View original document

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


By William McC. Martin
Chairman of the Board and Federal Reserve Agent/
Federal Reserve Bank of St. Louis

 MttOCftAT p. * i . c o . i r m c



A. F. BAILEY, Manager
M. H. LONG, Cashier

A . F. Bailey

C. A. Pratt

Ed Cornish

Geo. W . Rogers
Moorhead Wright

An Address Delivered Before the Annual
Convention of the Arkansas Bankers*
Association at Little Rock, Ark.,
on May 28, 1919.
In discussing this question it is going
to be my effort to be as practical as possi­
ble. Some banks have determined to join
the System and wish to know the next
step. Other banks are considering how
they should go about determining whether
or not they should join. It is my hope that
this discussion will enable both classes of
banks to clear up certain points about
which they are in doubt. To begin with,
a State bank to become a member of the
Federal Reserve System should be some­
thing more than solvent, it should be in
good condition. It stands to reason that
the System will not take in some bank
that weakens it. It would not be fair to
those banks that are already members of
the System. The System gives a great
deal of strength to the bank that joins it
and in turn does not expect to take in any
bank that contributes an element of weak­
ness rather than strength. A good bank,
however small it is, contributes an ele­
ment of strength to the Federal Reserve
Capital Necessary for Membership.
In addition to being a good bank, a
State bank must have sufficient capital to
enable it to join. That is, if it is located
in a city or town not exceeding 3,000 in­
habitants it must have a capital of $25,000.
If in a city or town exceeding 3,000 but
not exceeding 6,000, it must have a capital
Digitizedof $50,000. If in a city or town exceeding

6,000 but not exceeding 50,000 inhabitants
it must have a capital of $100,000 and if
in a city exceeding 50,000 inhabitants,
$ 200,000.
Perhaps the most helpful way to treat
this subject is to consider a hypotheticalcase, using the smallest capital which
makes a State bank eligible for member­
ship, that is, a bank with $25,000 capital.
Let us say that this bank has a surplus
equal to 20 per cent of its capital, or
$5,000. A good bank will want at least
this much surplus, and if a bank having a
less surplus should make application, while
this would not be something to criticise,
one of the conditions of membership would
be that the bank shall, twice each year,
carry to surplus account one-tenth part of
its net profits for the preceding half year
until its surplus fund shall amount to
twenty per cent of its capital stock.
The capital and surplus of an applying
bank is the basis for its subscription to
stock of the Federal Reserve Bank. There­
fore, our bank would subscribe for 6 per
cent of $30,000, or 18 shares of stock of
the par value of $100 each, but would pay
in only one-half of this amount, or $900,
the remaining $900 being subject to call.
On this $900 paid in, the bank would re­
ceive a 6 per cent dividend annually. It
is certain of this much return on the
money, for the dividend is cumulative.

Let us suppose now that our bank has
total deposits of $300,000, of which $200,000 are demand deposits and $100,000 time
deposits. It is necessary that a reserve

be kept against these deposits. Under the
Arkansas law, if not a member of the Fed­
eral Reserve System, it must keep a re­
serve against all of its deposits of 15 per
cent. This means that our bank would
have to keep at all times a reserve of $45,000. It is true that part of this reserve
may be kept on deposit with correspond­
ents, on which the bank would probably
receive 2 per cent interest, but the balance
must be cash in the bank’s vault.
The Arkansas law, however, provides
that when a State bank becomes a member
of the Federal Reserve System, if it keeps
the reserve required by the Federal Re­
serve Act, it complies with the Arkansas
law. The Federal Reserve Act then would
require of the bank under consideration,
it being in a non-reserve city, 7 per cent
of the $200,000 demand deposits, or $14,000, and 3 per cent of the $100,000 time
deposits, or $3,000, making a total reserve
of $17,000 that it will have to carry with
the Federal Reserve Bank. Our bank will
receive no interest on this $17,000, but it
is required to keep only $17,000 as a re­
serve, whereas before it became a mem­
ber of the System it had to keep a reserve
of $45,000. It therefore has released for
loaning purposes in its community $28,000.
If our bank had kept all of this $45,00G
reserve required before it became a mem­
ber of the System with correspondents,
which, of course, it could not have done
as the law requires part to be kept as cash
in vault, and had received 2 per cent on
this amount, its return would have been
$900. However, it does not lose anything

