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Federal Reserve Bank of St. Louis
VOLUME 2
PROCEEDINGS O F A CONFERENCE WITH THE FEDERAL RESERVE BOARD O F GOVERNORS A N D CHAIRMEN A N D FEDERAL RESERVE AGENTS
OF THE FEDERAL RESERVE BANKS
TREASURY BUILDING
WASHINGTON, D. c.
OCTOBER 10, 12, 13, 1922
WALTER $ . COX
SHORTHAND
REPORTER
COLUMBIAN BUILDING
WASHINGTON,
D . Cc,
216
PROCEEDINGS O F A CONFERENCE W I T H T H E FEDERAL
RESERVE BOARD,
O F THE GOVERNORS A N D CHAIRMEN
AND FEDERAL RESERVE AGENTS O F THE FEDERAL RESERVE BANKS,
—
EVENING SESSION
Thursday, Oct, 12. 1922.
The conference reconvened, pursuant t o adjournment,
at 8 o'clock, p.m. Wednesday, October 12, 192 2.
PROCEEDINGS ©
Vice Governor Platt.
A t t h e time w e took recess
for s u p p e r Mir. P e r r i n w a s o n h i s f e e t i n t h e m i d s t o f a
very interesting argument.
i e seem this time t o have a
real difference o f opinion, w h i c h i s conducive t o a good
argument.
hits Perrin.
J u s t t o show y o u a difference o f opir-
ion is not a basis for antdgonism, I will say that ir,
Strong has just entertained m e most hospitably, a n d h e
has n o t overstepped t h e enforcement o f the Volstead Act.
i personally f e e l very agreeable toward h i m and most
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Federal Reserve Bank of St. Louis
217
rriendly t o hin, b u t I
will s a y that w e did not tolk shop
very nuch.
When 4 + was asked before sdjournient whether I
start again with a full head o f steam, I
thet i t wasn't always e a s y t o make a
muld
told br- uiller
gooddrive f r o m t h e
first tee.
chat I cought t o bring o u t i n these facts which I have
stated was, first, t h e t t h e Bank o f England must impose
a penalty r a t e , t h a t t h e y c o u l d n o t p o s s i b l y
d o otherwise,
snd secondly, t h a t i t i s equally limpossible f o r the rederal
reserve banks t o impose a
City.
penslty rate, e v e n i n New York
T h s rvact thet s four p e r cent rate i s sald t o b e
ettective s t t h e present time, w i t h s five p e r cent loaning rate t o customers, u p o n t h e ground thet t h e y ®
borrow a t four per cent, appears t o b e
nat
n o n seguiter.
I f
customers w e r e willing t o borrow m o n e y s t rive p e r cent;
that i s t o say, i f there was a cemand f o r money a t five p e r
cent, those banks n o t having funds o f theirown t o loan
would o f coursé c o m e t o the Federel reserve banks.
T h e
resson t h e y d o n o t b o r r e w s t r o u r p e r c e n t i s t h e t t h e y
do n o t h a v e t h e demand.
Ooviously
i t i s not profitable
to borrow s t four p e r cent t o invest i n open market secur-
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Federal Reserve Bank of St. Louis
218
ities.
T h a t i s o n e o f t h e thinss thst i t seems t o m e the
acts w h i c h I have cited t r o m our experience serve t o show,
it has been exceedingly difricult f o r m e t o tear my-~
self away r r o m m y previous conception thet t h e only proper
control i s through the rate, t h e only exrective control,that
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Federal Reserve Bank of St. Louis
the o n l y c o n t r o l t h a t s h o u l d b e h s d i s t h r o u g h t h e rate.
Nothing i s s o repugnent
a s t o ssy thst w e are going t o
meddle i n t o t h e business o f all these member benks and,
by yes o r no, determine whether w e will loen them, a n d
not l e t i t rest u p o n some sutonstic control.
I have h a d some correspondence o f late--- 1
haven't
permission t o quote this lett:r, s o 1 wiil not give the
name--- b u t i t i s w r i t t e n b y a n e c o n o m i s t w h o e n j o y s t h e
cushighest esteem o f all those interested i n financial dbs
sions, e n d whe. I think is regarded 4 s 4 very high
suthority;
h e i s professor o r econo..ics i n one o f our
leading universities, s n d h e seid, " 1 agree with what
you s a y #bout t h e ineffectiveness o f the discount r a t e o f
the r e s e r v e b a n k s . "
H e r e i s a n esenomist,
w h o s e business
it 1 g to consicer these things abstractly, detachedly, a n d
from t h e scientific point o f view, n o t iniluenced b y asny-
thing excebt what the logical processes a
his mind will
219
lesd h i m t o @mnecluce t o b e t h e rsets.
H e goes o n t o
say, “ I venture t o make t h e following scugzestion o n discount policies, sithough I
a m quite w a r e thst t h e y d o not
fully meet t h e requirenents o f t h e situation:
"1, T h e discount rate should b e a little sbove the
lowest rate i n t h e district t o restrain i n sone messure
the borrowings o f the banks."
I want y o u t o notice t h e preconception i n favor o f
the penslty r a t e i n that statement.
"O.
T h e member benks should b e reguired, barring
emergencies,
t o liquidate a l l loans a t t h e reserve banks,
including those besed o n United states government securi-
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Federal Reserve Bank of St. Louis
tics, o n c e ¢
ysar, a n d p e r h a p s
the b a n k t o r 3
b s required
dsrinite period,
t o b e out o f
s a y i o r o n e month.”
That i s o n the thadrpr siscretion, b u t his preconception cays that a s long s s t h e rate i s slightly above
the l o w e s t r a t e i n t h e a i s t r i c t - - rate i n t h e district,
to m e t h a t i t i s a
a n d what isthe lowest
t o w h a t a o e s h e refer?
preconcepticn
rate w h i c h t h e e x p e r i e n c e s
i n favor o f t h e penslty
o f t h s b a n k s t h u s f e r meskes
sppa rently clear i s impossible a
application,
I will not qucte further f r o m t h e letter, although i t
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Federal Reserve Bank of St. Louis
220
is a n interesting letter.
N o w , i f we can detach ourselves
trom preconceptions o f that kind a n d permit ourselves t o
make conclusions based u p o n experience,
n o mstter where
those conclusions msy lead, s n d follow the logic o f the
facts a s they a r e developed b y our study, a n d n o t b y what
we believe ought t o be the way t o do it, o r the way w e
would like t o have i t done, but whet has been done i n the
experie nce of the banks, w e will get a better idea.
Now, with regard t o regulation b y discretion.
ur,
“trong has pictured discretion a s consicering s a y this
wi,000 loan, a n d w e say no, w e cennot mske that loan;
won't rediscount it; y o u must not mske this ,100,000
snd s o forth.
N o w , it‘sprpears t o me thet that i s a
very narrow intervretation o f discretion.
biscretion
covers the whole reslm of judgment, s n d the fullest application o f discretion would b e employed i f each Feders]
reserve b a n k h a d a clear picture o f the eredit position
of -8ch one of its member banks, I
am offering this only
as a tentative nethod o f operstion, b u t i t would probably
say i n its analysis t h a t thisbank i s not going t o violate
the principles o f sound banking,
i t i s not going t o call
upon u s f o r m o r e t h e n i t ought t o .
T h a t w e s reflected
in
whet Governor morss s a i d i n regard t o the sttitude o f
the Boston b a n k toward those banks i n which i t had full
econridence,
T h o s e banks n o t only w u l d n o t violate sound
banking methods,
b u t t h e federal reserve banks w i l l never
heve o c e s s i o n t o r e s t r a i n t h o s e banks;
b u t there w i l l b e
snother bank, assuming that w e have a clear picture o f
its condition, w h i c h would b e derived only f r o m obtaining
oll the inrornation sbout the benk's condition that could
tained
pe oh/ from examination s n d such other ways o f accumulate
ing information concerning 3 bank, j u s t ¢ s 4 conmercial
bank regsrds i t s borrowing customer, a n d i t would s a y
this benk, although » bank o f general good standing, a
large i n s t i t u t i o n , @
very popuisr institution,
has a
great mass o f losns that a r e really capital loans, t h e
bank i s very smbitious, v e r y desirous o f extending i t s business, p e r h a p s s
@ 6 managing ofricer, a
president,
o r who-
ever i t might be, w h o i s intsresteda i n meny other enterprises, a n d perhsps n o t given t o very clear thinking e s
to w h e t s o u n d b a n k i n g p r i n c i p l e s s r e - + -
I s m perhaps t i n g -
ing m y remarks somewhat b y experience w i t h a n occasional
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Federal Reserve Bank of St. Louis
benk that w e have--- now, t h a t b a n k m a y r u n slong f a 3 s
considerable period without redismunting,
a n d then i t
29%
starts i n to rediscount and, when reproeched with the fact
thet i t is beyond the limit, seys thot i t is obliged t o rediscount s o much a n d s o continuously because o f those cir-
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Federal Reserve Bank of St. Louis
cumstances where i t has bsen necessary t o help o u t this
industry a n d t h e t c u s t o m e r ' s r e q u i r e m e n t s ,
a u d s o on, a n d
the paper offered perhaps i s unexceptional, a n d then w e
find when w e g o i n and make 8s careful credit examination
8 lot o f things that enable u s t o talk straight t o that
bank, very ctraight. Governor Calkins in one interview
said “You must either restrain yourself i n regard t o the
amount o f sdvances you esk o r w e shell b e obliged t o set a
limit b e y o n d w h i c h w e w i l l n o t go.”
of ciscretion,
V
to make sdvences,
T h e r e i s a n exercise
e ore not meddling,
w e are not refusing
Y o u a l l know t o whom I
a m referring,
so f a r a s Ican recall w e never d i d refuse t o sdvance;
but
we stood ready, i f our caution was not headed, w e stood
ready t o take sction that would bring sbout vestraink,.
Governor Strong:
f o u l d you refuse 3dvences t o a
thet had t o nake good e n impairea reserve?
ure Perrin:
o u l d I?
Governorstrong:
ur. Perrin:
Y o u would not.
I t w o u l d d e p e n d u p o n t h e circunstsnces,
We would judge sach c s a s s separate cece,
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Federal Reserve Bank of St. Louis
Governor Strong: I
mean i f the loan was good m d was
secured,
pits Perrin: I
do nob t h i n k I - o u l d Snswer cetegorirc-
yes o r n o o n that point. I
each p a r t i c u l e r
member
believes o u r rediscounting
b a n k inust b e a
seperate prob-
lem, j u s t a s the loan b y a commusrcisl bank t o each c f its
borrowing customers i s a separate problem.
Governorstrong:
B u t y o u l e a d t o t h i s point: ‘ S u p p o s e
the condition resulted i n a withdrawal o f a few hundred
miliions o f dsposits i n New York City a n d t h e reserves o f
the New York banks generally became impelred.
the e x e r c i s e
o f discretion,
would
e v e n o f t h e most refined char-
acter, justify u s i n refusing t o lend t h e m the money t o
meke g o o d their reserves.
wr, Perrin:
I t appears thet t h e exercise o f prudent
discretion i n thet case should hsve begun earlier through
recognition o f whether w e were threatening t o call o n
any o f those banks w h i c h might h a v e occssion t o have several
hundred millions withdrawn i r o m them b y ssying "This situation looks t o u s t o be one o f incressing dainsity a n d w e
would just like to talk over the situation with you. Now,
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Federal Reserve Bank of St. Louis
225
shet i s your v i e w o f the outlook’
r o r instsncee, w h a t i s
your éstimate o r your requirenents o f us?" T i a t kind of
action t a k e n m o n t h s b e f o r e t h e s e w i t h a r a s i s s r e m e d s w o u l d
probably a v e r t t h e s i t u s t i o n w h e r e y o u w o u l d h a v e t o b e
eslled o n i n s cricis t o sdvence huncre.t o f millions t o
ngintoin t h e position o f those banks.
w h e n Lit cones t o
s crisis and the bank i s solvent, o f course there i s only
one thing t o do, just d o the best you cane I
think w e all
agree upon that point, that thet i s not the tine t o ¢xerThat
i n t h e s e n s e o f r e f u s i n g creait.
cise y o u r d i s c r e t i o n
would p r o d u c e t r o u b l e ,
o f course.
T n e t e r n cpplication
ofr discretion i s not t o be interpreted i n the narrovsense
which y o u g i v e i t ,
dtnuividual l o s n s @
i n t h e s e n s e o f meddling cirectly
t h e m e u b e r banks;
i n
i t i s rether t h e exer-
cise o f discretion i n controlling o r seeking t o control
with t h e c o o p e r a t i o n
o f the member banks through
a n undere
standing.
Governor strong:
I w a s leading u p t a this point:
cuppose a situation a veloped i n the country where this
chart inuicated the necessity for 8 check i n expsnsion
ot c r e d i t o f t h e r e s e r v e b a n k s e n d w e d o c i d e d 2 s a
metter
ot system policy that i t was impossible t o establish rates
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Federal Reserve Bank of St. Louis
226
thet sould b e sftrective i n controlling this ¢xpsnsion;
end w e undertook i n each reserve aistrict t o argue t h e
point w i t h each ..enber bank, determining h o w m u c h tach
should b e entit led t o borrm u n d e r the circuistances o f
that moment, w h e n w e were undsrtskin
ing tendency i n the muntry,
t o esrrest a n expand-
w e hed 11,000 borrowing banks,
or éven 5,000 borrowing banks, s n d esch benk h a d t o b e
dealt w i t h i n order t o arrset thet inflation because o u r
rate could not b e relied upon a t sll, how could w e develop
8 well coordinated policy r o r determining just h o w f e r t o
£07 w o u l d n ' t w e check t h e country u p rather sharvly?
ie Perrin:
I f you exercise your discretion s o badly
that y o u would upset t h e country, I
woulda s a y that w a s the
exercise o f discretion t h s t w a s unwisely exercised.
Governor strong:
B u t i s i t 9 practical, economical,
reasible thing; “ i s i t a humanly possible thing?
ure Perrin:
C o m i n g d o w n t o our o w n opsretions, I
propos ¢to exeupilfy w h e t d s i n m y mind o n s sinéller
:cale.
# @ G o not r u n into t h e huncredsof millions.
“ince our experience o f 1919, a n d the years following, w e
gre making a careful, intensive study o f the position o f
as
every member bank,seeking t o have/full information re-
227
its
garding i t s scgle o i operetion, t h e charscter o f
loans,
i n general t h e s o u n a n e s s
o f i t s policies,
s s DOs]
they
sible, s o thet w e ere able t o treat w i t h them, w h e n
come t o the redismunting point, t r o m the stsndpoint d
knowledge o f their probable requirements.
instance,
I i we
i n @ community where there a r e several banks,
thet one i s rediswmunting end the others 4a re liquicating,
we hove @
conversation w i t h the dis ounting b a n k e n d ask
‘Why i s i t that your requirements s r e s o a t variance w i t h
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Federal Reserve Bank of St. Louis
those o f the other banks under similar conditions?"
explanstion may o r may not b e satis factory.
satisfactory
w e have =
T h e
i f 3 4 tens
heart t o h e a r t t a l k a n d o u t l i n e w h a t
we t h i n k i s t h e p l e n t h a t t h s t b a n k s h o u l d pursue.
we exercise our discretion i n seeking t o guide thet bank
along sound lines.
The banks i n the c o m u n i t y r a l l into several ciassiyications, t h o s e t o which 1 reierrec t h a t would need n o
controlling hand, n o guide, tecsuse they woula guide
themselves.
T h e r e are s
number o f b a n k s u p i n I d a h o
where there has b e e n a very great l a c k o f losnable funds;
we heave n u m e r o u s b a n k s t h a t h a v e n o t c a l l e d u p tn u s f o r
any undue discount, s n d which have liquicated séasonslly,
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Federal Reserve Bank of St. Louis
2e8
and there a r e others t h a t heve not. I
a m willing t o ad-
nit that.
Governor Calkins: I
would ilke t o su_gest,
i n re-
soonce t o Governor Strong's juestion, t h a t t h e l a w ¢x;licitly imposes discretion u p o n us, because i t Linits o u r advaness
t o a.suber b a n k s
t o thoss
t o which they a r e entitled
in due proportion w l t h other menuber banks.
used torillustration,
i
n the csse
t h e application o r ciscretion w a s
tor the purpose o f svoiding 4 condition.
Governor strag a l s o inquired if, i n case a bank's
reserves w e r e depleted,
w e would refuse t o cicscount i @ i t .
The benk h a d been i s r beyond i t s basic linefor meny months.
We then colled atention t o thet situation z n d said, i n ef-
t, thet i f they continued t o increase the amount o f
their boirowings, r:discounts,
w e tould reach 4 point
where w e would n o t g o further.
T h s t i s the kind o r Gis-
cretion, I take it, that you ere telking about, ur’ Perrin,
and i t i s not t h e kind o f dise: t i o n thst I think Governor
Governor strong i s talking a o u t .
‘ha Pereing i
think Governor otrong h a s i n mind a n
entirely difrerent matter, t h a t o r weddling w i t h a n inulviucusl Line.
v
e d o u o t u n u e r t a k e t o d o that.
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Federal Reserve Bank of St. Louis
229
Governor Strong: I
have h e l d s r o m t h e start, w h e n
I suggested that thst iap w e e aguressed more especislly
to that .eetion o f the statute which y o u quoted, w h i c h wes
an attempt t c uevine i n the statute a
method o f avoiding
the s u z g e s t i o n t h s t d i s c r i m i n a t i o n s h o u l
b e svoiced o r
orevented s n d rsirness should prevail i n extending credit.
But I think also thet we have got to resolve this situstion o f the total volume o f credit somewnet i n view o f
the circumstances t h e t d i d net exist w h e n thet psragraph
was written,
I f you say thst the amouit of.credit which
we c a n e x t e n d i s t o b e r e i r l y Gistributed,
t h e n w e heve
got s o m e five o r six billion dollars t h a t w e have not y e t
distributed, end they may coue and ask you t @ it, #nd you
do not want t o let t h e m have it.
mr, Perrin:
T h a t i s where t h e exercise o f discretion
is called f o r s n d where t h e rate w u l d n o t prevent t h e n
from getting i t i f they neeced itand wanted it. T h a t i s
whet t h e experience o f t h e #ederal reserve benks shows.
Governor strong:
v a r r y i n g t h e t theory t o its bgical
outcome, i n view o f the len-uage o f the statute and your
argument, w o u l d i t not necessarily b e rationing credit?
ur, Perrin:
I
n s way I suppose that would b e ths
230
result, b u t thst dvesn't issn thet you are going t o give
The
5 mathenaticelly equal proportion t o @ c h ismber bank.
statute d o e s n o t r e q u i r e thet.
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Federal Reserve Bank of St. Louis
T h a t provision a
stetute quoted b y Govermor otrong t o show t h e difierence
tn the attitude o f the Bank o f sangiand toward those who rediscount with it, the miualemen snd the bill brokers, a n d
the statutory obligstion o r the Frecersi réserve b a n k t o
very airierent obliga-
each o f i t s m e n b e r banks, w h i c h i s 6
tion---
Governor strong (Interpesing): I
m y h a v e seid, v e r y cliwasily,
misunderstand w h e t I
this e x e r c i s s
hie
P
e
r
r
i
Go not want
o f discretion.
n
:
N
o
.
Governor strong: I
have »ritten a n d have statea
t h a t ag@ eat deal o f discretion i s going t o b e requir ed,
don't think w e ere very isr apart,
ur, Perrin: I
Governor Strong.
Governor otrong:
don't k n o w t h e t +
a g t o m y individuel opirion, I L
care v e r y s u c h h o w t h e t d i s e r . t i o n
is
exercised i n the indivicusl case, b u t i an. stteupting t o
point o u t thet exercise o f that t y p e o f ais cretion will
not b e efitective i n enything b u t 5
nation-wide policy,
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Federal Reserve Bank of St. Louis
2351
which will b e efrective i n controliing t h e ta& al voluis
Or creuit without t h e operation o f a rate.
ure Perrin: I
rate. I
think e
a m not advecating thet w e d o without
rete h a s a
tlueneing t h e d i s p e n s e r s
very inportant p a r t i n in-
o f credit,
a n d m y next subtopic
ears upon the signizicence o f the rate.
Governor strong:
I i rererred to it especially be-
cause there sre these two points a f view, which ore illustrated b y a curious coincidence.
I n fact I
heppened
to have h a d some correspondence w i t h this same ¢conomlst
thet you refer to, end i t hep.ens thet I knew o f your correspondenc- w i t h hin, a n d i n one o f his letters t o ue, i n
commenting u p o n t h e r e d seek r e s e r v e p o l i c y ,
h e deplored
the expansion that ctarted i n 1919 and safd that i r he hed
sny fault t o rind w i t h t h e sttitude o f that u s y i t w a s
thst t h e directors o f t h e federal reservé banks a n d t h e
Federsl R e s e r v e B o a r d G i d n o t s d v a n c e r a t e s h i g h e n o u g h
8nd soon enough i n 1919,
s
o rron thet y o u c a n see h e
hes some conryidence i n the <efrectiveness o f t h e rates.
Yey i
think thet i s based upon 4 pre-
conception o f 4a penalty r a t e a s a possibility. I
see i t , f r o m t h e e x p e r i e n c e
do not
o f t h e r e a e r a l R e s e r v e ~ystem.
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Federal Reserve Bank of St. Louis
232
Governor Strong:
R u t isn't any edvance i n the rate
s penalty?
me Perrin:
N o t a
penalty i n the sense that redis-
count o f l o a n s m a d e t o customers
lending benk,
T h a t i s what I
Governor Strong; I
i s done a t 8
loss t o t h e
mean b y a pensity rate.
think vr* willer touched the
heart o f thet thing, especially i n 4 period o f expansion,
which w e know i s elways ecconplished b y a n increased volune
of goods beingcarried i n inventoriés.
I
n the case o f
eredit with regard t o manufacturing a n d producing goods,
it i s a very i u c h sonmsller fector t h e n i t i s i n carrying
gooas o r the sale o f goas, w h e r e t h e turnover should b e
rapid.
T h i s penelty t h s t y o u rersrred t o i n 4 penalty
rate i s one that i s very proiptly reflected u p o n t h e carriers o f goais,
3 n d that i s why t h e rate does eventuslly
became sfrective, s n d i t becoues er.ective i n London i n
the seme way.
ur Perrin: v e r t s i n l y , whenever t h e discount r a t e
Sdvances the bill brokers are not going t o have their
rates v e r y much below t h e rates s t which they would have
to b o r r o w
sutonatiec.
i f comeslied
t o réaiscount.
T h e a t l s perfectly
T h e y will g o pretty close t o thst rate.
They
LOS
will g o u p i f the market w i l l l e t them, a n d thet narket
will siways be--- I
should n o t c a y always--~ b u t ususlly
that rate o f the Bank of =ngland will always b e such that
it will b e unproritable t o the reaiscounter.
Governor Morssi I
cial b e n k s
would l i k e t o ask i f the ow nuer-
i n Londen d o n o t have s
l i n e o f customers, p r o b -
ably a very large line, t o whom they loan the class of
business which is called by us bank's customers'?
wy, PeOrrins T h e y constitute three-fourth o f the
loans o f the benk,
Governor uorss:
T h e a t rate isn't below t h e discount
rate, t a Lt? I s n ' t i t higher?
ur’ Perrin;
I
Governor worss:
beeyusl
t i s higher.
d y wouidn't that situation then
t o w h e t w e have h e r e ?
wee Perrin:
B e c a u s e sdvences
t o customers s r e n o t
reciscounted,
Governor imorss,
I
t i s true s o f e r © . the rediscount
rate i s concerned.
wre Perrin;
T h e uiscount r a t e soplies t o that---
Vice Governor Platt:
u m , Perrin, j u s t what i s i t that
is higher t h a n the Bank o f iungland rate?
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
ure Perrin:
T h e open market rate.
T h e Bank of
england r a t e i s higher t h a n t h e market rate.
Vice G o v e r n o r Platt:
ue, y e r r i n s
i
w h a t nwarket r a t e ?
n London.
Vice G o v e r n o r Platt:
Y o u wean t h e rate e t which ac-
ceptances a r e sold?
ute Perrin:
A t which they s r e sold t o the bank b y
the bill brokers.
Vice Governor Piatt:
I
s i t not a matter o f fact,
the Bank o x knglend rate i s higher t h e n t h e
They a r e carried o n cail monsy i n t h e joint
stock banks, a n d i f there i s a big Gemand f o r ioney, e a l l
money goes up, t h e joint stock benks throw t h e m back o n
the bill brokers, a n d they take t h e n t o the Bank o f Sng~
land, t h e n the Bank o f bnglana r a t e i s consiuerably higher
then that call money rate. I s n ' t thet a l l i t means?
wt. Perrin: I
think the call loan market o n these
bills i s very close t o the selling merket. I
think there
fraetionel citrerentiation bo. tween the rate s t which
these a r e csrried a n d the rate e t which they s r e ©
investing banks, I
id t o
faney t h e amount carried o n call
osns i g 9 relatively snmsll part o r t h e blils thet a r e
owned b y t h e j o i n t s t o c k banks,
Vice Governor Plett:
w n e n they b u y bilis---
mM. Perrin: k x a s c t l y .
Vice Governor Platt.
B u t t h e bills thst g o into t h e
Bank o f Knglana ar+ bills t h e y carry o n call losns?
mY. Perrin:
Yes,
Vice Governor Platt:
w h e n they get out o f funus they
call the loans t o the bill brokers a n d take the bilis t o
the Bank o f England?
are Perring Y e s .
Vice Governor Platt:
s o that t h e #ote o f the B m k o f
England i s i n excess o f the call loen rate.
what ¢
cén i t b e ?
me, Perrin: E
think t h e t i s a
fsir statement
o f thet
rate, although t h e rate a t which they sell t h e bills does
not vary, e x e p t s rraction, f r o m the rate s t which they
are carried o n call. I
aon't think there i c much uiftfers
ence.
Vice Govern@e >latt:
Y o u could ecasliy tell thet b y
looking o t the rates quoted i n the British papers;
can t e l l t h e t t h e c a l l s
on a
y o u
certsin Gay, t h e r a t e o n t h e m
snd the bill rates d o vary some trom the Bank o f “ngland
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Federal Reserve Bank of St. Louis
Goevernor strong: I
a w h a t hao..ens
think there i s 8 m i s u n u e r s t a n d i g
n
i n t h e L o n d o n market.
a l l t h e bank noney
lenders, not only the joint stock banks, b u t others, make
two d a y loens o n what they e311 l o ters.
T h o s e are
generically cescribed e s anything that will g o at the bank,
nd t o 4 c o n s i d e r a b l e e x t e n t t i m t l i n e o f bills a p p l i e s
to Treasury obligations, Treasury notes, s t o c k i n the India
roads, gambling stocks, a n d one thing e n d another, a n d they
sre t a k e n t o t h o j o i n t s t o c k b a n k s b y t h e b i l l dealers,
unaer a
oreguler contract,
a n d they carry t h e m
two Gays, ave sometines s e v e n deys.
benk they have a
money lender;
A
O n e - d a y ,
t t h e joint s t o c k
t h e y have a
little pulpit,
and a man sits u p there w i t h his pook, e n d a t s certain
hour every monning they g o i n and find o u t what t h e rate is.
Ir the rate i s u p high cnough t h e n they melt their biils,
or they m e y b e rorced t o g o t o t h e bank w i t h their bills.
Then follows a readjustment or rates, i f the market i s
moving, a n d that r a t e i s the carrying r a t e which t h e joint
stock bank charges f o r carrying ftlosters thst a r e eligible
at the Bank o f nngland.
rate.
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Federal Reserve Bank of St. Louis
I t i s practically 3 cata money
ao7
in? es "Orrin: P r e t t y nearly, although i t i s not exaetly,
because there i g s rixed hour o r t h e d s y w h e n adjustment
takes plsce, souetines f o r t w cdsys, sometimes a B iong a s
seven dsys, a n d s t t h e B a n k o f sangland t h e s e s e v e n a s y
loans are called b s
T
h
e
y d o not like that kind
of a losn.
Governor Strong:
p o e s n o t v e r y much t h e cane sort
of thing operste i n the New York bank? . h e n the call
money rate goes u p = little b i t t h e bill brokers c o m e over
to you, t h e g e l i o w s w h o c a r r y t h e T r e s s u r y e z r t i f i c e t e s .
It seems t o me i t i s exactly the sane thing, except thet
the Ked<eral reserve banks d o 4 lot o f outsice business i n
rédis Ounting M i m reial notes, e n d s o rorth.
mr. Perrin;
B u t in 3
t i m e o r strain,
i s not t h e
situation i n the two centers very widely dirierent?
T h e
advances m a d e b y t h e L o n d o n b a n k s m u s t b e w i t h i n t h e l i m i t s
of their own means. T h e y corry 3 conci ersble percentage,
spproximately one iourth, w e will sey, o f these invest-
ments, but when they have exhsusted their supply of those
9s .econdary reserve, t h e y hsve n o pisce t o go. T h e r e
are only e few banks, b i g benks, thet ksep themselves i n
9 potition where their edvances t o customers d o not exceed
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Federal Reserve Bank of St. Louis
their o w n means.
4 m I n e t right?
Governor strong: U n l y « i t h this quclizvication, t h a t
the London benks s r e not governed b y @ fixed statutory r e serve,
ket Perrin:
B u b i g they u s e t h e m a l l u p they would
stilt b e within t h e linitetion o r their o w n means.
T h e y very rarely borrow f r o m the
Governor strong:
bank,
iu. Porrin:
T h a t conaition i s not true o f this coune-
try; i t i s not true i n New Yorke-- t h e y d o not confine
their loans within t h e limitation o f their o w n means, a n d
the things thet a r e rediscounted a r e n o t these salable
bills, w h i c h h a v 3
well estabii ched market rate, b u t a r e
sdvances t o customers, a n d those savances t o customers continue until s o lerge smount o f credit has been obteined
from the reserve banks that @ crisis, 6 s i n 1919, sppears.
Gov: rnor strong:
just a s w e have here.
T h e y have exceptions
i n London
T h e y have their quarter days e n d
their s t a t a u e n t dsys,ivhen t h e b a n k s o f L o n d o n s c t u a l l y h a v e
loaned beyond t h e extent c f their o w n means e n d then they
go into the Bank o f sngland. I
the Bank o f England c u t down,
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Federal Reserve Bank of St. Louis
bave seen the reserve o f
b y resson o f t h e enort.ous
239
supply c d bills o n the market, sctually i n the last t w o
years, c u t i n half,
hr, Perrin: B i l l s owned b y a joint stock bank sre a
pert o f itsmeans,
Governor Strong:
land.
T h o s e n e v e r g o t o t h e B a n k o f Eng-
T h e bills thet are cerried b y the joint stock banks
ere the floaters that I
me Perrin:
mentioned.
B u t i f a bank h a d 2 thoussnd million
total assets, i t s loans rever exceed what part o f the thousond million o f assetcee- t h a t i s the point.
Governor strong: I
think one great dirference
between their market a n d ours i s that there i s 4 very much
more stable market there;
i t is n o t subject t o these great
tides o f credit thst w e have i n the United states, r r o m
crops a n d 4 great uany
ur, Perrin: I
e r
things.
a m not t o u c h i n g u p o n w h e t b r i n g s a b o u t
the ability o r inability, b u t t h e extent t h a t t h e losning
power o f the London bank goes beyond i t s own sssets, a n d
as w e know, t h e meniber benks i n thie country sometimes l o a n
twice 8 s m u c h a s t h e l r i o w n a s s e t s .
Governor Strong;
T h e only difrrerence i s this, that
here o u r banks come uirectly t o the reserve bank s n d use
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Federal Reserve Bank of St. Louis
240
their o w n paper.
T h e r e t h e y t a c e their customers t o g o
to the Bank o f angland, w h e r e t h e y a r e private custoners,
to d i s m u n t their paner that t h e joint s t o c k banks have
been carrying,
wr. Perrin:
% e don't a o that i n this country.
Our
benks' business i s t o losn t o t h custemer, the niember
pank, a n d they g e t their additions] volune o f eredit f r o n
the Feaeral reserve benks, # h i c h cannot b e done i n London;
thet i s the point.
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Federal Reserve Bank of St. Louis
Vice Governor Platt:
B u t i s ~ . it sbsolutely t r u e
thet cannet b e cone i n London? C a n i o t t h e l o a n b e soid
one b a n k t o another i n London?
Governor otrongs
I t i s a fact, s o far s s I am aware,
that t h e London benks d o sometines s e l l bilis i n ths market
without their endorsement,
very common practice,
but I
do n d t h i n k thet i s 4
T h e bills w h i c h the b i g joint stock
banks i n London d o sell i n t h e merket a r e m o t bills which
they hold f o r their o w n sccount, b u t a r e bills which a r e
sent t o London f r o m ail over t h e world, a n a which t h e y carry
in their account und=sr a regular srrengement w h K h their
correspondents, i i k e t h e N e w York banks; e n d those biils
sre very frequentiy s o l d h y the London benks i n the market.
41
They e r e gererally sola, ho.ever, whenthe r a t e i e l o w ana
they e r e w i t h h e l d f r e m t h e m e r k e t a n d c é r r i e d w h e n t h e r a t e
is high.
Vice G o v e r n o r Platt:
Governor strong:
T e t
i s t h e r a t e o n bills?
s h e n the bank o r Sngland puts its
rate up, t h e rates inthe London mearkct s r e generelly icrked
up, and one o f the principel efrects c f t t t change inthe
policy o f the bank i n the sdvencing o r retes i s t o wit hhole
these very bills irom aiscount, which means thet foreign
copital 1s carrying these bills i n London end thst relieves
the pressure o n the bénk,
ur, Perrin;
B u t t h e polut stands out,
i t sppears
to
me, thet the rediswunting i s necessarily a t o loss i n
London, o n d t h e question -rises a s t o w e t h e r t h e experience
or t h e Fevers] res. rve banks shows t h a t r e d i s o u n t i n g i s
or can b e ususlly a t a loss i n this country; a n d what i t appears t o u e t h e experience shows i s that r e d i s o u n t i n g w i l l
beat a profit, ss in New York ot the present time, with a
customer's r a t e o f 5 per cent e n d s dis count rate o f 4
per cent,
Vice Governor Platt; b o n ' t you think i f w e had the
great volune o f bills that t h e y d o i n London thet w e would
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
2438
get them?
T h e volume o f sccsptances i n this country i s
Cenppe eee ig smail.
i W @ sterted that beceuse t h e rederal
reserve banks car:ied them.
I f that c a n b e done profritaly,
if w e had t h e same sort o f paper a n d t h e same sort o f sre
rangement--ure P e r r i n :
(Interrupting)
B u t w h y shouid &
member
bank owning s bill i t c a n sell e t 3-1/2 i n the open market
rediscount i t s t 4 ?
I
n this letter f r o m
N e w York Bank
they s a y thet o f the poper rediscounted i t i s 911 sdvences
to customers except _117,000.
Like: 1 m it-at eid:
N o conmercisl peper,
no
T h e y a r e simpiy i n the open niarket
sta lower rate.
Governor strong.
E v e r y biil
w e have beers t h e endorse-
mént o f a good N e w York bank.
mt, Perrin:
L i uo not s e s thet t h e t ersects it.
Governor strong:
T h e y have gotten credit f r o m u s
they have gotten i t s t s lower rete.
we: P a r t e :
T h e y have gotten i t from e n open market
operation, b u t they heven't gotten i t tor rediscounting?
