The Federal Reserve Bank of San Francisco: A Study in American Central Banking 9780231893800

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T H E FEDERAL RESERVE BANK OF SAN FRANCISCO

THE

FEDERAL RESERVE BANK OF SAN FRANCISCO A S t u d y in American Central Banking BY PARKER B. WILLIS

New York : Morningside Heights COLUMBIA UNIVERSITY 1937

PRESS

Copyright ¡937

COLUMBIA UNIVERSITY PRESS Published 1937

Foreign Agenti

OXFORD UNIVERSITY PRESS Humphrey Milford, Amen House London, E.C.4, England KWANG HSUEH PUBLISHING HOUSE 140 Peking Road Shanghai, China MARUZEN COMPANY, LTD. 6 Nihonbashi, Tori-Nichome Tokyo, Japan OXFORD UNIVERSITY PRESS B. I. Building, Nichol Road Bombay, India

Printed in the United States oj America

To E. H. S.

PREFACE THE following study is concerned with banking development in the Twelfth Federal Reserve District, in an effort to determine the influence of the San Francisco Federal Reserve Bank on the banking structure of the area. The policies of the bank in member and nonmember bank relations, relative to credit control, in stimulating the economic development of the region, in aiding in the formation of capital and money markets, and in relations with other districts, are given close consideration. A n attempt has been made to determine the degree of independence of the San Francisco Federal Reserve Bank in formulating its policies. Local and national problems which have arisen during the course of development of the bank are analyzed for their effect on Reserve system and commercial bank operations within the district. Among the materials used in preparation of the study, particular attention was given the Monthly Review of Business Conditions of the Federal Reserve Bank of San Francisco and its Annual Reports to the Federal Reserve Board; the Annual Reports of the Federal Reserve Board; the Federal Reserve Bulletin; Reports of the Comptroller of the Currency; Reports of the state banking superintendents of the Pacific states, congressional hearings and studies bearing on the Federal Reserve system. While a teaching fellow at the University of California, 1930-32, and during a trip of some months to the Pacific Coast in 1935,1 had a number of personal interviews with Federal Reserve officers, commercial bankers, business men, and university instructors in the Twelfth District. Visits were also made to the branches of the Federal Reserve Bank of San Francisco. I have examined the collections of banking materials in the library of the Federal Reserve Bank of San Francisco, the Bancroft Library of the University of California, the Library of Columbia University, the Library of the University of Washington, the Public Libraries of San Francisco, Seattle, Spokane, Portland, Los Angeles, and New York City.

viii

PREFACE

I record my thanks and indebtedness to Vice President Ira Clerk of the Federal Reserve Bank of San Francisco for his helpful advice and suggestions concerning Reserve bank operations. Thanks are due to former President J. U. Calkins; President William A. Day, Assistant Reserve Agent O. P. Wheeler; and R. A. Bachellor, formerly of the Department of Analysis and Research of the Federal Reserve Bank of San Francisco. I am indebted also to a large number of commercial bankers who aided me in the collection of materials. I wish to thank F. L. Lipman, chairman of the board of the Wells Fargo and Union Trust Company, San Francisco; A. P. Giannini, president, Bank of America, San Francisco; C. K. Mcintosh, president, Bank of California, San Francisco; N. W. Greenwood, president, Pacific National Bank, Seattle; M. A. Arnold, president, First National Bank, Seatde; A. W. Price, president, National Bank of Commerce, Seattle; E. B. MacNaughton, president, First National Bank, Portland; P. S. Dick, president, United States National Bank, Portland; A. W. ChafFey, president, California Bank, Los Angeles; and C. O. Howard, president, Walker Brothers, Salt Lake City. I also want to thank A. L. Pontious, Former Deputy Governor of the Federal Reserve Bank of San Francisco, E. M. Hupplinger, and R. W. Lowry, as well as many other bankers throughout the district. Acknowledgments are also due to Ira B. Cross of the University of California; Howard W. Preston of the University of Washington; J. A. Crumb, Supervisor of Research and Statistics of the California State Banking Department; and J. H. Gilbert of the University of Oregon, for advice and suggestions. I wish to express sincere appreciation to Professor B. H. Beckhart of Columbia University for his helpful criticism and direction of the work at various stages. Professors A. G. Buehler and M. H. Laatsch of the University of Vermont have considerately read the manuscript and offered helpful advice on arrangement and development of topics. I alone am responsible for the conclusions reached. PARKER B. WILLIS Burlington, Vermont August 30, 1937

CONTENTS I. Central Banking—Its General Relationship to the Pacific Coast II. Banking in California III. The Beginnings of Financial Organization

3 25

. . . .

IV. Establishment of the Federal Reserve Bank of San Francisco V. Operations of the Twelfth Bank

55 80 114

VI. Bankers' Acceptances and Bankers' Balances in the Twelfth District V I I . Twelfth District Relations with the Reserve System

150 169

V I I I . Twelfth District Relations with the World—Foreign Trade I X . The Twelfth District in Review

225 254

0 Manufactures for States and Territories, 1860Appendix i 9 1 A.

259

Appendix B. Principal Securities Listed on the San Francisco Stock Exchange Board, 1907

262

Appendix C. By-Laws, Federal Reserve Bank of San Francisco

264

Bibliography

269

Index

273

TABLES 1. Value of the Chief Products of the Twelfth District . . 2. Comparison of the Principal Vegetable and Cereal Crops and the Chief Products of Mines and Fisheries, the Area and Population for Stated Years, of the Twelfth Federal Reserve District, with Those of Sweden and Holland for Stated Years 3. Number and Resources of National Banks, 1900 and 1910 4. Total Loans Made by National Banks in Selected Cities, and Percentage Distribution of Their Loans by Geographical Divisions, January 13, 1914 5. Summary of the Numerical Changes in the Number and Classification of California Banks, 1880-1909 . . . .

47

6. 7. 8. 9.

48 51 53 57

Deposits of California Banks Annual Clearings, San Francisco Suspensions of National and State Banks Bankers' Deposits in Banks in San Francisco

10. Local Note Issue: Circulation of National Banks Outstanding, Pacific Coast, 1900-12 1 1 . Percentage of Single-Name Paper to Double in Bank Portfolios, June 30, 1910

11

13 20

22

66 70

12. First-Choice Vote for Reserve-Bank Cities by Districts 13. Capital Shares Held by Member Banks of the Twelfth District in the Federal Reserve Bank of San Francisco 14. Sources of Earnings of the Federal Reserve Bank of San Francisco 15. Earnings and Expenses of the Federal Reserve Bank of San Francisco

95

145

15. Surplus of the Twelve Federal Reserve Banks Compared with Subscribed Capital Stock, June 1, 1921 17. Acceptances

148 155

101 143

xii

TABLES

18. Amount and Velocity of Deposits of Twelfth District City Banks 168 19. Liberty Bonds Sold in the Twelfth District; Certificates of Indebtedness; Sales of Thrift and War-Savings Stamps and Treasury Certificates 174 20. Actual and Adjusted Ratios of the Federal Reserve Bank of San Francisco, 1920-21 185 21. Amount of Credit Extended and Received by the Federal Reserve Bank of San Francisco, 1920-21 . . . 186 22. Gold-Settlement Fund: Transit Clearings 196 23. Examinations Conducted by the Federal Reserve Bank of San Francisco, 1918-28 208 24. Member Banks in the Twelfth Federal Reserve District: Changes in Membership 212 25. Branch Bank Assets, Twelfth District 223 26. Chief Exports from California, 1854, 1855, 1856 . . . 225 27. Importance of Wheat in the Pacific Foreign Trade, 1870-81 226 28. Distribution of Foreign Trade on the Pacific Coast for Selected Years, 1880-1935 227 29. Classification of Bills Purchased 244

CHARTS 1. Twelfth Federal Reserve District 7 2. Gold Production in the Twelfth District in Relation to Monetary Gold Stock of the United States 49 3. Seasonal Demand for Loans and Prevailing Rate of Interest, 1900-14 61 4. Value of Securities Traded and Value of Stock Exchange Memberships, Twelfth District 79 5. Organization, Federal Reserve Bank of San Francisco 118 6. Interest Rates Charged by San Francisco Banks . . . 129 7. Bankers' Balances, San Francisco 160 8. Bankers' Balances, Twelfth District Reserve Cities outside San Francisco 161 9. Rates of Interest Paid by San Francisco Banks . . . . 162 10. Turnover of Member Bank Reserve Deposits, Federal Reserve Bank of San Francisco 167 1 1 . Rediscount Operations, 1920-22 183 12. Principal Factors Affecting Bank Reserves, Twelfth District 194 13. Government Financing, Twelfth District 204 14. Exports to Principal Areas of Destination from Twelfth District Ports, 1928-35 231 15. Foreign Trade of Pacific Coast Ports with Principal Countries 233 16. Acceptance Credit, Twelfth District 242

T H E F E D E R A L RESERVE BANK OF SAN FRANCISCO

I CENTRAL BANKING—ITS GENERAL RELATIONSHIP TO THE PACIFIC COAST DURING the twenty years since the passage of the Federal Reserve Act, numerous studies of the Federal Reserve system have appeared and various attempts have been made to evaluate the practices and policies resulting from the operations of the system.1 Most of these works have emphasized questions relating to policies and practices of the entire system, with only incidental reference to specific problems of particular banks. 2 The interior banks have not received detailed study and it would appear that need exists for a survey of each of them. DISTRICT ORGANIZATION PROBLEMS The framers of Federal Reserve legislation doubtless were too ambitious in setting up twelve banks, and it is questionable whether there was need in some areas for an independent bank. However, the existing situation must be accepted, and for the present purpose it is enough to say that the large geographical area of the United States and its varied sectional interests justified the establishment of a group of "central" banks, rather than the "one bank" which figured so prominently in earlier proposals for banking change. The fact that many of the areas required unique credit accommodation to meet their business needs and had originated a special type of business paper was a situation which could not be ignored. The burden of handling the current needs and the specialized credits of the industries of certain areas was 1 A m o n g m a n y studies, the following deal with the question suggested above. S. E. Harris, Twenty Tears of Federal Reserve Policy; B. H . Beckhart, Discount Policy of the Federal Reserve System; R. Burgess, The Reserve Banks and the Money Market; J . L. Laughlin, Federal Reserve Act; P. M . W a r b u r g , The Federal Reserve System; C. Whitney, Experiments in Credit Control; H . P. Willis a n d W . H . Stciner, Federal Reserve Banking Practice; W. Riefler, Money Rates and Money Markets in United States; L. Clark, Central Banking under the Federal Reserve System. 2 With the exception of the work by Clark, Central Banking under the Federal Reserve System, a n d J . Griswold, History oj the Federal Reserve Bank of Chicago.

4

CENTRAL

BANKING

thrown almost completely upon local commercial banks. The establishment of a central bank in the region was designed to make possible an assumption of the burdens formerly borne by the local banks, thus enabling them to diversify their portfolios, and so restore the balance in credit extensions. Hence it was concluded that each Reserve bank would serve the peculiar, as well as the general, needs of its own district, and would shape its policy accordingly. C E N T R A L BANKING BY R E S E R V E

BANKS

Whatever may be the ultimate verdict relative to the weakness of the Federal Reserve system, the bankers of the areas in which the Reserve banks were placed have been furnished with agencies for cooperative central banking. It has been their privilege to use or to ignore these agencies as they saw fit. In certain areas the central bank, with the cooperation of its members, does the actual work of the system. In some districts the Reserve bank has not prosecuted its task conscientiously, but has followed a passive policy, allowing the individual banks to shift for themselves. On the other hand, instances may be found where a Reserve bank has allowed itself to be dictated to by several of the more powerful banks in its district. Naturally these actions have not resulted in bringing about the conditions which the framers of the Act had hoped to establish. Thus an inquiry into the methods of central banking, as practiced, may be needful. The objectives of central banking are not, as yet, well understood, and the question whether it is adapted to the needs of any particular country or area is always open to discussion. Before proceeding, it will be well to indicate certain fundamental central banking functions as they have evolved in the development of central banks abroad. C E N T R A L BANKING

ABROAD

Theories concerning what is known as central banking have appeared from time to time in English, French and German financial writings. In England rudimentary concepts of central bank functions may be said to have emerged as early as 1815 from the con-

CENTRAL

BANKING

5

troversies surrounding the Bullion Committee's Report. By 1844, with the passage of Peel's Bank A c t , English b a n k i n g h a d definitely committed itself to the performance, through the Bank of England, of certain of the functions of central banking. Theories relating to bank rate control were crystallized in the 1847 crisis. T h u s , early in the last century E n g l a n d laid the foundations for her banking tradition. Discussions centered largely around note-issue practice, with Peel's A c t setting a definite limit on the fiduciary issue. A l l notes issued above the limit were to be fully covered b y gold. T h e issue and banking departments of banks were separated. T h e Bank of England became the chief bank of issue. Seventy years followed without important change. Historically, the principles of central banking were thus established empirically long before they received theoretical formulation. T h e activities of central banks and commerical banks are, in m a n y respects, different. Informed opinion generally agrees, and practice has established the view, that the central institution should have the monopoly o f the right to issue circulating notes or at least the privilege of originating the greatest part of the issue. If the latter arrangement prevail, perhaps some vested interest has been granted the right of a small issue of notes for political reasons or because of strong tradition. By reason of this privilege, the central bank has the power to specify terms to banks which need notes for deposit conversion. Centralized control is secured over the gold reserves of the country in question, with the amounts fixed b y statute or, as in the case of the Bank of England, b y custom. In recent years central banks h a v e been held responsible for the control of the foreign exchanges. Gold flows are influenced through discount operations or interest rate changes. Central banks are almost always designated as the fiscal agents of the respective governments, though in strict and generally orthodox practice they should extend no preferential accommodation to governments. Rediscounting is another recognized practice of central banks which is a means of liquefying or releasing a portion of the portfolio of the banking c o m m u n i t y . In E n g l a n d tradition has established the practice that the B a n k of England never refuses to

CENTRAL

6

BANKING

discount certain types of paper, thus assuring the financial community of definite relief. The types of money markets in various countries differ, and consequently activity directed toward the control of these markets varies. In England the Bank will not compete with the joint-stock banks, but is always a ready buyer for the preferred type of bills if offered by the bill holders. The bank may also make a higher bank rate "effective" by selling its portfolio of government obligations. In France there is no money market comparable to that of London. French banks generally refuse to put into circulation bills of exchange bearing their signature. The Bank of France mingles more directly than the Bank of England or the Reichsbank with the movement of business, and exercises control in this way. The market is divided into two parts: a market for money at sight and a market for private discount. The French bank does not believe in frequent changes of the discount rate. 3 CHARACTERISTICS OF THE AMERICAN M O N E Y

MARKET

Opinion concurs that the lack of a discount market in the United States, under the old national banking system, forced central banking organization and practice in America into channels which differed from those abroad. The American money market under the national system consisted for the most part of a number of markets for customer loans at the counters of some twenty thousand banks scattered throughout the country, and a well-developed open market for securities and security loans in New York City. It was desired that the Federal Reserve system ignore the latter, in an effort to discourage its further growth. Thus the Reserve banks were set up as regional central banks to supervise the commercial banks directly. It was hoped that regional Reserve bank operations and policies would have some effect upon rates charged customers and upon the lending practices of banks in their districts. But the so-called market for customer loans at banks is not in the true sense a money market, for most borrowers have no alternative but to borrow at one bank, and as a result the element of competition is not strong in rate determination. The competitive money markets 3

H. P. Willis and B. H. Beckhart, Foreign Banking Systems, pp. 575, 1 1 9 5 .

Chart TWELFTH

FEDERAL

I RESERVE

DISTRICT

Heavy black lines indicate boundaries of branch areas.

8

CENTRAL

BANKING

in the United States, in addition to the security markets and their adjuncts, consist of the large commercial borrowers who have the option of borrowing at any one of several banks, or who may borrow by selling their notes to brokers or to banks in the commercialpaper market or discount market. The influence of the Federal Reserve policy is therefore restricted to this small conpetitive part of the customer loan market and to the discount market for banker's acceptances,4 which found its inception in the Federal Reserve Act. The Federal Reserve banks deal extensively in the market for government bonds, as well as in the commercial loan markets. These dealings were permitted in order to give the Reserve system a means of exercising leadership over the commercial money markets as the Bank of England does through its dealings in consols.6

The close relationship of the Federal Reserve system to the Federal government, as well as the acceptance of the theory of quantitative control, has caused these dealings to increase greatly. Summary

The originators of the Federal Reserve Act expressly desired to give to the United States a central banking system which would improve and control business and banking practices in the several districts. As already indicated, many areas of the United States are of a self-contained character, and, in addition, custom and economic exigencies of a previous period have dictated in many of these regions a specialized method of business and financial procedure. PACIFIC S T A T E S — C E N T R A L BANKING

AREA

The particular area selected for analysis in this study, from the viewpoint of central bank policy, is the Pacific Coast states. This district, known as the Twelfth Federal Reserve District, includes the states of Arizona, California, Idaho, Nevada, Oregon, Utah, 4 Whitney, op. cit., pp. 1 6 - 2 0 ; Hearings be/ore a Subcommittee oj the Committee on Banking and Currency, United States Senate, 71st Congress, 3d Session, pursuant to S. Res. 7 1 , 1 9 3 1 , pp. 1 0 1 0 - 1 3 (hereinafter referred to as Hearings, 1 9 3 1 ) . ' W h i t n e y , op. cit., p. 19.

CENTRAL

BANKING

9

and Washington. Five southeastern counties of Arizona are found in the Eleventh District (Chart i). The region is one of the most self-contained and individualistic, from the viewpoint of business practice, in the United States. A brief discussion of certain of its features will indicate these characteristics. The acquisition of New Mexico and California in 1848, the Gadsden Purchase in 1853, and the establishment of the Oregon line in 1859 extended the boundaries of the United States to the Pacific Coast and rounded out our continental boundaries. Hardly had these acquisitions been made secure before a remarkable impetus was given to the occupation of the West Coast by the discovery of gold in California.6 Thus, even before the first continental railroad connection was completed in 1869, a trade had developed in California and in the contiguous territory which was to a high degree localized. Prior to i860, almost every manufactured article used in this western region was imported from the East or from Europe.7 The high cost of coal in California and Oregon, the speculative attractions of mining, and the high wages of labor handicapped the development of manufacturing in the early years. The lack of coal continued to be a drawback until after 1895, when the increasing use of petroleum and electricity obviated the difficulty to a certain extent. Geographic isolation fostered the development of state industries.8 While agriculture is without doubt the most important industry in these states, manufactures have maintained a constant rate of increase, and this became more rapid with the introduction of capital from without in the eighties and nineties. The gross value of manufactured products increased 41.9 percent between 1889 and 1899. In the latter year, California ranked twelfth among all the states in the gross value of all manufactured products. In that year the leading manufactures of the state, in the order of importance and value of products, in millions of dollars, were:9 ' J . H. Faulkner, Economic History of the United States, p. 194. ' The abundant supply of gold made it cheap and consequently labor was high as compared with its cost elsewhere. It was thus more economical to import. 8 See also I. B. Cross, Financing an Empire, I I , 591. • Twelfth Census of the United States, 1900, Manufactures, Part I I , V I I I , 35.

IO

CENTRAL

BANKING

Railway and Machine Products . . . . Lumber and Timber Sugar and Molasses, Refined Beef Slaughtering Canning and Preserving Flour and Gristmilling Malt, Vinous and Distilled Liquors . . Leather Industries Printing and Publishing

$19,600,000 18,570,000 15,910,000 15,720,000 13,080,000 13,001,000 9,260,000 7,400,000 6,860,000

Similar progress in the manufactures of Oregon may be cited during the period prior to 1900. The gross value of manufactures increased from $10,931,232 in 1880 to $41,432,174 in 1890, or 279 percent in ten years. Further rapid increase from 1900 to 1905 is evident from the value of factory products, which rose during these years from $36,592,714 to $55,525,123. Timber and wood products, especially sashes and doors, ranked first. In Washington also the chief progress in manufactures was to be found in the lumber industry. In 1870 the value of timber products was $1,734,742 and the state ranked thirty-first in the Union in this respect; by 1905 the value of these products was $49,572,512 and Washington ranked first in the United States. Flour and grist products were valued at $14,663,612; meat packing at $6,251,705, malt liquors at $4,471,777 and foundry and machine-shop products at $3,862,279. These figures furnish evidence of the progress of the Pacific states in the development of manufacturing processes and of the outgrowth of their dependence on eastern centers. The agricultural and ancillary industries in all the Pacific states are more important than the manufacturing, and have always furnished one of the chief lines of exports to other parts of the country and abroad. Table 1, prepared during the first year of the operation of the Federal Reserve system, indicates the importance of all products of the area embraced by the Twelfth District, and in the country at large. The area, at the time of the formation of the Twelfth District, comprised 716,499 square miles and had a population of 6,144,295 persons.

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12

CENTRAL

BANKING

It is clearly evident from Table r that the Pacific Coast holds a significant place in the economic life of the United States, and that it was never merely a "section" for the unloading or the marketing of products manufactured or produced elsewhere. The region contains valuable natural resources and a diversified intradistrict trade. Countries abroad which are similar in economic outline have found a central bank necessary for efficient organization of resources; yet there were those in certain quarters of the United States who were eager to subordinate the Pacific states to the control of a single bank, located in the East. T h e economic framework of these states justified a separate bank. COMPARISON OF T H E T W E L F T H DISTRICT WITH C E N T R A L BANKING

COUNTRIES

ABROAD

If the region is compared with European countries, it is evident that there are favorable conclusions of a physical and economic character. The area suggested for the Twelfth Federal Reserve District compared favorably with both Sweden and Holland. Sweden and Holland, like the Pacific Coast states, are chiefly agricultural. While Holland mines some coal, manufactures textiles, earthenware goods and paper, and engages in shipping, agriculture and stock-raising are the most important industries. Sweden produces more minerals and manufactures more goods than Holland; yet agriculture yields the largest income and ranks first in importance. Both countries produce a large variety of crops. Many of the crops produced in Holland and Sweden exceed in quantity that of similar crops in the Twelfth District. The geographical area of these states is smaller. The two countries have enjoyed ample credit, there have been few bank failures, and outside capital is invested in the industries. Table 2 permits a comparison of the resources of the three territories. For the Twelfth District, 1 9 1 4 has been selected as offering the fairest comparison statistically. It was the first year of Federal Reserve operations, and gives a good idea of the situation at the beginning of organization. It affords a basis for later comparison. The 1914 figures for most of the products were available. Most of the figures for Sweden and Holland are for the years 1 9 1 0 and 1 9 1 1 . The figures for these

CENTRAL BANKING

13

\years reflect more stable conditions than those for the years nearer tthe war. Sweden and Holland have long been under the superwision of central banks, and organization of resources has been ssecured to a great extent. Of course the banks have had governimental work to do. TABLE

2

(COMPARISON OF THE PRINCIPAL VEGETABLE AND CEREAL CROPS /AND THE CHIEF PRODUCTS OF MINES AND FISHERIES, THE AREA MND POPULATION FOR STATED YEARS, OF THE TWELFTH FEDERAL PRESERVE DISTRICT, WITH THOSE OF SWEDEN AND HOLLAND FOR STATED YEARS* TWELFTH YEAR

FEDERAL RESERVE

YEAR

SWEDEN

YEAR

HOLLAND

DISTRICT

Mrea (Square Miles) . . 1 9 1 4 TTotal Population '9'4 F'rincipal Cereal and Vegetable Crops W h e a t (Bushels) 1914 Oats " 1914 BJarley " 1914 H a y (Tons) ' 9 ' 4 Potatoes ( B u s h e l s ) . . . . • 9 ' 4 Bleet Sugar ( T o n s ) . . . . 1914 Bieans (Bushels) 1914 P'eas (Bushels) •9'4 Fisheries T u n a , Salmon Pack . . Herrings C.hieJ Products of Mines and Metals Coal (Tons) Gold (Dollars) Siilver (Dollars) Copper (Pounds) I iron Ore (Tons)

1914

1911

I9IO

172,876

191O

5,522,403

I909

5.858,175

7.399. '76

igiO

89,08l,000

I9II

i g i l

5.340,736

54.769,000

19H

61,501,000

1 9 "

3.176,056

63,159,000

i g i l

13,300,648

i g i l

3.310,000

12,973,000

19II

32.395.°°°

19II

4.231.315 51,041,650

19II

1,051,108

i g i l

20,728

i g i l

201,609

19II

154.722

i g i l

222,691

19M

variable

i g i l

2,453.151

i g i l

1,476,000

1,91 I , 0 0 0 3,875,000

$13.959.000

5.615.683

1913

J43.703,000

>9'3 1910

$I08,803,000

•9'3

12,584

7"6,499 6,044.295

532,690,698

1911

311,809

I91O

80,081,152

I9H i g i l 191 1

2,042,076 100,270,384 1.972,740

6,153.778

'Source: Annual Report of the Federal Reserve Bank of San Francisco, 1915, p. 24; ib>id., 1918, p. 26; Statistical Abstract for Principal Other Foreign Countries, 1900-11, pip. 3 3 4 - 3 7 , 4 4 6 , 4 7 3 , 8 4 9 ; "Production Data from Mineral Resources of the United S tates," Part I, Engineering and Mining Journal, J a n . 19, 1 9 2 9 , pp. 9 6 - 9 7 .

