frsbog_mim_v04_complete.pdf

E X - O F F I C I O M E M B E R S

W I L L I A M G . MCADOO SECRETARY OF THE TREASURY

CHAIRMAN

J O H N S K E L T O N W I L L I A M S COMPTROLLER OF THE CURRENCY FEDERAL RESERVE BOARD

WASHINGTON

r v 7 3

C H A R L E S S . H A M L I N , GOVERNOR F R E D E R I C A . D E L A N O , VICE GOVERNOR P A U L M . W A R B U R G W . P . G . H A R D I N G A D O L P H C . M I L L E R

H . P A R K E R W I L L I S , SECRETARY S H E R M A N P . A L L E N . ASST. SECRETARY

A D D R E S S R E P L Y T O

F E D E R A L R E S E R V E B O A R D

At the beginning of my s e r v i c e on the Federa l

Reserve Board I had a r a t h e r s t r o n g f e e l i n g , which perhaps

amounted to a p r e j u d i c e , t h a t Federa l Reserve notes should

not be counted as r ese rve by Nat ional banks. During the

twenty-two months of my se rv i ce I have given the m a t t e r

c a r e f u l thought and s tudy and whi le my mind i s perhaps

not f u l l y made up, and c e r t a i n l y s t i l l open to conv ic t ion ,

I have r a t h e r come t o the conclusion t h a t my f i r s t view

was a mistake and t h a t there i s a t l e a s t a good dea l t o

be sa id on the o the r s i d e ,

I have attempted t o s t a t e the case f u l l y and

f a i r l y i n the a t t ached memorandum and I should be very glad

t o have you read i t a t your convenience and give me the

b e n e f i t of your sugges t ions and c r i t i c i s m s . P lease unde r -

s tand t h a t t h i s memorandum expresses only my pe r sona l

views and e x p r e s s i o n s .

Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

1373" W I L L I A M 0 . M c A D O C

SECRETARY OF THE TREASURY CHAIRMAN

J O H N S K E L T O N W I L L I A M S COMPTROLLER OF THE CURRENCY

W . P . 6 . H A R D I N G , GOVERNOR P A U L M . W A R B U R G , VICE GOVERNOR F R E D E R I C A . D E L A N O A D O L P H C . M I L L E R

7 Q j H A R L E S S . H A M L I N

FEDERAL RESERVE BOARD H . P A R K E R W I L L I S , SECRETARY S H E R M A N P . A L L E N . ASST. SECRETARY

AND FISCAL AOENT

WASHINGTON A D D R E S S R E P L Y T O

FEDERAL RESERVE BOARD

June 16, 1916.

Dear S i r

There i s enclosed f o r your in format ion and a t t e n t i o n

copy of a r e s o l u t i o n adopted by the Federa l Reserve Board a t a

meet ing he ld on June 16, levying an assessment of s e v e n t y - f i v e

thousandths of one p e r cent ( ,00075) a g a i n s t Federa l Reserve

Banks to d e f r a y the es t imated gene ra l expenses of the Federa l

Reserve Board from Ju ly 1 to December 31, 1916. This assessment

does no t include the cost of engraving and p r i n t i n g Federa l Re-

serve n o t e s .

There i s a l so enclosed a s ta tement showing the

b a s i s upon which the assessment i s l e v i e d .

I have the honor to reques t t h a t you b r i n g t h i s

m a t t t e r to the e a r l y a t t e n t i o n of the Board of D i r e c t o r s of

your bank, and forward the assessment t o the Federa l Reserve

Board, one-half t o be payable Ju ly 1 s t and one-half on Sep-

tember 1 s t , 1916, as i nd i ca t ed in t h e r e s o l u t i o n .

Very t r u l y yours ,

Enc losu re s .

F i s c a l Agent.


1 3 Y 4 &


W I L L I A M 6 . M c A D O O SECRETARY OF THE TREASURY

CHAIRMAN


WASHINGTON

C H A R L E S S . H A M L I N , GOVERNOR F R E D E R I C A. D E L A N O , VICE GOVERNOR P A U L M . W A R B U R G W . P . G . H A R D I N G A D O L P H C . M I L L E R

H . P A R K E R W I L L I S , SECRETARY S H E R M A N P . A L L E N , ASST. SECRETARY


F E D E R A L REL

Dear S i r :

The Federa l Reserve Board has given c a r e f u l cons idera-t i o n t o the l e t t e r s received from the var ious Federa l r e se rve banks i n response to a l e t t e r sent out by Mr. McKay regard ing the issuance of par l i s t s i n connection with the c l e a r i n g system to be inaugurated Ju ly 15th.

In order t o meet as nea r ly as poss ib l e the wishes of a l l , i t has been decided f o r the presen t t o p r i n t a pa r l i s t showing each S ta t e s e p a r a t e l y along the l i n e s of the enclosed specimen s h e e t .

The m a j o r i t y of the banks having advised t h e i r i n a b i l i t y t o f u r n i s h be fo re Ju ly 15th a l i s t of non-member banks on which items w i l l be rece ived a t pa r , the p r i n t i n g of the l i s t s w i l l nec-e s s a r i l y be delayed, but i t i s des i red t h a t the pre l iminary l i s t be i s sued i n t ime f o r d i s t r i b u t i o n be fo re August 1 s t .

You a r e , t h e r e f o r e , requested to f u r n i s h in dup l i ca t e a l i s t of t he S t a t e member banks and non-member banks in your d i s -t r i c t upon which items can be handled by you a t pa r , t h i s l i s t t o be in the hands of the Board by Ju ly 23rd. I t i s intended t o d i s -t r i b u t e t he complete l i s t by August 1 s t , as we l l as t o include i t i n the August B u l l e t i n .

You are a l so requested to send i n t o the Fede ra l Reserve Board, so as t o be rece ived be fo re the 2Jrd of each month, a l i s t showing a l l a dd i t i ons and reduct ions in the l i s t of non-member banks upon which items can be handled by you a t p a r . These l i s t s when received w i l l be conso l ida ted , and each Federa l r e se rve bank w i l l be advised of a l l changes, so t h a t the informat ion can be t r a n s -mi t t ed to i t s member banks. I t i s a l so intended to show the l i s t of changes i n the monthly B u l l e t i n .


Governor.


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707

f e d e r a l R E S E R V E B O A R D

W A S H I N G T O N

To a l l Fede ra l Reserve Agents:

The p r o h i b i t i o n s of Sec t ion 8 of t h e Clayton Act which

r e l a t e t o i n t e r l o c k i n g "bank d i r e c t o r a t e s go i n t o e f f e c t on Octo-

ber 15, 1916. These p r o h i b i t i o n s r e l a t e to banks organized or

opera t ing under the laws of the United S t a t e s , and, t h e r e f o r e ,

apply to S t a t e banks or t r u s t companies which are members of the

Fede ra l Reserve System as we l l as t o n a t i o n a l banks. For con-

venience, t h e r e f o r e , banks "organized or ope ra t ing under t h e laws

of the United S t a t e s " w i l l be r e f e r r e d to as "member banks . "

ANALYSIS OF SECTION 8 OF THE ACT

As o r i g i n a l l y enac ted , Section' 8 of t h e Clayton Act p ro-

v i d e s , i n subs tance -

(a) That no person s h a l l . b e a d i r e c t o r , o f f i c e r or

employee of a member bank having r e sources aggrega t ing more

than $5,000,000 and a t the same time a d i r e c t o r , o f f i c e r , or

employee of any o the r member bank;

(b) That no p r i v a t e banker or person who i s a d i r e c t o r

of a non-member bank having re sources aggrega t ing more than

$5,000,000 s h a l l be e l i g i b l e t o se rve a t t h e same t ime as a

d i r e c t o r i n any member bank;


1376

707-- 2 -

(c) That no member bank in a c i t y of more than 200,000

i n h a b i t a n t s s h a l l havs as a d i r e c t o r or o the r o f f i c e r or

employee any p r i v a t e banker or any d i r e c t o r or o the r o f f i c e r

or employee of any o ther bank or t r u s t company l o c a t e d in the

same p l a c e .

EXCEPTIONS.

The p rov i s ions of Sect ion 8:

(1) Do not apply t o mutual savings banks not having

a c a p i t a l s tock r ep resen ted by s h a r e s .

(2) Do not p r o h i b i t a person from being a t t he same

time (a) a Class "A" d i r e c t o r of a Fede ra l r e s e r v e bank and

a l s o an o f f i c e r or d i r e c t o r , or both an o f f i c e r and a d i r e c t o r ,

in one member bank; (b) an o f f i c e r , d i r e c t o r or employee of

one member bank and one o the r bank or t r u s t company, whether

a member bank or non-member bank,where the e n t i r e c a p i t a l

s tock of one i s owned by the s tockho lde r s of the o t h e r .

THE KERN AMENDMENT

By an Act of Congress, approved May 15, l $ l 6 , Sec t ion 8

was amended by the a d d i t i o n of a f u r t h e r p rov i so r ead ing as fo l lows :

"Nothing in t h i s Act s h a l l p r o h i b i t any o f f i c e r , d i r e c t o r , or employee of any member bank, or Class 11 A" d i r e c t o r of a Fede ra l r e se rve bank, who s h a l l f i r s t p ro -cure the consent of the Fede ra l Reserve Board * * * * * from being an o f f i c e r , d i r e c t o r , or employee of no t more than two o ther banks * * * * * if such o the r bank * * * * i s not in s u b s t a n t i a l compet i t ion wi th such member b&nk."


1377

707

The duty imposed upon the Fede ra l Reserve Board i n pa s s ing

upon any a p p l i c a t i o n nads under a u t h o r i t y of t h i s amendment i s t o d e t e r -

mine Whether or not the two banks i n ques t ion (or e i t h e r of them) are

i n s u b s t a n t i a l compet i t ion wi th the member bank. If both &re non-member

banks the act does not r equ i r e t h a t they s h a l l no t be i n s u b s t a n t i a l

compet i t ion wi th each o t h e r .

In reach ing a conclus ion on t h i s p o i n t , i t w i l l be necessary ,

f o r the Board t o c a l l upon the Federa l Reserve Agent, as i t s l o c a l r e p - ,

r e s e n t a t i v e , t o make i n v e s t i g a t i o n of the fac l s i n each case , t o r e p o r t

t he same t o the Board and t o give t h e Board t h e b e n e f i t of h i s recom-

mendation whether the consent app l i ed f o r s h a l l be gran ted or r e f u s e d .

I t i s , t h e r e f o r e , necessary to c a l l t o the a t t e n t i o n of the Fede ra l

r e s e r v e agents some of the f a c t o r s which must be cons idered i n d e t e r -

mining t h e ques t ion of whether or not the banks involved- are in sub-

s t a n t i a l compet i t ion .

PURPOSES OF THE ACT AND THE AMENDMENT.

The s i g n i f i c a n c e of the language " s u b s t a n t i a l compet i t ion" .

can no t be f u l l y understood without cons ide r ing the purpose of the

o r i g i n a l ac t as wel l as t h a t of the amendment.

As o u t l i n e d by the J u d i c i a r y Committee, in r e p o r t i n g the

o r i g i n a l b i l l t o the House, t he purpose of Sec t ion 8, of the o r i g i n a l .

Clayton Act was• -

"to prevent as f a r as possible, c o n t r o l of g r e a t ag-g r e g a t i o n s of money and c a p i t a l through the medium of common d i r e c t o r s between banks and banking a s s o c i a -t i o n s , the ob jec t being t o prevent t h e ' c o n c e n t r a t i o n


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70?.

• - U -

of money or i t s d i s t r i b u t i o n through a system of i n t e r -locking d i r e c t o r a t e s .

I t w i l l "be observed t h a t the Act does not under take to

prevent i n t e r l o c k i n g d i r e c t o r a t e s of banks loca ted i n smal l c i t i e s

and having smal l aggregate r e s o u r c e s . I t a p p l i e s i n terms t o t h e

q u a l i f i c a t i o n of d i r e c t o r s , o f f i c e r s and employees of banks (a) i n

c i t i e s of more than 200,000 i n h a b i t a n t s c r (b) having resources ag-

g r e g a t i n g more than $5,000,000.

While the g e n e r a l purpose of tho Act, as i n d i c a t e d by i t s

t i t l e , v/a.s Ho'supplement- e x i s t i n g laws aga in s t un lawfu l r e s t r a i n t s

and monopol ies , " and while monopolies are c r ea t ed by a r e s t r a i n t of

l e g i t i m a t e competi t ion a l i t e r a l i n t e r p r e t a t i o n of Sec t ion 8 as

o r i g i n a l l y enacted would p r o h i b i t a person from se rv ing a t t h e same

time as a d i r e c t o r , o f f i c e r or employee of two or more banks, under

c e r t a i n c i rcumstances , whether or not such banks were compe t i to r s .

The Kern amendment, however, au tho r i ze s the Board t o permit a d i -

r e c t o r , o f f i c e r or employee of a member bank^who otherwise would

be i n e l i g i b l e , t o serve as a d i r e c t o r , o f f i c e r or employee of not

more than two other banks or t r u s t companies, whether S t a t e or

n a t i o n a l , provided such o the r banks or t r u s t companies a re not in

s u b s t a n t i a l compet i t ion wi th such member bank.

I t should be borne i n mind t h a t the Act does not ves t an

a r b i t r a r y d i s c r e t i o n in the Board to permit the same person to

serve on t h e board of d i r e c t o r s of any two or more banks, when

such banks come wi th in the r e s t r i c t i v e language of the Act as


1379

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o r i g i n a l l y passed; but i t merely confe r s a u t h o r i t y upon t h e Board

t o permit i n t e r l o c k i n g d i r e c t o r a t e s when such banks a r e not in

s u b s t a n t i a l c o n p e t i t i a n , w i th in the meaning of the Ac t .

SUBSTANTIAL COMPETITION.

I t i s mani fes t t h a t no f i xed r u l e can be p r e s c r i b e d by

which t h i s ques t ion can be au tomat i ca l ly de termined. The f a c t s

i n each case must be c a r e f u l l y considered and i t i s t h e duty of

the Board to withhold i t s consent i n any case i n which i t would

d e f e a t t he purposes of the Act to permit t h e same person to serve

as an o f f i c e r , d i r e c t o r , or employee of more than one bank.

If t he two "banks i n ques t ion are not compet i tors i n any

r e s p e c t no ques t ion a r i s e s . If they do compete the very d i f f i c u l t

ques t ion a r i s e s , whether or not the compet i t ion i s " s u b s t a n t i a l " .

I t i s necessary to keep i n mind t h a t t h e main purpose of

t h e Act was t o prevent the monopolizat ion and c e n t r a l i z a t i o n of

c r e d i t through i n t e r l o c k i n g • d i r e c t o r a t e s of banking i n s t i t u t i o n s .

One of the i n j u r i o u s r e s u l t s of such cond i t ions i s t h a t the pub l i c

i s deprived of the b e n e f i t of l e g i t i m a t e compet i t ion .

In g e n e r a l , t h e r e f o r e , two banks coming w i t h i n t h e p ro -

h i b i t i o n of the o r i g i n a l Act would be deemed t o be i n subs t an -

t i a l compet i t ion wi th in the meaning of t h e language used i n

the amendment if the bus iness engaged i n by such banks under


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707-

n a t u r a l and normal c o n d i t i o n s , c o n f l i c t s o: i n t e r f e r e s t o r i f t he

c e s s a t i o n of compet i t ion between the two would be i n j u r i o u s t o

customers, or wo;M-bo customers, or would probably r e s u l t i n ap-

p r e c i a b l y l e s s g r i n g the volume of bus iness or kinds of b u s i n e s s of

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

I t i s r e a l i z e d t h a t some d i f f i c u l t y w i l l be exper ienced

i n the a p p l i c a t i o n of t h i s t e s t .

Two banks engaged in t h e same c h a r a c t e r of bus iness ( f o r

example, where both rece ive commercial d e p o s i t s and make commercial

loans) would be regarded as in s u b s t a n t i a l compet i t ion i f t h e i r

f i e l d s of a c t i v i t y extended over the same geographical , t e r r i t o r y *

If t h e i r ope ra t ions were not c a r r i e d on i n t h e same geograph ica l

t e r r i t o r y , t h e n , al though they engaged i n t h e same c l a s s of b u s i -

n e s s , they would not n e c e s s a r i l y be regarded as s u b s t a n t i a l com~

p e t i t o r s .

Again, i f they conducted t h e i r ope ra t ions i n the same

p l a c e , b u t , because of t h e i r comparat ively smal l s i z e i n r e l a t i o n

t o t h e t o t a l banking o p p o r t u n i t i e s of the l o c a l i t y , and because

/ of the f a c t t h a t they did not dea l with the same c l a s s of customers,

t h e c e s s a t i o n of compet i t ion between them might , from the

pub l i c p o i n t of view, be unimportant , they would not n e c e s s a r i l y be

deemed t o be i n s u b s t a n t i a l compet i t ion . Or, i f t h e i r opera t ions

were conducted i n the same l o c a l i t y but the c h a r a c t e r of bus iness

engaged in d i f f e r s ( f o r example, where one does a s t r i c t l y com-

merc i a l banking bus iness vtfiile t h e o the r con f ines i t s ope ra t ions


t o a t r u s t company or f i d u c i a r y "business), such banks need not be

regarded as i n s u b s t a n t i a l compet i t ion .

I t i s , t h e r e f o r e , necessary to cons ider t h e scope or

ex ten t of t e r r i t o r y t h a t a bank ' s Operat ions cover and t h e charac-

t e r and kinds of bus iness i t engages i n . S i z e , measured by aggre-

ga te r e s o u r c e s , w i l l c o n s t i t u t e one of the f a c t o r s t o be cons idered ,

s ince to i nc r ea se the volume of loanable funds u s u a l l y i n c r e a s e s

the r a d i u s of a bank 's o p e r a t i o n s . A bank with $100,000,000 r e -

sources would seek investments i n a l a r g e r a r e a and of a more d i -

verse c h a r a c t e r than a bank with $5,000,000, and so might come i n t o

compet i t ion wi th banks loca ted some d i s t ance away, while the bank

with $5,000,000 resources might not extend i t s a c t i v i t i e s t o any

r e a l e x t e n t beyond the borders of the c i t y i n which i t i s l o c a t e d .

For example, a bank in New York might come i n t o s u b s t a n t i a l compe-

t i t i o n wi th a bank in Chicago if both were engaged i n the same

c l a s s of bus iness and if both had become so l a r g e as t o be more

than l o c a l i n s t i t u t i o n s .

Where t h e opera t ions of the two banks cover a common

t e r r i t o r y from a geograph ica l s t andpo in t , i t i s necessa ry t o con-

s i d e r c a r e f u l l y the c h a r a c t e r of bus iness engaged i n . As gu very

l a r g e p r o p o r t i o n of the member banks do a commercial banking b u s i -

n e s s , t he volume of t h i s bus iness w i th in the t e r r i t o r y covered by

the o p e r a t i o n s of the banks i n ques t ion becomes an important f a c t o r .

In a c i t y of 250,000 i n h a b i t a n t s any two banks which engaged i n a


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707.

commercial banking bus iness t o any g r e a t e x t e n t would presumably

come i n t o s u b s t a n t i a l compet i t ion , vi iereas , in a c i t y of 2,000,000

i n h a b i t a n t s one bank might conf ine i t s ope ra t ions t o the wholesale

d i s t r i c t while another might draw i t s customers e x c l u s i v e l y from

the r e t a i l d i s t r i c t , and so might be non-compet i t ive in the sense

t h a t an i nc r ea se of the bus iness of one would no t a f f e c t t he b u s i -

ness of the o t h e r .

i R E S U M E '

I t i s , t h e r e f o r e , necessary t h a t c o n s i d e r a t i o n should

be given xt-

(1) To the s i z e in aggregate resources of banks involved;

(2) To the cha rac t e r of bus iness engaged i n , i . e . , the

ex ten t of commercial bus iness and ex ten t of pu re ly

investment or t r u s t company bus iness of the two i n -

s t i t u t i o n s .

(3) Whether the opera t ions of the two banks cover the same

geographica l t e r r i t o r y .

(4) Whether the two banks a c t u a l l y compete to any app rec i -

able ex ten t i n any important a c t i v i t y - f o r example,

(a) in s o l i c i t i n g depos i t s on demand or on t ime from other

banks or i n d i v i d u a l s , (b) i n the purchase or s a l e of com-

m e r c i a l paper or o the r s e c u r i t i e s , (c) in the purchase

o r s a l e of f o r e i g n exchange, (d) i n s o l i c i t i n g t r u s t e e -

s h i p s , e t c .


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• 707. w ^ e—

The form of a p p l i c a t i o n approved by the Board i s intended

t o f u r n i s h an a n a l y s i s of the cha rac t e r of 'business of the banks

involved as tat as i t i s p o s s i b l e to determine t h i s from the books

of the bank. The Federa l r e se rve agent should supplement t h i s ,

however; with any in format ion he may be able t o ob ta in and should

base h i s recommendation upon the f a c t s in each c a s e . If he con-

cludes t h a t t h e r e i s s u b s t a n t i a l competi t ion between the banks or

t h a t i n t e r l o c k i n g d i r e c t o r a t e s or common o f f i c e r s or employees of

the two banks might r e s u l t in any i n j u r y t o the p u b l i c , or in any

s u b s t a n t i a l r e s t r a i n t of or det r iment t o the bus iness of e i t h e r

bank, he should recommend t h a t the a p p l i c a t i o n be r e f u s e d . The

Board, in reach ing a d e c i s i o n , w i l l c a r e f u l l y cons ide r the recom-

mendation of the Federa l r e se rve agent and w i l l base i t s conclu-

s ion upon the r e p o r t and recommendation of the agent t o g e t h e r with

o the r in fo rmat ion which i t s own i n v e s t i g a t i o n may d i s c l o s e .

The Kern amendment au tho r i ze s the Federa l Reserve Board

a t i t s d i s c r e t i o n "* * * * t o revoke such c o n s e n t . " In order t h a t

the Fede ra l Reserve Board may revoke i t s consent a t any time i t

becomes neces sa ry , Federa l r e se rve agents should keep i t advised

of any change e i t h e r i n l o c a l bus iness cond i t i ons or i n the r e -

sources or cha rac t e r of bus iness conducted by the banks which may

tend t o make them s u b s t a n t i a l compe t i t o r s .


1384

707-- 1 0 -

« In view of the g r ea t amount of t ime necessa ry to an

adequate c o n s i d e r a t i o n of each case i t i s d e s i r a b l e t h a t d i r e c t o r s ,

o f f i c e r s and employees f i l e t h e i r a p p l i c a t i o n s as soon as p o s s i b l e .

The Board w i l l endeavor to ac t upon a l l a p p l i c a t i o n s deceived be-

f o r e August 15, 1916, on or be fo re September 15, l $ l 6 .

6 / 2 3 / 1 6 .


709

RESOLUTION ADOPTED BY THE FEDERAL RESERVE BOARD.

F r iday , June 23, 1916.

oOo

WHEREAS. I t appears t h a t the twelve Federa l r e se rve banks have purchased in the open market "bonds in excess of the amount which might have been a l l o t t e d to such banks a t the end of t h i s q u a r t e r l y per iod on the b a s i s h e r e t o f o r e determined upon and announced by the Board.

NCW. THEREFORE. BE IT RESOLVED. That i t i s the sense of the Board t h a t no n e c e s s i t y e x i s t s f o r en fo rc ing the requirement provided f o r under Sec-t i o n 18 of the Federa l Reserve Act a t the end of t h i s q u a r t e r l y pe r iod ending June 30, 1916, and t h a t i t w i l l no t git t h i s time requ i re the Federa l r e se rve banks t o purchase any of those bonds which a r e o f -f e r e d f o r s a l e by member banks through the T reasu re r of the United S t a t e s under the p rov i s ions of Sec t ion 18.

BE IT FURTHER RESOLVED, That the S e c r e t a r y be i n s t r u c t e d t o send a copy of t h i s r e s o l u t i o n t o the va r ious Federa l reserve banks and to the member banks which have o f f e r e d bonds f o r s a l e in o rder t h a t they may be n o t i f i e d of the a c t i o n of the Board in the prem-i s e s .

6 /23/16


. 1386 EX-OPPIClO MEMBERS

W I L L I A M G . M c A D O C SECRETARY OF THE TREASURY

CHAIRMAN


WASHINGTON

W . P . 6 . H A R D I N G . GOVERNOR P A U L M . W A R B U R G , VICE GOVERNOR F R E D E R I C A . D E L A N O A D O L P H C . M i l . C H A R L E S S . I


AND FISCAL AGENT



. June 23, 1916.

Bear Sir:

For your information there i s given below a copy of a

resolution adopted by the Federal Reserve Board at i t s meeting

today covering the separation of the gold order c e r t i f i c a t e s

making up the Gold Settlement Fund and Federal Reserve Agents1

Fund.

RESOLVED, that the gold c e r t i f i c a t e s comprising the Federal Reserve Agents' Fund and the Federal Reserve Banks' Fund in the Gold Settlement Fund sha l l hereafter be sepa-rated so that certain c e r t i f i c a t e s shal l be credited to each fund by number and transfers made upon the books of the Federal Reserve Board by both numbers of c e r t i f i c a t e s and amounts in dollars, and

BE IT FURTHER RESOLVED, that any l o s s which niay occur in the Gold Settlement Fund af ter June 23 j 1916, sha l l be charged against the Federal Reserve Agents' Fund or the Federal Reserve Banks' Fund accordingly as ownership of the l o s t c e r t i f i c a t e sha l l by i t s number be indicated on the books of the Gold Settlement Fund.

Very truly yours,

Governor.


714

memorandum.

WHY MEMBER BANK DRAFTS ON FEDERAL RESERVE BANKS SHOULD BE ACCEPTED BY ALL FEDERAL RESERVE BANKS FOR

IMMEDIATE CREDIT AT PAR*

* * *

1„ Thrtftigh the es tabl ishment of the Federa l Reserve

System, ( membership compulsory ) Nat ional banks a re obliged

t o ca r ry t h e i r r e se rves i n Federal Reserve Banks. D r a f t s

a g a i n s t t h a t account should possess a l l the c i r c u l a t i n g

value t h e i r d r a f t s had he re to fo re on any or a l l of t h e i r

former reserve correspondents .

2« In the opera t ion of the c o l l e c t i o n system an i n -

cent ive to use f o r over - the -coun te r drawings, d r a f t s on Fed*

eral -Roberto Banks should be o f f e r e d . These d r a f t s , c r ed i t ed

on member bank books when drawn w i l l f l o a t f o r a t l e a s t one

day and o f f s e t through the c l e a r i n g .of f l o a t t h e i r equiva len t

in items charged.

3 , In the opera t ion of the c o l l e c t i o n system the ba lan -

ces between the Federa l Reserve Banks are created by check

t r a n s a c t i o n s t h a t a re equiva len t of gold through the Gold S e t -

t lement Fund, The except ions to t h i s a re some payments r e -

ceived through l o c a l c l e a r i ng houses , depos i t s of l awfu l money

or r e d i s c o u n t s .


. 1388

-7X4-*»2*»

4 . Clieeking i n a n t i c i p a t i o n or k i t i n g can be c o n t r o l l e d

by reasbti 6f the superv i so ry r e l a t i o n s h i p of Federa l Reserve

Banks t o t h e i r member banks.

5. Through making a low open d iscount r a t e 6n d o l l a r e x -

change , very much lower ,than open r a t e s p r e v a i l i n g f o r s t e r l i n g

d r a f t s on London, the Federal Reserve Banks a re seek ing t o pop-

u l a r i z e acceptances of American banks in world c e n t e r s . I t i s

j u s t as important t o s t imu la t e the use of d r a f t s on Federa l

Reserve Banks in t h i s country, even to the p o i n t of conces-

s ion or some expense in the beginning,

6. Dra f t s on Federa l Reserve Banks w i l l be c o l l e c t e d only

through o ther Federa l Reserve Banks f o r immediate c r e d i t . I t

amounts to the same p r o p o s i t i o n as d r a f t on a branch p resen ted

through the pa ren t bank or v ice v e r s a .

7* A se t t l emen t fund c o n s i s t i n g of l a w f u l money can be

c o n s t i t u t e d in Washington if exper ience in immediate payments

make i t necessary o r d e s i r a b l e . D e t a i l s , such as charging !

t h e member banks r e se rve account wi th the d r a f t on the day

i t reaches any Federa l Reserve Bank, and bank t r a n s f e r s upon

reques t only can be made p a r t of the p l a n .

P o s t s c r i p t .

To the above might be added the fo l lowing , as a sup-

p lementa l reason :


- 3 -

—714—

The public genera l ly have been educated by exper ience

to the f a c t t h a t a d r a f t on a New York bank is given immediate

c r e d i t and i s a v a i l a b l e f o r funds a t any town in the United

S t a t e s o r f o r t h a t ma t t e r in North America. So t rue i s t h i s

t h a t a c a r e f u l s tudy of bank s t a t i s t i c s shows t h a t the re are

very few banks in the United S t a t e s , National or S t a t e , t h a t

do not keep accounts in New York, the reason being t h a t in

no o the r way can they meet the wants of t h e i r customers

i n making payments a t d i s t a n t p o i n t s . The quest ion i s

whether t h i s requirement w i l l s t i l l be made, or whether a

d r a f t drawn by a member bank on i t s own Federal Reserve Bank

can be made ( by reason of the Gold Set t lement Fund and

t e l e g r a p h i c t r a n s f e r ) immediately a v a i l a b l e .

Many member banks mainta in t h a t r ese rves in Fed-

e r a l Reserve Banks w i l l be worth l i t t l e if t h i s i s not done.

Furthermore, i f i t i s not done, i t i s argued wi th some force

t h a t the Federal Reserve System, i n s t ead of d e c e n t r a l i z i n g

r e s e r v e s , w i l l tend to c e n t r a l i z e them more than ever in

New York Ci ty ,

Is i t not des i rab le t h a t a d r a f t on a Federa l Re-

serve Bank should be popular ized in every pos s ib l e way, and

t h a t a member bank be j u s t i f i e d in charging a moderate fee

to i t s customer f o r such a d r a f t ?


- 714

"-4~

So f a r as sa feguards are concerned., t h e r e i s no

o b j e c t i o n to sur rounding them wi th a l l p o s s i b l e s a f e g u a r d s .

For example, a member bank might be requ i red t o send , a t

the end of each day, by mai l , t o i t s Federa l Reserve Bank

a l i s t of a l l d r a f t s drawn aga in s t i t , showing to what

p o i n t s they have been s e n t , if i t i s known. This would

do away wi th "check k i t i n g " .

6 /27/16


. 1391 E X - O F F I C I O M E M B E R S

W I L L I A M G . M c A D O O SECRETARY OF THE TREASURY

CHAIRMAN


WASHINGTON

C H A R L E S S . H A M L I N , Sf lVBRNOR F R E D E R I C A. D E L A N O / p t j / f O l f l g H O R P A U L M . W A R B U R G W . P . G . H A R D I N G A D O L P H C . M I L L E R

H . P A R K E R W I L L I S . SECRETARY S H E R M A N P . A L L E N . ASST. SECRETARY



June 29, 19l6.

Dear S i r :

In response t o my te legram of June 21, t o each Fede ra l

Reserve Bank asking f o r views i n r e spec t t o g iv ing immediate c r e d i t

a t par f o r d r a f t s drawn a g a i n s t Federa l Reserve Banks, we have r e -

ceived r e p l i e s from each "bank, f i v e of vtfiich, are f a v o r a b l e , namely:

Cleveland, Richmond, Minneapol is , Da l las and San Franc i sco ; and

seven a re opposed, namely: Boston, New York, P h i l a d e l p h i a , A t l a n t a ,

Chicago, S t . Louis and Kansas C i ty . In view of t h i s marked d i f f e r -

ence of op in ion , the Board i s undisposed t o p r e s s the m a t t e r unduly

a t t h i s t ime , but proposes t o l e t the mat te f run along f o r f u r t h e r

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

The sugges t ion has been made by one of the Reserve Banks

t h a t t h i s p r i v i l e g e should not be g ran ted un le s s each Fede ra l r e se rve

bank' ma in ta ins a s u b s t a n t i a l balance wi th every o the r Reserve Bank

whereon i t s members nay d e s i r e f u n d s j t he suppos i t i on be ing , however,

t h a t t he ba lances would be mainta ined l a r g e l y i n New York. The

Federa l Reserve Board w i l l , of course , have no o b j e c t i o n t o t h i s ,

because the law permi ts the va r ious Fede ra l Reserve Banks t o keep

ba lances wi th each o ther f o r exchange purposes , but i t may be poin ted

out a t t h i s t ime t h a t the ob jec t of the Gold Set t lement Fund was t o

keep a j o i n t fund i n Washington which could be c l a s sed a s r e se rve

I.


• 1392 714 a»

- 2 -

and which would operate with g r o a t a r smoothness and f a c i l i t y

than f o r each tank to keep "balances wi th e leven o ther "banks. I t

has been s t a t e d t h a t t h e r e i s no n e c e s s i t y f o r h a s t e i n t h i s n a t -

t e r , t u t i t would appear t h a t t h i s i s one of the problems which

should have t h o u g h t f u l c o n s i d e r a t i o n of the Execut ive o f f i c e r s

and the Reserve Agents of each "bank and "be s e t t l e d i n t he near

f u t u r e *

An important f e a t u r e of the problem, i s t h a t a f t e r .

November, 1917* d e p o s i t s i n banks o ther than a Federa l Reserve Bank

are not rese rves# These d e p o s i t s , while drawing i n t e r e s t , must be

cont inued if a t a l l , as excess deposi ts#

The sugges t ion has been made by Mr* Harding, of the

Board*s Committee, t h a t i n s t e a d of i n s i s t i n g on any g e n e r a l r u l i n g ,

each F e d e r a l Reserve Bank make i t s own arrangements so t h a t d r a f t s

drawn aga in s t them woiild be given immediate c r e d i t a t such Reserve

Banks as they thought des i r ab le« I f , f o r example, the San Francisco

Bank d e s i r e d to havs i t s d r a f t s immediately a v a i l a b l e a t par i n

Chicago and Hew Yo:C%, i t could make arrangements with the Chicago

and New York Reserve Banks t o e f f e c t th is< This would be a

p a r t i a l i f not complete s o l u t i o n of the problem which would p e r -

haps answer the purpose f o r the p re sen t and t i l l a more compre-

hens ive p lan i s dev i sed .

A f a c t not t o be overlooked i s ths.t t he p u b l i c g e n e r a l l y

have been eduofLted by exper ience t o the f a c t t h a t a d r a f t on a

New York Bank i s given immediate c r e d i t and i s a v a i l a b l e f o r funds


. 1 3 9 5

71^ a .

a t any town in the United S t a t e s or f o r t h a t n a t t e r i n North America.

So t r u e i s t h i s t h a t a c a r e f u l s tudy of bank s t a t i s t i c s shows t h a t

t h e r e are very few banks in the United States, , Na t iona l or S t a t e ,

t h a t do not keep accounts i n New York., the reason being t h a t in no

o ther way can they meet the wants of t h e i r customers i n making pay-

ments a t d i s t a n t po in t s* The ques t ion i s vdnether t h i s requirement

w i l l s t i l l be made, or A e t h e r a d r a f t drawn by a member bank on

i t s own Fede ra l Reserve Bank can be made (by reason of the Gold

Set t lement Fund and t e l e g r a p h i c t r a n s f e r ) immediately ava i l ab le#

Many member banks mainta in t h a t r e s e r v e s in Fede ra l Re-

serve Banks w i l l be worth l i t t l e i f t h i s i s not dene. Furthermore,

i f i t i s no t done, i t i s argued with some fo rce t h a t the Fede ra l

Reserve System, i n s t ead of d e c e n t r a l i z i n g r e s e r v e s , w i l l tend t o

c e n t r a l i z e then more than ever in New York C i t y .

I t / i s not d e s i r a b l e t h a t a d r a f t on a Fede ra l Reserve

Bank should be popular ized in every p o s s i b l e way, and t h a t a member

bank be j u s t i f i e d i n charging a moderate f ee t o i t s customer f o r

such a d r a f t ?

So f a r as sa feguards are concerned, t h e r e i s no o b j e c t i o n

t o surrounding these ope ra t ions with a l l p o s s i b l e safeguards# For

example, a member bank might be requ i red t o send, a t the end of

each day> by mail,* t o i t s Fede ra l Reserve Bank a l i s t of a l l

d r a f t s drawn aga in s t i t , showing to what p o i n t s they have been

s e n t , or made payable , ~ which would be a sa feguard a g a i n s t "check


- 4 -

71-

k i t i n g " . Fur thermore, s p e c i a l sa feguards might be r e q u i r e d

on t r a n s f e r s of funds or the making of d r a f t s f o r l a r g e amounts

say over t e n thousand .-or t w e n t y - f i v e thousand d o l l a r s .

Yours t r u l y ,

Chairman., Committee on C l e a r i n g .

Statement enclosed


1395 711' Ve

- 2 - . .

: S t a t e Banks and Trust Cos. Nat ional Banks :not inc lud ing Savings

:Banks and P r i v a t e Banks. : Nizaber : . :Number

Tota l : l i s t i n g New Tota l : l i s t i n g New S T A T E Nmber : York c o r r e - : Number :York corre-

: spondent. : :spondent

Oklahoma 351 251 556 134 Oregon 89 86 154 111 Pennsylvania 837, 750 44g 397 Rhode Is land 18 17 28 28 South Caro l ina ! 71 71 319 283 South Dakota 112 7% 494 77 Tennessee 117 116 396 245 Texas 536 518 890 621 Utah 23 23 87 7U Vermont Us 4 l 35 28 Virg in i a 137 125 282 179 Washington 80 78 282 ' 227 West V i r g i n i a 117 113 190 171 Wisconsin 138 112 680 213 Wyoming 33 30 72 38

T O T A L 7,627 6,690 16,955 9,799

6/29/16


1396

714 t,

NUMBER OF BAMS LISTING CORRESPONDENT TS NEW YORK CITY

AS SHOOT BY BANKERS' DIRECTORY.

:S t a t e Banks and Trust Cos. Nat ional Banks :not inc lud ing Savings

:Banks and P r iva te ' Banks.

S T A T E

: Number Total : l i s t i n g New Number : York c o r r e -

: : Number : Tota l : l i s t i n g New : Number. : York co r r e -

• spondent . : : spondent.

Alabama Alaska Arizona Arkansas C a l i f o r n i a Colorado Connecticut Delaware D i s t r i c t of Columbia F l o r i d a Georgia Hawaiian Is lands Idaho I l l i n o i s Indiana Iowa Kansas Kentucky Louisiana Maine Maryland Massachusette Michigan Minnesota Mis s i s s ipp i Missouri Montana Nebraska Nevada New Hampshire New Je r sey New Mexico New York North Carol ina North Dakota Ohio

92 3

f 26l 120 72 24 14 55

112 5

58 472 257 348 219 140

£

169 106 280 36

197 11 56

204 37

479 80

152 377

92 258 254 3 12 11

13 . 66 62 51 395 121

252 354 304 115 179 101 72 68 66 11 24 12 14 12 12 54 198 186

111 654 639 5 17 8

53 121 64 351 226

807 575

320 285

248 456 201 21J 959 556 133 439 197 38 232 175 36 67 40 79 108 60

122 85 75 101. 319 259 223 993 449 36 268 226 P 1,293 295 61 217 109

169 815 506 11 18 17 30 13 2

195 137 123 34 44 31

478 325 323 79 402 299

115 64 l 199 366 480 417


906-b

AMENDMENT TO SECTION 11 ( c ) .

INCREASE OF RESERVES.

BE IT ENACTED BY THE SENATE AND HOUSE OF REPRESENTATIVES

OF THE UNITED STATES OF AMERICA IN CONGRESS ASSEMBLED, That

c l a u s e (c ) of S e c t i o n 11 of t h e Act approved December 23, 1913,

known as t he F e d e r a l Reserve Act , as amended by t h e Act a p -

proved September 7, 1916, be and i s he r eby amended by add ing

a t t h e end t h e r e o f t h e f o l l o w i n g s e n t e n c e ;

"The F e d e r a l Reserve Board s h a l l a l s o have power, whenever e x t r a o r d i n a r y c o n d i t i o n s j u s t i f y , t o i n c r e a s e , from t ime t o time f o r p e r i o d s n o t exceed ing t h i r t y days , on t h e a f f i r m a t i v e v o t e of f i v e of i t s members, t he amount of b a l a n c e s r e q u i r e d by t i i i s Act t o be ma in ta ined by member banks w i t h t h e i r r e s p e c t i v e F e d e r a l r e s e r v e banks , p rov ided such i n c r e a s e s h a l l a t no t ime exceed twenty p e r centum of such b a l a n c e s and s h a l l be a t t h e same r a t e f o r a l l member banks of any one d i s t r i c t , and • p r o v i d e d , f u r t h e r , t h a t t h e •Federa l Reserve Board s h a l l make a r e p o r t t o Congress in w r i t i n g s e t t i n g f o r t h t h e c o n d i t i o n s on which such a c t i o n i s based. 1 1

1 / 2 / 1 7


1805

947

COLLECTION OF CHECKS FOR NONMEMBER BANKS.


OF THE UNITED STATES OF AMERICA IN CONGRESS ASSEMBLED, That t h e

f i r s t p a r a g r a p h of S e c t i o n 13 of t he Act approved December 23,

1913, as amended, "by t h e Act of September 7, 1916, be f u r t h e r

amended so as t o r ead as f o l l o w s :

Any F e d e r a l r e s e r v e bank may r e c e i v e from any of i t s member banks and from the Uni ted S t a t e s d e p o s i t s of c u r r e n t ifunds in l a w f u l money, n a t i o n a l bank n o t e s , Fed-e r a l r e s e r v e n o t e s , o r checks and d r a f t s p a y a b l e upon p r e s e n t a t i o n , and a l so f o r c o l l e c t i o n , m a t u r i n g b i l l s , o r , s o l e l y f o r pu rposes of exchange o r of c o l l e c t i o n , may r e c e i v e from o t h e r F e d e r a l r e s e r v e banks OR FROM NON-MEMBER BANKS OR TRUST COMPANIES d e p o s i t s of c u r r e n t funds i n l a w f u l money, n a t i o n a l tank n o t e s , o r checks AND DRAFTS upon BANKS OR TRUST COMPANIES OR o t h e r F e d e r a l r e s e r v e banks eheeks aaet d-eaSta- p a y a b l e upon p r e s e n t a t i o n w i t h -i n i t s d i s t r i c t and ma tu r ing b i l l s payab le w i t h i n i t s d i s t r i c t ; PROVIDED, HOWEVER, THAT NO FEDERAL RESERVE BANK SHALL RECEIVE CHECKS AND DRAFTS FROM A NONMEMBER BANK FOR THE PURPOSE OF EXCHANGE OR COLLECTION UNLESS SUCH NONMEMBER BANK MAINTAINS WITH THE FEDERAL RESERVE BANK OF ITS DISTRICT A BALANCE IN AN AMOUNT TO BE DETERMINED BY THE FEDERAL RE-SERVE BOARD UNDER SUCH RULES AND REGULATIONS AS IT MAY PRE-SCRIBE.