Governor Strong: s u p p o s e t h e y s e l i the bill o n
6 rifteen d a y repurchase agreement,
o r whstever t h e srrenge-
ment is, and they tske that bill t o the New York Bank be-
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Federal Reserve Bank of St. Louis
245
cause call money goes u p ? v e e s n ' t t h e t m e a n exactly
the saue thing s s rediscounting a t 5 logs.
i t the call
money rate w e s lower they would not g o t o t h e N e w York
bank, I
think t h e s s n e t h i n g h e p p e n s
i n London.
C a l l
money r a t e potentislly g o s s u p svery t i n e bli
take t h e l r b i l l s t o t h e B a n k o r kngland,
a n d they tske them
tothe Bank of kngiend because they cannot get sn equivalent rate a t the joint stock banks, o r cannot g e t i t
That practicelly means t h a t t h e :s11 .oney r a t e goes up,
or i t amounts
t o t h e s a n e thing.
ur. Perrin: B u t the Bank of Hnglend rate will go
up above t h e call rate.
Governor strong:
f h e Kank of bngiand rate was higher
then t h e call rate beyore t h e y c a l l those loans.
those loans a r e called I
after
o m not s u r e whether i t i s higher
or not,
mr, Perrin:
I t sppears t o ie perrectly clear that
if the Bank o f England rate i s lower t h e n c s n b e had a t
sny other place, t h a t t h e Bank o f sngland will g e t t h e
bills a n d the whole volume o f bilis w l l l flow t o t h e Bank
of England,
Governor “trong:
O f course t h e joint s t o c k banks w i l l
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Federal Reserve Bank of St. Louis
244
have a rate low enough t o get the bills i r they want them.
If not they sill get r i d o f them b y bhidaing t h e rate u p
or calling t h e logsns,
Peerigs G o v e r n o r strong, y o u are v e r y Iemiliar
with the trensactions.
I s rediscounting w i t h t h e Bank o f
angland b y bill brokers.
a
n urususl o r occasional opera-
tion a n d n o t i n lsrge volume,
o r i c i t i n large volume a n d
dsily a n d regularly f o r t h e purpose o f s¢julring aaditionsl
funcs t o extend business?
u l e r e n d daily opers-
Governor ttrong: 3
tion at: alts
ur, Perrin: s
what I think, I
suppose w h e n
the bill broker does b u y these discounts, w h e n h e tskes
them to the Bank of zngland it is rediscounting--at: Austin:
I f d - m a y interrupt,
the
stock banks t s custoners average about 4 0
time o f p r e s s u r e t h e y g o u p t o 5 5 n e r cent, b u t n e v e r b e -
yond thet,
T h e rest o f t h e bank's investments a r e i n bills,
sscuritiss a n d s o on.
mp, Perrin:
T h e ststement I
started
t o make n o t v e r y
long a g o showed 3 smaller percentege o f bills t h a n that
but a larger percentsge o f sdvences.
t h a t touches u p o n
245
the i n t e r p r e t a t i o n w h i c h I
think shoulda b e p l a c e d u p o n
the exercise o r discretion « h i c h is, i f 1
Si correct i n
my interpretstion o f t h e facts o f o u r experience, t h a t i f
the discount r a t e o f the Federal reserve b a n k s .
will usually b e lower then ths rates borne b y the psper
orfered f o r reulscounting, t h e n the penalty r a t e i s n o t
epplicable i n this country;
3 n d i r w e cén detach ourselves
to tint extent f r o m the oellef thet thet i s the w a y you
cén control it, b y having 6
venslty rate, t h e n the jues-
tion comes what can you ago, end the snsawer is that through
the wedium o r »atching the member banks a s intelligently
98 you céfn, b y ex-«rcising t h e wisest judgment t h s t y o u c a n
bring t o besr o n the aisewunt policy thst you follow with
exerdise
cach Menber benke-- with some i t will b e thet you will/
discretion;
w i t h o t h e r s y o u w i l l w a t e h t h e r e c o r d o f vre-
vious years t o see whst aiscount program they folliowsad snd
how well they have lived u p t o their promises a s t o the
liguication or those things, snd that «ould 911 go to arrect
the e x e r c i : ©of your distretion a n d t h e determination o f
your judgment. I
ao not think there l e any w a y thet y o u
can escape t h e conclusion that t h e final determination o f
the totel volume o f creait, s o far a s the iniluence o f the
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Federal Reserve Bank of St. Louis
246
Federal reserve banks goes .ust b e i n the influence t h a t
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Federal Reserve Bank of St. Louis
you hsve upon your member banks s n a not through ¢ dais count
rate being s t such ® point thet i t is unprutitsble t o reGiscount, b u t with such slight restraint t h a t y o u c e n
induce your menber benks t o spply t o their a i n operations,
and with such moro strenuous restraint 9 s i t becomes neces~ssry t o apply.
T h e r e i s one sspect osbout t h e rediscount-
ing which woes n o t oppeer i n the London market, a n d that
is the auditionsl supply o f funas which has come, I
est this tinue,
think
t o b e regsrdéea 348 43 neces-.ary p r t cot t h e
hig r v e é bank cperations, saditionsl runds required
ror financing sessonal opéretions.
T h a t i s not a n occasion-
51 reciscounting, 8 s hsprens with the Bank o f ungisnd i n
thet large volume, c u t i s @ lerge volume o r saditionsl
losnable runds supplied r o r operstions t h e t a r e t o r the
cenevit
o f t h e c o u u n i t y r e l y i n g u p o n t h o s e iienber banks.
Those sessonal operations probsbly uevelop more i n the
sericultursl a n d country aistricts iirst, before t h e strain
shows i t s e l y i n t h e c i t y banks,
francisco. I
l l k e t h e psnks
3
i n sen
a m guite s u r e t h e principal part o f our
Bavances t o banks i n san Fre cisco i s for the benefit o f
the country banks, e n d thet would apply still more t o
banks i n Chicago, N e w York a n d ot, Louis.
247
Now, what.is, then, t h e signiri:ance o f the discount
rate.
I t cannot b e the mejor inrluence r r o m t h e standpoint
of meking rediscounting unpreritable. I
think exp:
shows that rediscounting w i l l usually b e proritable. I
also believe that w e could Lave absolutely stationary rates
ond render practically o u r rull reviscount services t o o u r
nember banks, a n d never vary t h e rate r r o m tive o r s i x per-~
cent.
I f the raté goes o v e r t h a t ,
s o that i t i s proritoble
to reaiscount s t six p e r céant--- sssuming thet t h e lending
rate i n Nev York i s eight per cent a n d the discount rate
Wes s i x per cent, t h a t i s a spread o f only t w o per cent,
which i s practically nothing, a n d the spreaa would have t o
be 4 grest deal greater than that, s n d with arediscount
rate a t the highest w e have ever had, s i x per cent, t h e
‘banks would borrow sinply because i t was profitable f o r
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Federal Reserve Bank of St. Louis
then t o d o #0,
z o m e o f t h e banks
i n Idaho, w i t h h i g h
rates prevailing, restrain theuselves wit hin the linits
oi their o w n means;
s o n e o f them only have small niesns
end occasionally rediscount
t a sessonal requirenents.
I a m not without f u l l appreciation o f t h e fsct thst
aediscount r a t e m e y b e m a d e s x c e e c i n g l y i m p o r t a n t
b y sup-
plementing t h e c o n t r o l w h i c h m u s t f i n a l l y b e b y alscretion.
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Federal Reserve Bank of St. Louis
248
I believe that t h e discount r a t e should b e 8 veclsration
of o p i n i o n b y t h e F e d : r a l r e s e r v e b a n k msenegement o ?
the anticipated t r e n d o f credit demsnd. I
that t h e advenc:
do not helieve
o f rate b y a faderal reserve bank, record-
ing t h e accomplished f a c t o f rates having advenced,
of a n y p a r t i c u l a r r e s t r a i n i n g v a l u e o r o t h e r vslue.
is 6 rother neaningless thing;
signel thet signals nothing.
i t i s neutral;
is
I t
i t is a
i v e r y b o d y k n e w i n the y a l l
of 1919--- y o u d i d not have t o tell snybody--- that there
Was a
tense finsancisl citustion.
Gdismunt rates, 1
T h e vélue
believe, c a n b e made very great, b u t I
believe i t should b e very flexible. I
stability
i n fixing r e -
o f r a t e mas,
i n itself,
uo not believe thet
a n y p a r t i c u l s r merit. I
think w e could have s n absolutely stable rate, unchsngsd,
end thet would b e the idesl, i f stability w e r e t h e e n d t o
be reached, b u t w h e n y o u meintsin s
rarely chan.jed,
rate unchansed,
or
i t sappears t o m e t h a t t h e b a n k i s n o t d e -
cléring i t s outiook o n t h e future, a n d I believe that t h e
public, a n d not alone o u r niember bsnks, a r e entitled t o the
guicance that t h e y would have f r o m t h e expre:sion o f sich
opinion s s the banks m e y form, f r o m their constant s t u d y
of conditions, reflected b y such studies 9 s this.
249
uske mistakes;
w e will make . a n y mistakes,
is p u t u p f r o m f o u r t o t o u r e n d =
I f the rate
haii o r y r o m f o u r e n d
e half t o rive, t h e r e i s n o nessa t o r i t being ¢:actly adapt-
It i s conceivsbie thet = usthematicsl couwputstion might call ior 5 4-3/8 o r a 4-7/8 rate.
very
butthst is/importent, becsuse I believe the value lines i n
the a d v a n c e s
3 s cautionary signals,
ué, L s w h a t e a c h s d v s n c e
o e
i n the rate ]
i t sppears
:
n
o
to
t bo
control b y .aking i t unproritable t o reaiscount with the
veceral reserve benk, b u t a s esutionary signsils that influcn
s t o r ctrain their customers
restrain t h e i r c u s t o m e r s
i n borrowing ¢ n d t o
i n t h e i r operations,
a n d the more
frezuently these precautionsry :ignals c a n b e given, t h e n
justiiied, the more sensibly alert will we be, i n notifying
our coluunities o f uhot o u r conviction is.
Now, W h e n i t canes t o reaucing t h e rate I
think i t makes s u c h cirrerence:
do not
w h e n t h e circuustsness a r e
such t h e t y o u h a v e p s s s e d t h e p e a k o f t h e e x p a n s i o n
it
coesn't m a k e w u c h dirferencs h o w v e s t o r h o w r a r y o u r e -
auce t h e rate, y o u a r e not going t o inrluence t h e s ituation, because that liguidation i s g i n g o n until t h e con-
viction arlses thet g a s a r e not going t o be worth less,
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Federal Reserve Bank of St. Louis
250
when p e o p l e w i l l c e s s e e x c h a n g i n g g o o d s
Governor Strong: I
question.
t @ money.
would like t o ssk a hypothetical
S u p p o s e t h e dirficulty b e t w e e n Turkey a n d
“reece w e s settled; s u p p o s e t h e reparetion uemands u p o n
Germany w e r e either forgotten o r nist-rlally reduced, t h e t
“urope s h o u l c c i s a r m , t h e t G o v e r n o r L a r c i n g s h o u l d b e r e -
spopinted, s n d that everything cise thet » e cen think ofr
would 811 happen a t once, thet w e would have a twenty point
rise i n the stock market s n d everybody hopped i n t o buy
things; t h a t stocks went u p s n d psople began t o buy goods,
that instead o f putting o u t t w o mliiilon sutomoblies w e
stsrted t o put out t w o e n d a half miliion t h i s year, a n d
8 big financiel credit srose a l l over t h e country.
v o you
think, under those clreumstsnce:, thst this types o f individual c o n t r o l
o f borrowing c o u l d b e m a d e ertective
contreiling 6.pansion?
anslysis, d e p e n d
money,
‘ o u l d i t not really,
in
i n the last
o n what i t cost t h e psople t o borrow t h e
i n other words, u p o n o u r rate, becsuse o f the fact
thet t h e psycologicel factor i s e very important one?
lure Perrin:
T h a t touches t h e point t h a t p r w i l i e r
‘raised before dinner, t h e t i t was es juestion o f t h e member
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Federal Reserve Bank of St. Louis
bank's relation w i t h i t s owncustomer,
e n d anyway, under t h e
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251-5 L
cirewistences w h i c h y o u cite, b y which o u r member banks
could b e iniviuenced t o make credit deersr t o their custoners--- I
soy a n y way, I
mean such 4 way 8 s i n
cise o f o u r cisereétion a n d o u r j u d g i e n t w o u l d s u g s e s t
to
us thet i t could b e brought about, would seem t o be the
a.sirable course t o pursue.
Governor strong:
U n d e r those circuustances, -9P,
Perrin, y o u r w e m b e r b a n k s
and S a n francisco,
i n t h e b i g cities o f L o s Angeles
t h e cities
i n t h e north,
a n d t h e seme
with Clevelana end vetroit.and all over the Unitec states,
would begin t o feel t h e insktent denand f o r credit,
I t
would have every apye arence o f being legitimate. s b v e r y
borrower i n every bank would ssy h e had 9 rea® neblé and
Legitimate d e m a n d f e r this, t h a t i t w a s t o provide f e c i l -
ities t o fill orders, e n d i t wuld b e i n every sense proper credit.
of, Porrin;
T h a t w e s t h e K i n d w e adverced
i n 1919,
mcstly p r o p e r credit.
Governor ztrong:
I t is proper credit.
A s those
loans were mace i n ¢very instsnce t h e reserve i n the menber
bank would b e iupsired a n d every d a y w e would g e t f r o m
fifty t o a Windread applications a t our reserve banks r o r
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Federal Reserve Bank of St. Louis
wee
losns t o make g o o t h e inpeirea reservst--~- e n d you teil
ns t h e t y o u h a v e n e v e r d e c l i n e d a
josn o f thet charscter
in ssn Fr-nceisco--- b u t under those circumstances w o u l d
you?
Perrin: I
referred
t o o n s bsnk.,
we h a v e n o t r e f u s e d t o m a k e loans,
Governor strong.
B u t under those circumstances w o u l d
it b e possible t o visuslize thirty-rive orzic:rs i n
perts o f the United states developing s u c h a nicely
ligned policy t h a t w e could check thet-- b y the u s e
cretion i n these thirty-five points alone?
um, Perrin: I
should s s y t h e t i f w e h a d = x e r c i s e d
our d i s c r e t i o n w i t h s u c h p o o r j u d g . e n t t h a t =
situsetion o f
that k i n d came upon us, i t would b e proof o n l y that o u r
Giscretion h s d b e e n unwlisely exercised,
Governor strong:
the development o f 3
I t seens t o m e thst i t calls f o r
kind o f human wisdon s n d juogment
n this world,
thet w e have n o t yet f o u n d i
uy. Perrin:
I i you make t h e rate s i c h thet i t will
prevent e m b e r benks r r o m borrowing beceuse there i s loss
in securing reaiscounts, h o w c a n i t b e otherwise t h a n
thet L t must c o m e through t h e exercise o f discretion, anda
204
the exercise o f discretion w o u l d b e i n conversation w i t h
your lésading b o r r o w i n g banks,
i n getting your menber banks
to cooperate w i t h y o u i n exercising reosenable restraint
upon their customers, t h e creating o r a ~entiment o f caution
by advencing your rate s s a cautionary signel, n o t moking
rediscounting unprofitable, b u t b y way o f a signal thet
esution shoulda be exercised, a n d the nmunber o f savences
you would woke and the extent t o wuich those advances would
be made would b e 9 declaration o f the smount o f csutian
thst the men who were wanesging the banks relt the situation
gustizied,
Governor strong: I
think the efrectiveness o f the
Bank of England rate it que to a very simple fact, l o d a y
there a r e tive b i g penks; a
Yew years o g o there were a
vozen and bétore that twenty-five o r thirty.
T h e y had
branches all over “ngland, where they received aeposits
énd nede advences o n their drsfts.
w o s t o r those advances
$
are regulated a s t o rate b y the Bank o f sngisnd rate, a n d
when the Benk o f England eavences its rate 311 those
nena gers autouetically put u p the rate o n their customers,
end t h a t i s w h a t n a k e s an. sdvance
here--~
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Federal Reserve Bank of St. Louis
i n our rate sriective
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Federal Reserve Bank of St. Louis
255
I
ur, Perrin:
n New York t h e banks hsve t h e interest
on t h e deposits---
vovernor
T n e euvence i n the Bank o f Sngland
vtrong:
rate wokes t h e credit c o s t nore t & everybody.
agree w i t h you.
mr, Perrin: I
T h e r e i t is a qes-
tiom o r control b y rate.
Governor strong:
T h a t i s «hat » € will have i n this
country, n o t a s t o those benks thet a r e charging sight o r
ten p e r cent, b u t a s t o t h e g r e a t m a s s o f a m e r i c a n benking,
of the reserve banks g o up, t h e i r rates g o
when .
up;
i t may not b e 6 loss t O the borrowing benk, b u t there
tax imposed upon bo:rowing,
s n u e d taxXe
i t is 8
very efrective c h e c k e n d i t holds t h e banks within t h e control thst I
a m spesking cf, that is, t h e nationwide control
<
or the total volume o r corsuit,; which i s made e f f e c t i v e =
through t h e ection o r t h e reserve banks through their rate.
ur, Perrin:
Because I
triet f r o m New York 1
couwe irom the remotest ais-
heve b e é n wis cussing N e w York.
Governor seay: G r e n t i n g w i c h a situation s s Gover n o r
Strong has a-scribed, a n d granting thst there should b e
etthat tine ¢ raise inthe discount rate, isn't i t your
o
n that uncer those circumstances 6 8 raise i n the
proposit i
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Federal Reserve Bank of St. Louis
aiscount r a t e would not control that acuand?
ue, P e r r i n e
Y e s .
Governor seay:
n
t a
tine s h e n p r i c e s s r e r i s i n g
ry strongly, whether speculstively i n securities, o r w. ether speculatively i n goods, t h e discount r e t e very seldom
controls t h e demand i o r credit.
I
yor the time being i n geculation.
t i s never controlled
I t cid not control i t
in 1919 i n business, a n d a s I unuerstvuod your position, ux,
Perrin,
i t was that slthough there should b e o n advance i n
rate, t h s t i n sddition t o the sdvance i n rate there would
heve t o b e t h e e x e r c i s e o f a i s e r e t i o n
a t that tine, e n d t h a t
e
the di cretion would h a v e O r~°.“inrlusnce
i n controlling the
cemand f o r credit t h a n t h e rate,
iP, Perrin: I
‘think Governor ~trong will sdmit that
it required the exercise o f personal ciscretion i n contr lling t h e situation i n New York i n 19197
Governor Strong: w e l l , mp, Perrin, i f I mey tell
you @ littie about that. N o b - : d y attenpted t o
eny greater aegree o f discretion, m o r a l suasion e n d coercion
end other kinds o f iniluence t h a t could b e brought t o near
upon those banks, b u t i t was ineitective, a n d i t was bound
to be inefrective s o long as w e did not sdvence our rates,
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Federal Reserve Bank of St. Louis
Zo?
we P e r r i n :
A f t e r t h e advanees w e r e m a a s y o u a i
not have t o speak t o any benk a t all?
Governor strong: I
s good while.
I
do not think w e had oecesion f o r
t was t h e rate thet c i d it.
Governor Calkins: I
would iike t o sugiest s
hypothet-
icol q u e s t i o n t h s t i s g e t t i n g d o w n p r e t t y c l o s e t o t h e
ground,
w a s the situation i n New York, w i t h a
s v e n per
cent rate, better controlled t h a n i t wes i n Clevelend,
wth
&8s i x p e r c e n t r a t e ?
Governor ctrong3
T h e t i s a very cirricuit compsrison
to make, b u t a s w e are getting pretty close t o the ground,
i will tell y o u w h y 1 t i s dirflicult. C l e v e l a n d exercises
a good deal o f that t y p e o f ciscretion,
I s that right,
ur. Wills?
wre Wills:
a i t e a Llittleee-- b u t £
will weke m y o w n
orgument.
Governor Strong:
A
s 8 part o f the sfrect o f i t l
will only state this 9 s one o f the factors, because i t was
felt i n a good many ways i n New York--- part o f the
of i t was, o f course,
t o witharsw balances r r o m N e w York.
There isn't any question sbout that.
going o u t a n d traced s
w e saw those balances
good . m y o r them. A n o t h e r part o f
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Federal Reserve Bank of St. Louis
258
the efrect o f i t was t o drive borrowers t o New York r r o m
other dis tricts;
a n d I will tell y o u whet t h e effect w a s
in the stock Exchange l o a n account.
T h w e r é millions
sid millions o f lousns that h a d béen corried i n h k Y o r k
from benks i n other districts w h o trensierred
end w e had t o take care o r them.
of sutomobile paper, w h i l e I
I
N e w York
n the little metter
d o not know whether there
would have b e e n a n y catastrophe i n the eutonobile inaustry-but I
looked sat the loans o n e d a y a n d w e were carrying
eighteen miliion dollers f o r one maker thst h a d been thrown
out over t h e country.
T h e r e w a s a disturbance w i t h regard
to automoblle paper, a n d w e had t o take csre o r it, end i f
we h a d a p p l i e d
i n New York that s a n e kind o f aiscretion
in telling the banks that they must cell their stock exchange
loens o r possibly that t h e y h a d t o o nuch suteomobile paper,
were lending t o o much t o the tire wanuracturers a n d s o torth,
we would n o t have h a d = reasonsbie number o f failures i n
this country, but w e mignt have had @ calamity.
wr’ Perrin; I
should think y o u would have h a d a n d
I should think y o u ought t o have had.
member b a n k t h s t i t h a d t o c a l l a
W
e never told a
loan, n o t one;
w e have
thought t h s t that sould b e e n unwise exercise o f discretion.
2509
ux, Jay:
h a v e you,at o n e tine, s a i d t o your banks
thet y o u would n o t discount r o r then paper o f such a n d
such 8 concern because y o u h e d enough o f thet, i t being a
pertectly good, solvent concern?
tedes MBER SeLetah @We Y e s ;
« 6 s s i d thet w e preprerred
vther peper,
Govsrnor valkins: I
statement
o f t h e case,
do n o t t h i n k t h s t i s guite t h e
w
e had o u r full proportion o f thet
paper,
ur. Jay:
H o w a l d you know i t ?
Governor Valsuinss
I t wae very e a s y t o asc-rtain.
tie
knew how m u c h was outstanding.
The juestion was esked Governor strong
sbout his district, s u d i n meking his a-frense--Governor Strong: I
ur. Wills:
s m not weking s dense.
A n y w a y y o u cited a n insténce t h s t would
seem t o indicate that w e had told s c u t o m m l
e menurscturers
ena tlre manufscturers t h e t t h e y could n o t borrow a n y more
money i n our district.
T h a t , o f course, d i d not hsppen.
I would iilke t o ssk Governor strong this question:
L o e s
he think thet discretion, exercised intelligently a t the
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2 6 0&- |
thet i t would b e exercised intelligsntly--- i f so, wouldn't
the aggregate o f credit i n the United otstes b e sesier t o
aeal with rather t h e n under y o u r proposition’
Governor strong:
think thet would b e dealing
N o , I
with i t i n o most unselentiric a n d inerrective method.
I will put i t the other way. I
say that t h e primery con-
trol o f the great bulk o f credit hes g o t t o b e through t h e
cost o f credit, t h e rete, a n d that that control has got t o
be supplemented b y individusl influences i n dealing with
inaividusl banks,
dition,
T h a t will siways b e with us, thet con-
a s long s s . e livey:
b u t w h e n y o u cone t o a national
policy, t h e only w a y i n which you e m control credit erfectively, smoothly s n d without mmpulsion,
i s b y 8 proper
adjustment o f our rates t o conditions a n d b y w.8king credit
cost more t o the whole country.
ur. Perrin h a s h a d experiences i n 6 aistrict where
the difficulty o f getting control is probsbiy greater than
{it £s i n ours, a n d I haven't a doubt thet thsre mey b e
other districts where t h e difficulty i s even greater t h e n
it is i n California,
ur, Perrin:
H u m e n nature, h o w e v e r ,
i s pretty m u c h
the saue o n the Pacific Coast # 5 i t i s i n New York, s n d
{ regret t o sey lt~-~Governor Strong:
Y e s , ur, Perrin, b u t this cifrer-
i s 4 very
ence between & penalty r a t e s n d a n etrective r a t e
8
consid rsble difiterence, 1 think, a n d m y theory o f how
rate c a n b e effective i n this country, u n c e r t h e conditicns
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Federal Reserve Bank of St. Louis
that prevail here i s t o make a rate which i s ressonebly
restraining u p o n t h e greatest anount o f eredit t o which
we
thet rate c e n b e applied, a n d then w e will d o t h e best
can with the rest o f it.
iure Perrins
T h e mejor part o t this discussion, since
York,
I have been o n my feet, has been sith regard t o New
snd I sm going t o ssy that New York is not t h e whole works.
Ninety p e r cent o r t h e banks t h s t a r e free rediscounters
are outside o f N e w York.
Governor Strong:
lux, Perrin:
Yes.
W h a t you can do with regard t o the
in New york, w e will say whet you csn do effectively,
not b e done efrectively w i t h t h e rest o f t h e country;
i t
cannot b e done g i t h equel efiect i n Cleveland o r i n San
Frencisa@. I
think a n rrancisco, n e x t t o New York, h a s
probably t h e lowest money r a t e i n the ountry.
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Federal Reserve Bank of St. Louis
26
Chicago p r o b s b l ; t o u c h e s a
lower r a t e a t times, b u t I
think
om rate would eversge 3 s low # 6 o r lower than Chicsgo,
ena s rate sdvsance airecting t h e rates charged b y bsenks
in New York t o their customers, w o u l d n o t influence a
ticle t h e reais o f t h e - u t l y i n g b a n k s
tricts.
par-
i n e n y o f these ais-
T h e most persistent rediscourers have been the
outlying bs.ks, end it we are going to consid:r a nationaide p o l i c y a n d t h e i n f l u e n c e s w o o n t h e t o t e l v o l u m e o f
crecit e x t e n u e d b y i.euber b a n k e
t o t h e i r custowers,
w e must
teske into account the very large body o 1 member bank losns
outsiae o f New York,
Governor Strong: :
we, Perrin:
e a r g e n u m b e r o f banks?
A n d a very lserge totsl of lans.
Governor strong:
Y e s , but i f you tske the twelve
cities w h e r e t h e r e d e r s l r e s e r v e b a n k s a r e locsted,
tog
with thelr branches, sdimitting that i t o u l d b e necessary
et tines t o have higher rates i n soue sections than i n New
York, don't you think that the rates esn be 2djusted which
would b e errective e s t o the grest buik a crséuit i n the
money centers o f the muntry generally?
x, P e r r i n : I
centers
esn t a l k with more experience o f money
o n t h e Pacific Coast. I
think G o v e r n o r
v a lkins
264
would join n e i n ssying that n o rate t h s t s e sre likely
to meke woulda b e higher t h a n the rate a t which benks i n
the cities l o a n t o their custoniers.
b o you agree w i t h
that, Governer
Governor valkins:
d
i»
s@s a n y prospect o f a rate
which w o u l d a c t 9 s 3 penalty rate.
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Federal Reserve Bank of St. Louis
T h a t i s a div rerent
question r r o n the one that has b e e n brought u p several
times, a s t o whether a rate, s o w e idesl rete, devised b y
& super intelligence, m i g h t n o t have inrluence u p o n t h e
Gawands f o r credit.
ing about. I
T h e t i s not resliy uhat w e are t a l k
an. quite resdy t o agreé w i t h G vernor
strong, e n d everybody ¢ l s e thot hola: the opinion, t h a t
such e n iaeal. rate i s uesirable.
w
e are talking about
what t h e experience o f t h e rederal reserve banks u p t o this
time h a s shown 4 + t o erfective control, a n d the expsrience
shown t h a t t h e r s t e 1 s n o t s n sffectixv c o n t r o l :
i t
shown that t h e highest r s t e has prevailed w h e n the high-
volume o r credit was outstanding;
i t hss shown thet
the high rate had n o efrect i n reuucing t h e volume o f credit
until other, w h e t w e call psycological efsects, b e g a n t o
operate,
Governor Strong: I s n ' t i t possible that t h e resson
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Federal Reserve Bank of St. Louis
265
why thet r a t e dig n o t appear t o b e errective cooner i s
because i t #8s not put into effect sooner?
a m o f the opinion,
Governor Calkins: I
3 s I think
you are, that i t was n o t put i n t o effect s o o n enough;
think thst the danger signals would heve been
in the day, but I slso think that the r-te, a s a rate, h a d
no eppreciable eriect u p o n the voluwe o r credit until t h e
psycologicsl fae¢tors began t o operate,
ur, Jey:
m a y 4 ask Governor Calkins w h e t i s meent b y
sn ideal rate?
Governor Céelkins:
to snswer. I
T h a t i s a very Gifficult juestion
think thet i s what w e have b e e n talking
about i n support o f rate controle<-
ur, Jay:
B u t is it three per cent, four per cent,
five p e r cent, o r what percent?
Governor Calkins: I
do not kmow thet per cent, but
sn idsel rate i s a rate which will G o whet Govérmor Strong
thinks the rate i i l do, I
grant you thet i t a n ideal
rate will d o it, w e would have a much easier tine.
br, miller:
b o e s ' t i t mean that, g n a isn't Lit in-
plicit i n mr. Perrin's plea for the exercise o f discretion?
ute POrrins
b o not c a l l i t a plea, Dr. miller.
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Federal Reserve Bank of St. Louis
266
ur. miller:
I t 1 s a pies and I
e m glad i t i s a piea.
spoligize t o r it.
is e n extremely I n t e r sting plea.
I t
B u t I think what wr. “ e r e
rin 3 1 1 the time acsunes i s that there i s always going t o
be exercised great e n d eirective aiscretion i n the metter
of rates,
wr, Perrin; O h , I think i t should b e o r the highest
riexibility.
wt, willer:
but I
N o t only o f the highest rlexibllity,
teke i t that i n the sai.e w a y y o u assume, a n d perhaps
rightly, t h e t there i s going t o b e great uiscretion a n d tore-~
sight exercised ¢ s t o just w e n t o put t h e conmunity o n
notice--iar. Perrin:
tae k k
Y
B e r o r e things hseopen?
e
s
, before things hsppen y o u a r e going
to put t h e n o n notice thst souething L s going t o heppen.
mre Perrin:
ur?’ milier:
A s w e think.
A n d , trenslated i n t o thst phrase, y o u
are going t o exercise Giscretion;
y o u are n o t going t o
wait until t h e y have conmitted inciccretions # n d then
subject them t o a process o f correction?
wre Perrin: m x e c t l y .
267
ute Miller:
Y o u a r e putting t h e m o n notice n o t t o
condult indiscretions,
b y marking u p your -kcount rate, a n d
then those w h o are inaiscreet enovgh t o make i t necessary
ror you t o b e aisereet, a r e going t o b e squonished o r
otherwise disciplined?
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Federal Reserve Bank of St. Louis
te C S T E :
Y e e sir,
ul, killer:
H o w a r e y o u going t o tind out obout t h e
sre
people thet have, a s i t were, involved theuseives and
in the position that ur, Strong has econstantiy i n mind,
so thet they have got t o crise t o you snd replenish their
Preserves?
I
t you do not extend credit t o thet purpose
you e r e s t a n d i n g b e t w e e n t h e n s n d c o u m l i a n c e w i t h t h e law,
wr. Perrin: I f the intelligence has bem keen enough
to foresse t h e trend t h e idsel r a t e could b e msintained o n
s horizontsl l i n e w i t h p r o d u c t i o n s n a e x s p a n s i o n o f credit,
put a l l thet y o u c s n hope t o obtain i s a rlattening soniewhet of.the peak,---
mr. Miller: (Interpos ing)
B u t m y juestion i s directed
t.ward something more personal than thst,
Y o u exercise
your discretion with the indiviaual b a r k that he. excesdsa
what y o u think i s the proper scope o f i t s activity i n losning too heavily e n d therefore g e t t i n g into a position where
268
it has g o t t o mime s n d redismunt w i t h y o u too heavily.
How d o y o u know what thet bank i s doing until i t i s alresdy
done?
Y o u stated about t h e rate, s n d t h e expressio
well worth quoting, t h e t t h e rate should n o t sinply b e a
méans o f ennvuuncing t o the country,
2 s i t were, a
recorded
feet; t h a t ithts vslue a s 4 cignsl--Perrin:
B e f o r e 3
development i n s t z a d o f arter-
wards,
inwee willler: z c a c t l y .
J u s t z o r t h e sake o f argument,
I say i t i s o r n o particular vslue t o say t o a bank i t has n o t
bsen discreet atter thet fact hss b e e n recoracd,
s h a t you
should s a y i s “You sare following @ course thet i s going t o
prove indiscreét, a n d w e put y o u o n notice now."
b u t how
sre y o u going t o rind thet out?
wr. Perrin:
O n l y b y your experience w i t h e a c h menm-
ber bank, b y the intensive study that w e havenisde o f dire
f.rent imember benks.
F o r instance, t a k e s bank w i t h
250,000 capitel, w h o owes u s nothing, 3 n d sends i n
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Federal Reserve Bank of St. Louis
god y000 redigoount .
O u r . t u d y s h o v e t h e t i t s rediscount
operstions w i t h u s i n 1919, 1 9 2 0 s n d 1921 were unsatis face
tory.
w é immedistely hesve a n interview w i t h that bank
to know whet program i t i s going t o follow. ‘ T h e y have made
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Federal Reserve Bank of St. Louis
269
thet k i n d o f a record » i t h u s onc w e are n & g o i n g t o
tolerate that kind o r a record sgain;
w
e wlll s e y thst
we stand ready t o d o everything w e cen t o support their
operstions
s s long s s they d o not exceed proper bounds
in
our judgiient, but w e will not g o to the length thst you
took us t o i n order t o rescue you i n 1919, 1920 end 1921.
ur? millers
H o w G o they tske it*
uP. Ferrin: I
meae t o that policy.
do n o t think w e hsve h a d a n objection
T h e y know they have been treated
properly; t h e y know thst t h e y have maae @
bad record, a n d
they #lso know they hsve got t o live down thst bad record
by &@ proper method o r operation.
v n e o f the banks w i t h
which w e had the most diryiculty i n convincing them that
we were right, because a n influential orricer i n thst b a n k
wes r a t h e r plge-headed, t e i s g r s p h e d
u s t h e other a a y that
they .wed u s nothing, e n d ssened t o take great pride i n
the fact thet they were out of cebt, snd pricing thenselves
upon the beginning o f a better record.
its due value w i t h us;
T h a t would hsve
w e Woulau stuuy very ceréefully t h
charéeter o f sssets o f that bank, whether i t wes getting
in a more liquid clsss o f psper, whether i t wes discontinuing t h e course i t followed previously,
¢ s w e hsd found b y
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Federal Reserve Bank of St. Louis
270
investics ating that most o r the assets w e r e non-liquid paper,
and 1 t was then coniing t o the Feceral reserve bsnk t o get
funds f o r currency e a c h aay.
e
@ set a
standard that
every b a n k should lijzuidate sessonally s i t h us, a n d thos 6
banks thet d o not cone u p t o that stancerd a r e n o t t o b e
iree f r o m careful considersetion a n d trom attempts t o bring
them into t h e line o f r : p e r banking,
t e f a r 9 8 w e cen in~
tluence then,
j e will always have banks t h a t will b e
tréensgre.sors;
w e csnnot h e l p thst;
b u t o u t whole errort
4s t o reduce t h e number o f those thst op-rate i n se
then that ofr e g o n a l liquiuwation.
wie h i legs V o u r policy, I
suppose y o u woulu aeq+
i s circretion s u p ieuented o r sud-
seribe i t i n this manner,
perted b y t h e rate.
ute Perrin:
Yes.
