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e x e c u t iv e ja m 3 \l Minutes cor: m i tm ie& m k o f th e o o m n April x s . m s . A Keetin^ o; t it Kxcic live Co itt.ee, called the ^esiient, m s held in the F«4eral H ea erve Board room in the Treasury Department, ftohington, B. C., Monday, ^ r i l 19, 1915, at 10*90 A.M. Present: Siesars* J a m a B. Forgan, in the sllilTt L. L# Hue, Daniel Ting, W* 3. Hov»f and Merritt H« Grim, Secretary. V: ->e ;t, . J. I", o r -m 0, (in >.urope). The President presented to the m e< t i n g a copy of a letter ftois mt, F* A, Delti.no, Vice Governor, Federal Reserve Board, dated 1 '^ rch 5th, 1915, on the subject of leaiscounts between Federal Eeaerve Panics, aid h i a re] ly thereto, «Jated Ktrch 7, 1915. ’r. . 3. I owe, raove# seconded by L. Z . Hue, that the residents reply ef Mftreh 7, 1915, be apiroared* lotion unanimously carried* • claro* letter i> s olio a: ^as injten, Kareh %1915. Tear ”r. Forga? • The Board will soon have to deal for the first tin* wit! the question of rediscounting letween Federal reserTe barJu., aid haa already discussed the matter Informally* 4s the first transaction of this kind Mgr be r egcurded as establishing a principle, the Board deems it wise to udvise you that this question is no*# under consideration, in order that you may hare an opportunity of giving it the benefit of any au^tfctlOBs tat you s.ay a .ern «xo^vr to .a>;e. There see?® at present to he no serious difficulties in connection r i t h rediscount operations betv*een districts, aiid the Bouru does not feel th*<,t the Luittfcr wuxr&nte calling tiiS Advisory Council together for < rence. Should you, h w r e r , entertain a oontrsury opinion, v» would be gla* at any tii&e to meet the Council or its Executive Co Ittee for a discussion o f the question# The Federal Reserve Banfc of Atlanta has no* urner a iscount for ita :^iber banks cor^roial paper aggregating approximate^ $ 5 ,200,000. and its net cash reserve against |ls net liabilities is but a Uttie than 45^* ve are approach!!^ a a when southern banks begin so reai^eount freely, v?*i it is ^sobable that ihe Federal reserve ban’s in ?: « southern district* will W f o r e long have occasion to aaJk otlier Federal reserve banks to discount for them* The surest len iuas been na.*e that a n y Federal rest*rve banJk so desiring s houM have an opportunity of partielpating pro rata in the purchase of |ha.per from the southern reserve institutions* As ^ou recall, the Board early in Jonu favored a re« auction of interest x^tee in the a uthern iat? icts in <ra« r to en* r a c u T r o e m e a r m of tics FID HAL AWISOEY COUSCIL April 19,1915 oowragf the retirement of Aldrleh-Vrecland currency, mad lh» low rates obtaining Imve been dffective in mat^rialiy reducing th« amount of Aldrich-Vreeland currency outstanding in the south* It see&s probable in fact tftat by April 1st there will be prasticdlly no Rational Bank Fotes in circulation in ti*e south except those secured by United States Bonds* When the Bocjrd a; roved the present discount rate* for the southern banfcs it was realised that tae banks would sooner or later reach a point where they mm* t rediscount, thdLs giving <*n opportunity for Federal reserve ban&s* in other sections to employ profitable m b s of their funds in the south* .*s you }-noi, Sect ion 11, of tii© Federal I.ea«-rve Act impose* upon the Board the duty of permitting or requiring F ^ e r a l reserve banks to rediscount for each other, at rates to be J ixeu by the leasral Je^erve B- -id* While tut Baara ^os-ia refer to auoj t a xolicy, as tw tt mm the public Interests will permit, of leaving tiie initia tive in these transactions to the Federal reserve banks, from whoa it expects shortly topareoeive suggestions as to rates, it seems pro* per that the Board should formulate its own v i e w regarding the sub ject, particularly ao t:aae rates m a t ultii ,tcly be fixe by thm Lf. .r i• It seen* to the Board that in consider lag the question, that the Federal Be serve banks &ay be properly regaroed &s coral onertt parts cf a unified system, ths prestige attu success of entire Federal Reserve Bystroa is involved • 3fc«t novr it is a problem with sooc of the Federal reserve baitls to earn t; eir operating expenses ana dividends adding to the dangers inherent in a ^reut abandonee of ;noneyt which condition, now exists in certain districts. On the other M l . tfee c o u n try a t la rg e * n o t y e t th o ro u g h ly u n d e rsta n d in g the 1ro b Ia n s p e e u lia r to F e d e ra l r e s e r v e b an ks, may view w ith d is a p point. e n t, even t iou h it iio u i re&uon, 11.e i n a b i l i t y of any o f V ■ Han5 ,> to r-a/n a . t o ; « r n U'rn* Those Federal reserve banks whieh rill have occasion to negotiate for a rediscount of their ;ajer will have found locally ample opportunities of employing their funds* For ©asmple: the- bank ©1 Atlanta has at present invented more titan 310$? of its capital, which even *d£ 4^ shoula mews a gross return of 12 i$f, «• that the organisation and op rating expenses and a dividend of 0 . would a rear assured. Whatever this bank would eomn in saccens of 65? wouli go, one- .If to its surplus account and the other hulf to t' -e overroasttfc* An abnerrmlly loxr discount rate granted by other Federal reserve banks t© Atlanta suight, therefore, bring about the anomalous position of a profit to the government from that bank at the expense o f other Federal reserve banha which iight not be making their dividends* As dividends are cumulative, the ultimate m u l t to the gsverro&ent ana the bank® will be the sums* It appear*, therefore, that it would be more rational, satisfactory and helpful for Jill the banks to earn ti*eir dividends if it cun be dons with due regard to t,unserv«*tiwia* Present conditions a re #§ r x m r r v n : comttTjKB of thf T; trPAL ADVISOf!Y C tDTCIX, * ril 19,1915 a b n o r m l # as tMe demand fcr banting eecem odation i.i eonfined mostly to the south. I n n o r m a l tine* banks deeiriAg to dispose of paper are the recipients of a service rendered «.y other bdnxs, and the rates fixed for these