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MINUTES OF MEETING of the FEDERAL ADVISORY COUNCIL M IN U T E S OF M E E TIN G OF T H E F E D E R A L A D V IS O R Y CO U N CIL M a y 16, 1921. A regular statutory m eeting o f the F ed eral A d v is o ry C ou ncil w as held in the F ederal R eserve B oard R o o m , M etrop olitan Bank B uilding, W a sh in g ton , D . C., at 10.30 A . M ., M on d a y , M a y 16, 1921. A ll the m em bers o f the C ou ncil w ere present as f o ll o w s : L. L. R ue, President D istrict N o. 3 P . M . W a r b u r g , V ic e President D istrict N o. P hilip S tock ton D istrict N o . 2 1 C. E . Sullivan D istrict N o. 4 J. G. B row n D istrict N o . 5 E . W . L an e D istrict N o . 6 J. J. M itch ell D istrict N o . 7 F. O . W a tts D istrict N o . 8 C. T . J a ffra y D istrict N o. 9 E . F. S w in n ey D istrict N o . 10 11 12 R . L . Ball D istrict N o . A . L . M ills D istrict N o . H . L. H ily a rd Secretary T h e P resident, M r. R u e, called the m eetin g to o rd e r at 10.30 A . M . O n m otion , duly seconded, the m inutes o f the F eb ru a ry m eetin g o f the C ou n cil and the E x ecu tiv e C om m ittee, cop ies o f w h ich had p reviou sly been sent to the m em bers, w ere a pproved. M r. R u e, a fte r thanking the m em bers fo r the h o n o r co n fe rre d u pon him in elect ing him as P resident, advised the C ou n cil o f the appointm ent o f M r. H a r ry L . H ily a rd , Secretary, at a salary o f $ 1 5 0 0 per annum , w hich appointm ent w as on m otion , duly seconded, a pproved. T h e President furth er a dvised the C ou n cil o f the op en in g o f an accou n t w ith the Philadelphia N ation al B ank to be d raw n against jo in tly by the P resident and the S ecre tary, w hich arrangem ent w as on m otion , duly secon ded, approved. T h e Presiden t presented the final financial report o f M r. M erritt H . G rim , fo rm e r S ecretary, sh ow in g a balance o f $7.21 turned o v e r to the new S ecretary as o f M a rch 1, 1921, together w ith certification o f the a u d itor as to the correctness o f M r. G rin rs report, both o f w h ich , on m otion duly secon ded, w ere app roved, and copies th e re o f m ade a part o f these m inutes. O n m otion , duly secon ded and carried, the S ecretary w as requested h erea fter to send to each m em ber o f the C ou n cil five cop ies o f the R ecom m en d a tion s adopted at each m eeting. *5 REPORT OF SECRETARY OF FEDERAL A D V IS O R Y CO U N CIL From December 31, 1920, to Date M arch 31, 1921. Balance on hand December 31, 1920, according to last report ....................... $609.93 D IS B U R S E M E N T S Expenses attending meeting o f the Federal A dvisory Council in W ashington, February 21 and 22, 1921 (including tw o days to N ew Y o rk ) ...................................................................................... $201.63 Expenses to Philadelphia, March 22, 1921............................................ 113.26 Total traveling expenses .................................................................... $314.89 Printing ............................................................................................................. $73.80 Stenography and Stationery ...................................................................... 10.80 Postage ............................................................................................................. 3.23 Salary, Secretary, tw o months, January and February ................ 200.00 H . L. H ilyard, Secretary, Balance to close my a c c o u n t ................... 7.21 ----------- $609.93 Respectfully submitted, M E R R I T T H . G R IM , Secretary. T o the Federal A dvisory Council: W e have examined the above account and find the balance o f $7.21 turned over to Mr. H . L. Hilyard, Secretary, to be correct. Respectfully, JAM E S A. D U F F Y , Assistant Cashier. T H E P H IL A D E L P H IA 16 N A T IO N A L BANK. T h e President reported that in accordan ce with the R esolu tion contained in T o p ic N o. 7 o f the R ecom m en d ation s o f the F ebru ary m eeting, he and M r. W a rb u rg , V ice President, had called upon the Secretary o f the T reasu ry and the Chairm en o f the Finance C om m ittee o f the Senate and the B anking and C urrency C om m ittee o f the M ouse, g iv