The Federal Reserve system as a whole has been functioning in an unsatisfactory manner since ending of hostilities. On account of the enormous indebtedness of the other banks to them, the Reserve banks have been constantly in position to control the supply of credit. This power has not been exercised. Low discount rates have been maintained although the margin between those rates and the rates at which borrowers secured accommodation from member banks was increasing.

It was reasonably to be anticipated that during the twelve months following the war some slight headway would be made toward the deflation of credit. Nothing of the sort has happened. On the contrary, since the Armistice the loans of the Reserve banks have been enlarged by $400,000,000, and on the basis of the reserve balances thus secured the commercial banks of the country have increased the volume of credit by at least $2,000,000,000. This increase in the purchasing medium has made possible the further increase in the cost of living during recent months.

The Federal Reserve Board in the meantime has repeatedly urged increased production as a remedy for high prices. In recommending this remedy, the Board disregards all past experience which is uniformly to the effect that increasing production never brings prices down while business is active and a plentiful supply of credit is available.

Strict economy in individual expenditure is also urged by the Reserve Board as an effective remedy for the high cost of living. It would indeed be effective if generally adopted, but here again past experience, and present experience for that matter, is conclusive to the effect that habits of thrift are weakened during periods of rising prices and suddenly increased money incomes.

Discounts and Market Rates

The Reserve Board, while urging repeatedly these ineffective remedies, has not seen fit to make use of the potent instrument for checking credit expansion, which it alone

can employ. Discount rates at central banks higher than the minimum rates charged by other banks is the most fundamental of the principles which should govern the policy of those institutions. During the war, it was perhaps proper to establish rates at or below those of the other banks. To maintain such rates for a year after the cessation of hostilities, while further credit expansion was taking place, was a course contrary to all of the teachings of financial experience.

During the war the advance in prices was generally looked upon as a temporary condition and at its close the business community was prepared for a decline in prices and for some liquidation. Influenced in large measure by the continuance of an easy money market and the further advance in prices, the business community has come more and more to act upon the assumption that the present situation is to be permanent. Abnormal returns are being made the basis for permanent obligations. As an illustration of this tendency may be mentioned the mortgage indebtedness being incurred by purchasers of land at fancy prices in the corn belt.

Delay in Advancing Rates

The unwillingness to advance rates at an earlier date is said by Governor Harding of the Reserve Board to have been due to a desire to avoid placing a burden upon the multitudes of persons who had purchased Liberty bonds and Victory notes on an installment basis of payment. To the extent that Reserve banks entered into arrangements to lend to banks assisting this class of subscribers, upon the discount rates of the banks, but this limitation did not apply to the lion's share of the government securities on which advances were made.

There can be no doubt that other considerations influenced the policy of the Reserve Board during the war, the policies of the Reserve banks were properly subordinated to the policies of the Treasury Department. This condition of subordination

apparently still continues. The Treasury is naturally averse to a further decline in the quotations for the various issues of Liberty bonds which were taken at artificially low rates of return to millions of patriotic citizens. The Treasury has also been insistent that nothing be done which would prevent the sale to the banks of successive issues of certificates at low interest rates.

Control of Credit Situation Considerations of this kind should not sway the policy of the Reserve banks in time of peace. In order to place some limit upon the possibilities of inflation, the Federal Reserve banks, were restricted to loans on commercial paper and United States bonds: When the Reserve Act was passed the amount of Government bonds outstanding was small. Now the total exceeds $20,000,000,000 widely scattered throughout the community The maintenance of low lending rates on these bonds is contrary to sound banking principles. The high quality of the security is an important consideration, but in the case of central banks the magnitude of the loans being made and the uses for which the proceeds are being employed are equally important.

The period during which Reserve banks were under specific obligations to subscribers to Liberty bonds has now come to an end, and future Government requirements will probably not be of great magnitude. In these circumstances, the adoption of a discount policy designed to check further credit expansion and to induce gradual contraction might be anticipated with confidence, if it were certain that the Reserve Board had faith in the power of the discount rate and the courage required to make it effective.

Unhappily, recent official expressions of opinion by the Board indicate that the adoption of a conservative discount policy is altogether unlikely. In the Bulletin of the Reserve Board for October, 1919, the opinion was expressed that "while repeated tendencies toward speculation have manifested themselves, there is no reason to believe that an advance of rates would have held these tendencies in check, at any rate no such advances as could have been undertaken without serious injury to legitimate business and desirable enterprise which were entitled to encouragement and support."

A subsequent passage is illuminating. Referring to the objects in view in shaping discount rates, it is observed that: "The objects to be obtained are to regulate the vol

ume and uses of credit so as to give to productive industry at all times the beneficial effects of credit stimulus and support without, however, opening the way to the costly evils of credit and price inflation."

The policy outlined in these passages cannot be carried out. In an enterprising community, the expansion of credit must be restrained in periods of active business. Under the Reserve system practically all restraints on credit expansion have been removed. Old-time legal safeguards have been abandoned. This was wise. The legal safeguards proved unsatisfactory. They were too rigid. Responsibility for the credit situation has been placed definitely upon those who conduct the Federal Reserve banks and upon the Federal Reserve Board. They have adequate power to control the situation. If they hesitate to use this power and follow the more agreeable course of moderate rates until forced to take drastic action, a repetition of the succession of crises which afflicted the country in the past is inevitable.

