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81 A meeting of the Federal Reserve Board was held in the office of the Federal Reserve Board on Thursday, January 24, 1929 at 11:00 a. m. PRESENT: Governor Young Mr. Platt Mr. Hamlin Mr. Miller Mr. Cunningham Mr. Eddy, Secretary Mr. McClelland, Asst. Secretary The minutes of the meetings of the Federal Reserve Board held on jaallarY 21st and 23rd were read and approved. Letter dated January 21st from the Governor of the Federal Reserve Bank °I; Boston, advising of the establishment on tnat date of the following rates for purchases of acceptances: Bankers acceptances: 1 to 15 days 16 to 45 days 46 to 180 days Repurchase Trade acceptances - 43/4% 4 7/8% 5% 5% 5% Noted. Mr. Cunningham, Chairman of the Committee on District #9, then presented 4 letter from the Federal Reserve Agent at Minneapolis, in reply to one ecldressed to the Agent in accordance with the instructions of the Board at its 4leeting on January 18th, recommending that the salary of Mr. Oliver S. Powell, St atistician in his Department, be increased from $4,500 to $4,800 per annum effective January 1, 1929. In accordance with the informal understanding at the meeting on January 18th, upon motion, it was voted to approve the salary now recommended for Mr. Powell. 473 . 1/2419 -2- Memorandum from Counsel dated January 19th, submitting draft of letter to tne Rnode Island Hospital Trust Company, Providence,R. I., with respect to the action of that bank, reported by the Federal Reserve Agent at Boston in a letter dated January 15th, in operating a branch in Woonsocket on the site formerly occupied by the National Globe Bank and the Mechanics Savings 13ank, wnicn went into liquidation after tneir assets had been taken over by the Rhode Island Hospital Trust Company, already operating one branch in honsocket; the letter pointing out tnat the new branch may not be continued if tne Rhode Island hospital Trust Company is to remain a member of the Federal Reserve System and requesting definite advice as to whether the bank plans to continue the operation of the branch or expects to consolidate it with its old branch in Woonsocket. Upon motion, the letter submitted by Counsel was approved. Discussion then ensued witn respect to the proposed letter to the boards of directors of all Federal Reserve banks on the subject of tne proper Ilee of the credit facilities of the Federal Reserve System, submitted by Mr. Miller at tne meeting of tne Board on January 21st. Mr. Cunningham presented and the Secretary read to the Board a reion of the letter submitted by Mr. Miller as follows: "The problem of exerting tne influence of the Federal Reserve System 4S a moderating iniluence in the movement of commercial money rates, is still us at tne opening of the new year. Tne extraordinary absorption of funds ' th speculative security loans wnicn has characterized the credit movement of ue past year, in tne judgment of the Federal Reserve Board, deserves particular attention lest it become a decisive factor working toward a further firming °f money rates, which would be detrimental to the business interests of the country. "The Federal Reserve Board nas on different occasions and in different places, notably in its annual reports, stated its position witn regard to proper 11Bes of tne rediscount privilege of member banks. Broadly speaking, credit 11 1/24/29 -3- St) accommodation obtained from the Federal reserve bank may be used consistently witn the purposes of tne Act for production, distribution, and marketing oPerations, in brief, for the requirements of industry, agriculture, and trade; pnd tne Federal Reserve Board believes taat Federal reserve credit used for investments in so-called speculative security loans, or in support of the market for securities of tnat cnaracter, is not, in tae main, being used for proper purposes. The whole tenor of the Federal Reserve Act makes it clear that a memoer bank is not within its reasonable claims for rediscount facilities at a Federal reserve bank wnen its borrowing is occasioned by reason of accommodations granted to custoJaers or otaers for tile purpose of carrying stocks, bonds, or other securities. In the opinion of tne Federal Reserve Board, wilenever taere is evidence taat member banks are maintaining a suustantial volume of so-called speculative ?ecurity loans with the aid of Federal reserve credit, tae Federal reserve Dank tnen becomes either a contributing or a sustaining factor in the existing volume of security loans, wnica is contrary to tae intent of the Federal Reserve Act, and the waolesome operation of the Federal Reserve Banking System. It is the opinion of tne Federal Reserve Board tnat, wnen member banks Which have substantial investments of tneir resources in speculative security 0i are called upon by tneir commercial customers to provide commercial credit accomodation, tne proper course for tnem to pursue is to reduce their 4.11 loans and taus put themselves in a position to take care of tne require'ents of tneir commercial borrowers without applying to tae Federal reserve aril= for credit, except possibly for two or three aays waile tneir call loans are ueing liquidated. You are desired to oring tais letter to tne attention of tne directors °r Your Dank in order taat tney may be advised of tae attitude of tne Federal 4eserve Board with respect to a situation and a problem confronting the e4ministration of the Federal reserve banks. After your directors have fully considered it, the Board desires to be ; 4vised oi their attitude and taeir views on (a) how tney keep themselves 211Y informed as to the occasion of borrowing by