Full text of Statements and Speeches of W. P. G. Harding : Efficiency and Economy in Administration of Federal Reserve Banks

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

X-3231

EFFICIENCY AND ECONOMY IN ADMINISTRATION OF
FEDERAL RESERVE BANKS.

the program for t h i s Conference,
m

°nth ago, the f i r s t

which was sent out about

subject l i s t e d f o r d i s c u s s i o n i s " E f f i c i e n c y

Economy i n Administration of Federal Reserve B a n k s " .
alvfav
ys

an important

one,

has added s i g n i f i c a n c e

k a r SQs which have been given wide
SS

This

®sponsible

subject,

c i r c u l a t i o n and p u b l i c i t y

thft *
expenditures of the Federal Reserve Banks.
r

and

at t h i s time because of

k Q e n an amazing waste of p u b l i c money i n the increase

doubt '

a

of

that

there

s a l a r i e s and

These charges a r e ,

f o r t h e r e s o l u t i o n recently adopted by the U n i t e d

Sonata

.
d i r e c t i n g the Federal Reserve Board to inform the Senate

dumber

t

*
o f f i c e r s and employees,

together w i t h t h e i r respective

no
States

of the
salaries,

Of
ne

federal Reserve Bank of New York,

HqoQvw

as w e l l as of the other

Federal

_
Q

Banks,

and the e x p e n d i t u r e s made by each "Branch Bank" i n the

^Qctin
011

of p u b l i c b u i l d i n g s and the general expenses i n the

administra-

tion of each Federal Reserve Bank, and how much of the net e a r n i n g s have
®en u a i , ,
* A a t 0 t h e United States as a f r a n c h i s e t a x .

b

I n

the opinion of the Board i t i s unfortunate that matters of

should assume a p o l i t i c a l

aspect or that they should become the

of a Congressional r e s o l u t i o n ,
^formed

this

The Board h a s kept

Congress

#

u

these matters ever since the Banks were organized l a t e

in

year
I n each Annual Report information regarding s a l a r i e s has
t Of

S^ven
a
ch

i n d e t a i l , names only b e i n g omitted.
An e x h i b i t has been made
federal Reserve Bank, showing the number of o f f i c e r s by grades,

X-3231
- 2 sa

i a r i e s p a i d to each,

^

the aggregate

the total number of employees, t h e average

of a l l

salaries paid.

salary

Information equally e x p l i c i t

has

given from y e a r to year regarding the b u i l d i n g operations of t h e severa
®ral Reserve Banks.
c

The Board has endeavored to make clear the

haracter a n d f u n c t i o n s of t h e F e d e r a l Reserve Banks and to

distinguish

®tween matters w h i c h come under the s u p e r v i s i o n and control
®spective boards of d i r e c t o r s and under the general
Fe

deral Reserve

of t h e

s u p e r v i s i o n of the

Board.

some time p a s t ,

a p e r s i s t e n t propaganda h a s been conducted,

calculated to mislead the p u b l i c and which apparently
the System and i t s management i n t o d i s r e p u t e .

which

i s designed

The powers and

to
duties

of the
directors

of Federal Reserve Banks are d e f i n e d i n S e c t i o n 4 of t h e

^Qderal r
reserve A c t .

Responsibility

f o r the management of these Banks

rests Primarily
Br'
and d i r e c t l y upon thorn and upon t h e i r duly

offi CQ

and a g e n t s .

appointed

The law r e q u i r e s that any compensation that may bo

provi(jftj ,oy boards of d i r e c t o r s

for directors,

o f f i c e r s or employees

shall
00

subject

ha s not •
Q(

to the approval

of the Federal Reserve Board.

a l l cases approved s a l a r i e s which have been voted by

*0ral Reserve Banks,

but as a rule the recommendations of

The Board
directors
the

^Qctor
s

with respect to s a l a r i e s have been approved by the Board,

some-

times
'

PQrhaps,

w i t h some r e l u c t a n c e .

Th 8 tB>° a r d h a s taken the p o s i t i o n , however, that as the d i r e c t o r s are
y
r e s p o n s i b l e for the a d m i n i s t r a t i o n of the Banks, much consideras

to

hould be g i v e n to t h e i r views as to the rate of compensation necessary

SQc
r

® honest,

efficient

and c a r e f u l management.

I n i t s Annual

Report

for
year l g i s ,

the 3oard pointed

out tnat p a r t i c u l a r l y w i t h

junior o f f i c e r s and employees s a l a r i e s must be p a i d

respect

approximating

-3-

« 'e
e(

Sal

x-3231

a r i e s paid by large member banks i n the c i t i e s where

Wal

Reserve "ban'is are l o c a t e d .

If,

policy should be adopted of making
6re

ec

in order to reduce

it

of the frequent changes i n v o l v e d ,

r

y

®tain the services

the banks would have

and smoothness of

trained and capable

Ten.

Board does not f o r a moment b e l i e v e

that

ture s •
in developing

operatiion

the compensation p a i d be s u f f i c i e n t l y

of

^ e< ieral Reserve b a n k in f i x i n g s a l a r i e s

e

is hardly p o s s i b l e ,

that

degree of e f f i c i e n c y i n a d m i n i s t r a t i o n
which f>,
cnev would have i f

expenses,

the Federal Reserve banks

t r a i n i n g schools f o r b a n k o f f i c e r s ,

&use

the

liberal

the directors

or i n a u t h o r i z i n g

of

expendi-

the b u s i n e s s have b e e n actuated by any d e s i r e

the Government of

£he revenue which it i s e n t i t l e d

to

to

receive

under fv,
terms of S e c t i o n 7 of the F e d e r a l Reserve A c t ,

and most

su
r e d l y the Federal Reserve Board would not b e a party to any such
^snaking.

f e d e r a l Reserve banks are n o t ,
s

^itutions.