1 / 2 / 1 7


905-a 1806 AMENDMENT TO SECTION 22.

EE IT ENACTED BY THE SENATE AND HOUSE OF REPRESENTA-

TIVES OF THE UNITED STATESOF AMERICA IN CONGRESS ASSEMBLED,

That t h a t p a r t of S s c t i o n 22 of t h e Act approved December 23,

1913; known as the Fede ra l Reserve Act , which reads as f o l l o w s :

"Other t h a n the u s u a l s a l a r y or d i r e c t o r ' s ferns pa id t o any o f f i c e r , d i r e c t o r , or employee of a member bank and o t h e r t han a r e a sonab l e f e e p a i d by s a i d bank t o such o f f i c e r , d i r e c t o r , o r employee f o r s e r v i c e s rendered t o such bank, no o f f i c e r , d i r e c t o r , employee> ot* a t t o r n e y of a member bank s h a l l be a b e n e f i c i a r y of or r e c e i v e , d i -r e c t l y or i n d i r e c t l y , any f e e , commission, g i f t , 6r b u s i -ness of t h e bank,»

be and hereby id Amended and re«-e.nact6d so a s t o read as f o l l ows :

"Other t h a n the u s u a l s a l a r y or d i r e c t o r ' s f e e s FEE pa id t o any o f f i c e r , d i r e c t o r , or employee OR ATDRNEY of a mem-ber bank and o t h e r t h a n a reasonable f e e pa id by s a i d bank to such o f f i c e r , d i r e c t o r , employee, OR ATTORNEY f o r s e r v i c e s rendered to such bank, no o f f i c e r , d i r e c t o r , em-ployee or a t t o r n e y of a member bank s h a l l be a b e n e f i c i a r y of o r r e c e i v e , d i r e c t l y o r i n d i r e c t l y , any f e e , commission, g i f t or o t h e r c o n s i d e r a t i o n f o r or i n connec t ion with any t r a n s a c t i o n or bus iness of the bank, PROVIDED, HOWEVER, THAT NOTHING IN THIS ACT CONTAINED SHALL ffi CONSTRUED TO PROHIBIT A DIRECTOR, OFFICER, OR EMPLOYEE FROM RECEIVING THE SAME RATE OF INTEREST PAID TO OTHER DEPOSITORS FOR SIMILAR DEPOSITS MADE WITH SUCH BANK; OR TO PROHIBIT A DIRECTOR, TOO IS NOT AN OFFICER OR EMPLOYEE, FROM RECEIVING, DIRECTLY OR INDIRECTLY, THE USUAL AND CUSTOMARY COMMISSIONS OR FEES FOR SERVICES RENDERED IN BUYING AND SELLING SECURITIES OR OTHER INVESTMENTS FOR OR ON ACCOUNT OF SUCH BANK, BUT IN THIS LATTER CASE THE ACTION OF THE BOARD OF DIRECTORS, IN DIRECTING EACH PURCHASE OR SALE OF SUCH SECURITIES OR OTHER INVESTMENTS, MUST BE BY AN AFFIRMATIVE VOTE CR WRITTEN AS-SENT OF AT LEAST THREE-FOURTHS OF THE MEMBERS OF THE BOARD EXCLUSIVE OF THE DIRECTOR INTERESTED, AND MUST BE RECORDED IN THE MINUTES OF THE MEETING OF SAID BOARD, SUCH MINUTES TO SPECIFY THJS NAME OF THE DIRECTOR AND THE FIRM OR CORPORATION , WITH WHICH HE IS CONNECTED, IF ANY, THROUGH WHICH SUCH ORDER IS TO EE EXECUTED TOGETHER WITH THE AMOUNT OF THE FEE OR COM-MISSION TQ BE PAID ON EACH TRANSACTION; AND, PROVIDED, FUR-THER, THAT NOTES, DRAFTS, BILLS OF EXCHANGE OR OTHER EVIDENCES OF DEBT EXECUTED OR INDORSED BY DIRECTORS OF A MEMBER BANK

DISCOUNTED WITH SUCH MEMBER BANK ON THE SAME TERMS AND 8 A S OTHER NOTES, DRAFTS, BILLS OF EXCHANGE OR EVI-

N C E S Of DEBT UPON THE AFFIRMATIVE VOTE OR WRITTEN ASSENT OF OF S U C H ^ J ^ ^ ^ ^ 1 1 1 3 ° F T H E M E M S R S 0 F T H E BOARD OF DIRECTORS


1807

910

B E I T ENACTED BY THE L&NaTE AND HOUSE OF I ^ P I D ^ N T A T I V E S

OF THE UNITED S T a T E S OF AMERICA IN CONGRESS .ubSEMB-bED, Tha t t h e f i f t &

p a r a g r a p h of S e c t i o n 1'j of t h e .^c t approved. December 23 , 1913, known

a s t h e F e d e r a l R e s e r v e a c t , a s amended by t h e A c t s approved March 15 , 1915,

and September 7 , 1916 , be and i s he reby amended so a s t o r e a d a s f o l l o w s :

iuiy member bank may a c c e p t d r a f t s or b i l l s of exchange drawn upon i t h a v i n g no t more t h a n s i x months8 s i g h t t o r u n , e x -c l u s i v e of days of g r a c e , which grow out of t r a n s a c t i o n s i n v o l v -i n g t h e i m p o r t a t i o n or e x p o r t a t i o n of goods ; or svhich grow ou t of t r a n s a c t i o n s i n v o l v i n g t h e domes t i c sh ipment o f goods p r o v i d e d s h i p p i n g documents c o n v e y i n g or s e c u r i n g t i t l e a r e a t t a c h e d a t t h e t i m e of a c c e p t a n c e ; or which a r e s e c u r e d a t t h e t i m e of a c -c e p t a n c e by a warehouse r e c e i p t o r o t h e r s u c h document c o n v e y i n g or s e c u r i n g t i t l e c o v e r i n g r e a d i l y m a r k e t a b l e s t a p l e s . No Mem-ber bank s h a l l a c c e p t , whe ther i n a f o r e i g n or d o m e s t i c t r a n s -a c t i o n , f o r any one p e r s o n , company, f i r m , o r c corporat ion t o an fca amount e q u a l a t any t i m e i n the a g g r e g a t e to more t h a n t e n p e r centum of i t s p a i d - u p and u n i m p a i r e d c a p i t a l s t o c k and s u r p l u s u n l e s s the bank i s s e c u r e d e i t h e r by a t t a c h e d documents or by some o t h e r a c t u a l s e c u r i t y growing ou t o f t h e same t r a n s a c t i o n a s the a c c e p t a n c e and no bank s h a l l a c c e p t s u c h b i l l s t o an amount e q u a l a t any time, i n t h e a g g r e g a t e t o more t h a n o n e - h a ^ f of i t s p a i d - u p and u n i m p a i r e d c a p i t a l s t o c k and s u r p l u s ! pxstx P R O V I D E D , HOWEVER, T H A I THE FEDERAL RESERVE BOARD, UNDER SUCH GLIJER-AL REGULATIONS A S I T MAY P R E S C R I B E , WHICH SHALL A P P L Y TO ALL BANKS A L I K E REGARDLESS O F THE AMOUNT O F C A P I T A L STOCK AND S U R P L U S , MAY AUTHORIZE ANY MEMBER BANK TO ACCEPT SUCH B I L L S TO AN AMOUNT NOT

. EXCEEDING A T ANY T I 1 E I N THE AGGREGATE ONE HUNDRED PER CENTUM O F I T S P A I D - U P AND UNIMPAIRED C a P I T A L STOCK AND S U R P L U S , PROVI DED, HOY,'EVER, THAT T I E AGGREGATE OF ACCEPTANCES GROW ING OUT OF DOILJOTIC TRANSACTIONS SHALL I N NO EVENT EXCEED F I F T Y PER CENTUM O F SLTCII CAPITAL STOCK P D SURPLUS.

1 2 - i a - i e


1808

* 9 / % -


OF THE UNITED STATES OF AMERICA IN CONGRESS ASSEMBLED, That Sec -

t i o n 17 of t h e Act approved December 23, 1913, known as t h e Fed-

e r a l Reserve Act , be and i s he reby amended so as t o read as f o l -

lows :

Sec . 17 . So rou eh of t he p r o v i s i o n s of s e c t i o n f i f t y -one hundred and f i f t y r - n i n e of t h e Revised S t a t u t e s of t h e Uni ted S t a t e s , and s e c t i o n f o u r of the Act of June t w e n t i e t h , e i g h t e e n hundred and s e v e n t y - f o u r , and s e c t i o n e i g h t of t h e Act of J u l y t w e l f t h , e i g h t e e n hundred and e i g h t y - t w o , and of any o t h e r p r o v i s i o n s of e x i s t i n g s t a t -u t e s as r e q u i r e t h a t b e f o r e any n a t i o n a l banking a s s o -c i a t i o n s s h a l l be a u t h o r i z e d t o commence banking b u s i n e s s i t s h a l l t r a n s f e r and d e l i v e r t o the T r e a s u r e r of t he Uni ted S t a t e s a s t a t e d amount of Uni ted S t a t e s r e g i s t e r e d bonds AND SO MUCH OF THOSE PROVISIONS OR OF ANY OTHER, PROVISIONS OF EXISTING STATUTES AS REQUIRE ANY NATIONAL BANKING ASSOCIATIONS N0'7 OR HEREAFTER ORGANIZED TO MAIN-TAIN A MINIMUM DEPOSIT OF SUCH BONDS WITH THE TREASURER i s hereby r e p e a l e d .

12/12/16


BRANCH BANKS


OF THE UNITED STATES OF AMERICA IN CONGRESS ASSEMBLED, That S e c -

t i o n 25 of the Act approved December 23, 1913, known as the Fed-

e r a l Reserve Act , as amended by the Act of September 7, 1916, be

amended by adding a s u b - s e c t i o n (a ) t o read as f o l l o w s :

"Sec. 25a . That any member bank l o c a t e d in a c i t y o r i n c o r p o r a t e d town of more t han one hundred thousand i n -h a b i t a n t s and p o s s e s s i n g a c a p i t a l and s u r p l u s of $1 ,000 ,000 or more may, unde r such r u l e s and r e g u l a t i o n s as t h e F e d e r a l Rese rve Board may p r e s c r i b e , e s t a b l i s h b r a n c h e s , not t o ex -ceed t e n i n number, w i t h i n the c o r p o r a t e . l i m i t s of t h e c i t y o r town in which i t i j l o c a t e d J Prov ided , That no such b ranch s h a l l be e s t a b l i s h e d in any S t a t e in which n e i t h e r S t a t e banks n o r t r u s t companies may l a w f u l l y e s t a b l i s h b r a n c h e s . "


951 1 8 1 0

MEMBERSHIP OF MUTUAL SAVINGS BANKS.


OF THE UNITED STATES OF AMERICA IN CONGRESS ASSEMBLED, That S e c t i o n

9 of t h e Act approved December 23, 1913, known as t h e F e d e r a l Reserve

Act , as amended "by t he Act of September 7 , 1916, be amended by add ing

a s u b s e c t i o n ( a ) t o read as f o l l o w s :

S e c t i o n 9 ^ a \ Any mutual s a v i n g s bank of a s s o c i a t i o n o p e r a t i n g

u n d e r t h e laws of any S t a t e , may make a p p l i c a t i o n t o t h e F e d e r a l Re-

s e r v e Board f o r t h e r i g h t t o become an a s s o c i a t e member of t h e F e d e r a l

r e s e r v e bank of t h e d i s t r i c t i n which such s a v i n g s bank o r a s s o c i a t i o n

i s l o c a t e d .

The F e d e r a l Reserve Board under such r u l e s and r e g u l a t i o n s

as i t may p r e s c r i b e may p e r m i t such bank o r a s s o c i a t i o n t o become an

a s s o c i a t e member of the F e d e r a l r e s e r v e bank, b u t such Board b e f o r e

g r a n t i n g any a p p l i c a t i o n s h a l l r e q u i r e s a t i s f a c t o r y ev idence t h a t the

laws of t h e S t a t e in which t h e a p p l y i n g bank o r a s s o c i a t i o n i s l o c a t -

ed , a u t h o r i z e such bank or a s s o c i a t i o n t o engage in t h e b u s i n e s s of a ,

mutua l s a v i n g s bank and p rov ide f o r a p r o p e r s u p e r v i s i o n over t h e o p e r -

a t i o n s of such bank or a s s o c i a t i o n .

Any mutua l s a v i n g s bank o r a s s o c i a t i o n which becomes an

a s s o c i a t e member of a F e d e r a l r e s e r v e bank, s h a l l agree t o comply

w i t h a l l t he p r o v i s i o n s of S e c t i o n 19 of t h i s Act* Such a s s o c i a t e

members s h a l l be e n t i t l e d t o a l l t h e c l e a r i n g p r i v i l e g e s g r a n t e d

t o member banks , "and F e d e r a l reserve banks s h a l l be a u t h o r i z e d

t o d i s c o u n t t h e p r o m i s s o r y n o t e s of such a s s o c i a t e members

h a v i n g a m a t u r i t y of no t more t h a n t h i r t y days and which a r e s e -


951

- 2 -

c u r e d , ( a ) by pape r e l i g i b l e f o r r e d i s c o u n t under S e c t i o n

13 of t h e F e d e r a l Reserve Act , (b) by Uni ted S t a t e s bonds ,

(c) by such m u n i c i p a l w a r r a n t s as F e d e r a l r e s e r v e banks a r e

a u t h o r i z e d t o purchase under t he p r o v i s i o n s of S e c t i o n 14 of

the F e d e r a l Reserve Act , o r (d) by commercial paper or bank-

e r s 1 a c c e p t a n c e s b e a r i n g the s i g n a t u r e of no t l e s s t han t h r e e

p e r s o n s , f i r m s , or c o r p o r a t i o n s *

1 /3 /17


1812

950.

BE IT ENACTED BY THE'SENATE AND HOUSE OF REPRESENTATIVES

OF THE UNITED STATES OF AMERICA IN CONGRESS ASSEMBLED, That p a r a -

graph f i v e of S e c t i o n 18 of t h e Act approved. December 23, 1913,

known as t h e F e d e r a l Reserve Act , be and i s he reby amended so as

t o r ead as f o l l o w s :

Upon t h e d e p o s i t w i t h t h e T r e a s u r e r of t h e Uni ted S t a t e s of bonds so p u r c h a s e d , o r any bonds w i t h t h e c i r -c u l a t i n g p r i v i l e g e a c q u i r e d unde r s e c t i o n f o u r of t h i s Ac t , OR ANY THREE PER CENT ONE YEAR GOLD NOTES ISSUED IN ACCORDANCE WITH THE PROVISIONS OF THIS SECTION, any F e d -e r a l r e s e r v e bank making such d e p o s i t in t h e manner p r o -v i d e d by e x i s t i n g law FOR THE DEPOSIT BY NATIONAL BANKS OF BONDS BEARING THE CIRCULATING PRIVILEGE, s h a l l be e n t i t l e d t o r e c e i v e from t h e Compt ro l l e r of t h e Currency c i r c u l a t -ing n o t e s in b l a n k , r e g i s t e r e d and c o u n t e r s i g n e d as p r o -v i d e d by law* e q u a l i n amount t o the p a r v a l u e of t h e NOTES OR bonds so d e p o s i t e d . Such CIRCULATING n o t e s s h a l l be o b l i g a t i o n s of t he F e d e r a l r e s e r v e bank p r o c u r i n g t h e same, and s h a l l be i n form p r e s c r i b e d by t h e S e c r e t a r y of t h e T r e a s u r y , and t o t h e same t e n o r and e f f e c t as n a t i o n a l bank n o t e s now prov ided by l aw. They s h a l l be i s s u e d and r e -deemed unde r t h e same terms and c o n d i t i o n s as n a t i o n a l bank n o t e s excep t t h a t t h e y s h a l l n o t be l i m i t e d to t h e amount of t h e c a p i t a l s t o c k of t he F e d e r a l r e s e r v e bank i s s u i n g them, CIRCULATING NOTES OF FEDERAL RESERVE BANKS SECURED BY THREE PER CENT ONE YEAR GOlD NOTES SHALL BE SUB-JECT TO THE SAME TAX IMPOSED BY LAW ON CIRCULATING NOTES WHICH ARE SECURED BY THREE PER CENT BONDS OF THE UNITED STATES.


, 1813 -9^9-

M AMENDMENT TO SECTION 4 OF TEE FEDERAL RESERVE ACT*


OF THE UNITED STATES OF AMERICA IN CONGRESS ASSEMBLED> That S e c t i o n

4 of t h e Act approved December 23, 1913,1 known as t h e F e d e r a l Re-

s e r v e Ac t , be amended, "by s t r i k i n g out t h e s e n t e n c e r e a d i n g a s f o l -

lows : "One of t h e d i r e c t o r s Of C l s s s C, who s h a l l be a p e r s o n

of t e s t e d banking e x p e r i e n c e , s h a l l be a p p o i n t e d by t h e F e d e r a l

Reserve Board as deputy chai rman and deputy F e d e r a l r e s e r v e agen t

t o e x e r c i s e t h e powers of t h e chairman of t h e board and F e d e r a l

r e s e r v e agen t i n c a s e of absence or d i s a b i l i t y of h i s p r i n c i p a l " ,

and by add ing i n p l a c e t h e r e o f t h e f o l l o w i n g :

"Sub jec t t o t h e a p p r o v a l of t h e F e d e r a l Reserve

Board> t h e F e d e r a l r e s e r v e agent s h a l l appo in t one or

more a s s i s t a n t s . Such a s s i s t a n t s , who s h a l l be p e r s o n s

of t e s t e d banking e x p e r i e n c e , s h a l l a s s i s t t h e F e d e r a l

r e s e r v e a g e n t i n t h e pe r fo rmance of h i s d u t i e s and s h a l l

a l s o have power t o a c t i n h i s name and s t e a d du r ing t h i s

absence or d i s a b i l i t y . The F e d e r a l r e s e r v e a g e n t may

r e q u i r e such bonds of h i s a s s i s t a n t s a s he may deem n e c e s -

s a r y f o r h i s own p r o t e c t i o n . A s s i s t a n t s t o t h e F e d e r a l

r e s e r v e a g e n t s h a l l r e c e i v e an annua l compensat ion t o be

f i x e d and p a i d i n t h e same manner as t h a t of t h e F e d e r a l

r e s e r v e a g e n t . "

1/3/16.


O A T H o r

FEDERAL RESERVE AGEWT OR DEPUTY FEDERAL RESERVE AGENT.

(Other Class "C" d i r e c t o r ' s may use t h i s for:.;, w i th r e f e r e n c e s t o F e d e r a l r e s e r v e agen t e l i m i n a t e d ) .

a

S t a t e of

Ci ty or County of S3

I , t he u n d e r s i g n e d , h a v i n g been a p p o i n t e d a C la s s T,CI! d i r e c t o r

of t h e F e d e r a l Reserve Bank of ... . , , l o c a t e d i n t h e Fed-

e r a l Reserve C i t y of , > S t a t e of _,

and i n D i s t r i c t No. , as de te rmined i n accordance w i t h t h e p r o -

v i s i o n s of t he F e d e r a l Reserve Act , and h a v i n g been d e s i g n a t e d as (Deputy)

F e d e r a l Reserve Agent by the F e d e r a l Reserve Board, be ing a c i t i z e n of

t he United S t a t e s and r e s i d e n t of t h e S t a t e of ,

do solemnly swear ( a f f i r m ) t h a t I w i l l , so f a r as t h e duty devo lves upon

me, d i l i g e n t l y and h o n e s t l y a d m i n i s t e r t h e a f f a i r s of s a i d bank f a i r l y

and i m p a r t i a l l y and w i thou t d i s c r i m i n a t i o n i n f a v o r of o r a g a i n s t any

member bank o r banks; t h a t I w i l l no t knowingly v i o l a t e , o r w i l l i n g l y

pe rmi t t o be v i o l a t e d any of t h e p r o v i s i o n s of t h e S t a t u t e s of t h e Uni ted

S t a t e s under which t h i s bank has been o r g a n i z e d ; t h a t I w i l l w e l l and

f a i t h f u l l y d i s c h a r g e the d u t i e s of the o f f i c e of (Deputy) F e d e r a l Reserve

Agent on which I am about t o e n t e r ; t h a t I am no t an o f f i c e r , d i r e c t o r ,

employee, or s t o c k h o l d e r i n any .ofher bank; and t h a t I - t a k e t h i s o b l i g a -

t i o n f r e e l y w i t h o u t any men ta l r e s e r v a t i o n or purpose of e v a s i o n .

S u b s c r i b e d and sworn ( a f f i r m e d ) t o b e f o r e t h e u n d e r s i g n e d , a

Notary P u b l i c i n and f o r t h e S t a t e and a f o r e s a i d , t h i s

day of , 191 .

Notary P u b l i c . Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

1814 9^7 a .

COLLECTION OF CHECKS FOR NONMEMBER BANKS.


OF THE UNITED STATES OF AMERICA IN CONGRESS ASSEMBLED, That t h e

f i r s t p a r a g r a p h of S e c t i o n 13 of t h e Act approved. December 23, 1913,

a s amended by t h e Act of September 7 , l $ l 6 , be f u r t h e r amended so

as t o read as f o l l o w s :

Any F e d e r a l r e s e r v e bank may r e c e i v e from any of i t s member banks and from t h e Uni t ed S t a t e s d e p o s i t s of c u r r e n t f u n d s i n l a w f u l money, n a t i o n a l bank n o t e s , F e d e r a l r e s e r v e n o t e s , or checks and d r a f t s payable upon p r e s e n t a t i o n , and a l s o f o r c o l l e c t i o n , ma tu r ing NOTES AND b i l l s ; o r , s o l e l y f o r pu rposes of exchange or of • ^ c o l l e c t i o n , may r e c e i v e from o t h e r F e d e r a l r e s e r v e banks d e p o s i t s of c u r r e n t funds i n l a w f u l money, n a t i o n a l bank n o t e s , or checks upon o t h e r F e d e r a l r e s e r v e banks and checks and d r a f t s payab le upon p r e s e n t a t i o n w i t h i n i t s d i s t r i c t and ma tu r ing NOTES AND b i l l s payab le wi th in ' i t s d i s t r i c t ; OR, SOLELY FOR THE PUR-POSES OF EXCHANGE OR OF COLLECTION, MAY RECEIVE FROM ANY NONMEMBER BANK OR TRUST COMPANY DEPOSITS OF CURRENT FUNDS IN LAWFUL MONEY, NATIONAL BANK NOTES, FEDERAL RESERVE NOTES, CHECKS AND DRAFTS PAYABLE UPON PRESENTATION OR MATURING NOTES AND BILLS, PROVIDED SUCH NONMEMBER BANK OR TRUST COM-PANY MAINTAINS WITH THE FEDERAL RESERVE BANK OF ITS DISTRICT A BALANCE IN AN AMOUNT TO BE DETERMINED BY THE FEDERAL RE-SERVE BOARD UNDER SUCH RULES AND REGULATIONS AS IT MAY PRE-SCRIBE.

1 /6 /17. .


f ' 1816

% . U U A X FREDERL

E X - O F F 1 C I O M E M B E R S ( 0 O A / V ^ W . P . G . H A R D I N G . GOVERNOR . W A R B U R G . VICE GOVERNOR

WILLIAM G . MCADOO I A J ^ ^ °

" C " E ™ » M " * » T " " S 0 " T $ > * < " C H A R L E S S . H A M U N

FEDERAL RESERVE BOARD AND FISCAL AGENT

WASHINGTON A D D R E S S R E P L Y T O Y 4 ® E D E R A L R E S E R V E B O A R D

J a n u a r y 2, 1917 .

Dear S i r :

Under s e p a r a t e cove r we a r e f o r w a r d i n g 150 c o p i e s of Rev i sed f o r m 38 f o r r e p o r t i n g d i s t r i b u t i o n by m a t u r i t i e s and c l a s s e s of b i l l s and s h o r t - t e r m i n -v e s t m e n t s on hand a t c l o s e of b u s i n e s s on F r i d a y s .

Your s p e c i a l a t t e n t i o n . i s c a l l e d t o t h e l o w e r p o r t i o n of t h e fo rm, r e q u e s t i n g i n f o r m a t i o n a s t o t h e v a r i o u s c l a s s e s of d i s c o u n t e d p a p e r on hand u n d e r t h e t w o - f o l d head of s e c u r e d and u n s e c u r e d b i l l s .

t P l e a s e d i s c o n t i n u e u s e of o l d Form 38 and r e -p o r t t h e i n f o r m a t i o n r e q u e s t e d on t h e new form, b e g i n -n i n g w i t h J a n u a r y 5 of t h e p r e s e n t y e a r .

R e s p e c t f u l l y ,

S e c r e t a r y .


1817

-9%9-

AN AMENDMENT TO SECTION k OF THE FEDERAL RESERVE ACT.

EE IT ENACTED BY THE SENATE AND HOUSE OF REPRESENTATIVES


4 of the Act approved December 23> 1913# known as t h e F e d e r a l Re-

se rve Act , be amended by s t r i k i n g out the s en t ence r e a d i n g as f o l -

lows: "One of the d i r e c t o r s of C l s s s C, who s h a l l be ?- pe r son

of t e s t e d banking e x p e r i e n c e , s h a l l be appo in ted by the F e d e r a l

Reserve Board as deputy chairman and deputy F e d e r a l r e s e r v e agent

t o e x e r c i s e t h e powers of t h e chairman of t h e board and F e d e r a l

r e s e r v e agent i n case of absence or d i s a b i l i t y of h i s p r i n c i p a l " ,

and by adding i n p lace t h e r e o f t h e f o l l o w i n g :

"Subjec t t o the approva l of the F e d e r a l Reserve

Board, t h e F e d e r a l r e s e r v e agent s h a l l appoin t one or .

more a s s i s t a n t s . Such a s s i s t a n t s , who s h a l l be pe r sons

of t e s t e d banking e x p e r i e n c e , s h a l l a s s i s t t he F e d e r a l

r e s e r v e agen t in the performance of h i s d u t i e s and s h a l l

a l s o have power t o a c t i n h i s name and s t e a d dur ing t h i s

absence or d i s a b i l i t y . The F e d e r a l r e s e r v e agen t may

r e q u i r e such bonds of h i s a s s i s t a n t s a s he may deem n e c e s -

s a r y f o r h i s own p r o t e c t i o n . A s s i s t a n t s t o "the Federal

r e s e r v e agent s h a l l r e c e i v e an annua l compensat ion t o be

f i x e d and pa id in t h e same manner a s t h a t of t h e F e d e r a l

r e s e r v e agent . 1 1

1/3/16-


1818

950.


OF THE UNITED STATES OF AMERICA IN CONGRESS ASSEMBLED, That p a r a -

graph f i v e of Sec t i on 18 of the Act approved December 23, 1913,

known as t h e Federa l Reserve Act, be and ia hereby amended so as

t o read as f o l l o w s :

Upon the d e p o s i t w i t h t h e T r e a s u r e r of the United S t a t e s of bonds so purchased , or any bonds w i t h the c i r -c u l a t i n g p r i v i l e g e acqui red under s e c t i o n f o u r of t h i s Act , OR ANY THREE PER CENT ONE YEAR GOLD NOTES ISSUED IN ACCORDANCE WITH THE PROVISIONS OF THIS SECTION, any Fed-e r a l r e s e r v e bank making such d e p o s i t in the manner p r o -vided by e x i s t i n g law FOR THE DEPOSIT BY NATIONAL BANKS OF BONDS BEARING THE CIRCULATING PRIVILEGE, s h a l l be e n t i t l e d to r e c e i v e from the Comptrol ler of t h e Currency c i r c u l a t -ing n o t e s in b lank , r e g i s t e r e d and coun te r s igned as p r o -v ided by law, equa l in amount to the p a r va lue of the NOTES OR bonds so d e p o s i t e d . Such CIRCULATING n o t e s s h a l l be o b l i g a t i o n s of the Federa l r e s e r v e bank p r o c u r i n g the same, and s h a l l be in form p r e s c r i b e d by the S e c r e t a r y of the T reasu ry , and to the same t e n o r and e f f e c t as n a t i o n a l bank n o t e s now provided by law. They s h a l l be i s sued and r e -deemed under the same terms and c o n d i t i o n s as n a t i o n a l bank no t e s except t h a t they s h a l l not be l i m i t e d to the amount of the c a p i t a l s tock of the Fede ra l r e se rve bank i s s u i n g them, CIRCULA?I.1G NOTES t f FlQSfiAI. KESBRVE BAKKS SECURED BY THREE PER CENT ONE YEAR GOLD NOTES SHALL BE SUB-JECT TO THE SAME TAX IMPOSED BY LA"' ON CIRCULATING NOTES WHICH ARE SECURED BY THREE PER CENT BONDS OF THE UNITED STATES.


951 1819

MEMBERSHIP OF MUTUAL SAVINGS BANKS.



9 of t h e Act approved December 23, 1913, known as t h e F e d e r a l Reserve

Act , as amended by the Act of September 7, 1916, be amended by add ing

a s u b s e c t i o n ( a ) t o read as f o l l o w s :

S e c t i o n 9 ^ . Any mutual s a v i n g s bank or a s s o c i a t i o n o p e r a t i n g

unde r t h e laws of any S t a t e , may make a p p l i c a t i o n t o t h e F e d e r a l Re-

s e r v e Board f o r t h e r i g h t t o become an a s s o c i a t e member of t h e F e d e r a l

r e s e r v e bank of t h e d i s t r i c t in which such s a v i n g s bank or a s s o c i a t i o n

i s l o c a t e d .

The F e d e r a l Reserve Board under such r u l e s and r e g u l a t i o n s

as i t may p r e s c r i b e may p e r m i t such bank or a s s o c i a t i o n t o become an

a s s o c i a t e member of the F e d e r a l r e s e r v e bank, b u t such Board b e f o r e

g r a n t i n g any a p p l i c a t i o n s h a l l r e q u i r e s a t i s f a c t o r y ev idence t h a t the

laws of t he S t a t e in which t h e a p p l y i n g bank or a s s o c i a t i o n i s l o c a t -

ed , a u t h o r i z e such bank or a s s o c i a t i o n t o engage in t h e b u s i n e s s of a

mutua l s a v i n g s b'ank and p r o v i d e f o r a p r o p e r s u p e r v i s i o n over t h e o p e r -

a t i o n s of such bank or a s s o c i a t i o n .

Any mutua l s a v i n g s bank o r a s s o c i a t i o n which becomes an

a s s o c i a t e member of a F e d e r a l r e s e r v e bank, s h a l l agree t o comply

w i t h a l l t he p r o v i s i o n s of S e c t i o n 19 of t h i s Ac t . Such a s s o c i a t e

members s h a l l be e n t i t l e d t o a l l t h e c l e a r i n g p r i v i l e g e s g r a n t e d

t o member banks , and F e d e r a l r e s e r v e banks s h a l l be a u t h o r i z e d

to d i s c o u n t t he p r o m i s s o r y n o t e s of such a s s o c i a t e members

h a v i n g a m a t u r i t y of no t more t han t h i r t y days and which a r e s e -


951

- 2 -

c u r e d , ( a ) by paper e l i g i b l e f o r r e d i s c o u n t under S e c t i o n

13 of t h e F e d e r a l Reserve Ac t , (b) by Uni ted S t a t e s bonds ,

(c) by such m u n i c i p a l w a r r a n t s as F e d e r a l r e s e r v e banks a r e

a u t h o r i z e d t o purchase under t he p r o v i s i o n s of S e c t i o n 14 of

the F e d e r a l Reserve Ac t , o r ( a ) by commercial paper o r bank-

e r s ' a c c e p t a n c e s b e a r i n g the s i g n a t u r e of no t l e s s t h a n t h r e e

p e r s o n s , f i r m s , dr c o r p o r a t i o n s .

1/3/17


1821 EX-OIPFICIO M E M B E R S

WILLIAM G . MCADOO -SECRETARY OF THE TREASURY

CHAIRMAN

J O H N SKELTON WILLIAMS COMPTROLLER OF THE CURRENCY FEDERAL RESERVE BOARD 952

W . P . 6 . H A R D I N G , GOVERNOR P A U L M. W A R B U R G , VICE GOVERNOR F R E D E R I C A. DELANO A D O L P H C . M I L L E R C H A R L E S S . HAMLIN


AND FISCAL AGENT



J a n u a r y 4 , 1917 .

Dear S i r :

I am s e n d i n g you h e r e w i t h f o u r c o p i e s of d r a f t s of

t h e v a r i o u s amendments wh ich have been p r e p a r e d by t h e Board

and s u b m i t t e d a f t e r d i s c u s s i o n t o t h e Committees on Banking

and Cur rency of t h e S e n a t e and t h e House of R e p r e s e n t a t i v e s .

You w i l l s e e t h e amendments cover t h e f o l l o w i n g s u b j e c t s :

1 . AMENDMENT TO SECTION 16 which p r o v i d e s

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 of 100% g o l d ; o r 100$ of p a p e r , o r b o t h .

f o r t h e c o u n t i n g of go ld h e l d by t h e F e d e r a l r e s e r v e a g e n t s a s s e c u r i t y f o r n o t e s , as p a r t of t h e gold r e s e r v e r e q u i r e d t o be h e l d by t h e bank a g a i n s t s u c h F e d e r a l r e s e r v e n o t e s .

This amendment was approved and e n d o r s e d by

a m a j o r i t y of t h e Board .

2 . AMENDMENT OF SECTION 19 a b b r e v i a t i n g

and s i m p l i f y i n g t h e c l a u s e s i n S e c t i o n 19

which r e l a t e t t o r e s e r v e r e q u i r e m e n t s . This

( a )

( b )


- 2 -

±822 952.

p roposed amendment p r o v i d e s t h a t a l l member banks s h a l l m a i n t a i n r e s e r v e s

i n t h e F e d e r a l Reserve Bank as f o l l o w s :

Aga ins t Demand A g a i n s t Time D e p o s i t s Pep os i t s

( a ) Count r%r Banks 7$ 3$ (b ) Rese rve C i ty Banks 10$ 3$ ( c ) C e n t r a l Reserve C i t y Banks 13$ 3$

and i n a d d i t i o n e v e r y member bank i s r e q u i r e d t o keep i n i t s own v a u l t

f o r t i l l money an amount of s p e c i e o r c u r r e n c y ( n o t n e c e s s a r i l y gold

o r l a w f u l money) e q u a l t o f i v e p e r c e n t of i t s demand d e p o s i t s , l e s s

t h e amount of n e t b a l a n c e s w i t h F e d e r a l Reserve Banks i n e x c e s s of t h e

minimum above s t i p u l a t e d .

3 . AMENDMENT OF SECTION 11 so as t o p e n n i t t h e F e d e r a l Reserve

Board t o v a i s e r e s e r v e r e q u i r e m e n t s i n emergenc i e s , j u s t as 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 ind t o lower t h o s e

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

4 . AMENDMENT OF SECTION 16 t o p e r m i t nonmenber S t a t e banks and

t r u s t companies, even though too sma l l t o be e l i g i b l e f o r membership

in t h e F e d e r a l Reserve Banks, t o a v a i l t hemse lves of t he c l e a r i n g and

c o l l e c t i o n f a c i l i t i e s of t h e F e d e r a l Reserve Banks, p r o v i d e d t h a t t hey

cover a t p a r checks on themse lves s e n t f o r c o l l e c t i o n by t h e F e d e r a l

Reserve Bank, and p rov ided f u r t h e r t h a t t h e y keep a compensa t ing balanci

w i t h t h e F e d e r a l Reserve Bank i n an amount t o be de te rmined u n d e r r u l e s

p r e s c r i b e d by t h e F e d e r a l Reserve Board .

5 . AMENDMENT OF SECTION 22 - t h e p e n a l s t a t u t e - so as t o de f in®

more c l e a r l y t h e r i g h t s and l i m i t a t i o n s of d i r e c t o r s i n t h e m a t t e r of


952

- 3 -

a c c e p t i n g f e e s o r compensa t ion o t h e r t h a n t h e o r d i n a r y f e e s p a i d

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 the r e g u l a r course

of b u s i n e s s , t h e per formance of which s e r v i c e s i s no t incumbent

upon them i n t h e i r c a p a c i t y as d i r e c t o r s .

6 . AMENDMENT OF SECTION 1] t o r e s t o r e t h e p r o v i s i o n which

was by e r r o r s t r i c k e n from t h e Act i n t he amendments of September

7 , 1916, t h u s r e s t o r i n g t o n a t i o n a l banks , w i t h t h e a p p r o v a l of

t h e F e d e r a l Reserve Board, t h e r i g h t t o a c c e p t up t o 100$ of t h e i r

c a p i t a l and s u r p l u s i n t r a n s a c t i o n s i n v o l v i n g impor t s o r e x p o r t s .

7 . AMENDMENT OF SECTION 17 t o c a n c e l t h e p r o v i s i o n of t h e

N a t i o n a l Bank Act which r e q u i r e s n a t i o n a l banks t o m a i n t a i n a

minimum d e p o s i t of Government bonds w i t h t h e T r e a s u r e r of t h e

Uni ted S t a t e s .

8 . AMENDMENT OF SECTION 25 t o a u t h o r i z e member banks l o -

c a t e d i n c i t i e s of more t h a n 100,000 p o p u l a t i o n and which have a

c a p i t a l and s u r p l u s of more t h a n $ 1 , 0 0 0 , 0 0 0 , t o e s t a b l i s h branches

i n the same c i t y , p rov ided t h e S t a t e laws do not p r o h i b i t S t a t e

banks and t r u s t companies from e s t a b l i s h i n g b r a n c h e s .

9» AMENDMENT OF SECTION 9 t o a u t h o r i z e mutua l s a v i n g s banks

n o t hav ing c a p i t a l s t o c k t o become a s s o c i a t e members of t h e F e d e r a l

r e s e r v e sys tem under c e r t a i n p r e s c r i b e d c o n d i t i o n s .

10 . AMDNEMENT OF SECTION 18 so a s t o g i v e t o Uni ted S t a t e s

one y e a r 3% go ld n o t e s i n t h e hands of F e d e r a l r e s e r v e banks t h e


1824

952

-Hi -

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 s u a n c e of F e d e r a l r e s e r v e bank

n o t e s .

11 . AMENDMENT OF SECTION 4 t o a b o l i s h t h e t i t l e and o f f i c e

of Deputy F e d e r a l Reserve Agent , t h u s h a v i n g two u n a t t a c h e d

C la s s 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 , and t o c r e a t e t he

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 Reserve Agent , who s h a l l not be a

d i r e c t o r of t h e bank, bu t who s h a l l be a s a l a r i e d bonded o f f i c e r

i n t h e F e d e r a l Reserve A g e n t ' s Depar tment , s e r v i n g a t a l l t imes

a s an A s s i s t a n t t o t h e F e d e r a l Reserve Agent and q u a l i f i e d t o a c t

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

Very t r u l y y o u r s ,

Governor .

Inc l o s u r e .


1825

S3?-

STATEMENT FOR THE PRESS.

January 3, 1917*

The Boston C l e a r i n g House banks have adopted a new

form des igned t o show t h e change i n t h e i r r e s e r v e p o s i t i o n from

week t o week> as g iven a t t h e bottom of t h e i r u s u a l c l e a r i n g

house bank s t a t e m e n t • In t h e p a s t they have announced t h e d e -

f i c i e n c y or excess of t h e i r v a u l t ca sh , and a l s o t h e i r d e f i c i e n c y

or excess wi th t h e F e d e r a l r e s e r v e bank*

S ince t h e a d o p t i o n of t h e r u l i n g making i t o p t i o n a l

w i th member banks t o keep r e s e r v e s i n v a u l t or in tiie F e d e r a l

r e s e r v e bank, t h e Boston banks have shown a d e f i c i e n c y i n t h e i r

v a u l t c a s h , and an excess w i t h t h e F e d e r a l r e s e r v e bank. I t

has been f e l t t h a t t h e s p i t ems might p r o p e r l y be c o n s o l i d a t e d

j u s t as s i m i l a r f i g u r e s a r e conbined i n E n g l i s h bank s t a t e m e n t s ,

and t h a t such c o n s o l i d a t i o n would be a f i n a l r e c o g n i t i o n on t he

p a r t of t h e C l e a r i n g House t h a t d e p o s i t s w i t h t h e F e d e r a l r e s e r v e

bank a r e p r a c t i c a l l y i n t e r c h a n g e a b l e (so f a r as r e s e r v e a v a i l s -

a b i l i t y i s concerned) w i t h cash i n v a u l t . When t h e m a t t e r was

r e c e n t l y c a l l e d t o t he a t t e n t i o n of t he C l e a r i n g House Committee

i n Boston, t h e members a c q u i e s c e d i n t h e s u g g e s t e d change• This

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

New England banks t o c o o p e r a t e w i th t h e F e d e r a l r e s e r v e bank

i n every way p o s s i b l e .


