CHAPTER XVII

DISCOUNT RATES OF THE FEDERAL RESERVE BANKS FROM THE DATE OF ORGANIZATION TO THE END OF THE YEAR 1919. HIGH AND LOW RATES ON 61 TO 90 DAYS PAPER, AND AGRICULTURAL AND LIVE STOCK PAPER MATURING AFTER 90 DAYS, COMPARED

Upon the opening of the Federal Reserve Banks, November 16, 1914, problems of a discount policy, and discount rates for the several banks at once arose. What should the discount rate or rates be, not only at the several banks, but on the several classes of paper? What effect should the length of maturity, character of the security, and liquidity of the paper offered for discount at the Federal Reserve Banks have upon the rates? Should there be uniform rates for all districts, or should the rates for the several districts differ as circumstances might dictate?

There was no standard or former experience by which the Federal Reserve Board or the banks could fix the proper rates at the opening of the system. However, it was felt that the rates should be started too high, rather than too low; because it would be less difficult for a new system to lower the rates than to raise them; consequently, by examining the discount rates at the opening of the banks, they are found to be the highest on record, up to the end of the year 1919. The first year the high rate was 6 per cent in all the banks, except Atlanta, Minneapolis, Kansas City, Dallas, and San Francisco, where the high rate was 612 per cent. From this high level, the rates declined until the highest of all banks, except San Francisco, were between 4 and 5 per cent, in 1916. San Francisco's high rate was 6. per cent for agricultural and live stock paper maturing after 90 days, and 42 per cent for all other paper.

During 1915, the Federal Reserve Board endeavored to "develop a consistent discount policy, graduating its rates according to the maturity and the character of the paper discounted or

purchased in the open market.” 1 During the year, the rates were rapidly reduced, and successful steps were taken toward uniform rates for the whole country-that is, a consistent relation one to another, of the rates in the several districts. To maintain the same rates in all districts would be impracticable. The eastern districts have larger savings than the western and southern districts, and, consequently, a larger demand for shortterm paper at lower rates; also, loans to a clothing merchant in Boston or live stock farmer in Illinois are less speculative than loans to men in similar businesses in the sparsely settled districts of North Dakota, Montana, or Idaho, where the climatic and business conditions are very uncertain.

At the close of the year 1915, the rates for paper with 61 to 90 days maturity were 4 and 42 per cent and agricultural and live stock paper maturing after 90 days, 42 to 6 per cent. However, in part, the lowering of rates was due to the inflow of gold from foreign countries, as a result of the war, which had brought about the heavy demand for American products and materials, and, consequently, a large balance of credit in favor of the United States.

To follow the policy of the Federal Reserve Board and the several banks in regard to discount rates would be very interesting, but the problem under consideration is that of the rates for agricultural and live stock paper maturing after 90 days, compared with paper of 61 to 90 days' maturity, and an analysis of the other problems must necessarily be eliminated from this study.

Boston

The discount rates for agricultural and live stock paper maturing after 90 days declined from the high level of 6 to 5 per cent in 1915, and remained at this figure throughout the five years under consideration.

The rate for paper with a 61 to 90 days' maturity declined from a high rate of 6 to 4 per cent in 1915, and remained at 4 per cent until 1917, when the high increased to 5, and the low remained 4. In 1918, the high rate was 5 and the low 434, but in 1919 the high declined to 434 and the low remained 434.

1 Annual Report of the Federal Reserve Board, 1915, p. 5.

The straight rates on the agricultural and live stock paper, after the decline from the high of 1915, are accounted for by the fact that this class of paper is a negligible factor in the rediscounts of the Boston bank. The higher rates paid on this class of paper, in general, were due to the longer term, for which an additional charge would ordinarily be expected in commercial banking.

The changing rates of paper maturing between 61 and 90 days were due to the fluctuating supply of this class of paper offered for rediscount. The rates for all classes of paper would have increased more than they did, had it not been for the shipments of gold from foreign countries to the United States, in payment of their balances for manufactured goods and war materials.

New York

The rates of the New York Federal Reserve Bank for agricultural and live stock paper took precisely the same trend during the period under discussion as those of the Boston bank, and are accounted for by the same economic reason. The New York rates for paper with 61 to 90 days' maturity, however, differed from the Boston rates in not reaching a high rate above 434 and a low of 42 per cent in 1918, being in each case 14 per cent below the Boston rate.

