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At a joint session of the Federal ?c:=crve oard vA.th the Federal ,dvisory '3ounci1 at 4 p. m. on 7onday, February 19, IMESENT: Harding, presiding, hr.ig,,trburg, Mr. 2filler, Mr. Willis, secretary. aamlin, present also members of the Advisory .3ounci1 as follows: 1.1r. Forcun, Mr. Lorgan, :r. Aecord, Mr. 1;atts, Mr. 71eishhacker, Yr. S,7inney, Mr. dowe, Rae, Mr. Mitchell, Mr. .,yerly, Mr. ;:orviood. President ?organ read the report of the Avisory Council to the Board as follows: Topic ho. 1. Domestic Branches of Federal eserve DLinks as required by L:ection 3 of the 7ederal deserve let. In this connection the attention of the Council is called to the report of the Committee of the lovernors of Federal eserve Banks, which advises that agencies rather than branches be established. Recommendation: The Federal Advisory Council approves the amendment proposed to Section 3 of the Federal aeserve Let contained in Section 7 of H.R. 20661 and would recommend that further legislation should be enacted giving the Federal reserve banks the right with the approval of the Federal Aeserve Board to establish agencies rather than branches where they would afford all the facilities necessary. Topic No. 2. Foreign agencies or branches of 7ederal aeserve Banks. Should their establishment at thic time be encouraged? , Aecommendation: The Council recommends that the foreign business of the Federal reserve banks should for t'le present be conducted through correspondents and that neither agencies no branches should be established in foreign countries by any 7ederal reserve bank until world conditions are more settled and until the efficiency of the service rendered by correspondents be thoroughly tested. Topic No. 3. Reserve position of member bunks. anticipated in the present situation? What changes are decommendation: The position of member banks in relation to their lawful reserves continues to be one of considerable surplus. The farther onntinaance of this position depends on the continuance or discontinuance of gold importations. There seems to be In prospect further foreign loans of considerable size as well as a loan of large proportions to our own government. Considerable dislocation ill inevitably result from these issues, bank deposits will no doubt be larg;ely drawn upon. Then the proposed changes in regard to the legal reserves of the member banks Including the discontinuance of having balances legal reserve agents counted as part of such reserves will more or less upset the position of the member banks in regard to their legal reserves as they no:: calculate them. In view of these prospective features of the situation we look for a shrinkae in surplus legal reserves and for higher rates for money than have prevailed during 1916. Topic Na. 4. Sub-Treasuries. (See letter of secretary of the Treasury in' 7ebruary Bulletin, page 110). To what extent is it practicable or advisable that their functions be performed in the 17ederal 'deserve Banks? Recommendation: We agree with the Secretary of the Treasury that. the gold coin and bullion held against gold certificates and the gold reserve held against 7.5. notes and Treasury notes of 1690 and the silver dollars held against silver certificates should all be kept in the physical control of the government so long as the government's obligations are outstanding against them. The government cannot properly transfer its trusteeship to the Federal reserve banks or any other agency. In our opinion however it may be possible with the cooperation of the government under legislation providing for it to gradually retire the government gold certificates and allow Federal reserve notes in suitable denominations to take their place in the circulating media of the country. The government now merely acts as warehouseman for the gold whereas in the hands of the Federal reserve banks it could be more economically and scientifically and quite safely used as the principal basis for the issue of Federal reserve notes and would thus materially contribute to the strength and efficiency of the Federal reserve system; the ultimate object being the replacement of the government gold certificates by Federal reserve notes. By cooperation between the Treasury Department and the Federal reserve banks the latter might be kept well supplied with U. S. notes, Treasury notes and silver certiticates in denominations to suit the convenience of the member banks. We see no reason why practically all the current funds of the government should not be deposited with the Federal reserve banks and the government disbursements as far as practicable made by checks on these banks. The Federal reserve banks should become the Government depositary banks and should be used by the Treasury Department as such on an eiuitable basis as to the cost of handling the business and the profits to be derived therefrom. The question of interest on government deposits need not be considered as whatever profit there is in the business of the Federal reserve banks beyond 65 to their stockholders reverts to the government. 190 It is quite evident that there are many functions performed by the sub-treasuries which the 'Federal reserve banks are not eiuipped and could not probably be efficiently equipped to perform. We are not sufficiently familiar with the operation of these functions to 7ive specific advice as to ahich of them it would be practicable or advisable to turn over to the '?ederal reserve banks. de agree with the Secretary of the Treasury, that this is an ir:portant matter and should be considered deliberately. It would seem to be one which can best be worked out between the Treasury officials and your Board cooperating together towards establishing the most efficient and most economical method of handling the public business in the interest of the public. The benefits to be derived from any changes afford the best if not the only reason for making them. Topic ro. 5. Should the Pederal Reserve Board employ a competent man to make a thorough study and investigation of foreign