.The government

s t r i c t l y speaking,

owns no stock in them,

P o r t e d b y appropriations made by Congress,
^axation on t h e i r real e s t a t e j u s t

Government

i-hey are not

they are subject

to

as n a t i o n a l b a n k s are and

theij.
Payments out of e a r n i n g s
a

to the Government as a f r a n c h i s e

tax

t ti
me

s g r e a t l y exceed a l l

lar^eofc

national banks,

taxes p a i d by an equal number of the

s t a t e banks and trust companies i n

the bnited

St a^e
s

*

^he

lirectors

of Federal Reserve banks are edven such in-

^idefif -»
ai

Powers as s h a l l b e n e c e s s a r y to c a r r y on the b u s i n e s s

of

- W i t h i n the l i m i t a t i o n s p r e s c r i b e d by the Federal Reserve

Act

-

^^

x-323'i

k

-

" s h a l l perform the d u t i e s u s u a l l y appertaining

directors of hanking a s s o c i a t i o n s
scribed by

of

and a l l such d u t i e s as are pre-

iaw".

^here c a n he n o q u e s t i o n ,
Erectors

to the o f f i c e

therefore,

as to the a u t h o r i t y of

of Federal Reserve banks to provide

suitable banking q u a r t e r s ,

their institutions

^s has been repeatedly pointed

with

out to

C Crr\
?ress,
Gilding

i t has been impossible
operctions h a v e ,

Solution,

t h e r e f o r e , become n e c e s s a r y .

to which a l l u s i o n has b e e n m * d e ,

Reserve banks as " b r a n c h e s " .
****

to lease adequate q u a r t e r s ,
The

Senate

refers to the Federal

The Federal Reserve Pet ,• however,

it very p l a i n that these banks are not branches^

T h e i r in-

Pendent powers are d e f i n e d i n Section 4 and authority to
ra

and

establish

ftche a of t h e i r own i s g i v e n them i n Section 3The b u i l d i n g s
ar

tljgi w,

®

or constructed b y Federal

in no sense p u b l i c b u i l d i n g s .

acquisition
the

acquired

title i s

n o t

reserve

The funds necessary f o r

or construction were not appropriated by Congress,
vested i n the United States b u t i n the Federal

reserve

and they are not exempt from t a x a t i o n as a l l p u b l i c b u i l d i n g s
ar

®» "but are expressly made l i a b l e

off
icers
and
are

6

0r

of Federal
not p u b l i c

Public

reserve banks are not o f f i c e r s
officials

officials.

officials;
°ard

any more than o f f i c e r s

Federal reserve b a n k s ,

g a n i z e a under the laws <f

^

to state and local t a x a t i o n .
of the United

States,

of n a t i o n a l banks

like national banks,

the United States and each are

the F e d e r a l

The

supervised

reserve banks by the Federal

and the n a t i o n a l banks b y the Comptroller of the

are

Reserve

Currency.

- 5 Both rO
masses

are impressed w i t h d u t i e s

^ a t Federal reserve b a n k s ,
mein

to the p u b l i c , "but i t

by reason of

ter banks and the nature of

is

true

t h e i r supervisory powers

their business,

over

and b y reason of

the

8li *
Nation

of the element of competition,

have more of

the a t t r i b u t e s

of

SOVftTn
cental

institutions

banks.

n

° r d e r to render e f f i c i e n t service
,

0

the p u b l i c

thsiQ

federal
n

than n a t i o n a l

and to perform the f u n c t i o n s

reserve banks

are obliged

° t imposed upon n a t i o n a l b a n k s ,

/

to the member banks and

through

imposed upon them b y

to make large expenditures

the

which

s t a t e banks and trust copipanies,

not w i s h to impair i n any degree

the e f f i c i e n c y of the Federal

* e r v e banks, b u t deems i t important, n e v e r t h e l e s s ,

to call-your

to the general b u s i n e s s d e p r e s s i o n now p r e v a i l i n g throughout the
n
t i o n to the reaction w h i c h has taken p l a c e during the past e i g h t e e n
Months,
atry,
oountrv
to the smaller volume of earning assets now c a r r i e d by the
FedA m •«
5
to

r

the

©serve banks and the consequent

change i n public

sentiment w i t h regard

Board urges you,
SSar

titu

c

W

therefore,

to large

and

expenditures.

to do a l l i n y o u r power to e l i m i n a t e

y expense and to conduct the b u s i n e s s of y c u r

tions

g e

reduction i n the e a r n i n g s ,

respective

i n such a manner as to give no reasonable grounds f o r any

f

extravagance and w a s t e ,
Secent Developments

i n the Par Clearance System and

Suggested Changes i n Methods.
ijiu
Board d e s i r e s
S l t i
c

°Utitr
y

n g
il1

its
ts

°n

to e l l

your a t t e n t i o n to the p e r s i s t e n t

on the p a r t of a large number of non-member b^nks

of

the

to the F e d e r a l reserve p a r c l e a r a n c e system and to the impedi. v
c h have b e e n thrown i n the way of making this system u n i v e r s a l

ni

scope.