by becoming a member of the System,

since by becoming a member of the Sys­
tem it releases the difference between
$45,000, the old reserve, and $17,000, the
System reserve, or $28,000. In the ma­
jority of instances the bank could loan
this $28,000 at home at 6 per cent, which
would give it a return of $1,680 a year.
Assuming that the interest it obtained
through its old reserve method is $900,
it is apparent that as a member of the
System, by investing the released reserve
at home, the bank in reality would make
$780. Or putting it another way, the bank
would suffer no loss if it invested this
$28,000 released reserve at just a little in
excess of 3 per cent. This, remember, is
iigured on the theory that our bank, under
its old reserve method, had kept all of its
reserve with correspondents, drawing in­
terest, and none in its vaults.
We therefore see that our bank, on be­
coming a member of the Federal Reserve
System, would have to make only two pay­
ments, one for its capital stock of $900,
on which it is sure to receive a 6 per cent
dividend, or $54 a year, and the other a
payment of reserve into the Federal Re­
serve Bank of $17,000, on which balance
it will receive no interest from the Federal
Reserve Bank, but, if the proceedings as
outlined above are followed, the released
reserve should make for the bank, over
its old reserve method, $780 a year.
Member Bank Must Par Checks.
A bank which becomes a member of the
Digitized Federal Reserve System must remit at

par for checks cleared on it through a
Federal Reserve Bank. For a time the
Federal Reserve Bank made a small serv­
ice charge for the collection of checks, but
you of course know that this has not been
its practice for quite a while. If the bank
under consideration has been charging
exchange on checks, membership in the
System will mean that it will receive no
income from exchange, or at least a smaller
income from exchange as a large number
of the checks which it now receives from
other sources will be routed through the
Federal Reserve Bank. This is what it is
coming to whether it joins the Federal
Reserve System or not, for in two of the
districts all of the banks are on the par
list and over 50 per cent of all the banks
in the Eighth District, both those that are
eligible and those that are not eligible on
account of insufficient capital, are remit­
ting at par and others are being added to
this number every month. In time, com­
petition will bring about the loss of ex­
change even though a bank should not
become a member of the System. If it
continues to stay out of the System this
may be a real loss, but if it comes into the
System it would seem that there are ways
to offset this loss. It certainly can be off­
set in the way mentioned to the extent of
$780, being profit on released reserve un­
der the Federal Reserve System, and it
would seem that any loss of exchange
would be more than offset by the lower
rate at which our bank can borrow from
its Federal Reserve Bank as compared
with the rate charged it by its corre­

Rediscount Rates.
For instance, at the present time, as a
member of the Federal Reserve System
it could borrow on its collateral note se­
cured by Liberty Loan Bonds or U. S.
Treasury Certificates for 15 days at 4 per
cent, or it could rediscount a note of a cus­
tomer secured by Liberty Loan Bonds or
Treasury Certificates of Indebtedness for
15 days at 4 per cent, and for a longer
time up to 90 days at 4 14 per cent. If it
wishes to use bills receivable as collateral,
it could borrow on its collateral note se­
cured by eligible bills for 15 days at 4 per
cent. It could rediscount its customers’
eligible paper for as long as 90 days at 434
per cent. A t present the highest rate the
Federal Reserve Bank charges is 5 1/2 per
cent, this being charged when a bank re­
discounts a note of a customer based on
agriculture or livestock for 91 days to
six months. You gentlemen know the
rates that you have charged banks that
have borrowed from you, and you know
the rates that you have had to pay when
you borrowed from your correspondents. I
believe it is safe to say that on all of the
borrowings you have had to make recently,
if you had made them from the Federal
Reserve Bank, you would have saved in
interest from one to two per cent. It
would seem that this lower rate would
more than offset any loss on exchange,
provided you ever have to borrow at all.
This brings us to the privilege you have
as a member of the Federal Reserve Sys­
tem of borrowing money and rediscounting
through your Federal Reserve Bank. The
Federal Reserve Bank of St. Louis mobi­
Digitized lizes the reserves of District No. 8. That

