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13

Lt a joint meeting of the Aderal Reserve
130ard with -lederctl Reserve Agents held in the office of the Bcar6 at 10:30 a. m.,

on Saturday,

Nove!Aber 6,

Mr. Hamlin, presiding

Er. Warburg

Lt.. Delano

Mr. Harding

Mr. Williams

Mr. Miller

Mr. Willis, Secretary.
PREJIZT ALJO, the following agents:
Lr. Curtiss

Mr. Bosworth

Er. Jay

Er. Mart in

Er. Austin

Mr. Rich..

Mr. Wills

Mr. Miller

Mr. Ingle

Mr. Tenison

Mr. Wellborn.

Mr. Perrin

Mr. Perrin being called upon by the Governor of the Board, informed the meeting that the
2eCern1 reserve agents had voted to favor, the establishment in foreign countries of banks jointly
'Owned by groups of member banks, an amendment, if




1308




necessary, to be secured from Congress for that
purpose.

The Federal reserve agents further con-

curred in the Board's recent renort relating to the
establishment of foreign agencies of Federal reserve
banks.

They were further of the opinion that Fed-

eral reserve banks in oferatino; abroad should be
limited to the a:pointment of correspondents, or the
establishment of agencies in the chief financial
markets of Europe.

A fuller report would be for-

mulated and later submitted. '
7,1r. Rich was asked to read to the Board a
paper he had prepared relating to the general conduct of Federal reserve banks in certain important
particulars.

The paper was road by :as. Rich

as

2ollows:

STATEILINT BY UR. JOHN H. RICH.
Conference of Federal Reserve Agents.
November 6, 1915.

There are two points of contact, between
the government as a supervising agency and the
member banks in the Federal reserve system which




1309

it seems to me are worthy of serious consideration.
You are all familiar with the
criticism of the reserve banks except in
the south, because they are not making money.
In some districts, such as the one I represent,
the member banks have even been fearful that
we would assess them to make up our year's expenses.
You are also familiar with the expressions of bankers who are afraid of competition
from the Reserve banks.
Upon the one hand our
members fear we will not make money, and upon
the other, they are greatly afraid .we will, and
make it in such a way that their own interests
will suffer.
Whether those criticisms are
groundless or not does not seem to me to be
important.
At least the member banks think
there is something in both points, and as long
as thby think so, the Reserve banks will be
under embarrassment.
Upon either point the
thing criticism swings upon is the dividend
upon the capital stock outstanding. The reserve banks, I think, are all making expenses.
Some have not had opportunity to make substantial progress toward the payment Of the
6% that is guaranteed on their outstanding
stock. To make the dividend they must increase the volume of re-discounts or the total of their investments, or accept the remaining alternative of going into the open
market and engaging in operations permitted
by the Act.
The volume of re-discounts is
fixed by conditions no reserve bank can control.
The opportunities for investment are
controlled by the offerings on the market and
these have not been as great as some of us
would wish.
To engage in open market transactions is to immediately provoke the criticism of the member banks for invading a field
which they consider their own.
It does not
look very promising from the dividend stand'point, when some of us consider these con.
ditions, and observe the limited opportunities

1310




our district affords to do a larger business.

My first suggestion is that the necessity of putting an undue strain upon our
earning capacity, to pay a dividend, be
I would suggest
wholly done away with.
done:
that this be
First. Either by returning to the member banks the full amount of their paid-in
capital and replacing the capital through
deposits of the government at 2% in equal
amount; or
Second. By returninc2; the paid-in capital and replacing it with an equal sum derived from the proceeds of 3% government
bonds.
• Under the first suggestion, the demand
upon the reserve bank would be reduced twothirds, the interest paid the government being only one-third the dividend rate fixed
Under the second suggestion,
by the act.
the bonds would carry a rate only one-half
that fixed as the dividend rate, and onehalf the annual dividend would be saved.
In either case, the total original subscription to capital stock by member banks
should stand subject to call and as a liability. Either of these suggestions would accomplish the purpose of eliminating the pressure on the banks to make heavy earnings to
provide for dividends, without at the same
time impairing the resources of the system
through cancelling a large amount of capital
without provision to replace it.
Upon October 13 I spoke before a gathering of bankers in Northern Michigan and cave