E X - O P F I C I O M E M B E R *

WILLIAM 6 . McADOO SKCRKTARY OF THK TREASURY

CHAIRMAN

J O H N SKELTON WILLIAMS COMPTROLLER OF THE CURRENCY FEDERAL RESERVE BOARD

WASHINGTON

1826 W . P . 6 . HARDING, GOVERNOR PAUL M. WARBURG. VICE GOVERNOR F R E D E R I C A. DELANO ADOLPH C . MILLER CHARLES S . HAMLIN

H . PARKER WILLIS . SECRETARY SHERMAN P . ALLEN. ASST. SECRETARY

AND FISCAL AGENT

A D D R E S S R E P L Y TO


960. J anua ry 8 , 1917 •

Dear S i r :

T h e ' F e d e r a l Reserve Board has t c - d a y d e t e r m i n e d , i n t h e e x e r c i s e of t M d i s c r e t i o n v e s t e d i n i t Under t h e p r o v i s i o n s of S e c t i o n 18 of t h e F e d e r a l Reserve A c t , t h a t , i t " / i l l not r e q u i r e F e d e r a l Reserve Banks t o purchase d u r i n g the y e a r 1917 more t h a n f i f t e e n m i l l i o n d o l l a r s of Uni ted S t a t e s bonds o f f e r e d f o r s a l e by member banks th rough the T r e a s u r e r of t h e Uni ted S t a t e s . I t w i l l r e q u i r e F e d e r a l Reserve Banks t o purchase on A p r i l 1,, 1$17, t h e f u l l amount of t h i s f i f t e e n m i l l i o n d o l l a r s , o r so much t h e r e o f a s may be o f f e r e d f o r s a l e on o r b e f o r e March 2 1 s t .

Under4 t h e p r o v i s i o n s of S e c t i o n 18 F e d e r a l Reserve Banks a r e not p e r m i t t e d t o pu rchase f rom member banks th rough t h e Treasure r , more t h a n t w e n t y - f i v e m i l l i o n d o l l a r s of bohds i n any one y e a r , l e s s t he amount of bonds b e a r i n g the c i r c u l a t i o n p r i v i l e g e a c q u i r e d i n t t ie open market du r ing th&t y e a r . - I f , t h e r e f o r e , F e d e r a l Reserve Banks a r e d e s i r o u s of g i v i n g member banks an o p p o r t u n i t y t o s e l l the f u l l amount of f i f t e e n m i l l i o n d o l l a r s undet* t h e p r o v i s i o n s of S e c t i o n 18, t h e y shou ld r e f r a i n from i n v e s t i n g i n t h e open market du r ing t h e f i r s t q u a r t e r a n y t h i n g i n excess of t h e d i f f e r e n c e between f i f t e e n m i l l i o n d o l l a r s and t w e n t y - f i V e m i l l i o n d o l l a r s .

P l e a s e b r i n g t h i s t o t h e a t t e n t i o n of your e x e c u t i v e committee*

R e s p e c t f u l l y . ,

Governor


1827

^ •*

STATEMENT FOR THE PRESS.

January Sj 191$* r

The F e d e r a l Reserve Board has de t e rmined , i n t h e e x e r c i s e of

t h e d i s c r e t i o n v e s t e d i n i t under t h e p r o v i s i o n s of S e c t i o n 18 of

t h e F e d e r a l Reserve Act ; t h a t i t w i l l n o t r e q u i r e F e d e r a l r e s e r v e

banks t o pu rchase dur ing t h e y e a r 1917 more t h a n $15 ,000 ,000 . of

Uni ted S t a t e s "bonds o f f e r e d f o r s a l e by member banks t h r o u g h t h e

T r e a s u r e r of t h e Uni ted S t a t e s * I t w i l l r e q u i r e F e d e r a l r e s e r v e

banks t o p u r c h a s e on A p r i l 1, 191%, t h e f u l l amount of t h i s

$15 ,000 ,000 . o r so much t h e r e o f as may be o f f e r e d f o r s a l e on or

b e f o r e March 2 1 s t , t he l a s t day on which a p p l i c a t i o n s w i l l be

r e c e i v e d by t h e T r e a s u r e r f o r thd s a l e of bonds on A p r i l 1 s t •

Under t h e p r o v i s i o n s of S e c t i o n 18 F e d e r a l r e s e r v e banks a r e

not p e r m i t t e d t o purchase from member banks t h r o u g h t h e T r e a s u r e r

more t h a n t w e n t y - f i v e m i l l i o n d o l l a r s of bonds i n any one y e a r ,

l e s s t h e amount of bonds b e a r i n g t h e c i r c u l a t i o n p r i v i l e g e a c -

q u i r e d i n t h e open market d u r i n g t h a t y e a r . There i s no l i m i t

imposed by law on t h e amount of bonds which may be pu rchased i n

t h e open marke t by F e d e r a l r e s e r v e banks*


963

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

TO THE SPEAKER OF THE HOUSE OF REPRESENTATIVES i

SIR:

The F e d e r a l Reserve Board t r a n s m i t s h e r e w i t h i t s a n -

n u a l r e p o r t f o r t h e c a l e n d a r y e a r 1916.

This r e p o r t ^ t h e t h i r d s u b m i t t e d , i s made j u s t a f t e r

t h e c l o s e of a y e a r of unexampled commercial , i n d u s t r i a l and f i -

n a n c i a l a c t i v i t y in t he Uni ted S t a t e s . Never b e f o r e i n t ime of

domes t i c peace have wages and p r i c e s reached such h igh l e v e l s .

In p r a c t i c a l l y a l l impor tan t i n d u s t r i e s l a b o r and c a p i t a l have

t h roughou t t he y e a r found f u l l and r emunera t ive employment. The

s i t u a t i o n may b e s t be summed up i n t h e s t a t e m e n t t h a t d u r i n g

t h e c a l e n d a r y e a r 1916 e x p o r t s of merchandise from t h e Uni ted

S t a t e s t o o t h e r c o u n t r i e s amounted t o about $ 5 , 4 6 0 , 0 0 0 , 0 0 0 , w h i l e

i t s impor t s amounted t o about $ 2 , 3 6 0 , 0 0 0 , 0 0 0 , l e a v i n g a n e t

t r a d e b a l a n c e in f a v o r of t he United S t a t e s of about $ 3 , 1 0 0 , 0 0 0 , -

000. Domestic t r a d e , s t i m u l a t e d as i t has been by t h e p r e s e n c e of


963

u n u s u a l l y h igh wages and p r i c e s , has 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 of 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 , and the r e s u l t s of

t h i s whole s i t u a t i o n have been r e f l e c t e d i n t h e augmenta t ion of

bank r e s o u r c e s , as i l l u s t r a t e d by 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 and t r u s t companies i n t h e United S t a t e s have shown

an i n c r e a s e d u r i n g t h e yea r of no t l e s s t han $ 4 , 3 0 0 , 0 0 0 , 0 0 0 .

INFLOW OF GOLD AND ATTENDANT PROBLEMS.

S ince t h e beg inn ing of t h e European war t h e problem i n -

c i d e n t to t h e d i s t r i b u t i o n of gold th roughou t t he wor ld , as f a r

as t he United S t a t e s i s concerned , has been r e v e r s e d . I t w i l l be

remembered t h a t a t the ou tbreak of t h e war American impor t e r s and

banking houses were indeb ted to t h e i r c o r r e s p o n d e n t s abroad on

c u r r e n t account t o t h e e x t e n t of about $450 ,000 ,000 . The l i q u i d a -

t i o n of t h i s i ndeb t ednes s a t f i r s t involved no t only l a r g e s h i p -

ments of go ld , b u t t h e c o n d i t i o n s under which gold could be e x p o r t

ed were such as t o add g r e a t l y t o t he normal c o s t of s e t t l e m e n t s .


963

- 3 -

To a s s i s t in t h i s s i t u a t i o n t h e r e was o r g a n i z e d , a t t h e i n s t a n c e

of t h e F e d e r a l Reserve Board, a "bankers' gold fund of $ 1 0 0 , 0 0 0 , -

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

n u a l r e p o r t made by t h i s Board. Due t o t h e a v a i l a b i l i t y of t h e

f a c i l i t i e s p rov ided by t h i s gold fund , as w e l l as t o t h e i n c r e a s -

i n g volume of our e x p o r t s t o Europe, b a l a n c e s s h o r t l y began t o

appea r in f a v o r of t h i s c o u n t r y . These b a l a n c e s have i n c r e a s e d

e v e r s i n c e a t an unp receden ted r a t e . The Board has i n f o r m a t i o n

showing t h a t f rom t h e b e g i n n i n g of t h e war u n t i l t h e end of Decem-

b e r 1916, t h e r e was a n e t movement of gold i n t o t h e Uni ted S t a t e s

of a p p r o x i m a t e l y $870 ,000 ,000 , and i t i s e s t i m a t e d t h a t d u r i n g

t h e same p e r i o d no l e s s t h a n $2 ,500 ,000 ,000 of s e c u r i t i e s of

American o r i g i n , i n c l u d i n g o b l i g a t i o n s of t h e n a t i o n a l 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 and i n -

d i v i d u a l s , have been t r a n s f e r r e d from f o r e i g n to domes t ic owner-

s h i p . During t h i s p e r i o d , a c c o r d i n g to t r u s t w o r t h y e s t i m a t e s ,

abou t $ 2 , 0 0 0 , 0 0 0 , 0 0 0 of s e c u r i t i e s i s s u e d by f o r e i g n Governments,


963

c o r p o r a t i o n s and f i r m s , have been absorbed and a re now h e l d by

American f i n a n c i a l i n s t i t u t i o n s and i n v e s t o r s . European h o l d -

ings of -American s e c u r i t i e s have t h u s been c o r r e s p o n d i n g l y r e *

duced, and f o r t h e n e a r f u t u r e , a t l e a s t , the Uni ted S t a t e s must

choose between t h e ext remes of e x c e s s i v e i m p o r t a t i o n s of gold

on the one hand, and t he undue a b s o r p t i o n of t he 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 on t h e o thers or i t must adhere t o a

s a f e middle course $ thd&e c i r cums tances > t h e m a n i f e s t du ty

of t h e F e d e r a l r e s e r v e banks had been tb encourage c o n s e r v a t i s m ,

and so f a r as p o s s i b l e to p r e v e n t undue and unwise e x t e n s i o n s of

c r e d i t . The y e a r ' s b u s i n e s s did no t develop even t h e s e a s o n a l

demand which on some occas ions r e q u i r e s a c t i o n and which , d u r i n g

t h e y e a r 1915 l e d t h e Board t o e s t a b l i s h what i s known as the

commodity r a t e , des igned p a r t i c u l a r l y to a id p r o d u c e r s d u r i n g

t h e crop-moving s e a s o n . To a g r e a t degree the e a s e of money and

smoothness of o p e r a t i o n of our f i n a n c i a l machinery have been due


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 and t o the con f idence i n s p i r e d by

t h e F e d e r a l r e s e r v e sys tem; as w e l l as t o the l a r g e l y i n c r e a s e d

s t o c k of r e s e r v e money r e s u l t i n g from the i m p o r t a t i o n s of g o l d .

During the y e a r t h e r e was a compara t ive ly l i g h t demand on t h e

p a r t of member banks f o r r e d i s c o u n t accommodations, t he maximum

amount of r e d i s c o u n t e d paper he ld by the F e d e r a l r e s e r v e banks

b e i n g $38 ,345 ,000 on December 8; and the a c t i v i t i e s of t he Fed-

e r a l r e s e r v e banks have been c h i e f l y under t h e open market p r o -

v i s i o n of the law in the pu rchase 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 n s of t h e s e k inds

were engaged in t o such an e x t e n t t h a t t he t o t a l i n v e s t e d r e s o u r c e s

of a l l F e d e r a l r e s e r v e banks on December 30, 1916, amounted t o

$221 ,897 ,000 . Ae a l r e a d y i n d i c a t e d , the Board *s p r i n c i p a l problem

has been t h a t of m a i n t a i n i n g , so f a r as 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 of t he bank ing community, and i n t h i s i t was of course p r i m a r -

i l y concerned w i t h t h e b u s i n e s s of t he F e d e r a l r e s e r v e banks them-

s e l v e s . The F e d e r a l Reserve Act p r o h i b i t s t h e inves tment of funds


1833

— * 6 - *

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

on ly bonds and n o t e s of the Government of t h e Uni ted S t a t e s ;

and, keep ing in mind the s p i r i t , as w e l l as the l e t t e r of the

Act , t he Board has r e c e n t l y i n two i n s t a n c e s deemed i t n e c e s s a r y

t o t ake d e c i s i v e a c t i o n . The f i r s t was i n connec t i on w i t h t h e

u s e of 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 a c c e p t a n c e i s now Wftll e s t a b l i s h e d in t h e wor ld 1 s mar -

k e t s , b e i n g known in almost a l l p a r t s of t he g lobe , and even in

t h o s e c o u n t r i e s which t h r e e yea r s ago had a monopoly of t he a c -

c.ag>4ance b u s i n e s s y American c r e d i t f a c i l i t i e s a r e now b e i n g f r e e l y

u s e d . The development of t h i s a ccep t ance b u s i n e s s has been h i g h l y

g r a t i f y i n g and t h e Fede ra l r e s e r v e banks have done t h e i r f u l l p a r t

in p romot ing i t s growth, as t h e y have been l i b e r a l p u r c h a s e r s of

a c c e p t a n c e s • More than a yea r ago, in August 1915, t h e Board was

informed of c e r t a i n renewals of a ccep t ance c r e d i t s which c l e a r l y

grew out of t h e shipment of goods i n t h e f i r s t i n s t a n c e , and i t


963

- 7 -

r u l e d t h a t , as a m a t t e r of p r i n c i p l e , such a c c e p t a n c e s need n o t

be exc luded and t h a i F e d e r a l rese tVd banks might Cons ider as

e l i g i b l e b i l l s h a v i n g no t l o n g e r ttiah i h r a e motitHd t o f u n , drawn

u n d e r such c r e d i t a r r angemen t s , I t was found, however, d u r i n g

t h e l a t t e r p a r t of 1916, t h a t renewal a c c e p t a n c e s wore b e i n g o f -

f e r e d on t h e marke t in i n c r e a s i n g volume, and t he Board took o c -

c a s i o n t o warn F e d e r a l r e s e r v e banks , and th rough them t h e member

banks , a g a i n s t unduly l a r g e p u r c h a s e s of p a p e r which , w h i l e e l i -

g i b l e in form, migh t no t be in f a c t o r i n e s sence of a t r 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 , of course^ p r o p e r t o ex tend a c c e p t -

ance c r e d i t s i n l i b e r a l amounts t o f a c i l i t a t e commercial t r a n s a c -

t i o n s a l l over t h e world , and t h e Board expec t s t o see b u s i n e s s of

t h i s k ind grow i n t o v e r y l a r g e f i g u r e s , b u t i t f e e l s t h a t banks

shou ld no t p e r m i t mere c o n s i d e r a t i o n s 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 and sound p r i n c i p l e s , t h e observance

of which i s so n e c e s s a r y f o r s a f e t y . One fundamenta l r u l e gove rn -

i n g t h e banke r s 1 a ccep t ance i s t h a t t h e a c c e p t a n c e shou ld f i n a n c e


t h e drawer and no t t he a c c e p t i n g bank. When a banke r makes a

cash advance a t a g iven 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 i m e , h i s d e b t o r should n o t draw upon him f o r t h e purpose of e n -

a b l i n g t h e banker t o r e imburse h imsel f by the s a l e of h i s a c c e p t -

ance f o r t h e advance which he has made t o t h e b o r r o w e r . This

p r o c e s s would make i t p o s s i b l e f o r a l o n g - t e r m bor rowing t o be

f i n a n c e d by an accommodation b i l l drawn f o r t he b e n e f i t of t h e

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

i n g . The r e a l bor rower tray have secured t h e advance by renewal

agreements f o r a l o n g - t e r m a t a f i x e d r a t e f o r the e n t i r e t ime

and no t s u b j e c t t o r e a d j u s t m e n t a t any renewal p e r i o d . In such

a case the bor rower i s no t concerned w i t h the d i s c o u n t t r a n s a c -

t i o n , and when t h e f i r s t b i l l ma tures the advance w i l l con t inue

t o run and no i n c r e a s e in r a t e would cause t h e bor rower t o cover

h i s accep tance and seek accommodation e l s e w h e r e , because d u r i n g

t h e term of t h e ex tended c r e d i t he would have no i n t e r e s t i n t h e


963 1886

- 9 -

d i s count r a t e of t h e coun t ry upon which he has drawn. The a c c e p t -

or and not t h e a c t u a l deb to r would be the bor rower i n t h e d i s c o u n t

m a r k e t , and as r e g a r d s t he o r i g i n a l borrower t h e accep tance would

become mere ly an accommodation d r a f t f o r the b e n e f i t of t he a c -

c e p t o r , who alone would be s u b j e c t t o t he changing v i c i s s i t u d e s

of 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 l a c e , t h a t

d r a f t s drawn in one count ry upon ano the r a g a i n s t l o n g - t e r m s e c u r i -

t i e s a re 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 how s h o r t t h e t ime t h e

d r a f t s themselves may have to r u n . Where a c c e p t a n c e s a r e based

upon a c t u a l commercial t r a n s a c t i o n s t h e sum t o t a l of 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 , and i s r e g u l a t e d by t h e volume of i n -

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

t h i s au toma t i c r e g u l a t i o n d i s a p p e a r s , and i f 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 be drawn w i t h o u t d i s c r i m i n a t i o n t h e y would con t inue

t o accumulate j u s t as l o n g as 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


- 1 0 -

i n t h e i n t e r e s t r a t e s of t h e two c o u n t r i e s conce rned . I t i s

e n t i r e l y n a t u r a l and p rope r t h a t c o u n t r i e s o r s e c t i o n s Where

w e a l t h has accumulated and which have l a r g e h o l d i n g s of gold .. -

shou ld 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 no t so 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 between n a t i o n s t h i s can be done

th rough s h o r t commercial c r e d i t s by means of b a n k e r s 1 a c c e p t a n c e s ,

where t h e accep t ance i s l i q u i d a t e d ou t of funds coming f rom t h e

bor rower b e f o r e m a t u r i t y ; o r s t r i c t l y as an inves tmen t p r o p o s i t i o n ,

by t r a n s a c t i o n s o u t r i g h t in s e c u r i t i e s i s s u e d o r he ld by c i t i z e n s

of the borrowing c o u n t r y . Both methods may be p e r f e c t l y sound ,bu t

d e a l e r s in c r e d i t shou ld d i s t i n g u i s h c l e a r l y between t h e two t r a n s -

a c t i o n s . We must be c a r e f u l n o t t o confuse commercial bank ing wi th

inves tmen t bank ing , nor shou ld we p e r m i t our d i s c o u n t marke t t o b e -

come so s a t u r a t e d w i t h 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 c h a r

a c t e r as t o i n f l u e n c e d i s c o u n t r a t e s and impede t h e f r e e o p e r a t i o n

of t h e d i s c o u n t m a r k e t , which i s in tended t o d e a l i n s h o r t - t e r m or

commercial bor rowings and shou ld no t be used o r abused t o s e r v e

m e r e l y as an a d j u n c t of t h e inves tmen t m a r k e t .


The second occas ion which i n t h e B o a r d ' s judgment c a l l e d f o r

a c t i o n a r o s e out of t h e t r e n d toward a b s o r p t i o n of f o r e i g n s e c u r i t i e s

"by t h e banks, of t h i s c o u n t r y , and b6Cause of t h e announcement t h a t

Treasury b i l l s , nomina l ly s h o r t t e rm, but obv ious ly r e p a y a b l e , i f p l a c e d

in l a r g e volume by 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 of t h e same kind

were about t o be o f f e r e d on t h e market i n an i n d e t e r m i n a t e amount. The

Board f e l t t h a t such pu rchase s i n any c o n s i d e r a b l e volume would i n e x -

i s t i n g c i r c u m s t a n c e s t end t o p l a c e t h e onus upon t h e F e d e r a l Reserve

Banks because whi le b i l l s 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 or purchase by F e d e r a l r e s e r v e banks , t h e member banks

would r e d i s c o u n t w i t h t h e Reserve 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 o r d e r

t o r e p l e n i s h t h e i r r e s e r v e s which might have been d e p l e t e d th rough pu r -

chases of such Treasutty b i l l s . The Board a c c o r d i n g l y , 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 c a u t i o n e d a g a i n s 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 f e r i n g s . This a c t i o n was t a k e n

no t because of any doubt as t o t h e u l t i m a t e payment of t h e o b l i g a t i o n s ,

but merely because they obv ious ly d id no t c o n s t i t u t e a l i q u i d banking

i n v e s t m e n t . The Board s t a t e d t h a t , i n i t s o p i n i o n , member banks should


pursue a p o l i c y of keep ing themse lves l i q u i d ; of no t l o a n i n g down t o

t h e l e g a l l i m i t , but of m a i n t a i n i n g an excess of r e s e r v e s - n o t w i t h

r e s e r v e a g e n t s , where t h e i r b a l a n c e s a re loaned out and c o n s t i t u t e

no a c t u a l r e s e r v e , but i n t h e i r own v a u l t s or. p r e f e r a b l y w i t h t h e i r Fed-

e r a l Beserve banks , The Board a d v i s e d banks t h a t t h e y shou ld p roceed

w i t h much c a u t i o n i n l o c k i n g up t h e i r funds i n long term o b l i g a t i o n s or

i nves tmen t s which a r e s h o r t term i n form or name bu t which may i n t h e

agg rega t e have t o be renewed u n t i l normal c o n d i t i o n s r e t u r n . The Board

does no 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

and so s t a t e d , but i n v iew of t h e f a c t t h a t t h e Un i t ed 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 roughou t t h e w o r l d , and &s s e c u r i t i e s

of v a r i o u s k inds a r e b e i n g o f f e r e d i n our m a r k e t s , t h e Board took occas ion

t o sugges t t h a t p a r t i c u l a r l y i n t he case of unsecured l o a n s , i n v e s t o r s

should r e c e i v e f u l l and a u t h o r i t a t i v e d a t a . In making t h i s s t a t e m e n t , •

i t was no t t h e purpose of 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,, nor d id i t seek t o r e f l e c t up on any p a r t i c u l a r o b l i g a t i o n s . The

Board sought mere ly t o i n d i c a t e t h a t t h e same b u s i n e s s l i k e h a b i t s which


- 13 - 963.

a r e w e l l e s t a b l i s h e d r e g a r d i n g domest ic l oans should be deve loped i n t h e

m a r k e t i n g 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 s s u i n g

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 o n and t o g ive

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 over i t s own s i g n a t u r e o r t h a t of t h e head

of t h e "borrowing c o r p o r a t i o n . The importance of complete and a u t h e n t i c

i n f o r m a t i o n i s nowhere more f u l l y unde r s tood and a p p r e c i a t e d t h a n i n

Europe; and i n f o r e i g n c o u n t r i e s 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 e m e n t s i g n e d 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 of t h e government o r by t h e i s s u i n g house , or i n some

c a s e s by b o t h . The t i m e l i n e s s of t h e B o a r d ' s s t a t e m e n t was demons t ra ted

by 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 f o r e i g n

b i l l s was withdrawn s h o r t l y a f t e r t h e s t a t e m e n t a p p e a r e d , t h e r e 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 oans i n our p r i n c i p a l money marke t ,

which advanced t o 15$, a h i g h e r l e v e l t h a n t h e y had reached s i n c e t h e

e s t a b l i s h m e n t of t h e F e d e r a l r e s e r v e banks . I t deve loped t h a t t h e r e -

s e r v e s of t h e banks i n our most i m p o r t a n t money c e n t e r were , a s a m a t t e r

of f a c t , none too l a r g e , and t h a t '-.he money t e n s i o n , which was f e l t how-


- 14 - 963

e v e r , only i n t h e case of c o l l a t e r a l l oans no 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 F e d e r a l r e s e r v e banks , was eased by t h e r e sumpt ion of go ld im-

p o r t s on a l a r g e s c a l e *

CONSERVATION OF GOLD SUPPLY

The Board, however, has reccgt t ized from t h e f i r s t t h a t merely

n e g a t i v e o r p r e v e n t i v e measures such as t h o s e j u s t r e f e r r e d t o can no t

be expec ted t o meet a l l t he r e q u i r e m e n t s of 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 has been c o n f r o n t e d and i t has 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 of t h e F e d e r a l r e s e r v e banks t o conse rve and ?

p r o t e c t t he c o u n t r y ' s gold supply ought t o be t a k e n . In t h e s t a t e m e n t

of November 28th above r e f e r r e d t o , t h e Board announced t h a t i t would

ask Congress t o advance t h e d a t e upon which t h e f i n a l t r a n s f e r of r e -

s e r v e s from co r r e sponden t banks i n r e s e r v e and c e n t r a l r e s e r v e c i t i e s

to t h e F e d e r a l r e s e r v e banks would t a k e p l a c e , and 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 ? , be advanced t o Februa ry

or 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 i n g t h i s c o n s i d e r a t i o n upon


184£ - 15 - . 963

t h e immediate a t t e n t i o n of Congress« The Uni ted S t a t e s has today a

p l e t h o r a of g o l d , and whi le t h e Board does no 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 of t he m e t a l must of n e c e s s i t y prove gt source of danger or

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 l o w i n g gold and n o t pe rmi t i t t o become t h e b a s i s of abnormal

expans ions and of i n f l a t i o n . The a b s t r a c t of r e p o r t s made by a l l n a -

t i o n a l banks on November 7> 1916, shows a s u r p l u s of about $ 1 , 0 1 6 , 0 0 0 , 0 0 0 .

This s u r p l u s i s based upon t h e reduced r e s e r v e s p e r m i t t e d u n d e r t h e Fed*

e r a l Reserve Ac t , and i t s enormous s i z e i s due 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 banks a r e s t i l l a b l e t o count b a l a n c e s w i t h n a t i o n a l

bank a g e n t s as r e se rve* The l aw now p r o v i d e s t h a t a f t e r November l 6 t n

t h e e n t i r e r e s e r v e s of member banks must be 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 and p a r t l y w i t h t h e F e d e r a l r e s e r v e 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 he r e s e r v e s of count ry banks c a r r i e d w i t h r e s e r v e

c i t y c o r r e s p o n d e n t s r e p r e s e n t about $1^0 ,000 ,000 , and t h e e f f e c t of a

p o s s i b l e w i 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 nex t

November has been viewed w i t h some? apprehens ion^ b u t w i t h t h e lar^ ,


- 16 - S 6 >

s u r p l u s r e s e r v e now c a r r i e d by t h e banks , i t does no t seem t h a t t h e r e

would be any w i t h d r a w a l s n e c e s s a r y should t h e da t e f o r t h e f i n a l t r a n s -

f e r be advanced as sugges t ed by t h e Bdai*d« The p r e s e n t r e s e r v e r e q u i r e d

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 banks is. $1 ,456 ,000 j000*

Banks ho ld $2>472,000,000, o.' r e s e r v e s , bf which $1,437>000,000 c o n s i s t s

of cash i n V a u l t , a n d b a l a n c e s w i t h F e d e r a l r e s e r v e banks , where a l l r e -

s e r v e s must u l t i m a t e l y be c o n c e n t r a t e d . From t h i s i t a p p e a r s t h a t only

$19 ,000,000 must be t a k e n out of t h e ba l ance of $ 1 , 0 ^ 5 , 0 0 0 , 0 0 0 now c a r r i e d

by t h e banks w i t h n a t i o n a l bank r e s e r v e a g e n t s i n o r d e r t o g i v e t h e banks

t h e e n t i r e . r e s e r v e r e q u i r e d . This p r o c e s s would g ive t h e banks t h e i r

e x a c t r e s e r v e r e q u i r e m e n t s in v a u l t and w i t h F e d e r a l r e s e r v e banks and

would l eave no s u r p l u s r e s e r v e a t a l l - This would not 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 of t he banks i n the s l i g h t e s t d e g r e e , f o r t h e c i t y

'banks would have b a l a n c e s .with t h e i r coun t ry c o r r e s p o n d e n t s j u s t a s before . ,

w i t h t h e e x c e p t i o n of t h e compara t ive ly sma l l amount r e q u i r e d t o be

t r a n s f e r r e d , and t h e only d i f f e r e n c e would be t h a t b a l a n c e s w i th f 0 r a e r

r e s e r v e c o r r e s p o n d e n t s would no l o n g e r count as bank r e s e r v e s , but 3


o t h e r r e s p e c t s would p rov ide f o r t h e same f u n c t i o n s as a t p r e s e n t .

The Board has g iven much a t t e n t i o n t o t h e whole r e s e r v e problem

and has t r a n s m i t t e d t o t h e Chairmen of t h e a p p r o p r i a t e commit tees r e -

recommendations f o r f u r t h e r amendments to t he F e d e r a l Reserve Ac t , which

had been ag reed upon by a m a j o r i t y of t h e Board. The t e x t of t h e s e sug-

g e s t e d amendments i s p r e s e n t e d i n e x h i b i t , bu t a s two of them a r e

d i r e c t l y connected w i t h t h e c o n t r o l and c o n s e r v a t i o n of our go ld s u p p l y ,

i t i s deemed p r o p e r t o make 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 :

( i n s e r t no te i s s u e amendment, and amendment r e g a r d i n g r e s e r v e s . )

When t h e F e d e r a l Reserve Act 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

d e a l w i t h n a t i o n a l problems of bank ing and c u r r e n c y , bu t s i n c e i t s

enactment f i n a n c i a l and economic c o n d i t i o n s i n t h e Uni ted S t a t e s have

undergone f a r r e a c h i n g changes which were not f o r e s e e n t h r e e y e a r s ago .

The Uni ted S t a t e s has grown t o be a world power i n f i n a n c i a l a f f a i r s

and i t seems n e c e s s a r y t h a t t h e Act , which has proved of such g r e a t

va lue i n the t r e a t m e n t of our domurt ic p rob lems , shou ld now be amended


- 1 8 -. 1 8 4 5

91>>

somewhat i n o r d e r t o enab le us t o d e a l e f f e c t i v e l y w i th 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 us and which seem d e s t i n e d t o p l a y so -

p o r t a n t a p a r t i n our economic l i f e . The "banking system of t h e Uni ted

S t a t e s should be p r e p a r e d t o meet e f f e c t i v e l y two c o n d i t i o n s of o p p o s i t e

c h a r a c t e r , - one, t h e e x c e s s i v e and u n c o n t r o l l e d i n f l o w of g o l d , and t h e

o t h e r t h e e x c e s s i v e and 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 by t h e Board a r e des igned t o p rov ide means of c o n t r o l l i n g an over

e x t e n s i o n of l o a n s based on new a c c r e t i o n s t o our gold s t o c k and 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 ana c o n c e n t r a t i o n of t h e gold h o l d i n g s of t h e

Uni ted S t a t e s so t h a t whatever t h e develo^izairte may be l e a d i n g t o t h e f l o w

of gold back i n t o Europe, or t o South America or 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 by t h e banks of t h i s count ry w i t h o u t f o r c i n g any

v i o l e n t c o n t r a c t i o n of l oans or c a u s i n g undue d i s t u r b a n c e t o l e g i t i m a t e

b u s i n e s s . At p r e s e n t out of app rox ima te ly two and t h r e e - q u a r t e r b i l l i o n s

of gold i n t h i s coun t ry t h e r e a r e h e l d or c o n t r o l l e d by 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

F e d e r a l Reserve Agents as s e c u r i t * ' f o r J fadoral r e s e r v e n o t e s o u t s t a n d i n g .


- 19 -

and. $455>000000 a re r e s e r v e money and must t h e r e f o r e "be used c o n s e r v a -

t i v e l y . But even if we assume t h a t t h e F e d e r a l r e s e r v e banks wbuld "be

w i l l i n g t o reduce t h e i r gold 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 and no t e

l i a b i l i t y (which would be r e g a r d e d a s a minimum and i n normal t imes would

be i nadequa t e ) t h e amount of f r e e g o l d , i . e . , t h e amount of go ld t h a t

t h e F e d e r a l r e s e r v e banks would l o s e b e f o r e r e a c h i n g t h i s bof? minimum,

would be a l i t t l e more t han $300 ,000 ,000 . While t h i s i s a very l a r g e

sum i t s s u f f i c i e n c y may w e l l be q u e s t i o n e d when we c o n s i d e r t h e wide

scope of our t r a n s a c t i o n s i n world f i n a n c e and the 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 i m 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 r e s e n t from seven t o e i g h t hundred m i l l i o n d o l l a r s in go ld

and go ld c e r t i f i c a t e s , and t h a t t h e r e a r e a t p r e s e n t h e l d i n t h e v a u l t s

of member banks about $768,000,000 of r e s e r v e money. There shou ld be

added t o t h i s e s t i m a t e about $600,000,000 of l a w f u l money i n the v a u l t s

of nonmember S t a t e banks and t r u s t companies. I t i s d i f f i c u l t t o e s t i m a t

t h e amount of go 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 as pocke t

money. The amount i s no doubt s u b s t a n t i a l , "cut whatever i t may be , i t


i s l o s t f o r r e s e r v e purposes and i s not 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 use of gold, as a medium of domest ic 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 f o r e i g n c o u n t r i e s i n normal t imes has

"been t o s u b s t i t u t e Government bank c i r c u l a t i o n f o r t h e use of m e t a l l i c

gold and t o c o n c e n t r a t e t h e go ld i t s e l f i n t h e c e n t r a l "banks. The

F e d e r a l r e s e r v e n o t e , which i s an o b l i g a t i o n of t he Uni ted S t a t e s secured

by an ample r e s e r v e of go ld and commercial p a p e r , i s a c c e p t e d as w i l l i n g l y

by the p u b l i c as a n a t i o n a l bank no te or as any o t h e r form of c u r r e n c y ,

and t h e p u b l i c does not d i s c r i m i n a t e between one form or a n o t h e r of

Uni ted S t a t e s cur rency* To the e x t e n t of about t h r e e hundred m i l l i o n

d o l l a r s F e d e r a l r e s e r v e no te c i r c u l a t i o n has been 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 . Under the r e q u i r e m e n t s of t h e p r e s e n t law, however, t h i s

gold i s d e p o s i t e d w i th t h e l e d e r a l Reserve Agents i n redempt ion of t h e

F e d e r a l r e s e r v e n o t e s i s s u e d a g a i n s t i t . The no t e so p r o v i d e d f o r there",

c e a s e s t o be an o b l i g a t i o n of the F e d e r a l r e s e r v e bank; bu t a s t h e gold

does no t f i g u r e as an a s s e t of t h e F e d e r a l r e s e r v e banks , t h e F e d e r a l r e -

s e r v e system i s unab l e t o show t h e g r e a t e r s t r e n g t h which migh t be


ev idenced if t h e laxv p e r m i t t e d , as proposed i n t h e amendments, t h e

i s s u a n c e of F e d e r a l reyrirva n o t e s not only a g a i n s t commercial p a p e r ;

but a l s o a g a i n s t go ld or a g a i n s t e i t h e r , p rov ided always t h a t every

F e d e r a l r e s e r v e no te must be covered by a t l e a s t 100% of commercial

p a p e r or gold., and t h a t thy re must always be a gold r e s e r v e of no t

l e s s t h a n 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 F e d e r a l r e s e r v e banks i n t imes of p l e t h o r a as 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 domest ic c r e d i t s and

a t t h e same t ime w i l l enab le t h e count ry When t h e t i d e t u r n s t o p a r t

w i t h l a r g e sums of go ld w i th l e s s inconvenience or shock , and w i l l

enab le us more s a f e l y and e f f e c t i v e l y t o piroceed w i th t h e development

of our f o r e i g n t r a d e and to g ive the n e c e s s i 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 f a c e c o n d i t i o n s which

may c a l l f o r an o u t f l o w of gold w i thou t any j a r t o our own o r t o t he

w o r l d ' s b u s i n e s s , and w i t h o u t making n e c e s s a r y d r a s t i c changes i n our

i n t e r e s t or d i s c o u n t ra tes '* The ..amendments sugges t ed by t h e Board a re

des igned t o e n a b l e t h e F e d e r a l reservebanks t o wi thdraw go ld from


a c t u a l c i r c u l a t i o n whi le e n a b l i n g them a t t h e same t ime t o r e l e a s e gold

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

proposed on t h e t h e o r y t h a t a l l of t h e i n d i v i d u a l banks shou ld s t r e n g t h e n

t h e gold h o l d i n g s of t h e F e d e r a l r e s e r v e "banks, The count r y 1 s h o l d i n g s

of gold a r e no 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

l a r g e number of banks s c a t t e r e d a l l over t he country> but i t s g r e a t e s t

use would coma from c e n t e r i n g i t , as f a r as p o s s i b l e , in t h e hands of

t h e F e d e r a l r e s e r v e banks, where i t can be p r o t e c t e d e f f e c t i v e l y when

no t r e q u i r e d and used e f f e c t i v e l y i n t imes of n e e d . The member bank

does no t r e q u i r e gold so much as cur rency w i t h which t o supply t h e

o rd ina ry demands of i t s d e p o s i t o r s . I t i s from t h i s p o i n t of v iew

t h a t t he F e d e r a l Reserve Board ha s proposed t h a t Congress i n c r e a s e the

r e q u i r e d reeerxres t o be m a i n t a i n e d by member banks w i t h t h e F e d e r a l r e -

se rve banks . On September 12, i g i 6 t he gold h o l d i n g s of a l l member

banks were about $500,000,000* Under t he p roposed amendment of S e c t i o n

19 $350,000,000 of t h i s amount would be 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 -

s e rve banks . P roceed ing upon t h i s t h e o r y , t h e Board b e l i e v e s " tha t u l t i -


mate ly the law should r e q u i r e of member "banks no more t h a n t h a t t hey

should m a i n t a i n a c e r t a i n ba lance w i t h t he F e d e r a l r e s e r v e banks , and

t h a t t h e F e d e r a l r e s e r v e banks must have s u f f i c i e n t r e s e r v e s of go ld

wi th which to p r o t e c t t h e c o u n t r y 1 s gold o b l i g a t i o n s , bu t t h a t t h e r e

should be no l e g a l r equ i r emen t»as t o t he r e s e r v e s t h a t a member bank

should ca r ry i n i t s own v a u l t , which i s a m a t t e r of b u s i n e s s judgment

t h a t might w e l l be 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

was t h o u g h t ; however, t h a t i f t h i s p r i n c i p l e were c a r r i e d i n t o f u l l

e f f e c t a t t h i s t ime ^ t h e s t e p might be t o o ex t reme , p a r t i c u l a r l y undet*

p r e s e n t c o n d i t i o n s , and n o t h i n g should be done t h a t might t e n d t o a

f u r t h e r rele-ase of r e s e r v e money* i t was though 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 cur rency t h a t t he member banks shou ld

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 sugges t ed i s 5f° of the

demand d e p o s i t s , so t h a t t h e p r e s e n t r e s e r v e r e q u i r e m e n t s w i l l remain

p r a c t i c a l l y unchanged. While the e f f e c t of some of t h e changes as

p roposed , w i l l be t o 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 he

r e s e r v e s w i l l be i n c r e a s e d by t h e a b r o g a t i o n of t h e p r i v i l e g e t h a t the


- 24 -

member t a n k s have h i t h e r t o had of c o u n t i n g i t ems i n t r a n s i t o r " f l o a t "

as r e s e r v e . The p e r m i s s i o n g iven member t a n k s t o use t h e i r own 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 cu r rency i n t h e i r v a u l t s , w i l l enab le

them t o r e l e a s e the gold they now h o l d , but t h e impor t an 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 F e d e r a l r e s e r v e tiotes f o r go ld and g o l d

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 t h i s change i n t h e law* Without

some such change member banks w i l l con t inue t o ask f o r go ld c e r t i f i c a t e s

i n s m a l l denomina t ions , because as long as they must have go ld o r

l a w f u l money t o count as r e s e r v e i t would be i m p o s s i b l e 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 b a n k s ' o b l i g a t o r y r e s e r v e , amounting

t o $60 ,030 ,000 , was p a i d i n t o t h e F e d e r a l r e s e r v e banks by t h e i r members,

Under t h e p r o v i s i o n s of t h e F e d e r a l Reserve Act about $260,000 ,000 of

r e s e r v e s were p a i d i n t o t h e F e d e r a l r e s e r v e banks immedia te ly upon

t h e i r o r g a n i z a t i o n . The Act p r o v i d e s ""that subsequen t r e s e r v e payments

should be made a t i n t e r v a l s of s i x months , and a c c o r d i n g l y on May l 6 ,


1915> November l o , May 16, l $ l 6 and November l 6 , 19 l6 , a d d i t i o n a l

pe r cen t ages 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 t h 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 as r e q u i r e d "by the law on t h e d a t e s s p e c i f i e d , and

p a r t l y t o the change in v a u l t r e s e r v e r equ i rement s p rov ided by t h e

mandatory Act of September ~J1916, the money s tock of F e d e r a l r e s e r v e

banks has been g r e a t l y s t r e n g t h e n e d , t h e a c t u a l h o l d i n g s on s u c c e s s i v e

d a t e s being as f o l l o w s :

Ho f u r t h e r payments a r e now compulsory, but from and a f t e r November l b ,

1917, ( o r e a r l i e r i f the Board ' s sugges ted amendment should be adopted)

ba l ances wi th r e s e r v e a g e n t s i n r e s e r v e and 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 as member banks ' r e s e r v e s , and members w i l l be r e q u i r e d

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

se rve banks s u f f i c i e n t l y t o cover t h e r e q u i r e d r e s e r v e s h e r e t o f o r e

c a r r i e d as ba l ances wi th c o r r e s p o n d e n t s .

