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VOLUME 1 PROCEEDINGS O F A CONFERENCE W I T H T H E FEDERAL RESERVE B O A R D O F https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis GOVERNORS A N D CHAIRMEN A N D FEDERAL RESERVE AGENTS OF THE FEDERAL RESERVE B A N K S TREASURY ‘BUILDING WASHINGTON, D. C. OCTOBER 10, 12, 13, 1922 WALTER S, COX SHORTHAND REPORTER COLUMBIAN BUILDING WASHINGTON, D.C, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis PROCEEDINGS O F A CONFERENCE WITH T H E FEDERAL RESERVE BOARD O F GOVERNURS A N D CHATRmEN A N D FEDERAL RESERVE AGENTS O F THE FEDERAL RESERVE BANKS. Washington, D . C., Tuesday, O c t o b e r 1 0 , 1922. The C o n f e r e n c e w i t h t h e F e d e r a l R e s e r v e B o a r d o f t h e Federal R e s e r v e G a v e r n o r s a n d t h e C h a i r m e n d n a Federal k e - serve Agents o f the Federal Reserve Banks w a s called t o order i n the Board Room of the Federal keserve Board, Treasury Building, Washington, b. C., a t 10 o'clock a.m. on Tuesday, Ooetober 10, 1922. Present: Hon. Edmund Platt, Vice Governor o f the Federal Reserve Board (Presiding) A. C . tiller, member, Federal Rescrve Board. John R. Mitchell, Member, Federal Reserve Board. C. S. Hamlin, Member, Federal Reserve Board. D. R. Crissinger, Comptroller o f the Currency and e x o f f i e l o M e m b e r o f t l e Federal Reserve Board. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis vharles A. mworss, Governor, Fearral Keserve Bank o f Boston, Benjamin Strong, Governor, Federal Reserve B a n k o f George w . Norris, G o v e r n o r , r e a s r a l R e s e r v e B a n k o f Phiisuelphia. ik. a. Fancher, Governor, #ederal Keserve B a n k o f Cleveland, George J . seay, Governor, Feccral kKeserve Bank o f Richi.ond, #@llborn, Governor, Federal keserve Bank o f Atlanta, mcbougal, Governor, feaeral Neserve Bank o f Chicago. Biggs, Governor, Federal heserve Bank o f st, Louis. Young, Governor, Federal neserve B a n k o f iminnsapolis, Bailey, Governor, Feceral ke. erve Bank o f nancas City. Calkins, Governor, Fecersl Heserve b a n k o f pan francisco. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis John Perrin, Chsiriuan a n d red-ral heserve Agent, H e d ersl Keserve B e n k o f s a n Francisco. rreasrick HK. Curtiss, Chairmen end rederal Keserve agent, »eceral Kererve B a n k o f Boston, Pjerre Jey, Cheirmman end rederal Kecerve Agent, Feaersl heserve B a n k o f New York. he L . Austin, Chairman a n d receral neserve agent, reaeral K e s e r v e B a n k o f Philaaelphia. Caldwell haray, Cngirman s n d rederal keserve Agent, Federal keserve B a n k o f Hichmond. Joseph A . ucCord, Chairman a n d rederel Heserve Agent, Federal Reserve B a n k o f Atlanta. William a. Heath, Chairmen and rederal Keserve Agent, Feasral R e s e r v e B a n k o f Chicago. @illiam meC. wartin, Chairman end reaeral HKeserve Agent, Feceral Reserve B e n k o f st. L o u k . john H. kich, Vhairnen ana Federal Keserve Agent, Keceral hKeserve Bank o f winneapolls. vp. C . wills, Chairuan m d rederal neserve Agent, Federal Keserve B a n k o f Cleveland. Ase & . Kamsay, Chairman s n d federal Heserve Agent, Fedsral Reserve B a n k o f Kansas City. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis & William F. Ransey, Chairman s n d fec.ral Keserve agent, Federal Reserve B a n k o f uslias. rge L . herrison, v e p u t y Governor, F e c c r a l h e s e r v e Kank o f N e w York, a n d .ecretsary t o the Conierence of G o v e r n o r s . PROC LLDINGS Vice Governor Platt: Gentisnen, w e have 6 rather long prograni a n d I suppose i t i s sdvisable that a s get started a s prouptly 3 . w e Can. I know y o u s l l regret t h a t Governor Herding i s not here t o conduct t h e proceeaings, end i t b e c o u e s m y d u t y t o o p e n t h i s conference. The Bosrd h a s n o consid-srable number o f things to the progrsem, w h i c h 1 think y o u will b e glad t o know. The p r o g r a m i s alreedy l o n g a n d h a s m a n y i n t e r e s t i n g t h i n g s on it, a n d i t i s the ides, I rregune believe, o f t h e Board a n d i o t t h e Conrerence also, t h s t t h s aiscussion o f t h e Federal kKeserve erédit policy will come a t the Joint Conrerance, a f t e r y o u ge. tlenen h a v e c o . p l e t e a y o u r s e p a r a t e conferences a s Governors a n d Federel heserve agents. T h a t Joint Conference w i l l perhsps b e h e l d o n Thursday, although I do not know just w h e n y o u are likely t o get through, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 5 evening. slthough I suppose i t will probably b e Wednesdey perticular I do not know that i t is necestary t o call thet is, 4 s sttention t o the various i t e s o n the progran, others. to s o u e o f t h e m b e i n g m o r e d i p o r t a n t t h s n uany o f has n o very great then a r e matters w i t h w h i c h t h e B o a r d them. Richiond, concern, slthough the Board i s interested i n I believe, i s going t o bring u p the interesting question with regard to the interpretation of the word "borrower", with the Board's having been i n more o r less discusgiop i s the borrower counsel a s t o whether o r not t h e ensorser t h e maker o f the or uhether t h e borrower i s necessarily note, o f some T h e question caine u p o n the redis@unting t o various cattle paper, a cattle desler who sold cattle tarmers a n d took their notes. I n this case t h e Board l s a n d t h e rederal trying t o help t h e r a r e r , theobetically, reserve c a n k i s trying t o sit o n hin. o n t h e progran, There i s one juestion which i : n o t p e r h a p s shoulda h a v e but w h i c h i s rather i n t e r e s t i n g e n d o f resome little Giseussion, a n d that i s the yuestion following the long practice i n the Comptroller's warrant, with Ofrice, a n d which may have some setual legal gola certiriregard t o reserves r o r Netional Banks, t h s t https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 6 cates, before t h e y were made legel tena-r w e r e l e g a l reserve t o r national banks b y a spsciriecstion i n t h e Act. subsidiary s i l v e r s a s c o u n t e d a s r e s e r v e i o r n a t i o n a l bénks, end the Federal HKe.erve A c t esys that f o r purposes o f reserve agsinst ceposits lawful money shall b e reserve. Lawful m o n e y a p p e r e n t l y m e a n s a n y k i n d o f 1ls.tul L o n e y r e e gardless o i whether i t i s legal tender t o r only 2 5 cents un /Linited any tor tenacr legal is i t or ,10, o r whether smount. I i x ever brought t o the t looks s g i r the thing, direct issue, would meke i t necessary tor u s to decice that even nickels s n d cents s a y b e counted a s reserve i n reserve banks. However, i t i s not 9 watter t h e t will sffect t h e d h a t w e would like t o do, percentege o r reserve a t all. t o c u t o u t t h e sub- snd w h a t t h e B o s r d h a s v o t e d t o do, & sidtary s i l v e r r r o m b e i n g c o u n t e d s s reserve, i n the hands ter h a s b e e n p l a c e d ur. Curtiss: I a n d t h i s niat- o r t h e c x e c u t i v e Consiittee. s not thet s B Vice Governor Platt deserves a little aiscussion, is o f g r e a t i m p o r t a n c e , but I s e a l in L u b u t it t h i n k it a m -entioning i t s s o n e o f the thines thst i s n o t o n ths prograi. Then there i s s question, w h i c h perhsps should b e civen https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 7 s little consideration b y the Fedsral Meserve Banks, w h i e h hseve fiscal sgancy w o r k tor t h e War #inance Corporation, and that i s the metter c r reimbursewent o f expense. K a n a a s City h a s a s k e d r o r s o m e sadditional reisibursenent f r o m t h e jar Finsnce Corporation r o r overhead, space, e n d s o forth. i n the w e y o f rented T h e y have kicked sbout i t , b u t t h e Bosra has tsken t h e position that t h e sensas C i t y Bank should not have a n y reiubursement r o r items which a r e not reinbursed t o the other banks. w e would like t o have a careful sccounting kept o f ell the items which should be reinbursed, s o that w e m a y h a v e t h e thing o n 4 strictly commercial basis, s o that w e may have some record o f whet the Federal Keserve system i s doing for the War Finance Corporation i n the w a y o f helping i t along. I understand that efter this joint meeting the Gove ors are t o meet i n Governor harding's room, e n d thet the “gents. will meet here. a s t o the progrecs o f the meetings, gentlemen, y o u will let the Board know shen you are resdy for t h e j o i n t conference, I ur miller: presuie. I s n ' t i t desirable t o have 6s commit tes ot t h e Governors 4 . d Chairman g e t together i n order t o determine a t what time they expect t o finish their respective https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 8 programs s o that w e will know w h e n the joint Conferense c a n be held? think that i s very desirable. Vics Governor Platt: I ure bilLlers I should think they could c o that soiie tine during t h e course o f the Gay e n a report tomorrow morning i n order thst w e mey know whether t h e final joint c o n ference i s likely t o b e o n Thurscay o r Friday. Vice Governor Platt: I f n o other i.ember o f the Board think thet i s all 1 have t o say hes anything t o ssy, I in the w a y o f starting things off, a n a 6 motion t o adjourn the Juint Conference i s i n order. uP, Hemiins I s o move. (The motion, b e i n g duly seconded, w a s esrried, a n d the joint conference sajourn a t 10:50 6 oiloce 4. m , t o recon- yene o n Thurscay, vetober lz, 1922, a t ten o'clock a. m., pursuent t o sqjourm.ent o f the separate conferences t o pe held b y the Governors o r t h e rederal heserve Banks a n d the Chsirnen s n d cederal n e s e r v e a g e n t s Benks. ) o f t h e Federal heserve https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis PROCBADINGS OF 4 CONFERENCH I T H T H E rRLERAL osc KVE B O A R D U r T h E GUVeRKNUdS aNbD C H a t h u c N WRAL nese RVE A G E N T u s T h e F e n rAl nESERVE BaNas bECOND U A Y . aashington, 4. C., Thursday, October 12, 1922. The Joint Conference o f the Federal Keserve Board with Governors a n d Chaim:.en s n d r e c e r o l n é s e r v e A g e n t s o f Fed ral kes r v e Banks rseeu.vened i n the Board n o o m o f Federal n e s e r v e Board, T r e a s u r y Building, # 8 chington, b. Ce, O n Toursday worning, Uetober 1 2 1 8 2 , a t 1 0 oO ciock O.fie, pursuant t o saGjournnent o f Tuesaay, Uctober 10, lvze. A-pearances a s incicated i n Tuesuay's proceedings, PnUCsnw thus Vice Governor Platt: G e n t l e m e n , t h e mzeting will please cone t o orar. w e have a rather long, b u t interest- ing program. First o f all I want t o say that i t seems t o me that this conference, s o tar s s I have heard o f its proceedings, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis LO hss b e e n v e r y s u c c e s s f u l e n d v e r y e x p e c i t i o u s or tronsatcting i t s business. i n the w a y I n s t e a d o f having a geieral discussion this morning o n the topics that have b e e n aiscussed a t th: conference, i think w e should have 4 brief report o r statement f r o m Governor strong a n a from “Pr* ~errin with regard t o the separate conferences, a n d then plunge imusdiately i n t o t h e resaing o f pspers a n d discussion o n the Federal keserve credit policy, w h i c h i s the chief matter i n which I know y o u ere 3 1 1 interested. Governor strong, w i l l y o u please s p e a k f o r the Govern- Governor strong: for this meeting was, I 4 s IL stated l a s t night, o u r program think, t h e shortest i n nuuber o f topics t o b e considered, t h a t w e have h a d a t any meeting of t h e G o v e r n o r s t h a t I I think I recall, a n d i n ordér t o ssve t i m e will refer only t o the one most liportant topic that w e h a d t o discuss, a n d that w a s t h e review o f t h e work of the committee t h t was appointed last acril t o execute, orders i n investment securities r o r t h e twelve reserve benks. Ehen that comuittee w a s appointed l e s t April, somewhat inspired, a s y o u know, b y t h e kKeserve B o s r a a n d b y t h e https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis at Treasury, t h e r e were cértain speciried things t o b e a c c o r plished b y the Committee, b u t the Committee wss not invested w i t h a n y di: cretion whatever, orders, i t w a s s i m p l y t o execute s o that t h e interests o f both t h e Tressury a n d the Reserve Banksand o f t h e market f o r Governiient c u r i t i e s would b e protected, The work o f t h e coiniittee hes, w e believe, b e e n hanGled successfully. I t hss exscutea o r u e r s aggregating, in round figures, ,200,000,000 i n the various issues a f governnent bonds, securities a n d notes; a n d i t i s 6 significant thing thst o f the ,200,000,000 buying a n a selling orders executed, only »84,000,000 were executed i n New York, the rest being distributed among #11 the other reserve benks, a l l b u t o n e o r two, s n d t h e r e z o r e c e r t a i n l y o n e o f the results o f the coiviit tee's operations h a s b e e n t o protect t h e market e n d the deslers i n the other reserve b a n k cities, Now, i t was felt b y ur. Gilbert, m d i think very strongly b y some menbers o f t h e K e eral hessrve Board that possibly the scope of the comuittee's ectivities might be «lighth}y extend.d, snd at a meeting held i n New York on uctober 2nd, which bre willer attended, w e discussed that https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 2 matter a t grest length a n d found a good deal o t dirficulty in dsvising ¢ formiuls, s h i c h would not sppear t o the reserve banks t o b e 9 surrender o f some o f their sutonony, and o f the suthority o f their boards o f uwirsctors t o control their policies, w h i c h certainly w a s n o t the intention of the conmittes t o suggest, a n d finslly a t our neeting yestsrasy w e devised s forimls, sading a n eadditionsl cuty to t h e work o f t h e conmittee, i n the foliowing langusge: The committee recoumenas continuance o f making reports, snd s o on, 3 8 formerly authorized, a n d i n view o f the foregoing t h e coumittee further requests t h e conrerence t o adda to t h e d u t i e s o t t h e canmuittee t h e w a k i n g o r iecom.enus-~ tions f r o m time t o time t o each Federel reserve b a n k a s to the a d v ability o f purchasss o r sales o f Government securit ies, which recommendations will i n every case receive serious con.ideration b y the orricers o r directors of the several benks, It i s n o t intencued b y that, tpesaking r o r t h e conmittes,’ to d o any nore t h a n convey t h e t t h e y hope will b e valuable intormation t o t h e hKeservs b e n k s . mr, Perrin: W i l l y o u kindly read that psragraph again, Governor strong? https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 13 Governor strong: I will read t h e last paragraph: ‘in view o r the rorsgeing,” that i s the report i n fulle-- “ t h e comuittee turther r e .uests the Conrerence t o aad t o t h e duti=s o r t h e couwnuittee t h e m a k i n g o f reconmuen- Getions f r o m time t o time t o each rederal reserve b a n k 4 6 to the advisability o f purcheses o r sale. o f Government securities, w h i c h recomucndetions w i l l i n :very cese receive serious consicderstion b y t h e oriicers o r cirectors ot the several banks." I That was sdopted unanimously b y the Conrerence. t is the Committee's belier thet, b y I r s j u e n t conferences emcng themselves, s n d b y keeping close »-tch o n the merket end b y keeping closely i n touch with the rederal neserve Board s n d w i t h t h e o r r i c e r s o f t h e Treasury, t h a t t h e s e recommendations might serve t o be soue guide t o the cirectors o f t h e F e d s r a l r e s e r v e b a n k s i n c s r r y i n g o u t a which will spply t o the system a s a whole; ant p a r t t h a t I would l i k e t o emphssize policy a n a the import- i n regard t o this eddition t o the couwsilttee's duties i s this: T h a t vetween january of this year end the tine of the Committee's orgsnization i n way o f this year, m a y i7, I think i t was, the Federal res-rve psnks, without a n y community o f interest, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis i4 or without a n y diiscussion o f policy, standing, I o r without a n y u n d e r - tear, s » t o the s i g i r i c a n c e o f their collect- ive section, w e n t i n t o t h e narket s n d pur hesed 3 tive hundred millions totel o f i n Govennment securities i n order to make sarnings, a n d i f you appreciate, a s 4+ au sure y o u do, t h e possibilities t h a t might result t o our credit position i n this country f r o m lack o f 3 policy t o shape o u r forces i n waking that vest investment, y o u will reslize t h e possibility o g dangsr t o t h e country f r o m t h e railure to heve some regulation, s o m e control, s o m e uncerstanding, the c o m m i t t e e w a n t s t o draw a and very c l o r e distinction b e e tween a n y etiort t o control o r direct t h e action o r menagement o f the twelve red-ral reserve banks a n d the sup: lying of those banks w i t h information which will l e a d t o the carrying out o f s n intelligent s y s t e m o r policy, t h e wmmmuittee simply bein. the instrument t o execrte t h e ordsrs o f thse reserve banks i n cerrying o u t thst policy. iY, nitcheli: f T woula like t o a s k 4 question, whether y o u m e a n t h e t b e f o r e = 3 s to re.sral r e s e r v e b a n k c o u l d go into t h e market a n d make a n y invectisent i n government securities, t h e matter should b e taken u p «ith this conmit= tee? https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis LS Governor otrong: I t would sutowsticeally b e s o anyway, wr’ witchell, becsuse, undsr the srrangement thich has now been i n rorce f o r nearly s i x months, t h s orders a r e a l l sent t o ths comuittes, s i t h t h e exception o f transactions which teke plecs between t h e redercl necerve banks s n d their meabers, over the counter, s o t o speak, e n d whensver 6 reserve b a n k i n t e n d s t o nake 3 purchsse o r sale t h e con- mittee i s inmediately notified s n d the order i s aistributed by t h e comilttee anong t h e dirrerent receral reserve cistricts, s o t h a t o u r s t t e n t i o n w o u l c b e brought s dscision b y a n y reserve b a n k t o make sither 4 sale, know, I a t once t o purchase T h e present practice h e s been, 2 s y o u all think, t o send a telegram t o every reserve b a n k practically every day esdvising whether the Tressury hss orders o r whether the’ reserve banks a r e giving orders, a n d then every dsy 8 letter goes t o each reserve bank .iving 8 suumary o f everything that i s done. I went t o suphesize, ur. sitchell, . h s t 1 eaid before, thet t h e coumittes isnct gssuming t o clrect o r control o r mensgs t h e i n v e s t u e n t a c c o u c t o f a n y reserve b simply e n instrument t h r o u g h w h i c h t h e p o l i c y o f t h e s y s t e m 3g 8 whole w i l l b e executed i n the markst without aisturb- https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 16 ing the merket. u y hope i s that t h e system, a s a result of today's conference, w i l l edopt a policy, s n a that t h e committee will b e i n a position t o execute thse orders thet result f r o m that policy, rathsr t h a n attsapting t o shape the policy. ur’ willer: w o u l d y o u siind reading t h e last p r t o f thet report again, Governor strong? might csy, Dr, miller, t h e t t h e Governor Strong: I first part o f this report simply ctetes thet i t wes prepered i n New York--ure Miller: I Governor strong: understand that, Governor. # I n view o f the roregoing the Cone mittee further re.uests t h e Conference t o acd t o the duties of the Committee t h e msking o f recomendations f r o m tine t o tine t o each federal reserve b a n k 3 s t o the sdvisability of purchssée o r sale o f governient s e c u r i t i e s ur’ wuiller: T h e a t i s ell 1 wanted. is the committee t o make recomendations O n whst basis a s t o the advis- ability o f purchase o r sale? Governor otrong: I think w e will have t o work that out w i t h the Board a n d with t h e Treasury. T h e only object immediatsly t o b e gained b y this i s t o create a n instrunent 17 through which e*dvice msy b e sent t o the reserve banks, which w e néver have heretorore done--= t h e c o m i t t s e h a g never undertaken t o say t e any reserve bank t o do this o r thet t o r t h e reason thet i t might b e a goagi p l a n t o buy something orp thet it might be 2 good plan to sell soiething. wY ldller: I t struck me, a ¢ y o u read it, that t h e coftiuittee was more f o r the execution o t ordsrs t h a n cystene ization o f operetions, a n d thet i t was also s policy conmittee, w i t h n o poltey inuicated. Governor strong; T h : r e i s n o policy incicated. 5 do not think t h e conmi t e e could assume t o indk ate a policy f o r t h e system. ure willler. mendations w h e n you set u p 3 coOmmittes t o ake recon- a s t o sdvisability ssRoksan hoes p o l i c y G i m d t t e e , o f purchese o r sale i t i n u n l e s s y o u ¢lsewhere indicate thet the policy ror the Feaersl ressrvs banks i n this metter i s t o b e otherwise determined. Governor strong: w e l l , sir, £ sm hoping that this meeting n a y develop w h s t that policy should be, aur’ killer: Yes. Governor strong: a n d t o confine t h e work o f the cou- mittee e s nearly t o purely ministerisl tunctions a s porsible. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 18 think i t would b e well t o cover that ote MiLiars I in your report. do not think i t could have b e e n Governor otrong:; I covered i n the report. mean i t i s i n accordance x i t h whstever hy, miller: I is at the time being formulsted o r adopted e s the investment p o l i c y o f t h e F e d e r a l r e s e r v e system. T h a t has teen outlined i n the pre- Governor ~trong; vious part o f the report pretty well. T h e previous pore tion o f t h e r e p o r t # s s i n react s n snuorsement o f 2 @ Yr .coMm- mendation o f the Kederal Advisory Council s t its last neet- ing, a n d the statement that t h e present conditions require prinarily s e regerd f o r the money warket, c r e d i t conaitions and operations o r the Tressury s s the controiling rectors in arriving s t a policy. ur héetlin: T h e word "primarily" w e s stricken out. I Governor strong: t w a s o r i g i n e l l y “exeluscively", or "solely", e n d t h e word i s “particularly”, 4 wr? Hemlin: I think, now. t i s much stwonger 3 s i t was left t h a n it was 3 s originelly .rswn. Governor strong: is. T i e Advisory's Vouncil's section T h e action expressed i n this report o f the comuittee https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 19 is not quite 4 s strong a s i t wa. aicteated i n New York. f think that i s ail t i Vice Governor ~latt: n e , «ur, Cheirman. w e ? e r r i n , w l l l y o u report briefly r o r the Federal Reserve Agents? nye Peprin: b i r . Cheirnan o n d gentlemen, o n behalf o f the Fedsral neservé agents I want t o ssy a word of our appreciation o f the hospit l i t y s a d courtesy t h e t t h e Board always extends t o u s w h e n w e come here. I t seems t o m e thet these conirsrences are a good deal stter the feshion o f Antaeus, w h o renewed h i s strength b y t o u c h i n g t h e esrth; it s e e n s t o n e w e g o back, a f t e r h a v i n g c o n t e c t i i t h t h e with s e c h other, h s v i n g d e r i v e d a broader uncerstanding snd wuch péuerit i n every way. “@ 8lso have h e d 6 briet prograiu. w O s t o f the subjects were those which s é provided ourselves, a n d upon those l -L1ll igske n o report. T h e r e w e r e , houwsver, t h r e e o r f o u r subjects r e s e r r e a f o r c o n s i v e r s t i o n Bosrd. b y t h e Feaeral neserve O n e w s s with regard t o uniron.ity i n the penalty tor deficiency i n rsserve, a n d o u r conrere:ce r e l t thst i t s h o u l e b e r e x e a i a l r a t h e r t h a n wancatory, gard t o t h e luposition o t either 9 w i t h re- progressive o r penalty rate, a n d e v e n though t e n per cent w a s nade t h e moximum, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 20 3 s a nexiit was agresd that i f t e n per cent v a t desirable chergs, a ian, i t should n o t b e obligatory t o inipose, sny c o so, beyona the receral .eterve b a n k snould n o t uwesire t o the the regular Giscount rate, b e y o n d thse provision i n @ charge cof regulation o r the Bboara that there should b e two v e r cent. jinor The second wes uhether subsicaisry coins 3 n d coins s h o u l d b e c o u n t e a the r e g u i r e m e n t 9 s reserve without rererence o f t h e law. i t to m L voted that i t was un- desirable t o count t h e m 6 s reserve. 2econd, therée w a s 4 request, c o m i n g i r o m U n a e r w c c r e - segregated i n the tery Gilbert, t h s t non-cash reserve b e weekly report. o n thet 4 , vote o f spprovel w a s adoptea matter a n d i t was referred t o the Governors’ Conference with a request r o r their action. was a general report, incicating general confidence, . oppozrition t o the @ comoarec notes, t h a t t h e out. par collection tystem a s greaually aying sere rererred t o That comprises 311 thesubjscts that us a n d u p o n w h i c h Vice G o v e r n o r Platt: T i e r s 1s & p r o p o s i t i o n c e auing t o turther itemizing, fro. t h e s e e r e t a r y w i t h rererence https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 2h in t h e w e e k l y s t e t e u e n t s , ties. t h e holdings o f governi.ent s e c u r - u r , Gllbert thought i t w u l d b e advisable i we could have t h e United states bonas, Victory notes, a n d s o forth, 6 1 1 separstely stated. I t would a d d a additionsl lines t o the report a n d 4 nu.ber o f do not know «hether it i s t o b e considered necessary o r not, b u t there should be some consideration given t o it. i think the nost interesting subject t h a t i s bevore u s is thet matter o f investment ingovernusnt securities. Y o u sll know the Tressury's attitude end the attituae o f the Advisory Council, w h i c h i s what started t h e matter a n d got i t o n the program, a n d 1 want t o ask, berore w e plunge into the discussion o f credit policy »hether® any uaicsuber of the Board d e s i r e s t o say sonething o n that. o r e wil- ler? inrPe miller: I think, war. Chairman, t h a t s o m e r e f e r - ence ought t o be mede, a t one o f these joint sessions o f the Conference, t o the work o f the ..embers o r the coumittee on ELeonemy snd Arriciency, e n a the so-called suxilisry Coumittee that i s coopersting with the Board i n this work. I gather t h a t t h i s m a t t e r h a s h a d s o m e a t t e n t i o n f r o m t h e https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 22 Conrerence o f Governors, h a t i t not, Governor strong? Governor strong: ur? willer. s Y e s , i t has. o thet perhaps i t i s n o t necesssry t o cay much more than t o give o m e inauication o f whet the rurther program o f the conmittee is. You 311 know thet t h e conuittee w e s s n outgworth o f suggestions s a d e a t the time thst w e were i n contfer<nce 4 year &go. T h e Boerd t o o k t h e initiative i n this motter because 2 great m a n y criticisms o f t h e neserve cystem were being made o n the score oftheir unneces.ary expense o f operation, a n d the responsibility o r snsvering these criti- cisus--= wany o f which eusnated rrom 7Congress--- reil t o the Board. a n a that merely served t o remind t h e Board thst i t hid a very important responsibility i n this mwatter, ingssuuch 2 s i t i s charged i n the neserve a c t w i t h the duty o f approving coipensation s n a exzenuitures t h a t are voted b y the bosras o f directors o r the ulrrerent banks. The Bosrd, i n order t o more fully inrorm itselr, a n d to b e i n a bett r position t o a i c c h a r g e i t s responsibility, set u p a couwittee, a n d that co.mitt:s, a s the first s t e p in its work, s e t stout getting inrormation fuller i n character s n d more satisfsctory i n torm than a n y thet w a s https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 20 avellable a t the time. A S y o u know, 8 czllwss sent o u t in becenber, 1921, t o get, i n conpsrable rorm, d a t a f r o m all the twelve Federel reserve banks w i t h respect t o the costs o f o p e r s t i n g t h e i r d i i f e r e n t G - p a r t n e n t s , e n d i t was net until warch o f 1922 thet t h e re;lies w e r e a l l in. when they were tebuleted s n d s e t u p i t soon developed t h a t they w e r e n o t o n l y u n s a t i s f s c t o r y ly i n e d e q u a t e t o r thse purposes i n themselves, b u t utter- o f t h e committee. The tiethod of reporting expenses b y the dirrerent banks s h o w e d s o i a n y v a r i s t i o n s t h a t i t w a s Lipossible, és things then sere, t o get 3 conspsctus o r what the aitrerent banks were psying tor the perrormance o f diirterent functions, I will ssy here, parerthetically, that the winite tee f e l t t h a t t h a t i n itself w a s a n e x t r e m e l y s e r i o u s r e - tlection o n the way i n which things have been ueneged the Federal Reserve systen, s cerious reflection, o n d it was impossibie for the Board, o r for any caiiittee the Federal Reserve banks, t o gst a picture o f how the different banks o t the systen were functioning i n performing their ditrerent functions, when that matter was viewed from the stendpoint o f operating economy o r operating efric iency. The cowilttee was, thererore, coutrontec with the alternetive o f either reconmending t o the Board a n d t o the https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 24 banks t h e adoption o f a n entirely n e w f o r m o f sccounting, which would b e uniform ror all the banks, or, without disturbing the existing accounting methous, t o devise some method o t reclassifying existing set-ups t o that i t would give t o our comuittee a n d enventually t o the banks, soiiething substantislly o r approximately accurate i n form a n d so s e t u p a s t o s n a b l e c o m p a r i s o n s t o b e mace b e t w e e n t h e costs o f operating depertments i n the dirrerent Federel reserve banks, 9 s well 9 s certain unit c o s t s o f opsration, stated both i n terus o f money ezpense a n d i n terms o f labor expense, b y which I mean t h e nunber o f men, o r number o f women, #ssigned t o psrforua certain runction, For that purpose, then, 3 conference w a s called i n Chicago o n the 28th o r April, 3 s 1 rénenber it. I have the dste s e t down here, b u t i t i s not o f particular consequence, 4 & schedule w a s work-d o u t b y the suxiliery Conmit- tee, n o t e b l y b y « r e C r a m e r , v e p u t y G o v e r n o r o f t h e B a n k of Chicago--- w h o was meae ¢ wenmber o r the Auxiilary Coumittee because o f the isct t m t u r . Calkins resigned o n ace count o f the Gifificulty o f attending rrequent meetings of t h e conmittee--- a n d thet schedule w a s eubmitted t o the Chairman o f the C o m i t t e e o n Procedure o r xconoi.y o f t h e https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 25 twelve Fea:rai reserve banks, w h o .et i n conferences i n Chicago. I t was subjected t o a gooa cesl o r guestion ani criticism; i t was suended a f t e r s ciscussion o f s o m e - thing more t h e n two days and, together w i t h # manual o f instructions, w a s circulated t o the banks soon therceefter, with t h e reyuest t h a t s u c h banks w o u l d make 5s report covering t h e month o f June, t o besubiuitd e t to the Board i n July. A iinited number o f the banks w e r e able t o d o that, b u t i t WSE n o t until t h e month o f July that thse returns under ~cheaule & came i n fron s l l t h e banks, T o d a y w e have re- ceived information t h a t t h e reports under ~chedule E , cover- ing the months o f July, August a n d september will soon be ave@ilable, T h o s e a r e n o t only i n the hanas o f the cone mittee, b u t o n e copy o r this r e p o r t h e s b e e n distributed to each o f the Federal reserve banks. w i e o f t h e banks hsve requested that as many as ten or tuelve copies b e furnished them s o that they could be aistributed t o the heads of t h difrrerent operating cepartments,. T h e coinuittee has felt that i t was undesirable t o d o thst, but that i s a matter upon which i t might b e well, i f you have sny views o n i t at this tine, t o express a n opinion, f o r the reason t h a t w e f e l t t h a t t h e g o o d p u r p o s e s o f this r e p o r t https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 26 would b e best served i f closely controlled, a n d thst i f copies o f these reports g o t into t h e hends o r uany officers, perticularly the junior ofricers, i t would divert sttention from the main object o f the report s n d give rise t o sll sorts o f captious criticisms, controversies a n d discussions, It has Geveloped thet a concica rable nunber o f the benks h a v e m i s u n d e r s t o o d m a n y o f t h e i n s t r u o t i o n s c o n t a i n - ed i n the manual o f instructions, : n d therefore t h e cata supplied i n the report under t h e n e w Schedule & i s linper- tect, a n d w e believe there i s s t i l l 5 consiutrable amount of w o r k t o b e d o n e i n e g u i . , i n g t h e banks, @ common language--- w e are still without @ s o t o speak, w i t h common ianguage-- covering the things thet are metters o f asily routine i n the operations o f all o f the banks, bécause things that t h e committee t h o u g h t w e r e c l e s r a n d o b v i o u s i n the manual epmarenty have given rise t o misconstruction i n certain reserve banks, a n g 8 v o l u n u ef o inquiries h a s b e e n constant- ly coming i n asking r o r aetsilsed aerinitions o f certain terms. w e feel that that i n itsely, a l t h o u h @ considerable burden o n the manittee, it enteliis i s o f grest value. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis PA f it i s e part o f t h e p r o c e s s cees o f development, o f ecucation, a part « s o t o speak, within t h e Fed-rsl reserve system, o f 6 common mind, & common understanding, 6nd 8 S 8 necesrary incident o f that, o f course, a lsnguea ge, t h e pro- conmon # e @ want t o have words used i n one bank con- veying e x a c t l y t h e s a m e m e a h i n g w h i c h t h e y c o n v e y w h e n used i n s l l t h e o t h e r banks. Now, gentlemen, w e heve reached thet tage. T h e auxil- tary Conmittse h e s been studying this matter w i t h s good deal o f intensity lately, a n d i s of the opinion that there should b e 8 conterence o f t h e Cheirmen o f the dirferent econolny o r procedure coiwittees o f t h e twelve Federal re- eerve banks i n the nesr future, soue time before the middle of Noveniber, u r . Cramer thinks t h a t this conference should be held i n Chicego. suthorize a i t is probable thet the Bosrd will cali o f s i c h 9 conference s o e time before t h e micdle o f Novenber, Now, s h a t t h e c o m m i t t e e i s after perhaps neéus a of explanation, e n d then perhaps © necessary 5 word word o f explenstion i s t o why t h e couwnittee chose t h e particular wetho? o f attscking this problem o f sconoilly 6 n d erricie ney https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 28 thet i t did choose. T w o courses seemed o p e n t o u s when we took u p this problem i n Vecenber o f last year. O n e was what might b e celled t h e orthodox, theoretical course, with which enginsers syproach a problem; w e could have the services o f a n eiticiency enginser o r expert, t a k e n trom one o r more o f t h e Fedsral reserve banks, irom the outside, o r engsced t o cet u p a typicsi plan o f orgsnization snd operetion o f a reaersl reserve bank, w i t h the object of getting t h e most eriicient orgsniz ation f o r the soney na t h e r e f o r e t h e m o s t e f i i c i e n b a n d most econouliesl, snd to have s e e n t o what extent changes neeced t o b e made i n the operating orgsnizstion s n d methods o r the dirfrerent l perrect schengs banks i n order t o conform t o this i d e a l y end the other w a s t o assume that w e woulda o n the h o l e g e t the best results e n d make t h e iwost satis factory progress if w e u t i l i z e d o u r o w n e x c e r i e n c e s a n d i f w e went o n the assumption thet right within t h e Fed<ral reserve system we hed t h e besis r o m which s e coulu deduce standards o f o eiricient opsretion, a n d i t measurement a n d p r i n c i p l e s r was t h e latter o f these t w o altzrnatives t h s t t h e wmumittse adopted, for a veriety o r ressons, p e r t l y b e c a u s e t h e c o u - mittee never acsumed thet i t w a s i t s problen t o undertake https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 29 to tell any reserve pank o r all the reueral Neserve banks how they ought t o organize, thenselves m d conduct their business. v @ telt thet o u r relation t o this p r o b l e m would b e most catisfsctory a n d most likely t o produce g o o d results if, s t any rate i n the initiesl steges o f t h work, we confined ourselves t o ostaiblin d a t e s which would enable the Federel reserve banks thei:elves, a n d the cifferent operating departments o f the dirterent banks, they c t a c k e d u p , banks. s o t o sg? T h e t was the psychclogy, i t o determine n caueerison w i t h other s o t o spesk, o n which w e were opereting, t o incite a certain sioumt o f interest m d curiosity, enulation, comparison, sug,estion, confcrence end result. # @ have never preemued--- 1 think i c a n s p e a k f a ¢évery a e n b e r o f t h e coumittese o n this m a t - ter, although w e hsve never taken 3 w r m e l vote o n ite-- end it is rarthest trom our minas of snything--- t o develop or attempt t o set u p snything i n the neture o f rigia yardsticks o f messurement. s h a t w e w a n t t o g e t l s ysrdsticks ol messurement--- i f 1 usy use that phrase with propriety in this uiscussion s t olle-- t h s t grow o u t o r the actusl experience o f t h e Feders] reserve banks. # @ g O not want to import enything i n t o this syste: frou t h e operation o f https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 30 coud: reisl banks o r other business housés; ive want t o develop o u r stendards ccoipsratively, and, i f you please, c o m petitively, f r o m a close a n d constant s t u d y o f that i s going o n i n t h e Feveral neserve system a n d what has gone on; i n o t h e r words, wise stated, t h e m e t h o d o f experiséne:, o r , other- t h e e m o i r i c a l method. Now, w e heven't gotten quite s s large a yield i n this metter f r o m o u r S c h e d u l e ~ e s w e h a d h o p e d w e might, partly b e c s u s e t h e r e a r e d i s c r e p a x ncies i n the r e p o r t s d u e ¢$ to misunderstsndings, b u t a l s o considerable di:crepsncics due t o whet w e hed slresdy forecasted w h e n w e und: rtook this work, although w e had not accurately forecasted the extent o f t h e very divergent conaitions certein departments, p a r t i c u l a r l y t h o s e w h i c h t h e diirer- ent Federal reserves banks opereted, w h i c h i s notably t r u e with respect t o t h t r a n s i t department i n c e r t a i n cities, the cleering house, f o r t h e osfriliatea members t h a t clear through t h e clearing house bénks, w h i c h relieve t h e rederal reserve banks o f e n immense burden o f work. T h e y do @ large amount o f sorting, a n d t h e trensit department o f the Federal Keserve B s n k happily situated i n thet way, nsturslly compares faverably w h e n y o u take into compsrison https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis oe s Federal reserve b o n k that operates und-r utterly difrereent conditions, B u t these sources now beginning t o geome t o light. o f discrepancy a r e T h a t i s one o r the things that w e are cisecovering through this. a great ceal i s being learned, n o t only b y the weubers o f the committee and the auxillory committee with respect t o the citierent réederal reserve banks, b u t t h e difierent rederal reserve banks are 6lreacy beginning t o learn @ great deal about the onditiom u n d e r which ¢ 5 o p e r a t e s a s cOlipared w i t h another. “we expset, i n the course o f three o r rour months, t o bring to the surfece a considerable number a@ these di.crepancies, which will serve a s checks, B o to speak, o f ruture costa thet will cone i n under cchedule i, s o that b y 5 procéss o f correction o n d elimination v e hope, b y ¢ bee ginning o f the next ysar, t o b e sstablished i n a position so that w e c a n 3,ply t h e »roper disc unts t o fisures under Echedule K and get a very close approximation o r the setual ana comparative ccsts o r operating the citierent -epartients in the Federal rerervse tanks, ststec b o t h i n terus o f money an@ i n terus o f labor units. T h e t , - w e béediéve,. w i l l b e of s o m e v e r y a é f i n i t e value. Nor, I do not want t o take t o o much time o n this, b u t https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 32 what I a m saying i s merely r o r t h e p u r p o s e o f incicating that t h e Conuiittee t s hard a t work o n this problem e n d that we all feel satisfied t h a t a very substential beginning has b e e n m e d e - - - a l t h o u g h s l o w i n i t s o p e r a t i o n - - - is just o n e word more: a n d there T h e t w e realize that n o two banks, leest a @ a l l the largest and the smallest, operate under conditions a n d with magnitudes t h a t make a comparison bétween them 9 conpsrably useful a n d productive undertaking. He have olways suspseted, f r o m the beginning, t h a t w e would sooner o r latsr srrive a t t h e stage where, f o r the purpose o r setting u p something i n the nature o f yarcasticks spplicable t o reserve banks, t h a t w e should group t h e reserve banks, a n d that w e should group those benks t h a t h a d more similarities t o one another t h e n they h e d differences, thet either operated und'r simller conditions o r that were of sinilar size, o r were i n other ways fairly caiparable. It has been extrenely interesting t o the committee, gratitying, a n d i n accordance w i t h o u r expectations i n t h e iatter, thet the banks thenselves.are sircady beginning t o group themselves, a n d thst many of the inquiries they make grow out o f t h e fact thst t h e y a r e n o t conparing themselves with the reserve bank average, including the largest and 33 the smallest, b u t a r e compsring themselves w i t h those r e - https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis serve b a n k s t h a t t h e y t e e l a r e p r o p e r l y c o m m a r a b l e w i t h them b y r e a s o n o f s i m i l e r i t y o f size a n d similarity o f conditions, At the conierence i n Cgicago next month w e hope thet, without v e r y much intrusion o r suggestion f r o m the @mhudittce, the banks themselves w i l l come w i t h their o w n sugsestions ss t o the groups that they think ou, ht t o b e set u p a n d sg t o the groups i n which t h e y think t h e y ought t o b e included. cases, 2 T h e committee i s o f t h e opinion that, i n some reserve b a n k m a y sppear i n nad o n l y o n e group b u t in two o r three groups; i n other words, that certain o f its operating departments suggest comparison s i t h come operéting depertment i n certain other reserve banks e n d certain other op2rsting cepartnents rether suggest that they s h o u l d b s g r o u p e d w i t h a cirferent g r o u p o f r e s e r v e banks; a n d so, by 2 process of constsnt comparison, ren comparison, b y elininetion s n d ‘inclusion, w e hope finally to get together those members o r the rederal reserve f a m i l y thet are of like stature, like weight, and of likeness i n other respects, and to treat that group 6 s 2 group, 4nd when w e s r r i v e s t t h e p o i n t w h e r e i t i s n e c e s s a r y t o bring https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 34 in, i f you please, t h e efriciency aoctor, hin i n t o a group, w e will bring a n d w e s h o u l d h o p e t o f i n d t h a t e r f i c i c ney aqoctor right within t h e group. Nov, gentlemen, t h a t i s the principle o n which, nearly 8 s I can express i t , t h e coimittee other words, 4s i s operating. w e are going t o work fron. within out, I n m d as the w o r k becomes more a n d more concrete, i t i s going t o become more i n the nature o f group work, i n which t h s ex- périences o f the group a n d t h e ability o f the group a r e t o be t h e siain s o u r c e r r o m w h i c h c e v e l o n u e n t o f n e w sources or efriciency a n d o f sconomy w i l l come. Now, o n e sord i n conclusion: I want t o repeat that this coumittbee w a s < e b u p originally i n order t o enable t h e Feosral K e s e r v e B o a r d t o u i s c n a r g e i t s v e r y i m o o r t a n t f u n c e tion unaer t h e l a w o f psesing u p o n t h e opersting c e ts o f the Federal reserve banks. T h e Government h a s 8 s stake in the proceeds, t h e earnings o f th: se banks, a n d t h e earne ings, o f course, a r e i n considerable m e s s u r e dependent u p o n the o p e r a t i n g costs. I t i s necestary, t h s r e r o r e , for the Board's inioruwation s n d r o r t h e proper discharge o f its function, t o have sone usthod o f inrorming itself, o t h e r then w h e t i t h a s h e d i n t h e p e s t - - - w h i c h h s s b e e n p r e t t y https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 35 near nothing--- and 1 should say---- and I an now speaking tor myselr individually, e s I have not cis cussed this w i t h any menuber o f the comnittee--- but v,eaking T o r myselr incividuslly, I should s a y this, t h a t 1 think i t i s t h e hope and e x p e c t a t i o n t h a t t h i s w o r k w i l l u l t i n a t e l y y l e l d r e - sults t h a t c m b e utilized e s the basis o f the salaried poliley o f the Federal Reserve Board; i n othsr words, t h a t the Federal Reserve Bosrd, i n passing upon the recomimendations f o r salsries i n the ditierent banks, particularly where i t concerns t h e operating departnients, w i l l have t o give co.e attention t o the evicences o f erficiency a n d ec@nony w i t h w h i c h s being operated. I givenbank given depsrtment i s n other words, t h s t w h o e v e r heppens be the head o f t h t department ofticer; or 5 h e is thre i to s there a s a n operating t o d o h i s w o r k e r r i c i e n t l y a n d econ- ouicelly, a n d thet thst must becouwe 3 factor i n the decisions n o t only o f t h e board o f directors o f t h e bank but @lso i n the deliberations o f t h e Federsl Neserve Board in dst rmining u p o n t h e propriocty o f 8 proposed salary i n - ase. I n o t L e r words, m y hope i s thet w e will, through this, gradually bring i n t o t h e sup-rvision o f the rederal neserve cystem something i n the nature o f primary business https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis principles, iy o w n view i s that this ought t o b e extremely helpiul t o the operating oiricers a n a chairmen o f these banks, To m y mind there i s nothing that s n y m s n w h o hss an active sense o r responsibility, dislikes more t h a n t o #ork without lindt, t o resl that h e i s the head o f a n ine stitution where costs don't count, o r doen't count except 4S u e politicisn i n .ashington, f o r exsuple, objects, a n d Federal reserve banks e r e i n this unique position, t h a t they a r e g r e s t b u s i n e s s - r g a n i z a t i o n s t h e t s r e b e i n g p b o - teetsa r r o m competition w i t h a n y other t y p e o f institution, except i n t h e metter o f buying services. T h e y a r e not competing r o r business; t h e y a r e monopolists i n their field; they have n o large body o i shareholders t h a t a r e querulous about dividends; t h e i r o w n directors s n d o r f i c e r s sny s t a k e i n t h e banks, e x c e p t t h e i r reputations. W v e not T o my mind t h e F e d ral keserve Board w a s psrtly s e t u p because of that réther pecullser and snoouislous position o f the Federsl reserve banxs, a n a I 8:. sxtremely anxious t o see the federal reserve banks anda t h e system ¢ s8s whole give e n account o f themeelves thet will b e reassuring rather than Gisturbing 3 s t o the potentialities o f enterprising busi- https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 37 ness, O f a charecter s u c h 3 8 t h e réserve banks are, where stimulus, w h e r e t h e insentive o f profit s n d the incentof p e c u n i s r y a u v a n t a g e i s s l t c g e t h e r removed. Now, thet represents--= s n d let m e repsat again, n o t the view o f the Comittee, because w e have never aiscussed thise-- b u t i t represents m y personal view, and, I mention it o n l y b e c a u s e I ful sccomplishnent feel t h a t t h e s u r e s t h o p e r o r t h e s u c c e s s o f this work will come through = cordial cooperstion o f the banks w i t h one another # n d the banks a s @ whole with the Board, i n trying t o utilize our experiences, as something thet gives support a n a encouragement t o the possibilities o f government o r seni-governnent hsnaling of business, w h e r e i t i s l e r g e l y pubiie than t h e reverse, a n d I think J when I i n cherscter, r a t h e r spesk r o r the conmittee say t h e t a l l o r t h e i n d i v i d u a l s w i t h t h o m t h e c o m - insttee has been brought into contect i n the ditfrerent banks, p a r t i c u l a r l y t h e U h s i r u a n o f t h e Y r o c e d u r e a n d ecunomy Conmmitties t h o have this . o r k more inmedbtely i n hand, h a v e entered w i t h resl e n t h u s i a s m a n d zest into t h e work, a n d 1 think they feel thet not only i s thsre going to r e s u l t f r o m t h i s 3 c o n s i d e r a b l e iniprovenent i n t h e sct- ual opersting o f the dcitrerent banks, b u t t h e t tle re i s https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 38 a good uéal o r tnstitutional prid: a n d enthusissm i n trying t o meke 9 record f o r the banks eas being banks that will messure u p t o the best institutio:.s o f similer nagnitude snd charscter, w h e n y o u apely e n y reasonable t e s t o f sconony end eificiency. And, further, take advantage a o n behalf o f t h e conumittee I want t o t h i s opportunity t o bespsak f o r this work, w h i c h i s y o u r work, y o u r e s r n e s t s u p p o r t , T h e Board's committee i s handling this, s o t o speak, w i t h hends ort, fare, i e have n o d.sire t o ‘ntrugé, n o desire t o inter- v e are working through t h e auxilisry committee, the auxilisry committee being s committee o f t h e banks a n d being t h e reel conidittee i n this metter; w e take n o step without their sccrovel, a n d uwany o r the steps thet a r e taken s r e taken innediately s t thelr sug-estion a n d o n their initiative, snd thererore I say savisedly, “your work", or “ o u r work", a n d w h e n y o u géentle.usn d o n o t h e a r f r o m us, ren.cuber that w e are n o t asleep, b u t thet t h i s work i s going constently forward. K h e u w . e n b e r that there a r e t w o men w h o are practically giving 3 1 1 their tine a n d con- stent e n d close attention t o the developient o f t h e method 39 ofhsndling this problem which w e criginally chose. t h e right method, s v e n “pore amid more sstistied that i t & https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis w e a r e though i t igs a little slow, o n d w e sre satisfied i t is the right method, because i t stinulates 8 little antagonism, gslittle fsult finding, which seems reasonable a n d natural, pecause i t is already bringing t o light things which almost suggest their o w n linueaiate reuedy. Vice Governor Platt: v o y o u care t o make o n y state- ment, m r H a m l i n ? ur’ Hamiln: N o sir. Vice Governor Plstt: w r ’ witchell, have you any subject thet you wish to bring up before the conference. mre Mitchell: of s Gentle..en, I a m v e r y niuch i n r a v o r unirorm policy a m o n g t h e Gitferent f e d e r a l Reserve Banks, that is, s s nesrly uniform 9 s i s possible, a n d one thing t h e t I have i n sind t h a t I tion t o i s t h e r e b a t e p o l i c y want t o c a i l y o u r s t t e n - o n unsarnea Giscounts p a i d t o a member b a n k w i s h i n g t o a n t i c i p a t e p a y m e n t count, I o f t h e redis~ think that rebate policy ought t o be uniform snd I cannot s e e sny reason why the policy t o be edopted should not b e @ rebate based o n the rederal Neserve B a n k the rate a t the time the rebate i s made, 9 n d not at/. rate a t https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis which t h e rediscount w e s aace. Now, there m a y b e srguuents against that policy, b u t it seems t o me thet whatever policy i s saopted ought t o be uniform. There h a s b e e n some pressure brought t o bear o n the poard b y one o f the districts i n particular, t h e vallas district, w i t h regard t o ths eligibility o f sight arefts tor rediscount, s e c u r e d b y bills o f lading conveying title to readily merketable a n d staple non-perishable agricultursl comuodities. I believe thet t h e banks toasy have the right t o give inmedlate credit t o these drafts, u n d e r certain conditions, b u t w e were threatened w i t h congestion or cotton drefts, f o r instance, i n the vallas vistrict this year, a n d t h e q u e s t i o n c a m e u p h o w t o hendle t h e m . It is true i n sone districts t h a t these crafts w e r e handled by the member banks through their correspondents; b u t 4t strikes m e that there i s a good deel o f soundness i n the position taker that this i s a s e r v i c e that t h e o render t h e member banks federal ressrve banks o u g h t t snd that # e ought t o b e able t o give inmediate credit f o r these sight drafts I end r e g u l a t i o n s have described, u n d e r certain rules t o b e prescribed b y t h e Federal hessrve https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 41 Boerd, I think this i s 6 very important matter a n d m y suggestion i s thot 6 b sppointed b y the Chairconmitteee man t o consider this matter, t o report s t sone later conference o f the Agents o r the Governors, a n a that is, 1 think, all I have t o say. Vice Governor Platt: T h e r e i s one matter that has been, a t various times, t h e subject o f a good ceal o f dis- cussion, a n d that i s the jucstion o r how t o hmdle par collections. I have here ¢ letter r r o m ur, «cAcams, w h o was recently p r esident o f the american Bankers association, who came i n to sse me and who talked with other menbers o f the B o s r d w i t h r e g a r d t o a plan f o r naking p a r payments of checks non-coupulsony smong member banks, but a t the same time refusing t o handle items with their sncaorsenent, and 4 will read a rew paragraphs o f this letter: "ie believe ir the Board will take action slong the lines r e f e r r e d t o , m a k i n g r e m i t t a n c e a t p s r voluntary a n d eliminating the possibility o f noneuwenber inctitutions feeling that t h e y s r e o r have b e e n coerced i n this connzc- tion, a decided step toward the ultiniate sclution o f this vexing question will have been taken. “As stated t o you, I believe t h i s action should b e https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 42 eccompsnied b y s ststement t h s t i t would b e untair f o r banks n o t remitting a t p a r t o use t h e collection fscilities or the Federal heserve system and therefore checks bearing the endorsez.ent o f non-assenting banks would not b e handled by the ssverol Kedersl Reserve institutions. will, I T h i s action s m sure, result i n making 5 lerge nejority o f the non-assenting banks egree t o remit s t par, e s they «ill then spprecilate t h e tract t h e y a r e r e c e i v i n g = in r e t u r n f o r t h e s e r v i c e r e n u e r e d real .ervice b y them, "Our F i r s t V i c e . resident, a r . w . i . Head, o f t h e Omaha Bank, onsha, Neb., statea that the Kansas vity bank had notified n o n d i c n b e r i n s t i t u t i o n s i n Nebraska t h e y w o u l d not require t h e m t o remit a t osr a n d imnediately t h e numbs of non-sssenting banks increased t r o n forty o d d t o over two hundred, T h e vinaha Ciesring house, however, refused to hendle itens o n banks not remitting a t par, a n d despits the Clesring houses i n st. Joseph, C e u s r Rapids a n d other places taking t h e opposite ctend, t h e nu.ber o f nonesssente ing banks h e s voluntarily b e e n decressed a g a i n t o slightly in excess o f fifty.” Incidental l y , I might a l s o say, w i t h rererence t o this suggestion, t h s t w h e n t h e a d v i s o r y C o u n c i l w a e here, I stated https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 43 to ur. Kue, w h o s a t alongside o f lie, thet o f eourse that would mean thatiifa cotton bayer b o u g h t s o n e cotton in the south snd gave i n payment » check on ur’ tme's Bank i n Philedelphia, a n d thet check was deposited b y the seller o f the cotton i n a country bank, W e will s s y i n south Carolina, w h i c h w a s n o t r e m i t t i n g s t par, t h a t «shen the check g o t back t o Philadelphia s n a went i n t o the Kichmond Bsnk, i t would b e thrown o u t a n d would n o t b e handied. was The Advisory Council d i d not sees t o think that thet a practical proposition, a n d I am not quite sure whether it would be of advantage i f hendied i n quite that way. I t would give a lot o f trouble, because i t seems almost iii possible that the Federal keserve Banks's transit department could operate o n the principle o f looking a t a l l the endorsements o n 2 check, b u t i f they once got i t understood by the banks sending i n those checks, that they would not be handled, probably t h e y would not b e sent, a n d they woulda be kept i n the member banks, so1..e bankers s a y that s o far a s their bank i s concerned i t «would simply b e a matter of having a n extra pigeon hole r o r checks r o r non-paying banks, a n d that all they would have t o do would b e t o throw them i n 8 separate pigeon hole and not senda them t o the https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis pederal reserve banks. N o w , t h a t looks pretty g o o d work o r theorstically, b u t t h e question i s shether { t will in a not, o r whether w e want t o make a n y kind o f change netter w h i c h ¢ e e m s t o b e working s l o n g fairly satisfsctor- ily i n most o f t h e d i s t r i c t s already. wr’ Comptroller, d o you want t o submit t o u s the figures o n the last call? ur. Crissinger: I you g e n t l e n e n think i t may b e o f interest t o t o know t h e t w e have a of the cities, w h i c h shows a tebulation f r o m t h i r t y net decrease i n total deposits YOO Et of 415,215, a net decrease i n totsl resources o f 70,875,000, and i n losne a n d discounts 8 wr J a y : dscrease @ w?8, 498,000. r r o m the preceding year o r the preceding Criss inger. miller: N o , t h e prececing call. M a t i s t h e s e p t e n b e r call? crissingers f h e septeuber 1 5 t h cell. I thought it might b e o f interest, a n d i f any o f you care t o look ae A e 3 0 S s a e N e w York shous 6 decrease o f ,219,241,000 in deposits. ur® nillers counts? w h a t does i t show « i t h regard t o dise https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 45 ur. Crissinger: u i s c o u n t s s h o w a decrcasc o f »256,652,000, o v e r that period f r a m June 3 0 t o september 15. I guess i t is going the other way now. Governor Strong: I think so, b u t o n l y f o r 4 very short seriod, ur. Jacobson: “ n e e August 3 0 t h i t M s b e e n going in the reverse way. ur’ Crissinger: B u t the whole banking situation, so far as i t is reileeted through our orfice, shows e n improvement i n every place except t w o o r three spots i n the United stetes, rrom which w e anticipate a great deal of trouble during the coming winter. ure Austin: snticipate b o you mind telling what trouble you i s due to? ur" Crissinger: I n the southwest, i n New mexico, part o f Texas and part o f Louisiana, i t is due t o a drought; they haven't h a d e n y rain there since + guess i n the spring; there isn't any gra.: and the cattle all hada to be moved or sold, a n d the shéep likewise. T h e ¢sne condition i s pretty largely true, a s I get # r r o m t h e bank examiners, in part o f UkKlahoiia. A & A certain section o f uklahoma i s i n very bad shape and w e look for quite a little trouble there, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 46 vutside o f thet, t h e o t h e r p l a c e s w o u l d b e u p i n t h e d r y land farming distriet where they haven't reised snything for a good while, s n d where s m t they h ve raised isn't worth e n y t h i n g w h e n y o u t s k e i n t o c o n s i d e r a t i o n t h e f r e i g h t they h v e t o pay. F o r instence, Governor Calkins w a s telling m e about t h e potato crop, w h i c h i s worth nothing up i n that country, e n d that i s true largely w i t h their wheat c r o p o n sccourt o f being s o far from t h e merket. we h a v e m o r e t r o u b l e i n those t h r e e p l a c e s t h e n i n s n y o t h e r piaces i n the United States. There are three spots now, t o which 1 referred, b u t w e are getting along pretty w e l l wit: the reorgenw ation a n d rebuilding o f the banks. I think w e heave hed about sixteen failures during this year, s i n c e t h e first o f January, b a n k s going. into the hands o f receivers, s n d I think w e w i l l o p e n f i v e . o r s i x o f those. i e have o n e b a n k that h e s been solvent, a . b i g bank, f o r ninety days, b u t we are afraid t o open it. i t i s s bank with a million and e half ceposite, a n d will hsve comething like 4p00,000, b u t w e are sfraid t o open it. I t i s a peculiar situation. B u t o n the whole there i s nct going t o be s o much loss i n this year's business t o depositors. A bank https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 47 cown a t Corridon, Indiena--- this m a y b e interssting t o the st. Louis people--= w i l l b e disposca o f 4 8 t o paythe adpositors 9 4 per cent, a n d when i t closed i t looked a s though i t wouldn't pay over 25 or 50 per cent; b u t we have sold the bank s o thet i t will psy t o depositors 9 4 per cent. Thet will b e helpful down there. ur uitchell: u r e Chairman, I move thst a conmittee or tive b e appointed t o look into this matter o f making sight drafts eligible f o r reciscount 9 t Federal reserve banks, Vice Governor Platt: f o r the purpose o f recomiend- ing 3 change i n the law, o r something of that sort? are gitchell: s i m p l y v o r 3 consicerstion o f the mat- Vice Governor Platt: b e y o u want that conmuittee sp,ointed b y me or by the separate conferences? mr, mitchell: u y motion is thet i t be sppointed b y the Cheirnan,. Vice Governor “latt: A ur. mitchell. conmittee o f rive? Y e s . Vice Governor Platt. G e n t l e m e n , y o u have heard t h e motion mace b y ire mitchell that 8 comnuittee o f five b e https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 8 appointed b y t h e C h a i r t o c o n s i c e r t h e g u c s t i o n o f making signt urafts, secured b y sta.le ogricultural coumoaities, eligible f o r rediscount. I s there a n y discussion? (The motion having b e e n Guly seconced, s a s carried.) Vice Governor Platt. I will appoint t h e t co:mittee after c o n s u l t a t i o n w i h t h e Chairnien o r t h e t w o s e p a r a t e conferences, Now,Gentlemen, w e seen t o hsve gotten t o the point where w e c a n open t h e iniportant dis cussion o f the day. I might say, with regard t o the Comptroller's rigures, that they are certsinly gratifying. there a r e o n l y a v @ are glad t o know thet f e w b a d spots, a l t h o u g h t h o s e s p o t s a r e pretty bad, particularly i n the northwest 3 n d southwsst, where i t looks a s though the cattle may have t o be moved into ;exico i n order t o save them, a n d there tuis new tariff guestion s t a n d s i n t h e way, a s they h o l a thatthe cattle cannot b e taken out o f this country snd brought back without paying t h e duty. It seens t o m e that o u t o f the period o f stress through w h i c h t h e c o u n t r y h a s pacsed, a n d from which i t is now happily recovering there should come consicerable consolication o f small banks and the strengthening o f the https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis system i n that way. _ v e r y b o d y k n o w thet there a r e sltoge-~ ther t o o many banks. T h e r e i s n o sense i n having three or four banks i n a little to.n thet hasn't any business for more t h a n one o r two, e n d where coupetition procauced i s _ mores o r less 9 cutthroat coupetition, while, o n the other hand, i n sppsrently most o f the casesthere i s practically no competition a t a l l which leads t o lower rates tothe farmer, a di: ferent k i n d o f competition f r o m that which prevails i n ordinary business where price h é s something t o do with it. I suppose w e a r e r e a d y n o w f o r t h e d i s c u s s i o n o f topic N o . 1 , w h i c h t s 1. t h a t object should Federal Reserve credit p o l i c y s e e k t o s c c o m p l i s h end b y w h a t t e s t m a y w e k n o w t h e t it i s sound? f will call o n ur. wills t o lead the discussion. ur. Wills: I these papers, understood t h a t t h e p r e p e r a t i o n of a n d t h e s u b u i s s i o n o f t h o m i n sdvance n o t only t o members o f the Conrerence, b u t t o the Board itself,. would preclucds o u r r e a d i n g t h e papers. Vice Governor Platt: urs Wiiis: T h a t i s correct, mr. wills. A n d {£ will briefly state what m y argument https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ur” Miller: G i v e u s your originsi view snd your re- vised view after getting the benefit o f the criticism o f the members o f t h e Conference. ar, Wills: m y original view was not much at varisenee with that o f m y colleague, i.r° Norris, w h o wrote 6 paper on the same subject without a n y colisboration o r conterence with me, H i s statement i n respect t o the object o f the credit policy o f t h e Federal Keserve oystem w a s that trade should b e served, a n d h i s tést o f whsther that object w a s being a c c o m p l i s h e d w a s t h e s a m e 8 s mine, t h a t i t i s t o b e aiscovered t h r o u g h i n s t r u m e n t s t h a t s e r e p a s s i n g r e p r e s e n t - ing that trade. I have n o t changed m y viswpoint m u c h because o f the pspers that have been submitted a l t h o u g h I do grant t h a t there o r e other factors besides t h e ones that I stated. You will renenber what m y arguinent was, although I stated mine i n 9 ditfrerent way from thet o f mr’ Norris, that i t was the object o f the crédit policy o f the Federal reserve system t o a s s i s t t h e m e m b e r b a n k s a n d the o p e n market, which i s the sgency through which the Federal reserve b a n k operstes, t o t a k e c a r e o f a l l proper trade, a n d t h e reeson https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 51 for that statgient w a s thet t h e genersl credit situation will b e sound a n d take care o f itself i f w e have a conbina- tion of clean doorsteps. I will admit some of the argu- ments that a r e here, t h e t those words a r e proper, send that the w o r d “trade“ is a relative t e r m ; b u t i t i s m y judgrent thet the lews o n the st-tute books, both state #nd nationel, that a r e i n existence, w e r e put the re f o r t h e purpose of protecting and promoting proper trade. ey I n the first place,/we endeavor t o say that t h e Federal reserve banks are operating according t o law, t o the regulations o f the Reserve Board snd the Federsl Keserve act, i f we put 4 n eupheasis o n that, t h e general situstion will take care o f itself, Now, a s t o t h e t e s t s s t o whether t h a t p o l i c y i s cor- rect and sound, that i s found i n the kinds o f instruments that are not only presented b y the banks ror rediscount, but are flowing i n and out o f the banks a s well 6 s i n and out o f the open mserket, I n other words, m y srgument i s that discretion a t the sources, a n d that being n o t entirely discretion, b u t souething for which w e have 4 yardstick in the laws thst I have mentioned, s n d the regulations o f the Board, t h s t s combination o f that k i n d o f policy, b e - https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 52 ginning there, w i l l result i n @ proper credit policy f o r the whole Federal Keserve system. T h e r e f o r e , I the rate itself i s not controlling. ating t o t i n d t h a t e number o f the I think that t was very iLlLlumin- .d b y men p r e p a r 8e pers who i n the originel days o r this conference stood out veliantly t o r t h e rate o s being t h e only thing, a n d thatwe should not neddle into t h e purpoces a n d uses o r intd t h e mansgement o f the menber banks, i t has been interesting t o me that sone o f those m e x have evidently, f r o m thelr e x p e r fence, c o m e t o the conclusion that a n edmixture, 4 very strong admixture o f discretion a t t h e source i s now necescary. I think that i s a fair stateuent, i s i t not, vr. willer, t h a t w e have soue converts t o thet policy? Another point t h e t Iwith t o make before I sit down is that there i s a n obligation o n the Federal keserve penks t o constantly survey 9 n d scrutinize t h e lines o f discount o f the member benks, through t h e open market, e v e n though this paper i s not coning into t h e Federal reserve banks o r i s not i n them a t t h e present tine. The result o f this policy, the very presence o f the system, 9 s I see it, i s that b y the «knowledge thet that is the w a y these separate banks d o opsrate i s 4 very efis.i- https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 58 ive comtroller end inspiration for all -orts o f banking policies which, i n the finality, c r e a t e a vory sound credit concition, Vice Governor Platt: I s o m e o f you have not read all introducing this subject. of t h e s e papers, was a little t o o informal i n 3 n d soiie o f y o u m a y n o t u n c e r s t a n d j u s t exactly w h e t t h e t o p l e i s . T h e general t o p i c i s “rederal Reserve Credit Policy”, a n d the subject covered b y ur, wells end up. Norrin l e “shat object should Federal Keserve Credit Policy seek to accomplish and by what test may be know that i t 1s sound?" We will noe h e s r r r o m Govornor Norris. Governor Norris: m r . thairman and gentleuen, i n attempting t o execute m y assignment I found some trouble i n contining myself t o the “what" part o f it; t h a t is, what object should the Credit pclicy o f the receral heserve system seek t o accom lish, a n d i n con<icering that I find myself constantly inelined t o wander o f f into a discussion of “HKow" and “why", P e r t i c u l a r l y for the purpose o f avoiding transgressing o n the part o f the subject that I was n o t concerned in, I possible f o r m , tried t o state i t i n t h e simplest o¢ As ur. wills h e e l r e a d y stated, our papers without a n y mnsultation, in substantisl accord. I h e a n d 1 prepsred a n d I think that weare looked past t h e inember bank t o what might b e cslled t h e ultimate consumer, a n d s a i d that our p u r p o s e w a s t o a s s u r e a n sdasguete s u p p l y o f c r e d i t f o r productive enterprise, u r e #ills stated that o u r objeet was t o ensble t h e nember banks t o d o that, which, nor horss h o s stated i n his coument, 9 s Gover- i s aerely t w o ways or stating t h e sane thing. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis I suppose t h e t o part o f m y d i f f i c u l t y s r o s e i r o m a lack i n the beginning o f sppreciating t h e truth o f t h e comnents t h a t mr. C a l k i n s makes, t h e t t h i s s u b j e c t ettord opportunity f o r didactic aiscussion. m e s not h e goes o n to s a y that i t i s not dirricult t o state t h e opject which the F e d e r a l R e s e r v e c r e d i t p o l i c y s h o u l d s e e k t o sccomplish, ss i t i s not difficult t o state w h a t s n aeroplane stabilizer s h o u l d secanrlish. I have resd carefully s l l the papers thet have been prepared o n this first topic, a n d i t seems t o me that either t h e gentlemen w h o have prepsred these papers a r e i n agresment w i t h ur. Wills a n d myself, o r , i f they a r e not in egresment, t n e y have been t o o polite t o express their https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis rote) Gisagreement; or, i f t h e y h a v e ¢ x p r e s s e d t h e i r disagreement, fihave not hed intelligence enough t o uncerstand their criticism, because I here, cannot f i n d a n y issue that & a n d the o n l y point t h a t occurs to suggest, a n d which I t o m e thet I raised did m e a n do not think ur, wills touched o a, end which doss not s e e m t o have b e e n touched o n i n any o f the comments end which, i f there i s t o be any further discussion o f the subject, I would like very much t o hear dis- cussed, a n d that i s this; t h a t while w e are i n agreement es t o its being t h e object t o arford a n sdequate a n d regue lar supply o f currency s n d credit t o the public, I put in, 8S 4 secondary object, t o indic ate t o the public the effect which business a s i t i s being conaucted, i s having u p o n the supply of credit, and to give timely notice of any distinct change which i s anticipated i n credit conditions, Now, t h a t i s going b e y o n d t h e m e r e p u r p o s e o f offering credit, a n d the thought i n my argument was thet i n eddition t o thst i t was one o x the duties t h a t w e ought t o perform to, a s far a s possible, c u t o f f t h e extreme peaks of inflation and deflation; t h s t i f w e muld hold out danger sisnals a t one time snd hold out w h e a t Judge Ramsey has frequently reierred t o 4s rays of sunshine a t https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 56 snother tine, t h a t t h e t i s s we might perrorm a n d which, proper s n d useful p u r p o s e t h a t i t seens t o me, 1 s going beyond merely orfering a supply o f credit. I think i t would b e interesting t o have that subject discussed, the a n d + would like t o know whether s n y o f of other members a t this Conference consider that anything that nature i s o r i s not ~ properly within t h e functions of the credit policy o f the Federal Reserve system. Vice Governor Platt: cussion, T h e topic 4 s now open t o r dis- T h e popers have b e e n prepared b y selection, topic that is, t h e people w h o prepared i t selected t h e mceonine themselves, a n d those w e r e Governor O r s s , Governor my list ney, Governor Calkins, ur. weCGord end “yp. Rich, i f from any of ts correct here, e n d x e will b e glad t o hear rurther, a n d you gentienen w h o want t o discuss t h e mstter the last partiLthink some consideration shoulu b e _iven t o some extent, of the topic, which «r°® «wills aid touch o n to present end that is,by what test m a y w e know t h e t t h e policy i s sound? Governor Morss: u p , Chairman, I referred i n the paper our discussion which I presented t o the tect that most o f retes, h o w they on the rirst topic w a s sbout o u r discount https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 57 shoula b e applied e n d when they should b e spplied, a n d that WaS 6 very natural concition, becsuse thet i s t h e most i m portant thing, t o n y mind, that w e have t o consider. have t a k e n c a r e o f o u r c i r c u l a t i n g c u r r e n c y I W e think a t t h e present t i m e i n such a way that there i s n o juestion about it. Y e t there i s also t h e guestion o f oredit a s reloted to open market trensaetions a n d that question i s brought up i n the most vivid way, a n d naturally b y the New York Bank, because that i s where t h e y feel i t every d a y a n d that is where they give i t the best consideration, T h e rest of u s d o not have t h a t s o constantly before u s all t h e time. It i s very proper that N e w York should d o that, a n d that w e should consider it. B u t t h e G k count rate, h o w and when i t should b e applied, i s the most important thing to most o f us. It i s very satisfectory, I think, that all the papers I have read o n this tirst topic agree that credit should be furnished far agriculture, indvetry, s n d dis tribution of goas, T h e r e i s n o dissgreement o n thet point whetever, They also agree that credit should b e furnished, e n even flow o f erecit, a s it msy b e expressed, a t all ties, a n d without t h e b l g ups e n d downs o f credit rates. G o v e r n o r https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 58 Norris says t i t these rates shoudd b e timed s o a s t o give advence informstion t o the business piblie o f whst i s probe ebly going t o hap,en,. I disagree w i t h thet a t all, do not think that snybody would I t i s supposed that t h e #eceral Reserve Banks, w i t h their opportuniti:s f o r information, end thelr constent study o f che subject, a r e i n a position to anticipate t o some cegree these considerable movement s of trade, a n d i f they a r e not t h e y ought t o be. T h e y ought to b e able t o see o r t o perceive w h e n a movement i s started end i n its initial stages, what that novenuent is, Peephia opportunity o f estimating h o w f a r that movement i s going, end I would agree with Governor Norris t h a t that infornation should b e given out t o the public ¢ s soon a s the ofticers ot t h e Federal Reserve Banks a r e convinced i n their o w n minds that i t should b e done. As I say, there i s no dissgreenent a s t o the objects of t h e credit policy, b u t a s t o just h o w that ils t o b e accanuplished there 1 s some disagreement, although thet really gets into t h e next subject more t h a n into this one. I jean that that i s quite noticeable f r o n t h e papers r e a d and t h e discussion o f these questions o f the relative i m portance o f the discount rates e n d other things. W w e hed https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 59 couple o f s great deal o f discussion about t h a t thing s discount years ago. a s t o hon f a r w e could aepend o n the celled rates a n d how far w e should depend o n what i s n o w “discretion”. I think that mr. Wills i s right, that there is more emphesis placed o n diserstion i n the pepers thst have b e e n p r e s e n t e d t h a n t h e r e w a s before. rather surprised t o see that, a n d I I , myself, a m think i t i s probebly the due, t o @ considerable extent, t o the expsrience that his o w n Governors o f the neserve Banks heve had, e a c h i n district. For my part, I would not care t o use diser-tion any do not believe further than is absolutely necessary. I in prying into the affairs o f the banks any more than lis necessary, the a m o u n t a serve bank, done i e n y whole measure o f what should b e eredit t h a t 9 bank demands of 6 Federal r e - I f i t i g not borrowing a t all of the Federal reserve bank, I do not see what right the rederal reserve bank has t o inquire into its eifairs; moderately and well within reason, I i f i t is borrowing do not see that the question Federal reserve bank c a n bother that bank with the of what kind o f business i t is doing. J t 1s only when the bank's losns with the Federal Reserve Benk get t o a point https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 50 size that where t h e y n e e d c o n z i c e r a t i o n b e c s u s e o f t h e i r the Federal reserve b a n k should have t h e right t o inquire of the bank a s t o what t h e y a r e coing with that credit. Governor strong's paper--- i f I msy get ofi the subject, up and this i s a very interesting point t o me--- tigured i t “that three fourths o f the credit would b e aftected b y 4 change i n «iscount rates. I think that i s p r o b a l y true, on put I , myself, w i l l depend o n dism unt retes, a n d not diseretion, We are &1ll more o r ls:s conscious o f the T e a r country, that there will b e a movement o f inflation i n this sna that when, i f it aoes come, i t will find the banks attenpt with a very lerge reserve o f credit, a n d that a n y to raise discount rates would b e resented b y the public at large, because a o u r high reserve percentage. I wish w e should to s a y t h a t i f t h i s i e eretben m o v e m e n t s h o u l d c o m e not hesitate t o raise t h e discount retes, was desirable e n d necesssry, i f we b a a t i t n o mettsr i f o u r reserve per- centage w a s 9 0 o r 100 per cent. The Federal Keserve Banks h y ve the backing o f the penking business ccumunity o f the country. I believe w e looks have their confidence, a n d that t h e business @ m m u n i t y 61 to the Hederal reserve banks t o protect t h e m against a n y changes that m a y come about, protect t h e m i n any inflation by a raise i n discount rates, p o matter whet the amount o f reserve m a y be, a n d I hope that there will n o t b e the slightest h«sitattion t o r a i s e d i s c o u n t r a t e s w i t h o u t p a y i n g a t e tention t o our reserve position, Vice Governor Platt: T e discussion i s certainly taking a very interesting turn. G o v e r n o r Calkins, I under- stand you prepared s paper o n this. Governor Calkins: w r . dheirnan, 1 wish t o hegin b y expressing m y gratitude t o Governor Norris, w h o made m y epology f o r me. u y educational advantages w e r e very limite ed, inssmuch a s I had n o opportunity t o read over Governor https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Norris! a n d ur. wills! papers berore 1 wrote m y memorandum, Whet I meant b y saying thet the subject did not lend itself t o ciscussion didactically, a s Governor Norris hes said, w o s that 1 t seems t o m e t o b e 5 nserrow question. I f it hed been put i n the f o r m o f g u e c t i o n s s t o what t h e policy should b e a n d what w e should acconplish, I probably could have written s t more length. I think that t h e conelusions a t the beginning o f m y paper a v e about t h e ones that I would still submit, a f t e r 62 having r e s d t h e p s p e r s t h a t h a v e b e e n w r i t t e n o n this ject. T h e purpose o f the credit policy seems t o m e t o be a very simple matter. T h e object t o b e achieved b y eny piece o f mechanism L s reletively a -low i s made t o plow with. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis s u b- simple matter. H o w e v e r I T h e will not dwell o n thet point. There i s one roint which has b e e n indicated b y Governor Norris a n d Governor morss that I something about. would like t o s a y T h e y lave both expressed t h e view that a part o f the Federal reserve credit policy should consist of prophecy, a n d I a m remincisd a t once that I once heard one ofthe members o f t h e Board s a y very rorcibly t h a t w e would never have a goai f e d e r a l reserve credit policy until w e had good prophecies t o base i t on; e n d h e edded souething t o t h e efrect t h a t t h e p r o p h e c y p r o d u c e d had not b e e n sltogether satisfactory. I s o far a m obliged t o feel that there i s no way of judging the future but b y the past, a n d that i f too much i s incluced i n the word “pro= phecy”, that i t must b e dealt with with considerable cautom. I t prophecy undertakes t o g o t o o f a r o r locks too f a r into t h e tuture f o r t h e purpose o r formulating 4 credit policy, I a m afraid i t will not b e good prophecy https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis oe) in every instance. buciness up. I P r o p h e c y s n d interferences w i t h t h e o f t h e wenbeor b e n k s n o r e o r l e s s h i t c h t h e m s e l v e s think w e should refrain, s o far a s possible, f r o m snything sporosching interrerence w i t h t h e member banks; but I put emphasis o n “as f a r a s possible", a n d i n thst connection r s r e r t o w h a t G o v e r n o r s o r s s ¢caid, a n d t h e t i s thet w e have'no concern about t h e operation o f the menber bank until i t is borrowing yrom the Federal reserve bank. I want t o ¢aythat i n our experience, i n cur actual exper- ience, probably the g:eatest difriculty that w e have encountered i n e n effort t o d o what w a s right i n a n ecute situation h a s b e e n w i t h t a n k s w h i c h h a v e p r e v i o u s l y n e v e r borrowed o n e cent t r o m t h e Fed_ral reservebank, b u t which, when exemined, w e o u n d t o b e i n extrene condition, s o ex- treme that i t wos elmost iupossible f o r u s to find @ way to assist them, N o w , i t seems t o me that t h a t must b e considered, that the opportunity t o take care o f theneeds or t h e menber bank mmst b e con.inerea s n d i t must b e considered i f w e a r e t o c o o u r w o r k s i f e c t i v e l y b e f o r e t h e actual occasion srisés, i n yone instances. I reslize thst there i s grest danger i n going too tar i n that direction. I told the Comptroller @ story this morning about 64 5 seetion o f o u r district w h i c h illuctratss v e r y s e l l what I have i n mind, a n d 1 will tell i t here: In s certain section o f th: district t h e bankers ¢éngcsod m a n y u n f o r t u n a t e c o n s e juences t r o m t h e countered a finsncing o f the cultivation a n d growing o f beet: l a s t yesr. “onsejuently a group o f them got together a n d aecided that they would not assist a n y b o d y t o grow beets this year. They told their customers that t h e y h a d grown their beets with disastrous results, a n d that t h e y could n o t furnish one c e n t t o r t h a t purpose, e n d that t h e y m u s t g r o w some- thing else. - h e r e u p o n these customers planted potatoes, r a not worth cigging with t h e n e t resilt thet p o t a t o e s e sna t h a t b e e t s a r e a https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis v e r y v e l u a b l e c r o p t h i s year. N o w , we d o not want t o d o anything like that. Vice Governor Platt: tration. a e wecord, your paper s e e s T h a t i s a very pertinent illus- i n the absence o f Govsrnor meninney t o b e the next o n the list. mre w e O o r d : , mr. h a i r m a n e n d gentlewen, I have tried to c o n f i n e m y s e l i e t r i c t l y t o t h e h e e d i n g o f t h e F e d e r a l Keserve Act, T h e object o f the existence o f t h e Federal reserve b a n k s s e e m s t o b e c a r r i e d i n t h e t i t l e o f t h e Act; “To p r o v i c e f o r t h e e s t a b l i s h n e n t o f r e d e r o l r e s e r v e banks, 05 to turnish a n ¢lastic currency, counting coumercisl paper, t o sfrord neans o f redis- t o establish 9 moreefrective supervision a f banking i n the United states, a n d f o r other purpo ses, The ftirst thing under conseiderstion i s the clestie currency. Y e won't d i parent t o every one. mercial payer, n o e n that because i t i s very spx t i s t h e ciscounting o f ¢ o tim T h a t i s a very easy metter, e n d i t was t o the e x p r e s s i o n “ r o r t h e b e t t e r s u p e r v i s i o n o f banking" that I led my thought; e l s o t o the latter part o f the juestion, “ B y shat t e s t msy w e know thet i t i s sound?" In reviewing t h e exanination o f reports o r t h e banks i n our cistrict I cirectors round that those benks, s h o s e oiflicers a n d d i d not t a k e u p t h e m a j o r i t y p a r t o f a lon in a better position to, henile t h e general public without réal acsistence f r o m us, t h a n those w h o hac t h e banks full o f i n t e r e s t e d l o a n s , I s l e o vounad t h e t s u c h banks a s had investinent loons, unless they were Goverment obligations, w e r e n o t i n poeition t o nelp t h e general public, by c o m i n g t o t h e Feisral r e s e r v e b a n k r o r rediscount, a s well 53s tiose «who had a n open rlow o i credit t o the eomuercial s i d e o f their business. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 66 Kor t h a t reason, I mentioned i n m y psper that t h e ais counting oriicers o f t h e Federal reserve banks should acgueint t h e m s e l v e s w i t h r e v o r t s o f condition or s h e t h e r 2 o r mot, discount i s offered be f o n i l i s r w i t h t h e c o n d i t i o n s i n advance s o that t h e y m a y i n that psrticular member bank w h e n i t comes t o re-discount, i see that m y friend, Governor Galkins, t a k e s t h e s m e view, t h a t w e should know the conaition o f 4 bank, i agree w i t h t h e gentlemen whos have spoken sh:sa o f m e that w e have n o right t o interfere or t o g o into o u r neéenber banks! business, e x c e p t t o s point Or acqusinting our-elves w i t h their condition, s o that when they come t o u s w e Will b e i n a position t o k n o t h e i r troubles a n d h a n d l e t h e m promptly. vut o f this grest deflation thet h a s cone, t h e rederal called reserve b a n k s w e r o n o t / u p o n t h e b e g i n n i n g , but when the withcarewal o f deposits c a m e w e found that o u r wenber banks were loaded, a n d the only remedy w e hsd w e s t o g o t o their rescue and help them. T h e y hpd t o come t o us, and without our having a n y knowledge, e x c e p t these general reports, snd 6 s i t w a s n e w b u s i n e s s w i t h u s w e w e r s n o t t u l l y p r e ? pared a n d did not have t h e experience. I believe w e are in a better p o s i t i o n t o d a y t o k n o w h o w t o t r e a t t h e s e m a t - https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 67 ters than ever before. I believe the constant investiga- tion a n d resuue o f the report o f conditions s n d o f the examination reports i n the w e y o r ramillarizing t h e dis count COtmulttse s i t h t h e s e c o n d i t i o n s 1 s a v e r y s o u n d policy, and I am led to that point o f view b y the fact that those banks that Keep a n even flow o r credit t o their gsneral customers, not overstepping tha.selves i n investment loans, not permitting t h e i r i n t e r n a l l o a n s t o get t h e better portion o f their resources, have most successfully aided the publie in every w a y . Vice G o v e r n o r Platt: u r , Rich, y o u slso have 4 paper On tonle i s uM, dich: I rhe u will not take up any time i n discussing r N o r r i s has expressed m y views entirely i n better language t h e n I could d o it. Vice Governor Platt: I d o n o k n o w whether m y list of papers i s complete, b u t a n y w a y i t i s not ihtended t o b e exclusive a n d w e © n o t n e e d t o stop t h e discussion. W e will b e very glad t o hear f r o m anyone e l s e o n the subject. Governor wWellborn: I left houe about t w o weeks a g o ena a l l these papers w e r e sent t o m e here. I have n o t had time to reed then carefully end did not prepare niy 68 paper until this iorning, like t o resd it, sould n y paper i s i n answer t o .uestion 3. Vice Governa@ Platt: Governor. s o with your permission I v e will come t o that presently, I s ther. anyone e l s e w h o cares t o ¢iscuss Topic? ur, Jay. w a y I say 6 word o r two, ur* Chsirman, s i n c e went in my peper I trsnssressed the rule oancA back sa little inte juestion 1 . i n y question i s No. 2 . I wes very m u c h interested t o hear Governor Norris say t h a t i n h i s o p i n i o n t h e p o l i c y o f t h e r e d e r a l N e s e r v e oyster s h o u l d b e t o t a k e o f f t h e h i g h a n d t h e l o w p o i n t s of inrlation a n g defletion, expansion a n d contisction o f creait, because t h . tis t h e point t h a t 1 spesk @ i n my paper, because i t referred back t o the purposes o f t h e federal reserve p@licy, e n d i t seems t o me that w e should consider : A number o f the pepers written o n the topic reter t o the title o f t h e red=ral Keserve act, w i t h its three objects, to f u r n i s h a n elastic c u r r e n c y , t o a r r o r d m e a n s o f redis- counting @ u m e r c l a l paper, e n d t o establish a more eftective supervision o r banking i n the United otates, a n d f o r other purposes. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis b o w , i t seems t o m e that y o u csunnot always rely https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 69 on the title t o a Congressional “ct for the whole scope of the purposes contained i n it. I looked this morning a t t h e title t o the bill prepared b y S e n a t o Aldrich, r o r t h e so-cslled A l d r i c h currency bill, a n d the title t o thst bill was “To incorporate the nationsl reserve sssociation o f the United ctates and for other purposes", s o that v e would not have gotten, h a d that become a law, a n y guidcence a s to what our credit polley should be. i t seems t o me t o say thst w e should fur- nish a n slastic c u r r e n c y e n d t h a t w e s h o u l d p r o v i d e « means for rediscounting paper, i s very much like saying that a man s h o u l d e a t t h r e e m e a l s a d a y a n d s l e e p e i g h t hours; but 1 t does not g o into the other things that g o to make up @ large prt o f a man's life. wills sug.ests, I f w e endeavor, 3 8 ur, t o study every community i n our district nd see that t h e y s r e handling proper péper, t h e t i s a n important thing, i t desirable. I sam inclined t o think thet it is not desirable to the extent thet he indicates, but i f desirsble i t i s uninportant because unsound move- ments stabt i n the conmunities without a n y .uestion, b u t we c a n n o t s l w a y s d e t e c t t h e m b y l o o k i n g a t t h e o mnunities. sonetinmes w h e n y o u a r e i n the woods y o u cannot s e e the https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis fore.t f o r the underbrush. I feel that i n the reserve system w e ought t o look a t our o w n d i s t r i c t s v e r y cerefully, e a c h o n e o f us, b u t w e should also l o o k a t the syetem a s a whole, s n d t h e system ag a whole, i n providing exce.. credit, seasons] o r emer- ,eney crecit a n d currency, i s related t o our wi.ole problem f production a n d distribution. an entity, m o t a n end; C r e d i t i n itself i s not i t o n k e x i s t s s s 8 tool t o facil- itate produetion snd cistribution; a n d therefore, i n deal- lig «ith our credit policy, w e ought t o look a t what i s going o n i n production e n d cistribution, our policy i s sound. t o see whethsr I t ceems t o me that Governor Calk- ins hes expressed that view most succinctly b y caying that we m a y k n o w t h a t t h e r e d e r a l n e s e r v e e r e a i t p o l i c y i s sound w h e n t h e inevitably fluctuations i n production a n d distribution have b e e n mst w i t h t h e minimum o f economics] or financisl dislocation, to emphasize a T h a t w s s a point t h a t I wanted little b i t i n ¢.nsid-ring t h e lerger j ucs- tion o f Federal reserve credit policy. It seems t o m e that w e should have some w a y o r aceter- wiiming what our policy is. now; v e may not b e able t o do i t i t mey take t w o o r three o r four years t o come t o a https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Th conclusion from e o iuany dirferent ongles a s t o what our objective should be, b u t I teel thet w h e n w e can arrive a t @ conclusion a n d d e c i s i o n a s t o t h a t p u r p o s e w e ought, e v e r y time w e make a chsnge i n our position with respect t o market rates o r open market operations, h a v e some specific objeative. I n locking over some data w i t h regard t o the opera- tion o f t h e G e r m a n nxn ischbank r r o m 1 8 7 5 t o i910, Perinde a s ststed thet they have, during thet period, m a d e 5 8 changes in their rates, that they h v e assigned reasons for each Ooi those changes. 1 3 o f those changes w e r e made t o counter- act gold outrlows t r o m Geruany o r t o correct unfavorable exchanges; 2 8 h a v e been i n a c e t o counteract mand Tor credit conestically, ad 1 7 have been made t o correct a combination of those two iniluences. Vice Governor Platt. T h o s e w e r e a l l increases i n rate, w e r e they? ite SEY: T h o s e w:re a l l inecresses, 1 assumes I think i t would help u s very nuch, i n coiing t o # conclu} sion 9 g t o what o u r oolicy i s o r should be, i f svery time we m a d e s chsnge i n our r a t e w e would d:finitely s e t d o w n what w e were trying t o G o when «we nsue that change i n rete. Vice Governor Platt: H a s sowesone else ganething t o https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis say o n this topic? ur. Willer, o r ur’ hamlin, a o y o u wish t o sey sorie- thing? think we ought t o hear more from the mr’ millers I do not think t h e gentlemen present here, mr. C h a iriuan. I subject has b e e n exhausted b y a n y means. Vice Governor Platt: I do not think s o either. T h e view that wr- Calkins expréssed, lip, Perrin: minimizing t h e inevitable fluctuations of i n volume o f credit, appesis t o m e 3 s the proper objective o f the credit policy. One point t h a t I was struck w i t h i n the statements o f one o r two o f those w h o have spoken, w a s that t h e objective should b e t o supply ean sdequete amount o f credit. seems t o m e thet t h e word “aacequsts" needs a tion, I t bit o f explana- T h e supply o t credit m a y b e o f two kinds, absolute or regulatory. adjuetment B y regulatory" I mean t h a t t e m p o r a r y i n t h e cash position o f a I mean b y “ebsolute"” menber bank, a n d what i e the a p o l y i n g o f additional funds. It appears t o m e that t h e purposes o f the Fed-ral resave b e n k s c a n hardly b e regarded s s primarily o r imniedi ate~ly t o suprly a n sbsolute addition t o loanable funds, b u t that i t should b e rather f o r a temporary o r regulstory pur- 73 pose, t o snable t h e member banks t o adjust their cash position, Then o n the question o f the test o f the soundness o r the credit policy, i t hss b e e n sugee sted that t h e character of paper orfered would b e t h e test o f that soundness. I submit t h a t i n a period o r great inflation t h e paper offered for r e d i s c o u n t i s substantially o f the sane characteras https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis that orfered i n a period o f greatest aefiation. T h e amount o f r e d s counts w i t h the Federal reserve banks con- stitutes but o very small part o f the totel loans o f the panks, even a t the period o f greatest total o f sdvencement. The main body o f loans i n the member banks m e y have b e e n made w i t h proper restraint, e n d t h e paper oifersd f o r re- discount may b e without exception; butsuppose w e come t o a position where t h e totsl volume o r erecits h a d bsen doub- led and the totel volume o f production had not been meterjally increased? T h e qualify o f the paper offered for rediscount, both b y the member bank 3nd oifered o n the open market, would probably b e o f substentlally the same character w h e n the volume o f credit w e s only o n e hali, a n d therefore i t see.s t o me thst some better test o f >soundness t h a n m e r e l y t h e c h a r s c t e r o f t h e paper, w i t h r e f e r e n c e https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 74 to its providing funds r o r “real trade", i think was o n e of the expressions w e d , s h o u l d b é adopted, a n d that t h e question o f whether the Federal reserve bank should make en absolute sdvance o f credit Srould elso require careful consideration, Governor Norris: u r , Chairman, I know o f n o better way t o get aiscussion o n a subject t h a n t o sub..it 9 hypo- thetical question, most éveryone, I t i s objectionable, I a n d therefore I think, t o al- would l i k e t o p u t a hypothet- Loo] cusstion: Suppose a reserve b a n k has 4 reserve percentage o f 70 or 80 per cent, thet its losns t o its member banks sre relstively small, thet i t obs<iwes that there i s a n active and constsntly increasing cpsculation going o n i n either stocks o r aommodities; discounts t h a t i t observes thst t h e loans s n d o f t h e banks s r < o u t o f proportion t o their d e - posits, that there 1 s going o n 3n exploitation o f lands, the building o f railroads, e n d the extension o f industrial plants o n short t i n e borrowings, with a constant c o n v e r - sion o f l i q u i d a s s e t s i n t o r i n e d c a p i t a l . concitions U n d e r those s h o u l d a reserve b a n k a d v a n c e i t s r a t e o r Shou Lo 1 h naw? 75 Governor worss: that I m s t o be almed s t something said. Governor Norris: Governor worss; N o t a t all. A b o u t s d v a n c i n g t h e dis count r a t e s , It seems t o m e thet t h e conditions t h a t Governor Norris outlinec would n o t take place unless i t w a s reflecte loans o f the Federal reserve banks. a s f o r raising t h e aiscount rates w i t h a high reserve, 2 s 4 matter o f practice, probsbly, i n d o i n g i t unless t h e w e would n o t b e justiried situation had gone yar enough t o reflect itself i n our loans. The only thing that I wanted t o emphasize wes t h a t perhe®ps 2 slight increase i n our loans, indicating condi- tions which kere teking place, o r which indicated the trend Ot w h e t w a s couing, s h o u l d b e n e t b y u s w i t h a n i n c r e a s e in our dis count rates, Governor Strong: i s a y * Chairnan, a r e w e going t o con- tinue o u r meeting atter luncheon? Vice Governor Platt; I thought perhaps w e could con- cluce Topic 1 this morning, Governor Strong; efter l u n c h s o n ? https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis B u t y o u d o expect t o reconvene https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Vice Governor Platt; Governor otrong: I Y e s . n thst case I L might intrude o n this subject, although t h e topic w e s n o t originally assigned to me. The topic o n the program reads “heat object should Federsl r e s e r v e cersdit p o l i c y s e e k t o accomplish”, is the first half o f the question. which G o i n g back t o the be~ ginning o f the war, 1 think i t is clear t o everyone i n the reserve system that o u r credit policy w a s designed t o facilitate t h e rinaneing o f t h e war, a n d that t h a t policy continued until t h e m n e l u s i o n o f t h e war. tice I A f t e r the Armis- think y o u will find, i f w e had a n y policy a t all, it w a s perhaps t h a t o f facilitating t h e Tressury i n conGueting post-war financial operations. tall o f 1 2 1 1 C g u w . enaing withthe presume o u r credit policy w a s directed toward srresting further inflation. O n the first o f Jane very w e had 5 further change i n the credit policy, w h i c h I think w a s brought o u t e t the Conference o f Governors held i n april--Vice G o v e r n o r Platt: Governor Strong: O L 29207 N o , indpril o f 1922, t h i s year. site ting i n this room I asked e a c h o f t h e Governors o f the ré- https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 77 -erve banks what their policy w e s o f making investments, and everyone o f them replied thet i t was t o earn enough t o pay expenses a n d divicends, a n d this thought i s suggested by what wr, J a y said, t h o t i t d i d appear a t that t i m e that, without consultation among ourselves, w e had automatically and voluntarily started a sibly = necessary o n e , policy i n the system, e n d pos- o f earning e n o u g h money t o keep g o - ing, e n d i n the course o f doing s o had advanced }500,000,000 to the market, s o t o speak, which was equivalent to’ importing ~500,000,000 i n gold, T h i s occurred a t a time when w e were importing gold, a n d the object o f theappointment o f the c o m m i t t e e a n d t h e e x t e n s i o n o f i t s d u t i e s s o m e w h a t I Spprehend, i s tor t h e purpose o f providing facilities r o r executing t h e credit policy i n regard t o these investments, when w e decide u p o n a policy. Now, a s to the importsnce of it, I want t o say just one ward. 6 2fin.. the rate a t which the member banks Giscount paper with us. w e heve n o position i n the market; we have n o influence upon the merket s t 411; w e are set in motion b y s n apslication from a member bank t o lend i t money, w e then pass u p o n that, and, i n most cases, w e de- cide t o extend the credit. I n very few cases i s it de- https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis clined. I i applications c o m e i n t o o r e s t s n d o u r r e - .@rves g o down, w e find i t necessary t o increase o u r rate, end w e take sdvantage o r t h e provisions o d section 14. N o - body sets this i n motion, sxcept o u r own Gesire t o a c c o m plish something, a n d I think i t i s important t h a t w e should find out a t this iecting v h e t w e d o desire t o sccomplish by v u r c h a s i n g G o v e r n m e n t s e c u r i t i e s , a t least, i n t h e market, under section 14, :stablich s policy, determine what w e are going t o do, s n d take sdvantege o f the machinery t h a t h a s been e s t a b l i s h e d t o c a r r y o u t t h a t volicy. This s e e m s t o b s a r c i r e c t l y u p o n t h i s topic, waking t h e r e m a r k s i m p l y i n t h e n a t u r e o f 4 snd I reyuest, au i f it meets w i t h y o u r s c roval, t h a t b e r o r e t h i s m s e t i n g s d j o u r n s this afternoon, w e have 4 discussion o f just what w e a r e seeking t o accomplish b y buying Government securitiscs, whether w e ought t o keep t h e m o r sell them, o r b u y more, a n d how i t should b e done. ire Austin: w a y L ask Governor ~trong 3 wmestion? Vice Governor Platt. C e r t a i n l y . ure Austin: I understood h i m t o s a y that o u r buying #509,000,000 securities s n d putting that money i n the market led t o thse lnmoitation o f 4500,000,000 i n gold. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 79 Governor strong: same e f f e c t N o , ur. austin, I said i t had the a s t h e iniportation o f 4 5 0 0 , 0 0 0 , 0 0 0 wre Austin: um. Wilke: i n gold. U h , I misunderstood you, m e y I ask a hypothetical q u e s t i o n a b o u t 9 particular s t a t e n e n t t h a t G o v e r n a m a r s s m a d e ? I like t o a s k this question: H would e ¢a3id w e were not interested in the borrowings o f the meuber banks until they became excessive, I would l i k e t o a s k w h e t h e r a bank t h s t w a s n ' t borrowing a t all, i f that b a n k came i n ena requested a. loan, end that bank was lending nioney o n wall Ctreet, a n d hed just turned i n some paper that i t h e d bought w i t h Federal Reserve bank monsy «would i t be good sound policy t o aecept thst k i n d o f paper a t thet stage? Vic- Governor r e T h e t isn't 6 hypothetical y e s - tion, Governor worss: I never ask any westions thelr l a w n s a r e enmall, will say, mr. Chairman, that I o f a n y o f o u r menber banks I when t secmg t o n e that w h a t t h F e c e r a l reserve banks should d o i s t o b e prepared t o take Hoare o f the situstion a n d t o check banks w h i c h M v e g o n e t o o f a r in s o m e o p e r a t i o n o r other, s o that t h e y becoue i n @ sense overextend:d, a n d thet i s refleeted i n thelr loans with https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 80 the Feueral Reserve banks. I t may b e thst t h e y have noney i n well street; t h e a m a y have Minmercial peper, t h e y may b u y bonds, t h e y m e y d o enything, I do n & t h i n k i t i s the object o f t h e Federal reserve banks t o protect everybody, or every bank, f r o m the penelties o f their o w n operations, wed I do not think w e shoulda attempt t o d o snything o f that sort. B a n k s a r e bedly mansged, s o m e o f them, t h e y g e t into operations s n d make unsound loans 6 n d b u y bonds, em it i s quite well known that they do, anda + do not think i t is r o r u s t o p r o t e c t t h e m froin w e r y t h i n g t h a t t h e y m i g h t possibly do. T h e y will sufier, e n d w h y should t h e y n o t surrer t h e penalty o f their o w n acts? J t h e r w i s e t h e y a r e not much more t h e n chilaren. B u t w e shoulc always b e the prepared t o take care o f t h e situation, s n d that i s resgon that, u n d e r t h e Act, w e @re instructed t o make loans with due regard t o the necessities o f all the banks, a n d we s h o u l d o r o t e c t t h e F e d e r a l r e s e r v e b a n k s f r o m l o a n s b y overeextended banks, I f a bank i s doing things that i t ought n o t t o do, thet i s the business o f the Comptroller t o check them up, a n d n o t that o f t h e Federal reserve banks, or i t i s the duty o f the State b e n k commissioner, whichever it may be. w e d o not d o that end 1 do not think w e should https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis do it. diab ur, silLis w o u l d i n d i c a t e o r s u g g e s t s h o u l d b e Gone t o m y mind would imake a supervision o f the banks o n e thet would b e intolerable t o them, w o u l d g e t u s disliked to such e n extent that, upon m y word, 1 think w e ought t o be cestroyed., w y view i s that w e are n o t t o r u n every bank, n o t t o know everything t h e t t h e y ao, a n d n o t t o b e esponsible r o r #zverything t h a t they do, a n d I dlagree w i t h ur. gills i n the idea thet h e seems t o rave thet w e should keep supervision o f t h e loans t h s t t h e banks make a n d s e e that they are proper loans, looked a t from the viewpoint that something might happen t o the Federal r«serve bank o r to t h o s e banks, Now thet I am on my feet I would like t o reffer t o something thet Governor Calkins said, a n d that i s that prophzcy wes very Gangéerous. T h e r s i s nobody w h o i s more s h y o f making prophecies thsn I am, end 1 fully realize the danger of that. A t the same time, moveu.ents i n business are detected quicker b y sowe people t h a n b y others, a n d they sre more quickly deteetéd b y those w h o a r e d n 4@ position to s e e t h e whole situstion a n d t o give their tine a n d at- tention t o .tudying i t than those who are not. B u s iness https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 88 men, a s 8 whole, h a v e their greatest attention given t o producing gocas a t a price s t which they c a n sell them, a n d they d o n o t t h i n k s o m u c h o f o t h e r t h i n g s e s p s r h a p s t h e y should,that t a k e u p t h e time a n d attention o f the Feceral reserve bank orricers, s n d + think that t h e redcral e c i e n benk o r f i c e r s a r e i n s u c h p o s i t i o n a n d s h o u l d s i v e s u c h tine a n d attention t o the mbject, t h a t t h e y would b e able to detect t h e trend o f events s n d give notice @ i t t o the business conmunity probebly i n scvance o f t h e time w h e n most o f that conmunity would notice it. ur Wills: m a y I just s a y that I missege t h e point o f m y yrestion. I think Governor uorss had n o intention o f giving t h e lipression that w e were going t o act a s wet nurses f o r these banks; b u t I wanted t o bring out t h e point thet w e were o n l y protecting oursélves w h e n w e did thet, bpeceuse t h o s e t w o o p e r a t i o n s c o n s i s t i n taking t h e reserve bank i n v o l u n t a r i l y i n t o t h e o p e n market. I n one case loan the funds t o :all ttreet, a n d i n the other case w e loan them i n the conmercial market. I thet o u t a s a dirference Governor iar ss: these things, just want c a e l i n o u r viewpoint. : I t i s very hard t o define s a n e o f F r o b a b l y w h e n i t cane t o 6 matter o f prac- 83 tice t h e p r a c t i c e o f t h e B o s t o n K a n k w o u l d n o t b e cirfréer-~ ent t r o m t h e practice o f the C l velanda Benk. T h e state- ment that y o u should k e e p infeorned o f t h e loans o f a cank when they have msde n o c&1l o n you i s quite 4 ment. P r o b s b l y ur, dilié, broad state i n practice, w o u l d n o t g o much rurther t h a n w e would. Governor strong: m a y I ask one zuestion, which i s perhaps o f a hypothetical nature also? I would like t o ask ur, Wills, if I may, hypothetically, whether, when a bank i n Cleveland, say, a member bank i n “leveland, which has losned @ million o r five million o r ten miliion o n stock exchange i n New York, a p lies f o r a rediscount at ths Keservebank o f Cleveland because i t s réserve h a s become inipaired b y reason o r withurewal o f deposits o f money o f t h a t sort, h o w t h e s e s t o c k s xenangse loans, w h i c h the Federal reserve bank requires t h e member b a n k t o get repaid, should b e liquidateo, ur. wWilis. b y what method? T h e y gre going t o be liquicated b y the reuerse method i n which they w e r e obteined, t h a t i s a l l I know. i siean t h e y w o u l d g o t h r o u g h t h e s a m e process, Governor strong: T h e r e will b e one of two methods;- they will t r y t o get some othe: fellow t o lend them money https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis or they will sell t h e securities. mPe Willis: Yes. Governor Strong: T h e n aren't w e gottvingback t o the ola system? Governor Calkins: A S was o f course insvitable, are aiscutsing a l l t h e topics o n the program. we T h e cis- cussion h a s shown s tendency t o b e rull a n d undoubtedly will continue between t w o more o r lessopposing views, o n e of which stated extremely i s that t h e rate alone fiust regulate, nothing b u t t h e rate. T h e other i s not s o extreme, that while t h e rate s e y inyvluence souwe other things must be taken into con: aeration. N o w , i t may b e true that in large cities like Cleveland, Boston, rhiladelphia a n d New York t h e rate n a y b e depended? u p o n t o agrester extent than elsewhere, b u t w e have feund b y demonstration thet th: r a t e eglone will n o t control the volume o f credib, a n d we are brought t o t h e consideration o f the situstion o f 8 bank w h e n i t spplies t o r rediscount. I t . 1 8 a l l very well t o s a y that a bank should surfer f o r its o w n misnenagement. I t undoubtedly should; othér people suffer a s well. b u t unfortunately I t i s a l l very well t o s a y thet mismansgement o f the bank's business i s the concern https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 85 of t h e Comptroller o f the Currency a n d n o t o r the bederal reserve banks, b u t i t hsppens t o b e s fact thet t h e Comptroller o f the Currency h a s n o fund with which t o keep a bank o p e n w h e n i t i s i n danger o f b e l n g c l o s e d , is t h e business o r t h e +ederal reserve banks, a n d that a n d unless we pay come attention t o the menagement o f t h e bank w e will suifer the consequences o f thet lack o f attention. Vice Governor Platt: I do n o t suppose that Governor uorss meant t o say exeetly thet the redersl reserve bank hss n o t esny interest i n knowing what t h e meuber b a n k i s doing, b u t h e c a n e p r e t t y n e a r s a y i n g that. Governor morss: 3 I take i t t h a t i n e v e r y r e d é r a l r e - serve b a n k e s c h o f i t s m e m b e r b a n k s h : s s péculiar s t a n d - ing and charseter; t h e y have banks that they know what it might b e expected t h e y will do, s o m e o f them msey need extreme attention, w h i l e o t h e r s w a y n o t r e q u i r e a n y stten- tion a t all. N o w , % t h e knowlsdge that you acquire o f those banks, i n the course o f tine sna experience with them, you know how t o deal .ith each benk s t sny tine, n o matter what m a y hap;en t o it. I woulc disclaim a n y thought t h a t we s h o u l d n o t p a y e n y a t t e n t i o n t o our member banks a t I s8y each o n e o t t h e m hs: @ standing a n d character https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 86 with u s 8 s cistinct 4 s a n y inen would have w i t h his custoners that h e dealt with, g o o d b a d s n d inciffrerent. T h a t is what y o u r e x p e r i e n c e g i v e s y o u s n a e n a b l e s y o u t o deter- mine whet ought t o b e done. Governo> nevLougal: I was much interested i n the pla- ture drawn b y ur. Norris o f a condition which might essily erise w i t h t h e r e s e r v e s high, a o f tho Federal réserve s y s t e m very condition a f w i l d speculstion, s n d his inquiry e s to uhat would b e t h e proper rats policy t o apply und-r those circumstances, I wes also interested inGovernor .orss'! statement, I uncerstood h i m co:rectly, of thst sort--- maybe I if t o the efrect t h a t a condition misunder-tood you, Governor worss--- would b e inevitably rerlected i n the Gemancds upon the Federal reserve banks, N o w , 8 s evidence o f t h e fact that Gover n o r morss i s mistaken,at least t o some extent, I can refer t o s condition which arose i n one city i n our dis trict where, auring a period o f tine w h e n t h e banks i n the dGistrict, under nomial conditions, w o u l d have b e s n liyuicatec, w h e n they should have h e d their o w n loaning power availabs, they got i n t o this period o f @ nsture quite similsr t o that t o which ure Norris h e s referred, a n d whet hsppensdy I t was https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 87 not reflected a t that t i e Reserve B a n k o f Chicago. i n the demands u p o n t h e Federal f t resulted i n applying f i r s t their o w n l o a n i n g poser, w h i c h t h e y s h o u l d h a v e r e s e r v e d for sgricultursl purposes, t h e n i t resulted i n criving them into t h e Federal reserve b a n k a t a tine w h e n they should not hive had t o come there, perhaps. T h a t w a s going on. we knew caquething sbout i t , b u t w e d i d not know t h e extent to which i t was going on. T h a t bears alrectly o n the point t h a t u r . N o r r i s r a i s e d . I have been very much intesssted i n this discussion so far and I sm satisried thst the first fsctor t o control is tound t o be the rate, w 6 All know that the rates thet have been current w i l l not b e a complete control, e n d d o not control t o any extent the rates charged b y the siiall banks i n the country districts. I believe what i s true in our uistrict i s true i n sll districts, b u t nevertheless the rates that have been i n force f o r anuniber o f months have, i n m y opinion, b e e n isesl a n d have enswered t h e pur- pose o f ciscouraging u.isuse o r sbuse o f the borrowing privilege o n the part o f the banks i n the financial centers, irom which centers w e get most o f o u r losning power. [ think with respect to thet class of banks, with our 44% https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 88 rate i n Chicsgo o n d s 4% rate i n New Y o r k that t h e results attained w i t h t h e b i g banks have b e e n satifactory, n o t f o r eBweek, b u t r o r months. I t shows that w e hsve some con- trol thers, because i t i s human nature o f t h e banks, they c a n borrow f o r profit, if t o d o it, b o t h b i g e n d little benks, I think, however, thet the metter o f ciscretion i s one which w e aust o l l exercise, I uorss' views s r e extrene. I consider that Governor think i n the Federal reserve benks w e must n o t forget that w e are aispensingcredit a n da that t h e underlying reqiisiteée should b e thse same a s though we were conaucting a commercial bank, giving, @ course, due consideration t o t h e fact that member banks hsve some privileges u n d e r the act, s n d I do feel thst i t i s our business t o know 6 a c h individual member bank, j u s t s s i t would b e i f w e were a @ naucting a conmercial bank, a n d that when w e d o l e a r n t o k n o w o u r banks, s s most o f u s h a v e in most c9s¢8s, Governor uworss, t h a t t h e policy y o u have outlined c a n b e followed, w @ know thebenks é n d w e d o not juestion the uses t o which they are putting the money i n most ceases; b u t i t there a r e reasons f o r questions, go not hesitete t o take t h e mstter up. ve W e have g o t t o 89 consid:r, o f course, t h e uses t o which they e r e putting t h e crecit, t h e character o f the paper they oirer, b u t I you, gentlemen, tell w e have g o t t o consider s l s o t h e present condition o r that borrowing bank with respect t o its assets, sna pearticulsorly w i t h r e s p e c t t o t h e t e n d e n c y o r t h e manage- nent, whether t h e nensgeuent o r that b a n k over s period o f tine has been erricient s n d satisfabtory. T h a t i s a very important metter r o r u s t o bear i n nind s n d t o give conciceration t o a t all tines, I wt. Curtiss: believe. I t seesis t o me, Governor ucYougal, that what y o u h a v e s a i d i n reverence being extreue, t o Governor wores' p o s i t i o n l s perhaps bssed o n misap;rehemsion o f what Governor mworss h a d i n mind, w h i c h L l think I c e n perhsps bring out. ur* Miller: A y o u g o i n g t o t a l k o n 6: discount p o l i c y ? ur, Curtiss: I er. M i l l i e " wes just going t o answer the question. 2 n e pretty t a r afield o f the topic o n thé program s s assigned, e n d 1 think the whole thing will b e very much o r e fruitful i f the discussion aaqoresses itself t o the topic, s v e n though i t makes reference t o r-lated things. H o w e v e r , https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis i r w @ g o ahead a n d diseuss https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 90 questions t h s t s r e schedules f o r this afternoon's ciscussion, w e will get pretty badly balled up, a n d t h e interest thet will attsch t o these pespers which have b e e n submitted will b e dininished, If nobody slse wants t o s a y sonething, I do. not think this topie h a s b e e n scratched. Governor necvougal speaks o f the #edseral reserve banks és dispensers o f credit. T h e y are; b u t t h e y a r e v e r y much more t h e n that; t h e y a r e isnuracturers o f credit, snd they a r e i n the rare position o f being dispensers w h o are not linited b y the fact that t h e accessible a n d available supply o f that which they acispense i s linited. mske t h e s u p p l y . T h e y T h e r e i s n o isethod b y which y o u c a n get incressed credit i n member benks i n this country except by a n addition o f gold,.which i s 9 n sicition t o the reserves o f the meuber osnks, o r b y a n sddéition t o the volume ot credit b y a fiscersl reserve bank, T h e important thing, ag I s s e i t , i s t h e t w e s h o u l d r e a l i z e “ s t t h e outset t h a t the Fedsral heserve bank, ‘whensver L t acts t o either re- strain o r to restrict o r call i n credit, srfects the total volume o f credit, a n d thereby hangs 6 very l o n g tall, w h i c h wo hope will b e brought o u t i n some o f the papers submitted https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis n c on the second topic this e f t e r n o . I have heard i n federal reserve discussions frequentlystatements t o this errect, ?souwetimes b y the officers o f réserve s/bank : " Z T believe i n letting t h e l e w o f supply e n a demand regulste this thing.” A etatement o f that kind, to m y mind, o v e r l o o k s t h e m o s t f u n c a n e n t a l a n d o b v i o u s thing i n the #edersl reserve bank, e n d thet i s that the bank itself i s the supply. reaches a w h e n e v e r t h e strain upon credit certsin sitount--- a n d this i s what makes t h e mebter o f polley s o rundanental--- b y 3 mere stroke o f the pen, b y the inrlux o f a little bright i n k into your reserve ledger, y o u create credit, s very much simpler process than the importation o f gold i n the olcen days, o r even now. The question, therefore, which wrikes m e that i s inplied i n this inguiry is: « h a t i s the object o f a good credit s y s t e m a n d b y w h a t t e s t m e y w e k n o w t h e t i t i s sound, i s one thet requires v e r y much more torougk going esnalysis then has yet b e e n given t o it, e n d thst that i s whet makes i t 4 mettsr o f policy. easy, plentiful s n d cheap; method o r another, w e can inake credit v e can make i t scserce, b y ons b y discrction,by r a t e o r b y a combineticn https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis of both with other things, w e can mske i t dear. Now, then, t h e problem t o n y mind i n this situation is; w h e n shall w e know; b y what cigns shall w e know, whether o r not there i s not enough credit, t o o little credit, or too much credit? hen a w @ operate o n the volume o r credit. cotton grower i n couth Carolina g o e s t o 4 inember benk a n d b o r r o w s a thousand d o l l a r s , t h a t i s n o t s i m p l y sn addition t o his ipackts i t ‘Le a n oddition t o t h e total volume o f credit i n the muntry; h e uses that credit t o peythe bill o f t h e implement meker, o r the grocer; h e . sends 8 pert o f that monsy t o New Kngland3 6 pert t o New York snd a part t o Chicego, a n d i t becomes a n addition t o the total volune o f credit i n existence, exercising t h e sanie affect, exactly, i n tine that any other edaition t o the totel volume o t credit exercises. T h a t i s whet w e have got t o recognize s t the very threshhold o f this inquiry. I submit, therefore, w i t h a l l respect, . to both the dif- ficulties o f the problei a n d the tianitestly sincere eriort to solve i t that have b e e n maue i n the payers submitted on the subject b y ur. Norris a n d mr. wills, t h e t t o say thet t h e business o f the Federal reserve banks i s t o supply adequsts¢ eredit, b e g s t h e question. T o s a y that i t tis https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 93 its b u s i n e s s t o see that t h e transactions penks a r e p r o p e r - - ~ o f i t s member i n other w o r d s i m p l y i n g i n that t h e extension o f 3 proper volume o f ersdit t o those member banks --- begs t h e question. eredit? W h a t L s a n sdequste supply o f h a t i s the proper volume o f credit? d h a t i s &@proper transaction? w e d o not primarily concern our-_ selves w i t h t h e i n d i v i d u e l t r e n s a c t i o n , e x c e p t a s i t bears evidence o f the purpose f o r which the credit i s going t o be used. O u r priniary concern with t h e individual trans- action, a s I view it, i s because k e methof b y which you add t o the total volume o f credit i s through t h e individual spigot. N o w , the addition t o the voluwie o f credit be- coues O f great consequence t o t h e country e s e l l a g t o the individual thst gets it. I think when Governor morss says t h a t h e d o e s n o t v i e w i t a s h i s b u s i n e s s t o protect an overextended bank ageinst its own foolishness o r mistakes thet h e i s anquestionable ground, b u t I should say that rer naee important t h e n his responsibility t o the member bank i s his responsibility t o the coliumunity. I t is our business t o protect t h e com.unity against a l l types o f extension o f credit that a r e unnecessary s n d that a r e unjustifiable acditions t o the total volume o f credit i n tines https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis of when credit 1 s expending, j u s t 3 s i t i s our businers t o Be a e t h e conmunity egainst t h e cons: juences o f t o o consiceroble 4 restriction o f credit, u n d e r certain other con- ditions. Thet means t o m y mind, t h a t s h e n w e come t o the second pert o f this sguestion, admitting thst w e agree thet i t i s our business t o ses that t h e cou.ercial banks o f the country m e y get credit f r o m t h e reaeral reserve banks o n terms a n d c o n d i t i o n s t h a t w i l l e n a b l e t h e m t o n e e t t h e economical e n a w l i d needs o f prouuctive industry, t h a t 1t stidi B e e e f o r u s t o determine b y what test w e may know w h e t h e r o r n o t t h e n e e d s w h i c h « 6 a r e s u p p l y i n g a r e really volid needs o r whether they a r e n o t valid needs. ur. Norris, I think, begins t o spprosch that end of the guestion w h e n h e says t o prevent t h e peak f r o m being too high, i n times o f expansion, s n d r o m being t o o l o w i n times o r resection. W h y should y o u hesitate i n saying t o prevent a n y p e a k i n t i m e o f exoefnsion t h a t h a s t h e s n o w cap o r the mantle o f iniletion o n it, rroubeing t o o high? what d o y o u m e s n b y that? w p a t L s t h e p r o p e r height. Too much and too little, i t stiikes me, nean much o r iittle eccording a s « . have e standard b y which y o u c é n deter~ https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 95 mine whether o r not something i s i n excess. S o + say negatively i t will b e a co.paratively s a s y metter t o devine the proper objective o f the Fed<cral Reserve credit policy, elthough perhaps pretty diriicult t o define i practice. B u t t o give the discussion point, I to p r e v e n t inflation; I would slnost in would say g o s o l a r 4 5 saying thet entirely apsrt i r o m t h e téchnique o f t h e instrumentalities t o r giving efrect t o the credit policy o f the rederal Recerve syetem. The primary negative test i s thet i t never induces, supports, o r sssists preventable inflation. I n seying that I use the word “intlation" with sone d i crinination. I ao not m e m sinple expansion. I mean e n expansion o f credib that cosnnot justizy i t selr b y the results that that ereait produces. A n expansion o f c r e d i t that justifies itself b y a co.responding increase i n the total volume o f production does not wear, does not neces:arily wear, the aspects o f inflation, although i t may possibly carry within itsself the seeds o f inflation. 3 0 thet when we mean b y inglation a n expansion o f incuctry, supported by 8 n expansion o f credit, t h a t i v e s rise t o a n inrlated condition i n inuustry, i n which the addition o r credit https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 96 let o u t b y t h e r e s e r v e b a n k c o e s nothing, l e t u s say, e x ~ gensral cept t o b l o w u p t h e b a l l o o n o f erecit a n d r e i s e t h e level o f prices, w i t h t h e inevitable r:oction thet must follow thet course, w e are approaching t h i s question i n I a negative tisnner. t o m y mind, n cbher words, matter o f degree,a matter o f volume. 1 t is a T h e papers that have been p r e p a r e d w i t h g r e a t c a r e i n this c o n n e c t i o n u s e t h e 3 ss though they were seli cefining. the term “proper a n d reasonable", ) u s e s a s though they were self derining terms, 2 n d the other uses the term Yadequate" a s though that « e r e a self-cefining tern. the very yuestion involved. w o a b me@acure o f adequacy, what m e a s u r e a @ r e a s o n a b l e n e s s , can w e s e b up. I N o w , that i s w h e t measure a think w e are still contrronted w i t h that question, although I sssune w e will g e t some Light o n i t in some sutseiuent papers o r subsequent tupics. words, propriety b y w h a t s i g n o r messure; i n other b y whet s i g n d o y o u know that there i s 9 n inacequste o r adequate supply, anda by what messure c a n y o u determine t h e anount o f the superfluity, o r the amount o f the dericiency? I repeat o n c e more that, t o m y mind, i t i s fundamental to this whole discussion t h a t w e tell right n o w whether o r https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 97 not t h i s p r o p o s i t i o n i s correct, t h a t every ection b y a vyedsral res:rve b a n k i s a n action upon t h e total volume o r credit, j u s t a s much a s castings bucket 2if water intothe big reservoir i n a city i s e n sddition, n o t t o meet the individual supsly, b u t a n sddition t o the total available supp ly. Therefore, 1 f I amright i n thet essumption, 1 will g o so.far a s t o say that that 1 s true s s regards any o n e o f o u r t w e l v e f e d e r a l r e c e r v e districts. An addition i n san fraacisco i s potentially m tion i n New York a n d i n south Carolina. get t h e r e s o o n e r o r later, A I sacle t i s bounc t o n inflation started i n one Gistrict ultimately, unless controlled end checked, becories an inflation i n snoti-r uistrict. T o wy wind one of the peculiarities s n d theoretical objections t o our regional which reserve s y s t e m i s that s s y e t t h e r e 1 s n o w e t h o d b y one section o f the country c a n protect itself against a n one inflation supported b y e regionel reserve bank i n any district, e x c e p t through t h e intervention o f t h e Federal Reserve Bosrd. T h a t i s o n e o f t h e reesons w h y w é put d o w n the fourth question, thst touches o n that. i f it is true operate, thet t h e v o l u m e o r erccitis t h e t h i n g u p o n w h i c h w e then i t i s most important t h a t that volume o f credit should https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 98 be o p e r a t e d u p o n properly, . <very point. @ cannot, I i f I may u s e t h a t phrase, a t think, g e t s x a y from that. I still l o n g f o r light u p o n t h e juestion b y what test m a y we know whether t h e supply o f eredit i s o r i s not 8dequste. ure Mitchell: gay t h a t I B e f o r e w e fe e r n l u n c h I want t o think t h e t t h e r a t e s o f t h e F e d e r a l r e s e r v e banks c a n control credit policies t o 6 very great extent. so long e s the Federal reserve b a n k rate i s such that Lit does not afford t h e member bank a profit i n rediscounting, there cannot, i n my judgment, b e any great tendency t o undue inflation. I believe, a s Governor ucbougal hss stated, that the rates o f the Federal reserve banks todsy a r e pretty nearly right. I h a v e slways been o f the opinion that the Federal reserve bank rates should b e equal t o o r a trifle higher then the going. iate. T h e borrowing b y member banks f r o m the Federal reserve banks f o r the purpose o r lending i n “sll street o t a b i g profit i s n o doubt done i n soue o f the districts, e n d that should b e deplored, I d o not b e - lieve t h e F e d e r a l r e s e r v e b a n k s s h o u l d c o u n t e n a n c e s u c h an operation, beceuse i t i s tantamount t o the Fed:-ral re-« https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 99 serve banks lending in.irectly f o r speculstive purposes, ena I belisve thet there should b e some regulation o n the part o i the Fed-ral rese.ve banks t o control operations o f that kind. B u t I want t o imprese i t upon y o u thet m y views are that t h e rates o f the Federal Keserve banks should n o t arford t h e member benks a n y prait i n reaiscounting, that condition a ful @ aitairs c a n b e isintsined I s n a if ai nottear- a n y g r e e t inrlation. Recently, a n d I do not intend t o criticisa t h e poli c y of a n y o n s o r t h e F e d s r a l R e s e r v e b a n k s , t h e r e w a s o n i n - clinetion o n the port o f the Federal neserve B a n k o f S a n “rancisco to establish a 3-1/2 per cent rate, and I undera d that i t cate very nésrly n a ure Perrin: ure mitchell: t s passing, d i d i t not? L w e were“divided board, Y o u were Giviced establishing o 3-1/2 ver cont rate. o n the juestion o f d h y the san francisco Bank should think f o r one minute o f establishing 4 3-1/eper cent rate i s beyond n y comprehension. I think that i s the most rialculou: proposition t h s t h a s ever been put u p t o t h e Federal keserve Bos rd since I its hsve b e e n o n T h e bank rate i s going t o control this thing. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 100 Vice G o v e r n o r Platt: is a motion befor under .tand t h e r e Gentlenen, I u s toa sdjourn. T h e motion t o adjourn is not debatsble, (:hereunon, u p o n motion duly seconcec, t h é recessed trom 1:10 o'cloek p s t u u n p. m. t 0i sa l el closk g of the saue day.) The Joint 2zession o f the Freasral neserve B o a r d with of the Governors o n d Cheirman 2 d rederal neserve agents p.m., the Federal Reserve Banks reconvened a t 2:30 o'clock cursuant t o adjourninent. Vice Governor Platt. to order. T n e weeting will pleases cone T h e discussion o f t h e morning wandsrea some- what r o m t h é strict letter o r t h e topic rather natural. i think perhaps o n e resson w h y i t was not definitely stated that t h s chier onject o f the Federal reserve crocit policy wa. t . prevent inrlation w a s because t h a t r a c t w a . a little t o o obvious, i t also struck me that, inesmach a s this ise 5 regional system, t h a t t h e conditions i n one district a r e d i e r e n t r r o m those i n https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis LOL in enother 2 n d the position taken b y Governor morss a n d representatives o f the New York, Buston a n d Philacelphia wistricts i s naturally a little cirserent r r o m thet taken in some o f the other c k tricts. T h e Kichmond vistrict would b e i n p r a c t i c a l l y t h e s a m e p o s i t i o n i f i t w a s n o t Yor p o u t h Caroline, ,@rt o f N o r t h Carolina, T h e Viscussion séeus t o be s very interest- I presume, ing one; a n d perhaps @ i t has b e e n a dittle s l o w i n gstting heated up, perhaps, b u t w e hope t o get started this efternoon i n good form, T h e next topic is:-= 2. «shat relative importence should b e given t o the following factors i n deter.ining s u c h policy? 8, Federal Keserve reserves. b. I n t e r e s t r a t e s i n t h e o p e n market, ¢, Interest charged b y member banks, ad. Interest rates paid o n tine Goposits. é@. Belsnce o f traus s n d inward o r outward movenent o f gold. Credit c o n a i t i o n s i n , s n d exchanges w i t h , leading foreign countries. Volume o f b a n k l o a n s s n d ueposits. Business a n d industrial activity, present or prospective. . Conuodity price level. j. Condition o f security markets. The leadereon the program ror this discussion are messrs J a y a n d sesy, esi, o n v o u Liret. I f y o u a r e reedy, mur* v a y , w e will https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 102 wr. Chairman, I L would like, i f I may, t o first inquire i f i t i s the view o f the Bosrd that there should b e a n y attempt e t reaching a n y conclusion onwhat the Federal reserve policy should a l m et? I t i s dirfri- cult t o discuss t h e second topic unless some general understanding i s srrived a t o n the first, because dirrerent tactors.ould b e a r d i t f e r e n t policiss. Vice Governor Platt: I think y o u m a y sssume thet the p u r p o s e o f t h e c r e d i t p o l i c y i s t o p r é v e n t inrlation, at least, prevent inirlation? Platt. uy’ Willers T h a t that i e the major purpose, j i h y d o not y o u state your o w n conclu- sions, ur. Jay, a n d take t h e m 6 s your starting point? mle J a y : m u r , Chairian, i was t a l k i n g w i t h ur. w i l l e r during t h e lunch hour, a n d @sked h i m whether h e thought i t might b e possible t o gst a n expression o f opinion a s t o whet w e should a i n at; i n other words, e s t o whether w e should a i m a t anything more t h e n merely supplying o u r member banks w i t h credit s n d currency. w e Gid not havé a chance t o discuss whether o r not h e thought t h a t practical, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis LOZ but h e just n o w sugrested t h a t I might r e s d something I had written o u t b y wey o f a hypothetical question. not k n o w w h e t h e r w e w a n t t o g o b a c k i n t o t h s t o r not, ut, Miller: T h a t states y o u r o w n position a t the moment, c o e s i t not, a n d i s i t not t r o m thet position that you s p p r o s c h y o u r c i s c u s s i o n GS6s, t h e second ,usstion? F e d e r a l reserve credit policy should listrict asceet t o furnishing eredit a n d currency t o mei.ber b a n k s f o r ses:ronsl a n a 6isergency r e - guirements, B I n its national espect t o prevent credit expansion tron. d veloping into inflation end natural contraction iwom developing into t h e converse o f inflation; w h i e n 2 eek here derlstion. C B y whetever me.ns F e d e r a l res:rve credit p o l i c y i s made efrective t h e cistriet aspects o f the policy should harmonize t i t h the netional aspects. Now, t h a t i s just something that 4 roughly ,anclled ur, Chairman, t h e second topic, w h i c h was assigned to Governor sesy a n d m e t o read t h e leading pépers on, a n d https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 104 on which t w o others, u r . wartin 3 n d ur. Austin, I know, h a v e helped u s out b y their views, s o far 4 s i s a very diffi- cult one t o discuss, first o f a11 because the #nswer t o question No. 1 1 s not given t o u s is lett indertminate, either h y p o t h e t i c a l l y o r otherwise, e n d certainly because we were o n l y given twelve hundred words t o ciscuss t e n differvent influences o n determining o f credit policy. Of course t h e Federel reserve reserves s r e always 6 n important c o n s i d e r a t i o n . u r , Norri, that t h e y a r e a n easy guide, b u t a i n h i s paper, s a y s bad one. O n e of the others w h o h a s w r i t t e n s t a t e s t h a t t h e y s h o u l d b e t h e m a i n guide, e n d even goes s o tar 3 s t o suggest a n sutouwatic scale b y which, w h e n t h e reserves a r e a t s certain percente- sge the discount rate should be at s certsin percentage, snd s o on. I cannot help feeling with regard t o that that conditions i n the United states, i n the Feceral reserve penks, e n d i n Grest Britsin i n the Bank o r sngland, a t the present tine are s pretty good ergument egsinst sttempting t o have a by. W fixed scale t o weasure y o u r discount retes e have this tremendous reserve i n this country w h i c h has come t o u s due t o abnormal conditions arising o u t o f the w a r and, i t seems t o m e personally because o f t h i s https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 105 largely rvortuitous supply o f gola caning t o u s b y force ox necessity, whereas t h e Knglisth are getting along péer- fectly satis factorily end have much lower rates then w e hve, with a reserve deposits. o f o n l y r i t teen o r t w e n t y p e r c e n t o n t h e i r O f course their notes a r s secured b y @ much higher percentege o f reserve. Feeling very strongly,as 1 do, thet « 6 should have a nationsl policy which looks t o sausthing more than nerely supolying credit o n d currency t o the menber panks f o r their neeés, sessonsl and eu.ergency, I cannot help feeling, a s I stated i n regard t o juestion No. 1 , i f w e are t o base our larger national policy o n a n sttenmpt t o prevent inilsetion, és you s u g g e s t e d , o n d also possibly t o prevent s o m e of the rigors o r constrsetion, which always follow a perexpansion, t h e t w e muet have come w a y o f measuring whether w e heve a n inflation @ not; e n d if you will look st the d-finitions o f inflation i n the cictionary, y o u will s e e i t isslnost invariably stated a s a n undue movement 4n c u r r e n c y o r prices, t h a t t h e t w o a r e g r o u p e d together; they follow o n e andher a s closely i n the dictionary caefini- tion of inflation s s they d o i n the charts o f the two phenomena, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 106 Therefore, t h e messure o r whether o u r volume o f credit i s o u t o f l i n e with t h e volume o f production i s shown very largely i n prices, whether w e should make o s o that i n order t o astermine move i n our national credit pol- icy, w e should endesvor t o develop s u c h 8 system o f indices of procuction a n d prices, a n d such @ n 4snelysis o f t h e credit volume s s would enable u s t o determine whether t h e creagit volume i s getting o u t o f line w i t h proauction; and n o t o n l y t h e c r e d i t v o l u m e , b u t t h e a c t i v i t y o r credit, because t h e two are very closely related. b o that neve relt that t h e thrze topics, g , h, a n d i , were ones that, g i v e n such a erscit policy a s 1 have described, woulda pe t h e o n e s o f p e r h a p s t h e g r e a t e s t i u p o r t a n c e i n consicer- ing what o u r eredit policy shouls b e alter w e take into considerstion t h e c o n d i t i o n o f o u r 1éserves. Now, o n the u e s t i o n o f whether o r not w e havs b e e n in a period. o f inflation i n the past, o f course there has n been n o b a n k i n g s y s t e m - i n t h i s c c u n t r y t o t a k e e n y s e t i o in regard t o inflation, a n d i t nas been t o a considerable extent a matter o f jJudguent. of f u d g i e n t anywey; I t has g o t t o b e a matter b u t t h e r e havebeen n o statistical studies which have atteapted t o dauonstrate i t , a n d the https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 107 work that h e s b e e n done b y the « e v e r a l neserve Board, by the Larvard Bureau a n d otner econoiists i n this country in t h e p a s t s i x o r eig.t y o a r s , h s s provided a cet o r production a n d o t h e r s t a t i c s w h i c h i s q u i t e s u p s r i o r anything t h a t h s s y e t b e e n prouuced, to s o much s o that t h e “nglish e c o n o m i s t s a r e t s k i n g t h e m a t t e r u p very sctively end feel that they should develop such statistics i n Great Britain a n d o t h e r B u r o p e a n c o u n t r i e s f o r g u i d a n c e t h e r e es t o whether t h e y a r s g e t t i n g i n t o a n i n i l a t e d p e r i o d o r not. s o thet w e are moving gradually toward t h e develop- mént o f indices which w i l l eneble u s t o tell, m o r e ecurately t h a n hss been possible i n the vast, whether w e are g e t t i n g i n t o a n inrleted s i t u a t i . n o r not. T h e more this can be d:velowd the more nearly shall ue beable to t e l l w h e t h e r w e a r e g o i n g i n t h e r i g t t a i r e c t i o n i n the movenent o f t h e cycle, o r whetLer w e are going into an i n r l a t e d p h a s e o f it. Of the othsr topics i n this group, t h e rates seemto be o r great inportance, a n d I notice that o f those s h o have written, besices myself, o n this topic, the question or the r e l a t i v e i m p o r t a n c e o f discount . a t e s a s related to market rates, a n d t o the rates chargecd b y member banks https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 108 seem t o b e the point o f issue, w r ’ seay, 1 think, feels thet t h e local rates a r e the inportant ones t o b e consicered, and wre a r t i n , w h o also wrote onthe subject, 4slso thet v i e w e s I recelh it. f o r my personal feeling was that serve banks, t a k i n g t h e nationa i c t h e Federal r e - y s s 6 whole, t h e open .arket rates were o f greater interest t h e n the locel rates b e c a u s e w e K n o w t h a t i n niost o f t h e districts, and except , in the large centers, t h e locel rates a r e probably always will b e considerably a b o v e what t h e s e a ral reserve bank rat » usually w i l l be, s o thet there will be, o n the face crofit roc. recdiscounts with t h e Fedoral reserve of it, a bank.:, u e p r o b a b l y n e v e r c a n h a v e F e a s r a l res. r v e b a n k retes high enough t o prevent t h a t situation f r o m occurring. Thet Federal .eserve b a n k rates will exercise a n influence when t h e y g e t u p t o t i v e o r s i x p e r c e n t o n t h e b o r r o w i n g done b y local banks, i s unaoubtedly true, N e v e r t h e l e s s , in many ceases they will never s o s o high that the local banks cannot b y discounting actually make s profit. my belier i s that t h e open market i s s very inportant elenent i n c o n n e c t i o n w i t h t h e F e e r a l R e s e r v e oystem. t L think possibly t h e t e r m “open merkst" n e e d s s o m e derini- https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 109 tion. w e ere a p t t o think o f open merket operations very largely a s our veslings w i t h a bill market a n d t o some axtent i n Governiient s e c u r i t i e s . I t seems t o m e thet t h e open market--- following t h e anz logy thet wr’ uiller nade this tiorning o f one great pool o f credite-- i s one great stock ovol also, whether i t b e loens o f vecurities o n the exchange, ceptances, o n governn.ent s e c u r i t i e s , c o m e r c i a l paper, ac¢- o r any other r o r n o f short instruments o f the highest grace into which bankers a n d oth: rs having short term f u n d s t o invest p u b t h e i r money, s u r p l u s m o n e y t h a t bankis n o t n e e d e d i n industry a n d i n t h e r o u t i n e w o r k o f ing. Now, when 9 benk i n the country i s loaning all that i s necessary t o i t s customers, h 3 s m o r é t o losn, b u t doss n o t w i s h t o p u t i t i n t o l o n g t i n e bonds, i t puts i t into o n e o f these rorus o f short tine investments, T h e time ssue/as d o indivicuals who have woney that they dao not want t o k e e p i n b a n k s a n d y e t d o net n e e d i n t h e i r business, but which may b e called o n later. T h e y too put the money into these foris o f investment. Now, this open merket i s a very senbitive thing, I t siall volune o f instruments, canpared with the total https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 110 voluwe o f benking crsdit inetrunerts, y e t the rates o n this small vclume, which riuctuates quite largely and trequently, h a v e 9 grset Larlusnce o n the rates charged b y the member banks a n d other banks. ~ s r h a n s a n snelogy would b e with iosns o n ths stock exchange. F o r init ance, let u s assure t h a t there a r e a billion dollers i n monsy loaned out o n the stock exchange; t h e anount o f loans that change h a n d s s v e r y a a y s t t h r e e p e r cent, 1 o u r p e r cent, five p e r cent o r whatever i t m a y be, i s perhaps 20,000,000; yet, thst siiall amount, that small moving nargin, fixes the rate o n the whole anount, o n the whole billion dollars. That i s notexactly t r u e w i t h regard t o the relation o f the open nsrket t o the total crecit volue, b u t i n the larger pleces movex.ents i n the open warket gradually have an iniluenece o n the totalvoluie o r credit, a n d i t csens t o me thet i t i s through t h e open market t h e t t h e e a e r a l r e serve credit policy, whether exerted b y rate o r other wise, o r b y our o w n purchase a n d wales o r bills anda -ecurities, i s going t o becone orinarily sivective, a n d w e wight v e r y well have = rate s t which very f e w member banks are borrowing. four months. T h a t hss been true tor the lest three o r I f w e feel thst w e wish t o raise o u r rates https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 13h ror e n y given purpoce ..