1311

them the ideas here expressed.
I was
much interested later to find that on the
following day Chairman Bosworth also went
into this subject in an address at Indianapolis, and suggested a substantial reduction
of reserve bank capital paid-in.
I do not
express a preference between his suggestions
and mine, except to agree fully with him that
some such action is necessary, and to say,
that if the capital is reduced instead of cancelled some provision should be made to replace it in some form.
The total resources
of the reserve system should not be impaired
to the extent of from ,,25,000,000 to .;:40,000,000
until a compensating advantage can be arranged
for. Perhaps government deposits might accomplish this, but they would have to be apportioned
in accordance with the cencellations of stock in
each bank.
I personally prefer the wiping out of all
of the paid-in capital. This is objected to on
the theory that reserve banks would then be government banks. I had supposed that they are now,
and have always been government banks. I can
not see that the shares of stock perform any useful function.
If wiped out, the subscription
would still stand, and each member bank would
be liable on call, not only for what it now has
in, but twice that sum if necessary. The wiping out of these shares would wholly remove
all basis of criticism. There would be no further point in any banking argument about what
the reserve banks are making or whether they
are making more or loss than their expenses.
Nor do I see that it would necassarily alter
the degree of representation of member banks
in the management of the reserve banks, or
that there would necessarily be any change
whatever in the present method of voting for
and electing officers, except that the method
should be simplified.




That suggests my second point, which
has reference to. the cumbersome and .unnecessarily involved method of electing reserve
bank directors.
The district I represent covers six
It has three
states in whole or in part.
groups of voting member banks, Each of these
three groups is divided between the six states.
It is wholly impossible for Groups 1, 2 or 3
to confer or create any common understanding
by discussion. Neithor can they have independent action because they are not organized,
and organized effort is impossible because
there is a distance of 1,500 miles in some
cases between banks in the same group. More
than this, these banks have no common interests by groups, or no purpose in organizing
and getting together except to nominate directors, and this is not important enough
in their minds to justify the trouble.'
Now, then, is it possible to expect
that the representative government of reserve banks can become an actual, fact?
The. Act provides for the election by
member banks of two different classes- of
directors; those representing banks as such,
and those .chosen from the non-banking field
to represent agriculture, commerce and industry. .
The non-banking director is picked and
elected by banks. I think most of you will
agree that the provision is weak and ineffective, and can hardly result in the creation
of a vigorous element representing business,
an these boards of directors. My ovservation
is that the Class B directors might just as
well be Class A directors. Naturally banks
will lean first toward men of banking views.




131,3

No method is provided through which any
man can become a Class B director except
through the favor of member banks. Class
B is therefore a good deal of a fiction.
The men occupying Class B directorships
are of the same general type and characteristics as the Class A directors. How true
this is is shown in the fact that in some
cases these Class B directors have had to
resign banking connections in order to
qualify.
I would therefore suggest the
advisability of amending the act by striking out these unnecessary and purposeless
distinctions.
I would suggest as a substitute method
that member banks be permitted to elect as
a whole, and not by groups, five directors,
but not until after they have made their own
nominations through a committee of their own
selection.
Such a committee can easily be
selected by states or by divisions of a district.
It can be comvelled by law to submit a list containing a selection of names.
The member banks then would vote with some
assurance that they are making actual choices
of men to represent them.
We would not see
what I have recently observed, and that is
nomination blanks coming in with every mail,
and every blank repeating the name of a nominee selected not by group members, but by
an unofficial clearing house steering committee.
The result of such a process as that is
that you have boards of directors who have
the power through unofficial organization not
contemplated or authorized by the act, of becoming self-perpetuating; and I see no way
in which this can be prevented so long as
the election provisions of the Act are left

