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Ski*-<JL #4, V —c- cv.-a.A.T-e. c>c, - ^ . (Xn q » ^ c j 630 THE F I N A N C fI A L VoL X AGE. . No. M President Haines: W e m U io w pro ceed with the program as arranged, and the next is an address on “The Federal Reserve System,” by Mr. Benjamin Strong, Jr., Governor of the Federal Re serve Bank of New York. T H E F E D E R A L R E S E R V E SY ST E M . Mr. Benjamin Strong, Jr., Governor of the Federal Reserve Bank of New York. Mr. President and Gentlemen: I am sure that Congressman Fowler will not object to my calling your attention to an error in the printing of the program. It ' seems that I am called upon to address you in regard to some features of an economic monstrosity. (Laughter.) Now. unfortunately the gentlemen who were charged with the duty of engaging of ficers for the Reserve Bank failed to take into consideration that certain qualifications not usually required for bankers appar ently were required for these positions. They should have selected men with some , talent for speechmaking. l)ur duties at the office in Xew York have been rather ardu ous, and rather than devote considerable time to careful preparation of addresses in regard to the Reserve Bank, we have thought best to ask the bankers who are good enough to invite us to address them to let us make very informal talks in re.garil to the work that is being done, and I will therefore ask your indulgence if the matters that 1 want to talk about this afternoon are viry informally dealt with. Congressman Fowler. I am sure, will not object to my referring to one or two words only of his remarks. Discussion of hank ing legislation in this country, as I recall, has been pretty active for the last eight or ten years. If we are to have the real dis cussion that Congressman Fowler suggests, I am afraid we will now have no time for anything but banking discussion, judging, at least, by the activity that has prevailed since 1907 in efforts to get better hanking law. He refers to a remark, possibly unfor tunate. that this new law is 70 per cent, good. My memory of one such remark was that it was i>*0 per cent. good. And Congressman Fowler considers it 170 per cent. bad. I think’ he is mistaken. These last sevm years of discussion, in which Congressman Fowler himself par ticipated very actively and himself contrib uted toward a better understanding of. the problem, if it did nothing else, con vinced the people of this country that our problem was a very different one from any that existed in Europe. We have in the United States over 2.V000 hanking in stitutions. The are scattered over an area equal to pretty much all of Furope. Conditions are different in the different parts of the country and at least twothirds or three-fourths of those institu tions are governed by the laws of fortyeight different States. I think at least we owe a great deal of thanks to those men who devoted themselves, with tangible re sults. not reduced to percentages, however, I The Seaboard National Bank of the City of New York earnestly solicits deposits from New Jersey Bankers. Personal attention on the part of the officers is given to all accounts. C a p ita l............................................... $1,000,000 Surplus and Profits (earned) 2,825,000 Deposits 35,000,000 S. <;. U A Y X E , President L I'. C. THOMPSON.^fViCj^A'esident S. li. X K 1.SO X , Vice-l’ rcsiilent B. L . G II.L , Vice-President W. K j/ O - E U k g jiE V , Cashier 1-. X. l»r V A C S X E Y , Assistant Cashier 1 1» bringing about the law that lias been passed. In fact, except some divine 1inspiration had operated in the prep aration of this law, I do not believe the American people could expect one that ; was 100 per cent, perfect. ___ _ j Now, my own view of the law has some; what changed since taking a position in this ; system. Before the law was passed, with many other bankers who 1 think were dei voting themselves to serious thought on this subject, I felt that one bank was what this country wanted, as Congressman Fowler i has suggested. We have twelve banks. With these we can well be satisfied. ■Our problem just now is to as; sist in the development of the system that ■we have, so that it will serve your needs, and some of the work along that ; line I would like to talk about. I must not, however, pass the oppor tunity to express the satisfaction that some i of us feel at the apparent success of the major surgical operation that was just referred to. Those 131 banks of northern New Jersey that are shortly to become members of the Second District will receive a very warm welcome. (Ap plause.) You will recall that shortly after the banks were organized, a circular, No. irt, was issued t>y the Federal Reserve Board in regard to commercial paper. That cir cular was later withdrawn and a new cir cular, for No.FRASER 4, was issued in its place, the Digitized effect of which was to leave it very much http://fraser.stlouisfed.org/ to theReserve discretion ofofthe banks and Federal Bank St. member Louis J . C. M in K V ; Assistant Cashier O. M. JE F F E R D S , Assistant Cashier the discretion of the officers of the Re serve Bank as to