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PROCEEDINGS
O F A
GOVERNORS
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
CONFERENCE
WITH T H E FEDERAL RESERVE
A N D CHAIRMEN
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 13, 15 & 16, 1920,
ASSOCIATED S H O R T H A N D R E P O R T E R S
SUITE
426
18-23
APPEALS
FIFTH
BUILDING
STREET,
WASHINGTON,
N.W.
0 . ¢,
BOARD
AGENTS
OF
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Federal Reserve Bank of St. Louis
SECOND DAY.
Washington, D . C.,
Friday, October 15, 1920.
11230 o'clock A. M.
The Joint Conference o f Federal Reserve Agents a n d
Federal Reserve B a n k Governors w i t h the Federal Reserve
Board resumed its session at 11:30 o'clock A. M., Gove
ernor W . P . G. Herding o f the Federal Reserve Board
presiding.
Appeerances a s heretofore noted.
Governor Harding.
T h e next o n the reguler order
of the topics i s "Loans Secured b y Liberty Bonds and
Victory Notes." U n d e r this topic there ere Sections
1, 2, 3 , 4
and 5 , a n d t h e first 1 s a paper b y Governor
Wellborn o f Atlante.
Governor Wellborn.
M r . Chairman a n d gentlemen,
the first question for discussion - "Is there a n y moral
obligation resting u p o n e n y o f the Federal Reserve Banks
to establish rates lower than commercial rates f o r paper
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Federal Reserve Bank of St. Louis
or this classification?"
I believe t i a t there i s
:
ue
d
i
s
t
i
on t h e p e r t o f F e d e r a l h e s e r v e b a n k s
n
c
t
moral ovligation
t o carry f o r member
banks Liberty a n d Victory Bonds thet v e r e subscribed f o r
/
by such member b a n tlea
dOD u r i n g t h e campaien,
ele
a s these bonds
were taken by the member banks tim4y-Hich pros
essurse
CLUS
From
the F e d e r a l N e s e r v e Banit o f A t l a n t a a n d G o v e r n m e n t a r s
Picials i n order that their varticular comunity micht
Posch. 2 b s -Guope.
These bonds t h e t vere actuelly subserit
meabor banks snould b e carried b y the Federal ieserve
ben:
ad
r o e era
usonéble a
discount rate a s possible.
T h e
rate snould b e one guurter o r one half above t h e rate o f
t
t o p r e vne n t s p io c u l
t h e t s t h e b oen d s b era r i n co r d e r t
Lion, b u t f
a~
e)
believe t h e aresent rates o n this c l bass
of
paper t o b e &
Gistinet burden o n the member banks, inas-
M U G 14 a g t h e J a r k e t v a l u e s
o f t h e bonds a r e a t present
then our, yhich represents t o the member
& potential loss, while not a n actuul loss. ‘ T h e
subscribing; banks e r e unable t o sell t h e bonds without
sustcinin:; a n cctuel loss, a n d beins forced t o hold
are severely penadlizec b y the present oich rates o f
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Federal Reserve Bank of St. Louis
interest.
The reasons z i v e n above apply only t o member banks!
direct notes secured b r bonds actually owned b y then.
In the case o f customers’ notes secured v y bonds, I
not t h i n k t h a t t h e s a m e m o r a l o b l i g i t i o n s a p p l y ,
purchasers
do
a s the
o f these bonds h a v e h a d a n Opportunity
during
term o f years
t o liguidete t h e i r i n e
Cebtedness secured b y Government bonds o u t o f their
brorits a n d savines.
Opportunity,
a s t
t h e banks heave n o t h a d this
b o n d s w e r e n o t purchased
b y them
as é n investment i n the first instunce, b u t were
vurchased with the intention o f passing t h e m o n t o a n
ultimate investor, e a d o n cecount o f the shrinkage i n
the market, t h e y have h a d n o opportunity t o 228s
to investors except a t a loss. i l o r e o v e r , t n e banks
in o u r d i s t r i c t h a v e b e e n c a l l e d U p o n t O e x t e n d u n u s u a l
credits f o> r c o m n e r c i e l a n d procucin:, purposes
a n d there-
Lore “Gre unable t o AIquidate loans a n d absorb t h e bonds.
Demand deposits i n banks, theoretically, s h o u l d never
be invested i n lon;; term Government securities o r other
Securities, c n d t h e investments m a d e b y member banks
in Government bonds mere f o r purely patriotic motives,
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Federal Reserve Bank of St. Louis
with1 n o antention o r thousht o f retainin« t h e m a: perma nent investments.
The i n d u s t r i a l p u r c h a s e r
o f G o v e r n m e n t bonds, h o w -
ever, i s a n investor, a n d h e should b e required t o pay
,0r h i s i n v e s t m e n t o u t o f h i s o r o f i t s
o r savines e n d v e -
tire n i s oblisetions a t the banks. ‘Therefore, I
tnat t h e r a t e s
o f customers!
believe
n o t e s secured b r Liberty
Gonds should remein eat a hich level, a n d such rate should
be the same o s t h e prevailing commercial paper rates.
Second question - "ould liquidation o f leans o f this
Glass b e returded o r promoted
lower rates?"
fn t h e c a s e o f m e m b e r b a n k d i r e c t n o t e s s e c u r e d b y
boncs actuslly owned, I don't think that liquidation o f
such loan ould b e i n uny wey affected b y hisher o r lover
rates, a s member banks u s e their Liberty Bonds f o r borrowing Durposes, principally because i t i s a simpler operation than rediscountins c o m e r c i a l paper.
in t h e c é s e o f customers!
notes secured
fam inclined t o believe thet a
b y Liberty
lover rate vould
juidation o f such l o a n a n d a hifher rate vould
promotes t h e ligquidetion.
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Federal Reserve Bank of St. Louis
Third question - "If tover retes are deemed desirable, vould i t b e equitable a n d practicable t o heve s u c h
rates apply t o oricinal subscribers only?!
The lower rate should apply t o member banks!’ direct
notes o n l y w h e n b o n d s s e c u r i n s s u c h n o t e s w e r e a c t u a l l y
owned b y the disec ountins banit p r i
t o April 3 , 1920,
Ttdo not think i t would b e practicable t o attempt t o
discriminate between bonds orisinally subscribed f o r a n d
other bonds securins customers’ notes.
I t would b e a aif-
ficult problem t o secure certificates a s t o ownership o f
these bonds,
a s i t would cause a
great deal o f confusion
and a o particular a i m would b e attained,as t h e Ladivicual
investor s h o u l d b e f o r c e d t o p a y f o r h i s b o n d s w h e t h e r
they represent original subscription o r bonds l e t e r Durchased
o n t h e o p e n market.
Fourth q u e s t i o n ~
“Should m e m b e r banks! c o l l a t e r a l
notes b e fully secured, tekins market value instecda o f
face value as 4 basis?!
The s a m e m o r a l oblivsution t h e t a p o l i e s
Wuuber 1
i n tuestion
applies t o ‘jwestion Nuuber 4 , i n s o far a s
Liberty a n d Victory Bonds actually owned b y member banks,
gubscribed f o r b y them during t h e Liberty L o a n Gim-~
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Federal Reserve Bank of St. Louis
/
palgn,
a r e concerned. {
therefore b e l i e v e t h a t t h o s e
banks which hold original bonds represented b y oris inel
subscriptions should b e permitted t o borrow o n these
bonds f r o m t h e F e d e r a l K e s e r v e B a n k 7s
Hovever, c u s t o m e r s !
a t t h e i r n a r value.
n o t e s secured b y Liberty Bonds
should i n all cases b e m a r s i n e d n
o a basis o f their
market value.
Pifth question - "If so, how and when could the new
policy b e put into effect with a minimun o f friction?"
ff i t is eventually Gecided that member banks!’ col-
lateral notes shall be fully secured, tains imarket value
basis, tuis nev policy should not b e 9.ut into effect
te &
until t h e r e s e n t f i n a n c i a l s t r i n g e n c y h a s h e e n relieved,
which relief will n o t lively materialize until after
Jénuary t h e rirst;
a n d further, I
believe t h e t m e m b e r
banks should b e ziven a t least sixty days!’ notice vithin
wiich t o arrénge their effairs.
Governor Harding.seh) B e f o r e calling o n Ghairman Rich,
4
I would l i k e t o state,
i n comienting
o n One particular
phase of Governor wellborn's paper, thet Section 13 of
the Federal iieserve Bank Act, i n its oricin:
not p r o v i d e f o r a n y d i r e c t e x t e n s i o n o f c r e d i t
to a
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Federal Reserve Bank of St. Louis
member bank, b u t merely permitted Federal Reserve Banks
to reaise ount eligible commercial a n d agricultural paper
upon the indorsement o f a member bank.
I n 1916, I
be-
lieve i t was, a n amendment was imade t o Section 13, which
proviced f o r t h e discount b y a Federal Reserve b a n k o f
the d i r e c t o b l i c c t i o n s
of a
member bank, p r o v i d e d s u c h
notes running n o t longer t h e m fifteen days were secured
by notes, d r a f t s a n d b i l l s
i n themselves e l i g i b l e ,
by notes a n d bonds o f the United States.
o r
W o w , i t seems
to some o f u s here that i t i s inconsistent w
i
t e -~whele
hh t
spirit o f the ict thet any credit should b e extended b y
the Federal ceserve B a n k directly t o the member benk
upon the nenber bank's o w n vespons ibility unsupported b y
collateral. I
taxe i t t h a t t h e r e i s n o q u e s t i o n b u t
if a member bank should undertale t o have a
Federal Ke-
Herve Bank discount its note running not lonser than
fifteen days f o r »100,000, a n d secured by, say, eishty
five thousanc dollars o f Treasury Certificates, t h a t t h e
note mould b e turned down, f o r t h e reason that i t i s
not sufficiently secured, t h a t there would b e a n extengion o f fifteen thousand dollars t o the bank upon its
Sinzle name.
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Federal Reserve Bank of St. Louis
214
Mr. williams.
Y o u mean bonds; y o u said certificates
of indebtedness.
Governor Harding.
W e l l , I
mean w h a t I
gaid, M r .
Comptroller.
My. Yilliams.
w o u l d there b e 1 5 per cent then there?
Governor Harding.
A l l United States certificates
of indebtedness a r e worth par. S u p p o s e t h e bank offers
its n o t e f o r 1 0 0 , 0 0 0 s e c u r e d
b y o n l y ~85,000.
Mr. williams. Oh, I thought you said »100,000.
Governor Harding.
N o , 985,000 o f Treasury Certifi-
cates o f Indebtedness.
I
f such a n offer were made t o
& Federal HKeserve Bank, the bank woulda say *vou must put
up additional security;
w e cannot take your straight
note for »15,000." ‘ j n a t is the
taxing a n obligation o f a member bank, a
promissory note
running n o t longer t h a n fifteen days, f o r »100,000 s e cured b y »100,000 o f Liberty Bonds,
i f you knoyw that t h e
market v a l u s
i s o n l y eighty-
o f those Liberty Bonds
eight o r eighty-nine thousand?
T h e r e i s clearly a
difference o f eleven o r t e l v e thousand dollars there
unsecured, which would be given to the banix uoon its
direct obligation. I
think, though, t h i s whole question
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Federal Reserve Bank of St. Louis
215
had better b e Giscussed sfter v e hear from Gheirmmen
hich o f isinneapolis, a n d then w e c a n discuss t h e whole
question altogether.
Governor siorris.
H o w many banks a r e still acceptin
Liberty Bonds a t var?
Governor Harding. I
cannot e n s e x thet, i f any.
Suppose a l i that are hold u p their hands.
(Four G o v e r n o r s h e l d u y t h e i r hands).
Governor Hamlin. I
think i t ought t o be consider-
ed thet t h e statute, Section li-m, does recognize Lace
value a s egainst market value. I
merely throw that o u t
for t h e committee t o consider.
Governor Harding. C h a i r m a n Rich o f Minneapolis
the next paper o n this subject.
My. n i c h e
I f am suffering f r o m o
severe c o l d a n d
permission I will ask Governor Younrs t o read m y
Governor Harding. Governor Young?
(Governor Youn: thereuvon read t i e paper referred to,
which i s as follows: )
TOPIG II--LOANS SHCURED B Y L I B U T ’ BONDS A N D V I C T R Y
NOTiS «
The d e t e r m i n a t i o n
o f t h e questions presented under
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Federal Reserve Bank of St. Louis
21¢€
this headinz must b e controlled v e r y larzely b y
the de-
cision o f this body and the Federal Reserve Board upon
the first point raised, namely, whether there i s a moral
obligation r e s t i n g u p o n t h e F e d e r a l k e s e r v e B a n k s
t o es-
tablish lower rates t h e n commercial rates u p o n loans
se.
cured b y paper o f this classification.
I
t a y b e are
Sued with considerable force t h a t owing t o the method
folloved i n plucing the large volume o f covernment securities, t h e r e i s a n obligation u p o n the Federel ReServe Banks, w h i c h were t h e distributing agencies,
to
recosnize t h e fact that t h e sale o f Liberty Bonds a n d
Victory Notes w a s forced with considerebly energy, a n d
that t h e y n o t only cultivated a
disposition t o buy, b u t
used @ certain amount o f pressure i n Gisposin,; o f the allot-
ments t o the various districts during the five loans.
If tois c r e a t e s astill existing moral obligation t o recognize t h e l o w rate o f return o n sovernnent securities,
it is pertinent t o inquire why the discount rate o n
loans secured b y paper o f this classification should not
be the rate borne b y Liberty Bonds and Victory Notes
rather than a comparatively small differential from the
present high average level o f discount rates.
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Federal Reserve Bank of St. Louis
217
“It seems t o n e t h a t w e cannot recosfize a moral.
opligetion i n part only.
I f the obligation exists, a
small differential i s not a satisfactory Yecognition
or that fact. P u r c h a s e r s w h o bought f o r patriotic
reasons and from the reserve banks from which they are
now borrowing, s h o u l d n o t b e penalized t o the extent o f
the difference between Liberty Bond a n d Victory Note
rates a n d the »revailing dise ount rates o n this class
Before w e accept this v i e w i t seems wise t o recog~
nize t h e fact tuat a period o f time h a s elapsed since t h e
Victory L o a n which should b e entirely sufficient t o
enable t h o s e w h o b o u s h t L i b e r t y K o n d s a n d n o t e s o f t h e
last i s s u e t o s a v e a n d p a y up. &
year a n d a
hal? h a s
now elupsed since the last loan, a n d this »seriod will be
lengthened o u t t o nearly t v o years b y the comings spring.
the ourposes f o r which banks u s e d t h e vroceeds o f the
rediscount
o f notes s e c u r e d b y paper o f this classifica-
tion s h o u l d a l s o b e considered.
O u r experience
is
that benks d o not treat this paper differently t h a n
other elizible paper, b u t t h e proceeds enter into
eericultural, commercial and industrial operations the
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Federal Reserve Bank of St. Louis
ame &@S the proceeds o f the discount o f other slisible notes.
after recognizing these facts, i t seems feir t o
assume that there was a moral obligation resting u p o n
the Weceral xeserve Banks t o treat loans secured b y paver
of this c l a s s i f i c a t i o n w i t h c o n s i d e r a t i o n d u r i n g t h e
period when the public was saving and paying u o its purchases
o f thes g o v e r n m e n t obligations,
b u t that period
of time has been sufficient t o complete this process.
It follows that Liberty Bonds and Victory Notes have from
the standpoint o f rediscount a t the Federal Reserve Banks
prectically the same standing as any other collateral.
Tam of the opinion that a differential i s not justifiable, a n d that t h e time has come w h e n the Reserve Bante
should consider t h e establishment o f discount rates o n
notes secured b y oaper o f this classification a t the same
level @ 3 other discount rates.
In regard t o the second point raised, I
Opinion t h a t l i q u i d a t i o n o f l o a n s
am of the
o f this class w o u l d
not be promoted b y the establishment o f lover rates.
It seems o b v i o u s t h e t c o n c e s s i o n s m a d e o n L i b e r t y b o n d s
and Victory Notes would encourage bankers to increase
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Federal Reserve Bank of St. Louis
219
bne volume o f loans secured b y paper o f this
classifiC&ution r u t h e r t h a n t o r e d u c e i t .
Upon the third voint, o u r officers a r e o f the opinpracticable
t o establish a
low rate
Orisinal subscribers only, s i n c e o u r
was t o discourage investments b y banks i n Liberty
Bonds a n d t o u r g e t h e n t o p a s s t h e b o n d s
o n + 9 their
customers a n d avoid lercse holdings f o r their own account.
I
n our district there i s n o method o f S e p a
rating purchases made for the bank and the bank's purcneses f o r i t s customers.
O u r records s n o w t h e BCane-
sate subscriptions, w h i c h ineluded those o f the banir end
its customers, a n d a n y effort t o determine t h e amount
actually téken b y the bank itself would b e impracticable
because o f the larve amount o f investizution a n d inquiry
required.
The e d e r a l Reserve b a n k o f iiinneapolis h a s f o r neany
months p a s t f e l t t h a t m e m b e r b a n k s c o l l a t e r a l n o t e s s h o u l d
be f u l l y s e c u r e d a n d o u r p r a c t i c e h a s b e e n t o t a l e t h e
nearket rather t h a n the face value i n cdeterminins t h i s
point.
f
n view o f the present Liberty Bond market a n d
the considerations t o wnich I have referred, ~
do not
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Federal Reserve Bank of St. Louis
220
believe w e would b e justified i n
accepting t h e face
value a s a basis.
The above remarks a r e submitted w i t h
some additional
Considerations
i n mind.
4
@ anticipate i n the course
of the next s i x months s o m e relief
f r o u the present strain
On Credit,
a t least s o far a s o u r district i s concerned.
It may b e possible i n the Spring t o reduce t o some
extent
Our oresent hish discount rates. P a p e r secured
by
Liberty Bonds a n d Victory Wotes n o v enjoys
a n advantage
Over otner paper and takes e 6 per cent rate
a s compared
mith @ 7 per cent rate for other paper. S h o u l d i t be
possible i n the spring t o reduce the present
7 per cent
per cent, v e feel that t h e present 6
per cent
rate o n paper secured b y obligations o f this
classification should b e allowed t o stand.
T h i s would olace inen-
ber banks’ collateral notes w i t h this
security o n the
8a-.e b i g i s a s o t h e r paper.
a h e n w e esrrive a t this
point, w e have discussed a great many times the advisa-
bility of mains some chenge i n our discount rate policy.
we a r e C o n s i d e r i n s w h e t h e r
i t trould b e practLeaplse
to
have o n e rate w i t h n o differentials except
those based
On maturities.
3 8 & n example, t h e discount rate f o r
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Federal Reserve Bank of St. Louis
9-day maturities
o n a l l classes
o f paper micht b e 6
por cent, w i t h a n advantase
o f o n e quarter o f o n e p e r
cent T o r 50-day vmaturities.
T h i s would
make t h e 30-day
V
rate 5-1/2 per cent, the 69-day rate 5-3/4 per cent, and
the 90-day t o six months r a t e 6 per cent.
Now thet “ e are reaching a
time then the operetions
of the Federal Reserve Banks a r e n o longed affected b y
the moral obligation o f granting low discount rates t o
assist i n the ebsorption b y the public o f a larze voluie
of g o v e r n m e n t s e c u r i t i e s ,
i t seems
be very practical advantages
t o u s that there micht
i n establishing this simpler
and more easily understood basis f o r o u r discount rates,
and i n recognizing t h e fact that t o a very considerable
extent t h e differential i n favor o f member benks! notes
secured b y sovernment oblizutions sinply represents a n
additional profit t o the discounting bani a n d n o advantage
to the public, s i n c e t h e proceeds o f the rediscount a r e
usec i n our district f o r t h e same nurposes a s the nroceeds o f the rediscount o f a n y other eligible p a p e r which
taxes a
high rate.
Governor darding.
S e c e o t i o n l l e m r e a d s a s follots:
‘Upon the affirmative vote of not less than five of
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Federal Reserve Bank of St. Louis
222
its embers, t h e Pederal “eserve Board
shall have pover
to permit Federal keserve Banks t o discount
f o r a n y mem~
ber bank notes, drafts o r bills o f exchange
bearing t h e
Signature
o r indorsement
o f a n y o n e borrover
of the amount permitted b y Section 9
i n excess
and Section 1 3 o f
this Act, b u t i n n o case t o exceed twenty p e r
centun o f
the tember bank's capital and surplus: Provided,
hovever,
that 811 such notes, drefts,or “bills o f exchange
discounted
for any member banic i n excess o f the amount
permitted
under such sections s h a l l b e secured b y not less t h a n
a
like face amount o f bonds o r notes o f the United
States
issued since April twenty-fourth, nineteen
hundred a n d
seventeen,
o r certificates
o f indebtedness
o f the United
States: Provided further, That the provisions o f this
subsection ( m ) shall n o t b e Operative after December
thirty-first, nineteen hundred a n d
twenty. “
schedule a
06s
of the War Revenue Act, S t a n p Taxes,
O n t o says
“his subdivision shall not apply to a promissory
note secured b y the pledse o f bonds o r obligations o f
the
United States issued after april 24, 1917, o r secured
by the pledge o f a promissory note which itself i s se-
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Federal Reserve Bank of St. Louis
223
cured b y the pledge o f such bonds o r obliczations:
Pro-
vided, That i n either case the par value o f
such bonds
or obligations shall b e not less then the anount
of
such note. *
“ou will observe that i n each case t h e
vords “ n o t
less" are used, a n d i n Section 5200, where
the Comptroller i s authorized, w i t h t h e anoroval
o f the Secretary
of the Treasury, t o extend the loan, the words
"not
less" also occur--"not less than face value.!
Those words " n o t less" would indicate that
there
is some discretion.
N o w , i t i s possible t h a t some o f
these bonds m a y s o t o a premium.
I f our bonds vere
offered t o you, i s s u e d s i n c e a p r i l 2 4 ,
1917, s n d “cre
worth 105, y o u would still under this A c t
b e obliged t o
have t h e face value i n any event,
the premium,
n o matter h o y hich
a s y o u c a n take those bonds a s security
only at their face value, i f the words “not less" are
to control.
U n d e r t h e present circumstances,
how t h e question m a y b e determined, I
n o matter
thinix everybody
would b e obliged t o agree thet i t is a matter
o f discretion, t h a t y o u a r e n o t c o m p e l l e d
t o tale t h e m a t the
face value, b u t that y o u must have n o t less t h a n
face
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Federal Reserve Bank of St. Louis
value.
Mr. Hardy. ‘ i t h the permission o f the iederal ke-«
serve Board.
Governor Harding.
Wess
T h e s e topics a r e o p e n
for discussion.
ir. wills. I
would litte t o ask a question about
the moral obligations existing between t h e Fedoral KeServe Banks a n d the member banics, o n account o f the »vur-
ehese b y the member banks o f these bonds for their own
account.
I f y o u g o one step down, corporutions v e r e
burchesers o f bonds instead o f individuals, a n d were
induced b y the member banics t o buy these bonds during
the canpaizn.
I t is the same obligation existing
between t h e member bank a n d the corporation that carries
them at rates that are not losing them any money.
Governor Yellborn. I
think t h e r e i s a
differenco.
f thins the corporations a n d the individuals a n d the
firms w h o heve purchased these bonds, t h e y have h e d
Opportunity t o liguidate
i n the course
ness» T h e y d i d not have oblisations
o f their busi-
o n them t o extend
the credit like banks have had.
My. Wills.
T h e y are not savers a n d investors i n
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Federal Reserve Bank of St. Louis
225
bonds l i k e individuals.
patriotic r e a s o n s ,
T h e : bought those bonds f o r
a n d under
Governor uéllborn.
business t h e y h a v
Liquidate
OTeESSure.
But
i n the c o u
2g hoa C 0 7 5 9 o r t u n i t y
ku
ws
a n c bBa n k s
h
e a v e
nno t . , k
M o s it
3 ?
s
and t h e y h a v e h a d t o e x t e n d t h e c r e d i t
e : e
ss
O F
o £ then.
i
their
b
o
have obligations,
i n n u m b e r of
individuals a n d corporetions should u s s their
wn d i iscretion about their funds, whereas banks could not;
they hud t o 50 ahead and extend these accommodetions.
Governor dard:
Governor w e l l b o r n , +
If I unéerstood y o u correctly,
i
n your opinion a n y bank
should b e extended a
oblications, Liberts: 7] Bonds
o
Governor wellborn.
r
Victory sotes, acquired b y
Y e s sir.
Governor Hardinge W o r , t h e lest sovernment flota~
why should a
bank thet bought
an investment o n the o p e n merket b e siven a
special rate?
Governor
There i s n o oatriotica O b l i z a t i o n t h e r e s
weLllborn.
d
@ Speak o f April 1
because
bonds d i d n o t begin t o ¢ 9 down until thet time, a n d ther
vere n o t dealt i n vory much o n the market, a n d people
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Federal Reserve Bank of St. Louis
226
Gic not buy t h e f o r speculation.
w
e fust fixed that
date betause after that time bonds w e n t d o w n
a n d there
was a n incentive for banks t o buy i n the open market
in
order t o speculate i n the bonds.
Mr. Perrin.
M r . Ghairman, t h e sense i n which the
term “patriotism” i s used, I take i t to mean
the willingness t o inour a sacrifice. I
would like t o raise t h e
question o f the extent o f the sacrifice incurred where
any bank buys bonds a n d passes t h a t sacrifice o n t o the
Federal Reserve Bank, and the bank, let us assume,
by
reason o f the continuing consideration o f the Federal
heserve Bank, carries t h e obligation t o maturity and
hes
itpaid at par. Just what is the extent of the
patriotic
sacrifice?
Governor Harding. Governor Norris, wiat is your
view as t o the difference between subscriving member
banixs
and subscribing individuals and corporetions
for these
bonds?
Governor Norris,
I w a s inclined
t o asi Governor
wellborn the same question that I asked Mr.
Martin day
before yesterday, o n what ground you
can base ea discrimi~
nation i n favor o f a bank a s against a n individwl.
i
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Federal Reserve Bank of St. Louis
understand t h a t t h e resson that i s assigned i s that t h e
incividual i s supposed a t least t o have had a n opportunity t o liquidate, o u t o f profits o r othervise, which
&@benk has n o t had. W o w , a
very large proportion o f
the bonds i n our district are being carried b y tro
large reilroad corporations.
opportunity t o liquidate.
T h e y have had no vossible
A s @ metter o f fact, I
under
stand t h a t o n e o f them wanted t o liquidate a n d take i t s
loss before the termination o f the period o f movernment
gverantes, a n d was refused permission.
Tne o n l y reason that hes b e e n assisned u p t o date,
certainly t h o s e r a i l r o e d c o m p a n i e s a r e e v e n m o r e e n t i -
tled than a n y bank t o have preference i n their favor;
T do not see where y o u c a n draw t h e line.
T h e r e no
doubt e r e individuals w h o have h a d t h e opportunity t o
liquidate o r t o pay up.
T h e r e unquestionably a r e others
who have nad even less opportunity than @ good many banks,
who have been making large profits a n d declaring large
dividends.
Governor Van aandt.
I t anpears t o me that the
profits which banks almost without exception have b e e n
able t o make b y reason o f war conditions heve given then
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Federal Reserve Bank of St. Louis
228
just &@s8 much opportunity t o churse those bonds down, a n d
have h a d « very favorable opportunity t o find a maricet
anc dispose o f them, m u c h more s o than individuals o r
even Goroorations h e v e had.
Therefore,
i n m y opinion,
the bam: i s n o t a n y more entitled t o preferential considerution
o n account
o f i t s o w n e r s h i p o f bonds, e v e n
though patriotically subscribed for, t h a n hove indivieuals.
Wie. “illiams.
M r . Ghairman,
w i t h r e g a r d t o Mr.
Perrin's sugsestion that s e are passing o n the sacrifice t o the bank, I
do not quite s e e i t thet way.
The
bank i s n o t a s i i n s t h e P e d e r a l R e s e r v e B a n k t o t a k e t h e
funds off of their hands a t cost. T h e y are simply asic.
itig, i n view o f thse conditions connected i t h therorigi-~
nal purchase a n d the fact n a k t h e y a r e sufferins v e r y
heavy depreciation, t h a t t h e y should allow t h e m some consideration i n the matter o f interest, a n d the loss which
they f e u r t o f a c e i n e v i t a b l y s h o u l d n o t b e i n c r e a s e d b y
the c a r r y i n ; charges.
T h e y a r e n o t askine t h e bank t o
pay a pert of their cost at all.
Mr. Perrine M a y I make this sugcsestion i n that connection?
W O u l d n o t the bank justify i t s claim o f pa-
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Federal Reserve Bank of St. Louis
229
triotic action i f i t sacrifices t h e orofit that i t vould
maise lending a t 8 per cent, f o r instance, instesd o f ace
cepting 4-1/4, i f i t buys O n e hundred thousand dollars
of bonds a n d says ‘ v e a r e patriotic enough t o buy these
bonds a n d carry them, a n d ~ e will content ourselves w i t h
An 1/4. p e r c e n t i n t e r e s t u s o n t h a t p a r t o f o u r investment ;
thet i f we nad not bought these bonds w e vould have been
able t o lend that o n e hundred thousand dollars a t eisht
per c e n t a n d t h u s w o u l d h a v e s e c u r e d 3 - 3 / 4 p e r c e n t a d -
ditional to the 4-1/4 per cent which ve are now gettingtwith what justice could i t =o t o the Federal Keserve Bank
and say “ve therefore wish you to carry these bonds a t
4-1/4 ov. 4-3/4, o r some rate lower than the market
price,
i n order that w e might n o t suffer b y reason o f
Our o a t r i o t i c i m p u l s e ,
b u t m a y m a l e t h e s a m e prorit,
the same a s i f w e had not subscribed f o r the bonds."
I believe that while i t i s desirable f o r t h e Federal Keserve Banks t o d o everything passible t o facilitate t h e financins o f the war, everything withinirea~
sonable limit, perhaps e v e n beyond reasonable limits,
that t h e Federal Keserve B a n k m a y not justly b e called
upon t o m a k e g )
o o d the
J m i s t aUk e s
oaf fudreinent
a E
even
A T those t h o
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Federal Reserve Bank of St. Louis
Aave bousht bonds under patrlotic
impulse; t h a t esch
individusl corporation a n c bank must
within ressonable
limits fece t h e consequences
o f its o w n acts. I
be-
lieve that after eighteen months have elapsed,
the
time woen special consideration should
b e extended t o
buyers o f Liberty Bonds has sone by, and T believe that
in & Situetion o f this kind Federal Reserve
banks are
alled upon t o see that they themselves keep
their efrs i n a sound condition, a n d i t i s n o t a soung
condition,
i n m y judgment, w h e n they are lending o n e
hundred
Gollers u p o n ninety dollars o f collateral.
Governor wellborn. ifr. Gheirman, I
intended t o sar
that t h e views expressed b y m e were based
o n conditions
in iy o n district. I
do not care t o 50 further into
the matter.
Governor Harding.
G o v e r n o r i.orss, will you favor
us w i t h y o u r v i e u g ?
Governor orgs.
district t h e s a r
PaLGhs
M
e
a
d e had alreedy experienced i n our
S
k
s t h e effort
h a s b e e n expressed b y tr.
i n evert l o a n t o prevent
our bank from subscribins directly for bonds,
because we
told t h e m thet tnose bonds m u s t b e subscribed
for b y
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Federal Reserve Bank of St. Louis
incivicueals o r corporations.
O f course, e
r did not suc-
ceed entirely i n keenine o u r subscrivtions f r o m the
banks
themselves;
i n fact, a szo00q many o f them cropped up. ‘ W e
heve felt, though, t h a t t h e time h a d n o t Sone sufficiently
long t o allow t h e banits, t h e corporations o r the
individuals either t o have saved their income a n d paid
for
their bonds,
o r t o have liquidated. 4
great many people
sold their bonds o u t a t a loss, a n d took their loss, s a y s
ing thet was t h e price o f their Subscription, a n d they
were Willing t o give it.
a
e now have a condition “here
we G O give @ lower rate o n loans secured b y Liberty Bonds.
I think t h e time i s fast passing a v a y when that c a n b e
done, and that before a great while there will be n o
injustice d o n e t o raise o u r rates o n loans secured b y
Liberty Bonds t o the same ratesas n o v prevail o n notes
or c o m m e r c i a l paper.
5
My. dardy.
M r . Gheairman, Speaking f o r t h e volior
of the Richiaond bank, o u r management studiously vieved
and refrained f r o m giving their pledge
t
o the extent,
the time, o r the rate a t which t h e y vould carry sovern\
aii
ment bonds, a n d while banks w e r e urzed t o subscribe liberally,
a n d s o m e o f thoss w h o h a d n o authority
t o sive
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Federal Reserve Bank of St. Louis
Such assurances t h e y have sone bevond a
reasonable limit
in soliciting subscrivtions, t h e management h a s refrained
especially f r o m making itself responsible in.any w e y for
any such assurances, a n d ve have felt lone ago that our
moral obligation a s t o carrying t h e bonds a t a oreferen~
tial rate o r at any particular margin had expired, a n d
that the conditions existing this y e a r have brought u s
face t o face with t h e necessity f o r hanglins t h e question purely o n a business basis, a n d for thet reason w e
abolished t h e preferential rate o n Securities, figured
the volume o f those loans a s @ part o f the basic line,
and applied t h e requirement f o r a satisfactory margin o n
the bonds.
4 e @ never urged anybody t o sell their bonds,
anc replied specifically t o a n y comaunications t o that
effect that w e did not urge them t o sell their bonds.
u@ never o u t a n y pressure o n a bank o r urged them i n
any Way, o r o n individual, t o sell their bonds, but i t
Was & matter that they must decide for themselves.
Unquestionably, t h e poliey which w e felt called upon t o
pursue,
i n o r d e r t o l i m i t o u r credit,
s o thet w e coule
meet the agricultural demands o n us, probably led quite
& nuaber o f holders o f bonds t o dispose o f them.
T
h
e
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Federal Reserve Bank of St. Louis
loeses which they «ust heave sustained,
a s ir. Perrin
expressed yesterday, w a s their contribution o n the
Score o f oatriotism,s, b u t w e h a v e h a n d l e d t h e e e
strictly a s w e supposed o n @ business basis, a n d w e
felt i n doing s o v e were n o t doing a n y o n e a n injust~
I fesl & great deal o f sympathy
for t h e viers expressed b y Governor ‘Yellborn.
Yor example,
Sey,
t h e F i r s t HWational Banir o f S a v a n n a h s u b -
scribed t o ten million dollars o f Liberty bonds a t par,
and has n o t sold them, a n d i s still cerrying t h e m vith
the F e d e r a l R e s e r v e B a n k o f atlanta;
@ loss o f o million a n d a quarter,
lars.
t h a t bani: faces
o r a million dol-
I t does n o t a s k anybody i n the goverrment t o
share t h a t l o s s e
sacrifice,
I t i s perfectly willing
t o make t h a t
t o contribute t h a t million dollars, b u t i t
does say thet “ye do not think that you should add to this
loss b y exacting a n additional, say, 1-3/4 per cent
per annua,
o r 1 7 5 , 0 0 0 m o r e a year, while v e are carry-
ing these bonds." h a t »175,000 which the First Wational Bank o f Savnah wishes t o evoid incurring would
Simply b e @ reduction o f the profits o f the Federal
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Federal Reserve Bank of St. Louis
234
Reserve B a n k o f atlanta.
N o b o d y i s called u p o n t o
make good that losse T h i s money which, i f i t is cnarge~
able t o the Hirst Wational Bani: o f Savenneh, s o e s
against t h e i r p r o f i t a n d loss, 1 7 5 , 0 0 0 6
year, s i m p l y
G°es t o swell t h e profits o f the Federal Keserve Banks,
and is turned into the government treasury.
Governor Harding.
M a y I ask where the logs comes
in i f the Federal Keserve Bani o f Atlanta should c a r r y
that l o a n u n t i l t h e b o n d s r e a c h e d p a r , a n d c a r r y t h a t
doen all the time a t a low rate?
Mre ‘uillioms.
I f i t reaches oar, a s I believe i t
will, there will b e n o loss, b u t i f the bank were r e quired t o sell the bonds,
i t would sustain a loss. I
agree with Governor Harding, with whet { understand t o
be nis views, t h a t t h e banks should n o t b e expected t o
lo&n o n these bonds more t h a n their p a r value. I
tirely agree with that point o f view. I
¢en-
think that t h e
First National Bank o f Savannah should b e required t o
margin its bonds down t o their par valuee I
agree with that point of view. I
entirely
think i t is entirely
unjustifiable f o r i t t o b e carrying 1 5 per cent without
any security o r collateral.
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Federal Reserve Bank of St. Louis
235
where & benic sot very p a ~
o subscribe f o r t e n million dollors'!
worth o f certificates, a n d w e declined t o receive their
subsori ztion, a n d told them very frankly that v e thought
bievy were macing m i s t a i t e , t h e t t h e time would
when they vould need a n unusual amount o f colletersubscription v a s finally c u t down t o tvo a m
e h a l f millions,
o
lons before w e h a d
u ind
rn i t was n o t very o
wa
carry it, a ntd t h e bankletas
1d
a a“tal
di i f theiyv s u b s c r i p t i o n h a d
iricates m a t u r e d ,
millions, I
verry m u c h r e l i c v e d w h e n
venture t o say that I
think w e vould
nave declined t o allow i t e
AY. O G o y
they were
s
u
"
b
e
s
c
@
1
r
i
e b o r r o vve r s a n i
d we
1
p
s
l t o sav thet a t the time
t
i
o
n
, t h e r were e x -
positively
s
teh a t t h ecy v o u l d
have t o rely u p o n u s t o cerry
tie, J a y e i d e y e s i t , f o r t h e i n f o r m e t i o n o f t h o s e
o Nave n o t &
h rate
uniforn
on bonds a n v
d c o n m e r c i a l oaper,
what t h e effect o f nelking u n i f o r m t i o s e t u o r a t e s
d bani: nt a g ?
o
D i d
m
h
i n the
the
c eaoun
i t o f sovernr
ment loans promptly o r materially?
Wire Seay. ‘ u i t e promotly a n d also materially.
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Federal Reserve Bank of St. Louis
& time when 70 per cent--I mean t o
time then the acgregate o f the loans o f
neserve bunks v a s about 5 0 per cent, a n d
1 Keserve B a n k o f H i c h m o n d
LeTon en
the
o n such
cent, a n d they have n o w been reduced below 5 0 per
cent, e n d they have b e e n also reduced v e r y neterially i n
anount . T h e y wight, o f course, b e reduced t o 50 per
cent b y t h e i n c r e a s e
i n comaercial l o a n s , b u t t h e y h a v e
been Gecreased i n anount, t o a very material extent.
Mr, Jar,
# @ S that b y sale o r b y their merely sub-
stitutins some other collateral?
eeay.
W e are unable t o determine.
‘ j e thins i n
Lt was b y sale, but w e sre unable t o deteriuine.,
Thet m e a n s l o a n s d i r e c t e d
t o t h e bank a n d loans w o n
paper o f the bank's customers secured b y government loans,
w@ 4Pe sOtislicd +) a
great deal o f the paper w a
up by the ourchesers o f the bonds i n the ordnary course
of the receiat o f their income.
h a t was intended. i e
believe t h a t the bull o f the reduction i n the loans
vovernment securities h a s b e e n d u e t o the absorption e y
tae investor.
a
@ t h i n k t h a t t h e m a jority o f
We O W h a v e a r e leans made directly t o the banks o n
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Federal Reserve Bank of St. Louis
their o w n security.