in g the C ou n cil's endorsem ent to the M cF a d d en B ill, w h ich contem plates abolish in g the office o f the C om p troller o f the C urrency, the appointing o f an U n d er secretary o f the T reasu ry, and the taking o v e r o f the fun ction s o f the office o f the C om p troller o f the C u rren cy by the F ederal R eserve B oard. T h e President reported that n o op p osition to the B ill had been encountered in any quarter, and that, in his op in ion , it w as unnecessary at this tim e to pursue the m atter further. T h e C ouncil, h ow ever, requested the same C om m ittee, con sistin g o f the President and the V ic e P resi dent, to continue to w atch the p rogress o f the Bill and en dea vor to secure its passage through both houses o f C ongress. W ith the approval o f the C ou ncil, the President directed the S ecretary to fo rw a rd to each m em ber o f the C ou n cil a list o f the m em bers o f the B an k in g and C u rrency C om m ittee o f the H o u se o f R epresentatives so that the m em bers o f the C ou n cil m ay com m u nicate with the m em bers o f the C om m ittee in o rd e r to assist in securing the passage o f the Bill. A t 11.15 A . M . the C ou n cil a d jo u rn e d to con vene in jo in t session w ith the m em bers o f the F ederal R eserve B oard. H. L. H IL Y A R D , Secretary. M IN U T E S OF J O IN T C O U N C IL AND C O N F E R E N C E O F T H E F E D E R A L A D V IS O R Y THE FEDERAL RESERVE BOARD M a y 16, 1921. A t 11.15 A . M . a jo in t con fe re n ce o f the Federal A d v is o r y C ou n cil and the Federal R eserve B oa rd w as held as arran ged. P resen t: M em bers o f the F ederal R eserve B o a r d : G o v e rn o r W . P. G. H a rd in g , V ic e G o v e rn o r E dm u n d Platt, M essrs. C harles S. H am lin , A . C. M iller, John R . M itch ell a n d D . R . C rissin ger, C om p troller o f the C u rrency. P re s e n t: M em bers o f the F ed eral A d v is o r y C o u n c il: L . L . R u e, P re s id e n t; P. M . W a r b u r g , V ic e P re sid e n t; M essrs. S tockton, Sullivan, B row n , Lan e, M itchell, W a tts, J affray, S w in n ey, B all, M ills, and H . L. H ily a rd , Secretary. T h e P residen t o f the C ou n cil, M r. R u e, called the m eetin g to o rd e r and invited G o v e rn o r H a r d in g to G o v e rn o r H a r d in g address the co n fe re n ce . discussed the topics, list o f w h ich had been sent to each m em ber o f the C ouncil. Lie laid particu lar em phasis upon the rate p o licy o f the Federal R eserve System and the agricu ltu ral situation. H e requested the C ou ncil also to con sider the f o llo w in g : 17 (a ) What suggestion should be made in connection with the follow ing Bills: S. 579, S. 831, H .R. 242, which contemplate an amendment o f Section 9 o f the Fed eral Reserve A ct? (See Recommendation No. 14). (b ) What action should be taken in regard to the discrimination by Federal Reserve Banks against the paper o f certain industries? (Federal Reserve Bank o f Kansas City— Rubber paper.) (See Recommendation No. 9 .) The Council discussed the serious situation o f the livestock industries and believed they should be assisted if possible, but was o f the opinion that it would not be good policy to make a recommendation concerning any particular industry, and Governor Harding was so advised. The joint meeting adjourned at 12 o ’clock noon. H. L. H IL Y A R D Secretary. M IN U T E S O F M E E T IN G O F T H E F E D E R A L A D V IS O R Y C O U N C IL M ay 16, 1921. The Council reconvened at 12 o ’clock noon, the President in the Chair. The ten topics submitted by the Federal Reserve Board were brought up for dis cussion, as were the additional topics suggested by Governor H arding orally at the joint meeting. In addition, the President submitted for consideration a copy o f form 8-PI-231, entitled “ Bankers’ Acceptance Questionnaire,” which is being sent to accepting banks by Federal Reserve Banks o f other districts. (See Additional Rec ommendation No. 11.) In regard to Topic No. 3, the Council discussed fully the question o f whether the present differential in rates in favor o f loans secured by Government collateral should be continued. On the question whether the Federal Reserve Banks were under any moral obligation to name lower rates on Government