June 30, 1;915

December 31,. 1915

June 30, I916

December 19^-6

December 31, I3I& $255,647,000

300,814 ,000

357,983,000

404,206,000

540,000,000


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 d i s c o u n t toward

t h e c l o s e of t h e yea 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 in some d i s -

t r i c t s by o n e - h a l f of 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 F e d e r a l

r e s e r v e banks have been n e a r l y s t a t i o n a r y t h r o u g h o u t t h e y e a r . Of

t h e changes made, t h e only one l i k e l y t o be of much impor t ance , was

i n t h e r a t e on a c c e p t a n c e s , which was f i r s t . advanced by t h e F e d e r a l

Reserve Bank of New York i n consequence of a f i n n e r t endency in the

money m a r k e t . 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

a c c e p t a n c e s , des igned t o f a v o r t h o s e made by member banks of t h e

F e d e r a l r e s e r v e system., has a l s o been adopted \>y some of t h e F e d e r a l

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

r a t e s des igned f o r the 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 a p p l y i n g a low "commodity r a t e " , e s t a b -

l i s h e d by t h e Board i n September 1915, f o r t h e b e n e f i t of p roduce r s

and 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 u c t s , has c o n t i n u e d o p e r a t i v e ,


-27

a l t h o u g h t h e r a t e i t s e l f was r a i s e d t o 3-^1/2 and 4$ a t dome of

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 has been l e s s t h a n i t

was a y e a r ago . The h i g h p r i c e s of 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 and s u s t a i n e d demand f o r them, not on ly a t home b u t

t h r o u g h o u t t he wor ld , has b rough t t o the f a rmer s of 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 r e s o u r c e s whol ly u n -

p r e c e d e n t e d . This h a s , i n b6> sma l l d e g r e e , d e l i e v e d them of d e -

pendence upon banks f o r c u r r e n t accommodation, wh i l e i t has a l s o

l e d them t o p l a c e t h e i r p r o d u c t s upon t h e marke t w i t h o u t h o l d i n g

them in o r d e r t o o b t a i n b e t t e r p r i c e s than could be had a t t he

c l o s e of t he growing s e a s o n . Not on ly t h e f a r m e r , bu t p r a c t i c a l l y

e v e r y o t h e r e lement in t h e commercial community has been s t r o n g

and s e l f - d e p e n d e n t , due to the h i g h r e t u r n on l a b o r and c a p i t a l ,

and t h e p r e v a i l i n g ease i n t h e money m a r k e t . The i n f l u e n c e of t he

F e d e r a l r e s e r v e banks upon r a t e s h a s , t h e r e f o r e , con t inued t h r o u g h -

ou t t h e p r e s e n t y e a r , as in t h e p a s t , t o be p o t e n t i a l and i n d i r e c t ,

and has no t been f e l t eiiher as 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 , or


1855 - 2 8 -

of p o s i t i v e a c t i o n des igned t o r e l i e v e banks o r b o r r o w e r s .

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 F e d e r a l

r e s e r v e banks shows t h a t t h e p r i n c i p a l d i f f e r e n c e between c o n d i -

t i o n s t h e p a s t y e a r and the p r e v i o u s one l i e s in 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 , t he new 15-day r a t e h a v i n g been

i n t r o d u c e d f o r t h e g r e a t e r convenience of member banks d e s i r -

ing temporary accommodations. Perhaps t h e r e i s no b e t t e r com-

menta ry upon some of t he f a c t o r s t h a t have 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 i n e s s t o t he Uni ted S t a t e s , t han a comparison of

r a t e s p r e v a i l i n g in t h e p r i n c i p a l f o r e i g n marke t s w i t h t h o s e in

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


963

—29™

Bank r a t e s in 1916.

London 5 - 6

P a r i s 5

B e r l i n " 5

Rome 5

P e t r o g r a d 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 has a l r e a d y been m&de to t h e ixaintenance and

i n c r e a s e of the a c t u a l gold s t ock of t h e n a t i o n as r e p r e s e n t e d by

t h e r e s e r v e s of t h e Fede ra l r e s e r v e banks , as a fundamenta l ly

n e c e s s a r y f a c t o r in t h e s o l u t i o n of e x i s t i n g f i n a n c i a l problems;

and the p l ans and p o l i c y of the Fede ra l Reserve Board f o r t h e p r o -


Jf'3

185? - 3 0 -

t e c t i o n and en la rgement of t h i s gold s t o c k , have been o u t l i n e d .

I t shou ld f u r t h e r be 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 F e d e r a l

r e s e r v e no te has p layed an impor t an t p a r t in p o t e n t i a l l y a s s i s t *

i ng t h e en la rgement of t h e gold s t ock a t F e d e r a l r e s e r v e banks ,

and a t t h e same t ime i n check ing an 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 t h e r w i s e have a r i s e n . The r a p i d i n f l o w of gold i n t o t h e

Uni ted 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 F e d e r a l r e s e r v e banks ,

as i t could not whol ly be under any 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 an i n f l a t i o n a r y t endency in p r i c e s , and an o v e r - e x t e n -

s i o n of banking c r e d i t , an admi t t ed e lement of d a n g e r . Even i f

t h e new accumula t ion of gold could be s u c c e s s f u l l y d i r e c t e d t o the

v a u l t s of t h e r e s e r v e banks , t h e r e would s t i l l e x i s t some t endency

toward i n f l a t i o n as t h e r e s u l t of g r e a t l y augmented r e s o u r c e s . But

as a m a t t e r of f a c t as t he new gold has come i n 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 has been brought t o a t l e a s t one of t he

r e s e r v e 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 .


The F e d e r a l r e s e r v e agents* h o l d i n g s of gold from -January 1 , 1915,

t o December 30, 1916, i n c r e a s e d $270,270,000, w h i l e our ne t imports

of gold f o r t h a t p e r i o d were $953,130,000. The Fede ra l Reserve

Act nowhere makes p r o v i s i o n f o r any such d i r e c t exchange of n o t e s

f o r go ld , bu t some of the F e d e r a l r e s e r v e banks , w i t h t h e B o a r d ' s

s a n c t i o n , have adopted t he exped ien t of o b t a i n i n g no te s from t h e

F e d e r a l r e s e r v e agen t a g a i n 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 -

ing t h i s o p e r a t i o n by a d e p o s i t of gold and wi thd rawa l of the c o l -

l a t e r a l , and t hen aga in d e p o s i t i n g the c o l l a t e r a l and o b t a i n i n g

n o t e s . I t i s ev iden t t h a t in t h i s way F e d e r a l r e s e r v e no t e s could

be ob t a ined upon p r a c t i c a l l y t he same b a s i s as i f they had been

d i r e c t l y i s sued a g a i n s t a d e p o s i t of gold c o i n ; 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 number of t i m e s , any amount

of r e s e r v e no t e s w i t h i n t h e l i m i t of the gold r e s e r v e r e q u i r e d ,

could be p l a c e d i n c i r c u l a t i o n . Largely as t h e r e s u l t of t h i s oper

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


963

1859 - 3 2 -

t o t a l sum of $310 ,110 ,000 of F e d e r a l r e s e r v e n o t e s . The t r u e c h a r -

a c t e r of t h e s e n o t e s i s e v i d e n t when i t i s seen t h a t t h e s e c u r i t y

p r o t e c t i n g them i s s l i g i b i e commercial pape r on ly to t h e e x t e n t of

$18 ,593 ,000 , w h i l e $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 n o t e s t h u s f a r p u t out h a s , i n f a c t , been p r i m a r i l y e f f e c t -

ed as a d i r e c t exchange of n o t e s f o r g o l d .

CONVERSION OF BONDS

and

RETIREMENT OF NATIONAL BANK NOTES.

Under S e c t i o n 16 of t h e F e d e r a l Reserve Act , F e d e r a l r e -

s e r v e banks may be r e q u i r e d to purchase $25 ,000 ,000 of United S t a t e s

bonds , and a r u l i n g of t he S e c r e t a r y of t h e Treasu ry unde r t h a t S e c -

t i o n p e r m i t s them t o conve r t t h rough the Treasu ry Department $ 3 0 , 0 0 0 , -

000 i n t o t h i r t y - y e a r 3fo Uni ted S t a t e s bonds and o n e - y e a r 3fo T r e a s u r y

n o t e s .

Uni ted S t a t e s bonds a c t u a l l y pu rchased by F e d e r a l r e s e r v e

banks d u r i n g 1916 exceeded $25 ,000 ,000 , t he amount which F e d e r a l r e -


9 63 i860

- 3 3

s e r v e banks may be r e q u i r e d t o purchase d u r i n g any one y e a r , and

a t no q u a r t e r l y p e r i o d was i t n e c e s s a r y f o r t h e F e d e r a l Reserve

Board t o d i r e c t t h e purchase of bonds unde r S e c t i o n 18 of t h e Fed-

e r a l Reserve Adt*

The f u l l amount of $30 ,000 ,000 i n c o n v e r s i o n bonds and

one^year n o t e s v^as t aken by thd 12 F e d e r a l r e s e r v e banks , an a l l o t -

ment based upon c a p i t a l b e i n g made t o each . Three banks , t h o s e a t

Bos ton , P h i l a d e l p h i a and San F r a n c i s c o , did no t a v a i l t hemse lves of

t h e f u l l c o n v e r s i o n p r i v i l e g e ; and the d i f f e r e n c e between t he f u l l

q u o t a of t h e s e banks and t he amounts a p p l i e d f o r by them, $ 1 , 9 1 8 , -

900, was d i s t r i b u t e d among seven o t h e r banks which had a p p l i e d t o

c o n v e r t more t h a n t h e i r a l l o t m e n t . Convers ion bonds amounting t o

$15 ,761 ,000 , and one -yea r n o t e s amounting t o $14 ,239 ,000 , were i s -

sued f o r t h e y e a r end ing September 30, 1916. Fo r t h e q u a r t e r end-

i n g December 31, 1916, F e d e r a l r e s e r v e banks conve r t ed $18 ,597 ,200 ,

of which $ 9 , 3 0 1 , 0 0 0 was n o t e s , and $9 ,306 ,600 bonds , t he Board hav~


i n g p r e v i o u s l y announced t h a t i t would approve t h e a p p l i c a t i o n s

of F e d e r a l r e s e r v e banks f o r t h e conve r s ion of a l l or any p o r t i o n

of t h e i r f u l l annua l a l l o t m e n t on January 1 , 1917, 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 as t he banks had t h u s a l r e a d y purchased bonds

i 6 an a&ourit e q u a l l i n g more t h a n ha l f t h e i r q u o t a s , t h e y Were a d -

v i s e d , i n an announcement made on January 8 , 1917, t h a t the Board

would no t r e q u i r e them t o p u r c h a s e d u r i n g the yea r 1917 more t h a n

$15 ,000 ,000 of Uni ted S t a t e s bonds o f f e r e d f o r s a l e by member banks

, t h rough t h e Treasury of t h e Uni ted S t a t e s , and t h a t i t would r e q u i r e

F e d e r a l r e s e r v e banks t o p u r c h a s e on A p r i l 1 , 1917, t h e f u l l amount

of t h i s $15 ,000 ,000 , o r so much t h e r e o f as might be o f f e r e d f o r s a l e

by member banks p r i o r t o March 21.

The o r i g i n a l purpose of t he bond c o n v e r s i o n of t h e F e d e r a l

Reserve Act was 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 Uni ted

S t a t e s bonds d e p o s i t e d t o s e c u r e c i r c u l a t i o n , and t h a t of i n s u r i n g

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 n a t i o n a l bank n o t e s , t h e gap


t h u s l e f t , t o be f i l l e d , so f a r as n e c e s s a r y , by F e d e r a l r e s e r v e

c u r r e n c y . During t h e p a s t y e a r n a t i o n a l banks have wi thdrawn

<from d e p o s 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 t a t e s bonds d e p o s i t -

ed t o s e c u r e c i r c u l a t i o n of t he p a r va lue of $ ,

They have d e p o s i t e d l a w f u l 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 in

t h e sum of $ , The t o t a l of n a t i o n a l bank n o t e s

o u t s t a n d i n g a t t h e b e g i n n i n g of t h e year 1916 was $ .

w h i l e on December 30, 1916, t h e amount o u t s t a n d i n g was $

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

F e d e r a l r e s e r v e banks s o l d in 1916 new bonds and c o n v e r -

s i o n n o t e s as f o l l o w s :

•

S e c t i o n 16 of the F e d e r a l Reserve Act p e r m i t s F e d e r a l

r e s e r v e banks t o i s s u e bond- secu red cu r rency known as F e d e r a l r e -

s e r v e bank n o t e s , p ro tes t ing them by d e p o s i t e d bonds , as in t h e case

of n a t i o n a l bank n o t e s . Under t h i s p r o v i s i o n of t h e law t h e t o t a l

amount of F e d e r a l r e s e r v e bank n o t e s i s sued t o December 31, 1916,

was $12 ,054 ,980 . There were h e l d a t t h e c l o s e of 1916 by t h e Fed-


; Do

- 3 6 -

e r a l Reserve Bank of Kansas C i t y , $6 ,000 ,000 , and "by t h e F e d e r a l

Reserve Bank of D a l l a s $ 2 , 0 0 0 , 0 0 0 . The remain ing amount i s i n

c i r c u l a t i o n o r in t he Treasury of t h e United S t a t e s . F e d e r a l r e -

s e r v e banks have 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 t h e s e n o t e s t h rough t h e d e p o s i t of l a w f u l money and on ac

count of $54,980 th rough t h e r e t u r n t o t h e C o m p t r o l l e r f o r d e s t r u c -

t i o n of an e q u a l amount of F e d e r a l r e s e r v e bank n o t e s ,


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 t h a t

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

system 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 and many

c o m p l e x i t i e s of p r a c t i c e . I t was 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 t a n k s , due t o t h e l o s e of revenue from t h e exchange which they

had 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 hough 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 u a 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 banks , and a t t h e i r i n s t a n c e t o a u t h o r i z e

a v o l u n t a r y sys tem of c l e a r a n c e and c o l l e c t i o n i n which member banks might

or might no t p a r t i c i p a t e , a s t hey 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 the B o a r d ' s annua l r e p o r t of 1915; was , i n f a c t , i n a u g u r a t e d ,

and f o r a t ime i t was hoped t h a t i t would prove a t l e a s t mode ra t e ly

s u c c e s s f u l . E x p e r i e n c e , 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 sys tem. The number of members d id no t

i n c r e a s e m a t e r i a l l y , and i n some d i s t r i c t s d e c l i n e d . There were con-

d i t i o n s which 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 of t h e sys tem i n t h e form


- ±865

t h e n adopted was a h a r d s h i p t o c e r t a i n c l a s s e s of banks , wh i l e t h e p l an

d id no t a t t a i n , and seemed u n l i k e l y eve r t o r e a c h , such a p l a n e of e f ~

e i c i e n c y as t o make i t a g e n e r a l f a c t o r i n t h e c l e a r a n c e and c o l l e c t i o n

system of t h e c o u n t r y . For t h e s e f e as oils i t was dec ided by t h e Board

d u r i n g t h e month of A p r i l , 1916, t o e s t a b l i s h a more comprehensive and

un i fo rm sys tem, and i t consequen t 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 s e v e r a l Reserve Banks t h a t they were expec ted

t o pu t i t i n t o e f f e c t . I t was o r i g i n a l l y i n t e n d e d t o beg in o p e r a t i o n s

under t h e new p l a n on June 15, bu t subsequent e v e n t s 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, so t h a t i t a c t u a l l y became o p e r a t i v e on

t h e f i f t e e n t h of J u l y , . Under t h e new system member banks , a s l o n g as

they comply w i th 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 con t i nue t o c a r r y

accoun t s wi 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 and w i th o t h e r banks t o whom

they may send i t ems f o r c o l l e c t i o n , and from whom they may r e c e i v e

f o r s i m i l a r p u r p o s e s , checks drawn upon themse lves o r upon o t h e r banks .

They a r e , however, r e q u i r e d t o pay w i t h o u t d e d u c t i o n checks drawn upon

themse lves and p r e s e n t e d a t t h e i r own c o u n t e r s . Remi t t ance of such


. 1866 — jO ...

checks by the Federal reserve "bank of their district through the mail,

is 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 for 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 faci l i t ies offered. Federal reserve banks handle,

beside checks drawn on member banks, checks on such State banks as can


"be c o l l e c t e d a t p a r , and. meuber banks d e s i r i n g t o h a n d l e f o r a F e d e r a l

r e s e r v e "bank checks 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 .

Dur ing crop-moving p e r i o d s i t i s t h 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 no d i s p o s i t i o n t o d e p r i v e member banks of any income

t h a t t hey have been i n t h e h a b i t of r e c e i v i n g from the c o l l e c t i o n of

d r a f t s ( o t h e r t h a n bank checks) o r from t h e pu rchase 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 t h e r e shou ld be no d i m i n u t i o n i n t h e

customary p r o f i t s of member banks from such s o u r c e s .

I t was e s t i m a t e d t h a t as soon a s t h s new c l e a r i n g system could

be pu t i n t o o p e r a t i o n , checks upon about 15,000 n a t i o n a l banks , S t a t e

banks , and t r u s t companies t h r o u g h o u t t h e Uni ted S t a t e s , cou ld be handled

by t h e F e d e r a l r e s e r v e banks a t p a r , s u b j e c t t o t h e sma l l s e r v i c e charge-

above r e f e r r e d t o ; and a s a m i n o r i t y of the banks would f i n d i t d i f f i c u l t

t o r e t a i n much of t h e i r most d e s i r a b l e b u s i n e s s when checks drawn upon

them a r e a t a d i s c o u n t , whi le checks drawn upon the m a j o r i t y of banks

can c i r c u l a t e a t p a r , i t was t hough t t h a t i n t h e n e a r f u t u r e checks upon


p r a c t i c a l l y a l l "banks Throughout the United S t a t e s cou ld "be hand led a t

p a r by F e d e r a l r e s e r v e "banks. Many banks have found i t n e c e s s a r y

h i t h e r t o t o m a i n t a i n "balances w i th a number of c o r r e s p o n d e n t s f o r ex -

change p u r p o s e s , t hus compel l ing them t o keep e x c e s s i v e "balances away

f rom home. Under t h e new p l a n t h e number of "banks upon which p a r

c o l l e c t i o n s a r e "being made, was on December 15, w a r 15,000; w h i l e i n

o t h e r r e s p e c t s t h e system i s deve lop ing as 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 F e d e r a l r e s e r v e banks a r e now over $125^000,000*

A f t e r November 17, 1917, or s o o n e r , shou ld t h e p roposed amend-

ment be adop t ed , no bank ba l ance w i l l be a v a i l a b l e as r e s e r v e f o r n a t i o n a l

banks excep t b a l a n c e s i n F e d e r a l r e s e r v e banks., and , t h e r e f o r e , a f t e r

t h a t t ime any n e c e s s i t y t o m a i n t a i n n o n - r e s e r v e "balances w i t h c o r r e -

s p o n d e n t s , e i t h e r f o r exchange pu rposes 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 , would be deemed i n many cases a g r e a t h a r d s h i p . I t i s

b e l i e v e d t h a t i n numerous i n s t a n c e s banks w i l l f i n d 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 n c e s and t o c l o s e many a c c o u n t s which t h e y now

c a r r y w i t h o t h e r banks , and t h a t a system which w i l l enab le them t o send


al l 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:


OPERATIONS OF THE FEDERAL RESERVE INTERDlSTRICT CLEARING SYSTEM

November 16 t o December 15 , 1916*

Average Nonmember number Average Member banks from of i t ems amount of banks which checks

B a. n k . hand led d a i l y 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 3 0 , 0 8 1 16,545,77% 632 292 Cleve land 15,873 8,320,355 754 496 Richmond 17,064 8 , 0 o 2 , 5 0 0 520 286

A t l a n t a 13,851 4,689,214 390 440 Chicago ( a ) 2 0 , 4 5 2 13 ,220 ,268 993 1,269

S t . Louis 10,039 8,402,904 469 881

Minneapol i s 15,613 8 , 8 2 8 , 2 6 9 759 1 ,100

Kansas C i ty 13,782 7,791,296 941 1,412 D a l l a s 12,734 6,521,235 621 238 San F r a n c i s c o 5,519 1 ,761 ,162 521 1,096

Total wov. l6 to Dec. 15 236,038 125,603,732 7,627 8 , 0 6 5

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 ,618 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 no t i n c l u d e Government checks a v e r a g i n g 2 , 0 6 2 .


. y i . 1871

With t h e v iew of. making t h e c l e a r i n g and. c o l l e c t i o n system

more e f f e c t i v e and of e n a b l i n g checks drawn upon nonmember banks and

t r u s t companies t o "be handled by F e d e r a l r e s e r v e banks i n t h e same manner

as checks drawn upon members, t h e Board has asked t h a t S e c t i o n 13 of

t h e Act be amended so as t o a l l o w F e d e r a l r e s e r v e banks t o r e c e i v e

a c c o u n t s f o r c o l l e c t i o n and exchange pu rposes from such nonmember banks

and t r u s t companies a s w i l l a g r e e t o r e m i t t o F e d e r a l r e s e r v e banks

a t p a r f o r checks drawn upon t h e m s e l v e s , and which w i l l , i n a d d i t i o n ,

m a i n t a i n a compensat ing ba lance w i t h t h e F e d e r a l r e s e r v e bank i n

*

an amount t o be de te rmined by t he Reserve bank. This w i l l g r e a t l y

ex tend and improve t h e s e r v i c e and w i l l make t h e c l e a r i n g system a

comprehensive and a l l embracing one .


1872

BRANCH1*; 4m' ACWli iS OF WDiMi , R2SE.WE rAUKS.

Of t h e c o n s t r u c t i v e s e c t i o n s of t he F e d e r a l Reserve Act

S e c t i o n 3, which p r o v i d e s f o r t he e s t a b l i s h m e n t of b r a n c h banks ,

i s t h e s h o r t e s t . I t i s as f o l l o w s :

"Each F e d e r a l r e s e r v e bank s h a l l e s t a b l i s h b r a n c h t . banks w i t h i n 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 F e d e r a l r e s e r v e bank which may have been suspended . Such b r a n c h -es s h a l l be o p e r a t e d by a Board of d i r e c t o r s under r u l e s and r e g u l a t i o n s approved by the Fede ra l Reserve Board . D i r e c t o r s of "branch banks s h a l l p o s s e s s t h e same q u a l i f i -c a t i o n s as d i r e c t o r s of F e d e r a l r e se rve banks . Four of s a i d d i r e c t o r s s h a l l be s e l e c t e d by t h e r e s e r v e bank and t h r e e by t h e F e d e r a l Reserve Board, and t h e y s h a l l ho ld o f f i c e d u r i n g the p l e a s u r e , r e s p e c t i v e l y , of the p a r e n t bank and t h e F e d e r a l Reserve Board. The r e s e r v e bank s h a l l d e s i g n a t e one of the d i r e c t o r s as manage r , n

In i t s annual r e p o r t f o r 1915 t h e Board s t a t e d t h a t

on ly in one i n s t a n c e did i t r e c e i v e a d e f i n i t e r eques t from a

F e d e r a l r e s e r v e bank t o e s t a b l i s h a b r a n c h . This r e f e r s t o t he

a p p l i c a t i o n of the F e d e r a l 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 O r l e a n s , Up t o t h i s t ime no o t h e r F e d e r a l r e -

s e r v e bank has asked the s a n c t i o n of t he 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 i n c i d e n t t o t h e o p e r a t i o n

of a b ranch i s no doubt a d e t e r r e n t . , and wh i l e t h e terms of


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 Federal Reserve Bank of

St, Louis be established there, A committee representing Louis

v i l l e bankers A appeared b e f o r e 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 Federal Reserve Bank 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-


d e n t , and in view o± tae p r o v i s i o n of law which r e q u i r e s tn°.

F e d e r a l r e s e r v e banks t o e s t a b l i s h b r a n c h e s , w i t h o u t g i v i n g

t h e F e d e r a l Reserve Board any d i r e c t a u t h o r i t y in t h e m a t t e r

e x c e p t to #approv9 n i l en and r e g u l a t i o n s unde r which the

b r a n c h e s s h a l l be o p e r a t e d , t h e Board has 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 ranches u n t i l t he move-

ment had been i n i t i a t e d by the F e d e r a l r e s e r v e banks . When

t h e b r a n c h bank in New Or leans was e s t a b l i s h e d , member banks

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

were a d v i s e d t h a t they had been a s s i g n e d t o t h e New Or leans

s u b - d i s t r i c t , and t h a t t h e i r r e s e r v e s shou ld be kept w i t h the

b ranch bank a t New O r l e a n s , and t h a t a l l of t h e i r t r a n s a c t i o n s

w i t h the r e s e r v e bank should be conducted th rough i t . The

amount of t h e c a p i t a l s t o c k in t he Fede ra l r e s e r v e bank of A t -

1 m t a he ld by t he member banks a s s igned t o t h e New Or leans

b ranch i s r e g a r d e d f o r bookkeeping pu rposes as 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 from t h e d i s c o u n t of p a p e r f o r


member banks from the purchase of commercial p a p e r and b i l l s of

exchange and from t r a n s f e r s of funds a re shown on the books of

t h e b ranch bank frotn which a re deducted 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 of t he b ranch bank* however ,

appea r each day on t h e ba lance s h e e t of t h e p a r e n t bank* During

t h e y e a r 1916 t h e g ross e a r n i n g s of the branch bank a t New Or -

l e a n s were $62 ,052 , and t h e t o t a l expenses 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 f e e s , amounted t o

$28,645, l e a v i n g a ne t p r o f i t t o t he F e d e r a l Reserve Bank of A t -

l a n t a from t h e o p e r a t i o n s of i t s New Or leans b ranch of $33,407,

which p r o f i t amounts t o 7.5% on t h e t h e o r e t i c a l c a p i t a l of

$445,000 a l l o t t e d t o the New Or leans b r a n c h .

I t i s f a i r t o assume t h a t a p o r t i o n a t l e a s t of t h e s e

p r o f i t s would have accrued t o the F e d e r a l Reserve Bank of A t l a n t a

had t h e r e been no branch a t New O r l e a n s . In view of e x p e r i e n c e

ga ined from t h e o p e r a t i o n of t h e one branch bank i n t h e e n t i r e s y s -

tem, i t seems t h a t i t would be w i s e , in c o n s i d e r i n g t h e e s t a b l i s h -


ment of o t h e r b r a n c h e s , t o t a k e i n t o account w h e t h e r t h e y would

be r e a l l y s e l f - s u s t a i n i n g , i . e . , whe the r t h e n e t p r o f i t s grow-

ing out of t h e i r o p e r a t i o n would exceed t h e revenue t h a t would

a c c r u e in any even t t o t h e ' p a r e n t bank.

While t h e Board has no t deemed i t n e c e s s a r y a t t h i s

t ime t o ask f o r an amendment of S e c t i o n 3, i t w i l l p r o b a b l y be

w e l l , b e f o r e b ranches 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 ask 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 , and t o r educe t h e c o s t of

m a i n t a i n i n g them.

The Board has been informed t h a t many of t h e F e d e r a l

r e s e r v e banks a r e ready t o e s t a b l i s h a g e n c i e s o r o f f i c e s in 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 , such

as t he 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 of t h i s k ind was e s t a b l i s h e d by t h e F e d e r a l

Reserve Bank of S t , L o u i s i n September l a s t , a t Memphis, Tennessee ,

and i t has proved conven ien t t o t h e banks of t h a t c i t y in t h e

h a n d l i n g of t h e c o t t o n c r o p .


±87? - 50 -

OPERATIONS ABROAD.

The C l e a r i n g and c o l l e c t i o n system has now 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 , and i t has demons t ra ted t h a t t h e p r o v i s i o n s of the

F e d e r a l Reserve Act r e l a t i n g t o t h i s f e a t u r e of t h e "business of F e d e r a l

r e s e r v e banks , a r e f e a s i b l e and p r a c t i c a l ; and i t i s c o n f i d e n t l y ex -

p e c t e d t he p r e s e n t y e a r w i l l w i t n e s s a g e n e r a l a c q u i e s e n c e i n i t and

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

i n g system* a l l t h e domest ic f u n c t i o n s of F e d e r a l r e s e r v 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 only a r e a s o n a b l e p e r i o d

of development f o r t h e i r complete a p p l i c a t i o n # With r e g a r d t o t h e p r o -

v i s i o n s of t h e F e d e r a l Reserve Act 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 . While 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 rough t he development of t he a c c e p t a n c e marke t and by

t h e e s t a b l i s h m e n t abroad of American banks , t h e p r o v i s i o n s of t h e Act

c a l l f o r t he 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 or branches of F e d e r a l

r e s e r v e banks have n o t as y e t been pu t . i n t o o p e r a t i o n , nor have t h e

r e s e r v e banks u n d e r t a k e n t h e d i r e c t pu rchase of f o r e i g n commercial b i l l s ,


3 r -

- 51 -

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 i ts 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 bil ls of exchange and to buy and sell with

or without its endorsement through such correspondents or agencies


963

- 5 2 -

b i l l s of exchange a r i s i n g out of a c t u a l commercial t r a n s a c -

t i o n s , tf so t h a t a broad f i e l d of o p e r a t i o n s i s opened under

i t * Other F e d e r a l r e s e r v e banks may p a r t i c i p a t e in the

agency r e l a t i o n s h i p w i t h t h e Bank of England upon t h e same

te rms and c o n d i t i o n s t h a t w i l l govern t h e F e d e r a l Reserve Bank

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

Other connec t ions of t h i s c h a r a c t e r w i l l p robab ly

be a u t h o r i z e d from t ime to t ime as occas ion r e q u i r e s , t hus

g i v i n g f u l l e f f e c t to t h a t s e c t i o n of t he F e d e r a l Reserve Act

which seeks t o r e l i e v e our banking system of i t s o l d - t i m e r e -

s t r i c t i o n s and to extend i t s u s e f u l n e s s t o the promot ion of f

f o r e i g n t r a d e on f a v o r a b l e t e r m s . H i t h e r t o bank ing o p e r a t i o n s

connected w i t h f o r e i g n t r a d e have been a lmos t e n t i r e l y in t he

hands of t r u s t companies and p r i v a t e banke r s , bu t as f a r as t h e

f u t u r e i s concerned , t h e r e seems to be no r ea son why t h e F e d e r a l

r e s e r v e banks shou ld not be p l a c e d upon p r a c t i c a l l y t h e same


963

f o o t i n g as t h e g r e a t Governmental banks of Europe, and given

wide powers in t he m a t t e r of i n t e r n a t i o n a l exchange , w i t h t h e

F e d e r a l Reserve Board a c t i n g as 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

in the c o o r d i n a t i o n and d i r e c t i o n of o p e r a t i o n s .

\


ENFORCEMENT OF THE CLAYTON ACT.

Impor tan t d u t i e s r e l a t i v e to t h e d e t e r m i n a t i o n of t h e

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 F e d e r a l

Reserve Board by t h e amendment to t h e Clayton Act , known as t h e

"Kern amendment11, which became a law on May 15, 1916. This l e g -

i s l a t i o n was in t ended t o p rov ide f o r an en la rgement of t h e powers

of i n d i v i d u a l s in a c c e p t i n g and h o l d i n g bank d i r e c t o r a t e s . I t

a u t h o r i z e d such i n d i v i d u a l s , when d i r e c t o r s of member banks , t o

a c t a l s o as o f f i c e r s , d i r e c t o r s o r employes of no t more t han two

e

o t h e r banks , banking a s s o c i a t i o n s , o r t r u s t companies , when o r -

g a n i z e d unde r t h e laws of t h e United S t a t e s o r any S t a t e , " i f

such o t h e r bank, bank ing a s s o c i a t i o n o r t r u s t company i s n o t in

s u b s t a n t i a l c o m p e t i t i o n w i t h such member b a n k . " I t was , however ,

r e q u i r e d t h a t t h e consent of t h e F e d e r a l Reserve Board be o b -

t a i n e d as a b a s i s f o r t h e con t i nuance of such r e l a t i o n s w i t h

o t h e r b a n k s . This th rew upon t h e Board as 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 consen t i n


such c a s e s , t h e du ty of a s c e r t a i n i n g whe the r t h e hanks i n which

an i n d i v i d u a l migh t seek t o ho ld d i r e c t o r s h i p s , were o r were no t

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

i n d i v i d u a l was a l s o a d i r e c t o r . A s p e c i a l committee of t h e Board

p a s s e d in rev iew the 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 t h e t ime d u r i n g t h e months

of August , September , and the f i r s t h a l f of Oc tobe r ; - t he Clay*

tori Act by i t s own terms becoming e f f e c t i v e on October 15 . Dur-

i n g the p e r i o d in q u e s t i o n t h e Board c o n s i d e r e d in a l l 1335 a p -

p l i c a t i o n s of which 1195 were g r a n t e d , and 140 r e f u s e d * In a

l a r g e 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 t o r s a f f e c t e d undoubted-

l y r ecogn i zed t h a t s u b s t a n t i a l compe t i t i on d id u n q u e s t i o n a b l y

e x i s t and so wi thdrew from one or more d i r e c t o r s h i p s , t h e r e b y

b r i n g i n g themse lves in compliance wi th t he Act w i t h o u t any a p -

p e a l t o the F e d e r a l Reserve Board, A d i f f i c u l t e lement was found

i n the p r o v i s i o n s of t he Clayton Act which p r o h i b i t a p r i v a t e

banke r from h o l d i n g a d i r e c t o r s h i p in - a member bank . Compliance


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 invo lved a d e f i n i t i o n of t h e

t e rm " p r i v a t e banker", , and the Board a c c o r d i n g l y agreed upon such

a d e f i n i t i o n f o r i t s owr. gu idance in p a s s i n g upon a p p l i c a t i o n s .

The terra p r i v a t e b x k e " was 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 i n d i v i d u a l s engaged, i n t h e bank ing b u s i n e s s , as' t h e t e rm 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 or 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, a c c e p t a n c e , l o a n o r d i s c o u n t b u s i n e s s , o r who p u r c h a s e

and 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 by which 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 was t h u s

i n t e r p r e t e d n o t to i n c l u d e t h e o r d i n a r y s t o c k , n o t e 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 r o p o r t i o n of h i s p r o f i t s comes from

banking a c t i v i t i e s , n o r d id i t i n c l u d e p a r t n e r s h i p s or i n d i v i d u a l s

u s i n g only t h e i r own f u n i s in making l oans o r i n v e s t m e n t s .

In a number of cases d i f f i c u l t y was encoun te red in d e -

t e r m i n i n g the e x a c t scope p r o p e r l y t o be a s s i g n e d to t h e t e rm >

" s u b s t a n t i a l c o m p e 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 to t h e


q u e s t i o n w h e t h e r such c o m p e t i t i o n must be r e g a r d e d as l i m i t e d

i n a r e a . I t was found t h a t some l a r g e banks competing w i t h

one a n o t h e r ove r a g iven a r e a d id not compete t h r o u g h o u t t h e

whole f i e l d of t h e i r b u s i n e s s , some of them b e i n g n a t i o n a l in

s cope , w h i l e o t h e r s con f ined t h e i r a c t i v i t i e s much more na r row-

l y . While in some i n s t a n c e s i t was though t b e s 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 d e s i r o u s of s e r v i n g on t h e

boards of such banks , i t was i n d i c a t e d in each case t h a t t he

consen t accorded to them was t e n t a t i v e o n l y , and t h a t f u r t h e r

i n v e s t i g a t i o n would be u n d e r t a k e n f o r the pu rpose of a r r i v i n g

a t a f i n a l c o n c l u s i o n . Indeed t h e whole of t h e Boa rd ' 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

be regarded as u n f i n i s h e d . New f a c t s o r ev idence b e a r i n g upon

t h e b u s i n e s s of g iven i n s t i t u t i o n s may a t any t ime d e v e l o p , o r

t he n a t u r a l growth of the b u s i n e s s of g iven i n s t i t u t i o n s may

be such as t o b r i n g them i n t o s u b s t a n t i a l c o m p e t i t i o n , a l t h o u g h


t hey were n o t p r e v i o u s l y r ega rded as 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 be n e c e s s a r y from t ime t o t ime t o r e v i s e t h e d e -

c i s i o n s a l r e a d y made, or c o n d i t i o n s may deve lop such as t o n e c e s -

s i t a t e the r e v o c a t i o n of t h e p e r m i s s i o n a l r e a d y g r a n t e d in c e r -

I . t a i n c a s e s , in 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 i m e , s u b j e c t i n g some d i r e c t o r s t o a r u l e

d i f f e r e n t from t h a t a p p l i e d in 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 h e r e i s a c o n s i d e r a b 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 and a p p l i c a t i o n of t he Clay ton Act . 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 u n c e r -

t a i n t i e s and t o apply t h e t e rms of t h e measure f a i r l y and u n i -

f o r m l y , w h i l e c a r r y i n g ou t t h e e s s e n t i a l i n t e n t of Congress .


1886 - 58 --

ilFTRY OF HEW MEMBERS.

During t he y e a r l $ l 8 , I I 3 banks e n t e r e d t he kedei*al Reserve

sys t em, making a t o t a l of 7 ,635 members on December 3 I ; Of t h e s e new

members 60 were newly o rgan ized n a t i o n a l banks , which , under e x i s t i n g

law,, a u t o m a t i c a l l y became members and took out s t o c k i n t he F e d e r a l r e -

s e r v e bank of t h e d i s t r i c t i n which they were l o c a t e d . Of t h e r emain ing

new members, 48 were S t a t e banks which e n t e r e d t h e system t h r o u g h t h e i r

c o n v e r s i o n i n t o n a t i o n a l banks , t he reupon a u t o m a t i c a l l y becoming members#

S t a t e i n s t i t u t i o n s which a p p l i e d f o r and r e c e i v e d membership, wh i l e r e -

t a i n i n g t h e i r S t a t e c h a r t e r s , numbered 7• I t had been supposed t h a t

upon t he o r g a n i z a t i o n of t h e c l e a r i n g and c o l l e c t i o n sys tem, a c o n s i d e r a b l e

number of S t a t e i n s t i t u t i o n s would f i n d i t t o t h e i r advantage t o apply

f o r membership, o r t h a t o t h e r f a c t o r s would t e n d t o b r i n g them i n t o

t h e sys tem. So f a r t h i s has n o t proved to be t h e c a s e , f o r t h e number

of S t a t e i n s t i t u t i o n s which came i n t o t h e system d u r i n g 1916 whi 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 , was l e s s t han du r ing t h e p r e c e d i n g yea r*

Many causes have o p e r a t e d t o produce t h i s r e s u l t , t h e ch ie f be ing t hose


- 59 -

a l r e a d y o u t l i n e d by t h e Board i n i t s r e p o r t f o r 1915* Added t o t h e s e

c o n s i d e r a t i o n s ha s been the e f f e c t of t he Clay ton Ac t , which i s o b j e c t e d

t o by many S t a t e banks as l i k e l y t o r e s u l t i n i n c o n v e n i e n t or unde

s i r a b l e changes i n t h e i r boards of d i r e c t o r s shou ld they a f f i l i a t e them*-

s e l v e s wi th t he F e d e r a l r e s e r v e s y s t e p ; a n d the, o p e r a t i o n of S e c t i o n 22

of t he F e d e r a l Reserve Ac t , which d e a l s w i t h 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 has s u g g e s t e d an

amendment t o t h i s s e c t i o n des igned t o c l a r i f y i t and t o remove u n c e r t a i n ^

t i e s , w i thou t a f f e c t i n g i n any way 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 or t h e development of any

s i t u a t i o n r e q u i r i n g mutua l a i d on t h e p a r t of banks , would undoubted ly

cause many nonmember banks t o apply f o r membership, but i t i s no t b e l i e v e d

t h a t they w i l l , a s a r u l e , e l e c t t o awai t such c o n d i t i o n s . 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 t o a

s ense of p u b l i c duty i n the m a t t e r , and 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 s t i n t e r e s t s r e q u i 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 F e d e r a l r e s e r v e system*


— 6 o —

1888

Many a p p r e h e n s i o n s , p r e v i o u s l y e n t e r t a i n e d have been shown t o be

g r o u n d l e s s , and t h e a t t i t u d e of t h e board toward S t a t e banks as members

i s b e t t e r u n d e r s t o o d t h a n f o r m a l l y #

In J u l y l a s t t h a Board a d v i s e d t he r e p r e s e n t a t i v e s of c e r t a i n

S t a t e banks and t r u s t companies which were a p p r e h e n s i v e t h a t membership

i n t h e sys tem might i nvo lve an 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 as a r e s u l t of t h e f u t u r e r e g u l a t i o n s of t h e Board, t h a t i t

d id not u n d e r s t a n d t h a t i t was incumbent upon i t t o u n d e r t a k e t o impose

on the a c t i v i t i e s of member banks any r e s t r i c t i o n s t h a t a r e no t contem-

p l a t e d by t h e Ac t , but only t o p r e s c r i b e such r e g u l a t i o n s a s a r e des igned

t o c a r r y out t h e purposes of t h e Act* The Board does no t f e e l t h a t i t

i s one of i t s f u n c t i o n s t o u n d e r t a k e t o r e s t r i c t S t a t e banks 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 as d e f i n e d

by t h e laws of t h e S t a t e i n which t h e y a r e c r e a t e d . In p a s s i n g upon t h r

a p p l i c a t i o n s of S t a t e banks and t r u s t companies however , t h e Board ho lds

t h a t i t would be i t s duty t o admit only t h o s e i n s t i t u t i o n s which a r e


- o l -

s o l v e n t and sound and whose membership w i l l no t c o n s t i t u t e an e lement of

weakness i n t h e s y s t e m . The fto&rd does not 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 admis s ion of any S t a t e t ank o r t t -u s t company t h a t ' i t

shou ld p o s s e s s any c e r t a i n amount of p a p e r e l i g i b l e f o r r e d i s c o u n t w i t h

a F e d e r a l r e s e r v e bank. The l aw p r o v i d e s t h a t p r i v i l e g e s and advan tages

of membership may be ex tended t o S t a t e banks and t r u s t companies , t hus

c o n t e m p l a t i n g one compact banking sys tem, wh i l e p r e s e r v i n g t h e i n t e g r i t y

of both t h e S t a t e and t h e N a t i o n a l banking s y s t e m s . The f a c t t h a t a

S t a t e bank has l i t t l e e l i g i b l e p a p e r does not of i t s e l f make i t s member-

s h i p an element of weakness or danger , and i t i s obvious t h a t as a member

of t h e system i t w i l l be i n a p o s i t i o n t o c o n t r a c t f o r l oans and t o

o b t a i n c a s h from o t h e r member banks hav ing p a p e r e l i g i b l e f o r r e d i s c o u n t ,

and t hus i n d i r e c t l y t o o b t a i n d e s i r e d accommodations. The a b i l i t y t o

a s s i s t member banks d i r e c t l y and i n d i r e c t l y w i l l be i n c r e a s e d as t h e

s t r e n g t h of t h e sys tem and l e n d i n g power of t h e F e d e r a l r e s e r v e banks

a r e i n c r e a s e d . There i s no r e a s o n why such a s s i s t a n c e shou ld no t be


1890 - 6 2 -

g i v e n f r e e l y t o a member S t a t e t a n k ; whi le i n t ime of s t r e s s t h e non-

member banks may f i n d t h e member banks no t l e s s d i s p o s e d bu t l e s s a b l e

t t o g i v e them 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 and unusua l powers., such as I

make, an a p p l y i n g S t a t e bank or t r u s t company an u n d e s i r a b l e member,

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

but a f t e r a S t a t e bank o r t r u s t company has a c t u a l l y become a member

bank, t he Board does no t e x p e c t t o i n t e r f e r e w i t h t h e e x e r c i s e of t h o s e

banking and f i d u c i a r y powers a u t h o r i z e d by i t s c h a r t e r .


