Mr. “iyatt.
discount.

I t merely says i t shall b e eligible f o r

I t does n o t s a y that y o u must discount.

Governor S e a y .

“ e m a y permit t h e m e m b e r b a n k t o b e c o m e

the agent f o r a non-member b a n k f o r the purpose o f discounting
this paper, b u t that would b e inconsistent w i t h the attitude
ef the Board a t the present time.
Governor Calkins.

T h a t would b e inconsistent w i t h the

attitude o f the Boarc, but i t i s not inconsistent with the
intention o f the people who made the law.
Governor Seay. I

know that, b u t i t will receive s o m e s h o

in other directions, a n d I think w e had better give them
that o n e too.
Governor Celkins. I

do n o t know whether y o u h a d better

or not.

Deputy Governor Case. These notes a r e made eligible
for member e n d non-member banks.

Y o u coule n o t take t h e m

in from member banks a n d decline t o take t h e m from nonmember banks.
Governor Calkins.

T h e probable result

would b e amended t o require u s t o d o it. I
the i n t e n t i o n o f t h e l s w .

i s thet t h e l a w

think that i s


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Federal Reserve Bank of St. Louis

118
Mr. “yatt. I

think that i s the intention o f the law.

Governor Seey. I

heave been i n hopes t h e t i t cnuld b e

met b y the Federai Keserve B a n k requiring t h e bank t o become
the agent f o r this particular class o f paper.
“leuld y o u g o s o far a s t o require t h e nonmember b a n k t o offer i t through a member bank?
Governor Seay.

Yes.

T h e r e w i l l b e n o risk r u n b y the

member b a n k i n endorsing paper.

Mr. “yatt.
plain p u r p o s e

I f you d o that you refuse t o carry out the

o f the law.

Governor Seay. I

hope w e will come a s near t o i t a s

possible, because i t i s a very vicious lew, I

think,

in

principle.
Governor Norris. I

do not know whether this came f r o m

the Federal Reserve B o a r d o r the Treasury Department,

or

where i t came from, but i t locks like the Federal Reserve
Board t-pewriting:

"Upon the endorsement o f any bank and subject t o regulations t o b e prescribed b y the Federal Reserve Board, a n y
such note secured b y a certificate a n d held b y a bank shall
pe eligible f o r discount o r rediscount, whether o r not t h e
bank offering t h e note i s a member o f the Federal Reserve


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Federal Reserve Bank of St. Louis

System a n d w h e t h e r

o r n o t i t ecquires t h e n o t e i n t h e

first instance from the veteran."
Covernor Seay. That i s the law.
Mr. “yatt.

Yes.

T h a t i s t h e lew.

Gevernor Norris. Y e s . N o w , manifestly t h e l a w intended that w e shouid rediscount

a e non-member banks i n order

to g i v e t h e v e t e r a n w h o m w e w e r e s e e k i n g t o f a v o r t h e w i d e s t

possible range i n getting his loan.
have n o doubt o f it.

Governor Seay. I
Governor Norris. I

was u n d e r t h e i m p r e s s i o n t h a t i f a

note w s s n o t p a i d e n d y o u w o u l d s i m p l y p r e s e n t

i t a t the

Veterans’! Bureay w h e n i t was s i x months! o v e r due, t h e y would
pay it, b u t this provision that t h e Director m a y i n his
discretion p s y it, fives u s n o guarantee o f payment a t all.
Governor Seay. I n a s m u c h a s the nonemember b a n k keeps
no s c c o u n t w i t h t h e F e d e r a l K e s e r v e B a n k a g a i n s t w h i c h t o

cherre this note u p o n maturity, reitersting what I

have

already said, t h e y w o u l d h a v e t o b e presented, w h e t h e r e n ~

dorsed o r not b y a member bank, with authority t o charg?
them t o the account o f the member b a n k i f not paid.
Governor Calkins. I
thing s s t h a t o f f e r e d

would l i k e t o hope t h e s a m e

b y Governor S e a y , b u t I

think w e


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Federal Reserve Bank of St. Louis

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t o do
@ s a t a n y other time
n
o
w
prepere
well
should j u s t a s
“g heve n o option.
banks.
it for non-member
to reason t h e
“ould i t b e possible
Mr. Harrison.
note
you ere getting a
a
l
l
after
t
h
a
t
thing out this way,
bank, a n d the
by the non-member
endorsed
of the veteren,
to a s k the
the opportunity
y
o
u
gives
l
a
w
fact that t h e
i s not paid b y
4 4 i n the event 4 t
p
a
y
Bureau
t
o
veterens!
could n o t send the
Goes n o t mean that y o u
the maker,
bank t o the
Tees
non-member
note h a c k f o r g l u e s
maker?

Governor Seay.
Mr. Harrison.

N o t a t all.
o f the note refuses
P n a i f the maker

to

against him.
rigat t o proceed
pay, y o u have t h e
t h e method b y
b u t I would provide
Yes,
SeayGovernor
will
4 s thet these notes
thet
e
n
d
done,
which this i s t o b e
bank for
t o the non-memoer
maturity
before
be forwarded
paid b y the veteran
event t h e y ere n o t
the
i
n
a
n
d
collection,
o n the d e y o f
must provide funds
h
a
n
k
non-member
then the
4 deteil.
paper. M a t i s clearly
the
p
e
y
t
o
maturity
bank
would k e e p the non-member
T
h
e
t
BeileyGovernor
freely 2 s before.
from taking t h e m s o
Chairmen,
Governor Fancher. M r .

that
i t seems t o m e here


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in doing w h a t t h e B o a r d w o u l d l i k e t o h a v e t h i s C o n f e r e n c e

do involves a

lot o f detailed s t u d y i n preperation o f forms

and legel points o f l a w a n d that sort o f thing.

I t seems t o

me that 1 f Mr. ‘ y a t t could l o o k about a t these different
banks e n d s e l e c t t h r e e o r f o u r m e n t h e t h e t h o u g h t c o u l d

assist him, and let them be a committee t o work these things
out, i t would b e a good idea.

“

e cannot sit around this

table a n d determine o n the f o r m o f e note o r a n affidevit

or this o r that. T h a t i s impossible, and it is impossible
also t o work out a concrete p l a n i n this discussion.

I t

is a matter requiring a good deal o f study and involving a
good deal o f time.

The Chairman.

M r . “yatt has stated that i n his

opinion 1 t would b e necessary t o work out a form o f affidavit,
and i n relation t o that matter I
e statement I

have.

would like t o read f r o m

I t i s very important that t h e f o r m o f

affidavit to.bé made b y the officer o f the Lank should b e
prescribed a n d sent o u t t o banks b y the directors.

These

losns will b e made and negotiated under statutory provisions.
The ‘ c t provides t h e t i f the statute i s not strictly com-

plied with the loan should b e void. T h i s application should
be full enough t o show that every essential provision o f the


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statute i s complied with, n o t o n l y e s t o the rate o f interest charged t h e veteran, b u t that t h e b a n k making t h e l o a n
was a

bank incorporated under t h e laws o f the United States

or of some State o r Territory.

T h i s form should b e sub-

mitted i
n advance t o the divector and definitely approved
by him, s o that a

bank making t h e loan would b e assured

that t h e loan would b e paid a t maturity.

T h i s just e m

phasizes y o u r s t a t e m e n t t h a t i t m o u l d b e n e c e s s a r y t o h a v e

a form a n d a uniform form.
wr. Wyatt.

M i r . Chairman, m a y I answer Governor Fancher’

Temark? T h e Federal Reserve Board o f course does not expect
a Governors! conference t o work o u t all o f these details.

das

I understand it, all the Board wished was a n expression iron
the Governors! Conference a s t o what their views a r e a s t o
the general volicy,

s o that t h e Board could promulgate i t s

regulations i n such a way a s t o meet t h e wishes o f the G o v

ernors.

O f course, t h e Board itself would have t o mork out

the details,

b u t i t i s p o s s i b l e t h a t t h e r e a r e s o m e practic.

al considerations t h a t are very important, a n d such questions
as Governor S e a y has been raising, a n d i f y o u could get a n
expression f r o m the Conference o n that I

think i t would have

a good deal t o do with the kind o f regulations the Board pro-


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mulgates.

Otherwise,

the
the Board has t o g o ahead i n

of
a n d it may meet the wishes
dark and d o the best i t can,
this Gonference

or i t may not.

I t i s simply a n effort

40 cooperate with this Conference

in the matter o f pro-

malgating t h e proper regulations.

would b e the regulas
Governor Oalcins. T h e first thing
thing would b e a uniform
tion o f the Board a n d the next

Reserve Bank t o member
ciroular t o be sent b y the Federal

ed
those things should be work
banks, and it seems to me that
the
Federal Reserve Board a n d
out with the Counsel o f the
officers o f the Federal
assistance t o h i m o f some operating»
Reserve Bank.

wir. Chairman, I would
Governor Seay, First and forenost,
Fedt o be the policy o f the
lige t o xnow whether 4 t is going
Reserve Banks t o diseral Reserve Board t o require Federal
count this paper f o r non-member banks.
thing,

T h a t i s the primary

the case
Y o u will recall that i n
a s i t seems t o me.

of the intermediate

that
credit banks the Board provided

»urchase a n y o f their svuff.
no Federal Reserve Bank should
50 per cent, a n d there
when their own reserves were below

that
that might b e imposed, but
are a wariety of limitations
Regerve
determined, i f the Federal
4s the primary thing t o be


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Banks ought, o r whether they would require t h e Federal R e
serve Banks t o disccunt t h i s paper f o r non-member banks.
The Chairman, T h e y certainly would require t h e m t o d o
it, will they?
Governor Seay, I
them t o , b u t I

do not know that t h e y will require

would l i k e a n e x p r e s s i o n

o f opinion a s t o

whether they will discount t h e m directly f r o m non-member
banks o r through t h e member banks a s a n intermediary.
wr. Wyatt. T h e question a s t o whether t h e y would re.
quire i t i s entirely academic.
Deputy Governor Case.

T h a t is, y o u think the Federal

Reserve B a n k should d o i t with t h e l a w a s i t is?
wr. Fyatt. T h a t i s obviously t h e policy.
Governor Calkins,

I t i s obvious under t h e terms o f

the law that the Board will not prohibit u s from doing it.
Reputy Governor Case,

I t seems t o m e o n this matter

there i s mich ado about nothing. H e r e there are two and
one-half billion o f these certificates p u t o u t i n the hands

pf veterans,

O n January 1st they have a loan value o f

$260,000,000, A s s u m i n g that 5 0 per Gent o f the veterans —
and I would not b e surprised i f a t least that percentage
did c a s h i n o n t h e m —

i t would mean somewhere between


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$125,000 and $150,000 taken from the banks of the entire
country.

i y judgment i s that —

o f course our district

may be a little different from some of the others -— but my
judgment i s that little o r none o f them would find their w a y
into t h e Federal Reserve Banks; t h a t t h e banks would carry

them themselves.

W i t h the law as it is, i f a bank u p at

Painted Post, a member bank, offered one o f those fer discount
and i t had the affidavit which i s prescribed a n d which I as.
sume o u r general counsel o f t h e Board would send u s a copy
of the form, i f i t had that o n a plain collateral n o t e given

to the member bank, I see n o reason why the Federal Reserve
Bank o f New York should not discount i t and not make a
face about it. I

wry

d o not believe y o u will g e t $5,000,000 o f

that paper i n the antire country, because t h e tendency o f
the banks i s t o give y o u the bigger notes t o carry, a n d sinilarly, w i t h t h e l e w a s i t is, i f the First State Bank o f

Painted Post, a non-member bank, were t o offer u s one o f

these certificates, personally I should he in favor of a d
vancing the money against i t and d o just what Governor Seay
says, a s the loan matures I

would send i t t o then and I would

say "This matures o n November 15th; please s e n d u s a check

for it when it matures."

A n d I do not believe in making a


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Federal Reserve Bank of St. Louis

terrible thing about it.
The Chairman. Y o u would exercise discret*on?
Deputy G o v e r n o r Case. I

The Chairman,

w o u l d e x e r c i s e discretion.

I f the non-member bank was i n good stand-

so far a s y o u were aware, y o u would take it?
Deputy Governor Case.
Governor Seay.

Yes.

Y o u could not discriminate?

Deputy Governor Case. I

d o not think there would b e

any risks involved, whether the bank was i n good shape o r
not. I

do not think y o u will g e t very m u c h c f i t a s a prac-

tical proposition.

T h e banks would carry that paper t h e m

selves and consider i t a real nuisance, which i t would b:,
of course.

Governor Seay, Unless, Mr. Oase, the Federal Reserve
Bank

would undertake t o collect these notes themselves,
Deputy Governor Case. I

Governor Seay. I

d o not think they should.

agree with you there, a n d I think

that

such should b e the regulation, H o w much o f this paper

will

find its way t o the Federal Reserve Banks when $900,000,

900 o f i t i s outstanding,

i s a problem. I

d o not think a n y

appreciable qucntity will c o m e into the c i t y banks, b u t a
lot i n t h e country.


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127
Deputy Governor Case.

W e will have a

lot o f experience

bythat time.
Governor Young. Y o u could put a limit o n the amount t o
be taxen a t a n y time.
Governor Calxins., J y s t s o far a s the Veterans fail t o

pay, the amount would b e equally distributed.
I t i s like the life insurance policies,

Governor Seay,

the L o a n value would increase f r o m year t o year, a n d t h e man
will t r y t o borrow c s much a s h e can get.

H e would have t o pay the first note

Governor Calkins.

before h e can borrow i n the second year.
Governor Norris. I
he k n o w a s a

would like t o ask Mr. Wyatt, d o e s

taatter o f f a c t w h a t t h e d i r e c t o r ' s p o l i c y w o u l d

-be where t h e a

t

e

h e m a y i n his discretion p a y t h e

bank, whether h e would establish i t a s a rule t o make t h e

Payment except i n sane extraordinary o r unusual case, o r
whether

h e w o u l d not.

wr. Wyatt. I

have n o way o f knowing that,

Governor Bailey.

W o u l d t h e veteran forfeit h i s right

to make t h e additional l o a n i f h e did not n a y t h e first note.

itr. Wyatt. T h e Director Pays the amount o f the note,
with interest, a n d then holds the certificate until one o f


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128
two things i s done, i n which event h e gives the certificate
back t o the veteran.

I f h e does not p a y o f f the loan,

the director holds i t until m

aturity, deducts t h e amount o f

the loan, p l u s interest t o date, a n d pays t h e balance t o

the veteran, i f he i s liviag, o r t o his beneficiary. I
think that will happen i n most o f the cases.
Deputy Governor Case. Governor Norris, y o u r question
is a very practical o n e from the Federal Reserve Bank's
viewpoint,

i f they follow the ordinary business custom o f

asking t h e member b a n k that i s under discount a t maturity.’
Governor Norris.
a member bank.

T h a t i s all right where i t comes fro.

B u t t h e i e d a c e t e a s b o r r o w the moment i +

is possible i s a person o f n o responsibility.
Deputy Governor Case.

T h a t i s true.

Governor Norris. A

non-member b a n k m a y not b e a

per

son o f mich responsibility.
Deputy Governor Casé.

M o s t o f them I should think

would b e good.

Governor Norris. I n - y o u r district a n d mine, but i n Gov—
ernor Young's district I

take i t that h e does not feel f r e e

to accept t h e i r e n d o r s e m e n t
Governor Calxins.

s o readily.

Y o u will have t o take i t for what i t


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Federal Reserve Bank of St. Louis

is worth.

Deputy Governor Case.
this other than t o get a
The Chairman, I

I s there anything needed o n
regulation?

think something i s needed,

I t is

something that i s put o n b y the Board, a n d what a r e w e
going t o say?
Governor Seay, Guvernor Fancher's suggestion that a

committee o f the operating m e n o f the bank should confer
with wir. Wyattj;seems t o be a good one.
The Chairman. B e f o r e w e d o that, w h y would not that

be @ proper subject t o refer t o our standing committee?
Governor Seay, I

think that they are such a convenient

committee that w e are apt t o leave t o them a great many
things w h i c h p e r h a p s a

great m a n y o p e r a t i n g m e n s h o u l d do.

Governor Fancher. I

should like t o ask Mr. Wyatt

whether that i s agreeable.
Mr. W y a t t , I

think t h a t i s t h e b e s t w a y o u t o f it,

so far as the regulations are concerned, i f there could
be four o r five operating men,
The Chairman. I

will give y o u two o f then,

Mr. Wyatt. That i s enough. T o confer with us, 1 think
we could get u p a regulation satisfactory t o those men.


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There i s another question,theugh, that I

d# not think

that will answer, a n d that t s whether the Federal Reservo
Banks will want t n participate i n any campaign fer publi«
city, a s t o h é w these leans should b e made.
Gevernor Seaye T h e r e i s n e question b u t that a
specific circular should b e issuea@ t o member a n d non-

member banks, describing the way they should d o this
thing, a n d that i s what I

believe t h i s committee shauld

do, t o diseuss not ouly matters which sheuld b e incorpors
ated i n regiilabions o f the board, but the procedure which
the Federal Reserve Banks shtuld adapt i n dealing with
member a n d nonemember banks alike.

W e m a y obtain later ir.

this conferensoe a n opinion a s t o whether t h e y think t h e

Federal Reserve Banks shnuld discount this paper from all
banks a s a matter o f polfoy. I

think I

can anticipate

their answer, but I weuld like t o have f t just the same,
Mr, Wyatt. M M a y I make one suggestion about this
committee?

I m view o f the fact that these loans have t o

be made beginning J a n u a r y lst, would i t b e advisable t e
give these m e n authority t o g o ahead a n d work u p some r e e

gulations i n a circular alsc, i f you desire that, and put
it out rather t h a n have t e come b a c k t e another gavernor!,
conference?


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152
Governor Biggs. Suppose y o u put that out a week o r
ten days befcre?
Governor Norris.

I t ought t o g o out about t h e middle

of December.
Mr. Wyatt. I
and c l e a r enough,

think i f the circular i s made complete
i t will save y o u a

Governor P a d d o c k .
Governerr Fancher.

lot o f correspondence.

I t ought t o b e explicit,
I t ought t o b e unifearm for all the

banks»

MMr. Wyabt.

I t seems t o me, i f such a thing i s gotten

up, t h e beard shoulec publish s a y i n the December bulletin

what has been determined upon, a n d the same statement cou.d
be circulated b y alj the Federal Reserve Banks.

W e get a

lot o f letters n o w inquiring abcut these loans.
Gpvernor F a n c h e r .

I t wceuld b e necessary f o r each

Federal Reserve B a n k probably t o serve notice o n all the
banks i n its district, member a n d non-member.

Mr. Wyatt.

@ f course, the other angle t o i t is that

it may eneceurage t h e banks t e expect t e reediscount the
paper.
Governor Bailey. M o s t o f them know i t now,
Governor Wellborn.

T h e y cannot charge o v e r 6 per cent?


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Federal Reserve Bank of St. Louis

Mr. Wyatt.

N e , sir.

Governor Wellborn,
to them, anyhow. I

T h a t will n o t b e very attractive

think w e ought t e t r y a s much a s

possible t o help the veterans.

W e ought t o earry i t out

in good faith.
Governor S e a y , I

think the banks ought t o help

them,
Governer Norris.

@ n e o f the operating m e n i n our

bank has gotten u p a form t o b e issued t o the banks, a
form o f note a n d a form o f arfidavit.

S o that, i f you

want t o have h i m help y o u i n this thing, h e will b e a t
yeur service.
Mr. W y a t t . I

would like v e r y much t o have t h a t

anyway i f this committee i s appointed. I
have h i m o n a

would like t a

committee.

Governor Talley. I

have a

out here, w h i c h i f y o u a d o p t I

set o f regulations written
guarantee y o u w o n ' t g e t

many o f these discounts.
Governor F a n c h e r .

H o w large a

eemmittee d o y o u want?

We will l e t y o u select t h e MEN.
Mr. Wyatt. I

do not care.

Governor F a n c h e r . S u p p o s e a

committee e f three f r o m


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Federal Reserve Bank of St. Louis

‘banks t h a t a r e n e a r b y o r a r e acceptable.

Mr. Wyatt.

O f course a n y bank that has a a y strong

feelings about i t would lixe t o be represented.
Governor Case.

T h e r e i s a moticn before t h e house

that y o u shevuld appoint a

committee,

Mr. W y a t t , o f operating officials,

i n consultation with
t o prepare t h e neeessa-

ry papers dealing with this sbject.
Gavernor Seat.

A n d I have supplemented i t , Mr.

Chairman, b y suggesting that they should b e representatives
of different banks a n d not necessarily officials around
the table.

The Chairman.

W e will make that a committee o f three,

if there i s n o objection.
Gevernor Seay.

W i t h due deference t o you, I believe

that w e sheuld have more t h a n three banks represented o n
that committee.
The Chairman. I

think three would b e enough.

What

de y o u suggest, Mr. S e a y ?
Mr. S e a y . I

would s a y five.

Mr. Talley. I suggest that i s to be compesed o f representatives o f banks nearer Washington.
Wovernor Calkins. I

suggest t h a t i t b e representatives


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Federal Reserve Bank of St. Louis

154
from banks n e a r t o Washington a n d distant f r o m Washingten.

I think there should b e one from Minneapolis o v Baller, - nut t o s a y S a n Francises,

think a small committee c f three

Governor Young. I
is sufficient.

Gevernor Calkins. T h r e e i s a plenty.

Geverner Young. ‘The collection committce could handle
it very nicely. T h e y always refer i t t o the banks before
making a n y recommendation.

T h i s committee c a n g o ahead a n d

get this u p an@ refer i t t o the banks a n d they c a n d o i t
very nicely.

