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The Federal Reserve System



and the Banks





Member Federal Reserve Board
Washington, D. C.



JUNE 9th, 1916



Member Federal Reserve Bank
Washington, D. C.

Address Before

JUNE 9th, 1916

I N D E X

American Bankers' Acceptances
Branches in Foreign Countries
Banks Organized To Do Business In Foreign Countries
Use of American Credit Facilities As Against Foreign
Recommendations of Conference of International High Commission at Buenos Aires
Uniform Money of Account
Legislative Handicap in the Past
Amendments to Federal Reserve Act
Three Months' Bankers' Drafts
Domestic Acceptances
Branches Within City Limits
Branches Within County Limits, etc
Loans on Improved Real Estate
Short Advances to Member Banks
Issue of Federal Reserve Notes Against Cold
Broadening of Powers But No Lowering of Banking S t a n d a r d . . .
Pyramiding of Reserves
Analysis of Present Reserve Situation
No Basis for 4 Billion Loan Expansion
Our Opportunities Limited By Our Control of Cold
Increased Lending Power No Inflation
Future Reserve Requirements
State Banks and Trust Companies
Objections and Answers
Dividends of Federal Reserve Banks
Right of State Banks to Withdraw
No Examination by Comptroller
Amended Clayton Act
Contribution By All Essential to Success
Exchange Charges by Country Banks
New Opportunities
Message to State Banks and Trust Companies
Summary and Conclusion


The Federal Reserve System and the Banks


SUCCESSFUL solution of Federal Keserve problems is dependent equally upon a thorough understanding- of the many features of detail involved in the
technique of banking and ujjon a strong grasp of the big
and fundamental objects for the accomplishment of
which the system was created.
It is, therefore, a pleasure to address an audience that
is certain to have a keen and sympathetic interest in both
of these phases of the problem. I am particularly
anxious, however, to speak to you about the broader
and more fundamental questions involved, for there is
an indefinite feeling of apprehension in my mind that
at this time we may be losing the big point of view of
financial statesmanship, and that petty and technical
questions may be claiming, perhaps, too much of our
While in South America I had an opportunity to get a
bird's-eye view of the operation of the Federal Keserve
System. With the keenest enjoyment and pride I saw
our system hitting its mark many thousands of miles
away, and became deeply impressed that we are now
firmly establishing ourselves as a great financial power
in the world's market. Upon my return I felt a very
chilling change of atmosphere, when i met American
bankers appearing to hold the view that the future of
our great monetary and banking system depends upon
the question whether or not a country bank might charge


exchange of one-tenth of one per cent when remitting
for checks drawn on itself!
The banking system of a world power cannot possibly
be construed upon so small a foundation.
I still remember that, when I had my first training in
banking in Hamburg, thirty years ago, my dear old
father's mind strongly rebelled against what he considered then the new-fashioned idea of being required—not
by the government, indeed, but by the general law of
competition—to discontinue the practice of charging a
small commission when remitting for checks or maturing
bills drawn on his banking firm. But he soon perceived
that the establishment of a general transfer and clearing
system, postal orders and postal checks, had made for
new conditions and that the development of a discount
system based upon modern principles of banking, wrhile
breaking down certain petty revenues, was bringing
about a tremendous increase in the volume of business.
As a result, he soon waived his objections and lent his
hand in turning his country from provincialism into an
international banking power. That, as I said, was thirty
years ago.
I have no doubt that this country has decided that it
is entitled to as modern a banking system as the rest of
the world, and that whatever old-fashioned privilege still
blocks the path will have to fall by the wayside. The
sacrifice will have to be borne for the general good and
will find its compensation in the freer economic development of the country.
One of the most tangible results of the operation of the
Federal Reserve System is the establishment and growth
Acceptances Qj ^e American bankers' acceptance business. In addressing a group of bankers it is unnecessary to dwell at
length upon the fundamental importance of this develop
ment for the general safety of our banking system. We


have now a substantial market for bankers' acceptances
to which all member banks will look for the investment
of some of their idle means and in which, at any time,
they may reconvert these holdings into liquid funds.
The more important this market grows, the stronger
will be the position of the Federal Eeserve Banks, for
the greater or lesser volume of purchases of such acceptances will otter one of the Federal Keserve Banks' most
effective means of exercising a wholesome influence upon
the fluctuation of interest rates. As normal conditions
are re-established in the world, this acceptance market
will become an important factor in protecting our exchange position with foreign countries and, incidentally,
our gold holdings. It has taken some time to develop
this market, but I am confident that, from now on, its
growth will be rapid. One of the obstacles that made the
start difficult was found in the fact that many acceptances, which are made for the purpose of financing importations and exportations, have to be drawn and sold
in foreign countries.
in Foreign


In order to make them negotiable in those countries as
p 0 p U i a r a n d current means of exchange, it was first



necessary to find banks there which would be willing to
purchase them freely whenever offered. It is unnecessary to say that European banks operating in these foreign fields were not over-anxious to see American bankers enter a business which they themselves monopolized
up to the beginning of this war. It is only since our own
banks went out into foreign lands and established their
own branches that the necessary foreign market for
American acceptances has been developed. The establishment of foreign branches of American banks has been a
most important step in advance, and without it our acceptance system could not have progressed as far as it
has today. The advent of these American branches

forced the other banks to modify their resistance and to
compete for our bills which, up to t h a t time, they had
tried to disregard. It is to be hoped that other American
banks will soon follow in establishing themselves in for­
eign countries.
to do
Business in

