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575
W, P, G, HARDING, fiOVIRNOR
ALBERT STRAUSS, VICE GOVIRNOR
ADOLPH C. MILLER
CHARLES S. HAMLIN
CARTER GL.\18
SICIIYAIT
or THI
TRIAIURY
CHAIRMAN
FEDERAL RESERVE BOARD
JOHN SKELTON WILLIAMS
COIIPTIOLLIR OF THI. CURRENCY
J. A. BRODERICK, SECRETARY
W. T. CHAPMAN, ASIISTANTSECRITARY
W.II..IIILAY, FISCAL AGENT
WASHINGTON
ADDRJ:S!I REPLY TO
FEDERAL. RESERVE BOARD
OOPY
August 8, 1919.
For release to Mon4ay Morning Paper;.
August 11, 1919.
Dear Sir:
The Federal Reserve Board
aeknowle~s
X-16~8
receipt of your letter
of the 5th instant asking for an ex_pression of its views
C:I.S
to the
advisabilit.Y of legislatian providing for the gradual reductian of
the currency in circulation as proposed by Senate Resolution 1~2~
1be .Board would suggeet that in determining whether or not
legislation is necessary or desirable to regulate tne volume of
(
currency in circulation. consideration be given to the various forms
of money which aake -up the sum total of our volume of currency.
A
distinction shoul.d also be drawn between the stock of money in the
country and. the amount actually in circulation.
With respect to gold coin. goid certificates; standard silver
dollars~
silver certificates,
s~bsidiary
silver and Treasury notes
of 1890, the Board assumes that it is recognized that no legislation
. is necessary.
.
!he United Sta.t$s notes, or legal tenders, which have remained
at the f1xed amount of $3146,681 1 016. :. ·. since March 31, 187S, have
not been a. d.isturbing factor since the passage of the act of March
14, 1900~
An ad,equate golcl reserve of
more than 45~ is now held
against these notes, most of which are in the form of small bills
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Federal Reserve Bank of St. Louis
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of $1, $2, and $5 denominations.
Notes of these deno~nations are
needed in the daily transactions of the public, and were the united
States notes to be retired, the ism1e of an equal volvme of
bills in some other fo~ of currency would be necessary.
s~11
To effeot
the retirement of the United States notes, funds would have to be
withdrawn from the Treasury to be s~plied either by tax~tion or by
the sale of interest-bearing obligations.
The Board does not believe
that ~ legislation with re~ect to United states notes is necessar,
or desirable at this time.
1-be national bank notes outstanding on A~st l, 1919, amounted to
$658,118,555-00, a reduction of nearly $60,000,000 since July 1, 1914.
The greater part of these notes is secured by United States 2% bonds,
and provision has already been made in Section 18 of the Federal Reserve
Act for their gradual retirement.
Federal reserve bank notes, which are secur.ed by United States
obligations and are taxed just as national bank notes are, have been
issued only to replace in,part national barik notes
retire~,
standard silver dollars mel ted or broken up and sold as
and
~llion
under
authority of the a~t of .April 23, 1918, known as the Pittman Act..
1-be
issue of thes·e notes has, therefore, brought about no increase in the
circu+ating medium.
The amount of Federal reserve notes outstanding has increased from
$357,239,000 onApril1, 1917, to $2,5014.753,000 on August 1,1919.
It appears therefore that those who see in the larger
volum~
of cir-
culation in the United States. the prime cause of increased costs of
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X-1648
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living and who seek a. . remedl
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577\
a. forced contraction of tbe
currency must have in mind the Federal reserve note and .section
16 of the Federal Reserve Act as amended June 21, 1917, which provides for its issue and redemption.
In analyzing our present monetary situation, and in considering
the causes which have led to the e:x:_pansion of credits and note issues
during the war. we should not lose sight of some of the developments
of the pre-war period and of their effect upon credits and prices.
Very heavy purchases of supplies of
ail
kinds were made in this
country by European belligerents during the years 1915 and 1916 7
payment for Which involved the shipment to us of large amounts of
The stock of gold in the United States on July l, 1914, was
gold.