is, it takes the reserves of the bank un­
der consideration, $17,000, a small amount
when used by itself, and adds it to reserves
which it holds of all the other banks in
District No. 8 in such a way that each
bank has behind it the combined reserve
of all member banks. As has so often been
said, these reserves are, as it were, in a
reservoir and are made available for use
by a bank through the process of redis­
Greater Part of Notes Eligible for
It used to be quite a usual thing for a
State bank, especially one of the smaller
ones, to say that it had no paper that was
eligible for rediscount with the Federal
Reserve Bank. When such a statement
was made, in nine cases out of ten, for
some unknown reason the bank had jumped
to this conclusion without having investi­
gated the facts. If a bank is a real bank,
doing a banking business, it is safe to say
that from 80 per cent to 90 per cent of all
the notes in its bill case are eligible for re­
discount with the Federal Reserve Bank.
This is not true if a bank has been in the
habit of allowing all of its customers to
give demand notes, for a note to be eligible
with the Federal Reserve Bank must have
a fixed future maturity. I believe the
bankers, however, will agree with me that
the demand note habit is not a good bank­
ing habit. The customer is better off when
he realizes that he must pay his note ait a
fixed time,'and the bank is better off when
it knows when its notes will mature. It
is just as easy to grant an extension, in
fact much easier, than to keep all of the

demand notes under constant vigilance, as

they should be kept.
Experience has
shown that it is not difficult for a bank to
get its customers in the habit of borrow­
ing money for the length of time they
think they will need it.

Then again, if the Federal Reserve
Rank is to rediscount a note it is natural
that it should want to know at least what
the bank knows that made the original
loan. Where the amount is less than $1,000, the Federal Reserve Bank of St. Louis
will accept the statement of the banker
as to the condition of the borrower. Where
the note is for more than $1,000,' a state­
ment of the borrower is required. Some
will say that we can not get statements
from our customers. Still if a man ex­
pects you to loan him in excess of $1,000
it is nothing more than fair that he give
you a statement of his affairs. The belief
that it is impossible to get a statement
experience has shown to be a mistake. In
fact, there are a number of our banks, and
I am speaking of the smaller ones now,
which instead of having the difficulty they
anticipated in getting statements, with
the use of a little tact, have really had no
trouble and say that it is one of the best
things that the Federal Reserve System
has helped to make a common practice.
Further than this, it stands to reason that
if National banks and the State banks that
have joined the System can get state­
ments, the other banks could also get
Red Tape.
There was time when a great deal was
said about red tape, and here again those
who talked did not do so from experience,
or if they
 did make a statement, saying

it was based on some experience of their
own, it was on the theory that if the Fed­
eral Reserve Bank did not do business as
loosely as they, then it was red tape. The
fact is that a member bank can do busi­
ness with the Federal Reserve Bank of St.
Louis as easily as it can with any bank in
the world, and I believe that our member
banks that have used us most will all bear
testimony to this effect.

Attitude of Federal Reserve Bank.
The chief purpose of the Federal Re­
serve Bank is to aid member banks to be
of more assistance to the communities
which they serve. It is true that members
of the Federal Reserve System have to
keep accounts with the Federal Reserve
Bank, but that very fact makes it all the
more necessary that the Federal Reserve
Bank do everything in its power to have
pleased customers. There can be no bank
more desirious of holding its correspond­
ents than the Federal Reserve Bank is of
giving real service to its members. To
this end it always welcomes suggestions
and is glad to be so aided by its member

F acilities Given by Membership.
When a bank becomes a member of the
Federal Reserve System that bank by the
very act of joining can enjoy banking
facilities in all of the cities in which Fed­
eral Reserve Banks or branches are es­
tablished. For instance, if it desires to
transfer money to a bank in New York all
it has to do is to write or wire the Fed­
eral Reserve Bank or a branch, if it is
located in branch territory, and ask that
so many thousand dollars be transferred
to for FRASER
Digitized such and such a bank in New York.

