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1099 F E D E R A L R E S E R V E B O A R D WASHINGTON December 3,1920. S u b j e c t . L e t t e r from Senator R.L. Owen, c r i t i c i s i n g c e r t a i n p o l i c i e s of the Federal Reserve System. tear Sir: I n order t h a t you may b e t t e r understand the b a s i s upon which my l e t t e r t o Senator Owen, copy of which was forwarded t o you yesterday, was w r i t t e n , I am e n c l o s i n g herewith f o r your f i l e s , a copy of the S e n a t o r ' s l e t t e r t o me, dated November I S t h , the substance of which appeared i n yesterday afternoon*s papers. Very t r u l y yours, Enclosure. Governor, To Chairmen and Governors of a l l F.R. Banks. X-2077 1100 UNITED STATES SENATE Washington COPY X-207? a November 18, 1920. Honorable W.P.G. Harding, Federal Reserve Board, Washington, D.C. My dear Governor; I wish t o a g a i n appeal t o you and t o t h e Federal Reserve Board t o lower t h e r a t e s of i n t e r e s t charged by the Federal Reserve Banks, and expand the l o a n s of t h e Federal Reserve Banks t o t h e e x t e n t which nay be r e q u i r e d f o r purposes of l e g i t i m a t e p r o d u c t i o n and d i s t r i b u t i o n . American banks a r e j u s t i f i e d i n charging s i x and seven p e r c e n t , because they ps*y two and t h r e e p e r cent f o r d e p o s i t s , and they a r e , e n t i t l e d t o make a p r o f i t of two and t h r e e p e r cent above t h e i r overhead charges on t h e d e p o s i t s which they handle a s merchants.of c r e d i t . Three p e r cent p r o f i t on the t o t a l l o a n s of a l l t h e banks of t h e United S t a t e s , which amounted on June 30th, 1920, t o $30,891, &93» 000.00 would make $ 9 2 6 , 000, 000.00 p r o f i t on $5,953/933/000.00 cf c a p i t a l , s u r p l u s and undivided p r o f i t s . The Federal Reserve Banks earned l a s t y e a r over one hundred p e r cent and a r e e a r n i n g now a t a r a t e i n excess of one hundred and f i f t y p e r cent p e r annum on i t s c a p i t a l , c o n t r a r y to a sound p u b l i c p o l i c y . This excess p r o f i t i s a l l t h e more r e p r e h e n s i b l e because i t goes t o t h e Treasury, i s made by a Governmental i n s t r u m e n t a l i t y and p u t s t h e Government i n t h e p o s i t i o n of p r o f i t e e r i n g , and s e t t i n g a n a t i o n a l bad example. The Federal Reserve Banks under t h e s e high i n t e r e s t r a t e s a r e measurably d e s t a b i l i z i n g c r e d i t s and promoting i n d u s t r i a l d e p r e s s i o n under t h e a r b i t r a r y high i n t e r e s t r a t e s which t h e Reserve Banks are charging. If the Reserve Banks would be content w i t h t h e same margin of p r o f i t i n i n t e r e s t r a t e s which t h e average bank of t h e country o b t a i n s , i t would be c h a r g i n g a r a t e of between t h r e e and f o u r p e r c e n t , because t h e Reserve Banks pay no i n t e r e s t on d e p o s i t s , and a t h r e e or f o u r p e r cent r a t e f o r the Reserve Banks would correspond w i t h t h e i n t e r e s t a member bank would e a r n which charged s i x p e r cent* N e v e r t h e l e s s , the Federal Reserve Board i s approving a s i x p e r cent r a t e on l o a n s secured by Treasury c e r t i f i c a t e s of i n d e b t e d n e s s , and a seven p e r cent r a t e on t r a d e a c c e p t a n c e s and on a g r i c u l t u r e and l i v e stock paper. 1101 -2- X-2077 a The Federal Reserve Board and the Federal Reserve Banks a r e s e t t i n g s standard of i n t e r e s t t h a t j u s t i f i e s the member banks and a l l other banks i n r a i s i n g , t h e r a t e s on a l l t h e i r loans and discounts, probably an average of t h r e e per cent which would amount t o an a d d i t i o n a l t a x on the productive and d i s t r i b u t i v e processes of America to t h e extent of a b i l l i o n d o l l a r s per annum. Of course, t h i s tax goes i n t o the pockets of t h e stockholders of the banks, but i t i s a t the expense of the whole country, and contrary to a sound public p o l i c y . As a stockholder * of the banks, I am b e n e f i t e d . As a consumer, as a producer, as a c i t i z e n , I am i n j u r e d . The country a s a