T h e rate i s 8 precaution t o look
it egain,
ure miller:
t o look out thice.
d o u l d y o u b e less exigent about getting
your r a t e i n t o o p e r a t i o n u n d e r y o u r p o l i c y t h e n y o u w o u l d
be i f you were putting exclusive reliance i n the rate?
Mae P e Lars r r o m 8 stuay o x what has been done 8 n d
whet hss n o t been done b y thse rate, I
Osikins o r I
do n o t belisve that
would e v e r f e l t h e t t h e r a t e w a s
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Federal Reserve Bank of St. Louis
271
going t o give u s much protection; I
mean protect u s from
undue epplication t o r rsaiscount.
Governor wesy;:
I t i s worthy o f mention, 1
think, a t
st as t o the penslty rete, thst experisnced borrowers
Siding t h e b a n k i n o v e r c o m i n g t h e penalty
which i s by---~
a. POrrinys J u s t shat d o you mean, Governor seay?
B y compensating belinces;
Governor seays:
on deposit s
b y leaving
consiuerable portion o f t h e money borrowed,
which i s 8 way o f siding t h e banks i n avoiding t h e penalty
ni P e r r i n e
B y “penelty rete" I
mean a rete where
discounting would not yield a prorit.
Governor s6ay:
T h a t i s whet I
I f the borrow-
iicn.
ing bank had t o pay s i x per cent i t might nevertheless
lend i t s t s i x p e r c e n t s n d b e c o m p e n s a t e d
or a
l a r g é p r o p o r t i o n o f t h e loan, w h i c h
by 8
h i t s
retention
w a s Pree
sorted t o very extensively w e r t h e country curing t h e recent crisis.
meg: i
I
do not s e e a n y differencs b e t w e e n
them.
Governor ceasy. I
sm just illustrating that e s showing
272
thet t h e rate does not absolutely control, w i l l not a n d
cénnot control.
u r ’ miller c a n testiry e s t o that expe-
dient w h i c h w e s
l
L a m trying t o c o n v i n c e m y -
selr t h e t y o u r s r g u m e n t
i s p e r f e c t l y s o u n d i n t h e t raspect; i
that t h e rate, a l t h o u g h
i t might appsaer t o b e a
rate, nevertheless,
penalty
b y the borrower leaving 9 large pro-
portion o f the noney, loened h i m i n balances,
i t might n o t
emount t o s penalty r a t e t o the borrower.
Gevernor Strong:
Governor Seay:
I t i s a penalty t o the borrower.
Y e s , b u t w h e n y o u teke s .peculsative
period r i s e i n prices,
t h e cost o f money aoes n o t deter a
men rrom entering into a contract i f h e thinks h e c e n mske
2 prorit. T h e r e t o r e ,
i n ¢ period o f rising prices i f ¢
nan t h i n k s h e c a n m e k e a
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Federal Reserve Bank of St. Louis
profit o u t o f 6
transaction, a
alirerence o f hslf o f one p e r cent o r o f one p e r cent i n
the c o s t t o h i n w i l l n o t d e t e r iim.
wr willer:
your statement.
I w a n t t o clsrify m y interpretation o f
Y o u sey you ao not feel the rate would
give y o u much protection?
um, Perpins
Y o u mean b y thst t h e rate elcne?
T u e rate alone would n o t give u s iuch
protect ion.
wr, Miller:
# i . @ n you suppienent
i t w i t h discretion,
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Federal Reserve Bank of St. Louis
273
or s h e n y o u s u p - l e m e n t d i s c r s t i o n w i t h t h e rete,
a o you
yeel that t h e rate i s o f inportance?
uP < Porrin:
Y e s , o f inportence, b u t I think i t is
not o f majorinportance,
juts i a bers I
want t o find out whet t h e diirferencs
.etween you sni ar. strong i s that you attech more importance t o the discretion s n d less t o rate s n a h e wore t o the
rate end less t o ulecretion, a n d i f that i s a rset I think
the discussion hss gotten about 9 s far 93s it csn; b u t I
want t o find out whether i n your state
.
~ Wille you
do not think the rete gives you much protection and you do
not r e g a r d i t a s s o important,
t h a t i t i s important t h a t
the rate should b e at s s high a level a s i t would be if
were trusting t o the rate alone, when you are using
rate a s a n aid t o the exercise o f ciscretion?
I
n
brief, suppose y o u were t o get a n expansion within t h e next
six nionths t h a t would,
or a
billion e n d a
i r l e f t unchecked,
take a
billion
heli o u t o r t h e r e d e r a l r e s e r v e banks;
would y o u say, 5 0 W r a s your purposes w o u l d b e concerned,
it would b e anough,
a s soon s s you felt thet something
wes i n prospect t h a t needed control,
t o mark your rate u p
to four e n d a half per cent a n d then begin t o walt until
274
somebody h a d c o m u i t t e d
a n indiscretion,
w h e n y o u would be-
gin t o exercise discretion and say, "tle will g o t o five
per cent o r s i x per cent i f Chicago, Boston, N e w York a n d
41. veland do," o r would y o u still rest s t 4 Perrin
w
y conception,
a s a result o f m y exper-
is t h a t t h e r a t e i s m o s t i u p o r t a n t e n d t h a t s d v a n c e s
in rates,
a s cautionary signals a r e o f the very highest
inportance,
I
t i s the orricisl statauert o f the Federal
ressrve b a n k t o ail those w h o reed i t thet caution i s neces~
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Federal Reserve Bank of St. Louis
sary i n t h e o p e r a t i o n o f business. I
hope t h a t business
will come t o look f o r those signals t o know what t h e financisl rorecast is.
Let u s a s s u m e a t t h e present t i n e t h a t w e s a w a
very
repid edvance that w e felt wss unsound, coming, a n d 1
would not feel that i t wos enough t o edvence the rate t o
4~1/2 per cent.
I f it looked es if it mas very squally
I would feel like putting it t o five, ana if that didn't
seem t o stop undue sdvances a n d déienas T o r esdvances,
4 would s a y g o t o six,
T u e n suppose
so w e saw that w e were mistaken;
i n three nonths
or
t h e n I woulda drop i t
pack t o four again, s o thet w e would b e ready t o give this
cautionary signal sgsin. I
would feel a disposition a l -
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Federal Reserve Bank of St. Louis
275
ways todrop back t o neutral s o a s t o b é i n a strategic
position t o give ceutionary signals a s the situation, i n
our judgment, s e e m e d t o warrant.
t h a t w o u l d b e o u r public
statement t o all the people o f our district, e n d w e would
expect i t t o influence t h e m e n whe w a s opsrating o n t e n
pér cent money, n o t because h i s paper rediscounted w i t h
his F e c e r a l r e s e r v e b a n k m e a n s a
loss t o h i s bank, c u t
because he, hinselt, guidsd b y the judg.ent o f the tederal
rescrve bank, which w e hope h e would come t o have confiagence in, would restrain hinsel?y s o that h e will n o t d o it,
ur. willer: Practically, tiien, without going into
specliications a @ ressons therefor, y o u a o believe i n the
addition o f t h e r a t e a s a
part o f t h e c o n p l e x p r o c e s s
of
getting control o f sicagee
ur, Perrin: A b s o l u t e l y .
ume Miiler: i
think w e heve gotten about a s far a s
we can, a n d I think your view i s really this, mr, Perrin,
if I may presume t o t r y t o resd your mind:
perience h s s n a d e y o u s k e p t i c a l
T h a t past ex-
o f t h e faith thet y o u once
had i n the rate a s a n instrument o f control.
Perrin:
ur. miller:
yes.
A n d your present position, I
thi
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Federal Reserve Bank of St. Louis
rather this, ’nJ o t t h a t y o u arse i n f a v o r
agsinst rate, b u t thet you r e s l l y want o 1 1
get o u t o f b o t h ?
That i s resily whes i t }
C A G Hs tteeres
tion plus rete control o r rate control plus ciscretion.
it i s inmaterial which, b u t y o u wont a l i thet y o u c a n get
out o f both.
I n other words, y o u would say, “ I will put
up m y r a t e s o n d t h e n 1
ise, Crissinger:
will wateh?
b
o I understand mr. Perrin t o
thet l f he had t o rely o n either h e #cula réthser rely
aiscretion?
lin, Penrinsg I
regard t o 1919, I
belisve i t s o strongly t h a t w i t h
am of the rirm conviction thst b y extreme
and ecsreful attention t o all situstions w s could ebsolutely
heave controlled t h e volume o f credit expension---
i t is
perhsps t o o strong t o s a y sbsolutely controiled--- b u t w e
could have kept within noderate limits t h e expension i n
1919, instesd o f having s o iany benks g o beyond what w e s
the safelinit.
{ u o n o t belisve a n y rate thet t h e "ederal
reserve B a n k o f s a n Fra.cisco c o u l d have adopted would have
eccomplished that.
A n d t h e t i s where 1
would sieasure t h e
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Federal Reserve Bank of St. Louis
rySeg
velue o f any coumpsrison, t h a t o n e would have done it, o r
could have done it, a n d the other could not.
ne. Criss Inger: I
think y o u a r e extremely optin.istic
snd 3 would like to believe that your faith is justified.
I would suggest t h e next time w e have &
you try it in “an Francisco.
cquall o n that
I r we are unfortunate snough
to get into a period o f depression i n business a n d a n ine
creasing demand f o r credit, t h e t threatens t o assume elari-
ing proportions, I suggest that you try it.
would b e a
great o p p o r t u n i t y t o v i n d i c a t e y o u r principlo.
mr, Perrin; I
but I
Z I think it
do not know how the other banks reel,
do hyve t h e bslief t h e t w e a l l yeel that o u r hands
were tied by the Treasury policy, that since we wuld not
sdvence t h e rate w e could n o t d o anything,
s o w e sat with
our hands folded when we mignt have been up end doing
with discretion;
t h s t i n not having a l l o f the implements
thet were possible w e should have done double work with
the o n e implement w e had, a n d w e aid n o t u s e i t t o the
extent t h e t i t should have b e e n used.
ar, hardy;
w a y L interrupt t o tell you about a con-
crete csse which, I think, illustrates just what you have
in mind? I
s m i n sympathy w i t h t h e views just expressod
278
and sttach just s s much importance t o t h e rate a s suggested
by o a kidler, a
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Federal Reserve Bank of St. Louis
national bank, i n good standing, that
we have b e e n hanmering f o r some time i n 6 rather persistent
o f
wey, continued t o sdvence i t s aiscount l i n s instead
Liquiuating, 1
think ror the purpose o f making what little
profit t h e y could make o n a four a n d 3 hair p e r cent rate
and accommodate their customers, u n t i l i t got t o a point--this happened a
few woeks a g o w h e n Governorseay
on his holidsy--~ i t got t o the point shere the matter came
before o u r officers o n e morning and, after ciscussing t h e
wetter, w e sent one o f cur most tactrul men t o pay this
penk a visit, n o t t o r t h e purpose o l examining it, b u t
to s c r u t i n i z e i t s o p e r a t i o n s c l o s e l y e n d f i n d <
the trouble wes, w i t h instructions, unlés
W
w e r e
a
s some
reason t o the contrary, t o call 3 meeting o f the Board
of directors t o plece t h e position o f the bank's discounts
and rediscounts before t h e board o 1 cirectors.
down there a n d found thst they weie carrying a
H e
consicersbie
line o f what w e would c a l l csapitsl loans, a n d rediscounting for t h e small profit t h e y were making, t h e bank being
dominated b y a president w h o w a s getting along i n years,
who a p p a r e n t l y c a r r i e d 9
big c t i c k that everybody w a s afrati
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Federal Reserve Bank of St. Louis
At a n y rate t h e m a n w e cent c o w n there round o u t the
concition t o which I have alluded,
h e called a neeting o f
the Bosrd o x virectors, a n d it seems thet this president
hod beén runnire the bank, a n d the board o f cirectors
ndt Know what was going on, d i d not know the lines of credit
being handled,
shell
s n d i t just exglodea miethin:
i n t h s t bank.
o f 3 boom-
T h i n g s h a v e s a j u s t e d themselves;
the directors asserted themselves a n d the matter w e s o n the
way t o c o r r e c t i o n e n d I
have n o d o u b t h a s b e o n c o n s i d e r -
ably c o r r e c t e d s i n c e t h a t incicaent.
Now, thet i s what 1
would call t h e use o f d & cretion.
.é Gid not tell t h e bank w e absolutely w o u l d not redis-
count any more, b u t w e gsve them t o unaerstand that they
had t o changs their policy and the @nuitions which I have
just described.
T h e applying o f 9
rete w a s not sufficient
in that cese, a n d w e had t o d o whet y o u heve just expressed,
we had t o g o after thst cese inaividually.
Governor morse.
I f 1 reasmber correctly, w h e n w e
were down here i n November o f 1919, s o m e o f us, a t least,
end I wes one o f them, took the position thet there should
be a n increase i n rete, a n d that w a s n o t done becsuse o f
280
Government Lusiness.
B u t I think I have clearly i n mind
that w e were told that w e ought t o control the losns b y
whet w e n o w call discretion.
‘ e n e m b e r f e e l i n g distinctly
at that time that t h a t «would not b e surricient w i t h us. Y o u
have stated that o u r hends w e r e t i e d a s t o the u s e o f discretion a t that tine.
w y récollsction i s thet w e were
urged t o use it,
up. Perrin:
O u r hands w e r e ticd w i t h regard t o the
vate.
Governor morss;
luye Porrins
N o t w i t h regard t o discretion, n o ,
Goernor morss; I
prs Perrin:
m i s u n d e r s t o o d y o u then,
N o , o u r discretion h a s always b e e n there.
Governor morss; I
thet t i m e t h a t £
B u t n o t « i h regard t o discretion.
remonber distinctly feeling s t
could n o t d o i t b y t h e u s e o f d i s c r e t i o n
as w e could i f w e w u l d h a v e high rates.
mre Perrin:
s o did i, I
ted reith i n high rates
at that time, raith i n control b y high rates, a n d I was
much displeased w h e n t h e cirectors c f t h e
Benk o f S a n f r a n c i s c o w o u l d n o t r e c o m m e n d a
thought w a s necessary t o ontrol.
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Federal Reserve Bank of St. Louis
Governor w o r s s :
rate w h i c h I
281
wos very insistent t h a t w e should n o t codvence t h e rates.
Governor strong:
U n d e r t h e circumstances t h e t t h e n
existed, y o u recell thet t h e meaber banks t e r e buying these
certiricates very lergely t o get goverment ueposits, a n d
there v a s n o market y o r the certiricates, t h e y become more
or less frozen i n the hends o f the tanks, a n a what would
a member bank do, o r a t least h o w could i t s borrowing b e
controlled, w h e n that Governuent deposit w e s witharewn a n d
turned over t o some bank thet possibly sas not borrowing
from the reserve bank a t 411?
ne Perrin: I
would not presume t o tell the Federal
Neserve B a n k o f N e w York what i t should have done i n 1919,
Governor Strong: I
mean e n y reserve bank.
Y o u d
feel, however, thot i t would have been helpful--- ho. much
nore o f u s c é n sey--- h a d w e been free sometime i n 1919
to s d v a n c e t h e r a t e
Bye Perrin:
a
a n c p u t t h a t pressure u p o n t h e morket?
s I
have e a r l i e r s t a t e d ,
udller interpreted what I
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Federal Reserve Bank of St. Louis
a n d s s vr,
have i n m y mina, t h e use o f dis-
cretion e n d raté are both necessary f o r a complete regu-
lation, that discretion, being worksu hard enough, c a n
regulate;
t h a t t h e rate cannot b e worked h a r d enough o r
will never b e worked hard enough, unusr the circuiustences
4 3of
existing here,
t o b e sirective i n control.
A s between
the t w o I believe that t h e exercise o f discretion nokes
sdequate regulation possible a n d thet rote does not.
I would like t o s u m u p one o r two points, j u s t t o
bring them i n review, e n d one i s thst t h e Bank o f »ngland
must necessarily h a v e i t s rate above t h e market rate, t h a t
market r a t e being o n bills thet have well established s#labil-
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Federal Reserve Bank of St. Louis
ity, t h a t i s t o say, e r e readily saleble;
t h e t i n this
country t h e r a t e o f t h e ¥ e d e r a l r e s e r v e b a n k w W i l u s u a l l y
be below t h e rate o n paper which i s o1ferec f o r redis count,
ana that t h e significance o f the rate should b e 4 s 5 cautionary signal; a
ceutionary signal might b e just s s
eftective i n a n advence f r o m four t o five p e r cent ‘as a n
sdvence f r o m f i v e t o s i x p e r cent.
I
f the rate o f the
Fed- r9l reserve banks h a d n o t gone below five p e r cent,
an advence o f o n e p e r c e n t w o u l d b e s
It i s a cautionary signal a n d not a
p r o n o u n c e d advance.
controlling factor.
in advance from four t o give per cent i s slso 8 substantial
advance a n d should have substentially t h e came influence
upon t h e p u b l i c b e c a u s e
o f t h e e x t e n t o f t h s edvance, r a t h e r
than the level t o which i t i s put. T h a t i s the substance
OL ay.
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Federal Reserve Bank of St. Louis
285
I s i t right t o ossume that 8 country
Governor Young:
g
&
bank that charges
per cent s n d thst reaiswunts w i t h the
federal reserve bank at'7 p e r esnt, d o e s s o a t 4 profit?
Let u s take t h e onditions
where they charge 6
i n the egricultursi sections
por cent;
l e t u s take e n average
bank out there with 4500,000 worth o f loans.
T h e r e isa
aise o f rate i n the Federal reserve b a n k which p3sses o n
to the comuerciel borrowers, e n d i s then reflected i n the
price o f bonds. w u o n e y i s dear.
T h e depositor i n the
country b a n k has a n opportunity t o buy governuent bonds
on 4 five per cent basis.
paying four per cent.
T h e country benker has been
I t is the genersi rormuis in the
country that you have got to cherge double what you give
to make 9 profit.
w i t h a rate cif discount o n st the
Federal reserve b a n k o f four per cent o f four énd 6 half
per cent, naturally t h e wmuntry benker dreates 4 & deposit
with the Federal reserve benk b y going there with t h e money.
and
But w h e n the federal reserve r a t e goes t o tive o r five
a half per cent the country banker begins t o resson with
the customer s n d t o offer t o psy h i n more, s n d eventually
as our rete goes t o s i x per cent h e colies u p t o s i x per
cent.
H e tries t o pags s o n e o f thet o n t o his borrower,
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Federal Reserve Bank of St. Louis
84
but h e c a n n o t p a s s a
may b e
L é g s
a
t
great d e a l o r it.
b i g hoFt p e r c e n t
P i n e lly c u m r a t e
cent s n d k e goes u p t o 7 per cent,
=
9 to
v u r i n g thet tine h e
has possibly borrowed »100,000 f r o m our benk, h e gets &
per cent a n d pays 7 and h e meskes 1
per cent o n thst, b u t
on the balance o f his aeposits, s o n e three o r four hundred
thousand Gollers,
h e pays t w o per cent nore.
Now, I
say
he has been penalized and is penslized right now. T h o s e
are the conditions that woe had i n the northwest.
I t wesn't
an increase i n loans, b u t 3 decrease i n deposits a n a every
country benker h e d t o pay o u t more r o r the deposits t h e n
he did berore,
s o the rate i s penslized them.
N
o
w
the rate h a s gone d o w n s o thsre i s more inducement f o r t h e
depositor t o deposit o u t there
e t s i x per cent o r seven
per cent, s o much s o that t h e banks i n South vskotsa right
reducing
at t h e present moment a r e consid .ring/the r a t e f r o m s i x t o
five p e r cent, a n d those banks have b e e n penalized v e r y
severely, m u c h more t h e n t h e city banks,
i n siy opinion.
Any chenge i n rate i n the c i t y i s bound t o afrrect everybody
in the country. I
don't s e e how y o u c a n gst a w a y from
it.
ha, Perring
l u y statement was, ur. Young, t h a t t h e
285
Fed:ral reserve b a n k discount r a t e will usually b e less
rate o n
than t h e / p s p e r s i v e r e d f o r r e d i scount.
T h e t w e s m y con-
tention,
Governor Young’
T h e srguiient i s to put a rete i n
that will be unprofitable t o the banks. [
think when you
do thet y o u make i t unprofitable e n d make t h e m curtail
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Federal Reserve Bank of St. Louis
credits.
ur” Perrin: I
would expect that a n advance i n rate,
8s 8 ceutionary signel, w o u l d make t h e m incresse their
caution i n their operation.
T h a t i s what t h e cautionary
Signal would b e intended for.
Governor horss: J o u l a n ' t i t be interesting, after
this discussion,
t o ask i o r a showing o f hancas?
Vice Governor Platt: u t h e r people have w i t t e n papers
on this, a n d they might perhsps wish t o discuss i t + G o v e r nor Young hes raised t h e point a s t o the errect o f t h e
federal r e s e r v e r a t e o n rates p a i d o n deposits.
I
t does
that i n England, too; t h e t i s t h e w a y i t efrects credit;
{t n o t o n y r s i s e s t h e r a t e s t h a t t h e b e n k p a y s t o t h e
Federal r e s e r v e b a n k , b u t i t r a i s e s t h e r a t e t h e t t h e b a n k
psys f o r i t s deposits,
cities, psrhaps,
i n m a n y cesses, n o t s o m u c h i n t h e
s s i t Goes i n t h e country.
286
Governor F a n c h e r
wellborn h e s a
i s n o t h e r e f o r t h e moment,
3 n d «mr,
paper o n topic 3 , s o w e will hear hin.
Governor uweéllborn:
w r , Ghoiruen, I
have listened
with 6 great Geal o f pleasure t o the lengthy aebate between
the gients o f the east e n d t h e west, a n d I believe t h e y
are just about 3 s r s r apart e s the Atlentic o c e a n a n d the
Pacific Ocean. I
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Federal Reserve Bank of St. Louis
have been i n t h e - y s t e m eight years.
we were csught o u t o n a limb i n 1919 o n d 1920, b u t I
we are beginning a
and what I
think
new’chepter i n the teaeral reserve system,
a m anxious t o see i s that w e correct t h e situa-
tion s o that w e will never get caught out sgain ilke w e
beligve i t i s avoldable s n d i t should b e
were then, I
voided,
A
t thet t i n e w e were sailing
a n uncharted ses,
but experience h a s built u s s good nany light houses,
thet s h o u l d s a f e l y k e e p u s o r r t h e r o c k s
i n t h s future.
we have all listened with e great deal @
interest t o
the discussion o r the penalty rate, a n d I believe i t i s
generally a g r e e d t h a t w e s h o u l d h a v e p e n s i t y r a t e s
way o r snother,
is really 2
but I
i n ons
a m g o i n g t o p r o p o s e sai.ething t h e t
penalty rate--- n o t a n imitetion; I
to offer t h e real stuff. I
paper o n the subject, w h i c h I
have prepared a
a m going
very short
shall resd t o you.
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Federal Reserve Bank of St. Louis
2e7
wy v i e w s w i t h r e g a r d t o t h e suestion,
the experienc
ent m e t h o d s
" h a t light does
o f #ed.rel reserve banks throw o n the differ-
o f u s i n g a n y discount p o l i c y efrective:"
i s
as folloss;:
It is a very difficult netter t o e x rees i n astail i n
few words what policizs should b e pursued b y 2 Federal
Reserve B a n k u n d e r t h e v a r y i n g c i r c u n s t a n c e s
count policy.
i n i t s dis-
u u c h might b e said with regard t o the ef-
torts o f t h e Federal reserve b a n k ofricers t o exercise a
ressonable control o f credits, b u t esiter all, t h e sifect o f
rates i s t h e n a i n thing.
“é@ found b y our experience i n 1919 end 1920 thet the
expsnsion o f bank ersdits r a n away with u s e n d t e were
conpelled
t o resort
t o t h e u s e o f sbtrong-ari f i n a n c i s l
methods t o protect o u r reserves,
i n order t o save a peril-
ous situstion-- w i t h which w e wére confronted,
now b e g i n t o p r e p a r e
w
e should
f a s i m i l a r c o n d i t i o r s , 6 8 s history
has a habit o f sometimes repeating i t self.
In my opinion, though w e started e littie late the
application o f t h e p r o g r e s s i v e r a t e s h a d a
end p l a y e d
a n important p a r t
splendid < f f e c t
i n checking t h e w i l d a n d ever-
ineressing extrsvagance a n d inflation shich was dominant
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Federal Reserve Bank of St. Louis
288
st that tine. I
s m inclined
t o b : i l l ee
v thé Important d u t y
that n o w l i e s bexzore u s i s t o s x s r t b y o u r d i s c o u n t p o l i c y
snd rates a n d other iniiusnces s
or ereadit expansion,
i
prevention o f @
p 14
i
recurrence
s i t i s very diffi-~
cult t o hold banks i n proper check, without t h e u s e of the
progressive ratos, w h e n there l s cuch « wide margin i n the
cis count r a t e o f s Federsl reserve bank, a n d t h e rates
charged b y ms:ber banks t o its customers.
I t i s t o o great
a temptation f o r a member b a n k t o b e able t o rediscount
at a Federal reserve bank a t the prevailing retes and relend t o its customers a t 8 0 per cent t o 9 0 per cent profit.
And, thereore, I believe it 1s wise and proper to again
nsugurate the progressive rates, b u b with 6 iluitation o f
the legsl rate o f t h e state f r o m which t h e peper i s o:fered
ss a
meximun.
in 1920 when t h e progressive rates w e r e applied b y
sone o f the sederal keserve banks,
i t did n o t have a
fair
trial owing t o the fact thet t h e nember banks w e r e s o greate
ly extended a t thst period.
I t i s proper, I think, t o
establish these rates a t 8 time when the member banks
sre not rediscounted freely, e n d i t will thus command a n
intiluence a n d serve a s a useful warning. A
basic l i n e
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Federal Reserve Bank of St. Louis
289
can b e f i x e d s o t h a t b a n k s w h i c h a r e b o r r o w i n g
i n reacon-
sble snounts, will uot b e penalized, a n d all legitimate
aemands
o f member b a n k s w i l l r e e e i v o t h e l o w r e d i s c o u n t s
to which they a r e entit led,
i t may b e said i n favor o f
having p r o g r e s s i v e r a t e s 3 5 a g a i n s t s
high t l s t r a t e iit:en
it i s necessary t o incresse rates, i t will evicently b e a
harcéship o n aeuber banks which a r e n o t borrowing uuch o r
at all, t o be obliged t o pay such high rates for their moderate borrowings.
i
n o t h e r words,
t h e prudent banks w o u l d
suifer s o r t h e exce:rsive Sniees P e r h e p s
i f t h e progrecsive
rates and hed been i n gensral use i n the year 1919, i t is
likely thet they would have had 5 naterial <ifect i n sreventing u n d u s e x p a n s i o n c f e r s d i t s s n d c o r e q u e n t l y
we
might have escaped the rapid liquidation which under the
prevailing circumistences was unsveidable i n 1920,
Vice Governar Platt:
i x . haracy, you have 4 paper
on Topic 3 , Ibslisve.
ur, Hardy:
of time, I
i r , Chairuan, I
have used u p 8 greet deal
think w e have b e é n over this subject pretty
as
fully, and I won't detain you by seying/.uch s s I said
just now i n relating the incident t o which 1 referred.
[ I
heve just a s high a regard f o r the suéstion o f rate a s eny
290
one. I
think w e should have relsed o u r rates i n 1919.
se were very strongly i n fevor o f it, b u t I t wes impracticable a t that t i e t o d o it.
hed t o p a y t h e u t m o s t a t t e n t i o n
The one I
B u t i n our district w e
t o the individusl oases.
just related i s a good illustration, a n d w e have
others that haves been more difricult t o deal w i t h t h a n the
one I cited,
T h e r e i s only one section o f our district
where t h e legal rate i s more t h a n s i x per cent, o n d that
is i n South Carolina,
#e carried o u r district through t h e troublesome tines
of 1919 and later o n a six per cent basis, without reising
our rate beyona that.
Governor 2eay:
lur. Hardy:
W
A n d w i t h n o failures.
e only h a d onefsilure
i n t h e district,
end thet w a s a case where t h e president h a s b s e n charged
with having looted t h e bank a n d having tried t o burn u p
the building.
a
e b e e n tried f o r i t since.
v8 used t h e b i g stick extensively.
benks, those
#
@ told our
w e r e pressing f o r undue volume a f dis-
counts, t h e t i f they insisted u p o n having such excessive
amounts t h e y would force u s t o a position where w e would
heve t o put progressive rates, prohibitory rates i n t o ef-
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Federal Reserve Bank of St. Louis
291
yeet, e n d b y srgument a n d persuasion,
4 8 s a y , w e naneged
to carry o u r district through o n @ s i x per cént basis. I
think thet primarily w e should have a
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Federal Reserve Bank of St. Louis
tainly r e s u l t
i n having influence
rate thst would cer-
i n controlling t h e voi-
think w e ought t o hsng thet r a t e
né o f recGiscounts; I
out just s s early a s w e think s: s e e a n y signs o f trouble
in the future,
s o s s t o sive warning, b u t i t will take
persuasion, discretion,
t o handle t h e situation,
our district i s concerned.
w
s o far a s
e could n o t rely absolutely
upon t h e tixing o f rates.
Vice Governor Platt:
T h e problem i s consid -rably
simpler w h e n you heve e six per cent limit o n t h e borrowing rate.
wr. Hardy:
W e hove that Linit a c e p t i n South Cara-
lina.
Vice Governor Platt:
a n d i t i s pretty thoronghly
eniorced, judging f r o m shat I hear.
iD. witchell:
b o t h e meniber banks live u p t o that
Slx p e r c e n t r a t e ?
wr. Hardy: I
they d o a s a rule. I
think they do, ur. mitchell. i t think
think there have been some cesses,
Which ur. ceay alluded t o just now, where when the dis count
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Federal Reserve Bank of St. Louis
2928
rate i s u p t o s i x per cent t h e y hsvs charged their m s t o m ers 6 1 x per. cent.
t h i n k t h e r e have b e e n s o e csses
E b LI do not think i t
where t h e l a w has not b e e n obeysa,
hes béen s o t o a n y great extent,
i? sad G O T 1sL s h a t i s t h e
ings d e p o s i t s d x a n o n d t i n e d e p o s i t s
ur. Hardy:
i n your c &
T h a t d i r t i c u l t t o snswer, because t h e
rate i n Richmond i s 3 per cent, although I
expect there a r e
ceses where more t h a n thet has been p o i d , a n d i n the
country banks t h e y p a y f o u r t five, a n d during this strinthrough
gency t m which w e heve passed I ao nob t h i n k there i s any
telling w h a t t h e y h a v e paid, b u t i
a m sure s o m e o f t h e m
héve p a i d a s m u c h 3 s s i x p e r cent.
mr. Curtiss:
v o those rates fluctuate v e r y quickly?
mre Hardy: I
ur, witchells
do not think so,
a r e they paying four s n a itive a n d
loaning s t six?
mr® Hardy: I
hardly think they are, I
think they
are ostensibly l o a n i n g a
t six p e r cent, b u t probably ¢
t
something o n t h e side b y stipulating s s t o s portion o f
the ac@ unt reisining o n deposit. I
think i n general,
under ordinary conditions, that the six per cent rate i s
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Federal Reserve Bank of St. Louis
29%
pretty s y s t e m a t i c a l l y s d h e r e d
t o i n t h e cities where that
is t h e legal limit.
Vice G o v e r n o r Platt: I
wonésr i f “r. “ a r d y d i d n o t
touch u p o n o n e o f t h e m e t i o d s
o f exer*ising discretion w h i c h
was pretty generally used throughout t h e system,
F o u r of
the districts adopted t h e rate a n d t h e rest threstened their
people with « progre.sive rate i f they cidn't behave.
Governorseay:
T h e r e i s slweys o n e thing t o sey about
@ reise i n retes, s n d that i s that i t elways carries a
threat o f s still higher rate,
Vice Governor Platt:
m r . Heath, y o u a r e down here
ror a paper o n this subject.
ure Heaths
w r e Chairman, I
have believea thet a
wore impertial expression o n some o f t h e polls sugested
in T o p i c 3
could b e h a d f r o m t h e viewpoint
o f t h e member
venks t h e n f r o m t h e viewpoint o f a n officer o f the Federal
reserve bank itself. T h e r e f o r e ,
heve prepared, I
have quoted from mr. J e B. rorgen, who,
while f o r f i v e y e a r s a
of Chicago,
i n a n article that I
director
a n d particularly ©
o f the rederal :eserve B a n k
member o f t h e advisory Coun-
lence, a commercial benker, a
ian
who speaks o i those things f r o m that standpoint, and, a s I
294
bélievc, speaks n o t o n l y f r o m his o w n experience e n d that
ot h i s o w n bank, b u t g r o m his c o n t a c t w i t h hundreds
member
a
of
n n a v e i n mind t h e metter o f t h e influence
of the F e d ral reserve rate upon t h e p o l i g o f member banks.
will not quote »r. Forgan's words i n full,
language:
"One thing, however, hes been proved, a n
the raising e n d lowering o f the reciscount
Fed r a l reserve banks influences v e r y gre-t
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Federal Reserve Bank of St. Louis
of money t y t h e benks,.
T n e question m a y arise whether
this i s not d u s more t o the pressure o f t h e example s e t
by t h e Federal reserve banks t h a n t o & mere change o f 4
relstively small peresntege i n the regiscount rate.
But
be that a s i t may, t h e banks i n the country have followed
e lead o f the Federal keserve -ystem."
Possibly, following that, ©
brief reference t o our
own observation i n this mstter m a y n o t b e out o f place.
The raise i n our retes, w i t h t h e lerge c i t y banks, slmost
without exception, m e t w i t h imnediate spproval, a n d while
it wes notat once merked b y a materisl reduction i n their
borrowing w i t h u s - - -
nevertheless
i n some cases
i t increased r o r a
time--~-
i t was patent a n d became evident v e r y shortiy,
295
that they did regard i t i n the light o f ao signsl o r 9 warning a n d were heeding it.
I
t may not b e more-~ I
not s u p p o s e i t i s more-- t h a n 4
do
siere
one notable example o f a large bank which
the warning m n t a l n e d
i n the raise i n our rate, b u t which
continued t o carry not only its essential loans, but others,
without proper effort a t reduction, a n d continued a l s o t o
logn money for the purpose o f gaining new business, w a s
finelly t a k e n o v e r b y s n o t h e r i n s t i t u t i o n t h r o u g h a
clear-
ing house guaranty e n d agreement.
Ti:at the efiect w a s slower i n the bsnks outside o f the
large cities,
i s undoubtedly true, b u t i n hundreds o f in-
stances, f r o m personal contact w i t h t h e m i n our offices
ané elsewhere,
w e found that t h e macj:rity o f then had héeded
suggestion, a n d sooner o r later t h e effect o f i t w a s
nanifested i n thsir o w n loan procedure, e v e n i n the one
state t o which Governor ucvougal referred this morning: i n
which other t h a n the usual rate t o custoners w a s above t h e
waxiiiun rate which w e set a t a n y tine, s n d therefore a
small margin o f prodit remained t o t h e , t h e efrect o f
our r a i s e
i n rates b e g e n t o b e felt,
mda I
cannot b e l i e v e
thet i n this case i f was only a cothcicencs, b u t something
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more, t h s t t h e raisin; o f our rate finaliy t o 6 seven
per cent flgure itarked t h e beginning o f 9 dsciced chenge
in the attituce o f the bonks i n that state regerding t h e
encouragement o f hand speculstion a n d wildcat speculstion,
and a
refusal
t o a c c e p t m o r s o f t h a t s o r t o f paper,
T h e
result o f i t wes, however, t h a t while they d i d finally
check that wave o f such speculation,
nd r e s u l t i n t h e l i q u i d a t i o n
i t d i d not a n d could
o f t h a t paper,
a n d that p s p e r
remained i n the banks r o r a long time, a n d some o f i t i s
there yet. I
believe thet t h e Conptrolier o f t h e Currency
will agree with me i n this state.ent, that with a Large
percentage
o f the banks i n the State o f Iowa thsre w a s a
larger a m o u n t o f s p e c u l a t i v e psper, b a s e d o n r e a l e s t a t e
tresnsactions,
o f a more o r less spéculative nature, a n d on
wild c a t securities,
i n proportion t o benking capitel,
than there w e s i n the stock brokers’ l o a n s i n New York
City.
