frsbog_mim_v04_1828.pdf

7/17/2019 frsbog_mim_v04_1828.pdf

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9 6 3

A N N U A L R E P O R T

TO THE

SPEAKER

OF THE

HOUSE

OF

REPRESENTATIVES

i

S I R :

The Federa l Reserve Board t ransmits herewith i t s a n -

n u a l r e p o r t f o r t h e ca lenda r yea r 1 9 1 6 .

This repor t^

t h e

th i r d s u b m i t t e d ,

i s

made jus t a f te r

t h e

c lo s e

of a

y e a r

of

unexampled commerc ia l , indus tr ia l

a n d f i -

n a n c i a l a c t i v i t y

i n t h e

United St a te s . Never be fo re

i n

time

of

domestic peace have wages

an d

pr i ce s r eached such h igh l e v e l s .

I n

p r a c t i c a l l y

a l l

im p o r t a n t i n d u s t r i e s l a b o r

a n d

cap i ta l have

th roughout t h e yea r found fu l l an d remunerative employment. The

s i t u a t i o n

m ay

b e s t

b e

summed

u p i n t h e

s ta tement tha t dur ing

t h e

c a l e n d a r y e a r

1 9 1 6

e x p o r t s

o f

merchandise from

t h e

United

S t a t e s t o other countr ies amounted t o about $5,460,000,000, whi le

i t s

imports amounted

t o

about $2 ,360 ,000 ,000 , l e av ing

a n e t

t r a d e b a l a n c e

i n

f a v o r

o f t h e

Uni ted S ta te s

of

a b o u t $ 3 , 1 0 0 , 0 0 0 , -

0 0 0 .

Domes t ic t r ad e , s t i mul a te d

a s i t h a s

been

b y t h e

p r e s e n c e

of

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963

unusual ly high wages

and

p r i c e s ,

h a s

developed

an

a c t i v i t y p a r a l -

l e l i n g t h a t

o f t h e

n a t i o n ' s f o r e i g n b u s i n e s s ,

a n d t h e

r e s u l t s

of

t h i s w ho le s i t ua t i on ha ve be e n re f l e c t e d

i n t h e

augmenta t ion

of

ba nk re sourc e s , a s i l l u s t r a t e d b y t h e f a c t t h a t t h e d e p o s i t s of

a l l

banks

an d

trust companies

i n t h e

United States have shown

a n

inc re a se dur ing

t h e

year

o f n o t

less than $4,300,000,000.

INFLOW OF GOLD AND ATTENDANT PROBLEMS.

Since

t h e

be g inn ing

o f t h e

European

w a r t h e

problem

i n -

c i d e n t

t o t h e

d i s t r i b u t i o n

of

gold throughout

t h e

w or ld ,

a s f a r

a s t h e Uni ted S ta tes i s concerned, h a s be e n re ve rse d . I t w i l l b e

remembered that

a t t h e

outbreak

o f t h e w a r

American importers

and

banking houses were indebted

t o

t h e i r c o r re sponde n t s a b roa d

on

c ur re n t a c c oun t

t o t h e

e x t e n t

o f

about $450,000,000.

The

l i q u i d a -

t i o n

of

th i s i nde b t e dne ss

a t

f i r s t i n v o l v e d

n o t

on ly l a r ge sh ip -

ments

o f

go ld ,

b u t t h e

co nd it io ns under which gold could

b e

expor t

e d

were such

a s t o add

g r e a t l y

t o t h e

normal cost

of

s e t t l e m e n t s .

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963

- 3 -

To a s s i s t i n t h i s s i t u a t i o n t h e r e w as o rga n i z e d , a t t h e ins t a nc e

o f t h e Federal Reserve Board, a bankers' gol d fun d of $ 1 0 0 , 0 0 0 , -

0 0 0 , t h e o p e r a t i o n s of which were f u l l y reviewed i n t h e f i r s t a n -

nual report made

b y

th i s Boa rd .

D ue t o t h e

a v a i l a b i l i t y

o f t h e

f a c i l i t i e s p r o v i d e d

b y

th i s gold fund,

a s

w e l l

a s t o t h e

i n c r e a s -

i n g volume of o u r e xpor t s t o Europe , ba lances shor t ly began t o

a ppe a r i n f a v o r of t hi s cou nt ry . These bal anc es have in cr ea se d

e ve r s i nc e

a t a n

unpre c e de n te d r a t e .

The

Board

h a s

in fo rma t ion

showing t h a t from t h e be g inn ing o f t h e w a r u n t i l t h e e n d o f Decem-

b e r 1 9 1 6 , t h e r e w a s a n e t movement of gold in to t h e Uni ted S ta tes

of approximate ly $870,000,000, a n d i t i s e s t ima te d t ha t du r ing

t h e same period n o l e s s t ha n $2 , 500 , 000 , 000 of s e c u r i t i e s of

A me ri ca n o r ig in , i nc lu d ing ob l ig a t i on s of the nat ional Government ,

of S t a t e s , of m u n i c i p a l i t i e s , and of f i r m s , c o r p o r a t i o n s a n d i n -

d i v i du a l s , ha ve bee n t r a n s f e r re d f rom fo r e ig n

t o

domest ic owner-

sh ip . D ur ing t h i s pe r iod , a c c ord in g t o t r u s t w o r t h y e s t i m a t e s ,

a bou t $2 , 000 , 000 , 000

of

s e c u r i t i e s i s s ue d

b y

foreign Governments ,

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963

c o r p o r a t i o n s

a n d

f ir ms , have been absorbe d

and a r e now

h e ld

b y

A m e r i c a n f i n a n c i a l i n s t i t u t i o n s

and

in ve s t o r s . European ho ld -

ings of -American se c u r i t i e s have thus been cor res pon din gly r e *

duced,

a n d f o r t h e

n e a r f u t u r e ,

a t

l e a s t ,

t h e

United States must

choose between

t h e

extremes

of

e x c e s s iv e im p o r t a t i o n s

of

gold

on t h e one hand, a n d t h e undue absorpt ion o f t h e c r e d i t o b l i g a -

t i o n s

of

f o r e i g n c o u n t r i e s

o n t h e

others

o r i t

must adhere

to a

sa fe middle course

$

thd&e cir cum sta nce s

> t h e

mani fe s t du ty

o f t h e Federa l rese rve banks h a d been t b encourage conserva t ism,

a n d s o f a r a s

p o s s i b l e

t o

prevent undue

an d

unwise ex tens ions

of

c r e d i t .

The

y e a r ' s b u s i ne s s

d i d n o t

develop even

t h e

sea sona l

demand which

on

some occa s ion s re qu ir es ac t i on

and

which, dur ing

t h e

y e a r

1 9 1 5 l e d t h e

Board

t o

e s t a b l i s h w h a t

i s

known

a s t h e

commodi ty ra te , de s igned p a r t i c u l a r l y

t o a i d

produce rs dur ing

t h e crop-moving season. To a grea t degree t h e e a s e of money and

smoothness

of

o p e r a t i o n

o f o u r

f inanc ia l mach ine ry have been

due

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963

- 5 -

t o t h e

f a c i l i t i e s a f f o r d e d

a n d t o t h e

c onf ide nc e i nsp i re d

b y

t h e Federa l rese rve sys tem; a s w e l l a s t o t h e l a rge ly i nc re a se d

s t o c k

of

re se r ve money r e s u l t i n g from

t h e

i m p o r t a t i o n s

of

gold .

During

t h e

ye a r t he re

was a

comparat ively l ight demand

o n t h e

p a r t of member banks f o r rediscount accommodat ions , t h e maximum

amount of rediscounted paper he ld b y t h e Federal reserve banks

be ing $38,345,000 on December 8 ; and th e a c t i v i t i e s o f t h e F e d -

e r a l re ser ve banks have been ch ie f l y under t h e open mar ket p r o -

v i s i o n

o f t h e l a w i n t h e

purc ha se

of

a c c e p t a n c e s ,

of

Government

bonds , and of m u n i c i p a l w a r r a n t s . T r a n s a c t i o ns of these kinds

were engaged i n t o such a n e x t e n t t h a t t h e to t a l i nve s t e d re sourc e s

o f a l l Federa l rese rve banks on December 3 0 , 1 9 1 6 , amounted t o

$221 , 897 , 000 .

Ae

a l r e ad y i n d i c a t e d ,

t h e

Board

*s

p r inc ipa l p rob l e m

h a s

been tha t

of

m a i n t a i n i n g ,

s o f a r a s

p o s s i b l e ,

t h e

l i q u i d c o n d i-

t i o n

o f t h e

banking community,

a n d i n

t h i s

i t w a s of

c ourse p r i ma r -

i l y concerned wi th t h e b u s i n e s s o f t h e Federal reserve banks them-

s e l v e s . The Federa l Reserve A c t p r o h i b i t s t h e inves tment of funds

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1833

— * 6 -*

of Federa l reserve banks i n l o n g - t e r m s e c u r i t i e s , e x c e p t i n g

only bonds

a n d

n o t e s

o f t h e

Government

o f t h e

Un i t ed S ta t e s ;

a n d ,

keeping

i n

mind

t h e

s p i r i t ,

a s

w e l l

a s t h e

l e t t e r

of the

A c t , t h e

Board

h a s

r e c e n t l y

in two

instances deemed

i t

necessa ry

t o

t a k e d e c i s i v e a c t i o n .

The

f i r s t

w a s i n

connec t ion wi th

t h e

u s e o f bankers * accep tances i n i n t e r n a t i o n a l t r a n s a c t i o n s * The

American acceptance

is now

Wf t l l e s t ab l i shed

i n t h e

wor ld

1

s m a r -

ke t s , b ei ng known

i n

almost

a l l

p a r t s

o f t h e

g lobe ,

a n d

even

i n

tho se co unt r i es which th ree years

ago had a

monopoly

o f t h e a c -

c.ag>4ance business

y

A me ri can c r e d i t f a c i l i t i e s a re now b e i n g f r e e l y

u s e d . T he development of t h i s accep tance bus i ness h a s been highly

g r a t i f y i n g a n d t h e Federa l reserve banks have done the i r fu l l par t

i n

promot ing

i t s

growth,

a s

they have been l ibe ra l pu rchase r s

of

acc ept anc es • More than

a

yea r

a g o , i n

August

1 9 1 5 , t h e

Board

was

in formed

of

c e r t a i n r e n e w a l s

of

accep tance c r ed i t s wh ich c l ea r ly

grew

o u t o f t h e

shipment

of

goods

i n t h e

f i r s t i n s t a n c e ,

a n d i t

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963

- 7 -

r u l e d t h a t ,

a s a

m a t t e r

of

p r i nc ip le , such accep t ances need

n o t

b e

exc luded

a n d

th a i Fede ra l resetVd banks might Cons ide r

a s

e l i g i b l e b i l l s h a v i n g

n o t

longer ttiah ihrae motitHd

t o f u n ,

drawn

unde r such c red i t a r rangements ,

I t w a s

found, however, during

t h e

l a t t e r p a r t

o f 1 9 1 6 ,

th a t renewa l acc epta nce s wore be in g

o f -

f e r e d

o n t h e

marke t

i n

in c r ea s i ng volume,

a n d t h e

Board took

o c -

c a s io n

t o

warn Federa l rese rve banks ,

a n d

through them

t h e

member

banks , a ga i ns t undu ly la rg e purchase s

of

pap er which, whi le

e l i -

g i b l e

i n

form, might

n o t b e i n

f a c t

o r i n

e s sence

of a

tr u e s e l f -

l i q u i d a t i n g c h a r a c t e r . I t i s , o f course^ proper t o e x t e n d a c c e p t -

a n c e c r e d i t s

i n

l ibe ra l amounts

t o

f a c i l i t a t e c omm er ci al t r a n s a c -

t i o n s a l l over t h e world , a n d t h e Board expects t o s e e b u s i n e s s of

t h i s k ind grow in t o ve ry la rg e f i gu re s ,

b u t i t

fee l s tha t banks

shou ld

n o t

pe rm i t mere con s id e ra t io ns

of

p r o f i t

t o

cause them

t o

d i s r e g a r d l o n g e s t a b l i s h e d

an d

s o u n d p r i n c i p l e s ,

t h e

observance

of

which

i s s o

n e c e s s a r y

f o r

s a f e t y .

One

fundamenta l ru le govern-

i n g t h e

banke rs

1

a c c e p t a n c e

i s

t h a t

t h e

acceptance should f inance

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t h e drawer a n d n o t t h e ac ce pt in g bank. When a banker makes a

cash advance

a t a

g iv e n r a t e

of

i n t e r e s t

f o r a

c e r t a i n l e n g t h

of

t im e ,

h i s

deb tor shou ld

n o t

draw upon

h i m f o r t h e

purpose

of e n -

a b l i n g

t h e

banke r

t o

re imburse himse lf

b y t h e

s a l e

o f h i s

a c c e p t -

ance f o r t h e advance which h e h a s made t o t h e bor rowe r . This

process would make i t p o s s i b l e f o r a long- te rm bor rowing t o b e

f i n a n c e d b y an accommodation b i l l drawn f o r t h e b e n e f i t o f th e

b a n k e r ; a n d such a dra f t would n o t b e e s se n t i a l l y s e l f - l i q u i d a t -

i n g . T h e r e a l bor rower tray have sec ure d t h e advance by renewal

agreements f o r a lo n g - t e r m a t a f i x e d r a t e f o r t h e e n t i r e t im e

a n d n o t s u b j e c t t o r e a d ju s tm e n t a t a n y renewa l pe r iod . I n such

a case t h e borrower i s n o t concerned wit h t h e d i s c o u n t t r a n s a c -

t i o n , an d when t h e f i r s t b i l l m at ur es t h e advance w i l l co nt inu e

t o ru n an d n o i n c r e a s e i n rate would cause t h e bor rower t o cover

h i s

accep tance

a n d

seek accommodation el se wh er e, b ecau se dur in g

t h e

te rm

o f t h e

ex tended c red i t

h e

would have

no

i n t e r e s t

i n t h e

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963

1886

- 9 -

d i s count r a te o f t h e cou nt ry upon which h e h a s drawn. The a c c e p t -

o r a n d n o t t h e ac tua l debtor would b e t h e bor rower i n t h e d iscoun t

m a r k e t , an d as r e g a r d s t h e o r ig in a l b o r r o w e r t h e acceptance would

become merely an accommodation draft f o r t h e b e n e f i t o f t h e a c -

c e p t o r ,

who

alone would

b e

s u b j e c t

t o t h e

c ha ng in g v i c i s s i t u d e s

o f t h e d i s c o u n t m a r k e t . I t i s c l e a r i n t h e second p lace , tha t

d ra f t s d rawn in one count ry upon ano the r aga i ns t long - te r m se c ur i -

t i e s a r e n o t s e l f - l i q u i d a t i n g , no m a t t e r ho w s h o r t t h e t ime t h e

d r a f t s t h e m s e lv e s may have t o r u n . Where ac ce pt anc es a r e based

upon ac tu a l commerc ial t r an sa c t io ns t h e s u m t o t a l o f t h e accep tance

b e a r s

a

d e f i n i t e r e l a t i o n

t o , a n d i s

r e g u l a t e d

b y t h e

volume

of i n -

t e r n a t i o n a l t r a d e , b u t when b i l l s a r e a c c e p t e d a g a i n s t s e c u r i t i e s ,

t h i s a u to ma t i c r e g u l a t i o n d i s a p p e a r s ,

and if

f i n a n c e b i l l s

a r e

p e r m i t t e d t o b e drawn wit ho ut d is c r im in a t io n the y would cont in ue

t o accumula te jus t a s lo n g a s t h e r e i s a s u b s t a n t i a l d i f f e r e n c e

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- 1 0 -

i n t h e i n t e r e s t r a t e s o f t h e t w o c ou n t r i e s c onc e rne d . I t i s

e n t i r e l y n a t u r a l

a n d

p rope r t ha t c oun t r i e s

o r

sect ions Where

w e a l t h h a s accumulated an d which have la rge holdings of gold .. -

s ho ul d a f f o r d c r e d i t f a c i l i t i e s

t o

o t h e r s

n o t s o

f o r t u n a t e l y

s i t u a t e d i n t h i s r e s p e c t . As be tw e en na t i on s t h i s c a n b e done

through shor t commerc ia l c redi t s by means of b a n k e r s

1

a c c e p t a nc e s ,

where t h e a c c e p t a nc e i s l i q u i d a t e d o u t o f fu nds coming fro m t h e

bor row e r be fo re ma tu r i t y ;

o r

s t r i c t l y

as an

inve s tme n t p ropos i t i on ,

b y t r a n s a c t i o n s o u t r i g h t i n s e c u r i t i e s is s ue d o r he ld b y c i t i z e n s

o f t h e borro wing co un tr y. Both methods may be p e r f e c t l y s o u n d , b u t

d e a l e r s i n c r e d i t sh o u ld d i s t i n g u i s h c l e a r l y b et we en t h e t w o t r a n s -

a c t i o n s . We must b e c a r e f u l n o t t o con fu se commercial ban kin g wit h

inves tment banking, n o r should we pe rmi t o u r d i sc oun t ma rke t t o b e -

come s o s a t u r a t e d w i th o f f e r i n g s i n t r i n s i c a l l y of an inves tment char

a c t e r

a s t o

i n f l u e n c e d i s c o u n t r a t e s

an d

impede

t h e

f r e e o p e r a t i o n

o f t h e dis cou nt mark e t , which i s in tended t o d e a l i n s h o r t - t e r m o r

commercia l borrowings and shou ld n o t b e used o r abused t o se rve

me re ly a s a n a d j u n c t o f t h e inves tme nt mar ke t .