This the Federal Reserve Bank will do by
wire free of charge, and it has cost the
member bank nothing. If the member
bank desires, it does not have to have a
New York, San Francisco, or other large
city correspondent, since as a member of
the System it can issue exchange drafts
available in the Federal Reserve cities
and cities having branches.
A member of the Federal Reserve Sys­
tem no longer has to assort currency. It
sends it to the Federal Reserve Bank or
the branch and this work is done for it.
In addition to this, the Federal Reserve
Bank will pay the postage, expressage and
insurance on shipments of paper currency
from it or any of its branches to member
banks and also on shipments of paper cur­
rency or coin from the member banks to
the Federal Reserve Bank or any of its
The Federal Reserve Bank will also pay
the charges on all telegrams received from
or sent to member banks in connection
with such money shipments, wire or mail
transfers, or deposit transactions.
These are some of the facilities given
to the member banks, not all. In fact a
member bank will not be able to appreciate
in how many ways it can get advantages
from the System unless it carefully studies
it with a view to its own requirements.
The Federal Reserve Bank of St. Louis on
its part is always trying to see how it can
be of some additional service to its mem­
bers. For instance, in order to assist
banks in handling the large number of
Government securities issued during the
past two years, the Federal Reserve Bank

has, when requested, accepted such securi­

ties from member and non-member banks
for safe-keeping, and will in the future be
glad to render this service, in keeping with
its facilities, free of charge to such mem­
ber banks as 'request it and will give to
such securities as are left in its custody
by the member banks the same care that
it gives to its own property.
Charter Rights.
Perhaps someone says, under our char­
ter we have a right to make real estate
loans in a much more liberal way than can
National banks, even country National
banks under the amended laws, and we do
not wish to give up this right by becoming
members of the System. The answer is,
you do not have to give up these rights,
for when a State bank joins the Federal
Reserve System it comes in with all of its
charter powers.
The Federal Reserve
Bank, however, just as your State Bank­
ing Department, desires that sound bank­
ing principles be followed and that, having
in view the volume of commercial busi­
ness, the amount loaned on real estate be
not so large as to impair the liquidity
of the bank. This, however, is just good
banking and has nothing to do with the
Federal Reserve System.

Loan Limit of the State Law.
Someone else says, the bank we have
under consideration is an Arkansas State
bank and the Arkansas law allows it to
loan to any one person, firm or corporation,
up to 30 per cent of its capital and sur­
plus. Could we continue to loan to this
limit as a member of the Federal Reserve
System? The answer is you would come
in under your charter rights and if the

Arkansas law allows you to loan up to 30

per cent, then you could continue to so
loan as a member of the System. How­
ever, you could not rediscount with the
Federal Reserve Bank any part of a loan
of a person, firm, or corporation which is
liable to you for borrowed money in ex­
cess of 10 per cent of your capital and
The Application.
If at this point it looks like it would be
well for our bank to join the Federal Re­
serve System, and it would be if the testi­
mony of the 54 State banks that have al­
ready joined in District No. 8 can be be­
lieved, what is the next step? The thing
to do is to write to the Federal Reserve
Bank for forms. It will send you an ap­
plication, in which is emboidied a form of
resolution to be passed by your board of
directors. One form calls, for a statement
of your resources and liabilities, really a
transcript of your daily statement, and
then there is a supplement to this form
which asks other questions in regard to
officers and directors, general information
in regard to loans, list of the bonds and
securities, and some Qther information. In
addition to these forms, a copy of your
charter and articles of incorporation and
also two copies of the last report of ex­
amination made by your State Bank Com­
missioner would be needed. If you will
request him to send the reports to the Fed­
eral Reserve agent he will do so.

There is a most cordial co-operation be­
tween the Bank Commissioner of Arkan­
sas and the Federal Reserve System, and
the System is glad to act on the Arkansas
examiner’s reports. Every State bank
Digitized for is a member of the Federal Reserve
that FRASER 14
Federal Reserve Bank of St. Louis

System must be examined at least once a
year, but it is not the object of the Sys­
tem to multiply examinations, nor cause
undue expense, so the examinations of the
State of Arkansas are accepted. The Ark­
ansas Bank Commissioner very kindly al­
lows a representative of our examination
department to accompany his examiners,
and this is without additional expense to
the member bank. Even where a repre­
sentative of the Federal Reserve Bank
does not accompany the State Department
examiners the examination is accepted. Of
course, the Federal Reserve Act provides
that “ Every Federal Reserve Bank may,
with the approval of the Federal Reserve
agent or the Federal Reserve Board, pro­
vide for special examination of member
banks within its district.” This provision
is a natural one and for the protection of
all banks. In brief, the examination of a
State bank that is a member are conducted
about as they were before it became a
member of the System. This question of
examination seems to be a thing very
much misunderstood, and I have even
heard it given as a reason for not joining
the System. Such a reason, however, was
given by someone who had not taken the
trouble to inform himself as to the facts.
Condition of Applying Bank Must be Good.
As has been stated before, the condi­
tion of the applying bank must be good or
it will not be taken into the System, be­
cause it is not fair to those banks that
are members of the System to take in a
weak bank. I am speaking to bankers and
you gentlemen know what is a satisfactory
banking condition and what is not. You
do not want too many doubtful loans in