My. Jay.
w i d the banks, u p o n y o u raisins t h a t rate
ber cent, reise their rete proportionately a n d
the sublic bear t h e additional oxpense.
Mr. Seay.
Y e s , t h e y did.
T o the best o f our
knowledge, t h e y raised their o w n rates under s l l cir-~
cums tinces.
I think v e ¢
1
ple o u t o f the discussion o f this topic.
s6t &
T o m y mind i t
presents t h i s q u e s t i o n a t this t i m e , w h e t h e r a
bonds w h i c h i t h a s b o u c h t O r i g i n a l l y
orinci-
bani h a s
o n subscription
and which i t cannot liquidate without loss, s h a l l b e entitled t o prefsrential treatment a t a reserve bank. A
guestion o f princigle ouzht never t o b e settled b y reference t o exceptional o r isolated cases.
goin; t o bank o n the reserve system,
I
f we are
o n the basis o f not
injuring some one, v e are zoin; t o banks o n the basis
-of injurin;; t h e more i n order t o protect t h e fer,
there i s a n a s p e c t o f t h i s t h i n c t h a t h e s b e e n o v e r -
looked that a t this time i s verry important.
j i @ eve
bean l i s t e n i n ; d u r i n e t h e l e s t f e r d a y s
tions o f r e p r e s e n t s t i v e s
o f t h e s r e s t faeriin 4
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Federal Reserve Bank of St. Louis
238
of the country w h o come before t h e Board askin:
that
they shall g e t such credit a s they vant i n order
to
permit t h e m t o liquidate their comaodities
without
loss, a n d i n sone cases t h e y have sone s o far a s
to
asi a
preferential r a t e i n o r d e r t h a t m a y b e a b l e t o
quidate t h e i r p r o d u c t s w i t h o u t loss.
w h e r e i n do
the t w o cases differ, s x c e p t thet t h e o n e i s 4 banker e n d
the other i g a fariner?
I
n w y ovinion i t i s preferen~
tisl treatment thet w e are Giving t o bankers under t h e
Suise o f patriotism, a n d l e t m e s a y p a r e n t h e t i c a
,
y
l
I think the time has lon: since passed when w e ousht t o
Gispense with the subject o f patriotism i n reserve bank-
ing, but i f you are soins t o talk i n the terms o f pan
more
triotism, where i s there a/patriotic obligation resting
upon u s t o b u y @
bond t h a t t h e r e i s u o o n a
farmer w h o
lanted the crop, laa r z e vl y under the liapulse and the ?
doctrine t h a t starvation would impend i n the world u n -
less h e did? I
a opposed t o preferential treatment
of anybody a t a Kesorve Lank, except that the preferential treatment i s warranted ¢ r o m a n economical point
OF Fisiiwv
I
f the charse o f profiteering c a n rest
against t h e Federal Keserve B a n k System i n any par-
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Federal Reserve Bank of St. Louis
259
ticular, i t is richt a t this-point where these people
who nominate t h e directors o f these banks a n d w h o d o
& great deal t o create t h e atmosphere i n which
these
banks a r e e d m i n i s t e r e d a r e t h e p r e f e r e n t i a l
customers
of t h o s e R e s e r v e B a n k c u s t o m e r s a n d facilities,
I
n
my jucgment, the time has lone since passed when
any
such concession t o barikins should b e made b y the authorities o f the Federal keserve System.
Iowant t o say i n behalf o f Governor wellborn's
Proposition, that i t has the merit o f consistenc~.
they want low rates and eusy money o n both classes o f
paper,
i n order that cotton shall b e carried t o what
they resard a s per, a s well a s Liberty bonds.
Governor Herding.
(after a pause).
I s there a n y further discussion?
t h e n w e will pass o n to the nex
topic, Federal Keserve dote Issues.
T h e first paper
is by ur. J a y o f slew Yoris.
Mr. Jaye I
regret t o say that I
have n o t been
able t o confine t h e study o f the very comprehensive
prosram o n this s u b j e c t w h i c h t h e b o a r d p r o p o s e a a n d
waich w a s a s s i g n e d
t o Governor iiorss a n d m e t o w i t h i n
the f i f t e e n - m i n u t e period. I
regret t o s u f f e r t h e
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Federal Reserve Bank of St. Louis
240
consequences o f m y sins, b u t I
think I
had better t u r n
in m y paper t o b e printed i n the record.
Governor Harding. I
think w e i g h t start your
rv, and i f there i s a szeneral sentiment thet y o u should
stop, I
will n o t b e mealy-mouthed about it, a n d will l e t
you :cnow.
iy. Jay. I t will take forty minutes, perhaps.
Governor worris.
v a n n o t y o u tell u s vhat i s i n
it end let us discuss it?
Mr. Jay. f
cannot very vell d o thit. I
Ses i f I could n o t cut i t down and I
tried t o
could n o t d o s o very
satisfactorily.
Governor darding.
d h a t i s the pleasure o f the Gon-
ference with revard t o the matter?
Mr. Perrin.
J u s t & viord o f explanation.
M r . Jay,
I sethered from a conversation with him this morning,
Aus Wede a very complete reviey o f the Huropean preatices i n the matter o f note issues,
i n Great Britain
particularly.
Governor ilarding. G o u l d not you state your con-~
clusions, ire Jey?
Mr. Jay. Y e s :
Y O not d o anythins about it.
Governor Harding.
T h e n I presume £ will have t o
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Federal Reserve Bank of St. Louis
call o n Governor Morss for his statement.
Governor Morss. I
may s a y that I have n o t gone
into 1 t a s extensively a s Mr. J a y has done a n d I hope
whet I have t o say will b e gotten through i n the time
limit.
I find t h e subject o f Federal Reserve note issues
which has been assigned t o me i s a very interesting and
difficult subject and one which would take a great deal
of time t o follow o u t i n 811 its lines o f thpnught.
I n
this paper I can only tough o n some o f the points that
seem t o m e t o b e the most important ones. I
do not pre-~
tend that the paper which I now read is entirely the
result o f m y o w n work; I
have called f o r help o n every-
body whom I thought would b e able t o give m e a n y informatien o n the subject.
All o f the principal banking systems o f the world
maintain a
ea
e
t
p e p e r currency a n d have attempted
to limit t h e amount o f credit which t h e y extend, b o t h
by the discount rate which i s placed i n the o w ntrol o f
8 B o a r d o f Directors
t o b e used a t their discretion a n d
by some s o r t o f legal limit beyond which a bank c a n
not e x t e n d c r e d i t .
I n some cases t h e m a i n effort h a s
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Federal Reserve Bank of St. Louis
242
been placed o n the control o f the issue o f currency,
and
in others i t hus been placed o n the amount o f cred
it
which could b e extended through banic loans,
the Bonk o f Hngland i s a n example o f the legal
control o f credit through a strict limit o f the issue
of
CUTE Ne ys T h i s worked vell with a
few exceptions f o r
many years until t h e w a r came on, w h e n the
gold i n c i r c u
lation disapoeared a n d there became a n absolute
need for
more paper currency.
I n s t e a d , however,
ine land i s s u i n g m o r e o f i t s o w n notes,
o f the Banic o f
t h e Enelish Gov-
erament issued Tretsury Notes practically «ithout
gold “
COVED.
In the Bank o f France there was a
L 6 0 0 422027 to. thie
issue o f notes which h e s always b e e n kept
with a
very
dibercl margin f o r present necessities, a n d has been
raised promptly whenever there w a s cause f o r more notes
then the limit alloved. D u r i n g the war there hes been
proctically n o limit, a s I
understand it.
\
The |
i
n
s o f Lerlin h a d n o lezal limit t o
credit o r notes but wag obliged t o pay a tax o n notes
issued beyond a Sliven limit.
w o e n necessity srose f o r
tne issue o f a n aaount o f notes subject t o
the tax,
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Federal Reserve Bank of St. Louis
the Reichsbenk absorbed t h e charge itself, a n d during
the war I suppose there w a s practically n o limit.
The Federal Reserve System controls its issue o f
credit and notes b y a legal minimum o f reserve for the
member banks and alse for the Federal Reserve Banks,
All o f these systeme, except t h e Federal Reserve .
System, while working well under nermal conditions, have
broken down under the strain o f war conditions.
The
Federal Reserve Banks have b e e n able t o maintain a
gold
basis, but their reserve went from 8 4 per cent t o about
50 per cent during the two years i n which the five
Liberty and Victory Loans were placed, a n d i n all probabt?
ity the Federal Reserve Board would have been obliged t o
weive the legal limit for reserve had the war continued
long enough,
The Federal Reserve System w a s t h e last o n e establis
ed of the great systems referred to, and has had a most
etrenous e n d interesting experience, a n d i t i s the one
abont which w e are most concerned.
I t depends f o r its
control o f credit e n the authority over discount rates and
the making o f loans vest i n the Federal Reserve Board
and the Directors o f the Federal Reserve Banks, a n d also
on the required legal reserves o f the member banks a n d
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Federal Reserve Bank of St. Louis
the Federal Keserve Banis.
it the o n d o f the w a r there v a s & @ ceneral dread
that h e n the soldiers and sailors vere deuobilized they
would n o t find sufficient w o r k t o support t h e m and thet
it viould b e necessary t o encourame business i n every w a y
80 thet there might n o t b e unemployment a n d distress.
aS @ matter o f fact, however, business b e g a n t o boom i n
the Spring o f 1919 because there was a t thet time a shortace O f soods a n d increase o f prices t h a t followed w a s made
possible b y the fact o f the easy condition o f the Federal
Kheserve Banks.
T h i s b o o m continuec with ineveasine i n -
tensity a n d increasing prices a n d made heavy demands o n
the C o m e r c i a l b a n s
reserve Banks.
o f t h e country a n d o n the Federal
T h e result was & ® Severe Gecline i n the
reserve position o f the Federal Reserve Banks, a n d n o se~
rious e f f o r t w a s m a d e t o cheecls this d e c l i n e u n t i l d i s -
count rates were raised about January 1 , 1920, w h e n t h e
feserve p o s i t i o n o f t h e F e d e r a l H e g e r v e S y s t e m h e d f a l i c n
to within a
few points o f the legal limit.
i n March,
1920, the averane reserve had fallen t o about 42-14 per
cent tithin about five points o f the required legal r e e
BELYVGe
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Federal Reserve Bank of St. Louis
245
One o f the results o f the increase i n loans w a s a
larze e a u e e e s
i n the amount o f Federal Reserve notes o u t
stunding, a n d this situation h a s raised t h e question
whether t h e Federal Reserve Board should u s e t h e authority
which i t has under the lew, t o i n some w a y limit t h e
amount o f notes w h i c h t h e F e d e r a l R e s e r v e B a n k s m a y issue.
To m y mind, t h e real question i s whether a
further
limit should b e placed o n the total amount o f credit which
may b e extended b y the Federal Reserve Banks, a n d i f i t i s
desirable t o limit that credit, whether t h e form i t should
take would b e in.the limit o f deposits o r the limit o f the
issue o f Federal Reserve notes.
I n discussing this quest-~
ion, t h e first point i s whether there i s a n ultimate limit
of c r e d i t a n d n o t e s t h a t i t i s p o s s i b l e
t o issue,and t h e
second point i s whether there i s a n y ratio betieen t h e
amount o f credit a n d notes t h e t will b e taien b y the bants
inside t h a t limit.
48 t o the first point, t h e r e i s a limit s o lon: a s n o
reduction i s made o f the reserves below t h e legal reserve.
This l i m i t would depend o n the amount o f gold held i n
the system a n d would vary o n l y a s that amount o f gold was
increased o r decreased through transactions v i t h foreign
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Federal Reserve Bank of St. Louis
countries»
On the second point I
possible
tablish a
heve supposed t i t i t would b e
t o s o t o t h e b a n k statements a n d f r o m t h e m e s ~
ration b e t v e e n t h e a m o u n t
o f loans t a l o n i n
notes and the amount taken i n deposit credit, I
have
been unable t o do this for the reasons that the making o f
loans a n d t h e issue o f notes a r e n o t necessarily simultaneous operations a n d the demand f o r notes varies greatly
under Gifferent circumstences a n d i n different districts.
Ficures h a v e been mede thich apparently s h o w that approximately three fourths o f the loans o f the Federal Reserve
Benks i n pormal times a r e taken i n currency a n d that t h e
other fourth i s used a s a reserve deposit o n which t h s deposits
o f t h e member banks a r e multiplied between n i n e
and t e n times o r t o the limit that t h e reserve requirements allow.
w h e t h e r o r not there i s e n y ratio that c a n
be established i t seems t o m e that t h e control o f the total
amount o f the credit extended b y the Federal Reserve Banks
imust control t h e smount o f notes which c a n b e issued
within the limit that i t i s desirable t o control them.
a
The question then erises, i n what ways can the issue
of c r e d i t b e f u r t h e r r e s t r i c t e d t h r o u g h t h e r e s t r i c t i o n
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Federal Reserve Bank of St. Louis
ofloans? O n e way is to eliminate all preferential
rates, whether o n loans secured b r government obligations o r i n the prices made f o r t h e purchase o f accept-~
ances i n the o p e n market, leaving t h e rates o n
acceptances t o b e controlled b y the investment marlret
rates
rather t h a n rates established b y the Federal Reserve
Banixs
and b y raising t h e disc ount rates o n loans
secured b y
Governnent obligations a t leest a g high a s the rates o n
commercial paper,
o r perhaps hicher.
another w a y t o control t h e amount o f loans would b e
to raise t h e legal limit o f the reserve,ratios,and this
may b e a very necessary a n d desirable method t o enploy.
I believe this would b e effective, because t h e banks o f
the country a r e accustomed t o a legal limit o f reserve,
ere i n the habit o f making loans u p t o a legal limit,
and when that limit i s reached t h e y eccept that a s a cood
and sufficient reason f o r limiting loans.
Qn the other hand, i f the Federal Keserve Banks should
attempt t o keep a reserve position o f s a y t e n o r trenty
ber cent above t h e legal limit, t h e y might meet such opposition from public opinion that t h e y would b e unsble
to maintain such rutes.
if the restriction o n credit i s t o b e obtained through
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Federal Reserve Bank of St. Louis
248
the i s s u i n g o f Federal K e s e r v e n o t e s ,
t h e w a r t o acconm-
Plish this i s perfectly obvious--fix a n arbitrary limit
to
the total amount o f notes which m a y b e issued a n d when
Federal Reserve Banks a r e required t o p a y balances betond
this amount, p a y then i n sold o r lemal currensy.
The sugsestion h a s been made that i f i t were desirable t o issue notes beyond s u c h legal Limit, s o l d should b e
put i n reserve against these notes dollar for dollar.
s
V
s
d
h i g
u f~
y
oe“ ‘
‘
+
accomplish
l
u
t h e same
result ao s the
former
method
and
“ould keep t h e sold i n possession o f the Federal Reserve
Banks
B o t h o f these methods, w h e n t h e demand f o r
notes w a s larse, would reduce t h e loaning power o f the >
vederal Keserve Banks very rapidly.
I am myself i n e lined t o the opinion thet i t ‘ould
leave t h e Federal iieserve banks i n better position f o r
possible n e c essary expansion o r emerseney t o limit t h e
amount o f credit a n d notes throuch control o f credit
rather t h a n throush a n arbitrery control o f note issues.
It may b e that I arrive a t this conelusion because I believe tnat about a l l o f the cold that i s available f o r
bank r e s e r v e s
o r for u s e a s money h a s b e e n sathered i n t o
the central baniss o f t h e vorld a n d that i t seems t o b e
absolutely necessary t o furnish paper money because gold
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Federal Reserve Bank of St. Louis
money i s n o lonzer available.
£ shall n o w taite u p the Guestions proposed b y the
Board a n d m y ensvers t o those questions w i l l b e besed o n
the a b o v e statenent.
1. I s the note-issue policy o f the Federel Reserve
system subject t o legitimate criticism?
Noe
T h e criticism should b e based
o n the total
amount o f credit t h a t i s issued, a n d n o t o n the notes.
2. w i a t connection i s there between chanses i n the
volume o f credit a n d the volume o f currency?
This i s v e r y h e r d t o determine,
b u t probably
it
will b e found i n normal times t h a t about three fourths o f
the loans t o member banks a r e tulken i n currency a n d o n e
quarter
i n deposits.
difference
i n relation
t o effect u p o n
price bettiesn the volume o f credit a n d t h e volume o f currency?
In m y opinion no. I n c r e a s i n g loans will support
increasing »srices, a n d h i s h e r p r i c e s r e q u i r e m o r e currency.
4. G a n t h e n o t e - i s s u e v o l i c y o f t h e F e d e r a l R e s e r v e
system b e Droverly charged “ith a n y important responsibility
for infleted prices?
I f so, ‘ h a t h u s b e e n the responsi-
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Federal Reserve Bank of St. Louis
258
bility, a n d i n what way doos the issue o f Federal
Reserve
notes promote o r assist inflation?
I believe t h s t t h e reserve position o f the Federal
hesServe Banks i n the early spring o f 1919 made lerge i n creases o f prices possible, a n d I
should p u t t h e emphasis
on the amount o f credit issued a n d n o t o n the notes.
Se G a n the accepted principles o f bank-note currency
regulation, applicable i n normal circumstunces w h e n the
Commerce o f the world i s conducted o n @ o l d standard,
be
ssfely taken as a suide i n the ebnormal circumstances
now
existing, when the sold stundard i s virtuslly suspended,
excent
i n the United States a n d Japan?
The aecepted vrincivles o f bank note circulation
certainly d o not work todey between nations when there i s
an embarso o n the shipment o f sold i n most o f t h e commorCiel n a t i o n s
o f t h e world.
I
t might w o r k o u t b e t r e e n
Pecderal Reserve Banks within t h e Federal Reserve
System,
but i n order f o r i t t o d o s o I believe i t vould b e neces~
ary t o a b a n d o n t h e p o l i c y o f r e q u i r i n g F e d e r a l R e s e r v e
Banks t o barrow o f other Federal Reserve Banks i n order
to m a i n t a i n a
m i n i m u m o f a c t u a l reserve.
it vould b e necessury t o impose a
“ i s o ,
L o believe
venalty o n a Federal
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Federal Reserve Bank of St. Louis
251
Xeserve B a n k a s i
w a s below i t s lesal reserve
and i t . ould elso b e & necessity t o devise a
method b y
rhien this penclty should b e immedictely transmitted t o
tne member banits u n d t o the commercial community i n the
Gistrict where t h e reserve eas deficient. I
fess, hovever, t h a t I
must con-
do not feel qualified t o express
positive opinion o n such a n intricate subject.
6. I n connection with t h e policy o f credit control
should t h e present note-issue policy o f the Federal x e -
serve Syste b e chunged and restrictions b e throvn cround
the issue o f Federal Reserve notes?
It may b e wise t o nut restrictions
credit,
o n t o t : 1amount o f
b u t n o t o n t h e notes.
7. I f t h e issue o f ecderal Reserve notes should b e
restricted, w h e t f o r m should t h e restriction telze a n d «hat
4
effect s o u l d d i f f e r e n t m e t h o d s
o f restriction neve?
(a). Inposition o f churses azainst Pederaul Kese
notes wuvon t h e u n c o v e r e d s e r t o f c i r c u l a t i o n i s s u e d t o
them a t a siven rate, f o r example, a
fixed rate o f 5
per cent o r a rate varying vith t h e commercial rate.
Imposition o f charces azcinst issues o f Federal Ke-~
serve n o t e s
o n t h e F e d e r a l n e s e r v e Banics -‘oulc b e i n -
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Federal Reserve Bank of St. Louis
252
eifective unless this cherge could b e trunsmittea t o the
a
1oun o f the member benks,
and I
have b e e n unable t o think
up a n y prsctical method b y which tais could b e done.
(b)e w o u l d i t b e »eructicable t o este
member bans a go-culled noraal currency list a n c t o ime
bose churzes o n member banks & l l i n s f o r notes i n excess
of their limit?
It w o u l d b e u t t e r l y i m p r a c t i c a l
t o establish a
amount o f currency ellotted t o each momber ben's.
normal
G i t e
Cumstunces v a r y with e a c h member baniz, a n d i t i s inpossible
to establish a besis o f h o w much e a c h banit should heve.
Further,
i f s o e iasthod w a g adopted, @
bank that h a d
reached i t s linit a n d c i d not require it, mivht sell
surplus
o f currency
t o a n o t h e r bani: a n d P o s s i b l y
at a
premium.
(c). w o u l d i t be advisable ~hile continuing t o
the w’ecderal Reserve Banks
a y a l l trensportetion cher-es
on incoming currency t o huve shipaents o f outroin: cur-
rency mode a t the expense o f the consiences?
NO. because transfer churces are paid both ways,
benks s h i p currency freely t o the e d e r :
1Keserve P e n g y
a
d
this keeps outsteancins notes G o w n t o a mininim s o fer
n
I
wee
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Federal Reserve Bank of St. Louis
253
a8 t h e banks a r e concerned,
I f transportation charzes
vere mace azsinst shivments t o then, t h e y
vould n o t
retura currency a s freely a s they d o now.
(ad). K e s t r i c t i o n b y definition o f the Gharocter
of
the paper ucceptable a s colleteral b y the Federal
Keserve
&Sent azainst t h e issue o f Pederal Reserve
notes. S h o u l d
member banks! collateral notes o v customers!
notes s e ~
Cured b y Governinent obligations b e talzen a s collateral
for e d e r a l neserve notes?
if the character o f collateral ascinst whieh Pederal
heserve invents could issue Federal keserve notes
‘ere r e ~
stricted,
i t v o u l d n o d o u b t v e s t r i ict t h e i s s u e o f notes
unless there w a s a
sufficient aaount o f acceptable col-
lateral f o r 2 1 1 the notes t h a t vere needed. I
Goubt t h e wisdom o f refusing notes secured
should
b y Governitent
obligations a s colleteral f o r Kederal Reserve notes a t
the o r e s e n t time.
L e f o r e t h a t was d o n e I
should p r e f e r
to raise t h e discount rates o n notes secured b y GovernMent oblisestions above t h e rate o f discount o f commercial
paper.
(oe). Limitetion o f the t o t s l volwne.of Federal
neserve notes b y the Federal Keserve Board,
t h e maximun
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Federal Reserve Bank of St. Louis
amount b e i n g f i x e d p r o r a t a f o r e c h t e d e r e
Reserve
Banks
( T h e Mederul Reserve Board h a s statutory pover
to cecept i n part o r t o reject entirely a l l applica-
tions for itederal Keserve notes.)
Dapractical t o limit t h e emount o f notes issued t o
each iederal e s e r v e banix,
ply e s restrictions
T h e same objection ~ ould ap-
o n wember banics.
3e w o u l d r e s t r i c t i o n
o f note issues
above iientioned ways operate t o promote a
i n any o f the
better control
of credit, a n d i f so, whut vould b e the effect u p o n tie
commerce end business o f the country?
The ansier t o this question i s included i n the statement t h e t I ' m a d e
i n the betinning
o f t h e ohver.
[ b t is a
Comuion and interestin: study how far a basis o f comnodity
prices c a n b e wuintuined, fluctuating o n l y between narra:
limits ,br rezuletin: t h e supply o f credit. T h i s seems t o
have b e e n fairly well accomplished b y the u s e o f the
count rates b y the beni o f i n l a n d a n d other Gentral
Lenss o f tae vorld for many years before the wer. T h e
caiscount rotes ceased beinn effective durin: the war.
Probably i t can not b e Gone aguin f o r meny years a n d n o t
until t h e f i n a n c e s
o f t h e nations
o f the world a r e avain
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Federal Reserve Bank of St. Louis
placed o n a stable basis.
Governor darding.
i e . J8y, y o u «ill leave y o u r
paper t o b e incorporated i n t o t h e recorc, pleise.
Gov-
ernor .iorsgs's p é p e r n o w i s o p e n f o r discussion.
ily. wills. i i n . Ghairman, £
Guestion, “ h e t h e r t h e m e m b e r s
vould like t o
o f t h e Gonference
has arrived f o r t h e Bourd t o
instance,
when -overnment-secd
e
r
u paper “ o u l d n o t b e
elisible a s security f o r ivederal iieserve notes.
Me. Gurtisse I
think that Governor ..orss's sug-
Gestion was t o raise t h e rates.
ir. Jar.
action c s thet.
L I hope t n e Board will never t a e s u c h
I t seens t o ime t o b e a Sreat s l a p a t
government security t o say that they should never bo’.
used 4s collater@l for Pederul Reserve notes.
ter c e n b e dealt with throuch t h e discount rate. ‘ T e
you e r e t o raise t h e rate f o r sovernment securities
above t h e rate f o r commercial paper, t h e y would a l d s a t
out o f t h e F e d e r a l K e s e r v e w y s t e n o v e r n i s t
not e f f e c t t h e beniin:: s y s t e m i n t h e slixhtest,.
would s i m p l y h a v e a
2 0 woud
#
8
different s e t o f c o l l a t e r e l p r e -
sented t o the “ederal Neserve bans.
I t vould be, i t
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Federal Reserve Bank of St. Louis
256
sees t o m e , @
tremendous Giserimination a n d a most u n e
fortunate discrimination a c c inst sovernment
bonds. PI.)
recovnize t h a t t h e F e d e r a l s e s e r v e S y s t e n
w e s established
to g e t a v a y f r o m a
bond-socured c u r r e n c y ,
a n d under t h e
act w e planned t o gradually eliminate t h e
bond-=secured currency a n d substitute Federel
reserve-+
Secured currency f o r it, b u t o n e o f the reasons
w e vented
to d o t h a t t a s b e c a u s e t h e W a t i o n a l b a n s c u r r e n c y
yas
absolutely inelustic; there was :
o f increasing it,
and the lesal restrictions tended t o restrict its contraction, b u t i t h t h e e d e r a l seserve notes issued
azzinst s o v e r n e n t »saper n o such condition apolies.
The
#ecderal .eserve Banks d o not have t o buy covernment
s
i n orderd i n order nt o these, oa s the wational
b
A
Banks
have t o do, and the bonds all come i n beurin: the indorsement
i n one fora
o r enother
o f a
m e m b e r banize . i o s t o f
them @re very stort loans, and there is just as complete
flexibility
o f F e d e r a l K e s e r v e n o t e s w i t h sovyernment s e ~
curity a 8 c o l l a t e r a l
a s i s w i t h c o m m e r c i a l p a p e r a s col-~
lateral.
{t seems t o me thet the way t o deal with the govern-
ment bona gituetion, when the proper time comes,--und
I
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Federal Reserve Bank of St. Louis
certainly believe i t i s coming feirly
soon--is t o d o
away w i t h t h e p r e f e r e n t i a l r a t e
o n S0overnment bonds, t h e n
let the banks p u t i n what t h e y want
f o r their discount,
but n o t t o establish,
a t t h e present t i n s a t least,
either b y a discriminatory rate against
t h e sovernnent
bonds o r by a euling o f the Federal
Keserve Board that
they m a y n o t b e used a g collateral f o r
sovernment notes.
a state o f mind with regerd t o thea,
a
complete turn-
about vith rezard t o them, w h i c h
seems t o m e vould b e
very unf ortunate.
APe syStine I
vant t o coneur i n whet ilg.e Jay says.
tfbelieve the reason -overnment bonds are
now largely
Securins o u r notes w a s that f o r a
year o r t70 t h e
Government v a s t h e largest factor i n this
country.
as @
Greet borrover.
T t
~ 8 time goes on, those bonds w i l l
be retired a n d other business v i l l Sredually
tate t h e
place o f the notes.
sreat d
I t seems t o m e i t woulé b e a very
r i m i n a t i o n asainst obligations o f the
sovern-
ment t o s a y thet t h e y shall n o t b e security
f o r the notes,
uv
and I thinks, i n lookinzs over the situetion
ina foreign
countries,
i t ‘ill b e found that vhat i s behind
the
bank o f unvlund's notes i g Sovernnent bonds,
a n d the
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Federal Reserve Bank of St. Louis
g$4né i s t r u e
o f t h e Benir o f F r a n c e .
Governor darding.
i i o w d o v o u feel
o n t h e propo.
Sition a t t h e S r o p e r t i i e o f a c v a n c i n s t h e r a t e o n
“OVe
ernient bonds t o inale i t uniform vith t h e c o m e r c i a l
péper rate?
ite, .castin. I
think most o f u s have alrecdy adoot-
ed & pate o n government bonds almost t h e same a g the comme
mercial rete. I
think t h e time m a y come when t h e i n -
vestment d e m a n d w i l l e b s o r b t h e a m o u n t
o f “overnnent
bonds beings offered f o r sale, a n d i f you vant t o raise
those r a t e s a n d f o r c e o v e r n i a e n t b o n d s
o n t h e Market,
vou
will depreciate their vorice.
+overnor Harding. Personally I thim: r e
try the unifora rate first, before tre attenpt
any rule thet they shall n o t b e accepted 8 s security f o r
notes.
iy. Gurtiss.
I d o not agree a t all i t h what ir,
that while i t i s not the time no: t o
cdo avar with loans secured b y Governitent bonds,
m y idea
of the entire e d e r a l ieserve System h a s b e e n thet t h e
Federal seserve banks should really heve nothins b u t
self-liquicatins notes, a n d short time notes.
O u r
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Federal Reserve Bank of St. Louis
commercial paper should a l l b e siort time; t o u heve linited i t i n the a c t t o ninety days; y o u cannot s e y that a
lonz-tine sovernment bond i s a self-liquidatin: collet-~
eral.
Governor Harding.
Y e t Section 1 5 exempts notes,
rafts o r bills coverins investment securities.
We. iicGord.
T h e t clause was o u t i n pection 10, 5 G
my itind, o m account o f the government lending i t s credit
to the benks b y issuins t h e notes.
O n e nrincioile i n -
volvec ves that i n times o f war t h e banizrs come t o the rescue O f the sovernnent»
I n times o f »%eace t h e movernnent
would h a v e t o c o m e t o t h e r e s c u e o f t h e banks.
lutely eliminate sovermient securities from the Tedere 1
ieserve acents! h a n d s f o r n o t e s m i c h t b e discstrous.
Mr. Romseye I
thins t h e views o f Mr. Jay,as snvlied
to present conditions s t least, are thovouvhly sound.
T f
understand t h e desire o f all o f -our officials t o have
gelf-ligquidutin; paper.
f £ think i t is srectly t o be
gall fectl i t e x c e s d i n s l y u n f o r t u n a t e f o r a n y c c t i o n t o
be tulten o n that aquestion now, a n d I think a n y lorge
discussion o f i t perhaps micht h e v e a bad effect.
I n
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Federal Reserve Bank of St. Louis
260
this connection I
desire t o b e recorded also a s saving
that m y o n judginent i s that t h e matter o f rates, v h i c h
W, M i g h t w e l l b e h e l d i n abeyance u n t i l t h e r e i s
a
durge liquidation a n d until w e c a n s a y i n the events
es
Ce
they o c c u r w h e t i s t h e w i s e s t t h i n e t o do.
5
Own judgment.
,e
That is my }
Bie’ >
t h e natter h a s frequently come before o u r
Board, a n d i n u general way ct least that i s a very prominent view held b y the board.
I t is a ins W u i c h t e
should heusten slowly, a n d I believe i t &imons the possibilities--on t h e question o f Federal control--thut there
may be very little occas ion for ony large increase
in
rates, b u t pvrobably w e shall have a n occasion t o equalize the rates. { o t h i n i : i t vould b e unfortunate t o d o
anythin,
especially
i n some o f t h e s t a t e s
a t least,
o n
the question o f rates a t all, a n d certainly i t sould b e
unfortunate a n d £
foar d i s a s t r o u s
t o take a n y action i m ‘
mediately towards retirins sovernment-secured yaper
as
security f o r Federal Kescrve notes.
Governor Hordin:.
I o understand t h a t t h e Gheirmen
and G o v e r n o r s h a v e n o t f i n i s h e d t h e i r
likerations.
o n Separate d e -
s o u l d i t be practicahle t o resune this
joint meeting say at 4:30 this afternoon? |
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Federal Reserve Bank of St. Louis
Mre Yerrin. I
think I
can Sanbie: eo% t h e itederal R e -
Serve aZsents.
Governor nardins.
Governor HMeDousal.
w h a t about t h o Governors ?
T h o t will b e entirely satisfact~
Ory T h e r e vere three o r four specific questions tshhich
the general conference referred t o the Governors
for cmSideretion,
a l l o f w h i e h h a v e b e e n a c t e d unon, a n d t h e
action t a i e n c e n b e s t a t e d
in a
very
care t o have i t a t this time, b u t w e have finished that
part o f t h e vrogram,
o r s e c a n deley thet until this
ofternoon.
Governor ndardinz.
w e have fifteen minutes t o s a r e
before l u n c h time.
Governor iicDougal.
Jay I
T h i s w i l l tele o n l y c fet moments
suy i n thet connection that those
juestions w i i c h were ziven t o u s yestercey worn-
Governor cDouzal.
T h e y were, yes.
wv
The Gonference thought t h a t i t wicht b e
visest t o postpone t h e reachins o f conclusions
o n tnose
questions u n t i l after t h e »vevers were vresented tiis morn-
ins, a s both o f then related t o the topics discussed
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Federal Reserve Bank of St. Louis
this morninz.
Governor H a r d i n . I
think t h e o n l y q u e s t i o n v a s
wnetner i t vould b e advisable t o put a tentative limit o n
meuber bank borrorings.
Governor .icbDougal. I
micht say, i n response t o ‘ir.
Jay, t h a t w e r e c o c n i z e c t h a t s o m e o f these s u b j e c t s w e r e
to be deglt with throurh the papers, a n c our ans: es has
been deferred, b u t others o f the questions, t i o o x three
of thein, have b e e n ansered.
i
e c a n brings that u p a t the
conference tiis afternoon, a n d I understand, lr. Jer, t h a t
you-willl have your ans‘ers ready then?
ir. J o y .
ansiered,
T h e t i s t h e only question t h e board wants
a n d i e t o o k a c t i o n o n that.
Yroitiller.
w i t h regard t o t h e matters b r o u c h t
up @ while azo, unless silence b e construed a s consent,
Governor danlin has suzsested t o me i t misht, I
as
wat t o
say thot I am distinctly o f the opinion that, with reference t o normal concitions w h i c h will some time b e restaed,
even i f not present immediately o r i n the near futuro,
thet makes t h e discussion o f this whole question t o a
certain extend academic. I
believe t h a t there vill never
be an effective system of restrictive control in this
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Federal Reserve Bank of St. Louis
263
country with reference t o the issue o f Federal Keserve
notes.
L i x e ir. Jay, i t vould take m e t o o l o n t o develop
my views o n the subject a n d t a e reasons w h i c h have l e d m e
to t h e t conclusion,
b u t i f y o u will permit me, Governor
Herding, s o m e time durinc t h e vinter I
nenorandum,
will prepere a
i f i t seems timely, f o r presentation a t the
next Gonference,
o n this question, a n d thet c a n serve a t
any rete a s a n indication o f m y attitude a n c t h e reasons
thet have produced it.
Governor Harding. ‘ i o u l d n o t the control o f credit
through the limiting o f Keserve Ean: disc unt control the
matter?
lire ifiller. Undoubtecly, b u t I
think i t i s really
a question, w h e n y o u get right d o w n t o it, o f what coes
tne experience o f the last hundred years, a n d particularly
of t h e l a s t f i f t y o r s i x t y years, s h o w ?
o
r
e f
rticularly
with reference t o bankins a n d credit conditions a s they
are i n our country, woiich always, except i n periods o f
incustrial depression,
i s under t h e support o f expansion
as b e t w e e n t h e G e r m a n a n d F r e n c h o r i n c i n l e e n d t h e E n glish principle.
T h a t i s p r e t t y n u c h v h e t i t comes d o w n
to, a n d i f I understood Governor i.orss's paper a n d »osi-
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Federal Reserve Bank of St. Louis
tion, t h e t wasinplied.
In the lisht o f experience, which one o f those i s
lixely t o produce the best results i n tunis country?
want t o say richt there that sucn a restriction a s chs
English banking a c t imposes u p o n t h e Bank o f unolend,
such a s the recent British Gomnittee, o f woich Lord
Guneliffe, Governor o f the Bank o f wancland, w a s Ghair-
man, said thet they uished t o have the la: continued t o
iipose a restriction, a n g thet they dic not want this
pover i n the matter o f nots issue.
i v view i s that a
restriction o f note issues would s o a lony ways totard
preventin: u n n e c e s s a r y inflation.
Governor norss. D r . .iiller, i t seems t o me that
wher bans, tinenever they needed any more currency, they
have é l u a y s w a i v e d t h e l a w s a n d m a d e t h e m q u i t e i n e f f e c t -
ive.
Mp, ililler. J u s t exactly a s i n the cage o f
uneland.
Mr, worss. I
understand they have vaived the
law i n the banks o f wneland today.
Governor willer..
I n t h e s e abnorinel conditions, vwaich
they recognize a s abnormal. I
think the question with u s
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Federal Reserve Bank of St. Louis
1s not whet w e are going t o d o i n
abnormal times, b u t
what i s the policy i n normal times which
¥ @ exoect t o
follow i n this country.
a r e v e SOing t o continue a pol-
icy viuich has sevown o u t o f the abnomacl
davs a s normal
days r e s t o r e t h e n s e l v e s ?
Governor .,orss. i
Opinion,
think I was influenced i n that
a s I said, b y the feelin; that t h e
a .ount o f
a
d
: thats t e b o d a y a v a i l a b l e f o r m o n e t o r y
purposes
harcly edual t o the burden thst i t has
got.
is n o t equel t o i t o n tre inflated basis,
more equél t o i t o n a norael basis.
is
I t certainly
a t i t is n o
T h e O l d has been
Ore Seylously e n d more completely gathered
into the
central r e s e r v e b a n k s
o f t h e world Since t i e W e r t h a n ever
before, a n d i t i s even s o i n England; t h e t ungland
t o my
Mind was always t h e o n e country where y o u have
z o t sold
in your pocket.
I f you vent t o a ban’: and drew ..100.00
they w o u l d s i v e y o u « o l d b y preference.
I t “as s o o r e
Or l e s s i n t h e b u r o p e a n countries,
Mr. l l l e r .
u t ,
p a r d o n ue,
T h e y h a d nothing
6élse t o i v e .
Governor .0rss.e. L x a c t l y ;
a n d tucrefore,
i f they did
not have currency o r vaper money t o sive out, t h e y had
to
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Federal Reserve Bank of St. Louis
eee“ O U b - a e ;
a n d a t £ 6 h o t s r e CanncO. a
wee nEae.. t o
adopt a policy o f parin;; o u r balances beyond t h e s:sount
of notes that v e vant issued,
Gan Gao so0, a
i f v e want t o pay them i n
thot. witli. 1imit 2b, o m a thet i s
the only thing thet will l i m i t , i
t erfectively,
i n iy
opinion.
There i s a
question o f whether y o u shall a d o p t t h a t
metnoc, w h i c h would b e very severs,
o r “iodify thet b y
holding .»100.00 in sold against »100.00 in notes beyond
tne linit.
I f you vant t o d o that, y o u till accomplish
your object,
n o guestion about it. T h e question i s
whether you hed better csdopt a
method a s severe es that.
If you ore at any time a t a point of expansion beyond
your note issues a n d v o u d o not raise t h e limit, t h e
federal acserve banks would pay out their gold to every~
bouy who cane for it,
H o w difficult i t woulda b e t o get
it back into the reserves o f the lederal Reserve L a n k a s
it .as meeded i s another watter.