7/17/2019 frsbog_mim_v04_1828.pdf


The

second occasion which

i n t h e

Board 's judgment ca l led

f o r

a c t i o n a r o s e

o u t o f t h e

t rend toward abs orp t io n

of

f o r e i g n s e c u r i t i e s

by the banks, of th i s c o u n t r y , a n d b6Cause o f t h e announcement that

T rea sury b i l l s , nomina l ly shor t t e rm,

b u t

obv ious ly repayab le ,

i f

placed

i n

large volume

b y t h e

s a l e

of

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

o f t h e

same kind

were about

t o b e

o f f e r e d

o n t h e

market

i n a n

inde te rmina te amount .

The

Board f e l t t ha t such purc hase s i n a n y c on si de ra bl e volume would i n e x -

i s t i n g c i r c u m s ta n c e s t e n d

t o

p l a c e

t h e

onus upon

t h e

Federa l Reserve

Banks because while bil ls

of

t h i s c h a r a c t e r

a r e

a d m i t t e d l y i n e l i g i b l e

f o r

r e d i s c o u n t

o r

purchase

by

Fede ra l r e se rve banks ,

t h e

member banks

would rediscount with t h e R e s e r v e i n s t i t u t i o n s e l i g i b l e p a p e r i n order

t o

re pl en is h t h e i r res e r ve s which might have been dep le t ed through

p u r -

chase s of such Treasut ty bi l ls . The Boa rd accord ing ly , on November 28 ,

made

a

p u b l i c s t a t e m e n t

i n

which

t h e

banks were caut ioned aga ins t

i n -

v e s t i n g

t o o

f r e e l y

i n t h e

proposed o f fe r i ng s . Th is a c t i on

w as

taken

n o t because of any doubt a s t o t h e ul t imate payment o f t h e o b l i g a t i o n s ,

b u t

merely because they obviously

d i d n o t

c o n s t i t u t e

a

l iquid banking

in v e s tm e n t .

The

Boa rd s ta ted tha t ,

i n i t s

op in io n, member banks shoul d

7/17/2019 frsbog_mim_v04_1828.pdf


pur sue a p o l i c y of keep ing themse lves l i qu id ; o f n o t loaning down t o

t h e l e g a l l i m i t , bu t o f m a i n t a i n i n g a n excess of r e s e r v e s - n o t wi th

res e rve ag en t s , where t h e i r ba lanc es a r e loaned o u t a n d c o n s t i t u t e

n o a c t u a l r e s e r v e , b u t i n t h e i r own v a u l t s o r . p r e f e r a b l y w i t h t h e i r F e d -

era l Beserve banks, The Board advised banks that they should proceed

with much caution

i n

l o c k i n g

up

t h e i r f u nd s

i n

long t e rm ob l iga t ions

o r

investments which a r e shor t te rm i n form o r name b u t which may in t h e

aggregate have t o b e r enewed u n t i l normal cond i t i ons r e t u r n . The Board

does n o t f e e l t h a t i t i s incumbent upon i t t o a d v i s e p r i v a t e i n v e s t o r s

a n d s o

s t a t e d ,

b u t i n

v iew

o f t h e

f a c t t h a t

t h e

U n i t e d S t a t e s

i s

becoming

t h e banker of f o r e i g n c o u n t r i e s t h r o u gh o u t t h e wor ld , and &s s e c u r i t i e s

of

va r ious k inds

a r e

b e i n g o f f e r e d

i n o u r

m a r k e t s ,

t h e

Board took occasion

t o s u g g e s t t h a t p a r t i c u l a r l y i n t h e case of unsecu red loans , i nves to r s

s h o u l d r e c e i v e f u l l a n d a u t h o r i t a t i v e da t a . I n making t h i s s t a t e men t , •

i t w a s n o t t h e

purpose

o f t h e

Board

t o

q u e s t i o n

t h e

c r e d i t

of any

govern--

ment,,

n o r d i d i t

seek

t o

r e f l e c t

up on a ny

p a r t i c u l a r o b l i g a t i o n s .

The

Board sought merely t o i n d i c a t e t h a t t h e same bu si ne ss l ik e ha bi t s which

7/17/2019 frsbog_mim_v04_1828.pdf


- 13 -

9 6 3 .

a r e

wel l es tab l ished regard ing domest ic loans should

b e

developed

i n t h e

marke t ing

of

f o r e i g n f l o t a t i o n s *

I t i s t h e

p r a c t i c e

of

every i ssu ing

house

i n

o f f e r i n g s e c u r i t i e s

t o

f u r n i s h s p e c i f i c i n f o r m a t i on

a n d t o

give

a l l

n e c e s s a r y d e t a i l s e i t h e r o v e r

i t s o w n

s i g n a t u r e

o r

t h a t

o f t h e

head

o f t h e borrowing co rp or at io n. The importance of complete a n d a u t h e n t i c

i n f o r m a t i o n

i s

nowhere more ful ly understood

a n d

a p p r e c i a t e d t h a n

i n

Europe;

a n d i n


a

p r o s p e c t u s c o n t a i n s

a l l t h e

important,

f a c t s r e l a t i n g t o t h e l o a n , i n a s t a t emen t s igned by an a u t h o r i z e d

r e p r e s e n t a t i v e

o f t h e

government

o r by t h e

i s su ing house ,

o r i n

some

c a s e s

by

b o t h .

The

t i m e l i n e s s

o f t h e

Board ' s s t a t emen t

w as

demonstrated

b y t h e

f a c t t h a t , n o t w i t h s t a n d i n g

t h e

f a c t t h a t t h i s o f f e r i n g

of

fo re ign

b i l l s

w as

wi thd rawn sho r t l y a f t e r

t h e

s t a t emen t appea red , the re

was a

n o t a b l e s t i f f e n i n g

of

r a t e s

f o r

c a l l l o a n s

i n o u r

pr inc ipa l money market ,

which advanced

t o 1 5 $ , a

h ighe r l eve l than they

h a d

reached s ince

t h e

e s t a b l i s h m e n t

o f t h e

Fede ra l r e se rve banks .

I t

deve loped th a t

t h e r e -

s e r v e s

o f t h e

banks

i n o u r

most important money center were,

a s a

ma t t e r

of fac t , none t o o l a r g e , a n d t h a t '-.he money t e n s i o n , which w a s f e l t h o w -

7/17/2019 frsbog_mim_v04_1828.pdf


- 14 - 963

ever , only

i n t h e

case

of

c o l l a t e r a l l oa ns

n o t

e l i g i b l e

f o r

r e d i s c o u n t

a t t h e Fede ra l r e se rve banks , w as ea sed b y t h e re sumpt ion of go ld im -

p o r t s

o n a

la rge sc a le*

CONSERVATION

OF

GOLD SUPPLY

The

Board, however,

h a s

reccgt t ized f rom

t h e

f i r s t t h a t m e r e ly

n e g a t i v e o r preven t ive measure s such a s t h o s e j u s t r e f e r r e d t o c a n n o t

be

expec ted

t o

meet

a l l t h e

r e q u i r e m e n t s

o f t h e

u n u s u a l s i t u a t i o n w i t h

which t h e count ry h a s been conf ron ted a n d i t h a s r e a l i s e d t h a t d e c i s i v e

s t e p s e n l a r g i n g t h e power o f th e Fede ra l r e se rve banks t o conse rve and ?

p r o t e c t t h e country ' s gold supply ought t o b e t a k e n . I n t h e s ta tement

of November 28th above referred t o , t h e Board announced that i t would

a s k Congress t o advance t h e da te upon which t h e f i n a l t r a n s f e r o f r e -

se rv es f rom cor resp onde nt banks i n r e s e r v e a n d c e n t r a l r e s e r v e c i t i e s

t o t h e Fe de ra l re se rv e banks would tak e pl ac e , a n d s u g g e s t e d t h a t t h i s

d a t e , o r i g i n a l l y f i x e d

on

November

l 6 ,

i g i ? ,

b e

advanced

t o

February

o r March. There a r e s e v e r a l r e a s o n s f o r u r g in g t h i s c o n s id e r a t i o n up on

7/17/2019 frsbog_mim_v04_1828.pdf


184£

- 15 - . 963

t h e immed ia te a t t en t ion of Congress« The Un i t ed S ta t e s h a s today a

p l e t h o r a

of

go ld ,

a n d

whi le

t h e

Board does

n o t

b e l i e v e t h a t f u r t h e r

i m p o r t a t i o n s

o f t h e

metal must

of

necess i ty p rove

gt

source

of

danger

o r

d i s t u r b a n c e , i t i s d e s i r a b l e , i n o r d e r t o avoid danger ̂ t o c o n t r o l t h e

i n f lowing go ld

a n d n o t

pe rmi t

i t t o

become

t h e

b a s i s

of

abnormal

expansions

and of

i n f l a t i o n .

The

a b s t r a c t

of

reports made

b y a l l n a -

t i ona l banks

on

November

7 > 1 9 1 6 ,

shows

a

s u r p l u s

of

about $1 ,016 ,000 ,000 .

This surp lus

i s

based upon

t h e

reduced reserves permi t ted under

t h e

Fed*

era l Rese rve A c t , a n d i t s enormous size i s d u e i n p a r t t o t h e f u r t h e r

f a c t t h a t i n t e r i o r b a n k s

a r e

s t i l l a bl e

t o

count ba lances wi th na t ional

bank agents a s r e se rve* The l a w now pro vid es t ha t a f t e r November l6 tn

t h e

e n t i r e r e s e r v e s

of

member banks must

b e

c a r r i e d p a r t l y

i n

t h e i r

own

v a u l t s

a n d

p a r t l y w i t h

t h e

Federa l reserve bank

of

t h e i r d i s t r i c t .

I t

i s e s t i m a t e d t h a t t h e r e s e r v e s of country banks car r ied wi th reserve

ci ty cor r espo ndent s rep re se n t about $1^0 ,000 ,000 ,

a n d t h e

e f f e c t

of a

poss ib le wi thd rawa l

of

t h i s

sum

from

t h e

r e s e r v e d e p o s i t o r i e s n e x t

November h a s been viewed with some? apprehension ̂ b u t w i t h t h e l a r ^ ,

7/17/2019 frsbog_mim_v04_1828.pdf


- 16 -

S 6 >

s u r p lu s r e s e r v e

now

c a r r i e d

b y t h e

banks ,

i t

does

n o t

seem t h a t th er e

would

be any

withdrawals necessary should

t h e

da te

f o r t h e

f i n a l t r a n s -

f e r b e

advanced

a s

sugges ted

b y t h e

Bdai*d«

The

pre sen t r e se r ve requ i red

a g a i n s t e x i s t i n g d e p o s i t l i a b i l i t y

of

n a t i o n a l b a n k s

i s .

$1,456,000j000*

Banks hold $2>472,000,000, o.' r e s e r v e s , bf which $1,437>000,000 cons is ts

of cash i n Vaul t ,and ba lances with Federa l rese rve banks , where a l l r e -

se rves mus t u l t ima te ly b e con cen t ra ted . From t h i s i t appears tha t only

$19,000,000 must

b e

t a k e n

o u t o f t h e

ba lance

of

$1 ,0^5 ,000 ,000

now

c a r r i e d

b y t h e banks with na t iona l bank reserve agents i n orde r t o g iv e t h e banks

t h e

e nt i r e . res e rve re qu ir ed . This proc ess would give

t h e

banks the i r

exac t r e se rve requ i rements

i n

v a u l t

a n d

wi th Fed e ra l r e se rv e banks

and

would leave

n o

s u r p lu s r e s e r v e

a t a l l -

Thi s would

n o t

n e c e s s a r i l y a l t e r

t h e

t e c h n i c a l p o s i t i o n

o f t he

banks

i n t h e

s l i g h t e s t d e g r e e ,

f o r t h e

c i ty

'banks would have ba la nc es .with t h e i r count ry co rr esp on de nt s j u s t

a s

before.,

w i t h

t h e

e x c e p t i o n

o f t h e

compara t ive l y smal l amount re qu ir ed

to be

t r a n s f e r r e d , a n d t h e on ly d i f f e r en ce would b e tha t ba lances wi th f0 rae r

reserve correspondents would n o longer count a s b a n k r e s e r v e s , bu t 3

7/17/2019 frsbog_mim_v04_1828.pdf


other respec ts would provide f o r t h e same func t ions a s a t p r e s e n t .

The

Board

h a s

g iven much a t ten t ion

t o t h e

whole reserve problem

a n d h a s

t r a n s m i t t e d

t o t h e

Chairmen

of t h e

appropr ia te commit tee s

r e -

recommendations

f o r

further amendments

t o t h e

Fede ra l Rese rve

A c t ,

which

h a d been agreed upon by a m a j o r i t y o f t h e Board. The t e x t of t h e s e s u g -

gested amendments

i s

p r e s e n t e d

i n

e x h i b i t

, b u t a s two o f

them

a r e

di re c t ly connec ted wi th

t h e

c o n t r o l

an d

c o n s e r v a t i o n

o f ou r

gold supply,

i t i s deemed proper t o m a k e p a r t i c u l a r r e f e r e n c e t o them a t t h i s p o i n t .

The two

amendments

a r e a s

f o l l o w s :

(insert note issue amendment, and

amendment regarding reserves . )

When

t h e

Federa l Reserve

Ac t was

d r a f t e d

i t s

p r i n c i p a l o b j e c t

was t o

dea l wi th na t iona l p rob lems of bank ing an d c u r r e n c y , b u t s i n c e i t s

e n a c tm e n t f i n a n c i a l

a n d

economic condi t ions

i n t h e

United Sta tes have

undergone f a r re ac hi ng changes which were n o t f o r e s e e n t h r e e y e a r s a g o .

The

U n i t e d S t a t e s

h a s

grown

to be a

world power

i n

f i n a n c i a l a f f a i r s

a n d i t

seems nec ess ary t ha t

t h e A c t ,

which

h a s

proved

of

such gr ea t

va lue i n t h e t r e a t m e n t o f ou r domurtic problems, should now be amended

7/17/2019 frsbog_mim_v04_1828.pdf


- 1 8 -

. 1 8 4 5

91>>

somewhat i n o r d e r t o enab le u s t o d e a l e f f e c t i v e l y w i t h t h e i n t e r n a t i o n a l

problems which now c o n f r o n t u s a n d which seem destined t o p lay s o -

p o r t a n t

a

p a r t

i n o u r

economic l i f e .

The

banking sy st em

o f t h e

United

Sta te s shou ld b e p r e p a r e d t o m e e t e f f e c t i v e l y tw o c o n d i t i o n s of oppos i t e

c h a r a c t e r ,

- o n e , t h e

e x c e s s i v e

a n d

u n c o n t r o l l e d i n f l o w

of

g o l d ,

a n d t h e

o t h e r

t h e

e x c e s s i v e

an d

u n r e g u l a t e d o u t f l o w

of

g o l d .

The

amendments

p r o -

posed b y t h e Board a r e des igned t o provide means of c o n t r o l l i n g a n over

e x t e n s i o n of loans based on new a c c r e t i o n s t o o u r gold s tock a n d t o p r o -

v ide f o r t h e m o b i l i z a t i o n a n a c o n c e n t r a t i o n o f t h e gold ho ld ings o f t he

Uni ted S ta t e s so tha t wha teve r t h e develo^izairte may be l e a d i n g t o t h e f low

of

gold back into Europe,

o r t o

South America

o r t o t h e

O r i e n t ,

t h e

gold

may be

r e l e a s e d

b y t h e

banks

of

th i s coun t ry wi thou t fo r c i ng

any

v i o l e n t c o n t r a c t i o n of loans o r causing undue d is turbance t o l e g i t i m a t e

b u s i n e s s . A t p r e s e n t ou t o f app rox ima te ly t w o a n d t h r e e - q u a r t e r b i l l i o n s

of

gold

i n

th i s coun t ry the re

a r e

h e l d

o r

c o n t r o l l e d

b y

F e d e r a l r e s e r v e

banks about $738,000,000 . Qf t h i s amount $283.-000,000 i s h e l d by

Federa l Reserve Agents a s s e c u r i t * ' f o r J fado ra l r e se rv e no te s ou t s t an d ing .

7/17/2019 frsbog_mim_v04_1828.pdf


- 19 -

and. $455>000000 a r e reserve money an d mu st t h e r e f o r e be used conse rva-

t i v e l y

. Bu t

even

if we

assume that

t h e

Federa l rese rve banks wbuld

be

w i l l i n g t o r e d u c e t h e i r g o ld r e s e r v e s t o k0f> of t h e i r d e p o s i t s a n d note

l i a b i l i t y ( wh ic h w ou ld

be

r e g a r d e d

a s a

minimum

a n d i n

normal times would

be

in a d e q u a t e )

t h e

amount

of

f r e e g o ld ,

i . e . , t h e

amount

of

gold tha t

t h e

Fe de ra l re se rv e banks would lo se b ef or e re ac hi ng th i s bof? minimum,

would be a l i t t l e more than $300 ,000 ,000 . Whi le t h i s i s a very large

s u m i t s

s u f f i c i e n c y

may

w e l l

b e

questioned when

we

c o n s id e r

t h e

wide

scope of our t r a n s a c t i o n s i n wor ld f inance a n d t h e phenomenal growth

of our own

c r e d i t s t r u c t u r e .

I t i s

e s t im a t e d t h a t t h e r e

a r e i n

c i r c u -

l a t i o n a t p re se nt from seven t o e ig h t h u nd re d m i l l i o n d o l l a r s i n gold

a n d

go ld c e r t i f i c a t e s ,

a n d

t h a t t h e r e

a r e a t

p r e s e n t h e ld

i n t h e

v a u l t s

of member banks about $768,000,000 of re se rv e money. There sho uld be

added

t o

th i s e s t ima te abou t $600 ,000 ,000

of

l a wf u l money

i n t h e

v a u l t s

of nonmember State banks and t r u s t companie s . I t i s d i f f i c u l t t o e s t ima t

t h e

amount

of

g o ld t h a t

i s

hoarded

by

i n d i v i d u a l s

o r

c a r r i e d

a s

pocket

money.

