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Address by Hon. W. P. G, Harding, Member, Federal Reserve Board,
before the Texas Bankers'

Association Convention, at Waco, Texas, May

18th 1 9 1 5 .
FOR RELEASE, Wednesday morning, May 19th.

" A

I S i * . A IZ \

I shall not attempt any discussion of the Federal Reserve Act
from its broadest viewpoints,

but shall confine myself to certain phases

of its operation that are of particular interest to member banks, and in
endeavoring to stress some of the benefits of the system, I shall not
seek to evade a discussion of certain features to which objection has
been made, particularly by the smaller banks.
The profits arising from exchange charges have always been
dear to the hearts of bankers, for the reason that transactions


which these charges are made are quickly closed up, and involve no long
"tying up of funds.

Profits from this source, however,



becoming smaller, so that in the case of many banks, in the larger towns

they have so diminished,

loss instead of a gain.

that the exchange account shows a

I can remember the time when banks in Alabama

charged a premium of l / 2 of 1% for their checks upon financial


while they would buy at the same time sight drafts upon the same cities
at the same rate of discount,

thus netting a clear 1%.

I presume that

there v/as a time when rates equally as high prevailed in Texas.

S~me of

these same banks are now glad to make a net profit of l / l O of 1%, and in
many cases this profit is derived only from the purchase .of bills drawn
against cotton when that commodity is moving actively,

or from the collec-

tion o f , and remittance for B/L drafts drav/n against shipments of goods.

exchange may be defined as the rate at which the documentary

transfer of funds is made, so that if the debits reciprocally due by two
Places be equal, the exchange w i l l be at par, but when greater in one
than in the other, the exchange w i l l be against that place which has the



larger remittances to make, and in favor of the other.

It is customary

for the seller of goods to forward them at the expense of the purchaser,

ho is supposed to pay for them in funds current at the place of resid-

ence of the s e l l e r .

Thirty years ago it v / a s ^ f e & ^ ^ f o r


to be made between parties living in different towns, by draft on New

ork or some other financial center, by post office money order, or by

shipments of currency by express.

In those days the rate of exchange

governed to a great extent by express raxes, especially when the

amount involved was large,

for the remitter would not pay a bank a high-

er rate for its check than it would cost him to forward the actual funds

y express.

Merchants would go to their local bank and purchase drafts

in favor of their.creditors,

paying the bank the agreed premium.

business of the country developed,

As the

the local merchant gradually acquired

the habit of sending his own check, drawn upon his local bank, to his
creditor in New York, Chicago or St, Louis, who would deposit the check
in his own bank, which would, in turn, forward it for payment.

The local

merchant found that by doing this he could avoid paying a premium for a
bank draft drawn upon the city where his debt was due.

The city dealer

found that he could, in most cases, prevail upon his own bank to accept
his country checks on deposit without making any deduction, so he soon
became accustomed to this method of settlement.

In the course of time,

when kxm many remittances were beinto made in this way, the burden upon
the banks in the financial centers became very great, and to protect them\

selves, the crediting bank would impose a charge on country checks deposited with i t ,

so that the cost of remitting funds for settlement of goods

purchased had been shifted from t h e ^ o ^ a l merchant to the dealer or jobber in the c i t i e s .

In many cases, however, this cost is borne by neither


of the parties to the transaction,

but is s t i l l absorbed by the city bank

which has the dealer's account, although there seems hardly more reason
for it to be taxed with the cost of transfer of funds from the buyer to
"the s e l l e r ,

than for it to pay freight upon the goods pur chased.

The bank-

er in the smaller tov/ns naturally looks with favor upon this method of

as he exacts his exchange charge from the bank from which he

receives the check, and his bank has enjoyed an increased deposit during
'the time the check has been outstanding,

Many abuses have crept i n , how-

ever, and it frequently happens, particularly where the drawer knows that
his check w i l l be outstanding four or five days, that he w i l l forward it
before he actually has funds in bank to meet i t ,

relying upon his ability

tfiake the account good by the time the check is returned for payment.

