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 1 Reserve System 
 the Banks 
 
 iiuiN. r/AvJL M. WARBURG 
 
 Member Federal Reserve Board 
 Washington, D. C. 
 
 STATE 
 BANKLRS 
 
The Federal Reserve System 
 and the Banks 
 
 HON. PAUL M. WARBURG 
 
 Member Federal Reserve Board 
 Washington, D. C. 
 
 NEW 
 YORK 
 STATE 
 
THIS ADDRESS WAS ORDERED PRINTED 
 
 AND DISTRIBUTED BY THE 
 
 NEW YORK STATE BANKERS* ASSOCIATION 
 
 IN CONVENTION ASSEMBLED 
 
 JUNE 9th. 1916 
 
THE FEDERAL RESERVE SYSTEM 
 AND THE BANKS 
 
 HON. PAUL M. WARBURG 
 
 II 
 
 Member Federal Reserve Bank 
 Washington, D- C. 
 
 Address Before 
 THE NEW YORK STATE BANKERS- 
 ASSOCIATION CONVENTION 
 ATLANTIC CITY. NEW JERSEY 
 JUNE 9th, 1916 
 

 INDEX 
 
 PAGE 
 
 American Bankers' Acceptances 4 
 
 Branches in Foreign Countries 5 
 
 Banks Organized To Do Business In Foreign Countries 6 
 
 Use of American Credit Facilities As Against Foreign 6 
 
 Recommendations of Conference of International High Commis- 
 sion at Buenos Aires 7 
 
 Uniform Mo'iJ^y'-pf Account. : .; ^ 
 
 Legislative Handicap fn tne Past lo 
 
 AmendmeJits' t6 'Fed era t Reseipvc Act 1 1 
 
 Three Months' Bankers' Drafts 1 1 
 
 Domestic Acceptances 1 1 
 
 Branches Within City Limits I2 
 
 Branches Within County Limits, etc 12 
 
 Loans on Improved Real Estate 12 
 
 Short Advances to Member Banks 13 
 
 Issue of Federal Reserve Notes Against Gold 13 
 
 Broadening of Powers But No Lowering of Banking Standard. . . 14 
 
 Pyramiding of Reserves 16 
 
 Analysis of Present Reserve Situation 17 
 
 No Basis for 4 Billion Loan Expansion 19 
 
 Our Opportunities Limited Bv Our Control of Gold 20 
 
 Increased Lending Power No Inflation 22 
 
 Future Reserve Requirenients ^.^^^-^.-r-r^-, ^ . ,^. 23 
 
 State Banks and Trust Companies 24 
 
 Objections and Answers 25 
 
 Dividends of Federal Reserve Banks 25 
 
 Right of State Banks to Withdraw 26 
 
 No Examination by Comptroller 26 
 
 Amended Clayton Act 2^] 
 
 Contribution By All Essential to Success 28 
 
 Exchange Charges by Country Banks 29 
 
 New Opportunities 29 
 
 Message to State Banks and Trust Companies 30 
 
 Summary and Conclusion 32 
 
 

 U. C. BERKELEY LIBRARIES 
 
 CDbs^3^3^E 
 
 .3665 
 
 ^ The Federal Reserve System and the Banks 
 
 A SUCCESSFUL solution of Federal Reserve prob- 
 lems is dependent equally upon a thorough under- 
 standing of the many features of detail involved in the 
 technique of banking and upon a strong grasp of the big 
 and fundamental objects for the accomplishment of 
 which the system was created. 
 
 It is, therefore, a pleasure to address an audience that 
 is certain to have a keen and sympathetic interest in both 
 of these phases of the problem. I am particularly 
 anxious, however, to speak to you about the broader 
 and more fundamental questions involved, for there is 
 an indefinite feeling of apprehension in my mind that 
 at this time we may be losing the big point of view of 
 financial statesmanship, and that petty and technical 
 questions may be claiming, perhaps, too much of our 
 consideration. 
 
 While in South America I had an opportunity to get a 
 bird's-eye view of the operation of the Federal Reserve 
 System. With the keenest enjoyment and pride I saw 
 our system hitting its mark many thousands of miles 
 away, and became deeply impressed that we are now 
 firmly establishing ourselves as a great financial power 
 in the world's market. Upon my return I felt a very 
 chilling change of atmosphere, when 1 met American 
 bankers appearing to hold the view that the fnture of 
 our great monetary and banking system depends upon 
 the question whether or not a country bank might charge 
 
 340513 
 
American 
 
 Bankers* 
 
 Aeeeptaneea 
 
 exchange of cue- tenth of one per cent when remitting 
 for checks drawn on itself I 
 
 The banking system of a world power cannot possibly 
 be construed upon so small a foundation. 
 
 I still remember that, when I had my first training in 
 banking in Hamburg, thirty years ago, my dear old 
 father's mind strongly rebelled against what he consid- 
 ered then the new-fashioned idea of being required — not 
 by the government, indeed, but by the general law of 
 competition — to discontinue the practice of charging a 
 small commission Avhen remitting for checks or maturing 
 bills drawn on his banking firm. But he soon perceived 
 that the establishment of a general transfer and clearing 
 system, postal orders and postal checks, had made for 
 new conditions and that the development of a discount 
 system based upon modern principles of banking, while 
 breaking doAvn certain petty revenues, was bringing 
 about a tremendous increase in the volume of business. 
 As a result, he soon waived his objections and lent his 
 hand in turning his country from provincialism into an 
 international banking power. That, as I said, was thirty 
 years ago. 
 
 I have no doubt that this country has decided that it 
 is entitled to as modern a banking system as the rest of 
 the world, and that whatever old-fashioned privilege still 
 blocks the path will have to fall by the wayside. The 
 sacrifice will have to be borne for the general good and 
 will find its compensation in the freer economic develop- 
 ment of the country. 
 
 One of the most tangible results of the operation of the 
 Federal Reserve System is the establishment and growth 
 of the American bankers' acceptance business. In ad- 
 dressing a group of bankers it is unnecessary to dwell at 
 length upon the fundamental importance of this develop- 
 ment for the general safety of our banking system. We 
 
have now a substantial market for bankers' acceptances 
 to which all member banks will look for the investment 
 of some of their idle means and in which, at any time, 
 they may reconvert these holdings into liquid funds. 
 
