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PROCEEDINGS
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Federal Reserve Bank of St. Louis
O F A
GOVERNORS
CONFERENCE
A N D CHAIRMEN
WITH T H E FEDERAL RESERVE
A N D FEDERAL RESERVE
OF T H E F E D E R A L R E S E R V E B A N K S .
ASSEMBLY
FEDERAL
R O O M
RESERVE
METROPOLITAN
BOARD
B A N K BLDG.
WASHINGTON,
D.C.
O C T O B E R I[3, I5 & 16, 1920.
ASSOCIATED S H O R T H A N D R E P O R T E R S
SUITE ( 8 - 2 3 A P P E A L S
BUILDING
426 FIFTH STREET, N. W.
WASHINGTON, D.C,
BOARD
AGENTS
OF
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Federal Reserve Bank of St. Louis
CONFERENCE W i T H T H E
FEDERAL RESERVE BOARD
of
GOVERNORS A N T CHAIRMEN O F THE FEDERAL RESERVE BANKS.
Washington, D . C.,
Wednesday, Cctober 13, 1920.
The conference with the Federal Reserve Board o f the
Federal Reserve Governors and Chairmen o f the Federal Reserve Banks was called t o order i n the Board Roem e f the
Federal Reserve Board, Metropolitan B a n k Building, W a s h e
ington, D. Ce, a t 10:30 o'clock A. M., o n Wednesday,
October 13, 1920,
Present:
Hon. W. P. G. Harding, Governor e f the Federal
Reserve Board.
Hon. Edmund Platt, Vice-Governor o f the Federal
Reserve Board.
Hon. A. ©. Miller, Member o f the Federal Reserve B o a r d .
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Federal Reserve Bank of St. Louis
Hon. ©. S. Hamlin, Member o f the Federal Reserve
Board.
Hon. D. CG. Will3, Member o f the Federal’ Reserve
Board.
Hon. J . Skelton Williams, Comptroller o f the
Treasury and ex-officio member o f the Federal
Reserve Board.
Ales:
Charlies A. Morss, Governor, Federal Reserve
Benk o f B o s t o n .
‘Frederick H . Curtiss, Chairman a n d Federal Reserve
Agest, Federal Reserve Bank of Boston.
J. H. Case, Acting Governor, Federal Reserve
Bank o f N e w York.
Pitorre Jay, Chairman a n d Federal Reserve Agent,
Federal Reserve B a n k o f New York.
George W . Norris, Governor, Federal Reserva
Bank o f Philadel phia.
R. L. Austin, Chairman and Federal Reserve Agent,
Federal Reserve B a n k o f Philadelphia.
E.R. Fancher, Governor, Federal Reserve B a n k o f
Cleveland.
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Federal Reserve Bank of St. Louis
George J . Seay, Governor, Federal Reserve Bank o f
Richmond.
Caldwell Hardy, Chairman a n d Federal Reserve Agent,
Federal Reserve B a n k o f Richmond.
M. P. Wellborn, Governor, Federsl Reserve B a n k o f
Atlanta.
Joseph A. McCord, Chairman and Federal Reserve
Agent, Federal Reserve B a n k o f Atlanta.
J. B e McDougal, Governor, Federal Reserve B a n k o f
Chicago.
William A . Heath, Chairman a n d Federal K e s o r v e
Agent, Federal Reserve B a n k o f Chicego.
D.C. Biggs, Governor, Federal Reserve B a n k o f
St. Louis.
Wm. NcoC Martin, Chairman a n d Federal Reserve Agent,
Federal Reserve B a n k o f St. Louis.
R. A. Young, Governor, Federal Reserve B a n k o f
Minneapolis.
John H . Rich, Chairman a n d Federal Reserve Agent,
Federal Reserve B a n k & f Minneapolis.
J. Z. Miller, Jr., Governor, Federal Reserve
Bank of Kansas City.
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Federal Reserve Bank of St. Louis
Asa E. Ramsay, Chairman a n d Federal Reserve Agent,
Federal Reserve B a n k o f Kansas City.
R. L. V a n Zandt, Governor, Federal Reserve B a n k
of Dallas.
Wm. F , Ramsey, Chairman a n d Federal Reserve Agent,
Federal R e s e r v e B a n k o f Dallas.
J. U. Calkins, Governor, Federal Reserve B a n k o f
Sen Francisco.
John Perrin, Chairman a n d Federal Reserve Agent,
Federal R e s e r v e B a n k o f S a n Francisco.
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Federal Reserve Bank of St. Louis
PROGHeBOINGS .
Governor Harding. G e n t l e m e n ,
a s y o u know, t h e scope
of this meeting covers three days, o r four, i f you wish
ae
T h e board's idea was that today would b e devoted
to & general conference bettieen the Ghairmen a n d t h e
Governors a n d the members o f the Federal Keserve Board
Lor discussion alony t h e practical lines o f this l i s t o f
topics. T o m o r r o w the Governors will have their meeting
and t h e iederal keserve Agents a n d Chairmen will have
their meetins,
W e have o n l y o n e assembly r o o m a t our
disposal; o n e body will use this r o o m a n d the other will
have t o f i n d o t h e r quarters
o f t h e i r o w n selection.
The last-minute arrangements f o r this Gonference
were referred b y the Board yesterday t o the x e c u t i v e
Gomnittes w i t h pover,
s o i n telling y o u what those ar~«
rangements a r e I T am also makins a
report f o r t h e lxec~
utive Gomaittes t o the Board.
I am goins t o b e very brief i n m y remarks this morning, because w e have a
long proszram- before us; y o u cen-
tlemen d o not want t o hear from me, b u t w e wont t o hear
from you.
This i s a time i n which w e ought t o stand very
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Federal Reserve Bank of St. Louis
6
close together.
Le *
T h e Federal Reserve S y s t e m h a s b e e n
under fire during the greater part o f the year; i t has
been the subject o f a great many unfair and unjust criticisims, @nd @ great many false statements have beon used
&s3 8 premise u n o n which these incorrect conclusions h a v e
been drawn.
This t o w n today i s full o f nevspaper men, o f furm-
ers' representatives, and voliticlans, and I wish to
caution each o f y o u t o b e very varticular t o give o u t
nothing whatever a s t o what goes o n i n these meetings.
These meetings u r e executive a n d anything t h a t m a y b e
said i s liable t o b e distorted a n d a wrong construction
put o n it. Y o u have a l l head these experiences a t home
in handling t h e press a n d I rant y o u t o b e particularly
careful about what you say here while attending these
mcectings, I
think i t i s going t o b e necessary,
o f course,
to sive o u t soie statement a t the conclusion o f these
meetings,
i n order thet there m a y b e wniformity,and t h a t
whatever s t a t e m e n t
i s s i v e n o u t m a y c a r r y p r o p e r weight,
&s being undoubtedly authentic a n d representing t h e
views o f this meeting, a n d I would suggest that a Publicity Gommittee b e appointed from the Chairmen o f the
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Federal Reserve Bank of St. Louis
Banks a n d also a similar committee f r o m t h e Governors
of the Banks.
T h e Yxecutive Gomaittee h a s ~one o v e r this
matter with m e a n d v e would like t o name t h e following
Publicity Gomuittee a s representing t h e Ghairmen o f the
Banks ¢
Messrs.Jcy Ramsey
o f Dallas, a n d Perrin.
as representing t h e Governors v e would like t o select the following committee:
Messrs. Seay, Fancher, a n d Young.
We would ask these gentlemen t o serve a s a joint o r
8 separate committees, a s m a y b e advisable,
o r probably i n
both capacities, t o let the sxecutive Coumittee o f the
Board have what t h e have prepered; t h e committee w i l l
then g o over i t with them with the view o f getting out
an authentic statement a & representing whatever this Con-
ference may wish to:give out. T h i s i s merely a sugrestion
offered b y the Executive Gomnittee a n d if there i s any
objection t o the argangement i t 1 s open for discuss ion.
Othermise, I
would like t o ask the appointment o f these
committees confirmed b y sa vote o f this body.
Mx. Heaths I
ments s t a n d e
move you, ur. Chairman, t h a t t h e appdint-
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Federal Reserve Bank of St. Louis
(fhe motion, heving been duly seconded, ves unanimously
carried.)
Before taking u o any other matter, I
wish t o present
to y o u some fisures showing o u r reserve percentages
in
theircdc enatured o r unadjusted state; t h e y are given t o
you every d a y b y wire after they have b e e n adjusted b y the
means o f inter-bank rediscounts.
I n their unadjusted
condition, eliminating rodiscounts, the Wederal Reserve
Bank o f Dallas, a t the close o f business last night, shotrad
16 per cent; Xansas Gity, 1 9 . 1 p e r cent; Minneapolis,
19.6 per cont; St. Louis 254 per cent; Ghicaco 36.7 per
cent; Atlanta 1 6 por cent; Richmond 54.2 per cent. i l e
did not have the Gleveland figures when I left the
office, but they will be around 8 0 per cent; Philacelphia 64.7 p o r cent; N e w York 36.1 p e r cent; Boston 6602
per cent.
With regard t o inter-bank rediscounts, although I f
presume y o u know what they are, I
will state that Boston
is carrying $43,593,000 for five banks; Philadelphia
‘p29,559,000 f o r four banks; Gleveland :)150,745,000 f o r
Six banks;
i n addition t o that, Philadelphia i s carrying
13,000,000 acceptances f o r another Federal Reserve
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Federal Reserve Bank of St. Louis
Bank; Gleveland, »~7,000,000 and San Francisco 91,975,000.
The combined reserves o f all the Federal Reserve Baniks
will b e anyvhere between forty tiro and o n e half a n d forty
three p e r cent.
T h e s e inter-banks rediscounts a r e n o t
as high as they have been.
T h e y heve been u p t o
228,000,000; they are down now to y209,900,000. ‘There
has been some reduction.
I n Atlanta they are down t o
41,934,000; Richmond has reduced t o »79,294,000; Kanses
Gity i s not quite a s high a s i t hes been, 439,646,000,
and Dallas ‘$31,545,000.
These varying conditions o f t h e Federal Reserve
Banks are caused, i n the Board's opinion, b y two ecircume
stances:
F i r s t , t h e business conditions a n d t h e demand
ray money i n the respective districts; and, second, t h e
credit control which has been exercised b y the management
of the banks and, through them, b y the member banks o f
the district.
Boston & year a z o was having active demand f o r money
and was borrowing money f r o m other districts, b u t bor-
rowing more money from some o f the banks thet are now
heavily indebted t o i t than i t is loaning them.
Philadelphia f o r a lone time w a s a heavy borrover, a n d
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Federal Reserve Bank of St. Louis
Philadelphia h a s n o w a n independent reserve o f 64.7 p e r
cent.
T h e Governor
o f the Philadelphia B a n k v e r y mod-
estly s t a t e d t h a t h e i s n o t e n t i t l e d
t o a n y credit,
but
that i n addition t o local conditions industry hes sloved
down, indebtedness h a s b e e n paid, a n d the reserves h a v a
accumulated i
n a natural way.
T h e Boston people t e l l
us Gbhout the same thing with respect t o their 66.2 p e r
cent reserve.
d i t h respect t o Gleveland,
i n the State
of Ohio, v e cannot expect a n y Ohio m a n t o b e very modest
at this particular time, b u t I
e m told b y our n e w collea-
fue, ity. tiills, t h a t t h e situation i n Qhio a n d i n the
Cleveland District has not been altogether automatic;
that the fact that they have a strong reserve i s due t o
the fact that they took u p the situation more than a year
&go and, with only a very moderate rise i n the discount
rates, they were able, b y a good deal o f conversation and
letter writing, t o impress the fact uoon thelr member
banks anc bring about conditions t o check a n undue use
of credit, enabling them t o maintein themselves i n a
very s t r o n g p o s i t i o n 3 1 1 t h e w a y through.
S o m e o f the
other districts h a v e h a d a great d e a l o f pressue ».ut upon
theme T h a t i s t r u e i n t h e South. I
a m familiar w i t h
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Federal Reserve Bank of St. Louis
mouthern conditions. I
:
went down the other d a y t o refresh
f
o
r
e
myself, a s Iwas efraid I misht heve/sotten some things,
and I have come back pretty thoroughly refreshed i n n y
knovledse o f Southern conditions.
T h e y have t h e idaa
generally d o w n there that t h e Federal Reserve B a n k i s a
source o f unlimited money supply and that i t i s the duty
of the Federal Kesoerve Bank t o administer t o the wants
of the needy a n d t o cater t o the ideas o f those w h o have
peculisr notions a s t o whet t h e price o f various c o m o d i ~
tiles ought t o be, £
should think that banking i n the
South e t this time i s a very difficult proposition, oallin; for t h e exercise n o t o n l y o f iron nerve, b u t f o r a l l
the tact that human nature i s capable o f showing, a n d a
combination o f the t w o i s necessary t o carry t h e situation throughe
In our sugsestion with reference t o the matter
of closer contract betiveen t h e Federal Reserve Banks, w e
point
o u t that the business o f the Federal Reserve
Banks i s interlocked, t h a t n o bank c a n stand absolutely
alone o n its o w n pedestal, t h a t a t times i t i s called
upon t o extend eccomnodations
t o other banks a n d m a y a t
Other t i m e s r e c e i v e a c c o m m o d a t i o n s f r o m t h o s e banks.
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Federal Reserve Bank of St. Louis
12
It is impossible t o asis all o f vou to come here
every month for «a conference, although i t would b e very
helpful i f w e could;
i t i s also impossible f o r members
of the Board t o spend their time o n reilroad trains
getting i n personal contact vith the directors and officers o f these Federal Reserve Banks, although i t i s
desirable t h a t v e should have that close contact a s
often a s possible.
T h e r e f o r e t h e Executive Gomnittee
would recomiend a voluntary step i n the matter o f better
organization o f the Federal Reserve Banks, w h i c h carn be
done without a n y legislation, a n d T
a m eoing t o explain
it to yous T h e r e t s nothing new about the plan; i t
has been adopted i n State Bankers' associations.
W
e
would suggest that the Ghairmen and Governors, a t their
conferences, either jointly o r separately, consider
the voluntary organization o f the Pederal Reserve Banks
of the country into four groups.
A s an example,
Group 1 would consist of Wlew York, Boston and Phila~
delphia; Group 2 of Cleveland, Richmond and Atlante;
Group &
of Chicago, St. Louis a n d Dallas, a n d Group 4
ofsilnneapolis, Kansas Gitvy and San Francisco, the
idea being that each member o f a group would s e t aside
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Federal Reserve Bank of St. Louis
13
one Directors’ meeting a yeay i n which either the Governor o r the Ghairvman,
o r both, o f the other t w o Federal
Reserve Benks i n that zroup could b e present.
stance,
F o r in-
w e would s a y that i n the Gleveland# Richimond-
Atlanta group they would have either the Ghairman o r the
Governor o f the xichmond and atlanta banks attend a Di-
rectors! meeting i n Glevelend, say, i n Merch, althoush i t
would b e better t o go South i n March, s a y Atlanta i n
Mevoh; t h e n some other meeting would b e held i n Cleveland
and a full meetin: i n Richmond.
I n other “ois, y o u could
just arrange i t t o suit yourselves, b u t t h e idea
there will b e personal contect with the officers
three banks i n each group.
I t would not involve x
traveling, a n d the Board woula try t o arrange t o
a menber o f the Board present a t each one o f these sroup
meetings «
I n that wey w e could exchange ideas »robably
better than we could than i f te undertake t o have these
‘senerel conferences s o frequently; a f t e r all, anythin;
that affects N e w York affects Boston and Philadelphia.
It misht b e helpful t o have the officers o f the Philadel~
phia a n d Boston banks g o t o Wew York a n d s i t b y invita-
tion with the Directors o f the New York Bank, e n c then
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Federal Reserve Bank of St. Louis
14
have t h e o f f i c e r s
o f t h e N e w Y o r k Bank s o t o Boston o r
Philedelphis, a s the case may be, thereby bringin: ubout
this contect betveen t h e different groups.
The Executive Gomaittee,being suthorized t o report
the last-minute program t o this Conference, makes t h a t
report a n d nopes that y o u will sive i t consideration,
with the view o f trying i t out during the year 1921.
o f
course, t h e r e m a y b e objections t o i t ana y o u should dis~
cuss i t fullye T h i s i s merely 4 suggestion thrown out to
TOuUs
I do not knon o f anything e l s e that i t i s necossary
LO s a y n o w a n d t h e meeting i s open for t h e regular order.
(Governor Harding then refcrred t o a request made of
the Boord b y certain parties for a hearing, t h e discuss ion
regarding which the reporter was directed not to'take).
Governor Harding. W i t h regard t o the statement
prepared b y the Publicity Committee, o f course i t 1s uncerstood that that will b e turned o v e r t o the Board a n d the
board will give i t out, s o thet i t will b e a joint stateMent.
O f course, t h e committees c o n either s i t jointly
or separately,
a s they choose, a n d t h e Executive Com~
mittee o f the board will b e glad t o meet with y o u 3 ba
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Federal Reserve Bank of St. Louis
you vant further assistince i n the matten.
With regard t o the topics o n the program, I believe
& conference w a s held b y a comaittee o f t h e Aaments a n d
also a committee o f the Governors, a n d I will a s k Mr.
Jay t o tell us whet arvangenent was made about the dis-~
cussion o f t h e topics.
Mr. Jar.
F i r s t t h e Cheirvmen h a d « meeting i n Cleve-
land a n d arranged,
p
a
p
i n order t o reduce t h e nuntber o f
e t rainstead
hs t
o f h a v i n e a c h member o f the Gonfer~
enge prepare a paper, a
prepare @
revresentative o f each bank would
paper o n one o f the subjects; a
tentative d i -
vision o f the subjects into different groups amon: the
different banks v a s prepared, which,
i n turn,
w s wy.
mitted t o a comaittee o f the Governors, w o i c h m e t a
couple o f e e k s later,
o f whieh I
think Governor Horse
was chaixvman, a n d IT understand that the tentetive as+
Sisnmuents sugsested b y the Ghairmen were aporoved b y the
Governors a n d vere i n turn submitted t o you, Governor
Harding, a n c anoroved b y yous U n d e r the plan proposed,
I think seven Governors a n d five Chairmen u r e assirned
to read papers u p o n the various portions o f the prosram
proposed b y the Pederal Reserve Board, a n d I presume you
have & statement there o f t h e specific assignuents.
Governor Harding. W o u l d i t be advisable t o have
the papers read o r t o have them falea and have the
author o f gach paper gave us a five ainute synopsis o f
his papsr}
Mr. Jay.
T h a t would b e according t o the view o f the
Board, I should think.
Governcr Harding.
A r e t h e papers o n l y fifteen min-
utes long? W h a t i s the pleasure of the Board o n that,
would suggest that the individual b e
Br. Milisr, I
allowed t c exercise has disoerastion a s t o whether h e wants
to Tead the paper o r give his can jaoas o n its
Governor Harding.
Y s s , I shcula think 5¢,.
Mr. Williams. I
think the Qnference would be very
giad t c hear the papers. I
do not think falee modasty
should hold any «ne bagok, a s the men whe have prepared
these papers have taken groat paine with them.
T h a t i s trues,
Governor Harding.
W e have four days a t
cur disposal,
Mr. Ramsay. I
thank there a s a limit o f fifteen
minutes o n sach paper.
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Federal Reserve Bank of St. Louis
Yr. Miller.
I d e n o t think w e should impose a n y too
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Federal Reserve Bank of St. Louis
narrow restrictions.
Governor Harding.
T h e first subject is "The pur.
pose o f Gredit Gontrol,” a n d I believe Hr. Perrin i s asSisned t o thst.
"Ti PURPOSE O F CREDIT CONTHOL I N THE WAIST ING CIRCUMS Talc.
Mr. Pervin.
T h e Amencrment t o the Federal Reserve
Act 6@poroved June 21, 1917, w e s apparently designed t o concentrate i n Federal Reserve Banks a n important part o f the
gold o f the country, t h e emburgo upon gold exoorts fixing
Lt there f o r the time a n d t o provide f o r its use i n such a
way a s t o e s t a b l i s h t h e i r m u x i m u n l e n d i n g p o w e r d u r i n g t h e
way rather t h a n t o ennesh them s o profoundly i n post-war
lending, a s has resulted.
{ t fundamentally changed the
relation o f member banks t o Federal Reserve Banks, m o r e
profoundly perhaps t h a n vas then perceived.
Resources
of Federul Keserve Banks w e r e sreatly increased b o t h
through the operation o f the new provision for exchange
of Federal xeserve notes for w l d and also through the
increase i n percentage o f required reserve deposits.
fhe elimination o f reserve requirements f o r member banks,
Other t h a n devosits w i t h Federal Reserve Banks, natur-
ally led t o reauction o f their vault cash,
I n banking
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Federal Reserve Bank of St. Louis
i8
for profit, t h e incentive i s constantly t o extend loens
to t h e limit.
T h e discount privilege rendered secondary
reserves less necessary.
T h e far-reaching effect o f
this a m e n d m e n t h a s b e e n t o d i m i n i s h
i n important m e a s -
ure the self-dependence o f member banks a n d t o develop
their dependence u p o n Federal reserve banks, w h i c h , a s
a result, h a v e b e e n placed i n a position more dominating
than originally contemplated.
The character o f the reserve provisions o f the original Act indicates t h a t i t was n o t t h e n thought t h a t
reserve b a n k s w o u l d b e t h e v a s t l e n d i n g i n s t i t u t i c n s
into which they have developed. S o m e light also i s s h e d
upon t h e i r anticipated position b y the fact that a t the
time o f t h e e n a c t m e n t
o f t h e Federal Reserve A c t concern
was felt lest i t would n o t b e possible t o p l a c e i n circulation a
sufficient v o l u m e
o f Federal reserve n o t e s
provide e n elastic element i n t h e currency.
to
T h e then
existing volume n f currency was apparently sufficient.
If a seasonal redundancy should develop,
Possible,
a s wes theught
t h e r e w a s n o responsive process f o r reduct-
fon i n t h e volume.
T h e gredual retirement o f National
bank notes, through purchase o f circulation bonds
b y
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Federal Reserve Bank of St. Louis
Federal teserve Banks, w a s relied u p o n t o supoly « vace
wun for federal Keserve notes t o fill.
The amendment centralized vast n e w lendins po.er
in federal Reserve Banks.
M e m b e r banks, spurred b y
joint influences o f patriotism a n d prorit a n d thorouzhly
confident o f Federel Reserve supvort, f r e e l y responded
durins t h e w a r t o demands f o r credit, o f t e n t o a n extent
entirely out’ of proper relation t o their o w n means.
fhe shift froma the o l d bankins methods t o the n e w was made
during a whirl o f war activities.
F o r m e r standards o f
Conservatism were n o t infrequently s e t aside without
Clear c o n c e p t i o n
o f what should constitute proper stand-
ards o f conservatism under t h e n e w conditions.
Finan-
Cial currents during the war moved s o swiftly and s o
deeply that i t is n o cause for Surprise i f member b e n s
should have felt helpless t o pilot their individual
courses a s i n former fashion, n o r i f they should heve
developea faith, perhaps even a n unressoning faith, i n
the financial capacity o f Pederol Reserve Banits, which
met w i t h o u t s t i n t t h e i r c a l l s f o r c r e d i t a n d currency;
thereby maintaining a
able circumstances,
financial Serenity under unbeliev-
w i c h formerly would heve occasioned
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Federal Reserve Bank of St. Louis
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not m e r e l y a
panic, b u t u n p i r a l l e l e d u p h e a v a l a n d p r o -
lonsed confusion.
But t h e e n d o f the w a r brought n o chance i n their
attitude. Speaicing generally, member banks proceed~
ea as i f free from their former peace~time duty t o
maintain their self-dependencs b y conductin= their operations, with occasional exceptions, within the limits
of their o w n means a n d a s i f their chief concern were
to open vigorously t h e credit throttle, Federal Reserve
banks being relied upon to manipuleto the steerins wheels
There wags apparently a vazue i d e a that brakes w e r e n o t
required.
T h e application
o f financial bralea
is
never exhilarating.
hw
InsGacwaat S i m i l a r feshion, the general public,
although technically uninformed, eppear t o recard the
ederal Reserve System as a Limitless financial pover,
Setusted by a spirit of benevolent paternalism, from
waleh relief may be expected i n any difficult situation
end especially just nov from legoiny markets and deClining prices which netucelly m e r k reaction from i n -
flation. Griticism is free if the force of economle
laws i s n o t counteracted.
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Federal Reserve Bank of St. Louis
Althouzh
n o member b a n k n o r menber o f t h e public
would probably odmit it, nevertheless, i n hazy oute
line, s u c h a p p e a r
t o b e t h e vresent conceptions
Federal R e s e r v e S y s t e m , marizing a
the beginning.
o f the
great c h a n g e s i n c e
T h e evolution o f t h e conception o f the
System's function appears t o have kept full pace with
its p h y s i c a l development.
T h e Federal Reserve A c t
gvents s o much discretion i n its interpretation and adiiinistration that probably n o tvo persons have idontical
conceptions o f its scope a n d surpose, b u t this brief ref-
erence i s inade t o the apparent departure from the orig-~
inal conceptions because pertainins t o the consideration
of the topics o f o u r program.
Instead o f taking u p the topics i n their resular
order, I
touch first u p o n
4, T o whet extent is it necessary to distinguish between t h e immediate objective
of the policy o f credit control a n d t h e
remoter o b j e c t i v e s u c h a g r e d u c t i o n
in
the cost of livine?!
Reduction i n the cost o f living, however desirable,
seems o u t s i d e t h e p u r p o s e s
o f t h e Federal Resorve Systeme
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Federal Reserve Bank of St. Louis
It would s e e m that t h e present ourpose should b e t o reestablish a n d t o maintain a
sound credit condition.
The accomplishment o f this will necessarily reduce t h e
cost o f living but the latter i s merely a n incidental
result. H i c h cost o f living, i n the sense i n which the
term i s n o w used i n this country,
i s o n e o f the s y m p
toms o f a disordered credit condition.
is rectified t h e symptom will disappear.
A s t h e disorder
I
t may prop-
erly be question whether the treatment o f such symptoms
is within t h e province o f the Mederel Reserve System.
Those walking a t night i n a n unlighted c i t y micht
stumble over irregularities o f the pavement o r be vio~
tims o f robbery, but a compeny ewployed t o supply light
would not properly include as a part of its purpose reduction i n stumbling o r abatement o f robbery.
Those
would b e purely incidental results o f the proper porformance o f its function which would b e solely that o f
furnishing lisht.
I t would think i n terms o f kilowatts
and n o t i n terms o f comfort o r crime.
There a r e t w o views o f the cost o f a ¢ mmodity,
that o f the producer a n d thet o f the consumer.
T h e ad»
vantage o f the o n e i s the disadvantage o r the other.
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Federal Reserve Bank of St. Louis
The proper adjustment o f relative advantaze a n d disadvantage c a n b e attained o n l y b y the operation o f the
law o f supply a n d demand a n d n o t through t h e exercise o f
bureaucratic control.
It was more necessary t o vin t h e w a r than t o observe
technicalities
o f theoretically sound policies.
While
present abnormal conditions a r e t h e outgsrovth o f the w e r
and doubtless justify methods which misht b e undesireble
after r e a d j u s t m e n t s h a v e b e e n made, y e t i t seems t h a t
the Federal Reserve System should see its justification
very clearly before including amone i t s purposes others
than those originally specified i n the title o f the Act
or clearly implied i n the character o f the amendments.
Regulation o f the price level does n o t apvear t o b e
among t h e implied additional purposes.
I f the determina-
tion o f the price level i s l e f t t
o the inter-play o f
natural forces,
i t i s inevitable t h a t a heslthy price
level will b e a n incidental result o f the establishment
of @ sound credit condition.
I turn n o w t o the first topic o f the program:
"1. W h a t are the objects south t o be attained
by the policy o f credit control i n the
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Federal Reserve Bank of St. Louis
oxistins c i r c u m s t a n c e s ? I
s the objects:
(a), T o maintain or strengthen reserves?
(b) f o stabilize the existing situation by sus~
pending further expansion?
(co) T o bring about discrbaina tite deflation b y
reducing the total volume of credit??
My ansver t o these queries reminds m e o f a n old
isasked whether h e will have sherry, o r whiskey, o r
brandy.
H e replies that h e will try a little sherry,
but will take t h e whiskey while t h e brandy i s Setting
ready.
S o I would answer vest t o all three queries o f
the topic.
“(a) T o maintain or to strengthen reserves" shoulda
be the present a i m but i t i s not inconsistent w i t h such
an @in t o permit reduction i n reserve strength, e v e n
regardless o f the legal limit, i f additional advances
are made i n order t o facilitate liquidation. R e s e r v e s
Should
i n due course b e increased b u t however desirable
that liquidation should g o forward, n o good can be serve —
ed by forcing disaster.
T h e tool situation i n the
Twelfth D i s t r i c t f u r n i s h e s
a n illustration.
Bankers
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Federal Reserve Bank of St. Louis
25
who h e d Lonriveeite mO0L “ Y O ‘ers 1/33 u n t i n e s vwoon important liquidation a n c t h e sro:ers h a d t h e
purpose
ke,
o f sellinzs e t h a t e v e r
t h e marlcet p r i c e s m i n h t
but just e t tne time chen t h e yv h e d their w
Clin recdaz,
the meriket disappeared, a l m o s t o v e r night.
f
t vas a n
unprecedented situation i n *~hich there ‘rere n o DUYEIS «
fills were receiving heavy cancellations a n d woulc maize
no new conmitments.
S o u n d soliey obviously celled for
contiauction and tnerease o f necessary advances avainst
wool until effective conswaption demand should r e e avoear,
but only until such time.
I t troule b e equally unsound
either t o force sacrifice sales w i t h n o consunotion d e -
wend, o r ofter a n effective cemand should reapyear t o
continue advences i n order t o enable ~royers t o hold rool
soeculatively f o r advance i n orice.
“(b)
T o stabilize the present situation b r
prevention o f further expansion?!
This is<¢ esirable, b u t i n statins this, reference
is intenced t o the prevention o:’ rurther expansion
though e v e n this shoyld b e temporately a n d persistently
ruther t h a n dresticelly sought.
I T understand t h e t t h e
liaplication o x the t e r m expansion i n the query i s that
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Federal Reserve Bank of St. Louis
it means expansion i n connection i t l
Operations.
e w o r enlarced
I t i s n o t expansion i n this sense i f loans
@re increased t o facilitate liquidation.
however, thhich e r e d i
M e m b e r banks,
s e a t o continue retiscounts t o o
consteéntly o r over e oeriod t o o lons, a s indicated per-
haps b y the course
w a t i c e : Buns tee iy situated,
may need special constraint.
of t h e a v s l i c a t i o n
rates
M u c h can be said i n favor
o f t h e s o - c a l l e d p r o t r e s s i v e d i s c ount
i n s u c h cases,
a n d t h e y m i s h t b o advantarzsously
&pplied according t o time i f not accordin:
t o amount.
Periodical complete liquidation with i t s Federal Reserve
Benk cannot fail t o meke f o r soundness
of <
member bank.
I
i n the operations
t h a s b e e n o b s e r v e d t h a t s o m e mem-~
ber banks which dise cunt freely and continuously with
their Federal ieserve B a n k a r e disposed t o use their o w n
funds for ineligible loans, often o f a capital character.
If the implication of the query i:
a t the present sit-
uation b e stabilized i n sush a vay that t h e existing volume o f credit s h o u l d b e r e g a r d e d a s a
minimum,
t h e n ate
appears t o m e thet taois trould n o t b e soing f a r enough t o
create a
sound c r e d i t c o n d i t i o n n e c e s s a r y
t o provice f o r
the welfare of business during the coming year.
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Federal Reserve Bank of St. Louis
"(o) @ o bring about diseriminating deflation
by reducing the total volume o f credit?”
The process o f reduction i n the volume o f credit
can never b e made popular o r joyous.
P a i n s which are
suffered n o w are t h e logical penalty f o r undue expansion,
for undue u s e o f bank credit instead o f capital.
W e
may b e sorry f o r t h e debtor w h o must suffer t h e pains,
but i t i s t o b e observed that, w h e n reaction follows u p o n
& period o f expansion, t h a t debtor i s often most fortu~
nate w h o takes h i s loss earliest.
B u t i t appears t o
me that t h e Federal Keserve System need n o t concern itself about deflation.