whole i s i n j u r e d by t h e i n d u s t r i a l depression f a r beyond t h e b i l l i o n of unearned profits* I f u l l y agree with the Board i n i t s policy of a d v i s i n g r e s t r i c t i o n s of loans employed i n stock speculations, i n commodity speculations, in hoarding and i n p r o f i t e e r i n g . This advice of t h e Board i s wise. I t can be only applied advantageously by the individual banks e x e r c i s i n g an individual d i s c r i m i n a t i o n against loans for such purposes. Such c r e d i t s when released, however, should be extended to those who are engaged i n l e g i t i m a t e production and d i s t r i b u t i o n . I t seems t o be the policy of the Board to r a i s e the r a t e s of i n t e r e s t f o r the purpose of broadly d e f l a t i n g c r e d i t s . I t has been pursuing t h i s policy f o r a year with the r e s u l t of t h i s policy of high i n t e r e s t charges being extended generally throughout the country, which has thus brought on a cond i t i o n of i n d u s t r i a l depression r e s u l t i n g i n checking, and in some cases a b s o l u t e l y stopping, l e g i t i m a t e production and l e g i t i m a t e d i s t r i b u t i o n . This i s the e v i l of usury, I h e a r t i l y approve the checking of speculation, hoarding and p r o f i t e e r i n g , but I very vigorously disapprove and p r o t e s t a g a i n s t the breaking down of l e g i t i m a t e production and d i s t r i b u t i o n by t h i s course. I t i s d i s c r e d i t i n g the Federal Reserve System, and if you w i l l pardon me f o r saying so, I believe, i t i s impairing i n the public mind the confidence of the wisdom of the Federal Reserve Board and the Federal Reserve bank management. The e r r o r of the policy of indiscriminate d e f l a t i o n i s l a r g e l y due, in my opinion, t o the lack of v i s i o n of the big New York City banks. Beginning a year ago, the men who control the policy of the big banks dealing i n stock exchange loans, began to put the i n t e r e s t r a t e s up from t e n to t h i r t y per cent, i n s t e a d of r e q u i r i n g such loaps t o be gradually l i q u i d a t e d on some reasonable b a s i s . On these high i n t e r e s t charges they probably made $100,000,000.00 of p r o f i t . I n c i d e n t a l l y the individual deposits of New York City banks which were November 12, 1$19, $6,313# 33%* 000.00 were reduced on November 10, 1$20, t o $4,916,375>000.00, a net l o s s of d e p o s i t s i n New York City of about $1,400,000,000.00, and a net reduction of l o a n s amounting t o a s i m i l a r amount. I s i t any wonder t h a t New York City i s complaining of the c r e d i t situation? X-2077 a i-1.02 But wh i l e the i n d i v i d u a l d e p o s i t s and l o a n s of New York City banks were coming down, the t o t a l d e p o s i t s of a l l the banks of t h e country, including bank d e p o s i t s , increased according t o the C o m p t r o l l e r ' s l e t t e r of October 13, 1920, $4,045,164,000.00, and loans increased $5,805,73&> 000,00 (including o v e r d r a f t s and d i s c o u n t s ) f o r the f i s c a l year ending June 30, 1920, so t h a t t h i s d i s p a r i t y of reduced d e p o s i t s and loans i n New York City i s a l l t h e more conspicuous. The New York City banks have above a l l o t h e r s pursued the policy of i n d i s c r i m i n a t e d e f l a t i o n , and have d e f l a t e d t h e i r -own d e p o s i t s a c c o r d i n g l y . The balance of t h e c o u n t r y ' s banks t h e r e f o r e , increased t h e i r d e p o s i t s e x c l u s i v e of New York about $5,000,000, 000.00. The t o t a l resources of the banks of the United S t a t e s increased $4,045,164,000,00 f o r the f i s c a l year ending June 30,1920, reaching t h e g i g a n t i c t o t a l of $53,079,108,000,00. The balance of the country has shown i t s normal i n c r e a s e i n s p i t e of t h e high r a t e s . Nsw York City under the control of those f a v o r i n g the policy of d e f l a t i o n shows a g r e a t l o s s i n d e p o s i t s and i n l o a n s . The stock market has bean broken. The p r i c e of Government bonds has been s e r i o u s l y depressed because t h e American market of stocks and bonds i s l o c a t e d i n New