what paper was eligible for rediscount by the member bank. Since that time there has been issued a new circu lar and regulation which is to take effect on ]uly 15th. So many inquiries are being made as to the exact procedure under that circular and just what will be required after July 15 rthat we have had in course of preparation statement or letter which will express as briefly as seems possible the views that are entertained by the officers of our bank on this matter so that the member banks can readily observe its provisions. I would like to read some portions of this circular, which may, however, be changed at a later date. Circular No. 3, the one which takes ef fect July 15th, defines eligible paper and provides that member banks will be ex pected to keep credit files showing the condition of their larger borrowers in or der to certify the eligibility of paper of fered for rediscount after July 15, 1915. Until July 15th, Circular No. 4 shows how such eligibility shall be certified, but thereafter Circular No. 4 will no longer ap ply. The judgment to be exercised, in other words, will be controlled by Circu lar No. 3, and I would like to call your attention to the fact that that circular dis tinguishes between paper taken by mem bers hanks from their customers and paper which they purchase from brokers or through their bank correspondents. As to all purchased paper, :he Board has seen fit to require that eaoh member g bank shall be able to certify to its reserve bank that it has a signed statement or a copy of a signed statement of the bor rower. As to the paper which they take from their customers, no such certificate is required in the case of a note of any one customer or the obligation of any one. customer which does not exceed five thou sand dollars in amount or does not exceed : 10 per cent, of the capital stock of the member bank. That is to say, a bank of twenty-five thousand dollars capital can apply for a rediscount of notes of any~ one of its borrowers not exceeding twenty* five hundred dollars in amount without . making a certificate or stating that they have in their files a statement of the bor rower’s financial condition. For larger amounts credit bills will be required. The Federal Reserve Banks must be pre pared to make their resources available when needed, to the commerce, industry and agriculture of the country, to facilitate production, manufacture or distribution. That is the language that is employed in the regulation itself. Their resources must, however, be kept liquid. Therefore, except for a limited amount of agricultural paper, all notes rediscounted must ma ture within ninety days and must be taken up by the banks which indorse them, whether they arc paid by the makers or not. But the act and the regulation re quire that the original borrower's finan cial condition shall also reasonably evidence his ability to meet his current liabilities, promptly. Stated negatively, this mean’ MS \ that 4 Federal Reserve Bank may not dis count a member bank's paper which rep resents or is based on lands, buildings, machinery or other fixed or permanent as sets or on investment securities or on goods carried merely for speculative pur poses. Such paper does not contain the clement of self-liquidation, as it does not represent goods in any of the stages of pro duction, manufacture and distribution. The paper which in form evidences most satisfactorily that it is self-liquidating is a note, bill or accepted draft, representing the obligation of the purchaser to the seller for goods sold. Let me say that there seems to be a good deal of misunderstanding as to what might be called trade paper. Too many of the member banks are under the impression that they must in applying for discounts submit only paper on which there are two obligations to pay, a maker and an endorser. That is not a fact. The test of the eligibility of a note, which I will refeT to later, is not of that character. This paper represents, in fact, an actual commercial transaction, and its payment is directly related to the sale of the goods. But the development in this country of the open credit granted by merchants and man ufacturers. and of the system of cash dis counts, offering advantages to purchasers with ample capital, has reduced the volume of self-liquidating paper and substituted for it the promissory note on which work ing capital is obtained in order to carry indebtedness due by customers on open ac counts, as well as for the purchase of ma terial. The provisions of the act and the regulation contemplate the rediscount of the latter class of paper at Federal Re serve Banks and it has so far constituted the vast majority in volume of the paper which our bank has thus far discounted. In the case of the ordinary promissory note with or without endorsements, how shall the member bank determine whether ■it is eligible for rediscount with its Fed eral Reserve Bank? This is most difficult in the case of notes discounted by indi viduals. In such cases it would be advan tageous to ascertain first the business of the discounter. If he is engaged in com■merce, industry or agriculture, it may be . eligible. If he is