No. ________. CHAMBER OF COMMERCE OF THE UNITED STATES OF AMERICA REFERENDUM No. 55 On the Report of the Special FEDERAL RESERVE COMMITTEE x A CJ - - ALY Ap 3 ne hal fd Sori. el SEs IY = 1 ed lly uc / “7 . C TIE mite NATIONAL HEADQUARTERS WASHINGTON. D."C. January 10, 1930 BY-LAWS ARTICLE XIII SUBMISSION OF QUESTIONS SECTION 1. All subjects considered or acted upon by this Chamber shall be national in character, timely in importance, and general in application to business and industry. SECTION 2. All propositions, resolutions, or Juestions, except those which involve points of order or matters of personal privilege, shall be submitted for action in writing only by the organization members, or by the National Council, or by the Board of Directors: Provided, That by consent of two-thirds of the delegates present at a meeting a subject not so presented may be considered. SECTION 3. When an organization member desires to present a subject for the consideration of this Chamber it shall commit its proposals to writing in the form of a resolution duly adopted by said organization or its governing body and forward it to the Secretary. It shall be the duty of the Secretary to bring this subject before the Board of Directors by mail, or at its first meeting, whereupon the Directors shall decide whether or not the subject is of national character, timely in importance, and general in application to business and industry. If the Board of Directors decides that a subject submitted by an organization member is not of national character, timely in importance, and general in application to business and industry, and should not therefore be submitted to the membership for consideration, the proposing member may appeal from the decision of the Board to the National Council at any meeting of that body or by mail through the office of the Secretary. If the National Council decides by a majority vote that the subject should be referred to the membership it shall pe incumbent on the Board of Directors to order its submission. SECTION 4. If the eligibility of the subject has been determined the Board of Directors shall decide whether the subject shall be submitted for consideration by the Chamber in annual or special meeting or by referendum. SECTION 5. REFERENDUM. A subject to be submitted to referendum shall as soon as practicable be referred to a committee for report. If the report when received is in proper and adequate form for submission to the membership, the Board of Directors shall order it 'o be incorporated in a referendum pamphlet without committing itself in favor or against any of its recommendations, but if not in proper and adequate form it shall refer it back to the committee or appoint a new committee to report on the subject. . SECTION 6. The referendum pamphlet shall contain in addition to the report itself a brief of the major arguments against the recommendations of the committee and such other matter as the Board may deem advisable. If the subject has been submitted by a member organization, said organization shall have the privilege ©f incorporating in the pamphlet a brief of such ‘ength as the Board may determine. The pamphlet shall also contain a ballot upon which the member organizations may register their votes respecting the questions submitted. SECTION 7. The pamphlet in the form in which it is approved by the Board shall be transmitted to each member of the Chamber in good standing and simultaneously the Secretary shall mail a copy to the National Councilor representing each organization member. SECTION 8. The pamphlet shall be accompanied by a notice from the Secretary that each srganization member is expected to register its vote on the ballot in writing and mail said ballot to reach the National Headquarters within 45 days from the date of issuance of the pamphlet. Each organization may cast one such vote for each delegate to which it is entitled in the annual meeting. [An organization hav-(Continued on page three of cover) BALLOT “To be detached) INDIVIDUAL AND ASSOCIATE MEMBERS of the Chamber of Commerce of the United States are urged to use this ballot to place before the commercial or trade organizations of which they are members their opinions respecting the questions presented in this referendum. They should not send this ballot to the Chamber of Commerce of the United States. [n forwarding ballots to commercial and trade organizations, individual and associate members should act promptly, in order that such organizations may have the benefit of their point of view before the organizations cast their own ballots. The period in which organizations’ ballots may be cast expires on February 21, 1930. [ The Committee recommends that in the structure of the Federal Reserve System the principle of regional banks with autonomous powers—in contrast to a central bank— be maintained. See naces 6-8 | IN FAVOR OF THE COMMITTEE'S RECOMMENDATION oo OPPOSED TO THE COMMITTEE'S RECOMMENDATION [I The Committee recommends that in maintenance of the principle of regional au tonomy the Federal Reserve Board should not initiate changes in the rediscount rate unless a plain national emergency exists and then not without conference with the directorates of the regional banks and full consideration of the resulting influence of its act upon the commerce and industry of the area involved. See pages 8-12 | IN FAVOR OF THE COMMITTEE'S RECOMMENDATION | | | OPPOSED TO THE COMMITTEE'S RECOMMENDATION | [11 The Committee recommends that a policy favoring a uniform rate of rediscount foi all reserve banks is unsuited to our regional system and to the diversity of busines: conditions. | , IN FAVOR OF THE COMMITTEE'S RECOMMENDATION { OPPOSED TO THE COMMITTEE'S RECOMMENDATION LL [V The Committee recommends that as the future need for reserve credit and currency cannot be definitely foretold, the reserve banks should possess powers of credit ang currency expansion sufficient to insure the largest measure of serviceability in anx periods of strain. See pages 8-12 See pages 12-14 IN FAVOR OF THE COMMITTEE'S RECOMMENDATION | OPPOSED TO THE COMMITTEE'S RECOMMENDATION NV The Committee further recommends that the precise adaptation of the volume o reserve credit in all its forms, including note issues, to the requirements of trad: should be regarded as a probem of administrative instead of legislative control. See pages I2-I4 . IN FAVOR OF THE COMMITTEE'S RECOMMENDATION i OPPOSED TO THE COMMITTEE'S RECOMMENDATION LL VI The Committee recommends that the development of increased skill in management of the system of regional banks in preference to changes in the structure or credi powers of the system constitute the best public safeguard. See pages 12-16 | IN FAVOR OF THE COMMITTEE'S RECOMMENDATION | OPPOSED 'TO THE COMMITTEE'S RECOMMENDATION VII The Committee recommends that no limiting policy such as one of maintenance oi price stability be imposed by legislation as a definite duty upon the Reserve Boarc and the reserve banks. yee pages 16-22 IN FAVOR OF THE COMMITTEE'S RECOMMENDATION | | OPPOSED TO THE COMMITTEE'S RECOMMENDATION VIII W hile the Committee does not believe that there should be prescription by Congres: of precise methods to be followed, IT RECOMMENDS that in determining the Sys tem’s credit policies Federal Reserve authorities, with cooperation of the membe: banks, should endeavor to restrict the flow of bank credit into speculative channels when such flow is likely to produce an immediate or prospective strain upon the re serve of member banks in their effort to provide credit accommodation of commerce and industry. ee pages 16-22 IN FAVOR OF THE COMMITTEE'S RECOMMENDATION OPPOSED TO THE COMMITTEE'S RECOMMENDATION [X The Committee recommends that, in passing upon an application for rediscount accommodation, a reserve bank should be guided by the general condition of the applying bank and the effect of granting the rediscount upon the safety of depositors as well as by the character of the paper which the applying bank tenders. See pages 22-20 ~~ — | IN FAVOR OF THE COMMITTEES RECOMMENDATION ! OPPOSED TO THE COMMITTE®’S RECOMMENDATION | X The Committee recommends that the present powers of the reserve banks to engage In open market operations should be continued. See pages 26-28 { IN FAVOR OF THE COMMITTEE'S RECOMMENDATION | OPPOSED TO THE. COMMITTEE’S RECOMMENDATION XI The Committee recommends that the powers of issuance of currency against bankers’ acceptances and eligible paper should be continued. | IN FAVOR OF THE COMMITTEE'S RECOMMENDATION OPPOSED TO THE COMMITTEE'S RECOMMENDATION | yold, See pages 28-32 X11 The Committee recommends that based on the recommendations of administrative officials of the Reserve System there should be a legislative revision of those provisions of the Federal Reserve Act relating to member bank reserves. See pages 32-36 — ——————r | | IN FAVOR OF THE COMMITTEE'S RECOMMENDATION | OPPOSED TO THRE COMMITTRER'S RECOMMENDATION XIi1 The Committee recommends that member banks should be given a larger participation in earnings of reserve banks with proportionate reduction in earnings required . to be paid to the federal government. See pages 36-40 - - 1 ' IN FAVOR OF THE COMMITT%@’® RECOMMENDATION ! OPPOSED TN THER COMMITTF®™S RECOMMENDATION X I V The Committee recommends that the Reserve System should maintain the policy of refusal to pay interest to member banks upon their reserve balances. See pages 126-40 a | | IN FAVOR OF THE COMMITTEE’S RECOMMENDATION ' OPPOSED TO THE COMMITTEE'S RECOMMENDATION XV The Committee recommends that the Governor of the Board be made its Chairman. See pages 40-48 | IN FAVOR OF THE COMMITTEE'S RECOMMENDATION OPPOSED TO THE COMMITTEE'S RECOMMENDATION The Committee recommends that the Federal Reserve B ; Tg XVI of HS GWE rve Board be housed in a building See pages 40-48 I » co— — ' IN FAVOR OF THE COMMITTEE'S RECOMMENDATION ' OPPOSED TO THE COMMITTEE'S RECOMMENDATION XVII The Committee recommends that the salaries of the Governor and members of Federal Reserve Board should compare more favorably with the salaries paid principal administrative officers of the reserve banks. the the See pages 40-48 \ | IN FAVOR OF THE COMMITTEE'S RECOMMENDATION I OPPOSED TO THE COMMITTEE'S RECOMMENDATION XY "TIT The Committee recommends that thoroughgoing consideration he given to the tions of the Treasury to the Federal Reserve Board, | | IN FAVOR OF THE COMMITTEE'S RECOMMENDATION OPPOSED TO THE COMMITTEE'S RECOMMENDATION |__ rela-See pages 40-48 X I X The Committtee recommends that the management of the Reserve System should provide the public with such an ample amount of information as to operations and policies ~ as will permit the formation of sound public opinion. See pages 48-52 pro— a a | IN FAVOR OF THE COMMITTEE'S RECOMMENDATION OPPOSED TO THE COMMITTEE'S RECOMMENDATION ed Name of Individual, Firm or Corporation TT Address This Ballot Pertains to Referendum No. 55 of the Chamber of Commerce of the United States, on the Report of the Special Committee on the Federal Reserve System. DUPLICATE BALLOT ‘Not to be detached) INDIVIDUAL AND ASSOCIATE MEMBERS of the Chamber of Commerce of the United States are urged to use this ballot to place before the commercial or trade organizations of which they are members their opinions respecting the questions presented in this referendum. They should not send this ballot to the Chamber of Commerce of the United States. In forwarding ballots to commercial and trade organizations, individual and associate members should act promptly, in order that such organizations may have the benefit of their point of view before the organizations cast their own ballots. The period in which organizations’ ballots may be cast expires on February 24, 1930. { The Committee recommends that in the structure of the Federal Reserve System the principle of regional banks with autonomous powers—in contrast to a central bank— be maintained. See pages 6-8 IN FAVOR OF THE COMMITTEE'S RECOMMENDATION OPPOSED TO THE COMMITTEE'S RECOMMENDATION [1 The Committee recommends that in maintenance of the principle of regional autonomy the Federal Reserve Board should not initiate changes in the rediscount rate unless a plain national emergency exists and then not without conference with the directorates of the regional banks and full consideration of the resulting influence of its act upon the commerce and industry of the area involved. ee pages 8-12 — Te————— i IN FAVOR OF THE COMMITTEE'S RECOMMENDATION { OPPOSED ™ "HR COMMITTEE'S RECOMMENDATION J 11 The Committee recommends that a policy favoring a uniform rate of rediscount for [ all reserve banks is unsuited to our regional system and to the diversity of business conditions. See pages 8-12 — - —— [IN FAVOR OF THE COMMITTEE'S RECOMMENDATION OPPOSED TO THE COMMITTEE'S RECOMMENDATION [V The Committee recommends that as the future need for reserve credit and currency sannot be definitely foretold, the reserve banks should possess powers of credit and currency expansion sufficient to insure the largest measure of serviceability in any periods of strain. See pages 12-14 I | IN FAVOR OF THE COMMITTEE'S RECOMMENDATION | OPPOSED TO THE COMMITTEE'S RECOMMENDATION V The Committee further recommends that the precise adaptation of the volume of reserve credit in all its forms, including note issues, to the requirements of trade should be regarded as a problem of administrative instead of legislative control. See pages 12-14 [=IN FAVOR OF THE COMMITTEE'S RECOMMENDATION OPPOSED TO THE COMMITTY®'® RECOMMENDATION VI The Committee recommends that the development of increased skill in management of the system of regional banks in preference to changes in the structure or credit powers of the system constitute the best public safeguard. See pages 12-16 IN FAVOR OF THE COMMITTEE'S RECOMMENDATION | OPPOSED TN THE COMMITTEFR’S RECOMMENDATION VII The Committee recommends that no limiting policy such as one of maintenance of price stability be imposed by legislation as a definite duty upon the Reserve Board and the reserve banks. See pages 10-22 IN FAVOR OF THE COMMITTEE'S RECOMMENDATION 1 OPPOSED TO THE COMMITTEES RECOMMENDATION VIII While the Committee does not believe that there should be prescription by Congress of precise methods to be followed, IT RECOMMENDS that in determining the System’s credit policies Federal Reserve authorities, with cooperation of the member banks, should endeavor to restrict the flow of bank credit into speculative channels when such flow is likely to produce an immediate or prospective strain upon the reserve of member banks in their effort to provide credit accommodation of commerce and industry. See pages 16-22 er — ——— rr ——— 8 ————— a ——— IN FAVOR OF THE COMMITTEE'S RECOMMENDATION | OPPOSED TO THE COMMITTEE'S RECOMMENDATION [X The Committee recommends that, in passing upon an application for rediscount accommodation, a reserve bank should be guided by the general condition of the applying bank and the effect of granting the rediscount upon the safety of depositors is well as by the character of the paper which the applying bank tenders. See pages 22-26 | | IN FAVOR OF THE COMMITTEE'S RECOMMENDATION | OPPOSED TO THE COMMITTEE'S RECOMMENDATION X The Committee recommends that the present powers of the reserve banks to engage in open market operations should be continued. See pages 26-28 | IN FAVOR OF THE COMMITTEE’S RECOMMENDATION | | OPPOSED TO THE COMMITTEE'S RECOMMENDATION X1 The Committee recommends that the powers of issuance of currency against gold, bankers’ acceptances and eligible paper should be continued. See pages 28-32 —_ IN FAVOR OF THE COMMITTEE’S RECOMMENDATION | OPPOSED TO THR COMMITTRE™S RECOMMENDATION X11 The Committee recommends that based on the recommendations of administrative ! officials of the Reserve System there should be a legislative revision of those provisions of the Federal Reserve Act relating to member bank reserves. See pages 32-3 | IN FAVOR C™ THE COMMITTEE'S RECOMMENDATION OPPOSED Tr THF COMMITTEF'S RECOMMENDATION XIII The Committee recommends that member banks should be given a larger participation in earnings of reserve banks with proportionate reduction in earnings required to be paid to the federal government. See pages 36-4¢ IN FAVOR OF THE COMMITT™™2 RECOMMENDATION | OPPOSED TO THE COMMITTEF’'S RECOMMENDATION XIV The Committee recommends that the Reserve System should maintain the policy of refusal to pay interest to member banks upon their reserve balances. See pages 36-40 | | IN FAVOR OF THE COMMITTEE'S RECOMMENDATION _— - — _— OPPOSED TO THE COMMITTEE'S RECOMMENDATION _—— ——— = ————————— XV . The Committee recommends that the Governor of the Board be made its Chairman. See pages 40-48 IN FAVOR OF THE COMMITTEE'S RECOMMENDATION ' OPPOSED TO THE COMMITTEE'S RECOMMENDATION XVI The Committee recommends that the Federal Reserve Board be housed in a building of its own. See pages 40-48 — - 1 | IN FAVOR OF THE COMMITTEE'S RECOMMENDATION OPPOSED TO THE COMMITTEE'S RECOMMENDATION | X\ TI The Committee recommends that the salaries of the Governor and members of the Federal Reserve Board should compare more favorably with the salaries paid the principal administrative officers of the reserve banks. See pages 40-48 IN FAVOR OF THE COMMITTEE'S RECOMMENDATION OPPOSED TO THE COMMITTEE'S RECOMMENDATION XVIII The Committee recommends that thoroughgoing consideration be given to the relations of the Treasury to the Federal Reserve Board, See pages 40-48 | IN FAVOR OF THE COMMITTEE'S RECOMMENDATION | OPPOSED TO THE COMMITTEE'S RECOMMENDATION X1 X The Committee recommends that the management of the Reserve System should provide the public with such an ample amount of information as to operations and policies as will permit the formation of sound public opinion. See pages 48-22 Bh | IN FAVOR OF THE COMMITTEE'S RECOMMENDATION | OPPOSED TO THE COMMITTEE'S RECOMMENDATION Name of Individual, Firm or Corporation Address This Ballot Pertains to Referendum No. 55 of the Chamber of Commerce of the United States, on the Report of the Special Committee on the Federal Reserve System. CHAMBER OF COMMERCE OF THE UNITED STATES OF AMERICA REFERENDUM No. 55 On the Report of the Special FEDERAL RESERVE COMMITTEE CONTENTS Statement of Question........ Personnel of Committee. ... Report of Committee... .. Arguments in the Negative. . Page WO Explanation —GG——— Re — HE Board of Directors in authorizing submission of a report to referendum neither approves the report nor dissents from it. In order to inform the members as fully as practicable on the subject submitted to referendum a carefully selected committee is appointed to analyze each question and report its conclusions. The purpose of the referendum is to ascertain the opinion of the commercial organizations of the country, not to secure the approval of the recommendations voiced in the report. Only the vote of the member organizations can commit the Chamber of Commerce of the United States for or against any of the recommendations submitted by the committee and until such vote is taken the report rests solely upon the authority of those who have signed it. REFERENDUM on the Report of the Special Federal Reserve Committee STATEMENT OF QUESTION “The federal reserve system has been from its inception the subject of serious study and steadfast support by the Chamber of Commerce of the United States.” “The Chamber has confidence in the federal reserve system and its adaptability to new conditions, and holds that the system is entitled to the utmost cooperation.” These quotations are taken from the declarations made by annual meetings of the Chamber and reflect the results of continuous studies of the operation of the reserve svstem under the changing conditions it has had to meet since its creation, sixteen years ago. Upon these studies have been based policies adopted by the Chamber respecting particular subjects, such as opposition to legislative changes such as were proposed in 1922, advocacy of indeterminate charters for reserve banks, and support of action taken by the reserve system in aid of stable currencies abroad, as desirable for industry, labor, and agriculture. In 1925 the Board of Directors became impressed with the timeliness of plans for a comprehensive survey of all questions relating to the federal reserve system, having received recommendations from the Committee of the Finance Department which had been following diligently the operations of the reserve system. The plans were developed with the assistance of inquiries which were made of business men in all parts of the country, these inquiries resulting in a special conference on the subject held at Washington in May, 1926. In the development of the plans a Committee on Banking and Currency was formed in the fall of 1926, with a membership of fifty, representative of banking and the forms of business served by banking in all of the federal reserve districts, and including representatives of labor and agriculture. Reports on special subjects were prepared by sub-committees and later consolidated into one main report, which was discussed by a special conference in June, 1928, in which the committee obtained the benefits of the criticisms and suggestions of not only business men and bankers who were asked to participate but also of federal reserve offi-Shals ond economists, as well as representatives of agriculture and labor, who were invited and cordially responded. After review of the discussions of the conference and studies which were subsequently made, the Banking and Currency Committee, in the spring of 1929, presented to the Board of Directors its comprehensive report with eight auxiliary statements on special phases of the subject. Recognizing the great value of a report into which so much study had been put, the Board of Directors authorized the appointment of a Special Federal Reserve Committee, composed of members of the larger Banking and Currency Committee, to prepare from a study of the extensive report a report with recommendations suitable for submission to the organization membership of the Chamber for a referendum vote, and directed that the large report and its auxiliaries should be printed and distributed at the time the referendum pamphlet was issued. The members of the Special Federal Reserve Committee are: Harry A. WHEELER, Chairman, Chicago ~ Wirriam F. GEpHarT, St. Louis SeweLr L. Avery, Chicago C. T. Jarrray, Minneapolis Jurius H. Barnes, New York JorN G. LoNspaLE, St. Louis A. J. Brosseau, New York Warrer Scorr McLucas, Kansas City WALTER S. BuckLiN, Boston R. GoopwyN RuEerr, Charleston, S. C. Cuarres S. CaLweiLL, Philadelphia Pavr Szoup, San Francisco The report of the Special Reserve Committee has now been received. Accordingly, there are printed in this pamphlet: Page 1. The Committee's Report. - . 