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B. Strong, .jr.. Merchants Assn.* Luncheon.

This is indeed a prosperity luncheon.

1 1 /2 4/1 4 «

I sympathize with your desire to permit

the Federal Reserve Bank to contribute to the object of the meeting.
warn you that the Reserve Banks cannot make prosperity.

I should also

As they gradually assume their

functions they will certainly aid in tho recovery of business from the shock of war,
and I hope will reap their share of the rewards.
Until Hovember 16th the Federal Reserve Act was simply the expression cf what
Congress believed the country demanded in banking and currency legislation.


November 16th it has become a powerful force behind our business machinery.

The test

of its ability to accomplish the objects desired will be determined by the experience
of the future.

We must bear in mind what banking legislation in the United States af­

fects over 25,000 institutions with resources of $25,000,000,000.

Since the panic of

1907, the states of New York, Pennsylvahia, Ohio, Illinois and California have made
important or complete revisions of state banking laws, and Congress has enacted the
Federal Reserve Law*

Legislation of this sweeping character, which in the case of the

Federal Reserve Act reposes broad powers of interpretation and direction in a Federal
Boai'd, must be dealt with conservatively.

The defects of the old system may have been

corrected ty the new, but we must be sure that other defects have not crept undetected
into the act from nhich unsound tendencies may develop, thereby defeating the purpose
of Congress and creating other weaknesses which it would require further legislation
to correct.

Judgment must be suspended and a generous attitude must be observed both

toward the Federal Reserve Board and the measures adopted by it for the development
and control of the new system and toward the managements of the various Reserve banks
in their exercise of the functions of these new institutions.
cooperation will insure the success of the system.

A liberal spirit of

Determined opposition can be made

to defeat its progress.
The fi*st notable development in the inauguration of the system was the pay­
ment of the capital instalment, and during the past week, the completion of the initial
reserve transfer, largely in gold, without recourse to the deposited reserves in the

reserve and central

reserve cities.

Out of $110,000,000 of such transfers made to the




Federal Reserve Bank of this city, a negligible amount was made by New York banks for
account of their correspondents in this district, and over $85,000,000 of the amount
transfej ed was in gold.

The spirit of cooperation thus exhibited by the banks of this

district and particularly by the members of the New York Clearing House Association
in this as in all matters connected vdth the establishment of the Federal Reserve Bank
of New York, gives striking evidence of their intention to permit no opposition to
develop which may interfere with a thorough test of the plan.

This insures its success.

I take thic opportunity to express m admiration of this body of men, our New York
bankers, who again give evidence of their loyalty to American institutions in true
American spirit.

The cooperation of the National banks, so necessary to the future of

this great plan, has been amply assured.

Of that the evidence is abundant.


cooperation by state institutions is of almost equal importance, and that of the busi­
ness men of the country is essential.

Plans far the admission of state institutions

to meraberwhip in the system will, I believe, develop rapidly and afford means far en­
larging the scope and usefulness of the system, without placing burdensome restrictions
upon the state institutions or subjecting the National banks to unreasonable competition.
The soundest banking system possible for this country should embrace in its operation
all banks which receive demand deposits and discount commercial paper.
provided for the establishment of an entirely new class of banks.

Congress has now

Their most important

functions will be to provide an elastic currency, to afford means of rediscounting com­
mercial paper by the members of the system,

to act as the depositaries and discal agents

of the Government, to effect the gradual retirement of our bond secured national bank
notes and to furnish the machinery for the clearance of checks and a more economical
adjustment of domestic exchanges.

In addressing you, however, I shall refer to only one

section of the law in which you have a special interest from the standpoint of the mercahtile borrower.

Some of you no doubt have at times been subjected to the uncertainty

and anxiety of haviiig obligations to meet without the immediate means of meeting them,
except through credit with a bank.

lour business may have been in a sound condition,

but still your bank be unable to care for your legitimate needs.
as well as your

Certainly your business,

peace of mind will be promoted by a greater certainty in regard to your

- 5 credit at the bank and particularly at a time when money rates may be high and busi­
ness uncertainty prevail.

Therein lies an important function of the Reserve Bank

It will broaden and stabilize the market for commercial borrowings.


Federal Reserve Act provides for the discount by Federal Reserve Banks (I quote from
the law) "of notes, drafts and bills of exchange arising out of actual commercial
transactions. "

The limitations thus imposed upon the Reserve banks in the char­

acter of paper which they may discount raises three important questions:

First, shall

the test of the eligible character of the paper be evidenced in the form of the paper

Second, if the note does not bear such evidence on its face shall the Federal

Reserve banks accept the statement of trie member banks that it does co,ply with the
statute, or Third, shall the member banks provide themselves with such means of informa­
tion as will enable than to determine whether paper offered for discount complies with
the statute.
The note of a merchant representing goods purchased, i f drawn upon an accep­
tor who may be either the purchaser of the goods or a bank or banker, affords reason­
ably certain evidence on its face of the character of the transaction which it repre­
sents, and that it complies with the statute.
to the London market, and known


Such paper, is , in fact, the b ill common

bankers the world over.

I f gradually, without undue

disturbance of existing methods, the accepted b ill can be substituted for the note of
hand, a class of paper will be created which will command a premium in the money markets
of tixis country-.