York City, where t h i s p o l i c y of d e f l a t i o n i s p e c u l i a r l y i n evidence. I n c i d e n t a l l y , many of the export houses i n New York City a r e going i n t o bankruptcy. Many of t h e great commodities l i k e l e a t h e r , wool, s i l k , rubber, c a t s , corn, e t c . , a r e already down below the cost of- production. The d e p o s i t s of t h e n a t i o n June 30, 1420, were over f o r t y - o n e b i l l i o n d o l l a r s , and the d e p o s i t s of New York City were l e s s than one-eighth of the other banks' d e p o s i t s of the country, but New York i s t h e f i n a n c i a l h e a r t of the country, and powerfully a f f e c t s the whole n a t i o n . My dear Governor, I am p r o t e s t i n g t o the Reserve Board a g a i n s t the policy of i n d i s c r i m i n a t e d e f l a t i o n , and am praying the Board t o reconsider i t s a t t i t u d e , and t o withdraw froa; supporting the policy of i n d i s c r i m i n a t e d e f l a t i o n by high i n t e r e s t r a t e s , and by r e f u s a l of c r e d i t s t o l e g i t i m a t e i n d u s t r y , which the Reserve banks can well a f f o r d t o make t o whatever extent a c t u a l l y required by the country. I have been d i s t r e s s e d by the propaganda being c a r r i e d on t o impress the country with t h e idea t h a t the Federal Reserve Banks were i n a condition of i n s t a b i l i t y . A day or two s i n c e , Mr. M. L, Requa, 120 Broadway, sent me a l e t t e r i n c l o s i n g a Roger Babson c i r c u l a r , s t a t i n g t h a t many of Babson's c l i e n t s have asked — H \7hy the Federal Reserve Banks should be alarmed over a r a t i o of f o r t y per cent when England i s g e t t i n g along on a r a t i o of about f i f t e e n per c e n t . " This c i r c u l a r then s t a t e d in l a r g e black f a c e type — 1103 -1)- X-2077 a "The t r u t h i s t h a t the United S t a t e s r e s e r v e s a r e q u i t e a s low a s those of England. The seeming d i f f e r e n c e i s only the methods by which they a r e calculated," In t h e f i r s t p l a c e the Federal Reserve Banks a r e not alarmed, and have not the s l i g h t e s t reason i n t h e world t o be alarmed. I t i s t r u e t h a t t h e Bank of England i s g e t t i n g along very wall with a r a t i o of currency a g a i n s t d e p o s i t s of l e s s than f i f t e e n p e r cent ( t e n per cent August k, 1920,), and nobody i n England i s a t a l l alarmed about t h e Bank of England, and navs no need t o be. The B r i t i s h Government. i s behind the Bank of England i n f a c t , if not i n law. But the statement t h a t the United S t a t e s r e s e r v e s a r e q u i t e a s low as those of England i s e n t i r e l y and u t t e r l y u n t r u e . The statement of t h e Bank of England which Babson quotes shows 136,000,000,000 pounds of d e p o s i t s with l i t t l e over 13,000,000 pounds of Bank of England n o t e s (now irredeemable), and l e s s than 2,000,000 pounds i n g o l d . The cash r e s e r v e s , t h e r e f o r e , of the Banking Department of the Bank of England a g a i n s t i t s d e p o s i t s was only a l i t t l e over t e n per cent, but t h e r e was no reason why the depositors should have any f e a r whatever, and they had none. But a g a i n s t the d e p o s i t s of t h e Federal Reserve Banks a r e r e s e r v e s of 35 per cent i n gold (over $60C, 0C0,000) and over 65 per cent f i r s t c l a s s s e c u r i t i e s , when a s a matter of f a c t , t h e d e p o s i t s i n the Reserve Banks cannot be withdrawn under the s t a t u t e , and no reserve of any kind i s r e a l l y necessary f o r the mere purpose of p r o t e c t i n g such fixed d e p o s i t s . Reserves Against Note I s s u e s . The currency of Great B r i t a i n c o n s i s t s of B r i t i s h t r e a s u r y one pound n o t e s and t e n s h i l l i n g notes and c e r t i f i c a t e s , o r d i n a r i l y known a s the "Bradbury n o t e s " , because issued under John Bradbury's a d m i n i s t r a t i o n . These n o t e s amount t o 352,79^*058 pounds s t e r l i n g , secured by 28,500,000 pounds i n gold, (equal t o 8 per cent of gold) i n t h e t r e a s u r y , and 18,750,000 pounds s t e r l i n g i n Bank of England n o t e s (equal