14

CENTRAL

BANKING

D E S I R E D R E S U L T S OF C E N T R A L

BANKING

Central banking should bring organization and economy in the use of banking resources to any area in which there does not already exist a unified and centralized system of banking institutions. It should promote greater efficiency in the use of credit facilities by business, industrial and financial communities. In the decade prior to 1913, the financial network of the United States offered some of the most serious banking problems in the world. There was no other country which had allowed its financial system to develop the decentralization characteristic of America. If there were no central bank in a particular region abroad, at least a system of branch banks existed, which were furnished the services of a central bank by the parent institution. Centralization and unity in banking abroad were products of time and experience. In the United States, before 1914, there were numerous independent local banks without any central framework. Credit was somewhat frozen throughout the entire system. Loanable funds flowed readily from country banks and those of small cities to the large banks, but, with the absence of branch banking, the movement went no further. The money centers under those conditions were reservoirs for the collection of funds which could not be employed either temporarily or permanently at home. They were unsatisfactory distributing centers, and surpluses of funds were not made available in areas where there existed a need.10 There was no economy in the use of capital, no efficiency in the handling of credit, and no general clearance of claims, all of which would have been possible in a system under the supervision of a central bank. Clearance is one of the primary functions of a bank. This contributes largely to the advantageous use of credit and the general organization of the facilities of other banks. It is evident that if a central bank forms a connecting link between the commercial banks, resources may be utilized more efficiently through the offsetting of obligations. In Great Britain the Bank of England performs this service for the joint-stock banks, in that it settles residual 10

O . M . W . Sprague, Banking Reform in UniUd States, pp. 153-54.

CENTRAL BANKING

15

balances between them; the joint-stock banks, through their branches, clear the balances throughout the United Kingdom. I n the United States, since 1914, the Federal Reserve banks have served as the basis of an inclusive system of clearance which permits a general offset of obligations for the country as a whole. It has thus remedied to a great extent the decentralization of the unit structure. Both here and abroad this function has brought about economy in the use of cash. When a branch system is already in existence, the central bank merely clears final claims. In the absence of a branch system, the clearing function of the central bank assumes special significance. Consequently, when items are cleared on the books of the central bank, redemption is necessitated for only a small margin. This redemption, moreover, may not be called for in cash, but may result merely in a transfer of credit on the books of the central institution. 11 Economizing the use of cash is not the most important result which follows from the settlement of clearing-house balances through a central bank. The bank stands ready to make advances when necessary to banks whose reserves need replenishing. Advances by the central bank can be far more effective than commercial interbank advances, because they can be made without delay and without the publicity which destroys the usefulness of that instrument as an emergency device. 12 The central bank may refuse accommodations to banks which are merely seeking to strengthen themselves unnecessarily, or which are making unreasonable demands when well able to meet their obligations with their own cash resources.13 One other factor remains for discussion. Another means of economizing the use of resources is by diminishing and regularizing the movements of cash by banks and between banks. The independent unit bank in the United States was generally separated by some distance from its reserve agent. When a bank thus situated found it necessary to increase its cash holdings, either to meet regular requirements, such as for crop-moving purposes, or in H. P. Willis, The Theory and Practice of Central Banking, p. 64. H. P. Willis, J. M . C h a p m a n , and R . R o b e y , Contemporary Banking, pp. 252-53. " W. A . Shaw, The Theory and Principles oj Central Banking, pp. 81-83.

u u

16

CENTRAL

BANKING

order to be on the safe side in emergencies, it called for a larger shipment of currency from city banks than there was any likelihood that it would be obliged to use.14 Reserve banks have remedied this situation by establishing a system for handling domestic exchange between localities. All payments can be met by transfers on its books. Thus any central bank must answer the needs of business in the area under its supervision and must make provision for a liquid credit supply. In any region in which the industrial arts have reached a high degree of specialization and agriculture is carried out under conditions of intensive cultivation, there is a definite need for some institution to perform the exchange or clearing functions, to direct the supply of different kinds of credit, and to stimulate indirecdy essential capital formation. Bank practice on the Pacific Coast early reflected public awareness of the region to the fact that it would be possible to set up a "system" which would make the area largely independent of the rest of the country in so far as financial arrangements were concerned. California's rejection of the "greenbacks," the adherence to the gold standard and the non-recognition of the "fiat-issue" until specie payments were resumed give a measure of the independent feeling which existed on the coast. ECONOMIC

CHARACTERISTICS OF THE FAVOR

COAST

CENTRALIZATION

T h e climate, the variety of crops, and the diversification and importance of the manufacturing industries all aided the development of branch banking. While its rapid growth has not been due entirely to a conscious recognition of these advantages, the assistance afforded by the coast's economic resources has been capitalized for its success. Some attempts at centralization of this kind were carried out as far back as 1890, under authority of the Civil Code and state banking commission's regulations. Branch banking was legalized in the Act of 1909. Experiments with branches or some other central framework by coast bankers would undoubtedly have " Sprague, op. cit., p p . 159-60.

CENTRAL BANKING

17

been attempted, regardless of the establishment of the Federal Reserve bank. The development of branch banking since the establishment of the Reserve system has been furthered by favorable conditions. T h e varieties of crops have significantly different times of maturity. Grain, cotton, raisins, citrous fruits, deciduous fruits, winter vegetables and the raising of livestock are handled in specific areas. Usually there is no coincidence of financial requirements of business men in the north and the south, particularly in California. 15 Demands for funds in the interior likewise do not conflict with those of the coast. A properly run branch system thus offers distinct advantages over the unit bank, and the work of the branches may be supplemented by a central bank. The branch system can transfer funds easily and cheaply from community to community, and thus satisfy the needs of different areas with smaller aggregate capital. The state-wide systems of branches in the Pacific states facilitate the transfer of funds from one section, where there is a temporary surplus of funds, to another, where the demand for loans at a given time is greater than the volume of funds available for lending. T h e branch system is, in turn, strengthened, because the branch bank will not be obliged to employ so large a proportion of funds in the money market or in the purchase of investment securities. T h e unit bank which functioned prior to the development of the branch system generally did not have sufficient funds to handle the crop financing of its immediate vicinity, and was forced to call upon its correspondent. At other times its funds lay idle or had to be invested in the capital market. The business men of the region were not long in recognizing the advantages of cooperative action. The organization of the California Fruit Growers' Exchange, and similar associations in other fields, bears witness to the fact that they wished to extend their activities to other markets throughout America. 15 For a discussion of the advantages of branch banking in California and a brief outline of the development of the Bank of Italy, see the article "Branch Banking," by A. P. Giannini, California Journal of Development, J u l y 30, 1927, p. 7; J . F. Sartori, Departmental and Branch Banking in California (printed pamphlet, copy available in the New York Public Library).

CENTRAL

i8

BANKING

Testimony given before the Committee on Districting the Federal Reserve areas also indicates strongly that both business men and bankers recognized the self-contained character and independent need of this area. In these hearings it was established that most of the coast trade was highly localized and that it was substantially financed by local capital. Statistics indicated that coast banks were not so dependent upon aid from their correspondents as banks in other sections of the country. Foreign trade is another factor contributing to the individuality and independence of the Pacific states. By 1900 this commerce had achieved considerable importance in the economic and financial life of the area. Exports of agricultural and manufactured goods were shipped both to Europe and to the Orient. Most of the European exchange was handled by eastern correspondents. Some few banks, however, maintained direct correspondents in London, Paris and Berlin.16 The instruments necessary to finance the oriental trade were originated by the Pacific banks. For these purposes the large banks in Oregon and Washington maintained correspondents in Honolulu and Hong Kong. The more common practice was to meet the demands for payment growing out of the Pacific trade by drawing drafts through San Francisco correspondents.17 GENERAL

FINANCIAL

RELATIONS

WITH O T H E R

OF

THE

PACIFIC

COAST

AREAS

A brief review of the financial history of the Pacific states discloses several general periods of especially close relationship with the rest of the country. 1. Until about 1890 all the states on the coast were dependent upon their own capital resources. Much of their banking capital was slowly accumulated through the ordinary processes of trade. T h e amount of available capital was entirely dependent upon the profits of business. Branches of foreign banks were established, chiefly in Oregon and California, at an early date, but the capital of the parent in" J. H. Gilbert, Early Development of Banking in Oregon, p. 29. 17 Ibid., pp. 52-60.

CENTRAL BANKING

19

stitutions was available only in meager amounts and for local investment. As a rule, the local branches made use of resources native to the vicinity, merely helping the community to utilize its own capital to best advantage. The distance from eastern money centers and the lack of easy communication deprived the communities of outside investments of capital until the early eighties. When eastern investors first became interested in the Pacific Coast, Oregon and Washington attracted little attention because of the rapid economic development in California. It was here that most of the eastern and foreign capital sought investment. Banks in Oregon and, to a lesser extent, in California were largely independent of eastern connections. Small balances were carried in centers like St. Louis, New York and Chicago, to facilitate the handling of eastern exchange. Balances carried in the eastern centers increased slightly with the establishment of the first national banks on the coast, about 1883. Banking development during the eighties brought about greater integration of the facilities on the coast. The panic of 1893 found the territory almost free of connections with other sections. The few failures in Pacific cities such as Seattle, Portland and San Francisco, apparently could not be traced causally to similar failures in the East. Suspension of payments and failures in the East undoubtedly caused uneasiness in the West. The panic affected the banks on the Pacific Coast favorably, if at all, in that it clearly outlined the need for centralization. 2. The 1890's found many municipalities, mortgage banking houses, and other long-term investment concerns heavily indebted to eastern capitalists and to investors abroad. The beginning of the twentieth century brought great industrial activity to all the coast states and more eastern capital found its way to the West. The resources of national banks increased substantially, and they grew rapidly in numbers from 1900 to 1910. In this period they surpassed the state systems. It will be noticed from a comparison of deposit and capital accounts for these states that the banks were capitalized out of proportion to their deposits. This was not so generally the case with banks in other areas of the country. It was probably attributable to the conditions which existed in the short-term commercial loan

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w Q

146

OPERATIONS

This figure is lower than in most of the other districts.58 T h e extensive development of the market for Federal funds has operated as a factor to reduce Reserve bank earnings since 1921. 6 9 T h e traffic in these balances has always been of importance to the Pacific Coast cities, but was of particular significance during 1929 and 1930. Open-market operations have assumed relatively the same importance in the Federal Reserve Bank of San Francisco as has been the case in the other banks of the system. Examination of Table 14 will show that while approximately half the earnings during the 1930-34 period were from government securities alone, the combined total of acceptance holdings and government securities bulks large as an earnings factor during the 1924-29 period. Table 15 shows the disposition of the earnings by the Bank. After deducting the expenses of bank operation, the assessments for Federal Reserve Board expense and the Federal Reserve currency and depreciation changes, net income is used to fulfill dividend requirements, build up the bank's surplus account and further as required by law. The remainder is paid the government as a franchise tax, representing the entire net income of the bank after paying dividends and making additions to surplus. Member banks are entitled to cumulative dividends at the rate of 6 percent of the capital stock of the Reserve banks. Their claim, of course, rests first on earnings. Full dividends have been paid regularly during each year of operations since 1918, in which year payment of arrearages was also made. The bank had lagged twelve months behind up to that time.63 Only in seven years of operation, when earnings were insufficient to cover dividends, has it been necessary to charge surplus for payment. Before amendment in 1919, the Federal Reserve Act required that after dividend requirements had been met one-half of the net earnings were to be paid into surplus until the account reached 40 percent of capital paid in. All remaining net earnings were to be paid to the government as a franchise tax. The New York Re58 See Clark, op. cit., p. 1 1 0 ; Griswold, op. cit., p. 154; Annual Reports oj the Federal Reserve Board, for earnings factors in the other Reserve banks. 59 See Chap. V I I . M Annual Report oj the Federal Reserve Board, 1917, p. 28.

OPERATIONS

147

serve Bank was the first to accumulate this surplus of 40 percent. None of the other Reserve banks had accumulated the surplus before the requirement was waived. San Francisco had accumulated 26 percent. T h e other banks stood as follows: 61 Boston Philadelphia Cleveland . Richmond . Atlanta . .

. . . .

. . . .

• 22.9 . . 17.2 . .19.6 • 28.5 • 24.3

Chicago . . St. Louis . Minneapolis Kansas Citv Dallas

. . . .

. . . .

. . . • .

.29.6 .21.1 .24.8 • 33" . 18.8

As indicated previously, on March 31, 1919, an amendment to the Federal Reserve Act provided that the Reserve banks were to accumulate a surplus out of net earnings, after setting aside dividends amounting to 100 percent of subscribed capital; and that after such surplus had been accumulated, they were to pay into surplus 10 percent of net income remaining after paying dividends. T h e remainder was to go to the government as a franchise tax. 62 In 1920 all but three of the Federal Reserve banks had accumulated surplus in excess of 100 percent of their subscribed capital stock, as outlined in the amendment to Section 7 of the Act. T h e positions of the banks are shown in Table 16. In keeping with general banking theory, the larger surplus was designed to afford better protection to creditors, and separate earnings and credit policy. T h e Federal Reserve banks operate under less stringent obligations than do national banks, regarding liabilities that are incurred. National banks are not permitted to become liable for borrowed money (except to Federal Reserve banks and the War Finance Corporation) in an amount greater than their capital stock. Nor could they issue or put into circulation national bank notes in excess of this amount. For purposes of elasticity, as institutions of final resort the Federal Reserve banks were not made subject to these restrictions. It is therefore of great importance for the protection of outstanding liabilities that the surplus be large. Federal Reserve notes issued through Reserve "Ibid., 1918, p. 28. " Ibid., 1919, p. 35. T h e surplus of the San Francisco Reserve Bank was 65.76 percent of capital in 1919.

OPERATIONS

148

TABLE

l6

SURPLUS OF THE T W E L V E FEDERAL RESERVE BANKS COMPARED W I T H S U B S C R I B E D C A P I T A L S T O C K , J U N E , 1, 1 9 2 1 » ( I n T h o u s a n d s of Dollars)

CITY

Boston New York Philadelphia Cleveland Richmond Atlanta Chicago St. Louis Minneapolis Kansas City Dallas S a n Francisco Total

NORMAL SURPLUS

SUPER SURPLUS

'5.436 52.745 16,970 20,305 10,538 8,106 27,825 8,346 6,922 8,910 6,033

275 3.669 40

•3.853 >95.989

TOTAL

SUBSCRIBED CAPITAL JUNE I, 1921

RATES OF SURPLUS TO SUBSCRIBED CAPITAL

101.5 I07.0 IOO. 2

9.'59 6,033

15.436 52.745 16,970 21,406 10,538 8,106 27.825 8,730 6,922 8,910 8,197

34'

14.194

13.853

94-9 100.2 102.9 104.2 95-6 100.8 102.8 73-6 102.5

6,047

202,036

199.638

101.2

23 237 '.'55 58 249

>5.7" 56,4'4 17,010 20,305 10,561 8.343 28,980 8,346 6,980

* S o u r c e : Annual Report 0/ the Federal Reserve Board, 1920, p. 8g.

banks are obligations of the Reserve system and are ultimately obligations of the United States government. The government share of the net earnings in the form of a franchise tax was used to increase the gold reserve held against outstanding United States notes, or to reduce outstanding bonded indebtedness. The law further provided that should a Federal Reserve bank liquidate, the surplus, after requirements had been met, would become United States government property.63 The accumulation of a large surplus fund under the 1919 amendment was provided for by substituting subscribed capital for paidin capital, by changing the percentage from 40 to 100 percent, and by providing for an additional 10-percent payment of net earnings after the 100-percent requirement had been satisfied. The ruling was retroactive so far as 1918 was concerned. " Annual Report oj the Federal Reserve Board, 1918, pp. 8 1 - 8 2 ; C l a r k , op. cit., 118-21.

pp.

OPERATIONS

149

The 1919-23 surplus was at least 100 percent of the subscribed capital, and the surplus was very close to 100 percent during 192335—even though it was necessary in 1922, 1924, 1930, 1931, 1933, and 1934 to draw down surplus for dividend payments and to carry nothing to surplus during 1925.64 Realizing the need for a large surplus as a basis for the creation of a nonpartisan credit policy, as well as the fact that the surplus had been below the ioo-percent of subscribed capital as permitted, the framers of the Banking Act of 1933 provided that the government would no longer be entitled to share in the earnings of the Reserve banks, but that the total should go to surplus.05 This same view was expressed in the Banking Act of 1935, in that national banks are now required to return surplus equal to 100 percent of capital.68 The position of the Reserve banks requires a large surplus. During 1920, 1921 and 1922, the Federal Reserve Bank of San Francisco paid to the government franchise taxes amounting to $7,697,341. During the years in which the system has been in operation, the Treasury has received from all Reserve banks Federal taxes amounting to $i47,ooo,ooo.67 Henceforth the Reserve banks will retain all earnings. M

See Table 15. " See Sec. 4, Banking Act, 1933. M See Sec. 6, Banking Act, 1935. " Annual Report 0/ the Federal Reserve Board, 1920, p. 4 0 1 ; for a discussion of the proposal to tax the Reserve bank on note-issuing power in lieu of franchise tax and the offsets of free services as Fiscal agents, see Clark, op. cit., pp. 1 3 1 - 3 2 .

VI BANKERS' ACCEPTANCES AND B A L A N C E S IN T H E T W E L F T H

BANKERS' DISTRICT

PRIOR to the establishment of the system and for some years thereafter, only one bank in the district had had any experience in the use of acceptances as a credit instrument. Acceptances had not been used to any considerable extent in financing the oriental trade, and few, if any, were originated locally. Commercial bankers were inclined to regard the sale of acceptances which they had indorsed as a reflection upon their own liquidity, as though they had been forced to borrow money or find a new means of satisfying credit demands which would generally have been handled in some other way. Reluctance on the part of the banking community to change practices, particularly on the Pacific Coast, was pronounced. It was not until several years after the establishment of the Reserve banks, despite the educational work undertaken to popularize acceptance credits, that banks began to experiment with the granting of such credits. From an investment point of view, United States government short-term obligations and stock-exchange loans offered sharp competition. First experiences m a d e evident, even after the accumulation of a certain volume of acceptances, that the banks for the most part were unfamiliar with the technique of the bill and its place in the credit structure. A n effective open market is predicated upon the willingness of a large number of strong financial institutions and firms to buy. Naturally none could develop automatically on the coast. As a result of this situation, all early purchases of the San Francisco Reserve Bank were made in the N e w Y o r k market for investment purposes. Its first purchases (1915), totaling $2,982,849, were made through the Federal Reserve banks of N e w York and Boston. 1 In a subsequent year, 1917, $52,532,168 of domestic 1

Annua! Report of the Federal Reserve Board,

1915, p. 368.

ACCEPTANCES

AND BALANCES

151

acceptances and Si5,733,940 of foreign-trade acceptances were purchased in the eastern markets. T h e coast banks, taken as a group, showed a definite lack of interest in the use of this instrument, prior to 1918. E A R L Y ACCEPTANCE

EXPERIMENTS

It was during the years 1919 and 1920, however, that complete experiments with acceptances were carried out by the commercial banks. T h e first bills (as had been the custom of New York banks with their southern correspondents) were initiated largely by New York correspondents of San Francisco banks at the local banks' suggestion. T h e first large block of bills originated by coast banks, used to finance the prune and apricot crops, was accepted by the Bank of Italy in syndicate participation with a number of New York and Philadelphia institutions. T h e largest percentage of the small volume of bills originated on the coast was used to finance Dutch East India and Philippine sugar imports and rice credits in the Far East. T h e majority of acceptances were sold in the East, and the coast commercial banks, whenever they bought acceptances, bought them in the East. Some acceptance purchases were made when offered by their customers for discount. It was more convenient for the interested bankers, because of the lack of facilities and the intermittent character of local offers, to adjust their investments from day to day in the New York market. 2 Usually these banks paid more when buying, and received less when selling, than the New York banks did when buying the same quality of paper. Except for an occasional instance when the San Francisco Reserve Bank would buy any bills offered, even from the acceptor himself, or sold bills to its member banks, there was definitely no local market, the only real market being in New York. 3 T h e San Francisco Reserve Bank never bought directly from bill dealers in New York, but made its purchases from the New York Reserve Bank. There was no desire to offer competition, and as a result the San Francisco Reserve Bank never bought directly Ibid., 'Ibid.,

8

1918, p. 732. 1918, p. 732.

152

ACCEPTANCES AND

BALANCES

from local San Francisco correspondents of New York dealers. New York dealers, however, frequently sold direct to San Francisco commercial banks for investment; but more generally these banks acted practically as agents for the Reserve bank. They sold most of the paper to it immediately, without indorsement as twoname paper. As stated before, San Francisco banks sometimes sold blocks created by themselves directly to the Federal Reserve bank. This type of activity, however, was closed when the Board ruled in February, 1920, that Reserve banks might refuse bills indorsed only by the acceptor, the theory being that the bills were then tested only by the Federal Reserve bank itself. The ruling also commuted preferential rates.4 The market at first was artificial. At one time twenty banks on the coast were floating acceptances which had been forced into use when commodities started to accumulate after the war. Educational work on the use of acceptances was then undertaken. Even after interest had been created by the war in this type of business, it was not further stimulated by the effort of local branch dealers representing New York houses. Before New York offerings could be fully considered and a firm order placed, perhaps half the paper on sale would have been disposed of in New York, because of the more favorable and rapid outlets for the paper in that area. The lack of volume in the creation of acceptances and of purchases for investment by the coast banks, as time passed, was caused by deficient facilities for trading. After 1922 several new dealers entered the field in an attempt to develop a local market. Among these the National City Company of California and the American Securities Company were chief. It was logical that a market should develop in San Francisco because of the distance from New York. Demand gradually increased, and there developed an original source of bills accepted by banks in San Francisco. Dealer Arrangements

Facilities were given by the Federal Reserve Bank of San Francisco to dealers who demonstrated that they were bona-fide buyers 4

Federal Reserve Bulletin, 1921, p. 699.

ACCEPTANCES AND BALANCES

153

and distributors of bills, and of demonstrated worth commensurate with the liabilities of the business, when accommodation for carrying bills was not available at local banks.6 Between 1923 and 1930, the volume of acceptance dealings increased about 300 to 400 percent. One dealer established lines of credit at the Federal Reserve Bank of New York through the San Francisco Reserve Bank, where the New York office was thus enabled to carry its portfolio of bills under 15-day repurchase agreements. Subsequently the same arrangement was made in Chicago and Boston. The latter, however, never became a "position" office. The dealers in San Francisco also made use ofthe balances of "Federal Funds" shipped to San Francisco after the day's closings in the East, and financed considerable portions of their portfolios in this way. When the market is active, the 15-day agreements entered into by dealers with the San Francisco Reserve Bank frequently have been broken after one, 2, or 3 days, in part to make deliveries to investors. The duration of the agreement has averaged 4 to 5 days, and at times 10 to 12 days.6 Carrying Rates on Acceptances

In the beginning, the carrying rate for bills at the Reserve bank was fixed at the actual rate at which each bill was purchased by the dealer in the market. When bills were being withdrawn each day for sale, an average rate was fixed. Later, rates were sometimes fixed in such a way that they would provide sufficient penalty to cause the dealer to seek cheaper funds elsewhere. When the banks were rediscounting, they would not accommodate dealers. Immediately the banks were in funds, they offered credit, which, if accepted, relieved the Reserve bank of dealers' obligations. The rate was fixed at the Reserve bank, in this instance, to create an incentive to borrow elsewhere as soon as surplus funds appeared. It has been felt that portfolios should have a direct relationship to the dealers' demands from investors, and that the San Francisco banks should not accommodate dealers • Hearings, 1 9 3 1 , p. 923. • Ibid., p. 946.

154

ACCEPTANCES AND

BALANCES

who are carrying bills with any other object in view. 7 T h e carrying rate has been used as a corrective measure. Uses of Acceptances

Acceptances on the Pacific Coast have been created under letters of credit and under acceptance agreements establishing both open credits and those requiring specific security. The open credits have been confined to bills drawn to create dollar exchange. These are rare and have never been in general use. The principal use of acceptances has been in foreign trade. About 90 percent of the import bills have grown out of the oriental trade. A substantial volume of bills was also originated in connection with domestic business, chiefly for storage. Foreign storage and shipment credits accounted for the largest volume in 1929 and 1930. Many of these bills were accepted on behalf of correspondents in Germany. Table 17 indicates the increasingly important position that bankers' acceptances have assumed in the Twelfth District during the five-year period, 1925-30. During a typical year, marked increases in volume are shown during the autumn, to a peak near the turn of the year, and a sharp decrease to a low point in April and May. This seasonal movement coincides with the marketing of some of the district's principal food products, which are nonperishable staples. The largest part of these commodities is marketed outside the district. CONCLUSIONS

The bill market which has developed in San Francisco is sharp but narrow, and all coast banks have received prime rates on their bills. They are also easily marketed in other districts. Bills are bought in small volume in Seattle, Portland and Los Angeles for San Francisco delivery and payment. Practice on the coast has for the most part been free from abuse. There has been but a small volume of unnecessarily long bills and but few renewals. These have generally arisen in connection with domestic storage transactions. It would perhaps be better to confine the use of the acceptance in this connection to the major staples, and to substitute loans as a means of carrying the others. San Francisco compares in no ' Ibid., p. 943.