The i n j u n c t i o n which was o b t a i n s

scn.a eighteen months ago by '

s

tate "banks i n Georgia a g a i n s t the Federal R e s e r v e B ank of A t l a n t a

s

t i l l in e f f e c t .

The F e d e r a l reserve b a n k was successful

in

the case from the s t a t e court to the United States D i s t r i c t
W

°n

a

c l e a r cut d e c i s i o n i n that c o u r t .

Cir
r

C

is

removing
Court and

It won also i n the United

States

•
cuu

°Urt

Court of Appeals, b u t the d e c i s i o n of the United States

' Va s to the e f f e c t

that i f

the a l l e g a t i o n s made by the

C0Uld

sustained they would b e e n t i t l e d

lsn

Us

guage

ed

to r e l i e f .

Supreme

complainants

By reason of

the

i n the o p i n i o n of the Supreme Court this d e c i s i o n has

been

^presented
to the p u b l i c as a sweeping victory f o r the complainants
ajid 8 5_
.
a condemnation by the h i g h e s t court of the land of the p o l i c y of
Federal reserve banks w i t h respect
a- matter of f a c t ,

however,

to c o l l e c t i o n s .

the case has merely b e e n remanded

to

tlle
tfoited States D i s t r i c t Court i n Georgia f o r t r i a l on i t s m e r i t s , and
ct f a v
° T a b l e outcome i s a n t i c i p a t e d b y the b a n k ^ s Counsel, w i t h whom i s
aSs

o c i a t e d Hon. John W. D a v i s ,

foixuai- S o l i c i t o r General

of the United

Sf
ates

^

more recently United States Embassador to Great B r i t a i n .

This

doubtless come a g a i n b e f o r e the Supreme Court of the United
States ai n regular course a f t e r i t has b e e n d e c i d e d b y the United S t a t e s
^ s t r W n
AC
t Court and the United
t is n e c e s s a r y ,
6

le

gislatures

however,

of the States

Circuit
States/Court

of

Appeals.

to c a l l y o u r a t t e n t i o n to the f a c t
of L o u i s i a n a ,

Mississippi,

that

Alabama,

'Pen
e

ssee,

Georgia,

F l o r i d a and North C a r o l i n a have enacted laws w h i c h

make i t d i f f i c u l t ,
at

-ia w

Par,
s,

and w h i l e

a separate

i f not impossible,

to oblige non-member banks

there is doubt as to the c o n s t i t u t i o n a l i t y
test 'will have

to be made i n each

instance.

of

to

x-323'i
- 7 Th '
s will

involve great expense and perhaps many y e a r s w i l l

elapse

before

i s not the purpose of the Board to recommend any immediate

change

the cases can bo decided
^
n

Policy,

finally.

for Cour.se). i- anxious that

nothing be done to confuse the

have already been d e f i n e d
^ted

States D i s t r i c t

a

opportune,

CCasion

+

in Georgia,

case now pending i n the

but a f t e r that

court has

decided

s e the Board may suggest a m o d i f i c a t i o n of the present p l a n .

s

St

Court

i n the

an<

ue i r

therefore,

i request

It

to d i s c u s s t h i s q u e s t i o n on the present

the Federal R-eserve A gents and G-overnors of the banks

separate meetings to devote

such time as may be necessary

for

ft f u 1
Xl

discussion

.of t h i s

subject.

A c t i o n 16 of the Federal Reserve Act a u t h o r i z e s the Federal
to exercise the f u n c t i o n s of a c l e a r i n g house for the

Federal

banks or to designate a Federal reserve bank to e x e r c i s e
furicti

Reserve

such

and a l s o to require each such bank to e x e r c i s e the f u n c t i o n s of

^ ClQa
tt

rmg
the

In

ma

house f o r i t s member b a n k s .

I n the development

Board has attempted to e s t a b l i s h

ny

of t h e p r e s e n t

such a c l e a r i n g house i n each

of the large c i t i e s there are banks which are not members of

th?
C

cal

c l e a r i n g house,

but which are permitted to use some

clearing

ho
US

to

c

mQ

°

aiber bank as a c l e a r i n g a g e n t .

°ftform to a l l

Member v ,
oanks.

Such banks are,

however,

obliged

the r u l e s and r e g u l a t i o n s which govern c l e a r i n g house

Non-member banks which r e f u s e t o remit at par for

,
,
checks

(irawn
0J

It ta

i them have been a v a i l i n g themselves of the f a c i l i t i e s

* * reserve p a r

clearance system through t h e i r member bank

of the
correspondent

^ teen suggested t o the Board by the Governors of two Federal
baiHc* +v,
tnat

i n view of the l e g i s l a t i o n

reserve

i n the s t a t e s above named and of

X-3231
- o possible similar l e g i s l a t i o n i n ether

states,

i t would be well to take

^ v a n t a g e of another provision • i n Section l 6 , which authorizes

the

Sderal Reserve Board to f i x the charge which may be imposed for the
ser

vice

of clearing or collection rendered by the Federal reserve bank,

y authorizing Federal reserve banks to advise their member banks that
on and

axxer a certain date a compensatory charge of so much per one

^ ^ r e d dollars w i l l be imposed against the member banks on a l l
u

the

D

Par

checks

y or o r i g i n a t i n g with a non-member bank whose name i s not on

list,

Under such a regulation non-member banks which refuse to lend

their

°P®ration to the Federal reserve collection system would have to pay
for

v
0

benefits derived by them from that collection system,

would

UlllQg

hardly be w i l l i n g to collect

f o r member

checks for such non-member banks

paid for doing so at rates equal to those charged by the
r

°S9rve
T

Federal

banks.

he Board requests that the Governors and Federal Reserve A gents in
e

parate sessions discuss t h i s proposition i n a l l i t s

bearings.