D e f l a t i o n f o r t h e sake o f de+
flation, o r of correcting injustices wrought b y infle-~
tion, i s not o n e o f the purposes o f the Feceral Heserve
System.
I t naturally involves 4
measure o f deflation
to reduce t h e volume o f credit, b u t t h e concern o@& t h e
Federal Reserve System lies chiefly i n establishing a
sound c r e d i t condition.
"2, C a n ae substantial reduction i n the volume
of credit b e effected without injury t o
legitimate business o f the country and
without curtailment o f essential production?”
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Federal Reserve Bank of St. Louis
No plan for deflation t o a p r e w a r basis w a n b e
recserded a g practical.
I f entered u p o n i t vould i n -
volve years o f declining prices, atrophy o f enterprise
anc. continued a n d widespread failures.
B u t L t ap-
pears t o b e i n the interest o f legitimate business o f
the c o u n t r y f o r t h e c o m i n g y e a r t h a t t h e p r e s e n t v o l u m e
of credit should b e reduced.
During the years 1916 t o 1919 inclusive, bank
credits expanded 6 0 per cent o r more, while t h e physical
volume o f trade remained almost stationary.
T h e
statement o f this fact sugsests that the converse o f
this i s true a n d this appears t o b e convicing proof
that @ reduction i n the volume o f credits trould result
in increasing, not in curtailing, general production.
*
Those p r e s e n t d o u b t l e s s k n o w o f m a n y c o n f i r m a t o r y i l lus trations. I
was t o l d o f one.
I
n t h e textile i n -
Gustry the custom hag prevailed o f a half-day o n SatUrday
orders,
I
n one o f the mills, owing t o diminisWing
i t was decided t o operate o n l y five days a
instead o f five a n d one-half days.
week
A t the e n d o f the
first weel, however, instead o f a decreased output
there was a n increase and a greeter increase the next
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Federal Reserve Bank of St. Louis
Vi@Gile a n o t h e r case vas t h a t o f a n automobile factorr
employing about s i x thousand m e n o f whom o n e thousand
vere l a i d off, because o f diminishing orders.
T o
the surprise o f the management t h e output increased.
Increased e f f i c i y
o F labor means a
reduced r e g u i r e -
ment o f credit f o r a siven production.
sonable, therefore,
I t seems rea-
t o anticipate t h a t a reduction i n
“the total volume o f credit would result i n increased
production a n d perhaps,
b r processes o f natural s e e
lection, g r e a t e r a t t e n t i o n
t o the production
o f essen-
word m a y b e added about essential production.
During t h e w a r the n d i y test o f essential character
was whether t h e product vould h e l p w i n the war.
then, except i n outstanding matters,
i t proved wvell-
nigh impossible t o Giscriminate intelligentir.
out such a
Liven
yWith-
n a a r a test, t h e determination i s now much
more difficult.
F o r instance, Galifornia raised this
year 650,000 tons o f barley, havins a value a t present
prices o f about 225,000,000.
T h e a t portion h i c h i s
of poor quality a n d o f lisht weight i s used entirely
a
for feed, vhile_that which i s o f g00d quality a n d heavy
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Federal Reserve Bank of St. Louis
weight i s sold almost exclusively f o r export t o bre vers
in burope.
I s the feec barley essential a n c thea «ood
barley non-essential?
If the wool already availeble exceeds t h e r e q u i r e
ments f o r the current year, i s the production o f more
wool essential?
I s lony staple cotton i n the year 1920
an essential i f its use i s solely f o r tire febric a n d
if a year's requirements a r e alreedy i n hana?
Instances c o u l d b e multiglied, particularly a t
present,
i n which sroduction, w h i c h e t first thought
woulg b e c l a s s e d a s essential, m i g n t u p o n c o n s i d e r a t i o n
perhaps prove t o b e non-essential.
In view o f the difficulty o f a n y precise classification, t h e r e appears crave doubt whether e v e n i n the
present abnormal post-war situation Federul neserve
Benks are justified, even for the purpose o f limiting
the volume o f credits, i n undertaking t o discriminate
as to the essential character of production.
I Y the
redise counts offered a n d the member banks offering t h e m
were c l o s e l y s c r u t i n i z e d a n c a d v a n c e s m a d e u p o n t h e
sole principle o f soundness o f credits, t n e result vould
be diminished advances t o some poorly managed banks
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Federal Reserve Bank of St. Louis
31
which a r e inclined t o borroy largely a n d a diversion o f
demand t O Wore conservative banks under sounder manese~
ment.
I
t misht well b e thiut such @ course sould n o t
result i n curtaiblnent o f essentiél production.
I
n aay
event @ sounder bankins situation would b e maintained
and t h i s a n p e a r s
t o b e t h e more lecitimate
the P e d e r a l R e s e r v e System.
vurpose o f
I t i s n o t infrequently t h e
weal anc badly managed banks, w i t h their o w n funds
lergely tied u p i n frozen credits, w h i c h u r s
‘
& the
production o f e s s e n t i a l s w i l l s u f f e r a n d g r e a t l o c a l
hardship result unless t h e i r Federal Reserve D a n k malres
advances t o them vhich from the standpoint o f sound credit
mould b e without justification.
w h a t e v e r may have been
justified a s a n cid t o carrying o n the wer, I
gravely
question vihether ¢ven the support o f alleged essential p r o d u c t i o n w a r r a n t s e d e r a l K e s e r v e B a n k s
i n dee
parting f r o m sounc business principles.
vances t o such banks i n a measure o u t o f proportion t o
their r e s p o n s i b i l i t y
i s t o favor t h e inefficient b a n k
“which is readily disposed t o over-expand and t o reach
out for n e w business b r use o f Federal Heserve B a n k
funds.
I f soundness o f credit, instead o f fostering e s -
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Federal Reserve Bank of St. Louis
32
sential production,
«
i s made t h e basis o f advances, b e t -
ter banking methods w i l l develop a n d a sounder credit
Situation result h i c h ultimately will b e more fuavorable for essential production.
What i s the proper conception o f 'the nor-
mal credit condition! which the Federal Reserve Banks should seek to bring sbout?”
This must necessarily refer t o the charector and
extent o f crecit sugslied b y Federal Neserve Banks inasmuch a g they have small poxer t o control the character o f
loans o f member banks a l t h o u g h i n some measure able t o
influence their volume indirectly.
in ideal credit condition of Federel
is one i n which their advances a r e solely f o r azricultural, commercial o r industrial purposes, growing o u t
of the production a n d distribution o f goods soing into
procuctive consuiption, a n d i n such volume o n l y that
tae combined reserves o f the System are so ample, even
at times o f seasonal peais loads, t h a t n o concern arises
as t o thelr sufficiemy.
a
I n s u c h acondition the dis-
count rates o f Federal Reserve banks would rezulats t h e
4
use o f r e s e r v e c r e d i t s w i t h i n t h e l i m i t s
o f such volume
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Federal Reserve Bank of St. Louis
oS
as could be imaintained without the necessity of violent
check o r forced liquidation, a n d member banks would
‘bain a n importent desree o f self-dependence, makins
in reagonable measure,
t o weet with their o w n
funds e v e n the seasonal reguirenents o r their borrovers.
This statenent o f a n ideal credit condition h a s n o
present practical value except t o point a direction.
The "noral credit condition” i s tho proper measure of the
extent o f prosress i n this direction which i t is cesirable t o maxe i n the present circumstence.
At the Gredit Gonference h e l d here i n Mey o f this
year a t the request o f t h e Federal Reserve Boarc,
i t was
the definite v i e w thet steps should t h e n b e taken t o
check the expansion o f credits s o as t o make provision
for t h e special requirements o f the autumn.
q
t is
unquestionably d u e t o the checks thereafter epoiied a n d
since continued thet w e now have a relatively easy credit
condition.
I n a similler way thouzht should n o w b e taken
for the coming year a n d s u c h credit provision made a s
Will sive adequate suoport t o commercial and industrial
ECtIVIty.
Y o thet end, there shoulc b e a reduction
in the present volune o f credit.
I t vould n o t b e safe
for a ney expansion t o start w i t h a condition olready
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Federal Reserve Bank of St. Louis
over~expanded.
for s u c h &
B u t a t this t i m e i t mary& n o t b e
a
reduction t o p r o c e c d v e r y f u r o r t o c o n t i n u e
very long. 3
O r g n o w having a n increase o f loans,
season i s o n e o f liquidst:
T h e r e i s&
nate
quirement o f temporary additional advances t o
finance t h e o v e m e n t
Suners.
.2
>
o f products f r o m producers
A d d i t i o n a l advances f o r such purposes
>
.
4
facilitate liquidation a n d mart
duction,
Lis.
i n brief course,
n e r e l e
4
t o cono f course
t h e progress tovard r e -
i n t h e present volume o f cred-
n o v i b u b i n g t o such reduction a r e
iuproved c a r movement, increased efficienc? o f lebor a n d
Geclines i n the prices o f comnodities.
I
t may b e men~
tioned i n passin: that althousn & number o f comaoditie
resdy s h o w n i m p o r t a n t d e c l i n e
so l u r s e &
i n prics,
volume o f b a n s d e p o s i t s a n d c u r r e n e y
v e t vith
i n cir-
culation, i t seems unlikely t h é h e r e will be any
level
i n the n o a r
future.
The l a s t f o u r m o n t h s h a v e s h o w n a
in the credit situation, although nob nuen improvement i n
reserve percentage. T h e comin: fovir months sive fair
Dromise n o t only o f continuin:; this betterment
i n tone
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Federal Reserve Bank of St. Louis
but also ¢ increasing the proportion of roserves.
These desirable results cannot f a i l t o b e attained i f i t
is seen t o that t h e liquidation usual a t this season o f
the year i s carried forward i n customary volune.
attained,
d n e n
w e shall have a “normal credit condition”
in
the s e n s e t h a t F e d e r a l K e s e r v e B a n k s n a y p r o p e r l y d i s -
continue, f o r a t least a period, t h e i r present efforts
Lo curtail t h e volume o f credits.
tion will n o t reach t h e ideal.
S u c h a credit condi-
T h a t c a n only b e reach-
ed, i f ever, a f t e r a lone series o f Steos.
B u t such a
“normal credit condition® w i l l provide t h e proper basis
and s u p p o r t f o r l a r g e i a d u s t r i a l a n d commerce ial a c t i v i t y
during t h e coming year.
Governor Harding.
T h e next,
o n the same subject,
is
by Governor Seay o f iiichmond.
r Seay.
o
1
M rn. GCnairmean
mGy rer
e and genblemen,
v
o
plies t o the questions are i n catesorical form and are
presented altogether f r o m the adwinistrative p o i n t o f
VLeWe
PURPOSE G
CREDIT CONTROL.
1. ‘ihet are the objects soucht t o be attained b y
the policy of cradit control in the existing etreumstances?
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Federal Reserve Bank of St. Louis
(a) T o maintain-or strengthen reserves ?
The p r i m a r y p u r p o s e
o f t h e éudeavor
t o gontrol c r e d i t
in the present situation a n d f r o m a Federal Reserve Bank
point o f view i s t O maintain o r Strengthen reserves, a n d
the conservation o f reserves should always b e the object
ofcredit control, T h i s control should normally be
exercised b y means o f the discount rate. R e s e r v e s h a v e
approached much too near the siinimum required b y the act,
in the absence o f any emersency~-domestic o r foreign-to bring about seneral alarm o r panic conditions,
In the absenes o f a state o f demoraligation which
the grant o f additional credit might tend t o sure, t h e
marsin o f regerves should n o t b e further encroached u p o n
except temporarily, f o r seasonal purposes.
(0) T o stabilize the existing situation by prevention o f further expansion?
The object of control is now not only to prevent
further expansion but t o get away from existing conditions, which are undoubtedly too expanded from every con-
servative point of view.
I f to "stabilize the situation"
means t o substitute liquid credit b y the processes o f
increased production for banix eredit tied u p i n improper
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Federal Reserve Bank of St. Louis
and capital bane loans, t h e n
stebilizetion should b e
one
of the purposes o f Gontrol.
T h i s vould t e n d t o vitalize
Credit, while perhaps m o t recucine
t h e volume.
T h e
congested state o f banks credit
i s very largely d u e t o
two greet @ volume o f long time,
capital a n d luproper
loans outstanding.
{c) T o bring about a ciseriminate deflation
b y reducing t h e total volume o f
credit?
It i s believed t h a t t h e sducetional
effect incident
to t h e c o n t r o l s o u g n t
t o b e exercised
w i l l have a n a t u r a l
tendency t o bring; about a discriminating
Geflation,
or a
grecusl collection o f baniz loans
o f a capitel nature, w h i c h
will tend either t o reduce t h e
volume o f credit o r confine
lt t o active industry,
8 s sucgested i n the foregoing.
This may vell b e one o f the ultimste
purposes o f credit
control.
&. G a n a substantial reduction
i n the volume o f
Credit b e effected without injury
t o the lesitimate busi-~
nessa o f the country e n d without
curteilnent o f essential
production?
it is, hovever, believed that a very
substantial re«
duction i n the volume o f credit c a n
b e effected n o t only
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Federal Reserve Bank of St. Louis
33
without injury but i t h decided benefit t o the Llevitinete
interests o f the country anc without curtailment o f
essential p r o d u c t i o n .
t
h
e readjustment
o f prices
t o a
legitimute basis, &llowing the normal business profit,
would b e one o f the effects brought about b y credit
control, a n d a
reduction
i n the volume o f credit required
for t h e c o n d u c t o f business w o u l d b e
a
6refore,
natural CoOnsecuence.
i t i s believed t h e t a reduction i n
the volume
could b e accomplished without curtailnent o f
essential vroauction,
I t would a i d i n the acconuplishment o f
such re-
duction t o exercise some control f o r t h e purposes
o f con-
fining within proper linits Speculetive activities i n
come
modities, whether raw or manufactured,
Speculation
either i n securities o r commodities i s not
2 crime, but
6) On. the contrary, w h o l e s o m e w h e n c o n f i n e d w i t h i n r e a s o n
@ble limits, a n d i s incident t o the conduct o f
all business;
it might b e celled t h e life o f trade.
There i s n o question, ho'ever, that over-Speculation
in comnodities durins recent ceriods was resnonsible
for
the absorption o f undue amounts o f credit,
a n d likevise,
in pért degree, responsible f o r t h e artificial
vise i n
prices, and robably was the cause of the apvarent
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Federal Reserve Bank of St. Louis
scurcity
o f goods, c a u s i n g s u c h «
r i s e i n prices.
The gradual collection o f loans made for. cavital purposes a n d reduction o f loans made i n ectivigies w h i c h
rether adainister t o self-indulgence t h e n t o material
velfare w i l l undoubtedly release a n enormous smount o f
credit without i n any manner curtailing essential production.
Oo. T o whut extent h a s o n e o r more o f these objects
been a t t a i n e d
i n each district a n d i n the c o u n t r
at
larze?
nag b e e n n o curtailment o f the volume o f bank
creait i n the country a t large, but,
continual expansion.
o n the contrary, 4
f h e increase i n the agaresete
of
se
banic l o a n s
t s t o o well knowm t o the informed
t o call for
statistics
o n this subject. T h e r e , h a s , novever, b e e n a
redistribution o f credit alon- t h e lines sussested i n
foregoing,
put,
t o the bensfit o f not only Keserve Laenks,
i n & lesser dezree,
have i n c r e a s e d t n e
f
t o m o m b e r banks.
o
A l l cistricts
r u c t i v e c o m n e r c i a l purnvoses,
ena s d e c u l a t i v e l o a n s b o t h i n comnocities
a n d securitics
have declined.
4. T o what extent i s i t necessary t o distincuish
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Federal Reserve Bank of St. Louis
betwcen the immediate objective o f the yoliey o f credit
control and the remoter objective, such a s reduction i n
the cost o f living?
Tt i g believed there should b e n o direct connection,
either actual o r apparent, betveen the objective o f the
credit control policy b y Reserve Banks anc the course
of orices; that i s t o say, control o f credits should not
be undertaxen by Reserve Banks for the purpose o f regue
lating prices.
T h e a i n should b e t o leep credit liquid,
prices
to control its use b y the discount rate, anc letve
Las «
to take their natural course according t o economic
o f purIt cannot b e denied thut a material increase
prices, s i n c e
chasing p o w e r h a s a n ultimate e f f e c t u p o n
the s p e n d i n g o o v e r o f a
nation a t a
civen time m a y b e
of its cireuaporoximately measured by the total amount
a n d bank
lating mediwa, t h a t is, t h e currency circulation
deposits t a k e n together.
G u t , nevertheless,
i t i s not
for
belteved that credit control should b e undertaken
the purpose o f regulating prices.
What i s the proper conception o f the ‘normal cred~
it condition” which the Federal Reserve Banks shoule
geeic t o bring about?
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Federal Reserve Bank of St. Louis
NORMAL GAnvl? CONDITIONS .
It trould b e difficult t o d e Line a
normal credit
condition, a n d perhans impossible t o define i t for prictical ourpoges.
T h e r e a r e recurring
ordinéry trade activities, followed b y declines, possi
influenced
b y the e b b and flow o f a
nation's e n e r s i c s ,
sonctimes b y conditions existing outside o f a nation.
There a r e periods o f abundant harvests a n d periods
snort harvests.
T h e oublic i s subject t o what w e m a y
tera fits o f extravavance a n d fits o f economy.
a n d while
all o f t h e s e may\ have d e f i n i t e c a u s e s , h o w e v e r o b s c u r e ,
to define a
normal condition woulda b e difficult.
misht b e t e r m e d @
I
t
period o f averase c r o p s a n d senercl e m -
ployment, w h e n there i s a n absence o f the fever o f s p e c
ulation, e i t h e r i n securities o r commodities; b u t t h e |
hunie a pendulum i s i n c l i n e d
the other.
I
t o swing f r o m o n e extreme
to
t would orobably b e fair
a
normal c r e d i t c o n d i t i o n e x i s t s w h e n b a n k l o a n s a r e m a d e
very lursely,
the p u r p o s e
ay .
S
2
4 s
a
a n d l o a n s f r o m kesscrve B a n k s e n t i r e l y ,
o f producing, p u r c h a s i n g , c a r r v i n g ,
for
o r mar-
keting goods i n one o r more o f the steps o f the process
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Federal Reserve Bank of St. Louis
oF production, manufacture, e n d distribution.
the Federal heserve L o u r d gnuould jealously suard t h e
resources o f the }
v e Banks b y regulations w h i c h will
not permit thoir u s e e x c e n t i n this manner.
T h e Ke-
serve banks i n their edministration should dissourc-~e continusus borrovine b y member banks.
T h e r e should b e an~
nual periods o f liquidation w i t h every tborrowins bank.
Thess idees should b e instilled i n the member banks b y
the processes o f educstion whidh the Reserve Lanks have
edopted; a n d a n intimate connection should b e maintained
between n e s c r v e B a n k s a n d t h e i r members,
f o r t h e purpose
of masing better known the sound principles o f banking and
credit.
Governor Hardinge
W e will next hear Y r o m Governor
Fancher o n the subject o f
MstHODS Oi CHBUTS GUNTROL.
Governor Fancher.
Gontrol"
I n discussing the subject of"Gredit
o n the basis o f a discount rate o f 6 ver cent
for comnerc ial peer, I
shall deol wholly with t h e ex-
perience w e have h a d i n the Federal Reserve Bank o f
Gleveland.
as serly a s August, 1919, w e noted that a number
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Federal Reserve Bank of St. Louis
of our menber banks w e r e borr wing substantial
amounts,
with a tencency tovard gradually ineressine these
borrowings.
a t this t i m e I
had prepared a list o f the
menber banixs w h o vere borrowin; amounts i n
excess o f thein
capital a n d surplus, a n d w e then proceeded, e i t h e r
br
correspondence o r yersonal contcet,
causes o f such borrowings,
t o ascertain t h e
i . e.:
(1) w h e t h e r t h e y grew o u t o f loans m e d e t o CUustomers f o r carryin:: ‘ S s h e u c s
o f Liberty a n d
Victory bonds o r Tax Gertificates.
dether t h e member banks h e d mede substantial
purchases f o r t h e i r o w n a c c o u n t
o f Government
securities.
whetnaer t h e funds “ere required f o r comuercial
or a s r i c u l t u r a l o p e r a t i o n s .
In obtaining this infomation,
w e d i d n o t su3cest t o
the banks t h a t a limit h e d been dleced o n their borrowings,
but rather intinated t o them that t h loaning; ability
of
the Federal Keserve System was n o t without Liaitetions.
Our loans continued t o gradually expand, a n d the
question o f raising o u r rates, particularly o n Governmentsecured p a v e r , w a s t h e s u b j e c t o f n o l i t t l e d i s c ussi o n
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Federal Reserve Bank of St. Louis
on the part o f the members o f o u r Board o f Directors.
Had i t not been for the announced aattee o f the Federal Reserve Board n o t t o approve a n increase i n rates
on Governnent-secured p a p e r until late i n the year,
our Board o f Directors would have established hisher
rates o n this class o f paper a s early a s September,
1919.
On November 10, the first increase i n rates o f real
interest t o o k place.
a t that time o u r Board established,
and the Federal Reserve Board approved,
a n increase i n
rates o n Liberty L o a n and Victory Wote secured paper
from 4 per cent to 4-3/4 per cent, which was the same
as our commercial paper rate.
T h e Federal Reserve Bank
of Cleveland was t h e first bank t o lead off with a n increase
i n rates
o n G o v e r n m e n t - s e c u r e d paper.
This action brought about a protest from several o f
our large ‘menber banks w h o were borrowing heavily.
They cited the fact that other Federal Reserve Banks, naming particularly the Pederal Keserve Banks o f New Y o r
and Chicago, had notdeemed i t advisable t o incresse their
Yates t o the extent that w e had.
T h e s e banks h a v e
since commended our policy o n rates.
W i t h this increase
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Federal Reserve Bank of St. Louis
45
in rates, w e then established e_different basis f o r cis~
cussing excessive borrowings w i t h o u r member banks;
namely, w h a t i s n o w known a s t h e “basic line”, a n d i n
interviewing o r corresponding with t h e representatives
of our members w h o were borrowing heavily, w e laid
especial s t r e s s u p o n t h e f a c t t h a t u n d e r t h e F e d e r a l R e -
serve A c t o u r Board o f Directors w a s charged w i t h a n
equitable distribution o f o u r loaneble funds; t h a t i e
were h a v i n g a v e r y a c t i v e d e m a n d f r o m o u r members,
with
new banks apolying deily f o r rediscounts; t h a t their
proportion o f our lounable funds, predicsted u p o n their
reserve deposit a n d capital payment, w a s such a n amount;
ond while w e d i d n o t fix that amount é s the limit o f
their borrowings w i t h us, y e t w e suggested t h a t a n y
borrowing i n excess o f the basic l i n e should b e o f a
temporary nature only.
time a s t o h e t h e r
w e also made inquiry a t that
t h e »veak o f t h e i r b o r r o w i n g s
had
been reached o r when i t was thought the peak would be
reached a n d when w e might expect liquidation.
Jur loans continued t o expand, reaching t h e high
point o n December 23, 1919, o f approximately 171,000,000,
of which 125,000,000 w a s secured b y Government obli-
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Federal Reserve Bank of St. Louis
gations, a n d 46,000,000 rediscountea
commercial paper.
fhe increase from August 1 , 1919, i n GovernmentSecured paper was approximately 2 5 , 0 0 0 , 0 0 0
s n d i n con-
mercial paper %36,000,000.
On January 1 2 our rates v e r e again increased--our
Liberty Loan and Victory Hote rate from 4-3/4
t o 5 per
cent, w i t h t h e same increase o n commercial
pauper,
On January 15, b y reason of redemption of Gertificates o f Indebtedness maturing o n that date,
w o experign~
ced @ very substantial decrease i n loans
secured boy
United Stateg obligations, t h e total borrowings
o f our
members o n that date being 136,000,000,
o r a decrease
from December 2 3 of 995,000,000, %28,000,000
o f which
Was paper secured b y United States
obliszations anc the
balance commorc ial paper.
On January 2 3 we azain increased our rates~-our
Liberty Loan and Victory Hote rate from 5 per cént to
5-1/2 p e r Cent, a n d commercial paper rate f r o m
5 bo
6 p e r cent.
Regardless
o f these increases
i n rates a n d t h e
active campaign which w e vere carrying o n
for a reduct~—
ion i n our loans, ‘our redisc amts increased f r o n
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Federal Reserve Bank of St. Louis
47
$156,000,000
o n January 1 5 t o »~170,000,000 o n March 1 .
Of this amount, 3122,000,000 w a s paper secured b y Gov-
ernment obligations, and ip43,000,000 commercial payer.
From this date w e began t o experience a
gradual
liquidation i n our loans t o members, decreasing f r o m
4s170,000,000 on ifarch 1 to 80,000,000 on October 1.
After t h e Gonference o f Governors w i t h t h e Federal
Reserve Board i n April, 1920, where t h e métter o f avnply-
ing graduated rates under the amendment t o the Federal
Reserve Act, w h i c h h a d just been vassec, received s u c h
discussion, I
took u p with t h e representatives o f fifS
i
a
teen o f our largest banks (either “individually o r i n
groups) whose borrowings aggregeted 6 5 per cent o f o u r
total loans, t h e m a t t e r
rediscount. I
o f applying graduated rates
of
stated frankly t h a t the inatter o f keeping
their Federal Reserve Bank strong i n reserve rested l s
with them; t h a t i f w e could count o n full cooperation,
with &@ gradual reduction i n their borrovings,
not b e necessary t o apoly these rates, a n d I
i t would
a m very
happy t o state that excellent cooperation was h a d a n d
the establishment o f the progressive rates n o t found
necessary.
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Federal Reserve Bank of St. Louis
On lay 1 5 our Liberty Loan and Victory ifote secured paper rate was advanced f r o m 5-1/2 p e r cent t o
5-3/4 per cent, our Board believing thet one quarter
per cent was a sufficient differential i n favor o f
Governient-secured paper, w h i c h i s our present rate.
We have gradually adjusted our rates for Treasury Gertificate secured borrowings, a t present our minimun being
5-1/2 per cent.
In the fore part o f July, when the 7 per cent conmercial paper rate was established b y several o f the
FPederel Reserve Banks, t h e question o f a n incresse i n
our comercial rate received n o little discussion o n the
party o f our Board.
A S o u r menber benk borrovings h a
decreased f r o m i9170,000,000 o n ilarch 1
to ~i45,000,000
on July 1 , with o u r reserve position comparatively
strong, our Board did notdsem it vise to establish a
higner rate, careful consideration being civen t o tho
fact that very stringent usury lews i n Pennsylvania a n d
Kentuciy did not make i t nossible foz m e m b e r banks i n
those states t o charge a rate higher than 6 per cent.
Had tne Federal Reserve B a n k o f Gleveland increased i t s
commercial rate t o 7 per cent, i t vould have penalized
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Federal Reserve Bank of St. Louis
all o f o u r members
i n those
t o states
o n their c o m m
Glial borrowings, whether t h e y were borrowing regulerly
or temporarily, u n d whether f o r small o r substantial
amounts.
O u r Board believed t h u t w e could control
the
borrowings o f o u r members a n d maintain o u r reserve
position even i f hichsr rates prevailed i n the districts
immediately a d j a s
Purther liquidation o f our member
banixg ! borrovings f r o m wiiS,000,000 o n July 1
to »~80,000,000
on October 1 hes confirmed our Board's judmment.
a
have always endeavored
w
'
t o keep
the use o f our
4
loan a n d d i s c o u n t f a c i l i t i e s d i r e c t e d alongs p r o p e r c h a n ~
nels.
“ @ carefully scrutinize a l l offerings, especially
comercial paper,
t o ascertain whether t i e paper was »ure
chased’ i n the o p e n market a t a time w h e n t h e banit vas r O ~
discounting with us.
I f such i s found t o b e t h e case,
we take t h e matter u o with t h e rediscounting menber,
acdvisins t h e m that t h e rediscount facilities o f their
Federal keserve B a n k should n o t b e used f o r mali g s oute
side investments a t a profit.
W@ h a v e a l s o found,
i n sone i n s t a n c e s ,
t h a t member
banks w e r e m a k i n g u s e o f o u r r e d i s c o u n t f a c i l i t i c s f o r
the p u r p o s e
o f usins t h e funds
i n the N e w York c a l l
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Federal Reserve Bank of St. Louis
money murket a t profitable rates, a n d these situations
nave been promptly corrected.
Our first report t o the Federal Reserve Board,
giving t h e list o f member banks borrowing i n excess
of
their basis l i n e f o r the period from M a y 1 0 t o 20, 1920,
showed that fifty-six members, with a total basic line
of 57,157,000,
h a d redise cunts with u s that averaged
for t h e period 85,526,000, whereas during t h e period
from Uctober 1 to 10 the mumber of banks borrowing
in
excess o f their basic l i n e has b e e n reduced t o trenty
nine, their total basic l i n e being ‘916,786,000, a n d their
average borrowings f o r the period .:22,342,000.
accolpanylng this paper, I have had prepared a chart
covering t h e oeriod f r o m august 1 , 1919, t o October 1 ,
1920, divided i n t o fifteen-day periods, showing:
Member bank rediscounts secured b y U. S e Securi-
Member bank redisc counts o f commercial
Totel r e d i s c o u n t s f o r m e m b e r banks.
nediscounts f o r other Pederal iieserve Baniss ,
inclucing bills ourchased f o r a c c o m o d a t i o n o f t h e Feder~
al K e s e r v e B a n k s .
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Federal Reserve Bank of St. Louis
I think this chart cletrly indicates t h a t s o far a g
the Federal Reserve B a n k o f Gleveland i s concerned, a
6 per cent commercial rate, counled vith the policy of
close contact with o u r borroring members, throuch which
we have enlisted their full cooperation, h u s been fully
as effective a s a higher rate would have b e e n i n b r i n g ing about a
very marlted liquidetion i n our loans.
This
has enabled u s t o render very substantial assistance t o
six other edoeral Reserve Banirs.
Governor Harding.
W w e will next h e a r from Governor
McDougal,
Mr. ticDoural,
T h e Program Committee h a s request-
ed m e t o speais o n behalf
o f the Federsl Keserve B a n c o f
Gniceso w i t h respect t o its experience i n operating
under t h e so-called “horizontal seven p e r cent discount
rate," the Ghicago b a n k being o n e o f those which elected
to adopt such a rate rather t h e n t o employ t h e so-celled
Hevaduated discount rate plan.”
In the early days o f the operation o f the Federal
Reserve Bank o f Ghicago, careful consideration was siven
to the question o f ciscount rates w i t h ea view t o estab-
lishing a discount rete nélicy.
T h e conclusion
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Federal Reserve Bank of St. Louis
52
reached w a s t h a t i n e s t a b l i s h i n s r a t e s , P e d e r a l R e s e r v e
Banks must b e governed b y conditions prevailing, b u t
it was agreed that t h e rate should b e muintoined a t a
point a t l e a s t e q u a l t o or,
i n case o f necessity,
slightly higher t h a n the prevailin: commercial rates
in the financial centers.
Uncerforeseen developments m a d e i t necessary t o
depart from this policy during t h e period o f wer financ-
ing, but since the sisning o f the armistice, t h e question
of credit c o n t r o l h a s b e e n c o n t i n u o u s l y u n d e r considcera~
tion, and we have been proceeding gradually i n the
direction o f a return t o the pre-war policy.
Undoubtedly t h e Federal Reserve Act, a s origi-~
nally passed, contemplated t h e mobilization o f reserves
in orcer thut t h e y mirht b e available a n d utilized t o
the best advantaze i n relieving any strain caused b y
seasonal demands, unusual location concitions,
sudden emergencies,
or
t h u s protecting a n d strengthening
the banking a n d credit structure o f the country.
Naturally, and, w e believe, oroperly, because o f
the wide variance with respect t o the character and
scope o f business c o n d u c t e d
b y m e m b e r binks,
t h e tempo-
rary credit reijuirements o f some institutions h a v e been
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Federal Reserve Bank of St. Louis
and a t tines will continue t o b e i n excess o f their
pro-rata contribution t o the loanins pover o f the
Federal e s e r v e System. G o n s e q u e n t l y , s u c h conditions
havin b e e n anticipated a n d provided f o r b y tne authors
of the law, d e s e r v i n g member bunks w h o s e levitimate
requirements a r e teinporarilly i n excess o f their normal
or besic l i n e should n o t b e venalized.