t o 5*3 P e r c e n t ) , a t o t a l cover of 13.3 P e r cent a g a i n s t t h e s e t r e a s u r y n o t e s which correspond c l o s e l y with the t r e a s u r y n o t e s issued by the United S t a t e s Treasury to t h e Federal Reserve banks, and c a l l e d "Federal Reserve n o t e s . " But the Bradbury notes (now irredeemable) have a gold cover only of 13-3 p e r cent (counting the Bank of England n o t e s a s gold), while the Federal Reserve n o t e s amounting on November 12, 1920, t o $3,328,985,000.00 had an a c t u a l gold cover of $2,180,000,000.00 (equal to 65 per c e n t ) , b e s i d e s an excess of t h i r t y - f i v e per cent of other f i r s t c l a s s s e c u r i t i e s behind th e s e Federal Reserve n o t e s amounting t o good s e c u r i t y of over one hundred per c e n t . 1104 -5- X-2077 a The Bradbury n o t e s a r e good if t h e B r i t i s h Government i s s o l v e n t , a s everybody b e l i e v e s i t i s , but the Bradbury n o t e s have only 13 per cent gold cover, while the Federal Reserve n o t e s have 65 per cent of gold cover, and a r e otherwise secured by sound s e c u r i t i e s , making a t o t a l s e c u r i t y exceeding one hundred p e r cent, and i n a d d i t i o n h a s the f u l l t a x i n g power of the United S t a t e s behind them. The Bank of England has o u t s t a n d i n g 139# 920, OCX) pounds s t e r l i n g i n Bank of England notes secured by 121,420,010 pounds of gold held in t r u s t by the Issue Department of the Bank of England f o r the b e n e f i t of the n o t e h o l d e r s , t o g e t h e r with 18,500,000 pounds,of Government debt, and other s e c u r i t i e s so t h a t the Bank of England n o t e s , though not underwritten by the B r i t i s h Government, a r e secured up t o one hundred p e r c e n t . However, under the need f o r the economical use of gold; p u b l i c opinion and the Government of Great B r i t a i n s u s t a i n s the Bank of England i n r e f u s i n g t o redeem i t s n o t e s in gold j u s t a s the Bradbury n o t e s a r e not redeemed i n gold, England i s not on a gold b a s i s . Last Saturday gold was s e l l i n g i n London per ounce a t 121 s h i l l i n g s and 11 pence (par value 65 s h i l l i n g s p e r ounce). In other words, gold was a t a premium of f o r t y - f i v e p e r cent i n liondon, while s e l l i n g a t p a r i n New York. This e x p l a i n s why the paper pound s t e r l i n g in New York i s s e l l i n g on the Exchange around $3*35 P e r pound. The currency of the United S t a t e s i s on a gold b a s i s , and t h e Federal Reserve n o t e s a r e being d a i l y redeemed i n gold by law. Babson's statement — "That t h e United S t a t e s r e s e r v e s a r e q u i t e a s low a s those of England, The seeming d i f f e r e n c e i s only i n the methods by which they a r e c a l c u l a t e d . " i s q u i t e unpardonable coming from a r e s p e c t a b l e p u b l i c a t i o n . The E d i t o r was unaware a p p a r e n t l y of the e x i s t e n c e of t h e Bradbury notes amounting t o $1,750,000,000,00. In the next p l a c e , i n theory, he t a k e s t h e t r u s t gold held by the Issue Department of the Bank of England and adds i t t o the gold i n the banking department, and then adds t o g e t h e r the o u t s t a n d i n g n o t e s of the Bank of England and the d e p o s i t s of t h e Bank of England, and e s t a b l i s h e s a r a t i o between t h e sums thus obtained ( o m i t t i n g the Bradbury n o t e s ) . 'i'here i s no j u s t i f i c a t i o n in law or i n morals t o t h u s assume to use t h e t r u s t gold held by t h e Issue Department of t h e Bank of England. This gold i s held i n t r u s t f o r t h e noteholders of t h e Bank of England, and cannot be used f o r any other purpose. Nobody i n Great B r i t a i n ever dreamed of u s i n g t h i s t r u s t gold to pay d e p o s i t o r s w i t h . I t would be unlawful and a felony t o do s o . The t r e a s u r y n o t e s of the B r i t i s h Government issued f o r currency have behind them t h i r t e e n per cent of gold, and a r e n o t redeemable i n g o l d . fact. The Bank of England notes are not redeemable i n gold, a s a matter of » -6- X-2077 a The d e p o s i t s of t h e Bank of England have a cash reserve