•, i

P r i n c i p l e s Governing the Discount Rate,.

bankg

Control over discount rates, as exercised by the Federal reserve
and
Federal Reserve Board, i s one of the most important and

-reachi n g

powers ever delegated by Congress to another

instrumentality,

grant
ranks w i t h the power given the I n t e r s t a t e Commerce Commission
to rQg U l .
kind

railroad rates.

Sh0
ul

d

While

it i s necessary that powers of t h i s

be vested i n a few hands they should be used with

discretion

a&d the
e

the

*fect

^ange i s

of a change i n rate should be carefully
made<

considered

before

x-3231
- 9 The p r i n c i p l e
rQ

r

i s well e s t a b l i s h e d

serve bank discount

ates.

^6en

that i n theory the

Federal

rate should be s l i g h t l y i n excess of

current

There has been much d i s c u s s i o n of the reductions which have

made

°Pinions

i n discount r a t e s during the l a s t
0f

the p r e j u d i c e d and t h e uninformed,

° n U i c t i n g views of
TQ o
Pect.

in a financial

disregarding

l e t us consider

some whose opinions are worthy

The quotations which follow

PUbll8hed

s i x months and

the

of a t t e n t i o n and

are from a symposium recently

journal.

^ New York banker and an E a s t e r n economist expressed

themselves

therein
as follows"

"The basic i d e a i n t h i s p o l i c y of keeping the

scount rate above the market i s t h a t

reserve bank money i s f o r

° 9 P tt i o n a l and unusual use - that i t i s not the province of a reserve
bank
bank
t<0
supply a s u b s t a n t i a l part of the ordinary funds employed i n the
i n ordinary times.

Of

course,

it i s expected that a reserve

bank

shall mat
a
* e money for i t s stockholders and shall employ such of i t s funds as
be
necessary to meet expenses and to pay d i v i d e n d s .

eral Reserve Act, p e r m i t t i n g open market operations on the part of
ra
l reserve banks, was designed to give them d i s c r e t i o n i n t h i s

the

1

the p 0

wh0

t h e r the member banks should rediscount w i t h them or n o t .

"0alC9s

But

...
ion of a reserve bank i s a very p e c u l i a r one.
a

ua
loan
n»

checlfe come i n a g a i n s t i t ,

dep0si+
At'S are made w i t h i t

of

If an ordinary bank

as a consequence of t h e loan,

eet out of i t s reserve u n l e s s i t
ll8w

One p r o v i s i o n of

should happen that

checks drawn on other banks.

which

simultaneously
Loans made

by a
®serve bank,
111

^ k i r i g& a* il o a n ,

^8counti
^ n g bank,
* Cce Pte<i

a s

however,

need not lead to d r a i n s on i t s r e s e r v e .

When,

i t i s s u e s i t s notes or gives a deposit

credit to a re-

that note or a t r a n s f e r of that deposit

credit w i l l be

ultimate payment by some other i n s t i t u t i o n .

The

deposit

x-3231
- 10 labilities

of the reserve bank count as ultimate

banks of the country,

reserve for the

and the volume of reserve money i s

other

consequently

^ c r e a s e d through a mere increase i n the deposit l i a b i l i t i e s of the
re

serve bank.

With an increase

in the volume of reserves of the member

there i s an immediate tendency to a reduction i n the
leV0

l

of discount rates throughout the country,

general

p l a c i n g them below the

* 6 v e l which open market conditions would otherwise call for and
te

®ptation for the uneconomical use of bank funds.

creating

There i s parti-~

(JUlarl
y a temptation to use bank funds in an excessive degree for
^ U r p o s e s , and for the ordinary- banks of the country,
artif•
1

misled by the

c i a l excess of l i q u i d cash, to t i e up too great a part of
in

non-liquid form.
low,

110

therefore,

capital

their

The reserve bank which makes rediscount

instead of performing i t s function of

increas-

liquidity

of the banking system, tends rather to destroy l i q u i d i t y
•A Chicago banker reiterates the opinion expressed by him several
015

s that the Federal reserve banks and the Federal Reserve Board ought

Proceed very slowly i n lowering the present r a t e s .

He a n t i c i p a t e s

"that +hf
nere i s

considerable danger,

i n case the rates are lowered

P i t a t e l y , of a renewed i n f l a t i o n , w i t h a consequent reaction more
x
h a n the one through which we are now p a s s i n g .
He takes the
y

iol(

^at
iew
rate s i

v

i n general i t i s a complete mistake t o have the

rediscount

lower than the p r e v a i l i n g market rates f o r commercial loans,

for

if bank s are enabled to rediscount t h e i r paper at a lower rate than they
theujgg-j v

VQs

His

receive,

obviously a continued i n f l a t i o n i s p r o f i t a b l e to them.

.
P i n i o n coincides with the views of the E a s t e r n banker and the
komist above quoted and he stresses the point that o u r large
VQ

is,

after a l l ,

gold

due only to the fact that gold i s not b e i n g

x-3231
- 11 Clr

culated at the present moment and that much of t h i s gold i s l i k e l y

to

out of the country as soon as there is a change in the balances of
•V
e

hi

'

He concurs,

also,

in the view that, a certain amount of the gold

ch the Federal reserve banks have at present

n

tr

y

adherents of a policy

ust for Europe.