The

amount

i s n o

d o u b t s u b s t a n t i a l ,

cu t

whatever

i t m ay b e , i t

7/17/2019 frsbog_mim_v04_1828.pdf


i s l o s t f o r reserve purposes a n d i s n o t f u l f i l l i n g i t s t r u e and. h i g h e s t

f u n c t i o n . The us e of gold, a s a medium of d o m e s t i c c i r c u l a t i o n i s a

n a t u r a l w a s t e .

The

tendency

i n


i n

normal t imes

h a s

been t o su bs t i tu te Government bank c i rc u la t i on f o r t h e u s e of m e t a l l i c

gold a n d t o c o n c e n t r a t e t h e g o l d i t s e l f i n t h e c e n t r a l banks. The

Federa l reserve note , which

i s a n

o b l i g a t i o n

o f t h e

Uni ted Sta tes secured

by an ample reserve of go ld a n d commercial paper , i s a c c e p t e d a s w i l l i n g l y

b y t h e

p u b l i c

a s a

nat ional bank note

o r a s a n y

other form

of

cur rency,

a n d t h e public does n o t discr iminate between o n e form o r a n o t h e r of

United St a t es cur rency* T o th e e x t e n t of about th re e hundred mi l l io n

d o l l a r s F e d e r a l r e s e r v e n o t e c i r c u l a t i o n h a s b e e n s u b s t i t u t e d f o r gold

c e r t i f i c a t e s . U n d e r t h e r equ i r emen t s o f t h e p r e s e n t l a w , however , this

gold

i s

depos i t ed wi th

t h e

ledera l Reserve Agents

i n

redempt ion

o f th e

Federa l r e se rve no tes i s sued aga ins t i t . T he no te so p rov ided f o r there ,

ceases

to b e an

o b l i g a t i o n

o f th e

Federa l reserve bank;

b u t a s t h e

gold

does n o t f i g u r e a s a n a s s e t o f t h e Federa l reserve banks, t h e F e d e r a l r e -

serve system i s unab le t o show t h e g r ea t e r s t r en g t h which migh t b e

7/17/2019 frsbog_mim_v04_1828.pdf


ev idenced

i f t h e

laxv pe rm it te d,

a s

proposed

i n t h e

amendments,

t h e

i s suance of Federa l reyr i rva notes n o t only aga ins t commerc ia l paper ;

b u t

a l so aga ins t go ld

o r

aga i ns t e i t he r , p rov ided a lways th a t eve ry

Federa l rese rve note must

be

covered

by a t

l e a s t

100% of

commercial

p a p e r o r gold., a n d t h a t t h y r e must always b e a go ld re se rve o f no t

l e s s than

40%

a g a i n s t

a l l

o u t s t a n d i n g F e d e r a l r e s e r v e n o t e s .

The

c o n t r o l of go ld by Fed era l rese rv e banks i n t imes of p l e t h o r a a s a t

p r e s e n t , w i l l d e c r e a s e

t h e

dc-nger

of

i n f l a t i o n

of

domes t ic c red i t s

and

a t t h e

same time will enable

t h e

country When

t h e

t i d e t u r n s

t o

pa r t

with large sums

of

g old with les s inconvenience

o r

shock,

a n d

w i l l

enab le

u s

more sa fe ly

a n d

e f f e c t i v e l y

t o

piroceed with

t h e

development

of ou r

f o r e i g n t r a d e

and t o

g ive

t h e

n ec e s si t y c r e d i t f a c i l i t i e s

f o r

b u i l d i n g

i t u p . We

should

be i n a

p o s i t i o n

t o

face condi t ions which

may c a l l f o r a n o u t f l o w of gold without a n y j a r t o o u r ow n o r t o t h e

w o r ld ' s b u s in e s s ,

a n d

with out making nece ssar y dr a s t i c changes

i n o u r

i n t e r e s t o r discount ra tes '* The ..amendments su gg es te d b y t h e Board a r e

des igned

t o

enab le

t h e

Fe de ra l reserve- banks

t o

wi th dra w gol d from

7/17/2019 frsbog_mim_v04_1828.pdf


a c t u a l c i r c u l a t i o n w h i l e e n a b l i n g t h e m a t t h e same time t o r e l ease go ld

which a t p r e s e n t i s t i e d u p i n t h e i r own v a u l t s . The amendments a r e

proposed

o n t h e

t h e o r y t h a t

a l l o f t h e

ind iv idua l banks shou ld s t r eng then

t h e gold ho ld ings o f t h e Fe de ra l re se rv e banks, The count r y

1

s hold ings

of

gold

a r e n o t

used most e f f e c t i v e l y when they

a r e i n t h e

v a u l t s

of a

large number of banks sca t t e r ed a l l over t h e country> b u t i t s g r e a t e s t

u s e

would coma from centering

i t , a s f a r a s

p o s s i b l e ,

i n t h e

hands

of

t h e Federa l reserve banks, where i t c an be p r o t e c t e d e f f e c t i v e l y w h e n

n o t r e q u i r e d a n d u s e d e f f e c t i v e l y i n t imes of n e e d . The member bank

does n o t r equ i r e go ld s o much a s currency with which t o supply t h e

ordinary demands of i t s d e p o s i t o r s . I t i s f rom t h i s po i n t of view

t h a t t h e Federal Reserve Board h a s proposed tha t Congress increase t h e

required reeerxres

t o b e

m a i n t a i n e d

by

member banks with

t h e

F e d e r a l

r e -

serve banks. On September 1 2 , i g i 6 t h e gold ho ld ings of a l l member

banks were ab ou t $500 ,00 0,00 0* Under

t h e

proposed amendment

of

Sec t ion

19 $350,000 ,000 of t h i s amount would b e t r a n s f e r r e d t o t h e F e d e r a l r e -

serve banks. Procee ding upon t h i s th eor y , t h e Board be l i ev es tha t u l t i -

7/17/2019 frsbog_mim_v04_1828.pdf


mate ly t h e l a w shou ld re qu i re of member banks n o more th an th a t th ey

should mainta in a c e r t a in ba l a nc e w i th t h e Fe de ra l r e se rve ba nks , and

t h a t t h e Fe de ra l r e se rve banks mus t have su f f i c i e n t r e se rv e s of gold

with which t o p r o t e c t t h e c o u n t r y

1

s g o l d o b l i g a t i o n s , b u t t ha t t he re

should be no l e ga l r e qu i re me n t»a s t o t h e r e s e r v e s t h a t a member bank

should carry i n i t s own va ul t , which i s a m a t t e r of business judgment

tha t might we l l b e l e f t t o t h e d i s c r e t i o n of each member bank. I t

w as

tho ugh t ; however , tha t

i f

t h i s p r i n c i p l e w e r e c a r r i e d i n t o f u l l

e f f e c t a t th i s t ime ^ t h e step might b e t o o ext reme, pa r t icula r ly unde t*

p r e s e n t c o n d i t i o n s ,

an d

nothing should

be

done that might tend

to a

fu r the r r e l e -a se of reserve money* i t w a s t h o u gh t a d v i s a b l e , t h e r e f o r e ,

t o p r e s c r i b e a minimum amount of currency tha t t h e member banks should

be r e q u i r e d t o keep i n t h e i r v a u l t s * The amount suggested i s 5f° of th e

demand deposi ts ,

s o

t h a t

t h e

present rese rve requi rements wi l l remain

pr a c t i c a l l y unc ha nged . Whi le t h e e f f e c t of some o f t h e changes a s

propose d , w i l l be to reduce somewhat t h e r e s e r v e r e q u i r e m e n t s , t h e

r e s e r v e s w i l l be i n c r e a s e d b y t h e a b r o g a t i o n o f t h e p r i v i l e g e t h a t t h e

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- 24 -

member tanks have hi ther to

had of

count ing i tems

i n

t r a n s i t

o r

f l o a t

a s r e s e r v e . The permission given member tanks t o u s e t h e i r ow n d i s -

c r e t i o n

a s t o t h e

c h a r a c t e r

of

cur rency

i n

t h e i r v a u l t s , w i l l e na b l e

them

t o

r e l e a s e

t h e

gold they

now

h o ld ,

b u t t h e

im p o r t a n t r e s u l t w i l l

be t h a t t h e s u b s t i t u t i o n of Fe de ra l re se rv e tiotes f o r go ld a n d gold

c e r t i f i c a t e s w i l l

be

f a c i l i t a t e d

by

this change

i n t h e

law* Wi th ou t

some such change member banks will continue

t o a s k f o r

g o l d c e r t i f i c a t e s

i n

small denomina t ions , because

a s

long

a s

they must have gold

o r

lawful money t o count a s r e s e r v e i t would be imposs ib le f o r t h e banks

t o exchange them f o r F e d e r a l r e s e r v e n o t e s . On November l 6 , l $ l 6 ,

t h e

f i n a l i n s t a l l m e n t

of

member ban ks ' ob li ga to ry re se rv e, amounting

t o

$60 ,030 ,000 ,

w as

p a id i n to

t h e

Federa l rese rve banks

by

their members,

Under t h e p r o v i s i o n s o f t h e Federa l Reserve A c t about $260,000,000 of

rese rves were pa id

i n t o t h e

Federal reserve banks immediately upon

t h e i r o r g a n i z a t i o n .

The Ac t

pro vid es tha t subsequent res e r ve payments

should

b e

made

a t

i n t e r v a l s

o f s i x

months ,

a n d

a c c o r d i n g l y

on May l6 ,

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1915> November l o , May 1 6 , l $ l 6 an d November l 6 , 1 9 l 6 , a d d i t i o n a l

p e r c e n t a g e s

of

r e s e r v e s were t r a n s f e r r e d .

Due

p a r t l y

t o

th e s e r e g u l a r

t r a n s f e r s

of

r e s e r v e s

a s

r e q u i r e d

by th e l a w o n th e

d a t e s s p e c i f i e d ,

and

p a r t l y t o t h e change i n vau l t r e se rve requ i rements p rov ided b y th e

mandatory

Act o f

September ~ 1916,

t h e

money stock

of

Fede ra l r e se rve

banks

h a s

been g re a t ly s t r en g the ned ,

t h e

a c tu a l h o ld in g s

on

success ive

da tes be ing a s fo l lows :

Ho fu r t he r payments a r e n o w compulsory, b u t from a n d a f t e r November l b ,

1 9 1 7 , ( o r

e a r l i e r

i f t h e

Board's suggested amendment should

be

adopted)

ba lances wi th re se rve agen ts

i n

r e s e r v e

a n d

c e n t r a l r e s e r v e c i t i e s w i l l

no longer count a s member banks ' reserves, a nd members will b e requ i red

t o b u i l d up e i t h e r t h e i r v a u l t c a sh o r th e i r b a l a n c e s w i th F e d e r a l r e -

s e r v e b a n k s s u f f i c i e n t l y

t o

cove r

t h e

r e q u i r e d r e s e r v e s h e r e to f o r e

c a r r i e d

a s

ba lances wi th cor re sponden ts .

June 30, 1;915

December 31,. 1915

June 3 0 , I9 1 6

December

19^-6

December

3 1 ,

I3I&

$255

,647

,000

300,814,000

357,983,000

404,206,000

540,000,000

7/17/2019 frsbog_mim_v04_1828.pdf


1853

DEVELOPMENT OF DISOUNT RATES.

Except f o r a s l i g h t s t i f f e n i n g of r a t e s of discount toward

t h e c l o s e o f t h e y e a r r e s u l t i n g in an i n c r e a s e of r a t e s i n some d i s -

t r i c t s b y one -ha l f o f one p e r c e n t , t h e r a t e s p r e v a i l i n g a t Fede ra l

reserve banks have been near ly s ta t ionary th roughout t h e y e a r . Of

t h e changes made, t h e only o n e l i k e l y to be of much importance, was

i n t h e

r a t e

on

accep tances , wh ich

w as

f i r s t . a d v a n c e d

b y t h e

Federa l

Reserve Bank

of New

York

i n

consequence

of a f

inne r t endency

i n t h e

money market. The i d e a of e s t a b l i s h i n g a d i f f e r e n t i a l r a t e f o r

accep tances , des igned t o favor those made b y member banks o f t he

Federal reserve system., h a s also been adopted \>y some o f t h e Fede ra l

r e se rve banks , and i s a d e s i r a b l e i n n o v a t i o n .

There h a s been no o c c a s i o n t o e s t a b l i s h new o r s p e c i a l

r a t e s des igned f o r t h e accommodation of p a r t i c u l a r i n d u s t r i e s o r

s e c t i o n s .

The

p l a n

of

app ly ing

a low

commodi ty ra t e , es t ab -

l i s h e d

b y t h e

Board

i n

September

1 9 1 5 , f o r t h e

b e n e f i t

of

producers

an d s h i p p e r s of a g r i c u l t u r a l p r o d uc t s , h a s con t inued ope ra t ive ,

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- 2 7

a l t h o u g h

t h e

r a t e i t s e l f

w as

r a i s e d

t o

3-^1/2

a n d 4 $ a t

dome

o f

t h e

banks ,

b u t t h e

need

f o r i t s

a p p l i c a t i o n

h a s

been le ss th an

i t

was a y e a r a g o . T h e h i g h p r i c e s o f a l l a g r i c u l t u r a l p r o d u c t s , and

t h e

g e n e r a l

an d

sustained demand

f o r

them,

n o t

on ly

a t

home

b u t

t h r o u g h o u t

t h e

wor ld ,

h a s

brought

t o t h e

fa rmers

o f t h e

c o u n t r y

a

degree

of

p r o s p e r i t y

and a

supp ly

of

f l u i d re sou rce s whol ly

u n -

p r e c e d e n t e d . T h i s

h a s , i n b6>

small deg ree , de l iev ed them

of d e -

pendence upon banks f o r current accommodation, while i t h a s a l s o

l e d them t o p lace the i r p roduc ts upon t h e marke t wi thout holding

them

i n

o r d e r

t o

o b t a in b e t t e r p r i c e s t h a n c o u ld

b e h a d a t t h e

c l o s e o f t h e growing season. N o t on ly t h e f a r m e r , b u t p r a c t i c a l l y

every other e lement

i n t h e

commercial community

h a s

been s t rong

a n d

s e l f - d e p e n d e n t ,

d u e t o t h e

h ig h r e tu r n

on

l a b o r

an d

c a p i t a l ,

a n d t h e

p r e v a i l i n g e a s e

i n t h e

money market.

The

i n f l u e n c e

o f t he

Federa l rese rve banks upon ra tes

h a s ,

th e r e f o r e , c o nt i n u e d t h r o u g h -

o u t t h e

p r e s e n t y e a r ,

a s i n t h e

p a s t ,

t o be

p o t e n t i a l

an d

i n d i r e c t ,

a n d h a s n o t

been fe l t e i iher

a s t h e

r e s u l t

of

l a r g e o p e r a t i o n s ,

o r

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1855

- 2 8 -

of p o s i t i v e a c t i o n d e s ig n e d t o r e l i e v e b a n k s o r bor rowers .

A

comparison

of

d i s c o u n t r a t e s p r e v a i l i n g

a t

Fede ra l

reserve banks shows that t h e p r i n c i p a l d i f f e r e n c e b e t w e e n c o n d i -

t i o n s t h e p a s t y e a r a n d t h e p r e v i o u s o n e l i e s i n t h e somewhat

g r e a t e r d i v e r s i f i c a t i o n of r a t e s , th e n ew 15-day ra te hav ing been

i n t r o d u c e d f o r t h e gr ea te r conven ience of member banks desir-

i n g tempor ary accommodations. Perhap s th e re i s n o b e t t e r c o m -

mentary upon some o f t h e f a c to r s t h a t h a v e l e d t o t h e t r a n s f e r

of d i s c o u n t b u s in e s s t o t h e United S t a t e s , than a comparison of

r a t e s p r e v a i l i n g i n t h e p r in c i p a l f o r e ig n m a r k e t s w i th t h o s e i n

New York. A n o t a b l e d i f f e r e n c e i s shown b y t h e f o l l o w in g f i g u r e s

c o n t r a s t i n g t h e range of bank ra te s i n t h e p r i n c i p a l f i n a n c i a l

m a r k e t s ;

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963

—29™

Bank rates i n 1 9 1 6 .

London

5 - 6

P a r i s 5

B e r l i n

5

Rome

5

Pe t r og r ad

6

Amsterdam 4 - 1 / 2

Stockholm

4 - 1 / 2 - 5 - 1 / 2

C h r i s t i a n i a 4 - 1 / 2 - 5

Copenhagen

5

Madrid

4 - 1 / 2

New

York

2 - 2 -3 /4

DEVELOPMENT

OF

FEDERAL RESERVE

CIRCULATION.

Reference h a s already been m&de t o t h e ixaintenance and

i n c r e a s e

o f t he

actual gold s tock

o f t h e

n a t i o n

a s

r e p r e s e n t e d

by

t h e

r e s e r ves

o f t h e

Federal reserve banks ,

a s a

fundamental ly

n e c e s s a r y f a c t o r

i n t h e

s o l u t i o n

of

e x i s t i n g f i na nc i a l p r ob l ems ;

a n d t h e p l ans and po l i cy o f t he Federal Reserve Board f o r t h e p r o -

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Jf '3

185?

- 3 0 -

t e c t i o n an d en la rgement of th is gold s t oc k, have been o ut l in ed .

