United States. Federal Reserve Board.

Annual report of the Federal Reserve Board for the period ending ..., Volume 3 online

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Beserve Act relating to this feature of t^e business of Federal
Beserve Banks are feasible and practical. It is confidently ex-^
pected that the present year will witness a general acquiescence
in it and its use by all banks. With the completion of the collec-
tion and clearance system, all the domestic functions of Federal
Beserve Banks will have been at least tentatively undertaken, re-
quiring only a reasonable period of development for their complete
application. With regard to the provisions of the Federal Beserve
Act relating to foreign trade, the case is different. While much has
been done to facilitate the financing of foreign trade through tbe
development of the acceptance market and by the establishment
abroad of American banks and branches, the provisions of the Act
which permit the establishment of foreign agencies or branches of
Federal Beserve Banks have not as yet been availed of, nor have tfee
banks as yet undertaken the direct purchase of foreign commercial
bills, or the x>erf ormance of other functions relating to foreign trans-
actions authorized in the law. This delay has been due partly to the
disturbed condition of business in markets abroad and partly to the
belief that a sound and thorough application of the law in itfi
domestic aspects should precede the undertaking of foreign opera-
tions allowed by the Act. The Board has, however, had un<kr
consideration for some time, the advisability of authorizing Fed-
eral Beserve Banks to appoint correspondents, and to establi^
agencies in foreign countries, and on December 20 formally ap-
proved the application of the Federal Beserve Bank of New York
for authority to establish an ag^icy with the Bank of England.
This authority was granted under the provisicms of section 14 of
die Act which permit any Federal Beserve Bank ^' with the cons»t
of the Federal Beserve Board to open and maintain banking accouste



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AVUrUAL B8FOST 07 THE FEDERAL BESERVE BOABO. 17

in foreign countries, appoint ccHrespondents, and establidi agencies
in 8Bcb countries wh^^resoever it inay deem best for the purpose of
pnrdaaang, selling, and o^iecting bills of exdiange, and to buy and
seU wi^ <Ht without ite uidoraeiae&t through such correspondents or
agencies bills of exchange arising out of actual commercial transac-
tions,'' no that a broad field of operatuMis is opened under it. If the
authority granted by the Board in this case shall result in the e£^»b-
Indmiemt of the ^ency, it will be so arranged that the oth^ Federal
Beserve Banks will be enabled to participate in ibe agency relation-
ship upon the same terms and conditions.

(. Lb is probable ihsA other connections of this diaraeter will be au-
thorised from time to time as ooca^on requires, thus enahling the
Federal Beserve Banks, while assisting in the development of our
international trade, to provide for themselves, by holding a substan-
tial amtount of foreign paper, «n effective means of absorbing any
shodc due to sudden withdrawals of gold for export. There seems
to be no reason why the Federal Beserve Banks should not be
placed upon the same footing in this respect as the great reserve
banks of Europe and given wide powers in the matter of intema-
tionai exchais^, with the Federal Beserve Board acting as the o^i-
tral controlling force in the coordinatum and direction of operatiims.

ENFOfiCEMENT OF THE CLAYTON ACT.

Important duties relative to the determination of the eligibility
of member bank directors were imposed upon the Federal Beserve
Board by the amendment to the Clayton Act, known as the Kern
amendment, which became a law on May 15, 1916. This legislation
was intended to give individuals greater latitude in accepting and
holding bank directorships. It authorized such individuals, when
directors of member banks, to act also as oflScers, directors, or
employees of not more than two other banks, banking associations,
CM* trust companies, when organized under the laws of the United
States or any State, "if such other bank, hanking association, or
trust company is not in substantial competition with such member
bank." It was, however, required that the consent of the Federal
Reserve Board be obtained as a basis for the continuance of such
relations with other banks. This placed upon the Board as a
condition necessarily precedent to the granting or withholding of
its consent in such cases, the duty of ascertaining whether the banks
in which an individual might seek to hold directorships were or were
not in " substantial competition " with the member bank of which
such individual was also a director. The Board reviewed the various
applications, this work occupying the greater part of its time during
the months of August, September, and the first half of October,



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18 ANKUAL BEPOBT OP THE FEDEHAL BESERVP BOABD.

the Claytcm Act by its terms becoming effective on October IS.
During the year 1916 the Board considered in all 1,359 applications,
of which 1,215 were granted and 144 refused. In a large number of
other cases the directors affected recognized that substantial com-
petition did unquestionably exist, and so withdrew voluntarily from
one or more directorates, thereby bringing themselves into com-
pliance with the Act.