T h e digference
i n t h e t w o c o n d i t i o n s w a s this;
New York losns could b e celled,
t h e
t h e brokers could call
their c u s t o m e r s a n d i n d s f a u l t o f settlement c o u l d s e l l
them out a n d realize o n the securities, w h i l e t h e psper
in t h e state t o which I
refercould n o t b e called, c o u l d
not b e called, becsuse 1 t was mostly time va:
s o m e of
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it long time psper, a n d its settlement was a pendent, i n
8 great many cases, u p o n subsequent tiansrers o f the prooerty Involved.
The situation tinslly resched s u c h a point t h s t w e
feced @ real crisis i n ths state.
T h e r e were 300 banks,
or more--~ I think I em right i n this, Governor ucbougal-which had alreedy reached o r gone beyond t h e point which
bre willer undoubtedly had i n wind this morning i n saying
that there w e s a certein smount o r prudence t o b e exercised
ond s certain line beyond which prudence would suggest
you s h o u l d n o t g o - - - 3 0 0 o r m o r e o f t h e s e b a n k s h e d r e a c h e d
that point and, i f it had been sn incividuel c-se, undoubtedly ordinsry ciseretion would have said, “No further."
But there was a larger question involved than that. T h e r e
wes a tense situation i n the entire ttate, a n uneasiness
end @ repid lessening of conridence. A
number o f syste i s
of chain benks w e r e i n danger a n d some o f the larger banks
vitally afrected. &
of banks
collapse o f a n y o n e o f the chain
o r a n y o n s o r m o r e o f t h e : s l a r g e b a n k s jmight
probably h a v e p r e c i p i t e t e d a
situation w h i c h w o u l d havs r e -
sulted i n the collapse o f practically t h e entire banking
system o f t h e state o f Iowa.
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This netter w a s carefully considered
h y our board
and w e aeciced that 9 larger weasure o f discretion with such
a .ituation w e s necessary; t h e t i t wes better r o r u s t o
incur e possible loss, running pemhaps invo t h e millions
re
than t o rece t h e denger o f s u c h @ crisis; a n d this m a n h e
(Governor mcbougal) p u b out the money i n the face o f such
a situation, e n d t h e rederal heserve =
ent, v h e n h e took
the collateral, p u t o n smoked glass¢s.
T h e situation w a s
tided over a n d that crisis i n lowe d i d not occur.
I think i t t s a fine ©
Chief E x a m i n e r Brown,
there,
umentery u p o n t h e work o f
t h e m a n w h o m the Comptroller s e n t u p
or
T h e r e were three states i n the district m o r e
perless affected b y thet situation, e n d curing that whole
iod o f his w o r k but eight member banks closed their doors
snd three o f t h e m have since opened. I
think that t h e
cooperation between your force, wr. Comptroller,.and t h e
ofticers
o f t h e F e d e r a l k e s e r v e b a n k -.avea t h e s i t u a t i o n
be~
and justizied t h e extrsordinary wesoures w h i c h w e took,
e
I
c we G i a saved t h e situation
believe
s
u that s t h e thin
c
co
in that state, end when i say “ue,” I mean the Comptroller's
force, ourselves a n d t h e state banking depertments, a l l o f
which c o o p e r a t e d w i t h u s t o t h e f u l l e s t extent.
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Now, “r, Shairman, t h e second section o f the paper
which I
submitted i s but 9 crude a n d hojliely effort t o re-
late t h e experiences c f a n effort t o astablish a n open mar-
ket tor bankers! scceptences i n the second city o f the
country,
hat
i n t h e e n d s v o r t o estab-
w e used sous methods
lish thst market w h i c h perheps ordinary banking ethics
would not justify except a s 6
eilisrgsncy meesure,
For instance, o n occasions, w e ¥ e
i s true,
acccptences from
our o w n portfolios a n d sell t h e m t o mauber banks a n d t o
other investors i n ord<r t o eequaint them with the scceptance
snd its merits, a n d w e succeeded,
a s w e think,
i n estab-
ishing guite 9 market there, s n d Ww
the country bankers, b u t t h e city bankers a n d other invest-
Ors.
But a t the present time, a s t o the open market i n Chicégu, let me ssy i n classic parlance, "There ain't none.”
Vice Gov-«rnor Platt:
Y o u r story about t h e conditions
in Iowa i s very interesting.
Y o u strayed 4 little bit
off t h e r e s e r v a t i o n w i t h r e g a r d t o t h e o p e n market.
The next gentlenan who hes a psper o n this subject i s
wr, Ramsey, o f vsellas,
ur, Ramsey:
i r . Chairman a n d gentlemen,
i f time h a d
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permitted I
would heave besn very glad t o have spent a
lit-
tle longer time t h a n would b e justifiable under present
conditions. I
sible, w h a t I
will, therefore, condenss,
3 8 much 4 S pos~
have t o say.
Ihed i n mind a
very cleer conception o f m y owm views
with respect t o t h e situation, b u t I
have labored under
the difficulty o f finding t h e precise terms i n which t o
o2tine
would agree w i t h the Governor f r o m New York thet w e
should adopt a s far a s practical a nationsl policy, a n d
while I
would scarcely concede that t h e interest o r opera-
tion o f o u r o w n banks should b e subordinate t o such a
policy, y e t I
think w e should conform t o i t 3 s much a s
practicable.
I a m inclined o n the whole, gentlenen,
t o agree
up, Perrin, a n d 1+ quite agree w i t h his sdmirable paper.
When I received i t i n Dallas I
had already prepered a
resd i t very csrefully.
brier psper myself, b u t I
inpressed with his peper that I
was 6 0
instantly a n d in.tinctively
wrote h i m 3 very cordial letter o f sppreciation o f the
wonderful erfort h e h a d made. I
said t o hin, a n d I trust
I may b e permitted t o s a y tke s a m e thing t o the gentlenien
oOL
present, t h a t I
thought h e h a d expressed himself i n writ-
ing, a s wes t p
expected, rether more clearly then he
hed i n h i s a
al statement.
I n fect I
was g r e a t l y i m p r e s s e d
with t h e precision o f his statements a n d the value h e seened
to attach t o the language used.
I think probably w e all mske perhaps o n e nistake a n d
thet i s j n assuming, t o the extent that w e have assumed
it, t h a t w e c a n h a v e s
universal p o l i c y a p p l y i n a n unvary-
ing w a y t o every part e n d parcel o f t h e wuntry. I
éndsavored, s i n c e m y @
have
nnection with t h e Federal Reserve
system, t o heve the good o f the wholesystem i n mind, b u t
I have felt that there were uigrerences
i n proauction,
in commerce, i n trade, i n hsbits, a n d t o s i e extent i n
mental sptitude, t h a t should make a difference. I
sppointed t h e p e o p l e
G i s -
i n m y section b y standing u p i n m y
own community snd trying t o convince them thet
it wes utterly illogical for us t o expect t o put i n rorce
s low a
ciscount r a t e i n o u r u n s e t t l e d c o u n t r y a s pre-
vsiled i n the great centers there t h e y h a d large reservoirs
of liquid Wealth, t h e a c c u n m l a t i o n f
o centuries.
now a
rour a n d a
half p e r c e n t r a t e , w h i c h I
w
e have
think i s a s
low a s i t ought t o b e now, a n d procably a s l o w e s i t ought.
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to b e under a n y conditions. I
d o not believe, however,
wr. Chairnian, t h a t w e c a n undertake
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t o m a p o u t a n y course,
unverying a n d invariable, w i t h inathenatical precision o r
With t h e exactness o f mere matnenatics. I
believe,
as
spplied t o conditions a s Governor Strong has explained
them, i n 6 very vair and interesting way, tnst credit c o nditions m e y largely b e controlled i n New York, a n d I assuiue
the same thing is, r o r all practical purposes, t r u e i n
Boston a n d Philadelphia w h e r e they have, especially N e w
York, a
psper.
real open iiarket f o r 3 1 1 classes o f negotiable
That, I
think, i s not true i n our section.
whe-
ther w e ought t o have a lesser rate o r not o f course maybe
debatable.
T h e matter h a s been debated very oft@m i n
our legislature, a n d f o r what appeared t e b e good reasons,
we still have a
contract r a t e i n Tezas, which forms b y
far t h e l e r g e s t p a r t o f o u r
s i
e
e
o f t e n p e r cent.
We h a v e s o u e f a i r l y s i z e a b l e c i t i e s a n d t o w n s
i n o u r State,
one b a n k w i t h d e p o s i t s s p p r o a c h i n g ~40,000,000. I
have
noticed o n e o r two loans made b y some o f our member banks
at our o w n discount rate.
W e have approximately 4 0 0 mem-
ber banks i n our district w i t h s capital o f $100,000, a n d
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less,
i n tLose widely separated areas, where t h e security
a i n older communities,
is not s o gafe, stable o r s o u n d s
snd many o f the benks charge a prettyuniform rate o f ten
per cent, and, considering t h e risk, i t ha. been m y experience thet that rate i s notexcessive.
I n a s m u c h , therefore,
8s y o u are compelled b y l a w t o make i n any given district
the same rate to all banks, you are conrronted with this
aifficulty---
i t w e were dealing w i t h c i t y banks alone
in
shreveport, ballas, F o r t worth, Galveston, Houston a n d
can Antonio w e could afrect, a n d t o mime extent control the
expansion o f credit voluie b y o u r rates.
B u t when you
remember that w e have a ten per cent rate i n Texas and a
12 per cent rate i n New xexico, y o u can see the utter impossibility,
a s I conceive it, o f largely jontrolling bor-
rowings b y mere rates.
Y o u get u p egainst a n economical
situation t h a t w e heve h a d s o n e d i f r i c u l t y w i t h .
had, e n d still have, s o n e aistressing conditions.
W
e have
W
e have
had liquidation f r o m ~111,000,000 d o w n to,on t h e llth o f
this month, ; 2 2 , 6 0 0 , 0 0 0 , i n c l u d i n g l o a n s o n G o v e r n m e n t
obligations, e n d m y prophecy i s that t h e y m a y g o t o below
‘~15,000,000.
However, I
started t o say that y o u are con-
tronted w i t h t h i s difficulty;
i f y o u make a
rate o f 7 , 8
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or 9 per cent, while you cannot apply control with that
rate, y e t y o u strangle your industries, u n d u l y a l a r m business a n d the public a n d produce confusion.
Therefore I
em inclined t o believe that while the rate i s important
it 1 s not solely controlling, and, u n d e r come conditions,
not e v e n chiefly controlling.
ir. Wills w a s o u t i n our country and, b y discretion,
inauced u s t o zstablish a rate o f seven p e r cent.
loans s t i l l c o n t i n u e d
liquidation w a s due,
t o i n c r e a s e f o r M i m e months,
as I
econcoive s n d belleve,
O u r
e n d our
n o t t o the
rate, because thore w a s still = large margin o f profit, b u t
to the vact that there w a s ultimately a n d inevitably a
sale o f goods a n d products o f the farm a n d range that
brought about large liquidation o f losns.
We have adopted a new policy within the year, which
had b e e n s d o p t e d t o s o n e e x t e n t b e f o r e ,
men with o u r member banks, b u t I
b u b w e haven't o n l y .
have personslily m e n i n
the highweys s n d by-ways i n many places i n the district,
and i n the press, w h o a r é repeating over a n d w e r again,
not o n l y t o our banks, b u t t o our poople, t h e true a n d
tried virtue o f the o l d homely things o f economy, industry
snd sobriety.
305
One o f the troubles about t h e Federal Reserve system,
snd i think t o some extent i n a small way i n our section
that I
have sinned that way, h a s
e e e
multiplying of
our holdings i n gold w e have multiplied the elinost Limitless
ability o f the system t o xurnish credit, 2 n d w e have t o
someextent misled the publie a n d have t o some extent encouraged t h e banks, s n d m y <fyvort has b e e n f o r more t h a n t w o
years
t o get t h e m t o understand t h e t s i m p l y because
we
heave a Federal reserve system, there i s still sone necessity f o r t h e e x e r c i s e o f c a u t i o n s n d conservatism,
i want t o make o n e statement about another matter a n d
then i n a minute I
will conelude,
o u r banks have lesrned
8 lesson, n o t all of them, perhaps, but most o f them, e n d
I believe that w e shall have i n our agricultural section,
where conditions are anything like fairly normel, 4 situation where thers will b e n o necessity for rediscounting a t
all. I
amsure thet i n all that section, except the por-
tions under great stress now, that our loans i n the future
Will b e fairly modest.
W e have certain seetions o f the
country where, a s i n Iowa, w e have a situation phere w e
have got t o make 4 decision a s t o how far w e may go.
i y
own policy i s that i n taking c a r e o f that great industry
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Federal Reserve Bank of St. Louis
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and o f that great seetion, t h e t w e should g o t o the very
limit o f reasonable sarety, beyond which,
o f course, I
think n o Federal reserve bank would b e justiried i n going.
Just where that twilight z o n e is, where i t begins a n d where
it ends, @
but I
c o w s é m a y b e 6 metter difricult:-of solution,
believe y o u will not have m u c h complsint o f any large
amount o f rediscounting i n the Federal reserve B a n k o f
Dalles, for many years. I
think thet the faithful have
learned their lesson, a n d when they have reauced, w i t h i n
@ reasonably short tine, t h e i r loans b y more t h a n 85,000,000,
leaving just a bare 922,000,000 with @ prospect o f 3:15,000,00D, i t does s e e m t o m e thet t h e lesson ought t o b e grave
enough a n d t h e condition sound enough t o g i v reasonable
promise f o r t h e future.
Vice Governor Platt:
w
e have o n e other topic, No. 4
on the program, w h i c h i s
What i s t h e most practicable method o f bringing about timely a n d competent consideration
or matters o f eredit policy b y 311 o f the
Federal Keserve Banks a n d effective action t o
obtain t h e results a i m e d at?
The discussion will b e l e d b y messrs. meDougal a n d
Curtiss,
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Governor icbougal:
T h e r e i s one thing w i t h respect
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to m y conment t h a t I
proval o f sll present
e m sure will meet w i t h t h e full apa n d will not csuse a n y aebate, a n d
that i s t h e i r brevity.
I understand that t h e Conference h a s n o w finished i t s
discussion
i n respect
t o t h e objeets
t o b e accomplished
by
the Federsl reserve credit policy, a l s o t h e relative importance o f the seversl faetors contributing t o ths seme, a n d
that a l l that i s lert n o w t o ur. Curtiss a n d myself,
i s to
mske sone recommendation a s t o the best means o f attaining
the object a i m e d a t , a n d i n c o n s i d e r i n g t h i s mstter,
i n
view of the experienees o f the Governors a n d the Chairmen,
end I
hope o f t h e B o a r d itself,
i n c o n n e c t i o n w i t h 4 2 con-
ference s u c h a g w e have b e e n holding here t h i s evening, I
sm l e d t o believe t h a t t h e b e s t m e t h o d
o f giving considera-
tion t o a l l o f these s u b j e c t s woulda b e t h r o u g h c o n f e r e n c e s
such a s we are holding here tonight.
It occurred t o me, however, that i t i s difficult a n d
expensive
t o have conferences
s o l a r g e 3 5 this, a n d c o n -
seguently m y reconnendation i s that consideration a t least
be given t o the matter o f appointing a committee o n the
part o f t h e Board, t h a t will b e representative o f the war-~
fous sections o f the country end b e representetive, o f
f
308
course,
O f the Board itself, w h i c h could meet a s often a s
conditions w o u l d s e e m t o make i t necessary,
t o receive
from seach o f the Federal Heserve vistriets reports i n re-
gard t o conditions current there, and t o receive from all
other available sources inrormation. relating t o all matters
Which might enter into t h e question o f credit policy.
That i s all I have t o say o n the subject, gentlemen.
hr. Curtiss: I
will cis cuss this matter i n two phases,
one of gensrel] conditions e n d the other o f ususual conditions.
I t seemsto n e thet @
conferenes s u c h a s this brings
us all more o r less into tone, a n d that w e should b e eble
to bring about more o r less o f a unizorm policy o n ordinary
conditions a s they arise i n each o f our cistricts. £
think that district matters, e s I have outlined i n my paper,
are the responsibility o f the locel bosrds o f dir-ctors.
I feel that there should be conmittees o f the opersting
officers a n d o t the chsirmen i n reference t o open market
operations,
T h o s e two coumittess should keep i n very
close touch with each other e n d with conditions.
There i s one subject which 1 did not refer t o i n my
paper, a n d thet i s the situation o f the system s s 3 whole.
I believe t h e t conrsrences should b e called w h e n possible,
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I reslize thet t h e y a r e expensive e n a that t h e y g e t t h e
orficers a w a y f r o m the dirrerent banks together, b u t I
feel
thet conferences o f this sort enable u s t o g o back and b e
prepared t o quickly s e e t h e signs o f ersdit w n a i t i o n s
which a f f e e t o u r o w n d i s t r i c t p o l i c y ,
system. I
3 s they affect t h e
believe that charts o f the sort thet ur, willer
has exhibited, s h o u l d b e i n each o f the bFecaeral reserve
banks,
s o that t h e banks c a n tollor t h e i r o w n local condi-
tions s s well ¢ s the conditions o i t h e system a s a whole.
I believe thet s u c h 2 committee a s Governor ucDougal
hes suggested would b e very nensficial, a n d b e more o r
less o f a n advisory caimittee t o the Board,
t o keep them
informed o f conditions a s they see them i n the fleld.
Governor mcbougal:
i
s m y intention,
and I
be-
lisve 1 t is understood b y the conference, thet such a
committee, i f formed, would ect only i n a n sdvisory capacity; t h e t t h e Board itself w i l l b e represented, a n d that
the direetions, recoiiie¢ndations, o r , s o t o peak, a
pice
ture o f the situation, which i s psssed o n by thet beekms
tes, g o t o all @
t h o s e present h e r e tonignt, a n d of course
be handed o n t o the boards o f directors o f t h e several
banks immeciately,
s o that t h e y might analyze i t i n accord-
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Federal Reserve Bank of St. Louis
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ance w i t h t h e r e a l s i t u a t i o n a s i t w e s p r e s e n t e d f r o m a
prosd viewpoint.
Vice Governor Platt;
I f nobody else cares t o speak
to this topic, s h a l l w e take u p t h e final topic o r thall
we adjourn t h e evening séssion?
mune Jays B e f o r e adjournment L e tesken, I would like
very niuch t o know i f i t would b e possible, a n d i f w e have
time tomorrow,
t o ask those w h o want t o Giscuss subgect
No. 3 , i f w e eannot have sone discussion @
ditions.
o p e n market con-
I t wss no& touched upon, practically,
i n ths
discussion today, but a s I conceive i t it is one af t h e
most importent elements i n the rederal reserve crecit
policy, e n d one which, i n view o f the gold movement that w e
have experienced during the past yesr and possible future
gold movements during t h e o m i n g year,
good déal o f light upon. I
w e ought t o get s
hope very much that w e may
find time enough t o hear something o n that subject f r o m
those a n o discussed topic No. 3 ,
Vice Governor Platt: G e n t l e m e n , I
will ennounce t h e
committee which w a s suthorized this morning, w i t h relation
to the matter o f considering some change i n the lew that
would make i t possible t o rediscount sight drefts with bills
311
ot lading.
T h e committee will b e Governors uOrss,
Fancher, Young, s e a y a n d wr, wartin.
(whereupon, s t 11 o'clock p. m., upon notion duly
Seconded, t h e Conference sdjourned until tomorrow,
iriday,
“ Qetober 13, ige2, a t ten o'clock 9, ni.)
te
O R
a
e
rrlaay, Ucotober 13, 1922,
10 o'clock a. m.
The Joint Conrerence reconvenes pursuant t o sajourne
ment o n Fridsy, October 13, 1922, a t 1 0 o'clock s . m
appearances a s indicated i n yesterday's proceedings.
Vice Governor Platt. G e n t l e m e n , w e had last night
a very interestinr discussion, a
discussion that really
came pretty close t o getting somewhere, a n d I think that out
of i t are going t o eone idess o f how t o operate t h e Federal
reserve banks i n the future, i f we ever have such g n expansion a s w e had before,
o r anyt expansion o f such dif-
ficulty, t h a t will enable t h e banks t o g o far toward
avoinding t h e serious situations: that resulted,
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Now, j u s t s s u e were closing w e were coming t o our
final question o n the program xhich i s
what does t h e present business e n d credit
situetion indicate w i t h reference t o the
prospective demand r o r credit a n d the n e e d
or advisability o f a n y sction a t the present t i n e b y Federal reserve banks w i t h respect t o matters o f credit a n d discount policy?
uf coursé t h e
.iscussion last night w a s n o t ecactly
directly relative t o that, b u t methods o f action, possible
action, w e r e pretty: w e l l covered, s n d t h e question n o w
is whether there i s a v v i s s b i l i t y o f a n y present action
or any present change i n policy.
Unrortunately s o n e tine a g o 1 mace a n engagement w h i c h
involves others besides nyseli, including 9 n sleven year
old niece o f nine, t o g o t o New York this norning o n t h e
eleven o'clock train,
s o that siter w e get t h e meeting
thoroughly opened I think I shall turn i t over t o wr. ulller o r mr. Haulin a n d r u n away.
it. day:
w a y 1 sugecest, ur. Shairmen, thet this prob-
lem b e e r s v e r y a i r e c t l y o n t h e y u e s t i o n o f w h a t w e a r s
siming at. s
res] yuestion i e can w e a o snything n o w
or i n the near future,
b y way o f raising t h e rates o r sell-
ing securities o r otherwise t o inzgluence t h e volume o f
credit.
w e have n o t yet cone t o any conclusion,
o r attempt-
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513
ed t o cole t o sny m n c l u s i o n 8 s t o what w e are aiming at,
eng having reached no concludion o n that i t is cirricult
to know from whet point o f view, except the personal point
or view, w e shall spproach this finsl juestion.
Vice Governor Platt:
Y o u have rererence t o lack o r
a.finite ccnelusion w i t h regard t o topic No. 1 ?
or. Jay:
w i t h respect t o the rirst topic.
Pe indller; I
would ssy let u s get the views 3 s t o
erecit concitions a n d indications o f possible increase a n d
prospective aéewand.
O i course back o f thet always Illes,
in the mina of the man who i s speaking, what he tz. inks i s
the objective,
that objective,
T h e n w e can have sone rormiulas t o resch
a n d w e c a n also discuss t h e metter ieferred
to seversi tlies yesterday, t o wit, the relation o f the
investment p o l i c y o f t h e b a n k s t o t h e c r e d i t situation,
Governor iworss:
u r . Chairman, I
d o not think there
is any aoubt b u t what there i s considerable movenient f o r
the increase o f business i n the muntry, w h i c h hes been held
back b y t h e strikes o f the coai people a n d t h e transports-
tion people, a n d 4 movement o f thst sort should always b e
ceérefully watched t o see how much there i s behind it.
A s
i say, i t was delseyed b y these st:ikes, a n d i t sppears t o
3514
mé thet there i s 6 good weal o r strength, r o r c e a n d lirt
tind sy 2%.
N e w England h a s been celsyed b y strikes, b u t
the rest o f t h e country h a s gone shead i n a wonderful way.
Just h o w f a r that movement i s going i s not clear t o me yet,
espécially a s the seasonal movement i s mixed u p with it;
but I
sometiues f o e l that o n e o f these b i g lifts, w h i c h
comés under business i n the United states eve:y f e w years,
is back o f this one, i n spite o f all t h e drags there a r e
on i t i n t h e w a y o f f o r e i g n c o n c i t i o n s a n d e v e r y t h i n g
of
thet sort.
my experience w i t h these movements h a s been that t h e y
are a n a c c u m u l a t i o n o f resources,
o f possibilities
o r doing
business, Gensands r o r goods, w h i c h have never b e e n measured
and cannot
b e measured,
a n d perhaps t h i s i s one o f those
movements, s n d there is, mixed u p with it, p r o b & l y more
or less o f a n inflationary inrlusnce.
of that influence.
T h e tariff i s sone
T h e r e h a s b e e n s n increase i n the
demand a n d t h e p r i c e o f wool, r o r instance, a
very a c t i v e
movement, a n d the tariif i s a n inrlstionsry inrluence.
rrobabl; restriction o f t h e movenent o f goods, through
transportation d i f r i m i l t i e s
inflationsry influence,
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a n d c o a l dirficulties,
i s snother
T h e s e influences, s o far, have
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S15
hed very little efrect, appsrently, i n the demand tor discounts made o n the #«ecderal reserve banks.
A
time,if y o u l o o k a t t h e c o m p a r a t i v e s t a t s i e n t s
t the same
o f t h e Keserve
“ystem o n October 11, 1922, e n d Uctober ll, 1921, t h e differences i n the total resources o f the system are n o t very
great.
F o r instance, i n ddscounts a year a o i t was
¢1453,0900,000 a n d now i t i s ,771,000,0C0.
hand w e have 428,000,000
wbO,000,000-— I
w n the other
i n securities a s against about
a m excluding t h e Pittmen A c t lsst y e a r e —
so that t h e totel difrerence i n your sarnings assets a s
of ly22 ageinet 1921, i s only about 43,000,000.
words,
I
n other
t h e r e d e r a l r e s e r v e b a n k s h a v e w o n e y i n the m a r k e t
or credit i n the market t o aluost t h e same amount.
I t is
not i n discounts, b u t a large part o r i t is i n securities.
Furthermore, I
notice t h s t t h e d i s c o u n t a n d b i l l o r rations
increased last week ~102,000,000, and that thst tendency
is reflected i n the Boston bank.
Vice Governor Platt:
v a s ' t thet aue to Governnent
operations?
Governor lorss: W e l l , therewas 446,000,000 increase
in circulsting notes, which would seem t o indicate that
s considerable p o r t i o n o f those rediscounts w e r e t a k e n i n
316
notes t o r business purposes.
A
L any rate w e hsve 3 move-
ment o n hand, a n d i f i t i s one o f those b i g mover.ents which
-come i n the United states periodically,
i t must t e watched
very carefully t o see whether there i s inilstion i n that
movement, s n d i f inflation i s i n thet movenent, t h e Giscount
bate,
i n m y opinion, ought t o b e rsised,
Of course w e will probably h a v e t o sonsider governuent
financing i n thst,
T h e Governnient i s just putting o u t a
bond s t 4-1/4 p e r cent, a n d probably s
considerable part
of its success i s due t o the fact that t h e dis m u n t ratein
the b i g uarkets i s a t rour p e r cent.
s t i l l t h e possibil-
ity that w e should increase o u r discount rate, probably
by t h e first o f vanuary,
o r i f not then, within s i x months
time, seems t o mie 4 very +:al possibility.
B u t i t does
not s c e m t o me thet t h e thing hes developed f a r enough a t
this tine t o say definitely whether w e shall d o thet o r not.
Governor Calkins:
i
t wight appeser, f r o m the course
of the argument last night,
i n which I
p a r t i c i md
e
t to a
small extent, t h a t t h e people o n the Pacific Coast d i a
not consicer t h e d i s m u n t r a t e o f sny inportance whstever.
Or course that i s not true.
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Vice Governor Flatt:
L t suppose this w i l l coue under
317
the c s u t i o n s r y s i g n e l i d e a t h e t s r , P e r r i n s x p o u n d e d ?
Governor Calkins:
m y own, rather sketchy v i e w is,
es I said to ur- Perrin this morning, w h e n he esked the
question, t h a t there i s nothing iimeciately i n sight t h a t
would indicate t h e necessity f o r flying t h e danger signal
by a d v a n c i n g t h e u i s c o u n t rate.
B u t m y rseling i s there
may be something i n sight i n the very near future. ‘ h a t
is about a s much s s I cen say, i f 1 usec a great meny more
words,
T h a t i s exactly a s 1 feel about i t st the present
tine,
T o i y mind, a s t o what v e shall do, i f that i s s
reaconable displsy o r intelligence,
i t a p p ars t o n e that
probably t h e r e s h o u l d b s a n o t h e r c o n t e r e n c e esrliscr t h e n
the usual tiie, o r the tine s e t this year, w h i c h would b e
well into 1925, ond thet i f there i s any incication o f récesesity w e should have a conrerence about the first o f the year,
or p e r h e v s e v e n b e f o r e that.
ae
R E P L I
which c a m e s i n c e 1
think { aid n o t show & compilation
have b s e n here, w i t h r e g a r d
t o t h e sane
Fraccisco banks, showing that they are largely incre sing
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their ctrength.
Vice Governor Platt:
I s there snything i n Cel itor nia,
in t h e r r u i t g r o w i n g business,
f o r instances,
o r elsewhere,
318
in thet district, comparable with what Governor uorss spoke
sbout o f t h e b o o m i n wool?
i
s thre
a n y evidence
o f in-
erease i n price?
Governor Calkins:
situation i n California.
u r . Perrin cescribed v e r y briefly t h e
T o g o into some detail,
to show that i t i s hard t o understand, I
i n order
will refer t o o n e
thing, T h e r e i s no question, o f course, about the low
prices a n d t h e depressed condition i n the production o f necessities, f o o d stuffs, b u t wine grepes, w h i c h before t h e days
of prohibition were sold a t seven a n d 4 helf dollars a
ton, have b e e n sold last year a n d this year @ s high a s .175
& ton o n the ground vhere grown.
T h e t i s not a
any significance, but i t is a matter o f interest,
matter o f
T h e
ract i s that a l l o f the things which m e y b e classed a s
luxuries, which are produced o n the Pacific Coast, s r e
selling a t extrevagant prices. I
exception,
do not think there issny
E v e n i f we coms down t o thst thing thet has
been derided s o much, t h e hunble prume, prunes a r e n o w
classed a s luxubles; t h e r é i s n o question about it, w h e n
& man hes t o pay 4 5 cents a
pound f o r prunes. I
remember
at the breskfast table, w h e b e there were were a number o f
Governors o f Federal reserve banks, some discussion about
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319
prunes came u p ond three orfour o f them spoke u p promptly
and s a i d t h e y coulda n o t s f r o r d t o s a t j r u n e s a n y hiore b e -
csuse the® cost t o o much,
Now, t h e prune price i n @lifernia i s # n unressonable
price.
I
t i s s u r p r i s i n g t h a t 4 + should c a y t h a t b e c a u s e
I grow prunes mypselz o n a small sesle; b u t 1 consider i t so.
{ d o not consider t h a t conditions
i n California,
which are
fsvorable and might indicate some revival, a r e indicative
of a n y t h i n g
o f the kinde-- w h a t t h e y m e a n i s very h a r d f o r
do not know w h y those thin.:s which I
me t o resilize. I
have described briefly should obtain. I
do not think
there i s any indication o n the Pacific Coest o f 8 marked
revival i n business.
Vice Governor Platt;
I s not that increase i n the
price o f luxubies o n e o f t h e syi:.toms o r unwholesone busi-
ness conditions thst often prevail i n tl.es o f budding
inflation?
ir, biller:
I t is. Extravagance a n d reckless liv-
ing very frequently g o with it.
w i t h regard t o this i n e
crease i n the price o f grapes, which goes Tar beyond snything that I
hsd heard, t w o years a g o i
think grapes were
selling i n California a t approximately 4 1 0 0 a ton.
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320
Governor Calkins:
Y e s ,
O r course m y exenmmle w a s
sn extreme one.
ur, Miller:
I t coesn't m a t t r m T h e point i s there i s
@ concentrated demand ror something that i s wanted, e n d
the people will p e y t h e price f o r it, which means that
they will have t o g without something else.
Vice Governor Platt: V e n t l e n e n , L i t will b e necessary
ror m e t o leave. 1
wish t o say that I
have conjoyed this
meeting v e r y much, a n d i f ur, miller will take t h e chair,
the inseting usy proceed.
(Viee Governor Platt ti: reupon retired from the Conferencé roon, )
ne. sLlilexs G o v e r n o r Strong, c 9 n w e hear f r o m your
district,
o r r a t h e r h s a r y o u r v i e w s s s t o formule.
Governor otrong:
T h e picture t h a t I
think stencs
out strongest i n m y mind i s sou.swhat a s you d s e r i b e d i t
yesterday, u r e siller.
#
6 898 8 Consicuerable sdvance
in prices o f goods generally, a n d probsbly e
more rspid
sdvence t h a n a t s n y t i n e s i n c e t h e C i v i l sar, s o m e i n c r e s s e
in production s n d incresse inbenk ercdits generally throughout the country, 8 n d increase i n the nonsy o u t a t Interest
gy the reserve banks s n d general inciciations o f more busi-
ei
ness activity,
a n d r i s i n g prices.
or i t i n New York.
I
n detail,
w
e s e e many indications
i n connection w i t h our
building, r o r instance, t h e contreet f o r steel i n our
building, w h i c h was l e t early t h i s year, w a s a t t h e rate
of,67.50 a ton erected, f o r 140,000 o r 145,000 tons o f steel.
That i s the lowest price t o r which a contiact o f that character h a s b e e n let, a n d t h e c o n t r a c t o r s t e l l m e t h a t t o d a y
it would b e impossible t o get that steel a t less t h a n 395,00
@ ton.
T h a t i s 4 very rapid sedvance,
we also s e é i n prospect sonsiderable further inporta-
tions o f gold.
k
we h a v e i n g u i r i e s
e have advice o f a
e s t o whether
shipment f r o m Greece;
w e will b u y #ustrian G o l d
crowns f r o n the Bank o f t h e Netherlands,
W
e know, w i t h
the 6¢xception o f s o n e s a l e s t h e t a r e m a d e
i n India f r o m
time t o time thet most o f the South African production i s
coming here, and undoubtedly tlh British Government will
heve t o continue t o make shipments i n connection with the
pay..ent o f interest onthsir debt.
s
o that m y feeling i s
we have g o t t o watch this movement a n d consider w h e n t h e
tine arrives that there are indications that w e are just
biduing u p prices o n each other and where there isn't a
real lezitimate denend t o increase a n y produaetion that i s
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S22
legitimate, e n d possibly t a k e steps t o make b a n k credit a
little more expensive.
After all, Dr. miller, t h e ideal policy ror the Federal
Reserve system, however i t may b e executed, would b e t o
aco.iplish that v e r y thing, t h a t is, t o prevent t h e introauction o f credit t h a t i s n o t really needed i n the market
to sustain the volume o f business t h a t i s then required
by t h e conditions o r the country,
o r possible conditions,
end i t i s a pretty Girrileult thing r o r u s t o do, because
we a r e n e w a t i t ,
n our operstion
Possibly t h e m o s dangerous e l e n e n t s i
mey b e those conducted under t h e open market
provisions o f section 14.