I t s h o u l d f u r t h e r b e e x p l a i n e d a t t h i s p o i n t t h a t t h e Fede ra l

r e s e r v e n o t e h a s p layed a n im p o r t a n t p a r t i n p o t e n t i a l l y a s s i s t *

i n g t h e en la rgement o f t h e gold s tock a t Federa l rese rve banks ,

a n d a t t h e same time i n check ing a n i n f l a t i o n a r y p r o c e s s t h a t

migh t o the rwise have a r i s en . The rap i d in f low of gold in to t h e

U n i t e d S t a t e s , i f n o t d i v e r t e d l a r g e l y t o Fede ra l r e se rve banks ,

a s i t could n o t whol ly be unde r a n y c o n d i t i o n s , n a t u r a l l y t e n d s

t o promote a n i n f l a t i o n a r y t en de nc y i n p r i c e s , an d an o v e r - e x t e n -

s i o n

of

b a n k i n g c r e d i t ,

a n

admit ted e lement

of

da ng er . Even

i f

th e n ew accumula t ion of gold could b e s u c c e s s f u l l y d i r e c t e d t o t h e

v a u l t s o f t h e res er ve banks , t he re would s t i l l ex i s t some tend ency

t o w a r d i n f l a t i o n a s t h e r e s u l t of grea t ly augmented re source s . B u t

a s a

m a t t e r

of

f a c t

as th e n ew

gold

h a s

c ome in t o c i r c u l a t i o n

a

c o n s i d e r a b l e p o r t i o n of i t h a s been brought t o a t l e a s t o n e o f th e

re se rve banks

f o r t h e

purpose

of

exchange

f o r

F e d e r a l r e s e r v e n o t e s .

7/17/2019 frsbog_mim_v04_1828.pdf


The Fed era l re ser ve agents* ho ld ings of gold from -January 1 , 1 9 1 5 ,

t o December 3 0 , 1 9 1 6 , increased $270,270 ,000 , whi le o u r n e t imports

of gold f o r tha t per iod were $953,130 ,000 . The Federal Reserve

A c t nowhere makes provision f o r a n y such d i rec t exchange of notes

f o r

gold ,

b u t

some

of the

Federa l reserve banks, wi th

t h e

Board ' s

sanct ion , have adopted t h e exped ien t of o bta in ing notes f rom t h e

Federa l r e se rve agen t aga in s t a d e p o s i t of e l i g i b l e p a p e r, f o l l o w -

i n g

t h i s o p e r a t i o n

b y a

d e p o s i t

of

gold

and

wi thd rawa l

of t h e c o l -

l a t e r a l , an d then aga in depos i t ing t h e c o l l a t e r a l a n d o b t a i n i n g

n o t e s . I t i s ev iden t tha t i n t h i s w ay Fed era l re se rv e not es could

b e o b t a i n e d upon p r a c t i c a l l y t h e same basis a s i f they h a d been

d i r e c t l y i s s u e d a g a i n s t a d e p o s i t of gold co in ; and by r e p e a t i n g

t h e t r a n s f e r of c o l l a t e r a l a s u f f i c i e n t n u m b e r of t i m e s , a n y amount

of r e se rve no te s wi th i n t h e l i m i t o f t he go ld r e se rve r equ i r ed ,

could

b e

p l a c e d

i n

c i r c u l a t i o n . L ar ge ly

a s t h e

r e s u l t

of

th is oper

a t i o n t h e r e h a s been i s sued , and was o u t s t a n d i n g on December 30 , a

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9 6 3

1859

- 3 2 -

t o t a l

sum of

$310,110 ,000

of


The

t r u e c h a r -

a c t e r

of

these no te s

i s

evident when

i t i s

seen tha t

t h e

s e c u r i t y

p r o t e c t i n g t h e m

i s

s l i g i b i e commercial paper on ly

t o t h e

e x t e n t

of

$18,593,000, while $282,522,000 of i t c o n s i s t s of a c t u a l g o l d . The

i s s u e of notes thus f a r p u t o u t h a s , i n f a c t , b ee n p r i m a r i l y e f f e c t -

ed as a

d i rec t exchange

of

n o t e s

f o r

gold.

CONVERSION OF BONDS

and

RETIREMENT

OF

NATIONAL BANK NOTES.

Under Section

1 6 o f t h e

Federal Reserve

A c t ,

F e d e r a l

r e -

serve banks may be r e q u i r e d t o purchase $25 ,000 ,000 of Uni ted Sta tes

bonds, and a r u l i n g of the S e c r e t a r y o f t h e Treasury under tha t S e c -

t ion permits them t o conver t th rough t h e Treasury Department $30,000,-

0 0 0

i n t o t h i r t y - y e a r

3

fo United S ta te s bonds

and

one -yea r 3f o Tre asury

n o t e s .

Uni ted St a t es bonds ac tu a l ly purchase d

b y

Fede ra l res erve

banks dur ing 1 9 1 6 exceeded $25,000,000, t h e amount which Federal r e -

7/17/2019 frsbog_mim_v04_1828.pdf


9 63

i86

- 3 3

se rve banks m a y b e r e q u i r e d t o purc ha se dur ing a n y o n e y e a r , and

a t n o

q u a r t e r l y p e r i o d

w as i t

n e c e s s a r y

f o r t h e

Federal Reserve

Board t o d i r e c t t h e purchase of bonds under Sec t ion 1 8 o f t h e F e d -

eral Reserve Adt*

The f u l l amount of $30 , 000 , 000 i n convers ion bonds and

one ^ ye a r no t e s

v^as

t a ke n

b y t h d 1 2

Fe de ra l r e se rve ba nks ,

a n

a l l o t -

ment based upon ca p i t a l bein g made t o each . Three bank s, th os e a t

B o s t o n , P h i l a d e l p h i a

a n d S a n

F r a n c i s c o ,

d i d n o t

a va i l t he mse lve s

of

t h e f u l l co n ve r si o n p r i v i l e g e ; a n d t h e d i f f e r e n c e b e t w e e n t h e f u l l

q u o t a of these banks a n d t h e amounts appl ied f o r b y the m, $1 , 91 8 , -

9 0 0 , w a s d i s t r ib u t ed among seven o th er banks which h a d a p p l i e d t o

conv er t more than t h e i r a l lo tm en t . Convers ion bonds amount ing

t o

$15 , 761 , 000 , and one-year notes amounting t o $14,239,000, were i s -

sued f o r t h e year ending September 3 0 , 1 9 1 6 . F o r t h e q u a r t e r e n d -

i n g December 3 1 , 1 9 1 6 , Federa l rese rve banks conver ted $18,597,200,

of which $9,301,000 w a s n o t e s , and $9,306,600 bonds , t h e Board h a v ~

7/17/2019 frsbog_mim_v04_1828.pdf


i n g previous ly announced tha t i t would approve t h e a p p l i c a t i o n s

of Federa l rese rve banks f o r t h e c onve rs ion of a l l o r a n y p o r t i o n

of t h e i r f u l l a n n ua l a l l o t m e n t on January 1 , 1 9 1 7 , o r t h e b e g i n -

n i n g of any o t h e r q u a r t e r l y p e r i o d .

Inasmuch

a s t h e

banks

h a d

thus a lready purchased bonds

i 6 a n a&ouri t eq ua l l in g more th an half t h e i r qu ot as , t hey Were a d -

v i s e d , i n a n announcement made on January 8 , 1 9 1 7 , t h a t t h e Board

would

n o t

requi re them

t o

purc ha se dur ing

t h e

year

1917

more than

$15 , 000 , 000 of Uni ted S ta tes bonds offe red f o r s a l e b y member banks

,

th rough

t h e

Tre a su ry

o f t h e

U ni t e d S t a t e s ,

and

t h a t

i t

would require

Federa l rese rve banks t o p u r c h a s e on A p r i l 1 , 1 9 1 7 , t h e f u l l amount

of th i s $15 , 000 , 000 , o r s o much thereof a s might b e o f f e r e d f o r sa l e

b y member banks prior t o March 2 1 .

The o r i g i n a l p u r p o s e of the bond convers ion of t h e Federa l

Reserve A c t w a s t w o - f o l d ~ t h a t of p r o t e c t i n g t h e v a l u e of United

S ta t e s bonds de pos i t e d t o se c u r e c i r c u l a t i o n , an d t h a t of insu r ing

a

g r a d u a l

b u t

s t e a d y r e t i r e m e n t

of

na t i ona l ba nk no t e s ,

t h e g a p

7/17/2019 frsbog_mim_v04_1828.pdf


t h u s l e f t , t o b e f i l l e d , s o f a r a s n e c e s s a r y , b y Fede ra l r e s e rve

cur rency . Dur ing t h e pa s t year na t i on a l banks have withdrawn

<from d e p os i t w i t h t h e T r e a s u r e r <j«f t h e Uni ted S ta te s bonds depos i t -

e d t o s ec u r e c i r c u l a t i o n o f t h e p a r v a lu e of $ ,

They have deposited lawful money t o r e t i r e o u t s t a n d i n g n o t e s i n

t h e sum of $ , The t o t a l of na t iona l bank no te s

o u t s t a n d i n g

a t t h e

b e g in n in g

o f t h e

year

19 16 wa s $ .

w h i l e

o n

December

3 0 , 1 9 1 6 , t h e

amount outs tanding

was $

a r e d u c t i o n of $ .

Federa l rese rve banks sold in 1916 new bonds an d c o n v e r -

s i o n n o t e s

a s

f o l l o w s :

•

S e c t i o n

1 6 o f th e

Federa l Reserve

A c t

pe rmi t s Fede ra l

re se rve banks

t o

issue bond-secured currency known

a s

F e d e r a l

r e -

se rve bank notes , protes t ing them

b y

depos i ted bonds ,

a s i n t h e

case

of n a t i o n a l b an k n o t e s . U nd er t h i s p r o v i s i o n o f t h e l a w t h e t o t a l

amount of Federa l rese rve bank notes issued t o December 3 1 , 1 9 1 6 ,

w a s $12 ,05 4,9 80. There were he ld a t t h e c l o s e o f 1 9 1 6 b y t h e F e d -

7/17/2019 frsbog_mim_v04_1828.pdf


; Do

- 3 6 -

eral Reserve Bank of Kansas City, $6,000,000, and by t h e Fede ra l

Reserve Bank

of

Da l l a s $2 ,000 ,000 .

The

remaining amount

i s i n

c i r c u l a t i o n

o r i n t h e

Treasury

o f t h e

Un it ed S t a t e s . Fede ra l

r e -

s e r v e b a n k s h a v e e x t i n g u i s h e d t h e i r l i a b i l i t y

on

account

of

$4,000,

fr rt>

of

these no tes th rough

t h e

d e p o s i t

of

l aw fu l money

and on ac

count

of

$54,980 through

t h e

r e t u r n

t o t h e

Compt ro l l e r

f o r

d e s t r u c -

t i o n of an equal amount of Federa l reserve bank notes ,

7/17/2019 frsbog_mim_v04_1828.pdf


1864

- 37 -

CLEARING AND COLLECTION.

As e x p l a i n e d i n t h e r e p o r t of l a s t y e a r , t h e Board found that

t h e i n t r o d u c t i o n of a g e n e r a l a n d e f f e c t i v e c l e a r a n c e a n d c o l l e c t i o n

sys tem was a h i g h l y t e c h n i c a l ' m a t t e r , i n v o l v i n g l e g a l q u e s t i o n s a n d many

c o m p le x i t i e s of p r a c t i c e . I t w a s c a l c u l a t e d t o a rouse t h e o p p o s i t i o n

of

many tanks,

d u e t o t h e

l o s e

of

revenue from

t h e

exchange which they

h a d been accustomed t o charge f o r r e m i t t a n c e s . The Board a t f i r s t

t h o u g h t b e s t t h e r e f o r e ,

t o

l e a v e

t h e

a c t ua l i n i t i a t i v e

i n t h e

m a t t e r

l a r g e l y t o t h e F e d e r a l r e s e r v e b a n k s , a n d a t t h e i r i n s t a n c e t o a u th o r i z e

a vo lun ta ry sys tem of c l e a r a n c e a n d c o l l e c t i o n i n which member banks might

o r

might

n o t

p a r t i c i p a t e ,

a s

they might p r e f e r . Such

a

s y s t e m ,

a s e x -

p l a i n e d i n t h e Boa rd ' s annua l r epor t o f 1 9 1 5 ; w a s , i n f a c t , i n a u g u r a t e d ,

a n d f o r a t ime i t w as hoped tha t i t would pr ov e a t l e a s t m o d e r a t e ly

su c ce ss fu l . Exp er i en ce , however , soon showed t h a t many f a c t o r s were

m i l i t a t i n g s t r o n g l y a g a i n s t t h i s sy s te m . The number of members d i d n o t

i n c r e a s e m a t e r i a l l y ,

a n d i n

some d i s t r i c t s de c l in ed . There were

c o n -

d i t i o n s w h ic h i n d i c a t e d t h a t t h e e x i s t e n c e o f t h e sys tem i n t h e form

7/17/2019 frsbog_mim_v04_1828.pdf


-

±86

then adopted

was a

h a r d s h ip

t o

c e r t a i n c l a s s e s

of

banks , whi le

t h e

plan

d i d n o t

a t t a i n ,

a n d

seemed un l i ke ly e ver

t o

reach, such

a

p l a n e

o f e f ~

e i c i e n c y a s t o make i t a g e ne r a l f a c t o r i n t h e c l e a r a n c e a n d c o l l e c t i o n

sys tem

o f t h e

c o u n t r y .

F o r

t h e s e

f e a s

oils

i t w a s

dec ided

b y t h e

Board

d u r in g

t h e

month

of

A p r i l ,

1 9 1 6 , t o

e s t a b l i s h

a

more comprehensive

and

uniform sys tem,

a n d i t

consequent ly adopted

a

p l a n

of

c l e a r i n g

and

c o l l e c t i o n , i n f o r m i n g t h e several Reserve Banks that they were expected

t o p u t i t

i n to e f f e c t .

I t w a s

o r i g i n a l l y i n t e n de d

t o

beg in ope ra t ions

unde r

t h e n e w

p l a n

o n

June

1 5 , b u t

s ubse quen t ev en ts made

i t

d e s i r a b l e

t o

d e f e r t h i s d a t e

f o r a

month,

s o

t h a t

i t

ac tu a l ly became ope ra t ive

on

t h e

f i f t e e n t h

of

J u l y , . Under

t h e n e w

system member banks,

a s

lo n g

a s

they comply with

t h e

s t a t u t o r y r e q u i r e m e n t s ,

may

c o n t i n u e

t o

carry

a c c o u n t s w i th t h e i r p r e s e n t c o r r e s p o n d e n t s

a n d

with other banks

t o

whom

they

may

send items

f o r

c o l l e c t i o n ,

a n d

from whom they

may

r e c e iv e

f o r s im i la r purpo ses , checks drawn upon themse lves o r upon other banks.

They

a r e ,

howeve r , r equ i red

t o p a y

without deduction checks drawn upon

themse lves

a n d

p r e s e n t e d

a t

t h e i r

ow n

cou nte r s . Remi t tance

of

such

7/17/2019 frsbog_mim_v04_1828.pdf


1 8 6 6

— jO ...

checks

by the

Federal reserve bank

of

their district through

the

mail,

i s

construed

as

presentation

at

their

own

counters,

and

they must settle

with the Federal reserve bank for such checks, either by acceptable checks

upon other banks, or by remittance of lawful money or Federal reserve

notes

at the

expense

of the

Federal reserve bank,

in

case they

are

unable

to

send

in

offsetting checks

on

other banks.. Checks drawn upon

a

zpeipber bank which have been received

by the

Federal reserve bank, ate

not

charged against

i t s

reserve account until sufficient time

has

elapsed for the checks to have reached the member bank and fo r returns

to have been received in due course by the Federal reserve banks.

The Board's clearing plan provided also that a small service

charge (from

one to two

cents

per

item)

be

made

at

stated intervals

against such banks as send to the Federal reserve bank checks on other

banks for collection and credit; but it follows that no portion of this

charge can be assessed against any bank unless i t shall have elected to

avail itself

of the

fa ci l i t ies offered. Federal reserve banks handle,

beside checks drawn

on

member banks, checks

on

such State banks

as can

7/17/2019 frsbog_mim_v04_1828.pdf


be

c o l l e c t e d

a t p a r , a n d .

meuber banks de s i r i ng

t o

h a n d l e

f o r a

Fede ra l

r e se rv e bank che cks drawn

on

S t a t e bank's,

are-

g iven

t h e

p r e f e r e n c e .

During crop-moving periods i t i s th o u g h t t h a t t h i s w i l l toe a d i s t i n c t

advantage

t o

member banks.

There i s n o d i s p o s i t i o n t o deprive member banks of any income

that they have been

i n t h e

h a b i t

of

r e c e iv in g f r o m

t h e

c o l l e c t i o n

of

draf ts (o ther than bank checks)

o r

from

t h e

purchase

o r

d i s c o u n t

of com-

m e r c i a l b i l l s

of

exchange ,

and so

the re shou ld

be no

d im in u t i o n

i n t h e

c u s to m a r y p r o f i t s of member banks from such sources.

