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Address of Hon. Charles S. Hamlin Governor Fedoral Reserve Board At New England Bankers Convention June 19, 1915 Reprinted from the UNITED STATES INVESTOR Address of Mr. Hamlin Mr. President and Gentlemen: I can not tell you what a great pleasure it is to me to be able to come into dear old New England again, if even for a few hours, to meet the members of this great organization. It was also a very great pleasure to hear the re marks of His Excellency, the Governor of this great State, and to hear W iia t ex-President Taft, that great American citizen, had to say to us all last evening. I think I can say with some confidence that the re spect and admiration of the people of the United States for ex-President Taft is not confined to any one po litical party. If it were, I should say it would be a monopoly under the Sherman A nti-Trust Act. I think we can say that the American peo ple, generally and universally, have foe greatest admiration and respect for him, and especially for the assist ance that he is rendering day and night in the interests of good govern Fage Three ment, local and national, in the Unit ed States. STATE AS W ELL AS NATIONAL. It is very interesting to me to attend this convention of the bankers of New England, and it is especially interesting to realize that here are represented not only the na tional banks, but tne state banks and trust companies, and, I suppose, the great savings bank Institutions of this district. Before leaving Wash ington I had a compilation made of the banking power of this F irst Dis trict, the center of which is the Fed eral Reserve Bank of Boston, and I was surprised to find that the na tional banking power consisted only of about 28 per cent, totalling $928,000,000; the banking power of the state banks and tiie trust companies was about two-thirds of this, $666,000,000, or a little over 20 per cent of the whole; while the wondrous re sources of the savings banks gave a banking power of $1,665,000,000, or 51 per cent of the total. I think that we must realize by these figures toat In considering the new Federal reserve system estab lished by the Federal Reserve Act we have got something more than national banks to consider. And only recently the Federal Reserve Page Four Board has issued its circular and regulations as to the admission of state banks and trust companies into the Federal reserve system. I think it must be apparent to anyone that in order to have a really co-ordinated system of banking we need the great state banks of the country, and signs are not wanting that these great banks are going to enter into the Federal reserve system, making it more powerful than it could possibly be when confined to national banks alone. FINANCES N EVER B E T T E R . The condition of the banks of the United States was never stronger, I suppose, In the history of our country, than it is to-day. We have something like $8 0 0 ,0 0 0 ,0 0 0 in excess of the legal reserves in the national banks alone, and if you com pute what excess is in the state banks and trust companies, it reaches perfect ly stupendous proportions. We have re serve deposits in the Federal reserve banks, payments already made, of about $300,000,000, and payments on capital of over $50,000,000, and you have a power in the Federal reserve banks to-day, if necessary, to Issue Federal reserve notes between $400,* 000,000 and $500,000,000. I think It would be a conservative estimate Page Five to state that we have the facilities for granting credits of at least five, or perhaps six, billions of dollars, to* day, if any such increase were neces sary. I think that gives a faint idea of the soundness of the position of the great banks, state and national, of the United States a t the present time. But I cannot help running back some months to the conditions we had last fall, when our foreign trade was for the time being disrupted and it was found that the United States owed abroad an indeterminate sum, perhaps $400,000,000, or perhaps $500,000,000, payable in gold, and we did not know raow we could pay it; we had the gold, but we did not know how we could send it abroad; the conditions in those days were very different from the splendid con ditions of to-day. You remember, of course, the gold pool of $100,000,000 which the Federal Reserve Board, ju st after the members took the oath of office, were asked to collect from the banks throughout the United States. And the fact that these banks gave more than $100,000,000 was a splen did tribute to their patriotism. I firmly believe if we had asked for $200,000,000 or $300,000,000, the amount would have been instantly Page Six forthcoming. As a result, uncertainty was turned into certainty. Possible disturbance was turned into ABSO LUTE CONFIDENCE, and, as you know, of that gold fund of $100,000,000, a paltry sum of perhaps $10,000,000 was ail that rnad to be sent out of the United States. You all remember that Sir George Paish, the British economist, was sent over by the British Govern ment, at our request, to confer with the Secretary of the Treas ury and the Reserve Board, and devise some method of settling the gold ob ligations of the people of the United States to foreign countries, whicn were, as