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Federal Reserve Bank of St. Louis
FIFTH CONFERENCE
GOVERNORS O F FEDERAL RESERVE BANKS
MINNEAPOLIS, MINNESOTA
HOTEL RADISSON
Wednesday, October 20, 1915
Thursday, October 23, 1915
Friday, October 22, 1915
Saturday, October 23, 1915
WALTER
SHORTHAND
S. COX
REPORTER
COLUMBIAN BUILDING—TEL. M. 8324
WASHINGTON,
D . C. :
BOO
B e
B e ae
Hotel Radisson, Minneapolis, Minn.,
October 21, 1915.
Conference reassembled a t 1 0 o'clock a . m .
attendance w a s t h e s a m e a S O n October ZOth.
METHOD ADOPTED B Y FED: RAL RESERVE BOARD I N
COMMUNICATING W I T H FEDERAL RESERVE BANKS.
The Chairman:
A t the last meeting held i n Chicago
we h a d some discussion w i t h Dr. Miller a s t o the method
which h a s been adopted b y the Fedcral Reserve Board i n com-—
municating with the Federal Reserve Banks,
i n confining
their official letters almost exclusively t o letters
addressed t o the Federal Reserve Agents.
T h e statement
was made a t that meeting that i n certain cases that caused
inconvenience,
T h e subject w a s referred t o Dr. Miller
informally, w i t h o u t a n y resolution being passed,
recall, a n d h e undertook,
as I
a s soon a s h e returned f r o m the
Pacific Coast, t o have a talk with his colleagues, t o see
whether s o m e s y s t e m c o u l d n o t b e d e v i s e d
letters,
b y which these
i n addition t o going t o t h e Federal Reserve
Agents, w o u l d automatically reach the banks. :
In that
‘case i f the Federal Reserve Agent happened t o b e away o r
the letter w a s mislaid o r anything happened t o interfere
with i t receiving prompt attention t h e officers o f the bank
would nevertheless receive a
copy o f it.
h a t matter h a s
apparently n o t b e e n acted upon b y the Board.
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Federal Reserve Bank of St. Louis
A t least w e
aor
do not observe a n y change i n the practice i n our Dank.
I would like t o ask, before this matter i s discussed
and a n y action taken, whether those o f y o u who ciscussed
it a t the last mecting have found that a n y change h a s
taken p l a c e
i n the practice?
Governor Wold:
w
e have n o impppvement
i n our dis-
trict w i t h the exception o f the clearance telegram o n Wed—
nesday, r e f e r r i n g
t o t h e G o l d Fund, w h i c h i s n o w d i r e c t e d
directly t o the bank instead o f t o the Federal Reserve Agent
and
as formerly.
B u t t h e Governor will write a
letter some
weeks o r months latter there will be a circular addressed
to the Reserve Agent i n response t o that, o r possibiy t h e
response will come through the“BulletimMin cue time.
The Chairman:
H e r e i s a letter which Governor W o l d
haé@ just handed m e which strikes m e a s being a
perfectly
proper comimmnication t o send t o the Federal Reserve Agent
to whom i t is addressed, inasmuach a s i t has t o d o with the
note i s s u e .
T h e letter
i s a s follows:
"By direction o f the Federal Reserve Board, I am
writing t o you i n confidence t o advise that t h e Treasury
Department,
u p o n recomnendation
o f t h e Board, h a s deter-
mined t o d i s c o n t i n u e t h e i s s u e o f t e n d o l l a r g o l d c e r t i -
ficates f o r the present,
a t least, a n d t o limit t h e issue
of twenty dollar gold certificates t o such amount a s may
be n e c e s s a r y t o issue
i n exchange f o r G 2 0 g o l d p i e c e s t h a t
may b e deposited w i t h the Department.
"Tt i s supposed that t h e effect o f this change i n
policy will b e to increase w h e demand for Federal reserve
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Federal Reserve Bank of St. Louis
257-A
notes o f the t e n o n d twenty dollar denominations, a n a i t
occurred t o the B o a r d that i t would b e well that y o u
should b e informed o f t
s i t u a t i o n i m order that, i f 1 %
is necessary, y o u m a y adjust y o u r orders f o r notes o f
of these Cenominntions t o m e t a n y increase i n G e m a n
that a n y present itself.*
Tint i s v e r y p r o p e r l y a
to the Federal Reserve Agent.
communication t h a t s h o u l d g o
O n tho other hand, t h e
Feceral Reserve Agent a t N e w York receives letters f r o m the
Board i n .aShington having t o G o with the daily operations
of the bank, concerning which the Federal Reserve Agent
feel t h a t t h e y
is n o t r e a l l y t h e r e s p o n s i b l e officer. I
shoula cither s e n d a duplicate o f such letters t o the
bank,
o r m k e s o m e provision f o r a
copy being delivered
at once t o the bank when i t i s received b y the
Reserve Agent,
Governor Kains: I
feel v e r y s t r o n g l y
have never written a
myself. I
letter t o t h e Board, a n d
Llwill n o t u n l e s s t h e y w r i t e t o ime. T
that s o r t
o f business
the r i g h t t o h a v e a
on between us.
it. I
a t all.
I
o n that subject
d o n o t understand
f we are a
bank
w e have
regular r o u t i n e c o r r e s p o n d e n c e g o i n g
B u t until t h e y start i t w e will not. start
think i t i s a most inefficient method.
The Chairman:
I t i s a very poor banking method a s
it G o e s n o t i n s u r e p r o m p t a t t e n t i o n
t o business.
Governor Aiken: T h e r e h a s b e e n n o change i n our
experience,
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Federal Reserve Bank of St. Louis
258
The Chairman: H a v i n g taken this u p a t a previous
meeting, a n d having endeavored t o nancle i t b y a suggestion t o one o f the members o f the Board, G o y o u n o t think
the time h a s come w h e n w e should m k e a
definite suggestion
in the f o r m o f a resolution?
Governor Fancher: I
thought i t was simply a sug-
gestion a t the Chicago meeting,
t o Dr. Miiler.
T h a t was a l l i t Was.
The Chairman:
W e did not
make i t a n y more formal t h a n that.
Mr. Curtis:
I
t was a
little m o r e f o r m a l , b u t i t w s
to b e r e p o r t e d informally. I
think t h a t w a s t h e situa-
tion with regard t o it.
This w a s t h e r e s o l u t i o n w h i c h w a s adopted:
"WHEREAS i t is reported a t this Conference that considerable inconvenience h a s been caused b y the failure o f
mail addressed t o the Federal Reserve Agents t o b e promptly acted upon i n the absence o f the Federal Reserve Agents,
and f o r other reasons,
"BE IT RESOLVED that it is the sense of this Conference that a l l communications addressed b y the Federal R e serve Board t o the Federal Reserve Banks should b e a d d r e s
sed t o the bank o r t o the chief executive officer o f the
bank, a n d only those communications w h i c h pertain particularly t o the duties o f the Federdl Reserve Agent should
be addressed t o him personally.
"AND I f WAS FURTHER RESOLVED that t h e foregoing preamble a n d resolution b e recorded i n the minutes o f the
Conference, b u t that t h e y b e transmitted t o the Federal
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Federal Reserve Bank of St. Louis
259
Reserve B o a r d o r a l l y b y t h e c h a i r m a n ,
w i t h s u c h explana-
tion a s h e m a y deem jucicious i n order that t h e matter m a y
be f u l l y e x p l a i n e d a n d p a r t
a r l y that t h e cesire
of
this Conference i s t o »romote t h e prompt a n d officient
transaction o f all matters relating t o the dank, anc that
the resolution i f not prompted b y any other motive."
The Chairman:
T h a t resolution covers exactly t h e
point w e want t o ceal with.
to have a
W h i h t h e meeting b e Satisfied
record made n o w simply renewing this reco mmenda-
tion a n d directing that i t b e handed t o Messrs. .arburg
and “arding tomorrow?
Governor McDougal I
will offer a resolution t o
that effect, t h a t is, that the resolution passed i n the
Chicago Conference b e d e l i v e r e d t
o Messrs Warburg a n d
larding, a s representing t h e sense o f this meeting i n
regard t o communications f r o m the Federal Reserve Board
to the Federal Reserve Banks.
he Chairman:
I s that motion seconded?
Governor Fancher: I
will second that motion.
(The motion was carried.)
Governor Seay:
B e a r i n g u p o n that, M r . Chairman, I
snould l i k e t o s a y t h a t t h e r e i s a n o t h e r c o n s i d e r a t i o n ,
and that i s that sometimes a n ambitious deputy i s acting
for the Federal Reserve Agent, a n d h e feels that t h e duties
of the cnairthan have descended u p o n h i m a n d h e must expand
to them;
h e proceeds
iar w i t h t h e p r a c t i c e
a
t o d o s o a n d h e i s n o t always, fami 1a s perhaps t h e e x e c u t i v e o f f i c e r o f
the b a n k would be, a n d sometimes opinions g o i n t o the
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Federal Reserve Bank of St. Louis
240
Board w h i c h I
a m c o n f i d e n d d o not, r e f l e c t f u l l y t h e p o l i c y
and opinion held b y the executive officers o f the bank.
I remember o n one occasion o u r agent w a s absent a n d
we h a d one o r two applications f o r capital stock. I
lieve I t i s required t h a t t h e signature o f +
Reserve Agent b e upon t h e application. I
be=
Federal
addressed a 4
harmless inquiry t o the Federal Reserve Board a n d asked
if, i n the absence o f the Federal Reserve Agent i n order
that there might b e n o delay, t h e signature o f the Executive
officer o f the bank would answer.
T h e y replied that whan-
ever t h e signature o f the Feceral Reserve Agent W a s specified i t must b e furnished;
t h a t w h e n t h e Federal Reserve
Agent w a s absent h e was supposed t o provide f o r t h e presence ofhis deputy t o act i n the capacity o f chairman o f
the board and t o perform the duties defined i n the Federal
Reserve Act.
The Chairman:
A l l o f these matters would b e dealt
with more satisfactorily i f we had the means o f getting
more direct communication f r o m the board t h a n w e now
have.
W e have n o difficulty i n our bank, b u t I
know
difficulty h a s arisen i n some o f the other banks.
Governor Seay:
I
t i s n o t w h a t y o u m i g h t cal2d d i f f i -
culty, b u t there i s 2 tendency t o let i t develop i n t o
There h a s never b e e n anything that y o u might t e r m
difficulty,
but i
can see what t h e tendency is, a n d i t
scems t o b e getting more a n d more pronounced i n a certain
direction.
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Federal Reserve Bank of St. Louis
Governor Kains:
W e have n o difficulty whatever.
241
But i t i s lacking i n efficiency.
I t i s not the proper
way t o cdo the thing.
Governor Aiken:
I
t seems
t o m e that o u r request
would b e simply t o p the establishment o f a sound practice,
The Chairman:
W 4 l l L this resolution m e e t t h e situa—
tion a s w e have outlined i t ?
Governor Kains: I
The Chairman:
think so,
M r . Curtis h a s called m y attention t o
items 2 3 and 24 that w e might take up now to advantage before Messrs. Warburg and Sarding are here. I t e m 23 is
“Commodity rates,"
T h a t should b e "Rates for commodity
paper", t o correctly describe the subject.
25. R A T E S F O R COMMODITY PAPER.
The Chairman:
T h e sussestion that w e discuss this
matter c a m e f r o m Governor Seay, I
Governor Seay:
The Chairman:
believe.
Y e s sir.
W i l l v o u start t h e discussion, Governor
Seay?
Governor Seay:
be a
T h e question o f whether there should
preferential r a t e u p o n n o n - p e r i s h a b l e c o m m o d i t i e s ,
stored i n warehouses, w a s referred t o the Advisory Council
for discussion.
i t was advanced b y the Board, n o t b y the
Council, a n d I think after t h e y h a d fixed the commodity
rate.
‘ T h i s subject w a s discussed b y our Board before w e
had a n y k n o w l e d g e t h a t i t w a s b e i n g e n t e r t a i n e d
b y the
Federal R e s e r v e B o a r d .
The Chairman:
T h e Federal Reserve B o a r d f i x e d n o
rate f o r c o m a o d i t y paper.
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Federal Reserve Bank of St. Louis
T h e y have n o t the power t o fix
a rate.
Governor Yeay:
mte,
N o .
T h e y only have power t o inti-
a t times.
Governor Wold:
T u e y Cid f i s 2h,
Governor Seay:
T h e y intimated that t h e banks mignt
find i t desirable t o f i x a preferential commodity rate.
I d o not know that i t w a s done formally b y circular, b u t
it was done, w a s i t not, Governor V a n Zandt?
Governor V a n Zandt:
I t was done b y wire, s o far a s
we were concerned,
Governor Seay:
W
e were advised that t h e other
banks h a d fixed t h e commodity rate.
O u r board »Dassed a
resolution a n d that resolution w a s contained i n our answer
to them, "That this bank, desiring t o act i n harmony with
the views o f and t o carry o u t the policies determined o n
py the Federal Reserve Board, fixes a rate o n commodity
paper a t 3 per cent subject t o review and determination
of the board."
Certainly a great deal o f pressure was brought t o
bear u p o n t h e b a n k s
t o f i x t h a t commodity rate, B i v i n g a
preference i n the rate.
W e discussed this before w e had
any idea that t h e board was entertaining it. I
entertained
and express t h e idea that a prefcrence f o r stored commodities under satisfactory warehouse receipts w a s a
thing a n d that w e mignt come t o it.
logical
O u r board did not
agree that i t was a desirablo t h i n g t o d o a t the time.
The Federal Advisory Council discussed i t and I think that
all o f the banks were o f t h e opinion that a
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Federal Reserve Bank of St. Louis
commodity rate
2435
was a n undesirable thing; t h a t i t was civing preference t o
certain classes o f people a n d certain classes o f business
vo which perhaps t h e y were n o t entitled;
t h a t other peo-
ple were just a s good credit a n d should b e perhaps entitled
to a n e q u a l r a t e ; t h a t t h e c o m m o d i t y r a t e w a s n o t a
able thing.
desir-——
B u t here i s one angle f r o m which I desire
to discuss it. A l t h o u g h t h e board s a i d that t h e commodity
rate was t o b e confined t o non-perishable, staplo articles,
and s o forth, there i s a desire o n the part o f borrowers
to extent t h a t note
t o most everything.
What i s regarded a s a staple article i n one c o m m n i t y
would n o t b e regarded a s a staple comaodity i n another.
We have hadnumerous applications t o extent, “note t o things
of a quasi-perishable character,
cattle w e r e a
staple c o m m o d i t y
O n e gentleman said that
i n h i s district.
W
e have
had applications f o r l o a n s n
o apples i n cold storage, a n d
various a n d sundry other thingsi
purpose o f the Board t o d o that. I
I t clearly w a s n o t the
a m inclined t o think
that a commodity rate might breed dissatisfaction.
The Chairman:
I
s there a n y further discussion
of
this matter?
Governor V a n Zandt:
I n our district, a f t e r getting
this telegram asking us, o r a t least intimating, t h a t w e
should e s t a b l i s h a
commodity r a t e o n t h i s paper,
w e estab-
lished a rate, b u t w e confined t h e rate t o promissory notes
of t h e a c t u a l p r o d u c e r ,
a n d w e required t h e following e n -
dorsement o n it, i n addition t o the regular endorsement:
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Federal Reserve Bank of St. Louis
"The maker o f this note i s the actual producer o f the
244
commodity s e c u r i n g same, a n d i s n o t b e i n g c h a r g e d
note a
o n this
greater r a t e t h a n s i x p e r c e n t p e r a n n u m e i t h e r a s
interest o r commissions, o r both."
Our action i n that matter w a s questioned b y the
Federal Reserve Board, a n d they wanted t o know why w e left
out the merchant w h o bought t h e cotton a n d the cotton buyer.
We wrote t o the Board, I think it was Mr. Harding, that
the r e a s o n w e d i d t h a t w a s b e c a u s e t h e a c t u a l p r o d u c e r w a s
the o n l y m a n t h a t w e w a n t e d t o hold;
to raise t h e price t o the spinner,
not o u r object.
W
t h a t w e d i d n o t want
a t all, t h a t that was
e wanted t h e producer t o get a fair
price f o r his commodity;
i f h e tere unable t o get a fair
price, t h e n wwe wanted h i m t o b e i n a position t o hold i t
in warehouse, a n d i f w e extended that privilege t o the
merchant a n d t o the regular cotton buyer i t would t e n d t o
encourage t h o s e p e o p l e
t o g o out a n d b u y f r o m t h e farmer
his product a t the lowest price a t which they could o b tain i t i n orcer t o speculate o n the farmer's comuodity.
The Federal Reserve Board wrote b a c k a n d s a i d that
our stand was well taken a n d t h e y approved o f it.
Governor Wold:
preferential r a t e s
v h e n the matter
o f special rates a n d
o n comuodity paper w a s suggested
t o the
ninth district b a n k | was a w a y from the c i t y and the Agent
asked that it might be heldin abeyance until 1 returned,
which I did a week @
the duestion.
w
t e n days later.
w e then discussed
e were n o t i n sympathy w i t h t h e establish-
ing o f a preferential r a t e o n that character o f paper a t the
time o r a t this time.
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Federal Reserve Bank of St. Louis
T h e r e i s n o call f o r it, a n d there
245
was n o t then,
T h e Board immediately commenced burning u p
the wires, wanting t o know w h y w e had not established that
preferential rate.
T h e n Mr. MeAdon's appointee, Mr. Burke,
took i t u p o n h i m s e l f
t o advise t h e n e w s p a p e r m e n o f N o r t h
Dakota o f the fact that t h e Ninth District Banks iere discriminating against t h e farmer; t h a t w e were autnorized
to extend credit t o the member banks u p there a t a three
per cent rate a n d hage n o t established it, a n d that h e
proposed t o see that t h e b a n k did s o o r
a
s removed t o
some place where t h e y would a c t upon t h e suggestion o f the
Federal Reserve Board.
A f t e r the circular h a d been cor-
rected s o i t w o u l d p e r m i t u s t o t a k e a
warehouse r e c e i p t
instead o f a warehouse terminal receipt, w h i c h m d e i t
applicable t o conditions existing i n the Dakotas a n d
Montana, t h e wheat growing states, w e established, against
our better judgment, a
three p e r cent pate.
I t has n o t
been made u s e o f b y the member banks t o a n y extent.
Governor V a n Zandt:
I n our district w e considered
the p r o p o s i t i o n o f m a k i n g a
regular c o m m o d i t y p a p e r , i n -
cluding commodities o f non-perishable character.
quite a
W e had
discussion i n our board meeting about t h e thing,
for the simple reason that, w i t h wheat bringing t h e price
it was b r i n g i n g a t t h e t i m e ,
w e d i d not feel that w e should
in any Way encourage t h e storing o r holding o f wheat.
For
that reason o u r resolution w a s a s carefully worded a s i t
could b e a n d "get by" w i t h the circular.
F o r instance w e
say this-— but I will read you that resolution, i f I may:
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Federal Reserve Bank of St. Louis
246
“that the Federal Reserve Bank of Dallas, i n conformity i t h the Federal Reserve Board's circular o n ‘comuodity
paper', hereby establishes a preferential rate o f three
per c e n t o n c o t t o n o r c o m m o d i t y p a p e r h a v i n g n o t m o r e t h a n
ninety days t o run; i . e., promissory notes o f actual
producers,
w h i c h a r e specifically s e c u r e d b y approved
warehouse r e c e i p t s f o r c o t t o n a n d r e a d i l y m a r k e t a b l e c o m —
modities o f a non-perishable character, where i t i s cer-—
tified
t o this b a n k t h a t t h e m a k e r o f t h e n o t e i s n o t p a y -
ing a greater rate t h a n s i x per cent either a s interest
or commissions, o r both,"
In other words, w e veiled i t a s much a s possible,
so
as t o let them think that this was f o r cotton a n d for
nothing else.
banks
f course i f w e had h a d inquiries f r o m the
O
o n other p r o d u c t s
w e would h a v e h a d t o admit t h a t
it did cover other commnodities.
The Chairman:
I
f any paper i s entitled
to a
prefer—
ence i n r a t e - - ~ a t a n y r a t e i n normal t i m e s - — t h a t prefrer—
ence should b e extended t o the paper that i s the most cer-
tain of being paid a t maturity b y reason o f the sale o f
the g o o d s t h a t s
ecure i t , t h e selling o f t h e goods w h i c h
-pesulted i n the making o f the paper.
T h i s special rate
apparently does not conform t o good banking practice i n
that i t applies t o a transaction that is designed t o withhold goods f r o m sale rather t h a n t o create t h e sale w h i c h
will l i q u i d a t e t h e note.
O u r board w a s o f the opinion
that i f a n y preference i n rate should exist i t should b e
directed against this class o f paper rather t h a n i n favor
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Federal Reserve Bank of St. Louis
ike bir
On the other hand, w e have a l l recognized t h a t m a n y
people h e l d t h e v i e w that there w a s t h e possibility o f a
cricis a r i s i n g w i t h t h e c o t t o n p r o d u c e r
market w i t h his c r o p a n d getting a
i n getting i n the
good price.
O u r board
was c l e a r l y o f t h e opinion, w h e n t h i s m a t t e r c a m e u p , t h a t
there would b e n o crisis s o far a s the cotton producer w a s
concerned, t h a t h e would h a v e n o difficulty i n marketing
his c r o p t h i s y e a r a t a
fair price; t h a t i f d a n g e r d i d d e -
velop i t would arise through t o o high prices f o r cotton
which would l e a d t h e producer t o hold his crop «hen h e
A n d that i s about what h a s happened.
should sell it.
The
cotton i s selling a t a higher price t h a n anybody realized
or expected i t would, and - movement o f cotton s o far has
been rather slow.
Governor V a n Zandt:
N o b o d y i s storing cotton.
W e
have o n e note secured b y a warehouse receipt f o r cotton
under this commodity proposition,
Governor tiold:
5 7 bales.
I f there i s a n y commodity which i s
readily convertible i t is the one i n this district, t h e
wheat producing section.
w h e a t i s a necessity o f life,
in constant demand a n d always commands a
But w e o b j e c t e d
ready sale f o r cash.
t o t h e commodity r a t e circular,
methods w h i c h t h e y a t t e m p t e d
t o follow,
a n d the
n o t only with the
rate that w e should establish, b u t t h e rate t h e member banks
should charge.
I t was a dangerous t h i n g t o start.
The Chairman:
I n order t o make a
record that will b e
of interest i n connection with this matter, m a y I go around
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Federal Reserve Bank of St. Louis
table a n d a s k o n e o r t w o cuestions.
Governor S a w y e r , h a v e y o u e x t a b l i s h e d a
Governor Sawyer:
rate?
W w e have, b u t i n the first instance
our board declined t o put i n the rate.
A f t e r Dallas,
Minneapolis a n d St. Louis h a d put i t in, a n d t h e Board h a d
become v e r y i n s i s t e n t t h a t w e s h o u l d f a l l
hacgee es
W
i n line,
w e put
e have n o commodity paper.
The Chairman:
Y o u have n o commodity paper?
Governor Sawyer:
Governor Fancher:
H o g Sos
w e h a d advance information f r o m t h e
Information B u r e a u t h a t t h i s w a s C o m i n s o u t .
T h e matter
was discussed a t some length b y the board a n c w e were o f one
mind that there w a s n o occasion for a n y commnocity rates i n ovr
Cistrict.
W e had n o commodity t o move and there was n o
paper o f that sort that could properly b e made.
making a
preferential r a t e f o r t h a t c l a s s
o f paper,
as t h r e e p e r cent, w o u l d l e a d t o s o m e c o n f u s i o n ;
would a t t e m p t
t o convince
W e felt that
a s low
t h e banks
u s t h a t m o s t a n y s o r t o f paper w a s
commodity p a p e r a n d e n t i t l e d
t o t h e l o w rate.
