Speech

X-3231 EFFICIENCY AND ECONOMY IN ADMINISTRATION OF FEDERAL RESERVE BANKS. the program for this Conference, which was sent out about a m°nth ago, the first subject listed for discussion is "Efficiency and Economy i Administration of Federal Reserve Banks". This subject, n alvfav ys an important one, has added significance at this time because of karSQs which have been given wide circulation and publicity that there SS kQen an amazing waste of public money in the increase of salaries and thft * expenditures of the Federal Reserve Banks. These charges are, no doubt ' r®sponsible for the resolution recently adopted by the United States Sonata . directing the Federal Reserve Board to inform the Senate of the dumber t * officers and employees, together with their respective salaries, Of ne federal Reserve Bank of New York, as well as of the other Federal HqoQvw _ Q Banks, and the expenditures made by each "Branch Bank" in the ^Qctin 011 of public buildings and the general expenses in the administra- tion of each Federal Reserve Bank, and how much of the net earnings have b®en uai, , * Aa t0 the United States as a franchise tax. In the opinion of the Board it is unfortunate that matters of this should assume a political aspect or that they should become the of a Congressional resolution, The Board has kept Congress ^formed # u these matters ever since the Banks were organized late in year In each Annual Report information regarding salaries has S^ven in detail, names only being omitted. An exhibit has been made t Of ach federal Reserve Bank, showing the number of officers by grades, X-3231 - 2 - saiaries paid to each, the total number of employees, the average salary ^ the aggregate of all salaries paid. Information equally explicit has given from year to year regarding the building operations of the severa ®ral Reserve Banks. The Board has endeavored to make clear the character and functions of the Federal Reserve Banks and to distinguish ®tween matters which come under the supervision and control of the ®spective boards of directors and under the general supervision of the Federal Reserve Board. some time past, a persistent propaganda has been conducted, which calculated to mislead the public and which apparently is designed to the System and its management into disrepute. The powers and duties of the directors of Federal Reserve Banks are defined in Section 4 of the ^Qderal r reserve Act. Responsibility for the management of these Banks rests Br' Primarily and directly upon thorn and upon their duly appointed offi CQ and agents. The law requires that any compensation that may bo provi(j j , ft oy boards of directors for directors, officers or employees shall 00 subject to the approval of the Federal Reserve Board. The Board ha not • s all cases approved salaries which have been voted by directors Q(*0ral Reserve Banks, but as a rule the recommendations of the ^Qctor s with respect to salaries have been approved by the Board, some- times ' PQrhap , with some reluctance. s Th 8 tB> °a rd has taken the position, however, that as the directors are y responsible for the administration of the Banks, much considera- should be given to their views as to the rate of compensation necessary to SQc r® honest, efficient and careful management. In its Annual Report for year lgis, the 3oard pointed out tnat particularly with respect junior officers and employees salaries must be paid approximating -3- x-3231 « 'e Salaries paid by large member banks in the cities where the e(Wal Reserve "ban'is are located. If, in order to reduce expenses, policy should be adopted of making the Federal Reserve banks 6re training schools for bank officers, it is hardly possible, ec&use of the frequent changes involved, that the banks would have degree of efficiency in administration and smoothness of operatii on which f>, cnev would have if the compensation paid be sufficiently liberal r®tain the services of trained and capable Ten. Board does not for a moment believe that the directors of y ^e<ieral Reserve bank in fixing salaries or in authorizing expendi- ture s • in developing the business have been actuated by any desire to e the Government of £he revenue which it is entitled to receive under fv, terms of Section 7 of the Federal Reserve Act, and most suredly the Federal Reserve Board would not be a party to any such ^snaking. federal Reserve banks are not, strictly speaking, Government s^itutions. .The government owns no stock in them, i-hey are not Ported by appropriations made by Congress, they are subject to ^axation on their real estate just as national banks are and theij. Payments out of earnings to the Government as a franchise tax at ti mes greatly exceed all taxes paid by an equal number of the lar^eof c national banks, state banks and trust companies in the bnited St a^e s* ^he lirectors of Federal Reserve banks are edven such in- ^idefif -» ai Powers as shall be necessary to carry on the business of - Within the limitations prescribed by the Federal Reserve Act x-323'i k - - ^^ "shall perform the duties usually appertaining to the office of directors of hanking associations and all such duties as are pre- scribed by i ". aw ^here can