4 2. Arguments in the Negative. <5 With this pamphlet there is sent to each organization member a copy of the large report and its auxiliaries. Copies are available to all other members upon their request. In the large report appear the names of the members of all committees which had a part in the Federal Reserve Study and a more complete statement than is possible here of the events leading up to the report of the Banking and Currency Committee and the subjects which were covered in the studies which were made. PERSONNEL OF COMMITTEE WHEELER, HARRY A., Chairman: Banker, of Chicago; vice-chairman, First National Bank of Chicago; formerly president, Chicago Association of Commerce; formerly president, Chamber of Commerce of the United States; chairman, Banking and Currency Committee, Chamber of Commerce of the Jnited States, and chairman, Executive Committee, Federal Reserve Study. Avery, SEWELL L.: Manufacturer, of Chicago; president and chairman of board, United States Gypsum Company; director of Armour & Company, Chicago Great Western Railroad, Northern Trust Company, Chicago Daily News, University of Chicago, Illinois Manufacturers Association, etc. BarNEs, Junius H.: Wheat exporter, of New York and Duluth; president, Barnes-Ames Company; formerly president, United States Food Administration Grain Corporation; chairman of board, Chamber of Commerce of the United States, and formerly its president. BrosseEAU, A. J.: Manufacturer, of New York; president, Mack Trucks, Inc.; vice-president and member Highways Committee, National Automobile Chamber of Commerce; member of executive committee, dighway Research Board, National Research Council; vice-president, Chamber of Commerce of the Jnited States. JuckrLiN, WALTER S.: Banker, of Boston, Massachusetts; president of National Shawmut Bank of Boston; chairman of board, Liberty Mutual Insurance Company of Boston; vice-president and director, United Mutual Fire Insurance Company of Boston; treasurer, Boston Clearing House Association; hairman, Bankers Committee, New England Council; member of Commerce and Marine Commission, American Bankers Association. CarLweri, CuAriLEs S.: Banker, of Philadelphia; president, Corn Exchange National Bank and Trust Company ; director and member of executive committee, Philadelphia Chamber of Commerce; director, Philadelphia Warehousing and Cold Storage Company; trustee, Philadelphia Commercial Museum. SEPHART, WiLriam F.: Banker, of St. Louis, Missouri; vice-president, First National Bank of St. Louis; formerly professor of economics and dean, School of Commerce and Finance, Washington University ; national councillor, St. Louis Chamber of Commerce. Jarrray, C. T.: Railway executive, of Minneapolis; president, Minneapolis, St. Paul & Sault Ste. Marie Railway Company; formerly president, First National Bank of Minneapolis; director, Northwestern National Life Insurance Company. : LONSDALE, JoEN G.: Banker, of St. Louis; president, Mercantile-Commerce Bank and Trust Company of St. Louis; director, St. Louis Federal Reserve Bank; president, American Bankers Association; director representing Finance Department. Chamber of Commerce of the United States. McLucas, WALTER Scott: Banker, of Kansas City; chairman of board, Commerce Trust Company; formerly vice-president, National City Bank of New York; formerly president, Kansas City Chamber of Commerce; member of Economic Policy Commission, American Bankers Association. REETT, G. GoopwyN : Banker, of Charleston, South Carolina; president, Peoples First National Bank; formerly president, Charleston Chamber of Commerce; formerly president, Chamber of Commerce of the United States. SHOUP, PAUL: Railway executive, of San Francisco; president, Southern Pacific Company; president, Pasific Oil Company; director, California Development Association; vice-president, Chamber of Commerce of the United States. Committee Report (17 Arguments in the Negative Alternate Pages COMMITTEE REPORT To the Board of Directors of the Chamber of Commerce of the United States: introductory Extended Report Auxiliary Statements Recommendations for Decision Nature of Recommendations Management Emphasized The undersigned, as a committee appointed to review the extensive report upon the federal reserve system recently submitted by the Banking and Currency Committee of the Chamber, find it to be currently’ applicable and to contain recommendations which should have the consideration of the organizations in the Chamber mem-Yership. The report— “The Federal Reserve System”—and the eight quxiliary statements upon special phases of the system, should conribute to the development by the American business public of a ;pirit of sober and sympathetic criticism of the system, and in their sntirety will repay review by the business community. They should se considered as a whole in connection with our observations below. We have found it practicable to select from the report certain -ecommendations which in our judgment lend themselves to expresions of approval or disapproval by the member organizations. We have omitted conclusions that are so technical in nature or so general 1s to be unsuited to this purpose. A few of the recommendations we present below differ in literal statement but are compatible in subtance with those of your Banking and Currency Committee, of vhich all of the undersigned were members. We believe it is significant that in the studies of the Banking ind Currency Committee, extending over a year, and in subsequent review, made in the light of recent developments, there are relaively few recommendations for changes in the Federal Reserve Act or in the administrative policies or practices of the system. In 10 instance is there insistence upon the necessity of immediate legislation. Instead, the emphasis is upon the importance of a capable and politically independent management and upon the wisdom of permitting the system to develop improvements in practice unhampered by upsetting investigations or by attempts at narrow legis-‘afive control of its policies. It is recognized, however, that it is not possible to foretell when anarmful proposals will be vigorously agitated. It is well, therefore, for the business community to register without undue delay its considered opinion upon fundamental aspects of the system. (Continued on page 6) ARGUMENTS IN THE NEGATIVE Having had to consider the nature of the federal reserve system, in reaching a decision that courts do not have jurisdiction to review ‘he policies of reserve banks directed toward the credit situation, the federal Court of Appeals for the second circuit began its opinion with 1 brief description covering the reserve act and legislation which asreceded it. As a summary, this description is quoted here, as follows “The federal reserve act marked the end of a long struggle and was thought to ifford the solution of many difficulties. When the independent treasury bill was passed 'n 1846, the effect was completely to divorce the government from all connection with the money market by making it its own banker and by keeping government funds in ‘he vaults of independent treasury office banks. The public then had to depend on state banks for currency and credit, with a result that.in times of financial stress is well known. “To meet the necessities of the Civil War, national banks were established. They secame the official depesitaries of the government and furnished an enlarged currency secause of their ability to issue circulating notes against government bonds deposited with the treasurer of the United States. They were required to maintain reserves in certain cities based upon a percentage of their deposits. As the government debts of the Civil War became liquidated, the means for issuing currency lessened, though the Jusiness requirements of the country were expanding. In such a situation business orosperity inevitably promoted monetary stringency. Moreover, as the reserves were deposited in relatively few banks in the metropolitan centers, when financial stringencies arose, pressure always came on the banks, their deposits would be withdrawn, the rates ‘or call loans would advance and a liquidation of collateral and depreciation of values would ensue. “While the national banking system was a great improvement over what went sefore, it provided no central regulating force and furnished no adequate means for ontrolling interest rates or preventing or lessening financial stringencies and panics. The usual method of furnishing funds needed for business was for the Treasury to debosit moneys from its vaults in the national banks and to withdraw these deposits if hey were used too much in speculation. This was a rather ineffectual way of dealing with complicated and difficult situations. It was dependent too much upon the de ermination of a single official and lacked the information and guidance that a scientific ‘ederal banking system would afford. “To remedy the difficulties we have mentioned, the federal reserve act was passed The federal reserve banks have national charters and their stockholders are member yanks. Each federal reserve bank has nine directors, three chosen from the member (Continued on page 7) History Independent Treasury National Danks Treasury's Procedure Reserve Banks b System as Whole The federal reserve system has demonstrated such success as to meet with widespread public endorsement of most of its basic features. Its structure and its fundamental powers are well designed to serve the need of our nation for a reserve banking agency adapted to our business and financial requirements and to our wide expanse of territory. COMMITTEE REPORT Importance of Administration While particular transitory policies have been called into question, in the main the administrations of the reserve banks, under the general supervision of the Federal Reserve Board, have shown capacity and skill. The continued devotion of men of ability and influence to the affairs of the system as members of its governing bodies is fully as important for its future welfare as any alteration in structure or method of operation. The system is a growing organism. It must be adapted with care to our country’s needs as those needs actually appear. This adaptation may be expected more confidently from a steady development of skill in administration than from any legislative overhauling of its powers and methods of operation. The conception of a system of regional banks of autonomous character is sound. The idea of a single, highly centralized reserve bank which was advocated for a while has come to be recognized as impracticable. Our political traditions, the immense area of the country, the wide variations in the economic development of its sections, and the proved values of the regional system, all lend support to the rejection of the one central bank idea. A fundamental necessity for the proper functioning of a central banking system in this country is the development of a high degree of cooperation between the reserve institutions and the member banks. The wholehearted support of the member banks must be had if for no other reason than that they make the direct contacts with the business public. A system that is not based upon the principle of coperation must fail. The reserve banks, as even our brief history has shown, must depend upon something more than their own activities and resources to achieve the needed progress in improving credit ~onditions. Regional Banks Dne Central Bank Rejected Dependence of Reserve Banks on Member Banks Regional System Promotes Close Relations The regional system makes the administration of each reserve bank more amenable to sentiment in its district and thus serves to emphasize the idea of cooperation. In particular the regional banks make the actual credit contacts with member banks, two-thirds of their directors are chosen by members banks, and the member banks provide all of their stock capital: While the same provisions might be utilized in the organization of a single central bank, the relationships of any one member bank to the central institution would be far less intimate and complete. If it be argued that a central bank could make use of branches to establish contacts with member institutions. [Continued on page 8) ARGUMENTS IN THE NEGATIVE banks, three selected 28 representatives from industry and three designated by the Federal Reserve Board—a central body consisting of the Secretary of the Treasury, the Controller of the Currency and six other members appointed by the President with the consent of the Senate. This board is given, by law, the power to exercise general supervision over federal reserve banks. It is in terms empowered to examine the affairs of each federal reserve bank and to publish weekly a statement showing the condition of each bank as well as a consolidated statement of all the banks in the system. It is also specifically empowered to permit or, in certain cases, to require federal reserve banks to rediscount the discounted paper of other reserve banks and to suspend, for a limited time, reserve requirements, and it is empowered to review and determine rates of discount to be charged by federal reserve banks ‘which shall be fixed with a view of accommodating commerce and: business.’ “Furthermore, a Federal Advisory Council is created by the act with a delegate member from each federal reserve bank. This council is authorized to confer with the Federal Reserve Board on general business conditions, to make oral or written representations concerning matters within the jurisdiction of the board and to call for information and to make recommendations in regard to discount rates, rediscount business, note issues, reserve conditions in the various districts, the purchase and sale of gold and securities by reserve banks, open-market operations by these banks and the general affairs of the reserve banking system. “The foregoing outline shows the broad purposes of the act and the wide powers of supervision and control given to the Federal Reserve Board over the whole reserve system. The congressional report of Senator Glass stated the objects of the act as follows: “‘l. Establishment of a more nearly uniform rate of discount throughout the United States, and thereby the furnishing of a certain kind of preventive against overexpansion of credit which should be similar in all parts of the country. “2. General economy of reserves in order that such reserves might be held ready for use in protecting the banks of any section of the country and for en. abling them to go on meeting their obligations instead of suspending payments as so often in the past. ‘3. Furnishing of an elastic currency by the abolition of the existing bondsecured note issue in whole or in part, and the substitution of a freely issued and adequately protected system of bank notes which should be available to all in stitutions which had the proper class of paper for presentation. - “‘4, Management and commercial use of the funds of the government which are now isolated in the treasury and sub-treasuries in large amounts. “ ‘5. General supervision of the banking business and furnishing of stringent and careful oversight. “ ‘6. Creation of market for commercial paper.’ “To carry out the purposes of the act, federal reserve banks, subject to the supervision of the Federal Reserve Board, are authorized to act as government depositaries Reserve Board Advisory Council Objects of Reserve Act Discount Rate Economy in Reserves Elastic Currency Commercial Use of Idle Public Funds Supervision of Banking Market for Commercial Paper Powers of Reserve Banks Continued on page 9 COMMITTEE REPORT Number of Regional Banks Branches of Regional Banks Recommendation Applications for Rediscounts Rediscount Rate Power of Reserve Banks 't must be admitted that it would be necessary for the branches to possess powers substantially similar to those now possessed by the regional banks, and so no apparent advantage would be gained. Any ‘nfringement upon the regional idea must operate against the prin-~iple of cooperation. While not asserting that exactly twelve regional banks located 1s at present comprise an ideal system, we believe that modification of this structural feature should not be attempted in the immediate future. Peculiar problems that grow out of the departure from the form of earlier central bank organizations are well on the road to solution. The conduct of business and banking in the United States has been adapted to this form. Attempts to eliminate any of the present district reserve banks undoubtedly would develop discord and rancor. This would outweigh any mechanical and operating efficiencies that might be afforded by changing the number of districts. Adjustments through approving branches within the areas of the respective districts of the regional banks are within the power of the Federal Reserve Board, but here it should be emphasized that the further extension of regional branch banks to meet the civic pride »f any community is inexcusable and should be made only when zlearly imperative to serve a territory not now in reasonably close -elationship to the regional reserve bank. After rejecting the principle of one centralized bank, we prefer :0 support for the present the continuance of the present number of reserve banks, while not precluding the possible desirability of a future adjustment in this feature of the system’s structure. The Committee recommends that in the structure of the federal reserve system the principle of regional banks with autonomous bowers be maintained. One of the major responsibilities of the regional reserve banks 's to act upon applications for rediscount made by member banks. Through decrease or increase of rediscount rates such applications nay be encouraged or discouraged. The changes in such rates are :losely watched by the banks and are of vital interest to the public zenerally because of the influence of the rediscount rate upon the ‘ending rates of the member banks. It is in relation to this function »f reserve operation that some tendency to weaken regional auton-»my has developed, which if it persists will furnish a considerable ‘mpetus to undue centralization of power within the system. The Federal Reserve Act specifies that the rediscount rates shall se fixed “with a view of accommodating commerce and business.” [t gives to each reserve bank the power to establish such rates, “subject to review and determination of the Federal Reserve Board.” (Continued on page 10) ARGUMENTS IN THE NEGATIVE and fiscal agents; to receive and maintain the legal reserves of member banks; upon ndorsement of member banks to discount notes, drafts and bills of exchange arising sut of actual commercial transactions but not ‘notes, drafts or bills covering merely nvestments or issued for the purposes of carrying or trading in stocks, bonds or other investment securities, except bonds and notes of the government of the United States’; to make advances to member banks on their promissory notes for not more than 15 days at rates to be established by the federal reserve banks subject to the review and jetermination of the Federal Reserve Board, provided such promissory notes are secured sy ‘eligible paper, or by bonds, or notes of the United States; to receive federal reserve aotes upon deposit of eligible paper, or gold, or gold certificates, provided a gold re serve of not less than 40 per cent of such notes is maintained. “Federal reserve banks may also, under rules and regulations prescribed by the Federal Reserve Board, engage in ‘open-market operations,’ that is to say, purchase and sell in the open market at home or abroad cable transfers and bankers’ acceptances and bills of exchange of the kinds and maturities eligible for rediscount. They may dea in gold coin and bullion at home and abroad; buy and sell, at home and abroad, bonds and notes of the United States and bills, notes, revenue bonds and warrants with a maturity from date of purchase of not exceeding six months, issued by any state, county, fistrict, political subdivision or municipality in the United States, such purchases to se made in accordance with regulations prescribed by the Federal Reserve Board. They may purchase from member banks and sell bills of exchange arising out of com: mercial transactions and may ‘establish from time to time, subject to review and determination by the Federal Reserve Board, rates of discount to be charged by the federal reserve bank for each class of paper, which shall be fixed with a view of accommodating commerce and business.” They may establish accounts with other federal reserve banks with the consent and upon the order and direction of the Federal Reserve Board and, under regulations to be prescribed by said board, may open accounts and establish agencies in foreign countries for the purpose of purchasing, selling, and collecting bills of exchange. They may purchase and sell in the open market either from or to domestic banks, firms, corporations or individuals, acceptances of federal ntermediate credit banks and of national agricultural credit corporations wheneve: the Federal Reserve Board shall declare that the public interest so requires. “The foregoing provisions enable the federal reserve banks, without waiting for applications from their member banks for loans or rediscounts, to adjust the general credit situation by purchasing and selling in the open market the class of securities that they are permitted to deal in. The power ‘to establish from time to time, subject to review and determination by the Federal Reserve Board, rates of discount to be charged by the federal reserve bank’ appears in the act with the open-market powers. The two powers are correlative and enable the federal reserve banks to make their rediscount rates effective. The sale of securities does not lessen the total amount of credit available but, by necessitating payment to the federal reserve banks, increases available credit in their hands ‘with a view of accommodating commerce and business’ as provided by the act.” (Raichle v. Federal Reserve Bank of New York, 34 F (2d) 910.) Open-Market Operations Credit "Continued on page 11) 0 a It has been generally accepted that when a reserve bank applies to the Board for permission to raise or lower its rediscount rate, the Board can grant or refuse that permission—a power of veto. It has not been so generally accepted that the Act gives to the Board the authority to force a regional bank to change its rate. There have been occasions when it has appeared proper to the Board to initiate and insist upon a change in rate against the active and determined opposition of the reserve bank concerned. If the Board compels a reserve bank to lower its rate, the reserve bank may be deprived of its most effective method of discouraging excessive local rediscount applications. As a corrective it might then be compelled to arbitrarily refuse applications for rediscount at the risk of threatening the good will of member banks, thus impairing the spirit of willing cooperation so essential to the operation of the federal reserve system. Similarly, if the Board orders a reserve. bank 0 maintain or increase a rate, it may result in special disadvantage ‘0 the commerce and industry of the particular district. It can be recognized that regional banks may be swayed in their judgment by the special problems of their districts and may not hold so impartial an attitude as would the Federal Reserve Board concerning the needs of the whole country. If given unrestricted freedom in the matter of rediscount rates, it is conceivable that the reserve banks could precipitate discrepancies and inequalities of a disturbing nature. As a rule, however, general financial developments would shortly indicate to any reserve bank whose rate is out of line ‘he necessity of correcting its rate. Even if it be admitted that the Federal Reserve Board should =xercise an authority to compel rate changes in a presumed national :mergency, the country has a right to expect that it adopt a consultative attitude toward the reserve banks and take action only after conference with regional bank directors and after full consideration of the resulting influence upon the commerce and industry of the districts especially affected. The persistent refusal of the Federal Reserve Board to permit a change in rate can be as violative of district autonomy as the actual forcing of a rate change. The Committee does not believe that the proper solution of this difficulty lies in legislative enactment. It should be left to the zoverning bodies of the svstem to agree upon mutually helpful safeguards. COMMITTEE REPORT Josition Taken by Board Result tor Reserve Bank Considerations Affecting Reserve Banks National Emergencies Jniform Rate Nationally In this connection another question of general application which has emerged with respect to the rediscount rate is whether or not it should be uniform throughout the country. Because the Federal Reserve Board's jurisdiction is nation-wide, a determination to estabish the same rediscount rate in all the districts would operate to (Continued on page 12) ARGUMENTS IN THE NEGATIVE 1 The present system is an attempt to obtain with decentralization National Needs the advantages of centralization as to matters of national, not regional, importance—note issue and the relation of the supply of credit to shifting economic conditions. It can fairly be argued that the problems of today are so different from those of 1913, and the international relationships of the country have so altered, that it has become timely to consider once more the advantages of a single central bank so organized and directed as to be quickly and effectively responsive to needs. It can also be fairly argued that the regional banks are not now autonomous. The federal reserve system was created, in 1913, when the United States was committed in theory and practice to decentralized banking, with a great number of separate units. The reserve system as created has not prevented new tendencies from developing to such a point that federal legislation in 1927 definitely recognized branch banking, on the part of national banks, and the federal official charged with supervision of national banks has now come forward, in December, 1929, with a proposal that national banks should be allowed to have branches within their trade areas, the trade areas in some instances being coextensive with federal