Use of
as Against

A s you know, the Federal Keserve Board has recommended an amendment to the Act to enable national
banks, singly or jointly, to hold stock in banks organized
"principally to do business in foreign countries." One
bill has already passed the House, a n d another h a s been
reported favorably by the Senate committee on banking
a n d currency. The Board hopes t h a t a satisfactory bill
will be agreed upon by both houses in the very near
It is a s t r a n g e fact, however, t h a t many of our business men, who enjoy the reputation of being keen and
progressive, are actually wasting their funds by still
using foreign acceptance credits instead of American.
At Rio I found to my surprise t h a t the majority of
American coffee importers were still using letters of
credit in sterling Cor which they were paying a discount
r a t e of about 4:}\f/o as against the American discount
r a t e of 2 % . Moreover, in doing so, they were often paying two commissions, one to the foreign banker who
issues, and one to the American banker who opens the
credit, instead of paying a single commission to the
American banker.
I t is true t h a t the wool a n d hide business, done by
New E n g l a n d with the Argentine, is today financed by
dollar acceptances d r a w n on Boston and NCAV York, and
t h a t the oriental trade has begun to use dollar bills, but
it is surprising t h a t so large a number of New York importers are still clinging to their old pound sterling acceptance a r r a n g e m e n t s .
Let me venture to urge most earnesllv ilia I; our bank


org canvass their lists of importing and exporting firnife
and point out to (hem the folly of not using American
banking facilities. Since my return 1 have tried to see
personally some of these large importing firms and explain to them the anomaly of their action. I believe,
however, that an association like yours is particularly
well adapted for carrying on a campaign of education «f
this kind.
With our increasing financial strength and with the
daily diminution of Europe's saving power, it stands to
reason that, for a long time to come, our discount rates
will compare favorably with those of Europe. We may
expect, therefore, that this acceptance business will not
only hold its own, but will grow and may be used to a
substantial extent even by European importers and exporters, and thus relieve Europe of some of her financial
While our foreign competitors, with few noteworthy
exceptions, are still trying to keep our dollar acceptances
in obscurity, our machinery is now firmly organized.
There are now local banks almost everywhere abroad
willing to buy American drafts going forward for acceptance and to deal in dollar exchange on practically the
same narrow margin which prevails in dealings in
sterling, marks, or francs, and the Federal Keserve Banks
are willing, whenever desired, to do their share by quoting favorable "forward discount rates'' to assure the
.rate of discount pending the time of transit. This new
feature of American banking, which is to be one of the
.roots of our strength and, at the same time, a new source
«of profitable and sound banking, ought to be developed
Recommend rener get ic ally by both our bankers and our business men.


Conference of
In this connection, it may not be amiss to give you a
short account of the conference of the International High
mission at
Commission at Buenos Aires.


In our deliberations, the question of banking Wtt&
given particular attention, and I am happy to report
that the general tendency at the conference was to do
everything possible to foster trade relations between the
United States and her neighbors to the South, and mutually to open the doors wide to one another's banks.
Resolutions were passed making for the adoption by
Central and South America of uniform laws concerning
bills of exchange, bills of lading, warehouse receipts, and
similar matters. A further recommendation was adopted
by the conference urging the respective governments to
enact legislation giving the widest possible protection to
the sellers of goods.
You are all familiar with the agreements for the arbitration of business disputes made between the United
States Chamber of Commerce and the Chamber of Commerce of Buenos Aires. We may expect that other countries will follow in the very near future, and the creation of these agreements will be an important factor in
obviating the annoyance and delay of protracted litigation in foreign countries and in providing for both sides
a safe and satisfactory basis for commerce and trade.
Money of

** w o u l d lead too far to enumerate all the topics discussed by the conference. I should not omit, however,
to mention that a resolution was passed recommending
that all the republics of North, Central and South America adopt a uniform standard of money of account on
the basis of a gold coin 9/10 fine and weighing 0.33437
gramme. This unit, which might be called the PanAmerican franc, though nearly the value of the European franc, is not its exact equal, but is precisely onefifth of the United States gold dollar. Delegates to the
conference had suggested making the gold dollar of the
United States the unit for all American countries, but
against this it was pointed out that the dollar would be


too large a denomination for many of the Southern republics, where small coins circulate and where, it was
feared, the larger unit of money of account would bring
about an increased cost of living. Moreover, the United
States gold dollar could not be divided into subsidiary
coins small enough to comply with the known demands
of many of these countries. It was thought, therefore,
that a unit of the approximate size of the franc would
be better adapted to the needs of these countries, but,
by adopting as the standard unit the exact one-fifth of
the United States dollar, the foundation will have been
laid for a Pan-American union of coins which, sooner or
later, may become of great importance. If this plan
should be carried into actual effect, the Pan-American
20 franc piece could ultimately circulate with us as a
$4 gold piece and our f 5 gold piece could circulate as a
25 franc piece in South or Central American countries.
A unity of standards of this kind will, of course, have
great advantages in facilitating trade between nations.
Amongst republics having actually introduced a gold currency on this basis it might ultimately lead to an understanding for the establishment of international gold trust
or clearing funds, having for their object the elimination
of the costs and risks caused by our present wasteful
method of shipping and remelting gold coins. A plan
on these broad lines, submitted by the American delegates, was recommended by the conference for closer
study to all governments concerned.
The immediate practical importance of this step may
not be great. As indicative of the trend of future relations between North and South American republics, however, it cannot be overestimated. It shows, as one of the
effects of the war and of our financial emancipation, that
the North and South have recognized their common economic and political interests; that they have begun to
consider this large hemisphere as one economic unit, and