Itsconvertibility at minimum rates of discount will serve as an induce­

ment to both the buyer and the seller of goods to substitute this form of credit for
direct bank borrowings against book accounts.
any such practice can be generally introduced.

Many obstacles must be overcome before
A merchant drawing a b ill in Hongkong

for acceptance in New York must know that the b ill can be sold in Hongkong.

The bank

in Hongkong with which he does business and which will be asked to buy the b ill must
know that the credit is good and i f it buys the b ill that he or his agent (say in New
York) can get immediate discount.

He shou&d be able to ascertain the rate, and should

know that the rate will be fairly stable.

While the banker in Hongkong will know the

-4 drawer of the b ill, he must also be informed as to the standing of the acceptor in
New York.

There are today in this country no acceptance houses, veiy few of the

National and State banks are engaging in the acceptance business, and furthermore,
unfortunately, the Federal Reserve Act limits the new acceptance privilege of the
National banks to the acceptance of b ill# representing the Exportation or importation
of goods.

In England ths small number of acceptance and discount houses, which,

however, do a vast volume of business, has enabled the business and banking world to
become familiar with London credits to an extent that is not true of any other money

Similar information regarding our credits must be dissociated the world
Knowledge of the credit of American firms and institutions will follow the

trade of the country, but it will not precede it .

The process of education which

must accoijpary the general use of bills drawn and accepted in dollars will take time
and patience.

One important function of the Reserve banks at the outset should be

to standardize the development of this practice and put a premium upon that bill which
conforms to sound business principles.

Accommodation acceptance, where the billdoes

not represent the sale of commodities, should be discouraged, so that eventually a
dollar acceptance will, in fact, represent the sale of a commodity, the proceeds of
the ultimate


of which will provide the funds to meet the b ill at maturity.

The second question has already been answered in part.

The Reserve Board

has, for the present, placed upon the management of each member bank the responsibility
of determining and giving satisfactory assurance to the Reserve banks that paper offered
by it for discount generally conforms to the intention of the Act.
denced by th.3 written statement of an officer of the member bank.

This is to be evi­
Commencing with

January 15th, however, the member banks will be required to affix by stamped endorse­
ment upon the note or by some other simple method, an indication that the note conforms
to the requirements of the Act and the definitions of the Reserve Bcard and that credit
information about the maker is available i f called for.

Thi* again places upon the

member bank, and not upon the Reserve bank, the obligation to deteimine the eligibility
of the paper.

By authorising this method the Eederal Board has recognized the unwisdom

- 5 of attempting revolutionary changes in business practice.

Assuming, however, that by

later regulation the Reserve banks are themselves required to determine the eligibility
off paper offered for rediscount, the third question arises, How shall the Reserve banks
distinguish between that portion of the borrowings of a merchant which may have been
applied to the building of factories, the purchase of machinery or to some other fixed
investment, and that portion which has been invested in the purchase of goods for
resale or which represents a sale of goods to a customer?

Borrowed dollars are not

earmarked in their journeys through the accounts of the borrower and it therefore would .
necessitate an examination of the financial statements of borrowers to ascertain whether,
in fact, borrowings are confined to an amount representing the business turnover, or
whether such borrowings, i f representing fixed investments may not result in a condi­
tion in the merchant1s affairs which would make it impossible to discount the paper
without violation of the provisions of the law.
By some means yet to be fully devised it must become possible to readily
determine the eligible character and quality of paper of the various classes which
may be offered to the Federal Reserve banks.

I do not \ sh to suggest that the

present system of mercantile credits should be generally abandoned.

The discount

allowed for cash settlement is an important factor in our business system.

But much

of the trade of the country which is now conducted against book credits of 50, 60 or
even 90 days, may properly be represented by mercantile paper i f the inducement is

Our vast domestic trade should hot be disorganized or hanjpered by a

sudden and radical departure from methods which are now satisfactory to merchants
and which are approved by many bankers.

The elimination from our money market of

the single name note may not be necessary or desirable, but on the other, it is
undoubtedly desirable that the paper in which our banks invest should more largely
represent the purchase and sale of commodities and not permanent capital.

The induce­

ment to the making of double name paper, representing in fact commercial transactions,
will lie in a preferential rate, rather than in a regulation.
trade methods will aid in bringing this about.

Gradual changes in

The best guide to a safe course will

-6 -

be experience.

In the meantime, it seems to be the intention of the Reserve Board

to facilitate adaptation to the new conditions, and to render the system effective
at a time when its service may be of moxe value to American business men than at
any time during the next generation.

This system does, in fact, mean a gradual

change in both banking and business methods.

The complete accomplishment of its

purpose will be brought about through the assistance, advice and patient cooperation
of both the lender and the borrower who by means of these banks will be brought
together on a sounder basis than has heretofore prevailed.
Permit me to ask the members of this Association to give careful study to
the provisions of the; law and to the regulations of the Reserve Board.

Our new

system may at first appear to have been devised for the service and protection of the

They own the stock, the reserve deposits belong to than.

The benefits of the

system, however, will, in fact, be realized by the merchant who borrows money. It has
already erased the word "panic" from our financial lexicon.

Its purpose is to safeguard

your credit and ultimately to enlarge the field of your business enterprise.