I have said, somewhere about $400,000,000 or perhaps $500,000,000. And we discussed it in the most friendly manner. Each side wanted nothing that was not right. We wanted to do what was right Im mediately, and we made up our minds that the United States could pay every obligation payable in gold with out trouble and without delay, but as our negotiations went on we found that conditions were rapidly <&anging, and we suddenly woke up one morning and found, after all, that there was no problem at all, th at the tide had turned, and that soon we Page Seven might have to discuss credits to be given to foreign countries and their cit izens, rather than credits to the Unit ed States. In place of being a debtor nation on current transactions, we woke up to the fact tiiat we were a creditor nation, and, more than that, we have got to give credits to the people of the south— of South Ameri ca—and people on the continent, who must trade with us, and yet who find it very inconvenient to send us the gold to pay for our fcuge and daily increasing exports. But, of course, we must remember that wftere we grant these credits, in the long run they have got to be met by either the payment of gold, ot by sending us back our securities, or by sending us goods in exchange. I think we all realize to-day the im portance of international trade, but it is not so many years ago that phil osophers and some political econo mists said that international trade was not gainful; that the precise gain of one nation was the precise meas ure of the loss to another nation. But that idea has not survived, and we appreciate to-day that in internation al trade there is a GAIN TO BOTH SID ES. But when we speak of international trade we must remember that it must Page Eight consist of buying as well as selling; in fact, every bale of goods that goes out of the United States, in the long run must be paid for by a bale of goods imported into tne United States. And every country that ex ports, in the long run, must take payment for Its exports in imports from the other country, or from some third country on account of that other country; and only the balances are settled— can be settled in gold. A country like the United States could not suppress all imports and continue to export If it did, in three or four years the United States would have practically all the gold in the world—and what would we do the fifth year? Of course, long before that would happen, the increase of gold in this country would so force up prices, and start such speculative activity, that our exports would soon reach such prices that they no long er could continue. The United States is in a bet ter position to-day than ever before to increase its foreign trade; to give credit facilities to countries who want to trade with us, and who yet cannot find it convenient to send us gold in direct payment; and also to finance our multitudinous domestic transactions, and that favorable po Page Nine sition that we are in today is large ly due to the fact that we have to-day a system of banking in which the people of the United States HAVE SUPREME CONFIDENCE. Tnere were various plans pro posed to remedy the evils of the old banking system and some to day think periiaps some other plan might have been better. But I think all agree that the Federal Reserve Act is a very long step, as ex-President Taft said, in the right direction, and many of us believe that it was the best step that could possibly have been taken. Now that favorable posi tion that we are in to-day, as I say, is due largely to the Federal reserve system established under the Fed eral Reserve Act through the consol idation of the reserves that it has brought about; through the lowered reserves that it has established; and through the system of truly elas tic currency which that Federal Re serve Act has inaugurated. Such is the confidence to-day in our financial system t!*at the terri ble act of blowing up the "Lusi tania,” from a financial point a* view, created hardly any impression in the United States. And I think that is one of the greatest tributes to the soundness of the system which Page Ten we are enjoying to-day. If that had occurred under our old system—be fore the Federal Reserve Act enact ment, I believe that we should have seen a condition in the United States exceeding in intensity that which we went through in 1907. We must remember at the outset that the Federal Reserve Act has not increased the money of the United States in circulation or in the banks. It has not added one dollar. It has merely made it P O SSIB L E TO UTILIZE MONEY held by the banks and the people in a more extensive way than It could have been utilized before. If we consider the old reserve re quirements—for example, on March 4, 1915, the latest date that I have, we had an excess of legal re serves in the national banks of over $731,000,000; but if we had applied the reserve requirements of the old law tiiere would not have been any such excess. The excess would have been only $185,000,000, which was actually a lower excess reserve than we had in a critical time during the panic of 1907. So, also, if we applied the old law as to reserves on March 4 or this year, the banks of the central re serve cities would have shown a defi cit of $12,000,000, whereas, under the Page Eleven new reserve requirement, they showed an excess of $127,000,000. The lowered reserve requirement of the Federal Reserve Act amounted prac tically to over $500,000,000. That showed conclusively -the confidence of the country that those old reserve re quirements were excessive and un necessary, and, as I shall try to show, unduly hampered and put in a strait-jacket the business and enter prise of the people of the United States. But before we turn to the Federal Reserve Act it is well to consider two or three glaring defects of the old system. We had under that sys tem 7,500 independent banks and 7,500 independent reserves. There was no co-operation between the banks. There was a kind of co-opera tion in reserves through the ability to place reserves in the reserve cities, but that co-operation I think all will agree to-day was one of the great dangers of the old financial system. We had, then, 7,500 independent banks, with their 7,500 independent reserves. The great anomaly of that old law was found in the TREATMENT OF RESERVES. When you speak of reserves, you ordinarily refer to some* thing that can be used, but under the Page Twelve old National Bank Act that was pre cisely what you could not do with the reserves. They were hermetically sealed up, and if any bank dropped beJow the legal requirement, only the forbearance of the Comptroller prevented his putting in a receiver if that condition was carried for thirty days. That, now, was certainly an anomalous condition. On the conti nent, in times of stress, all banks paid out freely. Under our old law, in times of stress, the reserves were hermetically sealed up to the busi ness men, who could only look on the reserves in the banks—the national banks—of the United States, but could not secure any benefit from their use. They were almost in the position of a man almost dying from starvation, look ing through a plate glass window at every delicacy in the way of food, and on which he reads an announce ment: “This food is for your express benefit. You may look at it, you may ^njoy the delicious fragrance, but un der no circumstances can you eat a particle of i t ” Now, that was the condition of the reserves of the Unit ed States before the enactment of the Federal Reserve Act. And as a result of this independence of banks, the banks, being independent* had to Page Thirteen fight for their own lives, and in times of stress they had do build up their reserves far beyond the legal lim it In the panic of 1907, in one of the worst stages, of that panic, there was over $200,000,000 of excess reserves in banks throughout tie United States. If these reserves had been co-ordinated, we never should have had that panic a t all. The banks having to take care of them selves they had to fight for their lives and let the devil take the hindmost, the hindmost generally being# it may be said, their poor customers. And in piling up their reserves, they had to call loans and refuse to make new loans; and the moment that the banks began to hoard money that was the signal for hoarding by the individual* I think you will find in the history of finance that hoarding of individuals rarely, if ever, occurs, except following the hoarding of frightened banks* I think there is no more grewsome spectacle in our financial history than a frightened bank calling in its reserves, piling them up, Pelion on Ossa, and allow ing its poor customers to get along as well as they can* The national banks under the old system were like an army going into action, an army of individuals, without a single offiPage Fourteen cer, without a single company, bat talion or regim ent But all that, as I said, has been done away with by the Federal reserve system. TH E DISCOUNTING OF PAPER. The banks also, as you know, en gaged in the discounting of commercial paper, and that paper was dead until resurrected at the time of maturity. When it was discounted the banks would lower that paper tenderly into their vaults with almost funereal cere mony. In fact, the national banks really were mausoleums for dead commer cial paper. And if any bank presi dent with financially ghoulish pro pensities should open the grave and take out any of that paper and try to sell it before maturity the finger of suspicion would be pointed at him and his directors. The Federal Reserve Act has made that dead commercial paper fairly quiver with life. The bank can now have its cake and eat it, too. It can loan its funds and take commercial paper, and yet that com mercial paper is gold in that the bank has merely to step across the street to the Federal reserve bank and there it will be turned into gold or cash credits on demand. The fact that commercial paper was not liquid forced banks under the old system to send their money to Page Fifteen some place where they could get it back, and that was the explanation of the call loan on stock exchange collateral. But that was a will-of-thewisp. Theoretically tfrat was a pure liquid investment, but when you tried to realise on these investments, their liquidity vanished* It was the liquidity of solid ice rather than the liquidity of water. And we saw in 1914, when an effort was made to realize on these liquid assets, the stock exchange quietly