FEDERAL RESERVE BOARD WASHINGTON

X-3749 June 1 6 , 1923

SUBJECT: Foreign Bank Transac t ions , D i scon t in -uance of P a r t i c i p a t i o n by F.R.Bank, Boston,

Dear S i r : -

You a re be ing handed herewi th copy of a l e t t e r d i r e c t e d to Deputy Governor J . H. Case, of the Federal Reserve Bank of New York, which grows out of Boston ' s d i s con t inu ing i t s p a r t i c i p a t i o n i n the t r a n s a c t i o n s wi th f o r e i g n banks c a r r i e d on with the Federa l Reserve Bank of New York.

I am a l s o handing you a copy of Governor Hard ing ' s l e t -t e r adv i s ing of d iscont inuance of t h e i r p a r t i c i p a t i o n .

Kindly l e t the Board have the views of your Bank prompt-l y so t h a t they w i l l be a v a i l a b l e b e f o r e the Open Market Investment Committee meets on June 26,

Very t r u l y y o u r s ,

Governor

(Enclosure)

To a l l Governors of Federal Reserve Banks except Hew York,

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COPY FEDERAL RESERVE BOARD.

X-37493 June 16, 1923-

My dear S i r :

This w i l l acknowledge ycur l e t t e r of June l ^ t h adv i s ing of the a c t i o n of the Federal Reserve Bank of Boston d i s c o n t i n u i n g i t s p a r t i c i -p a t i o n in the t r a n s a c t i o n s with f o r e i g n banks. The l e t t e r of Governor Harciing and your l e t t e r to him were presen ted to the Board f o r cons ide ra -t i o n . The Board, i s of the opinion tha t Governor Harding ' s l e t t e r r a i s e s very important quaa t ions ,/hieh cha l lenge the t r a n s a c t i o n s as m a t t e r s of d o u b t f u l p u b l i c i n t e r e s t -

The Board i s of the opinion t h a t the ques t ions r a i s e d by Governor Harding 1 s l e t t e r and your l e t t e r a r e of such importance as to r e q u i r e thorough c o n s i d e r a t i o n . You are t h e r e f o r e advised t h a t the Board i s of the opinion t h a t the ques t ion should be given cons ide r a t i on 6't the next meeting of the Open Market Investment Committee which w i l l be h e l d on June 26 th .

A copy of t h i s l e t t e r i s be ing sent to the Governor 's of a l l the Federa l Reserve Banks f o r c o n s i d e r a t i o n .

The Board, would l i k e to be adv i sed , and i s r e q u e s t i n g each of the Federa l Reserve Banks to give t h e i r views p e r t a i n i n g to the s u b j e c t mat ter r a i s e d by Governor 'Harding 's l e t t e r .

For the in fo rmat ion of the Board i t i s d e s i r e d t h a t you prepare a s ta tement showing the t o t a l amount of f r e e ba lances growing out of these o p e r a t i o n s f o r f o r e i g n banks; a l s o the t o t a l amount of inves tments ; the k ind of inves tments , and the y i e l d upon such inves tments , and such o ther i n fo rma t ion a s w i l l put the Board in possess ion of a l l the f a c t s inc iden t to and neces B ary f o r a thorough cons ide r a t i on and unders tand ing of the ques t ions involved .

I t would be i n t e r e s t i n g a l s o t o have the view of your Bank of the importance of c a r r y i n g on these t ransac t io t to f o r f o r e i g n baiiks, and whether i t should be continued or d i s con t inued .

Yours t r u l y ,

(Signed) D. R. Or i s s inge r

Governor.

Mr. J . H. Case, Deputy Governor, Fede ra l Reserve Bank, New York, N» Y.

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COPY i m S A L S3S3R7Z OF H2W YOEI.

X-37U9b

June 1^, 1923.

T/. P . G. Harding, E s q . , Governor, Federa l Reserve Bank of Boston,

Boston, Mass.

Dear Governor Harding:

I have your l e t t e r of June 14 in r e p l y to mine of the 6 th and 12th rega rd ing your p a r t i c i p a t i o n in th3 accounts of the Bank of Japan and the Bankovni Urad M i n i s t e r s t v a F i n a n c i , and note t h a t i t i s the sense of your boara t h a t the re i s no occas ion in the p r e s e n t circum-s tances f o r your f u r t h e r p a r t i c i p a t i o n in our t r a n s a c t i o n s wi th f o r e i g n banks . As you p o i n t ou t , your p a r t i c i p a t i o n in our f o r e i g n accounts i s e n t i r e l y vo lun t a ry ; and we have never had the remotes t d e s i r e to f o r c e upon any of the Federal r e se rve banks a p a r t i c i p a t i o n which they d i d no t wish# Our so le reason f o r o f f e r i n g p a r t i c i p a t i o n s has been to f o l l o w out a genera l p o l i c y ou t l i ned by the governors s e v e r a l years ago to have the Federal r e s e r v e banks a c t as a s i n g l e u n i t in t h e i r f o r e i g n r e l a t i o n s so f a r as p r a c t i c a b l e . As I have in the p a s t w r i t t e n bo th Governor Morss and your se l f q u i t e f u l l y on t h i s s u b j e c t , I am sure t h a t you and your d i r e c t o r s a r e aware of our views and tha t i t i s unnecessary f o r me t o say anyth ing f u r t h e r a t t h i s t ime.

