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Improving the Relations Between TRe Federal Reserve Banks and Member Banks. Address before the NATIONAL BANK SECTION of the AMERICAN BANKERS ASSOCIATION AT ST. LOUIS, September 30, 1919, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis by WALDO NEWCOMER President National Exchange Bank, Baltimore, Md. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Improving the Relations Between The Federal Reserve Banks and Member Banks. Mr. President and Gentlemen of the National Bank Section: I appreciate highly the honor of being invited to present for your consideration a subject so important and so inter esting to all of us as that covered by this paper. A keen sense of responsibility rests upon me and I know that some things that I shall say will be sharply criticised, but I want to speak with the utmost frankness and freedom and there fore I ask you to accept my assurance that not one word in this paper is intended as a criticism of, or a reflection upon, any Reserve Bank, Member or Non-Member Bank, or any individual. This is not intended to be, in any sense, a philosophical discussion on the theoretical relations between the Federal Reserve Banks and the Member Banks, nor yet a didactic ser mon on the duties of either, but it is an earnest, however, unsatisfactory, attempt to make a few practical suggestions, which may lead to closer co-operation and more efficient re sults. I do not mean to intimate that there is anything un satisfactory in the present workings of the system, but any machinery of human origin, however near perfection, has possibilities of improvement, and in this case we are all in terested in having it approach as closely as possible to the unattainable limit of absolute perfection, and wish to do all in our power to assist. Nor does this paper represent any personal hobby or theory of the writer, elaborated in the secrecy of his private study, but it has been prepared after correspondence with various officers of Reserve Banks and their branches, and with a number of officers of Member Banks of all sizes, scat tered over the whole United States, and to all these the writer desires to express his appreciation of their cordial responses and valuable suggestions. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The Federal Reserve System, in its plan for consolidat ing and mobilizing reserves, has frequently been compared to a reservoir of water as a protection against fire. For my present purpose, I prefer to think of it as a reservoir of drinking water, supplied by numerous streams covering a widespread and diversified area. You will see at once that two things are necessary that it may be thoroughly satisfac tory in the accomplishment of the work expected of it. First: The feeding streams must be developed and directed so as to supply the maximum amount of the purest water obtainable to the reservoir. Second: All leaks and waste places in the reservoir itself must be eliminated and the freest possible streams distributed to the population, new out lets and supply pipes being added to take care of enlarged demands, and the whole system so administered as to give satisfaction to patrons and tax-payers. You will observe that these two things are of equal im portance and interdependent. The best watersheds in the world are useless without a good reservoir, and the best reservoir in the world is equally useless without a good water supply, and the two must be properly co-ordinated. Now we have in the Federal Reserve System a magnificent reservoir of tested capacity. Reversing the usual practice, perhaps fortunately and perhaps unfortunately, this reser voir received its first test not under normal conditions, but under the strain of an unprecedented emergency. Nobly did it stand the test, and few will be found to deny that, but for it the financial system of this country would probably have collapsed in the great world war. We now desire not only to have the system revert to a peace basis, but to put on the finishing touches of its construction and so co-ordinate its activities with those of our individual banks that all may attain to their highest possible efficiency. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4 The first thing that struck me in considering this matter was that apparently in this case there was more room for improvement in the feeding streams than in the reservoir, and that this was perfectly natural. Ever since the Federal Reserve Banks were established their officers have been work ing, studying and conferring with each other without cessa tion in the effort to improve the system and to devise addi tional ways of making it more useful to members, whilst the members have not bestowed anything like a correspond ing amount of attention on their end of the problem. I say this is perfectly natural, for this study and these efforts to perfect the system formed the business of the Reserve Banks, while to the members it was merely an incident among their numerous duties. And this brings me to my first suggestion: We Member Banks should now make it our business to study the Federal Reserve Act, the Reserve Banks, our relations with them, and the possibilities of utilizing their services to an extent not heretofore contemplated. Misunderstand ings, minor disagreements, and criticisms are frequent and lost opportunities to receive benefits are legion, due not to ignorance or mental inability to grasp some complicated situation, but simply to the fact that individual bankers have not realized the importance of the subject, nor the advantages to their banks that were lying within their grasp, and have failed to familiarize themselves with the system. I wonder how many of us have carefully read the Federal Reserve Act with its Amendments. There should be a copy on the desk of every banker, and he should give it at