he no question, therefore, as to the authority of Erectors of Federal Reserve banks to provide their institutions with suitable banking quarters, ^s has been repeatedly pointed out to C Crr\ ?ress, it has been impossible to lease adequate quarters, and Gilding operctions have, therefore, become necessary. The Senate Solution, to which allusion has been m*de, refers to the Federal Reserve banks as "branches". The Federal Reserve Pet ,• however, **** it very plain that these banks are not branches^ Their in- Pendent powers are defined in Section 4 and authority to establish raftche of their own is given them in Section 3- a The buildings acquired or constructed by Federal reserve ar® in no sense public buildings. The funds necessary for tljgi w, acquisition or construction were not appropriated by Congress, the title i vested in the United States but in the Federal reserve s not and they are not exempt from taxation as all public buildings ar®» "but are expressly made liable to state and local taxation. The officer of Federal reserve banks are not officers of the United States, and s are not public officials any more than officers of national banks 6 Public officials. Federal reserve banks, like national banks, are 0rganiz a under the laws <f the United States and each are supervised e ^ officials; the Federal reserve banks by the Federal Reserve °ard and the national banks by the Comptroller of the Currency. - 5 - Both rO masses are impressed with duties to the public, "but it is true ^at Federal reserve banks, by reason of their supervisory powers over meinter banks and the nature of their business, and by reason of the 8li * Nation of the element of competition, have more of the attributes of SOVftTn cental institutions than national banks. n °rder to render efficient service to the member banks and through thsiQ , 0 the public and to perform the functions imposed upon them by the federal reserve banks are obliged to make large expenditures which n°t imposed upon national banks, state banks and trust copipanies, / not wish to impair in any degree the efficiency of the Federal *erve banks, but deems it important, nevertheless, to call-your to the general business depression now prevailing throughout the ntion to the reaction which has taken place during the past eighteen Months, oouanttrrvy , to the smaller volume of earning assets now carried by the FedA m •« 5 r©serve banks and the consequent reduction in the earnings, and to the change in public sentiment with regard to large expenditures. Board urges you, therefore, to do all in your power to eliminate SSary expense and to conduct the business of ycur respective titutions in such a manner as to give no reasonable grounds for any cW ge f extravagance and waste, Secent Developments in the Par Clearance System and Suggested Changes in Methods. ijiu Board desires to e ll your attention to the persistent Slti°n on the part of a large number of non-member b^nks of the c°Utitr y to the Federal reserve par clearance system and to the impedi- ng . v nich have been thrown in the way of making this system universal il1 its ts scope. The injunction which was obtains scn.a eighteen months ago by ' state "banks in Georgia against the Federal Reserve B ank of Atlanta is still in effect. The Federal reserve bank was successful in removing the case from the state court to the United States District Court and W°n a clear cut decision in that court. It won also in the United States Cir • rcuu Court of Appeals, but the decision of the United States Supreme C°Urt 'Vas to the effect that if the allegations made by the complainants C0Uld sustained they would be entitled to relief. By reason of the lsnguage Used in the opinion of the Supreme Court this decision has been ^presented to the public as a sweeping victory for the complainants ajid _ . 85 a condemnation by the highest court of the land of the policy of Federal reserve banks with respect to collections. a- matter of fact, however, the case has merely been remanded to tlle tfoited States District Court in Georgia for trial on its merits, and ct f av°Table outcome is anticipated by the bank^s Counsel, with whom is aSsociated Hon. John W. Davis, foixuai- Solicitor General of the United Sf ates ^ more recently United States Embassador to Great Britain. This doubtless come again before the Supreme Court of the United States a in regular course after it has been decided by the United States ^ s t rW n Circuit ACt Court and the United States/Court of Appeals. t is necessary, however, to call your attention to the fact that 6 legislatures of the States of Louisiana, Mississippi, Alabama, 'Pen essee, Georgia, Florida and North Carolina have enacted laws which make i difficult, if not impossible, to oblige non-member banks to t at Par, and while there is doubt as to the constitutionality of -i aws, a separate test 'will have to be made in each instance. x-323'i - 7 - Th ' s will involve great expense and perhaps many years will elapse before the cases can bo decided finally. ^ is not the purpose of the Board to recommend any immediate change n Policy, for Cour.se). i- anxious that nothing be done to confuse the have already been defined in