‘ h i l e I
think w e have g o t
to v a t c h t h e r a t e q u e s t i o n v e r y c l o s e l y a n d t o w a t c h t h o s e
developrients that inspire u s t o make a change i n our rate,
{£do not think t h e tine h a s y e t come t o make a n y changs,
as w e see i t i n New York,
expect, b u t I
I
t may come sooner t h a n w o
do think i n the meantine t h a t w e have got
to b e very careful,
i f w e have a policy,
t o see thet i t
is carefully executed a s t o operation under section 1 4 o f
the att.
ure Miller:
w o u l d you say, a s far a s you can look
ee
eshead. w e will s a y f o r s periad o f a
month o r six weeks,
thet y o u s e e n o o c c a s i o n o r G o i n g a n y t h i n g
i n thse msetter
of t h e d i s c o u n t r a t e i n N e w Y o r k ?
Governor Strong:
i
t i s pretty h a r d t o bind nyself
COWNae=
hire wlller: I
dado not mean that y o u siould make a
co:uitment,
Governor strong: I
Sity for a change. 4
do not sé6 any inumeciate necesrather reel a s Governor Calkins
Goes, t h e t possibly early n e x t year i t might b e desirable
for u s t o h a v e a
conrerence, soOucwust e s r l i e r
than w e have been i n the hebit o f neving it. &
i n the ysar
great deal
is going t o turn o n centinent j u s t n o w i n this country--=6 q u e s t i o n . h e t h e r centinient w i l l erise, auue t o political
end other developnents, thst will inspire people t o cpem-
late in buying things, snd stert a process of marking up
pricés
o n ¢ a c h other,
Governor Norris:
u r . Chairuen, I
haven't had oppor.
tunity o f consulting w i t h mr, austin o n this, 6 n a I do not
know whether h e would endorse t h e visws thet I
have o r not,
fr what I an going t o say i s not i n accord with what h e will
say, I
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will a s k h i m t o state h i s o w n views.
324
i think the great .ajority o f well informed busines s
people i n Philadelphia r e g a r d thepresent activity s s a rather
slight e n d tenporsry thing, t h a t i t s resection f r o m the extreme depression a n d hopelessness tiiat existed s i x months
ago; t h e t i t has been stinulated, a s has been statec, b y
the otitset i n the Tarirf Bill, o n d very grestly stinulated
by t h e t r e m e n d o u s e r i o r t t h a t h a s b e e n riade t o s u p p l y t h e
shortage i n buildings, a n d thet hes afrected the steel trade,
the cement trade, t h e brick a n d lumber trade, a l l building materisis, a n d h a s affected t h e labor market,
slso. I
o f course,
think that most people view t h e moverient rather
with suspicion a s t o Lts pernanence o r a s t o its going t o
any g r e a t extent;
t h e y v i e w i t a s a n upward s p u r t f r o m
the extreme l o w point, e n d thet a f t r the inmediate demands
are m e t a n d the natural s e a s o n a l activities o f the tines
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are over, business i s likely t o settle c o # n e n d that noney
rates will likely b e easier after t h e first o f the year,
I think that feeling i s strengthened b y t h e belief, w h i c h
I expres.ed t h e other evening w h e n w e were enjoying t h e
Secretary's hospitality e t the club, thet there
sre some things t h a t have n o t b e e n tsken csre o f i n this
period o f readjustment, t h a t have g o t t o b e tsken c a r e o f
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325
before w e sre ready t o start o u t o m a long-continued upward
cycle.
Sunming up, therefore, o u r feeling i s that the present
ectivity i s a
reaction f r a m cepression, s e a s o n a l ,
a n d due
to certain more o r less local causes, a n d that i t i s n o t
likely t o develop i n t o either a prolonged activity i n businéss o r a n advance i n prices,
interest rates.
W
o r t o permanently sdvance
e feel, therefore, t h e t the situation
is one which does n o t call f o r anything more t h e n «watchful
waiting.
Governor Bailey:
T h e conaition i n the l O t h Distriet,
Suuésd up, i s something like this.
O u r people cannot e n d
will no& b e made free buyers tntil conditions h a v e reached
8 point where t h e y a r e more fevorable t o the farmers.
At t h e present t i n e o u r crop movenent i s slow o n account
or the shortage o f cars. I
cannot h e l p b u t think that i s
a blessing i n disguise, e n d 1 believe, with the restricted
speculative restures i n the grain market, ‘that i f w e had
s free movement w e would break t h e wheat merket e v e n more
then i t i s now, because there i s nothing t o sustain i t i n
5 speculative way, a n d wheat would bresk from three t o five
to t e n cents, w h e r e i t used t o break only o n e t o two cents
526
& bushel. I
think that illust: ates o u r condition there,
vur people a r e not free buyers.
T h e r e h a s b e e n essy credit
in the Tenth District, a n d I think w e are going t o b e able
to t e k e c a r e o f t h s s i t u a t i o n i n g o o d shape,
are not ciscouraged;
t h e y a r e hope?rul.
O u r people
T h e benks a r e
in much better condition t h e n they vere a year 6 g .
W e
have some hard places, where s o m e fellows h a v e got t o b e
carried o v e r a n o t h e r year,
failures
tion, I
a & 4&4 result o f p a r t i a l c r o p
i n c e r t s i n districts.
B u t as 8
gensral p r o p o s i -
think business conditions out there a r e wholesome,
i think this boom has not hit our ststes, s o far s s increase i n business anda better prices, a n d those things that
are fundamental i n the Tenth wistrict are concerned.
I think t h e situation i s such t h a t w e d o not n e e d a n y
change i n the rate, because i t would not afiect u s much
out there now.
O u r rate i s s o mich higher thst o n e p r
cent put o n w o u l d n o t sfrect t h e borrowing o f money i n
the Tenth Listrict t o any meterial degree,
What I think is thst we should do something--- I do not
know what i t is--- t o get t h e prices o f t h e proaucts o f
these great plains u p relatively higher i n compsrison w i t h
whet t h e y a r e i n other pleces.
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Federal Reserve Bank of St. Louis
I f that i s done w e wouldébe
B27
all right o u t there, because w e have got the heart.
Governor seay:
b r , willer,
i t i s true that movements
in this country a r e s o large that t h e y orten take u s b y
surprise and they get: well uncerway before w e realize it.
I should b e inclined t o look upon t h e matter 3 s more séasonal
then otherwise.
T h e r e a r e sone things t o which more sig-
nificance should b e attsched, a n d it may b e thst the most
significant o f them i s the increase i n the price o f labor
here, there and elsewhere, most notable i n the Steel Corporstion. T h o s e things are indicative o f sone movemont 6vi-
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Federal Reserve Bank of St. Louis
dently.
t o u r d i s t r i c t a n d possibly,
With r e s p e c t o
4 8 far a s
we c a n l o o k i n t o i t , t h e G i s t r i c t s {uasaeciately s u r r o u n d i n g
us, w e are inclined t o think that t h e present movement i s
going t o result i n liquic ation.
I t will probably balance
the movement i n other parts o f t h e country, t h e manufractur-
ing parts o f the country.
W h e n I say “Liquidation” I
mean n o t o n l y l i g u i c a t i o n w i t h r e s p e c t
t o borrowing f r o m reserv
banks, which i s @ small proportion, b u t 1 iiean liquidation
of obligetions
proportion.
t o menber banks, w h i c h i s a
much larger
A s well a s w e can size u p t h e situation, I
venture t o say thet i t needs watchful attention, b u t w e d o
228
not believe i t i s more t h a n seasonal,
s o far a s human
jusgment c a n s a y concerning t h e <ituation.
W
e should n o t
be inclined t o s a y that i t calls i @ a n y action o n the part
and
of our bank,/if I may presune t o co still further than
that, r o r n o action o n t h e part o t the Reserve oystem.
Governor Young:
is a n y e v i d e n c e
u r . Chairmen, I
o f speculstion
do not think there
i n t h e northwest.
O u r situa-
tion i s n o t like t h e undseriying situation that has been
explained t o you b y Governor Bailey. I
do not think,
if
things continue 3 s they a r e a t t h e present time, t h a t there
will b e any additional demands o n the Federal Reserve B a n k
of minneapolis.
I
n fact, e v e n though t h e vrice o f wheat
is a n u n s a t i s r a c t o r y p r i c e t o t h e farmer,
a n unprofitable
price, t h e liquidation i n our district w i l l continue, b e cause t h e liquidation i n the member banks o r i n the reserve
bank,
i s produced through t h e sale o f goods, regardless o f
whether they a r e sold a t a profit o r not.
I t i s quite
true thst t h e farmer ends t h e year without profit, e n d that
is 5s dangerous situation, because i f h e has many more years
of that k i n d h e i s going t o b e i n a very b a d position a n d
he i s not going t o produce eontinuously a t a loss.
tarmer,’
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Federal Reserve Bank of St. Louis
gensrelly,
i n the northwest,
T h e
i s holding h i s wheat
B29
in storage, b u t i t will niove t o the market gradually.
There m a y be, a s e e
n o coubt is, a
little revival
in w e n u r a c t u r i n g l i n e s , m a n u f a c t u r e d p r o d u c t s ,
which are
selling a t s n increased cost, but just where are they going
to sell those? T h e y cannot sell those products i n the
northwest.
T h e rarmer has nothing «vith which t o b u y them,
They cannot sell them i n Kansss City, they cannot sell them
in Dallas, s a n d t h e y c a n n o t s e l l t h e m i n a l a r g e p a r t o f
the T.elfth bistrict, Idaho and wyOiming, s o 4 think that
the situation will teke care o f itself because o f the lack
of buying power.
I d o n o t think there i s any occasion
ior the Fed-ral Reserve B a n k o f minneapolis t o chenge i t s
rate undsr present conditions. N e v e r t h e l e s s , t h e y
may
be able t o sell i n other districts t o such a n extent that
there i s Inflation.
T h e more credit that i s used t h e more
Federal reserve n o t : sare put out, a n d when that heppens
it will b e rezlect+d i n the price o f money. I
how i t could b e otherwi se.
d@ n o t s e e
I t mey b e reflected first i n
Boston, a n d later i n New York, e n d they m a y have t o raise
their rates t o the commercial banks, b u t when they
d o the
Twin C i t y b a n k s
i n o u r d i s t r i c t t a k e adawantage o f t h a t r a i s e
e
in thelr rates snd when the rates i n the Twin Cities get
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Federal Reserve Bank of St. Louis
450
to a place where they a r e above o u r discount rates, I
think
4t i s t i m e r o r u s t o i n e r e e s e o u r redis count r a t e f o r o u r
own protection i n our o w n d s trict. I
controls this whole thing. I
think that t h e rate
think the signs will e¢ome
slong i f the reserves o f the Federal reserve system a r e used,
right i n our o w n local market i n i.innespolis, n o t t h e aver~
age rate that t h e y receive o n 911 thelr loans, b u t t h e rate
thet t h e y m e y receive u p o n their surplus losns--- I
think
even i f the price o f wheat does not increase that i n 411
probability t h e advances b y the Fed-ral Reserve B a n k o f
winneapolis t o i t s member banks i n our district will drop
5st least fifty p e r cent between n o w a n d march 15th.
O n l y
$12,000,000 o f sdvances t o member benks means i n our insti-~
tution that w e must g o into the open market f o r bankers'
ecceptances, Government securities,
o r what not, o r i t
must e a t into i t s surplus t o cover i t s expensss. b u t i t will
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Federal Reserve Bank of St. Louis
not d i s c o n t i n u e
t o i t s m e m b e r s t h e s e c o u r t e s y services.
Governor dellborn; I
ness improvement
is a revivel. I
think there i s a possible busi-
i n our district. I
would n o t s a y there
think i t i s d u e l a r g e l y t o t h e b u i l d i n g
operations t h a t a r e going o n i n the cities.
O u r cement
factories a r e running s t full capacity, t h e cotton mills,
331
a good many o f them, a r e runing c a y a n d night, a n d o u r
iron works sre all very busy, es,.eclally iron piping.
city I
used t o l i v e i n i n Alsbama
i s very p r o . p e r c u s o w i n g
to the menuracture o f iron pipe, soil pipe. I
they p r o d u c e m o r e t h e n a n y o n e l o c a l i t y
least that i s what they clein.
The
believe
i n the s o r l d
A t
B u t thet i s due t o the build-
ing o p e r a t i o n s g o i n g o n t h r o u g h o u t t h e country. I
see n o
evidence a t a l l o f inflation o r ex,ansion, because losns
are going down.
ur’ Miller:
born?
W h a t d o y o u meen b y that, Governor e l l -
w h a t loans a r e going down?
Governor «ellborn: I
nean t h e loans i n our bank a r e
going down,
iar millers
Y o u mean Federsl reserve b a n k loans a r e
going down?
Governor wellborn: Y e s .
ure falller:
H o w ere the nember bank loans?
Governor wellborn:
T h e y a r e going d o w n too. A
good
many o f our city banks are lending money i n wall Street
at the present time, A
good many o f our country bsnks
hsve idle funds and frequently they ssk us what t o do with
them e n d h o w t o make investients.
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Federal Reserve Bank of St. Louis
S
o far as w e can ses
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Federal Reserve Bank of St. Louis
352
I think t h e niember banks c a n take care, o u t o f their o w n
resources,
o f t h e business t h a t t h e y w i l l h a v e t o t a k e c a r e
of, a n d there will b e n o dG niands made u p o n t h e Federal r e e
serve banks r o r some time,
Dr. willer:
s o far a s I can see,
B e f o r e y o u sit d o w n 1 would like t o ask
S question that relates t o the same remark, made,by I
two o r three others w h o have spoken.
building
think
h a v e y o u a n y idea
how this extragx dinary/movement that has been under way for
the lest year i s being financed?
Governor #ellborn:; I
have watched i t very closely
in atlenta, Birmingham end New urleans, e n d 4 think there
will b e s
considzrable l e t - u p i n t h e b u i l d i n g p r o p o s i t i o n
in the coming year.
a s i t i s n o w w e have n o unemployment
in our «istrict, b u t I
apprehend that building operations
will cease t o quite a n extent bécsuse t h e y will catch u p t o
whet they need, a n d when that i s accanmplished I
apprehend
thet there will b e dull times s n d sou.e unemployment.
ur* willer:
soe information,
m y question was directed toward getting
o r i n lieu o f thet s o m e sxpressions a s
to whether o r not thisgreat building program o f the last
year i s being financed largely o r mainly b y borrowed n o n e ,
and whsther t h e caumereisl banks, so-called, h a v e partici-
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Federal Reserve Bank of St. Louis
333
pated i n the extension o f acconmecitions r o r building purposes?
think I
Governor «ellborn: I
couse I
can snswer that be-
have kept i n pretty close t o u c h with it.
T h e funds
tor t h e building operations a r e obtained t r o m outside
LOurces. I
do not think o u r co;merc ial banks o r our local
trust colipenies have b e e n participating, b u t that t h e monsy
hes been turnished b y large mortgage companies i n the ast.
Then w e have several wortgage coupanies there that conduct
building o p e r a t i o n s a n d s e l l securities,
Company
i n N e w York,
l i k e Strauss &
T h e y a r e scattered allover t h e
United States, s i x and ao half 6nd seven snd a hslf per cent
mortgeges,
s o that w e have h a d n o denand u p o n t h e banks,
The banks won't handle that kind of business, a n d they
are v e r y s h y o f i n v e s t u e n t s
o f t h e t nature.
O u r banks have
gone through eterrible ordeal and our benkers are very
cautious a n d are lending their money o n local psper and
Government securities.
ure Curtiss: I
would like t o ask whether savings
deposits h a v o shown a n y material increase.
Governor wellborn;:
q u i t e a n increases, yes.
I t is
remarkable h o w t h e savings deposits have increased i n the
(334
cities i m our district.
T h e national banks have o n l y
peid three s n d 3 hali p e r cent f o r savings i n Atlenta, a n d
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Federal Reserve Bank of St. Louis
notwithstanding thet v e r y l o w rate their ceposits h a v e increased enoruously.
S o u e o f t h e state banks,
m a y o
of
our system, p a y rour p e r cent, b u t their deposits d o n o t
seem t o increase s s rast a s those o f the national banks.
ure Curtiss:
I s there a n y eviasnee o f that money g o -
ing into these building opsretions?
Governor wellborn:
N o ; I
do not think so. T h a t
money i s used alnost entirely f o r cowmerctal trensactions,
the money i n the savings departuents o f t h e conmerctal
benks.
i
e have a very f e w exclusive savings banks l i k e
they have i n the East.
Our c o u n t r y i s i n 4
véry p r o s p e r o u s condition.
T I do
not want t o lead y o u t o think that t h e farmers a r e very
prosperous,
o r doing well, because t h e y a r e not.
T h e y
heve a pretty f a i r price f o r cotton, and, where t h e y c a n
proguce i t i n certain parts o f the district, they will
probably make a
little rioney;
b u t t h e cost o f production
oi cotton i s s o much grzater n o w than i t used t o b e that
there i s not very much margin o r prorit.
T h e only w a y
in the world that they c a n produce cotton a t all is b y the
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Federal Reserve Bank of St. Louis
335
axclication o f the ealeium arsenioe: method, e n d that i s very
expensive opsration.
I
t i s going t o require l a r g e expen-
citures a n d m e n w h o a r e a b l e t o s o r r o w t h e m o n e y t o r i n s n c e
the operation will be able t o édpserate the farms, but the
smell farmer will have t o g o out o f businesse-- what w e
céll the smell white farmer, with two or three acres, T h a t
is also true of the negro tenants,
T h e negroes are leev-
ing n o w i n trainloads because n o one will take t h e risk o f
tinancing t h e m o r supporting t h e m while they e r e waking
& Crop.
ure Miller: ushere do the nig.ers go?
Governor weilborn: I
think they a r e going t o the
Pittsburgh region where they can get good psy ror their
Gaily labor.
uy, Milier:
I s that movement t h a t i s i n evica-nce a
very i m p o r t a n t s h i f t ?
Governor «é6llborn: ‘ e l l , i t i s quite continuous.
It is not conspicuous, b u t I heard coming u p o n the train
the o t h e r d a y t h e t w h o l e c a r l o s d s w e r e p a s s i n g t h r o u g h
North Garolina g o i n g east.
ur. martin:
I n pistrict No. 8
this y e a r h a s n o t b e e n u p t o normal.
the seasonal demand
B
y that I
mean i t
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Federal Reserve Bank of St. Louis
256
is usual thet t h e demand starts about April 15th, t h e first
demand oceurs about then, a n d then i t lets u p 9 little b i t
until i n June. w h e n t h s demand comiences a g e i n a n d there
is a steady increase u p until about Uctober 15th. i e c e n t l y
it has b e é n running into November.
T h i s year t h e unusuel
thing about i t i s that while t h a t seasonal cenisnd has been
sppsrent i t has n o t been i n anything like whet w e might
call 4a normal volume.
Now, i n our district r i g n t a
t the present t i m e t h e
unusual t h i n g i s t h e t h i n g t h a t m a k e s u s k e e p o u r e y e s
open.
I
t does n o t seem thet there i s any particular rea-
s0n i n the immediate futture, b e s e d o n conaitions i n the
district, that would requirea chenge i n our rate. T h e r e
is a rather interesting thing i n some o f the cotton sections
that m a y account a
little b i t l o r t h e less demand for monsy.
They a r e waking a crop i n Arken:ess s n d through t h e velta,
so I
a m told, chsaper t h a n they v e
b e e n able t o d o i t
for a mumber o f years, chiefly a u s t o the dact thet t h e y
sre n o t hiring s o many laborers, e n d slso because t h e y e r e
getting away, s o I
a n told, f r o m the o l d formule o f a mule,
a n i g e r a n d ten acres, a n d a r e really n o t attempting t o
work ever seven acres with a wule a n d a nigger, b u t t h e re-
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Federal Reserve Bank of St. Louis
537
sult i s thet they a r e getting much better results o u t o f
the weven scres t h e n they used t o get o u t o f the t e n ecres.
It seems unquestionably true that the liquidation which
started i n the previous year g o t t o a point where there
Was a n accuiulation o f cash i n the nands o f the manuiscturer
or fsrmer,
a n d i n making t h i s year's crop, d u s perhaps
to
the lower cost, h e hss n o t h a d t o borrow a s much ioney a 6
usual.
I t is a time,we feel,when w e should watch the situa-
tion very carefully, b u t w e really d o not anticipate, f m m
conditions within t h e district, anything thet would make
us change our rate.
I t would b e 6 country-wids influence
rather t h e n a district inrluence that would cause that.
tire Miller: C h i c a g o i s the last district t o be heard
from end t h e one t o make t h e pronouncement.
Governor ievougal: I
state that t h e conditions
am very glad t o be able t o
i n the Chicago bistriet, general-
ly spe-king, a r e very satis factory.
T h e benks are i n a
strong position, a n d that, o f course,
rederal Keserve Bank, A
i s true with t h e
canvass o f t h e situation made
seversl wesks a g o uisclosed a protty genersl expectation
of 6 very material incr:ase i n the demand r o r credit, a n d
thet espparently i s due i n part, vecsuse o f the customary
338
seesonal demand;
b u t I
think i t i s d u e a l s o t o a
considéersble
extent becsuse o f t h e expectancy t h e t i f improvement i n
transportation recilities a n d fuel will take plece t h e
general business sctivity w i l l g o yorwerd.
< = everal weeks
have elapsed s n d those «xpectations h a v e b e e n realizea t o
sone extent, i
think,but n o t t o the point t h a t h a d been
looked f o r a t a n y rats.
j e t s v e r aacditionsl credit h a s
been put i n t o u s e has n o t b e e n noterially reflected i n the
demand o n the reserve benk, except thet portion o f t h e credit
istricts,
which comes fromsessonel denand f r o m intereior
ror cattle f e e d i n g purposes a n d other ssasonsl regqui renents;
t h a t h e s n o t b e e n unusually large, b u t I
agsecsrtain-
ed just before I left thet the lerger banks were having
considerable demand f r o m thelr country c o r r e oncdents,
slthough t h e amount involved w o s n o t unusual;
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Federal Reserve Bank of St. Louis
i n fact,
I think i t is rether below normsel.
it seens t o m e thst there e r e unuistskable signs that
we may b e entering i n t o e period o f what i s called inflation, b u t I
believe that o u r policy there should b e end
Will b e t o respond liberally and cheerfully t o the demands
ror credit z o r legitimate purposes, u n t i l t h e situation
reaches a
stage w h e n i t becoues a t least more scute, a n d
359
then Ithink w e should sdvance t h e rediscount r a t e wit hout
any hesitancy, I
think t h e r a t e a t t h e pre.ent t i m e i s
about where i t should be. T h i s certainly i s not a tine
for any reduction i n the rate.
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Federal Reserve Bank of St. Louis
a n y changes should b e up-
werd.
Governor morss:
u r . Chéeirnan, m a y I
sped a
few woras
in rebuttal, s o to speak, considering that I wes ths first
one t o speak?
ut, w i lLers Certsinly.
Governor worss: T a k i n g these statewents that have
been made, o r most o f them, i t would seem t o me thst people
pelieve that this movement i s n o 9 5 grealt movement, b u t i s
one o f only mod-rate prosperity.
N o w , I
what the verious districts have seid,
have litened t o
t h e other night
et the dinner, e n d today, snd, beginning with California,
we d o not hear anything but signs o f prosperity f r o m t h e
neCalivornia diztrict, except i n the territory unere t h e
cessities a r e raised,
s o t o spesk;
y o u g o g o w n t o Texas,
to Yallas, sndeverything i s liquiceting, small borrowings
snd good prices f o r cotton, a n d eoncitions a r e senerally
good, except i n one o r t o localities where they a r e heve
ing 6 hard tine because o f t h e drought, w h i c h i s not unusual;
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Federal Reserve Bank of St. Louis
40
I mean t o say that there g r e sone spots like that.
s h e n
you cowe t o Atlanta, t h e r e i s prosperity i n steel, g o o d
prices g o r cotton, g o o d prices f o r simost everything t h e y
heve t o ssil; w h e n y o u gst into st. Louis t h e cotton crop
is made cheaper t h a n e e r before, l e s s demand o n the bank
forcredit a n d liquidation, perhe.c,
o f whet oarecit thsy
heve. C o i i i n g t o nickwond, t h e y heve a
tobacco, a
splendid price
good price t o r Sates, t h e y s r e liguidating
there i s guall denand i o r loans.
Now, w h e n y o u c o n e t o t h e e n u l a c t u r i n g d i s t r i c t s ,
when y o u c o n e t o Cleveland, t h e r e i s 4
perfsetly i m m e n s e
demand f o r automobiles a n a o t h e r t h i n g s t h a t t h e y have.
shen y o u coue t o Chicago, c o r n i s t h e niost velusble crop,
or one o f t h e most valueble crops that c a n b e raised, b e sause i t h a s been i e d t o the hogs a n d sold e t a good prorit.
Now, w h e n you come t o uinnespolis y o u have 4 hard
story
t
T h e price o r wheat h s s b e e n s o l o w that t h e y a r sé
although
oe
getting 6 oprofit o n t hn e i r crop ¢pperently,
they havs rsised 9 large
e
n
y o u cons t o 4+ansas
City, another large wheat growing section,
i n s o fer a s
thewheat i s concerned t h e y a r e not doing well; b u t i t séens
to m e i g you g o around t h e circle y o u find good conditions,
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Federal Reserve Bank of St. Louis
41
good prices f o r crops a n d everything b u t wheat, o r wheat
end small grains.
Gistricts ‘
T h a t efiects particulsrly t h o s e t w o
w h i c h - are, y o u might sey, o n e crop cistricts.
Now, w i t h these signs o f prosperity, w h e r e does a l l
the m o n e y o m e f r o m t o p a y f o r t h i s b u l l c i n g boom;
were
does all the money come rrom ror these subscriotions f o r
securities that have been put o u t continuously, y o u iulght
say d s y after day, resources tepped thst t h e bond m e n m a y
they c a n n o t e s t i n a t e
s t s l l because t h e y e r e mainly n e w
resources p u t u p b y snall investors.
N o w , i r those a r e
not signs o f prosperity f o r almost e v e r y b o d y except t h e
wheat g r o w e r s , I
d o not k n o w w h a t s i g n s o f p r o s p e r i t y a r e
Wille i t £ s most unrortunate,
s n d w e are very sorry f o r
the wheat growers being i n this condition, i s it probable
thet the condition o f the wheat growers will hold back the
whole country f r o m 3 considerable boom?
Now, w h e n they attempted t o liqui a t e labor i t was a n
utter fesilure, a n d why?
labor.
B e c a u s e there w a s a aemand f o r
N o w , i t seeaus t o m e that i s 6 pretty prosperous
condition, a n d the danger o f inflation i s probsbly grave
pecausé
w e are shut i n from t h e rest o f t h e world w i t h re-
and
gard to movements of gold/by a considerable terirf, but
542
thet w
e are fundamentally pros,erous i t ssems t o m e t o
very plain,
Governor Strong: I
think that i s one point t h a t
not been réferred to, and i t hes s o e bearing o n this.
know these cycles that w o have b e e n talking about h a v e
:ectional course i n this country, w h i c h has been demonstrated
when they have occurred before.
after a
period o f liquidation,
then b y a higher bond market.
I t i s generally marked,
b y very cheap money, a n d
w u r i n g one period w e sav
Liberty bonds g o u p from 8 0 t o par anc over.
% e have s e e n
that same tendency i n high grade bonds, a n d then i n stocks;
we h a v e s e é n a n e m o r m o u i n e r e é s e
i n the speculative a c -
count i n New York, a n d then w e begin t o see conmsodity prices
afrected,
T h e y have b e e n afrected pretty largely slready;
we s e e building operations a n d land speculation s n d then
comes along t h e fly-by-night get-rich-quick fellow, w i t h
his stock offerings, a n d s o On. T h o s e movements i n this
country ..omginate 9 8 a rule along t h e atlantic seaboard
&n
and move west, o n d t h e reverse
e e e
g e n e r a l has the
same characteristics,
I recall i n 1907 seeing telegrans f r o m t h e sest saying,
“What i s the matter w i t h y o u rellows i n New York?
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Federal Reserve Bank of St. Louis
Y o u are
343
all tied up, but w e are all right out here.” A
nonth o r
two later they were tied u p a s tight @ s we were. I
have a
feeling that this building boom, which really started i n
New York a n d thet region, a n d a l l the other developnients
thst follow a
westward.
period o f liquidation,
T h e y glways d o it.
i s gradually moving
A n d the Gepression that
Governor Bailey mentions a n d which i s wentioned b y others
in the Federal reserve b a n k districts i n the middle west ,
is going t o respond t o that movement i n time.
H i g h e r wages
are going t o increase t h e buying power i n the zast a n d are
going t o causs more consumption.
and h a d the opportunity, I
I f I wes s speculator
think t h e very thing thet I
would speculate i n now would b e wheat. I
think this nove-
ment will reach the .est, and those are the things w e have
got t o watch,
W e feel first t h e effect o r this recovery
in New York; t h s e financial markets always r e e l i t rirst,
and they anticipets it,
mr” Miller:
I s there anyone else? I
will ask y o
gentlenen t o be brief, s o that w e will determine whether o r
not t h e r e i s a n y a c t i o n t h a t m a y b e n e c e s s a r y o r i n d i c a t e d
Within t h e n e x t t w o o r t h r e e m o n t h s
count r a t e .
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i n t h e mwstter o f dis-
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544
Lr, mamseys
i
n our district w e have o n the whole a
profitabie c o t t o n erop, o u r chief production.
I t i s not
much a s measured b y past years, b u t fairly considerable a n d
very economically produced,
s o economically produced, i n -
aeed, t h a t i n sections where t h s yield i s small t h e dirverence between t h e cost o f production sand the outcoue i s a
fairly considersble amount.
Except i n portions o f Oklahona, e n d i n some o r the R e d
River counrties, where the small banks are still i n a bad
way, o u r section,
meke practically a
i n the agricultural portions o f it, w i l l
complete Liguidation.
in the Houston vistrict,
T h a t i s eviuent
t h s o u t h e r n tier o f counties,
by the fact that their rediscounts a r e belo: a
Latha;
million dol-
o t edt a c a i e k t h e gact that t h e reserve deposits
of t h o s e b e n k s a r e s o m e t h i n g m o r e t h a n e l e v e n a n d s
half
million.
We will reduce, 1
think, o u r entire rediscount t o the
sum o f approximately 115,000,000, notwithstanding tke f a c t
that w e will have practically n o liquidation i n our Livestock :sction.
O
n t h e w h o l e w e have a
c o n d i t i o n o f canrort,
if not prosperity, except i n our live stock country which
8s w e all know i s i n a most distressing a m i critical condi-
545
tion. B v e r y t h i n g i s intrinsically sound «ith u s and I
think that i n the near ruture there will b e Little likdi- '
hood o f a n y o c c a s i o n f o r a n i n c r s a s e
o f rate.
m
y o w n judg-
ment i s that a t n o time n o w conceivable i s i t probable that
it will b e cesirable t o make the rate lowerthen i t is now.
I have a
feeling that w e have turned t h e corner definit ely
and that with sound management a n d safecontrol w e shall not
spproach a condition o f undus inflation.
It I
may b e p e r m i t t e d
I stated last night, i
t o emphesize a n o t h e r t h i n g w h i c h
would like t o say that I have talked
with bankers all over the country and there i s a universal
disposition
minimum.
t o limit r e d i s c o u n t s w i t h u s t o t h e i n d d s p e n s i b l e
O f course,
i n our country, where seasonal opera-
tiors f o r sowing, p l a n t i n g a n d h a r v e s t i n g c r o p e r e q u i r e
some money from the small banks, w e will have t o intelligently aid the banks for purposes o f production.
been o u r c i s p o s i t i o n
I t has always
t o d o thet e n d i t i s necesssry t o d o
that i f the country i s t o progress. I
a m hoping e n d be-
lieving, with t h e thorough understanding between ourselves
and t h e Comptroller,
s n d o f course t h e coopsration
o f the
Chief Bank Examiner, that w e might b e able t o get our
cattle country through, a n d i f w e d o i t without a
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collapse
546
in that grest a r e a o f not i.any benks, L
feel that o u r situa-
tion i s greatly liiproved.snd that o n e o f our problems h s s
been grestly lessened.
wr, miller:
w o e s anyones else want t o contribute
enything t o the discussion a t this point? I
should s a y i t
is a fair resding o f the mind o f t h e conference, w i t h respect t o future course o f t h e money merket, a n d our relations t o it, thet o u r attituae should b s one o f satching
and waiting, w i t h perhaps considerably more ap; rehension
being felt a s t o what might aevelop i n the tuo eastern
Gistricts. i
think i t would b e well, therefore,
t o cet a
little more light upon the eastern situation a n d i n New
York City. G o v e r n o r morss h e s given u s a n anpliricd verSicn, i n his separate statenient,
a s t o that h e fears m a y
develop, a n d * would like t o e s k Governor strong, w h o has
rererred t o the stock loan account i n New York, i f he has
any i d e a a s t o t h e a p u r o x i m a t e sniount o f t h e c o n t r i b u t i o n s
by u t e o f - t o u n bsnks t o the volume a @ c a l l loans? H a v e
you a n y further evicence e s t o whether o r rot i t has changed
in recent months o r recent weeks, Governor Strong?
Governor Strong:
l u r i n g t h e peak,
the peak i n the loan a c @ u n t
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Federal Reserve Bank of St. Louis
o r just prior t o
o n the stock exciange i n 1919,
O47
néarly o n e halr o f the stock exchange loans were those made
by out o f town institutions, I
might have been two-fifths.
say néarly o n e halr;
i t
A t the present time the total
contributed b y out o f town lenders i n i n the neighborhood
of one-third, possibly a
little under, s n d there has been
&@recent tendency o n the psrt o f the o u t o f town banks t o
reduce a
little bit.
sibly c a u s i n g a
T h e r e fave s e e n withdrawals, p o s -
somewhat h i g h e r l e v e l o f r a t e s
o n the stock
exchenge--- i t i s a little difficult t o attribute i t t o one
or another causé--- but i t certainly i s a fact that some
money h a s been withdrawn b y t h e out o f town banks.
Governor Norris: b o e s n ' t thet always oceur i n the
fall o f the year?
Governor strong:
Y e s ; i t i s very ilkely to.
I t really
means thet t h e banks i n t h e interior thet h a v e sent their
funds t o New York f o r loan o n the stock exchange e n d with
& four a n d a half p e r cent d i s m u n t l e v e l t h e interior banks
are finding i t more proritable t o withuraw their New York
belances
t h e n t o borroy f r o m t h e Federal reserve banks.
That i s one o f the reasons, I
has 4
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Federal Reserve Bank of St. Louis
think, t h a t t h e rate
very powerful in¥luence u p o n those banks.
We hove watched a good msny factors i n New York.
r o r
348
instance, w e got reports rron, I think, 6 4 different retail stores, showing t h e amount o f their turiuover, t h e
smount o f thelr stock e n d their turnover s s expressed i n
values e n d quantities, a n d there i s n o mistsking t h e fact
that sales s r e increasing, s n d thet t h e curve o f ssles i n
GcOllers shors a
more rapid incresse t h e n t h e increase i n
stock, w h i c h would come later i n the year anyway.
O n our
buiiding w e have m e n e t work a t certain trades who, i f i t
were no& a
permanent job, t o r u n f o r a long psriod d
tine,
could g e t gremiums o n other job: t o the extent o f »~2 a day
and ~ 3 e day beyond what w e sre paying then.
T h e t is
pecislly t r u e o f the plasterers, painters, electrical work-
ers and rinishing trades.
