Benjamin Strong Jr. to Carter Glass
Title
Benjamin Strong Jr. to Carter Glass
Creator
Strong, Benjamin, 1872-1928
Identifier
WWP18806
Date
1923 April 9
Description
Benjamin Strong Jr. writes Carter Glass on the subject of state banks joining the Federal Reserve System.
Source
Benjamin Strong Jr. Papers, New York Federal Reserve Bank
Language
English
Text
My dear Senator:
My old trouble has laid me low for a bit; but I am promised a speedy reconditioning, and given the privilege of some moderate work.
This letter, however, will prove to be a poor substitute for a talk which I would much prefer to have had with you regarding the hearings soon to be held, on the subject of State banks joining the Federal Reserve System. Let me, as well as I am able, suggest a few observations which are based upon the experiences of the last eight years.
First. The need for enlarged membership is, I believe, obvious, and I shall not repeat the statement on that subject which I made before the Joint Commission of Agricultural Inquiry, which you have already read.
Second. The reluctance to join the System, which has kept about 8,000 banks from membership, cannot be laid to any one outstanding cause. It arises from a variety of objections; some outweighing others according to the location and circumstances of the particular State bank.
Third. Some of those now connected with the System and some students of its affairs sincerely believe that the small and less responsible State banks should not be encouraged to join; but I do not personally hold this view.
Fourth. The objections offered by State banks, which seem to me of greater influence with them than any others, I would list, in order of relative importance, as follows:
(a) Sincere conviction that it will cause a reduction of profits generally.
(b) Specific loss of interest on reserve balances.
(c) Specific loss of so-called “exchange” on checks paid by mail, due to the par collection service of the System.
(d) Possible further regulation, supervision, examination reports, or interferencse by Federal authorities, in addition to present State superviosion, which they fear would be irksome and expensive.
(e) Uncertainty as to whether the Federal Reserve Bank will afford equal accommodation and as satisfactory service in various matters as old established correspondents have furnished.
(f) Reluctance to submit to the “entrance examination” in cases where slow or doubtful assets might be criticised and application to join be declined.
Other objections I believe to be of minor influence with one exception, the relative importance of which I shall not attempt to fix; but it is considerable. For over a year the bankers of the country have been hearing many groundless, but nevertheless grave charges, some of them indeed ridiculous and fantastic, as to the intelligence, honesty, integrity and good faith of the management of the System and of individuals in authority in the System. These charges have been given wide publicity, in fact have exhibited all the characteristics of organized propaganda. They have done much to create a widespread and dangerous public opinion that the System is exposed to political attack and will in due time be the object of political control.
Now as to these various objections, the views of many State bankers in our district, whose institutions joined and have enjoyed membership since about 1917, confirm our belief that none of the objections above expressed, are valid or would be urged were membership in the System given a fair trial. Without burdening you with details, we do not find that membership causes State banks reduced profits, either generally, or as to interest or exchange, - where earnings are reduced in some directions they are increased in others. There is but slight expense and trouble caused by the reports and supervision required, the services we render, with but few exceptions, are equal to and in many respects far exceed in value what reserve agents were able to extend under the old system of reserves; and of course the objection as to entrance examination needs no comment.
Having in mind the influence with nonmember banks (such as it may be) of recent attacks upon the management of the Federal Reserve System, it has seemed to me that the problem of State bank membership is about as follows:
There is no doubt that larger membership in the System will benefit the country.
There is no doubt that it will give protection to the State banks which they do not now enjoy.
There is no doubt that membership will impose none of the burdens, financial or otherwise, which State banks apprehend.
There is no doubt that membership by the eligible State banks generally would result in a more equitable distribution of credit where most needed and be of especial benefit to rural districts.
Therefore, the problem becomes one of method, of which there seems to be a choice of three.
First. To compel membership, and undergo the test of the Courts, as was done when the National Banking System was established, and State bank currency taxed out of existence. Such a plan which has been advanced in various forms, would, I fear, lead to endless controversy and cause long delay in a solution of the problem.
Second. To make membership more tattractive financially. This is usually proposed in two forms - larger dividends on our stocks and interest on reserve accounts. The arguments against any such proposals I believe are conclusive. To introduce simply an incentive to make profits would be a disaster to the System, but to make profit earning obligatory would literally undermine, if not destroy, the accomplishment of the true purposes of the System. Nor does this take into account the disastrous inflation which such a program would literally impose us.
Third. To educate systematically, all eligible nonmember banks, to the value of membership and appeal both to their best interests and to their public spirit. This seems to me to be the most feasible plan and the one promising most satisfactory results. It is the one pursued in our district with such striking success, as we have the largest membership, both in percentage of members and in percentage of resources, of any district, and practically no complaint about cost or services or supervision.
Finally, there is of course the ever present possibility that this move toward larger membership might become the opportunity for unwise amendments to the Federal Reserve Act, and especially for undoing the par system. As to the latter, I am taking the liberty of enclosing copy of a letter which I recently sent to Mr. John W. Davis, and which was intended to emphasize what I believe is the view we hold in New York on this subject.As nothing can possibly be gained by inviting further controversy about matters touched upon in this letter, I am sending it to you personally, simply to supplement our various conversations of last year.
