The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
knINUT&j or MKKTXHO
0 / THE
FJCD&RAL \DVi30HY COUNCIL.
Uay 17, 1920
w
A ri^ular statutory mootin' of ths Federal Advisory Council wa* held
ji the Federal Heaorve Board roof? Metropolitan Bank 31di;*,
fashington, 0 C,
»t 10JJU A. * . *anci .y, «uy 17, 1920.
Pro^ent:
«*oetra. J d /organ, rr»si4®nt, JL L Rue, Yice-Fr^aidant, fh ilip
Jtoc<ton, A ;* Hepburn,
^ Rowe, J 0 Brown, Oacar fo lia , F 0 &itta, I f iiwinney,
1 1 3-mf \ L M ille, and -*errit- « Gru«, Lecrotary.
Abaontl
wr G T Jaffray, who telegraphed that he could not attend the
Mttillg.
.
;-r: i . , ’ ■■
:
.......•*{
«r Forgan, i^reaident, called the meeting to. order and stated that aa
tr Jeffrey waa not present Mir R H Decker, had been usked by the Federal Reserve Bank,
if annaapolis to attend th is g a tin g in ids place*
to
There being no object ion
his doing sa ha van invited to s it in with the Council*
Oh motion of *r ftue, seconded by Hr Sti.ll* the minutes of meetings of tho
f«d«ral Advisory Council and of i t s Executive Committee held on February 16th and
ITth, copies of wtiich h\d been sent to mestoera of the Council were approved.
Tha Chair
stated tnat no had arranged with Ciovornor Harding that he and
?mral aasfcor3 of the Federal Reserve 3oard would join the Council at
11
aid thit the Board had invited the members of tne Council to luncheon at
o’ clock
1:15
it t)ia feetro .oi.it in Club to meet the Loorotary of tha Treasury, who was unable
ti be present at tne morning moating.
liar Farcin also informed the Council that Governor Warding had requested
Mato l*y before tha Council a acheiae he hoa personally thuu^t of to refund
•utrtarl-nK Liberty ind Victory Loan bondu by the iscaaneo of forty years bonds
*«aring interest at 5^
for tho fira t five yeiro, 4s$ for the following t*n yeara
a* 4i for the r mainin t* tw enty-five yeiro, drawing attention to tho fact that the
t*Ul aaount af intereat paid by tho government durin ; the forty years period wou d
*» tly th»» eame amount aa i f tho bonda wera to run for th it length of timo at
torn* And conditiena
of the refunding bonda in
regard to exemption from taxation
JAinuttfs of ttn*ting
of the
Federal Advisory Council.
2.
ito., to fre the sac:# as they are now in connection with the various issues to be
refunded; the long xeria bend* tc be exch «ngoAle for the short term bonds entirely
4t the option o; tee holders of the la tte r .
After eot-e discueuior.
of the matter
iX ms iecxdod that the J-renid jnt should in fers the Secretary of the Treaoury at
lmcheun that Governor Harding's proposition without going fully intc the matter
in %11 its dot a i l & increased the aedt»era of the Council as being worthy of his
ctrsful sonsideration.
At 11s20 the following members of the Federal Rosarve Board came in
Jowrasr I P C Harding, A C M iller, J 3 Willi®*® and H F £ie>f*anpah.
Governor ^xrding ext ended the Heard1s invitation for lunch to saset
tbs *«oretary ef the treasury an i stated that the joint conference with the
Fodsrai fteeerve 4o*rd, the Federal Advisory Council, the Claes A Directors of
foieral ^aerve bunks and a cofcftjittee appointed by the Executive Council of the
tar i cun Bankers Association on "Orderly deflation of Cr adit a” would meet tomorrow
l&n inat., at 10: dO A II in hiu office*
Governor ifeurJing than addressed the raoeting t length or. th* credit
•ltuation and tne noooaaity of preventing further expansion*
After a general diaousaion the weepers of the 3oai*d withdrew and the
1 *ouncil continued in session until one o’ clock when it adjourned for Jun^h,
L
U C R S T A H Y ,
r
f
Federal Advxeory Council*
3*
lianediitely after lunch (at the Metropolitan Club) tho Counoil
^
inte Joint c nference with the Federal Reserve 3oard,
All ef the Council uwJbera were f.rao.>nt >*nd the following notabors of the
f3i#rel Keaarve B eard: M esara. 0 F Houston, Secret try of the Treasury,
-nor, J S d i l i i a o a ,
* G Harding,
A J a lle r and it A kuehlenpttJu
£aoh ef the jaeobere of tho Council reviewed business uid financial
j«niitiona in nia Federal Reserve D istrict after which th« secretory gavfc an
•tiline of tae probably prospective requirements of the Troaeury departaant•
on the e u ^ e stie o ef the ^ecrot ury of the Treasury the Council was
/•quested by the Federal *es rve Board to j repare a resolution to *e laid by fore
th« Conference tomorrow setting forth the present. lack of transp osition fa c ilitie s
&
sad the affect that the congestion at the principal railroad cont ere uad at tha
shipping porta is having on tha banking situation in view of the present condition
of exptnded credit, with the understanding th.it the r&aoiu&ion i f adopted by tha
t
Conference should be la id before tho interstate Canneroe Coiaiaiusion and the United
•
States Shipping Board*
The joirn. session adjourned*
SECRETARY*
!
\
... . ,.
Federal Advisory Council*
4*
May 17, 1920
Th* Federal Advitory Council resumed ite session at 3s30 in
the Federal Reaer** Jloard room, taking up Governor Harding’ s letter of
t
vpril Xf, 1920, copy of *iixch ia hereto att^hed and wade a part o
w
these
■Inutee*
Ur. Forpjftn, Ur liue, %* 3winney and Mr M ills read to the laevting
iugtrestiona for racoaoandationiion the various topics submitted for the Council’ s
con3idsr at ion in Governor Harding’ s; le tte r *
After an informal disc^uaion of the topics Mr ^ue sieved that •^special
coi&itteo of threo be appointed by the Chair to fonaulate recommendations
..
/
ti■
ct? ■"cr. t
on them based an the views expressed.
•jr.cr: . " •■ •
_
,
* V. *
~r\r\ 1 \
Motion seconded by Mr fells and carried*
'
'
rs T* t *' r«
s r*G.cSX
The Chair appointed as such conmittee Ux & F Swinney, 4r A - Mills and
% ^scar /e lls*
*■ j *
i** t-^s Lcr:;jv tr thd T'-sdei .■<•
The aiitter of preparing a resolution in connection with the existing
Railroad situation as requested by the Federal Reserve Board to fe& submitted
for adoption at the conference tomorrow, was on motion of Mr Swinney,
aeconded by Hr i i l l a , referred to the £xsaut ~ve Committee*
The Chair
requested ter Docker to s it with the Executive Committee in the preparation
of this resolution*
~
,3, ;' 0 ... q -■
will coiT.e pr^p<«red to (
Aft or fiv e o ’ olocx on motion of Mr V it t l the Council adjourned until
9 A I , May 13th.
Q. o v a T
S S C RK H
R y*
FEDERAL RESERVE BOARD
WASHINGTON
Office Of The Governor
April 17, 1920
Dear Mr. Forgan:
Replying further to your letter of the 8th instant, I beg
to advise that after full discussion the Board, has decided that
the only topics which it will ask the Federal Advisory Council
to discuss on May 17th will be (a) "Causes of continued expan^Eicn of credits and of Federal reserve note issues", (b ) "How can
the reserve position of the Federal reserve banks be materially
strengthened before the seasonal demand sets in next fall with
out -undue disturbance of the processes of production and dis
tribution" , (c) "If steps cannot be taken at this time leading
to a more normal proportion between the volume of credits and
the volume of goods, when can they be taken", (d) "What is the
effect upon the general situation of the increased Treasury
borrowings and what should be the policy of the Federal reserve
banks in establishing rates of discount on paper secured by
certificates of indebtedness" , (c) "Should there be a revision
of rates on paper secured by Liberty Bonds and Victory Notes".
