ACCOMMODATION BETWEEN THE FEDERAL RESERVE BANK OF NEW YORK AND OTHER RESERVE BANKS. Accommodation granted by the Federal Reserve Bank of New York through rediscounts or the purchase of acceptances is shown above the zero line. Accommodation received by New York through rediscounts with other banks or sale of acceptances at its own request is shown below the zero line. Accommodation through the sale or purchase of acceptances alone (at the request of the selling bank) is shown by the broken line. In the early months of 1921 all accommodation received was through the sale of acceptances. Source of information: Annual Report of the Federal Reserve Bank of New York for 1920, weekly press statements, and special statement by the bill department.

And another chart comparing the accommodations granted between the New York reserve bank and other reserve banks, both ways.

RESERVE PERCENTAGES FEDERAL RESERVE BANKS BEFORE INTERBANK ACCOMMODATIONS. Source of information: Daily computation of Federal Reserve Board.

Also a chart which I would like to show to the committee just now, making an analysis of the reserve operations of all the reserve banks by comparison.

Gov. STRONG. Mr. Chairman, I pointed out the fact that as exchange ran against New York we had to offset that in order to keep our reserve, by various transactions. What transpired in the entire system is exhibited by this chart so graphically that I will take the liberty of explaining it. You will notice that the black line is the reserve percentage for 1920 of each of the reserve banks as it would have been had they not discounted any paper with other reserve banks, or had they not discounted any paper for other reserve banks. It is exactly what would have happened to the reserves of the reserve banks had they not had any transactions to correct their reserve percentages.

91341-22-VOL 2-38

Representative TEN EYCK. In other words, it would have been their local situation.

Gov. STRONG. It would have been their local situation without assistance given to or rendered by other Federal reserve banks.

You will observe that the reserve in Boston, from the beginning of 1920-the chart covers only the years 1920 and 1921, divided into quarterly periods pretty constantly rose from about 30 per cent, that is 10 per cent below the legal minimum, up to as high in the spring of 1920 as about 70 per cent.

Now, New England is a manufacturing district, an industrial district principally, and I interpret that chart to mean that in an industrial district this period of expansion and rising prices and of collapse again was dealt with by a more prompt readjustment than was possible in an agricultural section, for instance.

You will notice Boston, Philadelphia, Cleveland, three outstanding districts of that character, had a rising curve of reserve toward the end of 1920, very markedly so. Now, compare that with a district like Dallas, which is the other extreme. In the beginning of the year 1920 Dallas had nearly an 80 per cent reserve, and from that time it made a continuous descent until it got down as low as 9 per cent in the late summer of 1920.

And that characteristic you will find was true of the Kansas City district, the Minneapolis district, the St. Louis district, the Atlanta district.

In Richmond the curve has been almost continuously below the 40 per cent minimum during all of that period.

The great variation in demands upon the reserve banks through the period of 1920 is exhibited there, as you will see, by the black line. The dotted line is the year 1921.

When all of these figures are assembled, when the reserve banks dealing with each other had effected a correction of their reserve position, see what the chart presents an almost continuous line just above 40 per cent during the year 1920.

Representative TEN EYCK. New York pretty near kept the medium all the way through?

GOV. STRONG. Well, as a matter of fact that was just about what happened in New York. The fluctuations in the year 1920 were substantially these, that while we did by sales of acceptances and otherwise cause some $375,000,000 of funds to be transferred to New York from other districts, during that same year we loaned to other districts about $475,000,000. And it was up and down.

The CHAIRMAN. Now, according to those charts, there was evidently one period when three Federal reserve banks were loaning to practically all the rest.

Gov. STRONG. That is true. I think Boston, Cleveland, and Philadelphia during the latter part of that period, not the earlier part, were almost continuous lenders. I believe I have in the course of my remarks some tables to introduce to show the interbank borrowings as far as they concern the Federal reserve bank of New York. (See pp. 588-591.)

Representative SUMNERS. Does not that also show that the deflation in agricultural prices was probably greater than the deflation in manufacturing prices?

GOV. STRONG. The first impression that I get from this chart is that those sections where industry and trade predominate were able to

readjust very much more quickly than those agricultural sections where the turnover is an annual one. The turnover in a butcher store is a week or two weeks, say. In a grocery somewhat longer. And so on. In New England the manufacturer of shoes could shut down and let his people go, and sell out his stock and pay his debts, but the farmer had to go right on making his crop. Consequently the descending line of reserve shows the very great pressure in those districts.

