frsbog_mim_v15_1080.pdf

7/17/2019 frsbog_mim_v15_1080.pdf

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FEDERAL RESERVE BOARD

WASHINGTON

October

1 , 1 9 2 1 .

X-3217

SUBJECT: Fu rt he r Corre sponde nce wi t h Governor of

Nebraska.

Dear

S i r :

On September 1 7 t h I sen t y ou copy of c o r r e s -

pondence with t h e Governor of Nebraska. I now enclose

f o r your information copy of reply which h a s been r e -

ceived from Governor McKelvie

and

copy

of my

answer

t h e r e t o .

Very truly yours,

E nc lo su re . G o v e r n 0 r .

Governors o f a l l F.R.Banks.

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x 32r

?a

September

2 9 . 1 9 2 1 .

Dear Governor McKelvie:

Last Saturday I acknowledged receipt o f y o u r l e t t e r o f t ' e 22nd

i n s t a n t

a n d i n

r e p l y i n g

to i t now a t

grea ter l ength

I

wish

t o

i nv i t e

your a t t en t i on t o some o f th e u n d e r l y i n g p r i n c i p l e s o f t h e Federal

Reserve

A ct

which govern

t h e o

pera t ions

o f t h e

Federal "reserve "banks,

Fol lowing that I wi l l submit some f a c t s rel a t i ng t o t h e ope r a t i ons o f

t h e Branch o f th e Federal Reserve Bank: o f Kansas City a t Omaha, i n which

you and

your people

a r e

p a r t i c u l a r l y i n t e r e s t e d .

( 1 ) - The law

does

n o t

permit Federal reserve banks

t o

compete

f o r business with each other o r wi th th e na t i on al banks, s ta te banks and

t rust companies

o f t h e

cou ntr y. They

a r e n o t

al lowed

t o

receive deposi ts

from t h e p u b l i c n o r a r e they permit ted t o make loans o r advances di rect

t o i nd i v i dua l s , f i r ms o r co r por a t i ons . I n th@r re dis co un t ope rat ion s they

a r e l i m i t e d t o no t e s and b i l l s d e f i n e d a s "e l i g i b l e" which bear t h e endorse-

ment of a member bank.',,: I t fol lows, therefore, that Federal reserve banks

cannot extend

any

discount accommodations

t o t h e

public except through

the

medium o f a member bank, with which inst i tut ions t h e loans mas t f i r s t b e

ne go t i at ed . Federal reserve banks have n o funds t o l end t h e public through

t h e

i n s t r u m e n t a l i t y

of

member banks acting

a s

b r oke r s .

A

Fed era l rese rve

bank does n o t take t h e i n i t i a t i v e i n making loans t o a member bank f o r t h e

purpose

o f

enabl ing

t h e

member bank

t o

d i s t r i b u t e

t h e

funds

s o

advanced

t o

i t s customers. The Federal reserve bank lends t o t h e member "bank against

t ransact ions al ready made

f o r t he

puroose

of

enabl ing

t h e

member bank

t o

r e s t o r e i t s r e s e r ve t o t h e l ega l r equ i r emen t , a f t e r t h e r e s e r ve h a s been

impaired o r i s about to be impaired because of increased loans a n d depos i t s .

(2 ) - I have al ready cal led your at tent ion t o t h e f a c t t ha t t h e

Federal reserve bank i s given no control over t h e po l i cy o f i t s member banks

wi th r espect t o l oans b u t t h a t i t cannot compel a member bank t o make a loan

which

i t

does

n o t

d e s i r e

t o

nake

n o r

prevent

i t

fro m making

on e

which

i t

wishes t o make. Neither can a Federal reserve bank control t h e r a t e o f

i n t e r e s t cha r ged b y member banks. I n case o f i s tate banks t h e i n t e r e s t r a t e

i s r egu l a t ed b y t h e laws o f the r e s p e c t i v e s t a t e s a n d i n t h e case of na t ional

banks

t h e

Federa l

la w

pe r mi ts t hos e i n s t i t u t i o ns

t o

charge

up to t he

maximum

r a t es pe r mi t t ed i n t h e s t a t e s i n which they a r e l oca t ed .