T h e contract f o r stsel, which
I reterrad to, w a s made a t a l o w ti.ure u p o n t h e assumption
by the contractor, t h e american Sridge Company, that they
would b e successful i n negotiations t h e n pending t o reduce
their labor costs r r o u c a y t o day.
a s o
matterf
o fact
it hag increased, a n d they probably will wstain @ considerable loss o n that contract, b u t t h e evidence,
i t seems t o
me, i s pretty complete that there i s n o surplus o @ labor i n
our séction a t s l l j w t now, b u t thst there i s a bidding f o r
labor which has resulted i n ierking u p the labor prices and
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Federal Reserve Bank of St. Louis
lebor costs.
ons
1
6 most aepressing things t o m e wes that list
of f o r t y c o m m o d i t i e s w h i c h ghowec, w i t h t h e s o l e e x c e p t i o n
or wheat flour, s u c h considerable advances i n prices.
For instance, w e had 6 contract for eaient, a t @ given
price,
f o r t h e e n t i r e j o b o n t h e builuing,
w i t h t h e provi-
sion t h a t w e w o u l d g e t t h e b e n e r i t o f l o w e r p r i c e s
i r they
occurred, b u t that the price woulda not b e marked u p above
the maximum price that w a s fixed w h e n t h e contract w a s made.
At one time we were getting a dirferéntial i n thst i n our
favor below t h e price fixed i n the originsl contrect o f
35 cents.
T o d a y t h e price
a t which w e a r e getting cement
is below t h e market price; a n d s o i t goes.
With-s I t t tte t i m e f o r r e r l e c t i o n
a grest m a n y e x a m p l e s o f t h a t movenient.
w é could all give
U
n t o p o f i t cones
the fact that t h e earning assets o f tie reserve banks show
a tendency regulerly t o increase right along.
T h e only
section o f o u r district w h e r e there i s anything i n the
nature o f a n unfavorable developnent a t all i s i n the northern part o f New York state where t h e y e v e 6
that i s s o abundant t h a t a
be m a r k e t e d ,
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Federal Reserve Bank of St. Louis
fruit c r o p
great p o r t o f i t p r o b a b l y c a n n o t
350
I mentioned yesterday a
sugsestion that ur, Gilbert
iede t o m e i n regard t o our investuent policy. I
he mado i t t o i e simply because I
or t h e Coumittee. I
think I
suppose
hsppened t o b e the Chsirman
had better submit that t o you
now, a n d then I will b e through.
As a result o f the successful sale o f the 4-1/4 ver
cent bonds n o w oifered t h e Treasury w i l l b e i n funds, a r d
while t h e y have very large payments t o make t h e y will, a s the
result o f this sale, i f souething i s not d o n e t o sid then,
have very considerable b a n k balances.
aition thet w e always aeplore.
N o w , that &
a
cone
W e do not like t o see the
_reasury accumulating large bank balances.
i t atrords
opportunity f o r member banks t o make loans e n d then, i f these
aegposits a r e w i t h d r a w n b y t h e Treesury,
i t causes impsired
reserves i n those banks o n d drives t h e m t o borrow f r o m us.
They employ t h e deposit a n d they cénnot alusays g e t back
the l o a n o r d i s p e n s e w i t h t h e s e c u r i t i e s quickly.
lupe Gilbert fesls, e n d + share h i s bellef, t h a t thisis
a fevorable o p v o r t u n i t y ,
i f t h e o t h e r r e s irve b a n k s f e e l
Gisposed t o d o so, t o anticipate t h o s e maturities w h i c h w e
have, w h i c h fall due o n becenber 15, which consist o f i n the
nelghborhood o f #60,000,000 o f called Victories a n d sone
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351
five o r six million dollers o f December 1 5 t h certificates,
and he suggested t o me that I bring this u p a t the meeting
tor consideration b y those banks w h i c h hola securiteés. I
suggest a s a matter o f policy that w e mekse e n arrangement
with him s o that the Treesury will take these securities
up, which will dispose o f some of the bank bslances that w e
do not like t o see the Treasury have i n excess o f its needs.
I have a suggestion t o offer toward formulating s o m e
sort o f policy w i t h regard t o this investment account,
which I have very hastily jotted d o w n i n this language--slways providing that w e are simply stating # principle a n d
that w e a r e n o t g i v i n g a
power o f a t t o r n e y
t o anybody, t h a t
each bank must o f course make i t s o w n statement, a n d that
this policy shall b e adopted i n conrormity w i t h the reason-
Sble wishes of the Treasury and their own interests.
That t h e i n v e s t n e n t s
o f t h e reserve banks theusejve s
in both Government securities a n d bills b e regulated somewhat w i t h a view t o reducing t h e totel o s t h e amount o f our
discounts g o e s up, a n d i f necsssary,
o y possibly increasing
the inwestment account a s our discounts g o down.
That i s a
very hasty expression o f what I have i n mind
as t o what t h e policy should be, w h i c h will a t least b e i n
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352
the direction a o etability i n the amount o f credit that t h e
reserve banks extend.
nur” Willer:
T h a t brings
u p t h e siuestion o f i n v e s t m e n t
policy t h a t w e s d e f e r r e d f r o m o u r d i s c u s s i o n o f y e s t e r d a y
until today a n d probebly i s immeciately t h e most important
point s t which t h e reserve system o r some o f t h e res-rve
banks w i l l heave contact s i t h the money market e n d its changing course.
Tf I understand y o u correctly, Governor Strong, putting
it i n a little different form, t h e idea that mr, Gilbert
ard y o u have i n mind, w i t h r espect t o investment policy,
in view o f this recent successful placement a f 4-1/4 bonds
is: T h a t a s new credit i s established through thst operation
you a r e going t o offset i t b y extinguishing what i n fact
anounts t o credit slready existing,
b y a sale i n the o p m
market o f about 460,000,000 worth o f securities.
words,
I n other
y o u a r e g o i n g t o n e u t r a l i z e t h e e f r e c t o f t h a t opera-+
tion i n establishing n e w reserve credit,
b y boriowing f r o m
the market?
Governor Strong:
Yes,
I t i s somewhat the same thing
that w e have b e e n doing with regard t o g o l d imports, y o u
know.
O55
think w e ought t o have m
my, luillers I
expression
ofopinion o n the vert of the reserve banks 3 s to the point
that Governor Strong hes raised,
a s t o leying d o w n something
in the nature o f s very general guide t o investment operations
of t h e Fedsral reserve banks i n the future~-- s n d t h e proposition y o u have advanced covers operations n o t o n l y i n
Govermiuentsecutities, b u t also i n oilis?
ir, A u s t i n s
w
e started a
prospective credits, t h a t I
Giscussion w i t h regard t o
think ought t o b e finished, ur.
Chairman.
mP" MLIAOPS
l L assume that that i s finished unless
some member o f the Bosrd wants t o ask some .uestions with
respect t o i t o 9 t o make'soue observations. I
suggest t h a t
we discuss this question o f investuent policy, e i t h e r f r o m
the point o f view of the proposition submitted b y mur.
strong,
o r rrom any other point o f view. I
assume t h a t
it i s felt i n New York that th:re i s sufricient t u g upon
the money market there t o make i t important t o see what
other m e t h o d s
o f getting t h e reserve banks engaged w i t h
the market t h r e are, prior t o a n actusl change i n discount
policy o r discount rate, possibly w i t h t h e view that y o u
can exercise s o m e influence i n the money market,
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Federal Reserve Bank of St. Louis
o r that
554
you have @ situation there where y o u are n & o n l y justified
but more t h e n justified i n trying t o exercise m i e influence?
Governor strong: I
think w e are required t o do so,
br. twiller, i n the absence o f a free gold movenicnt.
Governor morss:
w i t h regrerence t o this committee, t h e
things that w e are saced alth, a s I see it, require reasonably p r o m p t n e s t i n g o f t h e couulttse.
T
h
e holdings
the Federsl reserve banks o f open inark:t transactiors
i n
i n
Government securities areg¢28,000,000, billsg2e46,000,000,
or a total o f $674,000,000.
T h e r e i s o f discounts betwenn
tom a n d five hundred million.
i t i s possible, therefore,
it t h e Federal reserve banks w e r e t o liquidate their hoidings i n open market transactions i t might obviate t h e necessity o f a n increase i n discount r a t e f @ m n i e tine.
they c o u l d h o l d o f f t o a
A l s o
commrativeiy stable anount o f
open market transactions a n d then adjust cis count rates
if necessary, a n d based o n thst I
take i t that buying more
in open market trensections should not b e considered a t
the present tine, except possibly a n increase i n the amount
of Ditia, T h o s e are juestions, i t seems t o nie, thet our
committee i s going t o b e raced with a n d w e ought t o have
soue e x p r e s s i o n s
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Federal Reserve Bank of St. Louis
o f opinion
o n t h e p o l i c y t o b e pursued.
355
ir. Miller:
w h a t i s your o w n proposition,
i f y o u were
to m a k e one, u r , w o r s s ?
Governor worss: I
extrenes.
i
a m generéliy i n c l i n e d r o t t o g o t o
t seems t o m e thet . e could v e r y properly r e -
ducé o u r investi.ents i n the o p e n merket t o some Gegree.
Certainly they should n o t b e incressec, a n d v 2 might r e s c h
a point w h e r e i t w o u l d b
e w i s e t o stabilize t h o s e h o l c i n g s
rather than t o liguicate all o f them, I
would b e a n extrenise measure.
shouid think that
T h s degree t o which opsn
market holdings shoul b e liquidated, I
oi not quite ready
to say naj. T h a t hss got to bo very csrefully considered.
Governor Strong: H a s n ' t that got t o b e actermined
from time t o time?
Governor horss;
ur. Haulin;
Y e s , a s circunstances necessitate.
T h a t sssuues that your bank, for exanrle,
has t o make enough money t o pay its expenses and dividends,
Or d O you assuués that thet should b e entirely cisregarded?
Governor worss;
O n e o f the most intere_ting things
that h a s c a n e u p i s t h i s guestion:
one p l a c e i t w i l l a p p e a r
another place;
I f you teke i t out o f
i n t h e Fedsral reserve banksin
i f t h e bsnks require f r o m ths ted-ral resprve
banks a certain amount o f credit, w h i c h i s brought o u t i n
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Federal Reserve Bank of St. Louis
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“356
New York here,
i f you d o get r i d o f seme o p e n market hold-
ings t h e y will eppear i n some form, probably i n the f o r m o f
recdise@ unts--=
mre Hatulin;
B u t your remarks a r e preaicated o n the
tneory thet y o u a r e interested i n the bank a n d thet i t i s
your duty t o ¢arn enough t o pay your expénses a n d t o pay
the statutory cividend?
Governor norss:
I f w e get r i d o f one kind o r invest-
ment a n d i t appears i n the banks i n another kind o f i n estment, o u r earnin.s a r e sutouatically t a k e n care of.
Governor Norris:
mr Hamlin;
B u t sup, ose they don't?
T h a t may b e true 3 8 a rsct. I
want t o
kno w h a t t h e underlying principle i s , a n d 4 think that
is t h e thing w e & ould determine,
A r e these perfectly
‘good banks, a n d i s i t their duty i n sone w a y t o support
thenselves,
o r should w e ©
t o Congress a n d saythst w e c é n
not, with certain money wnditions, consistently survive
unless y o u g i v e u s a n a p r o p r i s t i o n r o r o u r expsnses?
Governor uorss:
w r ’ hamlin, t h e question o f our
esrnings this year i s entirely taken care of.
Governor Norris;
Mir’ Hamlin:
T h e r e i s n o yuestion about thst.
O x course there i s a n underlying princi-
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Federal Reserve Bank of St. Louis
357
ple, a n d w e sre looking f o r certain principles f o r the
future 8 s «.eil a s f o r the present---
Governor Horss:
B u t 4 thought w e had laid down the
principle t h a t t h e j u e s t i o n o r earnings s h o u l d b e p u t i n
the background,
e t l e s s t f o r t h e present,
a n d considering
they a r e sare f o r t h e next s i x months w e c e n very readily
ignore them, I
feel w i t h Governor Strong, generally
speaking, t h e t t h e -uestion o f sernings should besubordinaté t o thas other question.
w h e n w e get t o the extreme
point w h e r e s c d o ncét h a v e a n y carnings a n a s r e going t o
have a big cericit, then that will have t o be tsken care
of.
Governor Strong:
O n e efirscet of this conversion thet
Governor liorss wentions is this, that we buy bills, Treasury certificates a n d other securities i n the market a n d
héve
i n nany c e s e s d u r i n g t h e p a s t s i x o r é i g h t m o n t h s ,
extended credit t o the warket a t rates below o u r uiscount
rates,
a n d the effect, i f Governor uorss' suggestion
is correct, a n d I think i t is, o r graduelly bringing sbout
a conversion o f the investient account i n t o t h e discount
sccount i s a n increesed c o s t o f this crecit t o t h e market.
Now, t h e extent t o which thet should b e done I
do not t h i n k
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Federal Reserve Bank of St. Louis
358
can b e determined t o r a n y given period o f tine.
I n the
very close bear-
first place t h e Treasury borrowings h a v e a
ing upon it, m d whenever the Treasury i s willing, under
tts present management o r any management,
t o racilitate
the operations b y the reserve banks which will ofrset a n y
inflationary tendency o n the part o f the Treesury borrowings, I
think i t i s a very g o o d thing f o r u s t o cooperate
with t h e Treasury,
a n d t h a t w e shoulc w e l c o m e e v e r y o p p o r -
tunity t o edopt a suggestion o r thet k i n d made b y the
Secretery. I
have n o doubt t h a t o u r discounts i n New
York with member banks i n New York City will n o w begin t o
increase f o r a time e s a result o r this loan.
“pay off
w n e n they
t h e bonds t h e y will get Government credit, a n d
when thst credit i s checked u p they will come t o u s t o borrou.
hire mitchell:
T h a t will g o rurther t h e n Ne. York
City, w i l l i t not; t h e t i s true a l l over t h e country?
Governor Strong:
possibly
to a
v h , yes, b u t I think i t i s true
greater e x t e n t
i n N e w York. I
figures f o r N e w Y o r k s n d t h e s u b s t r i p t i o n s
have t h e
t o this issue
for cash aggregate 3560,000,000 a n d i n exchanges 975,000,000.
That i s 8
very l a r g e subscription,
end I
cannot o e l i e v e t h a t
359
those subscriptions a l l represent bonafice sales t o ine
vestors, I
OQ 8
haven't s doubt that unad-r the inspdration
Very s u ¢ c e s s f u l i s s u e t h a t a
g o o d m a n y o f thse bsnks
Will want t o keep sone o f those bonds, a n d that will crive
some O r that m o n e y i n t o t h e r e s e r v e b e n k s
peying o r f 9
i n some way, a n d
l o t o f Government s e c u r i t i e s d o e s
i n p r t offset
that t e n d e n c y t o w a r d inflation.
Governor ucbougal:
A s s member o f the comiuittee that
was charged with the responsibility o f hendling, o n behalf
of the system, t h e purchése a n d sale c f government bonds.
i would like t o say that while there have been sone dirtereness o f o p i n i o n t h e r e h e s b e s n o n e m a t t e r w i t h r e s p e c t
to which w e have been i n agreement a t all times, a n a t h a
is t h a t t h e o u t s t a n d i n g rfactor d @ g r e a t = s t i m p o r t a n c e
the Tressury. I
is
was very tiuch interested i n Governor
strong's report, ensuing upon his conference w i t h t h e Under
secretary y e s t e r d a y ,
a n d t h e p l a n suggested
is r e s s o n a b l e e n d proper,
and 1
i t seems t o nis
should s a y , w i t h o u t a n y
hesitancy, t h s t personslly w e would b e i n favor o f following that policy a n é recommending i t t o o u r board.
with respect t o othsr o p e n aiarket operations, particularly bills, t h e r e i s a reason w h y t h e Federal Reserve
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360
system h a s a
large a m o u n t o f b i l l s now, o v e r a n d a b o v e
any desire t o nieke 8 profite-- I
think I
a m right about
this, Governor strong--- a n d thet i s since last spring t h e
rates o n bills have b e e n out o f line w i t h the rates o n
other investments, a n d @ s a natursl result, instead d
hav-
ing a n open nsrket t a r bills o f that sort they w e r e naturally
ariven into t h e F e d rel Reserve system.
I n that w a y those
that h a v e b e s n t a k e n h a v e b e e n t e k e n v e r y l a r g e l y f o r t h e
purpose o f finding a
market f o r them, a n d that w e s the
think t h e tendency h a s shown dur-
only narket t h e y had. I
ing the last r e w weeks towsrd a gracuel raising o f the
narket and rate o n bankers! bills. I
am not satisfied
that i t has gone rorward rast enough, b u t i f i t does g o
4 little further I
do not believe w e will b e greatly
troubled w i t h relieving t h s system o f those bills, a n d
will probably b e able t o let g o all thst w e want t o let
BO Ot.
wr. millers
w i a t d o y o u think they ought t o do, i f
they a r e given such a n opportunity, l e t t h e m go?
Governor ucvougal: I
bills.
know what w e would d o with our
I f w e had a demand t o r those bills i n the market
we would l e t them go.
w e always heve.
361
With respect t o the matter o i earnings being a faetor,
I would like t o remind this conrérence that last spring
very careful attention wes given t o the matter o t earnings
vatid: t h e r e l a t i o n o
thet suestion. I
investments
i n Government s e c u r i t i e s
remember t h a t t h e A d v i s o r y C o u n c i l ,
to
at
thet tine, efter giving conddersble attention t o the nmatter
reached t h e conelusion that t h e line o f Government securities a t that tine h e l d was n o t s o large a s t o cause t h e m
any apprehension, a n d i g I reuenber correctly t h e y felt
there w a s n o objection t o the banks carrying approximately
that emount, e v e n though i t might b e thst t h e y werecarried t o so..e extent f o r the purpose o f taking earnings.
In o u r c o n f e r e n c e w h i c h w a s h e l d subsequently,
if 1
am not mis teken, the general consensus o f opinion wese-~
I think there were n o wntrary votes-~- that the Fed«ral reserve b a n k s r e a l l y s h o u l d c o n t i n u e
t o p a y t h e i r cividendas,
end there w a s sone discussion e s t o whether thos e dividends
should be paid, i f necessary, b y depletion o f surplus;
but I
believe t h e conclusion reachec w e s thet rather t h e n
inpair t h e surplus that t h e banks w o u l d b e fully justified
in going into t h e open market, e v e n t o the extent o f buying
and holding s
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Federal Reserve Bank of St. Louis
few Government bonds,
i f necessary.
Naturally i t w o u l d b e v e r y i n t e r e s t i n g
haps t o others,
t o nx
t o know w e t h e r there has b e e n a n y cheng ¢
in the views expressed a t that timc.
ur. Miller:
I n order that w e may perhaps g e t 4 better
besis for the ciscussion o f this thing, l e t m e call sttention t o some salient tacts i n the last weekly statements
of the condition o f the twelve Feuersl reserve banks.
Totel earning assets about 4
billion a n d a quarter,
or
be
siter subtracting surplus, that I think ought not t o
{neluded, twelve hundr<d million.
O f this twelve hundred
discounts.
million l e s s t h e n s i x hundred m i l l i o n r e p r e s e n t
about
250,000,000 bills bought i n the open aisrket, a n d
Gowerne-
a
425,000,000 securities bought o n the o p e n market,
ment s e c u r i t i e s c a r r i e d
o n behalf a
dSalers---
i n other
millions
words, r o u g h l y speaking, e b o u t s e v e n h u n c r e d
of
have b e e
the earning assets o f the Federal reserve banks
unt.
acquired b y them voluntarily, n o t b y w a y o f rediso@
get a t
I think, baldly, t h e question is, i n orcer t o
under
the related proposition o f principle thet h e s b e e n
various ¢xdiscussion here, especially i n the light o f the
pressions,of concern with reference t o the future,
i s whether
or not t h e Federal reserve banks a r e o n solid ground i n
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Federal Reserve Bank of St. Louis
363
contributing about 750,000,000 t o the market s t the
present t i m e ? O t h e r w i s e s t a t e d ,
put i n this way:
t h e question might b e
W i t h the increase i n bank loans during
the past yesr epproxueting i n round numbers two billion
dollsrs t h e red-ral reserve panke a r e making @
contri-
bution of about a billion and a quarter, and is it d-sirsble t o méintain thst relationship,
a s w e g o into what i s
spperently, i n the minds o f practically all the men around
the t e b l e h e r e , w i t h o n e o r t w o exceptions, a
chenged
changed demand f o r money # n d 2 possible change
future, @
in the obligations o f the rederal reserve banks t o the
general m o n e y s i t u a t i o n .
Governor mclougal: I
Go not know thst I can snswer
that question i n the vay thet you have put it, but 1 would
ssy t h e t I
a o n o t b e theve w e n e e d h a v e v e r y m u c h aprrehen-
sion lest w e will not b e able t o make o u r dividends i n
the n e a r ruture.
relieved
T h e indications a r e t h e t w e will b e
t o s o m e e x t e n t o f t h s r e c e r s i t y o f o p s n inerket
operations because o r the prospective incresse o f calls
upon us.
I t i s pretty hard t o tell when the cmnmércial
banks m a y o m e i n ror assistsnce. I
sent condition a
belicve w i t h the pre-
business t h e banks i n this country should
564
be, and I believe they are, well able t o take cere of the
volume o f business t h a t i s going o n anda probably that
which ig in prospect i n the near ruture, ‘ h e i r own losn~
_ing power hss b e e n very grestly increased because o r t w o
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Federal Reserve Bank of St. Louis
ths
things, o n e their greatly incressed resources, a n d
other their greatly reauced ressrve requir sments.
«he-
ther o r not relatively that i s going totake t h e place o f
the necessity o f using perhaps 2 0 0 per cent o f capital n o w
to d o a given volume o f business 9 s compered vith whet
it would do before, I don't know.
T h e question of whether
or not w e are going t o buy Governient bonas i n the open
market n e e d n & b e o f great concern.
w o s t a l l o f t h e re-
serve banks h a v e pursued, a n d 4 think consis tently pursued,
was
the policy outiined lest spring, u n d e r which there
to be no materisl increase i n the aggregate amount o f Gov~
i t or
ernment securities,snd while y o u may heve noticed
mestmsy not have noticed it, Chicago, a t the time o f thet
1
ing, t e d e n excess holding i n Govermuent securities.
in
think that w e s csused simply bythe f a c t that w e went
quietly s n d bought these securities s
few months before t h e
other banks apparently awskened t o the neceu.clty o f doing
it.
W
e bought t h e m quietly a n d had t h e m tucked away,
365
and s h e n i t became necessary, o v e r 360,000,000 worth were
disposed of, nob over night, b u t gracuelly, without putting
8 dollar i n the open market.
T h e y were sole t o Cleveland
end the other banks thet apparently needed them, e n d to
the Treesury Depertrient, b u t n o t o n e i n t h e open market,
except small trensactions t h e t w e handled s t t h e suggs
of wr, siadison, t o test out the market. I
do not think
we have m u c h concern a s t o the ruture w i t h respect t o this
matter o f .isturbing t h e Treasury b y a n increase i n the
holdings o f Goverment bondse-- I don't know that that
énswers your question,
ur” iiiller:
«
-
”
~
m r miller.
I t snswers i t i n part but i t leaves out
whet Lt regard a s perhaps the essential part, and, speaking
from m y o w n p o i n t o f view, I
should b e e x t r e m e l y s o r r y t o
ses t h e reserve banks drifé into o r assume a n attitude o f
mind w i t h respect t o matters o f investment p o l i c y i n which
the interest of the Treasury, o r their views of the interest
of t h e Treasury, w a s taken 3 s a substituts f u r their o w n
active a n d independent judgment.
T h e t i s sexaetly whet w a s
done i n 1919, a n d I si sfraid thet a vitel misteske would
be made i f w e c i d thet now, except f o r o n e thing, a n d that
is that t h e gentlemen i n authority a t the e s u r y a t t h e
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Federal Reserve Bank of St. Louis
566
as
prevent time are/solicitous that the banks function pro-
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Federal Reserve Bank of St. Louis
perly a . reserve banks a n d reserve institutions a s they
are about. t h e relations o f t h e reserve institutions t o the
Treasury.
But w e ought never t o regign our major and immediate
responsibility f o r t h e g o o d operation o f t h e Focsral Heserve
oystem. I t h o u g h t very much more wes involved, a n d i n
order
t o get t h e oiscussion pointed 1
asked t h e question.
1 did n o t put this 8 s a proposition, b u t I
tion:
I n view o i what y o u have ctated,
ask the quss-
i n view o f what
is implied i n whet y o u have stated, d o y o u think i t i s desirable f o r t h e reserve banks t o g o o n lending three quarters o f @ billion d o l l a r s o
t the market,
i n the shspe o f
bills purchesed e n d securities carrisa, m o r e particularly
in view o f t h e statanent t h a t y o u have gotten f r o m G o ernor mevpousal--- a n d + think Governor worss mace t h e same
statement--- t h s t probably i f your portfolio o f investments
was liquidsted y o u woulc begin t o have a
counts.
I
demand f o r redis-
n other w o r d s , d
o you thinke--= a n d I a m just
putting i t very baldly t o get t h e g e s t i o n properly b e -
fore use-e- d o you think
e e
a r e moving into what cseenis
to b e gensrally f e l t here t o b e & ;eriod o f exyandirg
567
business, growing pros,erity, a n d possibly unhealthy d e velopment, t h a t i t i s better f o r t h e reserve bank statenent
to show three quzerters o f a
billion assets i n the chaz
of investnents, o r three juarters o f a billion i n the shane
oi reciscounts,
o r s o m e t h i n g approxinieting t h r e e q u a r t e r s
or & billion?
Governor .cvougal: I
think I can snswer that quese-
tionfron m y o w n point o f view, a n a thet i s that w e should
st sll times primarily devote our attention and our resources t o the matter o f supplying t h e neecs o f businéss a n d
the m a t t e r o r rediscounts,
a n d that a s the tendency
t o in-
ereasé reciscounts operations goes o n thet w e hqoulc permit
our investients, whetever t h e y m e y be, w h i c h have b e e n vecured i n the open market,
ur, miller: I
t o run off.
think G o srnor uwcvougsl has put the
ruestion i n another rom, e n d 4+ think w e should adaress
ourselfss
t o i t , a n d t h s t i s , s h a l l w e w a i t t o lisulicate
these i n v e s t m e n t s u n t i l t h e r e d e v e l o p s @
well defined r e -
oiseount d é m a n d o n t h e f e u e r e l r e s e r v e banks,
o r should
that b e anticinsated?
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Federal Reserve Bank of St. Louis
Governor Norris:
L would like t o ask,
T h e r e a r e t w o prectical questions that
T h i s discussion i s uwanifestlyhsaded
§8
toward t h e acGoption o f a
policy t o reauce t h e investments
of t h e r e s e r v e banks, b o t h i n Governnent s e c u r i t i e s s n d
bills. I
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woula b e sorry t o see o policy saoptea that w a s
going t o b e interdered w i t h b y either o n e o f those t w o
questions. I
think Governorstrong i s i n a position t o
answer t h e m both, a n d I would b e very giaa i f h e would, Yor
my o w n i n y o r a t i o n o t least.
S o m e s tine a g o w e ca.6 t o
the conclusion that three p e r cent o n acceptances w a s a n
artificial a n d unduly l o w rate a n d s é stopped buying them,
ané o u r holdings have r u n down rrom w3L,000,000 t o .19,000,000 s n a the rats onthe bills h a s gone u p from three t o
three e n d «
half.
F o r a
long time w e . e r e constantly
reminded b y ur. Kenzel, w h o hss h a d that matter constantly
in charge a n d who has been t h e expert o n the subject, t h a t
it w a s desirable t o keep that .arket a s nearly 6 s possible
on a n even basis.
T h e advance f r o m three t o three a n d a
half oceurred i n a compsrstively short tine. S u p p o s e
there w a s 8 repid advance n o w t o four p e r cent, d u e t o the
fact t h a t t h e r e s e r v e b a n k s I s ve s t o p p e d buying?
# o u l d
or would not the sug.estion then b e made t o us that thet
was demoralizing t h e werket a n d a¢estroying a l l t h e gooa
that h a d been done over a
period o f 4 year o r t o a n d that
369
we must c o m e into t h e merket a n d prevent t h e t rate changing s o rapidly?
Governor otrong. G o v e r n o r Norris, + think wr" Aenzel's policy i n regard t o buying bilis, that is, i n regard
to chsnges i n the rate s t shich w e are buying bills,
is
dictated v e r y largely b y the needs o f t h e brokers s n a aealers.
T h e y have h e d s very large portfolio a n d w e have
besn carrying bills r o r them a t a s l o w 4 rate a s w e thought
desirable, e n d w e have b e e n grsuusilly inereasing t h e rate,
and a s the rate increases t h e y take a little loss a n a
reduce t h e portyolio,
buy a t a higher rate.
s n d o t h e r b i l l s cou.e i n w h c h t h e y
U r dually w e sre getting the rete
up a n d IT have n o doubt thet i t mey g o u p 8 s high 3 s rour
per cent, i n other words, t o the same level ¢ s our cdiscount rate.
P h s t will probably result i n 6 much more
wholesome condition i n the msrket;
t h e s e biils wili t h e n
be distributed outside o r tne reserve banks t O & greater
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Federal Reserve Bank of St. Louis
extent.
u
@ tieve been looking rvor.ard t o t h e possibility
of c o n s i d e r a b l e i n c r e a s e
i n sows o f t h e f o r e i g n b i l l s e n d
I hope thet thet w i l l b e = distinct é i d i n teking these
bills o u t o f the hahds o f the dealers e n d lettingtiem stabt
buying again a t = new level.
s70
But, @ s orfcetting that, I
have a fear that this
large payment w h i c h will b e madeby t h e British Governmen t
on Moncay nmiay have b e e n partially invested i n bills, o r
partly loaned t o deslers w h o e r e carrying bills, é n d
msy résult i n small bills coming t o us.
O u r policy j u s t
now, 3 8 I think y o u know, Governor Norris,
i s t o get that
rate u p but n o t t o c o i t s o repidly t h e t i t will impose
undus hardship o n a lot o f cealers i n bills w h o have been
very ailigent, v e r y patriotic s n a heipful i n dz:vé loping a n d
protecting t h e market.
Governor weDougal: I
think i f you put t h e rate u p
to tour per cent o n bills thst o u r open iiarket would inmeO u r ssvings banks s n d
Giately c o m e into existence again.
others would b e glad t o feve them,
Governar otrong:
T h a t i s whet w e want t o do.
Governor Norris:
T h e n y o u c o not think i t i s likely
we will b e urged t o buy bills t o support t h e rate i n the
narket?
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Federal Reserve Bank of St. Louis
Governor strong;
N o .
Governor Norris:
T h e n t h e second question I
to a s k i s this:
s u p p o s e that a
wanted
member b a n k o f vers u s
Tressury certilicates e t par, w i t h t h e statement t h e t t h e y
S71
had endeavored t o sell them st par, that they had t o sell
thei, that t h e y h a d e n d e s v o r e d
t o s e l l t h e m s t par, h a d
not been able t o c o it, a n d if w e cic not take them they
would have t o orrer t h e m a t s discount.
I
s the Treasury
Lbepartment p e r f e c t l y s a t i s f i e d t h a t t h e y s h o u l d b e o f f e r e d
dis count?
Governor Strong:
S o far s s tke work o f the w m immittec
is concerned, Governor Norris,
w e keep i n daily touch with
the Treasury o n these matters, a n d m y opinion i s generally
that both i n the inter:st of the treasury and of the money
market there should not b e a n artiricisl market sade f o r
Governient securitiss, b u t that i t should finc its natural
level.
T h e r e have b e e n times w h e n i t sseued cesilreble
to prevent 8
sharp decline b e l o w w r in securities, a n d
we h a v e p u r c h s s e d t h e n .
m o s t o f t h o s e purchases, h o w e v e r ,
have b e e n uirectly i o r account o r the Treasury,
the v a r i o u s a c c o u n t s
w e h a v e opsratea,
i n one o f
a n d w e have simply
cerried them until the Tressury wes i n 3 position t o tske
them up.
ur, austin:
moneys,
W i t h respect t o investing these foreign
w h e n y o u h a d these moneys
t o invest
i n t h e past,
heven't y o u b o u g h t b i l l s w i t h t h a t m o n e y a t l o w e r r a t e s
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Federal Reserve Bank of St. Louis
372
theb y o u are sdvising t h e federal recerve banks t o purchase
bills a t ?
Governor Strong:
mr, Austin; I
been the csse I
N o , I
do not think so.
hsd thet impression, a n d i f that h a s
would like t o know whether that interferes
with a n y established policy thn thet y o u may s e t u p f o r t h e
reserve banks. I
thought they were bought a t a lower
rate; t h o s e were the rigures . i v e n me,
Governor Strong: I
Governor Calkins: I
do not think so.
think y o u have shown 6 desire
to bring o u t discussion o f t w o very vital points w h i c h verheaps become souewhst l o s t i n 4 more gé::sral cis cussion.
The first o f these i s i n regard t o Governor strong's suggestion t h e t t h e c o m m i t t e e
e e
ances
g a s
trensactions
tor F e d e r a l r e s e r v e b a n k s b e g e n e r a l l y s u t h o r i z e d
t o adopt
@ policy o r recoumending disposal o f open market securities
68s redisc@unts g o u p a n d o f scquiring t h e m e s they g o down,
In v i e w o f y o u r d i r e c t s u s s t i o n i t w o u l d a c e a r t h a t
thet policy would determine, finally determine, whether
or n o t i t w a s cGesirable f o r t h e r e d e r a l r e s e r v e b a n k s
hold three juertsrs o f a billion i n such . ecurities,
to
or
in other worus t o supply that smount t o the niarket indirect-
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ly, i f y o u want t o put i t that way.
It i s m y opinion,
a s I stated t o Governor strong w h e n
he showed this t o me, t h a t w e probably f - - 1 that t h e pro-
posal is right i n principle, b u t that inesumch e s i t involves t h e w h o l e r e d i s c o u n t a n d i n v e s t m e n t p o l i c y o f t h e
twelve F e d r a l r e s e r v e b a n k s ,
i t c a n n o t p o s s i b l y b e defin-
itely sgreed t o b y t h e representatives o f these benks here
es binding upon the Boards o f birectors o f the banks.
ur. Ramsey:
Governor C
I
t i s not contended t h a t i t would be.
alkins:;
T h e next question o f disposing o f
securities b y sale, related a s it i s t o the rediscounts
or the Federal reserve banks, m u s t b e very closely examined
before deternination i s arrived st, sither for the system
8s a
whole o r f o r a n y s e p a r a t e b e n k s .
T h e r e a r m a n y ele-
ments entering into the question that have not been fully
aiscussed and which should b e fully consiaered before any
conclusion i s reached,
One thing that interested w e i n the report o f t h e con-
dition @
t h e banks a t the present tine was the fact that
the reduction from the s m e d a y last year i n the amount o f
bills dis ounted secured b y Government operations i s pracw
tically exectly offset b y the inerease i n the holdings o f
374
Govermnent securities. b y the Federal reserve banks.
