and to keep away from the mass of details which it is impossible for any board sitting here in Washington to digest.

The Federal reserve banks do come in direct relationship and contact with their member banks. They have an intimate knowledge of the credit policy and of the borrowings of the member banks; they are kept fully informed from day to day of the change of position of the member banks, and through their contact with the Federal Reserve Board, as the coordinating and supervising body, they keep informed as to the board's general policy, and they transmit to the board such specific and general information as may be of assistance in determining these policies. But the primary banking business of this country is transacted by the member and the nonmember banks. Those are the banks which come in contact with the public, which are the custodians of the funds of the public, put with them on deposit, and they are the media through which commercial loans are made.

We have heard a great deal about the necessity of discriminating between an essential and a less essential and a nonessential loan. The discount operations of the Federal reserve banks and their powers to make investments are all clearly defined in sections 13 and 14 of the Federal reserve act. Those sections are permissive and not mandatory. A Federal reserve bank is not required to make any particular loan or any particular investment. The Federal Reserve Board may define eligible paper, but all rulings and regulations of the board must be in strict conformity with the terms of the Federal reserve act. The Federal Reserve Board has no legislative powers whatever. It can merely interpret by regulation or rule the enactment of Congress.

Now, without discussing any power that the Federal Reserve Board may have to define essential and nonessential loans, I wish to point out that section 13 provides, in a general way, that any paper maturing within the prescribed time, the proceeds of which have been used or are to be used for commercial, industrial, or agricultural purposes, is eligible. There is no specific condition imposed as to whether or not, in the judgment of any man or body of men, any particular loan is an essential loan for the well-being of the community or the country at large.

The board has reached the conclusion that there is no occasion now, whatever may be necessary later on, for it to attempt by any general rule of a country-wide application to define essential and nonessential paper. You remember the difficulties that were experienced in making such a definition during the war, when we had the War Trade Board, the War Industries Board, the Capital Issues Committee, and other temporary boards here passing upon all these matters. At that time the problem was simpler than it would be now, because there was a general underlying principle that anything essential must be something that was necessary or contributory to the conduct of the war. Now we have no war. The temporary boards have all dissolved and gone. The Federal Reserve Board is not a temporary board. It is a permanent organization and it must conduct its business in strict accordance with the terms of the Federal reserve act. Therefore, I think we are all agreed that there is no occasion at the present time, if ever, for the Federal Reserve Board to attempt to define, by regulation of country-wide applica

tion, what is an essential and what is a nonessential loan. A Federal reserve bank is in much better position to undertake this than is the Federal Reserve Board.

But even here there are difficulties in the way. Some of the Federal reserve districts cover very large areas. A rule adopted by one Federal reserve bank may not be susceptible of adaptation in another Federal reserve district, because what seems to be essential or necessary in one place may not be in another. While there is no particular objection to a Federal reserve bank, in the wisdom of its directors, undertaking to make a general discrimination between loans plainly unnecessary, plainly nonessential, and those which are less essential or more essential, it seems to the board that that whole question of discrimination might very properly be left for solution at the source, as a matter between the individual banker and his own customer, because the individual banker, particularly at times like the present, has a very close, confidential relationship with a borrowing customer. They can talk matters over with the utmost frankness. The individual banker is in position to give advice. He can accustom his customer to come to him, in advance of seeking a loan, or of making any commitment involved, to discuss the situation with him before the commitment is made. The individual banker in many cases-of course this may not be possible in the larger cities-but the great mass of banks all over the country that do mostly a local business can very largely anticipate the legitimate and necessary credit demands which are going to be made upon them; they can estimate the fluctuation in the volume of their deposits, and they are better qualified than anyone else to give advice to a borrowing customer. They can often restrict the amount of a loan before it is made and can persuade a customer in very many cases that he really does not need the money after all.

Then, again, the individual banker can determine, not so much the essential nature of a loan from an elementary standpoint, as to whether the loan is going to produce something that is absolutely needed, but he can decide better than anyone else whether the loan is essential or necessary for the public good in his particular locality, not only as a means of producing something that ought to be produced, and which is needed for consumption, but as a means of preserving the solvency of his community. We all know that if the bankers in any community, large or small, were to clasp the screws on tight, they could bring disaster to the community, which might spread to other communities.