closed, and that ended every semblance of liquidity. NATIONAL BANK NOTE SYSTEM . Then, we had the system of na tional bank notes. Those notes were supposed to furnish an elastic cur* rency, but there was very little elas ticity in them. During times of in creasing business, when we needed to expand, these stupid notes would often contract; and a t times when contraction was demanded, they as often would expand; and even when they did comply with the demand for expansion, they often would not begin to expand until the demand for expan sion had long since ceased. These notes were tied to government bonds. My friends, government bonds have nothing to do with the interests of trade and commerce. Government bonds represent the dire necessities Page Sixteen of the government in the p ast They were fixed in amount, they fluctuated in value absolutely regardless of the necessities of trade or business, and yet the national bank notes were tied absolutely to them, and dependent upon their fluctuations. It was cer tainly an extraordinary alliance; the national bank notes, supposed to be the measure of the trade expansion of the country, were tied to govern ment bonds which represented the destruction, the vast destruction, of the property of the country. In other words, the national bank notes repsenting the expansion of trade of the twentieth century, were linked to government bonds, representing the destruction of trade during the nine teenth century. Now, there may have been some reason for that strange alliance in the nineteenth century,—the desire to sell government bonds. But there is no reason for such an alliance to day, and the Federal Reserve Act provides a method by which these notes can be put out of the way and a truly elastic currency substi tuted. Why, Japan followed our national banking system at first, and issued national bank notes sim ilar to ours, and after a short trial she sent that system to the scrap Page Seventeen heap, just as we would send an old, worn-out warship that had outlived its usefulness, it was so insufficient for the necessities of trade a t the present time. UNDER OLD SYSTEM . Under the old pyptero, our banks oould not finance our foreign (trade, through acceptances. They were un able to loan their credit by accepting bills of exchange, and there was a great deal of trouble and expense placed on our merchants, because of that unwise limitation. We import enor mous quantities of silk, raw and man ufactured, from the Orient. The Bilk is hurried over on the ships, and special trains take it east, and yet the bill of exchange, drawn abroad by the seller, is drawn on a foreign bank, and while the goods go due east to our country, the bill and other docu ments go through the Suez Canal to a foreign country, or, worse, it goes right through this country on its way to the continent, sooner or later to be returned so that the purchaser may discharge his ob ligation. Now this has been changed, so far as relates to the foreign trade, by t'ne Federal Reserve A c t A mem ber bank can accept bills of exchange in relation to that foreign trade, and it means that sooner or later we are Page Eighteen going to be able to finance our for eign trade ourselves, and not have to pay tribute in the way of commis sions to foreign banks and foreign bankers. T h e Federal Reserve Act is a very long and somewhat detailed doc ument, and it is not easy to extract all the essentials from it from a cas ual reading, but the underlying principles of that Act ARB SIM PLICITY IT SE L F. The country is divided Into 12 districts, and each district contains from 600 to 700 national banks. The national banks of each district form a new bank, called the Federal re* serve bank. That is simplicity Itself. The capital of these 12 Federal re serve banks varies from $5,000,000 to $20,000,000, and the total capital of the 12 banks, as they stand to-day, is something over $107,000,000, so that you have these 12 Federal reserve banks looming up like moun tains, supported by the nation al banks and the state banks that later come In, in the respective dis tricts. That, as I see it, Is simplicity itself. Now there is a great difference in the population of these 12 Federal reserve districts. There are a good many bankers, men of the highest Page Nineteen ability, who would prefer one central hank in the United States, like the one suggested in the so-called Aldrich Cur* rency A ct They thought that would he more economical and better. It would not have been more economi cal as investigations that we are making will show that the expenses of a central bank would' be greater than any possible expense in curred by the Federal reserve sys tem, but that is another story. They wanted, as I have said, one central bank in Washington, with branches all over the country, in analogy to the great central banks in foreign coun tries* That is a question I will not enter into to-day. I merely want to point out one thing. The words “Central Bank” on the Conti nent mean an entirely different thing from one central bank comprising *the whole of the United States. For ex ample, the Federal Reserve Bank of Chicago has a population of about 12,000,000 people, larger than the popu lation of Norway, Sweden and Switz erland combined. I think you