( 3 )

- No Feder al res erv e hank can r edi scount paper f o r member

banks outs ide o f i t s own Federa l Reserve Di s t r i c t . I t s r ed i s coun t t r ans ac t -

ions

a r e

l i m i t e d

t o

deal ings wi th

i t s own

member banks.

The

Federal Reserve

A ct does n o t r equi re r a t es o f d i scount to be uni form i n a l l d i s t r i c t s . Each

Federal reserve bank

i s

au t hor i zed

b y

paragraph

( d ) o f

Sect ion

lU of the

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X-32l7a

Federal Reserve Ac t t o es tabl ish f rom t ime t o t ime , sub jec t t o review

an d de te rmina t ion of t he Federal Reserve Board, rates o f d i s coun t to be

charged b y t h e Federal reserve bank f o r each class o f paper, which shall

b e f i xe d wi th a view o f accommodating commerce an d bus iness a n d which,

s u b j e c t

t o t h e

approval , review

an d

de te rmina t ion

of t he

Federal Reserve

Board,

may be

graduated

o r

progressed

o n t h e

b a s i s

o f t h e

amount

of t he

advance# and discount accommodations extended b y t h e Federal reserve bank

t o t h e borrowing bank". The l a s t sen tence o f t h e paragraph ouoted above

r e l a t e s t o what i s knom a s t h e "progressive ra te" , which h a s now been

abol i shed i n the . four Federa l Reserve Dis t r ic t s i n which i t w as formerly

e f f e c t i v e .

One of the

e a r l y d r a f t s

of t he

Federal Reserve Bill which

w a s c o n -

s ide red b y Congress in 1913 provided that t h e Federal Reserve Board should

each week f i x t h e r a t e s of d i scount to be charged b y t h e r e s p e c t i v e F e d -

er al re ser ve banks a n d t h a t i t should n o t i f y each Fed era l re se rv e bank what

i t s discount rates would b e f o r t h e ensuing week. This pr ov is io n was

s t r i c k e n o u t i n a l a t e r d r a f t of t he b i l l and the Act as . f inal ly passed

con ta in s

t h e

language above moted.

I t

seems, therefore ,

to be th e

i n t en t

of

Congress that

t h e

d i scount ra tes sha l l

n o t

o r d i n a r i l y

be

i n i t i a t e d

by

t h e Federal Reserve Board b u t b y t h e d i r e c t o r s o f t h e respec t ive Federa l

re se rv e banks. This i s cons i s ten t wi th th e theory of t he Ac t which does

n o t c r e a t e a centra l bank b u t a re gi on al ..banking system, comprised of

twelve independent u n i t s . This theory i s based upon t h e presumption that

t h e d i r e c t o r s o f a Fed era l res er ve bank a r e more conversant with credit

cond i t i ons an d cu r r en t r a t e s f o r money i n t he i r r e spec t i ve d i s t r i c t s t han

t h e Federal Reserve Board in "ashington c a n b e expected t o b e .

,?

hile the

Federal Reserve Board undoubtedly

h a s

power

t o

d i r e c t

a n y

Fede ral r eser ve

bank which pers is ts

i n

main ta in ing

a

discount ra te which

i s

c l e a r l y

n o t

warran ted

b y

general condi t ions

to

change that rate,

t h e

Board

s o f a r h a s

h a d n o occasion t o i n i t i a t e a r a t e f o r a n y Fede ral r es er ve bank.

