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The Commoner
VOL. 15, NO.
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How the Federal Reserve Law Has
Benefited the Farmers
; UK special Washington dlapatch to tho New
York World, dated Sept. 25, says: W. P. G. Hard
ing; southern member of tho federal reserve
Ijoard, says that the banking legislation enacted
by tho democratic congress is proving a great
blessing to tho farmers of the country.
, "There are two distinct sections in the bank
ing, field commercial banking and investment
banking," said Mr. Harding. "An investment
banker, as a rule, operates the funds belonging
to himself and his associates, or to those who
have placed funds with him for tho specific pur
pose of investment. A commercial banker, on
tho other hand, recoives deposits from all classes
of people and holds them under agreement to
repay them on demand, or upon comparatively
short notice. It is necessary, therefore, that his
investments should be of such a character as to
enable them to be readily liquidated, and the
bulk of his loans should have only a short time
to run before maturity.
"The member banks of tho federal reserve
system aro commercial banks, and their reserves
are carried on deposit with the federal reserve
banks. Tho wisdom of congress, therefore, in
limiting the investments of these federal reserve
banks which carry reserves of commercial banks
to short time paper of a self-liquidating charac
ter, is beyond dispute, and it is clearly the duty
of tho federal reserve board and of the directors
of the federal reserve banks to throw every pos
sible safeguard around the operation of the fed
oral reserve banks.
WHAT IT HAS DONE
"While the federal reserve act has not created
a rural credit system, it has provided, as far as
is consistent with safety under a system which
carries tho reserve of commercial banks, for the
requirements of those engaged in agricultural
pursuits. For Instance, authority is given for
the discount of notes, drafts and bills of exchange
wising out of actual commercial transactions,
which are defined as notes, drafts and bills of
exchange issued or drawn for agricultural, in
dustrial or commercial purposes. It is elearly
stated that nothing in the act shall be construed
as prohibiting notes, drafts and bills of exchange
secured by staple agricultural products or other
goods, wares or merchandise from being eligible
for rediscount; but ho rediscount of notes,
drafts or bills covering merely investments or is
suod or drawn for the purpose of carrying on
trade in stocks, bonds or other investment secur
ities is forbidden, except bonds or notes of the
government. S '
"Whilo the notes and bills admitted to dis
count under the terms of section 13 must have a
maturity at the time of discount of not more
than ninety days, it is provided that notes, drafts
and bills drawn or issued for agricultural pur
poses or based on live stock, and having a matur
ity not exceeding six months, may be discounted
in an amount to be limited to such a percentage
of tho capital of tho federal' reserve bank as may
be fixed by tho federal reserve board, and tho
board has permitted the federal reservo banks
in agricultural sections to rediscount paper of
this kind to the extent of their capital stock,
which appears to be the limit permitted under
tho act.
INTEREST RATES STABILIZED
r
'The three great agricultural staples aro corn.
cotton and wheat. In some states tobacco is also
an Important product. Tho producers of these
commodities are vitally concerned in their order
ly and effective marketing. Heretofore we have
fceen accustomed to have a stringent money0
market with high interest rates in the fall of
tho year, when these crops are coming to market,
and the actual producer has frequently been
obliged to submit to forced sales at prices below
tho average In order to satisfy his creditors.
Under the federal reservo system thero are now
twelve independent money centres. Tho interest
rates have not only been stabilized, but they aro
approximately the same at all of these money
centres.
"The banks in agricultural sections, particu
larly those In' tho south, are usually compelled to
rediscount heavily at this seaso- of the year in
order to assist in the .movement of crops. .Here
tofore, owng .to. rates of interest that. the bpks
kavo had torpay on rediscounts, as well'as to the
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limitations upon the supply of funds available
for such purposes, banks have been unable to
any great extent to assist farmers in the orderly
marketing of their products, so that producers
having need for funds have been in tho habit of
selling their cotton, wheat or tobacco when ready
for market, regardless of price. The result has
been that the weight of these products upon the
market has been such as to depress the price at
tho very timo when' the most needy producers
were obliged to sell, so that without reference
to the real demand and actual supply, the mar
ket has been such a one-sided affair that sellers
had but little influence in fixing prices.
HELPFUL TO COTTON GROWERS
"It was evident two months ago that unless
something was done to stimulate the holders and
producers of cotton the market this fall would
be altogether in favor of the buyers, regardless
of the plethora of money held by the banks and
the unusually low interest rates at which money
could be obtained, and In spite of reports from
cotton producing sections throughout the world
which indicated that the available supply of cot
ton during the next twelve months would not be
out of proportion to the world's requirements.
Tho federal reservo board, therefore, appointed
a committee to study the cotton situation and to
report upon warehousing facilities throughout
the southern states. It having been ascertained
that the warehouse capacity was ample to pro
vide for all cotton upon which loans are likely
to be required, tho board's next concern was to
find some means of providing producers with
necessary funds at reasonable interest rates.
"By reason of the very large number of indi
viduals engaged in the production of agricul
tural staples throughout a vast expanse of terri
tory, it Is evident that the most effective means
of reaching the producers is through local banks
throughout the farming sections.'