In view of the f a c t t h a t your bank d e s i r e s to withdraw from your p a r t i c i p a t i o n in our f o r e i g n bank arrangements , I b e l i e v e i t would be more s a t i s f a c t o r y to te rminate your e n t i r e p a r t i c i p a t i o n a t one t ime, r a t h e r than cont inue i t as to t r a n s a c t i o n s in p r o c e s s , and we w i l l be glad to take over your p a r t i c i p a t i o n s to-day f o r our own accoun t . We have accord ing ly arranged with your o f f i c e to c r e d i t us to-day $103,241,06, being your share of the f r e e b a l a n c e s , and a l s o t o wipe out your con t ingen t l i a b i l i t y on b i l l s purchased f o r f o r e i g n correspondents amounting t o $2 ,195 ,89^ .90 . We have s imul taneously charged your account f o r the f r e e ba lance and inc reased our con t ingen t l i a b i l i t y in the a p p r o p r i a t e amount.

As to your share of the commissions earned on the f o r e i g n accounts i n which you have p a r t i c i p a t e d s i n c e January 1 , we w i l l c a l c u l a t e the amount due you and t r a n s f e r i t t o your bank in a day or two with a p p r o p r i a t e adv ice .

Very t r u l y yours ,

(Signed) J . H. Case

Deputy Governor.

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COPY FEDERAL RESERVE BANK 0]? BOSTON X-37%gc

June 14 , 1923*

Mr# J . H. Case, Deputy Governor, Reserve Bank of New York,

New' York.

Dear Mr* Case:

Your l e t t e r of June 6 r e g a r d i n g the p a r t i c i p a t i o n of t h i s "bank i n your account wi th the Bank of Japan , and of June 12 r e l a t i n g t o the account you have opened f o r the p r o v i s i o n a l bank of i s s u e in Czechoslovakia# were du ly cons idered by the board of d i r e c t o r s of t h i s bank a t t h e r e g u l a r s e s s i o n he ld t h i s morning.

I t i s the sense of our board t h a t t h e r e i s no occas ion i n the p r e s e n t c i r -cumstances f o r f u r t h e r p a r t i c i p a t i o n by t h i s bank i n your t r a n s a c t i o n s wi th f o r e i g n banks * There i s n o t h i n g i n the Federa l Reserve Act which r e q u i r e s such p a r t i c i p a t i o n , a l though i t i s p rovided t h a t wi th the consent and approva l of the I n d e r a l Reserve Board, any Fede ra l Reserve Bank may c a r r y on or conduct through t h e Fede ra l Reserve Bank opening an account wi th a f o r e i g n bank, any t r a n s a c t i o n s a u t h o r i z e d by S e c t i o n 14 of the F e d e r a l Re-se rve Act .

The r e c o r d s of t h i s Dank snow t h a t i t s p a r t i c i p a t i o n in t r a n s a c t i o n s of the I n d e r a l Reserve Bank of New York f o r the account of f o r e i g n banks began on June 16 , 1920, wi th the purchase of b i l l s f o r account of t h e Bank of J apan , in which t h i s bank*s con t ingen t l i a b i l i t y was $1 , l6s ,000« and i t s sha re of the f r e e balance was $292,000- There was no change i n t h e s e f i g u r e s d u r i n g the remainder of the year 1930 but d u r i n g the years-1921 and 1922, your o p e r a t i o n s were extended to i nc lude o t h e r f o r e i g n banks , and the t r a n s a c t i o n s embraced the ear -mark ing of gold and the purchase of T reasu ry c e r t i f i c a t e s a s wel l a s b i l l s • This bank* s r a t i o of p a r t i c i p a -t i o n was 7*3# of the t o t a l amount f rom June 16 , 1920, to December 31,1922, but s i n c e January 1 of t h i s y e a r , i t has been 7• 5fc* The f o l l o w i n g summary shows t h i s bank 1 s annual averages of the f r e e b a l a n c e d e p o s i t s , con t ingen t l i a b i l i t i e s , and t o t a l commissions p a i d :

1920 1921 1922 1923

Income to d a t e . , . *$7,498*14

I t i s conceded, of c o u r s e , t h a t the p o s s i b i l i t y of any s u b s t a n t i a l l o s s i n t he se t r a n s a c t i o n s i s ve ry remote , but i t seems t h a t the income a c c r u i n g

Average Average Free Balance Cont. L i a b f t y . Income

$292,000. $1 ,162 ,000 . 0 529,589* 2 ,330 ,721 . $3 ,742.40 ( i n c . 1 9 2 0 ) 326 ,038 . 2 , 3 1 4 , 4 0 6 . 3 ,755-74

92 ,215 . 2 ,343 ,496 .