ACCEPTANCES AND BALANCES TABLE

155

17

ACCEPTANCES* Totals as of November 30 (In Millions of Dollars) 1926

*9*7

1928

1929

'93°

362 522 20 260 75 416

243 421 33 273 56 543

T h e Entire Twelfth District Imports Exports Domestic Warehouse Dollar Exchange Foreign Storage and Shipment

281 260 20 '°5 21 39

304 375 22 186 31 111

317 448 18 163 32 221

San Francisco Alone Imports Exports Domestic Warehouse Dollar Exchange Foreign Storage and Shipment

14

'3 9

12 13

11 10

R

I

8

14

8

18

16

2

I

14

21

33

13 8 I

11

I

* Source: Hearings, 1931, p. 864.

way with New York or Chicago as a market for bills. This has been due to concentration of foreign banks in eastern centers. Coast bankers are reluctant to bid for this borrowing, as they have a fairly constant local demand for funds. Facilities could be expanded, however, and with the resumption of foreign trade the volume of the bills could be materially increased. Financial observers in San Francisco think that the Federal Reserve Bank of San Francisco would stand ready to offer support. In this case it would perhaps be possible to break the artificially low rates encouraged by the Federal Reserve Bank of New York. 8 BANKERS'

B A L A N C E S ON THE

COAST

Even before the establishment of the Reserve system, San Francisco had become the largest center for bankers' balances on the 8 See pp. 126-27, Chap. V, for a discussion of the effect of the rate of the Federal Reserve Bank of New York on the Twelfth District.

I56

A C C E P T A N C E S AND BALANCES

Pacific Coast, reflecting an elastic demand for money. It is today the primary market west of Chicago, and the only one of importance in the Twelfth District. The market for bankers' balances, although directly related to the banking system, is entirely apart from the routine work carried on in a Reserve city—accepting deposits and making loans and investments. The market for bankers' balances is made by the acceptance houses, the commercial-paper dealers, and arises from the demand for call money and transactions by security underwriters and security dealers. These sources of demand make possible the employment of excess funds of outside communities at times of seasonal surplus. Funds of Southern California are available in San Francisco at one time of year and when withdrawn are replaced by funds of the Pacific Northwest. San Francisco banks have not developed a securities market which absorbs all idle funds. Instead of passing all of the funds on to New York, however, local banks, over a period of years, gradually expanded their business on the basis of these outside funds. They have especially relied on these funds since the establishment of the Federal Reserve system. These funds furnish an immediate supply of money to support sudden and seasonal withdrawals. The banks have used the Federal Reserve facilities freely only in times of credit strain. 9 Other Reserve cities of the Pacific states have become of decreasing importance as markets for bankers' balances, and recent reports indicate increases in net balances "due from" banks.10 The balances in the smaller centers are held for clearing-house settlements in the convenience of checking accounts, and as legal reserves of nonmember state banks. While the deposits are not large, they are active.11 Amounts in excess of requirements for these pur• T h e banks used the Federal Reserve banks freely during the war, during 1921, and during 1932. 10 This is particularly true of Oakland and Odgen. Country bankers prefer to carry their reserves and checking accounts in the Federal Reserve branch cities. 11 Monthly Review of Business Conditions, Federal Reserve Bank of San Francisco, Feb., 1935, p. 15. State laws vary in reserve requirements of state banks outside the Federal Reserve system. Most require a nominal amount of cash in vault; the remainder may be kept in designated cities. The total volume of these funds is quite

ACCEPTANCES

AND

BALANCES

157

poses are transferred by Reserve city banks to San Francisco or New York. As the resources of the banks and the demand for credit in these areas are limited, the banks cannot, or as a matter of policy do not, employ these outside funds locally.12 As a rule the bank in the smaller city maintains the account with the correspondent in the larger city and not vice versa. In some instances reciprocal accounts are used, where the correspondents keep approximately equal balances with each other. Bankers regard this practice unfavorably, and most state laws prohibit reciprocal accounts between cities holding legally required reserves. Except in unusual situations, the outside banks do not require additional credit accommodations, nor do they make habitual use of the Federal Reserve bank. Seasonal currency requirements and demands for transfers of funds are met by recalling deposits in the larger centers, or by selling securities in New York. Unusual additions to the supply of funds are telegraphed to other cities or invested in the open market. 13 B R A N C H BANKS AND BANKERS'

BALANCES

The branch-banking systems on the coast, and particularly in San Francisco, have never been large holders of bankers' deposits. Country banks as a group have resented the methods used by these banks in expanding their systems, and consequently have preferred unit banks as correspondents. Most of the balances used by the branch systems in San Francisco have been overnight transfers from affiliates or correspondents in the eastern time zones. The distinction between the banks which received deposits and those which did not has been important at times. In some instances the branch systems have been embarrassed through the loss of funds and in other cases have been unable to employ all of their funds. stable, fluctuating slightly to changes in deposit. Measured by changes in the reserve requirements of country bank members of the Federal Reserve system, the change in dollar amount would be small. A small volume of the balances in these centers is comprised of funds kept to enable member and nonmember clearing banks to remit for checks drawn upon them by drafts on their reserve accounts or on correspondents in the branch city. 11 Bachellor, op. cit., p. 103. 11 Ibid., p. 104.

158

A C C E P T A N C E S

AND

B A L A N C E S

At the same time the unit banks have generally made good uses of funds and have passed their bankers' deposits on to New York. DOLLAR

MOVEMENT

OF B A N K E R S '

BALANCES

T W E L F T H DISTRICT

IN T H E

PRINCIPAL

CITIES 1 4

T h e country bank deposits with correspondents, as has been indicated, are usually passed on to San Francisco or New York, because of lack of means for profitable employment. Experience likewise shows that Reserve city banks deposit with the larger financial centers amounts in excess of those received as bankers' balances. The same factors that cause surpluses in country areas make for excesses in the Reserve cities. 15 Portland Portland banks shift to the larger financial centers somewhat more than two dollars for every dollar received. Amounts received by Portland banks from correspondents have remained fairly constant, but the proportion sent on to other cities has increased. Only small amounts have been left for use in Portland. Los Angeles As the item "due to banks" in Los Angeles increases from 30 millions to 80 millions, deposits of Los Angeles banks with other cities increase from 35 to 1 1 0 millions. The bulk of these deposits is lodged in San Francisco and New York. 1 6 From another point of view Los Angeles banks ship out $1.50 for each dollar received. When bankers' balances are recalled from Los Angeles, its bankers withdraw $ 1 . 5 0 from correspondents. This relationship has appeared to be regular since 1927, with the exception of the time of strained conditions during 1931 and 1932. Los Angeles banks seldom borrow at the Reserve banks, since, as has been shown, they do not employ all of their own funds which are available, nor are they able to make use of funds of other correspondents. 14

Weekly data on bankers' deposits have been collected since 1927. Monthly Review of Business Conditions, Federal Reserve Bank of San Francisco, J u n e , 1932, p. 48. " Bachellor, op. at., p. 124. 16

ACCEPTANCES

AND BALANCES

159

Seattle and Spokane

For every dollar received by Seattle and Spokane banks a dollar is passed on. Correspondents' funds in Seattle approximate 20 millions, the bulk of which has been sent elsewhere, except during 1931 and 1932, when larger amounts than usual were retained for local use. Bankers' balances with Spokane banks have been decreasing because of smaller deposits in Spokane by correspondents and larger amounts being sent to other cities. When Spokane banks use these funds to meet their own obligations, an average of a dollar is passed on to other cities for each dollar received in excess of 5 millions. 17 San

Francisco

Until 1908 San Francisco banks had more money "due from" other banks than owed to correspondents. Then, as the local banks began to receive increasing amounts of bankers' balances, they developed the practice of passing part of these funds on, in order to spread the risk of sudden withdrawals. Since 1920 the local banks have employed 40 cents of every dollar received in their local market. T h e remaining 60 cents have been sent to New York. 1 8 Sums "due t o " San Francisco banks have increased approximately 4 millions of dollars every year over the period 18901930; at a rate of more than 5 millions of dollars per year during the period 1914-30. Amounts "due from" outside banks have increased less rapidly. They have averaged a 3-million-dollar increase from 1890 to 1930, but only 1 millions from 1914 to 1930.19 It must be argued from this that the local business of San Francisco banks is being expanded on the basis of bankers' balances. Charts 7 and 8 show the movements of these balances from 1927 to 1932, in San Francisco and the outside Reserve cities. Fluctuations in interest rates have a definite effect on the net amount of funds retained in San Francisco. As has been said, the local banks ordinarily use 40 millions of outside funds. When interest rates in San Francisco are 2 percent above New York rates, Ibid., p. 127. " Monthly Review of Business Conditions, Federal Reserve Bank of San Francisco, 18 Bachellor, op. cit., p. 129. June, 1932, p. 48. 17

i6o

ACCEPTANCES AND

BALANCES

60 millions are retained; 80 millions, when local rates are 4 percent higher than those in New York. When rates in San Francisco are 2 percent below those prevailing in New York, only 20 millions will be retained for local use. Bankers' balances generally move

(]

IR

y

12» 1

»5

-

f

+J

N VI

OUC TO SA

NAS 1

v

Vj

\J L V J

Chart 7 BANKERS'

BALANCES,

SAN

FRANCISCO

" D u e to banks" represents principally balances carried in San Francisco by country banks and other reserve city banks in the Twelfth District. " D u e from banks" represents principally balances carried by San Francisco banks in New York and other cities not in the Twelfth District. Source: Monthly Review oj Business Conditions, Federal Reserve Bank of San Francisco, June 1932, p. 48.

two months after the interest rate changes and four months after differences have been established between the acceptance buying rate and the discount rate of the Federal Reserve bank.20 Twelfth District country and nonmember city banks regularly keep 100 to 155 millions of dollars of funds on deposit outside of the district, since city banks depend substantially on outside funds for their own day-to-day operations. All banks, city and country, keep from 170 to 205 millions with banks outside the district. Not any banks since 1914 have carried less than 100 millions outside m Ibid., p. 129; Monthly Review oj Business Conditions, Federal Reserve Bank of San Francisco, June, 1932, p. 48.

ACCEPTANCES AND BALANCES

161

the district. Reserves in the Twelfth District have been, over a period of time, closer to the required minimum than banks for the country as a whole, or than those of any other district. Amounts "due from" other banks are subject to the same general influences as amounts "due to" outside banks. Amounts "due MILLIONS Of

DOLLARS

»It

TO BANKS

V » out r*o J 75

iA /V3

Zi,

BANKS

\

1

\7

2» Chart 8 BANKERS' INCLUDING

B A L A N C E S , T W E L F T H D I S T R I C T R E S E R V E C I T I E S OUTSIDE S A N F R A N C I S C O , LOS

ANGELES, O A K L A N D , PORTLAND, SALT L A K E C I T Y , SEATTLE

AND

SPOKANE

" D u e to banks" represents principally balances carried in these "outside" reserve cities by Twelfth District country banks. "Due from banks" represents principally balances carried by "outside" reserve city banks in San Francisco and New York and other cities not in the Twelfth District. Source: Monthly Review of Business Conditions, Federal Reserve Bank of San Francisco, June 1932, p. 47.

from" banks are more directly related to the borrowings of San Francisco banks from the Reserve bank. It is obvious that if local banks are borrowing substantially, they will use incoming funds to repay indebtedness, instead of sending the money to New York for use at a lower interest rate than is paid on borrowed money. As borrowing declines, a large percentage of total money received is passed on to other cities; when borrowing is high, little if any money is sent on. There is a certain minimum below which "due

162

ACCEPTANCES AND

BALANCES

from" banks will not be reduced, owing to the operating necessity of meeting the demands on checking accounts. T W E L F T H DISTRICT MEMBER BANK BALANCES IN N E W

YORK

Since figures first became available in 1928, member banks of seven Pacific states have carried on an average between 50 and 60 millions of dollars with New York City correspondents. The

Chart 9 R A T E S OF I N T E R E S T

PAID BY SAN

FRANCISCO

BANKS

Weighted averages of mid-month figures. Source: Monthly Review of Business Conditions, Federal Reserve Bank of San Francisco, J u l y 1933, p. 55.

amounts have fluctuated between 45 and 77 millions of dollars.21 The amounts are considerably in excess of convenient checking accounts for payments. The development of the Federal Reserve system has apparently had no effect on reducing the concentration of deposits in New York. 22 SPECIAL PROBLEM OF COAST TIME ZONE

BALANCES

Because Pacific Coast cities are farthest west in continental United States, they are three standard time zones removed from 51 Federal Reserve Bulletin, M a r c h , 1931, p. 140. These figures do not take a c c o u n t of the large legal reserve and other balances of nonmember state banks. T h e y d o not include amounts loaned on call in N e w Y o r k . 22 Beckhart and Smith, New York Money Market, II, 230. See their comparisons of deposit concentration in recent years with 1915; also the Annual Report of the Comptroller of the Currency, 1915, I, 213-22.

ACCEPTANCES AND BALANCES

163

New York. When New York banks close at 3 P.M., San Francisco banks are still open for business, since it is only noon on the coast. During the daylight-savings months, a four-hour differential exists. This enables eastern banks and banks in other time zones to compute their funds in excess or deficit of legally required reserves, and if in excess sell that balance overnight in the West. The amount of excess reserves available for overnight or day-to-day use depends not only upon time differences, but upon correspondent relationships.23 Certain local banks have solicited funds from banks in all parts of the country and stand ready to receive up to certain limits at all times and without notice, agreements as to rates being understood. Other banks will receive funds if sent, but will not pay for these unless something is earned. Still others do not encourage the sending of overnight balances, but do accept limited amounts. A t the present time the regulations of the Federal Reserve Bank of San Francisco greatly discourage the use of overnight funds. During 1929, 1930 and 1931, telegraphic transfer of day-to-day funds was very important as a source of supply to San Francisco banks.24 Since 1931 they have become less important. This may be due not only to the attitude of Reserve bank officials, but also to the disposal by two large San Francisco branch banks of their wholly owned eastern affiliate banks, thus cutting off the available supply of funds. The affiliates have in many instances acted as agents for securing these overnight funds when having no excess reserves of their own.25 "Federal funds" are received from nearly every large city in the United States. At times during the year, eastern centers—New York, Boston and Philadelphia—supply most of the money. Substantial amounts, however, are received from Chicago, Detroit, Atlanta, New Orleans, St. Louis, Kansas City, Dallas and other points. In some cases, eastern funds are sent to banks in the Middle West and are again forwarded to San Francisco. Funds from Dallas are often sent to Los Angeles and reforwarded to San Francisco.26 " Hearings, 1931, op. at., p. 727. 21 Credit Sections, Monthly Reviews oj Business Conditions, Federal Reserve Bank of San Francisco, 1930-31. a Interviews. 51 Interviews.

164

ACCEPTANCES AND

BALANCES

EFFECTS OF BANKERS' BALANCES ON MEMBER BANK

BORROWINGS

San Francisco banks have relied heavily upon the Reserve banks in their day-to-day operations, since they have expanded local loans and investments through bankers' balances. In 1929, when large amounts of outside funds were transferred from San Francisco, the banks borrowed heavily during the entire year and the Reserve bank supported withdrawals with its own funds. At the close of October, 1929, the banks borrowed more than $100,000,000 from the Federal Reserve bank when pressed for transfers to New York. 27 Shortly thereafter a return flow of funds enabled them to repay discounts and, later in the year, to release funds through acceptances rather than discounts.28 The Reserve bank stands informed of the daily and hourly needs of the money markets, before the banks feel such need. This is possible because of the telegraphic transfer over which credits come in and go out of the city, and the centralization of Treasury disbursements and collections in the Reserve bank. The bank is then in a position to put money in the market through purchases of government securities or acceptances. 29 The use of bankers' deposits, however, has tended to weaken the effectiveness of credit control by the Reserve bank. OPEN-MARKET

PURCHASES OF

GOVERNMENTS

The Federal Reserve Bank of San Francisco seldom purchases government securities in the local market.30 Almost all of the purchases are carried out in the New York market, in cooperation with the other banks of the system.31 The first effect of these operations is to reduce the percent of gold certificate reserves and to lower the ratio of reserves to deposit 57 Monthly Review of Business Conditions, Federal Reserve Bank of S a n Francisco, Dec., 1929, p. 95. 28 Annual Report of the Federal Reserve Bank of San Francisco, 1929, p. 17. w Bachellor, op. cit., p. 119. 30 Factors Affecting the Use oj Banking Reserves in the Twelfth District, Federal Reserve Bank of San Francisco, J u n e , 1933, p. 7. 31 Local purchases are negligible. Anticipating a call from the Comptroller, local banks sometimes sell government securities to the Reserve bank for a few days to reduce indebtedness.

ACCEPTANCES

AND

BALANCES

165

and to note liabilities of the San Francisco Reserve Bank. The amount of free gold is also reduced. 32 In New York, commercial banks are supplied with immediately available funds. If the banks do not withdraw these funds in currency, they may use them to repay borrowings at the New York Reserve Bank, to transfer to other parts of the country, for loans and investments, or to support increased deposits.33 A continued buying program creates excess funds in New York which are likely to be used in reducing Reserve bank indebtedness. Whether the selling bank is a borrower or not has little effect, because it may sell its excess reserve balances. As another means to the same end, the money may be invested in the open market, "displacing investments of borrowing banks," and thus enable the banks to reduce indebtedness. O n the other hand, the selling bank may increase its customer loans. Thus part of the proceeds will be deposited with other banks throughout the city, putting them in funds. Dispensed throughout New York, Reserve system credit begins to spread to other sections of the country. 34 Interest rates begin to fall as New York commercial banks reduce their indebtedness, reflecting increased supplies of money. Yield on funds from areas outside New York is reduced. The outside cities begin to recall their balances as the rates at home become more attractive. Some New York balances are also shipped to these centers where customers' rates are sustained. Falling open-market rates are soon followed in thirty to sixty days b y a transfer of bankers' balances and open market investment from N e w York to San Francisco and daily excess reserves of N e w York go to San Francisco overnight. C o u n t r y banks also find it more profitable to keep their unemployed

funds in San Francisco. Experience of the

past

twelve years has shown that a lowering of open market rates b y one per cent is usually followed by a ten million dollar increase of bankers' balances in San Francisco. Local banks use these funds to reduce borrowings at the Federal Reserve Bank. 36 32 Government securities are not eligible for security for outstanding notes except with approval of the majority of the Federal Reserve Board. See the provisions of the Glass-Steagall Act. 33 Bachellor, op. cit., p. 180. 34 Ibid., p. 185; interviews. 35 Bachellor, op. cit., p. 190.

166

ACCEPTANCES AND

BALANCES

While open-market operations in government securities by the Reserve system ultimately affect conditions in each district, a time lag is introduced in effect between districts. The New York money market is most positively and effectively influenced. Even here some influence is lost because of the concentration of deposits of outside banks in New York. Credit control by the Reserve banks in their individual districts is weakened. The treatment of the government as an ordinary customer by the Reserve system and the more careful consideration of conditions outside New York would tend to make New York less important as a center for trading in government securities. It would also increase the influence of the Federal Reserve banks in their respective districts. SEASONAL

VARIATION

IN

LOANS

AND

DEPOSITS

Considering the Twelfth District as a whole, seasonal changes in loans and deposits in banks are slight. The variation between cities and regions is more significant. There is rarely more than a 2percent variation in loans from the month of the lowest to that of the greatest demand, taking the coast as a whole. Individual cities however, show variations of from 5 to 10 percent between the high and low points of demand. The peaks of demand for credit in Portland and Seattle occur at times of least need in Los Angeles and San Francisco respectively.36 Seasonal changes in reserve deposits of the district are fairly constant, the high point occurring during the last quarter of the year. When the banks' reserve deposits are at a minimum, they also keep their bankers' balances in other centers and call loans in New York at the lowest points of the year. This generally takes place in the second and third quarters of the year, when checks are being drawn against deposits in payment for goods purchased in other sections of the country. Banks utilize all sources to make payments. After crop marketing, the balance of payments becomes favorable to local banks and funds flow in. A surplus is made available for outside investment or deposit in other cities.37 M See Beckhart, Smith and Brown, The New York Money Market, Vol. I V , C h a p . X I X , for a more detailed analysis of the seasonal factors in bank credit movements in the Twelfth District. Seasonal influences in other districts are also discussed. See also p. 61 for seasonal peaks in various sections of the district. While the chart represents demands during igoo-14, it is also true of conditions today. " Bachellor, op. cit., p. n o .

A C C E P T A N C E S TURNOVER

A N D

B A L A N C E S

OF R E S E R V E

167

DEPOSITS

During the period 1926-30, the monthly turnover of reserve deposits increased from 10 times to almost 13 times. The increase was chiefly attributable to interdistrict transactions. Intradistrict transfers changed little. A record turnover was recorded during TIMES

23

PER

MONTH

20

ri«ANCI3C0

SAN

AREA

1 1 1 N/1

J

IS

10 T W E L F ' [-H

D I S I• R I C T

5 0 19261027

1926

1929Î93Ô

¡931

1932

1933

1934

Chart 10 TURNOVER

OF M E M B E R

FEDERAL RESERVE

BANK

BANK

RESERVE

OF SAN

DEPOSITS

FRANCISCO

Source: Monthly Review of Business Conditions, Federal Reserve Bank of San Francisco, August, 1934, p. 64.

1930 and early 1931, largely as a result of heavy daily traffic in "Federal funds" between the Pacific Coast and the East. An active turnover was noted again early in 1932, a consequence of the strained banking conditions. After February, 1932, a decline set in, which continued until 1936. Turnover of reserves in the San Francisco zone has been more rapid than for the entire district.38 D E M A N D AND T I M E - D E P O S I T

TURNOVER39

As indicated in an earlier chapter, savings and other time deposits comprise more than 50 percent of total deposits of the banks 31

Monthly Review of Business Conditions, Federal Reserve Bank of S a n Francisco, Aug., 1934, p. 64. " Information on relative turnover of deposits was first available in 1934.

168

ACCEPTANCES AND

BALANCES

in the Twelfth District. These accounts are generally inactive and the rate of turnover is usually less than once a year. Demand deposits have shown a tendency to decline in activity since the twenties, showing a rate of turnover during the last six months of 1934 of about 25 to 30 times a year. San Francisco deposits, however, show a more rapid turnover than those of other Western cities. TABLE AMOUNT

AND

VELOCITY

18

OF DEPOSITS CITY BANKS*

OF

TWELFTH

DISTRICT

Averages during twenty-five weeks ending February 20, 1935

DEPOSITS CITY

DEMAND

Los Angeles San Francisco Oakland Portland Tacoma Seattle Spokane Ogden Salt Lake City Twelfth District

TURNOVER

(In Thousands of Dollars)

281 ,000 290,200 27,200 6l,800 12,300

73.3°° 19,5°° 6,400 28,900 800,600

TIME

487,IOO 673,600 113,700 53.3OO 12,800 90,400 10,IOO 5,600 32,600 I,479,200

bankers'

5I,000 127,IOO 1,500 19,400 1,700 25,800 11,500 1,700 I 2,700 252,400

* Source: Monthly Review of Business Conditions, Francisco, Feb., 1935, p. 15.

OF DEPOSITS

(Times per Year) DEMAND

TIME

bankers'

24.8 26.6 25.0 23.2 21.3 23.2 19.8

I. I 0.7 0.8 0.6 0.4

29.8 25.2

257 22.3 249

0-5

29 5 24.8 36.0 48.7

0.7 0.4 0.6 0.8

48.0 27.2 28.6

27-7

Federal Reserve Bank of San

Bankers' deposit turnovers in San Francisco are generally lower than those for demand deposits. In the Reserve cities the reverse is true, reflecting the fact that the bankers' balances retained in the Reserve cities are usually only sufficient to answer the needs of business. Those in San Francisco are generally in excess of amounts carried for convenience.40 Table 18 gives the amounts and velocity of deposits of the Twelfth District city banks.41 Ibid., p. 15. Ogden shows a high turnover figure because of relatively small amounts of demand deposits. 40

41

VII TWELFTH D I S T R I C T RELATIONS WITH THE RESERVE SYSTEM it had been deemed wise in preparing the Federal Reserve Act and during the subsequent problems of organization to provide the country with several banks of substantial autonomous power in their respective areas, it was necessary, likewise, to secure a means of bringing these districts into federated harmony in handling local situations which have a reflex effect nationally. It was desired to secure greater standardization and centralization of banking practice throughout the country as a whole, to break down the differences in practice between the national and state systems, and to provide a means whereby the Reserve system could function as a central organization, but with due regard for the problems in the individual districts. These problems were the concern and duty of the Federal Reserve Board. The Board was designed and given the requisite powers to provide the unifying link between the separate banks and to harmonize their policy with respect to nation-wide policy. WHILE

REVIEW

OF T H E B O A R D ' S POINT OF V I E W

AS T O

C O N T R O L OF DISTRICTS

The Board was to carry out the provisions of the Federal Reserve Act and to act as a "continuation or successor to the authority of the organization committee of the Federal Reserve System." 1 Its relationship to the Comptroller of the Currency and the Secretary of the Treasury is coordinate, and when these officers sat on the Board prior to the Banking Act of 1935, it was supposedly in an independent official capacity. "The system is a going concern and the Board is a general manager thereof and actions once taken and rights once created are to be regarded as having been definitely established and hence are to be allowed full faith and confidence." 2 1 1

Willis and Steiner, op. cit., p. 10. Ibid., pp. 9-10; Willis, The Federal Reserve System, p. 555.