Some difficulty was f oimd in the provisions of the Clayton Act
which prohibit a private banker from holding a directorship in a
member bank. Compliance with this prohibition necessarily involved
a definition of the term " private banker," and the Board accordingly
published a definition of the term for use in the administration of the
Act The term "private banker" was interpreted to include part-
nerships or individuals engaged in the bimking business, as the term
is generally understood, including those partnerships or individuals
which solicit or receive deposits subject to check, which do a foreign
exchange, acceptance, loan, or discount business, or which purchase
and sell or distribute issues of securities by which capital is fur-
nished for business or public enterprise. The term as thus inter-
preted did not include the ordinary stock, note, or commodity broker
unless a substantial proportion of his profits came from banking
activities, nor did it include partnerships or individuals using only
their own funds in making loans or investments.*

In a number of cases difficulty also was encountered in determining
the exact scope properly to be assigned to the term " substantial compe-
tition," particularly with reference to the question whether such com-
petition must be regarded as limited in area. It was found that some
large banks situated in cities or places far distant from one another,
while not in competition in their respective locations, yet might be
held to compete to a greater or less degree in common territory.
While in some such instances it was thought best to grant the applica-
tions of directors who were desirous of serving on the boards of such
banks, it was indicated in each case that the consent accorded to them
was tentative only and that further investigation would be under-
taken for the purpose of arriving at a final conclusion. Indeed the
Board's work with reference to the application of the Kern amend-
ment must be regarded as a continuing operation which can never be
definitely finished. New facts or evidence bearing upon the business
of given institutions may at any time develop, or the natural growth
of their business may bring them into substantial competition,
although they were not found so in the first instance. It will there-
fore be necessary from time to time to revise decisions already made.
New conditions may develop which will necessitate the revocation of

1 Federal Reserve Bulletin, 1916, p. 588.



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ANNUAL BEPORT OF THE FEDERAL RESERVE BOARD. 19

permission already granted in certain cases in order to deal appro-
priately with such conditions without subjecting some directors to a
rule different from that applied in the case of others. As in all new
legislation, there is a considerable zone of uncertainty in the inter-
pretation and application of the Clayton Act It wiU require ex-
perience and further analysis to resolve such uncertainties and to
apply the terms of the measure fairly and uniformly in carrying out
the intent of Congress.

ENTRY OF NEW MEMBERS.

During the year 1916 one hundred and thirty banks entered the
Federal Reserve System, making a total of 7,627 members on Decem-
ber 31. Of these new members, eighty-seven were newly organized
national banks, which, under existing law, automatically became
members and took stock in the Federal Reserve Bank of the district
in which they were located. Of the remaining members thirty-five
were State banks which entered the system through conversion into
national banks, and two were national banks which were in charge of
receivers and were restored to solvency. State institutions which
applied fcMr and received membership while retaining their State
charters numbered six. It had been expected that upon the organi-
zation of the clearance and collection system a considerable num-
ber of State institutions would find it to their advantage to apply
for membership or that other factors would tend to bring them into
the system. So far this has not proved to be the case, for the number
of State institutions which came into the system during 1916 while
retaining their local charters was less than during the preceding
year. Many causes have operated to produce this result, the chief
being those already outlined by the Board in its report for 1915.
Added to these considerations has been the effect of the Clayton Act,
which is objected to by many State banks as likely to result in incon-
venient or undesirable changes in their boards of directors should
they enter the Federal Reserve System ; and the operation of section
22 of the Federal Reserve Act, which deals with the relations of
directors of member banks to their institutions. The Board has sug-
gested an amendment to this section designed to clarify it and to re-
move uncertainties without affecting in any way its principle.

