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act become more and more extended and felt throughout the country, the value of this useful piece of legislation will be more and more realized and more and more appreciated. Unfortunately the people at large are not yet familiar with the act, and every effort should be made to diffuse the widest possible amount of knowledge about it. In every respect the economic and financial condition of the country is extraordinarily sound. It is greater than that of any other nation, and if we use our resources and our opportunities intelligently and wisely, we shall establish the prosperity of this nation upon an impregnable foundation for many years to come.

COTTON AND GOVERNMENT DEPOSITS.

The announcement in August last that the British Government and its allies had placed cotton on the contraband list gave ground for the belief that the cotton situation in the South would again become demoralized as it did in 1914, with a repetition of the grave losses sustained by the people of the cotton States through a further narrowing of the markets and a restriction of the export movement of cotton. Had this resulted, serious hardships and losses would have been inflicted upon the southern cotton grower.

In order to meet the situation it was imperative that the people of the cotton-growing States should have the immediate assurance that sufficient funds or credits would be available to enable them not only to harvest their crops but to carry them at low cost for a reasonable length of time, so that they could be marketed in a gradual and orderly manner (thus giving the laws of supply and demand an opportunity to operate normally) and not be forced to dump their product all at once upon a demoralized and declining market, and sacrifice the hard-earned results of their industry and toil.

A critical situation was presented-it could be met only by prompt and decisive action. What the people of the cotton States needed more than any other one thing at that particular moment was the assurance that every proper power of the Government would be exerted, as it was in 1914, for their protection and assistance. No other kind of assurance would have satisfied. The support of the Government alone would give confidence. Following out the policy established by this department in the fall of 1913 and 1914 of making Government deposits in banks in the great crop-producing States of the West, Northwest, and South, for the purpose of facilitating the movement and marketing of the crops, I announced August 23, 1915, from North Haven, Me., where I was at the moment, immediately following the contraband declaration of the allied Governments to which I have referred, that I would, if necessary, deposit $30,000,000 in gold in the Federal reserve banks

at Atlanta, Dallas, and Richmond in order that these banks might have increased resources to rediscount loans made by national banks or member banks on cotton secured by warehouse receipts. I quote from said statement:

The Secretary said that in the exercise of the discretion given to him by law the Government will, for the time being, charge no interest on these deposits in Federal reserve banks; that such action is justified by the unusual situation respecting cotton caused by the European war; that he considers it his duty to use every available means in his power to help the cotton producer of the South in the circumstances; that it is a matter of economic importance to the entire Nation that those who have produced the cotton crop shall have a fair opportunity to dispose of it gradually and in an orderly manner, so they may not be forced, through inability to market their cotton gradually, to sell it at sacrifice prices.

Secretary McAdoo said that one of his chief objects was to create a basis for such enlarged credit in the South that the banks will have ample resources to extend to producers such accommodations that they will be able to carry cotton in warehouses for a reasonable length of time until it can be marketed advantageously. In order to accomplish this, he said that the national and State banks which are members of the Federal reserve system should make loans on warehouse receipts for insured cotton at low rates of interest; that the banks can well afford to carry cotton for producers at 6 per cent, especially if they are able to rediscount cotton paper at the Federal reserve banks at a much lower rate than 6 per cent; that the credit resources of the banks of the country are greater than ever before in our history; and that there is no reason why the banks should not, in cooperation with the merchants of the South, help the cotton producers with loans at low rates in the present peculiar situation.

The Secretary said that the Federal Reserve Board had a right to determine the rate of interest which the Federal reserve banks can charge member banks on notes or loans secured by insured and warehoused cotton rediscounted with Federal reserve banks. He has been unable to consult his colleagues of the Federal Reserve Board on account of his absence from Washington, but feels confident of their cooperation in every reasonable way.

Secretary McAdoo said that if it should appear, however, that the object in view can be accomplished with greater benefit to the cotton producers, the merchants, and the banks of the South by depositing Government funds in the national banks direct instead of in the Federal reserve banks he would take that course and make deposits in such national banks as would give him the assurance that the money so deposited or the credit based thereon would be loaned on cotton insured or warehoused and at a rate of interest not to exceed 6 per cent.

The Secretary said he believed that there was no occasion for alarm about the future of cotton and that if the bankers and merchants would cooperate with each other and with the cotton producers of the South in a spirit of patriotism and mutual regard for each other's welfare the situation could be handled with happy results to all concerned. He expressed the earnest hope that this would be done.

I am led to believe that the Government's action had a happy effect upon the situation; that it contributed to the immediate restoration of confidence, prevented demoralization, and was a potential

factor in the steady rise in the value of cotton from between 8 and 9 cents a pound, at which it was then selling, to between 11 and 12 cents a pound, at which it is now selling.

There have at all times been ample resources in the several Federal reserve banks for loans through member banks to producers throughout the country, which, under the terms of the act, can be readily obtained by member banks from any Federal reserve bank by the use of the rediscount process; but inasmuch as the Federal Reserve Board established some time ago a rate of discount between the Federal reserve banks, ranging from 31 per cent to 4 per cent, according to maturities, it was, to my mind, essential if the situation in the South was to be relieved to put the reserve banks in that section in position to extend credits or loans to member banks on a low enough interest basis to enable the member banks in turn to extend loans to borrowers or producers, secured by cotton or other staple commodities, at rates of interest not exceeding 6 per cent.

