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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
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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,
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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.
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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.
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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.
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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,
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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
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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
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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
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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
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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,
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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
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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
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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?
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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,
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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?
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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-
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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.
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Federal Reserve Bank of St. Louis
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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
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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,
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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
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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
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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
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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
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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
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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
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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.
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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
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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
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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
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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
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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
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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 -
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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
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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
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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
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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-
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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
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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 &
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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
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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
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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
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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
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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
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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
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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,
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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
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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
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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
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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
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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
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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 -
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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-
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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.
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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
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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
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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
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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
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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
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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
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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
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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.
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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
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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
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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.
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Federal Reserve Bank of St. Louis
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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 -
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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.
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Federal Reserve Bank of St. Louis
b o w , i t seems t o m e that y o u csunnot always rely
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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
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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
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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
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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
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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
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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 ?
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B u t y o u d o expect t o reconvene
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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-
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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-
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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.
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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
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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
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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
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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
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Federal Reserve Bank of St. Louis
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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
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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
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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
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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%
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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 ,
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Federal Reserve Bank of St. Louis
i r w @ g o ahead a n d diseuss
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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
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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
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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
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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
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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~
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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
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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
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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
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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-«
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Federal Reserve Bank of St. Louis
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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.
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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
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Federal Reserve Bank of St. Louis
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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
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Federal Reserve Bank of St. Louis
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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,
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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
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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
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Federal Reserve Bank of St. Louis
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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,
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Federal Reserve Bank of St. Louis
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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
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Federal Reserve Bank of St. Louis
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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
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Federal Reserve Bank of St. Louis
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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-
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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
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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
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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
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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
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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
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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
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Federal Reserve Bank of St. Louis
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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
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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
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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
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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
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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
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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,
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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
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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
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Federal Reserve Bank of St. Louis
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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
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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.
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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
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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
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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 -
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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
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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
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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
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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
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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,
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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
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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
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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
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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
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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
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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-
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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
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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«-
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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;
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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
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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
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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
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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
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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
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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,
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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
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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
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portfolios, c o u l d ruc’:
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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?
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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
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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
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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
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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,
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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.
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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
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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.
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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
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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
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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,
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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
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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.
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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
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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
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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
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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,
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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
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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
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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
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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"
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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-
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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
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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
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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
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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.
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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
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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,
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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;
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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
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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.
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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
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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
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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
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Federal Reserve Bank of St. Louis
know ©
an living.
little,
8 s he
u p ? strong,
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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
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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.
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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
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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
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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
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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
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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
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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
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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
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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.
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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
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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
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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
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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
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Federal Reserve Bank of St. Louis
213
penalty rate--- I
but I
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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.
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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.
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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
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@FedFRASER