that they are now looking to each other for mutual help
and co-operation in the future development of their respective problems. A Pan-American monetary union,
therefore, now appears a more natural basis for the
future monetary systems of American republics than a
Latin union based upon an agreement with France, Italy,
Switzerland and Belgium.
Our friends in South America consider the creation
of our Federal Keserve System as one of our greatest
achievements, and their willingness to rely upon our
ability to provide—to a certain extent at least—such
financial aid as Europe gave them in the past is predicated upon the confidence that our new system inspires.
Some of these republics are carefully studying this system with a view to establishing, at the proper time, a
similar banking machinery. In view of the fact that
several of these countries are federations like the United
States and cover tremendous areas of territory, it is evident that certain features of our system would be particularly well adapted to their needs.
While observing financial and commercial conditions
fFand!ca * these countries, it was deeply impressed upon my mind
in the Past how much the United States, by legislative action, had
in the past handicapped the development of our business
in foreign lands. It would lead too far to mention to
what extent our own legislation in the past has driven
our merchant marine from the ocean and how far it has
handicapped our industries by not permitting reasonable
trade combinations enabling us to compete in foreign
markets. But it is well within the bounds of this address to mention that the British, French and German
banks for generations have been entirely free to go into
foreign countries to open branches or acquire foreign
banks and to do everything and anything to further their
banking and trade. On the other hand, our national



banks, until the passage of' the Federal Reserve Act, were
forbidden by law to enter these fields or to accept drafts
for importations or exportations or to exercise many
other functions necessary to develop foreign banking and
foreign commerce. It is a relief to feel that at last the
time has come when a clear recognition of our country's
banking needs is asserting itself and when most of these
old shackles have been removed. Whatever obstacle remains we may confidently hope to see gradually eliminated.
to Federal
Reserve Act

Some amendments along these lines are at present under consideration by Congress, and have already been
favorably reported.


The Board has recommended that Congress permit
member banks to give their acceptances not only for the
financing of transactions involving importations and exportations, but also, to a limited degree and under the
supervision of the Federal Reserve Board, for bankers'
clean three months' drafts, such as are required in foreign countries for remittances abroad. As most of you
know, in South America, such remittances to foreign
lands are generally not made by checks, but by three
months7 drafts, and it is necessary that national banks
be permitted to accept for this kind of foreign exchange
transactions, if the dollar bill is to be used as freely in
foreign lands as is the sterling, the franc, and the mark


Turning to amendments touching domestic operations,
we have recommended that national banks be permitted
to accept drafts or bills growing out of transactions involving the domestic shipment of goods—provided shipping documents are attached at the time of acceptance—
and drafts and bills which are secured by warehouse or
similar receipts covering readily marketable staples, or
by the pledge of goods actualy sold. We feel confident


that, by enlarging the powers of national banks to accept in this manner, we shall open for our member banks
a new and profitable held of operation, and incidentally
the free development of this kind of bankers' domestic
acceptances will be an important factor in equalizing interest rates in the various parts of the country and will
be of great benefit in this respect alike to producer and
within city

We have also proposed an amendment authorizing any
national bank, located in a city of more than 100,000 inhabitants and possessing a capital and surplus of $1,000,000 or more, to establish branches within the corporate
limits of its city, and authorizing any national bank located in any other place, with the approval of the Fedoral Reserve Board, to establish branches within the
limits of its county or within a radius of 25 miles of its
banking house, irrespective of county lines. In recomwithin
county /im- mending the county line for branches, the Board was
its, etc,
moved by the thought that it might be found convenient
for several small banks doing business in the same county
to combine into one larger bank, thereby reducing the
overhead charges and making the deposits of one part
of the county available for the demands in another. It
is the hope of the Board that in some districts, through
such co-operation, it will be possible to reduce the exorbitant interest rates which, in some instances, have
been charged by small country banks. The Senate committee has stipulated that, for the beginning at least, the
number of branches of a national bank shall be restricted
to ten.
Loans on
real estate

We have further recommended to Congress that any
national bank, not situated in a central reserve city, be
permitted, within the same limits now existing for loans
on farm lands, to make advances maturing in not over
one year on improved real estate located anywhere with-


in a radius of one hundred miles of its place of business.
While the Board does not favor the idea of having national banks make heavy investments in mortgages, it
was felt that they should not be precluded from taking,
within certain reasonable limits, first mortgages as collateral security for their loans.
Short advarices to

These are the additional powers that we have recommended to be given to national banks. As to the Federal
Reserve Banks, we have suggested that Congress permit
them to make advances to their member banks on the
latter's own notes secured by eligible paper, such loans
to be for periods not exceeding fifteen days. This has
been done with a view to enabling Federal Reserve Banks
to accommodate members who, in the check clearing or
otherwise, might be short in their balances and wish to
have short advances at moderate rates. We believe that
this power, if granted to Federal Reserve Banks, will
greatly increase their ability to take care, in a simple
and effective manner, of the requirements of their members, and particularly of country banks.