170

RELATIONS WITH RESERVE

SYSTEM

In some quarters this view was construed as placing almost complete management and dictatorial powers over the banks in the hands of the Board. It was maintained by others that the individual directorates retained power over their bank, "save only in specific instances in which the Board may exercise a power which but for statutory direction would be reserved for the directors." 3 It was asserted by them that the system was not a going concern in the sense that it is a single corporate entity but rather a federation of member banks through the twelve Federal Reserve Banks. These institutions are all independent and although they are federated, they are not merged into a single identity.4

From this point of view the Board would have only such powers over the Reserve banks as are decreed by statute, and none so far as the member banks are concerned. A supplementary body, known as the Federal Advisory Council, was also provided for in the Federal Reserve Act. "The council was devised when the original plan of creating a self-governing banking system was abandoned and a presidentially appointed Federal Reserve Board instead created." 5 The Council has a purely advisory capacity and is composed of twelve men, one from each Reserve district. Generally the Reserve banks have seen fit to appoint a prominent local banker. The appointments are for one year, and the Council meets four times a year in Washington, electing its own officers and determining its own procedure. The Council is empowered to call for information on the business of the system and to make recommendations on rediscount rates, openmarket operations, procedure and other matters affecting the conduct of the banks or under the Board's jurisdiction. 6 It has hardly developed into a body of public importance while within the system its duties have been too limited to permit it to exercise a very striking effect on policies. Nevertheless, it has performed a useful service 1

Willis and Steiner, op. cit., pp. 9-10. * Ibid., p. 10. 'Ibid., p. 98. ' See Annual Report of the Federal Reserve Board, 1918, pp. 765-870, for recommendations of the Council.

RELATIONS WITH R E S E R V E SYSTEM

171

in helping to check or anticipate efforts to employ the system for political purposes.7 In the words of one Federal Reserve officer in the Twelfth District, it has reduced its effectiveness by turning itself largely into a "debating society." It has on occasion, however, in conference with the Reserve Board, sponsored beneficial action.8 In addition to the two bodies named above, legally charged with unifying and solidifying the system, there sprang up shortly after the commencement of operations two other bodies—the Council of Governors and the Reserve Agents Conference. The origin of the Conference of Governors is unknown. The first record of the organization is contained in the report of a committee on rediscount to the convention of officers and directors of the Reserve banks in October, 1914. 9 The idea of the Council is generally attributed to one of the members of the Board or to one of the larger banks which wished to offset the development of a concentrated banking power in Washington.10 " I n effect it was a new phase of the ever recurrent effort to create a central organization or interbank board of control," 11 not subject to law or administrative control. Frequent meetings were held at the beginning of its existence. At some sessions a representative of the Reserve Board was invited to attend. Although this was the case, "there was growing disposition among the members to think and act as if the Council was the real arbiter and final authority on system matters the Board becoming only a ratifying body." 12 The governor of the New York bank headed the organization. Out of the conflict which developed in 1922 over which body was to control the Reserve system, the demands of the governors to meet under prescribed conditions were satisfied with the condition of meetings called by the Board with one or more board members present. The Reserve Board could not prevent the ' Willis and Steiner, op. cit., p. 100. • Interviews with Seattle, San Francisco and Los Angeles bankers. • Annual Report oj the Federal Reserve Board, 1914, p. 1 7 1 ; Willis, The Federal Reserve System, p. 703; Clark, op. cit., p. 302. 10 Willis, The Federal Reserve System, p. 702. » Ibid. u Ibid., p. 704.

172

RELATIONS

WITH RESERVE

SYSTEM

governors of the Reserve banks from meeting and conferring on mutual problems. T h e r e was no reason to prevent this. T h e Board was, however, determined to prevent assumption of control. 13 T w o meetings at the instigation of the Board are held yearly and have developed into a Conference of Governors with the Board. 14 In 1922, the Governors' Conference appointed an open-market investment committee of four governors headed by M r . Strong. Its purpose was to effect coordination between open-market operations of the Reserve banks and operations as fiscal agents. 15 This committee rapidly assumed power over open-market operations and credit policy supposedly reserved to the banks and the Board. 16 T h e Open-Market Policy Conference (1930-33) of twelve governors, legalized with identical functions and powers by the Banking A c t of 1933, succeeded the earlier body with the title, Federal O p e n Market Committee. 1 7 Members of the Board could meet with the committee. Modified by the Banking A c t of 1935, it is today composed of five representatives of the Reserve banks and the Board of Governors. 1 8 It has complete charge of open-market policy and operations and its decisions are binding upon the Reserve banks. T h e Reserve Agents Conference meets only on call or arrangement with the Board, and usually confines itself to a program agreed upon by the Board in advance. This Conference was actually organized b y the Board to placate the agents and as a step to offset the power of the Council of Governors. These organizations constitute the connecting links of the system. None of the bodies has developed as originally contemplated, nor has union between the banks been achieved as originally contemplated. T h e Board of Governors makes public in its annual report much of the work done and proposed by these bodies. In addition, it issues monthly the Federal Reserve Bulletin. Each bank has issued a monthly review of district conditions since 1921 and an Hearings, 1931, p. 157; Clark, op. cit., p. 104. Hearings, 1931, p. 157; Clark, op. cit., p. 105. 15 B. Strong, Interpretations of Federal Reserve Policy, pp. 235-41; Clark, op. cit., pp. 163 ff.; Stabilization Hearings, H . R . 7895, 1926, pp. 863 ff. 18 Willis, The Theory and Practice 0/ Central Banking, pp. 1 o 1, 103-9. 17 Banking A c t of 1933, Sec. 8. " B a n k i n g A c t of 1935, Sec. 10. 13

14

RELATIONS WITH R E S E R V E SYSTEM

173

annual report to the Reserve Board. In these reports the conditions in the district, the general policy pursued locally and its connection with national conditions as a whole are discussed. At all times during the life of the Reserve system, it has been necessary for each of the Reserve banks to consider carefully the relationships of the various districts and to shape or pursue a judicious policy accordingly. Several events have tended to make this relationship more close and more concrete. Among them have been the periods of war and postwar problems and the developments of 1929. The relationship between the districts has been shaped by the dictates of the bodies mentioned above, but it has in another sense augured its own development. ORGANIZATION

OF T H E

TWELFTH

DISTRICT

FOR W A R

FINANCE

Appointed Fiscal Agent of the United States June 1, 1916, the Federal Reserve banks assumed another of the duties contemplated 19 in the original Federal Reserve Act. The Act provided that the Federal Reserve banks were to assume the fiscal functions formerly rendered by the national banks which had qualified as depositories.20 Complete fiscal-agency functions were not transferred to the Reserve banks until discontinuance of the subtreasuries in 1921. 2 1 The early fiscal services performed by the Federal Reserve Bank of San Francisco, in common with the rest of the system, were confined to receiving public monies from government depository offices and paying government checks and warrants for disbursing officers.22 The United States subtreasuries continued to hold large sums of government deposits.23 When complete functions were assumed early in 1921, the Reserve banks undertook exchange, ls Annual Report of the Federal Reserve Board, 1 9 1 7 , p. 583. This function was not mandatory. For a discussion of the abuses of the Independent Treasury system which this policy was designed to remedy, consult J . M . C h a p m a n , Fiscal Functions oj the Federal Reserve Banks', D . Kinley, Independent Treasury System of the United States. 20 Willis and Steiner, op. cit., p. 73. 21 Annual Report of the Federal Reserve Board, 1920, p. 72. 22 Annual Report of the Federal Reserve Bank of San Francisco, 1920, pp. 17, 23. T h e Reserve banks were required to keep a reserve against government deposits equivalent to that held against reserves of member banks. 23 Federal Reserve Bulletin, Feb., 1 9 1 7 , p. 1 1 2 .

174

RELATIONS WITH RESERVE

SYSTEM

replacement and redemption of United States paper currency, and exchange and redemption of coin.24 TABLE

ig

L I B E R T Y BONDS S O L D I N T H E T W E L F T H D I S T R I C T * 1917-19 AMOUNT SOLD

ISSUE

TOTAL

THROUGH

ALLOTMENT

AMOUNT

FEDERAL

TO

UNITED

RESERVE

TWELFTH

STATES

BANK

IN

PERCENTAGE OF

TOTAL

SALES, IN TWELFTH

DISTRICT

DISTRICT

TWELFTH DISTRICT

First Liberty Loan Second Liberty Loan Third Liberty Loan Fourth Liberty Loan Victory Liberty Loan

Si> 989.453.550

$175,623,900

®I33>694>000

8.0

3,807,865,000

292,889,300

261,138,000

7-6

4,'75.650,050

287,975,000

210,000,000

6.0

6,964,581,100

462,250,000

402,000,000

7.0

4.495.373.000

3'8,675, "5°

294.905,050

7.0

.537,4I3,35°

',301,737,050

21.432.922,700

I

Average 7 . 0

* Source: Annual Reports of the Federal Reserve Bank of San Francisco, 1917, 1918, 1919, 1920. C E R T I F I C A T E S OF INDEBTEDNESS t YEAR

»9'7

1918

>9'9

TOTAL,

UNITED

STATES

S 3,880,570,000 10,742,094,000 11,246,820,500

SALES, T W E L F T H

DISTRICT

$129,120,000 477,810,500 750,313.500

t Source: Annual Reports oj the Federal Reserve Bank of San Francisco, 1917, 1918, '9'9" Ibid. For a detailed list of services related to the function listed above, see the Annual Report of the Federal Reserve Board, 1920, pp. 72-74. The Treasury Department has continued guardianship of reserve funds for silver certificates, United State« notes and other monies.

RELATIONS WITH RESERVE SYSTEM TABLE SALES

OF T H R I F T

YEAR

1917-18 1918-19 1919-20 1920-21

AND

THRIFT STAMPS

Si ,620,817 198,870 '26,993 48,661

175

19—Continued

WAR-SAVINGS STAMPS CERTIFICATES*

AND

WAR

TREASURY

SAVINGS

SAVINGS

STAMPS

CERTIFICATES

$19,094,340 2,704,150 '.538,550 460,770

$

541 ,400 I,428,400 3 6 5.300

TREASURY

TOTAL VALUE

$20,715,157 3,444,420 3.093.943 874.73'

* Source: Annual Reports oj the Federal Reserve Bank oj San Francisco, 1918, 1920.

1919,

T h e Reserve banks also act for the government in handling the details of sales, allotment, redemption, exchange, commission, interchange and transfer of ownership of Treasury securities. They also supervise the maintenance of government deposits in qualified banks and hold the general deposit accounts of the Treasury. 26 In performance of fiscal duties, the Reserve banks deal with both member and non-member banks. T h e expansion of fiscal agency functions was necessitated by the entrance of the United States into the war and the immediate need for raising huge funds for war finance. Thus there immediately devolved upon the Reserve banks the problem of handling completely the sale and distribution of the government's war securities. "Each Reserve bank became the central agency" for its district for engineering the sale and distribution of securities. LIBERTY LOAN CAMPAIGNS IN THE TWELFTH

DISTRICT

T o carry out the war-finance program in the Twelfth District, a general executive committee was set up, with the governor of the Reserve bank as chairman. This committee supervised the entire ** Although the government maintains accounts with all twelve Reserve banks, its principal account has been with the Federal Reserve Bank of New York. See Beckhart, Discount Policy of the Federal Reserve System, and Brown, New York Money Market, Vol. I V ; Annual Reports of the Federal Reserve Board, 1917-19, for a discussion of war-finance practice of the Reserve banks, and postwar Treasury policy.

176

RELATIONS WITH RESERVE

SYSTEM

Twelfth District, using the state as the larger basis of organization. A state chairman, generally a banker, was appointed by the general chairman in each of the seven states of the district.26 This state chairman suggested the nomination of his local committee chairmen, who were then appointed by the executive committee at San Francisco. A special representative, generally a member of some local bond house, was assigned to cooperate with each state chairman to put into effect the definite plan of campaign of working through the banks to reach their depositors and in general to aid in formulating an effective organization.27 A general committee was established to manage the publicity and advertising. A distribution committee directed appeals to depositors through the banks of one district and assumed the responsibility for following up subscriptions. Wherever needed, local committees were established, modeled after those in San Francisco. The executive manager was the directing officer in the campaign and most of the questions of policy were decided by him. He maintained close contact with state chairmen and local committees. The various drives for loans were carried out with little friction, improvements in details of organization being perfected in the successive campaigns.28 The general outline or organization remained the same. Even with no precedent to determine the exact requisites for a successful campaign, the Twelfth District exceeded its quota by substantial amounts, and averaged 7 percent of total sales for the country as a whole. Apathy of the farmers as a class was reported by all committees.29 The Federal Reserve Bank of San Francisco, in common with the other Reserve banks, acted as agent of the government in selling war savings certificates and stamps to banks and trust companies, and to individuals who qualified as collateral agents by the deposit of Liberty Bond security.30 Annual Report of the Federal Reserve Board, 1917, pp. 583-84; 1918, p. 573. Ibid. » Ibid. » Ibid. K Annual Report 0/ the Federal Reserve Bank oj San Francisco, 1918, p. 12. Prior to Sept., 1918, the war savings certificate campaign was handled by the National W a r Savings Committee in Washington, which appointed state directors w h o reported direcdy to Washington. M 17

RELATIONS WITH RESERVE SYSTEM

177

Without doubt the Reserve banks were responsible for the smooth functioning of the raising of war funds and the avoidance of severe strains which definitely would have developed had there been no central organization. They were themselves investors, both directly through purchase of war securities and indirectly through the accommodation extended the commercial banks, member and nonmember, on their notes with government security as collateral. Close contact was maintained with commercial banks throughout the campaign, and one of the results was the increased membership in the Reserve system during the years succeeding the war. The use of Treasury certificates in financing Liberty Loan subscriptions and also tax payments was of great value in avoiding the strain that otherwise would have developed throughout the district from the withdrawal at one time of the large sums involved. POSITION OF THE COMMERICAL BANKS AS A RESULT OF W A R FINANCING

The necessities of the war resulted in a large manufacture of bank credit, eclipsing all preceding developments of this kind in financial history. The country was faced with the problem of securing a return to normalcy and ridding the portfolios of the banks of the accumulation of war paper. This problem was of utmost importance in all Federal Reserve districts. The deflation and inflation which followed the close of the war resulted in building up experience for the Federal Reserve and commercial banking officials which gave them definite precedents with which to work in subsequent years. Experience was gained with the use of warnings, discount rates and moral suasion. The effectiveness of these as instruments of credit control was tested. Over the course of the war period in the Twelfth District, with the expansion of business and the increase of prices, resources of the national banks increased from $1,065,191,000 on March 5, 1917, 31 to $1,360,534,000 on November 1, 1918. During this period, capital increased from $89,880,000 to $93,689,000, and surplus and undivided profits from $61,804,000 to $70,467,000. " Date of the last report of the Comptroller of the Currency prior to the entrance of the United States into the war.

178

RELATIONS WITH RESERVE

SYSTEM

Deposits "due to others" decreased from Si98,060,000 to $172,061,000, reflecting increased need for funds within the district. Demand deposits increased from $485,149,000 to $679,494,000, time deposits from $160,421,000 to $184,282,000, rediscounts from less than $500,000 to $38,517,000, and money borrowed from $704,000 to $57,780,000. Practically all of the latter was secured by government obligations. Loans and discounts increased to $691,176,000 from $559,469,ooo.32 Because the economy of the Twelfth District was primarily agricultural and its products were easily sold, the problem of liquidating the loans extended by the banks was not so acute as in other districts. A shortening of the period of commercial credit brought about in the district as a result of the war and through the influence of the Reserve bank and the enforcement of prompt payment of obligations were also factors which tended to facilitate the problem of rapid liquidation.33 The considerable borrowing on government obligations likewise showed signs of gradual liquidation without severe consequences.34 Investments in Liberty Bonds by banks were comparatively small. National banks, through which approximately half of the subscriptions were secured, held $56,854,000 of government obligations on November 1, 1918, compared with $1,360,534,000 of total resources, $691,176,000 of total loans and discounts, and $321,723,000 of other securities. The Liberty Bonds held by national banks in the district represented only 4.9 percent of the total sold in the Pacific states.35 RIDDING BANKS OF W A R

PAPER

The rate at which the liquidation was carried out is reflected in the reduction of rediscounts of commercial paper held by the Reserve bank. These were reduced from $49,289,000 on September 13 to $39,337,000 on November 8, to $30,038,000 on November 30, and to $23,732,000 on December 31. This compares with Annual Report of the Federal Reserve Bank of San Francisco, 1918, p. 16. M a n y concerns had reduced their selling terms of from 90 days to 6 months, to 30 days. 54 Annual Report of the Federal Reserve Bank of San Francisco, 1918, p. 16. 35 Ibid. 32 33

R E L A T I O N S WITH R E S E R V E SYSTEM

179

$23,464,000 of paper held under rediscount on January 1, 1918. Borrowings on government obligations by member banks were reduced from 861,561,000 on October 1 o to $44,136,000 on November 30 and to $45,027,000 on December 3 1 . Of course the fact that additional Liberty Loans were in prospect made it certain that, with the new issues, borrowing on war paper would once more increase.36 Throughout 1919 the Twelfth District Bank stood sixth among Federal Reserve banks in discounted bills held, but ranked third in bills bought in the open market, eighth in bills secured by government obligations, and tenth in "all other bills" held. This indicates that the banks in the Twelfth District had less proportionate need for Federal Reserve discount facilities than banks in other areas, and that liquidation was being continued. The bank showed a decrease in holdings of bills secured by government obligations from $45,024,583 on December 3 1 , 1918, to $43,551,373 on December 3 1 , 1919, and in all other bills from $33,734,845 to $30,344,585. Discounts secured by government obligations stood at $81,029,000 in May, 1919, after eight of the twelve issues of certificates of indebtedness had been issued in anticipation of the Victory Loan. 37 E F F E C T OF W A R F I N A N C E ON COMMERCIAL

PAPER

During the war years, production on government contracts had a tendency to lessen the offerings of commercial paper. Many concerns which had formerly financed themselves in the open market looked to the government for funds. On the other hand, the decreased purchasing power of the dollar increased the credit needs of many concerns, with the result that the volume of paper offered in the Twelfth District did not materially change. What offerings there were were quickly absorbed.38 The curtailment of credit periods was definitely beneficial to credit conditions in the Twelfth District. Many concerns which had " Ibid., p. 17. It was estimated, however, that if new loans were not undertaken before April or M a y , the principal part of the current loans on Liberty Bonds would have been liquidated, and such was the case. n Annual Report of the Federal Reserve Bank of San Francisco, 1 9 1 9 , p. 6. " Ibid., 1917, P- 16.

i8o

RELATIONS WITH R E S E R V E

SYSTEM

formerly sold goods on a go-day-to-6-months basis required payment in 30 days.39 During the war years and immediate postwar years, it was steadily the attitude of the Twelfth Bank to assist members in meeting the special demands made upon them. Particularly was this true in connection with the usual requirements for handling crops.40 P O S T W A R I N F L A T I O N IN T H E T W E L F T H

DISTRICT

Liquidation, however, was not to be achieved, because speculation and inflation, which began at the time of the Victory Loan of 1919, were not carried to a close until 1921. The increase in crcdit demands to finance the buying of crops in 1919 and 1920 is clearly reflected. This, in part, was aided by low money rates prevailing at the time, the preferential rates on government paper, and the inability of the Reserve banks to control rates because of the complicating factor of government finance. Discounted bills secured by government obligations increased by $8,606,000 in 1920, the heaviest increase appearing in the volume of "all other bills," which rose 270 percent from $31,297,000 on June 2, 1920, to $116,051,000 on December 31, 1920. The "warning" issued by the Reserve Board against undiscriminating extension of bank credit, which grew out of the meeting of the Board with the Advisory Council and Class A directors in Washington, May 17-18, 1920, had but momentary effect. This expansion continued until the call for funds for fall harvesting, which brought about a peak for the year of $121,027,000. The crest passed and liquidation set in, reducing the borrowings to $105,349,000. Customary early December expansion brought borrowings to $117,416,000 on December 10. 41 In addition, there had been for the country as a whole, during the twelve months preceding the depression in 1920, an increase in bank credit never before required in peace times. Such was the case in the Twelfth District, and it is clearly reflected in the figures " Annual Report of the Federal Reserve Bank of San Francisco, 1 9 1 7 , p. 16. 40 41

Ibid., 1918, p. 17. Ibid., 1920, p. 1 3 .

R E L A T I O N S

W I T H

R E S E R V E

S Y S T E M

181

above. Exceptional movements of funds in connection with the fiscal operation of the Treasury, as well as the seasonal funds for crop movements and purchase of raw material for industry, all were contributing factors. A D V A N C E S OF C R E D I T T O A G R I C U L T U R A L

GROUPS

In particular, the amount of credit extended to the agricultural industry in the Twelfth District is interesting, for it was in the states of Washington, Utah and Idaho that the greatest difficulties occurred. The policy of the Reserve bank is also significant. As already indicated, liquidation was not achieved after the war, but the brief period of deflation was immediately succeeded by speculative expansion beginning at the end of 1919 and carrying through 1920. During 1919, unusually good and in some cases record crops, with high prices, stimulated further expansion in agriculture in the Twelfth District, with consequent resort to the banks. Acreage and plantings were increased in many instances. Carry-overs of the previous year, a severe winter which slowed orderly movement of some crops and forced early feeding by stockmen, coupled with the inability of the railroads to provide adequate facilities, partly because of these factors, brought congestion at initial points. Commodities were accumulated until late spring and, although then moved to market in volume, were too late for advantageous terms. These circumstances aggravated the banking situation.42 Of the volume of Reserve bank credit extended in the Twelfth District during 1 g 19-20, the bank estimated that the total amount of paper of all maturities rediscounted by it during 1919 which could be said to be based on agriculture (excluding notes secured by government war obligations, the proceeds of which may have been used for agricultural purposes) was approximately $35,000,000; while the same for 1920 was estimated at $122,000,000— an increase of 253 percent. O n December 20, 1920, the bank held 20,389 notes under rediscount; of these 57 percent represented loans to agriculture and livestock interests.43 A n investigation carried out in the district on September 7 revealed that 12

Ibid., pp. 25-37.

43

Ibid., p. 14.

182

RELATIONS

WITH

RESERVE

SYSTEM

of the $162,500,000 of bills discounted held by the bank September 3, 58.77 per cent represents advances directly or indirectly in support of agriculture and livestock interests. In addition, the bank holds $57,700,000 bankers' acceptances bought in the open market, of which $9,200,000, or 15.94 per cent, are based on agriculture and livestock.44 Large loans of San Francisco banks to their correspondents were probably substantially used by banks in the agricultural sections. EFFECTS OF POSTWAR INFLATION IN BRANCH TERRITORIES

Idaho and Utah (Salt Lake branch territory) and eastern Washington (Spokane branch territory) were the areas most severely affected during the 1920 depression. Capital taken out of the region to finance Liberty Loans during the war had definitely weakened the banks and property holders. This was an important factor leading to strain. T h e other factors already indicated, partly developed by the easy-money policy of the Federal Reserve Bank of San Francisco, were a reflection of the policy of the system as a whole. Possibly the Federal Reserve bank had been "oversold" and rediscounting overencouraged. T h e Federal Reserve bank's policy during this period was liberal and supplied experience and lessons for future practice in averting or forestalling situations of this kind. T h e policy of the bank underwent three phases during 1921 and 1922: (1) No selection of banks or paper. T h e bank admitted everything in an attempt to allay a panic. (2) After the panic, it still discounted freely, even taking real-estate loans, ignoring the principles of eligibility. (3) Eventually its policy selected banks and paper admitted to discount privileges. This policy has been developed conservatively ever since. T h e seriousness of the situation at that time is reflected in the reserves of 1 X millions of dollars set up against possible loss on paper rediscounted. 45 It must be remembered that even though criticism has been directed against the bank policy at this time, this policy was necessarily affected by the war, the lack of experience of all banks, and the lack of acquaintance with the state banks which had been " ibid., p. 14. 45 Interviews with San Francisco and Salt Lake City bankers.

RELATIONS WITH RESERVE SYSTEM

183

admitted to membership during the war and postwar years. Definite lessons in member-bank relations were learned. The equalization of national and state bank standards was begun. Liquidation finally set in and was completed during 1921, the bank experiencing a decline of 56 percent, or $128,772,000, of earning assets. Principal among these was the amount of bills discounted for members, which declined by 60 percent, from $167,598,000 on December 31, 1920, to $67,043,000 on December 31, 1921. Repayment of borrowings continued through 1920, parMILLIOMSOP

DOLLARS

I 8O ISO 120 90

60 30

O

Chart it REDISCOUNT OPERATIONS,

1920-22

Comparing borrowings of city and country member banks as of the middle of each month Source: Annual Report oj the Federal Reserve Bank of San Francisco, 1922, p. 10.

ticularly in the case of country banks.46 Expansion and retirement of member-bank borrowings is clearly shown in Chart 11. E X T E N T OF I N T E R D I S T R I C T B O R R O W I N G A F T E R T H E P A N I C OF

1920

In spite of the strained situation during the postwar period, the Twelfth Bank was able to handle the demands made upon it almost completely from its own resources. The bank appeared only during April, 1920, and March and April, 1921, as a borrower from other Reserve districts. For the rest of the time it was a lender. The Federal Reserve Board carried out the policy of equalizing, so far as possible, the reserve positions of the several Federal Re" Annual Report of the Federal Reserve Bank oj San Francisco, 1922, p. 11.