will agree that is a very respectable*sized central bank in itself. Again, *the area of the Federal Reserve D istrict of San Francisco is so large that you could put within it Great Britain, Con tinental Italy, France and the German Page Twenty Empire, and then you would have area left over larger than the total area of New England, excluding only the State of Maine. So 1 think you will realize that the Federal Reserve Bank of San Francisco is a BANK OF ENORMOUS AREA, and, of course, having a very large population, I think you will also realize that we have 12 essentially central banks. And it would be a very complex and difficult problem to ioin these banks in one enormous centra! bank situated in Washington. Now, these 12 Federal reserve banks have to have capital. They have to have money to loan, and where do they get it? Well, each national bank contributes 6 per cent of its capital and surplus. Eacft national bank has to turn over approximately one-third of its reserves to these cen tral Federal reserve banks. And the national banks of the country have already paid about $300,000,000 In reserve money to the Federal reserve banks; and they have paid ju st half of the capitalization, something more than $50,000,000. Now at the end of the third year, when the Act is in full fiorce and effect, the Federal re serve banks will hold at least $400,000,000 reserve money from the banks, and they may hold as high Pag© Twenty One as $600,000,000; bo yoa will see they will be a very decisive factor In banking conditions in the United States. In addition to these resour ces,* amounting now to $350,000,000 to $360,000,000, and amounting ultimately to $600,000,000 to $700,000,000 at least —tbe Government of the United States has the right to make its deposits in the Federal reserve banks; and of course you will easily see what an enormous addition that may consti tute to the resources of the Federal reserve banks. Now the only stockholders of these banks are the member banks, that is, the national banks, and the state banks and trust companies that en ter the system In each district. They cannot sell that stock; they cannot hypothecate that stock. They are en titled to a cumulative annual divi dend of 6 per cent, and all over that, with the exception of a surplus fund requirement, goes to the United States Government as a franchise tax. Another important point to re member is that all the assets of these Federal reserve banks are, in ef fect, trust funds. They are held In trust by the banks for the benefit of the agriculture, commerce and In dustry of the United States, There Is an absolute divorce from the call Page Twenty Two loan on the stock market; not a dol lar of this money can be placed in any such investments as the call loan, or on stock exchange securities. Un der the old system, the call loan was the barometer of the financial condi tion of the country; it was the cen tral ring of the circus, so to speak, in fact there were no other rings at all; but under the Federal reserve system the call loan on stock exchange secu rities is relegated to the side show in the circus, along with the bearded lady and the fat boy. It is no longer the center of interest. We can look on the stock market—on the call loan market, now, with absolute indiffer ence. It may go up to 100 per cent, it is no longer going to frighten the banks and the merchants and the ag riculturalists of the United States. These Federal reserve banks are managed by nine directors; three are elected to represent the banks directly, by the bankers; three, rep resenting the agriculture, commerce and industry of the district,— they are also elected by the bankers; and three are ap pointed by the National government through the Federal Reserve Board. Thus we have on each board nine directors, three representing the banks directly, three representing ag* Page Twenty Three ri culture, commerce and Industry* and three representing the Federal government through the Federal R * serve Board. So you have there the banks, the public and the government all interested in the management of these banks* And remember that all profits made by these banks other than the 6 per cent dividend and the accumulated surplus fund, are takeu by the government as a franchise tax. That in a word Is the Federal reserve system. Now these Federal reserve bank* are absolutely independent, one of the other. They may make deposits under certain conditions with one another and tSiey can rediscount dis counted paper held by the other Fed eral reserve banks—they can do that voluntarily with the 'con sent of the Federal R®" nerve Board, or they can be made to do it by an affirmative vote of five members of the Federal Reserve Board. Up to the present time the banks are showing a perfectly friendly desire to assist one another In every possible way, and I think there will not be the slightest friction growing out of that power of thu banks, or of that still greater power of the Federal Reserve Board. It Is one co-ordinated system, but there Page Twenty Four are 12 independent banks. They are co-ordinated and given the benefits of one central system through the controlling power of a public body, the Federal Reserve Board in Wash ington. Now this Board HAS V ERY GREAT POWERS. It has