collateral than on other classes o f paper, the vote o f the Council was eight in the affirmative and four in the negative, the vote being as follow s: Y es Mr. Mr. Mr. Mr. Mr. Mr. Mr. Mr. No L. L. Rue J. G. Brown E. W . Lane J. J. Mitchell F. O. Watts C. T. Jaffray E. F. Swinney R. L. Ball Mr. Mr. Mr. Mr. 18 Philip Stockton P. M. W arburg C. E. Sullivan A . L. Mills T h e P resident suggested that R ecom m endation N o. 3 o f the February, 1921, m eeting should again be adopted with the addition thereto o f the w ord s “ to original su bscribers.” O n m otion , duly seconded and carried, the suggestion was adopted (S e e R ecom m en d ation N o. 3 o f these m in u tes), the vote being nine in the affirmative and three in the negative, as f o ll o w s : No Y es M r. M r. M r. M r. M r. M r. M r. M r. M r. M r. P. M . W a rb u rg M r. C. E . Sullivan M r. A . L . M ills L . L. R ue P hilip S tockton J. G. B row n E . W . Lane J. J. M itchell F. O. W a tts C. T . J a ffra y E . F. S w in n ey R . L. Ball A t 1.15 P. M . the C ou n cil a d jou rn ed to the M etrop olitan Club, w here variou s m atters w ere discussed in fo rm a lly w ith the m em bers o f the Federal R eserve B oard until 4 P. M . A t 4 P. M . the C ou ncil recon ven ed in the F ederal R eserve B oard R o o m , the P resident in the C hair, and con tin u ed its discussion o f the topics m entioned above, togeth er w ith additional topics suggested b y the m em bers and contained in A d d ition a l R ecom m en d a tion s N o. 13 and N o. 15. T h e top ics w ere referred to the E xecu tive C om m ittee, with instructions f o r the latter to prepare recom m en d ation s e m b o d y in g the C o u n cil’ s view s on the va riou s sub jects under discussion. At 6 P. M . the C ou n cil a d jou rn e d until 10.30 A . M . T u esd ay, M a y 17, 1921. H . L. H I L Y A R D , Secretary. M IN U T E S O F M E E T IN G THE OF TH E FEDERAL E X E C U T IV E C O M M IT T E E O F A D V IS O R Y C O U N C IL M a y 16, 1921. A m eetin g o f the E x ecu tiv e C om m ittee o f the F ederal A d v is o r y C ou n cil w as held in the F ederal R eserve B oa rd R o o m a fte r a d jou rn m en t o f the F ederal A d v is o ry C ouncil, at 6 P. M ., M a y 16, 1921. 19 Present: Mr. L. L. Rue, Chairman; Messrs. P. M. W arburg, Philip Stockton, J. J. Mitchell, F. O. Watts, E. F. Swinney, and H. L. Hilyard, Secretary. The Committee prepared Recommendations in regard to the ten topics originally submitted by the Board, together with the five subsequent topics. A t 7 P. M. the Committee adjourned, reconvening at 9 P. M. in the New W il lard Hotel, the entire Committee being present as above with the exception o f Mr. Stockton. A t 11 P. M. the Committee adjourned until 10 A. M. Tuesday, May 17, 1921. H. L. H IL Y A R D , Secretary. M ay 17, 1921. The Executive Committee reconvened at 10 A . M. in the Federal Reserve Board R oom on Tuesday, May 17, 1921, as arranged. Present: Mr. L. L. Rue, Chairman; Messrs. P. M. W arburg, J. J. Mitchell, and H. L. Hilyard, Secretary. The Committee concluded its work and requested the Chairman to present its report to the Council at the meeting scheduled fo r 10.30 A . M. H. L. H IL Y A R D , Secretary. M IN U T E S O F M E E T IN G O F T H E F E D E R A L A D V IS O R Y C O U N C IL M ay 17, 1921. The Federal A dvisory Council reconvened as arranged in the Federal Reserve Board Room, May 17, 1921, at 10.30 A. M. Present: Mr. L. L. Rue, President; Mr. P. M. W arburg, V ice President, Messrs. C. E. Sullivan, J. G. Brown, E. W . Lane, J. J. Mitchell, R. L. Ball, A . L. Mills, and H. L. Hilyard, Secretary. Mr. Rue, Chairman o f the Executive Committee, presented the Committee’s Recommendations, which were fully considered and approved fo r presentation to the Federal Reserve Board. Copy o f Recommendations is attached hereto and made part o f these minutes. The Council adjourned at 11.30 A. M. to convene in joint session with the mem bers o f the Federal Reserve Board. H. L. H IL Y A R D , Secretary. 20 MINUTES OF JOINT CONFERENCE OF THE FEDERAL ADVISORY COUNCIL AND THE FEDERAL RESERVE BOARD May 17, 1921. 