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(i I 1 4/ Address at & Meeting of the American Eao&eri Association at Seattle, Ftashington, 8eT>t. by-P. A , Delano, Vice-Governor"of the servo Board. liluoh has already been eaid, end roll eaid, aboui^® Jedoral Hee-erye Act, sad It ID doubtful i f x can add saaything now. I wish, however, to call attention to some important featureb which have been accepted ae msro cojamonplaces, but which are really deserving of more notice than they have received, a'irst, it should be borne in mind that it was necessary to frame the now la:/ so as to provide for a complete change in our note issuing and credit basis, yet at the oamo time, so accomplish this as to cause no disturbance in business by the upsetting of our existing banking system. It was like the problem of reconstructing a £reat office building, changing an antiquated construction and substituting therefor stool and marble, yet accomplishing it all without serious inconvenience to the tenants. -Xho task was necessarily a difficult one and the law probided three years for its accomplishment. Under the old law, banhs were all independent of each other, reporting direct to the Comptroller of the Currency at Wellington, but eaoh bank for itself. The ownership of branches was forbidden, and thus it was that when the law went into effect there wore seventy-six hxmdrod separate and distinct National banks varying in capital from twenty-five thousand to twentyfive million, ard i | ' ^ i t i o n , SEP 03 1964-0 4 •: i approximately eighteen thousand yi'."1 P state banks, trust companies and savings "banks. 2hese banks were not organ!sod or grouped in any way except that those in throe large c i t i e s (How York, Chicago and St.Louis) were classed as Central Keserve Banks and were allowed to hold a large share of the reserve deposits of national banks in other c i t i e s , while another group was formed of banks i n s o m f i f t y cities known as Beserve C i t i e s , which were allowed to hold a considerable share of country hank deposits and in tarn deposit one-half their reserves in Central Reserve Banks. A third group represented a l l the banks in other and smaller c i t i e s , towns and v i l l a g e s , which wore classed as non-reserve city or country banks. Those* were allowed to hold a minimum of reserves (3.5$) and deposit three-f i f ths of it in Heserve and Central Reserve C i t i e s . Tnis ioosoly formed grouping of the banks did not bring about any real unity of action or an effective organisation and even though some coordination of effort was aceOuiplished by Bankers Associations, Clearing House Associations and similar voluntary organizations of banks and bankers, the fimdaiKontal idea underlying the A f r i c a n Banking System was "Everyone for himself and the devil take the hindmost." Che .frauiers of the new law were face to face with the problem of devising a way to retain the advantages of competition between banks yet so to group and assemble the banks as to make it possible to use reserve resources jointly aril effectively for the benefit of all and for trio protection of the public. i!his was accomplished "by creating tv/elvo different central joint stoolc banks, each of thorn the dominating or central "batik of a large area. (These banks as established represent from 835 to 982 member banks with a nominal capital ranging from $ 4 , 8 0 8 , 0 0 0 to £1,6£4,000 - only one-half of which has "been paid in. 'Chess central banks were not created to transact business with the public but primarily as their name implies, for the purpose of holding the reserve deposits of their owning banks. Among the important services which they may ren- der to their member banks, the most important is the right to rediscount their paper and issue bonk notes against it. Man- ifestly then, the first groat result of creating twelve ban&s has been to bind together all the national banks of the country into twelve strong regiments thereby creating- an effective solidarity. Who can doubt the immense gain in doing that, oven i f nothing else had been accomplished by the Act? It is as if a man wore asked to organise an effective police force in this splendid city, and found 7600 policemen all reporting to one chief. The first thing he would do would be to divide the force into divisions with suitable headquarters and a competent officer i n charge of each. deed, without developing the simile further i t should bo apparent without elaborate argument that the creation of twelve central reserve banks was, from the standpoint o.f In- effieienoy of operation alone, the gre&teet stop in aftrazoe which has been made in the banking history of this country. .Ho for ©nee has been ma© to the fact thai under the old system in effect for f i f t y years, there had beea developed a system of depositing reserves of smaller hanks with other and larger baafcs. This had