absolute general con troi over the Federal reserve banks and almost, by necessary im plication, as large powers of control over the member banks.. It has pow er to remove any officer of a Federal reserve bank for cause; it has power to suspend the operation, or even to liquidate a Federal reserve 'bank; it has the power of definition of commer cial paper which can be discounted by the Federal reserve banks; it has final power over the discount rate es tablished by the Federal reserve banks throughout the country; it has regula tory power over acceptances of mem ber banks and over the discount of acceptances, by the Federal reserve banks, and it has regulatory powers as to open market operations, in the way of investments by the various Federal reserve banks; it has the great power to sus pend any or every reserve require ment of the Federal Reserve Act in case of necessity, and I think you will see what a great grant o f power Page Twenty Five that is. I am sure, however, expe rience will demonstrate that the Fed eral Reserve Board will exercise its great powers wisely and carefully tor the best interest of the hanks and of the people of the United States. There is also another body, the Federal Advisory Council* consisting of one member from ea>ch district, elected by the Federal reserve banks of the va rious districts. They are an advisory body. They come to ,us—they have the right to come to the Board and consult with us and advise us on all matters connected with the operation of the Federal Reserve Act, Now, as I have said, the Federal Reserve Act has cured the defects I have enumerated in the old system. In the first place, it has provided foi consolidation of the reserves which it has taken from the banks, although the Federal reserve banks are ready to pay them out in discounting paper whenever the banks want to come to them for it. That alone is a tremendous regulatory power, and a power, I believe, fraught with the greatest good to thu banks and to the commerce and ag* riculture of the people of the United States. It also provides for the redis counting, as I have said, of com Fage Twenty Six mercial paper, and it makes that paper held by the banks just as good as gold. It has made commer cial paper a truly liquid investment, and I think experience will show again, as it has shown, that there is no more safe, sane or liquid invest ment in the world than commercial paper under proper restrictions and regulations. It has further lowered the reserve requirements by some 400 or 500 million dollars, and the result is to increase greatly the power of the banks to accommodate the business people of the United States. Furthermore, when you take Into consideration the power over discount rates, you will see what tremendous power the Federal reserve banks and the Federal Reserve Board have in regulating the flow in and out of the United States of the precious metals. It has also provided a system of elas tic currency. We have power to issue, to-day, practically 400 or 500 millions of Federal reserve notes, If there were any necessity therefore. The power, you will remember, was given under the Aldrich-Vreeland Act to issue emergency currency. The Federal Reserve Act made that currency practicable by lowering the rate of taxation. As originally passed, under the Aldrich-Vreeland Act of Page Twenty Seven 1908 the rates of taxation upon the notes were so high that their use was practically impossible. The Federal Reserve Act temporarily extended the Aldrich-Vreeland Act, greatly lowered the rates of taxation upon these notes, and we were able to settle speedily the threatened panic begun last summer, about the first of August Some people have asked, “Why not extend the Ald rich-Vreeland Act? W hat need was there of another currency law?” The Aldrich-Vreeland Act was AN EMERGENCY MEASURE. The very name "emergency" cur rency” disturbed the country. It meant trouble* The Federal reserve notes will prevent a panic ever oc curring, while the Aldrich-Vreeland notes would simply put an end to a panic when It had reached, perhaps, Its height The whole method of ex amining the securities behind the Al drich-Vreeland notes was unsys tematic, It was not proper banking. I remember, about the first of August, I had to go to New York hurriedly and examine securities and issue the Aldrich-Vreeland currency. Mr. Hard ing was with me, and you will Imag ine the task we had there for two weeks examining this collateral. It was almost more than two people could physically accomplish, and it Page Twenty Eight was most difficult to give that col lateral the careful scrutiny that good banking practice demanded. However, the panic was averted, but, as I have said, in the future, with the Federal reserve system, you will not have any financial panics, you will be taken care of, in my judgment, easily and speedily through the Federal Reserve notes. The other day I was in Kansas City district and I asked the Gover nor of the reserve bank to compute for me the maximum sum that they were ever able to get by way of relief from the outside of their district In times of strain. He told me the amount, I have forgotten what it was. And I said, “How much relief could you give through the Federal reserve notes If there should be necessity