On March Slst last, t h e Federal Keserve B a n k o f
Gnicazo, f o r the first time i n its history,
i n order
LO maintain t h e desirec reserve position, f o u n d i t nec~
essary t o ask for assistance f r o m other Federal Reserve Banks, a n d o n April 24th, t h e hish point i n
our rediscountings operations w a s reached, t h e amount
being approximately y45,000, 000. R e a l i z i n g the necessity o f a n adjustment o f rates, consideration w a s s i v e n
to the araduated plan, t h e consensus o f opinion o f our
Board being unfuvorable t o the same.
gn June ist, o u r discount rate o n comicreial a n d
fericultural p a p e r v a s a d v a n c e d f r o m &
per c e n t t o 7
per C e n t e
The results attained b y the Ghicarco Bank a n d the
other Federal Keserve Banks which have adopted the 7
per cent rate, 8 s well a s b y those o f the banks which
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Federal Reserve Bank of St. Louis
have been operating under the so-celled “graduated d i s -
count rate plan,” are reflected, t o some extent, b y
the trend o f the reserve positions o f the several
banks involved.
w h i l e i t i s true thet t h e full m e a s -
ure o f relief hoped for has not been atteined b y the
Chicazo bunk, w e heve regarded i t as our duty t o pro~
vide f o r the requirements o f necessary business a n d
feel confident t h a t t h e eredit extended h u s b e e n s o
usede
the
Our position h u s been adversely affected b y
packing
u p o f loans f r o m neighboring districts w h i c h
'
adopted the graduated ciscount rates. a
number of
ins tances a r e known wherein banks located i n other
districts have come t o Ghicago for assistance rether then
to increase b o r r o w i n g s f r o m t h e i r o w n i e s e r v e b a n k s
to
& point where t h e sraduated rate, i f applied, w o u l d b e
in excess o f 7 per cent.
ue are i n favor o f the so-called “horizontal dis-
count rate”, but assumine thet others o f the neserve
banks m a y c o n t i n u e
count r a t e olan,
t o operate u n c e r t h e araduated d i s s
v e believe t h a t there s h o u l d b e uni-
formity a t least with respect t o the basic rate, m i c h ,
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Federal Reserve Bank of St. Louis
under conditions no: current,
w e pelieve should b e 7
per C e n t e
Governor Harding. G e n t l e m e n , i f there are n o obdjections, t h e meeting will n o w b e open t o forimet
cussion o f t h e papers that have alrecdy
Mr. Jay. T h e r e i s one point i n dr. Perrin
that I
vould l i k e t o see discussed a little,
his remarss a b o u t essential production.
om views corresponé exactly with those o f llr. Perrin.
Tt s e e m s
t o m e that t h e question o f essential p r o -
duction durin: t h e ver,wes,
a s h e seid, oroduction
after t h e w a r tre
expunded condition, w h e n supply w a s greuter t h a n d e
but wo still emphasize essential production without any
definition
o f it, hovever,
i n order t o endeavor
t o con-
centrate our efforts o n settine the supply equel t o
he cemand.
D u r i n g t h e past three o r four months i n
most insteunces t h a t c o n d i t i o n h a s a r r i v e d t h r o u g h w h a t
chain o r circumstances I
do not need t o discuss now, I
nave h u d the thousht thet t h e dvelling o n essential pro-
duction did aot have quite as much voint now as it hed
during t h e w a r a n d during t h e period u p t o tvo o r three
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Federal Reserve Bank of St. Louis
or f o u r months a g o . I
feel t h a t t h e e s s e n t i a l t h i n g n o w
in banking i s not essential production, b u t t o eet a n
essentially sound condition f o r the Federal Reserve
Banks
t o gredually v e a c h s o that t h e y c a n Operate w i t h i n
their o w n resources, a n d that possibly emphasis micht
be put upon thut; yet the board has recently asied u s
to discuss a procram i n which the words “essential proGuetion” appear one o r more times, a n d I would lite versondlly t o iknov the board's v i e w o n that a s compared with
the view that iir. Perrin hes expressed.
Governor Harding.
T h e Board h a s avoided sivins a n y
definition o f essential a n d n o n essential loans, a n d T
ao not thini t h e Board cares t o express itself o n the
matter o f essential production.
I
t i s beginnins t o l o o
in the circumstances a s i f there w a s some tendency towards oOver~production j u s t a t present.
I t may n o t b s
absolute over=-production, b u t when you consider the abilLty o f Hurope
t o absorb o u r surplus products a n d o a r f o r
them and the consequent change from a condition o f ex-~
treme vaste a n d extravazance o f a year a g o t o one o f
economy a t the present time, t h e whole question o f pro-
duction i s changed.
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Federal Reserve Bank of St. Louis
57
Governor Seay.
Y o u feel i t i s n o t s o necessary t o
emphasize t h e essential charecter o f production n o w a s i t
was four o r five months a g o ?
Governor darding. I
would like t o heer from a y col-~
league o n that, b u t m y o v n idea i s the main thine r o r u s
to emphasize n o w i s the working o u t o f a situation t h a r
will g e t a l l o f the Reserve banks o n &@ more iIndevendent
basis, b u i l d i n g
u d o u r reserves
i n order t h a t v e m a y b e
in p o s i t i o n t o m e e t f u t u r e r e q u i r e m e n t s .
Governor Seay.
T h a t will b e done b y the member
eniks i n turn getting themselves
Governor idarding.
i n better shape.
I t i s coing t o b e done b y coopera-
tion o n the part o f the member banks.
suddenly;
T h e y cannot d o i t
t h e y have g o t t o work o u t o f the present situa-
tion.
any o f y o u who have read t h e National Bank statistics
must have b e e n struck with t h e great increase i n re-dciscounts, b e u r i n s
i n mind t h s t i n 1907,
o n the 22nd d a y
of sugust, t h e total ceposits o f tutional Banks w a s
five whlllion, t o t a l loans a n d discounts f o u r million,
eight hundred thousciuc, total bills »oavable o f National
beanies, just preceding the panic o f 1907, fifty-eight
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Federal Reserve Bank of St. Louis
million,
o r about o n e a n d t w e n t y - f i v e o n e h u n d r e d t h e
the total loans a n d discounts;
of
i n 1914, uncer t h e stress
of the outbreat o f war i n Burope, t h e totel loans a n d
Giscounts o f all sutional kants h a d increased t o the
milHitherto unheard o f s u m o f one huncred a n d fifty-one
lion dollars, o r t o and trenty-six one hundredths p e r
cent o f the total loans and disc ountg;even efter the operation o f the #ederal Keserve Banks i n 1916,of t h e 4tu2us bt
call o f 1916, t h e total re-dise cunts o f all National Banks
had fallen t o about ninety million,
o r one a n d one-tenth
per cent o f their total loans a n e disc ounts.
D u r i n g the
we L e i ,
war i t began t o mount up; t h e first yeaer o f the
it was something over 3 per cent; t h e next y e a r sonething
135 Bek
over 1 0 per cent, a n d the n e x t yeer something o v e r
betvecn
cent, but there vas n o new governaent financing
May
the flotation of the Victory Loan in/1919 and the 30th of
that
June, 1920, yet the Gomptroller'’s ubstract shows
the sietional Bans o n June SOth, 1920, as against deposfifteen itillion, three tines what they had i n 1907,
1Sacainst loans o f approximately fourteen million,
or @
little o v e r “ x e c tutca w h e t they h a d i n 1907, a n d total
tivo
pills oayable and re-discounts o f two billion,
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Federal Reserve Bank of St. Louis
hundred a n d five million dollars, w h i c h v a s sixteen a n d
one q u é r t e r p e r c e n t o f t h e i r t o t e l l o a n s a n é discounts.
The normal re-discountins before the war, even after the
establishment
o f t h e Federal Keserve System,
v e s around
one a n d a quarter p e r cent o f the bank's t o t a l loans,
vet last June--it i s greater now, I haven't seen the last
abstract--but last June i t was sixteen and one: quarter
per cent, the National Banks' total loans and discounts
having increased t o that figure f r o m about thirteen a n d
one quarter p e r cent i n that period, e v e n though there
was n o new government financing, b u t o n the contrary t h e
government h a s reduced i t s outstanding oblisations b y the
recuction
o f T r e s s u r y Certificates.
S
o i t seems
t o me
that o u r principal problem right n o w i s t o bring about,
in
an orderly may, without trying t o d o the thing e t tnis
time, which i s obviously a
expansion
i n movin;; crops,
time f o r moderate decree o f
but at a
t i m e next s p r i n g ,
w e
ought t o get all the banks o f the country into a freim o f
yimd where t h e y a r e soinz t o watch their business m o r e
closely a n d not b e s o liberal i n their loans a s they have
been i n the paste
I t i s for them t o determine w h a t i s
an e s s e n t i a l a n d a
non-essential loan.
O u r position
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Federal Reserve Bank of St. Louis
is t h a t t h e w h o l e q u e s t i o n o f w h a t i s e s s e n t i a l a n d n o n e
essential i s one f o r local determinition, w h i c h the Fed-
eral Keserve Lourd washes i t hands o f absolutely.
I f
we had made t h e mistake a t the last Conference i n May o f
uncertasing t o define essential and non-essential loans,
we would have been i n a very serious situation after
Gongress r e - a s s e i b l e s , I
believe;
b u t w e kept o u t o f i t
and most o f the ederal xkeserve Banks kept out o f it,
and i n the ovinion o f the Board t h a t i s a matter t h a t
had better be determined by the individual banker i n
the respective localities, a n d that i f a banker, w h o
knows whet his line o f credit with the s‘ederal Reserve
Lenk is, is told “we know that your requirements are; v e
are not going t o let you have more t h a n a certain amount
unless y o u c a n s h o w e x t r e m e n e e d f o r i t , " I
think v e a r e
soins t o get back t o more conservative banking.
Mr. J a y e
T h e Guestion
i n m y mind vas n o t s o much
a Gefinition o y this, b u t vhether o r not, i n the opinion
of the Bourd, vie should continue t o telik sbout ine@king
essential a n d non-essentiul loans.
Dr. hiller.
L e t me call your attention t o the fuct
hat this does n o t s a y production o f essentials, b u t
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Federal Reserve Bank of St. Louis
where i t i s essential production~iLTe
Dr. wliller.
I n order t o sharply distinguish “hat
misht b e described a s a curtsilment o f business f r o m a
curtailment o f production, y o u micht,
possibility
i n order t o elimi-
o f d o u b t a s t o w h a t t h e »ohrase means,
recast i t by saying “without essentiel curtailment o f
production"--I d o not know vrhetber I make m y meaning
Clear o r not.
Mr. J a y .
Y e s , t h e r e i s guite a
Ur. silller.
difference.
O n e has t o do with the ectuel mauling
of the shysical soods a n d the marketing o f them, o n c t h e
other has t o d o vith dealins i n terms o f value. T h e r e
was n o thousht o n the pert o f the Board i n formuletinz
this question, I
think,
t o raise t h e q u e s t i o n o f c i f f e r e n c e
bettiesn production o f so-called essentials a n d so-called
non-essentials »
Fovernor Sear.
milicr
bly,
n
e u s e o f the tord i s very fa-
t o a l l o f u s a n d [ I jumped e t t h e conclusion, p o s s i e
m d I
think lr. r e r v i n m i c h t n a v e h e d t h e s a m e t h o u g h t
in mind, a s h e arsued a little b i t alonz that line--did y o u
not, .ire rerrin,
o n the question o f essential a n d non-
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Federal Reserve Bank of St. Louis
essential p r o d u c t i o n ?
referred
iy. Perrin. I
place £
t o that, a n d v e t i n another
discussed t h e question o f whether &
reduction i n
Le
the volume o f purchases w o u l d reduce t h e total o f procuction-Governor Harding.
I f y o u will vardon
ceeding with this discussion, I
would like
r e a d a cor
munication # r o n t h e S t a t e D e p a r t m e n t w h i c h t h e V e p a r t m e n t
transmits a s confidential information, a n d I f will request
that t h e information b e s o considered b y yous
(Governor dardiny thereupon read t o the Conference
the c o m u n i c a t i o n referred, “ h i c h t h e reporter w a s dir
yected n o t t o tate.)
Governor Harding.
I s there o n y further discussion
of the pupers t h u t have already been read t o the Gonference?
(after a pauses ~
.
desires t o discuss the
hat h a v e a l r e a d y b e e n read,
v e will proceed w i t h
the reuding o f other pavers.)
De. G a ialLers
I T would like t o s a y & word o n this
y as
important subject, before w e cismiss i t , 8 s b r i e ? i
possible. I
have listened t o the papers e f oir, “cermin 6 n d
ify, Seay with a great deal o f interest, a n d vas strucils
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Federal Reserve Bank of St. Louis
with t h e f u n d a m e n t a l w a y i n v h i c h t h e y a p o r o a c h t h e p r o b -
lein; both disclosed a
so09d deal o f thought a n d I
think
appreciation o f some o f t h e more obscure factors, fuctors that a r e rather more difficult t o brinz i n t o t h e
field o f b a n k appraisement.
Particulérly
am I
impress-
+
ed with t h e frequent reference t o underlying industrial
conditions a s affecting Reserve B a n k balances a n d the
betring o f iieserve Bank methods a n d operations t o o n
industrial conditions.
Ido n o t believe t h a t t o o much emphasis c a n b e o u t
upon t h e t f e a t u r e
while t o come. n
only
a t t h e oresent time,
genere
i
a n d for a
sood
t i s true that finencing
is not the/object;2bahking i s not the ohly- abject; t h e
onject i s t o promote industry, production a n d distribution a n d t h e workine i n t o their ultimste uses o f
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Federal Reserve Bank of St. Louis
nord o n t h e q u e s t i o n r a i s e d b y
lire Perrin's paver.
t i n my judgment the time i s right
now when the c o m u n i t y m u s t b e l e d t o judge f o r
itself
what i s essential a n d what i s not essential,
and no
arbirtary o r dosmatic prescriotion o n such a
subject
by @ Mederal Reserve b a n k o r the Federal heserve Board,
Ot this stage o f our post-war movement, vill b e reSpected b y a community, a n d i n my judgment should not
be.
There i s much that I
should l i k e t o s a y i n com-~
wendetion o f svecific points developed i n these
pcpers,.
tendency t o sideeany rate, t o adopt a
hesitant attitude t o -
the larger responsibilities o f the Federal Reserve
Systeu, but takin; vefuge i n the formule o f sound credit
Conditions anc without, i t seems to me, e n adequate
definition o f just what is, i n certeéin sections o f
our
o e
a t the present time, a sound credit condition;
in brief, whut tests w e must set up either for ourselves,
for o u r o w n u s e o r f o r t h e u s e o f others,
a s t o whether
or not our credit condition i s really a sound
one..
I t
is &@ very simple thing for me t o conceive that a
Ped-
eral Keserve System misht be extremely safe and strong
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Federal Reserve Bank of St. Louis
and y e t t h a t s a f e t y b e e f f e c t e d
a t t h e expense
of a
gafe
condition o f industry a n d 2 safe condition o f t h e whole
poay economic.
t h e t i s whet T
mean when I state t h a t
with a l l p o s s i b l e e m p h a s i s t h a t w e m u s t l o o k b e v o n d t h e
situation o f our immediate banks,
i n order t o understand
whether w e are functioning e s a
bankine system should
function, pvarticularly i n times
o f stress a n d transition
such @ 3 w e are i n the midst o f at the present time; i n
brief, w e must always k e e p o n e eve u p o n the effect o f a
liberal a t t i t u d e
i n the matter
o f credit e x t e n s i o n o f
an Llliberal attitude u p o n industry. P r o d u c t i o n , e f t e r
all, i s the fundamental thing. I
herefore,
should l i k e t o heer,
f r a n b o t h o f those sentlemen, p e r h a p s
others t o o , w h o f e e l a n i n c l i n a t i o n
f i m m
t o s a y t h a t a n adecuate
administrative object o f Federal Reserve bankines i s t o
maintain a sound conditilon--after all, whatever v e d o
affects s o m e b o d y , a f f e c t s s o m e section, e f f e c t s s o m e i n a
ieustry,
o r effects s o m e i n d u s t r y
i n cseneral, I
agree w i t h b o t h Mr. P e r r i n a n d Mr. S e a y ,
guite
a n d others,
when
they say i t is not our business t o undertake t o regulate
prices.
I d o n o t think that w e c a n s a y with t o o much
emphasis t h a t t e must n o t permit ourselves t o becomes,
in
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Federal Reserve Bank of St. Louis
the public estimation,
welfare institution.
i n ony sense & ® Seneral
econonic
e
x
I t i s o u r business
t o banks
i t
is our business t o create credit; i t is our business
setisfy,
a g t h e e d e r a l Heserve Lantk act itsel? ore-
scribes, t h e needs o f coimerce i n b u s i n e s s , . t
u
b thet
implies t h e t v e iust always h a v e a judgment u o o n whet
the Condition o f industry i s i n order that w e may form
& judsment u p o n w h a t t h e n e e d s
o f comierce a n d industry
are.
Now, t h e fect i s that a l l business transactions a r e
made i n toras o f xrices. Myr. n e a y brin;s o u t distinctly,
thougn e r e passingly, t h e effect that liberal credit
policies,
o n the v a r t o f reserve systems,
i n the p a s t
two years, h a v e h a d upon the upward flisht o f prices.
That, o f course, w a s n o t the intent, t u a t was n o t t h e
purpose;
i t was, h o w e v e r ,
icy pursued,
c a incident
o f the credit pol-
S o thile w e m a y n o t intend what v e d o vith
resvect t o mekin; t h e volune o f credit learser o r smaller,
meverticless
i f w e shovld s h u t o u r eyes t o t h e fact
that whatever w e d o i n the v a y o f affecting t h e volume
of c r e d i t i s b o u n d
t o have a n imaediate repercussion
upon t h e general movenent o f »rices,
w e should b e pure
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Federal Reserve Bank of St. Louis
suing a n o s t r i c h - l i k e p r o c e s s a n d p r o b a b l y e x p o s e o u r -
selves t o pretty severe criticism.
I t i s one thing t o
that w e d o not intend t o exercise a n y effect u p o n t h e
seneral movement o f prices a n d i t i s quite another thinn,
hovever,
t o s a y that t h e effect o f what w e d o o n prices
is o f n o concern t o us.
M y contention o n that point
would b e thit it. is o f immense concern t o us, a n d i n saying that I
should a t the same time caution that i t
would b e highly inadvisable t o convey that impress ion
the p u b l i c
o r o u r constituent bankers,
o r t o let tha
impression s o forth; b u t I think t h a t w e must alvays,
in
determining whether o r not o u r credit policies a r e a t
pottaa w e l l a d o p t e d t o t h e existin: b u s i n e s s
trial situation,
pay a
very l a r s e e n d r e s p e c t a b l e a t t e n -
tion t o vzhat t h e m o v e m e n t
o f prices i s .
Now, caning t o the immediate situation which has
received, properly, t h e major space i n these discus
I suppose t h e t beyond t h e elimination o f the excessive
speculation that wes noted i n both business a n d fundamental industrial enterprises
i n this country earlier
in t h e year a n d t h r o u g h o u t t h e l a r g e r p a r t o f t h e y e a r
1919, t h a t what w e might rationally b e said t o have done
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Federal Reserve Bank of St. Louis
is t o have permitted, due t o the discount policy o f tie
Federal e s e r v e B a n k s , s
cumstances w e thought w a s
tion a s could take effect with what w e felt a n improve~
ment i n the general health o f the country's industryz,
its business a n d i t s credit.
i
n brief, e a s I-shall o u t
it, o u r recent objective h e s b e e n a n orderly liuuidation, a n d b y t h a t I - m e a n a
liquidation t h a t neither coes
too rapidly, a n d therefore faces t h e danger o f becoming
a forced liquidation,
n o r o n e t h e t .:o¢s s o s l o w l y a s
to work asninst the inevitable drift o f economic arfuirs
in this »seriod o f readjustuent end t o returd then
wiat L a n n o t c l e a r
o n i s whether
a t t h e nrosent t i n e
ve are Golng twraplidly o r whether v e are join: too
Slowly, e n d that i s a practical guestion u o o n “nich
feel T would like a source of information for a determination
o f ite
I
t i s p o s s i b l e t h a t Liquidution,
cesirable i n and o f itself, m a y i n certain continzencies
soins s o fast a g t o b e acconplisned
will b e altovzether t o o c o s t l y w h e n « 6
some time i n the future, full reckoning o f
been doin.
O
n the other hand,
i t is
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Federal Reserve Bank of St. Louis
Ceivable t h a t the process m a y “ 0 Slowly, Slower t h a n
conditions
o n t h e w h o l e f a c i l i t a t e a n c maelze possible,
and
I an pretty clear i n m y o w n inind that i t i s so0ing o n
altogether t o o slowly i n certuin sections o f the country,
Gat those sections a r e t h e states t h a t a r e tiec u p i n
heir general economic position with o n e o r t o imne~
diate staples. I
that I
have n o hesitetion i n savine
think o n e o f the creetest arags u p o n t h e resump-
tiono
f a better condition o f credit i n business
in
this country today lies i n the undertaking i n certain
sections o f the South t o impede t h e natural movement o f
economic forces, particularly with respect t o the marketing o f cotton.
£ . feel, t h e r e f o r e ,
t h a t i n o r d e r t o get,
as i t vere, t h e field o f action within wiich t h e Federal
reserve B a n k s h a v e ‘jot t o operate,
a r e operating,
and
have s o t t o g o o n operatine f o r t i o o r three months
before t h i s f i r s t 2shase o f o u r r e c e n t d i s c o u n t p o l i c y
can fairly b e said t o have come t o a n end, t h a t w e ought
to h a v e m o r e l i s h t t h r o w n u p o n w h e t I
question a t t h e m o m e n t & s t o w h e t h e r
district,
a n d important industries
regard a s t h e n i v o t a l
o r not, G i s t r i c t
b y industry,
i t is
g0ing a s fast i n the interest o f a good state o f pro-
by
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Federal Reserve Bank of St. Louis
70
auction, nationally viewed,
a s w e G a n reasonably e x -
pect, o r whether i n some cases i t i s soing t o o slowlr
and i n other cases t o o rapidly.
guestion o f methods,
T o m y mind t h e whole
t h e w h o l e q u e s t i o n o f rates a n d
the whole question o f pressure--in brief, t h e whole
matter o f control, requires t h a t there should b e t o
that problem a n intellizent premise, a n d one thet i s
pased uvon a pretty direct acquaintance with the facts.
Some things t h a t I T have heard v e r y recently l e a d m e t o
think thet there are, c t any rete,” ’certain localities
in the country where the process o f liquidation has
become drastic i n cnarecter, a n d i n others, a s I have
already intimated, I
opinion,
think the whole
ressure o f oublic
t h e whole pressure t h a t focuses u p o n t h e P e d
eral Reserve Banks, a n d throuch them upon the banks that
have n o immediate reletion t o these local conditions,
isto throv obstacles in the way of liquidation~-in
brief, t o retard ite N o w one thing that I thinl: :rould
be fatal, froa the yoint o f vier o f the Federal Reserve
board i n the administration o f the Federal Reserve
System,
i s that i n times o f acute difficulty l i k e t h e
present w e should have o n e nolicy a s reszards o n e
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Federal Reserve Bank of St. Louis
section o r o n e d i s t r i c t a n d a n o t h e r v o l i c y a s regards
another district o r other districts. I
would l i k e t o
iknow for myself, f o r instunce, whether o r not w e should
not have a
perts
more energetic discount policy i n certain
o f the country where I
am n o w under t h e impression
uidation i s bein: retarded. I
would l i k e t o
knovw f o r m y o w n information whether i t would n o t b e
possible
t o release p r e s s w e
country where I
i n certain parts
o f the
am inclined t o suspect a t the present
time liquidation h a s o n e a
lon: w a y towards accomplish-
ing all that w e ought reasonably t o expect t o b e aca
complished i n this first t a c l s o n the problem;
i n other
words, w h e t h e r p r i c e r e c e s s i o n s f o r c e r t a i n comuodities,
>
particularly where i t affects manufacturinn activity,
have n o t become such that there i s developinz a
the p a r t o f i m p o r t a n t s e c t i o n s
o f t h e business a n d i n -
ustrial communities w i t h regard t o t h e future.
Pervin,
w e c a n n o t e v a d e o u r responsibility;
influence
fear o n
X
e
i n noting
o f o u r a c t i o n a n d o u r v o l i c y u p o n prices
we
may regret connection therevith o f the Federal Keserve
Banks
a s much a s w e want t o , b u t t h e f a c t still remains
there, staring u s i n the face, t h a t a s ars e r e d i t con-
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Federal Reserve Bank of St. Louis
a2 f
2
:
ditions g p :
é
3
s
t o a very @onsiderable extent will b e
price conditions, a n d price conditions i s one o f t h e
important things u p o n which t h e business m a n keeps h i s
eye i n determining h i s c o s t f o r t h e n e x t s e a s o n o r t h e
next year;
a n d i f h e thinks t h a t t h e Federal Keserve
System a s a
whole,
o r a n y p a r t i c u l a r P e d e r a l tteserve
bank, n e s definitely comnitted itself, irrespective
of industrial consequences
é n pusiness consequences,
to a policy of tichtening its grip o n credit, h e will
be fearful that his business i s goinz t o b e p u t into a
sht-jacket a n d t h a t m a t e r i a l s t n a t h e buys t o d a y
will have t o b e placed o n the market,
i n the f inished
product, s i x months o r nine wonths hence a t considerably
lower orices, prices t h a t m a y leave a very narrow imercin
of s a f e t y b e t w e e n h i m a n d p o s s i b l e e m b a r r a s s m e n t .
T h e
words “solvency” and “insolvency have not been brousht
into this e
s
a s yet, a n d yet I think there are
things t h a t make t h e m very pertinent,
Lam impressed a l l t h e time w i t h t h e fact that i n
business t h e question o f solvency i s purely relative,
énd the most linportant thing t o which the solvency o f
& well-conducted enterprise relates itself i s the dif-
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Federal Reserve Bank of St. Louis
ference between t h e prices a t which a man buys a
uisite
rede
o f production a n d t h e price a t which h e hes t o
liduidete t h e finished comuodity w h e n i t i s ready f o r
marketing, I
5
seem t o have sensed, f r o m thincs t h a t I
have r e a d a n d things t h a t I hear, t h a t there i s a
tant attitude i n industry developin:, d u e t o sreat
enxlety,
t o great uncertainty,
a s t o what price c h a n Bes
are goinz t o b e i n t h e next s i x t o nine months, a n d
founded larzely u p o n doubt a n d uncertainty a s t o what
the credit policy o f
because
s
y
i n t h e comprshens
s
i :f
t
e
m will
t n e ordinsry business
very close connection between
prices a n d changes i n the volume
of credit, w h i c h ultimately trace bacir
you please, i n the attituce of the Federal Reserve autbnorities.
Governor Harding. I
think a t the sroper time u e
should discuss t h e report o f business conditions s i v e n
out b y each Federal Keserve B a n k a n d b r the itederal Heserve BDoard etch month.
I
t has been cleimed b y gome
thet these reports h a v e h a d a
verr decided Luviuoace
in t o e d o w n w a r d t r e n d o f prices; s o m e o f o u r critics
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Federal Reserve Bank of St. Louis
navesaidsom that they have b e e n framed
with e view o f depressinz prices,
a n e s o forth.
T h a t is a
matter t h a t
Ought t o b e very cérerully considered,
a n d Lomnorrow,
at t h e ineeting o f t h e f e d e r a l R e s e r v e
agents,
t r o mene
bers o f the Board will a s k t o b e present
a n d the matter
Will b e d i
i
n more cetail a t that time.
Do y o u tiish nowy t o 8 9 o n with t h e reading
o f these
papers o r t o have further discussion o f the
papers w h i c h
héve élready b e e n read?
lin. sicGorde Governor Harding and sSentlemen, i n
the
4tlanta District, which seems t o be one o f the
large
borrowers o f the other Federal Reserve Districts,
before I
left home I
made a little comparison betveen
our c o n d i t i o n t o d a y a n d o u r c o n d i t i o n
a
TEAL Gr0- A
yeer a 0 w e were borrovine s e v e n a n d o n e half riillions,
and todey I believe i t is forty-four o r forty-five
aillions, forty-seven millions a
n
few days aso, a n d I
beginning t o cast about
a
Os
t o find t h e cause f o
r the
CiiLevenceeThe a c t i o n o f the Interstate Commerce
Gonmission i n giving t h e »referential t o Southern
ports
has. caused a diversion o f shipments
o f itississiopi
Valley comaodities t o the port o f N e w Urleang.
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Federal Reserve Bank of St. Louis
75
course,
“ 6 a r e very slad
on file, vinich I
d
e have a
have c h e c k e d a n d w h i c h I
statement
thint: i s cor~=
rect, shoving that our branch bank a t New Orleans i s
hendlins crain a n d other commodities o u t o f the Hiddle
de8t t o the extent o f about forty-seven million dollars,
commodities w h i c h i t had n o t handled previous t o this
time.
T h a t represents shipments o f wheat t o the Brit-
ish sovernment larzely, a n d there i s a revolving credit
necessary r o r t h e l e w O r l e a n s m e m b e r b a n k s b e f o r e t h e y
can reslize o n their drafts.
2ork, a n d t h e r e i s a
I
t i s three davs t o N e w
float o f t e n millions
o f dollars
in these drafts, a n d that i s one thins that ties t h e m
UP a n o t h e r thing i s that they a r e calling u v o n these
shippers
i n the west t o p a y these drafts o n the arrival
of this grain, w h i c h srain goes i n t o t h e immense elevators that t h e State o f Louisiana h e s constructed, elevators costing something l i k e s i x million dollars, a n d loaded
from t h o s e e l e v a t o r s
t o t h e vessels.
I
n the N e w Or-
leans e n d o f our district there a r e a lot o f small
banks, s m a l l farmer banks, s m a l l industries a n d small
agricultural developments, and a great port, a t which
credits a r e needed; a n d this development a t New Orleans
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Federal Reserve Bank of St. Louis
has caused t h e parent b a n k i n atlanta t o have to'furnish
the N e w Orleans Branch with a considerable volume o f credit
in order t o handle this n e w influx o f business, a n d t h e
anount which they take i n excess c t that e n d o f the
district will absolutely wipe o u t o u r re-discounts.
Governor Harding.
d a v e y o u fisured t o show h o w m u c h
thoe N e w Orleans Banic h a d i n ro-discounts l a s t y e a r a t
this time a s compared vith today?
Mr. HeCorc. I
heve n o t t h e f i g u r e s w i t h m e , b u t I
can produce them during the day.
T h e New Orleans
banks are borrowing considerably more today than they
diag a yeur ago, considerably more, a n d i t arises f r o m
tnis condition I have spoken of. I
morrow a
will produce to-
report o f t h e N e w Orleans C l e s r i n z House.
T h e
people i
n New Orleans could s t o p thet flow o f credit, b u t
it sould affect t h e port very materially a n d materially
effect t h e distribution o f the products.
I e o v i l l not
stand here a n d s a y that there h a s n o t been some violation
of w h a t w o u l d b e c o n s i d e r e d e t h i c s
flow o f c r e d i t
i n t h e matter.
T h e
i s f r o m n o r t h M i s s i s s i p p i i n t o N e w Orleans,
and t h e N e w Urleans banits h a v e o n e o u t a n d talsen advant-
ace O f that, probably, a n d sided some o f the north Mis\\
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Federal Reserve Bank of St. Louis
Sissiovl banks i n iir. Martin's district.
T h a t i s not
put u p + S a satisfactory reason--in fuct, ~ e criticised
that--cnd what I
want t o s e y i s that t h e contraction
of credit coule take place i n the Atlanta District b r
stop i n g t h a t s h i o m e n t
o f w h e a t a n d o t h e r products,
and oats, d o w n into W e y Orleans,
if
corn
w a g desired t o do
SO.
Governor Harding.
H o w lon; i s that movement likely
tO Gontinue, air. MeCord?
iy. c G o r d . I
thirty days.
tnink the movement w i l l b e over i n
w h a t d o you think about it, Governor
wellvorn?
Governor wellborn.
L
E think i t w i l l c o n t i n u e » r o b -
ably t o t h e e n d o f t h e yeer.
lip. weGord. I
mean the bulk o f it,
of i t p r o b a b l y will.
