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Federal Reserve Bank of St. Louis
FIFTH CONFERENCE
GOVERNORS O F FEDERAL RESERVE BANKS
MINNEAPOLIS, MINNESOTA
HOTEL RADISSON
Wednesday, October 20, 1915
Thursday, October 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
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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-
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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
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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
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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.
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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
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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
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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.
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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
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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
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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?
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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.
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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.
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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.
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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
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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.
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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.
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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
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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
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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
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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
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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
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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
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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
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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.
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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
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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
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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?
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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.
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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.
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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
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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
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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
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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
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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.
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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.
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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
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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,
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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
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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
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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
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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,
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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,
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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
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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
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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
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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
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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
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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?
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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
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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.
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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.
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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
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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.
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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?
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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
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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
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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
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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
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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 .
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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,
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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
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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.
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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
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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.
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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.
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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
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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 ?
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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.
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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.)
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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.
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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
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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 -
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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
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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
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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
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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
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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.
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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?
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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.)
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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,
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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
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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
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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.
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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.
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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
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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?
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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
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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
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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.
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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
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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
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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
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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
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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
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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
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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.
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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.
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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.
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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
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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.
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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.
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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
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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.
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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.
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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
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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.
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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?
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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:
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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,
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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
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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
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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.
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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.
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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
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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.
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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
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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
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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 -
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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.
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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
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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 —-
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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
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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.
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Federal Reserve Bank of St. Louis
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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
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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.
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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"
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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
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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
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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.
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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.
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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,
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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
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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?
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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.
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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.
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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
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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
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