their member banks: (b) :flat method they employ to protect their institution against improper use of 4 t8 credit facilities by member banks; and (c) what other steps they propose ' 0 take in working out a further procedure where existing methods are not roving fully effective. The Board realizes tnat time problem of adequate control against mis4:e of the credit facilities of the Federal reserve banks of tne kind tnat 40_ 8 given rise to tnis letter, is not free of difficulties. It also appreciates no one method of procedure would be equally effective in all districts ! lril t i in all circumstances. It is, therefore, not disposed to be dogmatic ell its own attitude. It is, however, firm in the opinion that a more effective chtrol is needed if the Federal Reserve System is to function satisfactorily. The Federal Reserve Board will await with deep interest the reply of Y011 i -r directors to this letter and bespeaks tneir prompt attention in order 4at it may have tneir reply at an early date." A detailed discussion ensued during which, at the suggestion of ill(lividual members of the Board, the letter submitted by Mr. Miller on 1/24/29 -4- January 21st was amended so as to read as follows: "The firming tendencies of the money market which nave been in evidence since the opening of the year - contrary to tne usual trend of money rates at this season - make it incumbent upon the Federal Reserve System to give constant and vigilant attention to the situation in order that no inIluence adverse to the trade and industry of the country snail be exercised bY tne trend of money conditions, beyond what may develop as inevitable. The extraordinary absorption of funds in speculative security loans which has characterized the credit movement in the past year or more in the judgment of the Federal Reserve Board deserves particular attention lest it become a decisive factor working toward a still further firming of money rates to tne prejudice of tne countryls commercial interests . The resources of the Federal Reserve System are ample for meeting any probq.ble commercial needs of credit without difficulty or strain provided the credit facilities of the Federal Reserve System are vigilantly and efficiPntly alministe red and restricted to such uses as are proper. The Federal Reserve Board has on different occasions and in different places, notably in its annual reports, stated its position with !',egard to uses of the rediscount privilege by member banks for purposes riat are proper. Broadly speaking, the purposes are proper when the credit ”oommodation obtained from the Federal reserve bank is for productiv e and gal stributive operation s, in brief, agriculture, industry and trade. They bre not proper men occasioned by extensions of speculati ve loans by member oarlke. While such loans are not prohibited eitaer by the National Bank Act mr by the Federal Reserve Act, the whole tenor of the Federal Reserve Act ,./ (es it clear tnat a member bank is not within its reasonable claims for ediscount facilities at a Federal reserve bank when the occasion of its orrowing is t (a) (b) Speculative loans tnat it contemplates making; or Speculative loans tnat it has made and which it desires not to liquidate. There would be no difference of opinion as regarls the impropriety seeking Federal reserve credit for the purpose of making security loans. It is the opinion of the Federal Reserve Board that tne objections that . lie against tne use of Federal Reserve credit for the making of speculati t e loans also lie against the use of Federal reserve credit for the mainling of speculative loans. The Federal Reserve Board has no disposition to assume authority to 4 _ , t erfere with the loan operations of member banks so long as they do 40,1? 4 involve the Federal reserve banks. It has, however, a grave responsib ility ofenever there is evidence tnat member banks are maintaining a given volume tkl ePeoulative security loans with the aid of Federal reserve credit. When a eh is the case the Federal reserve bank becomes eitner a contributing or I/ ijl etaining factor in the existing volume of security loans. Tais is not, th tile judgment of the Federal Reserve Bonrd, in narmony with the intent of e Federal Reserve Act or conducive to the waolesome operation of the banke sYstem of the country. Of 1-.24-29 -5- "It is the opinion of the Federal Reserve Board that when member banks waich have suostantial investmentsof tneir resources in speculative security loans are called upon by tneir commercial customers to provide commercial accommodation, tae proper course for them to pursue is to reduce their call loans and tnus nut themselves into a position to take care of the requirements of tneir commercial borrowers. The Federal Reserve Board has no lisposition to question tae propriety of investments by banks of sarnlus funds in the call loan market. The call loan market is capable of performing a useful service if investments by banks in it are treated as a secondary reserve to be availed )f as occasion arises. It may become a source of mischief, if the banks are permitted to regard such investments as sometning not to be disturbed except under tne pressure of exigent circumstances. You are desired to bring this letter to tne attention of tne directors of your bank in order that tney may be advised of the attitude of the Federal Reserve Board witn respect to a situation and a problem confronting fle administration of tne Federal reserve banks wnicn for more tnan a year 'las been exciting widespread interest and concern. The Board has undertaken to give a candid expression of its point of view and attitude. It would greatly