I n cons ide r ing th e proper l eve l of d i s coun t r a t e s , t h e d i r e c t o r s of

t h e Federal reserve banks have taken into considerat ion n o t only the

r e se rve pos i t i on o f t h e bank b u t a l so cur ren t loca l ra tes f o r money. I t irs

t h e purpose o f t h e Federal reserve b=nks to a f f o r d a ready means of r e d i s -

count ing paper f o r member banks b u t i f a r t i f i c i a l l y lo w ra te s should b e

e s t a b l i s h e d t h e resul t would probably be an unhea l thy s t i mula t ion of loans

b y

member banks, which,

I

unders t and from your l e t t e r

o f

September

1 2 t h , i s

something that

y o u d o n o t

d e s i r e ,

f o r y o u s a y i n

t h at l e t t e r

N or

-ould

I

have y o u be l i eve f o r a moment that I would have t h e Federal Reserve Bank

System encourage an ex tens ion o f credi t that would resul t i n unwise in f la -

t ion o r specu l a t i on" . The Board i s e n t i r e l y i n accord i t h your desire t o

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1033

- 3 - X 3217a

s e e t h e Federal Reserve System operate as an agency f o r f i n a n c i a l r e l i e f

a t a time when i t i s most urgently needed, a n d i n order t o keep t h e Federal

reserve banks i n p o s i t i o n t o extend such r e l i e f i t i s necessary tha t a

p o l i c y

h e

adopted which wil l

n o t

encourage

an

undue expansion

of

loans made

f o r t h e

sake

o f t h e

p r o f i t

t o b e

der ived

by

r ed i s cou n t i ng wi t h

t h e

Federal

reserve bank.

I n

y o u r l e t t e r

o f the

22nd ins tant

y o u s a y

t h a t

y o u a r e

a l t oge t he r

convinced that t h e Federal Reserve System i s n o t f u n c t i o n i n g a s i t should

i n y o u r d i s t r i c t . You say t h a t y o u a r e informed that t h e banks i n your

d i s t r i c t a r e n o t gene r a l l y pa t r o n i z i n g t h e Federal Reserve System. I t

i s t r ue t ha t a l a r ge ma j o r i t y o f s t a t e banks , f o r r eas ons s a t i s f ac t o r y

t o themselves, have n o t deemed i t advi sable t o apply f o r membership i n

t h e Federal Reserve System a n d t he r e a r e a l s o a considerable number o f

taember banks which have h a d n o occas ion u p t o this t ime t o r edi scount

wi th t h e Fe de ra l re se rv e ban k. Many o f th e non-member state banks,

however, have borrowed money from th e ir co rre spo nde nts i n Omaha, Kansas

x

City and o t h e r c i t i e s and these banks i n tu rn have red isco unt ed wi th the

Federal reserve banks . N o r i s i t t o b e doubted that t h e member banks

which have n o t r edi scounted wi th t h e Federal res erv e bank would he s i ta te

to do so should occasion arise.

On August 3 1 , 1 9 2 1 there were 203 member banks i n Nebraska. A t that

time 7*4- o f the se banks were n o t borrowing from t h e Federal Reserve Bank.

129 Nebraska member banks were a t tha t t ime redi scount ing t o t h e extent

of

$11,263,3^5.

On

June

3 , 1920 , 135

Nebraska banks were borrowing from

t h e

Federal Reserve Bank $30,068,992

and on

October

30 , 1920 , 168

Nebraska

members were bo rr ow in g $3 8,294,175. When

i t i s

remembered that

t h e

t o t a l

r ed i s coun t s

a nd

b i l l s payab l e

of a l l

na t ional banks

i n t h e

Uni ted States ,

a s

shown

by th e

o f f i c i a l r e p o r t

o f the

Comptrol ler

o f th e

Currency, OB

August

22 , 1907

amounted

t o

$59,177,000, itwwould seem that

t h e

advances

las t October

o f

over $38,000,000

by the

Kansas City bank

t o

member banks

i n

Nebraska alone would indicate very ef fect ive funct ioning

o n t h e

pa r t

of that bank. You w i l l r r e c a l l t h e severe "oanic which occurred i n t h e

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1CC4

- 4 - X-32i?a

f a l l o f 1 9 0 7 , a nd f o r sev era l weeks# be fo re t h e panic develcoed

cred i t condi t ions were a s s t r i n g e n t a s they have ever been i n th i s

country.