your bank. There should be no excessive
loans. The practice of granting overdrafts
should not be habitual. The banking
house and real estate should be carried at
a reasonable figure, and it is not a bad idea
to have provided an annual charge-off on
such things as furniture and fixtures. If
there are any matters of this kind, the
bank has undoubtedly had its attention
called to them perhaps more than once by
the Bank Commissioner. I am certain
that no one is more interested in having
an applying bank in good condition than
the officers and directors themselves. It is
well, however, to bear this in mind that
these reports of condition come before rea­
sonable and practical men. Nothing will
be asked of any bank in regard to condi­
tion that is not asked of all banks.
Summarizing what I have said, we see
“First. Our bank must present itself in
good condition.
“Second. It must pay into the Federal
Reserve Bank one-half of 6 per cent of its
capital and surplus, or $900 for certificate
of stock, the remainder of the subscription
being liable to call, but which in all prob­
ability will never be called.
“It must also pay into the Federal Re­
serve Bank 7 per cent of its demand de­
posits and 3 per cent of its time deposits,
upon which it receives no interest on daily
balances, but as its reserve takes the place
of that required under the Arkansas State
law, releases some of the reserve it now
must carry, which can be loaned locally at
a good rate of interest.
“Third. It gets out of the Federal Re­
serve Bank a 6 per cent cumulative divi


dend on its paid-in stock, also it can re­
discount its eligible paper with the Federal
Reserve Bank at rates which at the pres­
ent time are certainly lower than can be
procured from any other correspondent.
This discount privilege can be exercised
with certainty, as your Federal Reserve
Bank correspondent has sufficient re­
sources to grant any legitimate request as
soon as it is made. It can transfer money
throughout the United States, and issue
exchange drafts in place of New York, San
Francisco, Chicago, St. Louis, or any other
large city exchange. It can send in its
currency without the cost of shipping
charges and without the trouble of assort­
ing it, and also receive currency without
the cost of shipping charges. In fact, it
can do many things which will add to its
efficiency as a bank and thus add to the
efficiency of the help which it can render
its community.
Fourth. A State bank can try the Sys­
tem, and if then it prefers the old method
of doing business can return to that
method. The law allows it to withdraw
upon giving six months’ notice of its de­
Eligible State Bank Should Investigate
"It would seem that an eligible State
bank that does not join the System is
standing in its own light, but an eligible
State bank should not take the word of
anyone for this, but should carefully in­
vestigate and decide the question for it­
self. This investigation will make the
bank familiar with the possibilities of the
System as applied to its local needs, will
show it how to use the System, and for


this reason it will find its membership
satisfactory and remunerative. We do
not want a bank in the System that does
not know how to use it, because that bank
may be disappointed, and it is not the ob­
ject of the System to have any member
which does not receive a real benefit from
its association. There are at present 1,009
State banks that are members of the Sys­
tem, and I believe I am safe in saying that
they are all enthusiastic about it. One
reason for this I believe to lie in the fact
that when they came into the System the
investigation which convinced them of the
necessity taught them how to use it. There
may be here and there a National bank
which, under the law, had to come into the
System that complains or else speaks of it
with a faint praise that dairms. I think I
am safe in saying that in every case where
sufch a complaint is made the bank has
failed to learn how to use the System. It
is a pity that such a National bank was
forced by the law to join, for it prefers to
travel in an ox-cart instead of a high-pow­
ered automobile and complains because the
dust of the passing machine gets on its
clothes, and the pity is that the member
bank owns an automobile that will travel
over any kind of a financial road and will
not take the trouble to get out of the ox­
cart long enough to learn how to shift the
gears so as to run it.
“Membership in the Federal Reserve
Bank offers the opportunity for increased
business. I know of one State bank which
by advertising its membership increased
its deposits in a phenomenal way. It also
offers a sense of security not only to de­
positors but
 to stockholders, directors and

Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102