least one careful reading from beginning to end before consid ering it merely a useful book of reference for frequent con sultation. Whether or not we fully approve of the system in all respects, it will pay us to study it carefully from an unbiased and sympathetic standpoint, and try to realize its big, broad purposes and possibilities, and cease to regard it as simply a machine to effect clearances and collections. To be fully up to date with our knowledge of its meaning and development we should also read all the circulars of the https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 5 Federal Reserve Banks and the rulings of the Federal Re serve Board. These are so numerous that few of us have the time to comply literally with this suggestion. But we can and should, in that case, appoint someone in our bank to read these and call the attention of the proper officers to all matters of importance. ■ They are too valuable and important to be consigned unread to a waste basket, or, what is practical^ synonymous therewith in many cases, filed for future reference without reading. Perhaps you will suggest that the Reserve Banks might co-operate by cutting down the number of these communications so as not to overwork the individual delegated to read them. Let us remember, however, that it is inevitable that these circulars should be more numerous now than will be necessary later. Many rulings have been necessary to explain and clarify the mean ing of the Act, many rough places incident to a new struc ture have to be smoothed down, and no doubt many of us members have had to be instructed and educated. So much for our preliminary education. Now, how can we co-operate? If you have frequent business transactions with another bank, or a mercantile house, or an individual, a personal acquaintance with the man in authority clarifies and simplifies your problems to a wonderful extent. So now it will pay us well to become personally acquainted with the officers of our own Federal Reserve Bank, to discuss with them any matters we do not understand or of which we dis approve, and have a frank interchange of views. It would be well to send the heads of some of our departments to personally confer regarding the work of that department where it comes in contact with the Reserve Bank. In the case of country banks which cannot conveniently visit the Reserve Bank frequently, they should take up any difficulty direct with the Reserve Bank and not through a correspond ent, and take it up as a frank discussion and not as a com plaint. Get as near as possible to the basis of a face-to-face talk. To a certain extent the Federal Reserve Banks can co-operate in this by adopting generally a plan which one or https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 6 two are trying, with very satisfactory results. That is, by holding group conferences at regular intervals, to which are invited representatives of all banks in a given section or of a certain class, until in the course of a year or less every bank in the district has attended or, at least, has had a full opportunity to do so. At these conferences free discussions are encouraged, questions are answered, difficulties removed, misunderstandings cleared, and the larger purposes of the system made plain. The Federal Reserve Banks should (and I think they do) welcome suggestions from Member Banks for the improve ment and enlargement of their services, and we should feel free to make such suggestions, always, however, with a mind open to accept an explanation of the impracticability or the inadvisability of their adoption. I think it would be well for the Federal Reserve Bank of a district to be represented at all State Bankers’ Con ventions and Bankers’ dinners in that district, and when practicable their representative should visit those country banks which otherwise might not come into personal contact with them. These traveling representatives should make their reports to their superior officers, and matters of im portance should be passed on to the Federal Reserve Board. The Federal Reserve Act provides quite an elaborate and detailed plan for the nomination and election of Class A and Class B Directors. This plan was not made elaborate for the purpose of causing extra work, nor is it really compli cated. But under it each of us has a full, fair opportunity for participation in the selection of Directors. Let us see to it, then, to the best of our ability that the best available men of our district are nominated. We all know how seriously we are annoyed by the care lessness of a correspondent who does not handle his end of mutual business in a businesslike manner. Need I say that almost every Reserve Bank in the country would be https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis saved an enormous amount of work and unnecessary bother if we members were all careful to be businesslike in such details as sending renewal notes on time, advising as to our wishes with regard to the disposition of maturing paper, giving accurate descriptions of collateral, seeing that all the notes we tender are legally eligible, wrapping and sort ing currency properly, promptly returning bags, etc. Since the advent of the Federal Reserve Banks, and due to their requirements, there has been a wonderful improve ment in the completeness of the credit files of Member Banks. It is well worth our while now to endeavor to secure financial statements in proper shape from all our borrowers at regular intervals. This will work to our own advantage in lowering our loss ratio and also make all our paper, otherwise eligible, ready for immediate use in redis counts, thus forming a large secondary reserve. It is probably unnecessary to remind you that reserves should be kept up to the required amount in actually col lected funds, but I am told that many of the smaller banks do not carry a