 The more important this market grows, the stronger 
 will be the position of the Federal Keserve Banks, for 
 the greater or lesser volume of purchases of such accept- 
 ances will offer one of the Federal Keserve Banks' most 
 effective means of exercising a wholesome influence upon 
 the fluctuation of interest rates. As normal conditions 
 are re-established in the world, this acceptance market 
 will become an important factor in protecting our ex- 
 change position with foreign countries and, incidentally, 
 our gold holdings. It has taken some time to develop 
 this market, but I am confident that, from now on, its 
 groAvth will be rapid. One of the obstacles that made the 
 start diificult was found in the fact that many accept- 
 ances, which are made for the purpose of financing im- 
 Iportations and exportations, have to be drawn and sold 
 in foreign countries. 
 ranches In Order to make them negotiable in those countries as 
 
 C untrieJ^ ^ popular and current means of exchange, it was first 
 necessary to find banks there which would be willing to 
 purchase them freely whenever offered. It is unneces- 
 sary to say that European banks operating in these for- 
 eign fields were not overanxious to see American bank- 
 ers enter a business which they themselves monopolized 
 up to the beginning of this war. It is only since our own 
 banks went out into foreign lands and established their 
 own branches that the necessary foreign market for 
 American acceptances has been developed. The establish- 
 ment of foreign branches of American banks has been a 
 most important step in advance, and without it our ac- 
 ceptance system could not have progressed as far as it 
 has today. The advent of these American branches 
 
Bank» 
 Organized 
 to do 
 
 Business in 
 Foreign 
 Countries 
 
 Usm of 
 
 American 
 
 Credit 
 
 Facilities 
 
 as Against 
 
 Foreign 
 
 forced the other banks to modify their resistance and to 
 compete for our bills which, up to that time, they hati 
 tried to disregard. It is to be hoped that other American 
 banks will soon follow in establishing themselves in for- 
 eign countries. 
 
 As you know, the Federal Reserve Board has recom- 
 mended an amendment to the Act to enable national 
 banks, singly or jointly, to hold stock in banks organized 
 '^principally to do business in foreign countries." One 
 bill has already passed the House,. and another has been 
 reported favorably by the Senate committee on banking 
 and currency. The Board hopes that a satisfactory bill 
 will be agreed upon by both houses in the very near 
 future. 
 
 It is a strange fact, however, that many of our busi- 
 ness men, who enjoy the reputation of being keen and 
 progressive, are actually wasting their funds by still 
 using foreign acceptance credits instead of American. 
 At Rio I found to my surprise that the majority of 
 American coffee importers were still using letters of 
 credit in sterling for which they were paying a discount 
 rate of about 4%% as against the American discount 
 rate of 2%. Moreover, in doing so, they were often pay- 
 ing two commissions, one to the foreign banker who 
 issues, and one to the American banker who opens the 
 credit, instead of paying a single commission to the 
 American banker. 
 
 It is true that the wool and hide business, done by 
 New England with the Argentine, is today financed by 
 dollar acceptances drawn on Boston and New York, and 
 that the oriental trade has begun to use dollar bills, but 
 it is surprising that so large a number of New York im- 
 porters ai"e still clinging to their old pound sterling ac- 
 ceptance arrangements. 
 
 Let me venture to urge most earnestly that our bank- 
 
 6 
 
\ecomtnenda- 
 •oris of 
 junference of 
 iternational 
 Hgh Com' 
 \is8ion at 
 uenoa 
 irm» 
 
 •TS canvass their lists of importing and exporting firms 
 and point out to them the folly of not using American 
 banking facilities. Since my return 1 have tried to see 
 personally some of these large importing firms and ex- 
 plain to them the anomaly of their action. I believe, 
 however, that an association like yours is particularly 
 well adapted for carrying on a campaign of education of 
 this kind. 
 
 With our increasing financial strength and with the 
 daily diminution of Europe^s saving power, it stands to 
 reason that, for a long time to come, our discount rates 
 will compare favorably with those of Europe. We may 
 expect, therefore, that this acceptance business will not 
 only hold its own, but will grow and may be used to a 
 substantial extent even by European importers and ex- 
 porters, and thus relieve Europe of some of her financial 
 burdens. 
 
 While our foreign competitors, with few noteworthy 
 exceptions, are still trying to keep our dollar acceptances 
 in obscurity, our machinery is now firmly organized. 
 There are now local banks almost everywhere abroad 
 willing to buy American drafts going forward for accept- 
 ance and to deal in dollar exchange on practically the 
 same narrow margin which prevails in dealings in 
 sterling, marks, or francs, and the Federal Reserve Banks 
 are willing, whenever desired, to do their share by quot- 
 ing favorable "forward discount rates" to assure the 
 rate of discount pending the time of transit. This new 
 feature of American banking, which is to be one of the 
 roots of our strength and, at the same time, a new source 
 of profitable and sound banking, ought to be developed 
 energetically by both our bankers and our business men. 
 
 In this connection, it may not be amiss to give you a 
 short account of the conference of the International High 
 Commission at Buenos Aires. 
 
Ill out- deliberations, tiie question of banking was 
 •given particular attention, ami 1 am happy to report 
 that tlie general tendency at the conference was to do 
 everything possible to foster trade relations between the 
 United States and her neighbors to the South, and mu- 
 tually to open the doors wide to one another's banks. 
 Kesolutions were passed making for the adoption by 
 Central and South America of uniform laws concerning 
 bills of exchange, bills of lading, warehouse receipts, and 
 similar matters. A further recommendation was adopted 
 by the conference urging the respective governments to 
 enact legislation giving the widest possible protection to 
 the sellers of goods. 
 
 You are all familiar with the agreements for the arbi- 
 tration of business disputes made between the United 
 States Chamber of Commerce and the Chamber of Com- 
 merce of Buenos Aires. We may expect that other coun- 
 tries will follow in the very near future, and the crea- 
 tion of these agreements will be an important factor in 
 obviating the annoyance and delay of protracted litiga- 
 tion in foreign countries and in providing for both sides 
 a safe and satisfactory basis for commerce and trade. 
 
 Uniform I* would lead too far to enumerate all the topics dis- 
 
 Money of cusscd by the conference. I should not omit, however, 
 
 Account . . 
 
 to mention that a resolution was passed recommending 
 that all the republics of North, Central and South Amer- 
 ica adopt a uniform standard of money of account on 
 the basis of a gold coin 9/10 fine and weighing 0.33437 
 gramme. This unit, which might be called the Pan- 
 American franc, though nearly the value of the Euro- 
 pean franc, is not its exact equal, but is precisely one- 
 fifth of the United States gold dollar. Delegates to the 
 conference had suggested making the gold dollar of the 
 United States the unit for all American countries, but 
 against this it was pointed out that the dollar would be 
 
 8 
 
 I 
 
too large a denomination for many of the Southern re- 
 publics, Avhere small coins circulate and where, it was 
 feared, the larger unit of money of account would bring 
 about an increased cost of living. Moreover, the United 
 States gold dollar could not be divided into subsidiary 
 coins small enough to comply with the known demands 
 of many of these countries. It was thought, therefore, 
 that a unit of the approximate size of the franc would 
 be better adapted to the needs of these countries, but, 
 by adopting as the standard unit the exact one-fifth of 
 the United States dollar, the foundation will have been 
 laid for a Pan-American union of coins which, sooner or 
 later, may become of great importance. If this plan 
 should be carried into actual effect, the Pan-American 
 20 franc piece could ultimately circulate with us as a 
 |4 gold piece and our |5 gold piece could circulate as a 
 25 franc piece in South or Central American countries. 
 A unity of standards of this kind will, of course, have 
 great advantages in facilitating trade between nations. 
 Amongst republics having actually introduced a gold cur- 
 rency on this basis it might ultimately lead to an under- 
 standing for the establishment of international gold trust 
 or clearing funds, having for their object the elimination 
 of the costs and risks caused by our present wasteful 
 method of shipping and remelting gold coins. A plan 
 on these broad lines, submitted by the American dele- 
 gates, was recommended by the conference for closer 
 study to all governments concerned. 
 