the case now pending in the ^ t ed States District Court in Georgia, but after that court has decided ase the Board may suggest a modification of the present plan. It s opportune, therefore, to discuss this question on the present CCasion an<i request the Federal R-eserve A gents and G-overnors of the banks St + ue ir separate meetings to devote such time as may be necessary for ft f u1 Xl discussion .of this subject. Action 16 of the Federal Reserve Act authorizes the Federal Reserve to exercise the functions of a clearing house for the Federal banks or to designate a Federal reserve bank to exercise such furicti and also to require each such bank to exercise the functions of ^ ClQa ttrmg house for its member banks. In the development of the present the Board has attempted to establish such a clearing house in each In many of the large cities there are banks which are not members of th? Ccal clearing house, but which are permitted to use some clearing ho US° mQaiber bank as a clearing agent. Such banks are, however, obliged to c°ftform to all the rules and regulations which govern clearing house Member v , , , oanks. Non-member banks which refuse to remit at par for checks (irawn 0Ji them have been availing themselves of the facilities of the ** reserve par clearance system through their member bank correspondent It ta ^ teen suggested to the Board by the Governors of two Federal reserve baiHc* +tvn,a t in view of the legislation in the states above named and of X-3231 - o - possible similar legislation in ether states, it would be well to take ^vantage of another provision • in Section l6, which authorizes the Sderal Reserve Board to fix the charge which may be imposed for the service of clearing or collection rendered by the Federal reserve bank, y authorizing Federal reserve banks to advise their member banks that on and axxer a certain date a compensatory charge of so much per one ^^red dollars will be imposed against the member banks on all checks u Dy or originating with a non-member bank whose name is not on the Par li , st Under such a regulation non-member banks which refuse to lend their °P®ration to the Federal reserve collection system would have to pay for v 0 benefits derived by them from that collection system, for member would hardly be willing to collect checks for such non-member banks UlllQg paid for doing so at rates equal to those charged by the Federal r°S9rve banks. The Board requests that the Governors and Federal Reserve A gents in eparate sessions discuss this proposition in all its bearings. •, i Principles Governing the Discount Rate,. Control over discount rates, as exercised by the Federal reserve bankg and Federal Reserve Board, is one of the most important and -reach- i ng powers ever delegated by Congress to another instrumentality, grant ranks with the power given the Interstate Commerce Commission to rQg . Ul railroad rates. While it is necessary that powers of this kind h S 0 uld be vested in a few hands they should be used with discretion a&d the e*fect of a change in rate should be carefully considered before the ^ange i s made< x-3231 - 9 - The principle is well established that in theory the Federal rQserve bank discount rate should be slightly in excess of current rates. There has been much discussion of the reductions which have ^6en made in discount rates during the last six months and disregarding °Pinio f the prejudiced and the uninformed, let us consider the ns 0 °nUicting views of some whose opinions are worthy of attention and TQ o Pect. The quotations which follow are from a symposium recently PUbll8hed in a financial journal. ^ New York banker and an Eastern economist expressed themselves therein as follows" "The basic idea in this policy of keeping the scount rate above the market is that reserve bank money is for bbaann°9 kkP t tti < o nal and unusual use - that it is not the province of a reserve 0 supply a substantial part of the ordinary funds employed in the in ordinary times. Of course, it is expected that a reserve bank shall mat a*e money for its stockholders and shall employ such of its funds as be necessary to meet expenses and to pay dividends. One provision of eral Reserve Act, permitting open market operations on the part of the ral reserve banks, was designed to give them discretion in this 1 wh0ther the member banks should rediscount with them or not. But the p ... 0 ion of a reserve bank is a very peculiar one. If an ordinary bank "0alC9s a louaa n n » checlfe come in against it, as a consequence of the loan, which eet out of its reserve unless it should happen that simultaneously ll8w dep 0sAi+t 'S are made with it of checks drawn on other banks. Loans made by a ®serve bank, however, need not lead to drains on its reserve. When, 111 ^kirig i & a* loan, it issues its notes or gives a deposit credit to a re- ^8counti ^ng bank, that note or a transfer of that deposit credit will be *CcePte<i as ultimate payment by some other institution. The deposit x-3231 - 10 - labilities of the reserve bank count as ultimate reserve for the other banks of the country, and the volume of reserve money is consequently ^creased through a mere increase in the deposit liabilities