The merchant in the small town, therefore, prefers to continue this method
°f settlement, as it frequently saves him an interest charge.

It often

happens also that in cases where the bank in the larger city makes a
charge against its depositor more than ample to cover actual ccst of collecting a country check, that it seeks to retain all or a part of this as

net profit,

and is frequently enabled to do so by taking advantage of

competitive conditions in an intermediate town where it has a reciprocal
Account, so that the expense is in many cases lorne by a bank in some
local center which is w i l l i n g to take business at a loss to prevent a
competitor from getting i t .

The ideal arrangement which the bank in the

small town, or the real country bank, likes to make, and one which it is
frequently able to make, is to charge its correspondent bank located


a financial center of its own state, exchange at the rate of 250 per
hundred on a l l checks received for collection, at the same time clearing
li g s ci m 6
"through xixbc; correspondent all checks payable outside' of its own town

without any expense whatever.

I believe,

however, that arrangements

of this kind are becoming harder to make, and that the greater part of
exchange charges now being made in this country are borne by the sellers of goods.

It may be that their profits are sufficient to admit of

their bearing this expense, and I have always been impressed with the
logic of a contention made by a country merchant when I was a bank
clerk in

more than thirty years ago.

It seems that on one

occasion he sent his ov;n check on the local bank .to a New Orleans merchant in payment of some sugar, instead of following what was then the
Prevailing custom of going to the bank and buying its draft on New Orleans,

This check was deposited in a Mew Orleans bank, who sent it for

collection to the rival bank iraitaxadsaoeex, so that the bank on which
the check was drawn made no profit out of the transaction.

The cashier

asked this merchant what he meant by sending his local check as far away
as New Orleans, and suggested that he come in as usual and buy a bank

The merchant replied,

that whenever the New Orleans merchants

would pay the freight on their goods shipped to him, that he would be
willing to pay the freight on their money.

Sellers of goods all over

the country have for several years past been paying freight on the money
paid them for their goods, and the volume of local checks that are transmitted in the mails every day now reaches enormous proportions;- certainly 0 2 0 0 , 0 0 0 , 0 0 0 would not be a high estimate.
erve Act was being debated in Congress,

When the Federal Res-

representatives of those who

have been paying exchange charges on checks sent them in payment of
goods sold, exerted their influence in favor of free check


and shortly afterwards representatives of more than 2 , 0 0 0 country banks
went to Washington and appeared before the committee having the b i l l in


charge, and entered a vigorous protest against being deprived of what
they regarded as a legitimate p r o f i t ,

The result v/as, that this para-

graph was included in Section 16 of the b i l l as enacted, and is now
Part of the law:
"Every Federal reserve bank shall receive on deposit at par from
member banks or from Federal reserve banks checks and- drafts drawn upon
^ y of its depositors, cdnd when remitted by a Federal reserve bank,
checks and drafts drawn by any depositor in any other Federal reserve
bank or member bank upon funds to the credit of said depositor in said
reserve bank or member bank.
Nothing herein contained shall be construed as prohibiting a member bank from charging its actual expense
incurred in collecting and remitting funds, or for exchange sold to its
The Federal Reserve Eoard shall, by rule, f i x the charges to
® collected by the member banks from its patrons whose checks are
cleared through the Federal reserve bank, and.the charge which may be
^ p o s e d for the service of clearing or collection rendered by the Federal reserve bank."
It seems to have been the idea in Congress that country banks

ould be appeased by the provision that they might make a charge against

^hose of their patrons whose checks were cleared through the Federal reser


v e bank.