Governor Harding.
T h e n y o u will get liquidation a s
soon a s that i s over.
iim. MeGord. I
think w e will, s i r .
T h e r e is
another thing, gentlemen. ‘ T a k e a n y s e t o f men who have
been selling their product i n July a n d august a t 4 0 and
42 cents,
\
a n d then have t h e orice d r o p suddenly t o 2 0
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Federal Reserve Bank of St. Louis
78
and 2 1 cents @ pound, a n d there would b e hesitancy o n
their Surt i n marketing t h e product.
condition.
T h e t i s the
A n o t h e r reason i s that they cannot market
their p r o d u c t s b e c a u s e t h e r e a r e n o t a n y buyers,
for
the r e a s o n t h a t D r e W i l l e r h a s gtated, t h a t i s , t h e r a i s
a hesitancy o n the part o f the manufacturer t o purchase, a n d the osurchasers o f the oroduct a r e hesitating
because t h e y d o not know “here t h e stabilization i s
going t o be. w h e n that stabilization i s established,
then there vill b e »eople i n the mériket t o buy the prod-
uct. Hovever, a s i t is todey, there sre towns o f 15,000
inhabitants
a n d there i s n o t a
cotton buyer
i n the t o n .
There a r e buyers, b u t they a r e n o t buying, t h e y have no:
orders t o fill, a n d some sort o f stabilization h a s s o t
to come ebout before v e c a n expect a
real marketing o f
the crop.
Governor Hardins.
I f there i s n o objection,
w e will
adjourn a t t h i s t i m e u n t i l 2 : 5 0 o ' c l o c k t h i s afternoon.
(sihereupon, a t 1:00 o'clock PH, a recess was
talzen until 2:5. o'clock P M of the same day.)
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Federal Reserve Bank of St. Louis
AFTER RECESS
The conference was resumed a t 2:50 o'clock pem.,
fallowing recess,
Governor Harding. G e n t l e m e n , t h e next paper i s
by Mr. Martin, e f St. Louis,
"THE PROGRESSIVE R A T E A S APPLIED B Y THE FEDERAL
RESERVE B A N K O F ST. LOUIS."
Mr, Martin.
M r . Chairman a n d Gentlemen.
meade t h e effort t o compare a n d make a
W e have
study o f the e x -
periences o f the progressive rate a s i t 18 worked eut
in DistricticNo. 8; with the hope that w e can make some
real contribution t o the consideration e f another matter
threugh a rate increase o r decrease, consequently I
ask y a u t e bear with m e while I
must
mention reserve ratios.
I wish very much I hed a graphic o n the wall here,
I t
would help quite a great deal, but perhaps y o u can construct thet graphic f r o m the ratios a s presented.
From January i, 1920 until February 13, 1920, the Fede
eral Reserve Bank o f St. Louis was lending t o other Fed-~
eral Reserve Banks.
O n this lattor date the adjusted
reserva was between 48% and 46%, and we were not called
on t o lend t o other Federal Reserve Banks, especially a s
the tendency o f our reserve ratio was dewnward,.
O n
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Federal Reserve Bank of St. Louis
80
March 22nd our adjusted reserve was between 59% and 40%,
and from that time until t h e present w e have borrowed f r o m
other Federal Reserve Banks. From February 15th, when w e
stopped discounting f o r other banks a n d were standing o n
our own feet, a s i t were, until Merch 18th ovr reserve,
while showing a downward tendency, h a d periods o f recovery,
out c o m m e n c i n g M a r c h 1 8 t h o u r r e s e r v e w e n t d o w n sharply,
and we had t o commence borrowing o n March Zend,
From
that t i m e t h e t e n d e n c y w a s s h a r p l y d o w n w a r d u n t i l
o n May
26th we put i n the progressive rate.
O n May 27th our
reserve shoved a
O n May 28th i t was
slight improvement.
a fraction u n d e r 1 4 % , t h e l o w e s t p o i n t w e h a v e e v e r r e a c h e ,
On May 26th w e p u t i n the progressive rates
later t h e l o w p o i n t o f o u r r e s e r v e w a s r e a c h e d ,
T i o days
b u t from
that date our reserve improved, until o n June 28th i t
reached a fraction under 29% and stayed a t about this level
until September 15th, when it began to show a downward
tendency and is now, October 7th, 21.8%.
In the middle o f February, when w e ceased rediscounting f o r other banks, t h e protection o f our reserve
became a matter o f concern t o our officers a n d directors,
as the downward tendency was forescen,. T h r o u g h o u t t h e
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Federal Reserve Bank of St. Louis
days following, efforts were made, through correspondence
and personal i n t e r v i e w s ,
t o have o u r member banks u s e
careful discrimination i n regard t o loans t o customers,
and when i n the latter part o f March w e besan t o borrow
from other Federal Reserve Banks i n order t o maintain o u r
reserve, o u r efforts a l o n g this line, already strenuous,
were increased.
It i s a practice i n the Federal Reserve Banks o f St.
Louis f o r a l l paper, including that coming through the
branches,
t o b e passed o n daily b y the Governor, Chair-
man, a n d a t least o n e other officer o f the pant.
I n
this w a y we kept i n first-hand touch with the offerings o f
member banks a n d letters were continuously goinz o u t t o
those banks that had reached our base line o r had exceeded
ats
T h e F e d e r a l R e s e r v e B a n k o f St. L o u i s s i n c e i t s
early days has maintained the base line that i t is now
using and lists o f those banks that have exceeded the base
line have always come this year t o the officers! desks
at l e a s t t w i c e a
week,
T h e s e lists a r e a l s o presented
to our Executive Conmittee a t each o f its meetings and
to our d i r e c t o r s t
a each o f the meetings o f the Board,
From p e r s o n a l i n t e r v i e w s a n d t h e c o r r e s p o n d e n c e
we
were c o n v i n c e d t h a t p r a c t i c a l l v a l l o f o u r m e m b e r b a n k s
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Federal Reserve Bank of St. Louis
appreciated t h e situation,
w e r e n o t taking o n new
business, w e r e confining o l d business within what t h e y
considered legitimate limits, a n d i n fact were doing
everything i n their power t o hold down the demand,
I t
was f o r t h i s r e a s o n t h a t f r o m t h e l a t t e r p a r t o f M a r c h
up until M a y 26th, while a
change i n our rates w a s being
daily considered, n o change was really made because i t
seemed that o u r member banks were d o i n g all i n their
power t o control t h e situation.
mentioned i n C topic 5
I n fact t h e method
of this program was thoroughly
tried o u t i n this district,
However,
o n April 1 9 t h our neighboring Kansas C i t y
district put i n the progressive rate, a n d o n May 21st
our neighboring Dallas district p u t i n its progressive
rate.
T h e result o f the establishment o f the progress-
ive rate b y the Kansas City Bank was immediately felt i n
our District a n d i n a number o f instances w e found that
panks i n our district were embarassed b y demands f o r loans
from correspondent banks i n the Kansas City district,
which i t was difficult f o r them t o refuse a s their cor~
respondents called o u r banks! attention t o the fact that
they still enjoyed a
6 % rate f r a n their Federal Reserve
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Federal Reserve Bank of St. Louis
85
Bank.
T h e situation i n New York also had its effect
in this district.
L o a n s o n bonds a n d stocks which or-
dinarily would have b e e n carried i n New York were being
shifted t o St. Louis, a n d a s long a s the banks i n the
Eighth District were paying only a 6% rate, i t was extremely difficult f o r them not t o accommodate t h e i r
customers o f long standing o n loans o f this kind.
when
Dallas p u t i t its progressive r a t e w e knew that unless
member banks i n the St. L o i s District had some protection t h e i r b u r d e n w o u l d b e increased,
Consequently
o n
May 26th w e established o u r progressive rate,
There were 5 5 0 member banks i n this district o n the
day w e established t h e progressive rate,
O f this number
only 1 3 3 were o v e r o u r established basic line.
T h i s left
417 banks t h a t h a d been able t o keep their offerings under
the basic line.
T h e cost o f living was inordinately high,
To increase the rate t o 7% o n all banks i n the district
would n e c e s s a r i l y i n c r e a s e t h e c o s t o f p r o d u c t i o n
t o the
farmer a n d others a n d would have a
tendency t o increase
prices rather t h a n decrease them,
I f a n increase i n
rate were made applying o n l y t o those t h a t h a d borrowed
beyond t h e b a s e l i n e ,
i t would n o t b e s a i d t h a t t h e major-
ity o f banks i n this district were compelled t o raise
their r a t e s
t o farmers a n d o t h e r p r o d u c e r s b e c a u s e t h e
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Federal Reserve Bank of St. Louis
84
Federal Reserve B a n k h a d raised i t s rate.
T h i s bank
therefore decided o n a progressive r a t e a s being equitable
and fair t o all concemed, believing that i t would b e a
brake o n the bank that was going too fast and a warning
that would a i d other banks i n keep i n g within t h e limits,
and that i t would a l s o act a s a protection t o member banks
that w e r e b e i n g a s k e d f o r a i d b y correspondents
i n other
districts, i n that the banks i n this district could de-
that t h e y were having t o pay t h e progressive rate, o r
facing t h e possibility o f having t o p a y it.
As I have s a i d before, f r o m the middle o f February
until w e p u t i n the progressive rate, w e tried t h e method
used u n d e r s u b - d i v i s i o n G C o f t o p i c 5 , o f w h a t m a y b e
called t h e persuasion method, a n d undoubtedly o u r banks
thought t h e y were doing t h e best t h e y could t o keep down
the demands. H o w e v e r , the progressive rate i n this
district proves conclusively t h a t n o words a r e a s persuasive a s one a n d a half p e r cent. U n d o u b t e d l y t h e core
respondence a n d personal interviews o f the Governor a n d
other officers o f this bank had a great deal o f effect, but
the figures s h o w that o u r reserve w e n t d o w n until w e
'
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Federal Reserve Bank of St. Louis
established t h e p r o g r e s s i v e r a t e ; t h a t o n i t s e s t a b l i s n -
ment t h e ratio tmmediately began t o improve a n d continued improving steadily until J u l y léth, f r o m which
date its tendency was somewhat downward until August
6th, then i t went u p steadily until August 18th, when i t
reached 30%, with a downward sag from that time until
september 15th, w h e n i t reached about t h e same h i g h
point, with a general downward tendency since that date,
However, a s September, a n d October are months when the
demand i s always heavy i n this district, i t is fair t o
conclude t h a t w e r e i t n o t f o r o u r p r o g r e s s i v e r a t e o u r
reserve might a t this time b e lower than i t was i n May
when i t t o u c h e d t h e l o w e s t p o i n t
i n o u r experience,
As extravagant statements a r e sometimes m a d e a s t o
the h i g h i n t e r e s t b a n k s h a v e t o p a y u n d e r t h e p r o g r e s s i v e
rate, you perhaps will b e interested i n actual figures,
Ags y o u a r e aware,
o u r progressive r a t e i s applied
to
average borrowings a n d i s calculated f o r banks i n the
cities o f the head office a n d branches o n c e a week a n d
for all other cities once e a c h t i o weeks,
For the last two weeks o f August, 1920, there were
166 banks borrowing i n excess o f our basic line, o f which
Bl banks were subject t o the super-rate.
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Federal Reserve Bank of St. Louis
That meant that those other banks were borrowing o n
Governments which are exempt+-ir. Curtiss.
Mr, Martin.
M a y I ask what was the basic line?
reserve
S i x t y per cent/plus paid i n capital
multiplied b y two and one-half, t h a t i s the established
basic line figured o n gold reserve.
Governor Harding.
T h e required reserve o r the r e ~
serve actually carried, which?
Mr. Martin.
I t i s the reserve actually carried.
The average o f all borrowings o f these 8 1 banks amount
ed to 3104,407,400,
O f this amount 335,750,999. was the
average borrowing o n which the super-rate applied, and the
average rate paid b y these 81 banks was ,0646, ‘ T h e
highest rate charged was 15% on $651.
another way.
I
O r we can put tBis
f one bank h a d average borrowings o f
~104,407,400. f o r the last two weeks i n August, i t vould
have p a i d u s a t the rate o f .0646 o n the amount borrowed
for a year,
T h e highest rate p a i d o n the average bor-
rowings b y a n y one bank f o r this period was b y a small
bank i n Arkansas, which amounted t o .096,
In this connection, i t must b e remembered that during
these last two weeks i n August, o u t o f our total
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Federal Reserve Bank of St. Louis
87
banks there were o n l y 8 1 subject t o the vrogressive
rate,
A l l the rest were paying only 6 % on commercial
and agricultural loans, and a less rate o n governments,
or the average r a h e pald b y all o f our banks f o r the last
two weeks i n Aucust amounted t o 595,
From the facts a s above stated i t would s e e m that
the p r o g r e s s i v e r a t e h a s s e r v e d i t s p u r p o s e
i n this d i s -
trict i n that first, following its establishment the
borrowings o f member banks rapidly declined, a n d o u r re-~
serve correspondigniy increased,. S e c o n d , while o u r reserve
does n o t show a betterment f r o m d a y t o d a y vicht a t this
time, still i n the face o f seasonal requirements i t does
not show a s great a percentage o f decrease a s misht n a mally b e expected, showing that the progressive r a t e i s
holding t h e situation steady, and, a s i t would seen,
thoroughly under control.
Third,
i t has n o t proved a s
burdensome t o our member banks a s would a flat 7 % vate,
which all o f our member banks would have t o pay, a s
money
is costing our banks o n the average 5.95% and the burden
is borne o n l y b y the 8 1 banks, which, either d u e t o
c o nditions o r management, should bear t h e burden,
Now, i f I may just state, following Mr. Miller's
state~
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Federal Reserve Bank of St. Louis
ment t h i s m o r n i n g , I
think i t i s a p p r e c i a t e d t h a t t h e r e
is a relation between rate and price, not that rate should
be s e t t o control price, t h a t i s uneconomic i n m y judgement
but the effect o f a rate o n price, I
believe, must b e con-
sidered i n a broad view o f the matter,
T h e progressive
rate would seem t o offer a medium t o correlate those two
things i n a fairly equitable way, a l s o i t would s e e m from
our experience that i t is quite effective i n carrying out
an orderly Liquidation i n that i t does n o t force t o o fast
and still i t would seem from our experience that i t forces
what, i n our judgment, A
a e
(Applause, )
Governor Harding,
A s s i s t a n t Secretary o f the
Treasury, Gilbert, wishes t o meet with the Governors tomorrow f o r about half a n hour. I
would request t h e chair-
man of the Governor's conference t o advise Mr. Gilbert o f
the time when i t w o uld b e convenient f o r y o u t o receive
hime
I wish also t o state t o m y colleagues o f the Board
that Mr. liaves, President o f the Banking Association, desire¢
to pay a formal official call o n the Board tomorrow, a n d
I told h i m i t w o u l d b e c o n v e n i e n t
t o mest h i m a t t h r e e o'clca
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Federal Reserve Bank of St. Louis
89
I would suggest now that w e hear fron Mr. Miller o n
this same subject, then we will discuss the two papers together.
Governor Miller.
T h e progressive discount rate pro-
vision o f the Federal Reserve Act, a s amended, became ef-~
fective i n the Tenth Federal Reserve District o n April
LB, 29206
Its adoption was i n n o sense a desire f o r greater
revenue o r t o apply a new method té6 discount transactions
with m e m b e r banks,
E x p e r i e n c e h a d shown t h a t i n order
to discourage further expansion o f loans i t wag necessary t o
adopt some fethod o f making i t unprofitable f o r member
banks t o borrow i n excess o f their respective basic lines,
The basic line o f a member banks, a s computed b y Kansds
City, i s determined b y deducting f r o m the amount o f its
average reserve f o r a given time, t h e 3 5 % reserve o n de~
posits which federal reserve banks are recuired b y the
Act t o maintain;
t o the remainder
i s added t h e amount
of
capital stock paid i n b y the members; a n d this s u m i s
multiplied b y 23.
The aggregate o f the basic lines o f all members
is theoretically t h e lending power o f a federal reserve
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Federal Reserve Bank of St. Louis
90
bank b u t i n d e e d t h e a c t u a l l e n d i n g p o w e r igs f r o m 1 5 %
to 26% less, according t o the amount o f float, real
estate a n d other investments carried, n o t elisible t o
deposit with the Agent a s collateral t o secure federal
raséeve notes.
At the time the progressive discamt rate became
effeative, eleven banks in Kansas City had 43.2% and
eight banks i n Omaha h a d 2 2 % o f our total loans,
o r say,
nineteen banks o u t o f the total members o f 1,055 were
using 65.2% of our lending power while 352 other banks
borrowing m o d e r a t e l y w e r e u s i n g o n l y 54.8%,
O
n that
date 6 8 4 members w e r e n o t borrowing f r o m the federal
reserve b a n k but i n the ordinary course o f crop movements m a n y o f t h e s e w e r e e x p e c t e d
t o borrow,
Vith loans aggregating almost the totel lending
power o f t h e b a n k a n d t h e c r e d i t e x t e n d e d
distributed among members,
s o unequally
i t was necessary n o t only t o
make i t unprofitable f o r the large borrowers t o increase
their loans b u t t o encourage t h e m t o reduce s o that
the
demands and chaims o f other members borrowing moderately
or not a t all might b e met,
How f a r t h e p r o g r e s s i v e d i s c o u n t r a t e p l a n h a s
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Federal Reserve Bank of St. Louis
91
succeeded i n bringing about a better distribution o f
credit among t h e members i s seen when t h e status existing
on April 1 9 t h i s compared w i t h that o f September 30th,
on which date sixteen Kansas C i t y banks paying progress-~«
ive rates, had reduced their borrowings from 43.2% to
'25.1% and nine Omaha banks paying progressive rates had
reduced their aggregate lines from 22% to 14% of our
total loans; 196 o f the 684 members which were not
borrowing o n April 19th nave since become borrowérs; more
than half o f these h a d never before h a d discount relations
with the federal reserve bank.
Notwithstanding t h e better distribution o f credit
among members and the marked reduction o f most o f the largs
lines existing o n April 19th, t h e total loans t o all membex
banks increased f r o m 1 1 4 millions
o n April 1 9 t h t o 150
millions o n September 30th, caused altogether b y lack o f
adequate transportation facilities.
Under t h e K a n s a s G i t y p l a n l o a n s s e c u r e d b y liberties
and victories, o w n e d b y members o n April 19th, a n d b y
certificates
o f indebtedness
d o not a d d t o the credit
structure upon which the progressive rate i s computed,
Loans
o n liberties a n d victories a c q u i r e d s u b s e q u e n t
to
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Federal Reserve Bank of St. Louis
92
April 1 9 t h and borrowed a r e discounted a t the normal rate
but d o add t o the credit structure o n which i s computed t h e
progressive r a t e o n subsequent offerings o f commercial,
industrial o r agricultural paper,
Further referring t o the method o f applying t h e
progressive rate: O f f e r i n g s aggregating the amoung o f a
members’ b a s i c line a r e discounted a t the normal rate o f 6 2
on offerings i n excess o f the amount o f the basic line t h e
rate is progressed one-half o f 1% for each brackst o f 25%
of the basic line, therefore w h e n a member i s borrowing
from 100 % to 125% of its basic line, o n commercial, industrial o r agricultural paper, the rate i f 62%; when i t
is borrowing from 125% to 150% the rate i s 7%, etc.
As the rate progresses the psychological effect
causes t h e m a n a g e m e n t
o f t h e m e m b e r b a n k t o serutinize a n d
restrict loans t o customers, although a bank having loans
with the federal reserve b a n k equal t o tyice i t s basic
line and will be paying 8% on the last bracket, yet the
average rate o n the entire line will be a e 6-5/8%. A
member carrying loans t o a n amount equal t o 250% o f ite
basic lines will b e paying only 7.05% o n its entire borrowings.
T h i s average rate i s further reduced i n proporti.
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Federal Reserve Bank of St. Louis
to t h é amount
o f loans c a r r i e d w i t h t h e f e d e r a l r e s e r v e
pank secured b y governments.
Of a l l t h e b a n k s
i n the reserve cities
District o n l y o n e member a
a
o f the Tenth
a v e r a g e r a t e exceeding 7 %
during the month o f September~--the exact rate being 7.08%
mine paid less than 6% while fourteen paid less than
63% and twelve paid between 63% and 7%,
The average r a t e p a i d b y all members e p e c k n e b y the
progressive r a t e does n o t exceed 6 2 % while t h e average
rate paid b y all members inoluding those n o t effected
by the progressive rate i s just a fraction over 6%,
Regardless o f the rate a t which paper i s discounted,
member banks receive b y daily adjustment t h e benefit o f the
full amount o f their basic lines a t the normal rate.
rate o n borrowings
The
i n excess o f their basic lines i s ad~
justed according t o brackets beginning a t the lovest;
therefore b y this daily adjustment t h e rate p a i d b y a
member i s automatically reduced a g its indebtedness d e creased a n d when t h e borrowings o f a member i s reduced t o
within i t s basic line a refund i s paid t o such member i n
accordance w i t h such adjustment. (applause)
Governor Harding. Gentlemen, the meeting is open
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Federal Reserve Bank of St. Louis
for discussion o f these last t w o papers.
Mr. Curtiss. I
would like t o ask Governor Miller
whether h e buys b a n k transfers i n his Federal B a n k end
whether they are ino luded i n the lines?
Governor Miller.
Mr. Heath. I
W e d o nct b u y bank transfers.
should like t o ask just o n e question.
In your article y o u state t h a t Omaha a n d Kansas C i t y were
furnished sixty-three o d d par cent. o f your total loans?
Governor Miller. S i x t y - f i v e p e r cent., yes.
Mr. Heath. W h e t percentage o f your reserve deposits
did those two cities furnish?
Governor Miller. T h a t was very much out o f proper-
tion. I
have i t here and I will be very glad t o furnish
tou the figures, b u t that percentage o f loans i s very much
eut o f proportion t o that percentage.
Mr. Heath. T h a t i s the point I would like t o get
Mr. Wills. I
should l i k e t o a s k Mr. Martin a question
Accepting t h e theory that t h e progressive r a t e 1 s necessary
to prutect y o u a g a i n s t l o a n s c o m i n g i n f r o m o t h e r d i s t r i c t s
how d e you account for the fact that New York has a seven
por cent horizontal rate, a n d Chicago h a s a seven p e r cent
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Federal Reserve Bank of St. Louis
horizontal rate, and bettreen them lies the districts
of Philadelphia a n d Cleveland, w h y i s not Philadelphia
and w h y i s not Cleveland burdened w i t h the b i g loans?
Mr. Martin.
F o r the very simple reason that t h e
correspondents o f the banks affected were n o t i n Philadelphia a n d w e are shut o u t i n New York,
T h e r e a r e banks
in other districts t h a t have kept reserve deposits i n
St. Louis for twenty-five, thirty, a n d forty years.
Naturally the burden would fall against the St. Louis
banks before i t would h i t other places; t h e reserve w a s
there; they had a right t o make the call o n St. Louis. I
believe that is the answer,
the p a p e r s
Mr, Case.
M r . Chairman ,/we have listened t o
vs on the subject o f credit control b y rates, havé.been very interesting.
W e have heard f r o m Mr. Fancher
on t h e s i x p e r c e n t r a t e a n d f r o m G o v e r n o r M c D o u g a l
on
the seven p e r cent rate a n d f r a n Mr. Martin a n d Governor Miller o n the progressive rate,
A f t e r listening
to these l a s t t w o papers there i s a question arising
in m y m i n d a s t o t h e p r o g r e s s i v e r a t e , w h e t h e r
it
really forces liquidation; whether i t gets results,
or merely distributes t h e load elsewhere, I
found a
sympathetic response t o the statement made i n m y o w n
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Federal Reserve Bank of St. Louis
mind,
i n the statement made b y Governor McDougal.
T a k e
he districts where t h e y had t h e progressive r a t e a n d
there i s n o c u e s t i o n b u t t h a t t h e f i n a n c i a l c e n t e r s , g u c h
as Chicago and New York, have a n additional burden put
upon them b y reason o f those rates,
the normal course o f borrowing, a s Mr. Martin has just
pointed o u t ,
o f a g o o d m a n y o f t h e s e s m a l l banks,
G0 t o their reserve agent,St. Louis,
borrow there,
t
h
e
i
is to
o r Kansas City, a n d
r district, b u t i f they find
that their correspondent i s worrowing heavily a t the
Federal Reserve B a n k a n d come i n under this progressive
rate i t i s not a healthy place t o borrow, and the result
is that they g o t o thein correspondent i n one o f the
financial centers where t h e y carry additional funds, perhaps
Chicago o r New York,
O u r information from a number o f
our member banks i n New York i s that the borrowing
fro m
these districts i s very heavy, a n d while these districts
may b e enabled t o improve their position, a n d
n a t u r dy
l
these banks that pay the high rate, eight, nadthe
t o ten
per cent, w i l l impro v e their position a s
rapidly a s
possible, t h e r e c a n b e n o q u e s t i o n b u t
t h a t i t does drive
sane o f t h e m i n t o t h e s e p l a c e s ,
Upon t h e o t h e r h a n d i t seems
t o m e t h a t t h e horizonte?
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Federal Reserve Bank of St. Louis
97
rate Increase p u t s a steady, equal pressure o n your whole
district,
I n speaking with one o f the officers o f one
of these banks, where t h e y had a progressive rate, a s t o
his experisnce about the number o f borrowers, h e stated
that has been steadily increasing o f late,
I n our dis-
trict, and i n some o f the other districts where I talked
with the Governors, t h e number o f borrowers i s steadily
decreasing,
borrowers a
W e had some three hundred a n d thirty-four
few months ago, a n d i t now down t o tro hundred
and eighty~seven.
O f course while the number i s being
reduced o u r amount h a s not been reduced;
clined t o increase,
i t has been in-
O u r N e w York banks have n o t onl y
had this heavy credit pressure, s o m e o f i t from s o
me o f
the other districts, b u t have a l s o suffered a
very heavy
loss i n deposits, some }600,000,000 this year, However,
after listening t o these v e r y interesting a n d
illuminating
papers i t does s e e m t o me that t h e steady pressure
exerted b y t h e h o r i z o n t a l v a t e o f s e v e n
p e r c e n t affects
everybody a n d tends t o reduce borrowing.
rate o n l y affects a
T h e progressive
few, a n d i t encourages perhaps s o m o
who are n o t borrowers t o come i n and g o t
their basic line,
and then i f they cannot borrow from their
large banks i n
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Federal Reserve Bank of St. Louis
thelr o w n district,
t o g o t o gome other district a n d
borrow.
Mr. Martin. G o v e r n o r ,
i n a n effort t o really throw
some light o n this progressive rate w e are not coming here
with @ brief f o r it; w e want t o know t h e facts; t h a t i s
the way we have applied this matter i n St. Louis.
a e
there igs something wrong with i t we should like t o know
it; i f there i s some better w a y w e should like t o find.it,
We can only get those things i n a conference o f this kind,
Just taking u p Mr. Case's suggestions, which are
thoroughly i n point, I may say that I believe i n the
Eighth District the progressive mate has distributed
throughout t h e district a n d has also caused liquidation,
Ve have four centers i n our Distriet, St. Louis, Louisville, Memphis and Little Rock,
W
e can call those the
four centers, T h e r e 1 s a head office o r branch i n those
centers, a n d w e watch from d a y t o day t h e course o f the
lines t h a t come from those centers,
T h e effect o f the
Progressive rate, immediately, I believe i s t o get rid o f
a&number o f what w e may call frozen loans, t h e Irind that
ha d been renewed a n d renewdd a n d renewed,
T h e r e was a
sharp decline i n St. Louis; there w a s a most marked deelivs
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Federal Reserve Bank of St. Louis
99
some o f the
in Louisville, t h e Louisville District covering
the de~
tobacco region and the Southern part o f Indiana,
extent T
evrease was really wonderful there, a n d t o a great
ong
e
a s k i n g some o f the Louisville banks
that i t meant a
liquidation o f what w e may call frozen Loan
a
Was h
not a shifting o f those loans i n t o other territories.
Memphis h a s gone u p considerably. I
have n o t a doubt b u t
their
from that District loans o f banks t h a t have gone o v e r
line o n cotton h a v e a t t e m p t e d
t o b e s h i f t e d t o o t h e r center:
any center they can find, but i t has not been progressive
rate, I
think, t h a t has caused that nearly a s much a s the
condition o f those banks.
I
n Little Rock, where w e have
a cotton situation, there really has n o t been a n abnormal
inerease a t all, a n d t h e progressive r a t e h a s helped t o
keep d o w n t h e a m o u n t o f loans.
To follow this up. T h a t i s all right from the figure
but t o kind o f check i t a s against t h e experience o f the
bankers t h e r e t h e m s e l v e s , e i t h e r p e r s o n a l l y
o r through
so me o f our boys, w e tried t o interview a number o f banks
to see what i n their judgment had been the effect o f this
progressive rate. P r a c t i c a l l y m 1 1 o f the St. Louis banks
taterviewed s a i d t h a t i t h a d h e l p e d t h e m p r o t e c t t h e m s e lve:
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Federal Reserve Bank of St. Louis
LOO
and liquidate; t h a t i t had been a big protection.
I n
one little section, where they thaisht that they were
paying much more t h a n they were m y i n g , t h e y complained
pitterly, saying i f they had a flat seven per cent rate
it would n o t affect t h e m a t all, b u t i f they had t o pay
eight t o n i n e p e r cent o n cotton lines w h y i t was a great
embarassment.
N o w , i t i s true that steady pressure d o e s
not hit all o f the banks, but i t is concentrated o n the
S1 banks
i n our district where t h e pressure
i s needed.
That would seem t o be the effect and, a s I say, I am justtrying t o get this information before the conference i n
order that w e may know i t fron every angle.
G6vernor Morss,.
M r . Chairman, I
am impressed w i t h
these l a s t t w o papers especially because o f the feeling o f
tha t
satisfaction that seems t o be expressed # & the average
rate a t which their banks borrow i s low, down near six
per cent, w h e n o u r rate i s seven p e r cent.
I n one case
when o u r rate i s seven p e r cent, a n d i n one case i t Was
under s i x p e r cent.
O f course w h e n y o u eliminate bor-
rowings o n government obligations and keep those rates
down t o about five p e r cent, o r 5.5 per cent, y o u reduce
the average a t which those banks .wiil borrov very much
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Federal Reserve Bank of St. Louis
10m
indeed.
I t takes away about three-fourths, t o my mind,
of the effectiveness o f a progressive rate, o r any other
rate, b u t when the object o f re-discount rate i s t o let
the money g o t o their member banks a s cheaply a s possible,
it would seem as i f the progressive rate accomplished that
Now, o u r theory i n Boston was entirely opposite.
O u r
theory was that w e ought t o make borrowing expensive,
md
expensive t o everybody, a n d therefore w e p u t o n the seven
per c e n t rate,
T h e seven p e r cent rate h a s protected o u r
district from borrowings from other districts, although
not entirely, but the theory o n which w e work betveen our
district a n d t h e o t h e r d i s t r i c t s s e e m s t o b e q u i t e o p p o -
site,
O u r district, when we have a reserve o f sixty-~
five p e r cent i s paying more f o r the money they borrow
than t h e y p a y i n t h e o t h e r d i s t r i c t s w h e n t h o y a r e d o w n
to twenty p e r cent, o r sometimes more andsometimes less,
and i t does seem t o me that the graduated rate has not beer
effective w h e n that i s all that was accomplished,
Mr. Perrin, I
wish briefly t o touch upon t h e very
point Mr. Morss h a s touched u p o n s o effectively,
t o raise
the rate i n the districts t h a t borrov s o heavily, lending
the money s o much less t h a n the market rate a n d s o much
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Federal Reserve Bank of St. Louis
L102
less than other districts, C l e v e l a n d , P h i l a d e l p h i ad
n
a
,
San Francisco might make a
the
fair showing at/six p e r cent
rate, because t h e y are self-sustaining.
I f Boston charger
seven p e r cent t o all its customers, w h y should banks i n
the heavily borrowing districts, such as Kansas City and
St. houis, borrow a t 5.95 o r s i x plus?
Governor Yellborn. I
quite agree w i t h Governor Case,
with the statement h e made, for I have seen a foct. m a n y
cases where banks reached t h e progressive rate where t h e y
would g o t o New Yorle o r other centers a n d borrow money.