The low rate on commercial paper maturing within 90 days was influenced by the rate at which the Government was financing. The New York bank adopted the policy that "in view of the Government's policy of financing at low rates of interest, the Federal Reserve Bank should maintain steady and correspondingly low discount rates, and endeavor in individual cases to check any tendency toward taking advantage of the low rates for the mere purpose of profit making." 2

In proportion to the aggregate of rediscounts, agricultural and live stock paper maturing after 90 days is an item of minor importance in the New York bank; however, the general higher rate charged is justified by the length of maturity.

2 Annual Report of the Federal Reserve Board, 1918, p. 318.

Philadelphia

The rate on agricultural and live stock paper maturing after 90 days at the Philadelphia bank declined from a high rate of 6 to a low of 42 per cent in 1915, and remained at a low level throughout 1916. In 1917, the rate showed a high of 5, and a low of 412 per cent, and stood at 5 per cent for both high and low throughout the two following years.

The rate for paper maturing between 61 and 90 days declined from the high rate of 6 to 4 per cent in 1915, and stood at 4 in 1916, but reached a high of 42 in 1917 and 434 the two following years. The low in 1917 remained at 4 per cent, but increased to 42 in 1918 and 434 in 1919.

The increase in the rate for agricultural and live stock paper to the high rate of 5 per cent in 1917 is difficult to account for, because the amount of this class of paper rediscounted was $30,900, against $43,000, the previous year. However, as the rates for 90 days' maturity also increase it may be accounted for by the increase in the total volume of paper rediscounted, and the resulting increase in the rates for all classes of paper. The two following years, the rate on farmers' paper maturing after 90 days remained steady at 5 per cent, while the rate for paper maturing under 90 days showed a gradual increase. The longer term granted on agricultural and live stock paper accounts for this higher rate.

Cleveland

The discount rate of the Cleveland bank declined from the high of 6 to the low of 5 per cent in 1915, and remained steady at 5 per cent until 1918, when the high increased to 514 and at which rate both high and low remained during 1919.

The rate for paper with 61 to 90 days' maturity declined from the high rate of 6 to a low of 42 per cent in 1915, and remained at the low rate until 1918, when the high increased 1/4 per cent, at which rate both high and low stood in 1919.

The general higher rates of agricultural and live stock paper were due to the longer term required. The increase in the rate in 1918 was perhaps due to the general increase in the volume of all classes of paper rediscounted with the Reserve Bank, and

particularly that of farmers maturing after 90 days, the volume of which was $1,078,100, against $67,000 the previous year. The rates for 61 to 90 day paper increased at the same time, and for the same economic reasons.

The higher rates prevailing in 1919 were due to the continued increase in the total volume of paper offered for discount. However, the volume of agricultural and live stock paper maturing after 90 days decreased to $344,400 in 1919; but the rates remained steady at 514 per cent, due to the seasonal and less flexible character of this class of paper.

Richmond

The discount rates of the Richmond bank for agricultural and live stock paper declined from the high rate of 6 to a low of 5 per cent in 1915. In 1916, the high was 5, and the low 42 per cent. In 1917, both high and low were 412 per cent; but in 1918, the high increased 1/2 per cent, and both high and low remained at 5 per cent during 1919.

The rates for paper maturing between 61 and 90 days declined from 6 to 4 per cent in 1915, and both rates stood at 4 per cent in 1916. The high increased 1/2 per cent in 1917, and in 1918; but declined 14 per cent in 1919. The low was 4 per cent in 1917, but increased 1/2 per cent in 1918 and 14 per cent in 1919.

The declines in the rates for agricultural and live stock paper in 1916 and 1917 were due to the rates starting at entirely too high a level, and the encouragement of farm production in 1917 sought by the liberal policy dictated by the Federal Reserve Board, and acted upon by the Federal Reserve Banks. However, it is observed that the high for 61 to 90 days' maturity increased 12 per cent over the previous year. This was due to the large volume of this class of paper offered for rediscount. The rates for farmers' long paper would have increased had they not had a preferential rate in the agricultural districts. With the exception of the low rate of the agricultural paper, both classes of paper increased 1/2 per cent in 1918. However, the rates for both classes of paper were the same. The commercial paper rates increased, due to the increase in volume, and the farmers' paper did not, perhaps because of its preferential character; in spite