not so engaged, it is not eligible unless he uses the proceeds of the note for commercial, industrial or agri: cultural purposes. Smith may be a prac• ticing lawyer or physician, but he may <also own a farm and his notes may be is; sued to purchase feed, fertilizer or stock, 1or pay wages or other regular costs of • operating a farm, just as in the case of any I farmer. Likewise Smith may also have an interest in the local newspaper or other i industry. A note issued by Smith for . money to advance to the newspaper would <be eligible for rediscount, provided it was not to go into fixed assets, such as land, buildings or machinery. t But if Smith should offer a note issued i fcjr the person, firm or corporation running the newspaper or other concern, it would be evidence on its face that it had been i wed for industrial or commercial purDigitized ! poses. for In FRASER this case eligibility would be http://fraser.stlouisfed.org/ determined by examining the statement of Federal Reserve Bank of St. Louis THE FINANCIAL AGE. Vol. x x f from the reserve banks on the se of the concern to see if it has a reasonable excess of quick assets over current liabil bonds; conversely, it is no longer a. nec ities. But if Smith, a lawyer or physician, essary for member banks to carry bonds simply for the purpose of occasional bor merely borrows for household expenses or rowing, because the law permits the redis for any purpose not commercial, industrial count of their commercial paper when they or agricultural, his note is not eligible. are in need of funds. Accommodation makers or endorsers do In examining the statements furnished us not affect the eligibility of the note. The in New York by the member banks of eligibility depends primarily upon the pur our district I think there were something pose for which its proceeds are used. In the case of notes discounted by firms like seventy-five or eighty banks that re or corporations, if such firms or corpora ported that they had little or no paper that tions are engaged in commerce, industry was eligible to rediscount. We wrote each of or agriculture, their notes are eligible, pro those banks a letter asking them to either vided they show by statement or other . send an officer of the bank to see us or to wise that they have a reasonable excess write us and give a description of the character of the paper which they had in their of quick assets over current liabilities. It is quite apparent that if a large bor portfolios. We found on examination and in conversation with the officers that we rower in making a statement shows that his short borrowings, current liabilities, saw, that hardly any of those that replied current indebtedness, are in excess^of his had less than 50 per cent, of eligible paper quickly available assets, some part of his in their portfolios; but their reports were borrowings must have gone into plant or based upon a conception of what the regu machinery or fixed assets. And that, in lation meant that was not accurate. Many banks have been accustomed to fact, is the principal test of the eligibility of paper, based, as I have stated, upon borrow on demand. The law does not the character of the statement that the bor permit the use of commercial paper as security to demand loans, but banks desiring rower makes. In the case of purchased paper, eligibility short loans may select from their port folio paper having about the required time will be determined by the statement of the person, firm or corporation on the to run. The Federal Reserve Bank of New strength of whose credit the paper is bought. If a reasonable excess of quick York has as members several of the largest assets over current liabilities is shown, as well as many of the smallest national banks of the country. Its facilities are open the paper is eligible. In the case of paper discounted by farm on equal terms to all and it is prepared to ers, unless the farmer makes a statement discount small as well as large notes. You (in which case the same test of quick as may be interested in a few figures as to sets over liabilities will apply), and if the exactly what discounting we have done. Thirty-three banks have applied for re proceeds are to be used for seed, fertilizer, feed, stock or current operating expenses, discount of paper, the total amount aggre it is eligible, but it is not eligible if they gating $8,061,919.93. Only four of those are to be used for lands, buildings or ma banks were located in New York City; the other twenty-nine outside of the City of chinery of a permanent nature. New York. The largest amount redis Eligibility and credit, of course, are not to be confused. All notes discounted by counted on a single application has been member banks are presumably good; some $2,182,500 and the smallest $1,700. The are eligible and some are not, according largest single note rediscounted has been to the purpose for which their proceeds are $300,000 and the smallest $25.40. (Laugh ter.) Most of our applications come from to be used. member banks up the State and largely in A renewal is an indication that the debt farming communities. I can say that the is.not self-liquidating. But