rediscount 01 orations generally exjreua t is condition* Qrainarily, one M f f s U reserve ban! would regard its first duty as being to its owe a m b e r banks, and would feel that in placing funds at the iio osal of oilier districts at the rate given its own member bunks tisit it would be according as liberal treatment to others as could be enacted. This §*oulu uuggest a rate of around ^ at this time, am that Is the lowest rate w * prevailing in any of the districts. Howevert the argument say be made that the ruling rates in m.jsy districts are nominal, as under tIv m but little business is being secured by the banks. The natural eagerness Cauaea by present conditions should not lead the Federal fteaerve Board or the banks to a policy of exaggerated lib erality, which wouftd not add to the actual rofits of the banks which are expected soon to offer the. er for rediscount9 but mi it lead to over-stimulation of expectations, with inevital le 1 isai •oint ent later on* I have written you at length in order to put the matter before you fully, ,na ill be lad to xiave an ex- ression ox your Views by telegrapii if passible. Very truly yours, (signed) 7 . A. Tc Icvho, Yio e Cov* raox . vr. ’or.- v *j re -ly is ;w« folio* mt Au :;usta, 1'e r •.-r. /a*, *reh 7,3 21 b elanos I vR1 H ;ten to answer it* am in receipt of yournfavor of the 5th Unde r present conditions Z assure that such Federal Reserve Banks **s 1 ,c& a local de and for rediscounts ~ ill be ,lad of an epporti nity to rediscount for such ban k# as are having mere d< t ail t; ey C, -?■ su_ ij . Under such conditions the accomodation is mutual and the benefits should alao be mutual between the Federal I.eserve Bar' ring assistance *nd those fltrttiffhin^ it* It mey be as* sur$ea that the Southern banJka are supplying a legitimate ex a&sive de land for credit created by conditions in the South in eonneetias with the cotton industry* Such a 4eiano should not, ho-ever, be sup plied at rates wtii re abnor ally low for the j^jrticular disti icte. •' strength of t* and for rediscounts should measure ana govern the current rate for thest in (ac district t*,nd the rate siiould be Jitptly raiaad - net unduly - whenever the demand increases beyond and ability of the local banks to supply it from their wopcuTm coiaiiTm ; o f rm r*n I: A t ADVISORY a m OIL a ril 1<J93M9 o*.?n resource**. Unaer t *;»e circumstances the /> a * .*-• it© B ai of the Southern districts reattoru»bly and equitably be entitled to sake mtm rofit on the cow^rc lul paper with which they au* ply th* ban; 0 in other district* which from the standpoint o f earnings need it m much* In other words, they should be paid for their tndortBifli of th* paper they rediscount* It wcraM t *erefore mmmm that the local rt iii Ki junt rate of Federal }]es*rr* Baste reaching the li&it of their own resource* should be promptly raised say ^ above the rates current in the districts where no such local demand prevail*. The banks in the districts having a brisk local de&and could then rediscount at a irofit with the bank* in the districts lao>.in such ac.*ia4t &s to eetabliai'iinc^ a ,rltciple governing tlm fixing of rates of diicaunt between Federal He erve ban*## in agr opinion, th* Federal F:eserve Board will have to recognise and be governed by eonaition* > t h r y exiut irom time to tte** If the deaand for rediscounts by a particular Federal Beserve Bunk should be caused by a falling off in ite deyoait* or reserve resource* at a ttoe when al} the banka are experiencing *ii iJLar condition* to a greater or lea* degr*e, then eitfa p ^ t i e u l a r bonk should not expect to rake a .rofit on th* p ^ e r it require* to rediscount hut *heuld *j* lud to supply ite eiidorse ent without actual irofit. tfra er condition* <a* t ey no* exist it woulvi seea to e ti*&t the rate* current in district* having a rcdiaeount de* and beyond the resources of their own Federal Reserve Banks should be establle&sd at one per cent above Due rat** current in districts euffering for Icick of such a demand and that rediscount* between Federal Reserve Bank* tiiioula be i&ade at the rat** current at tne bank* fgranting t m x u a x counts. It would be very desirable, I t ink, to let any Federal fcjerve Bank so desiring iuave an opportunity of participating pro rata in the r*-di&counting of papa* for th* Southern reserve bank*. I t link fu©>t of them would be willia ; te hare the buwiness transacted through the Federal Ee**erve Bank of Hew York and to have their accounts with it charged with their pro rata share of any redl**ow»f wad e . In thi* way the risk on the pap** rediscount** would b* equalised a ©ng all participating bank*. This doubtleso would be s m convenient for th* borrowing bank** and the book*k*eplng Ik tween the loaning banks und the Tea- York Ba^k ' ^uld be u simple riattei . These are *sy personal views on the subject of rediscounting between Federal Reserve Banks. A copy of t;.is letter will be sent to each ttstber of the advisory council a c that any member desiring to express his vie*?* on the subject will have an opportunity of doing wo by ■ v t.ir<;. lr» et ly tf< y e v . Ve/y truly yeujs# uiaent Asivi .ry coutkj il. xxkcirrm c o k i i t t o k o t t h e FUXlBAL ABVIBOITJT COtfKCIL fs A ril 11«,1916 The President laid before the juetting tvro resolutions passed by the Directors of the federal heaerre Bunlnof Chlca o t oil April 10919fcft as follows : •KE90LVFD, That it is t e o inion of the Bo.^rd of Directors of the Federal P.esjerve Bank of Chicago that the Federal reserve Banka oh* ould buy Domestic Acceptances only from m*wtoer banks with their €»ndcrse ent*. "PI'S OLVH)f That r . Forgan be requested to convey to the Advisory Council the opinion of the Board of Directors of the Federal Reserve Bank of Chicago, that the tendency of c^ber banks to put into 9time deposit ft or ’50 day notice account1 a p ~rt of their a o w i & r e l a l deposits in order to reduce the reserve requiroments to 5 f inimical to the eomreroiul interests of the country ana dangerous to t. e eribrr ban) j". The President then oalled the attention of the nv etla;'; to the nsfiriorandua of subjects upon which the Federal Beserve Board aeslred the views of tsie Federal Advisory Council, aated A ,ril a, 1916, copy of T/hioh %a hereto attached ana u . a t of t «ue * inut^s. ., •.i • For .n should ini orr. t e U.uc.r,,x J surrvethat tne >:xeoutivs Corjiittee would be clad to meet them for an Informal exchange of views in regard to tli* v ;rious questions, contained in their e or^ndum dated a. ril ath, 191 v Thereupon • Fori an cal~*a on the Federal Reserve Board a no arranged a joint meeting at 2 830 P.*. The so i ittee then au journea m til to £ :3 0 P. • J O Ii.T MET ? ll; 0 OS’ T in. x o 'iv m c o m m x w ri or m m asAL um irnm OOUJiniL Aim TiCt T O S H A t iil* E K V S i*OAKD . A joint ‘Cwtin oi t in 1;k&vj'&X l *eeenre C u ..• . . . i o f room F#ae3fri>l M v l e e r y i*r«*as»tt lie i>•.;*£« 1, C, ‘. H i ■. * j i # J# . i l r. $ .«rck tUe IsJtsSutA.vs in t o e 1*0 **iPd C w jn o l i v m m h sX d in %im Tre-iujury Ttojuurt* « n t t A4 r i i r - r . i i r i -g, A. * 1 1 i',»,1-JU S . I 9 f 191& , a t £ :^ 0 P*J‘ . "Yeal ain,, I I ’; 1 . :-»# .^a 1 .... • ..j. bui * ^j j rko* . .C* *.'iX iis# tieor* t&ry of the I$o<*rd# ttnd ;isir«« J* B# Fcix,i>^is# L. L. I>u«t * S. , . •■. . ; '■ . , # * of the Federal Advisory Council. l:r, D t k a o o U l « 4 th*t the m # l i A | would fes considered Infcr^^l and tb&t r*o 4tiut»» would be tm k svu A ll th e q u e e tio n e re fe rre d to In t > - Z»o**rd to t?.e cout^ IX ^ e re t l* e r c n o r & iK iu c * o f ^ u b j e e t © >f,n I n ; oitr-^lljp 4 ^ssusesd s u b m it t e d &t Xtft$th» Ur. Xteluns usived the ttwutirs COKv-iittss to *iu^.;sst *ny oh«fl|wi th sy * e u X & ska v i* * e «*e'iie« of At i 1*0 19X5§ * * .. in 7 e d * j r * l J t e s e .j'v e B e ta -a 'c u j r e u l * * * uiw regui. tier<*> J .>., fitil ■ ..-^jcu:.-. m Kt uertoo 01' IX e n d 1 X&. Xaf u x m irm m m ? m * c& m x rrm of ths; 9 & r ’h * L h m i m c t councn, kpm 20,1910 A ; eeiiag of the Exeeetive Ceoaittee cullea fc\ Uie Preei&ent, *us M.I.; in th<- I’edii v^<i! .,1 it jsrve Lsasrd x q ^\ ten, i«. C.# Tucsusy, Ajril ,:0t in t ». Treasury Ifej**rt.:«®tf 1915# at 10, A*I*. Prtscmt: rej..rs. t*-. es 13. Itax.j&n, in the c;air# I. I** rue, Daniel G. Vin-;.t . S. Kerritt • Jri-, ecretary. Ab^rits I-r. *T. * "er.., ..n (in l.urope)• Kinutes of the iJwcttitc Committee l a i d on A]ril 19th tore read and rov? . the c o m it t M proceeded to consider the r e«orano«in o f question* mhmt*%ea to t? e Ik*c*;;rul advisory Council ky the FetuTul Reserve BeorcU The following answers were un&r*i»ieusly adopted by tins C o o k ittee as its reeesg&sendationr* to th® Federal Advisory Council: Ho. 1. The ?«dtral Advisory Council «fltr careful corn*id* ration of the subject of acceptances os set forth in the first question stabsitted fej the M « r & l titm m r ve Board under date cf &|ril 0, 1915, begs to *wdviae that it hae not changed its opinion in re 1 st ion to this quest ion m a tat ©4 in its cot* tiniest ion of January 1 9 , 1913, as felloes: •That for the present at least we deoat it wise for th#:? Federal Becerra banks to buy in the open m r ) » t under Seed ion 14. benders 9 acceptances and bills of eKcaange only when such bankers* acceptance* or bills of exchange are the acceptance* or bear the endor aensent of M s & e r banks* Siash M m d M K M I should also be subject te the follow* in, limitations •rovided for aeeeg&ttMMNI under Seat ion 15, as amended, t an offered for <i ioour;t, m follows: •Any Federal Be serve Bunk may discount aceox tenses which are baaed on the im ^ ortat ion or exportation of goods an4 which have a maturity at t i m of discount of not more than three aontho. The amou-.t f isero p t m o e s so iacconted ©hall at no tiiae exceed t:ie p%id uj capital stock and surplus of the bank for WAieh the rediscounts are jpa&o*. \ But zm the Federal reoerve Board has dec iued to alio* Veaeral Reserve BanVs to purchase acceptances of State bonks and bankers in V v or;an narkett it is tha Oj> inicn of the Federal Advisory Council jh m t such >.urchases should be limited to uuol State banks and bankers r u&e issue of acceptsnses does not satceed on*:, hundred ier sent of ?. eir c;,. ital and our ltm funo •• .;?•. • It. itf *;r: ini 1 - t -v V<\ ,v..l V^vise^ ' .■ <1 t, .vt see ( ctanees based upon the i-ore* «nt of or e x e h v M l m between foreijn countries ahoiiln be ell ,ib!e for discount or j^urehase by the T - r .i Te;3*--EtaiJ-ii?* K X H d Y iv fc ocm tvrm car tm m m & m * advisoit* council :\c* £• e tfO not believe tfc&t thn ;.reu< nt U a*jtix ;o#i&i5 u ;rvui t.io u & ti r f r tte M m l StM»m Write to §» into the fcrt^ n ix d i« g i tatUwcs* It ifi tlie opinion of ti*> Ffr.-crai Adviuory CtuuoU that present financial and business conditions do noi vs&ke it desirable or n#ces*sary for the Federal F t o e n e banks to 50 into the open market ic jnmrlioc i>— utic ao<?eptcw»ce ef mm&mtmmtm and aiMtfaeteraa* &c. 4* ?fce >'tH*cjrul <U.v_ .,oxy Hound11 a reclutes i t? usiratllity of ceeorias thf adi l u a i o n of ti*> State banks into the Federal reserve oyster* Ve wuJkb U«? ref ore eo&i e«t that t, e federal Receive Bc*»rd proceed to ff rraUate isueh re-;u3u-*.tiene os in its JudiTvent arc ^-ropo* and vould reboot that before tl*eir circular on the subject 1 ® 11 iu Count; 11 bo lv« r* m oj..et t nlty to consider it. TI10 time ti^vina arrived for the convening of the federal Adtieory Coy :-«c11 t--* ' x c c stiv e Co.. ^ ijo ta n e a * MXSUXM v m m A i advisory council Atr u ;?o, m » A etatutory m a t i n g of the Federal Adrioory Council «u« hold in the Fetural i,e trve &oi*rd rooai in the Treasury De^artraar.t, Waai;in*£ten, E* C., TnaaiW, At ril ;0, 1918, at U A. I. Prceents Vaatfira# &a«*ie £ # For*;^, in v « C a lr, L. I • JJue,s .u.Iiowe, George J . itoay, Cluarlea A. I ^ e r l y , K o lia V a lla , 3 . I . Swlnnay, J« Howard Ardrey, «nl Merritt H. Orim# Qearetar^ • Absent, ?eaere* J. >>. fcor&an, 0. V# Juf ir^y -urn Areulbala SUlne* Mr* F o r ^ M w y t u i m l that Ittr* Herman rm » in Europe, that Mr. tfafs'rjuy vie m a y oft a Weatorn trip and tl*at fcr* Kaine wa» u t U i M d on a&count of the abaenoe of n m m ^ l ofiicera of M o baftlu Ttia u a n i t M Of tac X'-.ir*uX ‘v/i^ry Cc.---.-cil of CSUn. 19tii .*rd -0th, coulee of w}iioh had been sent M&feera were ap^rorad* The minutee of a neetin^ of the I2*ecutiTe Ooimlttee of April l$th eere read* The Preoidant aiated that the Bxeeutiire Comittee had held a Beating tale Bernlng at ^hloh unaware were drafted to foud of tho queet ions* eubmitted to the Federal \ a v leory Council for it© eonoid* ration by the Federal l<aeer*e Bourn **na tint they vauJUi be taken a* ^ U x . The resolutions paaueu by the director*! of th® Ffeaural Reaarva Bank of Chicago referred to in the isinutea of the Executive Co^ittee on A^ril 19th, were reiaa for the informtion of the Council. U x . Bue then r^oved that Um mimttoo of the Lxeoutive CaarUttee of April 19th be ap, rored and that the resolution© of the Federal fteeerwe Bank of Chicago therein referred to be eubmitted to the Federal lieoerre Board for ite consideration. Motion unania»uely carried* T£ie Preeiaent reported that lie h**d arranged with Ur. MilliefSearetaary of the Federal Beserve Board, to have all circular* ana regulation* ia&ued ana to be leimed by the B o ^ d forwarded vhan ana ae issuer* to the member a of the Counoil; also that each of the Federal fteaerre banka had contributed *150*00 toirarda the payment of the oecretary'e aalary and incidental expense a for the current year# He also d»ew alter ticn to the letter ha hod written Viee«0overae* telnna on Maveh 7, 19o5, in answer to hi© letter of ftareh 5th on the subject of redieaounte between Faderal reserve Banka* (8c*a mint*tea of ^ecutiva Conaiittee April l # $ 1915*) The Tlreeident then aubftLltted to the eeting the taaeutira Cowiittee’a au^geeted aneweru to four Of the queisticne in the T^jRorandus of eubjeeta aub *aitted to the Federal Adwieory Council for ita conaideration V,/ the Iferh ral Iiaaerva 3'o.jrd* After due coneideration the anewara raaare ended by ttje •icecutiire Con: Ittee to lueistiono 1 , § :•, -r:-k 4, Trere umttirxn uly copied -e the anawera of the Federal AdTiaery council to theaa ^ueetiona and UIHTJTKS Fft4«r»l Advisory Council April 20,1915 •rd«.te«4 wr>t to U n Federal Lm «r?« Bo^ard* Cor, ittoe *f**etin- of thim cua« .) fZ ( «o Minute* of If♦* ?r*e P.r--.,L;fent otuted t-iut the *c*iutiv« Co; ■ it tee &id not i*vre sufficient time to eoeoider anewero to Humber* $ and 6 which wer* tftcn beforw t M *©etin^ for ecmoider&tien* Qm »otion of Hr*- Stay, eeeended by Hr* Welie.tte following iAVMr to Vo* i w m «*aoj>twd a m ordered *ent to tte Federal fceoerv* Beerdi . ; In tte opinion of tte yoitm.lt H r i a m ( M a i l It U unbound la ptflneipl*, end In general garnetiM would m tieetruetive, to i l l w *»ib*r bank* it ri4«t« their rmmrtmm below tte 1 *4*1 H u r n i should be a i i i ^ M i In tte M m X Bencrwe banJke e* a tataie for credit to bo eactersued by the federal r « « « m bank* to Unit a t e m « * wlfidicni $#imlty *houl& hr te; oiwd and atrietly enforced to dioeoura&e tte >jraotioot ttiKi to inauee tt«nbtv bm* e to reaieoount with Vue Federv.il Jeatr** bai&s for t o iurpee* of ainteiniiii* their own re*<?rve» and providing IhiMMtet with neoeweary finfti to m i their obUi^tionfS In anower to Ho* 6, It v?** d*ieided tt^t fc-e federal Advisory Cau had nothing to odd to tte view* ex^reacted in tte letter of tte President on thie eubjeet adareeaed to tfiae Governor Belane on I x r c h 7, 1915* eil Tte Freeiaent nutted tu*t ho had arranged with rr. Delano for a J< int ?«u?etin.; wit Feut.r .1. ,'^nv#* Beurd t : 0 V ♦ ur*i there bein?-: mc>- ’ ^. r:r tn $* i t .i C W il v.iJcnu-mMi lint* i ti--,t 11 . MINUTES OF THE FEDERAL ADVISORY COUNCIL AT ITS JOINT MEETING WITH THS FEDERAL RESERVE BOARD. APRIL 20, 1915. A joint meeting of the Federal Reserve Board and Federal Advisory Council was held as arranged in the Board room in the Treasury Department, Washington, D.C., April 20, 1915. Present: Messrs. F. A, Delano, Vice-Governor, pre siding, W. P. G. Harding, Paul M. Warburg, John S. Williams, A. C. Millar, and H. Parker Willis, Secretary, of the Federal Reserve Board, and Messrs. James B. Forgan, L. L. Rue, Bar.iel G. Wing, W. S. Rowe, George J. Seay, Charles A. Lyerly, Rolla Wells, S. F. Swinney, J. Howard Ardrey and Merritt H -Grim, Secretary, of the Federal Advisory Council. Mr. Delano stated that the Federal Reserve Board were now ready to hear from the Federal Advisory Council in regard to the subjects referred to in its Memorandum of April 8 , 1915. Mr. Forgan then read the ansv-ers of the Federal Advisory Council to the six questions propounded in the Memorandum referred to and a full discussion was had on each answer as it was presented. The joint meeting adjourned at 4:45 P.M. Secretary 188 b . Tentative Circular No__ Series 1915. FEDERAL RESERVE ECARP Washington, B.C.May 6,1915. A coordinated banking system, e/£oracing in its membership State institutions as well as National banks, is the aim of the Federal Reserve System» There can be but one American credit system cf nation-wide extent, and it cannot attain its fullest potentialities if it rests upon an incomplete foundation, and fails to include the greater part of the strong and well managed banks of the country, whether large or small. In the development of the new banking system, far-sighted and unselfish cooperation is expected of the banking community, and it seems clear that some basis can be found for harmonizing differences of interest or advantage existing among the National banks, State banks or trust com panies, sc far, at any rate, as may be necessary to secure the effective coordination of these different types of banking institutions in the Federal Reserve System, Appreciating fully that the strength of the Federal Reserve System is to be gauged by the quality of its members, rather than by their number, the Federal Reserve Board is prepared to use all the broad discretionary powers vested in it .by the Federal Re serve Act to bring about this coordina tion, The Eoard has sought, in the regulations governing the admission of State banks and trust companies hereto appended, first, to establish only such reasonable standards of admission as will be generally recognized as necessary to protect the Federal Reserve System against the admission of banks which would be a source of weakness rather than cf strength, and, second, to prescribe only such regulations governing their conduct as will insure a reasonable conformity to fundamental principles deemed essential to the success of the new banking system. Membership in the Federal Reserve System carries with it privi leges and guaranties of great value, not only to the ‘banks themselves, hut to It may be confidently expected, provided the stan their customers as well. dard for admission he kept sufficiently high, that with the further develop ment of the system and the fuller appreciation by the public of its meaning and value, membership in the system will come to be regarded as a test of banking solidity, and that the access afforded by membership, to the facilities and resources of the system, will add to the prestige of even the strongest institutions; so that in time the public in differentiating the banking in stitutions of the country will, instead of drawing the distinction as in the past between "National banks" and "State banks", rather make the distinction between the banks which belong to the Federal Reserve System and the banks which do not, and ultimately recognize but two classes of banks: ''MEMBER BAMS" and "NON-MEMBER BANKS". The Board realizes, however, that membership in the system also carries with it of necessity obligations and responsibilities as well as privileges and safeguards. The National banks are now, and perhaps will be always, the mainstay of the system: their membership is compulsory, the law having left them no option as to whether they would or would not avail them■selves of membership. Th responsibility of the system is theirs and they are therefore fairly entitled to expect that membership of non-national banks shall bring into the system only such institutions as can give sub stantial promise of being able to share the responsibilities as well as the privileges pertaining to membership. The Reserve Act, in Section 9, imposes certain fundamental conditions governing the membership of State banks in the Federal Reserve System, and prescribes that banks not organized under Federal law must comply with the ,-3 capital and reserve requirements applying to National "banks, and must con form to the provisions of law imposed upon National banks respecting the limitation of liability which may be incurred by any pers^r., firm or cor poration to such banks, and of transactions permitted with its directors, the prohibition against purchases of or loans upon stocks of such banks, and the withdrawal or impairment of capital, the payment of unearned divi dends, and to such rules as the Federal Reserve Board may prescribe. With respect to loans on real estate or mortgages, the Board i.) not disposed to assume as a matter of principle, either the authority or the duty to impose restrictions of a character calculated to embarass State barks in applying for membership, or to impair their usefulness in a field which has been well developed. It has endeavored in the regulations merely to provide a reasonable limitation, so that loans or investments of this character shall not be so excessive in amount as to endanger the liquid condition of a bank. Within the limits thus described, it will be the policy of the Board to determine the eligibility of State banks for membership in the Federal Reserve System by means of examination. Since admission to the system will be looked upon as an evidence of the bank’s strength, examina tions for admission must disclose clearly the condition of an applying bank and the character of its management. These examinations must, therefore, be thorough and effective, and be under the direction of the Federal Reserve Board, but the Board will endeavor to avoid any unnecessary additional expense to the banks by dispensing with separate and independent examinations so far as possible and by adopting a method of joint or supplementary examination in conjunction with State banking authorities. The Board plans to draw freely upon the examiner and auditors in the employ of the respective Reserve Banks and to use their services for the purpose of thus supplementing examinations conducted by the banking departments of the several states. It is hoped, -4 .therefore) that in passing upon applications for membership, the Board and the several Federal Reserve Banks will have the cooperation of State banking authorities, so that every qualified applying bank may be admit ted to membership, and all not qualified be excluded. Membership of State banking institutions in the Federal Reserve System being optional, the Board appreciates that those charged with the management -of these institutions might not feel authorized to enter a sys tem which by regulation might restrict the scope of their operations un less a definite assurance were given them of their right to terminate their membership if at any time they should feel it to their advantage to do so. The Board does not apprehend any such development; indeed, it expects that as the system develops membership therein will carry with it guaranties of safety and security which will be of inestimable value* At the same time it recognizes the responsibilities of those entrusted with the management of the State institutions and has, there fore, in the appended regulation, clearly defined the conditions upon which any State institution may withdraw from membership* The Board has taken legal advice from competent sources and has received ample assurances as to its legal powers in this matter. At the same time, the Board has taken the precaution of fixing the aggregate amount that may be withdrawn within any one year so as to fully protect the system in this respect. Governor. Secretary 188 c. Tentative Regulation No._____ Series of 1915. F E D E R A L R E S E R V E B O A R D Washington STATE BANKS AND TRUST COMPANIES AS MEMBERS OF THE FEDERAL RESERVE SYSTEM* Statutory Requirements. The federal Reserve Act provides: Section 9. Any bank incorporated by special law of any State, or organized under the general lav/s of any State or of the United States, may make application to the reserve bank organization committee, pending organi zation, and thereafter to the Federal Reserve Board for the right to subscribe to the stock of the Federal reserve bank organized or tc be organized within the Federal reserve district where the applicant is located. The organization committee or the Federal Reserve Board, under such rules and regulations as it may prescribe, subject to the provisions of this section, may permit the applying bank to become a stockholder in the Federal reserve bank of the district in which the applying bank is lo cated. Whenever the organization committee or the Fed eral Reserve. Board shall permit the applying bank to become a stockholder in the Federal reserve bank of the district, stock shall be issued and paid for under the rules and regulations in this Act provided for national banks which become stockholders in Federal Reserve banks. The organization committee or the Federal Reserve Boc.rd shall establish by-lav/s for the general govern ment of its conduct in acting upon applications made by the State banks and banking associations and trust companies for stock ownership in Federal reserve banks. Such by-laws shall require applying banks not organized under Federal law to comply with the reserve and capi tal requirements and to submit to the examination and regulations prescribed by the organization commitoco or by the Federal Reserve Board. No applying bank shall be admitted to membership in a Federal reserve bank unless it possesses a paid-up unimpaired capital sufficient to entitle it to become a national banking association in the place where it is situated, under the provisions of the National Bank Act. Any bank becoming a member of a Federal reserve bank under the provisions of this section., shall, in addition to the regulations and restrictions herein before provided, be required to conform to the pro visions of law imposed on the national banks respect ing the limitation of liability which may be incurred by any person, firm or corporation to such banks, the pro hibition against making purchase of or loans on stock of such banks, and the withdrawal or impairment of cap ital, or the payment of unearned dividends, and to such rules and regulations as the Federal Reserve Board may, in pursuance thereof, prescribe. Such banks, and the officers, agents, and em ployees thereof, shall also be subject to the pro visions of and to the penalties prescribed by sections fifty-one hundred and ninety-eight, fifty-two hundred, fifty-two hundred and one, and fifty-two hundred and eight, and fifty-two hundred and nine of the Revised Statutes. The member banks shall also be required to make reports of the conditions and of the payments of dividends to the Comptroller, as provided in sections fifty-two hundred and eleven and fifty-two hundred and twelve of the Revised Statutes, and shall be subject to the penalties prescribed by section fifty-two hun dred and thirteen for the failure to make such report. If at any time it shall appear to the Federal Reserve Board that a member bank has failed to com ply with the provisions of this section or the regu lations of the Federal Reserve Board, it shall be within the power of the said board, after hearing, to require such bank to surrender its stock in the Fed eral reserve bank; upon such surrender the Federal re serve bank shall pay the cash-pB id subscript ions to the said stock with interest at the rate of one-half of one per centum per month, computed from the last dividend, if earned, not to exceed the book value thereof, less any liability to said Federal reserve bank, except the subscription liability not previously called, which shall be canceled, and ?aid Federal reserve bank shall, upon notice from the Federal Re- -3 - servc Board, be required to suspend said bank from further privileges of membership, and shall within thirty days of such notice cancel and retire its stock and payment there for in the manner herein provided. The Federal Reserve Board may restore membership upon due proof of compliance with the conditions imposed by this section. Section 19. If a state bank or trust company is re quired by the law of its State to keep its reserves either in its own vaults or with another State bank or trust com pany, such reserve• deposits so kept in such State bank or trust company shall be construed, within the meaning of this section, as if they were reserve deposits in a national bank in a reserve or central reserve city for a period of three years after the Secretary of the Treasury shall have official ly announced the establishment of a Federal reserve bank in the district in which such State bank or trust company is situate. Except as thus provided, no member bank shall keep on deposit with any non-member bank a sum in excess of ten per centum of its own paid-up capital and surplus. No member bank shall act as the medium or agent of a non-member bank in applying for or receiving discounts from a Federal reserve bank under the provisions of this Act except by permission of the Federal Reserve Board. Section 21. The Comptroller of the Currency, with the approval of the Secretary of the Treasury, shall appoint ex aminers who shall examine every member bank at least twice in each calendar year and cftoiior if considered necessary-, PROVIDED, however, That the Federal Reserve Board may authorize examination by the State authorities to be accepted in the case of State banks and trust companies and may at any time direct the holding of a special examination of State Banks or trust companies that are stockholders in any Federal reserve bank, BANKS ELIGIBLE TO MEMBERSHIP A State bank or a Trust company to be eligible for member ship in the Federal Reserve System must comply with the follow ing conditions: (1) It must have been incorporated under a special or general law of the State in which it is located or of the Ur.!