FARMERS WERE APPREHENSIVE
"Bankers as a class are not lacking In patri
otism and are as liberal and public spirited as
those who are. engaged In any other business or
profession, but they are to some extent creatures
of habit. Having been accustomed to charge
high rates of Interest in the days when they
themselves were compelled to pay high rates of,
discount for accommodation, it was feared that
there would not be any unanimity of action on
the part of the country bankers in giving pro
ducers tho benefit of lower rates. It was be-4
lieved that the farmers, as a rule, would be dis
couraged and would be disposed to sacrifice their,
products unless they were given the stimulus of
low rates for loans on such commodities as they
might desire to hold. It was the opinion of the
board's committee that in order to establish
fair market conditions the financial ability of the
seller to hold must bo approximately equal to
the power of the producer to buy, and that if this
equilibrium could be established the market
would develop along true economic lines, based
upon actual demand and supply.
"The committee therefore decided to recom
mend to tho board that a regulation be issued
authorizing preferential rates on what is termed
commodity paper' that is, loans secured by
warehouse receipts for staple commodities of a
non-perishable character properly insured. Tho
committee felt that the federal reserve banks in
the agricultural districts, while fairly well loaned
up In some cases, could easily take care of the
situation, either by the issue of federal reserve
notes or by rediscounts. &r nprmUtnri ...
law, with federal reservo banks In other dls-
SECRETARY M'ADOO'S ACTION
"The committee had begun work on the com
modity regulation when it was advised by the
secretary of the treasury that he had decided to
deposit $30,000,000, if necessary, in ttS throe
districts where the heaviest demand was antici
pated, either with federal reserve banks or with
holders. ' to' b6 Mfld M8tettee crop
a"? c?nsldcrlne the matter, the secretary
decided not to make deposits with individual
banks, but with federal reserve banks only and
Hwi"? lniUIal depo8lts $6,000,000 each
with tho federal reserve banks of Richmond, iS
lanta, and Dallas; He has also commimicafed.
with the officials of the federal reserve bm .
Kansas City and Minneapolis, which serve V
great corn and wheat producing districts ?
bffered to make deposits with those institntE!
also if they wore desired, but he was inf?rm?JI
that the deposits were not needed, as those hl
have ample funds available. The secretary h
also announced that he js prepared to mako Tin
posits at any time with any other federal reserv
bank where such deposits would prove benefioini
"Meanwhile the board has adopted tho com
moditv regulation, practically as proposed by th
committee, and in order to make sure that Vm.
ducers get the benefit of the preferential ratw
provided, the regulation imposes as a condition
of the rediscount of commodity paper as such
and at the preferential rates, that the loan must
have been made by the rediscoiintlng bank to the
maker of the note at a rate of interest or dis
cpunt, including commissions, not exceeding 6
per cent per annum.
FAVORABLE RESULT
' "The federal reserve banks of Richmond, At
lanta, Dallas and St. Louis, which cover practic
ally all of the cotton producing section, have
fixed a rate of 3 per cent for this commodity pa
per, so that any country member bank desiring
to make a loan to a farmer or merchant against
warehouse receipts for cotton may, provided it
has taken the loan at a 6 per cent rate, indorse
it over at once to the federal reserve bank of
its district and receive credit, less discount, at
the rate of 3 per cent per annum. For example,
the National Bank of Cotton Town can discount
tho note of Farmer Jones having ninety days
to run for, let us say, $500, the note being se
cured by warehouse receipts for fourteen bales of
cotton, deducting interest at the rate of 6 per
cent per annum. Farmer Jones would receive
from the bank $492.50, while the bank can at
once send the note with trust receipt for collat
eral, to the federal reserve bank of its district
and receive credit for $496.25. It was believed
that the nature of the transaction would appeal
to the banker and make it easy for him to reduce
his usual interest charge, and it Is thought that
there are many farmers who will this fall ex
perience for the first time the sensation of get
ting money as low as 6 per cent.
"The comptroller oMhe currency has informa
tion from sworn reports o his office regarding
the maximum and average interest rates charged
by national banks throughout the United States.
From the report of June 23, 1916, it appears
that there are five national banks in Alabama
whose maximum rates of interest average 26
per cent, the, rate in one case being 60 per cent,
and In another 34 per cent. The. average rate of
Interest which one of these banks was charging
on all of its loans amounted to J2 per cent; an
other 10 per cent. In Arkansas one national
bank admitted making a loan at a rate as high
as 120 per cent, another one at 50 per cent, an
other at 60 and another at 2.5.
"In Georgia there were eleven banks where
the average maximum rate of interest wa; about
3,0 per cent. The maxiruunL.rate charged by one
of these banks was 40 per cent, and the average
on all loans was 15 per cent.
"No banlc in South Carolina admitted charg
ing more than 15 per cent
"In Texas a number of banks reported rates
in excess of 10fr per cent, -and many of them
stated that their average rates on all loans were
1 per cent per month or more. .
"These high rates, however, are not confined
exclusively to the south', for the reports show
occasional rates of 50 per cent in the east ana
north, as well as in the far west and south.
"Twelve per cent seems to be regarded still as
not extraordinary by the country bankers or
Minnesota, Wyoming, Kentucky and California.
Congressman Mann, republican house leader,
in a recent speech, said that the first thing the
republican party would do when it got into pow
er would be to enact a protective tariff, 8"Jr
which it would appoint a tariff commission, in
other words, Mr. Mann would give the manufac
turers what they want first and then try to flna
out afterwards whether they should have,h,ftaotT
Mr. Mann's program is not one calculated to ap
peal to the popular imagination.
The democratic administration continues tj
be fortunate. The most active condidates io
the republican nomination the proof or
candidacy lying in the fact that the gentlemen
have started in to woo the west-aro senai"
Weeks of Massachusetts, Former President a
and Late Ambassador Herrlck.
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