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855 FEDERAL RESERVE BOARD WASHINGTON CONFIRMATION OF TELEGRAM November b , l y ! 9 * Morss Strong Passmore Fancher Se ayWellborn McDougal Biggs Young Miller Van Zandt Calkins X-1717 Boston New York. Philadelphia Clevsland Richmond Atlanta Chicago S t , Louis Minneapolis Kirnsas City Dallas San F r a n c i s c o Board hopes you w i l l do what you can t o discourage member banks from using advance i n Federal Reserve Banks r a t e s as excuse f o r i n c r e a s i n g i n t e r e s t charge t o those borrowers on Government s e c u r i t i e s who are^ doing what may be r e a s o n a b l y expected i n the way of l i q u i d a t i o n . In such cases member banks should be s a t i s f i e d with moderate d i f f e r e n c e i n t h e i r f a v o r . Board does not mean t o suggest r e d u c t i o n i n r a t e s h e r e t o f o r e charged customers on such t r a n s a c t i o n s or to advocate any p o l i c y which would r e s u l t i n a e l a y of o r d e r l y l i q u i d a t i o n of bond secured l o a n s . HARDING. 856 THE SECRETARY OF THE TREASURY WASHINGTON COPY November 5* 1919* ® Dear Governor Harding: I nope t h a t the Federal Reserve Board w i l l not allow the Governors of the Federal Reserve Banks to r e l y wholly or too h e a v i l y , f u r the p r e v e n t i o n of the abuse of the f a c i l i t i e s of the Federal Reserve Syutem, upon the increase I n r a t e s iww established, with the approval of the Butxa, myself i n c l u d e d . The experience of a l l European c o u n t r i e s (and Japan) , i n c l u d i n g those c o u n t r i e s which have been n e u t r a l i n the war and thus© which have malutaitied a h i g h c e n t r a l bank r a t e , supports the view t h a t discount r a t e s w i l l not s u f f i c e i n these e x t r a o r d i n a r y times. The Reserve Banks 1 r a t e s should., of course, s c i e n t i f i c a l l y be above the commercial r a t e and not below i t . That cannot happen u n t i l the independent r e s o u r c e s of the ban&s s u f f i c e f o r the normal requirements of t h e i r c u s tomers f o r commercial, i n d u s t r i a l and Government p u r p o s e s . Banks cannot be expected t o meet th»se requirements h a b i t u a l l y a t a l o s s . Their dependence upon the Federal Reserve System should be seasonal or occasional and not h a b i t u a l . U n t i l t h a t c o n d i t i o n comes about as a r e s u l t of the production and saving of wealth the tendency w i l l b e , as Reserve Bank r a t e s are i n c r e a s e d , f o r the r a t e s t o t h e Government and r a t e s t o the commercial borrower to be inc r e a s e d i n t u r n . The world has been f o r f i v e y e a r s consuming or d e s t r o y i n g more than i t has produced* % own b e l i e f has been and i s t h a t with the c u r t a i l ment of export demand consequent upon the c u r t a i l m e n t of f o r e i g n c r e d i t s and with i n d u s t r i a l production proceeding f u l l steam ahead we should soon have reached an e q u i l i b r i u m i n t h i s country a t l e a s t * In the meantime, however, the .*-171* a labor s i t u a t i o n has become so acute as gravely t o t h r e a t e n production- and the I s p e c u l a t i v e mania has developed to such an e x t e n t as g r a v e l y to t h r e a t e n our credit structure. The c o n d i t i o n s under which changes i n the Reserve Banks ' r a t e s of discount would operate e f f e c t i v e l y do n o t e x i s t here today. Ma i n c r e a s e i n the discount r a t e w i l l not r e s u l t i n the importation, nor c u r t a i l the e x p o r t a t i o n , of gold to any m a t e r i a l amount. I t w i l l not r e s u l t i n a curta ilment of the importation of goods nor i n i n c r e a s i n g our e x p o r t s m a t e r i a l l y . In the p r e s e n t p o s i t i o n of the i n t e r n a t i o n a l balances and of the f o r e i g n exchanges and, because of gold