Hoping that you keep well and with cordial regards, I am,
BS.MM
My old trouble has laid me low for a bit; but I am promised a speedy reconditioning, and given the privilege of some moderate work.
This letter, however, will prove to be a poor substitute for a talk which I would much prefer to have had with you regarding the hearings soon to be held, on the subject of State banks joining the Federal Reserve System. Let me, as well as I am able, suggest a few observations which are based upon the experiences of the last eight years.
First. The need for enlarged membership is, I believe, obvious, and I shall not repeat the statement on that subject which I made before the Joint Commission of Agricultural Inquiry, which you have already read.
Second. The reluctance to join the System, which has kept about 8,000 banks from membership, cannot be laid to any one outstanding cause. It arises from a variety of objections; some outweighing others according to the location and circumstances of the particular State bank.
Third. Some of those now connected with the System and some students of its affairs sincerely believe that the small and less responsible State banks should not be encouraged to join; but I do not personally hold this view.
Fourth. The objections offered by State banks, which seem to me of greater influence with them than any others, I would list, in order of relative importance, as follows:
(a) Sincere conviction that it will cause a reduction of profits generally.
(b) Specific loss of interest on reserve balances.
(c) Specific loss of so-called “exchange” on checks paid by mail, due to the par collection service of the System.
(d) Possible further regulation, supervision, examination reports, or interferencse by Federal authorities, in addition to present State superviosion, which they fear would be irksome and expensive.
(e) Uncertainty as to whether the Federal Reserve Bank will afford equal accommodation and as satisfactory service in various matters as old established correspondents have furnished.
(f) Reluctance to submit to the “entrance examination” in cases where slow or doubtful assets might be criticised and application to join be declined.
Other objections I believe to be of minor influence with one exception, the relative importance of which I shall not attempt to fix; but it is considerable. For over a year the bankers of the country have been hearing many groundless, but nevertheless grave charges, some of them indeed ridiculous and fantastic, as to the intelligence, honesty, integrity and good faith of the management of the System and of individuals in authority in the System. These charges have been given wide publicity, in fact have exhibited all the characteristics of organized propaganda. They have done much to create a widespread and dangerous public opinion that the System is exposed to political attack and will in due time be the object of political control.
Now as to these various objections, the views of many State bankers in our district, whose institutions joined and have enjoyed membership since about 1917, confirm our belief that none of the objections above expressed, are valid or would be urged were membership in the System given a fair trial. Without burdening you with details, we do not find that membership causes State banks reduced profits, either generally, or as to interest or exchange, - where earnings are reduced in some directions they are increased in others. There is but slight expense and trouble caused by the reports and supervision required, the services we render, with but few exceptions, are equal to and in many respects far exceed in value what reserve agents were able to extend under the old system of reserves; and of course the objection as to entrance examination needs no comment.
Having in mind the influence with nonmember banks (such as it may be) of recent attacks upon the management of the Federal Reserve System, it has seemed to me that the problem of State bank membership is about as follows:
There is no doubt that larger membership in the System will benefit the country.
There is no doubt that it will give protection to the State banks which they do not now enjoy.
There is no doubt that membership will impose none of the burdens, financial or otherwise, which State banks apprehend.
There is no doubt that membership by the eligible State banks generally would result in a more equitable distribution of credit where most needed and be of especial benefit to rural districts.
Therefore, the problem becomes one of method, of which there seems to be a choice of three.
First. To compel membership, and undergo the test of the Courts, as was done when the National Banking System was established, and State bank currency taxed out of existence. Such a plan which has been advanced in various forms, would, I fear, lead to endless controversy and cause long delay in a solution of the problem.
Second. To make membership more tattractive financially. This is usually proposed in two forms - larger dividends on our stocks and interest on reserve accounts. The arguments against any such proposals I believe are conclusive. To introduce simply an incentive to make profits would be a disaster to the System, but to make profit earning obligatory would literally undermine, if not destroy, the accomplishment of the true purposes of the System. Nor does this take into account the disastrous inflation which such a program would literally impose us.
Third. To educate systematically, all eligible nonmember banks, to the value of membership and appeal both to their best interests and to their public spirit. This seems to me to be the most feasible plan and the one promising most satisfactory results. It is the one pursued in our district with such striking success, as we have the largest membership, both in percentage of members and in percentage of resources, of any district, and practically no complaint about cost or services or supervision.
Finally, there is of course the ever present possibility that this move toward larger membership might become the opportunity for unwise amendments to the Federal Reserve Act, and especially for undoing the par system. As to the latter, I am taking the liberty of enclosing copy of a letter which I recently sent to Mr. John W. Davis, and which was intended to emphasize what I believe is the view we hold in New York on this subject.As nothing can possibly be gained by inviting further controversy about matters touched upon in this letter, I am sending it to you personally, simply to supplement our various conversations of last year.
Hoping that you keep well and with cordial regards, I am,
BS.MM
Original Format
Letter
To
Glass, Carter, 1858-1946
Files
Collection
Citation
Strong, Benjamin, 1872-1928, “Benjamin Strong Jr. to Carter Glass,” 1923 April 9, WWP18806, Benjamin Strong Jr. Papers, Woodrow Wilson Presidential Library & Museum, Staunton, Virginia.