Governor Calkins. I
Governor Seay. I

The Ghairman.

seconé the motion for throe.

acquiesce, M r . C h a i r m a n .

T h e r e will b e a cemmittee c f three.

That i s settled.
Governor N o r r i s . .Has Topic 1 - H been settled?
The C h a i r m a n .

T h a t has b e e n settled.

Governor N o r r i s s

I t has n o t b e e n voted on.

The Chairman. I

thought i t had. What i s t o be

acted o n ?

Mr. Harrison. Governor Fancher moved that the
Chairman appoint a

committee o f three o f the operating


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Federal Reserve Bank of St. Louis

135
officials o f the Federal Reserve Banks, t e be selected b y
him te work with Mr. Wyatt i n devising regulatiens a n d forms,
including a

circular letter t e b e distributed concerning

those circulars a n d forms relative t e the discount o f noted
secured b y adjusted service certificates u n d e r t h e provisions
of Section 5 0 2 o f the World W a r f#djusted Compensation Act.
Governor Wellborn. I

second t h e metion.

(The motion was put and unanimously carried.)
IV. @ P E R A T I O N A N B ADMINISTRATION.
D, A d v i s a b i l i t y o f the B a r d adopting f o r all Natienal
Banks a

minimum c a p i t a l r e q u i r e m e n t a n d i m p o s i n g o t h e r r e -

quirements i n connection with i t s granting authority t o sush
banks t o exercise trust powe7S.
The Chairman,

T h e next Board topic which I

find i s

IV-D, "The advisability e f the Board adepting for all
National B a n k s a
other requirements

minimum capital requirement a n d imposing
i n connection with i t s granting authority

fo such banks t o exercise trust powers."
What d o we want t o de with that subject? I
expression here from our counsel o n that.
some , ana i t i s not v e r y leng:

have a n

I t may help


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Federal Reserve Bank of St. Louis

156

"Mme pewer o f the Federal Reserve Board t o s e establish a minimum capital i s clear, a l l a s pointed o u t b y the
general counsel o f the Board i n his letter above referred te;
but the necessity e r propriety o f establishing s u c h rule is,

by no means, clear.

" If thy Board, i n the exercise of its undoubted pewer,
is convinced that n o national bank with a capitas, f o r in-

stance, o f less than $50,000 should be granted trust pewers,
the pronouncement o f such conclusion might lessen t h e labors
of the Board i n censidering individual cases o f national

banks having less capital than $50,000; fer, i n that event,
of course, these banks with smaller capital would not make
application, having been advised i n advance that n o such
application would b e acted upon favorably.

" @n the other hand, i t occurs t o me that the bapks
with a smaller capital ought not t o be deprived o f the
right t o e x e r c i s e t r u s t p o w e r s w i t h o u t a

consideration

by

the Board o f the needs o f the community t o be served and
other facts a n d circumstancesthat might have a

just bearing

on whether o r not t h e permit should b e granted.

" In my view of the matter i t seems t o me that under tho
law every national bank i s entitled t o neve i t s application


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Federal Reserve Bank of St. Louis

considered

o n its merits a n d b e refused

o r granted a

permit

after the Board has c o n s i d e r e d .lla the things which the
statute provides t h e Beard has a

right t o consider i n deter-

mining the question.»

"Then, too, I am inclined te the view that the establishment e f such a rule b y the Federal Reserve Beard might
have the effect, and i n fact probably would have the effect,
ef calling down o n the Federal Reserve B e a r d t h e condemna-

tion o f the smaller banks.

® n that account i t seems t o me

it would b e a very short-sighted policy o n the p r t o f the
Board t o establish t h e hard a n d fest. rules suggested.

The

Federal Reserve Board and the Federal Reserve System need,
and should have, the good will o f all the smaller banks.
It seems t o me the estabiishment o f this rule couli answer
no really good purpose a n d might have the effect o f destroying some g o o d will which the System should have.

" yours truly,

(S) Chas L,. Powell,
Gounsel.”
Governor S e a y . T h e r e i s a great deal t o ke said
on the ether side, haever, I believe.

T h e galifications

of the executives o f a very small bank, exercising trust


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pewers, a r e cxtremely limited,

T h e y are n o t a s good a s

those e f a prominent individual e f a community which weuld
be likely t o b e called e n t e a c t a s executer o r administra-

tor, and s e forth.

S o that there i s something t e be said

en the other side,
The C h a i r m a n .

T h a t would n o t b e solved b y increas-

ing the minimum capital t e $5¢,000.
Gevornory S e a y .
je not place a

I t would help,

i n those states w h i c h

minimum capital a n d whese state banks there-

fere are qualified t d act as administrators. T h e r e might
be some competition between small stete banks a n d small
nacienal member banks.

S e c that that i s a complex question,

if you solve i t alone o n capital limitation, but neverth>less capital limitation i s a n important element i n it, a s
I beliove.

I t i s certainly true that banks w i t h small

capital and resources which cannet chuaitils pay for competent management, a r e i n a very much better pesition t s
exercise fiduciary powers, a n d I have b e e n afraid that
seoner o r later t h e failure o f some small b a n k which has
been granted fiduciary powers would bring the Feceral

Reserve System into disrepute, which i s a pessibility
which w e c a n n o t w i n k s t .


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Governor Fancher.

G u r counsel states t h a t t h e Federal

Reserve S y s t e m i s a t some disadvantage i n some a f the
states that make n o c a p i t a requirement.

T h e r e t n e national

banks would b e under seme handicap.

Governor Seay. Y e s . W h e t h o r o r not i t is better t o
suggest a

handicap i s a question t o b e determined, b u t o f

omrse i t would b e some handicap i r o m the standpoint o f the

national bank, when i t i s compared with the state chartered
banks,
Governor @aikins,.

T h e r e i s very nuch t o b e gaid i n

faver of placing a limitation uper capital. There are sevq
éral reasons w h y small barks shauldA not exercise s u c h powers,
the first o n e being that t h e y are generally incompetent.
The second a n d perhaps a

better reason is, i f we attempt t e

set u p a trust department i m a small bank, i t always results
in a loss,

S m a l l banks deceive themselves i n thinking i t

is d e s i r a b l e t o . g o o n a

trust b a s i s .

Howover, I

de n o t be-

lieve that there i s any equitable ground o n which the Federal Reserve b a n k c a n establish a

minimum capital.

The

question i s first bound u p with t h e provisions cof state laws

with regard to trust companies, and the second is whether or
not i t i s progr f o r the F e d e r a l Reserve b a n k t o diseriminate


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ameng member banks o n the basis e f capital enly.

M y own

opinion i s that i t would b e very inexpedient t e place a n y
trust powers u p o n a n y bank with a capital o f less t h a n

$250 00%,
Gevernor Fancher.

S e far as the Fourth District i s

concerned, t h e states have p r o v i d e d r
o
f that.

® h i o requires

$125,00C, Pennsylvania $125,@0@, West Virginia $100,900, and
Kentucky $56,008.

S o that capital requirements are very

definitely previded f o r i n the state laws.

Governor Wellborn.

T h a t would b e the best selutien o f

this m a t t e r , j u s t t o r e q u i r o e a deposit

o f s e m a n y bonds f r o m

a bank.

Governor Seay.

@ n the other hand, i n North Carolina,

the capital requirement i s as lew as $15,000,
The Chairman.

F o r a trust cempany?

Governor Seay. Y e s , sir, w i t h fiduciary powers under

state laws -~ $3@,900 i n cities and towns having a pepulation between 16,000 and 15,00@, and $15,006 being the lewer
limit.
The C h a i r m a n . I

was favorably impressed w i t h Govern-

or Calkins! statement, a n d I wish you would put that motion
anew i n a

f e w werds.

Y o u move what?


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Governer Calkins.

J f move that i t i s the sense s f this

meeting that i t is inexpodient for the Board t o place a n y
capital limitation u p o n banks applying f e r permission t o
exercise s u c h pewers.e
second that.

GQevernor Wellborn. 1
The Chairman.

I s there a n y ecmment o r disedssion?

Governor Seay, I
that while I

would like t o g o o n record a s saying

would vote f e r that, I

mevertheless believe

that f r o m othey péints o f consideration i t 4 s desirable t o

place a limitation o f capital upon those banks which should
be granted trust powers.
though. I

T h a t just goes into t h e record,

do not believe t h a t under a l l the circumstances

of the c a s e i t i s expedient t o d e it.
G overnor Galkins. I

TYdid s a y that I

d o n o t s a y i t i s undesirable.

theught i t was inexpedient.

I t would

seem to m8 to hexplain itself. T h e word "inexpedient" is
used for, while i t might b e dewirabile, i t would b e bad
policy, I

would b e glad t o have i t amended.

Governor Seay. I

would amend i t to this extent, thet

sound
even i n the opinion e f the Gonferense there a r e m a n y
reasons w h y a limitation u p o n capital sheulg b e plaeed

upon those banks granted fiduelary power, nevertheless, i n


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attempt
view of the werding ef tne law, i t is inexpedient t e
a limitation o f caplte
te govern t h e grant o f trust powers b y

motior
Governor Wellborn, H e w will it de te amend this
just t o make a

suggestien o n our part that t h e y consider

t o protect
some p l a n o f reqiring banks t e purchese bonds

the extending o f this power?
The Chairman,

Noe

Governor C a l k i n s e I

accept G o v e r n o r S e a y { s a m e n d m e n t ,

and I would like t o amend i t further,

b y saying that owing

fact that the
te the provisions o f the law and the further
governed b y aifferent
authority t o exercise s u c h powers i s

provisions i n different states.
Governor Seay. I

withdraw m y amendment, a n d he hac

and I
down whet h e wanted t o do i n the original motion,
very gladly accept t h e original motion.

The Cheirman.

W i l l you state the motion, Mr. Gal-

kins ?

Governor Calkins.

I t i s the sense o f this meeting

a capital
that i t i s inexpedient f e r this Board t o place
t e exercise
limitation v p o n banks applying f o r authority

o f the law, and
trust powers i n view o f the provisions
o f trust powers b y
the further fact that t h e exercise


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State Banks i s goverwed b y different laws i n different
states. 3

Governor Norris, I

second that motion.

The Ohairman. G o v e r n o r Seay, dé you second it?
Governor Seay. I

seeond its

( The motion was put and unanimously carried.)

Governor Fancher.

I n cehnection with this topie, I

think there is some language there "and imposing other
requirements” that I would like t d make a sliggestien about.

There has been a situation which we have observed i n our
district that trust powers a r e granted banks, a n d they

a aot qelite
simply don't qualify for some bind, (Wheyt
at all, for instances

W e have granted sich pewers t e 158

National banks and 4 6 have not qualifie®.

W e consider

the applications b a s e d o n the condition o f the b a n k from

which the application came, and if all the conditions were
met and i t was i n satisfactory cendition, a n d we are gsatisfied with the management a n d that they understand what
they are undertaking,
be grante&.
months.

w e recommend that t h e trust powers

N o w , that situation might changs. i n a few

I t rather seems t o u s that the Board, in. grant+

ing the trust powers,should impose a time limit when they


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@isqualify. ¢@therwise t h e y should renew the application

and let that application » e considered a new.
We considered the application o f ene o f eur National
banks along i n May, 1925, when the condition was very good,
as f a r a s w e could learn f r o m the customerst r e p o r t a n d
upon investigation, S h o r t l y after
granted,

+ r u s t powers were

i t took over a State b a n k which proved t o b e n o t

in good shape, a n d when the bank was next examined i t was
very severely criticised, m a n y things werd subject t o cri-

ticism, andi when w e got that report and went into i t cares
fully, w e learned that the bank had not u p to the time o f
examination qualified b y depositing its securtty with the
state, a n d our committee recommended t o the Board that
permission b e withdrawn, and the matter has been before
the Board, has been the subject o f some correspondonce,
and I do not know that the counsel has rendered a formal
opinion a s t o whether the Board has the right o r not, but
it seeme t o be the feeling i n the minds o f some o n the
Board that t h e y could withdraw those powers. I

can see

that h a d the bank accepted t h e trust there might b e possibly a complicated situation, b u t t h e bank never having
qualified b y complying with the @hio state laws ané@ de-


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posited sccurities,

w e cortainly, w i t h t h e condition re-

vealed b y the seeond examination, would under n o consideration recommend tnat t h e powers b e granted.
It seéms t o u s that there ought t o b e a time limit

after the trust powers are granted for the bank t o qalify.
Governor Galkins, I

judge, b y Governor Fancher!s

statement, that the counsel for the Federal Reserve Board
appears t o b e o f the opinion that t h e Board eannot withdraw yermigsion ohce i t i s granted,

Governor Fancher. I - d o n o t think that has been s o
atated, but i n discussing the matter with members o f the
Board that has come out, that there i s some question a s
to the matters
The Chairman.

D o y o u want that settled here?

Governor Fancher, I
to s u g g e s t

think i t might b e Very proper

t o t h e B o a r d t h a t i n granting trust powers

to

National banks there should b e some limit t o the bank
qualifying. I

would suggest t h a t some time limit b e

placed b y the Board for banks before trust powers are
grantoec.

The Chairman,

I f there i s no objection, that will

be taken a s the sense o f this conferences.


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146
Governor Seay. T h e r e a r e pcintse which i t mizht b e
exnedient t o inbornorate i n regulations a n d which w e might
suggest t o the Board f o r consideration i n granting autnority i n specific eases.

O n e o f them developed i n the previ-

ous diecursion here, I

think o n e o f the things either here

at the table o r outside atated that i t was t h e custom t o consider t h e ratio o f carital funde t o deposit.

T h a t i s a very

{mportant matter, a n d i t micht b e susvested i n grantinz this
authority i n enecific carers that capital funds t o devosit
should b e taken under consideration.
I move that i t b e suvgestec t o the Board that i n prac—
tice i t would b e appropriate f o r i t t o take into consideration t h e relation o f pital f u n d s t o deposit w h e n a bank
apnlies f o r a u t h o r i t y

t o exercise t r u s t powers,

The Chairman, D o e s anyone second that motion?
Governor Oalkine. I

will second it.

Denuty Governor C a r e seconded i t ,

(The motion was put end unanimously carried.)

LY, O F E R A T I O N

A D ADMINISGRATION,

E-6, 4 u t h o r i t y o f a Federal Reserve B a n k t o receive

deposite o r securities for safe kee»ing from farm l®an registrars, Federal L a n d Banks a n d intermediate credit banks,


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The Chairman.

T h e next subject i s for E-6, "Autho

ity o f a F e d e r a l Rescrve B a n k t o receive deposits o r se-

ctrities for safe keoping from farm lean registrars, Federal

Land Banks and intermeéiate eredit banks.” T h e r e i s a
Bord letter o n that. I
we c a n take o n this.

do not know what acticn, i f any,

A t t h e l a s t meeting i t was v o t e d t o

be the sense o f the conference t h a t t h e Federal Reserve Banks
have n o legal aythority t o receive deposits o r securities
for s a f e k e e p i n g f r o m F e d e r a l L a a d B a n k s a n d f a r m l o a n

registrars,
Governor S e a y »

I n the case o f our bank, w e frequently

hold a few securities f o r farm lean registrars, b u t a s I ree
cal] the F a r m Loan Commission o r F a r m Loan Board geveloned

some objectien to that plan, and latterly we have been
holding these c a m i siie

c h i e f commissioner o f the Farm

Loan Boerd for the registrars, and we find that plan works
more satisfactorily t h a n the former plan.

Governor Calkins, M r , Chairman, I have a n opinion
by our counsel which i s quite a l o n g that line,

T h e substance

or 1 % 1 8 %

"It i s m y opinion that Federal Reserve Banks possess
legal authority t o receive f o r safe keeping funds a n d secu-


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¥ities from Federal intermediate credit banks, but that
they # 0 not possess s u c h legal authority i n relation t o
farm loan registrars a n d Federal l a n d banks « ”
H e w about t h e F a r m Loan Board?

Governor Seay.

The Chairman.

T h a t i s i n harmony with the vpinion

of the B o a r d t s counsel.
Governor C a l k i n s .

Exactly.

Governor Seay.

T h a t w e have that avthority?

The C h a i r m a n ,

T h a t w e have n o t that authority. T h e

last paragraph i n the Board's counsel's letter is "We are

without legal suthority to recelve such deposits.”
Are
Governor Seay. ‘ T h a t states Federal l a n d banks»
the
you o f the opinion, M r . C a l k i n s , t h a t that includes

Farm Loan Board itself?
f t think so. T

Governor Calkins.

will read the whole

thing i f you would like t o hear it.
Governor Seay,
it says, I

I f i t i s very long a n d y o u know what

would take y o u r word f o r it.

I t i s a different

matter f r o m the F a r m Loan Board a n d the f a r m registrar a n c
the f a r m land banks, even.
Governor N o r r i s .
Farm L o a n Boards

Y o u could n o t accept t h e m from the

T h e y are n o t t h e property c f the F a r m


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Federal Reserve Bank of St. Louis

Ioan Board.
W e receive t h e m from the chief com-

Governor S e a v .
missioner

o f t h e T a r m L e a n Board.

H e c a n only hold t h e m a s the agent

Governor N o r r i s .
for the f a r m loan bank.

Governer Calkinse T h i s opinion i s that w e have n o
authority t o accept them from the farm loan registrars
I f you have n o authcrity t o accept

Governor Norris.

them from the farm loan registrar o r the Board, you would
have n o alithority t o hold t h o m f o r the commissioner.

Governor Seay.

I t is a question o f whu i s tho

principal.

Governor Norris, T h e y are the principal.
had n o a u t h o r i t y t o accep’ d e p o s t t s

I f you

o r securities f r o m

another Federal reserve bank, you could not accept i t

from the Federal Reserve Board, acting for the Federal
reserve bank i n the matter.
Governor Galkins,

T h e paragraphs t h a t perhaps will

be interesting a r e a s follows:
"Ts i s m y o p i n i o n t h a t F e d e r a l r e s e r v e b a n k s p o s s e s s

legak authority t o recéive for safe-keeping funds ayd securities f r o m Foderal intermediate credit banks b u t that


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Federal Reserve Bank of St. Louis

they d e net possess s u c h legal authority i n relation t o
farm loan registrars a n d Feceral lands banks.

" I believe that under the seventh subdivision of sectio.
four o f the Federal Reserve Act, Federal reserve banks have,
in addition t o the powers specifically given them, s u c h i n =
cidental p o w e r s

a s a r e necessary t o carry o n the business

of banks within the Limitations o f the Federal Reserve Agt
and that i f it were not for other facts hereinafter dis=
closed i t might b e reasenably said that Federal re.erve
banks, under the general provision o f section four o f the

Federal Reserve A c t , have authority tc receive for safee
keeping securities f r o m farm loan registrars a n d Federal

land banks.

I t is a familiar rule of statutory construce

tion, however, that when specific authority for a certain
kind o f business i s given with restrictions definitely pre-

seribed, general authority o f the kind specifically limited
may n o t b e exercisede

"By section fifteen of the Federal Reserve Act, the
Federal banks s r e requirod, w h e n requested b y the Secretary
of the Treasury,

t o act a s fiscal agents o f the United Szates

By the last provision o f the same section Federal reserve
banks a r e specifically authorized t o act a s depositories


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151
for and fiscal agerits o f any national agricultural corporation o r Federal ianve rms date ¢redit bank. T h i s provision
of section fifteen was added b y amendment (Act o f March 4,
1923}4

B y section fiftcen v f t he War Pinance Gorporation

Act, qproved A p r i l 5, 1917, a s amended August 24, 1921,
the Federal reserve banks were specifically authorized t o

act a s depositories f o r and fiscal agents o f the W,r
Finance Corporation.

I t will thus b e seen that whenever

Congress h a s s e e n fit t o authorize Federal reserve banks
to act a s depositories f o r o r fiscal agents o f the Govern~«
ment o r quasi g o v e r n m e n t a l c o r p o r a t i o n s ,

t h e power has been

specifically g r a n t e e a n d h a s n o t b e e n l e f t t o implication.

"The Federal intermediate credit banks are organized
under a n act which i s i n fact e n amendment t o the Federal
intermediate credit banks w a s inforporated i n the Federal
Intermediate Grodit A c t a s Section 4@64 T h e F a r m Loan
Act, a & amended t o date, contains n o provisions w h i c h

could b e reasonably construed a s conferring upon farm
loan registrars o r Federal l a n d banks t h e right t o deposit
their funds w i t h t h e Federal reserve banks n o r a n y provi-~
sion empowering Federal reserve banks t o receive s u c h funds.

Section thirteen o f the Federal Farm Loan Act, defining


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152
tne powers o f Federal L a n d banks, specifically empowers
such banks t o deposit their securities a n d current funds
subject t e check "with a n y member b a n k o f the Federal

Reserve System, a n d t o receive interest o n the same a s
may b e agreed,’

I t would reqire a

forced construction o f

this provision t o say that i t empowered Federa} reserve
banks t o receive s u c h sccurities a n d current funds f o r
safeskeoping.

“Therefore, inasmuch as Congress hes i n each ‘tnstance
seen fit t o specifically legislate when conferring upon
Federsl reserve banks the power t o act a s fiscal agents
of o r depositories f o r other organizations a n d has n o %
seen f i t t o s o legislate i n the case o f farm loan registrars a n d Federal l a n d banks, I

a m o f the opinion,

a s here~

inbefore stated, t h a t Federal reserve banks a r e without
‘legal authority t o receive deposits o f funds o r securities

from farm loan registrars o r from Federal layd banks f o r

safe-keeping. T h i s , o f course, i s not intended t o include
deposits made b y Pederai land banks i n anticipation o f
maturing c o u p o n s

o n f a r m t o a n bonds w h i c h a r e t o b e p a i d b y

the Federal reserve bankse S u c h deposits, the Federsul
Resorve B o a r d has mailed, may be received under the pro-


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Federal Reserve Bank of St. Louis

153
visions o f Section 1 3 of the Federal Reserve Act relating
to colteetion and exchange accommodations t o non-member
clearing banks (Federal Reserve Bulletin 1917, p. 818;

1918, pe 435).
"The provisions o f Seccion 405 o f the Agricultural

c
t of 1923, empowerjng Federal reserve banks t a
Gredits A
act a s d e p o s i t o r i e s f o r a n d f i s c a l e g e r t s

o f Federal inter-

medtate credit banks, e f course fihcludes authority t o recGivo from such intermediate credit banks scouriti:s a n d

funds for saferkecpings *
The C h a i r m a n ,

counsel.