In oxher words, if Mr. Brov/n of Abilene should draw his check

Pon the Citizens National Bank of Abilene, in favor of Smith c°; Co. of Chi-

cago, for C-100., and that check should be returned to the Abilene bank for
Payment through the Federal Reserve Bank of Dallas, it was thought that the
Abilene bank could charge Mr. Brown 150 for having paid his check in Chicago

The f a c t , however?, v/as evidently overlooked that Mr, Brown would not

look with favor upon this charge, which if persisted i n , would result in the
loss by the Citizens National Bank of Mr. Brown"'s account.
Permission given'"to

Neither is the

charge for exchange sold to patrons" any more satisfact

°ry to the small bank, for the reason that their patrons have long since got
ten out of the habit of buying bank drafts and make a practice of remitting
their own checks.

It seems, therefore,

in actual practice that the only

charge allowed is for "the actual expense incurred in collecting and re-


mitting f u n d s " , which must seem, a mere pittance to banks that have been

per hundred.

Yet the Federal reserve tar.<s are required to

"receive on deposit at par from member banks or from Federal reserve banks
checks and drafts drawn upon any of its depositors",

and the Federal Res-

erve Board is charged with the duty of carrying out the lav/.
It has been the earnest desire of the Board to cause as little
hardship as possible in making these changes, and after a careful study
the whole subject, and after many conferences with representatives of
all Federal reserve banks and officers of member banks,
agreed upon which w i l l be gradual in its operation,
"thought, in the course of time prove e f f e c t i v e .

a plan has been

and which w i l l ,

it is

Each Federal reserve

bank, in accordance v/ith this plan, has notified its member banks that a
check clearing system w i l l be established,

but that for the present the

system w i l l . b e a voluntary one, and no bank w i l l be required to be a party

it except of its own free w i l l and accord.

In order best to describe

the workings of this plan, I w i l l assume that the member banks in Dallas,

t . Worth, Waco, Austin, Houston, San Antonio, Paris, Galveston,

and El Paso assent,


and agree to permit the Federal Reserve Bank of Dal-

las to charge against their respective accounts as soon as received-checks

Pon each bank which may come into the hands of the reserve bank.


checks v/ill be immediately forwarded to banks upon which drawn, ioi


i t , and any checks not good are to be returned to the Federal Reserve

ank and re-credited by i t .

Each of the banks - agreeing to the plan must

carry with the Federal Reserve Bank, in addition to its



an amount sufficient to provide for the debiting against its account of
"these checks.

We w i l l assume that there are 40 banks which agree to this

Plan at the start.

Any one of these

40 banks having checks upon the other


39 banks, w i l l forv.ard them a l l tc the Federal Reserve Bark of Dallas,
and receive immediate credit.

It v/ill,

of course, have to stand an


mediate debit on the books of the Federal Reserve Bank of all checks drawn

Pon itself

received by the reserve bank from the other 39 banks,

"the net result to any one bank is merely a balance,

so that

and i t v/ill at the same

time have been convenienced by having to write only one remittance

^stead of a great many, and by receiving only one incoming letter from the

federal Reserve Bank, instead of perhaps 39.



Parties receiving checks upon

y of these 40 banks v/ill soon appreciate the fact that they are collect-

b l e at once v/ithout charge, and, therefore,

are as desirable as checks

New York, Chicago or St. Louis have been hitherto.

There w i l l thus

established a preference for checks drav/n on these banks, and parties
E m i t t i n g in payment of b i l l s

checks on banks not connect with this


S plan, w i l l soon be brought to realize that checks drav/n on banks in

the clearing

system are preferred.


a merchant in Sherman finds that

ty reason of his bank being a member of the clearing system that his
°hecks are received v/ithout question, he v/ill appreciate the f a c i l i t y
given him, but if

a merchant in Texarkana,

for instance,

finds that

ky reason of his bank not being a member of the clearing system he i s
charged exchange upon the checks that he sends out, v/hile his competitor i n Sherman or Waco is exempt from such charge, he w i l l soon, no
doubt, exert erough pressure upon his own bank to induce i t to become


member of the clearing system.
ell as D a l l a s ,

If Galveston, Austin and F t . VJorth, as

should a l l be members of the clearing system, merchants

ift a l l these towns v/ould enjoy the same advantage,

and in the course of

tirnp -t-1



banks i n x ^ M x ^ - ^ X

for instance, would find that they would


-ose business by remaining, out, ar,d would,

iness necessity,

I think, as a matter of bus-

f i n a l l y become members of the clearing system.

federal Reserve Act does not, of course,


become entirely effective as

ar as its reserve requirements are concerned until three years from
16, of
or until
thepartent l rveemr e
a member
must be 16,
in after
its own


> witn the Federal reserve bank of its d i s t r i c t .