I
t agid cane b a c k
dupia; t a e w a r quite thoroujhly, b u t y o u c a n accept that
issue and tate tnat i f you vish it. T h a t i s & matter o f
udgment a n d opinion, b u t that i s tne only m a y
t o linit
your notes, a n a i t would limit rour loanins Dover very
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Federal Reserve Bank of St. Louis
267
radically a s soon a s y o u get berond that linit o f notes.
Me. siiller. w o w , i t is worth noting that the
Federal Reserve System,at lezst a s the a c t a e o r i inally
Grain, a s s u m e s t h a t t h e r e i s a n o t h e r m e t h o d t h e n t h e
snglish method o n the one hand which Gefinitely restricts
the i s s u e o f aotes a n d t h e i m p o u n d i n z
amount o f sold, a n d t h e F r e n c h
Pixes a
o f a n equivalent
o r German methods,
one of
statutory limit u p o n t h e totel volume o f
Circulation t h a t t h e Bank o f France c a n issue, a n d t h e
other Laposes & severe tax where the note issues exhibit
Certain proportion t o the reserves.
limit that t h e reserve ban's imposes?
w h e a t i s thet
T I think w e h e v e for.
Gotten it, a n d v e have forgotten a prett deal that i s
very pecullar a n d very characteristic o f the kederal ReServe system.
T h e note-issuin:
provision o f the A c t
says that t h e neserve Bank m a y apply t o the Federal
heserve azent f o r notes.
issuln; bank.
T h e Keserve Lani i s n o t s
I t i s iicrely, i f vow xlease,
the distribution o f circulation.
note~
a n aceney f o r
T h e agent transmits
that avolication t o t h e Federal Keserve board, w h i c h
uncer t h e dct i s civen not o n l y t h e power t o srant i n
whole o r i n part, e n d t o reject eltogether t h e a p olica-
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Federal Reserve Bank of St. Louis
tion--there
i s n o l i m i t u p o n i t s S o 'ers;
i t i s not re-
stricted t o doing this f o r particular reasons a n d occasions;
t h e Act mich
s a i d the matter
e tJ j u s t a s -well heave
H
shoulc b e cetermined b y the Giscretion o f the Wederal
veserve board.
I t s judgment a s t o whether o r not the bus~
iness i n any particular district o r i n the country a t
larse r e q u i r e s t h a t t h e r e s h o u l d b e a n a d d i t i o n t o t h e c i r Gulétion, s h a l l b e conclusive
i n t h e premises.
I n other
worcs, i n s t e a d o f t h e r i s i d l i m i t s e t d o i m b y t h e B e n
of
angland a c t a n d the somevhat limit o f the French act, a n d
tne réther oelestic limit o f the German Act,
“ e have sub-
Stituted t h e ciscretion o f the Pederal Keserve Board, a n d
as I view t h e iWederal keserve System a n d t h e peculiur xve-
dation t o i t of the Hederel Keserve Loard, I
cannot help
but believe that consci ously o r unconsciously i n the minds
of t h e framers
o f t h e ’ e d e r a l K e s e r v e A c t w a s t h e t h e ory
anc the belief that the orimary function o f the Federel
Weserve LOurd vas t o sit i n judsnent o n this question a s
to now u c h currency the country needed.
ft is worth recallinz, iIr. Morss, that not since the
Givil w a r has there been i n any effective sense a
of u n l i m i t e d n o t e i s s u e s
i n this c o u n t r y , u n t i l 6
system
come
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Federal Reserve Bank of St. Louis
269
to the Federal Heserve System.
I t i s t o m y mind v e
notable a s i n d i c a t i n g t h e a t t i t u d e
o f the m e n zho
our policies o f financizl restoretion after t h e Givil
Jar thet until the resuiption o f specie ayments v a s e f fected, t h e r e w a s a definite l i m i t b y states a n d sections
of the country u p o n slaetional banic note issues,
a ! a e
aid n o t really c o m e t o a system o f Wetional Deni note issus:
until w e vere i n sisht o f the resumption o f specie parments. T h e r e w a s a
wor, 6
definite restriction there.
t e l about convertible currencr.
Y o u tal
68 &@ matter o f lau, a n d @ s a matter o f fact t h e
Federal seserve note c o n v e r t i b l e . 14.8 a motter o f fact,
novever,
8 S a matter
o f practice,
notes r e t u r n e d f o r r e d e m p t i o n
t o «hist extent a r e those
i n jold except f r o m o n e
receral reserve l a n k t o another?
a n d w h y not? B e c a u s e
the o l d s t a n d a r d i s p r e c t i c a l l y s u s p e n c e d
i n «11 t h e
Laportcnt countries w i t h which v e have commercial xelations, except one, a n c tine theory o f a convertible benik
note currency i s thet sold 1111 regulate t h e countrr,
so t h e t i f t h e s e n e r a l l e v e l o f p r i c e s
i n any o n e country
gets o u t o f seale “ith t h e seneral torld, t h e t will show
its sold will b e teéeken from t h e country, e n c t h e o r d nary
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Federal Reserve Bank of St. Louis
270
methoc employed i l l b e t o return notes f o r credit t o
the bank.
serves
h a t will ordinarily decrease the sold re-
o f t h e banis, a n d t h e bank,
i n self-protection, then
sot t o p u t i n a l l o f t h e i n s t r u m e n t a l i t i e s
o f con-
the difference betveen o u r system a n d t h e |
Glish i n this inportant particular i s that the unrelish
System under noraal conditions v e r y much more quickly
recoyjnizes t h e fact that t h e currency i s gettins redundént,
because the bank of Englad note i s tantamount t o cold,
and when sold i s taken from London, just a s s o many soverelgns a r e tairen out o f circulation o r s o many Hank o f
unglanc notes, wiich a r e t h e orecise equivalent o f sovereicns.
Wy. Perrin,
i n his
mace a
3
a
r
e
‘ t the Conference
very pertinent a n d pregnant r e -
mars 8 8 regards ban'sing under the Federal teserve
Dysteda, t o wit, the disapveurance o f the reserve requirement,
u s t h a t h a s b e c n commonly understood,
a n d t h e sub-
stitution therefor o f the mere requirement for national
banks e n d m e m b e r b a n k s
of a
toe F e d e r a l kKeserve bank.
cash b a l u n c e
o n the books
of
i f o banis n e e d e v e r b e w i t h o u t
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Federal Reserve Bank of St. Louis
acedue te reserve, p r o v i d e d
i t wants
t o puy the *oing
rate o f diso count o n the c o d inteeed
i t offers.
U n d e r the
Old conditions, t h e baniter Vas
alueys confronted « i t h t h e
boss ibility thit-he misht n o t
b e able t o discount h i s
pepsr a n d i w ovide c u r r e n c y t o
h i s customers,
nis lesel r e s o u r c e s w h e n h e
r a n ¢lose,.
fore, &
o r iainta
There
so-called danver line i n this country
viich w e r
the banker thet h e t a g e t t i n : t o o
much.
i f o banker w h o
is a member o f the Federal Reserve
System need ever Gread
the possibility o f being unable t o
lend t o nis customers,
becauss h e hes n o t s o t a n Sdeguite
reserve, b u t hoa can
alvcys b u i l d u o his reserve.
Nov, h a t h a v e v e done i n the matter
O f cxsh? U h e n
"e come t o analyze t u e thing, n o t a g
a propos ition o f lay,
but a s &@ proposition o f Operetion,
I
on extreme statement, Governor «Orss,
do not think i t i s
t o s a y that under t h e
vederal neserve System every member
bank i n the country i s
& bank o f issue.
toet w a n t e d c u r r e
i h a v e y e t t o hour o f a member
bank
c y for s n y purpose
t o U t tts Customers
Over & situation that i t could not Got Lbs
a l l that
it needs t o d o is t o establish t h e necessery
credit a t
the i e s e r v e Banic a n d t o c h e c k o u t t h e t
credit
i n CUYYENcT.
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272
Instead, therefore,
o f the Federel Reserve Loard exer-~
Gising t h e function which T I believe
i s its most invortent
statutory function a n d its most important
responsibility
under the l a w o f ceterminins -hether o r
not more currency
should issue, w h o does i t ?
T h e t member bank o n d its
customers, a n d you get this peculiar anomaly
under our
systen.
d © @ have tyvelve b a n k s a n d n o n e o f t h e s e b a n s
&ére¢ issuins alone t h e oblisations o f the United
States
gSoverntent.
T h e y circulate, because o f that, a n d i t
is well t o beur thut i n wind a t this time, w h e n t h e
dis
cussions around this table a r e brincing o u t that
there
may b e differences
i n the strength a n d t h e solidarity
of the different Keserve Banks, Wiich are also the different issuing b a n g .
T h e s e notes, should that
difference e v e r r e a l l y d e v e l o p
circulate a t par, o n l y because,
t o a serious p o i n t , w i l l
i n eddition t o being
the oblinction o f the issuing ban, they are
obligation of the United States Governnent.
Wor, w h e t d o e s t h e t m e a n ?
T t means t h a t a n y k e -
serve L a n t h e t over-expands t h e currency, expands i t
or inflates it, not only for its district, b u t sherever
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Federal Reserve Bank of St. Louis
its n o t e s go-s-Cleveland m a y p u r s u e a
v e r y conserva~-
tive policy with reference t o discounts a n d issues; Philadelphia o r Atlanta m a y pursue a
very liberal a n d care}
less policy with reference t o issues and re+discounts,
but t h e m a n w h o lives i n Cleveland, because e f the flu-
idity o f his currency, will suffer just a s much from any
harmful effect that always follew a n excessive volume o f
currency i n the country, whether Clevelend itasues a note
ar Philadelphia o r San Francisco 4tssues a note.
In brief, y o u have g o t a condition under whith t h e
people i n a section o f the country w h o are perfectly conservative a n d cautious,
o n account o f credit a n d currency
practices, m a y b e victimized, just exactly a s i f the
Bank o f France notes circulated i n Englend, a n d vice
versa, o r notes o f the Bank o f Germany, the Reichs bank
notes, circulated freely about Europe.
T h o s e a r e na-~
tional frontiers, b u t while w e ere all within the boundaries o f the same nation, there are a good many economic
frontiers i n this country, a n d there sre a graat many
differences i n the varities o f the soundness o f the currency a n d banking a n d credit practices i n the different
communities thet meke u p what w e call the American nation.
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I ai definitely o f the opinion, Governor-~pardon me,
ana £ will stop very shortly--that i f ve -0o on with our
practice o f allowing this thins t o s o on, there i s only
one c o n c l u s i o n a t w i c h
+ e w i l l e v e n t u a l l y arrive,
and
that i s that the original reserve system has sot t o be
converted i n t o a
central bank.
Governor iiorss.e M r . Ghuirman, m a y
no question o f the authority o f the
Federal e s e r v e Board t o limit t h e issue o f notes i f i t
sees f i t t o d o so, b u t that t h e opinion a n d the judpment
of t n e # e d e r a l K e s e r v e H o a r d w o u l d b e s e r i o u s l y q u e s t i o n e d
in case they did that I thoroughly believe.
S o that the
Bourd h e s sot that t o consider, whether t h e i r judgment
would b e accepted.
T h e Federal Heserve S y s t e m h a s o n e
point ‘mich is not i n other systems, a n d that i s the
legal reserve. T h e act says that the ederal kKeserve
Benk shell not issue credits o r notes combined below that
legal reserve.
Dre willer. Y e s , but then you say-Governor .iorss (interposinz).
plenish it.
T h e y have ~ o t t o re-
.
Dr. .iillcre E u t i t immediately sars that t h e koard
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Federal Reserve Bank of St. Louis
has poor t o suspend the requirements.
Governor iiorss. I t has, but there is the obligation
of the board a n d the banks t o maintain that Limit except
under i1most extraordinary circumstances.
Dr. tiller. a
watter o f fact t o shat
xtent i s that oblization being respected today?
Gevernor Morss.
M y experience i n commercial benks
was that while they had a limit o f legal reserve, they
alvays K e p t their loans s o that they were right close
down t o thet limit.
M y i d e a i s that i t i s very possible
that that i d e a hes tccome p r e v a l e n t amongst t h e b a n s
in this country that t h e Federal keserve Board will n o t
be able t o force u p the reserve o f the Federal Keserve
banks f a r above that legal limit, except i n times o f
epeat depression,
fore I
w h e n i t v o u l d g o u p itself,
a n d there-
made t h e sugzestion thet i t might b e wise t o reise
thet legal limit, i f you thought there were credits being
o
t :
‘:
eiven o u t t h a t o u g h t foo b e s i v e n o u t e
still h a v e t h e s a m e a u t h o r i t y
of emersency,
b u t there i s a
T h e Board would
t o w a i v e t h e l i m i t i n case
process a n d 2
method whotieh
apyeals t o all the banks o f this couwitry, t o limit the
legal reserve,
a n d i t i s available,
a n d some
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276
and e s p e c i a l l y t h e j u d g m e n t
o f t h e F e d e r a l R e s e r v e Bank,
mignt n o t b e ecceptable.
Dr. iiller.
Y o u r position virtually comes t o this,
that the judgment o f the Board will be received
when i t
relaxes safesuards provided b y the Act, b u t n o t
othervisee Y o u may b e right.
Governor iicDougal moved that t h e meetings adjourn
to
meet a r a i n a t 4 3 5 0 w i t h t h e F e d e r a l i:eserve Board,
which
motion was p u t and carried.
whereupon, a t 1:10 o'clock P iis, a n adjournment Was
taken until 4:30 o'clock P w o f the sane d s
ye
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Federal Reserve Bank of St. Louis
JOINT CONFERENCE O F
GOVERNORS O F FEDERiLL RESERVE BANKS A N D
CHAIRMEN O F FEDERAL
RESERVE BANKS W I T H T H E FEDERAL RESERVE BOARD.
Washington, D . C.,
Friday, October 15th, 1920,
The meeting was called t o order b y Governor
Harding, o f the Federal Reserve Board, i n the Board
Room o f the Federal Reserve Board, Metropolitan B a n k
Building, a t 4.30 o'clock p.m.
Governor Harding. G e n t l e m e n , here i s a tele~
gram which sounds a s though i t might b e fram the
Anti Saloon League.
"At mecting tomorrow suggest Federal Reserve Board
consider proposition that Federal Reserve System shall
not engage i n propaganda o r news dissemination o f any
sort, except i t might be the driest o f dry statistics,
and also that credit b e determined exclusively b y
supply, also that system operate a t reasonable profit."
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Federal Reserve Bank of St. Louis
278
That i s signed H. H. Franklin, Syracuse, N e w
York.
ITwish t o make a
report
t o t h e Conference a b o u t
a hearing i n the offices o f the Reserve Board, which
may have ‘some influence u p o n your statements.
S e n a ~
tor Randsell, o f Louiasana, Senator Smith o f Georgia,
Senator Swanson o f Virginia, Senator Dial o f South
Carolina, Senator Harrison o f Mississippi and several
cotton factors o f New Orleans a n d Oklahoma a n d Savannah
appeared b e f o r e t h e B o a r d a n d w a n t e d u s t o revoke
ox
suspend our rulfing on the cotton factors! paper, T h e
ruling i s that under Section 1 5 paper t o be eligible
must b e paper the proceeds o f which have b e e n used o r
are t o be used for industrial, commercial o r agricultural purposes,
I
n our regulations, o f which the
codification i s out this afternoon, this ruling tas
made o n advice o f Judge Elliot about a year ago, i n
November, 1 9 1 9 , t h a t t h e s e p r o c e e d s m u s t h a v e b e e n
used i n the first instance.
N o w , Senator Hoke Smith
gays h e i s very clear that h e thought about thig w h e n
it came up, and that the words "mere investments" hag
something t o d o with it, a d t h a t o u r ruling i s wrong,
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Federal Reserve Bank of St. Louis
279
and I think probably t i o o r three members o f the Board
were inclined t o agree with him.
A t any rate counsel
43 over there w i t h h i m now, w i t h a committee o f seven
or eight o f them, a n d I presume the next qMestion w e
shall have t o decide i s whether w e are going t o back
water o n this cotton factor ruling.
This cotton f a c t o r ruling i s pretty closely
linked u p with t h e automobile finance companies. A
number o f the automobil e
manufacturing companies d i d
not care about incurring large obligations themselves
and organized subsidiarfes a n d wanted their paper de»
clared eligible o n the ground t h e y were being used f o r
industrial p u r p o s e s .
The contention o f the cotton factors i s they claim
they are n o t private bankers; t h a t t h e y are n o t doing
a general financial business, t h a t these notes o f
theirs a r e n o t i n a n y s e n s e f i n a n c e b i l l s ; t h a t t h e
cotton factor i s a specialist; m o s t o f them are located
in Memphis and New Orleans and Savannah and Auguste,
Georgia and Charlestoh and Wilmington and Houston,
Texas.
T h e y make arrangements with farmers i n the
spking o f the year, usually taking a mortgage o n the l a n
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Federal Reserve Bank of St. Louis
280
a chattel mortgage,
o r anything t h e y c a n get, a n d
the essence o f the proposition i s that i t i s not a
gainful p r o p o s i t i o n f r o m t h e s t a n d p o i n t
o f interest,
they claim, and 1 guess i n most cases t h a t i
s true.
en
Wha t they w a n t i s t o g e t t h e cotton.
T h e s e factors
usually have their warehouses a n d compresses a n d they
charge a commission, a n d i t is quite a profitable busines
and the advances that the factors make all during the
year g o to the making o f the crop, and the advances
they make n o w a r e made pending t h e sale o f the crop.
They say the whole proposition i s intimately tied u p
with t h e production o f the cotton crop, a n d that
ag they specialize i n that a n d d o not g o into a n y
other proposition i t i s purely a n agricultural propo-
sition, a n d that any loans they make are for purely
apricultural purposes. I
was rather adverse t o
agreeing with this rmling last year, because I knew
the importance o f the factors! business t o the cotton
growing industry i n a good many sections, b u t counsel
linked i t u p s o with a l l these other financial cor.
porations that are financing all sorts o f things that
just from the legal s t a n d p o i n t I overcame m y redacte
ance a n d w a s a m o n g t h e n u m b e r t h a t v o t e d t o a d o p t t h i s
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Federal Reserve Bank of St. Louis
rulings
Governor Seay.
slight c h a n g e s
I t seems t o me that, with some
i n the practices
o f t h e c o t t o n factors,
that t h e y c a n a c c o m p l i s h w h a t t h e y d e s i r e u n d e r t h e
ruling o f the Board.
Governor Harding.
T h e w a y t h e y work i t now, t h e y
keep a book account; t h e y make a n advance t o their
client, instead o f taking his note they charge h i m
up o n the ledger;
i n the fall o f the year h e sends t h e
cotton; t h e y charge a l l freight a n d everything like
that, t h e n when t h e cotton i s sold t h e y d o not remit
him f o r the cotton unless h e specifically reqmiests
it; t h e y g i v e h i m c r e d i t
o n o p e n account; t h e r e i s a
credit shown there f o r a n y amount h e has there; s u b ject t o draft and, a s a rule, t h e farmer does n o t draw
all this i n one draft, h e uses this a good deal a s a
bank, t h e y l e t the money stay a n d draw o n the balance
ag needed, I
asked t h e qmestion w h y they could n o t
say to the farmer "You uve us $2,000 or $3,000 and vour
cotton i s not ready f o r sale; w e are needing some
money a n d would like t o close u p your book account;
send us your ninety day note,” then there would not
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Federal Reserve Bank of St. Louis
be a n y question, h e r e i s the farmer discounting t h e
Sage
w i t h a n endorsement that would b e eligible,
/ T h e y say, "No, here i s a business that has been
going o n for a hundred years and we d o not want
to change our way o f doing business,” although the
game p e o p l e
o n yesterday s a i d t h a t t h e f a r m e r w a s
so very b a d o f f f o r money h e would n o t hesitate t o
gign a note, a n d now, these factors c o m e here this
afternoon a n d s a y i t waild insult t h e farmer t o
ask h i m t o sign a note; t h a t h e a a
Mr, Martin,
n o t d o ite
W h e n t h e y change f r o m the cotton
factors! secured note t o take t h e note o f the planter
of the cotton, that note of the cotton planter
comes u p gay to the Federal Reserve Bank indorsed
by the cotton factor a n d also b y the offering bank,
with novcotton behind it. _
We are presented a
statement o f the cotton planter, which i s more
or less questionable a s d« rule,
o r t o the statement
of a cotton factor, which never shows a good ratio,
and y o u have g o t the indorsement o f the bank.
That
is all y o u have got. I
am speaking n o w about t h e
security o f the paper,
B u t when the cotton factors!
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Federal Reserve Bank of St. Louis
paper cames i n secured b y the actual cotton,
s o far
as security i s concerned y o u are a great deal better
OLT «
I t i s true t h a t y o u c a n make t h e demand t h a t
the n o t e o f t h e planter, i n d o r s e d
b y t h e factor,
be also secured b y the cotton, b u t they will i m mediately come a t you a n d s a y that y o u are asking
from them something entirely different from another
class o f borrowers;
a s security goes what they are
shifting t o Mr. Seay, i n our experience, i s not as
good a piece o f collateral f r o m a banking standpoint
ag what they gave originally. I
just suggest that.
Governor Harding, A n o t h e r feature that might
affect this statement,---I want to advise you that
at this meeting this afternoon, while some o f the
old, familiar faces were there, there were a good
many distinguished men, a much higher class gathering than any we have had heretofore aia: e e u a n d i t
was open tbh the press, w e had all The Associated Press
' people, a n d private correspondents o f different papers
here, a n d yet Senator Ransdell and tio or three
others made t h e statement, Senator Ransdell particularly, about t h e desperate condition o f the South,
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Federal Reserve Bank of St. Louis
that i t needed t h i s h e l p o t h e r w i s e t h e y w e r e broke,
and ali that sort o f thing.
I f this spreads a l l
over the country that i s going t o start some
trouble, they will say, "Here was a representative
meeting."
T I cautioned Senator Ransdell abamt it,
but could not get a t him i n time,
Governor Seay.
O u r counsel has examined
into t h e warehouse acts o f several States i n our
district a n d h e h a s r e a c h e d t h e o p i n i o n t h a t t h e
cotton f a c t o r h a s n o t i t l e
t o t h e cotton;
h e has
an equitable interest i n it, but n o title t o the
cotton.
The Chairman.
T h e y claim, under the laws o f
Georgia and Tennessee, that the fotton factor has
title t o the cotton equal t o the amount h e advanced
againgt it.
H
cotton i s n o t a
e has the right t o pledge.
fundable c o m m o d i t y ;
The
t h e y keep a
separate record o f each bale, a n d i f there were o n e
hundred bales o f cotton a s collateral t h e y are care-
ful not t o pay o n each bale any more than their amount
of equity.
Governor Seay. T h a t is so in the State o f Georzia,
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Federal Reserve Bank of St. Louis
285
but i s not s o i n the States o f the Fifth Distriot.
Mr, Wills.
the banks?
M a y I ask a question o f the m e n i n
I s the cotton factor a financial cor-
o selling and marketing?
poration, p r i m a r i l y ; r
Mr. McCord. S e l l i n g and marketing.
Mr. Wills.
S e l l i n g a n d marketing principally,
is that correat?
Mr. McCord,
Y@Se
Governor Wellborn, A n s w e r i n g Mr. Wills, cotton
factors h a v e c o n s i d e r a b l e c a p i t a l themselves.
Mre Wills.
W h a t d o they d o principally, a r e
they a selling and marketing corporation, advancing fund
to the farmers, either before o r after, o r are t h e y a
lending corporation primarily?
T h a t i s the point.
Governor Wellborn. T h e i r main business i s marketin:
and selling.
Mr. Hardy.
M a k i n g advances t o the merchant a n d
through h i m t o t h e f a r m e r s f o r t h e p r u p o s e
o f plant-
ing and raising a n d harvesting o f the crop. I
was
in that line o f business myself,
Mr. Wills, T h e company itself i g a marketing
and distributing company primarily, a n d t h e advancing
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Federal Reserve Bank of St. Louis
286
of money t o the farmers i s i n c i d e n t a lot that business,
.. that correct?
Governor Seay,
H e t s borrowing money for the
purpose o f advancing t o the farmers.
T h e r e i s no
deal online that from the conditions.
Mr, Wills.
I
t i s important there b e some state-
ment o n that,
Mr. Hardy.
E v e n i f there i s some question about
the warehouse laws o f any o f the states, I have never
known i n a n observation o f forty years o f but one case
in which title e
t h e cotton was questioned, a n d that
was questioned w h e n i t was stored i n a private warehouse
and not i n a regular storage warehouse, a n d I
am very
frank t o say that I considered the ruling of the Board
a great blog t o the cotton factor business o f the
South,
Mr, Williams.
T h e rule h a s n o t been enforced
and i t certainly creates a
very keen situation, a n d I
have felt that from the beginning.
T h e business i s a
safe business; w e have never discounted i n the Richmond
Bank a n y paper o f cotton factors t h a t d i d not make a
good, substantial statement, a n d where the paper showec
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Federal Reserve Bank of St. Louis
287
clearly that i t wag eligivle w e have considered t h e
credit a perfectly fair risk, and when it comes t o be
secured b y the cotton itself I do not think, as a rule,
there i s any danger ofthe cotton being pledged beyond
the equity which the factor has i n the paper, andthere
is n o better conmodity stored t h a n cotton;
i t does n o t
deteriorate i n quality; i t is not easily damaged, a n d
it i s usually a
commodity that i s readily a n d promptly
marke ted,
Mr. d e C o r d , I
want t o a s k M r , H a r d y a
question.
Is i t not true, Mr. Hardy, that a large bulk o f the
cotton i s h a n d l e d j u s t f o r a
f e w s h o r t days; t h a t t h e r e
is very little o f that o l d advancing going on; t h a t
the merchants i n the interior s h i p t o the factor f o r
sale andget advances i n order t o have i t sold and
immediately handled?
Mr. Hardy. I
do not know a s I catch t h e exact
adrift o f your duestion,
Mr. M6Cord,
T I mean this, instead of advancing a
lot of money i n the Spring of the year t o the planter,
that that i s a@argely a thing o f the past; t h a t t h e
great volume n o w comes f r o m the country merchants t o b e
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Federal Reserve Bank of St. Louis
sold -on credit?
Mr. Hardy.
that i s true.
A
t the time cotton i s shipped
T h e r e have b e e n advances made i n
the early spring.
Mr, Williams. I
should like t o ask the Ghair-
man o f the N e w York Bank i f h e c a n discern a n y wide
difference i n principle between t h e business o f the
commission merchant, w h o i s a factor i n New York,
Bliss-Fabyan Company, t o whom are sent the products
of the mills i n Boston, Fall River, a n d Providence,
and who are accustomed 4 6 advancing t o those mills
the money f o r this operation t o produce their goods,
and who i n turn can assign their goods t o these distributing agents w h o gell them over t h e country, b e tween their paper o n the o n e side a n d the cotton
factors o n the other,
I s that n o t tewy much t h e
same i n principle?
Mr. Jay. T h e r e a r e t w o kinds o f those comaission
merchants, Mr. Gomptroller,
O n e i s the commission
merchant: w h o actually owns the goods.
Mr.W illiams, I
was speaking not s o much o f the-~-«
Mr, Jay. E x c u s e me, and I will speak o f the
tiro
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Federal Reserve Bank of St. Louis
289
kinds i f I may.
O n e actually owns the goods, you
find, w h e n h e makes h i s final statement,
h e shows h e
has the goods there. h e r e are others who do part
of t h e i r b u s i n e s s t h a t w a y a n d p a r t o f i t b y advances,
but many o f i e e e commission merchants w h o borrow,
who. advance t o their mills take a note o f the mill
and indorse that, a n d that i s the w a y they g e t the
credit.
Mr. Williams.
D o y o u n o t s o m e t i m e s s i m p l y ad-~
vance them o n open account, advance them o n drafts?
Mr, Jay.
T o some extent.
Mr. Williams. A n d do they not them ag an offset
to t h e a d v a n c e s t h e y m a k e i s s u e t h e i r c o m m e r c i a l p a p e r
and d i s p o s e
o f i t t o t h e i r banks, w h i c h t h e n r e a c h e s
the reserve banks?
Mr. Jay.
T h e main part of that business i s done
the o t er way, a n d the ones w h o d o not take merchandise,
who merely make advances, a r e those w h o take notes f r o m
the mills a n d indorse those a n d put those i n the banks,
just w h a t i t seems t o m e t h e s e f a r m e r s s h o u l d d o w i t n
the cotton factors. I
understand t h e y s a y i t has n o t
been t h e c u s t o m d o w n there, b u t u n d e r p r e s s o f g<3r e a t
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Federal Reserve Bank of St. Louis
290
emergency many customs change.
T h e r e w a s t h e custom,
for example, n o t t o circulate paper o n the Pacific
Coast; always t o circulate gold, but during the war
théy g o t r i d o f gold a n d circulated paper,
Mr. Hernlin,s
I s i t not a kind o f ownership o f
Mr, Jaye I
would n o t s a y so.
goods.
H
e does n o t
show i t o n his statement, does he?
Mr. Hamlin, I
should think t h e question was,
can h e give a note a n d secure i t i n that w a y b y
pledging t h a t p a r t i c u l a r w a r e h o u s e r e c e i p t ?
Governor Seay,
H e can pledge his equitable
interest, n o t fhe commodity itself.
Mr. Hamlin.
H e pledges h i s interest,
i t is a
kind o f title, i t is treated i n equity as a title, a s
a legal t i t l e f o r t h e p u r p o s e
Governor Seay.
Mrs Hanlin.
o f pledge.
T h a t much h e can pledge.
I n other words,
i s h e not exactly
like the cammission merchant who has. the bLbLe a t
he c a n d o that,
I t i s not the title u p t o the full
value, b u t i t igs title t o a certain proportion o f
the v a l u e
o n w h i c h h e ? loaned, I
do not see the
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291
distinction i f the m a n has t h e right t o pledge whether
he could pledge twenty-five p e r cent, or, i f he owns
the whole o f t n e goods,
h e c a n pledge o n e hundred p e r
cent.
Governor Seay.
Mr, Hamlin,
T h e owner c a n take t h e cotton,
H e has got t o pay all the broker
Bob.
Governor Seay.
Y e s , the man that makes the ad~
vance o n the cotton has n o t g o t it, a n d t h e broker h a g
the funds repaid.
t o him b y the farmer t o whom h e ad-
vances i t , a n d they d o what t h e y p l e a s e w i t h it;
the Federal Reserve Banik, o r the bank that advances
has n o t the cotton.
Mr. Wills. I
asked t h e cuestion f o r a n o o r yes
reply, «whether t h e c o t t o n f a c t o r s c a n P l e d g e
i t is
up t o the bank, i f h e has n o t g o t i t h e does n o t
have
it, b u t t h e p o i n t i s , a r e t h e s e c o t t o n f a c t o r s
primarily
selling a n d distributing organizations,
o r just pledged
to turn back t o the farmers under a loan,
o r are t h e y
lenders
o f money primarily?
Governor “ellborn, f
in tivo minutes,
can explain t h a t t o you.
T h e essential p a r t o f t h e factor
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business i s selling, because they classify the
farmer's cotton, t h e y gerade it, y o u know. T h e a t i s
the most essential feature i n the cotton factor's
business, that the farmer's cotton 1s actually graded
and sold o n its merits; t h a t 1 s a great advantage t o
the farmer; i t is the only way i n the world h e can
get h i s c o t t o n p r o p e r l y classified.
Governor Seay. I
think I can answer both
your questions i n one. T h e y lend t h e money t o get
the cotton t o sell.
Mr. Williams.
A r e t h e y o r not i n the business
mainly f o r the purpose o f making t h e difference between
what they pay end what they charge the farmer, o r for
the purpose o f getting control o f his cotton.
Governor Sesy. G e t t i n g control and handling the
cotton.
Mr. Ramsey. I
Wills' question.
think I can partly answer Mr.
T h e only purpose for which a factor
borrows m o n e y i s t o enable h i m t o h a v e f u n d s t o a d -
vance t o these farmers.
T h e Governor a n d myself dis-
cussed i t together a n d I was quite well satisfied. I
may s a y i n this connection i t i s not a large inter-
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est in our District and some of Houston's bankers, o n
the promulgation o f counsel's opinion, h a d been inclined--the r u l e i s pretty well settled i n our
State, a n d I think that t h e general rule,
as the factor i s concerned,
s o far
i s that h e has a lien;
title
his title i g an equitable, possessory/in a way thet
extends over a n d beyond t h e claims o f reimbursement f o r h i s advancement.
N o w h o w f a r h e could trans-
fer his lien b y the hypothecation o f the real ownership i n some o n e else might
Mr. Wills.
b e a very serious question.
M a y I ask Mr. S e a y 4 question?
You say,"lend t o the farmer."
T h a t could not b e
construed t h a t t h a t w a s a n a d v a n c e
o n the purchase
the
price o f the cotton; i t i s 4 s t r a i g h t loan; i f
cotton pessed o u t o f the hands o f the cotton factor
this b e
and was seld under a n y circumstances could
construed a s a n advance payment o n account o f the
asle prise o f the cotton?
Governor Seay. Partially I think i t could.
Governor Harding. I
stated t o that meeting
it
that even 4 f counsel should advise the Board that
concurred i n a previous ruling, and the cotton fact-
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Federal Reserve Bank of St. Louis
or's peper wes taken to be eligible, there i s no
obligation o n the p a r t o
f the F e d e r a l R e s e r v e B a n k
to discount i f i t considered i t undesirable t o d o so.
Puro of the Senators said "We will relieve the situation a t this end, w e will put i t
Mr. Curtiss. I
through
y a
l o c a l banks."
want t o answer the Comptroller's
statement w i t h reference t o the commission houses,
W e
have just been i n touch w i t h every commission house i n
the N e w Y o r k district, particularly t h e names referred
to; the factor does n o t borrow, t h e mill borrows, a i d
it is a question o f the eligibility o f the mill note
that w e test when i t comes t o us.
W e h a v e had
several cases i n our district where commission houses
were doing nothing b u t advancing; t h a t note w a s n a
eligible w i t h us.
4s advancing.
W e have a
warehouse company that
T h e y have control
their warehouse.
o f the goods
i n
W e have refused t o take thet note,
believing i t was nothing but a ffence bill, but in
the case o f commission houses t h e commission houses
invariably indorse, b u t t h e mills thenselves borrow,
and the same question of eligibility comes up as it
does i n every mill case.
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Federal Reserve Bank of St. Louis
Governor Harding.
A n o t h e r statement made b y
Senator Hoke Smith was that although we p e a s e
ruling a year ago, that t h e bank--I d o not know which
bank h e referred te,--the banks down there, h e said,
disregarded i t entirely until about t w o months ago,
and. that brought about e a very b a d situation o f affairs,
and that t h e y urged o n u s now, n o matter what w e might
ultimately d o with it, t o suspend that operation s o
they could g o shead a n d load u p pending o u r final
decision.
D o e r s h e r e f e r t o you, M r . Wellborn,
as
disregarding the rulings o f the Board?
Governor Wellbern.
W e l l , t h e ruling came out,
I think i n February, t h e latter part o f the season,
I think the benkers' acceptance ruling came o u t
February,
i s m y recollection.
i n
T h a t w a s t h e only paper
we had, a n d w e did not disregard it, w e simply d i d
Lt
hot put/into effect because i t was the tail-end o f the
season, b u t t h i s s u m m e r ,
i n June, I
sent o u t a
notice t o all o f them, a n d printed t h e ruling
formel
o f the
Boerd a n d told them that would b e o u r policy this fall.
Mr. Williams.
H e said i t was a mighty good
thing y o u did n o t put i t into effect, t h e t i t would
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Federal Reserve Bank of St. Louis
296
have caused a more scute condition o f things d o w n
there t h a n t h e r e i s now.
~
Governor Seay.
Y o u mey recall the cotton
factors i n the State o f Georgia negotiate bankers’
acceptances i n our distridt, b a s e d u p o n those condi»
think the court held, a n d v e r y properly
tions. I
under t h e circumstances,
thet
i t was not a
subject for a banker's acceptance.
proper
T I should like to
say that, i n m y judgment, a n d i n the judgment
bank, that
o f our
i t i s a n exceedingly safe business, based
upon the commodity o f cotton; t h e o n l y danger: t h a t
I can conceive i n classifying
i t as a n eligible trens-
action 1 g in opening the question w i t h regard t o
other finenctal corporations which make edvances o n
commodities.
Governor Harding.
with four Senators
T h e counsel i s over there
o f the U n i t e d States, a l l
o f whom
are telling h i m that the ruling i s altogether wrong;
that t h e y were i n the Senate a n d helped pass t h e bill,
and eech one, I
guess, h a s h a d something t o d o with
this particular Section 15.
counsel
M g guess i s that
i s g o i n g t o backe-track o n t h e p r o p o s i t i o n ,
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Federal Reserve Bank of St. Louis
297
and i t will come right strat¢cht u p t o the Board
whether w e are going t o back-track. I
do not mind
beck-tracking i f I a m wrong, b u t i f I feel I
right I
am
a m going t o stand t o m y guns i f I e m the only
one that does it.
B u t I want t o know,
be p e r f e c t l y c o n s c i e n t i o u s a b o u t i t .
I
i n order t o
t
i s a close
point f r o m m y limited knowledge o f law, o n e
things, I
imagine, t h e t might
o f these
b e decided either o n e
way o r the other. L o o k i n g a t t h e thine from t h e etand-.
point o f the system a n d the whole thing, I
lieve a
d o not b e -
change i n this ruling i t s going t o eid very
much t h e lending power o f the banks, because those
banks i n the p a r t i c u l a r districts where t h e y expect
to crowd this paper i n have gone s o far I
how they are going further,
ble. I
do not s a e
n o matter whet i s eligi-
should just like t o pass t h e word around t h e
table, f o r m y own information,
a s t o whether
o r not,
with the lights before you, y o u think y o u Would, a s a
member o f the Bosrd, v o t e t o rescind this Opinion a s
to the eligibility of cotton factors' paper. W h a t
is your opinion, M r . Martin?
Mr. Martin.
M a y I make o n e statement?
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Federal Reserve Bank of St. Louis
Governor Harding.
J u s t let i t g o on
record.
Mr. Mertin.
T h e cotten fecters' paper first
came f o r consideration befcra us, a n d l t was i n two
characters, u n s e c u r e d a n d secured. I
heve t o g o
through this i n order t o give y o u the full detail.
was decided that an unsecured cotton factor's note
was not eligible.
T h e r e i s e ruling o f the Board
i n
the last pamphlet i n regerd t o commodity a s t o whether
marketable staples, p r o p e r l y stored, whether such
paper w a s c o l l e t e r a l
o r notes.
question r a i s e d a b o u t a
T h e r e w a s never a n y
secured c o t t o n f a c t o r ' s n o t e ,
but the unsecured cotton factor's n o t e w e ruled w e s
ineligible. T h a t was objected t o seriously, a n d t h e
matter was taken u p with t h e Board; t h e Board suggested
that i n order t o get a ruling that t h e Memphis banks
offered a note t o the St.Louis banks unsecured, B a r t o n
& Ce's note o f Memphis was offered t o the St.Louis
Benk, and, acting i n the usual way, w e said i t was
ineligible, b u t accepted from the Memphis benks a
brief o n cotton paper looking towards the establishment o f a n unsecured cotton factor's note a s being
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299
eligible.
