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/ ff.E.G. July 2, 1942 Mr. H. B. Elliston, Associate Editor, The Washington Post, Washington, D. C. Dear Mr. Elliston: I have your letter of June 25 enclosing a clipping of a letter from Congressman White published in the Washington Post. I regret that neither in the Bulletin nor in testimony have we dealt diyeoily with Mr. White's contention that silver money is costless while Federal Reserve notes impose an interest charge on the public. The contention is in some respects related to Mr. Patman1 a^ argument that the Government should finance its expeiiiiitUBes by issuing new money instead of paying interest to the banks, and I am, therefore, enclosing as of possible interest to you a copy of a letter which I wrote to Mr* Patman ox^ March 1941. Mr. Spahr of the Economists* National Committee on Monetary Policy has already engaged in correspondence with Mr. White on the question of, silver money vs. Federal Reserve notes and you may wish to consult this correspondence in the Congressional Record: Aprils30^X942(page 3978) j June 3,1942 (page 5209); June 9,1942 (page S230). In the Wall Street Journal of June 30 there was published a vigorous rejoinder to Mr. White written by Delmer Habbell. The facts of the case appear to be reasonably simple. Anyone who has a deposit with the Federal Reserve Banks may draw v $ m it to obtain Federal Reserve uptes. Ho interest is charged on this transaction. The deposit it is true, be the result - 11 - indebtedness. Corporate security issues for new capital, however, which are of greater significance in connection with/expansion of durable goods industries, were in larger volume in the first half or 1957 than in the similar period of any other recent year. Anticipating autumn demands / / In view of increasing indications/of uncertainty in business prospects, the Board in Aid summer reexamined the banking situation with particular reference to the reserve position of member banks, for the purpose of determining whether there was any action which fhe Federal Reserve authorities could undertake to counteract possible unfavorable business developments. This review showed that the volume of funds for purposes of lending and investment was adequate In all classes of banks;/that there was a continued increase in the banks1 lending for business purposes, and that liquidation by banks of their Government securities had practi/cally ceased. In anticipation of possiblJb soasonal demands for credit and currency in the autumn, the Federal Reserve banks in August and September reduced their discount rates. After these changes wire made the rate at the Federal .Reserve Bank of New York stood at 1 percent, rfche lowest central bank rate in history, and at the other Federal Reserve bemks at 1 l/2 percent. By placing Reserve bank discount rates at a level in closer relationship to rates in the money market, the Federal Reserve System/made it possible for individual member banks to meet seasonal or exceptional demands by borrowing from the Federal Reserve banks, rather than by liquidating any of their assets. The Board also issued in September a revision of its Regulation governing discounts for and advances to member banks, carryingfcutchanges in the law made by the Banking Act of 1935, and explaining the rules under*which member banks can obtain accommodation at the Federal Reserve banks on advances secured by any sound asset. -2- of direct borrowing from the federal Reserve Banks or the sale of Government securities to thern^ in which case interest is involvedj but the deposit may also be the reBult of the deposit of gold or silver certificates iif the Federal Reserve Banks or other cash transactions¥ Currently the Federal Reserve Banks have outstanding 9 billion dollars of notes and 14 billion dollars of deposits, only 2-1/2 billion dollars of which have resulted from operations involving interest. While it is true that a portion of Federal Reserve notes outstanding may have their ultimate source in operations involving interest, this does not mean that even this portion costs the public more than silver certificates. Silver certificates are not given to the public. The Treasury deposits them, together with other funds, in the Federal Reserve Banks and checks against the deposit to purchase goods and services from the public or to make loans. In the former case the public exchanges its goods and services for the Treasury's funds created by the issue of silver certificates} in the latter case the public borrows these funds and pays interest just as in the case of the Federal Reserve notes. In neither case does the public get the money without giving a quid pro quo. It is obvious that from a national standpoint silver money is more costly to issue than Federal Reserve notes i t silver is more costly than paper. The silver certificate does not perform the function of money any more effectively than Federal Reserve notes; hence the additional cost of issuing it is a national waste. If it were advisable for the Treasury to finance itself by issuing conditions in the Government security market /for a period in March were disorganized, and the average yield on long-term Government bonds rose from little over 2 l/4 percent in February to 2 3/4 percent early in April. Yields on high-grade corporate bonds also advanced. In order to stabilize conditions in phe money markets the Federal Open Market Cojranittee engaged in a series of apen-market operations. Between March 10 and March 31 it increased the Systemys holdings of Treasury bonds by $104,000,000 and at the same time reduced itjs holdings of Treasury notes by $85,000,000 and its holdings of Treasury bills by $19,000,000, so that the total of its portfolio of Government securities remained unchanged. On April 4 the Federal Open Market Committee issued jbhe following statement: "With a view (l) to exerting itI influence toward orderly conditions in the money market and (2) to facilitating the orderly adjustment of member banks to the increased reserve requirements effective May 1, 1937, the Open Market Committee of the Federal Rosorve System is prepared to make open-market purchases of United States Government securities for the account of the Federal Reserve banks in such amounts and at sucW times as may be desirable. This purpose is in conformity with the policy announced by the Board of Governors of the Federal Reserve System in its statemont jon January 31, 1937, which declared, with reference to the increase in relerve requirements, that by this action the System would be placed in a position where such reduction or expansion of member bank resorves as may be deemed! in the public interest may be effected through open-market operations." I Between April 4 and Aprik 28 the System purchased $96,000,000 of Treasury bonds, increasing its accounx by this amount. Government and other high-grade bond prices stopped declining in the early part of April. For the remainder of -5- new money instead of taxing or borrowing the resources necessary to cover its expenditures, it would be cheaper, and equally effective, to issue greenbacks, rather than to acquire silver and issue silver certificates. But as. is indicated more at length in my enclosed letter to Mr. Patman, I do not believe it advisable for the Treasury to finance itself by either greenbacks or silver certificate issues, Sincerely yours, Chairman. Enclosure - 7 - Board's power unfior tho law to increase reserve requirements. The Board stated that it was not ilts intontion to request from Congress additional authority to absorb excess reserves by means of further raising reserve requirements* In order to rive the banks ample opportunity to adjust to the new requirements, the Board in announcing the increase on January 31 provided that one-half of it v<rouid take effect on March 1 and the other half on May 1. Adjustment to increased requirements Following the announcement of the increase in reserve requirements on January 31 short-tenm money rates and yields on Government and high-grade corporate bonds advanced somewhat. In preceding weeks some of these rates had increased slightly from the extraordinarily low levels reached near the end of 1936* These advance* were taken by many investors, including banks, as an indication that the long continued decline in bond yields had come to an end. As a consequence, thire was a tendency to liquidate bonds in ordor to realize accrued profits* Banks in New York City had begun to sell Government securities as early as the middlio of 1936 following an extremely rapid expansion of their Government portfolio In the first half of that year. These sales "continuod in the early months oA 1937. Early in March, in ordor to meet the increase in reserve requirements and withdrawals of balanceslheld for interior banks, a few of the large moneymarket banks increased iiieir sales of Government securities. The securities sold were principally long-term bonds, on which they had profits, rather than short-term notes and bills, which they held in substantial volume. This selling movement spread to other panks and to other holders of bonds, which at first I also wanted to realize th<fir profits and later, as prices declined, to avoid losses. As the result of this selling movement, which assumed large proportions,
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