of the reserve bank. With an increase in the volume of reserves of the member there is an immediate tendency to a reduction in the general leV0l of discount rates throughout the country, placing them below the *6vel which open market conditions would otherwise call for and creating te®ptation for the uneconomical use of bank funds. There is parti-~ (JUlarl y a temptation to use bank funds in an excessive degree for capital ^Urposes, and for the ordinary- banks of the country, misled by the artif• 1cial excess of liquid cash, to tie up too great a part of their in non-liquid form. The reserve bank which makes rediscount low, therefore, instead of performing its function of increas- 110 liquidity of the banking system, tends rather to destroy liquidity •A Chicago banker reiterates the opinion expressed by him several 015s that the Federal reserve banks and the Federal Reserve Board ought Proceed very slowly in lowering the present rates. He anticipates "that +hf nere i considerable danger, in case the rates are lowered s Pitately, of a renewed inflation,with a consequent reaction more xhan the one through which we are now passing. He takes the yiol ( ^at in general it is a complete mistake to have the rediscount vie ratwe i s lower than the prevailing market rates for commercial loans, for if bank s are enabled to rediscount their paper at a lower rate than they theujgg-j v VQs receive, obviously a continued inflation is profitable to them. Hi . s Pinion coincides with the views of the Eastern banker and the komist above quoted and he stresses the point that our large gold VQ is, after all, due only to the fact that gold is not being x-3231 - 11 - Clrculated at the present moment and that much of this gold is likely to out of the country as soon as there is a change in the balances of •V e' He concurs, also, in the view that, a certain amount of the gold hich the Federal reserve banks have at present is merely held, in a sense, n trust for Europe. He regards as entirely fallacious the argument made y adherents of a policy of levering rediscount rates that such action is DJ-e because the reserve ratio: and gold accumulations of the Federal SSrVe banks justify a relaxation of the official rates, A Milwaukee banker who contends that the policy should be in accord with th money market tendency, states that "The main point made by those ^Pposed a "to the lowering of Federal reserve discount rates is that the re- Coittrt rate should always be above the market rate. This is laid down a Seneral principle to which there are no exceptions. Federal reserve are only emergency funds, it is said, and it should not be possible for K ^ a^s to make a profit by rediscounting at a lower rate than the market'.' °alis attention to the fact that "When the demand for credit is excessive Cr°asing, the reserve banks should move into a dominating position by sin6 their rates above the market rates for money. But the same neces- sity f r discouraging resort to Federal reserve banks does not exist when d9mand for credit slows down, loans are being paid_ off and reserves accumulating % What has happened as a result of the recent lowering of count rates? Has it resulted in an expansion of loans or reinflation? *ot at a11' On the other hand, the published records show that member banks h&ve °ntinued to reduce their rediscounts and borrowings and to do this v r°Ught pressure upon their customers to liquidate. Customers who '^Vq oluntarily liquidated and got themselves back into good financial Coii<Hti are offered lower rates on new loans. This, of course, is an tive to those who have not done so to liquidate. This is the X-3231 - 12 - practi i Ca way m which the leadership of the Federal reserve banks in reducir,, their r + a axes has worked. There has not been the slightest tendency toward re- ^wed, i nfnl ation. Rather the tendency has been to further liquidation." This banker ac ®rees that general principle of keeping Federal reserve discount 4 ^ t rates above the market rate for money is sound, but it does admit XcoPtions as in the present condition of things- The present Federal re~ serve 0 xcy i accord with the tendency of the money market and it is s in * to v . any 86fl ° now it has had or will have but a wholesome and constructive eff*ct. In a recent publication a well-known banker and economist has as- 88rte* that . ne best of the money market in this country is the rate 011 -credit loans to borrowers from two or more banks, and not the rate a c cc©ptance as in England, The volume of line-of-credit loans in s> S Cou t rv is far larger than the volume of bank acceptance credits, but it be fi 4 ~ ed whQther the rates on such loans are as competitive as bank ePtan CQ are atQs. Bank acceptance rates are fixed in the open market and Public . * Line-of-credit loans have no open market and there are no blishecl rate t Line-of-credit loans are not as competitive as they may Lar 551311 f im common;ly maintains a line of credit only at its own bank. 68 °0rPorati W 8 usual3-y iiave lines of credit not only with their home banks \*ith x Sec kS in financial centers, not necessarily because they can Ur ^ 1 Qty Qj, He rates,but because no one bank wants