It is thought that

b ' this time there will be a gradual accession to the number of


assenting to the new clearing plan, and after the f a l l of 1917

is not believed that many banks who have customers sending their
checks to distant points, w i l l f a i l to become members of the clearln

C section.

As balances with other member banks w i l l then no longer

°ount as reserve,

surplus funds w i l l be loaned,

rather than kept with

her banks to control 'collections.
V'e ought to look this matter squarely in the face,


a l i z e that we must jive and take,

and should

that we could not in any event have

expected permanently to be able to make a charge of from 150 to 25£ per
hundred on checks sent us for collection,

at the same time

U of our out of town checks without any cost whatever.
-L T

The banks in

smaller towns w i l l learn, as the city banks have already
make up losses in



exchange by adding to their volume of bus-

and while at first thought many of you may feel that there is

little chance of increasing the volume of business in your own towns,

am sure that as the workings of the Federal Reserve System become bet-

ter known, and the safeguards it offers are more fully appreciated,


^^cia> money now being hoarded in your communities w i l l come into sight


and be deposited with you, and with the development of your section, your
business w i l l expand in a healthy way.

You have been given


whether you borrow your money from the Federal reserve bank or not, of
getting all the rediscounts to which you are entitled at lower rates than
ever before.

You v/ill soon realise that there is no longer occasion for

y°u to hoard money by carrying abnormally large reserves,

reserve requirements

and before the

under the Act are fully e f f e c t i v e ,

I am sure that

>ou w i l l a l l have found that you can more than recoup your losses in the

ay of exchange profits by the gains derived through a greater volume of

What I have just said relates to the clearing of checks between
'°anks in the same Federal reserve d i s t r i c t ,

but the broader question of

exchanges between the respective Federal reserve banks has also been considered by the Federal Reserve Board.

It is proposed to obviate as far

possible the necessity for an actual transfer of currency from one

Fed eral reserve district to another, and I think we have seen for the
last time the stringency which has been recurring every f a l l during the
active crop moving period.

Member banks v/ill no longer be obliged to

undergo the expense o f , nor to suffer the inconvenience due to delays
attached to shipping in currency from the old reserve c i t i e s ,

but their

currency requirements w i l l instead be abundantly and quickly supplied at
a minimum cost by their Federal reserve bank.

The money that you w i l l

use in handling the crop next f a l l w i l l consist largely of Federal Reserve Notes, which w i l l stay in circulation as long as needed, and when
the crop movement is over, and the notes become redundant, they v/ill
find their way back to the Federal reserve bank, where they w i l l be retired.

The abnormally high rates to which v/e have become accustomed dur-



s the closing months of the year w i l l no longer obtain, nor v/ill there

°e the usual demoralization of rates in the early sprin,, due to the heavy
flow of redundant currency into the great financial centers.
drafts can,

if you wish,


Your cotton

continue to take their usual course, and I

Presume that you w i l l prefer to send them direct in order to avoid delays



You can, however, instruct your correspondent bank to make

' 4-

cposit with the nearest Federal reserve bank for the credit of your Federal reserve bank for your use, and you can order Federal Reserve Notes

om your own Federal reserve bank against such deposits as made.