Apprehension of stringent conditions or the development of any
situation requiring mutual aid on the part of banks would undoubt-
edly cause many nonmember banks to apply for membership, but it
is not believed that they will as a rule elect to await such conditions.
The largest and most important State bank in New York is already
a member of the system, as is the largest trust company in Boston.
Prominent trust companies (in St. Louis, Chicago, Kansas City, and
Birmingham) are also members, and there are indications that other



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20 AKNUAL R£POBr OF THE FSDEBAL BESEIVE BOAB0.

krge institutions are awakening to a sense of public duty, and are be-
sides gradually reaching the conclusion titiat tiieir own best intereate
require their affiliation with the Fed^ai Seserve System. Mmnj
Rpprehensioos previously eoitertained by nonmember banks h&is^ been
sliown to be groundless, and the attitude of the Board toward StMta
banks as members is better understood. The public, moreover, is be-
ginning to realize that its interests will be best served by the amf^
fication and fullest development of the Federal Reserve Systran.

In July last the Board advised the representatives of certain State
banks and trust companies, which were apprehensive that member-
ship in the system might involve an undue restriction of their corpo-
rate activities as a result of the futui^ r^ulations of the Board, tfajii
it did not understand that it was incumbent upon it to undertake to
impose upon the activities of member banks any restrictions tiuit an
not ccmtemplated by the Act, but only to prescribe such regolatioB
as are designed to carry out the purposes of the Act. The Board
does not feel that it is one of its fuiM^ions to undertake to restrict
State banks or trust companies in the exercise of banking or tnut
company powers as defined by the laws of the State in which tbtj
are created. In passing upon the applications o^ State banks and
trust companies, however, the Board holds that it is its diitj to
admU only those institutions which are solvent and sound and whoas
membership will not constiUite an element of weakness in the system.
The Board does not consider that it is a prerequisite to the adaiis-
sion of any State bank or trust company that it ^ould possess any
prescribed amount of paper eligible for rediscount with a Federal
Beserve Bank. The law provides that privileges and advantages of
m^nberdiip may be extended to State banks and trust companies,
thus contemplating one compact banking system, while preserving
the integrity of both the State and national banking organizat]Cii&
The fact that a State bank has little eligible paper does not neces-
sarily make its membership an element of weakness or danger, and it
is obvious that as a member of the i^stem it will be in a positi<m to
ccmtract for loans and to obtain cash from other member banbs hav-
ing paper eligible for rediscount, and tlius indirectly to obtain de-
sired accommodations. The ability to assist m^nber banks directly
and indirectly will be increased as the strength of the sjnstesn and
lending power of the Federal Beserve Banks is increased. .There
is no reason why such assistance cdiould not be freely given to a mena-
ber State bank, while in time of stress tiie nonm^nber banks may
find tlie member banks not less disposed, but less able to ^ve tiiera
this indirect assistance. ThB Board, of course, might consider the
exercise of extraordinary and unusoal diartw powers, whidi would
make an applying State bank or trust company an undesirable mem*



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AKNUAL REPC^T OF THE FED£BAL BE6E»Y£ BOABB* 21

ber, a euficient reason to ref uae to grant the application for admis-
SMU, Imt after a State bank or tmst company has actually become a
member bank, the Board does not expect to interfere widi the ex-
eraee of the banking and fidociary powers authorized by its charter.

FTOUCIAJtr POWBBS.

Applications for permission to exercise fiduciary powers under
the terms of the Federal Reserve Act have continued to be pre-
sented to the Board during the past year, and have been granted
in one hundred and twenty-five cases, action on eighty- four of which
carried approval of full fiduciary powers, while in the case of forty-
one only limited powers were granted. There is still uncertainty as to
the l^al status of the banks in exercising this function, the doubts
regarding it having been intensified by the action of the Supreme
Court of the State of Michigan in handing down, on September 26,
an opinion adverse to the contention of the national banks.* It was
the view of the court in this case that Congress had no authority to
permit national banks to exercise the fiduciary powers provided
for in the Federal Reserve Act, and, in accordance with the policy
annotmced in its report for 1915, the Board took steps to have the
case transferred to the Supreme Court of the United States on a
writ of error, in order that it might be finally determined. In
the meantime the Board is pursuing the policy of granting to prop-
erly qualified and well-managed banks the authority to exercise
fidudary powers in so far as provided by the Federal Reserve Act.
Ab has been explained on former occasions, the Board is bound to
grant specifically the privileges that have been granted by Congress
under the Federal Reserve Act, leaving to judicial determination any
questions which may be raised as to the constitutionality of such
grant. Pending a final decision by the court the Board will con-
tinue to pursue its present policy.