to take care of ..their full Qd ^ r thQse reasons it is to be doubted whether line-of-credit loans r4l a* PqaJ an inde* of money market tendencies as the bank acceptance $ The i at+A ^he ?9caUse thi rePresent the minimum rates for th? best class of paper H /r ift of ti™ 18 S°' th6y indicat0 far beyond their actual, money volume V? "to 5 ne market. The present rate on eligible bank acceptances of ^ P e c t e d T1^3 a better indication of *hat is taking place and what Which refi 0pQn raon9y market than rates on line-of-credit *°ii.ect market condition more slowly,M - 13 - x-3231 Another Chicago banker takjs an extremely conservative view. He would liv xiH:e to see "-any of the so-called "v?ar amendments" to the Federal ^serve ^Co repealed and states that as the law stands, ,7nothing but the a§e and wisdom of the management prevents i£ from becoming a disastrous sng ij^g n inflation*. He objects particularly to the amendment which forces Member w v ^^s to carry their entire lawful reserves in the form of collected dances • with the Federal reserve banks and "believes thpt this amendment, which regards as practically demonetizing gold, is most dangerous in n°riEai ti imes. Referring to the complaints which have been made that the ^icultnr i Uy utirleal odppisotsritiec tsis hathvee bcaeseen adnids carpimpeinarast edt o abgealiinesvte, ahel so"b etlhiaetv est het hat the eserve System has worked a great injury to the country as well aS inesti enable benefits. He states ,fIn a time of inflation such as we had a year aeo • it nullifies the operation of the usual normal remedies for aitions. If it had not been for the Federal reserve banks, farmers y Would have been compelled to sell their crops a year ago and o-ebts. This would have saved them and the country from the dis- aster th at has overtaken them. Also, had it not been for the Federal reServ* banv anKs, manufacturers and merchants would have been unable to ac- ich it or• cc arry the heavy inventories entailing losses m a single year take a generation to replace." He believes that "The Solut iotl xo this is to keep the Federal reserve discount rates above h - 14- - X-3231 Current market rates, so that there will be no temptation on the part of the Prober banks to profiteer through the Federal reserve banks. So long as the Federal reserve rates are kept below current rates, there is, in ray Wgment, .no way in which this kind of inflation can be prevented. On the °ther hand, if borrowers compel their banks to rediscount in order to en- them to carry crops or goods for higher prices, they are put on notice that thgy are acting against the general judgment. In normal times member bariks should understand that they are not expected to borrow except to meet r§encies, and they should be made to feel that borrowing at sucn times ls indication of weakness and needs explanation." He expresses the hope th t the Federal Reserve Board will make a public statement of what its policy will be regarding rates and expresses the belief tnat the con- fidence of the country in the Bo-^rd is such that any clear statement of ^anoental principles made by it would be acquiesced in. Mother New York banker while convinced that under nonxal conditions it i s ^fcical that the Federal reserve rate should be higher that the pre- ing commercial rate, believes that in view of the world-wide conditions thn f „ . exist today, the adoption, at this time, of artificial means to accele- th© process of readjustment would be a dangerous course to pursue. He tatSs "Considering the extent to which credit for speculative purposes has Uluidated, and also taking into consideration the present reserve ana. Position of the Reserve banks, it would seem that the reduction in rate fully justified. . Furthermore, I do not believe the reduction at this tiro in ^v e rate will appreciably encourage a tendency toward renewed credit ^ t i o n. The question of rates has, on the whole, been ably and cour- - 15 - x-3231 age°Us*y handled by the Federal reserve banks and the Federal Reserve Board." He ys that if he were to offer a critical observation, it would be to te- rkupon nsalutary modification of the need for deflation that would have the Suited had the high rates been put into.teffect in the spring of 1919 instead Of 4t.IV18 summer of 1920*1. A Boston banker takes the view that the Federal Reserve System was u ior the purpose of furnishing credit,by means of rediscounting, to cotmiercial banks of the country. He says (,In a general way the time When thi s credit is needed is just before, during and immediately after a Cre<Ut risi . s , or credit pinch, and it seems clear that at such time the rged for rediscounting should be at about the current market rate C^arged b y the commercial banks to their customers. To make the rate higher than the prevailing rate would tend to restrict the granting of necessary merchants and similar borrowers. To make the rediscount rate much n prevailing rate would tend to encourage overloaning by the 1 banks. In fixing the rediscount rates, the managers of the Federal reser*e b aiiks should try-, so far as possible, to keep their minds free from ^ence* v other than those which directly concern