I t i s

t rue tha t

t h e

loans

o f t h e

Federal Reserve Bank

o f

Kansas

City

t o

member banks

i n

Nebraska

are now

only about eleven

and a

mia r t e r mi l l i on do l l a r s

a s

a g a i n s t t h i r t y - e i g h t

and a

quar te r mi l l ions

las t October , b u t i t does n o t fo l l ow nece s sa r i l y t ha t t h i s h a s been

t h e r e s u l t o f harsh demands f o r l i q u i d a t i o n o n t h e p a r t of t he Federal

Reserve Bank o f Kansas City. I{s i t n o t poss ib le tha t there h a s been

a grea t dea l o f vo lun ta r y l i qu id a t io n , made pos s ib le b y s a l e s of f&rm

produc ts o r b y incre ased depos i t s? Cer t a in l y c r ed i t condi t ions genera l ly

a-re by no

means

a s

st ri ng en t now-as they were l a s t October. While

i t

may be

t r ue t ha t

t h e


o f

Kansas City, mindful

of

i t s r e s p o n s i b i l i t y u nd er the l aw and a c t i n g i n accordance wit h t h e d i c -

t a t e s of ordinary banking prudence, may have h a d occas ion a t t imes t o

c a l l t h e a t t e n t i o n of some o f t h e la rg er borrowing banks t o t h e neces -

s i t y of working themselves into a s t r o n g e r p o s i t i o n , t h e Federal Reserve

Board h a s y e t t o b e shown that t h e Federal Reserve Bank h a s ever under-

taken to say to a member bank what particular loans i t should require

t o b e

p a i d

o r a s k t o

have reduced.

At zqy

r eques t

t h e

Board ' s Div is ion

o f

Reports

an d

S t a t i s t i c s

h a s

prepa red

W o

tab les which re la te

t o t h e

d i s coun t t r ansac t i ons

by the

Omaha Branch of t h e Federal Reserve Bank of Kansas City during October,

1920 and

Augtist,

19 21 . One

table shows

t h e

total amount

o f

b i l l s

d i scounted f o r member banks during these months, t h e r a t e of i n t e r e s t

charged t h e borrowing customers b y t h e rediscounting member banks,

t h e amount a t each rate and the percen tage o f paper taken a t each rate

t o t h e total amount. You wi l l unders tand , o f cou r se , t ha t t h i s r e l a t e s

only t o t h e r a t e s of i n t e r e s t cha rged b y member banks on the p a r t i c -

ular notes which they i n turn rediscounted with t h e Federal Reserve

Bank Branch a t Omaha. I haves n o in format ion as t o t he ra tes charged

b y t h e n? ember banks on t he ir e n ti re volume o f l oans t o customers . The

other table shows

t h e

number

of

separa te no tes

o r

p i e c e s

of

t>aper

d i s -

counted

b y t h e

Omaha Branch during

t h e

same months

and the

rate charged

customersaby

t h e

borrowing bank

i n

each case.

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- 5 -

TABLE

A

X-3217a

BILLS DISCOUNTED

FOR

MEMBER BANKS

BY THE

OMAH4 BRANCH

OF THE

KANSAS CITY FEDERAL RESERVE BANK

DURING OCTOBER i g20

AND

AUGUST

1921

Amount

of

paper discounted:

Member bank s' c o l l a t e r a l no te s:

Cus tomers ' b i l l s

and

no t e s :

-

TOTAL

-

Number of p i e c e s of paper discounted:

Member banks ' co l l a t er al n ot es : -

Customers ' b i l ls and n o t e s : -

TOTAL -

Number of member banks accommodated:

Average rate

of

discount charged member

banks

by

Omaha Branch

-

October

1 4 2 0

August

1421

$16,058,636 $6,562,655

16.800.179 7.108.201

$32,858,865 $13,870,868

442

1 , 6 4 7

4,089

179

7-lOfr

255

J 3 3 -

1 , 9 8 8

Amount

of

paper discounted

by

Omaha Branch

on

which discounting member banks

charged their customers

a

r a t e

o f : -

October IQ20

145

6 . 0

August

1421

P e r

cent

P e r

cent

Amount

of

total Amount

of

to ta l

5 i -

$

19,700

. 1 2 $

— —

- —

6

150,200

. 8 9

— - -

6 f -

6 f -

85,000

• 51

546,100

7 . 4 7

f -

6 f -

6 , 1 0 0

. 0 4

- » —

— -

7 -

1,825, 800

1 0 . 8 7

1,650,100

22.58

7 i -

2,576,600

1 5 . 3 4

1,977,400

27 . C6

8 -

9,154,100 54.49

1,870,400

25.59

85 -

30,000

. 1 3

— —

- -

8 f -

528,200 3 . 1 4

400

.01

9 -

1,077,500

6 . 4 1

460,900

6 . 3 1

Si

130,300

.77

— —

- -

1 0 -

1,192,900

7 , 1 0

796, 300

1 0 . 9 0

1 2 -

21. 800

,14.

6 . 1 0 0

. 0 3

$16,800,200

1

00 .0 0# $7,308,200 lOO.OCfib

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1CGG

X-3217a

TABLE B

NUMBER

OF

PIECSS

OF

p/PER DISCOUNT

EC BY OM/H/

BRANCH

ON

WHICH DISCOUNTING MEMBER BJINKS CEflRGEDTHElR

CUSTOMERS

A

RATE

OF: -

October 1Q2Q

SATE

5 i

6

u

7

7 i

g

8 4

84

9

9 t

1 0

12

Total

Number

P a r

cent

-Si .

August

1921

Number

P e r

cent

3

. 0 8

2 0

. 5 5

—

mm -

9

. 25

26

1 . 5 0

l , . C 3

—

237

b . 5 0

67

3 . 6 7

229

6 . 2 8

95

5- 48

2,022

55.44

46 s

27.00

2

. 05

mm mm

mm

111

3 . 0 4 1

. Ob

199

5 . 46

152

6 . 77

11

. 3 0

- » —

800

2 1 . 9 4

913

52.6b

3

. 0 8

11

. 64

3,64? 100.00

1 , 7 3 3

100.00

I t should b e borne i n mind that due t o t he opera t ion of the

pro gre ssi ve ra te l a s t October t h e average rate of discount which t h e

borrowing member banks paid t h e Omaha Branch du ri ng t h a t month was

7-10%, while

i n

August

1921 , t he

progressive rate having been

abol ished,

t h e

discount rate paid

i n a l l

cases

was 6$ .

I t i s

i n t e r e s t i n g

t o

note

t h e

changes

i n t h e

percentages

of

rediscounted paper which

had

been taken

a t

vary ing ra tes

of

i n t e r e s t

by t he

borrowing member banks.

In

October

1920 t he

percentage

of

V> paper discou nted b y t h e member banks w a s 1 0 . 8 7 against 22.38 i n

August 19 21 . The percentage of paper w a s 1 5 . 3 4 against 27.c6

and the

percentage

of 8%

paper

w as

54.49 against 25.59.

T he p e r -

centage

of 9%

paper

w as

6

. 4 1

aga ins t

6 . 3 1 . T he

percentage

of

10/6

pap er , which

w as

~1 1Q

i n

October l/>20

#

increased, however,

t o

1 0 , 9 0

percent

i n

August

1 9 2 1 .

Looking

a t

Table

B ,

which relates

t o t h e

number

of

p ieces

of

paper discounted,

you

w i l l

s e e

t ha t

i n

October 1 9 2 0 t h e percentage of rediscounted paper taken by th e '

member banks a t 8$ was 55*44 against 27.00 i n August 1 9 2 1 , 9 . 5 . 4 5

aga ins t 8 . 77 a nd 10$ paper 2 1 . 9 4 against $2.68.

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- 7 -

X-32l7a

Carrying

t h e

a n a l y s i s f u r t h e r

wa

w i l l

s e e

t h a t

of the

t o t a l

of

$7/306 ,200 which

w a s

red iscounted

by t h e

Omaha Branch

f o r

Nebraska member banks during August

1 $ 2 1 ,

only $79^*800

was

t aken

b y t h e

borro wing banks from t h e i r c ustome rs

a t a 1 0 $

ra te ,

b u t

this amount

w as

made

up of 9^3

separa te p ieces

of

paper, more

than one-half

o f the

total number

of

notes taken during

t h e

month. The average amount o f the red iscounted no tes on which

customers

h a d

been charged

1 0 $ w a s i n

October

1 $ 2 0

about $1,490

a n d i n

August

1 9 2 1

about $870.