lea. not only to serious duplica- tion of roserves which rapidly evaporated in times of stress, out in addition to this, the results of active competition for deposits led to many vicious practices, each as paying fcigfc rates of interest or granting special facilities or favors. Banks >ept reciprocal balances with each other a^.d by a system v;hi6h might he likened to the time honored plan of "you tickle me, X tickle you", they got ahead,- at least on paper. However, these methods were not conducive either to safe haul-in^ or to lew end stable interest rates for the public. Hence, it was that one of the objection of this new law was to malie b a l i n g less hazardous, make profits surer, cut to accomplish i t in such a way that the investor, the manufacturer, the merchant, each and a l l , could count on banking facilities in r;ood times and had and also a f a i r stability of interest rates. Banking which has to recoup big losses with big gains way be expected in a nev? and raw community, but ehoiJld not e^ist in a well established, orderly community such as our a. I am not a hanker by training, but I believe that the principles which apply to b a l i n g are similar to those which. apply to "business generally and require that losses must oe compensated by gains. It has "been repeatedly pointed out that the only way a merchant or manufacturer can permanently roduc© his premium payments is "by reducing actual losses. So it i s that a Federal Eeserve Bank can only "bo an effective Instrument for improving the condition of the District of its . domicile, b y protecting i t s member banks against loss, by relieving necessity and by intelligently forseeing and forc a sting events. Of course during the f i r s t three years when reserve deposits aro being gradually shifted from the reserve and central reserve city hanks, we shall bear grumbling « hut the far-seeing banker already appreciates that the immense advantages of the new system w i l l more than compensate him for the loss of reserve deposit's. But I may assume that there are some skeptics i n this audience, some gentlemen from lii.fisouri, perhaps, who want to he vhovni, say f i r s t , was, 2o them I must you must admit that the old scheme of reserves to say the least, very faulty. Vfhen you needed it- most you did not have it and in fact as it was counted mostly tec©, there really wasn't enough to go around when as in the f a l l of 1907 everyone called for i t at once. new plan seeks to put the reserves where you csn' count on them. Xn,a bank o f which you,.and .the other con- fxECROO < PiY f •I'xERO |COPY| > • » tri outing banks of the district are the sold stockholders, i your stock is assured a 6fi return and a i l earnings above that go to the government, after the central bank's own reserves have "been strengthened. She reserves in tho (Central) ?:e~ sorve Bank of the District are used expansively ay the has is of note issue, so that instead of these reserves."being un- i available in tine of need, they are at once available to the fullest extent. The operation, simple enough to nest of you, consists in allowing member hanks to bring around tfee.tr commercial paper, and provided it complies vrith the not onerous provisions of the law and ru3.es of the federal He serve Board, j you are given a credit on tho ooolis of tlie bank or, at your option, the federal Reserve notes for tho full amount, 'issuing notos to yon, tho When federal Heserve Bank deposits against &ioh note issue, and as additional seoority above the eooaercial paper hearing your endorsement, 4 0 $ in gold. In other i/or&s, the reserve deposits t&ich jour baxik: and others have contributed become potentially capable of sustaining a paper e Ireul&tion 2;> times its face v&ule - or stated in another way, if allowance is nadc for 35$ reserve against all deposits and reserve against note issue, each one hundred i ! dollars of reservo money is capable of expansion when you 'bring in your cosiTioroial paper to $162.50. Hero then is a past TOS ever able to perform,. Hera is a real insurance and something which fully compensates you for loss of interest on a portion of your reserve deposits. Under the old system every national hauls was re- quired to hold United States Government bonds and these in turn were the basis for Sonic Bote circulation. She funda- mental idea underlying that system was to make a marhot for United States "bonds. She law served its purpose admirably and the b anise who v/ere among the first to enter the system made great profits from the appreciation of value of their bonds and made money with their hank note circulation as well, but it has long been recognized as a very rigid, inelastic system, which led to a shortage .of note circulation in busy times and a eh per- ab im&anc e or redundance in dull times. She now law lots the .National banft note currency pretty much alone, provides for the gradual retirement o f United States bonds through a period of £0 years and supplements it wivii an elastic currency known as Federal reserve notes, based, not on United States bonds, but on short time commercial pa^or, as heretofore described. the law is something that American hanks Si i s feature of o f this generation have had no experience with and it is perhaps not easy form them to adjust themselves to i t . rfany of them have been taught to believe that loans should be.