He regards as entirely

-e because the reserve ratio:
ba

A

with th

f a l l a c i o u s the argument made

and gold accumulations of the Federal

n k s j u s t i f y a relaxation of the o f f i c i a l

rates,

Milwaukee banker who contends that the policy
money market tendency,

^Pposeda

should be i n accord

states that "The main point made by those

"to the lowering of Federal

Coittrt

in a sense,

of l e v e r i n g rediscount rates that such action i s

DJ

SSrVe

i s merely held,

reserve discount rates i s that the re-

rate should always be above the market rate.

This i s l a i d down

a
Seneral p r i n c i p l e to which there are no exceptions.
are

only emergency funds,

for K
^

i t i s said,

Federal

reserve

and i t should not be possible

a ^ s to make a p r o f i t by rediscounting at a lower rate than the market'.'
° a l i s attention to the fact that "When the demand for credit i s excessive
Cr
sin

sity

°asing,

the reserve banks should move into a dominating p o s i t i o n by

6 their rates above the market rates for money.

But the same neces-

f
r

discouraging resort to Federal

reserve banks does not exist when

d9mand
ac

f
o r credit slows down, loans are being paid_ off and
cumulating %

What has

reserves

happened as a result of the recent lowering of

count rates?
Has it resulted i n an expansion of loans or reinflation?
*ot at a 1 1 '
On the other hand, the published records show that member banks
h&ve
° n t i n u e d to reduce t h e i r rediscounts and borrowings and to do t h i s
v
r

°Ught pressure upon t h e i r customers to l i q u i d a t e .

Customers who

'^Vq
oluntarily l i q u i d a t e d and got themselves back into good

financial

Coii

<Hti
are offered lower rates on new l o a n s .
tiv

This,

e to those who have not done so t o l i q u i d a t e .

of course,
This i s the

i s an

X-3231

- 12 practi C a i

way m which the leadership

of the Federal reserve banks i n reducir,,

their r a +
axes has worked.
^wed, i n n
f la t i o n .
banker

There has not been the slightest tendency toward re-

Rather the tendency has been to further l i q u i d a t i o n . "

This

ac

®rees

t h a t

general p r i n c i p l e of keeping Federal

reserve

discount

4

^

t rates above
Xco

serve

P0 t ix o n s as i n the present condition of thingsThe present Federal re~
c y i s i n accord with the tendency of the money market and it i s

* to
eff

the market rate for money i s sound, but it does admit

v
.
any
° now i t has had or w i l l have
but a wholesome and

86fl

*ct.

constructive

I n

a recent p u b l i c a t i o n a well-known banker and economist has as88rte

* that

.

ne

b e s t

of the money market i n t h i s country i s

the rate

011

-credit loans to borrowers from two or more banks,

and not the rate

ac
cc
S

4

are

Ptan C Q
Public

bli

as i n England,

The volume of line-of-credit loans

Cou t r v i s far larger than the volume of bank acceptance credits,
be fi

~
e

©ptance s >

ed

whQ

atQ

s.

in
but i t

t h e r the rates on such loans are as competitive as bank
Bank acceptance rates are fixed i n the open market and

.
*

Line-of-credit l o a n s have no open market and there are no

shecl rate

t
Line-of-credit loans are not as competitive as they may

551311

Lar
68

°

0r

f i m

common;l

y maintains a l i n e of credit only at i t s own bank.

Porati

8 usual3
- y iiave l i n e s of credit not only with their home banks
\*ith x
Se
kS i n f i n a n c i a l
cUr
centers, not n e c e s s a r i l y because they can
^ 1 Qty Qj,
ra
HeQd
t e s , b u t because no one bank wants to take care of ..their f u l l

W

r

^
r

thQse

s

i t i s to be doubted whether line-of-credit

loans

4 l a* PqaJ
a n

$

reason

i n d e

*

of

money market tendencies as the bank acceptance

The i a t + A
re r
^he ? 9 c a U s e thi
P e s e n t the minimum rates for t h ? best class of paper
if
18 S
H/r
t of ti™
° ' t h 6 y i n d i c a t 0 f a r beyond t h e i r actual, money volume
n e ma
V ? "to 5
rket.
The present rate on e l i g i b l e bank acceptances of
^ P e c t e d T 1 ^ 3 a b e t t e r i n d i c a t i o n of *hat i s taking place and what
Whi
0pQn
raon9y
market
c h refi
than rates on line-of-credit
*°ii.ect market condition more s l o w l y , M

x-3231

- 13 -

Another Chicago b a n k e r takjs an extremely conservative v i e w .
would xl i v
iH:e to see "-any of the so-called "v?ar amendments"
^serve ^Co repealed and s t a t e s
a

that as the law s t a n d s ,

§ e and wisdom of the management prevents

sng ij^g

He

to the Federal
,7

nothing b u t

the

i£ from becoming a d i s a s t r o u s

n

inflation*.
Member

w

He objects p a r t i c u l a r l y to the amendment which forces

v

^^s

to c a r r y t h e i r e n t i r e

lawful

reserves

in the form of

collected

d a n c e s with
•
the Federal reserve banks and "believes thpt this amendment,
w
hich
re
g a r d s as p r a c t i c a l l y demonetizing g o l d , is most dangerous in
n

°riEai ti
imes.