- 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 ut ider t h e te rms of t h e F e d e r a l Reserve Adt have c o n t i n u e d

t o be p r e s e n t e d t o t h e Board d u r i n g t h e p a s t y e a r , and have been

g r a n t e d i n 110 c a s e s , a c t i o n on 77 of which c a r r i e d a p p r o v a l of

f u l l f i d u c i a r y powers , w h i l e i n t h e case of 33 l i m i t e d powers

o n l y were g r a n t e d . The f a l l i n g o f f in t h e m a t t e r of a p p l i c a -

t i o n s as compared w i t h the y e a r 1915, was p r o b a b l y due t o u n c e r -

t a i n t y as t o tie l e g a l s t a t u s of 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 e g a r d i n g i t h a v i n g been i n t e n s i f i e d by t h e

a c t i o n of t h e Supreme Court of t h e S t a t e of Michigan i n hand ing

down,on September 26, an o p i n i o n a d v e r s e 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 was t h e view of t h e c o u r t i n t h i s c a s e

*Grant F e l l o w s , A t to rney Gene ra l of t he S t a t e of Michigan, on

t h e r e l a t i o n of t h e Union T r u s t Company, D e t r o i t T rus t Company,

S e c u r i t y T r u s t Company, Michigan T r u s t Company, and t h e Grand

Rapids T rus t Company, vs t h e F i r s t N a t i o n a l Bank of Bay C i t y .


963

- 6 4 - 1893

t h a t Congress had no a u t h o r i t y t o p e r m i 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 d u c i a r y powers p rov ided f o r in t h e F e d e r a l Re-

s e r v e Act , and, i n accordance w i t h t h e p o l i c y announced i n i t s

r e p o r t f o r 1915, t h e Board took s t e p s to have t h e case t r a n s f e r r e d

to t h e Supreme Court of t h e Uni ted S t a t e s on a w r i t of e r r o r , i n

o r d e r t h a t an a u t h o r i t a t i v e d e c i s i d i i migh t be f i n a l l y rer iddredi

In the 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 and wel l -managed banks t h e a u t h o r i t y t o e x e r -

c i s e f i d u c i a r y powers in s o f a r as p rov ided by t h e F e d e r a l Re-

s e r v e Ac t . As has been e x p l a i n e d on former o c c a s i o n s , t h e Board

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

bestowed g e n e r a l l y by Congress under t h e F e d e r a l Reserve Ac t ; and

i n making such g r a n t s , t h e Board mere ly c a r r i e s ou t t h e d u t i e s im~ j

posed upon i t by t h e Act , 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

how f a r and t o what e x t e n t t h e powers i n q u e s t i o n may l e g a l l y and

c o n s t i t u t i o n a l l y be 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 cou r se cf

e v e n t s , be some t ime b e f o r e t h i s i s s u e can be f i n a l l y d i s p o s e d of,.

and in the meanwhile t h e Board w i l l c o n t i n u e t o p u r s u e i t s p r e s e n t

cou r se of a c t i o n .


1893 - 55 -

CHANGES IN DISTRICTS.

In i t s r e p o r t f o r 1915 t h e Board s e t f o r t h t h e r e a s o n s t h a t

had l e d i t t o make c e r t a i n changes i n t he b o u n d a r i e s of F e d e r a l r e s e r v e

d i s t r i c t s , and i t was 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 was suspended i n v iew of an op in ion r ende red by t h e A t to rney

Genera l of t he Uni ted S t a t e s * * * where in i t was he ld t h a t t h e Board

p o s s e s s e d no power t o reduce t he 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 Board a l s o c a l l e d a t t e n t i o n t o t he f a c t t h a t n a f u r t h e r o p i n i o n has

been asked a s t o whe the r t h e Board has power t o change t h e l o c a t i o n of

a F e d e r a l r e s e r v e bank w i t h i n a d i s t r i c t * 1 1 The o p i n i o n t h u s r e f e r r e d

t o was r e n d e r e d by t h e A t to rney Genera l on A p r i l 4 , l $ l 6 , and covered

two p o i n t s ~

(1) Whether t he Board could change t h e p r e s e n t l o c a t i o n of any

F e d e r a l r e s e r v e bank i n c e r t a i n c a s e s , and

(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 must p r e s e r v e

t he $4 ,000 ,000 minimum c a p i t a l i s a t i o n r e q u i r e d of each F e d e r a l r e s e r v e

bank*


- 66 - 1 8 M

The At to rney Genera l h e l d t h a t t h e Board ha s no power t o

change t h e l o c a t i o n of a bank, i r r e s p e c t i v e of a l t e r a t i o n s or r e a d j u s t -

ments i n d i s t r i c t l i n e s , bul t h a i t h e main tenance of t he minimum c a p i -

t a l i z a t i o n of $4 ,000 ,000 was no t necessa ry«

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 from f u r t h e r con-

s i d e r a t i o n t h e pend ing a p p e a l s which invo lved 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 banks w i t h i n t h e i r d i s t r i c t s . I n view of t h e

o p i n i o n of t he A t t o r n e y Genera l t h e r e remained bu t t h r e e a p p e a l s c a l l i n g

f o r immediate d e c i s i o n - t h a t f i l e d by c e r t a i n C o n n e c t i c u t banks which

r e q u e s t e d t r a n s f e r f rom t h e Boston t o t h e 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 banks i n Wiscons in which r e q u e s t e d t r a n s f e r f rom t h e Minneapol is

t o t h e Chicago D i s t r i c t ; and t h a t f i l e d by c e r t a i n banks i n s o u t h e r n

L o u i s i a n a which r e q u e s t e d t r a n s f e 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 L o u i s i a n a a p p e a l was g r a n t e d by a r e s o l u t i o n adopted on February 25 ti:

t r a n s f e r r i n g c e r t a i n banks as d e s i r e d ; whi le t h e C o n n e c t i c u t a p p e a l

was 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 banks


u. 67 -

1895

banks s i t u a t e d in F a i r f i e l d County., C o n n e c t i c u t , t o t h e New York

D i s t r i c t , l e a v i n g t h e remainder of t h e C o n n e c t i c u t "banks a s members

o i y t h e F e d e r a l Reserve Bank of Bos ton . The Wiscons in a p p e a l

was s e t t l e d by an o r d e r of Oc tobe r 1 2 t h , t r a n s f e r r i n g t h e a p p l y i n g

"banks i n c e n t r a l and e a s t e r n Wiscons in t o t h e Chicago D i s t r i c t .

C


OPERATION OF THE BOARD.

On August 1 0 / 1916, t h e F e d e r a l Reserve Board had been

i n e x i s t e n c e two y s a r s , and, u n d e r the p r o v i s i o n s of t h e Act

c r e a t i n g i t , t h e term of one member came to a c l o s e two y e a r s af-

t e r h i s o r i g i n a l appo in tmen t . On J u l y 25 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 Cha r l e s S . Hamlin t o s u c -

ceed h imse l f as a member of t h e Board, t h e appoin tment b e i n g f o r

a te rm of t e n y e a r s . This nomina t ion was conf i rmed on August 3 .

Mr. Haml in ' s t e rm under h i s e a r l i e r appoin tment e x p i r e d on Wed-

nesday , August 9 , He q u a l i f i e d by t a k i n g t h e o a t h on August 10

Honorable W. P . G. Harding was, on August 10, d e s i g n a t e d by t h e

P r e s i d e n t of t h e Uni ted S t a t e s as Governor, and Honorable P a u l

M. Warburg as Vice-Governor of t h e Board, b o t h " f o r a p e r i o d of

one y e a r , o r u n t i l o t h e r w i s e d i r e c t e d , "

The F e d e r a l Advisory Counci l has h e l d i t s f o u r s t a t e d

mee t ings d u r i n g t h e l a s t y e a r , and has d i s c u s s e d t o p i c s submit tei

t o i t by t h e Board, a s w e l l as q u e s t i o n s r a i s e d by i t s own membe


*-69 *

p r e s e n t i n g r e s u l t s of 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 the p r o c e e d i n g s of t h e Counci l i s appended h e r e t o as E x h i b i t

11 11. Confe rences were h e l d a l s o by t h e F e d e r a l r e s e r v e

a g e n t s on May 29 and -pecember 4 , in Washington, t h e t ime a t

t h e s e mee t i ngs b e i n g devoted to 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 r e n t i n t e r e s t t o the F e d e r a l r e s e r v e b a n k s .

The mee t ings of Governors of F e d e r a l r e s e r v e banks which have

t a k e n p l a c e a t i n t e r v a l s s i n c e t he o r g a n i z a t i o n of the sys tem

have c o n t i n u e d , t h r e e such mee t ings hav ing been h e l d d u r i n g 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 of t h e Board have

con t inued w i t h o u t impor t an t m o d i f i c a t i o n , t h e p r i n c i p a l changes

b e i n g the b e t t e r development of i t s o r g a n i z a t i o n , and t h e g r a d u a l

growth and en l a rgemen t of t h e 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 remains e s s e n t i a l l y u n a l t e r e d , and t h e cos t of c o n d u c t -

i n g t h e B o a r d f s work, i n c l u d i n g members 1 s a l a r i e s and 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 in Washington, i n c l u s i v e of t h e corps of


1898 . jj 0'-

examiners , i s s t i l l about $180,000 p e i annum - t h e e s t i m a t e d

f i g u r e ment ioned in t h e r e p o r t f o r 1915. The Gold S e t t l e m e n t

Fund, t o which r e f e r e n c e has been made e l sewhere in t h i s r e p o r t ,

has 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 , bu t w i t h o u t

c o r r e s p o n d i n g i n c r e a s e in expense of o p e r a t i o n , t h e c o s t f o r t h e

y e a r 1916 be ing about $2 ,500 , w h i l e the t o t a l volume of b u s i n e s s

c l e a r e d d u r i n g t h e yea r has been about $ 8 , 0 0 0 , 0 0 0 , 0 0 0 . The Gold

S e t t l e m e n t Fund was o r i g i n a l l y conducted mere ly as a means of

s e t t l i n g between Fede ra l r e s e r v e banks , bu t i t s scope of o p e r a -

t i o n s has been e n l a r g e d by p r o v i d i n g a s i m i l a r fund f o r F e d e r a l

r e s e r v e a g e n t s , conducted on t h e same p l a n as t h e Gold S e t t l e m e n t

f u n d i t s e l f . This r enders p o s s i b l e t h e making of payments n o t

only between F e d e r a l r e s e r v e banks , bu t a l s o between t h e r e s e r v e

a g e n t s and t h e i r own banks , w i t h o u t t he n e c e s s i t y of s h i p p i n g

go ld o r i t s e q u i v a l e n t back and f o r t h *

, The F e d e r a l Reserve B u l l e t i n has been conducted t h r o u g h -

ou t t h e y e a r as d u r i n g t h e y e a r 1915, as a monthly p u b l i c a t i o n ,


and has been e n l a r g e d in s i z e , and broadened in scope in r e s p o n s e

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 , bu t i t has a l s o a growing l i s t of

p a i d s u b s c r i b e r s among non-members and t h e f i n a n c i a l community

g e n e r a l l y . So f u l l y has 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 of t he o p e r a t i o n of t h e F e d e r a l r e s e r v e sys tem, t h a t i t

i s u n n e c e s s a r y t o r e p e a t them i n t h i s r e p o r t , a complete f i l e

of 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 as supp lemen ta ry t o t h e

i n f o r m a t i o n h e r e i n g i v e n .

EARNINGS AND EXPENSES.

The p a s t y e a r has shown a v e r y dec ided improvement i n

t h e income-ea rn ing power of t h e F e d e r a l r e s e r v e banks . They have

been a b l e t o p r o v i d e f o r t h e i r expenses and t o c a r r y a s u b s t a n t i a l

amount t o d i v i d e n d a c c o u n t . For t h e y e a r 1916, as w i l l be s een in

g r e a t e r d e t a i l f rom 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 c u r r e n t expenses of t h e sys tem were $ ,


- 7 2 -

w h i l e t he t o t a l n e t e a r n i n g s f o r t h e e n t i r e y e a r were $

The f o l l o w i n g t a b l e shows t h e d iv idend d e c l a r e d by F e d e r a l r e -

s e r v e banks from the da te of t j i e i r o r g a n i z a t i o n down t o t h e

p r e s e n t t i m e :

( i n s e r t t a b l e )

The f i g u r e s f o r the whole sys tem t o the end of 1916

show an ave rage 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 the 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 y e a r 1916 t h e y

show an average n e t e a r n i n g of The advance in e a r n i n g

power t h u s 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

t h a t d i s c o u n t r a t e s have con t inued low, b e i n g p r a c t i c a l l y no

h i g h e r t h a n they were in 1915; w h i l e b o t h yea r 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 in t h e v a u l t s of member banks g e n e r -

a l l y , the consequent low r a t e s of i n t e r e s t and t h e l a c k of need

f o r member banks t o o b t a i n accommodation.


The ave rage " r e d i s c o u n t s u of a l l n a t i o n a l banks a s shown

by f i v e a b s t r a c t s i s s u e d by t h e Compt ro l l e r of t h e Currency i n 1916

were $ . Of t h i s amount $ , o r

were r e d i s c o u n t s wi th t h e F e d e r a l r e s e r v e banks .

The F e d e r a l r e s e r v e banks have no t been o p e r a t e d w i t h a

v iew t o p r o f i t , bu t t h e y have a l l ea rned t h e i r e x p e n s 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 idend r e q u i r e m e n t s . They a p p e a r

t o have ga ined s t e a d i l y i t i t h e c o n f i d e n c e Of t h e p u b l i c , and t h e

f a c t of t h e i r e x i s t e n c e has 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 -

out 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 r b a n c e and w i thou t any marked f l u c -

t u a t i o n s i n r a t e s f o r commercial p a p e r , many shocks and s e n s a t i o n s

which*probably would, under o ld c o n d i t i o n s , have been fo l lowed by

u n p l e a s a n t r e s u l t s . The F e d e r a l r e s e r v e system i s no l o n g e r looked

\

upon a s an ephemera l e x p e r i m e n t . I t has been e s t a b l i s h e d upon a

f i r m and e n d u r i n g f o u n d a t i o n , and i t has been demons t ra ted r e p e a t e d l y

t h a t i t i s no t b e i n g conducted f o r t h e p a r t i c u l a r b e n e f i t of any


- 7 3 a -

1902 963.

group or i n t e r e s t , bu t t h a t t h e p o l i c i e s govern ing i t s o p e r a t i o n

a r e , and must c o n t i n u e t o be , "broad enough t o serve. , w i t h o u t d i s -

c r i m i n a t i o n or f a v o r , t he banks and t h o s e who d e a l w i t h banks

t h roughou t t h e e n t i r e country. While r e g u l a t o r y and 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 , and when c o n d i -

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 Fedeiral r e s e r v e

system w i l l be r e c o g n i z e d , not on ly as a dominant f a c t o r i n our

own f i n a n c i a l a f f a i r s , but as a most impor tan t i n f l u e n c e i n t h e com-

merce of t h e w o r l d .


PROPOSED AMENDMENTS.

The most impor t an t changes in t h e Act t h a t have been s u g g e s t e d

by t h e Board and which r e l a t e t o n o t e i s s u e s and t o r e s e r v e s * have a l -

ready been d i s c u s s e d a t an e a r l i e r p o i n t i n t h i s r e p o r t undei - t h e h e a d -

ing of c o n s e r v a t i o n of gold supp ly ; b u t f o r conven ien t r e f e r e n c e we

append a complete l i s t of t h e Boa rd ' s . Amendments,, t h e t e x of which has

been s u b m i t t e d t o t h e p r o p e r committees 6f t h e Sena t e and House.

1 . Amendment t p S e c t i o n 16, p r o v i d i n g

( a ) For 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 of 100$ go ld or 100$ of p a p e r , o r b o t h , t h e gold r e s e r v e i n no even t t o be be low 40$.

(b ) Fo r t h e c o u n t i n g of go ld h e l d by t h e F e d e r a l Reserve Agents as s e c u r i t y , f o r n o t e s as p a r t of t h e gold r e -s e r v e Required t o be he ld by t h e banks a g a i n s t such F e d e r a l r e s e r v e n o t e s .

1 This amendment was no t ag reed t o unan imous ly , b u t was approved

and endorsed by a maj o r i t y of t h e Board. I t s pu rpose has a l r e a d y been

d i s c u s s e d a t l e n g t h e l sewhere i n t h i s r e p o r t .

2 . Amendment of S e c t i o n 19 a b b r e v i a t i n g and s i m p l i f y i n g t h e


1904

c l a u s e s i n S e c t i o n 19 which r e l a t e t o r e s e r v e r e q u i r e m e n t s . This p r o -

posed amendment p r o v i d e s T,hat a l l member "banks s h a l l m a i n t a i n r e s e r v e s

i n t h e F e d e r a l r e s e r v e banks as f o l l o w s :

and i n a d d i t i o n eve ry member bank i s r e q u i r e d t o keep i n i t s own v a u l t

f o r t i l l money an amount of s p e c i e or cu r r ency ( n o t n e c e s s a r i l y gold

o r l a w f u l money) e q u a l t o f i v e p e r cen t of i t s demand d e p o s i t s , l e s s

t h e amount of n e t b a l a n c e s w i t h F e d e r a l r e s e r v e banks i n e x c e s s of t h e

minimum above s t i p u l a t e d .

3* Amendment, of S e c t i o n 11 so as t o p e r m i t t h e F e d e r a l Reserve

Board t o r a i s e r e s e r v e r e q u i r e m e n t s i n emergenc ie 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 ind t o lower t h o s e

Aga ins t Deimand Aga ins t Tizni> i ) ep6g i t s . .Deposits

( a ) Country Banks (b) Reserve C i t y Banks ( c ) C e n t r a l Reserve C i t y Banks 3$


- 76 -

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

This p r o v i s i o n would, i f adop ted , enab l e t h e F e d e r a l Re-

se rve Board i n p ro longed p e r i o d s ©f extreme c a s e i n t h e money market

t o check any tendency toward e x c e s s i v e l e a n s of 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 16 t o pe rmi t nonmezaber S t a t e "banks and

t r u s t companies, even though too s m a l l t o be e l i g i b l e f o r membership,

i n t h e F e d e r a l r e s e r v e banks, t o a v a i l t hemse lves of t h e c l e a v i n g and

c o l l e c t i o n f a c i l i t i e s of t h e F e d e r a l r e s e r v e banks , p rov ided t h a t

t h e y cover a t p a r checks cn themse lves s e n t f o r c o l l e c t i o n by t h e

F e d e r a l r e s e r v e b a n k , , and p rov ided f u r t h e r t h a t t hey keep a compen-

t h e s a t i n g ba lance w i t h / F e d e r a l r e s e r v e bank i n an amount t o be de t e rmined

under r u l e s p r e s c r i b e d by the F e d e r a l Reserve Board* This i s no t i n -

t ended t o o p e r a t e as an e x t e n s i o n of any of t h e p r i v i l e g e s of t h e

F e d e r a l r e s e r v e sys tem t o nonmember banks a t the expense of members


- 77 -

1906

963.

Taut on t h e c o n t r a r y t h e amendrneht i s proposed, p r i m a r i l y f o r t h e con-

ven ience of t h e p u b l i c and i n c i d e n t a l l y f o r t h e "benef i t of t h e member

b a n k s . I t i s con templa ted t h a t t h e compensat ing b a l a n c e s which non-

member banks p a r t i c i p a t i n g in t h e c l e a r i n g p l a n w i l l be r e q u i r e d t o

keep w i t h F e d e r a l r e s e r v e banks , w i l l be s u f f i c i e n t l y l a r g e t o p r o t e c t

member banks a g a i n s t d i s c r i m i n a t i o n , and i t i s d e s igned t o e n a b l e

t h e F e d e r a l r e s e r v e banks t o c o l l e c t a l l checks a t p a r , whe the r t hey

a r e drawn upon member banks o r nonmember b t a t e bangs and t r u s t companies .

Any c l e a r i n g and c o l l e c t i o n p l a n t o be e f f e c t i v e must be so comprehen-

s i v e a s t o i n c l u d e g , l l checks . At p r e s e n t t h e p a r l i s t s of t h e

F e d e r a l r e s e r v e banks i n c l u d e p o i n t s t h a t can be c o l l e c t e d i n any

c i r c u m s t a n c e s a t a minimum of t ime and expense , bu t do no t embrace

a l a r g e number of towns i n eve ry S t a t e where t h e r e a r e no member

banks; and i n o r d e r t o make c o l l e c t i o n s on such p o i n t s many banks

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


363. — 78 *-

w i t h , t h e F e d e r a l r e s e r v e banks . A neces sa ry f a c t o r i n any sound c l e a r -

i n g p l a n i s the o f f s e t , whereby ba lances only r e q u i r e s e t t l e m e n t i n s t e a d

of the t o t a l volume of t r a n s a c t i o n s . As long as t h e c l e a r i n g system

does no t embrace a l l of t he banks t h i s o f f s e t i s l o s t i n a cor respond-

ing degree and t h e va lue of t h e system diminished i n p r o p o r t i o n *

5« Amendment of Sec t ion 22 - the p e n a l s t a t u t e ~ so as t o d e f i n e

more c l e a r l y t he r i g h t s and l i m i t a t i o n s ^f d i r e c t o r s in the m a t t e r of

a c c e p t i n g f e e s or compensation o t h e r than t h e o rd ina ry f e e s pa id 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 in the r e g u l a r course of b u s i -

n e s s , the performance of which s e r v i c e i s not incumbent upon them i n

t h e i r c a p a c i t y as d i r e c t o r s .

6* Amendment of Sec t i on 13 t o r e s t o r e the p r o v i s i o n which was by

e r r o r s t r i c k e n from the Act in t he amendments of September 7., i g i 6 , thus

r e s t o r i n g t o n a t i o n a l banks^ w i t h the approva l of t h e F e d e r a l Reserve

Board, t h e r i g h t t o accep t up t o 100$ of t h e i r c a p i t a l and s u r p l u s i n

t r a n s a c t i o n s i n v o l v i n g impor ts or e x p o r t s , This f n a t u r e was i n t h e law

but was i n a d v e r t e n t l y omit ted when the Act war amended on September

1916. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

7. Amending nu us "Section 17 tc c a n c e l t he p r o v i s i o n of

t h e Na t iona l Bank Act which r e q u i r e s n a t i o n a l banks t o ma in t a in

a minimum d e p o s i t oi; Government bonds wi th t h e T r e a s u r e r of t h e

United S t a t e s , Na t iona l banks a r e no l o n g e r r e q u i r e d to 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 not ob l iged to purchase or c a r r y any bonds

of the United S t a t e s ; but t h e r e a r e a number of n a t i o n a l banks

o rgan ized b e f o r e the passage of the FederalrrReserve Act which

have r e t i r e d t h e i r n a t i o n a l bank c i r c u l a t i o n in f u l l , y e t t hey

a r e , u n d e r a c o n s t r u c t i o n of the old law, r e q u i r e d t o keep on

d e p o s i t w i th t h e T reasu re r of the United S t a t e s , a c e r t a i n m i a -

imum of United S t a t e s bonds. The Board f e e l s t h a t i t i s j u s t

t o t h e s e banks t h a t they be 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 a u t h o r i z e member banks

l o c a t e d in c i t i e s of more than 100,000 p o p u l a t i o n and which have

a c a p i t a l and s u r p l u s of more than $1,000,000 to e s t a b l i s h branches

in t he same c i t y , provided the S t a t e laws do not p r o h i b i t S t a t e


963

- 8 0 -

banks and t r u s t cotapariies from e s t a b l i s h i n g branches<

9; Amendment of S e c t i o n 9 t„o a u t h o r i z e mutual s a v i n g s

banks no t hav ing c a p i t a l d tock to become a s s o c i a t e members of

t h e F e d e r a l r e s e r v e system under c e r t a i n p r e s c r i b e d C o n d i t i o n s .

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 be t h e mu-

t u a l s a v i n g s banks of the e a s t e r n and New England S t a t e s , which

can n o t become members of t h e Fede ra l r e s e r v e sys tem unde r t h e

p r e s e n t law owing t o t h e l a c k of any p r o v i s i o n e n a b l i n g them to

s u b s c r i b e f o r c a p i t a l s t ock of a Fede ra l r e s e r v e bank, as t h e y

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 p e r c e n t a g e could

be ba sed . They would be r e q u i r e d t o c a r r y a r e s e r v e b a l a n c e w i t h

t h e Gederal r e s e r v e bank a g a i n s t t h e i r t ime d e p o s i t s in t h e same

p r o p o r t i o n as member baj iks j and t h e accommodations proposed f o r

mutua l s a v i n g s banks a re l i m i t e d 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 .

10 . Amendment of S e c t i o n 18 so as t o g i v e t o United S t a t e s


o n e - y e a r 3% gold no t e s in t h e hands of F e d e r a l r e s e r v e 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 s u a n c e of F e d e r a l r e s e r v e

bank n o t e s , such c i r c u l a t i o n t o be taxed a t t h e same r a t e as

c i r c u l a t i n g n o t e s , which a r e s e c u r e d by bonds of t h e Uni ted

S t a t e s . In the o p i n i o n of 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 the F e d e r a l r e s e r v e banks in o r d e r t h a t t h e y

may have a d d i t i o n a l means of p r o t e c t i n g themse lves a t t imes

when t h e r e i s an unusua l demand f o r c u r r e n c y .

11. Amendment of S e c t i o n 4 to a b o l i s h t h e t i t l e and o f -

f i c e of deputy f e d e r a l r e s e r v e a g e n t , t hus h a v i n g two u n a t t a c h e d

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 , and t o c r e a t e

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 v e a g e n t , who s h a l l no t

be a d i r e c t o r of t h e bank, bu t who s h a l l be a s a l a r i e d bonded o f -

f i c e r in t h e F e d e r a l r e s e r v e a g e n t ' s depa r tmen t , s e r v i n g a t a l l

t imes as an a s s i s t a n t t o t h e F e d e r a l r e s e r v e agen t and q u a l i f i e d

t o a c t f o r t h e agen t in h i s ab sence . Expe r i ence has shown t h a t

t h e r e i s d i f f i c u l t y in f i l l i n g t h e o f f i c e of depu ty F e d e r a l r e -


963

- 8 2 -

s e r v e a g e n t . This o f f i c e r i s r e q u i r e d t o have t h e same q u a l i f i -

c a t i o n s as t h e F e d e r a l r e s e r v e a g e n t ; he must have had banking

e x p e r i e n c e and he must not be an 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 any bank. At the same t ime he i s no t a s a r u l e , a s a l a r i e d o f -

f i c e r , and r e c e i v e s only the 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 m e e t i n g s , and he i s ob l iged t o be p repa red t o assume

t h e d u t i e s of t h e F e d e r a l r e s e r v e agen t in case of t h e absence o r

d i s a b i l i t y of t h a t o f f i c e r , which invo lves a t r a n s f e r and 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 to 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 ive t h e Board more l a t i t u d e in the s e l e c t i o n of t h e Class

"C" d i r e c t o r s o t h e r than t h e F e d e r a l r e s e r v e a g e n t .


1912 E X - O F F I C I O M E M B E R S

WILLIAM 6 . McADOO SECRETARY OF THE TREASURY

CHAIRMAN


WASHINGTON

W . P . G . H A R D I N G , GOVERNOR P A U L M. W A R B U R G , VICE GOVERNOR F R E D E R I C A. DELANO A D O L P H C . M I L L E R C H A R L E S S . HAMLIN


AND FISCAL AGENT


F E D E R A L R E S E R ^ ^ O A R D

J a n u a r y 11, 1917 •

F e d e r a l Rese rve Bank,

Gent lemen:

We u n d e r s t a n d t h a t t h e weekly r e p o r t s f o r t h e g o l d s e t t l e m e n t f u n d as fo rwarded now, r e p r e s e n t t h e c r e d i t s i n a s i n g l e a c c o u n t which you c a r r y w i th each o t h e r F e d e r a l r e s e r v e bank . You h n v s , no doub t , c o n s i d e r e d t h e a e s i r a b i l i t y of r e p o r t i n g , i n s t e a d of t h e c r e d i t amount f o r each a c c o u n t , m e r e l y t h e n e t amounts in a c c o u n t s where t h e b a l a n c e i s i n f a v o r of a n o t h e r F e d e r a l r e s e r v e bank . The o b s t a c l e zo be e n c o u n t e r e d i n t h i s c o n n e c t i o n i s , of c o u r s e , t h e d i f f i c u l t y of h a v i n g t h e t ime s c h e d u l e s s o o p e r a t e d as t o s e c u r e e x a c t agreement a t any moment be tween t h e a c c o u n t s of t h e v a r i o u s banks , bu t t h e b e n e -f i t s of r e p o r t i n g t h e s m a l l e r number of i t ems a r e s o obvious t h a t we t h i n k i t d e s i r a b l e t o endeavor t o a s c e r t a i n how c l o s e l y t h e v a r i o u s a c c o u n t s would a g r e e .

To t h i s end, we r e q u e s t t h a t , i n a d d i t i o n t o s e n d i n g t h e r e g u l a r weekly t e l e g r a m as a t p r e s e n t , you fo rward by m a i l e a c h Wednesday e v e n i n g f o r some l i t t l e t i m e t o come, a memoran-dum of t h e n e t amount s t a n d i n g t o t h e d e b i t o r c r e d i t of e a c h of t h e o t h e r F e d e r a l r e s e r v e b a n k s . I n t h i s way, we can soon d e t e r m i n e whe the r or not a r e p o r t based or. on ly t h e n e t c r e d i t b a l a n c e s would be s a t i s f a c t o r y .


A s s i s t a n t S e c r e t a r y .

>



WILLIAM G. McADOO SECRETARY OF THE TREASURY

CHAIRMAN


WASHINGTON

3 -W . P . 6 . H A R D I N G , GOVERNOR P A U L M. W A R B U R G , VICE GOVERNOR F R E D E R I C A. DELANO A D O L P H C . MILLER C H A R L E S S . HAMLIN

H . PARKER W I L L I S , PEFRETARY S H E R M A N P . ALLEN V.ALS^F.- SECRETARY

AND FISCAL AGENT



J a n u a r y 1 0 , 191%.

Dear S i r :

Th i s w i l l c a l l a t t e n t i o n t o t h e f a c t t h a t copy f o r

b u s i n e s s c o n d i t i o n s t o be used i n t h e F e d e r a l Rese rve B u l l e t i n ,

f o r F e b r u a r y s h o u l d be i n t h e o f f i c e s of t h e F e d e r a l Rese rve

Board no t l a t e r t h a n J a n u a r y 24, I 9 I 7 . With t h i s copy, p l e a s e

send t h e u s u a l i n f o r m a t i o n &s t o c l e a r i n g e p e r a t i o n s on which

t h e summary f o r t h e B u l l e t i n i s made u p , and do no t f a i l t o

i n c l u d e t h e summary of b u s i n e s s c o n d i t i o n s upon t h e s l i p s f u r -

n i s h e d you f o r t h e p u r p o s e .

Because of t h e f a c t t h a t p a p e r and o t h e r c o s t s have

i n c r e a s e d , t h e Board d e s i r e s t o r e d u c e t h e s i z e and c o s t of

t h e B u l l e t i n a s much a s p o s s i b l e . You a r e , t h e r e f o r e , r e q u e s t e d

t o l i m i t y o u r s t a t e m e n t of b u s i n e s s c o n d i t i o n s t o no t more t h a n

one t h o u s a n d words , u n l e s s some u n u s u a l c o n d i t i o n has a r i s e n i n

y o u r d i s t r i c t which w a r r a n t s e x t e n s i o n of y o u r d i s c u s s i o n .

Very r e s p e c t f u l l y ,

S e c r e t a r y .


TOR RELEASE IN MORNING PAPERS. JANUARY 14, 1917.

PRESS STATEMENT.

January 13 , 1917.

A f t e r h a v i n g g iven much a t t e n t i o n t o t h e problem of con-t r o l l i n g and. r e g u l a t i n g the gold supp ly of t h e Uni ted S t a t e s and t o t h e q u e s t i o n of bank r e s e r v e s in g e n e r a l , t h e F e d e r a l Reserve Board, has p r e p a r e d and t r a n s m i t t e d t o t h e Chairmen of t h e Committees on Banking and Currency of t h e Sena te and House of R e p r e s e n t a t i v e s recommendations f o r t h e amendment of t h e F e d e r a l Reserve Ac t . While i t i s no t deemed d e s i r a b l e t o g ive out t h e t e x t of t he amendments t r a n s m i t t e d j s i n c e they w i l l p r o b a b l y soon be i n t r o d u c e d in Congress t h e f o l l o w i n g g e n e r a l s t a t e m e n t concern ing them i s made p u b l i c .

When t h e F e d e r a l Reserve Act 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 w i t h n a t i o n a l problems of bank ing and c u r r e n c y . S i n c e i t s enac tment f i n a n c i a l and economic c o n d i t i o n s in t h e Uni ted S t a t e s have undergone f a r - r e a c h i n g changes which were no t f o r e s e e n t h r e e years ago . The United S t a t e s has grown t o be a wor ld power in f i n a n c i a l a f f a i r s and i t seems n e c e s s a r y t h a t t h e Act ,which has proved of such g r e a t va lue in t h e t r e a t m e n t of our dotiiestic problems shou ld now be amended in o r d e r t o e n a b l e us t o d e a l e f f e c t i v e l y w i th t h e new i n t e r n a t i o n a l problems which seem d e s t i n e d t o p l a y so import a n t a p a r t i n our economic l i f e . The banking sys tem of t h e Uni ted S t a t e s should be p r e p a r e d t o meet e f f e c t i v e l y two c o n d i t i o n s of op-p o s i t e c h a r a c t e r - one, t he e x c e s s i v e and u n c o n t r o l l e d i n f l o w of g o l d , t he o t h e r t h e e x c e s s i v e and 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 proposed a r e des igned t o p rov ide means of c o n t r o l l i n g an o v e r - e x t e n s i o n of l o a n s based on new a c c r e t i o n s t o our gold s t o c k and t o p r o v i d e f o r t h e m o b i l i z a t i o n and c o n c e n t r a t i o n of t h e gold h o l d i n g s of t h e Uni ted S t a t e s so t h a t t h e f l o w of gold back i n t o Europe, o r t o South America o r t o t h e O r i e n t , may be a r r anged w i t h -ou t f o r c i n g any v i o l e n t c o n t r a c t i o n of l o a n s o r c a u s i n g undue d i s -t u r b a n c e t o l e g i t i m a t e b u s i n e s s .

Of approx ima te ly two and t h r e e - q u a r t e r b i l l i o n s of gold in t h i s c o u n t r y t h e r e a r e he ld o r c o n t r o l l e d by F e d e r a l r e s e r v e banks abou t $736 ,000 ,000 , of which F e d e r a l r e s e r v e a g e n t s h o l d $ 2 8 3 , 0 0 0 , -000 as s e c u r i t y f o r F e d e r a l r e s e r v e no t e s o u t s t a n d i n g , and $ 4 5 3 , -000 ,000 i s r e s e r v e money and must t h e r e f o r e be used c o n s e r v a t i v e l y . But even assuming t h a t t he F e d e r a l r e s e r v e banks were w i l l i n g t o r e -duce t h e i r gold r e s e r v e s t o 40$ of t h e i r d e p o s i t s and no te l i a b i l i t y


967 ±915

** 2 '**

(which would be rega rded as a minimum and i n normal t imes would be i n a d e q u a t e ) t h e amount of f r e e g o l d , i . e . , t h e amount of gold t h a t t h e F e d e r a l r e s e r v e banks would l o s e b e f o r e r e a c h i n g t h i s 40fo minimum, would be a l i t t l e more t han $375 ,000 ,000 . While t h i s i s a ve ry l a r g e sum i t s s u f f i c i e n c y can not s a f e l y be assumed when we c o n s i d e r t h e wide scope of our t r a n s a c t i o n s in wor ld f i n a n c e and the 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 i m a t e d t h a t t h e r e a r e now in t he hands of t h e p u b l i c , i* e . , o u t s i d e the Treasu ry and t h e banks , over e i g h t hun-dred m i l l i o n d o l l a r s in gold and gold c e r t i f i c a t e s , and t h a t t h e r e a r e a t p r e s e n t h e l d in the v a u l t s of member banks about $ 8 1 5 , 0 0 0 , -000 of r e s e r v e money of which $540 ,000 ,000 i s gold co in or gold c e r t i f i c a t e s . There should be added t o t h i s e s t i m a t e about $ 6 0 0 , -000 ,000 of l a w f u l money in t h e v a u l t s of nonmember S t a t e banks and t r u s t companies .

NOTE AMENDMENT.

The F e d e r a l r e s e r v e n o t e , which i s an o b l i g a t i o n of t he Uni ted S t a t e s s e c u r e d by an ample r e s e r v e of gold and commercial p a p e r , i s a c c e p t e d as w i l l i n g l y by the p u b l i c as a n a t i o n a l bank no t e or as any o t h e r form of cu r r ency , and t h e p u b l i c does no t d i s c r i m i n a t e between d i f f e r e n t forms of Uni ted S t a t e s c u r r e n c y . 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 has been s u b s t i t u t e d f o r gold cer~ t i f i c a t e s t o t h e e x t e n t of about t h r e e hundred m i l l i o n d o l l a r s .

' Under t h e p r e s e n t law t h i s gold i s d e p o s i t e d w i t h the F e d e r a l r e s e r v e a g e n t s in r edempt ion of the F e d e r a l r e s e r v e no t e s i s s u e d a g a i n s t i t . The no te so p rov ided f o r t h e r e b y in e f f e c t ceases t o be an o b l i g a t i o n of t h e Fede ra l r e s e r v e bank; b u t as t h e gold does no t f i g u r e as an a s s e t of t h e F e d e r a l r e s e r v e banks , t h e F e d e r a l r e s e r v e banks a r e unab le t o show t h e g r e a t e r s t r e n g t h which might be ev idenced if t h e law p e r m i t t e d , as proposed in the amendments, t h e i s s u a n c e of F e d e r a l r e s e r v e n o t e s no t only a g a i n s t commercial p a p e r , bu t a l s o a g a i n s t gold o r a g a i n s t e i t h e r , p rov ided always t h a t every F e d e r a l r e s e r v e no te must be covered by a t l e a s t lOOfo of commercial paper or g o l d , and t h a t t h e r e must always be a go ld r e s e r v e of 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 .

RESERVES.

The c o n t r o l of gold by F e d e r a l r e s e r v e banks in t imes of abundance such as a t p r e s e n t , w i l l d e c r e a s e the danger of i n f l a t i o n of domest ic c r e d i t s and a t t h e same t ime w i l l e n a b l e the coun t ry when t h e t i d e t u r n s t o p a r t w i t h l a r g e sums of gold w i t h l e s s i n -convenience o r shock , t hus e n a b l i n g us more s a f e l y and e f f e c t i v e l y


967

- 3 -

. t o proceed w i t h t he development of our f o r e i g n t r a d e and t o g i v e t h e n e c e s s a r y c r e d i t f a c i l i t i e s f o r i t s e x t e n s i o n . The United S t a t e s should be in a p o s i t i o n t o f ace c o n d i t i o n s which may c a l l f o r an o u t f l o w of gold w i t h o u t any d i s t u r b a n c e s of our own o r t o t h e w o r l d ' s b u s i n e s s , and w i t h o u t making n e c e s -s a r y d r a s t i c changes in our i n t e r e s t o r d i s c o u n t r a t e s . The amendments sugges t ed by t he Board a r e des igned t o enab l e t h e F e d e r a l r e s e r v e banks t o wi thdraw gold from a c t u a l c i r c u l a t i o n wh i l e e n a b l i n g member banks a t t h e same t ime t o r e l e a s e gold which a t p r e s e n t i s t i e d up i n t h e i r cwn v a u l t s . The amendments a re based upon the t h e c r y t h a t a l l of t he i n d i v i d u a l banks shou ld s t r e n g t h e n the gold h o l d i n g s of t h e F e d e r a l r e s e r v e banks . The c o u n t r y ' s h o l d i n g s of gold a re no t used most e f f e c t i v e l y when t h e y a r e i n t h e v a u l t s of a l a r g e number of banks s c a t t e r e d a l l over the coun t ry , bu t i t s g r e a t e s t use Would come from con-c e n t r a t i n g i t t o a g r e a t e r d i g r e e in t h e v a u l t s of t h e F e d e r a l r e s e r v e banks , where i t can be e f f e c t i v e l y p r o t e c t e d when no t r e q u i r e d and effectively ttsdd-when needed. The member bank does no t r e q u i r e gold wi th which to supply t h e o r d i n a r y demands of i t s d e p o s i t o r s so much as c u r r e n c y .

I t i s f rom t h i s p o i n t of view t h a t the F e d e r a l Reserve Board has proposed t h a t Congress i n c r e a s e t he r e q u i r e d r e s e r v e s t o be m a i n t a i n e d by member banks w i t h t h e F e d e r a l r e s e r v e banks . On November 17, 1916, t he cash h o l d i n g s of a l l member banks were about $815 , 000 ,000 . Umder the proposed amendment of S e c t i o n 19 ,$250 ,000 ,000 of t h i s amount would be t r a n s f e r r e d t o the F e d e r -a l r e s e r v e banks . Hence t h e Bo ard b e l i e v e s t h a t u l t i m a t e l y t h e law should r e q u i r e of member banks no more than t h a t they shou ld m a i n t a i n i s p e c i f i e d ba l ances w i t h the F e d e r a l r e s e r v e banks i n amounts adequate t o supply the n e c e s s a r y r e s e r v e b a s i s , and t h a t the F e d e r a l r e s e r v e banks must have s u f f i c i e n t r e s e r v e s of gold >vith which t o p r o t e c t a l l o b l i g a t i o n s , bu t t h a t t h e r e shou ld , however, be no l e g a l r equ i r emen t as t o the amount df cu r rency t h a t a member bank should c a r r y in i t s own v a u l t . This i s a m a t t e r of b u s i n e s s judgment t h a t might w e l l be 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 was t hough t , however, t h a t i f t h i s p r i n c i p l e were c a r r i e d i n t o f u l l e f f e c t a t t h i s t ime , t h e s t e p might be cons ide red too ex t r eme , p a r t i c u l a r l y under p r e s e n t c o n d i t i o n s , and n o t h i n g should be done t h a t might t end t o a f u r t h e r r e l e a s e of r e s e r v e money.