I t w a s

e s t im a t e d t h a t

a s

soon

a s t h s n ew

c l ea r i ng sys tem could

b e p u t

i nt o ope ra t i on , checks upon about 15,000 na t io na l banks , S ta t e

banks , a n d t r u s t companie s th rough out t h e Uni ted S t a t e s , cou ld be handled

b y t h e

Fede ra l r e se rve banks

a t p a r ,

s u b j e c t

t o t h e

small service charge-

above re fe r red

t o ; a n d a s a

m i n o r i t y

o f t he

banks would find

i t

d i f f i c u l t

t o

re ta in much

of

t h e i r most de si r ab le bu si ne ss when checks drawn upon

them

a r e a t a

di sc ou nt , while checks drawn upon

t h e

m a j o r i t y

of

banks

c a n

c i r c u l a t e

a t p a r , i t w a s

th o u gh t t h a t

i n t h e

near future checks upon

7/17/2019 frsbog_mim_v04_1828.pdf


p r a c t i c a l l y

a l l

banks Thr oug hou t

t h e

United Sta tes could

be

hand led

a t

p a r b y Fe d e r a l r e se r ve banks. Many banks have foun d i t necessa ry

h i t h e r t o t o ma in ta in balances wit h a number of c o r r e s p o n d e n t s f o r e x -

change purposes, thus compelling them

t o

keep ex ce ss iv e balances away

fr om home. Under t h e n e w p l a n t h e number of banks upon wh ic h p a r

c o l l e c t i o n s a r e being made , was on December 1 5, w a r 15,000; whi le i n

o t h e r r e s p e c t s t h e system i s deve lop ing a s a n t i c i p a t e d . The t o t a l

d a i l y c l e a r a n c e s

a t a l l


a r e n o w

over $125^000,000*

After November

1 7 , 1 9 1 7 , o r

sooner , should

t h e

proposed amend-

ment

b e

a d o p t e d ,

n o

bank ba lance wil l

b e

a v a i l a b l e

a s

r e s e r v e

f o r

n a t i o n a l

banks except ba lances i n Fe de ra l re se rv e banks. , a n d , t h e r e f o r e , a f t e r

tha t t ime any n e c e s s i t y t o mai nt a i n non -re ser ve balances wit h co rr e -

s p o n d e n t s , e i t h e r

f o r

exchange purposes

o r i n

o r d e r

t o

o b t a i n c o l l e c t i o n

f a c i l i t i e s , w o u l d

be

deemed

i n

many cases

a

g r e a t h a r d s h ip .

I t i s

b e l i e v e d t h a t

i n

numerous in s t an ce s banks w i l l f i nd

i t

e x p e d i e n t

t o

c o n c e n t r a t e t h e i r b a l a nc e s

a n d t o

close many accounts which they

now

carry with other banks ,

a n d

t h a t

a

system which w i l l ena ble them

t o

send

7/17/2019 frsbog_mim_v04_1828.pdf


all of

their checks

on

other banks

to the

Federal reserve banks

for ex •

change purposes,

or as an

offset against checks

on

themselves forwarded

by the Federal reserve banks, will, in course of time, came to be ap-

preciated as a convenience•

The

following table shows briefly

the

clearing operations

of

the

Federal reserve system

for the

monthly period ending December

15j 1916,

with comparative figures

for

each

of the

four preceding months:

7/17/2019 frsbog_mim_v04_1828.pdf


OPERATIONS

OF THE

FEDERAL RESERVE INTERDlSTRICT CLEARING SYSTEM

November 16 t o December 15 , 1916*

Average Nonmember

number Ave rag e Member banks from

of it em s amount of banks which check s

B a. n k . hand led da i ly i n t h e a r e c o l l e c t e d

daily. clearing District

at par.

Boston

38,479

$13,153,317

402

242

New York

42,551 28,307,438

625

313

P h i l a d e l p h i a

30 ,081

16,545,77% 632

292

Cleveland

15,873 8,320,355

754

496

Richmond

17,064

8 ,0o2 ,500

520

286

A t l a n t a

13,851

4,689,214

390

440

Chicago

( a ) 20,452

13,220,268

993

1 , 2 6 9

S t . Louis

10,039

8,402,904

469

8 8 1

Minneapol is

15,613

8,828 ,269

759

1 , 1 0 0

Kansas City

13,782

7,791,296

941

1,412

Dal la s

12,734

6,521,235

621

238

S a n Franc i sco

5,519

1,761 ,162

5 2 1 1,096

Total

w

ov.

l6 to Dec.

15

236,038

125,603,732 7,627

8,065

Oct.

16 to Nov.

15

227,489

115,061,224 7,623

8,059

Sept.16

to Oct.

15

204,891

97 ,666 ,107

7 , 6 1 8

7,459

Aug.

l6 to Sept.

15

177,397

78,559,704 7,618

7,449

July

15 to Aug.

15

133,113

59,301,696 7,624

7,032

( a ) Does n o t include Government checks averaging 2,062.

7/17/2019 frsbog_mim_v04_1828.pdf


. y i .

1871

With t h e view of . making t h e c l e a r i n g and. c o l l e c t i o n sy s te m

m o r e e f f e c t i v e

and o f

e na bl i ng c he cks drawn upon nonmember banks

and

t rus t companies

t o be

handled

by


i n t h e

same manner

a s

ch ec ks drawn upon member s,

t h e

Board

h a s

a sked tha t Sec t ion

13 of

t h e A c t b e

amended

s o a s t o

a l lo w Fed era l re se rv e banks

t o

r e c e iv e

a c c o u n t s f o r c o l l e c t i o n a n d exchange purposes from such nonmember banks

a n d

t r u s t companie s

a s

w i l l a g r e e

t o

r e m i t

t o

Fe de ra l re se rv e banks

a t p a r f o r

checks drawn upon themselves,

a n d

which wi l l ,

i n

a d d i t i o n ,

m a i n t a i n

a

compensa t ing ba lance with

t h e

Federa l rese rve bank

i n

*

a n

amount

t o b e

de te rmined

b y t h e

Reserve bank. This wi l l gr ea t ly

ex tend

a n d

improve

t h e

s e r v i c e

a n d

will make

t h e

c l e a r i n g s y s t e m

a

comprehensive

a nd a l l

embracing

o n e .

7/17/2019 frsbog_mim_v04_1828.pdf


1872

BRANCH

1

*;

4m '

ACWli iS

OF

WDiMi, R2SE.WE rAUKS.

O f t h e

c o n s t r u c t i v e s e c t i o n s

o f t h e

Federa l Reserve

Act

S e c t i o n

3 ,

which provides

f o r t h e

e s t a b l i s h m e n t

of

branch banks,

i s t h e

s h o r t e s t .

I t i s a s

fo l lows :

Each Federa l reserve bank shal l es tab l ish brancht .

banks wi th in

t h e

F e d e r a l r e s e r v e d i s t r i c t

i n

which

i t

i s

l o c a t e d

and may do so in t h e

d i s t r i c t

of any

Federa l

re se rv e bank which

m ay

have been sus pend ed. Such br an ch -

e s

s h a l l

b e

ope ra ted

by a

Board

of

d i r ec to r s unde r ru le s

a n d

r egu l a t io ns app roved

b y t h e

Federal Reserve Board.

D i r e c t o r s

of

branch banks s h a l l po ss es s

t h e

same q u a l i f i -

c a t i o n s

a s

d i r e c t o r s

of

Fe der al res erve bank s. Four

of

s a i d d i r e c t o r s s h a l l

b e

s e l e c t e d

b y t h e

reserve bank

and

t h r e e b y t h e Federal Reserve Board, a n d they shal l ho ld

o f f i c e d u r i n g

t h e

p l e a s u r e , r e s p e c t i v e l y ,

o f t h e

pa ren t

bank

a n d t h e

Federal Reserve Board.

The

reserve bank

s h a l l d e s i g n a t e one o f the d i r e c t o r s a s manager ,

n

I n i t s

annual re po r t

f o r 1 9 1 5 t h e

Board s ta ted tha t

only

i n o n e

i n s t a n c e

d i d i t

r e c e i v e

a

de f i n i t e r eques t f rom

a

Federal reserve bank

t o

e s t a b l i s h

a

b ranch . Thi s r e f e r s

t o t h e


o f t h e

Federal Reserve Bank

of

A t l a n t a

t o

e s t a b l i s h

a

b ranch

in New

Or leans ,

Up t o

th is t ime

n o

o the r Fede ra l

r e -

serve bank

h a s

asked

t h e

s a n c t i o n

o f t h e

Board

f o r t h e

e s t a b -

l i s h m e n t

of a

b r a n c h .

The

expense inc ident

t o t h e

ope ra t ion

o f a

branch

i s n o

doubt

a

d e t e r r e n t . ,

an d

wh i l e

t h e

terms

of

7/17/2019 frsbog_mim_v04_1828.pdf


Section 3 appear to be mandatory as to the establishment of

branch banks, i t will be observed that no time is specified

within which they must

be

established, While

it has

been

in -

timated

to the

Board that there

are a few

cities

in

some

of

the districts +-hat wculd like to secure a branch of the Feder-

al

reserve bank,

the

only application that

has

been presented

to the

Board

has

been

one

from

the

bankers

of the

city

of

Louisville, asking that

a

branch

of the


of

S t ,

Louis

be

established there,

A

committee representing Louis

v i l l e b a n k e r s

A

appeared before t h e Board on December and

presented arguments to support their application, but so far no

action has been taken by the Federal Reserve Bank of St.Louis,

and the

Board

has

reached

no

conclusion

in the

matter.

The New

Orleans branch

of the


of

Atlanta

was

estab

lished after a specific request had been made by the board of

directors

of the

Atlanta bank.

In

accordance with this prece-

7/17/2019 frsbog_mim_v04_1828.pdf


d e n t ,

and i n

view o±

t a e

p r o v i s i o n

of law

w h i c h r e q u i r e s

tn°.

Federa l reserve banks t o es t a b l i s h b ran ch es , w i t h o u t g i v i n g

t h e Federal Reserve Board a n y d i r e c t a u t h o r i t y i n t h e ma t t e r

ex cep t t o

#

approv9 n i l en and reg u l a t io ns under which t h e

b ran ch es s h a l l b e o p e r a t e d , t h e Board h a s dtiubted t h e p f o -

jp r i e ty of t a k i n g s t e p s t o e s t a b l i s h b r a n c h e s u n t i l t h e move-

ment h a d b e e n i n i t i a t e d b y t h e Fe de ra l re se rv e ban ks. When

t h e branch bank in New Or leans was es tabl ished, member banks

i n L o u i s i a n a , i n M i s s i s s i p p i , and in two c o u n t i e s i n Alabama,

were advised that they

ha d

been ass igned

to the New

Orleans

s u b - d i s t r i c t , a n d t h a t t h e i r r e s e r v e s s h o ul d b e kept wi th t h e

branch bank a t New O r l ean s , and t h a t a l l o f t h e i r t r a n s a c t i o n s

w i t h t h e reserve bank should be conducted through i t . T he

amount o f t he c a p i t a l s t o c k i n t h e Federal reserve bank o f A t -

1 m t a

h e l d

b y t h e

member banks assigned

to the New

Orleans

branch i s r e g a r d e d f o r bookkeeping purposes a s t h e t h e o r e t i c a l

c a p i t a l . The p r o f i t s a r i s i n g fr om t h e d i s c o u n t of p ap e r f o r

7/17/2019 frsbog_mim_v04_1828.pdf


member banks from t h e purchase of commercial pa pe r and b i l l s of

exchange a n d f ro m t r a n s f e r s of funds a r e shown o n t h e books of

t h e

br an ch bank frotn which

a r e

deduc ted

a l l

expenses

bf

o p e r a -

t i o n .

The

income

and

e x p e n d i t u r e s

o f t h e

branch bank* however,

appear each

d a y o n t h e

ba lance shee t

o f t h e

p a re nt bank* Durin g

t h e

y e a r

1 9 1 6 t h e

gross ea rn ings

o f t h e

branch bank

a t New O r -

leans were $62,052,

a n d t h e

to t a l e x p e n s e s

of

o p e r a t i o n , i n c l u d -

i n g s a l a r i e s of employes, and d i r e c t o r s

1

fees, amounted t o

$28 ,645 , l e av ing a n e t p r o f i t t o t h e Federal Reserve Bank of A t -

l a n t a f r o m t h e o p e r a t i o n s o f i t s New Orleans br anch of $33,407,

which p r o f i t amounts

t o 7 . 5 % o n t h e

t h e o r e t i c a l c a p i t a l

of

$ 4 4 5 , 0 0 0 a l l o t t e d

to the New

Orleans bran ch.

I t i s

f a i r

t o

assume that

a

p o r t i o n

a t

l e a s t

of

the se

prof i t s would have acc rued t o t h e Federal Reserve Bank of A t l a n t a

h a d the re been n o branch a t New O r l e a n s . I n view of expe r ience

gained from t h e o p e r a t i o n o f t h e o n e branch bank i n t h e e n t i r e s y s -

t e m , i t seems that i t would b e w i s e , i n c o n s i d e r i n g t h e e s t a b l i s h -

7/17/2019 frsbog_mim_v04_1828.pdf


ment of o t h e r b r a n c h e s , t o tak e i nto account whe the r th ey would

b e r e a l l y s e l f - s u s t a i n i n g , i . e . , whether t h e n e t p r o f i t s g r o w -

i n g o u t o f t h e i r oper a t i on would exceed t h e revenue that would

a c c r u e i n a n y e ve n t t o t h e ' p a r e n t b a n k .

While t h e Board h a s n o t deemed i t n e c e s s a r y a t t h i s

t ime t o a s k f o r a n amendment of Se c t ion 3 , i t w i l l p r o b a b l y b e

w e l l , be fo re b ra nc he s

a r e

e s t a b l i s h e d g e n e r a l l y ,

t o a s k f o r l e g -

i s l a t i o n t o s i m p l i f y t h e i r o p e r a t i o n , a n d t o reduce t h e c os t o f

mainta in ing them.

Th e Board h a s been informed that many o f t h e Fe de ra l

rese rve banks a r e ready t o e s t a b l i s h ag e n ci e s o r o f f i c e s i n such

c i t i e s i n t h e i r d i s t r i c t s as may r e q u i r e s p e c i a l s e r v i c e s , s u c h

a s t h e

c o l l e c t i o n

of

checks

o r t h e

making

of

l o a n s

on

warehouse

r e c e i p t s . An agency o f th i s k ind w as e s t a b l i s h e d b y t h e Federa l

Reserve Bank o f S t , L o u i s i n Se p te mbe r l a s t , a t Memphis, Tennessee,

a n d i t h a s

proved convenient

t o t h e

banks

of

t h a t c i t y

i n t h e

h a n d l i n g

o f t h e

cot ton c rop.

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±87?

- 50 -

OPERATIONS ABROAD.

The C l e a r i n g a n d c o l l e c t i o n s y s t e m h a s n o w f a i r l y begun i t s

p o t e n t i a l a c t i v i t i e s , a n d i t h a s demons t r a t ed tha t t h e p r o v i s i o n s of the

Federa l Reserve A c t r e l a t i n g t o t h i s f e a t u r e o f t h e business of Fede ra l

r e se rve banks , a r e f e a s i b l e an d p r a c t i c a l ; a n d i t i s c o n f i d e n t l y e x -

p e c t e d t h e p resen t yea r wi l l wi tness a gene ra l acqu iesence i n i t a n d

i t s u s e by a l l banks * With t h e comple t ion 6 f t h e c o l l e c t i o n a n d c l e a r -

i n g system* a l l t h e domes t i c func t ions of F ede ra l re se rv e banks w i l l have

been

a t

l e a s e t e n t a t i v e l y u n d e r t a k e n , r e q u i r i n g o n l y

a

r easonab le pe r iod

of

development

f o r

t h e i r complete app l i ca t ion # Wi th r ega r d

t o t h e p r o -

v i s i o n s o f t h e Federa l Reserve A c t r e l a t i n g t o f o r e i g n t r a d e , t h e case

i s

d i f f e r e n t . Whi le much

h a s

been done

t o

f a c i l i t a t e

t h e

f i n a n c i n g

of

f o r e i g n t r a d e t h r o u g h t h e development o f t h e acceptance market and by

t h e

es t ab l i shmen t ab road

of

American banks,

t h e

p r o v i s i o n s

o f t he Ac t

c a l l f o r t h e e s t a b l i s h m e n t of f o r e i g n a g e n c i e s o r branches of Fede ra l

reserve banks have

n o t a s y e t

been

p u t

. i n t o o p e r a t i o n ,

n o r

have

t h e

reserve banks under taken t h e d i r e c t p u r c h a s e of fo re ign commerc ia l b i l l s ,

7/17/2019 frsbog_mim_v04_1828.pdf


3 r -

- 5 1 -

or the

performance

of

other functions relating

to

foreign transactions

authorized in the law* This dealy has been due partly to the dis-

turbed condition of business in markets,abroad, and partly to the be-

lief that

a

sound

and

thorough application

of the law in its

domestic

aspects should naturally precede the undertaking of foreign operations

allowed by the Act* The Board has, however, had under consideration

for

some time,

the

advisability

of

authorizing Federal reserve banks

to

appoint correspondents,

and to

establish agencies

in

foreign countries,

and on December 20th formally approved the application of the Federal

Reserve Bank of New York for authority to establish an agency with the

Bank of England. This authority was granted under the provisions of

Section

14

of the Act which permit any Federal reserve bank with the

consent of the Federal Reserve Board to open and maintain banking accounts

in foreign countries, appoint correspondents, and establish agencies in

such countries wheresoever it may deem best for the purpose of purchas-

ing, selling and collecting bills of exchange and to buy and sell with

or without i t s endorsement through such correspondents or agencies

7/17/2019 frsbog_mim_v04_1828.pdf


963

- 5 2 -

b i l l s of exchange a r i s in g ou t o f ac t ua l commerc ial t r an sa c -

t i o n s ,

tf

s o t h a t a br oa d f i e l d of o p e r a t i o n s i s opened under

i t *

Other Fe de ra l res e rv e banks

may

p a r t i c i p a t e

i n t h e

a g e n c y r e l a t i o n s h ip w i th t h e Bank of England upon t h e same

te rms an d condi t io ns tha t wi l l gove rn t h e Federal Reserve Bank

of New York, i f they s o d e s i r e .