¢ iaight raise then, b u t i t might not aizect the use o f the rederal neserve -ysten at all; iz, o n ths other hand, w e sere t o sell sone o f our cecurities w e might thereby ceuse such 3 shrinkege i n the veluie ox funds avesilsble i n the open merket 6 0 t o raise the rate quite raeecalis a n d thereby bring our dlscount rate into play with our member benks; i n other words, arive t h e m to use our discount rates snd obtain saie of this credit back irom ue, Thet i s 9 method which h a s b e e n employed f o r many years i n England s n d other iLuropean countrie:, t o d o what they call make t h e bank rates eirective. T h e market r a t e does not always move with the bank rate. i z the bank hes 8 portfolio o f liguia cecu:ities t h e y c a n throw u p o n t h e market, t h e inarket L s obliged t o sbsorb them, a n d thereby thelr actual orricisl cimount r a t e i s mace errective, Now, with regard t o the relation o f reserve bank rates to the open market ratege-e a r d b y open merket rates I mean t h e general r a t e a t which surplus funds a r e invested in these various kincs o f short t e r m securit leseee i t seeiis to m e that w e ought t o keep o u r rates above t h e open market rate, t h e general o p e n market rete, i n o r d e r t h a t w e may 112 have s o m e c o n t r o l o f t h e u e s o f o u r f u n d s nerket. i n the open T h e r e may very well b e times when w e would have s certain reason, w h i c h w e ought t o have, i n m y opinion, Gistinctly i n wind w h e n w e d o 80, w h e n w e ought t o heve our rate below t h e open isrket rete, w h e n w e might w i s h to facilitates t h e u s e o r o u r f u n d s i n t h e o p e n market; but generslly .peaking, provided w e c o not w i s h t o encourage the banks t o syphon o u t o u r fundcs t o w e t h e m i n the open market t o r a profit, w e tchould keep our rates above the general rates prevailing i n the open market, s n d then w e won't have that .ituation sbout which Governor Strong asked ar. wills, o f asking a bank t o call i n its loans o n ths stock exchenge, I f our rate i s surrviclently high t o make i t unprofitable t o losn o n the etock exchenge t h e y -will d o thet o f their own accord, T h e r e f o r e 1 feel that https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis we shoulda t a k e g r e a t c o g n i z a n c e o f o p e n m e r k e t rates. Some o f us, lL think, s r é inclinsd t o reel that the open market applies t o t h e New York banks. N o w , i t hape pens thet stock exchange loans a r e mede i n New York Ulty but those loans m a y b e made f o r the benerit o f people a l l over the country. T h e r e i s a large uarket i n New York Ta b i l l s s n d Govern:.ent .ecurities. T h e r e i s a market i n https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 113 Sll other districts for bllls and sovernient securities, which market i s incressing s n d will probably extend Into sny Fed r a l reserve aistrict w h e r e surzlus fundas s r e apt t o gether, although it probsbly won't g o into districts which seldou have curjlus funds, s o that t h e open ierket i s not a matter o f one city o r uistrict alone, b u t i s a fiste ter for the country, a n d the rates are pretty well uniform on the same classes o f paper all over the muntry. I simply state . h a t I have, i n sadition t o what I have written, about the open warket i n 1¢lation t o local bank rates, t o indicate h o w i m p o r t a n t a n ¢lement i t seems t o we in Federal reserve credit policy. I n other words we should k e e p our eye all t h e tine o n the open market rates because they r=present the great volume o f sirolus funcs which move u p o r move down end which sfrect the Local ve. rates i n the cities a n d i n the districts throughout t h e entire country, i do not know thst I have anythin, -urther t o say o n this subject, beyonc w h s t I have written. Vice Governor Platt: G o v e r n o r Seay, I think you are the s e m n d leader o n this t o p i c o f shat relative importance should b e given t o the following ractors i n detcriiining such https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis policy. governor weey: uncerstood, . ? , Chsirnan, i w a s osked, t o give e n opinion, f o r p u r p o : Ss ofr aiscussion, upon t h e réleative v a l u e o r t e n ractois p u t r r w a r d b y the Board, w h i e h a r s supposed t o have a n influence u p o n t h e cetermination o f discount retes. resolving a T h s t i s sousthing like rate into i t s eleuaents a n a reasse:.bling t h e m eccording t o thelr co...eretal eirinity w i t h each other, and 1 s soncthing like articulsting 6 skeleton. i wight hseve snswereda t h e n i n order o r rearranged t h e n aco.rdaing to m y opinion, w h i c h «ould have b e e n 2 nstter o f d r y bones, and i t i s + question n o w wuether those bones c a n live. Ther-zore, while putting them i n the orcer i n which they should come according t o m y opinion i t would wive v e r y lite tle light upon t h e srgunents which l e a d u e t o these come clusions; I judge from the ciscussion which took place thie morning that t h se chilcren between wiich you hsve ssked u s t o distinguish heve sotten s o nuch nixed u p that it w o u l d t a k e 4 solor.on t o u n s c r a u b l e t h e m , tore d o not s e e how I and I there- can give the opinion s t which I srrive without reeaing t r o m o r quoting f r o m t h e arguments thet l e d t o m y conclusion, h e t h e r thet w i l l meet with 115 you a p p r o v e l a r not I cannot c a y y b u t I will endeavor t o ago i t i n that way, however. wr. ulller, this morning, stated, efter the discusSion which hed taken place, thet there were everal face tors entering i n t o t h e siatter which apje reply h a d not been touched upon; t h o t he hoped t o have them touched upon in this afternoon's ciscussion, a n d 1 hope that some of the:. will b e touched upon i n this paper. uy ulscussion a n d m y conclusions a r e s o mixed u p thet I dao not k n o w w h i c h i s which. L think m y c i s c u s s i o n is diviaed i n t o a nuuber o f conclusions, a n d + cannot give them better b y expre.: ing them verbally. whether 9 definite s n d equprehsnsive creait p o l i c y can b e laid down i n sdvance a n d 6 l i e d «ithout r o d i f i c a tion o r reappraissl o f the relstive iuportance o f the airisrent factors which lead t o the determinstion o f redige count rates, und:r the widely verying conoitions which srice i n t h i s c o u n t r y t r o m t i n e t o tine, u s y b e doutted, Governing principles, honever, trate: a y b e stated. f o illus- . t the neight o f recent credit expansion, w h e n the reserves o f redersl reserve banks had seriously declined, and t h e t e n d e n c y tovaraus f u r t h e r e x p a n s i o n w a s unniistake https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 116 able a n d Gangerous, t h e dominsting purpo.e i n ti«cing Feceral reserve b a n k rates w a s t o protect reserves. A t the present time, w h e n reascral res*rve b a n k res:rves a r e at a high retiouw and t h e reserves o f menber banks o f the country are i n excess o f comuercial venand snd sesking investment i n :ecurities, i t is obvious that ths protection of Federal reserve b a n k reserves cannot b e the pvriuery reason t o r fixing rates, a n d that other reasons w i i l a n d iust nsturally c o m e t o the rore. s w e regard must b e psid, however, b o t h t o ths current a n a ultinate errect o f a given r e t e a n a o f a rate policy. The distress s n d losses t o which very weny people have been subjected 3 s 6 result o r 8 nu.ber o f co.uplex causes arising o u t o f t h e war, t h e g r e e t e s t susrzsency e v e r e x - perienced i n the benking business, h e v e brought I n t o e x e istence meny distorted ideas o r t h e purpose i o r which t h e Federal Reserve s y s t e m w a s forsed, w h e t i t i s able t o ece n s sarely ettenpt t o accoiicouplish e n d m a y r e s s o n a b l y a piish. In con:idering 3 discount policy, i t i s well, therefore, to refer t o the Yunaagientsl principles u p o n which t h e Reserve s y s t e m w a . e s t a b l i s h e c e n a t h e c h i e t pvurposes o f https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis La? or t h e :ysten, w h i c h a r e fsirly w e l l werined i n the title to the Act. “ T o rurnish e n elastic currency, means o f recuiscounting conuwerelel psper, more 6rrective supervision o f banking . . thess purposes, t o ar-:ord t o establish s a ." T o sfreet i t « a 5 necestary t o gather reserves i n t o & cQimOn reservolr. The m o s t d e n g e r o u s & ¢@, O r concention, i n connection with t h system that has been put forward i s that i t cone+ trols the bank credit o f the nation; t h e charge that i t hes exercised thst control tyranously g r e w out o r thet ides, Up $ 8 certain point, t h e -ysteu possesses n o cone trol but 4 most Llindted tarluence o v e r t h e extension o f bank crecit t o ths co...eree o r the country, “hotever iay be conténusd b y sone, T h a t control is, o f course, soxere clsed b y the 30,000 benking institutions o f the netion. it fiay b e esrsucu thet s e t e v e r controls t h e extension o f credit, i n case o r ultinuate neeca, controls t h e credit sup- ply, b u t thet i s n o t s prectical ctateient o r yuestion under usuel o r norinal concitions. I t i s the ..sasuréble control over t h e u s e o f F e d e r a l K e s e r v e B a n k r e s e r v e s f o r f u r t h e r extension o r credit siter uenber benks have exhsaustsd their Own sumpplus r e s e r v e s t h a t u u s t b e l o d g e d so:ewhere, s i n c e https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1168 Lt is essentisl t o so.w-sciel .elrYare and ssrety. T h a t te a uistinetly cigyYorent matter which nos always b e e n controlled b y lew, T o s vlosting suprly o r cepitel o r credit in the hanes o f the banks o i the country controls interest rates b y coupstition, s n d the benks tneuselvées control t h e grant o f credit, s n d hsve t h e power t o grant b , a n d a o grant i t s o unrestrainedly s s t o nexe recourses t o rederal reserve banks necessary, 3 n d they mesy cavse srbarrecsinent before t h e restraining lo-luence o f #ecerel reserve banks cen b e brought i n t o play. I t i s only s h e n the banks generally a r e cuipeliecd t o cail upon recersl reserve banks that t h e p o w e r o r r e s e r v e b a n k s t o e x e r c i s e s n y c o n t r o l over credit begins, e n d i t i s st .uch tinss thet the rates and rete policy sscune greatest l.portence, The Ldes shoulé b e stirsnuously combatted thet t h e three billion aoiisrs o f golu nelau b y t h e receral : eserve banks i g a n incepencent r u n a o f thelr own, capable a ine cetinite expsnsion o n top o f bredit alrescy extend d by the banks upon this selisame fund. Aliusion is grequently mace to this fund ss ir it were idle, perforiing little service, end as ig Lt might be dissipated, o r enermously recuced, without sfrect ing the https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 119 eredit structure, a n d w i t h n o t h i n g b y t bensricial efirect to the p e o p l e a n d t h e benks i n d C a u orce, s n d 3 s i f Federal reserve banks should s e e k t o sti. ulete t h e use o f ¢redit or issue credit uirectly. based u p o n this fund. i t i s not yet 8 5 well unuerstood 9 5 i t shoula b e thet this i s t h e ultinate r s s e r v e o f t h e b a n k s o r t h e country, t h e reserve or fund upon which a l l cenk credits a n a wost o f our curr ency are based, Berore ths wer, i n 1914, the bank ca: posits o f the country amounted t o .21,328,000,00, s n d the psper currency o f the country (not including curzeney based o n silver) enounted t o 2,362,000,000, i.aking a n sggregete o r pee ,090,000,000 o f bank Lliesbilities a n a curreéeney supported bygohk. i n the entire country (not 311 oi “hich was i n the hands o f the bonxs) a:nounting s t thet tine t o ,1,844,000,- 000, T h e percentage o f gold t o ceposit liesbilities ond paper currency w a s 7.7. v f courses, t h e percentage o f gold actuelly held b y the banks and tressury was less. The voluuwe of g o l d i n ths country s t present amounts t o 3,858 ,000,000, a n d this g o l d fund n o w supports ueposit liabilities o r the banks aggregsting 438,558,000,000 s n d paper currency lisbilities egeregating ,4,450,000,000, s https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 120 tots] o f 4435, 108,000,000. T h s percentege o f our present gold holdings t o cepo.it Llisbilities sna paper currency i s 8.9, o n l y 1 . @ g r e a t e r t h e n i n 1914. O u r g o l d f u n a there- fore i s carrying es loan aluost a 6 heacy proportionately, ag the more limited gold rund hela i n 1914, There i s now 6 nuch greater concentration o f our gold in the banks, chiefly, o f course, i n rea r a l neserve Banks, gndunder t h e e r e d i t a n d c u r . e n c y p r i n c i p l e s o f t h e Act, it c a m b e inade t h e besis o f a volume o r ersdit approximate- ly twice a s large a s could have been extended under fomier benking methods. B u t w e l l defined principles should g o v e r n theextension o f this enormously increesed supply o f credit. Reserve Benks, therefore, sare not the source o f supplyof cepitel, but only eftord the mschinery b y which addtional credit m a y b e extended o n the existing capital supply. we have had a n exanple o f the déngers o r extending a voluus o f credit out o f proportion t o the volume o f goods and t h e pracuctive capseaity a n d consunptive powers o f the country.which should last u s for many, a e n y years, is undoubtedly t r u e thet t o o great 4 i t supply o r credit w i l l inevitably l e a d t o inflation, e n d i s i n itself inflation, and u n l e s s n e w u s e s f o r c r e d i t s r i s e t o s b s o r b t h e i n c r e s s e d https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis int supply, g a r e n d n o t b e n e r i t w i l l result. ‘ts e f f e c t i s t o cause 3 G r a n t e d that rise i n prices, h i g h p r i c e s r e q u i r e and sbsorb s larger volune o r crecit, e n d the chain i s enaless. C o n t i n u e d errort shoulu thererore p e wacs t o i n e press upon ths public ming t h e ract thst t h e redéral neserve “ystem is, i n its ¢.sence, a n d shoulc b e i n its plen o f operation, a "Reserve s y s t e m ” ;t h e t t h e r e s o u r c e s o f the red<ral Keserve banks a r e i n the mein t h e concentrated reserves o f t h e menber benks upon which thelr o u t s t a n d i n g credits s r e based; t h e t t h e g o l d held b y t h e Meserve B a n s over e n d above t h e aggregate reserve o f members, i s held in the place o f s n d t o redeem t h e currency issued b y Federal reserve banks, o n d thet the process o f reciscounting i s retrenching upon ress6rvés. The primary function o r rederal xeserve Banks is, snd wes intended t o be, "To proviae a n elestic currency” t o meet the oanking needs o f the country, which are rounded meinly upon trade and conu.erciel needs. T h e Neserve Benks can.ot e.ercise thie function without sirorcaing “neans o f rediscounting co.w.ercisl paper.” function o t t h e r e a e r a l aeserve. system, T h e second 4 s set forth i n the title o f the Act, therefore, follows logically s n a necessarily u p o n t h e primary function, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis concep-~ It i s probably right t o say that the original only liquid tion o r the Hederal xeservs system w a s thet co... ereiel end sgricultursl paper woulda se rediscountea, The r e g u l e t i o n s o f the Board a r e intended put thet conce;tion into practice. i n the m é i n t o l t has been thoroughly w e l l uncsrproved b y éxperisnce, however, e n d i s generelly stood, t h e t a very large proportion o f the lines o f credit of extenausd b y menber oanks, w h i l e coniorming t o rules eligibility, i s nevertheles¢e n o t liguia peper i n @ proper 3 s permsnent senses, s n d i s i n effect used b y the borrower t h e volume capits1, since thers lines a r e fairly constant; smsller. ot really liquid commerciel paper i s very much Reserve The volume o f truly liquid psper Which Federsl banks coule handle would b e practically unlimited. live o r liquid, 3 Being constant s t r e a m o f i t i n sny volime could o f psper would be safely henauled, a n d beceuse t h e t class carrying be drewn ror the purpose o f producing, purchssing, proand marketing goods i n one o r i.ore o 1 the steps o f t h e eess o f production, wanurecture u r distributian, t h e r e would be n o danger o f infletion, whatever the volume han@led. O v e r production might, o f course, o c c u r a n d cone https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Les sequently overexpansion, T h e s e s r e incidents o f produc« tion o n d trade which m a y never b e overcome. It i s the use o f FKedsral reserve b a n k resources i n lines of crecit psper o f a capitsl o r seni-capitsl] nature which neess t o be most carefully guarded, s n a i t can be guerasd only through uiscount regulations; t h e tendency to liberalize these regulations will require restraint. It i s impossible t o avoid being cailed upon b y banks for 9 supply o f funds f o r these capital a n d semi-cepital purposes, 3 s w e l l e s f o r vressonal a n d l i w i d purposes, and i t brings u s t o the inevitable conclusion that. Federal Reserve Bank rates t o their menbers tmst a s 3 governing principle b e oesed upon a n d bear a close r e l a t i o n t o the préveiling rates t o r bank funds o n Line o f credit paper current i n eny perticuler part o f t h e country, s n d cannot safely b e mede s o low e s t o encoursge t h s banks t o expend their loans o n this class o f paper t o the point which will neceésitate redis counting, If this prineuple o r opinion b e accepted, a unirorm discount rate throughout t h e country woulc b e neither logical nor practical. & low bank cis count : ate, Justified in some sections o f t h e country, w h e r e excess capital flends https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 124 to accumulate, L s nct expected t o pievail, a n d doss n o t prevail, generally throughout the country; a ¢o...ensurate reserve benk recis count rate night b e justiried i n those sections where capital i s plentiful, b u t i f the same redise count rate were apslied generally, i t vould inevitably tend t o increase denand t o r credit r o r capital purposes in thése sections o r t h e country ishich sre lacking i n cspital, e n d t h e rescurces o f reserve banks i n those sections would become t i e d u p i n such uses o r permitted. I t gmeuld be better rscogni-ed t h a t i t i s not t h e runction o f redersl reserve b a n k s t o f u r n i s h e r e c i t r o r c a p i t s l purposes. This might b e controlled b y not peruitting continuous corrowing by tieuber banks anywhere, i i that c a n b e cons, B u t i f the rate i s made s o low s s t o lead thes. into borrowing r o r protit, t h e n ths dsmage i s done. While o n e o f t h e most velusble restures o f t h e breceral Reserve Act, w h e t h e r i n si..o¢rgency o r f e r s e a s o n s ] purposes, is the provision r o r reais counting betwee banks, i t cannot b e rsassnebly contendec thet t h e banks of any one cistrict should b e encouraged o r péeruitted to PY use through s relstively l o w rate o r reasx count t h e creait resources o f t h e Federel reserve b e n k o f thst district w h e n 125 weney 1 8 borrowed s n d usea f o r ¢epiteal purposes t o a n e x tent which woula cause that Federal reserve b a n k t o rediscount w i t h other paderel https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis pees benks. It woula scen, therefore, t h e t t h e rates o f redersl reserve banks n e e d not b e unirorm, b u t should bear a rélae tion t o the rstes prevailing with meuber banks i n their respective districts. I t i s @ complic e t i o n th3t rates i n the lerge cities o f 911 districts e r e ususlly lowsr then the rate i n the country bénks. This will probably cause member banks i n one district to desl s t tines, not with their own réserve bank, but sith menber benks i n centers wheie t h e Keserve b a n k rate is lower, a n d likewise cause comsleint b y wenbers i n one district that they h:ve nots jual aaventsges with other cise» tricts, but thet i s one o f the complexities o f s n sciuite tedly c o u p l e x situation. In laying down end sdopting 3 discount policy, i t i s essential t o aeteri.ine o r sgres u p o n t h e fuudamentsel reactor which governs t h e interest rate, I t i s perhaps a s near t o the truth e s w é c a n come t o Bey that i t i s the relstive supply o f flosting capital. ered into a n d @ n u e n d e c T h i s rloating capitel i s gsth- b y t h e benks o f tie country. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 126 hen theee banks gensrally espply t o the reserve banks for rediscount o f line o f credit paper, i t i s not until their s u r p l u s r e s e r v e s e r e l o w o r h a v e b e c o n e exhsusted. This 1 s usually precedsu b y sone rise i n the interest rate, and i g i t i s not, i t can only b s because the bank: have recourse t o souwée lerge additionel sup.ly o f creult, nomely reserve benks, s n d because further they c a n obtein this additional supply o f credit s t 3 price which will enable them t o continue t h e o l d rates a t = profit. I n thst case interest rates would never change. The interest r a t e is, o r should be, a bsroneter o f the credit demand and should rise a n d if not srtificelly cone trolled will rise, w i t h credit Geuena, s n a t h e rediscount rate should b e sensitive t o the dsuana and reflect it, ang should never be nedé low encugh t o encourage the uss of Reserve benk funds for profit. T h i s may b e eleuéentary trom a reserve bank point o f view, but apparently i t is not f r o u . @ public point ofr view, The foregoing applies t o tho co..erelal rediscount rete, The operation o f Reserve banks calls f o r more t h e n ons discount rate, o r d i f e r e n t r a t e s u p o n airferent clssses https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 127 oftransactions. T h i s is recognized i n the act. The open market rete i s and shoulda be, governed b y Girrerent considerations, s i n c e dirferent principles 9 n d cirterent clesses o f peper ere involved. oince t h s o b i l i t y o f t h e r e s e r v s b a n k s t o supply credit increases o r dé#ainishes with the supply of their gold, there should be, a s there is, a distinct r a t e policy towards the those c p e n market t r - n s a c t i o n s w h i e h t e n d t o arrect flow o f gold rrom one country t o snother, a n d which esrfect the volume o f internetionel business e6pend-nt upon the supply o f internationsl cvedit o r the supply o f c redit in other countries. e b as thers is, 5 cistinet rate Also t h e r e s h o u l d , policy towards bills o f excnange O F 5 liquid nature, nether domestic o r ftoreign, purchssoa i n the open market. This o h a s s o f h e s e r v e b a n k o p e r a t i o n s ccoés notpresent sg many complications, Conclusion, Predicating conclusions u , o n t h e ftoregeing ocservations the uiscount policy o i rederal reserve benks shoulda b e consi: cred under t w o headings, rate a n d t h s o p e n m a r k e t r a t e . T h e coOu:ercisl dis count https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis COwwnERCTAL w I s C o U N T R A T E , The conmercial ciscount r a t e should b e governed b y the fectors submitted t o r ais cussion, i n the following or..er o r relative Liuportance: 1 (c) H s t e s cherged b y banks t o their custoners. 2(b)}) I n t e r e s t r s t e s i n t h e o p e n market. (g) T h e volume o f bank loans and ceposits. ( I n d i cative o f the reserve position.) (h) Business end industriel activity. (°resaging cenend vor credit.) (1) C o m u o d i t y price levels ( a s oitecting t h e volume of credit required, b u t n o t w i t h view o f price ontrol.) Condition o f security market ( a s indicative o r supply o f investment o r rlosting csplitel). Interest rates o n ti.s deposits, ( T h i s i s mere- ly a symptom of serscity o f capital). OPEN M A R K E T R A T E S Open merket rates ( o n benkers' acceptsnces). Belence o f trade e n d i n w a r d o r o u t w a r d r l o w o f gold. Credit conditions i n , s i d exchange with, leading foreign countrics. PKITECTIUN O F F H U E K A L K E E . RVE B A N K RESERVES. Finally; a n e n t h e intrieate p l a y o f these o r other fectors combines t o errect a drain upon t h e reserves, p r e - https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 129 sent o r prospective, t h e n t h e protection o f reserve b a n k reserves would become t h e orluery con_iceration. ur, J a y . pepper? H m a y L ask G o v e r n o r c e a y a question o n his e says “Thet federsl reserve b a n k rates t o their inenbers must a s a governing principle, b e besed upon a n d bear a closs relation t o thse prevailing rates for bank yunds o n l i n e o f c r e d i t p s p e r c u r r e n t t h sny particuler part o f the country, a n d cenuot sarely b e mede s o low a s to encourage the benks t o exsand their loans o n this class of paper t o the point w h i c h will necessitate redis- counting." w s y L ask how, i n his judgiuent, the rour and 6 hsli p e r cent r a t e o f many banks i n agricultural districts, where t h e rates a r e o n line o f crecit paper f r o m s i x t o seven p e r csnt, a r e justified, i r his statenent o r snslysis is correct? it s o happens thst i n our district, which i s comprised o r six divisions, five o r then sre governed b y the s i x p e r cent rate. I t i s not le-sl ror t h e banks t o charge more a n d they d o not charge more, nstional banks d o not charge more. T h e r e i s one state, south Caro- lina, i n which the legal rate i s eignt per cent. I the o p i n i o n t h a t t h e r e s h o u l d b e 9 an of cowbination o f rat2s https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 130 end o f restrsint u p o n the banks t n order t o exercise t h e most benevolent s n d most ezrective control, e n d 1 think ea rour snd 6 helf per e-nt rate under >sresent conditions w u l d not greatly encourage a n y iniletion i n those tive sections of our district t o which I Governor strongé borrower, have referred. I s not south Csrolina the largest i n proportion, o f sny section i n your Gis trict? s h e w a s the largest borrower i n pro- Governor weay: portion, b u t there was a very great aeal o f restraint, o t h e r than t h e d i s c o u n t r a t e , 3 very g r e a t desl o f restraint e x e r e cised i n the South Carolina district, straint I 2 n d without t h a t r e e think that worse conditions might k a v e developed in that state. ‘ g @ i s one other opinion t h a t has b e e sévanced i n connection w i t h that which I 47 n o t illuadinating, you cannot stete a think i s pertinent, a n d that i s thet s s a gsneral principle principle o r any governing i d c a which is not subject t o certein veristions béecsuse o f the veriety or conditions existing i n this c m untry a n d i n any district. lLrepeat that o n e o f the consicerations w h i c h woulc g o v e r n the determination o f the rete i s the interest r a t e charged by the member banks i n thet district. I think i t should not b e made profitable f o r these member banks t o borrows https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 131 Ii w e cannot have diriverent rates, a n d w 6 cannot, t h e n i n a casé i n which i n one civision t h e rete i s higher t h e n it is i n ths rest of the district, some other iniluence nust b e brought t o bear, we, Jays s u p o o s e thet this were 4 branch system, snd there wae a central governing body, a n a t h e principle were adopted that w e diould not have uniform rates i n 51il the districts, h o w would w e cdeal with a situetion i r the current rate i n s citrict i s 6 per cent c r rour 4 n d a helf per cent-e+ h o w would w e deal with i t i n some other <clse trict where t h e surrent r o t e i s eicht o r t e n per cent? woule w e still have the 4-1/2 per cent rato? Governor seay: wD. SEY: I n those dis tricts? Yes. Governor -:say: I c o n o t t h i n k i t woulda b e possibje tohave the 4-1/2 per cent rate. ur’ Jay: I v e have it noweee 6m speaking o f the present tine. Governor csay; w e have i t now, 9 6 I uncerstand, b e e céuse i t tias thoughtthst the red:ral reserve bank rate could b e nade without rersrence t o the juestion o f inilae- tion, w @ were i n s liquideting market, a n d that was one or the ergunents f o r revucing t h e Federal reserve b a n k rate https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 132 toseven, to six, to five and to 4#1/2, I t was then held thet whatever t h e rsts night b e thane W a s n o danger o f rée currency o r inrlation s t that tiie, u y coun opinion i s thst the redsral reserve bank rate shoulda b e mace senbitive to t h e credit denand; t h e t t h e interest r a t e i n the country et large i s the baronucter, I r , however, t h s uwember banks can a p p l y t o t h e F e d r e l r e s e r v e b a n k s a n d o b t a i n a n Llllinit- able guentity o r credit, t h e n i t will not control s n d ine Ylation will b e brouszht about. Vice Governor >lett: s O Might s s k t h e s u e question ina little more Girect rorm, s u p p o s e y o u h a d the right to make ¢ dij terent rate i n south Carolina, w o u l d y o u ado Lt? Governor seay: I believe I wuld. Vicec Governor Platt; Governor seay: I A n d how would i t work out? will snsver that e o a t t e y o u ecek: shat was the con:iceration which coverned t h e receral heserve Board a t one time when they rixea s conuodity rate which wes t o be given only t o those banking inetitutions in South Carolinas o r elsswhere which did not charge over $ix per cent t o thelr customers? Vice Governor Platts: I t had urdoubtedly a n influence https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis on the rate. Governor seay:; I t hed mime influence, o r rather i t hed n o influence, becauss those banks would rather charge eight p e r cent t o their customers t u a n t o borrm f r o m u s snd lend i t at six per cent. T h e y made more money b y it. This i s not s simple question, red i t t o u s for <iscussion. complicated question. o r y o u woul. n o t have referi t i s 6 n interesting 9nd- T h e r e i s another proposition, a n d thet i s that t h e City benks charge o n e rate e n d t h e country bsnks charges another rate. wP weCord; vVarolina a Y o u are going t o have i n Columbia, south 6 per cent rate s n d the bslence o f t h e state c¢ight p e r cent, Governor seay: i t i s very unfortunste thst one legal raté could not b e fixed, s o far a s we are concerned, b u t it i s pretty well recognized that s uniform interest rateees not a discount ratees- i s inpracticable. I think winnege polis would argue that i t would b e s grest hardship t o that territory, I think wr’ prlch advanced t h e orgunient it the interest rates w e r e meus uniform i t would prevent capital coming irom other perts o f the country and flowing into thst part o f t h e country where i t i s most nesced, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 134 Thererore t h s curren’ interest r a t e i n other parts @ the ccuntry i s tot practical ror you i n the winnespolis district. However) t h o s e o r e juestions t h e t