T h a t would
lead t o further o b j e c t i m f r o m o u r larger member banks.
advised t h e Board, a f t e r w e r e c e i v e d t h e ClPCuUlLar,
positim
grams.
i n the matter,
O
n
n e
W e
o f our
r e c e i v e d several tele-
e o f them i n particular w a s quite a n insistent
telegram a n d w e were requested a l s o t o g o further i n t o t h e
matter b y letter,
A f t e r t h e receipt o f the letter f r o m
the B o a r d w
e communicated w i t h s o m o o f o u r Cirectors
to s e e i f t h e y h a d e::perienced
y
a n y .c h a n g e 3
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Federal Reserve Bank of St. Louis
249
of heart o r i f they viewed t h e situation differently.
hey d i d not, a n d t e advised t h e Board t o that effect.
In our next meeting o f the Board t h e matter was gone i n t o
very carefully a n d w e absolutely ceclined t o m k e a
Tne Chairman:
H a v e y o u h a d occasion
rate.
t o discount a n y
paper o f that character i n your district, Governor Fancher?
Governor Fancher:
W e have h a d n o paper o f that
kind a n d w e have h a d onlyone inquiry f r o m a bank i n Kentucky, which handles a
good deal o f tobacco, a n d When w e
informed t h e m o f the conditions t h a t were being imposed b y
the board a s t o a statement o n the note, a n d a s t o the
interest r a t e a n d commission, t h e y said that t h e y didn't
eare f o r a commodity rate i n that district.
The Chairman:
I t might b e interesting i f you would
advise u s a little more about your information bureau
out there; Mr. Fancher.
Governor Fancher:
I t i s the Bankers' Service Bureau.
We get i t from Washington.
W e had i t before t h e circular
was received.
The Chairman:
D i d y o u establish a
special r a t e f o r
commodity paper i n Atlanta, Mr. Foote?
Mr. Foote!
Y e s sir.
The Chairman:
Mr. Foote:
H a v e y o u discounted a n y o f that paper?
Y e s sir.
V e have had a large amount
and w e have n o t used a n y o f the five million dollar deposit
made b y the Secretary o f the Treasury.
a number o f notes, handling some, I
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Federal Reserve Bank of St. Louis
W e have handled
believe, e v e r y day,
250
but t h e a g g r e g a t e h a s n o t b e e n l a r g e d
T h e r e has been
a Ccisposition t o sell cotton i n the South, a n d these notes
have n o t been made t o stand out t o maturity i n every i n stance.
B y the terms o f discount t h e y c a n b e redeemed
and the unearned interest refunded
a t t h e rate charged.
In that w a y a good m a n y o f the leans w e have made have n o t
gone t o maturity, a n d I think that will continue t o be the
Our bank went into t h e matter rather enthusiastic—
ally a n d energetically f r o m both a sectional a n d national
point o f view,
w e felt very mech like helping that sec-
tion down there and putting every additional dollar o f
value i n t o cotton that w e could.
w
e alse felt that
every c o l l a r o f additional v a l u e t h a t w e p u t i n c o t t o n
would a d d s o much t o the national wealth.
uS like a
I t looked t o
good proposition f r o m every angle, f o r the
special r e a s o n t h a t a t t h e c o m m e n c e m e n t
o f the undertak—
ing i t was n o t generally aspreciated h o w short t h e cotton
crop w a s a n d h o w m u c h m o r e v a l u e t h e r e w a s i n it. I
tended a meeting o f bankers a t Galveston,
of our reserve banks.
ate
a s representative
T h e substance o f tke t a l k a t that
meeting was that the c r o p was going t o b e very much shorter
than anybody h a d a n y suspicion of.
T h a t meeting was
held i n August, a n d they felt that i n order that the
situation should b e stimulated there ought t o b e a certain
amount o f publicity attached t o the fact; t h a t there ought
to b e a sort o f educational campaign inaugurated looking
to the e n d o f bringing o u t those facts a n d encouraging
our people t o stand firmly a n d with courage.
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Federal Reserve Bank of St. Louis
A
s you
251
know, w e had a n advance o f about (15 a bale since that
time, since that time, have w e not, Governor V a n Zandt?
Governor V a n Zandt:
Mr> Foote:
N e a r e r twenty dollars.
Y e s , nearer twenty.
i f the crop i s
12,000,000 bales, there is something like $200,000,000
value a d d e d t o i t s i n c e t h i s p r o p a g a n d a w a s c o m m e n c e d
last August.
In a d d i t i o n t o that, g e n t l e m e n ,
w e are receiving t h e
highest price f o r cotton secd i n the history o f cotton
growing.
w e have n a d higher priced cotton i n days gone
by, b u t never have w e had a s high a price paid f o r cotton
seed.
T h a t h a s been a tremendous advantage a n d has
added a
great deal t o the revenues o f the south.
The Chairman:
D o y o u feel, Mr. Foote, t h a t f r o m n o w
on t h e r e i s a n y o c c a s i o n f o r a p p r e h e n s i o n
o r special
methods t o relieve t h e situation i n the cotton district?
Mir. Poote:
Y o u mean tnis present season?
The Chairman:
Mr. Foote: I
taken c a r e o f . I
Yes.
feel that the situation i s absolutely
d o not t h i n k t h e reserve s y s t e m i s needed
any more this season. I
think the South i s abundantly
able t o t a k e c a r e o f t h i s p r e s e n t c p o p w i t h o u t c a l l i n g
the s y s t e m f o r a
on
dime.
_Governor Fancher:
M a y I ask, Mr. Foote, what the
feeling w a s o n the part o f some o f the member banks a t
having a rate dictated t o them a t which t h e y should make
loans?
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Federal Reserve Bank of St. Louis
Mr. F o o t e ; A
good m a n y o f t h e m resented it.
I
t was
252
not popular.
M a t i s one reason w n y there hasn't b e e n
great m a n y
more c o m a o d i t y p a v e r o f f e r e d r e s e r v e banks. A
i t a n impudent i n t r u s i o n a n a there
of t h e b a n k s c o n s i d e r e d
were s o m e v e r y ecnuSstic e x p r e s s i o n s m a d e ,
w e a r e all talk-
v
ing i n confidence a n c are going t o b e frank.
e did not
take s o much stock i n the proposition, b u t w e felt that i f
we could touch the proper psycological cords i n public
opinion,
i f w e could stimulate p u b l i c opinion, t h a t w e
would a c c o m p l i s h t h e e n d a t w h i c h w e w e r e criving.
T h e com-
modity rate h a d not appealed t o u s particularly f r o m a n y
other standpoint.
understood t h a t o n e o f your Girec-
Govern@ Seay: I
tors f r o m Chattanooga m a c e t h e statement a t a meeting o f
the Advisory Council t h a t your directors t e r e opposed t o
the t h r e e p e r c e n t rate.
Mr. Foote:
H e was mistaken about that.
Governor Seay: I
know h e was, b u t h e expressed t h a t
opinion.
fr. Foote:
AsI
said, this impressed the cirectors
more a s p o L i t i i é a l matter.
I t appealed t o u s more i n
that way, more a s a material f o r campaign f o r the right sort
T h a t i s t h e w a y i t appealed
of publicity.
‘ill y o u p e r m i t
ter G p a= te :
So ae e s
t
h
t o us.
m e t o speed this m a t -
e table i n order t o
get a n expression f r o m each bank o n this subject.
Y o u
mow t h a t w e want t o play golf this afternoon i f possible.
Ve a r e u n d e r i n s t r u c t i o n s
we d o that.
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Federal Reserve Bank of St. Louis
I
f r o m Governor
f y o u will bear w i t h m e i
Wold
t o see that
will t r y t o m o v e
along a s fast a s possible.
Governor Aiken, w n a t i s your situation?
Governor Aiken:
y e have n o consicerable pressure,
There i s n o cemand f o r ea comsodity rate with us,
not have a n y commodity loans.
I t i s t h e occasional .
case w h e n a man hnypotnecates n i s cotton.
commodities
V e do
I f h e has a n y
o f that s o r t h e i s ordinarily i n second credit
and i s n o t e n t i t l e d
t o the preferential rate.
e a s eunale
there i s a more fundamental objeetion t o i t than lack o f
need f o r it.
M r . F o o t e s a i d that i t was cOnsidered m o r e
for political o r psycologhcal effect which they were trying
to produce,
M r . V a n Zandt, I
infer f r o m what h e said,
tried t o control a n d influence prices b y the rate.
aoes n o t s e e m t o m e t h a t i t i s a
I t
f u n c t i o n o f t h e Federal,
Reserve Banks t o m k e a rate the ultimate use o f vhich i s
to c o n t r o l
o r influence c o m m o d i t y prices. I
think i t i s
a very hazardous undertaking t o begin making rates f o r
purpose.
The Chairman:
G o v e r n o r Rhoads, w h a t have y o u t o
Governor Rhoads:
while I
W e established a
was a w a y o n m y vacation, under a
pressure,
commodity rate
great deal o f
w e h a d n o paper o f that kind offered, a n d w e
felt that i t was i n Girect conflict w i t h the efforts
the D e p a r t m e n t
o f Justice
i n its d e s i r e
o f
t o break u p re-
straint o f trade a n d prevent t h e artificial h o l d i n g u p o f
the price o f any commodity.
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Federal Reserve Bank of St. Louis
The Chairman:
G o v e r n o r McDougal?
Governor McDougal:
O u r board o f directors considered
264
the matter a n d w e found n o o c m sion f o r t h e establishment
of a rate lover t h a n the rate w e already have,on commodity
proper o r O t u e r paper,
There i s one danger i n this rcgulation that
Van Zanct h a s touched u p o n bery forcibly, I
espress
2 t 2 5 this “vay:
think.
f i e PsSEE
T h a t commodity paper without
some restrictions o r restraints should never be:given a
preferential rate.
T h e r e a r e t w o things t h a t center into
commodity p a p e r w h i c h m u s t b e v e r y c a r e f u l l y considered,
The first i s the maker o f the paper, a n d not the comnodity
behind it.
I f the responsibility o f the maker i s not
ample w e would n o t touch commodity paper, a n d t h e establishment O f s u c h a
rate w o u l d c o u s e a n i n c r e a s e
o f speculation
by DPresponei bie J n c i v i ¢ u a l s a n d firms.
The Chairman:
a v e y o u discounted a n y paper o f
that c h a r a c t e r ?
Governor iicDougal:
Governor Rhoads:
N o .
H a v e y o u n o t discounted s o m e paper
on 6828?
Governor iicDougal:
of t h a t character.
t
N o , w e have n o t discounted anyfpaper
e have discounted s o m e paver o n
eggs, but, judging from the breakfast I had this morning,
they w e r e p e r i s h a b l e .
Cnairman:
Hoxton:
t h e t i s tue sittation
i n St. b o v i s ?
O u r executive comnittee f e l t t h a t there
wos n O n e e d f o r t h e rate.
I
t was established under s o m e
pressure a n d after v e had received information that other
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Federal Reserve Bank of St. Louis
255
banks h a d established it. I
think t h e sense o f our c o m —
mittee w a s that there was n o need f o r the rate i n our district. F u r t h e r m o r e t h e r e was t h e objection that i t would
overbalance certain rates i n parts o f o u r district which
vere already perfectly f a i r a n a just a n d which were based
on s u p p l y a n d c e m a n d a n d t h e r i s k involved.
w
e realized
at that time that there was n o t a gounmt o f distressed c o t ton i n our district, a n d w e knew that t h e ©
was @imed directly a t cotton.
mma@ity rate
H o w e v e r , w e m a d e t h e rate.
I do not suppose t h a t a n y cotton leans were m a d e i n our
bank t o take advantage o f t h e rate. I
loan from Indiana. I
think w e had a whiskg
do not recall one loan o n cothon
that h a s taken advantage o f the commodity rate.
Tne Chairman:
H a v e y o u established s u c h a
Governor Kains?
Governor Kpins:
Y e s sir.
W e have established a
rate o f five p e r cent, I believe.
I , myself, consider
the imposition o f a rate f r o m above vicious a n d dangerous.
The Chairman:
D i d y o u s a y five p e r cent?
Governor Kains: I
said so, sir.
Governor Aiken: I
would like t o know how you sot a
five p e r c e n t c o m m o d i t y r a t e a p p r o v e d ?
Governor Kains: I
approved. I
do not know that we did Het i t
knoww
e thought w e would like t o make a
cession to the Board on that.
that I
W e have certain Wheat loans
believe w e r e m a d e u n d e r t h a t rate.
districts t h e m s e l v e s a r e t h e b e s t j u d g e s
should govern; I
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Federal Reserve Bank of St. Louis
con-
B u t 1
think t h e
o f t h e rates t h a t
believe t h a t t h e y should make t h e rate
256
and advise t h e Federal Reserve Board, a n d that t h e Board
should a p p r o v e i t ,
The Chairman:
H a v e y o u a n y loans o f that character?
Governor Kains: I
were s o m e m a c e w h i l e I
deal. I
have not myself, but 1 think there
was away. I
have b e e n a w a y a
think there vere some loans f r o m Washington
Oregon t h a t g o t t h a t rate.
The Chairman:
W
e have n o w h a d a n expression
of
views f r o m all o f those present, and,far t h e purposes o f
the record, I
will s u m m a r i z e i t .
i
t seems that a l l o f
the banks entertain t h e view that the making o f the special rate was, t o a greater o r less degree,
a n imposition
upon them, o r a n attempt t o impose this rate w a s made b y
W a s h i n g t ot anwhere
h;t
the rates w e r e eStablished
a t three
per c e n t v o r y lLittie a d v a n t a g e h a s b e e n t a k e n o f t h e rate;
that i n the cases o f Atlanta a n d Dallas t h e limited u s e o f
the rate f o r t h e assistance o f the cotton situation,
i f it
had a n y effect a t all, w a s more psycological a n d political
than actual i n placing credit a t the disposal o f the cotton grower.
T h a t i s the impression I gather f r o m the
statements m a d e around t h e table.
Governor Fancher:
M a y 1 ask Governor Seay if he has
had v e r y m u c h o f that?
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Federal Reserve Bank of St. Louis
Governor Seay:
T h e y a r e o n t h e increase,
a n d m y sur-
is that t h e y are likely t o grow, w i t h cotton a t preprices.
W e disoount fifteen o r twenty a day, I
rec-
apparently t h e y a r e growing.
Chairman:
B u t y o u are doing that more f o r the
mills t h a n for t h e growers?
Governor Seay:
The Chairman:
N o , w e are not.
Y o u a r e doing i t f o r the cotton grower?
Governor Seay:
Y e s .
Governor McDougal:
I t i s stored i n public warehouse
in order t o make i t eligible,
Governor Seay:
i s i t not?
I n inegrporated warehouses.
(Informal d i s c u s s i o n f o l l o w e d w h i c h t h e r e p o r t e r w a s
directed not t o take.)
The Chairman: I
omitted t o state that the Federal
Reserve B a n k o f New York h a g established n o commodity rate
and h a s d i s c o u n t e d
n o c o m m o d i t y paper.
W
e advised t h e
Federal Reserve Board o f the views o f our board a n d suggested that w e would s e n d a committee o f o u r board t o Washington t o discuss t h e matter,
decd t o have a
o r w e would b e very glad i n -
committee o f the Federal Reserve Board meet
our board i n New York a n d discuss i t , t o see i f w e could,
by a n exchange o f views, agree o n one course o r another t o
be p u r sucd
i n N e w York.
has b e e n e s t a b l i s h e d
U
p t o t h e present
time
n o rate
i n New York a n d w e have simply advised
the B o a r d t h a t w e d i d n o t b e l i e v e
i n this methof o f pro-
cedure.
Governor Seay:
pened i n our case.
M a y 1 explain very briefly what hapW e were advised b y wire t h a t the banks
of Atlanta a n d Dellas h a d established these rates a n d that
they h a d done s o afterhaving b e e n previously communicated
with o n the subject.
T h a t came i n after o u r board h a d h a d
a meeting a n d considéred t h e whole subject a t m y instance,
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Federal Reserve Bank of St. Louis
258
tnat i s , t h e subject
o f rates f o r t h e c a n i n g season.
I wrote v e r y strongly o n the subject t o the board, expresing
the same views y o u have expressed:
T h a t i t would encour-—
age the speculative holding o f com.odities; t h a t i t Was n o t
justifiable;
t h a t i t would b e pernbcious;
encourage c r e a t i o n o f a
character
t h a t i t did not
o f paper,
i n tne first
place, that it was desirable for Federal Reserve Banks t o
handle.
We r e c e i v e d s e v e r a l w i r e c o m : u n i c a t i o n s
ject a n d finally I wrote a
o n the sub-
letter t o that member o f the
Board w h o i s the presiding diety i n our
and asked privately i f i t was t h e opinion o f the
Board t h a t , u n d e r a l l t h e c i r c u m s t a n c e s , t
i would b e judicious a n d w i s e t o e s t a b l i s h t h a t r a t e -
H
e replied that,
speaking f o r the majority o f the Board, t n e y h a c come t o
the conclusion that i t would b e judicious o n d wise t o ¢ s —
tablish that rate voluntarily a n d expressed t h e hope t h a t
we would fall i n line.
resolution
W e d i d so, b u t w e couchec o u r
i n somewhat t h i s way:
"That this bank, desiring t o act i n harmony With the
views o f , a n d t o carry o u t a n y policy determined t p o n b y
the F e d e r a l Reserve, f i x e d a
rate o n c o m m o d i t y p a p e r a t
three p e r cent subject t o review a n d devermination o f the
Board." :
The Chairman:
I n our communications w i t h the Federal
Reserve Board, i n each instance, w o said that our action
in establishing a n y such rate should n o t b e considered a s
evidence o f any reluctance o n our part t o extend accommo-
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Federal Reserve Bank of St. Louis
259
dation t o a n y o t h e r r e s e r v e b a n k w h o n e e d e d a c c o m m o d a t i o n
in c o n n e c t i o n w i t h t h e i r l o c a l e f f o r t s
t o take c a r e o f
the cotton situation, f o r instance, a n d that w e stood ready
to a d v a n c e a n y a m o u n t r e q u i r e d f o r t h a t purpose,
which m i g h t b e m u t u a l l y a g r e e d u p o n a s fair.
a t rates
T h e only
argument w h i c h I could advance a t o u r meeting i n favor o f
the e s t a b l i s h m e n t
o f the special rate f o r commodity paper
was t o m a k e u s e o f t h a t r a t e a s t h e b e s é r a t e i n d e t e r m i n -
ing what rate o n rediscounts should b e astablished f o r
loans t o other Federal Reserve Banks.
Y o u see our minimum
discount rate i n New York is four per cent.
Governor Seay: L
also Stated that difficulty t o the
Board.
The Chairman:
I
f the other reserve banks
o f the
South were taking large amounts o f commodity paper a t tnree
per cent, a n d o u r m i n i m u m r a t e w a s f o u r p e r cent,
i t made
a very d i f f i c u l t s i t u a t i o n t o d e a l w i t h i n rediscounts
for the southern banks. I
think i t was generally felt
at our meeting that i f occasion d i d arise f o r the southern
panks
t o rediscount
with
u s i n any large quantity
the com-
modity p a p e r t h a t w a s t a k e n i n a s s i s t i n g t h e c o t t o n growers,
we would t h e n have t o consider a
pehalf;
special rate anyway i n their
b u t a s t o o u r o w n district
was n o o c c a s i o n w h a t e v e r
w e c o s i d e r e d t h a t there
t o establish a
rate o f three p e r
cent o r a n y S p e c i a l r a t e t o t a k e c a r e o f t h i s c l a s s o f
paper.
Governor McDougal:
to s a y t h a t I
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Federal Reserve Bank of St. Louis
i f i t i s i n order, I
made t h e s t a t e m e n t
would like
t o Mr. H e A d o o t h a t I
believec
260
the e s t a b l i s h m e n t
o f a n y rate b e l o w four p e r cent i n our
LPLCt w o u l d b e inadvisable, I
said t h a t f o r t h e reason
that m o n e y i s w o r t h f o u r p e r cent.
O t h e r banks a r e pay-
ing three a n d four, a n d above that, i n some parts o f the
district;
a m i t seems t o m e that a n y reduction below that
figure w o u l d o n l y s e r v e t o d e m o r a l i z e a
already badly demoralized.
M
situation t h a t w a s
y opinion i s that the reduc-
ing o f the rate i n any o f the districts b e l o w four p e r
cent has been a mistake, a n d i f it is i n order I would like
to h a v e a n e x p r e s s i o n h e r e f r o m t h o s e p r e s e n t
opinion o f t h a t matter,
a s t o their
P h e m a t t e r o l “discounting o f r e —
d&scounting f o r your member banks i s a subject t h a t should
not b e confused w i t h the matter o f buying warrants a n d
acceptances.
T h o s e rates a r e rates t h a t
street f o r securities t h a t a r e i n wide demand a n d naturally
go lower.
f
t would like v e r y much tohave a n expression o f
opinion o n that.
The Chairman:
I s not that pretty well evidenced b y
the lawful rate n o w established a n d maintained?
F o u r
per cent i s a minimum rate f o r discounts f o r member banks
in all cistricts but one, where I believe there i s a minimum r a t e o f t h r e e a n d a
half p e r c e n t f o r s h o r t p a p e r m a t u r -
ing i n ten days o r thirty days, o r something like that.
G o v e r n o r iicDougal:
T h e r e
i s o n e feature
o f t h i s mat-—
ter that I think should b e given consideration b y those
who have i t i n mind, a n d that i s that after a l l the depositor,
t h e saving Gepositor a n d t h e individual depositor
are t h e people w h o a r e loaning t h e money.
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Federal Reserve Bank of St. Louis
T h e y a r e enti-
261- 4,
I f you are going t o crive interest
tiled t o something.
rates down, o f course that means a
to which they are entitled.
readjustment o f the rates
W e estimate t h a t t h e y are get-
ting a s fair a rate n o w o n deposits a s they c a n get.
hesitate t o g o around the table again
The Chairman: I
for individual expressions o f opinion off this subject.
i t
2ccomr-. would take i n the neighborhood o f half a n -hour L O
plish it.
Governor McDougal: I
Mr. Chairman, I
think we understand i t pretty well.
I f you will offer a resolution t o b e
The Chairman:
voted upon, I
will n o t a s k y o u t o d o that,
think w e will g e t just t h e expression O r
views that y o u want.
Governor McDougal: I
move that,
question o f rates f o r r e d i s c o u n t
meeting t h a t t h e a d o p t i o n o f a
i n considering t h e
i t i s t h e s e n s e o f this
rate b e l o w f o u r p e r c e n t i n
any district, under prevailing conditions,
i s jnadvisable.
I would like t o have t h e Secretary f o r m that resolution
and put i t vroperly-
The Chairman:
W e will ask Mr. Curtis t o read the
resolution.
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Federal Reserve Bank of St. Louis
Mr. Curtis:
I t is moved that i n considering the rates
of d i s c o u n t t h e a d o p t i o n o f a
rate o f f o u r p e r c e n t i n a n y
inadvisdistrict under prevailing conditions i s considered
able b y t h i s contierence.
Governor McDougal: I
this way:
might temper that a lattice 1 2
want
T h e timo w i l l come w h e n w e will probably
to put, a n d p r o p e r l y 5 0 , a
slightly l o w e r r a t e o n v e r y
Lo
Short t i m e paper, f i v e o r t e n day: paper.
S a )
T h e banks i n
Chicago, tr. Chairman, have indicated that one o f these
hey m a y w a n t t o s e c u r e s h o r t t i m e a c c o m m o d a t i o n s
The Chairman: I
will a s k “r- C u r t i s
t o read that
with t h e a c d i t i o n t o it.
Hr. Curtis:
I t is moved that i n considering the
rates f o r r e d i s c o u n t
o f commercial p a p e r
the C o n f e r e n c e t h a t t h e a d o p t i o n o f a
i t i s t h e sense o f
rate o f less t h a n
four per cent tin any district, uncer prevailing conditions,
is inadvisable, except f o r five o r ten d a y paper.
Governor McDougal: I
should like t o change that a
little bit, t o imply that the placing o f these rates u p
to t h e p r e s e n t t i m e h a s n o t b e e n warranted-
R
e cannot
tell what t h e future will bring forth.
