frsbog_mim_v06_3107.pdf

First Draft W.:P.G.H.

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In conf'orm1ty with the requirements of Section 10 of the Federal t

Reserve Act, the fourth annual report of the operations of the Federal

Bese:ne Board for the caJ enda.r year ended Decamber 31, 191 ~, is subm1 tted

herewi thi

The outstanding featurE' o'f the year has been, of course, the entry

of the United States Jnto th~ \?ar. The deo1arat1on by Congress of a

state of \12r, on A9ril 6th, had been preceded by a pen~d extend mg C>Ter

many months ot unpl'ecedented act1 vi ty and expansion in practically all

lines ot business and i.ndustrJ', tempered, however, in the minds of thought-

ful men, by uncertainty And apprehension as to tl'B ultimate adjustment of

international relationsh1ps. The Board had seen, tor a lo:ng tune, that I

I the feverish cor~rt1ons brought about by tpe rap•d oha.n.gp Jin 01u- position

from a debtor to a creditor :aa.'iien, by the great intl.u: of gold into the

country, and by the large foreJ.gn ~red1ts negotiated here, rendered it

imperative that tl'Je i'edera.t Reserve system should be strengthened and

brought to the highest state ot ef'f1c1ancy, in order that it might pertonn

the most eff'ecti ve service in either one of two even.ts which seemed likely

to transpire - the conclusion of a general peace in Europe, or the e11t.ry

et the United States itself into the war. In the event of pd&ce, a

radical readjustment was to be expected. a.ud there \70uld have baen a

slm7lng down of those industries wh:Lch were engaged 1n supplying war

aateri.al, a consequent heavy falling off in our exports, aocompan1ed, in

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all probability, by a strong 4enand upon ·us tor gold~ . and on the other . .

hand. in the aase o,f our own 'belligerenay, it •s f'oreseeo. that there

would be a greatly increased demand for all articles necessary for the

equipment and maintenanoe of' our· own military and .naval establishments,

much .l~rger credits to the countries associated with us in the war, and

~ inevitable cessation of gold shipments to us by those countries •.

For these reas~ns, the Board felt that it should in either event,

during this period of uncertainty, underta.ice to preserve the liquid

character of the ~sets of the Federal Reserve banks, to discourage

a_llY undue expansion of cred~ ts, and to reduce to very moderate proport~ons ·

the· holdings of the bankS in· such investments as bonds and warrants

which had been tll).li.Ei prins.rily for the sake ot -income. Early in the

year, therefore, the Board began to _carry out these po~icies ani the e~

of March found the Federal Reserve banks in a very strong position, with

assets unusually liquj.d. While some of. the ba.nks had purcba.sed ~

were holding government :a>oms, the aggregate amounted ~o less than five

P8r cent of their total resources. Holdings of municipal warrants,

which at tim8s had been freely purchased by some of the ba.nkS also, had

been reduced to a oomJ?aratively small amount. .

In order better to ·provide for the strengthening of otll' banking

struoture, for the conservation of our gold supply, and t'or the regul.$

tion _of ~t$ outflow, the Board in January ~"qJ"gested. some.amendments to

the Federal Reserve act which were designed to make membership in the

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SJ'Stem more attractive to the s~ate banks and trust companies, ~ to

mod.14' reserve requirements 1n suoh a wa:y as ·i;o increase the gold holdings.

of the Federal. Reserve bankS and ·oo make the~ gold more available as a

basis for note issues. !l!hese amendments finallJ be~· law on JUne 21st

and will be discwsed more f'a.l:ij !!.n other parts of ~his report. In anti-

c1pa.tion of these oh:lnges and of. future contl~enc ies, the Board deter.mined

upon the preparation and diatribut1on of a much larger volume of Federal

Reserve not es, and during the mo:r.r~Jls of January and Pebruary placed ad-

d1tional orders w.J.t.b the Bur&."J.u of Engravi:og and Prin~i~, through the

Comptroller ot the Curren.e'J', for more than $900,000,000 ot these notes,

and arranged al.so tb.o:t the stock of notes on ham sh.otlld. no lor!fJ'Jr be

' :reduced through w~.t.hdra.wals for m:.rren~ needs, but ·1;h3.'°i a.s d~&wn upon by

the i'edera.1 Reserve 'be.nkS new orders !u equal a.mom:i·:; fb.c-;:&.ld. be pl a.~ed

autonatlcal.J.7. 1.n o:rder to ins are iu:!nadiata availability, ample supplies

ot notes were placed at t.he sub·treasuries for deli·ver1 to the Federal

Reserve age:ats as required. The preoautious tak:ea have teen. Justified by

ne~ta and an ample suppl.y of Federal Reserve notes hl\s been available

througholit the .1ear.

\1hen a state of war was declared on April 6th., the reserve position

ot tb8 Federal Reserve banks was exceptionally strong. · Gol.C. ~.n the . .

Federal Reserve ba.nkB and with Federal Reserve agents amounted to

i943,552,0~~; the reserve against notes was 101.2% and againat deposits

'16.~ tho combined reserve against depollits a:rd notes bei?Jg _ 8JljJ.·


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Investments in government bo!'.dS and munio,.pal. warrant~ had been red'tioed

to-i61,B36,000 and .pu.rohases of acceptanoes we:::-e in smaller volume.

FEDERAL U>EJrlE·~ AS. FJBCAL AGENTS OF THE UNITED STATE3.

The entry ot the ccr~n"";:cy into wu resul·;;od almost immediately in

the assignment to the Faderal Beserv e banks of new and e xo eediIJg 1¥ 1m-

portant dutieA. Seoj:'.on 15 o~ the Fede~ Reserve Act provides in :i:art

that the banks when required b7 the Secretary of ~he Treasury shall

act as fiscal agents of the Ucl.ted States·. This function had hither-

to been a negl.igj.ble one, bl'CJ on ?,fay 2nd the Secretary of the Treasury

made public the ci.etails ot th.c f ~~st bond issue, A:nowr.. as the j,.iberty

loan of 1917, ~d a.t the same time J:.e announced tr...at aach Federal .Re

serve bank would be oonsti tut&d a central agenc7 in its own dis tridt

for the organization of a bor~ campaign, for rec~1V1l'J8 subscriptior.LS

and payments, making deliveries and m.anag;.ng tl"&E:! necessary detana. The

bB.nkS were also charged by the Secreta.1·1 of the Trea~ury with "Che dutJ"

of placing the sa.ocessive issues of short time Treasu."t-y C\F-rtif'icates

which have been offered, and of rl!ldeeming them a.t maturity. These new

duties have brought the bankS into more intimate contact with the

Treasurr and have also lnoreased eno:nnomly their opera.ting problems.

It has been necessary for them to add to their working space and to more

than double their clerical staffs. ~Y nave rendered especially

valuable servioe in the prompt fl~tatlon of the varioUJr issiEs of Treasury


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certificates of indebtedness which, ranniJJg ~or short periods onq in an.

ticipa.tlon of receipts f'rom the lo?Jg term bonds, were placed with bankS

rather than with the 1nves"'i1ng public.

~e f'irst i~sue ot iSO,C~0,000 of'f'ered under the provisions of the

Aot ot March 3, 1917 in· antlc:~pa.ti.o::i of inoome tax receipts a·corulng on

Jtme 30th, was of:tered before ra·C;es for mo2\9y ha.cl advanoed, and at the

request of the Secre-t;ary of the Treasury, the Federal ·Beserv e bankS t~

selves subscribed for th.e en~1r9 issue, at ~"l~ rate of 2% per ann.um.

This constituted their first direct service to the government in its war

financing. This issue howe7e:r, was only a beginning. It was following

by an of'fer1ng of $2So,oeo,occ, at :1...J, on A.pril 25th, which was quickly

distributed by tt .. e F.edera.1. Reserve ba.nkS among th~ membe::- and nonmember

banks of their raepecti ve districts. Th;.s prooess has been repeated on

eleven subsequent occasions, four issues having been made in 3.?lticipation (J t:J ()

of the first Libe~~r loau ot ;a,ooo,eooi\which was closed on June 15th,

While six were antic ipato17 of the second Llberty J.oan, subscrj.ptiono to

which closed on Novembe~ 28th. The last issue~~e. in . "

aaticipation of taxes due next June, has a longer time to :a.·~:n than the

others and being intended prinaril.y for the convenience ot those who will

have tues to -pay on account of incomE's and excess profits, appealed more

pa.rticu].arly to corporations and investors tha;n other issues, which went

nainly to bank&. Subscriptions a.re now being received by the Federai.

Reserve ba.nkS for a. new ottering of the· same character.

In his annual report to Congress the Secr~tary ot the Treasu17

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expressed h~s appreciation of the services rendered by the Feneral Reserve

bank& as fiscal agents b~ sta.·t.ing that "T.1'..e Federal Reserve 3ystem has been

· ot incalculable value duri:Jg ·;-w.1s period cf· war f'inancb~g on the .most e.x:

t~ive sea.le ever underta.li:sn by a:ny nation in the history of the world.

It would have been imposslbla to calTJ' through th93e "lllprecedented financing

operations under our old bar.t:~.r.g s19 "i;tc. fhe offecti ve raacminery af- .

forded by the Federal Ros9rve bankS ~s pe1m.t~ted the government to e.z

ecute its plans W.~hout a ·tremo: ~t d!Sturbance. Great credit is due

the twelve Federal. Reserve ba.nkS for their broad grasp of the s itua.tlon.

and their intall,.gent and comprehemive coopera·tlono" He a.clded that the

organizations w!J!o.h th~y hava P'rfectsd have contributed graa.t.q to the

phenomenal succ'3ss of the Liberty :Leans.

The Federal Be..;e.rve ban!ts have f~m the fir.st met with a prompt am

hearty response from the r~!?lber and nonmember bc.~nk& in ·their respective

districts, both in ths flotation of Treasury cert1~1c~tes al'ld of the

Li bert7 bonds. The Treasu:--y has relieved. pre~ S'.1re upon the market

by perm1tt1ng the Federal. Resen·e baaks to distribute tile proceeds of the

au.le ot certificates and bonds Among ·the national bauks suh~oribirJg, but ·

the term ot these deposits has :necessarily ·oeen sllort, and as a consider

able lapse ot time is requ1rett tor th~ redi str1 but ion ot these fur.ds

throughout the countr7 through noi-ma.l trade a.nd banking channels, the

greatest measure. of rallet has been afforded through redis~ounts of' member

bankl with the Federa.1. Reserve ba.DkS. These tra.nsa.otions have involved .

no losa ot .gold, tl11s being obviated by a subs~"t 1a1 expansion '>f Fed.era,l

Reserve note issues.


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DISCC'CJm POLICY.

Upon. the Federal Reserve Board has :tall.en the responsibility of

directing the pol1o1es ot the syateJD so as to insure pranpt accommodation

to be.nkS whose customers requind assist~oe in naklllg thef.1' P8"ments

for bonds, as well as to banks which bought bo:zids tor that r own account • ..

It was important that there be no disturbance in the mone1 narket am tlat

interest rates should be stable and as tree as possible from fluctuation.

b Board accordingly, before the subsoriptj.ons to the first Liberty bond

issue were olosed, and 1n anU.clpat!on of the amend.mm ts \vhloh b eoame

law on June 21st, established a preterential·:t:ate of discount for notes

ot member banks secured by gove~ent obligations, whether ce1·tifioates or

bonds, tixi?Jg a lmver rate than th.at borne b7 the securities themselves, -

* tor notes· na·turing up to 90 days. As a tur~er means of relief', the

Boa.rd authorized Federal Beserve bankS to discount for nonmember banks, '

upon the endorsanent of a member bank, notes secured by government se-

ourit1es, whether made by the nonmember blinlm themselves or by their cus-

tomers, when the proceeds we:re to be uaed for carrying Treasuq certifi

cates or United States boJlds. ~hese measures involved modif'lcations in

discount scliedules and rates, w~ch my be enumerated as f'ollO\YS:

(1) The establishment ot a rate of 3% per ~um fox- the discount

at Pederal Reserve ba.ziks o~ notes of menber bankS running not longer tban f

15 days seoured by Treasu~y certificates of -imebtedness, which certifi-

cates had been :t.ssued at ·rates varying from 3 to· 31% per annum.

(2) The establishment of a rate of disoount at.Federal Reserve

t»a.alm .ot * pe:r anntm. tor cmtomers' notes rlD'lll1ng up to 90 dBi's, with Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

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the endorsement of member banke:, when s ll)h notes had been made for the

purpose of obtaining ~..ds for the purchase of government bonds am were

secured by government obl!ga~ions.

(3) The authorisation ot Federal Reserve banks to rediscount for

member banks. on beha'lf of nor..mcmber banks, notes of nonmember baDkS or

their customers, secured by government obl1ga.t:j.ona. for the pur,Pose of

obtaining f'un4s withwhtch to purchase United S~a~es bonds or notes.

(4) ·The establishment of a one day mte of fl-Om 2 ·to 41' at the

rederal Reserve bankS in the principal financial centers, ttew York "Ii

patticularl7, for the P'~ose of restoring to the market funds te.mporar1l7

withdrawn through ga:>verllll!9nt loan operations.

