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E X ~ O F F I C I O

MllMBllRB

G.

McADOO

SECRETARY O THE

TRUSURY

CHAIRMAN

SKELTON WILLIAMS

COMPTROLLER OF THE CURRENCY

FEDERAL RESERVE BOARl2>-503

WASHINGTON

Novombar 14, 1917.

W.

P. G.

HARDING GOVERNOR

PAUL

M.

WARBURG,

VICE

GoVEltNOR

FREDERIC

A. DELANO

ADOLPH C. MILLER

C H R ~ E S

S.

HAMLIN

H. PARKER WILLIS, SECRETARY

SHERMAN P. ALLEN, ASST. SECRiTARY

ANP FISCAL AGENT

ADDRESS REPLY

TO

FEDERAL

RESERVE

BOARD

Copy oi le t tor

to

a Federal

Reserve agont

regarding endorseme1-it o

paper sold by one Foderal Reserve bank to another:

Dear Sir:

Receipt

i s acknowledged

of your

l e t t e r of

Novomber 6th

in

which

you

ask

whether

the· Federal

Reserve

Bank

of

Now

York

should

not

have·

ondorsed

the

$5,00l ,W

of bankers' accoptanccs which you

bought

recently from that bank in aecor iance with tho suggestiion of the

Federal Reserve Board,.

Your point i-s

well

takGn and tho

question

was ful ly

discussed

by

tho

aoard

when tho transaction

was arranged. In reviewing tho

co?iditions

which led to

t u

transaction, i t

should

bo rcmcmborcd

that

the Federal

Res crve banks,

w:i th hardly any exception, ha

vc been

accustomed, with the

approval of

the

Board, to invest l ibera l ly in

bankers

1

acc(lpt

anccs which •r pure ha.sod for thitm by the Fed(· ral

Rescrv" Bank of

N;;w

York. ·Thee.; tranes.ctione h11vc

be<>n

rlilgu+arly

cngagod

in

a?'ld on a largo ecal.o, _particularly by thol,\o banks

which,

l ike yo\,lr own. di d not

find

a sufficient

f

iold

of

investment in theil '

own di1Jtricts.

Tho Now York acoeptanco market

has

thus

been

developed

to

a

considerable degree

by

tho

combined operations o the

Federal

Resorve banks.

I t

hae

frequently

happened that tho F· deral R'-svrve

Bank o N W York has givnn othor Federal Roscrw banks largtilr part ic i -

pations

in

thes9 bankers ' -aeceptancos than

i t

would

have

dcsir.0d had

the

mattor beon l o o ~ e d

upon from

the viewpoint

of i t s own interest alone

.

Thel J• l ibera l

participations

havo

been

given othor Fodoral Reserve

banks

wh•n the Now fork bank's oarnings WQre not suff icient to meot i t s own

d i ~ d c n d roquiremonts,

whilC' thr-

otheT

banks I by

rccoi

vi.ng a

l i l :orel

allotment

of

acccptancos

purche.sod

in

New

York, wero

anablod

tho:r-cby

to

mak• a b ~ t t o r showing in t h ~ mattor of e a r n i n g s ~

Thero havo beon

other

occasions

whQ l the Fedaral Rasarvo banks

h ~ v e

discontinued

their purchases in

anticipation of

heavy demands

in

thf'1 i r o\m

dis t r ic te thus

throwing

t h ~

who lo burden

or sustaining

tho

a e ~ 1 1 ) t a n c e

market

upon the

Federal

Reserve Be.nk

of

Now York. In th is

w'-y they conserve

their

own

rasourcos,

while

the rosG1rves of tho Fodl.ral

Reserve Bank

of Now

York wore corroepondingly roducad bocauso o the

la rger part of ·tho burdon which

i t had to

assume.

These acts

are brought

.y'Our attf>nticn for the purpose of emphasizing the point that a par t ic i -

pa'tion in tho ptU chase of acc$ptancae is not only a privilege but

that i t

il l

~ r i f a ; i s

a.

duty also the

measuro

of

which

can

hardly

be gaugad

by

tb:.;

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X. 503

2 -

convenianca of any individual

bank.

Final rosponsibi l i ty in tho matter

res ts undar

the law

upon the federal Reserve Board, and i t may become ·

~ a c e s s a r y for tho Board in the future

to

tmdartake a more

complete

regulation

of thosa

functions.

In suggosting

to a nU111bor o·f faqoral Rasarve Banks which wore

in a strong

posit ion,

to purchase

bankers'

c c e p t n c e s ~ from the Federal

Rasarva

Bank of

New York the Board asked msrely

that

they resume

the i r

purchases

of

ac ceptancos in the nanner

in which

they had engaged in

these transactions

heretofore;

i . e . without the

endorsement of the

Federal

Roserve Bank

of Now

York.

The

]3oard

anticipates that ·

there

will

bit.a

quick

c ~ a n g e

in

banking

conditions

shortly

after

the

f i f t o e n ~ h

instant ,

wnen the

pressure on

New

York should

diminish

and·

bear.

heavier upon

somo

of

the

other d is t r ic t s . from this point of

view,

the

most

natural

operation

perhaps

would have been

the rediseo

unt

by other

Federal

Reserve

banks

of

the

f i f teen

d y member banks' collateral p a p e ~ of which

the

Federal Reserve

Bank

of New York holds

a very

large amount e.t

this

time.

S1 1eh 11 t ransact ion, however, would necessarily have been dealt with as a·

rediseount,

as

i t

would have

involved

single

name

collateral

notes

o

m•ber

banks

taken under

Section

13,

endorsed

by the Federal

Reserve

Bank of New York under

instructions

franthe Federal Reserve Board. lt

would

have been

necessary

to

show a

transaction o this

kind in the

weekJy statement, thereby

creating

more or less comment which

might

bave

been

undesirable

in

the present

circumetances,

nd

the

Board

fe l t

there

fore,

that

i t

would

be better for the adjustment

to

take tne form o a

sale.of acceptances suggested by the

Board

rather

than

by

a

rediecount

transaction

ordered by the Board. The Board understands, of course, tliAt

in any

case

where a rediscount operation

is

ordered, Federal Reserve

banks should

·have the

right to

require

tm t the paper bear the endorse-.

ment

o the

eel;iing

bank; but

where the Board invited the banks to

resume purchaeee of

bankers'

acceptances

upon

tbe

same

conditions

which

have prevailed hitherto, t we.e fe l t

that

there w e no necessity for

requiring

an

endorsement.

Had

any bank to which

the

Board suggested a

purchase, stipulated that the paper should be endcrsed,

the

Federal

Reserve

Bank of

New

York in tm t

event,

would have been called upon to decide

whether

i t

w o u l d ~ p r e f e r

not

to

consider

the

proposed

sale.

While your le t ter

was

in

t ran1i t the

Board effected

a

second

transaction of th i s k i n d ~ When the Federal

Reserve

bank gcvemore were

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X-503

3 -

assembled here l s t Thursday, some cf them whose banke were in a

par-

t icularly

strong

position, v1ere asked i they were willing

to

take from

the Federal

esefve

Bank

of

New

York a specified amount of

bankers

acceptances. Without heSitation they

l l

stated thei r will ingness

to

do so. This transaction also md the cmracter of a voluntary purchase

on

the

pa.rt o t

the federal Reserve

b a n ~ s ··Uf>on the

suggestion

of 1;he

Federal

Reserve Board,

and as there

was no

compulsion in

the matter,

the endorsement of the Federal Reserve Bank

of

New York was not required.

Respectfully

yours,

w P. G HARDJllG;

o Vernor.