Issue of

We have further recommended that Congress permit
Federal Reserve Banks to issue Federal Reserve notes,
not only against commercial paper, but also against
the deposit of gold. This amendment, if granted, would
greatly strengthen the lending power and the note issuing power of Federal Reserve Banks. Tt is the same
method that has been followed in Furope by the
Banque de France, the Reichsbank, the Bank of the
Netherlands, the Bank of Italy and many other government banks. These institutions are enabled, through
their note issue, to assemble a large part of the gold of
the country in a central reservoir. With us, up to the
present time, this accumulation of gold has taken place
to only a moderate extent and has not benefited the Federal Reserve Banks to the fullest possible degree. If the




amendment were to be passed, the gold, instead of being
segregated with the Federal Reserve Agent, would remain an asset of the Federal Reserve Bank, and, on the
other hand, the notes issued against it, instead of being,
as at present, technically redeemed, would remain the
liability of the Federal Reserve Bank.
Tn case the amendment should pass, it is hoped that
the Federal Reserve Banks may count upon the co-operation of their members in order to facilitate this substitution of Federal Reserve notes for gold certificates at
present carried in the pockets of the people in the oldfashioned and uneconomic manner. As in modern European countries, the gold should accumulate in the Federal Reserve Banks and the people should use instead
the Federal Reserve notes. The amendment would be an
important step in the ultimate simplification and consolidation of our circulation.
These are the principal amendments recommended by
the Board at this time. You will notice, gentlemen, that
they move in two directions. The one is an increase of
the Reserve Bank's general strength and lending power
and an enlargement of their scope of usefulness in dealing with their members; the other is the removal of limitations heretofore placed upon the operations of national

The Board feels keenly that, as a matter of equity,


but no lower- national banks should be placed on a parity with State
ing of bank- ^ a n ^ g a n ( j trust companies, wherever this can be done
tng standard


consistently with safety and conservative banking principles. But T wish to make it clear that the Board has
recommended, and will recommend, onlv such measures
as will eliminate old-fashioned or unwise restrictions
such as should be removed under anv circumstances, irrespective of whether or not the State banks exercise
greater or lesser powers. The Board would never recom14

mend granting national banks any powers or privileges
which are contrary to good banking principles. I t is to
the interest of both State institutions and national banks
that banking standards should be raised wherever practicable and not that they should be lowered. Between
the national and State banking systems there must not
be any competition to secure more members by a lowering of banking standards. The whole country would
suffer if this took place. It would be the height of folly
if States were to lower their requirements for no other
reason than to underbid the requirements of national
banks. To a certain degree this has been done—where
State governments lowered the reserve requirements for
their banking institutions because the Federal Reserve
Act lowered the reserve requirements for national banks.
The lowering of the reserve requirements for national
banks was predicated, however, upon their joining the
Federal Reserve System, subscribing to the stock, and
putting some part of their reserves into the joint insurance fund, and being bound ultimately to abandon the
method of pyramiding reserves and to keep them instead
either entirely in metallic form or with the Federal Reserve Banks. The reserves of State institutions, on the
other hand, were lowered without their being required to
join the system, make any such contribution, or discontinue pyramiding reserves. Moreover, lower reserve requirements are justified for member banks because they
may have direct recourse to the rediscount facilities of
the reserve system, but non-member banks have no such
direct access.
T wish I could adequately impress upon the minds of
all our bankers that there is no such thing as doing anything for the Federal Reserve System. Whatever the
member banks do, and whatever the State banks do, they
do for themselves and for the country. The Federal Reserve System, as such, is not a self-seeking and profit-


making organization. It belongs to the entire country.
It is there for the benefit of everybody; for the greater
security of the banks, and, through the banks, for the
security of the people. If you strengthen the Federal
Reserve System, you strengthen yourselves. If you raise
the standard of banking, it is for your own benefit—not
for the benefit of the Federal Reserve Banks, or least of
all, for that of the Federal Reserve Board.
These things appear trite, but still I cannot help expressing them because it is so absolutely essential that
the thought be overcome that there can be such a thing
as a conflict of interests between the Federal Reserve
System and the banks. The Federal Reserve System and
all it means is felt as an opposing factor where it comes
into conflict with bad banking practices. It is true that
the law has for one of its objects the removal of certain
habits which have crept into the old banking system,
but it is equally true that, by removing them, financial
catastrophes such as used to befall our country with uncanny regularity, are to be avoided in the future.
Pyramiding Let us consider, as the strongest case in point, the
pyramiding of reserves. I wish it had been possible to
stamp out this evil within a short time after the opening of the Federal Reserve System. As it is, many of the
smaller banks are still in the condition of a patient who
knows that he must undergo an operation in order to be
fully cured, but whose mind every now and then rebels at
the thought, and who continually relapses into arguing
with himself that, after all, he might possibly prefer to
continue to live with his disease and take his chances of
the certain recurrence of acute convulsions and intense
suffering rather than to have the operation performed.
The country, however, has decided that the operation is
necessary for our future safety and growth, and the vast
majority of our bankers are in full accord that it is the


wisest thing to do. The pyramiding of reserves will thus
end on November 16, 1917. But, as I said, 1 wish the
operation had already been performed.
Analysis of
At present our national banks apparently have excess
serve sit- reserves approaching one billion dollars. Of these, a
substantial proportion represents items in transit between the depositing and the depository banks; the balance, excepting about $100,000,000 excess cash in vault
held by all national banks outside of New York, is kept
entirely in central reserve cities, the bulk being in the
City of New York. There it is on deposit—drawing interest at the rate of 2%—and loaned out on stock exchange and other collateral, or invested in commercial
paper, except as to the required reserve of 18% and the
small total excess reserve of about fifty million dollars.
This is a reduction of excess cash reserves in New York
of over $100,000,000 since January 22d.
If Farmer Jones deposits $1,000 in a bank of Elk
River, Minnesota, and this bank should in turn deposit
this amount in a bank at Minneapolis and the Minneapolis bank in turn deposit it in New York at 2°/o interest,
and New York invest this money in a piece of commercial paper at 3 % interest, it is a most extraordinary and
unique method to permit Elk River and Minneapolis to
count these deposits as reserves, while if the bank of Elk
River had itself bought the piece of paper it would have
carried it as a loan and all the rest of the structure of
reserve bank deposits and reserves would have been
wiped o u t


In other words, in the final analysis, if we consider
the system as a unit, there is not an excess reserve of one
billion, but only about $150,000,000 in cash; the balance
is invested today in the "float," representing uncollected
items in transit, commercial paper, stock exchange loans
and securities. If we study the changes in the condition


of the New York Clearing House national banks which
have occurred between October 31, 1914, and May 1,
1916, we find the following increases estimated a t :
( I n millions of d o l l a r s )
Oct. 31, 1914.

