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kINUTKS OF THIS
I M C U T I W I Ct&MlTTBE O f
‘ITiK FKWSHAL ADVISORY CUUMCIL.

fcay 15, 1916

A meeting of the gxecutive Committee of the Federal Advisory
Council, celled by the President, was held in the federal Reserve
board room in the Treasury department, Washington, D.C., Monday,
Kay 15th, 1916, at 11 A. U.

L«C«

Present .Messrs. James B. Forgan, presiding, L.L.iiue,
ing, J.P. vorc...in, v.S.Howe, and erritt 1 . Grim, Secretary.

Linutes of meetings of the Executive Committee held on
February 14th and 15th, 1916, copies of which had been sent to members
were approved.
The Chains an stated that he had written Governor Hamlin of the

Federal Reserve Board on April 14, 1916, asking him to submit any ques­
tions the Board wanted the Couneil to consider at its meeting of 16tfc
inst., that Governor Hamlin had replied he would call his letter to the
attention of the Board, and that subsequently he had received the fol­
lowing letter fro»>Vice-Governor Delano, dated April 22, 1916,
suggesting subjscts for consideration:
My

dear Hr, Forgan:

I have been endeavoring to think up subjects for ths next
meeting of the Advisory Council, but thus far have not thought of any
particularly good onee.
However, 1 might mention again that we always deeire to hear
frcn> the Advieory Counoil its suggestions as to discount policy*
Another subject which occurs to me as worth considering and
entirely in line with the objects sought to be attained in the ap­
pointment of an Advieory Council might be phrased in this way:
"Presumably members of the Advisory Council hear many criticisms
of the Federal Reserve Aet and of the Federal deserve Board. To what
extent have these criticisms been substantive, constructive, or Bug-*
gsstivs, and to what extent does the Advisory Council endorse and ap­
prove them?"
Another subject which I think might be of interest is that
which is rsferred to in a speech by Vr. Lynch, of San Franeiseo,
delivered at Pasadena on the 3rd Day of Rarch, of which I send you
herewith fourteen copies, on the eubject of pyramiding deposits by
reason of inter-bank deposits.
Should the Federal Reserve Board seek to stop this! To what
extent should reservee carried against bank deposits be greater than
reserves carried against individual deposits;
federal Reserve Banks
are required to carry 35% reserve against bank deposits, whereas, the
large consKercial banks are required to carry only 15,1 to 18i.
Still another subject: #hat is the opinion of the Council a»
to the exceadlingly low rateii that prevail in the matter of bankers1
acceptances!
As any other subjects occur to me J shall be glad to communicate
with you.




Yours very truly,
(Signed) F A Delano,
Vice Governor.

MINUTES
executive o m a r m t

kay 1 5 ,

1916,

#2.

The chairman stated that the question in regard to the Federal
reserve bank's discount policy in its relation to existing business
conditions in the various districts should be answered individually by
each member of the Council for his own district at the joint session
with the Federal Heserve Board. This was agreed to.
The Executive Committee then proceeded to formulate tentative
answers to the questions suggested in Mr. Delano's letter to be recom­
mended to the Federal Advisory Council at its meeting on the 16th.
The executive Committee at the suggestion of U r , /organ also adopted
a recommendation to the Counoil in connection with the Interstate Commerce
Commission's tentative draft of rules govorning competitive bidding
required under Section 10 of the so-called Clayton Anti-Trust Act,
approved let. 15, 1j14, which section ^oes into effect on Oct. 15, 1916,
to accompany the Council's answers to the questions submitted by the
Federal deserve i>o*.rd.
The chairman laid before the Executive Committee the following
question just received from the Fsderal Reserve Board:
"question:
Ths invsstmsnts of the Federal reserve banks have reached
now the amount of #164,50Ct000; the percentage of cash against dsposits
and note liability is now about 69•8/.
"A further instalment of about #60,000,000 is due on ftay 16th
and will somewhat increase this percentage.
"It would be interesting for the Federal Reserve board to have the
Advisory Council give its opinion as to the advisability of the Federal
Reserve Board's now adopting a definite policy as to a minimum percentage
of cash reserve to be maintained by Federal reserve banks -- a percent­
age which of course would have to be adjusted from time to time according
to conditions.
If the Advieory Council should favor the adoption of such
a policy, what would be its idea as to the proper percentage to be Rpplied
under present conditions?
Should there be a different percentage in
the various districts?
Should Federal reserve banks amongst each other
adjust deficiencies against these reserves by rediscount operations, or
should the average percentage of all banks combined be considered the
basis and redisount transactions become necessary only when Federal reserve
banks reach the limit provided by the law of 40£ or
respectively?"