(
$1,890,678,304.
This amount increased steadily until April, 1917,
the date of our own entry into the war, when it reached $3,088,904,808,
an increase of about $1,200,000,000.
Bank deposits likewise show a.
large increase, the net deposits of national banks having risen from
$7,495,149,000 on June 30, 1914, to $10,489,217,000 on March 5, 1917,
while the net deposits of all banks in the United States increased
.
from $17,966,150,000 in June, 19k4, to $24,891,218,000 in Jtme, 1917.
Net deposits of national banks had further increased up to May 12, 1919,
to $11,718,095,000, and those of all banks in June, 1918. {the latest
i
·date for which figures are available)
to $26.769,546,000.
Shortly after
April 61 1917, when the Congress declared war, the Treasury began. to' sell
bonds, notes and certificates in large amounts resulting in a net
inc~ease
in the public debt to August 1, 1.919, of $24,518,064,840.
On
July l, 1914, the total stock of money in the United States,
exclusive of that held by the United States Treasury, was
•
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X-1643
-4On
April l, 1917, the stock of money, estimated on the same basis,
was $4,702,130,941, an increase of. $1,282,962,573 of whlch inr.ree.se
$38},481,028
was
On July 1,
in gold.
1914, there were no Federal reserve notes in existence,
while on April l, 1917, there were outstanding $357,239,000.
The amendment to the Federal Reserve Act approved J1:ne 21, 1917,
changed substantially the original reserve requirements :for memb"3r
. ba:nks and provided that their entire lawful reserve should be carried
with the Federal reserve banks.
Federal reserve banks to
The same amendment authorized the
excban~
Federal reserve notes for gold. The
result of these two changes in the law was to transfer immediately
large gums of gold from the vaults of the member and nonmember bariks
and from general circulation to the Federal reserve banks, and this
caused a change in the
~ethods
of accounting for gold
by
the Federal
reserve banks and Federal reserve agents.
In order to avoid confusion in determining the volUme of money in
actual circulation, it is necessary to distinguish between tables showing
the total stock of money in the country, and tables showing. the circula-
·"
tion outside of the
~reasury
and Federal reserve agents' vaults, and to
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lo
limit our view to amounts held by member and nonmember banks and the
public, which are exclusive of amounts on band at Federal reserve banks,
held by Federal reserve
a~nts,
and held in the Treasury.
579
•
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-5!be reserve &.uoney held by or for the Jl)deral res.;lrvc:: banks
of course, as
~
in circulation.
basis for cr-=-clit, but it forius no ):)art uf tht.: currency
Upon this basis, the aJ:.uount oi' .tlioncy in circulation on
July l, 1914, (There being no Federal reserve
-
s~rves,
ti1:oe) was $3,419,168,368,
uladd up as fvllows:
b~lks
in operation at that
Gold coin ano. certificates
$1,649,775•_803; silve:I' Ci.ollars an"- silver certificates, including Treasury
notes of 1890, $552,203,610; all uthar currency $1,217,183,955, being eirculation ~er capitu $34.53·
The correspond.ing
aJ:.uoun~s
of
tuon~:.:y
in circulation on April l, 1917, ·
December l, 1918, c.nu. August 1, 1919, are shown in the
follo\~ing
table.:
AMOUNT OF MONEY OUTSIDE THE TREASURY AND FEDERAL RESERVE BANKS
A•• •
.April 1,
1~11
Gold coin tmci certificates
$1,989,152,0UU
.Au~ust
Dect..wbi.:r l,
19115
1,
l~l~
$ 301,245 ,ouu $ 728,046 .ooo
Silver dollars and silver
certificates, (including
Treasury notes of 1890)
532,700,000
372,489,000
241,505,000
Federal Reserve notes
357,239,000
2,607,445,000
2,504,753,000
3,170,000
.87,737.000
lbb ,2b9 ,000
All _other currency
1,218, 715,000
1.,201. o69 ,ou0
l,l5t>,297,00U
Total
4,100 .97b ,ouu
5,129,9S5,ouu
4, 7'Jo, t>90 ,(;0Q
Federal Reserve bc:ak notes
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.Aruount fur ca1-:ito. uutsid.a the
Treasury c:·.nd the F.;d.cral '
~es.:::rvo ba.r:..tes
$}T-ats~
$48.13
$45.16
3f 3 -¥'
;
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580
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-6Assuming
th~t
the date Deceruber l, 191S, wcrks the begining of the
post-war period, the table shows
1, 1919, as follows:
chcngP-~
during this period up
to August
Gold coin and. ce.t ·:ific<~tes in circula.tion decreo.sed
$133,199,000; silver dollars and silver certificates, including Treasury
note~
of 1890, decrea.sed $130,934,000; Federal reserve notes
d~creased
$102,692,000; Feder~l reserv~ bnnk notes increased $78,552,000; all other
·currency decreased $44,772,000, ·being u net decrease in ~irculation for
the post-war 2eri0d of $333,095,000 1 or $2.97 per capite.