T h a t o p i n i o n i s i n accord w i t h o u r

f r e thore a n y other members here whose counsel

has passed upon the question involved?
Mr. Talley.

u r s

Governor Norris.

i s i n accord w i t h it.

O f course, Mr. Vest's opinion

calted attention t o the fact t h a t i f the Secretary o f

the Treasury asked u s t o d o it, w e would have t o do it.
Governor Seay.

O n what ground, the fiscal agent

of the government?

Governer Norris.

A s the fiscal agent o f the governs

ment, yess H e ca n require the Federal reserve banks t o
receive such deposits from the Federal land banks a n d


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154
from farm loan registrars a s are required o f them under
eertain sections o f the F a r m Loan Act. That i s a separate
thing, t h a t i s where t h e Secretary o f the Treasury deposits

MONEY «

move that it is the sense of this

Governor Catkins. I

conference t h a t t h e Federal reserve banks have n o legal
authority t o receive deposits o r securities f o r sufe+keeping

from farm loan registrars a n d Federal land banks«
Governor Norris.
Governor Calkins.

i n d joint stock banks.
A n d joint stock banks.
the intermediate credit banks.

Governor Batloy. ©

W e have specific authority f o r

Governor C a l k i n s .
thems.
The Chairman.

W h a t d o you suggest, Mr. Norris?

Governor Norris. 1

suggest adding the words "joint

stock land banks ™ to it.
The Chairmans T h a t {ts not inoluded i n the gestion.
Governor N o r r i s s I

know i t i s not, b u t w e might

well include i t .
The C h a i r m a n . I

think w e m i g h t e l i m i n a t e i t .

Governor Seays W o u l d y o u s a y w e have a y specific
authority t o hold scocurities f r o m member banks?


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Federal Reserve Bank of St. Louis

Governor C a l k i n s .

T h a t i s a n o t h e r question.

would like t o a s k the proponent

Governor S e a y . I

of that resolution i f h e means thereby t h e Federal reserve
banks should n o t receive deposits o f securities f r o m farm
loan commissioners?

think we have r o legal alithority

Governor Galkins., I

to hold securities f o r anybody except the intermediato
credit banks.
ask also i f anybody c a n give t h e

Governor S e a y . I

authority f o r holding securities f o r member banks, a n d i f
they c a n n o t d o s o , t h e n d o e s n t t

i t appear t h a t Federal

reserve banks m a y at their discretion hold securities for
whomsoever t h e y m a y desire?
The Chairman. I

think i t would b e best t o let o u r

action apply t o the bank o r t o the institutions t h a t a r e

named i n the question, because b y doing that w e have the
counsel o f the several banks behind us, b u t i f we incor-

porate Mr. Norris ' suggestion, w e would have t o modify
it perhaps a t some time.

Governor Calkins. I

offer m y resolution a s ofiginally

offered, without t h e addition o f the joint stock land banks.
Governor N o r r i s . I

won't g o t o the trouble e f offer-


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Federal Reserve Bank of St. Louis

ing i t a s a n amendment.

(The motion was put and unanimously carricd. )

IV. @PERATION AND ABMINISTRATION.
FP. Q u e s t i o n o f Federal reservo banks representation
at bankers! conventions - = t o what extent should Federal
reserve b a n k s

b e represented

The Chairman.

b y officers a n d emplcyees.

T h e next tepic will b e IV-F, "Ques-

tion o f Federal reserve banks representation a t bankers!
conventions - = t o what extent should Federal reservo banks

be represented b y officers a n d employees."
Governor Calkins.

M r . C h a i r m a n , representation o f

Federal reserve b a n k i n a State bankers! convention neld
within i t s district a n d a t meetings o f groups o f State
bankers! associations within i t s district i s f o r obvious
reasons highly desirable. A t t e n d a n c e o f one o r several
representatives o f the Federal reserve b a n k a t the Amer-

4can Bankers ' Association held i n its Gistrict, a t which
many representatives o f its member banks w i l l b e prosent,
appears

t o b e a l s o desirable.

at c o n v e n t i o n s

o f t h e A m e r i c a n Bankers!

its district i s unimportant.
that a

G e n e r a l l y , representation
Association outside

I n a y case, where i t appears

bank should b e represented a t conventions o f the


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American Bankers! Association outside i t s o w n district, t h e
question whether i t was expedient t o send one officer o r
more t h a n o n e o f f i c e r w o u l d b e d e t e r m i n e d

b y the reason o r

reasons f o r being represonted.
The Chairman.

I s there anything else t o b e said o n

this subject?
a m gite i n synpathy with that, Mr.

Governor Seay. I
Chairman. I

think tne F e d e r a l reserve banks ought t o b e

the judges o f whether o r not i t i s desirable t o send o n e
representative

o r more t h a n o n e representative,

may well b e left with them. I

and it

know that i n the case o f

state meetings i t i s very often desirable

i

n our

opinion t o sond one o r more m e n who will come i n contact
with o u r member b a n k a
would like t o hear Governor Calkins!

The Chairman. I

motion read again.
I t was a statement o f opinion.

Governor Bailey.

Governor Calkins. I

will maka i t a s a motion i f

somebody wants t o oppose i t .

Governor Wellborn.
be wejl t o get

a

M r . Ghairman, I think i t would

n expression o n this subject.

The Chairman. I

have here something which I was v e r y


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doubtful

a s t o whether J

Governor Seay.

would p r e s e n t

o r not.

W e a l l maintain bank relation depart-

ments, a n d w e send o u r representatives t e thés a n d that
and the other bank.
The Chairman.

W i l l y o u put your ideas i n the f o r m

of a motion, G o v e r n o r Calkins?
Governor Calkins. I

will make i t i n the f o r m o f a

motion:
It i s the sense o f this conference t h a t representa-

tion o f a Federal reserve b a n k i
n a State bankers’ convention held within i t s district a n d a t meetings o f groups
of State bankers! associations w h e n within i t s district i s
for obvious reasons highly desirable. A t t e n d a n c e o f one
or several representatives o f the Federal reserve b a n k a t
a convention o f the A m e r i c a n Bankers! Association held
in its district,

a t which m a n y representatives o f his

member banks would b e present, apyars t o b e also desirable.
Generally, r e p r e s e n t a t i o n

a t conventions

o f the American

Bankers! Association outside i t s district i s unimportant.
In any case, where i t appears t h a t a

bank should b e rep-

resented a t conventions o f the American Bankers! Association o u t s i d e i t s o w n district,

t h e question w h e t h e r

it


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was e x p e d i e n t

t o s e n d o n e o f f i c e r o r more t h a n o n e o f f i c e r

would b e determined b y the reson o r reasons f o r being represented.
Governor B a i l e y .

W h o i s t o determine those reasons?

Governor Seay. I

think the board o f directors should

be the judge.
Governor B a i l e y . Y e s .

The Chairman. I

think we should move that that should

be determined b y the board o f directors o f the rescrve bank
involved. I

think i t s h o u l d b e l e f t v e r y plain.

Gevernor N o r r i s .

T h e question thet t h e Board asked

was whether o r not i t

w o u l d n o t b e posshle t o suggest

some uniform practice t o b e followed. I

have drafted a

resolution here which I think i s almost identical w i t h
this, exccpt I

have shortened i t a good deal.

M a y I road

it, a n d possibly y o u will adopt i t ?
Governor C a l k i n s . I

will second i t before y o u read

Governor Norris. R e s o l v e d , that the representation

of Federal reserve banks a t conventions i n their own district i s o f the utmost importance, a n d that gych attendance a t conventions outside o f their distrigh i s sometimes

advisable, a n d that the detormination o f such questions i s


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16@
one which must necessarily b e left t o the officers a n d
Girectors o f each reserve b a n k a n d i t i s impessible t o
lay dewn a uniform ovecbsaky:

(The motion was seconded b y several o f those present,
and the motion was put and carried.)

IV. OPERATION AND ADMINISTRATION.
G. A d v i s a b i l i t y e f seeking a n amendment t o the l e w
to restore t o Federal courts jurisdiction over suits b y
and against Federal reserve banks.
The Shairman.

T h e r e i s just o n e other questien here

suggested b y the Board, IV-G:

“rdvisability o f seeking a n amendment t o the law t o
restore t o Federal caurts jurisdiction e v e r suits b y

.
and against Federal reserve b a n k s "
This topic was considereé a t the last conference

of governors, a t which time i t was voted that the counsel
of the Federal reserve banks declare opinions o n the subject, a n d that opinion b e ferwaréed t o the Board.
Geverner Wellborn.

O u r counsel has already signed

an opinion a n d sent i t t e the Beard covering that subjecte


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Federal Reserve Bank of St. Louis

The Ghairman.

O @ u r counsel h a s d o n e l i k e w i s e a n d

recommended a n amendmont, that is, the advisability o f
having a n amendment t o the law t o restore t o Federal
courts c h e jurisdiction o v e r suits b y and against Federal
reserve banks.
Governer Calkins,

W e approve Mr. Wyatt's suggestion

for a n amendment.

Mr. Talley.

W h i c h one - - the third?

Gevernor Bailey.
Mr. Talley.
The Chairman.

T h a t i s the one h e recomm nded,

H e speaks about two others.
6 u r counsel favored the third sugges-

tion, whatever that was.


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162

Governor Bailey,

G o did ours. I

make the motion that

the amendment No. 3 , a s recommended b y the counsel o f the
Federal Reserve Board, b e adopted.

The Chairman, W h a t i s that?
is ‘an amendment might b e sought

Governor Caltins. N o . 3

to the above quoted provision o f the Act o f February 13, 1925.
changing t h e proviso t o read somewhat a s follows:
"tProvided that

i e

h

a

e n o t apply t o any suit,

action o r proceedings brought b y o r againet a

Federal

Land Bank, goint stock fand Bank, F e d e r a l Reserve bank o r
any incorporation incorporated b y or under a n act o f Con—
gress wherein t h e Government o f the United States i s the
owner o f more than one_half o f its capital etock.'"
Governor Bailey,

I t puts i t back where w e were before.

The Chairman, T h a t motion i s made a n d seconded.

A r e

you ready f o r the question?
Deputy Governor Case.

I n addition t o the approval o f

this amendment No. 3 , our counsel makes a suggestion that
we thins well of, a n d that i s that legislation b e enacted
exempting Federal Reserve Banks from t h e »rocess o f a t t a c h
ment o r garnishment before final judgment i n any cage precisely a s national banks a r e n o w exempted under t h e provi-~


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3
Sions o f the Revised Statutes o f the United States.
Governor Norris.

O u r counsel makes t h e same suggestion.

Governor Bailey,

S c dees ours.

Governor Norris.

B u t that would b e a n améndment t o

the Federal Reserve Act.

The Cheirman, What i s the question?
Deputy Governor Case.
amendment No. 3

O u r counsel i n approving this

says:

WI think i t i s desirable a l s o that legislatiog b e e n
acted exempting Federal Reserve Banks f r o m the process o f
attachment o r garnishment before final gudgment i n any case,
as national banks a r e n o w exempted under t h e provisions o f
the Revised Statutes o f the United States."

That i s e

e

i m p o r t a n t principle t c be established,

I recommend that t h a t b e a part o f our action o n this subject.
Governor Norris. I

s e c o n d t h e motion.

(The motion was put and unanimously carried.)
(Whereupon, a t 5:30 p;m. a n adjournment was teken
until tomorrow, Tuesday, November 9, 1926, a t 10 o'ciock
&.M. )


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3

S

E

C

A

N

D DAY

1

6

4

A CONFERENCE O F GOVERNORS O F THE FEDERAL RESERVE BANKS.

Washirgton, D . ¢.,
Tuesday, November 9, 1926,

The Conference reassembled, pursuant t o adjournment,
in t h e h e a r i n g r o o m o f t h e F e d e r a l R e s e r v e Board, T r e a s u r y

Building, Washington, D . C., o n Tuesday, November 9, 1926,
at 1 0 o ' c l o c k a.m.

Appearances:

(As indicated on the first day's record, with the
addition o f Mr. H. F. Strater, Cashier o f the Cleveland

Bank, Cyairman of the standing committee o n correotions. )
A

penn ae

PROCEEDINGS.
The Chairman.

G o v e r n o r Fancher, a r e y o u ready t o g o

onwith Topic 1~(g)?
Governor Fancher. N o t for the record.
The Chairman.

T h a t topic is:

Wl, C r e d i t transactions a n d policies.
"G. N o t e s o f parent corvorations revresenting b o r r o w

ings t o be advanced t o subsidiaries. "


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Federal Reserve Bank of St. Louis

Govemor Talley. I

would like t o ask wr. Fancher i f

he thinks that this regulation would permit the eligibility
of notes o f cottonseed o i l mills when a part o f the vroceeds
are a d v a n c e d t o g i n s w h i c h a r e o m m e d b y t h e o 1 1 mills,

the purpose o f buying cottonseed. I

for

would like t o a s k i f i n

your j u d g m e n t t h i s r e g u l a t i o n w o u l d p r e v e n t t h e e l i g i b i l i t y

of notes o f the landlord where t h e y used t h e proceeds t o plan*

cotton?
Governor Fancher. T h a t d o e s not apply t o the matter a t

Governor Seay, W e are not corporations.
Governor Talley, I

xnow w e are not corporations, b u t

that i s getting b a c k t o the question o f -dr. Calkins o f what

determines eligibility for the use o f the proceeds.
Governor Calxins. Zxactly.
The Chairman, T h i s discussion applies t o parent c o m a n i e

that are operating subsidiaries entirely.
Governor Talley,

O i l mills operate gins a s subsidiarie

The question o f eligibility gomes i n just t h e same. T h e
principle i s the same.

Governor Seay, S a y what y o u will, there i s a substantia
difference between a n absolutely independent company a n d a
controlled company.

W h i l e t h e paper o f the absolutely


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&

1

6

6

independent company i s eligible under t h e conditions s e t

forth down here, excluding the 5 1 per cent, nevertheless
when y o u come t o the inter-related companies I

cannot h e l p

feeling that i t i s a n important safeguard t o insure control
over t h e parent companies.
Governor Calkins. Inasmuch a s this discussion seens t o
be a controversy, I

would like t o read this memorandum:

"The relative X letters Nos. 4692, 4484, 4560,4560a,

4560B and 4602, while ostensibly presenting a question o f
conflict with the Board's regulations and rulings relative
to finance paper, t o me center primarily upon the method
of analysis.
"The correspondence would indicate t h a t Hanna a n d Com.

pany had a net working capital o f approximately $10,400, 0C0,
of which $2,150,000 w a s represented b y advances t o corvora—
tions i n which t h e y h a d n o stock interest a n d cornorations

in which they had less than a 75 per cent interest,

I f the

total advances o f $2,150,000 were deducted from this net w o r k
ing capital,
proceeds

i t might properly b e contended that none o f the

o f Hanna a n d O,mpany's borrowings were used f o r

the purpose o f making advances t o corporations i n which
they h a d n o interest,

o r i n which t h e y h a d a n interest o f


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6

less than 75 per cent, but that such advances were made
out o f their o m f r e e working capital.
"However, t h e method o f analysis employed apparently

assumes that any borrowings become a part o f the general
working capital; and, i f any part o f the working capital
be used for a n ineligible purpose, t h e whole o f the parent
corporation's p o r r o w i n g s b e c o m e i n e l i g i b l e . "

Which i s absurd.
"Should this method b e generally applied, i t would
not only result i n the rejection o f a very large p r o p o r

tion of paper issued b y corvorations with subsidiaries,

but would affect practically all paper offered. The mere
fact that a parent corporation had made a n advance o f a
wholly inconsequential amount t o a subsidiary i n which i t
had less than a 75 per cent stock interest, o r to a subsidi-—
ary which d i d not s h o w a n e x c e s s o f quick assets o v e r c u r
rent liabilities, w o u l d render t h e paper o f the parent c o r —

poration ineligible.

T h e same method would make a farmer's

note ineligidle i f the statement showed any increase i n
fixed assets while borrowing, notwithstanding any excess
of q u i c k a s s e t s o v e r c u r r e n t liabilities.

"It will b e interesting, a s an example, t o note what


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?
Would b e its effact unon the p a p e r o f the
Commercial Company, which ovme i n their entirety eight
subsidieries end 5 ¢ per cent o f one subsidiary, h d s a ¢on-+
solidated nest working capital o f over $6,000,000, i s engaged whclly i n merchandising with but small fixed invest—
ments anc i s t n the highest credit standing. T h e varent
compajy h a s made advancesto a l l subsidiaries i n varying

amounts, that due the 50 per cent owned subsidiary being
$100,000, Five o f the wholle otmed subsidiaries d o not
show a n excess o f quick assets over theif current Liabilities
+6 the parent concern.
the paner o f the

U n d e r t h e foregoing f o r m o f analysis,

C o m m e r c i a l Company would b e inelig.

ible on two counts:
*(1) T h a t i t had loaned t o a subsidiary i n which i t
did not heve a t least a 75 per cent interest: a n d
"(2) t h e borrowings o f five o f its subsidiaries h a d n o t

been used for a n eligibie purpose insomuch a s the borrorings
from the parert corocration w e r e i n part represented b y ofset
of a n ineligible nature.
"Oyr method o f analysis, a n d one which w e think 1 3 c o r
tect, presupposes t h e advance t o the 5 9 per cent o m e d subsi-

diary and thet part o f the advance t o the five owned subsidi-


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Federal Reserve Bank of St. Louis

8
ries represented b y ineligible assets t o have been made out
of the free working capital o f $6,000, leaving any borrowings
amply covered b y assets o f a n eligible character.
lieve t h e m e t h o d w h i c h w e h e v e e m p l o y e d

W e be

t o b e i n harmony

with the regulations o f the Board, which state i n Regulation

IF(o) 2.
"*Comoliamce o f a note with I I (c) m a y b e evidenced
by a statement x

x x x showing a

reasonable excess o f

Quick assets over current liabilities. !
Any regulation o r ruling o f the Board subjecting paper t o

the analytical method employed i n the Hanna case would inev—
itably result i n excluding most o f the paper offered for r e
discount |

b u t w e d o n o t s o interpret t h e r e g u l a t i o n s

o r rule

ings.
"The subject may, however, b e intended t o generally review the exception t o finance paper, represented parent cor,

porations’ caper, rather than analytical methods suggested

by the foregoing.

I f so, i t would seem that the felloming

facts a n d vrinciples a r e germane t o the discussion,

I n the

industrial and commercial development o f this country the
corporate form of management has. expanded t a the point
where many of our most imortant industrial units are


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1

7

0

managed a n d controlled b y many corporations welded together
through the medium o f a varent corporation b u t revresenting

@ complete and cohesive business unit. T h e subsidiary units,
while separate legal entities, a r e engaged much a s depart-

ments would b e i n fulfilling their particular function i n
the consolidated unit. Presumably this form o f industrial
Management h a s grown o n account o f its greater efficiency,
economy o n d stability a s i t has t h e sanction o f l a w and o f
financial a n d industrial leadership.

I f engaged i n those

activities which give rise t o credit, eligible i n substance,
4t would s e e m the proper u s e o f administrative a n d interpretive discretion t o minimize t h e technical barriers growing

out o f the legal separation o f corporate subsidiaries, T h e
paper growing out o f the financing o f these units i s distinct
from 'finance vaper' s u c h a s generally understood, a n d t o

my mind should b e granted exceptions which could well b e
withheld fran finance corporations engaged primarily i n
commercial banking n o t subject t o the restrictions o f
banks o f deposit.

O t h e r considerations w o u l d enter i f the

discussion wers t o cover t h e elimination o f all provisions
barring finance paper, b u t i t i s assumed that this discus-

sion does not contemplate entering that field,


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Federal Reserve Bank of St. Louis

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"The present regulations a n d rulings under the method

of analysia w e have employed t o determine questions o f fact
relating t o eligibility have not resulted i n any serious
restriction t o the entrance o f paper o f the kind wnder dis-

cussion i n this distriét.

I t seems difficult, however, t o

discern t h e reasons f o r the limitatiop o f a 75 per cent stock
ommership, a n d i t i s believed that this might well b e modi-

fied t o "controlling interest'; otherwise w e have found
little p r a dical reason f o r requesting a n y radical modifica-~

tion o f existing regulations."
In other words, the primciple involved i s the use o r
the purpose f o r which the money i s t o b e borrowed o r has
been borrowed.

The Chairman I

Governor Fancher.

agree w i t h that last statement entirely.

B u t w e have facing u s here a regula-

tion which the Board has put out covering the question o f
full subsidiaries and which w e are attempting here t o have
modified, a n d now rhat i s the best way t o meet the situation?
What this regulation i n effect does i s this, that you take
a corvoration without subsidiaries, t h e r e h a s never b e e n

any condition imposed as to the use of the funds.

W e look


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to the statement a n d its condition a n d all t h e circumstances
surrounding i t a n d assume — - possibly n o t always raght i n

the assumption, b u t asswne -—- it was for a purpose that would
make t h e p a p e r cligible.