(5 ) J ·The autho=lmtiC"n ·cf. Fed.era:!. Reserve ban~ to d11:1001.1nt notes

made bJ' nolruember b8.DkS lrl th the e:cdorsemmt of a msnbei'" bank, on con-

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ditlon that such notes. running not longer than 90 days, should be radia-

counted •nq up to Jn.-1.y 15t.h and that they should be aocompa.nied bJ' au

af:f'idavl t tbat the pnceeds thereof had been used for the purchase of

gevermnent bonds by the banks er thel r customers. ,.,.. .... s given • ···

A general assurance I savings bankS am trust companies th9.t

the Board desired in every way to cooperate with them in avoiding strin

gm07 and that the Federal Reserve bankS were prepared to extend through

member banlal every reasonable accommodation not inconsistent with law,

tor the purpose of relieving any strain \\hich might result from with-

drawals et deposits for purchases of government securities.

1'he redisc?unt policy of the Boa.rd, which was intlnded to assis°ii

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·v those desiring to subs~ribe ior the first Libe~y _lou by assum1ng ballki?Jg

acconmodation pending the payment in full of their sub.so~iptions, was

amply Justified by results. As ne~lJ as can _be ascertained, scarce~y . . . . . . . . . . •.:.·

more than $300, 000, 100 ot ~he !.oan .1as actually subscribed bJ banks to.r

their own account-, ~ of thio tvnount a very .la. part was quickly ~rans

terred to pri•ate investors w:!°!O had no.t; or1g1r.ally subsor.J.bed for or ?een

· allotted all the bonds they desired to obtain.

~e amou..7it of r9d1Rco~ts a; Federal B.es&r7e bank& of ~otes secured

bJ gove~nt obU.gat.ions re~hed its maximum ot $82,95.0,000 on June 22nd, . . . . . . . .

one week atter t~e closi~ of s~bscriptions for ~he loan, but these notes

were pailft so :t~ap,.dly tl'lat the total ot such rediscoU!lts bai on August

17th, fal en to ~.1,osi,000. Rapor~s from all seot:::.ons of the count~ indicate that onl1 a compc.i:rativeJ.y smaJ~l perc~ ·;;age o?. ~he fl rs·t issue ot

Liberty bonds is now being oarr.ied. up~~ a lo~ term instalment basil, 8:Jld

that as a rule both ba.1'.kS and pri. va te inyes to r-s were ab~e ~ with_in a few

weeke,. to -pay tor the securitles w~ch _th91 agreed to take.

EFFEO!I' OF AD])I TI OHAL LtlA.NS.

The services rendered by the Fede~ Bese~e ba.nkS dur i?J€: the second

Liberty loan oampglp. w.h1ch began oi;i Cotober .1st and ended on October ·: . . . .

27th, were ~en more marked than .1~ :the _~irst ins~an~~· Tl.le . ex:pe~ence

Whioh lad been gained on _tiµ, former occasion, the tact t~t moi-e time llad tJ: ... ,#.1~,, .. ,~ ···-. '. . . : . . . • . ·r~ .._"r(lv \ ·

be~ afforded for nit±' 'ltail organ1.zat.lon, a _better understanding by the • • • •" • • • I . • . •

people of' the merits of gove~n·~ bonds as an investment, and a gene~ . . . . .

awakening to a sense o~ patriot~~ dlJ:ty, a.11 combined to br:lng ab~ut the


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vigorous cooperation ot the p·.· .. blic generaJ.J.;r. !fhe arrangemen~s pre-

viously made to acconmodate the banks and "their cus to.mars who desired to I

subscribe to government bor..ds. rSlJB.ined effective, and tl:,ere were no chazages . .

in discount ra.tea. 11otwithst.andS..r..g the advance. of one-h.~l:r of one J>tr cent.

in the rate of inte~est cari•ied by the "nonds themselves' until the close

of November B.?1.d the .middle of D&cember, who.:!. geceral advances of one-half

of one per cent in rates of Federal Reserve bank3 ware 118de. . .

The organlJ:a~:ion of _tlle .t.:t1°19'.9ty loan ocmmUtee and the arrangements

for publiaity 81'.Jd for soH.clt~.r-g subscriptions, had been grea_tly- improved

•er the ieadarship of the Fede:~ Reserve bank in ea.ch dis·triC;t, end

the result wf.is grat1~yi1J8 in a. oorrespoJid.ing.. degree • The f adt that the

. snond. loan,. aS o!9f'e:!9ed ~a the pubJ.lc, was ti.tty pe:.:- cani; gi•ga,of;er ~;han the

:·:.~.J:;r'fit. ~lle actu.-:i.l 3UbG<'ript1011s ·re<'elved were '·n an F.ve:a greater pro-. ~ . .

·':portion,A.natura~17. inorea.a~d ve.:ey subs~an~iaJ.iy the operations or the

Federal Reserve. banks in discoun~ing pa.per s3cured by government obliga.-

tions. ne total. of auc.b pn.per discounted at the B'ederaJ. Reserve ba.Dks

reached a nan.mum on ~ VD '·when the aggregate an.aunt of notes . ~

u"der discount ··secured by government cbligaU~ons wa.s ~ 'I '19 •a.' F. ~~" • I •

As was· the case with the tirs.·i; loan how~er,. there were oonstrur~ tra.n1:1-. .

fers to investors. and oD fll<9-~ ~~ thdl total amoUnt of )'escounts

o~ this character had been reduced to f. ~~J. ~ ,_/, Ullt:(

ElcperienQe duriJJg the yea.r with t~se ope:ratioiis and an anaJ.ysis of

the coiisequeiit changes in the banking s1 tU:8tt1on, demonstrate how greatly

the entry of the United states iiito the wa.:r has incr-eased the respons1~111ty

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ot the .i'ederal Rese1-va s,e·~e..-:i i::i.1 i ta relatj.ons to the !rre&s\ll7 and to the

public. Not only have new duties devolved upon. the Federal Bese"e system,

·but it-has been nalie more d~.?sc·i;ly responsib:t.9 for the soundness o~ the

.banking poa 1 t~on. The Federal Rese:-ve Board is• of course, not concerned

\ri. th the f'!?Jancial pol:ley ot the gove:mment e:me~ in so t~ aa the Seo-

· reta17 ot the Trcasurr may c:.~')c.~~e. to call upon 1 ts mambera for service 1n.

aerve Act w1 th the ax.erciae of a g9?l~:"a.l s~1pcrv:\s~on CY'l"f:'~ Federal .Reserve

bankS, which, 1~ "ilet:r function,,.; a~ ~ .. so~ ngel':i_;s of the govemment, are

responsible tor bankl?Jg teclnJ.ique of go•emment borrowing, ns well aa tor

thB emouti.on of polic:{Ss dete·min1rig the ex~ent n.Dd nanner of ba.:ilr.1ng .. .

partici_patlon i::i p·ahl:ln leans. fhis responsibility is one '\llhic!l, duri:ng .. the past year, hEiS rested ll.eav1::.y "'2po::i the member'i c:r- t:"lfi BCta.rd, am which

they cannot evade or transf'a:.·.

The Board feels that t:1e duties which i -~ is o&.ll&d up:m to perform

are at all times 1q;ressgcl_ with the highest (!UaJ.1Ues of trusteesh-1p; and

·1n times of emergcoy l.ike the p:i-esent, are vested, if it be poss:!.bJ.a, With

an added solemnity. lt seems n•t improper to suggest tha·t t:i1ose charged

W1th the supervision of ba.DltS should at this tim ad·;rise &:!.~ .caution the

banks et the cotmt:-z in the interest of the pu1'11o welfare, wi~h the view

·at developiJJB and applying methods wh!ch $.re best adapted to withdrawing

from private employment and diverting to public service the vs,st sums which

national neoess! ty demands and which Congress, ~Y its enactments, has

auth,,rlsed the S&cretary of the 'Tre&S".lrJ". to herrow or t:> raise by ta~t:i.Or.h

In 1 ts final analysis, wa:r f'i.na.nc1ng means the fur:i1s:t.1ng to our gove~ment


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ot suppl1e~ or serv:1oes for :i:,;d ·own uae or "£or the -assis·tanoe ot those

governments which. are. assoc!ated with us in {:he war. ·. These services and

supplies Bre necessary tor- the w-lnn!ng of. the wa:e, and 1 t is just as im

portant tha.t the govermner1t n e.ou.re them· as i"t is that i ~ should proo'ure

the funds or cred:'· ts with whi_:;,h to. pay for· ·them. In some :respects the

American peoplEt hBNe. no·i; as ye·~ coope:r.ated to a a~~fiaient degree, not

because of any la.c.k Qf. ~trio·L~.sm, but· beca·:_1$e ·~;h~y :have ?J.ot ya·t been

adequately 1mpresc.ad. with. t!ie ~.r._ipera·~:tve ·necescii;y for their conipl~te and

constant c oope~a i; 101• .• Thay ha99·e ·not .1et been tho1·o~llly aroused to the

fa.ct that the 1SS'U:8 -- S1lOCeCS Or fai:i.ure -~ Our future f!·S a ;cat ion, lies

1n their ha.lids • ..1: grea.fj camp3'(gn cf education, na.ti.on-w.Y.de ir. scopt:_,

opportunity to ~ender great se:a.··irirlP. ·r;,y cona:t,1 tut.1.:t.i.g thcmse."!.ves tile lt=aders

of public sen~imer.::t. Eac11 ·ba.-i:lk. !n l-i.:s own oommuu.f.'iY ought to Clke the

people umerstan.d cl ea.i.ty that the amo~t Ci! gcods. or. suppl.i9s whicl1 oan

be produced is J.1m.ted, and that 1~ ~onsen~t1on aud in the_ a.voidazr.e of

wa~te, a.S well a,s by inc:-ea.sed pr9duct1on of' food s·!iu.ft·E.:, co·t~on, wool, . . .

'wiiber, i:ron.·and s:t;eal p1·0J.uots, am all other suppl~.es necesea::.7 in ·the

()Ond.Uot ot the -wa~, the people. who ·remain at hom have the best op..·

portunity of servillg their courltr.y. These neoessa:ry sup_pJ.ies sl!ould. be

furnished· ,f.n sufficient quant1 ties· and in the shortest :flOSsible t:bne, for

time 1S .a Vital factor. It. is ot c.ourse essent!al to eco~om!ze in tl1e . .

use ot those things 'Wbiah are required by the governmant, but by re-

. s.tric~ting the Q!e o;. t~ose th~ngo wllloh are not required by the goverDlP:~t,

~ter~al iztty be rel,ase(l wh,ic:P, oan be used i~ other vrays or shipped to

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otber comitries. As an 1'.~:.w ·;:ration !t ma::/ be pointed out that if &Very

famlq in the On!ted StateE; \70U.'.d use f'ewer clothes th.an they would in

ord1na17 times. cotton.and woc,len goods to the val1:ae of millions of dol

lars could be uade avail.a.bl e fur e.xport, and the proceeds could be used in

making p~chases of copper in Maxloo, hidos and wool 3.n ,/1.rge.ntina, and of

u1tr~tes in Ch!le. By co~.s"ll:n.t:!lg a sl.G9.ller emo~t ot goods add.i t~onsl

mone7 is saved9 which can be used b~· the peopl.a in pa.yj.~ for the war loans

ot the govemmeu\-=> Deo~~sed 1lema.nd tor goods b1' indiv:~duals and pur-

chases of government bonds O'C.t of sar. .. ngs rr"l.ther tha..n by e.acoessive borrow-

1JJg from ba.nU, will tend to retard a further r.f.se ln prices a!K'~ 'to re-

strict expansion of b1.nlt1ng credits which necessar:t.:.y oontribu:'ie to ~;he

rise of prices. The government :ls t:he prinoipa.l c11s~:cme:- fo~ fE..rm

products and tor m11uf'ac ~u.red article~ and ·l':he:r:e- ~ed. b~ no fea.r of &UJ'

falling oft in demmd for staple articles ot all k,.nds as the resu.1.t o~

·1m.1vldual eoonomiAs.

Sinae the begj .. nni?Jg ot the war, l'.nd mo:a:-e especialJ .. v since tha entioJ'

of this countr~ in·to the wa..L~, depos1 ts 1n bn.nkS have iuc1·ease1. euorm.o".L;.-l:.7,

b~:t it should be remembered tl'l..at loanfl..Jmd discounts am in.,.estmen ts ilave . M~-,

inereased ln an even greater degJ9ee. .C.,__gold 'f~l.d!.:ngs in th:r.ee years

have 11lC:reased more than a billion dollars and are now larger than those -Iii.

ot any other cO"m·t17', but ~t the same time oar percentage of go!d reserves

Ago.inst deposits and note 1ss~s has decreased. ~se conditions are not

unusual in times of war, and ~o a. certain extent the~· cannot be prevented7

but the banks of the countrJ should ne.ke it their business to keep ·tl".iese

tendencies under control a:t1.d "'.;o- prevent too rapld an expansion ot c:redits

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

X-623

a.s tar aa possible, withou., 11..,.'l.clng tn Jeopa.rJ.1 the supreme object of our

national effoJ't ,._ the w5 n"'l'" lJ6 of the war. Ba.t we .should realize that

111 the accompl1slma1t ot ~i.ls purposo, the consenat1on ot our economic

am tin&iclal strenft..Jl 1s -'wa " as importan i as the a1J8m8ntatlon of our

n4112r3' powe:r, and th~~ upcn +1'is conservation ow- uilllta.ry strel'lgth de-

pends. Nothing mu9 Ii be ur~Fi.l wh"..ch can be d!.f'pensed with.

be a oonservatf.on o~ cred1.t as well as goods, and ored.~1., generally speak-

ing, sho~d no~ be used exoer,, where lt '8 requ!red for the common

welfare, * as in pla.nGil"..g crops, tlte uanuta.cture of necessary B.rticles,

or in such coz:structionbwo~ a.s rray be essential in bringing about in-~~

creased product\nn. Oen~2aci:len of ord:mary lines of credit JS nPCessa17

to aake room to.e t!l.e credits ra'l'l1!9ed by the gove"'"tIN?h:, fer "he }llll'Chase

ot supplies esser•tJ~ tor wa?- purposec.