exchange and its bearing on the efforts being made to establish dollar exchange in this country? Recommendation: The value of such a study or investigation would entirely depend on the practical knowledge, experience, efficiency and breadth of view of the student or investigator. A foreign exchange department manager whose training and experience has led him to rather in under the keenest of competition all the business he could control for the profit In it might find difficulty in grasping from a broader point of view the use that should' be made of such a department in a vederal reserve bank. At the same time no one could satisfactorily make such an investigation who has had no practical experience and who does not thoroughly understand the business in practice as well as in principle. Such an investigator should be very carefully selected and may be difficult to find, but when found we have no doubt that his investigation and report would prove of sufficient value to the 'Board and all connected with the 7ederal reserve system as to warrant his appointment. The Board should, however, tentatively settle in advance just --:hat attitude the Federal reserve banks will assume towards the foreign exchan3e bainess and the investigator should be given to understand thLA his investigation is to be made on the broad basis of how best Federal reserve banks can cooperate with their member banks in an effort to develop the foreign exchange business and to ez.t„llish dollar exchange in this country. The Investigation should be made broad enough to include the elements other than banking facilities which contribute to the development of foreign business such as transportation, inFurance, consular service, etc. aould the Coancil recommend a plan providing for rotation in its membershir decommendation: As the Aderal deserve ;,ct provides that such members of the Federal Advisory Council shall be elected annually by the directors of the Federal reserve banks we doubt the propriety of either the Federal deserve Board or this Council taking any action or making any recommendation in the matter. ADD1TIO14a, ...11400:11.11DATIZ: "..U,,V:ai) That in the opinion of this Council the last clause of Cection 3 of senate bill C259 (dated Feb. 14, 1917) reading as follows: "'Provided further, That in no event shall a bank accept for any one person, company, firm, or corporation to an amount equal at any time in the aggregate to more than twenty per cent= of its paid up :Aid unimpaired capital stock and surplus,'" should be stricken out." ADDITIONAL RLOOLULNDTION: Our attention has been directed to the proposed plan whereby a draft drawn by a member bank upon its 1Pedera1 reserve bank could be made receivable at par by another 192 designated Federal reserve bank. In order that such a plan should be Trade practically safe and effective in its operation drafts drawn under it should be made "payable upon advice" instead of "receivable for immediate availability" at the designated Federal reserve bank. In connection with all new plans inaugurated in the Federal reserve system for the transfer of funds or the collection of checks "safety first" should be the watchword; otherwise such unfortunate complications accompanied with probable loss as have lately arisen in connection with the collection of checks through the Federal Reserve P.ank of .M.n 7randisco on three Ctate banks in Seattle which recently failed are likely to be repeated to the discredit of the system. . Yr. ?organ stated thLt all of the recommendations rondo amnimoqs except the LE7t, which had reference to exchange conditions. fin this matter Mr. accord differed, believing that the attitude of the .tivisory Council was too conservative. on this recommendation, mr. ecord submitted tne follo7'ing minority report: WREREAS The services rendered by the 'federal reserve banks will be extended and made more helpful both to the member banks and to the general. public when exchange written by a member bank on the reserve bank of its district is made immediately available at a Federal Reserve Bank of another district, designated in the face of the draft. THLREFOilE de approve the recommendation made on this question by the governors of the Federal Reserve Banks at their meeting held January 22, 1917, c7e desire to state that the system .ill be farther improved when exchange written by a member bank on the Federal Reserve Bank of its District is immediately available at any other 7ederal reserve bank. Brief general discussion of the exchange situation followed. rr. Forgen then read the following resolution which had been passed by the Council, eith reference to the issue of Federal reserve notes: RESOLVLD That the Federal Advisory Council reiterates its previous expression upon the issue of Federal reserve notes directly aeainst the deposit of 1001 gold or 100: of paper, or both, .nd for the counting of gold held by the 7eder.1 Reserve agents as security for notes .s part of the gold reserve required to be held by the banks against such Rederal reserve notes. In the ()Onion of the Council, no more important recommendation has been presented by the Federal Reserve Board. ee, therefore, strongly urge the enactment of the principle into law. usoLirLD FURTUR, that the President of the Council is instructed to at once convey to the Federal Reserve Board this expression from the entire Federal Advisory Council. The resolution was discussed, and on motion, it eas agreed to modify it to the extent of authorizing the Federal Reserve Board to use its discretion as to transmitting the resolution to Congress. Mr. Forgan then read a copy of a letter sent to Mr. Swinney by a member bank in his district, protesting against the kind of publicity that has been given in some districts to preparations for the possible Issue of Federal reserve notes in case of emergency. Governor Harding then called upon a representative of each Federal reserve district for a statement of conditions therein. No. 1. The call resulted as fellers: Mr. Wing.