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DISTRICT NO. 2-NEW YORK.

PIERRE JAY, Chairman and Federal Reserve Agent.

RESULTS OF OPERATION.

BALANCE SHEET.

Schedule 1 shows the condition of the Federal Reserve Bank of New York on December 31, 1918, 1917, and 1916.

The increase in nearly every item in the balance sheet for 1918 is an indication of the increased use by member banks of the facilities of the Federal Reserve Bank in order to maintain their reserves and to provide the loan expansion which the financing of the war has necessitated. The various items will be commented on in detail under the appropriate headings. A table and chart showing by weeks the volume of notes and deposits, together with the course of the reserve percentage, are given on pages 382 and 383.

INCOME AND EXPENSE.

The income and expenses of the bank during the years 1918 and 1917 are shown in Schedule 2.

The great expansion in the business of the bank during 1918 has been reflected not only in increased income, but also in increased expenses, although earnings naturally increased far more than expenses. Most of the items of income are self-explanatory. The amount of service charges received decreased because these charges, imposed to cover the cost of collecting checks, were abandoned on June 15.

The items of expense have been further subdivided during 1918, many items heretofore included under general expense having been placed under separate headings. Almost every item reflects the expansion in staff, space and equipment which the immense volume of business transacted during the year has necessitated. At the close of the year, with the approval of the Federal Reserve Board, a further amount of $299,375 was set aside in the depreciation reserve account to provide against certain penalties for canceling leases in the Equitable Building should the bank erect its own building, and to provide against possible un ascertained losses. Also, under the same approval, $803,800 was charged off, representing the estimated value of buildings now standing on the site pur

chased during the year. Dividends at the rate of 6 per cent for the year were paid; $7,672,676.44 was carried to surplus, bringing the surplus up to the 40 per cent of paid-in capital which the present law permits; and $12,795,214.57, being the balance of the net earnings, was set aside as a franchise tax payment subject to the call of the Treasury Department, pending the consideration by Congress of a bill recommended by the Federal Reserve Board which would permit larger amounts of the net earnings of Federal Reserve Banks to be retained as surplus.

The expenses shown in the foregoing statement do not include the expenses of the departments of the bank performing its fiscal agency functions or the expenses of the Liberty loan and certificate of indebtedness selling and publicity organizations, all of which are reimbursed directly by the Treasury Department.

DISCOUNT RATES.

The discount rates established by the bank during the year and the rates at which bankers' acceptances have been purchased in the open market are shown in Schedule 3.

Throughout the year the rate policy of the bank has been necessarily influenced by the policy of the Treasury Department with respect to the interest rates on the bonds and certificates of indebtedness which it has sold. The only change occurred on April 6, when an understanding was reached, with the approval of the Federal Reserve Board, under which all of the Federal Reserve Banks established a rate of 4 per cent for discounting 90-day paper secured by United States Government obligations. This rate, conforming to the coupon rate of the third and fourth Liberty bonds, was continued for the balance of the year. At the same time the rate of this bank on 90-day commercial paper was advanced to 4 per cent, at which level it was still below the market rate for such paper, as it has been ever since the United States entered the war. While the rates of the Federal Reserve Bank normally should remain at or above the market rate, under prevailing abnormal conditions this was impracticable, since it was felt that a further advance in the 90-day rate on commercial paper might affect unfavorably the rates at which the Government was financing and 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.

Owing to the differential of one-half of 1 per cent between the rate on commercial paper and the rate on Government-secured paper, the bulk of the paper held by the bank has been of the latter class, which was natural in any event, since it was primarily the Govern

ment borrowings which compelled the banks to discount so heavily at the Federal Reserve Bank.

Since early in 1915 the bank has established maximum and minimum rates within which it has purchased bankers' acceptances. This policy was adopted at the inauguration of open-market transactions, as it did not seem wise at that time to establish a fixed discount rate on these bills. During the past year, however, the development of the market has reached a point at which a stabilizing influence was necessary and fixed rediscount rates as shown in the table for bankers' acceptances were accordingly established on October 1, under authority of section 13 of the Federal Reserve Act. While the banks have not yet needed to exercise their rediscounting privilege under this rate, as the market rate has been steadily lower, its establishment has undoubtedly exercised a beneficial influence on the stability of openmarket operations.

During the year member banks, especially those in New York City, have continued to use the 15-day rate very extensively. In fact, the great bulk of their accommodations has been for periods of 15 days or less and many of the largest banks borrow for from one to three days only. By providing for these "day-to-day" loans, the Federal Reserve Bank has furnished its members a recourse as quick and flexible as the call-money market, which, in view of the wide fluctuations in their liabilities caused by Government financing, has been of great service to them and enabled them not merely to secure promptly such large accommodations as they have required from time to time, but to pay them off with equal promptness and facility. The arrangements made permitted these short discounts and advances to be effected on either commercial or Government-secured paper and at the same rate.

INVESTMENTS OF THE FEDERAL RESERVE BANK OF NEW YORK DURING 1918.

DISCOUNTS, ADVANCES, AND PURCHASES, AND THEIR RELATION TO RESERVES.

As the war progressed it became increasingly necessary for the banks to have recourse to the Federal Reserve Bank. The following figures show the maximum use of its credit facilities in each of the Liberty loan financing periods to date:

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Each of these high points was followed by a period of contraction which, however, never reached the preceding base, so that the expansion was progressive, though not continuous.

While this heavy borrowing from the Federal Reserve Bank was caused fundamentally by Government financing, its direct relation was to the condition of the reserves of member banks rather than to the sales of Government securities. As the Government deposits created by the sales of securities and not requiring reserves to be maintained against them were transformed through Government disbursement into private deposits upon which reserves had to be maintained, the banks had to borrow to create these additional reserves. Furthermore, interior banks throughout the year continued to meet withdrawals of Government deposits by drafts on their New York correspondents, thereby causing a constant flow of funds from New York to the interior and requiring the New York banks to replenish their reserves at the Federal Reserve Bank until the funds thus withdrawn were returned again through Government transfers.

The following chart shows the gold holdings of the bank during the year and the aggregate amount of its loans and discounts. Aside from the gradual but steady increase of the gold held by the system, the fluctuations in the amount of gold held by this bank represent its gains or losses through the settlement of balances with other Federal Reserve Banks. The closeness with which the borrowings of member banks follow the fluctuations in the gold holdings of this bank clearly substantiates the views expressed in the foregoing paragraph.

EARNING ASSETS GOLD RESERVES

FEDERAL RESERVE BANK OF NEW YORK

→1918◄

DOLLARS JAN. FEB. MAR. APR. MAY JUNE JULY AUG. SEPT. OCT. NOV. DEC. 1.000

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