It is hoped that '!,,he bankS of the cot'Ut!J' wl 11 cc operate a.long

these lines and that they wtll teach the dooTnne ot servl"lg and savi.ng.

~la 1a not tbo tlme tor tho purchase and sale of Juxur"es or for carrying

large stockS of any kfnd. bre should be fewer and p.Lalner goods c.:i.rr1ed

l...l stock. tor their ls no U11l1m1ted suppq of goods or of r .. ed! t. Th!s

is a tlme tor all establ!sh.~ents, large and small, to redune 1nven~or1es,

thei-eby freeing goods aud bank•ng credit. It should be UJged upon state,

city and oounty authorities. t~at this is not the time for mtt'llc1p2.11tles

to eDgBge in construc.U.oii work, except perhaps in cases where such woJk is

necessary for the p'ci>J ic heal th, am th.at instead ot engaging in new under

takings, they should rather consider oancell1ng e...c1&ti!Jg contiacts in order


X-623

-15-

to relaase men and na.terl'.&r., +,hereby avoiding competition. with the govern-

mat for man power and for the savings of the people.

It is, of cou"'se, inevitable tha.t the war activities of the gove:m-

meat will tend .to oausa a turt.her J?lpld powth of deposits am loans 111

banks, and in order to keep o-;J.r cretU.t stru.oture strong it 1s necessary

that the ba.DkB shoti.ld eurt their lnfluenoe a.r.d J.end their energies to

a more general absorption of' government loans bJ' savlngs, to a contraction

of private credits whereYer p:raotloRble without causing hardship. Vie

mw1t look to the .tut\lra, and prepare unceasingly for further demands which the forests

DBJ' be nade upon us. !11!"..e products of the fields, /,the mines, and the

ae.nutacturlng es·~ablis.bments of the oountr1 are not, generally speaking,

in the nature of lu.rnries. They can, as a rule, be ol-assed a.s

necessaries, and w1 th the outlook ahead of us there seems to be no

poss! bill~ ot over-production. It seems• therefore, that the bankS

of the countr,.. from the star.idpoint ot good bas1ness as well as from

patrf.otlam, should lend their funds an4 credits freel-y to those engaged

:tn these produoU.ve _enterplises, and their power to sene the countr1

.in this •a-, will be inoreased b7 the curtailment of unnecessary credits

· and bJ' the adoption bJ the peopl.o gmerally ot a pol:toy ot common sense, ~

practical economy.

i'he Board would call atten. t1on also1 to the very gre&.t assistance

which it is ln the power of the Pederal Reserve bankS to give to their

member bank& bJ' red1acount1?Jg pa.per growing out ot &grlou1turalv i?Jd.,is-

trial. and colJID8rc1al transactions. The Federal Reserve i~ct as ama:lded

I _J


-· ·- --- ______ ....,....

X-263

-16-

last June provides that state ba.nkS admitted to aembership uay retain

all of their stat'1-tory and char'iier powers. · Thtm state bank members are

govemed .by their. own state laws and remain under the supervls ion ot their

state banking departments. . The1r interest rates and. the llmltat.tons upon

their loans are determined ent:f.~~ly ~Y f!t&te JJµv. . There are .... ~-· ./ not yet neI£.bers l.'rJ.t whi;;h \:.re eu.gib ... e .a; or kr:emoersh1p hundreds of good banks throughout the oount-ry/ and it seems proper to re-

fer here to _a statement issued by tlie President ot the United States on

October 13th last 1n which he called attention .to the fact that 11tlJe '

extent to w.hich our coimt17 can wi'.tb.stand the financial strains for m.ioh

we must be prepai·ed ~.11 depent':. very largely upon the stra:ngt~ and

staying power of the Federal Reserve ba.nkS., 11 and 1n which he m·ged the 1m-

.i:)Ortance of developing our ba.nk!ng power to the ma.gj.:rmnn degree and of pro ....

viding financial .machinery adequate for the very great financial r~quJ,re-

ments imposed upon our colmtry by reason of the war. He pointed out

that all bank& should cooperate· in stretjgthening the posit~on of the Federal

Reserve system, thereby strengthening the nation• s bam!ng power, and

urged upen ev eey bank offioer and di rector to consider the quest !on of

mambersh1p in the Federal Reserve.system as a "solem11 obl~ation. 11

Since the date of the President's statement the banking departments

ot nearly all of the states have e..q> ressed approval of membe~ship !n t.he

Federal Reserve system on the part of the bankS under their supervision,

but the reserve .req111rements 111 a few states practically prohibit the oo-


X-623

.. :J.7-

impossible to exchange their Federal Reserve notes for gold. The Board

·would suggest to the bar..kS ln these states that efforts should be made to

obtain such legislative a.o1;1on as mau be neeessa17 to enable them to oo-

operate with the system, and ~~hat in those statfJS ·where the legis-latures

will not meet fo~ a year or more, the bankS might feel J"'.lStified in ask-

1ng their governors to oonver.e the l~Oislatu1·a 1n sptc3.al session.

DIS CC!Jlf.1! RAT'.m.

The disoo'unt rates of the Federal Reserve banks have an important

bear1?Jg· uptm the problems of govemment financing, and upon the oond!tion

of the banks of the oountr~ as a whole. Since the first adj";.s·~mm.15 of

discount rates, effaotive short;q after the orgB.tlizat:'..o:c of the ~ederat. ~ ~""-,,,-/- ~-f.· "~ ... u-1up..t/..t:1 r

changes l11:tV'e been comparatively u1*0'u:taertxz1go ~K ~ 1"-t·..,,.

!!~~UIPiBEr1fiiGiil-ih~es;;raa:bb~l1s at vario · ... r ;~.>-

Reserve banks,

A.~ the _beginning of the year 191'1, money

was -ht abundant s~y, a.Di discount rates were l~. The e.it!Jeotation ,.,, 7' ~ ~ne.

o; s~~ that the entry of the United Sta.tea into the war would~a~e I ~-. ~1'-1 vct'V "'l.f.~.,e.~ ""V\'- . .,. .. 1.-/-fl.·J ~ 0 eEJtccbr\lngatJ_ 'n retea::ef tubes us b, was not reall zed~ A Market_ rates

lJa•e, •vi!:::cowA, .advanced substantially, ~the process has be9n

_gradual, and there were no changes ~in the rates of Fede:a.·a.l. Reserve . .

ban1m until the f'lotation of the first Liberty loan was well under wa.1.

Then, in o~d~ r to facil1 ta te the dispos 1 t ion of the ~bonds, the Bea rd

indicated to the Federal Baserve ba.?ikS that lt would be desirable to es-

tabllsh.preferential ~ates in favor ot notes secured by government


X-623

obllge.tiena. w,.th such p&IJ9r, as with ordi~ commer.o1al paper, a

d1st1not1on was ma.de be twee shctrt ma.tur1U.es am these running fer a

le:nger period. Aocordizlgl.v, notes of member banks rmm!:cg net longfl:':'

than fifteen daJS, and seot,.rBrJ. 1>1 gt>vern.men~ obl1gat1,,ns, were in gene:ra.:i.,

put upen a 3i:J, ba.E1s, while 9j da.y obl,.gatlGns seoured in the same way,

\vere given a rate of 31%, these rates be hg ab~ut one-half' of one per cent

below the rates fi""ed f.~r ordinary conmareiaJ. paper et the same ma-

turities.

Because et the generous c~operation of rrs:.,.1y bankS throughout the

countr; in mk:1ng 8dvanoes to purchasers of government bonds at the same

rate ot interest as that carried by the securities, these bo:r..d pu:·chasers

have had the full. advantagef ef the facilities afforded 'by Fedq1•a:!. Re-

serve banks in the redisoount of their notes. A f:!.rmer tendency baca.me

apparent during the st:mmer at some of the.t!na.r..cial centers, and the 4~ . .

rate berne by th~ se~o~d ~i~~rt.l ·~.~an. ( one~l_f per cent more than the "\•"'.f.. •r ' • . iltA,.:~ fJ"/-.

first) 11!gestad the 9mpllla•r e't~'gen.eral. ·adv~ce ot one-halt ot one

per cent in Federal. Reserve discount rates. As already stated, th!.s

advance ha.s been made' but the differen. t!al in f&vr.Jr ot .fBper . secured by

government obligations is still minta1ned. The discount JCbedules

have been consolidated and simplified by reiucing the number of separate

classifications.

In connection with the revision of rates, it was daemed proper to

merge w1 th the ordinary cnmmerciaJ. rates the s.1&cial rate which was nade

1n the summer of 1915 tor paper secured by warehouse receipts for staple

and readily marketable articles of a n~n-perishable character, known aa •


-~.---- .... --:-·:ft';---·•.~.~ . .- - ·-- ~71

X-623

-19-

commodity paper. !l'he cont!nua.r.ce of this rate, which had been nade

·01 '"):· t) . .: ... .J

original~ for the pw.-posf' of" assisting the oraerJ.y mB.l'keti:ng of orops

· 1n ol'der to avoid specUlatiun and violent ffaillotuations ir~ prices, had

become unnecessary because. ;,f t;he great advance in ~he price ,,.Q;f . f..r/1L-~~ ~ 11-l~vltil .

agricultural J;8'oducts, and. because;.gf price U =rirwl\by the government.

Changed ·conditions maie it de9irable that. these j>i·oducts should move

steadily to marke·t, and it seemed bes·~ :i.n -:;he circumstances not to encourge

the~infl:~-~ by producers. or middle l!lfln. C<JJL!>lete tables sh·:iwillg

these changes in disoo'tin·t rates, are appended to this report, as Exhibit

------··

The amendments to the Federal Reserve Act \\hich beca;ne law on June

21st last, were most oppcr~une, as they added greatly ~o the ability of the

Federal Beserve system tc assist in neeting the financial requirements of

the government, and ·~o · e:r.e~ise !..~·: controlling influe~e in the money

1111ll'ke~, Just eJI a time . .dlen much larger demands ~r.e being made u,pon it

because of war financing. The amendments were substan"&ialJy those

recommended by the Board in its last annual report, and they have opened

two new and distinct avenues of added strength, - by makine possible greatly

increased holding·~ of gold in the Federal Reserve b~ks by permitting them

to issue Federal Reserve notes in exchange for gold, and by inviting the

full cooperation of state bankS and trust companies, through more favorab1 .. e

conditions of membership.


X-i23

- 20-

The process of issuing notes hc:t.s been simplified, and the di~count

p0v"1er of the banks has been augmented without impairing their actual

holdings of gold~ by reason of their larger power to issue note~· While

it may be true that the character of the Federal B.eserve note as contem-

plated in the original aet ha.S been aitered to· a certain extent, and that these

notes rtl!J:y remain outstanding tor longer periods of time than had been first

intended, the flezible quality of the notes has not bee~ impaired, nof dces

a large issue of notes of necessity mean expansian of currency. The

character of the Federal Re~erve note is nmv best determined by the arnotmt

ltf the gdld reserve behind, it. \~'hen it is issued against geld, it merely

takes the place as a ctrculat ing medium ef the gold for which it was

exchanged. i\.S the gold reserve is redticed, CO·mme1·cial paper is dep •. sited

ta preserve the security9 and the note takes on niore of the quality which

it possessed under the origih2'll act, and \ilhen ·the rGdiscounts of the

Federal Reserve banks are reduced, the paper securing the no.te issues i-8:·

returned to the ma.imrs, and the gold reserves are correspondingly increased,

thereby giving outstanding·Federal Reserve notes more of the character of

tseld certificates •

.A.mendments to the act have also changed the former reserve require-

ments for member banks by fixing them at 13%, 1C%, and 7% for central

reserve, reserve city, and c&untry bankS res~ctively, and have, at tho

same ·time, .strengthened the position ef the .Federal Rese:rve bank~ them-

selves by requiring the maintenance with them of the member b~nkS' entire ~ft'V/"

reserves in cellected funds, the amount ~f vault cash to be carried by a (Jw-lA.·

member bank ·being left to its discretion,as determined by actual needs.l '\ .

This change, together.with the expiration of the time limit for the com-.