Governor ‘.old: I
do not believe I
will b e prepared
to s u p p o r t t h a t r e s o l u t i o n a s i t i s worded, G o v e r n o r Mc-~
Dougal.
Governor iicDougal:
I
f w e l e t i t apply u p t o the p r e -
sent t i m e - - -
Governor ‘old: (Interrupting)
— < s o m e w h a t of
a eriticism o f the banks, including our own, that have
establis h e d a
three p e r c e n t rate.
I
f y o u could frame
that s o that i t would apply t o existing conditions, t h a t is,
not justify t h e establishment o f a rate a t this time o f
less t h a n f o u r p e r c e n t u p o n a n y c l a s s o f paper,
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Federal Reserve Bank of St. Louis
i t would
be petter.
Governor McDougal:
U n d e r conditions w h i c h have c x -
that suit you?
Governor Wold:
U n a e r t h e conditions t h a t exist now.
Governor MeDougal:
W e r y well, l e t i t b e that way.
I want t o s a y that i t i s t h e farthest thought f r o m m y m i n d
to c r i t i c i s e t h o s e present.
I
t i s plainly evicent t h a t
this r a t e h a s b e e n f o r c e d u p o n t h e b a n k s a n d h a s n o t b e e n
initiated b y the banks themselves, generally speaking.
The Chairman: I
to get o n the record a
gather t h a t w h a t i s i n y o u r m i n d i s
statement t h a t conditions u p t o the
present time have shown t h e wisdom o f the course o f the
reserve banks i n not reducing rates generally below four
per cent.
Y o u d o not w a n t t o impose u p o n t h e meeting t h e
impression o r view that t h e y m a y not fecl justified i n establishing a lower rate i n the near future?
Governor McDougal:
N o .
w e cannot s e e What i s
of us, o f course,
Mr. Hoxton:
I s i t nota fundamental function o f
bank o f this nature, a
State bank, o r a central bank,
will call it, t o s o regulate rates tnat t h e y shall b e reduced until t h e money begins t o flow o u t a n d then raised
when the demand gets t o o strong?
I s not that t h e Duropean
plan?
The Chairman:
M r . Hoxton, t h o s e rules w o u l d a p p l y
in this country t o this n e w bankingsystem, h a d w e been i n
business l o n g enough t o accumilate a
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Federal Reserve Bank of St. Louis
large line o f loans
265
and h a v e a
position
o n b o t h s i d e s o f t h e market,
W
e
are n o w o n l y o n o n e s i d e o f t h e market, a x c e p t a s t o t h e
three southern banks,
-
W
e can only lend the moncy.
We cannot s t o p lending money a n d take i n our loans, b e -
cause we haven't any, t o speak of,
Governor Seay:
W e could d o that i f w e h a d sufficient
resources,
Mr. Hoxton:
I s not that t h e ultimate end?
The Chairman: U l t i m a t e l y , undoubtedly.
Mr. Foote: C o u l d not we have the resolution of
Governor S e a y s o framed a s t o get ovor the present situation?
T h i s present commodity l o a n i s a
passing thing.
Short time. I
because I
temporary a n d
l L imagine i t widl clear o f f within a
do not want t o vote against y o u gentlemen
believe y o u r v i e w s a p e p e r f e c t l y s o u n d ; I
think
you are exactly right about it, but those o f us who have
been indulged,
w h o have t h i s rate, a r e i n a
close place.
Our boards have promulgated the rate and w e d o not like
to vote against their decision.
W e d o not like t o vote
against the Reserve Board, i n view o f the fact that w e
have p a r t i c i p a t e d
i n t h e benefits;
a n d inasmuch a s i t i s a
temporary thing, c o u l d not t h e resolution b e s o framed thht
present o f f e n s e s c o u l d b e e x c u s e d a n d t h a t f u t u r e a c t i o n s
be safeguarded?
The Chairman: I
Foote, i
was j u s t thinking about that, Mr.
believe that what Governor McDougal h a s i n mind—-
and I have discussed i t with h i m a t various times-—— i s
something a little different t h a n the v e r y specific resolution tliat h e has offered. I
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Federal Reserve Bank of St. Louis
would like very much t o see
266
this meeting pass a
resolution, Governor McDougal, s o m e -
thing t o this effect:
T h a t i t i s t h e sense o f the meeting
that t h e Federal Reserve Banks, b y rate reduction o r b y
no other method, should contribute i n any w a y t o the e x pansion that i s n o w taking place i n this country i n dangereus fashion;
a n d i t i s the sense o f the meeting that a
conservative course requires t h e maintenance o f rates w i t h
due regard t o this period o f enormous expansion.
Now,
t o enlarge u p o n t h a t a
letter. I
d o not k n o w
whether y o u gentlemen realize t h a t t h e clcaring house banks
in New York, 6 4 i n number, h a v e increased their .eposits
since November, 1914, from $1,900,000,000 t o ‘%3,100,000,000.
They h a v e i n c r e a s e d t h e i r c e p o s i t s
welve hundred million dollars.
b y between e l e v e n a n d
T h e y have increased
their loans, b y last week's statement,
i n the neighbor-
T h a t i s about a fifty per cent
hood o f 750,000,000.
increase, roughly speaking,
i n the deposit
a n d loan ac-
counts o f the N e w York clearing house banks.
expansion h a s e v e r b e e n w i t n e s s e s b e f o r e
It i s s i m p l y t h e p r o c e s s
structure
o f erecting
o n t h e t o p o f this b a s i s
N
o such
i n this country.
a n enormous c r e d i t
of
r e s e r v e s
plus t h e g o l d that they have imported f r o m Burope.
c
e
what Governor McDougal h a s i n mind i s the declaration o f
a poligy o f conservatism o n the part o f the Federal Reserve
Banks i n throwing their enormous resources i n t o this process o f expansion, ,
I
a m strictly f o r i t and would like
to see i t pass.
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Federal Reserve Bank of St. Louis
Governor McDougal:
T h a t would cover t h e situation
267
satisfactorily, I
think, s o far a s I
a m cmecerned;
but I
wanted t o get something which might serve t o put the
brakes o n i n Washington, t h a t is, o n the tendency which
has developed o f initiating rates i n our district.
W e
believe t h a t should b e left entirely t o the judgment o f
our boards,
The Chairman: G e n t l e m e n , t h i s resolution i s assuming
more i m p o r t a n c e t h a n I
attributed
t o i t a t t h e outset.
When w e have h a d t o deal with a matter o f this sort i n
the past w e have generally asked t h e stenozrapher t o leave
space i n his record a n d have asked ifr. Curtis t o prepare
a resolution,
i n collaboration w i t h the Governor w h o offer-
ed it, a n d s u b m i t i t l a t e r a t o n e o f o u r s e s s i o n s f o r dis-—
cussion and vote,
I n order t o m k e progress I should
like t o suggest t h a t w e f o l l o w t h a t c o u r s e w i t h t h i s r e s o lution.
;
Governor Van Zandt: I
nection that t h e resolution,
would like t o say in that cona s offered b y Governor McDoug~
al, seems t o m e more i n the nature o f a criticism o f a few
of u s whose boards h a v e established a
lover rate t h a n four
per cent, a n d i t looks t o m e like i t i s a little uncalled
FOr.
If i t i s the sense o f this conference t h a t a more conservative action b e taken i n the establishment o f rates,
why, t a s t i s all well a n d sood; b u t t o say that just
at present,
i n the face o f some o f the banks t h a t have e s -
tablished a
lower rate t h a n four p e r cent, i t i s
demned, does not strike m e very ple santly.
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Federal Reserve Bank of St. Louis
t o b e con-
268
a m satisfied Governor McDougal
The Chairman: I
had n o such intention, b u t I
“ N e can take u p the discussion
the interest o f progress.
later w i t h a
a m making t h e suggestion i s
specific r e s o l u t i o n a f t e r i t h a s b e e n > r e p a r e d
and submitted t o the meeting, a n d see i f w e cannot meet
everybody's v i e w s , a n d m a k e a
unanimous e x p r e s s i o n a s t o
rate policy.
vant t o s a y that I
Governor Wold: I
do not take t h e
40. 10%
game v i e w o f i t that Governor V a n Zandt takes. T
lmow but whet w e a r e subject t o some censure f r o m the
Board o f Governors.
Mr. Foote:
J u s t i n the interest o f progress I
would susgest that t h e preamble t o that resolution n o t
rate, b u t just announce a
undertake t o state a
principle
and not take t h e details i n t o considcration.
The Chairman:
T h a t i s what 1 attempted t o suggest,
Me. Foote, a n d I understood,
b y a nod b y Governor Mcboug-
als that that w a s what h e h a d i n mind.
T h a t i s entirely satisfactory.
Governor McDougal:
The Chairman:
I f i t i s agreeable w e will pass this
subject a n d a s k Mr. Curtis a n d Governor MeDougal,
=
first opportunity,
e
a
t o crait a
to the Conference.
a t their
resolution t o b e submitted
w e will ¢ eo a n e a c w i t h t h e n e x t
COOus.
The next topic, w h i c h naturally folaows thequestion
of rates, i s No- 24:
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Federal Reserve Bank of St. Louis
269
24. A D V I S A B I L I T Y O F LIMITED O P E N MARKET TRANSAC+
TIONS.
May I suggest that this matter h a s already b e e n partly
discussed i n connection w i t h domestic acceptances, under
Section 14?---
Governor Fancher: (Interposing): I
topic f o r d i s c u s s i o n a n d I
The Chairman:
suggested that
withdraw it,
G o v e r n o r Fancher withdraws this f r o m
discussion a n d also f r o m the program,
a s i t has already
been dealt w i t h b y special letter t o the Federal Reserve
Board, a n d w e have already discussed i t a t some length.
I think w e c a n d i s p o s e
o f topic N o - 1 0 , suggested
by
Governor Aiken,
LO. I N F O R M A T I O N GIVEN T O MEMBER BANKS.
(a) Within own district, and
(b) O u t s i d e of own district.
The Chairman: G o v e r n o r Aiken, will you start the
discussion?
Governor A i k e n :
T h a t matter w a s brought a b o u t
by
a complaint made t o me b y one o f our large banks i n Boston, which reported t o m e that t h e y were having inquiries
constantly f r o m o t h e r F e d e r a l R e s e r v e B a n k s
i n regard t o
the standing o f some o f their correspondents
i n the dis-
trict;
t h a t they answered a s fully a s they could from
their f i l e s a n d records;
t h a t t h e y i n turn inquired o f
the Federal Reserve Banks,from whom incuiry came, a s t o
the banks i n the Federal Reserve Bank's district, a n d were
told that t h e Federal Reserve B a n k did not care t o give o u t
the information.
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Federal Reserve Bank of St. Louis
T h e y raised t h e point a n d made t h e c o m —
270
plaint that i f the Federal Reserve Banks accepted information from reserve c i t y banks a s t o their correspondents,
that there should b e a reciprocal arrangement. i
beLteve
tne credit m a n o f the b a n k explained t o m e that i t was the
established practice o f the Federal Reserve Banks t o give
no information.
H
e said t h a t being s o h e thought t h e
Federal Reserve B a n k ought t o stop asking t h e m for -information.
The Chairman:
T h e r e i s a good rey.
matter, Governor Aiken,
i f w e c a n adopt a
t o deal w i t h timt
uniform policy
here, a n d that i s t o have i t understood that every Federal
Reserve Bank, having occasion t o make inquiry about a
member
bank i n some other Federal Reserve Sank's dis trict, should
acdress that communication t o tho Federal Reserve Dank i n
the cistrict i n which the member b a n k i s located.
I f that
is done i t will b e very satisfactory a n d demonstrative o f
the importance o f having e a c h Federal Reserve B a n k thoroughly posted a s t o the condition o f all member banks i n
their o w n district,
O
f course t h e o n l y w a y i n which t h e y
could g e t complete information, w h i c h they should have, i s
from t h e e x a m i n e r ' s r e p o r t ;
a n d a g a i n we. g o a r o u n d i n a
circle a n d get back t o the same subject o f either conduct-
ing a n examination o f the member banks ourselves o r having
access to the reports to the Comptroller. T h i s is a case
yhere I would like t o offer a resolution, i f I may. I
will offer a resolution declaring i t t o b e the sense o f
this meeting that any inquiries b y Federal Reserve Danks i n
regard t o the condition o r management o f offairs o f member
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Federal Reserve Bank of St. Louis
i 68
panks o f other districts should b e cirected t o t h e Federal
Reserve b a n k o f the district i n which the member b a n k i s
located; a n d that replies t o those inquires should b e a s
complete a s possible, a n d whenever t h e information i s
available f r o m the office o f the chief examiner, t h a t
that s h o u l d b e m a c e t h e basis
Governor Kains:; I
Governor Aiken:
o f t h e roply.
will second that motion.
T h a t just misses the point I meant
to raise, Mr. Chairman,
F o r instance.
i f Mr. w o l d i s
checking u p one o f his banks a n d writes a n d asks t h e bank
of Boston i n regard t o their relations w i t h t h e North-
western National Bank o f Minncapolis, a n d that was the
specific type o f case about which complaint w a s made t o me--The Chairman: ( I n t e r p o s i n g )
I f h e vrites y o u a n d
asks you t o inquire o f the First National Bank o f Boston
in regard t o a bank i n Minnesota, a n d you direct the in-
quiry to the First National Bank of Boston, you would get
the information from them, and you would not disclose t o
the F i r s t N a t i o n a l B a n k o f B o s t o n t h a t t h e M i n n e a p o l i s
Reserve Bank was making a n inquiry, o r give the First National Bank o f Boston any occasion t o ask Governor ‘old for
information a b o u t b a n k s
Governor Aiken:
h
i n h i s district.
e resolution a s offered b y you
recites s p e c i f i c a l l y b a n k s w i t h i n t h e d i s t r i c t
o f the bank
of w h i c h i n q u i r y w a s made,
Mr. Curtis:
A S a matter o f fact y o u want t o cover
poth.
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Federal Reserve Bank of St. Louis
(After f u r t h e r i n f o r m a l d i s c u s s i o n t h e S s e r e t a r y w a s
272
requested
t o read t h e pending motion, w h i c h w a s r e a d a s
follows: )
Move@, T h a t i t i s t h e s e n s e o f t h e C o n f e r e n c e t h a t
requests f o r information concerning member banks desired
from banks
i n a n y cistrict s h o u l d b e addressed
t o the
Federal Reserve Bank of that district.
(The motion, v e i n g d u l y seconded,
The Chairman:
T h a t covers both items (a) and (b).
Governor Fancher:
M r . Chairman,
matter c o m e s t h e m a t t e r
The Chairman:
w a s carried.)
i n connection with
o f c r e d i t information.
T h a t i s further c o w n o n the program,
Governor Fancher,
Governor Fancher:
The Chairman:
A L L Pignt, sir.
D o you think i t would b e possible t o
undertake a discussion o f Item No. 8 , daily settlements
in the gold settlement fund, without opening u p the whole
subject o f clearances?
Governor Fancher: I
The Chairman:
think not.
S u p p o s e w e proceed w i t h No.9:
Qe F U N C T I O N S T O B E EXERCISED I N BEHALF O F MEMBER
BANKS.
(a) Collecting o f notes and drafts.
(b) Collection o f items not comered b y present system.
Collection o f items drawn o n banks n o t
members o f the Federal Reserve System.
Execution o f orders f o r securities.
Answering inquiries a s t o credits.
Purcnase o f commercial paper.
The Chairman:
my suggestion,
had f r o m a
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Federal Reserve Bank of St. Louis
T h i s i t e m was p u t o n the program a t
a s the result o f a recent inquiry that w e
member b a n k i n o u r district.
T h e President
of
273
a Small country bank vrote a n d told u s that w h e n the n e x
transfer o f reserves t o o k place i t would reduce h i s balance
Weun tie -OLner depositary,
o r the Other reserve agent.
to
such a point that h e felt h e could n o t g e t service f r o m o m
either, u n l e s s
h e c o n s o l i d a t e d h i s account;
t h a t h e would
now l i k e t o t r a n s f o r h i s e n t i r e r e s e r v e b a l a n c e
t o the
Federal Reserve Bank provided h e could b e sure w e would do
everything f o r h i m that h i s correspondent h a d been i n the
habit o f doing,
The lettor that I referred to specified certain things that would b e required i n the way of
service i n New York, s u c h a s buying commercial paper, r e porting o n credits, collecting notes a n d ¢rafts a n d s o on.
In anticipation o f this meeting I addressed a
letter
to the Reserve Board about it, a n d since leaving this
circular letter has been sent o u t t o all o f the Federal
Reserve Banks.
I t might b e a good plan t o read paragraphs
of this letter a s they come u p for discussion o n our pro-
gram.
9-{a) C O L L E C T I N G O F NOTES ANDURAFTS.
The next item, 9-(a), i s collecting of notes and
irafts.
T h e Federal Reserve Board, i n a letier o f October
15, ruled that there i s no doubt whatever that the Federal
Reserve Dank may collect notes and arafts, sent out h a
by member banks f o r collectiog, holding that i t i s one
of the implied powers necessarily incident t o the business
of t h e r e s e r v e banks.
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Federal Reserve Bank of St. Louis
Is there a n y discussion o f the m i t e r ,
o r i s i t satis-
274
factory t o have i t g o o n the record a s a ruling f r o m the
Federal Reserve Board which makes t h e matter entirely
clear?
Governor Wold:
Governor Strong. I
permits a
I
t depends u p o n h o w y o u l o o k o n it,
cannot s e e anything i n the A c t that
bank t o take a n y collections,
been u p before t h e Board before. I
very thoroughly.
T h e matter h a s
think w e discussed i t
O u r p o l i c y h a s b e e n t o collect o u r drafts
and notes t h a t w e have discounted, a n d t h e counsel have
held that w e nave a
perfect right t o collect a l l bills
that w e own, a n d whether this refers t o a general colf#ection business,
o r s i m p l y t h e b i l l s t h a t w e h a v e discounted,
he Act reciteé what w e m a y take o n deposit a n d what w e
may Ciscount.
W
e are not permitted
t o take notes ordrafts
on deposit.
The Chairman:
N o , b u t the board held that i t i s
necessarily a n incidental power t o the banking business
for the banks t o b e able t o collect notes a n d crafts f o r
member banks; n o t t o receive t h e m o n deposit f o r immediate credit, necessarily, b u t t o receive t h e m f o r collection.
Governor W o l d :
B u t this refers
t o those received
o n
deposit.
The Chairman:
N o .
Governor Fancher: A
power indidental t o receiving
the deposits.
Governor Wold:
h
can receive o n deposit.
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Federal Reserve Bank of St. Louis
e l a w i s specific a s t o what t h e y
W e cannot elaborate u p o n that,
can we?
The Chairman:
effect a
T h i s gives rise t o a deposit w h e n y o u
collection.
G o . e r n o r Wold, take t h e case o f
the bank that I referred to,
I t is not a large enough
bank t o carry a deposit t o compensate s o m e correspondent
for the service o f collecting notes anddrafts.
A t the
enc o f a couple o f years a l l o f the reserves t h e y have
carried o n deposit w i t h the reserve agent will b e i n our
hands a n d getting n o interest > . . .
a n d they naturally
will want t o get a maximum o f service i n return f o r that
money .
s u p p o s e w e require t h e m t o send all their c o l -
lection items through some other collecting channel i n
the Reserve Bank:
W h e r e i s i t going t o leave the member
bank?
Governor Wold: I
think i f w e leave that problem
until t h e three-year period comes o n i t will adjust i t -
self. T h e r e i s no use crossing the bridge n o w and as-~
suming those functions until i t i s necessary. i
believe
i t e v e r w i l l b e necessary.
a0 net
T h a t i s one point
that you and I do not agree upon.
The Chairman:
H o x will the member bank collect its
coupon n o t e s a n d d r a f t s ?
Governor Wold:
country bank, I
I n my judgment, if 1 were running a
would n o t carry money i n the Federal
Reserve Bank without interest that I might put i n another
bank a n d g e t interest upon,
The Chairman:
the other bank...
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Federal Reserve Bank of St. Louis
B u t i t dees n o t count a s reserve i n
H
e might, t o be sure, get two per cent
276
interest o n the account, b u t i f h e used t h e money a t a
time---
Governor Wold:
H e has g o t t o maintain a n excess
balance with tho Federal Reserve Bank in order t o have
H e cannot u s e
any working balance t o come a n d g o on.
his reserves t o transact business with--- h e has g o t t o
have a n excess
t o t r a n s a c t business.
H
e cannot r u n down
to t h e minimum.
(At this point a n informal discussion took place
which t h e s t e n o r a p h e r w a s d i r e c t e d n o t t o report, a f t e r
which t h e following proceodings w e r e had:)
The Chairman: I
do not think that you and I! agree
about that.
L e t use Look a t 1 t from s. iittie. ciftierent
standpoint.
T h e country b a n k i s heeping t h e reserve
account w i t h another reserve agent, w i t h another reserve
depository.
H e has h a d all o f this sorvice performed
and has received t w o p e r cent interest.
H e takes t h a t a c -
count bodily and puts i t in the Federal Reserve Bank in
New York o r Chicago.
W h a t i s he going t o @about the
service that h e has been getting f r o m his reserve agent?
He i s willing t o take twenty o r thirty o r forty o r fiftg
thousand dollars f o r his loanable funds t h a t h e has
heretofore b e e n uSing eat six per cent i n his o t m community
and transfer t h e m t o some Chicago o r N e w York bank ormaintain them with his present correspondent i n order that h e
may g e t t h e s e s e r v i c e s p e r f o r m e d t h a t a r e a b s o l u t e l y n e c e s sary i n t h e c o n d u c t
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Federal Reserve Bank of St. Louis
Governor Wold:
o f h i s business,
D o you know that the First National
277
Bank o f N e w Y o r k w i l l t a k e a n a c c o u n t f r o m t h e N o r t h w e s t e r n
Bank o n a five hundred dollar balance a n d give t h e m all o f
the facilities t h e y have got?
Governor Seay: T r u s t i n g t o get more balance f r o m
them
a t some future time.
Mr. McKay:
H i s deposit items a r e n o t v e r y large
aS c o m p a r e d w i t h h i s c a s h items.
Governor Wold:
W e arc going t o b e i n the Same shape
that t h e national banks were i n i n 1907.
W e are going t o
handle a l l the business o f the banks a n d conditions will
be a s t h e y w e r e then,
(At this point informal G@iscussion occurred which
the stenographer was directed n o t t o report.)
The Chairman:
b v e r y time I
discuss these matters
with Governor Wold i t dawns o n m e that t h e o n l y sympathy
that t h e poor abused country bank gets i n the United
States i s right i n the much abused city o f New York. I
take a
radically different v i e w f r o m yours i n this matter.
I believe that these reserve banks a r e going t o get enormous b a l a n c e s f r o m t h e m e m b e r b a n k s w i t h o u t interest;
in t i m e t h e y a r e g o i n g t o h a v e a
that
very l a r g e e a r n i n g p o w e r
and t h e y ought t o b e able t o perform a l l the services t h a t
the former reserve agents pcrformed f o r the country banks
and enable t h e m t o d o their business m o r e economically
than they were able t o d o under t h e o l d arrangement, a n d
that ultimately t h e trouble o f reserves w i l l n o t only b e n o
hardship t o the country banks b u t i t should b e made a n
advantage t o them; a n d i f w e s a y t o the country banks that
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Federal Reserve Bank of St. Louis
278
we are just going t o b e a safe deposit company f o r their
reserves, t h a t w e aro n o t going t o d o a thing f o r t h e m except when they want t o borrow moncy, t h e result will b e
that t h e y h a v e t o c a r r y a
reserve
i n two places instead o f
one, a s heretofore, a n d the reserve requirements o f the
Act a s t o the country banks a r e going to: be very material—
Ly increased.
W
e a r e going t o make t h e country banks
carry the float that h a s formerly b e e n carried b y t h e
city banks.