The Board is sending letters today to the Federal reserve
banks requesting that the three Class A directors of each bank
meet here on Tuesday, May 18th, for a discussion of the general
credit situation. As these directors are representative of the
member banks and are officers of institutions which not only borrow
from the Federal reserve banks but also make loans to
the public, it is the belief of the Board that an exchange of
views would, be helpful. At the conference reference will be
made to charts showing graphically the changes in the reserve
position and in the character of invested assets since July 1,
1919, of each of the twelve Federal reserve banks and of the
Federal reserve system as a whole. The Board hopes that mem
bers of the Federal Advisory Council will come prepared to ex
tend their stay in Washington in order that they may sit with
the Board at this conference with the Class A Directors.
Very truly yours,
Mr. James B. Forgan, P resid en t,
Federal Advisory C ou n cil.
(Signed) W, P. G. Harding
G o v e r n o r .
Fag® 5.
MINUTES OF
EXECUTIVE COMMITTEE
OF THE
FEDERAL ADVISORY COUNCIL*
May 17, 1920
Present: Messrs* James B, Forgan, L L Rue, Philip Stockton, A B
Hepburn, W S Rove, F 0 Watts and
by special request Mr E W Decker, also
Merritt H« Grin, Secretary*
The Executive Committee met at the New Willard Hotel and after dining
together prepared the following preample and resolution which subject to
the approval of the Federal Advisory Council should be submitted to the
Conference tomorrow*
I• ..The
og
(See minutes of Conference, May 18th.)
meeting then adjourned*
4#
img
WS 4
fiti.m
SECRETARY*
::u4£*.
Uinutofl of tha
Federal Advisory Council*
May 1 , 1920.
Thu
j
4 ] A
Federal Advisory Council Mat in tho Federal Reserve Board rooa
Tuesday, :u y lJth, 19idQ«
hrosent:
UMiri* Jaaeu 3* Forgan, ilrasidMatJ L b Hue, Viee~trssid«nt
7tj
t*> reply
•reft)
!: i** lo ! Sowing man-
fhilip jt ocJct on, H ii Howe, J 0 3rovm, Osoar 4e*lo, T 0 Watts, £ ? Sarinney,
ft , 9=il, * - -i ilo ,
Absent:
jid
orritt
;• iria»,J«cret .ry,
also Mr E W Decker.
ieasra. A 3 Hepburn ^nd G T Jaffray.
Tho ^resident cillo d the mooting to ordor and laid before it the report
»f tha jpocu 1 coiaaittoe on tho Federal Kea *rve Board's top ics.
After fu ll
consideration the Couaeil unaniatously adopted recoeuaenlotions, copy of which
printed form is hereto
in
attached and uade a part of theae tainutes, and tho
President s«ia requested to transait thoia to tho Federal Reserve Board.
Tho Executive Committee then submitted the preaatole and resolutions
it »ad prepared on existing railroad conditions wnich after discussion and ooi^e
uwndi^nts vero approved and le ft in charg# of ^r #atto for ui&oiission to tho
Conference to bo held U ^ioiiatoly after adjournment of this Mooting.
if "onforenco hteiy l i t h ) .
(Soe sdrutea
],
The Council then adjourned to attend the Conference at 1'j: 3Q A U
hi »ovHmor Harding*a o ffic e .
I
S ecr e ta r y *
R E C O M M E N D A T IO N S O F T H E F E D E R A L A D V I S O R Y
C O U N C IL T O T H E F E D E R A L R E S E R V E B O A R D
M ay 18, 1920
Hon. W . P . G . Harding, Governor,
Federal Reserve Board,
Washington, D . C.
M y Dear Sir:
T h e Council has given consideration to the matters included in your
communication o f April 17th, an^ beg to reply thereto in the following man
ner, following the order set out by you:
T O P I C N O . 1.— “ Causes of continued expansion o f credits and of
Federal Reserve note issues.”
A nsw er:
There are manv contributing causes of which the following may be re
garded as paramount:
1.
2.
3.
4.
W e recognize, o f course, that the 6r?t cause is the Great W ar.
Great extravagance, national, municipal and individual.
Inefficiency and indifference of labor, resulting in lessening production.
A shortage o f transportation facilities, thus preventing the normal
movement o f commodities.
5. T h e vicious circle o f increasing wages and prices.
T O P I C N O . 2.— “ H e w can the reserve nosition of the Federal R e
serve banks be materially strengthened before the seasonal demand sets in
nevt Fall without undue disturbance o f the processes of production and dis
tribution?”
Recom m endation:
B y urging upon member banks, through the Federal Reserve banks, the
wisdom o f showing borrowers the necessity o f the curtailment o f general
credits and especially for non-essential uses, as well as continuing to dis
courage loans for capital and speculative purposes; by checking excessive
borrowings through the application o f higher rates.
T O P I C N O . 3.— “ If steps cannot be taken at this time leading to a
more normal proportion between the volume o f credits and the volume of
goods, when can they be taken?”
Recom m endation:
In our opinion steps should be taken now, as outlined in answer to the
last question.
T O P I C N O . 4 .— “ W h a t is the effect upon the general situation o f the
increased Treasury borrowings and what should be the p olicy o f the F e d
eral Reserve banks in establishing rates o f discount on paper secured by
certificates o f indebtedness?”
R ecom m en dation :
It is obvious that the borrowings o f the T reasury have the same effect
upon the general credit situation as those o f other borrowers. T h e Council
w ould suggest the wisdom o f Congressional relief from the burden o f g ov
ernment financing by a policy o f rigid econ om y ; the revision o f the tax lav/s
for the sake o f a more equitable distribution o f the burden without reducing
the revenue; the enactment o f the budget system, the budget to include pro
vision for the gradual payment o f the short time obligations o f the Treasury.
These w ould o f necessity preclude unwise appropriations, such as the pro
posed soldiers’ bonus.
In view o f the large volume o f Treasury Certificates o f Indebtedness
carried by member banks at the instance o f the T reasury Departm ent, w e
believe that rates established by the Federal R eserve banks on paper secured
by them should not be materially greater than the rates borne b y the Certm cates.
T O P I C N O . 5.— “ Should there be a revision o f rates on paper secured
by Liberty bonds and V ictory notes?”
Recom m endation:
From a survey o f the present rates in force b y the Federal Reserve
banks it would seem that six per cent is now being charged on paper secured
by Liberty bonds and V icto ry notes. In the judgm ent o f the C ouncil when
and if any further revision o f rates should be made there should be shown
due consideration for the original subscriber o f government securities.
(S ig n e d )
JaS. B . Forgan, President.
T h e follow ing members o f the Federal A d v isory C ouncil were present
at this meeling:
Messrs. James B. Forgan, President; L . L . R u e, V ic e President; Philip Stockton, A . B . H epburn, W . S. R o w e , J. G . Brown,
Oscar W ells, F. O . W atts, E . F. Swinney, R . L . B all, A . L . M ills, and
Merritt H . Grim, Secretary.
Minutes of joint Con f ranco
Tha F«d#ral Raaarvs Bo rd, tho federal Advisory Council.
Tho Claao A Diroctora of tho Federal Nikiorve 3 inka, and
a special com. dt tee of tho American B mkors Aaeoci it ion*
May l i , 19^0.
A jol*t c nference of tho following bodioe was hold in Governor
Hirdisg'e offica in the Treasury Building, Washington, D G Tuesday, **ay Idth,
19*0, it 10:30 A M*
Hon. # 1 - 0 Harding, Governor, in tftO Chair, Hon. D F Houston, oecretary
iho Treasury, Messrs* J S ®illiam s, A 0 M iller, H A itoehlonpah, makers of
the Federal Reserve 3oard;
^Jessra. James 3 Forgan, JPresidant, L L. RiS, Vice-
freuident, Fhilip IHoekton, A 3 Hepburn, * Zi Rove, J G Brown, Oscar
e lls ,
f o f xtts, a r Sw^mey, R L B i l l , * i. M ills, areafeoro of the Federal Advisory
Council, and Aerritt H. Grim, Secretary; *A©asra. James 3 . Forman, Chairman
£ .f Docker, J H Puelicher, Francis Sisson, F 0 Watts, cmsfeers cf special comadtteo on "Orderly and proper D eflat-a* of Credits" appointed by the Sxecutive
Council of tha American Hankers Association; wad about thirty Class A Directors
of ths Federal Reserve banks*
Governor Harding addressed the conference at langth on tho proiablems
confronting tho Faisral Resarve loard*
A synopsis of his address is hereto
attached as part of thooo ainutaa*
Cach of the Class A Directors present made b rief remarks regarding
financial and com e rcia l conditions in thair d istric ts*
Thera being a congestion of freight in practically every section of tho
country, as indic ited by the gentlamen urho spoke, o*ing to tho lack of fa c ilitie s
®f tha railroads, on motion of feir James ^* Morgan, duly carried the chair was
authorised to appoint a committee of five to prepare a resolution to be submitted
t# the interstato Commerce Commission and the United States Shipping Board urging
’ no granting of increased rates and the proper distribution of shipping fa c ilitie s
«* tho ports*
* FRASER
resolution*
Digitized for
Governor Harding appointed tha following gantlemen to draft such
n
x-1933
OPENING REMARKS OF GOVERNOR HARDING- A^ THE CONFERENCE
•j-p-j the f e d e r a l r e s e r v e , b o a r d o f t h e f e d e r a l a d v i s o r y c o u n c i l a n d t h e
CUSS "A" DIRECTORS OF THE FEDERAL RESERVE BANINS, TUESDAY, MAY IS, 1920.
Gentlemen, the Board desires me to welcome you to Washington ana to
exrr^-ss its appreciation of your consideration in leaving your business ana
coiring i*ere to this conference.
We iiave boon v^ry judiciously advised from time to time by the Federal
revisory Council, which Dody nas always held its four statutory meetings
a yScJ", and ft times its executive committee has come on by request for a
special meeting; but the present situation is such that we felt it would
ce helrful if ve could .have with us not only the Advisory Council but also
the Class "^"Directors of the Federal Reserve Banks.
We should have liked
to ^ave nad r.ll of the Directors, but we could not ask them all to come to
■asidn^ton at one time, for it is necessary that a quorum of directors be
left at home to attend to the business of the- Federal Reserve Bants.
Tne Class"AJ'Directors are the banker members of the Boards of Directors
'-f Federal Reserve Banks.
They have a dual relationship.
They are not only
:ir;ctors and, as a rule.^very influential directors of Feaeral Reserve
“:-n£3, but they are officials of member banks ana thus they see both sides
the
icture.
So it seems to be peculiarly appropriate, at a time when
there is a banking situation to discuss, to have bankers nere to discuss it.
As you are busy men it will be our purpose to detain you for as short
a time as possible, and if it is agreeable to the members of the Conference,
will try to finish our discussion by half past
1
or
2
o 'clock so that
you can then be free to take afternoon trains home, if you wish, or to devote
ycur time, if you stay in Washington, to such other engagements as you may
have.
Of course, we all realize that the credit position is extended and
very considerably extended.
turbed over the situation*
There is no occasion, though, to be unduly dis
We want to look at the facts as they are and not
deceive ourselves in any .particular.
Having diagnosed the case, then we
want to determine what is the proper policy to pursue.
We have had an analy
sis ir.aae of the general banking credit expansion in this country, and with
out going into details I am going to save time by stating the result.
After allowing for the normal credit expansion in a growing country,
w. find that since the 30th of June, l^l^,
the expansion of bank credit
in this country has amounted to about eleven billion dollars.
At the same
time the expansion in the volume of currency in circulation, deducting from
our starting point the currency held in the Treasury, and deducting from
the present figures the amount held in the Treasury and in the Federal
P-serve Banks, has been about one billion, nine hundred million dollars.
'hen we remember that during the last three years the Government has floated
twenty six billion dollars of securities to take care of its own war re^uirem.nts, and to enable it to make advances to governments associated
•'ith us in the war, this expansion of bank credit does not seem to be excesc
-iv
or disturbing, when looked at purely from the standpoint of war necessity;
'ut the situation that //e want to discuss particularly today, and vvhich seems
x -1933
- 3 to b
disquieting, is tn ■ expanbi^n that has taken place in this last twelve
or fourteen months.
From the 1st of April, 1919* to the 1st of April, 1920,
the expansion of bank credit was about 25 per cent.
This has been in spite
ci the v ry large reduction of the amount, of Government obligations out
standing.
The reduction in Government obligations has ell been absorbed
by corcmercial credits, with the net result of expansion of bank credits of
about 25 per cent.
During che same time there has be .n an advance in com
modity prices of about 2 c per cent.
This has be-_n accompanied by a decrease
in production of essential articles.
Assuming for tho year 191S an index number of 100 in each of ten
principal articles of everyday use ancl necessity-— not necessarily production
figures, but distribution and consumption figures, such commodities as
grain, live stock, wool, copper, cotton, petroleum, pig iron, steel bars—
putting all them at
y=ar
1919,
100
for the year
19IS
we g t an index number for the
on the average of the ten commodities, of 6^,01 • While these
figures cannot be accepted as indicating a positive decline in production,
they do indicate a decided trend in that direction, a certain trend to
ward a reduction in the distribution of those products, so to all intents
and purposes we may assume that there was a decline in essential production
during the year
expanded
25
*.-a
1919
about 10 per cent.
At the same time credit has
per cent.
It is this tendency of production to decline, particularly in some
'SSsntial lines, which constitutes a very unsatisfactory element in the
present outlook.
It is evident that che country cannot continue to advance
Prices, ana wages, to curtail production,
to expand credits and to attempt
to enrich itself by non-productive and uneconomic operations without foster
x-1933
- 4 -
ng discontent and radicalism, and that such c course, if persisted in,
will eventually brin^ on a real crisis.
The re is a word-wide
lack of capital, and with calls upon the in
vestment market which cannot be met there is an unprecedented demand for
tan±c credits.-
The fact must be recognized that however desirable on
...n-^ral principles continued expansion of traae and industry may be, such
aevelopments must accommodate themselves to the actual suprly of capital
and credit available.
Official bank rates now in force in the leading countries are hightr
than at any time during the present century, except during the war panic
v,vek at the beginning of August 1914,
Only within the last few weeks the
official rate in Italy has been raised from 5 to 5-1/2/the Bank of France
rate from 5-l/2 to b,and the Bank of England rate from
6
to 7 Per cent*
Every effort should be made to stimulate necessary production, es
pecially of food products, and to avoid waste.
Planting operations in many
sections have been delayed because of adverse weather conditions, and should
there be an inadequate yield of crops this year the necessity for conserva
tion ana conservatism will be accentuated.
War waste and w?'.r financing
goods
result, inevitably in diminished supplies of
,and increased volume of
credits.
Now I assume, looking at the matter from the standpoint of the economist
that the trouble with the general situation throughout the world, and in this
country, is the disruption of the proper proportion or relationship between
‘h volume, of credit and the volume of goods.
Whenever that phenomenon
‘^curs, there are two remedies which suggest themselves: first a reduction
lr‘ the voluL'.e of credit, credit contraction.
That is a drastic
X -1933
-5 remedy, it is unpleasant medicine, but it may be necessary at times
to take medicine of that kind.
The other and better method is to
restore the proper equilibrium by building up production, in
other w^rds, letting the country catch up with itself.
can approximate this result in two ways,
We
^e can restrict credit
and expand production, letting the expansion of production proceed at
a greater rate than the restriction of credit, and we are then
'•■’orking along in the rirrht direction.
This is our essential
problem today, the formulation of some constructive policy to "be *
adopted by the Federal Reserve Banks which will build up essential
production and at the same time preserve the solvency of other
concerns which may not be essential per se , but which are highly
essential as part of the general situation, because there is no
chain which is stronger than its weakest link*
Now, there is undoubtedly, however, a spirit of extravagance
in this country which must be curbed.
There are some indications
that the people are waking up to what the consequences will be if
this wild orgy of extravagance and waste should be continued
indefinitely.
made for the
It may be that some real personal sacrifices must be
general economic good.
But it is very clear that
if we find it impossible under the present circumstances to increase
the volume of production of the most essential articles,
the
only thing for us to do is to reduce consumption of those articles.
Now, we might as well look at the situation as it is.
prudent man never lives for the day alone.
A
He always looks to
-6 -
the morrow and the months to ccme.
X-1933.
^hat is the situation in regard
to the output of the mines and of the farms in particular?
has been done to get
TTiat
normal output and production at the present
time and to provide proper means of distribution of the output in
order that there may be no acute shortage
necessities of life next ^inter?
in the fundamental
In this connection, I might call
attention to one circumstance which has caused a good deal of
uneasiness.
It may not prove as bad upon analysis as it appears
at first blush,
but I refer to the lack of liquidation which we
have experienced during the early months of the present year.
^e all know that normally, after ths fall trade is over and the
crops have been harvested and distributed, there is a marked easing
of money accompanied by the liquidation of debts.
This occurs
usually in January and February and up to the middle of March of
each year-
Liquidation of this kind is entirely natural and is
necessary in order that the banks may strengthen their resources
in order to meet the demands which will be made upon
- 7-
X-1933
ty0rr 1 iter on in the vear as the crops are in the -orocess of making or harvesting.
vear we have had no such liquidation.
Commercial loans have expanded
-t=>adily» and while there has been some reduction up to the last week or so in
loans secured by Government obligations,
that those loans have increased.
it is noticeable in the last few days
It would appear that this means an anticipation
cfi the part of the American people for their requirements for bark credit which
inquire
they usually make later on in the year. ?’e may well
that as we have had
this demand at a time when we ought to have had liquidation, what is our situation
going to be in the later months, when we are going to have the demands which we
ha're been accustomed to having?
Now, I hope that the answer to this is —
this is correct it is the reassuring feature of the situation —
and if
that the
demands which have besn made in the past few months, when we shculd have had.
liquidation , are due, at least in part, to the fact that essential commodities
have been held back by lack of transportation facilities.
Then our problem is
directed to opening -up the transportation facilities in order that these goods may
flow to market.
This done, we will get some liquidation which ought to be
sufficient to offset the demands which will be made upon the banks for essential
purposes later on in the year.
But we have figures to show that the extravagant spirit has not yet been
checked.
There are some indications that the peak has been reached and that
people are coming to a more realizing sense of the situation and that they will
a
recrudescence
Pursue/sounder and a saner course. There ought to be a
of our old
"ar-time spirit, of doing something that is worth while, and we should get down
to work and solid business.
There should be a general spirit of cooperation on
- ^art of the Federal Reserve Banks,
the member banks, the non-member banks and
t-s public to work out a policy which will result in greater production, less
^necessary consumption and greater economy; all unnecessary borrowings for the
~1irT;ose of pleasure and luxury should be restricted as far as possible and the
Houidation of long-standing, non-essential loans should proceed*
x -1533
n;e should be careful, however, not to overdo this matter of liquidation,
v^ause too drastic a policy of deflation, which rai rht result in crowding
to the wall and throwing into ‘'arikruptcy legitimate enterprises, however
^essential their operations may be, would have a tremendously bad effect
' jij would defeat the purpose of the very policy which we are trying to have
staMished.
There must always be a wise and discriminating judgment used.
A sensible and gradual liquidation will result in permanent improvement,
as v;e all know, but any attempt at radical or drastic deflation merely for the
;sl:e of deflation will result in very serious consequences, and such a policy
should be avoided.
It will be helpful for us to discuss and to understand the parts which
:ust be played by the Federal Reserve Board, the Federal Reserve Barts and the
rember and the nonmember banks in solving the financial and economic problems
that confront us.
Cur problems are inter-related, but they are distinctive.
The Federal
reserve Board is a governmental body, sitting here in Washington.
It does
not come, except indirectly, in contact with the member banks, and it can not
! be expected to have any intimate knowledge of the details of your business.
And, it ought not to attempt to interfere with the details of your business.
The function of the Federal Reserve Board, is to deal with general conditions
aid principles and to keep away from the mass of details which it is impossible
t 'or any Board sitting here in Washington to digest.
The Federal Reserve B?nks do come in direct relationship
*ith their member banks.
and contact
They have an intimate knowledge of the credit policy
| an. of the borrowings of the member banks; they are kept fully informed from
'W to day of the change of position of the member banks, and through their
j intact vith the Federal Reserve Board, as the coordinating and
supervising
x -iq ;3
-9 -
,0iv, they keep informed as to the Board’s general policy, and. they transmit
{0 the Board such specific and general information as may be of assistance
•n ieterminins: these policies.
But the primary banking business of this
country is transacted by the member and the nonmember banks.
Those are the
barfrs which come in contact with the public, which are the custodians of the
funds of the public, put with them on deposit, and they are the media
through 'vhich commercial loans are made.
We have heard a ^re-^t deal about the necessity of discriminating
between an essential and a less-essent.ial and a non-essential loan.
The
iiscaunt operations of the Federal Reserve Banks and their powers to make
investments are all clearly defined in Sections 13 anu lU of the Federal
.Reserve Act.
Those sections are permissive and not mandatory.
A Federal
Beserve Bank is not required to make any particular loan --.or any particular
investment.
The Federal Reserve Board may define eligible paper, but all
rulings and regulations of the Board must be in strict conformity with the
terns of the Federal Reserve Act.
lative powers whatever*
The Federal Reserve Board has no legis
It can merely interpret by regulation or rule,
the enactment of Congress.
Now, without discussing any power that the Federal Reserve Board may
•ave to define essential and non-essential loans, I wish to point out that
Action
13
provides,
in a general way, that any paper maturing within
the prescribed time, the proceeds of which have been used, or are to be
u^d, for commercial,
industrial or agricultural purposes, is eligible.
^ere is no specific condition imposed as to whether or not, in the judgment
^ any rran or vody of men, any particular loan is an essential loan, for
"r<e veil being of the community or the country at large.
The Board has reached the conclusion that there is no occasion now,
’■stover may be necessary later on,
for it to attempt, by any general rule
0f a cou n try-w ide apiolication,
to define essential and non-essential paper.
You reTflember the difficiilties that were errerienced in making such a defirn tion during the war, when we had the ^ar Trade Beard, the ’’’ar Industries
?o?.rd,
the Capital Issues Committee, and other temporary Boards here massing
ufon all these matters.
At that time the problem was simpler than it would
be now, because there was a general underlying principle that anything
e s s e n tia l
must be something that was necessary or contributory to the conduct
oi the war.
3nd
^one.
Now we have no war.
The temporary boards have all dissolved
The Federal Eeserve Board is not a temporary board.
It is a
•D-rmanent organisation and it must conduct its business in strict accordance
•vith the terms of the Federal Reserve Act.
Therefore, I think we are all
arre 3d that there is no occasion at the present time, if ever, for the
Federal Reserve Beard to attempt to define, by regulation of country-wide
application, what is an essential and what is a non-essential loan,
A
Federal Reserve Baril" is in much better position to undertake this than is
the Federal Reserve Board*
vay.
But even here there are. difficulties in the
S01L2 of the Federal Reserve Districts cover very large areas.
.A rule
adopted by one Federal Reserve Bank may not be susceptible of adaptation
in another Federal Reserve District, because what seems to be essential
or n°ce3sary in one place may not be in another.
While there is no
its
".articular objection to a Federal Reserve Bank,
undertaking
directors, .*
in the wisdom of
. ,
J to make a general discrimination between
loans plainly unnecessary, plainly non-essential, and those which are less
“ss^ntial or more essential,
it se ?ms to the Board that that whole question
of iscrimination might very properly be left for solution at the source,
as a natter between the individual banker and his own customer, because the
^ i ’iiual banker, particularly at times like the present, has a very close,
relationship with a borrowing customer.
Digitized for-^idential
FRASER
They can talk matters
X-1933
over with the utmost frankness.
p osition to eive
advice.
The individual banker is in
He can accustom his customer to come to
him, in advance of seeking a loan, or of making any commitment
t
involved,
made.
to discuss the situation with him before the commitment is
The individual banker in many cases - - of course this may
not be possible in the larger cities - - but the great i^ass of
barks all over the country that do mostly a local business can very
largely anticipate the legitimate and necessary credit demands.
/
-12-
X-1933
„rC roHXS tu uG rr£’^° u .on them; thsy can. estimate the fluctuation in the
their deposits, ard thC3* are better cualified than any one else to -give
'
f i a borro'./iHj customer. They can often restrict the amount of a loan
0
r^vi'e
it is r.i-co and can persuade a customer in very many cases that he really
v5:cre *
>c,t need the money after all.
ihen, again, the individual bai£:er can
--erhn~* not so nuch the essent ial nature of a loan from an elementary stand:a.t, as to './aether ‘the loan is so ing to produce something that is absolutely
but he can decide better than any one else whether the loan is essential
or necessary for the public good in his particular locality, not only as a means
r reducing seme thing that ought to be produced, and •.hi eh is needed for conmat an , but as a means of preserving the solvency of his ccnmmity.
ae all
mcr o'?at if the barkers in £.rrj community, large or small, mere to clanp the
srs'-'s
tight, they could bring disaster tc the community, vhich might s .read
' - -*er com m n it i os .
ccursc, there ,iay be cases, and there 'have been cases, doubtless,
in all of the districts, where some of the banhs have overdone the
itter n **
* ■■■£ extending ere.'its, but there is one very encouraging feature cf the
- situation, and that is such cases are comparatively few*
~
The majority
.ember baix.zs in occh of the Federal Heserve Districts are not
Or-0':er
s from the Federal Reserve Lanlc, and the number of member banks vhich
‘Q bo-.
°1vn
" O ’-'ing from the Federal Heserve Bah:s in an amount exceeding their o«r»
'^ ~toc2: is not large in proportion to tho total membership.
Fvery banker
[j£ ’ie ought to -oio./, "hat reasonable line of credit he can get from his
— seive Ba.ii, ^.rP. i want to call your attention to the power that the
or t ie Fed-r
1
‘ " :lo to tne fact
Reserve Lanks have to limit their loans.
that there is no mandatory provision in the Federal
~ct r jcniring that any particular loan be aa.de.
I referred
The nearest approach
- ’- 3 -
.1-1933
Qji'Ulsion in the matter of loans t h U you vill find anyviiere in the Act
, CO
■
,.,t provision ’/aich .'Crmxts end, upon chc affirmative vote of five me-ibers
,
Federal Reserve Board, requires a Federal Reserve sank to rediscount
, ;uo tier federal .aeserve uanh#
itn this e. .cep tion there is no other
,^-or' .10 /ision relating to loans in the Federal Reserve . ct.
hile sections
I
r> 1-1- • e ^ei.missive, tne re is no-, ever, a strict injunction laid uoon the
4- ■hich
>octors oi one xcceral ...esor ’c -,an -o in that ;part of section
■'irectors oi a aedcr..-1 _iesei're x>rn;i, to administer its affairs
requires
ithout favor
;i:ci'iain^uion for or against. an • member can:, end in racing loans, discounts
:icc:.u.its '.men in t.ieir opinion may oe safely ,nd reasonably made, to
--
regard to the vants ne requirements of other member hanlcs. Thus the
Reserve
-.vetore of Federal /3aitas are clearly v/ithin their rights hen they say to any
■••;r >anh, “You have gone far enough; v/e are familiar vith your condition;
..a p t more than your share, and ve ve.nt you to reduce■ a cannot let -ou
..r’aore.:: They m s t o::ercise their discretion as to the proper coarse
'.rsue, out they have the po*. or, end there are many cases
here the rule
t to 3c laid dovn and a member bahh ought to he made to understand that it
r
-i use the resources of the Federal P. serve 3civzs for its o-.n private
7
ior .profit; that it
"'*'1
ust not ah use the rediscount privileges of the
-•'-•serve 3yntem*
-a?. r baii'zer understends,
jurat as he aid in the old days "before
-ec; re hii:s that there is c
~
lays no National
1 iniit
to his hoero m g —
.nl his business he m e t
*'Cz .Vi- TiD1 ie :;1
t
1 imitations
-/hen a banner realizes on^t
do it more -end -ore out cf m s
hea.vily u on the Federal P.csei'vc
‘
o n
-1G mndej.-
;nd penalties eay he imposed u on ..io ;?o..-0 .m 0o,. tnen
’ /thina: about the 'Ds-'oholOiT:' of h n.:rag
ill rencaibe:
•/as permitted to become indob tec. /.or oorro ed
l-- - "mount exceeding its Cc..pital stool: —
' t5 oO cr
you
e had the
1 -i10
u~ ^ C-Aw
-lU *
x - 19 33
be de'osnda'i uron to use a wiser discretion in the matter of granting credit.
The recent amendment to paragraph (d), section lU, which
?Tpowers the Federal Reserve Bank, for itself, and without regard to
any other
Federal Reserve Bank,
to establish a normal or basic line
of c r e d it unon some principle applicable to all member baifl's in its
District alike, and to impose a graduated or penalty rate upon excessive
borrowings, does not repeal, amend or modify in any particular the
rrovisions of section U or section 13, and a Federal Reserve Bant is
still» even though it adopts the progressive or penalty rate, entirely
within its rights in declining to take un_esirable paper at any rate.
The progressive or penalty rate I will not liscuss at this time,
because we will have an open discussion a little later on and we will
take it up then.
It may be argued that the volume of credit must necessarily
be greater now than was the case a few years ago on account of the
hisher prices and hizher wages which are prevailing, so that any given
transaction requires a greater number of dollars to finance it than
was formerly the case.
That is true, but I believe that I can present
figures to you that will convince you that if there could be a freer
flo"i of goods and credit, in other words, a greater velocity in the turn
over of credit, the resources of the banks of this country are abundantly
-lU
a
X
a m p le
to
fin a n c e
a ll
essen tial
en te rp rise s
and
a
good
m any
of
-1933
the
non-essential as well.
The fundamental trouble with the situation
and. coTiiiodities
toaaY is that there is a large volume of essential goods/held beck
from the markets and kept out of the channels of distribution,
either for speculative purcoses, being held with the idea of getting
higher prices -later on, or \fehere they are held back of necessity on
account of lack of facilities to transport their' to market*
In the
latter case, it is a wise and proper pclicy to ease the situation
along, to assist the -people who are thus compelled to hold and not
throw any obstacles in their way, provided there is a genuine and
sincere disposition to put the stuff in process of distribution as
soon as transportation can be had.
But in the case of the hoarder,
who for selfish and profiteering purposes wishes to hold back from
the mouths of hungry people essential articles of food, or from: the
backs of the.naked essential articles of clothing, every good banker
should exert every influence within his power to force people of that
kind to turn loose their hoards.
Here is an opportunity for wise
discrimination, anu this (discrimination can be exercised more intelli
gently and effectively by the individual banker himself than by any
Governmental board.
V'e find instances also which always occur when there is a
constantly advancing tendency in the market, where merchants have
stocked up.
There are many cases where marcantile loans ara too
large and ought to be reduced.
There are merchants everywhere who
ought to be reasoned with and who ought to be encouraged to push
thair stocks out and get rid of the high priced stuff, because
some of these days, it may be sooner rather than later, the reign
of reason is going to be restored and the man in the street is no
longsr going to want to pay $25*00
$20.00 for a pair of shoes or $1.00
to $30.00 for a silk shirt, or
and
for four pounds of sugar,/lower
prices will be demanded , and trade will fall off unless lower prices
prevail.
It seems to me, from the standpoint of good merchandising
ani good banking, tha,t- the merchants should be encouraged to reduce
their stocks and not
.tempt the passer-by by extravagant display
in tha windows at high prices, which under the abnormal state of
mind which has prevailed, may themselves help to sell the goods,
because you all know cases where a customer would pass by with
contempt a two or three dollar article and turn his attention to
something at $25.00, although it may not be ons whit better suited
to his purposes.
In order to bring about a correct tendency and to lead to
a permanent cure of our present situation, p campaign of education
must be begun and continued.
H e r e , again, there is no agency so
well qualified as the banker, who receives on deposit the money of
the public and makes loans to the public, to give advice, so thus
there should be a concerted effort all over this country on the
part of the bankers to arouse in the public a spirit of common
sense.
Let us take our heads out of the clouds and get down to
business, and let us save, produce, and let each do his part in
a constructive -and productive way for the community, to add to
the volume of goods and facilitate distribution, thereby doing
something to cure the discrepancy, the bad
relationship which has
existed between the volume of goods and the volume of credit and
money.
In any circumstances, you all know that the Federal Reserve
Banks and the Federal Reserve Board will do their part to cooperate
with the sound, sensible and reasonable member banks.
In order that
we may accomplish any real results and effect any permanent good,
there must be cooperation on the part of the public with the banks,
and on their part with the Federal Reserve Banks and the Federal
Reserve Board,
^e must all pull together for souni, economic and
financial principles.
lo a great
^7e should do all in our power, and we can
deal to che£k the false ideas which have gained
circulation and inculcate in the minds of the people a sense of
the importance of steady, every-day production and distribution,
and to encourage the avoidance of waste and the elimination of
X -1 9 3 3
-1 7 -
extravagance.
I have here some charts ,'vhicth ’'ill he distributed among you,
which show the movement of principal asset and liability items of
each Federal Reserve Bank and of th? SystQm, of the twelve banks com
bined.
These figures are taken from July 3, 1919, to April 30, 1920.
They show the soli reserves, th° total cash r°selves, the member
banks’ reserve deposits, the Federal Reserve notes in circulation,
the acceptances bought, paper secured by Government war obligations,
divided into the headings > 9-ecured by Liberty Bonds, secured by
Victory Notes, and secured by Treasury Certificates, ani the tctal
discounted paper on hand.
Then there is another table which shows
the volume of bankers* acceptances purchased from other Federal
Reserve Banks and the volume of bankers 1 acceptances sold to other
Federal Reserve Banks, figures at the close of business on each
Friday from July 3, 1219, to April 30, 1920.
Now, gentlemen, I declare the meeting open for general discussion.
R E C O M M E N D A T IO N S O F T H E F E D E R A L A D V I S O R Y
C O U N C IL T O T H E F E D E R A L R E S E R V E B O A R D
M ay 18, 1920
Hon. W . P. G . Harding, Governor,
Federal Reserve Board,
Washington, D . C.
M y Dear Sir:
T h e Council has given consideration to the matters included in your
communication o f A pril I 7th, and beg to reply thereto in the following man
ner, following the order set out by you:
T O P I C N O . 1.— “ Causes of continued expansion o f credits and of
Federal Reserve note issues.”
A n sw er:
There are many contributing causes of which the following may be re
garded as paramount:
1.
2.
3.
4.
W e recognize, o f course, that the first cause is the Great W ar.
Great extravagance, national, municipal and individual.
Inefficiency and indifference of labor, resulting in lessening production.
A shortage o f transportation facilities, thus preventing the normal
movement o f commodities.
5. T h e vicious circle o f increasing wages and prices.
T O P I C N O . 2.— “ H ow can the reserve position o f the Federal R e
serve banks be materially strengthened before the seasonal demand sets in
next Fall without undue disturbance of the processes of production and dis
tribution?”
Recom mendation:
By urging upon member banks, through the Federal Reserve banks, the
wisdom o f showing borrowers the necessity of the curtailment o f general
credits and especially for non-essential uses, as well as continuing to dis
courage loans for capital and speculative purposes; by checking excessive
borrowings through the application o f higher rates.
T O P I C N O . 3.— “ If steps cannot be taken at this time leading to a
more normal proportion between the volume of credits and the volume of
goods, when can they be taken?”
Recommendation:
In our opinion steps should be taken now, as outlined in answer to the
last question.
T O P I C N O . 4 .— “ W h a t is the effect upon the general situation o f the
increased Treasury borrowings and what should be the p olicy o f the F e d
eral Reserve banks in establishing rates o f discount on paper secured by
certificates o f indebtedness?”
R ecom m en dation :
It is obvious that the borrowings o f the T reasu ry have the same effect
upon the general credit situation as those o f other borrow ers.
T h e C ouncil
w ould suggest the wisdom o f Congressional relief from the burden o f g ov
ernment financing by a policy o f rigid e co n o m y ; the revision o f the tax laws
for the sake o f a more equitable distribution o f the burden without reducing
the revenue; the enactment o f the budget system, the budget to include p ro
vision for the gradual payment o f the short time obligations o f the T reasury.
T hese w ould o f necessity preclude unwise appropriations, such as the p ro
posed soldiers’ bonus.
In view o f the large volum e o f T reasury Certificates o f Indebtedness
carried by member banks at the instance o f the T reasury D epartm ent, w e
believe that rates established by the Federal R eserve banks on paper secured
by them should not be materially greater than the rates borne by the Certifi
cates.
T O P I C N O . 5.— “ Should there be a revision o f rates on paper secured
by Liberty bonds and V icto ry n otes?”
R ecom m endation:
From a survey o f the present rates in force b y the Federal R eserve
banks it w ould seem that six per cent is now being charged on paper secured
by Liberty bonds and V icto ry notes. In the judgm ent o f the C ouncil when
and if any further revision o f rates should be m ade there should be shown
due consideration for the original subscriber o f government securities.
(S ig n e d )
Jas. B . Forgan, President.
T h e follow ing members o f the Federal A d v isory C ouncil w ere present
at this meeting:
Messrs. James B. Forgan, President; L . L . R u e , V ic e President; Philip Stockton, A . B . H epburn, W . S. R o w e , J. G . B row n,
Oscar W ells, F. O . W atts, E . F. Swinney, R . L . B all, A . L . M ills, and
Merritt H . Grim, Secretary.
“
FEDERAL ADVISORY COUNCIL*
^tinued.
Messrs. F 0 # itta , J rf Bailey, 0 M Ruynolds, R Ji Treuism and £ K
« Daukor*
J-uolioher offe r*, tne following resolution .vnich was un.vniwoualy carried*
R^>->JLVti:)i i'hat tha b inkers hare ausoiribled, in thwir capacity as
asiabors of the Fodoral Advisory Council, in their capacity as directors of
tha Federal Reservo banks of th® capacity; in their eaj acity as laeusbfcrs of
the “'Orderly Deflation CouTcrtittee of the hmrlaan Bankers Association, and
in their capacity as officers find directors of ban*8 doing business in too
various aitiea of tho country, approve tha yentiir^ita expressed in tho
very solo address oi’ Uovemor Harding a*: representing tho views of the
Federal Reserve 3o±rd; and also be it
rJUVhtfR R^iGLYzJD: Tnsct thoy believe that tho widest publicity should
be given tho address, and further, that they hereby agree to abide by the
a, ir it of the address, in the conduct of th^ir om a ffa irs, and that they
will ancwurage it s ssneral adoption by tho bankers and paople of our
country*
Mr. Jauoe J* Forman aw Chaxrinrvn of the American Bankers* Association CewcdfctM
on **lirdsr\y *md proper deflation of Credits” rsad to the oaoting several letters
and tolegr^as froc
various organisations, including Tb*.* National LplonsBit and
Chicle Co., n4fc &ai,ional Federation i f Constructiv- industries, The Studebaker
C#r,t oration, tha Central &«torz Corporation,
protesting a^^nst certain industries
being classified is non-esoontial ao tfeaifchey would be diBcrifcinated against wi«en
^plying for bank credit*
It «as dacidol na stated ir. Governor's address that the federal rtesarve Board
snu tha Feooral ^«.'jervfib^nkfi could sake no classification as to essential suad non••■srrtial indujrtrios and that the nie.i.der b inks individually should
be
strongly
wgsd to use utmost discretion in granting credits#
fir, F. w* Watts t'or the Zouuuitlvo reported the following praaroble and
^ig^uition on the ruii;oad situation, w h i c h on Motion was un&nimosuly adopted
°y tho Conference*
I ‘
I
9, for
http://fraser.stlouisfed.org/
Federal
l
aReserve Bank of St. Louis
■J'.xv.L':
• '
'
Tha whole country la Buffering fro® inflation of prices with
oonsequsnt inflation of ere lit.
From reports made by the mem-
£3*9 of this Conference, reprasanting aver}; section of the country,
It is obvioua that graat s u m are tied up in products tfhich if mar^etad tfculd relieve necessity, tend to reduce the price level and
rail*** the etrain on our credit system.
TM■? oon^&stion of freight la found in p ractica lly a ll cf the
I
lar^a railroad' cent-era sad shipping ports.
It arises ch iefly from
lrsd^uatJ transportation fa o il it is 2 availablo at thin tins? and is
seriously crip p lin g bunine5 3*
are informed that ths per ton mile
cf freight ind^daaad in thrss years - 191.6, 1£17 *md 191S - 4?£,
while
ftaig&t fcara in service during ths ijarss period increased 1,9^,
A strik in g n ecessity fcxlets ■which can only bo relieved through
tha upbuilding c f the credit c f the r illroads.
Thia m et come through
th? adequate and prompt Increase in freight rates.
the payin' o f ;vreatsr cost
Any delay means
d ire ctly and indirectly and pi ace a a
burden on the cre d it rsystorr. wlidh in the sjjproao&ing time for seasonal
aspan® ion «*y s&uSs abnormal strain,
Even unler the load oftmr in-
flation, ni/J; pr' 3© loval, -\nd extravagances, the bank reserves would
probably be sufficient. If qulcV. transportation could be assured fiurinr the tira of the greatest strain.
Therefore Be It Resolved, That this Conference urgs aa the
Rest ispcrtant rortedies that the Interstate Comr.era? Commission
and the Unit&d Static Shipping Board give increased rates and ade
quate facilities ^Urjh itarediate effect as may be warranted under
thsir authority,' and that a Committes of five representing the
various sections of the co^mtr^ be appointsd by the Chairman to
raproseat thi 0 Resolution to the Interstate Coemerce Commission
aad the United States Shipping Board with such verbal presentation
w may seem appropriate to tho Ccrin?..lttoe,
Minutes of Fed ral Advisory Council*
motion of » r . J S Williaaa tho Conference adjourned until 3:30 for lunch.
Oavemor Harding c illad tha Boating to order and announced tha following
committee t o preaent tha resolution adopted by tha Conference ta tha Intor stata
jeeaorca Cenaisslon cad tha United St ilea Shipping Board as thorain provided:
Moo^ra.
E. »• Docker, 0* ft# MaNider, R L B all, C E Hiasun <md John Ferrin.
ta nation af Mr. hualiohar, duly carried, tha Uevemor was authorised ta
appoint a eoomitt *e of five af which ha vould be e x -o ffic io a taectoer to draft
a report to the federal Reaerve Board for publication formulating th* view* axpr soed
by metiers of tha Conference*
The following couaaittee was natoed:
Janas B. Forgan, John Perrin, Joseph »ayne, J r ., T i Boal -md R H Treoan*
Several other mei&ers of tho Federal Reeerve 3oarri, including Dr A Z iiille r ,
HK Moehlenpah, J & W illi use, addreased the conference*
Govomor Harding stated that tha Coawitvee to draft the atatauant on tho
work of tho Conference would laeot after adjournment and prepare i t .
The Conference then adjoun&ed, at 5:3 0 o'clock*
■'M llSt Whicl
i
, ' .,*•.
; (Li
8
-
SECRETARY*
Tbe 3oi«uattae*a report of tho work of tho Conference ia hereto attached twid
* part of thoae ainutee*
X -I 9U0
<j»o the federal Reserve Board:
Sirs:
The undersigned committee appointed to f o m u l ate the views
expressed by members of the conference May I S ,
called by you
to give consideration to present credit conditions in t M s
country, beg leave to present the following:
At the present time banks have loaned to their customers a
total which is beyond all precedent and, in endeavoring to meet
their requirements, have called upon Federal Reserve Banks for
loans and rediscounts in grea-ter amount than ever before.
As a
consequence, reserves of Reserve Banks are now reduced almost to
the legal minimum, and this at a season when they should be high in
preparation for the inevitable expansion of loans in the autumn
for crop moving#
Causes contributing to the great increase of loans include
the following:
1. Thousands of blockaded freight cars are loaded with goods
against which hundreds of millions of dollars have been loaned,
the payment being necessarily delayed.
2.
Vast quantities of foodstuffs and other goods, against which
loans have been made, are held for lack of cars and ships, and
payment of loans consequently deferred.
3- Through loans and purchases, the banks have approximately
^
.
of fuflds |tied ^up ^in
Government obligations.
j
X- 19UQ
-2 4.
Vast amounts have been loaned to individuals, firms and
corporations to pay income and excess profits taxes.
Industry and trade are intensely active.
The demand for
commodities is beyond our power to supply with the present rate
of production.
The universal competition to buy has been a vital
factor in advancing all prices so that constantly increasing working
capital and bank loans have been required tc handle the same
volume of goods.
April
25
1 , 1919,
This is illustrated by the fact that from
to April
1 , 1920,
bank loans increased approximately
per cent, while production of goods declinedMS 8percent.
There is a shortage of capital.
Earnings, which would
otherwise be added to capital, are to a large extent now absorbed
by income and excess profits taxes*
nded.
Bank fcoans are already grewfrfcy
I t i s o b v io u s ly n e c e ssa r y tftat Ine volume of industry
and commerce mu^fcbe limited by the amount of capital and credit
I f credit is strained too far, disaster
which are available.
Bank loans are already g r e a tly expanded.
inevitably results.
The immediate problem is to determine a course
which will hold the volume of our industry and commerce within the
limits for whicn we have capital and credit, and wnich will make
adequate provision for the inevitable expansion of loans for the
Fall crop movement.
During the war extraordinary results were attained by general
patriotic cooperation.
The present strained credit situation
grows naturally out of the war and the subsequent readjustment,
2nd
a similar patriotic attitude should now be aidopted.
It is not
merely an ordinary credit regulation which is necessary but a
regulation as well of the whole economic situation.
Four months
of hearty cooperation by bankers, manufacturers, distributors,
-3 -
x-1940
producers and consumers, w ill go fa r to put the situation right.
Itethods of cooperation for the ensuing four months would
include the following:
1. Individuals could nelp by il r p n - j l i f i - Ifffcihwp'lT t t m iT — my
d e fe r r in g purchases of a l l but
a b s o lu te ly necessary th in g s and consuming th e" minimum p o s s ib le ;
by also d ep o sitin g in bank t h e i r money and by carryin g in" pocket
possible,
the least p o s s ib le amount.
2. Individuals, firms and corporations could nelp by deferring
all tut absolutely essential construction, whether of houses,
factory extension or other.
3. Those planning issues of securities for new enterprises
or expansion of those already existing could help by deferring
such issues, thus withholding their competition for capital and
credit.
U. States, counties and municipalities could render important
aid by deferring the issue of bonds, thus not competing for credit,
and by deferring as far as possible all public works and improve
ments, thus not competing for labor and materials.
5* The Federal Government could defer until after the crop move
ment all expenditures except those absolutely essential for the
orderly conduct of its affairs and could avoid all but absolutely
necessary borrowing.
6.
If every member bank would reduce the total of its loans b y
10 per
cent, tftere would be an aggregate reduction of about
$ 1 ,7 5 G ,0 0 0 ,0 0 0 .
If all of the banjos of the country would follow
this course, the aggregate reduction would be nearer $ 3 ,000 ,000 ,000.
-4 -
X-1940
r
Elis
w o u ld
give s a fe ty to the present cre d it situ a tio n and provide f or
an erual e::pansion in the Fall.
Indiscrim inate .ieflr^vion
The problem of credit control in rhe United
is not however desirable.
Str.tes is qualitative as well as q u a n tita tiv e.
Ql'e problem is to regulate
the flow and uses of credit so as to bring about a stronger situation with
a minimum of distirbance or hardship.
Specifically the problem majr be
stated to be to secure the exercise of greater discrimination in the grant
ing of credit and this is primarily the problem of the Commercial banker.
It is w ithin the p rovin ce o f the fe d e r a l Heserve Board to supervise the
operations of F ed eral Reserve B^nks.
Federal Reserve Bonks in turn come
into closer relations with member banks and may in some measure regulate
the volume of their loans.
But it is the banker who makes the loans upon
whom the responsibility rests to effect a c o rr e ctio n of the present situa
tion.
The success of his efforts w i l l be measure^ by the care with which
he discrim inates in lending so that credit whan required for the production
of food or other articles o f necessary consumption will not be restricted,'
while new loans for non-essential purposes will be declined and those al
ready made will be gradually reduced.
In thus undertaking to regulaie loans
in order to serve the general welfare, bankers would fin d i t h e lp fu l to
enlist the sympathetic understanding and coop era tion o f a l l , producer ar.i
r-0.:r;v;.*er a lik e .
-f prompt, in t e llig e n t and g en eral coop era tion alon.sj those linns fo r four
months can bo had, c a p it a l and c r o d it will be save! and the consumption r f
j*ods: icducod to cuch an o::tent that tho situation v/.ili bo safe*
ftearpectfally*
/
http://fraser.stlouisfed.org/
wi
....
Federal Reserve Bank of St. Louis
James B. Forpa.-* )
Thomas P. Beal.
)
P.obert H. CL'reman )
Joseph V/ayne, Ji %)
John Perrin
C GLfclT/TOIIB
.* * * * * * * * * * i"~ T1
@FedFRASER