184

R E L A T I O N S WITH R E S E R V E

SYSTEM

serve banks, by allowing them to borrow from one another.47 It was necessary for some of the Reserve banks to carry out borrowing operations in 1919, but the Twelfth District did not participate until 1920. Table 21 shows the position of the San Francisco Reserve Bank throughout the period. In the early months of the year, the operations of the Reserve banks were occasioned by the need of funds in eastern Reserve districts, for the financing of industrial activity and the purchases of raw material and as an aid to fiscal operations. From early spring until the end of the year, funds were demanded by western and southern agricultural districts to care for the harvesting and preparation of crops and livestock.48 As the postwar period developed, the volume of interdistrict loans increased steadily. A peak was reached in October, 1920. The Reserve banks in Richmond, New York, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City and Dallas had under rediscount, including bankers' acceptances, bills with the Federal Reserve banks in Boston, Philadelphia, Cleveland and San Francisco, totaling $367,378,000. The eastern centers had demanded the funds in the first quarter, and after May no eastern Reserve bank other than New York was a borrower from other Federal Reserve banks. The member banks in New York experienced heavy withdrawals of funds by their interior and southern correspondents, chiefly in agricultural sections.49 This forced rediscounting at the Federal Reserve banks. The decline in the price of cotton and grains in 1921 forced borrowing by the Reserve banks in Richmond, Atlanta, St. Louis, Dallas, Chicago, Minneapolis and Kansas City. During this period, and also in 1920, the Cleveland bank appeared as the principal lender, extending approximately $145,000,000 in 1920 and a more moderate sum in 1921. 60 Without doubt Reserve banks would not have been able to serve their districts so well had not accommodation been received 47 Sec. 11 of the Federal Reserve Act provided that upon affirmative vote of five members of the Federal Reserve Board, a Reserve bank could be forced to discount with another at a set rate of interest. 48 Annual Report of the Federal Reserve Board, 1920, pp. 47-50. «Ibid. 50 Ibid., 1921, p. 43.

RELATIONS WITH RESERVE SYSTEM

185

from other Reserve banks. This method transformed the system of twelve banks into what appeared to be a single organization, excess funds of one section being used to make up a shortage in another quarter. Diversification of crops throughout the Twelfth District definitely put the member and the Reserve banks for the most part in a better condition than was found elsewhere. In the areas in the District which suffered most, grains and livestock were specialties, and there was concentration on one crop. TABLE

20

ACTUAL AND ADJUSTED RATIOS OF THE FEDERAL RESERVE BANK OF SAN FRANCISCO* 1920-21

1920

MONTH

Jan. Feb. March April May June July Aug. Sept. Oct. Nov. Dec.

1921

ACTUAL t

ADJUSTED

ACTUAL

4°-3 44-5 44-9 42.4 42.2 52.0 46.8 44.8

4'-3 45-6 52.O 40. I

53-8

58.2

4°-3 44-9 44-9 49-3

47-5 45° 46.8

5i-2 53-3 55° 54-8 588 61.1 64.6 66.6 71.6

53-3 53-3 5 5 ° 54-8 58.8 61.1 64.6 66.6 71.6

79-3 76.5

79-3 76.5

42-9 52' 52 3 49-2

51 • 1

ADJUSTED

* S o u r c e : Federal Reserve Bulletin, J a n . , 1922, p. 30.

t "Actual" reserve ratios are based on reserves actually owned by the bank; "adjusted" ratios are based on its reserves before interbank borrowing and lending.

San Francisco took but litde accommodation; therefore there is but little margin between actual and adjusted ratios for the period. G E N E R A L A S P E C T S OF L O A N S AND INVESTMENTS IN 1 9 2 0 A N D A F T E R IN B R A N C H A R E A S

OF T H E T W E L F T H

DISTRICT

Idaho

As has been indicated, the greatest difficulties during 1920 occurred in Idaho and eastern Washington. The banking resources

186

RELATIONS WITH RESERVE TABLE

SYSTEM

2 1

A M O U N T OF C R E D I T E X T E N D E D A N D R E C E I V E D BY T H E F E D E R A L R E S E R V E B A N K O F SAN F R A N C I S C O , 1920-21 (In Thousands of Dollars) DATE

Jan. Feb. March April May June July Aug. Sept. Oct. Nov. Dec.

30 27 a6 30 28 25 30 27 24 29 26 30

IQ20

+ + + + + + + + + + +

3.408 3.408 7.08' 7.687 2,371 392 19,092 15.672 8,209 93 6,917 6,917

DATE

Jan. Feb. March April May June July Aug. Sept. Oct. Nov. Dec.

31 28 31 30 3" 30 31 31 30 3' 30 31

1921

+ 16,063 + 7>3'8 9 25

of Idaho were greatly overexpanded during the war period from 1915 through 1920. There has been continuous deflation since that time. Following a series of disastrous bank failures at the close of 1932, loans and discounts of all banks were once more at their average for the six prewar years, 1910-15. T h e figures, 30 millions, may be compared with loans and discounts of 107 millions on June 30, 1920, when credit was expanded to aid production of metals, livestock and agricultural commodities essential for war purposes and produced as a result of attractive prices in the postwar inflation period. Idaho banks, since 1920, have continued to recognize the danger of a high percentage of local loans, and have placed an increasing amount and proportion of deposits in readily marketable investments. During 1920 total loans were 104 percent of total deposits, which is interesting when compared with 50 percent at the close of I93i-

Utah T h e 1920 period did not affect Utah as noticeably as Idaho. Banking resources, deposits and loans, have shown a slow, steady

RELATIONS WITH RESERVE SYSTEM

187

growth. This area was not greatly stimulated by the war, and the strain of 1920 was rapidly repaired. The condition of Utah was by no means so extended as that of Idaho. Washington

Total Washington deposits, loans and discounts, and investments have increased steadily since 1905. The difficulty in eastern Washington since 1920 has lain in the expansion of all banking resources. There was, however, a small set-back in 1931 and 1932. Nevada

Resources—deposits, loans and discounts, and investments—of all banks in Nevada were not greatly overexpanded in either 1920 or 1929. Resulting deflation was minor compared with that in other states. The figures show a continuously upward trend since 1905, both in actual dollar value and in per-capita dollar value adjusted for purchasing power of the dollar. Oregon

The financial condition of all banks has remained unchanged since 1920, except that a constant reduction of local loans and discounts and total resources, both adjusted for price changes and unadjusted, has been the tendency since 1920. There have been slight increases in deposits and investments. Credit was overexpanded during the war, and the ensuing years have brought deflation. C E N T R A L B A N K I N G EMERGENCIES,

1929-33

The period from 1929 to 1933 afforded several severe emergencies, which show the way in which the San Francisco Reserve bank has functioned as a central bank, not only in aiding the other parts of the country, but also in standing ready to aid banks within its own district. The recent critical periods in the San Francisco area were more efficiently and professionally handled than was the emergency which arose in 1920. Again the developments grew out of a different set of circumstances and gave rise to some new problems.

188

RELATIONS WITH R E S E R V E

SYSTEM

T h e banking structure in the Twelfth District did not experience so severe a strain as that to which banks in other sections of the country were subjected after the drop of security prices in New York. In a sense the Pacific banks' practices of carrying large volumes of funds in the New York market were contributing factors to the stringency developed in the East. Demand for Reserve bank credit rose continuously from J a n u ary, 1928, and from August until May, 1929, fluctuated around 75 millions of dollars. Acceptance commitments were also relatively high. Rediscounts dropped slightly during the summer, but a sharp increase occurred in September and was carried to a peak for the year of 1 1 6 millions of dollars by November 20. Total bill-and-security holdings aggregated 160 millions of dollars. By the end of the year rediscounts had declined to 39 millions of dollars. The extension of Reserve bank credit was at the highest point since 1920. 61 Throughout the period the Twelfth District lost substantial amounts of funds to New York through the gold settlement fund. The net loss to the district gold stock was more than 61 millions of dollars. T h e reserve ratio fell to 59.6 of combined note and deposit liabilities. Brokers' loans on local member bank accounts increased significantly, reflecting increased extension of credit to the securities markets. There was also an expansion of local demand for credit based on securities. Interest rates on customers' loans remained unchanged. 62 After the drop in security prices in October and November, there was a reduction in loans made for and placed by the district banks in both local and eastern securities markets. Total security loans, however, increased. The Reserve bank supplied an additional 38 millions of dollars of credit. Many of the loans to brokers were shifted to other customers of the banks. 53 Funds began to return to the district in late November and 11 Annual Report of the Federal Reserve Bank of San Francisco, 1929, p p . 16-17; Monthly Review of Business Conditions, F e d e r a l Reserve Bank of S a n F r a n c i s c o , Nov., 2 ' 9 9 , PP- 8 7 - 8 8 . 62 Annual Report of the Federal Reserve Bank of San Francisco, 1929, p . 17. u Monthly Review of Business Conditions, F e d e r a l Reserve Bank of S a n Francisco, N o v . , 1929, p p . 8 7 - 8 8 .

RELATIONS WITH R E S E R V E SYSTEM

189

throughout December. They were used to reduce indebtedness at the Reserve bank. Other factors reducing the volume of member borrowings were a decline in currency, mint purchase of gold, and a net excess of treasury expenditures over receipts. Member-bank customers' and security loans continued to increase throughout December and were not reduced until after the close of the year. This was brought about by the flotation of a large issue of municipal bonds of the city of San Francisco in mid-December. T h e amount of both security loans and total loans was higher on December 18 than at any time since figures have been compiled. 54 The emergency in December, 1930, in New York, caused by bank failures and runs, during which the New York bank paid out $170,000,000 of currency to member banks, was met by loans and purchases of government securities by the Reserve banks. All banks aided in the purchases of government securities, and the San Francisco Reserve Bank increased its holdings substantially. They rose from 1 1 to 51 millions of dollars, reflecting an extension of credit to other districts, as the member banks in the Twelfth District had been continually reducing their indebtedness. Another critical condition arose in the Twelfth District as a result of acute and complicated international economic conditions. The gold and credit crisis abroad resulted in a drain on the American gold stock and a sharp reduction of the stock, amounting to 679 millions of dollars during the five weeks which ended in October, 1 9 3 1 . The large loss of gold was accompanied by increased holdings of acceptances and government securities by the Federal Reserve system, with active participation by the Twelfth Bank. Bankers' balances in the larger cities of the District decreased, and there were greater than seasonal withdrawals of currency. 55 Net demand and time deposits were reduced 407 millions of dollars, and the district experienced a gross loss of 261 millions of dollars through the gold settlement fund. The situation was brought to a climax in October, when the " Monthly Review of Business Conditions, Federal Reserve Bank of San Francisco, Dec., 1929, pp. 95-96; Jan., 1930, pp. 7-8. " These withdrawals were met by issue of Federal Reserve notes.

RELATIONS

WITH

RESERVE

SYSTEM

demand for Reserve bank credit again fell short of the record by only 3 millions of dollars. Total credit extended by the bank, both within and outside the district, stood at 246 millions of dollars on October 21, 1931. O f this amount, 42 percent represented rediscounts. Holdings of acceptances were record-high and amounted to slightly less than 32 millions of dollars.58 T H E BANKING H O L I D A Y

T h e last and most severe emergency was faced in the Twelfth District throughout the course of events leading up to and during the banking holiday in March, 1933. T h e year 1932 was characterized by large withdrawals of deposits from both member and non-member banks, particularly during the first six months. A total of 146 banks failed, compared with 76 in 1931. Reductions of deposits not only resulted from heavy transfers to other parts of the country, but also reflected increased demands for currency, amounting to more than 29 millions of dollars. Credit, extended to the district principally by rediscount, reached a peak of 147 millions of dollars late in February. 67 Events of the year culminated in the state-wide banking moratorium which began November first. Temporary suspension of banking had also been authorized in a few small cities in other states of the Twelfth District during the autumn. As a result of the moratorium, withdrawals of funds from the banks temporarily increased during the first ten days of November. Some currency was returned to the banks in late November and December. The banks ended the year under less pressure than i>t the beginning.58 Although several important banks in the Sacramento Valley were closed in January, 1933, the pressure as a whole did not appear to have increased in severity. In certain areas, particularly those adjoining the towns where banks had been closed, increased demands were made for currency. Shortly after Michigan's banking holiday on February 14, however, uncertainty in the Twelfth ** Annual Report of the Federal Reserve Bank of San Francisco, 1931, pp. 9—16; Monthly Review oj Business Conditions, Federal Reserve Bank of San Francisco, Oct., 1931, pp. 79-80. " Annual Report oj the Federal Reserve Bank of San Francisco, 1932, pp. 6-7. M Monthly Review of Business Conditions, Federal Reserve Bank of San Francisco, Jan., 1933, pp. 6-7.

RELATIONS

WITH

RESERVE

SYSTEM

District began to increase. District banks recalled large amounts of deposits from eastern cities. A part of these funds was used to meet currency withdrawals and part was left on deposit with the Reserve bank as a reserve. The eastern moratorium, which was declared in late February, started heavy runs on the commercial banks in the Pacific states, which were brought to a close March 2-3, when holidays became effective throughout the entire district. The national bank holiday was declared three days later.69 $120,000,000 in gold and currency was withdrawn from district banks between early January and March first. Less than 8 percent was in gold.®0 " Ibid., March, 1933, pp. 2 1 - 2 2 . Principal changes in Twelfth District banking Reserves, January 18 to March 8, 1933: M

January ¡8 to March 8,

igjj

Demands upon banks: Currency withdrawals by depositors Other demands

(Millions of Dollars) 120 7

Banks met these demands by: Withdrawing balances from eastern correspondents and using other funds received from outside districts Increasing their use of Reserve bank credit Using reserve deposits Using funds from other sources

127 55 54 14 4 127

March 15 to March 29, 1933 Banks gained funds through: Redeposits of currency Banks used these funds: T o make transfers to other districts T o meet withdrawals of funds due to United States Treasury collections in excess of disbursements in this district Other uses March 29 to December 31, Banks gained funds through: Net United States Treasury disbursements Redeposits of currency Banks used these funds: T o make transfers to other districts T o reduce Reserve Bank credit T o build up reserve deposits

95 84 7 4 95

/jjjj 139 45

184

70 66 47 183

Source: Annual Report of the Federal Reserve Bank of San Francisco, 1933, p. 5.

iga

RELATIONS WITH R E S E R VE

SYSTEM

The tabulation in footnote 60 shows the development of changes in district banking conditions prior to the moratorium, and the subsequent readjustment after a large majority of the banks reopened on March 13, 14 and 15. During the period, aggregate member bank reserves were continuously slightly in excess of legal requirements. When the holiday was declared, the Reserve banks' reserves stood at 50 percent of combined liabilities on account of deposits and notes. Subject to a penalty tax, both the Reserve bank and member banks could have reduced reserves below the statutory minimum, and thus have provided an additional amount of currency.61 In addition to the large amount of credit extended in the district during February, the Twelfth Bank also participated in the system's bill purchases in New York. Holdings of bills increased 58 millions between February 15 and March 8, representing almost entirely extension of credit to other districts. Member banks bought and accepted almost no new paper. Their portfolios averaged about 12 millions of dollars of bills.62 The officials of the Federal Reserve Bank of San Francisco acted with prudence and judgment with regard to the conditions which had developed. Because they were familiar with the officers and conditions of all banks in the district, they attempted to avoid closing a bank when it was thought that this course was warranted by the responsibility of the bank in its correspondent relations. Some observers think that the situation could have been forestalled had stringent, positive action been taken by the Reserve bank some time earlier. This observation, however, may be applied to the system as a whole. There was need for domination by the Reserve banks in all districts some years earlier. It is regrettable that these emergencies have occurred, but throughout them the Reserve banks have functioned efficiently, both as separate institutions and as a unit. The original intention of the Federal Reserve Act was to prevent such emergencies from arising. Involved in this question are the problems of Treasury financial policy, individual Reserve bank responsibility, the Board 61 Monthly Review of Business Conditions, Federal Reserve Bank of San Francisco, March, 1933, pp. 21-23. «Ibid.

RELATIONS WITH R E S E R V E

SYSTEM

of Governors' responsibility and member-bank functions regarding banker's balances. F L O W OF FUNDS B E T W E E N T H E T W E L F T H F E D E R A L DISTRICT AND O T H E R

RESERVE

DISTRICTS

The gold-settlement fund figures finally reflect the net gain or loss of funds by any Federal Reserve district. Transactions of either a commercial or a financial nature are cleared through the fund, and net debit or credit over a period of time is comparable with a nation's favorable or unfavorable balance of trade with foreign countries. Payments for receipts from goods, services, investments, interest charges, government tax collections, borrowings and expenditures and redemptions are the factors which comprise or influence the flow of funds.63 Important in the net loss or gain of funds to the Twelfth District are all Federal financial operations. At the time when the Treasury collects more money in the district than it spends, funds are withdrawn and deposited elsewhere. Conversely, when the Treasury spends more than it collects, bank deposits throughout the district are increased. If these funds are not required for local use, they are generally transferred out of the district. During 1927 and 1928, the Treasury withdrew more money from the area than it spent, while during the period 1929-36 the reverse was true.64 Treasury operations may at times be the most important single factor affecting bank reserves.65 For the past few years these operations have more than offset the small loss to the district from commercial operation, thereby creating a favorable balance of trade. Commercial operations, taken by themselves, have resulted in u See Beckhart, The New York Money Market, I I , 295, for a list of forces affecting the movement of funds into and out of the New York money market. " D u r i n g a typical period, 1929-32, the Treasury disbursed $504,000,000 in excess of local collections. Factors Affecting the Use of Banking Reserves, Federal Reserve Bank of San Francisco, J u n e , 1933, pp. 6 - 7 ; Monthly Review of Business Conditions, Federal Reserve Bank of San Francisco, 1 9 3 0 - 3 6 ; cf. Beckhart, The New fork Money Market, I I , 359-60. 95 See pp. 203-205. In addition to customary government disbursements, payments by the Treasury include payments for the Reconstruction Finance Corporation and other government credit agencies. N e w series of national bank notes were also of importance in 1932.

194

RELATIONS WITH RESERVE

SYSTEM

a small net loss to the district since 1921. This loss represents payments to other districts for goods, services, interest, investments and movements of bankers' balances.66 The amount of this loss is

Chart is PRINCIPAL

FACTORS AFFECTING

BANK

RESERVES, T W E L F T H

DISTRICT

(Changes cumulated from J a n u a r y 2, 1929) Treasury operations: N e t excess of United States Treasury disbursements over collections in the T w e l f t h District. G o l d production, etc.: T w e l f t h District production, net imports, and gold reclaimed from secondary sources. Interdistrict clearings: Net movement of funds out of the T w e l f t h District in connection with commercial and financial transactions. Source: Annual Report oj the Federal Reserve Bank of San Francisco, 1935, p. 6.

clearly shown in Chart 12. Tourist expenditures in the Twelfth District tend to help create a favorable balance for the area. The balance of payments to other districts is of the utmost importance in determining the amount of surplus funds available to the banking community. With an unfavorable balance, banks will be forced to sell investments, reduce loans, or otherwise act to secure funds. If the resulting balance is favorable, the banks generally increase deposits, not local loans, and show a surplus.67 The San Francisco district gains funds regularly from noninDuring a typical period, 1929-32, commercial operations resulted in a net transfer of $394,000,000 out of the district. 87 Factors Affecting the Use oj Banking Reserves, Federal Reserve Bank of S a n Francisco, June, 1933, p. 6. M

RELATIONS

WITH

RESERVE

SYSTEM

195

dustrial or agricultural areas, and loses continuously to industrial areas. Specifically, taking the Twelfth District as a whole, excess payments are regularly made to St. Louis, Cleveland, Chicago, New York, Philadelphia and Richmond. 68 The district gains from Atlanta, Kansas City, Minneapolis and Boston.89 These transactions exhibit a definite seasonal movement. Changes in the reserve balances arising from interdistrict payments are constantly offset, to a small extent, through domestic gold production70 and direct net import from abroad. 71 When gold M See Beckhart, New fork Money Market, I I , 369, for a discussion of San Francisco and New York funds movements. " Banking affiliations influence the gains shown from Boston. They do not result solely from commerce. 70 See Chap. I I . Gold is still exchanged for credit outside the district. T h e current annual production is in excess of the growth of the combined gold reserves of the San Francisco Reserve Bank and the commercial banks in the district. Production of gold averaged about 30 millions of dollars a year until 1933, when the government instituted its gold-buying program. T h e new price of $35.00 per ounce established in August, 1933, has resulted in a marked increase in output for the mines in the district and Alaska. In 1932 production totaled 1,406,000 fine ounces and the production for 1936 is estimated at 2,550,000 fine ounces. T h e yearly dollar increases in gold produced and the amounts imported can be seen in the following tabulation.

UNITED STATES T R E A S U R Y PURCHASES OF GOLD THE TWELFTH FEDERAL RESERVE DISTRICT*

IN

(In Millions of Dollars)

YEAR

DOMESTIC PRODUCTION AND SCRAP

IMPORTS

TOTAL

'929 '93° "93' '932 1933 '934 1935 1936

29-9 42.2 35-2 43-2 28.8 Ö5-3 92.2 116.1

5-7 177.0t 236. i t 99' 20.4 16.7 12.8 28.0

35-6 219.2 27'-3 142-3 49-2 102.0 105.0 144.1

* Source: Monthly Review of Business Conditions, Federal Reserve Bank of San Francisco, March, 1937, p. 1 1 . f T h e bulk of the import of gold in these years was for eastern accounts and remained in the district only a few days. " Except in the New York and San Francisco districts, the effect of exports or imports of gold at ports of entry, is relatively unimportant.

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F O R E I G N

T R A D E

235

tional banks, with capital and surplus of one million or more, in the aggregate, were permitted to invest amounts which would not exceed 10 percent of the bank's paid-in capital and surplus. T h e corporations thus formed were to be under the jurisdiction of the Board. Again, in 1919, Congress authorized national banks until June, 1921, to invest up to 5 percent in the stock of banking institutions engaged in foreign financing, designed to facilitate exports from the United States. There were no restrictions on the amount of capital and surplus. The corporations formed under this provision were to be under the supervision of the Federal Reserve Board. Corporations formed under the Edge Act and the War Finance Corporation were likewise designed as corporations to engage in foreign trade. Some institutions were also established to handle acceptances exclusively. The foreign banks created by members of the Federal Reserve system and by banking corporations brought into existence for the purpose of engaging in international trade and banking under agreement with the Federal Reserve Board have acted upon the authority outlined above. Throughout the whole course of development, slight as it has been, the Reserve Board has laid down definite rules and regulations regarding procedure in operations.12 The banks which have acted upon the authority given them in connection with foreign branches have been chiefly the larger banks in the eastern centers of the United States.13 Most of the branches of these banks have been established on the Continent, and several of them have developed extensive offices in South American countries.14 STATE

C O R P O R A T I O N S FOR F O R E I G N

BANKING

Several foreign banking corporations were also established under state law. During their existence they operated under agreeWillis and Steiner, op. cit., p. 546. A m o n g them have been the Bankers Trust Company, Guaranty Trust C o m pany, Chase National Bank, National City Bank of New York and, also T h e First National Bank of Boston. " See J. A . H. K e r r , "Federal Reserve Spanning Globe, Need of Foreign T r a d e , " Coast Banker, X X X I X (July 20, 1927), 33-36, for a discussion of the American foreign-branch problem. 12

13

236

F O R E I G N

T R A D E

ments with the Federal Reserve Board. 16 Branches were established in China, on the Continent, in several South American countries, and throughout the Far East. The International Banking Corporation and the National City Corporation established branches throughout the United States in principal cities. Each operated a branch in San Francisco. This type of institution never showed steady development, largely by reason of the unsettled conditions which prevailed in the foreign trade after their establishment. All have been disestablished. V I E W OF P A C I F I C C O A S T B A N K E R S T O F O R E I G N

CONNECTIONS

Only one bank in the Pacific states has participated in the movement to establish branches abroad. 16 The others have held back, largely because of the risk involved and the fact that the rapid economic development in the region has continuously used their funds. Most Pacific Coast bankers have preferred to use native banks in handling most of their foreign transactions. It is thought that better service at less cost is secured through these channels. The native banks are credited with having a better understanding of the business methods and the habits of their own nationals. They are better able to obtain credit information on the business houses in their own country, and this can be passed on to the correspondent of the American bank without arousing the antagonism which might develop if the native business house were subject to a credit investigation by a representative of an American branch bank. 17 Other bankers have favored the development of foreign branches, realizing that, if the initial costs could be overcome, definite advantages would result. The branch would be more effective in developing and maintaining foreign trade, and American business would be furnished with the same kind of service to which they are accustomed at home.18 15 Among these, the Equitable Eastern Banking Corporation, the International Banking Corporation and National City Company were of importance during their years of operation. The American Foreign Banking Corporation also operated in this field; upon dissolution, its branches abroad were taken over by the Chase National Bank. " Bank of America. 17 Kerr, op. cit., p. 34. 18 Ibid.

FOREIGN TRADE

237

With a revival and extension of foreign trade, the Pacific Coast banks will be able to secure a larger share of foreign trade only through an active campaign for branches abroad. This program was indorsed in 1926 by Pacific Coast bankers at the Foreign Trade Convention. 19 It is necessary to emphasize the fact, both at home and abroad, that the Pacific Coast banks are sufficiently capitalized and otherwise well equipped to care for foreign trade in all phases. Further industrial development of the Pacific Coast will naturally increase the volume of the exports and the foreign trade financed locally. Foreign branch development would, however, supplement this. F O R E I G N FUNCTIONS OF C E N T R A L

BANKS

It is generally agreed that a central bank should possess four rights, i.e., the note-issue privilege, the holding of the reserves of commercial banks, the buying and the selling of securities, and the right of discount. With these rights, it is possible for the central institution to perform operations making for seasonal stability, so far as money and trade relationship within a country are concerned. Other functions and duties naturally arise from these. Central banks are usually appointed as fiscal agents of the government, in order to prevent disturbance in the money market during the course of regular Treasury operations, and assume or render certain fiscal services better carried out by them than by the commercial banks. Ultimately, the aim of a central bank should be to maintain economic stability, both over long periods and over short periods. Frequent conferences between banks to decide whether individual policies should be directed toward a relaxation or a tightening of credit and rates, or the adoption of other instruments of control, should be undertaken. The joint policy should be accompanied by a distinct measure of local autonomy, and each bank should have freedom to attract gold to itself, but should, above all, avoid the importation of unnecessary gold.20 These objects have been " " F e d e r a l Banks for Foreign T r a d e Arc Indorsed by Convention," Coast Banker, X X X V I (1926), 3 1 1 - 1 8 . 20 Committee on Finance and Industry Report, J u n e , 1 9 3 1 , pp. 1 3 2 - 3 3 ; C . B. Kisch, "Central Bank Reserves," in The International Gold Problem, pp. 1 5 0 - 5 3 .