Othe r connec t ions

of

t h i s c h a r a c t e r w i l l p r o b a b ly

b e aut ho r i ze d f rom t ime t o t ime a s occas ion requ i re s , thus

g i v i n g f u l l e f f e c t t o t h a t s e c t i o n o f th e Federa l Reserve Act

which seeks t o r e l i e v e o u r banking sys tem of i t s o l d - t i m e r e -

s t r i c t i o n s

an d to

extend

i t s

u s e f u l n e s s

t o t h e

promotion

of f

f o r e i g n t r a d e on favo rab l e t e rms . Hi t he r to bank ing ope ra t ion s

connec ted with fore ign t rade have been a lmost ent i re ly i n t h e

hands of trus t companies a n d p r i v a t e b an k e r s, b u t a s f a r a s t h e

f u t u r e i s con cer ned , the re seems to be no r e a s o n wh y th e Fede ra l

reserve banks should

n o t b e

p l a c e d upon p r a c t i c a l l y

t h e

same

7/17/2019 frsbog_mim_v04_1828.pdf


963

f o o t i n g

a s t h e

g re at Governmental banks

of

Europe,

a n d

given

wide powers

i n t h e

m a t t e r

of

i n t e r n a t i o n a l e x c ha n g e, w i t h

t h e

Federal Reserve Board act ing a s t h e c e n t r a l c o n t r o l l i n g f o r c e

i n t h e c o o r d i n a t i o n an d d i r e c t i o n of o p e r a t i o n s .

\

7/17/2019 frsbog_mim_v04_1828.pdf


ENFORCEMENT

OF THE

CLAYTON

ACT.

Impor t a n t du t i e s r e l a t i ve

t o t h e

d e t e r m i n a t i o n

o f t he

e l i g i b i l i t y

of

member bank d i r e c t o r s , were l a i d upon

t h e

Federa l

Reserve Board

b y t h e

amendment

t o t h e

Clayton

A c t ,

known

a s t h e

Kern amendment

11

, which became

a l aw on M ay 15 , 19 16 .

This

l e g -

i s l a t i o n

w as

in t e nde d

t o

p rov ide

f o r a n

enla rgement

o f t h e

powers

of

i n d i v i d u a l s

i n

a c c e p t i n g

an d

h o l d i n g b a n k d i r e c t o r a t e s .

I t

a u th or i z e d such i n d i v i dua l s , when d i re c t o r s

of

member banks,

t o

a c t

a l s o

a s

o f f i c e r s , d i r e c t o r s

o r

employes

o f n o t

more than

two

o the r ba nks , ba nk ing a s soc i a t i ons ,

o r

trust companies, when

o r -

ganized under

t h e

laws

o f t he

Uni ted S ta tes

o r any

S t a t e ,

i f

such o ther bank, banking assoc ia t ion

o r

trust company

i s n o t i n

su bs ta n t i a l compe t i t i on wi th such member ban k.

I t w a s ,

however,

r e q u i r e d t h a t

t h e

consent

o f t h e

Federal Reserve Board

b e o b -

t a i n e d

a s a

b a s i s

f o r t h e

c on t inua nc e

o f

suc h re l a t i ons w i th

ot he r ban ks. This threw upon

t h e

Board

a s a

c o n d i t i o n n e c e s s a r -

i l y p r e c e d e n t t o t h e g r a n t i n g o r w i t h h o l d i n g of i t s c onse n t i n

7/17/2019 frsbog_mim_v04_1828.pdf


such cases , t h e du ty of a s c e r t a i n i n g w h et h er t h e hanks i n which

an ind iv idua l migh t s e e k t o h o l d d i r e c t o r s h i p s , w e r e o r were n o t

i n s u b s t a n t i a l c o m p e t i t io n w i t h t h e member bank of which such

i n d i v i d u a l

w as

a l so

a

d i r e c t o r .

A

sp ec ia l commit tee

o f t h e

Board

pa sse d i n review t h e v a r i o u s a p p l i c a t i o n s f i l e d w i t h i t , t h i s

work occupying a c o n s i d e r a b l e p a r t of the t ime dur ing t h e months

of

August , September,

a n d t h e

f i r s t h al f

of

O c tobe r ;

- t h e

Clay*

tori A c t b y i t s ow n te rms becoming e ffec t ive on October 1 5 . D u r -

i n g t h e p e r i o d i n q u e s t i o n t h e Board considered i n a l l 1 3 3 5 a p -

p l i c a t i o n s

of

which

1 1 9 5

were gra nted ,

and 140

r e f u s e d *

In a

large number of a d d i t i o n a l c a s e s t h e d i r e c to r s a f f e c t e d undoub te d-

l y

r e c o g n i z e d t h a t s u b s t a n t i a l c o m p e t i t i o n

d i d

u n q u e s t i o n a b l y

e x i s t

and so

withdrew from

o n e o r

more d i r e c t o r s h i p s , t h e r e b y

br ing ing t he mse lve s i n compliance with t h e A c t w i t h o u t a n y a p -

p e a l t o t h e Federal Reserve Board, A d i f f i c u l t e l em en t w a s found

i n t h e p r o v i s i o n s of the Clayton A c t w h i c h p r o h i b i t a p r i v a t e

banker f rom ho ld in g a d i r e c t o r s h i p in - a member ba nk . Com plia nce

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w i t h t h i s p r o h i b i t i o n n e c e s s a r i l y i n v o l v e d

a

d e f i n i t i o n

o f t h e

te rm pr iv a t e banker , , and t he Board accordingly agreed upon such

a d e f i n i t i o n f o r i t s o w r . guidance i n p a s s i n g u p o n a p p l i c a t i o n s .

The t e r r a p r iva te b x k e w as i n t e r p r e t e d t o i n c l u d e p a r t n e r s h i p s

o r

ind iv iduals engaged ,

i n t h e

bank ing bus ine ss ,

a s ' t h e

term

i s

g e n e r a l l y u n d e r s t o o d , i n c l u d i n g t h b s e p a r t n e r s h i p s o r i n d i v i d u a l s

who s o l i c i t o r r e c e i v e d e p o s i t s s u b j e c t t o check , who do a f o r e i g n

exchange , acceptance , loan o r d i s c o u n t b u s i n e s s , o r who purchase

a n d s e l l o r d i s t r i b u t e i s s u e s of s e c u r i t i e s b y w hi ch c a p i t a l i s

f u r n i s h e d

f o r

b u s i n e s s

o r

p u b l i c e n t e r p r i s e .

The

term

w as

thus

i n t e r p r e t e d n o t t o inc lude t h e o rd ina ry s to ck , no te o r commodity

b r o k e r u n l e s s a s u b s t a n t i a l p ro p o r t i o n o f h i s profi ts comes from

b a n k i n g a c t i v i t i e s , n o r d i d i t i n c l u d e p a r t n e r s h i p s o r i n d i v i d u a l s

u s i n g o n l y t h e i r own f u n i s i n making loans o r i n v e s t m e n t s .

I n a number of c a s e s d i f f i c u l t y w as encoun te red i n d e -

t e r m i n i n g t h e exac t scope p rope r ly t o b e a s s i g n e d t o t h e term >

s u b s t a n t i a l c o m pe t i t i o n , p a r t i c u l a r l y w i t h r e f e r e n c e

t o t h e

7/17/2019 frsbog_mim_v04_1828.pdf


ques t ion whe ther such compet i t ion must b e r e g a r d e d a s l i m i t e d

i n a r e a . I t w a s found t h a t some l ar ge banks competin g wi th

o n e

a no the r ove r

a

given a rea

d i d n o t

compete throughout

t h e

w hole f i e ld

o f

t h e i r bus ine s s , some

of

them be i ng na t i on a l

i n

scope , whi l e o t he rs con f ined t h e i r a c t i v i t i e s much more narrow-

l y .

While

i n

some ins tances

i t w a s

thought bes t

t o

g r a n t

t h e

a p p l i c a t i o n s of d i r e c t o r s who were des i rous of s e r v i n g o n t h e

boards of such banks, i t w a s i n d i c a t e d i n each case tha t t h e

consent accorded t o them w as t e n t a t i v e o n ly , an d t h a t f u r t h e r

i n v e s t i g a t i o n w o u l d b e u n d e r t a k e n f o r t h e purpose of a r r i v i n g

a t a f in a l c onc lus ion . Indee d t h e whole of t h e Board's work

w i t h r e f e r e n c e t o t h e a p p l i c a t i o n of the Kern amendment must

b e regarded a s u n f i n i s h e d . New f a c t s o r evidence bearing upon

t h e b u s i n e s s of g i v e n i n s t i t u t i o n s may at any t ime deve lop, o r

t h e

na tu ra l g row th

of the

b u s i n e s s

of

g i v e n i n s t i t u t i o n s

may

b e such a s t o b r i ng them in t o su bs t a n t i a l c ompe t i t i o n , a l t hou gh

7/17/2019 frsbog_mim_v04_1828.pdf


they were

n o t

prev i ousl y regarded

a s

b e i n g

s o . I t

w i l l , t h e r e

-

f o r e , n a t u r a l l y

b e

nec ess ary from time

t o

t ime

t o

r e v i s e

t h e d e -

cis ions a l ready made,

o r

c o n d i t i o n s

may

develop such

a s t o

n e c e s -

s i t a t e

t h e

r e v o c a t i o n

o f t h e

pe rmiss ion a l r eady g ran ted

i n c e r -

I .

t a i n c a s e s ,

i n

o r d e r

t o

d e a l a p p r o p r i a t e l y w i t h

new

c o n d i t i o n s ,

w i t h o u t , a t t h e same t ime, subjec t ing some d i rec tors t o a ru le

d i f f e r e n t f ro m t h a t a p p l i e d

i n t h e

case

of

o t h e r s .

As i n a l l

new

l e g i s l a t i o n , t he r e

i s a

con si der ab l e zone

of

u n c e r t a i n t y

i n

t h e

i n t e r p r e t a t i o n

an d


o f t h e

Clayton

A c t . I t

w i l l

r e q u i r e e x p e r i e n c e and f u r t h e r a n a l y s i s t o overcome such uncer-

t a i n t i e s

a n d t o

apply

t h e

terms

o f t h e

m e a s u r e f a i r l y

a n d u n i -

fo rmly , wh i l e ca r ry ing o u t t h e e s s e n t i a l i n t e n t of Congress.

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1886

- 58 --

ilFTRY

OF HEW

MEMBERS.

During

t h e

y e a r l $ l 8 ,

I I 3

banks en tered

t h e

kedei*al Reserve

system, making

a

t o t a l

of

7,635 members

o n

December

3 I ; Of

t h e s e

new

members 6 0 were newly organ ized nat i on al banks, which, under e x i s t i ng

law, ,

au to ma ti ca ll y became members

a n d

took

o u t

s t o c k

i n t h e

F e d e r a l

r e -

serve bank

o f t h e

d i s t r i c t

i n

which they were located.

Of t h e

remaining

n e w members, 4 8 were State banks which entered t h e system through the i r

con ver si on in to na ti o na l banks, the reup on au to ma ti ca l l y becoming members#

S t a t e i n s t i t u t i o n s wh ic h a p p l i e d f o r a n d received membership, while r e -

t a in ing the i r S ta t e cha r t e r s , numbered

7 • I t h a d

been supposed that

upon

t h e

o r g a n i z a t i o n

o f t h e

c l e a r i n g

a n d

c o l l e c t i o n s y s t e m ,

a

cons ide rab le

number of S t a t e i n s t i t u t i o n s w oul d f i n d i t t o t h e i r a d v a n t a g e t o apply

f o r

membership,

o r

tha t o ther fac tors would tend

t o

bring them into

t h e

sys tem.

So f a r

t h i s

h a s n o t

proved

t o b e t h e

c a s e ,

f o r t h e

number

of

S ta t e i n s t i t u t i on s which came in to

t h e

system during

1 9 1 6

wh i l e

r e -

t a i n i n g t h e i r l o c a l c h a r t e r s ,

w as

less than dur ing

t h e

preceding year*

Many causes have operated

t o

p r o d u c e t h i s r e s u l t ,

t h e

chie f bei ng th os e

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- 59 -

a l r e a d y o u t l i n e d

b y t h e

Board

i n i t s

r e p o r t

f o r 1 9 1 5 *

Added

t o

these

c o n s i d e r a t i o n s

h a s

been

t h e

e f f e c t

o f t h e

Clay ton

A c t ,

which

i s

o b j ec t ed

t o by

many S t a t e banks

a s

l i k e l y

t o

r e s u l t

i n

i n co n v en i en t

o r

unde

s i r ab l e ch an g es

i n

t h e i r b o a rd s

of

d i r e c t o r s s h o u l d t h ey a f f i l i a t e them*-

s e l v es w i t h

t h e

Fed e ra l r e s e rv e s y s t ep ; an d

t h e ,

o p e r a t i o n

of

S e c t i o n

22

o f t h e

Federa l Reserve

A c t ,

which deals wi th

t h e

r e l a t i o n s

of

d i r e c t o r s

of

member banks

t o

t h e i r i n s t i t u t i o n s *

The

Board

h a s

s u g g es t ed

a n

amendment

t o

t h i s s ec t i o n d es i g n ed

t o

c l a r i f y

i t a n d t o

remove uncer ta in

^

t i e s , w i th o ut a f f e c t i n g i n a n y wa y i t s p r i n c i p l e *

Apprehens ion of s t r i n g e n t c o n d i t i o n s o r t h e development of any

s i t u a t i o n r e q u i r i n g m u tu a l a i d o n t h e p a r t of banks, would undoubtedly

cause many nonmember banks t o apply f o r membership , b u t i t i s n o t be l i eved

t h a t t h e y w i l l ,

a s a

r u l e , e l e c t

t o

awai t such co nd i t io ns . There

a r e

some i n d i c a t i o n s t h a t s e v e r a l i m p o r t a n t i n s t i t u t i o n s

a r e

awakening

to a

s en s e

of

publ ic du ty

i n t h e

m a t t e r ,

a n d a r e

b e s i d e s , g r a d u a l l y r e a c h i n g

t h e

c o n c l u s i o n t h a t t h e i r

own

b e st i n t e r e s t s r e q ui r e t h e i r a f f i l i a t i o n

w i t h t h e Federa l reserve sys tem*

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— 6 o —

1 8 8 8

Many app re he ns io ns , pre vi ou sl y en te rt a i ne d have been shown

t o be

g r o u n d l e s s ,

a n d t h e

a t t i t u d e

o f t h e

board toward State banks

a s

members

i s

be t t e r unde rs tood tha n fo rma l ly#

I n J u l y l a s t t h a Board advised t h e r e p r e s e n t a t i v e s of c e r t a i n

State banks

a n d

trust companies which were apprehensive that membership

i n t h e

system might inv olv e

a n

undue r e s t r i c t i o n

of

t h e i r c o r p o r a t e

a c t i v i t i e s

a s a

r e s u l t

o f t h e

f u t u r e r e g u l a t i o n s

o f t h e

Board , tha t

i t

d i d n o t unde rs t a nd t ha t i t w a s incumbent upon i t t o unde r t a ke t o impose

o n t h e

a c t i v i t i e s

of

member banks

a n y

r e s t r i c t i o n s t h a t

a r e n o t

contem-

p l a t e d

b y t h e A c t , b u t

only

t o

p r e s c r i b e s u ch r e g u l a t i o n s

a s a r e

designed

t o c a r r y o u t t h e purpose s o f t h e Act* T he Board does n o t f e e l t h a t i t

i s o n e of i t s

f u n c t i o n s

t o

unde r t a ke

t o

r e s t r i c t S t a t e b an ks

o r

t r u s t

companies i n t h e e x e r c i s e of banking o r t r u s t company powers a s de f ine d

b y t h e

laws

o f t h e

S t a t e

i n

which they

a r e

c r e a t e d .

I n

pass ing upon

t h r

a p p l i c a t i o n s

of

State banks

a n d

trust companies however,

t h e

Board holds

t h a t

i t

would

b e i t s

duty

t o

a dmi t on ly t hose i ns t i t u t i ons w h ic h

a r e

7/17/2019 frsbog_mim_v04_1828.pdf


- o l -

s o l v e n t a n d sound a n d whose membership will n o t c o n s t i t u t e a n element of

weakness

i n t h e

sys t e m.

The

fto&rd does

n o t

c o n s i d e r t h a t

i t i s a p r e -

r e q u i s i t e t o t h e a dmiss ion of any Sta te tank o r tt-ust company that ' i t

shou ld posse s s a n y cer ta in amount of p a p e r e l i g i b l e f o r re d i sc oun t w i th

a

Fed era l res e r ve bank.

The l a w

p r o v i d es t h a t p r i v i l e g e s

a n d

advantages

of membership may be extended t o State banks a n d t r u s t companies , thus

c on te mpla t i ng o n e compact banking system, while preserving t h e i n t e g r i t y

of both t h e S t a t e a n d t h e N a t io na l ba nk ing sys t e ms . The f a c t t h a t a

State bank h a s l i t t l e e l i g i b l e p a p er d oes n o t o f i t se l f make i t s member-

s h i p a n element of weakness o r da nge r , a n d i t i s obv ious t ha t a s a member

o f t h e system i t w i l l be in a p o s i t i o n t o c o n t r a c t f o r loa ns a n d t o

obta in cash f rom other member banks having paper e l ig ib le f o r r e d i s c o u n t ,

a n d t h us i n d i r e c t l y t o obta in des i red accommodat ions . The a b i l i t y t o

a s s i s t member banks d i r ec t l y

a n d

i n d i r e c t l y w i l l

be

i n c r e a s e d

a s t h e

s t r e n g t h o f t h e sys tem a n d lending power o f t h e Federa l rese rve banks

a r e inc re a se d . The re i s n o r e a s o n why suc h a s s i s t a nc e shou ld n o t b e

7/17/2019 frsbog_mim_v04_1828.pdf


1890

- 6 2 -

g i v e n f r e e l y t o a member St at e t an k; w hil e i n t ime of s t r e s s t h e n o n -

member banks

may

f i n d

t h e

member banks

n o t

l e s s d i s p o s e d

b u t

le s s ab le

t o g i v e t he m t h i s i n d i r e c t a s s i s t a n c e . The Board of course might

c o n s i d e r t h e e x e r c i s e of e x t r a o r d i n a r y a n d unusual powers., such a s

I

make, a n app lyi ng St a t e bank o r trust company a n undes irable member ,

a s u f f i c i e n t r e as o n t o r e f u s e t o g r a n t t h e a p p l i c a t i o n f o r admiss ion ,

b u t

a f t e r

a

Sta te bank

o r

trust company

h a s

ac tua l ly become

a

member

bank, t h e Board does n o t e x p e c t t o i n t e r f e r e w i th t h e e x e r c i s e of those

banking a n d f i d u c i a r y p o w e r s a u th o r i z e d by i t s c h a r t e r .