May 11, 1916.







Collateral l o a n s
In e s t m e n t s in securities
loans, which
includes c o m m e r c i a l p a p e r . . . .
D u r i n g that period
i n c r e a s e d from






In addition, collateral loans and holdings of securities
of New York non-member trust companies increased by
about half a billion since the end of 1914.
These are phenomenal increases and we might well ask
ourselves whether or not we may take it as a certainty
that so extraordinary a growth will prove to have come
to stay or whether a return of more nearly normal conditions will not bring about a contraction. We should
well consider this question, because an increase of 90%
in securities and collateral loans—that is, an increase of
over $1,000,000,000 in New York City Clearing House
institutions—might well suggest a policy of liquidation
rather than one of further expansion. Our national
bank cash reserves in central reserve cities (including
balances with Federal Reserves Banks, figured at 100%)
were as of March 7, 22.88%; in reserves cities, 11.53%,
and in country banks, 9.80%.* Notwithstanding that
the aggregate cash held by all national banks increased
♦If we figured these balances a t 7 0 % , being the present cash
dition, a n d t h e actual metallic reserve, and added to cash in vault
cover maintained against reserve agents bRlances, t h e present cash
show as follows: Central reserve. 2 0 . 5 1 % : reserve cities, 13.66%,
banks, 11.83%.


reserve cont h e metallic
cover would
and country

from May, 1915, to March, 1916, by over $100,000,000,
in central reserve cities we are today materially below
the old cash reserve requirements, and if a situation
like the present had existed during any ante-Federal lieserve System period, we should have considered it a cause
for alarm. Thanks to the creation of our new banking
system, we are now dealing with completely changed
conditions, and the spectre of the end of the lending
power of the banks would not mean a panic as in the
past because of the reserve lending power of the Federal
.Reserve Banks and the confidence created by their existence. But, gentlemen, that must not lead us into the
No bash
illusion that this billion of so-called excess reserves may
loan expan- be considered as a basis for a loan expansion of four
billion dollars or more, as appears to be the general belief. Theoretically there is the foundation for so large
an expansion as long as we adhere to the old custom of
counting bank balances with reserve agents and uncollected items in transit as reserve, yet, in the last analysis,
it is the metallic cover—not the redeposited and actually
invested reserves—which must be considered in dealing
with this question of expansion of loans. The excess of
our metallic reserve, plus the free gold of the Federal
Reserve banks, constitute the basis of the reserve lending
power of our country.
We are at present in a condition of extraordinary
strength. We have bought back our own securities and
made foreign loans to an aggregate amount far in excess of $2,000,000,000. Our financial position for the
future has thus been greatly fortified. But the process
of absorption of our securities returning from abroad
should be conducted on such basis and scope as to turn
the individual depositor into an investor, so as to free
our gold reserves, rather than increase our loans on an
enlarged floating supply of securities.


Our oppor- We must not forget for a moment that not even the
limited by m o y t experienced can foretell what demands may be
our control made upon us in the future. At the end of the war our
of gold.


opportunities will be gigantic, but ultimately they will
be limited by the extent to which we are able to control
our gold. There cannot be any doubt that the demand
for gold at that time will be very keen and determined.
Wise statesmanship, to my mind, therefore, would indicate that everything should be done by the Federal Ke
serve System and by all the banks that are interested in
our strength to watch carefully further expansion at this
time and to accumulate the floating gold supply in the
hands of the Federal Keserve Banks so as to enable them,
when the time comes, if necessary, to spare large amounts
without thereby crippling their lending power. We are
in a period of widespread prosperity at this time and it
must be our serious concern not to weaken its solid foun
dation. The ease of this summer might well be used to
strengthen and prepare ourselves for the large problems
that may be in store for us.
It is impossible to try to prognosticate with any de
gree of certainty what will be the trend of interest rates
at the end of the war, but assuming that interest rates
for invesments in Europe will be high, and that the demand for gold on the part of Europe will be keen, we
would have to expect as a consequence that eventually
our rates will have to move up so as to approach theirs
more closely, and before we reach that point probably a
substantial amount of our gold will have to leave the
country and return to foreign lands. To preserve the
advantage of our strength and to maintain our money
rates on an independent basis of our own—in spite of
the close inter-relation that must exist between us and
Europe—will be one of our interesting but difficult tasks.
The establishment of the Federal Beserve System has