 The immediate practical importance of this step may 
 not be great. As indicative of the trend of future rela- 
 tions between North and South American republics, how- 
 ever, it cannot be overestimated. It shows, as one of the 
 effects of the war and of our financial emancipation, that 
 the North and South have recogniziHl their common eco- 
 nomic and political interests; that they have begun to 
 consider this large hemisphere as one economic unit, and 
 
that they are now looking to each other for mutual help 
 and co-operation in the future development of their re- 
 spective problems. A Pan-American monetary union, 
 therefore, now appears a more natural basis for the 
 future monetary systems of American republics than a 
 Latin union based upon an agreement with France, Italy, 
 Switzerland and Belgium. 
 
 • Our friends in South America consider the creation 
 of our Federal Reserve System as one of our greatest 
 achievements, and their willingness to rely upon our 
 ability to provide — to a certain extent at least — such 
 financial aid as Europe gave them in the past is predi- 
 cated upon the confidence that our new system inspires. 
 Some of these republics are carefully studying this sys- 
 tem with a view to establishing, at the proper time, a 
 similar banking machinery. In view of the fact that 
 several of these countries are federations like the United 
 States and cover tremendous areas of territory, it is evi- 
 dent that certain features of our system would be par- 
 ticularly well adapted to their needs. 
 
 While observing financial and commercial conditions 
 fiandica^^ iu thcse couutrlcs, it was deeply impressed upon my mind 
 in the Past how much the United States, by legislative action, had 
 in the past handicapped the development of our business 
 in foreign lands. It would lead too far to mention to 
 what extent our own legislation in the past has driven 
 our merchant marine from the ocean and how far it has 
 handicapped our industries by not permitting reasonable 
 trade combinations enabling us to compete in foreign 
 markets. But it is well within the bounds of this ad- 
 dress to mention that the British, French and German 
 banks for generations have been entirely free to go into 
 foreign countries to open branches or acquire foreign 
 banks and to do everything and anything to further their 
 banking and trade. On the other hand, our national 
 
 10 
 
AmendmentM 
 to Federal 
 Reserve Act 
 
 Three 
 months 
 bankers* 
 drafts 
 
 [ 
 
 Domestic 
 Acceptances 
 
 banks, until the passage of the Federal Reserve Act, were 
 forbidden by law to enter these fields or to accept drafts 
 for importations or exportations or to exercise many 
 other functions necessary to develop foreign banking and 
 foreign commerce. It is a relief to feel that at last the 
 time has come when a clear recognition of our country's 
 banking needs is asserting itself and when most of these 
 old shackles have been removed. Whatever obstacle re- 
 mains we may confidently hope to see gradually elimi- 
 nated. 
 
 Some amendments along these lines are at present un- 
 der consideration by Congress, and have already been 
 favorably reported. 
 
 The Board has recommended that Congress permit 
 member banks to give their acceptances not only for the 
 financing of transactions involving importations and ex- 
 portations, but also, to a limited degree and under the 
 supervision of the Federal Reserve Board, for bankers' 
 clean three months' drafts, such as are required in for- 
 eign countries for remittances abroad. As most of you 
 know, in South America, such remittances to foreign 
 lands are generally not made by checks, but by three 
 months' drafts, and it is necessary that national banks 
 be permitted to accept for this kind of foreign exchange 
 transactions, if the dollar bill is to be used as freely in 
 foreign lands as is the sterling, the franc, and the mark 
 exchange. 
 
 Turning to amendments touching domestic operations, 
 we have recommended that national banks be permitted 
 to accept drafts or bills growing out of transactions in- 
 volving the domestic shipment of goods — provided ship- 
 ping documents are attached at the time of acceptance — 
 and drafts and bills which are secured by warehouse or 
 similar receipts covering readily marketable staples, or 
 by the pledge of goods actualy sold. We feel confident 
 
 II 
 
tliat, by enlarging tlie powers of national banks to ac- 
 cept in this manner, we sliall open for our inemlxir banks 
 a new and profitable field of operation, and incidentally 
 the free development of this kind of bankers' domestic 
 acceptances will be an important factor in equalizing in- 
 terest rates in the various parts of the country and will 
 be of great benefit in this respect alike to producer ami 
 consumer. 
 
 Branches 
 within city 
 limitm 
 
 Branches 
 within 
 county lim- 
 its, etc. 
 
 We have also proposed an amendment authorizing any 
 national bank, located in a city of more than 100,000 in- 
 habitants and possessing a capital and surplus of |1,000,- 
 000 or more, to establish branches within the corporate 
 limits of its city, and authorizing any national bank lo- 
 cated in any other place, with the approval of the Fed- 
 eral Keserve Board, to establish branches within the 
 limits of its county or within a radius of 25 miles of its 
 banking house, irrespective of county lines. In recom- 
 mending the county line for branches, the Board was 
 moved by the thought that it might be found convenient 
 for several small banks doing business in the same county 
 to combine into one larger bank, thereby reducing the 
 overhead charges and making the ileposits of one part 
 of the county available for the demands in another. It 
 is the hope of the Board that in some districts, through 
 such co-operation, it will be possible to reduce the ex- 
 orbitant interest rates which, in some instances, have 
 been charged by small country banks. The Senate com- 
 mittee has stipulated that, for the beginning at least, the 
 number of branches of a national bank shall be restricted 
 to ten. 
 
 Loans on 
 improved 
 real estate 
 
 We have further recommended to Congress that any 
 national bank, not situated in a central reserve city, be 
 permitted, within the same limits now existing for loans 
 on farm lands, to make advances maturing in not over 
 one year on improved real estate located anywhere with- 
 
 12 
 
Short ad- 
 vances to 
 member 
 banks 
 
 Issue of 
 
 Federal 
 
 Reserve 
 
 Notes 
 
 against 
 
 gold 
 
 in a raflins of one hundred miles of its place of business. 
 While the Board does not favor the idea of having na 
 tional banks make heavy investments in mortgages, it 
 was felt that they should not be precluded from taking, 
 within certain reasonable limits, first mortgages as col- 
 lateral security for their loans. 
 