7/17/2019 frsbog_mim_v04_1828.pdf


- 6 3 -

953

1891

FIDUCIARY POWERS.

A p p l i c a t i o n s f o r p e r m i s s i o n t o e x e r c i s e f i d u c i a r y

powers utider t h e terms o f t h e Federa l Reserve A d t have continued

t o b e p r e s e n t e d t o t h e Board during t h e p a s t y e a r , an d have been

g r a n t e d i n 1 1 0 c a s e s , a c t i o n on 77 of wh ich ca r r i ed app rova l of

f u l l f i d u c i a r y p o w e r s , w h i l e i n t h e case of 33 l imi ted powers

on ly were g ran ted . The f a l l i n g o f f i n t h e m a t t e r o f a p p l i c a -

t i o n s a s compared w it h t h e y e a r 1 9 1 5 , w a s p r o b a b l y d u e t o u n c e r -

t a i n t y a s t o t i e l e g a l s t a t u s o f t h e banks i n e x e r c i s i n g t h i s

f u n c t i o n , t h e doub t s r ega rd ing i t h a v i n g b ee n i n t e n s i f i e d b y t h e

a c t i o n

o f t h e

Supreme Court

o f t h e

S t a t e

o f

Michigan

i n

handing

down,on September

26 , an

op in ion adve r se

t o t h e

c o n t e n t i o n

of

t h e n a t i o n a l b a n k s . * I t w a s t h e v iew o f t h e c o u r t i n th i s case

*Grant Fe l lows, At torney Genera l

o f t he

S t a t e

of

Michigan ,

on

t h e r e l a t i o n o f t h e Union Trust Company, Detroit Trust Company,

Security Trust Company, Michigan Trust Company, a n d t h e Grand

Rapids Trust Company,

v s t h e

F i r s t Na t i ona l Bank

of Bay

C i ty .

7/17/2019 frsbog_mim_v04_1828.pdf


9 6 3

- 6 4 -

1893

tha t Congress h a d n o a u t h o r i t y t o p e r mi t n a t i o n a l i n s t i t u t i o n s

t o e x e r c i s e t h e f i du ci ar y powers provided f o r i n t h e F e d e r a l R e -

s e r v e A c t , a n d , i n accordance wi th t h e policy announced i n i t s

r e p o r t

f o r 1 9 1 5 , t h e

Board took steps

t o

have

t h e

c a s e t r a n s f e r r e d

t o t h e Supreme Court o f t h e Un i t ed S ta t e s o n a w r i t of e r r o r , i n

o r d e r t h a t a n a u t h o r i t a t i v e d e c i s i di i m i gh t b e f ina l ly r e r idd red i

I n t h e

meantime

t h e

Board

i s

p u r s u i n g

t h e

p o l i c y

of

g r a n t i n g

t o

p r o p e r l y q u a l i f i e d

a n d

well-managed banks

t h e

a u t h o r i t y

t o

e x e r -

c i se f i du c i a r y power s

i n s o f a r a s

provided

b y t h e

F e d e r a l

R e -

s e r v e

A c t . A s h a s

been expla ined

on

former occasions ,

t h e

Board

cannot do l e s s t h a n g r a nt s p e c i f i c a l l y t h e powers that have been

bes towed gene ra l ly b y Congress under t h e Federa l Reserve A c t ; a n d

i n making such gran ts , t h e Board merely c ar r i es o u t t h e d u t i e s im~ j

posed upon i t b y t h e A c t , l e a v i n v i t t o j u d i c i a l i n t e r p r e t a t i o n

h ow f a r a nd t o what extent t h e powers i n q u e s t i o n m ay l e g a l l y and

c o n s t i t u t i o n a l l y

b e

e x e r c i s e d .

I t

w i l l ,

i n t h e

n a t u r a l c o u r s e

cf

e v e n t s ,

b e

some t ime before this issue

c a n b e

f i n a l l y d i s p o s e d

of , .

a n d i n t h e meanwhile t h e Board wi l l cont inue t o pu r sue i t s p r e s e n t

cou r se

of

a c t i o n .

7/17/2019 frsbog_mim_v04_1828.pdf


1893

- 55 -

CHANGES

IN

DISTRICTS.

I n i t s r e p o r t f o r 1 9 1 5 t h e Board s e t f o r t h t h e re a sons t ha t

h a d l e d i t t o make certa in changes i n t h e bounda r i e s of Fe de ra l r e se rve

d i s t r i c t s , a n d i t w a s t h e r e s t a t e d t h a t f u r t h e r c o n s i d e r a t i o n of t h i s

• s u b j e c t w as suspended i n view of a n opinion rendered b y t h e At torney

Genera l o f t h e U ni t e d S t a t e s * * * where in i t w as he ld t ha t t h e Board

p o s s e s s e d

n o

power

t o

reduce

t h e

number

of

F e d e r a l r e s e r v e d i s t r i c t s *

n

The Bo ar d a l s o c a l l e d a t t e n t i o n t o t h e f a c t t h a t

n

a f u r t h e r o p i n i o n h a s

been asked a s t o whether t h e Board h a s power t o change t h e l o c a t i o n of

a

Fede ra l res e rv e bank wi t h in

a

d i s t r i c t *

1 1

The

op in ion t hus re fe r re d

t o w a s re nde re d b y t h e At torney Genera l on A p r i l 4 , l $ l 6 , a n d covered

tw o

p o i n t s

~

( 1 ) Whether t h e Board could change t h e p r e s e n t l o c a t i o n of any

Federa l rese rve bank i n c e r t a i n c a s e s , a n d

( 2 ) Whether t h e Board i n r e a d j u s t i n g d i s t r i c t l i n e s m us t p r e s e r v e

t h e $4 , 000, 000 minimum c a p i t a l i s a t i on re q u i r e d of each Federa l rese rve

bank*

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- 66 - 1 8 M

The At to rney Genera l he ld tha t t h e Board h a s n o power t o

change

t h e

l o c a t i o n

of a

b a n k , i r r e s p e c t i v e

of

a l t e r a t i o n s

o r

r e a d j u s t -

ments

i n

d i s t r i c t l i n e s ,

b u l

t h a i

t h e

main tenance

o f t h e

minimum capi-

t a l i z a t i o n of $4 ,000 ,000 w a s n o t necessary«

The

e f f e c t

of

t h i s r u l i n g

was t o

e l i m i n a t e f ro m f u r t h e r

c o n -

s i d e r a t i o n

t h e

pending appeals which involved changes

i n t h e

l o c a t i o n

of

F e d e r a l r e s e r v e b a n k s w i t h i n t h e i r d i s t r i c t s .

I n

view

o f t h e

o p i n i o n o f t h e At torney Genera l there remained b u t t h r e e a p p e a l s c a l l i n g

f o r immedia te dec is ion - t h a t f i l e d by cer ta in Connect icu t banks which

r e q u e s t e d t r a n s f e r f r o m t h e Boston to t he New York D i s t r i c t ; t h a t f i l e d

by c e r t a i n b a n k s i n Wiscons in wh ich r eques ted t r ans fe r f rom t h e Minneapolis

t o t h e C hi ca go D i s t r i c t ; a n d t h a t f i l e d by c e r t a i n b a n k s i n sou the rn

Lou i s i ana wh ich r eques ted t r ans fe r f rom t h e D a l l a s t o t h e A t l a n t a D i s t r i c t .

The Lou i s i ana appea l w a s g r a n t e d by a r e s o l u t i o n a d o p t e d on February 25 t i :

t r a n s f e r r i n g c e r t a i n b a n k s a s d e s i r e d ; w h i l e t h e Connec t i cu t appea l

w as de te rmined by a r e s o l u t i o n on March 6 t h t r a n s f e r r i n g t h e s e b a n k s

7/17/2019 frsbog_mim_v04_1828.pdf


u. 67 -

1895

b a n k s s i t u a t e d i n Fa i r f i e ld Coun ty . , Conne c t i c u t , to the New York

D i s t r i c t , l e a v i n g t h e remainder o f t h e Co nn ec ti cu t banks a s members

oiythe Federal Reserve Bank

of

Bos ton .

The

Wiscons in appea l

w as s e t t l e d by an o r d e r of O c tobe r 1 2 t h , t r a n s f e r r i n g t h e a pp ly ing

banks i n c e n t r a l a n d e a s t e rn Wisc ons in t o t h e C h i c a g o D i s t r i c t .

7/17/2019 frsbog_mim_v04_1828.pdf


OPERATION

OF THE

BOARD.

On August 1 0 / 1 9 1 6 , t h e Federal Reserve Board h a d been

i n

e x i s t e n c e

tw o

y s a r s ,

a n d ,

unde r

t h e

p r o v i s i o n s

of the Ac t

c r e a t i n g i t , t h e term of one member came t o a c lose tw o ye a rs a f -

t e r h i s o r i g i n a l a p p o i n t m e n t . On J u l y 2 5 t h e P r e s i d e n t s e n t t o

t h e Sena te t h e nomina t ion of Honorable Charles S . Hamlin t o s u c -

ceed himself a s a member o f t h e Board, t h e appointment be ing f o r

a te rm o f t e n ye ar s . This nomina t ion w a s conf i rmed on August 3 .

M r .

Haml in 's ter m under

h i s

e a r l i e r a p p oi n tm e nt e x p i r e d

on W ed-

nesday, August 9 , He q u a l i f i e d b y t a k i n g t h e o a t h on August 1 0

Honorable

W. P. G.

Harding

w a s , o n

August

1 0 ,

d e s i g n a t e d

b y t h e

P r e s i d e n t

o f t h e

U ni t e d S t a t e s

a s

Governor,

an d

Honorable Paul

M .

Warburg

a s

Vice-Governor

o f t h e

Board, both

f o r a

p e r i o d

of

o n e y e a r , o r u n t i l o t h er w i se d i r e c t e d ,

The

Federal Advisory Counci l

h a s

h e l d

i t s

f o u r s t a t e d

me e t ings du r ing t h e l a s t y e a r , a n d h a s d i sc usse d t op i c s submi t te i

t o i t b y t h e Board, a s w e l l a s q u e s t i o n s r a i s e d b y i t s o w n membe

7/17/2019 frsbog_mim_v04_1828.pdf


*-69 *

p r e s e n t i n g r e s u l t s o f t h e d i s c u s s i o n s t o t h e Board* A r e p o r t

of t he p ro ceed i n g s o f t h e Counci l i s appended he re to a s E x h i b i t

11 11

.

Confer ences were hel d al so

b y t h e

Fed e ra l r e s e rv e

ag en t s

on May 29 and

-pecember

4 , i n

Washington,

t h e

t i me

a t

these meet ings be ing devo ted t o t h e c o n s i d e r a t i o n and a n a l y s i s

of

q u e s t i o n s

of

c u r re n t i n t e r e s t

t o t h e

Federa l reserve banks .

The

mee t i n g s

of

Governors

of

Fed era l r es er ve banks which have

t ak en p l ace a t i n t e r v a l s s i n c e t h e o r g a n i z a t i o n o f t he system

have con t in ued , t hr ee such mee t ing s havi ng been hel d dur ing

t h e

year*

The s t a f f and i n t e r n a l o r g a n i z a t i o n o f t h e Board have

co n t i n u ed w i t h o u t i mp o r t an t mo d i f i ca t i o n , t h e pr in c i pa l changes

b e i n g

t h e

b e t t e r d ev e l o p men t

o f i t s

o r g a n i z a t i o n ,

a n d t h e

gradual

growth and en l a rg emen t o f t he work* The p e r s o n n e l and s i z e of

t h e s t a f f r em ai ns e s s e n t i a l l y u n a l t e r e d , a n d t h e co s t of co n d u c t -

i n g t h e B o a r d

f

s work, in cl ud in g members

1

s a l a r i e s a nd t h e t o t a l

o u t l a y a t t h e o f f i c e s i n W as hi n gt o n, i n c l u s i v e o f t h e corps of

7/17/2019 frsbog_mim_v04_1828.pdf


1898

. jj 0 -

examiners ,

i s

s t i l l a b ou t $ 18 0 ,0 0 0

p e i

annum

- t h e

e s t ima te d

f igu re me n t ione d

i n t h e

r e p o r t

f o r 1 9 1 5 . T he

Gold Set t lement

Fund,

t o

w hic h re fe re nc e

h a s

been made elsewhere

i n

t h i s r e p o r t ,

h a s g r e a t l y e n l a r g e d t h s volume of i t s c l e a r i n g , b u t wi thout

c o r re spond ing i nc re a se i n expense of o p e r a t i o n , t h e c os t f o r t h e

ye a r

1 9 1 6

being about $2,500, while

t h e

to ta l volume

of

bus ine s s

c l e a re d dur ing

t h e

year

h a s

been about $8 ,000,000,000.

The

Gold

Set t lement Fund

w as

o r ig in a l l y c onduc t ed me re ly

a s a

means

of

se t t l i ng be tw e e n Fe de ra l r e se rve ba nks ,

b u t i t s

scope

of

o p e r a -

t i o n s

h a s

been enla rged

by

p r o v i d i n g

a

s i m i l a r f un d

f o r

Federa l

re se r ve age nts , conduc ted

o n t h e

same plan

a s t h e

Gold Set t lement

f u n d i t s e l f . T hi s r e n de r s p o s s i b l e

t h e

making

of

payments

n o t

only between Federal reserve banks,

b u t

also between

t h e

re se rve

a ge n t s

an d

t h e i r

own

banks , wi tho ut

t h e

n e c e s s i t y

o f

sh ipp ing

gold

o r i t s

e qu iva l e n t ba c k

a n d

fo r th*

, The Fe de ra l Re se rve Bu l l e t i n h a s been conducted through-

o u t t h e

y e a r

a s

dur ing

t h e

y e a r

1 9 1 5 , a s a

m o n t h l y p u b l i c a t i o n ,

7/17/2019 frsbog_mim_v04_1828.pdf


a n d h a s been en larged i n s i z e , an d broadened i n scope i n response

t o t h e

i n c r e a s i n g p u b l i c i n t e r e s t .

I t i s

d i s t r i b u t e d f r e e

of

charge

t o a l l

member banks,

b u t i t h a s

a l s o

a

g rowing l i s t

of

pa id su bs c r i b e r s among non-members a n d t h e f inancia l communi ty

g e n e r a l l y . So f u l l y h a s t h e B u l l e t i n d e a l t w i t h a l l of t h e d e -

t a i l s

o f t h e

o p e r a t i o n

o f t h e

Fede ra l r e se rve sys tem, tha t

i t

i s u n n e c e s s a r y t o repeat them i n t h i s r e p o r t , a comple te f i l e

o f t h e B u l l e t i n i t s e l f b e i n g t r a n s m i t t e d a s supp lemen ta ry t o t h e

i n fo rma t ion he re in g iven .

EARNINGS AND EXPENSES.

The p a s t y e a r h a s shown a ve ry deci de d improvement i n

t h e inc ome- earn ing power o f t he Fe der al re se rv e banks . They have

been able t o p r o v i d e f o r the i r expenses a n d t o c a r r y a s u b s t a n t i a l

amount t o d iv idend accoun t . F o r t h e y e a r 1 9 1 6 , a s w i l l b e seen i n

g r e a t e r d e t a i l f ro m f i g u r e s f u r n i s h e d

i n t h e

e x h i b i t s

t o

t h i s

r e -

p o r t , t h e cur ren t expenses o f t h e system were $ ,

7/17/2019 frsbog_mim_v04_1828.pdf


- 7 2 -

w h i l e t h e t o t a l n e t e a rn ings f o r t h e e nt i r e yea r were $

T he

fol lowing table shows

t h e

div idend dec la red

by

F e d e r a l

r e -

serve banks from t h e da te of t j i e i r organiza t ion down t o t h e

pre se n t t ime :

( i n s e r t t a b l e )

The

f i g u r e s

f o r t h e

whole system

t o t h e end o f 1916

show

a n

average

n e t

e a r n i n g s i n c e t h e i r o r g a n i z a t i o n

of fo

on t he c a p i t a l a c t u a l l y i n v o l v e d , w h i l e f o r t h e ye a r 1 9 1 6 they

show

a n

average

n e t

e a r n i n g

of The

advance

i n

e a rn ing

power thus shown

i s

e s p e c i a l l y g r a t i f y i n g when

i t i s

remembered

tha t d i scount ra tes have cont inued

l o w ,

b e i n g p r a c t i c a l l y

n o

hi gh er than they were

i n 1 9 1 5 ;

whi le bo th ye ar s have been

e x -

c e p t i o n a l l y u n f a v o r a b l e

f o r

r e d i s c o u n t i n s t i t u t i o n s , owing

t o

t h e

g r e a t p l e t h o r a

of

funds

i n t h e

v a u l t s

of

member bank s ge n e r -

a l l y ,

t h e

consequent

lo w

r a t e s

of

i n t e r e s t

a n d t h e

l a c k

of

need

f o r member banks t o obtain accommodation.