The Executive Committee then adjourned for luncheon to meet
at 3 t

.




Secretary

U liiim s

UK TMK EXECUTIVE COLUXTTBK

OF THE HBDKAAL ADVISORY C j’JNCIL

k a y 15,

1 9 16 .

Th© executive Comraittee mot at 3 1’ U * $ all members being present*
Consideration of the last question submitted by the Federal Reserve
Board was resumed and after a full discussion of it, on motion of ^r*
U.
ing, seconded by IZr. «• S, Kewe, Mr, J* 3. Forgan was requested
to prepare an ansver embodying the views as expressed by the members of
the C Q f i j ; ittee.
Vhe Conanittee then adjourned until 9:45 A. M. Tuesday, Lay 16,1916*

ja.llM-5 Q*

JaECtJTIVB col-mtwr

iay Id, 1916.
The l.xacutive Conanittee met at 9:45 Tuesday, Lay 16th, all members
being preoent.
kr* Korgaa read his proposed answer to tho last question submitted
by the Federal He serve Board and on motion it was unanimously adopted
as the executive CoaaaitteeU tentative answer to the question to oe
recommended to the Federal Advisory Council#
ihe time having srrived for the convening of the Federal Advisory
Council the ;xecutiv© Cona&itte© adjourned.




HXNUTSS OF THU
FRDfcKAL ADVISORY COUNCIL

May 1 6 , 1916.

A statutory meeting of the Federal Advisory Council m s held in
the Federal Reserve board room in the Treasury deportment, Wasiiington,
D. C., Tuesday, Kay 16th, at 10 A# k.
Present! Messrs. Jamee B. Forgan, presiding, L. L. Hue, J. r.
Morgan, W. S* Rowe, J. W. Borwoad, Charles A« Lyerly, F. G« fcatte,
'. Jaffray, T* J* ftecord, Herbert -xsiehhaafcer* . C. .-/lag, and Merritt
H Grim, Secretary.
Absent: Mr. S. F. Swinney.
The creaentials of ir. F. 0. uatts, of St. Louis, dated April
13, 1916, to represent Federal Reserve Listrict Ho* 8 , on the federal
Advisory Council, vert read and placed on file*
The minutes of the Federal Advisory Council of February 15th and
of the Executive Committee of February 14th ana 15th, 1910, copies of
which had been sent to the //.embers, fire approved.
The President stated that he had written Governor Hamlin of the
Federal Reserve Board on April 14, 1916 asxin^ him to submit any questions
the Board wanted the Counoil to eonsider at this meeting; that Governor
liamlin haa replied he would call his letter to the attention of the Board,
and that later he haa received a letter from Vice Governor Delano, dated
April £2nd, suggesting several subjects for consideration, a copy of which
had been oent to eaeh member of the Council. (A copy of feir. jelano's
letter ^ill bo found in the minutes of the Executive Committee of May 15th.)
Mr. Forgan suggested that each member should informally report to the
Federal Reserve Board on business conditions in their relation to the
discount policy of the Federal reserve bank in his o m district, at the
joint seesion whieh had been arranged for 12 M if the Council should bs
ready at that hour. This was agreed to.
The questions submitted by the Federal Reserve Board were then con­
sidered «lon& with the tentative answers prepared by the -executive Com­
mittee. The following statements were then formulated and unanimously
adopted as the Federal Advisory Counoil's answers and ordered submitted
to the Federal neserve Board:




question:
Presumably men;bar9 of ths Advisory Council hear many
criticism! of the Federal Reserve Act and of the Federal Reserve
Hoard.
To vhat extent have these criticisms been substantive,
constructive or suggestive, and to what extent does the Advisory
Council endorse and approve them.
Answer:
The Council has heard no vital criticisms of the Feoeral
Reserve Act beyong euch as have been referred to by the Feoeral
Reserve Board in its annual report to Congress and no criticisms
of the Board which seem worthy of discussion.

question:
Should the Federal Reserve Hoard seek to stop the pyramiding
of deposits by reason of inter bank deposits!
To what extent should
reserves carried against bank deposits be greater than reserves carried
against individual deposits?
Answer:
Under our system of banking it is practically impossible to
prevent the pyramiding of bank deposits* j£ach individual bank for its
exchange purposes finds it necessary to keep funds at its credit in the
principal centers with which ite locality has direct businees dealings*
^uite naturally when it lacks a sufficient local demand to employ its
funds it accumulates them with its correspondents at these centers*
Generally speaking these centers are the so-called reserve cities*
Hie bn.nks in these cities need funds for the same purpose in the larger
centers now known as central reserve cities, two of which - Chicago
and St* Louis— must of necessity maintain large balances in Hew York*
In this way when money becomes redundant, idle funds are passed along
from the numerous country banks to the less numerous reserve city
banks and from then, to the central reserve city banks finally reaching
the bunks of Mew fork, which thus become the reservoirs for the bulk
of the idle funds of the entire banking system* For sometime money
has been quite redundant over a large part o-f the country and this
pyramiding process has become intense, caueing inflation of bank deposits at the centers with a corresponding expansion of loans and a
demoralization of interest rates*
Under the national banking system prior to the passage of the
Federal Reserve Act the double or triple reckoning of bank deposits as
legal reserves formed the greatest evil of the pyramiding process* By
providing t h a t no bank deposits other than those with the Federal reserve
b an ks s h a l l be available as legal reserves and by providing the member
b a n k s w i t h the facilities offered by the federal Reserve banks




-2-

for rediscounting and supplying circulation the federal Reserve system
has greatly reduced the danger of this unavoidable pyramiding process
and will tend to reduce it in volume.
The banks in the present reserve and central reserve cities
vill undoubtedly continue to carry bank deposits after they cease to
act as legal reserve agents and for this reason doubtless they are
required by the Federal Reserve Act to maintain larger legal reserves
than the country banks*
The expectation that they will thus continue
to receive bank deposits affords the only reason for this requirement
and we believe that the 15^ &n4 1 Q% legal reserve now respective} re­
quired of them will be found adequate under the new syster,
inasmuch however as under the Federal reserve system the banks
in these so-called reserve cities are to lose their privilege of act­
ing as legal reserve agents for the country banks and as the banks in
many cities which have not been designated as reserve cities accept
bank deposits and offer special inducements to attract them, it would
seem equitable, conservative and proper that all banks receiving bank
deposits should be required to maintain a minimum legal reserve against
them of 15/C*

Question:
dhat is the opinion of the Council as to the exceedingly low
rates that prevail in the matter of bankers' accsptances!
Answsr:
The market rates for bankers' acceptances have been regulated
largely by th* rates current in New York on call loans and uank de­
posits*
Prims bankers' acceptances have already come to be regarded
as a new form of secondary reserve of unusual sfficacy, being readily
convertible into legal reserve by disposing of them to the Federal re­
serve banks.
Banks having surplus balances in New York or idle funds
beyong the limited amount on which their New York correspondents will
pay them 2% interest have been willing to take prime bankers* accep­
tances maturing within ninety days at rates only fractionally above the
2% paid on their bank balances*
This is the competition met by the
Federal reserve banks in purchaeing them on tho open market, and ex­
plains their making a minimum rate for them of 2 ?., which practically
established that as the market rate for all acceptances coining within
their le^al requirements.
when conditions change and money becomes less
redundant this competition will bo greatly reduced if not practically
eliminated and the Federal reserve banks should then raise their minimum
rate for them* Under normal conditions for the protection of "dollar
exchange" the discount rates prevailing in the leading foreign money
centers for similar acceptances payable in sterling or other foreign
currencies will have to be considered in fixing the Federal reserve banks*
discount rates o n prime bankers* acceptances. The rate will be regulated
by the law of supply and demand.



-3 -

^uestion:
The investment* of the Federal Reserve banks have reached no*
the amount of £164,500,000; the percentage of cash against deposits
and note liability is now about 6&.8$,
A further instalment of about .$60,000,000 is due on lay 16th
and will somewhat increase this percentage.
It would be Interesting for the Federal Pieserve Board to have
the Advisory Council give its opinion as to the advisability of the
Federal Heserve Board's now adopting a definite policy as to a minimum
percentage of cash rsservs to be maintained by Federal Reserve banks — a
percentage which of course would have to be adjusted from time to time ac­
cording to conditions.
If the Advisory Council should favor the adoption
of ouch a policy, what would be its idea as to the proper percentage to be
applied under present conditions!
Should there be a different percentage in
the various districts!
Should Federal reserve brinks anongst each other ad­
just deficiencies against these reserves by rediscount operations, or should
the average percentage of all banks combined be considered the basis and re­
discount transactions become necessary only -srhen Federal reserve bonks reach
the limit provided ,by the law of 40*t or 35> respectively!

Answer:
In view of the present unsettled conditions of international monetary
affaire produced by the European war and the plethora of money and expansion
of credit prevailing in this country due very largely to the some cause, we
are of the opinion that the Federal reserve banks should conserve their cash
resources and run strong in their cash reserves* we are not however prepared
to name a definite minimum percentage of cush reserves that could be made
applicable to them all* 'discretion should be exercised in the case of each,
A bank with its portfolio well filled with prime bankers’ acceptances, which
can be relied upon to liquidate themselves as they mature, especially when
they are made available as » basis for the issue of Federal reserve notes,
might legitimately encroach upon its cash reserves to a greater extent than
a banks having its portfolio filled ^ith the ordinary run of re*uiscounted
paper.
Under present conditions the cash reserves of the Federal reserve
banks cfjti most readily be regulated and controlled through their open market
transactions,
Should any of their, through their transactions in the open
market reduce their cash reserves to a point which in the judgment of the
Federal fteserve Board approaches teo close to the minimum le^;al limit,
they should be required to raise their rates on such transactions, abandon
them entirely or arrange with the other Federal reserve banks not similarly
situated to relieve them of some of their bankers' acceptances, municipal
warrants or other open market purchases.
In our opinion the average percentage of cash reserves carried by
the banks combined reveals the strength of the system and compulsnry
rediscounts b etween tho Federal reserve bnnks should be resorted to only
when rmy of then, through rediscounting for their member htnks, approach
too close to the limit provided by law of 40^ on their circulation and
35 ' on t>.eir aepo*i%e.

all




-

4-

The folio ing additional statement on motion of Kr, Rue was also
ordered submitted to the Federal Reserve Board having been recommended
by the Executive Committee:
»♦ In the interests of the banks of the country we would draw your at­
tention to Section 10 of the Clayton Anti-Trust Act, which prohibits any
common carrier having any dealings in excess of $5GtQ0Q a year without
competitive bids with another company in which a director of the common
carrier is interested.
The effect of this statute is that a railroad company, any of whose
directors or officers are interested in a bank, cannot deal with that bank
in securities without competitive bidding. It might be held that borrowing
money and giving note3 constitute "dealings in securities" and come within
the statute.
This section of the Clayton Act becomes effective October 15, 1916,
The Interstate Commerce Commission has just promulgated tentative rules for
competitive bidding which require a lar^e Hmount of newspaper notices, per­
mission to all bidders to see and take copies of the other bids and reports
to the Intisrstate Commerce Commission.
The hearing on these rules by the
Interstate Commerce Commission, originally set for today, has been postponed
to June 19th, The interests o t the bunks of the country nre in the con­
struction placed by these rules on the words "dealings in securities? A
great many of the large banks of the country have on their boards of directors
one or more persons who are directors of railroads engaged in interstate
commerce and many of these banks make short time loans to railroads in order
to enable them to pay taxes, bond interest, etc,
Sometines these loans are
made on plain, unsecurea notes, but more often they are secured by the pledge
of bonds, stock of subsidiaries or other securities. It is obviously un­
desirable that such short time loans, even when secured by the pledge of
securities, should require competitive bidding with publication of tenders
for bids, etc. Such short time loans from the necessity of the case have to
be made quickly and any variation in the rate of interest on them could not
produce any appreciable effect on the situation of the railroad.
Under the
various Stale statutes roquiring issues of securities to be submittea to
public utility commissions, etc., there is practically always a provision to
except from such subsdssion loans for less than either one or two years. It
does not seem to us that Congress intended by the words "dealings in securities’*
to include short term banks loans either secured or unsecured. We think that
the words "dealings in securities” do no4* cover the case of a pledge of
securities as collateral to a bank loan,
&e are therefore of opinion t h a t the p r o p o s e d rules should expressly ex­
cept brink l o a n s having not i ore tha n, say, two y e ar s to run, whether or not
such l o a n s are secured by the p l e d g e of collateral. The tentative draft of
rules promulgated by the Interstate Commerce Commission in paragraph 2 b y
implication indicates that a b o n k l o a n s e c u r e d by collateral is to be con­
strued a s within the terras o f t h e A c t a n d p o s s i b l y also by implication would
include a l o a n on an unsecured n o t e .
The F e d e r a l




Reserve Board will do a g r e a t s e r v i c e

to

th e

banks

of the country if they will make such representations to th* Interstate
Commerce C!onuris*ion as will induce them to codify the draft rules so as
to indicate clearly that short tiros bank loans whether or not secured by
the pledge of collateral are not construed to be within the tents of the
Act and can be made without competitive bidding following advertisement*
We would therefore urge that your Board take prompt action In this matter
while the Interstate Commerce Coaimission has it unuer consideration,
Th* Council th*n adjourn*d ponding th* arrival of th* Federal
R eserve

Bo^d.




JOINT SESSION
FUUSHAL K£SitfvYK BOARD
AND
FKDKRAL ADVISORY CuUNGIL

May 1 6 , 1916.

The Federal Reserve Boar a and the Federal Advisory Council met in
joint session in the Boara room at 12 M, Tuesday, May 16, 1916.

Prosent:

Governor C« $• Hamlin, in the ehair, Vice Governor ?• A*
Delano, Messrs. J. ~. Williams, A* C. Pillar, #• P* G. Harding, P. k.
Warburg, and Sherman P. Alloa, Secretary of the federal Reserve Board, and
Messrs. J. 3. Forgan, L. L. Rue, D* G. Wing, J* P. Morgan, W. 5, Rows,
J* ». Norwood, Charles A. Lyerly, F. 0. Sfatts, C. T. Jaffray, T* J. Roeerd,
Herbert Fleishhacker, of the Federal Advisory Council and Merritt li. Grist,
Secretary.
Governor Hamlin askea Iur. Forman to report the findings of the Council
on the questions submitted by tho Hoard.
Mr* Forgan then read the statements formulated by the Federal Advisory
Council and handed a eopy of them to the secretary of the Board.
Governor Hamlin then called upon each member of the Council to
report upon the dioceunt policy of the Federal reserve bank of his district
in view of general business conditions prevailing therein, after which
there was sons informal discussion concerning the general business and
dinancial conditions of the country in ^hich the members of the boara
and of the Council participated.
j i injt session ad jour .od at




* r.

.

Secretary.