A minimum amount of cu r r ency t h a t t he member banks shou ld be r e q u i r e d t o keep in t h e i r v a u l t s i s , t h e r e f o r e , p r e -scribed. The amount sugges t ed i s 5$ of t he demand d e p o s i t s , so !--• t h a t t he t o t a l r equ i remen t s - cash and r e s e r v e - w i l l remain p r a c -t i c a l l y unchanged. While t he e f f e c t of some of t h e p roposed


191? 967

- 4 -

changes w i l l be to reduce somewhat t he r e s e r v e r e q u i r e m e n t s , t he r e s e r v e s w i l l he i n c r e a s e d by t h e a b r o g a t i o n of t h e p r a c t i c e h i t h e r t o observed of coun t ing i t ems in t r a n s i t o r " f l o a t " as r e -s e r v e , The p e r m i s s i o n given member banks t o use t h e i r own d i s c r e -t i o n as t o the c h a r a c t e r of c u r r e n c y in t h e i r v a u l t s , w i l l enab le them t o r e l e a s e t h e gold they now h o l d , w i t h t h e impor t an t r e s u l t t h a t the s u b s t i t u t i o n of F e d e r a l r e s e r v e n o t e s f o r gold and 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 t h i s change in t h e law. Wi thou t some such change member banks w i l l c o n t i n u e t o ask f o r gold c e r t i f i c a t e s i n sma l l denomina t ions , because as long as t h e y must have gold or l a w f u l money to count as r e s e r v e i t would be imposs ib le f o r t he banks t o exchange them f o r Fede ra l r e s e r v e n o t e s .

OTHER PROPOSED AMENDMEKTS.

Bes ides t h e proposed changes r e l a t i n g t o no t e i s s u e s and to r e s e r v e s the Board has sugges t ed a l s o t h e f o l l o w i n g :

Amendment of s e c t i o n 11 so as t o p e r m i t t h e F e d e r a l Reserve Board t o r a i s e r e s e r v e r equ i r emen t s i n emergenc ies , j u s t as 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 ind to lower t h o s e r e q u i r e m e n t s .

This p r o v i s i o n would., i f adopted , e n a b l e the F e d e r a l Reserve Board in p ro longed p e r i o d s of ex t reme e a s e in the money marke t t o check any tendency toward e x c e s s i v e l o a n s o r o t h e r forms of undue e x t e n s i o n s of c r e d i t .

Amendment of S e c t i o n 16 t o p e r m i t nonmember S t a t e banks and t r u s t companies, even though too sma l l t o be e l i g i b l e f o r mem-b e r s h i p i n t he F e d e r a l r e s e r v e banks , to a v a i l t hemse lves of the c l e a r i n g and c o l l e c t i o n f a c i l i t i e s of the F e d e r a l r e s e r v e banks , p rov ided t h a t t h e y cover a t p a r checks on themse lves s e n t f o r c o l l e c t i o n by the F e d e r a l r e s e r v e bank, and p r o v i d e d f u r t h e r t h a t t h e y keep a compensat ing ba lance w i t h t h e F e d e r a l r e s e r v e bank in an amount t o be determined under r u l e s p r e s c r i b e d by the F e d e r -a l Reserve Board, This i s no t i n t ended t o o p e r a t e as an e x t e n s i o n of any of t he p r i v i l e g e s of the F e d e r a l r e s e r v e sys tem t o nonmember banks a t t h e expense of members, bu t on the c o n t r a r y the amendment i s proposed p r i m a r i l y f o r t he convenience of t h e p u b l i c and i n c i -d e n t a l l y f o r t h e b e n e f i t of t he member banks . I t i s con templa ted t h a t the compensat ing ba l ances which nonmember banks p a r t i c i p a t i n g in t h e c l e a r i n g p l a n w i l l be r e q u i r e d to keep w i t h F e d e r a l r e s e r v e banks , w i l l be s u f f i c i e n t l y l a r g e t o p r o t e c t member banks and j u s -t i f y F e d e r a l r e s e r v e banks i n under taking, the s e r v i c e . Any c l e a r -


967

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m g and c o l l e c t i o n p l a n to be e f f e c t i v e must be so comprehen-s i v e as to i n c l u d e a l l checks . At p r e s e n t t he p a r l i s t s of t h e F e d e r a l r e s e r v e banks i nc lude t h e names of banks checks on which can bo c o l l e c t e d < i n any c i r cums tances a t a minimum of t ime and expense j b u t do not embrace a l a r g e number of towns in eve ry S t a t e where t h e r e a re no member banks ; and in o r d e r t o make c o l -l e c t i o n s on such p o i n t s many banks a r e o b l i g e d t o m a i n t a i n a c -coun ts i n a d d i t i o n t o t h e i r r e s e r v e accoun t s w i t h the F e d e r a l r e s e r v e banks . A n e c e s s a r y f a c t o r in any s u c c e s s f u l c l e a r i n g p l a n i s the o f f s e t , whereby b a l a n c e s only r e q u i r e s e t t l e m e n t i n s t e a d of t h e t o t a l volume of t r a n s a c t i o n s * As l o n g as t he c l e a r i n g sys tem does not embrace a l l of t he banks t h i s o f f s e t i s l o s t in a co r r e spond ing degree and t he v a l u e of t h e sys tem d imin i shed in p r o p o r t i o n .

Amendment of S e c t i o n 22 the p e n a l s t a t u t e •* so as to d e f i n e more c l e a r l y the r i g h t s and l i m i t a t i o n s of d i r e c t o r s i n t he m a t t e r of a c c e p t i n g f e e s o r compensat ion o t h e r than t he o r d i n a r y f e e s p a i d 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 endered i n t he r e g u l a r course of b u s i n e s s , t he pe r fo rmance of which s e r v i c e i s no t incumbent upon them i n t h e i r c a p a c i t y as d i r e c t -o r s .

Amendment of S e c t i o n 13 t o r e s t o r e the p r o v i s i o n which was by e r r o r s t r i c k e n from t h e Act i n t he amendments of September 7, 1916, thus r e s t o r i n g t o n a t i o n a l b a n k s , w i t h the a p p r o v a l of the F e d e r a l Reserve Board , t h e r i g h t to a c c e p t up t o 100% of t h e i r c a p i t a l and s u r p l u s i n t r a n s a c t i o n s i n v o l v -i n g impor t s o r e x p o r t s .

Amendment of S e c t i o n 17 t o cance l the p r o v i s i o n of t h e N a t i o n a l Bank Act which r e q u i r e s n a t i o n a l banks t o ma in -t a i n -a minimum d e p o s i t of Government bonds w i t h t h e T r e a s u r e r of t he Uni ted S t a t e s • N a t i o n a l banks a r e no l o n g e r r e q u i r e d 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 o r g a n i z e d bank i s no t o b l i g e d t o pu rchase o r c a r r y any bonds of t he Uni ted S t a t e s ; bu t t h e r e a re a number of n a t i o n a l banks o r g a n i s e d b e f o r e the p a s s a g e of the F e d e r a l Reserve Act which have r e t i r e d t h e i r n a t i o n a l bank c i r c u l a t i o n in f u l l , y e t t h e y a r e , u n d e r a c o n s t r u c t i o n of the o l d law, r e q u i r e d t o keep on d e p o s i t w i t h t h e T r e a s u r e r of the Uni ted S t a t e s , a c e r -t a i n minimum of Uni ted S t a t e s bonds . The Board f e e l s t h a t i t i s j u s t 1b t h e s e banks t h a t t hey be r e l i e v e d of t h i s o b l i g a t i o n .

Amendment of s e c t i o n 25 to a u t h o r i z e member banks l o -c a t e d in c i t i e s of more than 100,000 p o p u l a t i o n and which have


1919 967

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% c a p i t a l and s u r p l u s cf more t l i sS $ 1 , 0 0 0 , 0 0 0 t o e s t a b l i s h %#*nches i n the same c i t y , p n v U M t h e S t a t e laws do n o t p r o h i b i t S t a t e banks and t r u s t companies from e s t a b l i s h i n g b r a n c h e s .

Amendment of S e c t i o n 9 t o a u t h o r i z e mutua l s a v i n g s banks no t h a v i n g c a p i t a l s t o c k t o become a s s o c i a t e members of t h e F e d e r a l r e s e r v e system under c e r t a i n p r e s c r i b e d c o n d i t i o n s . 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 be t h e mu-t u a l s a v i n g s banks of t he e a s t e r n and New England S t a t e s , which can no t become members of the F e d e r a l r e s e r v e sys tem under t h e p r e s e n t law owing t c t h e l a c k of any p r o v i s i o n e n a b l i n g them to s u b s c r i b e f o r c a p i t a l s t ock of a F e d e r a l r e s e r v e bank, as t hey 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 p e r c e n t a g e could be b a s e d . They would be r e q u i r e d t o c a r r y a r e s e r v e b a l -ance w i t h t h e F e d e r a l r e s e r v e bank a g a i n s t t h e i r t ime d e p o s i t s i n t he same p r o p o s t i o n as member banks; and t h e accommodations proposed f o r mutua l sav ings banks a re l i m i t e d s t r i c t l y t o t he 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 .

Amendment of S e c t i o n 18 so as to g i v e t o Uni ted S t a t e s one -yea r 3% gold n o t e s in the hands of F e d e r a l r e s e r v e banks the 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 s u a n c e of F e d e r a l r e -s e r v e bank n o t e s , such c i r c u l a t i o n to be t axed a t t h e same r a t e a s ' . c i r c u l a t i n g n o t e s , which a r e s e c u r e d by 3$ bonds of t h e Uni ted S t a t e s . In the op in ion of the Board i t i s d e s i r a b l e t o ex t end t h i s p r i v i l e g e t o the F e d e r a l r e s e r v e banks in o r d e r t h a t t h e y may have a d d i t i o n a l means of p r o t e c t i n g themselves a t t imes when t h e r e i s an unusua l demand f o r c u r r e n c y .

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 and o f -f i c e of deputy F e d e r a l r e s e r v e a g e n t , thus h a v i n g two u n a t t a c h e d 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 , aid t o c r e a t e the 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 v e a g e n t , who s h a l l no t be a d i r e c t o r of t h e bank, b u t who s h a l l be a s a l a r i e d bonded o f f i c e r in t he F e d e r a l r e s e r v e agent;1 s depa r tmen t , s e r v i n g a t a l l t imes as an a s s i s t a n t to the F e d e r a l r e s e r v e agen t and q u a l i f i e d t o a c t f o r the agen t in h i s absence . Exper ience has shown t h a t t h e r e i s d i f f i c u l t y in f i l l i n g t h e o f f i c e of deputy F e d e r a l r e s e r v e a g e n t . This o f f i c e r i s r e q u i r e d to have t he same q u a l i f i c a t i o n s as the F e d e r a l r e s e r v e a g e n t ; he must have had bank ing e x p e r i e n c e and he must no t be an 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 any bank. At t he same xime he i s n o t as a r u l e a s a l a r i e d o f f i c e r , and r e c e i v e s only the customary f e e s pa id d i r e c t o r s f o r a t t e n d a n c e upon m e e t i n g s , and he i s ob l iged t o be p r e p a r e d to assume t h e d u t i e s of t h e F e d e r a l r e s e r v e agen t in case of t he absence or d i s a b i l i t y of t h a t o f f i c e r , which i nvo lves a t r a n s f e r and 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 he change s u g g e s t e d w i l l o p e r a t e to 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 give t h e Board more l a t i -tude in the s e l e c t i o n of t he Class uClf d i r e c t o r s o t h e r t h a n the F e d e r a l r e s e r v e a g e n t .


969

BE IT ENACTED BY THE SENATE AND HOUSE OF REPRESENTATIVES OF

THE UNITED STATES OF AMERICA IN CONGRESS ASSEMBLED, That

S e c t i o n 3 of t h e Act approved December 23, 1913, known as

t h e F e d e r a l Reserve Act , be amended and r e e n a c t e d so as t o

r ead as f o l l o w s :

S e c . 3 . The F e d e r a l Reserve Board may p e r -m i t o r r e q u i r e any F e d e r a l r e s e r v e bank t o e s t a b -l i s h b ranch banks w i t h i n 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 o r w i t h i n t h e d i s -t r i c t of any F e d e r a l r e s e r v e bank which may have been suspended . Such b ranched , s u b j e c t t o such r u l e s and r e g u l a t i o n s as t h e F e d e r a l Reserve Board may p r e s c r i b e , s h a l l be o p e r a t e d under t he s u p e r -v i s i o n of a board of d i r e c t o r s t o c o n s i s t of n o t more t h a n s e v e n nor l e s s than t h r e e d i r e c t o r s , of whom a m a j o r i t y of one s h a l l be a p p o i n t e d by t h e F e d e r a l r e s e r v e bank of t h e d i s t r i c t , and t h e remain ing d i r e c t o r s by t h e F e d e r a l Reserve Board . D i r e c t o r s of branch banks s h a l 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 of the F e d e r a l Reserve Board,

1 /13 /17


1 9 & 1

970

BE IT ENACTED 37 THE SENATE AND HOUSE OF REPRESENTATIVES

OF THE UNITED STATES OF AMERICA. I'M CONGRESS ASSEMBLED, That

S e c t i o n 14, s u b s e c t i o n i e ) , ox t h e Act approved Docember 23,

1913, known as t h e Fede ra l Reserve Act , as amended by the Act

approved September 7, 1916, be f u r t h e r amended and r e - e n a c t e d

so as to read as f o l l o w s :

(©) To e s t a b l i s h accounts w i t h o t h e r F e d e r a l r e s e r v e banks f o r exchange purposes ana w i t h the consen t OR UPON THE ORDER AND DIRECTION of t h e F e d e r a l Reserve Board UPON AN AFFIRMATIVE VOTE OF NOT LESS THAN FIVE MEMBERS, AND UNDER REGULATIONS TO BE PRESCRIBED BY SAID BOARD, t o open and m a i n t a i n accounts i n f o r e i g n c o u n t r i e s , appo in t c o r r e s p o n d e n t s , and e s t a b l i s h agen -c i e s i n such c o u n t r i e s wheresoever i t may BE deenxED b e s t f o r t h e purpose of p u r c h a s i n g , s e l l i n g , and c o l -l e c t i n g b i l l s of exchange, and t o buy and s e l l , w i t h o r w i t h o u t i t s indorsement , th rough such c o r r e s p o n d -e n t s or a g e n c i e s b i l l s of exchange OR ACCEPTANCES aris-* i n g out of a c t u a l commercial t r a n s a c t i o n s which have n o t more t han n i n e t y days t o run , e x c l u s i v e of days of g r a c e , and which boa r t he s i g n a t u r e of two o r more r e s p o n s i b l e p a r t i e s , and, w i t h the consent of t h e Fed-e r a l Re,serve Board, t o open and m a i n t a i n bank ing a c -counts f o r such f o r e i g n c o r r e s p o n d e n t s o r a g e n c i e s . WHENEVER ANY SUCH ACCOUNT HAS BEEN OPENED OR AGENCY OR CORRESPONDENT HAS BEEN APPOINTED BY A FEDERAL RE-SERVE BANK WITH THE CONSENT OF OR UNDER THE ORDER AND DIRECTION OF THE FEDERAL RESERVE BOARD, ANY OTHER FED-ERAL RESERVE BANK MAY, WITH THE CONSENT AND APPROVAL OF THE FEDERAL RESERVE BOARD, BE PERMITTED TO CARRY ON OR CONDUCT THROUGH THE FEDERAL RESERVE BANK OPEN-ING SUCH ACCOUNT, OR APPOINTING SUCH AGENCY OR COR-RESPONDENT, ANY TRANSACTION AUTHORIZED BY THIS SECTION UNDER RULES AND REGULATIONS TO BE PRESCRIBED BY THE BOARD.

1 / 1 3 / 1 7




CHAIRMAN

J O H N S K E L T O N W I L L I A M S COMPTROLLER OF THE CURRENCY FEDERAL RESERVE BOARD 974

WASHINGTON

1922 W . P . G . H A R D I N G , GOVERNOR P A U L M. W A R B U R G , VICE GOVERNOR F R E D E R I C A . D E L A N O A D O L P H C . M I L L E R C H A R L E S S . H A M L I N


AND FISCAL AGENT



January 15, 1917.

Dear S i r :

In re UNFIT FEDERAL RESERVE NOTES FOFtfARDED TO THE TREASURER OF THE UNITED STATES FOR REDEMPTION BY A FEDERAL RESERVE BANK OTHER THAN THE FEDERAL RESERVE BANK OF ISSUE:

In J a n u a r y , 1916, a p l a n was f o r m u l a t e d t o p e r m i t

F e d e r a l r e s e r v e banks t o forward t h e i r own u n f i t 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 t o t h e T r e a s u r e r of t h e Uni ted S t a t e s f o r redemp-

t i o n . That p l a n , however, d id n o t p e r m i t a F e d e r a l r e s e r v e bank

t o s h i p t o t h e T r e a s u r e r , F e d e r a l r e s e r v e n o t e s i s s u e d by any

o t h e r F e d e r a l r e s e r v e bank. t

S e c t i o n 16 of the F e d e r a l Reserve Act p r o v i d e s in

p a r t t h a t , whenever a F e d e r a l r e s e r v e bank r e c e i v e s F e d e r a l r e -

s e r v e no t e s i s s u e d by a n o t h e r F e d e r a l r e s e r v e bank such no te

s h a l l be r e t u r n e d t o t h e Fede ra l r e s e r v e bank of i s s u e f o r

c r e d i t o r r edempt ion . In o r d e r t o avoid a round-abou t shipment

of F e d e r a l r e s e r v e n o t e s , f i r s t , from a r e c e i v i n g Fede ra l r e s e r v e

bank t o t h e r e s e r v e bank of i s s u e , and then from t h e bank of i s -

sue on t o Washington f o r redempt ion , t he f o l l o w i n g p l a n which per-

m i t s a r e c e i v i n g F e d e r a l r e s e r v e bank, under power of a t t o r n e y ,

t o forward u n f i t F e d e r a l r e s e r v e n o t e s of a n o t h e r F e d e r a l r e s e r v e

bank d i r e c t t o t h e T r e a s u r e r f o r r edempt ion , has been approved by

t he Treasury Department and the F e d e r a l Reserve Board»


198-3

974

—2—

1 . Each F e d e r a l r e s e r v e bank s h a l l g ive t o each o t h e r Fed-e r a l r e s e r v e bank a power of a t t o r n e y a u t h o r i z i n g such o t h e r bank t o a c t as i t s agen t in f o r w a r d i n g any of i t s u n f i t F e d e r a l r e s e r v e n o t e s t o t h e T r e a s u r e r of t h e Uni ted S t a t e s f o r r edempt ion . This power of a t t o r n e y may be in any form agreed upon by t h e r e s p e c t -ive F e d e r a l r e s e r v e banks and may d e f i n e t h e s t a n d a r d t o guide t h e f o r w a r d i n g bank i n d e t e r m i n i n g what F e d e r a l r e s e r v e n o t e s of t he i s s u i n g bank s h a l l be cons ide r ed u n f i t . The fo rward ing bank s h a l l , a t t h e t ime of sh ipment , n o t i f y t h e i s s u i n g bank t h a t the sh ipment has been mad6 f o r and in i t s name t o the T r e a s u r e r , and s h a l l charge the accoun t of t he i s s u i n g bank f o r the amount of n o t e s thus s h i p p e d . The i s s u i n g bank s h a l l t h e n c r e d i t the a c -count of t h e f o r w a r d i n g bank, and s h a l l i n c r e a s e on i t s books the i t e m , " M u t i l a t e d Currency forwarded f o r redempt ion" j u s t as i f i t , i t s e l f , had s e n t u n f i t n o t e s d i r e c t t o t h e T r e a s u r e r f o r r edempt ion .

2 . The T r e a s u r e r , on r e c e i v i n g such n o t e s , w i l l a d v i s e t h e f o r w a r d i n g banks of t h e i r r e c e i p t .

3 . The T r e a s u r e r w i l l t h e n complete t h e t r a n s a c t i o n j u s t as i f t h e no t e s had been forwarded t o him f o r redempt ion d i r e c t by t h e bank of i s s u e , under the p l a n approved by t h e Treasury Depa r t -ment and t h e F e d e r a l Reserve Board i n January , 191&. In accord— anca w i t h the p r o v i s i o n s of t h a t p l a n , the T r e a s u r e r w i l l iimie-S i a t e l y a d v i s e b o t h the F e d e r a l rese rv$bank of i s s u e and i t s Fed-e r a l r e s e r v e agen t of t he r e c e i p t of t h e n o t e s s e n t to him f o r r edempt ion , and w i l l redeem the n o t e s f o r t he account of t h e bank of i s s u e , no t f o r t h e account of t h e f o r w a r d i n g bank .

•**» A f t e r t he n o t e s have been redeemed t h e T r e a s u r e r , a c t -i n g unde r t h e powers of a t t o r n e y p rov ided f o r in t h e plan,, gove rn -i n g t h e redempt ion of u n f i t n o t e s sh ipped d i r e c t by t h e F e d e r a l r e s e r v e bank of i s s u e , w i l l forward such n o t e s to t h e Compt ro l l e r of t h e Currency f o r c a n c e l l a t i o n and d e s t r u c t i o n , a d v i s i n g t h e F e d e r a l r e s e r v e agen t of t h i s a c t i o n . B

By way of i l l u s t r a t i o n , a s p e c i f i c t r a n s a c t i o n would be

conducted as f o l l o w s :

( a ) The F e d e r a l Reserve Bank of Richmond r e c e i v e s from one of i t s member banks a d e p o s i t of u n f i t n o t e s of t h e F e d e r a l Reserve Bank of Chicago.

(b ) Ac t ing unde r the power of a t t o r n e y g iven t o i t by t h e


974

- 3 -

Chicago bank, t h e Richmond bank forwards t he se u n f i t no tes t o t he T rea su re r f o r redemption f o r and in behalf of the Chicago bank,

(c ) As soon as the Richmond bank makes the shipment d e -s c r i b e d in pa rag raph (b) f t charges the account of the Fede ra l r e s e r v e bank and so n o t i f i e s Chicago.

(d) Upon r e c e i p t of the n o t i c e forwarded under pa rag raph (c ) Chicago c r e d i t s the account of the Richmond bank and i n -c r e a s e s on i t s books the item "Mut i la ted c u r r e n c y forwarded f o r redempt ion" .

(e ) The T r e a s u r e r , on r e c e i p t of the no t e s sh ipped by Richmond, w i l l acknowledge r e c e i p t t o Richmond, w i l l a d v i s e both Chicago and i t s Federa l r e s e r v e agent s i m u l t a n e o u s l j j t h a t t he n o t e s have been r ece ived fo r the account of the Chicago bank, and w i l l redeem such no tes j u s t as i f t h s y had boon s e n t by the Fede ra l Reserve B^nk of Chicago d i r e c t t o t h e T r e a s u r e r

f o r redempt ion.

( f ) Upon r e c e i p t of the adv ice forwarded by t h e T r e a s u r e r , as provided in paragraph (e ) t h e Fede ra l Reserve Bank of C h i c a g o and i t s Fede ra l r e s e r v e agent w i l l r e c o r d t h e t r a n s a c t i o n in the manner o u t l i n e d in a c i r c u l a r l e t t e r from the Board da ted March 24, 1916, h e r e t o a t t a c h e d ,

(g) When the notes have been redeemed t h e T r e a s u r e r w i l l d e l i v e r them t o t h e Comptrol ler of the Currency in t h e name of t he Fede ra l r e s e r v e agent a t Chicago and f o r h i s c r e d i t .

(h) The Comptrol ler of the Currency, upon r e c e i p t of the n o t e s from the T r e a s u r e r , w i l l n o t i f y the Fede ra l r e s e r v e agent t h a t they have been rece ived f o r d e s t r u c t i o n , w i l l a r r ange fox t h e i r c a n c e l l a t i o n and d e s t r u c t i o n , and w i l l c r e d i t the a c c o u n t of the Federa l r e s e r v e agent of Chicago wi th the amount of the n o t e s when d e s t r o y e d .


Governor-

I n c l o s u r e .



CHAIRMAN


E X - O F F I C I O M E M B E R S W . P . G . H A R D I N G , GOVERNOR P A U L M. W A R B U R G , VICE GOVERNOR F R E D E R I C A. D E L A N O A D O L P H C . M I L L E R C H A R L E S S . H A M L I N

FEDERAL RESERVE BOARD H . P A R K E R W I L L I S , SECRETARY S H E R M A N P . A L L E N , ASST. SECRETARY

AND FISCAL AGENT


F E D E R A L RL B O A R D

J a n u a r y 15, 1917

Dear S i r :

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

copy of a form and r e s o l u t i o n t o "be Used "by member banks i n

o f f e r i n g f o r s a l e Un i t ed S t a t e s bonds t h r o u g h t h e T r e a s u r e r

of t h e U n i t e d S t a t e s . The form and r e s o l u t i o n a t t a c h e d a r e

t h o s e r e q u i r e d by t h e T r e a s u r e r .

one F e d e r a l Rese rve Bank has s e n t ou t a form unde r which t h e

T r e a s u r e r i s u n a b l e t o make t h e s a l e of b o n d s , and t o p r e v e n t

your f a l l i n g i n t o a s i m i l a r e r r o r .

E s p e c i a l a t t e n t i o n i s c a l l e d t o t h e r e q u e s t t h a t

T r e a s u r y r e c e i p t s accompany bonds o f f e r e d f o r s a l e .


Th i s n o t i c e i s s e n t you b e c a u s e of t h e f a c t t h a t

S e c r e t a r y

E n c l o s u r e .


REMARKS OF H. P. WILLIS,

At Boston, January l b , 1*317*

Mr* Chairman, and Members of the Boston Chapter cf the American In -

s t i t u t e of Banking:

I have been the gues t of the I n s t i t u t e of Banking a t many of

i t s c h a p t e r s Eas t and West i n t he Uni ted Sta tes . , but neve r , I t h i n k , i n

Boston. My expe r i ence a t t h e s e meet ings has been so happy, t h a t t o

add ano the r to t h e l i s t of c h a p t e r s I have known., i s always a t empta -

t i o n d i f f i c u l t t o r e s i s t . In th ia case yout* i n v i t a t i o n has found me

in a r e c e p t i v e mood because you have asked me t o t e l l you what I t h i n k

about some m a t t e r s which have long been a f a v o r i t e s u b j e c t of s tudy

wi th me, and in which I have l a t e l y had some d i r e c t e x p e r i e n c e . In-

t e r e s t i n g as t he P h i l i p p i n e N a t i o n a l Bank and the whole q u e s t i o n of

P h i l i p p i n e t r a d e i s i n and of i t s e l f , i t s l a r g e s t i n t e r e s t i s found i n

t h i s - t h a t i t i s but one phase of a g r e a t problem by which t h e Uni ted

S t a t e s i s c o n f r o n t e d today* I s h a l l r e f e r t o the P h i l i p p i n e N a t i o n a l

Bank and i t s expe r i ence t h e r e f o r e merely to a f f o r d p r a c t i c a l i l l u s t r a -

t i o n of my g e n e r a l thought on t h e b roader q u e s t i o n .

For many yea r s p a s t American merchants and m a n u f a c t u r e r s have

been t a l k i n g of expor t t r a d e . A s s o c i a t i o n s have been formed , m e e t i n g s

f r e q u e n t l y h e l d , and v a l u a b l e i dea s e x p r e s s e d . Government bureaus

have d i l a t e d a t l e n g t h upon r ea sons why American m a n u f a c t u r e r s never

secured s a t i s f a c t o r y c o n t r o l of f o r e i g n m a r k e t s , and Government a g e n t s


- 2 -

I B S ?

976,

have t r a v e l e d a l l over t h e world i n q u i r i n g i n t o t h e r e a s o n s why we d id

no t s e l l more of our goods t o t h e n a t i v e s of d i s t a n t r e g i o n s * There

had been very l i t t l e r e s u l t from a l l t h i s d i s c u s s i o n and i n v e s t i g a t i o n

u n t i l t he "breaking out of the European war , when many consumers t h r o u g h -

out t h e world who had p r e v i o u s l y gone f o r t h e i r s u p p l i e s t o p r o d u c e r s

who s t u d i e d t h e i r needs and under took t o supply them, t u r n e d t o t h e

Uni ted S t a t e s , no t because they wanted to do s o , bu t because t h e r e was

no choice . • Now we have b u i l t up a g r e a t f o r e i g n t r a d e , amounting f o r

t h e y e a r which has j u s t ended t o no t l e s s t h a n $5 ,400 ,000 ,000 i n e x p o r t s ,

and more t han $2 ,300 ,030 ,000 i n i m p o r t s , a n e t b a l a n c e many t i m e s t h a t

e v e r r e a l i z e d in any p r e c e d i n g y e a r . This immense expo r t t r a d e con -

s i s t e d t o t he e x t e n t of ^0% of omanufac turo i . goods , and wh i l e t h e r e has

been some compla in t of t he q u a l i t y of what we have t u r n e d o u t , I t h i n k

i t i s s a f e t o say t h a t xhe goods have g iven g e n e r a l s a t i s f a c t i o n , not

w i t h s t a n d i n g t h a t t hey have o f t e n been r ega rded as h igh—priced. Our

t r a d e wi th t h e P h i l i p p i n e s and t h e Far Eas t f u r n i s h e s an example of

what has occu r r ed t h a t i s ve ry i n t e r e s t i n g , t he mora so because of t he

f a c t t h a t we have a s p e c i a l r e l a t i o n t o t he P h i l i p p i n e I s l a n d s . They

a re bo th a f o r e i g n coun t ry and a p a r t of our t e r r i t o r y . Perhaps you are

no t p a r t i c u l a r l y i n t e r e s t e d i n t h e P h i l i p p i n e I s l a n d s . You have been

h e a r i n g of them f o r a long t ime from t h e p o l i t i c a l s t a n d p o i n t « They a re

a s e r i o u s and i m p o r t a n t n a t i o n a l problem i n t h a t c o n n e c t i o n . I a# no t

here t o d e a l w i t h them i n any such a s p e c t . What I wish t o c a l l t o your

a t t e n t i o n i s t h e i r t r a d e and t h e i r r e l a t i o n t o our b u s i n e s s . The P h i l i p -

p ine I s l a n d s have today about 9 , 0 0 0 , 0 0 0 p e o p l e , and t h e i r t o t a l t r a d e

w i t h o t h e r c o u n t r i e s c o n s i s t e d du r ing t h e y e a r 1915 of about $103,000,000


- 3 -

1.928 976.

of which $54,000,000 was e x p o r t e d , whi le $49,000,000 was i m p o r t e d . Of

t h e s e impor t s about came from the Uni ted S t a t e s , whi le 44$ of t h e

e x p o r t s were s e n t t o t he Uni ted S t a t e s . Ten y e a r s p r ev ious ly> i n 19^5/

t h e t o t a l t r a d e of t he I s l a n d s was l e s s thari t w o - t h i r d s what i t i s today ,

t he expo r t s t o a l l c o u n t r i e s amounting t o $33 ,000 ,000 , whi l e t h e impor t s

f rom a l l c o u n t r i e s were $30.,000,000, approx ima te ly * Of t he $33;000,000

of e x p o r t s a t t h a t t i m e , j i l i t t l e more t h a n 40$ was sh ipped t o t h e Uni ted

S t a t e s , wh i l e of t h e impor ts i n t o t h e P h i l i p p i n e I s l a n d s , only about 18$

came from t h e Uni ted S t a t e s • During t h e y e a r 1916 t h e t o t a l va lue of

sh ipments of domest ic merchandise t o t h e P h i l i p p i n e s from t h i s coun t ry

w i l l , i t i s e s t i m a t e d , agg rega t e about $22 ,000 ,000 , whi l e our impor t s

from t h e I s l a n d s may be e s t i m a t e d a t $34,000^000. I t i s wor thwhi le

t o s tudy w i t h some c a r e and 4 s t a i l t h e c o n d i t i o n s under which t h i s t r a d e

has been deve loped- F u l l j u s t i c e ought t o be done t o t h e e f f o r t s of

m a n u f a c t u r e r s and s h i p p e r s i n mee t ing t h e needs of t h e n a t i v e p o p u l a -

t i o n , p a r t i c u l a r l y as t h e problem of i n s u l a r t r a d e i s i n p r i n c i p l e t h e

same as t h e problem of f o r e i g n t r a d e e l sewhere * This problem i n c l u d e s

t h e f o l l o w i n g p r i n c i p a l e l e m e n t s :

D e s i r e on t h e p a r t of American m a n u f a c t u r e r s t o supp ly goods

a c c e p t a b l e t o b u y e r s , and the making of t r a n s p o r t a t i o n of o t h e r a r r a n g e -

ments n e e d f u l t o t h e cheap and s a t i s f a c t o r y d e l i v e r y of t h e i r goods .

Development of buying power and demand f o r American goods among

f o r e i g n consumers .

E s t a b l i s h m e n t of p r o f i t a b l e and mutua l t r a d e r e l a t i o n s so t h a t

e x p o r t s go from t h e Uni ted S t a t e s "by way of payment f o r i m p o r t s .


- 4 -

976.

1929

C r e a t i o n of economical banking c o n n e c t i o n s .

For many y e a r s t h e s e e l ement s i n t h e problem have been n e -

g l e c t e d i n t h e d i s c u s s i o n of A m e r i c a n - P h i l i p p i n e t r a d e , but today some

of them a r e a c c e p t e d , and e x p o r t and import b u s i n e s s i s s t e a d i l y improv-

i n g . A g r e a t o b s t a c l e t o t h e f u l l development of b u s i n e s s ha s been found

i n t h e t r a n s p o r t a t i o n s i t u a t i o n , which, of c o u r s e , has been bad a l l

t h r o u g h t h e European war . In s p i t e of t h i s h a n d i c a p , t r a d e i s g e n e r a l l y

a d m i t t e d t o be i n a very p romis ing and s a t i s f a c t o r y s t a t e * The suga r .

i n d u s t r y a t p r e s e n t i s h i g h l y p r o f i t a b l e wherever modern machinery has

been i n s t a l l e d , a s i t has a t a number of p o i n t s i n t h e I s l a n d s . Sub-

s t a n t i a l i n t e r e s t i n t h e suga r b u s i n e s s i s be ing shown by o u t s i d e i n -

v e s t o r s , and t h e r e i s r e a s o n t o expec t t h a t in t h e nea r f u t u r e t h e r e

w i l l be a c o n s i d e r a b l e development of modern suga r m i l l s equ ipped w i t h

p r o p e r machinery and a b l e t o produce good c e n t r i f u g a l suga r f o r e x p o r t .

The cocoanut o i l i n d u s t r y i s a l s o showing marked development , t h e b u s i « . -

nes s of e x t r a c t i n g o i l on t h e s p o t h a v i n g been r e c e n t l y i n t r o d u c e d i n

p l a c e of t h e o l d e r method of s h i p p i n g t h e copra abroad f o r e x t r a c t i o n

of t he o i l . The c i g a r b u s i n e s s hasbeen g r e a t l y s t i m u l a t e d by t h e high

p r i c e s of t obacco i n Europe and t h e Uni t ed S t a t e s . Hemp i s h igh i n

p r i c e and , as u s u a l , i s i n s t r o n g demand. In consequence of t h e good

p r i c e s r e a l i z e d f o r t h e i r p r o d u c t s t h e n a t i v e s have become b e t t e r cus -

tomers t h a n i n t h e p a s t , and t h e i r d e s i r e f o r American goods of a l l

k inds makes t h e I s l a n d s a d e s i r a b l e market f o r t e x t i l e s , au tomob i l e s ,

sewing mach ines , i r o n and s t e e l p r o d u c t s of &11 k i n d s , v a r i o u s forms

of wear ing a p p a r e l ( p a r t i c u l a r l y s h o e s ) , c a n n e d goods ,and a g r e a t v a r i e t y pf m a n u f a c t u r e s , e s p e c i a l l y t h o s e which have a R e l a t i v e l y l a r g e v a l u e i n s m a l l b u l k , and hence a r e a b l e t o bea r compara t ive ly h igh r a t e s of f r e i g h t .


I b L t

Americana in t r a d i n g w i t h t he P h i l i p p i n e s have committed

t he e r r o r of suppos ing t h a t a l a r g e p a r t of t h e i r marke t would d e -

pend upon the growth oi an American colony in t h e I s l a n d s . They

a r e now f i n d i n g i t more p r o f i t a b l e to adap t t hemse lves t o t h e n a -

t i v e demands Our e x p o r t e r s a r e t hus a t l a s t seeming ly working

a l o n g somewhat t h e r i g h t l i n e s > a l t h o u g h t h e y a r e t r e a t i n g t h e

s u b j e c t r a t h e r too na r rowly , f a i l i n g to r e a l i z e t h a t t h e same k ind

of energy and e n t e r p r i s e needed t o ex tend t h e i r s a l e s i n t h e

Uni ted S t a t e s , i s needed in t he P h i l i p p i n e I s l a n d s ; w h i l e they

too o f t e n n e g l e c t t h e f a c t t h a t t h e y must do a l l t h e y Can t o s t i -

m u l a t e i m p o r t a t i o n s from t h e I s l a n d s in o r d e r t o e n l a r g e the buy-

ing power of t h e n a t i v e s , and t h e r e b y improve t r a d e w i t h t h e Uni ted

S t a t e s . But t h i s p r o g r e s s may o r may no t be s t a b l e in t h e P h i l i p -

p i n e I s l a n d s , j u s t as i n t he case of o t h e r f o r e i g n c o u n t r i e s . There

i s p r o b a b l y more reason t o b e l i e v e in i t s s t a b l i l i t y because of t he

s t e a d y growth of t h e t r a d e w i t h t he P h i l i p p i n e s b e f o r e the war ,

and because of the p o l i t i c a l r e l a t i o n s between the United S t a t e s

and t h e I s l a n d s . N e v e r t h e l e s s , i n t h i s c a s e , as i n so many o t h e r s ,

t h e i n c r e a s e in b u s i n e s s w i t h the United S t a t e s has been p a r t l y

t h e r e s u l t pf n e c e s s i t i e s growing out of t h e d i s t u r b a n c e of wor ld

t r a d e , and i s no t s o l e l y due t o e f f o r t s on t h e p a r t of m a n u f a c t u r -

e r s , This t r a d e , moreover , has been c a r r i e d on unde r ex t r eme ly

d i f f i c u l t c o n d i t i o n s in bank ing , F i n a n c i a l r e l a t i o n s w i t h t h e


976

- 6 -

P h i l i p p i n e s have been rud imenta ry and u n s a t i s f a c t o r y , and t h e

I s l a n d s have had t o depend ve ry l a r g e l y upon t h e a i d of f o r e i g n

bank ing c a p i t a l .

What i s go ing to 'become of our f o r e i g n t r a d e a f t e r t h e

war i s ove r , no t mere ly wi th t h e P h i l i p p i n e I s l a n d s , b u t w i t h

o t h e r c o u n t r i e s ? This i s a u n i v e r s a l s u b j e c t of d i s c u s s i o n azld

i n q u i r y a t t he p r e s e n t t i m e . Some b e l i e v e t h e o u t l o o k w i l l be

b r i g h t e r and b e t t e r f o r our f o r e i g n b u s i n e s s t h e n t han i t i s nowj

o t h e r s seem t o e x p e c t a g e n e r a l r e a c t i o n , w h i l e s t i l l o t h e r s who

want t o be s a f e , p r e d i c t a p e r i o d of " t a p e r i n g o f f , " d u r i n g which

t r a d e w i l l g r a d u a l l y d e c l i n e t o someth ing l i k e i t s o ld l e v e l . I

do no t be long to any of t h e s e s c h o o l s of t h o u g h t , b u t am emphat-

i c a l l y a . b e l i e v e r in t h e d o c t r i n e t h a t t he d i r e c t i o n and amount

of b u s i n e s s a f t e r t h e war i s over w i l l depend v e r y l a r g e l y upon

o u r s e l v e s . If we want t h e b u s i n e s s , we can have i t ; and we can

have i t i n l a r g e measure because of t h e immense demand t h a t w i l l

e x i s t f o r our goods d u r i n g the g r e a t p e r i o d of r e c o n s t r u c t i o n

t h a t w i l l s e t in when t h e war i s o v e r . Moreover, we can, i f we

w i l l , preempt many undeveloped f i e l d s of f o r e i g n b u s i n e s s which ,

a t t h e p r e s e n t t i m e , a r e compara t i ve ly f r e e from c o m p e t i t i o n , and

which , a f t e r t h e war , w i l l no t be e x p l o i t e d even to t h e e x t e n t

t h e y have been i n t h e p a s t , because e x p o r t e r s and m a n u f a c t u r e r s i n

f o r e i g n c o u n t r i e s w i l l be unab le t o r e g a i n t h e i r ho ld immedia te ly ,

and w i l l on ly a f t e r c o n s i d e r a b l e t ime , be in p o s i t i o n to devo te


19 976

- 7 -

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

gave them b e f o r e t h e i n t e r n a t i o n a l convu l s ion which began i n

August , 1914. l7hat i s t he du ty of t he American bank ing and

b u s i n e s s community in t h e s e c i r c u m s t a n c e s ?