reserve district lines. He is led to this proposal, he says, in the interest of a safe and sound system of banking in communities and areas where there are signs unit banking is having difficulty in supporting itself. On June 30, 1913, there were 7,473 national banks. The number rose gradually ‘0 8,246 on June 30, 1922, but has since declined and on October 4, 1929, was back at 7,473. In June, 1913, the total number of banks—those under state charters as well as those under national charters—was 25,993 and their total resources were $25,712,000,000, of which the resources of the national banks were 42%. On June 30, 1929, the resources of all banks, state and national, aggregated $72.172.000.000 of which the resources of the national banks were 38%. In June, 1922, the number of banks in the federal reserve system reached its maximum, 9,859; the resources of these member banks then were $31,723,000,000. The national banks, which were included, as national banks are compelled to have membership in the reserve system, made up 84% of the number and had 62% of the resources. On October 4, 1929, the number of member banks was 8,616, and their total resources were $47,305,000,000; the percentage of national banks was 869% and their resources constituted approximately 62% of the total. The growth of chain banking has occurred in recent years, being so new, in fact, that the first attempt at comprehensive statistics seems to have been made in a report presented in October, 1929, to the American Bankers Association by its Economic Policy Commission. According to that report, seven percent of the banks of the country, possessing around seventeen percent of the total banking resources, are now in chains, some 272 in number with 1,784 units. Init Banking Number of Banks Banking Resources Uember Banks Chain Banking Upon this general subject the President of the United States said in the message which he addressed to Congress in early December, 1929: (Continued on page 13) 12 Recommendation Recommendation Functions of Central Banking Powers Necessary Reserve Credit Proposals to Restrict Powers COMMITTEE REPORT increase the Board’s influence. This again would tend to decrease the exercise of reasonable regional authority. If it be required that the cost to member banks of securing reserve credit be the same in all districts, each district directorate is in the position where it may have to subordinate local needs, even of an acute nature, to a more or less artificial national requirement. We believe that a policy favoring a single rate of rediscount as a principle of reserve system should be disapproved. The Committee recommends that: (a) In maintenance of the principle of regional autonomy, the Federal Reserve Board should avoid initiation of a change in a rediscount rate without conference with the directorate of the regional bank and full consideration of the resulting influence of its act upon the commerce and industry of the district. (b) A policy favoring a uniform rate of rediscount as a principle of reserve-system operation should be disapproved. Although the federal reserve system is not a central bank, its fundamental operations are in the field of central and not of ordinary banking. It is designed to supplement the credit distribution activities of ordinary banks that deal directly with the public and depend upon profits. It is charged with the primary responsibility to which, if necessary, every other consideration should be subordinate, viz., the maintenance of the currency and credit structure firmly upon an adequate foundation of gold. In general, as a reserve or supplementary credit institution, it must seek to exert a steadying influence upon the money market and upon the course of industry. Such an agency must be endowed with ample powers of credit and currency expansion and contraction. The successful discharge of these powers requires not only an experienced and politically independent management but the absence of narrow, restrictive legal limitations. It is to be admitted that any over-use of the credit-granting and currency-issuing powers of the reserve system might result in serious financial disturbance. A dollar of federal reserve credit establishes the basis upon which more dollars of member bank credit may be built. An excessive expansion of reserve credit may have the result, therefore, of exaggerating any rapid increase in the volume of member bank credit and thus lead to inflationary conditions. Because of this it is sometimes argued that restrictions should be placed in the Federal Reserve Act, beyond those now existing, to insure that the reserve banks are not provided with unduly large powers of credit and currency expansion at any given period of time. Among the proposals designed to restrict further the lending power of the reserve banks, are (a) permission to member banks to ceep 40 percent of their legal reserve and cash in their own vaults i Continued on page 14) ARGUMENTS IN THE NEGATIVE - Tr ee ee———————————— AL LV | . “It is desirable that Congress should consider the revision of some portions of Presidents Message the banking law. “The development of ‘group’ and ‘chain’ banking presents many new probiems The question naturally arises as to whether if allowed to expand without restraint these methods would dangerously concentrate control of credit, and whether they would not in any event seriously threaten one of the fundamentals of the American credit system—which is that credit which is based upon banking deposits should be controlled by persons within those areas which furnish these deposits and ‘thus be subject to the restrains of local interest and public opinion in those areas. To some degree, however, this movement of chain or group banking is a groping for stronger support to the banks and a more secure basis for these institutions. “The growth in size and stability of the metropolitan banks is in marked con. trast to the trend in the country districts, with its many failures and the losses these failures have imposed upon the agricultural community. “The relinquishment of charters of national banks in great commercial centers in favor of state charters indicates that some condition surround the national banks which render them unable to compete with state banks; and their withdrawal results in weakening our national banking system. “It has been proposed that permission should be granted to national banks to engage in branch banking of a nature that would preserve within limited regions the local responsibility and the control of such credit institutions. “All these subjects, however, require careful investigation, and it might be founc advantageous to create a joint commission embracing Members of the Congress anc other appropriate Federal officials for subsequent report.” During the post-war history of the federal reserve system there have been bank failures in such numbers, particularly of banks in smaller communities and agricultural districts, as to raise questions about the efficacy of the system in its relations to the smaller member banks. Reporting to Congress on December 21, 1929, the Comptrolle of the Currency,—who is the federal official charged with the duty of supervision of national banks,—pointed out that in the nine years between July 1, 1920, and June 30, 1929, about 5,000 banks have failed, and their failure had tied up deposits of $1,500,000,000. In the first ten months of 1929 there have been 521 bank failures, involving deposits of $200,000,000. An analysis of the statistics discloses that in seven states over forty percent of the banks in existence in 1920 have since failed, and in twenty-six states the failures have amounted to more than ten percent. It may be true that the greater number of the banks that have failed in recent years existed under state charters and many of them were not members of the reserve system, consequently not being in a position to derive direct benefits, but it is equally true that member banks, national as well as state, were found within the number of failing banks. In the years of 1921-1928 inclusive, eight hundred fifty-three member banks. failed, and they had aggregate deposit liabilities of $436,000,000. In the year following the end of the period for which these figures were compiled there have been seventy-nine failures of national banks including two national banks which had assets of more than $12.-Uontinued on dace 18) Bank Failures Forecasting Needs Adaptation of Credit Volume Administrative Problem Legislative Restrictions Dpposed Recommendation Recommendation COMMITTEE REPORT instead of the present requirement that the entire legal reserve be maintained with the regional reserve banks; (b) prohibition of the present right to issue federal reserve notes against gold or against acceptances purchased in the open market; (c) repeal of the pres-=nt provision that gold serving as collateral for federal reserve notes also may be counted by a reserve bank as part of its required reserve; ‘d) a drastic requirement that federal reserve notes be issued only against the collateral of paper obtained by rediscount. In general, these and similar suggestions seem to assume that it is possible to gauge in advance the exact amount of lending power that the reserve banks may require at any time. That is not the case. They overlook the fact that the need for reserve credit is subject to wide and unforeseeable variations. In our view it is not a matter of great consequence if the credit powers and resources of the reserve hanks are at times even materially in excess of immediate requirenents. Furthermore, the precise adaptation of the volume of reserve credit to the needs of business is of necessity a problem of adminisration rather than of law. In the exercise of such powers to regulate credit as the federal reserve system possesses, it is better for the country to rely positively upon experienced administration rather ‘han upon rigid statutory limitation. No automatically operative statute can be substituted in this particular for prudent judgment and discretion. The reserve administration is acquiring by experience an art and technique that will produce more definite and continuous progress than prescription by the legislative body. Successful management of our federal reserve system should be sought through development of the administrative ability of its officers and govern-‘ng board to meet changing conditions instead of through limitation »f power by legislation. We do not believe that the changes referred to above or other changes should be made in the provisions of the Federal Reserve Act relating to the issue of federal reserve notes or to reserve requirements, pertaining either to reserve banks or to member banks, solely for the purpose of restricting the lending powers of the reserve banks. The Committee recommends that: (a) As the future need for reserve credit and currency cannot be definitely foretold, the reserve banks should possess powers of credit and currency expansion sufficient to insure the largest measure of serviceability in any periods of strain. (b) The precise adaptation of the volume of reserve credit in all its forms, including note issues, to the requirement of trade should be regarded as a problem of administrative instead of legislative rontrol. ‘Continued on paae AY ARGUMENTS IN THE NEGATIVE 000,000. After reasonable allowance has been made for all of the other factors which might have had influence, such a record of failures suggests the federal reserve system as it now exists was not able to apply preventatives and correctives where they were most needed in the banking situation. In order that member banks may obtain the maximum of assistance from reserve banks, they should be in a position to utilize the facilities of reserve banks to make ‘ediscounts. ‘The portion of the loans of member banks that is eligible for rediscount at reserve banks, however, has been declining. This decline raises a question if, even for the purposes of a “decentralized banking system,” there should not be a recon. sideration of the whole situation. The statistics for national banks—all of which have to be members of the reserve system—appear to show a marked trend. In 1923 thirty percent of the loans of national banks were eligible for rediscount at reserve banks, in [926 twenty-six percent, in 1927 twenty-four percent, in 1928 nineteen and seven :enths percent, and in 1929 twenty and eight-tenths percent. For each year the per centage is as of June 30. The principle of one central bank for modern conditions has never been considered by Congress on its merits. The present reserve system does not follow the principle of regional banks with autonomous powers, and the experience which has now been had with the present system suggests that the time may have come for transition tg a single central bank, under a control that is definite and thus free from that division of responsibility which promotes confusion. The setting up in the United States under modern conditions an institution which would be a central reserve bank for the country was avowedly not even con: sidered in the formulation of the bill which, in the fall of 1913, was brought forward and which became the basis for the Federal Reserve Act of December 23, 1913. On September 10, 1913, the Chairman of the House Committee stated to the House: “It is sufficient to say that those members of the Banking and Currency Committee peculiarly charged with the responsibility for recommending legislation felt precluded ‘rom considering the so-called Aldrich bill by reason of the fact that the platform of the Democratic Party adopted at Baltimore explicitly denounced that proposed legislation.” ‘The so-called Aldrich bill was not debated in Congress. It is not necessary to approve of all of the provisions of the Aldrich bill in order to point out that political considerations had much weight in adoption of the plan now in use for a series of regional central banks and in order to suggest that there would today be a very muck better opportunity than in 1911-1913 for widespread understanding of the true func tions and purposes of central banking. Indeed, the legislation of 1913 created the appearance rather than the substance of autonomous regional banks. It went so far toward recognizing the principle of the central control which its authors condemned that foreign observers have not perceived in the result twelve regional banks with autonomous powers but, in the words of two recent writers for whose book the governor of the Bank of England wrote a foreword, ‘twelve regional reserve banks so federated under the Federal Reserve Board as to form an organic banking system and to work with a unity of purpose.” One of the out-"Continued on page 17) Eligible Paper One Central Bank Act of 1913 Regional Banks Not Autonomous COMM ITTEE REPORT Recommendation Juides tor Credit Policy (c) Attention should be directed to the development of skill in management of the system of regional banks in preference to changes in the structure or credit powers of the system. The federal reserve system has not been provided with greater resources than on occasion may be needed, nor have the administrarive bodies of the system been vested with too broad discretion as regards regulation of the volume of reserve credit and currency. This, however, does not appear to be the view of those who advocate the adoption of precise guides for reserve credit policy. A number of such guides have been suggested. Some urge an amendment to the Act whereby the reserve banks would be directed to employ their powers primarily for the purpose of realizing stability in commodity price levels. Others insist that the reserve ratio should be the predominant factor in the detérmination of reserve policy. Still others believe that principal effort should be exerted to regulate the course of speculation. There is also a school of thought which emphasizes the importance of adapt-‘ng federal reserve policies to credit developments in the world it large. Price Level nf Commodities Factors Affecting Prices As to price stability, there may arise situations in which it would he generally agreed that the movement of prices might constitute the most important single factor. Considerable changes in price levels might serve to indicate whether credit is excessive or deficient in volume. But the significance of moderate changes in prices, either in an upward or downward direction, is difficult to diagnose. On some occasions they may be attributable to other than credit factors, and to the extent that this is true, harm would be occasioned by using credit manipulation as a correction. A downward drift of prices, for instance, might be due primarily to technical improvements in injustry. When the cause of these fluctuations is not clear and uniform in its influence, a requirement in the Act that maintenance of the stability of prices be a primary obligation upon the administration of the system would be uneconomic and would inevitably invite reprisals both public and political. Even mild price movements in one direction if persisted in for a long period of time must make considerable changes in the purchasing power of the dollar. To require the system to attempt to keep the price level substantially unchanged would present an administrative problem impossible of solution. There can be no unanimity upon the precise causes of such a price trend or upon its desirability or upon the many forces other than the credit supply that may operate to alter it. (Continued on page 2) ARGUMENTS IN THE NEGATIVE standing American economists has concluded that the Reserve Board has almost unimited powers over the reserve banks. Central banks are now generally recognized as having two characteristic funcdons, 1) the issue of their notes for currency purposes on a basis which at once main: :ains the soundness of the currency and permits volume to expand and contract with the needs of business and 2) influence for the same purposes on the credit available for business. As to note issues the reserve banks do not have autonomous powers; for the law prevents them from issuing notes except with the permission of the Reserve Board, and puts into each reserve bank an agent of the Reserve Board. That the re serve banks are not now autonomous in regard to the second function mentioned above was the conclusion of the federal Court of Appeals last summer in the case of Raichle v. Federal Reserve Bank of New York, from which quotation has been made :arlier in this pamphlet. The court held that if suit were to be brought for injunction against activities with respect to credit and its uses the suit would have to be brought against the Federal Reserve Board as well as the federal reserve bank, saying the Board “is specifically empowered to regulate open market transactions, to review and determine rates of discount, and to make reports as to conditions in the federal reserve system. In such circumstances, the bank is, as to the matters complained of here, a governmental agency under the direction of the Federal Reserve Board. If the plainiff prevailed in his contention, the bank would be enjoined from fixing a discount rate which the board had presumptively directed. Such a situation under familiar principles renders the Federal Reserve Board an indispensable party to the suit.” Of course, the decision of the Court of Appeals in the Raichle case may be later reviewed by the United States Supreme Court, but there is no apparent reason for expecting the Su. sreme Court to reach a contrary conclusion. Relations to Credit That the Reserve Board has substantial activities would seem to appear from its =xpenditures. In 1928 its expenditures for its own purposes were $763,000—a figure which has been fairly constant over the last seven or eight years, having earlier heer lower. Activities of Board For illustration of the manner in which the reserve system is now operated reference might be made to the manner in which the reserve banks engage in openmarket operations, the procedure they follow in buying and selling government securities, and other devices which have been set up in order to maintain the semblance of regional banks with autonomous powers. Space will permit, however, only reference to the facts set out in one of the auxiliary reports accompanying the report of the Banking and Currency Committee. These facts raise a question whether or not there is justification for continuance of some of the reserve banks. The facts to which the auxiliary report draws attention are that in 1926 the average daily holdings of re discounted bills at one reserve bank were but 26% of its total holdings of bills and securities, at another were 25%, and at a third were 20%. This percentage may vary widely in a central banking institution for which there is complete justification and which is under active and wise management, but in the case of a considerable number of the reserve banks it tends to be low, thus suggesting that after years of experience there is not justification for these banks as they now exist. In 1928, when the average {Continued on page 19) Question as to Usefulness of Some Banks 8 COMMITTEE REPORT Regerye As to the reserve ratio—that is, the ratio of the total cash reserves to the federal reserve notes and net deposit liabilities combined—it is an extremely artificial and imperfect test when gold holdings are high. Changes in this ratio may not agree either in direction or in intensity with the country’s need for more or less credit. Widespread speculation in any of the markets—real estate, commodity or security—may make such demands upon the credit resources of the country as to impair their liquidity or dislocate the supply available for undertakings involving a normal business risk or unduly increase its cost. Speculation in a local or general market may arise from causes other than the immediate or prospective volume of money or credit. When widespread speculation is attributable in an important part, however, to an over-abundant supply of money or credit, it is clearly of concern to the system, since it possesses some power to influence the quantity and cost of that supply. On such occasions the system can not avoid seeking or urging such adjustments in the credit supply or in the directions of the use of credit as will assist in restoring the proper balance between the volume of credit used for speculative purposes and that used in accommodation to business and industry. Special interest has been manifested in the security market uses of credit. Credit released in security operations is always tending to be distributed about the country and, on this account, a growth in the volume of brokers’ loans or other forms of security credit may not operate to restrict the supply of credit for commercial or agricultural uses. The volume of security credits will also be affected by the particular methods employed by business to finance its projects. When, for instance, capital issues, instead of short-term bank borrowings are relied upon, the growth of security credits does not mean that business is being deprived of credit but only that its methods of securing this credit have changed. Since capital issues may be merely a substitute for bank credit directly obtained, it is not possible to determine with as near an approach to accuracy the amount required at any one time to service the security markets as it is to determine the total supply of credit needed for all purposes. There is, however, one respect in which any growth of security credits is peculiarly likely to lead to future credit strain. When the market for capital issues has been stimulated, business and industrial expansion is much more likely to take place at an excessively rapid rate than would be the situation if only short-term credit were available in liberal quantities. Funds obtained by capital issues may relieve business managements of any worry about the immediate sufficiency of their financial resources. Speculation Credit in Security Markets Effect of Stimulation of Capital [esues (Continued on page 20) ARGUMENTS IN THE NEGATIVE ————————— BCA TIVE daily holdings of all reserve banks in bills discounted was 57% of total bills and securities, the percentage in one of these regional banks did not get above 519% and was as low as 7%, the percentage for the second ranged from 79% down to 16%, and the percentage for the third went as high as 50% and as low as 6%. On December [8, 1929, the percentages for these three banks were 25%, 57%, and 37%, and for all twelve reserve banks together was 469%. With the modern facilities for