The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
At a joint session between the Federal Reserve Board and the Federal Advisory Council held in the Assembly Room of the Board, Metropolitan Bank Building, on Monday, November 19 at 11 a. m., PRESENT: Mr. Harding, presiding Mr. Delano, Mr. Warburg, Mr..Williams, Mr. Hamlin, Mr. Willis, Secretary. Present also, President ?organ, of the Advisory Council, and Messrs. Mitchell, Fleisnhacker, Swinney, Morgan, Wing, Rowe, Rue, Watts, Lyerly and Norwood. Governor Harding addressed the meeting, calling attention to the list of topics which had been placed with the Advisory Council, as follows: RECOMENDATIONS OF THE FEDERAL ADVISORY COUNCIL TO THE FEDERAL RESERVE BOARD. * ** NOVEMBER 20, 1917 DISCOUNTS AND INVESTMENTS: TOPIC NO. 1. Should member banks make a practice of discounting their own acceptances? Recommendation: While it may not be considered as be- ing in accord with best banking principles for a bank to purchase its own acceptances and carry them as an investment, nevertheless until a wider discount market is developed, which is most desirable, it may be at times necessary for a bank to purchase its OM acceptances for the protection of its customers. TOPIC NO. 2. Suspension of commodity rates and reasons therefor. Recommendation: The Council does not believe there is any necessity for a preferential rate for the rediscount of so-called commodity paper. TOPIC NO. 3. Is it desirable and necessary that preferential rates be established for customers' paper running not longer than ninety days, which is secured entirely by United States bonds or. Treasury certificates? Recommendation: To facilitate government financing we believe it desirable that there should be a preferential rate established for customers' paper running not longer than ninety days which is secured entirely by United States bonds or Treasury certificates. TOPIC NO. 4. General discussion of assistance to banks and savings banks especially in carrying investments in railroad and corporate Londe. (a) Vhat means, if any, are there of affording adequate relief under the present law. Recommendation: The present law does not permit any relief by granting loans to savings banks against the security of railroad and corporate bonds. TOPIC NC. 4. (b) Should the Federal Reserve Act be amended so as to permit the rediscount by Federal Reserve banks of notes secured by bonds of railroad or industrial corporations? Recomnendations: It is our opinion that the Federal Reserve Act should not be amended so ns to permit -the rediscount of notes secured by bonds of r9ilroads or industrial corporations, as such nmendment would be contrary to the spirit and intent of the Act as expressed in its title: "An Act to provide for the establishment of Feder91 Reserve banks, to furnish an elastic currency, to afford mennsof rediscounting commercinl paper, to establish a more effective supervision of banking in the United States, and for other purposes." TOPIC NO. 4 (Centinued) (c) Discussion of an alternntive plan. Recommendntion: It may be desirable to have enabling legislation to provide for the necessary financing of railroads, public utility corporations and s9vings banks either directly or indirectly, by the United States government during the duration of the wnr and under the supervision of a Federal commissions CAPITAL AND RESERVE REOUI ,NTS: TOPIC NO. 5. Should the Federal Reserve Act be nmerded so ns to allow state banks vhd.ell were in existence on November 15, 1914, to become, members of the Federal Reserve system, although their capitol be less than national bank requirements? Recommendation: We think it inadvisable no to amend the law. TOPIC NO. 6. Should the Board be given authority to exempt from the reserve requirements imposed upon banks in reserve and central reserve cities, banks not locnted in the business centers whose business in largely local, and which do not receive accounts from other banks. (Mote) The Board has received numerous requests that it ask Congress to modify the existing law in the manner above indicated, but so f'Ir has reached no conclusion in the matter. What would the Council advise' Recommendation: We think it undesirable that there should be any distinction made in regard to reserve requirements of banks located in central reserve or reserve cities simply because some of them are not located in the business centers of these cities. We believe however, that sooner or later the basis on which reserve requirements is established should be changed and should be determined by the character of deposits carried by the various banks under such classifications as bank deposits, commercial eposits and time deposits. We think, however, it is inadvisabA that any legislation looking to this change should be asked for under present cenditions. non PMPARCO: (Note) The Board has been charged rtith the duty of advising the Treasury in matters releting to foreign exchange, and to exportations