transit account on their books^ but- charge all items to the Federal Reserve Bank on the Reserve Account when deposited. Of course, their books can never agree with those of the Reserve Bank. Even the smallest bank should open such a transit account, and each day the transcript should be checked up and discrepancies reported at once. It would be a great convenience to the Federal Reserve Banks and also to each of us if all checks were of a uniform size and all bore the number of the Federal Reserve District as well as the A. B. A. transit number. Perhaps this is a little outside the scope of this paper and an attempt to make the improvement obligatory might meet with opposi tion from some of our customers, but I merely refer to it in passing and hope that in the future some method will be found for bringing about this reform, at least to the point that the check of special size will be the exception. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 8 In order that the Federal Reserve System may reach its fullest development and efficiency, it is essential that every eligible non-member bank should become a member. I under stand that State Banks and Trust Companies to the number of more than one thousand and representing more than fifty per cent of the resources of all the State Banks and Trust Companies of the country have already joined, but the actual number of eligible non-members is still very large. Now, if so many have found it advisable to come in, and they are not all very large ones by any means, there is very little doubt that it would be advantageous to the others, also, but they do not seem to realize it. Perhaps it is in our power to do a little missionary work which will redound to the benefit of the Reserve System, ourselves, and of the ‘‘con verted heathen.” Some large banks are said to be mildly dis couraging these non-members from joining on account of their fear of losing their reserve accounts. It is not easy to be unselfish in this world, but if the banks will remember the old theory that their deposits would shrink terribly when members transferred their reserves to the Reserve Banks, and how groundless was the fear, and will realize that the stronger and more efficient the system, the greater is their security and their opportunity to make profits, they may realize that they can, from a very selfish standpoint, take an unselfish position and encourage these non-members to join and share in the benefits. Now, before we can be very satisfactory missionaries we must ourselves realize more fully than some of us do the benefits of the system to us in our own banks. I therefore suggest that every doubting Thomas and every lukewarm Laodicean take his pencil and figure the following: 1. Take your deposits and calculate how much was free for loaning purposes under the reserve provisions of the old National Bank Act, and your income from this plus the interest on reserves in the hands • of Reserve Agents. Compare this with your income at the same rates on the loanable funds from the same https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 9 amount of deposits under the reserve requirements of the Federal Reserve Act. ' 2. Consider the mobility of your present reserves. 3. Consider the decrease in your float. 4. Consider the ease of securing currency. 5. Consider the rate at which you can borrow. 6. Consider the opportunities for profit in business which you could not transact under the old law. 7. Consider the advantages of a secondary reserve in income-producing acceptances. 8. - Consider the possible future advantages of cable clear ances and transfers in the world commerce which appears to be developing. After you have assimilated the above, see whether you are yourself using your Federal Reserve Bank to the utmost. Perhaps you may not have the time nor the inclination to enter into long arguments with the non-member, and you will always find that the arguments of the man who does not wish to be convinced are very adroit and difficult to answer satisfactorily to him. But there is one argument that is easily used by you and difficult to answer. Ask him to confer with some State Bank or Trust Company which has been a member for at least six months, and ask whether they have regretted the step or would care to resign. You can rest on that and the argument is almost unanswerable. In this connection may I call your attention to an excellent little pamphlet, issued by the Federal Reserve Bank of San Francisco, entitled “State Bank Membership in the Federal Reserve System.” This pamphlet contains 104 questions and answers, and is not only good for this purpose, but incident ally it puts the salient points of the Federal Reserve Act before one in a form easily comprehended and convenient for reference. I shall quote but three of these bearing closely on this subject: https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis io Q. “How does membership enable a bank to extend addi tional accommodations to its customers ?” A. “The law requires the maintenance of a reserve pro portioned to deposits. Experience shows that in creased loans mean increased deposits, which, in turn, mean larger reserves. By rediscounting a bank can at once build up its reserves ■ and thus increase its lending capacity. The ability to rediscount with the Federal Reserve Bank is both surer and cheaper than borrowing from a correspondent. Q. “Is it not true that the smaller banks have little, if any, paper eligible for rediscount? A. “Many banks think they do not have such paper, when in reality they do, or their paper can readily be put into such shape that it is eligible. This has been the experience of many banks throughout the country. Q. “How may a member bank offset the loss of interest on its balances with the Federal Reserve Bank? A. 1. “The deposit with the Federal Reserve Bank can generally be made in part from cash now carried in vault which is not drawing interest. Excess vault reserves are no longer necessary to be sure of maintaining the minimum required by state laws, and the Federal Reserve Bank can be relied upon to supply currency at any time. 2. “Member banks can safely carry much smaller excess reserves and have a part of the present excess reserves for loaning or investment; if invested in paper eligible for rediscount, it serves every pur pose of a reserve, since it can be immediately made available. Paper eligible for rediscount has come to be regarded as a member bank’s emerg ency reserve. 