for it?” Ht> figured out that he was prepared to give many times as much relief to his district from the issue of Federal re serve notes, as it had ever been able to get in times of stress from outside that district from the rest of the United States. These Federal reserve notes are truly elastic currency. They are not tied to Government bonds, they are tied to individual transactions of trade and commerce and agriculture. As trade and commerce and agricul ture increase, these notes increase; Page Twenty Nine when trade is depressed or recedes, the notes come in automatically and are withdrawn. They are covered by gold reserves of 40 per cent, and I cannot see any possibility of inflation unless you call inflation a responding to the legitimate needs of the com merce of the people of the United States. I think they will furnish a truly elastic note currency. They will make financial panics and trouble practically impossible for properly conducted banks in the future. Now the national banks, as I have said, have been given by the Federal Reserve Act the power to accept FINANCE ACCEPTANCES bills of exchange in the foreign trade and that means very much. The Federal reserve banks are furthermore given power to discount these acceptances in the foreign trade and you will realize what that will mean to the people of the Unitea States. The national banks are also given power to establish foreign branches. They have already estab lished branches in Argentina, in Brazil, in Panama, and in various other places. Then, the Federal re serve banks are given very great powers in addition; they can open banking accounts in foreign conn tries; they can establish agencies in Page Thirty foreign countries, they can appoint cor respondents in foreign countries,—for the purpose of buying and selling bills of exchange arising out of com mercial transactions; they can deal in gold coin and bullion a t home and abroad, and you can see, in connec tion with the power over the discount rate what power that will give to the Federal reserve banks, under the guidance of the Reserve Board, in fixing the flow of gold and precious metals into and out of the United States. We have ju st established our reg ulations for the admission of state banks, and Trust Companies and with out going into these regulations I want merely to express the earnest hope that every state bank and Trust Com pany in the country, doing a commer cial business, may ultimately find it for their advantage to enter the Fed eral reserve system ; and I firmly be lieve that in the near future we shall see that privilege exercised. We have given these banks the right to with draw from the system a t will on giv ing a year's notice; we have tried in every way to preserve to these state banks and trust companies the rights which their individual states have given them where they are not specifically cut down by the Fed Fage Thirty One eral reserve system; and we be lieve we are going to establish such co-ordination between the na tional banks and the state banks and Trust Companies that the privilege given to enter that system will be seen to be of the greatest value. And I be lieve in the near future there will be but one broad distinction throughout the United States, and that distinction will be a member bank and a nonmember bank; and that the prestige of membership in the Federal reserve system will be such that no well-regulated, strong state institution can afford to be with out. We hear criticism s of the Fed eral reserve system. We hear that there is a loss of interest to banks, that they can get interest on their re serves with their reserve agents, and that at the end of three years we will have done away with th a t But any bank president who feels that way I would ask to compute what the lowered reserve under the Federal Reserve Act is, and find out how much of his reserves have been re leased, so that he can bank on them and loan them, and if he will do that he will find that his bank will make very much more loaning them at simple interest than he <oould ever Page Thirty Two possibly have made out of these reserves at 2 per cent interest on deposit with reserve agents. T hat is not a question of opinion, it is a question of mathemat ics, and I think that will answer it for any bank president who will fig ure It o u t Some bank presidents come into Washington and say, “We cannot do anything with the Federal reserve bank, we have no paper which It will rediscount,'* and we ask him to go over with us his portfolio, and in most cases I find that much of the paper he has is readily, freely, Joyously, to be discounted with the Federal re serve bank, and he is a very much astonished man. But If any bank president finds that he has no paper that could be discounted by his Federal reserve bank, I think that he ought quietly to go home and call his directors together and bring his bank back to a commercial institu* tion, from which It has evidently strayed away. NOT CREATED TO MAKE MONEY. Some bankers say: “We are not getting any money. The Federal re serve banks are not paying divl* dends.