Governor Wold:
h
e country b a n k i s not going t o
run down t o the legal reserve limit.
T o get down t o a
concreto case, t h e T w i n Cities a r e n o different today
from m a n y r e s e r v e c i t i e s .
T h e y have possibly g o t twenty-
five o r thirty millions excess.
D e y o u think t h e time
will ever come w h e n they will b e foolish enough t o deposit
that with u s when they could send i t t o N e w York o r Chicage
and get t w o per cent o n it?
The Chairman:
T h o s e a r e not t h e banks, n o r are t h e y
the conditions t h a t w e are talking about.
W e are talk-
ing about a littlo b a n k u p i n Redwood, Dakota, t h a t i s
borrowing d u r i n g a
portion
o f the year,
that has been
dependent u p o n its correspondent f o r service, a n d has h a d
a good deal o f difficulty i n keeping a balance that will
compensate t h e reserve agent f o r performing those services.
And now, i f w e require h i m t o keep a
another w i t h h i s r e s e r v e a g e n t ,
tO. Deo L h
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Federal Reserve Bank of St. Louis
balance w i t h u s a n d
a s heretofore,
h e i s going
t r o u peL .
Governor Wold:
I c a n n o t s e e a n y distinction between
eto
a country b a n k a n d a
reserve b a n k , e x c e p t i n s t e a d o f m i l -
Lions y o u g e t thousands, A
thousand dollar balance t h a t
is n o t e a r n i n g t h e t v o p e r c e n t t h a t i t m i g h t e a r n i s o f
just a s much importance t o the little b a n k a s a large balance i s t o t h e large b a n k i n t h e city; a n d i n m y talks w i t h
these little country bankers that i s one source o f more
or L e s s complaint--—< t h e f a c t t h a t t h e y d o n o t g e t e n y i n -
terost O n their balance,
Governor Seay:
A
t certain times i t i s the country
panks that carry the entire oxcess resorve o f the country.
Nearly a l l the reserves a r e practically kept b y the country
banks.
T h e y are, o f course, i n the shape o f balances i n
“%
the c e n t r a l r e s e r v e
The Chairman:
a n d reserve cities.
e banks
h
i n the m o n e y ccnters h a v e
not m e a n s t o p u t o u t a l l t h e i r e x c e s s r e s e r v e s
loans and otherwiso,
o n call
T h e best they can do is to get two
per cent with thebr reserve agents, a n d i n consequence
the country bank piles u p a surplus balance a n d t h e city
bank i s using that and making call loans.
Governor Scay:
H o not o n l y gets intcrest o n the re-
serve t h a t n e i s r e q u i r e d
tain a
surplus r e s e r v e ,
t o keep there, b u t h a s t o main-
a n d h e gets these various a n d suh-
ary c o l l e c t i o n s t h a t a r e b o i n g m a d e , a r d h e d o e s m a i n -
tain tho excess resorves o f the country.
The Chairman:
O f course h e does.
W h a t are you
going t o do with him? Y o u are going t o make him buy the
float that will absorb a
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Federal Reserve Bank of St. Louis
lot o f the reserve;
i n the second
280
place, y o u are going t o take a w a y his cxchange.
going t o affect h i s revenue.
T h a t is
A n d i n the third place y o u
are going t o requirc h i m t o carry that same account a t two
per cent interest. I
d o not s e e what there i s i n i t
for the country bank. I
big s i t y b a n k s
can sce immense advantages t o the
i n the cstablishment
o f this Federal Reserve
Systen. H e r c t o f o r e t h e y have h a d i t turned over t o them
and they have a
problem t o get t h e checks b a c k a t a rcason-
able c o s t u n d e r a
and maintain a
system t h a t requires t h e m t o establish
very expensive piece o f machinery.
is just pic for them.
T h i s
T h e y are getting all there i s i n
it.
I think t h e country bank i s t h e fellow w e have g o t t o
Look out for.
Governor Wold: I
a m with y o u o n that part o f t h e
argument,
(At this point informal discussion t o o k place which
the stenographer w a s directed not t o report.)
Mr. Foote:
H o w m a n y collection items d o t h e Chicago
member b a n k s h a n d l e a
Mr. McKay: I
day?
do not know. I
a large c o m m e r c i a l bank. I
know o f o n e bank,
a m speaking o f items n o t
drawn o n banks--Mr. Footc: I
Mr. McKay:
mean, transit items,
O h , that i s a different matter. Severa 1
. hundred thousand.
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Federal Reserve Bank of St. Louis
Mr-e Foote:
H o w many a
Mr. McKay:
T h a t is a
day?
differcnt q u e s t i o n .
281
The Chairman:
M r . Foote, 1 was going t o kecp this
discussion a w a y from the problem o f collecting checks, i f
it was possible t o d o it, because w e are going t o get o f f
the s u b j e c t
o n t h e program, w h i c h i s s p e c i f i c a l l y a
dis-
cussion o f the matter o f policy that has been submitted t o
the FederalReserve Board and ruled upon b y the Board---
Shall the Federal Reserve Bank undertake t o collect noies
and drafts a n d other items f r o m member banks?
them
T h e y now
have collected for them b y their reserve agents. i
be-
lieve t h e time h a s arrived, a n d w e want t o detcrmine i f
possible whether w e shall perform that service f o r t h e
member banks.
O f course, knowing that t h e determination
here i s simply a declaration o f the views o f those attending this mecting,
i t i s not binding upon a n y bank, a n d
if G o v e r n o r W o l d d o e s n o t w a n t t e c o l l e c t d r a f t s f o r h i s
members h e will not d o it, o f course.
Governor McDougal:
Y o u have i n mind, o f course,
collecting these a t actual cost, o r thereabouts?
The Chairman:
O h , yes.
Governor McDougal:
T h e n I would move that at the
discretion o f c a c h b a n k i t b e u n d e r s t o o d t h a t t h e y a r e
permitted t o perform those functions f o r the member banks
if they s o desire.
Governor V a n Zandt:
Governor McDougal: I
Y o u m e a n these a , b
a m speaking o f a, alone, b e -
cause w e have g o t t o d o that sooner o r leterof i t i s very small. I
and c ?
T h e amount
would g o a little further t h a n Mr.
MeKay a n d s a y that probably i n Chicago t h e y handle 200,600
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Federal Reserve Bank of St. Louis
282
transit i t e m s a
day,
o r thereabouts,
a n d that probably t h e
number o f collections would n o t b e more t h a n five o r s i x
thousand,
n a t i s simply estimated f r o m general figures.
Governor Wold:
binding.
T n e action o f the council i s n o t -
W o have discovered t h a t what o n e b a n k does i n
the w a y o f rates o r any other thing i s urged b y the Board
and finally forced upon us; a n d y o u arc establishing a
policy h o r e a n d I
Oras
do not know vhere y o u a r e going t o e n d
Y o u aro going t o end just where y o u think y o u
are going t o end.
Y o u Will b e i n the commercial b a n k
business.
Governor Seay:
D e y o u not think that i n order t o car-
ry out t h e Act a s i t i s framed w e have t o d o that anyhow?
I will agree w i t h y o u very largely i n some o f the remarks
you made, a n d a s t o s o m e o f t h e o t h e r s I a m s o m e w h a t d i v e r g —
cnt.
Governor Wold:
D o y o u refer m e t o anything i n the
Governor Seay:
i t i s there, b u t whfl we cannot c a r r y
Act?
out t h e others unless w e take time t o d o tnese things.
The Chairman: G e n t l e m e n ,
w e must n o t assume that t h e
Federal Reserve Act i s going t o establish a type o f bank
that nover has existed i n the world, t h a t i s not based
upon human experience, because s u c h a bank will n o t suc-—
aed,
W
e h a v e g o t t o g o a l o n g a c c e p t e d l i n e s o f banking;
and while conditions
i n this country a r e vastly different
from what t h e y a r e i n Europe, j u s t consider what t h e
great banks o f Europe,
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Federal Reserve Bank of St. Louis
o f this type, a r e obliged t o do.
285
In Germany the Reishsbank does prectically all the collections o f t h e nation.
Fiance.
I t i s very much the same i n
I t i s the most scientific collection system that
is known.
T h e Reichsbank i s the reserve depository o f
the nation.
of issue.
x
I
8 t h e gold reserves, and i s the bank
n many respects these reserve banks a r e
cesisnec a l o n g the lone o f the Reicnhsbank. L
think w e
going t o make a great mistake i f we restrict the
operations
o f the Reserve banks
t o the functions
of a
safe
deposit c o m p a n y , h a v i n g a n i s s u e o f n o t e s a n d t h e o c c a s i o n a l
loaning o f money t o the members w h o need accommodation,
Governor Fancher:
[ I think, Mr. Chairman, that if
the member banks are going t o establish the collection
system t h a t t h e r e s e r v e b a n k s a r e g o i n g t o establish,
are g o i n g t o f a c e a
have faced.
they
different c o n d i t i o n f r o m w h a t t h e y
A s we all imow, the competition that has
been i n d u l g e d
i n b y the large banks h a s l e d t h e m not o n l y
to check their cash items a t par, but t o collect i n many
cases their miscellaneous notcs a n d drafts.
know what i t means t o handle a
collection.
w
I
e all
t i s a dif-~
ferent i t e m entirely from checks, a n d the work incident t o
handling t h r e e o r f o u r o r f i v e t h o u s a n d s t r i c t l y c o l l e c -
tion items i n a day is going t o be a tremendous proposition.
You c a n pass a
check through a machine, b u t y o u cannot a
collection item.
C:
Governor “eay: T h e r e s i s n o parallel i n any. otter
country.
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Federal Reserve Bank of St. Louis
284
Governor Fancher:
to b e a charge for.
T h a t v e r y service there i s going
v e are not o n l y going t o charge t h e
exchange t h a t i s c h a r g e d f o r t h e a c t u a l c o l l e c t i o n o f t h e
item, b u t charge f o r t h e actual work.
have this effect:
T h a t i s going t o
I t i s going t o b e disappointing t o the
member banks when they are going t o be charged for actual
expenses O f handling these items, a n d the result i s that
you w i l l g o b a c k t o t h e p o i n t w h e r e t h e b a n k s w i l l n o t s e n d
those items through the Federal Reserve banks.
Governor McDougal:
advantage
T h e r e i s not going t o b e a dis-
i n that.
Governor Fancher:
B u t they will be disappointed.
You cannot give t h e m what they have now.
The Chairmanit T h e logi¢al development will be along
this line:
W e have got t o make a different charge for
that service.
T h e member b a n k has t h e choice o f thrce
methods o f c o l l e c t i o n , d
n
a he will take the most economical.
He m u s t s e n d h i s i t e m s
t o us.
H
e m a y find that m o r e e x -
pensive o n account o f volume a n d other considerations t h a n
maintaining a
balanco w i t h t h e r e s e r v e a g e n t ;
o r he may
find i n t h e l o n g r u n t h e c h a r g e s a r e l e s s t o h i m a n d t h e
expense i s less t o h i m b y sending h i s collections direct
all over the country t o the nearest bank, i f you please,
If w e undertake
basis
t o m i k e t h e s e c o l l e c t i o n s u p o n o a fair
i t will n o t i m p o s e u p o n u s a
are a t a n y rave meeting a
by s o m e m e t h o d ,
the r e s e r v e
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Federal Reserve Bank of St. Louis
tremendous c x p e n s e ,
situation that has g o t t o b e m e t
a n d t h e little b a n k cannot afford t o keep
o r collection balances
w i t h the collection
285
agent a n d nas n o t t h e volume o f items t o justify a department a n d S t u d y o f methods
o f collection,
H
e c a n send t h e m
tO u s a n d w e are meetinghis needs.
I a m not a
bit afraid o f the volume,
for the next t w o years;
a t a n y rate n o t
a n d i f i t gets t o o heavy w e c a n
adjust i t b y t h e i r p a y i n g charges.
Governor Aiken, h o w d o you feel about it?
Governor Aiken: I
think w e have g o t t o d o it, a n d
L am hecrily i n favor of the motion.
Governor Mains: I
avor &
did not hear the motion, but I am
attempting t o collect items f o r o u r member
Ghat i s the motion? I
The Chairman:
happened t o b e out.
G o v e r n o r wicDougal offered a
resolution,
the sense o f which was that i t was t h e belief o f this conference t h a t the member banks sould endeavor o r should
undertake t o effect collcctions f o r the member banks,
Governor McDougal:
I f they s o desire. I
not b e i n favor o f circularizing a
ing t o bring this a l l u p a t once.
vould
district a n d undertakB u t , Governor Strong,
Mr. Kains h a s stated that h e w a p i n f a vor———
Governor Kains: I
The Chairman:
do not s e e anything else f o r it.
A r e vou ready for the question o n
Governor MeDougal's motion?
(The question w a s called f o r o n d was duly carried.)
ne Chairman:
T h i s s a m e Ciscussion w a s acplied
to
the seconc i t e m which really contemplates t h e collection
of coupons,
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Federal Reserve Bank of St. Louis
Gavernor V a n Zandt: I
d o not s e e W h y t h e y cannot b e
included i n the same motion.
Governor Wold:
at the cherry whe n
W h a t i s the use o f making t w o bites
you c a n swallow t h e whole thing a t one
tine?
The Chairman:
covered
I f i t i s m n s i d e r e d t h a t I t e m (b) i s
b y t h e m o t i o n j u s t adopted,
i t e m (c) really relates
to checks c r a w n o n banks t h a t a r e n o t members o f the
Federal Reserve System.
h
e ruling o f the Board i s that
there i s n o l e g a l p r o h i b i t i o n a g a i n s t r e c e i v i n g s u c h c h e c k s
for collection, b u t o f course immediate credit cannot b e
given f o r them.
Governor Fancher: I
move that t h e consideration o f
the subject b e deferred until w e g e t some more well d e fined a n d well developed p l a n o f collecting member checks.
Governor M c D o u g a l :
T h i s Guestion i s dealt w i t h i n
the Transit Committee's report.
T h a t m a y come u p there,
9-(e). COLLECTION OF ITEMS LRAYN ON BANKS NOT MEMBERS OF THE FIDIRAL RESERVE SYSTEM.
The Chairman:
Cliued i n No. 7 7
M a y I transfer i t e m 9-(c) t o b o inI t rea l l y comes i n the discussion under
Tm(c).
Governor V a n Zandt:
Tne Chairman:
7 - ( b ) a n d 7-(c).
T h e r e seems t o b e n o objection t o that
change, a n d we will discuss item 9-(d).
9-(d). E X . C U T I O N O F ORDERS F O R SECURITIES.
I would like t o read t h e paragraph relating t o this
matter i n the letter o f the Reserve Board cated October
Eos
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Federal Reserve Bank of St. Louis
287
"There does n o t s e e m t o b e a n y provision o f the Feder-—
al Reserve A c t which gives t h e Federal Reserve Banks a n y
expressed o r implied authority t o execute orders f o r securities
f o r member banks.
r t i s true that a
federal reserve
bank may, i n a n exceptional case, where commercial paper
elso has t h e additional security o f stocke a n d ponds, have
to sell such stocks o r bonds t o realize o n the security i n
case o f default.
B u t the right t o sell securities o n such
an o c c a s i o n a s t h a t d o e s n o t i m p l y a
power t o a c t a s a n
agent f o r the member bank i n the execution o f general
orders
f o r the purchase o r sale o f securities
Governor Wold:
. "
w h y @ o they not argue i n that case,
as t h e y cid i n the previous one, t h a t this i s a n incidental power?
The Chairman:
T h e y g o a little further:
“ I n con-
nection with this matter t h e Board wishes, hovever,
to
suggest that i t would b e pos sible f o r Federal Reserve
banks acting o n behalfof their members,
t o transmit s u c h
orcers t o certain brokers, requesting such brokers t o
confirm their transactions direct t o the member banks."
There i s one word here which is, I think, improperly
transcribed.
T h i s reads " i t would n o t b e improper",
I t
shoulc read, I believe, " I t would not b e proper."
"It ould not be proper for Federal Reserve Banks
to g i v e o r d e r s i n t h e i r o w n m a m e a n d t o e x e c u t e t h e m o n a
commission basis. .
Federal R e s e r v e Y a n k s s h o u l d n o t s e c u r e
any revenue from such orders.",
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As I interpret this fourth paragraph o f the letter o f
283
the Reserve Board,
i t means that a Reserve “ a n k i n under-
taking t o handle a n order f o r t h e purchase o r sale o f securities mist d o s o b y refraining f r o m acting a s a n agent, b u t
turn the transaction o v e r t o a broker a n d have t h e broker
lirest t o a member bank.
T h a t might b e a
feasible arrangement, although i t i s not alweys desirable
for a
bank t o g o b y the name o f its customer i n connection
with such transactions. I
would assume that later o n i f
we a r e c a l l e d u p e n t o e x e c u t e o r d e r s f o r s e c u r i t i e s f o r
our member banks w e could d o s o b y adopting a
uniform s e t
of forms t o govern advice, a n d s o on, that would m a k e
clear w e were simply transmitting a n order t o a broker i n
behalf o f a correspondent,
What i s y o u r p l e a s u r e
i n r e g a r d t o this p a r t i c u l a r
item o n the program?
Governor Fancher:
work I
F o r the sake o f expediting t h e
move t h a t i t i s t h e s e n s e o f t h e C o n f e r e n c e t h a t
theFederalReserve B a n k s d o n o t f o r t h e p r e s e n t e x e c u t e o r —
ders f o r s e c u r i t i e s f o r m e m b e r banks.
Governor fold: I
The Chairman:
any discussion?
second t h e motion,
T h e m o t i o n i s seconded,
T h e r e seems t o b e mone.
I
s there
A r e y o u ready
for t h e q u e s t i o n ?
(The q u e s t i o n w a s c a l l e d f o r a n d m s d u l y carried.)
The Chairman:
T h e f i f t h i t e m o f t h e Federal Reserve
15 o
reads a s Bfollows:
d 's letter
r o f October
a
"There i s n o express provision i n the A c t relating t o
the answer o f inquiries a s t o credits, b u t inasmuach a s
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Federal Reserve Bank of St. Louis
289
the regulations o f the federal Reserve Board reasonably
contemplate t h a t m e m b e r b a n k s m a i n t a i n c r e d i t f i l e s a n d
certify i n e a c h a p p l i c a t i o n f o r r e d i s c o u n t
o f paper b y
a Federal Reserve bank that the statements a s to the credit
of borrowers a r e o n file, i t would s e e m clear that e a c h
Federal Reserve Sank might advise its member banks i n
acvance a s t o t h e c r e d i t o f various bo: rowers i n i t s d i s -
trict.
“ u c h advice, however, must b e considered merely
as advice a n d not a s a guaranty o n the part o f the Federal
Reserve b a n k ,
I
t m u s t b e c a r e f u l l y c o n s i d eFr e d ,
h ’o w e v e r y
)
that t h e F e d e r a l R e s e r v e b a n k s r e c e i v e f r o m t h e i r m e m b e r s
confidential reports which they m a y not @ivulge a n d that
this m a y lead t o embarrassment. "
That leaves t h e matter i n a rather awkward situation.
Governor V a n Zandt; I
move t h a t i t 1 8 t h e S e n s e a f
this C o n f e r e n c e t h a t F e d e r a l R e s e r v e P a n k s
d o not furnish
member banks w i t h i n f o r m t i o n a s t o the credit o f borrows
ers.
Governor McDougal:
O u r Board o f directors h a s already
taken a c t i o n o n t h a t a n d h a v e v o t e d n o t t o e x t e n d t h a t
service t o our member banks. T h e r e f o r e 1
would second
the motion.
Tne Chairman:
Governor Aiken;
I s there a n y discussion o f this motion?
I
t seems
t o m e that a s l o n g a s t h e
reserve w i l l n o t b e t r a n s f e r r e d f o r s o m t i m e t h e r e w i l l b e
sufficient balance w i t h the reserve agents t o enable their
corresponcent banks t o render this service, a n d I think
it w o u l d b e v e r y h a z a r d o u s
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Federal Reserve Bank of St. Louis
a t this t i m e t o uncertake
290
either ( e ) o r (f); a n d i f Governor V a n Z a n d t w i l l permit,
I would like to have that motion extended to cover those
tivo i n the interests o f progress,
Governor V a n Zandt: I
The Chairman:
D
wuld b e very glad t o co that.
o y o u accept t h a t amendment, G o v e r n o r
MeDougal?
Governor McDougal:
The Chairman:
Yes.
I s there a n y further discussion?
(The q v e s t i o n w a s c a l l e d f o r a n d w a s d u l y carried.)
The Chairman:
T h a t disposes o f item 9 , with the
exception o f (¢), which was transferred t o Item 7. T h i s
reduces o u m program, gentlemen,
t o tnree subjects—-— t h e
subject o f collections a n d clearings, t h e daily s.ttlements
through t h e Gold Settlement Fund, a n d Amendments t o the
Federal Reserve Act. W i l l you be satisfied t o take up
a few of the subheadings o f Item 11, Amenaments t o the
Federal Reserve Act?
ll. A M E N D M L N T S T O THE FEDERAL RESERVE ACT.
Item ll-(c) h a s b e m d i s c u s s e d w i t h t h e e x c e p t i o n
of one feature, a n d 1 think I am justified i n making the
following statement about it:
It has been ascertained u p o n examination o f the
. records i n Washington that t h e earlier drafts o f the
Federal Reserve Act proviced that the Secretary o f the
Treasury within o n e year o f the passage o f the Act was t o
transfer t o the Fed:ral Reserve “anks the general fund,
and s o On. L a t e r crafts o f the Act resulted i n a cnange
in the language o f that portion o f it;
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Federal Reserve Bank of St. Louis
s o i t finally was
passed a s i t now reada&, leeving
tne e s t a b l i s h m e n t
o f the
o f Treasury S e u e e b a d t relations
reserve banks a n d their becoming i n fact t h e fiscal
f the Government t o the discretion o f the Secreagents o
tary of the ‘reasury.
In considering amendments t o the Federal Reserve Act
and speaking somewhat f r o m the standpoint o f Mr. Bosworth
of Chicago and Mr- Dawes, who entertains the same
view, t h e question arises a s t o whether t h e original i n tention o f the fuamers o f the Act would n o t b e carried
out b y now asking Congress t o amend the Act and make the
establishment o f the fiscal agency mandatory b y the
stutute s o that t h e constantly recurring criticism a n d ais—
pute about t h e favoritism a n d manipulation o f the general
funds and deposits i n the special banks cannot b e entirely
eliminated.
n a t in fact is the occasion for putting
this i t e m ll-(c) o n the program.
We n e v e r h a v e h e s i t a t e d
t o take a n y subject
a t these
n
a tackle i t , a n d there need b e n o hesitation
meetingsd
in tackling this one.
Governor Wold:
I f you will permit a
motion that w e
recommend that the Federal Reserve Act b e amended i n that
regard, I
will b e very glad t o offer it.
The Chairman: ‘ G u i l e t h e language o f the Federa 1
Reserve A c t vests discretion i n the Secretary o f the
*peasury,I h a v e always felt convinced that o n e purpose o f
the
d
clans
a
r
i
d
get
t
o
gradually
this legislation was
treasury <ystem o f the United States which nas beon a
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292
menace t o the courtry a t various times, ever since the
independent treasury existed.
I t has been twice done a w a y
with a n d three times i n existence, e a c h time w h e n the
first b a n k o f the United States w a s estabbished, a n d
when the second bank o f the United States w a s established
the statutes were amended a n d revised a n d t h e
independent treasury was done a w a y with.
After the charter of the second Bank of the United
States h a d e x p i r e d t h e r e w a s a
period w h e n t h e l e w i n r e -
gard t o the operation o f the independent breasur y
was
not restored t o the statute books a n d t h e whole thing was
in chaos.
W e h a d n o independent treasury a n d n o fiscal
agent, a n d the Secretary o f the treasury just assumed
authority i n those days--- that w a s about 1830, o r thereabouts—-~— t o s i m p l y d e p o s i t g o v e r n m e n t f u n d s i n state
banks, a n d i t led t o outrageous abuse, political misuse o f
the funds o f the Treasury, a n d later Congress adopted
statutes
t o restore t h e o p e r a t i o n o f the independent
treasury s y s t e m ,
a n d i t h a s b e e n i n o p e r a t i o n e v e r since.