the prevailing rates of ut they certainly are justified, when fixing the rediscount rate, S influenced by motives of the safety of the Federal reserve banKs ^ H es » ?nd when the rediscounts appear to be approaching a dangerous tal> the y should use their rate-fixing power to check speculation and to y possible danger to the Federal reserve banks, which are the ^ t l o r, of , 01 our whole banking<sy6tem- It was never intended and never 6ul<l be i intended that the Federal reserve banks consciously use their x-3231 - 16 - power a-n^ authority either to encourage or to discourage business. Their Chief rn Purpose should be tc assist comrrercial banks and to fix the rates of discount so as to best accomplish this, and at the same time to protect ir 0Wn Position from any possible overstrain." He regarls as one of the aangers the Federal Reserve System can be subjected to would be the atta v acics and manoeuverings of politicians, in order to make the system S3 ~rve Political ends. Mother leading banker does not believe that the time has yet arrived wh .. 5ri iscount rates should be held ut> to a point above the rates for com- mercial -n Paper because the conditions of business are not yet on quite a noriTial h • asis* He says that it has been the habit of commercial bankers to vn their commercial customers that their rate," to their customers is the Federal reserve bank discount rate and that it should ,be enough higher tbhpa n the discount rate so that there would be a profit to the banker betwee n discount rate and his rate to his customers. He says further There i s yet in our banks a large amount of so-called frozen loans which be de<*ar c » r it) i as loans which are probably good but which the borrowers Q; are not iln, a position to pay off at the present time. Therefore, they are not ^ a1 Ppooss iti tion to trade on market rates on an even basis with the banker. ier the conditions, a high discount rate of the Federal reserve banks SillIPly h as helped the comnercial banker to get higher rates from his cus- torner s m are justified by the conditions of credit. Therefore, it was aesi*ablo - necessary for the Federal reserve banks to reduce their rates from 6 or 7 per cent, to 5s per cent, in order to inform x-3231 - coir,rrerci?l community that the credit situation no longer ierr.anded these high rates." Ha takes the view that "Federal reserve bank dis- count rates should not be made with the idea of controlling business Market prices of conn o.li ties", but that "They shoula be indications of fv •e effect that the present business is having on the supply of Crsdit and of anticipated conditions that will affect the supply of creiit in the near future," He "believes that "^hen the business corrrnunity has bgQQjy trained to the point of watchinsr the reserve Position an t dis- rates of the Federal reserve banks and has come to an1, unierstand- ing , what these figures mean ** they will be helnei verv much by the published conditions of the Federal reserve banks and will reciat<5 w>at a change in iiscount rates means, provided of course th at fV e cf:i and directors of the Federal reserve hanks are not cers ^Qmperp^ * h m using their judgment in these natters by outside influences", ^ Chicap.o rerchant notes the difference of opinion among as to the proper time for raisine or lowering the Federal r®servR rediscount rates. He points out that neither the Federal ^e9erve <5 4. nor °ysten>/ any part of it can be run on any forrrula, and that if i t couli very little brains would be required for that part after e forrrul had been found. He believes that "If we are to be a world a commerce, as we rr.ay be, we shall have to make the New York or So e other district rate attractive for the discount of the world's *m£ort ^ export bills, We mi git, of course, be above the English rate for a sh°rt time, for adjustment or other purposes, but if we make a rule - 18 - x-3231 to ^ave the rate always above the commercial paper rate in New York, our ambition to be the world's bankers, or to compete with Englanl in conferee and finance, will vanish into thin air. * He takes the vi <v that in crises and extraordinary emergencies a Reserve e hank wel1 justified in violating temporarily the ordinary enons of sound finance, but emphasizes that under normal conii- tions and under conditions when it is possible to take a long run , the well established traditions covering a Reserve bank's Nations must be followed. The chief of these canons is that the J.Q-J j - iscount rate of Reserve banks should be kept above the mar- ket. The Federal Advisory Council, at its last meeting, on Septem- ber 2oth n» expressed its belief that rates should bear a direct re- en tt Federal reserve barik*s reserve and to the general money Market a » ani that in addition consideration should be given to the item s ^numerated in the Council's recommendaticn of May 17, 1921, as f°Uows : 1. The reserves of the Federal Reserve System as a whole. 2. The reserve position of tve Federal reserve bank whose rate it is contemplated to change. 3. The condition of all the banks of the country as a whole, and of the several Federal reserve districts. The economic and financial condition of this country. 