Of course, there may be cases, and there have been cases, doubtless, probably in all of the districts, where some of the banks have over done the matter of extending credits, but there is one very encouraging feature of the present situation, and that is such cases are comparatively few. The majority of all the member banks in each of the Federal reserve districts are not borrowers from the Federal reserve banks, and the number of member banks which are borrowing from the Federal reserve banks in an amount exceeding their own capital stock is not large in proportion to the total membership. Every banker knows, or he ought to know, what reasonable line of credit he can get from his Federal reserve bank, and I want to call your atten

tion to the power that the directors of the Federal reserve banks have to limit their loans.

I referred a moment ago to the fact that there is no mandatory provision in the Federal reserve act requiring that any particular loan be made. The nearest approach to compulsion in the matter of loans that you will find anywhere in the act is that provision which permits, and upon the affirmative vote of five members of the Federal Reserve Board, requires a Federal reserve bank to rediscount for another Federal reserve bank. With this exception there is no other mandatory provision relating to loans in the Federal reserve act. While sections 13 and 14 are permissive, there is, however, a strict injunction laid upon the directors of the Federal reserve banks in that part of section 4 which requires the directors of a Federal reserve bank to administer its affairs without favor or discrimination for or against any member bank, and in making loans, discounts, and advancements, which in their opinion may be safely and reasonably made, to pay due regard to the wants and requirements of other member banks. Thus the directors of Federal reserve banks are clearly within their rights when they say to any member bank, "You have gone far enough; we are familiar with your condition; you have got more than you share, and we want you to reduce; we can not let you have any more." They must exercise their discretion as to the proper course to pursue, but they have the power, and there are many cases where the rule ought to be laid down and a member bank ought to be made to understand that it can not use the resources of the Federal reserve banks for its own private advantage for profit; that it must not abuse the rediscount privilege of the Federal reserve system.

When a banker understands, just as he did in the old days before we had the Federal reserve banks, that there is a limit to his borrowing-and you will remember in the old days no national bank was permitted to become indebted for borrowed money in an amount exceeding its capital stock-when a banker realizes that if he wants to expand his business he must do it more and more out of his own resources and not lean so heavily upon the Federal reserve bank, when he understands that limitations and penalties may be imposed upon his borrowings, then if I know anything about the psychology of banking I know that the banker may be depended upon to use a wiser discretion in the matter of granting credit.

The recent amendment to paragraph (d), section 14, which empowers the Federal reserve bank, for itself and without regard to any other Federal reserve bank, to establish a normal or basic line of credit upon some principle applicable to all member banks in its district alike, and to impose a graduated or penalty rate upon excessive borrowings, does not repeal, amend, or modify in any particular the provisions of section 4 or section 13, and a Federal reserve bank is still, even though it adopts the progressive or penalty rate, entirely within its rights in declining to take undesirable paper at any rate. The progressive or penalty rate I will not discuss at this time, because we will have an open discussion a little later on and we will take it up then.

It may be argued that the volume of credit must necessarily be greater now than was the case a few years ago on account of the higher prices and higher wages which are prevailing, so that any

given transaction requires a greater number of dollars to finance it than was formerly the case. That is true, but I believe that I can present figures to you that will convince you that if there could be a freer flow of goods and credit-in other words, a greater velocity in the turnover of credit-the resources of the banks of this country are abundantly able to finance all essential enterprises and a good many of the nonessential as well. The fundamental trouble with the situation to-day is that there is a large volume of essential goods and commodities held back from the markets and kept out of the channels of distribution, either for speculative purposes, being held with the idea of getting higher prices later on, or where they are held back of necessity on account of lack of facilities to transport them to market. In the latter case it is a wise and proper policy to ease the situation along, to assist the people who are thus compelled to hold and not throw any obstacles in their way, provided there is a genuine and sincere disposition to put the stuff in process of distribution as soon as transportation can be had. But in the case of the hoarder, who for selfish and profiteering purposes wishes to hold back from the mouths of hungry people essential articles of food and clothing, every good banker should exert every influence within his power to force people of that kind to turn loose their hoards. Here is an opportunity for wise discrimination, and this discrimination can be exercised more intelligently and effectively by the individual banker himself than by any governmental board.