7/17/2019 frsbog_mim_v04_1828.pdf


The a v e r a ge r e d i s c o u n t s

u

o f a l l n a t i o n a l b a n k s a s shown

b y

f i v e a b s t r a c t s i s s u e d

b y t h e

Compt ro l l e r

o f t h e

Currency

in 1916

were $ . Of this amount $ , o r

were r ed i scoun t s wi th t h e Fede ra l r e se rve banks .

The Fe de ra l rese rve banks have n o t been opera ted wi th a

view

t o

p r o f i t ,

b u t

they have

a l l

e a r n e d t h e i r e x p e ns e s , t o g e t h e r

w i t h a s u b s t a n t i a l p a r t of t h e i f d iv id end req uir eme nts . They appe ar

t o have ga ined s t ead i ly i t i t h e c o n f i d e n c e Of t he p u b l i c , a n d t h e

f a c t of t h e i r e x i s t e n c e h a s enab led t h e c o u n t r y t o w i t h s t a n d , w i t h -

o u t t h e s l i g h t e s t f i n a n c i a l d i s t u rb a n c e a n d w i t h o u t a n y marked f luc -

t u a t i o n s i n r a t e s f o r commercial paper, many shocks a n d s e n s a t i o n s

which*probably would, under o l d condi t ions , have been fo l lowed by

u n p l e a s a n t r e s u l t s . The Fede ra l r e s e rve sys tem i s n o longer looked

\

upon a s a n ephemera l exper iment . I t h a s been e s t ab l i shed upon a

f i r m

a n d

endur ing founda t ion ,

a n d i t h a s

been demons t r a t ed r epea ted ly

t h a t i t i s n o t being conducted f o r t h e p a r t i c u l a r b e n e f i t o f any

7/17/2019 frsbog_mim_v04_1828.pdf


7 3 a

1902

963 .

group o r i n t e r e s t , b u t t h a t t h e p o l i c i e s g o v e r n i n g i t s o p e r a t i o n

a r e , a n d

must cont inue

t o b e ,

broad enough

t o

serve. , without

d i s -

c r i m i n a t i o n o r f a v o r , t h e banks a n d t h o s e who deal with banks

th roughou t

t h e

e n t i r e country. Whi le r e g u l a to r y

a n d

c o n s e r v a -

t i v e , i t i s none t h e l e s s a c o n s t r u c t i v e f o r c e , a n d when condi-

t i o n s t h r o u g h o u t t h e world become more normal, t h e Fedeira l reserve

sys t e m w i l l

be

r e c o g n i z e d ,

n o t

on ly

a s a

dominant fac tor

i n o u r

own f i n an c i a l a f f a i r s , b u t a s a most importan t inf lu en ce i n t h e c o m -

merce o f t h e world .

7/17/2019 frsbog_mim_v04_1828.pdf


PROPOSED AMENDMENTS.

The

most impor tan t changes

i n t h e A c t

that have been suggested

b y t h e

Board

a n d

w h ic h r e l a t e

t o

no te i s sue s

a n d t o

reserves* have

a l -

ready been discussed

a t a n

e a r l i e r po i n t

i n

th i s r epor t unde i

-

t h e

h e a d -

i n g o f

c o n s e r v a t i o n

of

gold supply;

b u t f o r

c o n v e n i e n t r e f e r e n c e

we

append

a

comple te l i s t

o f t h e

Bo ar d' s. Amendments,,

t h e t e x o f

which

h a s

been submit ted

t o t h e

proper commit tees

6 f t h e

Sena te

a n d

House.

1 .

Amendment

t p

S e c t i o n

1 6 ,

prov id ing

( a ) F o r t h e

i s s u e

of

F e d e r a l r e s e r v e n o t e s d i r e c t l y

a g a i n s t

t h e

d e p o s i t

o f 100$

go ld

o r 100$ o f

pape r ,

o r b o th , t h e go ld re se rve i n n o even t t o b e be low 4 0 $ .

( b ) F o r t h e

c o u n t i n g

of

gold he ld

b y t h e

Federa l Reserve

Agents a s s e c u r i t y , f o r n o te s a s p a r t o f t h e gold r e -

se rve Required

t o b e

h e ld

b y t h e

banks against such


1

Th is amendment

w a s n o t

agreed

t o

unan imous ly ,

b u t w a s

approved

a n d

endorsed

by a ma j

o r i t y

o f t h e

Board.

I t s

purpose

h a s

a lready been

d i s c u s s e d

a t

leng th e l sewhe re

i n

t h i s r e p o r t .

2 .

Amendment

of

S e c t i o n

1 9

a b b r e v i a t i n g

a n d

s i m p l i f y i n g

t h e

7/17/2019 frsbog_mim_v04_1828.pdf


1904

c l a u s e s i n S e c t i o n 19 w h i ch r e l a t e t o re s e r v e r eq u i r em en t s . T h is p r o -

posed amendment provides T,hat a l l member banks s h a l l ma in ta in res er ve s

i n t h e Federa l reserve banks a s fo l l o w s :

a n d i n

addit ion every member bank

i s

r e q u i r e d

t o

keep

i n i t s o wn

v au l t

f o r t i l l money a n amount of s p e c i e o r cu r r en cy ( n o t n e c e s s a r i l y g o l d

o r

l aw fu l money) eq ua l

t o

f i v e

p e r

cen t

o f i t s

demand de po si ts , le s s

t h e amount o f n e t ba lanc es wi th Fe der a l res erv e banks i n ex ces s o f t he

minimum above s t i p u l a t e d .

3 * Amendment, of Sec t i o n 1 1 s o a s t o p e rmi t t h e Federa l Reserve

Board t o ra i s e r e s e rv e r eq u i r emen t s i n emerg en c i e s , j u s t a s i t i s now

empowered i n c e r t a i n c o n t i n g e n c i e s of a d i f f e r e n t k i n d t o lower those

A ga in s t Deimand Ag ains t Tizni>

i )ep6gi t s . .Deposits

( a ) Country Banks

( b ) Reserve City Banks

( c ) Central Reserve City Banks

3 $

7/17/2019 frsbog_mim_v04_1828.pdf


76

r e q u i r e m e n t s .

This provis ion would, i f adopted , enab le t h e F e d e r a l R e -

serve Board i n pro longed pe r iods ©f extreme case i n t h e money market

t o

check

a n y

tendency toward excess ive leans

o

b t h e r

f

6Jfais

of

undue

e x t e n s i o n s of c r e d i t *

4«

Amendment

of

S e c t i o n

1 6 t o

pe rm i t nonmezaber S t a t e banks

and

t r u s t companies , even though

t o o

s m a l l

t o b e

e l i g i b l e

f o r

membership,

i n t h e Fede ra l r e se rve banks , t o a v a i l t h e m s e lv e s o f t h e c l e a v i n g and

c o l l ec t i o n f a c i l i t i e s o f th e Fede ra l r e se rve banks , p rov ided tha t

they cover

a t p a r

checks

cn

themse lves sen t

f o r

c o l l e c t i o n

b y t h e

F e d e r a l r e s e r v e b a n k , , a n d prov ided fu r th e r t ha t they keep a compen-

t h e

sa t i ng ba lance wi th /F ed e r a l r e se rve bank i n a n amount t o b e de te rmined

u n d e r r u l e s p r e s c r i b e d b y th e Fe de ra l Reser ve Board* This i s n o t i n -

t e n d e d t o o p e r a t e a s a n e x t e n s i o n of any of the p r i v i l e g e s o f th e

Fede ra l r e se rve sys tem

t o

nonmember banks

a t t h e

expense

of

members

7/17/2019 frsbog_mim_v04_1828.pdf


- 77 -

1906

9 6 3 .

Taut

o n t h e

c o n t r a r y

t h e

amendrneht

i s

proposed, pr im ar i l y

f o r t h e c o n -

ve n ie nc e o f t h e p u b l i c a n d i n c i d e n t a l l y f o r t h e benefi t o f t h e member

b a n k s .

I t i s

c on te mpla t e d t h a t

t h e

compensat ing balances which

n o n -

me mbe r ba nks pa r t i c ipa t i ng i n t h e c l e a r i n g p l a n w i l l b e r e q u i r e d t o

keep wi th Federa l rese rve banks , wi l l b e s u f f i c i e n t l y l ar g e t o p r o t e c t

member banks ag a i ns t d i sc r i mi na t i on , a n d i t i s de s igne d t o enable

t h e

Fe de ra l r e se rve ba nks

t o

c o l l e c t

a l l

checks

a t p a r ,

whether they

a r e drawn upon member banks o r nonmember btate bangs a n d t r u s t companies .

Any c l e a r i n g a n d c o l l e c t i o n p l a n t o b e e f f e c t i v e m u s t be so comprehen-

s i v e

a s t o

i n c l u d e

g , l l

c he c ks .

A t

p r e s e n t

t h e p a r

l i s t s

of the

Fe de ra l r e se rve ba nks i nc lude po in t s t ha t

c a n b e

c o l l e c t e d

i n a n y

c i rc ums ta nc e s

a t a

minimum

of

t ime

a n d

expense ,

b u t d o n o t

embrace

a large number of towns i n every Sta te where there a r e n o member

banks ;

a n d i n

o r d e r

t o

m a k e c o l l e c t i o n s

on

such points many banks

a r e o b l i g e d t o ma in t a in a c c oun t s i n a d d i t i o n t o the i r r e se rve a c c oun t s

7/17/2019 frsbog_mim_v04_1828.pdf


3 6 3 .

— 78 *-

wi th , the Federa l r e se rve banks . A n e c e s sa r y f a c t o r i n a n y sound c lear -

i n g

p lan

i s t h e

of fse t , whereby balances only requi re se t t lement ins tead

o f th e total volume of t r a n s a c t i o n s . As long a s t h e c lear ing system

does

n o t

embrace

a l l of t h e

banks t h i s o f f se t

i s

l o s t

i n a

cor respond-

i n g degree a n d t h e value o f t h e system diminished i n propor t ion*

5« Amendment of Sec t ion 2 2 - t h e p e n a l s t a t u t e ~ s o a s t o def ine

more c lear ly

t h e

r i g h t s

an d

l i m i t a t i o n s

^f

d i r e c t o r s

i n t h e

m a t t e r

of

accep t ing f ees o r compensation other than t h e ordinary fees paid d i -

r e c t o r s

f o r

l e g i t i m a t e s e r v i c e s * r e n d e r e d

i n t h e

regular course

of

b u s i -

n e s s ,

t h e

performance

of

which service

i s n o t

incumbent upon them

i n

t h e i r c a p a c i t y

a s

d i r e c t o r s .

6*

Amendment

of

Sec t ion

1 3 t o

r e s t o r e

t h e

provis ion which

was by

e r ro r s t r i cken f rom t h e A c t i n t h e amendments of September 7. , ig i6 , thus

r e s t o r i n g

t o

nat ional banks^ with

t h e

approval

o f t h e

Federal Reserve

Board, t h e r i g h t t o accept up to 100$ of t h e i r c a p i t a l an d s u r p l u s i n

t r a nsa c t i ons invo lv in g impor t s o r expor t s , Th is fna tu re w a s i n t h e l a w

b u t was inadver tent ly omi t ted when th e Ac t war amended o n September

1916.

7/17/2019 frsbog_mim_v04_1828.pdf


7 .

Amending

nu us

Section

17 tc

c a n c e l

t h e

p r o v i s i o n

of

t h e National Bank A c t which re qu i re s na t i on al banks t o mainta in

a minimum deposit oi; Government bonds with t h e T r e a s u r e r o f th e

United St at e s , Natio nal banks a r e no longer r equ i r ed t o keep

o u t s t a n d i n g

a

minimum amount

of

c i r c u l a t i n g n o t e s ,

and a

newly

organized bank i s n o t obl iged t o purchase o r ca r ry an y bonds

o f th e Uni ted Sta tes ; b u t t h e r e a r e a number of nat ional banks

organized before t h e passage o f t h e FederalrrReserve A c t which

have r e t i r ed the i r na t iona l bank c i r cu la t ion

i n

f u l l ,

y e t

they

a r e , u n d e r a c o n s t r u c t i o n o f t h e o l d l a w , r equ i r ed t o keep on

depos i t w i th t h e Treasu re r of the Uni ted Sta tes , a c e r t a i n m i a -

imum of United States bonds. The Board fe el s th a t i t i s just

t o

these banks that they

b e

r e l i e v e d

of

t h i s o b l i g a t i o n .

8 . Amendment of S e c t i o n 25 to authorize member banks

l o c a t e d i n c i t i e s of more than 100,000 po pu la ti on an d which have

a c a p i t a l an d s u r p l u s of more than $1,000,000 t o es t a b l i s h b ranches

i n t h e same city, provided t h e State laws d o n o t p r o h i b i t S t a t e

7/17/2019 frsbog_mim_v04_1828.pdf


963

- 8 0 -

banks and tr u s t cotapari ies from es t a bl i s hi n g branches<

9 ; Amendment of S e c t i o n 9 t„o au th or iz e mutual sav i ngs

banks n o t hav ing cap i t a l d tock t o become associate members of

t h e Fede ra l r e s e rv e sys tem under ce r t a i n p re sc r ibe d Cond i t ions .

The p r i n c i p a l b e n e f i c i a r i e s of t h i s amendment would b e t h e m u -

tua l sav ings banks o f t he e a s t e r n and New England S t at e s , which

c a n n o t become members o f t h e Federa l reser ve system under t h e

p r e s e n t

l a w

owing

t o t h e

l a c k

of any

pro vi s i on enabl ing them

t o

s u b s c r i b e

f o r

c a p i t a l s t o c k

of a

Federa l res erv e bank ,

a s

they

have no c a p i t a l i z a t i o n of t h e i r own upon which a pe rc ent ag e could

b e

ba s ed . They would

b e

r e q u i r e d

t o

c a r r y

a

reserve ba lance wi th

t h e Gedera l reserve bank against the i r t ime deposi t s i n t h e same

p r o p o r t i o n

a s

member bajiksj

a n d t h e

accommodations proposed

f o r

mutual savings banks a r e l i mi t ed s t r i c t l y t o t h e d i s c o u n t of t h e i r

t h i r t y - d a y o b l i g a t i o n s p r o p e r l y s e c u r e d .

1 0 .

Amendment

of

S e c t i o n

18 so a s t o

g ive

t o

Uni ted Sta tes

7/17/2019 frsbog_mim_v04_1828.pdf


one-yea r

3%

gold not es

i n t h e

hands

of

Federal reserve banks

t h e c i r c u l a t i o n p r i v i l e g e f o r t h e i s suance of Fede ra l r e se rve

bank no te s , such c i r cu la t ion t o b e taxed a t t h e same rate a s

c i r c u l a t i n g n o t e s , w hi ch

a r e

secu red

by

bonds

o f t h e

United

S t a t e s .

I n t h e

op in ion

o f t h e

Board

i t i s

d e s i r a b l e

t o

extend

t h i s p r i v i l e g e

t o t h e

Federa l reserve banks

i n

order tha t they

m ay have ad di t i on al means of p r o t e c t i n g t h e m s e l v e s a t t imes

when there i s a n unusual demand f o r cur rency .

1 1 . Amendment of S e c t i o n 4 t o a b o l i s h t h e t i t l e a nd o f -

f i c e

of

deputy fe de ra l rese rve agen t , thus havi ng

tw o

una t t ached

Class

C

d i r e c t o r s i n s t e a d

of one as a t

p r e s e n t ,

a n d t o

c rea te

t h e

p o s i t i o n

of

a s s i s t a n t f e d e r a l r e s e r ve a g e n t ,

who

s h a l l

n o t

b e a

d i r e c t o r

o f t h e

bank,

b u t w h o

s h a l l

b e a

sa la r i ed bonded

o f -

f i c e r

i n t h e

Fede ra l r e se rve agen t ' s depa r tmen t , se rv ing

a t a l l

t imes

a s a n

a s s i s t a n t

t o t h e

Federa l reserve agent

a n d

q u a l i f i e d

t o a c t f o r t h e

agen t

i n h i s

absenc e . Exper i ence

h a s

shown that

t h e r e

i s

d i f f i c u l t y

i n

f i l l i n g

t h e

o f f i c e

of

deputy Fed era l

r e -

7/17/2019 frsbog_mim_v04_1828.pdf


9 6 3

- 8 2 -

s e r v e a g e n t . T hi s o f f i c e r

i s

r e q u i r e d

t o

have

t h e

s a m e q u a l i f i -

c a t i o n s a s t h e Fe de ra l r e se rve a ge n t ; h e must have h ad banking

e x p e r i e n c e and he must n o t b e a n o f f i c e r , d i r e c t o r , o r s t o c k h o l d e r

i n a n y bank. A t t h e same time h e i s n o t a s a r u l e , a s a l a r i e d o f -

f i c e r , a n d re c e ive s on ly t h e customary f e e p a i d d i r e c t o r s f o r a t -

t endance upon mee t ings , and he i s ob l ige d t o b e p re pa re d t o assume

t h e d u t i e s o f t h e Feder a l r ese rv e agent i n c a se o f t h e a bse nc e o r

d i s a b i l i t y of tha t o f f i c e r , w h ic h i nvo lve s a t r a n s f e r a n d a u d i t

of s e c u r i t i e s and a c c o u n t s . I t i s b e l i e v e d t h a t t h e change s u g -

g e s t e d w i l l o p e r a t e t o f i x r e s p o n s i b i l i t y more d e f i n i t e l y and

w i l l g i v e

t h e

Board more la t i tude

i n t h e

s e l e c t i o n

o f t h e

Class

C d i r e c t o r s o t h e r t h a n t h e Federa l rese rve agent .

frsbog_mim_v04_1828.pdf

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Transcript of frsbog_mim_v04_1828.pdf