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M I N U T E S OF SPECIAL MEETING o f the EXECUTIVE COMMITTEE o f the F E D E R A L ADVISORY COUNCIL June 14, 1923 M IN U T E S O F S P E C I A L M E E T I N G O F T H E E X E C U T IV E C O M M IT T E E OF T H E F E D E R A L A D V I S O R Y C O U N C IL June 14, 1923. A special meeting o f the Executive Committee o f the Federal Advisory Council was held at 31 P ine Street, N ew Y o rk City, Thursday, June 14, 1923. The Chairman, M r. Rue, called the meeting to order at 11.30 A. M. P resen t: M r. Mr. M r. M r. t L. L. Rue, Chairman Paul M . W a rb u rg John M . M iller, Jr. H . L . H ilyard District N o. District N o. District N o. Secretary. 3 2 5 A b s e n t: Mr. A . L. A iken M r. J. J. M itchell M r. E. F. Sw inney District N o. 1 District N o. 7 District N o. 10 M r. Rue, Chairm an, presented letter from the Federal Reserve Board dated June 7, 1923, enclosing cop y o f com m unication from the First Federal Foreign Banking Association o f N ew Y o r k City, dated June 6 , 1923, urging the Board to redraft its regulations coverin g Section 25-a o f the Federal Reserve A ct to provide for the follow ing p oin ts: “ (1 ) ‘ E dge Bill' banks shall be permitted to accept drafts and bills o f exchange involving the exportation and importation o f goods o r the assem bling and storage o f goods destined for foreign export for periods ranging fro m three months to one year without having to obtain special authority fo r acceptances beyond the six months’ period. (2 ) Such banking institutions m ay extend credits or make loans upon p roper security o r bank guarantee to foreign institutions for periods o f one to five years, and m ay issue debentures, collateral trust notes o r bonds against such credits or loans or may endorse or guar antee and sell such credits o r loans with this endorsement or guarantee provided, how ever, that i f such banking institution shall at the same time be con du ctin g a general acceptance business the total amount o f its acceptances, debentures, notes and all other outstanding obligations o f any kind o r nature shall not exceed eight times the amount o f its paidin capital stock, surplus o r undivided profits.” A general discussion took place as to the merits o f the questions submitted. The Chairm an presented letter from M r. M itchell giving his views and telegram from M r. Sw inney stating his opinion. Mr. W a rb u rg reported having had a conversation with M r. Aiken on the subject the day before, and presented M r. A ik e n ’ s views, which were substantially in accord with the reply w hich w as subsequently adopted by the Executive Committee and forw arded to the Federal R eserve B oard. A fte r due consideration, reply to the Federal Reserve B oard’s letter was drafted and unanim ously adopted, and M r. R ue, Chairm an o f the Executive Committee, was instructed to sign and fo rw a rd it im m ediately to G overnor Crissinger. Copy o f the letter is attached hereto and m ade part o f these minutes. A t 2.30 P. M ., the m eeting adjourned. H . L. H I L Y A R D , Sr.,,- Sccrctary. l3 R E C O M M E N D A T IO N O F T H E E X E C U T I V E F E D E R A L A D V I S O R Y C O U N C IL T O C O M M IT T E E OF TH E T H E FE D E R A L RESERVE BOARD June 14, 1923. (Subsequently approved by the Council) June 14th, 1923. Hon. D. R . Crissinger, G overnor, Federal Reserve Board, W ashington, D . C. Dear G overnor C rissinger: T he E xecutive Com m ittee o f the Federal A dvisory Council met today and con sidered the letter o f the Federal Reserve B oard dated June 7th, enclosing communica tion from the First Federal F oreign Banking A ssociation o f N ew Y ork City, dated June 6 th, urging the B oard to re-draft its regulations covering Section 2 5-A o f the Federal Reserve A c t to provide fo r tw o requirements, marked (1 ) and ( 2 ) on page 2 o f their letter. The E xecutive Com m ittee o f the Federal A d visory opinion as fo llo w s : Council begs to state its W ith regard to ( 1 ) , the Com m ittee does not consider it equitable to make rulings on the eligibility o f acceptances m ade by acceptance corporations different from the rulings coverin g acceptances m ade by m em ber banks. I f it is necessary fo r member banks to secure the approval o f the Federal Reserve authorities before issuing accept ances beyond six ( 6 ) m onths, the same rule should also be applied to acceptance corporations. W ith regard to ( 2 ) , the so-called E d g e L aw is a com bination o f tw o separate p rojects; one was a law prepared several years b efore by the Counsel o f the Federal Reserve B oard, w hich law wras designed to provide fo r a Federal charter for banks or corporations in w hich national banks should have the privilege to invest, such corporations d oin g an acceptance business, and operating in foreign countries, either through branches o r through the ow nership o f subsidiary corporations. In providing fo r acceptance corporations o f this kind, tw o objects were had in m ind: 1. That it should be possible fo r several banks to combine in the ownership o f such a corporation, thereby creating a jo in t instrument with which to operate in foreign countries, it being realized that unless such a combination were permitted, only very few o f the very strongest banks w ould be able to engage in foreign banking. T he A m erican F oreig n Banking C orporation and the Mercantile Bank o f the Am ericas were the im m ediate ou tgrow th o f this legislation, which, it is interesting to remember, was proposed and adopted as against M r. M c A d o o ’s plan, who wished the Federal R eserve Banks themselves to g o to foreign countries with organizations o f their ow n acting as “ agencies'’ . 2. A m erican deposit banks being p rop erly restricted with regard to their accept ance pow ers to one hundred o r one hundred fifty per cent, o f their capital and surplus, while acceptance corporation s w ere not permitted to accept domestic deposits, it was provided that acceptance corporations, like British acceptance houses, should be allowed to accept a multiple o f their capital and surplus. 7 Congress amended the Federal Reserve A ct so as to permit national banks to invest in acceptance corporations o f this kind, but neglected to pass a law authorizing their existence under a Federal charter. The draft o f the law remained, therefore, hanging fire until Senator Edge became interested in passing legislation permitting national banks to invest in investment corporations in a similar manner as they had been authorized to do with regard to acceptance corporations. H e then took the draft of the law prepared for acceptance corporations and simply added to it the powers governing investment corporations. T w o entirely distinct projects were thus covered by one law. When the Board was asked to write its regulation it quite properly proceeded to separate these two functions, and the Committee holds the view that it would be a mistake to make the changes now proposed by the First Federal Foreign Banking Association. Investment banking and acceptance banking are two entirely different matters; acceptance banking deals entirely with short-termed credits o f a commercial nature, the risk being short, and the funds o f the corporation being kept liquid as a reserve fund to be available in case o f default in payment on the part o f any debtors. It would interfere with the liquidity and safety o f these corporations, as acceptance corporations, if they locked up their funds in illiquid loans against which they would put out their own obligations. A ll banking traditions in Europe, where this accept ance business has been developed, abhor the thought o f having an acceptance bank issuing its long term obligations in the market. It is obvious if any o f these long term loans went bad, and the debentures o f the acceptance corporation would begin to sell at a discount, that their acceptances could not be sold; also that in case the collateral of the securities, on which these debentures had been issued, could not be liquidated when the debentures matured, that the safety o f the acceptances would be impaired. As against these considerations, very little importance may be attached to the argument of the First Federal Foreign Banking Association to the effect that some business may be “ switched” from acceptances into long term obligations. Such transactions, if they are really based on import and export transactions, are extremely unlikely, and if they existed, they could be carried temporarily by a cash advance, or an acceptance credit might be secured from others. It is true that acceptance corporations have no easy time in making both ends meet, and earning a dividend. If greater latitude, however, is to be given to them, it must be sought on other lines, which do not run counter to safe banking principles. V ery truly yours, L. L. R U E , Chairman, Executive Committee. 8
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