** I think that is the weakest argument against the success of the Federal reserve banks, if It were true. Page Thirty Three The Federal reserve banks were not established to make money. As you know, all the earnings over the 6 per cent dividend and surplus fund —every dollar goes to the govern m ent They were established as in surance for their member banks. X was in California two or three months ago. I asked the governor of the reserve bank to compute what loss it would be to the member banks If they had to pay every dollar of the expenses of the Federal reserve bank, and he figured out that If they had to pay the entire expenses and no dividends were paid a t all, It would reduce the profits of the banks in the San Francisco district by the amount of one-fiftieth of one per c e n t Now, that is a pretty low rate of insurance for your banks, If even the expenses were not earned. But, my friends, the minute business starts up again, you will see the Federal reserve banks easily earning their expenses, and easily paying their dividends. Three, or four, or five, now are earning their expenses and are on a dividend basis, font that is absolutely imma terial. These dividends are sure to be paid. They are cumulative, but even if they were not, I think you will all see what low insurance the banks of this country are getting, Page Thirty Four through toe possibility of any time turning their commercial paper Into gold by simply crossing tho street to the Federal reserve bank. X earnestly hope that the mem ber hanks of this district will -begin to discount with the Federal reserve bank, no m atter whether they need it op not. They want to get over that feeling of shame in connection with rediscounts. Now, rediscounts under the old system, I admit, were sin, t\ut under the Federal Reserve Act rediscounts are righteousness. They are the very foundation of the whole system, and I want the member banks to learn to do i t One writer has said that the Federal Reserve Act wa* like an instrument which Congresb had presented to the American peoplu hut without teaching them how to Play i t You have got this NEW SYSTEM , and I hope the banks will es tablish cordial relations through redis counting, Just to see how it is done. Do not wait for an emergency. If you were going to buy a fire engine to protect yo,ur house, you would not wait until the fire occurred before you learned to operate i t A prudent man would learn how that engine op erated (before a fire started. If he did not the house might be burned down Page Thirty Five before he could get it into operation. I wish every bank in this district wo^uld take up that matter, ju st to see how easy it isf ju st to see how simple it is, ju st to get a guide to the ch arac ter of the bank officers, and I am sure they are all able men in this district. You have got a governor, I think, one of the best-equipped men in the United States for that responsible position, and he is on the platform here with me; you have as chairman of the Board a man splendidly equipped for that important office; your directors are able men, men enthusiasti cally working lo r the system ; but these men are human. They have their characteristics, they have their policies. And if your bank will sim ply go to them and start up relation ship with them, then, when the need comes you will be most surprised to see how quickly the whole thing can be brought about Now I wish I had much more time to talk with yQu about this system. 1 want to impress on you the feeling that the Federal Reserve Board to comprised of human beings, not ab stract entities, and we want to have the most cordial personal relations, not only with the Fed eral reserve banks, but with the member banks as well, and the people Page Thirty Six behind them, the customers of the member banks. I hope you will all feel at liberty at any time to write our Board a t Washington, and every letter we receive will be CAREFULLY CONSIDERED by the Federal Reserve Board. We feel that we are not thu repository of all human knowledge. I think there is hardly a day that we do not need help on almost ever> problem. And if you gentlemen will write us it will be appreciated. What ever you give us will be carefully considered according to its merits. Now t'aat I have finished what 1 have to say about the Federal reserve system, I feel that un der it the United States is in a po sition where it can truly claim to have one of the soundest banking systems In the civilized world; and it has come about a t a time when the Unit ed States is slowly turning from a debtor nation to a creditor nation. The enormous exports that we see going out of the United States every day, with the diminished Imports, means that the debts of foreign na tions to us, in the long run, can only be met by sending us gold or goods, or by returning our securities—and for my Part I have no fear of those securities coming back. Until we get them back Page Thirty Seven we cannot be a creditor nation, and we have the resources to take them back at good bargains. I see forces In motion that 'aave temporarily put the United States in the position that London used to be in and I firmly believe in the' ultimate future that you will see that condition made perma nent and then we can say that the United States of America stands fore most in finance among the great na tions of the world* Page Thirty Eight
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