- Conditions, are about as hereto- fore in the Boston District except that the transportation situation is making money rather scarcer as merchants have to be carried for a longer time. Some rediscounting and higher rates are to be expected in the near future. In the event of the declaration of war, foreigners in various industrial centers might withdraw funds rather heavily. The reserve bank, hoeever, is well eiuipped for emergencies. No. 2. Vr. Morgan.- Considerable surplus reserves now exist in New York. up." The banks are not unduly "loaned The fall in prices of stocks has enabled the banks to free their funds and to take care of merchandise loans on a better basis. J'd1 business, however, is being more or less held up until better iniormation can be had as to the future. There has been a reduction of foreign business When the internutional situation for a variety of reasons. clears, conditions can be well taken care of. The Federal reserve bank is in satisfactory condition. No. 3. The situation in Philadelphia is Mr. simil,r to that in Boston. lack of transportation. Merchandise is piling up for There is some strain on the banks. Importers are baying heavily .nd have to be "carried." The bunks, however, are well able to take care of the situation. The reserve bank is in good condition. No. 4. Mr. lowe.- Conditions in Cleveland, Pitts- burgh, Cincinnati and other places are disturbed and held up by lack of transportation, so that it becomes necessary to carry borrowers there. Otherwise conditions are favor- able and the outlook hopeful. No. 5. Mr. :Torwood.- Business in the Richmond Dis- trict is active, and the recent shrinkage in cotton has not proved particularly injurious,. Speculative holdings are small, and farmers are mkinL7 every efrort to get in a large crop. o. G. !*r. Lyerly.- Conditions in the Ltlanta District are as good as could be expected. Industries are doing well, especially the textile mills. oodwork- ing establishments have been someAlotat injured. Scarcity of coal has been a hardship. proved very injurious. The freight embargo has The banks have plenty of money, and rates are somewhat higher, Athough the demand for loans Is not strong. good. The outlook for the year is very The Ltlanta Bank is in excellent condition, nd is making a fresh effort to get State institutions into the system. Vo. 7. 'organ.The status in Chicago is like , 1:r. ' that in Boston and Philadelphia. There is a hesitation and a slo:iing down, due to poor export facilities. banks, however, are taking care of their :ustomers. is a good demand for money. much from brokers. The "here It is not necessary to bay Rediscounting is likely in the ne%r future, although of late the rediscounts have been running off at the reserve bank. No. 0. Mr. zatts.- There is probably more confidence in St. i.ouis than in nieago _nd elsewhere. In spite of the large percentae of Germans in St.:,olis, conditions there are very normal. Shipments of currency have been small, and there have been practically no drawals from banks. The deposits in St. Louis banks are at high water mark, and reserves are high. 7.7r. Mitchell.- Conditions in the Minneapolis No. 9. District are normal. The international situation has made Withdrawals of funds have almost zero. no impression. Prof- its have been large in all branches of business except banking. No. 10. Yr. Swinney.- Up to the time of the imposi- tion of the freight embargo, business in Kansas City was very active. down. Since that time there has been some shutting Train shipments, however, have gone :'outh instead of East and this helps conditions a little. The wheat crop outlook for the coming year is very bad, and the yield may be only half. Money is easy, the allies spending about 1500,000 a week for horses. The oil business is good. complaints have been heard in any quarter. No • Mr. lecord.- The b-nks are confident Yo. 11. and strong in the Dallas District. crops are good, the ff-rners making large deposits and being able to pay cash much longer than usual. 'ietailers are carrying small The outlook for the future is excellent. stocks only. The 7edera1 reserve bank Is not mach dra.:n upon, but business is beginning to increase. Mo. rr. 71eishhacker.- Except for the flarry 12. in (2eatt1e, conditions in the San ri'rancisco Tllstrict have T,o small State banks failed in Seattle, but been nor they have been .;eak for a long time. some anxiety as spreading in the community, when the reserve bank made a reassuring announce-went which qaieted the situation. There was a certain amount of trouble in r-ettinp; notes out of the Treasury, hich caused a delay of 27 hours. Outside of Seattle conditions are good and deposits ;- .roviin . The lack of rain has caused anxiety about the crops, but there is still time to CL.7e the situation, ir the vcther is good, for another year. the conclusion of the reports from the several districts, governor larding called for expressions from members the :;oa.lcil as to some points of policy that might occur to them. -r. -organ expressed the thought 111 that, te right plan was to go uhead-us at present, z..nd it for voluntary accessions to the stem. thouL:ht that while the system should Lr. iiecord be friendly to State banks, it should not defer to them too much. Mr. Norwcod cal.Led attention to the fact that the small national banks in the Fifth District uere now depending on the Federal reserve bank instead of on the larger national banks. The State eanks, no thouuht, wouid gradually come to do likewise.. Governor Harding called attention to the Senate bill's provision with reference to aceptances in foreign tmde, pointinsz out that ,..he amount of any one - ccept-nce wa:3 themin lildteu to 20; of Q4Diud. Mr. Fleishhacker moved that the hard be authorized to state that the Advisory Council recommende,1tit no limitation be placed on the aLount of any one acceptance, but that the use of tn, 106% power,.anu its division among different names be Left entirely to the discretien of the accoptinz 1;rik. Uon prevailed. At 5.40 p.m.. the joint session ,.djourned.. APPKVED: 441-6'71 Se e re tU 17y • The
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