I n
other words these securities w h i c h w e have bought h a v e
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Federal Reserve Bank of St. Louis
been taken o u t a @ t h e discount c a s h o f t h e Federal reserve
banks a n d put i n t o t h e purchasing c a s h f o r t h e Federal r e serve banks,
think,
a n d t h e o f f s e t i s a l m o s t exact. I
do not
i n what spparently i s felt b y 411 those present t o
be a time o f very considerable uncertainty, w h e n t h e tone
of t h e responses t o the yuestion i n regard t o what w e should
do i n the inmediate iuture hss definitely b e e n o n e o f doubt
and uncertainty,
a n d t o sov.e extent eprprehension,
can ¢*«cide without s
tion, s o vital 5
sion. I
that w e
very thorou h canvass o f the situa-
question a s i s involved i n this dicus-
have b e e n reminded sany tines during t h e aicsus-
sion o f t h e thought t h a t t h e tine t o a o anything i s slways
some other tine. I
think that i s true, e n d I think that
has been echoed sround this teble i n this discussion b y
almost e v e r y tian w h o h a s spoken.
wr’ Jays K e f e r r i n g t o one thing that Governor Calkins has said about watchiul waiting,
general .entiment,
i t seemed t o b e t h e
a s the question w e n t around t h e table,
thet a change i n the discount rate---
Governor Calkins. (Interposing)
T h e whole question
& involved i n the discount rate.
ure J a y :
O f c o u r s e i t i s involved,
b u t nevertheless
Gealing i n the o p e n uerket m a y b e a step towarcs t h e dis-
count rate, s n d gurthermore, I
would like t o bring this
point out, that t h e juestion o f converting ,750,002,000
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Federal Reserve Bank of St. Louis
of open market purchases i n t o rediscounts d o e s n o t arrect
thecrsdit volume o n e w a y o r t h e other v e r y nmiuch.
I t is
just a question of policy, #aether w e will have that
investment.
i l e may b e forced, i r we are going t o acknow-
ledge that w e have s n y responsibility r o r t h e total credit
volume, i n view o f prospective and further increases i n
our gold, t o let g o sone o f these investments.
T h e neu-
tralizing o f ince iuing gold i s a very aitiverent process
from changing these i n t o redismunts, b e c a u s e i t i s a
question o@& obsolutely reducing the volume o f our totel
i n every form, o p e n market o r rediscount,
holdings
With rurther payments b y the British a n d other items,
the p r o s p e c t s a r e ’ for a
further i n c r e a s e
i n our g o l d sup-
ply, a n d thet isn't going t o sda t o the incentive for discounts a t all, b u t iscertainly g o i n g t e involve u s i f w e
con't d o something t o offset it.
ur Miller: I
°
want t o make 6 remark here which, while
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376
it i e not probably aidactic, s t i l l i s a remark t h a t 1
nake after a n intinate acquaintanceship w i t h t h e Federal
Neserve system since i t s inception.
I t i s well estab-
lished psycologically that you cannot a c t i n a state o f
cdoubte
T h e blunders that hove been made b y the Federal
reserve system i n t h e past,
i f that i s n o t too strong 4
word, h a v e niany tines b e e n due t o the fact that w e have
been, o r have seened t o ourselves t o b e i n a state o f doubt.
I think sonetines t h a t that i s largely d u e t o the i a c t that
we had a rather conplex organization w i t h n o definite location o f responsibility;
w e have t h e rederal reserve banks
sna t h e ted ral neserve Board, 32nd there is, i n consequence,
that natural resitation that comes i n times o f uncertainty
as t o just whose responsibility i t i s t o decius whether
setion o f o n e kind o r snother shail b e taken, o r e s t o
whether indic ations a r e surficiently definite t o say that
no action should b e taken.
times drifted.
I
I n other words,
w e have a t
t has been a very common 4 n d very
painful observation i n the rederal Keservc system t o hear
the statement m e d e that certain sction would have b e e n proper i f w e had taken it.three o r four months 4go. I
wond-ring whether,
at
i n view o f what seems t o b e i n the minds
377
of s o m e o f t h e m e n w h o h a v e s p o k e n t h i s morning,
w e may
not b e drifting again, a n a whether there i s not, o n the
part o f the reserve banks, perhaps
to the opinion a
a n undue sensitiveness
o n e class o f dealers o r ancther class o f
deslers o r the opinion o f bsnkers. I
would n o t b e parti-
cularly concerned, ur+ Strong, t o hurt the bill brokers
in New York
i x w e had t o take that coursee
simply m e e n diminishing their profit,
b a
I t would
w a e
not be
particularly concerned i f w e had t o choose between that
end being responsible f o r t h e continuation,
o r possibly
the development o f a situation thst subesquently might
heve t o b e controlled b y very much more drastic processes,
i think that t h e rederal Keserve s y s t e m functions rightly
in just t h e degree t o which i t sees ahead.
I f w e wait
until a n expansion o f eredit h a s weveloped i n t o inflation, t h e n w e have waited t o o long.
I want t o s d d this reneark also.
flation w i t h perhaps
is meant b y it, I
w e telk about in-
n o mnimon understsnding
o f just what
think w e are s p t t o telk sbout i t eas
though i t were something thet announced itself.
w h e n in-
flation i s i n evidence, i t youwait until i t makes it self
éviacent, i t has gotten t o a point where i t cannot b e can-
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Federal Reserve Bank of St. Louis
378
veniently o r successfully controlled.
insidious process.
I n f l a t i o n is 6
very
I n f l a t i o n coes n o t begin a s inflation
sny more t h a n intoxication begins 3 s intoxication.
Y o u
begin with one drink. T h e a t whets your appstits, a n d i t
is a question just where y o u pass f r o m t h e right t o the
wrong.
I n f l a t i o n begins i n sonething that way, s n d b y a
process
o r growth e n d subsequent degeneration becomes i n -
ilation, j u s t a s @ rorest rire seldom begins a s a forest
tire, b u t usually begins 3 s 3 camp fire.
I
to attempt t o control i t until i t becomes a
f you weit
forest fire,
you have wsited t o o long.
Governor Strong;
n a yL
6sk 5 yuestion, u r miller?
wr” piillers i g l l you let me follow this up, please.
i an thinking siond, e n d I au doing i t i n the belle? that
it i s becouse someone does i t that w e c a n really ettract
attention
t o t h e m a i n q u e s t i o n hereee=- h o w c a n w e j u s t i f y
ourselves i f the general feeling o f what i s i n prospect
nere i s corr<ct.
T h e two esstern cistricts, Boston snd
Ney York, heave apps rently s e n s e d t h e p r o s p e c t i v e d e v e l o p -
ment.
T h e y a y b e syntunstic,
o r they m a y b e sonets ing
wore serious within t h e next three o r four months, e n d h o w
can w e justify ourselves purely o n the ground o f considera-
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379
tions d e r i v e d f r o m t h e s t u d y o f t h e p r e s p e c t i v c o u r s e
the tioney merket,
in
l n keeping s s tiuch 4 s three quarters o f
8 billion dellars i n t h e merket which has issuec f r o m the
Federal reserve banks? s u p p o s e w e leave out o f consideration e n t i r e l y t h e m e t t e r o f e n r n i n g s ?
earnings w e r e otherwise t e k e n care of?
S u v r o s e thet our
o u l d w e feel that
the indications w e r e s u c h that w e ought t o b e contributing
at this time three quarters o f a billion volunterily t o the
merket?
I n saying that I s m not ignoring the fact that
the Treasury i s 9 very importantfactor i n the tloney market
and that what w e ought t o do ought never t o te done without
regard t o its bearing o n the situation of the +ressury as
8 constant o p e r a t o r . . B u t w h a t I
a m terribly afraid o f
unuer
isthat w e are going t o drift slong 6
very casual and
tultinately very dengerous p o l i g ,postibly, o n the ground
thst i t is for the Tressury when, i n fact i t i s because w e
have n o t b e e n able t o develop surricient rermetive conviction with rezpect t o the trend o f @
policy o f our own, I
nditions t o v e a
belicve that w e ought not t o sdjourn
here todsy without fsirly facing t h e t g e s t i o n , because
ir w e wait until w e sssenbly i n the next conrerence
either i n April, o r earlier, s a y i n January o r february,
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380
we may rind outselves i n 3 position where w e are gathered
tozether t o shed tears over a situstion t h e t i s b a d 4 n d
thet has gotten b a d i n the meantine, a n d beyond o u r control. I
feel that t h e New York bank i s t h e one that ought
to, i n this particulsr thing, h a v e t h e most definite a n d
the most foriative convictions o n e way
o r enother wey, b e e
care i t i s there that t h e préssure a n d the pull would rirst
manifest itselz,
i s already manifesting itself,
kind o f a c t i o n h e s g o t t o b e taken,
taken, s n d t o m y mind i t i s merely 8
9 s t o what
i f i t is going t o b e
m e s t i o n o f shether
the time h e s wnie t o t e k e this a c t i o n w i t h nore cunviction
end with more energy,
o r whether w e should postpone i t
yor one reason a r another a n d feel that w e have done o u r
duty b y .aying o u r respect,
s s i t wers, t o the principle
that, a t times w h e n the market neeas control w e d o not
think i t i s sdvisable t o control i t b y ciscount rate, b u t
you would d o i t b y selling b a c k t o t h e market.
mr. Jay: I
am not going t o m s s k r o r New York beshould
cesuse I think Governor Strong ,
G o that a s he i s Governor
of t h e bank s n d chairmen o f the coisittee dealing with this
whole matter o f open market operations;
b u t I
we h a v e b e e n cis cussing t h i n g s h e r e f o r 4
do feel that
aay a n d 8
hal
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381
now a n d w e have r e e c h e d n o c o n c l u s i o n a s t o what t h e
Federal reserve policy shoula sttenipt t o accomplish.
A c e
cording t o the papers that were written and the ciscussions
that went o n yesterday t h e points o f view o r e very cif fer-
me expressed s purely locel slew; o t h e r s expressed
ent. S
s nationel view, s n d you, ur: uiller, spoke o f the credit
volume s s a whole and cf the nationel responsibility af
the system towarcs the credit volun. I
have n o & 2a
wnether that i s 2 metter o f general sgreement @ & not.
ne have h a d n o expression o n it.
I feel that i n ap:rosching all these questions--- sna
oné«-= that
this o n e t h a t y o u h s v e r e i s e d i s a n i n p o r t e n t
our w h o l e p o l i c y 4
the important t h i n g ,
s n d that o u r
respect
winds s n d o u r courses w o u l d b e m u c h c l a r i r i e a w i t h
to
o f what
thet whole policy i r w e could g e t m i e expression
has any
the p o l i c y o f t h e s y s t e m s h o u l d b e é n d w h e t h e r i t
nations] responsibility.
Last night I
brief. I
sketched o u t something, w h i c h i s very
showed i t t o hslf e
dozen o f those present t h i s
morning, e n d they sesned tothink that i t c
verea their vieus,
and I woulda like t o ssk i f I might submit i t Yor consiccration a t this time, t o see whether our minas are 4 unit with
382
respé@ct t o t h e q u e s t i o n o f o u r n a t i o n a l
r e g onsibility f o r
the total volume o f credit.
ror the present t h e credit policy o f t h e Federal Keserve s y s t e m should a i m t o f u r n i s h e r e d i t a n d c u r r e n c y t o
member banks f o r their seasonal a n d siergency requirements,
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Federal Reserve Bank of St. Louis
but s u e h policy,
a s well a s open mérket operations, s h o u l d
pe sdministered i n each aistrict i n mech manner a s t o o8sist t h e system i n d i s c h a r g i n g ,
able, its nationsl responsibility t
a S far a s i t may b e
prevent credit exten-
sion from d: veloping into credit inflation.
Goyernor xseay;
Y o u swientionsd just 6 moment a g o a
probable sensing i n certain districts o f a poriod of active
ity a n d not ®
period o r oxpansion. I
s very f e w words o n thet point.
i
a m going t o speak
t i s n o t unnetursl that
thet should b e so, those being t h e «snuracturing dis tricts
of the muntry.
A s Governor morss slluded t o ths high
prices v o r c o t t o n h e d i d n o t t a k e w h o l l y i n t o c o n : i d e r a t i o n ,
I think, t h e relstivity o r the prices o f cotton.
There
need n o t b e any tear thet t h e price o f cotton o r the price
of agricultural products anywhere i n the south i s going
to bring about a t once any greet recovery.
i f you recsli
the A g r i c u l t u r a l D e p a r t m e n t f o r e c a s t e d t h e o u t p u t
o f cotton
583
to b e a b o u t r i f t y p e r c e n t e - - t h a t r e p r e s e n t s ,
3 8 y o u know,
6 aetericration i n capitel that was put into that contton
and the probability s & that the present price i s based
upon thet deterioration, a n d therefore tnere l s n o resson
to believe, either i n the south o r i n other agricul: ural
sections o f the country, thst anything reeliaed from the
crop is going to bring about 2 complete recovery from the
tremendous locses surzvered during t h e past t w o years,
Therefore i t i s quite natural that those sections should
feel some d-gree of hesitancy, because, i f the prosperity
down o n t h e farm, a w a y b a c k home, c o e s n o t b e a r s o l e p r o -
portion t o the prosperity i n the manurecturing sections,
then the inpetus given to, manufecture i s going t o languish.
Thretore i t i s not unnstursl that there should b e s m e
hesitancy s n d a Givision o f opinion here between t h e menufracturing sections o f t h e country a n d t h e agriculturel sections o f t h e county.
Gor ernor sor ss;
B u t didn't y o u say thet your ssvings
aceposits h e d increased materially?
Governor . e a y :
Statese
Y e s , b u t t h e y h a v e 8l1l o v e r t h e U n i t e d
T h a t i s one o f the reniarkable incicents i n this
périod o f so-called inflation.
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Federal Reserve Bank of St. Louis
Governor morss:
Governor seay:
W h e r e d i d they come from?
A n d that notwithstanding t h e f a c t
that labor a t o n e time w a s o n one o f the greatest strikes
we have ever h a d i n the United States, a n d curing t h e period o f the strike,
ings d e p o s i t s
s o f a r 2 s m y observation goes, t h e sav-
o f t h e country increased.
There t e o n e thing y o u said that struck 6
very deep
seated feeling i n m y consciousness, u r , miller, a n d that
is thet there appeared n o w t o be possibly s o m e danger o f
substituting f o r t h e independent judgment o f t h e Federal r e serve banks,
t h e convictions
ment o r t h e Government. I
o r desires
of a
grest depsrt-
believe t h e t pérhaps there i s
soue d a n g e r o f t h a t e v e n yet, t h e r e f o r e 1
strongly c o n c u r -
red i n the view that y o u expressed that nothing should ever
obscure t h e independent judgment o f t h e Federsl reserve
banks,
Now, t i t h r:specttt t o t h e w n m i t t e e t h a t s h a l l d e t e r -
mine, o r , i f not agtermine, c h a l i execute t h e investment
policy o f the Federal reservo system, t h e r e is, i n m y niind,
so.e feeling o f reservation toward t h e control o f t h e Feaer81 Reserve system s s a whole b y the judgment o f e n y conmmittee. I
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Federal Reserve Bank of St. Louis
have w o fear whstever that t h e e o mmittese a s ap-
386
of being local i f w e have represented here t h e entire rederal
reserve system. I
a m a believer i n the value o f these
conferences, a n d I belisve i f they were called together imore
frequently t h a t t h e r e s u l t s
w e would obtain would b e very
valuable t o the system.
I feel a s Governor Calkins expressed hinself, t h a t
without being intended a t all to b e insidious, thet there
was something sweeping i n that resolution, a n d while reiterating my belie fthat the action o f that committee i s not
likely t o incur any hostility, I will say, o n the part of
the other banks that a r e not represented o n it, I
do be-
lieve that the success o f that committee will aspend very
much u p o n t h e m e n n e r
egein I
i n w h i c h i t i s adminis tered. I
have n o f e a r b u t w h a t i t w i l l b e s d m i n i s t e r e d
say
in
e way i n which w e can all coneur, b u t I do feel thet before
any conclusions a r e srrived s t b y that committee thst m a y
be determinstive, that perhags the committee ought t o advise,
in advsnce o f reaching i t s conclusions,
s o that t h e other
Federal r e s e r v e b a n k s m a y h a v e 3
t o f o r m a n opinion
chance
and give their iniormation o r judgment t o the comsittee
before conclusions o r judgments are actud5lly resches.
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Federal Reserve Bank of St. Louis
Dr. Miller: I
think thet o n e very essential member
387
has been left o f f t h e comnittes, a n d that i s the Federal
Keserve Bosrd, I
think i t i s well t h a t y o u s h o u l d b e r e -
minded thet there a r e n o open market opsrations t h e t a n y
Fed r e l reserve b a n k m a y b e engeged in, except under r u l s s °
end regulations l a i d down b y the Federal Reserve Board.
should say, t h e r e f o r e ,
that
i n this metter, w h i c h i s a
pretty vitel o n e under a n y @ m nditions, 8 n d psrticularly s o
at t h e moment, t h e e d s r a l reserve banks should not operate
independently i n the sense o f ope reting upon aiiferent policies;
a l l t h e F e d r a l reserve banks s h o u l d operate
on
essentially the same line, towards the same end, a n d that
the banks which a r e n o t represented o n the committee should
be r e p r e s e n t e d
csuse t h i s i s a
b y t h e Federal Keserve Board, precisely b e matter c o v e r i n g policy.
thet thet must cbviously b e the case, I
i
t strikes m s
do not k n o w what
my colleagues think about it, but t o ne i t is very elsear.
1 feel that i n this matter the federal reserve banks are
dving something t h e t bears directly o n the purpose s n d o n
the basis upon which the Feders] reserve system operates
and towards which i t dlrects its inrluence, a n d thst they
have squething t h a t i s quite 6 s important andperhaps, u n d e r
concitions s u c h a s w e have a t the moment, m o r e tinpa tant
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3588
than the diseount rate, I
of t h e f a c t t h a t I
fesl that particularly i n view
a m e n t e r t a i n i n g t h e s a m e v i e w ur. J a y
entertains a n d some o f the others here, t h a t t h e volume
of credit i s t h e volume o f credit, a n d a n addition t o i t
or s u b t r a c t i o n f r o n i t i n a n y w i s e o r a t a n y p o i n t i s a n
addition t o o r s u b t r a c t i o n f r o m t h e total v o l u n e o f credit;
thet t h e influence i s more important w h e n exercised a t certain p o i n t s
o r i n c e r t a i n a n o u n t s t h a n i t i s a t o t h e r points,
but that sooner o r later aetion sither o n e w a y o r the other,
either b y the w a y o f intake a
outflow, afrrects t h e total
volume o f credit, a n d i t i s the volume or credit that w e
undertakr
t o operate
the r e d i s m u n t r a t e ,
o n when w e either 2dvance o r reduce
o r when, t h r o u g h o p e n moerket p u r e
cheses o r sales w e either l e n d t o the market o r borrow
from. the market. I
am, therefore, c l e a r i n m y mind that
this is a matter that i s of concern not simply t o the individusl banks, t h s t hep,en t o b e particupating i n pure
chases o r i n sales, but that i t is s matter o f very large
consequence
& Saye
i n which t h e redsral Reserve B o s r d must h a v e
I f i t i s any comfort t o t h e banks w h o are n o t re-
presented b y members
o n t h e conmittee, 1
think w e c a n m e k e
8 motion a t thisConference, e i t h e r o n t h a remumendation,
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Federal Reserve Bank of St. Louis
389
or b y informal agreenent among t h e members o f the Board
who are here, I
cen say, speeking a s one member o f the
a m still seeking light f r o m this Conference
Board, t h a t I
3s t o what y o u think should b e the proper policy f o r such
a committee t o pursue.
Governor Calkins: I
think I might s a y i t w e s o f
b e concourse assumed that t h e Federal Reserve Board would
it
sulted and would ect with this committee, a n d f think
4s assumed b y all of us that the Federal reserve Board
would perhaps feel that i t should teke i n t o consideration
the views o f those representatives o f the Federal reservi
banks who were not members oft the conmit tee.
That I
remarks.
think i s the whole point o f Governor Seay's
wr lilller: I
this point.
oppreciats that, b u t I
come b a c k t o
Y o u are here now. L e t ' s have your views.
for
We are going t o disperse a n d th: re might b e occasion
ection, L e t ' s have your vie 0s now, instead o f merely
saying w e have oone together for a little conference.
Governor morsss
our wmilttee,
I
n the absence o f the chairman o f
a n d o few other members o f the coimittee,
I would like t o remind this body thet w e did not propose
to d o anything b u t make recommendations,
s n d thst w e are
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Federal Reserve Bank of St. Louis
390
here n o w hoping t o get something i n the w a y o f a n expres~
sion o f opinion t o guice w u ¢ o thet w e may know w h a t t h e
sentinient is.
W i t h regard t o a member o f the sederal Re-
serve Board being o n the Conmittes, L f you will look a t
the minutes o f our meeLing, whetever w e did wes t o be i n
consultation i n some form with t h e “eserve Board,
i n any
form i n w h i c h t h e “ e s e r v e B o a r d c a r e d t o handle t h e matter,
the s a m e a s y o u c a m e t o N e w Y o r k t h e o t h e r d a y , w r ’ miller.
ur. Jay.wants a n expression o f opinion with regard
to definite object, s n d I
a m going t o suggest that h e make
& motion o n d thst w e adopt it.
ur® Millers I
lire day:
N o ; I
think h e has.
have not made a motion.
Governor worss: ' I would like also t o make s further
motion, j u s t t o get a t a n expression o f opinion, t h a t t h e
policy o f the committee f o r the present s h o u l d b e t o re-
duce holdings from open merket trénzactions i n the Feceral
reserve banks b y twenty-five per cent.
I d o not care
anything about 25 per cent or any other per cent, but TI
offer that i n order t o get i t into s little concrete form
so thet w e may gst a
mr® Miller: I
uefinite expression o f opinion.
will reed the motion, i f y o u want t o
dispose o f i t i n t h t way.
“For t h e present t h e amredit policy o f the Federal
Reserve cystem should a i m t o furnish credit a n d curreney
to member banks t e r their seasonal s n d suergency require-
ments, b u t such policy a s well s s open market operations,
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Federal Reserve Bank of St. Louis
should b e sdministered i n each ditrict i n sich msnner a s
to assist t h e system i n discharging,
a s far a s i t may b e
able, i t s national r e g onsibility t o preventcredit expsn-
sion from developing into credit inflation."
(The motion received several seconds.)
mr’ Mitchell:
I t strikes m e that with reference t o
the responsibility o f preventing credit expansion déveloping into credit inflation, t h a t i s something t h e t might
just o s well be left out, but understood.
I t occurs t o me
that i g this goes in, “with cue regard” instead o f the
expression “ t o prevent credit expansion r r o m developing
into credit inflation", thet i t would probably b e better,
so that i t would read, “ w i t h d u e regard t o the national
responsibility." I
personally ©
n o t like t o w e t h a t
expression “to prevent credit expansion from developing
into credit inflation."
Governor Norris; I
would m a k e t h e c r i t i c i s m o f t h a t
592
that D r u i l l e r m a d e o f m e yesterday,
question.
t h a t that begs t h e
w h a t i s its nationsl responsibility?
ure Jays I
to b e published,
hadnot assumed thet this w e s winething
b u t merely
a n expression showing t h a t
Our minds met o n the subject a s t o whether w e had any nstional responsibility, a n d i f so, whet i t was.
i t i s not
6 flatter for publication.
lure uitchell:
O u r actions are more o r less public.
lay*® days T h e n let's have i t informal.
Governor Norris:
B e r o r e w e aecice that,
i f w e are
going t o decide it, t h e main question i s whether w e should
proceed t o r e d u c e o u r i n v e s t m e n t holdings.
d n d l e I
do
not want t o argue sgsingt that I do think there i s one thing
we O u g h t
t o b e e r i n mind.
I
n the paper that I
terday and i n what I seid afterverds, I
read y e s -
tried t o rather
emphasize o u r duty t o a t times h o l d out danger signals a n d
to deal with a situation before i t became acute, while i t
Wes still cepable o f being d-alt with i n a practical and
Simple way.
B u t t h e very charge @geinst b i e Reserve Sye=
tem snd t h e charge that h e . created most o f the enemies
thet t h e system hes, i s that w e contracted credit, c a l l e d
loans, a n d contracted currency.
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Federal Reserve Bank of St. Louis
A t t h e present tiine w e
593
are sbsolutely guiltless o f these indictements;
did call loans,
w e never
w e never d i d contract currency, a n d n o w i t
is proposed that w e shell.
T h e srgument i s mede that w e
have ¥750,000,000 i n credit out now and that w e should call
@ part o f t h a t i n b y s e l l i n g t h e s e c u r i t i e s r e p r e s e n t e d ,
Now, i f w e believed that this present pick-up i n business
was 6 permanent one, w a s going t o be a cantinuous o n e a n d
was liable t o grow, I would feel thst thet was the wise
thing f o r u s t o do, t h s t a
situation h a d arisen where
we should take preventative measures; b u t a s f a r s s m y
limited inrormation enables t o forii any judgment a t all,
I d o not belisve thet i t i s thet k i n d o f s movement. I
think that srter t h e dnmediate effect o f t h e adoption ¢
new terirf h a s been f e l t , after t h e crops have b e e n
marketed a n d sold, a n d after t h e people's c o a l bins have
been fllled, a n d arter the acute shortage i n building c o
struction has b <n met, thet this little boonlet that w e
have n o w i s going t o rads awsy. N o w , i f I s m right i n that
and i n t h e meanti:.e w e have contracted credit, whether i t
is 4175,000,000, which would result t r o m the adoption o f
ur’ liorss' 2 5 per cent, o r whether i t is ,350,000,000 o r any
other sum, I
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Federal Reserve Bank of St. Louis
think that w e ought t o reslize that w e d o then
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Federal Reserve Bank of St. Louis
594
lay ourselves o p e n t o the charge t h a t after business h a d
been flst o n its back t o r a period o f six inonths, t h a t t h e
wonent i t had gotten o n its feet, u p o n its Knees, t h a t w e
proniptly proceeded t o hit it.
wh, wlllers I
do not follow y o u a t sll a n d I do
not think you are looking a t other features o f the situation.
Y o u are perhaps closing one avenue o f dealing with
the federal reserve banks, but other avenués are open and
available,
t o wit, rediscounting a t four per cent.
I f you
want t o do i t i t i s a fair proposition t o sugsest that w e
might meke thet method o f dealing with the reserve banks
easier b y r e a u c i n g t h e r a t e t o t h r e e a n d a
halr p e r cent,
but w e ourselves are simply not going into the market.
On the contrary w e are walking out.
open t o r a n y o n e w h o i s a
T h e door i s s i l l
member b a n k t o c o m e i n t o t h e
Federal reserve bank and get accomodation a t four per
cent.
I f you think thet i s too high t h e proposition o f
reducing that might b e considered;
b u t w e are not contract-
ing credit; w e are simply refusing t o take the responsibility o f jamming credit i n t o t h e market o r o f keeping i n the
market a
volume o f credit that t h e market never sought
from us, b u t which w e put there a t a tine w h e n w e thought
395
that t h e r e w o u l d n o t b e surgvicient d é u a n d r o r t h e c r e d i t
facilities
o f t h e Federal reserve banks
t o enable t h e m t o
meke their operating expenses a n d dividends.” I
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Federal Reserve Bank of St. Louis
lis ve any cherge whstever could b e iade under a
that k i n d that w e are contractingcredit,
do nd. bepolig
o f
a n d i f so I tink
it wes & very s e r i o w m i s t a k e e v e r t o heve gone into t h e
market w h e n the banks d i d go.
mre Crissinger:
now what w o u l d happen,
f they p u t those o n the market
I
s o t a r e s the sale o f Government
securities l e concerned?
Governor Norris:
T h e fect that ur. Calkins called
attention t o this morning wes that our increase inholdings
of Governijient bonds o r securities i s almost exactly equal
to the reduction i n our reaiscounts
o n uovernment obliga-
tions, a n d while that would seem t o su_gest that that was
a pure transfer o f credit f r o m o n e form t o another, I
not myself think thet thet i s true. I
an interesting coincidence.
do
think i t i s rather
' I think our operations i n
Government securities arrect t h e espitel nmerket more t h a n
they d o t h e c r e d i t market. I
think w h e n n e b u y Govern~-
ment obligations i t i s a transfer o f osnership o f those
obligations
i n greater part, r r o m one invec.tor t o snother,
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Federal Reserve Bank of St. Louis
396
end that operstion i s one thet sitects t h e f u n d o f invested
capital rather than the fund o f credit, amd i f s e sold then
the effect w o u l d b e t o depress
p r i c e o f Government
securities, which would lead people t o buy Government
securities, o r otherwise they would have bought reilroad
bonds
o r f3rii l o a n bonds,
o r something else.
ure Crissinger: A s s u m i n g thet i t would not depress
the price, w h e t woulda happen?
I f i t d i d not de,ress 1 b ?
Governor Norris:
wr, Crissinger:
L e t us assu.e that i t didn't. #shat
would hap:en i f they were s o l a ?
Governor Norris:
a n e n they w e r e s o l d that money
would have t o coue trom soOuwewhere, probably i t would come
m
other invé:tors,
o
r
o r rroni
f
neonie w h o borrowed t h e money
&<
to
trom banks t o buy them, a n d t h e money w o u l d coOue back
US.
I f would have t o come from souewiere.
ur’ Crissinger:
Y o u have not very clearly snswered
it, i t seems t o me,
Governor Norris: I
e m tree t o admit t h a t I cannot.
I do not know whether snyboay con.
up wdllers
Somewhere?
Y o u s a y that i t would Inve t o cous from
Governor Norris;
ur’ willer:
Y e s .
w h e r e i s t h a t souiewhere?
Governor Norris:
I r they were bought b y investors
they would draw chscks o n their banks, a n d i t would cone
out @
t h e deposits o f the banks.
ure Crissinger:
T h e n what w o u l d he:ren?
Governor Norris: A
few hundred millions c r a w n from
the deposits o f t h e banks o f t h e country would not produce
any p e r t i c u l a r s f f e e t t h s t I
ur” willers
c o u l d i i a g i n e o f a n y kind.
B u t suppose thst i t vrocuced consider-
ableefrect; t h e n w h a t w o u l d heppon?
Governor Norris:
effect i t was. I
I t wouldg depend o n whet k i n d o f
cannot i n e gine what k i n d a f aneftfect
it would produce.
wr® w i l l e r s
Suppose
i t limited t h e lending capacity
of the banks b y just thst m u c h a n a they still had c o m e r eclal Gemands o n them?
Governor Norris:
T h e y would either have t o
their cuetomers o r increase their reciscounts.
ur’ ludllers w h i c h d o you think i s more likely o f
the twof.
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Federal Reserve Bank of St. Louis
Governor Norris: I
think i t i s more likely that t h e y
would increase their reuiscounts.
ure Crissinger:
A n d that i s the point.
would i t appear better?
heve rédiscounts,
v o u l d i t b e better policy t o
o r t o heve 3
Governor Norris:
W h i c h way
bond account~--
T o have rediscounts, decidedly. I
ar. not saying that t h e chsrge that i s brought : a g a i n s t
uswould be 6 just charge, because w e could make, snd properly make, j u s t thet defense t o it; b u t 1
think t h e charge
will certainly b e made, a n d i t would require sole explanation a n d derense, s n d i t would b e e n explanation 3 n d c3fense
that would not appeal t o the m a n o n the street because i t
would not be understood b y hin. T h e r e wouldn't b e any
getting away from the fact that, w e t h e r w e put credit
out wisely o r unwisely, e n d granting that the uoor was
i ¢ in and get a like
etill open tor 3 new borrower t o
onount o f credit i n snothsr way, t h e fact would still reingin thst x e had put
t r
a
4
s
i
x m o n t h s o r a year
go e n d thet w e were
Governor horss: Y l o u l d w e not b e léss liable t o criticism for sélling securities than w e would be for raising
the aiscount rate?
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Federal Reserve Bank of St. Louis
Governor Norris:
Y e s , but I do not think w e need d o
either.
mm, Jay: S u p p o s e w e had a couple hundred millions
in gold coning i n i n the ne«t s i x months.
H o w would y o u
meet i t ?
Governor Norris: I
would leave that t o ths N e w York
Benk.
Governor strong:
tuslly taken plsce,
the lo.est rete.
B u t w e cai not overlook what h a s ace
T h e marketslwaoys tskes o u r money s t
# 6 c a n count o n that.
w e have convert-
ed about 130 o r 140 millions o f Governrient security holdings, 6 n d almost thst exact smount h a s been teken back b y
the market i n our bill holdings, G u r i n g t h e period that
the c o m m i t t e e h a s b e e n r e d u c i n g t h e investinent h o l d i n g s ,
snd d u r i n g t h a t p e r i o a b y s l l o w i n g mseturities
t o r u n off,
our b i l l h o l d i n g s h a v e c o r r e s p o n d i n g increased.
I
t has
peen niy belief, looking s t the whole picture o f this
sscurity proposition that i t would b e possible f a r u s t o
.@ this,
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Federal Reserve Bank of St. Louis
t o continue Liquidation
o f s o m e o f o u r holdsings
of Govermiient cecuritiss, principally b y selling t i e m t o
the T r e a s u r y a s t h e y requirecd t h e m f o r r e l e a s e o f funds,
to some extent b y aliowing maturities t o r u n off a n d not
reinvesting, a n d i f w e cid n o t r u n this bill rate u p too
400
fast w e would srrord t h e relief w h i c h the market needed,
by gold imports, e n d b y the netural increase i n the holding
of b i l l s t h a t w o u l d yvlow i n t o t h e b a n k o f N e w Y o r k f r o m
the market, a n d n o great smount o f aiscount would b e forced
upon t h e reserve banks until o u r bill rate g o t u p t o the
cis® unt rate,
F r o m our past experience t h a t i s sbout
what will heppen.
A f t e r liquidation o f t h e Government
securities t h a t w e d-cided t o sell, t h e n i r the bill rate
gets up t o the discount rate, possibly sometime hence we
Will face the question o f then considering whether a change
in the discount rate i s needed, provided business d<«velopment indicsetes a need ror any diange a t all, which I
doubt.
Referring now to sonething that I only partly heard,
es I wes called out o f the room, I
think there i:ay be a
little misconception o f just what the function o f this cone
mittee i s supposed t o be.
m y thougut i s thet this meeting,
Which was called f o r this particular purpo:e, w i t h t h e
FeGerel Reserve B o a r d present a n d with t w o cixicers o f
each reserve b a n k present,
w s c a n d-cice u p o n s policy,
not delegate t h e decision o f the policy t o mybody,
cidé u p o n 4
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Federal Reserve Bank of St. Louis
policy,
b u t de-
s o that w e c a n g o hous t o our respective
401
banks, explain this mstter t o o u r directors a n d secure
their approval o f the policy which w e have joined i n reenimending t o thei, s n d when thet policy h a s b e e n adopted
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Federal Reserve Bank of St. Louis
then each reserve bank, u n d e r that o r some other formuls,
will b e able t o instruct t h i s comittee, w h i c h slaplyhes
a purely ministerial function,
t o perform a n a execute orcers
intellig:ntly i n the market; a n d when w e get orders, p o s -
sibly t o sell souwething i n the markst, i f thet canes a t a
time when a transaction b y the tressury i s under way or
is contemplated, i t may make i t advisable for the @umittee t o recouuwend t o the bank r r o m which t h e order comes
that i t i s a n imopportune t i n e ror t h e m t o mske t h e transaction.
T h e sane t h i n g might
chase orders.
B
u
b e true w i t h regard
t o pure
t this conmittee h a s n o t a n d should
not have, dslegated t o it, a n y cecision a s t o policy whate
ever.
I t sesns t o m e thet -usstion would b e decided here,
and y o u w i l l o b s e r v e t h a t t h e o c t i o n w h i c h w a s t a k e n a t
the Governors!’ Conference d i d not contemplate that t h e
conuittee should d o any sore then that particular thing,
make recomendations
a s to
s s t o when i t wes opportune,
the merket a n d e s t o conditions, w i t h which t h e @
keeps especially inyormed,
t o execute a n order.
mmittee
K a c h
402
reserve bank hes got t o decide o n its investment onders
and how they shell conrorm t o the system policy.
