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https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis FIFTH CONFERENCE GOVERNORS O F FEDERAL RESERVE BANKS MINNEAPOLIS, MINNESOTA HOTEL RADISSON Wednesday, October 20, 1915 Thursday, October 21, 1915 Friday, October 22, 1915 Saturday, October 23, 1915 WALTER SHORTHAND S. COX REPORTER COLUMBIAN BUILDING—TEL. M. 8324 WASHINGTON, D . C. f e t e s 2 Se a a 8 D A Y . Hotel Radisson, Minneapolis, Minn., Friday, October 22, 1915. 10 o'clock a e m e The Conference reassembled a t 10 o'clock a. m , pursuant t o adjournment. Attendance t h e same a s o n the t w o preceding days. There were also i n attendance, pursuant t o a n invitation extended t o them b y the Conference o f Governors, Messrs. P a u l Warburg, member o f the Federal Reserve Board, » G. Harcing, Member o f t h e Federal Reserve Board. The Chairman: T h e meeting will come t o order. I have just suggested t o Mr, tarburg and Mr. Harding that, i f agreeable t o them, w e would g o right ahead with the u n f i n i s h e d p o r t i o n o f o u r program, c o n s i s t i n g of twelve o r thirteen items, which w e have n o t y e t discussed, all o f w h i c h I believe a r e m a t t e r s i n which t h e y would like t o participate i n the discussion. Last night w e were i n the midst o f a discussion o f a sub-heading o f Topic 11, which i s "Amendments t o the Federal Reserve Act." Possibly I should explain t o these t w o gentlemen, w h o have not attended our meetings before, that b y mutual consent t h e C h a i r m a n h a s b e e n c l o t h e d w i t h r a t h e r u n u s u a l powers b y this meeting; t h a t w e impose certain restrictions upon the extent o f the discussion s o as t o save time and https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis repetition off matters already gone over, 1 will also state that the Chairman has been authorized n o t o n l y t o p a r t i c i p a t e i n t h e discussion, but t o offer resolutions himself. Item (a), “Immediate transfer o f reserves"and Subject 19, "Reserves of “ember Banks", including the sub-heads (a), "Treatmentof the float", and (b), "Penalties for impairment o f balance", were left for final Giscussion today, a l t h o u g h t h e y h a v e b e e n f o r m e r l y discussed. h e s e Subjects w e r e siggested b y Governor S e a y a n d under o u r rule here t h e o n e that suggests a topic opens t h e discussion. Governor Seay, will y o u make t h e first statement? Governor Seay: I n reference t o which topic? The Chairman: T o p i c s 1 1 (a), and 19 (a) and (b). 1di-(a). I M M E D I A T E TRANSFER O R RESERVES. =U, R E S E R V E S O F MEMBER BANKS. (a) Treatment o f the Float. (b) Penalty for Impairment o f Balance. Governor S e a y : Y o u a r e a l l familiar, I the opinion w h i c h I hold o n that subject. I believe, with have pre- pared some tables which would show the facility with which such transfers might b e made a t this time, a n d the effect after b e i n g made. seen t h e argument, I n a s m u c h a s perhaps e v e r y b o d y here. h a s i f h e has n o t read it, I won't g o v e r y elaborately into detail. I believe t h e time t o d o a thing i s when y o u c a n a n d not w h e n y o u cannot. I believe t h e time i s ripe n o w f o r puiting t h e a c t into full operation, a n d that i n all prob- https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 353 ability t h e d i f f i c u l t i e s w i l ] i n c r e a s e There i s o n e p o i n t o f v i e w w h i c h 1 a s w e s o along. did n o t touch upon in t h e p r e p a r e d a r g u m e n t , w h i c h p o i n t h a s a l r e a d y c o m e up. We are about t o face another transfer o f reserves a n d aliready s o m e o f t h e s m a l l e r b a n k s a r e f a c e t o f a c e w i t h the p r o p o s i t i o n t h a t t h e y w i l l h a v e t o d r a w d o w n t h e i r r e - serves f r o m their regular correspondents, w h i c h will d e plete t h e i r b a l a n c e s t o a n e x t e n t w h i c h will n o t enable them t o get the same accommodations w h i c h they have heretofore gotten, particularly i n the matter o f collections. when w e reach t h e next transfer, tion w i l l b e emphasized, I i n six months, t h a t condi- therefore b e l i e v e t h a t t h e Gisturbances created b y these periodical transfers w i l l perhaps place t h e country banks between t h e devil a n d caeep water, a n d that i t will b e better t o make o n e bite at the cherry instead o f several bites, The Chairman: A s I understand your v i e w o f this matter, y o u S a y that y o u believe t h e reserves w h i c n the Act c o n t e m p l a t e s s h o u l d b e t r a n s f e r r e d t o reserve b a n k s over a period o f years, should b e transferred a t once, a n d that b e done through a n amendment t o the Act? Governor Seay: I believe that should b e done, a n d particularly d o I believe i t t o b e advisable s i n c e e w are od brought f a c e t o face n o w with the collection feature o f the Federal Reserve System. I believe a t the very first meeting i t w a s t h e o p i n i o n o f s o m e o f us, a n d c e r t a i n l y my own expressed o n the record, t h a t t h e whole collection matter s h o u l d h a v e b e e n p o s t p o n e d u n t i l w e h a d t r a n s f e r r e d https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 354 all the reserves, I have n o t changed m y opinion after considerable thought o n the subject, I inseparably b o u n d u p . I think the t w o are think w e c a n n o t p e r f o r m o n e u n - we p e r f o r m t h e o t h e r t o e n t i r e satisfaction. t a s any e v e n t i t i s g o i n g t o b r e e d v e r y w i d e s p r e a d disturb-— ances, i f n o t dissatisfaction, a m o n g t h e country banks, no matter what collection p l a n w e might p u t i n force; b u t if w e carry o u t t h e provisions o f the Federal Reserve A c t and g i v e t h e m t h e o b j e c t l e s s o n b y s a y i n g t h a t t h e f e d e r a l Reserve System i s there t o provide a collection p l a n for them, t h a t t h e y will b e thrown upon t h e Federal Reserve banks i n order t o provide a system, t h a t t h e y will a c quiesce more readily a n d with less disturbance, T h e r e will b e n o other agency t o perform the collectio.. .s»vice for them, f n e i r balances will not b e mach i f they are not eptive = irhnsterned. a m t h e consideration f o r which that service h a s been performed will b e removed, Therefore t h e Federal Reserve Banks will b e i n a pertvion where, under t h e law, t h e y must perform it, a n d t h e y will be i n a pesition w h e r e t h e y w i l l s c e t h a t a c q u i e s c e n c e in the l a w carries t h e m t o the FederalReserve Yank, a n d one will dcvetail i n t o t h e other, t h e n I believe w e c a n accomplish vith much more satisfaction a n d much less chsturbance the s e t t l e m e n t o f t h a t m o s t v e x i n g o f a l l o u r problems--—- ceclicection problen. Then t h e r e i s a n o t h e r v e r y i m p o r t a n t p o i n t , f r o m a n S6conomic viewpcint, a s I believe. T n e Federal iteserve Act w a s p a s s e d f o r t h e a v o w e d p u r p o s e o f d e c e n t r a l i z i n g https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 355 recerves. A t the present time a l l o f the excess reserves are deposited i n the central reserve cities, a l l o f them being a c c u m u l a t e d t h e r e u n d e r t h e b u r d e n o f a n interest We know a n effort was made t o have those funds carn interest. I think everywhere i n the country greater encouragement i s given t o borrowers; m o n e y i s being thrust upon them, a n d I think there a r e m a n y cases i n which secondrate firms fate firms have a g e t t i n g t h e credit u p o n terms which first n o t formerly enjoy. I t certainly would material e f f e c t u p o n t h e r e s e r v e s i t u a t i o n a n d the interest r a t e a n d t h e plentitude o f money t o corral the r e s e r v e s i n t h e Fe. eral R e s e r v e Y a n k s w h e r e t h e y w i l l be under certainly modified control, trol. i f not complete c o n - F o r these reasons, a n d others which I might state in extenso, I believe t h e time i s ripe, t h a t i t would b e prudent a n d t h a t i t i s m o r e t h a n a d v i s a b l e t o undertake to complete t h e regeneration o f this cystem a n d transfer the reserve. The Chairman: M a y 1 ask y o u one o r two questions? Governor Seay: C e r t a i n l y . he Chairman: Y o u realize t h a t i f the reserves are immediately transferred i n full b y all t h e banks a n d the p r e s e n t c a p a c i t y o f t h e d a n k f o r m a k i n z c o l l e c t i o n s is taken awayfrom it, that w e would then be forced a t once t o d e v e l o p o u r o w n c o l l e c t i o n f a c i l i t i e s mm, t o the mazi- s O a S t o take care o f the collection business t h a t could not b e attended t o through t h e o l d channels. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Governor Seay: I folly realize that. 3556 The Chairman: O u r earnings possibly m i g h t n o t justify that expense. I of t h e a m going t o give y o u two o r three S e a bians t h a t o c c u r t o m e a s y o u discuss t h e mat-— ter--—— Governor S e a y (Interposing): me. T h e y have occurred to O f course when I say "at once" I do not mean i n the next month o r week, because I could -be p e r f e c t e d do not believe t h e machinery i n m u c h l e s s t h a n s i x months. gatnered h e r e f o r t h e p u r p o s e v e have o f putting i n t o execution some collection p l a n a n d I believe t h a t i t i s essential that o p u t into operation some collection plan a s quickly as possible, The Chairman: A n o t h e r p e i n t t h a t y o u h a v e not. toush-—~— ed upon i s that t h e immediate transfer o f the reserve would t h r o w u p o n u s t h e b u r d e n o f u s i n g t h e m e t h o d o f c o l - lection a n d reserve which w e believe i s t h e intention o f ne Act, a n d that ‘ould a t once throw the burden o f carrying the float upon t h e member banks. Governor Seay: The Chairman: Y h e r e I J think i t should b e carried, T h a t i n turn would p u t t h e pressure @ t h e n e w reserve requirement entirely u p o n the country bank, a S waS Suggested yesterday. Governor Seay: ( I n t e r p o s i n g ) vinced i t s h o u l d b e . I Where I d o not believe carry i t i n any other way, a m firmly c o n — i t i s possible to i t - i s a burden t o o great t o be b o r n e b y a n y c e n t r a l i z e d institution. T h e labor i s tremendous a n d the burden o f the float i s too huge. Gradually https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis i n this c o u n t r y t h e r e h a s g r o w n u p a tery per- 357 nicious practice o f allowing t h e float t e b e counted in the reserve, results T h e Federal Reserve banks are inheriting the o f t h a t p e r n i c i o u s practice, These subjects are s o copelated that i t i s @ifficult to s p e a k o f o n e w i t h o u t s p e a k i n g o f t h e other. h i l e you refer t o Section 1 9 there comes u p the treatment o f the that float. I f action could b e taken “«. WOuld demonstrate to the country h o w vicious t h e practice h a s been, am that the burdens o f the Federal Reserve banks a r e n o w forced upon them a n d accentuated because o f that practice, I believe i t would b e a n object lesson, F o r instance, suppose t h e C o m p t r o l l e r w e r e t o r u l e n o w t h a t i t e m s sent for credit, u n l e s s d r a w n u p o n r e s e r v e c i t y banks, t o be collected w h e n reaching t h e reserve city, should n o t re i n the reserve o f the bank sending them? T h e little c o u n t r y b a n k m i g h t s e n d i t e m s a l l offer t h e country; and although the reserve c i t y bank mignt n o t collect t h e m for a week, i f i t gives credit t o the country bank, i t becomes a reserve. to d w e l l upon. I T h a t process is a little t o o f a m i l i a r f that practice h a s n o t b e e n allowed to grow up, o r i f the comptroller were t o rule n o w that that &+ + > float s h o u l d b e b o r n e b y t h e c o u n t r y b a n k w h e n c e i t ori- ginates, a n d b y whom alone I believe i t c a n b e borne——— i t is o f such magnitude--- t h e y are responsible f o r i t and the r e s p o n s i b i l i t y s h o u l d b e p l a c e d u p o n t h e p l a c e o f ori- gin--—- I believe i t would s h o w that t h e Federal ““eserve banks a r e n o t t o be held responsible f o r creating practices w h i c h h a v e a https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis vicious tendency. 358 You speak’ o f t h e t r e m e n d o u s e x p e n s e involved. have g o t t o face that o f course. n — e T h e r e i s snother- point intimately associated w i t h that which w e are discussing here, a n d that i s some readjustment o f t h e capital o f Federal Reserve Danks. The Chairman: D o y o u not think w e ought t o leave that f o r t h e present? Governor Seay: Y e s , I doy b u t i t answers o n e question y o u ask, a n d t h a t i s t h e o n l y r e a s o n I mention 24. The Chairman: G o v e r n o r Seay, t h e present p l a n f o r the pradual transfer o f reserves does permit a gradual readjustment o f b o t h t h e f l o a t a n d t h e c o l l e c t i o n system, Immediate t r a n s f e r adjustment o f reserves w o u l d r e q u i r e o f the methodof treatment a n immediate o f the float a n d the immediate assumption o f all o f the collection business or a v e r y l a r g e p a r t o f i t b y t h e banks, w h i c h a r g u m e n t is d e s i g n e d o t emphasize t h e desirability o f tranpferring reserves at a time w h e n r e s e r v e s a r e abundant, but it Goes present t h e disadvantage t h a t i t requires a n immeGiate adjustmentof other important matters which, under t h e present plan, would take place o v e r a period o f two years. Governor Scay: T h a t also i s a question o f analysis. If these reserves should b e transferred i t would still leave i n t h e h a n d s o f t h e r e s e r v e c i t i e s a n d c e n t r a l r e serve c i t i e s a n enormous a m o u n t o f b a n k balances. I t would n o t b e necessary a l l a t once f o r the Federal R e s e r v e Banks t o undertake t h e whole collection system. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis There 359 be some :.490,000,000 o f balances remaining i n the of reserve c i t i e s a n d c e n t r a l r e s e r v e c i t i e s w h i c h Still j u s t i f y t h o s e b a n k s i n c o n t i n u i n g t h e opera-— tion o f the collection system, The Ghairman: Y e s ; b u t i f t h e balances i n the reserve a n d c e n t r a l r e s e r v e c i t i e s c i d n o t count a s re- serves, t n a t portion o f the balances createé b y the sale of u n c o l l e c t e d c h e c k s n o t c o u n t e d a s r e s e r v e s w o u l d put the burden o f adjusting t h e float u p o n t h e country b a n k : : at once, a n d p e r s o n a l l y I d o not think t h e country b a n k can s t a n d i t . (Further discussion followed u p o n this subject. Mr, Viarourg r e q u e s t e d t h a t h i s r e m a r k s acirected t o this topic s h o u l d n o t b e e n t e r e e u p o n t h e r e c o r d . ) The Chairman: resolution G o v e r n o r Seay, h a v e y o u prepared a t o deal w i t h this matter? Governor Seay: cussed finally. N o t until t h e matter h a s b e e n cis- However, I think I have delivered m y — Seis The C h a i r m a n : .. Are y o u Ccisposcd t o o f f e r a tion a n d s u b m i t i t t o the tender mercies Governor S e a y : cussion, I o f this crowd? Y e s ; f o r t h e purpose offer t h i s resolution: resolu- o f invoking d i s - T h a t i t i s the sense of t h e C o n f e r e n c e t h a t t h e p r e s e n t t i m e i s propatious for a complete transfer o f reserves t o Federal Reserve Banks, a n d that i t would b e i n the interest o f the developmentof t h e Federal Reserve System that s u c h transfers Shoule b e mace, a n d that this conference recommends that https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 3560 an amendment t o the act f o r this purpose The Chairman: Mr. Wold: I b e asked for, I s that motion seconded? will second it, Mr. Chairman. The Chairman: I s there a n y further discussion? (There w a s nofurther Giscussion, a n i t h e motion, being put upon a viva voce vote, w a s lost.) Mr. Warburg: I might suggest that there i s a way of doing something i n that direction. I t sounds pretty drastic a n d I do not Suggest t h a t i t ought t o b e done; but the Federal Reserve Board can make every city i n the country a central reserve c i t y today. I f you did that of course t h a t would S t o p t h e accumulation o f reserves, That + ould m e a n t h a t t h e c o u n t r y b a n k s w o u l d h a v e t o have & higher reserve; i t would bring t h e m u p t o 1 8 per cent, I don't think we ought t o do that. T h e n w e could, b y a ruling, s u s p e n d t h e r e s e r v e s a n d g e t t h e m d o w n to 12 per cent. B u t , I a m afrait that while w e could d o i t that way, i t would create trouble a n d cause objection, heChairman: Y o u r motion, Governor Seay, would not dispose o f Topic 1 9 o n the program, t h a t is, t h e method o f dealing w i t h t h e f l o a t a n d penalty f o r impairment of balance, t h e latter subject not having been mentioned yet. D o y o u care t o offer a resolution covering Item 19 (a) i n the matter o f the float? Governor Seay: Yes. F o r the purpose o f invoking ciscussion a n d testing o u t the sentiment, I will move that i t i s the sense o f the conference t h a t what i s meant by the "float", that i s t o say, cheeks forwarded b y country https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 36r banks t o their reserve correspondents, should n o t b e permitted t o count i n t h e i r r e s e r v e s unital collected. That would have t h e effect o f making a l l checks drawn o n banks o u t s i d e o f reserve cities p u t i n t o t h e c o l - lection c l a s s w h e r e t h e y a r e n o w p u t b y a l l t h e c o u n t r y clearing houses. I f a realization o f the situation could b e brought t o the banks o f the country b y a riling of that kind, I believe i t would b e beneficial, I t would tend t o correct a situation that i s vicieus a n d would bring the banks face t o face with t h e actual situation f o r which they themselves a r e responsible, he Chairman: Y o u started t o offer that i n the form of a resolution, b u t y o u ended u p with a comment. Governor Seay: T h e first part o f i t was t h e resolu- tion a n d t h e l a s t p a r t w a s t h e c o u m e n t thereon. The Chairman: G o v e r n o r Seay's motion, a s I understand it, i s t o express t h e sense o f this meeting b y a ruling p r o v i d i n g t h a t t h e p r e s e n t m e t h o d b y w h i c h c o u n t r y banks count uncollected checks o n the w a y t o their reserve agents a s a part o f their resorves, should b e discontinued. po I hear a second t o that? Governor Fancher: I Governor ithoads: second t h e motion. D i d n o t Governor S e a y g o further that a n d s a y t h a t t h e y s h o u l d n o t c o u n t u n t i l t h e y collected? The Chairman: Mr. McKay: Yes. M a y I ask i f they should b e permitted to count a s a reduction o f gross deposits? https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 362 Governor Seay: Y e s ; I think they should b e permit- ted t o count a s a reduction o f r o s s deposits. Mr. MeXay: “ h a t are the abuses of the present sysLen--— Governor Seay: (Interposing) T h e abuses a r e what we are trying t o settle n o w through t h e means o f some collection system. T h e y are s o many, lire Foote thinks I would f i n d Gifficulty i n telling y o u about t h e m i n a few words. I t i s perfectly clear that your bank, f o r instance, would n o t allow o n e o f its non-cepositors freely u p o n u n c o l l e c t e d funds. your hands a I t o check too f h e were t o put into larger proportion o f these balances w h i c h consisted o f money which y o u knew y o u could n o t co-lect before h e h a d c h e c k e d h i s b a l a n c e o u t , up a g a i n s t a oroplem. i t voulec b r i n g y o u Y o u would n o t permit y o u r customer to d o that, i n all probability, a n d y e t y o u are placing your reserve agent i n just that position. Mr. Foote: t i e , o f course, have t o make our custom— ers g i v e u s a n account t h a t c o m p e n s a t e s vice. H o w e v e r , u s for tHe ser= w e d o not d o that consistently, because we nave some accounts w e l o s e money on. I generally true o f most banks. think that i s B u t I think i t i s jumping right a t t h e m i d d l e o f t h e question, t o take a n arbitrary Stand a n d l a y t h i s a t t h e c o o r o f t h e c o u n t r y banks. i k think y o u c a n j u s t a s c o n s i s t e n t l y c h a r g e t h e c i t y b a n k s with b e i n g r e s p o n s i b l e f o r it. T h e country b a n k i s simply a relay station for this float just like t h e c i t y bank. This whole thing soes right b a c k t o the question o f traders. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 565 That i s w h e r e t h e q u e s t i o n Oriscinates. I t is a problem the solution o f which lies w i t h the traders, t h e people w h o buy and sell, a n d t o pick out t h e country b a n k a n d crucify it i s j u s t a n a r b i t r a r y t r e a t m e n t o f t h e gGuestion. z think the c i t y banks could just a s consistently b e charged with t h e responsibility. The Chairman: M r . Foote, t h i s i t e m "Treatment o f the float" should have b e e n put under section 7 progran, of our I t has more direct relation t o collection a n d clearances t h a n t o reserves, although w e m a y have discussed i t uncer t h e various reserve neacings t h a t w e were dis-— cussing. I can see that w e will Svadually drift into a discussion o f the whole subject o f collections i n a n efiort to deal with this one item, "treatment o f float", which i s & part o f that problem. I would like t o SUGSESt, i f satis- factory t o Governor Seay, w h o has offered this topic f o r discussion, if he is willing to do so his motion will be tabled a n d I will Change this i t e m from a p i e 10, 2 6 Yopie 7 , where i t w i l l c o m u p i n its proper place i n o u r cgiscussion., Governor Ceay: I z:ould b e v e r y - l a é owees w O rU v w k do that, f o r t h e particular reason tnat t h e very resolution which I have p r o p o s e d h e r e c o n e s i n the report transit c o m m i t t e e w h i c h w i l l b e discussed o f the a t t h a t time. T think i t could properly b e deferred, The Chairman: G o v e n n o r Fancher, dealing with this subject satisf €d. Governor S e a y s' ° mction. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis y i s that mcthod o f o u ? Y o u second- 364 Governor Fancher: I t i s entirely satisfactory to me, Mr. Chairman. The Chairman: v o u l d n o t t h e Same course apply t o topic 19-(b), Governor Seay? Mr. C u r t i s : T h a t h a s a l ready b e e n p a s s e d upon. Governor Seay: The Chairman: W e disposed o f that subject, I Y e s ; t h a t i s right. think. W e have acted upon t h a t subject. The next t o p i c i s ll-b: eas) R E D U C T I O N O F COUNTRY BANK RESERVES CARRIZD WITH FEDCRAL RESERVE BANKS. The Chairman: I suggested t h a t topic f o r the program after hearing f r o m Governor S e a y that h e proposed t o endeavor t o effect a n immediate transfer o f reserves, having Some compunction about t h e w a y this tould affect t h e country banks. N o w , proposal adversely, I a s w e have disposed ofGovernor Seay's would l i k e t o w i t h d r a w t h e t o p i c i l - b, f r o m the program, Governor V a n Zandt: I n vithdrawing t h a t y o u would not withdraw t h e subject which would necessarily b e conSiderea under subject 19-a, w h i c h y o u have j u s t transferred a? The Chairman: I t tould come u p incidentally anyway. If y o u prefer t o have i t specifically under i t e m 7 I will Lrpansler i t s Governor V a n Zandt: i Mr, Chairman; No. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis t h i n k t h a t w i l l b e setter, t h a t is, t o leave i t o n the program until 7 % has b e e n discussead, 365 The Chairman: U n l e s s objection i s sade I will fer item Liab t o topic 7 . You p a s s e d a resolution y e s t e r d a y t h e s u b s t a which was thet this conference remommend that the federal Reserve A c t b e amended s o a s t o provide f o r t h e transfer, within a period o f two years, o f the general fund o f the United States Treasury w i t h the fiscal agency functions o f the treasury t o the Mederal Reserve “anks. ve Should n o t pass that topic finally t:ithout hearing from Mr. “arding o r Mr. Warburg. Do y o u care t o make a statement o n that subject, Mr. Warburg? Mr. Warburg: 3 ° .:0U4G Like t o have y o u five u s a Statement o f the gist o f that ciscussion. The Chairman: I think t h e d i s c u s s i o n w a s b a s e d u p o n tne feeling that prevailed a t this meeting, t h a t t h e true intention o f the Federal “Neserve Act was t o do away ultimately w i t h t h e i n d e p e n d e n t t r e a s u r y ; t n a t t h e Government :: ; s h o u l d , not. snould g e t o u t ofthe banking business and,imaintain balances A with fiscal agencies. F u r t n e r that t h e true purpose o f the A c t h a d n o t b e e n e x p r e s s e d b e c a u s e C i s c r e t i o n i n thet matter was left t o the Secerctary of the treasury, which involves a very great responsibility. I t was prought o u t “in the discussion that quite naturally t h e Secretary o f the Treasury would hesitate t o take t h e responsibility o f turning over between t v o a n d three huncred millions o f Government f u n d s https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis t o newly organized banks w i t h t h e manage. ch n a d n o t 366 established themselves i n the public confidence, a n d so forth; b u t o ultimately s a e p u r p o s e o f the legislation was t o b e carried o u t t h e Secretary o f the treasury would have t o b e relieved o f the responsibility o f making a v e r y momentus d e c i s i o n , a n d t h e o n l y w a y i n which h e could b e relieved would b e t o amend t h e a c t making the operation m a n d a t o r y i n t h a t r e s p e c t i n s t e a d o f discerctionary with a n officcor o f the Government. The resolution offered Suggested n o particular method to b e followed, n o r did i t Suggest a n y particular safesuards to b e i n t r o d u c e d i n the amendment t o the: 26t; p u t 2 % t s undoubtedly t h e s e n s e o f t h i s meeting, b r o u g h t o u t b y the discussion here, that the terms o f the Federal Reserve Act which a t present left all responsibility w i t h the Sec-— retary o f the treasury, a r e mistakes; t h a t t h e a e t Should b e changed t o make t h e transfer effective b y manda". tory direction within s a y t w o years o r longer, period, o r a shorter a s m i g h t b e d e e m e d wise. Mr. Warburg: W h i l e Mr. Harding a n d I have views upon the subject I a m not — — S u r e whether i t would b e proper f o r u s t o discuss t h e m here. Mr. Harding: N o , I think we should not discuss that matter. The Chairman: I suppose b o t h o f you realize t h a t at these meetings, w h i c h w e have alwags regarded a s o f a most confidential nature a n d which w e regard a s very im-— portant t o this work, w e d o not hesitate t o tackle anything. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis T h a t condition I think will prevail a t these d i s — 367 cussions right along. whether i t happens I t coes n o t make a n y difference t o b e o n e o r another individual. T h i s discussion was n o t directed a t the Secretary o f the Treasury at all; w e are dealing w i t h a very important principle, Mr. Harding: T h e ciscussion would ultimately come back t o t h e F e d e r a l R e s e r v e Board. I openly h e r e w e m i g h t c o m m i t o u r s e l v e s the m a t t e r w h i c h m i g h t e m b a r r a s s in the Federal Reserve Board. I mind o n the proposition, The Chairman: it t o certain ideas o r bind u s t o a on discussion prefer t o keep an open s o far a s I a m concerned. T h e resolution m a m that w a s passed yesterday was v e r y brief. I any S u g g e s t i o n f w e Giscussed a m very sure that i f vou have t o b e made, e i t h e r o n o r o f f t h e record, to t h e e f f e c t t h a t i t i s i n a d v i s a b l e t o deal w i t h i t b y this method, t h e meeting would b e very glad t o hear your Suggestion. Mr. Curtis: T h e r e s o l u t i o n i s a s follows: It is the sense o f the Conference that the Federal Reserve A c t s h o u l d b e a m e n d e d t o provide f o r t h e transfer of the general f u n d o f the United States Treasury a n d the fiscal agency functions o f the Treasury t o the Federal Reserve Banks within a period o f two years f r o m the passage @ t h e amendment. Mr. ®arburg: H a s i t not been the habit o f this meet-— ing t o give o u r certain resolutions a t the conclusion of the meeting? The Chairman: out. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis w e give o u t just what w e want t o give T h i s matter would b e given n o publicity whatever. 568 It would be reported t o the Federal “eserve board i n a brief summary o f our proccedings, a s has always b e e n done, ip. Warburg, Governor Seay: v e could eliminate i t from the r e - cord, a S w e d o many things that pass. The Chairman: in discussing a W e certainly ..ould b e wasting o u r time very important matter i f w e should take action o f that sort a n d then not d o anything further about Lt. Governor Seay: I moan w e could listen t o the discus—- Sion o f Mr. “arburg and wr. Harcing and then d o that. I cid n o t a s k for that reason. The Chairman: Y o u realize t h a t a t our former meetings this m a t t e r h a s b e e n o n t h e p r o g r a m f o r d i s c u s s i o n , not With a view t o a n amendment t o the Act, b u t t o arrive a t an understanding w i t h t h e Federal Reserve Board a n d with the Treasury Department a s t o a method b y which this could b e carried out. T h e Secretary o f the Treasury exercises h i s discretion i n the case a n d w e have made n o progress toward a n arrangement o f the matter, although w e have had one o r two meetings i n Washington with a n Assist-~ ant Secretary o f the Treasury a n d a member o f the Reserve Loard. As the matter n o w stands, t h e Secretary o f the “reasury has g o t t h e right, w i t h o r w i t h o u t t h e c o n s e n t o r know- ledge, even, o f the Federal Reserve Banks, t o walk into the bank some d a y and make a large deposit. I t seems a n extraordinary relationship f o r these banks t o establish https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 369 with t h e T r e a s u r y D e p a r t m e n t t h a t w o u l d e n a b l e t h e i r b u s i - ness, o r the business o f the Federal Reserve bank, i f you picase, sudd n t o b e thrown o u t o f joint, s o t o speak, b y the and unexpected a c t i o n o f o n e officer o f t h e Govern- ment. Governor seay: H e would have equal power t o witherg it, having made it. The Chairman: Y e s . Mr. Warburg: I have here a letter which I want t o submit t a the Conference o n this subject. I think i t might p o s s i b l y c n a b l e y o u t o a c h i e v e something. T h e let- ter is acdressed t o Governor Hamlin b y Assistant Secretary Malburn. (The l e t t e r r e f e r r e d by the Chairman. t o was r e a d t o the Conference R e q u e s t w a s made o f iir. iarburg t o allow the letter t o b e placed i n the record, a m d h e informed t h e stenographer t h a t h e did n o t desire t o have i t i n the record. A Giscussion followed which the stenographer was L i k e w i s e d i r e c t e d The Chairman: t o leave o u t o f t h e record.) w h a t i s y o u r pleasure w i t h regard t o the resolution which w e have passed a n d for t h e present m a d e a part o f our record, i n view of the ~iscussion which has oe place? Governor Kains: I Governor Seay: I vould s e r v e a purpoSe move that the resolution stand a s s e c o n d t h e motion. f i g ouibae ee ek t o present o u r views f o r t h e considera- tion o f the Board a t the time t h e y are expressing their https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis own views, Governor Aiken: c t 1 remember c o r r e c t l y n o n e o f t h e resolutions t h a t w e have passed i n théssmeetings h a v e be-— come p u b lic o r have b e e n given t o the press, The Chairman: O h , no. Is there any further discussion o f Governor Kains! motion? H o w e v e r , 1 would Like t o call attention t o the fact that Mr. byurtis has just stated that i t really i s not necessary t o p a s s a n o t h e r m o t i o n u n l e s s i t i s the intenr tion o f this meeting t o change its former action; t h a t we d o not need t o vote. I ask f o r a motion i n case i t i s your intention t o change t h e action that w a s taken yes-— terday. Governor Kains: I The Chairman: will withdraw t h e motion. N o motion i s offered, a n d there i s no change i n the resolution. “@ will then pass t o Topic 11-(d). 11-(d). E L I M I N A T I O N O F DESIGNATION O F CAPITAL FOR FOREIGN BRANCHES OF NATIONAL BANKS. Before taking that u p 1 would like t o report t o Mr. “arburg and Mr. “arding that at yesterday's meeting a resolution was unanimously passed recommending that the National Bank Act b e amended , and i n case the Federal Reserve Dank Act i s amended t o provide f o r t h e establishment o f domestic branches b y national banks, that that b e affirmed i n the Amendment t o the National Bank Act suggested, s o that the banks establishing branches either i n this country o r abroad should n o t b e required t o segregate a n y portion o f https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 371 their c a p i t a l t o represent t h e business o f a n y particular branch, It was quite fully discussed a t this meeting, a n d w e were a l l clearly o f the opinion, I think, t h a t that w a s a sort o f b o o k k e e p i n g f i c t i o n w h i c h w a s q u i t e u n n e c e s s a r y except i n the case o f foreign branches, w h e r e t h e y were r e quired t o segregate a certain portion o f their assets t o protect their creditors i n those foreign countries. T h e question w a s a l s o d i s c u s s e d a s t o whether t h e i m p o s i t i o n of taxes u p o n t h e a s s e t s o f branches w o u l d n o i automatical— ly require t h e segregation o f a certain amount o f capital; but the amendment t o the National B a n k Act which w e recom-— mended w o u l d s i m p l y a u t h o r i z e b a n k s w i t h a capital of a million collars o r over t o establish branches within t h e limits o f the municipality i n which they had their offices, So t h a t w o u l d e l i m i n a t e a n y c u e s t i o n o f taxes u p o n t h e Segregated capital, a n d v e accordinglyhave m a d e that unqualified r e c o m m e n d a t i o n . Bearing o n that subject, under t h e head o f topics (a) and (e), i t was suggested here that the Federal Advis-— ory Council i n making their recommendation, h a d confined their recomsendation t o the extension o f the powers o f national banks having a capital o f a million dollars o r over a m located i n reserve o r central reserve cities, and t h a t a p p e a r e d t o u s t o b e a very arbitrary method o f dealing with the subject o f branches, T h e r e are many cities i n the United States t h a t a r e n o t reserve cities that h a v e t e n t i m e s t h e p o p u l a t i o n e n d b a n k r e s o u r c e s https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis of 372 some o f the reserve cities, a n d to-exclude t h e banks i n those cities f r o m the benefits o f such a n amendment 6 tne National Dank Act, o r to require them, i n order to avt o change their status ail themselves o f the privielege, and become reserve cities, seems t o u s a round about w a y of dealing with a subject that should b e dealt with Cirectly. b e felt that banks o f a certain size should b o per -_ mitted O t o establish branches. reached i n a good many ways. to banks L o c a t e d i n cities be f course t h a t could I t coulc b e c o n f i n e d of a certain population. a s ) were n o t inclined t o endorse t h e recommendation made b y the Federal Ravisory council that i t be confined to W reserve a n d c e n t r a l r e s e r v e c i t i e s . e were o f the opin- n o t a fair jon that that should n o t b e done, t h a t that w a s o n these pasis. P o s s i b l y I h a d better report completely matters t h a t w e Giscussed yesterda y under Topic: ids Act be It w a s r e c o m m e n d e d t h a t t h e F e d e r a l R e s e r v e amended s o that the Reserve Yanks ‘might issue notes Girectly against a deposit o f gold. mena@ed t h a t e i t h e r a formal I t was also recom— o r informal o p i n i o n b e o b t a i n e d from the Federal Reserve Board making i t clear whether there w a s o r was n o t under t h e statute a n y cuestion a s to the the ability o f the Federal Reserve Yanks t o recover https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis notgs b y the gold pledged a s security f o r Federal Reserve present p r o c e s s , s u c h recovery t o b e effected b y a of t h e p r e s e n t p r o c e s s Mr. Warburg: that o f putting reversal i t in. T e have given a n opinion about that, i t c a n b e done. 373 The Chairman: M r . ~arburg advises m e that an opinion to-that e f f e c t h a s a l r e a d y b e e n rendered. w e will have that e n t e r e d u p o n t h e r e c o r d a n d t h a t W i l l e l i m i n a t e the necessity o f reporting that action t o the Board. We have a l s o passed a resolution recommending that National banks b e given t h e right toaccept drafts arising out o f domestic transactions, w i t h suitable Safeguards, and w e also have passed a resolution declaring i t t o b e the sense o f this meeting that t h e powers o f member banks to m a k e l o a n s u p o n r e a l e s t a t e s h o u l d n o t b e extended beyond those now contained i n the Federal Reserve Act, In connection with that discussion i t was brought u p here that the officers of the Reserve Banks has been asked to express their views t o the Joint Committee o f Congress that i s dealing w i t h rural credits legislation, provisions o f the Hollis Billi a s t o the T w o resolutions were passed o n that subject condemning t h e suggestion that t h e Yederal Reserve Banks b e permitted t o make loans upon the bonds o f those rural credit banks, a n d also condeming t h e Suggestion that t h e national banks mightbe permitted t o accept drafts which would i n fact b e financed bills secured by t h o s e bonds. Our resolution s u g e s t e d t h a t i f the powers o f the national banks t o accept drafts b e extended S O a S t o include any form o f finance bill, t h e y certainlyshould not b e s o restricted a s t o c o n f i n e t h a t c l a s s o f acceptances those w h i c h w o u l d b e s e c u r e d to b y t h e s e p a r t i c u l a r bonds. that We F S EOmuD Tee, t e extension o f the powers ofNational banks https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis to accept drafts i f mace t o include finance bills, should confine those bills t o those which arose o u t o f commercial t r a n s a c t i o n s o r t h e proceeds o f which h a d b e e n used f o r industrial, cowmercial, agricultural o r exchange purposes, I think, after quite a full discussion, t h e feeling neré was that a draft d r a w n f o r the purpose o f making e x change, a S distinguished f r o m a draft drawn f o r the purpose o f c a r r y i n g s t o c k s , w a s q u i t e a legitimate d r a f t ; that i t had a very proper place i n the banking system and s h o u l d n o t b e e x c l u d e d f r o m t h e p r o v i n c e o f the nation- al banks o r possibly t h e reserve banks a s t o the discount— ing o f then. I do not know that I need t o g o into a further discussion o f that. Mr, W a r b u r g , I t will b e brought o u t i n the report, a n d y o u will undoubtedly comment o n it. I t will b e rolled along a n d possibly taken upat o u r December meeting. i s It was also recommended yesterday that the Federal Reserve A c t b e amended s o a s t o provide that mutual savings banks which had n o capital stock, b e permitted t o establish a relationship t o the Federal Reserve System under whieh hey w o u l d p e c p a required d e p o s i t , b a s e d u p o n t h e a m o u n t of their deposit liabilities, w i t h the Federal teserve B a n k of the District i n which located, a n d that they b e entitled t o discount eligiblepaper where t h e y neld such paper, or b e entitled t o borrow money from the reserve banks upon a https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis security o f Government b o n d s o r state o r municipal 375 bonds, I think w e a l l f e l t t h a t a n amendment actep w o u l d r e q u i r c a o f that char- great d e a l o f S t u d y a n d p r e p a r a t i o n So t h a t t h e reserve b a n k s be s u i t a b l y safeguarded; o f the system a s a but a whole c o u l d number o f those p r e s e n t m a d e Savings Statements indicating that t h e b a n k s i n various parts of the country a r e n o w very ANZ M S L o cstablish relations with the federal reserve banks a n d are Struggling w i t h the difficulty o f having n o paper which i s eligible f o r dis-— count which would justify their becoming members, i f they were permitted t o d o so. Governor V a n Zandt: I d o not think w e took a n y definite action o n that point, other t h a n t o refer i t to the Executive Committee. The Chairman: T h a t i s right, Executive @ommittee. i t was referred t o the B u t I think I am right i n stating that a s the sense o f the meeting. Governor Van Zandt: T h a t was the sense o f the meet- ing. Mr. Cyrtis: Committee s h o u l d , The Chairman: W i t h the s u g g e s t i o s t a h the Executive i f possible, p r e p a r e t h e amendment. T h a t , gentlemen, concludes a l l o f the action taken under Topic 1 1 o f our progran. Of the four o r five items l e f t undor that topic w e might discuss n o w Item (f) w e have n o t dealt with, and, I am ashamed t o say, i t was sucgebaddby me. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 11-(f). C O N S O L I D A T I O N O F COMPTROLLERS' FUNCTIONS. This matter h a s been discussed a t almost e v e r y meeting 376 of the Governors a n d was discussed i n connection with the unfinished business o f the last meeting yesterday. yesterday's m e e t i n g w e p a s s e d a A t resolution renewing t h e recommendation t h a t w a s s e n t t o t h e F e d e r a l R e s e r v e B o a r d , following o u r meeting i n Chicago, t h a t t h e Federal Reserve Banks should b e gimwen all t h e information that t h e Comptroller's e x a m i n e r s o b t a i n e d i n the examination o f the banks, Mr. Curtis: was s u b m i t t e d T h a t w a s n o t s e n t t o t h e Board. a e t o t h e B o a r d o r a l l y b y Mr. Miller. The Chairman: T h e s i t u a t i o n a s i t exists a t p r e s e n t in New York has undoubtedly resulted i n a certain division o f authority a n d responsibility t h a t would b e unsatisfactory i n a commercial bank. accomplish A l l that w e want t o i n N e w Y o r k i s t o insure t h e a b i l i t y o f the officers a n d directors o f the bank t o conduct i t along well r e c o g n i z e d b a n k i n g p r i n c i p l e s b y h a v i n g t h e m o s t com-— plete information about credits t h a t t h e y c a n obtain a n d which they have a right to. A t present w e are i n a posi- tion where w e cannot g e t information that w e ought t o have to enable u s t o deal w i t h members w h o have t h e right t o come i n and get discounts f r o m us, what a p p e a r s t o some o f us T h i s srows o u t o f t o b e a n innerent defect i n the F e d e r a l R e s e r v e A c t i n t h e d i v i s i o n o f r e s p o n s i b i l i t y petween t h e C o m p t r o l l e r ' s o f f i c e a n d t h e F e d e r a l R e s e r v e Board, a n d the division o f responsibility, i n the case o f our bank particularly, between the Federal Reserve Agent and the chief examiner o f the district, w h o i s the Federal https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Reserve Agent's deputy. The q u e s t i o n i s w h e t h e r t h i s m e e t i n g c a r e s recommendation a s t o a t o make a n y methodof d e a l i n g w i t h t h i s S u p j e c t of d i v i s i o n o f responsibility, w h i c h really extends throughout t h e e n t i r e system. Governor Rhoads: you would offer a M r . Chairman, i t w a s m y hope t h a t resolution. The Chairman: w discussion before a e generally h a v e a little p r e l i m i n a r y resolution i s brought out. I will apply t h e same rule t o this that I have applied t o other topics; h a t is, w h e n the time c o m s t o offer a resolu- tion, 4 will call f o r one, i f there seems t o b e a n y hope of passing it. GovernorSeay: I think possibly t h e Giscussion went even f u r t h e r t h a n y o u h a v e indicated. Y a s i t not i n your mind, w h e n y o u s p o k e o f c o n s o l i d a t i o n o f t h e Compirolier's — functions, t h a t e a c h o f those functions should n o w b e con-— soOlidated a n d c o n f e r r e d u p o n t h e F e d e r a l tteserve B o a r d ? Tne Chairman: W h a t I Governor Seay, w a s this: had specifically i n mind, T h a t t h e Comptroller h a s t h e right t o examine t h e member banks through his_examiners under t h e n a t i o n a l b a n k Act, and. exercises a able control over their affairs, h v e r y consider—" e e d e r a l Reserve Danks likewise h a v o t h e right t o examine member banks, b u t they have v e r y little control o v e r t h e affairs o f member banks otner t h a n that arising o u t o f the discount relations https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis the control o f their reserve account. T h e . " e d e r a l R e has t h e r i g h t t o e x a m i n e m e m b e r b a n k s a n d 378 Feceral Reserve Banks, and t o require reports, a n d i t exercises a very c o n s i d e r a b l e c o n t r o l o v e r t h e m e m b e r banks. We have a most extraordinary situation, where t h e Comptrol- ler i s , b y l a w - - - a n d w h a t i s o f t e n m o r e i m p o r t a n t , long h a b i t a n d p r e c e d e n t ; - t h e c o n t r o l l i n g f a c t o r by i n the Girection o f many o f the affairs o f national banks. The Federal Beserve Board i s n o w created a n d likewise h a s these broad powers. law, t o report W e are expected to, a n d required b y t a the Federal Keserve B o a r d o n t h e condition of a n y m e m b e r b a n k i n o u r d i s t r i c t w h e n t h e y a s k u s t o d o 50. I have never heard o f a business organization that could b e mace a success a s a n organization and effective and economical, w i t h such a division o f authority a s that. I would like t o see the situation remedied. is t o b e brought about I unsatisfactory. do not know. I J u s t howit think i t i s most I t has b e e n s o i n our case, a t least. Governor Seay: I s it not correct to say then, that a summary o f the expression o f opinion was that complete control a n d s u p e r v i s i o n o f m e m b e r b a n k s s h o u l d b e lodged i n the Federal Reserve Board, The Chairman: Yes. T h i s Act provides i n its short title that one o f the objects o f the legislation i s t o provide better supervision o f banksin t h e United States, but instead o f that w e are liable t o get worse supervision, because w e have three supervisors. Should n o t the Act b e dihabkified s o a s t o find o u t where t h e authority does rest? https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis I t i s not simply t h e 379 authority o f the Comptroller, because the word "comptrol-— ler" covers a very small part o f the subject. through t h e entire subject o f examinations. I t extends w e want t o know whether w e are t o deal with the Federal Reserve Board or the Comptroller o r with both, o r with the Deputy Federal Reserve Agent o r the chief examiner. Governor McDougal: I have n o t i c e d t h a t s i n c e t h e regulation bearing upon t h e admission o f state banks h a s been issued, containing u condition under which t h e federal reserve D a n k s m a y withdraw, w h i c h w a s a p p a r e n t l y t h e o b j e c - tion generally raised a t the outset, t h a t t h e question now m o s t g e n e r a l l y t a l k e d a b o u t i s t h e v e r y o n e t h a t y o u are discussing here--- the fact that t h e state banks would be u n d e r t h e s u p e r v i s i o n o f t w o m a n y supervisors. I have b e e n t o l d t h a t t h a t h a s b e e n i n s t r u m e n t a l i n prejudic-— ing them against coming into t h e system; t h a t i f the right of supervision were confined t o one o r the other authority, that i t would b e much more satisfactory t o them. The Chairman: product, W e l l , Governor iieDougal, a s a by- s o t o speak, o f this division o f authority between the Federal Reserve Board and the Comptroller, w e now have the extrordinary condition that a brand n e w system o f examination i s created where w e have t h e Federal Reserve Danks c o n d u c t i n g e x a m i n a t i o n s o f state banks t h a t a r e members i n cooperation w i t h the State examiners, a n d t h e Comptroller h a s nothing whatever t o d o with those examinations. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis A n effort t o meet a situation w h e r e t h e responsi- 380 bility w a s d i v i d e d a n d p r e s u m a b l y u n s a t i s f a c t o r y institutions h a s r e s u l t e d of t n e m a t t e r i n a t o such still f u r t h e r c o m p l i c a t i o n o f e x a m i n a t i o n a n d supervision. How do you feol about that subject, Governor \ains? Governor Kains: I be a think the Comptroller ought t o sort o f c h i e f e x a m i n e r u n d e r t h e F e d e r a l R e s e r v e Board. I think there o u g h t t o b e o n l y o n e s y s t e m o f e x — amination, The Chairman: H o w d o y o u feel Governor V a n Zandt? Governor V a n Zandt: I think there should b e less conflict o f authority i n the examination; t h a t i t should be c o n s o b i c a t e d i n some manner. I think t h e proper place f o r i t i s u n d e r t h e s u p e r v i s i o n o f the Federal R e - serve Board, althoush they m a y cesignate t h e Comptroller of the Currency o r any other official t o have charse o f the b u r e a u o f examinations. The Chairman: v h a t i s your opinion, Governor Sawyer? Governor Sawyer: a S u s e y s[ox rree W i t h t h e i d e a t n a t oO the p o w e r o f s u p e r v i s i o n s h o u l d b e s u p e r v i s e d b y t h e Federal Reserve B o a r d a n d s h o u l é n o t b e s o diviced. I think that concition has a tendency n o t o n l y t o complicate matters b u t to m a k e s u p e r v i s i o n m i c h l e s s e f f e c t i v e t h a n i t w o u l d b e if it was centralized, The Chairman: Mr. ioxton: I H o w d o you feel about it, tir. Hoxton? think the examination a n d control should be centered i n the Federal Ueserve Board. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The Chairman: A n e cine 6 Governor ithoads: I think y o u think Governor Rhoads? i t should b e centered i n 3381 the F e d e r a l ileserve B o a r d a n d t h a t t h e details o f i t should be exercised through the “eceral Keserve banks i n the district s o t h a t t h e i n i i r mation w o u l d b e i n those b a n k s , The Chairman: v h a t d o y o u think about it, Governor Governor Aiken: I think they shoule transfer t h e con- of the banks t o the Federal iieserve Board. The Chairman: ~ h a t d o you think, Mr. Foote? Mr. Foote: I The Chairman: a m o f t h e s a m e Opinion, A n d what i s your opinion, Governor wold? Governor Wold: I success a m thoroughly convinced that t h e o f the Federal Reserve S y s t e m depends upon all the C o m p t r o l l e r ' s S u p e r v i s i o n b e i n g p u t i n t o t h e Federal iieserve Board and being exercised through the Department to the “ederal Reserve Banks s o that w e will b e i n a position t o g e t a l l t h e i n f o r m a t i o n p e r t a i n i n g t o examinations and s o forth, The Chairman: h a t i s your opinion, Governor Fancher? Governor Fencher;: I a m strongly o f thet opinion, My. Chairman, a n d the point which Governor McDougal brings out a s t o the consideration some o f the State banks a r e giving t o the question o f joining t h e “syste, one o f the features t h a t t h e y are giving a thought to. I M e e e i s goed deal o f might a c d that I was i n conference w i t h the Board o f one o f our state banks some t w o weeks age, t bank was contemplating joining t h e System, a n d the a h T 4% question o f supervision was brought o u t b y several o f the https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis members o f t h e Board; t h e m a t t e r o f w h e r e t h e supervi-~ sion w a s g o i n g t o r e s t a n d w h a t t h e p o w e r o f t h e C o m p t r o l l e r of the Currency would exercise o v e r t h e examination o f the banks i n the matter o f reports w a s a n important question i n their minds, something that they wanted clearly determined. (A statement b y Governor Strong with reference t o the above matter w a s directed n o t t o b e recorded.) move that t h e procedure b e fol- Governor McDougal: I lowed a s y o u h a v e o u t l i n e d i t . Governor V a n Zandt: I The Chairman: second t h e motion. T h a t resolutim, a s I understand i t , provides that t h e Shes hoe, a s i s our custom, will a s k the Secretary t o prepare a resolution for submission t o this meeting, which would outline t h e sense o f the meet-~ ing a s brought o u t b y the discussion. H a v e I correctly stated t h a t , G o v e r n o r M c D o u g a l ? Governor McDougal: The Chairman: Y e s , sir. I s that motion seconded? Governor V a n Zandt: I The Chairman: secone it. I s there a n y further discussion? (There w a s n o further 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 carried.) The Chairman: I moment, a m going t o skip I t e m ( 2 hig S e e k a t least, a n d a s k for a discussion o f item (Tye 11 (j). READJUSTMENT O F CAPITAL OF RESERVE BANKS. That i t e m was suggested b y Governor Seay. W i l l you open the discussion, Governor Seay? Governor Seay: M r . Chairman, o n e o f the criticisms that h a s been developed against t h e Federal Reserve Banks is that they a r e expensive erganizations unable t o earn i n https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 385 terest o n t h e i r capital, I d o n o t believe t h a t w e should b e u n d e r t h e n e c e s s i t y o f e a r n i n g i n t e r e s t u p o n a capital w h i c h w e d o n o t u s e a n d p e r h a p s n e v e r w i l l use. The Federal Reserve Yank o f New York, for instance, has a paid i n capital of over $10,000,000, I understand. The Chairman: About$11,000,000. Governor Seay: Y o u would have t o earn 700,000 over a n d a b o v e e x p e n s e s t o pay a divicend. I do not believe i t i s a wholesome influence a t all. The feeling that federal teserve banks must use their resources s o a s t o earn interest u p o n a large capital i s Wrong. I d o not believe t h e necessity exists f o r putting in s o much capital i n order t o secure t h e degree o f safety which i s necessary. I believe i t would b e t o the interest o f the system to remove that necessity that w e now feel under, a n d that we have b e e n told w e are under a n d will b e under a s long as w e p o s s e s s t h e c a p i t a l o f t h e m e m b e r banks. A s long aS w e h o l d i n o u r p o s s e s s i o n t h e f u n d s o f m e m b e r b a n k s w e will b e expected t o return a dividend u p o n them. I would rather s e e t h e amount o f the call capital reduced, a n d i n order t o get a t the heart o f things I will offer a resolu- tion a s f o l l o w s : That i t i s the sense o f the Conference t h a t while t h e subscribed c a p i t a l s h a l l r e m a i n a s n o w p r o v i d e d f o r i n t h e Federal R e s e r v e A c t , t h a t t h e p a i d - i n c a p i t a l s h a l l b e o n e sixth i n s t e a d o f one-half. I to c a l l s o m e capital, I https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis believe i t will b e necessary have n e a r d t h e o p i n t o n e x p r e s s e d 584 that there i s n o necessity f o r cociling in: Capital, b u t if the Federal Heserve Yanks operate merely upon the reserves i believe there i s a positive necessity f o r calling some Of i h e -eapi tal. I t could perhaps b e a n elastic p r o p o s i - tion which would enable the Federal eserve Board t o say in any district w h a t proportion o f the subscribed capital should b e paid i n to the banks; but t o cover the whole thing, I offer a resolution t h a t t h e paid-in capital o f the Federal Reserve Yanks, instead o f being 5 0 per cent a s n o w provided for, shall b e mace, b y amendment, one-sixth o f the total capital, Governor McDougal: I The Chairman: moment. ) will second that motion. ( G o v e r n o r Aiken presiding f o r the A f t e r h a v i n g h e a r d t h e m o t i o n b y Governor Seay, and the second b y Governor MeDougal, I rassed b y the absence a m somerhat embar- o f t h e l e a d e r o f t h i s meeting. i nink i t waild b e initere:ting t o have a n expression o f Opinion f r o m t h e o f f i c e r s gard to this matter. o f t h e a i f f e r e n t b a n k s w i t h ‘re- W e would also like to have Mp, Yarg- ing a n d Mr. Warburg express a n Opinion about it. Mr. Yarburg: I think that matter was discussed w i t h the A d v i s o r y C o u n c i l t h e l a s t t i m e t h e y w e r e i n Nashington. Mr. S e a y w a s p r e s e n t a t t h a t ciscussion. I think every one was generally i n sympathy with. the thought that there was some difficulty i n making the dividends and that i t was an embarrgssing matier a n d that a reduction would b e advis- able. N o t h i n g formal has been done o n it, but informally + think most o f u s have expressed ourselves a s i n favorof https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Governor Wold: M a y 1 inquire i f i t i s t h e Opinion of the Board that a n y pald i n ¢apital i s necessary? Mr. Warburg: I could not give you the opinion of the Board o n that, Governor Wold: Mr. Warburg: W h a t i s your opinion, Mr, warburg? Y e s , 1 think it is advisable. I t is advisnble, I think for several reasons. O n e . i s the question o f assessment, I f y o u d o not e a r n your divi- dends y o u h a v e g o t t o b e assessed, w h i c h i s n o t pleasant, Then 1 think the banks ought t o be in a positien t o handle discount operations properly, I have a think the banks would stronger Standing sentimentally w i t h member banks and with everybody i n the country i f they have a certain amount o f c a p i t a l p a i d i n , It always sounds g o o d t o S a y that y o u have paid a Six per cent dividend. you h a v e p a i d a I f the capital i s small, b u t dividend o n it, t h e w h o l e s y s t e m looks . mich stronger, Governor Wold: S q @ n e o f o u r members a r e o f t h e o p i n - ion that the Government will r e a p t h e benefit o f any ¢arn— ings. T h e suggestion i s made that t h e banks might make & permanent deposit, approximating t h e amount o f capital withdrawn, w h i c h would p u t the bank i n about t h e same position--- Mr. Warburg: I d o not think that would b e advisable. I d o not think w e want i o cestroy t h e independent character of these banks. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis I f y o u put t h e Government i n there a s 3586 really furnishing t h e capital, y o u are going o n e step further i n that direction, I think these banks ought t o b e independent autonomous banks, a s far a s they c a n be, Governor Wold: I for t h e p u r p o s e suggested t h e idea, a s expressed, o f d r a w i n g y o u o u t o n it. I in s y m p a t h y w i t h t h e r e d u c t i o n o f o u r c h a r g e s a m very m u c h b y reducing the capital-—-— Governor Seay: ( I n t e r p o s i n g ) D o y o u mean that there Shoulda not b e a subscribed capital? Governor Wold: S u p s c r i b e d capital, y e s ; b u t not Paice in. Governor Seay: for t h e p u r c h a s e o f what funds w o u l d y o u provide o f the b a n k home? Y o u could not u s e reserves f o r that purpose? Mr. Warburg: N o . Governor Seay: S o m e capital would b e absolutely essential. Mr. Warburg: Y o u need some capital, undoubtedly. Governor Aiken: A s a n evidence o f responsibility it i s cesirable t h a t t h e r e s h o u l d b e s o m e c a p i t a l paid.in. Governor Rhoads: I should like t o ask Mr. Warburg vnhat h i s o b j e c t i o n s a r e t o r e d u c i n g t h e p a i d - i n c a p i t a l ? Mr. Warburg: I can only say that when a situation arises where t h e federal Reserve Banks deal with smaller banks t h a t a r e weaker, i f you have a hand i t i s comfortable t o have t h a t there should happen. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis T h a t feature Governor Seay: certain amount o n i n case anything i s t o b e considered, T o offset that would b e the loss aris-— 387 ing from inability t o earn dividends, w h i c h might necessitate a n &asessment a n capital a n d that loss would b e greater, a S i t affects t h e w h o l e system, t h a n a n y l o s s b y a n individual bank. T h a t point w e have considered too. Mr. Varburg: T h e thought w e n t through m y mind, in that connection--- and I do not know whether it is a good or bad thought--- thet n o w the Federal Reserve member banks may withdraw a l l their reserves; extent. t h e y m a y withdraw t o that P o s s i b l y y o u might say, w h e n y o u reduce t h e capital, t h a t n o bank whall have t h e right t o withdraw i t s balance beyond a certain point, w h i c h might b e made 5 0 per c e n t o f t h e capital. h a t would g i v e y o u a minimum to d e a l with. The Chairman: T h e witndrawal o f deposits b y member banks i s largely a n involuntary matter. I f you put a limit u p o n t h e a m o u n t t h a t t h e y a r e p e r m i t t e d t o overdraw, it means that y o u have g o t t o refuse t o clear checks, anc. t h a t w o u l d l e a d t o a situation t h a t w o u l d b e i n i o l e r - able a n d would @rive t h e banks o u t o f our clearing system. Governor Seay: T h a t i s true, w i t h t h e p r e s e n t c l e a r - ing methods. Governor Fancher: banks a r e holding a I t appears t o m e that t h e reserve little different f o r m o f reserves than m a i n t a i n e d w i t h t h e r e s e r v e a g e n t s central r e s e r v e c i t i e s . i n reserve a n d T h e banks cannot c h e c k t h e m our o f t h e r e s e r v e b a n k s a n d t r a n s f e r t h e m t o other b a n k s . They are required b y l a w t o maintain a https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis reserve w i t h the 588 reserve b a n k a n d these reserves o n l y fluctuate a s the deposits o f the member banks increase o r decrease, I n District No. 4 , when the reserves a r e finally transferred, we will have ceposits o f forty o d a million dollars, w i t h our presont capital o f six million. W h e t h e r t h e paid in capital should b e six million, o r a third o f it, two million, does not have any great bearing upon the situation; b u t i t certainly has bearing u p o n t h e earninss w e are r e q u i r e d t o produce, I a m strongly i n favor o f returning t o our member banks t w o thirds o f what they have p a i d in. The Chairman: I n New York the situation i s a little different than any other city because the proportion o f doposits i s s o mich greater t o capital t h a n i n any other district. Q u i t e recently our gross deposits have amount- ed to 180 ,000 ,000 and we have less than {11,000,000 paid in. I f o n e third o f that w e r e returned i t would m e a n a three capital o f less t h a n f a m m i l l i o n d o l l a r s w i t h t r e m e n d o u s deposits f o r t h a t a m o u n t o f capital. W e have beene ducated for a good many years t o regard the capital o f a bank as a margin of insurance o n its deposits. I do not imow whether t h e p e o p l e o f t h e c o u n t r y w o u l d b e s a t i s f i e d have a to bank s h o w i n g 1 8 0 ,000 ,000 g r o s s d e p o s i t s w i t h o n l y two and three-quarter millions capital paid in. (Further 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 n o t t o take.) Mr. Warburg: G o v e r n o r S e a y suggests t h a t this amend- ment b e n o t obligatory, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis b u t optional, s o that t h e y m a y d o 389 it; £ 0 O n e d i s t r i c t a n d n o t i n anothers W a s tnat your sugestion, Governor Seay? Governor Seay: Y e s sir. The Chairman: I uncerstand, Governor S c a y has made a motion, t h e terms o f which Governor Aiken repeated t o mee V a s that motion seconded? Governor McDougal: I The Chairman: seconded t h e motion, I s there a n y further ciscussion? Governor V a n Zandt: I n that connection there i s a t least o n e provision i n the act, o r one clause i n Section 13 o f the Ae@t, a n d i n some o f the regulations which have been already promulgated b y the Federal Neserve Board, bearing u p o n the amount o f capital stock o f the bank, w h i c h woulcof c o u r s e n e e d t o b e a m e n d e d i n that respect, t h a t i s , an amendment t o that portion o f Section 1 5 which refers t o ciscounting o f agricultural pwper t o a n amount t o b e limited to a certain percentage o f capital stock, unless t h a t per- centage refers t o prescribed capital and not t o paid-in capital. Toe Chairman: ‘ o u l d y o u suggest that Governor Seay's motion s h o u l d b e a m e n c e d a n d m a d e t o i n c l u d e a n amendment to Section 13, where reference i s made t o the proportion o f the paid-in capital that m a y b e advanced o n agricultural paper? Governor V a n Zandt: I eon he https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis think a n addition t o that motion B e made including a l l portions thereto, o f the Act refer- o r s o m e t h i n g o f t h a t kind. The Chairman: I s that acceptable t o you, Governor “360 Governor Seay: E n t i r e l y acceptable. S O f course that o was contemplated i n the original-motton, The Chairman: G o v e r n o r McDougal, i s that amend— ment satisfactory t o you? Governor MeDougal: he Chairman: Y e s sir. A r e y o u reacy f o r the ancci ian o n this motion? (The question was called for the the motion was duly carried, ) 11(i) ‘RESERVE Norms AS LuGaL RESERVES. The Chairman: Serves. I t e m (i), Reserve notes a s legal re-- G o v e r n o r S e a y , t h i s i s o n e o f y o u r topics; w i l l you o p e n t h e d i s c u s s i o n ? Governor Seay: tion where a M r . Chairman, w e are now i n the posi- member bank c a n b y rediscount create a credit with a Federal Reserve B a n k a n d count i t s balance a s a portion o f its reserve, a n d c a n proceed t o expand i t s Obligations accordingly. T h e r e i s nothing t o prevent three o r four o r more o f the large banks i n New York discounting with gou % 100,000,000 o f acceptable paper and being credited w i t h that amount o f reserve t o proceed t o expand i t s loans i n the usual way, whereas, i f they were to take dowm Federal Reserve notes a n d put them i n their vaults they would not count and they could not accomplish the purpose. We a r e a l s o i n t h e a n o m a k o u s p o s i t i o n w h e r e F e d e r a l Reserve n o t e s n o w c o u n t a s r e s e r v e s o f state b a n k s e x c e p t in those states where there a r e specific laws providing f o r https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 391 the c h a r a c t e r o f t h e reserves, I York State h a s a d o not k n o w whether N e w law which states w h a t t h e ruality o f he reserve shall be. Tho Chairman: I s there s u c h a law, Mr. Chairman? Yos. e s e r v e n o t e s a s reserves, I t prohibits the use o f Federal a S part o f the reserves i n state institutions, although i t permits t h e use o f national b a n k notes. A t t h e time t h e n e w banking l a w was passed i n New York State w e had not discovered that w e could apply a rotary pump t o our o w n issue a n d get gold i n behind o u r notcs, a n d i t was generally felt i n New York that there w a s a possibility o f a very consicerableinflation o f the note issues of the Federal Neserve banks, without any specific gold r e s e r v e b e h i n d t h o s e n o t e s o t h e r t h a n t h e g e n e r a l f o r t y per cent required o f banks, a n d that w i t h the enormous amount o f cash held i n the c a s h reserves o f state banks in New York State, i t might b e the means o f very seriously inflating note issues t o permit the national banks i n New York State, b y arrangement w i t h the state banks, t o take o u t reserve n o t c s a n d a t o n c e d e p o s i t t h e m i n t h e s t a t e b a n k s as reserves a n d continue t h e process indefinitely. At t h e t i m e t h i s a c t w a s p a s s e d i t w a s v e r y c a r e f u l l y considered b y a commission i n New York State, o f which Mr. Malburn was chairman, and 1 discussed i t with him a great at many t i m e s a n d a g r e e d t h a t t i m e f u l l y t h a t h e w a s i n a c c o r d with o u r t h e n u n d e r s t a n d i n g o f t h e Fedéoral R e s e r v e A c t t h a t Federal e s e r v e notes should serve a s reserve i n New York state, a n d I am honest enough t o confess that with a year's experience u n d e r t h i s a c t I https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis would n o t w a n t i t n o w p r o v i d e d 392 that they should also b e permitted t o b e uscd a s reserves to the national banks, Governor Seay: I at the beginning. I think all o f us shared that opinion a m quite positive i t was m y opinion, But suppose t h e state banks o f N e w York were t a procure the services o f t h e national banks b y getting t h e m t o dis-— count a n d t a k e o u t F e d e r a l r e s e r v e n o t e s f o r t h e p u r p o s e of reserves i n the state banks. W h a t would t h e differ- ence b e as regards the effect upon expansion? Y o u r member Dank itself might create t h e reserve w i t h y o u a n d might proceed t o cxpand, T h e y have t o take down the note i f they want t o have t h e credit. T h e expansion c a n b e either i n the state b a n k o r i n the member bank. H e r e i s the anom-— olous condition that can create a deposit b y rediscount, as t o eats: e a n notes that would b e required t o maintain a forty p e r cent reserve a s against t h e deposits i n their r e - I lation t o the now S,am decidedly i n favor o f the note itself being u s e d a s r e s e r v e i n s t e a d o f t h e p r o c e e d s o f the r e - discount being used, That subject also i s very closely related w i t h another topic that w e have discussed a n d passed upon, a n d that e he amendment t o the Act charging the direct issue o f Federal Reserve notes against gold. I have felt that the "ederal Reserve notes should be issued either against g o l d o r against commercial paper, and that inasmuch a s member banks c a n use their deposits created b y rediscounts w i t h t h e F e d e r a l “ e s e r v e b a n k a s a basis f o r expansion, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis i t could not possibly a d d t o the dangers 593 of expansion b y allowing Federal Reserve notes themselves to c o u n t a s reserves, I t would tromendously aidus in our endeavor t o corral t h e gold o f this country, which, as iy. Warburg h a s just said, although i t m a y exceed the Supply o f a n y o t h e r nation, i s never enough f o r o u r pur- poses, because i t i s not under concentrated control, and we are positively throwing a w a y t h e banking resources of this n a t i o n i n t h e m o s t p r o f l i g a t e m a n n e r i n which w e have conducted heretofore o u r banking business, I f i t would facilitate the corralling ofthe gold o f this country by using Federal “eserve notes, I believe i t e a n b e done, a n d 1 think i t would b e @ very f a r reaching benefit f o r everyone, The Chairman: W e went o v e r this pretty thoroughly yesterday i n ciscussing that other amendment t h a t Was o f ferec, a n d from that discussion I gathered that w e might have a pretty w e l l crystalized O p i n i o n o n t h i s subject. May w e not have t h e views around t h e table, without further discussion, a n d then & 0 over t h e subject again o n motion, i f you please? Governor V a n Zandt, h o w d o y o u feel about this? Governor V a n Zandt: i v e r since t h e passage o f the Act I have felt, i n view o f the fact t h a t those notes were redeemable i n g o l d o r lawful m o n e y , t h a t t h e y s h o u l d be counted a s r e s e r v e The Chairman: by a G o v e r n o r Sawyer? Governor S a w y e r : I possibly, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis i n a member bank, have f e l t t h a t t h e y c o u l d b e , limited w a y . The Chairman: G o v e r n o r Kains? Governor hains: I a m h e a r t i l y i n favor o f h a v i n g them h e l d eas reserves, The Chairman: Mire Hoxton: G o v e r n o r Hoxton? w e think that t h e y should b e held a s reserves, itr, Chairman, T h e state banks, however, Our city, a r e n o t allowed t o hold t h e m a s reserves. might b e some complication, Ory i o u r city, in There i n the fact that the sub-treas— o r the “ p e a s u r y Department, perhaps w o u l d n o t , c o u n t t h e m a s reserves. d o not, or T h e y send them in for recemption. The Chairman: G o v e r n o r iiecDbougal? Governor Mcbougal: I believe t h a t t h e notes should be counted a s reserves. The Chairman: G o v e r n o r Rhoads? Governor Rhoads: i think -2t- vous b e sate: t o a o it, although I would b e inclined t o limit t h e percentage to some extent. Governor Aiken: I Mr. Foote: I a m i n favor o f it. do not think we-ought t o discredit the reserve notes i n any way. i t h a large g o l d r e - Serve behind them, i n m y opinion i t makes h a m i t thoroughly consistent that t h e y b e classified a s reserves. Governor Wold: I was o r i g i n a l l y o f t h e o p i n i o n t h a t it would b e a mistake t o have t h e m count a s reserves, b u t in p r a c t i c a l o p e r a t i o n i t develops t h a t t h e s e a r e g o l d notes, a n d inasmuch as g o l d i s permitted t o count a s reserve i n a national bank, I ] see n o reason w h y a federal https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis S95 reserve note ougnt n o t t o count, because i t represents actual gold. Governor Fancher: n a i n t a i n a more f a v o r a b l e o p i n - + ion o f the "ederal Reserve note t h a n I did a t the outset. + was r a t h e r o p p o s e d t o t h e i r b e i n g h e l d a s r e s e r v e s in any form, b u t 1 think that t h e banks c a n well carry their notes a s reserves, i think, however, t h e r e ought. t o b e some percentage fixed. The Chairman: I think w e ought t o get y o u d o w n o n the record with a good statement today, Mr. Warburg. Mr. warburg: wnatever I s a y i s e n t i r e l y personal. 4 I cannot, o f course, speak for the Board. I have thought that t h e p r o c e s s w o u l d b e a b o u t a s i t h a s b e e n h e r e i n t h i s room. I was really feeling a s though | were getting pre- sents j u s t now. The Chairman: " B e w a r e o f the “reeks bearing gifts! " Mr. Warburg: N o ; w e have n o Greeks this time. When Senator Aldrich started i n h e was like everybody else: h e was absolutely opposed t o the thought. I t took m e three years t o get h i m around. E v e r y b o o d y a t fivest said, "Noy 1 i s inciation,” + Whil B S t Lire y o u b y all these arguments, b u t I have P - L hime 1 been w a i t i n g f o r t h i s m o m e n t patiently. really interesting moment. e e C a n y o u not g o t o Congress With u s a n d say, "These thing have g o t t o b e reserve, the system will never b e a success"? I or f you consider this one point that “r. Seay just mentioned, t h e getting of t h e g &o l d t h ao t https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis i s c S omine )f r o m Hurove--- hundreds and 3596 thousands o f millions, possibly--- i t will not g o into our b a n k s a t a give against time l i k e this. v e e ? i t is not reserve money. B e c a u s e What w e can I t ought t o b e in our hands, a n d c a n b e the basis o f a tremendous development s u c h a s w e f o r e s e e a n d s u c h a s i s b o u n d t o come. I t can come only i f w e have o u r gold. There i s n o logical thought a t all that c a n b e against it, a n d 1 hope that t h e t w o so-called conservative mombers who S t i l l b e l i e v e t h e r e o u g h t t o b e a will come o v e r after a limited p e r c e n t a g e while a n d even withdraw that e n d of it, because I honestly think that i f we have n o confidence i n our notes, w h o i s going t o have it. note p a y a b l e i n gold i n the United States, ~ € have a and it is a necessary obligation, a n d inasmuch a s it-is, h o w c a n w e Say that the United States i s good o n one piece o f paper and b a d o n another? 3150 ,900 ,000 against $450,000,000 i s less secarity t h a n notes, and I think we shoule preserve the 3 0 o r 40 per cent gold required, which I think i s low--- I could talk for a n hour, but I will not. Governor Wold: W e coulda listen f o r a n hour, too. Apropos o f tir, sarburg's statement, I went o n record some time ago a s being i n favor o f having these federal reserve notes a s reserve i n national banks, and the o n l y regret I have, after hearing what Mr. Carburg Nas S a i d , i s that h e does n o t d i s p l a y p e r s o n a l l y a greater confidence i n Federal Reserve notes himself--- because I https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 597 challenged h i m t o fill his pocket b o o k with them, a n d you can sec that i t i s full o f gole certificates a n a there are n o Federal reserve notes there, The Chairman: 6 w o u l d n o t have o u r record complete if we dic not have Mr. Uarding committed. Governor Seay, I think i f you have a motion with regard t o this subject w e c a n probably g e t a vote o n it, Governor Seay: M r . Chairman, I: feel like you do about these i m p o r t a n t r e s o l u t i o n s : I t i s right difficult to frame t h e m o n the spur o f the moment, b u t with the underStanding that i t m a y b e reframed, o r , rather, changed t o Sapress o u r purpose, I move t h e Simple resolution t h a t i t is the sense o f the Gonference thet Federal Reserve notes Should b e a n d m a y safely b e counted a s legal reserves o f member banks, Governor McDougal: I The Chairman: second t h e motion. I s there any further ciscussion? think w e ought t o close t h e door t o further G i s c u s s i o nx e cent f r o m the t w o members t h a t have reservations-—have reservations--- i n their minds. o r did A r e y o u ready f o r the question, gentlemen? (The question was called f o r t h e s h e motion was duly carried, ) Governor Seay; M r . Chairman, i n speaking t o that resolution I think I said that I entertained a n opinion that Federal eserve notes should be issued against gold or commercial p a p e r , frame a a n d i n Saying t h a t i t w a s difficult resolution t o cover that I intenced t o have that provided f o r i n the framing o f the resolution. I https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis to would 598 like t o k n o w i f i t w a s s o understood b y a l l present. he resolution i s t o b e reframed s o a s t o cover t h e whole subject comprehensively. I a m conficent t h a t t h e l a w per- taining t o the issuing o f Federal “eserve notes would have to b e a m e n d e d f u n d a m e n t a l l y s o a s t o enable t h e issue direct- ly against g o l d o r against g o l d o r commercial paper. The Chairman: h a t closes t h e caiscussion o f this subject, Governor Seay. the t e n d e r m e r c i e s T h a t motion will b e entrusted t o o f t h e Secretary. I am going t o skip (k), which should come u p under TOG 7 I t w a s p l a c e d u n d e r t h e h e a d i n g o f No. 1 1 as this suggestion coming f r o m Governor S e a y a n d Mr. Rhoads, or coming from Mr. Rnoads, a n d was intended t o refer specifically t o possible amendments t o the “ederal Neserve Act i n regard t o p a r collections, a n d Topic 7 was s i m p l y a cis- cussion o f collections a n d clearings under t h e l a w a s i t now stands. I f agreeable t o the meeting I will move (xk) to Subject 7 , 11 (n). R E M O V A L O F RESTRICTIONS O N QUALIFICATIONS OF DIRECTORS. The next topic under heading 11, o f amendments t o Federal “eserve Act is the removal of vestrictions o n qualifications o f directors, which is suggested b y Governor Rhoads. W i l l y o u open t h e Giscussion, Governor Rhoads? Governor Rhoads: M r . Chairman, ing that u p was that the restrictions m y thought i n bringo n Class B and Class C directors m a k e i t difficult a t times, under t h e restrictions, t o g e t t h e r i g h t t y p e o f men, a n t m y thought w a s t o present t h e subject t o the Federal tteserve Board f o r con https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 399 Sideration, i f i n their jucgment i t wos desirable t o remove any o f those restrictions. The Yhairman: A t o u r meeting yesterday w e were d i s - cussing t h e possible effect o f the Clayton Act upon t h e qualifications o f directors o f b o t h federal reserve b a n k s and national banks, a n d the discussion o f the effect o f the Clayton Act was deferred until w e took u p Subject (n), so that w e might agree, i f w e could, o n a recoimendation covering the whole subject, Do I uncerstand, Governor Rhoads, that this topic that you have suggested relates specifidally t o the Clayton Reserve Act, a n d the qualifications o f directors therein defined? Governor Rhoads: I had merely i n mind t h e qualifi- cations o f directors o f Feceral Keserve Yanks a s set forth in tie Ast. The Chairman: statute i n respect D o y o u suggest a n amendment t o the o f t h e qualifications? Governor Rhoads: I prefer t o d o i t i n the f o r m o f asking the "ederal Xeserve Board to consider the subject and, i n their judgment, i f i t i s desirable, the removel o f certain restrictions t o recommend i n Class B and C directors, The Chairman: Y o u r recomnendation would b e a little indefinite, Governor Rhoads, unless y o u mace clear what restrictions nowimposed b y the Act have b e e n found objec— tionable i n your Cistrict? https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 400 Governor Rhoads: N o director o f Class B officer, director o r employe o f any bank. I favor o f striking o u b the restrictions ectors can b e a n would b e i n o n officers a n d dir- o f a n y bank. The Class C mind « I director i s what I have particularly i n cdo n o t s e e w h y h e s h o u l d b e p r o h i b i t e d f r o m h a v — ing a n y b a n k i n g connections. A man must have some bank- ing experience, a n d i f they are t o sever a l l connections, it seems t o m e i t results i n subterfuges. The Chairman: Class B course, T h e n you believe that practically directors s h o u l d b e abolished, a s such? O f t h e intention o f the A c t i s t o insure t h a t t h e directorship o f the Federal Reserve banks should include men who are strictly merchants o r manufacturers o r agri- culturalists, a s distinguished from bankers, a n d that their participation i n the management o f the reserve banks Should b e f r e e f r o m a n y b a n k i n g c o n n e c t i o n t h a t w o u l d b i a s their j u d g m e n t a s r e p r e s e n t i n g t h a t c l a s s d i s t i n g u i s h i n g it from the banking class. Governor Seay: merce @ H e might b e actively engaged i n cem— agriculture, Governor Rhoads: I mean t o continue t h a t require- ment that t h e y shall still b e actively engaged i n commercial business. Governor Seay: business https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis T h e r e a r e very f e w high class, eficient m e n w h o a r e n o t directors The Chairman: o f s o m e bank. A s t o the second Class C directors, 401 would you_like~to have t h e same action taken, third C l a s s C director, w h o i s neither a s o that t h e federal r e s e r v e r deputy f e d e r a l r e s e r v e a g e n t , m i g h t s t i l l b e a n officer o r cirector o f a bank? Goernor Rhoads: The Chairman: Y e s sir. D o you offer that a s a motion, Governor Rhoads ? Governor Rnoads: Y e s sir. Governor V a n Zandt: I The Chairman: s e c o n d t h a t motion. I s there a n y discussion o f Governor Rhoads! motion which has now been seconded? Governor W o l d : I n a s m u c h *«s t h e s e i n s t i t u t i o n s w e r e not established f o r the primary benefit o f the banks, b u t were ,established f o r the benefit o f t h e business interests of this country, t h e representation o n the board i s important. A s one o f the Governors remarked yesterdgy, t h e business i n t e r e s t s o f this c o u n t r y h a v e m o r e confidence in this system than t h e banks apparently have, a n d I believe w e ought t o keep that business representation a n d have the board not a bankers' board, but a board that would fairly reflect a n d protect t h e interests o f the Banks, the business interests, a n d t h e public. The Chairman: Y o u a r e speaking against t h e motion, I understand. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Governar W o l d : The Chairman: Governor W o l d : { M o n nob i n favor o f it; t L e a s t n o t i n P a y o r C e 14t. A Governor Aiken: I t this. t i m e . w o u l d l i k e t o a s k f o r information. 