1 J .·

·X-623

21 -

plete transfer of reserves a~ required by the origirial. cl.Ct, involved ~he· I

trans~er of a la~ge · ~un~ tf ~t~ money to the F~d~rai Res~rve banks.

·· ~: ~·ermination· ot t~ ~e~i~d \vhen r~s dep~sited with banks ~n ~ese~e. .. - . . .. :·

Ci ties might be counted as reserve for ClOU~t:::iy 'ba.Dkfi.,. -W~\ij.d not;: .for. reasons

e.Eplained. in· th~ Beard;~ l~~- ~ual -~epcrt,_ :have me~de nec~ssary an1 material

transfer of cash, h~t tiie ii~. te~e:tve ·requirements led to ,the sbi:t'ting . .

ef abou~ f25o,ooo,ooo and a corresponding increase in the .cash holdings ef

Federal Reserve ba.nkS.

Another amendment inclu~d in the act of .June 21st, pe_rmits nonmember

:tJank$. te epen fGr exchange or celleet1Gn llurposes, ·aco•Wi.ts with Federe.l

Reserve bams, thereby availing themselves o~ the facil!tles of the check

clearing ani collection ~ystem. : .Thi$ c~ge, at ·the out~et,· increased

still fui'ther the cash holdirigs __ ef the F_ede:ral Reserve ba~, _as several

large nonmember inst! tutlons •p·ened ac~unts ef this kirid ~i th Federal

Reserve ba•s· Meat of, these instltu~ians have, however, rio\v become

. . . r.""Y,(l~(:e fi'" ·A members, se tblit the l!ala.nces ·held b)" llOlllllliDber banks are comp87~~eyr, ........ JL.·

negligible, am1unt1:ag ~ December 3ls 't te i · . Th~ga.i.n in 'Hl4 ",/ fijli<"'j • • •• ~ ~-~.J~~~ - -'-- •

actual cash by Federa.1 Reserve . bankS·, ~f 1sne amti£tiii1a/b~ ~ -

ma.1 · be best. demonstrated by a co!J1P8.risen of their:condition on.Jline.lst . .

(three ~e~kS _before.the -ndme~ts ..:ere adep~1~~·~.l.~~~~---~~ir._~·9·~~--~ ~n . . ·. . .~ .. ~ .... ~ ,_,,...,,_r=l -..'.,-: t rt .. ..••• · -~~~fr.-'

August 3ri •.. ·. : -~ ~ iliir~ier: •. dat~:' _the g~ld and· ldfJUJll8n~~'' ~~~ ~s~;J>!l-·, ·and-·:·.·: .;."Yele~;~_~=- a:g~·~ amounted te $933',425, ooe, while.

' • 0 o 0 • I I •

- . en t~e latter dA.te ·the total·~~s ~l,421,382,000.

MEMBERSHIP OF STATE BlNKS.

Second enly in importance te the change in the ·:res·e"e and nete issue

prtv~s~~~s ef the law, ~t be.reckened the Rmendment to Sectiln 9, .under


.- ........ , .• ''W"-- .....

-2~

~623 .. '>1 ~r- .. t"> . -~ .,,].

which. state banks and trust coDlpa.n1es 'f/B."3 beccpme menbers of the Federal.

Reserve system and retain, at the s~ time, their full chart~r and

statute%7 privileges. The Board has already given sueh assurance in

its regalati•ns relatiDg to membership of state ba.nkS, but there had al•ys

been a question in the minds of many a~ to the validity and permanence of

rhese reg12J.atlens, in the absence of definite · s~tat..:lr.-y,. authority. ~e

aotien of Co:agress in confinri.1ng what ~he Board had attempted to accomplish

by regulation· has given state ballking institutions firm assurance that

they ma.y continue to carry on the 1r business in substantially the same way . .

as the7 have heretofore done, . without fear of future cha.?3ges in ~ethods

p.rescri bed, and 1 t has gi vezr them in addition the definite ,J"ight to wltlP

dra.w from the system upon slJC months' notice, subJeot to condi t.ions. which

they, :reg~rd as r~asonable. · The µid mement to the siiate ba.DkS to become · I

1 . members of the system thus held out by thea.mendment· to Section 9 of the Act '·

was ful"ther strergthened by an opinlon·.of' the Attorney General of' the

united States rendered on Septeaber 10th, in which he ·e .xp ressed the vuew

that this amendment, in reserving to the state banks as men;ibers their :full

statutory and charter powers, released them tram the restrict~ons of

Seatlon 9 of .the Cla~ton Act, as to interlocking director~, to which they

had been previously held to. be subject, in common with the national

banks. Juat at a time when the principal 'lbstacles whic~ had previously

· at~od ln the way ot· t_he enll!lrgement of t~~~~te bank member

~ll.lp were ~hm overcome" by statute ~nd. by~ legal ~nterpretat ion, an

addlt1onal inoentive was.·~ven the ~ - state. banks ~d trust .companies

to appl.J for membership iii the system by reason of the· rapid develepment

-·


I

•

.. X-623

· .. ;• :·. ·::;.

-~3 .• ' I

of the go•ernment's requirema:x:is :l.n war f'in&.nc1ng, the pa·Grio·~ie desb·e

to assist in meeting an~ SUJ;'P.~y!l:ng these needs, am an appreeiation o-r

the added saf&tJ' to themsel•es resulting f~:om manbe:rsh1:p. Compelling

reasona for membership 1n the system from a patriotic standpoint were

brought to the attention or· all the bankB in a strong stateJ1Snt by the

P~esident on t:fc;,~r 13th, "..'l which :-eterence has aJ.reliey been. made.

Under all these j.nfluences many of the strong-es 'f; s·ta te bankS and trus·t

~ompanies in the uui-:;ed States have f11 ed. their a._ppl!ca;t1ons and haVe been

admitted to membership. At the t.tme of tb.e passage of. the Act on June

21st .§"~ state ba.nkS and trust .companies were members .of ·thf;l system,,

but on December 31st membersh:'.p had been. inorea.se~ to :2;JO . Tbe

BgfiTeB"ate cap:t1:al ·and s1u-.,plt'!S of 1;he. member stata barurs and truf!t

OCIDlpllllies wa~ 011 ~a.t da~e ~; __ '(.LHJ./"..fio_a.nsl aggregate ~eeource~ » ~ :J:::/:, 4:.""'4.m "1.fu,,44· as compared with ~-Ji. 'W"' r: __ am ~ .£8 6-.'11ti1tf0-.:i _on June 2ls~. It i.e esti~at~ that. the member- "

ship ot the Ped~:ral Res.erve SJJStem rapresents a~. this ti~ about ~ Of the total bank!ng assets of the country. . Thus it. !s evident that

substantial progress has been made toward the complete un,.£10.ation oi our

bankl:og ·system. A table showing the titles. dates of admission, capital

and sur,plus, and aggregate resources ot state bank" members appears !n

the appendh:.

OREDlf E4PANS1.~N.

Great as is the admitted. power ot the Federal Resene SJStem,

equipped with its new resources and supported by the grea~er pa~t ot the ~ .

>'O .

l I I

banking ••••~S!MUl!PllJmuis of.he cou:i';ry, there are nevertheless, 11m1.ts to its

c"'' H7MJI "" ~~' J1- ·'i'lf ,l/'J..7 .~rr . Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

~·

/) \

X-623 .•·

-24-

oapacity~ Dm'iDg the past yea:r there have been very naturally some ~x-

pressions of 'anxiety on the part of the rinanc I.al community as to ex-pansion of credits. The Boa:r.d ha.s fully recognized the d~ngers of

over~xpansion and haS endea~ored in every way not hu-rtful to war tina.nci~,

to.prevent such a oond1tion. The question as to how far expansion has

drifted toward the da?Jge~ po'-.nt, despite conoentration and careful use

of our banking resouroes9 shocld be· aarefu1.ly considered j.n the develQp...

ment of a sound poliay for ·the future. The ~~ ;J.low:lng tabulaU.on f:rom

combined statemerrt;s of the t"Welve Federal Reserve banks s~ows the changes

in the reserve position of the Federal Reserve system during the year~

the figures be 1ng as of Dacember 31, 1916, April 1, 1917 ,. July 1, J,.ugust . .

1, No°'ember 1, a.Di December 31, 1917, the four dates la.st na.u:ed re-

flectl:ng the changes ~irectly attributa~le .to the flotation of ~<he

Liberty loans:

{Insert table)

'From.the fo.rego1ng it w~.11 be noted that the ~n_erease '.n the total .•.

I

.1

invested funds grouped a.s. earning assets., duripg the months intervening 1

between the begirining and the close of tru3 ye;,i.r J.91'1 ts about !1,.l~fl,:,,jf(ee4 .. 1

. Of t.his sum, ~~·-.1"?~-- - :~· .is represented by purcha.se or _disc~mit ~-of ·· · . ' : commercial paper qf the "kinds -made eligible under the· terirB. of the

Federal Reserve Act, the remaining ;ii\ :i.7 2ffK. 0(/),6 reiresen~ the di~ . , I coun~;~chFJ.seJ.by the bankS *J'::;,~~~i-~o~t obfi~~ons-,_~!~~~'1 for the purpose o~ enabling buyers of bonds :t·o.--c~J"ry tham· during the

period necessary for the liquidation ot their· own obligations thus 1n~

ourre"d. As will be seen from the table, the red.uction in the rasene

1

percentages of the Federal Reserve banks against notes and deposits was

d,~ "'8 ... L·hM"J j,,4~,,,/; IF~-44·"""·;J~t tu' f~ ..4'1M•,~ : 'l#'W/' t /k ~.., U· i.. -t-e-r 1 tJ ,,..~ / L~--------- ---------------- -·-· ---~ --- - . - - -- --·-- - - -- -· -- ___ ___.


X.-623

.. 2s-

most m~ked during the periods between Ap:t~l l to JU~ 1 and bet.een

August l to November 1. During iihe month ot Ju4' there was a notable

stre?Jgthening of the reserve pos1tlon and this cona!don is also observed

in a smaller degree between November 1 and Deoember 31. Taking the

year as a whole. it will be not- ad that, although there has been a gre.3.t

lnorease 1n the tow asse' s of the sys..te."D, there has been a reduction ot

golf. and lawf'lll money reserves ,f'Mm llJ/.J. at the beglnnJ.ng, to {,~j, at

the end of the yea~, but 1 t should not be overlooked that the f lgures

fer December 31, 1917 represent the condition e~lstlng at a time when

the process of distributing the second L'berty lnan was still uncompleted.

The question whether the final distribution of the second Liberty loan

and the resultJng financia" .. adjustments would bring about as favorable a existed

si tua.t1on as tllat which ~ at the closi?Jg of the first loan, is still

an open one, but ind.1 cations are that there will be a larger amount of

bonds left in the hands of the bankS and th.at a correspf)nd.1ngly greater

volume of red1scounts secured by government ~bllgatlons m3¥ remain with

the Federal Reserve banks than was t.he case a.t the clns e of the fl?' st

L1berty loan. This condition will no doubt be gradually unproved,

but the .reduction in tha volume ttf discbunts will depend to a great

extent upon the requirements of the government and the tlllle whl.ch will

elapse before the floating of a nav bond issue becomes necessar7. The

position Of the banks with respect to credit expansion is shown by the

condensed statement of the deposits., loans, d1soounts, and i.nvestments

•f the national bank& as raported to the Comptroller of the Currency

on November 20th 1917, as compared w1 th o.orresponding figurls on


.· -2G-·

NOVemler 17, 1917:

Nov. J.7, 1916 j ...

n.epos1ts, net on which reserve 9 "'I, . ffo ,-op ts computed 1

•

L~ans and discounts,~t/,~~t./i

United States b~D.d=j~

f ~;-F. /p/,pp/)

7~ t171.11·'f)

Other stoekS, bonds, and eeour5..+;1es/7'1J. 7'/l/.IJlfJ

(a) Incl.ud~.ng ·J:roasu1:7 cer.··· tificates of ,.ud.ebted!.Less

'

X-623

31:~~

Nov. 20. 1917

It seem reasonable. to assume that while, du'!"i:cg the year 1917,' . . .

there has been a Jtfthex ta.1. le!=!saniDg of the fluidity and immediate avail-·

ability of the coor..mtr;'s banJl~.lf.ng resol.lrnes, the or~ge J.;a.s reatl~r been

moderate when there '-~ cons.i.d.e:red ·the- extent of t:r ... a :a.•equtl"ement.e whioh I

have been made ·upvn :n'!l' !>a.uking systa:n .. lt is e\"ldent also, _from an

analysis of the f:tgares1 _t.ha.t the decrease ,,u reserve streng~h is lia .. doey ~~¢ ~~tA,;I

attribu11i:.f.1.1.a.e/{to conme1•c:tal d iJcounts but th.at it is dlreotly the rasult of

government financing and ita unavoidable but necessaey demands upon our

rig! 5 Gild resources. !t j.s estimated that the advance !n col'IIClodity · ---I :I (

s·' l· l';i· ... ,

prices during the year 1917 "'shown by the statemarnts of the Dei,artment

of Labor has been about _J, which may be compared with an e;.:1t.imated

advance of about __ % from August 1, J.914 to Det;ember 31, 1916. It i~

cl·ear, howeYer·;·· ,that so tar as ·the year _l9l.7 is concerned, the rise in

prices must be attributed more· to the relatively decreasing supply of

neoessar3' commodities and a greatly increased demand tor them.because ~!

the war, than to e~panslon in the volume at currency or bank credits.