238

FOREIGN

TRADE

quite positively defined in the postwar development of central banking. The problems of international stability, acquisition of gold stocks, restoration of gold standards and the distribution of gold, have been of primary importance. In pursuit of the policy outlined above, central banks have held funds to be counted as reserves by foreign institutions, and have extended gold credits in cooperative agreement to aid stabilization or to replenish reserves. Several instances are found where the leading central banks have collaborated in foreign-exchange control. They have likewise transferred payments or receipts on maturing loans from one institution to another through foreign branches of commercial banks.21 The Federal Reserve system in the United States has demonstrated the efficiency and practicability of carrying a central pool of money with which to settle the claims of different parts of the country or the world. FOREIGN RELATIONSHIP PROVIDED IN R E S E R V E

ACT

The foreign functions of central banks, in connection with their duties of regulating the supply of specie and the foreign exchanges, necessitate operating in foreign markets through some agency. Where the agency is provided by branches of the commercial banks, or branches of the central bank, the problem of organization is important.22 The significance of foreign contact was fully realized by the framers of the Federal Reserve Act, and thus provisions were made whereby the system could maintain relationships abroad.23 In Section 14 of the Act, it was provided that: Any Federal Reserve Bank may under rules and regulations prescribed by the Federal Reserve Board, purchase and sell in the open market at home and abroad, either from or to domestic foreign banks, firms, corporations, or individuals, cable transfers, bankers' acceptances and bills of exchange of the kinds and maturities by this act made eligible for rediscount with or without endorsement of a member bank. Each Federal Reserve Bank shall have the power to deal in gold coin 51 Willis, Theory and Practice of Central Banking, pp. 426-27, 403-4; A. Goldstein, "Federal Reserve Aid to Foreign Central Banks," Review oj Economic Studies, II (Feb., 1935), p. 79. n Willis, Theory and Practice of Central Banking, p. 436. " See page 234 of this chap, for the provisions of Sec. 2 5 of the Federal Act. T h e Board by the Banking Act of 1933 is given complete supervisory authority over

FOREIGN

TRADE

239

or bullion at home or abroad, and with the consent of the Federal Reserve Board to open and maintain banking accounts in foreign countries, appoint correspondents and establish agencies in such countries. It is interesting to note that the A c t states that such foreign relationships shall be undertaken only with the consent of the Federal Reserve Board. T h e framers of the A c t intended that the agencies provided for were to be authorized to deal with the public directly and to discount " w i t h or without endorsement" the paper of the banks and maturities made eligible for rediscount at Reserve banks in the United States. In other words, the purpose was to establish or develop a system of banking which would enable member banks in the United States, whether small or not, to secure facilities in foreign countries for the management of the banking business and for the financing of goods moving between foreign countries and the United States. 24 ACTUAL

DEVELOPMENT

OF THE

FOREIGN

FIELD

T h e policy of the Federal Reserve system has been distinctly adverse to extending its operations by opening branches in the foreign field. Foreign contacts have accordingly been made in two other ways, namely, by opening accounts with foreign central banks and by appointing correspondents. This question was decided by the Board early in 1916 after much discussion. T h e opposition of the larger banks engaged in foreign-trade financing had much to do with the decision. 25 No agencies have been established by the Federal Reserve banks, except one of minor importance at Havana, Cuba. This was opened in 1923 and was at first operated jointly by the Federal Reserve Bank of Boston and that of Atlanta, later being taken over entirely by the Atlanta Federal Reserve Bank. Several other agencies, however, have been considered. 26 all relationships entered into between foreign banks and any Reserve bank. 14 Willis and Steiner, op. cit., p. 549. M See Willis, Federal Reserve System, Chap. I V , for a full discussion of this problem; Clark, op. cit., p. 301. s ' The Federal Reserve Bank of San Francisco has considered establishing an agency at Honolulu; see pp. 251-52 of this chapter.

240

FOREIGN

TRADE

ACCEPTANCE POWERS OF NATIONAL AND STATE BANKS Since 1914 national banks have had the power to accept bills drawn upon them in the ordinary course of banking business, authority being granted b y the Federal Reserve A c t . A t present most state banks have been given acceptance powers. In the Pacific states, only California and O r e g o n have been given the state banks' full acceptance powers. 27 In Washington a modified situation exists. A l t h o u g h no express powers are granted, an opinion of the attorney general of the state, in 1926, conferred some restricted powers of acceptance. 28 T h e states of U t a h , Idaho, N e v a d a and Arizona have conferred no express acceptance powers upon their banks. Both state and national banks in the Pacific states, however, possess the necessary powers to assist in financing foreign trade. T h u s with the Reserve system development there have been brought into being adequate facilities for the financing of foreign trade, and the United States has been placed in a position which enables it to vie with London for a share of over-seas business. A l l such business was concentrated in L o n d o n before the Great War, and the vast majority of foreign trade was financed through London. England was in a position to handle the trade efficiently. " In California, any commercial bank may accept drafts or bills of exchange of not more than six months' maturity growing out of transactions involving domestic shipment of goods or importation or exportation of goods, provided that shipping documents convey or secure title, are attached at the time of acceptance or that security is provided by a warehouse receipt or other such document, conveying or securing the title to readily marketable staples. Any commercial bank may accept drafts or bills of exchange of not more than three months maturity, drawn under regulations prescribed by the superintendent of banks in foreign countries or dependencies or insular possessions of the United States, for the purpose of furnishing dollar exchange—Sec. 80, subdiv. 4, California Bank Act. Savings banks may purchase bankers' acceptances of good character and maturity, defined by the Federal Reserve Act as eligible for rediscount. The Oregon law carries the same provisions as does the California law, with the exception that the banks may accept six-months paper for purposes of dollar exchange—Oregon Laws, 1925, chap. 207, Sec. 128, p. 307. " The attorney general ruled that as an abstract position, a Washington state bank had no power to extend its credit by guaranteeing by acceptance the payment of a time bill of exchange. However, if the drawee of a bill of exchange accepts it and arranges with the bank for a stated line and limit of credit within the law, such a bank may be permitted to guarantee the acceptance charging it on its books as such. Hearings, 1931, p. 977.

FOREIGN TRADE

241

A discount market, supervised by the Bank of England, had been developed over a period of years. These over-seas banks and the absence of an important stock-market demand for funds were also important aids in developing foreign business.29 The reverse situation was true of the United States. At that time, although New York was important in financing domestic trade, facilitating capital distribution and settling domestic balances, it was unimportant in financing the foreign trade of the United States. The lack of a central bank, the need for capital at home, and the utilization of funds in security trading were all factors presenting obstacles to be overcome. Even such American bills as there were did not have a ready market, nor did American dollars find any considerable foreign demand.30 In practice, the assistance to foreign trade by the Reserve system had been reduced to the character of the paper growing out of foreign trade. The Board early defined foreign trade as including not only the movement of goods between the United States and foreign countries, but also the movement of goods between such other countries themselves. Consequently, a Reserve bank can discount paper designed to facilitate the movement of goods between two foreign countries.31 Shortly after the passage of the Reserve Act, agitation was started to broaden the acceptance powers of member banks, and results were achieved which empowered the banks to accept bills in an amount equal to 100 percent of capital stock and surplus, whereas 50 percent had previously been the limit.32 Another result of the campaign for liberalization of acceptances was the extension of acceptance facilities to domestic trade finance. By far the largest volume of acceptances, however, have been used in foreign-trade financing. The trade acceptance and bankers' acceptance were put in a favored position by the Reserve Act, being admitted to both discount and purchase by the Reserve banks. n

Beckhart, The New York Money Market, III, 253. *> Ibid. " Willis and Steiner, op. cit., p. 561. " Beckhart, The New York Money Market, III, 365-66; Federal Reserve Act, Sec. 13, as amended June 31, 1917.

FOREIGN

242

TRADE

G R O W T H OF ACCEPTANCES

Bankers' acceptances assumed increasing importance in the financing of business activity over the period from 1925 to 1930. After 1930, the volume of financing by this method, as by others, decreased, until recently, when the value of bills began to show an increase. Chart 16 depicts the regular and uniform increase in acceptances in the Twelfth District up to the middle of 1930. MILLIONS o r

DOLLARS

ACCCPTANCE j A B i L i T r o r c TY BANKS TWCLFTH f C JCRAL RCSCflVC 0ISTRICT

J

ACC EPTANCC LIABIL TT SAN rAANCISCO BA> IKS

1 1 M 1 1 1 1 1 1 I 1 1 1 1 1 1 M 1 1 -1 L l 1 1 1 1 1 1 11 11 • 1 M 1 11 1 11 1 1 1 1 1 1 1 11 1I t 1 1 1 1 M 1 I 1

1923

192ft

1927

1926

1929

1930

Chart 16 ACCEPTANCE CREDITS, TWELFTH

DISTRICT

Acceptance liability of banks as reported by the American Acceptance Council Source: Monthly Review of Business Conditions, Federal Reserve Bank of San Francisco M a y , 1930, p. 38.

A portion of this total is composed of a group of acceptances used to finance imports or exports of goods to or from the Pacific states. T h e amount of acceptances used to facilitate the handling of these last two groups of commodities may be determined from T a b l e 17. Chart 16 shows the proportion used to finance goods stored or shipped between foreign countries. In this connection, New York, although first in importance, has been losing its relative position. Practically all dollar exchange drafts are drawn upon New York banks. Occasionally such drafts are drawn on Boston banks and, on one occasion, on San Francisco banks. 33 53 Bcckhart, The New York Money Market, III, 333-34; see C h a p . X I of that work for a discussion of the relative position of New Y o r k in the acceptance market.

FOREIGN TRADE

243

New York is the only center where export acceptances have been consistently larger than import acceptances. Both have been much greater, relatively, than the dollar value of the export and the import trade passing through the New York customs district.34 San Francisco has tended to hold somewhat the same position on a reduced scale. Similarly, at times export acceptances have exceeded import acceptances. The reason for New York's primacy in the bill market is found in the fact that export buyers usually arrange the financing, and that the foreign bank makes use of those banks in New York or other centers where it customarily holds its dollar-exchange balances.36 The New York banks have an advantage, in that some Far Eastern banks have branches in New York City. In many cases it has boiled down to a competition in rates, and the New York banks have on the whole been more intelligent in the application of a scheme of charges. Large exporters have likewise been able to make arrangements in New York for all quarters of the world, and there has been no need for making special connections for trans-Pacific business. Deposits of foreign banks with Pacific Coast institutions, nearly all of which are payable in dollars, have aggregated approximately $13,000,000. About one-third represents accounts of banks located in the Far East, with the remainder almost equally divided among Europe, Canada and Latin America.36 Several San Francisco banks have also always ranked in the first forty banks accepting bills in the United States. As stated in another chapter, the market for these bills in San Francisco has been sharp but narrow, there being only two dealers in the Twelfth District. It is the opinion of the officials of the Reserve bank that the market could be considerably broadened by having member banks establish foreign branches.37 The officials of the San Francisco bank also think that the market for bills could be improved in San Francisco and throughout the country as a whole if the Federal Reserve banks would educate accepting banks to extend reasonable lines of credit to all dealers, " Ibid., p. 332. » Ibid. M Monthly Review of Business Conditions, Federal Reserve Bank of San Francisco, June, 1933, p. 60. 17 Hearings, 1931, p. 861.

244

F O R E I G N

T R A D E

T A B L E CLASSIFICATION

O F

2 9 BILLS

(In Thousands, ooo's

ACQUIRED TWELFTH

IN

P U R C H A S E D *

Omitted)

ACQUIRED

THE

DISTRICT

OUTSIDE

TWELFTH

THE

DISTRICT

DATE FROM D E A L -

OUTRIGHT

AGREEMENT

$122,176

•929

I59.930 246,071

'930

s

I20,600

' S o u r c e : Hearings,

FROM BANKS

DEALERS

REPURCHASE

'927 1928

FROM O T H E R

FROM

ERS UNDER

FEDERAL RESERVE BANKS

57.577 109,068

»24.973 57.007

44.739

47,289

57.783

30,137

$

... 1

FROM OPEN MARKET COMMITTEE

$

3.5 ' 4 i ,000

35.230 35,188 46.437 i10,080

1 9 3 1 , p. 8 9 8 .

at a cost not greater than that bid for 90-day bills, even when the dealers are borrowing at the Federal Reserve bank. Of course, the accepting privilege is of no value unless a market can be found for bills. The dealers render this service, and the banks creating bills should extend their support instead of leaving such assistance entirely to the Reserve bank, as has been the case in the past. 38 Viewed from another side, a better market demand might be created for acceptances if the Federal Reserve banks gave the acceptance market less support. The accepting banks would be forced to support the dealers in handling their products by credit extensions. A wider investment field would be sought as a result.39 FUNCTION

OF

R E S E R V E

B A N K OF

IN

FOREIGN

FOREIGN

T R A D E

AND

PURCHASES

BILLS

The position of the Reserve banks in the foreign-exchange market or in fostering foreign trade is obvious. They stand ready to regulate the price of exchange by their willingness to discount bills growing out of such transactions. Summarizing conditions in M

Hearings,

"

Ibid.

1 9 3 1 , p. 8 7 9 .

FOREIGN TRADE

245

the San Francisco market, the Twelfth Bank has bid consistently for local acceptances. The early regulations of the Board forbade any of the Reserve banks to purchase bills stated in foreign currencies, and during the first years of operation they bought only bills stated in terms of dollars. This was after the practice of the Bank of England, which bought sterling bills. Sterling, however, was an international currency. After some experience, the ruling was changed in 1922 to permit the purchase of bills of specified maturity and character "stated in dollars or some other money."40 The Reserve banks were virtually empowered to purchase paper stated in foreign currency from their member or other institutions.41 American banks have always had relatively few branches abroad, and consequently the Reserve banks have been practically forced to deal with branches of foreign commercial banks in the United States. In all, "American central banking abroad has thus been conducted largely through the medium of institutions chartered by other countries."42 The regulation permitting the purchase of foreign currency bills by the Reserve banks has had no effect upon the independent operations of the Federal Reserve Bank of San Francisco. All of the operations involving the purchase of foreign bills, whether liability was assumed for payment in the form of guaranty or not, were carried out by the New York Federal Reserve Bank. The Twelfth Bank has never bought any of these bills independently for its own account.43 The change in the Twelfth Bank's portfolio, representing foreign bills, has arisen as a result of pro-rata participation in purchases decided upon and carried out by the New York Reserve Bank. Holdings of bills of the Federal Reserve system have resulted from independent purchase, and from purchases under agreement with other central banks. During the period 1924-31, foreign bills were bought independently and also under agreement. Since 1931, 40

Annual Report of the Federal Reserve Board, 1922, p. 252. Willis, The Theory and Practice oj Central Banking, p. 425. a Ibid. " Hearings, 1 9 3 1 , p. 84. 41

246

FOREIGN

TRADE

however, the holdings have represented the utilization of formal credits.44 The San Francisco Reserve Bank held no foreign bills until 1927, although other banks had shared in system purchases in 1924-26. Beginning with $747,000 worth of bills on June 29, 1927, its holdings had increased to $2,483,000 on December 3 1 , 1930.45 The portfolio has been composed chiefly of sterling bills. Francs, pengos and marks have been bought less extensively. Sterling was bought without agreement in 1927, to employ a portion of temporary London balances resulting from the sale of earmarked gold in London. It was hoped that the pound would be strengthened and imports of gold to the United States retarded. Sterling purchases were again undertaken, independently in 1929 and 1930, and in 1931 in cooperation with other banks, because of the weakness of the pound. Pengos were bought under agreement in 1929 and 1932, in cooperation with other central banks. These credits in 1931 were renewed, and consolidated in October, 1933. Provision was made for repayment over three years.46 Similar agreements to buy German and Austrian bills were entered into, on a cooperative basis, with other central banks. In contrast to the earlier agreements to buy bills, those made in 1930 and subsequent years were extensively and immediately used. Positive help was rendered in easing the strain of currency depreciations and making exchange fluctuations less violent. D E V E L O P M E N T OF FOREIGN FUNCTIONS BY T H E F E D E R A L R E S E R V E B A N K OF N E W

YORK

From the first, foreign functions of central banking in the United States have fallen largely into the hands of the New York bank, as to operations both in the purchases of dollar and foreigncurrency bills and in the carrying out of inter-central bank rela44 Goldstein, op. cit., p. 90; see pp. 85-89, 90-95 of that work, for a discussion of Federal Reserve system agreements to buy bills. 45 Figures subsequent to 1930 for San Francisco are not available. 48 Goldstein, op. cit., p. 93; see this discussion for details. R . Burgess, The Reserve Banks and the Money Market, rev. ed., pp. 167-68; S. E. Harris, Twenty Tears oj Federal Reserve Policy, I I , 6 4 1 - 4 2 .

FOREIGN

TRADE

247

tionships. This development has become strengthened during the period of operation of the Reserve system.47 The first relationship of the New York bank with foreign central banks was established May 3, 1917, between the Federal Reserve Bank of New York, and the Bank of England, the Federal Reserve Board having passed a resolution, on December 20, 1916,48 approving the application of the New York bank for an agency relationship. The agreement entered into by the directors of the two banks provided that the Bank of England would act as the correspondent and agent of the Federal Reserve Bank of New York, and the New York Bank would act as the correspondent and agent in America of the Bank of England.49 It was understood at the time of the agreement that the New York Reserve Bank would act on behalf of the other Reserve banks, and supply the needful services. Under the approval of the Reserve Board, the other Reserve banks were allowed to participate in the agency relationship that was to govern the New York bank.50 As a consequence of the agreement established by the two banks, "the New York Reserve Bank, in June, 1917, paid for the account of some English banks, a loan of 852,500,000 with interest maturing in New York." The Bank of England received, in return, an equivalent amount of earmarked gold sovereigns to the account of the Federal Reserve Bank of New York. The other Reserve banks were allotted shares in the transaction to the amount of $34,387,500, but held no gold on their own account. The gold in the Bank of England was credited to the account of the New York Reserve Bank and the latter held the gold to the credit of the other Reserve banks.51 Relationships of the same type with the Bank of France and the Bank of Italy were concluded in the same year.52 "Various types of transactions between the New York Reserve Bank and central banks throughout the history of the Reserve System have given rise to central bank balances where the New York " B u r g e s s , op. cit., p. 22; Annual Report of the Federal Reserve Board, 1917, p. 275. Clark, op. cit., p. 303. " Annual Report oj the Federal Reserve Board, 1917, p. 275; ibid. M Clark, op. cit., p. 305.

48

" Ibid. 61

Annual Report of Federal Reserve Board, 1917, p. 275.

248

FOREIGN

TRADE

Reserve Bank acted as agent of the other Reserve banks." 53 The precedent for such action, however, was established in the Bank of England relationship during war time. In this case, the Reserve Board authorized the arrangements in advance, while the negotiations were completed by the governor of the New York bank, and details of the agreement were ratified by the directors of the two banks. Following this, most of the foreign loans of the Reserve system have been arranged by the New York bank. The details and arrangements have later been made known to the Reserve Board.64 The other Reserve banks "were informed that they would be expected to contribute in proportion to their assets."65 All the early foreign relations of the Federal Reserve Bank of New York were connected with war transactions. Some of these were performed for the United States Treasury, in connection with exchange arrangements or credits with foreign central banks. The Federal Reserve Bank of New York also aided in the work of the Reparations Commission.66 A t the international conferences of central bank officers, after the war, the United States was generally represented by the governor of the Federal Reserve Bank of New York, and on visits of foreign officers, they always conferred with the governor of the Federal Reserve Bank of New York, and not with the Board. The governor of the New York Bank was the controlling figure in the agreements carried out in the twenties.67 These agreements attempted to establish stability in foreign exchange and likewise to ease the return to gold by countries abroad.88 T h e outstanding event was the establishment of the $200,000,000 loan in gold for the Bank of England, in which the other Reserve banks were to share pro rata. This agreement was negotiated by the governor of the New York Federal Reserve Bank. Other arrangements of a similar nature were effected with other central banks.59 None of these credits established for Great Britain, Belgium, or other Clark, op. cit., p. 304. Ibid., p. 304. " Ibid. M Burgess, op. cit., pp. 278-79. 67 Ibid. M Goldstein, op. cit., pp. 81-82. •* Burgess, op. cit., p. 279. u

M

FOREIGN TRADE

249

banks of other nations was used; but financial aid of the central banking system of the United States was contracted for and was available should the need arise.60 Other foreign relations were effected in aiding countries abroad to return to gold.61 The officers of the Federal Reserve Bank of New York were also influential in the formal development of the plan for the Bank for International Settlements.62 R E A S O N S FOR T H E C E N T R A L I Z A T I O N OF FUNCTIONS IN N E W

YORK

The reasons why the foreign functions of central banking have fallen largely into the hands of the New York Reserve Bank, as well as the extent to which they have been exercised in the United States, are various. They may be considered from political, economic and sectional points of view. The fact that New York City is the largest money market in the United States and that the largest banks of the country are quartered there has undoubtedly contributed to the advantage thus secured.63 New York banks have also jealously guarded the business in foreign trade, built up since the war, and have been able to finance it efficiently because of the large volume of unemployed funds attracted to the market in New York. The Treasury officials have likewise regarded the New York Reserve Bank as their chief contact and have to a large extent dominated its policies, because of the subordination forced by fiscal activities, having become the bank's largest, and a preferential, customer. Logically it has secured its foreign contacts through this bank. In other regions economic development has not yet reached the stage attained on the eastern seaboard, and there has been a greater need for capital at home. Again, the banks on the whole are smaller and have not wished to undertake the expense or risk necessary to expand to any extent through foreign operations, but M

Goldstein, op. cit., pp. 8 3 - 8 4 ; Clark, op. cit., pp. 3 1 8 - 1 9 . Harris, op. cit., Chap. X X I V , for a discussion of foreign relationships of the Federal Reserve system. 62 See Clark, op. cit., pp. 3 2 2 - 2 3 , and Willis, The Theory and Practice of Central Banking, Chap. X X I I , for a discussion of the part played by the New York R e serve Bank in the development of the Bank for International Settlements. " B u r g e s s , op. cit., p. 279. 61

25o

FOREIGN

TRADE

have let the eastern banks have all, or what they did not want, of foreign commercial accounts. They have never offered any real competition. This has in a measure influenced the Reserve authorities in the district. Finally, there has never been any collective protest or complaint concerning the development of the present situation. It remains true, however, that the New York Reserve Bank has, from the outset, and partly at the insistence of the larger banks in the district, attempted to control the policies of the other Reserve banks, even sometimes acting without the authority of the Board. THE

F E D E R A L R E S E R V E B A N K OF S A N

F R A N C I S C O AND

FOREIGN

AGENCIES

Many observers think that the Federal Reserve Bank of San Francisco stands in a favorable position for the further development of oriental trade and a local bill market. During the late twenties there was considerable discussion by groups of Pacific Coast bankers on the question of the establishment of foreign branches of commercial banks and a Far Eastern branch of the Federal Reserve Bank of San Francisco. At its annual convention in 1926, the Pacific Foreign Trade Council endorsed a policy of foreign branches. J . A. H. Kerr, a Los Angeles banker, in addressing the convention declared: Without waiting for any further legislation but using the authority already extended, I suggest therefore the following program for providing the necessary financial organization for the development of foreign trade activity on the Pacific Coast: First, that the Federal Reserve Bank of the Twelfth Federal Reserve District establish branches at strategic points in the Pacific trade area, using for the purpose the surplus capital they now carry unemployed. One branch might be located in Mexico, another in South America, several in the Asiatic territory and one possibly in the Malay area. Second, that the large commercial banks of the Pacific Coast be encouraged to establish foreign branches, either jointly or severally. Third, that the financial and business interests of the Pacific Coast cooperate in the organization of a foreign banking corporation under Section 25A of the Federal Reserve Act. . . . I believe that these three steps would serve to establish on the Pacific Coast adequate banking organization for foreign trade. They might be

FOREIGN

T R A D E

251

taken successively. T h e creation of foreign branches b y the Federal Reserve Bank would be first and easiest to accomplish, after they had engaged in the p r i m a r y pioneer work, the other two steps would follow more easily. T h e commercial banks would realize the ultimate profitableness of foreign branches a n d would be inclined to establish them. Similarly, the desirability of creating a foreign banking corporation would become clear. . . . Unless this country as a whole seizes the opportunity to make permanent its a d v a n t a g e in world trade, that opportunity m a y be lost forever. Unless the Pacific Coast in particular, seizes the opportunity to hold for itself its natural position of leadership in the great Pacific commerce which is developing, that leadership m a y be transferred to the Atlantic seaboard.® 4

Opinion on this subject today is mixed, and considerable inertia must be overcome before action will be taken. There has also been some agitation for the location of a currency depot, or branch of the Federal Reserve Bank of San Francisco, at Hawaii. The trade between Hawaii and the Pacific Coast is forced to carry the cost of exchange, as there are continuous shipments of notes between the two banks in Hawaii and their correspondents in San Francisco. Although the exports roughly offset imports, there is considerable seasonal movement which causes at some times a currency redundancy, and at others a currency shortage in the Islands. Government pay-roll disbursements, Army and Navy expenditures and tourist travel also affect this situation. These factors cause the banks to import currency at times, and at others to export it back to San Francisco. The rates are 82.00 per $1,000, and $1.00 for any excess. These rates have become more or less arbitrary, so that the Hawaiian banks accept drafts on the mainland at par and charge the quoted rates in selling drafts on the mainland, even though they are importing currency. The community has apparently always adjusted itself to the situation, and no hardship seems to be consciously felt. Action on the part of the Federal Reserve Bank of San Francisco would be for the establishment of an agency. However, it has not moved in this direction, because of the possibility that protest " Kerr, "Federal Banks for Foreign Trade Are Indorsed by Convention," Coast Banker, X X X V I (March, 1926), 316.