the regulation makes the statement of the concern the paper that is offered for rediscount, which is manifestly paper made by farmers, and test of eligibility. Whenever the statement shows a reasonable excess of quick assets very largely issued to buy fertilizer, stock, over current liabilities, a note, even if re to some extent feed and other supplies in the spring season, has almost without ex newed, may be considered eligible. What ception been discounted, and much of it was is a reasonable excess varies with differ single name paper. It becomes double name ent industries. Packers maintain high paper, of course, in our hands, with the en credit if they have say $1.50 of quick assets for $1 of current liabilities. A manufac dorsement of-the member bank. turer of jewelry possibly might make a Applications for rediscount are almost statement showing a large stock of gold invariably acted upon when accepted, and the proceeds credited on the day of re where the margin of quick assets would be ceipt. There again is a delusion that in very small and yet the statement be a per some way or other there is a great deal fect test of the eligibility of his borrowings. of red tape to uncut in connection with The more special the line the higher the the operation of discounting paper at ratio expected, unless there is a sufficiently the Reserve banks. It is quite simple. A strong endorser to permit the ratio to be number of banks have admitted to me reduced. But the excess should always be that they sent in some notes for dis reasonable considering all the circumstances count just to see how it worked, and in the case. they did not really want the money. Many member banks in our district carry bonds on which, as occasion re (Laughter.) It is our practice to return paper for quired. thev have been accustomed to bor collection to the bank which rediscount row from ‘heir reserve agents. The law ed it lb out five or ten days before Its does not permit member banks to borrow ] ‘ 1 • : f Magr 22, »15 THE FINANCIAL AOE. 823 Fourth Street National Bank OF PH ILAD ELPH IA Capital $3,000,000 Surplus and Profits - 6,800,000 E. F. S H A N B A C K E R , JA M E S H A Y , Vice-President F R A N K G. R O G E R S , Vice-President R. J. C L A R K , Cashier President \V. A. B U L K L E Y , Ass’t Cashier W . K. H A R D T , Ass't Cashier C. F. S H A W , Jr., Ass’t Cashier Exceptional Facilities for Making Collections Throughout the World ACCO UNTS INVITED maturity. W e charge it to the bank's account on our books the day it matures. It ia not our practice to permit a mem ber bank to take up paper before the date of maturity exccpt in spccial cases where the maker of the note has been permitted by the member bank to antic ipate his note. In such eases we have generally allowed a rebate of interest at one per cent, below the current rate for auch maturity at the date the note is taken up. Member banks offering notes for rediscount should examine them carefully to see that they are in good order. One of the most difficult matters to deal with in the bank has been the large around of paper that appears with various technical irregularities. Too many of them altogether indicate that carelessness prevails in observing pru dent rules as to the way notes are drawn, dated and filled in. And such little irrita tion as has developed from thnse discount ing transactions that we have had with the member banks has been almost entirely due to the existence of this carelessness in Hie way paper is permitted to be drawn by the customers of the member bank. Dae to what I personally regard as an unfortunate provision of the aet it is also necessary to require a special endorsement on the paper discounted, which in cludes a waiver of demand, notice and protest. I may say that the Governors http://fraser.stlouisfed.org/ die twelve Reserve Banks have already Federal Reserve Bank of St. Louis recommended that that provision be elim inated from the statute if possible, but the practice now followed, of sending notes well in advancc of maturity to the mem ber bank for collection, will dispel any doubt as to whether endorsers will be held by presentation and demand at the proper time. ^ Now I would like to say a few words generally about the attitude of the mem ber banks towards the Federal Reserve system. There is some danger that the work of HrvanmiiK ami developing the banks will be retarded by two classes of bankers; on the one hand those that are liable to make extravagant claims for what the lianks run do and express possibly nversanguine expectations, and on the other hand, those who are prone to express un founded fears and criticisms. It takes time to do the work that is now bcin« under taken by the Federal Reserve Board and by the officers of these hanks, and according to my view the development of the system will not be as successful as it should be if unwarranted expecta tions of immediate completion of work are developed or an attempt is made to progress too rapidly without due regard to the real interests of the member banka, both those who are present mem bers and those state institutions which are in fact potential members of the fu ture. There