 These are the additional powers that we have recom- 
 mended to be given to national banks. As to the Federal 
 Reserve Banks, we have suggested that Congress permit 
 them to make advances to their member banks on the 
 latter's own notes secured by eligible paper, such loans 
 to be for periods not exceeding fifteen days. This has 
 been done with a view to enabling Federal Reserve Banks 
 to accommodate members who, in the check clearing or 
 otherwise, might be short in their balances and wish to 
 have short advances at moderate rates. We believe that 
 this power, if granted to Federal Reserve Banks, will 
 greatly increase their ability to take care, in a simple 
 and effective manner, of the requirements of their mem- 
 bers, and particularly of country banks. 
 
 We have further recommended that Congress permit 
 Federal Reserve Banks to issue Federal Reserve notes, 
 not only against commercial paper, but also against 
 the deposit of gold. This amendment, if granted, would 
 greatly strengthen the lending power and the note issu- 
 ing power of Federal Reserve Banks. It is the same 
 method that has been followed in Europe by the 
 Banque de France, the Reichsbank, the Bank of the 
 Netherlands, the Bank of Italy and many other govern- 
 ment banks. These institutions are enabled, through 
 their note issue, to assemble a large part of the gold of 
 the country in a central reservoir. With us, up to the 
 present time, this nccumulntion of gold has taken place 
 to only a moderate extent and has not benefited the Fed- 
 eral Reserve Banks to the fullest possible degree. If the 
 
 13 
 
amendment were to be passed, the gold, instead of being 
 segregated with the Federal Reserve Agent, would re- 
 main an asset of the Federal Reserve Bank, and, on the 
 other hand, the notes issued against it, instead of being, 
 as at present, technically redeemed, would remain the 
 liability of the Federal Reserve Bank. 
 
 In case the amendment should pass, it is hoped that 
 the Federal Reserve Banks may count upon the co-opera- 
 tion of their members in order to facilitate this substitu- 
 tion of Federal Reserve notes for gold certificates at 
 present carried in the pockets of the people in the old- 
 fashioned and uneconomic manner. As in modern Euro- 
 pean countries, the gold should accumulate in the Fed- 
 eral Reserve Banks and the people should use instead 
 the Federal Reserve notes. The amendment would be an 
 important step in the ultimate simplification and con- 
 solidation of our circulation. 
 
 These are the principal amendments recommended by 
 the Board at this time. You will notice, gentlemen, that 
 they move in two directions. The one is an increase of 
 the Reserve Bank's general strength and lending power 
 and an enlargement of their scope of usefulness in deal- 
 ing with their members ; the other is the removal of lim- 
 itations heretofore placed upon the operations of national 
 banks. 
 
 Broadening T^c Board fccls keenly that, as a matter of equity, 
 but'no ^lower- uatioual banks should be placed on a parity with State 
 ing of hank- j^^uks and trust companies, wherever this can be done 
 
 ing standard * t % • • 
 
 consistently with safety and conservative banking prin- 
 ciples. But I wish to make it clear that the Board has 
 recommended, and will recommend, only such measures 
 as will eliminate old-fashioned or unwise restrictions 
 such as should be removed under any circumstances, ir- 
 respective of whether or not the State banks exercise 
 greater or lesser powers. The Board would never recom- 
 
mend granting national banks any powers or privileges 
 which are contrary to good banking principles. It is to 
 the interest of both State institutions and national banks 
 that banking standards should be raised wherever prac- 
 ticable and not that they should be lowered. Between 
 the national and State banking systems there must not 
 be any competition to secure more members by a lower- 
 ing of banking standards. The whole country would 
 suffer if this took place. It would be the height of folly 
 if States were to lower their requirements for no other 
 reason than to underbid the requirements of national 
 banks. To a certain degree this has been done — where 
 State governments lowered the reserve requirements for 
 their banking institutions because the Federal Reserve 
 Act lowered the reserve requirements for national banks. 
 The lowering of the reserve requirements for national 
 banks was predicated, however, upon their joining the 
 Federal Reserve System, subscribing to the stock, and 
 putting some part of their reserves into the joint insur- 
 ance fund, and being bound ultimately to abandon the 
 method of pyramiding reserves and to keep them instead 
 either entirely in metallic form or with the Federal Re- 
 serve Banks. The reserves of State institutions, on the 
 other hand, were lowered without their being required to 
 join the system, make any such contribution, or discon- 
 tinue pyramiding reserves. Moreover, lower reserve re- 
 quirements are justified for member banks because they 
 may have direct recourse to the rediscount facilities of 
 the reserve system, but non-member banks have no such 
 direct access. 
 
 I wish I could adequately impress upon the minds of 
 all our bankers that there is no such thing as doing any- 
 thing for the Federal Reserve System. Whatever the 
 member banks do, and whatever the State banks do, they 
 do for themselves and for the country. The Federal Re- 
 serve System, as such, is not a self-seeking and profit- 
 
 15 
 
making organization. It belongs to the entire country. 
 It is there for the benefit of everybody; for the greater 
 security of the banks, and, througl\ the banks, for the 
 security of the people. If you strengthen the Federal 
 Reserve System, you strengthen yourselves. If you raise 
 the standard of banking, it is for your own benefit — not 
 for the benefit of the Federal Eeserve Banks, or least of 
 all, for that of the Federal Reserve Board. 
 
 These things appear trite, but still I cannot help ex- 
 pressing them because it is so absolutely essential that 
 the thought be overcome that there can be such a thing 
 as a conflict of interests between the Federal Reserve 
 System and the banks. The Federal Reserve System and 
 all it means is felt as an opposing factor where it comes 
 into conflict with bad banking practices. It is true that 
 the law has for one of its objects the removal of certain 
 habits which have crept into the old banking system, 
 but it is equally true that, by removing them, financial 
 catastrophes such as used to befall our country with un- 
 canny regularity, are to be avoided in the future. 
 
 Pyramiding Let US Consider, as the strongest case in point, the 
 ^ervea pyramiding of reserves. I wish it had been possible to 
 
 stamp out this evil within a short time after the open- 
 ing of the Federal Reserve System. As it is, many of the 
 smaller banks are still in the condition of a patient who 
 knows that he must undergo an operation in order to be 
 fully cured, but whose mind every now and then rebels at 
 the thought, and who continually relapses into arguing 
 with himself that, after all, he might possibly prefer to 
 continue to live with his disease and take his chances of 
 the certain recurrence of acute convulsions and intense 
 suffering rather than to have the operation performed. 
 The country, however, has decided that the operation is 
 necessary for our future safety and growth, and the vast 
 majority of our bankers are in full accord that it is the 
 
 i6 
 
'Analysis of 
 present re- 
 serve sit- 
 uation 
 
 wisest thing to do. The pyramiding of reserves will thus 
 end on November 16, 191T. But, afc 1 said, I wish the 
 operation had already been performed. 
 