252

FOREIGN

TRADE

would be raised on the part of those correspondent banks which would be deprived of their income in the form of exchange charges. Existing law also affords an obstacle, because an agency similar to the one in Cuba would require an amendment to the Federal Reserve Act. The Hawaiian Islands are an insular possession, not a foreign country. Consequently, a branch only is permitted, and it is not felt that the service rendered would offset the cost of branch operation. The volume of business in Hawaii is not sufficiently large to promote extensive discounting or rediscounting. Establishment of an agency, however, to handle currency and even out and adjust the supply, would definitely make for a better arrangement in the long run. It would eliminate entirely shipments of currency to the mainland. The attempt of the bank to solve the currency flow by imposition of the exchange charge on currency has not been entirely successful, as it sometimes works in its favor and sometimes against it. Recently the United States government adopted a new plan of meeting its obligation in the Islands. It sends free of charge, to the Bishop bank, all the currency required for Army and Navy payrolls. The inauguration of the Clipper Air Mail service has cut off two-thirds of the steamer time. These factors have improved the smoothness of currency flow between the Islands and the United States. Further action would, however, be desirable. Consideration of a branch in the Far East has never been contemplated. There is, however, logical basis for one, and the future of foreign trade relatively will depend upon the activity of the Reserve bank and the member banks of the Pacific Coast in this direction. CONCLUSIONS

The theory of foreign central banking of the Federal Reserve system is highly specialized and peculiar. In the past, the theory of central banking, from the viewpoint of foreign development, has been generally the result of war, and what is needed now is a "theory and application of central banking, based upon cooperation." 65 The fifteen years since the close of the war have stressed the 65

Willis, The Theory and Practice oj Central Banking, p. 435.

FOREIGN

TRADE

253

importance of needed international cooperation "for the purpose of permitting a mutual aid and coordinate development among the principal financial markets of the world." 6 6 T h e foreign trade has reached a point at which further development will not take place unless there is international development of capital. " T h e experience of the past ten years has been disappointing, but the failures that have been incidental to it have merely proved more forcefully the necessity of central banking organization that would bring about real and effective collaboration in securing the distribution of capital and regulation of rules of discount upon a basis that would be effective." 6 7 The banks should not wait until foreign trade is established as their assistance is vital in creating trade outposts. It also seems clear that in a country as large as the United States, financial organization for foreign trade should be on a regional basis. The same objections which pertained to the concentration of capital for farm aid and general commercial banking apply here with equal if not greater force. The Federal Reserve Banks establish branches at strategic points, using for this purpose the surplus capital which they now carry unemployed. Naturally these branches should be located in more countries in which we have invested most heavily, either in the form of governmental or capital securities or other capital investments. In the establishment of such branches of the Federal Reserve Banks, it would be highly necessary to effect some means of coordination and proper distribution of branches as between districts. Foreign branches of the Federal Reserve Bank would serve to eliminate a great deal of overlapping of capital investment. They would eliminate duplication in personnel and organization which occurs in the establishment of branches of competing private banks. They would give a larger operating unit and afford a better regional distribution throughout our country of the benefits of foreign commerce.68 Ibid. Ibid. 68 J. A . H . Kerr, " F e d e r a l Reserve Spanning Globe, Need of Foreign T r a d e , " Coast Banker, X X X I X (July 20, 1927), 36; "Banking Service for Foreign T r a d e , " California Journal of Development, X V I I (July, 1927), 26-27. M

87

IX THE TWELFTH DISTRICT IN REVIEW years of Federal Reserve system development under the regional bank plan came to a close in November, 1936. The group of facts about its operation is sufficient to furnish strong conclusions as to its success. The operating philosophy seems clear, and certain strengths and weaknesses of the system are strongly outlined. The years of operation have caused departures in practice and in the theory of administration from what was originally contemplated in the Federal Reserve Act. The original Act was designed with the idea of furnishing American banking with several separate autonomous central banks of nearly equal size. These banks were to be charged with the duty of developing the credit policy of the particular areas in which they were placed. A policy was to be determined which was consonant with a national viewpoint. This has not come to pass, and the activities of the regional banks outside of New York have been obscured and restricted by a preponderance of power in the East. It is largely true that "the instrumentalities through which Federal Reserve Credit policy has been expressed may be brought into a grouping of three—the Federal Reserve Board, The Federal Reserve Bank of New York and the other or interior Federal Reserve Banks." 1 Action of both the Board and the New York bank has on occasion nullified positive functioning of a district credit policy. At other times independent policy has been prevented from being tried or effected.2 Despite this fact, the effectiveness of the American banking system has been augmented. It was the original intention of the framers of the Federal Reserve Act that emergencies should be prevented from arising. The Reserve system was not designed solely to provide a mechanism for handling strained conditions. Much could have

TWENTY-TWO

1 Clark, op. cit., p. 397. * Hearings, 1931, pp. 764-65; Griswold, op. cit., p. 239.

T H E D I S T R I C T IN R E V I E W

255

been done to forestall the emergencies of 1920 and 1933, had positive authority been exercised some time earlier, and had the "outside" banks been considered more fully in the policy discussions of the Federal Reserve Board. Important developmental and progressive work has, however, been carried out by the regional banks. The Twelfth District has grown in banking strength from $1,965,555,000 of resources on December 3 1 , 1914, to $5,143,548,000 on December 3 1 , 1935. As a trade area, it is still distinct. Consideration of it as separate from a central banking viewpoint is still justifiable. With the increase in banking strength, many changes in bank practice have occurred. These have been largely achieved under the direction of the Federal Reserve Bank of San Francisco. Through the activities of the bank, the banking structure of the Pacific states has been made more highly centralized. Paper in the portfolios of the banks has been improved in quality and made more liquid. The use of past-due and one-day notes has been almost entirely eliminated. Credit departments of the banks have increased in size and the analyses made more accurate. The acceptance has been encouraged and developed both in domestic and foreign trade. It has thus been financed at less cost than formerly and the framework for a local discount market has been provided. Many coast banks are found among the leading names in the bill market today. The program of bank examination developed by the bank in the twenties contributed to standardization of bank practice. State and national standards were made uniform, resulting in a more effective use of resources and supplying definite aid in problems of effective credit control. Unification of examination practice was not accomplished without difficulty. It was a pressing problem in the district at the outset, owing to the wide divergence between state and national law in the Pacific states. The Federal Reserve Bank of San Francisco has furnished a uniform and elastic currency for the Pacific Coast. The bank tactfully overcame the resistance of the community to the use of paper currency and succeeded in substituting Federal Reserve notes for gold coins. The greatest demands for currency in the history of the

256

T H E D I S T R I C T IN R E V I E W

Pacific Coast were met without friction in 1931 and 1932. Under normal business conditions, currency supplies throughout the district have been allowed to become neither redundant nor scarce. The branches of the bank have rendered valuable assistance in this connection. Through centralization of the legal reserves of the banks in the Reserve bank, a reduction in the amount and a change in the composition of working reserves for the area has been achieved. These reserves have been made more flexible and liquid. The bank has been able to offer adequate supplies of credit to members in two severe depressions—1920 and 1932. At times the Twelfth Bank has appeared as a lender, supplying other districts with credit. Centralization of resources and access to the Reserve bank has resulted in a general lowering in rates of customers' loans throughout the district. This has to a certain extent aided in breaking the customary rates which formerly prevailed on loans throughout the area. Another result has been to make the price of borrowed funds more uniform with that over the rest of the country. Reduction of float and successively improved availability of check collections have aided business. The clearing machinery has encouraged the use of the check and afforded a larger volume of available funds to business and banking, at less cost. The Twelfth Bank has not been able to develop a clear-cut, independent credit policy within the district. Progress in this direction has been modified and restricted by the attitude of the New York bank and the Federal Reserve Board. Credit policy of the bank has always reflected system policy. At least on one occasion it has been forced to reduce its rate, at the Board's suggestion, in spite of its own choice.3 Its rate changes have always followed closely those of the New York bank. The development of the Federal-funds market between the Twelfth District and the East has likewise been a modifying factor. Only a few years ago did the bank actively discourage traffic in these balances. System membership and the development of branch banking within the district has afforded one of the most trying problems for the bank, during the twenties. Except for a few years at the outset, • Hearings, 1931, p. 769.

T H E D I S T R I C T IN REVIEW

257

the bank has enjoyed the confidence and respect of the financial community. More positive and prudent action could have been taken in settling the controversy over branch banking. On the whole, there has been a marked change in the attitude of the banking community toward the Twelfth Bank. The hostility and suspicion shown by many bankers at the beginning have been entirely dissipated. These attitudes have been replaced by the acceptance of the institution and by confidence in its policies and staff. Many bankers, however, use the borrowing facilities of the bank with reluctance. The war period, the postwar depression, the emergency of 1933, and the accompanying situation have contributed materially to overcoming this attitude. Education is needed on this point. Whenever borrowing has been necessary, the largest volume has been based on 15-day notes secured by government securities. This naturally has tended to reduce the effectiveness of rediscount as a means of credit control. The facilities of the bank have been chiefly used by country banks. San Francisco and other Reserve city banks have used the institution but sparingly. Concentration of bankers' deposits in San Francisco, and to a lesser extent in the outside Reserve cities, has exercised an important influence in this connection. Other instruments of credit control—direct action and moral suasion—have on occasion effectively controlled credit extensions. Important problems must be faced in the future. With the reduction in the number and the increase in size of banks in the Twelfth District, the functions of clearance and collection have decreased in significance. The problem of developing a district credit policy, more nearly independent of other areas of the United States, has become more pressing. The development of a broader discount and money market will demand more attention. The bank will be in a better position to make its policies effective, as central banking functions more efficiently, with fewer and larger banks. The bank occupies an influential position in deciding the course of the development of oriental trade. It may aid this development through further encouragement of the acceptance and through the establishment of branches in the Far East. Here the bank can give the necessary encouragement to member banks by preceding the

258

THE DISTRICT

IN

REVIEW

commercial banks into the field. T h e development of branches abroad will be slower than it has been within the United States. Ultimately America's position in foreign trade must be assured through adequate banking facilities abroad. The outlook for the future justifies the continuance of the Federal Reserve Bank of San Francisco as a separate institution. A careful analysis of its twenty-two years of development makes it evident that a branch of a large central bank could have performed almost as effectively as the present bank has done. Independent regionalcontrol banking has not been achieved in the United States, but economic and structural conditions still justify the ideas of the original framers of the Federal Reserve Act. Public and banking opinion must insist on making them effective.

APPENDIX A MANUFACTURES FOR STATES AND TERRITORIES, 1860-1910 Y E A R ENDING J U N E I , i860*

STATE OR TERRITORY

California Oregon Washington Utah

NUMBER OF ESTABLISHMENTS

8,468 3°9 52 148

CAPITAL INVESTED (WITH MINES OUTPUT) $7,868,320

(22,043,096 '.337.238 I,296,200 443.356

ANNUAL VALUE OF PRODUCTS (WITH MINES OUTPUT) $22,210,995 »68,253,228 2,976,761 I,406,921 900,153

* Twelfth Census oj the United States, 1900, Manufactures, Part I I , V I I I , 982-9. Y E A R ENDING J U N E

California Oregon Washington Utah Idaho Nevada Arizona t Ibid.

3.984 969 269 533 101 33° 18

I,

1870!

$39,728,202 4,376,849 1,893,674 I.39'.898 742,300 5.127.790 150,700

566,594,556 6,877,387 2,851,052 2,343,019 I,047,624 15.870.539 185,410

a6o

MANUFACTURES Year

Ending June

i,

1880 J

STATE OR

NUMBER OF

CAPITAL

TERRITORY

ESTABLISHMENTS

INVESTED

5.885 I ,080 261 640 162 184 66

$61,243,784 6,312,056 3,202,497 2,656,657 677.215 I.323.300 272,600

California Oregon Washington Utah Idaho Nevada Arizona

ANNUAL VALUE OF PRODUCTS

$116,218,973 10,931,232 3,250,134 4,324,992 1,27I.3I7 2,179,626 618,365

t Ibid. Year

California Oregon Washington Utah Idaho Nevada Arizona

Ending June

7.923 ".523 1.543 53' 140 95 76

i,

i8go§

$146,797,102 32,122,051 34.369.735 6,583,022 i,048,916 1,211,269 616,629

$213,403,996 41,432,174 41,768,022 8,911,047 i,396.096 i,105,063 947.547

§ Ibid. Year

California Oregon Washington Utah Idaho Nevada Arizona H Ibid.

Ending June

12,582 3.088 3.631 i ,400 59' 228 3'4

i,

1900H

$205,395,025 33,422,393 52,649,760 14,650,948 2,941,524 1,472,784 10,157,408

$302,874,761 46,000,587 59,872,460 21,156,183 4,020,532 1.643.675 21,315,189

MANUFACTURES Y E A R ENDING JUNE

I,

1910**

STATE OR

NUMBER OF

CAPITAL

TERRITORY

ESTABLISHMENTS

INVESTED

California Oregon Washington Utah Idaho Nevada Arizona

7.659

2,246

3.659 749 725 1 77 3"

261

*537.'34.359 89,081,873 222,261,229 52,626,640 32,476,749 9,806,597 32,872,935

ANNUAL VALUE OF PRODUCTS

$529,760,528 93,004,845 220,746,421 61,989,277

22>399>86o

11,886,828 50,256,694

** Thirteenth Census of the United States, 1910, Manufactures, I X , 42, 81, 249, 7 1 1 , 1034, 1238, 1364.

APPENDIX

B

PRINCIPAL SECURITIES LISTED ON THE SAN FRANCISCO STOCK EXCHANGE BOARD, 1907 BONDS Associated Oil Bay Counties Power Co. California Central Gas & Electric Co. California Gas & Electric Co. Gen. M. & Ct. California Street Cable Co. Contra Costa Water Co. Contra Costa Water Geni. Mtge. Edison Light and Power Ferries & Cliff House Railway Geary Street Railway Hawaiian Commercial & Sugar Co. Honolulu Rapid Transit Land Co. Los Angeles Lighting Co. Los Angeles Pacific R . R . ist Con. Mtge. Los Angeles Pacific R . R . of California Los Angeles Railway Co. M Street Cable Co. 6 percent M Street Railway ist Cons. Mtge. M. V . & Mt. Tamalpais S. R y . Northern California Power Co. Northern California R . R . Northern Railway Co. of California. North Pacific Coast R . R . North Shore Railway Oakland Gas Light & Heat Oakland Transit Co. 6 percent Oakland Transit Co. 5 percent

Oakland Water Co. Ltd. Oceanic Steamship Co. Omnibus Cable Railway Pacific Electric Railway Pacific Gas Improvement Pacific Signal & Power Co. Park & Cliff House Railway Powell Street Railway Sacramento Electric Gas & Railway San Francisco & San Joaquin Valley Railway. San Francisco, Oakland & San Jose Railway Sierra Railway of California Southern Pacific Branch Railway of California Southern Pacific R . R . of Arizona 1909 Southern Pacific R . R . of Arizona 1910 Southern Pacific R . R . of California Series A. Southern Pacific R . R . of California Series B. Southern Pacific R . R . of California 1906 Southern Pacific R . R . of California 1907 Southern Pacific R . R . of California 1912 Southern Pacific R . R . of California ist Con. Gtd.

SECURITIES Southern Pacific R.R. of California 1 st Con. stamped Spring Valley Water 1st Mtge. Spring Valley Water 2nd Mtge. Spring Valley Water Genl. Mtge. United Gas & Electric

LISTED

263

United R.R. of San Francisco United States Government 4s United States Government 3s Valley Counties Power Co. Yosemite Short Line R.R. Co.

STOCKS

Water Stocks

Contra Costa Spring Valley Water Co. Gas & Electric Stocks

Central Light & Power Co. Martel Power Co. Mutual Electric Light Co. Pacific Lighting Co. San Francisco Gas & Electric Co. Insurance Stocks

Fireman's Fund Bank Stocks

American National Anglo California Ltd. Bank of California California Safe Deposit & Trust Co. First National Bank of San Francisco London Paris & American Ltd. Mercantile Trust Co. San Francisco National Bank Savings Banks

German Savings & Loan Humboldt Savings & Loan

Mutual Savings Bank Union Trust Co. Street R.R. Stocks

California Presideo Power Stocks

Giant Consolidated Co. Vigorit Sugar Stocks

Hawaiian Commercial & Sugar Co. Honolulu Sugar Co. Hutchinson Sugar Plantation Kilawee Sugar Plantation Makaweli Sugar Co. Onomea Sugar Co. Poan Sugar Plantation Miscellaneous Stocks

Alaska Packers Assn. Associated Oil Co. California Fruit Canners Assn. California Wine Assn. M. V . & Mt. Tamalpais S. Ry. Oceanic Steamship Co. Pacific Auxiliary Co. Pacific Coast Borax Co. Pacific States Gas & Electric

A P P E N D I X

G

BY-LAWS, FEDERAL RESERVE BANK OF SAN FRANCISCO ARTICLE

I.

DIRECTORS

SECTION I. Qyorum.—A majority of the directors shall constitute a quorum for the transaction of business, but less than a quorum may adjourn from time to time until a quorum is in attendance. SEC. 2. Vacancies.—As soon as practicable after the occurrence of any vacancy in the membership of the board the chairman of the board shall take such steps as may be necessary to cause such vacancy to be filled in the manner provided by law. SEC. 3. Meetings.—There shall be a regular meeting of the board every first and third Tuesday of each month at 11.30 o'clock a.m., or, if that day be a holiday, on the first preceding full business day. T h e chairman of the board may call a special meeting at any time, and shall do so upon the written request of any three directors or of the governor. Notice of regular and special meetings may be given by mail or by telegraph. If given by mail, such notice shall be mailed at least six days before the date of the meeting. If given by telegraph, such notice shall be dispatched at least three days before the date of the meeting. Notice of any meeting may be dispensed with if each of the directors shall in writing waive such notice. SEC. 4. Powers.—The business of this bank shall be conducted under the supervision and control of its board of directors, subject to the supervision vested by law in the Federal Reserve Board. T h e board of directors shall appoint the officers and fix their compensation. T h e board may appoint legal counsel for the bank, define his duties, and fix his compensation. SEC. 5. Special committees.—Special business of the bank may be referred from time to time to special committees, which shall exercise such powers as the board may delegate to them. SEC. 6. Order of business.—The board may from time to time make such regulations as to order of business as may seem to it desirable. ARTICLE

II.

EXECUTIVE

COMMITTEE

SECTION I. HOW constituted.—There shall be an executive committee consisting of the governor, the Federal Reserve Agent, and one or more directors; the member or members of the committee chosen by the

B Y - L A W S

365

board shall serve during the pleasure of the board or for terms fixed for it. Not less than three members of the committee shall constitute a quorum for the transaction of business, and action by the committee shall be upon the vote of a majority of those present at any meeting of its committee. T h e committee shall have power to fix the time and place of holding regular or special meetings and the method of giving notice thereof. Minutes of all meetings of the executive committee shall be kept by the secretary, and such minutes or digests thereof shall be submitted to the members of the board of directors at its next succeeding meeting Such minutes shall be read to the meeting if required by any member of the board. SEC. 2. Powers.—Subject to the supervision and control of the board of directors, as set forth in Article I, section 4, the executive committee shall have the following powers: (a) T o pass upon all commercial paper submitted for discount. (b) T o initiate and conduct open-market transactions. (c) T o recommend to the board of directors from time to time changes in the discount rate. (d) T o buy and sell securities. (e) T o apply for and provide for the security of such Federal Reserve notes as may, in the judgment of the committee or of the board, be necessary for the general requirements of the bank. (/) T o employ or to delegate to officers of the bank authority to employ clerks and other subordinates and to define their duties and to fix their compensations. (g) T o approve bonds furnished by the officers and employees of the bank and to provide for their custody. (h) In general, to conduct the business of the bank, subject to the supervision and control of the board of directors. ARTICLE I I I . Officers

SECTION I . The board of directors shall appoint a governor, a deputy governor, a secretary, and a cashier, and shall have power to appoint such other officers as the board may from time to time determine to be necessary and appropriate for the conduct of the business of the bank. The offices of deputy governor, secretary and cashier, or any two of them, may be held by one person, in the discretion of the board. The officers chosen by the board shall hold office during the pleasure of the board. SEC. 2. Federal Reserve Agent.—The Federal Reserve Agent, as chairman of the board, shall preside at meetings thereof. Copies of all reports

266

BY-LAWS

and statements made to the Federal Reserve Board shall be filed with the Federal Reserve Agent. SEC. 3. Deputy Federal Reserve Agent.—In the absence or disability of the Federal Reserve Agent his powers shall be exercised and his duties performed by the Deputy Federal Reserve Agent, w h o may perform such other services as shall be prescribed by the board of directors not inconsistent with his duties as provided by law. SEC. 4. The governor.—Subject to the supervision and control of the board of directors, the governor shall have general charge and control of the business and affairs of the bank and he shall be the chairman of the executive committee. He shall have power to make any and all transfers of securities or other property of the bank which may be authorized to be sold or transferred by the executive committee or by the board. T h e governor shall have power to prescribe the duties of all subordinate officers and agents of the bank where such duties are not specifically prescribed by law or by the board of directors or by the by-laws. T h e governor may suspend or remove any employee of the bank. SEC. 5. The deputy governor.—In case of the absence or disability of the governor his powers shall be exercised and his duties discharged by the deputy governor, and in case of the absence or disability of the deputy governor the board shall appoint one of the other directors governor pro tempore. T h e duties of the deputy governor shall otherwise be such as may be prescribed by the board of directors or by the governor. In case the board shall deem that the business of the bank requires the appointment of one or more assistant deputy governors, it shall have authority to appoint such assistant deputy governor or governors and shall prescribe and define his or their duties. SEC. 6. The secretary.—The secretary shall keep the minutes of all meetings of the board and of all committees thereof. He shall have custody of the seal of the bank, with power to affix same to certificates of stock of the bank, and by authority of the board or the executive committee to such other instruments as may from time to time be required. T h e board of directors may, in the absence or disability of the secretary, or upon other occasion where in the discretion of the board greater convenience can be attained, appoint a secretary pro tempore or empower one or more officers to affix the seal of the bank to certificates of stock or other instruments. T h e secretary shall perform such other duties as may from time to time be prescribed by the board of directors, the executive committee, or the governor. SEC. 7. The cashier.—The cashier and at least one other officer designated by the board of directors shall have the joint custody of all moneys, investments and securities of the bank, subject to such rules as the board

B Y - L A W S

267

may adopt for their safety. He shall perform such other duties as may be assigned to him from time to time by the executive committee, the board of directors, or the governor. ARTICLE I V . Certificates of stock SECTION I . Signature.—All certificates of stock, or of payment of or on account of stock subscriptions, shall be signed by the governor or a deputy governor, and the secretary or cashier, or such other officers as may be prescribed by the board, and such certificates shall bear the corporate seal. ARTICLE

V

SECTION I . Business hours.—The bank shall open for business from 10 o'clock to 3 o'clock on each day except Sundays or days or parts of days established as legal holidays, and on Saturdays from 10 o'clock to 12 o'clock. ARTICLE

VI.

Amendments

These by-laws may be amended at any regular meeting of the board by a majority vote of the entire board: Provided, however, That a copy of such amendment shall have been delivered to each member at least 10 days prior to such meeting.

BIBLIOGRAPHY BANK

PUBLICATIONS

American Trust Company, MercantileTrust Review of the Pacific (monthly), 1923-1928. Federal Reserve Bank of Boston, Annual Reports. Federal Reserve Bank of New York, Annual Reports. Federal Reserve Bank of San Francisco, Annual Reports. Monthly Review of Business Conditions. Circulars. GOVERNMENT

PUBLICATIONS, F E D E R A L AND

STATE

Arizona State Banking Department, Annual Reports. Bureau of Foreign and Domestic Commerce, Commercial Survey of the Pacific Northwest. 1932 Commercial Survey of the Pacific Southwest. 1930. Foreign Commerce and Navigation of the United States, 1928-33. Foreign Trade of the United States for the Calendar Tears 1930-1935. Statistical Abstract, 1930-35. California State Banking Department, Annual Reports. Comptroller of the Currency, Annual Reports. Discount Rates of the Federal Reserve Banks, 1914-1921. Washington, 1922. Federal Bank Organization Committee, Decision Determining the Federal Reserve Districts and Location of the Federal Reserve Banks. Washington, 1914. Letter to the Federal Reserve Board Relative to the Location of Reserve Districts in the United States, S. Doc. 485, 63rd Congress, 2nd sess., 1914. Stenographic Minutes of the Hearings before the Committee (unpublished). 1914. Federal Reserve Board, Annual Reports. Bulletins. Federal Reserve Committee on Branch Chain and Group Banking, Report of the Federal Reserve Committee on Branch Chain and Group Banking. 10 vols, (mimeographed), 1933. Hearings before the House Committee on Banking and Currency: 62d Congress, ist sess., on H. Res. Nos. 429 and 504, Investigation of Financial and Monetary Conditions in the United States. 69th Congress, ist sess., on H . Res. 7895, Strong Bill on Stabilization. 1926.

270

BIBLIOGRAPHY

Hearings before the House Committee on Banking and Currency: 70th Congress, ist sess., on H . Res. 11806, Strong Bill on Stabilization. 1928. 71st Congress, 2nd sess., pursuant to H . Res. 141, Branch C h a i n and G r o u p Banking. 1930. Hearings before the Senate Committee on Banking and Currency: Sixty-third Congress, ist sess., on H . Res. 7838 (S. 2639), Federal Reserve A c t . 1913. Seventy-first Congress, 3d sess., on S. Res. 81, Operation of the National and Federal Reserve Banking Systems. 1931. National Monetary Commission. Publications. Washington, 1910-12. I d a h o State Banking Department, Annual Reports. O r e g o n State Banking Department, Annual Reports. Washington State Banking Department, Annual Reports. OTHER WORKS Acceptance Bulletin, published by the A m e r i c a n Acceptance Council. Alta California, San Francisco. The Argonauts, San Francisco. Armstrong, Leroy, and J . L. D e n n y , Financial California. Coast Banker Publishing Co., San Francisco, 1912. Bachellor, R . A . , T h e Problem o f a C a l l M o n e y Market in San Francisco. Unpublished M S , 1932. Beckhart, B. H . , The Discount Policy of the Federal Reserve System. H e n r y Holt and Co., N e w Y o r k , 1924. -J. G . Smith, and W . A . Brown, Jr., The New York Money Market, Vols. II, I I I and I V . Columbia University Press, N e w York, 1932. Burgess, W . R . , The Reserve Banks and the Money Market. Harper and Brothers, N e w Y o r k , 1936. California Journal of Development, San Francisco. C h a p m a n , J. M . , Fiscal Functions of the Federal Reserve Banks. T h e R o n a l d Press C o m p a n y , N e w Y o r k , 1923. Clark, Lawrence E., Central Banking under the Federal Reserve System. T h e Macmillan C o m p a n y , N e w Y o r k , 1935. Coast Banker, San Francisco. C o n w a y , Thomas, and E. M . Patterson, The Operation of the New Bank Act. J . B. Lippincott C o m p a n y , Philadelphia, 1914. Cooke, J., " B r a n c h Banking for the West and S o u t h , " Quarterly Journal of Economics, X V I I I . Cross, I. B., Financing an Empire. 4 vols. S. S. Clarke Publishing C o . , San Francisco, 1927. C r u m b , J . A . , Banking Regulations in California, unpublished M S . doctoral dissertation, 1935; available in the University of California Library.

BIBLIOGRAPHY Dowrie, George W., "History of the Bank of Italy," Journal of Economics and Business History, I I (1930). The Financial Age, published by F. Howard Hooke, New York. Giannini, A. P., "Branch Banking," California Journal of Development, X V I I (June 30, 1927), No. 2. Gilbert, J . H., "Development of Banking in Oregon," Oregon University Bulletin, N. S., I X (1908), No. 1. Goldstein, A., "Federal Reserve Aid to Foreign Central Banks," Review of Economic Studies, I I (1935), No. 2. Griswold, J . , History of the Federal Reserve Bank of Chicago. Chicago, 1935Hancock, G. D., " T h e National Gold Banks," Quarterly Journal of Economics, X X I I (1907). Hardy, C . O., Credit Policies of the Federal Reserve System. T h e Brookings Institute, Washington, 1932. Harris, S. E., Twenty Tears of Federal Reserve Policy. 2 vols., Harvard University Press, Cambridge, 1933. The International Gold Problem. Collected papers. Oxford University Press, 1 9 3 1 . Kemmerer, E. W., "Seasonal Variations in the Relative Demand for Money and Capital," Report of the National Monetary Commission, l 97, PP- 30-40Kerr, J . A . H., "Banking Service for Foreign T r a d e , " California Journal of Development, X V I I (1927), No. 8. " E x t e n d T h e Federal Reserve System A b r o a d , " Southern California Business, V I (1927), No. 9. "Federal Reserve Spanning Globe Need of Foreign T r a d e , " Coast Banker, X X X I X (1927), No. 1. Kinley, David, The Independent Treasury of the United States. Government Printing Office, Washington, 1 9 1 0 . Kisch, C . H., and W. A . Elkins, Central Banks. 4th ed., Macmillan and Company, London, 1932. Knight, N. R . , "History of Banking in the State of Washington," Unpublished doctoral dissertation, 1935, available in the University of Washington Library. "Pioneer Private Bankers in Washington," Washington History Quarterly, X X I V (1934). Laughlin, J . Lawrence, Banking Progress. Charles Scribner's Sons, New York, 1920. Banking Reform. T h e National Citizens League, Chicago, 1 9 1 2 . The Federal Reserve Act: Its Origin and Problems. The Macmillan Company, New York, 1933. Los Angeles Times, Los Angeles. Mercantile Gazette, San Francisco.

272

BIBLIOGRAPHY

Morehouse, W. R., "Banking in California," Bankers' Magazine, X C (1880). Morning Oregonian, Portland. Muhleman, L., Monetary and Banking Systems, Monetary Publishing Company, New York, 1908. Myers, Margaret G., The New York Money Market, Vol. I. Origin and Development. Columbia University Press, New York, 1931. North Pacific Banker, Portland. Preston, H. H., "Banks of America," Journal of Economics and Business History, IV (1932), No. 2. Report of the Committee on Finance and Industry (Macmillan Report). H. M. Stationery Office, London, 1931. Report of the Monetary Commission of the Indianapolis Convention. University of Chicago Press, Chicago, 1898. San Francisco Chronicle, San Francisco. San Francisco Examiner, San Francisco. Seattle Daily Times, Seattle. Seattle Post Intelligencer, Seattle. Shaw, Wm. A., The Theory and Principles of Central Banking. Isaac Pitman & Sons, London, 1930. Spahr, W. E., The Clearing and Collection of Checks. The Bankers' Publishing Company, New York, 1926. Spokesman Review, Spokane. Sprague, O. M. W., History of Crises under the National Banking System. Government Printing Office, Washington, 1910. Banking Reform in the United States. Harvard University Press, Cambridge, 1911. Strong, Benjamin, Interpretations of Federal Reserve Policy. Edited by W. R. Burgess, Harper and Brothers, New York, 1930. Warburg, Paul M., The Federal Reserve System. 2 vols., The Macmillan Co., New York, 1930. Watkins, Leonard F., Bankers Balances. A. W. Shaw & Co., Chicago, 1929Willis, H. Parker, The Federal Reserve System. The Ronald Press Company, New York, 1923. The Theory and Principles of Central Banking. Harper and Brothers, New York, 1936. and B. H. Beckhart, editors, Foreign Banking Systems. Henry Holt and Company, New York, 1929. J . M. Chapman, and collaborators, The Banking Situation. Columbia University Press, New York, 1934. and W. H. Steiner, Federal Reserve Banking Practice. D. Appleton and Company, New York, 1926. Wright, B. C., Banking in California 1880-igio. San Francisco, 1910.

INDEX A c c e p t a n c e m a r k e t : centralization of, in N e w York, 155, 2 4 2 - 4 3 ; developm e n t of, o n Pacific Coast, 149-53 A c c e p t a n c e powers of national a n d state b a n k s on t h e Pacific Coast, 2 4 0 - 4 1 A c c e p t a n c e rates: carrying, '53_54; local a n d in N e w York, c o m p a r e d , 126-27 Acceptances, b a n k e r s ' , 1 5 0 - 5 5 ; kinds of, originated by Pacific Coast banks, 1 5 4 ; kinds of firms f r o m w h i c h p u r chased, 151-53; table of holdings of T w e l f t h Bank, 1 5 5 A l d r i c h bill: a p p r o v e d by the California Bankers' Association, 8 2 - 8 3 ; a t t i t u d e of Pacific Coast bankers t o w a r d , 8 3 - 8 4 ; i n t r o d u c e d into Congress, 82 A n d e r s o n , F. B., q u o t e d , 83 A r i z o n a : a c c e p t a n c c powers of state b a n k s in, 240; b r a n c h b a n k i n g in, 76, 2 2 2 - 2 3 ; early b a n k i n g in, 46« A r m s t r o n g , L., cited, 25, 26, 28, 29, 30, 32 Bachellor, R . , cited, 5 1 , 56, 78, 164, 165, 167; q u o t e d , 55, 165 Bank c r e d i t : control of, 1 2 5 - 2 6 , 1 2 8 - 3 2 , 164, 177, 182, 184; d e t e r m i n a t i o n of use of, 1 3 0 - 3 2 , 134, 1 8 1 ; factors m a k ing for expansion of, after w a r , 181 - 8 2 ; factors m a k i n g for expansion of, d u r ing w a r , 1 7 7 - 8 0 ; influence of discount r a t e changes on cost of, 128; m e m b e r b a n k reserve balances t h e basis of, 194, 2 0 5 - 6 ; o p e n - m a r k e t operations, effect on, 1 6 4 - 7 7 ; relationship of interdistrict operations to, 1 9 3 - 2 0 3 ; relationship of g o v e r n m e n t financing to, 2 0 3 - 5 ; seasonal d e m a n d s before 1 9 1 4 in S a n Franciso a n d o t h e r coast cities, 5 9 - 6 2 , 1 6 2 - 6 7 . See also Bankers' balances Bankers' balances in T w e l f t h District cities: before 1914, 5 5 - 5 7 ; c o n c e n t r a tion of, 1 5 6 - 5 7 ; dollar m o v e m e n t of, 1 5 8 - 6 2 ; effect of, on m e m b e r - b a n k borrowings, 164; holdings b y b r a n c h

banks, 157; in N e w York, 162; interest paid by S a n Francisco banks, 162 Bank failures: before 1900, 4 1 - 4 3 , 47, 5 2 - 5 3 ; e x a m i n a t i o n function a n d , 206-7 Bank for I n t e r n a t i o n a l Settlements, 249 Banking Act of 1935, c h a n g i n g n a m e of of Federal Reserve Board a n d status of Federal Reserve Agent, 12on Banking holiday, 1 9 0 - 9 2 Banking in C a l i f o r n i a ; early p e r i o d of: constitutional provisions c o n c e r n i n g , 36, 39; d e v e l o p m e n t of, 2 5 - 3 0 ; f u n c tions of, 25; regulation of, 3 6 - 4 2 , 4 6 47; stability a n d failures, 5 2 - 5 4 Banking in C a l i f o r n i a a n d o t h e r Pacific States ( 1 9 0 0 - 1 9 1 4 ) , 5 5 - 7 9 ; corres p o n d e n t relationships, 5 5 - 5 8 ; m a r k e t for N e w York exchange, 6 3 - 6 6 , 6 5 66; ratios of loans a n d investments, 77; r e f o r m m o v e m e n t s , 8 1 ; seasonal forces in m o n e y m a r k e t , 5 8 - 6 4 ; use of overdrafts, 68; use of single-name paper, 68-70 Banking r e f o r m : in California, e a r l y period, 3 6 - 4 3 ; preceding e n a c t m e n t of F e d e r a l Reserve Act, 8 0 - 8 3 Bank of E n g l a n d , 5 - 6 , 2 4 7 - 4 8 Bank of F r a n c e , 6, 247 Bank of Italy, 247 Bank of Italy, California, 2 1 1 , 221 Beckhart, B. H . , cited, 3, 6, 123, 162, 175, 193. 2 4 i Board of Governors, see F e d e r a l Reserve Board Bordwell, C. O . , 102 B r a n c h b a n k i n g : a t t i t u d e s of Pacific Coast b a n k e r s t o w a r d , 2 1 2 - 1 4 ; attitudes of Reserve Board t o w a r d , 2 1 5 16; d e v e l o p m e n t since 1933, 222—23; early period of, o n Pacific Coast, 7 3 76; effect of, o n m e m b e r s h i p in Reserve system, 2 0 9 - 1 1 ; effect of M c F a d d e n Act on, 2 2 0 - 2 1 ; r e g u l a tions of Reserve Board concerning, 2 1 6 - 2 0 ; relation of, to e c o n o m y of

274

INDEX

Branch banking—(Continued) Coast, 1 6 - 1 7 ; state regulations concerning, 75-76, 222H Branches of Federal Reserve Bank of San Francisco: establishment of, 10612; scope of service, 1 0 9 - 1 1 Burgess, R . , cited, 3, 247 By-laws of the Federal Reserve Bank of San Francisco, 264-67 California: acceptance powers of state banks in, 24on; Bank Commissions in, 39; branch banking in, 73-75, 2 1 1 24; coins in circulation, early period, 28-29; concentration of banking balances in, 56-57, 159-60, 225-27; early banking, 25-30; early banking regulation, 36-42; early economic development, 9 - 1 0 ; failures, 52-54; first constitution, 36; greenbacks, 3 3 34; location of Reserve bank in, discussed, 92-95; national gold banks, 35-36; security markets, 77-79 Calkins, J . U., 103, 2 1 4 Call money market, 78 Central banking: demand for, at beginning of century, 80-83; general principles, 4-6, 1 4 - 1 6 , 237-38; Pacific Coast area favorable to, 8 - 1 3 Central banking areas, comparison of Twelfth District with Sweden and Holland as, 1 2 - 1 3 . Central banking functions, 5 - 8 , 1 4 - 1 5 , 237-38; in crises, 180-83, ' 8 7 - 9 3 Central bank policy: acceptances, 1 5 0 53; accumulation of surplus, 147-49; earnings, 136-37, 144-45 Chapman, J . , cited, 15, 43, 173 Clark, L., cited, 3, 94, 146, 210, 247, 248, 249 Clerk, I., 102 Coinage, early period of, in California, 28; kinds of coins in circulation, 28-29 Conway, E. M . , cited, 81 Correspondent relationships, 18, 56-58, 229-30 Credit control, 125-26, 128, 132, 164, 182, 184 Crises in Twelfth District: 1929-33 period, 187-93; postwar period, 1 8 2 87 Cross, I. B., cited, 9, 25, 26, 27, 30, 33, 39. 42, 72, 67, 68

Crumb, J . A., cited, 30, 3 1 , 37, 39, 42, 43. 46, 5 2 . 72; quoted, 3 1 , 32, 37, 77 Currency: shipments to Hawaiian Islands and exchange charges, 2 5 1 ; use of gold certificates as reserves, 202; withdrawals during 1 9 3 1 - 3 3 , 191 Day, William A., 103 Denny, J . O., cited, 25, 26, 28, 29, 30, 32 Deposits: government, 205; time and demand, 48, 77n, 167-68. See also Bankers' balances Deposit turnover, 167-69 Directors of branch banks of Federal Reserve banks, 1 2 1 - 2 2 Directors of Federal Reserve banks: classification of, 98-99; interests represented by 1 1 5 ; methods of election on Pacific Coast, 1 0 0 - 1 0 1 Discount policy of Twelfth Bank, 30; additional collateral, 132; kinds of paper discounted, 132; rejection of paper, 1 3 3 ; results, 134; use of financial statements, 131 Discount rates: development of policy, 126; early, 124; effectiveness of charges, 126; effect on borrowing, 128; problem of setting opening, 1 2 2 23; progressive, 125 Domestic exchange, 67, 65 Dowrie, G. W., cited, 2 1 1 Eligible paper: distinguished from acceptable paper, 135«; loans on, as collateral, 1 3 2 - 3 3 ; practice in rediscounting, 130-36; in postwar period, 179-82 Emergencies, see Crises Examinations of banks, 206-9; table of, 208 Federal Advisory Council, 170 Federal fund market, 162-64 Federal open-market committee, 172 Federal Reserve Act: attitude of Pacific Coast bankers toward, 85-86; hearings under, before districting committee on the Pacific Coast, 87-93 Federal Reserve Agent: function, 1 2 0 2 1 ; and examination function, 206-7; and governor, 1 2 0 - 2 1 ; subordination of, to governor, 1 2 1

INDEX ¡Federal Reserve Bank of New York: fiscal agency function of, 1750; foreign representative of Reserve system, 246— 48; interdistrict rediscounting by, 184; open-market operations of, 164-65 Federal Reserve Bank of San Francisco: administration, 120; administration of branches, 1 2 1 - 2 2 ; By-Laws, 26467; capital stock, 1 3 5 ; earnings by periods, 1 3 7 - 4 2 ; earnings by source, table of, 143; establishment of branches, 103-8; expenses, table of, 145; opening of, 1 0 1 - 2 , organization chart of, 1 1 8 ; organization and management of, 1 1 7 ; problem of Hawaiian branch, 2 5 1 - 5 2 ; problem of Far Eastern branch, 250, 253 Federal Reserve Board: appointment of directors and officers of Reserve banks, 120; branch banking problem, report on (1923), 2 1 5 ; branch banking resolutions of 1923, 2 1 6 ; branch banking regulations of 1924, 2 1 6 - 2 0 ; control of districts, 169-70; Federal Reserve Agent as representative of, 1 2 0 - 2 1 ; name changed to Board of Governors, 12on; problem of discount rate, 1 2 2 - 2 3 ; relation with New York Reserve Board in foreign connections, 247-48; relation with open-market committee, 1 7 1 - 7 2 ; supervision of interdistrict borrowing, 183-84; warning against undiscriminating use of credit (1919), 180 Federal Reserve Districts: criticism of, 93-94; decision on Twelfth District, 93-94; hearings on districting, 88-93; location of Federal Reserve banks, 86-88; map of Twelfth District, 7 Fiscal Agency function, 1 7 3 , 1 7 4 Foreign bank deposits in San Francisco banks, 243 Foreign banking corporations, 7 1 - 7 2 Foreign branches of commercial banks: attitude of bankers toward, 236-37; provided for in Reserve Act, 2 3 4 - 3 5 Foreign branches of Federal Reserve Bank of San Francisco: proposal to establish, 250-52; provided for in Reserve Act, 238 Foreign currency bills: purchase by Reserve system, 245; purchase by

275

Federal Reserve Bank of San Francisco, 246 Foreign exchange, early market in San Francisco, 230 Foreign relations: New York bank acts for other Federal Reserve banks, 2 4 7 48; provided in Reserve Act, 238 Foreign trade, importance of, to Pacific Coast: in early period, 225-27; in recent years, 232-34 Foreign trade financing: by Pacific Coast bank, 2 2 5 - 3 2 ; by New York banks, 225; chief instruments used today, 2 3 1 - 3 2 ; correspondent banks and, 229; importance of acceptances to, 242; reasons for concentration in New York, 243, 249-50; use of finance bills, 228-29; u s e Hong Kong local currency draft, 229 Giannini, A. P., cited, 17 Gilbert, J . H., cited, 18, 34 Glass, C., quoted, 234 Gold, Treasury policy of 1937 concerning, 202-3 "Gold Banks," 35-36 Gold production in Pacific states: effect on balance of trade, 194-95, 19571; importance in early period, 27, 48-49 Goldstein, A., cited, 238, 246, 248 Government operations, flow of funds due to, 203-5 Greenbacks, 33, 34 Griswold, J . H., cited, 3, 2 1 0 Hancock, G. D., cited, 33, 35 Harris, S. E., cited, 3, 172, 246, 249 Idaho: acceptance powers of state banks, 240; branch banking in, early development, 75; branch banking since 1933, 2 2 2 - 2 3 ; early banking, 45; issue of national bank notes, 66; loans and investments after 1920, 185-86; policy during postwar inflation, 182 Independent treasury, 173 Indianapolis monetary commission, 8 1 , 82 Inflation: connection of agricultural credit with, 1 8 1 - 8 2 ; effect of postwar, in Twelfth District, 180; Federal Reserve policy toward, 182

276

INDEX

Interest rates on customs loans: before 1914, 6 1 ; since 1914, 128-29 Investment capital, 77-79 Kains, A., 102, 103 Kemmerer, W. E., cited, 57-59, 63, 64 Kerr, J . A. H., quoted, 2 5 0 - 5 1 , 253 Kinley, D., cited, 173 Kisch, C. B., cited, 237 Knight, N. R . , cited, 43, 44, 45, 46 Laughlin, J . L., cited, 8 1 , 82 Lipman, F. L. quoted, 64, 65 Lowry, R . , cited, 102 Lynch, J . K . , 86, 103 Member banks: borrowing by, on government securities, 132; deficient reserves of, table, 143; examination of, 206-9; grouping of, 97, 98; war financing by, 1 77-83 Membership in Federal Reserve System: of Pacific Coast banks, connection of problem of branch banking with, 2 1 1 - 2 0 ; extent of, 2 0 9 - 1 1 ; tabic of, 2 1 2 - 1 3 Miller, A. C., 106 Mitchell, W. C., quoted, 3 3 - 3 4 Money market: characteristics of, before 1914, 6-8, 58-62; ebb and flow of funds between Twelfth District and others, 193-205; effect of treasury borrowing, outlays, and collections on, 203-5; effect on bank reserves, 195, 202-3, 205; factors causing flow, 193-94; movements reflected in goldsettlement fund, table, 196-201 Moore, W. N., 121 Myers, M . , 72, 230 National banks: development before i 9 ° ° . 3 5 - 3 6 ; gold banks, 35 Nevada: acceptance powers of staet banks, 240; branch banking, early development of, 25; branch banking since 1933, 2 2 2 - 2 3 ; early banking, 45; issue of national bank notes, 66; loans and investments after 1920, 188 Newton, I., 121 Note issue of national banks before 1914, 65-67; prohibition of, for state banks, 3 1 - 3 3 , 44-46; use of, in New York exchange market, 66-67

Open-market operations: concentrated in New York, 165; effect of, in Twelfth District, 165; of Federal Reserve Bank of San Francisco, 164-65 Oregon: acceptance powers of state banks, 240; branch banking, first development of, 75-76; branch banking since 1933, 222-23; early banking, 43; economic development before 1900, 1 0 - 1 1 ; issue of national bank notes, 66; loans and investments after 1926, 187 Overdraft: succeedcd by single-name paper, 68-6g; use of, on Pacific Coast, 68 Patterson, T., cited, 81 Perrin, J . , quoted, 85-86, 106, 1 2 1 , 136 Ralston, W. C., quoted, 84 Rediscounting: developments of rate policy, 126; effect of rate on, 126; kinds of paper offered, 132; opening rates, 1 2 2 - 2 3 ; practice, 130-36; rejection of paper, 133; with correspondents, 56-58 Reserve Bank Organization Committee; decision 21s to Twelfth District, 93-96; criticism of, 96 Reserve deposits: in state banks, 1 5 6 57, 157«; turnover of member banks, 167; use of, 156-64 San Francisco: acceptance market, 1 5 4 55; bankers' balances in, 57, 159-60; demands for credit in, before 1 9 1 4 , 59-62; exchange market, 6 3 - 6 5 ; financial center, 55-62; hearings, 92; security market, 78 San Francisco banks: acceptance experiments, 1 5 1 - 5 2 ; attitude toward Federal Reserve system, 83-85; bankers' balances, 56-57, 155-57, ' 5 9 . 162; branch banking, 73—75, 2 1 1 - 2 2 ; correspondent relationship, 18, 5 5 58, 92, 1 1 2 - 1 3 ; early development, 26-28, 3 0 - 3 1 ; foreign-trade finance, 227-32; interest rates, 128-30; turnover of time and demand deposits, 168; use of Federal Reserve credit, 164-65 Seasonal demands for credit, characteristics of, 59-62

INDEX Security markets on the Pacific Coast, .77-78 Single-name paper, development of, on Pacific Coast, 68-70 Sprague, O. M . W., cited, 14 State banks: competition of, with national banks, 2 1 1 - 1 6 ; desirability of, in Federal Reserve System, 209-11 ; development of, in California, 36-42, 46, 47; development of, in other Pacific states, 43-46, 209-10; inducements to join Federal Reserve system, 2 1 0 ; problem of branch banking, 2 1 1 33; prohibition of circulation of notes b Y. 3 ' " 3 3 . 44-46; regulation of, 36-38 Strong, B., cited, 172 Twelfth Federal Reserve District: economic characteristics of, 3 - 1 3 , 16; general financial relationship with other parts of the United States before 1914, 1 8 - 2 2 ; map of, 7 United States Government securities: distribution in Twelfth District during World War, 173-76; earnings of Twelfth Bank from, 143; lending on, 125, 1 3 2 ; member-bank borrowing on, 134, 180 Utah: acceptance powers of state banks, 240; branch banking, early develop-

277

ment of, 75; branch banking since 1933, 2 2 2 - 2 3 ; early banking, 45; Federal Reserve policy during postwar inflation, 182; issue of national bank notes, 66; loans and investments after 1920, 186-87 Vincent, J . D., quoted, 84 Warburg, P. M . cited, 86 War financing: effect on commcrcial paper, 179-80; Liberty Bonds sold, table of, 174; organization of Twelfth District for, 1 7 3 ; position of commercial banks at close of war, 1 77-78; ridding banks of war paper, 178-79 Washington: acceptance powers of state banks, 2 4 0 - 4 1 ; branch banking, early development of, 75; branch banking since 1933, 2 2 2 - 2 3 ; early banking, 44; economic progress before 1900, ! 0 - 1 1 ; Federal Reserve policy during postwar inflation, 182; issue of national bank notes, 66; loans and investments after 1920, 187 Watkins, L., cited, 22 Whitney, C., cited, 1, 8 Willis, H. P., cited, 3, 15, 82, 83, 123, 124, 169, 1 7 1 , 172, 238, 239, 245, 253 Wright, B. C., cited, 25, 26, 27, 36, 40, 4 i , 42