•made preferably against 'xO EP RY O ji ijC 1 COPY j. <5 -8- securitlcs as collateral, spooks and bonds, such for example' as well known To them the new plan seems revolutionary or at least difficult to comprehend. In point of fact it is the basis upon which banks of issue in our own country, before the Civil Y7ar, and practically all European countries have operated. i £he theory upon which the issue of notes on short time paper i s justified and preferred to the idea of issuing notes against good bonds, i s , that if Bank note currency is to be really flexible, i t must expand or con- tract in volume exactly as the business of the country expands and contracts. Furthermore, i t must be based on articles of daily use and necessity, articles which like food and clothing are being consumed and, therefore, bought and paid for every day. Shis, experience here and abroad has taught, is a bettor basis for currency than Government bonds or any other slow or long time investment security. xtt what I have said, I havo tried to explain briefly some no elected features of strength in the no?; banking lav;. Eo no they are important. Experience lias taught mo that the greatest necessity in modern industrial l i f e is intelligent organization. efficiency. a system. Sithout it Wo can not secure cooperation or It was a misnomer to call the old banking system, if it was a system, i t was so against the spirit of the lav; which created it, 3,'XE CR OO PY• J and came about by purely advenf(COPY: XERO titious methods. How wo havo what can really ho called a syateca, - 7 , 6 0 0 or more han&s grouped into 12 Districts, • each District fcoadod by a central hanls which, being the j;iutual, Jointly owned ban.1: of all the member banks of the District, should serve the necessary purpose of creating an organisation in a hitherto unorganised aggregation of units. •rnoso Reserve 3anks "belong to the banlcs so largely rex* resented ^ r e , Directors . 1}hc y ore created and nana red by your -The Federal Reserve Board, a quasi-governmental body, has no desire to interfere with their mara^; cment. It is obviously our aim to have the spirit of the law complied with, and our duty to have the letter of the la?? obeyed, but we have no thought that it will ever be accessary to- adopt harsh or arbitrax-y methods to accomplish that purpose. we are gla<1 to cxchango views with you, glad of your saggestions and criticisms» While only two of our numbor ere bankers of e ^ e r i e n c e and training, all tire equally desirous of making the system a success, and we know full well that success can not be had unless the member banks as well as the business tcan of the country fare well under its operation. 77e hoar much of the ti-.^er of competition of the Federal Eeserve Jku&B with osmbor banks. It isn't strange perhaps that in a time when business is poor and a plethora of money exists that there should be those who resent the fact that Reserve Banks are permitted to enter the open market,- but thoso who really I -10- study oucstion, will so on realize that those open market operations at raost are negligihl o when nonpar ad to the aggrogato of each operations by stato and national honhs* !Phe rodiscoanting of eom-nercial paper of irjonhor b«n;.rs by tho servo belles is tho chief function of those banlts and ?;h:lle it creates some competition in dull times with large banlcs who have heretofore rendered this sorvioe for their •'correspondents it too is negligible in volume and in busy tines would ho welcomed. reserve rorvirenonts, IDhe fact'that the nev/ lav/ lowered of course released reserve money which corjpotod with previously existing funds and tended to 1 ower interest rates, hut that will soon adjust itself when business improves ?er contra and over aga5nst all the arguments which the sleep tic aad tho grumbler nay assert, I aslr you to consider tho benefits of organisation and coordination of effort, resulting from the grouping of banrs Into districts, each urn or a strong mutually owned haulr. If you gentlemen who are complaining of the ruinous effect of competition brought about by the Kosorvo System, w i l l apply your so Ives loyally to tho tunc you can n a ^ this Federal Reserve System, chartered as it i s under Federal law, the bulwark against the fiercest kind of competition, unfar competition, competition r/hioh mahes for payment of, high rates o f interest
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