H e r e y o u imposed a

restriction t h a t

you cannot d o certain things which verhavs corporations w i t h

out subsidiaries are doing, b u t with a liquid basis that
the paper i s accepted.
Governor Calxins. T h e acceptibility o r the eligibility
of paper should b e determined b y two factors: F i r s t , t h e
puroose f o r which t h e money i s loaned; second, t h e consolidat_
equin—
ed statement showing t h e condition o f the ccmoany 4 8 t o

ment; a n d those are the only two vital questions involved.
Governor Seay.

w a y I as’c Governor Calkins h o w i t

would suit h i m t o offer t h e first t w o lines somewhat t o

this effect, "There a parent corporation owns o r controls
stock o f each o f a number o f subsidiary corporations"

Governor Galxins. I

think that would b e an improvement,

Governor Seay, L e a v i g g o u t your 5 1 per cent.
Governor Calxins., B u t y o u are dealing with something
that i s not a

principle a t al].

Governor Seay,
thens the situation.

I f we follow that up, i t rather strenga A noted o f sugh parent corporation,

the notes o f which have been advanced, a n d s o forth, a n d ther


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173

controlled corporation
4+ goes o n to say, "where the
only f r o m the parent corporation."

borrows

Then y o u tie those t w o

strengthens
things together I T think i t

the situation.

and

fOumed and controlled"
Governor Talley, W h y not say

been loaned t o the subsidiary
then t h e proceeds o f which have
corporation

for a n eligible purpose.

Governor Seay, That is satisfactory,

I think. Isn't

it, Governor Fan cher?
Yes, sir.

Governor Fancher.
Governor Calxins.
that suggestion —

—

1 think that i s a n improvement

principle,
b u t 4 t does n o t fit t h e

which

really o f any consequence.
4g the only thing that i s
Governor Norris.

m e i s that t h a t i s
T h e w a y i t seems t o

adopting a very indefinite

sort o f & standard.

You s a y “Owns

or controls. "

sg a matter o f fact, the acceptibil-

Governor Calxins.

are discussing
ity of paper o f the character m e

should b e

the facts in that case
determined i n each individual case py
ruling which has nothing
and not controlled b y a n arbitrary
to do with the principle.
Govermor Norris.

owns at
W h e n t h e parent corporation

shat i t does control.
least 5 1 ver cent, i t is obvious


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Federal Reserve Bank of St. Louis

Governor Seay.

Y e s

Governor Norris.
control e c t u c

i f the suggestion i s t o leave that

a n d unquestionably,

well b e 5 1 per cent.

I f i t means less than that, t h e n h o w

are you going t o do it?
a corporation

t h e n i t might j u s t a s

I n our o p i n i o n , f
i the stock o f

i s a t a l l scattered,

4 0 o r e v e n 3 5 per c e n t

ownership o f the stock i s practical ccntrol.

N o r , d o you

mean practical control, o r do you mean absolute control, a n d
if y o u mean practical control where a r e y o u going t o draw thu

line?
Governor Seay.

I

f you a r e tying i t u p with No. 3 ,

it makes practical control, "the subsidiaries borrow n o
money e x c e p t f r o m t h e parent c o r p o r a t i o n . "

Governor Wellborn. Y o u could leave out "control", becuse i f you o m y o u control,
Governor Norris.

A c t u a l control i s 5 1 per cent, o r

dear knows what.
Governor Wellborn.
Governor Calxins.

I t m a y b e a lot less than 51.
A s a matter o f fact, e a c h case has

to b e analyzed a n d considered b y itself. T h e determination
of acceptibility o f paper cannot b e determined b y a n arbitrai
rule, without a n invasion o f o u r rule o f not mating advances


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14
except f o r specific ourposes —~- those ourvooses specified i n
the law, T h a t i s t h e d e t e r m i n i n g question,

a n d not a n y

specific percentage o f stock onership.
Governor Norris.
tion m i g h t

a n d i n another case, a

o m o n l y perhaps

parent corpore-.

2 0 p e r cent, a n d t h e y m i g h t s a y

"Our directors individually o w n 3 C per cent, 5 0 that w e have
practical control."

Governor Calxins. I thins that, coupled with three, t h e
suggestion Governor S e a y makes i s a n improvement.
The Chairman.

W h a t Governor Calkins would like t o find

out i s the significance o f the 5 1 per cent o r 7 5 per cent.

Is that it?
Governor Caliins. T h e r e i s n o difference i n principle

between 5 1 and 7 5 per cent, only a n attempt t o determine b y
an arbitrary ruling i n regard t o the vercentage o f omership
the purpose f o r which the money 1 8 advanced.
done.

T t cannot b e

m y vosition is, a s I have stated before, t h a t there

are two questions involved: fFyrst, the use of the money,
the purvose for which the money i s advanced. That i s i n the
law. Second, t h e condition o f t h e borrowing company,

as

shown b y its consolidated statement w h i c h i n the case o f

0
Hanna and Company, would phow & net free capital of $8,250, C


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15

after eliminating t h e advances o f $4,150,000 t o cornorations

in which i t does not o w 7 5 per cent. That statement would
make them perfectly a c c e p t a b l e , e
h
t question ofeligibility
being determined b y the use o f the money, a n d I think i t i s
unnecessary t o injure a n y other provision.

Governor Seay, m r . Chairman, there certainly i s no difference where t h e paper o f a parent corporation whose statement show3 the paper t o b e eligible,

i s given t o a n outside

personal c o r v o r a t i o n f o r a n e l i g i b l e purpose,

o r given t o

another corporation i n which i f they have a n interest f o r a n
é€ligible wurpose. T h e r e i s n o differencs.

T h e only question

is whether i t i s necessary t o t a z c w e
n unusual safeguard uround
the paver c f the parent corporation when i t i s related t u a
number o f subsidiaries. I
If y o u will provide,

d o not know whether i t i s o r not.

a s this resolution attempts t o provide,

that i t mist b e issued for eligible nurvoses all around,
that would b e a different matter.

Governor Calkins.

I n the case I referred to, the a d

vances mace b y the parent corporation t o its sudsidiaries, i n Cluding t h e one i n which i t owned only 5 0 per cent, a r e p r a c
tical advances o f stock i n trade t o b e resold, t h a t might jus’
as well b e called that a s advances i n money.

T h e parent c o r


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poration vrovides i t s subsidiaries w i t h t h e stock which they

sell —- stock i n trade, I mean; I do not mean the stock in
any other sense.

I t happens that i t advanced $100,000 t o

one i n which i t owned only 5 0 per cent, T h e ratio o f quick
assets t o current liabilities i s 218.

I t s credit i s absol-

utely first class, and there is not a better eoromentive of
its xXind anywhere i n the country, a n d t o exclude t h e paper
of t h a t c o r p o r a t i o n b e c a y s e

i t h a d m a d e a n advance

t o a sub-—

sidiary i n which i t owms 5 0 per cent f o r a strictly eligible

purpose, i s the height o f absurdity.
Governor Seay, T h e danger, o f course, lies i n the viole
tion o f that fundamental prinoipie, which requires funder
to b e used i n the first instance,

The Chairman I

do not get anything from this discussion

that i s better adapted t o the situation t h a n wir. Fancher's
owh recommendation, R e a d that recommendation.
Governor Fancher,
The Chairman,

I t i s before e a c h o f the Governors.

‘ V h a t doés this do?

Governor Calxins. Wothing.

The Chairman,

I t does a great deal.

situation which h a s caused t h e difficuity.

I t corrects the
I n the case o f

Hanna, t h e reason w h y the Hanna people were declared t o b e


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17

b

i

ineligible w a s because that eligibility w a s desired becaus¢
they were maxing advances t o companies other t h a n the c o m
panies that they owned, T h o s e advances w e r e aoparently
being made f o r legitimate purposes,

t o provide companies

with t h e means o f producing goods which w e r e t o b e returned

to Hanna, e n d that transaction i s very different from what
it would have been i f Hanna h a d been loaning t h e money a n d
tacing t h e companies! notes.

T h i s suggestion o f My. Fancher

that h e has framed i s silent o n that subject a n d w e c a n take
care o f that very well.

I t seems t o m e that t h e suggestion

that h a s been m a d e here will b e sufficient t o give u s lati-

tude enough t o operate, a n d operate o n a uniform basis. I
do not know what the significance i s of stock control ryself,
and I d o not think anyone here has been a b l e t o tell us.

Governor Galxins. mr. Chairman, you don't mean to sugz:.
that w e should recommend a change i n the regulations t o suit
the c a s e o f o n e concern?

The Chairman Not at all, but that wou}d be adapted to
many concerns.

T h e r e a r e m a n y c o r p o r a t i o n s a n d m a n y companie.

that are not operating subsidiarigs that are doing the same
thing that Hanna i s doing, according t o this, a n d i t i s not
noticed.


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Governor Calkins.
The Chairman.

Well, I

M r . Fancher,

restate m y objection.
d o you want t o present

yours?
Governor Fancher.

M r . Chairman, I

would present t h i s

as @ sudstitution f o r the regulations which t h e Board pro-~
mulgated i n their letter X-4484 under date o f December 30,

1925.
Governor Young.

I s that a motion?

Governor Fancher. J
Governor Young. I
Governor Calkins.

make i t a s a motion.
second it.

I f the motion i s changed a s suggested

by Governor Seay, I will withdraw m y objection and perhaps
vote f o r it, b u t I

shall certainly oppose i t a s i t is.

The Chairman, W i l l y o u state your position again,

Gow

ernor Seay?

Governor Seay,

M y suggestion was that the first para-

graph b e made t o read about a s follows:

"Where a parent corporation owns o r contrls the stock
of each o f a number o f subsidiary corocrations, *

heaving out the 51 per cent, a n d m y contention was
that the idea conveyed b y "owns o r controls", connected
with proviso 3

of the same resolution, w o u l d certainly e s ~


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39

tablish effective control, n o matter what the ownership o f
the stock was.

The Chairman. Would you b e willing t o state "Owned o r
controlled through stock ownership?"
Governor Seay. Yes, sir, oertainly.
The Chairman, H o w would that d o you, ir. Fancher?
of course appreciate that that i s

Governor Fancher. I

a matter f o r the Bard. T h e y have a

The Chairman.

regulation here.

I t is a recommendation.

Governor Fancher. I t is a recommendation t o the Board,

The Chairman |That i n effect i s what y o u recommend, t o o ?

Governor Fancher.

H e r e i n this recomaendation w e spe-

cifically s a y that t h e percentage shall b e a stock ownership.

The Chairman. This rould answer the same purpose.
Governor Fancher.

I n other words, this defines the per-

centage o f stock ownership which i s recognized a s a control.
Governor Norris. I

present form.

can vote f o r t h e resolution i n its

I f i t is amended i n that way, I would feel

obliged t o vote against it, because t h e proposed anendment
is the substitution o f a n uncertain a n d indeterminable thing
for a n absolute f o o t h o l d .


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The Chairman. T h e question i s o n thi s récommendation,
of Governor Fancher, which has received @ second.

I s there

any further diserssion?
Governor Calxins. I

move a n amendment t o i t -

Governor Norris (Interposing:)

T h e question i s o n the

amendment,
Governor Calkins. I

Gavernor Seay,

nove i t a s a n a:nencment.

O f course, t h e Board may take the view,

‘That d o you mean b y it?"

Governor Talley,

I t makes it a question for dete rmina-

tion a n d leaves i t t o the Federal Reserve Bank t o determine
it.
Governor Norria.

A n d i t c a n h a v e n o vossible m e a n s

for determining it.
Governor Talley,

I t does not mean anything.

Governor Seay, That i s true
Governor Celxins. Y o u cannot make a thumb rule t o accept
or Teject every tiecs o f vaper.
Governor Talley, I

would like t o say, briefly, t h a t

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

tion makes the vaper eligible. i

think the trouble i s with

the regulation, b o t h the original regulation and the other


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1

8

2

one, a n d even t h e last one suggested i s still t o o definitive,

The Chairman, W e l l , t h e question i s o n the proposed
amendment.

A r e y o u ready f o r t h e question?

"
(Gries o f "Question, Question. )
The Chairman, T h e r e a r e some ayes a n d some noes.

"
(Cries of "Division, division. )
The Chairman, T h e ayes will please raise their hands.

(Five o f those present voted i n the affirmative.)
The Chairman T n e ,oes will please raise their hands.

(Six voted i n the negative.)
The Chairman. T h a t will l e a v e t h e question n o w o n G o w
ernor Fancher's motion.

A r e y o u ready f o r t h e question?

Governor Norris. T h e amendment h a s been lost | has it?
The Chairman. T h e amendment h a s been lost.

A r e you

ready f o r the question?

(Cries of "Question, question. )
"
The Chairman. T h o s e i n favor o f the recommendation a s

prepared b y Governor Fancher will signify i t by raising
their right hands.

(Eight voted i n favor of the recommendation.)
Governor Fancher.

d r . Chairman, here i s a note handed

me b y wir. tyatt s a y i n g he would like t o be present during


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22
this discussion.

H a d w e better c a l l h i m i n and tell h i m wha:

has taken place here?
Governor Calkins.

# r . Chairman, t h e opposition would

like t o b e recorded a s having voted o n this matter.

The Chairman, Those opposed will say "No."

(The Governors from Dallas, San Francisco and Boston
voted " N o ,

(At this voint Mr. Wyatt came into the hearing room.)
The Cheirman.

W e have j u s t considered very carefully

@ suggestion which came f r o m y o u a n d i t h a s been voted t o
“ake that f o r recotmnendation t o the Board.

wir. jyatt. I
discussion

simply wanted t o be i n here during the

i n o r d e r t o g e t t h e v o i n t o f v i e w o f a n y experi-_

ence the Governors might have had, which would indicate the
direction i n which this thing i s going t o lead us.
As I told Governor Fancher when I
tive arrangement w i t h him, I

discussed that tenta-

could not permit myself t o

do i t i n any way, b u t i t seems t o m e that i f h e wants t o
make t h a t r u l i n g y o u h a v e g o t t o b e p r e p a r e d

t o rule t h a t

in a n y case where a borrower borrows funds t o g o into a
general p o t a n d out o f that not h e makes s o m e advances t o
other people, t h a t nevertheless this paver i s paper o f a


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4

business which i s primarily industrial, commercial o r agric.
tural.

I f y o u d o that y o u h a v e abandoned t h e interpretation

of the Federel Reserve Act that i n order for paper t o be
eligible t h e proceeds must b e used i n the first instance f o r
an agricultural,

commercial

wir. Harrison.

o r industrial purpose,

H a s not t h e Board's original ruling

done that very thing?
wr. T y a t t .

N o , f o r t h i s reason:

says that where y o u have got 3

T h e original r u l i n g

groun o f subsidiaries a n d

control all of them, t h e parent corvoration makes the advance
only t o the sudsidiaries, a n d the subsidiaries borrow n o
money f r o m t h e p a r e n t c o r p o r a t i o n ,

t h e n y o u disregard t h e

corporate eitity a n d consider t h e parent corporation a n z
the subsidiaries a s a single borrower — - consider t h e group
as a@ single borrower.

Y o u get away f r o m the group here. Y o u

have n o t got a n y single borrower, because y o u have g o t this
corporation mexing s o m e advances t o other parties w h o a r e

not subsidiaries and not controlled, a n d i f you once d o that
I think you have abandoned the fundamental principle o n which
your r u l e a g a i n s t f i n a n c e p a p e r

of now far you are going. I
that rule, b u t I

i s based.

I t is a

question

think i t is possible t o abandon

d o not think y o u should d o i t without knowir


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how far y o u are going,

Governor Seay, D o you hold that ooinion notwithstanding
the three »~rovisus herein incornorated?
ir. y a t t .

Y e s , because this i s a case where your

parent c o r p o r a t i o n

i s maxing advances,

a n d t h a t i s o n e condi.

tion for eliminating the first condition i n the old ruling.
Governor Fancher.

I n n o previous fuling has t h e first

condition imposed herebeen anvplied t o a n y other corporation;

in other words, that has been determined i n determining the
eligibility.
ment,

Y o u have determined t h a t b y the comoany's state.

b y the nature o f the corporation's business, a n d many

things that surround that corporation,

N o w , you, b y i n t e r

jecting condition 1 there, y o u have the corporation with a
group o f subsidiaries thich y o u attempt t o recognize a s a
corporate entity under certain conditions,

i n a different

position t h m y o u d i d t h e c o r p o r a t i o n w i t h o u t subsidiaries.

wir. Wyatt, T h e Federal Reserve Board h a s never s a i d
in any ruling that i f the corporation’s statement i s satis—

factory and its business i s principally commercial, a l l o f
its paper i s eligible, e v e n though part o f i t i s used f o r
finance purposes.

T

h

e B o a r d h a s n e v e r s a i d that, a n d I

think i f the present existing rulings were carried t o their


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35

logical conclusion y o u would have t o reject t h e paper o f

any borrower i f he makes any advances t o anybody else;
but I

very e x t r e m e c o n c l u -

thins t h a t i s c a r r y i n g i t t o a

gion, a n d I

think probably

a n undesirable conclusion,

B u t

this ruling forces u s t o come t o the parting o f the ways.
You have g o t t o d o one o r the other here.

A

s I see it,

if you are going t o rule o n it, you have either got t o Say
that where a borrower makes certain loans t o other parties
all o f his paper i s ineligible,

o r you have got t o s a y

where a borrower makes certain loans to other parties his
paper i s not ineligible f o r that Treason. Y o u have got t o
carry t h e r u l e a l l t h e way,

o r y o u have g o t t o break d o m

the fundamental basis f o r your rule,

Governor Calkins.

I s it breaking down the provision

of l a w t o say that i f a parent corporation o r a corporation.
is m a k i n g i n c o n s e q u e n t i a l a d v a n c e s

paper i s ineligible?

t o J o h n Smith,

i t s whole

I s that a n invasion o f the provision

of the law?
wir. Jyatt, I

d o not t h i n k i t necessarily i s , Governor

Galkins, i f you take the notes o f the borrower t o whom h e
Makes advances a n d discount t h e m a t the bank, b u t here i s

the problem, a s I see it:

I f a borrower borrows money, i t


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18”

all’ goes into a general fund, a number o f checking accounts,
and o u t o f t h o s e h e d r a w s m o n e y f o r a l l h i s purposes.

I f

one o f those purposes i s t o make advances t o other people,

it i s impossible t o say what portion o f his borrowings i s bor.
Towings -- i t is imoossible t o say what proceeds o f this
note i s for commercial »nurvoses a n d what portion i s for finance purposes.

T h e fact t h a t h e makes some loans t o

other people would s e e m t o taint h i s entire borrowings w i t h
Su@icion,

a t least.

I t is a

question o f w h e r e y o u w i l l d r a w

the line.
Governor Calkins.

R e f e r r i n g t o the case I see before

me o f a parent corporation,

i t o w e d outright eight subsidie—

ries a n d owned 5 0 per cent o f one subsidiary.

T h e business

of the entire cornoration i s comercial; there i s no ques—
tion about that, T h e advances that i t makes t o subsidiaries
might j u s t a s well b e considered a s advances o f stock —
Stock i n trade i n all cases - - a s advances i n money. T h e y
are s i m o l y s t a t e d i n t e r m s o f money.

U n d e r t h e Dresent r u g s

ing o f the Board, a s strictly interpreted, t h e fact that
this corporation, t h e consolidated statement o f hich showed
a ratio o f 318, t h e fact that the company has loaned $180,000

gat of $5,900,000 advanced to subsidiaries, t o one in which


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make all this paper ineligi:
it ommed 5 0 per cent only, would
said that, a n d I had
dir. Wyatt, T h e Board has never
have that question p u t u p
hoped that t h e Board never would
v i e w t o show i n which
a n simply taxing t h e extreme

to it. I

direction i t may lead, I

think i t would be very undesirable

i s used for making advance
to nave a Tule i f all o f the money
whole borrowing, b u t o n
to other persons i t would taint the
i f you rule that the
the other hand i f y:u make this ruling,
a r e used f o r macing
mere fact that part o f the borrowings
loans t o other parties, t h e n I

cannot s e e wuere y o u are going

to stop.
The Chairman,

Wyatt, f o r
D o you think i t i s right, wr.

b y a ruling where, i f a
the Board t o make a ruling and stand
h a s advanced funds t o a n
company lixe t h e Hanna Company,
purpose o f producing c o a l o f
outside c o r p o r e t i o n f o r t h e

bought under a
iron, which coal o r iron has been

by the Hanna Company a
ruling? I

contract

d o you think that i s a justifiable

do not.

wr. Wyatt, I

would like t o answer that question.

on a note which
Tie Shairman. I t is not a n advance made
advance for the »roduo4g t o be made i n money, but i t i s an
do that, and i f it i s Cat.
tion o f goods. I f you are going t o


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Federal Reserve Bank of St. Louis

28

ried t o t u s extreme,

o f course i t would a p p l y t o the other

independent c o r p o r a t i o n s

o r companies,

w h i c h o f course would

be more o r less absurd, a n d i t would then créate ineligibil—
ity f o r a great d e a l o f the most desirable paper w e have.

wir. ilyatt, There are two answers t o that. O n e is that .
exactly the same argument wag made c n behalf o f the cotton
factor, a n d the Federal Reserve Buard, with the support o f
the Federal Reserve Banks :h e l d out very strongly against
the cotton factor's paper t o the bitter end i n the face o f
all sorts o f opposition, with the result that finally Senator Heflin succeeded i n tacking o n a report t o the agricn..:
tural credits bill t o make that vaper eligible f o r the u s e

of agricultural droducts i n their raw state. T e c h n i c a l l y
that amendment might'be construed a s impliedly admitting
the soundness o f the Board's r u l e against finance paver,

and impliedly saying that paper the nroceeds o f which have
been u s e d t o advance t o other parties shall n o t b e eligible
unless t h e advance i s for the u s e o f agricultural products
in their r a w state.
The other answer t o your criti#ism i s that all o f this
paper, j u s t like t h e cotton factor's paper, c o u l d have been

eligible i f they would d o their business i n a slightly


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39g

its
different way. H a n n e Company staciah take t h e note o f

subsidiary, lixe i t did for years, a n d put its own endorsement o n i t and discount i t a t t h e bank.
business

I

f they d i d the

i n that w a y i t would m e a n n o hardship o n t h e sub~

sidiary o r the Hanna C o m p a n y ,either one.