 At present our national banks apparently have excess 
 reserves approaching one billion dollars. Of these, a 
 substantial proportion represents items in transit be- 
 tween the depositing and the depository banks; the bal- 
 ance, excepting about $100,000,000 excess cash in vault 
 held by all national banks outside of New York, is kept 
 entirely in central reserve cities, the bulk being in the 
 City of New York. There it is on deposit — drawing in- 
 terest at the rate of 2% — and loaned out on stock ex- 
 change and other collateral, or invested in commercial 
 paper, except as to the required reserve of 189^o and the 
 small total excess reserve of about lifty million dollars. 
 This is a reduction of excess cash reserves in New York 
 of over 1100,000,000 since January 22d. 
 
 If Farmer Jones deposits |1,000 in a bank of Elk 
 River, Minnesota, and this bank should in turn deposit 
 this amount in a bank at Minneapolis and the Minneapo- 
 lis bank in turn deposit it in New York at 2% interest, 
 and New York invest this money in a piece of commer- 
 cial paper at 3% interest, it is a most extraordinary and 
 unique method to permit Elk River and Minneapolis to 
 count these deposits as reserves, while if the bank of Elk 
 River had itself bought the piece of paper it would have 
 carried it as a loan and all the rest of the structure of 
 reserve bank deposits and reserves would have been 
 wiped out. 
 
 In other words, in the final analysis, if we consider 
 the system as a unit, there is not an excess reserve of one 
 billion, but only about $150,000,000 in cash ; the balance 
 is invested today in the "float," representing uncollected 
 items in transit, commercial paper, stock exchange loans 
 and securities. If we study the changes in the condition 
 
 17 
 
of the New York Clearing House national banks which 
 have occurred between October 31, 1914, and May 1, 
 1916, we find the following increases estimated at: 
 
 (In millions of dollars) 
 
 
 Oct. 81, 1914. 
 
 May 11, 1916. 
 
 Increase. 
 
 Collateral loans 
 
 547 
 106 
 
 406 
 
 954 
 
 280 
 
 667 
 
 407 
 
 In istments in secu"ities .... 
 Unsecured loans, which in- 
 cludes commercial paper.... 
 
 174 
 26i 
 
 Total 
 
 1,200 
 
 2,100 
 
 842 
 
 During that period deposits 
 increased from 
 
 900 
 
 In addition, collateral loans and holdings of securities 
 of New York non-member trust companies increased by 
 about half a billion since the end of 1914. 
 
 These are phenomenal increases and we might well ask 
 ourselves whether or not we may take it as a certainty 
 that so extraordinary a growth will prove to have come 
 to stay or whether a return of more nearly normal con- 
 ditions will not bring about a contraction. We should 
 well consider this question, because an increase of 90% 
 in securities and collateral loans — that is, an increase of 
 over 11,000,000,000 in New York City Clearing House 
 institutions — might well suggest a policy of liquidation 
 rather than one of further expansion. Our national 
 bank cash reserves in central reserve cities (including 
 balances with Federal Reserves Banks, figured at 100%) 
 were as of March 7, 22.88% ; in reserves cities, 11.53%, 
 and in country banks, 9.80%.* Notwithstanding that 
 the aggregate cash held by all national banks increased 
 
 ♦If we figured these balances at 70%, being the present cash reserve con- 
 dition, and the actual metallic reserve, and added to cash In vault the metallic 
 cover maintained against reserve agents balances, the present cash cover would 
 ■how as follows: Central reserve, 20.51% : reserve cities, 13.66%. and country 
 banks. 11.8S%. 
 
 i8 
 
• 1 
 
 from May, 1915, to March, 1916, by over |100,000,000, 
 ill central reserve cities we are today materially below 
 llie old cash reserve requireaieuts, and if a situation 
 like the present had existed during any ante-Federal Ke- 
 serve System period, we should have considered it a cause 
 for alarm. Thanks to the creation of our new banking- 
 system, we are now dealing with completely changed 
 conditions, and the spectre of the end of the lending 
 power of the banks would not mean a panic as in the 
 past because of the reserve lending power of the Federal 
 Keserve Banks and the confidence created by their exist- 
 ence. But, gentlemen, that must not lead us into the 
 No basis illusion that this billion of so-called excess reserves may 
 loan expan- he Considered as a basis for a loan expansion of four 
 sion billion dollars or more, as appears to be the general be- 
 
 lief. Theoretically there is the foundation for so large 
 an expansion as long as we adhere to the old custom of 
 counting bank balances with reserve agents and uncol- 
 lected items in transit as reserve, yet, in the last analysis, 
 it is the metallic cover — not the redeposited and actually 
 invested reserves — which must be considered in dealing 
 with this question of expansion of loans. The excess of 
 our nietaUic reserve, plus the free gold of the Federal 
 Reserve banks, constitute the ba^is of the reserve lending 
 power of our country. 
 
 We are at present in a condition of extraordinary 
 
 strength. We have bought back our own securities and 
 
 4 made foreign loans to an aggregate amount far in ex- 
 
 1 cess of $2,000,000,000. Our financial position for the 
 
 future has thus been greatly fortified. But the process 
 
 r of absorption of our securities returning from abroad 
 
 ^ i'hould be conducted on su^h ba^sis and scope as to turn 
 
 the individual depositor into an investor, so as to free 
 
 our gold reserves, rather than increase our Iooms on an 
 
 enlarged floating supply of securities. 
 
 19 
 
Our oppor- We must not forget for a moment that not even the 
 limited by ^^^^ experienced can foretell what demands may be 
 our control made upon us in the future. At the end of the war our 
 
 of gold. 
 
 opportunities will be gigantic, but ultimately they will 
 be limited by the extent to which we are able to control 
 our gold. There cannot be any doubt that the demand 
 for gold at that time will be very keen and determined. 
 Wise statesmanship, to my mind, therefore, would indi- 
 cate that everything should be done by the Federal Ke- 
 serve System and by all the banks that are interested in 
 our strength to watch carefully furtJier expansion at this 
 time and to accumulate the floating gold supply in the 
 hands of the Federal Keserve Banks so as to enable them, 
 when the time comes, if necessary, to spare large amounts 
 without thereby crippling their lending power. We are 
 in a period of widespread prosperity at this time and it 
 must be our serious concern not to w eaken its solid foun- 
 dation. The ease of this summer might well be used to 
 strengthen and prepare ourselves for the large problems 
 that may be in store for us. 
 
 it is impossible to try to prognosticate with any de- 
 gree of certainty what will be the trend of interest rates 
 at the end of the war, but assuming that interest rates 
 for invesments in Europe will be high, and that the de- 
 mand for gold on the part of Europe will be keen, we 
 would have to expect as a consequence that eventually 
 our rates will have to move up so as to approach theirs 
 more closely, and before we reach that point probably a 
 substantial amount of our gold will have to leave the 
 country and return to foreign lands. To preserve the 
 advantage of our strength and to maintain our money 
 rates on an independent basis of c>ur own — in spite of 
 the close inter-relation that must exist between us and 
 Europe — will be one of our interesting but difficult tasks. 
 