transportation and communication it is not apparent why the rediscount rate for paper of the same quality and the same maturity should not be the same at any par ticular time throughout the country. The argument in favor of different discount rates in the various reserve districts was stated as follows, in 1921, by a Federal Reserve Agent: “Obviously the same >ank rate cannot be charged in Massachusetts and Montana because of the difference in conditions. In the partially developed sections capital is scarce and credit is limited. The northwestern states have for years found it highly beneficial to attract eastern money by making favorable rates. * * * Ap equal or uniform level would naturally destroy this advantage since individuals in the East having surplus funds could :mploy them at the same rate at home and there would be no reason for sending money out into the West.” Statements of this kind seem to contain an element of fallacy; for in the period in which the quoted statement was written the rediscount rates of western reserve banks frequently were below those at the same time in effect in eastern districts. Indeed, this has on occasion continued to be the case. For example, at the end of 1928 the rate in ‘he four western districts was 414%, whereas in the other districts it was 5%. In the middle of December, 1929, the rate was 414% at the reserve banks of Boston, New York, Atlanta, Chicago, Kansas City, and San Francisco, whereas it was 5% at the reserve banks of Philadelphia, Richmond, Cleveland, St. Louis, Minneapolis, and Dallas. It can be fairly argued, of course, that there can scarcely be any justification in considerations which should be given weight in central banking for a difference in rates between New York and Philadelphia, between Richmond and Atlanta, or between St. Louis and Kansas City. The fallacy may be in a confusion of loans of one quality with those of another. The time has come, it may fairly be argued, when a loan of the highest quality according to all banking tests should be subject to the same rediscount rate in the central danking system whether the borrower, perhaps a resident of a western city, placed the paper at his local bank or with an eastern bank. The apparent false premise in such statements would seem to be contradicted, too, by the provisions in the law for reserve banks coming to one another’s aid. Inter-dis. rrict borrowing assumed large proportions in 1920 and 1921, reaching a maximum in one month of $260,000,000. If it had not been for these transactions between the reserve banks, with examples of some reserve banks receiving aid maintaining rediscount rates lower than the rates of the lending banks, one of the reserve banks would {Continued on page 21) Differing Rediscount Rates Partially Developed Regions Actual Rates Inter-District Loans 4) -— Restriction by Reserve Authorities Security Operations Sold Movements Foreign Money Markets Tconomic Recovery Abroad Legislative Fixity [Indesirable COMMITTEE REPORT Such a business expansion, artificially stimulated by abundance of long-term capital, must react upon other enterprise and incidentally increase still further credit demands upon our banks. Once under way, such an expansion is difficult to restore to healthy dimensions. In anticipation of such conditions, involving as they may, ‘future strain upon the pool either of member or reserve bank credit, ‘he reserve authorities may properly act to restrict the intensity of rowing speculative or investment demands for credit. This is not necessarily to say that every growth of security operations is per se 0 be regarded with alarm. Security operations are only one of the wmerous factors which may serve to develop a situation requiring -orrective action on the part of the reserve banks. Security operations take place primarily in the financial centers >f the country, and money rates in the financial centers are of especial importance in determining gold flows to and from other countries which may tend to counteract important credit policies of the system. An extensive gold inflow, for instance, might serve to defeat a policy or credit restriction. Thus, we approach the question of how and why our relationship to the foreign money situation may bulk large in our own affairs: During the last few years, when foreign countries have been stabiliz-.ng currencies and restoring the gold standard, it has been desirable n the general interest that no unnecessary pressure upon important foreign money markets should be exerted from this side. The accenruation of ease in the money market, if that involved no serious risk of undesirable domestic developments, was clearly advantageous since it would aid in the restoration of normal monetary conditions in other countries. Indeed, to avoid undesirable domestic developments, there may be positive necessity to contribute to economic recovery abroad. Without stabilization of important foreign currencies there inevitably would be a narrower market for our exports. This would be ~specially serious in periods of increasing domestic production, when foreign outlets for our products are of the highest importance in preventing that congestion in our domestic markets which would tend to lower prices and reduce profits. It is apparent, however, with respect to any of these problems that efforts to fix by legislation the degree of importance which must be attached to any of them would be productive of harm, not zood. A variety of considerations which will have different degrees >f weight in different periods must necessarily influence the general credit policies of the reserve banks. The elements which create a helpful or harmful financial situation are constantly being combined in changing proportions and it is not possible to state in ad-(Continued on page 22) ARGUMENTS IN THE NEGATIVE have found it necessary by reason of the provisions of the law to have put its own rediscount rate up to 22%, if it had not been able to obtain relief in other directions. [ncidents of this sort tend strongly to suggest the desirability of one central banking institution under which there could be a rediscount rate uniform throughout the country and the formulation of a true rediscount policy such as the interests of the country make ippropriate. Such a policy could properly include differing rates for the differing classe of paper eligible for rediscount, rather than differing rates for different districts with ‘he rate in each district, as now, uniform for all classes of eligible paper. If there were no other considerations pointing to the desirability in the public interest of concentrating the authority for the discount rate in a single institution with clear and identifiable responsibility, the unavoidable international relations of the United States in financial matters would be sufficient warrant. When the World War began in 1914, the United States had less than $2,000,000,000 in gold. At the snd of 1918 it had slightly more than $3,000,000,000 in gold. In April, 1927, it held its largest amount of gold, $4,609,000,000. The amount drifted downward to $4,109, 200,000 in June, 1928, and then rose once more, reaching $4,386,000,000 in October, 1929, Rediscount Policy Effect Upon Other Countries Gold - . Such figures suggest the extent in which the United States has brought within its borders a large part of the world’s supply of gold. At one time we had about 50% of he supply; we now hold approximately 42%. This gold has given the United States an inevitable responsibility toward othe: countries, whose welfare is affected in fundamental ways by conditions here causing rises in their interest rates with effects upon their business situations. As these countries afford large markets for our own products, their purchasing power is of direct con cern to all of our commodities that enter export trade. Exports of our products in the calendar year of 1929 have been at least equal to exports in 1928, when they had a value exceeding $5,000,000,000. In 1927, the latest year for which complete data are yet available, we furnished more than a quarter of all imports of Australia, Brazil, Chile, and Japan, and more than an eighth of all imports of China, Denmark, Germany, Italy, New Zealand, Norway, Poland, Sweden, South Africa, and the United Kingdom. Almost one-half of our exports, measured in value, go to Europe. An European point of view was expressed clearly in a study presented by Gustav Cassel, of Sweden, to the international financial conference held at Brussels in 1920 As the following quotation discloses, this study accurately forecast events occurring ir the years which have since intervened : “The United States having already resumed gold payments, the dollar may be raken henceforth to represent gold. The problem of the restoration of a gold standard will therefore practically take the form of the problem of stabilizing the dollar ex: change at some definite figure. England and some continental countries will certainly do their utmost to restore the pre-war parity of their currency with the dollar. Other countries with much more depreciated money will have to relinquish this aim and choose a new parity with the dollar, concentrating all their energies upon keeping their money in that parity for the future. * * * It is now clearly in the interest of [Continued on page 23) Conditions in Foreign Countries Financial Conference of 1920 Restoration of Gold Standard Recommendation Recommendation forms of Reserve Accommodation Notes of Member Banks “Eligible” Paper and “Acceptable” Paper Original Theory Experience 2 COMMITTEE REPORT vance the exact policy or formula which would produce a desirable result. In the employment of their resources the reserve officials must consider a variety of factors and credit conditions. The Committee earlier recommended that the precise adaptation of the volume of reserve currency and credit to requirements of trade should be considered as a problem of administrative instead nf legislative control. It now recommends that no limiting policy such as one of the maintenance of price stability be imposed by legislation as a definite {uty upon the Reserve Board and the reserve banks. And further, while it does not believe that there should be prescription by Congress of precise methods to be followed, the Committee recommends that in determining the system’s credit policies federal reserve authorities, with cooperation of the member banks, should endeavor to restrict the flow of bank credit into speculative channels when its volume or directions of use are such as to produce an immediate or prospective strain upon the reserve or member banks in their effort to provide credit accommodation for commerce and industry. By the Federal Reserve Act and by regulations of the Federal Reserve Board certain types of commercial and agricultural paper which member banks accept from their customers are made eligible for rediscount with the regional reserve banks. A handier way for a member bank to get reserve accommodasion is by presenting its own note, collateraled by either government securities or eligible paper, to the regional bank for discount. Such loans may be made for fifteen-day periods. The belief early arose and has long persisted that the presentarion of eligible paper automatically opened the coffers of the reserve bank to its members. A distinction has come to be made between ‘eligible” paper and “acceptable” paper, cutting down somewhat the original conception. There has been little disposition on the part of ‘he reserve banks, however, to deny reserve accommodation to the member which offered acceptable paper or government securities. There are instances of this attitude leading to unwise loans which ~ontributed to member bank weakness. At the time the Reserve Act was passed it was no doubt generally believed that strict insistence upon the commercial character of paper which the member banks might tender for rediscount would accomplish the two-fold purpose of, first, preventing the extension of too large a supply of reserve credit and, second, of encouraging member as well as reserve banks to keep in a liquid condition. Experience in administration has shown that the determination of the (Continued on page 24) ARGUMENTS IN THE NEGATIVE all countries endeavoring to stabilize their dollar-exchange that the United States should not enter upon any monetary policy effectively raising the internal value of ‘he dollar. In fact, the problem of stabilizing the world’s exchanges being in its nature an international problem, it is desirable that one country should take the lead by fixing the internal value of its money, and it seems natural that this should be the United States. “In the same manner, it is of great interest for all countries striving to restore a definite parity with gold that the value of gold as against commodities should not be raised and that, when the new parities once have been settled, the value of gold should remain as constant as possible. Though the enormous fall in value of gold since the oeginning of the war has certainly been a very injurious process, the inverse process of raising the value of gold would probably be still more disastrous. For the gold countries it would mean a prolonged process of deflation with all its pernicious effects on trade and enterprise and on the financial burdens of the state. For other ‘countries it would seriously aggravate the restoration of a pre-war gold parity or the main tenance of a new established gold parity.” On November 2, 1929, the London Statist reviewed editorially the situation in other countries, under the head “The World Credit Crisis,” saying: “We are at the present time witnessing a near approximation to an international credit crisis. The storm center is now in Wall Street, but before the wholesale liquidation in that center made itself felt there had been signs of impending trouble in other parts of the world. * * * On the continent of Europe serious bank ing difficulties had for some time been apparent. * * * These are some of the indications which had recently become observable of a growing malaise in the European industrial and financial spheres. In other parts of the world similar indications were not lacking. * * * “Upon this apprehensive world position came the crash in Wall Street. The boom in the American Stock Exchange had long ago ceased to have purely domestic sig nificance. In the first place, the eagerness of the American speculator had drawn within the vortex of rising prices a large number of shares of non-American com: panies—principally Canadian and British. Secondly, the reaction of American credit conditions to the extension of stock speculation had in turn had its effect upon the whole structure of world credit. The break in the boom was, therefore, bound to have immediate repercussions throughout the world. * * * Montreal, by reason of its geographical proximity to New York, has been one of the worst sufferers. The collapse in the securities market has accentuated some of the difficulties which, for many months, have been observable in the Canadian exchange situation and, during he current week, the Canadian dollar has fallen in London * * * ell below the gold export point for Canada, and it is only by the unofficial but nevertheless rigorous application of an embargo on gold exports that substantial quantities of gold have not left Canada. * * * Another currency which has recently been forced off the gold standard is the Argentine peso. * * * The gold point has been passed and it is understood that an unofficial embargo on gold exports has been imposed. These reactionary developments—the forsaking of the gold standard by two "Continued on page 25) November, 1929 Credit Abroad Gold Standard - 4 + Manner of Utilization of Credit Consideration of Member Banks’ Condition Right to Refuse Discount COMMITTEE REPORT desirable quantity of reserve credit cannot on all occasions be achieved merely by assuring the eligible character of the paper rediscounted. On occasions of rapid business expansion, in which in-Aationary conditions develop, the supply of eligible paper always ‘ncreases. This increase may be due in part merely to general increases in commodity prices. Although the reserve banks were given power, on such occasions, to discourage the increase in member bank rediscounting, by raising their rates and consequently the cost of reserve credit, experience has further shown that the effectiveness of rate increases is subject to many limitations. Some of these limitations arise from the considerable differences in money rates which prevail over various parts of the country so that discount rates which would effectively restrain some member banks from excessive rediscounting might not thus operate to restrict the activities of other member banks. With these limitations upon rediscount policy to secure for the sountry the desirable aggregate of bank credit, it would appear that rediscount devices are principally important from the standpoint of their ability to encourage the desirable type of credit activities of member banks. But restrictions upon eligibility determine only the way reserve credit may come into being and do not insure its subsequent utilization by member banks in encouraging either commerrial or short-time agricultural operations. Member banks, whose assets are generally becoming frozen and uncollectable, may discount their best paper with the reserve banks and in this way build up the reserves which permit them to .ncrease their extensions of long-time and perhaps unsound credits to the business community. If the reserve banks rest content merely in securing sound paper, they may protect themselves adequately, but at the cost of threatening the safety of the other creditors of the member banks, including the depositors. In the event of failure, these depositors may find that their bank has pledged its best assets with the reserve bank and that their ability to recover has been in large part destroyed. It should be clear that in the general welfare he reserve banks cannot act in disregard of the interests of the bank’s lepositors even though their own security has been maintained. The right of a federal reserve bank to refuse to rediscount sligible paper has been upheld in the federal courts. In one important decision it is stated: “Certainly it was lawful to engage in open market transactions by the sale of securities, to fix the rediscount rate and to decline to rediscount eligible paper . . . Itis important to note that it (the federal reserve bank) is not under any compulsion to rediscount eligible paper, for the words of the Act in respect to rediscounting are wholly permissive.” (Continued on page 26) ARGUMENTS IN THE NEGATIVE 2° mportant currencies of the world—are not the least important of the available inlications of a strained position in international finance. * * * “This world-wide financial crisis has been heralded by the customary fall in the price of a number of sensitive key commodities in which a speculative market exists. Among these might be mentioned the substantial falls that have taken place in the prices of tin and copper, of sugar, wheat, rice, and rubber. There is about the present position every appearance of a major deflation crisis, and if ‘natural forces’ are allowed free play we may rest assured that the cycle will pursue its course and will lead to a further general fall in commodity prices and to a restriction in commercial and industrial activity. It is, therefore, high time that the purely financial or monetary factors which played their part in giving the downward phase of the economic cycle its initial impetus should be reversed. Once the forces of deflation have been set in motion they gather momentum by the psychological reactions which they themselves create. If the policy of stabilizing business conditions and credit is to be maintained, it cannot be too soon for money rates throughout the world to adjust themselves to an appreciably lower level than has obtained in recent months. The lead in this movement should, of course, be taken by the U. S. A., and the Federal Reserve Bank of New York this week signalized the new trend in its policy by lowering its buy ing rate for bills in the open market * * * and by reducing the official redis tount rate. * * # The same financial review, in commenting upon the action of the Bank of England in raising its rate for rediscounts in September, 1929—a course which was criticized in many quarters in England because of the business depression already existng—expressed its views as to events in earlier months, saying: “The Bank of England, however, appeared to look farther than its critics. It saw that America was not “playing the game” demanded by the normal functioning of the international gold standard. In their attack upon the supposed evils of stock speculation, the Federal Reserve authorities were creating artificially stringent credit conditions in the United States, and were effectively sterilizing any gold that was ar riving in that country. Our own difficulties arose directly out of the abnormal con: ditions obtaining in the United States. * * = “The Bank rightly considered itself to be protecting the interests of Europe against those of the United States in resisting as long as was feasible the pressure on sterling exchange. *®* * * The most serious aspect of the high Bank rate, from the point of view of trade and industry as a whole, is that it strengthens the forces of :redit and price deflation which have been rampant throughout the gold standard world during the past ten years. The curtailment in purchasing power and the fall in prices iikely to follow the more restrictive credit policy must hamper business activity far more seriously than the relatively insignificant factor of the higher price paid for borrowed money. The circumstances which forced the Bank of England to impose virtually a panic rate when every index in the domestic situation calls for easier credit :onditions is a damning commentary on that intelligent cooperation between central banks which is supposed to be taking place and which should render the gold standard an effective and equitable basis of world values. The cooperation of this kind that has {Continued on page 27) Commodity Prices 26 Brcourageinent Utilizing the controls of rediscount to encourage sound methods Methods oy member banks should not be objected to on the ground of undue interference by reserve banks with member bank activities. Soundly managed member banks will usually find their discount applications accepted as a matter of course. It is only a member bank which is tending to deviate somewhat from the recognized principles of prudent banking, in undermining its liquidity and using borrowed reserve credit unduly for profit purposes, which may find its borrowing powers thus interfered with. By insisting that such a member bank adhere to sound principles and accepted standards and protect its solvency, the reserve banks are acting not only for the benefit of other banks but also for the stockholders and depositors of ‘he bank in question. COMMITTEE REPORT Recommendation The Committee recommends that, in passing upon an application for rediscount accommodation, a reserve bank should be guided by the general condition of the applying bank and the effect of granting the rediscount upon the safety of depositors as well as by the character of the paper which the applying bank tenders. It was recognized at the time the Federal Reserve Act was iramed that the outstanding volume of reserve credit could not be regulated in satisfactory fashion if the only method of influencing it were by changes in the rediscount rate. One reason is that rediscount applications rest upon the initiative of the member bank, and the rate is only one of the factors entering into the decision. There must be at times some way by which the reserve banks, upon their own initiative, can influence the volume of reserve credit more directly and more speedily than by a rate change. Open-Market Operations 2urpose Effect To make this possible, reserve banks were given the privilege of dealing in bills of exchange and government securities in the open narket—buying from and selling to other than member banks. They can, by making purchases, place money in the market, and by making sales, take money out of the market, thus producing an immediate ffect upon the outstanding volume of reserve credit. Counteracting Activities It is to be admitted that the open-market operations of the -eserve banks may frequently be countered by the activities of memser banks. Funds