A l l o f this

question comes u p a s the result o f the fact that the Hanna
Company changed i t s way o f doing business.
Governor Fancher. T h a t m a y b e true s o far a s t h e hanna
Company i s concerned,

b u t y o u h a v e a n y nunber o f concerns

that operate a little differently where t h e advances a r e
made, s i m p l y small advances.

T h e situation i n Chicago I

think Mr. Whitmore brought out. h e discussed that, d i d he
not?
The Chairman. C h i c a g o ?
Governor Fancher. T h e Wilson Company situation?
The Chairman,

H e discussed weet i cate ies this Hanna

paper, w h i c h h e said happened t o b e very desirable a s a
financial r i s k f r o m every standpoint, a n d stated that t h e
obstruction i n the w a y o f eligibility w a s d u e apperently
to the fact that Hanna & Company were making advances f o r

the purposes that I have tried t o outiine here, t o companies
in order that they might b e able t o produce merchandise whic


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30
the Hanna Company had bought o r would buy o r had contracted
to buy, a n d that that h e considered w a s a

perfectly legiti-

mate and proper transaction a n d one that was indulged i n by
corporations, whether they had subsidiaries o r not, a n d
that i f that destroyed t h e eligibility a s a matter o f fact
you h a d better b e careful o r you would n o t b e able t o take
very m u c h good paperof corporations.

H e thought w e ought t o

distinguish between advances made o f that sort i n order t o
assist i n the vroduction o f goods, a n d advances that were
made purely f o r finance i n the matter o f loaning t h e money
and taxing t h e notes, I

would b e perfectly willing t o see

this suggestion carried out and placed o n the banks this
responsibility,

a n d that i s where i t belongs,

o f determining

whether o r not t h e borrower i n question i s conducting itself
in accordance w i t h t h e spirit

o f the law, a n d i t will have

to rest there finally anyhow.

f e cannot sit here and draw

up a n y rigid, i n f l e x i b l e rules.

Governor Calkins. T h a t i s just what y o u have done.
The Chairmen. I

do not think w e have. I

think w e are

making this such more elastic than i t was before. I

a m sure

of that.
Governor Fancher. I

was g o i n g t o a s k whether

i n this


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i

c

e

first condition here, " T h e parent corvoration a n d all i t s

subsidiaries are engaged i n a distinctly commercial o r indus~
trial business" just what was i n the minds o f the Board i n
outting t h a t c o n d i t i o n

i n i n this case?

a r e y o u trying t o

again fortify y o u r position a s t o finance vaper?
wir. Hyatt,

No.

Governor Fancher.

W a s that what y o u h a d i n mind a t

that time i n passing that condition?
Mr. Wyatt,

N o . This whole ruling w a s prepared w i t h the

idea o f a n atteapt t o find a way t o make a n exception o f
finance paper, b u t a t the same time t o guard against a n y

abuse growing cut o f this ruling.

O f course, t h e basis ror

the exception w a s found i n the fact, t o use t h e words o f
Governor Harding, t h a t t h e corporation a n d i t s subsidiaries
were really o n e b i g concern, a n d when t h e y made these advanc..
es t O a Subsidiary t h e y were just taking t h e money o u t o f one
pocket a n d putting i t into t h e other, a n d w e found a basis
for the exception i n the fact that w e might d o something that
the Board h a d never done before a n d which w a s a very doubt-

ful proposition, a n d that i s t o disregard the vornorate
entity a n d view t h e group o f corvorations a s a single b o r r o m

er.

I n order t o d o that we seized unon the hypothetical


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state o f fects w h i c h w a s p u t u p t o t h e B o a r d a n d o n w h i c h
the B o a r d w a s m a x i n g t h e ruling,

t h a t t h e parent c o r p o r a

m
tion was mating advances t o subsidiaries a n d we u n d tesood
4 only t o subsidiaries, a n d the subsidiaries borrowed
no money exceot f r o m the parent corvoration.

T h e ruling

stated t h e f a c t s a s t h e B o a r d u n d e r s t o o d t h e m |

I t later

developed that t h e facts were n o t a s the Board understood
them.

B y t t h e whole ruling w a s pased o n that principle,

that i t was one group and borrowed from all within the
group, a n d that i s why condition No. 1 is stated.
Governor Fancher.

A s the Chairman states,

i n the m a t

subsi—
ter o f advances o f individual corporations without

diaries, that has been a matter o f determination within
the banke. T h e r e h a g been nothing i n any o f the Board's

rules-that has out any restrictions, that has been left
mith the banks themselves,

i n the matter o f the statement ~ ~

which i s furnished b y the corvoration a n d o f its liquidity,

is determined o n the eligibility and uvon the desirability
of the paper.
ir. Wyatt, FPortunavely t h a t q u e s t i o n h a s n e v e r c o m e u p

before the Board, and T had hopec i t never would come up.
It would leave t h e bank some little latitude i n determining


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the facts for themselves,
Govermor Fancher.

T h i s would g e t back —

assuming that

this retommendation which w e have passed here would t h e n

permit considération of the corporation and subsidiaries,

the same latitude; i n other words; tt would get back to
the banks themselvés t o determine the eligibility.

O f course

unfortunately this condition 1 here has never been put out
in a ruling. That i s the wmfortunate thing, I think; i n considering this whele thing.

Mr. Wyatt, I

think it may be unfortunate too, but I do

not. 8eé o n what other basis bine Board could have made that

ruling, certainly on the facts as presented to the Board
at the time.

Governor Fancher.

O f course, i n discussing i t with

the Board, that question of outside advances was never

touched on at all, O f course the enty question was the com
poration and its subsidiaries.:
wir, Wyatt, T h e point was put u p to the Board i n this way
abeén
h
declared ineligible
n
Tne paper o f this c o r p o r a t is o

because i t makés some advances t o its own subsidiaries.
Governor’ Fancher.

O n the previous Board's ruling?

iir.- W y a t t .
,s.That
eY was the clear understanding. I

wa:


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34

there during the whole discussion, a n d i t was certainly
my clear understeading, a n d I think i t was the understanding
of t h e Beard, t h a t

n o loans w e r e m a d e except

Now, w i t h r e f e r e n c e

t o subsidiaries

t o t h i s ruling, w h i c h I

understand

the Conference has adopted a s its recommendation, I

drafted

that a s a basis for discussion, a s I told Governor Fancher.
I was not prepared t o advocate it. W h e n I drew that I had
this i n mind A s s u a i n g that the Goveruors' Conference was
prepared t o recomnend that t h e o l d rule against finance
paper, t h e rule that t h e proceeds o f the paper must b e used
in the first instance f o r a n eligible purvose a n d m s t n o t

be passed t o somebody else, ascuming thet you are willing t o
abolish that ruling o r materially modify that ruling, w h a t

can w e do to let i n the paper o f corporations like the Hanna
Company e n d a n y o t h e r company,
individual,

t h e borrower, c o r p o r e t e

w h o i s doing principally commercial

or

o r industrié

business, a n d a t t h e same time rule o u t t h e paper o f the
finance companies w h o are engaged principally i n the finance
business?

T h e s e conditions i

end 2 are put i n there f o r

that purpose.

Governor Seay.

wr, Wyatt,

D o n ' t y o u believe this does it?

I f the Federal Reserve Board i s willing t o


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35 :
abandon i t s rule against finance paper, I

9

6

d o believe that

this does it, and I do not believe that you can adept this
rule without a t least putting yourself i n a position where
you are going t o b e forced t o abandon y o u r ruling against
finance paper.

Governor Seay. I
Counsel,

cannot take that view entirely, Mr.

i f you consider t h e specific provisions o f the sever-

al paragranhs w h i c h follow the first. T h e r e are some distances
which cannot b e negotiated i n ote leap, I
in t h e r i g h t direction,

and I

believe t h i s i s goin

think i f a n y p a p e r o f f e r e d t o

the Federal Heserve Bank complies with a l l o f the provisos

here laid down, i t can hardly fail t o be commercial paper and
acceptable paper,

dr. Wyatt. I

do not think so, either, b u t technically

it i s paper t h e proceeds o f which have been used t o make a d

vances t o someone else,
Governor Seay, U n d e r cirocumstancee which are very clear):
and fully described.
cotton

ir. Wyatt, Y e s . N o w , the/factor came up here and he
Says " I a m engaged i n a comnercial business; I

have got a lot

of customers who are engaged i n the agricultural business. A s
incidental t o m y commercial business a s a cotton factor I


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1

9

want t o m a k e s o m é a d v a n c e s

7

t o m y customers w h o a r e farmers,

and they are going t o use the proceeds f o r a n agricultural
purpose.

a l y business

ness i s agricultural.
Why can't I

d o this?"

Mr. Harrison.

i s c o m n e r c i a l a n d t h e customers!

busi-

B o t h give rise t o eligible paper.
T h e Board said "You cannot."

P e r h a p s t h e same argument w a s made

in

the first year o f the system, when the Board had t o decide
this one question:

W h a t i s the ourport o f the phrase "The

proceeds have been u s e d o r are t o b e used"?

T h e r e was a

bank i n Florida which borrowed money f r o m another bank,

The borrowing bank used all o f these funds t o advance t o
farmers, They had n o other customefs a t all, and the lenuing
bank wanted t o take that note a n d rediscount i t with t h e
Federal R e s e r v e B a n k o f Atlanta,

o n t h e t h e o r y that t h e p r o

ceeds were t o t e used i n the second instance i n that c a s e
foP : -riswiturset1 purvose,

a n d t h e B o a r d a t t h e outset h a d t o

establish the principle then that the proceeds must be used
in the first instance a n d a t n o other time f o r the c o m m e r

cial purvose, Othsrwise it would have been possible, c o n
ceivably, t o have ruled that any paper the vroceeds o f which
are never used f o r a commercial nurvose,

a s established b y

affidavit o r otherwise, would p e sligible within the terms


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of the Act,
I a m very m i c h interested i n what wir. Wyatt has said,
because o f m y past experience w i t h the Board, a n d I

a m realiy

alarmed a t the development t h a t has taken place i n the last
few years i n admitting i n t o t h e System finance paper generall:’
The cotton factor ruling which w a s made a t t h e time when I

was with the Board, I think was wholly correct under the law,
but i t has been modified b y a n amendment t o the Act, I

think

that the present ruling, o f which this present resolution
is to be a modification, while i t is justified b y the Board
on the theory that Mr. Wyatt h a s advanced,

t o disregard t h e

corporate fiction,is i n fact nothing b u t finance paper, » e cause under n o theory o f l a w that I know can y o u disr-cgard
the corporate fiction where t h e parént o w n s less than 5 0 per
cent. T h e only theory I ever heard o f was where y o u h a d one

individual incorvorating himself and owning the whole StOCK, °
or certainly i n the case where a group o f mennommed all of ©
the s t o c k o r o n e c o r p o r a t i o n o w n e d a l l t h e s t o c k o f a n o t h e r

corporation.
The b i g question,

a s I see i t now, i s not whether y o u

are going t o modify t h e present regulation o f the Board (X-

4484), but rather whether you want t o develop the situation
along t h e line o f generally taking finance paper o r whether


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38
are going t o stop it.
There i s a real consideration, I

think,

i n the fact

that t h e amount o f paper i n the country that i s eligible
is gradually decreaeing, a n d i t may become nece8sary,

as

time goes on. frankly t o admit that you want finance paper,
If that time comes, i t might b e necessary t o ask a n amend—
ment o f the law, o r it might b e necessary, a s wir. Williams
once Sugzested,

t o admit t h e discount o f stocks a n d bonds

or anything else, leaving the control with the Federal Reserve Bank; but as long as the law is what i t is, and as
long a s you have t h e o l d rulings o f the Board which a r é

based o n the principle that they must b e used for a commer
cial ourpose, i t seems t o me that whatever clauses you
leave i n or leave out you are breaking away from the principle which has been o u r safeguard from the very beginning.
Governor Seay, W o u l d you call paper issued under the
provisos herein set down finance paper i n the general accept.
ance o f the term?
air. Harrison. I think i t is, without a n y question. I
an talking f r o m a legal standpoint, b e c a u s e c n e corporation

does » o r r o w money which they have used t o lend t o another
corporation, a n d the fact that t h e y o w n 5 0 per cent o f thé


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2

0

0

stock i n the borrowing corporation makes n o difference a s
& matter o f law i n the nature o f the transaction.
Governor Sezy,

F o r general purposes, l o a n e d t o anoth«

corporation f o r general purpcses, b u t this i s not f o r general

purposes,
Mr. Harrison.

L e t u s assume that t h e purpose o f the

loan i s t o provice funds which a r e t o b e used b y the borrower
for commercial purposes.

factor used it for.

T h a t i s p r e c i s e l y what t h e cotton

W h a t are you going t o do about motual

loan associations o r cocperative l o a n associations?

Governor Seay.
win, Harrison.

O r grain corporations.
O r grain corporations.

Governor Seny. T h a t i s the truth.
itr. Harrison.

W h o are borrowing f o r only o h e purpose,

to make a commercial u s e o f the proceeds.
Governor Calkins.

w r . Chairman, Mr. Wyatt a n d Mr. Harri

son have certainly thrown a very desirable light o n thé dia.
gussion which w e have endeavored t o have, a n d they have
shown, a s perhaos s o m e o f u s said before, t h a t w e are g e t
ting i n t o very deep w e t e r , somewhat deeper weter t h a n w e

are accustomed t o getting into.

T h e fact is, o f course,

that t h e r e i s not o n e large commercial corvoration i n the


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40
United States operating which does not make advances i n
some f o r m o r o n some occasion t o the subsidiaries o r other—
wise, a n d that i s strict interpretation o f the Board's
regulation will make ineligible t h e best papér which i s
afloat

i n the markets

o f t h i s country.

i d y Oninion, w h i c h

was stated before very badly, b u t t o restate i t for the purpose o f t h e question,

i s t h a t a n y attempt

o n t h e part o f

the Federal Reserve Board o r this Conference o f Governors.
to define down t o t h e last notch,

b y defining b y a differ-—

ence o f one per tent what i s and what i s not a

suosidiary

corporation, i s dangerous, that the only sound and practical
course t o b e followed, e i t h e r b y the banks i n passing u p o n
paper o r the Board ig, formulating regulations,

i s the appli-

cation o f some degree o f analysis t o the immediate transac
tion involved.
Goverror S e a y ,

I s jot t h a t e q u a l l y dangerous?

Governor Calkins. I

d o not think so. T h e determina-

tion o f the aligibility may b e i n accordance with the p r o
visions o f the l a w and the regulations o f the Federal R e -

serve Board, which must be applied b y individual judgment
in evsry case.

I n the last analysis i t i s not nossible t o

determine e l i g i b i l i t y w i t h o u t t h e anvplication o f j u d g m e n t


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41
in the individual case. There i s n o one w n o c a n set u p a

set o f rules which can cuver all the cornorations i n the
United States for commercial, agricultural and industrial
purposes, a n d make i t possible t o determine b y that rule
aud without examination o f the actual ciroumstances whether
it i s eligible o r not,

Governor Seay, D&: you hold that the omership o f 51
per cent o f the stock determines the eligibility here?
Governor Calkins. I

do not.

Governor Seay, I would not think so, either, a n d i t
seems t o me that under this amendment, a s proposed, t h e
bank would have t o exercise a l l o f that discretion which
you s a y finaliy t h e y should exercise.
Governor Calxine, I

do not s a y that t h e y should. I

say

that they mst, because there i s no possible way out o f it.
Mir. Harrison, Can't y o u do what you want t o do without
this rule?

Governor Calxins. Yes.
wr. Harrison.

O r without t h e Federal Reserve Board's

original rule’xX4484?

Governor Galkins., I prefer i t very much.
wip. Harrison, A n d look t o the general s t a t e m e n tf
o


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43

2

0

3

the corporation and see whether they show the reasonable
ratio o f assets t o current liabilities, a n d ignore these
insignificant transactions w h i c h g o o n within t h e corpora—
tion?
Governor Calkins. T h a t i s the argument I

have made,

but o f course y o u put i t i n briefer a n d better form, a s

usual.

T h e r e i s n o rule, either i n the law or i n the

regulations,

o r n o rule that w e c a n set up, b y which w e

can determine, without excluding almost all the paper that

is offered, the cligibility o f paper, except and unless
in eaoh individual c a s e a s i t i s presented a n d the a p p l i c a
tion o f judgment o r whatever y o u want t o call it, t o that
case. Y o u cannot m a k e a

set rule. I

object t o the present

75 per cent regulation, because i t attempts t o set u p a
rigid rule b y which eligibility may be determined. I
to t h e 5 1 r e r c e n t r e g u l a t i o n

o n t h e s a m e ground,

object

a n d [ I thin:

it i s highly desirablea:that s o m e other formula b e used which

will permit what w e all know, a n d that i s that eligibility
can o n l y b e determined b y the application o f judgment i n
the individual c a s e concerned.

sir. Harrison. G o v e r n o r Fancher, supvose w e had neither
rule, X-4484 o r the present modifications, a n d the Hanna


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Federal Reserve Bank of St. Louis

Compeny p e p e r w e r e p r e s e n t e d

t o y o u o n the e s i s

o f

the
e l d procedure followed b y
their stetement, a n d e r t h e
e n y chance o f you considering
Reserve Bank, would therebe
{t eligible within your judgment?
Governor Fancher.

the fact
P h e trouble h e s b e e n i n

rerulstions t o the differof the Roerd epplying different
ent benks.
Mr. Herrison.

T h a t i s what I

e m getting et.

I s not

iny o u have h e d 4 different
thet really the fact, t h e t

b y the different Federel
terpretation o f the reguletions
Reserve B a n k s ?
Governor Fancher.

Mr. Earrison.

Yes,

S F 4

t o cover thas
‘ n d the Roord sttempted

regulation, w h i c h hes
by 2 modificstion o f the

m a d e

i n the different benks? |
still further diffeientesin practice
egain t o set
Governor Calkins. i n a i f they ettempt
still further differup a n arbitrery rule, i t will make
ences.
Governor Telley.

'

g this recommendstion

stands,

or

i f the Boerd adopts t h e
as voted b y this Conference, a n d
the Boerd t o rule i f notes
reguletion, t h e n w e sh-ll e s k
a r e u s e d t o lend money
of lendlords, where t h e proceeds


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Federal Reserve Bank of St. Louis

205
to tenants f o r essricultural purposes, a r e n o t slisn eligible.
Mp H e r r i s o n .

T o erystalize i t , « = I

inject myself into this question, o n d I

a m sorry t o

did i t only o n

accnunt o f m y interest i n the past i n connection with t h e
Boerd's r u l e s - - b u t I

would l i k e t o a s k Mr. “ y a t t w h e t h e

thinks the Board might have t o sey i n the future,if this
present regulation were edopted b y the Boerd * s e principle,
t

regesrding t h e applicetion

o f a bank, 4&8 che Sligibility

of paper o f a mutunl l o a n essocietion o f some sort, where
ell o f the members o f the associetion,

w e will s e y 9 9 per

cent o f them, are borrowing for some commercial purposes,
and o n l y that.

“ o u l d t h e r e b e a n y recl difference?

Mr. “yett. N o , not legal difference.
Mr. Herrison. Thert i s what I mean.
és I see it, i f you edopt this ruling,
you e d m i t t h e t i t i s n o t n e c e s s a r y f o r t h e p r o c e e d s

o f the

psper t o b e u s e d i n t h e f i r s t i n s t a n c e f o r a n agriculturel

purpose.

T h a t knecks o u t i n toto t h e technical legal

construction o n which your ruling against finence peper i s
based, a n d y o u haven't p o t a n y legel principle o n which
you c a n éliminste a n y other finance paper e t #11, i f the
proceeds s r e used ultimately i n the second, third, fourth


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70
egricultural
er fifth instance, f o r a n

or commercial

pur-

pose.
Thet i
s exactly t h e s i t u a t i o n

Governor Fancher.
Hanne &

that

C o m p a n y a r e under.

Mr. “yatt.

the ruling thet has
I f w e c e n strike o u t

the position
a n d f o back t o
peen m e d e o n t h e H a n n a C o m p a n y

exactly what Governor Calkins
you had before, y o u could d o
end I
Harrison has suggested,
wishes t o d o a n d whet Mr.
edequetely
think y o u would still b e

protected b y youre

rule egeinst finence paper.
wouid be,
“hat d o you think the result

The Chairmen.
Mr. Fancher,

regard
their ruling i n
i f the Board revoked

to t h e H e n n e p a p e r ?

Governor Fencher.
to the fundamental
that t h e proceeds
so forth.

Mr. Chairman,
Y o u # r e right back,

law a s t o the eligibility

of peper,

m u s t b e used, a n d
i n the first instance

jump over that?
‘ p e y o u going t o

Mr. “yatt.

position t o
t a m “in an emberivass ing

might suggest t h e t y o u could
answer that question, b u t I
has
paper t h e seme thing that
with reference t o the Hanne

t o the “ilson & Company
peen done for years with reference
paper a n d other paper.


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Federal Reserve Bank of St. Louis

There i s another point i n connection with this
think there h e s b e e n a greet deal o f confusion arising

nut o f this, the discussion o f the subject, because o f the
Board's regulation requiring consolidated financial stetements . I

have talked t o one o r two people w h o thought

thet that ruling required y o u t o get a consolidated statement w h i c h s h o w e d a n excess

o f quick assets o v e r current

liabilities before you could declere the peper t o be eligible.
It does not.