T h a t brief, w h i c h i s i n the files o f
the Board, answers t h e questions t h a t Mr. Wills h a s
asked, a n d i f i t were referved t o y o u would s e e
that s o far as the Tennessee factors are concerned
it traces t h e t r a n s a c t i o n f r o m the beginning t o
the end.
T h e ruling o f the Board was mede b y Mr.
Herrison, i f I remember; t t was not i n Judge Elliott's
time.
Mr. Jay.
W h a t w a s t h e date, please?
Mr. Martin.
ing c a m e o u t ,
I n February, 1919.
W h e n that rul-
s o f a r a s o v r B o s r d w a s concerned,
we
considered that i t finally settled the case a s t o a n
unsecured cotton factor note.
I t did not enter o u r
heads a t all, a s the case h a d come u p o n a n unsecured
note, t h a t i t referred t o a secured cotton factor's
note, since the commedity r e g u l a t i o n wes still
among t h e regulations.
c o e d s
w e m a y have
been i n error, b u t under o u r understanding
o f thet
regulation, without question, until some little time
ago, w e did take the secured cotton facter's note,
thinking that w e were acting strictly i n accord w i t h
the regulations
o f the Board,
S i n c e w e have b e e n
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Federal Reserve Bank of St. Louis
300
advised that that ruling
o f February, 1919, which
on careful reading recently I find does n o t speak o f
unsecured o r secured netes, b u t since w e have b e e n
advised that that ruling m e y have covered secured
paper too, o f course,
a u W e always do, w e have t r i e d
our bast t o carry o u t not o n l y the letter b u t the
spirit o f the rulings o f the Board.
Mr. Miller.
W h a t i s your answer, v e s o r no, t o
Governor Harding's question?
Governor Harding. I
asked you, were y o u i n m y
place t o vote, i f you would vote t o reverse that
previous ruling?
Mr. Martin. I
should like t o vote this way,
that i t be postponed until this crop movement i s
en-.
ever, a n d that t h e n the regulations b e strictly
forced.
Mr. Miller.
T h e vote is, no.
Governor Harding.
Y o u will remember t h e regu-
o f elilations i n which w e laid d o w n the primary test
gibility.
T h a t covers a broad mass
o f opinions.
W e
things
back-tracked o n all of that, let i n all these
four o r
that h a v e b e e n r a i s e d h e r e t h e l a s t three,
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Federal Reserve Bank of St. Louis
five y e a r s , i f w e s a y the paper i s eligible where
the proceeds a r e t o b e used, o r heave been used f o r
industry o r egriculture;
w e put that i n the regula-~
tions there i n the first instance; t h e Senatorial
gentlemen questioned o u r right t o d o that, a n d y o u
oper¥' up all o f this question about mill commission m e n
and automobile manufacturing, a n d everything-~
Mr. Ramsay.
A n d the wheat, too?
Governor Harding.
Mr. Jay. I
A n d the wheat too.
would not back-treck o n the general
principles, b u t a s t o security that indicates fairly
Glearly that hoe has got title t o it-«he sannot give
title 1 f he has not that title.
Governor Harding.
D o y o u think i t would b e
possible t o differentiate
i n favor o f odten factors,
to save o u r faces without disturbing a l l other rulings w e have made?
Mr. Jay.
W h e r e t h e y give security.
Governor Harding.
T h e y claim i n Georgis and
Tennessee they have the right t o give security u p t o
the amount o f their equity; t h a t beyond that, I
lieve, t h e y commit a penal offense.
bee
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Federal Reserve Bank of St. Louis
502
Mr. Jay. I
do not know anything about those
details.
Me. Ramsay.
ing correctly,
T h e Judge used the Board's rule
a n d w e should n o t make advancement o n - -
Governor Harding.
M r . V a n Zandt, d o you agree
to that?
Governor V a n Zandt.
Governor Harding.
Yes.
M r . MeDougal?
Governor McDougal. I
have not heard all this
discussion, b u t m y understanding
o f the situation
would lead me to believe that cotton factors’ paper,
as it was described a few minutes ago, would b e eltgible either i f the factor could s h o w 4 satisfactory
financial statement, o r if the paper i n question was
secured, otherwise i t was note
Governor Harding. M r . Wellborn?
Governor Wellborn.
O u r bank h a s ruled that w e
will not accept any cotton paper unless i t is secured.
We put i n effect l a s t fall, therefore I
think y o u
gentlemen ought t o stand o n the cotton facta’s paper,
because i t 1 s not e financial corporation o r a financtal
business.
T h a t i s only a small part o f i t .
39S
Governor Harding.
Governor Norris, w h a t
i s your
view?
Governor N o r r i s .
I a m not a t a 1 1 sure t h a t I
understand t h e a u e s t i o n s u f f i c i e n t l y t o express
opinion.
My general impression i s that I
an
would n o t
rescind t h e ruling.
Governor Harding.
Mr. Ramsay.
Mr. Ramsay?
I would not.
Governor Harding.
Mr. F a n c h e r ?
Governor Fancher.
I would n o t .
Governor Harding.
Governor C e l k i n s ?
Governor Calkins.
No.
Governor Harding.
Mr. R i c h ?
Mr. Rieh.
No.
Governor Harding.
Mr. Austin.
Mr. A u s t i n ?
I would.
Governor Harding.
Governor Morss.
Governor Morss?
Noe
Governor Harding.
Mr. Curtiss.
Mr. C u r t i s s ?
No.
Governor Seay?
Governor Harding.
Governor Seay.
I think the Board's ruling that
it must b e used f o r commercial purposes i n the first
instance 1 s too important t o reverse.
Governor Harding.
Any way of modifying without
reversing?
Governor Seay.
Ster foils
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Yes.
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Federal Reserve Bank of St. Louis
304
Governor Harding.
O p e n u p a n avalanche a n d the
has t o be done a l l over.
Mr. Heath?
Mr. Heath, I
would say, no, o n vour proposition.
Governor Harding,
Mr, MeGord,
M r . McCord?
O n l y o n secured paper,
Governor Harding. M y r . Harey?
Me. Hardy. I
coneur i n Mr, Seay's answer,
Governor Harding.
I a m sorry that these matters
have t o come u p and b e reinforced b y Senators
a n d Congressmen, I
think w e a r e capable
o f discussing t h e s e
things i n a n impassionate w a y without their help,
At the same time t h e fact that they d o
come i n o n
this t h i n g i s n o t g o i n g t o inflvence m e
one way o r
the other as t o the merits o f the proposition. I
do not want t o be g o straight a s t o lean backwards,
Governor Seay, M a y I say we had a n interview
with
a cotton manufacturer and merchant about
the mling o f
the Board, and the explanation i s satisfactory
to
them; h e said he could d o business i n State
o f Virginia
on that ruling.
Mre Villiams. M r , Chairman, I was
a t that discussto:
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Federal Reserve Bank of St. Louis
305
today and I should like t o say a few words.
A s far
ag I can see it.would b e hard t o find, i n my judgment,
paper that igs more eligible, within the meaning o f
the act, t h a n t h e paper w e have been discussing.
The
language o f the act is, paper, notes, bills o f exchange o r drafts which have been o r may be used for
agricultural, commercial o r industrial purposes.
Have
been o r are t o be used, N o w , a g I gaid before, i t
seems
t o m e t h a t this c o t t o n factors' p a p e r , w h i c h w e
are discussing,
i s eligible b o t h a s commercial paper
and a g farmers! paper.
I t has been made clear that
the f a c t o r s o n l y b o r r o w t h i s m o n e y f o r t h e p u r p o s e
of
making advances t o farmers and t o enable them t o grow
their crops. T h e y use i t for n o other purpose. T h e y
have n o dealings with anybody else.
Governor Seay.
Mr, Williams.
A n d the merchants. ~
T h e factors who are there today
told us, Mr. Barret, for example i s one o f the largest
factors i n the South, s a i d his dealings a r e entirely
with farmers. I
think that that was t h e statement,
was i t not, Governor? T h e r e f o r e his whole business
is f o r the purpose o f producing agricultural products.
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Federal Reserve Bank of St. Louis
506
When he has enabled the farmer t o raise his crops and
continues his loans the advaned ‘are then made for com-~
mercial purposes, f o r one s t e p o r another i n carrying
the product f r o m the producer t o the consumer, f o r
the purpose o f carrying t h e product t o the mill man.
So i t seems t o me that however w e look a t the business
of the factor i t canes either under the head o f
agricultural purposes o r commercial purposes,
or
both,
Governor Harding. M r . Comptroller, sometimes
these factors are very heavy speculators. I
know,
of my own certain knowledge, that one o f the gentlemen who talked t o us today, made and lost i n two
seasons $750,000; made i t one season and lost i t the
next Inspeculation.
W h a t would happen, supposing
he had been advancing t o farmers and we took his notes
&s commercial paper? T h a t was one o f these men who
talked t o us s o very nicely this afternoon.
Mr. Williams. G o v e r n o r Harding,
sh,
i s that n o t
true a s t o every class o f men who d o business with
the member banks? T h e r e are among them all tremendous speculators, a n d others w h o confine themselves
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Federal Reserve Bank of St. Louis
S07
to the legitimate business o f manufacturing
or
merchandising o r commercial pursuit. I
do not think
because some cotton factors are great speculators
at times t h a t w e should shut o u t a t once
f r o m the
benefits and advantages o f the Federal Reserve
S773 tem
the whole olass o f cotton factors, throigh
whan a t
least o n e half o f the cotton e r o p o f
the country
is financed, I
think Mr. Barret, w h o was o n e o f
the leading speakerg there today, stated
that i n
his part o f the country probably three-fourths
of
the cotton was financed through factors,
did he
not?
I s that your recollection?
Governor Harding. I
think he stated that,
yese
Governor Norris. t
should like t o ask t h e
Comptroller a question for
m y OWn information,
It would have some bearing o n
m y judgment i n thig
thing.
A a r e these advances t h a t
the factors make
exclusively f o r t h e m a k i n g
o f t h e c o t t o n crop, f o r
the seeding, f o r the Planting,
f o r the cultivating,
or are t h e y general advances
t h a t a r e made t o a
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Federal Reserve Bank of St. Louis
508
cotton planter o u t o f which h e buys h i s food a n d
his clothes a n d whatever else h e may want t o buy?
My, Williams. ,'..: Is not the first part
of your question part o f the last?
i n order t o
make h i s cotton h e has g o t t o live while h e i g
makeing it. I
suppose that covers his living
oxpenses while h e i s seeding, planting a n d culti-
vating his cotton,
A s I understand i t they simply
advence t o the farmers t o enable t h e m t o produce
the crop and f o r n o other purpose.
Governor Morrs,
‘hen a
man owes m e f o r m y
whole year's living i t does not seem to me he is
advancing money for the benefit o f the Federal
Reserve System,
Dr. Miller. I
think w e have canvassed t h e
opinion of all the Chairmen and Governors.
Mr, Williams. I
just want t o add one other
thing, t h a t i s that these gentlemen present a t
the Conference t h i s evening made i t ‘very clear
that their business w a s n o t the business o f
making a profit b y borrowing a n d lending money;
that, a s a matter o f fact, t h e leading m a n there
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Federal Reserve Bank of St. Louis
explained t o us there that they frequently are
paid more f o r their money t h e n they receive f r o m
the farmers; t v o conspicuous cases o f that sort
were mentioned i n conference this afternoon, a n d
that t h e m o n e y t h a t t h e y w e r e c o r r o w i n g w a s
for
the purpose o f enabling them t o make the advances
to the farmer only for the handling o f the cotton,
where their profits c a m e in, a n d they also made
that differentiation between t h e commercial dis-
count companies, whose profit i s solely made i n
interest, a n d their profit, which i s made b y the
handling o f the commodity. .
Mr, Hamlin. I
should like to say that I
listened with a great deal o f interest t o that
debate this afternoon,
S p e a k i n g f r o n the general
impression made o n m y mind, i t was that the factors!
note, unsecured, w e could not consider a s eligible.
In other words, a s the Governor has pointed out,
it must b e the use t o the maker o f the note which
governs, b u t Senator Smith brought o u t the fact that
the very next section provided that, "Nothing
herein shall prevent such bills o r notes being
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Federal Reserve Bank of St. Louis
discounted o r secured b y staple agricultural products,
or by other goods, wares, o r merchandise," I
under A
think
p o e could put in a cotton factors! secured
paper, Y o u could brviygaim within the range of eligible paper, because i t says if such paper is secured
by G o v e r n m e n t b o n d s y o u c a n g a m b l e
o r d o anything y o u
want, b u t i t must n o t b e a s t o other paper merely
for investment,
N o w , t h e question is, c a n v o u say
that advance o f the cotton broker i s merely f o r investment w h e n those m e n testified, a n d I have n o doubt
they spoke the truth, that that i s really the main
business, t o sell that crop, from the day o f the planting o f the seed t o the final sale, t h a t they make some
advances a n d very often d o not get back the interest,
but the main S
e e
3
t h e sale, a n d m y mind hinges
on that proviso which Senator Smith cays was drawn
for
this express purpose, a n d I
think i t well f o r counsel
to carefulgy study that and look u p the debates
and
look u p the amendments a n d s e e i f that does
a d d what
I believe i s not entirely a question o f an
unsecured
note o
Governor Van Zandt.
M r . Chairman, i t is
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Federal Reserve Bank of St. Louis
certainly understood t h a t occasionally t h e proceeds
of an advance made b y a cotton favetor t o a farmer i s
used b y h i n . t
o tuy o n cutomobile.
Governor Seay. S u p p o s e , Governor Hamlin,
he
cannot give a n absolute title t o the commodity, b u t
only a n equitable interest. I
do not want t o argue
against this thing, I only want t o build u p the fact.
Mr. Hamlin.
I f the factor has a n y interest t h a t
enables h i m t o make a legal pledge o f the certificate
I should say that would come within the definition
of an eligible paper, I should say that i s the question.
Governor Van Zandt.
B u t i n the event that h e
cannot pledge t h e actual commodity,
i s there a dif-
ference i n that case between t h e unsecured a n d t h e
secured paper?
Mr, Hamlin. 2
should s a y no.
T h e case t h e y p u t
to us, t h e certificate i s i n the name o f the factor,
he pledges that certificate t o his bank, I understood
that certificate;’ s
e
o
g to the Federal Reserve Bank,
so that the farmer could never Bet back his profit
unless t h e Federal Reserve B a n k i s paid t h e advance
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Federal Reserve Bank of St. Louis
and they also said, i n Georgia, I
think i t was, a n y
factor that borrowed more than his equitable title i t
was a State's prison offenss.
T h e question i n m y
mind i s a s t o whether s u c h s e c u r e d p a p e r c o u l d b e o a l l e d
eligible paper. I
have n o doubt whatsoever a s t o the
first part, i t mst b e the use o f the proceeds o f the
original paper o r note,
Mr, MeCord,
paper.
T h a t i s why w e required a
seoured
i e d o not take a n open cotton paper, i t hag
got t o be a secured paper,
Governor Calkins.
I t appears t o me there have
been tvo suggestions which might enable the Board t o
meet the situation s o far as i t should b e met without
reversing its mlings, t h e first i s that these cotton
factors should adapt themselves t o the l a w t o the e x -
tent of taking farmers! notes, which would be unquestionably eligible; t h e second i s that the ruling
mignt not b e held t o apply t o secured cotton factors!
PAPO.
I t seems t o me that i f that soluti o n i s
offered i t should b e entirely sufficient, a n d that i t
can be offered without a reyersal o f the Board's
ruling.
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Federal Reserve Bank of St. Louis
313
Governor “Wellborn. T h e r e i s no question about
that.
Mr, Hamlin.
O r could w e say that, pending our
further investigation i n t o the gestion,we m a d e t h a t
preliminary ruling, pending a complete investigation ,on
a rehearing o f the matter, w e make that ruling?
Governor Harding. S e c u r e d paper means secured
I f the factor has not title t o i t it is not
paper.
secured.
Governor Seay.
M y recollection is the ruling
of the Board covers two cases, one where the cotton
factor absolutely owns the commodity, then i t is
eligible, a n d the other i s when he takes the farmers!
note, I
think that i s i n the ruling o f the Board
at present.
Mr, Hamlin. W h e r e h e actually owns the cotton
or has @ right under the law o f his state t o get a
valid title,
Governor Harding. T h e s e new regulations were
intended t o rescind a l l previous ralings a n d regulations except i n s o far a s they were completed a n d
codified.
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Federal Reserve Bank of St. Louis
314
Mr. Hamlin.
ir, Jay.
W e could say that i n a rehearing--~
I t seema t o me you would not have
tomake this in the form of taking any? “ba cl track;
merely a n interpretation.
Governor Harding. I
would not want t o leave
anything open o n this thing.
W e should make i t final,
If not they will come again o n sanething else.
Unless there i s something else t o come u p I
suggest that w e consider this formal statement t o
be given t o the press, I
told them I did not think
there would b e anything ready for them tonight, that
it would g o over until tomorrow, but there i s n o
question w e have got t o issue some sort o f a statement,
Dr. Miller,
A t your request I
gat i n with t h e
committee a t lunsheon hour today; I think two members
of the committee w e r e absent.
P o l l o w i n g my sug
gested f o r m o f s t a t e m e n t l a s t e v e n i n g a t t h e d i n n e r
I d@ietated something this morning, which I read t o
the c o m m i t t e et
a noon,
I t is clear t o me, t o use
Judge Ramsey's gencral term, that the committee felt
there was altogether too much sunshine i n the statement,
T h a t l e d t o a p r e t t y thorough going discussion
of the whole situation that lies back o f
the statement,
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Federal Reserve Bank of St. Louis
or the need f o r a statement, a n d I soon found myself
in a minority o f one as regards views o f the con-~
ditions o f business, economic, financial, credit,
which are the reasoris f o r making the statement, i f
that statement i s t o be made b y the Federal Reserve
Board, I
therefore suggested that the matter
should b e referred back informally t o the Reserve
Agents' Gonferemce that was i n session this after~
noone T h a t was dones A
canvass o f opinion was
invited and it developed that of the Eleven Dis«
tricts represented here eight felt that conditions
in their districts were such as t o make a statement
at this time highly inadvisable,
a s locally t o give
arige-to a n unsettlement o f mind where, o n the whole,
the existing state o f sentiment seems pretty good.
There were three districts, Dallas, Atlanta, a n d
Minneapolis, where i t was stated that a statement
be
ofthe right kind might/expected to have a distinotiy
feassuring effect.
Mr, Williams, H o w about the Pwekfth District?
Dr. Miller.
O n e District was n o t represented,
The other districts, t h e agricultural districts, Kansas
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Federal Reserve Bank of St. Louis
O16
City, Chicago, a n d San Francisco all felt there i s
nothing i n those districts that would. require any~
thing i n the nature o f a statement b y the Federal
Reserve Board addressed t o general conditions.
That
led m e t o take a distinctly different view o f the
situation, a n d f o r myself I
felt more thoroughly
informed after this canvass than before, I
cer-
tainly was under t h e impression t h a t t h e members
of this conference, b y reason o f their silence
when this subject was first raised day before yesterday, were i n substantial agreement w i t h the sug-
gestion that a statement should b e made. I
now
am very definitely o f the opinion t h a t these gentle~
men ake, well informed a s t o their views o f tueir
own P e r e
e e s oars a gtatement would b e inadvisable
except i n s o far a s that statement i s addressed t o
the conditions i n certain of the agricultural sections
and as affecting certain o f the tuportant staples,
not that the staples should b e m e n t i o n et dut,bhat
in the statement nothing should b e said that would
tend t o disturb a state o f mind that i s pretty good
throughout the country as a whole,
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Federal Reserve Bank of St. Louis
Governor Harding.
H e r e i s a n important conferenc:
a joint conference o f the Governors a n d Federal Reserve
Agents,
N o t i c e w a s s e n t o n t about i t a
t w o
months agoj i t has been talked about i n the press o f f
and o n for the last s i x weeks.
N o w , i t seems t o me i t
is imperative f o r this conference t o give t h e press
some s o r t o f a statement.
I t ought t o b e matter o f
fact, relating t o this conference, then you can sand~
wich i n any little other thing y m want.
mean a
T h a t does n o t
labored statement about reaffirming t h e i s l e
tion o f Independence, a n d all that sort o f thing, but
simply a statement a s t o proceedings o f this conference,
going a s little i n t o details a s y o u want to, with such
incidental reference t o other matters a s you may want
to put in.
Mr. Miller. T h a t i s very simple, that i s a n easy
way out o f it.
Mr. Williams.
H a v e y o u prepared something, D o c ~
tor?
Dr. Miller. I
the c o n f e r e n c e
prepared a brief reference o n whic
i s a s k e d t o express i t s views,
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Federal Reserve Bank of St. Louis
Mr. Williams, I
mean t o say, d i d y o u p r e p a r e
a gtatement f o r t h e press?
Dr, “Miller.
N o sir, this i s that t h e Board might
transmit a letter t o the Conference reading scnawnad
as follows:
"Representations having recently been made b y
delegates from the agricultural sections, which have
been awarded hearings, before the Federal Reserve
Board t o the effect that conditions affecting the
markets f o r their staples were s o unsatisfactory a s t o
merit the attention of the Federal Reserve Board and
Banks with a view t o modifying its practices and
methods, the Board desires that the Chairman and
Governors o f the Federal Reserve Banks n o w assembled
in conference i n “ashington at the call of the Board,
should carefully canvass business, industrial,
financial a n d Sncnehite conditions a n d sentiment i n
each o f the Federal Reserve Districts with a view o f
informing the Board whether conditions i n the districts a r e s u c h a s t o call f o r a n y change i n the existing policies a n d practices o f the Federal-Reservo
System,"
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Federal Reserve Bank of St. Louis
319
I thought t h e report might b e made b y this coms
mittes t o the Board i n such f o r m a s the Board s a w
£i% t o publioh a b y 12. nob, ta..2526 it,
Mr, Williams.
Y o u rather agree w i t h Governor
Harding that the Joint Conference, through the Board,
should cive some flat fhoted statement?
Dr, Miller.
C o u l d w e poll the Governors?
Governor Harding.
Dr. Miller,
W h a t i s the question?
T h e question i s whether y o u feel
the conditions i n your district are s o unsettled,
the sentiment s u c h that a comprehensive statement b y
the Board, addressed t o the Banks o r t o t h e country
as a whole, w i t h a view o f reassuring it, i s needed.
Governor Harding. I
will call the role,
Digtrict No. l e
Governor Morss. I
d o not know that I heard
the whole o f that, b u t a s I understand i t , a s near
as I
e m l d g e t it, 1 t was whether i n our district i t
was advisable a t this time for the Board t o make a
reassuring statement?
Governor Harding.
Governor Morss,.
Yes.
Y e s , i f a reassuring statement
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Federal Reserve Bank of St. Louis
320
can be made.
B u t i f it is going t o b e a doubtful
statement i t should not b e made.
I f the time has
ceme whon you can say with conviction that you believe
the tide igs turned a n d that w e are going t o have better
things, s a y so, but i f you camnot s a y that, I think
you had better not say anything.
Governor Harding. N u m b e r two, Mr. Case i s not
present. N u m b e r thres, Governor Norris.
Governor Norris.
~ L do not think I am quite satis-
fied that there i s no statement required for us i n the
hird district. I
think that weight, however, must”
be given t o the consideration that a n expectation has
grown up, a
general public expectation, t h a t there i s
going to be a statement from this conference, and that
therefore the failure t o make any statement might b e
misconstrued as an inability on our part to make any
statement that would b e otherwise than disquieting.
I think, therefore, that while a s I say s o far as the
needs o f the third d i strict are concerned there i s
mo necessity for a statement, I think that some statement
has got to be made,
Governor Harding. N u m b e r four?
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Federal Reserve Bank of St. Louis
321
do not
Governor Fanoher. G o v e r n o r Harding, I
think that conditions i n the fourth district a r e such
that w e need a t this time a n y reassuring statement s o
far a s o u r particular locality i s coneerned. I
agree w i t h Governor Norris, I
quite
think that this meeting
has b e e n given some publicity a n d i t has been known
for t w o o r three weeks t h a t this meeting was going t o
be held, a n d I
think a statement i s expected; I
think
some statement has got t o be put out, tut s o far as
some weassuring statement for the fourth district, 5
do n o t t h i n k i t i s required.
Governor Harding. D i s t r i c t number five?
Governor Seay.
W h e n I left t h e bank I
a m sure
there wags n o expectation o n the part o f the officers
that there w a s m y necessity that this board should
make a statement a s t o conditions i n the country, o r
in the fifth district.
I
t i s undoubted t h a t i n the
strictly agricultural sections o f o u r district there
is a feeling o f very severe disappointment a t the very
heavy fall i n agricultural commodities, i n the price,
and some fecling o f resentment.
S i n c e being here,
however, a n d finding sentiment f r a n different parts
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Federal Reserve Bank of St. Louis
of the country and from other agricultural districts,
and i n view o f the attitude which t h e papers have
taken, I do believe that i t is desirable and has even
become necessary for the Board t o make some kind of
statement, however general i t may make it, but with
particular reference t o the fifth reserve district.’
we did aot anticipate a n y such statement, n o r d o w e
belleve,in the language o f the query o f Dr. Miller, that
conditions i n our district call f o r any change i n policy
or change i n the practice o f the Federal Reserve Banks,
Mr. Ramsey. T h a t i s not contemplated i n any statement.
Governor Seay.
T h a t i s contemplated i n the state-
ment addressed t o us b y Dr. Miller.
Governor Harding.
Governor e l l b o r n .
T h e Sixth district?
I
n view o f t h e published
statement o f the Secretary of the Treasury, and the
misunderstandings about those statements, a n d speaking
in c o n n e c t i o n w i t h w h a t h e s a i d l a s t n i g h t I
think
it is absolutely necessary for this Board t o make a
full statement a n d a reassuring o n e too, t h a t t h e y
will stand back o f the business interests o f thig
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Federal Reserve Bank of St. Louis
country « T h e r e i s a fear all over this country
that the Pederal Reserve will n o t stand b y it, I
mean t h e business a n d agricultural interests o f the
country »
Governor Harding. D i s t r i c t number seven?
Movernor McDoigal. W h e n this subject was first
introduced, Governor Harding,
i t was m y understand-
ing that the necessity arose from the fact that a
good deal. o f publicity h a d been given t o the calling
of the conference a n d that the press w a s clamoring
for a statement, a n d I think, wisely, the members
ef the conference were warned n o t t o discuss t h e
matter with the press o r outside o f these meetings.
I d i d n o t understand, h o w e v e r ,
t h a t occasion f o r
this statement arose because o f the general conditions: .
which existed throughout the country.
I n our dis-
trict w e feel, while w e are overloaned a t the present
time, w e understand t h e reasons f o r it; w e feel t h a t
we are blessed i n having wonderful crops, gathered
and i n prospect, a n d w e look forward with confidence
to our ability t o take care o f the situation a n d are
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Federal Reserve Bank of St. Louis
expecting v e r y material improvements, a n d I believe
so far as our district i s concerned n o statement i s
necessary, although I can easily understand i t is
going t o be a n obligation o f this conference t o give
something t o the press, t h e nature o f which I
a m per-
fectly willing t o leave t o this canmittee that has
been appointed o n the Board.
Governor Harding. D i s t r i c t number eight?
Mr. Martin. G o v e r n o r Biggs i s not here,
Governor Harding, D i s t r i c t number nine?
Governor Young.
M r . Chairman, I think a statement
should b e made, not because conditions are unsound i n
our district, but because t h e minds o f our agricnitur-
al producers have been distorted ‘hArough men that have
spoken t h r o u g h t h a t d i s t r i c t
i n p u b l i c mectings. =
think that statement should correct some erroneous
impressions t h a t are i n the minds o f a good number o f
people out there, that is that the Federal Reserve
Board and the Federal Reserve Banks have unlimited
funds t o loan, I
think that i t should show enough
statistics t o counteract a n y erroneous ithpregsions
that may b e i n the minds o f the aericultural
borrowers
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Federal Reserve Bank of St. Louis
that they have n o t been used fairly, a n d with t h e con-
clusion, possibly, that the Federal Reserve System has
functioned f o r the benefit o f business, finance a n d i n -
dustry, i s functioning i n that capacity a t the moment,
and there i s n o reason w h y i t cannot continue i n that
capacity.
Governor Harding. D i s t r i c t number 10, Governor
Moore n o t here,
District nuhber eleven?
Governorn
a
V Zandt. G o v e r n o r Harding, I
a gtatement o f some kind should b e given out.
believe
i f not
a reassuring one, a s has b e e n mentioned, s u c h a states
ment a s will cover the facts t h a t this conference
hag b e e n held, s o m e o f the principle topies discussed
at this conference, a n d a survey, a
‘
j
i
c
reswnme a s t o the
t
resources o f the Federal Reserve “rstem, a n d t o the
effect t h a t nothing has occurred herein t o change t h e
views o f the Boerd with respect t o the statements
that i t has given o u t heretofore, b u t I think that
some statement o f some kind should b e given out.
Governor Harding. D i s t r i c t number twelve?
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Federal Reserve Bank of St. Louis
526
Governor Calkins.
M r . Governor, i n order to
be brief I shall endeavor t o b e direct. I
believe
no conditions i n the twelfth district should call f o r
a statement o n the part o f the Board o r anvbody else.
However,
i t appears t o m e that i t i s expedient f o r the
Board t o make a
perfectly usual, c a s u a l statement
of
its conelusions, based upatt thé conference here held.
Mr. Hardy. I
want t o make a motion t o bring
the matter t o a vote.
Governor Harding. I
think i t i s unthinkable
that a gtatement should n o t b e made here. ‘ w e are
obliged t o make a
statement n o matter i f everything
is a s r o s y a s y o u please,
v o u could n o t l e t a
con-
ference o f this sort assemble i n Washington, with the
Publicity i t has had without saying something about it.
It is sometimes a very good rule when i n doubt t o
pass t h e buck; i n s t e a d o f t a l k i n g t o o m u c h a b o u t o u r
reserve a n d f i n a n c i a l c o n d i t i o n a n d t h e c o u n t r y a n d s o
forth, l e t us say something about the car movement,
ang let us say i n what district i t is bad, then bring
out, incidentally, that owing t o decline i n prices o f
some o f the staple agricultural products the c r o p
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Federal Reserve Bank of St. Louis
S27
movement h a s n o t been accelerated t o the extent that
was anticipated a
few months ago, a n d that therefore
the whole process h a s been somewhat delayed, a n d that
it is only fair t o assume the peak o f the movement
will b e extended o v e r a longer time t h a n anticipated,
and not say very much else. B r i n g i n something about
the car service, because that would b e entirely con-
sistent with our answer t o the resolution the Senate
very k i n d l y s e n t d o w n t o u s w a n t i n g
t o know w h a t w e were
going t o do, a n d w e r e p l i e d t h a t t h e p r o p o s i t i o n w a s o n e
of transportation rather than finance, N o w , let us
carry that idea out.
Governor McDougal.
situation, i
I
n regard t o the transportation
can state that one o f the principle factors
in our over-loaned condition i s due t o the fact that
the transportation facilities d u r i n g t h e swamer a n d
recent months, a n d until quite lately, hove been entirely
inadequate,
pe
enee Harding.
N o doubt thousands o f dollars
are t i e d u p i n Alexandria f o r l a c k o f trans poréa tion
facilities,
Governor McDougal. I
have stated further, a n d e>
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Federal Reserve Bank of St. Louis
328
very glad t o state i t again, that I do not believe
that i t can now b e claimed there are not cars avail-~
able t o move grain i n our district.
T h e trans-~
portation situation has improved very mterially.
I am told b y the officers o f the railroads t h a t i n
many wayg, largely because o f the improved temper
of mind, perhaps, o f the employees, t h e railroads
are moving their frieght now satisfactorily, a n d
I believe c a r e c a n b e secured t o move what grain
they are ready t o move i n our district.
Governor Harding, Y o u -gé#blemen will appoint
from your number your own committee, o r a sub-comnittee
of two t o cooperate w i t h a small committee o f the Board
to get o u t a statement that will b e satisfactory, I
think,
Let u s just - o around t h e table v e r y briefly.
What i s the condition o f the car service i n District
number one?
Very m u c h improved,
Governor Harding, N u m b e r two?
Mr. Jay.
H i g h l y improved.
Governor Harding. D i s t r i c t number threc?
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Federal Reserve Bank of St. Louis
Mr. Austin. I m p r o v e d .
Governor Harding. D i s t r i c t number four?
Governor Fancher. I m p r o v i n g .
Governor Harding.
D i s t r i c t number five?
Mr. Hardy. I m p r o v e d .
Governor Harding.
D i s t r i c t number six?
Governor Wellborn.
Mr. MeCord.
V e r y poor.
A n embargo a t N e w Orleans o n grein.
Governor Harding.
D i s t r i c t number seven?
Mr. Heath. I m p r o v e d .
Governor Harding.
D i s t r i c t number eight?
Mr. Martin. I m p r o v e d .
Governor Harding. D i s t r j c t number nine?
Mr. Rich. I m p r o v e d .
Governor Harding.
T h e tenth district?
Mr, Ramsay. I m p r o v e d , b u t still unsatisfactory.
Governor Harding.
D i s t r i c t number eleven?
Governor V a n Zandt.
V e r y greatly improved.
Mr. Ramsey. I m p r o v e d , b u t not adequate.
Governor Harding.
D i s t r i c t number twelve?
Mr. Perrin. S a t i s f a c t o r y .
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Federal Reserve Bank of St. Louis
330
Governor Harcing.
S o w e have g o t one cotton
district where t h e railroad service i s still poor,
Governor Norris. A
gmall group o f us a t the
other end of the room have a suggestion t o offer as
to the first t w o paragraphs o f any statement t h a t m a y
be pub out, the remainder o f the statement t o consist
of such figures o r statements a s i t may b e deemed ad~visable t o add t o it.
T h e first t w o paragraphs, which
would b e the substance o f the statement, would be:
"At the April conference o f the Governors o f
Federal ReserveBanks there was a Guite general
anxiety a s t o the ability o f the banking resources
of the country t o meet t h e demands ineident t o the
autumn erop moving period.
A t the joint conference
of the Chairmen and Governors just concluded i t wag
the general sentiment t h a t these demands h a d been met
up t o date and that there was n o longer any reason
to fear that a n y future domands could n o t b e met,"
Mr, Hardy,
{ I move, i n order t o get the sense
of the conference, a n d see i f agreeable, a n d only for
that purpose, t h a t t h e guestion b e referred t o the
two chairymen, the Governors! Ghairman and the Chaiymen's
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Federal Reserve Bank of St. Louis
351
Chairman,
t o confer w i t h t h e Board f o r t h e purpose
preparing a
of
statement t o b e issued b y the Soard,.
(The motion was seconded b y Governor Yellborn a n d
carried unanimously.)
(inereupon, a t 6.00 o'clock p.m., the Joint Conference was adjourned until 10.30 e'clock a.m, Soetie’.
day, October 16th, 1920,
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Federal Reserve Bank of St. Louis
JOINT CONPLRENCIs c a
GOVSRNOGLS O f FUDHRAL RESERVE BANKS A N D GHAIRMEN O F FEDERAL
RaSuRVe BANKS W I T H T H E F.aDeRaL RuSERVE BOARD.
Saturday, October 16, 1920.
The meeting w a s called t o order b y Governor Harding,
of t h e F e d e r a l R e s e r v e B o a r d ,
i n the Eoard R o o m o f the
Federal iteserve board, wetropolitan Bank Building,
at
10:50 o'elock a. Me
Governor dardinge I
have before m e a supplemental
list o f topics t h a t w e r e s u g r e s t e d f o r t h e J o i n t G o n f e r eNCE
S o m e o f t h e m h a v e a l r e a d y b e e n discussed.
H e r e
is a letter f r o m the Hederel Reserve B a n k o f Hinneapolis
on the circuitous routing o f checks b y Federal Reserve
bankse H a s that been discussed?
Governor Young.
w e discussed thet at the Governors!
Conference.
Governor darding.
T h e next topic i s Boards! Inter-
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Federal Reserve Bank of St. Louis
vistrict Time Schedule. a d v i s a b i l i t y o f its incorporation
into all inter-district schedules.
H a s that been Cis-
cussed?
Governor iicDougal.
Governor Harding.
T h a t has not been discussed.
I f there i s n o objection, I
vould
like t o ask Mr. Hoxton, Secretary o f the Board, w h o pre~
pared these schedules,
Mr. Hoxton. I
t o make a
statement regarding then.
think that « 1 1 o f the banks h a v e
adopted intra-district schedules, w i t h the exception o f
Boston, N e w York, Philadelphia a n d Chicago.
N o w , the
inter-district schedule was gotten u p and compiled b y
the Board o n actual transit time, taking i n t o considera-
tion the clearing houses a t the different points, after
the transit managers,
a t a meoting i n Cleveland l a s t
year, h a d said that they were unable t o acree o n it and
head thrown i t bac:: t o the Board.
T h e time schedules
were a l l set d o w n upon the agreement o f both banks
concerned, except i n tro o r three cases where t h e banks
could not asree and we had t o arbitrarily fix the time,
and i n fixing t h e time w e were supposed t o adopt a
a
lonzer time i n order t o save float i n the system.
we feel, hovever,
i f that schedule i s not right,
so
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Federal Reserve Bank of St. Louis
far a s actual transit time taken i n connection w i t h clear~
ing t i m e i s concerned,
t n a t i t s h o u l d b e m a d e right,
and
that after i t is made right i t is really o f very little
practical use unless i t is incorporated b y the several
benks into intra-district schedules. A
bank i n Memphis,
for instance, d o e s n o t want t o b e deferred o n its Boston
items three days i f Loston banks are only deferred tivo
davs o n their iwemphis items.
I t i s m y feelings, that t h e
inter-district schedule i s o f very little advuntave t o
the systea a s a whole unless i t i s incorporated b y the
Several Federal Reserve banks into intra-district schedules.
Governor darding.
proposition?
I s there a n y discussion o n the
J u s t what i s the objection o n the part o f
any bank which hus not established the Board's intradistrict schedule?
Governor iieDousal.
scnusvule a n d T
O u r bank i s not using that
am not prepared t o ansver a s t o vhy w e
are not doing it. I
would b e glad t o look into i t
and i f i t i s y o u r t;ish w i l l a d v i s e w i t h zou.
Governor Harding. I
is u n f i n i s h e d b u s i n e s s
wish you vrould, because this
o n our records a n d 6
want t o
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Federal Reserve Bank of St. Louis
dispose o f i t one w a y o r the other.
The tederal teserve B a n k o f Kansas G i t y has made a
suggestion t h a t t h e r e o u g h t t o b e F e d e r a l l e g i s l a t i o n
maicins robbery o r attempted robbery o f National Banks a
Crime under t h e Mederal statute.
I agree with h i m i n the position that there.is,
generally speaking, a
more wholesome fear o f United Stutes
courts a n d United States penitentiaries t h a n there i s o f
State courts a n d jails a n d pvenitentiaries.
T h e cuestion
of legislation, however, depends entirely o n Consress.
The only prectical question i n connection with this t h a t
we have before u s this morning i s as t o whether i t would
be advisable t o have a bill prepared a n d request Gongress
to snact s u c h a law.
Governor wellborn. I
think there i s a bill slready
before Gongress, w h i c h w a s introduced b y Senator Gore,
although £ think the bill has been held up.
the bill and I
T I have read
think " e ousht t o g o o n record, sentlemen,
as favoring thet bill,
o r favoring action i n the matter;
it may n o t b e proper t o adopt that specific bill.
