Benjamin Strong Jr. to William G. McAdoo
Title
Benjamin Strong Jr. to William G. McAdoo
Creator
Strong, Benjamin, 1872-1928
Identifier
WWP18467
Date
1914 September 24
Description
Benjamin Strong Jr. sends William G. McAdoo a report on the gold reserves in 1907.
Source
Benjamin Strong Jr. Papers, New York Federal Reserve Bank
Language
English
Text
My dear Mr. Secretary:
The enclosed statement will be illustrative of the criticism which you made to me by telephone yesterday of the attitude of certain banks in regard to their reserves, and will give in condensed form a concrete illustration of the facts upon which your statement of yesterday seems to have been based.
The enclosed figures were compiled in our office last December, in connection with certain information we were asked to prepare bearing on the new Federal Reserve Bank system.We have first figured the exact amount of cash reserves that Central Reserve city, Reserve city, and country banks (by States) were required to keep in their own vaults in order to comply with the reserve law, based upon the amount of deposits reported as of December 3rd., 1907. In the next column we showed the actual amount of cash reserve held by the banks in their own vaults. The results show that, while the banks in the three central reserve cities were $32,397,000. deficient in their reserves, the banks in the reserve cities were over $11,000,000. in excess of their reserves and the country banks held $113,840,000. in excess of legal reserve requirements, being no less than 76% in excess of what the law required them to hold. These country banks could have carried an average excess reserve over their legal requirements of 54%, and the balance divided among the three central reserve cities would have made up the entire deficit of $32,000,000.
This is the primary cause of high money rates in the banking centres. Boston is charging 7-3/10% interest on Clearing House loan certificates; Chicago, I believe, 7%; New York 6%. I doubt if any New York institution is charging more than 6% to any of its regular customers on either call or time loans, notwithdstanding that 6% involves a loss to such of the New York banks charging this rate as are obliged to use Clearing House loan certificates to settle their debit balances.
It is a fact, however, that some of the banks are charging as high as 8% on stock exchange collateral loans. This policy has created an incentive for brokers to strengthen their position by calling upon their customers for cash payments, which could not have been created by any other method. So far as I can discover the policy is not a uniform one, nor do I know of complaint being made by the brokerage houses that the rates charged them are too high. They, of course, are able to recoup themselves by charging a corresponding rate to their customers.
This matter of interest rates is, of course, one of policy which seems to be open to argument on both sides. I feel certain, however, that the New York banks as a rule have not taken unfair advantage of their customers, and that the consensus of opinion among the stock exchange houses, who are the ones that are paying the high rates, is one of grateful appreciation to the banks for their efforts to save them from what might have proved to be a real disaster.
I am prompted to send this letter by the terms of your statement in the morning papers, which appeals to me very strongly.
Yours very truly,
The enclosed statement will be illustrative of the criticism which you made to me by telephone yesterday of the attitude of certain banks in regard to their reserves, and will give in condensed form a concrete illustration of the facts upon which your statement of yesterday seems to have been based.
The enclosed figures were compiled in our office last December, in connection with certain information we were asked to prepare bearing on the new Federal Reserve Bank system.We have first figured the exact amount of cash reserves that Central Reserve city, Reserve city, and country banks (by States) were required to keep in their own vaults in order to comply with the reserve law, based upon the amount of deposits reported as of December 3rd., 1907. In the next column we showed the actual amount of cash reserve held by the banks in their own vaults. The results show that, while the banks in the three central reserve cities were $32,397,000. deficient in their reserves, the banks in the reserve cities were over $11,000,000. in excess of their reserves and the country banks held $113,840,000. in excess of legal reserve requirements, being no less than 76% in excess of what the law required them to hold. These country banks could have carried an average excess reserve over their legal requirements of 54%, and the balance divided among the three central reserve cities would have made up the entire deficit of $32,000,000.
This is the primary cause of high money rates in the banking centres. Boston is charging 7-3/10% interest on Clearing House loan certificates; Chicago, I believe, 7%; New York 6%. I doubt if any New York institution is charging more than 6% to any of its regular customers on either call or time loans, notwithdstanding that 6% involves a loss to such of the New York banks charging this rate as are obliged to use Clearing House loan certificates to settle their debit balances.
It is a fact, however, that some of the banks are charging as high as 8% on stock exchange collateral loans. This policy has created an incentive for brokers to strengthen their position by calling upon their customers for cash payments, which could not have been created by any other method. So far as I can discover the policy is not a uniform one, nor do I know of complaint being made by the brokerage houses that the rates charged them are too high. They, of course, are able to recoup themselves by charging a corresponding rate to their customers.
This matter of interest rates is, of course, one of policy which seems to be open to argument on both sides. I feel certain, however, that the New York banks as a rule have not taken unfair advantage of their customers, and that the consensus of opinion among the stock exchange houses, who are the ones that are paying the high rates, is one of grateful appreciation to the banks for their efforts to save them from what might have proved to be a real disaster.
I am prompted to send this letter by the terms of your statement in the morning papers, which appeals to me very strongly.
Yours very truly,
Original Format
Letter
To
McAdoo, W. G. (William Gibbs), 1863-1941
Files
Collection
Citation
Strong, Benjamin, 1872-1928, “Benjamin Strong Jr. to William G. McAdoo,” 1914 September 24, WWP18467, Benjamin Strong Jr. Papers, Woodrow Wilson Presidential Library & Museum, Staunton, Virginia.