Detroit Trust Company Named as
Co-Trustee of Dodge Estate

The Detroit Trust Company is named as co-trustee in the will of the late John F. Dodge, the wealthy Detroit manufacturer of the well-known Dodge automobiles, who died recently in New York. The value of the estate is not indicated but it is known to amount to many millions. Associated with the Detroit Trust Company as trustees are the widow, Mrs. Matilda R. Dodge and the brother of the testator, Horace E. Dodge. It is stated that Mr. Dodge had contemplated making gifts for public welfare purpose which should have his supervision in his lifetime, but was prevented by death from carrying out his plans or designating them in his will. For similar reasons the will contained no provision for the youngest daughter although her interests will be fully provided for under the laws of the State.

The bulk of the estate, after various specific bequests are paid, is to be held by the trustees with full power to handle the property with directions to form a corporation to be known as the John F. Dodge estate to carry out the trust provisions if such a corporation can be legally formed. If this plan should prove unfeasible the trustees named in the will are instructed, after payment of certain annuities, to divide the estate into five equal parts, one each for the widow and for four of the children.

Until very recently the National banks and trust companies in far-away sunny Hawaii have flourished side by side without the least bit of friction or without any attempt at encroachment upon their respective spheres of activity. The trust companies religiously eschewed all banking business in compliance with the territorial trust company law which prohibits them from discounting commercial paper or doing either a general banking or savings bank business. The National banks, on the other hand, did not seek to transact any fiduciary business. Neither class of institution felt the need of poaching upon one another's ground because there was ample room for profitable expansion for both National banks and trust companies. As a result of this distinct line of cleavage National banks as well as trust companies have attained high standards of usefulness and have prospered along with the commercial and financial development of the Hawaiian Isles.

The first rift in this amicable relationship came when one of the National banks of Honolulu recently notified its stockholders of intention to obtain trust powers under the provisions of section 11 (k) of the Federal Reserve Act, which has been such a prolific source of litigation between National banks and trust companies on the mainland. As a result of this attempt on the part of a National bank to invade the field of trust companies the latter have combined in a protest which was recently transmitted to the Federal Reserve Bank of San Francisco. The contention is that such granting of trust powers to a National bank in Hawaii would be both in violation of territorial law and would constitute a violation of the ruling laid down by the United States Supreme Court in defining the constitutionality of the aforesaid provision of the Federal Reserve Act which justified the granting of fiduciary powers to National banks only in those jurisdictions where trust companies come into active competition with National banks. It is maintained that trust companies in Hawaii do not come into competition with National banks

and therefore the Federal Reserve Board is not acting in consistency with the Supreme Court ruling if it gives permission to a National bank in Hawaii to engage in trust busi

ness.

Following is the letter of protest signed by officers of all the trust companies in Hawaii, which has been recently forwarded to the Federal Reserve Bank of San Francisco, and I which is to be submitted to the attention of the Federal Reserve Board at Washington:

"We, the undersigned trust companies, being corporations organized and doing business in Honolulu, under the laws of the Territory of Hawaii, respectfully call to, your attention the following situation in Hawaii:

"The First National Bank of Hawaii, Limited, a National bank in Honolulu, has notified its stockholders that at its next meeting, on January 13, 1920, there will be considered the question of applying to you for permission to act as trustee, executor, administrator and in other fiduciary capacities under section 11 (k) of the Federal Reserve Act as amended by Section 2 of the Act of Congress approved September 26, 1918.

"We respectfully protest against your granting the request of the said bank, and, in support of our protest, we submit the following facts: The trust companies already existing in Hawaii are amply sufficient, in number and resources, to take care of all the trust business including acting in the aforesaid fiduciary capacity. In addition to the five undersigned trust companies, there is the First American Savings & Trust Company of Hawaii, Limited, which is closely affiliated with the aforesaid First National Bank of Hawaii, Limited, being controlled by the same stockholders in much the same proportions and having its office at the said bank. There are also several small investment companies and similar institutions.

"The statutes of Hawaii do not permit trust companies to do a banking business and do not permit banks, either Territorial or Federal, to do a trust company business, as is shown by the enclosed copy of our Territorial

trust company law. We appreciate that the above-mentioned Act of Congress is controlling and overrides our Territorial statutes in so far as it is in conflict with them. The Act of Congress, however, authorizes your board to grant authority to National banks

'to act as trustee, executor, administrator, registrar of stocks and bonds, guardian of estates, assignee, receiver, committee of estates of lunatics, or in any other fiduciary capacity in which State banks, trust companies, or other corporations which come into competition with National banks are permitted to act under the laws of the State in which the National bank is located. "The Act of Congress is expressly based on the consideration that National banks should be given the right to compete in trust company business with trust companies which compete with National banks, as is shown by the underlined words in the foregoing quotation and also in other provisions in the said section of said Act. This construction of the Act has been adopted by the United States Supreme Court in the case of First National Bank vs. Union Trust Company (244 U. S. 416). The Supreme Court in this decision was construing section 11 (k) before the amendment in 1918, but the amendment clearly strengthens and in fact incorporates the said construction.