Governor Harding. J i h a t i s t h e pleaswre o f the Conference o n that subject?
a r e y o u willins t o s o o n record
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Federal Reserve Bank of St. Louis
as Lavoring lesislation o f thet kind?
Governor #ancher. J
move that i t i s the sense o f
the meeting that w e favor such lerislation.
(The motion was d u l y seconded a n d unanimously car-
Governor darding.
T h e next tonic deals with the
Buerantee o f indorsenents
b y member banks i n one cistrict
on items sent direct t o Mederal Keserve Banks i n another
district.
Governor McDougal. T h a t topic was considered e t
our Gonference a n d will b e considered i n our regular
yreport.
Governor Hardins.
ciscuss here:
H e r e i s & matter v e want t o
P o l i c y t o b e pursued b y H#ederal Reserve
Banks i n furnishins their own Federal Keserve notes t o
the Treasury Department f o r use i n making current dis~
bursements i n exchange for sold t o be deposited b y the
Treasurer w i t h t h e F e d e r a l R e s e r v e B o a r d f o r t h e c r e d i t
of the *ederal Keserve Banks i n their sold settlement
fund account.
ere i s a inemorandwa from Mr. EMerson, t h e board's
4
assistant Secretary, w h o has supervision o f the rnold
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Federal Reserve Bank of St. Louis
settlement fund.
H e goes o n t o say:
"The Treasury Department and the Federal Reserve
system have been cooperating since 1917 t o secure the
gold reserves o f the country a n d t o centralize t h e same
in the Federal Reserve Banks.
"Tn order t o carry o u t this policy t h e Treasury
offices h a v e b e e n instructed b y the Secretary o f the
treasury not t o pay out gold coin o r sold certificates,
and i n order t o carry o u t this policy t h e y have secured
Pederal R e s e r v e n o t e s f r o m F e d e r a l R e s e r v e Banits i n ex-
change f o r fold.
S i n c e November, 1917, t o date t h e
Federal r e s e r v e B a n k s h a v e s u p p l i e d n e w F e d e r a l R e s e r v e
notes t o the Cashier o f the Treasury a t Washinston,
the amount o f 573,040,000.
I
in
n return t h e Treasury
Department h a s deposited g1,169,500,000 w i t h t h e Federal Reserve Board t o the credit o f the Federal Reservo
Banks i n their Gold Settlement Fund accounts.
T h e Board
has n o figured available a s t o the amount o f Federal
Reserve notes a n d other kinds o f currency furnished
various sub-treasuries
b y the Federal Reserve Banks.
"Recently, o n e Federal Reserve Bank (Minneapolis)
advised t h e Board that i t objected t o furnishing t h e
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Federal Reserve Bank of St. Louis
338
Geshier o f the Treasury Department w i t h its o n Federal
Reserve notes because i t wished t o maintain i t s Federal
neserve n o t e c i r c u l a t i o n
a t t h e l o w e s t p o s s i b l e fizure,
and further desired i t s circulation figures t o reflect
only the issue o f notes i n its o w n Federal Reserve Digtrict.
"I aa advised b y Treasury Department officials that
the Department i s willing t o continue cooperating with
the Federal Reserve System i n maintaining t h e above policy,
and i t i s s u g e s t e d t h a t this matter b e submitted t o the
Governors’ Gonference t o determine i f the Federal Reserve
Banks desire t o continue t h e policy o f conservation o f
S0ld and centralization o f sold reserves i n Federal keserve Banks, a n d i f s o whether o r not the policy i s t o
be adhered t o by all the Federal Reserve Banks.
this connection,
I n
i t might a l s o b e pointed o u t that a s
long a8 the Treasury has deposit balances with the Fed-~
eral Keserve Banks such balances are vayable i n zold o r
Currency.
"The above policy was adopted because t h e circula-
tion o f gold coin and sold certificates tends t o dissipate t h e reserves,
a n d t h e circulation
o f gold c o i n i n +
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Federal Reserve Bank of St. Louis
volves a
considerable loss d u e t o abrasion,which i s
avoided b y having the gold carried i n the vaults o f the
Federal n e s e r y e B a n k s a n d t h e Treasury.
tattacued h e r e t o i s a
memorandum w h i c h h e s b e e n
orepared giving t h e esteblishment a n d history o f the
policy, a n d a statement a s t o the manner o f its opera-
tion"
Governor Harding (continuing).
O u r policy here hes
been that i f the Treasury announces t h e t i t i s ready
to exchange t e n inillion collers o f gold f o r notes,
it
was prorated among all the ederal Reserve Banks. A
month o r so aso, when they offered one bank itspert,
ve got a telegram saying t h e y d i d n o t want it, a n d w e
had t o allot that t o some other bank.
O f course, t h e
Guestion comes u p now a s t o the availability o f Federal
Neserve notes, t h e suovly i s r u n n i n g short; t h e Bureau
of Kngraving a n d printing promises t h e y will d o better,
put they a r e not meating a l l the requirements.
Governor V a n wandt.
T I move that i t i s the sense o f
this Gonference t h a t t h e practice o f conserving g o l d i n
the m a n n e r d e s c r i b e d b e continued,
a n d that a t every
possible opportunity w e exchange Federal Reserve notes
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Federal Reserve Bank of St. Louis
for cvold,.
Governor Youns. I
think sir. Rich handled t h e trans-
action referred to. I
know I
Governor Harding.
came i n a day o m so later.
D o e s y o u r institution wish t o b e
elinineted from any future distribution o f cold received
vrom the Treasury?
Governor Young.
f
£ would n o t s a y that, I
knot; enough about i t a t the moment t o make a
Sabout it.
a S I
do not
statement
understand t h e transaction, t h e Treas-
ury Department h a s t h e option o f paying « o l d o u t o r pay-
ing Pederal Reserve notes, and that is, as it has been
explained here, a n d rather t h a n p a y gold o u t they request
&@Federal Reserve B a n k t o furnish i t s Federal Keserve
notes, a n d w h i l e y o u m i s h t n o t g e t t h e s o l d a t t h e mo-~
ment, the System gets the gold.
Governor Harding.
ily. Perrin,
I s that correct?
Yes.
w e also feel very strongly that the
practice o f exchanzing gold for Federal Reserve notes,
thereby conserving the gold, should b e continued.
W e
also believe thet the Board should sugrest t o the Secretary o f the Treasury that gold coinage o f a denomination
below twenty dollars b e discontinued entirely,
s o as
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Federal Reserve Bank of St. Louis
341
to force t h e use o f currency f o r all cash payments e x cept where gold i s absolutely necessary,
i n which case
tventy dollar coins w i l l serve every purpose.
Governor Harding.
T h e motion has been made that
it i s the sense o f the Gonference t h a t t h e policy o f
exchanging Federal sxeserve notes w i t h t h e Treasury f o r
gold b e continued.
(The question was put and the motion passed.)
Governor Hardinge
cuss t h e question,
N o w i t mirht b e i n order t o dis~
i n case a n y Federal Keserve b a n k a t
any time should prefer n o t t o take i t s pro-rata p a r t o f
the allotinent, h o w many volunteers a r e there t o take that
bank's part?
{The hand of eight gentlemen present were raised.)
Governor Young. I
would not want t o be understood
that w e would n o t share i n this.
Governor Hardinge U n d e r this resolution, then, w h e n
any offer was made, y o u would b e given
a n opportunity
=]
to c o m e i n , a n d i f y o u d i d n o t w a n t t o c o m e
i n you could
Say 80.6
Governor iicDoural. I
think there i s one point i n -
volved concerning which Governor Younm i s perhaps n o t
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Federal Reserve Bank of St. Louis
fully informed,
H e says h e understands t h o t t h e change
would result ultimately i n their securing zold.
A s a
matter o r fact, they get their gold a t once,
Governor Harding. Inmedistely.
o f course there
might b e times when certain banks might need notes o f
cert&in denominations a n d the banks might not have them.
There was some correspondence-Governor Young. I
do not remember that correspond~
ence.
Governor Harding.
I t was with ifr. Rich.
H e wrote
aad said that they had taken a pride i n holding their
note issues a n d they would prefer t o limit their note
issues t o their o w n district requirements -
Governor Young.
a s I remember the telegram, the
request made was that w e would p u t these notes o u t f o r
some other banlt, and of course we do not understand this
transaction.
S o m e other banit may have b e e n short o f 4
sinaller denomination.
Governor Harding. T h e r e must have been some misunderstanding, because I was surprised t o know that they were
$0 tell off i n their reserves.
B u t t h e transaction a s
put t o you would have resulted i n a n immedivte accession
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Federal Reserve Bank of St. Louis
to your reserve o f a million dollars i n x0l
dere i s the next topic:
Uniform report t o the Federal Reserve Board o f
current. e x p e n s e s o f the branches o f the Federal Reserve
Banks.
Governor Harding (reading): " t h e reports of current ex.enses o f the Branches o f Federal keserve Banks
received
b y t h e Federal Reserve B o a r d indicate t h a t there
is little uniformity among Federel Reserve Banks i n the
preparation a n d r e n d i t i o n o f t h e s e r e p o r t s
neserve Board.
t o t h e Federal
T h i s i s due t o the fact that certain
Branches include i n their expense reports items w h i c h a r e
not directly incurred b y the Branch, such a s
Assessinents a/e expenses i. R. Board,
Federal .dvisory Council,
Governors! conferences,
Federal Reserve Agents’ conferences,
Gost o f Federal Reserve currency,
Miscellaneous charges a/c note issues,
Taxos F . h e Bank note circulation.
"In addition, the Federal Reserve Bank of itlanta
cherges i t s Branches w i t h a part o f the overhead expenso
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Federal Reserve Bank of St. Louis
344
of the dead Office o n account o f the salaries o f the
Governor, "ederal Keserve azent, auditor, etce., under
authority o f the board cranted i n 1917.
5 0 far a s I
can l e a r n n o o t h e r F e d e r a l n e s e r v e B a n k h a s a d o p t e d a
Similer policy.
'Tnasimuch as Branches o f Federal Reserve Banks are
now established f o r the nurvose o f rendering more prompt
and e f f i c i e n t s e r v i c e
t o inember b a n k s l o c a t e d
i n sections
remote from the parent Federal Reserve Bank, i t is thought
that t h e accounting records o f such Branches should b e
kept i n such manner t o s h o s o far as practicable whether
or not the improved service given t o member banks i n the
Branch territory i s o f sufficient value t o warrant t h e
added e x p e n s e
o f m a i n t a i n i n g s u c h Branches,
rether than
whut extent, i f any, t h e Branches contribute t o the
net profit of the parent Federal Reserve Bank.
‘With this i n view, and i n order that the Board may
have éxuense fisures o f all Branches o n a comparable basis,
I would recaimend that t h e attached draft o f letter b e
sent t o the Ghairman o f all Federal Reserve Banks i n this
connection."
There i s a
r e c o m m e n d a t i o n m a d e t o t h e Board.
Before
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Federal Reserve Bank of St. Louis
sending o u t this letter, I
agreed t o discuss t h e matter
with t h e Governors a n d Federal Keserve Agents o f tho
Gonference «
ow, t h e apoortionaent o f administrative anda overhe.d expenses between Federal keserve Banks a n d their
branches « T h a t i s the subject o f the letter.
T h i s
letter reads?
Tt i s the present practice o f some of the Federal
Heserve Banks t o charce t h e i r brenches w i t h a portion
of
of the overhead expense o f the Head Office o n sec ount
and
galeries o f the Governor, t h e Federal Keserve agent,
actuelly
the auditor, a l s o with certain expenses n o t
incurred b y the Branch, s u c h a s the cost o f Pederal
Keserve currency, including taxes o n Federal Reserve
branch terBank note circulation, i s s u e d t o banks i n
ritory, etc.
“tn order that the Federal Keserve Board may have
ficoures o f the expenses o f all Federal Reserve Eranch
Banits o n a comparable basis,
i t i s requested t h a t begin~-
ning with the month o f October the current expense rebe
ports, F o r m 96, o f each Federal Reserve Eranch Bank
month and
meade o u t s o a s t o s h o w b o t h f o r t h e c u r r e n t
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Federal Reserve Bank of St. Louis
for t h e period since J u l y 1 , 1920, o n l y such expenses
6s vere actually incurred b y the Branch,
i e o., t h e y
should not include a n y charges connected with the issuence o f Federal Reserve currency, f o r overhead expenses
at the jiead Office, f o r the expenses o f Federal .dvisory
Gouncil, Governors' a n d Federal Reserve Ajgents' Conferences,
o r for t h e maintenance
o f t h e Federal Keserve
Board."
Wow, t h e l a w i n the case i s moverned b y Section 6
of the “ederal “eserve Act, which i s the second section
in the entire Act.
T h e Board's construction o f that
.
*
b r a n o h ;
:‘
section i s that a / s
an essential part o f the
Federal “eserve Bank itself, that i t exercises n o ine
dependent function, i t is merely a n office o f the Federal “eserve Benk and a part o f i t Just as much a s the
transit cepartment i n the home office i s a part o f the
bank o r just as much a s your currency department i s a
part o f the bank.
portant,
T h e Board regards i t as very in-
i n order t o m a k e a
u n i f o r m r e p o r t t o Gongress,
which w e are required t o do i n respect t o all these
matters, t h a t there b e some uniformity i n the methods
of accounting o f these banks!’ expenses. W o w , after all,
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Federal Reserve Bank of St. Louis
547
just w h o t r e c s o n i s t h e r e w h y a l l t h i s b o o k k e e p i n g s h o u l d
be determined, w h y y o u should g o t o the trouble o f Figuring
your p r o p o r t i o n o f o v e r h e s d a n d a l l t h a t a g a i n s t y o u r
brench bank a n y more t h a n y o u ficure t h a t against a n y
one o f your o w n divisions a n d your o w n home office, I
do
:
not soo.
Governor Galkins.
T
t seems t o b e obvious v e shoulda
not t r y t o d o it, because i t cannot possibly b e cone.
Mr. deGord.
I t twas established f o r this reason.
Branches w o u l d v i e w i t h e e c h o t h e r a n d w i t h t h e p a r e n t
pank when i t caie t o the matter o f showing profit, a n d
our board o f Directors deemed i t advisable t o allocate
the overhead exoense i n each seperate branch i n order
that i t might b e determined a s t o whether thet branch
yas a
profitable branch o r not, a n d keep down a n y compe~
tition o r c o n t r o v e r s y
a s t o whether t h i s b r a n c h
o x that
o the other branch was making more iaieer a n d s o
brenchr
forth.
T h a t was o n e o f the prime reasons f o r allocating
tet
Governor sarding.
supremacy
I
n view o f the acknowledged
o f t h e B a n k o v e r i t s branches,
acy has b e e n acknovledged b y the Board,
w h i c h suprenie-
i n view o f the
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Federal Reserve Bank of St. Louis
fect that y o u have three other branches besides K e w
Orleans, a n d i n view o f t h e policy adopted b y all the
other iederal Keserve benks, a n d i n the interest o f sound
accountine,
w h a t i s the objection
t o your pursuing t h a t
policy and complyiny: vith the Board's request i f this
letter i s sent out?
ir. MeGord.
N o n e whatever.
“Overnor Harding.
D o e s a n y other member see any
objection t o this letter?
Mr. Hardy. I
think thet there i s a feeling o f jeal-
ousy @roused and competition emong the points thet have
branches, a n d I do not think i t i s a logical proposition.
Governor Harding.
T h e officers o f the Atlanta bants
will bear m e out when I say that the Board hes alvays
Sustained them and taken the position that the branch was
actually under t h e control o f t h e parent bank, b u t that
the Board did not regard themselves responsible directly
for the conduct o f the branches, b u t would hold the parent bénk responsible f o r t h e conduct o f the branches.
Mr. ticCord.
i e asked f o r authority a t the time,
and w e w e r e p r o c e e d i n g
jection t o i t whatever.
o n t h a t course,
a n d w e h a d n o ob-
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Federal Reserve Bank of St. Louis
lve h a v e n o s u c h practice,
enc. I am inclined t o agree ‘ith ilr. Galicins that i f ve
start t o d o L t w e will find that w e cannot dao it, @ X cept t o suess a t ite
iIpe uieGord.
Y o u could d o it o n a basis o f reserve
y
and capital.
Governor Harding.
T h e r e w e r e s o m e questions propound-
ed here a t the first meeting o f this S ont prance: I
under-
stand that Governor Mcbouzal i s ready t o reply t o thoi.
Governor MeDoyzal.
G o v e r n o r Harding, t h e five
questions submitted b y the Conference o n the opening
to the Governors! Conference v e r e considered, a c t i o n
was taken,
a n d t h e r e p l i e s a r e brief,
from this menorandum.
and I
will r e a d
f h e first question vas;
dill i t b e advisable o r practical next year, o r i n
the near future,
t o astablish i n each district a
uniform
rate o n all classes o f paper except b a n k e r s '
!
. acceptances,
doin; a v a y with a n y differential o n zovernment-secured
|
paper?
It wag tne vote of the Conference that i t will be
advisable and practical i n the near future t o establish
in each district a
uniform rate o n all classes o f paper
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Federal Reserve Bank of St. Louis
356
except bankers! acceptances, doing away with any differential
o n g o v e r n m e n t - s e c u r e d p a p e r e x c e p t p o s s ibly T r e a g e
ury certificates.
The s e c o n d q u e s t i o n was:
Should there b e a limit fixed i n advance o n Inter-bank
borrowings?
The Gonference answers t h i s question i n the negative.
the third question wass
Should there b e a uniform inter-district ciscount
rate?
The Gonference ans‘ers t h i s question i n the affirmative
The f o u r t h q u e s t i o n was:
Shall the borrowing Federal Reserve Banks b e required
to f i x a
rate t o i t s c u s t o m e r s
t o meet t h e rate o f t h e
#ederal iieserve Bank from which i t borrows?
It l s the sense o f the Conference t h a t t o take s u c h
action w o u l d i n t r o d u c e a
new factor i n t o t h e fixing o f a
discount rate and might involve, under certain circumstances
a change o f rate o n the part o f t h e mediscounting b a n k
which would not be justified b y fundamental conditions i n
the district, a n d that therefore s u c h action would b e injudicious.
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Federal Reserve Bank of St. Louis
fhe P i f t h c u e s t i o n
snoulc there b e o theoretical limit o n issue o f Fed-
eral uweserve notes t o member banks?
the G o n f e r e n c e a n s t e r s t h i s q u e s t i o n
i n t h e nesetive.
with respect t o the regular vrogram considered b y
the Governors!’ G o n f e r e n c e , G o v e r n o r H a r d i n g ,
w e shall re-
port i n a v e r y s h o r t t i m e t o t h e b o e r d w i t h r e s p e c t
t o
all cetion taken, r e c o m i e n d e t i o r s ,
e
d
a
m and v e hope that
the Koard w i l l b e considerate enouza t o five attention
to these metters a t the earliest possible time.
If t h e t r e p o r t
our report.
i s satisfactory,
t h a t v i l l constitute
I f there i s o n y topic concernins which
you wish o discussion,
w e will b e clea t o heave i t pre-
sented.
Governor Harding. I
see ir. Herrison o f the Federal
Reserve Banik o f New Yoris here.
mn
H e i s Deputy Governor a f
that bans a n d until recently hes b e e n General Gounsel o f
the Board. U n l e s s objection i s raised, I
will ask ilr.
Harrison t o discuss briefly the theory of the board's
rulin: that a cotton factor's paper is not eligible for
discount a t Federal Heserve Banks.
Y o u are probably
avare that a strong conmittee anpeared before the Board
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Federal Reserve Bank of St. Louis
O52
anc insisted that thet rulins b e abrogated o r dispensed
with a n c t h e t c o t t o n factors!
counted.
p a v e r b e allowed t o b e dis-
e x o r e y o u start, tir. derrison, I
will s a y for
your i n f o r m a t i o n t h a t t w o o r t h r e e o f t h e S e n a t o r s s a i d
thet they were co-suthors o f the bill o r had something
to d0 with that particular paragraph, a n d they clain
thet c o t t o n factors!
s e c u r e d p a p e r i s eligible, u n d e r
the vording found i n Section 13.
iy. uérrison.
T h e history o f the matter i n refer~
ence t o the cotton factors i s s o longs and interesting
that I
a n sorry I
did n o t h a v e a
little m o r e o p p o r t u n i t y
to prepare myself i n speaking o n this subject.
start,
T
o
i t s1ould b e interesting t o g o back o f the spe-
cific Guestion t o some extent.
I
n the early davs o f the
System @ question was presented t o the board which involved a t the outset t h e question o f what vas t h e commercial p u r p o s e
t o which t h e proceeds
note might b e pute
of a
particular
I n other words, should t h e board
ceclare t o be eligible a piece o f poper the proceeds
of which,
b y affidavit
o r otherrise, m i g h t b e d e t e r m i n e d
to have b e e n p u t ultimately t o a commercial purpose,
or
should the Board arbitrarily define & limit which would
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Federal Reserve Bank of St. Louis
ascertain t h e purpose a t the outset.
bank i n Georsia,
T h e r e vias &
s s I remomber, t h a t r a i s e d t h e question
in t h e f i r s t instance.
ft
a
s P
T e ia a n a w 4
2
Governor
Harding.
3
i
nave b e e n a Georwzia case too, b u t I
2
si
a
e 5
n , ~ t h e ‘r e o m
ay
remeber t h e Toxas
CASE.
diy, durvigon.
Well, a
was lon: before, I
Lanks v e r e a u t h o r i z e d
notes.
bank i n the South, I
will say.
may mention, t h e Federal sieserve
t o make d i s c o u n t u p o n m e m b e r banks!
T h i s banis borroved some money f r o m anotner bani:
upon its o w n note.
T h a t note was oresented t a 4 Hederal
reserve B a n k f o r caiscount.
T h e t raised a t the outset
the fundamental principle u p o n which the Board h e s acted
ever s i n c e y c o u l d p a v e r t h e p r o c e e d s
o f which were used
by a.bank o r banter o r financial institution o f any kind
for t n e p u r p o s e
o f lendinz
sidered eligible?
T
h
t o some o t h e r v e r s o n b e c o n -
e Botre ruled that tais particu-
lar note was financial papor and i t was inelisible, T h e
bank came pack a n d said that a l l its customers ‘ e r e
farmers, t h e t t h e y m a d e n o loans
t o a n y o n e b u t furmers,
and that they could prove that the proceeds o f this
note w e r e l e n t
t o furmers.
B u t t h e Board s a i d no, t h a t
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Federal Reserve Bank of St. Louis
554
in tais perticulear cese t h e proceeds vere used t o lend t o
some other person.
That rulin:, w h i c h w a s n o t objected t o a t the time
und "GS peganded a s fundamental, w a s the basis o f the
subésequent ainendment t o the A c t which permitted t h e
Federel neserve Banks t o male advances u p o n t h e notes o f
member banks provided t h e y vere secured b y eligible ¢ om
inercial paper.
The purpose o f that amendment vas two-fold: First,
Iothink partly t o evoid--iell, the veal purpose was t o
avoid t h e difficulties incident t o handling notes o f
varying maturities,
or t e n days.
o n a short transaction o f perhaps f i v e
T h e fact, h o v e v e r ,
t h a t t h a t anendment
wes Necessary i n the case o f member banks! paper shoved
that the Congress itself felt clearly that n o note the
proceeds o f which were used b y sone third party could b e
considered eligible, n o matter how secured. w h e n , there-
fore, the cotton factors! paper vas presented t o the Board
for consideration, i t ves mede t o appear that the cotton
different
:
factor i s i n no way/from the banker who was borr oving
money t o send t o a farmer upon the security o f cotton
Shipped t o the factor for sale.
I t is argued that that
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Federal Reserve Bank of St. Louis
355
is incident t o the necessary functions o f makings t h e
cotton.
T h a t i s true, b u t that i s the very function
Of “everr benin in: the country, i t s e
to the procuction o f soods.
e
i s incident
T h e more f a c t that a bank
is lending money for thet purpose i s not making ites
pépor p e r s e eligible.
Kor t h e s a m e r e a s o n t h e p a p e r o f t h e c o t t o n f u c t o r
who borrows m o n e y t o loan t o a farmer i s a b Lig E e
you will,
t o get business, a n d his business i s the sell-
Lng o f cotton.
Imiediately this brings i n t o consideration o n e
ait, which says, quotins f r o m memory, t h a t
act snall b e construed t o prohibit s u c h
notes, drefts a n d bills o f exchange, secured b y staple agricultural sroducts,
for such discount.
o r o t h e r goods, f r o m b e i n g e l i s i b
T
h
e Gonference I
thinks will b e in-
terested i n & history o f that particular DNPESe.
wt tie time t h e act vas under consideration there i s
no doubt that a larse clemént o f Goneress tried t o aake
eligible a t all events paver w h i c h was secured b y agricultural products, recardless o f the purpose f o r
which t h e l o a n was made, a n d that peurticular section w a s
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Federal Reserve Bank of St. Louis
put i n the l a w with t h e avowed purpose o f making eli-
2ball events per which was secured by agricultural products, a n d a Gongressman with w h o m Iconferred
in regard t o the matter
told m
e that h e inserted t h e
word "such" befors “peper”. T h i s Gongressman. to vhom
I refer w e s o n t h e B a n k i n y a n d G u r r e n c y G o n m i t t e s
the time.
at
H e said h e wus interested t o ksnov “hether
made a ruling involving the construction
of this particular section o f the law. I
that 6
told h i m yes,
h a d ruled that n o paper was eligible even
if secured b y farm products, unless i t conformed w i t h
the orior provisions o f the Act, which orovided that
its proceeds must b e used for a n agricultural o r commer-
Cisl purpose.
H e said "Bully for the Board,’ that was
the necessary ruling and the one demanded b y a11 the
fundamental principles o f the act.
He said " I will tell y o u the history o f that. j i h e n
that section was aut into lay the agricultural interoets
wanted t o make eligible a t all events paper which was
secured b y agricultural vroducts", and, h e said, "TI
inserted the word 'such' before'paper.'"
i e said "I
confess & @ great m a n y people d i d n o t know what i t meant,
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Federal Reserve Bank of St. Louis
the purpose of it, but,” h e said, “the purpose o f it,
and t h e o n e which y o u have folloived since then, w a s t o
taice thet particular section i n connection with t h e »vrior
section, t i i c h says "commercial paper i s that paper t h e
proceeds o f which have been used f o r 6 commercial o r ag-
ricultural purpose. '®
wo t h i s i s t h e s i t u a t i o n s
Y o u have t h e first vart
of Section 1 5 defining what i s commercial o r agricultural
paper and you have another provision which says “such
paper s h a l l n o t b e i n e l i g i b l e w h e n s e c u r e d m e r e l y b y f a r m
products.
Governor Harding.
M a y I interrupt you @ moment?
liv. ilarrison. O e r t a i n l y .
Governor Harding.
T h e point w a s raised b y the Sena-
tors yesterday afternoon, also, t h a t v e h e d n o risht i n
our n e w regulations t o use t h e vords " i n t h e first i n -
stance."
vr, uerrison.
tions a
T h a t i s only putting into the regula-
principle adopted b y t h e Federal Neserve Board
and every one o f the banks since their inauguration, a n d
it vas merely t o make evident t h a t very principle t h a t
that amendment w a s placed i n the regulations.
I f we do
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Federal Reserve Bank of St. Louis
558
not d o that, y o u make eligible every bit o f bani paper
issued b y 411 sorts o f companies, guaranty companies a n d
all these institutions w h i c h i n the wast f e w rears h a v e
been tryins t o Finance automobiles.
Mr, williams. Y o u say thet the word “such” wag
bernaps inserted unobserved.
W o w i f Gongress thought
that i t was giving effect t o that statute, giving i t the
effect uhich i t had before the vord "such" was inserted,
and péssed t h e bill i n rood faith, w i t h thet expectation,
do you think that the word “such” was inserted--while the
Gebetes i n Congress may have shown thet they did not ins
tend t o give i t the meaning which i t would carry with the
insertion of the vord “such,” that that would have any
beering, and, i f so, what bearing upon the construction
we should give t o that act?
We. darrison.
M r . Comptroller, I
feel, . though t h e
history o f the manner i n which that word was inserted i s
-& matter
o f interest
t o u s a t this pertdcular time,
is not a matter that i s pertinent
mate c o n s t i e t i o n o f the law.
a t
i n determining t h e ulti-
A f t e r all, y o u may prove
very Conelusively that nine tenths o f members o f Gongress
in inany instances d o not know what they are enacting i n a
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Federal Reserve Bank of St. Louis
359
particular paragraph, a n d that fact,
whether established
by oath o r not, i s not Geterminative
o f the construction
of the law, because i f i t were 7 o u
would never have a n r
stable l e s i s l e t i o n . L
vations
should p e r h a p s m a t e s o m e r e s e r -
i n inaing t h a t statement. I
a m simpl:
from m y recollection o f past conversations
with os
of Gontress, a n d L f vill n o t rive h i s name
f o r th:
<houzh I
have n o o b j e c t i o n
t o mentioning
of the members here, because T
i t t o any
am sure that h e i s proud
of the fact tiis w o r d was inserted,
i f only because o f
his realization o f its necessity i n maintaining
t h e very
Geep principles f o r which t h e a c t stands, t h e t
is, t h a t
money shall be loaned only for a commercial o r asricultural purpose i n helpins- oroduction, t h e cérrying
o n or
marketing
“00cs
o f goods,
i n storaze
s n d n o t f o r t h e purpose
o r othervise
o f covering
o r for purely speculative
purposes, a n d if.we d o not give t h e A c t t h e particular
construction I
have r e f e r r e d t o ,
i t w o u l d m a k e p o s s ible
the carrying o f goods a n d farm products f o r
a n indefinite
purpose,
Mr. Hamlin. I
understand t h a t provision merely t o
sey that asricultural paper
i g SLLiLL agricultural paper
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Federal Reserve Bank of St. Louis
although i t may b e secured b y agricultural products.
Mr. Harrison.
I f the proceeds
o f the paper
i n the
first instance were used--
Mr. Hamlin.
W h a t necessity would there b e for say-
ing that that agricultural paper still remains agricul-
tural paper if secured by agricultural products? C o n egress must have had something else i n mind than that
trite statement, I
should think.
Mr. Harrison. N o , not necessarily so, Mr. Homlin,
for this reason that you know, a s well a s all the mem~
bers o f the Board, t h a t m a n y people h a v e b e e n told f o r
@ long time that a piece o f paper secured b y bonds o f the
Pennsylvania Railroad Company, for instance, was
ineligible,
o n the theory that 14t 1 s a loan t o carry o n
finence the holding o f Pennsylvania Railroad.bonds.
A s a
matter o f fact, t h e Board h a s ruled v e r y decidedly that
that paper is eligible 1 f used for a proper purpose
remardiless o f the security.
T h a t is, u s e d for o n e o f the
purposes specified b y the law.
In the case o f National Banks, t h e question o f the
eligibility o f e loan depends always u p o n t h e collateral.
Congress h a s khown that, a n d i t 1 s the backbone o f the
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Federal Reserve Bank of St. Louis
561
Wational Bankins system.
P e r s o n a l security i s all risht,
reul security i s not.
Now, i t seems that a n atteupt i s being made t o change
the whole fundamental nature o f the elizibility o f paper.
den l t comes t o the Federal Heserve System, t h e colleteral inakes n o difference, t h e y say, t h e purpose o f the
proceeds o f the l o a n i s n o criterion, e x c e p t zovernment
bonds.
Mr. Hamlin. w h a t does “merely investment" mean?
That is, agricultural paper secured b y agricultural prod-
ucts i s all right i f not merely for investment.
ir, darrison. I
confess I
am a
little b i t a t a
loss, because I have not a copy of the act here, and T
have n o t revieved i t for some time.
a s I remember, hovw-
ever, t h e t particular feature o f the l a w was inserted
for t h e purposes o f precluding t h e eligibility o f any
paper c r e a t e d f o r t h e p u r p o s e
o f carrying investment
security.
Mr. Hamlin. ‘ B u t “Merely for investment" seems t o
qualify i t .
Mr. narrison.
that u p .
d e l l , a s I say, I have not looked
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Federal Reserve Bank of St. Louis
562
Mr. williams.
of Gongress,
D o y o u not think i t was t h e purpose
i n introducing t h a t clause relative t o as-
ricultural products, t o liberalize,
My. darrison. I
troller, I
n o t t o limit?
think s o originally, M r . G o m p -
agres t h a t t h a t w a s t n e o r i g i n a l purpose,
but
I feel also equally certain that t h e subsequent amendment
to that varticular section o n the floor o f the nouse was
in itself sufficient t o neutralize t h e main purpose.
Governor Harding.
L e t the record s h o w that the House
Bill i n conference e s s e n t i a l l y p r e v a i l e é , t
a
h
t i n all disputed points the House got the better o f the Senate.
Mr. darrisone T h i s is, on the floor of the House
even before going t o conference, I
think.
Dr. ililler. Yes, but the House vording. i
n that
section went t o the conference-~
Mr. Harrison. I
believe i t did.
Dr. Miller. « a n d the Senators w e r e more liberal i n
these oarticulars.
Mr. iarrison.
I
t i s very obvious, f r o m reading
the particular paragraph, that i t is not only not very
cleer i n its intent anyway, b u t i s really ungrammatical
and s o involved a s that i t i s pretty harca t o tell what
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Federal Reserve Bank of St. Louis
563
was really intended i n the first instance.
S o when i t
comes t o &@ question o f constitutionality w e have t o d o
the best w e can with the lew before us. T h e word "such"
clearly refers b a c k t o eligible agricultural paper.
T I
will read the sentence:
"Nothing i n this Act contained shall be construed
to prohibit s u c h notes, drafts a n d bills o f exchange, se-~
cured b y staple asricultural products,
o r other goods,
wares, o r merchandise from being eligible for such dis-
counts *
Governor Harding.
I t does not say any note, but
says "such notes.”
Hy. darrison.
Y e s , a n d the construction o f the
sentence, too, rather makes i t more consistent w i t h t h e
insertion o f the tvord “such" t h a n I
had Supposed, because
it says “such notes, Grafts and bills," ete., secured b y
Staple agricultural products.
I n other vords,
i t just
says--it i s i n the negative~-that nothing i n tnis A c t shall
malke ineligible elizible paper w h e n secured b y agricultural products.
Dr. Miller. a g r i c u l t u r a l paper might b e eligible,
if secured b y agricultural products, j u s t a s & commer-
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Federal Reserve Bank of St. Louis
564
cial note mizht might have a
chattel mortgate o r a land
mortse@ z
e to secure it, that would not destroy elisibility 4&8 commercial paper.
Mr. Herrison.
A
n
d that w e have accomplished
by
regulation o f the Board, whereas t h i s other thing i s
accomplished
by a
p r o v i s i o n o f t h e law.
Dr. Miller. Y e s .
Me. Harrison.
I n o t h e r words,
argue t h a t t h i s h a s p r o v i d e d
y o u misht properly
i n advance f o r a
contingency
that subsequently d i d arise.
Dr. ililler. I
have always considered that i n the
case referred t o i t was n o t a speculative n o t e a n y more
than i f @ Pennsylvania Railroad bond i s attached t o a
commercial note, & merchandise note, that thet does not
make i t @ Speculative provosition,
i t does n o t lose
its eligibility b y reason o f the security attached t o
it.
Mr. Harrison. I
think that i s a necessary con-
struction, f o r the .reason that i f y o u d o not place that
construction u p o n i t you have t h e effect o f making eli-
gible any paper regardless b y whom made and regardless
of the purpose f o r which i t i s made,
s o lone a s i t i s
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Federal Reserve Bank of St. Louis
secured b y a n agricultural product=- ~
Mr. wililams. U n l e s s h e l d b y investment.
Mr. Harrison.
E v e n assuming that his construction
of that part o f it, unless h e l d f o r investment, w o u l d
be unnecessary, because n o E
g
o c being held f o r
any other purpose would properly come within t h e dis-
tinction o f the eligible part o f the law.
Mr. Hamlin.
G o u l d y o u just read that, merely f o r
investment, t h a t clause.
Mr. Harrison.
T h e particular sentence i n which
that occurs begins w i t h the part I have j u s t read, noth-
ing i n this act contained shall be construed t o prohibit such notes, drafts, a n d bills o f exchange, secured
by staple agricultural products,
o r other goods, wares
or merchandise, f r o m being elizible f o r such discount.
Mr. H a m l i n e S u p p o s e y o u r e a d t h e s e n t e n c e b e f o r e
thate
Mr. darrison.
T h a t is, t h e discount o f eligible
agricultural paper. T h e word “such” occurs twice.
Then there i s a serecolon, a n d then the words "But such
definition shall n o t include notes, drafts,
covering merely investments."
o r bills
I t i s not a definition,
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Federal Reserve Bank of St. Louis
366
because i t is purely i n the negative.
reads:
A n d then it
‘ o r issued o r drawn f o r t h e purpose o f carrying
or trading i n stocks, bonds, o r other investment
secur=
ities, except bonds a n d notes o f the Government
o f the
United States,"
One m a n ' s S u e s s
i s perheps
a s good a s another one's
on that.
I think that provision o f the l a w relates t o
the
subject which i g covered b y the Board i n its
specific
paragraph o f regulations, which says "No note the proceeds o f which a r e used f o r derma nent b a fixed
investments,
such as land, machinery," and what nd, "shall be considered eligible for discount," including the bonds and
notes o f commercial corporetions o r any institution
other t h a n t h e G o v e r n m e n t
o f t h e U n i t e d States,
a n d that
Sives i t a losical conclusion.
Mr. Hemlin.
M a y I asi another question?
Mr. Har:ison. C e r t a i n l y .
Mre domlin,
ily. Harrison.
D o you consider a cotton factor abenker?
W o t i n the Ordinary sonse.
Mr. Hamlin. 4
iy. siarrison. I
money lender?
think h e is, yes, just a s Wanamaker
might D e considered t o b e a money lender, because
part
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Federal Reserve Bank of St. Louis
of nis businessis running a little bank i n connection
with his b i g business.
S o far a s h e i s borrowing f o r
comaercial purposes, h i s paper i s eligible, b u t s o far
as t h e cotton factor w a s borrowing t o conduct t h e incicdental part o f his business, lending money,
i t would
be ineligible.
Governor Harding. « i n argument was made yesterday
that the whole essente of the cotton f i c t e '
s business
wag t o get control o f the sale o f the cotton, t h e t t h e
advances h e makes i n the spring o f the year a r e n o t made
for t h e sake o f the interest received o n the money advanced,
that that was n o t the underlying basis o f the proposition
&t all, b u t t h e cotton factor wented t o set control o f
the sale o f the cotton when i t was ready, a n d a good m a n y
cotton factops c l a i m that their interest accounts s h o w a
balance o n the wron: side o f the ledger, s o m e o f them do,
and that they claim that they are entitled t o consideration i n this matter f o r t h e reason that their business
is very clearly a n d essentially p r t o f the »roduction
and making o f an agriculture] staple. T h e y claim that
they are n o t money lenders, t h a t ther confine their business entirely t o makins advances t o producers o f acertain
commodity and to the sale o f that commodity, and that the
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Federal Reserve Bank of St. Louis
board could therefore distincuish i n their favor a s
agcinst amrbody else w h o might b e i n the general money
lendin: business.
Mr. williams.
cotton,
T h e y l e n d t n e m o n e y t o produce t h e
t o enable t h e farmer
Mr. H a r r i s o n .
that.
t o p r o d u c e t h e cotton.