released to the market by purchases of acceptances ind government securities may be employed by member banks to reduce their discount indebtedness with the reserve banks. On the sther hand, funds withdrawn from the market by these operations may be offset by increased rediscounting. These processes, however, rake time to operate; hence, it would appear that on almost all occasions the reserve banks have it in their power to exercise an influence apon the outstanding quantity of reserve credit. {Continued on page 28) ARGUMENTS IN THE NEGATIVE taken place hitherto has failed dismally, and if it continues to make so poor a showing * * * the day will indeed be brought much nearer on which an impatient and axasperated Europe will relegate the gold standard to the relics of a barbarous age.” Undoubtedly acting by reason of European interest, the Financial Committee of ‘he League of Nations recommended last year that a special commission should be sonstituted to study the purchasing power of gold. This year it was decided the Financial Committee should proceed by having a subcommittee of its own members, supplemented by a number of financial experts, make the studies. The report of the Financial Committee respecting the subject, dated September 20, 1929, read: “This question of the purchasing power of gold is without any doubt a problem of the greatest importance. The fluctuations in the purchasing power of gold react on the level of prices and thus on the economic well-being of all countries of the world. Gold Inquiry “In certain circumstances, they may bring the most serious economic disturbances n their train. It is therefore fortunate that the League of Nations is examining the problem. It is indeed so vast, so complex and so fraught with difficulties that no nation alone could tackle it; only an international enquiry well prepared and methodically :arried out, such as the League of Nations is able to arrange. could contribute marerially to the solution of the problem. “During the year under review, the enquiry has been started. In agreement with the Council, the Financial Committee has appointed a delegation from amongst its swn members, to which certain other experts of international authority have been added. The delegation is partly composed of persons who are; or recently have been, at the head of Central Banks, persons connected with other branches of finance, and certain economists known all over the world. Its terms of reference are: ‘to examine and report upon the causes of fluctuations in the purchasing power of gold and their offect on the economic life of the nations.” The delegation held its first preliminary meeting at Geneva during the last month, and on that occasion drew up a programme of work.” The London Statist’s comments at the time of the first meeting of this body will further illustrate the points of view reflected in the quotations made above from its pages, and were: “Recent developments in the sphere of international credit have made it appear increasingly evident that some intelligent approach to a problem of the future value of gold will have to be made soon if the gold standard is not to be discredited as an adequate basis of world credit and world prices. It is, therefore, welcome news to hear that the special delegation set up by the Financial Committee of the League of Nations to look into this vast problem has held its first session. EE Their conclusions will almost certainly be based upon the contention that, unless there is some intelligent and coordinated effort on the part of the important central banks of the world to economize gold, the general level of world prices is almost bound to fall further during the next few decades. Gold economy has already made good progress insofar as gold is utilized for actual currency purposes. What remains to oe done now is to devise some means whereby gold can also be economized in respect to its utilization for the reserve requirements of central banks. * * "Continued on page 2N 28 Li It may be agreed that open-market operations on occasions are Banks competitive with member banks but the limitations upon the reserve banks’ open-market powers serve to soften some of the objections which otherwise might be made against their utilization. If in adding funds to or withdrawing them from business use through openmarket operations the reserve banks could disregard the special re-Juirements of the bill market and if they were under no obligation to heed the direction and volume of gold flows, there might be decided objection to bestowing such powers upon the reserve banks. As it is, however, the reserve banks’ open-market powers are usually of limited influence only, but they are important in that they serve to increase the effectiveness of other powers. COMMITTEE REPORT government Securities The bulk of open-market transactions are in government securities and bankers’ acceptances. The maintenance of a discount market ‘or foreign bills in New York, and the necessity of support of an mncompletely understood type of bill—the acceptance—require at times that rates of acceptances be fixed with a view to considerations other than the use of the acceptance as a credit volume control. It is essential, therefore, that there be some asset of unquestioned value available in substantial supply, which can be dealt in by reserve banks. Fortunately government securities, especially short-term Treasury Certificates, have met these tests. Without the right to buy ind sell governments, reserve banks would be unable to exercise any i1dequate control over the volume of reserve credit. Recommendation The Committee recommends that the present powers of the reserve hanks to engage in open-market operations should be continued. Note Issues In the early days of the banking reform movement remedial plans frequently were centered upon changes in note issue provisions. This emphasis upon note issue was due in large part to the fact that the cause of each major disturbance was manifested superficially oy a shortage of currency and attention was concentrated upon this rather than upon the credit developments which may have been responsible for the currency strain. Since, furthermore, the provision of currency was generally regarded as a government function, reform plans were careful to specify that the central institution’s 10tes should be issued only under certain tlearly indicated condiions. In the original Reserve Act attempt Was made to emphasize ‘he special serviceability of the new system to commerce and agriculture by providing that reserve notes should be issued only against he collateral of paper obtained by rediscounting. Original Provisions of Law Supply of Credit Not Collateral, {s Critical Factor The main consideration, however, as experience has shown, is 10t the collateral, but the character of operations member banks are encouraged to engage in and the adequacy of the mass of credit (Continued on page 30) ARGUMENTS IN THE NEGATIVE i “It is impossible, of course, to dissociate the work of these delegates of the Finan- Berk for International cial Committee of the League from that of the committee which, in pursuance of = = the decision of the Hague Conference, will draw up the statutes of the Bank for. aa - | International Settlements. * * * It rests largely with this organization com ~~ w% nittee whether the proposed bank is to be merely an agent for the collection an = b Tiel x | listribution of reparations, or whether it is ultimately to fill that ambitious place in 2, ot ‘he structure of world credit that has been intended for it by those far-seeing men “hy 5 ge) who drew the Young Plan. It is evident that if some super-national institution can Young Plan ve set up to act, in fact, as the central bank of central banks, a tremendous step forward will have been taken in rendering the problem of a national control of gold ‘ipe for solution. * * *» f In the middle of November, when an outline of the statutes prepared by the Organization Committee for the Bank for International Settlements became avail able, it was apparent that results tended toward the latter conception of the field for ‘he Bank. This was apparently the understanding of the Statist’s correspondent who was present in the city where the committee worked, for he wrote: “Since the bank is a complete novelty without anything like a precedent in existence—for it can be compared only to a very limited extent to the Federal Reserve Board; since it will presumably exist for generations, not only for the Young Plan’s scheme of reparation annuities (until 1988) but thereafter also; and since it is to be not merely a reparation bank but a sort of international clearing house, a perpetual liaison between the existing central banks, a dispenser of credit and agent for the development of world sommerce, and a money-maker for the benefit of its shareholders, who may ultimately be in greater part the general public—for these reasons and more besides the experts have had a difficult course to steer between those who want the bank to do great things and those who want it to do only small ones, between those who fear a super-bank’ and those who dread to let the chance go by of establishing what may be a really useful organization for the stability of the exchanges, and the facilitating of international monetary and business transactions.” The plan formulated during October and November for the Bank for International Settlements is to be considered bv a conference of governments at the Hague in January, 1930. Bank's Statutes Stability in the general price level is a proper aim for a central banking system. Since too rapid an increase in credit will, by experience and according to theory, cause prices to rise there would be 1 safeguard for the reserve system against political or other extraneous ‘nfluences if there were statutory recognition of the responsibility of ‘he system with respect to prices. Price Stability The argument is not based necessarily upon an assumption that the reserve system has complete power over price levels, but only that it has a large influence. Stability in the general price level does not mean absence of fluctuation in individual prices, nor that there will not be minor changes upward and downward in the gensral level; it means stability in prices as a whole without changes upward or down-(Continued on page 31) Meaning of Proposals Currency Restrictions Not Necessary Notes Against Bankers Bills Counter Money Notes Against Gold 0 COMMITTEE REPORT that is supplied. It has previously been argued that in encouraging the desirable type of member bank operations dependence should be placed largely on the condition of the member banks. So far as concerns the general encouragement given to business to expand or contract, what counts at any particular time is the amount of deposit credit reserve banks extend to member banks. It is these deposit accounts which constitute the legal reserves of member banks. The problem of the reserve banks is thus to insure that the total supply Of credit is properly adjusted to the country’s requirements. So far 1s note issues and currency are concerned, the problem is merely to relate these properly to the supply of credit. If the outstanding supply of credit is correct, any excessive supply of currency would be promptly returned to reserve banks. On the other hand, under liffering conditions, a deficient supply of circulating currency would de met by member banks requesting currency in place of their credit. (f the credits thus checked against are not provided contraction is liscouraged. By the use of their discount and open-market weapons the reserve banks must endeavor to provide the country with the proper supply of credit. It is not necessary, or in fact desirable, to impose special restrictions upon currency issuance. Advocates of such special restrictions appear to lose sight of the fact that credit control is the principal problem of the reserve banks and that in the regulation of their credit activities the reserve banks are provided with certain powers. These powers should not be confused by establishing any -estrictions which might interfere with the free exchange of currency ‘or credit. To prohibit the issuance of reserve notes against bankers bills would produce difficulties. Reserve banks in the interior districts subjected to currency demands may not be provided with an adejuate quantity of discounted paper to collateral note issues. To obain the necessary collateral they may now purchase bills in the cenral money markets. To prevent the use of this type of collateral 15 the security for reserve notes might interfere unduly with reserve banks whose territory does not include any large money market. At the present time, furthermore, the outstanding currency of :he country is very largely utilized for counter-money purposes. In ‘he future some of the present elements in the currency, such as rational bank notes, may be reduced in supply. To prevent the reserve banks from using bills as collateral for reserve issues might ‘hen interfere unduly with the ability of the reserve banks to provide ‘he country with the desirable quantity of currency. Permitting the issuance of reserve notes against the collateral of gold is now desirable for the purpose of simplifying the enforce-(Continued on page 32) ARGUMENTS IN THE NEGATIVE ward over such periods that true trends are discernible so far as the general level is in-Auenced by the volume of credit. Studies which have been made by statisticians and economists suggest that the average growth in the physical volume of business in the United States is about 4%, and that since 1921 a tendency of bank credit to grow at a higher rate than 44% 2 year has led to conditions recognized by the federal reserve system as requiring it to apply restraints, whereas growth in bank credit at a rate less than 414% has brought about a situation in which the federal reserve system has seen reason to make credit =asier. Discussions of these studies appear in the proceedings of the American Economic Association at its meeting of 1928. Those who argue that the federal reserve system should have an express duty with respect to the general price level see in the facts cor--esponding changes in the price level. At one of the legislative stages the bill which became the Federal Reserve Act provided that rediscount rates should be made, not only “to accommodate commerce and business,” the existing language, but also to “promote a stable price level.” As the 5ill became law, however, the latter phrase was omitted. Over a period of years bills have been introduced in Congress the effect of which would be to place in the law this smitted phrase. In 1926 and in 1928 hearings were held upon bills of this kind, in each instance ‘he bill being known by the name of its author, Congressman Strong. The principal srovision in the bill which was introduced in March. 1928, read as follows: Experience Proposals for Legislation Strong Bill “The federal reserve system shall use all the powers and authority now or hereafter’ possessed by it to maintain a stable gold standard; to promote the stability of -ommerce, industry, agriculture, and employment ; and a more stable purchasing power of the dollar, so far as such purposes may be accomplished by monetary and credit solicy. Relations and transactions with foreign banks shall not be inconsistent with the purposes expressed in this amendment.” In favor of the principle of such legislation there is support of a kind which cannot be ignored. For example, the executive officer of the Stable Money Association, testifying in 1926 at elaborate hearings held by the House Committee on Banking and Currency, said: “We are hoping to see the activities of the Reserve Board in the direc ion of preventing inflation and deflation extended, refined, perfected, legalized and nade mandatory on future boards, and made to operate ministerially and not left to discretion.” Stable Money 4 ssociation This organization has a membership which includes distinguished names in bank-‘ng, business, and economics. It does not concern itself with methods but emphasizes the ‘mportance of a stable general price level, A statement in its bulletin was: “There is probably no defect in the world’s economic organization more serious than the fact that our most common unit of value is a fixed weight of one commodity having a varying value. The resultant monetary instability brings in its train many serious economic and social results. The changing purchasing power of the dollar robs ane class of persons to the extent of billions of dollars within a few years only to give ‘Continued on page 331 32 Conclusions Summarized Recommendation Reserves of Member Banks Effects of Changes COMMITTEE REPORT ment of reserve provisions. While the discussion of this phase involves highly technical banking arrangements, it should be evident that no inflationary effect is produced by permitting the circulation of reserve notes against the full collateral of gold. The Committee has already stated that changes should not be made in the provisions of the Federal Reserve Act relating to the issuance of federal reserve notes solely for the purpose of restricting the lending powers of the reserve banks. It has observed that it is impossible to gauge in advance the exact amount of lending power the reserve banks may require at any one time; that it is not a matter of great consequence if the credit powers and resources of the reserve banks are at times even materially in excess of immediate requirements. It has taken the position that reserve banks should possess powers of currency and credit expansion sufficient to insure the largest measure of serviceability in any periods of strain. It has also concluded that the precise adaptation of the volume of reserve credit in all its phases, including note issues, to the requirements of trade should be regarded as a problem of administrative instead of legislative control. In the light of the foregoing the Committee recommends that the powers of issuance of currency against gold. bankers’ acceptances and eligible pader be continued. The Federal Reserve Act specifies the reserves which member banks must maintain against deposits. These reserves must be carried with the regional reserve banks. Because they are so concentrated, it has been possible to reduce materially the reserve requirements from those which were usual before the establishment of the system. Changes in the legal reserve requirements would affect either the total volume of credit the member banks can extend or the relative credit granting powers of the different classes of member banks. The desirability of encouraging an expansion in the aggregate volume of member bank credit by means of a general reduction in reserve requirements depends upon the need of business for more abundant supplies of credit. The reserve banks are in a position to meet any demands of the immediate future. The increase of lending powers of member banks that would result from a lowering of their reserve requirements would not coincide, save by accident, with any need of business for more credit. Once the country has become adjusted to certain reserve requirements it is undesirable to subject them to serious and sudden alteration. The extent to which such reduction would benefit the average bank may also be questioned. The increased lending power thereby acquired by any one bank would be offset to some extent, at least, by the intensified competition {Continued on page 34) ARGUMENTS IN THE NEGATIVE them to another class, which class is in turn robbed as time brings other changes in the value of the dollar.” The Swedish economist, Gustav Cassel, who has already been quoted above, is a prominent European exponent of the relation of the volume of credit and the price level. Writing as of the middle of November, 1929, for the Journal of the American Bankers Association he found in the course of prices in the United States a stability which had in fact been largely brought about by the federal reserve system. After com menting upon a rising tide of production in the United States from the end of 1927 and the trade cycle of which this tide was a part, Professor Cassel continued: “In one respect this trade cycle has been quite unique. It has not been accompanied by any rise of the general level of commodity prices. In all previous cases such a rise in prices has been a very conspicuous feature of the rising tide. “For instance during the boom of the first part of the seventies Sauerbeck’s index of wholesale prices for Great Britain was carried from 96 in 1870 to 111 in 1873 and thrown back to 96 in 1875. At the same time the group ‘Minerals’ showed an increase from 89 to 141 and thereupon a reduction to 101. Similarly the wave of prosperity at the end of the century carried the general level of prices in the period, 1896-1900, from 61 to 75 and the index of minerals from 63 to 108. “In the present case nothing of that kind has occurred. The general index of commodity prices of the United States Bureau of Labor statistics computed on the basis of 100 for 1926 never rose to more than 100.1, which was in September, 1928. For the most part of the period it stood in the neighborhood of 97 and for August, 1929, it was 97.7. The group ‘Metals and metal products’ has shown a slight increase up to a maximum of 106.4 for March and April, 1929. For August, however, the figure was down to 104.3. For building materials the index reached a maximum for March of 98.8 and was down in August at 96.7. “This is indeed an extraordinary experience. A regular and strong tide of industrial prosperity coupled with the most complete stability of commodity prices! From the fact that prices have not been inflated during the rising tide the very im portant result follows in that now no deflation is required. The level of commodity prices must be regarded as quite sound as it is and this gives a great strength to the present industrial situation. “Economists have given much attention to the question of why rising tides are regularly accompanied by a rise of the general level of prices. Some authors have held that such a rise was solely due to the action of the central bank which supplied the country to a too liberal extent with means of payment. With a more restrictive policy, they have said, it would always have been possible to keep the general level of prices constant and to avoid stimulating the boom that follows from a too abundant supply of means of payment. “Other authors have not been willing to go so far. They have believed that the upward movement of the trade cycle in itself possessed a power of raising the general level of prices and that it was impossible for a central bank to resist this power. However, it is clear that rising prices, particularly during a time of increased industrial activity, require a more abundant supply of means of payment, and if this supplv is not forthcoming the rise of prises must come. to a standstill, “The experience of the United States of the rising tide that has now come to an end has given the first practical decision in this very important question. As a matter of fact, the federal reserve system has succeeded in so restricting its supply of means of payment that an enhancement of the general level of prices has been avoided. This very remarkable result has been attained by an administering of the rates of discount ‘Continued on paae 35) 3: Recent Stability Trade Cycle Earlier Price Changes Recent Price Level Theories dmerican Accomplishment 4 Reductions Opposed Minor Adjustments Legislative Review Cash in Vault Rural Banks ‘tems Due From Other Banks Country Banks Reserve Required of Country Banks COMMITTEE REPORT of other banks whose lending powers would be similarly increased. Attention has already been directed to the fact that reserve percentages are now much less than they were prior to the enactment of the Federal Reserve Act. Just as the Committee has been opposed to general reductions in the reserves required of member banks when such reductions were proposed solely for the purpose of lowering the lending powers of reserve banks, so, too, it is opposed to such zeneral reductions when they are suggested solely for the purpose of ncreasing the lending powers of member banks. This is not to main-‘ain that we are opposed to any change in the reserves required of nember banks. We favor some early minor adjustments as indicated >elow and support a thorough legislative review of the whole sublect. There is room for minor adjustments in the existing reserve rejuirements if made for the sole