been a step of inestimable value in the direction of efficient control of our country's gold holdings; and, if we
do not disregard all rules of business conservatism and
prudence, it will prove an efficient means of protection
in case of emergencies.
If we want more than a strong instrument of defense
and protection, if we desire—as we are entitled to—that
the Federal Reserve System be the foundation of a banking structure contributing its full share in rebuilding
the world and at the same time assisting our own country
to meet all the new demands, whether domestic or foreign, that the future may make upon it, then we must
do all we can to preserve its strength and to broaden its
foundation by further perfecting methods of systematically accumulating and economically using our vast
treasure of gold. Too large a proportion of this gold
still remains wastefully scattered and decentralized.
The gold stock of this country is estimated at $2,320,000,000. Of this amount only $335,000,000 is held in
the vaults of the Federal Reserve Banks and about $180,000,000 is in the hands of the Federal Reserve Agents'.
The national banks and State institutions hold about
$800,000,000, and there is estimated to be in actual circulation about $870,000,000. If we deduct from the
$335,000,000 held by all Federal Reserve Banks a minimum reserve of only 40%, that would leave as their free
gold about $200,000,000. This is an invaluable item of
strength as a basis for a note isue of $500,000,000 in case
additional currency should be demanded by our people;
and the Board, by permitting a reduction of the 40%
gold reserve, could, in case of emergency, sanction the
issue of even larger amounts. When, however, it comes
to exportations of gold, you can readily see that the
$180,000,000 now accumulated with the Federal Reserve
Agents would serve as a very welcome additional pro-


lection. For we have learned, gentlemen, that this is a
period of economic history, where balances between nations are not dealt with in millions, but in hundreds of
Think of the strength that our system might possess
if we carried into effect the policies pursued by the
Banque de France, the Reichsbank or other powerful
central banks, and if, for a substantial part of the $870,000,000 of actual gold circulation, there were substituted
our Federal Reserve notes, and if national and State
banks kept in their vaults only what they needed for till
money and deposited with the Federal Reserve Banks the
rest of their idle gold.
We talk of preparedness as the need of the hour. If
we contemplate what European nations have done, before and during the war, to strengthen their grip on their
gold, and compare it with our own efforts, we find that
our financial preparedness is just in its first stages. The
amendment recommended by the Board should prove an
important step in advance in this direction.

In view of the statement made by some of our critics
*^ a * this substitution of Federal Reserve notes for gold
certificates means inflation, it might be timely to point
out that, by a simple substitution of one note for the
other, there is. of course, no increase in the volume of
circulation whatsoever. I t is merely a change in the
form of circulation. As a matter of fact, we find that the
operation of all Federal Reserve Banks during a period
of one and a half years has caused a net increase in the
circulating medium of the country, by the issue of Federal Reserve notes and Federal Reserve Bank notes, of
less than $10,000,000. On the other hand, the national
bank circulation has decreased during the period November 2,1914. to June 1.1916, by $53,000,000, exclusive
of the redemption of the approximately $385,000,000 of


emergency currency issued under the so-called AldrichVreeland Act. While it is evident, therefore, that the
Federal Eeserve System has not increased the volume of
circulation, the process of substituting, as a means of
circulation, the Federal Reserve note for the gold certificate has the most important effect of strengthening
the potential lending and note issuing power of Federal
Reserve "Banks in case of need. To refuse this larger
power of protection for fear that it might be misused
would be tantamount to refusing to give a modern revolver to a policeman for fear that he might shoot at the
wrong man and at the wrong time.

Rut, let me ask you, gentlemen, is this the proper time
for country bankers to urge us to recommend to Congress the further reduction of their reserve requirements
or to recommend that they be granted permission to continue to hold a certain percentage of their reserves with
their central or reserve city correspondents?
Some day, no doubt, it will be proper to reduce reserve
requirements, but that can only be brought about by a
systematic strengthening of the central reservoirs. The
stronger the Federal Reserve Ranks, the easier the access
to their resources by sale of liquid paper, the less will
become the necessity for member banks to maintain in
their own vaults, as a legal requirement, large segregated
gold holdings.
Steps in this direction are: first, the substitution of
Federal Reserve notes for the gold circulation in the
pockets of the people; second, the maintenance with Federal Reserve Banks of larger member banks' balances,
created by depositing part of the "optional" now kept in
vault by member banks, and, finally, the increase of the
number of depositors to be secured through the entrance
of the State institutions into our system.


State banks
and trust


W ant


to compliment our large member trust comL


pames and State banks upon the broad point of view
which guided them when entering the system; but I
might at the same time ask their powerful sister institutions how, under present conditions, they can justify
themselves in staying out of the system and in throwing
the entire responsibility and burden upon the shoulders
of the national banks and those few trust companies and
State banks that have become members? They do not
contribute their fair share of gold to the general reserve
fund of the nation, nor do they provide their share of
the capital of the Federal Reserve Banks. Indeed, not
only do they fail to contribute their share of strength to
the system, but, unconsciously perhaps, they become
forces that make for the direct weakening of its strength
and efficiency.
Do the large trust companies and State banks claim
that pyramiding of reserves is sound? Would they prefer to see our ancient system perpetuated and the reforms contemplated by the Federal Reserve Act abandoned so as to make room again for the good old conditions of 1893 and 1907? Unless they are willing to subscribe to that doctrine, how can these large banking institutions, some located in Central Reserve cities, justify
themselves in considering as reserve, after the manner
of the country banks, their interest bearing deposits with
other banks?
If a call loan on the stock exchange made by a trust
company is not a reserve but a loan, is it sound banking
to call a reserve deposit made by a trust company in a
national bank a reserve, when 82% of it is loan on call on
the stock exchange? Still, it is just through these deposits that, in emergencies, the trust companies will lean
on the national banks and the national banks, in turn,
will fall back on the Federal Reserve System. The net


result is that the trust companies, in building up their
business structure, must rely today on the greater assurance provided by the Federal Keserve System, though
permitting the member banks to carry the entire burden
of its support. Our small country banks will have to
stop pyramiding of reserves; do the large trust companies and State banks plan to continue this practice?
What is it that powerful and prominent institutions
(some of which, in their foreign and acceptance business, derive the greatest possible advantage from the
discount market and the general prestige of the Federal
Keserve System) may say in justification of such an
and An-