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- 2 - X-3749C ' . ~ B

to t h i s t a n k as a r e s u l t of i t s p a r t i c i p a t i o n s i s small and n o t i n p r o p o r t i o n to t h e amounts i n v o l v e d . A p a r t i c i p a t i o n i n a purchase or l o a n r e t u r n s a p r o p o r t i o n a t e share of the d i s c o u n t or i n t e r e s t p a i d , "but our p a r t i c i p a t i o n s i n your f o r e i g n a c c o u n t s , whi le c a r r y i n g a l l the r i s k invo lved i n a p u r c h a s e , g ive u s only a sha re in a small commission.

The d i r e c t o r s of t h i s bank f e e l , t h a t look ing a t the m a t t e r p u r e l y from the s t andpo in t of income, i t i s no t good b u s i n e s s t o pe rmi t i t t o havs t he se c o n t i n g e n t l i a b i l i t i e s . The i r approva l of t h e s e p a r t i c i p a t i o n s i n the p a s t has been a c t u a t e d by a d e s i r e t o coopera te wi th t h e o t h e r F e d e r a l Reserve Banks i n t r a n s a c t i o n s which .vere r e p r e s e n t e d as be ing in the p u b l i c i n t e r e s t , and which i n t h e c i rcumstances then e x i s t i n g seemed l i k e l y t o i n v o l v e con-t i n g e n t l i a b i l i t i e s which had b e t t e r be d i s t r i b u t e d among a l l F e d e r a l Re-se rve Banks r a t h e r than assumed by one bank a l o n e . There do n o t a t fcbi p r e s e n t t ime , however, appear t o be any c o n s i d e r a t i o n s of a p u b l i c c h a r a c t e r r e q u i r i n g t h i s bank to cont inue t o p a r t i c i p a t e i n accounts opened by t h e F e d e r a l Reserve Bank of New York i n i t s own name and upon i t s own i n i t i a t i v e w i t h v a r i o u s f o r e i g n banks . The conduct of t h e s e accounts i s n e c e s s a r i l y under the s o l e management and c o n t r o l of the o f f i c e r s of the F e d e r a l Reserve Bank of New York. Your i n s t i t u t i o n i s the so l e b e n e f i c i a r y of any c o l l a t e r a l advan tages which may accrue froc, these banking connec t ions abroad and b e a r s tho overhead expense of t r a n s a c t i n g t h e b u s i n e s s . There i s a t p r e s e n t no s t r a i n upon the Fede ra l Reserve System and the d i r e c t o r s of t h i s bank see no r ea son i-nt i l corn i t ions change why i t should s h a r e i n the p r o f i t s or bea r any p a r t of the l o s s e s which may grow out of your t r a n s a c t i o n s w i th your f o r e i g n c o r r e s p o n d e n t s .

I n any l a r g e t r a n s a c t i o n s impressed with a d i s t i n c t p u b l i c i n t e r e s t such as the ea r -mark ing of gold wi th the Bank of England in June , 1917; the d e -p o s i t s you h e l d f o r the account of the Bank of the Nat ion of Buenos A i r e s , which involved t h e i r payment i n gold w i t h i n a c e r t a i n time a f t e r the end of the war; the ea r -mark ing of German gold with the Bank of England i n J u n e , 1919; and the ea r -mark ing of gold wi th t h e Bank of France i n Sep t -ember, 1920, the d i r e c t o r s of t h i s bank have c h e e r f u l l y agreed t o a p a r t i c i p a t i o n , and i t i s t h e i r i n t e n t i o n t o p a r t i c i p a t e i n any s i m i l a r t r a n s a c t i o n s which may be engaged i n h e r e a f t e r .

I n view of t h e f o r e g o i n g , the d i r e c t o r s have i n s t r u c t e d me to a a v i s e you t h a t t h i s bank does n o t care t o p a r t i c i p a t e in your arrangement wi th the Czechoslovakian bank, and wi th r e s p e c t t o your accoun t s w i th t h e Bank of J apan , Bank of England, Bank of F rance , de Neder landsche Bank, Swiss N a t i o n a l Bank, and de Javasche Bank, in which t h i s bank has been a p a r t i -c i p a n t , to g ive n o t i c e of c a n c e l l a t i o n of p a r t i c i p a t i o n agreements h i t h e r t o made by t h i s bank excep t a s t o t r a n s a c t i o n s i n p r o c e s s .

With a s s u r a n c e s of our a p p r e c i a t i o n of the c o u r t e s y you have accorded us in a l l t hese m a t t e r s , I am,

Very t r u l y y o u r s ,

(Signed) W. P. G. Hard ing ,

Governor.

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