is also some danger in the develop ment of unenlightened and uninformed crit icism. I do not want to go into that par ticularly just now. You have all heard it. I would like to feel that those who are af fected by the development of these banks are at least patient enough and loyal enough to give those men who are doing the work an opportunity to demonstrate by experi ence with the system what it can do rather than condemn it before any ex perience at all can be had with it. (Ap plause.) Another feature of the attitude of the member banks that personally I deplore —it is a natural oi:e, possibly—is a tendency to regard the Federal Rt.serve banks as de partments of the government. I am sure you will not consider that I am dealing with this matter in a trifling way when I say that some of the bankers who have called at our office have evidenced considerable uneasi ness when they came in to talk to Mr. Jay or myself, such, for instance, as they might display in calling upon some high officer of the government. Now that is all wrong. Member bankers must bear in mind that they own these banks. Every dollar of their assets belongs to the member banks. Twothirds of the directors they have elected themselves; and the officers of the banks are appointed by those directors; atkd speaking for onr bank I have no hesita tion in saying that if that bonk ia not properly m u u fe d it Is largely the fault THE of t*ic member banks of that district for not electing proper directors or seeing that proper officers were elected. The disposition to regard the banks as a de partment of the government is, however, fairly natural owinx to a feature of the Federal Reserve Act that is quite unique in legislation in this country. Banking legislation in this country, as Con gressman Fowler suggested, has Wen discussed and passed somewhat upon the theory that the hanks needed regulating, just as the railroads needed regulating. In the case of the railroads, statute; and regu lations were passed and adopted and a spe cial body was created l>v Congress to ad minister this law. Unfortunately the Ameri can people are altogether too prone to point out evils existing in our economic life, cry for the passage of some law, rejoice over its enactment, and then subside into a happy lethargy, thinking that the pass age of the law has accomplished every thing, that it will work some revolution. As a matter of fact the accomplishment of the purpose of such legislation depends up on its administration and in the case of the Federal Reserve Act quite a new plan of administration has heen introduced. The government has in fact loaned its credit in. a very important way to these banks. They are the instruments through which notes bearing the obligation of the govern ment are to be issued. The security for those notes remains in the office of the bank by which they are issued. The gov ernment has therefore placed three direc tors in the lioard of the bank and appointed two of those directors officers of the bank to make them in fact not only partners in the management of the reserve hank but to recognize the responsibility resting upon the government for its management. Directing and supervising the manage* ment of the Reserve banks is a Government-appointed Board, with broad and nec essary' powers by which the system may be co-ordinated and safeguarded. Just the experience of the last six months has indicated many of the advantages of that arrangement. In the case of the regu lation of the railroads it is common knowl edge to everybody that for many years past there has been a species of antagonism, you may call it, at any rate a distinct line of cleavage, between the body that i« administering the Interstate Com merce law and the railroads that are af fected by it. Now that line of cleavage has resulted in much of the construc tive progress being wrung from one or the other body as the result of bitter lit igation carried to the court of last resort. Apparently in the reserve banks quite a different condition exists. Instead of developing a distinct line of cleavage between the regulating body and the banks these government directors and elected directors meet weekly or monthly in the banks, and the contact there resulting becomes rather a point of fusion. I can see many cases where difficulties that might develop at those points of contact are very easily dealt with, and I feel especially hope ful of the success of that feature of the http://fraser.stlouisfed.org/ Federal Reserve Federal Reserve Banksystem. of St. Louis . f» ! 