I do no t wish i n t h e l e a s t t o u n d e r e s t i m a t e what has

been done by some e n t e r p r i s i n g and a b l e b u s i n e s s concerns i n p r e -

p a r i n g themse lves f o r t h e con t inued development of t h e i r f o r e i g n

m a r k e t s . The e f f e c t of the g r e a t f o r e i g n t r a d e t h a t has been

thrown, one migh t s ay f o r c e d , i n t o our hands d u r i n g the p a s t two

y e a r s , has been to educa te many e lements of our b u s i n e s s p u b l i c

out of the p a r o c h i a l , a lmost i n s u l a r a t t i t u d e on t h i s s u b j e c t t h e y

had e n t e r t a i n e d in t h e p a s t . They now recogn ize t h e impor tance

of f o r e i g n b u s i n e s s as a b a l a n c e wheel and r e g u l a t o r of a l l b u s i -

n e s s , as a d i v e r s i f i e r of p r o d u c t i o n , as a means of e q u . l i z i n g and

s t a b i l i z i n g p r i c e s , and l a s t , but no t l e a s t , as a s o u r c e of v a l -

u a b l e a d d i t i o n a l p r o f i t , i r r e s p e c t i v e of t h e s t r e n g t h of home d e -

mands. But i t must a l s o be a d m i t t e d t h a t t h e r e a r e l a r g e s e c t i o n s

of t h e b u s i n e s s community which a r e i n d i f f e r e n t t o t h i s p o i n t of

View, and which a r e a p p a r e n t l y s imply w a i t i n g f o r someth ing t o

t u r n up, l e a v i n g i t t o Prov idence o r some p o l i t i c a l p a r t y t o t a k e

ca re of t h e i r f u t u r e b u s i n e s s ab road , t r u s t i n g t h a t when t h e war

i s o v e r b u s i n e s s may con t i nue p r e t t y good f o r a t ime a t l e a s t , o r ,

as Mr. K i p l i n g ha s exp res sed i t , " w a i t i n g some asy wonder, hoping

some s a v i n g s i g n . " For t h e s e , shou ld they c o n t i n u e t h e i r p r e s e n t


976 1 9 3 3

a t t i t u d e , t h e r e i s bu t l i t t l e p r o s p e c t of s u c c e s s , and. t h e y must

e x p e c t t o s e e t h e i r umronted and. unexpec ted teusiness d i s a p p e a r

in some cases a lmos t as q u i c k l y as i t came t o them, u n l e s s t h e r e many

i s d e f i n i t e and f a r s e e i n g a c t i o n on t h e i r p a r t . There a r e / l i n e s

of work i n t h e way of t h e development of commercial p r e p a r e d n e s s ,

and which must be u n d e r t a k e n in t h e nea r f u t u r e ; bu t of a l l

t h e s e t h e r e i s bu t one t h a t i s germane t o the purpose of t h i s m e e t -

i n g - t he development of a b e t t e r c o n t r o l 'of i n t e r n a t i o n a l banking .

by our own bankers and f i n a n c i e r s . I t i s t h i s m a t t e r on which I

w i s h t o speak t o you s a r i o u s l y .

For many yea r s p a s t t h e r e has been an a lmos t u n l i m i t e d

amount of t a l k about f o r e i g n bank ing , and ye t t h e number of b a n k -

i n g e n t e r p r i s e s a c t u a l l y e s t a b l i s h e d abroad by American bankers

p r i o r t o t h e passage of t he F e d e r a l pe se rve Act , could be counted

on t h e f i n g e r s of one h a n d . The F e d e r a l Reserve Act , as you

know, p r o v i d e s f o r t h e e s t a b l i s h m e n t of b r a n c h banks , by p r o p e r l y

q u a l i f i e d i n s t i t u t i o n s , in f o r e i g n c o u n t r i e s , and i t a l s o a u t h o r -

i z e s t h e F e d e r a l r e s e r v e banks t o e s t a b l i s h a g e n c i e s i n such coun-

t r i e s . Only two n a t i o n a l banks , so f a r as I am aware , have t a k e n

advan tage of t h i s p e r m i s s i o n , and of t h e s e bu t one , an eminent and

a b l y managed i n s t i t u t i o n of g r e a t r e s o u r c e s and f a r - r e a c h i n g v i s i o n ,

ha s e n t e r e d t h e f i e l d on a l a r g e s c a l e . A few months ago t h e r e was

an o u t c r y among b u s i n e s s men 's a s s o c i a t i o n s f o r an amendment t o the

F e d e r a l Reserve Act t h a t would p e r m i t bankers t o j o i n t o g e t h e r f o r


1984 976

—Q«-»

t h e purpose of o r g a n i z i n g such "branch i n s t i t u t i o n s . The demand

was heeded, and on September 7, 1916, Congress , a t t h e r e q u e s t

of t h e F e d e r a l Reserve Board, so amended t h e F e d e r a l Reserve Act

as t o pe rmi t such j o i n t l y owned banks t o be o r g a n i z e d . Thus f a r

no such banks have been e s t a b l i s h e d , and I am no t aware of any

p r o p o s a l s to c r e a t e them t h a t a re l i k e l y to come t o a head in

t h e n e a r f u t u r e . Perhaps t h e r e a r e some of which I am not aware ,

b u t c e r t a i n l y t h e movement has no t gone f a r , i f indeed i t has eve r

been s t a r t e d * We must conclude , t h e r e f o r e , t h a t t h e banks of t h e

c o u n t r y have no t gone a c t i v e l y i n t o the t a s k of p r e p a r i n g t h e m s e l -

ves f o r t he s t r u g g l e t'o r e t a i n our f o r e i g n t r a d e a f t e r t h e change

of c o n d i t i o n s which a l l admit must come when European c o n d i t i o n s

m a t e r i a l l y a l t e r , and when c o m p e t i t i o n i s r e s t o r e d t o something

l i k e i t s fo rmer i n t e n s i t y . The F e d e r a l r e s e r v e sys tem has made a

b e g i n n i n g by u n d e r t a k i n g p r e l i m i n a r y a r rangements l o o k i n g t o t h e

d e s i g n a t i o n of f o r e i g n agenc i e s i n t ended t o a s s i s t in f u l f i l l i n g

t h e pu rposes of t h e sys tem in so f a r as t h e s e r e l a t e t o f o r e i g n

o p e r a t i o n s . I need n o t , however, i n s i s t upon t h e f a c t t h a t t he

F e d e r a l r e s e r v e sys tem has a pu rpose which i s e s s e n t i a l l y d i f f e r -

en t from t h a t of o r d i n a r y commercial banks , and t h a t wha teve r i t

may do i n p romot ing our r e l a t i o n s w i t h f o r e i g n c o u n t r i e s and in

a i d i n g i n the g e n e r a l p l a n t o promote t h e w e l f a r e of t h e American

d i s c o u n t marke t , i t can not p e r f o r m t h e t a s k which only s t r o n g com-

m e r c i a l l y o rgan i zed i n s t i t u t i o n s can f u l f i l l - t h a t of e x p l o i t i n g


and deve lop ing t h e f o r e i g n market i n t h e i n t e r e s t of our own b u s i n e s s

community.

I t i s t o be f e a r e d t h a t some of our bankers look a t t h i s

q u e s t i o n as if i t were a q u e s t i o n of immediate p r o f i t s o l e l y . They a re

i n c l i n e d t o i n q u i r e i n t o t h e p o s s i b l e p r o f i t s t o be g a i n e d by t h e e s t a b -

l i s h m e n t of b ranches and c o n n e c t i o n s a b r o a d , a s if i t a f f e c t e d only them

and t h e w e l f a r e of t h e i r i n s t i t u t i o n s . The q u e s t i o n i s , however, a

good d e a l b roade r t h a n t h i s , s i n c e , as I have j u s t shown, i t i n v o l v e s

t h e whole m a t t e r of r e t a i n i n g our t r a d e and d e v e l o p i n g i t i n m a r k e t s

o t h e r t h a n our own domest ic f i e l d s . The b u s i n e s s man w i l l no t be ab l e

unde r e x i s t i n g c o n d i t i o n s i n t r a d e and i n d u s t r y , t o c a r r y on t h e cam-

p a i g n a l o n e . He must have t h a t p o w e r f u l a s s i s t a n c e which only t h e banker

can a f f o r d , and t h i s can not be r e n d e r e d w i thou t s p e c i a l o r g a n i z a t i o n

and c o o p e r a t i o n f o r f o r e i g n t r a d e i n t h e way t h a t I have spoken o f .

There a r e two methods by which<such e f f e c t i v e c o o p e r a t i o n can be a c -

compl ished; one, t h e a c t u a l e s t a b l i s h m e n t of b r anches ab road , t h e o t h e r

t h e e s t a b l i s h m e n t of connec t ions w i th some i n s t i t u t i o n which w i l l f a i t h -

f u l l y and e a r n e s t l y r e p r e s e n t t h e i n t e r e s t s of our own bankers and bus -

i n e s s men i n t h o s e f o r e i g n c o u n t r i e s . And j u s t h e r e l e t me speak t o

you b r i e f l y of t h e P h i l i p p i n e N a t i o n a l Bank i n i t s r e l a t i o n t o American

t r a d e and b u s i n e s s .

I have a l r e a d y e x p l a i n e d t h a t our t r a d e development i n t h e

P h i l i p p i n e I s l a n d s t hus f a r has been p a r t l y the r e s u l t of f o r t u i t o u s

c o n d i t i o n s , a n d p a r t l y the r e s u l t of a g r a d u a l comprehension of t h e needs

and c h a r a c t e r i s t i c s of O r i e n t a l b u y e r s . I have a l s o b r i e f l y s u g g e s t e d


- 1 1 -

1936 976.

t h a t t h i s development has o c c u r r e d under very d i f f i c u l t banking c o n d i t i o n s »

In China and Japan t h e r e a r e a number of n o t a b l e f i n a n c i a l i n s t i t u t i o n s

of l a r g e c a p i t a l i z a t i o n , sound management and broad c o n n e c t i o n s . Some

of t h e s e i n s t i t u t i o n s have b ranches i n Mani la , and i n t h e p a s t have

do as a l a r g e p a r t of t h e banking b u s i n e s s t h e r e . There has been no p a r -

t i c u l a r r eason why they should seek t o develop t h e r e s o u r c e s of t h e

P h i l i p p i n e s , and t h e y have very A a t u r a l l y c o n f i n e d themse lves q u i t e g e n -

e r a l l y t o exchange o p e r a t i o n s and a l i m i t e d c l a s s of commercial b u s i n e s s

i n t h e I s l a n d s . The P h i l i p p i n e Government has been o b l i g e d a t t i m e s t o

supplement l o c a l banking a c t i v i t i e s by making a d v a n c e s , sometimes t h rough

l o c a l banks , t o a g r i c u l t u r a l and o t h e r e n t e r p r i s e s i n t h e P h i l i p p i n e s .

As i s w e l l known, i t has a l s o e x e r c i s e d t h rough i t s T reasu ry Department

t h e f u n c t i o n of m a i n t a i n i n g t h e cu r r ency of t h e coun t ry a t a p a r i t y

w i t h g o l d . I t has been f e l t f o r a good whi le t h a t someth ing more was

n e e d e d , and t h i s w i t h o u t i n t h e s l i g h t e s t degree r e f l e c t i n g upozl t h e

s e r v i c e a l r e a d y r e n d e r e d by bankers or o u t s i d e i n s t i t u t i o n s which have

e s t a b l i s h e d t hemse lves i n t h e P h i l i p p i n e s , or by t h e e f f o r t s of such

l o c a l c a p i t a l a s i s i n v e s t e d i n t h e banking b u s i n e s s t h e r e . The purpose

t o be accompl i shed was t h a t of f u r t h e r i n g and deve lop ing l o c a l b u s i n e s s ,

of c o n n e c t i n g i t w i th t h e t r a d e and bahking o r g a n i s a t i o n s of t h e Uni ted

S t a t e s , and of i n j u r i n g a f t e r t h e t e r m i n a t i o n of t h e p r e s e n t s p e c i a l and

p e c u l i a r c o n d i t i o n s , a con t inuance and improvement of t h e t r a d e p r o g r e s s

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

The P h i l i p p i n e ; N a t i o n a l Bank i s t h u s a n a t u r a l ou tg rowth of

c o n d i t i o n s , and a f f o r d s a s u g g e s t i o n of one way i n which d i s t i n c t


and o rgan i zed e f f o r t must be made. l ook ing t o t he r e t e n t i o n and improvement

of f o r e i g n t r a d e . The Bank h&s t a k e n over most of t h e banking f u n c t i o n s

h e r e t o f o r e e x e r c i s e d by t h e Government, and i s supplement ing e x i s t i n g

banking i n s t i t u t i o n s by u n d e r t a k i n g o p e r a t i o n s which they have n o t ca red

t o go i n t o , or e l s e were n o i f i t t e d t o t a k e up . I t i s t o some e x t e n t

unavoidably occupying t he same f i e l d as t h e s e o t h e r i n s t i t u t i o n s , but i t

i n no wise seeks t o l i m i t t h e i r b u s i n e s s , but f a t h e r t o f u i ' t h d r i t . Since

i t s o r g a n i z a t i o n i t has s tood ready a t a l l t imes t o r e d i s c o u n t any paper

t h a t might be p r e s e n t e d to i t l o c a l l y » As t ime goes on, i t may be ex -

pec t ed t o e s t a b l i s h branches e l sewhere i n t h e O r i e n t , and p a r t i c u l a r l y i n

t h e P h i l i p p i n e s , and t h u s t o become a g e n e r a l O r i e n t a l i n s t i t u t i o n , not c

c o n f i n i n g i t s e l f e x c l u s i v e l y t o t h e P h i l i p p i n e s , but endeavor ing t o de -

ve lop t r a d e between the P h i l i p p i n e s and o t h e r p a r t s of t h e E a s t . For t h e

p r e s e n t i t s work i s n a t u r a l l y c o n f i n e d t o t h e I s l a n d s t h e m s e l v e s . I t has

a l r e a d y e s t a b l i s h e d twen ty - seven agenc ie s i n as many p r o v i n c i a l c a p i t a l s , ••

where."deposits a r e r e c e i v e d and exchange s o l d , and a t which a p p l i c a t i o n s

f o r loans may be f i l e d f o r t r a n s m i s s i o n t o Man i l a . A r e g u l a r l y o rgan ized

branch a t I l o i l o has been opened, and a branch f u l l y equipped f o r bus ines s i n

i s s h o r t l y t o b e / o p e r a t i o n i n New York. The Bank has e s t a b l i s h e d r e l a -

t i o n s wi th c o r r e s p o n d e n t s i n Japan and on the China C o a s t , and i s s e l l i n g

and buying exchange upon E a s t e r n p o i n t s g e n e r a l l y .

The i n t e r e s t of American bus ine s s men i n t h e new i n s t i t u t i o n

shou ld be genuine i f they a r e a t a l l concerned i n E a s t e r n t r a d e . Inasmuch

as the P h i l i p p i n e Na t iona l Bank i s endeavor ing t o do a s u b s t a n t i a l l o c a l


1 9 3 8

- 1 3 -

b u s i n e s s , d i s c o u n t i n g paper and a s s i s t i n g t he development of Phi l ipp ine-

e n t e r p r i s e s , i t i s i n a p o s i t i o n t o he lp i n the expans ion of i n s u l a r

b u s i n e s s to a very m a t e r i a l e x t e n t • One of t h e o b j e c t s of i t s c r e a t i o n

has been t h a t of c a r r y i n g f u r t h e r and r e n d e r i n g more e f f e c t i v e t h e wor£

of t h e former A g r i c u l t u r a l Bank7 which had a l r e a d y r e n d e r e d good s e r v i c e

i n h e l p i n g t h e growers of s u g a r , hemp, t o b a c c o , and o t h e r a g r i c u l t u r a l

p r o d u c t s . At t h e opening of t h e Bank1s b u s i n e s s , i t , of c o u r s e , unde r -

took t he duty of making a g r i c u l t u r a l loans» These a r e c a r e f u l l y l i m i t e d

by law t o one -ha l f of i t s c a p i t a l and s u r p l u s , p l u s such sums as may be

r e c e i v e d th rough t h e s a l e of a g r i c u l t u r a l bonds based on i t s mortgage

l o a n s . The new Bank has c a r r i e d t h u s d u r i n g the p r e s e n t s e a s o n , l a r g e

l oans t o sugar g rowers , and has made c o n s i d e r a b l e advances i n connec t ion

w i t h t h e m i l l i n g of s u g a r , American b u s i n e s s men who a r e l o o k i n g t o t h e

development of a market i n t h e P h i l i p p i n e I s l a n d s a r e b e i n g accommodated

th rough the u s u a l methods of opening c r e d i t s and f i n a n c i n g i m p o r t a t i o n s ;

w h i l e , as a l r e a d y s e e n , l o c a l e x p o r t e r s a r e be ing a i d e d i n b r i n g i n g t h e i r

p r o d u c t s t o m a r k e t , a s w e l l as i n merely a i d i n g t h e shipment of them

a b r o a d . The Bank has opened c r e d i t s i n t h e Uni ted S t a t e s f o r some of

t h e p r i n c i p a l i m p o r t e r s i n t he P h i l i p p i n e I s l a n d s , and has a l s o begun

f i n a n c i n g o p e r a t i o n s between Mani la and t h e a d j a c e n t c o a s t of China* In

a l l t h i s t h e new Bank w i l l be an impor tan t f a c t o r i n s t i m u l a t i n g and

d e v e l o p i n g our t r a d e w i th t h e P h i l i p p i n e s ,

The Bank had an a u t h o r i z e d c a p i t a l of 20 ,000 ,000 p e s o s , or

$10 ,000 ,000 g o l d , of which 10 ,100 ,000 pesos has been sub -

s c r i b e d by t h e Government of t h e P h i l i p p i n e


- 1 4 - 976

I s l a n d s . The remainder of t h e s t o c k i s o f f e r e d t o p u b l i c s u b s c r i p -

t i o n , and i s b e i n g g r a d u a l l y s o l d and t a k e n u p . As t h e d e p o s i t i n g

of i n s u l a r , p r o v i n c i a l and m u n i c i p a l funds t h r o u g h o u t ; t h e i s l a n d s

w i t h t h e bank i s made mandatory , excep t in c a se s where p u b l i c w e l l -

b e i n g may demand t h e use of o t h e r banks , t h e i n s t i t u t i o n a l r e a d y ;;

has c o n t r o l of a l a r g e volume of p u b l i c f u n d s . I t s r e sour t i e s a p -

p r o x i m a t e ' 66 ,000 ,000 p e s o s , o r about $33 ,000 ,000 i n American c u r -

r e n c y .

The p r e s i d e n t and v i c e p r e s i d e n t a r e a p p o i n t e d by t h e

Governor of t h e P h i l i p p i n e I s l a n d s ; and s i n c e t h e Government con-1

t r o l s a m a j o r i t y of s h a r e s , i t w i l l always c o n t r o l a m a j o r i t y of

t h e board of d i r e c t o r s . The t r a n s a c t i o n of g e n e r a l Government

b u s i n e s s , t h e r e c e i p t of c u r r e n t d e p o s i t s , payment of Government

checks , making of r e m i t t a n c e s t o f o r e i g n c o u n t r i e s , and t h e l i k e ,

a r e now i n t h e hands of t he P h i l i p p i n e N a t i o n a l Bank, so t h a t i t s

d u t i e s a r e d i s t i n c t l y of a p u b l i c c h a r a c t e r f rom many s t a n d p o i n t s .

Pe rhaps t h e r e a r e some of you who a re i n c l i n e d t o s u g g e s t

t h a t t h e o r g a n i z a t i o n of t h e P h i l i p p i n e N a t i o n a l Bank t r a n s g r e s s e s

views which you have formed about t h e i n t e r f e r e n c e of t h e Government

w i t h p r i v a t e e n t e r p r i s e i n b a n k i n g . And y e t , in one a s p e c t t h e

i d e a of t h e P h i l i p p i n e N a t i o n a l Bank in t h a t r e g a r d i s v e r y s i m i l a r

t o t h e b a s i c c o n c e p t i o n of t he F e d e r a l r e s e r v e s y s t e m . I t i s no t

based upon t h e i d e a of Government i n t e r f e r e n c e w i t h bank ing , b u t

r a t h e r of Government c o o p e r a t i o n w i t h t h e community in r e n d e r i n g

bank ing more e f f e c t i v e . The F e d e r a l Reserve Act was framed upon t h e


1940 976

- 1 5 -

t h e o r y t h a t by the use of the banking energy of t h e count ry in a

combined and u n i t e d form, suppor ted and s u s t a i n e d by t h e power of

t h e Government, g r e a t b e n e f i t could be rendered t o every element

i n the coraxunify, both a g r i c u l t u r a l , commercial and i n d u s t r i a l .

The concep t ion upon which t h e P h i l i p p i n e Na t iona l Bank i s founded

i s the same, and t h e ideas u n d e r l y i n g i t are i d e n t i c a l w i th t h o s e

u n d e r l y i n g t h e F e d e r a l Reserve Act . I t p roceeds upon t h e theo ry

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

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

funds which i t p l a c e s in a bank, and t h a t p r i v a t e i n i t i a t i v e and

p r i v a t e management in t h e o p e r a t i o n of banking concerns a r e l i k e l y » • e

t o be 'more s u c c e s s f u l and e f f i c i e n t t han t h e work of p u b l i c o f f i c e r s ,

however f a i t h f u l and devoted t h e s e may be . The P h i l i p p i n e Na t ion -

a l Bank, e s t a b l i s h e d under d i f f e r e n t ausp i ce s and meet ing v e r y d i f -

f e r e n t l o c a l c o n d i t i o n s , i s t hus a s p e c i a l a p p l i c a t i o n of the

concep t ion of t h e Fede ra l Reserve Act t o t h e b u s i n e s s a f f a i r s of

a f a r d i s t a n t peop le whose development i s a t p r e s e n t much behind

t h a t of the United S t a t e s . That t h e bank has j u s t i f i e d i t s e l f

may be more f u l l y unders tood when I speak of i t s growth i n r e -

s o u r c e s from about 9 ,000 ,000 pesos e a r l y in May l a s t , t o about

66 ,000 ,000 a t t h e c lo se of the y e a r . A p a r t of t h i s growth i s ,

of c o u r s e , due t o t h e g radua l t a k i n g over of p u b l i c d e p o s i t s and

p u b l i c b u s i n e s s , bu t a ve ry l a r g e p a r t of i t i s due a l s o t o the i n -

c r e a s i n g con f idence of the b u s i n e s s community i n t h e i n s t i -

t u t i o n , and t o t h e r ap id growth of t h e d e p o s i t and l o a n a c -


1941 976

- 1 6 -

counts of t h e b u s i n e s s p u b l i c which had d e a l i n g s w i t h i t . The

P h i l i p p i n e N a t i o n a l Bank i s doing i t s p a r t t o a t t a i n t h e end

which might from a n o t h e r angle have been approached by our own

banks had they chosen t o u n d e r t a k e t h e e s t a b l i s h m e n t of bank -

i n g o r g a n i z a t i o n s in t h e P h i l i p p i n e s f o r t h e pu rpose of o b t a i n -

ing and d e f i n i t e l y h o l d i n g t h e t r a d e of t h e I s l a n d s , o r e n c o u r -

a g i n g t h e improvement of a g r i c u l t u r a l and p r o d u c t i v e c o n d i t i o n s ,

and of a s s i s t i n g i n t h e advancement of m a n u f a c t u r i n g e n t e r p r i s e s

t h e r e .

Doub t l e s s i t would n d t be f e a s i b l e f o r American i n s t i -

t u t i o n s to go so fa1" in. the d e v o t i o n of r e s o u r c e s t o t h e d e v e l o p -

ment of b u s i n e s s i n f o r e i g n c o u n t r i e s as t h e y would be j u s t i f i e d

i n do ing in t h e P h i l i p p i n e s , o r as t he P h i l i p p i n e N a t i o n a l Bank

i s u n d e r t a k i n g t o do. And ye t t he e x p e r i e n c e of t h i s bank i s

i n l i n e w i th t h a t of bank ing i n s t i t u t i o n s o r g a n i z e d by f o r e i g n

c o u n t r i e s f o r t h e purpose of o p e r a t i n g abroad and p o i n t s out t h e

on ly t r u e way i n which to f o s t e r and r e t a i n f o r e i g n t r a d e * This

i s t h r o u g h t h e e x t e n s i o n of accommodation unde r w i s e and c o n s e r v a -

t i v e c o n d i t i o n s , t o t h o s e b u s i n e s s i n t e r e s t s i n o t h e r c o u n t r i e s which

r e q u i r e t h a t k ind, of a s s i s t a n c e , and which i n r e t u r n f o r i t , o r as

a c o n d i t i o n of g e t t i n g i t , w i l l be w i l l i n g and ready t o t u r n t h e i r

p u r c h a s i n g power toward t he Uni ted S t a t e s • We have l o n g known t h a t

E n g l a n d ' s p o w e r f u l ho ld upon t h e t r a d e of South America and t h e Far

Eas t was not due t o any i n n a t e fondness on t h e p a r t of t h e peop le of


*»- >* 'A?'." •%</,< •* RW ' V R«

• 5 7 6 1 9 4 2

- 1 7 -

t h o s e r e g i o n s f o r Great B r i t a i n o r h e r a s s i s t a n c e , bu t was due t o

t h e f a c t t h a t B r i t i s h banking i n s t i t u t i o n s s tood ready t o f a c i l i -

t a t e t h e movement of goods t o t h o s e coun t r i e s> wh i l e they a l s o

s t o o d s tood ready within, r e a s o n a b l e l i m i t s t o a s s i s t i n t h e d e v e l -

opment of t h e r e s o u r c e s oi t h o s e c o u n t r i e s , and i n t h e e x p o r t a t i o n

of t h e i r p r o d u c t s t o Great B r i t a i n . The p r o g r e s s which has been made

i n r e c e n t y e a r s by German bankers and b u s i n e s s men i n competing wi th

Grea t B r i t a i n and h e r r e p r e s e n t a t i v e s , has been due t o Germany's

r e c o g n i t i o n of t he e s s e n t i a l b a s i s f o r B r i t i s h t r a d e , ana h e r a d o p t i o n

of s i m i l a r modes of g e t t i n g and c o n t r o l l i n g b u s i n e s s . The r e a l q u e s -

t i o n i n the whole m a t t e r i s : Do we want t o c o n t i n u e our p r e s e n t con-

t r o l of f o r e i g n t r a d e , o r a r e we c o n t e n t to r e t u r n to t h e f o r e i g n

t r a d e s i t u a t i o n which e x i s t e d b e f o r e t h e European war? If we do i n

f a c t b e l i e v e t h a t b e n e f i t comes t o t h e coun t ry f rom the main tenance

of a s t r o n g and w e l l — d i v e r s i f i e d f o r e i g n t r a d e , i t w i l l be n e c e s s a r y

f o r us as a n a t i o n t o adopt t h o s e measures and methods which e x p e r -

i e n c e has shown to be r e q u i s i t e .

As I have a l r e a d y i n t i m a t e d , I do n o t b e l i e v e s t r o n g l y i n

t h e e f f e c t of a r t i f i c i a l l e g i s l a t i o n in s u s t a i n i n g and e x t e n d i n g out*

b u s i n e s s . In o r d e r t o d e a l w i t h f o r e i g n c o u n t r i e s s u c c e s s f u l l y we

must n o t on ly s e l l bu t buy , We must do more than t h i s . We must *

h o l d ou t t h e h e l p n e c e s s a r y t o enab le our own. b u s i n e s s men t o p l a c e

t h e i r goods on f o r e i g n marke t s w i t h s u c c e s s and a t r e a s o n a b l e c o s t ,

and we must e n a b l e s h i p p e r s in t h i s coun t ry t o e x p o r t w i t h o u t u n r e a s o n -

a b l e s a c r i f i c e . Indeed we must , i f we wish t o c r e a t e a permanent and


— 18 —

1943 971,

growing f o r e i g n t r a d e , a id p r o d u c e r s and s h i p p e r s abroad "by every l e g i t i -

mate means in our power, t o i n c r e a s e t h e i r o u t p u t , and t o market i t under

f a v o r a b l e c o n d i t i o n s * The i d a a t h a t t h i s can no t be done, o r t h a t some

s p e c i a l d i f f i c u l t i e s s t a n d i n t h e way, or t h a t t h e problem i s b e i n g p r e -

ma tu re ly p r e s e n t e d , or t h a t f o r some r e a s o n we can e scape immediate a c -

t i o n upon i t , has been d i s p e l l e d by t h e e v e n t s of t h e p a s t two y e a r s .

I t must be e v i d e n t t o a l l t h a t t h e p r e s e n t moment i s one which c a l l s f o r

t h e e x e r c i s e of c o n s t r u c t i v e b u s i n e s s a b i l i t y and t h e d i s p l a y of e n t e r -

p r i s e and i n i t i a t i v e by our peop le a long every l i n e t h a t e x p e r i e n c e shows

t o be r e q u i r e d i n f a c i l i t a t i n g t h e growth of b u s i n e s s . Our r e l a t i o n s w i t h

t h e P h i l i p p i n e s a f f o r d merely an i n t i m a t i o n of what can be and i s be ing

done i n t u r n i n g t r a d e toward t h e Uni ted S t a t e s , i n f i n a n c i n g i t , i n

economizing t h e expenses n e c e s s a r i l y i n c u r r e d i n c o n n e c t i o n w i t h i t , and

g e n e r a l l y i n b r i n g i n g t h e f o r e i g n p roduce r and buyer c l o s e r t o t h e home

p r o d u c e r and b u y e r .

What I have s a i d t h u s f a r has been e x p r e s s e d i n p u r e l y g e n e r a l un

t e rms ; and I a m / w i l l i n g t o l e a v e t h e s u b j e c t t h i s even ing w i t h o u t p l a c i n g

b e f o r e you a d e f i n i t e problem*

F i r s t of a l l , I b e l i e v e i t t o be n e c e s s a r y t h a t our banker s

shou ld t o a much g r e a t e r e x t e n t t h a t a t p r e s e n t , make a c t u a l , p r a c t i c a l

c o n n e c t i o n s a b r o a d . This shou ld be done e i t h e r t h r o u g h t h e e s t a b l i s h m e n t

ment of b ranches of t h e i r own a t s t r a t e g i c p o i n t s , o r

t h rough t h e p e r f e c t i n g of agency r e l a t i o n s w i t h o t h e r


976 1944 *-i9"

banks which can be r e l i e d upon to promote t h e i n t e r e s t s of t h e

Uni ted S t a t e s and i t s b u s i n e s s men. In a c o n s i d e r a b l e number of

i n s t a n c e s t h e f o r e i g n connec t ions I speak of must be e f f e c t e d by

t h e a c t u a l and d i r e c t e s t a b l i s h m e n t of branches. , r a t h e r than th rough

t h e agency method.

Secondly , our bankers g e n e r a l l y must endeavor , so f a r as

t h e y can, t o promote the p r o g r e s s and a i d i n t h e development of t he

f o r e i g n b u s i n e s s of banks c h a r t e r e d unde r American c o n t r o l , and d i -

r e c t l y concerned t o promote American i n t e r e s t s . Our b u s i n e s s men

must c o o p e r a t e in t h i s r e g a r d by p l a c i n g t h e i r b u s i n e s s whereve r p o s -

s i b l e w i t h such banks . This i s no t a counse l of o p p o s i t i o n o r h o s -

t i l i t y t o any f o r e i g n banking i n s t i t u t i o n ; i t i s mere ly a s u g g e s t i o n

t h a t so f a r as p r a c t i c a b l e , we u n i t e as a b u s i n e s s community i n f o r -

ward ing by a l l l e g i t i m a t e means ou r own i n t e r e s t s a b r o a d .

T h i r d , t h e F e d e r a l r e s e r v e sys tem s h o u l d , and w i l l , as con-

d i t i o n s p e r m i t , e s t a b l i s h abroad agency c o n n e c t i o n s which w i l l enab le

t h e F e d e r a l r e s e r v e banks t o a s s i s t i n t h e f o r e i g n o p e r a t i o n of such

o t h e r banks as are formed t o promote t r a d e in o t h e r c o u n t r i e s , and

w i l l a t t h e same t ime u n d e r t a k e t h o s e o p e r a t i o n s des igned t o m a i n t a i n

t h e s t a b i l i t y of monetary and exchange r e l a t i o n s h i p s between o u r s e l v e s

and o t h e r c o u n t r i e s which a r e c a l l e d f o r by t h e Government banks

e l s e w h e r e .

F o u r t h l y , our b u s i n e s s p u b l i c must u n d e r t a k e t o f u r n i s h a

d i r e c t , p r a c t i c a l s u p p o r t t o t h e s e e f f o r t s on t h e p a r t of our banks ;

l o o k i n g a t t h e m a t t e r from t h e l o n g range s t a n d p o i n t ,

and r e c o g n i z i n g t h a t wh i l e t h e y may have t o submi t t o


1945 976

—20™

some d i f f i c u l t i e s o r even inconven ience w h i l e we a r e e x t e n d i n g

our bank ing r e l a t i o n s h i p s ab road , t h e s e a r e i n c u r r e d mere ly f o r

t h e sake of d e v e l o p i n g a sys tem which in i t s t u r n w i l l s a f e g u a r d

t h e i n t e r e s t s of t h e b u s i n e s s p u b l i c when t h e i n t e n s i t y of compe-

t i t i o n i s r e s t o r e d , and when t h e e f f o r t of European c o u n t r i e s t o

o b t a i n a s h a r e of f o r e i g n marke t s aga in becomes a c t i v e .

This i s a l a r g e program, bu t t he same may be s a i d of

e v e r y t h i n g t h a t i s d e s t i n e d t o e x e r t a f a r - r e a c h i n g and permanent

e f f e c t . A g r e a t d e a l of such s u c c e s s as may be a t t a i n e d w i l l be

s e c u r e d t h rough t h e a c t i v e i n t e r e s t and e n t e r p r i s e of t h e younger

b a n k e r s of t h e c o u n t r y ; upon them w i l l f a l l t he a c t u a l work of

u n d e r t a k i n g t h e t a s k s involved i n t h e e x t e n s i o n of. our bank ing

c o n n e c t i o n s , and t o them undoub ted ly w i l l be a s s i g n e d most of t h e

c o n s t r u c t i v e d u t i e s involved in t h e i n v e s t i g a t i o n and a n a l y s i s of

f o r e i g n c o n d i t i o n s . New c o n d i t i o n s must be met , and o ld ones must

be adap ted t o them. The work i s one which c a l l s f o r v i s i o n and

i m a g i n a t i o n , as w e l l as f o r t h e t e c h n i c a l knowledge of e x p e r i e n c e d

men who have a d e f i n i t e purpose to accompl i sh , and who a r e a b l e

t o s e p a r a t e what i s p o s s i b l e from what i s v i s i o n a r y and u n a t t a i n a b l e .

This i s why I have b rough t t h e s u b j e c t t o your a t t e n t i o n as one who

has had a s m a l l s h a r e i n t h e working ou t of one phase of t h e problem,

who s e e s t h e f i e l d t h a t i s open, and who r e c o g n i z e s t h a t a l t h o u g h

t h e h a r v e s t i s r i p e , t h e r e a p e r s a r e ve ry few i n d e e d , If T navs a t

a l l c o n t r i b u t e d t o making our f o r e i g n problem more v i v i d i n your minds and i n p e r s u a d i n g you t o a more p o i n t e d r e c o g n i t i o n of. t h e need f o r immediate a c t i o n I s h a l l f e e l t h a t a f u r t h e r s t e p has been t a k e n towards i t s d e f i n i t e s o l u t i o n .


E X - Q F F I C I O M E M B E R S


CHAIRMAN


1946 W . R . G . H A R D I N G , GOVERNOR P A U L M. W A R B U R G . VICE GOVERNOR F R E D E R I C A . D E L A N O A D O L P H C . M I L L E R C H A R L E S S . H A M L I N


AND FISCAL AGENT

WASHINGTON 977 A D D R E S S R E P L Y T O


January 15, 1917.

Gentlemen:

In accordance w i t h a r rangements a l r e a d y

made the F e d e r a l pese rve Board, w i l l p u b l i s h a s u p p l e -

ment t o t h e p a r l i s t as of Feb rua ry 1, 1917.

W i l l you p l e a s e , t h e r e f o r e , fo rward such

changes as shou ld be made f o r your D i s t r i c t t o r e a c h

Washington n o t l a t e r t han January 23d?


S e c r e t a r y .




CHAIRMAN


qt i) FEDERAL RESERVE BOARD

WASHINGTON

I t H Y

W . P . 6 . H A R D I N G , GOVERNOR P A U L M. W A R B U R G , VICE GOVERNOR F R E D E R I C ^ D E L A N O A D O L P H C / W L A . « R C H A R L E S S . H A M L I N


AND FISCAL AGENT



J a n u a r y 17, 1$17«

Dear S i r :

In answer t o i n q u i r i e s dece ived : f rom some t a n k s a s t o

proper methods ox c l a s s i f y i n g t h e d i s c o u n t m a t e r i a l on hand u n d e r

t h e s e v e r a l heads shown i n t h e lower p o r t i o n of Form 3 8 , e s p e c i - ,

a l l y unde r t h e head of " A g r i c u l t u r a l and l i v e - s t o c k p a p e r " , I

would say t h a t i t i s t h e d e s i r e of t h e Board t h a t t h e F e d e r a l r e -

s e r v e t a n k s a s c e r t a i n i n a l l c a s e s w h e t h e r t h e o r i g i n a l l o a n has

been o b t a i n e d f rom t h e r e d i s c o u n t i n g member bank f o r a g r i c u l t u r a l ,

i n d u s t r i a l o r commercial p u r p o s e s so t h a t a l l d i s c o u n t i t e m s of

t h e R e s e r v e Bank migh t be r e p o r t e d t o t h e Board p r o p e r l y c l a s s i -

f i e d .

I n c l a s s i f y i n g t h e d i s c o u n t m a t e r i a l t h e r e s e r v e banks

s h o u l d i n t h e f i r s t p l a c e be gu ided by t h e s t a t e d p u r p o s e of t h e

o r i g i n a l l o a n , a s r e p o r t e d by t h e r e d i s c o u n t i n g member bank , i n

c a se t h i s p u r p o s e i s s t a t e d o n l y i n g e n e r a l t e r m s , a s e . g . " i n

a c c o r d a n c e w i t h S e c t i o n 1 3 " , t h e o c c u p a t i o n of t h e b o r r o w e r s h o u l d

be u s e d a s a g u i d e i n c l a s s i f i c a t i o n . Thus , i f John Smi th , a ?

m e r c h a n t , who i s a l s o .engaged i n f a r m i n g , g i v e s an u n s e c u r e d note,

t o Henry J o n e s ; engaged i n t h e f e r t i l i z e r b u s i n e s s , i t would seem

e n t i r e l y p r o p e r t o r e p o r t t h e i t e m as "Unsecured c o m m e r t i a l and

i n d u s t r i a l p a p e r " , u n l e s s t h e r e i s i n f o r m a t i o n on hand which makes


1948 980.

- 2"—

i t c l e a r t h a t Jones was t o use t h e p roceeds of t h e loan f o r a g r i -

c u l t u r a l purposes* In c a s e t h e n o t e was s e c u r e d "by twenty "bales

of c o t t o n , i t would be p r o p e r t o r e p o r t i t as "commercial and i n -

d u s t r i a l p a p e r - s e c u r e d " , u n l e s s t h e purpose of t h e l o a n was „

c l e a r l y s t a t e d t o Tie a g r i c u l t u r a l . Nor would i t make any d i f -

f e r e n c e i n c l a s s i f i c a t i o n were t h e payee of t h e n o t e r e p o r t e d a s

" f a r m e r " .

In c a s e Farmer Smith g i v e s to R i c h a r d Jones a n o t e s e -

cured by a l i e n on 25 s t e e r s (documents a t t a c h e d t o no t e or n o t )

i t would be p r o p e r t o r e p o r t t h e i t em as l i v e - s t o c k p a p e r , u n l e s s

t h e r e i s i n f o r m a t i o n t o t h e e f f e c t t h a t t h e p r o c e e d s of t h e l oan

have "been o r a r e to be used f o r a g r i c u l t u r a l p u r p o s e s ,

I t i s c l e a r t h a t a l l s ix -month p a p e r i s t o be r e p o r t e d

e i t h e r as a g r i c u l t u r a l o r l ive—stock p a p e r . I tem " T o t a l "b i l l s

d i s c o u n t e d " , shown i n t h e lower h a l f of Form 38 , s h o u l d , of c o u r s e ,

e q u a l t o t a l of s u b d i v i s i o n 1 , - ( B i l l s d i s c o u n t e d - Members), i n

t h e upper h a l f <bf t h e fo rm.

I t i s r e a l i z e d t h a t t h e above e x p l a n a t i o n s by no means

exhaus t a l l p o s s i b l e c o m b i n a t i o n s , bu t i t i s t hough t t h a t t h e y w i l l

prove h e l p f u l t o your d i s c o u n t depar tment i n t h e p r e p a r a t i o n of t h e %

weekly s t a t e m e n t on Form 3 8 .


Vice Governor .


1949


W I L L I A M 6 . MCADOO SECRETARY OF THE TREASURY

CHAIRMAN


WASHINGTON

W . P . G . H A R D I N G , GOVERNOR P A U L M. W A R B U R G . VICE GOVERNOR F R E D E R I C A . D E L A N O A D O L P H C . M I L L E R C H A R L E S S . H A M L I N

H . P A R K E R W I L L I S . S M B T > 8 Y S H E R M A N P . A L L E N , ASST. SECRETARY

AND FISCAL AGENT



J a n u a r y 19 , 1917*

Dear S i r :

In v i e w of t h e f a c t t h a t t h e r a t e f o r banke r s* a c c e p t a n c e s r e c e n t l y m a i n t a i n e d by F e d e r a l r e s e r v e banks has been somewhat h i g h e r t h a n t h e tipen m a r k e t r a t e , t h e h o l d i n g s of a c c e p t a n c e s by t h e F e d e r a l Rese rve banks have been m a t e r i a l l y r educed d u r i n g t h e p a s t weeks*

In consequence t h e Board has r e c e i v e d l e t t e r s f rom some of t h e F e d e r a l r e s e r v e banks e x p r e s s i n g a p p r e h e n s i o n t h a t t h e i r e a r n i n g a s s e t s migh t be r e d u c e d t o o d r a s t i c a l l y # and some of t h e banks have shown some i n c l i n a t i o n t o i n v e s t i n w a r r a n t s , even a t low r a t e s , and f o r t h e f u l l p e r i o d p e r -m i t t e d by l a w .