402 In y o u r j u d g m e n t i s it a legislative p o s s i b i l i t y , w i t h o u t regard t o the merits o r cemerits o f the motion, t o have such a n amendment m a d e i n Congress? Governor Wold: T h a t i s another thing. The Chairman: I d o not know that I have a n y opinion on that, Governor Aiken, I should think Congress would hesitate a long time t o adopt any such amendment. A n d there i s a n o t h e r i m p o r t a n t t h i n g a b o u t S u g g e s t i n g a m e n d - ments just now, a n d that i s that there a r e undoubtedly a Small number, possibly n o t over half a dozen amendments to theFederal Reserve Act that are really vital t o the ultimate success o f the system, a n d i n the early stages of the provesses i t may b e well t o concentrate o u r efforts towards b r i n g i n g a b o u t t h o s e a m e n d m e n t s t h a t a r e r e a l l y vital a n d l e t t h e fine French knitting work come later. Is there a n y further discussion o n Governor Rhoads! motion? Governor V a n Zandt: I seconded t h a t motion, but with t h e point o f view which y o u have j u s t brought t o m y mind I believe I woulda like t o withdraw m y second. The Chairman: I t looks very ominous for the motion Governor V a n Zandt: W e h a d better a s k for a few things a n d fight hard for those which insure t h e suc- cess of the Federal Reserve System, than to ask for it all. The Chairman: G o v e r n o r Rhoads, c a n you find another seconder. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Governor V a n Zandt: However, I have n o t changed m y view o n what ought t o b e done... ee ~ Gevernor Rhoads: T h e m a n w h o h a s n o connections at all i s very apt t o b e a nonentity a n d not o f m y u s e a s a director. T h a t i s what I h a d i n mind. i realize: t h a t it is not the most important thing t o be urged a t this moment. I t i s really important w i t h u s i n our district. Governor Seay I am in quite firm agreement with you en the Class B director. I amendments d o agree a s t o the vital t o the Fe.eral Reserve Act. vital a m e n d m e n t s T h e r e a r e some t h a t s h o u l d b e c o n c e n t r a t o d upon. I weuld like t o a s k Governor Rhoads i f h e i s willing t o let this remain and be carried over for discussion. Governor Rhoads: I Tne Chairman: a m e n t i r e l y Satisfied. B y mutual consent w e will permit this to r e m a i n o n o u r p r o g r a m w i t h o u t a c t i o n a t t h i s meeting. It lea v e s t h e subject, however, o f amendments t o the Clayton A c t still o n the program. I wonder i f that can- not b e disposed o f promptly b y asking Governor S e a y t o Suggest t h e substance o f the recommendation which was made by the Federal Advisory Council t o see whether that would not e m b o d y t h e v i e w s o f this meeting a n d whether i t i s not of s u f f i c i e n t i m p o r t a n c e f o r u s t o t a k e a c t i o n o n t h a t matter. Governor Seay: T h e council considered t h a t question in c o n n e c t i o n w i t h t h e q u e s t i o n o f a n amendment allewing National Banks t o establish branches; t o the Act a n d as a part o f their resolution I read the following: "“Amendming the Clafton Act; making officer o r directer https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4.04. of a national b a n k elizi i bank o r trust c o m p a n y a n d a iirector Sa Girector i n one state private b a n k e r e l i g i b l e i n one national b a n k a n d a as a state b a n k o r trust company." iImebling a man practically t o b e a director i n two banks. H a v i n g those affiliations i t w o l d enhance h i s value. The Chairman: D o y o u think i t would b e wise t o add t o t h a t r e s o l u t i o n a recommendation t h a t t h e a c t m a k e clear i t s application o r non-application t o directors o f Federal Reserve Yanks? Governor Seay: The Chairman: L f do; ‘ o u l d you accept that a s a n amendment to your motion? Governor Seay: i The Chairman: wilt. I s that motion seconded? Governor Fancher: I The Chairman: second the motion. I s there a n y aiscussion? A r e you was called f o r a n d t h e motion was duly carried.) 1i=-(p). C L A R I F Y I N G SECTIONS 1 3 , 1 4 The Chairman: sections 1 5 , 1 4 T h e nezt T o p i c t ¢ l i tp), G i a e e e a n d 18. I will ask Mr, Curtis i f he will make a statement o n this subject, a s h e really suggested puiting this o n the program. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Mr- Curtis: r e w a s t prepared 495 not p r e p a r e d a n y d e t a i l e d s u g g e s t i c i t has occurred to me t h a t a l l t h o s e s e c t i o n s h a v e v a r i o u s p o r t i o n s t h a t a r e very blind. W e are running along o n them now, obtaining constructions f r o m t h e b o a r d o n t h e m f r o m t i m e t o t i m e wnen a new point c o m e s up, I worth w h i l e t o have a believe t h a t i t w o u l d b e committee t a k e u p t h o s e f o u r sections in p a r t i c u l a r a n d m a k e t h e l a n g u a g e c l e a r a s t o w h a t t h e intent is, following t h e rulings o f the board o n them s o far a s they have b e e n made, a n d getting n e w constructions of the portions t h a t have n o t b e e n covered. I t h i n k i n e a c h gqne o f t h o s e s e c t i o n s y o u w i l l f i n d plenty o f food f o r thought a n d f o r clarification. I have n o t p r e p a r e d a memorandum myself o n that, M r - C h a i r - mane It i s too general a dispose o f b y discussion, meetings. I ina d v a n c e a t any rate, subject f o r u s t o a t one o f these would be glad to deal with it by submitting o f one o f o u r conferences a set o f proposed amendments w h i c h weuld clarify those f o u r sections o f the Act a n d g i v e t i m e f o r study, a n d then, at a subsequent meet-— ing w e could discuss t h e proposed changes a n d endeavor t o agree u p o n what t h e y should consist of. H a v e a n y o f you a suggestion o f a method o f dealing w i t h this matter? Mr- Hoxton: C o u l d n o t Mr. Curtis d r a w what i s neces-— sary i n the w a y o f proposed amendments, a n d send a copy to each o f the Federal Reserve Banks t o be ready for the next conference? https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The C h a i r m a n : I have n o doubt that Mr. Qurtis could 406 ane. would b e very glad t o d o that, We h a v e h a d o n e o t h e r m a t t e r r e f e r r e d committee o f somewhat s i m i l a r c h a r a c t e r , t o our executive a n d i f w e could come t o the mceting w i t h a recommendation f r o m the Executive Committee, w e would possibly facilitate t h e dispos— ing o f the matter. Mr. H o x t o n : T h a t w o u l d be. better. Governor Seay: “hile I h a w n o desire t o add t e the burdens o f the Executive Committee, I move t h a t t h a t m a t t e r b e r e f e r r e d Sideration a n d r e p o r t Mr+ Hoxton: I nevertheless t o that body for con- t o t h i s conference. second t n e motion. The Chairman: T h i s matter h a s b e e n considered a great deal a t cifferent times, and 1 think w e should have a n expression, i f possible, f r o m Mr. Harding a n d Mr. Warburg a s t o whether a n effort t o make clear these Sections o f the Act would b e o f any service t o the Board, or whether they might b e undertaking the same things themselves, a n d w e b e duplicating their work. Mr. Warburg: T h e Board i s just n o w taking u p the question o f amendments, a n d 1 was just wondering what t h e date o f your next conference will be. The Chairman: N o date h a s b e e n fixed> G e n e r a l l y the last business a t these meetings i s t o f i x the time and place o f the next meeting. T h e few words that have passed o n the subject would indicate t h a t seme time i n December i s the logical time f o r the next meeting, am it has f r e q u e n t l y b e e n s u g g e s t e d t h a t i t w o u l d p r o b a b l y b e https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 407 be cesirable t o have t h e next meeting i n Washington. Mr. Warburg: W h i l e I am not speaking for the Board, I a m quite confident t h a t w e would b e only t o o glad t e have a l l the suggestions t h a t t h e Governors c a n give u s in this respect. just b e g i n n i n g T h e y would b e very helpful. w e are t o d e v e l o p t h i s t h i n g a n d t o w o r k o n these various amendments t h a t w e think a r e necessary. O f course I mignt a d d t h a t w e p r o b a b l y s h o u l d c o n f i n e o u r s e l v e s t o the most necessary things, because Congress does n o t e x pect t o b e a very p e a c e f u l o n e t h i s t i m e , a n d i t i s v e r y doubtful w h e t h e r o n e c a n a l t o g e t h e r a f f o r d Act f o r f e a r o f w h a t m i g h t happen, t o open u p the i f w e do, a n d m y o w feoling i s that i t i s a question o f getting t h e more vital parts amended rather than "going the limit" a s you call it, because t h e minute w e begin t o work w e d o not k n o w where we will end. My o w n fceling i s that i t i s more advisable t o let he board continue until w e have reallyc stablished what is the most desirable t h i n g t o do, I ticity i s v e r y a d v i s a b l e think a certain elas- i n t h e l a w , b e c a u s e o u r problems Change a n d o u r experience changes, a n d i t may b e just a s well t o leave i t a little b i t vague i n language i n certain spots. I d o n o t B b j e c t t o it. he Chairman: W o u l d y o u c o n s i d e r t h a t i t trould b e o f advantage t o the Board t o have t h e work o f studying o u t the necessary c h a n g e s i n language, w h i c h i s a b o u t a l l i t w o u l d amount t o , u n d e r t a k e n https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis b y this Committee a s t o those m o r e particular sectiow Mr. Werbugh: o f the Act? M o s t certainly i t would b e highly sug- gestive, a n d w e c a n only profit b y it. The Chairman: I s there a n y further debate u n Gover- nor Seay's motion, o r are you ready t o vote upon i t at once? (The question was called far, and the motion was duly carried. ) The Chairman: T h e r e was another topic under 2 (a), which w a s p a s s e d o v e r t c S e e t i o n 1 1 , w h i c h r e a l l y c e n t a i n s twe “uestions. T h e portion relating t o amendments t o the Clayton A c t h a v e b e e n c e a l t with. O n e section o f the Federal Reserve A c t i s very blind, namely, t h a t having te deo with the profits w h i c h directors m a y realize i n Gealing w i t h t h e i r o w n b a n k i n g institutions. Speaking from eur experience only i n New York w e have had a very large number o f inquiries. I think that i s not a n exag- geraticn, Mr. Curtis? Mr. Curtis: A The Chairman: A considerable n u m b e r o f inquiries, ccasiderable number o f inquiries have b e e n addressed t o us a s t o all sorts o f transactions Which the country bank director generally i s i n the habot ef conducting, w h e r e h i s b a n k i s i n some w a y involved, and where it dees not seem to be clear, by the Federal Reserve Act, a s t o whether i t i s pronibited o r not. cases Where a T h e r e are cirector i n a country b a n k conducts a n insur- ance business a n d has b e e n i n the habit o f insuring t h e bank building, a n d those w h o possibly will take o u t t h e https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 409 Liability policies, a n d there i s cuite a variety o f doubt- ful points brought o u t b y this section o f the Act. I t has b e e n o n o u r p r o g r a m f o r d i s c u s s i o n e v e r s i n c e t h e second o r third meeting. Do y o u wish t o take this u p n o w o r pass i t over f o r a later meeting. I t rather falls within that class o f amend- ments o f less importance; t h e r e i s n o doubt about that, as compared w i t h some o f very much greater importance. Mre Curtis: I would suggest, Mr. Chairman, that w e just add Section 2 2 t o those four that w e have just referred t o the sxecutive Committee, w h i c h would cover this Situation, a n d then t h e Executive Committee c o u l d think up a n a m e n d m e n t t o cover Section 22. I advised one bank i n New York, telling the Presi- dent that this was just a personal opinion and + would put it u p t o the Board i f he wanted it, and I adopted a somewhat m a e restricted v i e w o f the intent o f that language than t h e c o u n s e l f o r t h e B o a r d s u b s e q u e n t l y adopted-» banker w a s r a t h e r a n n o y e d b y having received a This strict i n t e r - pretation f r o m m e and then, afterwards, finding that h e could have gone chead w i t h his business u n d e r the interpretation Mr. ELLiott p u t upon it. I told h i m that h e ought t o read Mr. Elliott's opinion a n a find t h a t h e specifically said that h e would n o t b e responsible f o r a n y subsequent indictments u n d e r t h a t section; The Chairman: M r . Curtis suggests t h a t w e a d d Sec- tion 2 2 t o the other f o u r sections referred t o the Executive Committee. E x e r c i s i n g m y privilege, I https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis would like t o offer that a s a motion. Governor Wold: I second t h e motion. (There was ho discussion, the question was called for and the motion was duly carried.) 16. R E T I R E M E N T O F NATIONAL BANK NOTES A N D PURCHASES OF GOV: RNMENT BONDS. The Chairman: P a r a g r a p h 1 6 o f our program was pretty fully discussed, a n d then left for consideration a t this meeting. T h e topic i s "Retirement o f National Bank Notes and Purchases o f Government Bonds.” Governor Seay, this topic w a s suggested b y you, a n d I a m going t o ask i f y o u will make a statement o f the dis- cussion yesterday, w h i c h i s undoubtedly f r e s h i n yeur mind; De cause t h i s i s t h e l a s t i t e m w h i c h w e w i l l b e a b l e t o consider before lunch, a n d i f w e c a n dispose o f i t i t will leave u S free t o spend a l l o f the afternoen o n the subject of collection and clearings and one o r two subjects that relate t o t h a t m a t t e r indirectly. Governor Seay: M y recollection is, Mr- Chairman, that w e effectively disposed o f that item, b u t that i n connection with i t there w a s some subject w i t h reference to purchase o f Government bonds that j o u desired t e bring up. I a m not anxious t o court trouble o r assume responsi- bilities, b u t I d o feel s u c h a n ambition t o simplify t h e currency o f this country that I put that o n the program for discussion; b u t with respect t o that portion relating to retirement o f national b a n k notes 1 that c a r r i e d e v e r . https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis would like t e have 411 The Chairman: Y o u will recall, Governor Seay, t h a t your first suggestion was that notwithstanding t h e prohibition o f the National B a n k Act w e might feel willing to recommend t o the Federal Reserve Board that the process of purchase a n d c o n v e r s i o n o f t h e Government B o n d s a n d National Bank notes b e accelerated a little faster than the s t a t u t e c o n t e m p l a t e s , Governor Seay: S u c h i s t h e case; b u t o n g0ing a r o u n d the Board i t developed t h a t i t was t h e sense o f the Governors that there were v e r y much moreimminent problems, a n d that that h a d better b e deferred f o r consideration, I quite a g r e e w i t h t h a t sentiment. I f , however, t h e whole subject will b e transferred t o a later date I would l i k e it, because I think i t i s a h i e w e will have t o con- Sider, Governor Wold: W a s there n o t o n e more thought brought gut i n reference t o banks being permitted t o take out. notes? Governor Seay: the p r e s e n t p o s i t i o n Y e s - I expressed t h e opinion that o f the Comptroller i n permitting n e w > banks t o issue national b a n k notes w a s perhaps n o t i n harmony with the best development o f the Federal Reserve System. I permitted think i t would b e wise i f Hew banks were n o t t o a d d t o t h e b u r d e n o f national b a n k n o t e s already out. h a t was a n opinion suggested i n discussing the f i r s t question, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The Chairman: I t was brought out i n the @iscussion 412 yesterday t h a t t h o r e w e r e r e a l l y t h r e e p r o b l e m s currency t o b e dealt with. o f the t a t L e y national b a n k notes or United States notes a n d t h e silver certificate, a n d that, assuming f o r t h e p u r p o s e o f illustration t h a t t h e Federal Reserve Banks t o o k over t h e entire amount o f government bones i n a very short periog, w h i c h n o w secure national ba n k notes, a n d assume a l l o f the notes, t h e note issue would b e very largely a fiduciary issue, a n d the provi- Sion o f a reasonable reserve o f gold i n addition t o the government bonds would impose a pretty heavy burden upon the national banks. Furthermore, i f the general fund of the government were largely deposited i n the Federal Reserve Yanks and these Federal Reserve Bank notes were also issued against t h e deposit o f Government ponds, t h e burden o f r e d e m p t i o n in sold t h a t woulda b e t h r o w n u p o n oO cr the reserve banks i:ould b e a very heavy one. At t h e p r e s e n t t i m e t h e g o v e r n m e n t i s charged w i t h the statutory obligation o f redeeming their national b a n k notes o u t o f the general fund, a n d undoubtedly t h a t obliga- tion would b e discharged s o far as the government i s concerned, a S rapidly a s tne Federal Reserve banks t o o k over the national b a n k notes, a n d the Government would b e undeb no Obligation b y the statute a s i t stands t o d a y t o redeem he issuance o f bank notes out o f the general fund. I do not understand t h a t t h e provisions o f the revised statutes applying t o redemption o f national b a n k notes ’ were m a d e t o a p p l y t o Mederal ‘teserve n o t e s https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Mr. Warburg: a t all. I f the Government redeems national b a n k 413 notes o u t o f the general fund, i t o f course calls u p o n the national banks t o make good. ference between a note. S o I d o not s e e a n y cdif- federal reserve note a n d a national b a n k T h e Government coes n o t p a y the noteg; the banks have t o p a y t h e notes, a n y h o w . f h e panks i n turn Tall back upon the Federal Reserve banks for their gold. The federal reserve notes t h e y c a n rediscount i f they have a demand f o r gold, a n d i t will come b a c k t o the Federal Reserve banks anyhow- I f that b e so, i t has always struck m e t h a t t h e F e . c r a l R e s e r v e B a n k s w o u l d b e i m m e a s - urably better o f f i f they would control t h e note issue f o r the general protection o f the system, i f they would g e t the profits, a n d I have always thought t h a t t h e most vicious p a r t o f o u r p r e s e n t F e d e r a l R e s e r v e S y a t e m i s that i t w a s p e r m i t t e d t o start w i t h a l l t h e m t i o n a l bank notes outstanding. (At this point informal ciscussion took place which t h e s t e n o g 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 wnich t h e following proceedings w e r e had:) The Chairman: because I I t really 2 8 a do not think y o u o r m q u e s t i o n o f degree, ybody w o u l d a s s u m e t h a t v the F e d e r a l R e s e r v e b a n k s w e r e i n a position t o a s s u m e $760 ,000,000 o r 33800,000,000 o f nationalbank notes a n d t o set aside what t h e y should i n the w a y o f a gold reserve against their o w n issues. T h a t would b e putting a heavy b u r d e n u p o n t h e m a n d g i v i n g t h e m a pretty considerable earning power. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Mr Verbure: I a m not. so Sure whether that i s so. 414 It. looks v e r y dangerous, b u t when y o u consider t h a t those (33800 ,000,000 are really carried b y the country and they do come back, because t h a t i s the amount o f currency that t h e people require, taking o f f possibly some millions m o r e o r that a r e being artificially p u t o u t b y some o f the banks, o n the whole t h i s s t u f f will s t a y o u t a l l t h e t i m e where t h e p e o p l e w h o c o n t r o l t h e a d d i t i o n a l n o t e i s s u e can reach it. I f anybody should b e afraid, he Chairman: M i r e “arburg, 1 i t i s we, have always: felt that the objection t o accelerating this process m o r e t h a n a moderate amount l a y i n the fact that under t h e l a w a s i t Stands a t present w e a r e o u r s e l v e s a l o n e o b l i g a t e d f o r t h e redemption o f a l l t h e n o t e s t h a t w e i s s u e o f t h a t c h a r - acter o u t o f our reserves, a n d w e ought t o set aside a very considerable gold reserve against all the federal reserve notes which were issued, The l a w o n l y r e q u i r e s a fund, but a S a matte: ought t o have a five p e r c e n t r e d e m p t i o n s o o d , sound banking practice w e verg much larger reserve t h a h the amount of the five p e r cent redemption fund. Y o u , fvtaiek, v a i to tnat. Mr, tarourg: Tne Chairman: hundred Y e s ; but we naturally would have. Y o u would think that by, Say, o n e o r even t i o hundred millions difficulty i n it. I there tould b e no f w e undertook t h e program i t would contemplate making t h e entire conversion i n three o r four or five years, a n d w e might f i n d i t a very considerable burden u n l e s s https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis t h e whole scheme o f amendments was. S o carried 415 out and madeeffective t h a t w e could accumulate g o l d behind our feceral reserve note issue v e r y rapidly. O n e means that w e c o u l d employ, w h i c h i s v e r y a t t r a c t i v e t o me-—— others m a y not agree w i t h me--- would b e t o effect conver= Sion o f the United States notes. I f our government were Willing t o give t h e federal reserve banks a government obligation which «ould b e salable a s a n investment obligation t o represent t h e difference between t h e amount o f gold reserve behind t h e United States note a n @ the amount that i s outstanding a s d l y a s w e retire them, a n d i s - a6 o u r o w n notes i n exchange, w e would accumulate 4 4 per cent exchange against those notes a n d have 5 6 per cent o f the amount converted a n d would g e t a n interest bearing obligation o n the Goernment. 4 s a matter o f fact, t h e Federal Reserve System today could afford t o assume a l l ofthe {546,000,000 of United States notes if the Government would give them the $153,000,000 o f gold plus a Government bond for the difference o f about pL90 ,000, 900 ofid. Mr. Warburg: V e e , D u t they will -not 46.1%. The Chairman: I Mr. Warburg: I d o not know. T h i s Congress may, a m following y o u v e r y carefully your thought t h a t y o u fcel a sufficient protection. on five p e r cent bond i s n o t I f y o u have t w o p e r cent bonds they would n o t be, still. B u t d o not forget that i f you really w e r e i n trouble y o u c o u l d c o n v e r t y o u r two's i n t o three 's--The Chairman: a year. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Y o u c a n ameliorate y o u r position f o r 416 Mr-e Warburg: A kind. year i s a long time f o r a bank o f this M y theory is, o f course, t h a t w e never know what will happen, a n d these eight hundred millions will b e a fixture a n d will continue t o b e a fixture, a n d i f y o u should get worried there i s your remedy. i t t is not ideal, a n d I would never have p u t o u t these eight hundred millions t o begin with; i t was a mistake t o p u t t h e m out. B u t inas-— much a S they are there t h e national banks c a n call o n you for 100 per cent o f gold a s i f you h a d issued them-you selves. Y o u are n o t a bit more protected, The Chairman: O f course t h e national banks today can give t e u s government bonds that secure these notes in order t o get gold f o r their redemption. doubt about that. t h e r e 18 no T h e y c a n take their surplus reserves out o f us for that purpose. I would n o t care t o see this Act amended s o that i t would impose u p o n t h e reserve s y s - tem or reserve banks the obligation o f taking over the entire n a t i o n a l b a n k n o t e c i r c u l a t i o n years. i n a short p e r i o d o f T h e r e ought t o b e protection against that operat-— ing t o o rapidly. Mr. Warburg: O h , L would n o t suggest a n y amendment, Please d o not misunderstand m e there. i a m mot clear i n my mind what t o do, but my. feeling i s that w e ought t o be bold a n d simply g o ahead a n d b u y more bonds a n d gradual-— ly aSsume m o r e circulation. I about it. I think w e a r e t o o s l o w think we. are getting n o earning power there and ‘there i s n o risk i n it, because i t carries igéself i n times o f active money. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 417 The Chairman: Y o u would have t h e accumulation o f the government bonds b y the reserve banks effected under Section 1 4 o f the Act, a n d g o attempt t o amend t h e pro- vision i n regard t o the ticnty-five millions t o b e purchased each year, b u t operations under "ection 1 4 o f the Act, i f continued t o the limit o f possibility, w o u l d Qualify t h e provision f o r t h e t w e n t y - f i v e m i l l i o n a n n u a l p u r c h a s e , in- asmuch a s those purchased b y reserve banks Quring t h e year i n which t h e twenty-five millions were t o b e purchased are a credit u p o n t h e amount t o b e allotted t o them, a n d we would not g e t anywhere. w e would n o t facilitate prog- Bess. Mr. a r b u r g : O h , y o u could d o i t i f you wanted to. You could n o t b e forced t o b u y more; b u t i f you wanted to buy 50,000,000 a year you coulda d o i t and nobody could stop you, The Chairman: T n e A c t coes n o t permit t h e reserve banks t o purchase more t h a n twenty-five millions i n one year. Mr. arburg: N o , b u t i n the o p e n market y o u can. is o n e o f t h e m o s t w o n d e r f u l c o n s t r u c t i o n s I t o f l a w that was ever put out, a n d 1 a m frank t o s a y that i t has n o t entered m y mind yet. B u t w e have g o t it; there i s n o doubt about it, a n d o u r lawyers a r e quite clear about i that t h e l a w i s s o p o o r l y d r a t m t h a t y o u c a n g o a h e a d a n d buy a l l y o u please, The Chairman: C o u l d n o t t h e statute b e amended to make clear that the reference t o bonds purchased under Section 4 , w h i c h p r o v i d e s f o r t h e p u r c h a s e o f n o s o v e r n m e n t 6 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 418 bonds a t all, r e a l l y i n t e n d e d t o r e f e r t o bonds p u r c h a s e d uncer S e c t i o n 14? Mr. Warburg: The Chairman: Y e s ; 1 think that i s soT h a t i s evidently a typographical error tnat ought t o b e amended. £ s t h e statute n o w reads it i s possible t h a t w e c o u l d n o t t a k e o u t c i r c u l a t i o n against t h e b o n d s g i v e n u s u n c e r S e c t i o n 1 4 . T h e portion of the Statute which refers t o taking o u t circulation against bonds purchased i n the o p e n market refers t o bonds purchased u n d e r q u i t e a Cifferent s e c t i o n t h a n t h o s e p u r - chased i n the open market. Mr. Varburg: I think that ought t o b e made clear. Governor S e a y : I another, was n o t prepared, a n y more t h a n t o suggest anything definite, but I was satisfied that i t would b e a fruitful subject o f discussion, a n d I am satisfied i n my orm mind that the process o f retirement of national bank notes, s o as t o make the Feceral Reserve banks t h e sole banks o f issue, will have t o b e accelerated. I d o n o t think i t i s wise t h a t t h e banks s h o u l d b e allowed to buy circulation against t h e bonds now. I would like to s e e t h e m a t t e r c a r r i e d o v e r f o r discussion, b e c a u s e it Will occupy our minés, and i n the meantime something o f value m a y o c c u r t o us. The Chairman: Y o u r suggestion, then, Governor Seay, is that this i t e m b e continued o n our program a n d n o action be t a k e n s p e c i f i c a l l y u p o n i t ? https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Governor Seay: Y e s sir, The Chairman: I f there i s n o objection, that will b e done, Governor Seay: L e t m r e m i n d you, Governor Strong, in connection w i t h that, t h a t y o u gave t o u s a circular “ which y o u r b a n k h a d p r e p a r e d a s t o t h e p u r c h a s e ment bonds. o f Govern—- D o y o u desire t o bring that up? Tne Chairman: T h i s i s a good time t o refer t o one feature o f the process t h a t ought t o b e carefully consideredi A t least, i t seemed t o u s s o i n New York. If a notice i s sent t o 7600 national banks a very short time before this provision becomes operative, may l e a d a l l t h e n a t i o n a l b a n k s it o f the c o u n t r y t o under- take t o d o the same thing a t the same time with reference to their Government bonds, a n d that would b e a n undersirable thing. w e prepared t h a t draft, a n d I believe a copy was sent t o washington i n the hope that the Board i n Washington wouE decide t o send o u t whatever circular t h e y s a w fit, o r arrange t h a t the banks s e n d out whatever circular Was n e c e s s a r y o n this subject a s f a r a s possible i n ad- vance o f the date w h e n this provision o f t h e Act would b e gin t o operate. Mr. Larburg: I us t o d o that. I cid not understand that y o u wanted thougnt y o u wanted i t understood t h a t you were going t o agree among yourselves a s t o what kind of & circular y o u w o u l d s e n d out. The Chairman: T h i s was submitted i n oraer that i t migut b e read b y those present t o see whether i t covered the matter a n d t o see whether i t was n o t a suitable f o r m for u s t o s e n d out. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 420 Mies. i think. a b i os Y o u . c o u l d d o i t a n y W a y y o u prefer, I f you desire the board t o prepare that, I think i t c a n b e easily done. I write the Board would suggest that y o u t o that effect. (Whereupon, o n motion duly made and seconded, the Conference, a t 1:10 o'clnck p. m., took a recess until 2100 o Glock p,m.) https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ARTE R R E C L e Ss The Conference reassembled, pursuant t o recess, a t O el ecko, “ma, The Chairman: T h e meeting will come t o order. There a r e still a but a few matters t h a t ought n o t t o take minute o r t w o t o d i s p o s e o f , t h a t s h o u l d b e d i s p o s e d of before w e t a k e u p collections. In regard t o the tentative draft o f the circular prepared b y ir. C u r t i s o n the subject chase o f government bonds. o f tender a n d pur- M r - Curtis has receiveda letter i n response t o a n inquiry sent t o Washington o n this Subject a n d i will a s k h i m t o r e a d t h e l e t t e r o r s t a t e a Summary o f 20. Mr. Curtis: T n e letter i s dated October 19, 1915, and i s addressed t o Mr. J . F. Curtis, Secretary t o the Gonfcrence o f Governors. The first part o f the letter simply acknowledges receipt o f a l e t t e r f r o m G o v e r n o r S t r o n s , a s follows: "Mme Federal Reserve Board some time ago received a letter f r o m Governor Strong submitting certain questions with r e f e r e n c e t o t h e policy t o b e pursued i n regard t o the allotment o f bonds t o Federal Reserve Banks. T h e board has considered t h e m t t e r a n d f o r your information and thet o f tne Conference o f Governors, I a m writing t o inform y o u o f the position taken. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis "The principal points raised a r e asiollows: tle I n t h e allotment o f bonds a t t h e e n d o f e a c h 422 quarter, wilLhthe limitation o f (25,000,000 be_divided by f o u r a n d t h e a m o u n t o f bonds p u r c h a s e d b y t h e reserve banks i n that quarter b e deducted f r o m the quarterly amount." That i s t h e question. T h e answer is: "as t o this, the Board has passed the following resolution: R e s o l v e d , t h a t until further notice, i n - r e q u i r i n g _ Federal Reserve banks t o purchase United States Bonds offered f o r s a l e t o m e m b e r b a n k s u n d e r t h e p r o v i s i o n s of Section 18, the Federal Reserve Board will not allot t o any o n e F e d e r a l R e s e r v e B a n k i n a n y o n e q u a r t e r m o r e t h a n one-fourth o f the p r o rata share o f the bonds t o b e purchased during t h e calendar y e a r under the provisions o f this section, we I n case the applications received exceed the amount t o be alotted, will the allotments b e based upon the order o f receipt o f the applications, o r upon the pro rata share o f each applying bank?" That i s the qvestion, a n d the answer is: "It would seem that i f the applications filed with the T r e a s u r e r e x c e e d t h e a m o u n t t o b e allotted i n any one quarter, t h e allotments should b e based n o t upon t h e order o f receipt o f such applications, b u t rather upon t h e pro rata share o f each applying = T h e Act evidently contemplated that a n y bank which has i t s application o n file t e n days prior t o the e n d o f the quarterly period will be o n a n equal footing w i t h a n y other bank which has filed https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis A235 a Similar a p p l i c a t i o n , a n d the o r d e r i n which s u c h appli- cations a r e received would s e e m t o b e immatcrial a s long as they are filed before t h a t t e n day period. wa W i l l a n y mention b e made o f bonds securing cir- culation other than the two per cents?" "Bonds made eligible for sale b y member banks under Section 1 8 are n o t limited t o two p e r cent bonds, b u t rather t o a n y U n i t e d S t a t e s b o n d s w h i c h a r e s e c u r i n g c i r - culation. h e t excludes t h e three p e r cent Panama bonds, series 1 9 1 1 , t h e 1 9 0 8 - 1 9 1 8 t h r e e p e r c e n t bonds, a n d also the four p e r cent bonds, l o a n o f 1925, a r e eligible i f they, 2 S a matter o f fact, a r e securing circulation. "4, T o what date will the accrued interest o n the bonds that a r e sold b e figured? 'There i g nothing definite i n the Act t o indicate that date shall b e fixed t o determine t h e amount o f acerued interest o n bonds s o l d under section 18, b u t a l l provisions o f that section, a s read together, w o u l d s e e m to justify t h e conclusion that t h e accrued interest should be figured a s o f the date o n which tne lawful money t o cover t h e purchase price o f such bonds i s deposited w i t h the Treasurer O f the United States. SB I f a n application t o sell bonds i s not granted in full a t one quarter day, will i t b e considered a s continuing i n effect f o r the balance o f the next quarter day, and s o on, until the sale i s completed?" ithe Boerd believes that banks whose applicat have n o t been granted i n full a t one quarter d a y should r e - https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis apply. "Mr. Strong raises a g a i n t h e question whether o r not the limitation of 25,000,000 contained i n the proviso of Section 1 8 prohibits t h e purcnase b y Federal Reserve Banks o f bonds i n the open market.” That was n o t exactly t h e question raised b y Mr. Strong, but i t v e r y n e n r l y s t a t e s i, "The board has already ruled ‘on two o r three occasions that t h a t p r o v i s o i s n o t i n t e n d e d t o a n d does n o t a p p l y t e or restrict t h e purchhmse o f Government bonds under t h e provisions o f Section 1 4 of the Act," 1 think Mr. Strong's question was whether o r not the proviso would limit a bank t o purcnasing a n y more than its pro rata share o f 925,000,000 i n the open market in a n y o n e year, a s the ‘interpretations. The Chairman: I understand, both from the Statement made b y Mr. varburg before luncheon and from thks letter, that Section 1 8 o f the Federal “teserve A c t has b e e n con- strued b y the Federal Reserve Board.as n o t imposing this limitation u p o n the Federal Reserve Banks a s t o the amount of t h e i r purchases, n o t w i t h s t a n d i n g t h e l a n g u a g e w h i c h appears i n the Act. The second Daragraph o f the Act says that the treasurer Shall, a t the end of each quarterly period, furnish the Federal iteserve Board with a list o f applications, a n d the Federal Reserve Board may, i n its discretion, require t h e Federal teserve Banks t o purchase s u c h bonds f r o m the https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 425 banks w h o s e a p p l i c a t i o n s h a v e b e e n f i l e d w i t h t h e t r e a s u r e r at l e a s t t e n d a y s b e f o r e t h e e n d o f a n y q u a r t e r l y p e r i o d , 4 ind which t h e federal Reserve Board m a y direct t h e purchase t o b e made, a n d 1 will n o w read t h e language o f t h e Statute: "Provided, That Federal Regerve Banks shall not b e permitted t o purchase a n amount t o exceed 25,000,000 o f such bonds i n a n y o n e year, w h i c h amount s h a l l include Section 4 of this act by the ederal Reserve Banks." Section 4 makes n o p r o v i s i o n f o r t h e p u r c h a s e at all, S e c t i o n 1 4 does. This, 1 o f bonds suppose, w a s intended to refer t o bonds acquired under Section 14. I d o not understand h o w t h e F e d e r a l R e s e r v e B a n k s c a n a c c u i r e m o r e than their p r o rata o f »25,000,000 i n one year, whether acquired u n d e r S e c t i o n 1 8 o r 1 4 , Mr. Curtis: I t seems t o m e that while t h e statute says o n e t h i n g i t r e a l l y i n t e n d s t o s a y t h e other. a should agree w i t h the construction placed o n i t b y the Federal R e s e r v e B o a r d , & h a t i t o u g h t n o t t o c a r r y t h e limitations o v e r t o t h e b n n d s It says i t does, b u t I c e a e u n d e r Seetion 14, do n o t think i t meant that. (Further discussion followed which t h e stenographer wes directed n o t t o report.) Governor McDougal: I understand t h a t a n y a l l o t m e n t that m a y b e made next y e a r under t h e provisions o f Section 18 will not i n any w a y affect what I https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis have already purchased, 426 nor will what I have already purchased affect o u r allotment n e x t year. The Chairman: i s it: proper f o r m e 0 0 refer t o the gentleman w h o surreptitiously m a d e a n offer t o you t o sell your bonds t o another reserve b a n k i n consideration of font buying their bonds after t h e first o f January? Mr. Gurtis: A s I understand the ruling o f the Board it i s t o this effect: T h a t t h e allotment cannot exceed the a m o u n t o f the p r o r a t a s h a r e t h a t a n y F e c e r a l R e s e r v e Bank i s allotted, b u t i n estimating that p r o rata share they w i l l t a k e i n t o c o n s i d e r a t i o n t h e b o n d s t h a t t h a t bank has purchased i n the o p e n market during that callendar year; b u t t h e p r o h i b i t i o n d o e s n o t p r e v e n t a n y b a n k from purchasing i n the o p e n market more t h a n its p r o rata share i n a calendar year, i n which case i t would b e free from h a v i n g a n y a l l o t m e n t f o r f e d u p o n i t c u r i n g t h e t y e a r ? Mr. warburg;: The Chairman: f h a t i s 1 b exactly, T h e r o e l questilon b e r e r e L i e m e e u m n s is whether a n y motion i s desired t o secure, through the aid o f this tentative suggestion, a fairly uniform cir- cular f o r the reserve banks t o sond t o their member banks in regard t o the purchase o g Government bonds, w h i c h will commence after the first o f January? Governor V a n Zandt: U n d e r t h e rulings t h a t have been made, i f all o f the Federal “eserve Danks should accuire, p r i o r t o t h e a l l o t m e n t b y t h e F e d e r a l HKeserve Board, e n o u g h balance t o offset their p r o rata share o f the 425,000,000, would that not mean that none o f the https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 427 national banks would have opportunity t o dispose o f a n y : 0 6 0 Part o f t h e e nat t h e y s h o u l d o f f e r f o r s a l e ? a ts The Chairman: I understand-——~ although Mr. Curtis is the expert o n this subject---— that i f they acquire a n amount equal t o their pro rata proportion o f the $25,000,000 allotment, after t h e veriod beginds, w h i c h i n this i n Stance w o u l d b e a f t e r J a n u a r y l s t , t h a t t h e y w o u l d t h e n have a c q u i r e d a l l o f t h e b o n d s t h e y c o u l d b e r e q u i r e d to take under t h e allotment, a n d that t h e y would n o t have t o take a n y ? Governor V a n Zandt: l f that were t h e case w i t h all the banks there would b e n o national b a n k circulation Lronsfer, Tne Chairman: T h a t would b e t h e unfortunate c o n s e - quenne, The whole proposition i s this: I f w e wait until after the first o f January t o buy the bonds a t cheaper than par i n o r d e r t o a n t i c i p a t e t h e a l l o t m e n t s u n d e r t h e v25,000,000 offer, I suppose w e will b e very successful in making Government 2 ' s sell a t par. I f y o u b u y them prior t o January lst you d o not reduce your allotment. It was some s u c h brilliant thought t h a t occurred t o Governor Wold w h e n h e made h i s proposition t o Governor McDougal. Governor McDougal: I operations , ta might s a y that Mr. Fancher's together w i t h those o f the Chicago Bank, have demonstrated v e r y clearly that there vould b e n o trouble i n sending bonds u p t o par, w i t h special reference to the 2's, a n @ i n sending t h e 3's w a y u p beyond what t h e y https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis are. T h e r e a r e v e r y f e w o f t h e m b e i n g offered, The Chairman: I mignt r e m i n d y o u t h a t t h e s a m e q u e s - tion will arise i n regard t o the purchase o f Government bonds after January lst b y Federal tteserve banks that arose w h e n w e discussed this a t the last meeting, w h i c h resulted i n our boing charged w i t h a conspiracy t o depress the p r i c e o f Government b o n d s , thon w e a t t e m p t e d t o effect an arrangement b y which a committee o f the Reserve Danks would undertake t o purchase t h e bonds for.account o f all of the Reserve Eanks. I think still that that i s the pro- per w a y t o handle t h e t r a n s a c t i o n a n d I d o not consider that there i s a n y conspiracy i n i t a t all. However, w e will have a gency arises, a meeting before this contin- meeting p r o b a b l y t o b e h e l d d u r i n g t h e month o f December, a n d t h e r e i s h a r d l y a n y u s e t o discuss that matter nov, would i t b e satisfactory t o the meeting t o have this proposed circular submitted t o the “ederal “eserve Board as coming f r o m this conference, w i t h a request t h a t suggestions b e sent t o the various reserve banks o f a n y changes t h a t t h e B o a r d t h i n k s s h o u l d b e m a d e i n i t ? I t is h i g h l y d e s i r a b l e t h a t t h i s c i r c u l a r s h o u l d b e uniforu, if possible, Curtis: k Mr. Yarburg: The Chairman: a copy o f i t was sent t o the <7 Y e s . B u t i t was s e n t more a s a personal matter f r o m our bank rather B h a n a s representing a l l the banks. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 429 Governor Fancher: I would o f f e r a resolution embodying your statement, t h a t a draft o f the circular beforwarded t o t h e Board. The Chairman: I s that motion seconded? Governor Wold: I The Chairman: will s e c o n d t h e motion, T n e motion offered b y Governor Fancher is t h a t t h i s f o r m o f circular w i l l b e s u b m i t t e d t o the Federal Heserve Board for their comment and criticism and such changes a s they desire t o make will b e reported back t o t h e t w e l v e r e s e r v e b a n k s , t h e p u r p o s e b e i n g t o have t h e c i r c u l a r u n i f o r m i n c h a r a c t e r a n d terms, Are y o u ready t o vote o n that motion, gentlemen, o r , is-there a n y f u r t h e r d i s e u s s i o n Governor V a n Zandt: o f i217 w o u l d w e not have t o have v e r y prompt a c t i o n o n that? The Chairman: O h , yes; i t ought t o be dealt with im t h e w e n t t w o weeks, Governor S e a y : I n a d i n mind asking a leading question: unether, i n case the Federal Reserve Board exercises its discretion a n d r e q u i r e s t h e b a n k s t o purchase t h e s e b o n d s , wnether t h e y h a v e C e t e r m i n e d t h a t t h e y s h o u l e b e p u r c h a s e d al per, O r whether t h e y e r e c i n e t o determine t h a t b e = a few bonds are sold at 97-1/2 or 98, that that is the m a r k e t price. i P O u ick i c e to mow e t 1 b i s phe purpose t o have these purchases b y the federal “eserve banks made a t par? https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The Chairman: Governor Scay: T i e statute requires that. T h e statute says t h e banks shall o f - 430 fer t h e m f o r p u r c h a s e get par’ a t par. B u t suppose t h e y cannot I s t h e Federal Reserve B o a r d g o i n g t o require us t o purchase t h o s e b o n d s a t p a r ? Mr. “Warburg: I t stands t o reason that i f y m c a n buy them below p a r that y o u will order your quota before the m o m e n t comes. Governor Seay: I wented t o know if there was any settled opinion o n the matter, irrespective o f what t h e market price o f the bonds might be. Mr. Warburg: I think most certainly t h e y would to take t h e m a t par. Mr. Curtis: A s the only obligation was t o sell a t par, y o u c o u l d n o t a c c e p t a n offer before i t had been made-—— Governor Seay: ( I n t e r p o s i n g ) B u t suppose t h e banks find the market t o be98,. Mr. Warburg: T h e banks, o f course, will have taken them before that. Governor Seay: T h a t i s true. I see h o w i t will work out. (Further informal discussion followed.) The Chairman: A r e y o u ready f o r t h e question o n Gov- ernor Fancher's motion, gentlemen? (The question was called a n d t h e motion was duly carried.) https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ADVISABILITY OF- PURCHASING ACCEPTANCES O F STATE BANKS A N D TRUST COMPANI“CS, BASED U P O N DOMESTIC TRANSACTIONS. The Chairman: M r . Harding h a s handed m e some corres- 431 pondence relating to'the possible m l a r g e m e n t o f the investment f a c i l i t i e s being p e r m i t t e d o f the reserve Danks t o purchase a c c e p t a n c e s b y their o f state banks a n d trust c o m p a n i e s w h i c h a r e b a s e d u p o n d o m e s t i o transactions. - we discussed t h a t subject a t length yesterday, believing that t h e ruling o f the Board a n d t h e opinion o f counsel for t h e Board, w h i c h holds t h a t t h e Reserve Banks m a y exercise t h e f u n c t i o n s regu- i n the absence o f the making o f a lation b y t h e Board, w o u l d o p e n t h e d o o r t o s u c h t r a n s actions. Y o u will recall t h a t t h e ciscussion yesterday hinged first upon the policy a s t o whether w e cared t o buy bills o f that character, a n d secondly, i f w e did, whether i t would interfere i n any w a y with the present errangement w i t h regard t o the purchase o f bankers! ac-— ceptances, covered b y the regulation o f the Board. W e did not attempt t o m k e a n y definite declaration o f policy in regard t o that class o f investments yesterday because I think i t was understood t h a t t h e cirectors o f the various b a n k s w o u l d w a n t t o discuss t h a t matter; but I learned today from ir, W a r b u r g that the Federal Reserve Board dees not u n d e r s t a n d t h a t t h i s w o u l d p e r m i t t h e e e e e o f gomestic a c c e p t a n c e s m a d e b y S t a t e b a n k s a n d t r u s t c o m panies, t h o s e r e a l l y h a v i n g b e e n c o v e r e d i n a existing regulations o f the Board, mit t h e p u r c h a s e o f that class Mr. tarburg: Tue Chairman: sense b y t h e i n that i t did not per- o f bills. D o m e s t i c bills? D o m e s t i c bills; yes. T h a t vicw o f the l a w i s a little inconsistent w i t h the opinion o f counsel, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis i t seems t o me. I t occurred t o m e that t h e exer- 452 a e . 7 Cise.of functions specifically granted t o the reserve bankg cannot b e suspended because o f the failure o f the Board to make regulations. However, t h i s question h a s already been brought b e e fore t h e Federal iteserve Board f o r consideration, a n d I have just read a letter f r o m Governor Hamlin indicating that h e feels that the povers o f the Reserve Banks i n that respect should b e e x e r c i s e d n o w , i f they care t o d o so; that t h e y should n o t b e restricted i n their investments i n the open market only t o bills growing out o f foreign transactions. The question before this meeting is, therefore, t o enn- -vey to the Federal ®eserve Board, i f it is the desire o f you gentlemen t o d o so, some cxpression o f view a s t o whether t h e Reserve Banks should b e permitted, either b y the absence o f regulation o r the making o f a regulation, to make t h a t c l a s s o f investments? Mr. :.arburg: I mignt s a y a word o r t w o a b o u t t h e law covering t h e open market transactions. view i s this: T h e point o f T h e Act says that the open market transac- tions a r e o p e n t o t h e b a n k s u n l e s s t h e y a r e c o v e r e d b y regulation. H e have issued regulations for bank accept- ances, Warrants, Government bonds, a n d .we; have n o t cover- ed bills o f exchange and far eign trado acceptances b y regulation. U n t i l t h e y are covered t h e vanks a r e free to deal w i t h them. T h a t w a s t h e idea o f the law. came t h e q u e s t i o n o f domestic a c c e p t a n c e s T h e n o f S t a t e banks, We were i n some doubt whether w e should o p e n that u p and amend o u r a c c e p t a n c e r e g u l a t i o n s p e r m i t t i n g t h o s e t o b e c o m e https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 495 eligible. T h e question i s would i t b e quite fair t o the member banks, w h o cannot accept those transactions, to Sive that advantage t o the state banks w h o have n o t entered the system. The Chairman: W i l l y o u open the discussion o f this matter, Governor Kains? Governor Kains: fam i n doubt. I I n view o f what Mr. “arburg has said believe w e should remember that t h e national banks a r e t h e favored children. I d o not think we would want t o d o anything against t h e interests o f the national banks, although othervise I a m i n favor o f the provilege o f buying acceptances growing o u t o f domestic operations. he Chairman: “ o u l d y o u favor federal reserve banks purchasing t h e s e d o m e s t i c a t a t e b a n k ageeptances v r i o r to the enlargement o f the powers o f the National banks? Governor Kains: Mr. Harding: I N o , I would not. think there i s one practical question that comes i n right there, v e are going t o recommend to Congress t h a t t h e y g i v e t h e poter, u n d e r c e r t a i n restrte-— tions, t o national banks t o make these acceptances» T h a t is i n accordance w i t h y o u r views, as I uncerstand 5 Bpee Would o u r chances o f getting that amendment through b e increased o r lessened b y giving this authority t o the State Danks i n advance? w o u l d i t b e a n argument o f value t o GO t o Congress a n d Seay t h a t t h e State banks c a n accept and the Fede-al Reserve banks c a n b y y their acceptances, and y e t t h e y c a m o t b u y d o m e s t i c a c c e p t a n c e s f r o m t h e National https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 454 banks.or f r o m their o w n members, a n d f o r that reason y o u should g o ahead a n d sive t h e national banks what t h e state Danks have. T h e question i s would that b e a n argument for i t o r against i t t o t h e minds o f Congress. The Chairman: D o e s n o t that cuestion really hinge upon t h e o p i n i o n o f counsel f o r t h e B o a r d a s t o h o w t h e powers o f the banks m a y be exercised? C e r t a i n l y i t would assist a great deal i f the statement was made t o Congress that the “ederal Reserve Board has no power to restrict t h e Federal Reserve Yanks f r o m exercising povers that Congress expressly intended t h e m t o exercise. Mr. Harding: Y o u might say that these “ederal Reserve Banks a r e badly i n need o f increasing revenues, a n d that that i s a good opportunity t o increase t h e m through the buying of state bank acceptances, but that the Federal Reserve Board d i d not feel that i t was right t o give t h e power t o the state banks when they could not give i t t o the national banks, a n d i f y o u will enable u s t o give i t t o the National banks we will also give it to the state banks. (At this point Mr. varburg m d e a statement t o the Conference and directed the stenographer not to put it in the record.) | The Chairman: W h a t are your views, Governor McDougal, about permitting Federal Xeserve “anks to buy these comes-— tic acceptances o f state banks? Governor iiecDougal: hat permission a t all. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis v i e are n o t s t e d i n having W e woulda rather n o t have it. 435 The Chairman: H o w d o y o u feel about it, Governor Aiken? Governor Aiken: M e . Kains expressed m y feelings i n would r a t h e r n o t h a v e t h e tne m a t t e r v e r y clearly. I banks b u y t h e m u n t i l t h e n a t i o n a l b a n k s c a n accept. The Chairman: G o v e r n o r Wold? Governor Wold: I a m inclined t o think o u r people would n o t b e i n favor o f going into t h e o p e n market o n state b a n k a c c e p t a n c e s u n t i l s u c h t i m e a s n a t i o n a l b a n k s may b e granted t h e same prixilege. The Chairman: G o v e r n o r Sawyer? Governor Sawyor: I would l i k e t o a s k i n what s t a t e the s t a t e b a n k s c a n accept? The Chairman: are a c c e p t e d number, I Quite a i n Massachusctts, judge, because t h e y N e w York, « h e r e t h e y h a v e specific power, Illinois, a n d 1 think i n Pennsylvania. Governor rhoads: power T h e state institutions h a v e n o t o accept. The Chairman: H o w about Illinois? Governor McDougal: I a m not sure. I think they the power, b u t they are not exercising it. The C h a i r m a n : Mr. H a r d i n g : i M e P r o a r e a nirmbey O L “States t h a t c a n s N e a r l y a l l t h e states c a n G o the same thing. Governor Sawyer: I d o not believe o u r institutions would like i t a t this time. I do n o t believe w e ought t o be g r a n t e d t h e p o w e r o f b u y i n g t h e m u n t i l t h e n a t i o n a l banks h a v e t h e same right. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Hoxton: “ e never have Ciscussed t h e matter i n eur board that I know of, b u t I do n o t think w e should g o o t state b a n k a c c e p t a n c ens u n t i l o u ri o w m m e m b e r7 s h a v e a n equal right. I n Missouri t h e n e w l a w pérmits state banks to make acceptances, b u t the National banks have n o such right. The Chairman: G o v e r n o r Seay? Governor S e a y : f t think i t would b e wise t O wait before exercising t h a t vrivilege. The Chairman: G o v e r n o r Van Zandt, what i s your view? Governor V a n Zandt: I a m such a he national b a n k act that I strong b e l i e v e r do not bolieve anything should be d o n e f a v o r i n g t h e s t a t e b a n k s o r that t h e state banks should b e g i v e n p r e f e r e n c e o v e r n a t i o n a l banks. national b a n k s c a n accept I in P a t i : d o not bolieve w e should e v e n be granted t h e power o f purchasing state b a n k acceptances, The Chairman: Mr. Foote: I M r . Foote, w h a t i s your opinion? agree w i t h G o v e r n o r V a n Z a n d t o n that proposition. The Chairman: G o v e r n o r Rhoads, w h a t i s your view? Governor Rhoads: I think w e had better wait until the national banks have the privilege. Tne Chairman: G o v e r n o r Fancher will y o u state y o u r epinion? Governor Fancher: T n e matter h a s n o t been considered by our board, b u t i n expressing m y personal apinion I should think i t would b e unwise t o give t h e state banks https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis the p r e f e r e n c e a n d p e r m i t F o .eral R e s e r v e B a n k s their a c c e p t a n c e s b e f o r e t h e p r i v i l e s e t o buy i s given t o the national banks. The Chairman: D o e s somebody want t o offer a resolu- tion that will mike a record o f the opinion that has been expressed h e r e , a n d wnich i s apparently unanimous? Governor V a n Zandt: I offer such a resolution, to be c r a w n b y t h e S e c r e t a r y ? The Chairman: Mr-e Fancner: I The Chairman: I s that motion seconded? s e c o n d t h e motion. I s there a n y further discussion? (There w a s n o further discussion a n d t h e motion was auly carried.) TELEGRAPHIC TPANSFERS. The Chairman: I have a matter o f personal privilege to bring u p a t this meeting. At a meeting s o m e months a g o w e arrangea, b a s e d upon the report o f the Lxecutive Committee, a s 1 recall it, a scheme f o r charging f o r telegraphic transfers, a n d some o f the banks, I W e understand, h a v e b e e n making u s e o f that. have n o t h a d occasion t o use i t tntil quite recently. The question n o w comes up: w h a t i s a telegraphic transfer, when t h e G o l d S e t t l e m e n t F u n d e f f e c t s t h e s e t t l e m e n t o n l y once a week, instead o f daily? I n other words, i s a de— posit made with us i n New York, t o the credit o f a bank in some other section o f the country, t h a t is, a reserve ba nk, t o b e advised b y telegram, a that justifies making t h e charge? https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis transfer o f the character 458 The G u e s t i o n a r o s e i n sonnection w i t h a transaction at Atlanta. The transaction was about a s follows: A state b a n k in New York, the Bank of America, deposited with us 100,000, advising that they cid s o for the account o f a savings b a n k and trust company i n the Atlanta district, the money t o be credited b y us t o the Nederal Meserve B a n k of Atlanta a m t !i i v i s o d b y telegraph. not q u i t e a correct statement. The transactionswas this. T h e y deposited {:100,900 i n gold f o r the Federal Reserve B a n k o f Athanta b y order o f the S a v i n g s B a n k a n d T r u s t C o m p a n y , t o b e advised b y tele- graph. The Chairman: W e e e e t h a t a s being a telegraph— ic transfer a n d charged t w o days interest a t t t o p e r cent. A t l a n t a objected t o that o n the ground that i t was s i m p l y a have a deposit letter w h i c h I i n N e w Y o r k t o t h e i r credit. L received f r o m G o v e r n o r M c C o r d , h a v - ing asked h i m t o make a n explanation o f the traniaction, telling h i m I woild submit i t a t the meeting here f o r discussion a n d s e e whether w e could agree u p o n some method of dealing w i t h transactions o f that character which might or might n o t fall within t h e class o f telegraphic transfers. T h e letter i s a s follows: "I w i r e d y o u y e s t e r d a y s t a t i n g t h a t w e w e r e p u r c h a s i n g New Y o r k e x c h a n g e f r o m t h e C e n t r a l B a n k & Trust C o m p o r a t i o n of Atlanta, a n d were having t h e m t o have their correspondent https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 459 tne Bank o f Awerica, N e w York, make the deposit o f gold or cold certificates w i t h your b a n k a s per o u r request, e n d i statec also that the Bank o f t i o f (100,000 i n ¢golé sa n d y o u h aod d e c l i n e d pt o t a k e i t sEceDt O n payment of knov i f y@u insisted were f o r o u r benefit, and 1 have y o u r r e p l y you will accopt deposits o f gold f o r o u r ercdit w i t h charge subject t o determination o f the matter a t the meeting o f the Governors. “rovever, inasmuch a s i t is impwe sible for m e t o leave here t o attend. that meeting, I now write t o acquaint you and t h e other Governors o f the facts. : @ have b e e n purchasing c o l d i n the f o r m o f exchange b y naving t h e gold deposited withyou i n o m e r t o convert i t into t h e gold pool, a n d w e h a v e b e e n p a y i n g o u t o u r l e d e r a l R e s e r v e motes a g gainst t h e s e p u r c h a s e s o n the G a y t i us t h a t t h e m o n e y h a d b e e n p l a c e d y o u wired t o o u r credit. T h i s was done i n order t o s i l i t a t e t h e moving o f the cotton crop i n this s e c t i o n a n d t h i s m a t t e r w a s c i s c u s s e d ralpbpauave ac" meeting o f Governors i n Chicago, a n d I understood f r o m y o u at t h a t t i m e t h a t y o u w o u l d a c c e p t t h e s e d e p o s i t s f o r o u r account. I f w e v e r e t o Gemand p a y m e n t o f t h e i n t e r e s t f r o m the Central Bank & Trust Corporation, t h e y would have t h e currency shipped i n from other cities i n payment o f New York ye would have t o pear t h e burden o f receiving tnese eeposit against N e w York credits. the m a t t e r w o u l e b e e n t i r e l y s a t i s f a c t o r y https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis B e l i e v i n g that t o you, w e h a v e 40 made t h e p u r c h a s e s a s above stated a n d with this explana- tion o f the exact facts, I submit the m i t t e r t 6 your con~ sideration f o r y o u r approval. I f t h i s i s notmaoifiihmmino satisfactory w e will, o f course, h a v e t o discontinue it. I might a d d aaiso that w e have m d e similar arrangements With s e v e r a l o t h e r b a n k s . Yours v e r y truly, (Signed) J o s - A. HeCord, Governor," The p u r p o s e o f this t r a n s a c t i o n , a s v e view i t i n “ew Yortr, i s t o enable t h e “ederal Rezerve Y a n k o f Atlanta to convert N e w York Exchange i n t o gold a n d use that gold and take out Federal Keserve notes a n d deliver them t o their m e m b e r s o r t o s t a t e b a n k s c o w n there. I do not want t o open u p for discussion now, under this particular matter, t h e tsnole suhject o f t..c opera- tion o f the Gold Fund, exchange, collections a n d s o on, put i t seems t o m e that this i s a transaction which involves a telesraphic t r a n s f e r nave t O S u i p p e d of shipment, o f money w h i c h otnerwise w o u l d i n currency. T h e r e . would b e the expense t o c o v e r the c o n s t r u c t i v e c o s t o f w h i c h w e have agrced t o makc a charge. think it might interest you to know Mr. “arding: I that the Federal Reserve Pank of Atlanta made a telegraphic toansfer t o ‘ew York of “20,000 for oneof their member s, o n which they paid two days interest, n o t a t two er gent, b u t a t three p e r cent. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The Chairman: M e b a s i s o f t h e cnuarge o n transactions 44] of this character, notwithstanding t h e fact that t h e g are settled through t h e gold fund, i s that constructively there i s a movement o f currency involved i n such a trans- action, a n d that w e have g o t t o assume that b y some method of charging t h e reserve banks will g e t some income f r o m the shifts o f currency, which, while o n l y constructive, are t h e c a u s e o f expense t o t h e m e m b e r banks. L very g l a d i f w e c o u l d a g r e e u p o n a to govern u s i n this matter. I will b e policy amongst ourselves have n o doubt that Gover- nor iicCord would accept that agreement, a s h e has a l l other agreements a n d undertakings t h a t w e have made a t these meetings. Governor Kains: W h y d o you think a charge should b e made i n t h a t t r a n s a c t i o n ? I s i t o n account o f your in- ability t o get the money before t h e G o l d Settlement o f that w e e k comes around? The Chairman: N o , b u t theoretically, make a n y charge a t all f o r these transfers, i f w e camnot w e will transfer all t h e c u r r e n c y i n t h e U n i t e d S t a t e s a n d t h e r e w i l l b e no shipments except through o u r facilities i n New York. Governor Kains: The Chairman: I t i s t o safeguard yourselves? Y e s , t o safeguard ourselves. Mr. H a r d i n g h a s h a d w i d e e x p e r i e n c e ‘ I think i n that matter a n d h e will c o n f i r m m y sttatement, t h a t i t i s a b s o l u t e l y n e c e s s a r y for t h e banks t o protect t h e m e l v e s b y imposing charges o f that kind. Governor Fancher: I t seems t o me the priviple in-~ volved i s the same, i f i t i s a transfer between t w o Federal https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 442 Reserve Danks o r between a member bank and a Federal Resorve Banks The Chairman: I t i s subject t o another v i e w o f the Gcld Fund, w h i c h I have always held, a n d that i s that t h e accounts that a r e supposed t o b e maintained between t h e reserve b a n k s , a n d a r e s p e c i f i c a l l y a u t h o r i z e d b y the statute, a r e accounts f o r exchange purposes, a n d the statute probably never contemplated that the establishment o f a clearing house arrangement such as suggested b y the language o f the Act should result i n a daily settlement o f a n account maintained f o r exchange purposes. T h e setilements to be effected b y the clearing house o r Gold Fund arrangement are settlements o f balances which eall for settlement, and not balances created f o r exchange purposes. I f the Federal Reserve B a n k o f Atlanta needs N e w York exchange and arranges f o r a transfer t o us for its credit b y the Bank o f America o f New York exchange, a n d intends t o cheek against that, w o would c a r r y i t i n account f o r credit o f Atlanta until i t is checked against. N a t u r a l l y that transaction i s not subject t o any charge. applied I f that principle i s t o t h e c p e r a t i o n o f t h e G o l d Fund, w h a t w o u l d i t amount t o ? T h i s i s what I think i t would result i n : That the exchange transactions would b e carried o n normally a s banks conduct exchange transactions betweenthemselves, an account created f o r that purpose. in T h e shifts o f cur- rene$--- that is, t h e reserve m o n e y a s distinguished f r o m Federal R e s e r v e n o t e s - - - n e c e s s i t a t e d u l t i m a t e l y b y this principle o f exchange accounts a n d b y the building u p o f https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 445 reserves i n one part o f the country a s against another part of the country, would b e effected through t h e g o l d fund a n d he o p e r a t i o n s o f t h e g o l d f u n d would o f course b e v e r y much l e s s active. Governor Seay: S u p p o s e y o u were advised o f the d e - posit o f t h e A t l a n t a b a n k b y mail? b o y o u consider t h e principle o f the transaction t o have b e e n changed a t all? The Chairman: N o t a bit, excepting that t h e Atlanta bank wants tomove s o mich reserve m o n e y f r o m N e w York t o Atlanta, o r t o a n y point i n its district, through t h e opera- tiL0n G r tne gold: funds C o n s t r u c t i v e l y there i s a n expense attached t o that, a n d that expense should b e borne b y somebody. I n this instance those w h o g e t t h e benefit o f i t should p a y t h e charge. Governor Seay: B u t i f you got that advice b y mail ado you still think a charge should b e m d e ? yould h a v e h a c t h e t r a n s f e r Mr. McKay: t o make? h a t i s not a The Chairman: Y o u . etalk real telegraphic transfer. I t would have been i f we had daily Settlements o f the gold fund. (Further informal Giscussion followed.) Governor Wold: I s not that a practical d e m o n s t r a - tion o f the advantages t o b e derived f r o m exchange accounts? It would obviate a good deal o f trouble a n d annoyance b y having these eschange accounts settled through t h e gold fund. I n the operations o f t h e N i n t h District B a n k w e a r e accumulating money i n the gold fund that will shortly come out https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis I t w i l l c o m e o u t t h r o u g 6h N e w York c e x c h a n g eS. W e will b44 be sellers o f New york Exchange a s soon as the crop has been moved, E h y should n o t those credits which w e have accumilated i n the gold fund have been accumulated w i t h you a n d p r o t e c t e d y o u a n d m a d e i t u n n e c e s s a r y f o r y o u t o have taken u p all these silver certificates a n d put u p gold? Why could they not have counted with you until such time as w e sold exchange against them? The Chairman: S u p p o s e N e w York exchange w a s a c c u m - lating w i t h y o u aml y o u were obliged t o take i t from your members i n large volume, even though a t some discount. you f o u n d t h a t t h e a c c u m u l a t i o n and y o u n e e d e d r e s e r v e s t r i n o u r hands w a s t o o great i n the G o l d Fund o r i n your o w n vaults y o u vould order through the Gold F u n d a transfer and that transfer would b e f o r your benefit, a n d i f there was a n y cost attached t o that transfer y o u would have t o pay it. Governor V a n Zandt: S u p p o s e the Dank o f Atlanta you t h e c h e c k o f t h i s S a v a n n a h b a n k o n t h e B a n k o f American f o r 6redit? The Chairman: maintain i t should “ o u l d there have b e e n a charge? h e r e would h a v e b e e n a charge, b u t I b e cre€ited f o r settlement i n the Gold Settlement Fund, except i n case t h e Atlanta D a n k could n o t use N e w York exchange a n d was willing t o p a y the cost o f transfer of the money from New York to Atlanta. structive chargo I T h e con- think i s m u c h less t h a n the actual cost of shipping a n d insuring t h e money o r currency. As pointed o u t i n this meeting w e have u p t o date paid in 528,000,000 i n gold t o the subtreasury for transfer https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis through t h e Gold f u n d t o the various reserve banks, a n d if occasion should ever arise where t h e Government found i t necessary t o charge f o r the actual physical transfer o f the gold c o i n which i s held b y the Treasury behind t h e gold certificates, t n e question woule t h e n arise, o n l y i n a different form, o f who Shall p a y the cost o f Shipping t h e $28,000,000 o f gold from New York to these various points throughout t h e country. N E S S ) bPansacLaons i n which we have n o interest, a n d from which w e d o not g e t o n e penny's b e n e f i t ; a n d w e would naturally maintain, that o c c a s i o n a r o s e , t h a t e v e r y c o l l a r when o f that e x p e n s e should b e borne b y the other reserve banks, t h e banks that had accumulated this New york exchenge, a n d c cttlement. parts o f the m u n t r y , W e G o not g e t exchange o n other a n d have n o occasion t o order these transfers t o New York. Governor Seay: S u p p o s e y o u start > AnLer——Tetricti clearing? s u p p o s e w e s a y t o our Yaltimore cCank, f o r i n stance: “ I n s t e a d o f sending u s items o n your bank i n New York that t h e y transfer t o -+7 f o r o u r credit items o n your member b a n k a n c a d v i s e u s , y o u a c v i s e u s b y m a i l a m . s e t t l e for that through t h e Gold Fund--- The Chairman: B u t 1 would like t o g o back this being really i t e m 8 e* “ ; 3 5 o n your program, z e “Daily Settlements", a n d call your attention t o the a h r e t t - t n e -farst. m e o t i n c o t a s t e on October 2Oth, i n washington, l a s t year, i t https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis m e d 446 over o u r protest i n New York, t h a t Federal teserve banks Should r e c e i v e f o r i m m e d i a t e c r e d i t a t p a r c h e c k s d r a w n o n any other federal reserve bank, a n d t h e result o f that was t o put t h e other Federal Neserve Banks i n debt t o New York f o r a very large amount o f money. T h e y owed u s a t one time $28,000,000, a n d the question a t once arose: is going t o stand t h e cost o f settlement. to d o it. Who W e d i d n o t want V e d i d not desire exchange f r o m Dallas, Atlanta andother parts o f the country, a n d i t was decided t h e n t o discontinue t h a t process a n d p u t time o n those checks, s o hat these expensive exchange accounts would b e controlled. Now the same question arisesin a propose different form- W e t o open u p a n inter-district c o l l e c t i o which will result i n very large balances being created, and + find that y o u are a l l quite willing t o take exchange on New York for immediate credit a t par, particularly when it i s at a discount, a n d w e a r e going t o be i n the unfortunate position, i f that develops w i t h o u t limit, o f possibly ®me d a y Standing t h e cost o f shifting this g o l d around, 4 although w e have n o interest i n doing so. Mr. Mebay: I n the transit report t h a t question hap- pens t o b e covered b y a resolution, w h i c h I think i s exactly what y o u want. The Chairman: Mr+ McKay: L e t us have it. I n submitting o u r plan o f inter-district collection w e r e c o m m e n d t h a t a n y e x p e n s e c o v e r i n g d e f i c i e n - cies i n the Gold Se.cleaent fund, incurred b y Federal Reserve Panks, shall b e avportioned i n a n equitable manner t o https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis be determined later," I think t h e subject i s covered b y this resolution, If there i s a n y expense t o the N e w York bank i n transferfing g o l d t o W a s h i n g t o n t o make u p a deficiency i n the settlement f u n d there, this resolution covers it. W e have h a d that phraseology i n every The Chairman: report a n d r e c o m m e n d a t i o n one. w e have made exccpt t h e first A t the meeting o n December 1 0 i n Washington, where that question o f charges arose, N e w York very foolishly offered t o bear o n e halfof t h e expense i n order t o get an a d j u s t m e n t Of it. I o f some k i n d a n d g e t s o m e experience o u t t w a s a n expense t h a t w e w e r e n o t i n c u r r i n g in any Way. Governor a i n s : The Chairman: I t did not amount t o anything: N o , i t did n o t amount t o anything because w h e n these v e r y large balances accumulated i n the other reserve banks t h e y were n o t a t all keen t o settle. They just l e t them run. Governor a i n s : he C h a i r m a n : W w e w e r e n e v e r a s k e d a b o u t them, e specifically stated that w e never would ask. B u t y o u took them a t par without o u r Governor Kains: being consulted i n the matter a n d you should n o t have done that. The Chairman: Y e d i d n o t know. W e were under t h e impression w e were required t o d o s o b y the mandate o f this meeting in: ashington, a n d 1 remember that some o f those i n attendance h a d a feeling that w e were trying t o smother this thing i n some w a y i n New York. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 448 Governor Seay: T h e r e h a s always b e e n a n understand- ing b e t w e e n u s t h a t i f u l t i m a t e l y t h e r e s h o u l d b e a n y e x - pense d u e t o sub-treasury operations t h a t that expense should b e borne b y the bank which gave occasion f o r it. It seems t o m e t h e q u e s t i o n r a i s e d i s o f t h a t character, Theoretically y o u are making a transfer, b u t I under- stand, a s I have always said, t h a t ultimately if, i n making a final settlement, i t involved t h e actual transfer o f funds, t h a t t h e b a n k which gives rise t o the transaction should bear the cost. The Chairman: Y e s > I n this instance i f Atlanta and a l l t h e o t h e r r e s e r v e b a n k s a r e w i l l i n g t o e n t e r i n t o an undertaking that these settlements w e a r e making weekly, which involve t h e transfer o f enormous amounts o f gold, are t o bo made a t their expense i f anye xpense arises therefrom, w h y v e d o not care, a s long a s i t does not deplete o u r gold. B u t the p l a n that w e agreed upon,” Governor S e a y , w a s t h a t t h e t r a n s f e r s b y telegraph, which this really is, should b e charged for. Governor Scay: I t i s a unique transaction. I mast confess i f the transaction h a d been offered t o u s w e would have received it. T h a t i s the way i t occurs t o me. The Chairman: S u p p o s e a member bank camo t o you G m and said, “We are depositng with you 100,000 for credit of the Fedoral PReserve Bank of New York, b y order o f the Bank of America f o r telegraph ed¥ice t o them." aopear o n its f a c e t o b e a telegraphic t r a n s i e r ? can hardly read i t a n y other way. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis W o u l d n o t that You. 449 Governor Seay: I do n o t think i t would b e a transfer of t h e n a t u r e w h i c h w e c o n t e m p l a t e d w h e n w e p r o p o s e d a tective c h a r g e u p o n t e l e g r a p h i c transfers, I pro- t was L o r the protection o f a reserve b a n k against i t s member banks. he Chairman: T h i s , a s i t happens, was a transaction petween b a n k s t h a t w e r e n o t e v e n m e m b e r banks. Governor Seay: B u t boiled d o w n finally i t was « 4 transaction between Federal Neserve Danks. The Chairman: a d Governor Fancher: o n o t t a k e t h a t v i e w o f 26, B u t i t was f o r t h e benefitof a non-member bank. Governor Seay: M a e banks responsible w e r e t h e reserve of A t l a n t a a n d t h e r e s e r v e b a n k o f N e w York. Mp. M c k a y ? T h e reserve b a n k f o r which t h e transfer was made expected t o collect charges f r o m its customers whetner i t b e a member b a n k o r a non-member bank, a n d i n charge i s u s u a l l y c o v e r c d a n y c o s t t h a t t h e N e s e r v e might h a v e t o p a y afterwards, s h o u l d t h e N e w Y o r k have t o s h i p t o t h e G o l d S e t t l e m e n t F u n d a n d i n c u r a by d o i n g s o . (Discussion f o l l o w e d w h i c h t h e s t e n o g r a p h e r w a s d i r e c t - ed not t o take.) he Chairman: T h i s would b e a n academic discussion if i t were not-for o n e thing, a n d that i s that w h e n ihe gold f u n d w a s c s t a b l i s h e d t h e T r e a s u r y D e p a r t m e n t apparent-— Ly reserved t h e right t o charge t h e cost f o r shitting t h e gold a n d the Federal Neserve Board reserved t h e right t o assess t h e banks i n proportion a s they h a d benefited. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4.50 The analysis o f this g o l d settlement f u n d i n our bank and o f all transactions g oOZz o i n g through t h e fund since M a y 19 w i l l i n d i c a t e w h a t a n immense volume o f transactions have developed a n d the possibihities o f that charge, = i n settlement c f = we h a v e o e f r o m m s o u n t s (127,785,000. We h a v e p a i d o u t i n settlement o f d u e t o accounts $158 ,129,000. We have n o assurance whatever t h a t t h e “reasury W i l l not make a constructive c m r g e f o r the cost o f operating this thing, a n d issuing t h e gold order certificates, a n d for some portion o f the cost o f the shifting o f gold coins that takes place a l l t h e time between sub-treasuries. I do not like the idea o f going i t blind o n the general a s s u m p t i o n t h a t w e c a n a r r i v e a t a tion o f who will bear these charges, fair determines i n view o f the large volume o f business t h a t i s being created. A S a matter o f fact t h e N e w York bank i s not benefited t o the extent o f a dollar b y the operation o f this fund. S o far a s w e a r e c o n c e r n e d w e d o n o t n e e d t o h a v e i t operated. New York being a n exchange centcr these gentlemen are able, through the Gold Fund, New York exchange a t will. t o create a n d craw against A s a n evidence o f how the Gold Fund influences these transactions, I shortly b e f o r e will s a y that i t was established t h e other reserve banks owed us 228,000,000 net. T h e y all awoke t o the fact, as we knew they would, that i f they permittea tnese balances t o remain until t h e gold fund was settled, i t would mean that we would ship 228,000,000 o f gold t o our credit https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 451 to Washington. T h e y a t once scurried around t o get New York exchange a n d when the fund was settled w e found ourselves n e t i n debt t o the other reserve banks. If i t w a s p o s s i b l e t o adjust t h e e x c h a n g e a c c o u n t s at that time b y that method, w h y isn't i t possible t o operate t h e e x c h a n g e a c c o u n t s p e r m a n e n t l y b y t h a t m e t h o d and a v o i d t h e i m m e n s e c o n s t r u c t i v e s h i p m e n t o f gold e v e r y week? Mr. McKay: N e w York is i n a position where i t can buy C h i c a g o exchange. i t h i n k t f t h e y -<cid that t o e y could t u r n the tide t h e other w a y very quickly, because New York commercial houses a r e n o w collecting Chicago xchange a t a pretty heavy ciscount. I t casts t h e m 25 t o 5 0 cents p e r thouscnd t o get remittances f r o m the Chicago banks, a n d i n addition t o that t h e y a r e o u t four days! time. T h e Federal “teserve bank o f New York could take items f o r immediate credit a t a discount o f t e n o r fifteen cents per thousend, a n d 1 think they woula get a large volume o n Chicago particularly, a n d I believe i t would b e a very orofitable operation f o r them. The Chairman: W e a r e d o i n g t h a t now. W e are tak- ing checkson t h e other *ederal iieserve banks w i t h a doduction o f time allowance, w h i c h amounts, Chicago, t o ten cents a thousand. does n o t p r o v i d e a n offset. i n the case o f O f course the volume W h e n w e first started this transaction w e took checks o n the other Federal Reserve Banks f o r immediate credit a t par a n d w e got t o o m e c h o f an offset f o r y o u gentlemen, w h o called u s off. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis £52 Mr. MeKay: T h o s e a r e t h e transfers o f funds, Gover- nor Strong--- Governor Seay: (Interposing) a s I view it, the Gold Fund i s a n experiment i n the settlement o f exchanges with a view t o eliminating t h e cost o f transfer. take a I f you period sufficient o n l y t o cover t h e e b b a n d flow o f excnange w e hope a n d believe there will n o t result a n y actual physical transfer o f money. i f i t should result, and w e cannot tell except b y experience, t h e n i t vould b e ~perfectly p r o p e r f o r t h e “ e d e r a l tteserve B o a r d t o l e v y t h e cost o f this s e t t l e m e n t a g a i n s t t h e b a n k s b e n e f i t i n g it. I by think y o u are right theorctically, b u t this i s a n experinent. I f w e are t o make a transaction I ment. I charge f o r a specific think i t w o u l d t e n d t o vitiate t h e e x p e r i - d o not want a n y service performed without a n adequate c o m p e n s a t i o n t o t h e b a n k t h a t p e r f o r m s i t . is t h e w a y I l o o k a t i t now. I e o n s f w e make specific charges for individual transactions there i s practically n o use in t r y i n g t h e experiment. The Chairman: W h e n y o u b u y exchange at a Ciscount you a r e making a charge. lips MeKay: I discount at a o n Chicago--~ The Chairman: Federal think N e w Y o r k c a n b u y exchange Reserve W h a t w e d o i s t o take checks o n the Yank o f C h i c a g Oo o a t a discount per thousand, w h i c h jives deferred credit. o f ten cents W h a t you do is to take New York exchange for immediate credit at par. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 453 Mr. McKay: we t a k e i t a t a W e t a k e i t a t p a r sometimes; discount a n d s o m e t i m e s at a sometimes premirma; a n d we s e l l i t i n that way. The Chairman: I question really c i d n o t want t o raise t h e i n connection w i t h t h e transaction w i t h Atlanta on the basis that weshcould g e t a compensation f o r a n y service, because w e really d i d not perform a n y service. I did want t o bring a u t before this meeting that w e are operating i n a very large w a y through this Gold Fund a n d possibly, a s was stated a t the Executive meeting i n New York, a r e creating s o m e liability o f unkmowm amount t o the Treasury Department. I t seems t o m e that i t mist b e fairly apportioned, a n d 1 would-not w a n t t o see a n y misunderstanding a s t o o u r p o s i t i o n w h i c h w e m i g h t s o m e d a y h a v e t o take. T h e s e heavy cemands t h a t w e are making through the Gold Settlement Fund, and, i f y o u please, t h e receipts t h a t go into t h e fund f o r our credit, a r e n o t f o r o u r benefit af o33.; T h e y are t o enable t h e other banks t o create exchange a t N e w York o r t o sell exchange o n New York which they receive f r o m their members through o n e transaction o r another. t m i g h t appear, i n a s i m c h a s t h e t r a n s a c t i o n I would g o through both ways, t h a t a s t o those that w e sent we were benefiting. W e are note W e have n o interest i n those transactions. Hovever, Department i f inquiry should b e made o f the ‘treasury a s t o whether, i n view o f the transactions c a r - ried on, t h e y felt there w a s a n y basis f o r charge, a n d w e found there w - s n o basis f o r a charge, why, therc would b e https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ‘nO point t o this discussion. I this c o n n e c t i o n t h a t a was going t o sugs resolution b e p a s s e d r e q u o s t i n g ‘ederal Reserve Board t o ascertain f r o m the treasury D e partment w h e t h e r t h e y c o u l d n o t p e r i o d i c a l l y g i v e u s a dis- charge o f liability f o r t h e cost o f operating t h e fundhas been i n operation n o w since t h e 1 9 t h o f last May. I t A t the e n d o f s i x m o n t h s i t s e e m s a s t h o u g h w e o u g h t t o b e 1h ; able t o get a statement f r o m t h e treasury Yepartment t o the ecifect t h a t w o a r e n o t l i a b l e f o r a n y expense, o r if we are, h o w much i t amounts to; a n d when that report comes in this matter nignt b e reported t o the 4xecutive Committee and they could begin t o work out a basis. I it b l i n d i n a do not like transaction t h a t involves s u c h v e r y sums o f money, a n d I d o not think Governor iicDougal to d o s o either. Governor iicbougal: Governor Kgins: N o , I d o not. Y e are i n the same position and w e would l i k e -to-imow a b o u t i t , Governor h o m a I s not this accumulation o f gold in New York a good thing, and will not the gold remain there. W e will never have t o take i t The Chairman: W h i c h gold d o you refer to? Governor McDougal: I refer t o t h e s t a t e m e n t t h a t y o u made t h a t y o u h a d p a i d i n t w e n t y m i l l i o n s had t o b e transferred. o f gold, a n d i t T h e gold flows naturally eastward and i t w o u l d s e e m t o m e t h a t t h e r e w o u l d n o t b e a n y e x p e n s e of moving it. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The Chairman: T h e sub-treasury a t N e w Y o r k i s always 455 glad t o have deposits o f gold, because t h a t i s where t h e sub—treasury system loses t h e gold. T h e time i s coming w h e n y o u will need |. The Chairman: T h e gold will b e large amounts o f New York exchange. i n other parts o f the country paid into t h e subtreasuries ana checked against, a n d t h e N e w York subtreasury will have t o pay i t out constructively-—- Governor Wold: (Interposing) I f We accumlate t e n million dollars o f gold i n the fund through purchases o f New York exchange that would remain there until the pendu— lum swings i n the other direction, s o far a s exehange i s concerned, t h e n w e would sell t h e N e w York exchange f o r drafts u p o n you, y o u get t h e gold o u t o f the fund, a n d there i s n o shipment involved a i all. W e might gradually accumulate such a The Chairman: large proportion o f reserves i n the G o l d fund b y reason of extensive checking against New York for New York Exi : : : p q change that w e would have t o say t o tne Federal Reserve Board "Transfer 50,000,000 t o our credit i n the gold fund t h r o u g h t h e s u b t r e a s u r y a t N e w York.", a n d w e would then g o t o t h e s u b t r e a s u r y a n d a s k f o r a n i s s u e o f f i f t y millions o f certificates a t N e w York. T h a t w o u l d b e eqaui- valent t o a shipment t o N e w York--Mr. Warburg: I think there should b e a very extended period o f o p e r a t i o n b e f o r e w e c r a w a n y c o n c l u s i o n s i n this matter. (Further discussion followed o n this subject, i n which : participated,. Mr. Warburg. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis w i t h the request t h a t h i s remarks b e left o u t The Chairman: I a m going t o offer a resolution, as follows: That the subject o f de:ermining w n o shall b e liable for charges o r expenses incurred i n connection w i t h the operation o f the G o l d Fund b e referred t o the Uxecutive Committee for investigation and that the Federal Reserve Board b e r e q u e s t e d t o ascertain informally, i f they are able t o d o so, what i f any liability has been created b y reason o f the operation o f the gold fund t o date. (The motion was duly seconded and carried.) The Chairman: “ i e have t w o i t e m s o n t h e program. One i s c o l l e c t i o n s a n d t h e o t h e r d a i l y s e t t l e m e n t s through the gold fund. Mr. Warburg and Mr. Harding have some matters they would like t o discuss before w e take u p the rest o f our program, ESTABLISHMENT O F SOUTH AMERICAN AGENCIES. Mr. Warburg: T h e r e i s one thought o n the question ofestablishing agencies i n South America that I would like to g i v e you. I t nas b e e n suggested t h a t possibly before thelaw i s amended s o that t h e member banks c a n unite i n establishing foreign banks w e seng@ outside agents t o act for the banks down there and place credits for the United States. The Chairman: Mr. warburgs: D o y o u refer t o reserve banks? R e s e r v e banks. Y o u remember t h a t the Board issued about a week ago a statement concerning foreign agencies t https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis e s t a b l i s h e d b y reserve banks. I t 457 a s s u c h tviould l e a v e said t h a t r e s e r v e b a n k s i t t o the member banks, a n d 1 thought i t had been ciscussed, but I a understand i t has not. Tacre i s one point that possibly Federal Reserve Danks should accomplish i n foreign countries, a n d that i s i f member banks should agree t h e Federal Reserve banks c a n take i t u p w i t h t h e m e m b e r b a n k s a n d s e n d o u t f o r t h e t i m e being individual agents. S o m e o f y o u might b e interested. You could a c t for t e n member banks i n placing credits a n d building u p business f o r t h e member banks. I ally speaking, think, gener- i t might b e a good thing, because t h e country w a n t s t h e Federal R e s e r v e B a n k s t o d o everything that t h e y c a n do, a n d there i s not anything that w e could not d o except possibly w i t h regard t o the i t e m o f expense. That i s the only thing that ! can see against it. here i s another t h i n g that needs t o b e consicered: me mere fact that the Mederal Reserve Banks are going into those fields might have a n adverse effect o n member banks. I t might interfere w i t h their business, t h e y Say. We said i n our report, before w e made o u r final r e - port w e would l i k e t o get a n expression o f the views o f the Governors o n that point, a n d w e are going t o ask the Federal R e s e r v e A g e n t s t o f i v e u s t h e i r views. T h e n we are going t o make o u r final report, a n d i f i t c a n b e done We W O u l d L i k e s P e w Gxzpressaions o n t n a t point. The Chairman: T h i s i s t h e first cis cussion w e have had o f the matter, Mr. Varburg. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Governor Kains, what i s your view o f this suggestionj Governor Kains: M y view has b e e n Reserve Banks having foreign agencies; a n d w i t h regard to t h e m e m b e r b a n k s I it, w h y , I a m neutral. I f they want t o d o t h i n k t h e y s h o u l d b e o f f e r e d e v e r y opportunity. he Chairman: M r . carburg's sugsestion was that a n arrangement might b e effected b y a reserve b a n k o r a number of reserve b a n k s i n cooperation. Governor Kains: The Chairman: the m e m b e r b a n k s Y o u mean member banks? N o ; reserve banks; s o that i n case o f their district contemplated establish- ing agencies in, say, South America, w h e n t h e A c t i s amend— ed s o that they c a n establish joint agencies, possibly joining w i t h t h e m e m b e r b a n k s i n appointing a representa- tive t o g o G o v m a n d i n v e s t i g a t e t h e s u b j e c t t h o r o u g h l y in the interest o f both the member banks o n d t h e Federal R e - serve banks; possibly doing some preliminary work towards the a p p o i n t m e n t o f a n agent t h e r e , w h i c h woulda not, h o w - ever, contemplate appointing a Mr. Warburg: T h a t i s right. Governor Kains: I any o b j e c t i o n branch, do not think that there would b e t o that. Tne Chairman: T o u l d i t b e o f any service i n connec— tion with the Ciscussion i f w e take a vobe first u p o n the question o f the advisability o f the reserve banks estab-— lishing foreign agencies? https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ifr. ~arburgs The Chairman: is a b o u t V e r y well, T h e record of this matter, a s ! recall a s follows: 459 Following t h e Pan-American Congress i n Washington Secretary McAdoo m d e a brief statement i n which h e recom- mendcad t h a t t h e r e s e r v e b a n k s b y a n amendment b e authorized to the law, i f they cid not already have t h e power, t o ¢stablish branches i n South America, a n d that the Federal t o b r i n g t h a t about. Reserve B o a r d t a k e s t e p s H i s report was referred t o the Federal Reserve Board, and they expressed a n adverse opinion o n the policy o f establishing branches b u t i n one para- i n S o u t h America; of Federal R e s e r v e B a n k s graph I think i t was suggested that t h e matter would b e discussed obtained. a t this m e e t i n g a n d a n expression o f opinion S o i t would b e quite proper f o r u s n o w t o give an expression o f opinion a s t o whether federal reserve banks should g o into t h e business o f commercial banking i n South American markets. a m adverse Governor Kains: I The Chairman: t o that. I s i t necessary t o g o around t h e table to get a n expression o f views? I f someone would make a motion, those that have positive views c a n then ciscuss that motion. move that i t i s the sense o f this Governor Kains: i meeting thet w e are adverse t o the idea o f Federal Reserve Banks e s t a b l i s h i n g f o r e i g n b r a n c h e s Governor Wold: I Governor teay: i n South America second the motion. I t might facilitate matters i f I should r e a d t o the Conference t h e action taken b y the Federal Advisory Council. following effect: https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis T h e y passed a resolution t o the 460 "In our opinion i t is not advisable a t this time for the F e d e r a l R e s e r v e H a n k s foreign countrics, t o establish joint agencies in a s their resowiro6s should b e kept f o r tne p r o t e c t i o n o f the m e m b e r b a n k s a n d n o t b e c o m e i n v o l v e d in financial o r frade t r a n s a c t i o n s i n f o r e i g n markets. The financing o f foreign trade transactions belongs legitimately t o the member banks, state banks a n d private banks, and should n o t b e a function o f the Federal Reserve Banks." Mr. Warburg: I you want t o say. do not think that that i s quite whet w e @iviced this i n t o foreign branches, foreign countries, a n d South American countries. foreign countries, E n g l a n d , « r a n c h a n d Germany, I n t h e y have joint agencies w h i c h sooner o r later will b e uscful, That m e a n s n o t h i n g b u t c o r r e s p o n d e n t s w i t h f o r e i g n c o u n - tries, w h i c h y o u might have jointly. There was another question, a n d that w a s t h e question of individual foreign agents, where w e might sometimes cooperate w i t h the member banks i n a district i n a very loose a n d experimental way. i covering a l l foreign countries. think thie soes 100. far i n W e a r e villing t o in- clude Germany, France a n d England, Governor S e a y : there w a s a C i e n o n o f f e r thie. I understood definite m o t i o n b e f o r e t h e C o n f e r e n c e , and I meroly r e a d t h i s i n c o n n e c t i o n w i t h that. Mr. Hoarding: T h e Gistinction i s that t h e Board does not want t o authorize t h e Federal Reserve Danks t o engage in loan transactions o r , t o a n y great extent, of bills o f exchange i n those countries, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis I i n the purchase n normal times, 461 times o f w o r l d w i d e peace, t h e s e f o r e i g n a g e n c i e s w i l l probably b e beneficial provided w e are dealing w i t h thoroughly e s t a b l i s h e d s o l d s t a n d a r d countries, ne Chairman: T h e r e i s another p o i n t where i t seems to m e w e have t o distinguish between what Secretary MeAdoo a p p a r e n t l y d e s i r e d t o accomplish a n d what t h e A c t understood h i s r e c o m m e n d a t i o n c o n t e m p l a t e d provides. I that t h e F e d e r a l R e s e r v e b a n k s w o u l d a c t u a l l y o p e n branches. zl r s . Mr. “arding: ~ E Y H e referred t o the whole power o f the Federal Reserve System. The Chairman: T o create banking agencies o r branches in t h e S o u t h A m e r i c a n c o u n t r i e s a n d p r o m o t e b a n k i n g t r a n s actions b e t w e e n t h e t w o countrics. I d o n o t believe that the Federal Reserve Banks g a n possibly d o that without a wholesale amendment t o the law. i n the first place, i f we s h o u l d o p e n a n actual b r a n c h o f f i c e in a South A m e r i c a n capital a n d unde:take t o open credits d o w m there, i t would be necessary f o r u s t o transact t h a t business f o r the benefit o f t h e A m e r i c a n e x p o r t e r o r importer, a n d w e could n o t very well conduct t h e business directly unless w e h a d relations w i t h the American importer o r exporter, a n d I believe i t i s possible t o develop a business do not o f that c h a r — acter u n d e r t h e p r e s e n t s c h e m e o f t h e F e d e r a l R e s e r v e A c t . On the other hand t h e establishment ultimately o f a n agency o r a joint agency d o w m there might b e poomoted b y the c o o p e r a t i o n o f t h e F e d e r a l R e s e r v e t a n k i n some w a y without interfereing o r competing with t h e member banks i n https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Our point o f view was that i n South America; where t h e y have business resources, m o n e y shall not b e employed. T h a t was o u r answer t o that. I t was for the protection o f the Foderal Reserve Banks, because we want t o uold foreign rescources, w h i c n a r o liquid assots for the bonefit of the Federal Neserve banks. T h e n it was all right t o keep joint agencies i n Duropean countries where such a fair m a r k e t exists. matter o f cooperating, T h e other thing W a s simply a a n i t was i n a very, v e r y small Way. Governor Rhoads: V o u l d i t b e sufficient t o answer he inquiry o f the Federal Reserve board b y passing a lution c o n c u r r i n g The Chairman: reso- i n t h e s t a t e m e n t t h e y p u t out. D o y o u offer that a s a n amendment, Governor Rhoads, t o Governor Kains' motion? Governor Rhoads: Y e s sir. Governor Kains: I Governor Fancher: I The Chairman: accept t h e amendment. second it. - G o v e r n o r Kains a c c e p t s t h i s amendment, Governor Rhoads, t h e your resolution i s t o endorso t h e statemont m a d e b y the Fedcral Ncserve Board o n the subject @¢ t h e establishment o f branches o r agencies i n foreign countries, T h a t m o t i o n i s seconded. I s there further discussion? The q u e s t i o n t a s c a l l e d f o r a n d w a s d u l y carried.) Governor Aiken: H a v i n g had no experience i n this forcign business, I3 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis a m doubtful a s t o what t h e Secretar i635 proposed i n his foreign branches, b u t i t seems t o m e that if t h e r e r e r e o p e n e d b r a n c h e s i t would involve t h e transformation o f the whole reserve business i n t o a commercial banking system. The Chairman: I t would t e n d strongly i n that cirec- tion, Tho next question i s a s t o what shall b e done b y tne Fedcral R e s e r v e b a n k s t o promote t h e interests ber banks i n establishing agencies o f the mem- m d branches there. think i t would b e quite sufficient tip, arburpe: I if y o u w o u l d s a y t h a t y o u w o u l d t a k e t h a t t h o u g h t h o m e a n d discuss i t with such member banks a s have c v i n c e d i n t e r est i n the mattor, because I Go not think the wholo thing is very complete, a n d w e want t o t r y t o develop something if w e can. Mr. Harding: “ h a t we propose i s this: T h e r e is only o n e bank i n connection w i t h these foreign branches. A great m a n y other banks d o not feel disposed t o incur the expense a n d risk. A t the same time t h e y realize that i f they d o not g o into something o f this sort they are likely t o lose some local business, a n d w e arc going to rcecounend t o Congress t o amend t h e l a w s o a s t o autnor- group o f m e m b e r b a n k s t o join together i n subscrib- ing for stock i n any foreign bank that they mignt w i s h t o enter, a n d i n making i t open t o everybody. Tne Chairman: P o s s i b l y w e c a n frame a resOlution Taich will permit o f a discussion o f this matter, a n d a final expression thereon. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 464 I t h e r e f o r e _ m o y v e — t h a.tesense h ti.Iefbo f this meeting that w e a s c e r t a i n f r o m t h e m e m b e r b a n k s o f o u r r e s p e c t i v e districts t o what extent t h e y m a y desire t o establish con+-nections, branches, o r joint branches i n South America, a m d LO. eney. e x t e n t L t v o u l d b e p o s s i b l e f o r t h e “ e d e r a l R e s e r v e banks t o promote t h e i r i n t e r e s t s i n doing s o b y sending a representative d o w n there o r b y other means t o b e sug- Governor Fancher: I second t h e motion. (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, ) Tne Chairman: I would l i k e t o r e a d t h e p a r a g r a p h as i t n o w stands i n regard t o collections a n d clearances, We h a v e t r a n s f e r r e d a number o f sub-headings t o this s e c - tion o n the progran. W o have t o deal w i t h the treatment of the float, amending t h e praisions o f the Poderal Reserve Act r e l a t i n g t o t h e p a r c o l l e c t i o n o f cheeks, r e p o r t o f the Transit Conference, t h e subjoct e f intra-district clearings, t h e matter o f items bearing endorsements o f non-member b a n k s , i n t e r - d i s t r i c t c l e a r i n g s , i n c l u d i n g items é r a w n o n banks which a r e n o t members o f the Federal Rescrvo system, Mr- Talley's plan o f possible necessity o f c h a n g i n g t h e r e q u i r e d r e s e r v e s of banks, g r o w i n g o u t t h e d e v e l o p m e n t o f country o f t h e clearing system, and, again, f r o m another scction, t h e collection o f items drawn o n banks w h i c h a r e n o t membors serve System. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis o f tne Foderal Re- T h a t i s covered under 7-(c). Governor Wold: I f e a r that Mr. t:arburg drow the wrong 465 inference f r o m m y remark. T h e reason I thought i t would not b e necessary t o discuss i t vas because i t was s o fully in accordance w i t h the views o f t h e Board o n that subject thet I did n o t think i t was necessary f o r us t o thresh i t all o u t again, a n d w e could vote o n i t immediately. B u t I think you are all cleared u p for Mr. «arburg: collection d i s c u s s i o n a n d i t w o u l d b e b e t t e r t o d i s - of 2 t Tire, The Chairman: w e should l i k e first, I think, t o near f r o m Mr. iicKay i n regard t o the conference o f the transit m o n a n d t h e i r r e c o m m e n d a t i o n s . I what f o r m your report takes. a m not s u r e O u r time i s a little short, and i f i t i s possible t o smmmarize i t into t h e recommendations, t h a t h a d better b e done, Mre McKay: I t i f all included i n this report o f which eferyone h a s h a d a copy, b u t i f not, there a r e copies h e r e t o b e distributed. REPORT OF TRANSIT MANAGERS' CONFERENCE. The Chairman: embodied M r . MeKay, would Resolutien No. 12, i n this report, s u b s t a n t i a l l y s u m m a r i z e t h e recommendations o f the conference. Mr. McKay: Y e s » R e s o l u t i o n No. 1 2 docs that, a n d the p r e c e d i n g r e s o l u t i o n s s i m p l y a r e t h e r o t e s h o w w h a t led u p t o t h i s N o . 1 2 . Governor V a n Zandt: M r . Chairman, d o y o u not think it would b e advi sable t o take this report o f the Transit Committee section b y section? The Chairman: Y e s ; b u t the first part o f it, a s fT recall f r o m reading it, Governor V a n Za.dt, w a s simply t h e https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 466 specific v o t e s which resulted i n the asscombling o f all of these recommendations i n t o resolution No. 12, s o that we would b e considering t h e samc matter twico, a n d b y acting en t h e f i r s t e l e v o n v o t e s w e t a k c u p a summary o f a l l o f them i n t h e r e c o m m e n d a t i o n N o . 1 3 . Mr. McKay, have y o u a statement t o make i n rogard to. this r e p o r t ? Mr. McKay: N o , I have not. T H e oreport L b s e l y 1 6 the meat o f tho wholo meeting, t h e result o f the meeting, and t e boiled i t down, a n d 1 thought i f there were a n y ques-— tions that would come u p aftervards 1 would answer those specific qucstions i f I could. he Chairman: H o w would y o u deal w i t h items d r a w n on momber banks which are n o w members o f the clearing system a n d for which immediate debit a n d credit i s made, notwithstanding that they may be some distance from the Federal Reserve Banks, more than one day's transit time? Mr. MeKay: T h i s p & a n o f inter-district c l e a r i n g i s not designed t o interfere w i t h a n y local p l a n that m a y b e introduced. I t does not prevent the Kansas City bank from continuing t o g o o n with immodiate debit a n d credit if i t s o desires, n o r doos i t interfere w i t h the S a n Francisco Bank's going o n with the deferred debit a n d credit systcom w h i c h i t h a s i n operation. Tne Chairman: S u p p o s e w e scnd y o u a n item drawn o n a bank i n Peoria, w h i c h i s a member o f the clearing systom, a n d i n the same letter a check o n another b a n k i n Peo- ria, which i s not a membor o f the clearing system. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis O n e 467 item y o u w o u l d c h a r g e i m m e d i a t e l y t o the Peoria B a n k that Was a momber o f the clearing systen——=— Mr. McKay: “ Y o w o u l d probably immedciatcly go into t h e deferred debit a n d crcdit f o r t h e members t h a t are n o w i n o u r c o l l e c t i o n system. The Chairman: Mr. McKay: Y o u would abandon t h e present system? O h , yes; b u t I mean those banks t h a t have a n immediate debit o n d credit system c a n keep i t up i f t h e y s o dcsire. I t does n o t p r e v e n t t h e m f r o m doing so. The Chairman: T h e n , i n our district, i f w o decidod to continue t h e immediate debit a n d eredit f o r 1 2 5 o r 130 banks, w e would have t w o methods o f treating items which you w o u l d s e n d us. T h o s e o n banks w h i c h w e r e n o t i n t h e system would b e credited f o r a greater dcfcrred time o n the b o o k s t h a n t h o s e w h i c h w e r e i n t h e s y s t e m ? Mes Mokaer N e x 4a wenden S e ech ceetrtct would have t h e samc system within i t s o w n district. I f ‘we sent y o u items o n banks that a r e not n o w i n the collection system, y o u would treat t h e m just t h e same a s y o u do nov. The Chairman: ire MeKay: T h a t a r e n o t i n the system? N e t o P e BOL t n the system. The Chairman: T h e n i t ..ould become mandatory a s t o banks t h a t h a d not joined t h e system? Mr. McKay: T h a t i s p r a c t i c a l l y w h a t i t means, Tne Chairman: Y o u are dealing v i t h those beyond Kansas C i t y o n a battle a x e basis. I https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis d o not know whether we could d o that, Mr M o r a y : W h i l e t h e deferred debit a n d credit s y s - tem m a y b e m a n d a t o r y i n that way, I d o n o t t h i n k it: W i i offer t h o samcoobjoctions a s the immediato debit, because there a r e large overdrafts occasioncd, a n d the fact that they have t o carry excess resorves o n their o w n books makes s O m a n y objcctions. The Chairman: P r a c t i c a l l y , Mr. McKay, t h i s report means either a mandatory immediato debit a n d credit system or abandoning t h e immediate debit a n d ercdit system ent i v eyL ? Mr. McKay: Y e s ; b u t t h o idea i s that t h e deferred debit a n d credit system i s a proper one. want t o i n t e r f e r e w i t h K a n s a s C i t y , B u t w e d o not a n d The Kansas C i t y meant representation w o u l d n o t h a v e v o t e d f o r t h i s i f i t that they had t o change their method t o deferred debit ana credit. The Chairman: | Did Kansas City realize that this would bring all of the items into tho Federal Reserve banks a n d t h e o t h e r ¢ i s t r i c t s w h e r e t h e y p r o b a b l y m i g h t a l l and eleven abandon their present p l a n o f eotloe teGha ( a a y would gct pratically n o items o r very few? I n other words, Kansas City, clearing b y the immediato debit a n d credit plan, w h u l d offer attractions t o banks a l l over t h e coun- try for using the Federal Roscrve Systom, which no other of pank would offer, a n d i t would precipitate a l l items the Kansas City Bistrict through the Federal Resorve Danks. Mr. McKay: K a n s a s C i t y w o u l d n o t p u t P o o h . E m u C c Lave debit a n d credit system f o r items drawn o n points outside https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis its o w n district? The Chairman: N o ; w e are talking about items drawn on points w i t h i n i t s district. T a k e N e w Y o r k f o r instance. The New York banks, o f course, have a large amount o f chocks t o clear dravn o n the Kansas C i t y district banks. By t h e p r e s e n t p r o c e s s t h o s e b a n k s i n New York who have t o cash those checks f o r their correspondents i n order t o get the proceeds b y the shortest possible method a n d the cheapest, would g o b y this plan, because t h e credit would b e given i n two days instead o f four o r five, allowing time for their local deferred debit and credit, a n d Kansas City would naturally b o a t a disadvantage--Governor Sawyer: U n l e s s w e should dofer o n outside endorsers. The Chairman: T h e n y o u w o u l d h a v e t w o s e t s o f books to keep f o r every member bank, w h i c h i s a very expensive proposition. fr. McKay: I think i t means t h a t Kansas C i t y will probably b e obliged t o g o o n the deferred debit a n d credit system for the whole district. ne Chairman: Mr. Hendricks: I n t e r a n d intra-district, both? T h e inter district would b e control- lod b y t h e o t h e r banks. The Chairman: O s t e n s i b l y , then, Mr. McKay, t h i s contemplates t h e possibility i n theory that a Federal k e - serve b a n k m a y c o n t i n u e i t s i n t r a d i s t r i c t i m m e d i a t e d e b i t and c r e d i t p l a n , w h i c h w o u l d n o t a p p l y t o t h e inter-cdistrict business, a n d consequently those banks which h a d the i m - https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 470 mediate c e b i t a n d c r e d i t p l a n i n o p e r a t i o n a s t o o n l y a few o f its mombers, i f they wanted t e continue, would never have t o carry t w o sets o f books; a n d a s t o those items drawn o n members w h i c h c l e a r e d t h e y w o u l d h a v o a account f o r items which were n o t suspense t o b e credited until after the l a p s e o f t h e d e f e r r e d t i m e ? Mr. McKay: h e Kansas C i t y District w o u l d h a v e t o do that, because t h e y would n o t b e willing t o give u s immediate debit a n d credit, The Chairman: T h a t would b e a themselves against t h e float. means o f p r o t e c t i n g I f they d i d that f o r every member bank, inasmuch a s thoir system i s mandatory, t h e y vould have t o establish t w o sots o f collection records, one t o cover immediately cleared itcms, a n d another t o cover the Ssehedule o f debit a n d credit--Mr. McKay: T h e Kansas C i t y representative informed us that they were doing i t n o w t o some cxtent--- taking itoms from the Kansas City banks o n a deferred credit basis o f two o r three days. due-bill f o r t h e items. T h e y gave those banks a S o they are operating t o a certain cxtent n o w under t h e deferred debit a n d credit. The Chairman: G o v e r n o r Van Zandt, I did not mean t o interrupt your suggestion t h a t this recommendation b e taken u p b y paragraphs. A f t e r reading i t i t occurred t o me that i t s basic principle t h a t w e have just b e e n discussing w a s t h e principle o n which t h e whole thing hinged, and i f w e could agrec, o r agree t o disagree o n that, v e would b e ablo t h e n better t o discuss i t b y paragraphs. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ATL Governor V a n Zandt: I t looks f we t o o k to methati up s o m e o f t h o s e q u e s t i o n s t h a t w e r e a d o p t e d ahead o f these, i t might preclude o u r acting o n No. 12. n i s matter i s open for discussion The Chairman: by a n y m e t h o d w h i c h y o u p r o p o s e t e deal w i t h it, a n d the y o u sug» Chairman w i l l a d o p t a n y c o u r s e o f procedure t h a t gest a n d a g r e e upon. MeKay: I think i t i s a very good suggestion these votes b e taken i n the order i n which they apherc, because t h e y lead right u p t o the m a i n topic. The Chairman: T h a t i s your pleaiure, gentlemen? 