embargoes the Federal Reserve Bank r a t e s cannot f u n c t i o n i n t e r n a t i o n a l l y , and . w i l l operate s o l e l y upon the domestic s i t u a t i o n . In t h a t c o n d i t i o n an important f u r t h e r i n c r e a s e i n Federal Reserve Bank r a t e s might have the e f f e c t of p e n a l i z i n g and discouraging the borrower f o r commercial aid i n d u s t r i a l purposes, thus c u r t a i l i n g production and d i s t r i b u t i o n and i n c r e a s i n g the shortage of goods,and consequently the p r i c e of them, and thus, i n t u r n , s t i m u l a t i n g s p e c u l a t i o n . ( An i n c r e a s e i n r a t e s (per c e n t , per annum) f a l l s very l i g h t l y upon the borrower f o r s p e c u l a t i v e purposes, who f i g u r e s a very large p r o f i t on the turnover i n a day, a week, a month or some other s h o r t p e r i o d ) . I t might have a l s o a very grave e f f e c t upon the Government's f i n a n c e s . In consequence of the war the Government has issued sane $25,000,000,OCX) of i n t e r e s t b e a r i n g s e c u r i t i e s which are of prime e l i g i b i l i t y . Before the war* when the Government's debt was only $1,000,000,000 and t h a t a l l s t o r e d away in s t r o n g boxes, the p o s s e s s i o n of e l i g i b l e paper was very s t r u n g presumptive evidence of the r i g h t of a member bantu, to borrow. N<v.w aid f o r the l i f e of t h i s g r e a t war debt the p o s s e s s i o n of e l i g i b l e paper w i l l be no evidence a t a l l . Therefore, I b e l i e v e i t t o be of prime importance t h a t the Federal Reserve Board should i n s i s t upon and t h a t the Governors of the banKs should e x e r c i s e a f i r m d i s c r i m i n a t i o n i n making loans t o prevent abuse of the f a c i l i t i e s of the T3~ <• " X-1718 a 8 5 8 Federal Reserve System i n support of tide r e c k l e s s speculation i n stocKs, land* c o t t o n , c l o t h i n g , f o o d s t u f f s and commodities generally# We cannot t r u s t t o the copybook texts* Maying c r e d i t more expensive w i l l not s u f f i c e * There i s no precedent i n h i s t o r y f o r the g r e a t war which we have been through nor f o r the conditions now existing* The Reserve Bank Governor must r a i s e h i s mind above the language of the textbooks ana f a c e the s i t u a t i o n which e x i s t s * He must have courage t o a c t promptly and with confidence i n h i s own i n t e g r i t y t o prevent abuse of the f a c i l i t i e s of the Federal Reserve System by the customers of the Federal Reserve Banksf however powerful or i n f l u e n t i a l * Speculation i n stociis on the New Yor& Stock Exchange i s no more vicious i n i t s e f f e c t upon the welfare of the people and upon our c r e d i t s t r u c t u r e than speculation i n c o t t o n or i n land or i n codAodities generally* But the New York Stock Exchange i s the g r e a t e s t single organized user of c r e d i t f o r speculative purposes• I t i s the organized instrument of a countrywide specular t i o n . I believe t h a t the p r a c t i c e of financing speculative t r a n s a c t i o n s i n stocks by loans on c a l l , with d a i l y s e t t l e m e n t s , i s unsound and dangerous to the general w e l f a r e . Call money loaned to c a r r y speculative t r a n s a c t i o n s i n stocks i s only l i q u i d when there i s no need. The paper i s not I f - l i q u i d a t i n g and, i n the case of an emergency, a s , f o r example, upon the outbreak of the European war, and throughout the period of our p a r t i c i p a t i o n i n the war, such loans are i n the mass u n c o l l e c t i b l e . The use of l i b e r t y Bonds t Victory 'Notes and Treasury C e r t i f i c a t e s as c o l l a t e r a l f o r borrowings made by member banks from the Federal Reserve Banks f o r the purpose of carrying speculative t r a n s a c t i o n s i n stocks makes i t the r i g h t as well as the