The Board t h e r e f o r e has t h o u g h t i t a d v i s a b l e t o d i r e c t me t o a d d r e s s a l e t t e r t o a l l F e d e r a l r e s e r v e a g e n t s i n o r d e r t o s e c u r e a b e t t e r u n d e r s t a n d i n g of t h e p o l i c y which i n i t s ' o p i n i o n , s h o u l d be p u r s u e d a t t h i s t i m e .

D u r i n g t h e month of December, and up t o J a n u a r y 12, t h e n e t g o l d i m p o r t s i n t o t h e Un i t ed S t a t e s amounted t o a b o u t $ 1 6 9 , 0 0 0 , 0 0 0 . Excess r e s e r v e s have m a t e r i a l l y i n c r e a s e d i n con-s e q u e n c e . I t may be assumed t h a t t h i s p l e t h o r a of go ld i s n o t e n t i r e l y a n a t u r a l one and t h a t much of i t vfjr l l be a b s o r b e d by impending f l o t a t i o n s of new s e c u r i t i e s , a f t e r which we . s h a l l p r o b a b l y w i t n e s s a g a i n t h e same development t h a t h a s been c h a r -a c t e r i s t i c of s i m i l a r p e r i o d s i n t h e p a s t - t h a t t h e d e p o s i t and l o a n s t r u c t u r e w i l l a g a i n expand so as t o a b s o r b l a r g e p o r t i o n s of t h e new g o l d .

There i s g e n e r a l agreement t h a t t h i s c o n t i n u o u s and r a p i d growth of d e p o s i t s and loans i s n o t w i t h o u t d a n g e r . With t h e p r e s e n t e a s e of money, i t would a p p e a r , t h e r e f o r e , i n t h e o p i n i o n of t h e Board , t o be a wise p o l i c y t o p e r m i t t h e e a r n i n g a s s e t s of t h e F e d e r a l r e s e r v e banks - which combined amount t o a b o u t $206 ,000 ,000 - t o be r e d u c e d by from f o r t y t o f i f t y m i l l i o n s ,


982

and thereby to* absorb, temporarily at l e a s t , an equiva lent amount of the newly imported gold . Of course , such a p o l i c y must "be carr ied out i n a c a r e f u l and t a c t f u l Way, and no d e f i n i t e amount can be f i x e d at t h i s time to which the in* vestments of the Federal reserve batiks should be reduced* Changed in condi t ions may occur at any moment, which may ren-der i t necessary t o reverse th ia p o l i c y , or t o apply i t even more r a d i c a l l y than i s now contemplated. During the past few weeks Federal reserve banks have operated along these l inea with very good r e s u l t s , and acceptances and rediscounts have been reduced by about $40,000,000 s ince they reached t h e i r h ighes t po in t , e a r l y i n December. So long as the present ease cont inues , there should hot be any d i f f i c u l t y in cont inuing the present policy* By permitt ing the open market to absorb the bankers' acceptances , the a d d i t i o n a l object i s gained of t r a i n i n g the member banks to dea l l a acceptances and t o become accustomed t o inves t ing in them.

In express ing t o you these thoughts the Board wishes me t o add that i t hopes that the banks w i l l not become unduly r e s t i v e because of a temporary reduction of t h e i r earning a s -s e t s . The Board has no doubt tha t be fare the year j u s t begun i s p a s t , many occasions w i l l a r i s e which w i l l enable the FedeiS-a l reservebanks t o employ t h e i r funds a c t i v e l y , but the Board considers i t the primary duty of the Federal reserve banks t o be mindful of t h e i r o b l i g a t i o n to do t h e i r f u l l part in prevent-i n g j u s t now a rapid expansion of c r e d i t and in accumulating resources to be used when a c t i v e demands are made upon them for ordinary commercial cred i t f a c i l i t i e s *

Very t r u l y yours,

Governor


FORM OF RESOLUTION AUTHORIZING A FEDERAL RESERVE BANK TO SHIP UNFIT FEDERAL RESERVE NOTES OF ANOTHER FEDERAL RESERVE BANK DIRECT TO THE TREASURER OF THE UNITED STATES FOR REDEMPTION.

At a mee t ing of t h e Board of D i r e c t o r s of t h e F e d e r a l

Reserve Bank of , c a l l e d p u r s u a n t t o t h e p r o -

v i s i o n s of t h e by- laws of 3a id t a n k and he ld on t h e day of

, 191 , t h e f o l l o w i n g r e s o l u t i o n was o f f e r e d ,

seconded and duly adop ted :

"BE IT RESOLVED, That t h e F e d e r a l Reserve Bank of

"be and hereby i s a u t h o r i z e d , empowered, and

d i r e c t e d t o fo rward t o the T r e a s u r e r of t h e Uni t ed S t a t e s f o r r e -

demption f o r and i n behal f of t h i s bank a l l u n f i t F e d e r a l r e s e r v e

n o t e s i s s u e d by t h i s bank which t h e F e d e r a l Reserve Bank of

may now o r h e r e a f t e r h o l d , and t o do and t o

pe r fo rm eve ry l a w f u l a c t n e c e s s a r y t o e f f e c t such r edempt ion i n

t h e manner o u t l i n e d i n t h e c i r c u l a r l e t t e r of t h e F e d e r a l Reserve

Board, d a t e d Janua ry 15, 1$17, r e l a t i n g t o u n f i t F e d e r a l r e s e r v e

n o t e s fo rwarded t o t h e T r e a s u r e r of t h e Un i t ed S t a t e s f o r redemp-

t i o n by a F e d e r a l r e s e r v e bank o t h e r t h a n t h e F e d e r a l r e s e r v e bank

of i s s u e . "

I he reby c e r t i f y t h a t t h e f o r e g o i n g i s a t r u e and c o r -

r e c t copy of a r e s o l u t i o n adop ted and sp r ead upon t h e m i n u t e s of

t h e Board of D i r e c t o r s of t h i s Bank, h e l d on t h e d a t e s p e c i f i e d .

C a s h i e r or S e c r e t a r y , , , F e d e r a l Reserve Bank of

1/22/17.


1952

WILLIAM G . M c A D O O SECRETARY OF THE TREASURY

CHAIRMAN


E X - O F F I C I O M E M B E R S W . P . 6 . H A R D I N G , GOVERNOR P A U L M. W A R B U R G , VICE GOVERNOR F R E D E R I C A . D E L A N O A D O L P H C . M I L L E R C H A R L E S S . H A M L I N

FEDERAL RESERVE BOARD H . P A R K E R W I L L I S . SECRETARY S H E R M A N P . A L L E N , ASST. SECRETARY

AND FISCAL AGENT

WASHINGTON I E R A L R E S E R V E B O A R D

January 23, 191?

Dear S i r :

The Boafd has been r e q u e s t e d by s e v e r a l of t h e

F e d e r a l r e s e r v e banks to p r e p a r e a form of power of a t t o r -

ney t b be used i n c o n n e c t i o n w i t h t h e p l a n s e t f o r t h i n i t s

l e t t e r of January 15, 1917> whereby u n f i t F e d e r a l r e s e r v e

n o t e s may be forwarded t o t h e T r e a s u r e r of t h e U n i t e d S t a t e s

f o r redempt ion by F e d e r a l r e s e r v e banks o t h e r t h a n t h e bank

of i s s u e .

i s s u b m i t t e d merely as a s u g g e s t i o n and which may be a l t e r e d

i n any manner t h e F e d e r a l r e s e r v e banks may deem . a d v i s a b l e .

T r e a s u r e r of t h e Uni ted S t a t e s c o p i e s of wha teve r r e s o l u t i o n

you may a d o p t a u t h o r i z i n g any F e d e r a l r e s e r v e bank t o a c t a s

your a g e n t i n f o r w a r d i n g F e d e r a l Reserve n o t e s t o Washington

f o r r e d e m p t i o n .

I n c l o s e d h e r e w i t h i s a form of r e s o l u t i o n which

I t i s r e q u e s t e d , however, t h a t you send t o t h e


Governor

I n c l o a u r e .




CHAIRMAN


WASHINGTON

1953 W . P . G . H A R D I N G , GOVERNOR P A U L M. W A R B U R G , VICE GOVERNOR F R E D E R I C A . D E L A N O A D O L P H C . M I L L E R C H A R L E S S . H A M L I N

H . P A R K E R W I L L I S . SECRETARY S H E R M A N P . A L L E N , ASST. SECRETARY

AND FISCAL AGENT

Q A B M E S S R E P L Y T O 0 0 F E D E R A L R E S E R V E B O A R D

Janua ry 23, 1917.

Dear S i r : .

A number of l e t t e r s have been a d d r e s s e d t o t h e F e d e r -a l Reserve Board, r a i s i n g t h e q u e s t i o n whe the r a t r a d e a c c e p t -ance , which i s d e f i n e d in the B o a r d ' s r e g u l a t i o n s as "a d r a f t o r b i l l of exchange drawn by t h e s e l l e r on t h e p u r c h a s e r of goods s o l d and accep t ed by such p u r c h a s e r , " i n c l u d e s a d r a f t o r b i l l of exchange based on t h e pu rchase of a d v e r t i s i n g s p a c e .

*

The te rm "goods" as used in the r e g u l a t i o n s of t h e Board i n c l u d e s w a r e s , merchandise. , or a g r i c u l t u r a l p r o d u c t s i n -c l u d i n g l i v e s t o c k , and because of t he doubts r a i s e d as t o w h e t h e r t h i s t e rm i s broad enough t o i n c l u d e a d v e r t i s i n g s p a c e , t he Board has r u l e d t h a t a d r a f t o r b i l l of exchange drawn by a p u b l i s h e r , or o t h e r a d v e r t i s i n g agency, on t h e p u r c h a s e r of a d v e r t i s i n g space and accepted by such p u r c h a s e r s h a l l be con-s i d e r e d a t r a d e a c c e p t a n c e , p r o v i d e d t h e a d v e r t i s e m e n t on which t h e d r a f t o r b i l l i s based i s f o r t he purpose of ' p romot ing o r f a c i l i t a t i n g t h e p r o d u c t i o n , m a n u f a c t u r e , d i s t r i b u t i o n , o r s a l e of goods, w a r e s , merchand i se , o r a g r i c u l t u r a l p r o d u c t s , i n c l u d -i n g l i v e s t o c k ; and p r o v i d e d , f u r t h e r , t h a t such a d v e r t i s e m e n t i s n o t i l l e g a l , and i s no t f o r t h e purpose of promot ing o r f a -c i l i t a t i n g any t r a n s a c t i o n which i s p r o h i b i t e d by t h e laws of t he S t a t e in which i t i s t o be consummated.

Each F e d e r a l r e s e r v e bank should t a k e such s t e p s as i t deems n e c e s s a r y t o s a t i s f y i t s e l f t h a t a t r a d e a c c e p t a n c e cov-e r i n g t h e s a l e of a d v e r t i s i n g space i s of t he c h a r a c t e r d e s c r i b e d i n t h i s l e t t e r .


Governor .


1954 989

Division of Audit , (revised) and Examination. FEDERAL RESERVE BOARD

Washington. MEMORANDUM FOR THE AUDITOR:

Kindly furnish to the Federal Reserve Examiner, examining your "bank as of lose of business , the following:

1. Statements of account current to be sent to a l l member banks as of close of business .

2. Statements to be sent to other Federal reserve banks*

3* Immediately upon receipt of daily statements from other Federal reserve banks as of close of business ' reconcile , and tufn over to Examiner copies of such reconcilements io be retained by him.

4. Daily statement, Form 3^, 3 copies cer t i f i ed to by cashier. 5* Report of earnings and expenses, to be brought up to date, Forms 95 * 9^. 6. Expenses of Transit Department brought up to date, Form 97 • 7• Estimate of accruals:

(a) Loans and discounts (b) Acceptances (open market purchases) (c) Warrants (d) United States Securities (e) ( f )

Transit service charges co l l ec t ib l e Less amount payable to other F. R. Banks.

8. Estimate expenses unpaid: (a) Salaries (b) Rent (c) Directors fees (d) Sundry

9« Proof of expenses paid in advance and other deferred accounts. 10. Changes in furniture and equipment account.

11. Changes in cost of Federal reserve notes since l a s t examination. 12. Inventory of machines and mechanical devices, giving kind, number, e t c .

Transit machines, Burroughs Adding machines, " Typewriters, Underwood.


1955

990 D i v i s i o n of Audi t ( r e v i s e d ) and Examination*


Washington

MEMORANDUM FOR THE CASHIER:

Kindly * f u r n i s h t h e i n f o r m a t i o n r e q u e s t e d below f o r t h e use of t h e F e d e r a l

Reserve Examiner , examining your bank a s of c l o s e of b u s i n e s s

1 . L i s t of o f f i c e r s and employee, by depar tments (Form i s a t t a c h e d , and p a p e r and carbon w i l l be f u r n i s h e d ) •

2w Three c o p i e s of each c i r c u l a r o r r e g u l a t i o n i s s u e d by t h e bank s i n c e t h e l a s t e x a m i n a t i o n .

3 . Custody of c a sh : If t h e r e i s any change s i n c e l a s t e x a m i n a t i o n , p l e a s e g ive d e t a i l e d memorandum of vtiiere k e p t , u n d e r whose c o n t r o l , p r o t e c t i o n , e t c#

4 . L i s t of i n s u r a n c e and f i d e l i t y bonds c a r r i e d - f i d e l i t y , b u r g l a r y , r e g i s t e r e d m a i l , f i r e , e t c , - showing e x p i r a t i o n and premium p a i d .


1956

Division of Audit 991

and Examination, (revised)


Washington

MEMORANDUM FOR MANAGER CF TRANSIT DEPARTMENT:

Kindly furnish the information requested below for the use of the Federal Reserve Examiner, examining your bank as of close of business «

1. Number of member banks: National State

2. Number of non-member banks in d i s t r i c t .

3* Number of non-member banks upon which items are co l lec ted . Through member tanks Direct Through other non-members

4. What items are received for immediate avai labi l i ty? 5- Form of settlement accepted from non-members. 6. Daily averages of items handled, for three months period preceding,

by calendar month (e i ther f i r s t to f i r s t or l6th one month to 15th of next) , in following form:

Elsewhere Other Period covered Your c i ty within d i s t r i c t F.R.Dist Total

Number

Amount (even t h o u s a n d s )


1957 Division of Audit - 2 - . 991

and Examination. (revised)

7- Expenses of Transit Department, such as sa lar i e s , rent, telephone and telegraph, postage, expressage, printing and stat ionery, insurance and f i d e l i t y bonds, depreciation, e t c . , for current or previous month.

8. Serviqe charges col lected over same period. 9. Service charges c o l l e c t i b l e for same period.

10. Service charges (per item charged) (a) To member banks (b) To Federal reserve banks

11. Service charges paid to other Federal reserve banks. 12. Service charges col lected since inauguration of system in July 19^6,

actual to l a s t day of previous month and estimated to date of ex-amination, showing from what sources derived, as follows:

Reserve c i ty banks j Other member banks Federal Reserve Banks

Service charges paid to other Federal reserve banks since inauguration 3f system in July 1916; actual to las t day of previous month and estimated to date of examination.

Total cost of transit department; actual expenses to las t day of previous month and estimated expenses s ince.

l j . Deficient reserves - how covered? How have penalties been assessed? How often i s report of net deposit balances cal led for?

(a) Reserve c i ty banks (b) O the r member' banks

l4» Three copies of any changes in the Clearing House rules since the inauguration of the co l lect ion system in July 1916*

15. Operationsin purchase and sale of bank transfer; schedule of rates, earnings by months.


E X - O P F I C I O M E M B E R S


CHAIRMAN

J O H N S K E L T O N W I L L I A M S COMPTROLLER O F THE CURRENCY FEDERAL RESERVE BOARD

WASHINGTON

1958 W . P . 6 . H A R D I N G . GOVERNOR P A U L M . W A R B U R G . VICE GOVERNOR F R E D E R I C A . D E L A N O A D O L P H C . M I L L E R C H A R L E S S . H A M L I N

H . P A R K E R W I L L I S . SECRETARY S H E R M A N P . A L L E N , ASST. SECRETARY

AND FISCAL AGENT

A D D R E S S

994 F E D E R A L R E S E R V E B O A R D

*

January 26, 1917 •

Dear Sir: N

On "behalf of the Committee on Clearing of the Fed-eral Reserve Board I beg to s tate that i t i s the be l ie f of the Committee that i t i s important that we should make ready arid have our plans formulated as to the next step that should be taken in advancing the operations of the clearing and c o l l e c -t ion system. Congress w i l l adjoufn oft March 4th and we w i l l then know viiat, if any, steps have been taken in respect to the Kitchin amendment. At the present time i t does not look ,as i f there were much l ikelihood of the Kitchin amendment be-ing adopted* If i t i s not, i t w i l l become the duty of the Board and the Federal reserve banks to go ahead energet ical ly and perfect the system, the most serious objection to which at the present time is the fac t that there are s t i l l some 7,000 banks who do not remit at par* In laying our plans for the future I desire to ask for comments from you upon the following suggestions and statements:

(1) I t would appear that one of the greatest obstacles to progress i s the att i tude of many of the l oca l clearing houses; for instance, we have a recent case where under the clearing house rules of Macon, Georgia, the banks impose a charge of one-eighth of one per cent for a check which would be given immediate credit a t par at Atlanta, only e ighty-eight miles away; whereas they accept at par checks drawn on Phila-delphia or New York. How sTiall we meet t h i s s i tua t ion , and has the time come for the Board t o promulgate rules , as con-templated i n Section .16, which w i l l specify the maximum, charges which a member bank Bay make against i t s customers?

(2) As indicating the sort of adjustment which should be made with clearing houses i f they are w i l l i n g to meet the views of the Federal Reserve Board and the Federal reserve banksy I would point out that in quite a number of important c learing houses a d i f f e r e n t i a l in favor of checks of banks that can be co l lected through the Federal reserve bank at par i s made, as compared with cJiecks which cannot be so co l l ec ted . Such a d i f f e r e n t i a l operates to a s s i s t the Federal reserve bank in extending i t s par l i s t . In quite a number of cases , however, a l l checks of certain areas are taken on the same


1959

9 $k - 2 -

basis regardless of how col lected. This means that the checks col lectable through the Federal reserve bank have no advantage bver those not so co l l e tab le . This method, while not ideal , i s , obviously, more advantageous to the Federal reserve bank thati that described in No. 1, where checks col lectable through the Federal reserve bank are actually discriminated against .

, (3) We are gett ing ready to o f f e r country banks the privi lege of issuing drafts against Federal reserve banks, Which w i l l be given immediate credit and ava i lab i l i ty not only at the bank upon which drawn, but at one other designated Fed-eral reserve bank. This w i l l be a privi lege of considerable value t o member banks, but i t i s assumed that i t w i l l be ac-companied, or followed soon a f t e r , by the granting of the privi lege of co l lec t ing for <x>untry banks time items, on terms at least as favorable as the terms heretofore afforded by c i ty banks to the i r country correspondents.

(4) The o f f i c e r s of several of the Federal reserve banks have expressed themselves as bel ieving that not much more pro-gress can be made in enlarging the volume of transactions o f -f e f b d for clearing and co l l ec t ion unt i l Federal reserve banks express themselves as wi l l ing to co l l ec t items on nonassenting State banks'and trust companies. In a number of the D i s t r i c t s arrangements are being perfected for the co l l ec t ion of items bf t h i s character through express companies, but in some Dis* t r i c t s i t i s impossible to teach a l l of the banks, eVen through express companies, azid i t may in those cases be nec-essary to adopt the Post Office method. Collection through express companies vti.ll, however, enable the co l l ec t ion of a great many nonassenting member bank; items and i t would appear as though in the more thickly se t t l ed Di s t r i c t s , such as New York, Pennsylvania, and Cleveland t h i s matter should be imme-diately taken in hand.

(5) At the l a s t meeting of Governors a plan was submitted by the writer under which a scale of charges as between Feder-a l reserve banks and member banks, and as between member banks and t h e i r customers was proposed. It was the Opinion of the Governors that the time was not opportune for putting out th i s schedule of charges; also that the rates suggested were too high. Is th is s t i l l your view, and i f you Relieve that the scale of charges i s too high, have you any counter suggestions to make?


ssk

(6) To vyhat extent can the clearing system be made more popular with bankers in reserve c i t i e s - or in other large c i t i e s with similar banking f a c i l i t i e s - by the adop--t ion Of a plan similar to that adopted in Dallas and about to be adopted in the kansas City d i s tr ic t? This plan pro-vides for the direct interchange of items between c i t i e s , and drawing on the Federal reserve bank i or items sent di-rect* This plan has the merit of cutting down f l o a t , of rel ieving the federal reserve bank of cost of handling a good many items, and, l a s t l y , of putting the banks in d i t i e s thus inter~eotinected on a pari ty .

Yours very truly ,

Chairman, Committee on Clearing.


1961 997

P R E S S S T A T E M E N T .

January 29, 1917»

The F e d e r a l Reserve Board t o - d a y made p u b l i c t h e

t e x t of a memorandum t r a n s m i t t e d t o i t "by Mr* James B. Forgan ,

P r e s i d e n t of t h e F e d e r a l Advisory C o u n c i l , e x p r e s s i n g t h e

views of t h a t "body w i t h r e f e r e n c e t o t h e p roposed amendments

t o t h e F e d e r a l Reserve Act r e c e n t l y s u b m i t t e d t o t h e Banking

and Currency Committees of t h e two Houses of Congress by t h e

F e d e r a l Reserve Board-

I t w i l l . b e no ted t h a t t h e Counc i l unanimously a p -

proved t h e proposed n o t e i s s u e amendment which had been s t r i c k e n

ou t by t h e House Committee on Banking and Cur r ency , and t h a t

t h e Counc i l has s u g g e s t e d a m o d i f i c a t i o n of t h e p roposed r e -

s e r v e s t o be c a r r i e d by member banks w i t h t h e F e d e r a l r e s e r v e

banks• In v iew of t h e f a c t , however, t h a t the House Committee

s t r u c k o u t a l l r e q u i r e m e n t s f o r v a u l t c a s h , t h e Board b e l i e v e s

t h a t t h e s u g g e s t e d r e s e r v e s of s e v e n , t e n , and t h i r t e e n pe r

c e n t r e s p e c t i v e l y f o r country b a n k s , r e s e r v e c i t y banks and cen-

t r a l r e s e r v e c i t y banks , shou ld b e r e t a i n e d .

The Advisory C o u n c i l ' s memorandum, da t ed J anua ry 2$ th ,

i s as f o l l o w s :


1963

v * 997-

RECOMMENDATIONS BY THE FEDERAL ADVISORY JGUNCIL IN REGARD TO THE AMENDMENTS

TO THE FEDERAL RESERVE ACT PROPOSED BY FHE FEDERAL RESERVE BOARD

JANUARY 1 9 1 7 .

Noi 1 . AMENDMENT TO SECTION l6 which p r o v i d e s

( 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 of -g o l d ; or 100$ of p a p e r , o r b o t h ;

(b) f o r thfe c o u n t i n g of go ld h e l d by t h e F e d e r a l r e s e r v e agen t s as s e c u r i t y f b r n o t e s , as p a r t of t h e go ld r e s e r v e r e -q u i r e d t o be h e l d by t h e bank a g a i n s t such F e d e r a l r e s e r v e n o t e s ;

Meets w i t h t h e a p p r o v a l of t h e F e d e r a l Advisory Counci l*

No. 2 . IN RE. AMENDMENT OF SECTION 19, a b b r e v i a t i n g and s i m p l i f y i n g t h e c l a u s e s i n S e c t i o n 29 which r e l a t e t o r e s e r v e r e q u i r e m e n t s • This p r o v i d e s t h a t a l l member banks s h a l l

- m a i n t a i n Rese rves i n t h e F e d e r a l r e s e r v e bank as f o l l o w s :

Aga ins t Aga ins t Demand Time D e p o s i t s D e p o s i t s

. ( a ) Country banks 7 $ 3$ (b) Reserve c i t y banks 10$ 3? ( c ) C e n t r a l Reserve c i t y banks 13$ 3$

and i n a d d i t i o n eve ry member bank i s r e -q u i r e d t o keep i n i t s own v a u l t f o r t i l l money an amount of s p e c i e or c u r r e n c y ( n o t n e c e s s a r i l y go ld or l a w f u l money) e q u a l t o f i v e p e r c e n t of i t s demand d e p o s i t s , l e s s t h e amount of n e t b a l a n c e w i t h F e d e r a l r e -s e r v e banks i n e x c e s s of t h e minimum above s t i p u l a t e d .


- 2 -

1963 ?97-

This amendment i s i n h a r n ? . o n y wii i i one of t h e "basic p r i n -

c i p l e s of t h e F e d e r a l Reserve Act t o t h e e f f e c t t h a t t h e "bulk of

t h e go ld h e l d as r e s e r v e s f o r "bank d e p o s i t s shou ld "be m o b i l i z e d

i n t h e F e d e r a l r e s e r v e "banks• From t h e s t a n d p o i n t however of a

p r a c t i c a l working b a s i s t h e Counc i l doubts i f so mtich as i s p roposed

of t h e member banks* a v a i l a b l e cash s h o u l d be a r b i t r a r i l y t i e d up i n

t he form of compulsory b a l a n c e s w i t h t h e F e d e r a l Reserve banks•

The Counc i l a t i t s mee t ing of September l $ t h l a s t , drew

t h e Board 1 s a t t e n t i o n t o t h e f a c t t h a t u n t i l t h e S t a t e banks j o i n

t h e sys tem and d a i l y c l e a r i n g house b a l a n c e s can be s e t t l e d by

checks on t h e F e d e r a l r e s e r v e banks t h e member banks , e s p e c i a l l y

i n t h e l a r g e c i t i e s , must keep a s u f f i c i e n t supply of g o l d or law^

f u l money on hand f o r t h e s e t t l e m e n t of such b a l a n c e s a s w e l l a s f o r

t h e i r c o u n t e r u s e . Bes ides t h i s i t would be a c o n s e r v a t i v e p o l i c y

f o r t h e member banks t o keep i n t h e i r own v a u l t s a r e a s o n a b l e amount

of g o l d ©r l a w f u l money p r o p o r t i o n a t e t o t h e i r demand d e p o s i t s * #

Banks l o c a t e d i n F e d e r a l r e s e r v e c i t i e s ridw r e c e i v e from t h e F e d e r a l

r e s e r v e banks l a t e i n t h e a f t e r n o o n checks on t h e m s e l v e s i n l a r g e

volume and amount which have accumula ted d u r i n g t h e day and have been

charged a g a i n s t t h e i r l e g a l r e s e r v e b a l a n c e s i n such l a r g e volume and

amount a s t o hamper t h e n in m a i n t a i n i n g t h e i r l e g a l r e s e r v e b a l a n c e s *

In our o p i n i o n 5$ cash on hand would no t be s u f f i c i e n t f o r t h e s e

p u r p o s e s and from a p r a c t i c a l s t a n d p o i n t i t would f a c i l i t a t e t h e o p e r -


997 1964

at ions of the member banks i f the minimum compulsory balances t o

be kept by them with the Federal reserve banks aga ins t t h e i r de-

mand depos i t s were at l e a s t reduced in each c l a s s and the per*,

centage of the t i l l money correspondingly increased in the case

of the reserve c i t y and centra l reserve c i t y banks., the irid re as 6

in / t i l l money i n the casB di the country banks being unnecessary* . . . . . . i *

The Counci l ' s recommendation i s there fore as f a l l o w s ;

Deposi ts in Deposi ts in Federal Res. Federal Res. T i l l Banks against Banks against

. Demand Depos i t s . Time Depos i t s . Money

Country Banks 6$ 3$ 5^

Reserve City Banks 9$ 3$

Central Reserve City Banks 12$ "bi° 6$

No. y . AMENDMENT OF SECTION 11, so a s t o p e r m i t t h e F e d e r a l Reserve Board to r a i s e reserve requirements i n emergencies , j u s t as i t i s now empowered i n c e r t a i n cont ingenc i e s of a d i f f e r e n t kind t o lower those requirements.

The Council i s of op in ion that i t would "be undes irable

and unnecessary to grant such power t o the Federal Reserve Board.

The Board would only take a c t i o n under such power when member

banks are overburdened with surplus cash re serves and i t s a c t i o n

then could only apply t o member banks. The e f f e c t would t h e r e -

f o r e be that member banks would be compelled t o increase t h e i r

non interes t -bear ing balances w i t h the Federal reserve banks whi le


1965 • . . 99? t *

- 4 - ,

nonmember banks would have t h e f r e e . u s e of t h e i r f u n d s . I t would

p l a c e a n o t h e r s t u m b l i n g b lock i n t h e way of S t a t e banks j o i n i n g

t h e s y s t e m .

No. 4 . AMENDMENT OF SECTION 13, t o p e r m i t nonmember 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 be e l i g i b l e f o r membership i n t h e F e d e r a l r e -s e r v e banks , t o a v a i l , t h e m s e l v e s of t h e c l e a r ~ l e g and c o l l e c t i o n f a c i l i t i e s of t h e F e d e r a l r e s e r v e b a n k s , p r o v i d e d t h a t t h e y ctiver a t p a r checks on t h e m s e l v e s s e n t f o r c o l l e c t i o n by t h e F e d e r a l r e s e r v e bank and p r o v i d e d f u r t h e r t h a t t h e y keep a compensa t ing b a l a n c e w i t h t h e F e f e r a l r e s e r v e bank i n an amount t o be d e t e r -mined under r u l e s p r e s c r i b e d by t h e F e d e r a l Reserve Board .

This might work t o t h e m u t u a l a d v a n t a g e of t h e member

banks i n c o n n e c t i o n w i t h t h e check c o l l e c t i o n sy s t em and of non -

member banks w i l l i n g t o conform t o t h e r u l e s p r e s c r i b e d by t h e

F e d e r a l ' R e s e r v e Board as w e l l a s t o t h a t of t h e F e d e r a l r e s e r v e

banks t h rough t h e -•compensating b a l a n c e s . The exper iment might be

wor th t r y i n g .

No* 5 . AMENDMENT OF SECTION 22 - t h e p e n a l s t a t u t e - so ad t o d e f i n e more c l e a r l y the r i g h t s and l i m i t a t i o n s of.. d i r e c t o r s i n t h e m a t t e r , of a c c e p t i n g f e e s o r compensa t ion o t h e r t h a n t h e o r d i n a r y f e e s p a i d 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 r e g u l a r cou r se of b u s i n e s s , t h e p e r f o r -mance of which s e r v i c e s i s no t incumbent upon them i n t h e i r c a p a c i t y as d i r e c t o r s .

The C o u n c i l would recommend t h a t t h e p roposed a d d i t i o n

t o S e c t i o n 22 commencing w i t h "PROVIDED, HOWEVER, THAT NOTHING IN

THIS ACT CONTAINED" s h o u l d be amended a s f o l l o w s :


1966 ' ' - 5 - 997

PROVIDED, HOWEVER, THAT NOTHING IN THIS ACT CONTAINED SHALL BE CONSTRUED TO PROHIBIT A DIRECTOR, OFFICER, OR EMPLOYEE FROM RECEIVING THE SAME RATE OF INTEREST PAID TO OTHER DEPOSITORS FOR SIMILAR DEPOSITS BDE WITH SUCH BANK: OR TO PROHIBIT A DI-RECTOR, WHO IS NOT AN OFFICER OR EMPLOYEE FROM RECEIVING, DIRECT-LY OR INDIRECTLY, THE USUAL AND CUSTOMARY COMMISSIONS OR FEES FOR SERVICES RENDERED IN BUYING AND SELLING SECURITIES OR OTHER IN-VESTMENTS FOR OR ON ACCOUNT OF SUCH BANK, BUT IN THIS LATTER CASE THE ACTION OF THE BOARD OF BISECTORS, IN DIRECTING EACH PURCHASER OR SALE OF SUCH SECURITIES OR OTHER INVESTMENTS, MUST BE BY AN AFFIRMATIVE VOTE OR W T T E # ASSENT OF AT LEAST THREE-FOURTHS OF THE MEMBERS OF THE BOARD EXCLUSIVE OF THE DIRECTOR INTERESTED. AND BUT EACH SUCH TRANSACTION MUST BE RECORDED IN THE MINUTES OF THE MEETING OF SAID BOARD, SUCH MINUTES TO SPECIFY THE NAME; OF THE DIRECTOR AND THE FIRit OR CORPORATION WITH WHICH HE IS CON-NECTED, IF ANY, THROUGH WHICH SUCH ORDER IS TO BE EXECUTED TO-GETHER WITH THE AMOUNT OF THE FEE OR COMMISSION TO BE PAID ON EACH TRANSACTION; AND, PROVIDED FURTHER, THAT NOTES, DRAFTS, BILLS OF EXCHANGE, OR OTHER EVIDENCES OF DEBT EXECUTED OR IN-DORSED BY DIRECTORS OF A MEMBER BANK MAY BE DISCOUNTED WITH SUCH MEMBER BANK ON THE SAME TERMS AND CONDITIONS AS OTHER NOTES, DRAFTS, BILLS OF EXCHANGE, OR EVIDENCES OF DEBT UPON THE AFFIRMA-TIVE VOTE OR WRITTEN ASSENT OF AT LEAST THREE-FOtRTHS OF THE MEM-BERS OF THE BOARD OF DIRECTORS'. OF SUGH MEMBER BANK.

The Counc i l makes t h i s recommendation 'because i n i t s

judgment an a f f i r m a t i v e vote o r w r i t t e n a s s e n t of a t l e a s t t h r e e -

f o u r t h s of t h e members of t h e Board i s an u n n e c e s s a r y r e s t r i c t i o n

i n c o n n e c t i o n wi th such s e r v i c e s by a d i r e c t o r as t h e buying and

s e l l i n g of s e c u r i t i e s and inasmuch a s n o t e s , d r a f t s , b i l l s of ex-

change o r o t h e r e v i d e n c e s of debt e x e c u t e d or i n d o r s e d by bank d i -

r e c t o r s a r e as a r u l e t h e very b e s t of t h e i r c l a s s , t h e p l a c i n g

of s p e c i a l r e s t r i c t i o n s on t h e d i s c o u n t i n g of such i n s t r u m e n t s

f o r d i r e c t o r s would only u n n e c e s s a r i l y and u n w a r r a n t a b l y impede

l e g i t i m a t e b u s i n e s s o r f o r c e i t i n t o o t h e r b a n k s .


1967 997

-6_

No- 6 . AMENDMENT OF SECTION l j t o r e s t o r e t h e p r o v i s i o n which was "by error stricken from the Act in the amendments of September 7, 19l6> thus restor-ing to national banks> with the approval of the Federal Reserve Board, the right to accept up to 100$ of the ir capital and surplus in transactions involving imports and exports.

The Counc i l approves t h i s amendment.

No. 7 . AMENDMENT OF SECTION if , t o e&tieel t h e p r o v i s i o n of The Nat iona l Bank Act which Requi res n a t i o n a l banks t o m a i n t a i n a minimum dep t i s i t of Gov-ernment bonds w i th t h e T r e a s u r e r of t h e Uni ted S t a t e s .

The Counc i l approves t h i s amendment.

No. 8 . AMENDMENT OF SECTION 25 t o a u t h o r i z e member banks l o -ca t ed i n c i t i e s of more t h a n 100,000 p o p u l a -t i o n and which have a c a p i t a l and s u r p l u s of more t han $1 ,000 ,000 t o e s t a b l i s h b ranches i n t h e sane c i t y , p rov ided the S t a t e laws do n o t p r o h i b i t S t a t e banks and t r u s t companies from e s t a b l i s h i n g b r a n c h e s .

The Counci l h a s a l r e a d y a d v i s e d t h e Board t h a t i t a p -

p roves t h e a u t h o r i z a t i o n of member banks l o c a t e d i n c i t ies of more

t h a n 100,000 p o p u l a t i o n and which have a c a p i t a l and s u r p l u s of

more t h a n $1 ,000,000 t o e s t a b l i s h b ranches i n t h e same c i t y , bu t

d i s a p p r o v e s t h e g r a n t i n g of such a p r i v i l e g e t o t h e banks i n some

S t a t e s whi le i t i s w i t h h e l d f rom banks i n o t h e r S t a t e s irrespective

of S t a t e laws a f f e c t i n g S t a t e banks and t r u s t companies i n r e g a r d

t o t h e e s t a b l i s h m e n t of b r a n c h e s by them.


1968 997

-7—

No. 9 - AMENDMENT CF SECTION $ , a u t h o r i z e mu tua l s a v i n g s baulks no t having a c a p i t a l s t o c k t o become a s s o c i a t e members of the F e d e r a l r e s e r v e sys tem tinder c e r -t a i n p r e s c r i b e d c o n d i t i o n s .

The C o u n c i l approves t h i s amendment.

No. 10 . AMENDMENT OF SECTION 18 so a s t o g i v e t o Uni t ed S t a t e s o n e - y e a r 3$ go ld no t e s i n t h e hands of F e d e r a l r e s e r v e 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 s u a n c e of F e d e r a l r e s e r v e bank n o t e s .

The Counc i l would recommend t h a t i n s t e a d of amending Sec-

t i o n 18 so a s t o g i v e Uni ted S t a t e s one-year 3$ go ld n o t e s i n t h e

hands of F e d e r a l r e s e r v e 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 s u a n c e of F e d e r a l r e s e r v e bank no t e s t h a t t h e l aw p r o v i d i n g f o r

t he exchange of 2$ go ld bonds b e a r i n g t h e c i r c u l a t i o n p r i v i l e g e ,

bu t a g a i n s t which no c i r c u l a t i o n i s o u t s t a n d i n g , f o r one -yea r

go ld n o t e s t o an amount no t e x c e e d i n g one-ha l f of t h e 2$ bonds so

t e n d e r e d f o r exchange , be so amended a s t o do away w i t h t h e one-

y e a r g o l d no t e s e n t i r e l y and p r o v i d e t h a t t h e 2$ gold bonds may

be exchanged f o r an equa l etoount of t h i r t y - y e a r 3$ go ld bonds

w i t h o u t the c i r c u l a t i o n p r i v i l e g e .

No. 11 . AMENDMENT OF SECTION 4 t o a b o l i s h t h e t i t l e and o f f i c e of Deputy F e d e r a l Reserve Agent , t h u s h a v i n g two u n a t t a c h e d C la s s C d i r e c t o r s i n s t e a d of one a s a t p r e s e n t , and t o c r e a t e 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 Reserve Agent , who s h a l l no t be a d i r e c t o r of t h e bank, bu t who s h a l l be a S a l a r i e d bonded o f f i c e r i n t h e


997 «-8w

F e d e r a l Reserve Agent 1 s depar tment s e r v i n g a t a l l t imes as an a s s i s t a n t t o t h e F e d e r a l Reserve Agent and q u a l i f i e d t o a c t f o r t h e Agent i n h i s absence#

As member banks and o t h e r s doing b u s i n e s s w i t h t h e Fed-

e r a l Reserve Agent and h i s a s s i s t a n t would not n e c e s s a r i l y be

charged w i t h knowledge of the absence o r d i s a b i l i t y of t h e F e d e r -

a l Reserve Agent t he r e s t r i c t e d power of h i s a s s i s t a n t t o a c t i n

h i s name and s t e a d only d u r i n g h i s absence or d i s a b i l i t y shou ld

f o r t h e i r p r o t e c t i o n be removed by s t r i k i n g ou t t h e words "du r -

ing h i s absence o r d i s a b i l i t y " o c c u r r i n g in t h e l a s t p a r a g r a p h

of t h e p roposed amendment. If t h e a s s i s t a n t shou ld a c t i n any

m a t t e r of impor tance dur ing the p r e sence or d i s a b i l i t y o'f t h e

Ag6nt t o act f o r h imse l f h i s a c t i o n would be n u l l and v o i d . O t h e r -

wise t h e Counc i l s e e s no o b j e c t i o n to the amendment.

1/29/17


1970

999<

64th CONGRESS, ,2d Sess ion* H. R. 205^0•

IS THE HOUSE OF REPRESENTATIVES,

J anua ry 26, l $ l 7 •

Mr. ti-lasd I n t r o d u c e d t h e fo l l owi f t ^ b i l l j which Was r e f e r r e d t o t h e Committee oh Banking and Currency and o rde red t o "be p r i n t e d *

A B I L L

To a u t h o r i z e n a t i o n a l t a n k i n g a s s o c i a t i o n s t o e s t a b l i s h b r a n c h e s .

Be i t e n a c t e d by t h e Senate and House of R e p r e s e n -

t a t i v e s of t h e Uni t ed S t a t e s of America i n Congress assembled ,

That t h e Act approved December t w e n t y - t h i r d , n i n e t e e n

hundred and t h i r t e e n , k n o w n as t h e F e d e r a l r e s e r v e A c t , be ,

and t h e same hereby i s , amended by add ing a new s e c t i o n as

f o l l o w s :

"Domestic B r a n c h e s .

"Sec . 25a- That any member bank l o c a t e d i n a c i t y or

i n c o r p o r a t e d town of more t h a n one hundred t h o u s a n d i n h a b -

i t a n t s and p o s s e s s i n g a c a p i t a l and s u r p l u s of $1 ,000 ,000

o r more may, under such r u l e s and r e g u l a t i o n s as t h e F e d e r a l

Reserve Board may p r e s c r i b e , e s t a b l i s h b r a n c h e s , no t t o *

exceed t e n i n number, w i t h i n t h e c o r p o r a t e l i m i t s of t h e c i t y

or town i n which i t i s l o c a t e d : P r o v i d e d , That no such

branch s h a l l be e s t a b l i s h e d i n any S t a t e i n which n e i t h e r

S t a t e banks nor t r u s t companies may l a w f u l l y e s t a b l i s h


- 2 -

1971 995-

b r a n c h e s : And p rov ided f u r t h e r , That t h e number of

b r anches which a member bank may e s t a b l i s h s h a l l n o t

exceed t h e number of b r anches which t h e laws of t h e

S t a t e i n which s a i d bank i s s i t u a t e d p e r m i t a S t a t e

bank o r t r u s t company t o e s t a b l i s h w i t h i n t h e c o r p o r -

a t e l i m i t s of s a i d c i t y o r t o w n . "

1/30/17.


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