9 * — — — FINANCIAL Vol. X X X I, No. 21 AGE. I would like also to refer to one rather important matter that is peculiar to the present time. It is undoubtedly a fact that some bankers in this country feel that the expiration of the Aldrich-Vreeland law, its operation expiring by limitation on June 30th, possibly weakens our situation. They look back with satisfaction at what was ac complished in August, Septeml>er and Oc tober of last year in that great crisis by the ability of the banks to promptly furnish currency through the operation of that law, in fact, to convert their assets into a circu lating medium. Some inquiry' has lieen made as to how well prepared the Reserve Banks might be in case some emergency arose that required a similar treatment of the situation. I would like to read some figures to indicate in a measure what has been and what 1 think can be confidently counted upon to take place if any such occnrrcnce did develop. In 1907 the reports made by the national banks to the Comptroller of the Currency as of August 22nd showed that the national banks of the three central reserve cities held $14,000,000 of excess cash reserve in their vaults and that all the other national banks in the United States held $77,000,000 excess cash reserve. No call was made until after the worst effects of the panic of the fall of 1907 had passed; that is. until December 3rd. The call of Decem ber 3rd showed that the national banks in the three central reserve cities were de ficient $32,000,000 in cash reserve, and that all the other national lianks of the United States held an excess cash reserve of $122,000,000. Now the effect upon our banking system of this sudden withdrawal or shifting of bank reserve, in addition to the withdrawal of money which was un doubtedly hoarded at that time, can hardly be estimated. I would like to contrast those figures with the reserve situation of last summer and fall. The call of June 30, 1914, showed that the national banks of the three central reserve cities were deficient <6,000,000 in their cash reserve and that all the other banks of the country had excess cash re serves of $56,000,000. The call of September 12th, 1914, disclosed that the cash reserves of national banks in the central reserve cities were $45,000,000 deficient, and all the other national banks of the country were 900,000,000 excessive. Contrast these fig ures with 1907. It means that in 1907 the country national banks and the national (tanks in the reserve cities accumulated about $50,000,000 of reserve money that they did not need, and last fall, in the face of a possible calamity far worse, from our point of view, for the gold reserves of Europe were closed to us, the country banks actually accumulated only $4,000,000 of ad ditional excess reserve. Undoubtedly that was largely due to the influence of the ex istence of the Aldrich-Vreeland Act and to its prompt operation. Now what can the Reserve banks do after the expiration of the Aldrich-Vreeland Act? In the first place the Aldrich-Vreeland associations were admittedly barely organ ized last fall. _ They had a p»per organiza tion only. They had no clerks, they had ncN offices, they had no machinery, they had no credit information except what could be gathered from the banks that participated in the management of the affair. These twelve Reserve banks have complete organi zations, they have credit information; they have stored in Washington already $300,000,000 of notes, and on July 1st they will have $.>00,000,000, and the supply will be kept at about $500,000,000 or over. And I think sight has been lost of the fact that these Reserve banks have over $250,000,000 of "untouched cash assets. Sometimes it is a little difficult to be patient with criti cism that compares the facilities that ex isted last August, say, with those that ex ist today with these twelve banks in full operation. Now just one word in conclusion of a more personal character. The men who are managing these twelve hanks—and I am now well acquainted with nearly all of them —believe that they are performing a public duty. It may be that they are mistaken in that idea, but I do not think so. And they feel that they are entitled to have the support of the banks for whom they are really working; and that support to day will l>e best evidenced by patience in waiting for results. It may also be ex pressed by a statement of my personal views as to what should be done in regard to fa cilities for the admission of State banks to membership. No reform of our banking methods in this country will be complete and satisfactory to the country until it includes all banks, at least all banks that do commercial banking in one comprehen sive system. I firmly believe that if a reg ulation can be issued which will appeal to the State bankers of the country as fair, not as evidencing an intention to buy their allegiance, and, on the other hand, not evi dencing an intention to bar their admission, that we can then afford to let them work out that particular feature of the problem themselves. Our duty will be to make the system attractive to them and wait for them to come in if they want to. Gentlemen, I am sorry to have taken so much of your time. You have listened very patiently. Permit me to thank the bankers of this State for extending to us an invitation to address them on this very important matter. The Chair desires to anndunce the names of the members of the Nominating Com mittee—Charles H. Laird, Jr., J. VV. Lushear and Wessels Van Blarcom. And the Resolutions Committee—W . H . Taylor, F. A. Phillips and F. Mr. Riley. We will proceed with the program with an address on "Bank Publicity.” by Fred W. Ellsworth, of the Guaranty Trust Com pany of New York.
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