I have a l w a y s f e l t t h a t t h e p u r p o s e
o f this Act w a s again
to get back t o the system o f fiscal agencies, a u c h a s
prevails i n all o f the important countries i n Europe,
and t o d o away with t h e indopéndent treasury system, a n d
gradually t h a t should b e brought about.
Will t h e purpose o f this A c t b e carried into effect
by leaving t h e matter i n the hands o f the Secretary o f the
treasury t o gradually c u t off his o w n head i n these matra
ters?
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293
This matter o f course i s possible o f tonstruction i n
two ways:
O n e i s personal criticism, possibly,
policy o f t h e p r e s e n t S e c r e t a r y o f t n e Treasury, i
o f the
a6
not think that w e ought t o b e governed b y any Such conSideration whatever.
N a t u r a l l y t n e S e c r e t a r y o f the
Treasury would want t o feel very certain about t h e manage~
ment o f these b a n k s a n d t h e i r stability;
a n d the stabil-
ity o f the whole organization h e wants t o feel v e r y certain
of before h e uncertakes t o turn t w o o r three hundred millions
banks.
o f t h e Government's f u n d s o v e r t o t h e c u s t o d y o f t h e
A n d I guess i f any o f u s were i n his position w e
would hesitate a long time before w e took that last step,
to c l o s e u p t h e i n c e p e n d e n t t r e a s u r y operation.
The question i s «hether, after years o f experience,
the reserve system i s now not sufficiently well established
and does not enjoy sufficient confidence t o justify asking
Congress t o -ssay this discretion vested i n the Secre-
tary of the treasury should now be changed so that it becomes mandatory efter t h e lapse o f a year, o r some period
of time.
Governor Seay:
W
i
t
h a
due s e n s e o f r e s p o n s i b i l -
ity, sir, 1 would say he would like t o have it. I
cama
conceive that i f I were occupying that position I would n o t
rather have i t removed f r o m m y discretion a m relieve n e
of responsibility i n the matter.
Mr. Chairman, w e would have t o undergo a course o f
preparation t o p e r f o r m t h e d u t i e s t h a t w o u l d d e v o l v e u p o n
the r e s e r v e b a n k s
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Federal Reserve Bank of St. Louis
i f t h a t w e r e done.
94
The Chairman: I
have reached the stage o f confi-
dence i n the m e n who a r e running these banks t o feel that
that j o b o r a n y o t h e r j o b t h e y u n d e r t a k e
their powers t o handle.
once i t would cause a
I f they h a d i t dumped o n them a t
very difficult situation a n d a lot
of hard work, b u t they would handle it.
gradually,
i s quite within
i f i t were done
o r after t h e lapse o f a period f o r preparation,
they would d o i t well a n d cxpeditiously,
T h e r e i s not a n y
question i n m y m i n d t h a t t h e s e r e s e r v e b a n k s c a n d o e v e r y -
thing that t h e statute really contemplated b y the brief
reference t o the deposit o f the general fund, a n d i t i s
just a question o f whether discretion camnot now b e removed f r o m the Secretary o f the T r e a s u r y , r
o a n effort made
to remove it, s o that i t must b e done within a period o f
time.
Governor Fancher:
I f this situation were brought
about, would n o t t h e reserve banks undertake a n expensive
plece o f business?
The Chairman:
Yes. I
done t o o suddenly. I
ly.
do not think i t should b e
think i t should b e done v e r y gradpal-
W e d o not want t o find ourselves i n a position where
the reserve system itse]f h a s g o t t o g o begging #ashington
for ceposits.
W e have t o have a l l that Gone a n d t h e
machinery created a n d ready t o operate,
s o that t h e general
fund, i f i t i s t o b e what i t should be, a n d the bank
deposits w h i c h will b e used with conservatism i n the wegkestbanks, w i l l b e there ready f o r use a n d the plans made
tO- use: 2 h ;
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Federal Reserve Bank of St. Louis
295
Governor Fancher: I
what t h e d e p o s i t s
think there is no doubt but
o f the general revenucs
o f the Federal
Reserve banks o f course a d d very m u c h t o the whole structure,
The Chairman:
Yes.
T h e r e a r e very grave responsi-
bilities that g o with it, Governor Fanchcr.
take t h e whole question o f redemption.
F o r instance,
O u r Government
has b y express mandatory statute t o maintain a l l legally
issued currencies o n a parity with gold, and the means
that the Government h a s t o d o that consisis o f two funds:
One is the trust fund, now about $153,000,000, but the
real reserve t h a t they have o n hand f o r that purpose i s
the g o l d i n t h e g e n e r a l f u n d , b e c a u s e t h e t r u s t f u n d i s
like t h e reserves o f the national banks;
there and you cannot use it.
i t i s locked u p
I t is psyehologically a n
exhibition of gold in a show case. T h e sixty odd millions o f gold just n o w held i n the genoral f u n d i s really
tho redemption fund behind a l l o f t h e United States notes
and a l l t h e s i l v e r c e r t i f i c a t e s o u t s t a n d i n g .
So, when the goneral fund is transferred t o the reserve banks, what y o u might call the surplus reserve o f
the independent treasury, i n other words, the gold i n the
general f u n d being transferred t o u s Will make t h e Government q u i t e d e p e n d e n t u p o n t h e r e s e r v e b a n k s f o r t h e s u p p l y
of g o l d t h a t t h e y w o u l d r e q u i r e
i n order
t o make g o o d
their statutory obligations t o maintain a parity.
Sometimes I have had a good deal o f doubt a s t o the
wisdom o f going a s far a s w e would b e going i n taking over
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Federal Reserve Bank of St. Louis
296
the general f u n d a n d t h o implied Obligations that
g o with
it i n connection w i t h redemption.
B u t a n c e t h a t step
is taken w e g o a very long w a y towards t h e general reforma—
tion o f our whole currency system.
Governor Wold: G o v e r n o r “trong, I said a minute
ago that 1 would offer a motion if you will submit it;
but i f i t involves t h e maintaining o f a parity o f
the silver certificates o n a gold basis b y the banks,
I
withdraw
my offer.
The Chairman:
I t decs not d o that directly,
course, Governor Wold,
of
I t simply means t h a t t h e Govern-
ment makes u s the sustodian o f the gold which
they would
have t o use f o r that purpose; b u t i f the demand
ever arises
for the Government t o redeem i n gold t h e y would
have t o
come t o us t o the extent that they had balances with
us i n
order t o get t h e gold.
But there is another view back of it which 1 think
is the sound one,
am
t h a t i s t h e creation o f this b a n k
machinery w i t h t h e r e s o u r c e s t h a t t h e y w i l l
have.
T h e s e
twelve reserve banks w i t h their enormous g 0 l d reserves
will g o a long way t o prevent any such demand ever being
made u p o n it.
I n other words, w e a r e nearer a
real gold
standard i n this country, w i t h these banks
i n Operation,
than w e e v e r h a v e b e e n before,
W
e have g o t t h e gold f o r
the purpose o f redemption, a n d I do
not feel that the implied responsibility i s going t o b e a serious one;
probably
no m o r e s e r i o u s t h a n i t w e u l d b e i f t h e
demand were made
upon the Government a n d w e did not have
the general fund,
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Federal Reserve Bank of St. Louis
297
because t h e n the Government would like t o come t o u s f o r
gold anyway.
There i s another s t e p that follows t h a t almost irres-
istible logic for the transfer o f the genoral fund, which
would also require a n amendment t o t h e law, a n d that i s i f
we arc going t o b e the custodian o f the gold upon which
the Government redemption i n gold depends, why, i t i s natural that w e should h o l d all o f that gold; t h a t i t should
not b e divided.
T h e main bulk o f the gold i s the
155,000,000 i n the trust fund, a n d i f our Congress could
be p e r s u a d e d
t o pass a n a c t w h i c h w o u l d p e r m i t u s t o
gradually assume the obligation t o pay off the United
States notes a n d issue o u r o w n Federal Reserve notes i n
exchange f o r t h e m a n d t o t a k e o v o r r a t a b l e p r o p o r t i o n s
of the gold reserves plus a n interest bearing obligation
of the Government f o r t h e difference; t h a t i s t o say, i f
the statute m a y provido that t h e federal roserve banks would
ass me $346,000 o f Unitcd States notes, would take over
153,000,000 o f gold i n the trust funds, ani wuld receive from the Government $190,000,000 o f two and a half
or three per cent ponds, w e would then add $153,000,000
to our gold a n d w e would g e t a n interest bearing obliga-
tion which could gradually b e sold and gold accumulated
from t h e proceeds,
a n d a t least w e would eliminate g r e e n -
backs f r o m our currency system.
T h e addi tion o f the enor-
mous amount o f gold t o the gold i n the Federal Reserve banks
would b e another source o f strength;
ness a t all.
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Federal Reserve Bank of St. Louis
i t would b e n o weak-
298
(At this point a n informal Ciscussion arose w h i c h
the stenographer w a s directed n o t t o report; a f t e r which
the following proceedings were had:)
The Chairman:
T h i s i s a long dissertation o n a
very minor part o f our program.
N h a t views d o y o u en-
tertain about Item 1l-(c), i n regard t o the subtreasury
functions?
D i d this a c t contemplate t h e establishment
of fiscal agencies o r the continuance o f the independent
treasury system?
A n d what d o y o u want t o recommend i n
connection with the fiscal agency provisions o f the Act?
If anyone offers a
motion---
Governor Fancher:
G o v e r n o r Wold offered a resolu-
The Chairman: I
thought h e withdrew that motion.
tion.
Governor Wold:
Y o u frame a
The Chairman:
motion a n d [I will offer
M y motion would b e that i t i s the
sense o f this conference t h a t t h e federal reserve A c t
should b e a m e n d e d
t o provide f o r t h e t r a n s f e r
o f the
general f u n d o f t h e T r e a s u r y a n d t h e f i s c a l a g e n c y
functions
o f the independent treasury
serve b a n k s w i t h i n a
t o t h e F e d e r a l Re-~
period o f t w o y e a r s f r o m t h e p a s s a g e
of the amendment.
Governor Fancher: I
The Chairman:
second t h e motion.
A r e y o u ready for thequestion?
(The question was called for ana the motion was
carried.)
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Federal Reserve Bank of St. Louis
The Chairman: I
should l i k e t o a s k s o m e o n e
to
299
gest t h e next easy o n e under 1 1 for discussion.
Governor Aiken:
T h e r e i s o n e o n there t h a t w e c a n
take u p i n a very f e w minutes;
( 0 ) , S a v i n g s b a n k member-
ship.
1l-(o). SAVINGS BANK MEMBERSHIP.
I put that i n a t t h e request
Savings banks i n Massachusetts. I
talked about somewhat.
o f several officers
of
know that i t has been
S o m e large savings banks a r e
very-anxious t o have s o m e w a y devised b y which they c a n
aveil themselves o f the opportunity t o get currency i n
times o f stress.
U n d e r t h e l a w i n Massachusetts
a n d also
in New York the savings banks, t h e mutual savings banks,
cannot o w n s t o c k i n t h e F e d e r a l R e s e r v e bank.
chusttts t h e savings banks h o l d a
I
n Massa-
considerable amount o f
commercial paper that would b e rediscountable i n the
Federal R e s e r v e Bank.
I d o not k n o w whether
i t i s g o i n g t o b e practicable
to work ont a plan b y which they can hold stock and have
available the currency respurces o f the Federal Reserve
Banks, b u t I told t h e president o f one o f our largest
savings banks that I would submit thequestion and ask t o
have consideration o f the Governors o f the banks, n o t
with the idea of taking any immediate action, but to ask
them t o look over their o w n local situation a n d see {tf-tn
their j u d g m e n t t h e y t h o u g h t
ticable
i t would b e possible
o r prac-
t the l a w s o that t h e y c a n
t o make a n a m e n d m e n t o
use t h e Federal Reserve banks.
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Federal Reserve Bank of St. Louis
The Chairman: I
have b e e n thinking about that a
500
Little b i t a n d have talked i t over a t different times
with the head o f a large institution i n Ohio which i s
very much interested i n the subject, a n d i t occurred t o
me that t h e Act might b e amended t o provide f o r a different character a f membership b y savings banks, particularly
mutual savings banks, b y which they would n o t b e required
to take a n y capital stock, b u t t h e y would b e required t o
keep a
minimum deposit w i t h t h e reserve banks,
a n d that
deposit would b e liable o f course f o r indebtedness t o the
Reserve Bank, j u s t t h e same a s capital would be, a n d t h e
provision authorizes t h e reserve b a n k t o discount a n y
elisible p a p e r w h i c h s a v i n . s b a n k s m i g h t h o l d ,
o r t o loan
them money f o r a specific period a n d u p t o a specified
amount w h e n secured b y obligations o f the United States
Government o r of the states o r municipalities.
A l l of
the savinzs banks a r e large holders o f securities o f that
character, a n d i t would give t h e m a very considerable
credit available i n time o f difficulty.
(At this point a n informal discussion took place
which the stenographer was directed not to report.)
Governor Aiken:
T M r o veeks a g o I
a t t e n d e d ameeting
of the Massachusetts Savings Banks Officers' Club, and
was v e r y m u c h surprised a t the unanimity o f desire t o become i d e n t i f i e d
i n some w a y w i t h t h e Federal Reserve Banks
s0 that t h e y could b e available f o r use i n time o f stress.
The Chairman:
O f course, Governor Aiken, s u c h a pro-
gram might arouse opposition f r o m member banks t h a t n o w enjoy large deposits i n the savings institutiens,
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Federal Reserve Bank of St. Louis
SOL
Governor Aiken:
L e d e n o u t h i n k 11. would i
Governor Kains:
y
to us.
e nave three v e r y large savings
banks i n San Francisco. I
know them all intimately,
and they are hangng around t o have s o m e sort o f associate
membership. I
think that suggestion o f yours would s u i t
them absolutely.
The Chairman:
H a v e w e reached a
point
i n the dis-
cussion where somebody i s willing t o offer a motion?
Governor Aiken: I
move i t b e r é f e r r e d
t o the Execu-
tive C o m m i t t e e f o r f u r t h e r consideration.
The Chairman:
i s i t your idea that reference.
of
his m a t t e r t o t h e f - e c u t i v e C o m m i t t e e o u l d i n v o l v e t h e m
in the responsibility o f preparing a n amendment t o cover
the q u e s t i o n ?
Governor Aiken:
The Chairman:
referred
Y e s .
T h e motion i s that I t e m 1ll-(0) b e
t o the Lxecutive Committee w i t h request t h a t
they endeavor t o prepare a
amendment
t o the Act.
Mr. Hoxton:
The C h a i r m a n :
tion.
I
definite suggestion f o r a n
s t h a t s seconded?
L L s e c o n d the: morioen,
I
s there
a n y discussion
o n the m o -
T h n e r e s e e m s t o b e none,
(The motion was duly carried.)
The Chairman:
and I
I t . is a
little a f t e r h a l f - p a s t t w e l v e ,
believe w e h a v e m a d e e n o u g h progress,
ing t o meet again
this evening,
©
t o take a
(On motion duly made a n d seconded a
at 12:55 o'cleck >. m
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Federal Reserve Bank of St. Louis
i f y o u a r e will-
recess now,
recess w a s taken
until 8:30 o'clock’ ,p m.)
E V E N I N G
e
e
ee a
R e
The Conference reassembled a t 8:30 o'clock p. m.
The Chairman: G e n t l e m e n , t h e r e a r e three o r four
topics under heading 1 1 o f amendments t o the Federal Reserve
Act t h a t w e o u g h t t o b e a b l e t o d i s p o s e
o f v e r y promptly.
Li=<( 2) I S S U A N C E O F RISERVG NOTSS AGAINST GOLD.
That w a s s u g g e s t e d
b y Governor S e a y . I
believe y o u
will have n o difficulty i n agreement u p o n a n amendment
to recommend.
N i l l y o u start t h e discussion, Governor
seay.
Governor Seay:
T h e heading speaks f o r itself,
Governor Strong. W i v e r y b o d y ' s doing it", a s the song
Gays, a n d w h i l e w e a r e d o i n g i t i n d i r e c t l y I
would b e b e n e f i c i a l
t o d o i t directly.
A
think i t
s w e are doing
it n o w tre have t o sequestrate o u r gold fund, a n d I
not think that i s t o our advantage. I
law m i g h t j u s t l y b e a m e n d e d
all u n d e r s t a n d
believe t h a t t h e
t o b r i n g t h a t about,
i t s o well that I
do
and we
do not think there i s
any u s e i n s a y i n g a n y t h i n g further,
The Chairman:
embody your views,
Y o u l d y o u offer a
motion w h i c h w o u l d
i n the w a y o f a recommendation, Governor
Seay?
Governor Seay: t
will move, sir, that i t is the
sense o f this C o n f e r e n c e t h a t t h e S e c t i o n o f t h e F e d e r a l
Reserve A c t w h i c h r e l a t e s
notes s h o u l d
t o t h e i s s u e o f Federal R e s e r v e
b e s o =z=mended a s t o enable t h e b a n k s
notes d i r e c t l y a g a i n s t gold.
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Federal Reserve Bank of St. Louis
t o issue
303
You all know what I mean b y that, a n d i f the Secretary Cesires t o put that into other language, why, I
shall
appreciate i t .
Mr. Curtis: I
will identify t h e section b y calling
4% Noe 16,
Governor Kains: I
The Chairman:
second that motion,
I s there a n y debate i n regard t o this
motion w h i c h embocies a
recommendation
t o amend t h e Federal
Reserve Act? T h e r e seoms t a b e n o debate.
A r e y o u ready
for t h e q u e s t i o n ?
(The q u e s t i o n w a s c a l l e d f o r , a n d t h e m o t i o n w a s d u l y
carried, )
li-(h). REVERSING THE PUMP.
The Chairman:
A s being somewhat o n this same sub-—
ject I have suggested topic (h), reversing the pump, t o
use a
colloquial expression that applies t o the present
practices o f issuing notes against gold and taking down
the gold against substitution o f commercial paper,
At a conference i n Washington with members o f the
Federal R e s e r v e B o a r d s o m e d o u b t w a s e x p r e s s e d a s t o
whether i t would later b e possible f o r u s t o recover this
gold f r o m the Federal Reserve Agents b y the substitution
of commercial paper, e v e n through the indirect process o f
delivering Federal Reserve notes t o the agents, a n d then
taking d o w n n o t e s a g e i n s t t h e d e p o s i t
o f commercial paper,
continuing that process indefinitely until t h e gold was
recovered.
I t seems t o m e that with 1 3 5 millions o f
gold n o w impounded behind Feceral reserve n o t e issues, a s
is the case i n the whole system,
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Federal Reserve Bank of St. Louis
i t i s important t h a t w e
304
should have a
definite unccrstanding a s t o what method
we m i g h t p u r s u e
t o r e c o v e r t h a t gold. i
think within t h e
past t w o months t h e Atlanta b a n k has p u t through some
transactions w h i c h i n effect reverse t h e p u m p a n d take
down the gold,
A
m I correct i n that, Mr. Curtis?
Mr. Curtis: I
do not know.
The Chairman:
M
Atlanta--- M r . F o o t e ,
y impression i s that t h e B a n k i n
y o u G o u b t l e s s w i l l k n o w a b o u t this.
You know what w e mean b y reserving t h e pump?
That i s getting t h e gold back, i s i t
The Chairman:
Y e s .
Foote: I
have heard t h e Chairman o f the Board
t we could n o t g e t some o f the gold back; b u t
‘those transactions tere between meetings a n d d i d not come
up before t h e board. I
but I
a m not advised a s t o the details,
have h e a r d s o m e e x p r e s s i o n s
t o that effect
i n the
bank.
Tne Chairman: I
a m clearly o f the impression, Mr.
Foote, that the Atlanta Bank has taken back a portion o f
sold deposited with the Federal Reserve Agent a s secur-
Governor Seay:
T h e Richmond b a n k has done so.
can s a y that definitely.
The Chairman:
W e have n o w a precedent, w i t h your
report, a n d I think i t would b e desirable t o show o n the
record here t h e opinion o f this meeting that i f there i s
any d o u b t w h e t e v e r
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Federal Reserve Bank of St. Louis
i n regard
t o h o w this g o l d m a y b e r e -
305
covered,
i t should’
if necessary,
b e cleared u p b y a
ruling o f t h e b o a r d
o r b y a n amendment t o the statute; a n d in-
asmuch as 1 suzgested this topic, I would like to move
that the "ederal Reserve Board be requested t o give a n
expression, either formally o r informally,
a s t o their
view o f the meaning o f the statute i n respect o f the
custody o f this g o l d , a n d i f there i s a n y d o u b t a t a l l i n
the minds o f the Board a s t o our ability t o revérse t h e
pump, t h a t w e r e c o m m e n d s u c h n e c e s s a r y a m e n d m e n t s
t o the
statute o s would enable u s t o substitute commercial
paper f o r g o l d h e l d b y t h e F e d e r a l R e s e r v e Agents.
Such
an amendment would b e quite unnecessary i f the amendment
suggested b y Governor S e a y i s successful.
Governor Kains? I
a m very much curprised t o learn
that there i s a n y doubt o n the subject.
v e have discus—
sed this matter i n San Fmancisco w i t h the Federal Reserve
Agent, a n d w e thought t h e pump could b e reversed v e r y
readily.
Mr. 3
O
u
r Federal Reserve Agent thinks the
same Way.
Governor wold:
D i d I T uncerstana y o u t o s a y y e s t e r —
day that some member o f the Board h a d expressed doubt a s
to whether w e might b e able t o d o it?
The Chairman:
Y e s ; this w a s some time ago; b u t
in looking over t h e figures before this meeting i t davmnod
on m e that this h a d t e come a very important question a n d
it would become a
very mich more important question a s
the process o f issuing notes against gold developed i n
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Federal Reserve Bank of St. Louis
volume.
second t h e motion.
Governor Aiken: I
I
The Chairman:
s t h e r e a n y debate?
(The q u e s t i o n w a s c a l l e d f o r a n d t h e m o t i o n w a s d u l y
carried. )
11-(m).
L O A N S O N REAL ESTATE.
The Chairman:
T o p i c (m), Loans o n realestate,
suggested b y Governor Rhoads.
is
G o v e r n o r Rhoads, w i l l y o u
open t h e d i s c u s s i o n ?
M r . Chairman,
Governor Rhoads:
i n conversation
with o n e o f the members o f the Federal Reserve Board, I
learned that t h e Board was contemplating opening t h e doors
was
wider t o real estate loans, b u t a s I understand i t i t
to permit s i t y banks, reserve cities a n d central reserve
cities,
t o loan o n city real estate. I
thought i t would
to
be desirable f o r u s t o consider t h e matter here a s
whether w e w a n t e d t o e n d o r s e
o r oppose s u c h a n amendment.
Would i t promote progress i f I move a
resolution
on
that w e are n o t i n favor o f opening t h e doors t o loans
real estate?
The Chairman:
G o v e r n o r Rhoads offers a
resolution
xpressing t h e sense o f this meeting t h a t i t would b e
inadvisable t o extend t h e authority o f the reserve banks
to m a k e l o a n s
o n r e a l estate.
Governor Sawyer: I
Governor Seay:
second “the motion.
I n that cennection, Mr. Chairman,
1 would like t o call your attention t o the fact that
there i s ,
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Federal Reserve Bank of St. Louis
aw
?
e a l l know,
n o w
am o v e m e n t
i n Congress
t o 6sS-
50F
tablish r o t a r y c r e d i t b a n k s , a n d i t a p p e a r s
t o b e contem=-
plated i n the bill n o w before t h e Joint Committee t h a t
the Reserve Danks shall b y an insidious process make loans
on r e a l estate.
received a
I
t i s probable t h a t e v e r y G o v e r n o r
similar l e t t e r f r o m t h e J o i n t Committee,
and
the criticism o f the Governors was invited, a s i t was i n
mine. I
call your attention t o two provisions i n that
bill, a n c i t seems t o m e that i t i s o f sufficient seriousness
t o justify s o m e consiceration
Governor Wold:
language
o n o u r part.