1he hederal Reserve Board and the Federal Advisory Council met in joint session in the Federal Reserve Board Room, May 17, 1921, at 11.30 A. M., as arranged. Present: Members of the Federal Reserve Board: Governor W . P. G. Harding, Vice Governor Edmund Platt, Messrs. Charles S. Hamlin, A. C. Miller, J. R. Mitchell, and Mr. D. R. Crissinger, Comptroller of the Currency. Present: Members of the Federal Advisory Council: Mr. L. L. Rue, President; Mr. P. M. Warburg, Vice President; Messrs. C. E. Sullivan, J. G. Brown, E. W . Lane, J. J. Mitchell, R. L. Ball, A. L. Mills, and H. L. Hilyard, Secretary. The President submitted the Councirs report and the various recommendations were discussed informally by the members of the Board and the Council. Mr. Warburg presented for discussion the question of recommending to the Board that it take a sympathetic attitude towards Federal legislation now being prepared for the purpose of properly checking the issue of fraudulent securities. He suggested that the plan, as now contemplated, would provide that local committees should be organized in the twelve Federal Reserve Banks, and possibly in Federal reserve branch cities, where, under the presidency of the Chairman of the Federal Reserve Bank, who should be authorized to engage the services of competent men, they would watch the offerings of securities in their districts and report to the Attorney General as soon as they would have reason to suspect that the public might be facing the danger of being defrauded. The Governor expressed the view that the Board would prob ably be disinclined to take on any additional burdens, but would probably not object to the Chairmen of the Federal Reserve Banks co-operating in the manner suggested. Members of the Council freely expressed the view that effective checking of the issue of fraudulent securities was most important and that regulation under the auspices of the Federal Reserve Banks would render a great .service, inasmuch as it would keep out the danger of over-legislation or political influence in case the matter wTere placed in the care of political departments, be they State or Federal. At 1 P. M. the joint conference adjourned, concluding the session of the Council. H. L. H IL Y A R D , Secretary. l 1 R E C O M M E N D A T IO N S OF T H E F E D E R A L A D V IS O R Y CO U N CIL T O T H E F E D E R A L R E SE R V E B O ARD M a y 17, 1921 T O P I C N o. 1— W h a t considerations should be taken into account in fo rm u lating the rate p olicy o f the Federal R eserve S ystem ? R E C O M M E N D A T IO N : T h e fo llo w in g sh ould be taken into co n s id e ra tio n : 1. T h e reserves o f the Federal R eserve System as a w hole. 2. T h e reserve p osition o f the Federal R eserve Bank w hose rate it is con tem plated to change. 3. T h e con d ition o f all the banks o f the cou n try as a w h ole, and o f the several F ed eral R eserve districts. 4. T h e eco n o m ic and financial con d ition o f this country. 5. W o r ld con d ition s, both econ om ic and political. 6 . T h e eventual establishm ent o f a credit rate p o licy fo r the Federal R eserve B anks b y w h ich the re-d iscou n t rate to m em ber banks is h igher than the p reva ilin g com m ercia l rate, takin g due con sideration o f the p reva ilin g open m arket rates f o r v a riou s classes o f loans both in this cou n try and abroad. 7. U n ifo r m ity o f rates, w h ile at times practicable and desirable, should n ot be adop ted as a fixed p olicy , the System bein g predicated upon the principle that v a ry ing con d ition s m igh t exist in differen t sections o f the country. T O P I C N o . 2— D o con d ition s w arrant any m od ification o f e xistin g p o licy at present tim e and sh ould any changes o f rates be m ade in any d istricts? R E C O M M E N D A T IO N : Since the question w as subm itted to the C ou ncil, changes in rates have already been inaugurated. T h e C ou n cil does n ot feel it can give intelligent advice f o r future action until the international situation is clarified. T h e C ou ncil feels that the fa r-re a ch in g liq u id ation o f loans, the con traction o f circu lation, and the strengthening o f the reserve p osition o f the F ed eral R eserve Banks are m ost im portant steps in the h ealing p rocess th rou gh w h ich the cou n try has been g oin g. T h e federal R eserve B oa rd is to be con gra tu la ted on the lead in g part it has played in this conn ection . T h e recession o f prices has g on e fa r tow a rd s the re-establishm ent o f a sound business basis. It still rem ains a m atter o f doubt, h ow ever, w hether this readjustm ent has com pleted its course. T h e real tu rn in g poin t, in the C o u n cil’ s view , can n ot be expected to be at hand until the E u rop ea n situation is furth er cleared up. U ntil the E u ropean p u r chaser returns as an im portan t fa cto r into ou r m arkets, easy m on ey rates alone can not b rin g effectu al relief in m o v in g ou r g ood s. T h e C ou ncil believes, th erefore, that a future d iscou n t p o licy can n ot yet be suggested. 7 The Council respectfully suggests that under the law it has the power, which involves an obligation, to keep itself informed concerning the operation o f the Federal Reserve system, and to advise with the Board concerning the same. In the exercise o f these duties it may convene whenever it deems advisable. In order to be able to act promptly, the Council has organized an Executive Committee, a m ajority o f which can be called together at the shortest possible notice. The Council realizes, o f course, where requests for action upon changes o f discount rates emanate from individual Federal Reserve Banks, that the Federal Reserve Board must act promptly. But where the direction for a change o f policy with respect to discount rates emanates from the Federal Reserve Board, or where there is ample time for consultation, the Council stands always ready to convene, or have its Executive Committee act in its behalf, in order to keep itself advised and to express its views with respect to the questions in hand; and it will be pleased to have the Federal Reserve Board avail itself freely o f its services. TOPIC No. 3— Should the present differential in favor o f loans secured by Government collateral be continued? If not, should rates on such loans be uniform in all districts? R E C O M M E N D A T IO N : The Council is of opinion that for the time being it may be opportune to con tinue preferential rates on notes secured by Liberty Bonds and V ictory Notes, both (a ) in respect to customers’ paper discounted, and ( b ) in respect to member banks’ 15-day collateral notes, but such preferential rates should be discontinued as soon as it can be done advantageously and without injustice to original subscribers. TOPIC No. 4— Should there be progressive rates? Should they be discon tinued in the two districts in which they are now in effect, and if continued, should a maximum rate be established beyond which there shall be no progression? R E C O M M E N D A T IO N : It seems no longer desirable to continue the policy o f progressive rates, but if any of the Federal Reserve Banks find it desirable to use progressive rates, it would be well to establish a maximum rate. TOPIC No. 5— Should Federal Reserve Banks pay out gold certificates in order to prevent undue increase in reserves? R E C O M M E N D A T IO N : Conditions do not justify Federal Reserve Banks paying out gold certificates in order to prevent an increase in reserves. The Council is o f the opinion that high gold reserves do not constitute any danger, provided the Federal Reserve Board and the various Federal Reserve Banks continue a conservative policy in regard to grant ing loans and bear in mind that the present plethora o f gold may be only o f a tem porary nature, and that before the war, central banks abroad did not consider a gold reserve o f six ty o r seventy per cent as abnorm al o r excessive. It is apt to be f o r gotten that the fo rty per cent limit fixed by the Federal R eserve A ct was put into the law as a m inim um o f reserve to be m aintained. E du cation o f the public in these respects is desirable and recom m ended by the Council. T O P I C N o. 6— S hould a p olicy be established fo r the entire System in regard to the kinds o f m on ey to be paid out by Federal R eserve Banks in response to dem ands o f m em ber banks f o r cu rren cy ? R E C O M M E N D A T IO N : A p o licy as nearly u n ifo rm as practicable in regard to the kind o f m on ey to be paid out by the Federal R eserve Banks should be established f o r the entire system. T O P I C N o . 7— Sh ou ld steps be taken to discontinue entirely payin g out Federal R eserve B ank N o te s ? R E C O M M E N D A T IO N : F ederal R eserve B ank N otes have been issued in substitution tificates w h ich have been p reviou sly w ith draw n , and as the issue o f increases, because o f the purchase o f silver under the p rovision s o f there w ill be an autom atic decrease o f the issue o f Federal R eserve this latter issue should eventually be retired. o f the silver ce r silver certificates the P ittm an A ct, B ank N otes, and T O P I C N o. 8— S h ou ld reserves o f Federal R eserve Banks be based, as fa r as possible, upon h old in g s o f g o ld coin and g o ld certificates, elim inating silver certificates and legal tenders b y p ayin g them out in lieu o f Federal R eserve n otes? R E C O M M E N D A T IO N : T h e reserves o f the F ed eral R eserve Banks should be based on go ld , g o ld certificates, and legal tender notes, elim in atin g silver certificates as rapidly as this m ay sa fely be done, and b earin g in m in d that ultim ately excess earnings o f Federal R eserve Banks m a y possibly be applied fo r the purpose o f placin g the legal tender notes on a 100 %, g o ld basis. T O P I C N o . 9 — D iscu ssion o f p o licy o f Federal R eserve Banks as to redis cou n tin g paper, the eligibility o f w hich m ay be d ou b tfu l on accou n t o f con d ition state ments o f m akers and discu ssion o f feasibility o f a dop tin g a u n ifo rm p olicy f o r all Federal R eserve Banks. R E C O M M E N D A T IO N : In n orm a l tim es the p o licy o f the Federal R eserve B oard, the Federal R eserve Banks, and their regu lation s should tend tow ards establishing a high standard o f paper w hich the F ederal R eserve Banks m ay accept. U n d e r existin g circum stances the 9 policy o f the Federal Reserve Banks should Ijc to avoid the application o f technical rules in determining the eligibility o f paper. The present tendency should be to accept paper tendered for relief o f a real situation, even though the paper in some respects does not conform fully to previous standard requirements. In no case, how ever, should Federal Reserve Banks be permitted to discriminate against paper o f a legitimate industry as a class. T O P IC No. 10.— Discussion o f so-called “ direct action,” that is, policy of applying pressure upon borrowing member banks to compel their customers to liquidate. R E C O M M E N D A T IO N : Liquidation has progressed to the point where it is no longer necessary merely for the purpose o f improving the reserve position o f the Federal Reserve System. “ Direct action” should be pursued only in unusual cases and fo r specific reasons. A D D IT IO N A L R E C O M M E N D A T IO N S R E C O M M E N D A T IO N No. 11. It has been called to the Council’s attention that form 8-H -231, entitled “ Bankers’ Acceptance Questionnaire,” is being sent to accepting banks by Federal Reserve Banks o f other districts. This is one o f the illustrations o f procedure that is helping to make the acceptance business cumbersome. The Council reiterates the rec ommendation made at its last meeting to the effect that the Federal Reserve Board should engage the services o f one or more experts in the acceptance business, in districts where acceptances originate, whose duty it should be to keep in touch with accepting bankers, and by personally conducting investigations from time to time, acquaint themselves with the methods observed by accepting banks. In this manner these officers could be trained to use discrimination and discretion in dealing with indi vidual cases, instead o f obligating the Board to issue rigid and comprehensive regula tions, which may interfere with and make unduly cumbersome legitimate business. Moreover, it is impossible for the American bankers’ acceptance to establish itself in competition with the British Sterling acceptance in world markets if the foreign drawer is bewildered by a mass o f regulations which he has to understand fully if he is to be certain that he is issuing an eligible bill which will find a ready market in the United States. The simpler the regulations the better the opportunity for the Ameri can bankers’ acceptance to become a credit instrument in world markets. If there are competent men whose discretion may be relied upon in charge o f the supervision o f American acceptors, there is no need for attempting to control by detailed regula tions the practice of American accepting banks and bankers. R E C O M M E N D A T IO N No. 12. It is important, if we are to have a free discount market in the LTnited States, that national banks should be encouraged to endorse bankers’ acceptances a,s freely as they would long bills on London, which they may indorse under Section 5202 io w ithout the liability incurred under such indorsem ent being counted within the 100 per cent} lim it T h e C ouncil recom m ends that Section 5202 be am ended by striking out the w ord s "p ayab le a b roa d ” in clause 7 o f this Section, m aking it to read as fo llo w s : “ Seventh, liabilities created by the indorsem ent o f accepted bills o f exchange actually ow n ed b y the in d orsin g bank and discounted at hom e o r a broad .” R E C O M M E N D A T IO N N o. 13. T h e C ou ncil fu rth erm ore suggests an am endm ent to S ection 13 o f the Federal R eserve A c t so as to perm it m em ber banks to guarantee letters o f credit up to an a ggregate am ount o f 50 per cent o f their unim paired capital and surplus. T h e C ouncil feels stron gly that the guarantee o f letters o f credit is a p ow er that should be given to m em ber banks as fu lly as is exercised by them under the acceptance privilege. R E C O M M E N D A T IO N N o. 14. T h e C ou n cil w ou ld respectfu lly advise that it has exam ined the fo llo w in g b ills : S. 579, S. 831, H . R . 242, contem platin g an am endm ent o f Section 9 o f the FederalR eserve A ct, and is o f the op in ion that no injustice is done to State m em ber banks by the existin g law , w hich should th erefore n ot be changed. R E C O M M E N D A T IO N N o. 15. A t the m eetin g o f the C ou ncil in F eb ru a ry the Federal R e serve B oa rd requested the C ou n cil to subm it suggestions fo r the am endm ent o f S ec tion 1 1-C o f the F ederal R eserve A c t dealing w ith the tax applicable in case o f reserve deficiencies. T h e C ou n cil recom m en ds that the F ederal R eserve B oa rd prepare and submit to C on gress an am endm ent to Section 11-C o f the Federal R eserve A c t p ro v id in g that the B oa rd shall be em p ow ered to le v y a graduated tax upon the am ounts by w h ich the R eserve requirem ents o f the A ct, fo r both notes and deposits, shall fall below 40 per cent. Such ta x to be paid by the F ederal R eserve Banks to the G overnm ent, but the F ederal R eserve banks shall n ot be required, as under the present law , “ to add an am ount equal to the said ta x to the rates o f interest and discount fixed b y the Federal R eserve B o a r d .” T h e C ou ncil w ou ld p r e fe r to see the im position o f the ta x c o n tained in clause “ C ” entirely elim inated, inasm uch as a con traction o f the re-discou n t operation s o f m em ber banks w ith the F ed eral R eserve Banks can best be brou gh t about by a p rop er increase in rediscou nt rates. F o r p sy ch olog ical reasons, h ow ever, it m ay be advisable to p rov id e f o r the im position o f a tax, even th ou gh it w ill have to be borne by the F ederal R eserve Banks, w hich in turn w ou ld recou p them selves b y a co rresp on d in g increase in rediscount rates. T h e section as at present draw n is entirely im practicable, inasm uch as it taxes the note issue, but does not p rovid e fo r a like pen alty w ith respect to deposits. T h e ta x should, h ow ever, affect rediscount operations, ir respective o f v/hether they result in a ch eck draw n against deposits o r in a w ithdraw al o f Federal R eserve notes. It is the loan in g op eration upon w hich the brakes should be applied, and it is fr o m this poin t o f view that the am endm ent here p rop osed has been devised, a ffectin g w ith equal fo rc e n ote issue and deposits. 11 RECOMMENDATION OF THE FEDERAL ADVISORY COUNCIL TO THE FEDERAL RESERVE BOARD June 21, 1921 Amendment t o Recommendation N o . 14 o f t h e M a y 17,1921 meeting. Referring to Recommendation No. 14 made by the Federal Advisory Council to the Federal Reserve Board on May 17, 1921, wherein the Council expressed itself as being opposed to the enactment into law of Bills S. 579, S. 831 and H. R. 242, o n further consideration of the provisions of Senate Bill 831, the Council is now in favor of the enactment of this Bill into law.
@FedFRASER