1 want t o get the method o f procedurepretty well understood Here. Governor McDougal: I move t h a t t h i s r e p o r t b e t a k e n we go up, beginning with vote No. l , a n d considering i t a s along. Governor R h o a d s : I second t h e motion. (The motion was duly carried.) The Chairman: Y o t e No, 1 . " t h a t w e heartily collecfavor every extension o f the operation o f a check permistion system consistent w i t h sound principles a n d sible under the federal “‘eserve Act." Governor Kains: I Governor Wold: I move w e concur i n Vote No. 1 . s e c o n d t h e motion. (There w a s n o discussion, a n d the motion Was duly carried, ) y The Chairman: V o t e No. @. " T n e deliberations o f member ban. this b o d y are based o n the assumption that every https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis is recuirec b y l a w t o cover a t par all cnecks a n d drawn u p o n i t r e c e i v e a f r o m t u e f o d e r a l -teserve B a n k o f which s a i d b a n k i s a member. T o bring this before t h e house I Governor Aiken: O L Vote NOs 2 . move t h e s p n p o v a l Governor Fancher: I second the motion, Governor Rhoads: S p e a k i n g t o that motion, 1 would ask a ruling of the Federal Reserve Board o n the suvject. The Chairman: T h e polite language u s e d b y tne Transit c o n f e r e n c e s o r t o f veils t h i s question. vote No. 2 means, t o m y ammteurish mind, o n these matters, to is t h a t t h e m e m b e r b a n k s w o u l d h a v e t o b e r e q u i r e d abandon t h e charge o f exchange. MeKays T a t Governor Rhoads: I s that correct? i s correct. I t means remittance a t par. Governor V a n Zandt: R e m i t t a n c e a t par t o the *ederal reserve B a n k s , that c a m o t b e definitely understood w e cannot proceed v e r y far. Mr. Foote: I VoOues. e r e . notice, gentlemen, one thing i n the G u n cashier w h o represented o u r p a n k a t tnis the confcrence wanteé t o knov o n e thing, explaining that putAtlanta directors w e r e o n record a s being opsosed t o ting into effect any system o f clearing o n & par basis. Our board i s unanimously a g r c e d o n that proposition. Pike, however, 1 Board. h a n d i c a p p e d i n s t r u c t i o n s f r o m the T h e Board c i d ; Mad Oa: V O T E ry e n s ana tL Ona —- https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ir. H e 473 Mr. Hondricks: H e oxplained that, Mr. Foote. H e said h e d i d n o t agree w i t h them, b u t h e felt h e must vote against i t , knowing t h e attitude o f the Board. Mr. Foote: I prepared q u i t e o formidable p a p e r yesterday a f t e r n o o n t-hile y o u g e n t l e m e n w e r e o u t p l a y i n g SOoLf, b u t T-have n o t h o d the nerve t o read 1 % yet--— The Chairman: I submit h i s paper, move t h a t Mr-e F o o t e b e r e q u e s t e d t o b e made a part o f our record, to s o «6 can all read-it. Governor V a n Zandt: I second t h e motion. (The motion was duly carried.) (The p a p o r a b o v e r e f e r r e d the s t e n o g r a p h e r , t o was n o t delivered to although request w a s m a d e f o r it, until too late t o b e incorporated i n the record.) The Chairman: Mr. F o o t e , T h a t motion i s a little o u t o f place, o f the b u t w e w o u l d l i k e t o have t h e b e n e f i t paper t h a t y o u h a v e p r e p a r e d , i f y o u c a n have i t type- written a n d distributed. Mr. Footc: T a a n k y o u very much. pecsled r a t h e r p e c u l i a r l y directors, T h e guestion a p - t o t h e S i x t h District, a n d the i n taking t h e position t h a t t h e y have o n this xchange quastion, h a v e dono s o with reference t o wnat they consider t h e best interosts o f the district. Tne District h a d charge o f 7 6 banks, 7 5 i n our clearings, a n d some o f them are clearing i n a limitea fashion. One bank, I rcceall, permits several banks, i t s correspond- ents, t o Graton i t through the “ederal Reserve Yank, a n d https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4174 items a r e charged immediately a t the reserve bank. p o e does not receive any o f its customers’ checks. There a r c four member banks i n New Orleans, three @ w h i c h were precipitated i n t o this clearing system. There was a member bank i n New Urleans having a n (38,000 balance i n the reserve bank, getting (340,000 o r .:50,000 of items a day o n the other »anks i n Now Yrleans, a n d it forced t h e m i n Line. O f course t h e biggest feature his Q u e s t i o n i s t h e float. of T h e country b a n k does n o t know anything about the float. H e is for the most part thinking about the exchang Laftcr he sees there is t somo float attached t o it, too, i f he does not have a p o plexy, h e will b e a good one. fhe Cheirman: H o r d o y o u f e e l about. t h e v o t e w h i c h has been made b y all except Mr. Pike, w h i c h t e thoroughly uncerstand, a s i t was explained t i n effect that the transit m e n o f these twalve banks, w i t h the ex-= ception o f ir. Pike, believe that the law requires a member b a n k t o remit a t p a r f o r c h e c k s s e n t t o i t f o r p a y m e n t OF BOLL ection. Mr. Foote: W e are advised b y counsel that i t coes s a legal question, a n d I a m not competent t o ississippi Bankers’ Association filed a brief i n Washington i n which counsel t o o k t h e position t h a t it is not necessary for the 'ederal :ieserve Board t o invoke any such order; i t is not mandatory o n the *ederal +‘eserve Board t o take a n y such action. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis e 475 The Chairman: T h i s is really the point, and the only p o i n t n o w u n d e r d i s c u s s i o n a t t h i s stase. Mr+ Foote: S e n a t o r Williams explainec voto o n Section i6- t o m e his H e said that h e voted f o r that section believing that t h e provision was simply t o regulate and n o t t o coerce, e x c e p t b y rcgulation; purpose t h a t i t was h i s t o s e e that t h e country banks continued t o enjoy reasonable returns w i t h exchange charges, a n d h e d i d n o t think those charges ought t o b e taken from them i n view of the v e r y necessary service, Laey prenderea t h e country. H a s h e expressed it, that e v o t e d w i t h t h e f u l l u n d e r= standing t h a t i t w a s s i m p l y a n a u t h o r i t y v e s t e d i n the Reserve Board f o r t h e purpose o f regulation only. H e went o n t o s a y t h a t t h e r e h a d b e e n s o m a n y p e o p l e t h e r e i n Washington c o m p l a i n i n g a b o u t t h e h e a v y c h a r g e s banks. o f country H e said h e did n o t sympathize w i t h them, o r any- thing o f that kind, b u t h e dia sympathize heartily with thetr being permitted t o make reasonable charges, a n d that it was with a disposition a n d a desire a n d a willingness to help r e g u l a t e d n a prevent abuses t h a t h e voted f o r that section. The Chairman: i x c u s e m e j u s t o n e minute. W e are facing this situation, t h a t t h e board naturally h a s t o b e governed b y its o w n views o f what t h e intention o f the statute i s , a n d those which i t i s advised b y its counsel are proper t o take, a n d I understand t h a t t h e Federal R e serve B o a r d h a s a well s e t t l e d o p i n i o n n o w a s t o what t h i s law mcans i n respect o f the charge o f exchange b y a country https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis pank. A m I correct i n that, Mr. “arding? Mr Hoarding: I The Chairman: think you. ere. T o u l d i t n o t b e proper i n connection with the C€iscussion o f this vote, Mr. Foote, t o get t h e opinion under which the Board i s acting, a n d which will control o u r actions until t h e l a w m a y b e amended, whether we agree that i t is good business o r not. W e have t o ac- cept one fundamental fact, t h a t this l a w means something, and, arriving bythe best possible method a t the determination o f what i t means, t h e twelve reserve banks have to g o ahead a n d d o the business, e v e n though i t means some h a r d s h i p u p o n t h e m e m b e r b a n k s , u n l e s s by a test o f the meaningof t h e Act i n the courts, o r b y persuading Congress that they have imposed unnecessary hardships upon the member banks, a m i that t h e y should amend it, w e C a n escapo t h i s difficulty. We have followed this f o r nearly a year now, consum— ing anywhere f r o m twenty-five t o fifty p e r cont o f the time o f our meetings i n endeavoring t o get a n understand— ing o f what tho law means, and t o find the means t o put the L a w into effect. Nobody f e e l s a n y m o r e s t r o n g l y t h a n I d o t h o t t e e s Acer in its various reserve requiroments, a n d i n the requirements as t o p a r c o l l e c t i o n s d o e s b e a r d o w n u p o n t h e c o u n t r y banks. W e have threshed that o u t a t great length. fortunately, i t i s the l a w o f the land, a n d w e want t o get finally a n d sutnoritatively a by t h e Act. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Un- statement o f what i s meant 477 These gentlemen have stated their understanding o f the meaning o f the Act, a n a a t thispoint I would like very mich i f Mr. “arding ond Mr. i arburg could give us the opinion o f t h e b o a r d a n d c o u n s e l a n d t h e i r o w n o p i n i o n a s to w n a t o b l i g a t i o n l e g a l l y rcosts u p o n u s t o C O L L S G y checks a n d upon that method, s o far a s par i s concerned? ould you accept this interruption, Mr, Foote, before we - fo Turtner’ Foote: C o r t a i n l y , 827, have not a copy o f our counsel's Mr. “arding: T opinion i n this matter. H e i s @rite. clear, i f 1 recol- lect correctly, t h a t n o bank c a n b e forced t o actually pay a check ¢ r a v m o n i t payableat i t s o w n counter anywhere T h e r e cocs not seem t o b e a t i t s o w n counter. exceot S any cGuestion a b o u t that. o that t h e charging u p t o the a pank's a c c o u n t of a chee 7 a Federal c s e r v e B a n k does not i n any sense constitute payment o f that check. cannot d e p r i v e t h e d r a v e r o f h i s cneck. H T h e y e has some rights i n the matter, too. At t h e s a m e t i m e t h e c o u n s e l means w h a t receive i t says, o n deposit i s clear that this L e y t h a t every Federal +eserve a t par f r o m member banks Reserve B a n k s checks a n drafts . a n d s o on. Y a n k snall o r f r o m Federal B i e r slacomass, held a t one stage o f the proceedings t h a t that c i d not necessarily m e a n immediate credit. I think h e recognized credits mizht b e permitted; wnetner they w e r e a d v i s a b l e o r n o t h e d i d n o t undertake to but h e t h o u g 6h >t t h a t a s l o n g a s t h e u o r d "immediately" https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis w a 478 left out, there w a s nothing i n there that specified i m mediate credit. S o long a s y o u take t h e m a t par the fact that credits a r e deferred f o r a while does n o t s e e m to b e material, There i s one saving clause f o r t h e member bank: "Nothing herein contained shall b e construed a s prohibiting a member b a n k f r o m c h a r g i n g i t s a c t u a l e x p e n s e incurred i n collecting a n d remitting funds." That coes n o t mean constructive, b u t actual expense in collecting a n d remitting funds. In the case o f M u n t r y banks, t h e business o f many o f them i s very largely made u p o f the collection business, There a r e a good m a n y country banks, I presume, t h a t d o not have more than one discount o n a banking day, a n d probably a country b a n k t h a t w i l l m a k e o n e l o a n a day--- The Chairman: P a r d o n m e a second. O n e bank i n our district reports $100, and ‘1200 exchange. Mr. Harding: ; deposits T h e average country bank receives o f cash, a n d c h e c k s o n l o c a l business, p a y s c h e c k s over t h e counter, a n d they have a lot o f drafts f o r collec- tion sent o u t b y one o f the banks t o collect those drafts, and they craw checks i n payment o f remittance f o r those goods. T h e y g e t a lot o f checks f r o m their c i t y corres— poncents t h a t t h e y ecither credit o r debit; checks t h e y draw their o n t h e N e w Y o r k o r N e w Orleans corresporident i n pay- ment o f it, a n d a s f a r a s t h e actual w o r k o f the average country bank i s concerned, I https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis should s a y that fully fifty 479 per c e n t o f i t i s - t a k e n u p i n t h e c o l l e c t i o n business, the handling o f checks that have t o b e remitted outside o f the t o w n i n w h i c h t h e b a n k i s located, Counsel h a s n e v e r g i v e n u s a very c l e a r o p i n i o n a s to what this actual expense medns, whether anything i s alo r whether y o u are allowed t o charge lowed f o r overhead, in a certain proportion a n d what proportion head charges a r e proper t o put i n it. o f the over- T h a t i s something hat I think ought t o be elaborated on. I have never seen a n y full information about it, o r full opinion a s t o it. B u t i t i s stated: "Nothing herein contained shall b e construed a s prohibiting t h e member b a n k from charging i t s actual expense jncurree i n collecting and remitting funds." If y o u send o u t a lot o f checks b y a runner d o w n t o another b a n k i t seems t o m e t h e r e i s a n expense i n c u r r e d lecting t h o s e funds. Y o u h a v e t o p a y t h a t man's wages; you h a v e g o t t o p a y y o u r c a s h i e r h i s salary, a n d part o f his salary goes i n t o t h e supervision o f thos c The Chairman: i n col- transactions. T h e adifficulty seems t o arise here, though, Mr. “arding, that by thepresent process the country bank c o l l e c t s t h a t c h a r g e o u t o f t h e c i t y b a n k t h a t s e n d s the c h e c k s t o i t f o r collection. Mr. Harding: I The Chairman: understand that. A n d b y the provisions o f the l a w i t i s contemplated that t h e country b a n k shall collect i t s compensation o r reimbursement f o r the service i t performs f r o m its own customer, a n d a reversal o f the charge means that https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 480 the c o u n t r y b a n k w i l l n o t b e a b l e t o c o l l e c t f r o m i t s c u s tomer, b e c a u s e t h e c u s t o m e r w i l l p r o m p t l y d r a w h i s a c c o u n t out. I t goes o n t o s a y nerc, Mr. Harding: charging f o r c o l l e c t i n g a n d r e m i t t i n g - - - b y t h e way, w h o m are y o u going t o charge, t h e m a n f o r Whom y o u collect o r for w h o m y o u r e m i t ? T h e r e is a full s t o p there. "~The Feceral “*eserve Board shall, b y rule, f i x t h e charges t o b e collected b y the member b a n k from its patrons whose checks are cleared through the "ederal Reserve Bank, and the charge w h i c h m a y b e imposed f o r t h e service o f slearing o r collection rendered b y the “ederal Reserve Bank." Counsel h a s never given u s a n y opinion a s t o what h e have h e a r d t h a t t n e r e W a s a tnought t h a t meant. I mittee t h a t c a m e dowmm i n c o n n e c t i o n w i t h i t - com—- w e r e you along w i t h that committee, Mr. Foote? Mr- Foote: Yes. I saw some members o f the committee when t h e y g o t b a c k home, m d t h e y w e r e f e e l i n g v e r y good. thought t h e y h a d saved themselves. T h e y said that had fixed i t all right; but they did not seem t o real— ize that they were expected t o collect their charge from the m a n w h o d r e w t h e c h e c k . I t seems t o m e that anyone who knows t h e temperament o f the average Cepositor o f a country b a n k w i l l k n o w t h a t w h e n J o h n S m i t h d r a w s a check on his bank i n Mississippi t o send u p t o Chicago f o r a -nup~ dred dollars o r so, that Chicago bank puts a pencil memoran. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 481 dum o n it, "Fifteen cents" o r "2b cents" extra. going t o r a i s e 4 stand roriit, big r o w about that. i n Chicago a n d I those goods a n d send them a check. I pay freight b o t h ways. It s e e m s o n m y goods, I pay t n e freight a m not going t o will p a y t h e f r e i g h t o n h i s money. t o m e that t h e whole proposition i s that a I on I f the Chicago m a n will p a y the jobbers h a v e b e e n r a i s i n g a charges. e i s not going t o T h e r e i s n o use i n discussing i t i S u p p o s e I bought s o m e g o o d s greight H H e is lot o f lot o f commotion about these f t h e merchant jobbers w o u l d stand u p a n d de- mand t h a t a n d r e f u s e t o take anything except funds incurred at t h e p l a c e w h e r e t h e s e g o o d s a r e s h i p p e d f r o m , t h e s y s t e m would work o u t a l l right; because t h e n with t w o merchants i n a town doing business w i t h different banks, i f one merchant did b u s i n e s s w i t h a bank w h o s e c h e c k s w e r e a c c e p t e d w i t h o u t question a n d a n o t h e r d i d b u s i n e s s w . t h a bank w h o s e c h e c k s were always returned t o h i m o n account o f this exchange charge, t h e second merchant would g o t o his bank a n d say, "T w a n t t h e s a m e facilities; o t h e r w i s c I will w i t h d r a w account arid d o b u s i n e s s w i t h t h e b a n k t h a t g i v e s my m e these facilities." Me. Boote: W e always t h o u g h t t h a t t h a t b u n c h o f fellows w e n t d o w n there a n d unfixed everything w e fixed. We h a d f r i e n d s e n o u g h a n d h a d l e g a l a d v i c e e n o u g h t o h a v e that section fixed, a n d the words agreed on, that would have the sanction e f several e m b e r s lower Reuse. M r . Underwood, of the house, concurred. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis o f the committee i n the w h o a t that t i m e w a s Speaker O u r Congressman, g ’ M ’rn. Harrison 488 handled t h e proposition, of well-known ability. H e is a distinguished l a w y e r [ I t never was incorporated i n the bill, b u t i t was a l l agreed to. Senator Williams, w h o h a s given this matter a good Ccok O L 8 Ene F C NIFOM and w h o l t h i k : Woe: c o o p e r a t e w i s e lcgi Sslation b y suggestions a l o n g t h e s e lines, i understands t h o banking business. H e told m c that h e wont down t o seo Mr. Hamlin about this matter. Speaks o f Mr. Hamlin a s "Charlic.™ told m e that this i s vory inéefinitewhet 1 t moans," H t o fur- H H e e said, "Charlie L t 3 8 hare. to--eay e was comowhat a t a loss t o decide what to d o about it, a n d thought action would have t o b e taken with refercnce t o what t h e y believed i t was t h e intention of the Senate t o have accompliahed i n that paragraph. Mr. Williams t h e n m d e a n explanation o f what t h e interpretation o f i t was a t the time. a n d what h o believed i t was and What h e believed t h e Senate thought about it. was w h e n h e m a d e t h i s s t a t e m e n t T h a t a s t o what h i s convictions were, h i s t h e n convictions, So i t i s a two-sided question, gentlemen, L y e L s you, r i g n t n o w , y o u a r e g o i n g t o s e c t h e b i l l o w s r o l l f r o m onc s i d e o f this w u n t r y position, t o the other about that very pro- i f you d o not find s o m w a y t o get over i t with- out putting t h e country banks o u t o f businoss. The Chairman: W e have b e e n rolling along f o r a year with the billows rolling over u s a n d under us; and, Mr. Foote, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis a s t o this s t a t e m e n t n o f the apparent belief o f the m e l t e g ee w h o aprepared those resolutions, tnh e second thought 483 it seems t o me i8 a n inference drawn fremttlaw rather than a ate. statement o f t h e l a w itself t h a t i s n o t quite a c c u r - T h e l a w does n o t s a y vhat t h e M®untry banks shall do except b y implication i n remitting f o r checks it. fae I f I wore writing that, with all respect: to Mr. MeKay and Mr. Hendricks, I would express i t something like this: “The deliberations o f this body are based upon the theory that every Federal Hoserve Y a n k i s required b y l a w to recoive o n deposit a t par without deduction o f e x c h a n g e ” — And there I think w e have t o have a qualifying clause something like this: "put n o t necessarily i n the case o f checks o n banks in other districts f o r immediate credit, t h e checks a n d drafts drawn upon banks which are members o f the federal reserve system.” That i s more nearly what t h e l a w states. I t tedils the Federal “eserve Bank, "You cannot make a deduction from the face o f the check for cxchange." Mr. Hendricks: i s 2t- not a fair inference, then, i f the Federal “eserve Banks are required b y law to accept at par t h a t t h e y m s t a c c e p t t h e m a t p a r ? The Chairman: Y e s ; b u t t h e l a w does n o t say--~ Mr. Harding: h them at par. e l a w does n o t s a y y o u must collect I f I were running a member bank I would tell m y lawyer t o study these t w o sentencos right h e r e — — "very Federal “eserve B a n k shall receive o n deposit at par from member banks o r from Federal “eserve Danks checks a n d crafts drawn upen a n y o f its depositors, a n d https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 484 when remitted b y a Federal Reserve Bank, checks and drafts drawn by any depositor i n any other “ed ral “eserve Bank or member b a n k u p o n f u n d s t o t h e c r e d i t o f s a i d depositor in said reserve bank o r member bank." And: "Nothing hercin contained shall b e construed a s prohibiting a member b a n k f r o m c h a r g i n g i t s a c t u a l e x p e n s e i n - curred i n c o l l e c t i n g a n d r e m i t t i n g f u n d s , sold t o i t s patrons." o r f o r exchange --- --- and t r y t o analyse t h a t a n d see what i t covers. You s a y that this section i s mandatory. B e eee mandatory i n one line o f i t i t ought t o b e mandatory a l l through. I t says, "Every federal reserve bank shall re- geive." T h a t word "shall" i s mandatory. T h e n the last sentence says "The Federal “‘eserve Board shall b y rule fix the charges t o b e collected b y a member b a n k from its patrons." I t does not say the chargos that may be col- Lected o r a r e t o b e collected. I n o t h e r words, i t puts the Federal Reserve Board i n the attitude o f issuing a regulation t o the member banks a n d saying, "Now, y o u are going t o have some c h e c k s dravm o n you b y your deposi- tors to go to New York or Richmond or Atlanta or Dallas and from such «hecks that bear a n endorsement y o u shall collect t e n o r fifteen o r twenty cents a would b e a reductio Mre Foote: I brief. That a d absurdum. brought a copy o f this Mississippi W o u l d y o u like m e t o read the comments o n this particular section there? https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis hundred. ~ 485 The Chairman: I t h i n k w e w i l l h a v e to. make p r o g r e s s faster t h a n that, Mr, Foote. n e WLll have t o adjourn i n about t e n o r fifteen minutes. ‘ h a t w e ought t o d e i n order to make progress i n this discussion i s t o agree a t the outset t h a t t h e e x p r e s s i o n c o n t a i n e d i n the Second V o t e o f this committee o f this b o d y i s o r i s not correct, a n d i f it 1 8 mot corr cen, l e t u s correct 21. I whether t h e v o t c i s s t a t e d t h e r e d o not care i n t h e s e terms. T h e ef- fect m a y b o t h e same, b u t I do not agree that that correctly States t h e intention o f the law. Mr. M c K a y : T h e point w a s that t h e member banks do not expect t o charge the *ederal “esorve Banks. The Chairman: N o ; I think the intention o f the l a w is something like this, t h a t t h e Federal Reserve Sanks must receive these items o n deposit a n d a t par. receive t h e m o n deposit a t par, n e c e s s a r i l y i t ” they b y implication they cannot s t a n d t h e empense o f the collection charges that m a y b e imposed, method b y which the © a n d consequently t h e l a w provided a untry bank could romit a t par f o r those checks, b u t could put a reasonable exchange charge upon its o w n customer a s anitem o f expense, Governor Wold: I The Chairman: think that i s the intention. A n d i n ordor that those charges might ‘pe uniform a n d subject t o regulation, Reserve B o a r d with authority t o make a i t clothed t h e Federal regulation o n the subject, stating n o t what t h e y shall charge, b u t what t h e mcmber banks m a y charge. at par. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis M a n y o f them m a y decide t o remit 486 Mr- Foote: T h a t i s the view Senator Williams takes. The Chairman‘ agreement, W e are getting pretty close t o a n i f you gentlemen c o not disagree w i t h what has been stated b y Mr. “arding a s te what the law means. C a n we not agree that this second vote does o r does n o t express the intention o f the law, for the purpose o f our discus— sion? Governor. V a n Zandt: I is sound, think that their second a e i n view o f the fact that i t was based o n the theory that that w a s t h e intent o f the law; t h a t that was what w a s intended. law states, T h e y d o not s a y that t h a t i s what t h e o r says. I t i s a deduction f r o m the state- ment o f the law. The Chairman: I agree t h a t t h i s s u g g e s t s a part e f the deduction which I would d r a w from the law, b u t not all ofit, because this does carry with it the implication that t h e Federal Reserve B a n k m a y receive o n deposit; and, assuming t h a t t h e p r e s e n t m e t h o d w e a r e o m p l o y i n g i s u n d e r - stood t o b e a legal method, w e c a n charge these checks to the accounts o f the membcr banks a s a method o f getting par s e t t l e m e n t s f o r them. I d o not think w e have t n a t power, Mr. McKay: N o ; i t does n o t mean that a t all. The Chairman: I say that t h e inference which i s stated in this second resolution i s not complete enough, because it should specify that p a r does n o t m e a n immediate credit. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Mr. Foote: D e f e r r e d Gredit cannot b e classified a s The Chairman: B e t w o e n t h e t w o horns o f the dilemma w e #87 reach the point where the Feceral Resorve Sanks buy all the float. I t might b e well t o remind those Governor McDougal: present o f the statement o f wir. Glass a s h e made i t to. the committee. H e stated t h a t i t w a s unquestionably the intent o f the authors o f this bill t o abolish exchange charges, and, moreover, t h a t i t was unquestionably t h e intent t h a t checks b e collected a t par. I very well, remember that A n d h e said h e would l i k e t o have u s c a r r y that b a c k w i t h us. remember that, too, Governor McDougal, he Chairman: I but 1 do not remember that Mr. Glass undertook t o define what p a r meant, Governor iicDougal: N o ; I remember that h e d i d n o t attempt t h a t . W e have a definite and positive ruling The Chairman: from t h e B o a r d n o w w h i c h i s s u p p o r t e d b y the opinion o f the Board's counsel that par, i n the language o f section 16 o f t h e a c t d o c s n o t c o n t e m p l a t e t h a t t h e r e s e r v e b a n k s are recuired t o give immediate credit f o r items deposited with them, n o m a t t e r w h e r e t h e y m a y b e payable, a n a , another theory o f the law, that we w o u l d s i m p l y b e r e q u i r e d i on f for immediate credit, t o ii:y7 the f l o a t , a n d w e c a n n a t ’ possibly afford to do that. Mr. ferding: I CLon. Suppose 1 would like to ask Mr. Curtis a ques- went t o S e w Y o r k a n d m a d e a transaction, made a deposit w i t h a bank o n deferred credit a n d g o t crediv, say, a week from now, a n d I had a pass b o o k t o show that I https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis £53 had a thousand dollars i n such a bank without a n y memorandum showing that that was only good for a week f r o m now; put up a suppose t l went a r o u n d a n d bought s o m e t h i n g , mar- gin o n the stock exchange, a n d I was n o t known, a n d ! was asked, "Have you got that money o n deposit?" Wes.” I A n d TI say, go around the next day and this i s sent through the c l e a r i n g h o u s e a n d i t i s t h r o w n bank; a deferred credit. i t i s simply h o u l d I. not b e guilty o f Taise repye= sentation i f there was some slump o r the market h a d gone against m e o n the propositien? Me. Curtis: I think i f you knew they h a d undertaken at f o r collection a m n o t for immediate credit you would be guilty o f misreprosentation, ar. Herding: I think s o too. (At this point informal discussion occurred 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 Chairman: M r . Harding, t h i s m e e t i n g i s approach- ing that peyprological condition where w e generally make progress, a n d 1 think w e will have t o adjourn, uncertaking to iouwe this matter f o r discussien a t a meeting t o b e called, say, for nine o'clock tomorrow morning. If there i s n o dissent f r o m that suggestion w e will take a recess u n t i l n i n e a ' c l o c k n e e r s morning; and I am going t o take t h e liberty o f suggesting t h a t t h e interests of e v e r y o n e h e r e r e a l l y c e m a n d t h a t w e s t a r t p r o m p t l y a t nine o'clock. (Whereupon, a t 5:20 o'clock p. m., the Conference adjourned until tomorrow, Saturday, October 23, 1915, a t 9 a.m https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis