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MINUTES OF MEETING of the FEDERAL ADVISORY COUNCIL M a y 21, 22, 1923 \ 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 COU N CIL May 21, 1923. The regular statutory meeting o f the Federal Advisory Council was held in the Federal Reserve Board room, Treasury Building, Washington, D. C., Monday, May 21, 1923. The President, Mr. Rue, called the meeting to order at 10.30 x\. M. Present: Mr. Mr. Mr. Mr. Mr. Mr. Mr. Mr. Mr. Mr. Mr. L. L. Rue, President P. M. Warburg, Vice President C. E. Sullivan j . M. Miller, Jr. E. W . Lane J. J. Mitchell G. H. Prince E. F. Swinney R. L. Ball D. W . T w ohy H. L. Hilyard District No. 3 District No. 2 District No. 4 District No. 5 District No. 6 District No. 7 District No. 9 District No. 10 District No. 11 District No. 12 Secretary. A bsen t: Mr. A. L. Aiken Mr. F. J. W ade District No. District No. 1 8 Communications were presented from Messrs. Aiken and Wade giving reasons for their absence. On motion, duly seconded, the Council voted unanimously to ask the Federal Reserve Banks to select an alternate to attend the sessions o f the Council in the place o f any member who might be unable to be present, said alternate to be asked to take part in the proceedings o f the Council without the privilege o f voting. On motion, duly seconded, minutes o f meeting o f February 19, 20, 1923, o f the Council and o f the Executive Committee, copies o f which had previously been sent to the members, were approved. The President, Mr. Rue, presented Governor Crissinger's letter o f May 3d enclos ing copy o f “ Memorandum for Governor’s Conference, X-3676," with reference to voluntary and unremunerative services performed by the Federal Reserve Banks and also asking members o f the Council to furnish the Board with reports upon economic and credit conditions, copies o f said letter and memorandum having been sent to the members previously. On motion, duly seconded, the Council unanimously approved Recommendation No. 1, copy o f which is attached hereto and made part o f these minutes, with reference to the voluntary and unremunerative services performed by the Federal Reserve Banks. 9 At 11.30 A. M., the Council adjourned to convene in join t session with the Federal Reserve Board. H . L. H IL Y A R D , Sccrctary. M INUTES OE JO IN T 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 CO U N CIL A N D T H E F E D E R A L R E S E R V E B O A R D May 21, 1923. At 11.30 A. M., a joint conference o f the Federal Reserve Board and the Federal Advisory Council was held as arranged. Present: Members o f the Federal Reserve Board : Governor D. R. Crissinger, V ice G overnor Edm und Platt, H on. H. M. Dawes, Comptroller o f the Currency, and Messrs. C. S. H am lin, A . C. Miller and G. R. James. Present: Members o f the Federal A dvisory C ouncil: Mr. L. L. Rue, President, Mr. P. M. W arburg, V ice President, Messrs. C. E. Sullivan, J. M. Miller, Jr., E. W . Lane, J. J. M itchell, G. H . Prince, E. F. Swinney, R. L. Ball, D. W . Twohy, and H. L. H ilyard, Secretary. The President o f the Council, Mr. Rue, called the meeting to order and invited Governor Crissinger to address the conference. G overnor Crissinger referred to his letter of May 3d, asking Council’s advice relative to voluntary and unremunerative services performed by the Federal Reserve Banks. Governor Crissinger discussed the matter o f an A gen cy o f the Federal Reserve Banks of Boston and Atlanta to be located in Havana, Cuba, such Agency to buy and sell cable transfers, and to buy, sell and collect bankers’ acceptances bearing satisfactory bank endorsements on behalf o f the Federal Reserve Bank o f Boston, and to purchase cable transfers and bankers’ acceptances and pay out Federal Reserve Notes on behalf of the Federal Reserve Bank o f Atlanta. G overnor Crissinger stated that the Board had tentatively decided to grant such applications but that their final approval had been deferred because o f Mr. Rue’s telegram o f M ay 16th requesting the Board to reserve its decision upon the question until the Council should have an opportunity of con sulting with the Board. A general discussion was held am ong the members of the Board and o f the Council concerning the merits o f the question and the Board submitted to the Council a copy o f its proposed resolution on the subject. At 1.10 P. M., the joint conference adjourned. H . L. H IL Y A R D , Sccrctary. 10 M IN U T E S O F M E E T I N G 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 ! May 21, 1923. A t 2.30 P. M ., the Federal A dvisory Council reconvened in the Federal Reserve Board room , as arranged, the President, M r. Rue, in the Chair. W ith the approval o f the Council, the President invited Governor W . P. G. Harding, o f the Federal Reserve Bank o f Boston, to address the Council on the subject o f the Federal Reserve Bank A gen cy in Havana, Cuba, in accordance with Governor H arding’s request. G overn or H arding spoke at length on the subject and a general inform al discussion am ong the members o f the Council followed. A t 4.30 P. M ., G overnor H arding withdrew. The discussion o f the Cuban A gen cy was continued and upon motion, duly sec onded, M r. W a rb u rg was requested to prepare and submit to the Council for its approval, a recom m endation on the subject em bodying the views o f the members. A t 4.45 P. M ., the m eeting adjourned. H . L. H I L Y A R D , Secretary. M I N U T E S O F M E E T I N G 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 M ay 22, 1923. A t 9.30 A . M ., the Federal A d v iso ry Council reconvened in the Federal Reserve Board room , as arranged, the President, M r. Rue, in the Chair. P re se n t: M r. L. L. R ue, President, M r. P. M . W arburg, V ice President, Messrs. C. E. Sullivan, J. M . M iller, Jr., E. W . Lane, J. J. Mitchell, G. H . Prince, E. F. Swinney, R. L. Ball, D . W . Twroh y and H . L. H ilyard, Secretary. M r. W a rb u rg subm itted to the Council fo r its approval, the recommendation which he had prepared relative to the Cuban A gency. On m otion, duly seconded, C ouncil approved the recommendation for presentation to the Federal R eserve B oard, M r. Sw inney and M r. Ball voting in the negative for the reason that while they agreed with the provisions o f the recommendation they were unwilling to approve it inasmuch as the Federal Reserve Board had advised that they had already decided to grant this authority and M r. Swinney and Mr. Ball did not want to appear as being in opposition to the Board. (Recom m endation N o. 2 .) At 11.50 A. M., the Council adjourned to convene in joint session with the Federal Reserve Board. H . L. H IL Y A R D , Secretary. M INUTES OF JO IN T C O N F E R E N C E O F T H E F E D E R A L AD VISO RY CO U N CIL A N D T H E F E D E R A L R E S E R V E B O A R D May 22, 1923. At 11.50 A. M., a joint conference o f the Federal A dvisory Council and the Federal Reserve Board was held, as arranged, in the Federal Reserve Board room. Present: Members o f the Federal Reserve B o a r d : Governor D. R. Crissinger, Vice G overnor Edmund Platt, Hon. H. M. Dawes, Comptroller o f the Currency, and Messrs. C. S. Hamlin, A . C. Miller and G. R. James. Present: Members o f the Federal Advisory C ou n cil: Mr. L. L. Rue, President, Mr. P. M. W arburg, V ice President, Messrs. C. E. Sullivan, J. M. Miller, Jr., E. W . Lane, J. J. Mitchell, G. H . Prince, E. F. Swinney, R. L. Ball, D. W . Twohy and H. L. H ilyard, Secretary. In the temporary absence o f the President, M r. Rue, when the session convened, the Vice President, Mr. Warburg, called the meeting to order and at his request the Secretary of the Council read the recommendations which had been prepared by the Council, relative to the voluntary and unremunerative services performed by the Fed eral Reserve Banks (Recommendation N o. 1 ), and the Federal Reserve Bank Agency in Havana, Cuba (Recommendation No. 2 ) . It was the unanimous opinion of the Council that there is nothing in business and financial conditions which would occasion any change in rediscount rates at this time (Recom m endation No. 3 ). Copy of the recommendation is attached hereto and made part o f these minutes. A general informal discussion took place concerning the subject matter of the recommendations. At 1 P. M., the joint conference adjourned, concluding the session o f the Council. H. L. H IL Y A R D , Secretary. 12 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 FED ERAL RESERVE BOARD M ay 21, 1923 R E C O M M E N D A T I O N 1. The Federal A dvisory Council believes that all the services inquired about by the Federal Reserve Board in its letter o f May 3, 1923, enclosing copy o f “ M em orandum fo r G overnor's Conference, X -3 67 6 ,” should be con tinued, except that the Council holds to the opinion that the service rendered in the free collection o f non-cash items, both city and country, should be reduced. The free collection o f coupons, how ever, should be continued. The Council understands that this question is now being studied by a special committee o f Governors appointed by the Board. R E C O M M E N D A T I O N 2. T he Federal Reserve Board has submitted to the Federal A d v isory Council a copy o f its resolution in tentative form authorizing the Federal Reserve Bank o f B oston to establish an agency in Havana, Cuba, and specify ing the terms and conditions under which such an agency should operate. The Board has asked the Federal A d v isory Council to express its views particularly on the ques tion whether the restrictions em bodied under “ number ( 1) ” o f the resolution are farreaching enough to insure sa fety ; and on the other hand, whether in the opinion o f the Council these restrictions are so far-reaching that they might prevent the attainment o f the objects o f the establishment o f the agency— the outstanding objects being, as mem bers o f the B oard have explained to the Council, the so-called stabilization o f the Cuban currency and banking situation, and the furnishing o f a continuous supply o f clean money. A careful exam ination o f the resolution leads the Council to the view that the limitations are not stricter than the circumstances require. The stupendous losses that A m erican banks operating in Cuba have recently suffered cannot but impress the Coun cil with the absolute necessity o f placing the greatest possible safeguards upon the open market operations o f Federal R eserve Banks in Cuba. I f these bills are to be bought by the agency b efore they are actually accepted by the bank on which they are drawn, it is obvious that the B oard is w ell-advised if it stipulates that they shall be secured by shipping or other docum ents con veyin g title. A lso that they should bear what the Board calls “ a satisfactory bank endorsem ent.” W ithout these safeguards obviously the agency w ould not be safe in buying these bills. W ith these safeguards it is doubt ful, how ever, w hether the agency w ill find an adequate supply o f bills which are thus made eligible fo r purchase by it. A very large number o f these bills are being drawn as so-called “ dry season credits” — that is, the large sugar grow in g concerns are per mitted to draw on the banks granting the credit for the making o f the crop in advance o f the grinding, and during the grinding period, and the shipping documents are forth com ing in due course as soon as the raw sugar becomes available fo r shipment. W hile these bills are excellent investments fo r Federal Reserve Banks after they have been accepted, they are, th erefore, not available fo r purchase by the foreign agency in the foreign country w here they are drawn. A n oth er difficulty arises when we reach the point o f defining wrhat is a “ satisfactory bank endorsem ent.” I f we were restricting this definition so as to include on ly m em ber banks, there wrould be only two banks available fo r such endorsem ent fo r the agency, and this w ould give them a position o f preference. O n the other hand, it w ill be very difficult fo r the agency to discriminate and to refuse the endorsem ent o f local banks or the Canadian banks. The fact remains, 3 however, that the Federal Reserve Bank is in no position to examine these Canadian or local banks in a similar manner as it can secure statements and examinations of American endorsing or accepting institutions. There have been quite a number of important Cuban banks that have gone into receivers’ hands, and one o f the important Canadian branch banks became heavily involved only about a year ago. Moreover, it should not be overlooked that some o f the large sugar estates are practically owned, voluntarily or involuntarily, by banks and banking firms and that in such cases the bank endorsement is not quite as independent a guarantee as it would appear. If the agency would be very careful in selecting the names that it would consider as satisfactory endorsements, and in keeping the amount that it would take o f each name within very conservative limits, it would soon be charged with giving a position o f preference to American branch banks. It is hard to conceive, however, how such a development could be avoided. Moreover, the supply o f these bills will be forthcoming only during certain seasons o f the year. The operations o f the agency will, therefore, not be con tinuous, but only seasonal. On the whole, the Council cannot escape the conclusion that on this of-necessity restricted scope a basis cannot be found which would prove satis factory to the Cuban banks or secure any position o f continuous effective influence for the agency. What has been said about power to purchase acceptances applies to a certain degree also to power given to the agency to buy and sell cable transfers. This, too, would be only a sporadic business, and there is grave doubt whether the agency would be able to secure the bulk o f this business as long as it could not buy the bulk o f the long bills which would be offered in the market, and as long, therefore, as a great many of the sellers of these bills are more likely to send their remittances to some New York, Phila delphia or Boston correspondent and draw against these remittances by cable. More over, the volume o f cable transfer business to be done by the agency would be deter mined by its willingness to carry, itself, the expense o f shipping currency. It also must be borne in mind that a bank buying or selling cable transfers wrould not of neces sity pay in currency or receive currency. It may simply receive or make payment by transfer in the settlement at the Clearing House. It is, therefore, a mistake to assume that all of these transactions would result in currency movements. Governor Harding o f the Federal Reserve Bank o f Boston appeared before the Council and explained his thoughts concerning the future operations o f the contem plated agency. When asked how these operations would tend to stabilize the currency he replied that Cuban currency was practically stable; and about the currency situation itself he stated that in his opinion it seemed worse than it actually was, inasmuch as there was a great deal o f clean currency in Cuba, but this w^as held back by the banks and the people while the unclean currency was put into circulation. He said that the total amount o f objectionably soiled currency in circulation wras estimated at about ten million dollars. While the Council is in full sympathy with the ends that the Board is trying to attain, it believes that the plan as now contemplated would not prove successful in actual operation and that what the Board desires to achieve can and should be accom plished by other and simpler means which would not involve the ominous step of permitting Federal Reserve Banks to establish organizations o f their own in foreign countries— a step which in the opinion o f the Council was not contemplated by the Act— a step for which the traditions o f the important European central banks would give no precedent. The following thoughts have suggested themselves to> the Council and are here with respectfully submitted to the Board fo r its consideration. It has been stated as an element of uncertainty in the Cuban banking situation that in case o f runs or emer gencies, the banks cannot count on obtaining an adequate supply o f currency within a 4 reasonably short time. It w ou ld seem to the C ouncil that if provisions were made to maintain at all tim es an adequate cu rren cy supply at the Jacksonville Branch o f the Federal R eserve Bank o f A tlanta, or, if need be, at a branch to be established by it at K ey W est, a cu rren cy reserve cou ld be m ade available fo r the banks in H avana in practically one night o r even in a shorter tim e. T h e m ere fact that such an arrange ment w ou ld be announced w ou ld have a reassuring effect, and in case o f need no doubt this arrangem ent w ou ld p rove entirely sufficient. W h ile a p rovision o f this sort w ould give Cuba assurance that a sufficient volu m e o f currency w ould be forthcom ing, there remains the second phase o f the problem , w hich is to provide fo r Cuba a constant stream o f clean cu rrency. I f the B oa rd authorized Federal R eserve Banks to appoint corre spondents a m on g the banks operatin g in Cuba, fo r w hich appointm ent the Federal R eserve A c t gives them undoubted authority, it w ou ld be an easy and entirely practi cable m atter to have accounts o f F ederal R eserve Banks opened not only with the A m erican branches but also w ith the leading Canadian and local banks. I f such accounts w ere opened by F ederal R eserve Banks transm itting to such Cuban banks, let us say, one hundred thousand dollars in clean currency, fo r w hich balances collateral could be required, and if at the same tim e arrangem ents w ere m ade with these corre spondent banks by w h ich the return o f unfit currency to the U nited States w ould be facilitated, a sim ple m achinery w ou ld be set up by w hich these balances could be con tinuously replenished by the rem ittance o f clean currency, while the soiled currency w ou ld flow back to the U n ited States. W hat; volum e this stream o f currency w ould assume is a m atter that cou ld be ascertained and developed on the strength o f actual experience gained fr o m m onth to m onth. I f a plan o f this sort w ould be announced, the C ouncil has no doubt it w ou ld be m ost popular, because it w ould meet the tw o main requirem ents o f the situation w ith ou t su b jectin g the System to the charge o f undue discrim ination o r ex p osin g it to the danger o f opening the crack o f the d oor which m ight lead the F ederal R eserve System to operation o f its ow n organizations in other foreign countries. I f , as these operations develop, the B oston Federal Reserve Bank, or any other F ederal R eserve Bank, should feel that the general interest requires that they should buy bills in Cuba direct, instead o f purchasing them a fter they are in the U nited States and prop erly accepted, o r that they should deal in cable transfers, they are free to do so through the interm ediary o f their correspondents o r agents, o r agencies (w h ich ever name m ay be p r e fe r r e d ). T h e C ouncil fails to see that these transactions w ould in any w ay p rom ote o r that they are directly related w ith the attainment o f the end sought b y the B o a r d ; viz, the creation o f an adequate currency reserve, o r the furnishing o f a constant stream o f clean circulating notes. F rom G overn or H arding's statement, it w ou ld appear that the dealing in cable transfers and the open market oper ations are prop osed m ainly fo r the reason o f givin g the agency a legal status, which then w ou ld enable it to exercise the cu rren cy functions w hich are the real object to be accom plished, but fo r w hich S ection 14-E does not grant any special authority. W ith the question o f w hich o f the Federal R eserve Banks should secure a larger or smaller share in this developm ent, the C ouncil has little concern, nor does the C oun cil think that the Federal R eserve Banks am ong themselves should look upon this prob lem from the point o f view o f com petition o r o f securing any special advantage fo r any particular district. T h e question must be ju d g ed from the point o f view o f what is best fo r the F ederal R eserve System , best fo r the U nited States, and also in this case o f what is the m ost advantageous m ethod o f procedure in w ork in g out the financial problems o f Cuba, in w hich the U nited States has so large an interest, and fo r the w elfare o f w hich our cou n try has responsibilities that it has tow ard no other foreign nation. R E C O M M E N D A T I O N 3. C ouncil is o f the opinion that there is nothing in business and financial conditions w hich w ould occasion any change in rediscount rates at this time. 5
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