w i 1 2 hpve t o b e sored our n c o n l y fevom the e w nomic point o f visu, b u t f r o m the practical peint o r view. Vice Governor Platt: I leading papers. think w e have had very good - a v e r a l others h e v e submitted pepers o n this topic, slthough not a . many, sérhea s , 368 O n other pape ers, u r , Austin, # 6 will b e glad t o heer from you. mr* Austin: w s Sheirman e n d gentlemen, my paper o n this topic I i n preparing had n o idea o t liiposing n y views sbout the errect of the Federal r e s e r ébenk rate upon the members here, b u t I did call attention t o shat 1 thought was 8 very serious metter f o r u s t o consia:r, a n d tast i s the veriety o f dism@unt rates i n the feasral reserve banks, end I believe the way t o d:termine what our policy shall , be o m the discount rate i s by basirg i t o n the reserve. Tn ur. seay's very interesting paper, sfter giving oll kinds o f reasuns r e r controlling t h e ails count r a t e h e winds u p b y saying “when the intricate pley o f these o r other factors conbiues t o srfrecta a r a i n upon t h e reserves, present o r prospective, t h e n the protection o f reserve b a n k https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis reserves w o u l d becoiie t h e p r i u s r y c o n s i u s r a t i o n s In all the pepers I have resd they have sterted off for by giving a v a r k ty a ressons/controlling the c i count rate other then reserves, b u t they all admit thet s t s tine when t h e ovsrations o f the banks begin t o araw o n the r e e serve a n d r e d u c e t h e reserve, t h a t t h e n t h e prinary policy of the benk should b e t h e protsetion o t t h e Federel reserve res: rves. As I ssid before, m y ides ias t o csll attention t o the dirrerent rates i n the Federal reserve banks ond t o see 4¢ w e cannot d:vise sone w a y b y which w e o u l d siways b e eitteective i n control, b y unirforiuity i n principle; not uniromity o f rate, b u t sone unitor.ity o f principle. f si. sure that the public, efter reading our stetements c o n teining dirferent rates, feels that there i s n o uniformity of opinion smong Feacral reserve banks # 8 to what controls the dis count rete, a s there should be, 4nd their messure of the situstion i s our reserves. I an sure thet when they ses 3 four psr cent rate i n can riancisco, a n d 63 per cent reservs, 6 four p e r cent rete i n New York with a n 88 o r 8 5 per cent reserve, w i t h Boston e n d Philadelphia the sane rate a n d about t h e same reserve, w i t h 4 four a m https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 136 5 half @ t o u r p e r cert rate i n Chicago, a n d with vallas end sensas C i t y a n d sone o f the other banks w i t h a four and a halt p e r cont rate, w e n Chissgo h a s a n 8 5 psr cent reserve a n d ballas e n d scuwe o f the other banks a r e cown to 60, 6 2 o r 63, that t h e y most f o r i some judgient s s t o whether o r not w e sre seting o n eny #elledetermined o r welltixed principle, I was very much surprised t o hésr ur. Morss s a y this worning that h e would favor reising the Giscount rate n o matter h o w b l e t h e reserve was, i f he thought business c o n e ditions warranted it. I was just reeding t h e other d a y a statement b y some economic writer w h o s a i d h e a l d not bee lieve t h e public would accept 3 reise i n a i wmunt rates which was out o x proportion t o the reserves o f the banks, even though t h e business conditions d i a warrant lt. Vice Governor Platt: T h e a t i s a pretty g o o d argument yor us t o psy out some gold. wy, Austin: t cones right back t o youe B u t i cannot hoard o r bury it; i t comes back. I Y o u n some o f the pspers the «ritsis say that they hope the public will form t h e habit o f noticing t h e dscount retes a n d t h e reserves o r t h e reserve bonks a n d apgreciate w h a t rluctuetions https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis interesting talk this morning, slanter borrowing T r o u 4 member bank ss forming a Gistinet increase i n the vciune c f cred that thet roney w e s paid out i n Chicsgo, iclec tg 4¢ nct likely that the p losn wont t o pertiss w h o were indebted t o banks 6 n a served to tske v p loens meade b y Federal reserve banks, s o that the amount o % cretit w a s n o t stftiectsed? ‘ h i l e h e may heve made 4 ican down south of wl,000, i t was paid off in other banke, Now, thet sane statenent might apply t o Governor streng's remark about our pureieses of Gov. rniuont securities, If t h e ,5C0,000,000 proceeds o f these ourcheses roneined 2g 9 fund 1 a the hends o f sellers sesking reinvestment, it vould w o r k herm, b u t there t e quite 2 probability a it heaving bésn wiod t o take u p other cents a n d t o reduce losns o t t h e ssceral reserve banks, s c tust there w a s sinmplya shitting o f ownership a n d n o increase i n the volune or credit. I t scsns t o m e w e c e n r o s a y thet a n y loan transaction results i n a n increase o r deersase i n the volume o f eredit. T e t i s only nerlected i n the stetements 138 or the benks, w h i c h will show whether t h e Yolume o f credit is increasing, o r wisther t h e p r o c e s s used t o pay cir others. purpose t h e n 8 acersase I o f n e w l o a n s #reé v they a r e n o t used i o r i n t h e percentege o r reserves indicate that, a n d t h e discount rates could b e fixe accordingly. Qoux Giscount rates are a n expression o f our willinge ness a n d sbility t o extend credit service i n the w a y o r https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis selling credit, a n d there i s n o better w a y o r determining that sbility t h a n b y our re:erves. I d o not k n o w t h a t I have a n y t h i n g m o r e t o s s y o n t h i s subjeet, but I would like to ¢-eak about 9 mettsr which has come w p quite frequently, a n d thet i s the question of the menber b a n k doing tusiness w i t h the Fed: ral reserve benk o t a profit. i . v i s c u s s i n g i t w e have reverred t o me snglanad a great deal, a n d t h e bankers o v e r there tell they have n o experience thst will heip u s i n that, because no joint stock bank sver reciscounts w i t h the Bank o f ingelend a n d never sells a n y o f its psper, either « i counted o r bought, s o w e have n o experience slong that line t o help us, b u t i t seensto m e f o r u s t o talk spout i t a s 9 loss or gain i s wrong. T h e situation i s this. A menber bani https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 139 has dé.ands r r o m its custoners f o r loans thst l t eannot meet, a n d i n order t o neet t h e m i t applies t o the bederal reserve b a n k a n d submits gensraliy t h e best paper, short tine paper, w h i c h has quite 6 varicty o f rete, I t prob- ably takes vaper which bears the lowest rate, but thet is limaterial, T h e t bank hes got c e r t a i n s:ount o f money to supply i t s custeusrs a n d i t i s inmatcrial s h a t t h e paper they are ciscounting w sts them. they are going t o gat for it. Federal hKeserve bank a t I t is not materiel that I f he rediscounts a t the f o u r o r four s n d s halt p e r cent I aim very sure h e does not make loans t o his customers at a lowsr rate. I f he has t o iake 8 new rete h e i s going to charge s high rate. i t is inneterial what the peper t h e y a l s c o u n t c o s t s t h e ben:; i t is 8 question w h a t they c e n getrron t h e proceecs o f that sale, a n d I do not there i e think such 9 question a s doing business a t 6 Fed-ral reserve bank a t a loss o r 6 gain. , Vice Governor Platt: w x . martin, w e will n o w b e eled t o heer f r o n you, ur? nartins u r . Chairnan, i t seens t o me thet any Gis cussion o f the relative importance o f t h e t e n factors mentioned i n topic 2 must necessarily a t this tine b e theo- 140 retical. I t i s true that t h e banks w e r s opened u p seve n years ago, b u t w a r was across t h e water e n d t h e t w o a n d a halt years succeeding their opening w e r e spent i n the edu- https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis cation o f the banks. T h e n w e got into t h e w a r anda w e geined w a r experience a n d post w a r sxperience, a s G a ernor “trong stetec t h i s morning, b u t w e have h a d n o axverience st sll under normal conditions, s o thet i t is dit ficult to come t o s conclusion it, i n fact, w e ever c a n come t o one, 3 s t o th: relative importance o f these factors; a n d thet i s borne out b y the fact that ur’ J s p put them i n one ordsr a n d ur. S e a y puts t h e m i n another order, «9. Austin puts t h e m i n 9 third order, a n d L belisve t h a t these factors w i l l c h e n g e a n d shoulda change, w i t h c a c h o f t h e seversl ulstricts, c e r t a i n l y r i g h t n o w w h e n t h e y a r e i n the tormetiv e otage. u r . J a y has little troubie w i t h high interest rates suthorized b y the law of his state, end naturally t h e open msrket rots i s t h e w n t r o l l i n g f a c e tor. u r e sesy, o n the other hand, i s troubled s h h a conglomeration o f rates i n various states, e n d the situeetion i n his case i t seems t o m e psrhaps i s more: nearly like thet o f e11 the other banks than the situation i n New York. Y o u tind him, thererore, looking t o the rates https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 141 that t h e bank charges t h e customer a n a giving t h e m more ‘mportonce t h a n c e s s + Now, a s ur. w i l l e r s a i d t h i s m o r n i n g , i f 9 men borrows ten thousand dollers, secured b y s o many bales o f cotton, the p r o c e e d s o f that l o a n increase t h e t o b s l volume o f credit snd thet i s exactly t h e proper thing. I t ceases t o bse a proper i n c r e s s e o f c r e d i t o n l y w h e n i t l a c k s t h e I n h e r e n t liquidity t o put that increase o n t o f existence w h e n the need expires. Then, i t seems t o me that the basis o f @ sound credit policy would b e i n the ract that loans a r e jade t o meet the needs and loans g o Gown when the needs are out o f the way snd there i s no surglus creait o n the market t o be used i n en extraordinary way. T h e r e t s n o use, i t seeris to me, o f c o n s i d e r i n g t h e r e d i s c o u n t r a t e i n a n y o t h e r w a y than thet i t is an index of the «ederal reserve benks' crecdit polley. w e have g o t t o give i t that liportance. Now, a rate set b y a fed rel reserve bank that will enable nienber benks t o borrow f a r legitinate neeas, s n d a t t h e same time doses not encourage t h e m t o borrow forprinary pure poses o f profite-- understand now, i I am not saying r o r purposes o f profit, b u t forprinery purposes o r profltee«- https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 142 becsuse e 1 1 i s for i n most c a s s s t h e r e a s o n benkse b o r r o w a t e profit; b u t the priuery purpose o f that borrowing should or J our credit wrong i s rate our else o r profit, 3 tor not b e polry l s wrong. i t would b e a fortunate thing, i t seens to m8, i f the borrowing could b e controlled sutoustically by t h e r a t e , T h a t e s n n o t b e done, b e c s u s e per cent r a t e here, # e have 3 ten s n eight p e r cent r a t e here, 6 8 six per unless cent rate here a n d & seven p e r cent r a t e there, a n d diniposr5 rate i s set t o r e a c h state i t would b e utterly sible t o autonmstically control the situation. Therefore, the possibility o f controlling the gituetion sutoustice~ slly, b y the rate, i t seeas t o m e i s 6linineted. T h e truth i s the ederal reserve system i s traveling a n unblazed trail. Y o u esmiot t o k e x r reign e:perience 9 s 3 guide, Now, t h e rate cannot b é cot, 3 8 I see it, t o sutousticslly control the borrowing b y menber benks. T h e y sre at going t o borrow a n d they will t e und r temptstion, and Least, o n account o r the ciiverence between our rate the the r a t e t h a t t h e y c é n c h a r g e t h e i r c u s t o m e r s u n c e r law t o make 9 profit. T h a t will b e their constant teimpte- tion. C o n s e q u e n t l y I hardly see how w é con svoid the attention conclusion thst while w e must give most cereful https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 146 to the rates, w e wight s s well race the proposition that, unfortunate a s i t may be, t h e banks a r e going t o be coimelled t o exercise a petore, + certein suount a discretion. a s i L said would like t o see i t sutomatically d o n e b y t h e rates, but w e are facing 3 situetion there the rato will not d o it, s o while you have got t o conriaer that rate, and i n considering thet rate have got t o besr i n mind the rate that your iienber banks charge their custonsrs i n the Giftrerent operations o f the district, a t the sane tine I do not s e e how w e c a n svoid t h e use o f discretion i n avoide ing borrowing o f any member bank ror the primary purpose of msking s profit. I would also like t o say that t h e public alusys looks at o u r r a t e s i n c o n n e c t i o n w i t h o u r «eserves, e n d the closer o u r res:rves c a n b e rormulated i n the publishec ctate~ ments t o aporoxinate a n d correspond w i t h t h e changss i n rate, b y just that m u c h a r e w e i n less possibility a f being misunderstood, I co not know thet i t cen ever be done, put i f our reserve percentage could o e inaicative o t thece ten factors a little bit, s o thet a raising a r lowering of the rate o u l d includs t h e m all, I less chance o f being nisunaerstoad. believe w e would stand https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 144 I believe t h i s topic i s going t o b e o n our program vesar after year a n d that sone d e y w e will find t h e general principle. inure AUStIn: Y o u sjid banks thet borrow f o r profit sltogether? mr wartin: P r i n a r i l y t o r profit. am austin: I s n ' t there clvevs « ° profit Yherkéthe country b a n k rediscounts w i t h you, between what t h e y g e t end whet they e r e charging? ure martin: T h a t i s where t h e ciscretion conics in. inP, Austin: B u t i f they only borrow f o r profit w h y con't they use up sll the reserve thet you have? mur’ sartin: f o r t h e simple r e e s o n t h a t sonetines they will come t o the office a n d b y tseiking t o then, ssying, “it o e borrow t h e money n o w shat s r e y o u going t o G o when the crop season comes on", t h e y listen t o reason . mr. Austin, p o n ' t thet huppen t o only e very few custoners? ur, wartin: N ; I wouldn't s a y a very few. Vice Governor Platt, I s thet t h e o n l y r e a o n people are n o t b o r r o w i n g n o w m o r e lsergely t h e n t h e y a r e : ure martin: N o , I do not nean t o say thet. T h e r e https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ien't t h e denend--Vice G o v e r n o r P l a t t : ir, mactin: fit. T h e r é a r e t w o w a y s o f b o r r o w i n g r o r pre- O n e i s t o put h i s soney o u t buy business with it. t h e other i s t o g o and I f the business isn't i n sight h e isn't und:r the tezpbation o f going out and buying the business, a n d when i t i s i n sight h e j s mighty lisble t o t r y to borrow t o g o get the business u n a he may need a word or caution, Vice Governor Platt: T h e r e would b e n o profit i n borrowing f r o n the st. L o u i s Bank s n d buying o p e n merket commercisl paper o r acceptances? wr, Martin: N e t now. Governor Norris: I a gussition. would like t o ssk 1 ide martin I f I understood h i n correctly h e said thet different reserve banks would satcach caiiterent degrees of rsletive ingortsnce t o these various factors, Mr. M a r i n ; ¥ e s . Governor Norrie: I would l i k e t o ssk h i n whether h e does n o t also think that a n y o n e o f the ressrve b a n k w o u l d attach d i f f e r c n t d e g r e e s o f lmportance t o thsse factors https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis at dif ferent t i m e s ? wD, martin: t h y , i Governcr Norris: I think so,. yess. had supposed y o u would answer i t I t seams t o m e really that t h i s whole gues- in thet way. tion comes d o w n t o whet «=r, d a y sal» i n the beginning o f the discussion o f this topic, t h a t 1 t all depends o n what you are alniing st. Viee Governor Platt: I s there anyone e l s e w h o desires to speak t o this Topic No. 2 ? ur. Mlliler: I attention want t o take this opportunity t o a l l t o some charts t h a t h a v e b e e n recently t h e sub- fecg of a great aeal of study b y the staft of the Board's vivision o f Analysis, i n connection with thst o f three o f the banks. T h e y m a y perhaps serve t o bring o u t t h e point o f view thet h a s been expressed i n one o r t w o o f t h e rence te. I think hss b e e n implicit i n scme o f the state- ments which have b e e n made, (ar. miller indicated t o the conference t w o charts which hed been pleced o n the wall o f the Conference room. ) If y o u s t a r t w i t h s and desire t o k n o w what t h e volune o r business is,/to m y mind t h e most promising point o f view from which t o speroach a eredit study o r a stucy o f the https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 147 credit situstion, i s at large; t h a t 1 s to say, viewed not in a n y p a r t i c u l s r t o w n b u t i n t h e c o u n t r y a t lerge, you turn t o the bess single reflection w e heve o f thet, although it could not b e called = messure, bsceuse there l e n o com- petent measure a s yest available, e n d i t will be found that the statistics that t h e Federal keserve Board has been sccumulating f o r some yésra past now, i n the hope o f devis- ing a n accounting thet shows the volume o f creait that i s in use, i n ordsr t o retlect t h e total volume o f business transact fons--- this (indicating o n plet) i s the line, a n d in order t o e l i m i n a t e t h e i n f l u e n c e o f t h e greet v o l u m e of stock sxchsnge trenactions, N e w Your i s not incluaed in t h e figures 3 s they a r e presented here. thing a little more point; T o give t h e i n other words, t o get sone line u p o n t h e v c l u n e o f b u s i n e s s t h e t c o n c e r n s i t s e l f w i t h the t u r n o v e r o f c o m u o d i t i e s e n d m a t c r i a l s t h a t e n t e r i n t o production a n d into distribution o r enter into actusl u s e in consumption, i f you start here i n 1922 (indicating o n chart )ytw get something thet i s not the present cituation, of which w e have sone c a r e o e should undertake t o superinmose u p o n this plst t o show t h e trend, y o u would heve 2 distinct upward trend i n business, a n d i t would b e a 148 eurve inclined soiewhat a s follows (demonstrating o n chart). Unniistakably, then, these rigures indicate that there has been, during t h e recent months, a very noticeable i n - eresse i n the total volume o f business i n the @ untry a s reflected i n the grest mass o f transactions t h a t a r e afrected through webits t o the accounts o f individisis w i t h t h e banks thst a r e referred t o i n this census a n d which may b e https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis taken a s representative o f t h e genersl movenent. Now, w e want t o know whet has done that. 6n inersase i n business. I s i t fictitious? T h e r e is i s i t merely thet there i s a boom movement o n and there i s a bidding up o f prices, s u c h s s w e usually mMve normally i n 2 period of inflation, o r i s i t bottoned upon something that need give u s a n y concern? N o w , w h e n w e move f r o m this a n d g o to t h i s l i n e ( i n d i c a t i n g o n chart) w h i c h i n d i c e t e s t h cost o f production, this line being a n index reflecting the movement o f production i n certain o f t h e representative basic manuzacturing incustries o f t h e country, w e see that a t t h e same tine that t h e volume a f business h a s b e e n rising there l e s also been a pretty steady rise i n the volume o f production, i n the output o f t h e soil, output o f textiles, e n d s o c n and s o on. i n the s o n e have gone https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 149 up more rapidly than others (incicating o n chart) e n d some have n o t gone u p a t Governcr strong? iuPe Willer; down o f courees, I s coal incluaéd? m e t i s incluced a n d i t holds t h e thing I n that particuler instance i f coel prosuction has besn normal this line (indicating) w o u l d p very mach more pronouncedly. have s h o t : u Governor otrong: v o e s that sccount y o r t h e sharp adropt inr* willer; T h e r e i s little drop. I suppose you would call thet cessonal, probsbly s little seasonal drop. Therefore t h e m o v e m e n t o f that l i n e f o r a n y particular month i s not t o be taken as a group barometer. I t is when you take the trend over a series o r months end that series of months expresses. what i s souetines called b y economists s new phase o r the cycle, that i t becou.es significent. This (indicating) indicates, o r seems t o indicate, let m e say, rather, t h a t w e are n o w slreaday getting tairly well a d v a n c e d i n s n e w p h a s e o f t h e b u s i n e s s cycle; i n other words that recoeery i s now a n actual fact; i t is i n process, a n d while i t doe: n o t grow a t a uniform rate i t ig, looking back over s period o f six months o r more, a n https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 150 undoubted fact, i f these figures c a n b e trusted, s n d they or sre t h e b e e t t h e t a r e s v s i l a b l e a n d h e v e t h e a p p r o v e l sll experts that have studied t h e thing a n d a r e t h e most trustworthy t h a t w e h a v e b e e n a b l e t o f i n d o r d e v i s e in setting u p the information r o r the use o f the Federal reserve system s n d i t s constituencies. Now, t h e r e i s a rough perallel between t h e growth o f the volume o f business, @xcluding stock exchenge transactions, a n d the growth o f volume o r production, despite t h e fact that there has been, during this period, 4 check given to tuel production, despite t h e fact thet transportation has tended t o still further restrict t h e nomel, f r e e a n d unimpeded movement o f goods into t h e markets, a n d i f those things had been eliminated, i f w e had ned n o railway strike, n o cosl strike, a n d n o textile strike, undoubtedly the g a i n i n the product ion chart w o u l d hsve b e e n more marked. Now, then, w e g o o n t o the third teature o f thechart, thet gesture which has b e e n t h e subject o f reference i n the discussions t h i s morning a n d mors porticularly i n the debates, a n d one oft ths most striking things i n many o f the pspers e n d nenioranda which have ciscussed t h e phase o f credit policy. T h i s again represents e n inaex (indicating https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 151 chart), conputed o n exsetly t h e same basis a s this produce tion index (indicating). Starting i n 1919, s o as t o embrace within the frame only things that a r e definitely compareble, t h e s e s r é built upon exedctly tre same basie (indlesting), heve a n incresse i n business, N o w , we a n increase i n production end a n increase i n prices, which sesns t o indicateee~« and i am telking now for illustrative purposes, rather than giving a n account of what 14 think is actually i n processee«it seems t o indicate that t h e increase i n business here (indicating on chart) i s the outcone of tw rectors that are each o n e tending t o strengthen t h e other, t o wit, a n increase i n prices end a n inchrease i n the e@ctusal physical mess o f goods thet i s being turned out t o g o into exchange, into use, a n d s o on, N o w , w h a t t h e relationship m a y b e between those tuo things I would not presuue t o say, though I do not hesitate t o e x p r e s s t h é opinion, a n d i n order to make clear the nature and the basis for thst opinion, let m e picture here a difrerent situation (demonstrating on chart). S u p p o s e w e had this line a s it is (indicating) still cli.bing upwards; s u p p o s e this line (indic ating), insteadf o clinbing upwards goes L u a horizontsl] direction; https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ise sn o t h e r words, s u p p o s e t h e c h a r t s i n o i c a t e d a n incresse t h e volume in the volune o i business a n d not e n incresse i n of production; s u p p o s e t h i s price l i n e incicated a more a b r u p t serent, still T h e i n t e r e n c e t h e t t h a t woulda s u g g e s t to m y mind would b e thet t h e increase i n the volume o f business s h o w n b y t h e chart w a s n o t d u e t o a n actusl i n e crease i n goods produced, b u t uue t o a n increased bidding ? for g o o d s w h i c h res leeted i t self i n a rise i n prices; thet end it was n o t thet more business w a s being done i n tons aone i n yerds a n d s o forth, b u t m o r e b u s i n e s s w a s b e i n g terms o value, a n d + should say v e had better «atch extremely carefully.if w e take thet s i g n slone, uncorrected b y certeain other values thet w e might find i n the situation, w e might tsirly conclude t h t w e were going i n t o a tion; period o f infla- i n other words, that the volune o f credit might oute run i n its growth the voluue o f procuction. I uill sssuie that the volume o f production i s stationary, w i t h prices rising, a n d i f that vere reflectec i n an increase i n Federal reserve b a n k credits w e w u l d b e almost warranted i n the inference n o t only thst credit w a s susteining soniething in the nature a a n inflationary rise, i n price o f cosmoai- ties which swelled t h e general volume o f business, b u t thas https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 153 the reserve banks had issued credit that made thet swelling possible, a n d i t would a t once suggest what ection w e should take a n d what o u r responsibilities i n the prenises were. Goming back t o the question s s t o the relation between this rise i n prices e n d this rise i n pre uction, b o t h o f which reflect theuselves i n the ineresse here i n the total volume o f business, I do not think a n y competent analysis can show just whet i s the degree o f responsibility t o b e attached t o sach o f these t w o factors. u y opinion i s that normally what i s going o n now i s what i s normally t o b e expected i n ¢ period o f business rec.very after a severe crisis, followed b y a period o f liquidation and depression in industry. T h e jrevailing attituce o f mind i s that men are remembering f a r more t h a n they a r e anticipeting, a n d they s r e more o r less i n the grip o f fear a n d ceution, which i s the business residual o f tear. T h e result i s thet t h e recovery a t first shows itself i n the determination o n the part o f dixferent sections o f the m i m u n i t y t e resuie living s n d buying; t h e r e i s a Gemiand f o r goods o n the part o f consumers a t the retail shops; t h e retsil shopkeeper finds h i s shelves aepleted a n d goes t o the wholesaler; t h e goods are n o t there i n adequate volume, prices 154 ere b i d up, e n d thet trensmits itself b a c k t o the manufaciiad t h a t w h a t w e c o n s u n e todasy h a s b e e n menufacturec. s t least three months o r s i x months sgo, t h e r e usually comes 5s bidding u p of prices f o r goods i n more o r less finishec state, o r more o r l é s s ready r o r distribution at any rate, s n d that translates itself back t o the manuf ace turer a n d s o m e t i m e s t o t h consumer, t o r p r i n s r y naterisls. so thet m y o w n view o f t h i s i s thet i t i s largely this r i s e in prices thst h a s induced this increase i n produet ion, I have not tslked with »r°® stewart t o find out whether thers i s anything i n the nsture a f a line u p o n it, a n d I leg that gives u s any a m therefore expressing merely a n opine jon and ndt a conclusion. T h i s , hovever, I think i s in- portant, t h a t t h e movement o f prices upward i n and o r itself ean never b e taken a s a n indicator o f what i s a count policy, proper dis- a n y more t h a n t h e rise i n the temperature of a men indicates w h a t medicins y o u a r e going t o prescribe tor him. Y o u have got t o see the other thines i n combin- ation with i t before y o u c a n téll precisely whether t h e rise i n tempersture i s really 3 “bax pathological condition, 4 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis getic treatnient, sérious incication o f condition thet requires ener- o r whether t h r re are, 3 s i t were, certain https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 155 neutralizing symptoms that indicate thet i t is 4 more o r lesstansicnt thing. I n esny cess you d o not doctar t h e temperature; y o u doctcr t h e patient. A t most temperature is synptomatic. I say, therefore, partly i n view o f the fact that many papers s t r e s s t h e i m p o r t a n c e @ p r i c e l e v e l 4 8 a guide, n o t en exclusive guid<s, b u t a t any r e t c o n important guide, to credit policy, that prices should slways b e studied with reference t o their aceompanying conditions, that folloz them. o r conditions T h e r e i s n o objection t o s rise i n prices per s e as long se w e have reeson t o think that the rise i n price i s going t o wash itself out ana take care of itself throuzh a comiensurate increase i n the ectual production o f goods; b u t w e never want t o “108e sight o f t h s tact thst our modern system o f economy J s 4 price e a nomy, thet the signal tor inereased procuction i n any conuodity is the fact that the price af i t i s rising; t h a t means thst there i s 8 shortage; more books @ cotton @ t h a t means thet sonebcdy wants sutonobile tires, o r “hetever i t may be, a n d i f there i s svailebis p l a n t yrvacility t o meet thet, i f there i s unemployed lebor evailable t o mset it, it need give u s n o partim ler concern. I do not m e a n b y https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 56 that thet 1 % snould n o t b e watched, b u t I the signs that there *. mean i n reading e c t i o n t o steing a n increase ing load upor t h e snoulders o f the growing child, provided the child i s really srowing s n d squall t o the burden, O u r price l i n e ought always t o b e checked a n a véerifled i n c o n e nection w i t h t h e production line. i f w e reach t h e ctags, 8s w e may sconer o r later, a n d 3 s . e will sooner o r lsatereeunless t h e Federal rsservesystem i s alive t o the possibilities a n d intelligently 9 s well s s enxiously watching, m d therefore grasns t h e roint a t which t h e p r .cuctive organize- tion of the country i s all tuncticning s t its full capacity, ° snd t h a t a n y r u r t h e r c r e d i t p a i d i n a t t h a t t i m e c o e s n o t h - ing except t o blow u p prices, waking i t possible f o r those who a r e c a g e r t o b u y s n d o v e r b u y g o o a s b s c s u s e t h e y s e e gods are becoming scarce--- the productive orgenization o f the country being a t full c a acity, w e should probably get something i n the nsturse o f resl inflation, a n c r e a l iniglation i s sowething thet i s practically never controlled when i t bécones real inflation. - r e v e n t i o n i s the cure there, 2 s has been brought o u t i n several pspers, o r in certsin o f t h e c¢iscussions, a n d the only cervice that t h e Federal reserve s y s t e m a y properly b e called u p o n t o render 157 is t o stick u p some g l , g i v e some Indication, b y rate Le Luimending. But t e repeat once mere, “hose 4re t o my mind slwavs the thrseirporiant things w i t h which t o stars. T h e y will, to my mind, t a k i s sSaat g e s n e place i n the dellberations of P a s > b a n i t h a t t h e temperature, t h e record of pulse e n d respiration t a k e w i t h t h e physician. I not mean a y that t h e y alone survicie, do o r that t h e sane ’ight l s t o b e given t o those factors under different circunstances, O n the contrary I heve g i v e n y o u t h i s i l l u s - treticn purposely t o show thot a rise i n prices s t tines is o n the whole s hselthy synptom. w e need n o t g e t trightened because prices are going up. I should have more concern, i f prices w e r e f o r instence, not rising. s t th: p r e s a n t t i m s , T h e fact t h e t prices a r e rising indicates thet there i s a considerable b o d y o f pecplé w h o s r e going shead, w h o havo igsith enough t o meke co.witments, w h o have faith enough t o onsure, a n d that signel i s being transmitted b e c k t o the productive industries o f t h e @ untry and t h e chart incicates t h a t t h e y o r e responding t o it. when t h e y c e a s e t o r e s p o n d t o it, t h e r i s e i n price a n d the ineresse i n volume o f business i s due mainly t o the https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 158 burned over a n a sot inrluenced t o the values o f the good: that e r e turned cver, % n o n w e s r e coming about t e the e n c o f economicaliy sa2e, s a f e i n the sense t h e t w e a r e G o i n g o v r p a r t p r o p e r l y t o safeguard t h s public interest--~- w e are getting pretty nearly t o the init. Now, gentilesen, t h a t i s a bald a n d rather dogmetic presentation o f a thing which i s subject t o a good deal o f qualification, criticism e n d objection. I could s i t down uyselr and, i ? soieons else h s d spoken some o f t h e words I have u e d , ask 4 great m a n y e m b a r r a s s i n g q u e s t i o n s w h i c h would bring o u t thet this i s a rather rough s n d sketchy pr esentation o f what i n faet i s & more complicated subject snd subject t o a grest deal o f qualirication b y the introcuetion e f other factors that s r e not noted o n these charts at all, Let m e ¢ i n suimerizing: things, t h e chert o f 3 the Snert. o f prices, s T h a t these three , the chart o f production s n d i f properly r e l a t e d t o one anothsr, in attempting t o meke a n economical intsrpretation, s h o u l d snable u s t o test t h e volume o f credit t h a t i s i n existence, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis particularly s t times w h e n t h e reserve banks bscome a tor i n t h e v o l u m e o f c r e d i t , fas- a s a t presont y o u c a y t h e y are not. Governor Strong: n a y L ask what e r enter into thet curve o f volui.e o f eredits? A r e they t h e earning sssets o f t h e reserve banks? wr. miller: wviscounts. T h e upper line i s the Federal reserve n o t e circulation e n d t h e lower i s the aiscounts. I t does not include investments? Governor strong: wr" siiller, N o ; I was just using this for illustra- tive purposés. mre J a y s w e y I ask u r e w i l l e r , when he s p s a k s f a testing thie b y the total volume o r credit, i f he doesn't meen Federal reserve credit, b u t outsice credit? ur’ Miller: mre Jay: Yes. b r ’ iiiller spoke o f t h e rise i n prices, t h e increase i n business, i aking necesssry reciscounts i n the Federal reserve banks, ceusing o u r curve t o run up. s o u l d he b e willing t o say a word about t h e erfect o f g o l d coming in from abroad a s reflecting the volume o f credit and federal reserve b a n k rediscounts? ia t i t e r : I think there a r e other tien who a r s going https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 150 I t is will s s y 9 word i f you want. to bring thst out. I very obvious here that a very con.ids rable increase i n the lest s i x months h a s taken place i n the velune o r business. There hes b e e n s risc i n prices that t e n ysars a g o would heave been alerning. T h a t i s a very merked rise i n prices in the course o f s i x months. g e would p v e t o s o back a it. long way i n our history t o find onything compsrable w i t h Setween the beginning o f the war i n 1914---1916 was when i t begsn t o take errect here--- e n a t h e Civil wdar--i doubt whether w e could find a n y such marked rise o f prices i n so short a period o f time, a n d there has b e e n 6 n expan~ the sion o f about t w o billion i n credit i n the course o f last year. Governor Strong: A ur, willer: little o v e r that. I n other words, the credits heve expanded two billiors without being felt i n the reserve system. T h e r e ang has been a little sporadic seasonal borrowin 3here there, b u t i t does n o t smount t o anything. Governor strong: W e hove over t w o hundred million earning assets, t w o hundred a n d fifty million about. Lr” Miller: Y e s , y o u have, but that really represents s contribution made b y the Federel reserve banks. Y o u have Lol suprlied t w o h u n d r e d m i l l i o n s i n m o n e y t o t h e market. It i s plain, therefore, t h a t t h e banks h ve b e e n able t o expand t h e i r c r e d i t t w o billions w i t h o u t r i n g i n g t h e d o o r beel o f the federal reserve bank. I t i s cane t o t h e fact of these heavy importations o f gold, w h i c h give t h e banks that r e c e i v e t h e g o d a ur, Curtiss: basis a lending. b o e s n o t the g o l d thet comes i n g o into the r e s e r v e b a n k s s n d i s n o t t h e real i n c r e a s e c o m i n g f r o m the actual lowering o f the reserve mte? b o e s not the gold that comes into this countryultinately g o into t h e reserve benks? ur Willer: Y e s , but that makes n o difrerence. I f a bank gets 45,000,000 i n gold, thet i s the basis tor exe tending its credit--- ur, Jay o r ur. Strong can snswer that--. but I will b e v e r y m o d e s t a n d c o n s e r v a t i v e i n ssying t h a t if i t takes i n five million i t c a n loan twenty-five million. Governor strong; ure miller: I a l l the benks together can, t means t h e creation o f u n suditional twenty-five million t o the total volume o f credit, ur’ day: Yes. O n the other hand i t i s also clear thet t h e Federel reserve banks w i t h three o r four hundred millions o f sécurities, b y liquicsting their investment https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis portfolios, c o u l d ruc’: https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis i n funds cold begin t u creates a vacuum, a s i t were, i n t o which e r e d i t f r e m other w o u r e e s T o u 1 G haevs t o slow; 2 6 would start competisicn i o r funcs i n the monsy merket-e= let's call it the national money market--- i t would begin et some local point s u c h a s New York, b u r t b would s o c n meke itself relt, e n d i t would d o something i n the way o r control bevore t h e banks round theuselves a t t h e end o f their losning tether and obliged t o sone t o the reserve benks t o redismunt paper. T h e y c a n d o a s c t l y t h e came thing b y selling bills o u t o r their bill portfrolios. io BLLLG I would like t o e s k shether i t woulda b e safe, r o r instance, i n our district, line o f production. F o r instence, t o follow o n e basic 1 s pig iron sur-icient- ly indicative t o follow? ur, Stewart. o f course recently i t has been lover. less satisfactory I think e s 4 monthly i n d e x i t would b e auch than i t would b e o n es yearly basis. iy. dey: I s i t teesible f o r s n y district t o take any particular commodities i n tha% distriet s s e n indication of the whole? C o n s i d e r i n g this test here, isn't i t neces~ on 4 sary t o follow i t o n a national basis rather t h a n Gistrict o r single c o u o d i t y basis? https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis uP, miller: O # course I haven't ofiered this 4 s a working instrument, b u t m e r e y t o illustrate certain points. These charts have b e e n prepared f o r use i n connection with 6 new f o r m o f presenting t h e Federal neserve B e a rd's nonthly review o f nationel . 1 economic a n d business conditions. it i s m y expectation that w h e n this p a r t o g the j o b i s cone pleted steps should b e taken b y t h e seeprate banks t o see what t h e y c a n c o t o set up, a s i t were, similar graphs o f schedules for their aistricts. T h e a t will b e a matter requiring a great ceal o f tine, b u t t h e y should ado it t o see whether there are any single commuoaities, o r some two o r three commodities that, b y test, c a n b e shown t o be good dis trict indk& etors o f t h e r e l a t i o n s h i p b e t w e e n t h e m o v énent of prices 3 n d the volune a business a n a t h e volune o f pro- eéuct ion i n so-celled bssic industries, a n d then test t h e volune o f creait among the coumercial b a k s i n their disa r e contriets a n d t h e i r o w n v o l u s e o f e r s d i t w h e r e t h e y tributory t o the expension o r ersdit, b y the ectual volune of what w e call economic 1 , valid business. heferring t o the first question t h a t w a s asked this morning, I think t h e thought w s i n the minds o r many o f https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 164 those w h o s p o b u b t h e y never quite c a n e t o the bat, t h a t the object o f orca r o r i a l l y e n d i n the most gsnersl fornula, i s t o sssist procucticn, u s i n g t h e word product ion in t h e i m e l u s i v e s e n s e o f i n c l u d i n g n o t o n l y r a i s i n g t h e products o r tks soil, aigging prceuusts T r o u under t h e ¢o11l, put their manuracturs, t h e i r distribution until t h e y a r e finally passed through t h e last stsge o i distribution, two the retailer t o the consumer; transportation o f t h e m i s ine cluded within production. a s I use t h e teri, b u t i t i s goods rather t h a n t h e Gollar mark o n the goods that i s inmeailately t h e most important thing. r o u g ly spesking, a B u s i n e s s volume is, uultiple o f the yvOlume o f goocis, therre- quency o f turnover a n d the prices a t which these thrés things a r e being done. Let m e a l s o s a y , b y w a y o f possible question, that I do not regard these three things, o r any combination things, e v e n though y o u 4ssign Gixierent motives e n d ent factors under difrerent concitions, aetermine a aiscount pol‘tcy, s s competent T h e r s a r e a griet many things thet s r e t o o elusive t o admit o f specifr ation o r mechanical messurenent, a n d , t o refer t o the illustrstion I usec p moment sgo, j u s t a s a physican wants t o know what * h e https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 165 temperature, w h a t t h s pulse a n d what t h e respiration o f a patient is. e c w o want t o lmow whet certain o f these basic reflectors indtute, a n d supplemert t h a n b y a great m a n y other things which way immodietely o r quickly inrluence any or a l l o f thoss, a n d nost o f those a r e merely a the basis o n which a judgment i s based. part ofr I t must not b e overlooked that t h e toriulation o f a eredit policy is, after all, good judgtent, a n d good judguent c a n never b e mechan- ically “indicated, hosever it may be aided by mientific tests.and presentation o f data i n some f o r m like this. Governor Strong: W o u l d n o t t h s chart g i v i n g t h e vole uue o f credit b e more illuawinating i f t h e curve $ s t o discounts i n c l u d e d a l l e a r n i n g assets, a n d i f a n o t h e r curve, taken from the seniannual reports o f bank conditions were added, giving t h e total volume o f bank credits i n the United states? lur* Miller: proposition, Y e s ; w e mean t o d o that i n a -eparate T h e lstter I think is pertimlarly important. When i t comes t o t h e total velume o f sarning assets I should s s y yes a n d no. I should s a y yes, provided t h e volume o f esrning assetse-Governor Strong (Interposing): A f t e r a l l i t doesn't https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 166 jske e n y uixrerence whether w e make these investments i n order t o get soue earnings, o r i n order t o supply t h e nare- f o r any other resson. ket w i t h credit @ i t hss t h e same effect o n the volume o f credit a n d would undoubtedly be reflected quickly i n the total o f benk loans 45nd deposits i n the country. aO, s i llers I t would sometines a n d sometimes i t would not. Governor Strong: I t strikes me, looking a t this pic- ture a s you describe it, that i f w e had these curves o f sbsolute figures, irrespective o f the motive which led to the making o f the curve, e n d then got @ curve b y some sample process o r other process o f t h e quantity o f goods ag distinguished from the movement o f the goais, w e would get a pretty good picture, pr® millers L e t u s siprose that y o u replace t h e dls- count line b y 4 line showing t h e total volume o f earning assets. N o one would hsve any clue a s t o whether @ not those earning assets had h e s brought t o the federel reserve benks b y the process o f rediscunting, because t h e member benks m d reached t h e e n d o f their loaning power a n d therefore were obliged, i n order t o g o o n extending their loans, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis L6e7 to borrow f r o m the reserve banks, o r whether i t came b y 8 purchase o f ‘nvestment securities b y Fredersl reserve banks o n their c w n motion o n the market. Gov. rnor Strongs p o e s i t make any cifiscrence i n the effect--- I meosn any efrect upon the curve that w e want to show here, whether s national b a n k comes a n d borrows s0lu@ money o r whether w e voluntarily lend i t t o them? wr’ willer: I t does under certein circumstances, I should say 3 t ths present time i t would not make any aifference, b u t e number o f months s g o i t would have made 4 difference, Governor otrong:; w o u l d not the effect o f the gold imports be identical, wouldn't the efiect of the gold imports b e reglected i n the growth o r total bank asposits?-ur. willer; ( I n t e r p o s i n g ) reflected & ysar ago, Y e s , but I say i t was n o t I t depends o n whether there i s a cemand f a credit o r whether there i s not. I f there. i s a demand ior credit then the gold iamorts are of more consequence t h e n t h e p u r c h a s e o f securities b y t h e Federal r e - serve banks--- b u t if you are i n s period o f liquidation it makes n o Gifiverence, the money warket has more then it esn use anyway. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 168 Governor strong: 1 woula s a y that would b e true i n £ c o u n t y l i k e Lnglend, w h e r e they h a d n o subsiciary r e serve, a n d where u n d e r certain conditions t h e banks are allowed t o build u p @ large 2xcecs o f reserve s n d under other c o n c i t i o n s t o l e t i t r u n low; try, w h e r e w e have a b u t h e r e i n this c o u n - subsidiary reserve, t h e mininum re- serve will always becone t h e mexinum reserve, But t h e y p u t a o w n t h e price o f money, end u n d : rthose ciicumstances w h e n they p u t uown t h e price of money until money i n the open norket g o e s cown t o 2-1/2 per cent~-- i t has been 3 s l o w s s three a n c s fracticn, hosn't ite-- but suppose i t got t o two and a half? would s e e m t o m e that under those circunstences I say t h a t t h e t o t a l e a r n i n g e s s e t s I t would o f t h e Federal reserve banks wouldn't cut any figure, Governor strong: I think i t would i n peactice because under those conditions t h e banks p a y off their loans a n d the certificates o f incebtedness a n d other securities drift into t h e banks. f t i s s curious thing, v r . willer, t h a t efter that period o f Lliquication w e had i n the nineties, when t h e total b a n k resources i n New York were n o t m u c h over a third o f what t h e y e r e now, i f they were that much, w e haa https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 169 8 period where there w a s a t one time a maxiniun surplus r e serve o f banks i n the clearing house o f ,11,000,000. I n 1907, L I think t h e m e x i m u m s u r p l u s w a s o w e r 4 8 0 , 0 0 0 , 0 0 0 a n d money was preetically unloanable. N o w , that surplus i s limedLately employed t o pay o f fat the reserve banks until i t results i n s condition vhere w e d o nob h a v e very l o w rates, o r neither d o w e h a v e v e r y h i g h rates. wre miller: S u p p o s e i n the beginning o f this year, we will ssy through roreign trensactions o r through sonie not interior trouble, westould/have hed 5 resumption o f busi- ness, but distinetly dull business #nd a contimation o f the G e p r e s s i o n o f 1921. things h a v e been, w h a t would h a v e happsned? w e have h a d a resuiption, A g s a n d thet r e - sumption h a s been most setive i n the stock markets b y aenticipeting w h e t i s ahead, T h e movenient i n t h e past t w o years has been pretty true t o r a m . Liquia@tion cones earliest i n the great eastern cities end slo.est i n the: interior egricultural centers, liquidets e n d i s just sbout o T h e interior w a s s l o t o mpleting i t s liquidation, while N e w York o n d the influences t h a t center i n New York heve been cistinctly resuiiing. T h e result i s that the liguicated funds f r o m t h e western sources f l o w into N e w Y o r k 170 and g£ind a n outlet b e c s u s e outburst o f speculation t h re i n anticipstion o f businesg-e- Governor strong: I heve hap;ened. 8 s been this t r e i e n d o u believe 1 can tell you shat would W e probably would hive refunaed t h e governe ment debt o n a three p e r cent basis. had completely repaid their loars I f the member banks t o the reserve banks andhsd t h e perlod o f liquidation continued beyond thet, t h e member banks w o u l d then havs sctually h a d « surplus which they must employ, s n d w e would have h a d 9 grest reduction in intcrest rates, t e r below w h a t w e have had, e n d very shortly t h e Government w o u l d v e intervened w i t h = rsefunde ing operation, e n d w e might have had the soldiers' bonus also. ur’ miller: Refunding does not take money out of the market, b u t i t takes i t out o f o n e pocket s n d puts i t in another. Governor -trong; I was just reflecting o n some o f the consequences. Vice Governor Platt: I next topic, gentlemen, suppose w e ought t o g o t o the T h i s hes beens v e r y interesting ciecussion and I should like t o have taken part i n it myself, b u t I will refrain. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis T h e next topic i s What light does the e x erience o f the Federal Reserve Banks t h r o w o n the value o f different meticeds o f making their credit a n d discount policy erfective. a. wviscount rates. b. Open market operations. ¢. wiscretion i n rediscount ing. d. Credit examination o f member banks e. Credit reting o f conmerciol borrowers, This discussion © t o b e l e d b y wessrs Strong a n d Per- rin. Governor <trong: I was all prepsred this morning, after hearing Governor Norris apologize f o r having encroach- ed upon othertopics, t o make such 6 n apology myself, but whet lir, Perrin and I propose t o discuss has been dissected to the bone pretty well, and I think possiblg w e might ask for sone apology. I read wr. Perrin's paper with the greatcsst possible interest and a good deal o f respect s n d adiiration for the way i n which he had presented s view which, I say, I do not hold myself, with regard t o the effect a @ our policy, I https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis an frank t o do sgree with h i m slnost t o t h e letter i n the expression that h e y s g i v e n i n his p3per o f these difficulties, a n d I think I ment that a agree w i t h h i m entirely i n his state- comosrison o f the effect o f the d i s m u n t r a t e o f L72 ths Bank o f »ngland w i t h the srrect e f our aiscount retes is almost wholly misleading. I will n o t g o into thet beceuse certainly o n those t w o points I think w e ere i n entire agreement. The outstanding thing t o m e ebout ir. Perrin's paper--- end I will sddress myself particulerly t o that because 1 want t o stick t o the subject 9 s closely 2° possible--- i s the w a y i t exhibits Cirferoncesin t w o wholly difrerent dis- triets i n the nation, which are possibly extrese i n their conditions, thet i s t o say, the New York and sen Francisco districts, # 6 , i n N e w York, a r e conpasectly w i t h i n t h e central woney nerket, i t i s v e r y s:nsitive money narket, snd i n thet respect w e have 4 great advantage over a n y other 9 n ef1rective rate. reserve b a n k i n e s t a b l i s h i n g other hand i n can traisco t h e y have 6 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis J n the very large territory, covering great distances, w i t h 6 grest variety o i int srests in the districts, a n d a great variety o f intsre:t rates in the district. T h e r e ars. iany small banks a s well a s lerge banks i n that district. The value which I get trom sr. Perrin's psper, which I have read very carefully, distinct c o n t r a s t t h e e x t e n t i s that i t brings o u t i n such o f the difficultiss t h a t a r e 173 encountered i n 9 district l i k e his, a n c how relatively slight they a r e i n New York, T h o s e a r e t h e conaitions that we want t o have discussed i n our bank a n d that « e will profit b y hearing discussed here, because t h e y have g o t t o be understood a n d t h e problems that t h e y present m u s t b e solved. I apprehe:.d, i n regard t o wr+ Perrin's paper, that h e is inspired t o express s rather extreme v i e w about condi- tions i n his district, just 9 s I was perhaps inspired i n my pape: i n expressing possibly a the c o n d i t i o n s i n v o u r district. more extreme view o f T h o s e v i s w s a r e illus- trated b y the conclusions drawn, a n d 4 would like t o bring a out w h a t t h e contrast i s , ur? Perrin's conclusion is, speaking o r creait e n d aiscount policy, t h a t credit s n d discount policy will b e made efrective through the exercise of di: cretion i n kind of rediscounts, a n d not through regulation b y dismunt rate... luy Own c o n c l u s i o n s i thet t h e rediscount r a t e a t the reserve bank regulates how much i n general each member bank borrows, a n a possibly iniluences a n increase o r decrease in the total volune o f bank credit, a n d I supplement t h a t by saying that i n sections where intsrest rates a r e h i gh, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 174 discount rates m a y n o t prevent overborroewing b y mwénber benks, Now, i t seome sed t o one thing s n d mine j i i a r e s s e d a n o t n s A f t e r Giscussing t h e difficulties expsiienced i n extending credit to individusl banks u p o n t h e basis describod i n the statute, he quotes 9 s follows: “ T h e bank i s owned b y its sember bonks a n d 9 nisjority o f the directors", a n d s o on, a n d then he quotes “The virectors shall extend t o cach menber b a n k such sdvancements e n d accom:.odations a s might efiectively and reasonsbly b e nade w i t h d u e regard t o the clisins t o b e made b y o t h e r i e n b e r banks", peper, f r o m beginnins a n d frankly, n o w h e r e i n his t o end, d o i find 4 discussion o f what seems t o m e t o b e the metter o f persmount Lmportance, 110 W and that i s the total volume o f creditin t h e United -tates as a whole shall b e reguleted @ bounds. H controlled o r kept within e does n o t say, whether thst shail be, i f y o u please, b y t h e policy o f fixing rates, o r whether i t i s pos- siblp t o d o i t b y t e l l i n g s a c h o n e o f t h e 10,000 d i f f e r e n t banks h o w n u c h i t i s e n t i t l e d t o have. After 3 1 1 slmost e v e r y arguient h e makes i n his paper as t a the judgment s s t o how e a c h individuel b a n k shall https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 175 heve credit f r o m the reserve bank, i s the identical argument t h a t I make 4 n a shorter s p a c e i n m y paper. i agree with thet end I agree thet s s t o individual banks i n meny ceses, where interest rates are high anda where conditions are difvicult as they are in the Sen F.ancisco district to exercise rate control, thst the other type o f control i s the only o n e that c a n b e exercised; the problem. b u t that ccoes not solve w h e n you consider these chzrts, t h a t does not solve t h e problem a s t o how much credit t h e #ederal reserve b a n k s s r e g o i n g t o permit t o develop i n t h e United Stetes, s n d i t i s m y belief thet t h e rule which applies t o the individual bank does not, i n point o f fact, apply t o the s y s t e m 6 s a whole, This morning, a s D r willer, a t the conclusion o f the meeting, w a s about t o speak, i had already storted t o write this very hasty suggestion t o distinguish between up, b e n e rin's point o f view which must b e thst o f the mamagers o f the reserve banks i n meny districts, s n d thst which I think we are beginning t o feel i n New York, nanely, that the regulation o f credit volume, the smount o f increase o r decrease, m u s t principally b e governed, a s t o the whole coun- try, b y discount rates a n d open market operations. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Q n the 176 other hend, t h e exercise o f ciscrevion a s t o borrowings by wany individual banks 1 s solely a matter o f indivicual credit, wre Perrin: thet I W i l l y o u read that a Little slowly s o can get i t ? Governor Strong: T h i s has been very hastily written and Icon inprove u p o n t h e language. I merely w a n t t o introduce the thought thet your psper i s addresv.ed t o one ‘subject a n d mine i s addressed t o another, s p e a k i . g f o r the N e w York bank w e will s a y that t h e regulation o f the credit volune, i t s rate, a n d t h e smount o f increase a n d d crease iiust principally b e governed, country, a s t o the whole b y discount retes a n d open market operations. ir, Perrin: Y o u mean b y thst redural reserve dis- @munt rates? Governor strong: Y e s , entirely. A s t o the other point o f view, t h e t t h e exercise o f discretion referred t o in the caption o f t h e topic s s t o the borrowings o f many individuel banks, t m t i s solely o métter o f individusl credit; I mean b y that that e v e n i f w e attompted t o d o i t by n i c e l y d e v i s e d n e c h i n e r y i t would n o t b e possible f o r the managements o f the twelve separate reserve banks t o deal https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis if? individually w i t h 10,000 aiffrerent busrrowers, ing, b y bargein- s p e a k , o r b y a test o f thetr erecit o r a n exain {nstion o f th i r business, o r even of their nssas; i t would not b e possible for u s t o accomplish t h e gr:at object, which i s one o f o u r responsicilities, o n e o r t n e principal responsibilitics o f t h e r e s e r v e system, t h a t o f c o n t r o l l i n g the total wolume o f credit i n t h e country. I want t o very carefully distinguish between the two points, o f controlling the totel volune o f credit and conduct ing i n c i v i d u a l business b y t h e reserve b a n k with its members, seems T h e y are two wholly cirierent things, i t t o me, Before discussing that let m e cigress © moment t o refer to something that I have n o t heard aissussed a t our neebting, and which 1 think w e have got t o c o n c l a.x i f w e had a4 syetem o f branch banks i n the Unitec t a t e s w e would, in fact, 8 s i n other countries where t h e y have Lranch benks, form 9 direct communication o f cresit between money centers, “rere m o n e y w a s plentiful, a n d n e w e n d d-véloping districts where i t was deficient, T h a t would b e the normal way, under a branch banking system, b y which the surplus o f credit i n some sections might b e distributed f r o m those sec https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 178 ticns t e a l d deficiencies. B u t w e nave n o system o f branch enking a n d tcs 4 4 a 7 t St: “ween t h e banks i n the money cent ters a n d t h e banks i n mors g sections, « h e r e eight, ten and twelve p a r cent i s chargec, i s not sufficiently intbimste t o e n a b l e t h e c r e a t i o n w flow o f credit, stimulation o f that free s a y f r o m N e w Y o r k t o Uyoming w h e n they a r e feeding sheep i n woming. O b s e r v i n g shat he= recently taken place, t h a t t h e banks i n t h e large cities throughout the United States, i n particulsr f e d ral reserve cities a n d the member benks i n most o f the large cities i n 811 the districts, h a v e practically liguiuated e 1 1 o f thelr losns et t h e r e s e r v e banks, rather s u g g e s t s t h i s conclusion, the reserve system, thst b y bringing t h e membership o f the dis- trict i n contact w i t h t h e central reservolr o f credit i s gsecomplishing, i n quite a different wsy, t h e thing that woulc be accomplished under t h e branch banking system, because the country banks a r e t h e ones thet h v e n o t liquicated. Until very recently t h e banks i n the northern part d York State, a n d one New i n New Yersey, w e r e borrowing m o r e from t h e F e d r a l r e s e r v e bankse t h a n a l l t h e o t h e r banics in the district p u t together, T h e r e v a s a time w h e n t h e benks i n New York city were only borrowing w3,000,000 from https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis L179 us, @ n d i n those s e c t i o n s o f the state w h e r e interest r a t s s were still higsh they vere still borrowing. T h a t i s pro b e ebly true i n every Fedtrs] resery: district. banks, w h e r e t h e s u r p l u s o 7 credit accu:mlates, their loans, a n d autonstically, having designed a T h e city p s y off s o t o speak, without o u r systen f o r that purposs, t h e s e country banks i n seetions where interest rates s r e high are getting relief. I t may b e a good thins I t may b e s e will have to close our eyes t o the cevelopment a @ s perfectly natural tendency t o h v e t h e r e s e r v e s y s t e m sect 3 s a pips, b y the connection between surplus e n d deficiency, e n d by ironing out, £ 0 t o Speak, through this n e w methodof t y i n g o u r bankeing system together, I do not think that w e can afford to put t o o a n y shetbetée a t t h e present t i n e inthe w a y o f the continustion o f that, certainly not until =r. Crissinger's trouble: a r e over with t h e problem o r branch bankeing. Now, diverting once more, I would like t o refer t o soniething that h i a v e r y uirect b e a r i n g upon this question of total v o l u n s f o credit. f n e n t h s authors o f t h e #ederal Reserve a c t prepared t h e bill t o rsorganize o u r banking system, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis w e w e r e n o t a t war, t h e w o r l d w a s n o t a t war, a n d 180 there w a s n o c o n t e m p l s t i o n o f a n y w a r t o k i n g place. T h e ot w a g not designed t o mest w a r conditions, becsuse i t a n d h a d ths "ederal reserve hed t o b e anended t o a o 59; be system s i n p i y t a k e n o v e r t h e r e s e r v e s w h i c h w e r e t h e n t o contributed, s n d having held just that esmount o f g o l d s s reserve, w h i c h i t was contemplsted »sé should hold, 9 very slight extension o f credit b y the Federal reserve banks, a very smell amount, w o u l d have brought o u r rescorves down to the legal niininum. P r o b e b l y that amount o r credit, from w h e t w e c a n g a t h e r i n N e w Y o r k t r o m e x o e r i e n c e abroad, probably that aiiount o f credit would simply h a v e reflected higher prices; t h o s e higher prices would unaoubtedly have https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis caused t h e importations o f goods e n d t h e importations o f goods w o u l d e v e p u t t h e e x c h a n g e s a g a i n s t u s , a n d w e w o u l d heave exported g o l d and w e would have v e r y shortly b e e n obliged t o put o u b discount r a t e up, i f y o u plesse, to p r o t e c t o w reserves. J e would have b e e n i n a i n order nernmal situation had there been no war, e n d had we, through ignorance, indulged i n a little inrlation w i t h these n e w instruments, w e would h a v e paid t h e peralty right a w e y exports, a n d those exports w o u l d have forced u p o n our a t e tention right a w a y the necessity f o r a rate control o f t h e 181 total volume o f arsdit. W w e could n o t have g o n e t o sac h ten oF jwenber bank a n d told them that t h e y f e d te-pey o f f th: sé twenty p e r cent o f thelr loans because H e had t o stop gold exports. O n l y t h e rate o f discount w o u l d h - ve done Lt. Now, the exigency o f the war had resulted ina chang e not o n l y in the reserve act, t h e inportetions o f gold h a d increased, gold t o ihet would probably h a v e b e e n 4 normal reserve o f a https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis billion dollers, b u t t h e y h a d dumped t w o bile lion dollars more o f gold upon us, a n d with the world having suspended gold payment entirely, with the doller, i f you please, a t a premium i n almost all parts o f the world} w e could g o o n here forever; w e would not lose the gold under s u c h excess the p r e s e n t c o n d i t i o n s u n l e s s o u r p r i c e s g o t t o Levels that the exchange came back t o par, a i d irrespective of any other esrgument with regard t o rates controliing the mula volume o f crecit, i f i t had n o t been t o r t h e war, w e not have helped t h e vsry f a c t o f our g l a exports produce which ing 6 penalty f o r a little indulgence i n iuriation, r e t e reduction have otherwise/attempted might w e upon u s irrespective o f snything would have b e e n t h e csuse o f r o r e i n g 10. G0. 182 I regard t h e ditticulty t h a t h a s n o w developed--~ s n d I mean the alirficulty o f regulating b a n k borrowing, as being very largely due t o t h e fact that, w i t h this enormous mass o f gold i n our insides, w e are not su:rject t o the influences a n d pensities o f t h e misuse o f it. C o n s s q u e n t i y w i t h this fine showplece o f three billions o f gold there i s nothing liable t o d<velop except that i t i s liable t o b e 5 very expensive s h o w plece, a n d w e h a d b e t t e r p u t i t t o use. T h e penalty w i l l b e edditionally severe i f w e d o put i t t o use, becsuse o f t h e exportation o f gold which c-nnot teke place in order t o correct i t pronptly snoughe-- i t did n o t correct it i n 1919 s n d 1920, a s otherwise i t would, As t o New York end the effect o f ths rate there, I can assure you, f r o m personal experience, a n d without g o i n g into detail o r giving figures, t h a t there i s a rate which aoes control t h e amount t h a t t h e member banks borray f r o m us, a n d that rate today i s effective through practically the entire banking community o r New York, snd, 3 s you gentlemen have noticed, 3 s t o the rest o f ths second district. In inverse rstio s s you get further from New York and other money centers, t h e rate becomes l e s s effective a n d t h e personal control becomes more necessary b e t o 6 larger nume https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 183 doubt i z i t i s very large a s t o the volume ber o r henks, I of bank credit, but take the Second vistrict, ur. °srrin, and y o u h a v e L o s Angeles, c a n francisco, Seatt«, Portland and Tacoma, a n d I suppose today thet rate i s strective i n all those cities, o r pretty nearly s©, snd probsbly i s i n san francisco. ur Perrin: I Governor Strong: of s will touch on that point. I f it isn't it won't take very much chsnge t o m a k e i t so. j b e n y o u g e t u p t o Utah a n d over into Arizona and other intereior sections where interest retes are higher, y o u ney have ten times 4 s many banks in y o u r d i s t r i c t w h o m u s t b e c o n t r o l l e d b y t h e personal influence and domination o f the officers o f your bank as wehave i n our district; but the principle i s just the sane in both cases. "discretion" https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis T h a t k i n d o f control, w h i c h i s called i n this progsam, exercised o n many individual benks, reguletes t h e amount o f credait extend.d t o those in- dividual benks. I t may b e bectuse o f the character o f business they d o thst nskes you cautious, o r mskes i t necessary t o admonish them, o r i t msy b e for any one o f a nuni ber of regsons, b u t t h e total o f ell t h e regulation o r dis cretion will never accomplish the main purposs o f the reserve system, 184 credit reguistion, i n g t o t s l volume o f credit i n the United statss a s t h e rate will d o it. T h a t is m y belief. Iam going t o s e y a few wordsin conclusion o n a more personal a s p e c t o f t h i s m s t t e r a control. I a m firmly convinced f r o m t h e experienc> t h a t w e have h a d i n the leet three years that a Freceral reserve bank, w h i c h i s a n institu- : i s tion o f snorimous influence a n d power,/opsrated b y men w h o are n o different t r o m other hunian beings i n one respect; the yare like government bosrds and com.is slons, possibly somewhat like Congress, want more power. i n that they get power and thsy T h e r e i s s n insatisole craving i n the human mind t o exercise t h e powers o f regulation, t o exert influsnce, t o be a factor, s o t o speak, I t h i n k w e sre all subject t o that influence. Now, t h e l a w o f this country provides t h a t bank regulation a n d s u p e r v i s i o n s h a l l b e i n t h e h e n d s o f c e r t a i n officers o f t h g o v e r n m e n t ’ d n e o f the states. I think i t will b e most unfortunste if, through this conmon humsn veak- ness, that 1 do not believe any man in this room will deny exists--= o r e v e n from.a desire t o improve banking i n the United States, a n d t h e w a y i t i s conducted a s t o the indi- https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 185 vidual member banks, I say i t would b e unfortunate, o n d kLthink i t sould b e 9 greot mistske for the reserve banks to intrude w p o n the exercise o f these regulating powers o f most supervision that a r e n o w held b y competent officers i n esses, t o inject t h e i s e l v e s 2 s snothsr regulatory authority upon the member benks, beyond the very minimum that i s necessary t o protect the reserve system it self. I t will give rise t o compleint; i t will make enemies anong our members. ILwill sdmit that w e have t o distinguish, thet there ere many banks where t h e individusl credit transaction requires https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis it; byt gonerally, 3 s a system policy, t o intrude upon the autonomy o f the banks a n d i n the exsreise o f power that i t has under the lew, I c-nnot helpfeel will b e 8 grea mistake. I am inelined t o think that some o f the dif riculties thet w e have encountered i n our par collectionsystem, a n d possibly i n some other natters recently, h a v e been d u e t o too much roliance--- sand w e are just 3 5 gullty 3 s anyone else L f there i s any guilt-*- u p o n thst t y p e o f intrusion, regulation, s n d inposition o f our views upon others. R i g h t among the councils o r the reserve banks n o w and then I have heard t h s u g g e s t i o n t h e t t h e airectors o f those panks enjoy a certain sutonouy uncer t h e l a w that they c o 186 Renot like t o have interfered with, e v e n b y t h e Federal serve Board I l frankly g e a r i t e n d 1 feer that i t would Conresult i n enisnosities s n c ultiisately i n o n atteupt b y https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis sress t o andify t h e Act, waich, j u s t now, 1 Now, i n conclusion, a think i s pretty o r d about t h e othsr side o f thisquestion, t h e reguletion o f the totel volume o f bank credit, T h e reason w h y I asked vr. willer about thet New curve wes because o f certsin things w e have observed i n o n just now, York, certain things t h s t w e gesel sre going that a r e o f interest t o us. Tire loan account o f the br.kers © exchenge N e w York stock a t the i s p r o b a b l y 8 0 p e r c e n t sbceve w h a t i t w e e low tigure lest yssr. but i s s i n p l y 9 T h a t i s nothing t o frighten us, fact t h a t « e w a n t toxtuday. I hsve w i t h i s 5 list o f rorty conmmoulties, s o n e o f t h e most fiuuportant colilco.modities t h a t w e pracuce i n this country, a n d have pared a n d listed t h e monthly average price, 1 9 2 1 - 2 w i t h the september 3 0 prices, a n d with t h e sole exception o f flour they a l l show advances w h i h renge u p 3 s high 4 6 336 per cent, i n the case o f cos], a n d excluding coke, which has been subject t o very unusual factors, t h e s e r e g e https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 187 37.2 per cent. for the whole list e f fozrty conuoGities i s prices s h o w n Dr. tiller reverred t o t h e increase i n or 1 7 per cent, by that chert, s h i c h Itiink i s asout 1 6 8s unusual. @ h a v e « e e n a chert o f that character care h a s been n o such ried beck t o Civil . a r cays a n a there that since the chenge i n vaiues ina period coupsrable with hapreadiustment took place aiter the Givil war. m i s Jay exact point pens t o heve i t here, a n d i t illustrates t h e which y o u meke, b r e willer (exhibiting chart). place i g a n inNow, the third thing that hes taken over t w o billion, crease i n totslbank deposits o r something between January 3 n d July. may b e The rourth thing that h s s taken piace, w h i c h a coincicence, i s that the earnings asec. ts of the vederal reserve bsnks v e increased two o r thres hundred million shundred dollars end thet . e heve luported something over million dollars i n gold. a l t h i n g s merching slong outstsnaing together have a l l inaicated t o n y iind one this room, w h o hss enban sane thet Lsee- l e t every i a n i n his inaividusl meme s theoryor h o w h e should lend money t o per banks--- I that, s m frankly n o t v e r y nuch interested i n some m e n d o i t o n e way ys n d s o m e s n o t h e r e - - t h e thing thet 1 a m interested i n i s the fact thst policy, that w e shell have the extent t o which « e sre exercising @ ntrol over it, that w e d o not miniiize o r overlook thettrundsuentally, in the last snelysis, t h e thing thet controls borrowing b y the great iass o f bsnks o f this country, t h a t i s those banks representing t h e great iusss o f banking resources, and the control that t h e y a r e going t o feel, i s what that crecit costs then, Vice Governor Platt. w e will n o w hesr f r o m ur, Pere Pins ue, Peprini u m . Chairuan, 4 + feel thst I 9in almost in the position o f sowe o f those soldiers o f whom 3 gentlee men n o w dead sllzeged thst many sere executed without trisl. snen @ wenber o f t h e Federal Reserve Board nave t h e statement t h i s morning thet t h e most sbsurd proposition that has ever b e e n c u t u p t o the Board auring h i s snounbency was 8 s u g e s t i o n r r o u t h e r e d e r a l n e s e r v e B a n k o f S e n Fren- cisco thet t h e rate b s rixed s t 3-1/2 p e r @ent, m y cese had not b e e n subiittea t o the Jury b u t 1 was slresdy exe- cuted. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis however, a n y feeling t n a t existed u p o n m y part o n that https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 189 cubrageous charge b y mz’ witchell w a s paliated b y 58 very delicious luncheon which 1 enjoyeu w i t h him, a n d I forgave hin. when « partook o f his huspitetity. I feel thet s v e n with t h e disposition o n the part o f the gentlemen present t o b e fair f ai. aluost t n a position ot greot Gisadventsge when I undsrtakedto speak o f conditions i n New York, about w h i c h «r, ctrong i s s o faniliar, ané about which I necessarily a m very unfamiliar, b u t I teel very much plessed t h a t i n s o nsny things mp. ctrong hes agreed with the idess thet i hed sdvanced i n my paper. But h e renarked t h a t w e seemed t o b e discussing diiferent things, o n d I believe thet I an not incorrect i n saying that mr. Strong hss n o t b e e n adherung closely t o the topic. Governor strong: I guess you are right about that, ur, Perrin, up, Perrin: f h e topic i s not whst w e would like t o have, n o t whet w e sould like t o believe. I L might l i k e t o believe thet the Heavenly gates are o f pearl end thet the streets are very heavily paved with gold; I i s personal God; I like t o b e l i e v e : n might may believe 8 1 1 those things, a n d i f I do n o amount o f argument i s going t o chang: my bellef. B u t I submit t h a t those things have never 190 been demonstrated j n fact, t h s t e r s y a r e simply what o n e may like t o believe. Now, t h e topic i s not what w e would iike t o have 6 s esnethod o f regulation. T h s topic i s that light aces t h e experience o f the rederel reserve’ benks throw o n the value of diferent iethods o f meking their credit a n d uiscount policy effectivs, w h i c h i s nmserely wheat i n the experience of the Federal reserve banks i s of value, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Now, 4 s I believe, t h e r e a r e very strong preconcep~ tions i n r a w r o f what i s known s s the penalty rate. L myself, r o r s o long e s I have k n o w n a n y t h i n g a b o u t c e n t r a l benking, h a v e b e e n thoroughly convinced t h a t t h e only proper control i s b y a penselty rate. yirst things that I T h e a t w a s one a f t h e learned about central banking years 4&go in m y first experience i n Europe ,whéme: I made some little study o f banking. Now, i t i s perheps worth while t o stop f o r a moment anda consider w h a t i s a penalty r a t e , e n d t h e B a n k o f EKnglsnd comes u p a s the best illustration o f the appiication o f such a principle. and b y that I w h e n a penslty r a t e i s referred to, mean a rate a t which rediscounts will n o t be profitable, w i l l either cause @ loss o r a t least producs 192 no profit, w e consider what e r e t h e bills thst a r e subject to recis count. London, T h e bills handled b y t h e bill brokers i n 9 s middlemen, a r e those which s r e soid i n the open market. T h o s e broksrs e r e dealers i n those bills just a s our scceptance people a r e dealers i n acceptonces here, T h e i r purpose is, o f courss, t o sell them 6st such I t i s usually e n extremely small a profit a s they cen, margin o f profit because t h e y have 5 tremendous turn-over. They b u y a n d sell a n d they d o n o t crdainsrily rediscount. The only time w h e n they rediscount i s w h e n they a r e called upon t o pay u p a losn which they have negotiateu agsinst those bills they sre dealing in, end then their recourse is t o g o t o the Bank a t sngland s n d redic count thore; b u t that i s a n unusual s n d exceptional thing. T h e Bank o f Englend does n o t reciscount f o r t h e blil prokers s s samatter of considering t h e necessities o f t h e bill brokers pris«.arily; https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis they a r e c o n s i c e r i n g m e r e l y t h e n e c e s s i t i e s o f the general situation, o n d the bill brokers must take their chances a s to whethsr they meke 3 profit o r lose i n their dealings. Now, l e t u s sssuue t h e t t h e Hank o f sangland rate w a s lower then the market rate a t which these bills were going in the open merket, h o would get the bills? O f courses the entirs velume a f b i l l s vould g o t o the best bidder, snd i f that w a s the Bank o f #ngland, t h e Bank o f onglend would g e t a l l the biils. B u t o f course t h e resouress o f the Bank o f England a r e relatively s m a l l conpered t o the sverage volume o f billse+t- 1 a m speaking o f t h e time before the war-e+ i n the mprket, a n d i t 1 s perrectly obvious t h a t the Benk o f inglend rate nust b e abows t h e market a n d that it m u s t i n p o s e a péenelty r a t e , Now, s h a t d o w e d o i n this country? Gismetricslly dirrerent. T h e thing i s T h e bilis thers are of one general, uniform clsses, s i t h very siight vsristions, h e v e like maturities, o n d there i s a asfinite tiarket rate o n those bills t h s t t h e Bank o f bngisnd would accept f o r ree https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Giscount, slithough there, 8 s Governor strong h e s mentioned, the banks d o notes» [ think this i s correct, Governor strong? Governor otrong: I t i s 2 fact, e n d * think «+r Yay mentioned it. mur? Perrin: T h a t t h e banks d o not rediscount, n o r do they ¢ver sell t h e bills. u y most intimate information regarding t h e operation there comes f r o m & man who worked for a good while i n London i n one o f the joint stock banks, 193 end h e said they tried t o censurlage s good many o f their operations, s n d when they s o l a their bills t h e y sold t h e m without encorsenent, b u t thet selling w e s 6 very common and usual thing; i n other .oras, u n e t o the opsrations o f the bill market, they sdjusted thelr cash position. Now, the uenber bank i n this country g o e s t a the red-ral reserve pank with whstcver psper i t h e e which i e eligible. i n t ? » strong hss sald 9 good deal about the van “msncisco district e n d t h e operations o f similar districts, a n d thet i t ie sn excellent type ofee- shall we coy country district? I t i s a high rate district i n some Governor otrong: .¢ stions. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis wr P e r r i n : Y o u pald u s a compliment w h e n y o u s a i d thet the pre:ent rate wa. probebly sifsetive i n é n srane edgco, L o s Angeles, ssattle, Portland o n e Tacoma, Governor strong; I vatd I should imagine i t was under present conaitions. wr Perrin: # @ have 3 vour per cent rate. L e t us taxe theother cities outsids o f c a n Francisco, a n d there is not ¢ city o n the Pacitic voast i n which the lending rate to their best customers, outside o f Sen rrénciseo, i s at 194 the present t i m e lees t h e n s i x : : s h a t does sfiect- ive mean with a four p e r cent cissount r e t e a n d s six p e r cent lenaing rate? T h e mininun rate i n san rrensisco s t the present t i m e i s five p e r cent. u h e t doss “efiective" nean i f e five p e r cent lending r a t e i s u p sgeinst a four per cent d i s m u n t rate, U b v i o u s l y t h e r e i s s profit, j u s t https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis as cdistinet f r o m the penalty rate o r t h e Sank o f sngland as c a n oe, Now, what £ was going t o say--- a n d first o f a l l l want t o s a y that I a m net trying t o pxye anything--= b u t I started t o say this s n d d i d not finish, t h a t m y earlier convictions, u n t i l within t h e last two years, w o r e thst the only proper r gulation w a s b y rate, a n c a n y change o f view which I heve h s s b e s n ootsined sgsinst m y will, b u t simply becsuse o f the experience i : thse Federal neserve bank, w h i c h h e s proven t o m e that t h o views which I had previously h e l d were absolutely without w r r a n t , t h a t they eere preconceptions, t h a t t h e y were like religious beliers, they were n o t subject t o proo:. Now, s i t h r e g a r d t o t h e d i s t i n c t i o n n a a e b y u o v e r n o r strong between credit extended t o a n individausl bank 6 n d the total volusie o f credit, I probably d i d n o t understand https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 195 just what h e had i n mind, b u t I csrnot s e e i n principle duy Gifterence betucen creditextenuded t o the Netionel City Bank a n d credit extend-d t o the « 1 s t National ‘Bank o f Pocatello, Idaho. E e c h i s 3 credit trensavtion, t h o u g h one i s a larger troneaction then the other, b u t they are, it appears t o m e , identical i n principle. I r they go,and all such transactions g o to increase tus volume of credit, I can see n o uly ferentiation. Now, w e are not concerned w i t h t h e purposes, i n this Giscuseéion, o r the object o f regulation, but aierely with the velue o f different methods d voelceped b y t h e experience of F e d e r a l N s s e r v e Banks, > l e a s s b e a r i n mind t h a t I not t r y i n g t o p r o v e snything, but I am a n olmply t r y i n g t o tind what i s the experience o f the reveral reserve banks when i t comes t o the juestion o f h a t iniluences a n increase in the extension 3 s refusal t o extend creait. there a r e 6 multiplicity o f iniluences. like a O f course Y o u might n o t n a n b e c a u s e h e a o e s n ' t b e l o n g t o y o u r chureh; I si. speaking o f the individusl benker; like a tian becsuce h e i s profane a 3 n d you might not drinks, o r soisthing else thet you con't like; a n d you refuse that man credit. Another m e n , w i t h n o b e t t e r statauent, b u t i n whom y o u have more confiderce, y o u extend credit to. You reénenber souwe ysars & b i s V a c a e r l i p made a n scaréess before the Bankers!’ Associetion, I Virginis, i n sbout 1905, which crsated a think i t wes i n gooc ceal o r dis- turbence i n the public m i n d becsus p r e a i c t e a dirfrlcultlese--- s n d soue o f y o u m a y remember this b Ss i t just ocuurs t o m y mind a t the moment--heve a very inportant influence u p o n credit e x . s Now, l e t u s assume that things we.t along sna thet t h e efrect o f that would shortly b e cissips The penalty r a t e inrluence w i l l n o t b e dissipats 8 continuing influence, : : I wish t talk between those influences t h s t a r e externel ences t h a t a r e persibtent. B y “erbernai"” Z I mean sentinent- 81, perheps, t h o : e things t h a t cirectly in:luence t h e q u stion o f prorit o r loss i n reciscounting. tion o f what I L shall s a y o r what I I t i s not a shall omit, because I sm going t o burcen y o u w i t h 3 good desl o r telk upon this. There i c n o néerket rate within f o r the p a p e r rediscounted B y t h e f e d r a l r e s e r v e bank. L a m now t a l k i n g sbout wr, otrong's aistriet, s b o u t which I cia sbout S a n Francisco, w h e r e I https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis know © an living. little, 8 s he u p ? strong, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 197 p.éssing belieis, e n c a y statement wish t o present t o you. i s based First I heve s letter f r o m t h e Federal reserve v a n k which I ob§ained trom one o f your subordinates, Governor strong. 1 did n o t ask you for this because | Gid not want t o bother you with it, i n which i t is stateé “In accordance with your wire, which w e rscebved i r o m ore sargent, y o u r as.istant, take p l e s s u r e we i n advising y o u that a t t h e close o @ business vetober second w e h e d u n d e r u i s c o u n t unsescured p a p e r aimount- ing to ,20,720,000; discounted, interested custouers' peper si.ounting t o ;18,745,200, a n d 1 1 7 , 0 0 0 o f others," Thet i s not o f itselr significant, except that i t shows thet the banks i n New York o n thet cate were redis counting with y o u papsr which h a d n o market, i n ths :énseé o f being readily salable. Governor strong: T h e t i e true. Paper that i s taken i n rediscount, no matter how high its gradee-- i mean pepsr that i s taken b y ths Federal reserve banks i n losns t o Lts customers, n o met- ter how h i g h t h e grade, h e s n o éstablis hed nmerket. I think that i s not 9 natter o f beller, b u t i s s matter that any o n e o f y o u w h o h a v e b e e n i n t h e @ amercial b a n k i n g business, w i l l know t o b e true. Governer strong’ H o w ebou, t h e coimercis] market rate commercial p a p e r ? ue” -Perbins I s m not speaking o f thet e t this moment. This i s customers’ paper, A t this cate you will observe there w a s i n comimercisl paper i a recdiscounts--- I however, t h e t y o u raised t h e t inguiry--- I am ¢ belies mitchell, t h e t y o u have h a d large exosrience i n conmercial https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis banking, s n d y o u k n o w t h s t t h e r a t e o n Ccimercisl parmr, when sold through brokers, r u l e s ei.ead o f the rates charged to customers, b e c a u s e i n l e n d i n g t o customers, you t a k e t h e r e s p o n s i b i l i t y * s y o u know, o f meeting t h e t customer's r e - quirements s o f a r 2 s you s r e able to, a n d y o u require o f him s compensating balence, s n d i n consiceration o f thathe buys t h e right t o call upon y o u r o r losns s t his convenience snd n o t a t t h e m n v é e n i e n c e lend it. o f the b a n k a n a y o u uncertake to O f course thet isn't scsolutely carricd out i n sll ceses, b u t t h a t i s t h e i m p i i e d obli. stion i n s u c h a tion, a n d thet justitiss a rel - higher r a t e o n customers! p s p e r over t h e country t h a n that a t thich w u s s r c i a l paper ordi-~ nesprlly ruiss. u r cuurse i n tinss o f extrenie stringency that w o u l d n o t b e true. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis mc” m i t c h e i l s A b o u t o n e h a l f o f o n e p e r cent. wr” Pervins t h a t e v e r that moy be is immaterial. w e do not n e e d t o determine that. I have before m e a list o f on figures w i t h regard t o t h e rate, a n d that paper reierred t o which ruled s t lets then qastomners' peper, t h s rate i s still sbove the rediscount rate for the New York Bank. ‘ h e r e fore, £ sucnit that t i i s not a prectical suggestion that the Fed:iral r e s e r v e r e d i s c o u n t r a t e b e nmeintsined a b o v e the market rate, because there i s n o merket i n the sense of salsbility. market r a t e i s , T h e r s i s no way cf ascertaining what the Y o u c a n a s c e r t a i n w h a t t h e market r a t e is, 8 S ur’ Jay pointed out, upon banker:' anceptances, short tlie g o v e r n i e n t s e c u r i t i e s a n d c 3 l l loans, not t h e t h i n g s t h a t s r e p r e s e n t e d b u t thoss s r e t o t h e reaers] reserve banks for redism unt. You sre limited b y t h e topic t o ‘whst i n the experiences of F e d e r a l r e s e r v e b a n k s h a s b e s n shown. N o w , t h e only way i n which a penslty rate could b e imposed would b e to charge @ fraction above t h e lending rate. nically there i s one ditriculty. O x course tech- I f the rate o n loens is4-1/2 we soula reciscount at 4-3/4, if it was le it would b e 12-1/4, s n d o f course thet i s notfeasible, becauss https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 200 once y o u @ u p y o u are lending uwonsy o n wal] street a t 4-1/4 and charging out i n Idaho 12+1/4, and that is not to b e consicersd. in Now, Governor Strong, justirication o f m y discussion of New York, when 4 said that the wewe that I advoceted, I meant t h e experiences o f the Federel reserve s y s t e m prove, I am talking fects snd 4 shall b e glad t o be core rected infracts. I et all. I do not want t o put o n y beliets i n this said this will herdly b e yuestioned i n sny western o r southern Federal Keserve wistrict, b u t even i n New York, t h e money center, t h a t w o u l d b e trué. Governor Strong: ute Perrin: w h a t would b e true, “r, Perrin? T h e t the discount rate will usually b e less t h e n ths r a t e charged customers o f the lending banke. i think you made that statement, ur* dey, e n d i n that statement ur, J s y m d a i @ncur, Now, t r o m the etsndpoint o f é n efisctive repression or credit sxpsnsion, I submit t h s t s rate cannot b e stated that l e sbove t h e ruling rate t o custoners, whether those banks making t h e loans a r e i n New York City, lending t o the biggest borrowers, t h e best borrowers, whose credit i s of the highest, e n d who might have their paper sold through https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 201 hrokere and coumand ¢ rate & t thé present time of 4-1/4 or probably = higher rate t n a n that, o r wnether i t i s t h e paper @ f banks i n Idaho, arizona o r Texas o r sone other very high rate Gitrict. O r course there i s n o contention that a four per cent reciscount rete hes any restraint upon a bank lending e t bight, t e n o r twelve per cent, Governor strong: there? m a y I interrupt t o raise a point D o you mind being interrupted, mr’ Perrin? ur’ Perrin: N o . Governor Strong: discount, w o n ' t you think thst the rate o f i n -rder t o b e efrective i n 4 central money market like N e w York o r San Francisco, m u s t necessarily b e above the genersl level of custoners' mtes? wP.ferrin: i the I f it i s gsing t o be e f r e e t i v e , n sensé i n which I om using it, i f v e meke 2 bénk hesitate to extend credit because i t will incur 2 loss i f i t goes to the Federal ieserve bank, a s the bill brokers hesitate when they g o t o the Bank o f bnglend t o medi scount their billse==- i f New York had s rate o f four and @ hsif o r rive per cent there would b e e# discussion a s t o whet thet signitlede-<Gevernor strong, f é s i d e from thetee- d o you mind https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis these interruptions, ur. “errin? ur® Perrin; anything; i N o t a t ell. I an not arguing t o prove a u siuply wanting t o rind t h e facts, s n d w e are all equslly interestedin that. Governor strong: I s i t not s borrows a t a reserve ben.eee I fact thet a benk which uean a large bank, t h e t watches ite arrdairs very closely a n d knows just w h a t i t s money costs it, that t h e benk does n o t regard t h e gpecial rate which it i s receiving o n sny individuel type o r loan that i t makes t o sny particulier customer, o r o n bona investments or anything ¢lse, b u t when i t borrows f r o m t h s reserve b a n k et tour o r four s n d 6 hslr p e r cent i t has regard t o what it l s going t o get for sll ites money,the aversge o f its return o n its money? wr* Perrin. Y o u e r e speaking still more strongly f o r the view thet thse average o n 1 1 investuents w i l l b e very watsrlally above t h e rate o n the lowest grade o r papsr? Governor strong: I a m inciinsed t o think thet t h e rete becomes er.ective i n the broad cense, a n d I f do not mean t o apply i t particularly t o customers’ rates, o p e n a r e ket rates, o r any other rates, w h e n i t s o encroachesupon the margin o f profit thet the bank i s receiving upon all of https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis oo its losned funds that i t i s not profitable f u r thse bank to u s e m o n e y a t f o u r o r f o u r s i d 5s hair p e r cent. A S a matter o f fect undsr o u r system, a n d thet i s why 1 think w e are misled b y a comparison w i t h Londone-- 1 think t h e rete doc: become efrective t o restrain borrowing s t some point below t h e customers! r a t e thet Governor = : s y reterred to. i cannot define i t exsctly because there i s such 4 voriety of rates, but trom our experience i n Nev York 1 am inclined to t h i n k t h e f a c t i s thet t h e r a t e béeconies s f i e c t i v e at e considerable level below t h e sverage o f what you cescritbe s¢ the customer's rate. ware Perrin: u r . Calkins, w h o has b e e n good snough to share w i t h m e the view which I hold, brought m e this very p u n g e n t l i n e a monient ago. " No rate that hse ever prevailed hss hed sny considerable effect u p o n t h e voluie o f credit.” When you teke the rats, a n d this comes ulrectly t o the section that ur, witchell hadjme hung, . r a w n a n d qusrtered for, a n d I wat responsible for the suggestion that the rate go to 3-1/2 per cent--- i t was not that there sas anything sacred a b o u t a 3-1/2 p e r c e n t rate. I wanted t o p u t i t up t o t h e k e d e r a l R e s e r v e B o s r d w i t h t h e h o n e t h e t t h e y 204 would think i t out a d t e l l u s what w o u l d b e a proper credit policy. A n g i t wes a s a result o f the fscts, which 1 think prove this, t h a t l e d t o that k i n d o f 4 rate: T h e a t after w e hed c o . 6 t o ¢ point w h e r e w e passed t h e p e a k i n 1 9 2 0 a n d li:uidation begsn, w e might not have known the rirst dey thet liguication had begun; b u t w e did know i n a relatively short tine, I rate, submit thet i f s t that tine « e had sdopted a i n the fall o f 192C--- t h e Board wanted t o @amie cown in very gingerly fashion, a n d they were afraki o f whet? wy contention i s that i f w e hadin t h e teil o f 192C, d r o p e d https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis our rate t o 3-1/2 p e r cent nothing untoward would have hap- pened. T h i s is what the suggestion c f 5 3-1/2 per cent rate meant, t h e t w e were entering u p o n 4 period, s u c h 3 s ensued efter w e passed t h e peak i n 1920, w h e n n o uesnipuletion o f rates @muld possibly hevse checked that liquidation Sts 1 3 . P e o p l e h a d cone t o t h e conviction t h a t i t was more profitable r o r them t o hold the goods thén t o exclonge them f o r money, T h a t whole period o r liquidation w a s one in w h i c h e a c h asy, ¢ a c h week, e s c h month, good See= e n d when 1 the owner: say goods I t h e owner o f the mean i n the sconomic sensée-- o f the goais s a w thet they were ually, w e e k l y snd monthly becoming o f less value, wcasured I n money, a n d https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 205 therefore t h e y wanted t o exchange anything they hed, w h i c h was exchengsble i n money, t o sevoid further loss. Governor Strong: Y o u are sure you d o not mind inter- ruption? wXe Perrin; N o t a t sll. I a u not trying t o prove esnything, b u t 5 m t r y i n g t o f i n a o u t w h e t e x p s r i e n c e shows. Governor Strong: p o n ' t you think that a n increase in rate i n 1919 would have h e d 9 n sffrect upon t h e expénsion that t o o k placs? lure Perrin: I want t o t o u c h u p o n that a s a s u b se- quent topic, snd I will came t o it in 9 moment. Let u s take s concrete iilustration o r two. would a aesler i n wheat--- I think thet i s ur. Kich's grest come mcdity, heve been willing t o buy «heat a t todsy's prices--I am speaking o f the middle o f 1920--- f o r delivery thrée or six months theresfter, i f he was given 3 six months dating, w i t h n o interest whstever? w o u l d t h e arygoods merchant, h a v i n g bought i n the spring his 9 1 1 supply f o r 1920, s f t e r h e w a s s a f m t i e d t h e p e a k h a d b e e n passed, h a v e bought his 1921 spring stock i f he hsd been given April or way datings, with n o interest whatever? without dielating upon that, I think you will sdwit thet with a https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 206 value o f goods, usasured i n money, steadily ascending, y o u coula na& b r i n g sbout <peculative unaertakings, s n d I sii not now referriug t o p e c u l a t i o n i n the stock market o n the bear side, i h i c h I s entirely snother matter. true, t h e n i t makes i f thet i s n o aifference w h a t r a t e y o u have u n d e r those concitions; I mean h o w l o w 6 rote, Governor Norris: G r a n t i n g thet i t would n o t csuse inflation, m i g n t i t n o t check unnecessary derlation? uP’ Perrin: Anything we coulda do to lend a little of Judge nansey's sunshine t o 9 cepressed situstion would have been helpzul, s n d t o the sxtent thst w e exerted 6 sentinent81 influsnee u p o n it, might hsve b e e n beneficial, Governor Norris: v e n a t t h e b e g i n n i n g o f t h e per- a ur §=6Perrin: Y o u could not have stopped it. Governor Norris: ur’ Perrin: T h a t i s m y belisr too. I f recuction i n rates vould h a v e checked thet liquidation, h o w does i t happen that the process ofr liquidation never ceasec, b u t w a s accelersted w i t h successive drops i n rates? Governor #Fsnchsr: ur* Perrin: a n d i t hasn't cessed yet. T h s t i s whet i think t h e i e c t s prove. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 207 with 8 ceclining market i t coesn't matter i f you crop t o T h i c i s not = 3-1/2 p e r cent. jury, o f course, but I would b e willing t o have t h e jury g o out e n d lock itself up e n d think thst over a n d s e e whether that proposal w a s so s b s u r d a s i t s e e m e d t o be. um Curtiss: B u t shyt 2 3-1/2 per cent rate? uP’ Perrin: T h e r e is nothing sacred sbout a 3-1/2, T Sor a 4 per cent rate. o m y mind our experience w i t h the Fed ral Keservs wysten shows thst reductions i n rate heve very little influence s n d s r e o f very little conse- juence, d e might juet as well, s o far 4s the cifect went, r e t s i n t h e h i g h rate, # s i x o r i l v e p e r c e n t rate, snd liqiication would nave gone o n without any appreciable scceperstion, Y o u a r e g o i n g t o have t h e t persistent e x e cLanging o f goods f o r m o n e y u n t i l t h s p e o p l e c a n e t o t h e convietion that goods were n o t going t o b e »orth less t o e morrow t h a n t h e y w e r e touay, I uo not t h i n k t h e r e i s anything i n the experience o f the rederal Neserve system; {do not k n o w a s n y fect, I have n o t b e e n s b l e t o u n e a r t h sny fects, t h a t t h e rate, f r o m t h e s t e n a p o i n t benk o f E n g l a n d p r i n c i p l e o f the aioption a a a r the penalty r a t e , has ever been efrective, just a s ure Calkins has said, thet 208 it hsasnotbeen s;preclably sirective i n liniting t h e volune or rediscounts, are iiller: w h e n t o aothe reserve banks want t o ad- venee t h i s r a t e ? ware Perrin: a wee hiiiler: aiscussion. > » not t h e tople, u r willer. B u t i t i s immecistely involved i n this W e sre talking here ebout the value o r dif- rerent methods o f giving srfect t o erecit policy e n d dis- count policy. I do not believe there would b e any jyuerrel- ing with the assertion that i t i s on 3 rising market, a n d particularly s market s h e r e p r i c e s g r e rising, s t 2 rate that asakens concern a n d gives csuse t o the belief t h s t t h e tine has conie t o exercise control through nsking credit Qesrere-= nite Terran: Y e s . LBs lab bLex: T h e tern “etrective” h e s b e e n used i n the .iscussion, but without defining egoinst whom i t is thet w e want t o make t h e rats errective. I t sccurs t o m e thet y o u perheps might m s k e t h e mistake o r thinking that it i s t h e menber banks S g a i n s t whouw the rete i s t o b e madeefrective, r a t h s r t h a h t h e borrower i r o m t h e member https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis enk. T h e ultimate u s e r o f t h e credit i s t h e member bank's https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis cu stoner, mms Perrin: Y e s sir. wur* uiller: N o w , when you have 3 n advéneing jarket there c r e d i t i s i n asmand, 3 n s d v e n c i n g market, when it gets to 8 certain point, such gs it did in this country in it the early part o f 1920,/is 9 market that has got t o keep onsdvancing or otherwise it erscks, and orten it will creck o f its own veight; but shen acvencing has once gotten to 9 certain voint, i t hss got to keep on. i t means, then, t h e t i f the reders] reserves osenk would advance i t s rates a t a tine shen the wenbsr bank is charging 6-1/2 or 7 p s r c e n t t o i t s customers, t o 6 5 per cent, s n d c h a r g e s the niewber bank six per cent, wnat heppens with regard t o the customer's rate? wPe Perrin: mre wilier: ur. Perrin; iv” Miller: T h e r e 4 s always 8 I s y i p a t n e t i c tarluence. t i s s n actual inzluence, I t i s n o t s n iniluence o f loss, I t t e a n inrluesnce o f loss t o the cuse toner, a n d h e i s the nan that w e really v a n t t o got efter. I think you sre thinking o f the market a » a static market end of the rate a s 8 static rate, where a s 6 matter o f fect the market i s not static, b u t i t is one thst i s in- 210 creasing i n its accelebation, a n d every time that y o u https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis give i t s punch through your r a t e y o u e r e forcing accelera- tion under dirfia lties, o r rether you ere increasing the ditvficulties o f ecceleration a n d t h e member bsnk a t ones tries to, a n d usually succeeds i n passing o n your increase to its customers. U l t i m a t e l y the man you ere after i s the customer o f t h e menber bank. I t i s n o t necessary t o put practically penslize t h e bank, b u t i t i s necessary t o s n d the any p r é s s u r e y o u c h o o s e b s t w e e n t h e m e m b e r b a n k customer, the A t s time w h e n the merket i s speeding u p rate customer orfers f a r less resistence t o a n sdvance o f by t h e R e s e r v e B a n k , a n a t h e result i s t h a t u n d e r circum- a chance t o stances o f that kind t h e meiuber bank has g o t that way lift its retes t o its borrowing customers, a n d i n it tends t o became erfective. wre Perrin: I have o n e s u b j e c t , r e g u l a t i o n b y als- ev-etion w h i c h I wart t o touch upon 5 little bit. G o v e r n o r otrong: esked me sbout 1919--Governor otrong: terently. L e t i e put m y yuestion a little dit- Y o u have partly snswered i t alreau. believe, ado you not; I think most @ Y o u do u s do, t h a t chsnges in discount rates a r e t h e dignirficent things t h e t a r s 212 you have i n your iiina, ¢ s 8 Gerinition o f a n effective rete, penalty rate. wre Perrin: & penalty rate. i t is thet t o which I a n referring, Governor strong: I neven't head i t i n m y m i n a f o r a veristy o f reasons, kre Perrin: I heave s topic h e r e “ t h e s i g n i f i c a n c e of rate", w h i c h incluces that. Governor ctrong: T h e r e i s 9 airferente between what msy orove, u n d s r o u r cystem, t o b e a n effective rate, a m d whet y o u describe a s a penalty rate. ire Perrin: i was trying t o uivferentiate t h e senti- mentbel inxvluences, w h i c h a r e n o t persuasive influences i f comiitions d o not «s-rrant, a n d the sersistent iniinence o f the penalty rate, Governor strong: I think i f vre w i l l é r h e c p r e p a r e d é chert which would exhibit the curve o f psyshology, thet we would have t h e whole picture mr’ Perrin: T h e s e collatersl influences a r e largely psycological. bre wililer: s h e n you usé t h e t e r m “penalty” a n d “effective”, t h a t t h e rate i s not effective unless i t i s a https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 213 penalty rate--- I but I https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis know y o u c o not believe that, ir. strong, think ur, Perrin belies ves it--wre Perrin: P a r d o n m e , mire miller; I wes t r y i n g have snother subject to distinguish between t w o rates. I upon t h e signiricance o f t h e rate s n d the w a y i n which the rate c a n b e made very influential. New, 2 8 t o 1919, i f the Lesson tought b y our experfence i s that ereuits could not b s c a ttolled through 4 -enalty rats, t h e n the jusstion i s what could w e have cone in 1919. I belisve thet o u r si:perience cemonstrates t h a t o ths rate conif w e hed recognized t h e i n e f r é c t i v e n e s s f trol i n New Y o r k a n d i n can francisco, e n d h a d s e t u p thse regulation o f t h e volume o f creuit extenaed b y ciscretion, that w e c o u l d h a v e p r e v e n t e d to 8 consiuerable extent t h e vast expension thzt ceue i n 1919, o r w e M u l a h a v e flattened thet pesk a good agal. Governor strong: m a y I interject j u e t o n e thought? ur. Perrin: v e r t a i n l y . Governor strong: d o u l d w e have cone i t despite t h e fact that every time the Tressury nedce a n issue o f T r asury certificetes i t c:eated 3 volume o f creadit w h i c h u l t i m a t e l y woula@ f i o w f r o m o n e b a n k t o snother, e n d w e h a d t o suppor. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 214 4t b y loans t o neintain reserve ageinst a d posits? ur, Perrin: I think perhsps t h e most effective answer to that would b e thet t h e 7 per cent rate i n New York--i venture t o say it, y o u have n o t t o l a ne, that y o u d i d not stert sith the i n position o f thst 7 per cent rete, b u t you called i n your big borrovers snd reasoned with they thet i s t o say, y o u exercise e d Your discretion e n d seid, “This mast n o t g o on." I f you will hola u p your herd sand d thate-tell me thet you d i d n ' t o Governor .trong: I will hold u p m y hand s n d tell you this, thst i t wasn't efrective until w e put u p our rate. wre Perrin: B u t t h e e x e : c i s e o f d i s c r e t i o n wags w h a t made the rate effective. I t wasn't t h e loss, becSuse i n 1920 money would have losned i n New York s t more t h e n seven per cent, oscauce e v e n i n vanuary o f l92z1l your svérage rate on coninercial p a p e r w e e 7.94.~ Governor strong: Y e s , but don't forget thet New york lost 8 blilion dollsrs i n deposits t o the rest o f the country s n d w e hed t o loan noney t o make thet good, s t eny rate. ure Perrin: T h a t i s n o t t h e topic, Governor. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis mr, JEY? B u t that i s 2 fact. al" 6 e Y s , a n d thers o r e & lot o f other feets; but that w a s not t h e topic under ulscussion. wr. n s i r m a n , I had other topics t o aiscuss, a n d m a y I b e pardoned f o r continuing t h i s discussion? think « * shall have t o have Vice Governor Platt: I en evening cession t o finish u p now. (After i n f o r m a l daiscussion, at 6 o'clock D e M e y upon motion auly wade, seconaed e n d carriec, t h e Conference adjourned until 8 o'clock » . uw. o f the sams aay.) ee e d https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis