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mi no t s s o f m estimo


FS3RUAHY lift, 1919
/. statutory B itting of the Federal Advisory Counoil was hold
ia tho Federal Reserve Board room, fcletropolitan Bank building.
iashingt on, D C, Monday, February 17f 1019, at 11 A ft.
Lr. J vuja 3 Forman called the meeting to ordor and nominated
Mr. S f iiwinney cu3 temporary chairtuan.
;.ir. Swinney asked the Secretary to report the credentials of tho
oooberu of the Federal %dvi3 ory Counsi for the year 1913*
Tha following corapoae the Federal Advisory Counoil for the year
1919 :v
A.3. Hepburn,
L» L.
2 0 .Brown,
Jamas B» Forman,
F. 0, i'atts,



F. Swinney,
r. i/iluot,
• i>-illO| v
All of tfhom wore present.

Reserve District No. 1
Reserve District NO. 2
Reserve District Mo. 3
Reserve District No. 4
Reserve District NO. 5
Roserve District No. 6
Reserve District No. 7
Reserve District No* a
Reserve District Mo. 9
Reserve District No. 10
Reserve District No. 11
Reserve District No. 12
Also tho Sccrotary Morritt H Grisu

The rupor+ of tno Secretary covering his secretarial and other
expons©u for ihe year 1913 was on ration accepted and ordered spread
on the recoruo#
it jras surestod that tho Hxocutivc Committee ought to consist of
*ix members instead of five and on motion Article IV of the By-Laws
amended to road as follows:
"There shall be an Executive Committee of six (6 ) members of
tho Council, of which the t resident and Vice-President of the Council
"kill be ox-officio members.*
Lyorly moved that the by-laws of the Council for the year 1913
*Uh this chanr,® bo adopted as the by-laws for the year 1919. Motion


February X7, 1 919.



lilmcd on Jiand Dee* 31. 1917,


23 , 1918 ,
of 15 Q#




1294.43 assessments on IS Federal Reserve
each, total,

i\t 2

$ 2,094.43


JExpessos attending four mooting* of the federal Advisory
Council and of the Executive Gofflraitteo in iashingt on, as
fo lio v s :

?eb. 19
ky 21

R H fare
4 9 ,2 i
69.4 5

r*7 1




"•til traveling expenses as above
itmography, stationary,

j frintiflg
’tiegras, postage
! «lary uocretary 1913



1 ,2 0 0 .

HUnco in First Motional Bank, ^h ic*^
Dec. 31, 1913




Respectfully eybrnitted
Merritt H Grim,
oi or at ary

b y -l a w s o f t h e f e d e r a l a d v is o r y council


Officers o f this Council shall be a President, Vice-President and Secre­





1 he duties o f the President shall be such as usually pertain to the office;
and in his absence the Vice-President shall serve.


1 he Secretary shall be a salaried officer of the Council and his duties
and compensation shall be fixed by the Executive Committee.


There shall be an Executive Committee o f six ( 6 ) members of the
Council, o f which the President and V ice-President of the Council shall be
ex-officio members.


It shall be the duty o f the Executive Committee to keep in close touch
with the Federal Reserve B oard and with their regulations and promulga­
tions, and communicate the same to the members o f the Council, and to sug­
gest to the Council from time to time special matters for consideration.
T h e Executive Committee shall have power to fix the time and place of
holding their regular and special meetings and methods o f giving notice thereof.
Minutes o f all meetings o f the Executive Committee shall be kept and
such minutes or digest thereof shall be immediately forwarded to each member
of the Council.
A majority o f the Executive Committee shall constitute a quorum and
action o f the Committee shall be by a majority o f those present at any meeting.



Regular meetings o f the Federal A dvisory Council shall be held in the
City o f W ashington on the third M on day o f the months of February, M ay,
September and N ovem ber o f each year.
Special meetings may be called at any time and place by the President
or the Executive Committee, and shall be called by the President upon written
request o f any three members o f the Council.


These B y-law s may be changed or amended at any regular meeting by
a vote o f a majority o f the members o f the Federal Advisory Council.


Federal Advoirpy Counoil

February 17# 1919/Jent.

Jfr. W.atu raovud that Ur* Jaxaeo B. Korean bo electod President
of tuu -’’ouotuj. ‘Vivinnry Council fcr tho year 1^13 and that Ihu
secretary t*> instruct od to ca&t th* iniriiscus ballot far
liotion <wrried and tho taap *rn*y chair iaa snnsvtnood tiuvt ^2r • * ^eo
5 , For'an m
mc oloctod i resident*
Mr* i*‘er»?m than t,ook tJ>« <thair«
On .motion tho Secretary was instructed t& a&ot the unaniaoua
ballot for *4r . l*. L* Rue io Vioo-?rai4idtnt of tho Council ior the
year 1919. iwo ion ouwied -xiid ;*r. -r*uo mo Loclarod alas* ad.

o5r, Spinney moved that Ur* /in&# Ur. itoftoum, iir. i\o«ey<and
Mr* /svtts b^ chouen jmjii&era of the .&:eoutJ.vo Oojaniiitoe and the Sec­
retary be instructed to caet the unanimous ballot for theae p,ontIt**
..-3' , 4«t ior oarriud ana tae-jo ^anllei^a v?erc .’cclaTO-;! olocted*
i|iq affXaioLxy of tas Council au cleated for the >ear 131) is

Hue. D G */»n;i,

Jaioon B. forgan
?zvi3ident, . • _<. Hue
afaX.t)aut.iyo wuu.-iafcu’i,
-aacre, Jai;jor. U, forgan, k*l*«
A B Hepburn, / 3 ftoviro and F 0 flatto.

Lr. lotion oi iJr* Huaf -r. *erriit i Qriw was ohooen woerotary
of the Federal Advisory Council Tor the year lni9 s/ith a salary oi
r‘1 , 2 0 0 #
isr, F.yte revei the adoption

tho folloi/in^ revolutions

*R*eolveri tlsat the JPrf ^idflirt be ard he it hereby authorised

to ask each Kocteral P.esonrs Bau.- vc contribute $3.50 towards tho seop
r tt* r i* l and incidental ax* enecu of the eecreiary of the federal
'vc.vibory Council ior tho ye tr 1919 uud to dra® on them for Ahat pur»
poce us heretofore.**

Tho resolution was adopt eu •
The rrdnutoe of uectinjs of the Federal Advisory Gouncil hold on
Hovenber 14th and 19th and of lto
scutivo Ooooittoo hold or. hoveuiber
18th, 1918, copies of which iiad been eent to raewbers of the Council
'of the Secretary, were on taction approved*


Fedtral Advisory Council
February 17, 1919f Cont#

Jsir. Forgan stated that in accordance with Governor*s Harding*s
requast at the previous meeting that the Belabors of the Council take
the in itia tiv e in bringing any criticisms or suggestions relative to
tne management of the Federal Reserve system to the attention of the
Foderal Reserve Beard and the Council's subsequent action in connection
therewith he had on December 6, 1913, written to the chairmen of the
twelve federal Retex’vo bonks suggesting the desirability of keeping
t ieir r&.ubers of the Federal /uiviaory Council in as close touch as
possible with wiiat is goirit, un an the Fsaorai liuserve bauds’* ilo also
in January 1919 wrote tne movers of tao Council as ho was advised of
their ulestien for th is year requesting that they should each ascertain
if there is anything regarding the policy or nraagejsent of the Federal
Reserva bonks of th e ir d istric t an conne ct ion vitfc which a chaagt should
bo reoo.jmendod by the Gcunoil or i f thore wore any criticisms of the
s y ste m *

He further statue that he had writ tun as usual to ths Governor of
the Federal Reserve Board asking hiu to sub«*it any topics the Board
wished tho Council to consider at this meeting and hud raooived a reply,
copy of which is hereto rfctuohed, dated January 20th, 1913* "-ho topics
suggested by tho Federal Heoerve Board and tho mombera of the Council
*»ro listed and sent to all the members of tho Council for their confiid^ration in advance of tho meeting*
A digasii of certain oaondmonte to the federal Heserve Act rooowrionded
by the Federal Reserve Board to Congress ;U»d whioh tas Board was re**
quested to recoffi.nfsnd for passage by Congress was also sent to Council
m o ck e rs*

Ur. Finney and others said that in their opinion soma of the ^oderal
Reaerve banka *ere too liberal in rediscounting for fl»mbei%
s banka, in
some cases granting unwarranted linen* Agter several citations of in­
stances where this had resulted in threatened loss to the reserve b inks
it was decided that this subject should be taken up informilly with the
Federal Reserve Board at the joint session vaich the choir had arranged
for llt30 o'clock*

Office of the Governor

January 20, 1919.

Dear Sir:-

Receipt is acknowledged of your letter of the 15th
inst. advising that the next meeting of the Federal Advisory
Council will be held in Washington, Monday, February 17th.

The Board presumes that this meeting will be held, as usual,
in the assembly room in the Metropolitan bank building, and
will be prepared to meet the Council at eleven o ’
Secretary of the Treasury Glass has announced in the
coming papers that the next bond issue, which may be six
billion dollars, will be the last, but h e has not as yet in­
dicated what the maturity or rate will be* I think, however,
it is reasonable to assume that the issue will be for a short
terc - not longer than five years «* and unless he reaches a con­
clusion before the meeting of the Council, I am sure that he
would be glad to have the Council!s views. I know that suggestions
have been cade to h i m that subscribers be given an option of taking
a bond bearing four and one-half to five per cent interest, running
for five years, with limited tax exemptions only, or one running
from three to five years at four per cent with full tax exemptions.
The poLicie9 of the Federal Reserve Board just now as to
discount rates are dependent to a great extent upon the deter­
mination of the Treasury as to bonds, and the Board is -unable at
the nocent to offer ar$r suggestions as to topics to be discussed.
It would be interesting, however, if members of the Council would
come to the meeting informed as to the amount of Government
issues remaining undigested in the respective districts, and
prepared to express an opinion as to the length of time which
will be required in making a permanent distribution of them.
This will have a bearing not only upon discount rates but upon
the character of the invested assets of the Federal reserve banks,
the larger part of vtfiich consists of member banks’fifteentey notes secured by Liberty Bonds and Treasury certificates, and
of customers* notes m t u r i n g within ninety days secured in like
The Board would like the opinion of the Council, also,
as to the merits of differential rates. Assuming the differentials
have been necessary to aid the Treasury in floating its securities,
does the Council feel that differentials with respect to the

character of paper and not to time of maturity should be con­
tin u e d as a permanent p o lic y ?
In order to encourage the development of the acceptance
business the Board has authorized the Federal reserve banks
tc purchase in the open market bankers® acceptances with member
banks* endorsements at r a te s considerably lower than the dis­
count rate fo r e l i g i b l e promissory notes of lik e m aturities,
preferential treatm ent in a sm aller degree h a s been accorded
to trade acceptances. As you know, the acceptance market in
London is much broader than in t h is country on account of large
a c c u m u la t io n s of funds there a v a ila b le fo r purchase of b i l l s .
Ihe p r i v a t e rate i s lower than the bank r a te , and purchasers
of b ills desiring r e l i e f before m aturity may discount them at
the bank at the o f f i c i a l r a t e , w hile in New York the rate at
vrhich the Federal Reserve Bank w i l l buy acceptances has governed
in market tr a n sa c tio n s. For several months past the actual
rate for b i l l s in London has been lower than in New York as
the private r a te , which has been around three and one-half per
cent, has governed, although the o f f i c i a l Bank of England rate
has been fiv e per c e n t. Rates at the Federal Reserve Bank of
New York have been from four to four and three-eighths per cent,
thus making our o f f i c i a l ra te lower than the B ritish o f f i c i a l
rate, but as the p riv a te r a te s have follow ed the bank ra te s,
our market has a c tu a lly been higher than the London market*
The Board b e lie v e s , however, that i t w ill be necessary for some
time to come, in order to develop an acceptance market in this
country, to stim ulate i t by a low rate at the Federal reserve
bank, but would lik e the views o f the Council on th is point.
Very tru ly yours,

W. P* G* Harding,

Mr. James B. Forgan, p re sid e n t.
Federal Advisory Council,
Chicago, 1 1 1 .

Joint session of
Ths Federal Reserve Board
Ths Federal Advisory Council

February 17, 1919

iessrs Harding, Hamlin, and M ille r, and Secretary
0f the Foderal Reaerve Board cans in as arranged*

F A Broderick,

Mr. Forman asked Governor Harding to address the rueeting*

Harding reviewed the topics which he had submitted in
of January 20th, and suggeoisd several additional subjects
for the Council's considsration.

his letter

Governor Harding said he expected Congrots to pass in a day or two
an amondwer.t to ths Federal Reserve Act which would permit tho sur­
pluses of Federal Reserve banks to accumulate until it amounted to
10# of the subscribed capitals cf the bunks and ten per cent par
annua thereafter. This was re commendod by ths Council at a previous
Mr. Forgan than brought before the Board in an i n f o r ^ l *ay th#
subject of too liberal rediscounting for member banks on the part
of dome Federal Reserve banks. The matter was carefully discussed.
The Board had already taken steps to check th is policy and would
continue th sir e ffo r t s , also requesting the o ffic e r s of the reserve
banks to tnorougnly in vestigate a ll applications and to refuse thoeo
that were excessive or unwarranted.
The joint sooeion adjourned,
raeet at 2 F M.

ancf^rcotion of the Council voted to


,} 5 .

Minut ob o f
Federal Advisory Council

February 17, 13X0

ft % t U the Council reauaiad its session*
,U1 laaxTibora of

tho Council ware present.

Xr*g iroeiaoact oallod (no **>*vixug to order. Ha au^eated that
it yculu be xdyiaable to incorporate an intreduction to ttoe Council1*
for^d r^i>ort to th# * odcrul Heeerve tioard indicating tho result

*f tho replies h«

rocuAvad froia the menbara of the ^i>unciX in

regard to any oriticiaujs or eu&ga&iiomi in connection with the Fedoral
floury* Byatesi on the twelvo ‘
''uderal Reserve district b* On ;uotion
it who ao ordered u*id r o f u n e u to tho Executive Comitt se* It vie also
undorutood that all of the topics brought before tho seating would bo
fr©ol> diaoussea end then referred to the Executive Gomit feec to foryijate who conciueiono arrived at by the Council* All of tho toj ice
submitted by tan ^outti ;u. lieeerve Board and by sKtubsre of tho Council
'«ro fully dieousted*
In connection with the quaetien as to whether
n»Eoor bi:»ka should be baaed on wiu character «f
ratht»r ihun on present classification by reserve
sitiuc, or. lotion of, Mr. watte, i t was |;sfeij>oiied

the reserves of
tho deposits hold,
and cent nil roservo
until the nort meet­

ing of the Council*
fcr, Lyarly lucved a hearty vote o f thanks to President Forgan^
Vicc«lT;sidofit Kue and the Bribers of the Kxecutive Coiaiuittoe for
their faithful and efficient aork during the year 1918* i’.otlon
Wtoiiaouoly carried*

Ki 5:^0 ©‘ clock the Council adjounaod u n til 1 0;30 A M tonorrow
?lbruary 13th*


of ri is

February 13 f m s .

A r.i3 elir.£ of tan Executive Coamiliiee of tho Federal Ad»
viaoO Council, iu*i held i$ the Federal Koiiorva Board rooi^
tfasiunston, 0 C., Tuesday, February ldih at 9 A k.

ireaeai; iieaord J B Forgan, h L Hug, A. & iiap'carn, 0 G
■'ing, <f S Rove, and F 0 .Vatts. ilso Maxritt H Grit;, 3 caretary*

Th*) Co»<c-ttca took up the top ics referred to It by, the
Fouaral Advisory Council and prepared a tentative report cover
lag the conductions arrived at in the general dieeussien of them
by tho Council on the preceding day, and the Chair was auii.©ri*©d
tc present the report to the stating o f the Council at 10:30 A U.

S ecretary .



February 18, 1919

As arranged th e second s e ssio n of th e F ederal Advisory Council
*a3 held in Federal Reserve Board room, Washington, D. C., a t
jC:20 A.
Tuesday, February IB.

M essrs. James B. Forgan, P r e s id e n t, in the c h a ir,
L. L. Rue, Vico P r e s i d e n t, D.G. Ying,
I . Hepburn,
W. S. Rowe, J . G. Brown, C. A. L y erly, F. C; a t
C.T. J a f f r a y , K. F. Swinney, K. P. 7-ilmot,
A. L. K i l l s and I ' e r r i t t H. Grim, S e c re ta ry .

The President p re se n te d th e r e p o r t o f th e Executive Committee

j*nd after c a re fu lly c o n s id e rin g th e suggested recommenaations the
:followin^ formal r e p o r t was p re p a re d by th e Council and ordered
rataltted by the C hair to th e F e d e ra l Reserve Board at the j o i n t
session arranged f o r t h a t p u rp o se .

(See printed r e p o r t h e r e t o a tta c h e d and made a part of these
In connection w ith to p ic No. 3 , Kr* D. G.
fills voted in the n e g a t i v e .

'ing and I r . A. L.

The members of the Federal Reserve Board having arrived the
’ouncil adjourned fo r the .joint se ssio n .

S e cre ta ry



Minutes o f Joint Session

The Federal Reserve Board
The Federal Advisory Council
February 18, 1919

As arranged a jo in t session of the Federal Reserve Board
and the Federal Advisory Council was held in the Federal Reserve
Board room, Washington, D. C., a t 11:30 A. M., Tuesday. February
18, 1919.

The following members of the Board:
Governor W. P. G. Karding, Messrs. C. S. Hamlin,
A. C. M iller and F. A. Broderick, Secretary; .
and the following members of the Council: Messrs.
James B. Forgan, President, L. L. Rue, Vice President,
D. G. Wing, A. B. Hepburn, W. S. Rowe, J. G. Erowi,
A. Lyerly, F. 0. Watts, C. T. Jaffray, E.F. .Swin
E P. Wilmot, A. L.M ills, and M erritt H. Grim, Secretary.

Governor Harding called the
Council’s re p o rt.
Mr. James B.
of the Federal Advisory Council,
discussion on the various topics
the Federal Reserve system.

meeting to order and asked for the
Forgan then read the Recommendations
a f te r which followed a general
and other matters pertaining to

Governor Harding suggested that i t would be desirable to print
the Recommendations of the Council for the past four years as an
appendix to the forthcoming annual report of the Federal Reserve
Board and on putting a motion to that effect to the Board i t was so
ordered subject to the approval of the Council.
The President then la id the question before the Council and on
motion of Mr. Hue, seconded by Mr. Wilmot the President was authorized
to turn over to the Federal Reserve Board the complete recommendations
of the Federal Advisory Council during the past four years of the
Council’s existence for publication along with the annual report of
the Board about to be issued.
The motion was carried, Mr. W. S.
Rowe voted in the negative.
The jo in t session then adjourned.


Washington, D. C., February 18, 1919
The Federal Reserve Board,
Washington, D . C.
A s suggested when we last met in conference the members of this
Council have each made inquiry among the member banks to ascertain how
they feel in regard to the administration of the Federal Reserve banks of
their respective districts and as to whether there now exist any criticisms
or suggestions, the correction or adoption of which would improve the work­
ing o f the Federal Reserve system.
W e are pleased to report that we find no criticisms that in any way
reflect on the policies o f the Federal Reserve Board or on the management
of the Federal Reserve banks as they are now administered under the terms
of the Federal Reserve A ct. W e believe there is a growing appreciation
of the usefulness o f the Federal Reserve system, a pride in what it has
accomplished during the strain caused by the war and an increasing con­
fidence that it will continue to function satisfactorily during the remainder
of the government war financing and the reconstruction period and that
it will continue to be a bulwark o f strength to its member banks when busi­
ness is reestablished on a peace basis.
T h e few suggestions that have come to us are not of a vital nature.
They are as follow s:
T O P I C N O . 1— It is suggested that the present law should be so
amended as to require all new national banks to have the approval of the
Federal Reserve Board before they are permitted to begin business.
Recom m endation:
T h e Council is o f the opinion that the Federal Reserve Board having
facilities for investigation through the official staffs o f the Federal Reserve
banks should have this authority placed upon it and that Section 5169
should be so amended.

T O P I C N O . 2— It has been suggested that the Federal Reserve banks
should send all checks and other items for collection directly to the town or
city in which they are payable even if such town or city is located in an­
other Federal Reserve district rather than send them in the first place to
the Federal Reserve bank o f the district as is now the practice with at least
some o f the banks.

T h e Council is o f opinion that collections should be made in the most
direct and expeditious way possible and w ould recommend that in the inter­
est o f increased and better service the B oard should look into this matter
with the view o f seeing to it that due diligence is exercised by the transit
departments o f the Federal Reserve banks in the matter o f check collec­

T O P I C N O . 3— It has been suggested that the Council should recom­
mend that the Federal Reserve A c t should be amended so as to permit mem­
ber banks to borrow on their promissory notes secured by U . S. Government
obligations for a period o f ninety days instead o f for the short period of
fifteen days which is the time limitation now put upon them by Section 13
of the Federal Reserve A ct.
This would prove a great convenience to both the Federal Reserve
banks and to the member banks. T h e C ouncil w ould recommend that the
necessary legislation be asked to extend the period to not exceeding ninety
days and to last until the government war financing has been fully accom­
plished and its bonds have been better distributed among permanent investors.
(M r. W in g and M r. M ills voted in the negative.)

T O P I C N O . 4— It has been suggested that the Federal Advisory
Council should recommend that the contingent liability o f Federal Reserve
banks on account o f bills rediscounted with other Federal Reserve banks
should be shown in the published statements o f the banks so rediscounting.
It is most desirable that each o f the Federal Reserve banks should
disclose its actual condition in all o f its published statements and as this is not
done if its contingent liability for bills rediscounted is not shown, the Coun­
cil would recommend that the Federal Reserve Board make a ruling requir­
ing them to do so.

T O P I C N O . 5— It is suggested that the Federal Reserve banks should
receive on deposit National bank notes and pay out in place o f them clean
Federal Reserve notes.
The Council recommends that the Federal Reserve Board as a matter
of additional service to member banks request the Federal Reserve banks to

receive on deposit for immediate credit from member banks national bank
notes unfit for circulation.

T O P I C N O . 6 — Sh ou ld the C ouncil again call to the attention o f the
Federal R eserve B oard its recommendation for a plan under which instant
credit should be given to the members’ reserve accounts for bank acceptances
paid to any R eserve B an k ?
R ecom m endation:
T h e C ouncil at its last meeting recom m ended that this be done and
would respectfully inquire what progress if any has been made to put the
plan in operation?

T O P I C N O . 7— Y o u have asked our opinion as to the terms under
which the next Governm ent bon d issue should be offered to the public. Some
suggestions have also com e to us from member banks as to such terms, as
follow s:
(a )
the length o f time the bonds should run to maturity;
(b )
the rate o f interest they should bear;
(c )
the extent to which they should be exempt from taxation;
(d )
should they be made acceptable at their face value by the G o v ­
ernment in payment o f inheritance taxes?
R ecom m endation:
A fte r full discussion c f this topic the Council voted as follow s:
(a )

T h a t the life o f the proposed V ictory Loan bonds should not ex­
ceed five years.
(U n anim ous.)
( b ) and ( c )
T h a t two classes o f bonds should be offered, one free o f
all taxes and one subject to surtaxes. T h e follow ing vote
indicates the opinion o f each member o f the Council as to the
rate o f interest on the two issues suggested:
T a x F ree.

M r. W i n g .................... .................... 4 %
M r. H epburn ............... .................... 3 .6 5 %
M r. R u e ......................... .................... 4 %
.................... 4 %
...................... 4 %
...................... 4 %
...................... 4 %

Mr. M ills

................. 4 %
...................... 4 %
...................... 4 %





4 3/4 %
4 3 /4 %
4 V a.%
4 ?4 %
4 V a.%
W a %


M r. W atts’ vote indicates his disapproval o f the issue o f any bonds
exempt from surtaxes.
(d )
It was unanimously voted that both issues o f bonds be made
acceptable by the Government at par and accrued interest
for inheritance taxes.
It is also the opinion o f the Council that both issues should be made con­
vertible at the option o f the holder during the term o f the bonds into a twenty
or thirty year 4|/^ % bond subject to surtax.

T O P I C N O . 8 — Y o u have asked our advice as to the discount rates
current at the Federal Reserve banks particularly as they are affected by the
amount o f government issues remaining undigested as evidenced by the fact
that the larger part o f the invested assets o f the Federal Reserve banks con­
sists o f member banks’ fifteen day notes secured by Liberty bonds and Treasurv certificates and c f customers’ notes maturing within ninety days secured in
like manner.
T h e Board would like the opinion o f the Council as to the merits of
differential rates. Assuming the differentials have been necessary to aid the
Treasury in floating its securities, does the Council feel that differentials with
respect to the character o f paper and not to time of maturity should be con­
tinued as a permanent policy.
Until the Liberty bonds already issued and the V ictory bonds to be
issued are distributed among permanent investors and paid for by them and
until the banks are relieved o f the obligation they are under to carry such large
lines of them for their patriotic customers who have gone in debt for them,
and until our Government gets through with its temporary financing on short
time certificates, the discount rates at the Federal Reserve banks should con­
tinue to show some preference on loans covered by Government securities. The
rates might well be continued as they now are until after the next bond issue
has been placed, but there will come a time when such preference should not
be continued, otherwise loans on Government securities will continue to form
too large a proportion of the Federal Reserve bank loans to the disadvantage
of commercial paper and therefore to the disadvantage o f industrial and com­
mercial enterprise. T h e financial necessities o f the Government for the pay­
ment o f its war debts will however have to be met and provided for before
such discrimination in favor o f loans covered by Government securities as
will induce people to borrow to pay for them in anticipation o f their future
earnings and incomes can be discontinued.