T h e t ruling only declares eligible f o r this

reason: the Board's regulations s a y that the pro,eeds o f
the p a p e r m u s t n o t b e u s e d f o r c a p i t a l l o a n s ,

a n d thet a

stetement showing e n excess o f quick assets o v e r current

liabilities i s sufficient t o show thet the proceeds are
not used f o r capital purposes.
(?t this point t h e members o f the Federel Reserve
Boerd c a m e i n t o t h e h e a r i n g r o o m f o r e

joint c o n f e r e n c e

with the Governors, t h e fallowing being present: Governor
Crissiner, Vice Governor Platt, Dr. Miller, Mr. Hemiin,
Mr. Cunninghem a n d Mr. Jsmes, Governor Crissinger assuming
the cheir s s cheirmen o f the joint meeting; whereupon t h e
following o c c u r r e d ) :

Governor Crissinger.

“ e @ are reody t o take u p these

four o r five items which t h e Board h a s suggested.

‘‘e


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Federal Reserve Bank of St. Louis

will heer from Mr. McDougel o f the Conference.
Governor McDougal.

T h e Conference i s right i n the

midst o f its program, b u t w e have considered most o f the
questions p u t o n the program b y the Board, a n d i n addition
to that, Governor Crissinger,

w e have received a n d approved

the customery report presented b y the O p e n Market Invest-

ment Committee, which I think i t would b e well for the
Boerd t o review.

T h e r e i s a recommendation o r two con-

tained i n i t which I

suppose t h e Board c a n act upon,

either n o w o r a t leisure.
thet report?

M r . Case, w i l l y o u discuss

H a v e y o u copies o f thet f o r the members o f

the Boerd?
Deputy Governor Cese. Y e s , there e r e copies.

Very

briefly, M r . Chairman, t h i s report undertakes t o review
whet hes taken place during t h e current year.

T h e Board

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

we

bourht #50,00C,000 i n short-term Governments, which w e resold t o the market i n January, a n d i n the N e w York market
we h a d a period o f considerable e a s e t h e early pert o f the
year, w h e n o u r r a t e w a s r e d u c e d f r o m 4

t o 3 4 p e r cent.

“e r a n along:until Merch, w h e n there w a s considerable
pessimism developed a s t o the current outlook f o r busi-


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Federal Reserve Bank of St. Louis

209

ness, and e t thet time w e purchased a n additional {65,000,C00
of Government s e c u r i t i e s , b r i n g i n g t h e p o r t f o l i o

u p to

275,000,000 t o us. Happily, thet feeling that w e might
heve e a period o f recession o f business o r a little d e pression,

d i d n o t develop.

I n fact,

i t might f a i r l y b e

considered that t h e reverse w a s true.
‘long i n duly a n d ‘ugust, during t h e summer, w e h a d a
very active situation i n the stock market, w i t h a substantiel increase o f prices, a n d o u r rate i n New York was a t

that time m a r k e d u
p from 33 to 4 per cent, and at e
meeting o f the O p e n Market Committee,

a t which t h e Bosrd

was present, w e agreed t o reduce the holdings down t o

#200,000,000 o f the open merket funds. T h a t was done
between “ugust a n d September, a n d the o p e n market holdings

stend about 200,000,000.
There i s a feeling that we are getting a little experience a s we g o along t o the end o f the year, a n d that
we should b e prepered this year t o deal with the end o f the
yesr situation perhaps a little more effectively than was
done l a s t year.

fs the Conference w i l l recell, there i s usually a

demand for currency for the Christmas holidsys thet re-


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216

quires from $200,000,000 t o 250,000,000 o f additional
credit, a n d also there h a s developed i n recent years a
consijerable window-dressing,

b y which t h e banks e n d

lerge corporations s l s o und«rtake t o better their position b y h e a v y c a l l i n g o f loans.

T h i s y e s r w e have e v e r y

reason t o think that t h e same procedure bAs«:occurred last
yeor will take place, a n d that w e should b e prepared t o deal
with that.
So that,

i n reviewing t h e pest situstion a t the pres~

ent moment, t h e committes a n d the Conference w e s unenimous
that there w a s aothing i n the situation that called f o r
any change i n rete o r a n y further action s t this time b y
the Ope1 Market Committee, either i n buying o r selling,
but there i s s suggestion contained i n the report, a p proved b y this Conference, t h e t during t h e next s i x weeks
it might b e desirable t o b u y u p about a
dollars

hundred million

i n t h e w a y o f a d d i t i o n a l s h o r t - t e r m Governments,

on the theory thet a l l o r «a substantial part might b e sold

to the market i n January, unless w e had a change j n the
business situation,

a n outlook o f pessimism a n d depression,

inwhich event, if the committee end the Board concurred,
it might b e desirable t o hold 011 o r part o f the additional


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amount t o b e nurchesed.

Briefly, I

think that i s a summation o f the report.

Governor Crissinger.

" e l l , t h e Board will have a
Open

meeting efter this Conference a n d take u p the/Market Com+
mittee's report.

Governor MeDougsl.
suggested b y the Board,

T a k i n g u p the topics that were
i n the order i n which they sppear o n

the program, Topic 1-F, t o amend regulation /

t o make eligi-

ble f o r rediscount o r purchase b y Federal Reserve Ranks a
bankers! acceptance d r a w n b y a n elevator o r warehouse c o m pany a n d s e c u r e d b y terminel w e r e h o u s e r e c e i p t s

o f the

elevator o r warehouse company that draws the draft, w e ar.

not reedy to report yet o n that.

“ e are waiting o n some

eadvice that Governor Young expects t a get f r o m his counsel.

The next topic i s 1-G, notes o f parent corporations
representing borrowings t o be advanced t o subsidiaries.

we are wrestling with thet and not ready to report.

T y e

Conference hes adopted a suggestion i n respect t o this
topic, b u t subsequently w e received some advice f r o m Mr.
Vyatt, a n d I think i t was concurred i n b y Mr. Harrison,
which would indicate t o m e that perhaps w e h a d better reconsider that, a n d w e will report later.


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212
Then coming t o Topic I-H, regulations covering r e discount o f notes secured b y adjusted service certificates
under the pravisions o f Section 5 0 2 o f the “orld “var /d-

justed Compensation fet, t h e Conference voted that while
it was t h e sense o f the Conference t h a t i t i s regrettable
that t h e Federal Reserve Banks should have b e e n given authority t o discount adjusted service certificates, nevertheless a s a practical matter i t i s realized that Federal
Reserve Banks will b e expected t o discount s u c h certificates
when offered b y member o r non-member banks under suitabie
regulations a n d safeguards.

I

t wes accordingly vated that

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

cammittee

of three operating m e n from the Federal Reserve Banks t o
canfer a n d c o o p e r a t e w i t h M r . “.yatt,

i n the

i f desired,

preparation o f regulations a n d forms, including a

draft o f

circular l e t t e r t o b e i s s u e d b y c a c h F e d e r a l R e s e r v e B a n k
before J a n u s r y 1 , 1927, c o n c e r n i n g t h e d i s c o u n t

o f these

certificates.
Do y o u want t o discuss this?

Governor Crissinger.

D o e s a n y member want t e discuss

this?
Governor McDougsl.

I t would b e a discount o f paper


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213
that d o e s n o t h a v e e l e m e n t

have.

o f convertability that i t should

I t would b e a discount o f paper f r o m non-member

banks which I

think y o u gentlemen believe should n o t b e

the case.

Governor Platt.

H a s anybody e n opinion s s t o whet the

volume o f these loans i s likely t o be? I

saw a statement

the other day that i t might run to ¢200,000,000.
Governor Hamlin.

I t i s very small.

Governor McDougal.

T h e face value ultimately will

besomething over $2,000,000,%06.
Governor C r i s s i n g e r .

H

o

w m u c h d o y o u figure w e will

be c a l l e d u p o n t o d i s c o u n t ?

Mr. Smead. I

would say about $215,000,000 c a n be

rediscoounted, and later o n it goes u p to $260,000,000,
and later o n i t runs u p a great deal more. I

think ulti-

mately i t w i l l r u n u p - -

Governor McDougal (int. rposing).

T o something oyor

2,000,000 ,000.

Governor Seay.
is the l o a n velue.

B y 1930 it is up to $570,000,000. That
T h e first o f January, 1927, i t i s

$260,000,000 loan value.
Governor Platt.

T h a t would n o t hurt u s very seriously.


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214

Governor McDougel.

N o one can tell the extent t o

which t h e b a n k s w i l l b e e s k e d t o t a k e t h i s p a p e r .

Covernor Crissinger.

I s i t mandatory o n the banks t o

discount them?
Governor McDougal.

T h e y are made cligible.

I t i s not

mandetory.

Governor Crissinger.

I f i t i s desirable.

T h e statement h a s b e e n made i n the

Governor Platt.

newspapers t h a t t h e Federal Reserve B o a r d desires t c make
a ruling o r pronouncement i n regerd t o this thing.

D o you

know about that?
Governor Crissinger.

I

t came o u t o f the “ a r Depart-

ment.

Governor Hamlin.

“ e @ had some announcement o f thet.

Governor Crissinger.

I t came f r o m the Veterans!

Bureau.

Governor McDougal.
should never make a

" e should hope thet the Boerd

ruling t o eccenpt these f r o m e n y e n d e l l

sources f r o m which t h e y would come.
Dr. Miller.

I t occurs t o m e that i f there i s ground

for anticipation that there will b e as much a s «200,000,000
of this paper t o b e presented t o the Federal Reserve B a n k


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215
for rediscount a t the first o f the year, Mr. James i s
very confident t h a t every dollar o f i t that i s avqilable--

Mr. James (interposing). I

mean by that of an offer

to the Federal Reserve Bank, o u t t h e fellows w h o have g o t
thet m u c h money sveilable w o u l d c a s h i n o n i t just a s
fast a s the money becomes available somewhere.
Re. Midler... Y e s .
Mr. James. “ h e v h e r i t comes i n t o t h e Reserve B a n k o r
not i s another question.
Dr.Miller. I

should think that until y o u get some

light o n this i t might b e edvisable t o do only that which
the country e a n digest.
Mr. Jomes. I

would like t o a s k two questions. T h e

first i s whether o r not these certificates a r e o f a character that t h e Federal Reserve S y s t e m c a n buy, a s they
buy open market peper, a n d whether there i s s n y obligation
on the pert o f the Federal Reserve System t o take e n y o f
these certificates c o m i n g through non-member banks.
Deputy G o v e r n o r C a s e . I

do n o t t h i n k t h e l a w states

that they shall b e bought b y Federal Reserve Boenks.
Mr. James.

T h a t i s m y understanding.

Governor Hamlin.

Rediscounted?


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Deputy Governor Case. Y e s .
Mr. James.

B u t i t does s a y i n the / c t that t h e y are

eligitle t h e same a s a n y other thing would b e eligible f r o m
that standpoint, a n d therefore t h e seme rules a n d regulations
that apply t o eligible p a p e r o f any kind c a n b e applied t o
these, could theycené6t?
Deputy G o v e r n o r C a s e .

Yes.

T h e o n l y unusual t h i n g

in this i s t h e t F e d e r a l R e s e r v e B a n k s a r e r e q u i r e d

t o dis-

count notes secured b y these certificates f r o m non-member
banks.
Governor Crissinger.
Governor S e a y .

I t requires them?

N o t requires them.

Deputy Governor Case, T h e y are eligible.

f

s a

practical matter, y o u take i n any district, w i t h a member

bank end a nonemember bank side b y side, and let them make
advances, a n d then with t h e provisions o f the l a w what t h e y
are, offer t h e m t o the Federal Reserve B a n k o f that district ,

I think i t would b e most inexpedient, w i t h t h e

provisions o f the law what they are, t o take the paper
and discount i t for the member b a n k a n d decline t o d o i t
for the non-member bank.

Governor Crissinger.

“ o u l d you have t o d o i t for


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either o f them?

I t i s just permissive, t h a t i s all.

Governor McDougal.
Mr. “yatt.

T h e a t i s only permissible.

T h e language i s that i t shall b e eligible.

I think that i s permissible.
Deputy Governor Case.

I n the discussion yesterday,

the view generally thet was taken, s s expressed b y Mr.

James, was that e very large amount would find their way
into t h e banks, b u t b e c a u s e

o f the fact that t h e y ere i n

small units, probably o n l y o smell proportion o f what would

flow into the banks would g o into the Federsel Reserve
Banks, e n d those banks ususlly use t h e largest piece o f

paper.
Governor Platt. I

think t h e banks w i l l a s k u s t o dis-

count those notes, becsuse t h e y are eligible.
Deputy G o v e r n o r C e s e .

M r . Harrison points o u t there

are some technicslities w h i c h have b e e n referred t o coun-

sel t o be worked out; thet is, thet they have got t o heve
affidavits o f s certain chartecter sttached, o n d s o on.

Governor Seay.

I t wes hoped also, Mr. Governor,

that b y the restrictions surrounding these notes,

i t might

deter e® non-member bank and the member bank from sending
them i n to the Federel Reserve Banks.

F o r instance, the


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218
non-member b a n k who h a d n o account w i t h t h o Federal R e serve B a n k should b e required t o take u p these notes o n
the d a y o f maturity i n Federal Reserve B a n k funds i f the
veteran does n o t p a y it, a n d then i t was rather thought
thet i t might n o t b e desirable f o r the Federal “eserve
Bank t o collect these notes finslly f r o m the Veterans!
Bureau ,

but require b o t h member a n d non-member banks t o

undertake that.

I t i s stated that t h e Federal Reserve

Banks might b e ioaded u p with a lot o f paper o f that nature
because i t i s within t h e discretion o f the Veterans! Bureau,
or t h e C o m m i s s i o n e r ,

t o p a y o r n o t t o p a y this paper;

but i f there b e certain rigid restrictions w h i c h will
require t h e n o n - m e m b e r b a n k t o reimburse t h e F e d e r e l R e s e r v e

Benk o n the note o n the date o f maturity, e n d then t o
collect these papers themselves, t h a t i t might b e a deterrent.
Personally, i

have b e e n i n hope t h a t t h e F e d e r a l RKe-

serve B o a r d m i g h t r u l e ,

a s Mr. J a m e s s a i d , t h a t t h e s a m e

regulations epplicable t o paper generelly might b e mede
equally a p p l i c a b l e

t o these notes,

a n d t h e y might rule t h a t

non-member banks would have t o offer t h e paper through
member banks, b u t Mr. Case, I

think, hes v e r y aptly


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219
stated t h e political rumpus which that might create. I
think t h e t i
s undoubtedly true, t h e t i t would create a
political disturbance, a n d i t might therefore b e expedient

to discount these papers under the térths: o f the ‘ct for
either member o r non-member banks.
Deputy Governor Case.. B u t collect t h e m b y ,ending t h e m
direct t o the bank.

Governor Seay. Y e s , for which discounted, a n d compel
them t o collect f r o m the Veterans’ Bureau.
Governor Platt.

‘

s I understand fhis, there i s

going t o be a propaganda started b y the fmerican Legion t o
urge t h e soldiers n o t t o borrow o n these certificates.
effect that will have I

do not know.

“hat

M r . -yeatt cells a t e

tention t o one thing, that i f they borrow the minimum amount
which t h e y c a n b o r r o w t h e f i r s t y e o r , t h e y w i l l h a v e t o p e y

that o f f before t h e y c a n borrow t h e second year.

Governor Crissinger.

M r . Goldenweiser wants t o say

something.

Mr. Goldenweiser. I

was going t o say that the pro-

portion o f the increase i n Reserve Benk credit i s likely
to b e o n l y o n e - t e n t h o f t h e a m o u n t t h a t i s discounted.

The creation o f thet additional credit i s not likely t o


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create a

very large incresse i n currency demand,s a n d t h e

only w a y t o r e a c h t h e R e s e r v e B a n k ,

in volume,
posits,

as a

matter

o f increase

i s b y the extent that i t will increase t h e de-

a n d therefore t h e i r reserve requirements,

will probably b e one-tenth o f the smount.

a n d that

S o , i f they

will discount £200,000,000, t h e increase i n demand f o r re-

serves will be about “20,000,000.
Governor Seay. That is, however, a

pure conjecture.

I t i s just simply o n the theory

Mr. Goldenweiser.

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

rency, a n d therefore t h e o n l y requirement i s i n new deposits.

Our currency does not g o out unless there i s a n increase
in pricos o r something o f that sort.
Governor P l a t t .

E v e r y m a n that borrows

o n one o f

these certificates w i l l take t h e money right o u t o f the
bank.
Mr. Goldenweiser.

B u t h e will spend it, a n d i t will

come back.

Dr. Miller.

T h e certificates, a s I understand, a r e

for small amounts, a n d presumably t h e y will b e eashed b y
the m e n who ordinarily have n o t a bank o r a checking
account.


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Goldenveiser.
Miller. I

Yes.

should sunpose t h a t thet would take f r o m

bank s c t u a l currency.
Goldenwciser.
- Miller.

i

f t h e y k e e p i t i n t h e i r pockets.

T h e y t a k e i t o u t t o spend.

Mr. Goldenweiser,

I f they spend i t i t will come right

to the bank.

Dr. Miller.

I t will come right back t o the bank, yes,

sit. - h e t h e r i t will remain i n circulation, then, will
depend

o n whether e n o u g h n e w business

i s stimulated

by

purchase b y the veterans t o demand that.
Mr. Jomes.

“ o u l d i t not b e somewhat comprrable t o

the C h r i s t m s s d e m a n d f o r m o n e y?

Mr. Goldenweiser.

T h e r e m e y b e © very short time

inerease i n demand f o r currency, b u t I

a m sure those m e n

will spend that money richt sway.
Mr. James.

O h , yes.

Mr. Goldenweiser.

T h e y will spend i t i n the depart-

ment stores a n d i n various o t h e r stores, a n d they will redeposit i t .
Mr. James.

T h e sutomobile salesman i s right n o w wish-

ing f o r t h e f i r s t o f J a n u e r y t o c o m e s r o y n d .


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/

Governor Crissinger.

s I

understand t h e recom-

mendation o f the Governors! Conference,

i t i s going t o b e

thet t h e y are eligible f o r rediscount, a n d that t h e banks
presenting t h e m for rediscount w i l l have t o make collection.
Governor McDougal.

T h e recommendation i s ifor the

appointment o f a committee i n working o u t with Mr. “Wyatt
the details, a n d the Conference recognizes t h e fact that
they are declared eligible o n the port o f either member o r
nonemember banks, b u t I

of course d o not understand that

we are required t o rediscount them.
Governor Crissinger. S u p p o s e #

non-member b a n k comes

elong t h e t y o u k n o w i s p r o b a b l y n o t i n g o o d shape, w o u l d y o u

take i t ?
Governor McDougal.

N o , I

would n o t take it.

Governor Crissinger. T h e n t h e question i s the determinetion o f the bank itself?
Governor McDougal. I

suppose t h e Board a n d the benk

will make o vigorous effort n o t t o encourage i t .
Governor OCrissinger. I

think the banks will n o t encour-

age i t themselves, will they?
Gevernor McDougal.

No.

T h e next topic i s IV-D,

fdvisability o f the Soard adopting for all national banks


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a minimum capitsel requirement a n d imposing other requirements

i n connection w i t h i t s granting a u t h o r i t y t o s u c h

banks t o exercise trust powers.
It was voted t o b e the sensenofsthe Conference t h a t

it would b e inexpedient for the Federsl Reserve Board t o
Place a

capite] limit o n the size o f national benks eligible

to epply f o r such powers i n view o f the provisions o f the

law, and the further fact that the exercise o f trust powers
by State banks i s governed b y different laws i n different
States.

It was voted t o b e t h e sense o f the Conference t h a t
some limit should h e placed u p o n the time i n which national

banks must qualify, under the lews o f the State i n which
they a r e located,

t o exercise t r u s t powers w h i c h h a v e b e e n

granted b y the Federal Reserve Board.
it.was voted t o b e the sense o f the Gonference t h a t
the C o n f e r e n c e s h o u l d s u g g e s t

t o the Federal Reserve B o a r d

the advisability o f the Board's taking into considerstion
the reletion between capital end deposits o f sny netional
bank applying for the privilege o f exercising trust powers.
Governor Crissinger.

I s there 9 discussion o n that

by a n y m e m b e r o f t h e F o a r d ?


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224

Governor McDougel. T h e next topic is IV-E-6, /uthority
of a Federal Reserve P a n k t o receive deposits o f securities
for safe-keeping f r o m Farin Loan Registrars, Federal L a n d
Banks a n d Intermediate Credit Banks.
It was voted t o b e the sense o f the Conference t h a t t h e
Federal Reserve B a n k has n o legal authority t o receive deposit.
as securities f o r safeekeeping f r o m Farm Loan Registrars,
Federal L a n d Banks a n d intermediate credit banks.
It was voted t o b e the sense o f the Conference t h a t
the Federal Reserve Banks have n o legal suthority t o receive
deposits

o f securities f o r safe-keeping f r o m Federal L a n d

Benks a n d Ferm Loan Registrars.
Dr. Miller.

D o e s that carry with i t the idea that

it would b e inadviseble t o d o it, t o have t h e authority?

Governor McDougal.

“ell, I

do not think i t does,

Dr. Miller, but I think i t would b e inedvisable i f we did
heve t h e suthority.

T h a t i s merely m y p a opinion.

Governor Crissingor.

Governor McDougal.

“hy?

F o r one resson only tnat I have i n

mind, t h e t there i s a very great responsibility.
times seems a

I t some-

question whether w e ought t o assume what

we a r e alreedy essuming, w i t h hundreds o f millions o f


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Federal Reserve Bank of St. Louis

dollars security.
Governor Crissinger.
De. Miller.