The

average amount

of t h e r e -

discounted notes

on

which Customers

h ad

been charged

8% wa s i n

October

1 9 2 0

about $4,520

and i n

August

l g 2 1

about $4,000,

and

t h e average of 7% no t e s w a s i n October 1 9 2 0 about $7#700 and in

August

1 9 2 1

about $24,62$.

A l l

this would indicate ,

a t

l e a s t

s o f a r a s t h e

rediscounted

no te s a r e concerned, that t h e larger borrowers a r e g e t t i n g a

s l i gh t r educ t ion i n r a t e b u t t h e r e i s no th ing t o show that t h e

smaller borrowers

a r e , f o r

no twi ths tanding

t h e

reduced volume

of

l oans

t h e

number

of

t ransact ions a t3 .0^

w as

g r e a t e r

i n

August

1 9 2 1

than

i n

October

1 9 2 0 ,

There i s no th ing i n t h i s l e t t e r or i n my l e t t e r of September

15th

which

i s

intended

a s a

r e f l e c t i on upon

o r a

c r i t i c i s m

of the

banks

of

Nebraska.

I n

common with

t h e

r e s t

o f t h e

banks

of the

country, they have

h ad

very serious problems

t o

contend with

and

they

a r e

E n t i t l e d

t o

grea t c red i t

f o r t h e

manner

i n

which they have

met

t h e s t ra in which h a s been imposed upon them, b u t I wish t o cal l

you r a t t en t i on

t o t h e

fac t tha t

t h e

Federal Reserve Bank,

of

Kansas

Ci ty , l ike

a l l

ot he r banks

h a s h ad i t s

problems

t o o a n d i t s

r e d i s -

count fac i l i t i e s have cer ta in ly been

of

g r ea t a s s i s t ance

t o t h e

banking community and through t h e banks t o t h e p u b l i c . The Federal

Reserve Board i s watching t h e r a t e s i t ua t i on c lo se ly a n d i s anxious

t o

have

t h e

r a t e s

of

each Federal reserve bank bear

t h e

proper

r e l a t i o n s h i p

t o

cur ren t ra tes

i n t h e

r e s p e c t i v e d i s t r i c t s .

I inqui red in my prev ious le t t e r whether y o u thought a r e -

duc t ion

i n t h e

d i scount ra te

o f the


of

Kansas

City would result

i n a

lower level

of

i n t e r e s t r a t e s

t o t h e

publ ic ,

I s e e

nothing, however,

i n

yo ur l e t t e r

of

September 22nd which bears

on

t h i s i nqu i ry

and I

w i l l

now

withdraw t ha t q ue sti on

and ask

instead

whether

y o u

th ink condi t ions

i n

your State wil l

b e

improved

by a

r educ t ion i n t h e Federal Reserve Bank rate and I would appreciate

a

f rank expression

of

your views.

I am informed b y t h e Governor o f t h e Federal Reserve Bank o f

Kansas City that

t n e

r eco rds

o f t h e

Omaha Branch w i l l show t h a t

no

member bank

h a s

been urged

t o

l i q u i d a t e r a p i d l y

i t s

discount l ine

and

t h a t n e i t h e r

t h e

head of f ice

n o r t h e

Branch

h a s

ever suggested

t o a member bank what policy i t should adopt towards requiring i t s

customers t o l i q u i d a t e . Between October 3 0 , 1 9 2 0 a n d June 30 , 1921

t h e

member banks

i n

Nebraska have reduced their loans from

t h e


by

about $25,000,000

bu t o f

this amount

A A '

S

>*V»

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10 38

- 8 - X-32172

X-3217a

approximately $1g,000,000 was l i qu i da t ed by banks i n Omaha and

Lincoln, while t h e loans o f a l l ot he r member ban ks i n Nebraska were

reduced only by about $b,jOO,OOG.

