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EX·OP'FICIO MEMBERS '. W. P. G. HARDING, GOVIRNOR PAUL M. WARBURG, VICE GOVIRNOR FREDERIC A. DELANO ADOLPH C. MILLER CHARLES S. HAMLIN WIL;o;o\ ...... McADOC SECRETARY OF THE TREASURY CHAIRMAN JOHN SKELTON WILLIAMS COMPTROLLER OF THE CURRENCY H. PARKER WILLIS, SEcd'MtRY SHERMAN P. ALLEN, ASST. SECRETARY AND FISCAL AGENT FEDERAL RESERVE BOARD WASHINGTON ADDRESS REPLY TO FEDERAL RESERVE BOARD June 28 1 1918. X-1035 Dear Governor Harding: I have read very hastily Dr. Miller's xr.en:orandum. As I understand it, he favors a substantial increase in all rates of discount of Federal Reserve Banks, including the 4 rate on 15-day collateral notes. ~1r ctnt His purpose seems to be to force contraction in non-essential industries and to indicate, as he says, 11 the desire and expectation of the Federal Reserve System that it is not to ~e xrade so easy for member banks to carry the certificates as an extra that they deed do nothing to curtail." The position taken by him that the discount ~te is the instrument by which the Federal Reserve Bank should control tho credit situation, wowld appear tc: be sound in norrral times, but I wish to point out that his argunent logically would seem to require the putting up of all Federal reserve rates a1ove cornnercial rates,fior this is their normal position, unless for special reasons the reserve banks desire to reduce corrmercial rates, in Which case by putting down Federal Reserve Bank rates, the desired reduction c·ould be accompliehedv The present tirr.es, however1 are not war is the normal condition; and1 to my mind~ normal~ we rr.ust approach this rate question with a view to present cor..ditinns, Today T a;:n . X-1035 ., - 2 inclined to believe that a general increase in rates would have little effe~ in the way Of contracting, or wiping out, the non-assen'tial industries. To my mind, it would be much more efficacious .if we were to ration credit exactly as we now havo to ration food, and in that ''• way directly control non-essential industries. I think it is clear that a great deal of this has already been done by the banks throughout the country. Dr. Miller points out that our reserve dropped between June zz, 1917, and June 21~ 1918, from 71~6 per cent to 63.4; and he seems to think that our reserve situation is perilous. While these figures are accurate, they do not accurately show the ;'\'hole picture. On April 51 1917, when we entered into the war, our cash reserves were 83 per cent, vvhile at the end of November they had fallen to 63.2 p~r cent, thus revealing that the placing of 6.5 billions of loans had pulled down our reserves about 21 per cent. ·' ' l· There is, however, another more roseate view of this picture. On January 15, 1918, the last instalment of the Second Liberty Loan was due. On January 18, our reservJs were 65.2 p0r cent, while on June 21 1 1918, they had fallen to 1.8 per cent. 63~4 or a decline of onl~ It should be remembered that during this p3riod about 80 per c:mt of the Third Liberty Loan has been paid, and this, to my mind, tends to show that our reserve situation is not .t> in as great peril as Dr. :W..iller fears. ) 5 - 3 ~ fl.,,. On June 19 1 1918• the Secretary of the Treasurr offered 750 million dollars of Treasury Certificates. beuing interest fr0111 ,,,.,.- June 25. \ This offer has :. been before the people for nearly two weeks and the :subscription closed on July 2nd. Meanti:rr.a, the Federal reserve banks have given no notice whatsoever to the banks of any .purpose ·to advance the rates on cbllateral 11otes secuted by these certificates. It would seem to me that to increase rates on these certificates at the present tirr.e or in the near future, unless some startling new situation develops, would ,savor of bad faith with the banks which have taken these certifiates• It seems to me th• :banks had a right to assua:• in the avsence of solt8 notification from the Federal Reserve Board, that no ir.rmedi&te ,t t: chugs - at least in these rates - wa.s contemplated. I believe the discount of member banks' notes secured by United States bonds or Teea.sury Certificates. is largely confine4 to .·operations in the way of financing the Government by the JUrchaee of thea~ certificates. For the Whole system, on June 21• abaut 50 per cent of the total bills discounted, excluding acceptanc-•;, consisted of :member banks' collateral notes, of which about 92 per cent were sevure4 by Liberty Bonds or Certificates. At the Federal Reserve Bank of New York on JQne 21, about 65 per cent of the total bills discounted, excluding acceptances, consisted of member banks' collateral notes, on which all of the collateral was Liberty . .. _.., Bon~!! I or Certificates. • I believe we should move very cautiously and conservatively in the n:a.tter of increasing rates, and especially on member :hanks' 09.llateral notes. In a matter such as this I shoUld place great reliance on.the judgment of the Federal Re3erve Banks of New York and ' Chicago.. They are in .the field., and. I should hesitate to disregard ~their judgment·~ u1l1es~ ~ud.g.UJ$nt it were shORn beyond a reasonable doubt that their is in error. I do not know trkt their judgment is, and regret that I can not be at the meeting, but I have given you. my views very hasti;ly 1 for s\\oh use as you may care to put them to. Very truly yours, • •~ " c. Hon. w. P. G. Harding, Governor, .Federal Res~rve Board• . I r S. HAMLIN.
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