purpose of removing existing inequalities in the schedules applying to the various classes of banks. One such apparent discrepancy is due to the fact that banks in rural sections are now obliged to carry in till relatively larger amounts of cash than banks in reserve and central reserve cities. Inasmuch as this cash in vault does not now count as reserve money, the country banks are obliged to keep larger actual percentages of reserve than the nominal requirements of the law. It seems only just, therefore, that member banks, in computing the deposits against which reserves must be carried, be permitted to deduct cash in vault from net demand deposits. This would result in no serious expansion of the lending powers of member banks such as would be occasioned by a proposal sometimes advanced, namely, that cash in vault should be counted as legal reserve—a proposal we do not support. There is another respect also in which country banks now feel that they are discriminated against. No bank may now utilize items due on demand from other banks to accomplish anything more than ‘0 offset amounts due to other banks. Banks which have an excess of ‘due from” items over “due to” items, can under present law receive 10 credit for the excess. This difference in the financial practices of country and of city banks has persisted to a greater extent than anicipated when the present reserve requirements were established. On this account it is recommended that banks be permitted to deduct tems “due on demand from other banks” from gross demand deposits instead of merely from amounts due other banks. There is on the other hand one respect in which country banks 10ld a present advantage over reserve city and central reserve city banks. Banks which hold an excess of items due on demand to other >anks over items due from other banks must observe the reserve per-“entage applying to their particular classification. On this account (Continued on page 36) ARGUMENTS IN THE NEGATIVE and of the supplementary means of credit policy that has been completely justified by ts results. “The federal reserve system has been criticized for its reduction of the rate of discount to 314 per cent in August, 1927. It has been said that the system thereby zave the first stimulus to the great period of stock exchange speculation. The business of the federal reserve system is, however, to supply the country with means of payment to such an extent that the general level of commodity prices is kept as stable as possible. “Now in the summer, 1927, the price index had come down to 94 and it was the obvious duty of the federal reserve system to take measures to bring back the price level in the neighborhood of the normal figure of 100. With more reason the system may be criticized for not having reduced the discount rate in March when the downward movement of the price index was already manifest enough. However, the effect of the reduction of the discount rate was a rise of the general level of prices. “During 1928 the rise proved so strong that it was necessary to raise the bank rate repeatedly. In July, 1928, the New York Federal Reserve Bank raised its rate to 5 percent, and this rate was sufficient from October onward to keep the commodity price index between 96 and 98. Thus on the whole the credit policy of the federal reserve system has proved to be correct. “No doubt it may be said that the aim of the system has not been to stabilize the general level of commodity prices but rather to fight the stock exchange specula-Hon. Banking policy, however, should be judged according to its results rather than by aims that may have been expressed by its leaders. As a matter of fact, the federal reserve system has proved, for the first time in economic history, that a central bank has the supply of means of payment sa completely under its control that it is perfectly able ro prevent a rising tide of industrial prosperity from causing any inflation of the currency. By this very remarkable accomplishment the federal reserve system has not only done a great service to present American economy but also set an example whicl will prove to be of the highest value for all countries and for all future times. “In comparison with this great achievement it is of secondary importance that the attitude of the federal reserve system with regard to stock exchange speculation has been a mistake. It is fundamentally a mistake of a central bank to try to regulate stock exchange business. A central bank has no other function and should never for a moment contemplate taking over any other function than that of keeping the purchas ing power of its currency in regard to commodities at the highest possible stability. “Any attempt to do anything more must either result in failure or lead the policy of the central bank in a false direction. In the present case the attempt to regulate the stock exchanece has failed in the most manifest manner ¥% % ** The Committee in effect proposes that federal reserve authorities in cooperation with member banks should attempt to discriminate among the uses to which credit is put. This should not be a function of the reserve system, the task of which is to see that there is a proper volume of sound credit and not to direct the uses to which it is to be put. When credit is made available by the reserve system and the banks in amounts greater than are proportionate to the needs of industry and commerce, the excess is very likely to find employment in the securities market, in the various forms of opera tion for which the securities market exists and for the performance of which it has very efficient mechanism. There are students and economists that maintain the federal "Continued on page 37) Rediscount Rates Banking Policy Judged by Results qttitude Toward Stock Market Speculation Origin of Soreculation 6 [ncrease from 7% to 10% Proposed Reserves of State Banks Review of Reserve Requirements Reserve Authorities Recommendation hea Extension of Membership Attractiveness of Membership Distribution of Earnings of Reserve Banks COMMITTEE REPORT a country institution is not obliged to maintain as high a reserve for bank deposits as a reserve city bank. In view of the recommendations above, which would have the effect of lowering country bank reserve requirements, it would be only equitable to require country banks to keep a ten percent reserve, instead of the present seven percent, against net deposits due to other banks. A factor which has engendered other inequalities is the difference in the reserve requirements of the various state laws, a number of which do not coincide with the federal statutes. State requirements generally should be correlated with the reserve provisions of the Federal Reserve Act. As indicated, the changes advocated above are put forward to remove discrepancies and to make the system somewhat more attractive to member banks. Their adoption would not confuse the situation pending a review of the whole subject of reserve schedules. Such a review has been proposed from time to time by federal reserve authorities and we support the suggestion, provided the review is undertaken in the first instance within the system itself. We believe that recommendations should be made by administrative officials of the system because of the complicated nature of the subject and the many ramifications of the effects of changes. The Committee recommends that based on the recommendations of administrative officials of the reserve system there should be a legislative revision of those provisions of the Federal Reserve Act relating to member bank reserves. Approximately one-third of the banks of the country belong to the federal reserve system. This membership includes all the national banks, some seventy-five hundred in number, as compulsory members, and some twelve hundred state banks as voluntary members. It is sometimes urged that steps should be taken to bring into the membership a larger number of state banks. From the standpoints either of increasing the resources of the reserve banks or of providing greater effectiveness in the distribution of credit to all localities, no additional membership is now urgently required. If, however, measures can be taken, which, without lowering membership standards, will make membership more attractive to present and prospective members, they should be given consideration. One such, we believe, is the distribution of reserve bank earnings in greater part to member banks. At present each reserve bank, after payment of a six percent dividend to member banks of its district, passes the balance of its Continued on page 38) ARGUMENTS IN THE NEGATIVE reserve system was responsible for such an excessive increase in credit in 1927. Accord: ing to one economist whose paper appears in the proceedings of the American Economic Association for 1928, the “reserve banks in the summer of 1927 undertook to aid European and American trade and agriculture by lowering their discount rates in the face of a member bank credit expansion exceeding 414% per annum and before the gold inflow had changed to an outflow. After this easing measure, three successive rate increases had to be enacted before the rate of member bank credit expansion declined in the late summer to less than 415%. * * * The securities market was now in a mood to fight for its credit by paying higher rates.” Even if there were not an element of injustice in the reserve system, which intentionally or unintentionally had given rise to a use of credit in securities markets, altering its position to an attitude of hostility and discrimination, there would remain the question of the possibilities of success in any attempts at discrimination in the uses of such a fluid thing as credit. Though the person who obtains bank credit may use it for an approved purpose, its very use involves its being passed to another person who is necessarily free to apply it to any purpose he may see fit. References to speculation generally relate to buying and selling on the stock market, and this is particularly true just now by reason of recent events. It is to be remembered, however, that banking operations in connection with stock market transactions are carried on with such efficiency that there is not the effect upon the credit situation that would accompany a similar volume of transactions in some other direction. A study which was made in 1926, when brokers’ demand loans in New York were under $2,500,000,000, resulted in a conclusion that brokers’ loans might rise to six billion or even more without a serious effect upon money rates in New York and without more than a slight effect upon the lending capacity of the American banking system as a whole. This statement was based upon the efficiency which has been built up to handle transactions in securities. The author of this study, of course, was speaking only of the effects upon the credit available for other fields; he remarked upon the dangers from such a situation if for any reason any considerable portion of such demand loans hac to be liquidated at any particular time. In August, 1929, brokers’ demand loans in New York in fact exceeded six billion. They reached their high point, of $6,804,000,000, on October 2, fluctuated for several weeks, and then dropped by large amounts, on December 24, 1929, standing at $2,886,000,000 as against $4,538,000,000 on December 26, 1928. The weekly averages for months of 1929 to October and the weekly figures to December 24 were: [anuary —-—-—ecee——-- $5,408,000,000 October 16_______. $6,801,000,000 February —._..-——--- 5,555,000,000 October 23... --—.. 6,634,000,000 March ee coe. . 3,679,000,000 October 30-___._._. 5,538,000,000 April _._ ee 5,477,000,000 November 1,882,000,000 May ————_—————_——- 5,491,000,000 November 4,172,000,000 June ——o___——_—___ 5,383,000,000 November 3,587,000,000 July oo oeoeeoo-— 5,841,000,000 November 3,450,000,000 August ____. . ~~ 6,069,000,000 December 2,945,000,000 September ____ _ 6,540,000,000 December 2,991,000,000 October 2 e_____ 6,804,000,000 December 2,943,000,000 October 9 ____.__ 6,713,000,000 December 2,886,000,000 It is possible to point out that the figures for brokers’ loans are not so accurate 1s they might be, to reflect the call loans made to brokers in connection with their transactions for their customers, but expressly include loans made to dealers on securi: ties they hold in the course of marketing new issues, and to remark upon defects in the figures from several other points of view, but whatever the defects of the figures for Machinery of Market Brokers’ Loans Dut-of-T own Banks Continued on page 3 18 Larger Dividends Earlier Reasons for Limitation Rarnings from Competitive Dperations Decrease in Franchise Tax (nterest to Member Banks »n Their Reserves Impracticability COMMITTEE REPORT net earnings to surplus until that equals one hundred percent of its subscribed capital (which is two hundred percent of the present paid in capital). After that, its net earnings go ten percent to surplus and ninety percent to the government as a franchise tax. In recommending that reserve banks, under adequate safeguards, be permitted to declare larger dividends to member banks, there is no purpose to make the capital subscriptions of the member banks extraordinarily profitable. An increase of a full one percent in the dividend rate would increase the distribution to a bank with a capital and surplus of $100,000 by only $30. While the financial advantage of the suggested change would not be great, it is believed that it would be attractive and would be fair in principle. It would stimulate good will and, with the experience which has been gained n reserve operation, would not result in deviation from sound procedure in order merely to enlarge earnings of reserve banks. The earlier reasons for limiting dividends on stockholdings in reserve banks to six percent, such as the fear of undue emphasis upon earntngs and the fear of stimulating competition by the reserve banks with their member banks, are no longer applicable. Under present law there have been years of small earnings and there is likelihood of their recurrence. No pressure to earn the dividend now permitted has been exerted. Six percent, is today not as reasonable a measure Of proper expectancy from such an investment as in earlier years. Future operations of the reserve system may require a larger development of the reserve banks’ open-market dealings. Member >anks which may meet, even to a slight extent, competition on this ground from the reserve banks have a right to share in the profits erived from such operations. Even though the monetary return to the member banks be small in amount, it is thought to be important n principle that the member banks be permitted a larger participaion in the earnings of the reserve banks; such larger participation should be so devised as to permit of the amassing of ample surpluses by the reserve banks. In other words, the larger participation in sarnings of reserve banks should be given to member banks principally through a proportionate reduction of the earnings now required to be paid to the federal government. Permitting an increase in the dividend rate or provision for extra dividends would serve to overcome a frequent proposal that interest be paid on reserve balances, which we do not favor. No method has been proposed by which interest could be safely dffered by reserve banks upon member balances. At the beginning of the current year member bank reserve accounts were nearly two and 1 half billions of dollars. Two percent of this sum would amount to (Continued on page 40) ARGUMENTS IN THE NEGATIVE sther purposes they serve to bring out clearly the extent in which banks outside of New York still put out funds in New York as loans on securities. These loans in New York on call reached $1,897,000,000 on September 18, 1929, and remained over $1,700, 100,000 to October 23. They then dropped rapidly and on November 27 stood at £638.000,000. So large a volume of “country money” on call in the New York market raises 1 question if the federal reserve system has brought about some of the. fundamental -hanges which its supporters undoubtedly expected. Before the reserve system was organized there was much criticism of a situation which resulted in out-of-town banks keeping a large aggregate of reserves in New York, where these funds were predominantly lent on call. It was argued that this concentration of funds caused dangers which had been actually experienced when conditions arose which led the out-of-town yanks to withdraw suddenly any considerable portion of their funds. In the reserve system many of its supporters saw means for preventing this concentration of bank ‘unds, through the transfer of reserves to the respective reserve banks and ways for utilization of other funds nearer home. Yet, in 1929, the aggregate of funds of out 2f-town banks on call in New York was larger than at any time before the reserve system came into existence. Banking is a business. It is privately owned and privately operated. In the interest of those who deal with banks, and of the public at large, banks have been subjected to public regulation for ‘he purpose of maintaining their solvency. The federal reserve system was created to aid the banks in performing their functions, both in ‘heir own interest and in the interest of the public. For the reserve banks to attempt to discriminate among the uses of credit, to refuse to srant rediscount of eligible paper, and to take other steps of a similar ind would seem to involve interference in the management of banks which is foreign to the proper functions of central banking. The regulation of banks for purposes of safety is covered by statutes dealing with the subject and compliance with these statutes is enforced by the Comptroller of the Currency in the case of national banks and by state banking commissioners for state banks. So far as the federal reserve system intervenes in the affairs of its member banks it is therefore dealing with their banking policies with which the law does not otherwise concern itself. There may well be question whether or not such intervention should occur at all, as well as further question whether or not, if it is to occur, it should occur as a matter of discretion, being unaccompanied by responsibility for results. The distinction between attention of the reserve system to banking policy— and, incidentally some of the difficulties which arise, in the nature of things—and the attention of the system to credit policy appears in the following passage in the annua: ceport of the Federal Reserve Board for 1928: “Influence exerted by a reserve bank on the loan and investment policy of an ndividual member bank is ordinarily exercised only over banks that are borrowers from the reserve banks. It is in the nature of banking supervision, and is akin in many respects to the bank examination function of the reserve system. This phase of reserve bank policy may be called banking policy, as distinguished from credit policy, which Jeals with more general developments of banking in relation to the credit needs of the country. Banking policy ordinarily has but limited effect on credit conditions as a whole, because no class of borrowers is confined for accommodation to any single bank or group of banks. and because of the general mobility of bank credit. When one mem-(Continued on daae 41) Banking Policy Federal Reserve Ronrd Banking Policy Offsetting Factor recommendation Recommendation Importance of Management “ COMMITTEE REPORT almost fifty millions of dollars. Last year, after meeting dividend and surplus requirements, the net earnings of the reserve banks amounted to two and a half million dollars, and in the previous year to only two hundred fifty thousand dollars. Thus it is seen that the interest which could be paid upon reserve balances would be negligible. Last year, for. instance, only one-tenth of one percent could have been so paid. In rejecting the interest payment proposal attention should be directed to the fact that under the Reserve Act the reserve percentages have been reduced by amounts calculated to be sufficient to offset the loss of interest earned .on reserve balances when carried with other banks. The Committee recommends that: (a) Member banks should be given a larger participation in earnings of reserve banks with proportionate reduction in earnings required to be paid to the federal government. (6) The reserve system should maintain the policy of refusal ‘o pay interest to member banks upon their reserve balances. In this report the Committee has endeavored to stress as a.factor of utmost importance the necessity for capable management throughout the system. Upon capacity for good management and its increasing efficiency as distinguished from legislative devices, must now rest the well-being of the system and its ability to realize the high purposes for which it was created in the interest of all the people. No banking system is self-operating, no matter how perfect its structure, nor how smooth its working parts. This is especially true of central or supplementary banking systems; and peculiarly so of the federal reserve system. Jnusual Problems. Function of Reserve Board Certain unusual management problems are encountered in the reserve system. The special needs of twelve, largely autonomous, districts must be met, while at the same time the policies and activities of district organizations must be blended into a national policy conceived in the interest of long-sustained business stability. In the direction of meeting these two-fold requirements the Federal Reserve Act provides for a balanced system of administration, wherein the activities and policies of the district banks are integrated with those of the Federal Reserve Board. The function of coordinating he activities in a national way must rest with the Federal Reserve Board. It is obvious that the Board cannot concern itself in any high degree with the minutiz of operation. The Board could not acquire such knowledge of local conditions as is required in passing upon the large number of rediscount applications which may be made by Continued on page 42) ARGUMENTS IN THE NEGATIVE ber bank, for example, on its own initiative or at the instance of the reserve bank, repays indebtedness to the reserve bank by withdrawing funds lent on the stock =xchange, the effect may be to cause the borrower to seek accommodation at another bank, member or nonmember, that is not indebted to the reserve bank. For the purpose of meeting the demand thus transferred without borrowing at the reserve bank, the bank to which the borrower applies may borrow from a member bank, which in turn may borrow from the reserve bank. As the result of this series of transactions there would be no reduction in security loans or in borrowings at the reserve bank. The importance of banking policy lies in promoting the soundness of member banks, and cooperation of these banks with the federal reserve system in carrying out banking policy is essential to the maintenance of sound banking conditions. For influencing general credit conditions, however, the federal reserve system relies on credit policy rather than on banking policy. “Credit policy is essentially impersonal and finds expression chiefly through the influence that the federal reserve system may exert on the volume and cost of bank credit through its policy of sales or purchases in the open market and through discount rates on member-bank borrowings and buying rates on acceptances. In determining upon credit policy the federal reserve system is always under the necessity of balancing the advantages and disadvantages that are likely to follow a given course of action. Low money rates may have a favorable effect on domestic business, but at the same time may stimulate speculation in securities, commodities, or real estate. High money rates, on the other hand, may exert a moderating influence on speculation, but at the same time may result in a higher cost of credit to all lines of business, and thus be detrimental to commerce and industry; ultimately they may draw gold from abroad, which would tend to ease the domestic situation. It is impossible to foresee all the offects of a credit policy and difficult to appraise them even after they have developed. [t is certain, however, that the federal reserve system must steer its course with -eference to broader developments and longer time objectives than day-to-day or month-to-month changes in any particular line of credit. Principal among such objec: :ives are the continuous provision of credit at reasonable