 The establishment of the Federal Reserve System has 
 
 20 
 
been a step of inestimable value in the direction of effi- 
 cient control of our country's gold holdings ; and, if we 
 do not disregard all rules of business conservatism and 
 prudence, it will prove an efficient means of protection 
 in case of emergencies. 
 
 If we want more than a strong instrument of defense 
 and protection, if we desire — as we are entitled to — that 
 the Federal Reserve System be the foundation of a bank- 
 ing structure contributing its full share in rebuilding 
 the world and at the same time assisting our own country 
 to meet all the new demands, whether domestic or for- 
 eign, that the future may make upon it, then we must 
 do all we can to preserve its strength and to broaden its 
 foundation by further perfecting methods of systemati- 
 cally accumulating and economically using our vast 
 treasure of gold. Too large a proportion of this gold 
 still remains wastefully scattered and decentralized. 
 
 The gold stock of this country is estimated at $2,320,- 
 000,000. Of this amount only |3eS5,000,000 is held in 
 the vaults of the Federal Reserve Banks and about f 180,- 
 000,000 is in the hands of the Federal Reserve Agents'. 
 The national banks and State institutions hold about 
 1800,000,000. and there is estimated to be in actual cir- 
 culation about $870,000,000. If we deduct from the 
 $335,000,000 held by all Federal Reserve Banks a mini- 
 mum reserve of only 40%, that would leave as their free 
 gold about $200,000,000. This is an invaluable item of 
 strength as a basis for a note isue of $500,000,000 in case 
 additional currency should be demanded by our people; 
 and the Board, by permitting a reduction of the 40% 
 gold reserve, could, in case of emergency, sanction the 
 issue of even larger amounts. When, however, it comes 
 to exportations of gold, you can readily see that the 
 $180,000,000 now accumulated with the Federal Reserve 
 Agents would serve as a very welcome additional pro- 
 
 91 
 
Increased 
 lending 
 power no 
 inflation 
 
 lection. For we have learned, gentlemen, that this is a 
 period of economic history, where balances between na- 
 tions are not dealt with in millions, but in hundreds of 
 millions. 
 
 Think of the strength that our system might possess 
 if we carried into effect the policies pursued by the 
 Banque de France, the Reichsbank or other powerful 
 central banks, and if, for a substantial part of the |870,- 
 000,000 of actual gold circulation, there were substituted 
 our Federal Reserve notes, and if national and State 
 banks kept in their vaults only what they needed for till 
 money and deposited with the Federal Reserve Banks the 
 rest of their idle gold. 
 
 We talk of preparedness as the need of the hour. If 
 we contemplate what European nations have done, be- 
 fore and during the war, to strengthen their grip on their 
 gold, and compare it with our own efforts, we find that 
 our financial preparedness is just in its first stages. The 
 amendment recommended by the Board should prove an 
 important step in advance in this direction. 
 
 In view of the statement made by some of our critics 
 that this substitution of Federal Reserve notes for gold 
 certificates means infiation, it might be timely to point 
 out that, by a simple substitution of one note for the 
 other, there is, of course, no increase in the volume of 
 circulation whatsoever. It is merely a change in the 
 form of circulation. As a matter of fact, we find that the 
 operation of all Federal Reserve Banks during a period 
 of one and a half years has caused a net increase in the 
 circulating medium of the country, by the issue of Fed- 
 eral Reserve notes and Federal Reserve Bank notes, of 
 less than $10,000,000. On the other hand, the national 
 bank circulation has decreased during the period No- 
 vember 2, 1914, to June 1, 1916, by $53,000,000, exclusive 
 of the redemption of the approximately 1385,000,000 of 
 
 22 
 
Future 
 reserve 
 require- 
 ments 
 
 emergency currency issued under the so-called Aldrich- 
 Vreeland Act. While it is evident, therefore, that the 
 Federal Reserve System has not increased the volume of 
 circulation, the process of substituting, as a means of 
 circulation, the Federal Reserve note for the gold cer- 
 tificate has the most important effect of strengthening 
 the potential lending and note issuing power of Federal 
 Reserve Banks in case of need. To refuse this larger 
 power of protection for fear that it might be misused 
 would be tantamount to refusing to give a modern re- 
 volver to a policeman for fear that he might shoot at the 
 wrong man and at the wrong time. 
 
 But, let me ask you, gentlemen, is this the proper time 
 for country bankers to urge us to recommend to Con- 
 gress the further reduction of their reserve requirements 
 or to recommend that they be granted permission to con- 
 tinue to hold a certain percentage of their reserves with 
 their central or reserve city correspondents? 
 
 Some day, no doubt, it will be proper to reduce reserve 
 requirements, but that can only be brought about by a 
 systematic strengthening of the central reservoirs. The 
 stronger the Federal Reserve Banks, the easier the access 
 to their resources by sale of liquid paper, the less will 
 become the necessity for member banks to maintain in 
 their own vaults, as a legal requirement, large segregated 
 gold holdings. 
 
 Steps in this direction are: first, the substitution of 
 Federal Reserve notes for the gold circulation in the 
 pockets of the people; second, the maintenance with Fed- 
 eral Reserve Banks of larger member banks' balances, 
 created by depositing part of the "optional" now kept in 
 vault by member banks, and, finally, the increase of the 
 number of depositors to be secured through the entrance 
 of the State institutions into our system. 
 
 23 
 
-^ 
 
 State banks J want to compHment our large member trust com- 
 
 and trust . ^ ^ 
 
 companies panies aud state banks upon the broad point of view 
 which guided them Avhen entering the system; but I 
 might at the same time ask their powerful, sister institu- 
 tions how, under present conditions, they can justify 
 themselves in staying out of the system and in throwing 
 the entire responsibility and burden upon the shoulders 
 of the national banks and those few trust companies and 
 State banks that have become members? They do not 
 contribute their fair share of gold to the general reserve 
 fund of the nation, nor do they provide their share of 
 the capital of the Federal Reserve Banks. Indeed, not 
 only do they fail to contribute their share of strength to 
 the system, but, unconsciously perhaps, they become 
 forces that make for the direct weakening of its strength 
 and efficiency. 
 
 Do the large trust companies and State banks claim 
 that pyramiding of reserves is sound? Would they pre- 
 fer to see our ancient system perpetuated and the re- 
 forms contemplated by the Federal Reserve Act aban- 
 doned so as to make room again for the good old condi- 
 tions of 1893 and 1907? Unless they are willing to sub- 
 scribe to that doctrine, how can these large banking in- 
 stitutions, some located in Central Reserve cities, justify 
 themselves in considering as reserve, after the manner 
 of the country banks, their interest bearing deposits with 
 other banks? 
 