T O P I C N O . 9— Y ou have asked for the views o f the Council, as
to whether it will be necessary for some time to come in order to develop an

acceptance market in this country to stimulate it by a low rate at the Federal p ,
Reserve banks, and you have drawn our attention to the lower rates prevail­
ing in London for bankers’ acceptances than those current here.
In the opinion o f the Council the acceptance market in this country is
developing as well as could be expected. T he market for bankers acceptances
is now and has been materially interfered with by our Government’s financing
on certificates o f indebtedness. This interference will continue as long as the
Government continues its short time financing. In the meantime the accept­
ance rates at the Federal Reserve banks should be maintained just about as
they have been. W h en conditions again settle down on a peace basis supply
and demand combined with competition in foreign markets will govern such
rates. In comparing discount rates for bankers acceptances current here with
those current in London it should be remembered that during recent years
much o f Europe’s foreign business, particularly that of England, has been
financed through loans made by our Government. In this connection it is
of interest to note that the acceptance business of the London banks and banks
domiciled in London, on December 31, 1 9 12, amounted to approximately
£l I 7 ,000,0 00 sterling, while on Decerrber 31, 1917, the same had fallen to
approximately *-82,000,000. O n August 31, 1918, it had advanced to ^85,000,000. This decrease o f from 2 5 to 3 0 % in the volume of the Lon­
don acceptance business, together with the fact that our loans to the British
Government had the effect o f largely relieving the London banks of re­
sponsibility for financing their Government on short time obligations while
it threw exactly that burden on the banks of this country largely account for
the low discount rates for acceptances prevailing there and for the higher rates
prevailing here. Vv hen England again resumes the financing of her import*
and exports through the ordinary banking channels and the present artificial
restrictions are withdrawn by both Governments in connection with their im­
ports and exports, and our Government restrictions on all foreign exchange
transactions are removed a better equilibrium of the two discount markets is
likely to be established.
In other words foreign exchange markets during
the war have been in quite an abnormal condition and are likely to continue
so until government war debts between the nations are finally and perma­
nently adjusted and international business transactions return to their normal
and natural course free from the governmental restrictions and impediments
placed on them during the war. LJntil then existing conditions do not afford
an equ’table basis on which a comparison of current rates existing in London
and N ew Y ork can be made.

T O P I C N O . 10— T h e Council would draw the attention of the Fed­
eral Reserve Board to the follow ing:
Under the provisions o f Section 5202 of the National Bank A ct the
liabilities incurred by a national bank directly and indirectly cannot exceed
the amount o f its capital stock except for certain purposes named.

It would seem that the amount o f bills o f exchange which a national
bank may discount in London and other foreign centers comes under the
prohibition o f this section.
T h e rate at which 60 or 9 0 day bills o f exchange on London are sold
in this country is based upon the Sterling cable rate less certain deductions,
principally an interest charge at the open market rate in L ondon for discount­
ing bills. This rate, which today is 3 7 -1 6 % rules much below market rates
for money in this country.
In purchasing export Sterling bills a national bank must discount the
bill in London immediately upon its arrival if it is to engage in a profitable
transaction. If it does not discount the bill, it carries a 3 7 -1 6 % investment
to maturity when money in this country is worth more. T his no bank will do.
But to engage in this class o f business to the extent required by the de­
mands o f American exporters and to discount the bills purchased upon their
arrival in London the contingent liability created by the bank by the endorse­
ment of bills will quickly exceed the amount o f its capital.
Again, while the rediscount o f domestic acceptances with the Federal
Reserve bank does not come within the prohibitions o f Section 5202, it is
probably true that the discount o f such acceptances through channels other
than the Federal Reserve bank does come under such prohibition.
A s it is the desire o f the Federal Government and the Federal Reserve
Board to encourage as far as possible the development o f bankers acceptances
and the financing of foreign commerce by Am erican banks to meet the competi­
tion o f London banks, it is suggested that Section 5 2 0 2 be amended so as
to exclude from its prohibitions the liability created by a national bank as an
endorser on accepted bills o f exchange actually owned by the bank and re­
discounted at home or abroad, or if this object can be accomplished by a
ruling of the Federal Reserve Board it w ould be more desirable than to at­
tempt an amendment to the A ct.
There is no limit in the amount o f bills drawn against actually existing
values which a bank may purchase and hold, hence it w ould seem logical
that there should be no limit upon the amount which a bank might negotiate
by endorsement.