cost in amounts adequate for ‘he requirements of trade and industry and the safeguarding of our gold reserves which are held in trust to meet future needs, against unduly rapid absorption through sxpansion of credit.” A major purpose in the creation of the federal reserve system was to substitute an elastic currency for the inelastic currency which had been used since the establishment of national banks. The issue of currency against gold and against paper bought by the reserve banks in the open market introduces inelasticity. The Federal Reserve Act as it became law contemplated the issue of currency by the reserve banks against paper arising from commercial transactions which were financed by member banks. When commerce expanded and there were correspondingly larger needs for currency, the currency would expand in amount, and when activities in commerce and trade declined the volume of currency would contract through the self-liquidating character of the paper upon which it was based. In other words, the needs of business as those needs actually existed, and not as they were assumed by any board or official, would be the significant factor in determining the volume of currency. Of course, the plan provided for a percentage of gold as a reserve against this currency and afforded means for a holder of the notes to have them redeemed in gold. When notes are issued against gold itself, however, they have no necessary rela: tion to the trend of business and instead of being so secured that they are promptly Credit Policy Elastic Currency Original Law Gold Certificates Continued on dage 43) Y. COMMITTEE REPORT nearly nine thousand member banks. It can take action within the district only on important matters of an inter-district or national ~haracter. District Management Board’s Task Board Membership Strong Board No matter how judiciously the Board functions, however, effisient administration of the reserve system depends to an important extent upon the activities of the district directorates and their officers. Their functions as regards the determination of rediscount rates and open-market operations are of the greatest importance, and the large degree of autonomy wisely permitted them must be zealously guarded in the interest of proper servicing of district situations. It is encouraging that the district directors, representative of industry and commerce, as well as of banking, are developing special knowledge and experience in these and other system matters. Emphasis upon the necessity of an efficient district administration does not mean that an able Federal Reserve Board is not of the highest importance. Although the Board’s executive powers are exercised chiefly in emergency situations, its very detachment from daily district administration and its sources of general information, both domestic and foreign, furnish a background which should prove of great value in judging financial trends and in exercising ‘ts persuasive, interpretative and harmonizing influences which are always imperative in the continuous task of adapting the total volume of reserve credit to the requirements of the country as a whole. Some objection is encountered to increasing the attractiveness of Board membership on the ground that in the interest of district dank autonomy a weak Board is actually to be preferred. There is also another view that it is impracticable to develop the conditions ‘hat are conducive to the existence of a strong Board and that the nevitable had better be expected. This committee, however, does aot accept the opinion that even with the most competent district management the system can be properly administered without the assistance of a strong and able Board. Even a cursory review of the broad powers of the Board indicates that membership upon it offers the opportunity for public service of the greatest importance ‘0 the whole country and that relatively simple adjustments will ‘ncrease its attractiveness to able men. It must not be overlooked that a weak Board would be more inclined to interfere with the autonomy of the reserve banks than a strong Board, and that the policies it would favor would be more likely to work injury to the country than those sponsored by a capable Board. The specific recommendations listed below are intended to assist in developing the dignity and independence of the Board and to improve its working coniitions. Continued on page 44) ARGUMENTS IN THE NEGATIVE and automatically retired they are in effect gold certificates, or receipts for gold, the ‘etirement of which may have no relation to the course of business. 42 Similarly, notes issued against paper purchased by reserve banks in the open market have no connection to the actual requirements of the business of the country out may depend only upon the reserve banks’ desire to increase their earnings by =mploying a portion of their assets which otherwise would be idle. The questions which may properly be raised about continuance of authority to issue currency notes against gold illustrate the problems which exist through con tinuation of the war-time amendments of the Federal Reserve Act into a period which may fairly be described as remote from war conditions. The amendment permitting the use of gold was made through the Act of June 21, 1917, and was recommended dy the Federal Reserve Board in the annual report presented to Congress in February 1917. In making the recommendation the Reserve Board dwelt upon the desirability of “mobilizing” the gold supply. The nature of this amendment should be understood, in order that the propriety of reexamination now may be realized. Before the amendment was made, a reserve dank in order to get reserve notes had to turn over to the reserve agent 100% of :ommercial paper from its portfolio and as it issued the notes it obtained it had te srovide 40% additional in gold. Consequently, there was behind the notes in circula don 140% of direct security. The currency could be expanded, consequently, only as *he commercial paper owned by the reserve banks expanded. But in war financing bank deposits would grow without relation to commercial paper. Therefore, the Reserve Act was amended not only to allow issue of notes against paper secured by government obligations but against gold. This meant that, instead of having behind them 100% of commercial paper and 40% of gold, notes could have behind them 10% of gold and 60% of paper secured by government obligations and/or commercial paper and/or gold. The result was to open the way to the war inflation, according to some critics, and according to well qualified experts to transfer anywhere from half tc ‘hree-quarters of a billion in gold to the reserve banks. The open-market operations of the federal reserve system have as one of their purposes the building up in the United States of a market comparable with the markets in which central banks in Europe operate. The results raise some question about the desirability of continuation of the preferences which have been given to acceptances and some of the developments leave doubt about the propriety of the issue of currency against acceptances purchased in the open market by reserve banks. The considerations which are to be weighed may be suggested by quotations from a report made in 1922 Jy a committee of national bank examiners, as follows: “The new regulations which have been issued by the Federal Reserve Board in connection with the use of bankers’ acceptances covering import and export transactions emphasize the necessity of more carefully considering the basis upon which acceptance credits are being granted by the various member banks. In spite of the comprehensive regulations issued by the Federal Reserve Board regarding this phase of banking practice, there have been numerous and flagrant violations upon the part of the large as well as the small banks. * * * Perhaps the most frequent abuse in connection with granting acceptance facilities against import and export transactions is found in the continued renewals given by some banks to their customers, * * * When the Federal Reserve Board announced its intention of showing greater leniency toward rediscounting by the federal reserve banks of renewals, in connection with transactions affected by the worldwide depression in business, many banks took advantage of this to too great and unintended an extent, and advances which were originally made by acceptance credits, but which should long since have been either liquidated Continued on page 45) Votes Against Open-Market Purchases Reserve Board Security behind Notec Imendment of 1917 Bank Acceptances dbuses Foreipn Trade “ COMMITTEE REPORT he " The position: of Governor of the Board should be enhanced. The Board cannot possibly be expected to meet the anticipations of the framers of the Reserve Act while it continues to include the Secretary of the Treasury as its Chairman, overshadowing the Govsrnor. Indeed, we are convinced of the inadvisability of including the Secretary of the Treasury as a member of the Board. On general principles, the exclusion of Treasury representation on the Reserve Board would seem to be desirable because the Treasury is a frequent borrower and is consequently prone to attach major importance in the determination of credit policies to the maintenance >f easy conditions in the money market that will facilitate the placing »f loans at minimum rates. This consideration, as is well known, was riven undue weight for a year and more after the Armistice and, apparently, though with less serious consequences, on some subsequent yccasions. Reasons for Independence Chairmanship of Board This proposal—to free the Reserve Board from Treasury influance—it should be clearly understood, is not urged on the ground that influence has commonly been exerted in support of unwise policies. By no means! Treasury influence at times undoubtedly has yeen a factor in securing effective action without unreasonable delay. Even so, it is evident that representation of the Treasury on the Board has not been conducive to realization of that personal responsibility, independence of action, and freedom from administration influence, which the country has the right to expect. It is hardly going too far to say that since the establishment of the reserve system the Treasury Department to a considerable extent has overshadowed the Board and has tended, consciously or unconsciously, to reduce the Board to the status of a departmental bureau. As members of the Cabinet, holding an historic office of great responsibility, it is to be presumed that Secretaries of the Treasury will be in the future, as they have- been in the past, men of wide experience and strong character, enjoying widespread public confidence. It is precisely for this reason that, if a strong Board as a whole is to be secured, the Secretary of the Treasury should not be ane of its members. More particularly, the Chairmanship of the Secretary must obviously render the post of Governor of the Board less attractive to a man of executive capacity and energetic temperament. In the judgment of your Committee, the dominant personality on the Board should be the Governor and he, not the Secretary of the Treasury, should be its Chairman. The elimination of the Secretary of the Treasury from membership, or at least from the Chairmanship, will surely assist in making the position of Governor of the Board more (Continued on page 46) ARGUMENTS IN THE NEGATIVE or turned into a direct loan, were carried along by the banks by means of continued renewals of acceptances. A national bank should not commit itself regarding renewals of acceptances at the time of the opening of the credit. Each application for a renewal should be judged upon its own merits at the maturity of the acceptance. It is found, however, that some banks have agreed to one or more renewals at the time of the opening of the credit. There have been a number of cases where acceptances have been renewed as many as five or six times against imports or exports of both raw materials and finished products. The tendency in such cases is for the bank to furnish working :apital to concerns by means of acceptance credits rather than by making them 2 direct loan. * * * Some member banks have not taken definite steps in connectior with granting acceptance facilities against export transactions to assure themselves that there were actual and definite shipments involved. * * * “In a general way the abuses which have come up in connection with the granting of acceptance facilities against export and import transactions apply in the case of credits governing domestic acceptances. * * * There have been instances when domestic acceptances have been given with practically no attention paid to the question of the accepting bank being secured during the life of the acceptance. * * * Domestic accept: ance credits have also been used for the purpose of securing continued finance. * * * “The above is a summary of the most common abuse of acceptances found in the recent examination of national banks. In view of the excellent material which has been issued by the Federal Reserve Board and the American Acceptance Council on the correct method of financing domestic and foreign business by means of acceptances, it would be quite useless to reiterate the clear and concise suggestions made by them. * * * In spite of this, scarcely an examination is made of use of the larger accepting banks without finding some violations of the intent and purpose of the Federal Reserve Act in connection with acceptances. It is very difficult for the federal reserve banks to discriminate between acceptances which are drawn in accordance with the law and those which are not, when member bank acceptances are offered to them for re discount. Furthermore, it is extremely awkward, if not impossible, for them to make inquiries regarding the transaction actually behind an acceptance when the bill is presented to them for rediscount through a third party, as it would necessarily have to he ”’ The preferences given to bankers’ acceptances by the federal reserve system have included liberal support through purchase. In the years from 1916 to 1923 there was a marked tendency for the reserve banks to hold approximately one-half of these acceptances which were outstanding. Since 1923 the volume of outstanding bankers acceptances has grown from the neighborhood of $650,000,000 to $1,284,000,000 at the end of 1928 and $1,541,000,000 at the end of October, 1929—the latest date for which these figures are yet available, although it is estimated that at the end of November, 1929, the total outstanding was about $1,600,000,000. At the end of 1928 the holdings purchased in open market by federal reserve banks for their own account and the account of foreign correspondents were $816,000,000, of which 489,000,000 were for their own account. On November 27, 1929, the total holding: were $766,000,000, of which $257,000,000 were for the account of the reserve banks themselves—this latter fizure having grown to $392,000,000 on December 31. 1929 The government receives such services from the reserve banking system that there is no valid reason why the government, which contributes none of the capital, should take any part of the earnings of the reserve banks. Under the Federal Reserve Act the Secretary of the Treasury may use the reserve banks as the government's fiscal agents. ‘The Secretary utilized this permission and the (Continued on page 47° 4 Domestic Trade Bankers’ Acceptances Outstanding Earnings Fiscal Agency Operations Relationship to Treasury Comptroller of Currency Building for Board © COMMITTEE REPORT distinguished and influential. Enhancement of the importance of this office is necessary if men of the highest capacity are to be secured and if Board membership in general is to be more attractive. This proposal is not to be understood to involve any reflection upon the present Secretary of the Treasury. On the contrary, his ability and the undoubted high character of his public service stamp his administration as one of the ablest the country has ever enjoyed. It is hecause of his very incumbency that such a proposal can be made without the restraints that would be necessary were a lesser man in slice. There should, however, be some rather close interrelationship between the Federal Reserve Board and the Treasury Department, and it is inevitable that in the very nature of things there would be. To be independent is not to be less cooperative. There could, and undoubtedly would exist a close contact and splendid cooperation between the Department and the Board, without dissolution of the official connection as we suggest. There are important banks of issue abroad which have no representatives of the government upon their governing boards. The Committee has reviewed a current proposal that, instead of the Secretary of the Treasury being a member of the Board, the Undersecretary should sit, but is convinced that this is not a practical suggestion. The Committee is convinced of the undesirability of the Secretary’s membership on the Board. The Committee is willng to concede that legislation to this end might await the test of further experience, but believes that an early change in the Chairnanship of the Board is desirable. This Committee is further of the opinion that there should be a thoroughgoing survey of the office of Comptroller of the Currency and its relationships to the Treasury Department and to the Federal Reserve Board to see if it would not be feasible to make such a transfer as would bring the duties and activities of that office under the purview of the Federal Reserve Board rather than continue them under the Treasury. While recognizing the force of some: of the practical difficulties, the Committee nevertheless feels that more is to be said for the divorce of the office of the Comptroller of the Currency from the Treasury Department than against that proposi-Hon. As a further means of developing the independent status of the Board, that body should be adequately housed in a special building of its own. This building should provide adequate facilities for the Board’s analytical and research work, now being done at a distance from the Treasury Building where the Board is housed. Continued on page 481 ARGUMENTS IN THE NEGATIVE reserve banks became fiscal agents at the beginning of 1916; they have since continued to act in this capacity. It is not necessary to refer now to the services of the reserve hanks in war financing. When the extent of the government’s present financial opera: tions are considered, the extent and value of the services performed by the reserve hanks without cost to the government are obvious. The annual report of the Federal Reserve Board for 1925 contains a brief description of the functions performed as Ascal agents, as follows: “The fiscal-agency operations of the federal reserve banks include the sale and delivery of government securities newly issued, the redemption of securities called for payment or matured, denominational exchanges, interchanges of coupon and registered bonds, transfers of ownership, purchases of securities in the open market for government account, maintenance of government deposit accounts with designated deposi-“aries, and the custody of government securities. Acting as depositaries for the Treasury, the reserve banks pay government checks, warrants, and coupons, collect checks and non-cash items for the account of the Treasury, withdraw government deposits from depositary banks, transfer funds by telegraph, and render services formerly rendered through the subtreasury offices, including the replacing exchange, and redemption of United States paper currency and coin. Expenses incurred by the reserve banks directly in connection with the issue of new securities are reimbursed by the Treasury, but all other expenses incurred in the discharge of their fiscal-agency func tions are absorbed in the operating costs of the reserve banks.” The circumstance that in 1928 these reimbursable expenses were $371,000 suggests that the nonreimbursable expenses properly chargeable to the costs of the fiscal-agency ‘unction were a substantial portion of the total expenses of the reserve banks for al purposes, of $26,904,000. The facts about earnings of reserve banks and their disposition appear in a recent address of the governor of the Boston Reserve Bank at a meeting of its member banks. Although there was advocacy only of a distribution of a larger part of excess earnings to member banks, the following quotations are taken from this address, because the principles involved in fact support the cutting off of payment of any part to the government : “I have noticed a sort of a feeling of unrest on the part of some of our member sanks, due to what they term the expense of membership in the system. I take it the sanks of New England may have to pay more on their deposits than banks in other sections. Now, the member banks know that the reserve balances which they carry with the federal reserve bank yield them no interest. If those balances were carriec with other banks they would get ‘interest. They inquire why it is that the federa seserve bank cannot pay them interest. I will tell you. “It is because this bank is a reserve bank. You carry, on an average, about 5% of all your deposits as a reserve with this bank. In the old days a national bank located outside of a reserve or central reserve city had to carry 6% lawful money in its own vault, on which it got no interest. You carry about 5% with the federal reserve bank [t would take at least $3,000,000 a year for us to pay you 2% interest on your reserve Jeposits. Ordinarily that is more than we make. We have had an exceptionally good year this year, but our total net earnings this year will hardly exceed $2,900,000 o1 $3,000,000. That includes a dividend of about $600,000, * * * “At the same time, there is a matter of gross injustice which member banks may call in a temperate way to the attention of the Federal Reserve Board and the Congress of the United States in the hope that they can get it remedied. The government, as Senator Glass has pointed out, has not one dollar of proprietary interest in the federal Description Cost Bostom Reserve Bank Amount of Reserves Dwnership of Reserve Banks 4’ Continued on page 49) 18 COMMITTEE REPORT Salaries of Board salaries are now palpably inadequate and incommensurate with those which necessarily must be paid to both the reserve agents and the governors of the district banks. Some of the latter receive three and four times as much as members of the Federal Reserve Board. Their compensation must approach, at least, the salaries paid in the field of general banking, from which federal reserve management must be drawn. This Committee recommends that salaries be increased from the present figure of $12,000 to a minimum of $30,000 per annum for the Governor of the Board and $25,000 for the other members. Objection to these salary increases should not be made on account of conditions existing in the general governmental service. It is to be noted that salaries as well as other expenses of the Board are defrayed, as would be the cost of a separate building, from assessments upon the reserve banks and not upon the United States Treasury. Recommendation Recommendation Recommendation Recommendation The Committee recommends that provision be made to increase the attractiveness of Board membership and develod the influence ind independence of the Board by: (a) Enhancing the importance of the position of Governor of the Board by making him Chairman. (b) Housing the Board in a building of its own. (¢) Increasing the salaries of the Governor and members of the Federal Reserve Board to compare more favorably with the salaries paid the principal administrative officers of the reserve banks. Thoroughgoing consideration should be given to the relations of the Treasury to the Federal Reserve Board, especially with respect to discontinuing the membership of the Secretary on the Board, as well as to the desirability of a change in the status of the office of the Comptroller of the Currency to bring that office more directly under the purview of the Board. This Committee has insisted that the efficiency of the reserve system must depend upon wise administration. On this account, it has opposed the employment of legislative devices to restrict narrowly the powers of the reserve banks. Public Relations The grant of liberal powers to the reserve banks necessarily requires that there be complete recognition by them of their public responsibilities. Neither the public in