M a y 1 call your attention to the
o f the A c t which Goes n o t permit national banks
in central reserve cities, uncer a n y circumstances,
real e s t a t e loans.
t o make
T h e b o a r d m a y r u l e a n y w a y i t pleases,
but i t would n o t affect t h e law.
The Chairman:
G o v e r n o r Rhoads! motion was directed
against what h e had understood t o b e a possible effort
to amend t h e statute s o a s t o extend t h e powers o f the
Federal Reserve Danks i n that respect.
G o v e r n o r Seay,
you were going t o call attention t o two provisions o f the
proposed rural credit bill.
Governor Seay:
T h e bill states t h a t "Being available
as collateral security t o a n y customer o f a member b a n k
of t h e F e d e r a l R e s e r v e S y s t e m i n p r o c u r i n g i t s a c c e p t a n c e s ,
that t h e h o l d e r o f t h o s e b o n d s m a y p u t t h e m u p a s s e c u r i t y
of the member banks i n return f o r these acceptances, a n d
get a renal estate bond."
A
n
d again, "The direct ap-
plications o f such member banks i f o f n o longer maturity
than sixty days, w h e n accompanied b y these bonds a s col-
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Federal Reserve Bank of St. Louis
308
lateml security, shall b e eligible f o r d i s m u n t
b y the
Feceral Reserve Sanks."
Governor told: I
presume t h a t e a c h o n e o f t h e G o v a r n -
ors has had a copy o f this bill sent him with a letter
asking his opinion.
W o u l d i t not b e wise t o have o n e
opinion f o r m a t e d reflecting t h e views o f all o f the
Governors a n d not have twelve different views g o i n t o
the rural credit commission?
The Chairman:
I
n listening t o this discussion i t
occurs t o m e that t h e wisest course f o r u s t o pursue is,
first,
t o pass a
resolution i f i t i s the sense o f the mecet-
ing, s u c h a s Governor Rhoads h a s offered, having n o relation trhatever t o the proposed rural credit legislation.
Having passed t h a t motion,
i f Governor S e a y will t h e n
raise t h e question about t h e proposed rural credits bill,
ve c a n pass another resolution that will cirectly apply
to that matter, a n d i f the Governors o f the Reserve “oanks
then intend t o submit criticisms o f the bill t o the committee t h e t h a s i n v i t e d t h o s e c r i t i c i s m s , w h y ,
be imniform
i t will
s o far a s i t applies t o loans b y Fececral
Reserve Danks secured b y these bonds,
The o t h e r p o i n t s o f t h e b i l l i t s e e m s
nothing t o dovwiti
t o m e w e have
T h e y co not touch the Federal Reserve
Gystem cirectly, a n d i t i s largely t n e expression o f indiBut,
s o f a r a s i t affects t h e * e d e r a l
Reserve System and the Federal Reserve banks, i f ue agree
now i n passing a
resolution w h i c h w o u l d c o n c e m n t h i s p r o -
vision o f the bill, naturally a n y opinbons that w e send t O
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Federal Reserve Bank of St. Louis
the c o m m i t t e e w o u l d b e u n i f o r m o n t h a t subject,
Is i t satisfactory t o you, Governor Seay, t o deal with
the m a t t e r
i n that way?
Governor Seay: P e r f e c t l y , sir.
The Chairman: G o v e r n o r Rhoads'motion was seconded,
1.think,
Governor Seay: I
was speaking t o his motion i n bring-
ing u p this matter.
The Chairman: I
had that i n mind, a n d i f the sub-
ject h a d n o t b e e n b r o u g h t
up I
wes g o i n g t o s u g g e s t t h a t
a resolution should b e submitted covering that matter, separ-
ately, however, Governor Seay; and i f there i s n o objection
I will put Governor Rhoads! motion and then we will take
up t h e q u e s t i o n o f t h e r u r a l c r e d i t legislation.
Is there any further debate o n Gavernor Rhoads!
motion?
(The question was called
a
n
a the motion was duly
carried.)
The C h a i r m a n :
G o v e r n o r
in r e g a r d t o this b i l i t h a t I
S e a y h a s praised t h e q u e s t i o n
have r e a d v e r y c a r e f u l l y
with a lot o f other literature o n the subject, a n d 1 think
we can well afford t o take a positive position o n that matter right now.
Governor Fancher: A b s o l u t e l y .
The Chairman:
G o v e r n o r Seay,
i s your v i e w o f i t
positive enough t o justify your offering a resolution t o
cover t h e matter?
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Federal Reserve Bank of St. Louis
Gevernor Seay:
E n t i r e l y so, sir.
i
n 2eply 2
31LO
that I
expressed t h e o p i n i o n t h a t I l was u n a l t e r a b l y o p -
posed t o having s u c h bonds made available a s collateral
security, a n d that i t violates t h e essential principle o f
the reserve idea, t o preserve which s u c h transactions s h o u l c
be o f a liguid c o m e r c i a l nature, I
d o not know, sir,
whether these queries w h i c h were p u t b y the Joint Committee - a r e provisions contained i n the bill o r not?
T h e y are.
The Chairman:
T h e y are n o t only con-
tained i n the bill, b u t t h e y are i n the original report
of the rural credits commission that investigated this
trip t o BGurope a n d a rather l o n g
subject a n d made a
detailed report o n the subject.
T h e effort i s made
throughout t h a t bill t o bring t h e rural credit banks a n d
tne F e d e r a l R e s e r v e B a n k s i n t o r a t h e r c l o s e r e l a t i o n s h i p s
in some features o f their business,
move, sir, that this o n f e r e n c e
Governor Seay: I
of Governors
is a w e
f i r m l y opposed
t o the previsions
of the rural credit bill, Senate Bill No. 5542,
T h a t i s the Hollis Bill?
The Chairman:
Governor Seay:
Hr. Curtis:
Yes°sir.
i s that bill. i n its present final
shape a s i t was p u t through t h e Senate?
Governor Seay:
T h i s i s t h e f o r m which was approved
by the Senate Banking a n d Currency Committee.
Mr. Curtis:
substitute’ a
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Federal Reserve Bank of St. Louis
h e y struck o u t the House Bill and
new bill?
Governor Seay:
Yes.
O48
(Continuing t h e resolution: ) T h a t t h e Conference o f
Governors a r e unalterably opposed t o making the f a r m loan
bonds cescribed i n such bill available a s collateral security i n obtaining t h e acceptance o f any bank o r a vailable
as s e c u r i t y f o r l o a n s o b t a i n e d f r o m F e d e r a l R e s e r v e Yanks.
The Chairr..... "
want t o take the liberty o f calling
your attention t o one effect o f that resolution,
offer it.
a s you
T h e acceptances o
f national banks n o w are con-
fined t o the acceptance o f those drafts which are drawn i n
connection w i t h t h e i m p o r t a t i o n
o r exportation
o f goods,
and a strict inteppretation o f the meaning o f the statute
would confine acceptances o f national banks t o documentary
bills o r t o bills which were s o closely related t o commercial t r a n s a c t i o n s t h a t t h e r e w o u l d b e n o p o s s i b i l i t y
of t h o s e b i l l s b e i n gtS ¥d i r e c t l y d3 r a w n a g a i n s t c o l l a t e r a l
out
with/revard
t O w h a t t h e v r o c e e d s w e r e u s e d for,
It is quite possible that Congress m a y even, a t the
sugcestion o f the Federal Reserve Board, consicerably e n large t h e powers o f national banks i n accepting drafts;
they m a y even g o s o far a s t o give t h e m the power t o accept drafts growing o u t o f domestic transactions
i n goods,
or e v e n t o a c c e p t f i n a n c e d r a f t s w h i c h a r e s e c u r e d b y c o l -
lateral,
A n d i f Congress should g o a s far a s that, i t m a y
be unwise f o r u s t o recommend that member banks should b e
permitted t o accept against bonds o f a different character
from these,
ftvould l i k o t o t a k e t h e l i b e r t y o f s u g g e s t i n g a s a n
amendment t o your resolution that i t i s the sense o f this
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Federal Reserve Bank of St. Louis
512
meeting that t h e porers o f national b a n k s t o accept drafts
against t h e collateral o f these mobbgage bonds should n o t
be cxtended unless t h e povers o f national banks t o accept
drafts a r e generally enlarged t o accept against collatcral
under suitable safeguards; a n d t h e n w e d o not appear t o
be discriminating against legislation which I think all
of u s r e g a r d a s w i s e l e g i s l a t i o n
framed. I
i f i t i s satisfactorily
would be afraid t o see the Federal Reserve
Banks c o m e right o u t squarely a n d s a y i n effect that t h e y
ao not believe that national banks should b e permitted t o
accept drafts against this particular k i n d o f collateral.
If w e are going t o s a y that w e ought t o make i t much wider
than that, a n d s a y that w e d o not believe t h a t t h e member
banks should b e permitted t o accept against collateral a t
all e x c e p t t h e d r a f t b e d r a w n i n c o n n e c t i o n w i t h a
com-
mercial transaction.
Governor Seay: I
amendment becauso I
a m very willing t o accept that
think i t i s the essence o f the whole
thing.
(At this point informal discussion t o o k place which
the stenographer w a s directed n o t t o report.)
he Chairaan:
permission,
attempting
C a n w e not clear this up, w i t h your
a s y o u have offered this resolution,
t o cover b o t h subjects
b y not
i n o n e resolution?
Can w e n o t deal b y one resolution w i t h the subject o f
Federal Reserve Banks loaning m o n e y o n the security o f
these bonds, a n d then deal separately w i t h the subject o f
the acceptance o f member banks secured b y these bonds?
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Federal Reserve Bank of St. Louis
Tney r e a l l y a r e n o t d i r e c t l y r e l a t e d to. e a c h other,
Governor Seay: I
a m o f the opinion that either o n e
or t h e o t h e r s h o u l d b e done. I
appreciate t h e f o r c e o f
What y o u say, a n d I a m perfectly willing t o divide t h e
resolution i n t o t w o r e s o l u t i o n s a n d a c c e p t y o u r substitute.
The Chairman:
T a k i n g t h e first part o f your resolu-
tion a n d e l i m i n a t i n g t h a t p a r t a p p l y i n g
t o the acteptance
provision, t h e remainder would consist o f the expression
of t h e s e n s e o f this m e e t i n g t h a t w e a r e o p p o s e d
t o having
Federa 1
t o member
Reserve B a n k s a u t h o r i z e d
t o make loans
banks u p o n t h e s e c u r i t y o f t h e s e m o r t g a g e bonds.
I
s that
correct?
Governor Seay:
T h a t i s the direct sense o f the reso-—-
lution and I accept that language i n place o f the resolution o f f e r e d ,
Governor Fancher: I
second t h a t motion.
(The motion was duly carvied.)
Governor Seay: M r . Chairman, I accept your resolution a S a
substitute f o r t h e o n e o f f e r e d b y me. I
merely
desired t o cover the idea, a n d I think i t i s important
enough
t o b e covered.
I
t think that
part a s w e l l a s t h e f i r s t p a r t , a n d I
w e Should c o v e r that
accept t h e s u b s t i t u t e
you propose,
The Chairman:
resolution,
W i t h o u t attempting t o dictate t h e
d o I understand y o u correctly, Governor Seay,
in s a y i n g t h a t y o u b e l i e v e t h i s m e e t i n g s h o u l d p a s s a
reso-
lution t h e effect o f which trould b e t c express o u r disap-
proval o f a plan t o extend the povers o f national banks t o
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Federal Reserve Bank of St. Louis
314
accept d r a f t s a g a i n s t s e c u r i t y w h e n t h e o n l y s e c u r i t y
which i s permitted will consist o f the bonds o f these mortgage banks, a n d i f the powers o f the national banks a r e t o
be enlarged s o that t h e y m a y accept finance drafts, t h e
whole subject o f that character o f acceptance should b e
carefully considered a n d suitably safeguarded?
Governor Seay:
Y e s sir.
Governor VanZandt:
the b i l l p r o p o s e s
D o you think, Mr. Chairman, that
t o create finance bills?
The Chairman: U n c u e s t i o n a b l y .
what i t does do.
T h a t i s exactly
B u t t h e only class o f finance bills
that w u l d b e created b y the operation o f that bill would
be those which are secured b y these mortgage bonds.
Governor Seay:
I t i s not the purpose, b u t t h e e f -
fect?
Governor V a n Zandt: I
had a n idea that t h e words i n
the l e t t e r p r o v i d e d t h a t a n i m p o r t e r
case o f domestic a c c e p t a n c e s ,
o r exporter,
i n the
was permitted, n
i obtaining
acceptances f r o m a
bank w h e r e t h e m a n ' s c r e d i t w a s n o t g o o d
enough,
t u p these b o n d s a s collateral
t o
p
u
secure t h e m o n these transactions. I
to
had n o idea that
it referred t o the creation o f finance bills, b u t i t appears t o , f r o m looking a t i t now.
The Chairman:
i f i t does n o t intend that i t i s s o
clumsily e x p r e s s e d t h a t a n i n t e r p r e t a t i o n
o f l a w would
undoubtedly l e a d t o that being done, i t seems t o me,
Governor Seay:
A n d the banks, i f they were s o
minded, c o u l d perform that transaction under cover o f this
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permission.
Mr. Cnairman,
i f you will frame that t o cover the
idea o f what I have i n mind, I
stitute resolution.
will accept that a s a sub-
D o y o u not think i t should b e covered
now?
The Chairman: I
d o indeed.
W h a t I hesitated about
adopting a s m y o v m p e r s o n a l v i e w i n t h a t r e s o l u t i o n w a s a
condemnation,
i f you please, o f a n effort t o permit some
legislation ehich w e ought t o have i n this country i n some
form,in s u c h general terms t h a t i t might b e misunder-
stood, and 1 wuld b e afraid that the resolution would
be m i s u n d e r s t o o d u n l e s s
i t was qualified
i n t h a t way.
While this resolution i s being framed b y Mr. Curtis
I do not mind saying that I believe that a restriction o n
the right o f acceptance b y national banks i s undoubtedly
coming.
G o v e r n o r Kains h a s h a d considerable experience
in this matter, a n d I have discussed i t with h i m once o r
twice, I
think he will agree with me--~ i f he does n o t
he will say so--- that the development o f o market for
these bills does n o t necessarily depend u p o n whether t h e y
are finance biths o r commodity bills, but i t depends really u p o n t h e reputation, c r e d i t a n d s t a n d i n g
o f t h e acceptor,
and that if we are to have a real bill market i n this
country what w e have g o t t o guard ourselves against i s
not the creation o f finance bills, b u t t h e creation o f a
lot o f bills that are not regarded a s sound and marketable
in any part o f the world.
A t present, w i t h t w o classes
of institutions accepting bills, state banks and matienal
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Federal Reserve Bank of St. Louis
316
banks, w e are i n some danger o f having a
certain amount
of reckless acceptance business g o i n g on, that will injure
the market f o r the perfectly legitimate acceptance,
that h a s g o t t o b e safeguarded i n some way.
A
n
d
T h e best
safeguard ,which C o n g r e s s a p p a r e n t l y w a s u n w i l l i n g
t o adopt,
would b e the limiting o f the right o f acceptance t o those
institutions w h i c h have large capital a n d resources a n d
much e x p e r i e n c e
i n t h e business.
T h a t would b e the sound-
est method o f protecting t h e market against t h e creation
of a
large v o l u m e
o f bills t h a t n o b o d y k n e w a n y t h i n g
about.
Governor Aiken: T h e r e . i s n o distinction made i n
the London market between those bills.
The Chairman:
not. I
N o , a s a matter o f fact there i s
think there i s a good deal o f misunderstanding a s
to the distinction that applies t o bills i n the London
market,
N o w and then one acceptor, usually t h e private
acceptance house, g e t s a n oxtension, a n d the banks dis-—
criminate against their bills, just a s discrimination
arose a
year a g o last summer against t h e acceptance o f
some o f the agencies o f foreign banks i n the London market
which w e r e p r o p e r l y f i n a n c e b i l l s a n d w h i c h oca@ sioned
the b a n k s s o m e a n x i e t y a n d a f t e r t h e w a r w i l l o c a s i o n a
great deal more anxiety.
Governor V a n Zandt:
D o e s n o t t h e issuance o f
finance bills b y a n institution have a
marked effect o n
the bank's credit, more than i t would i f they were documentary bills?
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Federal Reserve Bank of St. Louis
317
The Chairman:
ment a p p l i e d a s a
T h e y nave a more sensitive insirucheck u p o n t h e u n w i s e u s e o f t h e p r i v i l -
ege i n t h e m a r k e t f o r t h e i r o w m p a p e r ,
a n d the banks
i n this
country a r e a l l required t o publish statements, national
and state, a n d t h o s e s t a t e m e n t s a r e b e i n g c a r e f u l l y w a t c h ed, a n d a n y b a n k t h a t a b u s e s i t s a c c e p t a n c e p r i v i l e g e
‘ould b e noted right away.
Governor Seay:
while back, a
M e . Chairman, I received, a little
communication f r o m Mr. Harding i n which h e
touched u p o n c e r t a i n o p e n m a r k e t t r a n s a c t i o n s ,
a n d also
upon t h e domestic acceptance, w h i c h leads m e t o believe
that they are considering i t and not along the lines o f
limiting t h e acceptance t o banks o f high standing a n d
large capital,
The Chairman: I
think there i s likely t o b e a n ef-
fort made i n the near future t o enlarge the powers o f
national banks t o accept drafts, probably t o cover all
forms o f comestic transactions.
V h e t h e r i t will include
the acceptance o f a finance bill drawn against collateral
is matter o f some doubt, I believe.
Governor Seay: I
was t o l d that Mr. Glass w a s very
firmly o p p o s e d a t t h e b e g i n n i n g
acceptance
p a ers t o all banks
he h a d b e e n w o n a r o u n d t o a
The Chairman:
t o granting unlicensed
i n t h e country,
b u t that
different p o i n t o f v i e w now.
S o I understand.
M a y we ask Mr. Cur-
tis t o read the resolution that h e has drafted.
Mr- Qurtis: ( R e a d i n g ) :
" M o v e d that the Conference
is a l s o o p p o s e d t o a n y l a w e x t e n d i n g t h e a u t h o r i t y o f
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Federal Reserve Bank of St. Louis
318
national b a n k s t o make a c c ptances based upon such farm
loan bonds i f such bonds a r e t o b e the sole f o r m o f collateral u p o n which such acceptances m a y b e based;
a n d if
he acceptance o f finance bills b y national banks-is t o
be authorised, t h e l a w should permit more forms o f collateral t h a n such farm loan bonds, a n d should provide
suitable safeguards against t h e abuse o f the privilege
by l i m i t i n g s u c h a c c e p t a n c e s
t o t h o s e o f bills t h e p r o -
ceeds O f which have b e e n o r are t o b e used f o r commercial,
agriculatural, industrial o r exchange purposes,?
The Chairman:
G o v e r n o r Kains, I
would like t o
hear w h a t v i e w y o u e n t e r t a i n a b o u t t h i s matter,
Governor Kains: I
think that they a r e Legitimate
finance bills, a n d I understood f r o m the resolution that
Mir. Curtis has just read that w e are taking every possible
means
t o p r e v e n t i l l e g i t i m a t e f i n a n c e b i l l s b e i n g issued.
I think that a
finance b i l l c r a w n i n t h e p r o p e r w a y h a s
assets n e n i t will realize befere those bills become d u e
and i s perfectly legitimate, a n d I think that national
banks s h o u l d b e a l l o w e d t o a c c e p t t h e m w h e n v i e t 2 6 t h e
case,
The Chairman:
Y o u believe, then, t h a t i t i s a per-
fectly legitimate transaction f r o m a banking standpoint
for a
national b a n k t o a c c e p t a
draft w h i c h i s d r a w
against collateral and for the purpose o f creating exchange?
T h a t i s what i t amounts t o i n the last analysis,
is 1 t not?
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Federal Reserve Bank of St. Louis
Governor Kains:
Y S s Sirs 1
-do,
519
The Chairman:
T o S p e y this discussion a little fur-
ther, finance bills, f r o m the standpoint o f the N e w
York market, h a v e n o t for years b e e n drawn f o r t w o purposes, o n e f o r t h e purpose o f creating exchange; t h a t i s
to say, w h e n a bank which issues a
for travelers
t o e x t e n d abroad,
large amount o f credits
o r when t h e y a r e selling
exchange i n large volume t o Europeans that have bills t o
pay abroad, t h e y will d r a w finance bills f o r use;
and
in the carly part o f the year, i n the expectation that
when t h e c o t t o n b i l l s c e m e i n t o t h e m a r k e t t h e y w i l l b e
able t o buy those bills a t lower rates a n d cover their
finance bills.
T h a t is a
type o f f i n a n c e b i l l s d r a w n
for exchange purposes w h i c h I believe a r e perfectly legiti-
mate.
Governor Kains: I
he Chairman:
quite agree with you.
T h e r e i s another type O f bill drawn
in the New York mrket, usually o n London banks, that
possibly would not be regarded a s legitimate.
to Say, w h e n stock speculators
T h a t is
i n New York are buying
stocks the rates for stock exchange loans i n New York are
high a n d exchange happens t o b e high a t the same time, a n d
they will sometimes draw very large volumes o f a
finance b i l l s
o n London acceptance h o u s e s s i m p l y t o bor-
row m o n e y a t t h e l e w e r r a t e s t h a t h a p p e n t o prevail
in
Lendon a t t h a t t i m e t o e n a b l e t h e m t o c a r r y t h e i r s t o c k o n
cheapest market.
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Federal Reserve Bank of St. Louis
Governor Kains:
The Chairman:
T h a t i s illegitimate.
T h o s e a r e illegitimate finance bilis;
320
and these transactions take, o f course,
of forms.
B u t generally speaking, a
a n infinite variety
bill Grawn t o make
xchange i s just a s legitimate a s the bill crawm t o ship
cotton.
Governor Kains:
Tne Chairman:
O r , Yos.
B e c a u s e t h e proceeds o f the bill
drawn t o m a k e e z c h a n s e a r e u s e d t o v a y f o r g o o d s
i n anti-
cipation o f the cotton bill coming into the market t o provide that exchange.
I
Governor Keins: I
t is m
anticipation.
used t o draw o n our own office
in London just f o r those purposes.
mate transactions.
T h e y are a l l legiti-
F o r the same legitimate purposes
hat w e draw o n the banks o f Scotland, making a n arrange-—
ment with the Bank o f Scotland s o that w e could put o u t
another million pounds,
o r so.
B u t i t was a l l legitimate
business.
The Chairman:
bitious t o occupy a
O f course, t h i s country i s rather a m prominent position i n the world's f i n -
ance, a n d i t cannot d o it. W i t h t h e brakes o n the banks,
Governor Seay:
T h e r e a r e houses w h o might, w i t h brib-
ing, a c c e p t t h o s e i l l e g i t i m a t e t h i n g s
i f t h e y desire;
but t h e y should n o t b e confused w i t h the functions o f
national banks o r Federal Reserve Banks.
The Chairman:
N o .
W o y , i f the stock houses i n
New York want t o make arrangements
i n London with some
of the London acceptance houses o r London banks t o put
up collateral i n New York a n d draw finance bills t o enable
them t o operate a t 2-1/2 p e r cent interest instead o f 5
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Federal Reserve Bank of St. Louis
vel
per cont; ( e t them d o it; b u t that type o f billie shouig
HOG D e eiipible: J o r us: t o buy.