Now, w e put o n the progressive rate for the very reason,
as Governor Morss has stated, for the purpose o f protection, and we thought i t vould give our banks a lower rate,
But I think we have outlived that, and for the past few
months I have advised our Board t o suspend for the time
being the progressive rate a n d adopt the rate, that i s
the present rate, because I thought i t was unfair and
really looked a little hoggish, t o be plain about it,
for o u r banks t o rediscount s o heavily with other banks
to try and maintain a low rate. I
have not yet been able
to convince o u r board, t h e y are divided v e r y much o n that
question, b u t I
think very shortly w e will p u t i n a flat
seven p e r c e n t rate,
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Federal Reserve Bank of St. Louis
Mr. Jay. M r .
Chairman,
t o amplify what Mr. Case
sald, t o adopt t h e
seven p e r cent rate i n New York, I
think o u r idea was
nob-so m u c h the question o f the rate
at w h i c h t h e b a n k s
would get money from us, but the
desire t o bring pressure o n the borrawazg-‘of the district
back o f the banks, t o s t e p b a c k o f t h e b a n k s a n d t o
impress their minds w i t h the necessity f o r borroving
as little a s possible a n d t o provide a
rate which they
themselves would feel, t o be passed o n t o them, s o that
the purpose w a s n o t t o see h o w cheaply o r inexpensively
the banks could get the money, that was not the purpose
entirely, o n e o f the purposes w a s t o exert pressure u p o n
the b u s i n e s s b o r r o w e r s
to them,
o f t h e district,
t o b e passed
on
A m I not correct, Mr. Case?
Governor Harding.
I s there a n y other further
discussion o f these papers?
Governor Fancher...
I t seems t o me that o n e argu-
ment b y the banks that have the progressive rates i n
effect why they should not raise thetisic rate, l s
take t h e banks a t Kansas C i t y a n d St. Louis, which are
discounting v e r y heavily, a n d t h e rate a t which t h e y aro
discounting the paper i s about seven per cent, m d hag
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Federal Reserve Bank of St. Louis
been f o r some weeks.
I t would almost s e e m that that roule
be one argument f o r bringing t h e base rate t o seven p e r
cent, applying i t progressively, because t h e y are making
that thoir rate,
Governor Seay. I
would like t o say, speaking f o r
one o f the borrowing districts, during the crop raising
season, t h a t w e feel o u r banks have gotten themselves
into a difficulty.
‘ Y e felt that the establishment o f
& progressive rate would work very seriously against
a
large number o f borrowing banks that were borrowing purely
s i e
£
for a g r i c u l t u r a l p u r p o s e s ,
T h e r e i s quate a
considerable
number o f our borrowing banks that are borrowing
from
six t o tventy-five times t h e amount o f their basic
line.
You might s a y that those banks should n o t have b e e n al-
lowed t o get i n that situation, but they got themselves
into that situation and they needed the protection, a n d
we have tempered t h e wind t o the shorn land,
fore f e l t v i t h r e s p e c t
t o the establishnent
V
e there-
o f the vro-
gressive rate that i f we we r e t o adopt i t it should
be
in advance o f a time w h e n t h e banks h a d already
gotten
themselves into a cifficulty, a n d for that reason
w e were
not inclined gréatly toward the use of the progressive
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Federal Reserve Bank of St. Louis
LO5
rate, a t least this season,
restrict borrowings
gressive rate .
V
e are also not inclined t o
o n government securities
o n the oro-
‘ Y e found on, seeking information from our
banks that they had about 3100,000,000 invested i n Government securities, t h e y owned thom.
I
t was n o t preetical t c
effect a n y purpose, a n y practical purpose,
t o put i n the
progressive r a t e a n d exempt a n amount o f borrowing which
wae almost equal t o the lending power o f our banks.
in the establishment o f the progressive rate, and i n
of
the presenceAmergencies w h i c h were greater t h a n they were
last year, w e have nevertheless kept our own rediscounts
with dther Federal Reserve Banks d o w n nearly fifty p e r cent.
Ve have never borroved over 330,000,000.
L a s t year we
borroved 55,000,000 from the other reserve banks, but we dz
very early, institute a
campaign o f education;
w e showed
the member banks where t h e y would b e i f i t became iImverative
to e s t a b l i s h a
progressive r e d i s c o u n t r a t e ;
w e wrote e v e r y
excessive borrower f o r five months about twice a month tell-
ing him what his reserve balance had been, what his basic
line would b e upon that reserve balance, a n d showil n g him
what his rate would b e i f h e were borrowing a s much a s h e
was borrowing a t the time.
T h a t seemed t o deter t h e banks,
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LOS
Therefore, not t o impose a burden where w e thought the
burden could b e least tolerated o r borne, w e did not
establish a progressive rate.
I t would have h a d o n e
of two effects, either have imposed a n intolerable burden
on the producing community, o r it certainly would have
transferred the borrowing t o other districts, a s i t has
done i n some other cases.
We did not follow other banks i n raising o u r rate
to seven per cent, a s much a s we should have liked t o
do from certain points o f v i e w . W e are just a s much
inclined t o control borrowing a s i t can be controlled t o
serve a n y beneficent purpose, b u t banking {ts a very practical b u s i n e s s m a t t e r a n d i n v i e w o f a l l t h e c i r c u m s t a n c e s
we neither established a progressive discount rate nor
followed some a f the other reserve banks, from which w e
are borrowing,
b y establishing t h e seven p e r scent r e <
discount rate.
Iam quite i n sympathy with Governor Morss! remarks
about one district borrowing from his district yet lending
ata lower rate than he i s giving t o his member banks.
I t
is a condition which ought not t o exist, tit i n view o f
meeting conditions i n a practical way we adopted neither o f
%
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Federal Reserve Bank of St. Louis
Abas
those policies, a n d I must say that as far
as results
have gone w e have shown a better control over
our banks
than w e showed last year, s o i f things
a r e t o b e judged
bytheir results I am not convinced that we could have
accomplished a n y better resuits b y any
change o f policr.
Mr. Hardy.
Mr. Seay.
W h a t i s the rate o n Liberty Bonds?
S i x p e r cent o n everything,
v e were?”
in favor o f abolishing the discriminating rate,
t h e differential rate o n Government securities
l o n g before w e
did it,
O u r District for a long time was lending
more
against Govermment securities t h a n a n y other district
cept the four large ones. I
ax
think that perhaps our banks
were laboring under a n excess o f zeal o r excitement
or
patriotism, and they overburdened themselves,
events, f o r a long time, f o r many m o t h s ,
A
t all
w e were lending
our banks more against Government securities than any
other districts excepting t h e very large ones,
T h a t hag
been reduced v e r y steadily.
Nv, C u r t i a s ,
I w o u l d l i k e t o ask Governor Yellborn
what his basic rate is, how h e bases it,
Governor Wellborn,
Mr. C u r t i s s ,
N
E x a c t l y like St. Louis.
o exemptions?
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Federal Reserve Bank of St. Louis
Governor Wellborn.
y
e exempt, p r a c t i c a l l y , G o v e r n ~
ment bonds.
Mr. Curtiss. A n y t h i n g else?
Governor fiellborn.
Y e s , farm paper for agricultural
production, b u t that has ceased now since the crop has been
produced and they have marketed the crop. T h a t a l l comes
under the basic line, the progressive rates.
Mr. Hardy. ‘ h a t i s yvour rate o n Government bonds,
Governor Vellhborm?
Governor Vellborn.
Governor Norris.
P i v e and one-half per cent.
I t may b e o f interest i f I add t o
the statements that have been made here the reasons that
actuated t h e Board o f the Philadelphia B a n k i n not adopt-
ing either o f these tivo methods, either increasing rate
or adopting the graduated rate. A f t e r the conference here
last s p r i n g a n d t h e m s s a g e
was borrowing, I
think,
o f the Phelan bill Philadelphia
i n the neighborhood o f $30,000,000
from other banks; h a d been for a year and a half, and w e
had every reason for adopting any course that we thought
mould i m p r o v e o u r situation,
W
e were adverse
t o raising
the rate t o seven p e r cent f o r the same reason that Governe:
Seay has just stated i s applicable t o Richmond.
I n
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Federal Reserve Bank of St. Louis
109
Pennsylvania,
w h i c h represents t h e greater p a r t o f o u r
District, there i s an absolute limitation o f six per cent,
and t h e r e f o r e h a s b e e n a
very great hardship
o n o u r member
banks »
As t o the graduated rate, w e figured the situation out
carefully a n d f o u n d t h a t i f w e a d o p t e d i t w i t h o u t e x e m p t -
ing secured paper w e would work a very g r e a t hardship o n
a number o f banks that had practically bell entee tahe t o
liberty loan bonds, o r encouraged their custamers t o do
ite
t t we exempted t h e secured paper, a s those banks
that have addpted t h e graduated scale have done, w e found
that the results would b e negligible a s far as any reduction i n our loans w a s concermed,
m d that the only two
results w e could foresee t h a t would flow f r o m that would
be, first, t o distribute the burden fran the city e e
that were t o a great extent carrying their country corres-
pondents, shift the portion o f their loans onto those count
banks, and we feared that the moment that w e established
a basic rate, a basic line, that a multitude o f banks i n
the District w h o vere n o t borrowing would say, " L e t u s g e t
far
in and get our loan,” and w e feared that so/from its making
any reduction i n our line that i t would probably tend t o
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L1LO
increase i t ,
“ h i l e recognizing that w e might b e darven
to one o r the other o f ‘the methods, w e determined t o try.
first,
t o see what could b e done b y Putting t h e situation
before our member banks, stating the alternative and inviting their cooperation,
T h a t i s all that we have done,
and we are, notwithstanding the fact that buéiness i n
Philadelphia, a s measured b y bank clearings has been very
much more active, a n d i s still holding u p very much better
than the average o f the country, w e have been able t o get
a reduction of $88,000,000 o u t f
o 227,000,000.
Mr. Perrin. I
want t o ask i f your success i n
holding them dorm hag not been partly due t o the fact that
New York had the seven per cent Giese and some — —
diatwioba. 8 0 that you are able t o point t o what may hap~
pen t o your pagks? —
Governor Norris. Undoubtedly. T h a t is what I
meant when I said w
e put’ the situation before them end
called their attentiono
t the alternative, that if
their demands o n us were such that w e would have t o call
in other banks, then undoubtedly we would h a v e t
o adopt
one or both of those methods,
Governor Harding.
I s there any'further discussion?
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Federal Reserve Bank of St. Louis
did
Mr. Rich, I
should like t o ask Governor Norris
if any o f this decrease o r inflation was caused b y sloving
down i n industries o r curtailment o f their development,
or output?
Governor Norris.
N o , I
think not,
L I have w i t h m e
the figures here showing that while t h e bank,--~just t o
take t h e last three months,---in t h e month o f July there
was @ fractional decrease o f bank clearings i n the country,
in P h i l a d e l p h i a t h e r e w a s a n i n c r e a s e
o f 1 5 . 4 p e r cent;
in August there w a s a decrease o f one v e r cent i n the
country a n d a n increase
o f c l e v e n p e r c e n t i n Philadelphia;
in September there w a s a n increase o f one v e r cent i n the
country,
a n d s e v e n a n d o n e - h a l f p e r c e n t i n Philadelphia,
I do not think i t has b e e n due t o any sloving down o f
business;
i t has been due principally t o a reduction i n the
volume o f government bonds, subscriptions, t h a t were being
handled,
Mr. Rich,
S o m e o f those have b e e n sold off?
Governor i A
UD.
s o m e s o l d a n d a great many paid
w e heve o n e bank i n Philadelphia t h a t borrows
nothing f r o m u s except t h e amount t h e y are lending t o
customers o n liberty bond subseriptions, a n d that amount
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Federal Reserve Bank of St. Louis
LLée
in February, I think, o r perhaps a little later than that,
was about 312,000,000,
$5,000,000 now.
T h e y have got it down t o
T h e y have been averaging three-quarters
of a million a month, which represents what they have been
able t o g e t t h e i r s u b s c r i b e r s
t o p a y u p o n their subscrip-
tions principally.
Governor Harding. : Speaking o f contrection o f credit
because o f the slowing down o f industries,
that ought t o work both ways.
~
i t looks a s tho.
€ have heard this morning
of a large increase o f business i n New Orleans o n the mater
jal coming from other districts.
Y
e know o f the increase
in the lending operations i n the Federal Reserve Bank o f
Atlanta, y e t f o r several weeks t h e Financial Chronicle r e ports v e r y great decreases i n both Atlanta a n d New
Orleans,
Govermor McDougal.
ject, I
B e f o r e y o u pe
t o another sub-
think i t has been clearly demonstrated, throuch
the papers a s read, a n d t h e discussions ensuing, t h a t
those o f t h e b a n k s w h i c h a d o p t e d t h e e l a s t i c p l a n
believe
they have been pursuing the right course, and those who
have a d o p t e d t h e h o r i z o n t a l P l a n b e l i e v e t h e y
have adopted
the most effective policy, consequently I should like,
if
it i s i n place,
t o have a n expression o f this conference
on the point browsht out i n my brief paper that i f dn any
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Federal Reserve Bank of St. Louis
113
event there ghould b e uniformity w i t h respect t o the basic
rate.
Governor Harding.
H a v e y o u a n y objection that that
be veferred t o the separate bodies?
Governary McDougal.
Governor Harding.
N o t a t all,
S u p p o s e t h a t b e referred
t o the
Governors a n d t h e Chairmen a t their separate conferences
T O M O Y TWO «
In that connection, t h o Board would b e glad i f these
two parties w o u l d c o n s i d e r o n e o r t w o propositions,
which
I will state here.
lst:
A s t o trhether i t w o u l d b e a d v i s a b l e
o r prace
ticable, not now, nor i n the immediate future, m t sometime
say next year i f conditions warrant,
District a
t o establish i n each
uniform r a t e o n all classes
o f paper w i t h t h e
exception o f the usual spread o f banks! acceptances,
discontinue a n y p r e f e r e n t i a l
to
i n favor o f bond«secured p a p e r
The tendency o f government bonds lately has b e e n t o
advance.
I t i s possible i n January there will b e a furthe.
advance, a n d t h e question v e r y naturally arises. how long
are s u b s c r i b e r s
t o Government b o n d s e n t i t l e d
tial i n rate o n bond secured paper,
t o a cdifferen-
O n e effect o f the
Government b o n d p a p e r i s t h a t i t h a s a n e f f e c t u p o n o v r n o t
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Federal Reserve Bank of St. Louis
L14
issues.
T h e whole theory o f the Federal Reserve -Lct
is t o get away from bond secured CUrrency . P r o v i s i o n
wags made i n section 1 8 for the eventual retirement o f
all national bank notes, and liberty bond issues have
no
circulation p r i v i l i g e ,
y e t because
o f loans m a d e
o n Liberty
bonds a n d deposit o f those b o nds s o secured w i t h the
Federal Reserve agent, the Federal Reserve Banks
are now
issuing Federal Reserve notes, not o n liberty
bonds thomselves, b u t o n the equity i n liberty bonds,
V e would
like y o u t o consider:
Whether o r not i t would b e practicable
have a
o v advisable t o
uniform rate o n all classes o f paper i n
each District
not necessarily uniform i n all Districts,
b u t uniform within
the District o n all classes o f paper, eliminatingz
t h e differ
ential i n favor o f Government bonds.
The thought i s that it would bring out note
issues o n
& more licuid basis; that the banks then would
n o longer:
have t h e i n d u c e m e n t
t o deposit b o n d s e c u r e d p a p e r
with t h e
Federal Reserve Bank,
The next proposition the Board would
like t o have you
consider separately is:
end:
4 8 t o whether there should
b e a limit, a t l e a s t
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Federal Reserve Bank of St. Louis
115
a theoretical l i m i t , f i x e d i n advence
o n inter-bank borrowe
so that each member Reserve B a n k would know n o t only ihe:
its own resources are, but know what its borrowing capacity
is.
Then, g o i n g a little further,
Whether i t would b e advisable t o d o what w e have al-~
ready done, t o have a uniform inter-bank borrowing rate o n
all classes o f paper.
Following that idea up,
ord: W h e t h e r i t would b e well t o require e a c h
Federel R e s e r v e B a n k t h a t b e c o m e s a
borrower
t o advance i t s
rediscount r a t e u p t o t h e p o i n t t h a t i t i t s e l f h a s t o
to other banks o n its loans.
The i d e a i s t h a t y o u r m e m b e r b a n k s w o u l d h a v e t h e
same trouble with them that they have now i n Richmond and
Philadelphia,of t h e fear o f a progressive rate, o r fear
of a
s e v e n p e r c e n t rate, w h e r e y o u c o u l d s a y t o y o u r
member bank, "Our rate is so and so, but the inter-bank
borrowing r a t e i s s e v e n p e r cent;
i f vou crowd u s s o
much that w e have g o t t o borrow w e have automatically
to do i t at the seven per cent rate, and you bring i t
yourselves."
I t may be impracticable, the Board has
LLG
reached a n y conclusion o n i t itself, b u t w e should very muco
like y o u t o di. “ss i t a n d give u s the benefit o f your
opinion o n it,
Then there i s one other proposition which w e would like
to hear from you on, a s follows:
Whether o r not i t would b e practical o r advisable f o r
the Board t o allot a t the beginning o f the year a theoretical
limit o n the amount o f Federal Reserve notes i t would issue
to each bani,
You have heard iy. i l l e r s t a t e h i s views o n that
before, I
think,
Gentlemen, I
have g o t a n engagement w i t h the Farmers
anc. I should like t o a s k im, Wills i f h e will b e good enough
to volunteer t o accompany me, a n d if we survive w e will b e
back, i f not, good bye,
(ie, Platt, presiding.)
NTUTER-RESERVE BANK RE-DISCOUNTS"
i”, Platt,
8 nex e m s to be, "Inter-Reserve
1
Rediscounts,” w i t h a »vaver f r o m Judge hamsey, I
“it.
n s ov
a
believe,
} e c e r a l Reserve Act, i n relation
to rediscounting between Federal Reserve Banks (clause
Section 11), contains the following provision:
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Federal Reserve Bank of St. Louis
ron t h e affirmative v o t e o f
o e ks
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Federal Reserve Bank of St. Louis
five members d f the Federal Reserve Board, t o
require Federal Reserve Banks t o rediscount
the discounted paper o f other Federal Reserve
Banks a t rates o f interest t o b e fixed b y
the Federal Reserve Board,”
This policy was, and i s indispensable t o the effective and
efficient operation o f any regional system o f banking.
B y
analogy i t was doubtless suggested b y the actual practice
in those countries, a s i n England, where branch banks were
authorized,
U n d e r their system t h e c a s h resources o f the
bank are available at. the several brahches, where either
seasonal demands o r unexpected calls make c a s h o r credit
or both indispensably necessary.
U n d e r o u r regional system
the same imperative n e e d i s demanded,
I t wouid indeed b e
impossible f o r the Federal Reserve System t o function a n d
to adeqiately meet t h e needs o f the country without t h e
authority a n d power conferred i n the above clause,
Again, it must seem evident that if a due and
orderly coordination o f the operations o f the Federal Reser
System 1 s t o be achieved, this power should, a n d must b e
lodged i n the Federal Reserve Board,
I t may be assumod
that a n y reasonable, voluntary arrangement entered i n t o
by any o f the 1 2 Federal Reserve Banks i n the matter o f
rediscounting a s between themsclves would receive t h e
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Federal Reserve Bank of St. Louis
118
sanction o f the Board,
i
i 8-5 therefore , I think,
in
relation t o fediscounting paper between Federal
Reserve
Banks b y direction o f the Board that i t
i s expected that
the d i s c u s s i o n s h a l l proceed.
The Federal Reserve B a n k o f Daliss has,
i n recent
times, had expertence i n the matter o f rediscounting
with
and for other Federal Reserve Banks, which
is, doubtless,
somewhat unusual, a n d one which should enable
i t to view
the whole situation G % ite impartially.
During t h e summer
and early fall o f last year, a s indeed they
have done this
year, o u r c a s h reserves t e s t e d
b y o u r o w n resources d r o p p e d
almost t o the vanishing point, but
with seasonal liquidattor.
during t h e last quarter o f 1919
those reserves rose, after
paying all rediscounts with other
Federal Reserve Banks,
to 77% cash reserves and stood at
that figure o n December
ol o f last year, a level far higher
than any other Federal
Rdserve Bank i n the Systen, and
very much hisher than the
average o f all o f the Banks,
W h e t h e r w e shall attain
that high percentage t h i s vear
m a y well b e doubted, b u t
it
is not, i n my opinion, t o be questioned
that during the
fall a n d winter w e shall
b e able t o retire a l l
o f our
rediscounts with other Federal
Reserve Banks and build
Up our cash reserve t o
very respectable Proportions,
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Federal Reserve Bank of St. Louis
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During t h e period f r o m November o f last year a n d
until early i n April o f this year, w e were b o t h able anda
Glad t o rediscount for other Federal Reserve Banks, includi:
New York, Boston, Philadelphia and Kansas City. T h e s e
rediscounts a t one time reached t h e v e r y substantial
and
respectable figure of something more than 332,000,000,
However, f o r several months n o w w e have b e e n Giving
other
Federal Reserve Banks, notably Boston a n d Cleveland,
and
occasionally N e w York, s o m e v e r y good Dusiness,
a n d have
at least dome o u r part toward enabling these
Banks t o earn
the dividend permitted under and b y the law o f
their ‘creation,
(a)
I t i s not only, a s I conceive, important
that t h e r e s h a l l a l w a y s
be a
reasonably Approximate ecuali-
zation o f reserves, b u t i t i s absolutely incispensable
that
the reserves o f none o f the Federal Reserve
Banlts should
bewmanently,
o v for long b e permitted t o remain below t h e
legal minimun.
T o cdo so might, a n d i n practice would tend
to create a l a r m o n a distrust, a n d would a l s o
impair a n d
diminish,
i f i t would n o t destroy t h e ability o f
such Banks
to m e e t t h e d e m a n d s
o f trade a n d c o m m e r c e
That s e e m s s o é v i d e n t t h a t a
i n t h e i r Districts,
mere s t a t e m e n t
o f conclusions
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Federal Reserve Bank of St. Louis
seems t o be sufficient.
(b) T h e whole question o f inter-Reserve B a n k
rediscounting i s s o wholly within the control o f the Federa:
Reserve Board, and their better knowledge o f the condition
of the several Banits and clearer vision o f the whole System
go much better equips a n d prepares t h e m f o r handling t h e
matter, that one naturally approaches a discussion o f the
question with, I
hope, becoming modesty; a n d yet i n the
light o f our experience a s both lender a n d borrower, a n d
from such study as I have been able t o give the matter,
I venture t o submit, w i t h diffidence, t h e following views:
In the first place, a s affecting the matter o f credit
control,
i t seems essential t o the proper extension o f
credit, a n d e s assuring within reasonable limitations,
some fair approximation o f uniformity o f interest rates
throughout the nation, that the credit resources o f the
whole System should b e both intelligently a n d sympathetically utilized s o as t o meat t h e real needs o f every gecti
of the country according t o the demand and season.
T o do
this a n d provide credit reasonably necessary when, where
and a s the occasion properly requires, a n d t o discourage
unwise a n d harmful extension o f credit where i t i s and
may b e improvidently granted, t h e Board must, a
law h a s b e e n done, r e s e r v e
t o itself t h e p o v e r t o f i x t h e
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Federal Reserve Bank of St. Louis
discount rates between a l l Banks,
M y o w n opinion i s that
the p r e s e n t p o l i c y a n d p r a c t i c e w i t h r e s p e c t
t o such
redisceunbs is, i n the main, both sound and satisfactory.
However, I
a m inclined t o think that t h e matter o f rates
on such rediscounts might well receive further consideration.
I understand, I
think, t h a t i t i g idle t o expect
rates t o be charged b y member banks t o their customers
to b e everywhere uniform a n d invariable, {
think i t may
also b e assumed that absolute u n i f o r m i t y m
t rates fixed
by Federal Reserve Banks f o r member banks will
n o t always
be possible, e v e n i f this were desirable; a n d y e t
directly,
as I believe, due t o the establishment and operation o f
the Federal Reserve System, I
have, since m y connection
with the Federal Reserve B a n k o f Dallas, s e e n
a very substantial a n d very gener.l reduction o f interest
rates, a n d
at l e a s t s o m e a p p r o a c h t o t h e m o d e r a t e r a t e s
charged
in
normal times b y banks i n the more settled,
older and
wealthier portions o f the country. I
have, o f course,
recognized the unvisdom o f undertaking t o fix
under all
conditions a n absolutely uniform rate o f Rnterest
o n the
same classes o f paper b y all Federal Regerve
Panks; a n d
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Federal Reserve Bank of St. Louis
yet I
think w e h a v e f a i r l y c l o s e l y a p p r o x i m a t e d t h a t r e +
sult, a n d i f prophesy b e permitted, I
would b e inclined
to s a y that w e shall i n the coming years more nearly
achieve t h a t result a n d that t o the extent that conditions permit. t h i s t o b e done, t h e c o u n t r y w i l l b e b e n e -
fitted b y it.
However, this may, I
am strongly inclined t o
believe t h a t inter-Reserve B a n k discount rates should
alueays b e a s nearly uniform a s possible, I n d e e d , I
would personally favor uniformity o f rates i n such transactions for, after all, v e have, i n the larger sense, o n e
bank, a n d i n a strict sense w e have o n e system o f bank-
ings
V e are all dwelling socially under a common shel-
ter, a n d anything t h a t i n a large w a v hurts a n y Federal
Reserve B a n k f i n d s r e f l e c t i o n
i n same injury t o all o f
them.
It i s m y opinion that t h e rate charged a Federal
Reserve Bank should never b e greater than that fixed b y
the discounting Federal Reserve Bank for its member
banks.
I t seems t o me that a lower rate t o a Federal
Reserve B a n k t h a n t h a t e x t e n d e d
t o its member banks
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Federal Reserve Bank of St. Louis
(which seems t o have b e e n originally t h e practice) c a n
be supported i n sound reason,
F r o m t h e beginning t o
this time a l l the Federal R e s e r v e Sanks have discriminated i n t h e i r i n t e r e s t r a t e g i n t h e p u r c h a s e
o f bankers’
acceptances, basing their rate o n the soundness a n d
strength o f the bank whose acceptance w a s bought, a n d
having probably sometimes, a t least, i n mind the credit
strength o f the dravrer,
T h i s i s , o r a t least has
been a n o p e n a n d a v o v e d v u r p o s e a m o n g @ 1 l F e d e r a l R e s e r v e
Banks a s t o bills o f member a n d nonmember banks,
O n
assumption t h a t t h e r u l e o f r e a s o n h a g a p p l i c a t i o n
and that solvency and certainty o f payment a t maturity
still affects t h e rates o f interest o n any Loan, 1
seems
t o m e that t h e endorsement
o f a n y Federal Reserve
\
Bank should b e considered i n fixing the rate t o be charge
their r e d i s c o u n t s ,
i
L a m i n c l i n e d a l s o t o be-+
matter o f sound public policy, t h a t recounts between Federal Reserve Banks s h o u l d b e made
rather than difficult; that this policy should
be Aastablished s o that N e w York, during times w h e n
enormous drafts a r e being made o n its resources a n d
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Federal Reserve Bank of St. Louis
124
money sent b y the tens o f millions o f dollars
t o the
daterior o r beyond seas, should b e able, a t reason-~
able rates, t o replenish her reserves and strengthen
her resources f r o m t h e s u r p l u s
o f other Banks n o t having
demands f o r their funds; a n d that Banks i n
the west a n d
southvest should, i n times like these, have the game
favorable c o n s i d e r a t i o n ,
T h i s v i e w represents
no
selfish interest, bit i s based o n what I consider
a
broad and national view o f Federal Reserve Banks
ad
méaémbers o f o n e body. I
think t h e m l e m u s t a p p l y
to t h e m w h i c h s o o f t e n w e h a v e h e a r d a p p l i e d
toa
chain---that i t was only a s strong a s its weakest link;
that a policy o f strensthening t h e entire
Svstem should
be adopted, which, like the flaming svord i n Holy
Writ,
would stand forth as a defense where any assault
might
be attempted.
With all due respect f o r the views o f others,
I
cannot conceive how the Board o f Directors o f any
Federal Reserve Bank, o r its Governor o r other
executive
officers, could,
o r would materially change i t s credit
Policy t o member banks a n d guaging o r limiting
the v
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+125
extension o f credit t e them b y t h e retes
teother Federal reserve benks, I
i t was paying
think in adopting
any plan w e should assume b o t h fidelity a n d capecity
on
the part o f those charged w i t h t h e administrathon
re
J
the effairs o f a Federal reserve bank,
o f
a n d that with a
per
fect imnowledge o f thetr operations b y the Federal Reserve
Board, a n d its power i n a
proper case t o decline t o
direct o r permit rediscount w e shall have ample pretection ageinst a n y unwise extension « f credit,
A g a i n ,
it i s m y impression that t h e strong positien o f | the
Cleveland and B o s t o n banks, which i n recent months have
been carrying most o f the rediscounts o f other Federal
reserve banks, i s net largely o r especially d u e t o a n y
difference between these and other banks i n t h e matter
of c r e d i t centrol, b u t i s directly d u e t o what m a y b e
celled, i n a sense, local conditions, w h i c h e r e clearly
any fully stated b y Vice Governor Platt i n h i s West V i r
ginie address.
the country,
I f the other Federal reserve banks s f
a n d t h e Federal Reserve Board, c o u l d k n o w
end understand t h e groans unmentlonable welling u p
in
Dellas from all o f us, a n d especially from Governor
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126
Van Zandt, e v e r y time w e are called upon t o rediscount
with other Federal Reserve Banks, there would
be no
we
suspicion even that/were not endeavoring to limit our
rediscounts t o the absolute imperative needs o f our
country.
O f course i f through incapacity o r undue
liberality any Federal Reserve Bank were granting
credits with improvident o r needless liberality, t h e
Federal Reserve Board n o doubt would,as indeed i t
should, t a k e effective steps t o discourage a n d prevent
such bank from rediscounting w i t h other banks,
I n -
deed i t i s conceivable i f present conditions continue
that the Bank may find i t necessary t o fix a n established
normal line o f rediscount beyond which n o Federal
Reserve
Bank will b e permitted t o Z O
(Applause. )
Mr. Platt,
of Philadelphia,
T h e next paper will be fran Mr, Norris,
o n the same subject.
Governor Norris,
and I
M r . Chairman, i f Judge Ramsey
had h a a o p p o r t u n i t y
t o compare n o t e s b e f o r e h a n d
Perhaps w e might have b e e n able t o get o u r views a
little closer together;
a g i t is I
am afraita there i g
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Federal Reserve Bank of St. Louis
a little divergence,
The subject assigned
t o me f o r presentation t o
ee
this C o n f e r e n c e
i s stated
o n t h e p r o g r a m a s follows:
"inter-Yeserve B a n k Re-discounts a s related t o
the p r o b l e m o f c r e d i t control.
I
s t h e exist-
ing policy e n d practice v i t h respect t o such
re~discounts satisfactory and sound?"
(a) T o effect a n approximate equalization o f
reserves?
(bo) A t the same vate fixed for its member banks
by the bank granting the accommodation?"
The question s t ated i n the subhead (bd) having
been ruled upon b y the Board a s o f September 13th last,
f assume that n o extended discussion o f i t is required.
Whenever i t becomes necessary f o r a bank t o rediscount,
i t seems t o me clear that t h e rate policy fixed
by the Board o n September 13th should prevail. I n d e e d ,
it i s a debatable question whether a n y bank should 1
entitled t o re-discaint facilities a t any rate, however
hich, until i t has first exhausted its powers o f credit
contraction b y raising ,
In his recent address
o w n rates t o the maximum.
t o the
association, M r . Platt expressed «
view which I think:
most, i f not all, o f us must b e i n accord, when h e
\
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"The Boston Reserve Bank is charging its own member banikcs
7 per cent f o r rediscounts o f commercial paper a n d i s
loaning i t s surplus t o Vestern a n d S o u t h e r Banks, w h i c h
make most o f their re-discounts
per cent.
t o member banks a t §
T h a t doesn't seem quite right,
ance with strict business principles,
principles,
I n accord~
o r with economic
i f you like t h a t term, t h e rates ought t o b e
highest where t h e demand i s greatest,"
I n m y own
humble way, I said much the same thing i n addressing the
Annuel Convention o f the Pennsylvania Bankers!’ Assgocita-
tion i n June last, when, after reminding them that the
philadelphia B a n k h a d not raised i t s rates a g high
ag
some o f the other Banks, I continued---"As the matter now
stands,
i t i s u p t o the e m b e r banks t o s a y whether this
policy c a n b e continued,
Manifestly,
money t o l o a n t o o u r members
at 6
w e cannot borrow
percent f r o m o t h e r
Reserve B a n k s w h i c h h a v e t h a t m o n e y
t o loan o n l y because
they have discouraged their member banks fron Dorroting
by charging t h e m 7 percent,
I f we fall beloy o u r re-
quired reserve, and are obliged t o rediscount,
v e must
advance o u r rates." I
quote this only t o show that 3
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Federal Reserve Bank of St. Louis
am not talking o n e w a y here a n d another w a y a t home.