appreciate a similarly candid expression °f tae attitude of your board of directors. Furtner, it would like an exl?ression of the views of your directors on (a) now they keep theAlselves fully Informed as to tne use made of borrowings by taeir member banks; (b) what Method s they employ to protect tneir institution against improper use of its credit facilities by member banks; and (c) how effective tneir policy has been. The Board realizes that the problem of adequate control against mislise of tne credit facilities of tne Federal reserve banks of tne kind that t'1,?ve given rise to this letter is not free of administrative difficulties. It the matter primarily as one of good operating practice. It also apprecithat no one method of procedure would be equally effective in all disricts and in all circumstances. It is, therefore, not disposed to be dogmatic l e n its own attitude, but is, however, firm in tne opinion tnat a more effective : 311trol is needed if tne Federal Reserve System is to function satisfactorily tnat methods of control suitable to the situation and not invasive of the vv ivacy of member bank operation can oe worked out by each Federal reserve bank _Ilat will have tne approval and support of the majority of tne member banks tne Federal Reserve krstem and the general body of puolic opinion. The Federal Reserve Board will await with deep interest the reply of 14.r directors to tnis letter and uespeaks tneir prompt attention in order that nlaY h9ve tneir reply at an early date. It is also requested that you treat this letter as a coniidential , c ument, intended for the directors of your bank only, and your reply will be reated so by tne Board. The primary purpose of tnis letter is to undertake to establish a ecIT1Il°11 viewpoint between the boards of directors of the Federal reserve banks ati`t tne Federal Reserve Board." 4 At tne conclusion of the discussion, Mr. Hamlin moved tnat tne letter be further amended by the addition of tne following paragraph: 1/24/29 -6- "The Board does not intend, by tnis letter, to advocate any sudden, drastic liquidation of existing speculative loans. It simply is layinc.; down a procedure primarily for tne future, with tne feeling, however, tnat a gradual conservative liquidation of present speculative loans may be brought about without injury, tnus releasing Federal Reserve credit for normal purposes." Mr. Hamlints motion was put by the chair and lost, voting as follows: members tne Governor Young, "no" Mr. Platt, "no" Mr. Cunningnam, "no" Mr. Hamlin, "aye" Mr. Miller, "not voting" The members of tae Board did not object to tae substance of the additional paragraph bat expressed the belief tnat it is unnecessary, as tne position of tne Board is already made clear in tne proposed letter quoted above. Mr. Platt tnen moved that tne letter, in ,tne amended form quoted above, be approved witn the understanding tnat corrected copies will be supplied to each member of tne Board and tnat formal approval will be deferred until the meeting of tne Board on Monday wnen a date for its transmittal will be fixed. Mr. Platt's motion being put by tne Chair .was carried, Governor Young voting Mr. Hamlin stated that he rests his vote in tne affirmative on tne fact taat tne letter is not a ruling of law, but merely S. declaration of good banking policy and does not advocate or suggest drastic liquidation. Governor Young reserved tne rignt to insert a statement in the record regarding his vote. Mr. Miller tnen moved tnat in view of t_le considential nature of tne proposed letter, tne Governor be requested to see to it taat special pains are taken to maintain tnat character for it and t_lat in the event of anything in the nature of a leak a thorough-going investigation be instituted to determine wnat cnanges in tne procedure or organization of tne Board should be made. Carried. 1/24/29 -7- Mr. Hamlin then submitted, for the information of the Board, a letter addressed to him under date of January 22nd by the Governor of the Federal Reserve Bank of Boston, quoting the following resolution adopted by the board of directors of that bank at a meeting on June 20, 1928: "Resolved that in the judgment of this board of directors, the funds of the Federal Reserve Bank are primarily intended to be used in meeting the seasonal, temporary or unusual requirements of member banks and that continuous borrowing by a member bank as a general practice is inconsistent with the spirit and the intent of the Federal Reserve Act, and with tne policy of this bank, and that the Governor be and ne hereby is authorized and requested to bring the substance of this resolution to the attention of the officers of any member bank which shows a tendency toward making continuous use of reserve bank credit, with a view of having such continuous use terminated." Noted. tlq2JITTS OF STANDING COMMITTEES: Ipated, January 22nd, Recommending action on application for fiduciary powers as set forth in the Auxiliary Minute Book of this date. Recommendation approved. January 23rd, Recommending approval of the application of Mr. George F. Gunnell for permission to serve at the same time as director of the Ashland National Bank, Ashland, Ky., and as director and officer of the Kentucky National Bank, Catlettsburg, Ky. Approved. 13ated, January 23rd, Recommending approval of tne ap lication of Mr. James W. Turner for permission to se e at the same time as director of the Ashland Natio Bank, Ashland, Ky., and as director and officer if the Paint sville National Bank, Paintsville, Ky. Approved. The meeting adjourne4 a 41)Pr'oved: Gov ;rnor. (-/
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