of gold, and it would like to have the opinion of the Council in the following matters: . TOPIC NC. 7. To what extent, and for what purposes should gold be released for shipment to other countries? Recommendation: Gold should not be released for snipment to other countries except in sufficient quantities to settle unfavorable trade balances against us before the dollar exchange in the foreign country falls to a level low enough to increase intollcrably the cost to us of the principal commodities imported by us from that country. Imports should be restricted to such RS are necessary for cerrying on the war ere exports should be fecilitated in every possible way. TOPIC NO. 8. Should the stabilization of sterling exchange by purmheses of sterling bills in this country be continued? Recommendatiun: Ye'. TOPIC NO. 9. Should any attempt be made ,to stabilize dollar exchange in countries of continental Europe, such 7s Sweden, T4olland, Switzerland and Spain? Should an effort be made to bring the dolto its parity in South American countries? back lar Recommendation: It is very desirable to make such arrangements as are possible that do not involve the undue shipment of gold. TOPIC NO. 10. Exchange relations /ith Canada. Should unrestricted shipments of cold to Canada be permitted, or if limited, what arrangemente can be made to continue normel trade relations with Canada and to fecilitete the movement of Canadian corps? Recommendations: The Council makes no recommendations, as it is informed that exchange relations with Canada are in process of adjustment . TREASURY CERTIFICATES CF INDEBTEDNES: TOPIC NO. 11 What means should be availed of to secure a more general distribution of Treasury certificates of indebtedness? Recommendation: The market for Treasury Certificates is constantly broadening and we think it inadvisable and unnecessary that any special steps be taken to force their distribution among the banks. Additional Recommendation: Now that the financing of the Second Liberty Loan is effected it is our opinion thott discount rates should be increased and we would recommend that the current rates be increased onehalf of one percent in each of the various classifications of paper discounted or purchased by the Federal Reserve banks. He said, however, that topics not on this list • which might occur to any members of the Council should also be discussed. novernment financing, he said, was of more and more importn.nce from day to day and tended to overshadow other phases of banking.' He called attention to the fact that there might be in the near future sane demand for financing the needs of corporations by means of acceptances protected by warehoused goods. He described the raethod of conducting financing on this basis, and suggested that this be considered by those present. As to the commodity rate until recently in effect, he placed the matter before the Council, expressing the cpirion, tInt there probably could be little doubt that under existing conditions this rite was now obsolete. As to the rite for customers' paper running 90 days and secured by Government obligations, he called attention to the questicn whether preferential rates should not be accorded by Federal Reserve banks. "The same question presented at the last meeting of the Council is also again up for consideration," said Mr. Harding, "namely, the best method of relieving savings banks end other holders of investment securities. The situation is complicated by the fact thlt large issues of Government bonds have occurred. "What is mainly needed," he said, "is the revival of confidence in the outcome of present conditions." He thought it desirable that the railroads should be granted some increase in rates as the first step toward the relief. The question of doing anything further than this wns more difficult. Some had suggested an amerdment to the Federal Reserve Act in such a way as to admit to discollrt paper now regarded as invest• ment pnpor. This 'could he a very serious proposition, even in time of war or no a temporary renrt. It was the opinion of the Board, he said, that --,he diccount market should not be called upon to carry burdens of a strictly investment nature. It was not inconsistent however, that I.ederat th this, eserve bunks should ie discount- ing paper secured by Government obligations, because these obligations were today taking the place of commercial paper in financing business enterprises. Forg.tn interposed at this point, suggesting tint some incoming state banks thrt he knew of were possessed of vuch inelirible paper of short maturity. It was of the kind that Federal Reserve ban7 could buy in the cmen market if they chose. Was it not, therefore, rirht that they should 1091, on this security ? Governor Hnre.in-, said that he .7ould take the matter up specifically with Counsel if Hr. Forgah would furnish facts in cacti car.s. Governor Harding then called attention to the question of discounting non-liquid