T h e r e i s really n o t m u c h difference
i n
W @ l l , t o take a snecific case, t h e Gontinental
Guaranty Gorporation organized originally t o finance t h e
automobile business.
T h e i r original proposition w a s
this, t h a t t h e manufacturer o f automobiles d i d n o t k n o w
his customers o r hed n o way o f ‘noving t h e various dealers,
and t h e Gontinental Guaranty Gompany, through i t s vare-
rious correspondents, w a s able t o say who the dealers
were a n d knew them, a n d was i n @® position t o sell t o the
dealer o n cash, a n d they said they would lend the dealers
the o n e y required, a n d they tried t o make eligible their
notes t h e proceeds o f which were used t o lend solely t o
dealers who were buying eutonobiles.
Mr, iilliams.
T h a t i s not a n azricultural comnodity?
Mr. Harrison.
N o , but i t is a comercial commodity.
Mye weoGord.
May I
ask a question?
Mr. uarrison. CGertai nis.
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Federal Reserve Bank of St. Louis
The Gontinental Guaranty Company i s
in the business o f lending money a n d they a r e n o t i n the
businessof carryins o n the operation o f a warehousing
proposition a n d t h e y d o n o t denvend u v o n a
warehousing
proposition f o r t h e m a i n p a r t o f t h e i r profit.
Mr. Harrisone I
think i n this connection i t may b e
interesting f o r m e t o review f o r 4 minute t h e situation
thet w e nave been confronted w i t h i n New York.
the Wederal keserve Banks, I
Some of
think i t was Kansas Citr,
in the first olace, refused t o discount t h e paper o f one
of t h e p a c k e r c o m a i s s i o n m e r c h a n t h o u s e s ,
called,
a s they are
o n the zround that t h e paver was inelizible under
the terus o f the cotton factor ruling.
T h a t mecde u s
tae notice f o r t h e first time, méece u s s o into t h e
fundamental character o f that narticular class o f paper.
de have b e e n investigating; that f o r nearly three months,
interviewins a l l t h e various comnision houses, interviswins t h e a t t o r n e y s a n a i n t e r v i e w i n g t h e m e m b e r s
o f one
admittedly banizing house that i s doins t h e same character
of business. I
cause I
have n o t finished o v r investications.
ir. ii&amlin.e
Banis 2
hesitate t o sive a n y conclusions yet, b e -
A n d that paper i s being teken b y other
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Federal Reserve Bank of St. Louis
570
Mr. Harrison. ‘ Y e s , a n d v e are taking i t ourselves.
Those people d o business i n a very different way from
the cotton factor.
In the case o f the comnission merchant, t h e mills
shid s00ds direct t o the commission merchant and the conmission merchant asrees t o sell those goods t o anybody
he cares t o sell then to.
A t the outset that looks v e r y
much like the cotton factor, particularly a s t h e commission merchant advances funds pendine ultimate s a l e b y the
comaission house t o the buyer. I f , however, y o u look
into t h e decisions o f the courts interpreting those transactions,
i n o s t o f the states o f the South a n d the State
of N e w Yor::, y o u w i l l f i n d t h a t t h e N e w Yor's courts h a v e
held that t h e Massachusetts m i l l shipoing t o the commis~
sion ierchant i n New York i s not doing pusiness i n Nei York
at all, that this i s the comission merchant thet is makinv the sale o f the goods, that the creditor mill cannot
r
He. :
attach t h e s o a l s i n t h e hands o f the commission merchant
in the sense that t h e attachment vould usually b e made,
subject
t o t h e l i e n o f t h e c o m n i s s ion iierchant o r s u b j e c t
to moneys a d v a n c e d .
In other tords, t h e courts h a v e said that t h e mill
no l o n g e r h a s a n y i n t e r e s t
i n rem,
t o use a
l e v a l term,
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Federal Reserve Bank of St. Louis
371
That means @ n interest i n the soods themselves, against
the c o m i s s i o n house, u n d e r t h e contract t o sell.
You take a
case i n the South, however, a n d n o t only
has the farmer still a n interest i n the cotton, b u t
under t h e laws o f those various states h e c a n trace t h e
cotton t o the ends o f the world i n the hands o f bona-fide
purchaser t o male sood t h e anount o f money received b r
the factor b u t n o t paid over b y the factor t o the farmer.
In other vords,
i f the factor fails, t h e farmer c a n traco
nis coods anywhere.
Mr, damlin.
D o y o u mean t o s e y h e could telke thein
irom @ Federal Reserve Banik?
My, derrison. Yes.
s
s
; 1 Reserve Bank
the cotton.
ie, damline H o l d t h e certificates.
wr. aarrison.
H o l d t h e certificatesor h a v e a n inter-
est i n t h e c o t t o n o n l y f o r t h e a m o u n t t h a t t h e c o t t o n f a c t o r
maz have advanced t o the farmer.
B u t i f a cotton factor
makes & @ loan o f 10 percent o f the value o f the cotton
to the planter,
i f tnat cotton goes i n t o t h e hands o f a
Pederal Reserve Bonk,it m a y have a n advance o f 5 0 per cent
of the value o f the cotton.
Mr. williams.
N o , t h e y s a y that i s n o t dono; these
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Federal Reserve Bank of St. Louis
larze factors a
pearing before t h e board yesterday
stated specifically that they never pledged
t h e cotton
for more than the amount they were loaning o n the incividual bale.
asked t h e cotton people about t h a t
My. Harrison. I
last sprins a n d they said a l l they could guarantee w a s
that the assresate o f their loans did not exceed the
agcrezate o f their interest i n the cotton, b u t they
did n o t know, o r did n o t attempt t o undertake t o prove,
how much was advanced sgeinst any one particular bale.
Governor H a r d i n g , I
asked q u e s t i o n s a b o u t t h a t y e s -
terday a n d they said i f they borrowed #5,000.00
o n cotton
they were very caref 1to firure out how much had bea
advanced
o n e a c h sarticulear bale.
T h e y said thet t h e y
kept @ record o f it.
Mr. tiarrisone
I n order t o clinch the record, m a y
say
T/something i n that connection, regarcless o f whether o r
not the cotton factor borrows only t o the extent o f his
interest i n the cotton.
T a m citing that n o t t o show
that t h e Federal ieserve B a n k has n o t g o t a good line o n
the cotton,
b u t rather
t o show o n l y thet t h e c o t t o fact-
or i s borrowing f r o m a bank t o lend money t o somebody
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Federal Reserve Bank of St. Louis
373
else o n the security o f cotton, a n d that i s what I
the commission merchant i n New York will n o t doMr. Hamlin. I
would like t o ask about t h e notes o f
commission f i r m y o u spoke of, i n New York,
of note.
o r that
D o e s t h e Federal Reserve B a n k take t h e m
they a r e n o t secured?
Mr. Harrison.
Mr. Hamline
O h , ves.
I n other words, y o u recosnize t h e t that
of n o t e i s contnercial p a p e r ?
Mr. Harrison.
Mr. Hanlin.
Yese
w h a t i s the difference between that m d
the cotton factor, t h a t i s wnat I
Mr. darrison.
cannot ses?
T h e r e i s the same difference between
them a s t h e r e i s b e t w e e n W o o d w a r d «
mercial t a t i o n a l bank.
Lothrop a n d t h e Gom-
O n e i s financins,
i f y o u till,
the marketinz o f s o o d s . h e i t h a ' s : qequired from a producer.
The o t h e r i s h e l p i n g t h e p r o d u c e r f i n a n c e h i s o w n s o o d s
by lending h i m inoney just like a bank w o u .
ifee Hamlin. I
d o n o t s e e that.
Governor Wellborn.
D o e s t h e c o m m i s s i o n m e r c h a n t ad-=
vance money t o the mill?
Mire darrison.
Yese
Governor wWellborn.
I f h e advances i t t o the mill, w h v
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Federal Reserve Bank of St. Louis
not to the faruer.
Mire ciarrison.
B u t m y point i s thet under t h e decigs-~
Lons o f t h e c o u r t s t h e m i l l n o l o n g e r h a s a n i n t e r e s t
the f00as,
3 0 i t i s equivalent
purchased. I
to a
part p a y m e n t
i n
o n soods
aia trying t o describe a s t o what i s the
fundamental nature o f the vaper o f each o f these concerns,
and I
ai a t a little disadvantage because w e have n o t
quite finishedour investigation i n regard t o the commission
merchants
i n New York.
T h a t investigation i s still soins
One B u t s o far a s o u r investigation h a s pone, w e feel
\
that there i s a real difference a s the business i s conduct6G.
Mr. Hamlin. S u p p o s e h e h a d complete title, a s t h e
cainission merchant has, would not that put the tvo cases
absolutely o n a parity?
Me. derrison.
W o gir, for the reason that i n the one
case l e g a l t i t l e s o e s t o t h e f a c t o r a n d i n t h e o t h e r c a s e
he legal title never touches t h e factor.
Mr. samlin. w o u l d n ' t the commission merchant have a
lez@al title?
Wir, sarrison.
selves.
Yes,
h e haés a
right
i n the coods then-
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Federal Reserve Bank of St. Louis
S75 .
Mr. Hamline T I um asswaing that the factor gets the
cotton itself andhas the legal title t o that cott one
Governor darding.
B u t h e hss not. T e l l m e how the
commission wercnant gets a legal title, that i s what I
want t o know.
Mr. Harrison.
I n the ;
Gavs t h e c o m m i s s i o n m e r -
chant i n New Yorls dia -only t h i n c , h e bousht imported
“9008 t o rosell i n tuis country, a n d h e porroved
pay f o r goods that h e bougnt uproud.
e r e s
T h e r e w a s never a n y
question that t h e foreisnseller w a s horrovins, money
n merchant,
from t h e c o m n i s s i o
h e was merely taking money
as o a r t p a y m e n t f o r f o o d s s o l d , u n c e r &
contract w h i c h p r o -
& s the comvided thet h e should s e t the balance @ s soon
mission m e r c h e n t h a d e f f e c t e d t h e d i s 2 0 s i t i o n
o f the
joots.
alon;;
Mois b u s i n e s s h e s d e v e l o p e d s t e a d i l y f o r y e a r s
those sume lines, s 0 as t o extend t o commercial business,
to orovide a n effective means o f marketin: t h e
wares
o f practically a l l t h e wills
i n W e v Encland.
ereater a r t o f i t i s done throuwh these commission f
they k n o t h e buyers; t h e y t a e
credit risks; i f the buyer fails, they l o
Were Williams.
S u p p o s e t h e c o t t o n factor i s i s c o t e
ton t o a man that fails.
d e i s responsible t o the faricr?
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Federal Reserve Bank of St. Louis
376
Mr. Sarrison.
B u t i f the cotton fector fails a n d
neglects t o make z o o d his obligation t o the farmer,
the farmer can get his money back.
Mr. williams.
W o t against the Federal Heserve Bank.
uY.e Harrison. a g a i n s t any one.
Mr. danalin.
D o y o u mean t o say that t h e Federal
Reserve bank does not get any title whatever?
ir. Harrison. T h e y d o subject t o the anount-ifr. damlin (interposing).
T h a t t h e factor h a s
advance 6d?
Mr, Harrison.
iy. Hamjpin.
Yes.
w e l l , t h a t i s all that t h e y advance.
Mr. Harrison. I
know, but I am afraid, again, w e
serve B a n k u p o n t h e d e t e r m i n a t i o n
o f whether
o r not
the paper i s eligible, a n d the Board has never considered
the question o f security, e x c e p t i n the case o f Government
ponds,
i n determining t h e question
o f eligibility. I
am
going into security only t o show that a s a matter o f fact,
cotton factors d o not buy and sell cotton, but merely
act a s agents f o r t h e farmers, a n d that & cotton factor
does a little banking business o n the side, lending t o
the farmer pending sale.
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Federal Reserve Bank of St. Louis
Governor Harcinge
L e t me put this case. S o m e
times w h e n t h e p i s iron market i s dull a n c the furnaces
do not want t o shut down, t h e y will ship No. 2
or g r a y forge »
for instance,
foundry
t o a certein
concern a n d that concern, pending sale o f that p i g iron,
will mate advances t o those furnace companies o f , say,
75 p e r c e n t o f t h e v a l v e
o f t h e p i g iron.
f l o w suppose
a firm h o s e entire business w a s receiving consignments
of pig iron and advancing t o the furnace company against
that p i g i r o n t o them, would that firm's n o t e siven for
the p u r p o s e
o f setvins funds
t o c o n d u c t t h e i r p u s iness
be elizible o r not under your rule?
ire narrison.
a s I
understand i t , a s y o u s t a t e t h e
facts i n that case, probably i t would b e ineligible.
There a r e lots o f cases l i x e that.
instance,
T h e r e i s the case,
o f tie Lumber Sales Corporation, w h o a r e &
of luwabverdealers combined f o r the purpose o f effecting sales organization, a n d they ship goods t o the sales
organization for sale a t prices thet they fix themselves.
The sales organization finance’ themselves b y borrowing
from t h e i r banks o n their notes.
T h e Board has ruled
time a n d time again that t h e notes o f the Lumber Seles
orvsanization a r e n o t eligible unless i t i s a n indevend~
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Federal Reserve Bank of St. Louis
ent c o r p o r a t i o n w h i c h b u y s a n d resells.
There h a s never been a n y doubt t h a t i f the farmer
will d r a w o n t h e f a c t o r a n d u s e t h e p r o c e e d s
draft f o r t h e p u r p o s e
o f the
o f p r o d u c i n g h i s f a r m products,
the paper i s ineligible.
iy. Hamlin. S u p p o s e a
customs broker o n a n import
transaction covered b y a n import acceptances advances
the money temporarily t o pay the duties a n d then accounts
to his client; supposing h e wanted t o borrow money t o
furnish himself vith capital f o r matin; those advances ,
would n o t that h e considered elisible commercial paper?
Mr. Herrison. w h a t i
s the mature o f the man's busi-~
ness?
ily. damlin.
H e is @ customs broker, h e takes zoods
from the custom house, advances t h e money t o pay t h e
duty, and he wants t o raise sane money for that, and he
issues h i s notes, a n d that note toes t o the Federal Reserve Bank, trould that b e eligible according t o your
definition o f eligible paper?
Mr. darrison.
a s I
understand i t , i t probably vould
not b e eligible, b u t I would like t o look into t h e facts
more closely before I answered that.
I t is not at all
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Federal Reserve Bank of St. Louis
crent f r o m a n y other corporation; whether y o u call
bank o r banker o r credit company o r zusranty comof what not, t h e y a r e a l l a part o f the machinery o f
marketing gods, t h a t i s what t h e y are f H ,
b u t the
mere fect t h a t they are a part o f that maci inery does
not make their paper eligible.
Mrs Hamlin.
T h e point I
mizht b e considered a
wanted t o make v a s that t h e y
prt o f a n agent,
s o t o spealt, n o t the
general benking agent, but a n agent o f the factor, a n d that
his acvances misht possibly b e considered commercial paper.
I vould l i x e t o a s k t h i s q u e s t i o n o f Mr. Curtiss,
Is i t n o t afact t h a t i n Boston your construction o f the
law differs f r o m what tir. darrison has s t a e d ?
Mr. Gurtiss.
d e does, a s h e explains w i t h refer-
ence t o the commission house h e mentioned several times.
1@ have similar cases a n d w e are investigatins o n e particular case n o v t o ses whether i t comes u n t o this classification that y o u refer to.
Mr. McCord.
Y o u s a y the paper o f these commission
houses i s taken. N o v , t h a t statement shows possibly a d vances t o iiills, s o much, w h i c h i s a n acc ount.
Mr. darrison.
I
t shovs a l s o bills receivable.
But h o l d
o n e
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Federal Reserve Bank of St. Louis
Herrison.e w e l l , a l l o f them word their statement
Mr. M e o G o r d «4
all means t h e s a m e t
:
i
T h e y
receivable, a d v a n c e s
all a n account @ n d regarded a s a quici:
Now t h o s e camnaission h o u s e s y o u s p e a l o f c h a r g e
the m i l l a commission f o r t h e sale o f their goods, a n d those
3008 a r e consisned t o then and advances m a d e against then.
I can s e e n o difference betveen thet a n d a cotton fector.
iy. daialin.
sive a
note a n d a
Mr. d a r r i s o n e
O f courss,
i n all those cases a
mill could
commission merchant e n d o r s e i t .
«a8 a
matter
o f fact,
i n a conference
I had d a y before yesterday with t h e Textile Benicins Gorporation, admittedly « ban:,und trriny t o cdo business t h e
same w a y @ s these otasr people do, thes “antec t o knot
wheat I voula suzzest thet t h e y should do.
T h e board.
nes ruled that their »aper i s ineligtvle f o r the reason
that i t i s impossible f o r ther b
t h e i r charter,
to
co business i n a way t o maize
whet £
would sugzvest, a n d I said “ Y o u c a n continue t o
your business that av, b u t your paper «ill b e ineliszible, o r you c a n d o the thing t h a t will make i t elisible,
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Federal Reserve Bank of St. Louis
and YRedephy: drefts d r a i n against y o u a s a
ban
The g e n t l e m a n v i t h w h o m I
that ?!! i
was t a l i i n g a s k e d “ C a n w e
said “Yes, because the zoods are shipped t o
them b y the mill o n a bill o f lacing, t h e y a r e srospective buyers. ‘
!
Mr. Hamjin. T h e y could give a banker's acceptance.
uly. nharrisone Y e s , they could sive a banker's acceplante.
a s a matter o f fact, t h e y a r e siving bankers!
acceptances.
Mre Hamlin. Well, could a factor sive a es e e e
acceptunce?
im-=
Mr. idarrison.
I t i s rather fneterial whether y o u call
A:
r a e , @
draft given b ye him,: a n acceptance o n him,E aR Sbanker's
ie)
acceptance o r not; h i s paper nould/ eligible beczuse t h e
proceeds vould b e used b y the fermer f o r a n acricultural
purpose.
Y o u have t h e case o f the Gotton Sales Gorpora-
tion o r t h e G o t t o n G o o p e r a t i v e a s s o c i a t i o n ,
where I
o r whatever
understand t h e Board h a s already ruled”
that t h e paper drawn b y a farmer o n that association i s
eligible.
Governor Harding.
T h e y say they have done business
in one way for a hundred years and vwehawé to let thea
Glone.
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Federal Reserve Bank of St. Louis
Dr. tiller.
I t strites m e thet w e are siving a lto-
gether a o disp¥oportionate t i m e t o the discussion o f a tech-
nical detail, a n d i t strixes m e that this i s a settled
yuestion i n the iuinds o f most o f us.
interesting argument,
a s & question o f
w e might s o o n indefinitely, b u t I
should think tnat those w h o wish t o discuss i t further
might d i s c u s s
i t v i t h uir. s a r r i s o n personally,
succest t h a t t h e G o n f e r e n c e m i v h t w e l l p r o c e e d
and I
ould
t o the
discussion o f other questions t h a t i t may h a v e t o con-~
sider.
lin. darrison. I
Mr. uillliams. I
apologize f o r taising s o much time.
wish t o dissent v e r y strongly f r o m
Dr. ililler's position t h a t this i s a mere technical question.
T I happened t o b e present a t tne hearing yestordar.
There were s i x United States Senators present a n d representatives
i n behalf
o f the cotton industryyof t h e
Southern states, w h o aporized u s that their interests a n d
the prosperity, t h e prosperity o f the whole section,
‘Ss
was jeopardized a n d endangered a n d i l l
b e further endan-
gereca i f the ruling recently made goes i n t o effect.
S o
I do not know anything w e can discuss with more profit a t
this t i n e that this particular question.
I
t i s not a
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Federal Reserve Bank of St. Louis
sectional matter, either, f o r t h e vrinciple involved
affects a l l azricultural districts.
Dr. Miller. I
is technical,
do n o t mean toe imply, w h e n I
t h e t i t i s n o t a n inportant thine,
sav
but I
do
not think i t i s important t o f 0 o n Giscussins this Guestion a n y further a t this Conference,
a t this session,
in
ofoy t h e tine w e nave given t o i t and i n view o f the
foct t h e t t h e d i s c u s s i o n f o r t h e l e s t f i f t e e n m i n u t e s
has a p w r e n t l y n o t advanced v e r y imuch.
not i m p o r t a n t
i n i t s effects,
but I
N o t that i t i s
do n o t think a
fur-
ther digcussion o f i t a t this time i s very important.
Governor Hardins.
b o y o u raise t h e point @
order
hese p r o c e e d i n g s a r e o u t o f o r d e r ?
Dr. ililler. wWothing s o rigic a s thet.
Governor Harding. I
@ m sure none o f u s 7
protract t h e discussion unnecesserily.
Governor .ellborn.
T h i s ciscussion h a s brought o u t
some facts thet M r . Harrison d i d n o t seem t o b e acqQueinted sith, o n e o f them beings that t h e y sive these
notes a n d a l s o t h e s e a c c e p t a n c e s .
Governor Harding.
T h e strons p o i n t that t h e y made
yesterday was that the cotton factors “could be distinguished f r o m a n y other business, inasmuch a s their busi-
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Federal Reserve Bank of St. Louis
ag c o n n e c t e d f r o m s t a r t t o f i n i s h w i t h t h e p r o -
aguction o f a staple crop, a n d that they d i d n o t lend
Money e T h a t impressed mee
: M r e williams.
I t seems t o m e t h e solution o f this
soenien would b e for the factors t o be given notice that
they must call upon their farmers t o give-notes e a r l y
in the season,
i n February, M a r c h a n d April, w h e n t h e y
make those advances, a n é those notes w i l l b e eligible u n questionably when those factors w a n t t o use t h e m i n the
banks.
Governor Harding. T h e y were s o advised last spring.
Me. williams.
B u t later on, w h e n t h e time comes f o r
the marketing o f the cotton, t h e y need more money t h a n they
have i n hand o r than t h e y have available, a n d they want t o
be able t o have farmers s h i p the cotton a n d get further
advances from them, a n d they want t o be able t o use the
cotton which i s shipped t o them o n warehouse receipts a n d
on bills o f lading.
T h e bills
o f lading a n a t h e warehouse
receints c o m e i n at this season o f the year a n d the farm-
ers! notes earlier i n the season.
Mr. Harrison.
I a m sorry I took s o much time, b u t IT
would b e slad a t a n y time t o discuss tnis question further
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with anybody, either with the Board o r anybody that i s
particularly interested i n it.
Governor Harding.
M
r
. J a y has a
peper w h i c h h e
did not read yesterday o n account o f the l a c k o f suffi-~
cient time, a n d v e will b e very glad t o hear f r o m h i m
NOW e
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Federal Reserve Bank of St. Louis
Mr. Jay.
T h e third tope o f the progranme f o r the
conference prepared b y the Federal Reserve Board is:
TIT. F E D E R A L RESERVE NOTE BSULS.
1. I s t h e n o t e - i s s u e p o l i c y o f t h e F e d e r a l K e s e r v e
System subject t o legitimate criticism:
2. ‘ w h a t c o n n e c t i o n
i s t h e r e b e t w e e n changes
i n the
volume o f c r e d i t a n d t h e v o l u m e o f c u r r e n c y ?
3. I s there a n y difference i n relation t o effect
volume
upon prices between the volume o f credit and the
of currency?
Reserve
4. G a n the note-issue policy o f the Federal
System b e properly charged with a n y important responsi-
bility for inflated prices, i f so, what has been the
Federal
responsibility and i n thet way does the issue o f
Reserve notes promote o r assist i n f lation?
cur~
5. G a n the accepted principles o f pank-note
circumstances w h e n
rency regulation, applicable i n normal
gold stand~
the commerce o f the vorld i s conducted o n 4
ard,
b e sefely taken a s a
suide
i n the abnormal circun-
vir~
stances now existing, when the gold standard i s
Japan?
tually suspended, e x c e p t i n the United States a n d
6. I n connection with t h e policy o f credit control
Federal Reshould t h e oresent note-issue policy o f the
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Serve System b e changed a n d restrictions b e thrown
around the issue o f Federal Reserve notes?
7. I f the issue o f Federal Reserve notes should b e
restricted, w h a t f o r m should t h e restriction take a n d
what effect would different methods o f restriction have?
{a) I m p o s i t i o n o f charges against Federal Heserve
notes u p o n t h e uncovered p a r t o f circulation issued t o
them a t a given rate, for example, a fixed rate o f 54
or a rate varying w i t h t h e commercial rate.
(ob) would i t be practicable t o establish for each
member bani a so-called normal currency limit and to
impose c h a r g e s u p o n m e m b e r b a n k s c a l l i n g f o r n o t e s
i n
excess o f their limit?
(c) o u l d i t be advisable while continuing t o have
the Federal Reserve Banks p a y all transportation
charges o n incoming currency,
t o have shipments o f
outgoing currency made a t the expense o f the consignees?
(d) Restriction b y definition of the character of the
paper a c c e p t a b l e
a s collateral
b y t h e Federal Reserve
agent against the issue o f Federal Reserve notes.
Should member banks! collateral notes o r customers!
notes secured b y Government obligations b e taken a s
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collateral f o r Federal Reserve notes?
(oe) L i m i t a t i o n o f t h e t o t a l v o l u m e o f F e d e r a l r e s e r v e
notes b y the Federal Reserve Board, t h e maximum amount
being fixed p r o rata f o r each Federal reserve bani.
(The F e d e r a l R e s e r v e B o a r d h a s s t a t u t o r y p o v e r t o accept
in part o r t o reject entirely a l l applications f o r
Federal reserve notes.)
(f) Restricting issues of Federal reserve notes to
Federal reserve banks a s a potential means o f enforce ing
Credit control; canvass o f Hnglish experience a n d
views.
Would restriction o f note issues i n any o f the above~
Mentioned ways operate t o promote a better control o f cred~
it, a n d i f so, w h e t would b e the effect u p o n the commerce
and business o f the country?
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INTRODUCTION
(a) T h e Questions Proposed b y the Federal R e s e r v e B o a r d
(ob) Inflation
THE FEDHRAL RESEKVE N O T H
(a) I t s Standing under the Lew
(b) t s Blasticity
(c) T h e Cause o f its Issue
(d) W h o holds the Outstanding Notes?
RELATION O F NOTES T O DEPOSITS A N D T H E R
RELATIVE EFFECT U P O N INFLATION O F PRICES.
RELATION O F THE FEDERAL RESERVE NOTE D
BANK CREDIT AS A WHOLE
METHODS
C F C O N T R O L L I N G E X P A N S I O N O F CREDITS
THROUGH NOT: ISSUES
(a) I n Foreign Countries
(bp) T h e Board's Suggestions f o r this
Gountye
GENERAL REVIEW O F DISCUSSION
ENGLISH E X P E R I E N C E A N D V I S
CONC LUS ION.
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I. INTRODUCTION
(a) T h e q u e s t i o n s p r o p o s e d b y Federal R e s e r v e B o a r d e
The third subject which the Federel Reserve Board has
proposed f o r consideration a t this conference i s , properly
speaking, the relation o f Federal reserve notes t o inflatione
T h e Questions proposed b y the Board s e e m t o in-
dicate the desirability o f considering whether Federal
reserve notes a r e sound i n both theory a n d practice a n d
to what extent note expansion has contributed t o the
existing price inflation.
T h e inference i s that i f the
theory o r practice under which t h e y have b e e n issued has
proved unsound,
o r i f their influence o n price infla-~-
tion has been baleful t h e Board should n o w exercise some
of its discretionary powers t o restrict their volume.
These remarics will b e directed chiefly t o a conSideration o f t h e c h a r a c t e r i s t i c s
o f the Federal r e ~
serve note as a bank note, the primary causes o f its
issue b y a Federal reserve bank, its relation t o the
expansion a n d contraction o f deposits, t h e relative
effects o f notes a n d deposits u p o n price inflation and,
lastly, the methods o f controlling the issue o f Federal reserve notes suggested b y the Federal Reserve Board
as contrasted with the necessity for c o n t r o l l i n ge
h
t
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demand f o r credit itself.
John Stuart Mill,
i n his "Principles o f Political
Bconomy", says:
"Tt apprehend that bank notes, bills, o r cheques,
ag such,
d o n o t a c t o n prices
act. o
n prices i s credit,
a t all.
W h a t does
i n whatever shape given,
and whether i t gives rise t o any transferable instruments capable o f passing into circulation, o r not.”
That t h e object + o which w e should direct o u r energies i s not the demand f o r either deposits o r notes,
put t h e demand f o r credit itself,
i t will b e the pur-~
pose o f this paper t o show.
I. INTRODUCTION.
(b) Inflation.
The Oxford Dictionary defines t h e verb "to inflate"
"Do swell or expand artificially o r unduly;
to expand beyond proper o r natural limits;
t o raise
above t h e amount o r value which sound commercial
principles would fix."
Generally s p e a k i n g , i n f l a t e d p r i c e s r e s u l t f r o m a
disproportionate increase i n the volume o f the purchas-~
ing power i n terms o f dollars a s compared with the vol-
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O98
ume o f goods a v a i l a b l e f o r purchase.
W h i l e sold and
bank credits (whether deposits o r notes) a l l constitute
‘purchasing p o v e r " a n d w h i l e a b n o r m a l S u p p l i e s
o f any
one o r all o f them tend t o promote a n increase i n the
price o f goods, assuming that the volume o f goods renains stationary, nevertheless, t h e real problem for
consideration i s the proper method o f controlling t h e
demand that results i n the increase o f any one o f the
elements constituting "purchasing vower.”
IT.
T H E F E D E R A L R E S E R V E NOTH.
dn order t o advance t o clarify t h e discussion which
will follow,
i t i s necessary t o define i n some detail t h e
essential characteristics o f the Federal Reserve note;
how i t is issued and the reason for its issue.
(a) I t s Standing Under the law.
Under t h e terms o f Section 1 6 o f the Federal Reserve
act i t i s provided t h a t Federal Reserve notes a r e
"obligations o f the United States and shall be ren
Ceivable b y all national and member banks and Federal
Reserve Banks a n d for a l l taxes, customs a n d other
public dues.
T h e y shall b e redeemable i n sold o n
demand a t the Treasury Department o f the United
States,
i n the city o f Washington, District o f
Go~
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393
lumbia,
o r i n gold o r lawful money a t a n y Federal
Reserve Bank."
While t h e notes are, therefore, n o t legal tender for a l l
purposes, t h e y are, because o f their character, gener‘ally acceptable n o t only throughout t h e United States
itself b u t i n many nearby countries a s well.
ty and goodness cannot b e questioned since,
T h e i r safei n addition
tobeing a direct obligation of the Government of the
United States, t h e y are fully secured either b y the
pledge o f gold, commercial paper,
o r notes secured b y
obligations o f the United States. Furthermore, they,
together with Federal Reserve B a n k notes, a r e a first a n d
paramount l i e n o n all o f the assets O f t h e Federal Reserve Bank o f Issue.
T h e ascregate assets o f the Fed-
eral Reserve Banks a r e n o w about double t h e amount o f
their note liabilities. T h e law provides also that each
Federal Reserve B a n k shall maintain 4 gold reserve o f
40% against the amount of its outstanding notes, thus
insuring for all practical purposes their ready con~vertibility i n t o gold.
W h i l e technically t h e y a r e re-
deemable i n either gold o r lawful money a t a n y Federal
Reserve B a n k , r e g a r d l e s s
o f whether
o r not i t i s the
bank o f issue, a 1 1 Reserve Banks a s a matter o f practice
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394
have e s t a b l i s h e d t h e p o l i c y o f p a r i n s b o t h t h e i r n o t e s
anc their deposits i n gold o n demand.
A s long a s
notes, therefore, a r e n a t issued i n such volume a s t o
impair the confidence o f the public i n the ability of
the Government t o pay its obligations
i n gold o n demand,
and as long as the Federal Keserve Banks which issue
the n o t e s a r e a b l e t o p r e v e n t u n d u e e x p o r t s
o f sold,
there seems t o b e n o reason t o doubt t h e ability o f the
United States t o maintain its gold standard and t o insure t h e convertibility o f Federal Reserve notes i n t o
gold o n demand.
II.
T H E PeDseaL RESHAVE O T K .
(>) I t e Wlesticity.
The Federal Reserve Srsten was devised t o ovorcome
specific shortcomings i n the organization which preceded
Le
I
n 1863-5 t h e National Banking System was evolved
to provide, amon; other things, @
note issue which would
be o f undoubted acceptability a n d goodness,
o f instant
redecmability, a n d which vould circulate a t par throughout the entire country.
D u r i n g t h e »eriod f r o m 1908-15
the i‘ederal Reserve Syatem,was evolved t o nrovide,
a , note i s s u e w h i c h ,
anon?3 o t h eNr thines,
S
S a
i n addition t o
l
the foregoing characteristics, w o u l d b e s p e c i f i c a y
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595
convertible into gold, would expand and contract with the
emergency o r seasonal requirements o f the business conmu-
nity and vould b e interchangeable with deposits. Blastic~ity o f credit, whether i n note o r deposit form, i s the
essential basis o f the Federal Reserve Systeme
The l a w imposes n o arbitrary limit u p o n the issue o f
Federal Reserve Notes, either absolute o r with relation
to capital.
T h e o n l y limitation upon the character o f
their deposits o r notes i s a prescribed and fixed relation t o gold o r lawful money reserve.
I n each case the
limit i s the same, except, f o r slignt differences
amount a n d composition.
in
T h e limit m a y b e suspended b y
the Federal Reserve Board b u t i n that event t h e l a w preseribes t h a t i n the case o f notes 4
brake shall b e ap-
rates,
plied through t h e motive pover o f higher discount
which shall increase progressively a s reserves against
notes decreases
demThe power t o expand credit h a s already b e e n amply
onstrated.» T h e fact that Federal Reserve Notes have
i s not o f
expanded faster t h a n Hederal Reserve deposits
unduly,
{ftself a n y indication that they have expanded
b u t i s merely
for reasons w h i c h will b e discussed later,
system under
a result o f tne normal functioning o f the
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which a normal relation between t h e aggrerzate volume
of the t w o different kinds o f credit, hand-to-hand currency
and deposits, inust b e maintained.
~ T h e readiness w i t h which
Federal xeserve notes decline i n volume after holidays '
gives clear evidence o f their elasticity.
T h e fact
that their tendency i n the main has been t o increase with
the increase o f credit a n d prices does n o t justify a n
assumption that given declining credit and declining
prices, the volume of Federal Reserve notes will not
decline proportionally.
Reduction o f the volume m a y b e expedited b y dis-
count rates sufficiently high t o discourege the taking
of credit. R e a d y redemption i s assured b y the provision
forbidding one Federal Reserve Banls t o pay out the notes
ofanother under penalty of 10%; and by the Federal ReServe Bank policy o f paying the costs o f shipping coin
and currency t o and from member banks.
T h i s practice
facilitates t h e casy flow o f hand-to-hand currency t o
and from its source. besides, a g coin and notes i n
the vaults o f a member bank c a n n o longer b e counted
as a
p a r t o f i t s l a w f u l reserve,
i t provides a
direct
incentive t o carry n o more t h a n minimum till money
requirements»
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Hee
T H E PaburRAL KRaSMBVE N O P .
(ec) T h e cause o f its issue.
Federal reserve notes originelly found their w a y into
circulation i n exchange f o r gold.
L a t e r they were issued
when required b y member banks virtually i n exchange
for
commercial a n d government-secured paper,
T h e member
banks required t h e m t o accommodate customers wishing
to
convert their deposits i n t o a senerally acceptable
form
of hand-to-hand money. 4
typical transaction mirht b e
described a s follows:
le T h e business customer o f the member b a n k needing c r e d i t t a k e s h i s p r o m i s s o r y n o t e t o h i s b a n k
anc receives a
deposit credit.
He checks t h e bulk o f this deposit o u t t o pay
for soods, etc.
He converts t h e remainder o f his deposit i n t o
circulating currency f o r use i n the payment o f
wages. « a 8 the custom o f paying wages b y check
increases,
t h e necessity f o r t h e u s e o f Feder~
al seserve notes i n this connection “rill de~
Crease.
In just the same way the member bank obtains Federal
reserve notes b y checking against i t s balance v i t h i t s
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Federal Reserve Bank of St. Louis
Federal Reserve Banks
I f that balance itself b e inade-~
quate, t h e member bank replenishes i t by rediscounting
eligible paper which i t originelly discounted for its
customer, o r by offering its own note secured b y obligations o f the United States. S i n c e member bank re-
serve balances are themselves replenished ‘mainly through
rediscounts i t will b e seen that n o Federal reserve note
isplaced i n actual circulation with the public unless
the Federal neserve Bank has first made a discount for
some member bank, (except notos issued a s a mere exchange
for gold already i n cireulation).
B u t i t i s not t h e
Federal Keserve Banks themselves w h o decide vhat propor~
tion o f notes shall b e issued;
i t i s the credit needs
of the customers o f the member banks, varying greatly
in different sections o f the country and a t different
seasons o f the year, which determine the amount o f
notes issued and the proportion between note and deposit
liabilities. .
That proportion i s shown later t o be
fairly uniform.
Ite T H E FEDERAL RGSHRVE Bank.
(a) W h o Holds the Outstanding Notes?
The volume o f Federal Reserve notes outstanding
about i63,300,000,000,.
O f these i t is probable that
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about 500,000,000 a r e circulating i n other countries,
mainly those adjacent t o the United States i n the Caribbean
ALSCH.«
I
t is estimated that about 525,000,000,
about o n e sixth,
215,000,000
Stitutions.
a r e h e l d b y t h e banks
o f t h e country;
b y national a n d 510,000,000
T h e balance,
or
b y state in-~
o r about p23475,000,000 a r e i n
general circulation a g till and pocket MONG6Y s T h e extent t o which they a r e carried i n either tills o r pockets i n excess
o f actual requirements
i t i s o f course i n -
possible t o estimate, b u t i t i s quite probable t h a t t h e
volume thus employed could b e somewhat reduced b y a n
appropriate educational campaigns
Tile T H E RELATION O F NOTES T O DiiPOSITS AND THEIR
RELATIVE EFFECT UPON INFLATION O F PRICES.
The theoretical relationship between notes a n d de-
posits has been stated b y n o one more clearly than b y
Dunbar, who says, i n his "History of Banking";
"The notes of a bank are a liability, distinguishable i n form, b u t n o t i n substance, f r o m its
deposits."---"The question whether notes shall be
issued o r not i s one which i n modern banking i s not
Settled affirmatively b y the bank, but i s settled
by the creditor.” -~"Banks cannot extend their lia-
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Federal Reserve Bank of St. Louis
400
bilities o f olther sort except i n response t o @
demand from the public;
i t i s true that i n certain
states o f business this demand m a y b e unduly stimue
lated b y their action, a n d thet issues made i n
response t o a n unhealthy demand a r e i n excess o f the
proper needs o f the comunity.
I n any such period
of general expansion o f bank credit, however, b a n k
notes play the least important part."
In Appendix A will b e found a number o f quotations
other economists expressing similar views»
In the evolution o f modern banking t h e use o f circu~
lating bank notes preceded t h e use o f deposits operated o n
by checls.
I n most countries t h e y a r e still the sreatiy
preponderating element.
B u t t h e advantage o f check o r
deposit currency, as it is often called, are being increasingly appreciated.
I n France, f o r example, t h e Bank
of France during the war issued a pamphlet describing
and urging the economy o f the use o f checks+
I n England,
Ganada a n d the United States w h e r e deposit currency i s
very highly developed i t s u s e has increased progress~
ively.