. Under
iwnitlelr econtinue
s tprevail tothroughout
before uniform/rates
command highHouston,




and Waco

in ZiuxnamspEx:*xk'atxKbexxix*xXiQr&x than it w i l l in New York, Chi-

cago or Boston, but the rates w i l l certainly be stabilized and extreme
fluctuations v/ill cease.
Section 16 of the Federal Reserve Act provides


"T'he Federal Reserve Board shall make and promulgate from time to
time regulations governing the transfer of funds and charges therefor
^'Ong Federal reserve banks and their branches, and may at its discretion exercise the functions of a clearing house for such Federal res6;i
ve banks, or may designate a Federal reserve bank to exercise such
A c t i o n s , and may also require each such bank to exercise the funcx
ions of a clearing house for its member banks,"
Uie Board has accordingly,

after conferences with the Federal Reserve

Agents and the Governors of the several Federal reserve banks, decided


establish a Gold Settlement Fund, to be carried in the Treasury at

'asnington, and to which each Federal reserve bank shall


v l , 0 0 0 , 0 0 0 in gold, gold certificates or gold order certificates,


E d i t i o n to an amount at least equcd. to the net indebtedness due to all
Federal reserve banks as of May 24-th.

Each Federal reserve bank will be

required to keep at all times in this fund, a balance of not less than



and this balance w i l l count as a part of its lawful reserve.

the close of business each Wednesday night

(or when Wednesday is a

holiday, Tuesday night) each Federal reserve bank w i l l telegraph to the
Federal Reserve Board the amounts in even thousands due to the other Fed
er d l reserve banks as of that date, and on each Thursday the Settling

&ent of the Federal Reserve Board w i l l make the proper debits and cred-


in the accounts of each Federal reserve bank with the fund, tele-


each bank the amounts, in even thousands, of credits to its set-

Element account, giving the names of each bank from whom received, and

giving the net debit or credit balance in the weekly settlement.

debits and credits w i l l then be made upon the books of each FedQ y*Per
q "I
- reserve bank.

In case the debit settlement balance of any Federal

eserve bank should be in excess of the amount to its credit in the Gold




tlement Fund, such deficiency must be immediately covered either by

- deposit of gold, gold certificates or gold order certificates in the

eusury or any Sub-Treasury,

or by credit operations, which term include

d i s c o u n t s with other Federal reserve banks which have an excess balance

the Gold Settlement Fund.



Excess balances may remain in the fund to

credit of the banks to whom they are due, or they may, if desired, be


by the return to the reserve bank of gold order certif i c a ^ ,

Properly endorsed, or of gold certificates payable to bearer, and whenGver

practicable payments w i l l be made by the nearest Sub-Treasury.
I am violating no confidence when I say that the Federal Res-



desires earnestly to have the state banks become members of

Federal Reserve System.

The Board feels that the membership of the

at +
institutions is essential to the coordinated banking system that
wishes to establish,

and realizes that there can be but one credit


system of nation-wide extent.

It fully appreciates that the strength

°f the Federal Reserve System must be gauged by the quality of its members., rather than by number, and i t w i l l use all the broad discretionary
Powers vested in it by the Federal Reserve Act to bring about this coordination*

It seeks to establish only such reasonable standards of ad-

ission as w i l l be generally recognized as necessary to protect the Fed-

eral Reserve System against the admission of banks which would be a source
_ <
oi weakness rather than of strength,

and i t intends to prescribe only such

regulations governing their conduct as members, as w i l l insure a reasona

° l e conformity to the fundamental principles deemed essential to the suc-


s s of the new banking system.


The banks of this country are beginning

realize that membership in the Federal Reserve System carries with it

Privileges and guaranties of great value, not only to themselves,
their customers as well.

but to

It is believed that membership in the system

i l l come to be regarded as a test of banking solidity,

and that member-

ship, giving as it does f u l l access to the f a c i l i t i e s and resources of
"the system, w i l l add to the prestige of even the strongest