In considerinb the ·-luestion or currency in circulc..tion, there should
be taken into account the vurious
f~tors
demond for currency, omong which u.re!
which have entered into the
The grudual enlarg0ment of po.yrolls,
both as to the nuuilier of workers and amount paid to each; the effect of
higher wages upon deposits in banks and upon the cwounts of money carried
by shopkeepers in their tills and by individuo.ls in their poc.kets; the
amounts of money locked up or carried on their persons by ;,wr.kJ.uen who have
been receivin·g high Wl.tges and who,
foreigners, ure unwilling to
in Governn.ent bonds; the
esp~cio.lly
do;~pusit
~:~uount
t:O.~...oir
of woney
ing to their homes in foreign countries;
in ti:w
or ignorc.nt
S<..ivings in b<..:..1Ks or to invest
cc.1.r:~ied
n.w;:;.y by 'NOrku,tln return-
<:.nd. the fuct t:nc,t t.£J.e circu-
latinrg n..ed.ia of the Philip:pine Islands, Hc.wo.ii,
nowingo J
C[.. se
Cub<~,
Porto Rico, Sc.nta
includes
Haiti' Honduras, Panawa, ond in pu.:;-t, Mexico' I
"Qi United
Statt>s paper currency o.nd subsidiary silver.
these countries. li>Ost of
creased in the
l~tfew
Nhic~:.
years. ·
The amounts
reu:;,uUQ~-
in
ure very prosperous, have 5 rec,t ly in-
Thstot~l foreign circulation of United States currency cannot be stated
a.ccura.tc:ly, but is estiwated to be at least one hundred and fifty nlillion
dollars.
The difficulty, indeed the iupvssibility, of Keeping in circulation
-
an excessive volwu~ of Federal Reserv~ notes should be understood.
The
issue of these notes has been c~refully safeguarded by the federal Reserve
Act, and. ample provlsion has bljen made for their red8niption.
Federal ,
resC)rve notes c:.re redeewcbl..- in gold; they cannot be forced into circulation in p:::.ywent of the e.qxmses vf ti.10 Gov<::rnllient, or for uny other
purpose, ::ts tney c.:;,n be issued only in o:;;.xchange for
6 olu.
or
~c:.:.inst
u.
action, plus the reY.uireci 15olo. reserve vi nut less tuc:...n 40 :per centw.
be::~,:;n
Upon payment vf COJuiLbrCi<::.l pe.per whicn nas
I'
de}?IJsited to
s~:;cure
Federal Reserve note.s 1 there r-.asults .::d t:aer an iu.u.ediate return of an
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equal amount of notes to the bank, or an auto£,"atic inc;-ease in the percentage of gold reserve available for tn"'ir
red~;;
•iftion.
Ft::d0ral R0serve
notes. are not lee!,al tender, nor do tncy count as roscrve mon;;;y fur lut:rubor
banks.
Tn<>y are issued· unly as a nt:ec.. for
become redundant in e;.ny loce.lity they are
th<;:~
devulor;s , anCl as they
returned tu the •rreasury at
Washington, or to a Federal Reserve bank for redemption.