So far s s the credit position i s concerned,
f e e d
very well satisfied with m y expsrience that i t will work
about a s I have describea,that o u r bill holdings will gradually g o u p a s the Government investment holdings g o down,
snd when the bill rate gets up to 4 per cent, then we are
confronted with a decision 3 s t o wiether the dis count
rate shall b e changed.
ur tillers
T h a t means, virtually, t h a t y o u maintain,
in one form or another substantislly the present volune
of investment i n the market.
T h a t i s reolly whet i t
means ?
Governor strong;
I t neans that the thing which Gover-~
nor Norris teared would not b e brought about b y the sdoption of 5 policy simply t o sell governuent securities,
wy comment upon the policy o f buying these :ecurit ies,
if it i s a criticign a t sll, i s not criticism o f the policy
of buying them, b u t i t 1 s criticisn o f the twelve reserve
banks, without a n y policy, seach o r itself, b u y i n g ,500,-
000,000 i n securities without regard t o what the effect o f
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Federal Reserve Bank of St. Louis
the section o f all collectively might have been,
T h i s sug-
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Federal Reserve Bank of St. Louis
403
gestion w e s asuggestion o n l y @
principle,
a s Governor
Calkins expresssd it, namely that investments b o t h i n
Government securities a n d b i l k s h o u l d ultiu.ately b e regulated sonewhat w i t h a view o f reuwucing t h e total a s d i s
counts g o up.
ur. Hamlin;
T h e r e i s no contraction there.
Governor Strong:
A n d possibly--- I
put i n the word
“possibly” presouse i t mey b e a long time i n the future before w e face this, b u t w e have g o t t o look o n both s ides
or t h e o p e r a t i o n - - «
a n d possibly i n c r e a s i n g t h e m é s d i s -
counts g o down, a n d make t h e investment operations o f t h e
reserve banks under cection 14, i n both bills a n d securities, somewhat o f s regulatory influence i n keeping t h e
volume o f credit ressonsbly stsble,.
nr miller:
W 1 1 1 y o u repeat t h e first half o f that
resolution sgain?
Governor strong:
T h a t investieuts b e regulated
so..ethat with e view t o reducing thetotal o s discounts g o
Up.
Governor Norris:
T h a t I am in complete accord with.
The thing I have m y doubt about i s t h e further suggestion
that instead o f thelr being reauuced a s rediscounts g o up,
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Federal Reserve Bank of St. Louis
they b e r e d u c e d
i n esdvance o f r e d i s c o u n t s g o i n g up.
ar w i t c h e l l : I
would l i k e t o s s k @
to get a t this proposition.
question
i n order
I f I understand the semti-
ment i n .any o f the banks regarding sarnings i t is t o nske
énough t o neet o v e r h e a d e n d t o p a y d i v i d e n d s ?
thet that i s peramount with most all o f the banks.
Now,
if thet i s their a i m I cannot s e e shet ditfrersne: i t makes
Whether t h e #ederal reserve b a n k has bills o r securities
in i t s portfolio,
s o l o n g 8 s i t mests 2 1 1 o f t h e require-
ments o f the dienber banks.
N o w , i s that the first s i m of
the Federal r-serve banks,
t o acet t h e overlead expsnses
3nd dividends? I
ed here. I
would like t o hive that guestion snswer-
think there i s sons Girverence o f opinion a s
to whether thet i s necessary o r not, s n d + would like t o
Know w h a t t h e senti:ent h e r e i s with t h e Federalreserve
banks.
I
t ssoms
t o n e that i s something t h s t ought
t o be
settled before w e c a n decide anything slse.
Governor ctrong:
A t a weeting o f the Governorsycat
Which o11 of the banks but vballas sere represented, w e approved @
recommendation o f this committee o n investusnts
to t h e stfect thst regard should n o w principally b e had
in making Investments t o the condition o f the credit warket,
405
with cue regard t o the Tressury, o f course, rether than t o
earnings.
Governor Norris:
v
6 Opproved a
reco;nenaation b y
the acvisory Council that these operations should not b e
controlled o r afrecteé b y t h e necessity o f esrning expenses
end making aGividends.
wr. Austin; I
would like t o know ihether this reso-
lution w a s sver presented t o the Beard o f wvireetors o f the
banks s n d sdopted b y them. I
know thet i s n & true with
our bank,
Governor otrong: I
cdo not think e n y o f u s decide
at these weetings upon policies which are not t o be submitted t o our airectors, b u t w e icet r o r t h e purpose o f arriving a t conelusions o f which w e hope o u r directors w i l l
epprove, 7
ur’ A u s t in: I
did not s a y that i n criticism, b u t
it seems t o m e t h e question Dr* willer raised i s one o f
whether the res:rve benks would survive,
got t o live.
h i l e y o u m a y b s ve i n j e c t j
T h e banks have
t h e market
w?00,000,000 o f credit which sppsrently t h e
business activity o f t h e country c i d not require,
i n the
way o f rediscounts, b u t w e have g o t t o invest i t i f w e want
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Federal Reserve Bank of St. Louis
406
to make o u r expenses s n d pay o w divicaends.
T h e orgsniza-
tion o f t h e banks 6 s banks made certain investment f r o m
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capital o f 5 certain auount o f funds t o keep t h e m going.
Governor Strong: Possibly I can throw some light o n
the matter b y resding some figures.
T h i s comuittee, prior
to the meeting, g o t s reportfrom each o f the reserve banks
as to its earnings. T h i s report, figured upon the basis
of what will be earned this year upon existing investments
end what i s estimatsd t o b e the d i s c o u n t s f o r t h e belance
of t h e year.
T h e s u r p l u s o v e r é x p e n s e s s n d divic-nds
for Boston i s »357,500,
New York, 3 7 0 3 , 0 0 0 ,
Philauslphia, 4%1,390.006;
Cleveland, ~977,000;
Richmond;
387,000;
Atlanta, $696,000;
Chicago, %340,000;
St. Louis, $38,000;
winnespolis, 2 6 2 , 0 0 0 ;
Kenses City, 382,000;
Dallas; <195,000;
sen ¥rancisco, $351,000.
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te millers I
am going t o ask thet thet resolution
of yours b e read agein, Governor Strong.
Governor Strong:
T i s w e s v e r y h a s t i l y prepared.
T h e
suggestion i s that i n principle investi.ents, including both
Goverrmént securities a n d bills b e regulated sowewhat with
8 view t o reuucing t h e total o f those t w o sccounts s s discounts g o up, a n d possibly incressing t h e total 4 s dis-~
counts g o down.
ur” miller:
N o w , translating that into sliiple mng-
lish, onthe basis o f the present statement,
w e are l e n d i n g
a billion s n d a guerter i n the money aarket o f t h e country
at t h e present monent, s n d t h e resolution proposes t h a t
sg w e l o a n m o r e t o t h e market,
counts
g o up,
w e reduc
chases somewhat.
i n c t h e r w o r d s 4 s redis-
t h e si.ount o f o u r o p e n m a r k e t p u r -
N o w , i s i t realized t h a t a n addition
of five hundr c millions t o the ssrnings assets o f the “edersl reserve banks s n d that ..750,000,000 would iiean that t h e
reserve system w 8 s agsin supporting #
very concidsrable
volune o f barking and conuercisl creait i n the country,
not s o v e r y f a r f r o m t h e v o l u m e t h s t w e h a d w h e n e x p s n s i o n
in this country wes 9 pretty serious tector?
wy Own teeling i s that that resolution practically
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408
anounts t o this, putting i t i n plein, every-day spsech,
thet t h e redsral HKecerve system i s prepared h e r e a n d now
to subscribe t o a proposition that i t i s going t o support
6 new movenent tosard inflation--~- t h s t i s what i t means
trenslated into ls. guage, a n d when you say that you think
you c a n give sufficient relisf t o the market b y gradually
working your rste u p t o 4 per cont, I just wondered what
the market i s that needs relief, e n d that i s entitled t o
relief, e n d i am wondering how much w e have already ariven
it from the reserve systei toward certsin tendencies that
heve swakened a
good « s a l o f concern---
Governor strong:
Y o u realize that this i s addressed
to s situation which exists, s o far ss that investment
account may b e regarding
a s having crought about any
inflation that h s s hsp,ened, and---
we giller: (Interpodng) T h a t is just the thing
that iakes u e extremely concerned apout thie thing, T h a t
is what usually hepeens i n the Federal Neserve systen--son.ething hepnens s n a after.erds w e meke 2
prnouncement
thet i t h e s hsppensd.
Governor strong:
B u t 1 do not think thissction did
bring about the inflation, bre iiller.
I t hac the same
409
efrect a s gold imports, b u t just a s has b e e n s u g e s t e d
here, a t t h e level o f rates which preveiled w h e n thie i n vestment w e s nade,
i t simply fecilitated repayment a @ loans
to the Federal reserve banks,
if w e hed n o t make that I
t h a t would have occured
a m not willing t o prophesy.
It
is impossible t o surmize whether, a t the level o f discount
rates which were t h e n mainteined, prectically t l e seme a s
now, not quite, whether the market would have gone o n co nverting goods i n t o bank credit, e n d bénk credit i n t o l i quidation o f losns---
ae ltchell: (intserposing)
A s I understood your
suggestion y o u sre proposing t o prevent s u y further
inflation o r possibility o f inriation.
T h a t i s a s I under-
stand, a n d +think Dr. willer has gotten the wrong engle o f
this thing.
ur” orissinger.
ure Mitchells
H e proposes t o reduce i t ?
N o , h e proposes t o hold i t where i t
Governor -trong: P u t t i n g i t a littie ciiferently,
unless I
misunderstand you, y o u would advocate thet w e
mark u p t h e r a t e o n b i l l s
t o t h e l e v e l o f o u r ciscount r a t e
and t h e n p r o c e e d a l s e t o Lliquicate s o n e p a r t o f o u r h o l d i n g s
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410
of Government securities, a n d bring about a n oetusal contraction of bankcredit, a t least t o the extent that liquidation o f our investients exceeded t h e amount o f gold idiwports-and o f course thismenorandum i s deficient i n not rererring
to gold imports--- a n d I
a m suggesting t h e t a policy might
beadopted to keep this voluue of bank credit as steble
6S w e may, a n d s s these developments unfold w e hiay
need t o make 9 change.
T h e r e might b e a demand r o r credit,
a perfectly legitimate deiiand which should b e met, w h i c h
would cause us t o stop liquidating the investment account,
even though o u r discounts d i d g o up.
ur’ niller: I
an not proposing anything. I
trying t o get light. I
an
am trying t o see o n whet spound
you can reconcile s policy thot i s described thers with
the v i e w t h a t y o u a n d G o v e r n o r m o r s s h a v e g i v e n o f t h e c o n
ditions i n the s s t e r n district.
T
h
e inpression I
have
gotten i s one that indicates s u m e degree o f concern o n
your pert a s t o shat i s i n process, a n d I say thet whatever m a y b e i n process, e v e n though there m a y b e something
which i s undesirable a n d c@leulatsd t o give concern, t h a t
you a r e a d d i n g t o i t sand y o u a r e c o n t i n u i n g
t o sdd t o i t
6s you are contributing through these investment holdings
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Federal Reserve Bank of St. Louis
411
a very large block o f credit. I
ani not s o nuch concerned
with the past, except a s i t enables u s t o get s o n e indicasay thet a
tion o f good policy s o r the ruture., I
fair
reading o f w h a t h a s g o n e o n i n t h e p a s t y e a r , w i t h re1rerence
T h a t the redsral
to your last statement, i s sbout this:
reserve banks severally, i n the beginning o f the year 1920,
begen t o p u r c h a s e G o v e r n u e n t s e c u r i t i e s f o r t h e p u r p o s e
of making esrnings; b u t thst volume h e s grown t o the nagni-
tude of three juarters of a billion doilers a t the present moment, s f t s r soue consia< rable sales.
to t h s t t h e r e h a s b e e n p u r c h e s e d
I
n addition
b y t h e banks approximately
a querter o f 5 billion dollors w o r t h o f bilis,
s o that
through voluntsry operations--- 1 think I sm overstating
tt a little--- b u t through voluntary operations, b s g u n
originally f o r the purpose o f macing earnings, t h e Federal
s
a r d s s o r et h r ere
e ks
v a v er u p w e
h
ban
uarters
oe.
of a
hillion
losned t o the market, e n d they a r e now arraid o f pulling
thet o u t o f the market, l e s t 1 t work soue disturbance.
How d o y o u r e c o n c i l e t h a t w i t h s u c h e x o r e s s i o n s
o f con~
cern a 8 Governor morss a n d Governor Strong have g i v e n with
respeet
t o impending conaitions
i n t h e money market?
o e s
it mean that w e are permanently g o i n g t o have t h e reserve
412
benks w i t h a billion o r more loaned t o the tarket?
m y
own theory about i t i s that t h s only justification, t h e
only real justification that a red-ral reserve b a n k has
for ever going into t h e market a n d purchasing investiuents,
particularly government investients,
i s that i t garners
those u p i n times o f extrenie money plethora a n d money s o s e
8s ageinst a
tine w h e n i t w i l l need something t o operate
with before i t c a n effectively perform i t s true function
of rediscounting,
a n d if it be continued beyona that
point t h e n t h e Fedsral reserve banks actually become inten-
tionally,
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Federal Reserve Bank of St. Louis
o r with inadvertence, contributor t o a result
that m a y b e very undesirable s n d Gangerous, a n d I
ing whether,
a n wondere-
o n such 4a curvey o r t h e situation a s t o the
eastern districts thet you give; you are not actuaily i n
that position now.
Governor morss:
O n e o f t h e worst reaturés
o f open
market transactions i s thet i t obscures t h e réal demand f o r
business,
Y o u cannot b e sure sfietLer you are forcing
eredit into t h e market o r uhether there i s @ real cemand
Loe 2 h
I z v the open market holdings w e r e reduced today
and replsced w i t h rediscounts, t h e n w e could b e sure that
the market demanded that amount o f crealt,
I f some holdings
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Federal Reserve Bank of St. Louis
413
were liquiuateda * n d they w e r e replaced w i t h re. iscounts,
it would show that t h e y hada been artificially p u t in.
uPe lulller:
Y o u c a n say this w i t h a
cegree o f truth, t h a t i f you g o into t h e narket a n d buy
short securities @
a n y kind y o u a r e forcing somebody elses
to look elsewhere f o r short securities?
Governor t o r s s :
mye uillers
Y e s .
A n d i n rorcing h i i t o look elsewhere y o u
are actually beginning t o rorce a n expeénsion o f credit,
pbeceuse h e i s not going t o exercise t h e sane wise judgment
in behslf o f the gener2l credit situation that the rederal
reserve b a n k i e y b e presuucd t o exercise,
A
n
d here i s
where this really becomes § i.stter o f considereble inporte
ance.
F o r lack o f anything better h e puts i t into t h e
call market, a n d i t cecomes a
contributary rorce t o whate
ever i s going o n i n the nsture o f stock exchange speculation.
Governor otrongs I
have b e e n sceaking f r o m t h e stand-
point o f the committee,and w h a t thse committss uncerstands
to b e the consensus o f opinion o f t h e reserve bank.
to the New York bank alone, I
a m quite willing t o s a y that
our p e r s o n a l d e s i r e w o u l d b e t o l i q u i c a t s t h e s e securities,
414
possibly f a s t e r t h a n i n d i c s t e d
i n this memoranduu, p r o v i d e d
elways t h a t i t c o u l d b s d o n e w i t h o u t a n y i n c o n v e n i s e
c
n to
the tioney nerket a n d t o t h e Treasury, w h i c h i t might serlously sfrect. I
a m not s u r e s b o u t t h e other reserve
banks, but I would b e willing t o g o 3s far 4 s thet.
the
Now, there i s = grest desl that depsnds u p o n personal
judgment a n d d i s c r e t i o n w i t h w h i c h t h e actuel e x e c u t i o n o f
these orders i s sexriected f r o n tine t o time, according t o
the condition o f the market.
T h e tact i s that y o u hsve
8 very f a v o r a b l e tiise n o w a s 5
result
o r t h i s sale, s n d
ZLwould l i k e t o s s e t h e r e s e r v e b a n k s t s k e a d v s n t e g e
it.
of
i f this sale results i n large bélences tor the
“reasury, and et the sane time, a s it will, makes virtuslly n o discounting,
b y banks w h i c h h a v e n o t c i s t r i b u t e d
the new issue o f bonas very fully, t h e minute t h s e balances
are createc a n d seek a n outlet i n the iwarket, a n d they a r e
balences t h a t r e q u i r e n o r e s e r v e a g a i n s t t h e m , t h e n y o u
Will have a merket which will liquidate even more rapidly
then this--- b u t t o sdopt t h e policy o r saying, irrespective o f conditions, t l e t w e nust reduce t h i s investiient
account a n d force 6 certain siount o f liquidation, I
not want t o sxecute it, simply 9 s a n agent,
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Federal Reserve Bank of St. Louis
would
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415
ur, miller: I
do not think enybody i s proposing that
or would have thet i n mind, b u t I think there i s 4 vast
difference between that e n d saying t h a t y o u will d o i t a s
repidly a s i t c a n b e done without csuging inconvenience t o
the market, s n d t h tto my mind means that i t won't b e
aone,
I t could n o t b e done without causing invonvenience.
Governor otrong;
S e r i o u s inconvenisnecs.
ir” willer: I n c o n v e n i s n c e t o a .arket i n which money
rates should s h o w @ tendency t o rise.
Governor otrong:
I t will cause incressed rates;
hsven't @ doubt o f thet, ultiaately, b u t there will b e
times w h e n w e c a n G i s p o s e
o f a good m a n y c e r t i f i c a t e s w i t h -
out a n y inconvenience t o the market, s n d errect a
notirial
reduction.
iy. Crissinger: O u g h t thet not b e done b y all the
banks?
Governor strong: I
do not like t o speak vor the other
banks,
ur G i s s i n g e r :
Governor otrong:
s p e a k for yoursslver, then.
s O Isr 8 8 Wwe are concernea i n New
work, w e have v e r y largely reduced t h e holdings that w e
had,
N e a r l y o n e h a l f o f t h e s e c u r i t i e s t h a t 9,:.sar i n
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Federal Reserve Bank of St. Louis
416
ow account a s investments a r e really loans.
think w e c é n work
ing them far d e a l e r s , a n d gradually I
them off.
w e are carry-
T h a t i s wheat w e want t o do.
(Discussion followed s s t o whether o r not action
should b e tsken o n the resolution submitted,
o r shether
the Conféerencs shoulé recess until the afternoon. )
Governor strong:
tidn,
d h a t I
{ i really have oxrfered n o resolu-
have o f f e r s d i s ¢ i m p l y r o r < i s c u s s i o n a s
I f the feeling is that the tine has co.e to
topolicy.
foriulate that more carefully, i t can b e done i n the form
never contemplated t h e t that would
of a resolution. I
b e
sdopted as 3 resolution a t all. u r ’ day, however, has
offered a
resolution w h i c h ssesib t o m e t o p r e c e d e this.
mre Austin:
L
I would l i k e t o otfer
wr, J a y ' s resolution,
c e r t a i n r e s o l u t i o n 4 s t o invest-
t o the efiect t h a t w e should n o t consider
earnings i n niaking our investments.
is concerned,
to
T h e statement h a s b e a n made t h a t
the Conference: p a s s e d 3
ment policy,
o n s.endment
S
o f a r 3 s our bank
w e have ignured t h e resolution because w e
have kept o n investing with the idea o f earning our expenses
end s o on. I
would l i k e t o add that that b e referred t o
the d i r sectors o f t h e s e v e r a l F e d e r a l r e s e r v e b a n k s f o r
their c o n c u r r e n c e a n d criticism.
mr” mitchell: I
part @
think there i s s disposition o n the
t h e directors t o insist that sulricient sarnings b e
made t o pay dividends,
ur, Bay: I s n ' t anything thst eithsr the Chairnien,
the Governors,
o r this joint body edopts relative t o policy,
only a n expression o f bpinion b y t h e conferences.
t h e
policies o f the different reserve banks a r e decided b y
their b o a r d s o f directors,
u n d e r t h e general supervision
of t h e Federal Reserve Board, b u t t h e boards o f directors
cannot c o m e together, s n d w e are, theoretically,
t h e nedium
through which t h e policies c a n b e fornmulatsd a n d referred
to the boards o f directors f o r their consideration,
Governor easy: V e n t l e n e n , I
pose o f thi t h i n g i n five minutes.
beélisve w e w u l d dis-
I s n ' t the main point
the fact that there should not b e sny abtificiality i n the
credit situation, brought about b y the arbitrary ection
of t h e Federal reserve banks i n niaking investitents? ©
times past w e were compelled,
e s w e thought,
In
t o pay due re-
gard t o our earnings, a n d that t h e y should b e surricient
to pay o u r expenses a n d meet o u r dividends, a n d I think
if w e were faced with thst condition again w e would s l l
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Federal Reserve Bank of St. Louis
418
feel t h e same way s o u t i t .
W i t h thet feeling w e made
certain i n v e s t m e n t s t h a t h a v e b e e n r u n n i n g off.
best way, i t seems t o m e ,
N o w , the
t o eliminate t h e artificiality
from the situaticn i s Just about what Governor Strong has
proposed, a n d I
a m prepared t o vote f o r thet, because I
think i t i s the least pernicious w a y o f eliminating artificiality t r o m t h e credit situation,
s o far a s the federal
reserve b a n k s h a v e b e e n r e s p o n s i b l e r o r b r i n g i n g i t about.
br* miller:
b o you reslly aduit there i s artiricial-
ity?
T o the extent that w e hold invest-
Governor seay:
wents, because t h e y hive n o connection w i t h operation a n d
trade, L
a m o f the opinion that t h e y have interjected
artificiality i n t o t h e ersdit situation,
ure witchell:
T h e reason you are holaing the investe
ments i s t o make enough t o pay overiead 4 n d dividends?
Governor Seay:
T h a t i s t h e moving cause, é n d n o w
thet w e have done it, how can we eliminate i t without
Going a n y harm?
wr, Hemlin;:
H o w c a n w e ¢liminete i t through Governor
strong's resolution?
Governor seay:
B y doing that w e substitute credit
419
srising f r o m trade transactions r o r credit crested b y investment transactions.
mr’ Henlin:
T a t G o e s n o t atrfect t h e q u e s t i o n o f
bank earnings s t all.
H i s resolution simply says thet w e
should change o u r investments,
loans.
T o that I
s o f a r a s possible i n t o
say amen, b u t i t coesn't affect t h e ques-
tion o f whether t h e banks shoulda earn divicends.
ur’ Miller: I
would not say ordinarily that our
proceedings should necessarily b e governed b y strict parliamentary form, b u t mr, J a y has orfered a
r e m lution, w h i c h
puts t h e question very directly; y o u c a n w t t l e i t b y
adopting it, you can vote i t down o r it cen be smended.
The motion hss b e e n duly presented,
i s entertaired s n d i s
before y o u f o r action.
Governor seay:
mre Jay:
R e a d i t again, mr, day,
T h a t t o r t h e presei.t t h e credit policy o f
the Federal Keserve system should a i m t o furnish credit
and currency t o member banks f o r thsir sessonal s n d emergency requirements, b u t s u c h policy a s well a s open market
opsrations should b e administered i n each district i n such
menner a s t o assist t h e system i n dischsrging,
e s far 4 s
to may b e able, i t s national responsibility t o prevent
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420
eredit expansion r r o m developing i n t o erecit inrlation.
Governor seay: I
move t h e Glimination o f everything
after the words “national responsibility". I
agree with
ur, mitchell that i t will accomplish everything t h a t w e have
in mind,
ax. Hamlin: I
move thet Governor Strong's expres-
sion o f opinion b s substituted f o r that omission.
wr, Jays T h a t only covers o n s thing, «r. chairman.
That i s only | small detail o f our responsibility.
Governor Norris: I
am for both resolutions, e n d i
am tar ur’ Jay's resolution i n its original worm. I
do
not want any discussion, but i f there i s eny further ciscussion I would like t o see = vote o n the amendment t o «ar.
Jay's r e m lution,
bre M i l l e r s I
i may.
want t o make a
midway s u g g stion,
if
u r . Seay's smendment w u l d n a k e t h e last part o f
the resolution resd “such policy t o be aduink tered i n each
Gistrict i n w e h manner 3 5 t o assist t h e system i n dis-
charging
8
s Tar s s it may b e sble its national re-
sponsibility," a n d i t strikes m e that i t simply means i n
that f o r m thst attention must b e paid t o the national
situation a s w e l l e s t h e d i s t r i c t s i t u a t i o n .
T h a t
421
strikes m e s s only a
partiel solution o f the problem that
has pneen brought u p i n the aiseussion, a n d I
a m wondering
whether i t could not b e smended s o 3 s t o b é so..ewhet m o r e
d-finite, a n d a t the sane time t o svoid the ohrase obiscted
to, b y being meade t o resd s s follows:
“ t o b e sdmninistered
in each district i n such manner a s t o sssist t h e system
indischarging a s f a r a s i t m a y b e able, w i t h primary regard
to t h e money situation a n d t o the relation o f the Federal
Reserve System t o ite--"
Mr. mitchell:
8 suggestion. I
policy,
I
f t h a t i s y o u r s u g sestion, I
will m a k e
would s u g . 2 s
o
t that i t read "Thst s u c h
a s weil @ s open nserket operations s h o u l d b e adminis-
tered i n esch district i n mech mé@nner a s t o assist t h e
System i n discharging i t s nationsl responsibility with re-
gard t o generel credit conaition:.”
urs Jay: I
wouls e c c e p t thst smenduent.
wr’ miller: S u p p o s e i s should take ure witehell's
emenament a n d take i t o n i n a uliferent way, s o a s t o make
the resolution read, “ s o d s t o astist t h e system i n dise
charging i t s national responsibility w i t h revard t o general
crecit conditions"
b y making i t read a s follows, “ s o 4 s t o
stsnist the system i n ischarging,
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9 s far as i t may b e able,
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Federal Reserve Bank of St. Louis
422
its national responsibility f o r general credit conditions.“
will accept t h s t amendment simply
Governor seay: I
to bring the metter t o a conclusion,
i f possible, a n d I
will move, ur, vuhairman, f o r the sake o f getting a conciuSion i f possible--- I
“That such policy,
accept hr- witchell's phrascology---
a s well a s open uarket operations s h o u l d
bé administered i n each district i n such manner a s t o aseSist t h e system i n discharging,
a s far a s i t m a y b e able,
its responsibility with regard t o general credit conditions", isaving out the word “national”,
Governor Strong:
T
o amend a
resolution i n thst w a y
Will result i n its being dirrerently interpreted b y any
person according t o business views, s n d i t really doecn't
mean anything, I
would like t o g o o n record personally
just a b o u t a s ur. J a y h a s expressedit, b e c a u s e o n e o f o u r
responsibilities
ss a
system i s r:ally
t o tarnish w h a t
is r e q u i r e d r o r p r o p e r b u s i n e s s e x p a n s i o n a n d t o prevent
it from being converted into dagerous inflation.
ur? mitchell: I
ur. Calkins: I
tact t h a t q u i t e a
suggest that we sédjourn until 2:45.
would like t o call attention t o the
number o f t h e r e p r e s e n t a t i v e s a
t h e banks
423
have already deperted and that some more are contemplating doing so.
I f w e d o adjourn, t h i s question, w h i c h i t
seems t o m e could b e decided now, w i l l b e veded o n b y a
minority o f the conference.
ur liiller:
# h a t disposition d o you wish t o makes o f
this matter, gentlemen?
t o uiscuss i t t o 4 finish a v d make
a record o f our judgment now, o r t o sdjourn? &
motion t o
adjourn i s realiy n o t debatable.
wt. ramsey: I
suggest that w e have @ motion o n wr.
witchell's substitute f a wr, Jay's motion, i f that i s the
wey t h e thing is.
wr, MLLL ex: I
will r e a d t h e aiginal,
will r e a d h i s amendment.
T
h
e original
e n d mre uitchell
i s s s follows;
“Mat for the present the credit policy o f the rederal
Neserve system should aim t o furnish cre it and currency
to miember banks f o r their sessonal 9 n d euergency requirements, b u t s u c h policy a s well a s open market operations
should b e adminis tered i n e8ch district i n such menner e s
to assist t h e system i n discharging,
s s far a s i t mey b e
able, i t s nstional responsibility t o prevent credit expan-
sion from devsioping into credit inflation."
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Federal Reserve Bank of St. Louis
ur. Mitchell:
u y suendment reads:
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424
“But such policy, a s well a s open market operations
should b e administered i n es¢ch district i n s u c h menner e s
to assist t h e System i n discrarg-ng i t s netional responsibil-
ity with regard t o general credit w m nditions."
(There were calls g o r the gestion.)
ux. willer:
T h e guestion i s o n the smendiment.
(as the result o f a vive voce vote there were six ayes
and eight nays.)
uy, Miller: I
will now
p
u
t the vriginal motion,
which is:
“That vor the present the credit policy o f the Federal
Neserve s y s t e m s h o u l d a i m t o f u r n i s h c r e d i t e n d c u r r e n c y
to member banks for their seasonal and suergency requirements, b u t such policy, 8 6 well a s open market operations,
chould b e administered i n esch district i n such hisnner a s
to egssist t h e systan i n discharging,
a s f a r a s i t may b e
able, i t s national responsibility t o prevent crecit expan-
sion from developing into credit inflation."
(The origins] motion, h a v i n g b e e n duly seconded, w a s
unanimously carried. )
Governor Strong: I
ing;
now desire t o foirfer t h e f o l l o w
425
"Resolved that any g w inciple o f Federal reserve investment i n Government securities a n d bills b e regulsted souswhat with a view t o recucing t h e aggregate o f such investments a s t h e sggregate o f Gistrict ciscounts a n d gold inports increases."
Governor <eay: I
would like t o Isve thst r e a d again.
(Governor strong repeated the resolution a s sbove.)
Governor seay: I
r o p o s e t h e elinination o f the words
“pold imports",
ur, Austin; I
ur’ pidller;
second that.
I t i s moved and seconded that the notion
be amended b y t h e elindination o f the words “gold Limorts".
(as a result o f 4 viva voce vote, sight ayes a n d
eight nays.)
The Chalri.sns
i r the Chsir i s obliged t o vote i t
will vote against t h e amendment a n d ths smendment i s
The v o t e t h e n c o m e s o n t h e o r i g bo
i’n s l r e s o l u t i o n
want t o czl1l your attention t o the fect thet i t follows
inmedilately t h e preceding resolution e n d presumably i s
an interpretation o f whst i s ieant b y our responsibility
for generalcredit conditions.
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Federal Reserve Bank of St. Louis
ur, hitchell: I
want t o speak against t h e inclusion
of the words “gold imports".
ue? dnd Lex:
T h e auendment i s lost.
ur? witchell: I
know i t is, b u t I
judged that y o u
going t o talk about t h e resolution?
Mir’ Miller: Y e s .
ur? witchell:
mr" miller:
A r e remarks i n order?
Yes.
un, mitchell: I
a m opposed t o the resolution 3 s reed,
including the words “gold imports" for the reason that I
think that the main thing t o consider i s what errect this
is going t o have o n the earnings o f the Giiferent banks,
and the importing o f gold i s not going t o increase the ¢arnings i n eny way.
T h e imports o f gold, i f the action o f
the mumittee i s lived u p to, according t o the strict letter
oi t h e resolution, w o u l d m e a n a reduction i n t h e earnings
of the system t o the extent o f t h e Liports o f gold, w h i c h
strikes m e a s dead wrong. I
think i t is important that
the Federal reserve bankswill b e kept u p t o 4 certain level,
st least a n smount,
a s I understand t h e sentiment o f the
Federal reserve banks, that will enable them t o c e t their
overhead expense a n d pay aividends.
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Federal Reserve Bank of St. Louis
Governor Strong:
I
n regard t o the matter o f gold l i e
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Federal Reserve Bank of St. Louis
427
ports, t h a t i s not going t o trouble t h e earnings ofthe
benks very much, a s gold i s coiing i n now. m a t h e n a t i c a l l y
carried o u t t h e propossl would possibly involve a
reduc}
tion i n our earning sssets before thse next mesting t h a t w e
have here, o f a hundred t o a hundred a n d firty million dollars, which, a t four per cent, w o u l d hsrdly more t h e n ofrset t h e surplus earnings w e now have.
it would b e s i x million dolisrs 9
A t Your per cent
year. I
think w e have
@ very great responsibility a s t o the:e g o l d imports, a n d
we have opsrated i n New York with regard t o their volune
right slong, a n d I do n o t think w e should consider 4
pole
icy i n relation t o t h e nation a s 8 whole i n volume o r
credit without taking t h e m into account.
the earnings,
T h e efirect upon
s o far a s that c e n b e forecasted, w i l l not
be serious a t all.
ere millers I
will put the resolution a s originally
ortered b y Governor strong.
Resolved,
T h a t a n y principle
o f Federal reserve i n -
vestments i n government securities end bills b e regulated
somewhat w i t h s view t o reaucing t h e aggregate o f such
investments a s the aggregate o f district Cciscounts a n d
gold inports incresses,
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Federal Reserve Bank of St. Louis
428
(On a viva voce vote t h r e w e r e s v e n syes a n d t e n
nays and the motion was lost.)
ur. mausey:s I
attach a grest deal o r importance t o
this r e s lution with t h e words “gold imports" s t r u c k out,
and I now meke the notion thet Governor Strong's resolut-
tion with the words "gold imports" stricken out, b e adopted
es the sense o f t h e conference.
mr, Haulin: I
iP, miller:
will second thet.
J u d g e hauwsey now orfers the resolution
Originelly subuitted b y Governor otrong with the words
“gold imports" eliminated, w h i c h notion has been duly seconded.
(ur, Haasey's motion,
a c above stated, having b e e n
duly seconded, w e s unanincusly carried.)
ur. day:
w r e dheirnan, I would like t o introduce
souething that seens very triviel -aftter the very important
netters thet w e have b e e n discussing, b u t while w e are
sll here I think i t 1s important that i t should b e brought
up. I
refer t o the motion picture exhibit which y o u
gentlenen s a w a couple o f years 360.
ssems t o b e that a longer picture,
T h e general opinion
o f t w o reels, should
be made, explaining things more fully e n d teking i n t o
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Federal Reserve Bank of St. Louis
429
consideration certain particular criticisms w h i c h were
made.
T h e cost o f doing that would probably b e seven
or eight thousand dollars, I
a m intforied, f o r making t h e
films, a n d i t would cost about +150 f o r prints.
W e have
spent sbout .3500 a n d I under.tand w e have s o e material
that could b e used, b u t w e would have t o abandon e
good
deal o f it, because w e would have i t i n longer form, a n d
thet t h e cost will b e i n the neighborhood o f s i x t o sight
thousand dollars f o r t h e twelve banks, f o r t h e system a s
a whole.
b o y o u mean s i x t o eight thousand dol-
jaye Harlin:
lars t o e c h bank?
wre Jay:
N o , for the twelve banks,
ur’ Hanlin: I
move i t i s the sense o y the necting
that there prints refered t o shoulc b e made.
(The m o t i o n w e s d u l y s e c o n d e d e n d u n a n i n o u s l y carried. )
Dutt haviin:
N o w , mr. Chaiman, I
wove y o u t h a t t h i s
body edjourn sine die.
(Whereupon, 6 t 2.15 o'clock p. m., o n notion duly
seconded,
t h e joint conference a d j o u r n e a s i n e dis.)
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