The resources of the southern Federal reserve banks were not sufficient to enable them to extend accommodations on a large scale to member banks without, in turn, borrowing from or discounting their paper with other Federal reserve banks which had a surplus of available resources.

Under the discount rates, namely, 3 per cent to 4 per cent, fixed by the Federal Reserve Board for transactions between Federal reserve banks, the southern Federal reserve banks would have been obliged to borrow from other Federal reserve banks at from 33 per cent to 4 per cent, and the southern Federal reserve banks would naturally have charged the member banks a higher rate of interest, say from 41 per cent to 5 per cent at least, for compensation and expenses, which would have made the rate to member banks so high that they in turn would have been obliged to exact from borrowers a rate considerably in excess of 6 per cent to compensate them for expenses and the risks assumed.

It was hoped that by the deposit of Government funds in the southern Federal reserve banks without interest, the resources of those banks would be enlarged to such an extent as to enable them to extend a large amount of relief at such a rate of interest as to provide the ultimate borrower with accommodations at rates of interest not exceeding 6 per cent.

The deposit of Government money with Federal reserve banks without interest was justified for the reason that the Federal Government is entitled to the surplus earnings of the Federal reserve banks after they have paid their expenses, dividends of 6 per cent on their stock, and built up a surplus fund of 20 per cent. In the case of member banks the Government has no such interest,

and therefore for deposits of Government funds in national banks the department has maintained the policy of charging a uniform rate of interest of 2 per cent per annum.

Ten days after my announcement that I would deposit Government funds in the South, the Federal Reserve Board contributed greatly to the relief of the cotton situation, and the agricultural interests of the country generally, by the adoption and promulgation on September 3, 1915, of regulations concerning commodity paper. Under these regulations all national banks and State banks which are members of the Federal reserve system may lend money to farmers or others on notes secured by nonperishable staple agricultural products properly warehoused and insured, and if the member banks charge the farmer or borrower on such "commodity paper" a rate of interest, including commissions, not exceeding 6 per cent per annum, they may rediscount such notes with the Federal reserve bank of their district at an interest rate of 3 per cent per annum. This gives the member bank an opportunity to make loans on commodity paper at an interest rate not exceeding 6 per cent per annum and to rediscount or sell the same loan, if desired, to the Federal reserve bank in their respective districts at 3 per cent interest per annum, thus giving the borrower accommodations at a low rate of interest, the member bank a liberal margin of profit on such loans, and the Federal reserve bank a reasonable compensation for the use of the money.

If the member banks charge the borrower on commodity loans a nigher rate of interest than 6 per cent per annum, including commissions, then such loans can not be rediscounted by the member bank with the Federal reserve bank at the low rate of 3 per cent per annum.

The beneficial purpose of these regulations is to put the member banks in position to extend accommodations to borrowers on nonperishable staple commodities, at the time when they are most needed, at 6 per cent interest or less, and to obtain from the Federal reserve banks, if necessary, the resources for such loans at the low rate of per cent per annum.

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These regulations do not apply to cotton alone, but cover as well all nonperishable staple commodities in all parts of the country, and like credit facilities are available to producers in all parts of the country.

I am happy to say that it has not been necessary up to the present time to deposit more than $5,000,000 in gold in each of the Federal reserve banks at Richmond, Atlanta, and Dallas, or a total of $15,000,000. As the deposits were chiefly made through the new gold settlement fund established by the Federal Reserve Board, but little

shipment of currency was necessary and the transaction was effected practically without cost to the Government-by bookkeeping transfers for the most part.

The policy thus adopted was of direct and marked benefit to the southern producer. Fear that cotton could not be financed on reasonable terms and for a reasonable length of time almost immediately disappeared, and I am led to believe, from the reports that have come to me from various quarters in the South, that these deposits of public funds, coupled with the adoption of the commodity paper regulations and the establishment of a 3 per cent discount rate for such paper by the Federal Reserve Board, relieved the cotton situation. As in the case of the cotton-loan fund of 1914, these beneficial results were obtained without the necessity of very extended loan operations. The combined commodity loans by reserve banks in the South up to the first week in November amounted to $3,548,293, practically all of this being concentrated in the banks of Richmond and Atlanta. The reserve banks were, however, enabled to advance money on cotton with much greater freedom and assurance than could have been possible had they not known that they could rely upon the Government for reasonable support in the event they reached the limit of their loanable funds, while the deposits placed with them made it practicable to ask and to secure the cooperation of the member banks in extending accommodations to borrowers on commodity paper at a rate of interest, including all commissions, not exceeding 6 per cent.

The satisfactory price of cotton, which was speedily established after the announcement that Government deposits would be placed in the southern reserve banks and the adoption of the commodity-paper regulations by the Federal Reserve Board, has caused the staple to move steadily to market and has saved the member banks and the reserve institutions from any strain on that score. In fact, the great improvement in the price of cotton of itself relieved the producers of the necessity of borrowing on cotton, because they have been able to dispose of their product at remunerative prices, and thus the Federal reserve banks and the member banks of the South were relieved from any great pressure for loans to carry the crop.

In this, as in many other respects, the benefits of the Federal reserve system have already been felt throughout the country, notwithstanding the fact that the system has been in existence but little more than one year.

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