Thus there can-
not at any tiu.e be u,ore Faderal Rc:sl::rVtl notes in circular.tion tht.m
needs of tb.c; country
.
;,~t
ne ..;d abctes the: volume
th.:: present l;;:;vel of J?ric<>s rtq.uirt:, ond
o~
th~::
L.<.S
the
notes outst.:....nding will bci correspondingly re-
duced through redenrption.
Th.:o incre<~sed volurutl of Fed<jr[..l Res.::rve notes
in circulation during the pust three:
result of direct e.xch<.nges for
~::,old.
ye~.rs,
in so far ns it is not the
r.nd gold certificates which bc.ve been
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withdru.wn frau;
c.nd
not their
circ1flt~tion,
cause.
is tlle effect of t.idv'-'Ilcing
w~ges
<mo. prices,
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~
- 8 There has undoubtedly taken place during the last two years a. certain
amount of credit expansion whic.h, und.er the circumstances co:nnGt! ted with
our war financing, was inevitable, but. th.is will bs corrected as the
securi~-
ties issued by the U:.1.:t ted States Govel'nment for war pux-1)0ses are gradually
I '
absorbed by investors.
This credit expansion ls eQ..ua.l to the 'd.ifference
between the total of the wa1·
expendi vU"es of the GoYe:.."'lmerl.t on <;he one hand,
and on the other, the total amnunts r aised by the Govex·nrnont th:t.•ough ta.1ta,.
tion and by the sale
~f
its obligations so far as pajd for cut of savings.
No reliable estimate can be made of this diffe:':'ence, which must be gra.duall1
absorbed through future savings for the l~eascn that b<:~nks are lending and will
always lend freely on Government bonds a.s collateraL
The principal cause of the advance of prices before and du.:t·:l.ng the war
was the urgent need of the go~ernments of the aJJ. ied wn.r1 d for goods of all
kinds for Cluick delivery in la.rge volume, and the con:;?etition of this buying by governments with purchases by private individuals who failed to contract their expenditures at a rate comnensurate with the g!·owing expend.it\1res
of these governments.
In the post-war period, throu.g'tl w);.Jch we are now
passing, the cou.ntrf has experienced rising prices ~wir.g, in part, to a
general relaxation of the war time regime of personal
€('!'";1'1.mrr.;t
~
r-emll ting in
an increased demand for commodities by individuals who l"'-lst~~5.cted their
purchases during the war but who are now buying in COII!Petition with export
demand.
In ad.di tion, accrued incomes and increased wages have led to heaVY'
demands for commodities not of :prime necessity, wh~.ch have resulted in
diverting labor and material. from essentials to nonessentials ..
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- 9The Federal Reserve Iloa:.:O. helieves tr..at aey cil!':>:ency legislation
for the present. sj t'J.C\t'lon is tl:.r3 same, n.am2l;1 tt' wc·rk
·,
the largest
p::H;~:·'i.".:llc
a~'ld
to save; .
vo}JJ..'T!G of comm<",,U t;l.es~ al;ld to exerci,.;:o reasonable
economies in o:r:-de:r. tnat money, good.s: aud servico3 may be d.evoted
primarily to the l:i.Q.·llida:t.i.:ln of debt a."ld to the
snti~fe.ction
nf the
demand for necensi f;ies 1 rather than t.o :i.r.cl1.1.lgence in e.xtr.avaga.nces or
wa.:r
the gratificat..i.c.n of a desire for l·J.:~urS.es.
sense - and while the
bil~s
'l1he /~;; over, - in a military
have been settled by loans to the Government,
these obligations. so far as they are carded by the bar:ks, m1:1st be
absorbed before the war chapter of the financial hisi;ory of the
can be closed.
Very truly yours,
w.
P. G.
ru.nmim
Governor ..
Ron. Geo. P. McLean, Cha~.rznatl,
Committee on Ba.rJcl.r..g an:i C1lrrency,
United states Senate,
Washington,
I.
D.
c•
C.;cur~tr~"
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