of Federal

At first they feared that, by entering the system, they
might lose some of their present powers and privileges.
But the Board has made regulations permitting them to
continue to exercise practically all legitimate banking
functions enjoyed by them in the past.
Some of the State institutions have raised the point
that, by joining the Federal Keserve System, they would
be called upon to make investments in the stock of the
Federal Keserve Banks upon which, in the case of most
of the Federal Keserve Banks, no return has as yet been
But, gentlemen, while for many reasons some of us
would favor an amendment permitting a Federal Keserve
Bank to pay back a portion of the capital paid in (leaving the liability upon the subscribed but unpaid capital
otherwise unchanged), provided the member would in
turn agree to increase its required reserve balance by a
certain proportion of its optional balance, this question
in itself cannot possibly be of sufficient importance to
keep any strong State institution out of the system.
These dividends are cumulative, and anybody having a
moderate degree of foresight can readily appreciate that,


sooner or later, the back dividends will all be paid. Even
at the present low rate of return of 2.4%, secured by
Federal .Reserve Banks from their investments, they
would have to employ only an additional sum of less
than $50,000,000 for the entire system to earn the full
six per cent on the stock at present paid in. When the
final instalment of reserves has been transferred and
with the return of more nearly normal rates of interest,
there will not be the least difficult}' for these banks to
earn their dividends without investing a larger proportion of their resources than would be consistent with
safety and conservatism.
Right of

State banks and trust companies furthermore claimed


to withdraw that if they entered they could not withdraw'. But the
Board, in the exercise of its power to prescribe regulations as a condition of membership, has provided that
they may withdraw under conditions previously made
known, and the subscription to the stock of a Federal
Reserve Bank made by a State institution is conditioned
upon this express agreement.
No examiThey have objected to being examined both by their
c^m^Jo^ier o w n D a n king department and by the examiner of the
Comptroller of the Currency. The Board, in accordance
with the provisions of the Federal Reserve Act, has provided, however, that, wherever there is an efficient State
examination, as in New York, it shall be accepted in
place of examination by the Comptroller and, only failing that, an examination shall be made by examiners
under the supervision of the Federal Reserve Board.
Furthermore, in a circular letter sent to all State
member banks in May of this year, the Board and the
Comptroller of the Currency announced that State member banks, in making their stated reports to the Comptroller of the Currency, might use the form of statement
prescribed by their respective State banking depart-


ments, provided they are rendered as of the same date
as required by the Comptroller of the Currency for national banks. If reports are not rendered on those dates,
State member banks are required to use the same forms
as national banks, but they may omit from their reports
to the Comptroller all schedules except that relating to
coin or coin certificates.

They have feared that the Clayton Act would deprive
them of valuable directors. But Congress has amended
that Act so as to permit a director of a member bank to
be, at the same time, a director of two other banks or
trust companies, provided they are not in "substantial
competition" with the member bank.
I know the arguments that are being advanced that
the rulings of the Board may be changed and that, therefore, it may be possible, under a different personnel of
the Board, to reverse the present arrangement and subject the State banks to the examinations, reports, and
rulings of the Comptroller of the Currency. But that is
not likely to happen, and if it did, the State bank or trust
company could exercise its privilege to withdraw from
membership in the system.
Let us assume, however, that joining the Federal Reserve System does involve certain sacrifices, some of
which are necessary and some of which may be thought
unnecessary. If you throw into one side of the scales
all the benefits accruing to the banks and the nation by
the creation of the Federal Reserve System, and into the
other the sacrifices to be made by its members, there cannot be any doubt whatsoever that the advantages will
outweigh the disadvantages a thousandfold. The Federal Reserve Act is one of the most constructive pieces
of legislation that ever was put upon ouf statute books.
Nobody could be foolish enough to expect that a law


which is so complicated in its nature, so far-reaching in
its scope, and a compromise in so many details between
opposing views, could be absolutely perfect. It is a
wonder that, from the beginning, it has proved as workable as it has.
Personally, I am on record as having opposed several
of its features of detail. But, when the President honored me by inviting me to become a member of the
Board, I accepted because I felt that the fundamental
principles were sound and that the Act, as it stood, would
redound to the greatest benefit of the country. I felt
confident that if after sincere and unbiased efforts in
the operation of the Reserve Banks, defects should develop that needed correction, we could confidently count
on a patient and sympathetic hearing before Congress.
And let me remind you, gentlemen, that several of my
colleagues and the able men who accepted to serve at the
head of your Federal Reserve Bank of New York, all
joined in the same spirit; they did so for the purpose of
serving their country even though they had to make
material sacrifices in doing so.
ContribuIn one of his admirable speeches, entitled "Ideals and
^ssZntiaUo Doubts," Oliver Wendell Holmes, Associate Justice of
the Supreme Court of the United States, makes the following statement concerning the topic of legal reform:
"To know what yon want and why you think that
such a measure will help it is the first but by no
means the last step towards intelligent legal reform.
The other and more difficult one is to realize what
you must give up to get it, and to consider whether
yon are ready to pay the price.*
These are golden words of wisdom which, at the present juncture of our economic history, every bank president in the United States ought to have constantly before
his eyes.