3. “Member banks can borrow at the Federal Reserve Bank at lower rates and with greater certainty than from correspondents. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 11 4. “By using the check collection service of the Federal Reserve Bank the member can effect a saving in two ways: . (a) “Balances carried with correspondents solely for purposes of check collections may be discontinued and these balances loaned at current rates. Since checks on the vast majority of banks can be collected at par and without cost, this is clearly a desirable thing to do. (b) “Checks can be collected through the Federal Reserve Bank in the shortest possible time, . ■ since checks are routed direct. The funds thus become available for loaning more quickly than under the old system of in■ direct routing. “The experience of member banks shows that the saving and added profits more than offset the loss of interest on the balances carried with the Federal Reserve Bank. One state bank has volunteered the information that its profits have been increased 25 per cent through membership.” In view of the importance of having non-members join the system, some have advocated measures designed to force them to join, and others have favored the granting of special privileges to induce them to join. Personally, I am opposed to both methods, though the suggestion which I am about to make may appear to have some of the elements of coercion. I do not think it fair to give them privileges not accorded to members, nor would I attempt to compel them to come in. Leave the matter to the slower, but less irritating, processes of education and growing intelligence. It is greatly to their advantage to join; more are seeing this every day, and in time all will realize it. Consider this point, however: Sup pose you were members of a club which offered special advantages and valuable privileges to members, and you had invited a number of men to join, knowing that the club https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 12 would be of great benefit to those men, and that the addi tional membership would enable it to greatly extend its usefulness. If those men failed to recognize this and failed to join, you would not think of attempting to compel them to adopt your views. But let me ask you this: Would you extend to them the benefits and advantages of membership without the payment of dues or the assumption by them of the duties and responsibilities of membership ? I think not; and yet that is exactly what we are doing in this case in many instances. And, therefore, on these grounds exactly, and not as a measure of coercion, I suggest that we members refuse to be the medium for the collection through the Federal Reserve Banks of items for the benefit of banks which will not themselves reciprocate by remitting at par. and that we refuse to discount for eligible non-members when we are forced to rediscount with the Federal Reserve Banks in order to carry them, unless we do so at such rates as really pay us and are more expensive to them. There is no earthly reason why they should secure the advantages without the obligations, and then say, with some justice, that there is no further advantage to them in joining the system. ' Section 4 of the Federal Reserve Act enumerates the powers of the Federal Reserve Banks in eight items, and my attention has been called to a paragraph in the eighth item, which reads as follows: “Said board shall administer the affairs of said bank fairly and impartially and without discrimination in favor of or against any member bank or banks, and shall, subject to the provisions of law and the orders of the Federal Reserve Board, extend to each member bank such discounts, advancements and accommodations as may be safely and reasonably made, with due regard for the claims and demands of other member banks.” - . . A very high authority has asked me to express an opinion on the above, and puts the question in this way: “Do you https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 13 feel that, as a matter of conservation on the part of a Federal Reserve Bank and with the further idea of allowing the larger banks to continue their relations with the country banks, normal lines of credit, based either on capital and surplus or aggregate resources, should be allotted by the Federal Reserve Bank to the member banks, or should the entire question be left open, to be determined as the needs of each particular occasion may arise?” My answer to the above question is, of course, nothing more than a personal opinion submitted respectfully and with some diffidence. As for assisting the larger banks to retain their business with country banks, I do not think there is any obligation of this nature. Existing business arrangements should never be summarily swept away by law, but if a thing is for the general good, and its adoption is not going to seriously cripple the one affected, I do not think his more or less selfish interests should be allowed to interfere. Moreover, in this case I do not believe any large bank cares materially whether his country correspondent, who already7 has a right to borrow from the Federal Reserve Bank, is permitted to exercise that right to the extent of a considerable proportion of his