FEDERAL RESERVE BULLETIN VOL. 2 AUGUST 1, 1916 No. 8 WORK OF THE BOARD. A large number of nonmember State banks have signified their willingness to remit at full face value for checks drawn against them and sent by Federal Reserve Banks for collection. The Board is confident that the United States has now embarked upon a most effective checkcollection system, the use and appreciation of which will continue to grow and enlarge until it becomes universal. As that time approaches the cost of the service can be reduced to a very low figure. lege of using Federal Reserve Banks as clearing Activities of the Federal Reserve Board houses for the collection of checks. Not only during July have covered a wide field. The those drawn against other member banks, but check clearing and collection plan, announced also a large proportion of those drawn against on May 1, went into operation on Saturday, nonmember banks, may, through this plan, be July 15. Preliminary rulings in connection collected at a minimum of expense to the dewith the exemptions under the Kern amend-positing bank. ment to the Clayton Act have been completed and forms and instructions placed in the hands of applying officers and directors of banks. Amendments to the Act, recommended by the Board, have been under discussion in the Senate. Discount rates have shown a slightly upward tendency. The gold settlement fund has been unusually active, due to the repayment to the Treasury Department of the $15,000,000 placed in the Federal Reserve Banks of Richmond, Atlanta, and Dallas in September, 1915, and large withdrawals by the Government of funds deposited with the 12 Federal Reserve Banks acting as fiscal agents of the Government. Deposits in this fund reached, in July, a record total of $168,500,000. While it is early in the operation of the clearing plan to give figures showing its actual results, it is conservative to say that it was begun very auspiciously. There has been a pretty general cooperation from banks and bankers, of which the Board desires to make acknowledgment. Through the taking over of the Boston Clearing House by the Federal Reserve Bank of Boston, checks drawn against any bank in this district, whether a member of the system or not, are collectible at par, subject, of course, to a charge to cover the actual cost of collection and interest upon distant items where immediate availability of funds is asked. All national banks and State bank members of the system may avail themselves of the privi A consolidated statement of the 12 Federal Reserve Banks for the first six months of the present year shows that earnings were $1,824,436 and aggregate current expenses for the same period $1,019,926. This leaves a surplus available for dividend distribution of $804,510, or at the rate of 2.9 per cent upon a total paid-in capital for all the banks of $54,854,000, reported as at close of business June 30, 1916. All of the Federal Reserve Banks except St. Louis earned their current expenses for the first six months of the present year. Five of the banks have already paid dividends. Four Federal Reserve Banks have slightly increased discount rates during July. Rates for bankers' acceptances have shown a firmer tendency. On trade acceptances, commodity paper running 90 days, and commercial paper running 10 days the rate at Philadelphia is 3 per cent; on trade acceptances the rate at Boston is 3 per cent; Chicago has increased its rate for 60-day commercial paper from 4 per cent to 4 per cent; and since July 24 the following new rates have been in effect at the Federal Reserve Bank of Kansas City: Commodity paper and trade acceptances, 4 per cent; commercial paper running 10 days, 4 per cent. On August 1 the rate for trade acceptances at the Federal Reserve Bank of Cleveland will be increased from 3 per cent to 3 per cent for 60-day paper and from 3 to 4 per cent for 90-day paper. After carefully considering the advantages of the Federal Reserve System the Corn Exchange Bank of New York made application to be admitted as a member, and on July 7 favorable action was taken upon the application by the Federal Reserve Board. This bank has a capital of $3,500,000 and a surplus of $6,991,165.32. Almost coincident with the application of the Corn Exchange Bank was that of the American Trust and Savings Bank, of Birmingham, Ala., upon which the Board also took favorable action. The capital of the latter bank is $500,000 and its surplus $250,000. The Board has had informal discussion with the representatives of several other State banks who are considering the advantages offered by membership in the Federal Reserve System. Permission has been granted by the Federal Reserve Board to the National City Bank of New York to open a branch at Petrograd, Russia. This permit includes authorization to establish several subbranches or offices in Russia. Mr. E. T. Meredith, of Des Moines, Iowa, has resigned as a Class C director in the Federal Reserve Bank of Chicago. Mr. Meredith submitted his resignation because of his nomination as the candidate of the Democratic Party for governor of Iowa. This vacancy and that of a Class C director at the Federal Reserve Bank of Philadelphia have received the consideration of the Board, but no elections have resulted. While there has been interesting consideration of amendments to the Federal Reserve Act in the Senate, because of the necessity of giving first consideration to the appropriation bills, the time given to Federal Reserve Act amendments has been limited. There is reason to anticipate favorable action upon the amendments at an early date. All of those applying for instructions and forms to enable them to apply for exemption by the Board under the Kern amendment to the Clayton Act have been furnished with such information. A large number of applications have been received and the work upon them has taken a considerable part of the time of the Board and its counsel. This amendment provides, in