-.,


I i

-27-

Rising "prices are an wu~vo~.dable ~utgrt)w~h o~ a state ot af'fa.lrs throug12,·· . .

out t~e viorld ~eraby a. va:~J 1.arge px.-opor;;u:n cf a:t""G!tsa.ns and laborers

have been transferred from prodnct:tve ocnu:p&:ii:tons 1n1o; unproductive and

ing their dema.nds Ul>''n th.;:! :te.maJ:r .. , .. :r..rg stoak. o:{ ·tb.e ava~.la.ble s uppl.:tes •

. It seems, there:C'ore, ·;,;njt:~~·:; to ase~d.be ·i:ihe r$.se in pr~.ces enti.!98ly to

Nor can

the increased· vu1.~ne cf the Fede:ta1. Regerve no~e 'ls sues be regarded as

innat~ona.17, f\lr !le,-~ cr.~J.y are these netes nr:t available as ~ega.l re-

serve. in the .va.~J:&;s of member · bankS, b~ the w i·ttd~'awal. ~.f e.'{"•ld and.

gold cert!ficatas iram c:ircula·tJ.mi wh.~.ch has resul-"~ed fr@m .th~ eff'CJrts

ot the Boat"d h'1S nat1J.~aJ.J.y C!rea·ted a vaouum wb icb. could onl.y be filled

by addl tional 1e.sw>s c,f cur:i..-EU'".1.~y~ It rrs.y be asse"rted with con~.dence

that any danger of undue expansion with wh.loh the c ount17 r:ay be confronted

1s 11.lmly to D8n1!'e~.t: i"tsel:r not in an ever-issue of circula.t:tng notes,

but rather in the i11orease in bank deposits resulting f!·om lLlBnS - tre.

oreatlon of demand credits ~on the bookS ()f the ba.ukS.

curreDCJ' inflation.,. the eV"lls of which have been felt in all previO"lS

wars of long dura.til'>ll, has not,. tlp to this time, been a menacing c:1ue 1n

the United States. ~he fluid cenditic.n Qf' our banking resources and the shl.i'Llld

amount of tree gold held bj Federal Reserve ba.nkS, a.~e fg.cto.rs which ·; ·

be ta.ken into ac~eunt wnen the question of note issues ls considered.

P.RIVATE la.ND CCRPORl:i.TE FINl'~CE.

A feature ef the banking a.nd fina.ncial situation whJ:ch ha.; been

L~--~-- --- .. --· - -- - -- - . -~ -~----- ---- -- -~-~------__........ ___ _ Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

L_ -

X-623

-29-

de•elopl»g during. the" past year, and t • whidh ~e attentlen o~ the Board

. has been frequently directed, is the ptsit:"..on et firms and private cor

p•rationa having short. term obllgatinns maturing in the near tuture, and

who have been accustomed to procure banking acccmmodatlons upon terms

which are now impossible. The acti~n of the Prasident in taking over . .

contrel of the railr3ads and of their financing has apparently solved the

mo st serious problem 'With w;tiich t_he country had been ciontronted., bttt

there remains to be considered the requir~nts of various public utili

ties corporations, as well as. of some of the larger concems which have

been accusttl:med to bc!"row h~avily at bank& tor the purpose of carrying .

l~e steekS or of prov:td~ng themselves with W.)I"k~ ... ng capital. The "ffect of public borrowing on a veey large scale has been a wi.thdra.wa.J.

from the market of a large pm port ion of the funds available for short

term loans, or for private investment on long term. While every effort

has been ma.de to transfer govern.men t obligations speedL\y cmd etfeoti.vely II

te pri va.te OWnersh!p, !n order. to Withdraw them frGm the market, and ta

prevent their accumulat1?Jg 1n. the portfolios ot the banks, it is reverthe

less trlie that during the preo.ess of di atri bution, large angunts are

necessaril.J carried· bJ the bankS f'or their account, as well as for their

customers.

The influence thus exert ed. upon the loan and investment market is

necessarily incidental to opera.tions. of t_his kind. The resulting situat!(\tl

is more or less imonvanlan-t f'or all who have been acous t cmed to resort

to bankS tor loans on collateral, but 1 t ls particularl7 distressing to ~he Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

-- - - - ~ .. ~---;-~ -- -...--.--. . .r t 'i

-29-

larger borrowers. The s:ltu9.tion has been further· ccmpllcated by tlle com-

paratively large 'folume o~ ob:Z.1gat1ons of foreign governments which are

bei?Jg carried by the banJts against short term notes, resulting in a dl-. .

ipnutlon of their percentage of llqu!d asse·ts. fheee oonditions are

reflected. in the requests wh1r.h the Board has for some time past reoei ved.

from nany quarters that the redisoount privilege be extended to pa.pei of a

character and form '.Vhich has not been regarded hitherto as eligible.

Perhaps the mos·t urgen.~ req11est of th:ls killd has been that the Board par- •

mlt Federal Reserve bg,nkS to df.soount ·notes or acoeptanoes ._!oh haTe

been placed upo~ the ns.rket under an agreement bet~een the borrowers and

their bankers, which provides f'or a considerable number of successive

renewals. Had th9 Board permitted such paper to be red1scounted, Federal

ReserTe bankS would have been bu~ened w1 th paper which the nal'8rs would

not expect to liqu,.date a·t nat .. u•i ty. The discount of pa.per based upon an

agreement for repeated renewals is not consistent with tJle underlying

principles of the Federal Reserve Act, and the Board has had no hesitation

in stating that it does no·t regard paper subj eat to these agreements as a

desirable investment for Federal. Rese~e banks. The Board's attitude

does not imply any doubt or question of the legi t1mao,. of the purposes

for which the funds were desired, or ot the inherent sound4!less· of' the paper

itself. "but rather that such transactions are not a kind which Federa1

Reserve banks my properly f'acj.U.tate, as they should never overlook their

obligation to preserve the liquid character ot thei~ assets.

Ano th er proposition o t a. somewhat similar aharact er which contemp~ted

the sale of acceptances dasigned to fin~·e foreign purch~es of. goods in


X-623

-30-

the United States• but whioh had no connection with any sp>eolf1c trans-

action, was likewise brought to the attention o~ the Board during the

month of November: and for reasons similar to those governing the case

ot tha renewal paper, to which ?'eferenoe has just been· mad.et the Board

has found itsel~ 'DJ1able to look upon such acceptanoes as- eligible tor

dlsoozt at Federal Reser?e bank&. Arioth-s~ case ~.nvol"f:l.ng the eligibility

o~ aooeptamea secured by read!ly marketable oomnod! ties oarr1 ed. in ware-

homes, was also taken mid.er c:>nsideratlo:n, and the Board reached the

oonolusion that acceptances of th1s kind might be el:I.g:lble for .discount

o:r parohas& bJ' Federai Reserve banks, provided the goods were stored 1n a

aatistaoto17 ne.n11a::-, and unquestioned legal tUle •f the PD?Perty ct!>r~

Teyed by the W~eho~Be reoeiptsa While this .CODOl.mi~n is in harmony

with the letter Clf the Fsde~al B.eser;e A.at, 1·t sel~D!S, r..evertheless, that

diacomits ot pa.pe~ of this eha:-acter should be scruUnized clesely and

that the~ sheuld not be pe:rm1tted in very large volume.

The signifio2?!ce of .these propositions is that there is pressu!"e on

the pg.rt of commercial. ar.Ld mnutacturing .en~;erprlses to gain access to the

red1sco'Gl'lt taoil1t1ed of the Federal Reserve banks, and there is evidently

a·d1spos1t1on tQ obtain the privilege upen the terns of technioal .p~J.nts

of the l• rs.tber than its spiri~. Tl°'-'9 policy at the Bf)ard, h.Clilever,

nmst 1D'f'ar1ably be to interpret and apply the law in accerda.nce with its

maniteat intent and underlying p::-1nc1p~s, with the end in view alwa~


et sa.f'egaarding and na1nta1n::ug the liquid cha.raoter of the assets· of the

Federal Reserve banks/ Tht.s duty, always present. has become imperative

because of the tact that t~e entire reserves of the member bankS, so far

as based upon legal requirsments, are now, by th·e act. ot June 21, 191"7,

carried on the b~oks of the F'ec!.eral Reserve banks. Up~n these bankS•

and upon the Fede::.""al Reser.re Board, theref'r>re~ falls the . respensi bili ty

for the :rraintenanoe of a liquid condi.tion, and upc.n them will justly fall

censure tor any .:1.mpr~per ,,r 1mpru.dent use sf these reserve funds which

are held under a t::-astee&i.,.p of the highest character.

· The:refere, ,,n no CJiraumotauoes, can the BBard adml.t th@ eligibility

of paper by whomc~ever made whioh, in its essential character, fails to

conform t~ sound h..ll!tlllr1ng p.rlr.io!.pJ.es and to the prov~.s!Qns· ~£ the li'ederaJ.

Reserve Act. In IUlk:l:og th.is o·ta·t9ment ef its at·titude, h1wever, the

Doard dees net 1gn11re or overleok the ve17 seriltus pmblems which new

cQnfrent private ente:rpr!sec ,,.,. providing fo·r their f'!nanoiaJ. requirements.

Frem statistics w.b.!.c!l .t.a.ve been ebtained by the Boa.rd, it is evident th.at

there .Will nfl:ture during the year 1918~ s.bdrt term obligatiens aggregating

a large amount, and the Board has ne inf'erma.t19n, up to th:tP time, as to

arrangements for their llquidatlen er renewal.

Reference has al.ready been made te the position of' the sav!ngs banks

~d other investment institutions !n general. UndQubtedly some effective

measure of' relief' is desirable and if nade available will be of great

benefit net only.tc those re~uiring ~s ~or comparatively long periods,

but would also improve indirec:lrly the general. banking· situation. The


x - 623

~32-

re,ultiug prbblem !s ~ne which ·as:y perhaps a~me within the scope ef the

&oa.rdis adv1St;ey relationship, but 1 t 1s not.~ which can be dealt w_ith

bJ. the Board in an a.dmlnis~ra'hive wa1• Fitem a purelJ aclvisorr standptJ!nt,

the Board WQu..ld s ~ges t the propr1et7 o~ dealing w 1th tbis si tua tien

thr0ugh direct govermnSltaJ. a.:ld in some form approvld b7 the lecretar7

"f the Treasuey. Th.e Boa::-d ~.s, moreever, of the opinion that any plan

involving ~vernm~.ntal aid is preferable t-o one which would be dependent

upen the use nf the resources of the Federal Res·erve banks. Such an

expedient would be jus·t, . .fied, if at all, only a.fter all o12'ler means had

failed, and as a final and desperate rtfm:::E resert at a time of the zngst

urgent na.tlonaJ. DP.cess:tt~r• It is particularly recommended &lsc, that 8D.''8

plan which nay be adl'pted for the relief ot those des:f.r1ng lt''~ t:tme

accommedations upon security of a non-liqu!d chara~ter, shou.ld not be

made t~ depend tor its success upon all'I· access direct or indireot to the

resources et the Federal Deserve bankS, er upcan· tho pewer tc issue currenc7

tor the purpose of ertend!ng credits of th!s charaote1·.

be pessible t~ e.rlend etf'eot1ve aid to th~se dese.rV!ng 1~ without

11e•pard1.z1ng G>ur entire financial structure.

CONSERVATION OF •GOLD.

!l'he entry cf the countiy into the war \Vas accompanied a.lm~st immediately

b7 a oessat1on of the .Dldvement ef geld te thiS ceuntry whicll hB:·d been

continuous since the early months ef the year 1915, and in :tact the move-

ment had begln to slacken as esr::.y as November 1916. Forej.gn governments.

~ found it convelilient to liquidate their obli~tions due in other

countries_ by purchB.se of ;Dills in our own markets, and while the aggregate


x-623

-33-

trade balance has oontlnued 1!l favor of this o~unt17, the balance is against ..

us in some cases. Dur1Dg the second quarter of t~e year there develeped

a strq tendency t~ withdraw gold by those neutrals vi.hose supplies o:t raw

naterlals had been drawn upEm by our own governkent am by other gov~rn

Dients associated with us in tile war, and during the months o~ June, July,

and .b.ugust., our net loss o:f' er.>ld am9".mted to a.b9ut ~J.00,000,000. The

movement of goJ,d hav~.ng al"t-eady baen restr,.e~ed inall o:f the bell1B9rent

•ttm cotmtries, demands for 1 t in settling 1n"':;ernat1Ell:nal accounts, in

adjusting exahange rates, and ln strengthening reserves; \Yara natuml.17

made in our own markets. A.s tha movement began to assume larger pro-

portioJJS., the President, on September ~th, issusi an e.x:ecutive erdee,

attached hereto as E.rhibit___, vesting in the Federal Reserve Board,

with tile &iJproval ot the Seor~tary t;f the Treasury, th~ du_ty of passing

upon a_ppl1oat1om for shipme!lt cf oo~~. bullion, or currency. .A.cting

in conJunotlon with a reprasentative of the Treasu:r;r Department, the

Boa.rd issued raga.lations ccvering the llo,nsing of .such shipments, am

has slnoe lield daily sittings for t~e purpose of considering applioatiens.