The entire subject o f Inter-Reserve B a n k Re-Discounts cannot b e intelligently discussed without a brief
reference t o the principles underlying t h e Federal Reserve
Act.
& s we all remember, there had been years o f dis-
cussion prior t o the passage o f the A c t a s t o whether
there s h o u l d b e o n e c e n t r a l R e s e r v e B a n k o r a
such banks.
I
number o f
n accora with the traditional opposition
of the political p a r t y then i n power t o a central bank,
and i n the belief that regional banks could better b e
expected t o administer t o the immediate financial a n d commercial recquirements o f their respective territories
and might more certainly b e depended u p o n t o breat t h e
problems
o f various l o c e l i t i e s
i n a
sympathetic
a s well
as a n intelligent way, i t was determined t o adopt a re-
gional system.
H a c h one o f the twelve regional banks
was made independent o f every other regional bank, e x cept when,
i n emergency, t h e central board should require
one regional b a n k t o re-discount f o r another,
I n order
that this might b e regarded a s a n extraordinary operation, rather t h a n a usual function, t h e Federal Reserve
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Federal Reserve Bank of St. Louis
130
Board was authorized " t o permit, or, o n the affirmative
vote o f at least five members o f the Reserve Board, t o
require F e d e r a l R e s e r v e B a n k s
t o re-discount t h e dis-
counted paper o f other Federal Reserve Banks, a t rates
ofinterest t o be fixed b y the Federal Reserve Board,”
Tt will b e recalled that this provision o f the Act wag
bitterly resisted b y many prominent bankers, a n d was
occasion o f a notable joint debate between Mr, F, A.
Vanderlip a n d Hon. C a p t e r G l a s s b e f o r e t h e # c o n o m i c
Society o f New York i n November, 1913.
Iounderstand that there hever has been, and 1 8 not
now, a n y o b j e c t i o n
t o the provision
o n the part o f the
officers o r directors o f any one o f the Federal Reserve
Banks.
S o hearty and universal has been the acquies-
cence i n the provision that i t has never been nécessary
for the Reserve Board t o "reauire” a n y bank t o
rediscount
for another bank. R e q u e s t s o r even suggestions
f o r rediscounting have always b e e n acted u p o n promptly
and
cheprfully, doubtless i n recognition o f the desirability
of effecting "an approximate equalization o f reserves,”
It seems t o m e that "the existing policy a n d practice
with respect t o such re«discounts" i s "satisfactory
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Federal Reserve Bank of St. Louis
1351
and sound," except for a few slight modifications which
I shall take the liberty of sugzesting.
The fact that a regional system was adopted i n preference t o a central system seems t o me t o impose o n
each bank t h e d u t y o f controlling credit i n its district,
and o f preserving i t s o w n required reserve a t all times
except i n cases o f emergency.
I
n other words, t h e
policy o f a bank should b e controlled primaril y
b y the
condition o f its o w n reserve, a n d not b y the condition
of the reserve o f the system a s 4 whole.
v i e n i
en
tered the Federal Reserve Bank o f Philadelphia last
spring,
f e l t a distinct sense o f mortification t h a t
that: Bank had been leaning upon the other banks i n the
system continuously for a year and a half, and although
there were local conditions w h i c h measurably excused
this s i t u a t i o n ,
a n d although I
realized t h a t a n y e f f o r t
to correct i t vould involve sacrifice b y the banks o f the
Gistrict a n d their customers, a n d would n o t tend t o
enhance the popularity o f the new Governor, I set myself
to the task o f securing such liquidation i n the district
as would relieve t h e other banks o f the system o f the
necessity o f carrying Philadelphia,
i f the business
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Federal Reserve Bank of St. Louis
132
of t h a t d i s t r i c t w e r e s e a s o n a l - + - w h i c h
i t i s not---or
if a n y sudden emergency made i t wise a n d proper f o r
the Federal Reserve B a n k t o extend unusual accommo-
dations t o its member banks, beyond its own resources,
f would have n o hesitation i n appealing t o the Board
for assistance f r o m the other Reserve Benks, b u b I T
should regret the necessity, a n d strive t o correct
this condition a s quickly a s possible.
in other words, i t seems t o me that our o f a camt of harmony a n d co-overation, t h i s r e has c o m e t o b e r e g a r d e d a s m o r e o f
a matter o f course t h a n t h e framers o f the A c t
cone
templated,
I n saying this I
do not mean t o sugcest
that the Federal Reserve Board should have made
any
effort which i t hag n o t made t o limit t h e
Practice. 7
am i n t h o r o u g h a c c o r d w i t h t h e policy:
o F effecting a n
approximate e a u a l i z a t i o nfo reserves, b u t
I
do not think
that this policy should b e régerded a s minimizing
i n the
sibility o f the officers a n d
directors
zation,
o f e a c h Bani: t o a v o i d t h e n e c e s s i t y f o r
eqjuali-
b y keeping t h e i r o w n reserve
u p t o the minimum
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Federal Reserve Bank of St. Louis
legal l i m i t a t a l l t i m e s e x c e p t a t times
o f great emer~
GENCY»
It seems t o me further thai when a Reserve Bank seeks
re-discounts f r o m other Reserve Banks, ordinary business
principles i n regard t o accommodations should b e recog-=
nized a n e followed, I
vould suggest t h e following
changes i n the existing practice:
All Inter-Reserve B a n k discounts should b e f o r a
round sum---sey, 2 multi
o f 5100,000---and not for
odd amounts; a n d should b e i n fhe f o r m o f a borrowing b y
the applying b a n k f o r e fixed period, secured b y longterm collateral,
w i t h t h e necessary provisions a n d ar-
rangements f o r the substitution o f other collateral i n
the event o f anticipation o f payment o f any o f the pledged paper,
T h e r e s h o u l d b e n o privilige
o f anticipa-~
tion o f payment b y the applying bank, except w i t h the con-
sent o f the re-discounting bank. D a r i n g the long period
when t h e Reserve B a n k o f Philadelvhia w a s rediscounting
with o t h e r banks,
a l l o f these p r i n c i v l e s w e r e o b s e r v e d ,
It does n o t s e e m fair that the re-discounting b a n k
should h a v e i m p o s e d u p o n i t t h e b u r d e n o f c o r r e s p o n d e n c e
and bookkeeping incident t o constant notifications o f
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Federal Reserve Bank of St. Louis
134
anticipated payments and the adjustment o f unearned discounts.
It w o u l d s e e m a l s o that, e x c e p t
stances,
i n very rare i n -
i t cught n o t t o b e necessary t o ask that a re-
discount transaction b e put through a s o f the previous
day.
B y the use o f an "anticipation sheet” w e I n o
our reserve percentage with almost absolute accuracy
within a few minutes after three o'clock each day, and
if w e n e e d t o re=-discount w e c a n a d v i s e t h e R e s e r v e B o a r d
before three-thirty P, M. E v e n assuming that different
conditions make this impracticable
i n other districts,
a deficiency for one day i n the reserve o n all liabilities h a s become t o o frequent a n incident t o justify
asking that a transaction fade o n a’ certain d a y should
be entered a s o f the day previous---vith the possible
exception o f the one day i n the week when the reserve
percentages a r e published, I
understand t h a t there
is a strong opposition t o any deficiency i n the reserves o n Federal Reserve notes.
T h i s , however, c a n
readily b e taken care o f by a bank's providing itself
with a reasonable margin, instead o f hovering o n the
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Federal Reserve Bank of St. Louis
edge o f a deficiency.
(Applause. )
Mr. Platt.
I s there, gentlemen, some discusston~_
of these tivo papers?
Mr. Ramsey.
T h a t completes t h a t topic.
M r . Chairman, t h e very thoushtful paper
of our Governor o f the Philadelphia Bank, and the very substantial difference between h i s views a n d m y o w n may i n
part, I think, b e accounted for b y the great difference
in the banks f r o m which w e c o me.
stand.
I
T h a t I
cen well under-~
o have said i n a public address 2 little thile
ago that i n the great settled vicinities o f Boston, Philadelphia o r New York, where, w i t h some exceptions,
there was a reason for a greater rate o f interest, a n d
reason, perhaps, w h y there should b e n o progressive rates,
and some reason w h y re-discounting would b e considered
if not a crime, a t least impolite, a n d that i t should b e
discouraged, I
feel that i n justice t o the Federal R e -
serve Bank o f the Hleventh District, a n d other banks similarly situated, t h a t a brief statement would b e i n order,
which I
believe a n d h o p e m a y b e o f s o m e v a l u e , p e r h a p s ,
to
the Board,
As stated i n m y paper, during t h e last year o u r reserve,
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Federal Reserve Bank of St. Louis
tested b y all resources, went almost t o the vanishing
point, d u e t o the fact that t h e Boards o f little
banks,
both i n the agricultural sections and the livestock
country, Were calling o n us t o meet seasonal
demands ,
and which must b e met i f agriculture i s t o
be fostered
and promoted, and i f the live stock interests
o f the
Statesare t o receive that decent attention
which every
consideration o f self-interest should
suggest.
Mr own judgment, Mr. Chairman,
i n the first place
is that a seven per cent rate, o r an
eight per cent rate
would not have any distinet o r substantial
effect upon
the borrowings i n our country. N i n e t y
per cent o f the
banks i n number
i n our District have a
capital o f
less than 200,000; v e r y many o f them
are banks with
capital o f fifty and twenty-five thousand,
a n d who
have usually but one o r two other
accounts, a n d fre-
quently no account of any consequence with other
banks,
so that when t h e time f o r borrowing
comes, i f they are
to meet withdrawal deposits, a s
they are canpelled t o
G0,.47 t h e y are t o meet these
imperative a n d pressing
demands f o r production, either
f o r livestock o r agricul-
137
ture, t h e y must borrow.
T h e same thing I think “largely
must b e true i n the Atlant& District; I
think i t must
be measurably tame i n the Kansas City District, that i n
our t i m e a n d s e a s o n f o r l e g i t i m a t e p u r p o s e s
i t i s just a s
inevitable a n d just as certain that the banks must borrow
from u s a s that water runs d o w n hill,
As I said i n my paper our cash reserve went o n December 21st t o 77%, which is far far larger than any other
bank i n the system and very much larger than the average
of all t h e banks.
My 9wn judgment, Mr. Chairman,
i s that rediscounting
between Federal Reserve Banks ought t o proceed upon some
gecent theory that t h e Governors o f the Federal Ressrve
Banks and the Directors o f the Federal Reserve Banks ,
doing their part, a s i n Dallas w e have done o u r part t o
conserve credit and t o d o the best w e can t o discourage
undue borrowing.
W
e have applied a
progressive rate i n our section,
somewhat different
M o r e than that, very
early i n the season a Governor o f our bank issued a
let-
ter i n which h e directed, i n the form o f a request,
that banks applying f o r credit should state their needs
and t h e o c c a s i o n f o r t h e discount.
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Federal Reserve Bank of St. Louis
W w e have a d o p t e d ,
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Federal Reserve Bank of St. Louis
universally a n d frequently t h e policy a n d practice where
offerings c a m e i n that seemed t o be f a r beyond t h e need
of a bank, t o decline t o consider t h e application f o r
the moment a n d a s k the banker f i e some explanation f o r
the ocfasion f o r it.
W
e have daily i n our deliber-
ations cases where banlrs uaving t h i r t y , forty,
o r seventy-
five thousand, give i n one-third o f i t and hold the rest
of it.
S
o i n a district like ours, which, beginning
in April, May, June, and on,you have streams o f credit
running out to the little place, a district that i s fifteen hundred miles long and contains every sort o f popu
jation i n the world and every sort o f industry, a n d particularly i n a section where, a s Mr. Heath said o v e r a great
area, a 8 b i g a s N e w York over nicht wool went f r o m sixty
cents a
pound a n d became unsalabdle a t a n y price, h a d n o
market, while rice today i s worth less than one-half
last year, where t h e sheep and cattle raised f o r feeders
are unsalable a t any price, where i n the Northern part
tate w e had fifteen t o twenty-two million bushels
of wheat, a n d where w e h a d last year running t o more
than
forty-two million, that i s unsalable a t any price;
our
139
folks offering cottéh with no takers, where if you offer
twdnty-four cents f o r one thousand bales t h e y take o n e
hundred bales while i f tomorrow y o u offer the same cotton
at twenty-three cents t h e y will take t w o hundred bales,
the result. i s ,
have a
record,
t h a t accounts for our borrowing. I
and I
a m p r o u d o f it; I
have g o n e b e f o r e
the legislature o f the State; I have gone t o the cattlerai o f the f a r Vest; I
have gone before t h e Montgomery
convention and have said, where i t took some courage t o
say it, that w e could n o t lend money t o them merely f o r
the purpose o f speculation; t h a t i f these products a r e t o
be h e l d t h e y m u s t b e h e l d l a r g e l y u p o n d i e s t r e n g t h o f
‘ the oveddit resources o f the man who produces the goods,
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Federal Reserve Bank of St. Louis
but that w e were i n favor o f a fair and orderly end
reasonable marketing o f those products extending o v e r
several years, a n d were o f the disposition e n d ability,
ritth the aid o f our neighbors a n d friends, t o furnish the
necessary money f o r the proper marketing o f what i n
ancient days used t o be about t h e balance o f trade i n
this country.
We h a v e h a d t h e g a m e e x p e r i e n c e
a g when i n the old
r
e
140
days, where t h e demand w a s heavy w e bought freely o f their
acceptances and never lost a dollar and never expect t o do
it. T h i s i s just a little o f f the question, a n d really,
while I
have supported andvhile m y judgment commends t h e
action o f the Board i n undertaking t o get off o f this ‘high,
artificial level w e are on, I want t o avail myself, Mr,
‘toate
o f this opportunity, because I shall probably
not further obtrude myself upon the deliberations o f this
body, both as chairman o f our bank, and as a member o f
the committee o n publicity,
t o make this statement,
in
respect t o wheat, which has fallen greatly, w i t h respect
to corn, w i t h respect t o everything t h a t forty-five p e r -
cent o r more o f our people use, w e have a market with a
‘waiting policy on the part of the countries of the old
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Federal Reserve Bank of St. Louis
world; with a p o l i c yf
o indecision and waiting i n every
counting house 3 4nd market in this country, and we
believe the Board ought not to close its eyes t o the fact
of a situation o f such seriousness a s m a y well give t h e
patriotic man the greatest concern, a n d while I would b e
the last man t o deluge any part o f the c a p
into a
theory or’ belief that w e will lend adphadctene money they
want, o r for any time they want it, I do believe, and I
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Federal Reserve Bank of St. Louis
think Dr.
M i l l e r - s t ev keynote
uh ctk
when h e said the cues
tion o f marketing a s affecting the question o f price i s
the great overshadowing question bere this body and one
that the Board must meet, a s I am sure i t will meet it,
with courage andwith intelligence.
A n d I am hoping that
at some time a n d i n sane w a y that some message o f sunshine
and cheer, based o n reason a n d expressed i n moderation
may find expression from this Board. ( A p p l a u s e . )
Mr. Platt. T h e r e ought t o be some further ciscussion o n this.
Governor Morss.
M r . Chairman, I
sympathize v e r y
much with what Governor Ramsey has s a i d a s t o the market
prices i n his district, and also about the difficulty o f
finding a market for those products, but I want t o say
that the condition i s just as bad i n New York, and the
declines i n the prices o f their products has been just
as great a s i t has been i n the farming districts,
There
is, ---I d o not quite want t o use the vword---but almost
alarm amongst t h e manufacturers
i n our district,
there i s n o price f o r anything. A
Today
man cannot liquidate
because h e cannot find a customer, a n d n o man knows what
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Federal Reserve Bank of St. Louis
the price o f wool is, what the price o f cotton is, o f
leather, o f cotton goods o r woolen goods o r boots and
shoes, a n d does n o t know what i t will b e tomorrow.
Now t h i s w a v e o r t h i s s e n t i m e n t
t o stop buying
came a t a time w h e n all the crops o f the c a n t r y were
coming o n the market.
ferhaps i t was an unfortunate
time, b u t I must s a y that I
do not know a n y w a y i n
which i t vould have been avoided. I
do not know any
way now o n which these markets c a n b e started.
N
o
body, n o single bank, n o individual can control a market today, because t h e elements i n i t are t o o varied,
and nobody knows today where they are ségoing to settle.
It is not for the interestscof one part o f the
country t o have t h e product o f another part o f the coun-
try sold too low,
I t is not for the interests o f
New York to have cotton sold too cheaply, t o have the
wool sold too low o r the nides sold too low,
I f they
are sold too low and any part o f the country i s not
prosperous, t h e market f o r New England goods i s cut
off.
sumé..
W e p r o d u c e agreat many more goods than we conW e a r e dependent u p o n selling those goods
o n the
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Federal Reserve Bank of St. Louis
143
prosperity o f the rest o f the country, s o we are just
as anxious f o r the people t o get a fair price f o r cotton,
and a l l t h e p r o d u c t s
o f t h e f a r m a s a n y b o d y c a n be,
but today y o u are i n a condition which I
just what t h e outcome will be.
do not know
T h e o n l y thing y o u
can say is that consumption i s going on; buying i s
not going on, b u t cordumptdon i s going o n a great deal
the same a s i t has gone before, and I am in hopes t o
get some Light o n this subject,
m t i s there anything
to d o but t o wait a n d l e t the thing settle andwork
itself out?
Our banks a r e carrying their customers t o d a y t h e
same a s y o u are carrying your customers, a n d t h e y have
got t o because they cannot sell; there i s not any use
for t h e c v o m e r t o s e l l h i s g o o d s w h e n h e c a m o t f i n d
any buyer a t any price.
Y o u have t h e game trouble,
and m a n u f a c t u r e d g o o d s h a v e g o n e d o w n f i f t y p e r cent;
our customers, o u r mills have their inventories, nobody Imows what the valuc o f an inventory o f a mill
is today because there i s n o meso e and the price i s
just cut i n the middle.
Mr. Miller, G o v e r n o r , w h y i s there not a market?
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Federal Reserve Bank of St. Louis
r
Morss, W e l l , markets come and go.
o
n
r
e
have had, s i x o r eight months ago, a
as i t h a s b e a n called,
v
o
V e ?
G
“
.
terrible buying orgy,
a n d o f course g r e a t extravagances;
it was supposed w e could n o t make 0 0 d ; enough t o supply
the country, a n d apparently there were n o t goods e n o gh.
what with the future buying o f everybody t o get advanced
goods, then with the difficulties i n transportation there
did not appear t o be enough goods, but today I do not lmow
of any kind o f goods that there does not appear t o be a
surplus of.
N o w , a s t o that p u s s
e s
o f a surplus ,-+-
there w i l l s o m e t i m e c o m e w h e n t h a t a p p e a r a n c e w i l l
be
a mistake.
I t is impossible, o r very difficult, t o tell
just w h e n t h e t i d e t u r n s , b u t a p p a r e n t l y t h e r e i s
a
surplus
of every kind of goods made i n this: country today,
and
of every raw product, but that thing will work itself out,
but I dors not know just when,
I want t o say this, partly t o show that w e have sympa thy u p here, i n Massachusetts, where i n the fay Northeast~
ern corner we have sympathy with Dallas; w e have the same
kind o f trouble and we have all got t o hold o n and wait
until t h e m a r k e t s s e t t l e t h e m s e l v e s .
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Federal Reserve Bank of St. Louis
145
Mr, Ramsey.
M r , Chairman, I
recognize a n d avpreciate
the broad vision o f Governor Morss, a n d i f I-did n o t make
it clear I desire t o d o so, that from the beginning o f my
service i n the Pederal Reserve B a n k I have always under-
taken t o take a broad, national view o f all questions affecting the Federal Reserve Board and its mamgement, a n d
1 sould consider myself utterly unworthy * o occupy t h e
position I hold unless I had that vision o f duty. a
believe t h e welfare o f the whole country i s wrapped up,
not. only i n our condition, b u t i n the condition o f the
great Vest where they have sot perhaps one hundred and
twenty millions o f bushels o f wheat, which, due somewhat
to decline o f prices recently, b u t earlier than that t o
transportation difficulties, h a s imposed o n that rich
country, with the products o f the soil awaiting shipment a n d unable t o get the market, t h e people wanting
the goods and able t o pay for them,-~--has imposed this
present condition, i
have the vision, Mr. Chairman,
I think i t is not t o b e doubted, that Méssdcnigest
New Y o r k a n d P h i l a d e l p h i a a n d N e w Hoagland, a n d a l l o f
that section 1 s directly interested i n andaffected b y
the v u r c h a s i n g p o w e r o f t h e p e o p l e o f t h e E l e v e n t h Distr.
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Federal Reserve Bank of St. Louis
vay, sir, the mill man i n Fall River, and the man
who manufactures shoes a t Rochester a n d clothes i n Massachusetts, t h e welfare o f their labor, h i s wages a n d his
comfort i s bound u p and affected b y the purchasing power
of the folks West o f the Mississippi River, a n d t h e
Cleveland people, i n their district, i n the manufacture
of automobiles undoubtedly will b e affected b y condi-~
tions
i n o u r section.
Nov, I docnot believe, sir, there i s any sowreign
remedy. I
do not think t h e wisest m a n i n the world
can put his finger on any one thing and say, "This will
seve the day," but I am seeking t o impress o n our
asso-~
clates and friends here, and particularly upon the Board,
there is merit i n what I am saying, i s that it is
importent, i n my judgment, to get away from any feeling
of alarm o r stampede i n this country.
I f there should
be, and conditions are far fron favorable, i n this day
and time a n d with the widespread distrust o f
the integ.
rity o f o u r c o m m e r c i a l s y s t e m ,
n o artist t h a t e v e r lived
could p a l n t the picture o f what might
happen,
Mv f r i e n d f r a n C a l i f o r n i a w i l l r e m e m b e r
f o u r vears
ago at Albuquerque, I went out of my way to gay
that I
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Federal Reserve Bank of St. Louis
felt s o m e u n v i s d o m h a d b e e n s h o w n a s t o t h e p o w e r o f t h e
Federal Reserve System; t h a t t o o many o f our friends v e r e
inclined t o believe t h a t with t h e Federal Reserve Svstem
no harm could ever come t o anybody, a n d that all the
wisdom a n d e x p e r i e n c e
o f the p a s t o f e c o n o m y a n d s o b r i e -
ty, and all that, might b e disregarded because n o harm
could come t o anybody a n y more.
L o o many o f our none
professional p e o p l e t h i n k t h a t , a n d t o o m a n y o f o u r
bank folks think that,
There i s a lamentable extension, unwise a n d undue
and unprecedented,
believe,
s o that w e are i n n o condition, I T
t o meet a n y such shock,
a g cven i n 1893 a n d
1996 and 1897 w e were able, i n a way t o meet, and I
believe w e have got the resources, a n d I am >utting m y
faith i n the Federal Reserve Board t o meet the issues,
and I know the willingness o f our people i n Dellas, from
the Governor u p and domn, t o meet it; i t i s not t o pers
mit o u r s e l v e s
t o g o too far
o n the p r o p o s i t i o n
o f ine
sisting that the merit o f any bank i s t o be tested under
all circumstances b y the state o f its reserve, a n d n o t
to insist that there m u s t b e liquidation w h e n n o l i q ida-
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Federal Reserve Bank of St. Louis
tion c a n b e had,
Now, i n our District, Mr. Chairman, i n the smaller
wanks o f our country, i n the Souther and central
parts
of the State, and even around Dallas, w e ere
getting
some liquidation,
I t i s caning through cotton; b u t i t
ds bulking u p and greatly increasing the indebtedness
of
the larger banks a t the cotton centers, where
t h e cotton
must b e Graded, m u s t b e compressed before i + starts
to
its destination,
Mr, Platt,
Mr. Ramsey.
T h a t i s cotton that has been gold?
T h a t i g cotton that has been sold,
Governor Van Zan@t has the figures better
i n Hand, m t I
know many banks within fifty miles o f Dallas
that have
Paid u s the entire volume and others have greatly reduced, but a t Dallas, Fort-Torth and Houston,
and even
smaller towns o f twenty-five o r thirty thousand
people
they have not.
T h e reports shov we had ginned i n
Texas already more t h a n t e n days a g o
something more t h a n
oné million three hundred thousand bales
o f cotton,
in the first place, i f they are willing t o take
what
they think a r e most unfriendly, m o s t
unne ighborly
Prices, they «could not sell it.
T h e r e i s no market
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Federal Reserve Bank of St. Louis
for i t now, a n d w e must i n reason,
i f we are t o trust
our banks w h e n t h e y attempt a n d cannot collect, w e
must permit a little grace,
A t this time a year ago,
I think w e had paid u p entirely, a n d under ordinary
conditions w e would today b e glad t o lend money t o
Kansas C i t y a n d other banks t h a t are wanting it.
But we have got a condition, a n d they have got i t also
in the Kansas City District t o the North o f us, and
I am sure t h e y have g o t i t i n Mr. nientg District,
I heard the other day, Mr. Chairman, t h e most
effective speech I ever heard i n my life, from a man
who h a d never before made a
speech i n his Zife, 2.
banker i n Rosslyn, a t the dedication o f our El Paso
Banks
W
e n a w g o t t h e finest conditions i n that
country w e have e v e r had; w e have g o t a large c a l f
and land crop, Pine range and grass, and they are
in better condition t h a n they ever were before;
we
have got a great alfalfa crop o n the irrigated lands
on the Pecos River, but h e said, "ve cannot get any
cars t o s h i p o u r alfalfa; t h e r e
i g n o sale f o r o u r
wool; n o sale f o r o u r mohair a n d nobody t o look a t
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Federal Reserve Bank of St. Louis
our cattle o r sheep, w i t h the result w e are literally
starving i n the midst o f plenty."
T h a t condition, lir,
Chairman, ei: ists i n your district i n Pennsylvania,
because I
have b e e n there.
I t i s true i n the Kansas
City District of my namesake, and what we have got to
ado i n districts l i k e that, t h e things t h e y have toilad
allow
for through the years and made, i s t o Wecwm some reason-~
able g r a c e o n t h e proposition,
w h i c h L a m s u r e w e will
have, s o m e reasonable indulgence, a n d i f you will give
Us, s O far as we are concerned, sixty days, probably
less, w e will b e o u t o f the woods a n d have o u r reserve
PILLS U p ,
But the central thought I
have g o t i n m y minc, a n d
I have h a d n o o p p o r t u n i t y o f t a l k i n g t o t h e B o a r d p r i -
vately about it, i s t o see without going too fary-i recognize, o f course, the Board has got t o be care~
ful andl recognize, o f course, they ought t o make
no promises t h e y cannot live u p to, b u t I
a m not mis+
taken, Mr. Chairman, I-think i n the view a n d belief
that i n s o far a s i n reason i t c a n be done t h e country
ougnt t o b e assured o f the soundness o f our financial
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Federal Reserve Bank of St. Louis
system;
o f the disposition, within reason a n d within
limits o f safety, t o sustain the trade o f the caintry,
and that will affect Boston,
i t will affect e v e r y
district i n the country, and I believe i f the right
action i s taken that it:will n o t o n l y tend t o increase liquidation, b u t i t will tend t o a n orderly
course o f business t h a t i n three months w i l l p u t
us
on safe ground,
Governor Vellborn,
D
o you think the occasion
requires t h e b o a r d t o t a k e a c t i o n t h a t w i l l c a r r y
these
crops for orderly marketing for a period o f time and
to suspend t h e reserve o f the Federal Reserve
Banks?
Mr. Ramsey. B e f o r e I answer that, I have n o
thought o f sympathy with these wild fellows! talk
about
forty cents for cotton and the Government advancing
money
and going into e charity business, a n d I told them
s o at
Montgomery and, strange t o say, g o t o f f
with i t and they
seemed t o like m e better after I
Spoke t h a n before,
That i s the trouble, w e have g o t a lot o f
missionaties
with great geal and n o wisdan working a t
the whole cotton
broppsition, a n d I
suspect t h e wheat proposition, I
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Federal Reserve Bank of St. Louis
doubt i f the Board could p a t d i n - thet language,
but
would urge some reassuring statement a s t o the credit
strength o f the situation a n d the Cisposition o n the
part o f the Board t o foster a n d promote a n d
take care
of the legitimate business o f the country.
what language i t should b e couched I
J u s t in
do not know, b u t
I do say, Mr, Chairman, a n d i f I ean impress
the soriousness o f that view o n the board that
i s the main
thing I should like t o do,-~=I believe i t
is necessary,
and I believe these gentlemen will b e
just a s eandia
énd a little more than I am, and outspoken,
that that
thought must hawe dawned o n then. “ l e had three bank
failures i n Texas i n two days; w e m a y
have thirty; w e
might have o n e hundred, and-we a r e
n o t the o n l y pest...
of the country that might have them.
Mr. Platt.
W e r e those banksfailures due t o ad»
vances i n cotton?
Mr. Ramsey,
O n e o f them I suspect was,
O n e of
them was a bank I know very well, and
i n both cases fr
may s a y f o r the protecti o n o f myself
a n d Governor
Van Zandt, w e h a d over o n e hundred
percent exresg col-
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Federal Reserve Bank of St. Louis
lateral,
O n e was t h e case simply o f a man trying t o
ruin a bank without a m r sense; t h e other m a n was a
man
who had been speculating i n cotton, a n d had been doing
so for many year; h e could n o t bear t h e burden.
But here i a the difficulty.
O y r banks are in-~
trinsically sound, ninety-sight p e r cent o f them, b u t
there have been some little symptans t h a t have come
to me, some little hint, and ideas that come t o me
when you talk about excess rates and great profits made,
and tell folks t o s o back ond quit grumbling, and the
inability t o do, and the inability t o d o this and the
inability t o d o that, y o u may get the impression t h a t
while t h e getting 1 s good
h e will g e t his money, a n d
if a t this time o f year there w a s a
widespread r u n i n
many sections t h e y have n o t s o t the ability t o withstand i t unless w e should g o far beyond what w e ought t o
be called u p o n t o d o t o supply t h e needs t h a t m a y 2 %
hei foreed upon them a t almost any time.
Mr, Rich.
e e
y o u should Porce your member banks t o
liquidate, i s i t possible f o r them when there i s no
market f o r t h e m a i n c r o p ?
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Federal Reserve Bank of St. Louis
Mir, Ramsey.
O h , I do not think so, but I think
every m a n i n our bank agrees o n that proposition,
we
believe the man i n debt ought t o sell fram day today
somewhat o f his cotton and take care o f his most pregs-~
ing nobts, that the great bulk o f the cotton held must
be held fron the credit strength o f the owner o f
the
cotton, but there should b e a n orderiy marketing;
the m e a n t i m e t h e r e s h o u l d b e a
in
sympathetic t r e a t m e n t
of that situation within reasonable order.
Governor Calkins,
very d e e p l y i n t e r e s t e d
M r , Chairman, I
have been
i n the discussion t h a t h a s been
going o n hem today, and I have but few things t o say,
partly from lack o f voice. I
have b e e n reminded o f the
fact that I have never had occasion t o discuss
the condition o f a bank with its managing officer without
as-~
certaining a t once that the situation i n which that
bank found itself was exceptional.
T h e r e always are
circumstances w h i c h make i t necessary f o r
that bank
to d o what a bank under othen conditions
would n o t b e
c o m p e l l e do
t do, I
am obliged t o feel that there
is the same disposition among us here, and
that each
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Federal Reserve Bank of St. Louis
one femiis that the conditions i n his District are excep-~
tional conditions, differing from those i n the other districts a n d e n t i t l i n g h i s d i s t r i c t
tion. G o v e r n o r Morss, I
t o special
E E
a
p
am sure, with the ninety-nine
percent reserve, o r something like that, i s entirely
confident that conditions i n his manufacturing district
are more acute t h a n i n other parts o f the country.