paper, reiterating the fact that the Board was against such a plan. Governor Harding next presented the question of admitting to the Federal Renerve System state banks whose capitals were too small to permit of their entering under the terms of existing law, but which were possessed of a good surplus and were othc-rwise desirable members. He also inquired whether in the opinion of the Council the Bu-,rd oucht to be authorized to exempt ,banks technically located in cities from the reserve requirements enforced there if such banks are really country banks. Governor HardinF then asked that the Council con— sider the whole question of the Fold embargo and decide He how f%r exportation should be permitted as a policy. outlined the Mexican situation, calling special attention to the frame of mind prevailing among ba_lk depositors on the frentier who thought that there was danger of some kind and who were preferring gold to paper currency. He further described the recent co iferonce between the Board an'l the Canadian Bankers AsQcciation with reference to the gold embargo and sketched the terms of the agreement thich h -id been arrived at. Governor Hqrdieg then raised the question of Treasury certificates of indebtedness and the host method of securing wide distribution of them. He said the Board thought this was one of the most import-nt questions now open. Eond issues ought to be as infrequent as possible, but this was feasible only if a ready market in the meantime could be found for the certificates as they were issued. The issue of the certificates was less disturbing to financial conditions tin frequent bond issues. lidas it adviaable, he asked, to suggest to each bank that it undertake to carry a certain percentage of its assets in the form of these certificates, He stated that the question of rates of interest on Government issues should be very carefully discussed and attention also given to methods of keeping the maturity of the issues as short as possible. Mr. Rue inquired about the Canadian situation, asking whether balances now to the credit of Canadian banks in I1e,7 York were not really the result of Canadian sales to England and whether Canadian bankers were not thus really putting upon American banks the burden of supplying gold growing out of operations with England. Mr. Morgan said he thought the question was really in process of settlement and adjustment. To this Governor 'Harding assented. Mr. Warburg said that what the Can- adians wanted was gold which they might use as a basis for further currency issues. He said he thought they should do something to change the conditions in Canada which made it necessary for them to place 100 gold be- hind new issues of notes. Mr. Viatts inquired whether there really was any Food reason for fixing the reserves on a basis of population, and asked whether it was not better to fix the percentage in accordance with the kind of business done by the banks. At this point Mr. Forgan described with some de- tail the reserve situation of Chiclgo, calling attention to the fact that there were eleven banks in the Chicago city limits all organized prior to the Federal Reserve System and at first located in small places outside of Chicago, but later included within the city limits. These banks had been allowed to keep on with their old capitalization and with country bank reserves until the present time. This raised the question whether a country state bank located in the same territory could afford to enter the Federal Reserve System and place a reserve of l3r. with a Federal Reserve Bank. In the case of one particular bank in which he was interested and which had 0400,000 capital, the cost of such entry into the system would be about f10,000 a year. He thought the Board should be allowed to exempt this bank from the city reserve requirements. Several members suggested that the real way to relieve the situation would be to permit the establishment of branches of large national banks. Fr. Fleishhncker called attentioo to the need of financing the public utilities of the country on some basis during the next ye-1r or so. Be thought they could not gat any money under present conditions. A critical period was likely to present itself during the coming year, and if their necessities were not disposed of in so-le way these companies could not go on developing. Nevertheless, the country Must have both light and power. "r. Hamlin invited the Council to attend a simple luncheon to the Japanese Financial Commission at his house at 1 p. m., on Tuesday, November 20 . Mr. Fleishhacker spoke of the question of shipping silver to India instead of gold as a means of paying for tr,:t commodities, and expressed the opinion that Japan could probably be induced to finance the trade on a uilver basis, just as India could. Governor Harding replied that it would be well to have this subject also discussed. On motion, at 11:55 a. m., the Conference adjourned. APPROVED: Chairman.
@FedFRASER