resources or to a limit granted arbitrarily by the Reserve Board. If I am correct in the above, there remain only two considerations that would suggest the limitation to a percentage of Capital and Surplus or of Resources. One is the limit of credit which can safely be extended to a given bank, and the other is the limit of available resources of the lender and the desire for a fair distribution of these among the would-be borrowers. Neither of these considerations, to my mind, necessitates the fixing of such a limit. As for the first, some banks are absolutely safe for such advances to a limit of double their capital and surplus, and others questionable at fifty per cent thereof, depending upon their management, the amount of their borrowings elsewhere, and the purposes for which they desire the proposed advance. I think the Federal Reserve Banks and the Federal Reserve Board can safely be granted wide powers of discretion on https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 14 this point. As for the second consideration, whilst the loan able funds are not absolutely without limit, yet a legitimate demand can scarcely come heavily from all parts of the country at the same time, while under the present redis counting arrangements among the Federal Reserve Banks the loanable funds can, and in the light of the experience of the past two years, I do not fear the exhaustion of the lending power of the Federal Reserve Banks through any legitimate demands. There are two additional powers or duties which I think might, with propriety and advantage, be transferred to the Federal Reserve Board. One of these is the power to grant or refuse charters to National Banks, now vested in the Comptroller of the Currency. The Federal Reserve Board is supposed to have power to grant or refuse to state-char tered institutions the right to join the Federal Reserve Sys tem, yet I am advised that several cases have arisen where they refused admittance to a bank on account of the per sonnel or character of its management, whereupon the same individuals secured permission from the Comptroller to nationalize, thus automatically becoming members, against the judgment of those presumed to be authorized to pass upon the matter. The other duty to which I refer is that of examination of National Banks. There are now three examining powers in the country—the State Banking De partments for all State-chartered Institutions, the Comp troller of the Currency for all National Banks, while the Federal Reserve Board has a right of examination of all member banks. The first of these has inalienable rights so far as the Government is concerned, and in general their reports are accepted by the Reserve Board, without waiving its rights; it also accepts the Comptroller’s reports as to National Banks. At the same time I think it would be advantageous to cut the number of examining authorities from three to two, and that the files of the reports of these examinations should be where they belong—in the custody https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ' 15 of the Reserve Board, which deals directly and constantly with the credit and management of these banks. I recognize the fact that a self-evident corollary to the above suggestions would be a recommendation that the office of the Comptroller of the Currency be abolished. This has been recommended before, and, so far as I am aware, the chief opposition to it has come from the incumbent of that office, who regarded the movement as an attack upon him and his administration, and, perhaps, justly so. My thought, however, is entirely impersonal, and I would be glad to see the plan adopted, effective upon the retirement of the present incumbent from office. The case is analogous to that of the Sub-Treasuries. The movement to abolish these (which will probably succeed in the near future, as practically all the valid objections were based upon the conditions at the time it was attempted in the past) is being pressed on the ground that the Federal Reserve Banks can take over and perform the duties of the Sub-Treasuries. Similarly, the Reserve Board can readily take over the duties of the Comptroller’s office, and, in view of the complete identification of the National Banks with the Federal Reserve System, it is a natural move in the right direction. We now come to the question of the possible extension of the services of the Federal Reserve Banks for the benefit of members. If we are perfectly frank with ourselves, we will admit that many of the thoughts which occur to us and many of the suggestions of our friends are not based entirely upon an unselfish desire to improve the system, but grow out of a feeling that the Reserve Banks are making large profits and that we should have some of them. I have tried to free myself from this obsession and also to bear in mind that the profits of the past year were abnormal, and we must not ask them to go on a basis which will involve an expense not bearable in normal times, but a fair discus sion of an equitable disposition of profits, if earned, is admissible. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 16 Remembering that member banks furnish the entire cap ital and the greater part of • the deposits of the Federal Reserve Banks, are they not entitled to share on some rea sonable basis in the profits, whether abnormal and tempo rary or normal and permanent? The Government is entitled to an eventual profit in return for the very liberal charter and franchise rights granted, but is it entitled to the entire accumulation of surplus, no part of which can ever go to stockholders under present regulations? The present cumu lative dividend of 6 per cent is a fair return for the money actually invested in stock and should be continued, but when earnings are large, they should be shared on some reason able basis. I would like to see the member banks granted the right to carry Federal Reserve Bank Stock on their books at amount paid in plus a certain percentage of its surplus. Such a price should then be paid for it by new members, and at this price it should be taken back from members liquidating or otherwise leaving the system. In the matter of dividends, why not give them a 6 per cent cumulative dividend on amount paid in, and a lower rate, if earned, on the excess? Suppose, for example, we were allowed to capitalize 25 per cent of the surplus and to receive 4 per cent on this, and suppose the whole surplus of 100 per cent of subscribed capitalization, which is 200 per cent of amount paid in, to have been earned and set aside. Even under these exceptional and ultimate figures our book value would be 150 and our highest possible divi dend 8 per cent on cost to original members. Perhaps it would be less complicated to provide for a 6 per cent cumu lative dividend plus a small additional non-cumulative divi dend, payable only if earned and not to exceed 2 or 3 per cent. Is this excessive? If it is, then revise the basis, but adopt the principle. . For a long time I have advocated the payment of a mod erate rate of interest on balances in excess of required reserve, believing that this was fair and would encourage many banks to be more liberal and not cut such close corners. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 17 Abuse of the privilege could be prevented by limiting the amount on which interest would be paid to a certain per centage of excess over required reserve. Suggestions on simi lar lines have come from several of my friends, also. I am not fully convinced that this would be bad banking, but will frankly say that it has been opposed by the Federal Reserve Board, officers of Reserve Banks, and by National Bankers of the highest standing in whose judgment I have the utmost confidence. Among other reasons, they say that if interest is paid on deposits, the Reserve Banks might, in self defense, in order to make their dividends, enter into competition with member banks. I admit myself outvoted and partially convinced and will press the suggestion no further, being quite willing to compromise on the adoption of the above suggestion as to book value and dividends. Now, without any further attempt to loot the Treasury, permit me to suggest a few ways in which the Reserve Banks may increase their services to members. We must remember that during the abnormal times through which we have been passing they have been deeply absorbed in war work, and I feel sure that they are already working toward the accom plishment of much that I shall suggest. For instance, the broadening of the collection system is known to be receiving their very active interest. Probably no department of their work is of such generally recognized interest to members as this. Those of us who represent city banks with numerous collectible items are keenly interested in seeing all checks on the par list. Those country banks which make money on exchange feel aggrieved that they should be asked to give this up. Some of their arguments are very plausible, but they usually show a lack of—shall I say sincerity or consist ency? A favorite argument is this: “Checks on this bank are payable at its counter, and if you ask me to remit to another point for your convenience, I am entitled to be paid for the service. The fact that I lose nothing and really gain by the deferred charge of my check sent in payment has no bearing. You are asking me to render a special service. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 18 For this I charge so much, and you can pay it or I stand by the letter of my obligation.” Now, take the gentleman at his Word and say: “Very well, we do not wish to pay for any extraordinary service or ask anything unreasonable, and since you prefer it, we will have all checks on you pre sented at your counter and take the cash to which we are entitled.” He then cries out for mercy and says you are trying to coerce him. Not at all. If your grocer charges for each parcel delivered and you consolidate your orders and carry home your purchases in a basket, are you coerc ing him ? Passing over the flagrant abuses, such as excessive charges and remittances made by checks requiring addi tional time and expense to collect, is there any valid reason why checks on Vermont or New Hampshire should be col lected free and those on South Carolina be subject to an exchange charge? A broader collection system must come. Some of the Reserve Banks have already7 succeeded in par ring checks on every bank in their district. Let the others endeavor to do the same and let us do all in our power to help them. It may be necessary, to continue, at least for the present, the practice of a deferred credit. There is no reason in equity for the entire absorption of the float by the Reserve Banks, but it will be a splendid service if they can shorten this deferred period, and when they have learned what their earnings are in normal times, they may be able, perhaps, to carry the float on all items requiring not more than one day to reach their destination. A moderate service charge is defensible, covering cost of service, and might properly be allowed to member banks, particularly for items not drawn on themselves, this being a. very different thing from the so-called exchange charge referred to above. My own hope is that upon investigation such defensible charges will be found to be so small that they will be voluntarily waived. Notes, time drafts and messenger items are being handled to some extent, and we believe this service can and will be broadened as time goes on. . https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 19 In this connection I quote two paragraphs from an inter esting memorandum prepared by Mr. J. H. Ardrey, Vice President of the National Bank of