In ingland i n 1820 t h e ration o f Bank o f mngland
notes i n circulation to Bank of Bngland deposits was
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ebout S75, i n 1844 i t was 154%; n o w i t i g Only about
100%
even after t h e tremendous substitution o f notes f o r t h e
gola i n circulation which accrued during the war.
T a «
day the total notes (Bank o f England notes end currency
notes) aro about 18% o f the total deposits o f English
banks.
C h a r t B , showing t h e velative growth o f deposits
and notes i n Bneland from 1914-1920, indicates that
during
the war notes increased faster t h a n deposits.
In Ganada where notes are issued b y the individual
banks, t h e r a t i o . f
o their notes t o their deposits i s
about 10% and the ratio o f banit notes and Dominion notes
to bank deposits i s about 15%. C h a r t GO shows that during
the w a r bank notes a n d bank deposits expended alnost pro-~
portionally, t h e notes a trifle the faster,
In the United States, just prior t o the Givil War, when
bank notes, m o l d a n d silver constituted t h e entire h a n d
to~hand circulation, t h e ratio o f notes t o deposits was
apout 100.
T o d a y e l l forms o f coin a n d notes h e l d out-
side the Treasury and the Federal Reserve Banks are about
15% o f all bank deposits, excluding Federal Reserve Bank
deposits.
Thus i t will b e seen that i n theses check-settling
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Federal Reserve Bank of St. Louis
countries t h e note i s a dwindling element o f the total
volume o f circulating credit.
And even within the United States the relative use
of notes and deposits varies with localities a n d seasons.
Fewer notes i n proportion t o population a r e used i n the
cities a n d c o m e r c i a l centers a n d more i n the country
districts; a n d more a r e used a t harvesting a n d holiday
periods t h a n a t others.
w h i l e notes a r e still used b y
ali for pocket and till money, t h e number o f thoss who
keep Ghecking accounts i s constantly increasing and the
number o f those whose entire finances a r e conducted b y
notes i s constantly decressing..
wacse earners a r e n o w d i s b u r s e d
E v e n many payrolls t o
b y check,
a n d were i t
practicable for 411 such wage earners i n turn to maintain checking accounts a t their local banks, further
very considerable reductions i n the use of notes could
be effected.
T h e standardization o f check currency
‘through the development o f the par collection system and
the superior facilities f o r t h e transfers o f funds which
the “ederal Reserve Banks h a v e created a r e effecting
material economics i n the u s e o f notes.
Wo have seen, then, that the demand for credit pre-
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Federal Reserve Bank of St. Louis
cedes t h e extension o f credit i n the form o f either deposits o r notes; a n d that a deposit i s the usual f o r m
in woich the credit i s first extended, t h e conversion
of @ portion o f the deposit t o the note f o r m being usu~
ally a subsequent transaction,
we have t h e usual relationship between t h e t w o kinds
ofcredit summed up by Professor Irving Fisher i n his #purchasing Power of Money" a s follous:
"The quantity o f circulating credit tends t o hold
@ definite r e l a t i o n t o t h e q u a n t i t y o f m o n e y i n cir~
culation;
t h a t is, deposits e r e normally a
more o r
less definite multiple of money."
And w e h a v e s e e n t h a t i n t h e t i o o t h e r g r e a t c h e c k u s ing
countries, e v e n under t h e stress o f war, Professor FPish-
er's statement has been fairly well substantiated.
we know that Federal Reserve notes while not legal
tender have been kept convertible into gold and that none
of t h e m h a v e b e e n f o r c e d i n t o circulation.
and o u r credit a n d prices being i n a generally expanded condition,
w e are interested i n ascertaining whether
our recent experience justifies Professor Dunbar's state-~
ment t h a t
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Federal Reserve Bank of St. Louis
"In the general expansion o f banks credit, bane
notes play the least important part.”
Dunbar would presumably expect o u r notes t o abonia
less t h a n bank deposits, a n d Fisher that the expansion h a d
. been proportional.
T h e actual experience i s set forth
in Ghart D, showing from 1914 t o 1920
(1) national bank Geposits (which reflect accurately the course o f all bank deposits).
Eseraegate amount o f coin and circulating notes
outside o f the Treasury and the Federal Reserve
Banks.
(3) Bureau of Labor price index.
It will b e seen that t h e lines r e p r e s e n t i n g e
h
t ox~
pansion o f deposits a n d ynrices a r e a l m o s t p r e c i s e l y p a r e l ~ —
jel, while the line representing hand-to-hand currency
expanded less,
I
t may fairly b e question whether owing
to the organization o f the Federal Reserve System during
the perial covered b y the chart, a n d the transfers o f
larse amounts o f sole from the member banks t o the Federal
Reserve benks, t h e fisures u s e d accurately represent.
the actuel increass o f our hand t o hand currency.
B u t
if w e deducted f r o m the figures used, t h e amount o f coin
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Federal Reserve Bank of St. Louis
and notes h e l d b y all the banks o f the country,
we
should certainly eliminate every element tending o n the
chart t o slow d o w n t h e rate o f expansion o f hand-to-hand
CUPTENCYs
t h e currency line, thus adjusted,
i s not
drawn o n the chart, b u t i t parallels precisely t h e line
of deposit expansion, w h i c h i n turn parallels t h e line
of price expansion.
The conclusion, therefore, seems justifiable that i n
the general expansion o f credit a n d prices t h e expansion
of notes h a s n o t been undue b u t hes b e e n either proportional o r less than proportional t o the expansion o f deposits.
I f t h i s b e t r u e i t Goes n o t s a o m r e a s o n a b l e
to
charge o u r note issue vith a n y undue influence o n the
present inflation o f prices.
NOTE:
< x T h e figures showing t h e total amount o f money
of 411 kinds i n circulation other t h a n money i n thes
Treasury and the Federal Negerve Banks are used rather
than the figures f o r Federal Reserve Notes alone,
because during 1915 and 1916 there was a considerable
increase i n the amount o f gold and gold cortificates
in circulation, a n d because the fisures for Federal
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Federal Reserve Bank of St. Louis
Kieserve Notes alone, starting a t zero i n 1914, would
indicate a n absurd ration o f increase.
I n the game
way during 1915 a n d 1916 about 5 0 , 0 0 0 , 0 0 0
o f na~
tlonal bank notes were retired while during 1918,
1919 and 1920 some 350,000,000
o f silver certificates
“ere retired and their place partially taken b y the
issue o f Federal Keserve Bani notes.
T h e important
comparison i n the discussion o f the relative influenee o f deposits a n d notes o n inflation i s the exbaénsion o f deposits a s compared with the total hand-
to-hand medium, rather than as compared with one o f
its elements; especially since orior t o April 1917
Pederal Reserve Notes were issued almost entirely
against sold.
IV. R E L A T I O N O F THE FaduksaL RESKRVE NOLL T O BANK
CREDIT A S A
WHOIR.
AS w e look a t Federal Keserve credits f o r the past
six years, projected upon Ghart A in the bold lines which
the W a r expansion traces,
w e c a n see f a r more clearly t h a n
was possible earlier, t h e relation o f the Federal Reserve
Note t o the credit structure a s e whole.
W e see that
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406
the e x :ansion o f discounts
i s almost identical w i t h t h e
expansion o f e d e r a l Keserve notes, a n d bears little r e e
dation t o the expansion of Federal Reserve deposits. T h e
reason f o r this i s clear.
Member end other banks may expend their deposits subject t o d o n o limitetion other t h a n that o f maintaining
the required reserve.
I n the case o f member benks, t h i s
reserve, m a i n t a i n e d w i t h t h e F e d e r a l H e s e r v e B a n k , r a n g e s
from 7
t o 134.
I t may be built u p by means o f redis-
counts equal t o the amount o f the reserve required, w h i c h
in its turn i s only ea small fraction o f the amount o f
credit granted b y the member bank t o its customers i n
the form o f deposits.
On the other hand, t o grant credit i n the form o f
hand-to-hand c u r r e n c y m e m b e r b a n k s m u s t o b t a i n F e d e r a l R e «
serve notes, which are substantially their sols source o f
additional note supply, since t h e y themselves m a y issue
no further notes, (except national bank notes which have
but small expansive possibilities).
a n d t o obtain Federal
neserve notes, member banks must rediscount a full 100%
of the amount o f the credit they desire t o extend and must
pay the discount rete o n the entire sum. ( x )
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Federal Reserve Bank of St. Louis
x (If the specific deposit with a Federal hkeserve
Bank wonich i s converted i n t o notes arises f r o m a transfer
Prom the Pederul HKeserve deposit account o f some other meme
ber bank, t h e net result i s the same, Since i n any p e r
Lod o f expansion t h e other account must have b e e n built
up i n the first instance b y means o f redisc counts.)
The rate thus paid t o obtain notes * * 45 not unlike the
tax imposed b y some countries
o n their banks o f issue i n
respect o f excess o r emergency issues, o r that imposed b y
the aldrich-Vreeland Act, under which notes secured b y
the Dledre o f paper o r securities w e r e issued b y various
currency a s s o c i a t i o n s
t o their members u p o n t h e payment
of a tax t o the Government, starting a t 3% o n the notes
outstanding and progressing t o 6%.
I n the case o f both
Federal Keserve notes a n d deposits t h e discount rate oper-
ates a s a tax upon the extension o f credit, b u t while the
tax applies 100% against the amount o f notes issued, i t
applies only, say, 10% against the increased deposit
credits granted b y member banks t o their customers.
NOTE:
x x I n the case cited i n the foregoing note t h e
tax m e y n o t b e paid b y the bank actually receiving
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403
the notes b u t t h e constant interchanze betivcen notes
and deposits cannot obscure t h e fact s o clearly
brousht o u t b y the chart thet rediscounts
i n the
main are made f o r t h e purpose o f obtaining a n d maintaining t h e necessary volume o f hand-toehand currency.
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e
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Ve M E T H O D S O F CONTROLLING sxPANSIOW O F CRuDITS
THROUGH N O T ISSULS.
Before u n d e r t a k i n g a
consideration
o f the »roper
method o f controlling the demands for credit i n the United
States,
i t may b e o f interest t o review bricfly t h e ways
in which note issues a r e controlled i n other countries.
(a) I n Foreign Gountries.
In appexndiz B
are stated i n summary form t h e legal
limitations o r devices prescribed i n the leadine countries
to control t h e volune o f note issue.
I t should b e re-
membered that i n most o f these countries t h e nete i s still
the predominant element, w i t h deposits a s yet very little
devoloped.e
S o m e countries h a v e 4 reserve percentege;
others leave i t t o the judgment o f bank managerse S o m e
countries h a v e a
flat t a x o n the note issue; Others a
progressive tax; others n o tax a t all.
I n some t h e
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Federal Reserve Bank of St. Louis
409
tax i s o n t h e e n t i r e i s s u e ;
covered portion.
i n others o n l y o n t h e u n e
S o m e o f the taxes a r e for revenue
only; others represent a n attempt t o penalize t h e bani
on its uncovered note issues.
I n some countries t h e se-
Surity behind notes i s specified;
i n others t h e y a r e
secured b y the general assets o f the bank.
I n some
countries redemption i n sold i s required; i n other countries,
i t i s not.
I
n some countries @
on the amount o f the issue;
none e
i n other countries there i s
I n some c o u n t r i e s t h e n o t e s
are legal tender;
limit i s p l a c e d
o f the central bani
i n other countries t h e y a r e note S o m e
of these restrictions arise f r o m a definite desire t o
control t h e issue o f credit.
O t h e r s a r e mere revenus
measures, o r find their origin i n attempts t o prevent the
unsound methods and faulty administration which prevailed
in the earlier days o f banking.
I
n practically every
country the banking system has been a n evolution and must
be studied i n its historical a s well a s i t s theoretical
aspects, i n order t o understand the provisions prevailing
today
From this brief outline i t will b e apparent there i s
no generally accepted formula f o r the control o f credit
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Federal Reserve Bank of St. Louis
410
expansion, whether i n the form o f notes o r deposits.
The fact I s that, whatever t h s legal limitations vere, a
fairly satisfactory note issue was normally maintained
in all o f these countries b r the oxercise o f human foreSight, j u d g m e n t a n d c o u r a g e
o n t h e p a r t o f t h o s e respon~-
sible f o r administering t h e issuee- B u t during t h e w a r
most legislative restrictions a n c artificial o r automatic
controls,
a s well a s the controls customarily exercised
by men, w e r e swept away b y the inexorable pressure f o r
inflation.
V. M E T H O D S O F CONTROLLING EAPAIYSTION O F CREDITS
THROUGH NOT! ISSUES.
(>) T h e Board's suggestions for this country.
ederal Reserve Board h a s suggested f o r o u r
consideration,
a s means o f controlling credit, certain
specific proposals b y which t h e issue o f Federal Reserve
notes might b e indirectly o r mechanically checked.
These
will n o w b e discussed i n the order sugsested b y the Board.
Ae S h o u l d t h e Federal ‘‘eserve Board impose a n interest charge o r tax upon t h e notss issued t o a
Federal H e s e r v e B a n k ?
Under t h e t e r m s
o f Section 1 6 o f t h e Federal Reserve
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Federal Reserve Bank of St. Louis
&ct, the Federal sieserve Board i s authorized t o require
Federal Keserve Banks t o p a y such rate o f interest a s
it may f i x o n the uncovered amount o f then outstanding
Federal Reserve notes.
T h e question i s whether the Fed-
eral deserve Board should exercise its authority t o re~quire Federal Reserve Banks t o pay a n interest charge and
whether,
i f that tvrere done,
i t would tend t o reduce t h e
amount o f Federal Reserve notes outstanding.
I t i s not
believed that a n y Federal Reserve B a n k desiring o r need-=
ing Federal Reserve notes would consider t h e payment o f a n
interest charge a s a hindrance t o the maintenance of” the
interchangeability o f its notes a n d deposits, particularly
as the only immediate effect o f the payment o f such a
charge would be to transfer t o the Treasury at onee funds
which would come t o i t later i n the form o f a franchise
tax.
I f the Federal Reserve B a n k d i d consider t h e interest
charge a hindrance t o paying out Federal Reserve notes
its only alternative i n mcetins the withdrawal of member
pank d e p o s i t s w o u l d b e t o p a y o u t r e s e r v e M o n e y o r s u s e
pend p a y m e n t entirely.
At present, surplus earnings when transferred t o
the Treasury may only be used t o add t o the sold reserve
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Federal Reserve Bank of St. Louis
behind United States notes o r to retire Government
bonds.
A transfer accomplished through t h e imposition
o f a n in~«
terest charge would augment t h e general fund
o f the
Treasury a n d thus serve a s a basis f o r Congressional
appropriations.
T h e danger o f the political pressure f o r
large earnings w h i c h mipht thus arise
seems apparent.
The question o f imposing a n interest charge
for the
purpose o f forestalling t h e desire o f member
banks f o r
larger dividends does not seem germane t o the
present
discuss ion.
Be T h a t &@ currency limit should b e established
for
each member b a n k a n d a charge imposed u p o n notes
issued t o a
member b a n k i n excess
It may b e questioned whether a
o f this limit.
Federal Reserve B a n k
has any legal authority t a impose a charge upon the
amount
of notes issued t o a member bank i n excess o f a specified
limit, unless i t were accomplished b y means o f the
pro-
gressivo discount rate which would b e applicable not
merely t o the issue o f Federal Reserve notes b u t t o
the
creation o f Federal K e s e r v e deposits.
Mechanically the
establishment o f such a limit does n o t appear t o be
fease
ible, since i t would b e extremely difficult t o
keep a n
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Federal Reserve Bank of St. Louis
412
accurate record of, o r identify t h e notes issued t o a n y
one individual member bank and remaining outstanding.
Purtheriore, should t h e Federal Reserve Board t r y t o
limit the amount o f notes a
member bank could receive, t h e
member bank, having obtained through rediscount o r
otherwise a deposit credit a t its Federal Reserve Bank, v o u l d
proceed t o d r a w g o l d o r o t h e r l a v f u l m o n e y r a t h e r
than t o
pay the proposed charge o n an excessive issue of Federal
Reserve notes, a n d failure o f the Federal Reserve B a n k
to
respond t o the exercise o f this right would place o u r
entire banking system i n collapse.
Another feature o f this question i s worthy o f consid~
eration.
I f i t is expected that ultimately the Federal
Neserve note will be the main circulating paper
currency
in the country, nonmember banks, a s vell a s member banks
must procured Federal Heserve notes f o r the conduct ¢
their
pusiness. P r e s u m a b l y , certain city member banks w h o have
numerous out of torn correspondents will be called
upon to
furnish t h e m with notes a n d will become t h e distributing
media f o r these notes t o nonmember State banks, eligible
and ineligible.
I t would b e unfair t o assess those e l t y
banks f o r e x c e s s i v e i s s u e s
o f Federal Reserve notes w h e n
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Federal Reserve Bank of St. Louis
415
the e x c e s s d e m a n d s c o m e f r o m t h e i r n o n m e m b e r c o r r e s p o n d BNts «
Ge T h e Federal Reserve Board suggests discontinuing
the payment o f postage o r express charges o n
currency shipped t o member banics.
The theory o n which Federal Reserve Banics p a y the
charges o n incoming a n d oOutgoin; coin a n d currency f o r mem-
ber banks, while having its origin i n the development o f
the collection system,
i s o n e o f equalization.
I t is to
make available t h e facilities o f Federal Reserve Banks t o
the country banks o n the same terms, a s t o expense, a s
to the banks located i n the sane c i t y a s the Federal Reserve B a n k o r any o f its branches.
course, Cannot b e equalized.
absorb t h e e x p e n s e s
T i m e a n d distance,
of
T o require member banita t o
o n all outgoing Shipments
would merely penalize t h e country banks,
o f currency
a s compared with
banks i n Federal Reserve B a n k o r branch cities w h o would
Still be able t o obtain their curreney without any charge
whatsoever.
T h e purpose w o u l d presumably b e t o check t h e
demand f o r Federal Reserve notes.
T h e result would b e t o
check the demand o f the country, banks a n d not t h e demand
of the city banks,
I t would b e a measure o f uncertain
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Federal Reserve Bank of St. Louis
result a n d o f unjust a n d inequitable application.
De T h e Federal ieserve Board sugeests that a
limit
Should b e fixed upon t h e amount o f Federal Re=
Serve notes issued t o each Federal Reserve Bank,
Mechanically, t h i s limit could probably b e put into
Operation, but i t could not be a rigin one, Unless i t were
desired t o compel Heserve Banks which have heavy
seasonal
currency requirements
i n their respective districts t o
pay out their reserve money.
I f the limit were one which
might b e exceeded upon payment o f a penalty i n the
nature
of a tax, w e should have 4 condition n o t very
different
from thet which exists today in regerd t o redise
ounting
between Federal Reserve Banks, t h e rate o f redism
unt
being t h e t a x which the debtor reserve b a n k pays.
Normally, e a c h member bank i s Supposed t o live within
its
own resources a n d only when its requirements f o r credit
exceed its resources t o seelr at a penalty, a rate o r
tax, t h e additional credit f r o m i t s Federal Heserve Bank.
So i s each Federal Reserve Banke supposed t o live within
its o w n resources a n d only when these a r e insufficient,
to seek additional credit-making power from other Federal
Raserve Banks,which i t does a t a penalty, a
rate o r a
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Federal Reserve Bank of St. Louis
tax.
4 n d b y rediscounting a n d paying a penalty, a
or a tax, a
rate
Federal Reserve B a n k obtains t h e fold which
may serve as a pasis off -an additional note issue.
Purthermore, suppose a
limit were fixed today a t
about t h e present level o f Federal Reserve notes, a n d suppose next year the UnitedStates should again become a par~
ticipant i n a greet w a r a n d was able t o effect about t h e
same degree o f self-restraint among i t s people a s prevailed
during the European Ware D o e s anyone believe that i n the
light o f the experience o f this a n d other countries
i n the
Buropean w a r such a limit would stand? ‘ W i t h the further
inflation o f deposits a n d prices w h i c h would inevitably
follow, a repetition o f our policy f m 1917 - 18 would inexorably sweep such a limit a w a y just a s would have b e e n the
case had we attempted o n January 1, 1918,,to set a fixed
limit o n Federal Reserve notes a t about t h e amount t h e n
outstanding.
F r a n c e has followed the policy o f fixing a
limit t o the note issue o f the Bank o f France, b u t e v e n
before t h e w a r the limit h a d t o b e raised b y the Government from time t o time a s the limit was aporoached.
other words,
I n
t o enable t h e banks t o function normally,
the limit would have t o b e s o high that i t would n o t
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Federal Reserve Bank of St. Louis
be a n effective means o f credit control t h e purpose f o r
which i t would presumably b e imposeds
I f i t were l o w
enough t o b e effectivo i t would merely result i n the
neserve Bank's paying out reserve moneys
Be T h e Federal Reserve Board inquires whether member banks’ collateral notes o r customers! notes
Secured b y ance n e n t obligations should continue
to be taken as collateral for Federal Reserve
Notes.
The q u e s t i o n i s p r e s u m a b l y a g i e d w i t h @
view t o a g e
certaining whether declining t o accept Government obligations a s security f o r Federal Reserve Notes would reduce
the volume o f these notes.
Such a
decision would disquali-~
fy about 1,200,000,000 o f paper now held by the Federal
Reserve Banks,
B u t i t would leave t h e m with sufficient
commercial paper a n d gold t o cover t h e present note issue,
so that a t present s u c h ameasure might n o t o f itself r e -
strict the volume o f fedora’? Reserve notes.
If i t were desired t o accelerate the elimination from
the Federal Reserve Banks o f Government secured paper, the
ration o f which t o total Federel Reserve B a n k discounts
has i n the past tuelve months decreased from 71% to 39%,
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Federal Reserve Bank of St. Louis
417
this could b e substantially a n d promptly effected b y es-
tablishing a rate higher than the commercial paper rate
for t h e d i s c o u n t
o f p a p e r s o gecured.
Except
i n the case
of those fe: member banks which have n o t other eligible
paper, Government secured loans would thus b e withdrawn
almost o v e r nights T h e i r disappearance, however, w o u l d
not change t h e general banking condition o f the country,
would n o t bring either t h e banks o r the Federal Reserve
Banks a n y nearer a2more normal credit volume, n o r would
it change t h e volume o f hand-to-hand circulating medium
or the need for it.
T h e fact i s that through the use
of the purchasing power which t h e Government derived b y
the sale o f bonds w e are i n a position o f expanded credit
and expanded prices, b o t h o f which require a n expanded
note issue.
( x )
nm
(NOTE x. T h e Federal Reserve Board said,editorially,
in the November, 1919, Bulletin, "Were the differential rate which n o w favors wareloan paper t o b e reversed
so that i t woulc favor commercial paper, i t is likely
that t h e portfolios o f the Federal Keserve Banks woulda
change i n character.
comercial p a p e r a s a
M e m b e r banks would select their
basis
o f rediscount,
and in
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Federal Reserve Bank of St. Louis
consequence Federal Reserve. Bank portfolios m i g h t
consist primarily o f commercial bills rather than
of war-loan papere A
true appreciation o f the cred-~
it situation, t h e r e f o r e ,
c a n b e obtained o n l y b y
considering the portfolios o f Federal Reserve Banks
and those of member banks as an aggregate."
One o f the purposes o f the Federal Reserve A c t was
to substitute bank notes secured b y commercial paper for
pank notes secured b y Government bonds.
T h e war not
only interrupted this process b u t resulted necessarily
in the issue o f more notes secured b y Government bonds t h a n
ever before.
T h e process, a s w e have seen, i s reversing
itself automatically a n d really w i t h remarkable rapidity.
That i t should continue until a l l Government bonds h a v e
disappeared f r o m Federal Reserve B a n k portfolios e v e r y
one will agree.
But a little analysis will make it clear that there
is o great difference between t h e present bond secured
Federal Reserve note and the bond secured National Bank
note, a n d this diffierence justifies patience i n deal-~
ing with a situation not altogether t o our liking.
The
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Federal Reserve Bank of St. Louis
419
reeson w e d e s i r e d t o g e t a w a y f r o m notes s e c u r e d b y Gov-
ernments bonds w a s n o t because s u c h a note issue was
not good, but because experience showed that i t neither
expanded n o r contracted promptly i n accordance w i t h chang=
ing conditions,
N o n e o f these conditions o b t a i n with re-
Spect t o that portion o f our Federal Reserve Wote issue
which i s secured b y Government paper.
T h e Federal Re-
serve Banks a r e not, l i k e t h e National Banks, required
to buy Government bonds.
T h e Government paper which they
pledge a s c o l l a t e r a l f o r F e d e r a l R e s e r v e n o t e s i s a l l
short p a p e r b e a r i n g t h e o b l i g a t i o n s
o f m e m b e r banks.
M o s t
member banks a r e anxious t o pay off these loans w i t h t h e
Federal Reserve Banks.
T h e experience o f the Federal Re-~
serve bank o f New York shows that its. loans o n Government
securities a r e not only theshortest dated, b u t the most
flexible o f all its loans, expanding o r contracting i n
huge swings a t the quarterly tax periods o r at times o f
other large movements
a
i n Government finance.
I t may b e
i n t e r e s t a l s o i n this connection t o observe that t h e
portion o f the Bank o f England notes which i s uncovered
by gold i s covered mainly b y Government securities.
T h e
same i s true o f the currency notes issued b y the British
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Federal Reserve Bank of St. Louis
420
Treesury during t h e war which i t i s proposed presently t o
consolidate w i t h t h e Bank o f ungland notes.
It has been suggested that the potentiality o f the
20 ,000,000,000 o f Government securities
i n the hands o f
the public a s a basis f o r further note issues i s a MeNae
But t h e likelihood that these 1320,000,000,000 o f Govern-~
ment Securities w i l l b e presented asscollateral t o new
note issues seems l e s s imuediate t h a n the presentation o f
the immense unused lines o f credit which the merchants a n d
manufacturers maintain a t their banks,
o r the many billions
of eligible commercial paver which the banks already have
in their portfolios.
T h e media f o r potential credit a n d
hote expansion a r e vast a n d their u s e will depend u p o n
two factors, t h e oressure f o r credit a n d i t s control
through the Federal Reserve Bank rates and discount
poliCies.
The conclusion to be reached is that to disqualify
Government w a r securities a s collateral f o r Federal ReServe notes would b e ineffective a s a method o f reducing
the volume o f notes a n d i s unnecessary f r o m the point o f
view o f either t h e safety o r the elasticity o f the note
isSuee
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Federal Reserve Bank of St. Louis
squalification would n o t s e e m t o b e i n accordance with t h e spirit o f the Act,wiich specifically states
in section 1 5 that notes issued f o r carrying bonds a n d
notes o f the G o v e r m e n t
o f the United States a r e anong
the kind o f paper eligible f o r discount, a n d
at the collaterel security f o r notes shall b e gold
and notes, drafts, bills o f exchancze o r acceptances a c quired u n d e r S e c t i o n 1 3 .
&iso,
i n w y opinion,
T h e i r d i s q u a l i f i c a t i o n *sould
b e a n unnecessary a n d unfortunate
diserLiination azuinst t h e u r i t i e s o f our Government.
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Federal Reserve Bank of St. Louis
VI. GENERAL REVIEW O F DISOUSSION.
With r e s p e c t
t o the Board's questions concerning
the practicability and advigability o f exercising credii
control t h r o u c h d i r e c t l y
o r indirectly l i m i t i n g t h e
amount o f notes issued, w e have seen.
(a) t h a t i t i g the extension o f credit, rather
eater
A v hed dete a d s
than notes o r deposits which acts o n prices,
{b) t h a t there i s n o essential difference betveen
bank notes a n d bank deposits.
(c) t h a t o u r note issue i s functioning a s the
Act intended i t should, additional incentives t o its redemption w h e n not needed
having been developed b y the Federal Reserve
Banks.
that relative t o deposits o u r notes a have n o t
expanded u n d u l y .
Under these conditions, I
am strongly o f
the
opinion that i t would b e inadvisable a t presemt t o
attempt t o exercise credit control b y Placing checks
and limits upon t h e issue o f notes.
v e whould attack
not one o f the forms which Federal Reserve credit takes
5
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423
but t h e transaction which precedes t h e creation o f
Federal Reserve credit i n either o f its forms;
namely, Federal reserve rediscounts,
W e should
attack credit inflation a t the root a n d not attempt
to deal with i t among t h e limbs a n d leaves.
The method o f control adopted b y oractically
all central banks, w h i c h i s merely a n adaptation o f
the l a w o f supply a n d demand,
i s the use o f the dis-
count rate a n d the exercise o f discretion i n the
granting o f credit.
seems c l e a r ,
F o r us, the intent o f the Act
a n d i n addition
i t specifically prescribes
that i n case t h e reserve against notes falls below
40% & progressively increasing discount rate shall
be established.
T h e effect o f this would b e t o de~
crease the volume o f the discounts which, i n any
period
o f expansion,
m u s t precede t h e sranting o f
eredit i n either deposit o r note form,
I f i t had
been i n t e n d e d t h a t c r e d i t c o n t r o l w a s t o b e e x e r c i s e d
through throving limitations arounc t h e note issue i t
is f a i r t o assyine t h a t t h e s e w o u l d h a v e b e e n o r e =
serlbed i n the Act, since t h e various limitations
prevailing i n other countries t e r e well known t o the
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Federal Reserve Bank of St. Louis
framers
o f t h e Act.
It seems
t o me that the only reason which could
justify p l a c i n g a r b i t r a r y l i m i t a t i o n s
o n the issue
of notes which would result i n the paying o u t o f
reserve money would b e that such limitations might
thus make i t easier for the Federal Reserve Banks,
at times, t o establish high discount rates,
A s
such limitations w o u l d approximate t h e workings o f
the Act unddr which the Bank of 4ngland issues
notes, t h i s thought will b e discussed a t the e n d o f
the next section, w h i c h deals w i t h English experience.
VII. ENGLISH EXPERIENCE AND VIEWS.
In connection with t h e consideration o f our note
ue problems, the Board has asked that English ex-~berience end English views b e discussed.
T h e y are
of special interest t o us a t present, because the
growth o f deposits a n d t h e use o f checks i n England
iscompgrable with their development in the United
States, and because England from 1821 t o 1914 always
permitted bank notes, a n d through the medium o f notes
bank balances a s well t o be withdrawn freely i n gond-~ocean
E A S e:
a
&
condition
which the. Federal
Reserve System has under~
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taken t o maintain i n the United States,
To ascertain the meaning of the Act of 1644,
establishing t h e p r i n c i p l e s
o n which t h e B a n k o f
Zngland operates today, i t i s necessary t o under-
stand the conditions prevailing a t the time the 4ct
wag passed,
Specie payments i n England were resumed i n 1821
after 2 4 years
o f suspension.
« a period o f g r e a t i n «
custrial a n d s p e c u l a t i v e a c t i v i t y e n s u e d c u l i m i n a t -
ing i n the crisis o f 1825 i n which 7 6 banks failed.
These failures, following some 2 5 0 which h a d occurred
in the years preceding, l e d t o legislation i n 1826
encouraging t h e caintry bankers t o incorporates a n d
forbidding the issue o f notes i n denominations less
than &.pounds.
T h e purpose
o f this l i m i t w a s t h a t
fewer n o t e s m i g h t f i n d their-sway i n t o t h e h a n d s
of
the laboring classes w h o would thus avoid t h e losses
from b a d notes f r o n which they h a d s o frequently J
‘
suffered,
I t was also felt that overissues 6f.L t
notes h a d tended t o drive o u t sold sovreigns a n d
facilitate inflation,
I n 1833 Bank o f England notes
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426
were made legel tender. A n o t h e r crisis occurred i n
1839 during which the Bank of Snglend's Reserve fell
below 2,500,000 pounds,
I n the folowing four years
83 banks failed, o f which b y 1845 1 7 had a s yet paid
no dividend,
T h e experiences o f the 2 2 years fol-
‘lowing the resumption, a peri f
great indugtrial
expansion, h a d convinced t h e government, t h o u g h n o t
the country bankers, o f the umhwisdom o f permitting
every bank t o issue notes, a n d had gradually crystallized opinion i n favor o f fundamental currency
reforme
The m o v e m e n t f o r r e f o r m p r o v o k e d a
violent c o n -
troversy between t h e tyvo schools o f thought which be-~
lieved, respectively, i n the "currency principle” and
the "banking principle."
The "currency principle” called for "a constant
supply o f paper equal i n value t o coin, a n d s o varying
in amount a s t o insure a t all times immediate convertibility i n t o cdin.”
T h u s t h e circulation would
"fluctuate precisely as it would have fluctuated haa
the currency b e e n pmrely metallic.
The "banking principle" under which notes had
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427
previously b e e n i s s u e d b y t h e banks,
a n d o n which
the Act o f 1644 turned its back, provided n o such
limit.
I t assumed that "as notes are only issued
in discounting o r making advances o n securities, t h e
amount o f t h e i s s u e d e p e n d s ,
n o t o n the wishes
o f the
bank, but o n the needs of the public."
I t was main-
tained " t h a t a n overissue c o u l d i n v o l v e
n o danger
either for the issuing bank o r for the public s o long
ag the notes remained convertible,"
Against t h e supporters o f the "banking principle"
Peel argued "that t h e nominal convertibility o f
paper into sold, where there i s unlimited com-
petition as t o its issue, does not insure the value
and practical convertibility o f the paper; t h a t t h e Bank
has more t h a n once b e e n exposed t o great danger i n
respect t o the exhaustion o f its treasures, a n d for
the p u r p o s e
o f averting
i t has b e e n compelled
t o make
sudden and violent contractions o f the currency."
He
further asserted that the Bank o f Zngland had such
Imperfect c o n t r o l o v e r n o t e i s s u e s t h a t o t h e r i s s u e r s
had s o m e t i m e s i n c r e a s e d t h e i r c i r c u l a t i o n a t a
time
when the bank's ciroulation was being contracted,
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428
thereby agezravating t h e ultimate pressure u p o n the
country.
The "currency principle" won, and among the
Plens which were considered t o carry i t into effect
establishment o f a new institution t o issue
notes, o r their issue b y the government; but Sir
Robert Peel remarked t h a t "the true polioy o f take
country i s t o work, s o far as i t be possible, with
the instruments v o u have ready t o vour hand." ‘ T h e
plan f i n a l l y a d o p t e d w a s g r a d u a l l y
t o restrict t h e
note issuing privilege t o the Bank o f England, ‘and
to require i t t o maintain a separate n o t e issue de-~
partment i n which a l l notes issued in. excess o f a
fixed
minimum should b e covered b y gold,
Its cffect was expected b y Peel t o be "such a
degree o f control b y the bank
over t h e general issues
of t h e c o u n t r y a s t o e n a b l e
i t t o regulate t h e c u r s
reney b y gradual c o n t r a c t i o n a n d gradual e x p a n s i o n
according t o the gtate o f the exchange."
The a c t acconplished t u o things :
1.
I t assured beyond question t h e
goodness a n d
convertibility o f bank notes:
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429
2
A n d b y far t h e more important,
i t related
additional n o t e issues directly t o gold m d g a v e
control o f future note issues, which were and still
ape t h e regognized medium f o r obtaining g o l d f o r ox-
port,directly into the hands of the Bank of England,
so that b y its discount rate i t could exercise c o n -
trol not only over international movements o f gold
but o v e r d a n e s t i c e x d a n s i o n a s well,
Hardly h a d the reform becaine effective w h e n
the panic o f 1847 ocourred, resulting i n such heavy
withdrawals from the Bank o f England a s almost t o
exhaust its reserve against deposits.
I n this ex-
tremity reassurance v a s brought b y a letter f r o m the
Chancellor o f the Exchequer advising t h e bank that h e
would propose t o Parliament a bill o f Indemnity i n the
case o f any notes issued i n excess o f the limit o f
1844, provided t h e bank would increase i t s Giscount
rate t o & per cent. A l t h o u g h n o excess notes
were
issued t h e panic thereupon ceased a n d
confidence w a g
restored,
I
n 1857 a n d 1866 t h e same situation
arose
and the Act was suspended with a like result,
except
that i n 1857 # 000,000 pounds excess
notes were actually
issued,
;
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430
Usning the years following the passage o f the
“act the directors o f the Bank o f England and the
British public generally h a d beén gaining experience
With the operation o f their banking system under t h e
new rules.
T h e responsibility o f the Bank o f Eng-
land f o r the maintenance o f adequate reserves a n d a
sound credit position i s discussed a n d emphasized i n
Bagehot's "Lombard Street," which was published i n
1875 a n d made a
deep impression,
F r o m 1866 until
the outbreak of the Eyropean War in 1914, the Bank
of 4ngland s o conducted i t s business a n d adjusted i t s
discount rates t h a t no, further suspension o f the
Pank Act was necessary, a n d a free gold market wag
maintained a t all times,
Bank o f England deposits are convertible into
its notes andits nobes a r é convertible i n t o
gold a t
its issue department.
T h u g deposits a r e convertible
into gold, and thus the Act of 1944 established a
direat connection betieen international movements
of
GO0ld a n d t h e r e s e r v e s w h i c h t h e B a r k
o f England m a i n e
tains againts i t s deposits.
E x c e p t f o r the uncovered
a88ue, now 18,450,000 pounds the reserve against notes
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431
ig fixed at 100% while the reserve against deposits i s
not fixed b y law but i s custanarily much lower.
This m a k e s e x p o r t d e m a n d s f o r g o l d a c t m u c h m o r e v i g -
orously against the deposit reserve than would b e the
case i f the deposit a n d the note reserves were merged
and rose o r fell together,
I t was this more prompt
action o n the banking reserves u p o n which t h e framers
of the Act relied t o cause the Bank t o take steps
earlier t o correct adverse situations a n d thereby
lessea the severity o f commercilal convulsions.
The gtep which t h e bank takes i s t o raise i t s
discount rate sufficiently t o bring about the desired
result.
T h e following paragraphs, paraphrased f r o m
the 1918 report o f the Parliamentary Committee o n
Currency and Foreign Exchanges after the war, o f which
Lorg Cunliffe, the Governor of the Bank of Znglana
was chairman, describe the effect o f such action,
if the balance o f trade became unfavorable,
raising t h e discount rate retained m o n e y i n England
which would otherwise have b e e n remitted abroad a n d
attratted remittances f r a n abroad t o take advantage o f
the higher rate, thus checking the outflow o f gold
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Federal Reserve Bank of St. Louis
and even reversing the streams
If the unfavorable balance threatened t o become
permanently adverse the maintenance of the hicher
discount rate a n d t h e steps t a k e n t o make i t effect~
ive l e d t o a general rise o f interest rates a n d a
restriction o f credit,
N e w enterprises were,
fore, postponed, andthe demand f o r constructional
materials a n d other capital goods w a s lessened,
The consequent clackening o f employment also diminished t h e demand f o r consumable goods, while holdérs o f stocks
>
o f comnodities c a r r i e d l a r g e l y w i t h
borrowed money, being confronted with a n increase o f
interest charges if not with actual difficulty in
renewing loans, and with the prospect o f falling
prices, tended t o press their goods o n a weak market,
The result was a decline i n general prices i n
the
home market which, b y checking imports and stimulating
exports, corrected t h e adverse trade balance
which wag
the primary cause o f the difficulty.
if credit a t home threatened t o become unduly
expanded,
a n d b y f o r c i n g u p prices,
t o create a n i n -
creased demand for leral tender currency both
from the
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433
banks
i n order t o maintain t h e i r normal proportion
of c a s h t o liabilities a n d f r o m t h e g e n e r a l p u b l i c
for the payment o f wages a n d f o r retail transactions,
the raising o f the rate o f discount resultsd i n the
same chain o f consequences a s have j u s t been de-«
scribed and speculative trade activity was similarly
restrained,
There was, therefore,
a n automatic machinery b y
Which the volume o f purchasing power i n ingland was
continuously adjusted t o world prices o f commodities
in goneral a n d domestic prices were automatically
regulated s o a s t o prevent excessive imports,
The sudden outbreak o f the European War i n
1914 a n d t h e a c c o m p a n y i n g c o m n e r c i a l c h a o s
required
an lmmediate e x p a n s i o n
o f credit, P a r t i c u l a r l y
form o f hand t o hand currency,
i n the
T h e legal prohibition
against the issue o f bank notes i n danominations
less
than 5 pounds w a s doubtless o n e o f
the reasons Which
led t o the issuance o f the 1 0 shilling and
1 pound
currency notes b y the Britisn Treasury.