Referring

to the complaints w h i c h have b e e n made that

the

^icultnr i
u
t irl a
el

U y

d i s t r i c t sis have
e e n and
d i s c appears
r i m i n a t e dto abgealiinesvte,
opposite
the b
case

the
eserve System has worked a great i n j u r y
aS

in

a year

aeo

ai

He states

tions.

o-ebts.

I f i t had not been f o r the Federal reserve banks,

h

to s e l l

for
farmers

their crops a y e a r ago and

T h i s would have saved them and the country from the dis-

th
a

reServ

I n a time of i n f l a t i o n such as we had

the operation of the usual normal remedies

y Would have b e e n compelled
aster

,f

•
it nullifies

Sol

to the country as w e l l

esti
enable b e n e f i t s .

ich

he
"believes
a
lso
that thethat

t has overtaken them.

A l s o , had i t not b e e n f o r

the Federal

* banv
anK
s , manufacturers and merchants would have b e e n unable to acc
the heavy inventories e n t a i l i n g losses m a s i n g l e y e a r
it o r• carry
take a generation to r e p l a c e . "
He b e l i e v e s that "The

utiotl

xo

this

is to keep the Federal reserve d i s c o u n t rates

above

X-3231

- 14- -

Cur

r e n t market r a t e s ,

the

as

Prober banks
the Federal

so that there w i l l be no temptation on the p a r t

to p r o f i t e e r

reserve

rates

through the Federal

reserve b a n k s .

are kept b e l o w current

rates,

So long

there i s ,

W g m e n t , .no way i n which this kind of i n f l a t i o n can b e p r e v e n t e d .
° t h e r hand, i f borrowers compel

t h e i r banks

to rediscount

them to carry crops or goods f o r higher p r i c e s ,
that

thg

bariks

r

should understand

§encies,

ls

th

y are acting against

the general judgment.

that they are not expected

and they should be made to f e e l

i n d i c a t i o n of weakness

of the country i n

to borrow except

He expresses

^fcical

in

thn f

rates and expresses the b e l i e f

ist

th

© process

tatSs

U

today,

the a d o p t i o n ,

luidated,

that i n view of

at t h i s

time,

of

in.
conditions

the world-wide

the preconditions
.

of a r t i f i c i a l means

of readjustment would be a dangerous course

"Considering

to accele-

to p u r s u e .

He

the e x t e n t to which c r e d i t f o r s p e c u l a t i v e purposes

has

and also taking

P o s i t i o n of the Reserve
full

tnat the con-

that the F e d e r a l reserve rate should be h i g h e r that

ex

the hope

the Bo-^rd i s such that any c l e a r statement

g commercial r a t e , b e l i e v e s
„

to meet

statement of what i t s

New York b a n k e r while convinced that under n o n x a l

it i
s

in order to en-

I n normal times member

^ a n o e n t a l p r i n c i p l e s made b y i t would be acquiesced
Mother

On the

that borrowing at sucn times

t the Federal Reserve Board w i l l make a p u b l i c

fidence

in ray

they are put on n o t i c e

and needs e x p l a n a t i o n . "

p o l i c y w i l l be regarding

of

into consideration

banks,

y j u s t i f i e d . . Furthermore,

the present

reserve ana.

i t would seem that the r e d u c t i o n i n

I do not b e l i e v e

the reduction at this

in ^v
e

r

a t e w i l l a p p r e c i a b l y encourage a tendency toward renewed

^ t i o n .

The question of rates h a s ,

credit

on the whole, b e e n ably and cour-

rate
tiro

- 15 -

age

x-3231

° U s * y handled b y the Federal reserve banks and the Federal Reserve B o a r d . "

He
y s that if he were to offer a c r i t i c a l
rk

upon

Sui

Of

the

observation,

i t would be

to te-

nsalutary modification of the need f o r d e f l a t i o n that would have

t e d had the high 1rates b e e n put into.teffect i n the spring of 1919

tI18
4.V

c
When

summer of 1920* .

instead

A

Boston banker takes the view that the Federal Reserve System was

u

i o r the purpose of furnishing c r e d i t , b y means of rediscounting,

otmiercial banks of the country.

He says

(,

to

I n a general way the time

thi
s credit is needed is j u s t b e f o r e , during and immediately a f t e r a

Cre<

Ut

ri
r

C

s i. s ,

or credit p i n c h ,

and it seems clear that at such time the

ged f o r rediscounting should be at about the current market rate

ar

^ ged b
y the commercial banks

to their customers.

To make the rate higher

than the
prevailing rate would tend to restrict
merchants and similar borrowers.
n

1
reser

*e

prevailing
banks.

the granting of necessary

To make the rediscount rate much

rate would tend to encourage overloaning b y the

In f i x i n g

the rediscount

rates,

the managers of the Federal

b

aiiks should try-, so f a r as p o s s i b l e ,
^ence*
u

t

to keep their minds free from

v
other
than those which d i r e c t l y concern the p r e v a i l i n g rates
they c e r t a i n l y are j u s t i f i e d , when f i x i n g

the rediscount

of

rate,

S influenced by motives of the s a f e t y of the Federal reserve banKs
^ H e s
tal

>

» ?nd when the rediscounts appear to be approaching a dangerous

they should use t h e i r rate-fixing power to check speculation and to
y possible danger to the Federal reserve b a n k s , which are the

^tlor,

of
01

,
6ul

our whole banking<sy6tem-

I t was never intended and never

<l be intended
i
that the Federal reserve banks consciously use

their

x-3231

- 16 power a-n^

authority either

to encourage or to discourage b u s i n e s s .