The second thing that that chart indicates to me--and I think this will be disclosed by studies which are now being made-is that the expansion which took place in bank loans and deposits was very much greater in agricultural sections than it was in industrial sections, and especially in the money centers. We are just now engaged in having an analysis made of all the member bank reports for the purpose of comparison, based on the predominating characteristics of each of the counties of the United States, to show the degree of expansion that takes place in the agricultural counties. It will be shown by counties and States. And it is an immense undertaking. When it is completed, I believe that it will be illuminating to the commission as showing just what did happen. (For expansion by counties, see pp. 650-663.)

The CHAIRMAN. Was that expansion due to the greater demand primarily in the agricultural districts which lowered the turnover or the relatively smaller borrowing powers to begin with?

Gov. STRONG. Well, sir, I would express it in this way-that the farmer was engaged in making a high-priced crop, which he had to complete at high wages, high costs, before he could get any of his money back; whereas the merchant or the manufacturer was not making a crop that took a year, he was just taking in and turning out goods, and by readjusting his prices promptly, by pushing his sales, by such policy as Mr. Ford recently stated he had pursued, he was able to readjust. These people were able to meet the sudden change of conditions very much more quickly than the farmer. With the farmer there was no money coming in until that crop was harvested and sold. And then what accentuated the condition was that when they got this high-priced crop they could not sell it at a price which would liquidate their loans.

I have referred at some length, at possibly too great length, to the influence of the New York call-money market and its relation to the attraction of funds to New York. I think it is an influence which is greatly exaggerated under present conditions. I think the reserve system is accomplishing a good deal in convincing bankers that these investments which they make in eligible paper, with their immediate availability at the reserve bank, are desirable, constituting, as they should, the major part of their portfolios.

But there is another very important influence which developed during the war, the possibility of competition by the banks of New York, in the payment of high rates on deposit balances, to retain deposits which they felt were being withdrawn or would be withdrawn by reason of the Government loans, withdrawn to other sections of the country, and due also to a desire to build up deposits, if you please, in order to take care of the enormous withdrawals that they would suffer. This became manifest to the Federal reserve bank. It was a development that occurred not only in New York,

but one which the members of the Reserve Board discovered was observable in other parts of the country.

So early as February of 1918 it became the subject of correspondence between the Federal reserve bank of New York and the Federal Reserve Board. And the subject was discussed also with the authorities of the New York Clearing House Association. There was no rule which governed the amount of interest which could be paid on out-of-town bank balances by banks which were members of the clearing house.

Now in London, whenever the bank rate changes, the committee of the clearing house banks of London meets and fixes the rate which they will allow on what they call bankers' balances, because the change in the bank rate creates a change in conditions which justifies a review of this question of interest which shall be allowed upon bankers' balances; and to make the statement brief, I shall only say that after much discussion, numerous meetings with the clearing house officials, and a visit which Gov. Harding made to New York, when he addressed all of the members of the clearing house on the subject and pointed out the dangers of an outbreak of unrestrained competition for deposits that would be reflected all over the country-the dangerous effect that it might have upon the program of the Treasury for financing the war-the clearing house adopted an amendment to the constitution, which was modified in form some time since it was first adopted. The result of it is to fix the rates, by a definite provision of the constitution, which the New York banks are allowed to pay upon the deposit of out-of-town bank balances. I shall not read those. The amendment to the constitution and the rulings of the clearing house committee on the application of this amendment to the constitution are long. I think they are of sufficient importance, however, if the commission is willing to have them printed in the record, to present to the commission, and I have a copy of the constitution here to submit for that purpose. The effect of the change is to make the maximum rate, under the present provision of the constitution, 24 per cent, which the New York banks allow to their out-of-town correspondent banks, that being a rate which is graduated up from 1 per cent, and which is fixed in definite relation to our 90-day rate for the discount of commercial paper.

(The part of the constitution of the New York Clearing House Association as in force since January 16, 1920, presented by Gov. Strong, is hereto attached, as follows:)

ARTICLE XI.

INTEREST ON DEPOSITS, EXCHANGE CHARGES TO BE PAID BY MEMBERS, ETC. SECTION 1. No member of this association, or bank or trust company or others clear ing through any member, shall agree to pay, or shall pay, directly or indirectly, on any credit balance payable on demand or within 30 days, or certificate of deposit so payable, by its terms, issued to or for the account of any bank (other than a mutual savings banks located in the second Federal reserve district), trust company, or other institution conducting a banking business, or private banker or bankers, located in the United States or Dominion of Canada, interest at a rate in excess of 1 per cent per annum when the then 90-day discount rate for commercial paper at the Federal reserve bank of New York is 2 per cent or less, and an additional one-fourth of 1 per cent for every one-half of 1 per cent that such discount rate of the Federal reserve bank shall exceed 2 per cent, except that the maximum rate paid or agreed to be paid on any such credit balance or certificate of deposit shall not in any case be higher than 2 per