'From this it must also follow that even although a business be of such a character that it is not inherently considered susceptible of being included by Congress in the powers conferred on National banks, that rule would cease to apply if by State law State banking corporations, trust companies, or others which by reason of their business are rivals or quasi-rivals of National banks are permitted to carry on such business. This must be since the State may not by legislation create a condition as to a particular business which would bring about actual or potential competition with the business of National banks and at the same time deny the power of Congress to meet such created condition by legislation appropriate to avoid the injury which otherwise would be suffered by the National agency.' -First National Bank vs. Union Trust Company (244 U. S. 416 at 425, 426).

"Since, as we have already stated, trust companies in Hawaii are not allowed, under our Territorial statutes, to compete with National banks, and since Territorial banks which do compete with National banks in banking business are not allowed to do a trust company business, we do not believe that said section 11 (k) of said Act applies to Hawaii,

THE GUARDIAN TRUST AND SAVINGS BANK OF TOLEDO

MEMBER FEDERAL RESERVE BANK

OFFICERS

EDWARD H. CADY, President WALTER L. Ross, Vice-President EDWARD G. KIRBY, Vice-President and Trust Officer HARRY P. CAVES Secretary and Treasurer GEO. E. WISE, Ass't Secretary and Treasurer¿

Correspondence Invited on all Trust Matters

either in letter or in spirit. The well-established and long maintained policy in Hawaii has been to give the right to do a banking business to one set of corporations and the right to do a trust company business to another set of corporations, and not to combine the two kinds of business in either group of corporations. We submit that this local policy should not be overridden unless it is required either by the Act of Congress or in order to give reasonable protection to the National banks in Hawaii, neither of which conditions exists."

Respectfully submitted: Bishop Trust Company, Ltd., Wm. Simpson, treasurer; Trent Trust Company, Ltd., Chas. J. Heese, Jr., treasurer; Guardian Trust Company, Ltd., W. W. Chamberlain, treasurer; Henry Wa terhouse Trust Co., Ltd., by A. N. Campbell, treasurer; Hawaiian Trust Company, Ltd., H. H. Walker, vice-president.

Accompanying the above letter is a draft of the Hawaiian territorial law governing trust companies, and which specifically prohibits trust companies from engaging in banking business. Reference to published statements of trust companies located in Honolulu also shows that their assets and liabilities contain no item which indicate any encroachment upon banks. It is, therefore, urged that the granting of trust powers to National banks in Hawaii will not only be in violation of the territorial law, but would also work a serious injury to trust companies since National banks would have the right to transact both banking and fiduciary business.

Prior to the war in Europe there were 1,285,636 shares of the common stock and 312,311 shares of the preferred stock of the U. S. Steel Corporation held in Europe as compared with 368,895 shares of common and 138,566 shares of preferred stock held abroad on December 31, 1919, a reduction of European holdings of the entire issues from 8.67 per cent. to 3.84 per cent.

To Mr. Samuel S. Conover, the president of the Fidelity Trust Company of New York City, belongs the credit of having compiled from various authoritive sources the first reliable approximation of the great wealth which is concentrated in New York's whole. sale commission district located between Cortlandt and Canal streets, west of Broadway. The results of his investigation are as tonishing and disclose that, from the standpoint of actual wealth involved, the much more widely advertised and well known "Wall Street District" must look to its laurels. The estimate made by Mr. ConI over places the total gross annual sales of New York's wholesale commission district at no less than $2,400,000,000. The compilation is based on statements from the district's various trade organizations, commercial bodies, leading merchants, etc., embracing a mass of detail information and this being the first time that such facts and figures have ever been assembled covering this important business and distributing center. The fact that the Fidelity Trust Company is located in the heart of the wholesale commission district at Chambers and Hudson streets and that the business relations of the company intimately touch the numerous business and commission firms therein, aided Mr. Conover in obtaining access to fairly accurate figures and facts.

Approximate annual gross sales in the various individual trades are as follows: Cotton fabric

Fruit and produce

(Estimated value of goods

arriving at New York)

Butter, eggs, cheese, poultry.. Boots and shoes

Groceries

Paper

. $1,500,000,000

400,000,000

306,500,000

75,000,000

150,000,000

7,000,000

$2,438,500,000

neighbor, the Wall Street district," says President Conover in explaining the estimate. "It does much of its business in structures built 75 years ago and its many diversified mercantile lines are crowded together in an area only half a mile square. Nevertheless, its gross annual cash turnover is nearly two and a half billions of dollars.

"It provides 14,000,000 people throughout the Eastern States with their daily food; contains the largest wholesale fruit and produce market in the world; and sells 67 per cent. of the nation's entire cotton crop. after fabrication.

"Although, 200 years ago, Anthony Rutgers received most of the district free from the township on condition that he drain it,

Provides Daily Food for 14,000,000 People

"The city's wholesale commission district is quite as important a factor in the nation's economic life as is its much more advertised

SAMUEL S. CONOVER President Fidelity Trust Company of New York