Their

Chief rn
Purpose should be

tc a s s i s t comrrercial banks and to f i x the rates

discount so as to best accomplish t h i s ,
ir

0Wn

and at the same time to protect

P o s i t i o n from any possible o v e r s t r a i n . "

He regarls as one of the

aangers the Federal Reserve System can be subjected
the attaacics
v and manoeuverings of p o l i t i c i a n s ,

S3 rve
~

Political

of

to would be

in order to make the system

ends.

M o t h e r leading banker does not b e l i e v e
wh5ri . .

that the time has yet arrived

iscount rates should be held ut> to a point above the rates for commer

cial -n
Paper because the conditions of business are not yet on quite a

noriTi

al h

•
asis*
vn

He says that i t has been the habit of commercial bankers

their commercial customers that their rate,"

to

to their customers

is

b p the Federal reserve bank discount rate and that it should ,be enough
higher th
an the discount rate so that there would be a p r o f i t to the banker
een
discount rate and h i s rate to h i s customers.
He says further

betw

There i s
yet in our banks a large amount of so-called frozen loans which
a
be de<*r»
crit) Q; i as loans which are probably
are

good but which the borrowers

ln
not i,
a p o s i t i o n to pay off at the present time.

Therefore,

1

^

a Pos
positi
tion to trade on market rates on an even basis with

they are not

the banker.

ier the
conditions,
SillI

tor

Ply

has

ners

aesi

m

a high discount rate of the Federal reserve banks

helped the comnercial banker to get higher rates from h i s cusar

e j u s t i f i e d by the conditions of credit.

Therefore,

i t was

*ablo
-

necessary for the Federal reserve banks to reduce

rates from 6 or 7 per cent,

to 5s p e r cent,

their

i n order to inform

x-3231
-

c

oir,rrerci?l community that the credit s i t u a t i o n no longer

these high r a t e s . "

ierr.anded

Ha takes the view that "Federal reserve bank dis-

count rates should not be made with the idea of controlling business
Market prices of conn o.li t i e s " , but that "They shoula be
of fv e
• effect that the present business
Cr

sdit and of anticipated conditions

in the

near f u t u r e , "

indications

is having on the supply of

that w i l l a f f e c t the supply of c r e i i t

He "believes that "^hen the business corrrnunity h a s

bgQQjy
trained to the point of watchinsr the reserve Position an t disra

tes

ing

of the Federal reserve banks and has come to an1, unierstand-

,
w

re

hat

these figures mean ** they w i l l be h e l n e i verv much by

the published conditions of the Federal reserve banks and w i l l
ciat<5 w>at a change i n iiscount rates means, provided of course

th at fV e
^Qmperp^

cf:icers
*
m

and directors of the Federal

reserve hanks are not

u s i n g their judgment in these natters by outside

^ Chicap.o rerchant notes the difference
as

h
influences",

of opinion among

to the proper time for r a i s i n e or lowering the Federal

r

®servR

rediscount rates.

e

He points

out that neither

the Federal

n o r

^ 9erve <5 4.
°ysten>/

any part of i t can be run on any forrrula, and that

if i t
couli very l i t t l e brains would be required for that part after
e

or

f

orrrul a had been found.
commerce,

So
e

oth

He b e l i e v e s

that " I f we are to be a world

as we rr.ay b e , we shall have to make the New York

e r d i s t r i c t rate attractive for the discount of the w o r l d ' s

m

* £ort
for

a

^
s

h°rt

export b i l l s ,
time,

We mi git,

of course, be above the English rate

for adjustment or other purposes, but i f we make a rule

- 18 -

to

^ave

Yor

k,

the

rate always above

our ambition

E n g l a n l

i n

hank

the commercial paper rate in New

to be the w o r l d ' s bankers,

conferee and f i n a n c e ,

takes the vie<v that i n c r i s e s
w e l 1

justified

x-3231

or to compete with

w i l l v a n i s h into thin a i r . *

and e x t r a o r d i n a r y emergencies a Reserve

i n v i o l a t i n g temporarily

the

ordinary

enons of sound f i n a n c e , b u t emphasizes that under normal
tions and under conditions when i t i s p o s s i b l e
,

the w e l l

Nations

established

conii-

to take a long run

t r a d i t i o n s covering a Reserve

must be f o l l o w e d .

He

bank's

The c h i e f of these canons i s

that

the J.Q-J j
- iscount rate

of Reserve banks should b e kept above

the mar-

ket.

The Federal Advisory C o u n c i l ,

at i t s l a s t meeting,

on Septem-

ber 2oth
n

»

expressed i t s b e l i e f

that r a t e s should b e a r a d i r e c t re-

en t t a Federal reserve barik*s reserve and to the general money
Market » ani
that in a d d i t i o n consideration should be given to the
item s
^numerated i n the C o u n c i l ' s recommendaticn of May 1 7 ,
f

1921,

as

°Uows:
1.

The reserves

of the Federal Reserve System as a w h o l e .

2.
The reserve p o s i t i o n of t v e Federal reserve bank whose
rate i t is contemplated to change.
3.
The c o n d i t i o n of all the banks of the country as a
whole, and of the several Federal reserve d i s t r i c t s .
The economic and f i n a n c i a l c o n d i t i o n of t h i s
5.

^orld c o n i i t i o n s ,

country.

both economic and p o l i t i c a l .