On the other hand, i f the national banks i n New York
want t o a c c e p t b i l l s G r e v n o n t h e m b y L o n d o n b a n k s
or
London bankers t o enable those banks i n London t o create
credits
i n N e w York, w h i c h w i l l b e u s e d t o p a y o u r e x p o r t -
ers f o r goods t h e t w e are shipping t o Zurope,
w e are c e r —
tainly i m p o s i n g l i m i t a t i o n s u p o n o u r b a n k i n g b u s i n e s s
in
preventing national banks f r o m accepting those bills, that
are u n w i s e a n d w i l l retard t h e d e v e l o p m e n t
o f our banking
business,
Governor Fancher:
I s not that just t h e situation
that i s likely t o ariSe i n this proposed settlement l o a n
of a quarter o f a million dollars?
The Chairman:
Yes.
Governor Fancher:
ne Chairman:
T h a t i s just t h e situation?
J u s t that exactly-
T h e s e London
banks want to create credits i n New York, and the “rench
bank cid i n a small vay, i n order t o have accounts t o draw
checks upon,
T h o s e checks a r e sent over here t o p a y
for wheat that i s being exported from Minnesota, a n d the
idea o f stating b y statute, a s i t attempted i n this statute,
Ilpelieve, that the only kind of bill that can be employed
to enable the foreign buyer o f these goods t o pay for the
goods i s the bill that i s drawn b y the seller o f the goods,
is unwise.
ceptance
W
e should h a v e t h e door wide o p e n t o the a c -
O f a l l k i n d s o f -rafts,
t h e proceeds
are u n d o u b t e d l y u s e d f o r c o m m e r c i a l purposes.
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Federal Reserve Bank of St. Louis
o f which
I
f this m a t -
322
ter comes u p i n Washington,
a s i t undoubtedly will this
fall, w e may find i t desirable t o g o into this thing a t
much greater detail t h a n i s necessary now.
Governor Fancher:
I t occurs t o m e that a situation
is going t o develop here.
T h e r e i s very heavy bidding f o r
foreign goods, a n d there will b e some financing done also,
The Chairman: I
cannot h e l p b u t feel that a
resolu-
tion drafted b y Mr. Curtis expresses a l l that w e need t o
express n o w i n connection w i t h the Hollis bill; b u t i f
the general subject o f the powers o f national banks t o
accept drafts i s to be dealt with, that ought t o be gone
into very mich more carefully a n d recommendations m a d e that
would b e more effective t h a n this. I
d o not believe t h e
time h a s arrived y e t when i t i s necessary t o g o into that.
Would y o u care t o have this resolution read again?
(Mr. Curtis again read the resolution referred to.)
The Chairman:
H o w d o y o u f e e l about that, Governor
Seay? :
Governor Seay: I
a m p e r f e c t l y w i l l i n g t o h a v e that,
Mr, Chairman.
Goernor V a n Zandt:
I
t just s t r u c k me, Mr. Chairman,
as that resolution w a s being read, t h a t i f w e n o w pass a
resolution which imposes t h e same limitation which w e n o w
object to, it might later seem inconsistent for us to ask
Congress t o amend t h e A c t s o that national banks will b e
authorized
t o accept s u c h b i l l s t h a t a r e c r a w n f o r e x -
change p u r p o s e s .
I f w e a d d these words “exchange p t r -
poses" now, i t will b e consistent later i f w e determine t o
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Federal Reserve Bank of St. Louis
323
refommend t h a t a s a
general p l a n f o r e n l a r g i n g t h e p o w e r s
of national banks.
Governor Seay: I
that,
Y h a t I
a m perfectly willing t o agrec t o
had i n mind w a s this;
t h a t a n exchange
condition which would necessitate t h e drawing o f s u c h
bills must arise o u t o f commercial o r industrial transactions.
T h e exchange condition i s the result o f those c o m -
mercial o r industrial transactions.
Governor Wold:
H o w are y o u going t o distinguish
between the exchange bill and the finance bill?
Go ernor Seay:
W e can ask the purpose o f the accopt~
ance a n d certify i t a s t o the nature o f the bill.
The Chairman:
I t is easy t o do that.
(At this point informal discussion took place which
the stenographer w a s directed n o t t o report; a f t e r which
the following proceedings were had: )
(The question was called for and was duly carried.)
Governor Seay:
M r . Chairman,
w e are touching v e r y
intimately t h e r e u p o n t h e d o m e s t i c a c c e p t a n c e business.
11-(1). DOMESTIC ACCIPTANCES.
The Chairman:
T o p i c (1), Domestic acceptances i s
suggested b y two o f the Governors, M r - Rhoads a n d Mr, Seay.
Mr-e Rnoads, will you open the discussion of this matter?
Governor Rhoads: I
understood,
a s perhaps a l l o f y o u
have, t h a t there i s a probability o f that amendment being
introduced, a n d m y own feeling was that i t should be safeguarded o n the lines a s indisated i n the discussion tonight;
that i t should n o t b e open t o every bank irrespective o f
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Federal Reserve Bank of St. Louis
its size o r financial standing.
Governor Wold:
T h y ?
W h y m a y not a
bank o f
50,000 accept a certain percentage o f their capital a s
Safely a s a bank with ‘35,000.000.
Governor Rnoacs:
Governor Wold: >
I t m a y o r i t may not.
hy m a y i t not? A
hundred dollar
note made b y a small cealer m a y b e just a s good a note
and y o u m a y b e just a s sure t o get your payments a t
maturity, a s a 550,000 note made b y a large concern.
is a l l b a s e d u p o n t h e v o l u m e
I t
o f accepting t h a t t h e y a r e
doing a n d their ability t o meet their obligations.
Governor Seay:
w o u l d there b e any occasion f o r t h e
matter t o take t h e f o r m o f a bank acceptance i n such a
small amount?
Governor Wold:
T h a t i s another question;
b u t bank-
ing has b e e n free, a n d i t i s pretty difficult t o commence
that a t this time.
I t i s a wise thing f o r a million
dollar b a n k t o b e m m a t a n p e r m i t t e d
t o accept domestic
bills based o n a percentage o f its capital.
W h y is it
not just a s safe and practicable f o r a ‘500,000 bank t o
be p e r m i t t e d
t o accept t h e s a m e p r o p o r t i o n
o f its capi-
tal i n domestic bills?
Governor Rhoads:
M a y I inquire what a r e t h e excep-
tions, i f any, o n state banks a n d trust companies i n New
York State o n their domestic acceptances?
The Chairman: A b s o l u t e l y n o restriction whatever.
It would b e interesting t o some o f you, I guess,
a little a b o u t t h e e x p e r i e n c e
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Federal Reserve Bank of St. Louis
t o hear
i n the N e w York market w i t h
acceptances of state institutions.
At the outset, w h e n the l a w was passed, w h i c h was
about eighteen months ago, some o f the N e w York State
trust companies, t h e small ones, thought i t was a n easy and
convenient w a y o f accomiodating their customers, a n d one
or t w o t r u s t c o m p a n i e s
i n N e w Y o r k City,
o f the smaller
ones, and a few up state, undertook t o handle for their
customers against collateral, and, I guess,
without collateral,
i n some cases,
B u t i t did not take v e r y long for
these bills t o disappear f r o m t h e market.
I t was pretty
soon understood that those acceptances w e r e n o t really
legitimate, I
have i n mind two institutions i n New York.
One institution was accepting f o r a commercial paper
broker o f i t s c o m m e r c i a l p a p e r t h a t t h e b r o k e r w a s c a r r y ing, a n d i t w a s k n o w w h a t t h e c h a r a c t e r
o f transaction
WAS. E v e r y b o d y knows t h a t commercial paper held b y a
broker i s limited when h e c a n sell it, b u t i f h e cannot
sell i t h e i s h u n g u p w i t h it.
A n d those bills j u s t d i a
not sell well, a n d y o u will n o t find a n y o f them i n the
New York market now,
Governor Wold:
The Chairman:
D o e s n o t that take care o f itself?
Yes.
Governor Wold:
T h e r e i s n o obligation o n the Federal
Reserve Banks t o buy anybody's acceptances.
Y o u Ciscrim-
inate a g a i n s t t h o s e w e a k ones, a n d t h e y c a n n o t p u t o u t a n y
Quantity o f them,
The Chairman: I
have m i c h less fear o f the abuse o f
the acceptance privile_e b y small banks t h a n Governor
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Federal Reserve Bank of St. Louis
526
Rhoads possibly entertains,
1 6 0 m o t ond ale the bill
will sell cheaply enough.
Governor Wold:
T h a t i s just @e@cetly it.
Governor Rhoads:
I
s there n o t something
i n the idea
that t h e y are member banks a n d they a r e n o t customers, a n d
that +
not otherwise b u y i f w e were free?
The Chairman: I
think t h e real weakness o f the u n —
limited e x p a n s i o n o f t h e p o w e r o f aecevtance,
a s was shown
by the legislature i n New York State, i s the fact that
there i s n o provision f o r t h e accepting b a n k t o carry
a
reserve against t h a t f o r m o f liability, a n d i t i s logical
that i f a bank i s going t o create a
large acceptance l i a -
bility which i s payable o n maturity, j u s t a s the time d e posit i s payable,
t o b e sure, subject t o reimbursement b y
the p a r t y t o w h o m c r e d i t i s issued,
t h a t character
of
liability should b e reinforced i n s o m w a y b y a reasonable reserve,
I n the course o f time i t seems t o m e that
the buyers o f bills will u s e that a s one test o f the
Quality o f the bill, whether a
ent r e s e r v e
bank i s Carrying a
suffici-
t o justify i t s using t h e acceptance privileze
to the extent. that 1 % is.
Governor Rhoads:
D
o a n y state institutions voluntar-
ily c a r r y r e s e r v e s n o w f o r t h a t p u r p o s e ?
The Chairman:
ly, I
N o , I
d o n o t think t h e y do. P e r s o n a l -
a m rather i n favor o f Seeing t h e national banks get-
ting l a r g e p o w e r s , b e c a u s e t h e y a r e u n d o u b t e d l y
a t some
Cisadvantage j u s t n o w as a g a i n s t t h e state banks, a n d this
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Federal Reserve Bank of St. Louis
is o n e o f t h e f e w e n l a r g e d p o w e : s t h a t c a n b e g r a n t e d
to
them--~ giving t h e m the right t o accept domestic crafts,
Mr. Hendricks:
I s not a domestic acceptance a s good
aS a foreign acceptance?
Tne Chairman:
I n many cases i t i s better.
Do y o u propose t o offer a resolution, Governor Rhoads?
GOvernor Rhoads:
to o f f e r a
N o , I do not think I am prepared
resolution, I
feel t h a t y o u r k n o w l e d g e
o f the
matter i s s o mich more extensive than mine that I would
rather have y o u frame it.
The Chairman:
I
t i s just a
porsonal o p i n i o n ; I
not want t o urge i t too strongly. I
do
think this i s a
matter that i s G0ing t o be dealt with without very nuch
regard
t o h o w w e f e e l a b o u t i t anyway.
Governor Seay, d o you feel Gisposed t o o f f e r aresolution covering this subject?
Governor Seay:
M r . Chairman, I entertain the con-
viction that the subject i s going t o be dealt with, and I
also e n t e r t a i n t h e c o n v i c t i o n t h a t i t i s a
power w h i c h
may t o advantage b e granted t o the national banks o f this
country, and, under proper safeguards, c a n be safely
granted t o them,
But I also believe t h a t t h e opinion o f the Governors
is going t o b e asked o n the subject, a n d since w e are a p proaching t h e period n o w when 6ongress will assemble
anc w h e n these things will b e thought o f , a n d w e d o not
to be
know where o u r next meeting will happeng
a n d I thought i t
was a
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Federal Reserve Bank of St. Louis
fitting subject f o r discussion now. i
-belleve A t
328
would b e o f acvantage t o have t n e sense o f this meeting a s
to whether o r not the power o f the member banks might n o t
be s o enlarged a s t o give t h e m the privilege o f making
cgomestic acceptances. I
would a s k y o u t o take t h e sense
of this meeting o n that subject,
The Chairman:
offered a
I t would m u c h facilitate t h a t i f you
resolution, Governor Seay.
Governor Seay: I
move that i t i s the sense o f this
meeting that t h e powers o f the national banks m a y b e s o
enlarged a s t o m a k e d o m e s t i c a c c e p t a n c e s u n d e r p r o p e r
restrictions a n d safeguards,
Governor Wold: I
The Chairman:
second t h e motion.
I s there a n y ciscussion o f Governor
Seay's m o t i o n ?
Governor Kains, h a v e y o u a n y t h i n g , t
o say i n opposition?
Governor Kains: I
did n o t s a y anything, because I
like t o listen, b u t I have a n opinion o n that subject,
and I
a m cntirely o f the opinion that there i s a desir-
ability o f creating a market f o r donpstic acceptances
under proper safeguards a S Governor S e a y says, a n d I think
the time i s now, o r i t will b e shortly.
The Chairman:
I s t h e r e a n y further discussion?
Governor Rhoads:
w h a t safeguards h a d y o u i n mind,
Governor Seay?
Governor Seay: I
a m not prepared t o say, o n l y that
it should b e limited t o a certain percentage o f their
capital.
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Federal Reserve Bank of St. Louis
T h e q u e s t i o n o f reserve
i s another w h i c h m a y
329
well b e entertained, because i t i s just a s mich o f a liability a s a
security,
deposit i s ; b u t sone times t h e y a r e m a e a g a i n s t
a n d i n those c a s e s , p e r h a p s ,
lieved o f carrying it.
in p r e p o r t i o n
t h e y might b e r e -
B u t a t least w e will s a y a limit
t o t h e i r c a p i t a l a n d surplus. £
State that a s a n illustration. I
will j u s t
a m not prepared t o g o
further into it, Mr, Rhoads.
Governor Rhoads:
Y o u would n o t limit i t t o banks o f
a certain minimum size?
Governor Seay: I
believe i t would b e advantageous t o
do so, b u t I do not believe i t would b e possible. I
also
believe t h a t t h e m a r k e t w i l l b e t h e t e s t o f these accept-—
ances, a n d i t will eliminate t h e small b a n k acceptances,
Governor Aiken: I
market being a
d o not quite agree a s t o the
satisfactory protection.
I
t seems t o m e
it i s quite probable t h a t second-rate brokers might obtain
from banks that were n o t accustomed t o the business their
acceptances f o r s a l e i n c o u n t r y b a n k s t h a t a r e b u y e r s
paper.
of
T h e country b a n k does n o t scrutinize t h e risk
nearly a s carefully a s the city bank; a n d I can conceive
of a fair market f o r second o r third rate bills a t a
rate a
little b e l o w t h e c o m m e r c i a l p a p e r r a t e , b u t d i s -
tinetly higher t h a n the rate f o r prime bills i n New York
or Chicago, a n d With a broker o f the type that f o u would
naturally t h i n k w o u l d p u s h t h a t m a r k e t a n d w o u l d e n c o u r -
age t h e banks, j u s t a s they encourage t h e commercial borrower today ® borrow more t h a n h e really needs because o f
the o p p o r t u n i t y
t o finance h i m s e l f
at a
l o w rate. I
was
talking with the president o f one o f the banks i n St. Paul
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Federal Reserve Bank of St. Louis
330
tocay,
a n d h e t o l d m e that o n e o f t h e brokers
i n the uast
was offering money t o small a n d not particularly strong mercantile concerns a t extremely l a w rates, lower t h a n they
could g e t a t their local banks, a n d selling that paper
in the East, a n d that because o f the .onfidence t h a t some
of the smaller paper-buying banks h a d i n the firm they
were a b l e t o c r e a t e a
market f o r t h e p a p e r t h a t t h e m a k e r
of t h e p a p e r r e a l l y w a s n o t e n t i t l e d t o .
T h e y are en-
couraging makers o f paper t o borrow more money, because
of the l o w rate a n d because o f the market created, t h a n i B
sefe f o r the maker o f the p a p e r : o
t have outstanding.
The Chairman:
Y o u realize, Governor Aiken, t h a t i f
the p o w e r s a n d a c t i v i t i e s
o f t h e national banks o f the
country a r e t o b e l i m i t e d
t o those w h i c h m a y s a f e l y e x -
tend o n l y t o the weakest banks a n d those that a r e t h e
poorest managed, w e are going t o have a
very difficult
time developing o u r banking business.
Governor Aiken:
Y e s . i
wOald n o t d o thet; b u t I
would p u t s u c h limitations o n the small bank; I
wowld dis-
criminate against t h e small bank.
Governor Wold:
the c a p i t a l
M a y I inquire o f Governor Aiken i f
o f t h e bank, t h e l a r g e b a n k , m a k e s t h a t b a n k
more s e c u r e t h a n t h e c a p i t a l
smaller deposits?
o f t h e small b a n k would f o r
D o e s not the (50,000 capital of the
bank i n the country just a s amply provide against losses
against Ceposit liabilities o f 750,000 a s the
35 000 ,Y00
c a p i t a l o f the city bank provides
against losses against its deposit liabilities o f ‘5,000,000?
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Federal Reserve Bank of St. Louis
531
The percentage o f security i s there just t h e same,
I
n
other words there i s n o particular merit o r security i n
Size alone,
Governor Aiken:
N o ; t h e percentage i s not t h e test
of the security. T h e o r e t i c a l l y that i s sound, but-—-Governor Wold:
I f that were true w e would never have
large b a n k failures.
W e have large b a n k failures, j u s t
as w e have small b a n k failures.
Governor Aiken:
B u t w e d o not have a s many large
bank failures i n proportion t o the number o f large banks
as we have with regard t o the small banks. I
know o f
Small banks with a c&pital o f 25,000 where the capital
bears t h e same relation a s does t h e capital o f a million-—
dollar bank, a n d where t h e bank i s not anywhere nearly
as safe;
t h e obligations
hearly a s safe,
o f the b a n k a r e n o t anywhere
I t would be peculiarly true i n this
acceptance business, because i t i s entirely f o r e i g n o
t the
experience o f the small bankers. I
have s e e n evidences
right i n our district o f inclinations o f banks t o start i n
and a c c e p t w h e n t h e y h a d n o t a n y b u s i n e s s
t o g o into t h e
acceptance business a t all a n d did n o t k n o w anything about
it.
Governor Wold:
B u t i f n o one buys acceptances t h e y
cannot p u t a n y o f t h e m o u t a ~ ~
Governor Aiken: I
cannot quite agree w i t h that,
because these a r e brokers w h o c a n b e found w h o will handle
those acceptances a s long as they can get a commission out
of them, a n d they have s u c h confidence i n the brokers, b e -
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Federal Reserve Bank of St. Louis
332
ause o f the personal ecuation, t h a t they will d o this
on the broker's s a y so. I
do not believe that the arith-
méetical proportion between t h e capital a n d the liability
is the test o f the safety o f a n institution.
Tne Chairman:
I s n o t this subject o n e that c a n only
be d e a l t w i t h n o w g e n e r a l l y b y s u c h a
seay has offered.
resolution a s Govermor
A s was suggested, l a t e r o n w e m a y have
to get down t o a careful study i n detail o f the whole s u b ject, a n d the provision o f safeguards s u c h a s w e have
been ciscussing.
meeting.
I
n other vords, w e cannot d o that a t this
I t would b e impossible f o r u s t o agree without
very extenced ciscussion a s t o what were suitable safeguards.
Can w e n o t m a k e p r o g r e s s
b y taking action o n a v e r y
general resolution, s u c h a s offered b y Governor Seay, w i t h
the understanding that a l l o f us reserve o u r opinions a s
to what i s o r i s n o t a suitable safeguard?
Governor Aiken:
L l did n o t intend.to offer taat a s a
Suggestion, b u t because I
did n o t want t o allow Governor
Wold's statement t o g o b y without mildly protesting ageinst
it, as 1 do not agree with it.
The Chairman: G o v e r n o r Seay's motion was made some
time ago, and 1 will ask Mr- Surtis i f he will read it.
Mr- Curtis: M o v e d that it is the sense of the Conference that ational banks should b e authorized t o make
comestie a c c e p t a n c e s u n d e r p r o p e r s a f e s u a r d s a n d r e s t r i c —
tions.
The Chairman:
this m o t i o n ?
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Federal Reserve Bank of St. Louis
I s there a n y further discussion o f
A r e y o u r e a d y f o r t h e question.
3335
(The cuestion was called for and the motion was duly
carried.)
The Chairman:
W
e n o w have a
choice o f subjects
to
up.
yo C O M M O D I T Y RATES.
Mee Curtas:
W i t h reference
left t h e o n u s o f d r a w i n g a
myself,
t o T o p i c N e w 25.) t a e C h e i z
r e s o l u t i o n u p o n Mr. M c D o u g a l a n d
W e have n o w produced this joint effort, which i s
as follows:
"Voted, t h a t i t i s the sense o f the Conference t h a t
the function o f initiating discount rates o f all sorts
should b e exercised b y the Federal Reserve Banks without
pressure f r o m t h e Federal Neserve Board; a n d that i n the
opinion o f t h e C o n f e r e n c e t h e v a r i o u s r a t e s h e r e t o f o r e
established h a v e b e e n a n d a r e a t l e a s t a s l o w a s i s c o m patible w i t h s o u n d b a n k i n g principles.
The Chairman:
I a m going t o offer a n amendment t o
that resolution b y adding the words “under the unusual
domestic and international conditions which o w prevail."
Governor iicDougal:
course.
ent.
T h a t places t h e last half o f
T h e first part covers t h e situation a t the mom-
W e want t o b e relieved f r o m a n y further pressure
being brought f r o m Washington.
The Chairman: I
Governor S e a y :
agree w i t h that.
A
s bearing directly u p o n that subject
I would like t o s a y that t h e following question w a s submitted t o the Feceral Advisory Council a n d they were asked
for a
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Federal Reserve Bank of St. Louis
suggestion a n d r e c o m m e n d a t i o n
a s t o t h e probable
554
course t o b e taken i n the coming months i t h reference t o
discount rates t o Federal Reserve Banks,
T h e reoly o f
the counsil w a s that"in o u r opinion Suggestions a n d recommendations a s t o discount rates t o the Federal Reserve
Banks should b e initiated b y the cirectors o f thoso banks,
as provided i n the Federal Reserve act.#
The Chairman:
H o w cdo you feel about t h e anendment,
Governor HeDougal, which draws attention t o the fact that
conditions a r e quite unusual i n everybody's experience
and that w e should indulge i n extreme conservatism i n the
use o f the assets o f the reserve banks?
Governor McDougal: I
have n o objestion t o it.
think i t i s all right.
Governor Wold:
M i g n t i t not b e wise t o s a y that
these extremely l o w rates a r e bound t o create more inflation than i s n o w going on, wnich i s lible t o become dangerous7 Gove rnor MeDougal: I
think y o u have enough i n there
if you put Governor Strong's suggestion i n the motion,
The Chairman: I
will a s k t h e S e c r e t a r y t o r e a d the.
motion again, w i t h that addition,
to accept t h e amendment, I
will w i t h d r a w i t ,
Governor MeDougal:. I
the first paragraph.
a e e
I f you are n o t willing
a m very well satisfied w i t h
w e Want t o guard against pressure.
t h a t t h e following i s quite proper, t o o ,
Mr. Curtis: ( R e a d i n g ) :
T h a t i t i s the sense o f
the Conference t h a t t h e finetion o f initiating discount
rates o f all sorts should b e exercised b y the Federal R e
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Federal Reserve Bank of St. Louis
3355
serve b a n k s w i t h o u t p r e s s u r e f r o m t
a
l Reserve
Board; a n d that i n the opinion o f the Conference t h e various rates heretofore cstablished have b e e n a n d are a t
least a s l o w a s i s comoatible v i t h sound banking principles f o r the Reserve Danks,
i n view o f the unusual domestic
and foreign conditions.
Tne Chairman:
T h e language w h i c h I suggested b e added
does n o t l i m i t o r m o d i f y i n a n y w a y t h e s t r e n g t h o f t h e
first p a r t o f t h e resolution,
' Governor McDougal:
Governor Fancher:
I
t i s entirely satisfactory t o
T h a t language coes n o t i n a n y
way soften what w e are contendin; for.
W e are contending
for a principle; f o r the right given u s i n the act,
The Chairman:
D i d I hear that motion secondod?
Governor Wold: I
The Chairman:
will s e c o n d t h e motion.