running from t e n t o f o u r t e e n per cent i n Bank of England n o t e s , including about one per cent of a c t u a l gold. The Bank of England can command gold neverthel e s s , and i s not alarmed. The d e p o s i t s and acceptances of the twelve j o i n t banks of Great B r i t a i n in t h e i r l a s t r e p o r t (these banks do the great commercial business of the B r i t i s h I s l e s ) amounted t o 1,955/200,000 pounds, a g a i n s t which they had 300, 000,000 pounds in s o - c a l l e d cash, t h e cash c o n s i s t i n g of Bradbury notes secured by t h i r t e e n per cent gold, and t h e i r deposits with t h e bank of England secured by a l i k e percentage of Bank of England notes, so that if the a c t u a l gold reserves were estimated a g a i n s t t h e i r deposits and acceptances i t would amount t o l e s s than f i v e per cent gold, and t h i s need cause, and does cause, no alarm. These banks a r e abundantly protected by p u b l i c opinion and by the support of the B r i t i s h Government behind the Bradbury notes, and behind the Bank of England. The t r u t h i s the English people a r e using gold very economically, and the United S t a t e s i s using gold very uneconomically. The Federal Reserve Banks have i n gold, including a small amount of I g g a l tender, $2,180,000,000.00. The banks of the United S t a t e s had in cash i n t h e i r v a u l t s $626,000,000.00 on June 30th, 192O. There i s i n the United S t a t e s t r e a s u r y over $300,000,000.00 of f r e e gold and s i l v e r , and t h e r e i s outstanding outside of the Federal Reserve Banks and outside of the Treasury $670,000,000.00 i n gold and $414,000,000.00 of s i l v e r , making a t o t a l of over $3,000,000, OCO.00, or about $30.00 per c a p i t a , while the t o t a l amount of gold in the B r i t i s h I s l e s i s about $800,000,000.00 or seventeen and a f r a c t i o n d o l l a r s per c a p i t a . The world owes the United S t a t e s $15,000,000,000 and we can command the gold of the world. The Bank of England a c t i n g as the Reserve Agent of a l l t h e banks of Great B r i t a i n i s safeguarding a world wide business, probably equal to t h a t of the United S t a t e s , with a cash supply on hand of only $75# 000,000.00, c o n s i s t i n g of the Bank of England notes (irredeemable a t t h i s time) and including l e e s than $10,000,000.00 a c t u a l gold,while the Federal Reserve Banks serving a s i m i l a r o f f i c e f o r American banks have $2,180,000,000,00 of gold, so t h a t the Reserve Banks have over twe nty- f ive times a s much gold a s the Banking Department of t h e Bank of England. To t a l k about the Reserve Banks being alarmed under t h e circumstances i s s t u p i d . To s t a t e t h a t the r e s e r v e s of the United S t a t e s a r e q u i t e a s low a s those of England does a s e r i o u s i n j u s t i c e t o the Federal Reserve Banks and Federal Reserve notes, whose r e s e r v e s a r e many times stronger than the Reserves of the Banking Department' of the Bank of England. If the Federal Reserve n o t e s were issued up t o the 13 per cent r e s e r v e of the Bradbury n o t e s the $2,100,OCO, 000.00 of gold would s u s t a i n Federal Reserve notes equal t o $16,155, 000,000,00, or an expansion of- c r e d i t equal t o over $12,000, 000, OCO. 00, The Federal Reserve Act contemplated the r e s e r v e s a g a i n s t t h e Federal n o t e s going below f o r t y p e r cent, and made p r o v i s i o n f o r i t by a moderate and small p e n a l t y . The Federal Reserve Board has r e f u s e d t o allow the r e s e r v e s t o go down when t h e very purpose of the r e s e r v e a s contemplated 1106 X-2077 a -7-i by t h e Act i s t h a t i t should be used when the n a t i o n a l w e l f a r e r e q u i r e s it. I r e s p e c t f u l l y pray t h e Board t o now give c o n s i d e r a t i o n t o t h e question of reducing t h e r a t e of i n t e r e s t and of extending the powers of the Federal Reserve Banks t o the f u l l accommodation of our l e g i t i m a t e commerce and i n d u s t r y i n order t h a t the g i g a n t i c s t r i d e s of America along t h e road t o p r o s p e r i t y may continue unimpaired. R e s p e c t f u l l y yours, (Signed) ROBERT L, OWEN.
@FedFRASER