It beoatJJe man1f'est almost immediatel-J that appl!o.a·t:f.ons for permission to

expo·rt gold fell into a few diStinot olassificatJ.ons. . Applications for

permission to ship g~ld to Eunpea.n neutral oountri es have, except for a

few days fellewing the date of the order, bean invar1a.bly deolined, for.

obvious reasons which it do es not seem necessa17 to enumerate. A dif-

ferent preblem ha>wever, i;m·esented itself' ln the case of applicatisns for

shipmm.ts ef gold m the Orient, te Me.xice, and te S~uth l..merloan

countries which had been furnishing neoess$ry ra.w materials. It was


X-62S

-34-

deemed important to c•nt1nue these ·trade relat~ns.hlps while reducing ship..

ments of gold to a mi:r:dmum. For a short time large shipments were

perm! tted t• go to India, but as a result ef negotiations between the .

Treasury Department and r'epresentatives 't the British go-vermnent,

pnv1s1en has been n:ade fpr r·w.pee ex:al1a.n~ :resw.tillg fro~. sh1pments of

silver, to be allotted by Feiera.1 ReseM'e bankS to 1mp,,rters acoE'rd1ng to

their necessities. In a few cases shipments of gold are being psr.m&tted

to South Ainerlca.D. C(:.untries, al thsugh 1t ls hoped that arrangements can

be concluded at an early date wh!chwlll eb~late the necessity ot mak:lng

further sh1P.Dents in any considerable velume. 1'he :Mexican govermient

issued a decree ·bn Sep~ember fill: 27th which requires .the pa.yme~t of expert

and impert dut16s in gold, tlle ret·arn !n gold of tlle :full value of. gold

ores and bullion exp<;rted from Mexicei, ~d the return· :f.n gold of 25% of

the value of silver ores eX,!)orted. For a time it was necessary to per-

mit some shipmeil'ts of gold f~r payroll purposes. in minillg operations

contr.,lled by citizen~ of the United states, an(l where the products were

breught into this country. .More recently. howe?er, it has been the

po~icy of the Board to decline to permit exportation of gold to Uexico

e.x:cept for ,J&yment tiJf duties. and for the return ~o Mexico of the vallie

of metall!o brought int> this ceunt·ry. It has been ascertai~ed that in

many instances UDited States currency can be used in Mexico for payrell

purposes, _and that in cases where 1 t cannot be used. Mexicau gold can

usually be purchased. The total &Hunt of gold shipments ta •ari6US

~untries which have been authorized since September 7th appears as

Exhibit ___ • Befere the exeouti Ye ol'der was lsseed, considerable sums


X~623 , .·; -~; t! -·-

-35-

of g~ld had ·been earmarked :bl! or held in trust for Canadian banks. bf smne

ot the bankS in Naw Yo:tk C1i;y. The Board has deemed it proper to perm.lt

the exportation of th:ls earmarked gold, and has also entered into an

agreement with Canadian bankers whereby a total of $25, ooo, 000 ot gold

may be released up to Jul.y l, J.918. Th.ls action was deemed essential in

Qrder tq finance the movemer:t of Canadian orcps whioh were needed for

export to European countries assoe~.ated wit-h us 1n the war, and its effect

upon sentiment was se fa.vorahl.e t~t ne pa~t of the amoimt has so far ,

been withdrawn, New York excliange in Canada ha.v~ now advanced to a

censiderable premiWD.

Fereign exchange rates have been abnermal thr")ug.bout the year and in

rzany of the cotmt,-ries wh.ioh send us necessary material, A.me1·ics.n bills are

at a heavy discount. · · !fhe Boa:ed is ma.king a c1.ose st11dy of our trade

relationships with neutral countries 8.nd has been fo~tuna.te in securing

the services of Mr. Frederick I. Kent, of New York as its foreign exchange

adv1r;8r.

(Statement by Kent)

(Ma:!ce ref arence here tf-l the new o~·der which the President is exiscted te issue giving ~~e Board authority t~·issue licenses in fereign exchange transactions.)

CL~ING AND COLLECTION.

The volume ef checkS hand.led by. the Federal Reserve bankS during the

year has increased enormously, although ther~ has ~een no material addition

to the number of nonmember banks which remit at pati to Federal Reserve

banks. 5ect1an 13 0f the !ct was amended last June as recommended by


X-623 (·-.a.~~

·' -~ •• 1

tbe Board, s• as to all3W Federal Reserve baDkS to receive accounts for

oellootion and exaha.nge purp.,ses from such nonmember banks and trust

companies as may agree to ram!:~ to Federal Reserve bankS at par tor checks •

drawn upon themselves and which will, in addition, maintain baJ.ances with

the Federal. ReseJTe bank sUrf1oient to offset the items in transit held

f~r their a9cotmt bJ the Federal Resel"'fe bank. Comparatively few ne:n-

• member banks have, 1'.owever, availed themselves o:f this pr1v,.lege, and the

Federal. Reserve bankS are st~.ll unable to collect checkS drawn on_ rrs.n1

nenmember banks exoept at hea~ expens~. An· effort was· nade, on behalf

of' some •f' the batlkS to amend the Act by providing f~r a stamard..1. zed

exchange charge n_Qt to e~oeed ~ne-tenth. cf one per cent, to be made by

member b.ankS against Federal Reserve· banks for checks sent for collection.

It was not ~ucoessful, and the Act as finally ame:mied pmvides tl1lt a

member or nonmember bank as:y make re~sona.ble cha-rges, t~ be determined

and r88'11ated by the Federal Resene Board, but· in no case t0 exceed ten

cents per hundred dill.a.rs or ·fraction thereof, based en ·the total Gf

check& am. drafts presented at any one time, for oolleot.1on or pa.pent of

checks and drafts and remission therefor by exolrJi.nge or otlle1w1se; jlUt no

such charges shall be nade against the Federal Reserve ban~ The

Attorney General has been reque~ted te g1w his cplnion as to whether

this proviso applies to nonmember bankS. .Kpcc An af'firuative opinion

,9111 ma.lee pessihle the establishment of' ~ universal par clearin8 system,

but if, on the :}Gntraey, it should be held that it applies to member

banks onq, the further development of the collection system will neces

sarily be slow. . It seems unfair that small member bazi.kS should be

obliged te. remit at par while their iionmember bank co.mpet1t .. rs oan continue


X-623

81.43 -37-

to llBke their usual charges. The Board fe&.ls ~~t all banking inst1tut1~ns

should be ebliged to remit a·t par or else 1;liat they should all be permitted

to make reasonable chargeeo

In order to complete as far as po~sible the olear:tng and collectiw

system, and to rendei all possible serv:lce to ··the banks and to their

·clistomers. the Board authorized the Federal Re~erve bBZJkS ou July lst,. to

J'.'90eive for colleat1on for ~oaa.nt of membar banks ?JB.tuTtng notes and ..

bills. and miscellaneous d1·atts. subject to a moderate collectiGn charge,. . .

Consequently, nambe:~~ bc"UlkS whiG!1 were obl:1ged to re~;y upon other· ban~

for services of ·th!s k1.nd; oan now depend upen the Federal Resene banks

for such service. ~here bas also been put intr. operation by all Federal

Reserve banks a system of transfer drafts, which enables any member bank

to have its dra!f!·~, drawn up~n tlle Federal Reserve bank of i·~s em dia-

trict~ paid immedia~ely, without ~j.me allowa.nae or deduction at any other

Federal Reserve ba..Uk, adjustments· between the respective Federal Reserve

banks being 1111de throug?! the go~ settlement fund. In this wa~. a~

member bank has. under. the proper and necessary- restrictions prr.vided, the

same exchange facilities it would ha•e by carrying accounts in each of the

twelve Federal reserve cities.

oo.LD· SETTLEMENT FtJNI.T

The operatien of this fund has been described, in f·ormer reports of

the Boa.rd, and no ~tended cormnen1ts ~pon it seem necessarJ' at .. this time.

Under the act as amended additional safeguards have been thrown areund

the fund by permittl?lg the Treasurer of the United States to carry a special

account upon his bot.ks to the credit cf the Federal Resene Board as agent .

·i I l

_j


-38-

tor the respective Fedefal Rese~ bank8 and Federa1·Rese:rYe agents•

Settlements are now made by warrant. signed by ott:lc~ls of the BeBrdf' and

the p1'8ct1oe of issuing gold order certificates 1n denominations ef ~10,GOO,

representing gold depes1ted with the Treas~er by ~ederal Reserve bankS,

and which were held in the cust~dy of the Federal Reserve Board pending

transfers batween the banks a:id the Treasury, r..as been dfs.continued.

T'he operation of this fund, whiah 1s in effect a clearing house

between the twelYe Federa1 Reserve ba.nks 9 has been particularly useful

during the pa.st year by reasc-n ~f the continuous transfers for very J.a.rge

amounts which. have grown out ef the sale of government bonds and Treasury

certificates and the redistltbutlon and disbursement e>f the fU.nds real-

i.zed. \71thout such an arrangement, our own operations would have been

accempanied with grea'G expense and much 1nconvenieace, b11t. by its af.d,

transfers have been instantaneolis and autouat1c, and have been made with-

eut the inconvenience and expense which would have bea un&v•idable. had

physical transj.Pers or shipment~ et money been necessa17.

BRANCH.Bl OF FEDERAL R:BiERVE .BA.NKS.

During the year, branches ha-ve ~een established at Omaha, by the

Federal Reserve Bank et Kamas· City, at Leu1sv1lle by the FaderaJ. Reserve

Bank o:f' St. Louis, and at Pert land, Oregon, Seattl.e and Spokane, \:7~shing

ton, by the· Federal Reserve Bank·~ San Francisco, and are in satisfactory

eparatlon. Th.a Board ha.s, in addi tien, authorised the estab~1aunent of

branches at Pittsbu.igh, and Cincinnati l?Y the Federal Reserve Bank of

Cleveland; at Detroit by the Federal Resene Bank of ChicagQ; at Baltimore

by the Federal Resene Bank of Riohmend, and at Denver by the Federal


-39-

X-~R /" ~ .. . ;1..-.~ •· '··

Reserve btmk et Kansas r.~.tyo· It ls ei:pected tba~ &11 et these branches

will begin bus mess during "'Gl:.e months of Jan~ry or Februar1.

Questions relating to the establishment and operation ot bran.oh

ba.nkS · hava bee~ simplified by the amendment to Section 3 of the Federal

Resene Act. As erig.tna:ny enacted, this seotion provided. that each

Federal Baserve bank 11shall eetab1.!sh bra.nob banks" to be "operated bJ' a

beard of d1raotors nncle1· r;:.l.ea and regu.lati.ons app:.·o•ed by tb e Fede:a.'"al

Reserve BQard." and provided alsa t:ta t the:.~e be seven dj.reotcrs and that

tal1' s.bould possess the same qua.llf!catioDs as directors o~ Federal Re-

se~ bankS. The Sec~icn as now amended prov'-des ~hat the Federal

B-ene Board may penrd.t r;r requ1re ~ Federal llesene bank te establish

branches with.to its di.st.1•1c·t, and that such brencms, subjeot to suoh

rules and reguJ.a·~ ions as ~he Federal Resene Boa.rd :i:oa1· preso?-1.be, shall

be operated unde:- the superv~.s!on of a board o~ db·ec·~ors to consist of not

more than seTeia or less than three directors. ot whom a ma.jor1t7 s!tall

ef one shall be appointed by the Federal Resene bank of the district, and

the remaining directors by the Federal Resert'e Board. pulicy

The .. of the Bo.ard in the establishment of these new branches,

:ba.s been t e reoognl .se the unity a.Dd p-ramount responsi bi 11 ty ot the Fed

era1. Resette ballk, while extending to the ba.nlm in the terri tG>ry served

b7 the brancll f'.ill factl1ties. By aveidlng duplicatiens !n boGklteeping, .

~d by a con~ol1dated control ot accounts at the Federal Reser.a baak1

it is believed that b.ranches can be operated at a cemparat1veq small

expense.

The branch of the Federal Reserve Bank of Atlanta, at New Orleans, Jate

which9 at the of the Board's last annual report, was the cnly one in

,•·


. ------~- -------.--X,..623

31 /l! ~-·. ... . .......

operation, :has, during the past 19ar, again demons t~ ted 1 ts useful.Dess

and ha.a beEn _, or soon w:i.ll be., supplemented by the tm just· referred to.

INTERLOCKING DIRECTORATES.

In its report for the year 1916, the Board gave full details o~ its

werk in the application of' the provisions et Section B ef' the Cla,ton ~ct

and the Kem amemment theretoo DU'r1ng the year 1917 ,. __ a_ppl1cat1ons

· ·" were received for penniss:lon ·to serve as Joint directors,. and of this / .. ~ . ,· ~ . . ·-~ I ' number · have been gran"ied, and ha've been refused.

FimCIARY POWERS.