Commerce, New York: “The propriety of the Federal Reserve Banks absorbing the exchange charge on cost items has been questioned. Un doubtedly, however, the present as well as the prospective earnings of the Federal Reserve Banks permit them to easily absorb those charges without interference with their divi dends. Furthermore, many member banks feel that they should receive a moderate rate of interest on their reserves held by the Reserve Banks, and still others suggest the pay ment of interest at even a higher rate on balances in excess of required reserves maintained with the Reserve Banks. These proposals come chiefly from the smaller member banks and from the non-member banks as reasons for their not joining the system. Universal par facilities through the Reserve Banks would unquestionably be regarded by these institutions as fair compensation, in part at least, for their loss of interest on reserves and for their loss of exchange in remitting for collections sent them under the old order of things. The objection that it is unfair for the Reserve Bank to pay exchange for the collection of checks on non member banks and not pay exchange to member banks is not sound, because with universal par facilities the member banks thereby save the cost in the collection of its non member items, paid either in direct exchange or in reduced earnings, by maintaining balances for the service with city correspondents; whereas the non-member bank must still pay in these ways the collection of its own cost items on non-member banks and is deprived of the other benefits of membership in the Reserve System. “Along with the broadening of the facilities for the collec tion of cash items should come more liberal regulations for the collection of time and messenger items. Naturally, faster progress can be made with respect to the collection of such items payable in cities having Reserve Banks or their branches because of better facilities for their presentation, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 20 as well as the facility of immediate settlements through the Gold Settlement Fund. The Federal Reserve Banks are now receiving for immediate availability on the day of maturity, subject, of course, to final payment, bankers’ acceptances payable in cities having Reserve Banks or their branches, when deposited with the Federal Reserve Banks sufficiently in advance to reach place of payment in time to be cleared against the paying bank at maturity; and there does not appear to be any good reason why the same privilege should not be extended to strictly commercial paper, payable at banks in cities having Reserve Banks or their branches. Likewise, there does not appear to be any good reason why the Reserve Bank should not immediately begin handling as cash, with appropriate additional time allowance if neces sary, demand drafts, with or without documents attached, drawn on individuals, firms and corporations in cities hav ing Federal Reserve Banks or their branches, and in time further extending this service as the facilities are developed to similar items payable at any point.” I have quoted the above because I believe that its sugges tions are worthy of very careful consideration, but the latter part opens up a possibility of embarking the Federal Re serve Banks on lines which might be objectionably competi tive with members, and I am not recommending it for adop tion as a whole. In conclusion, may I suggest a very interesting possible development of the activities of the Federal Reserve Banks through the building up of a regular market for acceptances, purchasing from those banks which wish to sell, and selling to those which wish to buy. This subject is too important and too technical to be adequately dealt with in this paper (already rather long), and I shall content myself with a brief comment on the subject, expressing at once my indebt edness to Mr. John E. Rovensky, Vice-President of the National Bank of Commerce, New York, for a very valuable discussion on the subject, his paper being, unfortunately, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 21 too long to be quoted in full, and yet so concise as to defy abbreviation. The Federal Reserve Act has introduced the bank acceptance and made it available as a standard instru ment of credit which will bear the rate of interest which money will command, with no addition to cover credit risk. Our banks of deposit naturally take the place of the Accept ance Houses of Great Britain, and with the establishment of a broad discount market, where banks could buy accept ances when they had surplus funds, with the full assurance that they could resell without disturbing interest rates when their condition changed, we would soon have a National Discount Market, and its operations could soon be extended to an international basis. The advantages claimed for such a market are: 1. To regulate the cash and investment situation of the banks. •■ 2. To equalize interest rates between different sections of the country. . 3. To equalize interest rates between the United States and foreign countries. 4. To minimize the necessary gold movements between countries. ' 5. To stabilize interest rates within the country and so . prevent some of the present wide fluctuations. I thank you, gentlemen, for your very kind and patient attention, and, whether the particular suggestions in this paper meet with your favor or not, may I plead for hearty, sympathetic, unselfish co-operation in working out the great possibilities of the system and building up in this country the greatest and soundest financial system possible in this world. The foundations are laid on broad and comprehen sive lines, and there are vast possibilities for a magnificent structure if our activities are unselfish and constructive rather than selfish and destructive. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 22