*;-* States (District of Columbia), (2) It must have an unimpaired capital stock as follows: In cities or towns of less than 3000 inhabitants, $25,000; In cities or towns of more than 3,000 but less than 6000 inhabitants, $50,000; In cities of more than 50,000 inhabitants $200,000. (3) They must agree to comply specifically with the requirements of the provisions of Sections 9, 19, and 21 of the Federal Reserve Act. APPLICATIONS FOR MEMBERSHIP. Every State bank or Trust company whi^h shall desire to become a member of the Federal reserve system, shall make * » -5application on Form_____to the Federal Reserve Agent of its district for an amount of capital stock in the Federal Re serve Bank of such district equal to six per centum of the unimpaired capital stock and surplus of such State bank or trust company. Such application shall state that it is made in accordance with a vote of its board of directors, and shall be accompanied by a statement of the conditions of the applying bank c e r t i f i e d by an examiner to be approved or d esignated by the Federal Reserve Board. Upon receiving the aforesaid application and statement from any State bank or trust company within its district, the Federal Reserve Agent shall submit the same to the counsel of such Federal Reserve Bank, who ihall certify that in his opin ion membership in the Federal reserve system is not in con travention of the laws of the State or District in which the said bank or trust company shall be located. The application and certificate of counsel shall thereupon be submitted to a committee of -,ot less than three members of the Board of Directors of the Federal Reserve Bank. The said committee shall examine the application and if it shall find that the applying bank has complied with the provisions of this regulation, and is in compliance with the State la^,' it d2?'*-.11 transmit the same to the Federal Reserve Eoard with its recommendations . APPROVAL OF APPLICATION. In passing upon applications of State banks and Trust companies for membership in the Federal reserve system, the following considerations will be taken into account. (1) Whether the assets of the applying bank or trust company are of such a nature as to entitle it to be con sidered a commercial banking institution in a liquid con dition. (2) Whether the charter provisions and the nature of the powers exercised by the said bank or trust company are or are not consistent with the proper conduct of the busi ness of commercial banking. (3) Whether or not the statutes of the State or Dis trict in which the applying bank or trust company is located, do or do not contain provisions likely to interfere with the proper regulation and supervision of member banks. Whenever in the judgment of the Federal Reserve Eoard an applying bank or trust company fully complies with the requirements thus indicated, the said Board will issue * +» - 7- a certificate of approval of the application, and there upon the applying bank shall subscribe end ray in its cap ital stock to the Federal reserve bank of the district in accordance with the conditions provided for member banks. POWERS AND RESTRICTIONS, Every State bank or Trust company which shall be admitted to membership in the Federal reserve system, shall contorm to the following requirements: (1) It shall observe all those requirements of the law to which State banks and Trust companies which have become member banks are subject* (2) It shall conform to at least as high a standard of commercial banking as controlled it at the time of its admission to the system; with such improvements and changes in its banking practice as may have been specifically re quired of it by the Federal Reserve Board as a condition of the admission, (3 ) It shall not engage in loans on real estate or mortgages of a character or to an :*xtent which will impair its liquid condition, and it shall carry in its investments liquid loans eligible for rediscount with the Federal re serve bank to an amount not less than its paid in capital and surplus. - ♦ -8 (4) If in any case such an applying institution has loans secured by its own stocks or loans to one person, firm or corporation aggregating more than 10% of its capital and surplus, it shall adjust such loans to conform with the re quirements of the National Bank Act, the same to be done within a reasonable time to be determined by the Federal Re serve Board* Except as herein specifically provided, every State bank or trust company becoming a member of the Federal Re serve system, shall continue to retain its full rights as a * State bank and shall be entitled to exercise all functions permitted by its charter* Any State Bank or Trust Company which is a member, shall he.ve the right Q£ withdrawal and may withdraw by giving ninety days’ written notice of its intention so to do, to the Federal Reserve Bank of the District in which said Bank or Trust Company is located. At the expiration of said ninety days, such member shall surrender all of its holdings of cap ital stock subscriptions be canceled and not and sum equal to its it shall be previously the cash member paid released called. shall from i zs Such shares receive subscriptions on stock therefor the shall a shares ♦ ♦ - 9 - surrendered, and one-half of one per centum a month from the period of the last dividend, not to exceed book value thereof, less any liability of such member to the Federal Reserve Bank; said payments to be Dade twenty-five per centum (25%) on the expiration of the ninety days' written notice aforesaid, twenty-five per centum [25%) in ninety days, twenty-five per centum [25%) in one hundred eighty days, and twenty-five per centum [25%) in two hundred seventy days after the said first payment; provided, however, that the said Federal Reserve Bank may have the right and option to make the entire payment at any time after the surrender of such stock, provided further, that no Federal Reserves Bank shall be required, in dealing with the voluntary withdrawal of State banks and trust companies, to cancel any stock offered for the purpose of effecting a voluntary withdrawal if such Federal Reserve Bank has previously canceled within the same year ten per centum of its capital stock under the provisions of this