On ~ 11, 1917, the Supreme Ceurt ef the United States handed

down its decisien in the case of Bank vs FellOwsT appealed from the

Supreme ceurt of Michigan, which was referred to in the Board's last

annual repsrt to Congress. The lewer cQurt was reversed, and the c omrt

sustained the consti tu·t1on~l1·';y of' Section 11 (k) o~ the Federal Raseive

Act wh,ioh aullo;rlzes the Federal Resern Board "te grant by speoial

permit to national. ba.nkS applying therefor when not in oentravention of'

state er local law the right to aot as trustee, e.iceoutor, administrator,

and registra-r et stooks and bonds under such rules am re(;lllations as the

said Boar4 may prescribe." The decision in this case is of' tar-reaching . .

and vital importance to the Federal Reserve system !n ~hat 1 t not only

sustains the right of' C1'ngress to vest in national bankS the pawers

enumerated in Seotion 11 (k), but fully reoognizes the rie'ht of' Con3ress

to grant to suoh bankS any and all powers that are necessary. to enable them

to meet the cOI!lpetition tJf oorpo:ratiens organized under state law.

* First National Bank of Bay City, v Grant FellQWS, A.ttorney General, and others.

,,


-41-

X-623

~-~'I!" I 1-J ' ..... -· ~ I

Pr1e~ to this deoisien the Federal Reserve .B,ard had.granted perm.\ts

te applicant. ba.Dlm except in thos.e oa$es where the· laws of the s:tate in which

the bank was laoated e.q>~ssly or by necess~ iinpl~cation- prehib1 tad s~h

banks from exercis;.ng these po-Re:rs. ~lie lan.gQ.a.ge o.~ tlle 0 ourt, in the

dee ision handed down on June ii th; was appa.z'en~ly s~aeptibl~ of the 1ntel'

pretat1en that these permits m:f.ght be granted in al'l.y aase in Vii.1ch the state

laws permt tted competing bankS t~ exero ise suoh powers. In v.Lew of 1 ts

importance the matter was referred to the Attorney Ge:neral who reached the

c•nclus1en that wb.1.le Congress is f'ul.ly. empowered to authorize the Board te

grant permits under such circumstanGes, the Aot as 1t now stands does net

vest this authority in the Board. There are sene states, which autherlze

l

banks er trU:St compan!es nreated and '?rganised under ~heir cawn laws te e..zcercise ~

such powers but wh:tch e.",PresslJ' prohibit any other corpo~tions f~m doing

s•. In •mer to ooerdinate tb.e poeers of nationa'. with state banks it is

recommet:ded that section 11 (k) ,should be am"e.med so as to permit the granting

of th8se pewers to national bankS in any case in which the competing ccuporation

organized under state Jaws are permitted "ta exercise such powers.

BJ direction of the Board its oounsel, with the canaent of the Court,

to•k part in the prcoeedings beth in the Supreme Court ef M1chig8.n ~nd on

appeal befo.re the Supre:rm Court ef' the United States. The Board has granted

during. the year 1917, 112 permits for th~ e~ercise ef f'i~uciary powers,

mak~ng a total to date oL 481.

FABNIN.Ql. AND EXPEE ES.

The rediscount.de.nands which have been made upe~ the Federal Reserve

banks during the pkSt year, and.the greater employment e:f' their funds, have

been reflected in veey greatly increased ea~ings. The a.ambined net earm.ngs


X-623

:l1!.)6

ot the twel"Ve bankS fgr the year, were at the rate et ---" en the ag... /~· ,i / ,. l

grega.te capital, and the total net earnings for the entire year were .

~---------------------· Sectien 7 flf the aot provides that "aft erall necessary expenses of a

Federal Reserve ba.Dk: have been paid er pnv.1.ded for, the st,ckmlders shall

be en.titled tc receive an ar .... uual d'-vidend ef six per· oentum en the p.16-in

capital steclc, whioh dividend shali be cumula.tiv_e. After the aforesaid

dividelld claims .have bee~ fuliy met~ al.i the n.et earnings shall be paid

t• the United States as a franch:ls:e tax, e~oept that one-half' r1t such net '•

earnings shall be paid .into a surplus fund until 11; shall amount to forty

per cent um of the paiJ.-!n oa pi tal s took of such b8nk1 11

. .

The Board cons~rueo the foregoing as meaning that no contingent funds

can be set u;p against f'utlire eXpemitures or as a. r_esei-ve for unfo!eseen

iosses, but that the surplus fund whiCh, Under the iaw, can accumulate until

1 t ~aoH.ea rortt per nentum of the capital of the Fede~l Reserve bank, is

int 8Dded. to tak~ care of all suc.h cont i:ngenc!es. The Board h&.s 1 however,

advised the banks tha·i; provision for apparent or temporal'J depreciation in

securities should be made, before any sum is transferred to surplus account

or &n1' pa.JD19nt is uad.e to the United States government. It has also per-

mitt~d bankS to charge off furniture and fixture ac~ounts in full, and a

reasonabl~·proportion of' the co~t of vaults. It has authorized ·the writ-

ing ott ot the amo~ts actually paid for the printing ot Federal Reserve

notes, whether the notes have been ·put in circulation by the .bank or held

b7 the Federal Reserve agent. It has al,o authorized those- banks which

own their pranises to '119ite off tlve per cent of the total cost per annum

as a deprec~ation allo"WB.nce. The gross and net earnings of all the bamm

for the ~endar year 1917, and the dividends declarAd by them from the date

of their organization to the end of 1917, are shown in the following table: Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

:..!.. ~- · __

""•···· . - ~----- "'-·.·-.;,,.--: ';. ..... --· -·.

(Insert table .-- see page ;L3 a.nn~l report.1916) - ~ • I .

. It will b; B~.f T/f' t~ foregolilg that the Federal Reserve BllZlk of

San F-1~M~il-/tftdounula1iid .dividends up to Deoeber· 31, 1916, a:al

that f'i w others - the Federal Reserve banks of Phila~~phia,, sc · , lop II I

Kansas C1tt. Cle'Veland, and Dal.las;. have patd th.air acowimlated clividen'ds

up ·to ~une 30, 1..91.7, and that six ~ ~. tliOse of Boston~ New Yol1t,. . . :

Richmond, i\.,tlanta, Chic.ago,. and M1nneQpol1s; l'_lav e paid al..1 ao<'.Jwnulat·ed

div1.dend.s to the e~ ~f. 1917. · ~hese banks;~ after charging off their ex

penses and making th·e depreciation allowances, which :have been preyiously

~escr1bed.1 have: set aslde s~lus f~ds and haft paid equal amomits to

the government a.s a f'ranall~tse tax, makbig the tota.i retu.i-n to the govern-

ment $, I. I 'fr!f. 'J, 1fJ.i. · · . ' I

Tbe Board wishes t.o repeat the statements made :ln prev;.ous reports

tmt t!ie banks ·a.re ·not ope~ted: prinar.1ly t~ pr0f'1t~ but in meeting the.

demam.a . winch &re. e~~ roted tr.- be ~de upon them during the 0 oming year. . .

thelr earnings will ~d.ftubtedly continue to. be large. It is exp.ected

ttlat all acoumula.ted d,.v!dend.s will .be paid during the year, and that the

exoess to be paid ·tn ·i';he gove:rnmel).t as a franchise tax, ·at the beginni.ng

ef 1919, will .be ve17 rm1ch greater than the payment which has jus~ been

made.

Amill.IS TBA.TIVE P0:LIC1FB.

D119iug the peri3d of argan!zatien and ef developnent 'Which eJCtaJlled

•ver the first two years of. the operation of the ~s.tem, the B;oa.rd. deemed

it advantageous t0> obtain· frequent s:uggestlons from the efflcia.ls et the· . . . .

Fedel'al Rese:rve banks, a.nd to.have them c•itrer with each •ther in arder that

~y .«. -~


X-623

:l150 -44-i

definite understand.f.ngs m,,ga."lt be reached~ and un,.f'oim methods. of' operation

deteimlned upon, Many- of the problema which had to be wo11ted out were ·

eht!relt new~ am because of wJ.deJ.¥ diff'ercni; C":ond!t.:\ons 1n the various . . .

dls~ricta, frequen·t oonsU:lt~·~1 .. ons seem&d necessa:t'l'' 1:0 eilS~'t-e a bett.~r

knowledge of admin1~trat1ve deta!ls. Thus treqt~nt oonterenoes with the

Federal lteserve agent a ar.d gove1-no!'s of the banltS 0 were deemed advisable-

1n order to secure more speed1J¥ an effective organization.

however, by the end of the year J.916, become well estabU.shed, and h:i.ving

had two 7ea.rs of actual experience to guide· them in the future conduct of

their business, these frequent conferences gave become no longer necessaryo

The Federal. k.dvisor.1 Co12noil, composed of twelv:e members, chosen by

and representative of the Federal Reserve banks, has held, in oonformit;r-

with the requirements o:r Section 4 of the Act, four meetings during the

year,: thus. giving the Boa1 .. d a.t frequeut · intervclls the benefj.t of :!.ts views

as to the trend of tlle mney na.r"~et, ·and the proper adjustment ~ discount

rates. :Members of the Ccunc11 have reported also upon the general

financial, agricultural, conmercial and industr.tal cond1.t1ons in their

· respective distrio-t;s.

There have been no meetings of the Federal Reserve ager1~a durj.ng

the year, but the Board, in anticipation or the fi"rst Liberty bond campaign,

held a meeting with the governors of the Federal Resel'V'e ba.nlm in l~p-ril,

and requested them to confer with it, in \1ash1ngton, again in·November. . .

The activ! ties ef the year have· been so great as to require the constant

presence •f the executive officers at their bankS. The Bea.rd now exe.rcis.es

breader administrative funct1ens, and makes final decisions on all qti.P-stl&ns


X-623 ,,_ OA '-\· :. t1t- ~ ' 'J_

et policy calling f rJr prompt aotbn, without e.wai ting an e1>portunl ty tar

consultation and devel~pment of oplnic.n c:>n ma.t~ers of detail, as has been

custemary in the beginning. The' functions of the Board as the co-ordinat- .

ing be>dy fer all the banks, and as the directors of the Federal Reserve ara now

system, f' : well. defined, and the· line of distinotJ.on between tm

local management of the bank:S aud their ope!9ation as a system, has becGme

more c 1 early marked. !L"he Board has, on twCI rocasions during the year,

e%ercised 1 ts p~wer of requiring Federal Resel'V'e banks to make redisccunts . .

for other Federal Reserve banks without submittirJB the quest1cn to their

directors Oor deter::iina.ti~n. !rhis has been dee fer the sake of great·er

JlrapnStmx prompt:mees am efficiency in securing ~he adjustrre:ilts desired,

and net because the!"o was any doubt about fa.vorahi.e ao~iE'A:J. being taken . .

upen the suggestiens of tlle Board, as the bank& have all responded promptJ.r

in cases where the Bea rd has ma.de its wishes knOWD•

~BSERVE CITIES.

The Federal Reserve Act cenf'ers authority upen the Federal Reserve ·

Board to add to the number 1f cities classified as reserve and central reserve

c1t1ts, er te reclassify existing reserve and central reserva cities or to

terminate their designation as such. A.s the reserves -of menber bankS

are now carried emlusively 11ith the Federal Reserve bankS, the designation

Of any city as a reserve city relates :t:m only to the p~rcen tagg of reserve

.:rhlch must be carried by the member banks l,,cated therein. The Board has

retained the old classification of central. reserve and reserve cities, s...~d

has als• designated as reserve oltles, ma.king the bauka ·therein subj eet to

-------~-·---~ -~ ··--


I •

·-46•

!.ncrease~re,erve requirements, _tlje._clties of_.Buf~, N. J~~aaii'~i ~ ~ IY~~w )KN;{ ~~;/pA~)~· ~"J ;1., ,/ -.-,, ~ ,1).1 ~~~ llllf~,. (Insert balance) . .

~ ~ ~· I ~ . The cities so designated all have a population in excess of 100,000 and are

banking centeJ;9s. \;rithout this classification,· the banks in those ·cit las

wo~ld have continued to carry the ·reserve prescribed for country bankS .J

?'fo, and the Board µ.eeme~ it eq".litable t"o _bring their reserve1 up to the

requirements of other cities of their cl.ass. The. three central reserve

cities. under the old national banking laws - New York, Chicago, and St~

Lo~s, .have been continued i:n that classitioation~ and the member banks

of ·thqse cities are required to· carry the.· ma.icimum reserve ·"".Jf 13'fo.

Philadelphis and Boston, a.J.though important banki:ng centers, and each

having a great~r .population than the city ot St .. Louis, continue to be

··classltied·:as re~e~e oi tit es, a.nd reserves of 18% .only a.re ~equired ot the

banks located. therein. . It is difficult t".» nake an equitable and llDiform

a.dJustinent of reserves under the. present law, and the Board is makiDg a

caref'lll study of the subject, with a view of recommending to Con~ress at a . . .

iatol date a change in the law whiah··would provide for a C:.ifferentia.l in

u.umxct reserves to be c_arri~d in all town11 and ·cities ~H.ke upon certain

classes at: deposit..8• with a mini~ for _time d~os~ts, a max:imum f-~1*. deposi:ts, and a.n interm8diate figure, to be determined upon, for indivj,dual

or commercial deposits subject to check.· This is a matter however, which

. will require careful study and. analysis , and the Board is n~t prei>ared

as yet to nalm a recormnendation for any change in the reserve requirements.