duty of the Federal Reserve a u t h o r i t i e s to see t o i t t h a t the methods of f i n a n c i n g such t r a n s a c t i o n s are reformed and reformed immediately* Open and n o t o r i o u s manipulation of stocks has been taking place during the p e r i o d o f , say, nine months, since the removal of the c o n t r o l of the Sub-committee <%i Money of the Liberty Loan Committee. This manipulation, which — a 859 takes the form of p u t t i n g up the p r i c e f i r s t of one s t o c k and then of another, no matter what may be the condition^, f o r the purpose of s t i m u l a t i n g i n t e r e s t on the p a r t of the u n i n i t i a t e d , p u b l i c , i s , I imagine, c o n t r a r y to the lav Of the S t a t e of New YorK and the r u l e s of the New York StocK Exchange# In any event* i t needs only vigorous a c t i o n t o p u t an end t o i t . The F e d e r a l Reserve Bautc of New York i n i t s r e l a t i o n to the Subcommittee on Money of the L i b e r t y Loan Committee, voiich Committee was a t a l l times i n touch with the of1 l e e r s of the Stock Exchange, n a t u r a l l y sought t h e views of the Treasury by r e a s o n of the f a c t t h a t i t s prime duty concerned the s a l e of l i b e r t y Bonds. A c o n t r o l now put i n t o e f f e c t w i l l be p r i m a r i l y f o r the c o n s e r v a t i o n of the g e n e r a l c r e d i t s i t u a t i o n and should t h e r e f o r e be i n i t i a t e d and s u p e r v i s e d , n o t by the T r e a s u r y t b u t by the F e d e r a l Reserve Board. I need n o t say t h a t such s t e p s should be t a k e n not only f i r m l y but with d i s c r e t i o n and i n such a way as not t o involve grave h a r d s h i p t o i n d i v i d u a l s or i n j u r y t o t h e g e n e r a l w e l f a r e , I have w r i t t e n t h i s l e t t e r b e l i e v i n g t h a t you and the o t h e r members of the Board a r e i n g e n e r a l accord w i t h the p r i n c i p l e s said views expressed i n i t end t h a t i t might be of some a s s i s t a n c e t o you i n d e a l i n g with the problem with the Governors of the Banks t o have t h i s w r i t t e n e x p r e s s i o n of the views of one of the members of the Board whose other o f f i c i a l d u t i e s p r e v e n t h i s f r e q u e n t attendance a t your meetings, I need s c a r c e l y aid t u a t t h i s l e t t e r i s w r i t t e n i n no s p i r i t of c r i t i c i s m * The Governors of the Federal Reserve Banns have served t h e i r c o u n t r y w i t h d e v o t i o n , courage and wisdom d u r i n g the t r y i n g p e r i o d t h a t i s p a s t . I t would be d i f f i c u l t f o r me t o g i v e adequate p r a i s e t o the p a t r i o t i c s p i r i t of s e l f - s a c r i f i c c which has a c t u a t e d them 06 adequate a p p r e c i a t i o n t o the s k i l l and s a g a c i t y with which they have performed t h e i r d u t i e s - During the war they have n a t u r a l l y turned f o r l e a d e r s h i p t o t h e T r e a s u r y s i n c e i t s o p e r a t i o n s were the dominating f a c t o r 880 * * 2-1718 a i n the f i n a n c i a l s i t u a t i o n * I t would f however $ be a g r e a t misfortune i f ^ now t h a t the Treasury (operations are on a diminishing s c a l e , the Governors of the Federal Reserve Banks are allowed to f e e l t h a t the problems of the f u t u r e were f o r them to solve each according to h i s own b e s t judgment. The need of l e a d e r s h i p i s no l e s s g r e a t , the need of examining the s i t u a t i o n from a broad national and i n t e r n a t i o n a l p o i n t of view i s no l e s s imperative* X look t o see the Federal Reserve Board# not c r i t i c a l l y nor a g g r e s s i v e l y b u t p a t i e n t l y and p e r s i s t e n t l y , provide t h i s leadership* Very t r u l y yours, CARTER GLASS. Hon. WeP,G. Harding, Governor, Federal Reserve Board.
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