Whatever impressions may e x i s t t o t h e cont rary , i t i s a

f ac t t ha t t h e Federal Reserve Board h a s always been keenly desirous

t o have Federal reserve banks d o a l l they could legi t imately t o a i d

t h e member banks i n meeting t h e credi t requirements of tnose engaged

i n a g r i c u l t u r e and th e r a i s i n g of l ive s tock . The trouble, however,

l i e s l a r g e l y i n t h e f ac t t ha t t h e l a rger opera t ions i n farming and

c a t t l e r a i s i n g a r e car r i ed on in sections where t h e depos i t s a r e

seasonal and where t h e l end i ng ab i l i t y of the banks out of the i r

own r esources i s l i m i t e d . Tnen agai n, many banks do no t l i k e t o

lend their money f o r a s l o n g a term a s i t i s needed i n c a t t l e

r a i s i n g and in certain farming operat ions

The Joint Commission of Congress of Agr icul tural Inquiry

h a s been f o r some months past investigating thoroughly t h e credi t

s i t u a t i o n a s r e l a t e d t o t h e farming and l i ve s t ock i nd us t r i e s and

I am informed that i t s repor t wi l l be made public before very long.

I am sure i t w i l l be mos t in teres t ing and i l l umi na t i ng and w i l l no

doubt conta in some co ns tr uc ti ve sugg est ion s.

I am sending you w i th t h i s l e t t e r a copy of B u l l e t i n No.

999,

en t i t l ed "Pr i ces

of

Fara Products

i n t h e

United States",

r ecent ly i s sued

by the

Department

of

Agr icul ture, which contains

a

&reat deal

of

informat ion

of

v i t a l i n t e r e s t

t o

farmers

a n d t o a l l

who

l i v e

i n

ag r i cu l t u r a l s t a t e s .

I wish i n conclusion t o thank y o u f o r t h e l e t t e r s you have

w r i t t e n me and t o say t ha t I have replied t o them i n n o cont rovers ia l

spi r i t whatever . I am sure th at we have a common purpose and I hope

t h a t you wi l l have a n opportunity sometime of t a lk i ng wi th t n e o f f i c e r s

and d i r e c t o r s of the Federal Reserve Bank of Kansas City, who a re

more di re ct ly respon sible f o r t h e p o l i c i e s and opera t ions of the

Federal Reserve Bank than

t h e

Federal Reserve Board

i s . I t i s

d i f f i c u l t

f o r t h e Board t o admonish t h e o f f i c e r s and d i r e c t o r s of a Federal reserve

bank

a s t o

t he i r pr ope r po l i c i e s

and

conduct

a s

long

a s

complaints

a r e

merely general i n t he i r na t u r e . I t i s t h e earnes t des i r e o f the Federal

Reserve Board that a l l Federal reserve banks should function a s they

a r e intended by law and if you w i l l l e t m e know just i n what respects

t h e Omaha Branch o r t h e Federal Reserve Bank of Kansas City i s n o t

funct ioning proper ly , t h e informat ion wi l l be apprec ia ted .

I have sent a copy of t h i s l e t t e r t o t h e Chairman o f th e Board

of d i r e c t o r s o f the Federal Reserve Bank of Kansas City, with t h e request

t ha t

i t b e

read

t o t h e

d i r e c t o r s

a t

their next meeting.

Very truly yours,

Governor.

Hon.

Samuel

R .

McKelvie,

Governor of Nebraska,

Lincoln, Nebraska.

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1009

STATE

OF

KEBRASKA

EXECUTIVE OFFICE

LINCOLN

Sept .

2 2 ,

1921;.

X-J217b

Hon. W, P .

G.Hardin g,

Governor, Federal Reserve Board,

Washington, D.C.

My

de ar Governor Harding :-

I am grea t ly obl iged t o y o u f o r t h e in format ion

contained

i n

you r l e t t e r

of

September f i f teen.

The facts which yo u s e t o u t a r e o f such v i t a l

importance

and

suggest other leads

of

even equal

o r

grea te r

importance, that

I

have called

a

conference

o f t h e

Council

of the Nebraska Bankers' Association a n d t h e o f f i c i a l s of

cer ta in Federa l

and

pr iv a t e f inanc i ng agenc ies

t o b e

held

i n

Omaha

a t 7

:

3 0 P . M . ,

September twenty-six.

The

purpose

of t h i s conference wi l l b e t o d i scuss these ques t ions i n

d e t a i l

a n d t o

determine what

may be

done

t o

e f f e c t

a

source

of

reasonable c red i t

t o t h e

farmer

a t a

r a t e

of

i n t e r e s t

t ha t b e c a n a f f o r d t o p a y , I have invited Governor Miller

of the Kansas City Federal Reserve Bank and Mr.Ramsay,

Chairman

o f t h e

Board

of

D i r ec to r s

of

that bank.

I

wish

t h a t

you

might also

b e

p r e sen t .

The

f ac t s t ha t

y o u

give regarding

t h e

r a t e

of

i n t e r e s t t h a t

i s

being charged

by

correspondent banks

o n

loans tha t

a r e

rediscounted through

t h e


a r e

i n t e n s e l y i n t e r e s t i n g ,

I am n o t

prepared

t o s a y

tha t

these margins have given

any

unusua l p rof i t

t o t h e

banks

that have been patronizing

t h e

Federal Reserve System,

bu t

I do

fe e l tha t there

i s

something ra di ca l ly wrong wi th

a

system which re qu ir es such wide marg ins. Alsc,

I am

convinced that this and other hampering influences must be

remedied before

t h e

system w i l l

b e

very usefu l

t o

a g r i c u l -

tural borrowers here.

I am

fur ther informed that

t h e

banks

i n

t h i s

d i s t r i c t

a r e n o t

genera l ly pa t ron iz ing

t h e

Federal Reserve

System. I t would seem that i f t h e margins indicated i n

y o u r l e t t e r a r e p r o f i t a b l e t o t h e correspondent banks,

there would

b e a

more general patronage

o f t h e

Federal

P/3 se rve Bank. Tne answer t o t h i s seems to be ind ica ted

i n a te legram tha t I have ju st r ece ive d from a member bank a t

Genoa, Nebraska,

a s

fo l lows:

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- 2 -

X-J2l7b

T he Farmers State Bank j oined t h e


tw o

y e a r s eg o

a n d f o r

t h e p a s t s i x months h a s red iscoun ted 1 0 $

i n t e r e s t - b e a r i n g n o t e s .

Cur

re c o rd s j u s t i f y

me in saying that we have made no p r o f i t s

owing t o their changes of r u l e s and red iscoun t

r a t e s .

1 1

I am a l so informed th at ce r t a i n banks i n t h i s

te r r i to ry have , wi th in t h e last sixty days, withdrawn

from membership i n t h e Federal Reserve system.

From information that I have, I am•al together

convinced that t h e Federal Reserve system i s n o t f u n c t i o n -

i n g a s i t should i n t h i s d i s t r i c t . The demands f o r

l iqu ida t ion were ha rsh i n t h e extreme, i n view of the

f a c t t h a t t h i s

i s a n

a g r i c u l t u r a l r e g io n

a n d t h e

borrowers

here could n o t easily conform t o t h e same requirements

that were imposed upon semi-agricultural o r n o n - a g r i c u l -

tu ra l reg ions .

I n conclusion I d e s i r e t o suggest t h e d e s i r a b i l i t y

of a

close cooperation among

a l l of t h e

agencies that have

a con t ro l ing in f luence over t h e hand l ing of Federal Reserve

funds i n t h i s d i s t r i c t . Thi s i s n o t t h e cond i t ion tha t

o b ta in s now, and I am s in cer ely hopeful th at something wi l l

be done t o b r in g i t about. May I an t ic ipa te your hear ty

i n t e r e s t

i n

tha t d i rec t ion?

Very truly yours,

Samuel B . McKelvie

Governor.

frsbog_mim_v15_1080.pdf

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