 If a call loan on the stock exchange made by a trust 
 company is not a reserve but a loan, is it sound banking 
 to call a reserve deposit made by a trust company in a 
 national bank a reserve, when 82% of it is loan on call on 
 the stock exchange? Still, it is just through these de- 
 posits that, in emergencies, the trust companies will lean 
 on the national banks and the national banks, in turn, 
 will fall back on the Federal Reserve System. The net 
 
Objections 
 and An- 
 
 BUfetM 
 
 Dividends 
 of Federal 
 Reserve 
 Banks 
 
 result is that the trust companies, in building up their 
 l>usiness structure, must rely today on the greater assur- 
 ance provided by the Federal iieserve System, though 
 permitting the member banks to carry the entire burden 
 of its support. Our small country banks will have to 
 stop pyramiding of reserves; do the large trust com- 
 panies and State banks plan to continue this practice? 
 
 What is it that powerful and prominent institutions 
 (some of which, in their foreign and acceptance busi- 
 ness, derive the greatest possible advantage from the 
 discount market and the general prestige of the Federal 
 Keserve System) may say in justification of such an 
 attitude? 
 
 At first they feared that, by entering the system, they 
 might lose some of their present powers and privileges. 
 But the Board has made regulations permitting them to 
 continue to exercise practically all legitimate banking 
 functions enjoyed by them in the past. 
 
 Some of the State institutions have raised the point 
 that, by joining the Federal Reserve System, they would 
 be called upon to make investments in the stock of the 
 Federal Reserve Banks upon which, in the case of most 
 of the Federal Reserve Banks, no return has as yet been 
 paid. 
 
 But, gentlemen, while for many reasons some of us 
 would favor an amendment permitting a Federal Reserve 
 Bank to pay back a portion of the capital paid in (leav- 
 ing the liability upon the subscribed but unpaid capital 
 otherwise unchanged), provided the member would in 
 turn agree to increase its required reserve balance by a 
 certain proportion of its optional balance, this question 
 in itself cannot possibly be of sufficient importance to 
 keep any strong State institution out of the system. 
 These dividends are cumulative, and anybody having a 
 moderate degree of foresight can readily appreciate that, 
 
 «5 
 
sooner or later, the back dividends will ail be paid. Even 
 at the present low rate of return of 2.4%, secured by 
 Federal Keserve Uanks from their investments, they 
 would have to employ only an additional sum of less 
 than 150,000,000 for the entire system to earn the full 
 six per cent on the stock at present paid in. When the 
 final instalment of reserves has been transferred and 
 with the return of more nearly normal rates of interest, 
 there will not be the least difficulty for these banks to 
 earn their dividends without invesling a larger propor- 
 tion of their resources than would be consistent with 
 safety and conservatism. 
 
 Right of State banks and trust companies furthermore claimed 
 
 state banks 
 
 to withdraw that if they entered they could not withdraw. But the 
 Board, in the exercise of its power to prescribe regula- 
 tions as a condition of membership, has provided that 
 they may withdraw under conditions previously made 
 known, and the subscription to the stock of a Federal 
 Beserve Bank made by a State institution is conditioned 
 upon this express agreement. 
 
 No exami- They have objected to being examined both by their 
 c'omptr^er ^^^ banking department and by the examiner of the 
 Comptroller of the Currency. The Board, in accordance 
 with the provisions of the Federal Keserve Act, has pro- 
 vided, however, that, wherever there is an efficient State 
 examination, as in New York, it shall be accepted in 
 place of examination by the Comptroller and, only fail- 
 ing that, an examination shall be made by examiners 
 under the supervision of the Federal Keserve Board. 
 
 Furthermore, in a circular letter sent to all State 
 member banks in May of this year, the Board and the 
 Comptroller of the Currency announced that State mem- 
 ber banks, in making their stated reports to the Comp- 
 troller of the Currency, might use the form of statement 
 prescribed by their respective State banking depart- 
 
 26 
 
ments, provided they are rendered as of the same date 
 as required by the Comptroller of the Currency for na- 
 tional banks. If reports are not rendered on those dates, 
 State member banks are required to use the same forms 
 as national banks, but they may omit from their reports 
 to the Comptroller all schedules except that relating to 
 coin or coin certificates. 
 
 They have feared that the Clayton Act would deprive 
 them of valuable directors. But Congress has amended 
 that Act so as to permit a director of a member bank to 
 be, at the same time, a director of two other banks or 
 trust companies, provided they are not in "substantial 
 competition" with the member bank. 
 
 I know the arguments that are being advanced that 
 the rulings of the Board may be changed and that, there- 
 fore, it may be possible, under a different personnel of 
 the Board, to reverse the present arrangement and sub- 
 ject the State banks to the examinations, reports, and 
 rulings of the Comptroller of the Currency. But that is 
 not likely to happen, and if it did, the State bank or trust 
 company could exercise its privilege to withdraw from 
 membership in the system. 
 
 Let us assume, however, that joining the Federal Re- 
 serve System does involve certain sacrifices, some of 
 which are necessary and some of which may be thought 
 unnecessary. If you throw into one side of the scales 
 all the benefits accruing to the banks and the nation by 
 the creation of the Federal Reserve System, and into the 
 other the sacrifices to be made by its members, there can- 
 not be any doubt whatsoever that the advantages will 
 outweigh the disadvantages a thousandfold. The Fed- 
 eral Reserve Act is one of the most constructive pieces 
 of legislation that ever was put upon our statute books. 
 Nobody could be foolish enough to expect that a law 
 
 27 
 
Contribu- 
 tion by all 
 essential to 
 success 
 
 which is so complicated in its nature, so far-reaching in 
 its scope, and a compromise in so many details between 
 opposing views, could be absolutely perfect. It is a 
 wonder that, from the beginning, it has proved as work- 
 able as it has. 
 
 Personally, I am on record as having opposed several 
 of its features of detail. But, when the President hon- 
 ored me by inviting me to become a member of the 
 Board, I accepted because I felt that the fundamental 
 principles were sound and that the Act, as it stood, would 
 redound to the greatest benefit of the country. I felt 
 confident that if after sincere and unbiased efforts in 
 the operation of the Reserve Banks, defects should de- 
 velop that needed correction, we could confidently count 
 on a patient and sympathetic hearing before Congress. 
 And let me remind you, gentlemen, that several of my 
 colleagues and the able men who accepted to serve at the 
 head of your Federal Reserve Bank of New York, all 
 joined in the same spirit ; they did so for the purpose of 
 serving their country even though they had to make 
 material sacrifices in doing so. 
 
 In one of his admirable speeches, entitled "Ideals and 
 Doubts," Oliver Wendell Holmes, Associate Justice of 
 the Supreme Court of the United States, makes the fol- 
 lowing statement concerning the topic of legal reform: 
 
 "To know what you want and why you think that 
 such a measure will help it is the first but by no 
 means the last step towards intelligent legal reform. 
 The other and more difficult one is to realize what 
 you must give up to get it, and to consider whether 
 you are ready to pay the price" 
 These are golden words of wisdom which, at the pres- 
 ent juncture of our economic history, every bank presi- 
 dent in the United States ought to have constantly before 
 his eyes. 
 
For generations we have lived shackled and constantly 
 menaced by a defective and old-iasliioned bankinj* sys- 
 tem ; tor years we have toiled to secure reform. We have 
 at last brought it about and, whetlver or not it pleases 
 everybody in every detail, it behooves us all to do our 
 share in making it a success for the greatest possible 
 benefit of our country, no matter whether it involves 
 some small or even a heavy sacrifice. That is the prin- 
 ciple which members of the Board have laid down for 
 themselves, and if they are to be faithful to their trust 
 and successful in their task, there is no other principle 
 upon which they can deal with the banks of the country. 
 
 That is why, though sincerely appreciating the hard- 
 ship it entails for the country banker, and fully sym- 
 pathizing with the difficulties of his position, we must 
 say to him : "Forget these exchange charges. We think 
 our new clearing plan is fair and equitable, free from 
 unsound principles and bound to become a very effective 
 instrument for the general good. It otters to take from 
 you at par all your checks on any member bank of the 
 entire United States, and on certain State banks in addi- 
 tion, and will ]*efund you any actual expense that you 
 may incur in case you have to remit currency. All it 
 asks of you in return is that you remit without charge 
 to your Federal Reserve Bank in payment of checks 
 drawn on yourself. But even if we did not believe that, 
 by the service we render and by relieving you of the 
 necessity of maintaining bank balances all over the coun- 
 try, we shall compensate you for what you think will be 
 your loss, we have to hold to the view that you must pay 
 the price — whatever your little share may be — for the 
 larger benefit of all." 
 
 The new system brings new opportunities; as an illus- 
 tration, let me remind the country banker that his ex- 
 change loss will appear to him very unimportant if he 
 
 39 
 
Message 
 to State 
 Banks and 
 Trust 
 Companies 
 
 will adopt the habit of paying for his deposits a fluctuat- 
 ing rate of interest, which should aiways remain a cer- 
 tain percentage below the ninety-day discount rate of his 
 Federal Keserve Banii. The unreasonable rates paid for 
 deposit money are a serious menace to the safety of our 
 banking system and the economic development of our 
 country. 
 
 And, with this same spirit, and even with greater em- 
 phasis, we must say to the State banks and trust com- 
 panies : 
 
 At this momentous period of its financial history, the 
 country is entitled to have its banking system attain its 
 maximum strength. Irrespective of burdens involved — 
 imaginary or real — it is the duty especially of these large 
 State institutions to come in promptly and contribute 
 their share, making whatever suggestions they think 
 helpful as friends and members rather than as critics 
 from the outside. 
 
 I am glad to state that one of our largest trust com- 
 panies expressed precisely this broad point of view when 
 applying for membership. 
 
 The Federal Reserve System will grow stronger with 
 every coming day, and the stronger it grows and the 
 more it perfects its organization, the more apparent 
 will its benefits become for all its members. A 
 great deal of pressure has been brought to bear upon 
 the Federal Reserve Board, particularly during the early 
 stages of the development of American bankers^ accept- 
 ances, to cause discrimination against the acceptances of 
 non-member banks. So far the Board has been disin- 
 clined to favor such a policy, as it was thought to be in 
 the general interest of the country to give encouragement 
 to the freest and fullest development of this acceptance 
 business, which is of the greatest benefit to the trade of 
 
 30 
 
our country. The Board thought further that time 
 should be giveu to the State banks and trust companies 
 to acquaint themselves fully with the policies to be pur- 
 sued both in dealing with State institutions in general 
 and the acceptance business in particular. Nor does the 
 collection plan just approved by the Federal Keserve 
 Board contain any element of discrimination against 
 non-member State banks collecting at par, without cost, 
 their out of town checks through member banks of the 
 system. The Board believes, however, that the time has 
 now come for these large institutions to recognize their 
 duty to join the system. It will not be long before the 
 banks that stay out of the system will become conscious 
 of the fact that member banks will command the greater 
 confidence, and there is no doubt that the public will 
 begin to resent having its interests sacrificed for the ben- 
 efit of institutions unwilling to join the general pro- 
 tective system, and that before long their resentment 
 will have to be heeded. 
 
 Before closing, I should like to make it clear that, 
 though speaking to the New York State Bankers^ Asso- 
 ciation, whatever I have said is meant to apply to the 
 State institutions of the entire country. I should not 
 wish to give the impression that I am particularly criti- 
 cal of the New York institutions. Quite the contrary, 1 
 am very glad to have this opportunity of testifying pub- 
 licly to the spirit of good citizenship that you have mani- 
 fested in every phase of the development of the system 
 from the very first beginnings, when we were dealing 
 with the gold and cotton funds in the fall of 1914. Tn 
 the negotiations, resulting in the creation of these two 
 funds, there asserted itself for the first time in our finan- 
 cial history a broad national spirit uniting in a work 
 of patriotic co-operation national banks, State banks and 
 trust companies of every section of the country. That 
 was the first effect of the coming of the Federal Reserve 
 
 31 
 
System, the physical organization of which at that time 
 had not even been completed. It is this same spirit, this 
 larger conception of banking functions and ideals, that 
 will ultimately lead into the Federal Keserve System all 
 elements worth having; that is, all elements of financial 
 and moral strength. 
 
 I trust that my frankness will not be misunderstood 
 by you. There is an old adage that "imitation is the sin- 
 cerest form of flattery." I venture to paraphrase this say- 
 ing into: "frankness is the sinceresc form of flattery,'' 
 because it shows that you respect the intelligence and 
 moral fibre of your audience. 
 
 Summary j believe that our future looms large beyond measure ; 
 
 and con- 
 clusion 
 
 I believe it our duty to be financially prepared on the 
 broadest possible scale ; 
 
 1 believe that we should use the months ahead of us, 
 not to expand any further, but rather to consolidate our 
 strength ; 
 
 1 believe that, through the Federal Keserve Banks, we 
 should strengthen our hold on the gold in circulation 
 and that the stronger the gold holdings of these banks, 
 the better shall we be equipped to cope with the prob- 
 lems ahead of us, of helping ourselves and of helping the 
 world ; 
 
 I believe it to be the duty of every bank in the country 
 to contribute its share in equipping our nation for this 
 task; 
 
 I believe that State institutions which are strong 
 enough should come in now and do their share, no matter 
 whether or not they are in full accord with every detail 
 of the Federal Reserve machinery ; 
 
 32 
 
1 believe that, as we proceed and gain in experience, 
 wiiatever may prove harmful will be remedied. The ten- 
 dency of the country is for a fair deal for fair people; 
 
 While I believe that the country expects that strong 
 State institutions should do their duty and join, we are 
 neither begging nor clubbing anybody to come in nor to 
 stay in ; 
 
 But I firmly believe that the future will belong to those 
 banks — national or State — that are members of the Fed- 
 eral Reserve System, -:,.... 
 
 33 
 
 Press of The Financial Age, 2 Rector Street 
 
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