Judge
Ramsey, i n Dallas, with a minus reserve, f o r aught I
mow,
is m
ite a s confident t h a t the conditions
i n hig
district a r e different f r o m those o f any Songs district,
My a t t e n t i o n h a s b e e n c a l l e d a g a i n t o a curious f a c t , a n d
I might preface w h a t I have t o say o n that subject b y say-
ing that w e are always a little skeptical about the apparent showing o f statistics.
I
t seems t o me t o b e a
curious f a c t that i n those districts, w h i c h have neither
adopted t h e h o r i z o n t a l s e v e n p e r c e n t r a t e o r t h e
progressivo r a t e , t h e a v e r a g e r e s e r v e
i s very much the
highest i n the System, a n d that i n those districts t h a t
have adopted t h e seven p e r cent rate, w h i c h i s
presumed
to be much less drastic than the reserve rate, the reserve i s the next highest, a n d i n those districts where
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Federal Reserve Bank of St. Louis
the progressive rate has been applied, presumably the
most drastic that c a n b e a p plied,
t h e average percent-
age o f those four banks i s very much below that o f the
other t v o groups.
Iam speaking very roughly and not trying to
cover the subject.
I a m inclined t o feel that i t
would b e quite appropriate:
t o say something comparable
to what was said i n our district, what I said i n our
District t o the president o f a member bank who wrote a
very glowing account o f the crop conditions i n his district, h i s community,
a n d ended h i s lettem b y saying
that i f our manager o f the bank i n that district would
Look with more favor upon t h e c r o p conditions h i s bank
would have n o difficulty whatever i n meeting the demands
on its depositors,
T h e reply that I made t o him,and
his bank was very much over-extended, a s are some o f our
banks, was that our manager was not g o much concerned
with the crop conditions i n his district a s he was with
the condition o f his bank, which was i n a dangerously
over-extended condition,
Now,
i t appears
??
t o me,
aa s J u d g e$ R a m s e y h a s said,
and
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Federal Reserve Bank of St. Louis
as J heard h i m s a y four years ago, there i s i n the country
avery strong disposition t o look upon t h e resources of:
the Federal Reserve System as inexhaustable and aveilable for all Federal Reserve Banks.
extweme examples o f that, I
W
e have all seen
have o n e very amusing o n e
in m y o w n mind, where a n officer o f a member bank undér~
taok t o finance a
lighting corporation, w h i c h was about
one hutidred times too big for his bank, and his whole
Wag
dependence/on his ability to rediscount the paper with
the Feder a l Reserve Bank, a n d h e thousht h e was being
subjected t o a very unjustifiable restriction when w e
told h i m h e c o u l d n o t d o t h a t l i t t l e thing.
I
t appears
to me, speaking as I a4ntended t o speak as the representative o f an agricultural district bank, comparable
with the Eleventh, the Tenth and the Ninth Districts,
Which has never re-discounted o n e dollar, which has maintained a fairly respectable reserve, andwhich hopes t o
maintain a
fairly respectable reserve f o r this season
at least, that our experience may be o f some value.
Putting it briefly I will say that that experience has
been that i t was absolutely necessary t o hold down the
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Federal Reserve Bank of St. Louis
expansive b a n k e r a n d s h o w h i m h e w a s n o t e n t i t l e d
t o more
than his share o f the resources o f the Federal Reserve
Banik, and t o tell him that i n the last extremo i t might
become necessary t o erect a stone wall a n d s a y t o hin,
"thus far and n o further," a n d I believe that will b e
necessary i n sone o f the other districts a n d i t will
be necessary, t o put i t the other way, t o say t o the
member banks, particularly t o the small country member
banks in the agricultural districts, "You cannot go
beyond a reasonable limit."
We have i n our district a
greater diversity o f pro-
Quet than i n any other district.
L a s t year a t the rice
harvesting season the representatives o f the rice grovers!
association, and their bankers, came t o the Federal Reserve Bank and told their story, just the same kind o f
a
story as we have all heard from different interests, and
they said, "if the Federal Reserve Bank does not
d o something t o help o u t this situation t h e rice will
rot i n
the ground." “ e l l , 1 said a number o f things, among
which that I could not see any ten cent rice rotting
in
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Federal Reserve Bank of St. Louis
the ground, a n d I
assure y o u none rotted there.
B u t I
learned, among other-things, that i t is not m y business
to advise bisiness m e n t o make new banking connections,
but i t is perfectly obvious, and I said this t o the bankers, “that when your line limit i s 527,500, a man that
needs {150,000 ought t o open a new banking connection,
and must."
T h i s y e a r w e had t h e same delegation w i t h
the same story a n d t h e same plea, a n d o f course I
it necessary t o s a y the same thing.
found
O n e o f these bankers
paid, "that is perfectly true, our going limit is thirty
thousand.
odd Adollars, a n d this rice grower here h a s g o t t o have
$140,000 t o harvest his crop. N o w , where i s he soing
to get it?"
T h e obvious ansver, h e has got t o get i t
from somes other bank.
The n e t c o n c l u s i o n
o f m y rambling remarks
I believe w e h a v e c o m e t o a time w h e r e
i s that
i t i s necessary
to rigidly limit, b y the force o f persuasion,
i f you
please, and b y something more rigid i f necessary, the
disposition
o n the p a r t o f the small agricultural b a n k
to g o far beyond its proper means. ( A p p l a u s e , )
Governor Morss,
M r . Chairman,
i t seems a s i f I
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Federal Reserve Bank of St. Louis
had given a Wrong impression
i f Governor Galking thinks
that from what I gata there
w a s a peculiar condition
in
the First District, W h a t
I tried t o s a y was that
the
condition i n the first district
was t h e same with p r a c
tically all the districts
i n thig country, a n d t h e
trouble i s that the markets
for commodities have, I might
say, stopped; there t s no market
price a t which anybody
can g o and really l i g Quidate
a n y amount o f stuff, a n d
that i s c o m m o n a l l o v e r
t h e country,
I agree with Judge Ramsey
that nothing must b e
done that would break this
Situation, a t least b y
the
Federal Reserve Banks, I t
is too delicate, Y o u canes
not know what harm would
come o f it, T h e one
bright
spot i n the business o f this
country today i g the Federal
Reserve Banks, I
believe t h a t i f i t
was n o t f o r the
Federal Reserve Banks
y o u would have h a d
a panic i n
this country such as
we never sav before,
I t is the
Federal Reserve Bank standing
petween the courtiay
and
that panie, T
had one of the presidents
o f one o f
our largest banks tel}
me the day before I
came that,
"The o n e staple plant
a n d business t o d a y
i s the Federal
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Federal Reserve Bank of St. Louis
Reserve Banks, a n d nothing must b e done
t o weaken their
influence o r the confidence o f the
people i n those banks ,"
You must remember, amongst ather
things, t h a t w e have out-
standing three billions o f dollars,
a n d more, o f Federal
Reserve notes t h a t are a demarc
obligation f o r gold.
a n
anything should happen that t h e
people l o s t confidence ay:
the value o f those notes y o u
d o not know where y o u would
be.
T h e Federal Reserve System
has a free gold reserve
today o f not much more than 250,000,000,
Supposing
800,000,000 of nd es were Presented
for gold payment?
So I say y o u must hold this
thing together a n d i t will
in time settle itself, I
have great a n d supreme c o n e
fidence i n the ability o f
the Federal Reserve Banks
to
at least hold the financial situation
i n good condi-~
tion, and without that I do not
know what would happen,
Governor Seay.
M r . Chairman; o n e wrong impression
has already gotten abroad here,
a t least i n certain parts
of the country,
L e t u s b e particular t h a t
another
wrong -impression shall not g o
abroad,
I t has been
widely stated i n certain publications,
w h i c h h a g been
accepted b y still other publications
a s t h e fact, a n d
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Federal Reserve Bank of St. Louis
editorials have b e e n based u p o n it, m d a large. con-
tingent i n the agricultural regions believe i t
a fact, a n d that i s that Federal Reserve Ranks
tailed credit for commercial purposes, when
we know, a s
a matter o f fact, i t is continuing t o expand credits,
Now, d o not let it get abroad that the Federal Reserve
Banks a r e c o m p e l l i n g l i q u i d a t i o n .
I
s t h e r e a n y Federal
Reserve Bank that i s compelling L i m idation?
i think Judge Ramsey says h e pleads for sixty days
further i n which t o Liquidate.
I s there a single Fed-
eral Reserve B a n k that i s conpelling liquidation?
I t
would b e a very distressing thing i f such a n impression
should g e t abroad,
W
e are using o u r publicity sec-
tion t o counteract t h e b e l i e f
o n the p a r t o f a very large
part o f the public, d u e t o misrepresentations, t h a t the
Federal Reserve Banks, i n the last fev months, have
been
curtailing credit, a s we know i t is a n infamous mig=
representation,
With pespect t o the stoppage o f markets,
determine a l l the reasons w h i c h enter i n t o
it?
“ h o can
I t seems
to be the consesus o f opinion, expressed here and
ex-~
pressed there, t h a t t h e public i s the c a u s o f
it; that
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Federal Reserve Bank of St. Louis
over-consumption h a s stopped; t h a t buyers have stoppd f o r
the time being; t h a t trade i s a t war within itself.
W h a t
do we hear from the retailers o f the country? " T h e s e
goods w e have o n our shelves y o u cannot g e t a t lower prices,
Lower prices m a y come next spring, w h e n w e have s o l d these
goodg, then the public will get them.”
T h e retailers
are a t this moment, certainly t o some extent andin some
parts o f the country, staring liquidation i n the face,
How can that position b e maintained, a n d as long as i t
is maintained t h e whole process o f trade i s stopped.
W h o
is compelling, w e will say, those who have cotton t o
liquidate t h a t cotton a t the present time, Unless t h e y
want more money with which t o enter into further oblig-~
rations w e are not exercising a restraint upon credit,
But those producers o f cotton a n d o f tobacco, w h o al-
ready have obligations incurred for raising them, may
take their produce and stove it, and they can pay their
obligations f o r raising it, for which they will furnish
no security, t u t t h e storing a n d t h e paying o f those
obligations, b u t when they want t o incur additional obligations,--<suppose a
man comes t o you who i s already bor-~
rowing five and six times his bank line, six, seven and
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Federal Reserve Bank of St. Louis
ten times h i s reserve deposits, w h a t are y o u going t o d o
when confronted w i t h s u c h a condition a s that?
a practical question,
B u t I
I t ig
believe, s i r , there i s
one thing w e should b e very, v e r y particular about, a n d
that i s that the Federal Reserve Banks are not reguiring
Liquidation a n d f o r c i n g t h e s a l e o f c o m m o d i t i e s
a t preg-
ent prices when i t seems t o me there i s no buver i n
large quantity.
W o have combatted the other point;
we can d o s o effectively i f we are very careful the
idea does not get currency, I cannot see why, within a
reasonable length o f time, the situation will not worl
itself out,
But i s i t not manifest, i f the Federal Reserve
Pans should undertake t o encourage the whole commodi-
tymarket to hold for an arbitrary and pre-determined
price, and for an indefinite price, that the thing itself
must stop there?
H o w far can we go, can we say that
we will lend money indefinitely o n cotton until i t gets
to forty cents, o r o n tobacco wntil
i t gets t o fifty
cents?
I believe, sir, that t h e duties assigned t o the
publicity committee a r e v e r y important
a t this time, a n d
that the Federal Reserve System can define,
s o that the
country m a y understand, a n d c a n defend
itself against t h e
misrepresentations a s t o the curtailment
o f credit a g
entirely unféuzddd,
we, Platt.
I s i t possible t h a t t h e fact that
the
banks, for instance, which have not raised
their rates
things
of discount, h a v e G O coutvol/somewhat
b y cooperation
with member banks i n urging them t o not
increase their
loans, t h a t that might give t h e impression
that t h e y
are restricting credit,
whereasi
f the rate were higher
it would not have that effect?
Governor Seay. S u p p o s i n g the rate were
High and
the bank still borrowing?
Y o u d o not think, f o r instance,
as a practical, concrete iliustration,
t h a t i f the rate
had been one per cent higher that
our borrowing would have
been o n e dollar less?
W
e know I
think, however, t h e
J
individual bank, which already
h a s borrowed more t h a n i t
is willing t o lend, h a s gone a s
f a n with i t s customers
as i t cares t o go i n telling that
customer h e carinot get
rediscount a t the Federal Reserve
B a n k a n d therefore cannot grant h i m a n y further accommodation,
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Federal Reserve Bank of St. Louis
W
e know also
that the state bank, the non member bank, ,is at the
bottom o f a great deal o f this, and the customer o f the
non-member bank. T h e y have n o central reservoirs t o
which t o go,
I n our system our banks are lending
$30,000,000 t o the non-member state banks, which is
more money than we are borrowing from other Federal
Reserve Banks. I
believe also the member banks them=
selves, unwittingly, are a t the bottom o f this,
They
do nob feel comfortable i n borrowing a n unlimited
amount t o lend; t h e y tell u s they are
n o t confortable:
but nevertheless when they are asked for more they
put
the burden upon the Federal Reserve Banks; they
gay,
"we cannot get vour paper rediscounted a t
the Federal
Reserve Banks," when they have gotten more paper re-«
discounted a t the Federal Reserve Banks t h a n
t h e y are
entitled to, a n d are Perhaps loaning that
borrower more
than t h e y ought t o c o e
Mr. Platt,
t h a
him.
D o e s that have a n y effect a t all with
non-member banks?
Governor Seay,
T h e non-member b a n k i s a customer
and a depositor o f the member bank, and h e
i s a very
valuable customer a n d depositer,
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Federal Reserve Bank of St. Louis
N e w York, particularly,
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Federal Reserve Bank of St. Louis
I think h a s m a n y n o n - m e m b e r b a n k s t h a t a r e v e r y v a l u a b l e
customers o f theirs,
City.
I t i s s o i n every Federal Reserve
T h e member banks have t o take care o f them t o
somas extent.
Mr. Platt,
D
o they have any control over them
in that way?
Governor Seay.
Y e s , t h e y do,
T h e y decline t o
lend t h e m a s m u c h m o n e y a s t h e y a s k for; t h e y t e l l t h e m
about the limitations, a n d they d o r e f u s e t o lend
them.
I n many cases, w i t h the difficulties
i n which non-
member banks get themselves, t h e member bank-has ceme t o
us and stated the situation, saying, "Here this bank will
promptly fail i f w e d o not come t o its assistance;
are e x c e s s i v e b o r r o w e r s
f r a m vou.
bank additional funds?"
ations
W
S h e l l
we
w e lend this
e have had t o meet many situ-
o f t h a t kind, a n d w e a l w a y s a d v i s e l e n d i n g t o t h e
bank, w e say i t must b e supported, "You assist i t and w e
will lend the money,”
W
e have done that i n many cases.
But the non-member State b a n k i s complicating this situa-
tion t o a very serious extent, i n my judgement.
I believe t h a t a
statement c a n b e made,
well t e m p e r e d a n d conprehens ive
a n d t h a t w e c a n persuade t h e people
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Federal Reserve Bank of St. Louis
168
of this country that t h e situation w e n o w find ourselves
in c a n b e worked o u t i n time i f the people will b e temperate a n d act i n accordance w i t h prudent principles,
Mr. McCord.
M r . Chairman and gentlemen, i n our
district w e have twenty-two hundred banks, and four hun-
dred and thirty four Momberi Banks. T h o s e four hundred and thirty four member banks have largely taken
care o f the superstructure o f the credit.
T h o s e credits
were granted i n the spring o f the year, a great many o f
them t o those n o n - m e m b e r b a n k s
ing industry.
t o take c a r e o f the f a r m
N o w they are coming to maturity, but
owing t o their inability t o sell t h e product t h e y cannot
liquidate with the member banks,
T h e president o f one
member, bank told me last Thursday, he said, "my bank ig
an old Federal Reserve Bank o f $4,000,000 capital.
‘ h e
non-member banks i n the State o f Georgia loan to my bank
~5,000,000,under ordinary conditions this would all have
been p a i d ,
m t
y o u cannot b e paid because
o f want o f
market," therefore that is one of the causes.
T h e areat
trouble i s hesitancy o f the real basic value o f our
products,
well.
I f we could arrive a t that then all would g o
T h e Boston District would b e buying our cotton
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Federal Reserve Bank of St. Louis
169
and w e Would b e furnishing reserves u p there, possibly.
Mr, Platt,
A t what rate o f interest d o those
non-member banits i n your district l o a n t o their custo-
mers ?
Mr, McCord,
T h e lawful rate i s about eight per-
cent, and they charge, I expect, all the way from eight
to twelve p e r cent.
Mr. Platt,
A t what rate d o they borrow f r o m their
correspondent national bank?
Mr. MeCord,.
Mr. Platt,
A
t s i x t o s i x a n d o n e hails p e r cent,
T h e r e i s not very much inducement t o
make them loans i f they make a profit out o f redisedunt?
Mr. MeGord. G o v e r n o r , t h a t price w a s made i n the
spring o f the year when those banks were entitled t o their
credit with them.
I n other words, they promised t o ex-
tend t h e cre@it o n the same basis t h e y g e t i t a t other
places,
T h a t i s the difficulty.
T h e y would not loan
it to them now at eight o r nine por cent, yet onmiene tact
paper o f the largest houses i n the United States sell
in o u r c i t y o n a n i n e p e r c e n t p a s i s w i t h a
Governor Seay.
of a
f e w lines,
deposit.
L e t m e read y o u just o n e paragraph
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Federal Reserve Bank of St. Louis
One o f our directors i s a merchant a n d a farmer
and a cotton buyer.
H e lives i n South Carolina
where this question i s very rampant.
Another
whaich came t o my knowledge i s from North Carolina,
Taey sent 2 personal letter t o their people i n North
Carolinas, and this i s the message:
"Many sections had last fall enough money o n
hand t o operate t h e f a r m s a n d b u s i n e s s e s f o r t y e l v e
months, b u t wasted a large p a r t o f i t and then went
back t o the banks for abnormal advances, o n the
assumption that hich prices would b e permanent.
The agricultural a n d manufacturing sections o f North
Carolina and South Carolina might have become
financially independent during t h e past three years
if their people h a d shown sound business judgement
and had held o n t o a fair proportion o f their profits,
should l o g e n o o p p o r t u n i t y
t o call
attention to this fact in order that their people
may profit from the bitter experfenvué through which
we are passing and must pass because o f it.”
Mr. Perrin,
M r , Chairman, l e t m e draw attention
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Federal Reserve Bank of St. Louis
chi.
to a fact.
T h e r e i s n o question about the strength o f
the Pederal Reserve System o r its power t o tide o v e r a n y
situation t h a t i s presented o n the face o f it, b u t t h e
point wé should discuss a t this time, I take it, I take
4t that i s what t h e subject refers t o , i s the basis o n
which reserve bank rediscounts should b e made.
A
g Mr,
McCord has just admitted, money borrowed from other districts, where a
seven p e r cent rate prevails, w a s being
loaned t o member banks which lent i t to non-member banks
at s i x and s i x and one-half p e r cent, “ w h i l e a s Judge
Ramsey has said, the inter-reserve bank rediscount i s
absolutely essential, a n d the question o f whether thoy
should b e made a s easy as the discussion has proved i t
has been, I
think very properly m a y b e raised, I
think because the Federal Reserve System is strong to
meet a n y s u c h situation,
a n d t h a t t h e r e i s a n abunde nee
of lending power i n the strong banks o f the Federal
Reserve System, does not mean that i n this situation,
when there should b e a general influence towards carry=
ing products t o market whereever t h e opportunity occurs,
and as rapidly as a reasonable opportunity presents itself
stve should not
pzcie/ b
e exerted b y rates.
I t is impossible that any
$
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Federal Reserve Bank of St. Louis
man Will feel the same necessity f o r marketing h i s
products when h e i s borrowing money a t six per cent
as i f he were paying a higher yate.
B
y way of illus-~
tration, Mr. Calkins will lmow very well this case
because I
told h i m o f it, b u t i t illustrates t h e point,
one very large-banker i n our district, o n e o f the
largest,
i s very strenuous i n the assertion that h i g
bank loans only for absolutely essential purposes, and
for that reason the rediscount rate should n o t b e above
six per cent.
T h i s i n connection with the propriety
ofour fixing a seven per cent rate, and which I myself
very strongly believe in, that i n a situation o f thig
kind there i s a salutory influence not only i n the rate
itself, t u t the psychological effeet upon the public
of knowing that while credit m a y b e had i t i s expensive,
This banker i n discussion o n e forenoon w a s very strong
upon the point o f his bank being one hundred per cent
Pure I n repard t o its advances.
‘ A s I came d o w n after
Juncheon from the club one o f my friends s7id, " E am
getting along pretty well i n that sub-division o f real
estate n e a r S a n Francisco; I
have already sold about
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Federal Reserve Bank of St. Louis
L735
half a million dollars o f that, and I have rot 3120,000
of paper from it, and t believe i t is about time t o
buy some good securities, and just to Imo where I
stood L f dropped i n t o this same b a n k t o see whether I
could b o r r o
o r not a n d said, ‘ h o w would i t b e i f I
should want {350,000 o r 1340,000,'and I told them the
tale about his million based upon this real estate,
and they said, “vell,"---thig was the cashier, i t
was not referred a t all t o the higher officers,--‘well, d o not c o me unless i t i s necessary, b u t i f
you vant i t we will let you have it,! I
mention
this t o call attention t o this fact, that bank, that
was o n e h u n d r e d p e r c e n t pure, t h a t i t w a s n o t e v e n
necessary t o refer a request o f that kind t o the Vice~
President o r the President, but vight offhand 530,000
or 340,000 was available t o lend for the purpose o f
buying s e c u r i t i e s a n d b a s e d u p o n «
récl estate t r a n s
action,
If the rate o f the Federal Reserve B a n k o f San
Francisco w e r e s e v e n p e r e c n t a n d t h a t m e m b e r b a n k ' s
rate were s a y seven p e r cent, possibly e v e n higher,
»)
there w o u l d n o t b e t h e s a m e d i s p o s i t i o n
t o ask f o r
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Federal Reserve Bank of St. Louis
50,000 o r .340,000 with a view t o buyine securities,
particularly i f it were t o buy bonds,
i believe that i n the agricultural district o f
Sen Francisco, and w e have some sections o f our district that are intensely agricultural and with necessities j u s t ‘
. t a s those
o f a n y o t h e r digs-
trict i n the country, I believe that we have encountered a s many difficulties a g have presented thenselves
dn the other districts,
I
t has beon observable i n
very many cases where we have perhaps
boen a bit too
lenient i n s willingnoss
t o further t h e production o f
foodstuffs, t o permit these banks t o borrow very:
Dreely:
it has been observable i n a good many cases
when i t came
to examine t h e reports o f these banks t h a t
from the
standpoint o f liquid condition they were i n
2 very bad
situation b y reagon o f the ease o f rediscounting
with
Federal Reserve Banks they had been led t o
invest
their o w n finds i n capital loans,
i n non-licuid loans,
in loans t h a t were furthering enterprises
t h a t were
well enough f o r capital investment, b u t
absolutely
improper f o r t h e i n v e s t m e n t
o f b a n k credit, a n d I
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Federal Reserve Bank of St. Louis
believe t h a t a high rate i s a very salutory solvent
in a situation o f that kind. I
think i t i s a pre-
ventative,.
Coming back t o the point o f inter-reserve b a n k
rediscounts, i t appears t o me that while those should
be made a n d must b e m d e necessarily i n large méasure
in emergencies, I believe that there i g everything t o
be said i n favor o f that being m d e expensive, a n d
that i t should b e necessary f o r the heavier borrowing
districts t o be required t o advance their lending. rates
in their districts i n order t o justify their applying for loans f r o m other Federal Reserve Districts,
It seems t o m e entirely improper that money
should
be loaned t o member banks i n the Atlanta District,
~-Iosay this n o t i n a n unfriendly criticism, simply
as
an abstract probleme--at six and six and
Six and one-~
half p e r cent, t o b e reloaned t o non-member banks
at
such rates a n d borrowed f r o m a District where
they
feel that a seven p e r cent rate i s desirable
f o r all
their borrovers,
f believe too, referring t o the inquiry o f the
Chairman o f Mr. Seay as t o the extent o f control they
have o v e r nonmember banks under those circumstances ,++«
I believe i f the paper wore v e r y carefully scrutinized
that came t o the Federal Reserve Banks, a n d t h e very
best o f reasons required where member banks a r e made
the medium f o r nonmember banks, a n d i t were n o t made
easy f o r nonmember banks
t o borrow ldndivectiy f r o m
& Federal Reserve Bank, that nonmember banig, s o far
as they were elisible, w o u l d dnua very much
larger
measure b e c o m e m e m b e r s
o f the Federal Reserve B a n k
and thereby come i n under very much greater control
than
they possibly can be when they are nonmembers,
®
42.SOP
M s
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
Mr. Jay.
enbracing a
M
p
. Pervin's i s e large district,
nuaber o f states, a n d h e himself favors a
higher rate t h a n 6 ber cent. w h a t i s the usury situation
in your district, wir. P e r r i n ?
Wr. Perrin.
I n regard t o what?
In regard t o usury.
Hy. Perrin.
T h e r e i s n o place
states where t h t would work a
i n any o f our seven
i
g
T h e State
of Urexon i s contemplatins--in t h e free-and-easy w a y they
neve o f making constitutions o u t there, b y popular vote,-=+
voting u 2 0 n a n amendment t o their constitution this f a l l
which will provide a
lezel rate o f 4 per cent, w i t h a
contract rate o f 5 per cent.
usurious
T h a t vould s e e m t o b e
i n that case, b u t upon submittin: t h e matter
our c o u n s e l n i s o v i n i o n is<--not e n t i r e l r c o n c u r r e d
in
the opinion o f counsel o f the #ederal Reserve Board-that Oregon could b e servec f r o m t h e necd o f f i c e
through branches
o r
i n the State o f Washington, without
violation o f the usury l a v i n case that anendment v e r e
adopted i n Ureson; b u t e v e n i n the face o f a n usury lan,
Mr. Jay, o v e n i f i t were necessary t o lend a t 6 ver cent,
why should n o t the bank,
i f i t zoes bevond i t s o w n
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Federal Reserve Bank of St. Louis
178
means,
D a y a hicsher rete, e v e n i y i t w e r e « a temporary l o s s ,
to serve i t s c u s t o m e r s ?
My. Ja: i n e r e i s n o reason
Mere Platt.
D
o y o u want t o discuss this matter
further o r shall v e s o o n t o the next s u b j e c t ?
Governor Voung.
Q u r osople a r e n o t altogether sate
isfied vith the 7 per cent rate o n re-discounts between
Wederal iieserve banks.
w e cannot s e e w h y another Fed~
erdl ieserve bank should charze u s a greater rate than
its own member banks. I
have listened t o the
discussion here with a srest deal o f interest, a n d i f
my con¢lusions a r e correct, t h e y are these: t h a t t h e increase i n the re-discount rate between t h e Federal Keserve
Banks was not made for profit, b u t mede t o hold the
Foderal Keserve Lanks i n check.
T h e four banks
are loaning a t the present time, L £ think a l l o f them
& 6 per cent commercial rate. I
have listened t o
very interesting papers this mornine t o the effect
they were able t o control that situetion through a
cent p a t e r e b h e r t h a n i n c r e a s i n g
t o a 7 per cent
Now, i f thet i s applicable t o menber banks,
it
me that i t i s equally applicable t o Federal Re-
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Federal Reserve Bank of St. Louis
serve Banks.
V i e fecl that w e are siving something t o
onother F e d e r a l s e s e r v e Ban's w h e n w e r e d i s c o u n t p a p e r
t i e would m u c h
with them, t h e y m e t a
profit o u t o f it.
prefer e t t h e moment,
i n o w o w n district,
t o let our
reserves r u n down t o the 2 2 per cent a n d p a y t h e penalty
in zold against notes,
o r against depos-
its, whichever w e prefer t o pay, whichever was more profjtable, a n d e n d u p the year with a profit o f approximately .360,000.
Mr. Platt.
Y o u have a 7 per cent rate i n your dis-
trict?
fir. o u n c e a
7 per cent rate, res, 6
per cent o n
Liberty Bonds a n d 5-1/2 p e r cent o n Gertific
debtedness, b u t i t i s not a n opportune time, Hr.
man, w i t h a l l o f o u r s e a s o n a l demands,
t o raise t h e r a t e
on Liberty Bonds o r Certificates o f Indebtedness--90 days
from n o w t h a t m a y change.
Dr. i i l e r s
T h e Giscussion this afternoon I
has b e e n e x t r e m e l y N n O r e e a n Ie: a n c t h o u g h i t seems
have b e e n rather cise j
:
think
to
1 0 W s S h o v every important
feature o f Federal Reserve B a n k operations L i n t
up vith practically every other feature.
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Federal Reserve Bank of St. Louis
I vant t o make a few remarks, a n d I want t o
begin
with @ brief reference t o what Governor Young has said
last.
ought
h e function of re-discounting/always, i n my
judgment,
t o b e distinct a n d separate f r o m t h e question
of rates.
T I think i t is fundamental i n reserve banking
that @ Reserve B a n k should never refuse t o dise ount good
péeper for a good borrowing bani, b u t i t always ought t o
assure itself that t h e need o f that bank i s a genuine
need b y the test o f a rate which really tests.
T h a t ,
I think, i s the princivle that ought t o obtain i n the
relations o f the Reserve Banix with its member banks.
B y
thins i t still remains t o b e determined i n our experience
with reserve banking in this country whether ve ean
regulate with the degree o f efficacy that v e hope t o obtain
by the mere application o f a rate.
T h e mere fact that
that has been the traditional method i n countries o f
Gurope, notably i n wngland, o u g h t n o t t o mislead u s into
thinking that i t is going t o be a n easy thing t o accomplish here.
I
t i s one thing f o r the Bank o f England,
which deals w i t h a mere handfull o f huge: joint-stock
banks, w i t h hundreds o f branches whose ramifications r u n
all over t h e United Xingdom,
t o operate through a rate;
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Federal Reserve Bank of St. Louis
LBL
but there i s but o n e money market i n inelend, a n d that i s
London; t h a t i s the money market f o r the country, e n d
money i s voyth h a t i t is wor
i n London. ‘inen, ho-vever,
it comes t o the Guestion o f e@ rate a s between ieserve
benss,
t h e question seems
t o m e t o b e cuite simole--I
am
not speaking positively b y the record nov, because I
have n o t recently refreshed m y mind o n this point~-but
Ioao s p e a k w i t h a
soo0d d e a l o f c o n f i d e n c e w h e n T I say t h a t
£ believe t h a t i f the record i s searched y O u can never
% cose where t h e Bank o f England dise ounted f o r the
bens o f France,
o r i n the exceptional case vhere t h e Banik
of France discounted f o r other great central institutions
in Burope, w h e r e i t was done a t a n y other t h a n a neneliz-~
ing rate.
t h e safeguard o f credit,
i n brief,
i s thet
you have s o t t o p a y a orice which discourages i t s u s e except o n the gart o f e n institution o r a section o f the
country that really needs funds t o a desree thet i t is
entitled t o g o elsewhere a n d take t h e m a y a y from other
sections o r other countries. L
have therefore lonc, l o n g
been o f the ovinion that w h e n o n e Rcserve B a n k rediseountsa
for another,
i t ought t o charse a t least t h e highest
rate that i t charges i t s o w n borrowers. I
even a m in-
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Federal Reserve Bank of St. Louis
1
8
2
¢lined t o the opinion thut the rate ought t o be nich
enougn, O r enoush hisher, t o actually imaike i t eat into
the earninzs o f the bank that avplies f o r the re-discount
and .© usin; i t o certain desree o f discomfort i n pevinn.
after cll, p&ycholocy i s what w e have t o deal vith i n
matters o f this kind. &
bank ordinarily operate
the m e t i o d o f profit a n d loss, a n d t h e o n e p o i n t
in
the system zpgears t o be weal o r a little cefective i n
psycholosy, a s compared vith other central reserve sys~
tems, i s thet the method o f profit a n d loss i s not suf~
ficiently immediate, because after 2 1 1 whet G o y o u lose
in Dallus i f New York cherges y o u 7 per cent o r 8 per
cent o r 10 per cent, until i t gets t o a point where you
haven't sot enouch t o pay your 6 per cent cumulitive
Givicends, for the loss i s eventually sustained b y the
United States Treasury, or, i f vou have not yet acquired your full surplus, t h e rate a t weich i t i s being
built u p is momenturily diminished, a n c that I think i s
a point that v e ought never t o lose sight of, and v e
have s o t t o f i n e a
substitute f o r t h a t i n t h e o p e r a t i o n
of the Federal Keserve Banks.