CHANGES IX DISTRICTS.

In its report tor 1015 the Board set forth the reasons that had led
it to n^ke changes in the boundaries of certain Federal Reserve
districts, and stated that ^furtiier consideration of this subject
was suspa^ded in view of an opinion rendered by the Attorney
General of the United States ♦ ♦ ♦ wherein it was held that
the Board possessed no power to reduce tiie number of Federal
Reserve districts." The Board also called attention to the fact that
" a furth^ opinion has been asked as to whether the Board has power

^Qrant Fellows, attorney general of the State of Michigan, on the relation of the
Umao Tmst Co.. Detroit Trust Co., Sectirlty Trust Co., Michigan Trust Co., and th«
Otand aa{4ds Trust Co. v. The First National Bank of Bay City.



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22 ANNUAL BEPORT OF THE FEDERAL RESERVE BOARD.

to change the location of a Federal Reserve Bank within a district.^
The opinion thus •referred to was rendered by the Attorney General
on April 4, 1916, and covered two points:

(1) Whether the Board could change the present locaticm of any
Federal Reserve Bank in certain cases, and

(2) Whether the Board in readjusting district lines must preserve
the $4,000,000 minimum capitalization required of each Federal
Reserve Bank.

The Attorney General held that the Board has no power to change
the location of a bank, irrespective of alterations or readjustments in
district lines, but that the maintenance of the minimum capitaliza-
tion of $4,000,000 was not necessary.

The effect of this ruling was to suspend consideration of the pend-
ing appeals which involved changes in the location of Federal Reserve
Banks within their districts. There remained, then, but three ap-
peals calling for immediate decision — one filed by certain Connecti-
cut banks, which requested transfer from the Boston to the Ne^w
York district; one filed by certain banks in Wisconsin, which re-
quested transfer from the Minneapolis to the Chicago district; and
one filed by certain banks in southern Louisiana, which requested
transfer from the Dallas to the Atlanta district. The Louisiana
appeal was granted by a resolution adopted on February 25 transfer-
ring certain banks as desired ; while the Connecticut appeal was de-
termined by a resolution on March 6 transferring those banks situated
in Fairfield Co., Connecticut, to the New York district, leaving the
remainder of the petitioning Connecticut banks as members of the
Federal Reserve Bank of Boston, subject to such future determina-
tion of the Board as experience shall show to be necessary. The Wis-
consin appeal was settled by an order of October 12, transferring
the greater number of the applying banks to the ChicagX) district*

MORE EFFECTIVE CONTROL OF GOLD SUPPLY, AND PROPOSED AMENDMENTS.

The final installment of member banks' obligatory reserves, amount-
ing to about $60,000,000, was paid into the Federal Reserve IBanks by
their members on November 16, 1916. Under the provisions of the
Federal Reserve Act about $250,000,000 of reserves were paid into
the Federal Reserve Banks immediately upon their organization.
The Act provided that subsequent reserve payments should be made
at intervals of six months, and accordingly on May 16, 1915, Novem-
ber 16, 1915, May 16, 1916, and November 16, 1916, additional per-
centages of reserves were transferred. Due partly to these regular
transfers of reserves, as required by law, and partly to the increase
of member bank deposit liabilities as well as to the change in vault



1 Federal Reserre Bulletin, p. 590.



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AITNUAL EEPOBT OF THE FEDEBAL EESEKVE BOARD.



23



requirements provided by the act of September 7, 1&16, the money
stock of Federal Reserve Banks has been greatly increased. The
actual holdings on successive dates were as follows :

December 81, 1914 $255,647,000

June 30, 1915 800,814,000

December 31, 1915 i 857,988,000

June 30, 1916 404,206,000

December 30, 191G 474, 590, 000

No further payments are now compulsory, but from and after No-
vember 16, 1917 (or earlier if the Board's suggested amendment
should be adopted) , balances with reserve agents in reserve and cen-
tral reserve cities will no longer count as member banks' reserves,
and members will be required to build up either their vault cash or
their balances with Federal Reserve Banks sufficiently to cover the re-
quired reserves heretofore carried as balances with correspondents.