F o r member banks?

‘ n d therefore t h e question seems, a s a

practical one, whether thet responsibility i s meterially in.
creesed b y the performance o f this additional service,
you s h o u l d a s s u m e i t .

if

T h e s e a r e q u a s i - p u b l i c agencies,

and w h a t y o u a r e d o i n g f e r y o u r m e m b e r b a n k s t h a t y o u h a v e

no legal authority t o d o i s largely b y way o f accommodation,
isnit i t ?

Governor McDougal. Y e s , purely s s a matter o f accommodation, b u t I

a m not sure sbout n o t having légal authority.

Dr. Miller. I

sey, you have n o legel authority for

doing what y o u are doing now. I s n ' t thet right?

Governor McDougel. I

am not sure o f that.

Governor Sesy. U n l e s s i t comes under t h e general s u e
thority o f the Board o f Ddrectors t o conduct ©

general bank-

ing business under t h e fect.

Governor Crissinger. ‘ i t h member banks?
Governor Seay. Y e s , sir.
Governor Crissinger.
Governor Seay.

B u t not with other banks?

T h e r e i s a disposition t o impose u p o n

the Federsl Reserve Bank the burden o f carrying certain


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226
ef the responsibilities which should b e imposed upon these
separate governmental organizations t h a t e r e created f r o m
time t o time.
Dr. Miller. I

know, b u t I

a m just wondering whether

you simply want t o take t h e responsibility thet y o u d o not
feel obliged t o d o it, a n d therefore y o u d o not d o it, o r
whether y o u take t h e position that i t i s inadvisable.

M y

own position i s that the banks, with the great funds o f
money that t h e y have, w i t h t h e gigantic fortresses w i t h
vast vevlts, a n d s o forth, t h e t i t i s not advissble f o r them
te b e t o o buresucretic i n matters o f this kind.

“ ‘ t any

rate, unless y o u r counsel o r our counsel should rule definitely thet i t would b e illegal f o r y o u t o d o it, t h e
question should b e considered o s t o whether o r not i t i s
an a c c o m m o d e t i o n t h e t y o u w i l l u n d e r t a k e w i t h o u t u n d u e

hazerd a n d without seriously edding e s sump expense.

lix. Hemlin.

ae, ““yatt.
the q u e s t i o n

O u r counsel has ruled o n it, hasn't

‘ ‘ e have not, I

do not think, ruled o n

o f a c c e p t i n g s e c u r i t i e s f r o m m e m b e r banks.

lire Hamlin. I

thought v e ruled o n thet, t h a t

that came o u t o f the right t o receive deposits.


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Mr. Harrison.

I n 1915.

Mr. “iyatt. Y e s , t h a t i s a fact.

“ e ruled thet y o u

can-do i t .

think, Mr. Chairman,

Governor Calkins. I

be p o i n t e d o u t t h a t t h i s e x p r e s s i o n

Gevernors! counsel reelly was e

i t should

o n the part o f the

renetition o f the opinion

of counsel f o r the Federel Reserve Bcerd, a n d the counsel
for the verious banks thought t h e vanks should n o t have
authority t o accept securities f o r safe-keeping f o r Federal
Land Banks, a n d also that t h e v d i d have euthority t o receive
securities f r o m intermediete banks, t h e specific authority
being g r a n t e d

i n one c a s e a n d n o t i n t h e o t h e r , w h i c h i n d i -

cated the differentistion.
Deputy G o v e r n o r C a s e .

I

t i s s e fair t h i n g t o s a y t o

Dr. M i l l e r t h a t w e a i d n o t i n t h e C o n f e r e n c e c o n s i d e r t h i s

motter from the viewpoint thet he reised.
Governor McDougal.

N o , w e did not. T h e r e are some

restrictions e v e n respecting member banks w i t h respect t o
the matter o f sccepting these securities.

"

e d o not

eceept anything f r o m large c i t y banks.
Dr. Miller. I

understend thet, b u t I

thet there i s n o legal authority.

B u t I

also understend
should say,


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228
before disposing o f the matter o n legal grounds, t h a t
the question i s t o b e asked, i s there enything that t h e
law contsins t h e t would prohibit y o u r doing this?

I n

other words, w o u l d i t b e illegal t o d o it, o r could i t b e
assumed, e v e n i n the absence o f a specific cuthorization,
one o f t h e t h i n g s

If so, I

i n which y o u r discretion should rovern?

should s a y that i t might b e worth while t o consider

gt.
Deputy Governor Case.
acted o n it, e n d I

D r . Miller, assuming that w e

a m now speaking f o r myself,

o n the

theory thet v e could n o t legall hold them, d o y o u think
it would b e desirable f o r the Conference t o really take
the initistive e n d suggest that t h e l a w b e changed t o make
it permissible?
Dr. Miller.

O h , no, I

don't; o n l y i n the event that

our c o u n s e l expressesbhthe o p i n i o n t h e t t h i s w o u l d n o t b e

an unwarrantable assumption o f legal euthority. I

think

the Governors’ Conference might point o u t that t h e y could,
and i f they thought i t advisable l e t t h e Reserve B o a r d
secure t h e guardianship o f these securities.
Governor Seay.
our responsibility,

I t seems t o m e that t h e question o f
i f a Federal Reserve B a n k undertook o f


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229
its o w n volition t o accept t h e custody o f these securities,
on account

o f m o b violence

o r a n y attempt o f t h a t s o r t ,

might result i n their loss.
Dr. Miller.

E x e r c i s e t h e same discretion which y o u d o

in t h e c u s t o d y o f y o u r o w n securities,

e n d in’ the -eveny o f

their loss b y riot o r enything o f thet sorter

Governor Seey (interposing).

“ l e might not b e able t e

set u p thet defense i n the case o f another governmental
agency, w h e n w e d i d n o t h a v e t h e l e g a l a u t h o r i t y t o a c c e p t

them.

“ e @ might i n the case o f individuals.
Dr. Miller. I

lewyer, b u t I

should s a y all the more.

J I am not a

think i t would b e merely a matter o f ace

commodstion and they would run the risk themselves, I
should say, a n d that a

Reserve B a n k would b e immune.

Governor Norris. M r . Chairman, m a y 1 add that w e
discussed this purely and solely a s e matter o f lew. T h e
opinion o f the fssistent Counsel given t o the Federal R e serve Board reeds, o n e paragraph,

i n this way:

"There i s n o express authority given i n either the
Federsl R e s e r v e ‘ c t o r t h e F a r m L o a n fect f o r F e d e r a l R e -

serve bonks t o receive deposits o f funds o r securities
from Federal l a n d banks o r from Farm Loan Registrars.

T h i s


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230
in itself m a k e s t h e r e c e i p t

o f s u c h deposits b e y o n d t h e

powers o f Federal reserve banks.

I n eddition, however,

there i s a provision o f the F a r m Loan / c t which seems b y
implication t o deny the existence o f a right i n Federal
land banks t o make deposits

i n Federal reserve banks.

This

is found i n Section 1 3 o f the F e r m Loan /ct a n d authorizes
a Federal l a n d bank ' t o deposit i t s securities, a n d its
current funds subject t o check, w i t h a n y member b a n k o f the
Federal Reserve System.!
this p r o v i s i o n

I

t i s reasonable t o assume f r o m

o f l e w s n d f r o m t h e absence o f a n y provision

authorizing deposits i n Federsel reserve benks, t h a t i t was
not intended that Federsel land banks should meke deposits

in Federal reserve banks,"
So that t h e question came before u s n o t Simply a s a
question o f a n apparent l a c k o f power t o d o a thing that

perhaps w e would b e disposed t o do, but a s a thing that i s
impliedly prohibited b y the low, o r e t least thet t h e

lew never intended should b e done, a n d all thet w e did
yesterday was t o concur o r t o accept t h a t opinion o f the
Board's counsel.
Governor Crissinger.
Governor McDougal.

I s there anything further?
M r . “yett, y o u have given some


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251
consideration t o the legnl status o f this matter, haven't
you?

Mr. “ yatt.
opinion. I
qaered. I

Y e s , t o the extent o f approving their

fully concur i n the opinion which was rendo not think that the law can be construed a s

absolutely prohibiting it, but i t i s like a n y other ultra
vires act, you simply have not the power t o do it.

I f

you d o undertake t o a o it, y o u a r e exceeding your lawful
powers,

a n d there i s n o distinction

i n accepting t h i s

in

this r e s p e c t a n d a c c e p t i n g t h a t i n a n y o t h e r respect.

The fact thet you d o g o beyond your powers would not b e
any defense t o you i n a court o f law, a n d your position

would be no more food to-day if you had not the lawful
pover t o d o i t a n d h a d t a k e n t h e r e s p o n s i b i l i t y

i n pur,guence

of lawful power.
Dr. Millen.

“ o u l d this b e » correct statement, t h a t

Federal Reserve Banks a r e liable a s custodians f o r the
several hundred million dollars o f securities t h a t t h e y

are now carrying for safe keeping for member banks?
as

PASE:

“ e l l , their liability goes t o a

rea-

sonavle extent. T h e y are bailees without hire, and a s

such they are liable for any loss resulting from gross


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Federal Reserve Bank of St. Louis

negligence o n their part.
Dr. Miller.

Yes.

Mrs." e a s e » T h e sitnuation would b e exactly t h e same
if the Federal Reserve Banks exceeded their powers a n d took
these securities.
Governor Seay.

D o y o u think t h e situetion would b e

the seme i f w e d i d receive f r o m other governmental bodies
those securities?
Mr. “yatt. I

think s o . I

do not s e e h o w t h e Goycrnment

would have a n y better claim than anyone else. T h e Goyernment, o f course, i s interested i n this, but this i s a n entirely different question.

T h e Government has the right

to q u e s t i o n a n y a c t o f a n y o f i t s c o r p o r a t i o n s ,

which are

beyond t h e powers t h e t have b e e n granted t o i t b y the
Government.

T h e Federal Reserve B o a r d could tell the

Federal Reserve B a n k t o d o that o r t o d o a n y ultra vires
act, a n d i t i s conceivable S h e account o f the Federal Reserve
Bank m i g h t b e forfeited.

Governor Crissinger.

D

o y o u consider t h e additional

cost t o the b a n k t o handle a l l o f this?
Governor McDougal.

H o w many m e n have y o u i n your

safe-keeping department, M r . Case? I

would s a y not less


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Federal Reserve Bank of St. Louis

than 25,
Denuty Governor Case. I

really a o not know the nuwoer,

Do you, Mr. Harrison?

Governor ‘cNougal. I

gueas probably double that. I

do not know.

lir. Harrison.

M y feeling i s that there are only 1 2 i n

the vaulad a n d coupon cutting.

Governor :cDougal, T h e r e i s a tremendous amount o f
labor there i n the matter o f taking the coupons orf and
keeving there eecurities i n order,
Mr. Harrison,

W e have o u r safe-keeping department

now organized o n a n entirely aifferent basis, w h i c h would
enable u s t o eliminate a
When w e m a d e t h e c h a n g e

vood many m e n w e had before,
i n o u r system, t h a t e n a b l e d u a t o

eut our force very materially.
Governor Orissinger. A n y t * i n g further?
Governor McDougal, T h e next topic i s 4 - f , t h e ques—
tion o f Federal Reserve Bank representation a t bankers!
conventions-~

t o what e x t e n t s h o u l d F e d e r a l R e s e r v e B a n k s

be rerresented b y officers a n d employees,
It w e e r e s o l v e d t h a t e t t e n d a n c e

a t conventions w i t h i n


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254

the district i s o f the utmost importance t o every Reserve
Bank a n d that attendance a t conventions outside o f the
district i s often advisable; t h a t this whole matter must
necessarily b e left t o the judgment o f the officers a n d
directors

o f e a c h Reserve B a n k a n d t h a t i t i s impossible

to establish b y rule a n y uniform practice.
Governor Crissinger.
Governor McDougul.

I s there a n y remark?

T h e next topic i s IV-G, t h e advis-~

ability o f seeking a n amendment t o the l a w t o restore t o
Federal Courts jurisdiction over suits b y and against
Federal R e s e r v e B a n k s .
It w a s v o t e d

t o h e the sense

o f the Conference

H e o a

is adviseble t o procure a n amendment t o the l e w t o restore

to Federal Courts jurisdiction over suits b y end sgainst
Federel R e s e r v e B a n k s

Ne. 3

o n page 3

i n the f o r m suggested

i n paragreph

of Mr. y a t t ' s memorandum X-4551.

It was also voted that i t would b e desirable t o seek
the e n a c t m e n t

o f legislation

t o exempt F e d e r a l R e s e r v e B a n k s

from the process o f attachment o r garnishment before finel
judgment

i n a n y case,

a s National banks a r e n o w exempted

under the terms o f the United States Revised Statutes.
That covers, I

think, Governor Crissinger, t h e topics


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Federal Reserve Bank of St. Louis

that the Board has placed o n the program.

" 2 ere -in

the midst of our program, w e are not through with the
tepics, a n d i t i s probable t h a t some o f the topics t h a t
are being considered o r have b e e n are interesting, a n d
some w i t h r e s p e c t

t o which y o u probably would want a

re-

port, a n d w e o f course will b e available t o the Board a s
soon e s w e a r e t h r o y g h a n d w i l l m e e t y o u r pleesure. I

think we can get through here today, can't we?
Deputy Governor Case.

I t does n o t look s o a t the

speed w e a r e making.
Governor Norris.
Governor McDougel.

joint meeting.

“ e are just half through.
G o v e r n o r Crissinger spoke about a

f s I understood you, y o u wanted that t o

be arranged f o r tomorrow?

Governor Crissinger.

I t looks a s i f that i s going t c

be t h e o n l y available t i m e w e will have f o r it.

“

e havo

e hearing o n Thursday o n the question o f Cuban agency,
which orises o u t o f the t w o agencies n o w existing between
/tlanta a n d Boston,

and I

presume t h a t i s g o i n g t o t a k e

practically a l l o f the dey.

“ h e n this date w a s s e t down,

I think four o f the Reserve Banks were notified--Boston,
New York, Philadelphia a n d ftlanta--that i f they wanted


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Federal Reserve Bank of St. Louis

256
to b e heard t h e y could b e present.

I n view o f the fect

that a l l o f the Governors a r e here, i f they went t o come
™ e

in we will b e very glad t o have y o u all come in.

thought t h a t those f o u r banks were a l l that were interested,
but w e will b e very glsd t o have y o u all come in.
This o n e subject which y o u have disposed o f about
the a d v i s a b i l i t y o f s e e k i n g a n amendment r e s t o r i n g F , d e r a l

Reserve Banks f o r myself
jurisdiction i n 911 suits against
&’
I:think t t i s a

debatable o n e . I

think t h a t a

man w h o

hes a n action against t h e Federel Reserve Ranks ought n o t
tc b e compelled t o g o avey o f f t o some Federal Court,
because t h e suit c a n finally g e t into t h e Supreme Court,
and under t h e National B e n k ‘ c t they have locsl jurisdiction--I j u s t surgest that, t h a t i t does n o t l o o k roir
to the poor devil w h o thinks h e has a right o f action
ageinst e

Federal R e s e r v e B a n k t o g o w a y o f f s o m e p l a c e

where h e c e n maintain his ection. I
you h e d c o n s i d e r e d

do not know whether

i t a l o n g t h a t l i n e o r not.

Governor Seay. T h e r e i s still pending t h e question
es t o wh: ther Federal Reserve Benks a r e domiciled i n hhy
State o f their district other t h e n thet o f the State i n
which t h e y ere located. I

think that metter i s u p i n


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Federal Reserve Bank of St. Louis

2 suit i n which t h e Richmond b a n k i s involved.
Governor Crissinger. I
ity o f t h e s y s t e m i s d e p e n d e n t

think s o m e o f t h e p o p u l e r o n whether y o u p u l l p e o p l e

eway out o f their localities t o a Federel court.
Governor Seay.

O n the other hand, i t subjects t h e

Federal Reserve B a n k t o herrassment.

Governor Crissinger. Y e s , perhaps i t does.

i f

thet i s ell, t h e Board will retire s n d consider your report.
(Thereupon t h e members o f the Federal Reserve B o e r d
retired o n d the Governors continued their Conference e s

follows)? e - "
The Cheirman.

“ @ h a d n o t finished w i t h 1-G.

Governor Calkins.

L e t u s f i n i s h w i t h that.

I . under-

stend t h a t s o m e o f those w h o v o t e d a f f i r m e t i v e l y s r e n o w

prepered t o sugrest thet t h e resolution b e rescinded, a n d
thet s o m e o f those w h o v o t e d n e g e t i v e l y e r e a g r e e a b l e

t o

e substitute r e s o l u t i o n w h i c h m i g h t b e offered.

The Cheirmen. I

would like t o heer t h e substitute

before w e rescind t h e other ection.
Governor Calkins. I

say, Mr. Chairmen, l e t u s re-

scind t h e o t h e r o n e , w h e t h e r w e a d o p t a n y substitute
nov.

or


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238
Governor Norris.

M r . Choirman, I

move that t h e

vote b y which t h e lest previous reselution o h this subject
vias a d o p t e d b e reconsidered.

The Jheirman.

T h a t motion i s seconded?
second that.

Deputy G o v e r n o r Cese. I
The C h a i r m a n .

‘ r e y o u r e a d y f o r t h e question?

(The m o t i o n w a s n u t a n d u n s n i m o u s l y c a r r i e d . )

Governor Norris.

think i t i s open f o r the

Now, I

offering o f » substitute resolution, which I understand
has b e e n prepered, e n d I think i t would b e sdvisable f o r
ws t o consider.

Mr. Harrison.

Shell I

The Cheirman.

Yes.

reed it, Mr. Chairman?

Governor Seay. S u p p o s e
Mr. Harrison.

T h i s is

veg prepared b y Governor Seay.
Governor S e a y .

Y e s .

Mr. Harrison. [ b r o g e t e t h e present 7 5 per cent
ruling e n d rule that where t h e borrower i s e perent
corporetion,

o r where t h e parent corporetion a n d its sub-

sidisries a r e i n precticel effect o n e single organization, «end m a y with propriety b e considered e s & single


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Federal Reserve Bank of St. Louis

borrower, t h e paper o f such parent corporation m a y b e
considered e l i g i b l e
and r e g u l e t i o n s

i f ectherwise c o m p l y i n g w i t h t h e l a w

o f t h e Federal Reserve Board.

Governor Seay.

M r . Chairman, I

will simply state,

in explanation, that when we were interrupted i n our d i s cussion o f thet matter, Governor Fencher end I were talking
to the counsel f o r the Board, a n d that idea occurred t o me,
and w e h e d some brie: discussion with t h e counsel, a n d I
understood h i m t o s e y thet practically that wes considered
at some former time b y him o r b y the Board.

I d o n o t know

whet objections there s r e t o it, b u t i t occurred t o m e
that ~ e a l l went t o bring ehout j u s t about thet stete o f
affairs, e n d the present 7 5 per cent ruling i s i n the way,
and w e r e c o g n i z e t h e d e n g e r o f m a k i n g e n y s p e c i f i c l i m i t a -

tion i n the stock ownership o f corporetions.

It is a fact, a s you state, that thevolume o f eligible
paper i s perhaps diminishing i n this country--eligible
under t h e present rules sand regulations--and f r o m time t o
time i t w i l l b e advisable e n d p e r h a p s n e c e s s a r y t o m a k e
some a l t e r a t i o n s

i n the present rulings w h i c h will require

e greater volume o f eligible paper that i s good a n d

acceptable from a banking standpoint.


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Federal Reserve Bank of St. Louis

I offer that with some diffidence, n o t knowing
whether I

have c o n s i d e r e d a l l s i d e s o f t h e q u e s t i o n o r not.

The Chairman.

M r . Harrison, w i l l y o u reed that motion

again, please?
Mr. Harrison.

‘ b r o g a t e t h e present

and r u l e t h a t w h e r e t h e b o r r o w e r

7 5 per cent ruling

parent c o r p o r a t i o n

is a

or

where t h e parent corporation e n d its subsidiaries e r e i n
practical e f f e c t o n e s i n g l e o r g e n i z a t i o n a n d m a y w i t h p r o -

proety b e considered s s a single borrower, t h e paper o f
such parent ecrporsation m a y b e considered eligible,

if

otherwise complying with the law and the regulations o f the
Federel Reserve Board.
Governor Young.

I t sbrogates t h a t whole regulation,

or just that part o f it?
The Chairman.

T h a t will suit you, wont it, Goyerner

Fancher?

Governor Fancher.

T h e question i s whether i t ebrogates

that whole regulation a n d i s a substitution f o r 1 , 2 and 5s.
“e h a v e g o t t w o r e s t r i c t i o n s t h e r e .

O n e i s 7 5 per cént

of stock ownership a n d the other i s the advances t o other
corporations r a t h e r t h a n subsidiaries.
Deputy G o v e r n o r C a s e .

T h i s i s t h e 7 5 p e r c e n t only.


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Federal Reserve Bank of St. Louis

241
Governor Fancher.

T h a t i s the point exactly.

Governor Seay. I

had i n mind thet i t would permit t h e

peper o f these parent corporetions, “hether t h e proceeds
were u s e d f o r f i n e n c i n g t h e s u b s i d i a r i e s

o r a n y b o d y else,

would b e eligible u n d e r that ruling.
Governor Young,

T h e n y o u want t o abrogate t h e whole

ruling %-4484.
Governor Seay.
Governor Young.

h a t w a s m y idea.
I n s t e a d o f s e y i n g 7 5 p e r cent, j u s t

say thet, a n d that will take care o f it.
Governor Fancher. Yes, t o ebrogate t h a t ruling, s u b stitute that.
Governor Seay.