Under an
emergency a c t these notes were t o
be issued t o banks
and bankers, through the Bank o f
England, a s a n
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Federal Reserve Bank of St. Louis
advance a t the current bank rete,
434
B u t the constantly
inoreasing volume o b bank deposits enabled banks t o
pay for t h e Treasury notes b y drawing checks o n their
at the Bank o f England. T h e y thus converted these balances into legal tender currency
without the customary withdrawal o f notes from the
Bank o f England's bantcing reserve, which would
ordinavily have compelled t h e Bank t o radse i t s rate
and
apply t h e normal safeguards against excessive expansion o f credit,
The first report o f the Sanmittee o n currency
and Foreign Exchange, above referred to,
was published
before the armistice,
A f t e r studying the situation
and listening t o many recommendations f o r a
more
elastic organizétion o f bank credit the camnittee
recomnended t h e maintenance o f the
existing p l a n for
the complete separation o f the banking
and the note
issuing departments o f the Bank o f England,
modified
only t o t h e e x t e n t t h a t t h e b e r m i s s i o n
granted
i n the
Sct o f L 9 1 4 t o issue t e m p o r a r i l y a d d i t i o n a l
notes n o t
covered b y gold, w i t h t h e consent
o f the Treasury,
should c o n t i n u e ,
B u t a l l profits f r a n s u c h
excess
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435
issue should accrue t o the government and a high
discount rate shoild b e maintained during t h e existence o f such excess issue,
The committee a l g o recommended, a n d their re-
commendation has been adopted, that, following the
precedent g ¢ y j the Act o f 1844, a definite limit
should b e placed u p o n the amount o f currency notes
unsecured b y gold, a n d that this limit should b e
progressively decreased s o that t h e actual maximum
of one year should become t h e legal maximum o f the
following year,
wag t h e p u r p o s e
o f the limit?
T h e pro»
& limit u p o n t h s currency note i s s u e w a g
made, not for the gake o f the limit itself, but t o
rostore t o the Bank o f England i t s control o v e r note
expansion,
o f which t h e continued issue o f these
currency notes during the war had effectually doprived
a
B
y Placing a limit t o the amount
o f the un-
covered issue, a n y further currcney notes
beyond t h i g
limit could be obtained only py Placing gold
or Bank:
of “ngland notes behind them; a n d these would
have t o
be drawn from the banking reserve o f
the Bank o f
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Federal Reserve Bank of St. Louis
436
Gngland, T h i s would again exert the usual impulse
upon the Bank of England t o protect its reserve
by raising its rate, thereby bringing credit pres-~
sure, a n d a reduction o f the credit voluem.
I t is
quite clear fron Cunliffee's report that the
limitation o f the Treasury notes was not a n end
in itself, but merely a means t o what i n their minds
was t h e all important e n d o f reestablishing t h e
principle o f the A c t o f 1844 a n d putting t h e Bank
of England i n a position t o control effectively t h e
issue o f legal tender money.
T h e report also opened
the way for the Bank of England, merely with the
consent o f the Treasury, a n d without waiting for its
banking resdrve first t o be drained t o the bottam, t o
issue i t s o w n notes uncovered b y gold.
The limit does not apply t o currency notes i n
the aggregate b u t merely t o uncovered currency notes,
The volume of these notes, t o meet the need for more
Currency o f small denomination, increased from
548,000,000 pounds o n January 1, 1920, t o 367,000,000
pounds o n 4ugust 4, 1920, T h i s increase o f 19,000,000
Pounds, however, was covered b y gold or Bank of England
notes,
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437
i t h regard t o the final disposition o f the
currency notes, t h e Cunliffe cannittee recommends
hat when t h e portion o f the issue covered b y cove
erament securities "has been reduced t o the amount
which experience shows t o b e consistent with t h e
maintenance o f a gold reserve o f 150 million pounds
in the issue department o f the Bank, the aitstand~
ing currency notes should b e retired a n d Bank o f
England notes o f low denomination substituted, t h e
Bank of England fiduciary issue being simultaneously
increased b y a n amount equal t o the then issue o f
currency notes covered b y Government securities,
VIII. CONCLUSION.
It has seemed worth while t o present Enslish
conditions a n d views a t such length because o f the
successful credit control the Bank o f 2ngland has
exercised, a n d because after t h e greatest o f wars a
mos table commission has recommended that its organization, unique and rigid a s i t is, should b e
maintained,
The difference between the organization o f the
Bank of England and the Federal Reserve System
is in
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438
game respects the difference between the "currency
principle." and the "banking principle" s o thoroughly
discussed i n 1844.
E n g l i s h bank notes follow i n
volume the movements o f gold, while Federal reserve
notes a r e credit ingtruments moving commensurately
with deposits.
T h e very rigidity o f the method o f
issuing Bank o f England notes, adopted a t a time when
deposits were relatively unimportant, compelled
English banking t o develop t h e use o f deposit bank-
ing,
A s Hartley Withers, Editor o f the Economist,
says, "The cheque has freed banking fran the fotters
of the Bank act."
T h e Federal reserve banks, o n
the other hand, were established a t a time when
deposits were t h e overwhelming clement i n our currency.
But i n the organization o f the Federal Reserve System
there have b e e n climinated m a n y o f the elements o f
weakness i n the Banking Principle i n the form i n
which its proponents i n 1844 wished t o see i t per~
petuated i n England:
First, our right o f issue i s confined t o a
group o f 12 noncommercial banks instead o f
being extended t o all commercial banks;
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Federal Reserve Bank of St. Louis
439
second, this makes possible a n effective central
control o f the issue;
overissucg,if any, among commercial banks
are d i e t o desire f o r profits, whereds i n
the case of the Federal reserve banks the
temptation t o make profits igs a t a minimum,
and i n t h i s r e s p e c t t h e y a r e u n i q u e a m o n g
central b a n k s
o f issue;
Fourth, t h e rizht t o proceed without limit t o
extend s u c h credit a n d issue s u c h notes a g
business requires, w h i c h w a s contended f o r
in 1844, i s limited b y the required reserves
which t h e Federal Reserve Banks must main-~
tain.
Several o f the banking systems o f continental
Kurope are organized - o n modifications o f the Banking
Principle, resembling i n many respects t h e basig o n
which t h e Federal reserve banks a r e organized, b u t
in none o f t h e m d o e s t h e B a n k i n g P r i n c i p l e o p e r a t e
Ltdid in #ngland before 1844, and'as its
adherents t h e n wishes i t t o contimue
t o hold sway.
We m a y also note, parenthetically, t h a t i n
spite
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440
of the abandonment o f the "banking principle" b y
the inglish, this principle, i s successfully operated,
with certain modifications,
i n Canada, There, many
individual b a n k s i s s u e n o t e s w i t h o u t s p e c i f i c s e c u r i t y ,
without required reserves, a n d i n normal times under
& tax which i s a pure revenue measure, A l t h o u g h i n
Canads, a s in other countries, the war has necessitated special measures, including a government re-~
discounting agency not unlike o u r Aldrich-Vreeland
Currency plan, the Canadian banks normally have pro-~
vided a most acceptable h a n d t o hand currency, capable
of rapid expansion a n d equally rapid contraction i n
accordance w i t h agricultural a n d business require.
ments,
W h i l e t h e amount o f notes issued o n the
general security o f the assets o f a bank i s limited
to the amount o f its capital, plus a n excess issue
equal t o 15% o f capital and surplus combined a t a
these limits u p t o the time
war proved more t h a n adequate.
In considering the English and American systems
we should not lose sight o f the fact that the Banik
of England's l a c k o f experlence, coupled
w i t h its
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441
dilatoriness
a n d its failure
t o realize t h e e x t e n t
f its responsibility played a large part i n creating
necessity f o r banking reform.
E v e n after 1841,
\
what t h e Cunliffe canmmittee describes a s " a n automatic
machinery" broke down several times, largely through
the game sort o f short=comings
o n the part o f the
Bank a s were exhibited priot t o the act,
S i r Robert
Say, Aad toda A k Past uenene i n December 1847, said:
"Ie did hope that after t h e panic o f 1826, after
that o f 1836, after that also o f 1839, w e did
that the Bank of England would have confined
itself t o those principles o f banking which
their o w n directors admitted t o b e just, b u t from
which they had admitted their own departure,
though prescribed i n part b y their o w n repula-
tions.
I n that hope I am bound t o acknowledge
that w o have b e e n disappointed,.---It was i n the
power o f the Bank, h a d i t taken early precautions,
if not t o prevent a l l t h e evils t h a t have arisen,
at least m o n e y t o diminish their force.
the B a n k h a d p o s s e s s e d t h e r e s o l u t i o n
I f
t o thhet
the difficulty o f a contraction o f its issues
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Federal Reserve Bank of St. Louis
S46
by raising the rate o f discount, b y refusing
much o f the a c c o m o d a t i o n which t h e y granted
between t h e years 1844 a n d 1846---if t h e y had
only been firm a n d persevering i n those precautions,
t h e n e c e s s i t y f o r a n y e x t e n s i v e intber-
ference w i t h t h e i r o p e r a t i o n s m i g h t h a v e b e e n
prevented,"
The outstanding change of the past fifty years
seems t o be t h e realization b y those i n responsibility
that, h o w e v e r a u t o m a t i c i t s n o t e i s s u i n g p r o v i s i o n s
may be, the Act can be administered satisfactorily
and the banking position o f England protected only
by t h e e x e r c i s e
o f t h e m a x i m u m o f h u m a n judgment,
foresight and courage,
This, i t seems t o m e i s t h e lesson w e should learn
from English experience since 1844 and from the available reviews o f that expericonce i n the light o f the
great war,
W e should also realize t h e even heavier
responsibilities which lie upon us than upon the
governors and directors o f the Bank of England, ‘These
responsibilities are heavier (1) because, b y our
e r f
substantially merged reserved against désdsits andvenotes,
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443
both d o m e s t i c i n f l a t i o n a n d g o l d e x p o r t s a c t
less
abruptly o n our reserves t h a n t h e game influences
act o n the reservas o f the Bank o f England a n d
are
therefore n o t apt t o lead t o such early o r vigorous
protective m e a s u r e s ,
( 2 ) because
o f the infinitely
greater, more diversified and less concentrated b a n k
ing a n d business vogition w e have t o protect,
and
(3) because o u r protecting agency, T h e Federal
Reserve
System,
i s itself decentralized a n d Wisely
so.
United action igs therefore more difficult a n d
the
method o f securing i t i s a s y e t only i n course
of
evolution. ‘ T h e principles underlying t h e English
System were fully considered b y comnittees o f
Son-
&ress andthe segregation o f the note-issuing function
with a fixed limit t o the uncovered note
issue were
not adopted,
Y e t , I n the last analysis, t h e t w o
Systems a r e n o t very dissimilar, f o r both
depend upon
the digcount rate t o control credit
i n the f o r m o f
cither n o t e s a n d deposits,
a n d while o u r s permits
notes customarily t o be issued Against
less than
100% gold, the English System permits
thig occasionally
as a n e m e r g e n c y measure,
a n d t h e Cunliffe Comnittee
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recommends t h a t t h e T r e a s u r y b e a u t h o r i z e d
t o consent
in any time o f stress t o the issue o f uncovered notes.
The arbitrary Limit recently placed o n the issue
of British currency notes had n o special significance
for u s since i t s purpose w a s t o relate t h e issue o f
additional a m o u n t s
o f this c u r r e n c y t o B a n k r e -
serves, while issues of Federal Reserve Notes are
already g o related,
I
n a period o f lessening
ercdit requirements, s u c h a s w e believe i s about t o
begin, t h e establishment o f a limit a t the present
level would presumably b e o f no effect,
i f
limit were established a t a lower level, a s w e have
alregdy shown, gold and other leagl tender would b e
paid o u t from Federal Reserve B a n k reserves a n d p u t
into circulation, g i n c e there i s n o legal method o f
issuing two kinds o f Federal Reserve notes, one with
40% o n larger r e s e r v e s a n d o n e w i t h 1 0 0 % reserves,
In favor o f this course i t i s urged that w e i n
the United States are accustamed t o viewing banking
conditions i n the light o f fixed legal reserves; that
being optinists w e are prone t o feel that reserves
in excess o f the legal limit are t o be used i n further
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445
credit extensions; a n d that w e are intolerant
of
anything resembling credit contraction;
Therefore
it i s argued t h a t although notes a r e b u t
a small
Clement i n our total eredit volume, t h e y
are never-
theless a necessary clement, a n d we may,
b y limiting
the amount o f notes o p b y requiring hisher
reserves
against them, automatically cause demands
for notes
to reduce more promptly t h e smaller reserves
maintained
aes2inst d e p o s i t s a n d i m p e l F e d e r a l
reserve banks
to
raise their discount rates, when necessary
for pro«
than w o u l d b e d o n e u n d e r t h e
present
arrangement.
This argument i s based o n one o r
both o f the
following assumptions,
(1) T h a t the Federal Reserve Banks
will have
neither t h e foresight n o r the
courage o n
their o w n judgment t o raise
discount rates,
and
That the american People will
not countenance
raising t h e discount rate
a t a time w h e n t h e
rescrve m a y happen t o
b e considerably above
the legal minimum.
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The fact that i t took t n e Unglish s o m a n y w a r s
to gain the necessary experience t o exercise proper
credit control during years when the idea o f central
control was a new one, and when tho larger rosponsibilities o f the Bank o f England were n o t fully recognized, furnishes n o reason w h y i n the light o f
English and other foreign experience a n d with a full
realization o f our responsibilities,
w e should n o t
be expected t o act i t h b o t h foresight a n d courage,
“hether public opinion will sustain o u r actions
depends upon our ability t o educate i t ag t o their
purpose, meaning a n d necessity, I
am sanguine t h a t
this can be done, and believe that a broad base
of understanding public opinion t g a groater safe~
guard f o r o u r system t h a n a more automatic a n d rigkad
note issuing note control without s u c h a state
of
public opinion.
Hurthermore, such limiting restrictions a g the
Board proposes would b e tantamount t o ea most important
emendment o f the Federal Reserve Act, and the introduction o f a principle contrary t o the theory
o f the
Aet, which was that credit i n the form o f
either notes
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447
or deposits w a s t o e x p a n d o r c o n t r a c t
i n accordance
with t h e requirements o f the country a n d t o b e cons
trolled i n general b y the discount rate and as t o any
particular member bank b y the exercise o f judgment o n
the c a r t o f t h e F e d e r a l r e s e r v e b a n k .
I a m convinced t h a t w e should n o t a t present
establish l i m i t s
o r impose t a x e s
o r set other arbi-
trary r e s t r a i n t s u p o n t h e m o v e m e n t s
o f o u r note issue.
while n o t e s a r e t h e p r e d o m i n a n t e l e m e n t
o f Federal
reserve bank liabilities ,because w e have t o furnish
note expansion f o r all t h e banks o f the country, t h e y
are a diminutive a n d constantly diminishing element
of t h e e n t i r e v o l u m e
o f bank credit which w e are
charged w i t h t h e duty o f supporting a n d keeping convertible i n t o gold.
We h a v e a
banking s y s t e m established u p o n prin-
cidles w h i c h h a v e b e é n a p p r o v e d
b y o u r goqundest b a n k -
ing and ceonomic minds---the latest sreat national
system t o be established,
T h e war demonstrated t h e
ability o f t h e s y s t e m t o provide t h e n e c e s s a r y c r e d i t
expansion
i n b o t h i t s forms.
“ I e have s h o w n o u r
ability during the last eight months, through methods
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448
which have b e e n tested a n d proved effective i n
central banks abroad a n d i n our commercial banks a t
home,
t o control t h e expansion o f credit.
Lately,
we have seen a lowering o f commodity prices all over
the world.
W
e all hope that deflation has set in,
but the Federal Reserve “oard in its last anmal
report gaid:
"Poo r a p i d o r t o o d r a s t i c d e f l a t i o n w o u l d d e f e a t
the very purpose o f a well regulated credit system
by the needless unsettlement o f mind i t would
produce and the disastrous reaction that such
unsettlement would have upon productive industry."
Do not l e t u s b e impatient a n d depart f r o m t h e
method o f credit control b y discount rates, tested
in many countries a n d fully indicated i n the Act; a n d
by trying some n e w plan, r i s k ruining t h e clasticity
of our new system,
A t present through the almost
world w i d e s u s p e n s i o n o f g o l d payments,
o u r problem
of credit control i s reduced t o its simplest domestic
form.
L e t u s devote o u r energies e n d o u r earnest
thought t o ascertaining what elements i n our commercial
and financial structure must be reockdned with i n
effecting credit control w h e n gold payments a r e
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449
resuined among t h e leading nations,
t o inaugurating
effective methods o f ascertaining accurately t h e
movements o f these elements,
t o evolving unity o f action
in meeting them, a n d t o creating s u c h a public understanding o f o u r o p e r a t i o n s
a s will support a n d approve
our actions w h e n taken, M e a n t i m e , a n d until o u r
System i s p r o v e d w r o n g
i n theory o r impracticable
to
operate, l e t us have faith and steadiness and patience
to see i t through o n the theory laid d o w n i n the l a w
and o n accepted lines o f credit control, which are,
the application o f discount rates a n d t h e exercise
of
proper d i s c r e t i o n
i n t h e e x t e n s i o n o f credit,
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APPENDIX A
QUOTATIONS F R O M ECONOMISTS REGARDING
RELATION.
O F DEPOSITS T O NOTES,
MONEY, CREDIT INSTRUMENTS, A N D PRICES.
By Professor E, %. Kemmerer, p. 74,
"The nature a n d influence o f checks u p o n prices
is not essentially different from the influence o f
convertible government notes o r bank notes,”
Treatise o n Money and Essays o n Monetary, Problems,
By Professor J , S e Nicholson,
pp. T 5 " 4 ,
"the competition o f those who buy o n credit,
SO long a s that credit i g accepted, obviously affects
the demand for commodities and raises the prices
just a s much a g when ready money i s offered, A
per-
son whose cheque will b e taken i n payment can bid ag
effectively as one who brings a bag of money."
Money a n d the Mechanism o f Exchange ,
by Professor W. 3S. Jevons,
"Currency must b e supplied like all other commoditic
according t o the free action o f the laws o f supply
and
demand, "
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Monetary Economics---By Professor '!, %, Carlile,p.158.
"There has beon a good deal o f controversy over
me g u e s t i o n w h e t h e r
money doese
o r not credit affects prices
ag
I t would, i t seems t o me, b e more t o
the point t o inguire whether anything else b u t credit
worth m e n -
Money and Banking B y Professor ¥, A. Scott,p.113.
"The amount o f bank currency depends primarily
upon t h e needs a n d desires o f the scustomers o f the
banksesesssthig currency will came i n t o circulation
in t h e p l a c e s w h e r e i t i s i n d e m a n d a n d a t t i m e s w h e n
Lt is necded.sssueee-+-eBy Clasticity of bank currency
is meant i t s capacity t o adapt itself,
a g i t were
automatically, t o the varying needs o f commerce,”
Principles o f Economics, B y Professor F, W,
Meee). VOLS 2 , p, 438,
WThere w a g a
long controversy, a
couple o f gener-
ations ago, concerning t h e mode i n which
bank notes,
if they were allaved t o be freely issued, affected
business activity a n d rising prices; whether
their
free issue had per ge a stimulating effect, o r whether
d2
a
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an independent increase o f activity w a s t h e cause
leading t o the larger issue. Which, i n other words,
was t h e cause a n d which t h e effect?
T h e same ques-
tion can be raised a s t o deposits, a n d i t is i n this
form that the question i s now a n important o n e i n
English speaking countries.
D o e s a n increase o f
deposits cause greater activity and higher prices o r
does greater activity cause a n increase o f deposits
and s o bring i n its o w n train the higher prices? ‘ T h e
truth seems t o b e that there i s a n interaction o f
chuse. “ b e n the spirit of hope is pervasive, liberal
banking facilities nurture a n d stimulate i t ; without
general optimism, s u c h facilities a r e unused a n d
in-
operative,"
Money b y Professor D , Kinley---p, 367,
"The check, n o t the note, i s today t h e symbol o f
banking p r o g r e s s , e
h
t instrument
o f large e x c h a n g e ,
I t
is the deposit a n d the check that
w e must reckon with
today.
B u t the cha ee of form of the bank function
has not changed its character.
T o discount a piece
ofmercantile paper by issuing notes i n payment for it
4
differs i n no respect fran discounting the same paper
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453
and erediting its seller with a proper amount a g a
deposit t o be drawn o u t b y checks a t the convenience
of the holder.
Professor N. HE, Pierson, (Dutch economist.)
"It is not true that i n a country where n o bank
notes are i n circulation, exportation o f specie results
an i m m e d i a t e f a l l i n prices a n d c o n s e q u e n t l y
alteration i n the balance o f payments.
in
I t would
so i f baniz notes were t h e only possible substitutes
for specie:
b u t b a n k d e p o s i t s a l s o s e r v e a s substi-~
tutes for spocie,~-“-Bank notes and bank deposits
differ only i n form, since both take the place o f
specie w h e n they are n o t covered b y a metallic
reserve!
"REPORT O F THE INDIANAPOLIS MONETARY G O M M I S S
ION."
pages 1 6 4 and 165,
"The borrower needs immediate means o f payment;
and t h e bank c a n sive this t o him i n
either o f several
forms, whichever the custaner prefers,
I t can give
him actual money from its uninvestea
resources (either
& portion of its own capital o f money left with
i t by
others); o r it can give him its circulating
notes;
or i t c a n sive h i m a credit o n its bookg«-ama
deposit
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account,
B o t h are equivalent demand liabilities
of the bank. A
note i s a promise t o pay o n demand;
so i s a deposit.
H i t h e r o n e means t h a t its holder
refrains froin demanding actual money from the bank,
the deposit o r note answering 211 his purposes,"
"Introduction t o Eeonomics."
Professor Henry Rogers Seager.
P a g e s 3 3 1 & 332.
"Besides lending their credit i n the form of
deposit liabilities, banks which enjoy the privilege
of issuing bank notos, that is, the bank's promises
to pay o n demand without interest t h e sums named o n
the face o f the notes, m a y lend their credit i n this
form,”
"OUTLINES OF EcONOMIes."
By Professor Richard T . Ely, p a g e 850,
"Bank notes a r e like deposits i n that both
are demand liabilities o f banks. B a n k notes, however, circulate among persons who have n o means o f
informing themselveg a s t o the solvency o f the banks
issuing them.
T h e holders o f bank notes a r e accord-
ingly usually given special protection b y laws which
regulate the conditions o f their issue and redemption,"
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"ORGANIZED BANKING."
“by Professor E, E.Aggor, page 34.
"Other things being equal then, and agswning the
absenee o f any special restriction, t h e credit that the
bank extends will take o n e o r the other o f the t w o
forms, (cither that of notes o r deposit liabilities)
or both,
I n such proportions as, i n its broad relations
with its clients, the opportunities f o r profit t o the
bank seem to dictate."
"Principles o f Economics"
~~Professor Edwin R , A, Seligman, P a g e 474,
"So far as the bank and the borrowers are concerned, t h e economic essence o f the bank note i s iden~
tidal with that o f deposits.
B o t h are b a n k liabili-
ties,because t h e bank must ultimately p a y its note o r
honor a requisition o n the deposit; both involve the
granting o f oredit t o the borrower w h o acquires t h e
right t o demand payment o f a given s u m from t h e bank,
the function o f issue differs i n form, but not i n
substance, from that o f deposit,”
“The Theory and Practice o f Banking."
Henry Dunning Macleod, Pages 289 anda 290,
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456
"A merchant brings his debts, payable some time
after datg, for sale, and b y a flourish o f his pen,
the b a n k e r trangsmutes t h e m i n t o d e b t s p a y a b l e i n s t a n t -
ly, whieh have precisely t h e same effect i n commerce
as s o many sovreiens,.
H e reaps cxactly t h e same
profit b y creating a credit i n favor o f hig custamer,
as i f h e g a v e h i m t h e a c t u a l c a s h ,
A n d t h e cheques
drawn against these credits, s o oreated b y the banker,
clroulate c o m m o d i t i e s e x a c t l y
i n the same manner a g
bank notes do, which circulate commodities exactly i n
the same manner that sold a n d silver money does,"
"Principles o f Money"
~
Br Professor J. L e Laughlin --pp.117-18," |
"Te choice between receiving notes o r a deposit
rests wholly with the customers o f the bank. Hence
we g e e t h e r e a s o n f o r t h e w e l l - e s t a b l i s h e d f a c t t h a t
the expansion o f notes relatively t o deposits,
o r of
deposits relatively t o notes, i n our banking history
is independent o f the control o f the banks, a n d i s
determincd b y the business habits a n d custome :of the
public,"
“Money and Banking"--by Horace White,
"The form o f igsug,whether i n checks that may
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pass through one o r two hands, o r i n circulating notes
hat may pass through many hands,
i s o f little can-
sequence; and, even i f it were o f much consequence,
it i s beyond h i s control,
I t i s also beyond t h e
control o f the depositor,
H e will call f o r notes
only i n cases where h e cannot use checks. ‘ T h e controlling force here i s the m b l i c demand,
t o which
both the banker and his customers conform,"
"American Banking”
~-by H, Parker Willis, Pazes 9 2 and 93,
"Prom what has been said it is clear that the
theory o f note issues and their relation t o the bank
is identical w i t h that o f deposits a n d their relation
to the bank,
T h e r e i s i n fact n o distinction t o b e
drawn i n this respect between the note and the
deposit."
Professor O.M.il. Sprague o f Harvard SHYS :
"I do not think i t possible t o differentiate the
responsibility f o r inflation a g between notes
a n d deposits,
t h e o n e cannot expand f a r i n the
absence
of
expansion o f the other, though i n a c h e c k
using country
deposit e x p a n s i o n p r o c e e d s n o t e e x p a n s i o n
tent
cn
t o some e x -
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APPENDIX B ,
REGULATIONS CONCERNING NOTE ISSUES
IN FORSIGN COUNTRIES,
THE LAYS R E G U L A T I N G E
H
T ISSUE O F BANK NOTRS I N THE
LEADING N A T I O N S B a N K S O F I S S U E AND R E G U L A T I O N S
EGARDING T H E I S S U E O F NOTES.
Australia, Commonwealth Bank, Head Office Sydney:
The n o t e s
i n c i r c u l a t i o n c o n s i s t o f 4ustral-
ian notes issued b y the Commonwealth govermnent, w h i c h
legal tender, T h e Commonwealth Bank attends t o
distribution a n d redemption o f these notes,
O f
notes i n circulation t h e banks h o l d 3 2 million
pounds a s assets, u s e d a g till money, a n d t h e pmuablic
the remainder,
B a n k notes have n o t circulated sinae
Atal
aB
Japan, Bank of Japan, (Nippon Ginko), Head Office:
Toklo:
M a y issue 1 2 0 million y e n secured b y the goverm-
ment debt,
A L L o t h e r n o t e s m u s t b e cokblateralled
entirely b y gold coin and bullion.
in excess
o f this s u m are s u b j e c t
N o t e s issued
to a
5 % annual t A X e
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459
Denmark, B a n d u e rictionale d e C o p e n h a g e n -
Head Uliice, Gopenhageni
Denmark;
M u s t maintain a sold reserve
of 53~1/3% , tne proportion n o t covered b y cash must b e
by assets
i n the proportion o f 1 5 0 kroner t o e a c h
kyoncr o f notese T h e issue m a y exceed t h e legal minimum u p o n the pavinent o f a S y annual tax.
sland, B a n k o f isnelands:
M a y issue t o any amount
if the notes a r e collateralled entirely b y gold, a n d m a y
issue L 18,450,000 secured b y government securities.
The
bank has issued above this amount u p o n the suspension o f
the Banic act.
France, Banque d e France; H e a d Office Peris:
T h e
bank pays a franchise t a x t o the government equal t o 2 %
of its circulatinz notes, there i s n o required c o l d re-« )
Sservee T h e notes a r e n o w legal tender b y a n act dated
August 5 , 1914.
B y a n act o f Parliament o f April 14,
1920, t h e maximum advances t h e bank m a y make t h e government
was fixed a t 2 7 billion francs.
Holland, Nederlandsche Bank; H e a d Office, Amsterdam:
A 2 0 reserve o r gold a n d silver i s required t o b e mainto ined against demand liabilities ( b a n k notes, checks,
and d e m a n d d e p o s i t s . )
T h e reserve
i s fixed b y royal
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460
cecree.
T h e l a w imposes n o restrictions
a g t o the pro-
portion o f sold and silver.
ftely.
L T S
B a n k o f Italy, B a n k o f Naples, B a n k o f
T h e banks
o f Issue a r e required
t o maintain a
40,0 S o l d r e s e r v e a g a i n s t n o t e s i s s u e d
f o r commercial p u r ~
poses and S3-1/3 a-zinst notes issued o n soyvernment
ace
Counte D u r i n g t h e w a r the banic note
circulation f o r commercial purposes h a s less t h a n doubled
while t h e total
Circulation increased s i x fold.
I n addition t o this r e -
Serve requirement t h e amount o f notes which
c a n b e issued
is a l s o limited.
fhe so-called normal prevar maximum limit o f
the
bank o f Italy was 8 6 0 lire, t h e Bank o f
Naples 200,000,000
lire and the Bank o f Sicily 48,000,000 lire,
totalling
908,000,000 Lire.
B a n k s c a n issue notes above these
anounts, provided that they are backed b y
&@ 100 per cent
that t h e y m a y exceed t h e normal maximum
ovoviced that there i g a 40 per cent cash reserve
cover~
ing the entire Issue and that a special
tax wag paid o n
tue excess o f the circulation.
T h i s t a x i s 1 / 3 o f the
rate o f cise ount when the excess i s not more
t h a n 50,000,000
lire i n the case o f the Bank o f Italy, 15,000,000
lire
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461
in thet o f the Lank o f Naples a n d 4,000,000 l i r e i n that
ofthe Banks of Sicily.
I t is 2/3 of the rate of disc count
when the excess i s not less than 50,000,000 lire and not
more t h a n 100,000,000 l i r e for the Bank o f Italy, betywoen
15,000,000 l i r e a n d 30,000 lire for the Bank o f Naples
and between 4,000,000 l i r e a n d 8,000,000 l i r e f o r the
Banis of Sicily. ‘ T t is equal t o the full vate o f discount
wien t h e excess i s respectively: betweenl00,000,000 l i r e
end 150,000,000 lire, between 30,000,000 l i r e a n d
45,000,000 l i r e a n d between 8,000,000 lire a n d 12,000,000
liree w h e n t h e excess i s above 150,000,000 lire,
45,000,000 l i r e a n d 12,000,000 l i r e respectively,
a n ex-
traordinary tax of 7 1/2 per cent is levied on the additional amount over and above these figures.
when a consortium o f banks was organized i n the fall
of 1914 t o come t o the a i d o f industry b y discounting bills
secured b y industrial obligations, t h e banks o f issue
asreed t o accept f o r rediscount s u c h bills, t h e share t o
betaken up by the Bank of Italy being f i x e d a
t 75 per
Cent.
o f the total amount, t h e share o f the Bank o f
Naples a t 2 0 per cent, a n d t h e share o f the Bank o f Sicily
at 5 per cents P r o v i n c i a l syndicates f o r t h e purchase
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Federal Reserve Bank of St. Louis
462
and d i s t r i b u t i o n o f cereals « e r e a l s o o r r a n i z e d
at
toat tine, a n d the banks o f issue jointly came t o
their a s s i s t a n c e b r y aiscounting v a p e r s e c u r e d b y
stocks o f cereals.
Norway; Norges B a d e a d Office, Christiana:
of notes l i m i t e d b y ( 1 ) t h e v a u l t s t o c k o f g o l d c o i n a n d
bullion, (2) available balance abrosd u p t o
1/2 o f gola
stock, (5) belances i n the Bane o f sweden and the Hational
Bank o f Denmark u p t o six million kroner, ( 4 ) A n amount
of 70 million kroner i n excess o f gold stock.
Additional
notes a y b e issued under penalty o f a 6
tax.
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Federal Reserve Bank of St. Louis
463
Scotland, Eight Joint Stock Banks which were
issuing notes i n 1884-45:
T h e Scotch banks m a y issue
notes unsecured equal t o the average during t h e year
ending May 1, 1845. A l l notes issued i n excess
mugt b e based o n gold.
A h e authorized circulation
is now L 2,676,350; t h e bulk o f the notes are i n
denominations o f L5 and under the lowest denomination
allowed being L 1. T h e bank's notes are legal tender
like Bank o f @ngland notes, T h e elasticity ana
security o f the notes are secured b y daily exchangos
through t h e Edinburgh Glearing House.
N o t e holders
have a prior lien o n the assets o f a failed bank, and
the sharcholders! liability f o r note igsues i s unlimited.
S i n c e 1 9 1 4 the excess o f the actual o v e r
the authorized circulation i s backed largely b y
Currency notes.
N o ’ reserve required against d e ~
posits,
Spain, Banco d e Espana, H e a d office-~-Madrid:
The following reserves a r e preseribcd against note
issues; ( 1 ) u p t o 1,200 million pesetas, a
specie
reserve o f 35 1/3%, a t least 1/2 of which must be
gold; ( 2 ) from 1,200 t o 1,500 million pesetag a
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Federal Reserve Bank of St. Louis
464
specie reserve of 60% of which 2/3 must be gold as a
minimum; (3) From 1,500 t o 2,000 million pesetas a
specie reserve of 70% of which 5/7 must be gold;
(4) from 2,000 t o 2,500 million pesetas the notes
must b e covered entirely b y specie, w i t h n o linitations a s t o the proportion o f gold a n d sliver;
(5) from 2,500 to 4,500 million pesetas the notes
must b e covered entirely b y gold.
T h e maximum amount
allowed t o be issued i s 4,500 pesetas which i s Pixed
by legislation.
T h e productive circulation (uncovered
by specie) t s taxed o n per mille p e r annum,
Sweden, Sveriges Riks Bank, Head Office---5tockholm:
T h e notes which are legal tender are Limited
by (1) the metallic reserve, including foreign and
domestic gold coins and bullion i n the vaults o f the
banks; ( 2 ) gold coin a n d bullion o n deposit abroad
or i n transit, covered b y a marine insurance policy;
(3) amount of its funds in current account with
foreign banks o r banking firms.
Bank i s entitled t o a n i
I n addition the Riks
mennen note issue n o t ex-
ceding 100 million kroner which must b e secured b y
eadily realizable assets.
T h e metallic reserve
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Federal Reserve Bank of St. Louis
must not be less than 4 0 million kroner, and i n
the event that the uncovered issue exceeds 6 0 million
kroner a n additional g o l d reserve m u s t b e maintained
equal t o 30% of this excess circulation.
Switzerland, B a n q u e N a t i o n a l e S u i s s e , H e a d
Offices---Zurich and Berne: M u s t maintain a 40%
metallic reserve against t h e notes i n circulation, t h e
romainder o f the notes being collateralled b y Swiss
discount bills a n d drafts o n foreign countries.
Vith
the authorization o f the Federal Council, i n times
of stress, t h e metallic reserve may be lowered t o
331/3%.
Canada, Bank Notes are issued b y the 1 8 CharterBanks:
T h e issue o f notes i s limited by: (1) amount
of paid-in-capiteal; ( 2 ) gold deposited with the Gen-
tral Gold Reserves; (3) additional notes equal t o 15%
of the Capital and Surplus o f a bank may b e issued
ject t o a penalty o f a 5% per annum tax,
apgontina, Caja d e Conversion:
T h e r e are n o
bank notes i n circulation, T h r o u g h t h e Caja d e Conversion t h e government issues notes t o the Banco d e
la Nacion o n the secubity o f rediscounted paper,
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Federal Reserve Bank of St. Louis
466
A 40% gold reserve i s maintained against these notes,
whieh t h e B a n c o d e l a N a c i o n p u t s i n t o c i r c u l a t i o n
by loans
t o o t h e r banks.
Chili, Caja d o Kmnistion: I s s u e s money t o banks
upon e q u i v a l e n t d e p o s i t s
o f gold.
T h e r e are a
number
of j o i n t s t o c k b a n k s w i t h t h e r i g h t t o issue n o t e s
upon depositing gold, Govermment notes o r securities
in the Treasury.
T h e r e a r e also land banks which
issue scrip payable t o bearer, bearing interest,
secured b y first mortgages.
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Federal Reserve Bank of St. Louis
LIshould l i e t o move that a
ir. Jay's paper and thet every member b e
a COD.
The m o t i o n v a s d u l y s e c o n d e d a n d u n a n i m o u s l y a g r e e d
RePORT O F P H S COMMITTEE.
Dr, Miller o f the “ederal seserve board presented a
dvaft o f a proposed statement t o be given t o the presse
after considerable discussion, t h e statement v a s finally aporeved b y the Gonference t o b e siven o u t i n the discretion o f the Federal Reserve Board.
Governor Hoarding.
I T think i t i s only prover t o say,
in clasin= t h e Gonference, t h a t w e regerd this a s o n e o f
the most interesting a n d instructive conferences t h a t h a s
peen h e b .
and I
‘ i e have taxed your time a n d patience,
went t o a s s u r e y o u Governors
o f the banks t h a t
your reports v i l l b e carefully digested.
w e have h a d
eryeat Ceal o f vle&sure i n having y o u vith us, a n d v e
cou eciate t h e sreat value t o u s that your counsel a n d
a
a
perience e n d o r e e t i c a l k n o w l e d g e h a s been,
and v e t r u s t t h a t i n s o m e m e a s u r e c o n t a c t v i t h u s h a s
been orofitable t o you.
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Federal Reserve Bank of St. Louis
Mr. Perrin.
M r . Chairman, I
wish t o say i n be-
helf o f the Federal Keserve Agents t h a t 1 t i s the unig
versal s e n t i m e n t a m o n s t h e m t h a t t h i s G o n f e r e n c e h a s b e e n
=
|
the most valuable o f a n y w e have attended.
v
e have
come i n closer touch with the minds o f the Federal Reserve
board i n regard t o the real vital matters o f the Federal
Woerd operation t h a n a t any previous Gonferencey, a n d i t
is i y view,
i n wonich I
a m s u r e a l l w i l l concur,
that
conference o f this i i n d held once @ yeer would b e o f
preme value.
I f thet conference, following Governor
Harding's sugcestion, c o u l d b e called f o r tionday, s o that
the whole week micht b e available, I
good tuing.
think i t would b e a
W e @ppreciate very much the courtesy which
the members o f the Board have extended t o this Génfens
GNnCGe
Thereupon, upon motion duly seconded, a t 1:40 P M,
the Gonference adjournede
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Federal Reserve Bank of St. Louis