6.
The eventual establishment of a ere l i t rate p o l i c y
f o r the Federal reserve banks by which the rediscount
rate to member banks is h i g h e r than the p r e v a i l i n g com-

- 19 -

x-3231

mercial r a t e , t a k i n g due c o n s i d e r a t i o n of the p r e v a i l i n g
open market rates f o r v a r i o u s c l a s s e s of loans "both i n
t h i s country and abroad.
7 . Uniformity of r a t e s , w h i l e at times p r a c t i c a b l e and
d e s i r a b l e , should not b e adopted as a f i x e d p o l i c y , the
System b e i n g p r e d i c a t e d upon the p r i n c i p l e that varying
c o n d i t i o n s might e x i s t in d i f f e r e n t sections of the
country.
With r e f e r e n c e to the general money market the f o l l o w i n g f a c t o r s were
3u

ggested by the Board as ones which should be considered in

at

a

arriving

conclusion as to what i s the current rate for money.
1.
2.
3«

B

Rates charged b y banks to their regular customers.
Rates for one-name paper bought through nfcte b r o k e r s .
Onen market r a t e s on bankers acceptances, and
Rates on Treasury C e r t i f i c a t e s .

° a r d asked the Council f o r i t s views as to the r e l a t i v e importance

of

®ach of i-L.
these f a c t o r s and the council expressed the view t^at a l l
items mentioned
rro • •
are important i n determining the money market but
^ay be
other f a c t o r s which
nera

l b u s i n e s s conditions and the reserve p o s i t i o n of a Federal

district will

there

should l i k e w i s e be given c o n s i d e r a t i o n ,

was the v i e w o f the Council
a

four

such as
reserve

that the r u l i n g r a t s for money

a d j u s t i t s e l f automatically

to these

conditions.

The Council expressed the view also that a Federal reserve bank
c

t i s borrowing should not lower i t s rate, but states
that special
a
°hditi0n
.
s -might e x i s t i n a d i s t r i c t which would make/reductions dea n ! would j u s t i f y

such a course.

- 20 -

x-3231

I t seems clear to the Board that i t is not nracticabls i n this
country for Federal reserve hanlrs to maintain rates

of .discount higher

current market rates i f line-of-credit loans are to he
as

the c r i t e r i o n .

80

high as to nreclude this as a p o s s i b i l i t y .

stan

The rates of interest permitted in many states are
I n ordinary circum-

ces when the credit r i s k i s at a minimum the r^tes p a i i for high
8

m

accepted

commercial paner sold i n the open market ir>av be regarded as a

^asure of the market rate f o r money, but i t i s evident that at present

er* ^A
there
s much consideration to be given to the b a s i s on which short
time

^ligations

^ankers*
e
,rre

of the Treasury are sold and tc'market

acceptances.

The nroblem,

rates for prime

therefore,i,s more simple at this

in ji i s t r i c t s l i k e New York, Chicago and P h i l a d e l p h i a ,

where the

B'edier AT
A

reserve c i t i e s are dominant i n their d i s t r i c t s ,

^istrirv*t s which
,
cover a larger
str

i b u t e d and d i v e r s i f i e d ,

SQ
,v

but in other

territory and where the business i s more

the problem is more d i f f i c u l t .

At the

nt time four Federal reserve banks are rediscounting about

$U^*000,

ith th
nree other Federal reserve banks.
W1

te

f

n g banks

The directors of one of

more than a ijionth ago voted to reduce

r 0 m 6 per cent,

to 5J per cent,

these

their " ^discount

on a l l classes of paper, but the

federal rReserve
>
Board has not yet approved the reduction.
No evidence
has b e P w
presented to show that current rates for bank accomodations are
less th
tna

n the Federal reserve bank r a t e ,

^ducea v
the

or that current rates would be

lowering the reserve bank r a t e , but the directors argue

that

Co

° n s o l i d a t e d reserve p o s i t i o n of the system j u s t i f i e s a lower rate.
^
desires to have the views of members of this conference as to
the q j .
d i s a b i l i t y of permitting any Federal reserve bank to reduce its

21 -

x-3231

Resent discount rate u n t i l i t s own reserves have increased to a p o i n t to
* * * it unnecessary for it to rediscount - i t h other Federal reserve b a r k s .
The Board has been i n c l i n e d to the view that the reserve percentage of
09 v
federal reserve bank,
lnto

*

Per

cen

*

I f the Federal Heserve Bank of Chicago, with a reserve of around 70
t.

and the Federal Reserve Bank of S t . L o u i s , with a reserve of

per cent,
°,v

do not f e e l j u s t i f i e d i n reducing their

Cent

r

0

Usfiount rates

present level of 6 per cent, what argument i s there for a borrowlike

0f

should be taken

ccrsideration as one of the determining factors i n f i x i n g the discount

ratQ

bel

as well as that of the System,

»,

Atlanta, having a reserve without rediscounts

to have a 5 i per cent,

ratet

of only 3 2

On the other hand, what are the

® * < * t 8 against a reduction i n d i s t r i c t s which have so high a percentage
re
serve?
Board requests the members of this Conference to discuss a l l

^tions
to

involving p r i n c i p l e s of the discount rate frankly and f u l l y

^ P o r t their conclusions before the close rf the Conference.
Sx

c

*dble,
<*mt,

^ e n

C

y

i f

p03sible,

frorp

w h i c h

cases%

It

these
and

seems

to formulate a general policy regarding rates

there

w o u l d

fce

n o

divergence except in unusual

or

of