Let m e say, then, t h a t I ain rather flexible i n m y
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Federal Reserve Bank of St. Louis
attitude
counts,
as &
o n t h e c u e s t i o n o f i n t e r - R e s e r v e B a n k yredisbut I
a m rather i n f l e x i b l e
Reserve B a n k a p p l i e s
re-discounts,
i n imy o p i n i o n t h a t
t o the Board f o r more a n e more
w e ought t o push t h e rate u p o n them. I
would n o t hesitate t o s o t o 1 0 per cent i n cherging
certain BPederal Reserve Banks t h a t vere porvowing if,
on m y s u r v e y . o
f the condition o f business e n d banking i n
that district, I
believed t h e y were exercisin;; t o o much
latitude i n the administration o f their local credit; I
would make i t cost t h e m t o a point where,
o n the whole,
it would b e more uncomfortable f o r them t o come t o the
Federal ieserve Bani a n d a s k for re-discount t h a n i t
would b e t o 3 0 t o t h e i r m e m b e r b a n k a n d t e l l t h e m t o
stop re-discounting;
i n brief, o f f e r t h e m a choice o f
alternstives, b o t h o f wnich a r e uncomfortable, b u t t h e
least uncomfortable o f which vould b e t o attempt t o put
& tight c u r b upon such o f their member banks a s sere
abusing t h e credit facilities a t the Federal neserve
bank.
Now, t h e G i s c u s s i o n t n i s a f t e r n o o n h a s s e v e r a l
times come pretty close t o what I
regard after a l l a s
the m o s t G i f f i c u l t a n d a t t h e s a m e t i m e t h e m o s t c r u é i a l
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Federal Reserve Bank of St. Louis
element i n this whole problem.
v e n i f n o conclus-
ion i s reached b y the Gonference a s a conference,
a3
thins every Ghairman and Governor who i s here has got
to seérch his o w n heart a n d mind a n c fine some sort o f
conclusion f o r aimself.
the Guestion, w h i c h I
w h e n I
asked Governor Morss
feel h e did n o t ansver satisfact-
orlly, a n d that i s w h y there was n o market f o r shoes
in New Encland o r cotton, t h e same question mMicht b e
around t h e table--why i s there n o maxlzet
for r a w cotton i n the South o r for r a y wool i n the ijest?
It is a question that has sot t o be answered, a n d t o m y
mind that i s now the very immediate and very acute and
in 4 very real sense the problem o f credit control i n
the United States a t the present time.
W
e can sice-
step our responsibility i n the metter; w e can say we
have nothing t o d o with that; w e c a n deny that r e have
the informetion, u n d truthfully deny it, but the certain
foct i s that what w e d o o r what w e d o not d o exercises
a tremenduously important influence, a n d that w e may
say exercises,
have, a
at a
time o f b u s i n e s s t e n s i o n s u c h a s H e
tremendous influence. I
think a t the moment,
and I feel i t more stronziy after certain thinss t h a t
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Federal Reserve Bank of St. Louis
185
have b e o n ssic here this afternoon--and I
but sonse &
cennot h e l p
certain amount o f suppressed e n
this afternoon--thet v e have c o t t o a point
ness sentiment a n c state o f mind i s « part o f the conaition that constitutes o u r credit »roblem e t this
ent m o m e n t .
It i s a n old sayine that t h e anerican public, u s
< speculation, b u y s o n a visin: market a n d
not o n a fallin, market. b
i g the exceptional m a n
who H&s sot the wisdom and courese t o mo i n and buy
on
a fullin: merket;
ot t h e resources,
L
s a l s o t h e exceptional m a n *‘ho has
a s a rule, t o buy o n a fallins merket.
is imprucent, m a y b e a
Others,
e n a i n tines w h e n s t o c k s
little b i t more g o than
o r Gnyrthin: e l s e a x e
Falling, h i s spirits e r e falling a n d his reluctance t o
maze loans, except o n assured security, increases.
history o f 6 1 1 periods
T h e
o f liguidation followin: shatter-
“fter t h e Givil
a r i n owr o w n coun-
try a n a i t vas strikinzly illustreted a t the close o f the
Napoleonic wars--is invariably «
period o f speculition;
you cannot s e t s ’ a y from it; speculétion was vife i n ”
this country f r o m 1865 o n until t h e great collapse o f
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Federal Reserve Bank of St. Louis
1875, a n d o n e o f the most striking thinzs brought o u t
in the great census o f 1870 was the great increuse i n
the number o f speculative business traders i n tiis
country. « a n d why? B e c a u s e e n y business,
n o matter
what i t is, whether i t i s groving wool o r cotton o r
prunes, w h e t h e r
i t i s manufacturing shoes
o r cloth,
is
attended with hazards far beyond what i s true uncer
orcinary conditions.
a n d whet i s i t that makes t h e haz-
The Gread spectre t h a t r o u may n o t b e able t o sell
your comioditr, vhether i t is a
s t a p l e or
miether a finished manufactured product,
a t ea price suf-
ficient t o reimburse y o u for your expense o f production,
leaving a sufficient marvin o f profit t o make your enter-
prise solvent and satisfactory.
T h e r e i s n o ‘iuestion i n
my mind b u t thet v e are going t o have severel years
where there a r e goins t o b e tremendous inducements f o r
the m a n ‘tho has a speculative imaginution and foresight
and the courage t o back nis judgement, t o g o i n and imake
tremendous killings, whether i t is i n the comaodities
maricet o r whetner i t i s i n the securities market.
”
T
my mind, ilre liorss, t h e feeling o f uncertainty u s t o
o
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Federal Reserve Bank of St. Louis
what p r i c e s e r e s o i n n t o be, Speaitine
more particularly
oF your Gistrict,
o f next suiuser o r Spring shoes,
or
muslins, c e l i c o e s a n d G i n s h a m s t h a t h a v e
3 o t t o b e vro-
anc sold t o the consumer next Suamier, i s the
thing
Sives & eertain pause t o business.
&ll business,
Eee *;
“
T t i s true o f
b u t i t i s t r u e o f stiericen b u s i n e s s
e Sense,
i n a
a s that business prosvers o n l y i n
an atmos»vhere o f hope a n d expectation o f vrofit
a n d goin,
ena t h e h e s i t a t i o n t h o t v e n o v i c e a t
t h e yrresent time,
thet h a s b e e n -iven C x p r e s s 1
0
n here, t o m y mind i s
mainly d u e t o the fact that there i s 6
connection, d i r ferently s t a t e d b y d i f f e r e n t i n c i v i d u e l s ,
a n d scrhavs
“Mich cannot b e stated nith s clentigfic accuracy
b y anybody, b u t u n upoveciztion o f the connection
p u r e e what
we .co-
i n w h e Federal ueserve S y s t e
monuficturer,
o r e s e mrover o f 4
a n d w h e t IT, 3 8 a
staple, v i l l ultimately
fine. the condition f o r m y orocuet o r m y crop t o be.
contlusion I
The
crew fron thet e s resurds t h e courge o f the
present ciscussion i s that I
yacuum o f xno ‘ledge--if I
eagse-=-to
b e yilled.
se)
think there i s still ea
may speak o f a vacuum o f knowl.
T h e r e i s a vecuua thet recuires
filling b y a better statement o f the condition o f nind
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Federal Reserve Bank of St. Louis
188
in tne respective business communities t h e t a r e repre=sented b y these seserve banks, w i t h 4 view o f deternining
whether
o r not w e a r e comins
to f a c e i t h a
i n the near future f a c e
c o n d i t i o n vihere i n d u s t r y m a y halt, w h e r e
enterprise may linger because o f the threat o f falling
prices.
Une thins I thinic can be said vith absolute assurance a s a fair statement
o
f the attituce o f the American
peopdle o n t h e q u e s t i o n o f c u r r e n c y a n d c r e d i t
to fellin: orices,
a s related
i s that t h e american public ‘111
never stand contraction i f i t knows w h a t i s soing on,
because i t has grasped i n recent months, e s i n years
lon: s o n e b y , a
éonndction b e t v e a n contraction o f credit
and currency and falling prices a n d regards that a s ultimately eventuatins i n an injuey t o business e n d industrial
stranculution.
d y o n viet i s that t h e keserve S7sten
has c o m e i n t o c l o s e c o n t a c t v i t h t h e m o s t d i f f i c u l t s i t u ation t h e t a n y s y s t e m o f K e s e r v e L a n k i n s h a s e v e r h u d t o
wind, “bot v e d o wisely, what “ e omit unOP N E G 6 . C 6 un-isely,
i S -Hoin t o b e o F ort=
founc c o n s e q u e n c e t h e f u t u r e c o u r s e
o f incustry
i n this
country a n d i s soinz t o heve social reverberations f a r
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Federal Reserve Bank of St. Louis
beyond what a n y o f u s a t this oresent motent c a n anticipatee
The thins that looms up-to m e a s o n e o f the most s e rious f a c t o r s
i n c o n n e c t i o n v i t h t h e i n e v i t a b l e Lliduide-
tion following t h e var, v i t h woich I
thoroushly srmpa-
thize, a n d belisve i t i s a necessity a n d believe o n the
whole i t maxes f o r e more wholesome condition, provided
it i s n o t p u s h e d t o o fast, p r o v i d e d
far, p r o v i d e d
i t does n o t z o t o o
i t does n o t a d d u n n e c e s a r i l y
t o the many
disturbins, unsettlin: factors t h a t a r e oresent i n
the situction a n d “ihich n o one c a n eliminate o r control,
is thit + e may s o s o fast a n d s o far a s t o precipitate
a wave o f insolvency throuvh this country that will wi
out thousands a n d tens o f thousancs o f business e n t e r
oroducers «sho are already oretty close t o the crargh
annot escane t h e fact t h e t undcerlyiny a l l theories
recajuatuents t h e r e i s & question o f the relationship
debtor a n c getation
f
h
e lest f e v yeers o f rise
prices a n é t h e steady depreciation o f the value o f
money h u s been a “reet tins f o r t h e debtor; a n d the most
arcent oroponents o f “hat i s called deflation a t the
present time a r e obviously those t h o have bsoen squeezed
L9O
7
& AG
s t u n g
b y this process, w h o a r e holding obliceutions
against corporations t h e market value
o f which i s cone
sicerably d e p r e c i a t e d a n d t a e b o r r o w i n e
value o f which
is very materially depreciated.
I t i g anevitable,
that t h e creditor, Darticulerly t h e strong
creditor, i s looking with a certain cala upon
rhet i s
aheud.
Deflation
i s n o t g o i n g t o hurt him; l i g u i d c t i o n
is not going t o hurt him; i t seuns a
quick restoration
of the economic value o f the dollar a n d a quick restoration, w h e n the first catechisiie effect o f
the melee i s
over, o f the value o f his securities.
LIam inclined t o think, therefore, t h e t vhile
I
am
in thoroush agreement w i t h t h e proposition that
hes b e e n
voiced here from time t o time, t h a t woe d o not a n t
to
invite a n y responsibility t h a t i s n o t ours i n the atti-
tuce W e are assudine o r the banks thet « e are administerings w h i l e w e d o not want t o take any efYirmative attitude o f responsibility f o r this wovement o f OPices,
nevertheless ‘ 6 have jot t o take a squint a t the effect
of our credit »oolicies o n »orices, even though w e d o it
ith s u c h skill thet i t i s not observed b y anybody o n the
outside.
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Federal Reserve Bank of St. Louis
L
I have r e l u c t a n t l y a n d v e r y slowly, b e c a u s e
it
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Federal Reserve Bank of St. Louis
s0es agiinst a l l o f m y personal
instincts a n d a l l o f
Li
my economic principles o f trading, c o m e t o the conclusion
that o n e o f t h e n e c e s s a r y a n d p e r h a p s o n e o f t h e m o s t 5
woolesome functions o f the Federal Reserve System,
in
ay 1921, o r & consicerable p a r t o f the year 1921,--~I hope i t will b e & very brief period,~-will b e t o moderate t h e d e s c e n t
o f orices;
w e d o n o t want t h a t process
to come u o throush a Federal Heserve Bank, a n d when I
say thet I
do not mean inability t o get currency o r
crecit throuzh t h e bani, b u t I mean a condition o f hysteria i n the business m i n d o f the country that seriously
chee:ts t h e itovement o f industry.
T o m y mind, t h e riost
important thing i s thut t h e wheele o f industry should b e
kept turning and that i t ought t o be our constant study,
as skilfull operators o f the business credit o f t h e
country, t o find out tae minimum o f credit that will d o
the j o b e
f
o n g mind,
and I
a m searchin:
it i s & problem o f cemree, a n d I
f o r lisht,
think t h e elements o f
tire o r o b l e m h a v e b e e n p r e t t y v e l l b r o u c h t o u t i n this
discussion this afternoon.
A L t h rerarc t o apoliving
a policy s o a s t o s e t t h e results wanted,--and I
thin‘:
this h a s been said here casually three o r four times--~
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Federal Reserve Bank of St. Louis
Lge
it would b e well after t h e adjournment o f
this Confer-
ence, i f not within the next fer Weeks , ~ ~ b o ~ m a l t s . . a :
"ode
considered statement that will relieve the communities
in practically every section o f the country f r o m the
state o f anxiety, t h e mental anxiety, w h i c h t h e y a r e i n
at the present time, o s t o what more o r further t h e Federal keserve System m a z do.
#
6 isnow that v e have tre-
mencous povers; we'icnow, f r o m shat v e have acconplished
in the last four o r five months, t h a t v e have tremendous
influence, Besides t h e povers that w e can exercise under
the Federsl ieserve Stutute, t h e public oaseribes t o us
povers both for good, as they view good, ond for evil, as
they view evil, f a r beyond what v e know that w e ourselves
possess.
d e n I use m y imazination and carry myself
bock t o California a n d o u t myself i n the attitude o f a
farmer o r of & merchant who i s operatine upon pretty:
sill capital, a n d who, during the past three o r four
years o f daily flying prices, h a s been led t o think that
under the disposition o f the Hederal Reserve System
eredit i s alvays soins t o flow into industry like a n
everlusting shower, a n d that a l l h e had t o d o ras t o
buy i n the confidence thet h e vould sell « t a suffi-
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Federal Reserve Bank of St. Louis
493
ciently hisher price t o reap a big profit, a n e
then h e
sees what h a s been soing o n i n the last t h r e e .
r
o four
months,--and l e t m e s a y thet I
heartily approve o f
vhat has b e e n going o n and keenly regret that
i t was
not done a yeer sooner,--but i n Spite o f that
I should
be guessing a s t o just what these m e n beck i n
ja
ington e r e soins t o d o next, a n d even thouch
I
did not
question their intenrity a n d the complete
patriotism
of their motives i n the sdministration o f
their Functions,
I think £ should b e frequently l e f t
i n doubt a s t o
woether t h e y h a d all the information t h e y
needed t o
nave, a n d above a l l that t h e y h a d all the information
that m y s e l f a n d m e n l i k e m e h a d t o property,
~isely and
judicially administer t h e credit that exists a n d
the
credit that i s i n the power o f the Federal heserve
Board t o create.
I i think, therefore, t h e t i t i s nec-
essary f o r every o n e o f u s from time t o time
t o set
out o f his shell a s a Federal Keserve authority
a n d see
this thins directly f r o m the view point o f the m a n
who
is the ultimate user o f credit.
I o a o not mean b y that
to get i m p r e s s i o
n
s merely f r o m member banks, b u t t o set
thoroughly i n f o r m e d u p o n b o t h w h a t i s
the state o f the
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Federal Reserve Bank of St. Louis
industries i n your districts, what i s the
state o f the
expectations
sellers,
o n t h e p a r t o f t h e pvroducers, talkers a n d
a n d t o what extent a r e t h o s e eexpectations
reesonably .ell founded, a n d what should w e ao, a S we
stated i n our annuel report a
year &50,--I a m speaking
for the Board now--to make a healthy condition o f
mind,
ag. w e stated i n our report i t was our intention t o
do.
I do not state that a s a conclusion; T
raise i t a s
& question, because I have been inured here i n dashingston
now for sixty days a n d have n o t been i n the United
States
of america, necessérily, f o r sixty deys, certainly
not
in those parts o f the country vhere active operations
with r e g a r d t o Credit,
t h e makins
o f crops, a n é t h e m o v i n g
of the production o f other commodities are soing on. T
am quostionin:
a s t o what extent there i s Ceveloping a
state o f mind that may be distinctly infirious t o the resuaption o f industry i n the future, a n d i n saying that
let ime sey Once More thet I
grew u p i n @ school o f fie
nance where 1otletion~-or l e t m e use t h e softer t e r m that
carries w i t h i t less sussestion o f impeachment, a n d which
is i n use i n bankins circles, t h e t o f “ e x p a n s i o n ”I= v a g
brought u p i n & school o f finunce where expaasion i s prettr
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Federal Reserve Bank of St. Louis
195
ne&rly t h e ultimate w o r d i n bad Finance; b u t
I also
realize f r o m iny s t u d y o f P i n a n c i a l
history that when
Once y o u have &
condition o f inflation, s u c h a s w e have
in the United States today, vhere t h e poison,
use t h a t t e m ,
i f I may
h a s s o n e i n t o t h e w h o l e b o d y economic,
it i s a n outromely difficult thins t o met back
t o 6 condition o f whet i s called sound credit a n d sound business.
I recull a t this moment a letter that I r eceived
two years a c o f r o m a British friend o n the subject
of
inflation.
d
e said h e h a d recently s e e n tir. k . H e
noted.
Ingliss-Palerave, perhaps t h e most/bankine authority
in
ungland durins t h e last century, a n d h e said that PalGrave w a s solns o v e r some o f his early experiences;
thet
he gre! u p a s @ young banker i n London i n the period
follovins t h e close o f the Napoleonic wars, t h a t
he
therefore b i n e d ,
a s h e said, through &
psriod o f defla-
tion» T v o years a z o m y friend said t h a t Hr, Palsrave
wes ninesy-tuo years old, i n o o d h e a l t h a n d hearty spirits, b u t h e seid w h e n h e remembered t h e horrors o F the
deflation period i n which h e sot his first bankincs experience
i n uncland,
h e f u c e d death, w h i c h i n a n y e v e n t
was certain, w i t h greater equanimity a n d greater r e a d
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iness than otherrise h e vould have.
Mr. dardy.
i r , Cosirman a n d sentlemen, I
$0in;; t o very brief. T
want t o s a y that I
am
a m very much
in sympathy with t h e views expressed b y Governor
Norris
and sir. Perrin and Mr. Miller a s t o the question
o f ren
discounts a o n ; vederal Reserve B a n s .
£ simply want t o gav this v o r d with resard t o the
policy o f t h e Aichaond Benix.
T h e Mederal Reserve Banks
whieh have adopted the progressive rates have adopted
those rates o n l y s o far a s commercial Giscounts a r e con~
cerned, apoarentir n o t applying t h e m t o loans
United States scourities, and I infer--althouch I may
be Somevhat i n error i n this--have not included loens
against soverninent securities a s a part of the re-discount
dine o f & bank.
N O w that seems t o me t o come prettr
nearly t o the emasculution o r procressive rates.
w
e
nave made a uniform rate o f 6 per cent and anplied i t t o
lofns «sainst government securities a s well as against
commercial puper, a n d have incluGed the line o f loens
against sovernmment
paper a n d have included t h e line o f
2
Geinst sovermient paper as a a r t o f /the line o f
eee
in f i s u r i n g t h i s a l l o t m e n t
o f credit
x e Clured
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Federal Reserve Bank of St. Louis
this percentage o f loans, a n d a s o u r loans against sovernment securities w e r e large, i t has rently been t o m y mind
A
& more drastic anvlication o f the rate question,
s o far
as o u r district i s concerned, t h a n the application o f the
procressive rates h a s been i n sonte o f the other districts.
I want t o add that I
a m very much i n sympathy with
what Doctor t i l l e r has said regardingive) the thought
+
wag i n his mind,--I think i t is what w e are all feeling
for, a n d t h a t i s I
think w e h a v e l e a r n e d m o r e o f t h e F e d -
eral Heserve System, i t s possibilities a n d its limitations,
in the lest f e w years t h a n w e would have learned i n t e n t y
five years under ordinary conditions. I
think i t i s os-
sential i f possible t o let the public know that “ e are
not restrictins credits a n y further t h a n they have already
beon restricted.
T h e deflation,
s o t o speak, o f prices i s
the result o f the l a w o f supoly a n d demand more t h a n any-
thing else, b u t < t the same time i t is associated i n the
public m i n d with this i d e a o f deflation o f credit,
a s they
call it, wnich h a s n o t taken place because credits h a v e o x panded,
and I
think i f i t w a s p o s s i b l e f o r u s t o s e y s o n e -
thing c o n s e r v a t i v e e l o n g t h a t l i n e t h a t i t w o u l d h e l p t h e
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Federal Reserve Bank of St. Louis
198
situation very much. £
do not mean t o underestimate
the seriousness o f present conditions, b u t I cannot
help f e e l i n g t h e t w i t h t h e p r o d u c t i o n o f crops w h i c h
we h a v e b e f o r e u s , w h i c h r e p r e s e n t
a n enormous i n c r e a s e
of values, a n d which, a s they a r e moved, a r e bound t o
represent e
¢ortain amount o f liquidation r e Basing
credits f o r transfer t o the manufacturer,--yet w e cannot expect ultimate liquidation until t h e crops a r e con-
Sunled=~T cannot help feelins that i f the »resent volume
of credit i s maintained,
i f w e d o not s e t into e state
fod
of w e n t e l panic, w o e o u g h t t o b e a b l e t o f i n a l l y r e s c h a
gradual condition of licuidation, @ »vrocess of liquidation whieh ought t o relieve t h e situation u n d carry
it throush this period without a n y v e r y serious results.
lily. uertine I
would l i k e t o correct a n idee that
Wr. darcy, a n d doubtless others have,
i n regard t o the
exemption o f xX ‘maient bonds. Theoretically w e ~ould
like t o have t h e aro -resive rate applied t o all o f t h e
averr u n v i s e t h i n g ,
we “ore arransine f o r a chunge o f rates,
thins.
t
a t the time
t o d o that
b may b e that leter r e c a n include t a e sovern-
ment borrowings within the limits o f the orocresive
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Federal Reserve Bank of St. Louis
We heve done it.
ipe tlartin.
the idea I
w e vent a s f u r a g w e could; t h a t i s
wanted y o u t o set, nr. Hardy.
O n sovernnent
bonds t h a t were owned b y the offering banks
panisd b y certificates Showing thet they
were owned b y
the offering banks p r i o r t o april 20, 1920, those
bonds
were e x e m p t e d f i o m t h e b a s e l i n e ,
4 1 1 other Durvoses
iter april 20th were included i n m a i n e t h e i r
base
lines.
Governor Norris.
w h y d o y o u discriminute
i n favor
of a bank that owns bonds a s against a n individual
tho
orms bonds?
Mir. wiartine T h e banks i n our district, Governor
Norris, s o m e o f them really went t o a n Lnordinate
desree i n their purchases o f tovernment bonds.
Governor vorris. Individuals d i d that too, d i d ther
My. martin.
T h e t i s trus, b u t t h e indivicual h a s a
greater means o f distribution;
between d i f f e r e n t b a n k s .
was really,
h e c a n distribute h i s
T h e b a n k t h a t o - n e d t h e bonds
i n our judenent, v e r y much héndicapoed, and,
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Federal Reserve Bank of St. Louis
leading u p t o the possibility o f ine Ludins t h e
bonds
some d a y i n the prosressive line, w e took this
Step,
drawing t h e dead-line a t april 20th, 1920.
T h e rate,-
of course w e did not increase f o r t h e same
reason that
we did n o t include a l l bonds
i
n the base line.
#@ a p y eclate, a s all o f you gentlemen do,
t h e difficul-
ties thut war finencins interjected into the situsetion.
dr. Hardy. I
do not, o f course, mean t o express
an opinion a s t o vhat the $t. Louis Bank should have done.
They were o: course zoverned b y their own judgment
in
the matter, b u t I
think that t h e policy, f r o m m y voint
of view, 4 8 exoressed b y the policy w e have adopted
in
the Kichitond Bank, hes largely emasculeted the effect of
the increased rates b y the very exemptions which you
granted.
Governor Sezy. D o n ' t that make the everace rate
above 7 per cent?
My. iicrtbine W o . T h e r e rere eighty-one banks out
of one hundred and thirty three that vere subject t o
thet progressive rate, and the remainder, fifty-two
banks, t n o s e banks owned bonds.
wp. dardy.
# 7 6 applied t h e rate a n d did n o t make
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Federal Reserve Bank of St. Louis
any exeniptions-Mr. Hartin. T h e o r e t i c a l l y w e would like t o have
gone thet.
O u r Board discussed t h a t particular
of i t very inuch.
a
w
zhase
e d i a not g o into i t blind, b u t
before t h e rate was established i t vas calculated both
ways; “ e took exaroles o f o u r banks a n d o u r Board finally c a m e t o t h e c o n c l u s i o n
t o p u t those. provressive
rates o n any other basis t h a n the o n e w e put them i n
on mizht b e @ very dangerous thine t o some o f the b a n s
perticularly. I
have i n mind t h e tobacco district
vith regard t o that a s being & district where i t might
be dangerous f r o m a psycholorical standpoint a s much a g
from anytnin: else.
GOVErNOY W O F S S e p o e s Dr. Hillier *
hing i n reply t o the question h e
Ure Hillier. 2 6 g , (orernor tiorss, T
Governor .iorsse
O f course, t h e r e i s a
the marketing o f all comnodities.
Scars
i n
I f r o u o v n something
vou d o not know what y o u are goine t o sell i t for, a n d o f
course t h e r e i s &
scare; t h a t i s psycholozical,
n o
Goubt e w i e t h e r anythin a)
2 could b e said thet would help
z
the c o n d i t i o n i s always c
question.
T h e r e misnat
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Federal Reserve Bank of St. Louis
2028
thing said possibly. I
think that is indicated by people
aslsing u s i f v e w o u l d n o t a s k t h e B o a r d t o s a y s o n e t h i n g
thet would help to change this psychological condition.
But t h e fundamental trouble i n the decline o f commnodities i s the real trouble.
I
n the first place 1 % look-
ed as i f there might have been a n over-production o f
goods « T h e r e isn't a raw material t o d a y that i s not
affected
b y world-wide conditions--wool,
leather.
F o r instance, take the wool Guestion,
cotton end
T h e
british government owns threes million beles o f ‘ool and
they d o not irnoy h o w t o gell it; there i s a bir crop i n
australia coming a n d another o n e coming alons i n the
Argentine.
N
o one c a n s a y that i s going t o b e t h e
price o f wool. I
two saustralians.
lunched not @ great while aso with
O n e o f them was t h e Finance i:inister
of the Commomrealth o f ,ustralia a n d the other vas a
sheep grovrer. B o t h h a d come f r o m London.
T h e sheep
geo'er said there was soing t o be lover prices for
rool, t h a t i t i s utterly impossible f o r the finances
of the world t o carry rool o t the present prices;
aot t o f o down.
‘ f i n d you,
h e was a
a large
5 c l i p probably coming on.
£
i t has
sheep srover w i t h
T h e seme thing c a n
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Federal Reserve Bank of St. Louis
203
be said o f cotton a n d t o 2 certain extent o f wheat.
Gase, I
Mr.
thinki
t was, t o l d m e over t h e telephone t h a t
the d a y the price o f wheat dropped i n Chicago t h e embergo o n the shipment o f wheat f r o m India w a s talcen
that i s the condition y o u have.
J h a t can
we d O hear t o save t h e market f r o m goins t o o low? T h e
reserve o f credit which c a n b e loaned will n o doubt
make i t possible i n the case of ‘adwantelof prices, but
how a&re y o u soins t o control a decline i n prices i s a
very intuch more difficult question.
br. tliller.
ical man.
L e t m e a s k y o u this q u e s t i o n a s a
pract-
C a n there b e any Orderly liquidetion--of
course that phrase h a s b e e n used a great deal i n discussion today--unless y o u provide credit t o the buyer
vho has t o liquidate f o r the seller?
Governor jiorsse N o , b u t - -
Dr. tillers
Y o u cannot have a n orderly licuida-
Governor i:orss.
T I know, but then the Pederal He-
serve banks a r e n o t proposine t o shut o f f credit. I
do
not know o f a beni that would d o that. <sihen I left home
I gave i n s t r u c t i o n s , b e c a u s e
w e d i d n o t ltnow w h e t ‘airht
happen
i n the n e x t f e u “eexs, t h a t i f
any one came into
tine bans a n d
' ° s a l d they ought t o have CPA0lt,
give i t t o them.
nave it.
e e e
7 6 would n o t s a y that t h e y should
not
t h a t would smash everytoing t o pieces.
hand, I
ts
O n
a m not a t a l l sure b y putting d o w n
the rates a n d saying credit i s easy, t h a t
y o u could main-
tain prices, o r if you did raise them for a while, that
it would last, because o f these very world-wide
conditions.
B u t i f you are a manufacturer o r a merchant and
prices commence t o G O down and down a n d down,
why, y o u
get Scored. j h a t are the manufacturers faced with today,
the cotton msnufacturers a n d wool inanufecturers? T h e y
cannot buy cotton und wool at the socalled market prices
today, t a e lowest vrices t h a t a r e guoted, a n d manufacture
those goods a t o cost that will allow t h e m t o sell them
at a price a t which the 3000s a r e beine sold i n the markot
if y o u a r e a
real condition t o you.
manufacturer,
that i s a
pretty
“ o u d o not really know h e t y o u
can c o o r w h a t y o u o u r h t t o do.
T h e t i s n o t theory,
it is a condition : h i h y o u must face.
but
X o u have t o
manufucture goods a t the lowest price a t whieh y o u c a n
buy your r a w material, a n d that costs y o u more t h a n the
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price a t which y o u can sell the foods.
Dr. ililler. I
thims thet i s uncoubtedly true.
The
question t o n y mind i s a n attempt t o approximate t h e extent t o w h i c h t h e c r e d i t s i t u a t i o n
Or, U O Hus i t constructively,
i s responsible f o r it;
t o thet extent a
modifica-
on o f our credit osolicy, o r anythinne thet ~ e c a n d o b y
vay o f influencing t h e situation, t i l l correct it.
Governor iorss. I
think y o u have expressed i t i n
sayin: the policy o f siving out the cheap money © year
ago o r more nade the rise i n prices possible.
I t aight
not huve stopped it, b u t i t might have stonped i t from
goins quite s o highe
B u t I
a m trying t o make u p iny
mind uhsther there i s a n y policy thet c a n b e adopted b y
the bederal Reserve Banks t h a t will prevent prices soing
downe
I f you restrict your loans severely y o u i l l drive
pricoglown, n o doubt. T h e r e i s n o use t o increase your
loans, n o use t o tell people thet there i s plenty o f
credit b y reducins t h e rate--I don't k n o w whet y o u c a n
do about it.
Governor Seat.
a h a t i s t h e chief element
cost o f production?
Governor horsss
I n what kind o f goods?
i n the
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Federal Reserve Bank of St. Louis
206
Governor Seay. w h a t LT am getting at is, what is it
thet p
r e v ee manufacturer
nh t #s
from being able t o pro-
duce h i s goods a n d sell them o n the market a t the prices
prevailing today--is i t the labor?
Governor hkorss.
I t i s producing cost--
Governor Seaye T h e labor?
Governor liorss. L a b o r i s very high. T h e n , for instance, t a k e t h e i t e m o f coal, which i s 1 5 - 0 0 a
ton in-
stead o f :4.00 o r 5.00; b u t t h e bir thing,
n o doubt, i s
the labor.
o f course y o u
‘ n e n y o u c a n reduce t h e labor,
can begin over anuin.
(After a little informal d i s c u s s i o n , t h e Joint
Gonference adjourned,
October 15, 1920.)
a t 6:00 o'clock P M , u n t i l Peidey
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