general, nor Congress, will be content to rely solely upon the probability that the administration will always be composed of far-sighted men. The activities of the reserve banks must be such as to insure confidence in the system’s general policies. Such confidence cannot be gained unless the proper type of criticism is stimulated. (Continued on paae 50) ARGUMENTS IN THE NEGATIVE reserve bank. The federal reserve bank belongs to its member banks. It is all right, of course, that the federal reserve banks should be under very strict governmental regulation, but in other respects they are very much like the national banks. The national banks operate under government charters and the federal reserve bank operates under a government charter; a charter signed in each case bv the Comptroller of the Currency. “The law provides that you may have 6% cumulative dividends on your stock and requires your federal reserve bank to build up its surplus and when the surplus reaches a certain point, that is, after the surplus is equal to the subscribed capital or double the paid-in capital, the government gets 909% of all the rest of the earnings of the federal reserve bank, the remaining 10% going to surplus. “Every dollar with which the federal reserve bank operates, as to capital stock, and almost every dollar as to deposits, comes from the member banks. The government deposits are small and temporary in character, and their value is far more than offset by the actual out-of-pocket expense incurred by the federal reserve bank in acting as fiscal agent for the government. Senator Glass has pointed out that the government is tremendously compensated for anything it may have done for the federal reserve banks. The earnings of the federal reserve bank properly belong to you, and I believe if you stand up for your rights you are going to get them. I know the banks in othe: sections of the country feel as you do, and there are other sections that seem to have more political power than New England. “There is another matter. The Federal Reserve Act provides that in the event of liquidation of a federal reserve bank, the member banks get back their deposits, they get back what they have paid in on the capital stock, and all the rest of the assets go to the Government of the United States. Now, we have approximately $10,800,000 paid-in capital. This bank can be dissolved only by an act of Congress or be liquidated for violation of law. It cannot be liquidated by vote of the stockholders. “It may continue in business as long as Congress permits; Congress could put us out of business tomorrow. What I want to point out is this: In the event of liquidation of this bank, you would get back approximately $10,800,000. The Government of the United States would get about $20,000,000. That money, that surplus, belongs to you; it has been made with money. furnished by you, and it has been made principally bv transactions which this bank had with vou. Present Distribution nf Earnings Liquidation “That fund is the result of members dealing with this bank. Now, I ask, where is the justice of the great Government of the United States saying that your share in the earnings of your own bank, every dollar of the stock of which is owned by you, shall be treated in that way, that a certain amount shall be carried to surplus regardless of whether the bank needs the surplus or not, and that everything else shall go to the government and that in the event of liquidation all the accumulated orofits and sur plus shall go to the government? * * * “Let us analyze this situation today. I estimate that we may have net earnings of approximately $3,000,000 this year. We have already paid you approximately $300, 000 in dividends for the first six months of this year. In addition, under the present law, you will get $300,000 more in dividends. We must, as the law stands, accumulate a surplus equal to 100% of our subscribed capital, or $21,600,000 at this time. That means that we shall carry between $1,800,000 and $2,000,000 to surplus. There is no occasion for carrying $2,000,000 more to surplus. Yet, under the present law, when we pay you a semi-annual dividend of $300,000 on December 31, we must carry at least $1,800,000 more to surplus and pay the remainder, or about $600,000, to the Government of the United States as a franchise tax, * * * (Continued on page 51) Boston Bank in 1929 50 COMMITTEE REPORT Inforaptien To insure the desirable type of criticism, it is essential that the Troggs Srivisten public be provided with ample information relative to the activities Policies of the reserve banks. The amount of valuable credit information, statistical and otherwise, supplied by the federal reserve system is far beyond that furnished by foreign central banks. For this accomplishment, the reserve administration is to be commended. But in providing the country with official or semi-official explanations of the basic purposes of major policies, much yet remains to be done. The scheme of twelve regional banks and the division of responsibility between the Federal Reserve Board and the district officials increases the difficulty of supplying the public with the desired interpretations of reserve policies. It is to be recognized that various officials may support the same measure from different points of view and that to secure agreement upon the factors to be emphasized may create discord within the system. The further fact that a certain measure might accomplish one useful purpose, but not precisely that originally avowed. must also serve to retard explanation. Difficulties Recognized Possibilities if Difficulties Not Overcome But despite the difficulties attendant upon complete statements of intent, no secretive policy will succeed in securing approval for the reposal in the reserve administration of a large degree of discretionary power. An ill-informed public will demand precise statutory limitations. Without ample knowledge, public criticism cannot be intelligent and beneficial. The more abundant the information and the sharper drawn the issues, the less fertile becomes the field in which charges of ulterior motives can be sown. When ignorance abounds, the arena belongs to the careless. the radical. and the irresponsible. [11-Advised Critics With general discussion of reserve problems lifted to a higher plane, ill-advised critics will find it more difficult to secure an audience of intelligent men. Neither should there be too great apprehension regarding the inevitability of frequent reversals of policy. Thoughtful men understand the imponderable character of most credit problems and they will not demand that there be complete -onsistency between the views of different reserve officials as enunciated on various occasions. Reversals of Policy The Additional Information Needed The explanations and interpretations advanced in the Federal Reserve Bulletin, the annual reports of the Federal Reserve Board, and by various reserve officials in Congressional hearings, have been highly serviceable and beneficial. What appears to be required further is that on irregular occasions of important decisions, men who occupy prominent administrative positions in the system should seek to clarify their motives. By this it is not meant that there should be a newspaper release on every action. But in some recognized way, [Continued on tage SN ARGUMENTS IN THE NEGATIVE “What has been the history of this government franchise tax? Up to January 1, 1929, the Government of the United States has received as franchise tax from the federal reserve banks $142,826,000, but those payments have not been at all regular. In 1920 the banks paid the government something over $60,000,000; in 1921 they paid the government something over $59,000,000; in 1922 and 1923 they fell off; in 1924 the banks all told paid the government $113,000; in 1925 they paid the government $59,000, and last year, although the total net earnings of the federal reserve banks were over $32,000,000, the government received a franchise tax of $2,500,000, which was paid by the six smaller banks in the system. Except for the year 1926, when it paid $45,000, the Federal Reserve Bank of Boston has paid no franchise tax to the government since 1923. “Last year the net earnings of the Federal Reserve Bank of New York were over $11,000,000. The amount left after payment of $2,700,000 in dividends was not enough to build up its surplus to the required amount and consequently it did not pay anything to the government. The Federal Reserve Bank of Minneapolis, smallest in the system, made net earnings of over $600,000 and, because it had a large surplus in proportion to its capital, it paid a franchise tax of $390,000 to the government.” There are sound business reasons for continuing the membership of the Secretary of the Treasury on the Federal Reserve Board and for keeping the office of the Comptroller of the Currency independent sf the Board. The federal reserve banks are commonly described as bankers’ banks—i. e., banks which render services for banks. As has been pointed out above, however, they perform services for the federal government. It is accordingly appropriate, and in accordance with business practice, that the Treasury should have representation in the direction of the federal reserve system. It is to be remembered, too, that there is public advantage in having the fiscal operations of the government handled by the reserve banks and that, if the Secretary of the Treasury ceased to be a member of the Reserve Board, he might refuse to continue this arrangement. There is further reason in the circumstance that the notes issued by the reserve banks are obligations of the United States government. With six appointed members and only two ex-officio,—the Secretary of the Treasury and the Comptroller of the Currency,—the Board is certainly in a position to base its decisions upon consideration of the general public interest. The Federal Reserve Board is a committee and subject to all the defects of com: mittee action in matters requiring executive action. The difficulty on the executive side does not stop with the Board, either; for whatever advantages are found in the present reserve system it should be recognized that responsibility is diffused. On the other hand, the task of examination and supervision of the great system of national banks calls for executive action, which often has to be quick and decisive, if the interests of depositors and the public are to be safeguarded to the fullest possible extent. This was emphasized by the Comptroller of the Currency who was in office in 1923 and who then appeared before a joint Congressional committee. In the course of his testimony he spoke as follows with respect to the office he held: “The office of the Comptroller of the Currency is one of the most independent in the government service. It is a part of the Treasury organization, but the Comptroller reports directly to Congress, and his appointment is made by the President on the recommendation of the Secretary of the Treasury, to be confirmed by the Senate, and his term is not necessarily or usually concurrent with that of the Secretary of the Treasury. This arrangement was made with the obvious purpose of protecting the (Continued on page 53) 5 Franchise Taxes New York Bank Minneapolis Bank Secretary of Treasury Comptroller of Currency Treasury Representation Comptroller of Currency Executive Action (independence of Comptroller 2 Exchange of Information ~ Within Svstem Recommendation I OG CL ens COMMITTEE REPORT such as by addresses of the officials of the Federal Reserve Board and of the district banks, sufficient information should be given about the determining factors in the situation so that intelligent men may be able to engage in frank and friendly criticism. And more than this is necessary. It would be evidently advantageous if as a regular feature of reserve bank practice full and detailed publicity were given to the purposes and results of various policies after the situation with which they were concerned had developed to such a point as would make such a statement practicable. There is need also for greater exchange of information and clear opinion within the system itself. The regional reserve bank should be thoroughly familiar with the policies of the Federal Reserve Board and the reasons therefor. Only thus can they be in a position to chart their own course and to enlighten the member banks. Not otherwise may there be expected the fullest comprehension of problems and solutions, with wholehearted and intelligent cooperation. There may be some justification upon occasions for not taking the entire public into confidence; there is little for lack of frankness between the Board and the reserve banks. The Committee concludes that the grant of liberal legislative powers to the Reserve Board and to the reserve banks imposes upon them the responsibility of providing the public, not only with an ample amount of factual and statistical credit information, but also with the means of determining the purposes of major policies. The Committee recommends that the management of the reserve system should provide the public with such an ample amount of information as to operations and policies as will permit the formation of sound public opinion. H. A. WHEELER, Chairman SEWELL L. AVERY Jurius H. BARNES A. J. BROSSEAU WALTER S. BUCKLIN CHARLES S. CALWELL W. F. GEPHART C. T. JAFFRAY JoHN G. LONSDALE W. S. McLucas R. GoobwyYN RHEIT PAUL SHOUP ARGUMENTS IN THE NEGATIVE national banks with a leadership which would be independent of undue influence from other government authority. The Comptroller of the Currency should, in the govern mental organization, be the representative and the partisan of the national banks. “The suggestion for the abolition of the office of the Comptroller of the Currency, or the transfer of the essential functions of that office to the control of the Federal Reserve Board, would at one stroke deprive the national banking system of its inde pendent representation in the fiscal plan of the government. # # * The operation of the national banking system is under the most rigid supervision. When a group of individuals subject themselves to this strict supervision and to the laws requiring a rigid observance of fixed principles, it is to be presumed that they should receive some compensating advantages and that such privileges as they receive should be of a permanent nature and not be taken away from them in a summary manner. The inde pendent representation in the government's fiscal scheme by the national banks was part of the original contract and while, for the good of the country at large, the com pulsory entrance of the national banks into the federal reserve system can be justified nothing can justify their reduction from their former independent status to one of complete subserviency to an institution which is, in its nature, part privately and part governmentally controlled. * * * “Assuming that the powers of the Comptroller of the Currency should be trans ferred to the Reserve Board, or that the Comptroller or someone acting in a similas capacity should be under the direction of the Board, the anomalous condition would be immediately created by which a trustee relationship would be entered into in which the trustee would have a preferential claim against the trust which was administered. With the powers of the Comptroller of the Currency exercised under the direction of or by the Federal Reserve Board, we would have a federal reserve system composed of one group, the state banks, entirely relieved of supervisory regulation and anothe: group, the national banks, subjected to the supervisorv regulation of its principa’ creditor. * * * “The unadvertised but chief function of the office of the Comptroller of the Currency is keeping banks from failing, and not operating receiverships. To accomplish this the federal reserve system is the most valuable instrument conceivable, but to use this instrument for the protection of the banking situation the Comptroller personally and through his examiners frequently approaches the federal reserve banks as an applicant for the extension of credit. Can the Comptroller, in this situation, successfully sit on both sides of the counter and represent the needy bank and protect the assets of the federal reserve bank from which he is trying to borrow? * * * “The office of the Comptroller of the Currency has to be organized for quick and summary decisions. A mob of depositors is never complacent enough to await the deliberations of a town meeting. If the Federal Reserve Board is composed of men of the ability and force of character that have typified this Board in the past, each member in self-respect will insist upon expressing himself and impressing his personality on any proposed methods for relief, and the fire wagon, if it arrives at all, will approach in orderly and dignified fashion after the last wisps of smoke have floated away and the ashes cooled. Please understand that this statement would still be made if absolute assurance could be given that the ablest men in the world would alwavs sit on this Board. ‘Boards is Boards.” ” National Banks’ Representative Consequences of Teyansfer Chief Function ing 25 members or less is entitled to one delegate¥and for each 200 additional members in excess of 25 one additional delegate, but no organization is entitled to more than ten delegates.] No vote shall be valid unless received by the Secretary within 45 days of the date of the mailing of the pamphlet. In connection with its vote each organization member may file such explanation, comment, or opinion as it may desire. In forwarding the pamphlet it shall be the duty of the Secretary to advise each organization member of the date on which the right to register votes expires. SECTION 9. If before the expiration of 4 days from the date the pamphlet was sent out votes representing more than two-thirds of the voting strength of the organization membership are registered in favor of the propositions submitted or any of them, the Secretary shall immediately certify that fact to the Board of Directors. ‘Thereupon, the propositions so approved shall be recorded as having been adopted by the Chamber and it shall be the duty of the Board of Directors to take such steps as may be necessary to make effective the action taken. If at the expiration of 45 days one-third of the voting strength of the Chamber has been recorded and two-thirds of the vote thus cast representing at least twenty (20) states is in favor of the propositions submitted or any of them, the Secretary shall so certify to the Board of Directors. Thereupon the proposition so approved shall be recorded as having been adopted by the Chamber and it shall be the duty of the Board to make effective the action taken. SECTION 10. On a question submitted to referendum no organization member found to have voted with the minority shall be deemed to impair its standing in this Chamber by adhering to its position or by continuing its efforts in support thereof. SECTION 11. Upon approval by the Council or Board of Directors a member may be permitted by petition to place upon the program for consideration at the annual meeting a quesion which has not been submitted in advance dy mail as hereinbefore provided for, but such 1 question shall not be considered if one-third of the delegates present object thereto, and its submission by mail as hereinbefore provided for shall be ordered on the recording of a twothirds vote in favor of that method of procedure. SECTION 12. ACTION AT MEETING. (a) On all questions before a meeting of this Chamber, on which a vote is taken viva voce, or by division, each duly accredited delegate from an organization member shall be entitled to one vote in person. A yea and nay vote may >e ordered on any question upon demand of one-fourth of the delegates present officially rep--esenting such organization members and on such ballot only the votes of said members shall be counted. On all yea and nay votes each organization member shall be entitled to as many votes as there are delegates present representing said member, subject to the provisions of Article VI, Section 3. All yea and nay votes shall be fully recorded and published in the proceedings. An affirmative vote of two-thirds shall be necessary to carry the approval of the Chamber of Commerce of the United States of America ipon any proposition or resolution which may appear upon the official program or be added thereto as provided for by these By-Laws: Provided, That such a vote shall be void and of no effect unless the attendance registered at the meeting shall represent one-third of the voting strength of the Chamber from at least twenty 20) states. (b) The list of questions to be considered at each annual meeting shall be mailed to each member at least 30 days in advance of such meeting. (c) No question shall be received from an organization member for submission to the Chamber at the annual meeting within 40 days of the date of said annual meeting, except in case of emergency and unless by a two-thirds vote of the Board of Directors. ~ on = { ix EE YT nN I oy) J b> n ho! —y - Xo - n 1bers or less is entitled to one deler each 200 additional members in 5 one additional delegate, but no 1 is entitled to more than ten dele-» vote shall be valid unless received ctary within 45 days of the date of ; of the pamphlet. In connection te each organization member may tplanation, comment, or opinion as re. rding the pamphlet it shall be the Secretary to advise each organizar of the date on which the right to £s expires. 9. If before the expiration of 45 the date the pamphlet was sent out senting more than two-thirds of the igth of the organization membership ed in favor of the propositions subny of them, the Secretary shall imertify that fact to the Board of Di-‘hereupon, the propositions so ap-1be recorded as having been adopted mber and it shall be the duty of the lirectors to take such steps as may be » make effective the action taken. expiration of 45 days one-third of strength of the Chamber has been id two-thirds of the vote thus cast yr at least twenty (20) states is in € propositions submitted or any of scretary shall so certify to the Board s. ‘Thereupon the proposition so hall be recorded as having been the Chamber and it shall be the duty 1 to make effective the action taken. 0. On a question submitted to reforganization member found to have the minority shall be deemed to tanding in this Chamber by adherosition or by continuing its efforts hereof. . Upon approval by the Council Directors a member may be peretition to place upon the program for consideration at the annual meeting a quesrion which has not been submitted in advance by mail as hereinbefore provided for, but such a question shall not be considered if one-third of the delegates present object thereto, and its submission by mail as hereinbefore provided for shall be ordered on the recording of a twothirds vote in favor of that method of procedure. SECTION 12. ACTION AT MEETING. (a) On all questions before a meeting of this Chamber, on which a vote is taken viva voce, or by division, each duly accredited delegate ‘rom an organization member shall be entitled 0 one vote in person. A yea and nay vote may be ordered on any question upon demand of ne-fourth of the delegates present officially rep-"esenting such organization members and on uch ballot only the votes of said members shall »e counted. On all yea and nay votes each orzanization member shall be entitled to as many rotes as there are delegates present representing iaid member, subject to the provisions of Article VI, Section 3. All yea and nay votes shall be fully recorded and published in the proceedings. An affirmative vote of two-thirds shall be nec. :ssary to carry the approval of the Chamber of Commerce of the United States of America 1pon any proposition or resolution which may ippear upon the official program or be added hereto as provided for by these By-Laws: Provided, That such a vote shall be void and of 10 effect unless the attendance registered at the neeting shall represent one-third of the voting strength of the Chamber from at least twenty '20) states. (b) The list of questions to be considered 1t each annual meeting shall be mailed to each member at least 30 days in advance of such meeting. (c) No question shall be received from an organization member for submission to the Chamber at the annual meeting within 40 days of the date of said annual meeting, except in case of emergency and unless by a two-thirds vote of the Board of Directors. ’