For generations we have lived shackled and constantly
menaced by a defective and old-fashioned banking system ; for years we have toiled to secure reform. We have
at last brought it about and, whether or not it pleases
everybody in every detail, it behooves us all to do our
share in making it a success for the greatest possible
benefit of our country, no matter whether it involves
some small or even a heavy sacrifice. That is the principle which members of the Board have laid down for
themselves, and if they are to be faithful to their trust
and successful in their task, there is no other principle
upon which they can deal with the banks of the country.
That is why, though sincerely appreciating the hardcharges by ^ p ft entails for the country banker, and fully symcountry
pathizing with the difficulties of his position, we must
say to him: "Forget these exchange charges. We think
our new clearing plan is fair and equitable, free from
unsound principles and bound to become a very effective
instrument for the general good. It oilers to take from
you at par all your checks on any member bank of the
entire United States, and on certain State banks in addition, and will refund you any actual expense that you
may incur in case you have to remit currency. All it
asks of you in return is that you remit without charge
to your Federal Reserve Bank in payment of checks
drawn on yourself. But even if we did not believe that,
by the service we render and by relieving you of the
necessity of maintaining bank balances all over the country, we shall compensate you for what you think will be
your loss, we have to hold to the view that you must pay
the price—whatever your little share may be—for the
larger benefit of all."

The new system brings new opportunities; as an illustration, let me remind the country banker that his exchange loss will appear to him very unimportant if he


will adopt the habit of paying for his deposits a fluctMt*
ing rate of interest, which should always remaiii a certain percentage below the ninety-day discount rate Of his
Federal Keserve Bank. The unreasonable rates paid for
deposit money are a serious menace to the safety of our
banking system and the economic development of our
And, with this same spirit, and even with greater em^ankT'and phasis, we must say to the State banks and trust comTrust

At this momentous period of its financial history, the
country is entitled to have its banKing system attain its
maximum strength. Irrespective of burdens involved—
imaginary or real—it is the duty especially of these large
State institutions to come in promptly and contribute
their share, making whatever suggestions they think
helpful as friends and members rather than as critics
from the outside.
I am glad to state that one of our largest trust companies expressed precisely this broad point of view when
applying for membership.
The Federal Reserve System will grow stronger with
every coming day, and the stronger it grows and the
more it perfects its organization, the more apparent
will its benefits become for all its members. A
great deal of pressure has been brought to bear upon
the Federal Keserve Board, particularly during the early
stages of the development of American bankers' acceptances, to cause discrimination against the acceptances of.'
non-member banks. So far the Board has been disinclined to favor such a policy, as it was thought to be in
the general interest of the country to give encouragement
to the freest and fullest development of this acceptance
business, which is of the greatest benefit to the trade of


our country. The Board thought further t h a t time
should be given to the S t a t e banks a n d t r u s t companies
to a c q u a i n t themselves fully with the policies to be pursued both in dealing with S t a t e institutions in general
a n d t h e acceptance business in p a r t i c u l a r . Nor does the
collection plan j u s t approved by the F e d e r a l Reserve
Board contain any element of discrimination against
non-member S t a t e banks collecting a t par, without cost,
their out of town checks through member b a n k s of the
system. The Board believes, however, t h a t the time has
now come for these large institutions to recognize their
d u t y to join the system. I t will not be long before the
banks t h a t stay out of the system vvill become conscious
of the fact t h a t member banks will command the greater
confidence, and there is no doubt t h a t the public will
begin to resent having its interests sacrificed for the benefit of institutions unwilling to join the general protective system, and t h a t before long their resentment
will have to be heeded.
Before closing, I should like to make it clear that,
though speaking to the New York S t a t e B a n k e r s ' Association, whatever 1 have said is m e a n t to apply to the
State institutions of the entire country. 1 should not
wish to give the impression t h a t I am particularly critical of the New York institutions. Quite the contrary, 1
am very glad to have this opportunity of testifying publicly to the spirit of good citizenship t h a t you have manifested in every phase of the development of the system
from the very first beginnings, when we were dealing
with the gold and cotton funds in the fall of 1914. In
the negotiations, resulting in the creation of these two
funds, there asserted itself for the first time in our financial history a broad national spirit uniting in a work
of patriotic co-operation national banks, State banks and
t r u s t companies of every section of the country. That
was the first effect of the coming of the Federal Reserve


System, the physical organization of which at that time
had not even been completed. It is this same spirit, this
larger conception of banking functions and ideals, that
will ultimately lead into the Federal Reserve System all
elements worth having; that is, all elements of financial
and moral strength.
I trust that my frankness will not be misunderstood
by you. There is an old adage that 'imitation is the sincerest form of flattery." I venture to paraphrase this saying into: "frankness is the sincerest form of flattery/'
because it shows that you respect the intelligence and
moral fibre of your audience.

j believe that our future looms large beyond measure;

and conelusion


I believe it our duty to be financially prepared on the
broadest possible scale;
1 believe that we should use the months ahead of us,
not to expand any further, but rather to consolidate our
I believe that, through the Federal Reserve Banks, we
should strengthen our hold on the gold in circulation
and that the stronger the gold holdings of these banks,
the better shall we be equipped to cope with the problems ahead of us, of helping ourselves and of helping the
I believe it to be the duty of every bank in the country
to contribute its share in equipping our nation for this
I believe that State institutions which are strong
enough should come in now and do their share, no matter
whether or not they are in full accord with every detail
of the Federal Reserve machinery;


1 believe that, as we proceed and gain in experience,
whatever may prove harmful will be remedied. The tendency of the country is for a fair deal for fair people;
While I believe that the country expects that strong
State institutions should do their duty and join, we are
neither begging nor clubbing anybody to come in nor to
stay in;
But I firmly believe that the future will belong to those
banks—national or State—that are members of the Federal Reserve System.


Press of The Financial Age, 2 Rector Street