We find instances also which always occur when there is a constantly advancing tendency in the market, where merchants have stocked up. There are many cases where mercantile loans are too large and ought to be reduced. There are merchants everywhere who ought to be reasoned with and who ought to be encouraged to push their stocks out and get rid of the high-priced stuff, because some of these days, it may be sooner rather than later, the reign of reason is going to be restored and the man in the street is no longer going to want to pay $25 to $30 for a silk shirt or $20 for a pair of shoes or $1 for 4 pounds of sugar, and lower prices will be demanded, and trade will fall off unless lower prices prevail. It seems to me, from the standpoint of good merchandizing and good banking, that the merchants should be encouraged to reduce their stocks and not tempt the passer-by by extravagant display in the windows at high prices, which under the abnormal state of mind which has prevailed may themselves help to sell the goods, because you all know cases where a customer would pass by with contempt a two or three dollar article and turn his attention to something at $25, although it may not be one whit better suited to his purposes.

In order to bring about a correct tendency and to lead to a permanent cure of our present situation, a campaign of education must be begun and continued. Here, again, there is no agency so well qualified as the banker, who receives on deposit the money of the public and makes loans to the public, to give advice, so thus there should be a concerted effort all over this country on the part of the bankers to arouse in the public a spirit of common sense. Let us take our heads out of the clouds and get down to business, and let us save, produce, and let each do his part in a constructive and productive way for the community, to add to the volume of goods and facilitate distribution, thereby doing something to cure the dis

crepancy, the bad relationship which has existed between the volume of goods and the volume of credit and money.

In any circumstances, you all know that the Federal reserve banks and the Federal Reserve Board will do their part to cooperate with the sound, sensible, and reasonable member banks. În order that we may accomplish any real results and effect any permanent good, there must be cooperation on the part of the public with the banks, and on their part with the Federal reserve banks and the Federal Reserve Board. We must all pull together for sound, economic, and financial principles. We should do all in our power, and we can do a great deal to check the false ideas which have gained circulation and inculcate in the minds of the people a sense of the importance of steady, everyday production and distribution, and to encourage the avoidance of waste and the elimination of extravagance.

I have here some charts, which will be distributed among you, which show the movement of principal asset and liability items of each Federal reserve bank and of the system, of the 12 banks combined. These figures are taken from July 3, 1919, to April 30, 1920. They show the gold reserves, the total cash reserves, the member banks' reserve deposits, the Federal reserve notes in circulation, the acceptances bought, paper secured by Government war obligations, divided into the headings, secured by Liberty bonds, secured by Victory notes, and secured by Treasury certificates, and the total discounted paper on hand. Then there is another table which shows the volume of bankers' acceptances purchased from other Federal reserve banks and the volume of bankers' acceptances sold to other Federal reserve banks, figures at the close of business on each Friday from July 3, 1919, to April 30, 1920.

Now, gentlemen, I declare the meeting open for general discussion. Mr. HEPBURN. I would like to inquire if any arrangement has been made to place your opening remarks before the public, Governor Harding, because, if not, I think that should be done and that they should be given the widest distribution.

Governor HARDING. I have a synopsis prepared which was given to the press on yesterday for release to-morrow morning. It is rather more abridged than the statement I made this morning, but it is the substance of it.

Now, gentlemen, I want to introduce our member designate, the Hon. Edmund Platt, who is at present chairman of the Banking and Currency Committee of the House of Representatives.

The Federal Reserve Board is greatly indebted to Mr. Platt for cooperation during all these years, especially more recently since he has been chairman of the committee, and for the assistance he has given the board in all matters of legislation. It is with a great deal of pleasure that the members of the board are going to welcome him as a member, and I want you to know him.

I have the pleasure of introducing to you Mr. Platt. [Applause.] Mr. PLATT. Mr. Chairman and gentlemen, it is a great pleasure for me to be here. I feel a little bit of trepidation before an audience made up exclusively of bankers, because I think I may be subject to a little criticism for not having had a great deal of banking experience. In fact, I think my actual banking experience is confined chiefly to acting as teller at a few bank elections. But I have