substance, that nothing in the Act shall prohibit any officer, director, or employee of any member bank, or Class A director of a Federal Reserve Bank who shall first obtain the consent of the Federal Reserve Board, from being an officer, director, or employee of not more than two other banks, banking associations, or trust companies which are not in substantial competition with such member bank. The circular sent out by the Board and the forms to be used in making application are to be found on another page. Authority to accept drafts or bills of exchange up to 100 per cent of their capital and surplus under the Federal Reserve Act has been granted by the Board during July to the National Bank of Commerce, Seattle, Wash., and the Webster and Atlas National Bank, Boston, Mass. Hearing of Wisconsin Banks. Upon the presentation of new facts to the Board it was voted on July 26 to reopen the petition filed by certain banks in the State of Wisconsin, asking that they be transferred from the Minneapolis to the Chicago Federal Reserve district. An informal hearing of oral arguments will, therefore, be given by the Board in Washington on Tuesday, August 8, at 3 p. m. New briefs are not necessary, but permission is given to file them if desired. Applications of banks in the northern peninsular of Michigan which desire to intervene in this petition will be considered at the same time. Federal Reserve Bank Earnings. All the Federal Reserve Banks are now showing earnings in excess of expenses, as will be seen by the annexed table showing the rates of earnings over expenses in the months of May and June and for the six months ending June 30, 1916. From this statement it will appear that in the month of May two banks earned over 6 per cent on their paid-in capital; three banks earned over 5 per cent, but less than 6 per cent; three banks earned over 4 per cent, but less than 5 per cent; two banks earned over 3 per cent, but less than 4 per cent; two banks earned 2 per cent or less. For the month of June the showing is as follows: Two banks earned over 6 per cent; two banks earned over 5 per cent; two banks earned over 4 per cent; three banks earned over 3 per cent; two banks earned over 2 per cent; one bank earned less than 2 per cent. For the six-months period it will be noted that three of the banks earned over 5 per cent while three more earned in excess of half of their dividends. Federal Reserve Bank of Boston.. Philadelphia. Cleveland. Atlanta. Chicago Minneapolis. Kansas City. Dallas. Rate of net earnings, per cent on Six months May, 1916. June, 1916. ending June 30, 1916. A BILL To limit the use of the words "Federal" and "reserve." Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That all banks, other than Federal Reserve Banks created and organized under an act of Congress approved on December twenty-third, nineteen hundred and thirteen, and known as the Federal Reserve Act, and all firms, partnerships, or corporations doing the business of bankers, brokers, or savings institutions, and all insurance, indemnity, and trust companies are prohibited from using the word "Federal" or the word "reserve" as a portion of the name or title of such bank, corporation, firm, or partnership, and any violation of this prohibition committed after the first 2.9 day of November, nineteen hundred and sixteen, shall subject the party charged therewith to a penalty of $50 for each day it is permitted or repeated: Provided, however, 1-7 That this prohibition shall not apply to corporations or5.1 ganized prior to December twenty-third, nineteen hun5.3 dred and thirteen, under titles which include the words "Federal" or "reserve" or to firms or partnerships doing business prior to that date under such titles. 4.1 3.9 3.5 2.1 5.3 2.0 .7 Announcement by the Federal Reserve Board. The attention of the Federal Reserve Board has been called to the fact that a circular dated July 22, 1916, and signed by T. R. Dickson, as secretary of a conference of bankers held at St. Louis, contains the following paragraph: The administrative committee has decided to bring suit seeking to set aside the Federal Reserve Board's order of May 1 on the general grounds herein outlined. The committee understands upon good authority that the proposed suit is regarded by the Federal Reserve Board in an entirely friendly light. The order referred to is manifestly Circular No. 1, series of 1916, which relates to the collection and clearance of checks. The Board has not been informed of the character or form of procedure it is proposed to adopt in order to set aside the regulation of May 1. If any of the member banks feel aggrieved at this regulation and desire to resort to the courts there is, of course, no disposition on the part of the Board to interpose any objection to any action they may deem it proper to take. It desires, however, to correct any impression that may have been created that the proposed litigation is a "friendly suit" in the sense that this language is ordinarily used, namely, a suit to determine some question about which the parties involved are mutually in doubt. JULY 28, 1916. Use of Checks in France. The Board recognizes the right of any member bank to resort to the courts to test the constitutionality of any provision of the Federal ReAn interesting communication relating to the serve Act; to procure the court's interpretation more general use of bank checks in France is of any part of the Act, or to question the legal-contained in a report of Commercial Attaché ity of any regulation of the Board. Where C. W. A. Veditz, printed in the Daily Bulsuch a course is necessary to remove any doubt letin of Commerce Reports dated July 10, that may exist the counsel for the Board will cooperate as far as possible in expediting a hearing in order that the banks and the Board may have the benefit of a judicial determination of the question involved. 1916. An extract from the report is given below: The Banque de France is urging a more general use of checks in France, where to-day the checking system so well known in the United States is hardly used at all. Practically all transactions are settled by passing bank notes from hand to hand. This practice has led to the issuance of both small and large denominations of bank notes. For ordinary daily purchases, etc., there are the 5, 10, and 20 franc notes, and for large transactions there are the 1,000-franc notes. The statement contained in the circular above referred to that the proposed suit is regarded by the Federal Reserve Board in an entirely friendly light might lead to the conclusion that the Board is in doubt as to its power to promulgate the regulation in question and, therefore, welcomes litigation designed to settle the question. The fact that such an impression may be created by the circular is evidenced by inquiries received from some of the banks as to the attitude of the Board. This statement is, therefore, misleading. The of the fiduciary circulation of the country by regulation in question was adopted after deliberate consideration and is intended to carry out one of the important purposes of the Act, namely, the substitution of one compact clearing system for the many independent collection organizations heretofore in force. In a pamphlet of explanations just issued by the Banque de France the difficulties of the present French system are well pointed outand of theft, and particularly the surcharging the risks of error in counting, the risks of loss the fact that most everyone carries about in his pockets either a few thousand or a few hundred francs, representing for the whole of the country a sum well up in the billions of francs which is dead capital, unemployed. Then follows a full description of the use of checks as known in America-opening of the account, issuance of check books, correct form of checks, etc. One feature described in the pamphlet is somewhat different from the American method: In order to protect adequately the drawer of a check that is to be sent through the mails to another city, and therefore subject to special risk of loss, the drawer can trace across the face of the check two parallel lines (barres transcersales), by which sign, under the terms of the new law, the check can be made negotiable only at a bank, which bank becomes responsible for any payment to a wrongful holder. In this connection it is interesting to note that the French Minister of Finance announces that hereafter payment made by the French Government will be largely by check, and that arrangements will be introduced whereby private establishments can make payments to the Government by check. Purchase of Brokers' Paper. The subjoined suggestions for the purchase of brokers' paper are drafted by a hard-headed and experienced banker who has submitted them to the Board for its information. These suggestions are not promulgated by the Board as rules, but they are so evidently based upon common sense and experience that they may well be given a wide publicity: Don't be influenced by the "rate." Of two names of equal quality, of course take the one that nets the better rate, but never subordinate "quality" to "rate." Favor generally the concerns dealing in staples (such, for instance, as wholesale groceries, wholesale hardware, and wholesale dry goods) in preference to those dealing in specialties or luxuries. In manufacturing concerns also favor those producing staples as against those producing specialties, the sale of which depends on extensive advertising and solicitation. Avoid dealers in articles which become unseasonable or go out of style and which would be subject to unusual and severe shrinkage in case of trouble. Do not buy names which, on account of their small size, are not justified in selling through brokers. Endeavor to get names whose statements show in excess of 2 for 1 to debt. But take into consideration that in different lines of business this proportion will justifiably vary. Avoid names whose statement shows a large amount of "bills receivable" (unless the nature of the business is such that settlement is generally made by note), this condition indicating that customers are slow in settling. Where statements show "bills receivable," ascertain if the name is in the habit of discounting its "bills receivable." Be careful of the very large concerns in small towns and the small concerns in large cities, as in neither case can you get proper local bank "checking." Be careful of names whose business admits of speculation. In taking paper secured by warehouse receipts, see to it that the collateral is stored in public warehouses. In case statements are very old-10, 11, or 12 months don't buy (except the very highest class risks) unless the broker will furnish figures showing liabilities in detail at a recent date. Watch crop conditions and do not buy names located in or whose customers are made collections slow or the business hazardous. largely in districts where a crop failure has Do not buy more than $5,000 of any name except the very highest class risks. Insist on a 10-day option on every bill. Return paper invariably where anything unfavorable develops in the investigation. Do not renew notes without any additional investigation. Make a complete new investigation once a year. Let each name run off occasionally. Do not take any paper because of the broker's persistence. Devote the proper amount of time to the purchase of the note in the first instance and get all the data you want from the broker at the time of purchase. Also get financial statement at that time so as to avoid delays. Legitimate "receivables" indorsed by a name of good standing should be held in high esteem. The effect of a mortgage on the plant or real estate should be carefully considered, if one exists. Periodically look up trade references. Ascertain if the name gives personal indorsements at its local banks or secures such paper 53038-16-2 |