S o m e s u c h ruling a s thet, I

think, Mr.

Cheirman, w o u l d e l i m i n a t e t h e d a n g e r o f t a k i n g t h e p a p e r

of commercial credit organizations. I

think that i s one

of the grentest threats t h a t perheps meneces t h e Federal
Reserve B a n k , t h e d a n g e r

o f that k i n d o f paper creeping

into Federal Reserve Renks, a n d a resolution o f that charsceter would leave s u c h paper ineligible.
Governor Calkins. I

e m wondering, M r . Chairman, whether

Governor S e a y w o u l d b e w i l l i n g t o accept
The Chairmen. I

think s o m e o n e

a n o p i n i o n o n that?

i s modifying t h a t motion


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Federal Reserve Bank of St. Louis

242
will have i t read epfain.
now, e n d when i t i s finished w e

offer a t least for disGovernor Sesy. M r . Chairmen, I
econteined i n the
cussion t o abrogate t h e present ruling

;

Board's letter X-4484.
I s thet t h e Hanne ruling?

The Chairman.

Governor Seay. Yes, “and rule," ete.
all, please?
“ i l l y o u read i t

The Chairman.
Governor Seay.

b e requested
I t i s moved thot t h e Board

contained i n 8 letter X-4484
to abrogate i t s present ruling
i s 2 perent corporsetion
and rule thet where t h e borrower
e n d its subsidiaries a r e
and where t h e perent corporation
organization, a n d m a y with
‘n prectical effect o n e single
propriety b e c o n s i d e r e d

as @

single b o r r o w e r ,

t h e paper

b e considered eligible,
of such perent corporation m e y
l e w e n d regulations
otherwise c o m p l y i n g w i t h t h e

if

o f the

Board.
The Chairman.

s a y ebout
M r . “yott, w h a t have y o u t o

that?
Mr. “‘yatt.

vague, a n d
T h a t seoms t o m e t o b e rather

what y o u went, unless y o u
I a m afraid i t wont secomplish
add something t o add.

complyY o u s a y there “ i f otherwise

the j a w .*
ing with t h e reguletions a n d

I t would n o t com-


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Federal Reserve Bank of St. Louis

240
ply with existing regulations,

t o s a y nothing more, because

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

advance t o one o f its subsidiaries.
plish what I

T

o make this accom-

think y o u want i t t o accomplish, y o u have

either g o t t o s t a t e t h e f a c t s a s t h e y e x i s t

i n t h e Seiics

case, o r you have g o t t o g o ahead a n d say, I

think, t h a t

the p a p e r w o u l d b e e l i g i b l e e v e n t h o u g h t h e p r o c e e d s a r e .

used b y the parent corporation t o make advances t o subsid-

faries for eligible purposes.

I t seems t o heavesthe whole

thing u p i n the air.
The Cheirman.

f n d that i s what w e want t o evoid.

Governor Calkins.

I

s not thet covered

b y the a s -

sumption that t h e perent corporation a n d its subsidiaries
are o n e corporation,

w h i c h t h e y a r e i n fact,

o f oourse,

i n

practice, absolutely?
New yatt.. I

to do.

think I

fully u n d e r s t a n d w h a t y o u w a n t

Y o u want t o accomplish t w o things.

O n e i s t o get

awey from this first condition stated, a n d the other i s t o
get a w a y from the statement e f the specific percentage o f
the stock.
Governor Seay.

“ h e n t h e Cheirman returns, I

like t o s u g g e s t t h a t t h e i d e e c o n t a i n e d

would

i n this r e o l u t i o n


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Federal Reserve Bank of St. Louis

or motion b e referred t o counsel a n d a s k h i m t o dress
it u p o r amend i t o r edd t o i t i n such a way a s h e thinks
will accomplish t h e idee contained e t present i n the resolution, a n d that h e present i t t o u s later o n i n x

acy

session.
Mr. “‘yatt. I

a m willing t o t r y t o d o that, t o ox-

press y o u r idea a little more completely.
I n your absence, M r . Chairmen, I

Governor Seay.

suggested something which I will restate, a n d that i s
that t h e resolution e s ofrered b e referred t o the Board's
counsel, a n d the counsel b e requested t o elaborate i t
end amend i t i n such a way a s would carry out t h e idee
at p r e s e n t i n c o r p o r a t e d

i n t h e r e s o l u t i o n a s offered,

and

resubmit i t t o this Conference l a t e r o n i n the day.
Governor Galkins. I

a m wond:ring, M r . Chairman,

whether M r . ‘ y a t t w a n t s t h a t
Mr. “yatt. I

i n t h e record.

d o n o t c a r e i f i t i s i n t h e record,

4f i t i s distinctly understood t h a t i n preparing this
I a m simply putting something

i n shape f o r G o v e r n o r S e a y .

I eam willing t o do. anything h e wants m e t o do.
The Chairman. I
formal v o t e .

think w e c a n d o that without a


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Federal Reserve Bank of St. Louis

Governor Seay. I
The Chairman. I

believe soc.
will b e v e r y g l a d t a have y o u d o that.

Governor Bailey. I
Governor Seay.

ssay, w h y put that i n the record.

“ h a t Mr. “yett h a s just s a i d i s i n the

record, e n d I think that will b e sufficient.
Governor Young.

from Judge Ueland.

M r . Chairman, I

have a

communicetion

C a n we g o back t o I-F?

i+F--Continued.
The Chairman.
wants

M r . Young has a message w h i c h h e

t o read.
Governor Young. I

h a v e a wire f r o m J u d g e U e l a n d

which reads this way:
"Registered terminal warehouse receipt, issued b y

terminal warehouse i n Minneapolis,

i f endorsed and de-

livered b y depositor, passes secure title t o the grain t o
pledgee, subject t o defects i n title o f depositor.

See

Minnesota General Statutes, 1923, Sections 519 t o 522,
inclusive.”
Governor Bailey.

T h a t means t h e t i f the title c a m e

to h i m t h a t h i s t i t l e p a s s e d u n l e s s

grain i n the elevator. I

h e failed t o put t h e

have never known thst t o y,appen

on m y line o f elevators f o r forty years.

T h a t i s a thing


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Federal Reserve Bank of St. Louis

246
thet never happens a t all.

T h a t i s just like being struck

by lightning when there i s no cloud.
Governor Seay.

T h a t means t h a t i t i s good against gen-

eral creditors, then?
Governor Young.

O h , yes. I

was talking with a man

last night a n d h e said that t h e y have actuelly b e e n upheld
by the court. I

therefore m o v e that i t i s the sense o f the

Conference that thése particular warehouse receipts, under
the practice which prevails, s r e within the spirit o f the
Board's regulations requiring that warehouse receipts shall
be issued b y a warehouse independent o f the b o r r o w e r , d
n
a
thet therefore t h e Board should rule that acceptances s e cured b y them are eligible, provided o f course t h e t t h e y
comply with a l l o f the relevant requirements o f the Federal
Reserve ‘ c t .

Governor Calkins. I
The Chairman.

second t h e motion.

I s there a n y discussion?

(Cries o f "\westion, mwestion.”)
(The question w e s p u t a n d unanimously carried.)

Governor Bailoy. I

would like t o have this thing clari-

fied i n m y mind, t h a t i f does n o t simply apply t o Minnespolis,
but thet i t applies t o a n y district?


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247
The Chairman.

T h a t a p p l i e s o n l y t o Minneapolis.

Governor Bailey.
City.

T h e n I move that i t apply t o Kensas

" Y e have exactly the same condition there,
Governor S e a y .

I t d o e s n o t s e y i t sprplies t o Minneap-

olis.
The Chairman.

Y o u quoted t h a t a s these particular r e -

ceipts, o r words t o that effect.
Governor Young. I

did n o t m e n t i o n Minneapolis.

sey "repistered terminel werehouse receipts."

Y

e

T h a t i s what

we are talking about.
Mr. Harrison.

I s s u e d under t h e practice w h i c h pre-

vails i n Minneapolis.
The Chairmen.

D

Governor Beiley.

o y o u withdraw y o u r motion?

f l l I wanted t o know i s that w e had

the same protection a s they have i n Minneapolis.
Governor Young. S u r e .

II. C O L L E C T I O N S ‘ N D CLE/ RINGS.
C. D e s i r a b i l i t y o f having Federal Reserve Banks

and direct sending member banks (where the
volume werrants) l i s t i n separate c a s h letters
items which a r e payable i n each State served
by Federal Reserve P a n k o r branch t o which same
are forwarded.
The Chairman.

“ e will proceed w i t h Topic II-C, desir-


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Federal Reserve Bank of St. Louis

248
ability o f having Federal Reserve Banks a n d direct send-

ing member banks (where the volume warrants) list i n

separate cash letters items whdok are payable i n esch
State served b y Federal Reserve B a n k o r branch t o which
same e r e forwarded.
Mr. St.Louis, w i l l y o u lead this discussion?

Governor Biggs.

T h i s topic was suggested with the

idea o f obtaining o n expression, either f r o m the Go,yernors,
or preferably i n the next report o f the standing committee
on collections.

“

e have made n o attempt t o get other

Federsl Reserve Benks o r their direct sending member
banks t o list i n seperate c e s h letters items which a r e
payable i n each State, although i n quite »
it appears d e s i r a b l e .

‘ Y e preferred

few instances

t o g e t a n expression

on the subject before taking a n y action.

I have very little t o say about it.
-question o f w h e t h e r

i t i s esvitebie

I t is just the

t o make t h a t request,

or whether we shell proceed as we have.
Governor Young.

“ “ e @ approve o f i t i n Minneapolis.

“e think i t i s desirable.

Governor Seay.

T h o t i s a t the present time the

practice o f other Federal Reserve Banks.


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Federal Reserve Bank of St. Louis

The Chairman. I
practice.

would like t o know where i t i s not the

I t i s the practice w i t h us.

Governor Biggs.

“

e have n o t taken i t u p with other

banks.
The Chairman.

I s there a n y bank represented here which

‘does n o t have this practice?
Governor Bailey.

W e d o not sort i t that way.

“ 6 sort

alphabetically.
Governor ‘“iellborn.

T h i s suggestion might b e o f assist-

ance t o the transit department
of checks,

i n eliminating o n e essortment

w h e r e t h e V o l u m e w e s v e r y large , a n d i f a l ?

Federal Reserve Senks a n d branches a n d direct sending banks
would adopt t h e same prectide.

However,

w e doubt whether

the volume o f checks coming into this district would be
sufficient t o render it of material benefit t o our bank.
So w e a r e n o t following that practice.
The Chairman.

“ e have followed i t for several years.

"411 those of the banks who are not following i t giye
expression t o it?

4 1 1 y o u d o that, Mr. Talley?

Governor T e l i c y . I

d o n o t t h i n k i t makes a n y g r e a t s m o u n t

of difference, because i t seems that what i s desired i s t o
have t h e sorts made u p s o the receiving Federel Reserve


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Federal Reserve Bank of St. Louis

26°
Rank will have t h e i t e m i n shape,
sort them.

M

i n the same manner t h e y

e have never s e e n a n y occasion t o sort b y

States a t ell.

Governor Seay.

H a v e they ever requested you t o do it?

Governor Talley.

No.

Governor Bailey.

T h e r e i s a qualifying werd there.

says "where the volume werrants it."
Governor Taliey.

I t simply scems t o u s that where a

bank does make it, i t i s making a n additional sorting that
is not necessary.

The Chairman.

I t seems t o be the custom.

I s that

satisfectory t o you, o r d o you want some action?
Governor B i g g s .

N o ; t h a t i s acceptable

The Chairman. T h a t , t h e n , d i s p o s e s

Deputy Governor Case.

t o me,

o f the subject

H o w i s that disposed o f ?

The Chairman. T h a t i s disposed o f because Mr. Biggs

declares himsslf setisfied.

I t i s the general practice,

but i t i s not followed b y all banks.

ee C O I N , CURRENCY ‘ N D SIRCUL/ TION.
*. G o l d Holdings a n d Payments.


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Federal Reserve Bank of St. Louis

251
The Chairman.

H e r e i s one topic III-’, calling f o r

"Gold holdings e n d payments ." I

do not know where that

originates.
Deputy G o v e r n o r C a s e .

I t originates

i n N e w York,

end i n following the usual prectice, I think Mr. Harrison,
who operates t h a t department, h a s usually made a n oral
statement concerning it.
The Cheirman. “ 4 1 1 1 y o u d o that?
Mr. Harrison.

Yes.

S o m e t w o o r three years a g o I

wes appointed a committee of one for the purpose of taking

upwith the Treasury the evaileble supply of gold coin and
certificates which would permit o f each Federal Reserve
Bank incressing i t s supply o f hand-to-hand g o l d currency-thet is, sold certificates a n d gold coin--to a n amount equal

to 20 per cent o f their aggregate liabilities.
great deal has b e e n accomplished f r o m the time w e
first started, w h e n the average reserve o f this kind o f
currency w a s e b o u t 1 2 p e r c e n t f o r t h e w h o l e s y s t e m .

Some

of the Reserve Banks h a d less t h a n 1 per cent, a

great

number o f them h a d less t h a n 5 per cent

n the f o r m

of payeble gold.

i

' t this time t h e svernge f o r the System

is 1 8 per cent, a s contrasted w i t h 12, b u t i t s o happens


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Federal Reserve Bank of St. Louis

252
a number o f the N e w York banks a r e still v e r y much
below t h e 2 0 per A

w

h

e

t appesrs t o b e even a

setisfactory working requirement f o r even the smaller districts. K a n s a s City, f o r instance, h a s a reserve s u p p l y
of 3.4 p e r cent o f gold c o i n a n d certificetes,

o r o f gold

reserve: t h e t is. i n the f o r m they c a n p a y out u p o n demand.
Atlante h a s 7 . 4 p e r what? S e n Francisco h a s 9 . 4 p e r cent,
as contrasted w i t h 4 . 7 2 year apo.

T h e y have ebout doudled

what t h e y h e d a year ago, b u t t h e y are still v e r y low.

I n

New York w e have 2 7 ner cent, Richmond h a s 2 6 per cent, a n d
others range between t h e l o w points I

have mentioned a n d the

high roints which i s for N e w York.
Governor F e n c h e r .
Mr. Herrison.

“ h a t i s o u r vosition?

C l e v e l a n d 13.2.

Deputy G o v e r n o r Paddock.

Mr. Harrison.

Twenty.

Governor Talley.
Mr. Harrison,

“ h a t i s Boston?

“ h a t i s Dallas?

o6.a.

Y o u a r e next t o the highest.

Governor Fancher. ‘ i h a t date i s that?
Mr. Herrison.

T h i s i s a s o f September 5 0 o f this year

Governor F a n c h e r ,
Mr. Harrison.

1 3 . 2 you show us?

Yes.


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Federal Reserve Bank of St. Louis

Governor Piges.
Mr. Harrison.

“ h a t i s St.Louis?

1 8 . 8 . C h i c e g o i s 11.7. N o w , I

that t h e development o f our fold business

think

i n the past

two veers h a s indicated quite clearly that a n average o f
20 p e r c e n t f a r N e w Y o r k i s w h e l l y inadequate,

and it is

our ambition t o incresse o u r supply o f gold certificates
and gold coin t o well above 2 0 per cent, which w e figured
wes a working basis f o r a1] Reserve Benks.
many demands t h a t a r e u n e x p e c t e d e n d l a r g e

“

e have s o

i n volume f o r

gold t o b e émported thet i f w e tried t o work o n a 20 per

eent reserve supply o f gold certificates a n d coin i n the

acgregate, i t leeves u s with such « smell supply of coin
thet

w e cannot m e e t t h e current demands.

“

e are pro-

tected i n our case b y the fact thet w e have the sssay
office i n New York City, where there i s e large supply o f
coin which would b e available t o u s i n time o f need, a n d
the s e m e i s t r u e o f S a n F r a n c i s c o a n d m a y account f e r

their relatively low percentage.

T h e same i s true i n

Philadelphia, although they have got a pretty good
percentage, e v e n so, a s contrasted w i t h the whole; b u t
I mention this n o w i n case some o f those banks thet a r e

still feirly low might care t o teke steps t o build u p


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Federal Reserve Bank of St. Louis

204
their working supply o f gold certificates gyqgold coin.

“le have i n New York over °250,000,000 i n the gold set-~
tlement f u n d a n d about “125,900,000 e r “130,000,000
agents! fund.

i n the

“ e have figured o u t that that i s entirely

too m u c h g o l d f o r u s t o h a v e l o c k e d u p i n t h e T r e a s u r y w h e n

we have adequate vaults f o r o u r o w n supply.

“ e fave there-

fore requested the Treasury for $100,000,000 i n gold bars,
which after considerable negotiation w e are now able t o get
back from the Treasury without paying t h e b a r charge.
have removed t h e b a r charge since October 1 .

They

f f t e r we

get that $100;000,000, we hope to get another $100,000,000.
Governor Fancher.

P u r s u i n g that a

little further,

would i t b e your thought, M r . Harrison, t a k i n g this situation a s a p p l y i n g

t o o u r o w n case, “ h e r e v e a r e u n d e r o u r

percentage e n d w e desire t o build i t up, w e have b e e n
pursuing t h e p o l i c y o f p a y i n g o u t a s m u c h g o l d a s w e r e -

ceive, perhaps a

little more, c e n w e reasonably,

t o follew

out o u r program, curtail o u r payments a n d gredually i n crease o u r holdings i n the f o r m o f gold certificates?
Is that going t o b e acceptable entirely t o the Treasury,
in view o f the policy edopted here o f banks n o t paying o u t
gold certificates,

w i ich w e have tried t o perform?


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Federal Reserve Bank of St. Louis

250
Mr. Harrison, I

think that would b e wholly agreeable

to the Treasury, a n d would b e quite consistent w i t h the
policy w e have discussed i n past meetings, f o r the reason
that a t the present t i m e t h e amount e f gold certificates

actually i n circuleticn i s *1,100,000,000, which i s practically “100,000,000 more than the figure a t which w e had
hoped t o r e t a i n t h e circulation.

I

f some o f the Reserve

Banks c a r e t o c o n t r a c t t h e i r g o l d payments,
quent a d d i t i o n a l e x p e n s e

Reserve notes, I

w i t h t h e conse-

o f paying o u t t h e i r o w n Federal

see n o reason w h y they should n o t c o it.

Thet i s v e r y m i c h t h e e p e r t h e n b u i l d i n g

u p their g o l d r e -

serves i n the vaults b y shipping bars from New York t o the
respective F e d e r a l R e s e r v e B a n k s .

Governor Talley.

“ e have not paid out any gold for

some time, a n d the result o f that h a s b e e n that following
the policy o f other Federal Reserve Banks w e have accumulated

more @d1ld, end i n addition t o that you will recall ,ou
stopped some shipments a n d that w a s diverted t o us, a n d that

has further increased our gold, and last summer the balance
of trade went against u s and we took credit i n gold, a n d
now t h e w o r d c a m e t h r o u g h t h e o t h e r d e y t h e t w e w o u l d p a y
out s o m e g o l d certificates,

o f course p a y i n g o u t t h e w o r n


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Federal Reserve Bank of St. Louis

254
ones, s o thet t h e y will come back, a n d w e will ship them
here.

T h a t will a t the seme time offset t h e action o f

any other Federsal Reserve B a n k thet m a y went t o contract
its fold herding.
Mr. Herrison.

T h e problem o f esch bank i s a n individual

problem, because a s I sey there e r e some banks t h a t s r e
close t o mints o r assay offices e n d

t h e r e s r e others

who o r e not. “ h e t h e r those w h o have a

large supply o f

bars o n d 2 medium supply o f coin desire a
is m o r e o r l e s s e

l o c a l problem,

different ratio,

b u t the main point which

I think w e should consider a n d the o n e which this Conference
pessed u p o n some time ago, i s that, irrespective o f the
emount o f bars which y o u hold, y o u ought t o t r y t o maintain
e reserve o f paysnle gold, thet 1s, f o l d c o i n o r certificates, equal t o not less t h e n 2 0 per cent o f your liability,
end i t i s that ratio that I

have referred t o i n this memo-

randum a s b e i n g p r e t t y l o w i n s o m e c a s é s .

T h e Treasury

has d o n c # greet job about minting gold i n the last three
yeers. I

think they e s

m i n t e d between [150,000,000 a n d

+£00,000,000 o f fold coin.
Governor Fancher.
fold n o w ?

I s there a

surplus o f free minted


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Federal Reserve Bank of St. Louis

257
Mr. Harrison.

U n f o r t u n a t e l y t h e r e i s not.

There

isonly about “11,000,000 excess over certificates, and
in?case where t h e bani, a s i n our o w n case, h a s a large
w e c a n serve t h e Treasury's purpose

supply o f certificates,

n
a taking coin. T h a t helps
by redeeming t h e c e r t i f i c a t e s d
to a considerable extent, because t h a t reduces t h e ratio

of these certificates ogainst which they have got t o have
a supply o f one-third i n coin.
minting agein, I

think,

B

u

t they have started

i n the S a n Francisco o r Denver

mint, end it is very likely that #411 be building up in
the n e x t f e w months e

lerge a v a i l a b l e s u p p l y o f coin,

t o bé

held against certificates, t h e r e b y increasing t h e excess
supply o f coin.

Y o u are building your supply u p b y

The Chairman.

T

accumulating bars.

Mr. Harrison.

o what u s e c a n y o u p u t those?

“ e l l , o u r thought i n building u p our

supply o f bars w a s n o t s o much t o have t h e m i n the form
thet w e could p a y out, a s t o reduce t h e liability o f

the Treasury t o the Reserve System for gold held for account o f the System.
fre there e n y questions about this?

The Chairmen.

I f not,a motion t o adjourn will b e i n


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