° that in the course of time the public w i l l ,


instead of drawing a dis-

tinction as heretofore between national banks and state banks, w i l l distinguish rather between banks which belong to the Federal Reserve System
^nd the banks which do not belong, so that ultimately l i t t l e



ill attach to the terms NATIONAL BANKS and STATE BAT-IKS, and banks w i l l

Section 9 of the Federal Reserve Act requires that state banks

becoming members of the Federal Reserve System must comply with certain
general requirements which now apply to national banks.
ital permitted is $ 2 5 , 0 0 0 ,

The minimum cap-

and this requirement as to capital is raised

I i\ (



according to tne population of the town in which tie bank is located,
so tnat in cities of more than 5 0 , 0 0 0 inhabitants the minimum capital
allowed w i l l be C200,000 c

State banks becoming members must also con-

°nn to .the provisions of law governing national banks regarding the
limixation of l i a b i l i t y which may be incurred by any person,
corporation to such banks,

firm or

the prohibition of purchases of, or loans

Pon their own stock, the withdrawal oi impairment of capital,

Payment of unearned dividends.

and the

The Board is not disposed to make any

and fast rules respecting loans upon real estate or mortgages by

ate banks who wish to become members.


e reasonable limitations,

It w i l l seek rather to pro-

so that loans or investments of this char-

acter w i l l not be so excessive in amount as to endanger the bank's


The important question of examinations has been fully con-


by the Board.

As admission to the system w i l l be regarded as

idence of a bank's strength,

the Board must necessarily have accurate

reliable information regarding the condition of an applying bank and

character of its management.

Examinations must, therefore,

be under



direction of the Board, but it w i l l


far as possible avoid impos-

additional expense upon a bank by adopting a method of joint or sup-

plementary examination in cooperation with state banking authorities.

w i l l use examiners and auditors in the employ of the respective Fed-

e rA T
reserve banks in supplementing the examinations conducted by the
banking departments of the several states, and in passing upon applicatl


o n s for membership the Board w i l l appreciate the cooperation of the

ate banking authorities.
The membership of state banking institutions in the Federal



eserve System d i f f e r s from that of national banks in being

and the Board has f e l t


from the start that the directors of state banks

should be given the right to terminate their banks' membership in case

e y should deem i t advantageous to do so.

The Board does not believe

that state banks after becoming members w i l l wish to withdraw from ttoc
system v/hich offers

so many advantages,

the r e s p o n s i b i l i t i e s


but at the same time it recogn-

to the management of the state


^nd having received ample assurances from high legal authorities as to
its powers,

it w i l l ,

I think,

members may, with reasonable

reach the conclusion that the state bank
limitations as to the maximum withdrawal

capital and reserves during any one year,
should they elect to do so.

surrender their membership

I am sure that the Board w i l l define


Petition in this matter clearly within a very short time.
Permit me, in


to impress upon you a l l ,



that we are l i v i n g in a c r i t i c a l period of the w o r l d ' s h i s t o r y ,

v e r sets upon the lands that are sending troops to engage in the most


conflict of a l l the ages,

destruction of property is enormous.

The sun

and the t o l l in human lives and in
The money cost of this war,

e indebtedness of the nations party to i t ,

sion of the average mind.

are beyond the


Mo one can predict the duration of

nor its ultimate outcome, nor can we foretell what






capital must be made between the nations after, the restoration of


were able last summer, to withstand the shock occasioned by the out-

break of war,
June 30th,


by putting into circulation over 0 3 0 0 , 0 0 0 , 0 0 0 of emergency

now p r a c t i c a l l y a l l retired or in process of retirement.

the law w i l l no longer permit such i s s u e s ,


and such

currency expansion as may be necessary in future w i l l be in the form of


Federal Reserve Notes.

The Federal reserve banks can ultimately provide,

even without the state banks as members, an emergency issue more than

'hree times as large as the maximum outstanding last year, but it can

extend direct aid to member banks only.

Those of you who control the

destinies of state banks are earnestly invited to bring your institutions under the protecting aegis of the Federal Reserve System,

and I

confidently believe that in doing so, not only w i l l you promote your


but that you w i l l perform at the same time a patriotic

act by adding to the power of the world's strongest banking system*