In a press statement d&ted November 28, the Board announced
that Congress would be asked to move forward the date when bal-
ances with correspondent banks in reserve and central reserve cities
shall no longer count as member bank reserves, and suggested that the
date originally fixed for November 16, 1917, be advanced to some
time in February or Marph. There are several good reasons for
urging this change upon the immediate attention of Congress. The
United States has to-day a plethora of gold. While the Board does
not believe that further importation of gold will of necessity prove
a source of danger or disturbance, it nevertheless believes it desir-
able, in order to avoid possible danger and misconception of the
situation, to call particular attention to the actual reserve conditions
and to make clear that the inflowing gold should be controlled and
not be permitted to become the basis of abnormal loan expansion.

The following table shows the reserve position of member banks on
November 17, 1916:

lOOO's omitted.J





In vault.


With
Federal
Reserve

Bank.


Either in
vault or
withFed-
eralRe-


With ^
approved
reserve
agents.


Total
reserve.


Total United States <aU member banks):
A mount reserve held . . ^ ^ x x . . . ^ - . . x . . . .


813,573
67«,062


674,235
606,413




1,048,313
175,014


2,536,121
1,510,146


Anxmnt reserre required


151,756




Ezoess reserve.


237, 6U


67,822


1151,756


872,390


1,026,076





> Amount to be deducted from excess in vaults of Federal Reserve Banks to agree with total excess.

From this table, taken from the official abstract issued by the
Comptroller of the Currency, it is evident that under present methods
of computation more than four-fifths of the item " excess reserve " is
in the form of balances carried by banks with other banks which are
now approved reserve agents, but which can not act in that capacity
after November 16 next. Of the actual reserve required on November

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24 ANNUAL BEPOBT OF THE FEDEBAL BSSEBVE BOiJEOu

17, 1916 <$1,510^45,000), the member hanks carried in their vanlte
and with Federal Beserve Banks $1,467^8^000; so tiiat in order to
place them upon their permanent reserve basis it would have beoi nec^
essary on that date for the reserve city banks and the country hanks
to transfer only $22,337,000 frc«n their central reserve and reserve
city bank €orreq>ondents to the Federal Beserve Banks or to tiieir
own vaults. This process would not have altered the technical
position of the banks in any appreciable degree, for the city banks
would still have had more than $1,000,000,000 of balances from their
depositing banks just as before, less a deduction of the OMnpara-
tively small amount required to be transferred to the Federal Be-
serve Banks. The essential difference would have been that balances
with former reserve correspondents could no longer be counted as
bank reserves, but in all other respects would provide for the sasne
functions as at present. It is interesting; to note that had tb&
reserve requirements which will now become operative on Novendber
17, li)17, been effective on November 17, 1^16, the apparent excess
reserve of more than $1,000,000,000 would not have existed, but
that a transfer of $22,337,000 from the vaults of central r es er ve
and reserve city banks to the Federal Reserve Banks would have
been necessary to place the member banks as a whole upon their
required resen^e footing. After carefully studying the whde re-
serve problem, there has been transmitted to the chairmen of the
appropriate committees, in the name of the Board, recommenda-
tions for further amendments to the Federal Reserve Act. The text
of these suggested amendments is attached as an exhibit to this
report.

When the Federal Reserve Act was drafted its principal object was
to deal witii internal problems of banking and currency. Since its
enactment financial and economic conditions in the United States
have undergone far-reaching changes which were n<^ foreseen <3iree
years ago. The United States has attained to world influence in
financial affairs and it seems necessary that the Act, which has proved
of such great value in the treatment of our domestic problems, should
be amended in order to enable us to deal effectively with the inter-



Online LibraryUnited States. Federal Reserve BoardAnnual report of the Federal Reserve Board for the period ending ..., Volume 3 → online text (page 3 of 48)