5. ^orld coniitions, both economic and political. 6. The eventual establishment of a ere lit rate policy for the Federal reserve banks by which the rediscount rate to member banks is higher than the prevailing com- - 19 - x-3231 mercial rate, taking due consideration of the prevailing open market rates for various classes of loans "both in this country and abroad. 7. Uniformity of rates, while at times practicable and desirable, should not be adopted as a fixed policy, the System being predicated upon the principle that varying conditions might exist in different sections of the country. With reference to the general money market the following factors were 3uggested by the Board as ones which should be considered in arriving at a conclusion as to what is the current rate for money. 1. Rates charged by banks to their regular customers. 2. Rates for one-name paper bought through nfcte brokers. 3« Onen market rates on bankers acceptances, and Rates on Treasury Certificates. B°ard asked the Council for its views as to the relative importance of ®ach of i-L. these factors and the council expressed the view t^at all four items rro • • mentioned are important in determining the money market but there ^ay be other factors which should likewise be given consideration, such as neral business conditions and the reserve position of a Federal reserve was the view of the Council that the ruling rats for money a district will adjust itself automatically to these conditions. The Council expressed the view also that a Federal reserve bank t is borrowing should not lower its rate, but states that special c°hditi 0 ns -m . ight exist in a district which would make/r a e ductions de- an! would justify such a course. - 20 - x-3231 It seems clear to the Board that it is not nracticabls in this country for Federal reserve hanlrs to maintain rates of .discount higher current market rates if line-of-credit loans are to he accepted as the criterion. The rates of interest permitted in many states are 80 high as to nreclude this as a possibility. In ordinary circum- stan ces when the credit risk is at a minimum the r^tes paii for high 8 commercial paner sold in the open market ir>av be regarded as a m^asure of the market rate for money, but it is evident that at present er* there ^A s much consideration to be given to the basis on which short time ^ligations of the Treasury are sold and tc'market rates for prime ^ankers* acceptances. The nroblem, therefore,i,s more simple at this ,rree iinn ji istricts like New York, Chicago and Philadelphia, where the B'edie r AT A reserve cities are dominant in their districts, but in other ^istrirv*ts w , h ich cover a larger territory and where the business is more stributed and diversified, the problem is more difficult. At the SQnt time four Federal reserve banks are rediscounting about $U^*000, ,vith th nree other Federal reserve banks. The directors of one of these W1ng banks more than a ijionth ago voted to reduce their " ^discount te fr m 6 per cent, to 5J per cent, on all classes of paper, but the 0 federal r> Reserve Board has not yet approved the reduction. No evidence has b ePw presented to show that current rates for bank accomodations are less th tnan the Federal reserve bank rate, or that current rates would be ^ducea v lowering the reserve bank rate, but the directors argue that the Co °nsolidated reserve position of the system justifies a lower rate. ^ desires to have the views of members of this conference as to the qj. disability of permitting any Federal reserve bank to reduce its 21 - x-3231 Resent discount rate until its own reserves have increased to a point to *** it unnecessary for it to rediscount - ith other Federal reserve barks. The Board has been inclined to the view that the reserve percentage of 0 9 v federal reserve bank, as well as that of the System, should be taken lnto ccrsideration as one of the determining factors in fixing the discount ratQ* If the Federal Heserve Bank of Chicago, with a reserve of around 70 Per cent. and the Federal Reserve Bank of St. Louis, with a reserve of 0 * per cent, do not feel justified in reducing their Usfiount rates bel°,v present level of 6 per cent, what argument is there for a borrow- like Atlanta, having a reserve without rediscounts of only 32 Cent», to have a 5i per cent, ratet On the other hand, what are the r®*<*t8 against a reduction in districts which have so high a percentage 0f reserve? Board requests the members of this Conference to discuss all these ^tions involving principles of the discount rate frankly and fully and to ^Port their conclusions before the close rf the Conference. It seems Sx*dble, p 3sible, to formulate a general policy regarding rates of if 0 c<*mt, f fce divergence except in unusual or rorp which there would no ^ e n y C cases%

W. P. G. Harding (1921, October 27). Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/speech_19211028_harding

@misc{wtfs_speech_19211028_harding,
  author = {W. P. G. Harding},
  title = {Speech},
  year = {1921},
  month = {Oct},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/speech_19211028_harding},
  note = {Retrieved via When the Fed Speaks corpus}
}