1314




unchanged.
I would suggest that the remaining
four members of each board of directors
be appointed by the Federal Reserve Board.
Ey observation is that three men do not
constitute a proper governInent minority on
these boards. I think it is proper and
reasonable that the control of these boards
should be in the hands of the member banks.
For this purpose, a majority of one is entirely sufficient.
The Federal Reserve
Board, having the authority to name a minority of four, would never be at a loss to
secure in each reserve bank board the highly desirable and healthful influence that
can and should be exerted by a live minority.
It should also be considered that the Governor of a reserve bank, although not a director,
In one bank, at least,
exerts an influence.
he sits in board meetings and is to all intents and purposes a director. He is the
appointee of a majority of the board, and
consequently his influence is with the majority.
The Federal Reserve Agent, as
chairman, and pursuing the impartial attitude which a chairman should hold, is
hardly in a position to have the same influence, especially on any question where
there is a division of opinion between the
banking and the governmental interests.
Some day we are going to be asked what
real participation or influence agriculture,
commerce and industry have in these banks,
except as such influences may be interpreted through the medium of member banks. It
is with a thought of the criticism that may
ultimately come that I suggest and strongly
favor a simpler, more direct and more easily
The pubunderstandable system of election.
lic will readily recognize and probably not

d

criticise a banking majority when accompanied by an active government minority.
Ls at present constituted, these boards
are not understood by the public. and as a
matter of fact they do, not seem to me to
be working out as the act originally contemplated, that is to say, in such a way
that the government, the business of the
country and the member banks have at all
times an equal and evenly balanced power
Hand influence.
I do not make these suggestions as a
final opinion.
Both these subjects are
so impostant that quick conclusions should
be avoided.
I believe, however, that the
suggestions I have made will form a basis
upon which they can be discussed, and may
serve as an entering wedge toward two important improvements in the working of the
reserve system.

Mr. Per in informed the joint meeting
that the reserve agents had taken up for consideration the question of the increased cost of
bank examinations.

Yr. Delano reviewed the in-

quiries that had been made into this subject, and
discussion participated in by Messrs. Jay, Ingle
and 'ills, ensued.
Mr. Perrin stated that the reserve agents
had briefly discussed the question of transfers between the gold settlement fund and the Treasurer




1316




of the United States.

An important question in•

volved related to the expense of conducting such
transfers.

1.1r. Miller called attention to the

fact in this connection, that he had in his possession V7,000,000 in gold, which was more than
should be hold from the standpoint of safety in
the vaults of the Federal Reserve Bank of Kansas
City.

Further extending the discussion on the

subject of exchange, Mr. Miller said that exchange
in Kansas City was at a premium eight months in
the year, that it was the practice of the reserve
bank to buy all it could get at par or at a small
premium

but that it habitually stopped baying

when the rate went higher than ten cents per ,
thousand.. Mr. Tenison offered some remarks _further elaborating the same subject.
Mr. Perrin stated briefly the substance
of the report of the committee appointed for the
purpose of standardizing the reports on business
conditions, and the annual reports.

He then re-

ferred to the question of bond given by Federal

1_317

reserve agents, saying that it was the opinion
of the reserve agents that the amount now required was too Large, and that the cost of these
bonds should be borne by the bank to which the
reserve agent is accredited.

He further re-

ferred to the pending election of directors, and
stated some of the problems arising in connection
therewith, ezixessing the hope that the Board
would pass unon these as soon as convenient.
Lir. Delano described to the meeting what
it was desired to do with the maps and charts of
each district which had been called for by the
Board, pointing out that these materials have a
statistical value, and were not intended to satisfy more curiosity, or to supply purely general
information.

He asked for suggestions with ref-

erence to the data to be accumulated by this means.
Er. Hamlin directed that the question of
settling details relating to the election of directors be made an order for consideration by the
Board at the meeting of Monday, November 8.




1318




Ur. Bosworth stated to the conference
the result of a discussion carried on among Mr.
Warburg Mr. Jay and himself respecting the issue
of notes by Federal reserve banks against deposits
of gold and lawful money, saying that a common
ground with reference to the matter had been found.
He was of the opinion tnat the practice followed in
New York was wise, but that it did not materially
add to the lending power of the bank.

He further

criticised the present situation with respect to
the personal responsibility of Federal reserve
agents for gold placed in subtreasuries without
counting, and otherwise held.
On motion at 12 noon, the joint meeting
adjourned.

secretary.

APPROVE):

Chairman.

A