SUGGESTIONS FDR· ~MS•

The Board sees no occasion at this time tor ant sweeping ~nges in the

~ct. It would suggest• however, th~ foil~ing for the con81deratlon of

Congress:

(1) An amend.ment o~ sedt~on 4_relatii>g to the election ot directors • . .

~a law provides that the memba1• barilal s.hal.J .. be c:tass:lf!ed into three .

general. groups or d!visions, eaoh group to aon·l;ain as nearly as mq be

one-. third of the aggreaa te number of member bankS of the l'l:i striet, and to

consist as nearly as possible of bankS of small capitalization, and that

each member bank shall elect by ballot a district reserve elector &Di shall

certify his name to the chairnan of the board of directors of the Federal

Reserve bank of the district, who shall make lists of the district reserve

el".'ctors thus ?Jamad by bacicS in the three groups and s~ll transmit one 11st

to. each elector in the grou,P. Ea.ch dmber bank is permitted to aominate to

the chal:rman one candidate for a dinctor of Class A and one candidate for

director of Class B. Candidates so nominated a.re 1'.sted by tha cha,.rd.n and . a c~py of the list is furnished by him to each_ elect~r, who, within fifteen

days atter the receipt of the list certifies to the ohai~ a second or

ether choice of directo~s of Class A and Class B respectively, upon a

preferential ballot. Any candidate having Q majority cf all votes cast 1n

the celumn of the first choi~e is declared elected and if no candidate have

a majerity of all the. first choice votes, then there is added the vctas cast

•

by the electors for such candidates in the second choice column. Any candidate

having a majr1rity ef the el:eotors·' vote by addillg toB'ether the first and

seceDd choices. is declared elected. Sheuld no candidate have a majQrity


X-623

31M

1n this wa;r, then the third oho1oe vote• are added1 Thia 8,Stem, which is

designed t~ sedttre a ~epresehtative beard of directors; ls cOmplicated and has

resulted ~n many cas~~ in the dli~lc~ bf dire~t~ts bt a ve-i,. smS.ii m1~erit~ &f . . . . . .

the banks. A maJo~ty br the -ba.rlics bite :deve:f siitoe 19i4 chosen a d:IStrlct

e1eot6r am there seems te ·be no re&11on ·mr the directore et the banks sheuld

not be pemitted t~ attthort• the President a~ Cash!~ Of- the bank te cast

the vote at the bank. The Board has ruled that electcrs once chosen ma.v .

continue to serve until their successors are elected, but since the first

1ear the banks have net a.s a rule participated fully in these elections. . "

In the election held in December 1917 by the various greups in the re~pective . .

districts, 1n nearly every case less tha.n ·one-half of the bBllks participated.

In the New York district 84 wtes were cast out of. a total ef 224; in the

Richmond distriat 72 out of 172; 1n the Atlanta district 66 out of 140; 1n

the Chicago district 86 out of 360; in· the St. Leu1s district 35 out ef

162; in the Minneapolis dist~ct 45 out of 283; in the Dallas district

~5 eut ef 201; in the San Franoisco district 71 out o~ 178; and in c:r.ie

1ns.tanee the successful candid~te was chosen by 15 votos eut of a total et . .

201,· azid in ancther by 28 votes out ot 162.

The 13,,ard would suggest that this section be ~ged so as to simplify

elections by pe~1tting each ba~k through its President or Cashier tG cast ohe

vete for director rega.rdles~ of its capitalization, and by provi~ing that ene

additiena.l vote may be cast by a bank for each .. ~10,001 et steck held by it

in the Federal Raserve bank, the total .number et vftes cast by a?JN ballk: not tc

exceed ten. It is als• suggested that the banks be ierm1tted to eleot three

Class B directors, but enly two Class A directors, and that one Class~ director


X-623

-49-

be appointed by the Board in adcU ti£·n 'bl' the three Class C "directors new

appointed by it. The member bankS weul.cl stlll elect a majGri ty et the

Beard, five against four ~ppo~.nted. by the Federal Reserve Board, which 1n

being permitted to appoint the third Class A director., would have an ~

oppQrt unity o t rec t ify:i.:cg any S.neqllB.1'. t S.es \i!llloh might resul.t from the elec t1o.u.

by the member bank&~

(2) .An amendment ttJ Sd·~t.iGn 9 to pen.e:.: t rrt;ate ·banlcl already in

eperat1on9 ha.viDg·~n aggregate cap1ta.J. and surplus ~f n~t less tns.n flOG,000

te become members Qf° the Fede:ra.1. Reserve s113·tem a.t the dis!lretion of •the

Federal Reserve Board. This section as it is now'W81tten ~equires tha.t

n1 applying bank sil.t!>uld be adm5.tted to membership in a Federal Besene bank

unless 1t p0-9Sesses a paid-up and unimpaired oapi tal st:.t.fioient to entitle

it to become a :na..t~onal banking asso~iatien in the p:'..aoo where it is situated

under the provisiens of the national. bank Aot.

The attention of the Board ~s boen directed, in Jdi.ny oases, to state . . ..

banks ethel'Wise. eligible fer membership, whloh canne»t apply because Gf this

restriction, and which do nat feel warranted in asking their stockh?lders 1D

increase their capital to the requisite amo-.mt~ There are several nat!anal

.ba.nkS located in towns er cities whese p•pulat~~n has been greatly increased

by annemtiens er ot;heiwise, which are ·now ~perating with a smaller capital

than weuld be required ef new b&;lks in these cities, under charters granted

befere this increase in pepula~i.Jn took place• and the Board does net believe

that any .injustice wuld be done by m0difying this section in the manner

suggested so as to be appllcableenly te existing bar:ikS.


X-623

-50-

(3) An amendment ta Seot~.on 9 t.J authorize mutual savinga ba.nkS

having ne capitai at~~ck, tt. bec.eme associate members at the Federal Reserve

SJStemuDd.er certain presoribed ~bnditi~ns. This was sr:.ggested by the

Beard in its annual repert f:>r "';he year 1916, and its consideration at this

time seems more important than was th:e case a year ag'".J, as many savingS

banks nbw have elig.,_ble pa.per :i:r1 the f~rm a£ n~tes Peoured by obiigation~ Of

the United States. The principal be?lef!c!a.ries w.:.uld be the mutual savings

banks of the. Ea.stern and New England states which camittt beoftme members of

the Federal Reserve s~tem under the present la.w because of the lack o~

any provision ·enabllng th~ to subscribe te ca,Pital st~ck in a Federal

Reserve bank, as they have no ca pi tali zatien of their own upon which a

percentage could be based. The accoimnedatlon proposed limits mut'.ial

savings ba.nkS strictly to the discount •f customers' notes secured by notes

er bonds •f the United States :ae.turi?Jg\11ithin thirty days, or of their own I

- --- - -- --~

premissory notes secured· in like :ae.nner running not l@nger than ·fifteen days.

(4) An amendment. ~:t Sectien 16 which nJW ):lermits Fede~al Resexve

notes to be issued in denem.1.na.tions •f q~s, $10, .J;20, i50, and ~~100 only,

so as te permit their issue in the larger denominaticm of $500, ~1,ocn,

f5,0IO, and $10,00a. It is thaught that such an amendment would tend to

increase the geld holdings of the Federal Reserve bankS, pa.rtic ularly

those in the la.rger financial centers. The Federal Reseive banks receive

gold at the present time chiefly frem two sources: by registered ma.iJ. or . express frem national. or state ba.nlm, and over the counter in cases \""there

now c urreney ill cGnvenient denominations ls required for payrolls or for

other purpeses. All avenues fer loss of geld are nlW under control e~cept


X-623

-51-:~1 ~.-.. ~ •" I •• ii'

direct withdrawals over the counter, and an analysis of counter transactions ·

at some et the larger Federal Reserve baDkS discioses the :tact that fl'Wl

$100,000 te .:f:l,to0,000 cf gold certificates a.re paid out every business day

na1nq because many mE1Dber banks prefer te keep as part of their ~ault ~ney ..

net es of large denam1nat ions which can now be furnished only in the form 0£

geld certificates.

(5) An amendment of Section 22. Th~~ is a penal section, not al-

together definite in its terms, and the Board is censtantly receiving requests

for a preper cans·truction of it. It has, hE>Wever, unifonnly adhered t•

the view. that a s eC\tion of this charao ter can be construed ~nly 'by the .

ceurts, and has declined in all cases t:> express any opinion ao to the

liability Which might be incurred by any bank which acted upen an incerrect .

interpretation. As amended en June 21st this section pe~ ts transactiens

~~ating te the discount ~f notes, drafts, or bills cf exchange by a director

with his OND bank, upon the affirnative vote or \vritten 00nsent of"at least

a ma.jori ty of the ~ard of di.rectors •f the bal'lk; but there are other trans-

aotiens such as the purchase by directers of goods ar property taken by the

bank fer debt, which might Wf:!ll be p~rmitted under the same conditions. It is

net incenceivable that there r/IJ.y be eocasiens where a bank oan best save

itself from loss by being permitted to have a tra?JSactien of this kind \vi.th

ene of its own direotors.

(6) An amendment t~ Sect1Qn 25 to previde for the Federal incorporation

of banking cerperatiens wh;se stock is t\vned by national bankS which operate

under: the contrwl of the Federal Reserve bankS anl: which are engaged· solely

in internati1nal and foreign banking. The present ·-iaw permits any national


.Jt.-623

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bank to invest an anount not exc~eding ~ ~·"aggregate ten per centum o~ ·its

pi.id i~ capital stock and surpluS in the stock Of One er mere b&DkB or Ctr•

plrati~ni ch&rtared.er incorporated under the laws •f the United states er

any state thereof·· ana. prinei~q ~ad in inte~tional er fereigri bank

i'rlg. er banking in a dependencv CJr i~ular pGSses sion •f the United Sta tea.

Thia la.age ap1Bats ti 1hd1 cate arl intent1cn by .Congress· to pezmi t in

corpo rat lon under the laws of the United States; and several national bankS . .

have become stoekh(llders in banks whiGh have been organized uni.el' state 1~

f~r the purpose ef car17ing en a foreign banking business in accordance with

the terms of this sectien. The arguments in favor ef Federal !ncerperation

are:

{l) The time will probably come when the confl.1c1; of the dual

centr•l exercised by the Federal Reserve Boa.rd and by the banking department

' ef a state may be a matter of embarrassmm.t or unduly restrict the activities

•~ the banking corperat1on.

(2) Such a banking CO?poration, being essentially a national enter-

prise, Whf)Se stock ownership by na.tlenal banks was authorized by an act Of . Cengr~ss, is subjected to unfavorable comnent by foreigners, in that it is

incorptrated under local rather than natieml laws.

(7) .6.n amendment te Sections 5208 and 5209 of the Revised Statutes.

These are panel secU_ens relating to the evercertificat i•n ef checks, te

embezzlenent, abstraction or wilful misapplicatien ef moneJS, funds, or credits

of natienal bBllkS by officers, directe.rs, agents, er employes gf national

banks, .and to false entries in books; rep1rts, or statements of national

banks with intent to injure or defraud en the part e:r any officer, di rector,

· agent er employe of a na t ienal bank. It is suggested that these sections be

,·


3159 X-623

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adiended so as ·to apply to similar acts caemnitted by eft1oers, directers, agents,

er employes •f Federai Reserve bankS and member barikS.

ORGANIZATION, s~n. AND EXPENDITURES ..

~here· have been mt changes in the organ1 m.t1on o'l: the Board dlJ.l"ing the

past. year. The growth ct the s1stem and the expariSien ef the work of tlle

Beard have required ·~ome add1t1Bns t0 its cle-rical and examining force. There

have been some min•r changes due ns.inly t<a the tact that several •f the

B'8rd1 s staff have engaged in military ·service, but the Board has thus far

been able to fill their places satisfactorily. There are now_ on the

staff of the Board, The total.. cost of conducting its work during the year •

1917, including phzta printing of the Bulletin and salaries of manbers,

was $. _______ , which was defra19d by assessments levied ~n the

Federal Rei;erve banks ameunting to ;ixxxxxxx ___ 'fo of their ca pi taL. The •'

volume :ef clearings through the S-'ld settle~nt fund has greatly increased,

the tetal during .thet year having am('unted ta ~-------- as compared

with~---------·- during 1916. The cost of operating the g•ld

settlemap.t fupd for the year 1~17 was ii, _____ _.· as aem.pared with ~----,..

in 1916, the net cost being ____ cents per ~1.000 as against ____ cents

the previous y ea.r. The net balances, representing the change of ownership

between the Federal. Reserve banks of gold held in the fund were ~-.-----

which represents the ameunt of (lurrency. er c o1n \Yhich wo~d, wi thou~ the

facilities of the gcild settlement fund, have been transported between the banks. Further details relating t.. th·e eperat ion ~r the Federail Reserve banks and of the s19tem, rill appear as exhibits in the a_ppendix ef this report, as will the annual rep•rts of the Federal Reserve agents.

'• I .,

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