I s there a n y further discussion?
Governor Seay:
W a s there n o t another resolution
passed bearing u p o n that same thing?
The Chairman:
N o .
Governor McDougal:
T h i s i s t h e other resolution
arranged.
Mr. Curtis:
The Chairman:
T h e o t h e r w a s n o t passed,
T h e question h a s been called for.
there a n y further discussion?
(There w a s n o A u a n e e d i s c u s s i o n a n d t h e m o t i o n w a s
duly carried.)
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Federal Reserve Bank of St. Louis
The Chairman:
T h e next topic, 11-(e) has algo been
suggested b y Govennor Rhoads a n d Governor Seay.
a ge 8 D I R E C T AUTHORIZATION O F DOM. STIC BRANCHES
FOR NATIONAL BAT KS.
The Chairman:
G o v e r n o r Rhoads, w i l l y o u e p e n t h e
dis cussiqn?
Governor Rhoads:
L v e r y o n e i s aware o f the recent
experience o f the Chatham a n d Phoenix B a n k i n acquiring
branches.
I
t t o o k o v e r t h e C e n t u r y B a n k a n d i t s branches,
which a r o u s e d a
good d e a l o f discussion,
It occurred t o m e that w e ought t o make s o m e recom—
mendation a s t o that principle.
A
s f a r a s w e have gone
I would b e i n favor o f authorizing banks w i t h a certain
amount o f c a p i t a l
t o establish branches w i t h i n their
OWN CliLy e f T o w a m i c e ,
The Chairman:
W h a t h a v e y o u t o say, Governor Seay?
Governor Seay:
T h a t also i s a question that was
discussed a t the meeting o f t h e Advisory Council.
Governor Kains, I
would like t o appeal t o your judg-
ment.
Governor Kains: C e r t a i n l y .
Governor Seay:
impropriety w h a t e v e r
D
o y o u consider t h a t there i s a n y
i n m e o r yourself,
a s members
o f the
Advisory Counstl, ciscussing matters t h a t w e have dis-
cussed there?
Gevernor Kains: I
think t h i s i s a l l i n the f a m i l y
here, and I do not think there i s any impropriety about
Lt
W
e a r e representing t w o districts
Council,
I f there w a s anything o f a confidential nature
imposed u p o n u s w e w o u l d n o t d i s c u s s i t ,
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Federal Reserve Bank of St. Louis
i n the Advisory
T h e s e are
things o f more o r less public concern.
Governor Seay: I
cid not think there was the slight-
est impropriety myself, b u t I wanted t o give myself t h e
benefit o f the doubt.
Iwill say, Mr. Chairman, t h a t that subject w a s considered a n d the Council passed this resolution:
T h a t the
National B a n k Act b e amended s o a s t o permit t h e establishment o f branches
o f national b a n k s h a v i n g a n u n i m p a i r e d c a p i -
tal and surplus o f not less than $1,000,000 i n central reserve and reserve cities, provided that n o branches are
placed outside o f the limits o f the c i t y where t h e head
office o f the parent b a n k i s located.
Amend the Clayton Act making a n officer o r director
of a national bank eligible a s a director i n one state
bank o r trust company and a private banker eligible a s a
director i n one national bank and a state bank o r trust
company.
I do not believe that that resolution goes far enough,
I think a great many o f the traxbles which we are now daal~ing with and which w e will have t o deal w i t h i n the
future, would b e i n some measure solved o r helpod iff a
more liberal extension o f the branch bank idea were made
than i s covered b y this resolution. A
Minneapolis banker,
at the meeting today, said h e had come t o the conclusion
that this country h a d reached a
stage o f development
where i t s further development will b e promoted b y the
encouragement o f branch bank ideas.
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Federal Reserve Bank of St. Louis
Governor Kains:;:
Y
e h a v e t o c r a w l b e f o r e w e walk.
This is the first feeble step.
Governor Seay:
I t was w i t h a view @
bringing o u t
discussion o n that point, f r o m that point o f view, t h a t I
advanced this subject for
e i n ,
I
t is m y own view
that this i s n o w the time w h e n the subject m a y well b e
dealt w i t h because w e are allowing t h e national hanks n o w
to take i n state banks,
t o consolidate w i t h state banks
having branches, a n d allowing t h e m t o maintain their
branches, a n d w e are taking into o u r o w n system state
banks which themselves a r e authorized b y the laws o f
their o w n states t o have branches; a n d w e a r e going t o
get a conglomerated s y s t e m unless w e equalize t h e powers
of the state banks and the national banks, and I believe
it.is with that thought i n mind that the Federal Reserve
Board desired i t discussed.
Governor Kains:
M r . Chairmm,
a t the time t h e
charter o f the second B a n k o f the United States expired,
if that charter h a d been renewed, t h e r e i s n o doubt i n
my mind that instead o f such a n absence o f system a s w e
have i n this m u n t r y , now, t h a t that would have given u s
a system o f branch banks that would have been o f great
benefit. I
think w e are just about cighty years behind
the t i m e s h e r e , a n c w e cannot,
i n a
year o r two, m a k e u p
for that lost time.
The Chairman:
Governor Kains:
7
9
, t o b e exact?
Yes,
7 9 .
“ e have repented.
I understand that the word "repent" means t o turn around.
Now, i f w e have gone a l l these 7 9 years a n d repent a n d
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Federal Reserve Bank of St. Louis
339
turn around w e are still a
long w a y off.
I
t i s just
a Sign that w e have s o m e t o our right senses a n d are
ready t o get o n the right track. I
think i t was a
good
idea that the Federal Advisory Council gave t o the Feder-—
al Reserve B o a r d t h e a d v i c e t h a t t h e y g a v e i t .
The Chairman:
T h e r e i s o n e danger i n opening t h e
door wide t o the extension o f powers o f national banks
so that t h e y c a n establish branches a l l over the United
States, a n d that i s the possibility o f rank speculation i n
the p u r c h a s e a n d s a l e o f banks a l l o v e r t h e country.
Governor Kains:
The Chairman:
T h a t i s true.
I t would b e a rather uncontrolled
development f o r a while.
Governor Kains:
The Chairman:
I t would.
A m b i f i o u s banks, possibly o f a
char-
acter o f which we d o not approve, would t r y t o extend
their operations a l l over t h e United States, a n d might
undertake t h e purchase o f small banks i n little towns
everywhere
i n t h e country.
Governor Kains: U n d o u b t e d l y they will, and there
will b e all sorts o f crises before w e get the w a y clear;
but I think someday a good strong chain o f banks will b e
established b y some large interest w h i c h will give a n
exemplification o f the advantages o f the branch system,
whieh will b e s o great a s t o induce other chains t o be
established, a n d when that comes about every little b a n k
will want t o join some chain, a n d that i s the way i t
will ultimately b e brought about.
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Federal Reserve Bank of St. Louis
W h e t h e r that i s going
340
to b e five, ten, fifteen o r twenty years f r o m now I could
nou soy.
Governor Seay:
M r . Chairman, I
have believed w i t h
you t h a t u p t o t h e p r e s e n t t i m e i t w a s s o m e t h i n g t h a t
Should n o t b e exerciscd w i t h a n unbridled privilege, b u t
now that w e have a
our member banks,
central a n d controlling power over
i t probably might b e done, w i t h the ap-—
proval o f the Federal Reserve Board,
a m t h a t certainly
would p l a c c s o m e c h e c k u p o n t h e t e n d e n c y y o u s p e a k o f .
The Chairman:
W h a t I
had i n mind was that t h e first
step towards t n e reduction i n the number o f banks, w h i c h
is what would undoubtedly result f r o m the creation o f a
branch bank system--- with the establishment o f a branch
system i n m u n i c i p a l i t y e s w h e r e p u b l i c o p i n i o n a n d local
knowledge operate t o the control--- i t might b e that after
ten years, o r a limited period, t h a t process would have
been b r o u g h t
to a
point w h e r e i t w o u l d b e v e r y m u c h s a f e r
to e x t e n d t h e o p e r a t i o n o f t h e p l a n t o l a r g e r d i v i s i o n s
the country.
Whereas,
of
a t the outset, w c , w h o have h a d
l&ttle experience i n managing branch banks a n d bankers,
and who a r e not qualified t o undertake t h e management o f
the establishments t h a t cover a wide territory, might b e
led i n t o
a n extensive operation
a n d g e t i n t o trouble.
That would b e much less liable t o happen i f the power o f
establishing branches w e r e confined,as suggested i n the
resolution which y o u have just read. Governor S e a y
3
to m u n i c i p a l i t i e s w h e r e t h e b a n k s had@ i t s h e a d office.
This i s a
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Federal Reserve Bank of St. Louis
matter t h a t c o n c e r n s t h e b a n k s
i n all parts
of
341
the United States,
I t coes n o t simply apply t o N e w
York and Chicago, a n d I think we ought t o hear from some
of the other governors here o n this matter.
Yhat i s t h e s e n t i m e n t
i n St. L o u i s
i n regard t o this
Matter, Mr. Hoxton?
Mr. Hoxton:
it a n y thought.
R e a l l y , Mr. Chairman, I
have n o t given
W e have i n our district n o w one national
bank with a branch, a n d the only thought t h a t w e have
given t o i t was t o t r y t o keep t h e t w o o f them separate
on our books s o a s n o t t o m i x u p the branch with tho
“parent bank. T h e Pirst National Bank of Eoru, Mississ—
ippi, i s a branch o f the First National B a n k o f Pontioc.
It was a state institution a n d was admitted into t h e
National system with its branch,
W
e have Looked a t
the matter only from a n academic point o f view, a n d w e
really would n o t b e prepared t o s a y what w e think about
it.
The Chairman:
D o e s anyone e b e care t o express
his views regarding this matter?
Governor Fancher:
I t seems t o m e that under t h e
ruling which has been made i n the Comptroller's office,
permitting t h e c o n s o l i d a t i o n
o f the Chatham a n d Phoenix
bank w i t h t h e C e n t u r y Bank, t h a t w e a r e g o i n g t o witness
Similar occurrences i n the large centers.
The Chairman: i
am very sure w e are,
Governor Fancher: I
think i t i s a movement t h a t i s
going t o soweed W h e t h e r i t will simply b e i n the
central r e s e r v e c i t i e s
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Federal Reserve Bank of St. Louis
o r will m o v e t o other reserve
cities, i t i s hard t o determine.
Governor Aiken: I
a m heartily
Sage o f such a resolution.
I
i n favor o f t h e p a s —
t seems t o m e i t i s a great
deal better t o have direct authority f o r the organization
of these branches t h a n t o have i t done through subterfuge.
Recently i n Boston there have b e e n organized a
number o f
Small trust companies that a r e not particularly well govened a n d that a r e n o t very satisfactory banking institutions.
It would b e much better f o r o u r whole banking situation
aL instead o f having these small trust companies organ-
ized, our large banks like the Shawmt, t h e Second National, a n d the Merchants, should b e permitted t o place banks
where i t i s necessary,
I t would insure their proper opera-
tion a n d safe conduct o f the business, w h i c h i s far from
being a s s u r e d u n d e r t h e c o n d i t i o n s t h a t e x i s t w i t h u s to-—
day. I
think also that those conditions a r e n o t confined
to Boston,
I should b e heartily i n favor o f such a condition
hat w o u l d r e s u l t f r o m t h e p a s s a g e
o f t h a t resolution.
I had a talk with Mr. Wing, o u r member o f the Advisory
Council, q u i t e recently. I
talked w i t h h i m q u i t e a
lit-
tle about i t and I know that h e Sonknwiane w i t h m y views
entirely. I
have a l s o talked w i t h officers o f one o r
two o f the large banks i n Boston,
The Chairman:
w e have n a resolution concerning this
Subject t o act upon.
Governor Aiken:
M a y w e have r e a d again, Mr. Chairman,
the action o f the Advisory Council?
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Federal Reserve Bank of St. Louis
T h a t seems t o m e t o
be admirably worded.
Governor Seay: " T h e National Bank Act should be
amended s o a s t o permit o f the establishment o f branches
by national b a n k s h a v i n g a n u n i m p a i r e d c a p i t a l a n d s u r p l u s
of not less than {1,000,000 i n central reserve and reserve
cities, p r o v i d e d
n o branches a r e p l a c e d o u t s i d e
o f the
limits o f the c i t y where t h e head office o f the parent
bank i s located.
"Amend the Clayton Act making a n officer o r director
of a national bank eligible a s a director i n one state
bank o r trust company, a n d a private banker eligible a s
a director in one national bank and a state bank, or trust
company."
Governor Aiken: I
would offer a s a resolution
the first resolution read b y Governor Seay.
Governor Seay:
U p t o the suggested amendment t o
the Clayton Act?
Governor Aiken:
Y e s ; n o t including t h e suggesied
amendment t o the Clayton Act.
Governor lieDougal:
M a y I
interrupt h e r e j u s t a
moment and read something regarding branch banks? 4
think t h e C o m p t r o l l e r e x e r c i s e s t h e a u t h o r i t y g i v e n h i m
under t h e Act.
The Chairman:
Y e s , G o v e r n o r MeDougal.
Governor McDougal:
h
e National Bank Act, i n para-
graph 5 1 5 5 says:
"It shall b e unlawful for any benk o r banking association, organized under state laws, a n d having branches, t h e
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Federal Reserve Bank of St. Louis
544
capital being ( a g e a n d assigned t o and used b y the
mother—bank, a n d branches i n definite proportions,
comé a
t o be-
national banking association i n conformity w i t h t h e
existing laws, a n d t o retain a n d keepin operation branches
of such one o r more o f them a s they m a y elect t o retain;
the amount o f the circulation redeemableat t h e mot her-bank
and each branch,
t o b e regulated b y the amount o f capital
assigned t o and uscd b y each."
That i s p r o v i d e d f o r i n t h e act,
Governor Seay:
I f one large national b a n k i n a
;
t
h
e
place purchases a state b a n k with i
a t
o t h e r large
bankgwill w a n t t o b e p l a c e d u p o n a n e q u a l i t y o f footing,
in order t o obtain n e w business, a n d t h e probability i s i t
might result i n the establishment o f state banks for the
purpose
o f establishing branches a n d t h e n t h e purchase
of state banks a n d a n absorption i n a n indirect way.
What c a n b e a c c u
a
e
s h o u l d b e accomplished o p e n l y a n d
above-board,
Governor Aiken:
T h a t i s the f o r m o f subterfuge t h a t
I spoke of.
Mr. Hendricks:
O n e o f the officers o f a bank i n
New York told m e that i f they could bring i t about t h a t i s
just what t h e y viould do, that t h e y would g e t i n the
National system f o r the purpose o f establishing branches.
Inasmuach a s t h e r e q u i r e m e n t s
would t a k e a . a y a
o f t h e Federal Reserve A c t
lot o f their reserve accounts a n d r e -
duce their deposits, t h e only w a y they could make i t u p
would b e b y establishing branch banks a n d accumulating
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Federal Reserve Bank of St. Louis
345
individual ceposits, o n t h e p l a n of” the Corm Iuchange B a n k .
That w a s thought o f seriously.
Governor Seay:
I n the large cities i t would shut
off t h e f o r m a t i o n o f m a n y small, i m p r o p e r l y m a n a g e d b a n k s ,
because t h e business c a n b e b e t t e r a t t e n d e d
t o b y the
banks already located there,
The Chairman:
A r e you satisfied with the resolution
as adopted b y the Advisory Council, considering t h e fact
that i t would preelude t h e development o f branch banks
in a great m a n y cities o f the United States which are not
reserve cities, but which as a matter o f fact are very m e y
larger and more important a s banking centers than many of
the r e s e r v e cities,
T a k e , f o r instance, a
city like
Buffalo i n our state, where the establishment o f branch
banks c e r t a i n l y w o u l d b e m o r e d e s i r a b l e L o g i c a l l y -than i n
a city like Des Moines, which I believe i s a reserve city
but which probably hasn't got but ten per cent of the
population o f Buffalo.
I do not like this resolution i n view of the fact
that i t confines t h e e s t a b l i s h m e n t s
o f this c h a r a c t e r
of
bank t o those cities which are arbitrarily designated a s
reserve cities, without regard t o population o r banking
power, and so forth. I
would like t o see a resolution
passed b y this conference applying t o a much sounder
principle;
t o apply i t t o a greater physical limitation
than a wholly arbitrary ‘one that designates reserve
cities.
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Federal Reserve Bank of St. Louis
Governor Aiken:
M r . M c K a y suggests t h a t t h e capital
requirement t a k e s c a r e o f t h a t situation.
Mr. Mchay: A
bank with a capital a n d surplus o f a
million dollars would n o t b e situated i n a small town.
The Chairman:
That i s n o t a
B u t h o w about a
city like Buffalo?
reserve city.
Mr. McKay:
D o not mention reserve cities a t all,
and that will take care o f it.
Governor Scay:
T h e r e w a s this i d e a o n the question
of percentage o f reserves w h i c h are kept up.
other cities
I n the
1 2 per cent reserve : ould hold, whereas i n
the central reserve a n d reserve cities i t would b e 1 8 and
15 p e r c e n t respectively. I
believe
i t twoule b e triser t o
go further a n d specify a capital limitation, letting i t b e
established wherever a
bank o f sufficient s i z e a n d capital
could maintain it. I
will make that amendment, unless
you propose t o m k e i t yourself, Mr. Chairman.
The Chairman: I
Sion.
was just suggesting i t for discus-—
M y ming i s not altogether clcar o n it, because
of t h e difficulty o f reserves.
I t will b e a n open ques~
tion for t w o years longer.
Governor Seay, c a n I suggest that y o u paraphrase t h a t
rosolution a n d d i c t a t e
Governor Seay: I
i t t o the stenographer?
think, sir, if I should eliminate
these words, i t would probably give t h e sense o f the meeting, a 8 s o far expressed:
"The National Bank Act should be amended so as to
permit t h e establishment o f branches b y national banks having a n u n i m p o i r e d c a p i t a l a n d s u r p l u s
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Federal Reserve Bank of St. Louis
o f not less t h a n
347
one million dollars, provided that n o branches a r e placed
outside o f the limits o f the c i t y where t h e head office o f
the parent b a n k i s located,
The Chairman:
I s that motion seconded?
Governor Kains: I
The Chairman:
will second t h a t motion,
I s there a n y further discussion o f
the motion?
(There w a s n o further discussion a n d the motion was
duly carried, )
Tne Chairman:
I t i s necesary, following this s u b —
ject, t o take u p Item 11-(d),
11i~(da). E L I M I N A T I O N O F DESIGNATION O F CAPITAL FOR.
FOREIGN BRANCHES O F NATIONAL BANKS.
because t h e s a m e l i m i t a t i o n o r t h e s a m e r e q u i r e m e n t
as to
segregated capital apparently applies under this method
of establishing branches t h a t seems t o b e i n vogue, a s
applied
t o f o r e i g n branches. I
believe t h a t t h e desig-~
nation o f segregated capital for a branch i s a mistake.
I d o not think i t i s sound,
Governor Seay: I
The Chairman:
do not think s e either.
T h e obligations o f the bank extend t o
all o f its branches a n d t o the parent bank.
T h e y apply
to all of the assets o f the bank wherever located, a n d
the theoretical segregation o f so much capital t o a
branch d o e s n o t a c d t o o r d e t r a c t f r o m t h e s e c u r i t y o f
the c r e d i t o r s
o f the bank.
Governor Seay:
might i t not?
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Federal Reserve Bank of St. Louis
I t might b e a technical weakness,
he Chairman:
Yes.
Governor Kains:
I t i s a curious t h i n g about t h e
State authorities forcing a
segregation o f capital. i
ropresented i n New Orleans a
bank with a capital o f ~ ~
$6,000,000, a n d they wanted t o tax us o n that 46,000,000.
Consequently w e started a bank, nationalized i t a n d did
business
d o w n there.
T h e n I
was s e n t o u t
t o the Coast.
I was manager f o r a bank i n Seattle a n d S a n paa n c i s c o o n d
in each o f these places t h e bank h a d grown a n d probably
had a capital o f $15,000,000,
T h e y made u s segregate
I think {500,000 o r $600,000 f o r capital there.
The Chairman:
S o a s t o taz 187
Governor Kains:
pos 6 , i
tried.
J u s t for taxation purposes, I sup-
t o tell t h e m tist wherever
v e were
behind a n y obligation under t h e l a w o f California.
a branch manager I
more L o a n s
w e were
Being
made i t a part o f m y policy t o keep
i n California t h a n I
had deposits f r o m Cali-
fornia a t all times s o that I would feel safe myself. I
did n o t propose,
i f anything happened
t o t h e bank,
t o have
t0-g0=——
he Chairman: (Interposing)
T o have t o g o home t o
get t h e difference?
Governor Kains:
The Chairman:
N o .
T h a t question w o u l d n o t a r i s e i n this
particular m a t t e r b e c a u s e a l l t h e branches
o f each bank
would b e within t h e jurisdiction o f the o n e taxing power
*. of a given municipality a n d n o segregation would b e imposed
upon t h e bank which h a d all its assets a n d was doing a l l
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Federal Reserve Bank of St. Louis
549
its business within t h e limits o f the o n e municipality.
Governor Kains: T h a t is correct.
The Chairman: I
do not believe i t is practicable,
or sound o r wise that a bank should b e required t o segregate a
portion o f i t s c a p i t a l f o r t h e s e r v i c e
of a
branch
in the same c i t y o r even a branch i n a foreign country,
except t o comply with the statute o f the foreign country
in which i t might b e located.
Governor Kains:
T h a t i s where i t comes in, p i e a 8
the foreign l a w that will govern that matter.
Governor Rhoads:
D i c y o u h a v e t o deposit s e c u r i t i e s
in trust i w s t a t e officer,
o r anytning o f that kind,
Governor K a i n s ?
Governor Kains:
N o .
Governor Rhoads:
T h a t i s required
i n s o m e states,
is i t not, Mr. Chairman?
The Chairman:
Y e s , b u t i t would n o t a p p l y t o t h e
matter w e a r e discussing,
s o f a r a s domestic bankers a r e
concerned,
Governor Geay:
T h a t might b e covered b y a technical
setting aside without limitation o f liability.
Mr. Curtis: I
d o n o t understand t h a t t h e Federal
Reserve Act, i n words, o r in sense, limits the liability
for the amount o f segregated capital for foreign branches
of National banks. I
but i t d o e s n o t s a y so.
amount « I
t h i n k i t m i g h t h a v e t h a t effect,
I
t says t h e y shall designate t h e
was talking with one of the officers o f a
state b a n k i n New York a n d h e asked m e what | thougnt about
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Federal Reserve Bank of St. Louis
550
it, what they were t o do. I
said, "You can search me".
I haven't any idea what y o u have t o do about it. T h e y
have s e t u p o n their books segregation f o r their South
American branches,
Governor Seay: H a v i n g done that, does not that lesSen t h e c a p i t a l
o f the parent concern?
Mr. Curtis:
T h a t i s one o f the questions
me, which 1 answered i n the same way,—that I
h e asked
did n o t kmow.
(Informal discussion followed which the reporter was
directed n o t t o take.)
The Chairman: G e n t l e m e n , I move that i t is the sense
ef this meeting t h a t t h e National B a n k Act a n d Section 2 5
of the Federal Reserve A c t should b e amended s o that i t
will n o t b e necessary f o r a National B a n k t e segregate
any p o r t i o n o f i t s c a p i t a l f o r t h e b e n e f i t
o f any branch
that i t m a y establish i n a foreign country o r a n y domestic
branch i t may b e attthorized t o establish
b y amendment t o
the Federal Reserve Act.
Governor V a n Zandt: I
The Chairman:
second that motion,
I s there a n y further discussion?
(There was no further dis cussion and the motion
was duly carried.)
(Ghereupon,
o n motion duly seconded,
a t 10:50 o'clock,
Pe me, Thursday, October 21, 1915, t h e Conference adjourned
until Friday, October 22, 1915, a t 9:30 o'clock Q e Me)
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Federal Reserve Bank of St. Louis
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