regulation. Applications for the volun tary withdrawal shall be dealt with consecutively in the order as they shall be filed. In the case of such voluntary with drawal of a member bank, the reserve balance kept by it under the provisions of law with its Federal Reserve Bank shall be transferred to the said liquidation account and shall be - 10- pciid off in the same proportions and at the same dates as the repayments of balance^ due on liquidation account with res pect to capital stock. EXAKlN YTl CMS . In the matter of examinations of State banks, the Fed eral Reserve Board expects to cooperate with State authorities in making their examinations and avoid, if possible, dupli cation of this work. It is proposed to accept the examina tions made by States wherever these are found to be thorough and complete and of the same standard as the National bank examination, or else to appoint a representative of the Board or of the Reserve Bank of the District to- act with the State examination staff, and in that way enable the Board to accept with confidence the report of the State examiner s . FUTURE REGULATIONS. The Federal Reserve Board reserves the right to make such amendments and adopt and publish, from time tc time, such further regulations as it may deem necessary. CHARLES S. HAMLIN, Governor. H, PARKER LILLIS, Secretary, 5/6/15 . MEMBERS O F F IC E R S A M E S B. F O R G A N , P R E S I D E N T D A N IEL , L, R U E . V l C C ' P R E S I D E N T O. W I N S . D i s t r i c t N o . 1 J . P. M O R G A N , D i s t r i c t N o . 2 L . L. R U E , d i s t r i c t N o . 3 Ek c c u tiv c w. s. C o m m it t e e R OW E. D is tric t No. a G E O R G E J . S E A Y . DISTRICT NO. 5 A MES B. F O R G A N FEDERAL ADVISORY COUNCIL M L. R U E CHARLES A. L Y E R L Y . DISTRICT NO. 6 J A M E S B. F O R G A N . D i s t r i c t n o . 7 . F. M O R G A N R O L L A W E L L S . DISTRICT NO. S ) A N I E L C. W I N G O FFIC E O F THE PRE SID EN T V §. R O W E C. T . J A F F R A Y , D is t r ic t N o. 0 E. F. S W I N N E Y . D IS TR IC T N o . tO J . H O W A R D A R D R E Y . D I S T R I C T N O . 11 A R C H IB A L D CHICAGO, K A I N S . D I S T R I C T N O . 12 I'ay 21, 1915 Hon. F. A. Delano, Vice-Governor Federal Reserve Board, Washington, D. C. Dear Mr. Delano: Referring again to your le t t e r of the 7th i n s t . ; I have now heard from the different members of the Federal Advisory Council in re gard to the draft of a circular on the subject of the admission of state banks and resp ectfu lly submit for the consideration of the Federal Reserve Board the following suggestions: In connection with applications for membership it is suggested that such applications along.with c e r t if ic a t e s of counsel should be sub mitted to the Executive Committee of the banks instead of to comri itte e s of not l e s 3 than three d ire cto rs. The governors of the banks being ex o f f i c i o chairmen c f the executive committees ought to be parties to the negotiations. Referring to Clause three, "Powers and Restrictions’1, it is suggested that instead of requiring State bank members to carry among their investments liquid loans e l i g i b l e for rediscount with the Federal Reserve Bank to an amount not le ss than their paid in capital and surplus, it would be better to require that a certain percentage of their demand de posits should be invested in such e l i g i b le paper, somewhere from 25 to 50 i . It is also suggested that a more definite lim itation to the real estate loans made by state banks should be established and that that lim itation should also be related to the amount of their deposits by a d e f in ite ly fixed percentage not exceeding 25 ic Referring to paragraph 4 under "Powers and R estriction s", it is suggested that in lieu of the payments to be made to retiring banks extending over a period of one year, only a certain amount of capital shall be retired in any six months’ period, somewhat along the lines provided by the National Bank A ct for the retirement of national bank circulation. Under such an arrangement only a certain number of banks whose capital would aggregate the amount fixed, could withdraw during each six months' period. Whenever the combined capital of banks app^ing to withdraw aggregates the amount so fixed, the applications of banks for withdrawal subsequently re ceived would have to be postponed until the following six months’ period. M E M B E R S O F F IC E R S I A ME 9 B. F O R G A N . P r e s i d e n t D A N IE L L. L. R U E . V i c e - P r e s i d e n t J . P. M O R G A N . D i s t r i c t N o . 2 G. W I N G , D ISTRIC T N O . 1 L. L. R U E , DISTRICT NO. 3 e x e c u tiv e w. S. C o m m itte e JAMES B. F O R G A N L L- R U E FEDERAL ADVISORY COUNCIL CHARLES 4 A. L Y E R L Y . DISTRICT NO. 6 J A M E S B. F O R G A N . D I S T R I C T N O . 7 J, P. M O R G A N DANIEL R O W E. D is tric t No. G E O R G E J. S E A Y . DISTRICT N o. 5 R O L L A W E L L S , DISTRICT N o. 8 C. W I N G O F F IC E OF THE PRESIDENT W. S. R OWE C . T . J A F F R A Y , DISTRICT NO. 9 E. F . S W I N N E Y . D I S T R I C T N O . tO J . H O W A R D A R D R E Y , D I S T R I C T N O . 11 A R C H IB A LD Hon. F. A. Delano jf 2 K A I N S . D I S T R I C T N O . 12 CHICAGO, The idea is that under the provision proposed in your tentative circular the reserve deposits of retiring banks are to be put into a liquidation account along with their capital and are only to be paid out at fixed periods extending over a year. It might be a serious matter to a State bank to have so large a part of i t s reserves tied up for so long a time. State banks would probably prefer to have action on their appli cations to withdraw postponed and remain members until they could withdraw their capital and reserve deposits within a shorter period of time after their withdrawal had become e f f e c t iv e . Mr. Seay of Richmond has gone into the matter much more elaborately than any other member of the Council and I respectfully beg to enclose herewith a copy of his l e t t e r along with his suggestions in connection with your proposed cir cu la r . Very truly yours, (Signed) James B. Forgan P r e s id e n t.